UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| |
(Mark One) | |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172022 |
OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______ |
Commission file number: 001-13122
RELIANCE STEEL & ALUMINUM CO.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization) | 95-1142616
(I.R.S. Employer
Identification No.) |
350 South Grand Avenue,16100 N. 71st Street, Suite 5100400
Los Angeles, California 90071
(213) 687-7700Scottsdale, Arizona85254
(Address andof principal executive offices, including zip code)
(480) 564-5700
(Registrant’s telephone number, including area code, of principal executive offices)code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | |
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, $0.001 par value | | RS | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 12months (orforsuchshorterperiodthattheregistrantwasrequiredto file such reports), and (2)has been subject to such filing requirements for the past 90days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | |
Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ | Emerging growth company ☐ |
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on the New York Stock Exchange on June 30, 20172022 was approximately $5,140,000,000.$10,280,000,000. For purposes of this computation, it is assumed that the shares of voting stock held by Directorsdirectors and Officersofficers would be deemed to be stock held by affiliates. As of February 23, 2018, 72,830,04024, 2023, 58,979,530 shares of the registrant’s common stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2018 Annual Meeting2023 annual meeting of Stockholders (the “Proxy Statement”)stockholders to be held on May 17, 2023 are incorporated by reference intoin Part III of this report.III.
FORWARD-LOOKING STATEMENTS
Unless otherwise indicated or required by the context, as used in this Annual Report on Form 10‑K,10-K, the terms “Company,” “Reliance,” “we,” “our,” and “us” refer to Reliance Steel & Aluminum Co. and all of its subsidiaries that are consolidated in accordance with U.S. generally accepted accounting principles. This Annual Report on Form 10‑K10-K and the information incorporated by reference contain forward‑lookingforward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also provide oral or written forward-looking information in other materials we release to the public. Our forward‑lookingforward-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 metals pricing and our results of operations, margins, profitability, impairment charges, taxes, liquidity, capital expenditures, 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‑lookingforward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”“potential,” “preliminary,” “range,” “intend” and “continue,” the negative of these terms, and similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those in the future that are implied by these forward‑lookingforward-looking statements. These risks and other factors include those described in “Risk Factors” (Part I, Item 1A of this Form 10‑K)10-K) and “Quantitative and Qualitative Disclosures about Market Risk” (Part II, Item 7A). In addition, other factors of which the Company is not currently aware may affect the accuracy of our forward-looking information.information and may cause actual results to differ from those discussed. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Actual eventsoutcomes and results may differ materially from what is expressed or forecasted in our forward-looking statements as a result of operationsvarious important factors, including, but not limited to, actions taken by us, including restructuring and impairment charges, as well as developments beyond our control, including, the unknown duration and economic, operational and financial impacts of the global COVID-19 pandemic, an economic recession or the ongoing conflict between Russia and Ukraine and changes in worldwide and U.S. economic conditions that materially impact our customers, the demand and availability of our products and services, including supply disruptions, labor shortages and inflation. Further deteriorations in economic conditions could lead to a further or prolonged decline in demand for our products and services and negatively impact our business, and may vary materially.also impact financial markets and corporate credit markets which could adversely impact our access to financing, or the terms of any financing.
We do not assume any responsibility to publicly update any of our forward-looking statements regardless of whether factors change as a result of new information, future events, or for any other reason, except as may be required by law. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. You should review any additional disclosures we make in our press releases and other documents we file or furnish with the United States Securities and Exchange Commission (the “SEC”), including our Forms 10-K, 10-Q and 8-K filed with or furnished to the SEC. We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.8-K.
This Annual Report on Form 10‑K10-K includes registered trademarks, trade names and service marks of the Company and its subsidiaries.
PART I
PART IItem 1. Business
We are a leading diversified metal solutions provider and the largest metals service center company in North America (U.S. and Canada). based on revenues, with 2022 net sales of $17.03 billion.
We have been in business over 80 years since our original organization on February 3, 1939, operating a single metals service center in Los Angeles, California fabricating steel reinforcing bar. We reincorporated in the State of Delaware in 2015. Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “RS” and was first traded on September 16, 1994.
We believe we have a unique and sustainable business model predicated on the following key attributes:
| ● | Diversity of Products, Customers and Services |
We operate through a network of metals service centers operates more than 300approximately 315 locations in 40 U.S. states in the U.S. and in 13 other countries (Australia, Belgium, Canada, China, France, India, Malaysia, Mexico, Singapore, South Korea, Turkey, the United Arab Emirates and the United Kingdom). Through this network, we provide metals processing services, or first-stage processing, and12 foreign countries. We distribute a full line of more thanover 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium and specialty steel products, toproducts.
We have more than 125,000 customers in a broad rangevariety of industries.industries, including general manufacturing, non-residential construction (including infrastructure), transportation (rail, truck trailer and shipbuilding), aerospace (commercial; military, defense and space), energy (oil and natural gas), electronics and semiconductor fabrication, and heavy industry (agricultural, construction and mining equipment). We focus on small orders with quick turnaround and increasing levels of value-added processing. In 2017,also service the auto industry, primarily through our average order size was $1,740, approximately 48% of our orders included value-addedtoll processing and approximately 40% of our orders were delivered within 24 hours from receiptoperations where we process the metal for a fee, without taking ownership of the order. Many of ourmetal.
Our diversification by product, end market and geography helps mitigate volatility in metals service centerspricing and changing end market conditions. We are not dependent on any particular customer or industry because we process and distribute only specialtya variety of metals. This diversity of product type and material reduces our exposure to fluctuations or other weaknesses in the financial stability of particular customers or industries. We have grown our international presence selectively to support the globalizationare also less dependent on any particular suppliers as a result of our customers. We generated net sales of $9.72 billionproduct diversification. As a result, we have remained profitable every year, even during recessionary periods and a global pandemic, since our initial public offering in 2017 and net income attributable to Reliance of $613.4 million.1994.
Our primary business strategy is to provide the highest levels of quality and service to our customers in the most efficient operational manner, allowing us to maximize our financial results. Our growth strategy is based on increasing our operating results through organic growth activities and strategic acquisitions that enhance our product, customer and geographic diversification with a focus on higher margin specialty products and value-added processing services. We focus on improving the operating performance at acquired locations by integrating them into our operational model and providing them access to capital and other resources to promote growth and efficiencies. We believe our focused growth strategy of diversifying our products, customers and geographic locations makes us less vulnerable to regional or industry specific economic volatility and somewhat lessens the negative impact of volatility experienced in commodity pricing and cyclicality of our customer end markets, as well as general economic trends. We also believe that our focus on servicing customers with small order sizes and quick turnaround, along with our growth and diversification strategy, havehas been instrumental in our ability to produce industry‑leadingindustry-leading operating results among publicly traded metals service center companies in North America. In 2022, approximately 97% of our orders were from repeat customers and we delivered approximately 40% of our orders within 24 hours of the customer placing the order with us.
| ● | Value-Added Solutions Provider |
We provide a wide variety of processing services to meet our customers’ specifications and deliver products to fabricators, manufacturers and other end users. We believe that few other metals service centers offer the broad range of processing services and metals that we provide. Our primary processing services range from cutting, leveling or sawing to more complex processes such as machining or electropolishing. We generally only process specific metals to non-standard sizes pursuant to customer purchase order specifications. In addition, we typically acquire standard size and grade products that can be processed into many different sizes to meet the needs of many different customers.
We have increased the amount of value-added processing services we provide through recent acquisitions and significant investments in new equipment over the past several years. Expanding our value-added capabilities (including toll processing) and increasing the percentage of our total sales represented by the higher margin orders generated from those capabilities, helps reduce the volatility in our profitability ratios during periods of unfavorable metals demand and/or pricing.
