Reliance Steel & Aluminum Co. — Q2 2022 Form 10-Q
Business context and reporting period. Reliance distributes and processes metals across diverse products, end markets, and geographies. This unaudited filing covers the quarter and six months ended June 30, 2022. Results are interim and are not necessarily indicative of full-year performance.
Financial results and position
| Metric | Q2 2022 | Prior-year comparison | Six months 2022 | Prior-year comparison |
|---|---|---|---|---|
| Net sales | $4.681 billion | +$1.262 billion; +36.9% | $9.167 billion | +$2.910 billion; +46.5% |
| Gross profit margin | 31.9% | 31.7% | 31.4% | 32.5% |
| Operating income | $787.5 million; 16.8% margin | $460.4 million; 13.5% margin | $1.504 billion; 16.4% margin | $838.7 million; 13.4% margin |
| Net income attributable to Reliance | $572.8 million | $329.1 million; +74.1% | $1.096 billion | $596.0 million; +83.9% |
| Diluted EPS | $9.15 | $5.08; +80.1% | $17.49 | $9.20; +90.1% |
- Q2 average selling price per ton rose 34.0% year over year to $3,240; tons sold increased 2.2%. For the first half, selling price rose 44.7% and tons sold increased 1.4%. Same-store tons sold declined 0.9% in Q2 and 1.7% in the first half.
- Six-month operating cash flow was $674.2 million, compared with $263.4 million. Capital expenditures were $154.2 million; cash and cash equivalents were $504.5 million at June 30.
- Total debt was $1.661 billion, including $509.7 million classified as current. Reliance had no borrowings on its $1.5 billion revolving credit facility and reported a 14.3% net debt-to-total capital ratio, down from 18.1% at year-end 2021. It was in compliance with credit facility covenants.
- Current assets were $5.024 billion and current liabilities $1.666 billion. Inventory was $2.352 billion, up from $2.065 billion at year-end; inventory turnover slowed to 4.4 times from 5.2 times in the comparable first-half period.
Material changes and management commentary
- Management reported record quarterly sales, average selling price per ton, and EPS, citing elevated metal prices, healthy demand across most end markets, operational execution, and expense discipline. It said this was the sixth consecutive quarter of record financial performance.
- Q2 gross margin improved slightly year over year, while first-half gross margin declined 110 basis points. Management attributed the first-half comparison largely to unusually rapid metal-price increases and limited supply in the first half of 2021.
- Inflation increased costs for wages, fuel, freight, and packaging. Management also cited labor and supply pressures, inflation, and recession concerns as constraints on volumes; Q2 tons sold remained below 2019 pre-pandemic levels.
- Four acquisitions completed in Q4 2021 contributed $473.7 million of first-half 2022 sales. Purchase accounting included $8.1 million of non-recurring inventory step-up amortization in first-half cost of sales.
- Six-month cash returned to shareholders included $211.0 million of share repurchases and $110.6 million of dividends and dividend equivalents. The quarterly dividend was $0.875 per share; after quarter-end, Reliance repurchased $100 million of shares and the board renewed the repurchase authorization at $1.0 billion.
- The 2022 capital expenditure budget, including unspent prior-year amounts, was increased to $455 million. Management said liquidity sources should be sufficient for operating needs, capital spending, growth, debt repayment, and shareholder returns, but provided no specific financial guidance in this filing.
Outlook, risks, and contingencies
Management identified COVID-19, the Russia-Ukraine conflict, inflation, potential recession or slowdown, supply disruption, labor shortages, metal-price movements, and changes in demand as risks to results. It expects debt obligations to be funded through operating cash flow, available credit, and potentially capital markets; $500 million of senior notes mature in April 2023. The filing reports no material changes to the risk factors in the 2021 Form 10-K.
Environmental remediation related to former operations is expected to be largely covered by insurance, and management does not expect a material adverse financial impact. Pending legal matters are described as routine litigation, with no expected material adverse impact. The filing reports no material changes to critical accounting estimates or internal control over financial reporting.
Important facts for investors to verify
- Whether elevated metal prices and selling prices persist, and how changes in metal prices affect margins and inventory accounting, including the $870.4 million LIFO reserve.
- Whether volumes recover from below-pre-pandemic levels and how inflation, labor constraints, supply conditions, and a possible economic slowdown affect demand and costs.
- Working-capital trends, particularly inventory growth, slower turnover, and cash conversion.
- Plans to repay or refinance the $500 million notes due in April 2023 and maintain liquidity while funding capital expenditures and shareholder returns.
- Integration and performance of the 2021 acquisitions, and the carrying values of goodwill and intangible assets, which totaled approximately $3.16 billion at June 30, 2022.