Reliance Steel & Aluminum Co. — Q2 2021 Form 10-Q
Business context and reporting period. Reliance is a metals service-center company. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Management reported record quarterly sales, gross profit, pretax income and earnings per share, supported by rising metal prices and improved demand.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $3,418.8 million | $2,019.3 million | $6,257.2 million | $4,592.2 million |
| Gross profit / margin | $1,082.2 million / 31.7% | $614.7 million / 30.4% | $2,035.9 million / 32.5% | $1,395.4 million / 30.4% |
| Operating income / margin | $460.4 million / 13.5% | $118.6 million / 5.9% | $838.7 million / 13.4% | $221.9 million / 4.8% |
| Net income attributable to Reliance | $329.1 million | $80.2 million | $596.0 million | $141.9 million |
| Diluted EPS | $5.08 | $1.24 | $9.20 | $2.15 |
| Cash from operations | $101.6 million | $475.7 million | $263.4 million | $646.5 million |
- Q2 sales rose 69.3%; tons sold increased 17.5% and average selling price per ton rose 43.8%. For the six months, sales rose 36.3%, with tons up 5.7% and average selling price up 29.5%.
- Q2 net income attributable to Reliance increased 310.3% year over year; six-month net income increased 320.0%. The 2020 six-month comparison included $143.1 million of impairment and restructuring charges, including a $39.8 million inventory provision.
- Reported gross profit and gross margin exclude associated depreciation and amortization and are identified by the company as non-GAAP measures. Excluding the 2020 inventory provision and LIFO reserve adjustments in both periods, management said gross margins improved 730 basis points in Q2 and 660 basis points for the first six months.
- Cash from operations fell year over year as working capital absorbed cash amid higher metal prices and demand: receivables used $568.3 million and inventory used $217.8 million in the first half. Capital expenditures were $123.8 million; cash at period-end was $727.6 million.
Balance sheet, debt and liquidity
- At June 30, 2021, cash was $727.6 million, current assets were $3,944.6 million and current liabilities were $904.9 million.
- Total debt was approximately $1.663 billion, including $1.641 billion in long-term debt net of discounts and current maturities. The company had no borrowings under its $1.5 billion revolving credit facility and had $31.2 million of letters of credit issued against it. Net debt-to-total capital was 14.0%, compared with 15.8% at year-end 2020.
- Debt includes senior notes due in 2023, 2025, 2030 and 2036. Reliance reported compliance with its credit-agreement financial covenants. It said $911.9 million of debt obligations were due before the revolving facility expires in September 2025.
- Six-month financing cash use was $122.4 million, including $88.6 million of dividends and $24.0 million of share repurchases. The quarterly dividend was $0.6875 per share.
Changes, outlook and risks
- Profitability increased sharply with stronger demand and record selling prices, particularly for carbon steel. Management cited constrained metal supply, labor shortages and other supply-chain disruptions as limiting sales volumes; commercial aerospace demand weakened again in Q2, and semiconductor shortages affected some automotive customers.
- Despite substantially higher LIFO charges—$200.0 million in Q2 and $300.0 million for the first half, versus credits in the comparable 2020 periods—gross margins improved. Higher incentive compensation and shipment-related costs contributed to higher SG&A.
- Management described demand as healthy or improving in most end markets, but did not provide numerical earnings or revenue guidance. It said the duration and full business impact of COVID-19, including possible resurgences, remain uncertain. Its liquidity outlook assumes continued access to operating cash flow, the revolving facility and capital markets.
- On July 20, 2021, after quarter-end, the board declared a $0.6875 third-quarter dividend and authorized a new $1.0 billion share repurchase program. The authorization does not require the company to repurchase a specified amount.
- Environmental remediation at former subsidiary operations is partly covered by insurance; Reliance does not expect a material adverse effect. The company reported no material changes to previously disclosed risk factors and no pending legal proceedings beyond routine litigation. Goodwill and other intangible assets were substantial—$1.94 billion and $928.9 million, respectively—and subject to impairment assessment.
Important facts for investors to verify
- Whether elevated metal prices, supply constraints and working-capital needs persist, and how they affect cash conversion and margins.
- Whether demand improves or weakens in commercial aerospace, energy and automotive end markets, including the effects of COVID-19 and semiconductor shortages.
- The sustainability of reported margins and earnings given significant LIFO charges and the unusually weak, charge-affected 2020 comparison period.
- Debt maturities, covenant headroom and cash available for capital spending, dividends, acquisitions and repurchases.
- Future impairment risk for goodwill and intangible assets, and developments or costs related to environmental remediation.