Customers purchase from metals service centers for a variety of reasons, including the ability to obtain value‑addedvalue-added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size, and quality control. Many customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum order sizes specified by mills or because those customers require intermittent deliveries over long or irregular periods. Metals service centers respond to a niche market created because of the focus on just-in-timewhen-needed inventory management and materials management outsourcing in the capital goods and related industries. In general, metals service center customers have placed increased emphasis on carrying lower amounts of inventory, especially during declining price environments. We believe that many customers have also reduced their in-house
The processing capabilities, opting to source processed metal from service centers like us, which has been supportive of our recent capital expenditures and improved gross profit margins. There have been significant advancements in processing equipment in our industry in recent years that have enabled us toservices we provide higher quality products and increase the efficiency of our customers’ manufacturing operations, which has contributed to our improved our gross profit margins.
These processing services save our customers time, labor, and expense, reducing their overall manufacturing costs. Specialized metals processing equipment requires high‑volume productionhigh utilization to be cost effective. ManyWe believe many manufacturers and their suppliers are not able or willing to invest in the necessary technology, equipment, and warehousing of inventory to efficientlyperform efficient and effectively performeffective metal processing themselves for their own operations. Accordingly, we believe industry dynamics
have created a niche in the market for metals service centers. Metals service centers purchase, process, and deliver metals to end‑usersend-users in a more efficient and cost‑effectivecost-effective manner than the end‑userend-user could achieve by dealing directly with the primary producer. ServiceThe metals service centers of the MSCI comprise the largest customer group for North American mills, buying and reselling almost 50% of all the carbon, alloy, stainless and specialty steels, aluminum, copper, brass, bronze and superalloys produced in the United States according to a May 2017July 2022 report on the metals wholesaling industry issued by IBISWorld Inc., a global intelligence publication.
According to IBISWorld Inc.’s July 2022 report, the United States metals wholesale industry (comprised of metals service centers of the MSCI and other metal wholesaling distributors) revenues were expected to grow approximately 15% from $191 billion in 2021 to approximately $219 billion in 2022, primarily due to increases in metal prices. IBISWorld Inc. expects the largest industry participants to represent less than 10% of the estimated $219 billion industry total in 2022. Our 2022 U.S. revenues of approximately $16 billion represented about 7% of the entire U.S. metals wholesaling market based on IBISWorld Inc.’s estimated 2022 industry revenues. However, the measurement of our market share based on the shipment levels of the metals service center industry published by the MSCI, who does not also publish estimated industry revenues, was at 14.5%, which we believe is due to the inclusion of non-metal service center companies in the broader metals wholesaling industry as defined by IBISWorld Inc. Regardless of the measurement of our market share through our tons sold via MSCI industry shipments or our sales relative to what we believe to be the broader metals wholesaling industry, our relatively low market share provides us significant opportunity for growth.
We believe that metals service centers are generally less susceptible to market cycles than metals producers because service centers are generally able to pass on all or a portion of increases in metal costs to their customers, unless they are selling to their customerscustomers. As we have a limited long-term contractual business and focus on a fixed‑price contractual basis. We believe that service center companies, like Reliance, that emphasize rapid inventory turnover, and minimal contract sales,we believe that we are generally less vulnerable to changing metals prices than the metals producers. However, fluctuations in metals pricing have a significant impact on our revenue and profit.
Operational Strategy
Our primary business strategy is to provide the highest levels of quality and service to our customers in the safest, most efficient operational manner, allowing us to maximize our financial results. The metals service center industry is highly fragmented and competitive within localized areas or regions. Manycore tenets of our competitors operate single, stand‑alone service centers. Accordingdifferentiated approach include:
| ● | Our commitment to safety which is our top priority and an important element of our culture and day-to-day operational focus. Our executive team supports a safety management system that includes policies, standard practices and goals at our facilities. In addition, our safety professionals monitor compliance with regulatory requirements and conduct safety assessments and training to improve safety practices. |
| ● | Organic growth and innovation through our industry-leading investments in state-of-the-art value-added processing equipment to better service our customers. We have made significant investments in our businesses in recent years, including investments in advanced, state-of-the-art value-added processing equipment. |
| ● | We believe our diversification of products, end markets and geography reduces volatility. We maintain a wide variety of products in inventory and believe this differentiates us from all other North American service center companies. Our product mix has become more diverse mainly as a result of our targeted growth strategy that includes acquiring companies that distribute mainly specialty products and provide increased levels of value-added processing services. |
| ● | Our decentralized operating structure puts decision making and resources close to the customer. Due to our focus on small orders, our decentralized operating structure and the diversity of the markets we serve, customer concentrations are not significant. |
| ● | A focus on when-needed inventory management and small orders with quick turnaround and increasing levels of value-added processing which generate higher profit margins as compared to IBISWorld Inc., there are approximately 10,100 metal wholesaling locations operated by more than 7,100 companies in the United States in 2017. The significant number of metals service centers that exist in this fragmented market, along with the consolidation trend continues to create opportunities for us to expand by making acquisitions.According to IBISWorld Inc., the United States metals wholesale industry (which includes metals service centers) is expected to generate revenues of approximately $182.7 billion in 2017, a 10% increase over 2016 revenues of $165.9 billion mainly due to higher metals prices. The five largest U.S. metals service center companies are expected by IBISWorld Inc. to represent just over 10% of the estimated $182.7 billion industry total in 2017. While we remain the largest metals service center company in the United States on a revenue basis, IBISWorld Inc. estimates our 2017 U.S. revenues to account for only about 4.8% of the entire U.S. market, leaving significant opportunity for further strategic growth.
History and Overview of Reliance
Reliance Steel & Aluminum Co. was organized as a California corporation on February 3, 1939, and commenced business in Los Angeles, California fabricating steel reinforcing bar. Within ten years of our founding, we had become a full‑line distributor of steel and aluminum, operating a single metals service center in Los Angeles. In the early 1950’s, we automated our materials handling operations and began to provide processing services to meet our customers’ requirements. In the 1960’s, we began to acquire other companies to establish additional service centers, expanding into other geographic areas.
In the mid‑1970’s, we began to establish specialty metals centers stocked with inventories of selected metals such as aluminum, stainless steel or brass and copper, and equipped with automated materials handling and precision cutting equipment specific to the selected metals. In the mid‑1990’s, we began to expand nationally and focused on acquiring well‑run, profitable metals service center companies, and we continue to expand our network, with a focus on large volume orders. We seek to increase profitability through our customer service, operational efficiencies, pricing discipline, innovation and inventory management as well as by providing increased levels of value-added processing. Approximately 40% of our orders were delivered within 24 hours from receipt of the order. We believe that this provides a competitive advantage to us, and, for the remainder of our orders we typically have shorter lead times than our competitors given our decentralized structure and investments in processing equipment.
|
| ● | Strong pricing discipline by our managers in the field allows us to appropriately price the value provided to customers. We believe our focus on maintaining pricing discipline related to our processing services coupled with our investments in state-of-the-art equipment and advanced technology were significant contributors to the substantial increases in gross profit margin over the past several years. |
| ● | Minimal contractual sales help us effectively manage working capital and minimize the impact of changing metal prices. |
Growth Strategy
Our growth strategy is based on increasing our operating results through organic growth activities and strategic acquisitions that enhance our product, customer and geographic diversification. We believe our focused growth strategy and increasing the level of value-added services and specialty products towe provide our customers as opposedmakes us less vulnerable to merely distributing metal. We reincorporatedregional or industry-specific economic volatility and somewhat lessens the negative impact of volatility experienced in the State of Delaware in 2015. Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “RS”commodity pricing and was first traded on September 16, 1994.
