UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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As of April 29, 2022,
RELIANCE STEEL & ALUMINUM CO.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions, except number of shares which are reflected in thousands and par value)
March 31, | December 31, | ||||
2022 |
| 2021* | |||
ASSETS | |||||
Current assets: | |||||
Cash and cash equivalents | $ | | $ | | |
Accounts receivable, less allowance for credit losses of $ | | | |||
Inventories | | | |||
Prepaid expenses and other current assets | | | |||
Total current assets | | | |||
Property, plant and equipment: | |||||
Land | | | |||
Buildings | | | |||
Machinery and equipment | | | |||
Accumulated depreciation | ( | ( | |||
Property, plant and equipment, net | | | |||
Operating lease right-of-use assets | | | |||
Goodwill | | | |||
Intangible assets, net | | | |||
Cash surrender value of life insurance policies, net | | | |||
Other assets | | | |||
Total assets | $ | | $ | | |
LIABILITIES AND EQUITY | |||||
Current liabilities: | |||||
Accounts payable | $ | | $ | | |
Accrued expenses | | | |||
Accrued compensation and retirement costs | | | |||
Accrued insurance costs | | | |||
Current maturities of long-term debt and short-term borrowings | | | |||
Current maturities of operating lease liabilities | | | |||
Income taxes payable | | | |||
Total current liabilities | | | |||
Long-term debt | | | |||
Operating lease liabilities | | | |||
Deferred compensation and retirement costs | | | |||
Other long-term liabilities | | | |||
Deferred income taxes | | | |||
Commitments and contingencies | |||||
Equity: | |||||
Preferred stock, $ | |||||
Common stock and additional paid-in capital, $ | |||||
and shares— | | | |||
Retained earnings | | | |||
Accumulated other comprehensive loss | ( | ( | |||
Total Reliance stockholders’ equity | | | |||
Noncontrolling interests | | | |||
Total equity | | | |||
Total liabilities and equity | $ | | $ | |
* Amounts derived from audited financial statements.
See accompanying notes to unaudited consolidated financial statements.
1
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except number of shares which are reflected in thousands and per share amounts)
Three Months Ended | |||||
March 31, | |||||
2022 |
| 2021 | |||
Net sales | $ | | $ | | |
Costs and expenses: | |||||
Cost of sales (exclusive of depreciation and amortization shown below) | | | |||
Warehouse, delivery, selling, general and administrative (SG&A) | | | |||
Depreciation and amortization | | | |||
| | ||||
Operating income | | | |||
Other expense: | |||||
Interest expense | | | |||
Other expense, net | | | |||
Income before income taxes | | | |||
Income tax provision | | | |||
Net income | | | |||
Less: net income attributable to noncontrolling interests | | | |||
Net income attributable to Reliance | $ | | $ | | |
Earnings per share attributable to Reliance stockholders: | |||||
Diluted | $ | | $ | | |
Basic | $ | | $ | | |
Shares used in computing earnings per share: | |||||
Diluted | | | |||
Basic | | | |||
Cash dividends per share | $ | | $ | |
See accompanying notes to unaudited consolidated financial statements.
2
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Three Months Ended | |||||
March 31, | |||||
2022 |
| 2021 | |||
Net income | $ | | $ | | |
Other comprehensive income (loss): | |||||
Foreign currency translation gain (loss) | | ( | |||
Postretirement benefit plan adjustments, net of tax | ( | — | |||
Total other comprehensive income (loss) | | ( | |||
Comprehensive income | | | |||
Less: comprehensive income attributable to noncontrolling interests | | | |||
Comprehensive income attributable to Reliance | $ | | $ | |
See accompanying notes to unaudited consolidated financial statements.
