Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains certain statements that are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our forward-looking statements may include, but are not limited to, discussions of our industry and end markets, our business strategies and our expectations concerning future demand and major commodity product pricing and our results of operations, margins, profitability, taxes, liquidity, macroeconomic conditions, including inflation and the possibility of an economic recession or slowdown, litigation matters and capital resources. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “preliminary,” “range,” “intend” and “continue,” the negative of these terms, and similar expressions. All statements contained in this report, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date of such statements. We caution readers not to place undue reliance on forward-looking statements.
Forward-looking statements involve known and unknown risks and uncertainties and are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements as a result of various important factors, including, but not limited to, actions taken by us, as well as developments beyond our control, including, but not limited to, the impacts of labor constraints and supply chain disruptions, the continuing pandemic and changes in worldwide and U.S. political and economic conditions such as inflation, a prolonged higher interest rate environment and the possibility of an economic recession that could materially impact us, our customers and suppliers and demand for our products and services. Deteriorations in economic conditions, as a result of inflation, elevated interest rates, economic recession, COVID-19, the conflict between Russia and Ukraine or otherwise, could lead to a decline in demand for our products and services and negatively impact our business, and may also impact financial markets and corporate credit markets which could adversely impact our access to financing, or the terms of any financing. Other factors which could cause actual results to differ materially from our forward-looking statements include those disclosed in this report and in other reports we have filed with the United States Securities and Exchange Commission (the “SEC”). Important risks and uncertainties about our business can be found elsewhere in this Quarterly Report on Form 10-Q and in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC and in other documents Reliance files or furnishes with the SEC.
The statements contained in this quarterly report on Form 10-Q speak only as of the date that they were made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. Except as required by law, we disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein to reflect any change in assumptions, beliefs, or expectations or any change in events, conditions, or circumstances upon which any such forward-looking statements are based. You should review any additional disclosures we make in any subsequent press releases and Forms 10-K, 10-Q and 8-K filed with or furnished to the SEC.
14
Table of Contents
Overview
We delivered solid financial performance in the first quarter of 2023. Our first quarter of 2023 results included an increase in tons sold, a strong gross profit margin that was consistent with the first quarter of 2022 and strong operating cash flow through outstanding operational execution in an uncertain business environment. We believe our ability to maintain a strong gross profit margin in the first quarter of 2023 was supported by our diversified business model, value-added processing capabilities and ability to service small order sizes with quick turnaround.
Key results for the first quarter of 2023 compared with the first quarter of 2022 were as follows:
● 7.2% increase in tons sold.
● Net sales of $3.97 billion were down 11.6%; reflecting a 17.7% decrease in average selling price per ton sold.
● Gross profit margin of 30.9%.
● Earnings per diluted share of $6.43.
● Cash flow from operations of $384.6 million.
● Inventory turnover rate (based on tons) of 4.9x exceeded our Company-wide goal of 4.7x and our 4.4x rate in the prior year quarter.
● Returns to stockholders of $100.9 million, comprised of $62.0 million of cash dividends and $38.9 million of share repurchases.
Our net sales decline in the first quarter of 2023 was primarily due to a 17.7% decline in our average selling price per ton sold that offset a strong 7.2% increase in tons sold compared to the first quarter of 2022. The increase in tons sold was due to solid demand in the vast majority of our end markets, with particular strength in non-residential construction, the toll processing services we provide to the automotive market, general manufacturing and aerospace. We continued to execute our strategy in a dynamic operating environment featuring metal pricing volatility, ongoing inflationary headwinds, recessionary concerns, supply chain disruptions and labor shortages.
Our gross profit margin of 30.9% in the first quarter of 2023 was consistent with the first quarter of 2022. Pricing for most of the aluminum, carbon and stainless steel products we sell declined throughout the fourth quarter of 2022; however, early in the first quarter of 2023 the metals pricing declines had generally stabilized, and we operated in a relatively flat pricing environment during most of the quarter. We believe that announced carbon flat-rolled steel price increases during the quarter incentivized some of our customers to increase their purchases to buy ahead of further price increases. Our inventory turnover rate accelerated and our inventory costs on hand continued to align with lower replacement costs as our tons sold improved 17.7% compared to the fourth quarter of 2022, which was one of the best first quarter starts we have seen in our history.