We continue to execute our growth strategy and have become the largest North American (U.S. and Canada) metals service center company based on revenues, with over 300 locations and 2017 net sales of $9.72 billion. Although we continue to expand the types of metals that we sell and the processing services that we perform, we have not diversified outsidecyclicality of our core business and we strive to consistently perform as the best in our industry. We focus on smaller customers and order sizes with quick turnarounds and have steadily increased the percentage of our orders with processing performed, which reached 48% in 2017, up from our historical level of 40%. We currently operate metals service centers under the following trade names:
| | |
Trade Name
| | No. of
Locations
|
Reliance Divisions
| | |
Bralco Metals
| | |
Bralco Metals
| | 6
|
Aerotech
| | 1
|
Affiliated Metals
| | 1
|
Airport Metals (Australia)
| | 1
|
Olympic Metals
| | 1
|
Central Plains Steel Co.
| | 1
|
MetalCenter
| | 1
|
Reliance Metalcenter
| | 8
|
Reliance Steel Company
| | 2
|
Tube Service Co.
| | 6
|
All Metal Services
| | |
All Metal Services Ltd. (China)
| | 1
|
All Metal Services France
| | 1
|
All Metal Services Limited (United Kingdom)
| | 5
|
All Metal Services (Malaysia) Sdn. Bhd.
| | 1
|
Allegheny Steel Distributors, Inc.
| | 1
|
American Metals Corporation
| | |
American Metals
| | 2
|
American Steel
| | 2
|
Alaska Steel Company
| | 3
|
Haskins Steel Co., Inc.
| | 1
|
Lampros Steel
| | 3
|
AMI Metals, Inc.
| | |
AMI Metals
| | 6
|
AMI Metals UK, Limited
| | 2
|
AMI Metals Europe (Belgium)
| | 1
|
AMI Metals France
| | 1
|
AMI Metals Aero Services Ankara Havacılık Anonim Şirketi (Turkey)
| | 1
|
Best Manufacturing, Inc.
| | 1
|
CCC Steel, Inc.
| | |
CCC Steel
| | 1
|
IMS Steel Co.
| | 1
|
Chapel Steel Corp.
| | |
Chapel Steel Corp.
| | 5
|
Chapel Steel Canada, Ltd.
| | 1
|
Chatham Steel Corporation
| | 5
|
Clayton Metals, Inc.
| | 3
|
Continental Alloys & Services Inc.
| | |
Continental Alloys & Services
| | 4
|
Continental Alloys & Services, Inc. (Canada)
| | 1
|
Continental Alloys & Services Middle East FZE (Dubai)
| | 1
|
Continental Alloys & Services (Malaysia) Sdn. Bhd.
| | 1
|
Continental Alloys & Services Pte. Ltd. (Singapore)
| | 1
|
| | |
Trade Name
| | No. of
Locations
|
Crest Steel Corporation
| | 1
|
Delta Steel, Inc.
| | |
Delta Steel
| | 6
|
Smith Pipe & Steel Company
| | 1
|
Diamond Manufacturing Company
| | |
Diamond Manufacturing
| | 3
|
Ferguson Perforating Company
| | 2
|
McKey Perforating Co.
| | 1
|
McKey Perforated Products Co.
| | 1
|
Perforated Metals Plus
| | 1
|
Durrett Sheppard Steel Co., Inc.
| | 1
|
Earle M. Jorgensen Company
| | |
Earle M. Jorgensen
| | 31
|
Earle M. Jorgensen (Malaysia) Sdn. Bhd.
| | 1
|
Encore Metals USA
| | 2
|
Steel Bar
| | 1
|
Feralloy Corporation
| | |
Feralloy
| | 3
|
Acero Prime S. de R.L. de C.V. (60%-owned)
| | 4
|
Feralloy Processing Company (51%-owned)
| | 1
|
GH Metal Solutions, Inc.
| | 4
|
Indiana Pickling and Processing Company (56%-owned)
| | 1
|
Oregon Feralloy Partners (40%-owned)
| | 1
|
Fox Metals and Alloys, Inc.
| | 1
|
Infra-Metals Co.
| | |
Infra-Metals
| | 6
|
Athens Steel
| | 1
|
Infra-Metals / IMS Steel
| | 2
|
Liebovich Bros., Inc.
| | |
Liebovich Steel & Aluminum Company
| | 5
|
Custom Fab Company
| | 1
|
Good Metals
| | 1
|
Hagerty Steel & Aluminum Company
| | 2
|
Metalweb Limited
| | 5
|
Metals USA, Inc.
| | |
Eagle Steel Products, Inc. (45%-owned)
| | 1
|
Gregor Technologies
| | 1
|
Lynch Metals
| | 2
|
Metals USA
| | 24
|
Ohio River Metal Services
| | 1
|
Port City Metal Services
| | 1
|
The Richardson Trident Company, LLC
| | 3
|
National Specialty Alloys, Inc.
| | |
National Specialty Alloys
| | 3
|
Aleaciones Especiales de Mexico, S. de R.L. de C.V.
| | 1
|
Northern Illinois Steel Supply Co.
| | 1
|
Pacific Metal Company
| | 6
|
PDM Steel Service Centers, Inc.
| | |
PDM Steel Service Centers
| | 8
|
Feralloy PDM Steel Service
| | 1
|
Phoenix Corporation
| | |
Phoenix Metals Company
| | 12
|
Aluminum and Stainless
| | 2
|
| | |
Trade Name
| | No. of
Locations
|
Precision Flamecutting and Steel, Inc.
| | 1
|
Precision Strip, Inc.
| | 13
|
Reliance Metalcenter Asia Pacific Pte. Ltd. (Singapore)
| | 1
|
Reliance Metals Canada Limited
| | |
Earle M. Jorgensen (Canada)
| | 5
|
Encore Metals
| | 5
|
Team Tube
| | 5
|
Service Steel Aerospace Corp.
| | |
Service Steel Aerospace
| | 3
|
Dynamic Metals International
| | 1
|
United Alloys Aircraft Metals
| | 1
|
Siskin Steel & Supply Company, Inc.
| | |
Siskin Steel
| | 4
|
East Tennessee Steel Supply Company
| | 1
|
Sunbelt Steel Texas, Inc.
| | 2
|
Sugar Steel Corporation
| | 2
|
Tubular Steel, Inc.
| | |
Tubular Steel
| | 6
|
Metalcraft Enterprises, Inc.
| | 1
|
Valex Corp.
| | |
Valex
| | 1
|
Valex China Co., Ltd.
| | 1
|
Valex Korea Co., Ltd. (95%-owned)
| | 1
|
Viking Materials, Inc.
| | 2
|
Yarde Metals, Inc.
| | 8
|
Operational Strategy
Our executive officers maintain a control environment that is focused on integrity and ethical behavior, establish general policies and operating guidelines and monitor adherence to proper financial controls, while our division managers and subsidiary officers have autonomy with respect to day‑to‑day operations. This balanced yet entrepreneurial management style has enabled us to improve our safety performance and the productivity and profitability of both our acquired businesses and of our existing operations. Key management personnel are eligible for incentive compensation based, in part, on the profitability of their particular division or subsidiary and, in part, on the Company’s overall profitability.
Safety is our top priority and an important element of our day-to-day operational focus. We seek to increase profitability through improvements in our customer service, operational efficiencies, pricing discipline, and inventory managementend markets, as well as by providing increased levels of value-added processing. We continue to adjust our business practices to leverage our size and gain efficiencies which contribute to our profitability. We believe that we have an excellent reputation in the industry and are known for our integrity and the quality and timeliness of our service.general economic trends.
Historically, we have expanded through both acquisitions and internal growth. Since our initial public offering in September 1994, we have successfully purchased 63 businesses, including the acquisition of Ferguson Perforating Company in 2017. Our internal growth activities during the last few years, which are supported by our capital expenditures, have been at historically high levels for us and have included opening new facilities, adding to our processing capabilities and relocating existing operations to larger, more efficient facilities. Our investments in processing equipment have allowed us to increase the range of value-added services that we provide to our customers and increase our efficiency, which we believe has contributed to our recent gross profit margin improvements. These investments also differentiate us from our competitors and have allowed us to increase our market share. We will continue to evaluate acquisition opportunities and we expect to continue to growgrowing our business through acquisitions and internal growth initiatives, particularly those that will diversify our products, customer base and geographic locations and increase our sales of high-margin specialty products and high margin, value-added processing.