3
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except number of shares which are reflected in thousands and per share amounts)
Reliance Stockholders’ Equity | ||||||||||||||||
Common Stock | Accumulated | |||||||||||||||
and Additional | Other | Non- | ||||||||||||||
Paid-in Capital | Retained | Comprehensive | controlling | |||||||||||||
Shares |
| Amount |
| Earnings |
| Income (loss) |
| Interests |
| Total | ||||||
Balance at January 1, 2021 | | $ | | $ | | $ | ( | $ | | $ | | |||||
Net income | — | — | | — | | | ||||||||||
Other comprehensive loss | — | — | — | ( | — | ( | ||||||||||
Dividend to noncontrolling interest holder | — | — | — | — | ( | ( | ||||||||||
Stock-based compensation | | | — | — | — | | ||||||||||
Common stock withheld related to net share settlements | — | ( | — | — | — | ( | ||||||||||
Cash dividends — $ | — | — | ( | — | — | ( | ||||||||||
Balance at March 31, 2021 | | $ | | $ | | $ | ( | $ | | $ | | |||||
Balance at January 1, 2022 | | $ | | $ | | $ | ( | $ | | $ | | |||||
Net income | — | — | | — | | | ||||||||||
Other comprehensive income | — | — | — | | — | | ||||||||||
Dividend to noncontrolling interest holder | — | — | — | — | ( | ( | ||||||||||
Stock-based compensation | | | — | — | — | | ||||||||||
Common stock withheld related to net share settlements | — | ( | — | — | — | ( | ||||||||||
Repurchase of common shares | ( | | ( | — | — | ( | ||||||||||
Cash dividends — $ | — | — | ( | — | — | ( | ||||||||||
Balance at March 31, 2022 | | $ | | $ | | $ | ( | $ | | $ | |
See accompanying notes to unaudited consolidated financial statements.
4
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Three Months Ended | |||||
March 31, | |||||
2022 |
| 2021 | |||
Operating activities: | |||||
Net income | $ | | $ | | |
Adjustments to reconcile net income to net cash provided by operating activities: | |||||
Depreciation and amortization expense | | | |||
Provision for credit losses | | | |||
Deferred income tax benefit | ( | ( | |||
Stock-based compensation expense | | | |||
Other | | | |||
Changes in operating assets and liabilities (excluding effect of businesses acquired): | |||||
Accounts receivable | ( | ( | |||
Inventories | | ( | |||
Prepaid expenses and other assets | | ( | |||
Accounts payable and other liabilities | | | |||
Net cash provided by operating activities | | | |||
Investing activities: | |||||
Purchases of property, plant and equipment | ( | ( | |||
Proceeds from sales of property, plant and equipment | | | |||
Other | ( | ( | |||
Net cash used in investing activities | ( | ( | |||
Financing activities: | |||||
Net short-term debt repayments | — | ( | |||
Dividends and dividend equivalents paid | ( | ( | |||
Share repurchases | ( | — | |||
Payments for taxes related to net share settlements | ( | ( | |||
Other | ( | ( | |||
Net cash used in financing activities | ( | ( | |||
Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||
Increase in cash and cash equivalents | | | |||
Cash and cash equivalents at beginning of year | | | |||
Cash and cash equivalents at end of period | $ | | $ | | |
Supplemental cash flow information: | |||||
Interest paid during the period | $ | | $ | | |
Income taxes paid during the period, net | $ | | $ | |
See accompanying notes to unaudited consolidated financial statements.
5
RELIANCE STEEL & ALUMINUM CO.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, our financial statements reflect all material adjustments, which are of a normal recurring nature, necessary for presentation of financial statements for interim periods in accordance with U.S. GAAP. The results of operations for the quarter ended March 31, 2022 are not necessarily indicative of the results for the full year ending December 31, 2022. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2021, included in the Reliance Steel & Aluminum Co. (“Reliance,” the “Company,” “we,” “our” or “us”) Annual Report on Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Our consolidated financial statements include the assets, liabilities and operating results of majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The ownership of the other interest holders of consolidated subsidiaries is reflected as noncontrolling interests. Our investments in unconsolidated subsidiaries are recorded under the equity method of accounting.