Our SG&A expense in the first quarter of 2023 increased $39.4 million, or 6.4%, from the first quarter of 2022. The increase was primarily due to incremental variable costs associated with a strong 7.2% increase in tons sold, including headcount increases and inflationary pressure on wages, fuel, freight and warehouse costs, offset by decreased incentive-based compensation from lower profitability.
Our cash flow from operations of $384.6 million in the first quarter of 2023 decreased only $19.4 million, or 4.8%, compared to record first quarter levels in 2022 despite a 26.7% decline in net income. The decrease in our profitability in the first quarter of 2023 from then-record levels in the first quarter of 2022 was generally offset by decreased working capital requirements mainly due to lower metals pricing and volatility. Our strong cash flow generation enabled us to grow our business and increase returns to stockholders. During the first quarter of 2023, we invested in our future growth with a quarterly record $102.9 million invested in capital expenditures and we increased our returns to stockholders by 36.7%. Additionally, in the first quarter of 2023 we completed the redemption of $500.0 million aggregate principal amount of senior unsecured notes with cash on hand.
15
Table of Contents
We believe our strong liquidity position that includes substantial cash on hand, strong cash flow generation and $1.5 billion of availability under our revolving credit facility will support our continued prudent use of capital as we maintain a flexible approach focused on growth, both organically and through acquisitions, and stockholder return activities.
Results of Operations
The following sets forth certain income statement data for the first quarters of 2023 and 2022 (dollars are shown in millions, except for per share amounts and certain amounts may not calculate due to rounding):
Three Months Ended March 31,
2023
2022
% of
% of
$
Net Sales
$
Net Sales
Net sales
$
3,965.3
100.0
%
$
4,485.8
100.0
%
Cost of sales (exclusive of depreciation and amortization expense shown below) (1)
2,739.3
69.1
3,098.7
69.1
Gross profit (2)
1,226.0
30.9
1,387.1
30.9
Warehouse, delivery, selling, general and administrative expense (“SG&A”)
651.3
16.4
611.9
13.6
Depreciation and amortization expense
61.1
1.5
59.1
1.3
Operating income
$
513.6
13.0
%
$
716.1
16.0
%
Net income attributable to Reliance
$
383.1
9.7
%
$
523.3
11.7
%
Diluted earnings per share attributable to Reliance stockholders
$
6.43
$
8.33
(1) Cost of sales in the first quarter of 2022 included $8.1 million of non-recurring amortization of inventory step-up to fair value adjustments for our 2021 acquisitions.
(2) Gross profit, calculated as net sales less cost of sales, and gross profit margin, calculated as gross profit divided by net sales, are non-GAAP financial measures as they exclude depreciation and amortization expense associated with the corresponding sales. About half of our orders are basic distribution with no processing services performed. For the remainder of our sales orders, we perform “first-stage” processing, which is generally not labor intensive as we are simply cutting the metal to size. Because of this, the amount of related labor and overhead, including depreciation and amortization, is not significant and is excluded from cost of sales. Therefore, our cost of sales is substantially comprised of the cost of the material we sell. We use gross profit and gross profit margin as shown above as measures of operating performance. Gross profit and gross profit margin are important operating and financial measures as their fluctuations can have a significant impact on our earnings. Gross profit and gross profit margin, as presented, are not necessarily comparable with similarly titled measures for other companies.
First Quarter Ended March 31, 2023 Compared to First Quarter Ended March 31, 2022
Net Sales
Three Months Ended March 31,
Percentage
2023
2022
Change
Change
(dollars in millions, tons in thousands)
Net sales
$
3,965.3
$
4,485.8
$
(520.5)
(11.6)
%
Tons sold
1,520.1
1,417.7
102.4
7.2
%
Average selling price per ton sold
$
2,623
$
3,186
$
(563)
(17.7)
%
Our tons sold and average selling price per ton sold exclude our tons toll processed. Our average selling price per ton sold includes intercompany transactions that are eliminated from our consolidated net sales.