Customers and Markets
Our customers purchase from us and other metals service centers to obtain value‑added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size and quality control. Many of our customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum order sizes specified by mills, because those customers require intermittent deliveries over long or irregular time periods, or because those customers require specialized processing services. We believe that metals service centers have also enjoyed an increase in services requested
Sales and Marketing
Sales personnel are organized by division or subsidiary and are divided into two groups. Outside sales personnel travel throughout a specified geographic territory and maintain relationships with our existing customers and develop new customers. Inside sales personnel remain at the facilities to price and write orders. Outside sales personnel generally receive incentive compensation based on the gross profit from their customers due toparticular geographic territories. Inside sales personnel generally receive incentive compensation based on the focusgross profit and/or pretax income of the capital goods and other manufacturing industries on just‑in‑time inventory management and outsourcing of materials management and metals processing. Due to technology advancements in metals processing equipment, metals service centers that have invested in new processing equipment are able to provide higher quality levels to their customers.particular location.
We have more than 125,000 customersacquire well-run businesses with strong customer relationships and solid reputations within the marketplace. Because of this, we find value in a variety of industries, including general manufacturing, non‑residential construction (including infrastructure), transportation (rail, truck trailerthe acquired trade name and shipbuilding), aerospacecontinue to use the business name and defense, energy (oil and gas), electronics and semiconductor fabrication, and heavy industry (agricultural, construction and mining equipment). We also servicemaintain the auto industry, primarily through our toll processing operations where we do not take ownership of the metal.customer relationships.
Customers
Although we sell directly to many large original equipment manufacturer (“OEM”) customers, the majority of our sales are to small machine shops and fabricators, in small quantities with frequent deliveries, helping them manage their working
capital and credit needs more efficiently. Our metals service centers wrote and delivered over 5,567,0004.6 million orders during 20172022 or an average of 22,15018,460 per day, with an average price of approximately $1,740$3,670 per order. Most of our metals service center customers are located within a 200‑mile200-mile radius of the Reliance metals service center serving them. The proximity of our service centers to our customers helps usreduce total road miles and carbon emissions, promote efficient routing and provide just‑in‑time delivery and increases the likelihood of repeat business. In 2017, approximately 97% of our orders were from repeat customers.quick delivery. With our fleet of approximately 1,7001,720 trucks (some of which are leased), we are able to service many smaller customers and provide quick turnaround deliveries. We believe that maintaining our own fleet of trucks and drivers provides a competitive advantage as there has been a shortage of qualified drivers and third-party freight costs have been at elevated levels in the current environment where it is becoming increasingly more difficult to contract with third party carriers.recent years. Moreover, our computerized order entry systems and flexible production scheduling enable us to meet customer requirements for short lead times and just‑in‑time delivery.quick delivery, when needed. In 2022, approximately 97% of our orders were from repeat customers. We believe that our long‑termlong-term relationships with many of our customers significantly contribute to the success of our business. Providing prompt and efficient services and quality products at reasonable prices are important factors in maintaining and expanding these relationships.
Our acquisitions in recent years have increased our international exposure from both a customer and physical location perspective. In addition, weWe have built and opened international locations in recent years to service specific industries, typically making limited investments to support existing key U.S. customers that are operatingalso operate in those international markets. Net salesAccordingly, our exposure to risks associated with such investments is minimal. Sales from our foreign operations were 6% of our international locations (based on where the shipments originated) accounted for approximately 9% of our consolidated 2017 net sales for the year ended December 31, 2022, or $873.7 million.$1.05 billion. However our net sales to international customers (based on the shipping destination) were approximately 11%8% of our consolidated 20172022 net sales, or $1.1$1.37 billion, with approximately 23% of these sales,29%, or $258.2$398.0 million, to Canadian customers.
Customer demand may changechanges from time to time based on, among other things, general economic conditions and industry capacity. Many of the industries in which our customers compete are cyclical in nature. Because we sell to a wide variety of customers in a wide variety of industries, we believe that we are able to somewhat mitigate earnings volatility. In addition, many of our customers are small job shops and fabricators who also have a diverse customer base and the versatility to service different end markets when an existing market slows. Given our business model and focus on small, quick turnaround orders, we primarily operate in the spot market for both the purchase and sale of our products. As we have limited contractual business, this enables us to better pass on higher metal prices to our customers and maintain consistency in our gross profit margin.
Due to our focus on small orders, decentralized operating structure and the diversity of the markets we serve, customer concentrations are not significant. Our largest customer represented only 1.1%1.2% of our net sales in 2017.2022. In 2017,2022, we had only 23 customers withgenerated sales greater than $25 million.million from only 44 customers.
Suppliers
The geographic breakout of our sales based on the location of our metals service center facilities in each of the three years ended December 31 was as follows:
| | | | | | | | |
| 2017 | | | 2016 | | | 2015 | |
Midwest | 32 | % | | 32 | % | | 31 | % |
West/Southwest | 22 | % | | 22 | % | | 23 | % |
Southeast | 18 | % | | 17 | % | | 18 | % |
International | 9 | % | | 9 | % | | 8 | % |
Mid-Atlantic | 6 | % | | 7 | % | | 7 | % |
Northeast | 6 | % | | 6 | % | | 6 | % |
Pacific Northwest | 4 | % | | 4 | % | | 4 | % |
Mountain | 3 | % | | 3 | % | | 3 | % |
Total | 100 | % | | 100 | % | | 100 | % |
See Note 16 — “Segment information” of Part II, Item 8 “Financial Statements and Supplementary Data” for further information on U.S. and foreign revenues and assets.
Suppliers
We primarily purchase our inventory from the major domestic metals producers which we also refer to as mills. Wein North America. Our U.S. operations do, however, also purchase limitedminimal amounts of certain products from foreign producers. We have multiple suppliers for all of our products. Our major suppliers of domestic carbon steel products include AK Steel; ArcelorMittal; California Steel Industries, Inc.; Commercial Metals Company; Evraz NA; Gerdau; NLMK USA; Nucor Corporation; Steel Dynamics, Inc.; SSAB; United States Steel Corporation; and Zekelman Industries. AK Steel, Allegheny Technologies Incorporated, North American Stainless, Outokumpu and Universal Stainless are our major suppliers of stainless steel products. We are a recognized distributor for various major aluminum companies, including Aleris International, Inc.; Arconic Inc.; Constellium N.V.; Hydro; and Kaiser Aluminum Corp. Our major suppliers of alloy products include ArcelorMittal; Carpenter Technologies; Gerdau; Nucor Corporation; and TimkenSteel Corporation.
Because of our total volume of purchases and our long‑termlong-term relationships with our suppliers, we believe that we are generally able to purchase inventory at the bestmost competitive prices offered by our suppliers. We believe that these relationships provide us with an advantage in our abilitysourcing product to source product and have itbe available for our customers in accelerated timeframes when needed, and also allowsallow us to more efficiently manage our inventory. We believe that we are not dependent on any one supplier for our metal inventory. We believe both our size and our long-term relationships with our suppliers continue to be important because mill consolidation has reduced the number of suppliers.
BacklogSeasonality
Because of the just‑in‑time delivery and the short lead‑time natureSome of our business, we docustomers are in seasonal businesses, especially customers in the construction industry and related businesses. Our overall operations have not believe information on our backlog of orders is meaningful to an understanding of our business.
Capital Expenditures
We maintained our focus on internal growth in 2017 by opening new facilities, building or expanding existing facilities and adding processing equipment with total capital expenditures of $161.6 million, with the majority growth-related. Our 2018 capital expenditure budget is our largest ever at approximately $225 million, much of which is again related to internal growth activities comprised of purchases of equipment and new facilities along with expansions of existing facilities and also includes about $40 million of projects that were included in our 2017 budget, but not completed. This reflects our confidence in our long‑term prospects; however, we will continue to evaluate and execute each growth project and consider the economic conditions and outlook at the time of investment. We estimate our maintenance capital expenditures at approximately $80 to $90 million annually, which allows us to significantly reduce our capital expenditures if economic conditions warrant a more conservative approach to strategic allocation.