Inventories
The majority of our inventory is valued using the last-in, first-out (“LIFO”) method, which is not in excess of market. We estimate the effect of LIFO on interim periods by allocating the projected year-end LIFO calculation to interim periods on a pro rata basis.
Recently Issued Accounting Standards—Not Yet Adopted
Reference Rate Reform—In March 2020, the FASB issued accounting changes that provide optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The accounting changes may be applied prospectively through December 31, 2022. The Company expects to adopt this guidance for any contracts that are modified as a result of reference rate reform. We do not expect the transition from LIBOR to have a material impact on our consolidated financial statements.
Note 2. Acquisitions
2021 Acquisitions
On October 1, 2021, we acquired Merfish United, Inc. (“Merfish United”), a leading master distributor of tubular building products that are distributed to its independent wholesale distributor customers across a variety of end markets in the United States. Merfish United, headquartered in Ipswich, Massachusetts, serves
6
On December 10, 2021, we acquired Admiral Metals Servicenter Company, Incorporated (“Admiral Metals”), a leading distributor of non-ferrous metals products in the Northeastern U.S. Admiral Metals, headquartered in Woburn, Massachusetts, serves a variety of end markets, including semiconductor, automotive, medical, infrastructure, aerospace and industrial markets through its
On December 10, 2021, we acquired Nu-Tech Precision Metals Inc. (“Nu-Tech Precision Metals”), a custom manufacturer of specialty extruded metals, fabricated parts and welded components. Nu-Tech Precision Metals, services the nuclear energy, aerospace and defense end markets from its location near Ottawa, Ontario, Canada.
On December 17, 2021, we acquired Rotax Metals, Inc. (“Rotax Metals”), a metals service center specializing in copper, bronze and brass alloys. Located in Brooklyn, New York, Rotax Metals operates as a subsidiary of Yarde Metals, Inc., a wholly owned subsidiary of Reliance.
Included in our net sales for the quarter ended March 31, 2022 were combined net sales of $
We funded our 2021 acquisitions with cash on hand.
The preliminary allocations of the total purchase for our 2021 acquisitions to the fair values of the assets acquired and liabilities assumed were as follows:
(in millions) | ||
Cash | $ | |
Accounts receivable | | |
Inventories | | |
Property, plant and equipment | | |
Operating lease right-of-use assets | | |
Goodwill | | |
Intangible assets subject to amortization | | |
Intangible assets not subject to amortization | | |
Other current and long-term assets | | |
Total assets acquired | | |
Deferred taxes | | |
Operating lease liabilities | | |
Other current and long-term liabilities | | |
Total liabilities assumed | | |
Net assets acquired | $ | |
The completion of the purchase price allocations for our 2021 acquisitions are pending the completion of pre-acquisition period tax returns.
Pro forma financial information for all acquisitions
The pro forma summary financial results present the consolidated results of operations as if our 2021 acquisitions had occurred as of January 1, 2021, after the effect of certain adjustments, including depreciation and amortization of certain identifiable property, plant and equipment and intangible assets, and lease cost fair value adjustments.
7
The pro forma results have been presented for comparative purposes only and are not indicative of what would have occurred had the 2021 acquisitions been made as of January 1, 2021, or of any potential results which may occur in the future.
Three Months Ended | ||
March 31, 2021 | ||
(in millions except per share amounts) | ||
Pro forma: | ||
Net sales | $ | |
Net income attributable to Reliance | $ | |
Earnings per share attributable to Reliance stockholders: | ||
Diluted | $ | |
Basic | $ | |
Note 3. Revenues
The following table presents our net sales disaggregated by product and service.
