Reliance Steel & Aluminum Co. — Q1 2021 Form 10-Q
Business context and period: The filing is for the three months ended March 31, 2021; the company distributes and processes metals. Results are unaudited and compared with Q1 2020. Management described Q1 2021 as a record quarter. The filing cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change/context |
|---|---|---|---|
| Net sales | $2,838.4 million | $2,572.9 million | Up 10.3%; average selling price per ton rose 16.0%, while tons sold fell 4.0% (daily tons, adjusted for shipping days, fell 2.5%). |
| Gross profit / margin | $953.7 million / 33.6% | $780.7 million / 30.3% | Up 22.2% in dollars. Management’s adjusted comparison excludes the prior-year $39.8 million inventory provision; margin expanded 170 basis points. Gross profit and margin are company-presented non-GAAP measures. |
| Operating income | $378.3 million | $103.3 million | Prior period included $137.5 million of impairment and restructuring charges; excluding that charge, Q1 2021 operating income increased $137.5 million, or 57.1%. |
| Net income attributable to Reliance | $266.9 million | $61.7 million | Up 62.0% excluding the prior-year impairment and restructuring charge. |
| Diluted EPS | $4.12 | $0.92 | Up 68.2% excluding the prior-year charge, according to management. |
| Operating cash flow | $161.8 million | $170.8 million | Lower despite higher earnings, primarily reflecting working-capital investment. |
Cash, debt and liquidity: At March 31, 2021, cash and cash equivalents were $760.3 million, total debt was $1.663 billion, and net debt-to-total capital was 14.2%, down from 15.8% at December 31, 2020. The company had no borrowings under its $1.5 billion revolving credit facility and reported $32.3 million of letters of credit issued under it. It reported $1.640 billion of long-term debt and $5.2 million of current debt maturities and short-term borrowings. The company said it was in compliance with credit covenants; its interest coverage ratio was 14.4 times against a 3.0-times minimum, and leverage ratio was 21.8% against a 60% maximum.
Cash use and working capital: Investing activities used $27.7 million, including $43.7 million of capital expenditures, partly offset by $20.6 million in asset-sale proceeds. Financing activities used $56.4 million, including $44.8 million of dividends; there were no Q1 2021 share repurchases. Cash increased $76.8 million during the quarter. Receivables rose to $1.272 billion from $926.3 million at year-end, and inventories rose to $1.477 billion from $1.420 billion. Management cited a $182.8 million investment in operating assets and liabilities, primarily working capital, amid higher metals prices.
Material changes and management commentary
- Sales growth was primarily price-driven: average selling price per ton increased 16.0%, while total tons sold declined. Carbon steel average selling price rose 30.1%; carbon steel represented about 56% of gross sales dollars.
- Management attributed record gross margins to strong metals pricing, solid demand and limited supply, which allowed selling prices to rise ahead of higher metal costs. The Q1 2021 LIFO inventory reserve adjustment was a $100.0 million charge, compared with a $20.0 million credit in Q1 2020.
- Demand was healthy in most end markets, but commercial aerospace and energy volumes remained below pre-pandemic levels. Management reported signs of improvement in both, while citing metal supply constraints, supply-chain disruptions, and labor and trucking shortages as limits on sales volumes.
- Inventory turns improved to 5.4 times based on tons, versus 4.8 times in Q1 2020; days sales outstanding improved to 41.1 from 42.4 days.
- Quarterly dividend was $0.6875 per share, compared with $0.625 in Q1 2020. The board declared the same $0.6875 dividend for Q2 2021, payable June 11, 2021.
Outlook, risks and unusual items
- No specific earnings, sales or margin guidance was provided. Management expects liquidity to support operations, capital expenditures, acquisitions and internal growth, dividends, and opportunistic share repurchases.
- Management said the full, ongoing effect of COVID-19 cannot be reasonably estimated. Future results remain exposed to pandemic developments, economic conditions and customer demand; estimates may be more volatile than usual.
- Other cited risks include metals pricing and availability, interest rates, foreign exchange, competition, and end-market demand. The company reported no material changes to the risk factors in its 2020 Form 10-K.
- The Q1 2020 comparison included $137.5 million in impairment and restructuring charges, mainly related to energy businesses and planned closures; Q1 2021 recorded $0.1 million of restructuring cost and no impairment charge.
- Environmental remediation tied to former EMJ operations could involve significant cleanup costs, but the company expects insurance to cover most related costs and does not expect a material adverse impact. Routine litigation was not expected to have a material impact.
- Goodwill of $1.936 billion and net intangible assets of $938.0 million are significant balance-sheet items subject to impairment assessment. A subsequent-event agreement signed April 21, 2021 permits standby letters of credit or guarantees up to $50 million in aggregate.
Important facts for investors to verify
- Whether elevated metals prices and constrained supply persist, and how changes in selling prices versus inventory costs affect gross margins and LIFO charges.
- Whether tons sold recover in aerospace and energy, and whether supply-chain, labor and trucking constraints ease.
- Working-capital and cash-flow trends as receivables and inventories rise; confirm liquidity and debt maturities remain manageable.
- Whether goodwill and intangible-asset valuations remain supportable if end-market outlooks weaken.
- Review the company’s 2020 Form 10-K for additional risk-factor, debt-obligation and contractual-commitment detail; the 10-Q states there were no material changes to disclosed commitments.