Products and Processing Services
We provide a wide variety of processing services to meet our customers’ specifications and deliver products to fabricators, manufacturers and other end users. We maintain a wide variety of products in inventory, and believe this differentiates us from all other North American service centers. Approximately half of our orders do not require extensive or specialized processing allowing delivery to the customer within 24 hours of receiving the order. This provides a competitive advantage to us, and, for the remainder of our orders we typically have shorter lead times than our competitors given our decentralized structure and investments in processing equipment. Our product mix has become more diverse mainlyshown any material seasonal trends as a result of our targeted growth strategy to acquire companies with specialized inventorygeographic, product and provide increased levels of value-added processing services. In addition, we have invested over $1 billion in capital expenditurescustomer diversity. Typically, revenues in the six-year period endedmonths of July, November and December 31, 2017, with approximately 50% spent on processing equipment. We have increased our investmentsbeen lower than in processing equipment due to our existing and potential customers requesting higher levelsother months because of value-added processing, which has contributed to increases in our profitability. We currently perform processing servicesa reduced number of working days for 48%shipments of our orders compared to our historical level of 40%. We believe our investments in state-of-the-art processing equipmentproducts, resulting from holidays observed by the Company as well as vacation and focus on maintaining pricing discipline related to our processing services were significant contributors to our substantial increases in gross profit margin over the past few years. We also believe our enhanced processing capabilities have allowed us to increase our market share, especially for higher-margin products and services. Flat‑rolled carbon steel products (i.e., hot‑rolled, cold‑rolled and galvanized steel sheet and coil), which generally have the most volatile and competitive pricing, accounted for only 15%extended holiday closures at some of our 2017 sales.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.
Our sales dollars by product type as a percentage of total sales in each of the three years ended December 31 were as follows:
| | | | | | | |
| 2017 | | 2016 | | 2015 | | |
| 11 | % | 10 | % | 12 | % | carbon steel plate |
| 10 | % | 10 | % | 10 | % | carbon steel structurals |
| 10 | % | 10 | % | 8 | % | carbon steel tubing |
| 7 | % | 6 | % | 6 | % | hot-rolled steel sheet and coil |
| 6 | % | 7 | % | 7 | % | carbon steel bar |
| 5 | % | 6 | % | 5 | % | galvanized steel sheet and coil |
| 3 | % | 3 | % | 4 | % | cold-rolled steel sheet and coil |
Carbon Steel | 52 | % | 52 | % | 52 | % | |
| | | | | | | |
| 7 | % | 7 | % | 6 | % | heat-treated aluminum plate |
| 6 | % | 6 | % | 6 | % | aluminum bar and tube |
| 4 | % | 5 | % | 5 | % | common alloy aluminum sheet and coil |
| 1 | % | 1 | % | 1 | % | common alloy aluminum plate |
| 1 | % | 1 | % | 1 | % | heat-treated aluminum sheet and coil |
Aluminum | 19 | % | 20 | % | 19 | % | |
| | | | | | | |
| 6 | % | 6 | % | 6 | % | stainless steel bar and tube |
| 6 | % | 6 | % | 6 | % | stainless steel sheet and coil |
| 2 | % | 2 | % | 2 | % | stainless steel plate |
Stainless Steel | 14 | % | 14 | % | 14 | % | |
| | | | | | | |
| 4 | % | 3 | % | 4 | % | alloy bar and rod |
| 1 | % | 1 | % | 2 | % | alloy tube |
| 1 | % | 1 | % | 1 | % | alloy plate, sheet and coil |
Alloy | 6 | % | 5 | % | 7 | % | |
| | | | | | | |
| 4 | % | 4 | % | 3 | % | toll processing — aluminum, carbon steel and stainless steel (1) |
| 5 | % | 5 | % | 5 | % | miscellaneous, including brass, copper, titanium, manufactured parts and scrap |
Other | 9 | % | 9 | % | 8 | % | |
| | | | | | | |
Total | 100 | % | 100 | % | 100 | % | |
(1) Includes revenues for logistics services provided by our toll processing companies.
We are not dependent on any particular customer group or industry because we process and distribute a variety of metals. This diversity of product type and material reduces our exposure to fluctuations or other weaknesses in the financial or economic stability of particular customers or industries. We are also less dependent on any particular suppliers as a result of our product diversification.
For sheet and coil products, we purchase coiled metal from primary producers in the form of a continuous sheet, typically 36 to 60 inches wide, between 0.015 and 0.25 inches thick, and rolled into 3‑to-20 ton coils. The size and weight of these coils require specialized equipment to move and process the material into smaller sizes and various products. Many of the other products that we carry also require specialized equipment for material handling and processing. We believe few of our customers have the capability to process the metal into the desired sizes or the capital available to acquire the necessary equipment.
We believe that few metals service centers offer the broad range of processing services and metals that we provide. In addition to a focus on growing our revenues from specialty products, we have also enhanced the level of value‑added
processing services we provide through recent acquisitions and significant investments in new equipment over the past few years. For example, we have made significant investments in facilities and equipment due to the increased demand for our products sold to the aerospace market and toll processing aluminum for the automotive industry.Competition
After receiving an order, we enter it into one of our computerized order entry systems, select appropriate inventory and schedule processing to meet the specified delivery date. In 2017, we delivered approximately 40% of our orders within 24 hours of the customer placing the order with us. We attempt to maximize the yield from the various metals that we process by combining customer orders to use each product that we purchase to the fullest extent practicable.
In 2017, we performed processing services for approximately 48% of our sales orders. Our primary processing services range from cutting, leveling or sawing to more complex processes such as machining or electropolishing. Throughout our service centers we perform most processes provided in the industry, without encroaching upon the services performed by our customers. As part of our growth strategy, we have been expanding into higher value‑added services, including certain fabrication processes as requested by our customers.
We generally only process specific metals to non‑standard sizes pursuant to customer purchase order specification. In addition, we typically acquire standard size and grade products that can be processed into many different sizes to meet the needs of many different customers. We do not maintain a significant inventory of finished products, but we carry a wide range of metals to meet our customers’ short lead time and just‑in‑time delivery requirements. Our metals service centers maintain inventory and equipment selected to meet the needs of that facility’s customers. We work with our customers to understand their needs and identify areas where we can provide additional value, increasing our importance to them.
Sales and Marketing
As of December 31, 2017, we had approximately 2,090 sales personnel located in 44 states in the U.S. and 13 other countries providing sales and marketing services throughout each of those areas. Our sales personnel market and sell our products and services and we believe that our sales force has extensive product, service, market and customer knowledge. Sales personnel are organized by division or subsidiary and are divided into two groups. Outside sales personnel travel throughout a specified geographic territory and maintain relationships with our existing customers and develop new customers. Inside sales personnel remain at the facilities to price and write orders. Outside sales personnel generally receive incentive compensation based on the gross profit from their particular geographic territories. Inside sales personnel generally receive incentive compensation based on the gross profit and/or pre‑tax profit of their particular location.
Our business is relationship based and because of that, we operate under many different trade names. We acquire well-run businesses with strong customer relationships and solid reputations within the marketplace. Because of this, we find value in the acquired trade name and continue to use the business name and maintain the customer relationships.
Competition
The metals service center industry is highly fragmented and competitive. competitive within localized areas or regions. Many of our competitors operate single, stand-alone service centers. According to IBISWorld Inc., there were approximately 11,200 metal wholesaling locations operated by approximately 8,800 companies in the United States in 2022. Our 2022 tons sold from our U.S. locations represented approximately 14.5% of the total tons sold by the U.S. metals service center industry according to MSCI reporting. The significant number of metals service centers that exist in this fragmented market creates opportunities for us to expand by making acquisitions.
We have numerous competitors in each of our product lines and geographic locations, and competition is most frequently local or regional. Our domestic service center competitors are generally smaller than we are, but we also face strong competition from national, regional and local independent metals distributors and the producers themselves, some of which have greater resources than we do. In their May 2017 report on the metals wholesaling industry, IBISWorld Inc. estimated that in 2017 there were approximately 10,100 metal wholesale locations in the United States operated by approximately 7,100 companies. Nevertheless, the five largest U.S. metals service center companies are expected to represent just over 10% of the estimated industry revenue in 2017. IBISWorld Inc. estimates our 2017 U.S. revenues to account for only about 4.8% of the entire U.S. market. We are the largest North American (U.S. and Canada) metals service center company on a revenue basis.