Three Months Ended | |||||
March 31, | |||||
2022 |
| 2021 | |||
(in millions) | |||||
Carbon steel | $ | | $ | | |
Stainless steel | | | |||
Aluminum | | | |||
Alloy | | | |||
Toll processing and logistics | | | |||
Other and eliminations | | | |||
Total | $ | | $ | |
Note 4. Goodwill
The change in the carrying amount of goodwill is as follows:
(in millions) | ||
Balance at January 1, 2022 | $ | |
Purchase price allocation adjustments | | |
Foreign currency translation gain | | |
Balance at March 31, 2022 | $ | |
We had
8
Note 5. Intangible Assets, net
Intangible assets, net consisted of the following:
March 31, 2022 | December 31, 2021 | ||||||||||||
Weighted Average | Gross | Gross | |||||||||||
Amortizable | Carrying | Accumulated | Carrying | Accumulated | |||||||||
Life in Years |
| Amount |
| Amortization |
| Amount |
| Amortization | |||||
(in millions) | |||||||||||||
Intangible assets subject to amortization: | |||||||||||||
Customer lists/relationships | $ | | $ | ( | $ | | $ | ( | |||||
Backlog of orders | | ( | | ( | |||||||||
Other | | ( | | ( | |||||||||
| ( | | ( | ||||||||||
Intangible assets not subject to amortization: | |||||||||||||
Trade names | | — | | — | |||||||||
$ | | $ | ( | $ | | $ | ( |
Certain amounts in prior periods have been reclassified to conform with current period presentation.
Amortization expense for intangible assets was $
During the first quarter of 2022, we recorded purchase price adjustments relating to our 2021 acquisitions based on the finalization of intangible asset valuations that decreased trade name intangible assets for $
The following is a summary of estimated future amortization expense for the remaining nine months of 2022 and each of the succeeding five years:
(in millions) | ||
2022 (remaining nine months) | $ | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
2027 | |
9
Note 6. Debt
Debt consisted of the following:
March 31, | December 31, | ||||
2022 |
| 2021 | |||
(in millions) | |||||
Unsecured revolving credit facility maturing September 3, 2025 | $ | — | $ | — | |
Senior unsecured notes, interest payable semi-annually at | | | |||
Senior unsecured notes, interest payable semi-annually at | | | |||
Senior unsecured notes, interest payable semi-annually at | | | |||
Senior unsecured notes, interest payable semi-annually at | | | |||
Other notes and revolving credit facilities | | | |||
Total | | | |||
Less: unamortized discount and debt issuance costs | ( | ( | |||
Less: amounts due within one year and short-term borrowings | ( | ( | |||
Total long-term debt | $ | | $ | |
Unsecured Credit Facility
On September 3, 2020, we entered into a $
As of March 31, 2022 and December 31, 2021, we had
Senior Unsecured Notes
Under the indentures for each series of our senior notes (“Indentures”), the notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. If we experience a change in control accompanied by a downgrade in our credit rating, we will be required to make an offer to repurchase each series of the notes at a price equal to
Other Notes, Revolving Credit and Letter of Credit/Letters of Guarantee Facilities
A revolving credit facility with a combined credit limit of $
Various industrial revenue bonds had combined outstanding balances of $
10
A standby letters of credit/letters of guarantee agreement with one of the lenders under our Credit Agreement provides letters of credit or letters of guarantee in an amount not to exceed $
Covenants
The Credit Agreement and the Indentures include customary representations, warranties, covenants and events of default provisions. The covenants under the Credit Agreement include, among other things,
Note 7. Leases
Our metals service center leases are comprised of processing and distribution facilities, equipment, trucks and trailers, ground leases and other leased spaces, such as depots, sales offices, storage and data centers. We also lease various office spaces. Our leases of facilities and other spaces expire at various times through 2045 and our ground leases expire at various times through 2068. Nearly all of our leases are operating leases; we have recognized finance right-of-use assets and of less than $
The following is a summary of our lease cost:
Three Months Ended | |||||
March 31, | |||||
2022 |
| 2021 | |||
(in millions) | |||||
Operating lease cost | $ | | $ | |
Supplemental cash flow and balance sheet information is presented below:
