Reliance Steel & Aluminum Co. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Reliance distributes and processes metals across diverse end markets. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $3,847.4 million | $2,085.6 million | $10,104.6 million | $6,677.8 million |
| Gross profit | $1,211.1 million | $676.1 million | $3,247.0 million | $2,071.5 million |
| Gross margin | 31.5% | 32.4% | 32.1% | 31.0% |
| Operating income | $547.6 million | $160.5 million | $1,386.3 million | $382.4 million |
| Net income attributable to Reliance | $395.7 million | $97.6 million | $991.7 million | $239.5 million |
| Diluted EPS | $6.15 | $1.51 | $15.35 | $3.66 |
| Operating cash flow | $142.2 million | $296.3 million | $405.6 million | $942.8 million |
Q3 sales increased 84.5%; nine-month sales rose 51.3%. Higher average selling prices per ton—up 77.9% for the quarter and 44.5% year to date—were the main driver, alongside increases in tons sold of 5.8% and 5.7%, respectively. Q3 operating margin was 14.2%, versus 7.7%; nine-month operating margin was 13.7%, versus 5.7%. The company describes gross profit and gross margin as non-GAAP measures that exclude related depreciation and amortization.
Cash and equivalents were $638.4 million at September 30, 2021, down from $683.5 million at year-end 2020. Total debt was approximately $1.66 billion; the $1.5 billion revolving facility had no borrowings outstanding. Net debt-to-total capital was 14.7%, compared with 15.8% at year-end. The company reported $4,284.0 million in current assets and $1,007.1 million in current liabilities. Capital expenditures were $178.9 million for the first nine months.
Material changes and key drivers
- Management reported record sales and profitability in each of the first three quarters of 2021, attributing results to high metals prices, healthy demand in most end markets, pricing discipline, strong gross margins, and expense control.
- Significant LIFO inventory charges reduced earnings: $262.5 million in Q3 and $562.5 million for the first nine months, compared with LIFO credits of $12.5 million and $37.5 million in the respective 2020 periods. The balance-sheet LIFO reserve was $678.1 million.
- Operating cash flow fell year over year, primarily because rising metal prices and demand increased investment in receivables and inventory. At September 30, accounts receivable were $1,693.5 million and inventory was $1,877.8 million, up from $926.3 million and $1,420.4 million, respectively, at year-end 2020.
- SG&A increased 35.1% in Q3 and 19.7% year to date, mainly from higher incentive compensation and shipment-related variable costs, with some inflation in fuel, freight, and packaging. SG&A declined as a share of sales.
- 2020 comparisons included impairment, restructuring, and postretirement settlement charges; the first nine months of 2020 included $157.7 million of impairment and restructuring charges. No comparable material charges were reported in 2021.
Outlook, risks, and other notable items
- The filing gives no specific quantitative earnings or sales guidance. Management said it expects liquidity to support operations, capital spending, acquisitions, dividends, and opportunistic repurchases, and expects to continue acquisition and internal growth activities.
- Management said sales volumes were constrained by metal supply limits, labor shortages, and other supply-chain disruptions. COVID-19 developments, including government requirements and vaccination mandates, could affect Reliance, customers, and suppliers; management said the pandemic’s ongoing impact could not be reasonably estimated.
- On October 1, 2021, after the reporting period, Reliance acquired Merfish United, a U.S. distributor of pipe and related products. The company said the target had approximately $215 million in assets and $600 million in trailing-12-month revenue; purchase-price allocation was incomplete, and the acquisition was funded with cash on hand.
- The board declared a Q4 2021 dividend of $0.6875 per share. Reliance repurchased $155.0 million of shares in the first nine months and authorized a $1.0 billion share repurchase program in July 2021.
- Environmental remediation costs at a former subsidiary operation are expected to be largely covered by insurance. The company said routine litigation and other disclosed matters are not expected to materially affect its financial condition, results, or cash flows. It reported compliance with debt covenants and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether elevated metals prices, LIFO charges, and supply constraints persist, and how they affect margins and inventory valuation.
- Whether cash conversion improves as receivables and inventory levels normalize; operating cash flow was materially lower despite record earnings.
- Merfish United’s final purchase-price allocation, integration progress, and contribution to results after closing.
- Debt maturities and liquidity needs: the filing states $911.5 million of debt obligations come due before the revolving facility expires in September 2025.
- Potential effects of inflation, labor availability, COVID-19 developments, and other supply-chain disruptions on volumes and costs.