We compete with other companies on price, service, quality, processing capability and availability of products and services. We maintain relationships with our major suppliers at the executive and local levels. We believe that this division of responsibility has increased our ability to obtain competitive prices of metals by leveraging our total size and to provide more responsive service to our customers by allowing our local management teams to make the purchasing decisions. In addition, we believe that the size of our inventory, the diversity of metals products we have available, and the wide variety
of processing services we provide distinguish us from our competition. We believe our competitors are generally unable to offer the same high qualityhigh-quality products and services we provide using state-of-the-art processing equipment and advanced technology as they do not have the financial ability or risk tolerance to grow their businesses at the same rate as Reliance. We believe we have increased our market share duringindustry-leading financial results in recent years were due to our strong financial condition, the high quality of products and services we are able to offer as a result of our significant investments in our acquired businesses, facilities and equipment, as well as our continued focus on small order sizes with quick turnaround.
Human Capital
At December 31, 2022, we employed approximately 14,500 persons worldwide, of which approximately 12,800 were employed in the United States. Our total workforce of approximately 15,000 persons at December 31, 2022 includes approximately 500 contract and temporary workers.
As of December 31, 2022, approximately 13% of our employees were represented by unions under collective bargaining agreements. We have entered into collective bargaining agreements with 42 union locals at 52 of our locations. These collective bargaining agreements have not had a material impact on our revenues or profitability. From time to time, our collective bargaining agreements expire and come up for renegotiation. Approximately 500 employees are covered by 23 different collective bargaining agreements that expire in 2023.
As a result of a materiality assessment, we determined that Reliance’s most significant social issues are: (i) the health and safety of our colleagues; and (ii) human capital management. We seek to create an environment that values the health, safety and wellbeing of our employees, their families and the communities in which we live and do business. We strive to equip our employees with the knowledge, skills and resources to maintain or improve their personal health, develop professionally and operate safely within our businesses. A highlight of our commitment to our employees is the inclusion of “People” as one of our six core values that represent key areas of focus for our company. For more information on the Company’s core values, see the Company’s Code of Conduct available at investor.rsac.com. Among the critical elements included in the People category are the following:
The health and safety of our employees, customers, suppliers and communities is our most important core value. Our safety programs are designed around recognized standards with appropriate variations addressing the multiple jurisdictions and regulations, specific hazards and unique working environments of our operations. Our SMART Safety program focuses on embedding our culture of safety across all of our operations. We strive to have zero fatalities and no life-threatening or life-altering injuries and illnesses from working at our facilities.
Our executive team supports a safety management system that includes policies, standard practices and goals at our facilities, including:
| o | conducting regular safety assessments; |
| o | monitoring best practices and compliance with regulatory requirements; |
| o | training our employees to improve safety practices; |
| o | integrating video-based technology and safety programs into substantially all Company-operated trucks; and |
| o | maintaining emergency preparedness and response plans. |
The Company utilizes a mixture of indicators to assess the health and safety performance of its domestic operations. Lagging indicators include the Occupational Safety & Health Administration (“OSHA”) Total Recordable Incident Rate (“TRIR”) and average Department of Transportation Recordable Accident Rate per million miles (“DOT Rate”).
| | | | | | | | |
| | Year Ended December 31, |
| 2022 | | | 2021 | | | 2020 |
Safety Indicator: | | | | | | | | |
TRIR | | 1.61 | | | 2.12 | | | 1.86 |
DOT Rate | | 0.55 | | | 0.54 | | | 0.60 |
Our focus on safety is evident in our 2022 TRIR being our lowest ever and lower than 3.5, as reported in the most recent Metals Service Center Institute survey performed in 2020. A lower TRIR means that fewer people are injured, and fewer lives are negatively impacted. We have not identified a universally accepted and annually updated benchmarking standard for DOT Rate.
| ● | Diversity, Equity and Inclusion |
We believe that superior Company performance requires contributions from a diverse workforce that includes a variety of employee experiences, backgrounds, and characteristics. We are committed to providing fair and unbiased opportunities and hiring, developing and supporting a diverse and inclusive workplace. Our commitment to diversity and inclusion is also reinforced by our Code of Conduct, which prohibits employment discrimination or harassment based on race, color, sex (including pregnancy, childbirth, and related medical conditions), national origin, religion, age, disability, genetic information, veteran status, sexual orientation, marital status, or any other characteristic protected by applicable law.
| ● | Employee Health, Wellness and Wellbeing |
The health, wellness and wellbeing of our employees is critical to our success. We are committed to providing our employees with resources to help them achieve their personal health, wellness, and wellbeing goals. As part of our comprehensive benefits offering, we provide employees and their covered spouses/domestic partners with a robust employee assistance program, individualized assessments, access to lab or on-site health screenings and personalized wellness coaching. Our customizable program integrates web-based tools, phone and mail-based communications, local activities and is designed to support the diverse and individualized needs of our employees in order to help them improve or maintain their health status and ongoing engagement in healthy behaviors.
| ● | Compensation and Benefits |
To help attract and retain the best employees, we strive to offer competitive compensation and best-in-class benefits. In addition to base salaries, our compensation programs can include annual bonuses, stock-based compensation awards, a 401(k) plan with employee matching opportunities, healthcare insurance and welfare benefits, health savings and flexible spending accounts. We believe that we provide industry-leading healthcare
benefits to our employees and fund approximately 86% of the costs associated with our U.S. employees’ health insurance coverage.
Reliance is committed to investing in and enriching the communities in which we live and work. Giving back to those in need and enriching people's lives is a deep-rooted philosophy ingrained in our corporate culture primarily through our support of non-profit organizations that provide active duty, veterans, transitioning service members and their families with advanced manufacturing training and other support services. Our dedication to each and every member of our Family of Companies is the foundation for “Reliance Cares,” our emergency assistance fund dedicated to supporting employees impacted by natural disasters. Through employee funded contributions, matched dollar-for-dollar by Reliance, we have been able to provide approximately 1,000 grants to employees (including approximately 170 grants to support employees and their families responding to COVID-19 related personal impacts)since the inception of Reliance Cares in 2017.
We believe employees should have an opportunity for ongoing development through challenging daily contributions and structured development programs. We launched an annual evolving leaders program focused on the continued training of selected employees, encouraging the development in several areas of our business, leadership and communication, along with opportunities for enterprise-wide collaboration to drive an approach to innovative problem solving and solutions. We continue to expand our talent management initiatives to pursue the significant long-term potential for our continued success. Our success is dependent on the knowledge, skills and abilities of our current and future leaders.
Quality Control
Procuring high qualityhigh-quality metal from suppliers on a consistent basis is critical to our business. We have institutedmaintain strict quality control measures to assure that the quality of purchased raw materials will enable us to meet our customers’ specifications and to reduce the costs of production interruptions. In certain instances, we perform physical and chemical analyses on selected raw materials, typically through a third partythird-party testing lab, to verify that mechanical and dimensional properties, cleanliness and surface characteristics meet our requirements and our customers’ specifications. We also conduct certain analyses of surface characteristics on selected processed metal before delivery to the customer. We believe that maintaining high standards for accepting metals ultimately results in reduced return rates from our customers.
We maintain various quality certifications throughout our operations. Approximately 55%50% of our operating locations are ISOhave earned International Organization for Standardization (ISO 9001:2008 or ISO 9001:2015 certified.2015) certifications. Many of our locations maintain additional certifications specific to the industries they serve, such as aerospace, auto, nuclear, and others, including certain international certifications.
Systems
A common financial reporting system, as well as certain other accounting, tax and human resources systems are used company‑wide. However, we maintain various transactional software applications across our operations that meet the individual needs of those operations. Generally, these localized systems provide information in real time, such as inventory availability, location and cost and may be customized with features to accommodate the products the respective operations carry and services they provide, automated equipment interfaces, or other specialized requirements. With this information, our marketing and sales personnel can respond to our customers’ needs more efficiently and more effectively. Many of our companies also provide online access to our existing customers to allow them to interact with us more efficiently, and also provide the ability for potential customers to make inquiries and place orders.