Three Months Ended | |||||
March 31, | |||||
2022 |
| 2021 | |||
(in millions) | |||||
Supplemental cash flow information: | |||||
Cash payments for operating leases | $ | $ | |||
Right-of-use assets obtained in exchange for operating lease obligations | $ | $ | |||
March 31, | December 31, | ||||
2022 | 2021 | ||||
Other lease information: | |||||
Weighted average remaining lease term—operating leases | |||||
Weighted average discount rate—operating leases |
Maturities of operating lease liabilities as of March 31, 2022 are as follows:
(in millions) | ||
2022 (remaining nine months) | $ | |
2023 | ||
2024 | ||
2025 | ||
2026 | ||
Thereafter | ||
Total operating lease payments | | |
Less: imputed interest | ( | |
Total operating lease liabilities | $ | |
11
Note 8. Income Taxes
Our effective income tax rates for the first quarters of 2022 and 2021 were
Note 9. Equity
Dividends
On April 26, 2022, our Board of Directors declared the 2022 second quarter cash dividend of $
During the first quarters of 2022 and 2021, we declared and paid quarterly dividends of $
Stock-Based Compensation
We make annual grants of long-term incentive awards to officers and key employees in the forms of service-based restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) that have approximately
In the quarters ended March 31, 2022 and 2021, we made payments of $
12
A summary of the status of our unvested RSUs and PSUs as of March 31, 2022 and changes during the quarter then ended is as follows:
Weighted | ||||||||
Average | ||||||||
Grant Date | Aggregate | |||||||
Fair Value | Fair Value | |||||||
RSUs and PSUs | Per RSU | (in millions) | ||||||
Unvested at January 1, 2022 | | $ | ||||||
Granted(1) | | |||||||
Vested | ( | |||||||
Cancelled or forfeited | ( | |||||||
Unvested at March 31, 2022 | $ | $ | ||||||
Shares reserved for future grants (all plans) |
(1) | Comprised of |
As of March 31, 2022,
Share Repurchase Plan
On July 20, 2021, our Board of Directors authorized a $
During the first quarter of 2022, we repurchased
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss included the following:
Foreign Currency | Postretirement Benefit | Accumulated Other | ||||||
Translation | Plan Adjustments, | Comprehensive | ||||||
(Loss) Gain |
| Net of Tax |
| (Loss) Income | ||||
(in millions) | ||||||||
Balance as of January 1, 2022 | $ | ( | $ | ( | $ | ( | ||
Current-period change | | ( | | |||||
Balance as of March 31, 2022 | $ | ( | $ | ( | $ | ( |
Foreign currency translation adjustments have not been adjusted for income taxes. Postretirement benefit plan adjustments are net of taxes of $
13
Note 10. Commitments and Contingencies
Environmental Contingencies
We are currently involved with an environmental remediation project related to activities at former manufacturing operations of Earle M. Jorgensen Company (“EMJ”), our
subsidiary, that were sold many years prior to our acquisition of EMJ in 2006. Although the potential cleanup costs could be significant, EMJ maintained insurance policies during the time it owned the manufacturing operations that have covered costs incurred to date and are expected to continue to cover the majority of the related costs. We do not expect that this obligation will have a material adverse impact on our consolidated financial position, results of operations or cash flows.Legal Matters
From time to time, we are named as a defendant in legal actions. These actions generally arise in the ordinary course of business. We are not currently a party to any pending legal proceedings other than routine litigation incidental to the business. We maintain general liability insurance against risks arising in the ordinary course of business. We expect that these matters will be resolved without having a material adverse impact on our consolidated financial position, results of operations or cash flows.
Risks and Uncertainties
We continue to monitor the impact of the COVID-19 pandemic, and government actions and measures taken to prevent its spread, and the potential to affect our operations. The conflict between Russia and Ukraine, could also significantly impact the demand for our products and services, as well as those of our customers and suppliers, and our estimates and judgments may be subject to greater volatility than in the past. Refer to Part I, Item 1A “Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2021 for further discussion of these risks.
