Business context and reporting period
Reliance Steel & Aluminum Co. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company distributes and processes metals. Results include $681.7 million of nine-month sales from four businesses acquired in 2021; same-store comparisons exclude those acquisitions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $4,247.2 million | $3,847.4 million | $13,414.2 million | $10,104.6 million |
| Gross profit / margin | $1,239.0 million / 29.2% | $1,211.1 million / 31.5% | $4,121.5 million / 30.7% | $3,247.0 million / 32.1% |
| Operating income / margin | $548.5 million / 12.9% | $547.6 million / 14.2% | $2,052.1 million / 15.3% | $1,386.3 million / 13.7% |
| Net income attributable to Reliance | $393.5 million | $395.7 million | $1,489.6 million | $991.7 million |
| Diluted EPS | $6.45 | $6.15 | $23.98 | $15.35 |
Q3 sales rose 10.4% year over year, while nine-month sales increased 32.8%. Diluted EPS increased 4.9% for Q3 and 56.2% for the nine-month period. Q3 net income attributable to Reliance was slightly lower year over year despite higher EPS, alongside fewer weighted-average shares.
For the nine months, net cash from operations was $1,309.9 million, versus $405.6 million in 2021; management separately reported record Q3 operating cash flow of $635.7 million. Capital expenditures were $249.7 million. Cash and cash equivalents were $643.7 million at September 30, up from $300.5 million at year-end 2021.
Total debt was $1,661.2 million, including $509.5 million classified as current; the company had no borrowings on its $1.5 billion revolving facility. Net debt-to-total capital was 12.8%, down from 18.1% at year-end 2021. The company reported compliance with its credit facility covenants. Its $500 million of senior notes due April 2023 are a near-term maturity.
Changes versus the prior comparable period
- Sales growth reflected higher average selling prices and modestly higher tons sold. Same-store Q3 sales rose 5.0%, while same-store tons sold increased 0.4%; nine-month same-store sales rose 26.0%, but tons sold declined 1.0%.
- Gross margin declined 2.3 percentage points in Q3 and 1.4 points for the nine months. Management attributed the pressure to metal prices peaking in Q2 and falling through Q3, following unusually rapid price increases in 2021.
- Nine-month operating income rose 48.0%, and operating margin improved 1.6 percentage points, as higher sales and operating leverage more than offset lower gross margin and inflationary costs. Q3 operating income was nearly flat year over year.
- Operating cash flow improved substantially as net income increased and the prior-year period required much heavier working-capital investment. Inventory turnover slowed to 4.3 times from 4.9 times; days sales outstanding increased to 39.6 from 39.1.
- Nine-month share repurchases increased to $547.7 million from $155.0 million. Dividends paid rose to $163.5 million from $132.3 million.
Outlook, management commentary, and risks
- Management described demand as healthy across most end markets, but said supply-chain challenges continued to constrain tons sold and toll processed. It expected metal selling prices to decline further in Q4 2022; the filing provides no specific earnings or revenue guidance.
- Management said cash, operating cash generation, and nearly $1.5 billion of revolver availability should support operations, debt repayment, capital spending, acquisitions, dividends, and opportunistic repurchases. The 2022 capital expenditure budget was increased to $455 million.
- Key risks include sustained inflation in wages, fuel, freight, and packaging coinciding with declining metal prices; weaker customer demand or ordering; supply disruptions and labor shortages; rising interest rates; and economic slowdown or recession. COVID-19 impacts and the Russia-Ukraine conflict also contribute to uncertainty.
- Unusual or notable items: Q3 LIFO inventory adjustments increased gross profit by $27.5 million, versus a $262.5 million reduction in Q3 2021. Nine-month LIFO expense reduced gross profit by $22.5 million, versus $562.5 million in 2021. Nine-month gross profit also included $8.1 million of non-recurring inventory step-up amortization related to 2021 acquisitions.
- The company reported an environmental remediation matter related to former EMJ operations; insurance is expected to cover the majority of costs, and management did not expect a material adverse effect. Other pending legal matters were described as routine and not expected to be material.
Important facts for investors to verify
- Whether metal prices and gross margins continue to decline, and how quickly selling prices adjust to replacement costs.
- Whether supply-chain constraints ease and support higher volumes, given the modest Q3 same-store tonnage growth and nine-month decline.
- Ability to refinance or repay the $500 million notes due in April 2023 and maintain liquidity while funding capital spending and shareholder returns.
- Whether inflationary operating costs can be offset if metal prices fall or customer demand weakens.
- Potential sensitivity of goodwill and intangible assets, together about $3.13 billion at quarter-end, to future impairment tests; no goodwill impairment was reported at September 30, 2022.