Government Regulation
Our metals service centers are subjectBeyond our compliance requirements with environmental regulations, compliance with government regulations has not had and, based on laws and regulations currently in effect, is not expected to many foreign, federal, state and local requirements to protecthave a material effect on the environment, including hazardous waste disposal and underground storage tank regulations. The only hazardous substances that we generally use in our operations are lubricants, cleaning solvents and petroleum for fueling our trucks. We pay state‑certified private companies to haul and dispose of our hazardous waste.Company’s capital expenditures, earnings or competitive position.
Our operations are also subject to laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health ActOSHA and related regulations, which, among other requirements, establish noise, dust and safety standards. We maintain comprehensive health and safety policies and encourage our employees to follow established safety practices. Safety of our employees and others is critical to our success. We continue to expand and improve our internal safety resources, which has contributed positively to our safety metrics and financial results. We encourage social well‑being by instituting these high quality labor, health and safety standards. We do not anticipate that continued compliance with such laws and regulations will have a material adverse effect on our results of operations or financial condition.
We are subject to the conflict mineral provisions of the Dodd‑FrankDodd-Frank Wall Street Reform and Consumer Protection Act of 2010. We are required to undertake due diligence, disclose and report whether the products we sell originate from the Democratic Republic of Congo and adjoining countries. We verify with our suppliers the origins of all metals used in our products.
We sell metals to foreign customers and otherwise operate abroad, subjecting us to various countries’ trade regulations concerning the import and export of materials and finished products. Our operations are subject to the laws and regulations of the jurisdictions in which we conduct our business that seek to prevent corruption and bribery in the marketplace, including the United States’ Foreign Corrupt Practices Act (the “FCPA”) and the United Kingdom’s Bribery Act 2010. We have developed and implemented company‑widecompany-wide export and anti‑corruptionanti-corruption policies designed to provide our employees clear statements of our compliance requirements and to ensure compliance with applicable export and anti‑corruptionanti-corruption regulations. For information about risks related to government regulation, please see the risk factors set forth under the caption Item 1A. “Risk Factors” including the Risk Factors captioned “We are subject to various environmental, employee safety and health, and customs and export laws and regulations, which could subject us to significant liabilities and compliance expenditures;” and “We operate internationally and are subject to exchange rate fluctuations, exchange controls, political risks and other risks relating to international operations;operations.”
Environmental
We are not a metals producer or mill – we operate metals service centers. As a distributor and “Our international“first-stage” processor of metal products, our operations, continue to expand, exposing us to additional risks.”by their nature, have a limited environmental impact as we do not emit significant amounts of carbon dioxide or other greenhouse gases.
Environmental
SomeIn addition, the overwhelming majority of our operations involve the processing and distribution of inherently sustainable aluminum and steel products that we believe (i) are some of the properties we own or leasemost commonly-recycled materials in the United States and (ii) can be 100% recycled without loss of quality. We believe aluminum and steel are located in industrial areas with histories of heavy industrial use. We may incur some environmental liabilities because of the locationmost recycled materials on the planet—more than plastic, paper, and glass combined each year. In 2022, we reintroduced over 197,500 tons of these properties. In addition, we are currently involved with a certain environmental remediation project related to activities at former manufacturing operations of Earle M. Jorgensen Company (“EMJ”), our wholly owned subsidiary, that were sold many years prior to Reliance’s 2006 acquisition of EMJ. Although the potential cleanup costs could be significant, EMJ maintained insurance policies during the time they ownedrecycled scrap material into the manufacturing operations that have covered substantially all of our expenditures related to this matter to date, and are expected to continue to cover the majority of the related costs. We do not expect that these obligations will have a material adverse impact on our financial position, results of operations or cash flows.life cycle.
We believe that all scrap metal produced by our operations is recycled by the independent scrap metal companies and producers to whom we sell our scrap metal. We continue to evaluate and implement energy conservation and other initiatives to reduce pollution and improvethe environmental impact of our environmental impact. Enactmentbusiness. However, enactment of more stringent environmental regulations could have an adverse impact on our financial results. In addition, the manufacture and production of the materials we source from mills can be a carbon-intensive activity, and adoption of more stringent carbon regulations or policies may increase the prices of these materials.
Although we have implemented policiesAs a processor and procedures to comply with these regulations, we cannot guarantee that we will not incur any violations and resulting penalties from such activity.
Corporate Responsibility
Sustainability
We are committed to mitigating the impact our products and operations have on the environment. As an operatordistributor of metals, service centers,and not a producer, we acknowledge and embrace our day-to-day business consistsrole in protecting the environment and are currently assessing our impacts. Our strong desire is to identify and prioritize areas of the sale, distribution and processing of a broad variety of metal products sourced from numerous primary metal producers. The majority ofimprovement. In order to align our orders are basic distribution with no processing services performed. For the remainder of our sales orders, we perform “first‑stage” processing, which does not require significant amounts of energy or toxic or hazardous materials as we are simply cutting the metal to size. Our operations, by their nature, do not emit significant amounts of carbon dioxide or other greenhouse gases or have a significant impact on the environment.
As part of our commitment to environmental sustainability, we:
| ·
| | purchase significant volumes of metal produced in electric arc furnaces that consume recycled material;
|
| ·
| | sell scrap material generated in our operations to recyclers;
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| ·
| | use propane fuel to operate forklifts and have installed natural and energy efficient lighting in many of our operations; and
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| ·
| | utilize energy efficient diesel tractors that consume less fuel and reduce emissions for the majority of our trucking fleet.
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Community Programs
Reliance is committed to investing in and enriching the communities in which we live and work. We support a variety of organizations and community programs including:
| ·
| | Veterans support— We are supporters of a non-profit organization that provides veterans and transitioning services members with advanced manufacturing training and industry-recognized certification for careers in welding, machining, and fabrication at no cost to them. Since 2013, Reliance has partnered with this organization through financial sponsorship, donations of metals for their training courses, and hiring this organization’s graduates. For the past four years, we have also participated in a national program focused on supporting enlisted members of the Armed Forces and their families.
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| ·
| | Reliance Cares— In 2017, we launched an employee relief fund to support our workforce of approximately 14,900 individuals across 40 states and 13 countries outside of the U.S. (“Reliance Cares”). Reliance Cares is available to any of our employees impacted by a natural disaster. In the wake of Hurricanes Harvey and Irma, in August and September 2017, we provided financial assistance to 135 employees through our Immediate Response Program. We further funded 27 grants to help our employees’ rebuilding efforts.
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| ·
| | Local Community Organizations— Reliance encourages our subsidiaries and divisions to engage in and initiate events serving their communities and their employees. To commend our companies for their civic contributions, Reliance matches the fundraising efforts of our subsidiaries and divisions and supports volunteer efforts by our employees.
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Employees
As of December 31, 2017, we had approximately 14,900 employees. Approximately 12% of our employees are covered by collective bargaining agreements that expire at various times over the next eight years. Approximately 600 employees are covered by 23 different collective bargaining agreements that expire in 2018. We have entered into collective bargaining agreements with 41 union locals at 53 of our locations. These collective bargaining agreements have not had a material impact either favorably or unfavorably on our revenues or profitability at our various locations. We aim to always maintain excellent relationsinitiatives with our employeesbroader strategy, we completed a materiality assessment in 2021 to determine the environmental matters that are most critical to our business and have never experienced a significant work stoppage. Over the years we have experienced minor work stoppages by our employees at certain of our locations, but due to the small number of employees and the short time periods involved, these stoppages have not had a material impact on our operations.stakeholders.
Seasonality
Some of our customers are in seasonal businesses, especially customers in the construction industry and related businesses. Our overall operations have not shown any material seasonal trends asAs a result of the materiality assessment, we determined that the most material environmental issues are: (i) emissions from company-owned trucks that deliver our geographic, productproducts; and customer diversity. Typically, revenues(ii) our overall energy usage. We expect to update this materiality assessment on a periodic basis to ensure it reflects changes in our business and 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 vacation and extended holiday closures at some of our customers. Reduced shipping days also have a significant impact on our profitability in any particular period. We cannot predict whether period-to-period fluctuations will be consistent with historical patterns. Results of any one or more quarters are therefore not necessarily indicative of annual results.external environment.