Note 11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended | |||||
March 31, | |||||
2022 |
| 2021 | |||
(in millions, except number of shares which are reflected in thousands and per share amounts) | |||||
Numerator: |
| ||||
Net income attributable to Reliance | $ |
| $ | ||
Denominator: |
| ||||
Weighted average shares outstanding |
| ||||
Dilutive effect of stock-based awards |
| ||||
Weighted average diluted shares outstanding |
| ||||
Earnings per share attributable to Reliance stockholders: | |||||
Diluted | $ | $ | |||
Basic | $ | $ |
The computations of earnings per share for the quarter ended March 31, 2022 and 2021 do not include
14
RELIANCE STEEL & ALUMINUM CO.
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 metal pricing and our results of operations, margins, profitability, impairment and restructuring charges, taxes, liquidity, 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 our forward-looking statements as a result of various important factors, including, but not limited to, actions taken by us, including restructuring and impairment charges, as well as developments beyond our control, including, but not limited to, the impact of the COVID-19 pandemic, as well as the impact of actions taken or contemplated by government authorities to mitigate the spread of the COVID-19 pandemic, and changes in worldwide and U.S. economic conditions (including as a result of COVID-19 or the ongoing conflict between Russia and Ukraine) that materially impact our customers, the demand and availability of our products and services, including further supply disruptions, labor shortages and inflation. 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 in our Annual Report on Form 10-K for the year ended December 31, 2021 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.
Overview
We generated record financial performance in the first quarter of 2022 and in each of the previous four quarters. Outstanding operational execution of our strategies under our resilient business model during a quarter that included strong demand and ongoing strength in metals pricing once again resulted in record profitability in the face of continuing operational challenges that included volatile (though improving) metals pricing trends and limited product availability.
Certain key results for the first quarter of March 31, 2022 included the following:
● | Record quarterly net sales of $4.49 billion were up 58.0% from $2.84 billion in the first quarter of 2021. |
● | Record quarterly average selling price per ton sold of $3,186. |
● | Record quarterly gross profit of $1.39 billion increased 45.4% from $953.7 million in the first quarter of 2021. Our strong first quarter of 2022 gross profit margin of 30.9% declined 270 basis points compared to our record gross profit margin in the first quarter of 2021. |
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● | Record quarterly pretax income and margin of $697.2 million and 15.5% increased $338.2 million and 290 basis points, respectively, compared to the first quarter of 2021. |
● | Record quarterly earnings per share of $8.33 was more than double our earnings per share of $4.12 in the first quarter of 2021. |
● | Record first quarter cash flow from operations of $404.0 million in the first quarter of 2022 increased $242.2 million, or 149.7%, from $161.8 million in the first quarter of 2021. |
Our record quarterly net sales in the first quarter of 2022 were the result of a record quarterly average selling price per ton sold that increased 57.7% compared to the first quarter of 2021 and a 0.6% increase in tons sold.
Our record profitability in the first quarter of 2022 was driven by record metals prices, fundamentally strong underlying demand in most end markets, a strong gross profit margin and careful expense control. Our gross profit margin in the first quarter of 2022 of 30.9% was strong, but declined from record quarterly gross profit margin of 33.6% in the first quarter of 2021 as our inventory costs approached replacement costs. Our same-store SG&A expense in the first quarter of 2022 increased $70.1 million, or 13.5%, compared to the first quarter of 2021 due to higher variable expenses associated with inflationary impacts for wages, fuel, freight and packaging costs and to a lesser extent higher incentive-based compensation attributable to our record gross profit and pretax income.
We generated record first quarter cash flow from operations of $404.0 million in the first quarter of 2022 compared to $161.8 million of cash flow from operations in the first quarter of 2021 as a result of our increased profitability.
We believe our strong liquidity position that includes significant cash on hand, strong cash flow generation and $1.5 billion revolving credit facility with no borrowings outstanding 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.