Our net sales decreased from record first quarter levels of 2022 due to a significant decline in our average selling price per ton sold that was partially offset by a strong increase in tons sold. Demand was healthy in the vast majority of our end
16
Table of Contents
markets, with particular strength in non-residential construction, the toll processing services we provide to the automotive market, general manufacturing and aerospace.
Since we primarily purchase and sell our inventories in the spot market, our average selling prices generally fluctuate similarly with the changes in the costs of the various metals we purchase. Our average selling price in the first quarter of 2022 was a quarterly record for us, which peaked at an ultimate record in the second quarter of 2022 and then declined for the subsequent three quarters mainly due to mill price decreases for our major product categories ; however, metals pricing remained relatively higher versus historical levels throughout the first quarter of 2023.
The mix of products sold can also have an impact on our overall average selling price per ton sold. As carbon steel sales represented approximately 52% of our gross sales for the first quarter of 2023, changes in carbon steel prices have the most significant impact on changes in our overall average selling price per ton sold. Y ear-over-year changes in the selling prices of our major commodity products and related mix of our tons sold are presented below:
Change in
Change in
Average Selling
Percentage of
Price Per
Total
Ton Sold
Tons Sold
Carbon steel
(23.6)
%
1.6
%
Aluminum
(1.3)
%
(0.5)
%
Stainless steel
(2.9)
%
(1.1)
%
Alloy
13.9
%
(0.4)
%
Cost of Sales and Gross Profit
Three Months Ended March 31,
2023
2022
% of
% of
Dollar
Percentage
$
Net Sales
$
Net Sales
Change
Change
(dollars in millions)
Cost of sales
$
2,739.3
69.1
%
$
3,098.7
69.1
%
$
(359.4)
(11.6)
%
Gross profit
$
1,226.0
30.9
%
$
1,387.1
30.9
%
$
(161.1)
(11.6)
%
LIFO (income) expense
$
(15.0)
(0.4)
%
$
37.5
0.8
%
$
(52.5)
*
* Not meaningful.
Gross profit in the first quarter of 2023 decreased from the first quarter of 2022 mainly due to lower sales as a result of a decrease in average selling price per ton sold that outpaced an increase in tons sold.
In addition, we record non-cash adjustments to our LIFO method inventory valuation reserve, which are included in cost of sales and, in effect, reflects cost of sales at current replacement costs. The inventory caption of our consolidated balance sheet included a LIFO method inventory valuation reserve of $728.8 million at March 31, 2023. Furthermore, cost of sales in the first quarter of 2022 was reduced by $8.1 million of non-recurring amortization of inventory step-up to fair value adjustments related to our 2021 acquisitions that decreased gross profit margin 20 basis points.
Our gross profit margin in the first quarter of 2023 was strong and unchanged from the first quarter of 2022. We believe our strong and consistent gross profit margin was supported by investments in value-added processing equipment in recent years, relatively higher metal pricing versus historical levels and healthy demand.
See “Net Sales” above for further discussion on product pricing trends.
17
Table of Contents
Expenses
Three Months Ended March 31,
2023
2022
% of
% of
Dollar
Percentage
$
Net Sales
$
Net Sales
Change
Change
(dollars in millions)
SG&A expense
$
651.3
16.4
%
$
611.9
13.6
%
$
39.4
6.4
%
Depreciation & amortization expense
$
61.1
1.5
%
$
59.1
1.3
%
$
2.0
3.4
%
The increase in our SG&A expense was mainly due to higher variable costs associated with higher tons sold and inflationary wage increases, which were partially offset by lower incentive-based compensation that is primarily tied to first-in, first-out (“FIFO”) pretax income profitability, which declined 32.8%. Our SG&A expense as a percentage of sales mainly increased due to lower sales levels.
