Reliance Steel & Aluminum Co. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Reliance distributes and processes metals through service centers. The interim financial statements are unaudited.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $3,880.3 million | $4,681.2 million | $7,845.6 million | $9,167.0 million |
| Operating income | $511.3 million | $787.5 million | $1,024.9 million | $1,503.6 million |
| Net income attributable to Reliance | $385.1 million | $572.8 million | $768.2 million | $1,096.1 million |
| Diluted EPS | $6.49 | $9.15 | $12.92 | $17.49 |
| Gross profit margin | 31.5% | 31.9% | 31.2% | 31.4% |
| Operating margin | 13.2% | 16.8% | 13.1% | 16.4% |
Gross profit margin is a company-presented measure that excludes depreciation and amortization associated with sales; it may not be comparable with similarly titled measures at other companies. Six-month operating cash flow was $679.7 million, versus $674.2 million a year earlier. Capital expenditures were $233.1 million; investing cash outflow was $255.0 million. Financing cash outflow was $780.4 million, including $505.7 million of long-term debt principal payments, $120.6 million of dividends and $112.8 million of share repurchases.
At June 30, cash was $816.3 million, total debt was $1,151.7 million, and net debt-to-total capital was 4.1%, down from 6.3% at December 31, 2022. Reliance had no borrowings on its $1.5 billion revolving facility and reported $1.5 billion available under it. Current assets were $4,858.3 million and current liabilities were $937.8 million. Inventory was $2,202.3 million; the LIFO inventory valuation reserve was $683.8 million.
Material changes versus the prior comparable period
- Q2 sales declined 17.1% and first-half sales declined 14.4% year over year, despite tons sold increasing 1.9% and 4.5%, respectively. Lower average selling prices per ton—down 19.0% for Q2 and 18.3% for the half—more than offset the volume growth.
- Q2 operating income fell 35.1%; first-half operating income fell 31.8%. Attributable net income declined 32.8% for Q2 and 29.9% for the first half. Diluted EPS decreased to $6.49 from $9.15 for Q2 and to $12.92 from $17.49 for the half.
- Gross margins edged lower from prior-year periods that benefited from rising metals prices. Lower sales also reduced operating leverage; SG&A rose 0.3% in Q2 and 3.3% for the first half, with wage and transportation inflation partly offset by lower incentive compensation.
- Cash and equivalents decreased from $1,173.4 million at year-end 2022 to $816.3 million, following the $500.0 million redemption of 4.50% notes in January, dividends, repurchases and investment spending. Cash from operations remained slightly above the prior-year level despite lower net income, which management attributed to working-capital management.
Outlook, commentary and risks
- Management described demand as healthy in most end markets, with particular strength in non-residential construction and commercial aerospace. Q2 average selling price per ton was relatively flat sequentially: higher carbon-steel pricing offset declines in stainless steel and common-alloy aluminum.
- No quantified earnings or revenue guidance is provided in the filing. Management expects cash, operating cash generation and credit availability to be sufficient for operations, debt repayment, capital expenditures, acquisitions, dividends and repurchases over the next 12 months and beyond.
- Reliance acquired Southern Steel Supply, LLC on May 1, 2023, funded with cash on hand. The acquisition contributed $8.9 million of sales in the first half; cash paid, net of acquired cash, was $24.1 million.
- The company cites risks from inflation, elevated interest rates, possible recession or slower growth, changes in metals pricing and demand, labor constraints, supply-chain disruptions, and geopolitical or public-health developments. Results may also vary with shipping days and seasonal customer activity.
- Environmental remediation related to former EMJ manufacturing operations could involve significant cleanup costs, but insurance is expected to cover the majority; management does not expect a material adverse impact. Other disclosed litigation is routine, and management does not expect a material adverse impact.
- Reliance reported compliance with its credit-agreement financial covenants. It had $400.6 million of debt obligations due before the revolving facility matures in September 2025. The company reported no material changes to its risk factors or market-risk exposures compared with its 2022 Form 10-K.
Important facts for investors to verify
- Whether metals prices and product mix stabilize, and whether volume growth continues to offset price-driven sales declines.
- Whether gross margins, SG&A leverage and profitability hold up as demand and commodity prices change.
- Working-capital trends, especially receivables and inventory, and the sustainability of operating cash flow after capital spending and shareholder returns.
- Debt maturities, liquidity and covenant compliance, including the stated $400.6 million due before September 2025.
- Southern Steel’s contribution and integration, and any developments in environmental remediation or other contingencies.