We believe our industry-leading results are due to our unique business model and the strong operational execution of our strategies. We believe our business model characteristics, including broad end market exposure, a wide geographical footprint, diverse product offerings, significant value-added processing capabilities, and focus on small order sizes and when-needed delivery differentiate us from our industry peers. We believe these unique business model characteristics and strong operational execution of our strategies that include pricing discipline, concentrating on higher margin business and cross selling inventory within our operating locations enabled us to persevere during the pandemic in 2020 and were the cornerstone of our record quarterly financial results in each of the past five quarters.
2021 Acquisitions
On October 1, 2021, we acquired Merfish United, Inc. (“Merfish United”), a leading master distributor of tubular building products that are distributed to its independent wholesale distributor customers across a variety of end markets in the United States. Merfish United, headquartered in Ipswich, Massachusetts, serves 47 U.S. states through its twelve strategically located distribution centers.
On December 10, 2021, we acquired Admiral Metals Servicenter Company, Incorporated (“Admiral Metals”), a leading distributor of non-ferrous metals products in the Northeastern U.S. Admiral Metals, headquartered in Woburn, Massachusetts, serves a variety of end markets, including semiconductor, automotive, medical, infrastructure, aerospace and industrial markets through its eight strategically located service centers.
On December 10, 2021, we acquired Nu-Tech Precision Metals Inc. (“Nu-Tech Precision Metals”), a custom manufacturer of specialty extruded metals, fabricated parts and welded components. Nu-Tech Precision Metals, services the nuclear energy, aerospace and defense end markets from its location near Ottawa, Ontario, Canada.
On December 17, 2021, we acquired Rotax Metals, Inc. (“Rotax Metals”), a metals service center specializing in copper, bronze and brass alloys. Located in Brooklyn, New York, Rotax Metals operates as a subsidiary of Yarde Metals, Inc., a wholly owned subsidiary of Reliance.
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Included in our net sales for the first quarter of 2022 were combined net sales of $226.5 million from our 2021 acquisitions.
We funded our 2021 acquisitions with cash on hand.
Results of Operations
The following table sets forth certain income statement data for the first quarters of 2022 and 2021 (dollars are shown in millions and certain amounts may not calculate due to rounding):
Three Months Ended March 31, | |||||||||||
2022 | 2021 | ||||||||||
% of | % of | ||||||||||
$ |
| Net Sales |
| $ |
| Net Sales | |||||
Net sales | $ | 4,485.8 | 100.0 | % | $ | 2,838.4 | 100.0 | % | |||
Cost of sales (exclusive of depreciation and amortization expenses shown below)(1) | 3,098.7 | 69.1 | 1,884.7 | 66.4 | |||||||
Gross profit(2) | 1,387.1 | 30.9 | 953.7 | 33.6 | |||||||
Warehouse, delivery, selling, general and administrative expense (SG&A) | 611.9 | 13.6 | 518.5 | 18.3 | |||||||
Depreciation expense | 46.9 | 1.0 | 47.7 | 1.7 | |||||||
Amortization expense | 12.2 | 0.3 | 9.2 | 0.3 | |||||||
Operating income | $ | 716.1 | 16.0 | % | $ | 378.3 | 13.3 | % |
(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 expenses 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 our 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. |
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First Quarter Ended March 31, 2022 Compared to First Quarter Ended March 31, 2021
Net Sales
Three Months Ended | |||||||||||
March 31, | Dollar | Percentage | |||||||||
2022 |
| 2021 | Change | Change | |||||||
(in millions) | |||||||||||
Net sales | $ | 4,485.8 |
| $ | 2,838.4 |
| $ | 1,647.4 |
| 58.0 | % |
Net sales, same-store | $ | 4,259.3 |
| $ | 2,838.4 |
| $ | 1,420.9 |
| 50.1 | % |
Three Months Ended | |||||||||||
March 31, | Percentage | ||||||||||
2022 |
| 2021 | Change | Change | |||||||
(tons in thousands) | |||||||||||
Tons sold |
| 1,417.7 |
| 1,409.7 |
| 8.0 |
| 0.6 | % | ||
Tons sold, same-store |
| 1,374.2 |
| 1,409.7 |
| (35.5) |
| (2.5) | % | ||
Three Months Ended | |||||||||||
March 31, |
| Price |
| Percentage | |||||||
2022 |
| 2021 |
| Change |
| Change | |||||
Average selling price per ton sold | $ | 3,186 |
| $ | 2,020 |
| $ | 1,166 |
| 57.7 | % |
Average selling price per ton sold, same-store | $ | 3,116 |
| $ | 2,020 |
| $ | 1,096 |
| 54.3 | % |
Our tons sold and average selling price per ton sold exclude our tons toll processed. Our average selling price per ton sold includes insignificant intercompany transactions that are eliminated from our consolidated net sales. Same-store amounts exclude the results of our 2021 acquisitions.