See “Cost of Sales and Gross Profit” above for discussion of our LIFO method inventory valuation reserve.
Operating Income
Three Months Ended March 31,
2023
2022
% of
% of
Dollar
Percentage
$
Net Sales
$
Net Sales
Change
Change
(dollars in millions)
Operating income
$
513.6
13.0
%
$
716.1
16.0
%
$
(202.5)
(28.3)
%
The decrease in our operating income was mainly a result of lower gross profit, driven by lower sales due mainly to lower metals prices along with a moderate increase in SG&A expense that was generally consistent with the increase in our tons sold. Our operating income margin decline was consistent with the increase in our SG&A expense as a percentage of sales that was mainly due to our lower sales.
Income Tax Rate
Our effective income tax rates for the first quarters of 2023 and 2022 were 24.4% and 24.8%, respectively. The differences between our effective income tax rates and the U.S. federal statutory rate of 21.0% were mainly due to state income taxes and higher foreign income tax rates, partially offset by the effects of company-owned life insurance policies.
Financial Condition
Operating Activities
Net cash provided by operations of $384.6 million in the first quarter of 2023 was slightly less than record first quarter cash flow of $404.0 million in 2022. We were able to achieve consistent operating cash flow as the decline in our net income required a similar decrease in working capital investment in the first quarter of 2023 compared to the same period in 2022, due to the relatively flat pricing environment in the first quarter of 2023 compared to the same period in 2022 in which our average selling price had increased significantly to a record level. To manage our working capital, we focus on our days sales outstanding and inventory turnover rate as receivables and inventory are the two most significant elements of our working capital. As of March 31, 2023 and 2022, our days sales outstanding rate was 40.0 days and 39.1 days, respectively. Our inventory turnover rate (based on tons) during the first quarter of 2023 was 4.9 times (or 2.4 months on hand), compared to 4.4 times (or 2.7 months on hand) in the first quarter of 2022.
Income taxes paid were $21.2 million in the first quarter of 2023 compared to $89.8 million in the first quarter of 2022. The decrease in our taxes paid was mainly due to income tax extension payments in the first quarter of 2022 which were not required in the first quarter of 2023.
18
Table of Contents
Investing Activities
Net cash used in investing activities was $102.6 million in the first quarter of 2023 compared to $63.3 million in the first quarter of 2022 and were substantially comprised of capital expenditures. The majority of our capital expenditures in the first quarters of 2023 and 2022 were related to growth initiatives.
Financing Activities
Net cash used in financing activities was $639.2 million in the first quarter of 2023 compared to $92.0 million in the first quarter of 2022, mainly due to the redemption of $500.0 million aggregate outstanding principal amount of senior notes in January 2023 . In the first quarter of 2023, we spent $38.9 million to repurchase shares of our common stock compared to $17.1 million in the first quarter of 2022. Our other stockholder return activities included an increase in our quarterly dividend rate with total dividend payments of $62.0 million in the first quarter of 2023 compared to $56.7 million in the first quarter of 2022. We also spent $37.2 million on taxes relating to net share settlement of performance-based restricted stock units in the first quarter of 2023 compared to $17.1 million in the first quarter of 2022.
On April 25, 2023, our Board of Directors declared the 2023 second quarter cash dividend of $1.00 per share. We have increased our quarterly dividend 30 times since our IPO in 1994, with the most recent increase of 14.3% from $0.875 per share to $1.00 per share effective in the first quarter of 2023. We have paid quarterly cash dividends on our common stock for 64 consecutive years and have never reduced or suspended our regular quarterly dividend.
See Note 8—“Equity” to our consolidated financial statements in Part I, Item 1 “Financial Statements” for further information on our stock repurchases.
On July 26, 2022, our Board of Directors amended our share repurchase program to increase the repurchase authorization to $1.0 billion. At March 31, 2023, $641.8 million of our common stock remained authorized for repurchase. The share repurchase program does not obligate us to repurchase any specific number of shares, does not have a specific expiration date and may be suspended or discontinued at any time.
