Reliance Steel & Aluminum Co. — 2020 Form 10-K
Period: Fiscal year ended December 31, 2020; the filing also reports fourth-quarter results. Reliance is a diversified metals distributor and processor with approximately 300 locations, one reportable segment, and more than 125,000 customers.
Financial highlights
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $8.812 billion | $10.974 billion |
| Gross profit / margin | $2.775 billion / 31.5% | $3.329 billion / 30.3% |
| Operating income | $565.8 million | $1.014 billion |
| Income before taxes | $478.2 million | $929.3 million |
| Net income attributable to Reliance | $369.1 million | $701.5 million |
| Diluted EPS | $5.66 | $10.34 |
| Cash from operations | $1.173 billion | $1.302 billion |
| Capital expenditures | $172.0 million | $242.2 million |
For the fourth quarter of 2020, net sales were $2.134 billion, gross profit was $703.6 million (about 33.0% of sales), net income attributable to Reliance was $129.6 million, and diluted EPS was $2.01. In fourth-quarter 2019, those figures were $2.448 billion, $794.2 million (about 32.4%), $165.6 million, and $2.44, respectively.
At year-end, cash and cash equivalents were $683.5 million, working capital was $2.500 billion, and total debt was approximately $1.664 billion. Reliance had no borrowings under its $1.5 billion revolving credit facility, $1.46 billion available to borrow, and a 15.8% net-debt-to-total-capital ratio. It reported $5.123 billion of total equity. The company was in compliance with its debt covenants; its interest coverage ratio was 11.8x against a 3.0x minimum, and its leverage ratio was 22.6% against a 60% maximum.
Changes versus the prior year
- Sales fell 19.7%; tons sold declined 10.8% and average selling price per ton fell 9.6%, reflecting weaker demand and lower metals prices amid COVID-19.
- Despite lower sales, gross margin reached a record 31.5%, up from 30.3%, supported by pricing discipline, value-added processing and fourth-quarter pricing conditions. The company processed 49% of orders with value-added services.
- Operating income declined 44.2%, and net income attributable to Reliance declined 47.4%. Diluted EPS fell 45.3%.
- Operating cash flow decreased 9.9%, but remained strong as lower working-capital investment and non-cash impairment charges partly offset lower earnings. Inventory turns improved to 4.7x from 4.5x.
- Year-end cash rose to $683.5 million from $174.3 million. Total debt increased to $1.664 billion from $1.596 billion, while the company extended maturities through a $900 million notes offering, including notes due 2025 and 2030.
Outlook, risks and unusual items
- Management said COVID-19’s duration and financial effects remained uncertain and could continue to adversely affect demand, operations, earnings and cash flow. Demand improved in some markets late in 2020, while commercial aerospace and energy remained under pressure.
- The company recorded $157.8 million of impairment and restructuring charges, including $137.5 million associated mainly with energy-related businesses and reduced outlooks for certain other operations. These charges included $108.0 million of long-lived asset impairments and $38.2 million of inventory provisions. A separate $19.4 million postretirement-plan settlement charge also affected results.
- Management reported adequate liquidity for operations, capital spending, debt service and shareholder returns, while noting that further COVID-19-related deterioration could reduce cash generation and access to financing. The filing does not provide a quantified earnings or sales forecast.
- The 2021 capital expenditure budget was $245 million, with actual spending expected to be higher because of projects carried forward from 2020. In February 2021, the board raised the quarterly dividend 10% to $0.6875 per share.
- Key business risks include metal-price volatility and inventory effects, cyclical end-market demand, supplier availability, competition, leverage and refinancing needs, goodwill and intangible-asset impairment, cybersecurity, regulatory and environmental obligations, and labor negotiations. Approximately 700 employees were covered by collective bargaining agreements expiring in 2021.
- The company disclosed an environmental remediation matter related to former operations of an acquired subsidiary; insurance was expected to cover the majority of related costs. It did not expect a material adverse impact. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; recoverability of long-lived and indefinite-lived intangible assets was identified as a critical audit matter.
Important facts for investors to verify
- Whether demand recovery across end markets, particularly commercial aerospace and energy, supports continued sales and margin performance.
- How metals-price movements, inventory costs and LIFO adjustments affect reported gross margin and cash generation.
- The assumptions and remaining exposure underlying the 2020 impairment charges and future goodwill or intangible-asset impairment risk.
- Debt maturities, covenant headroom, interest-rate exposure and the company’s ability to sustain dividends, buybacks and planned capital spending.
- Potential changes in environmental remediation costs, customer credit losses, supplier availability and labor negotiations.