Our net sales in the first quarter of 2022 were the highest in our history due to a record quarterly average selling price per ton sold and a modest increase in tons sold compared to the first quarter of 2021. During the months of January and February, prices for certain carbon and stainless steel products fell sharply, and certain customers adjusted their purchasing patterns due to the uncertainty surrounding the direction of metals prices. The Omicron surge in January and to a lesser extent in February further decreased demand by exacerbating existing labor and other supply chain disruptions on us, our customers and suppliers. In early March, these trends and headwinds subsided and metal prices increasing significantly, mainly for the aluminum and stainless steel products we sell, and our shipment levels accelerated with our March daily tons sold being the highest since the start of the pandemic.
Since we primarily purchase and sell our inventories in the spot market, the changes in our average selling prices generally fluctuate in accordance with the changes in the costs of the various metals we purchase. Our same-store average selling price per ton sold in the first quarter of 2022 was significantly higher than the first quarter of 2021 mainly due to several significant mill price increases for our major product categories.
The mix of products sold can also have an impact on our average selling prices. As carbon steel sales represented approximately 55% of our gross sales for the first quarter of 2022, changes in carbon steel prices have the most significant impact on changes in our overall average selling price per ton sold.
Our major commodity selling prices changed year-over-year as follows:
Same-store | ||||
Average Selling | Average Selling | |||
Price per Ton Sold | Price per Ton Sold | |||
(percentage change) | ||||
Carbon steel | 56.3 | % | 55.8 | % |
Stainless steel | 57.4 | % | 57.7 | % |
Aluminum | 32.8 | % | 33.7 | % |
Alloy | 35.5 | % | 35.5 | % |
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Cost of Sales
Three Months Ended | |||||||||||||||||
March 31, | |||||||||||||||||
2022 | 2021 | ||||||||||||||||
| % of | % of | Dollar | Percentage | |||||||||||||
$ |
| Net Sales |
| $ |
| Net Sales |
| Change |
| Change | |||||||
(dollars in millions) |
| ||||||||||||||||
Cost of sales | $ | 3,098.7 | 69.1 | % |
| $ | 1,884.7 | 66.4 | % |
| $ | 1,214.0 | 64.4 | % |
The increase in cost of sales in the first quarter of 2022 compared to the first quarter of 2021 was mainly due to a higher average cost per ton sold and to a lesser extent, higher tons sold. See “Net Sales” above for trends in both demand and costs of our products.
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 related to our 2021 acquisitions.
In addition, 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, resulted in expenses of $37.5 million and $100.0 million in the first quarters of 2022 and 2021, respectively. As of March 31, 2022, the LIFO method inventory valuation reserve on our balance sheet was $857.9 million.
Gross Profit
Three Months Ended | |||||||||||||||||
March 31, | |||||||||||||||||
2022 | 2021 | ||||||||||||||||
| % of | % of | Dollar | Percentage | |||||||||||||
$ |
| Net Sales |
| $ |
| Net Sales |
| Change |
| Change | |||||||
(dollars in millions) |
| ||||||||||||||||
Gross profit | $ | 1,387.1 |