Since 2018, we have repurchased approximately 16.1 million shares at an average cost of $115.65 per share, for a total of $1.86 billion, resulting in a 22.2% reduction in our common shares outstanding. We expect to continue to be opportunistic in our approach to repurchasing shares of our common stock.
Debt
We have a $1.5 billion unsecured revolving credit facility with no outstanding borrowings at March 31, 2023 under our Amended and Restated Credit Agreement (as amended, the “Credit Agreement”). We also had an aggregate of $1.15 billion principal amount of senior unsecured note obligations with various maturities through 2036 issued under indentures as of March 31, 2023.
On January 15, 2023, we redeemed in full the $500.0 million aggregate outstanding principal amount of our 4.50% senior notes due April 15, 2023 using cash on hand. See Note 5—“Debt” to our consolidated financial statements in Part I, Item 1 “Financial Statements” for further information on our debt obligations.
Liquidity and Capital Resources
We believe our primary sources of liquidity, including funds generated from operations, cash and cash equivalents and our $1.5 billion revolving credit facility, will be sufficient to satisfy our cash requirements and stockholder return activities over the next 12 months and beyond. As of March 31, 2023, we had $816.2 million in cash and cash equivalents and our net debt-to-total capital ratio (net debt-to-total capital is calculated as carrying amount of debt, net of cash, divided by total Reliance stockholders’ equity plus carrying amount of debt, net of cash) was 4.3%, down from 6.3% as of December 31, 2022.
19
Table of Contents
As of March 31, 2023, we had $408.5 million of debt obligations coming due before our $1.5 billion revolving credit facility expires on September 3, 2025.
We believe that we will continue to have sufficient liquidity to fund our future operating needs and to repay our debt obligations as they become due . In addition to funds generated from operations and nearly $1.5 billion available under our revolving credit facility, we expect to continue to be able to access the capital markets to raise funds, if desired. We believe our sources of liquidity will continue to be adequate to maintain operations, make necessary capital expenditures, finance strategic growth through acquisitions and internal initiatives, pay dividends and opportunistically repurchase shares. Additionally, we believe our investment grade credit ratings enhance our ability to effectively raise capital, if needed.
Covenants
The Credit Agreement and indentures governing our debt securities include customary representations, warranties, covenants and events of default provisions. The covenants under the Credit Agreement include, among other things, two financial maintenance covenants that require us to comply with a minimum interest coverage ratio and a maximum leverage ratio.
We were in compliance with all financial maintenance covenants in our Credit Agreement at March 31, 2023.
Seasonality
Some of our customers are in seasonal businesses, especially customers in the construction industry and related businesses. However, our overall operations have not shown any material seasonal trends as a result of our geographic, product and customer diversity. Typically, revenues in the months of July, November and December have been lower than in other months because of a reduced number of working days for shipments of our products, resulting from holidays observed by the Company as well as vacation and extended holiday closures at some of our customers. The number of shipping days in each quarter also has an impact on our quarterly sales and profitability. Results of any one or more quarters are therefore not necessarily indicative of annual results.
Goodwill and Other Intangible Assets
Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $2.11 billion at March 31, 2023, or approximately 21% of total assets and 29% of total equity. Additionally, other intangible assets, net amounted to $1.01 billion at March 31, 2023, or approximately 10% of total assets and 14% of total equity. Goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests and further evaluation when certain events occur. Other intangible assets with finite useful lives are amortized over their useful lives. We review the recoverability of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable.
Critical Accounting Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our Unaudited Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical accounting estimates include those related to goodwill and other indefinite-lived intangible assets and long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
During the quarter ended March 31, 2023, there were no material changes to our critical accounting estimates as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition
20
Table of Contents
and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.
Website Disclosure
The Company may use its website as a distribution channel of material company information. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at www.investor.rsac.com . In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Alerts” section at www.investor.rsac.com . The website is for informational purposes only and is not intended for use as a hyperlink. The Company is not incorporating any material on its website into this report.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.