Available Information
We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”)SEC under the Securities Exchange Act.Act of 1934, as amended (the “Exchange Act”). The SEC maintains a website that contains reports, proxy statements and other information regarding issuers, including our Company, that file reports electronically with the SEC. The public can obtain any reports that we file with the SEC at http://www.sec.gov. You may also read and copy any document we file at
the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. Call the SEC at 1-800-SEC-0330 for further information on the public reference room.
Our Investor Relations website is located at http://investor.rsac.cominvestor.rsac.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 are made available, free of charge, through our website as soon as reasonably practical after we electronically file or furnish the reports to the SEC. Information about Reliance’s ESG-related programs and initiatives is available under the “ESG” section of the Company’s website. Additional corporate governance information, including our restated certificate of incorporation, amended and restated bylaws, principles of corporate governance, Board committee charters, code of conduct and anti-bribery and anti-corruption policy, is available under Corporate Governance in the “Investors” section of the Company’s website. We encourage investors to visit our website.
The website addresses presented above and elsewhere in this Annual Report on Form 10-K are not intended to function as hyperlinks, and the information contained in our website and in the SEC’s website is not intended to be a part of this filing.
Item 1A. Risk FactorsFactors
Set forth below are the risks that we believe are material to our investors. Our business, results of operations and financial condition may be materially adversely affected due to any of the following risks. The risks described below are not the only ones we face. Additional risks of which we are not presently aware or that we currently believe are immaterial may also harm our business.
Risks Related to Our Business and Industry
The costs that we pay for metals fluctuate due to a number of factors beyond our control, and such fluctuations could adversely affect our operating results, particularly if we cannot pass on higher metal prices to our customers.
We purchase large quantities of aluminum, carbon, alloystainless and stainlessalloy steel and other metals, which we sell to a variety of customers. Our profitability is largely dependent upon the prices of the steel, aluminum, and other metals we sell our customers. The costs to us for theseprice of metals we purchase and the prices thatprice we charge our customers for ourthe products maywe sell change dependingbased on many factors outside of our control, including general economic conditions (both domestic and international), competition, production levels, raw material costs, customer demand levels, import duties and other trade restrictions, currency fluctuations and surcharges imposed by our suppliers. Prolonged disruption in the supply and/or distribution of metals due to weather, climate change, natural disasters, COVID-19, labor disputes or interruption of service by carriers could increase costs, limit the availability of materials critical to our operations and have a significant impact on results. We attempt to pass cost increases on to our customers with higher selling prices, but we mayare not always be able to do so, particularly when the cost increases are not demand driven. When metal prices decrease, we may not be able tooften cannot replace our higher cost inventory with the lower cost metal at a rate that would allow us to maintain a consistent gross profit margin, which would reduce our profitability during that interim period.
Metal prices are volatile due to, among other things, fluctuations in foreign and domestic production capacity, raw material availability and related pricing, metals consumption, tariffs, import levels into the U.S., governmental regulations, and the strength of the U.S. dollar relative to other currencies. Future changes in global general economic conditions or in production, consumption or export of metals could cause fluctuations in metal prices globally, which could adversely affect our profitability and cash flows. We generally do not enter into long‑termlong-term agreements with our suppliers or hedging arrangements that could lessen the impact of metal price fluctuations.
We maintain substantial inventories of metal to accommodate the short lead times and delivery requirements of our customers. Our customers typically purchase products from us pursuant to purchase orders and typically do not enter into long‑termlong-term purchase agreements or arrangements with us. Accordingly, we purchase metal in quantities we believe to be appropriate to satisfy the anticipated needs of our customers based on information derived from customers, market conditions, historic usage and industry research. Commitments for metal purchases are generally at prevailing market prices in effect at the time orders are placed or at the time of shipment. During periods of rising prices for metal wecosts, our results may be negatively impacted by delays between the time of increases in the costcosts of the metals to us and increases in the prices that we charge for our productspurchase if we are unable to pass these increased costs on to our customers.make equivalent increases in the selling prices of the products we sell. In addition, when metal prices decline, this could result in lowerour selling prices for our productsgenerally decline and, as we use existingsell inventory that we purchased at higher metal prices,costs, results in lower gross profit margins. Consequently, during periods in which we sell this existing inventory, the effects of changing metal prices could adversely affect our operating results.
Global economic conditions, including inflation, and supply chain disruptions, have adversely affected, and could continue to adversely affect, our operations.
Our business could be adversely affectedfinancial condition and results of operations are impacted by declinesglobal markets and economic conditions over which we do not have control. A general global economic downturn or other adverse macroeconomic trends, including heightened inflation, capital markets volatility, currency rate fluctuations, an economic slowdown or recession, or a slowing or stalled
recovery therefrom, have in economic activity.
Demandthe past resulted in and may in the future result in unfavorable conditions that negatively affect demand for our products and services is affected by a numberexacerbate some of general economic factors. A decline in economic activity in the U.S. and international markets in which we operate could materiallyother risks that affect our business, financial condition and results of operations. DuringBoth domestic and international markets experienced significant inflationary pressures in fiscal year 2022 and inflation rates in the most recentU.S., as well as in other countries in which we operate, are currently expected to continue at elevated levels for the near-term. In addition, the Federal Reserve in the U.S. and other central banks in various countries have raised, and may again raise, interest rates in response to concerns about inflation, which, coupled with reduced government spending and volatility in financial markets, has had and may continue to have the effect of further increasing economic recession, bothuncertainty and heightening these risks. Interest rate increases or other government actions taken to reduce inflation have resulted in recessionary pressures in many parts of the world.
Recent inflationary pressures have increased the costs of labor, energy and raw materials and have adversely affected consumer spending, economic growth and our operations. If we are unable to pass any increases in costs along to our customers, it could adversely affect our operating results.
The 2022 Russian military invasion of Ukraine has led, is currently leading, and for an unknown period of time will continue to lead to disruptions in local, regional, national, and global markets and economies affected thereby. These disruptions caused by the invasion have included, and may continue to include, political, social, and economic disruptions and uncertainties and material increases in certain commodity prices that may affect our business operations.
Excess capacity and over-production by foreign metal producers or decreases in tariffs could increase the level of metal imports into the U.S., resulting in lower domestic prices, which would adversely affect our sales, margins and profitability.
Global metal-making capacity exceeds demand for metal products in some regions around the world. Rather than reducing employment by rationalizing capacity with consumption, we believe metal manufacturers in many countries (often with government assistance or subsidies in various forms) have periodically exported metal at prices which may not reflect their costs of production or capital. Excessive imports of metal into the U.S. have exerted, and may continue to exert, downward pressure on U.S. metal prices.
On March 1, 2018, the United States announced a plan to indefinitely impose a 25 percent tariff on certain imported steel products and a 10 percent tariff on certain imported aluminum products under Section 232 of the Trade Expansion Act of 1962 (the “Section 232”) tariffs.
These tariffs have triggered retaliatory actions by certain affected countries, and other foreign governments have initiated or are considering imposing trade measures on steel and aluminum produced in the United States. To the extent these tariffs and other trade actions result in a decrease in international demand for steel and aluminum produced in the United States or otherwise negatively impact demand for our products, our business may be adversely impacted.
We expect that these tariffs, while in effect, will discourage metal imports from non-exempt countries. These tariffs have had a favorable impact on the prices of the products we sell and pricing levels declined
rapidly and significantly. In addition to reducing our direct business activity, many of our customers were not able to pay us amounts when they became due, further affecting our financial condition and results of operations. An economic downturn inIf these or other tariffs or duties expire or if others are relaxed or repealed, or if relatively higher U.S. metal prices make it attractive for foreign metal producers to export their products to the markets we serve may result in reductions in sales and pricingU.S., despite the presence of our products,duties or tariffs, the resurgence of substantial imports of foreign metal could create downward pressure on U.S. metal prices which could have a material adverse effect on our potential earnings and future results of operations.
Currency fluctuations and changes in the worldwide balance of supply and demand could negatively impact our profitability and cash flows.
Significant currency fluctuations in the United States or abroad could negatively impact our cost of metals and the pricing of our products. A decline in the U.S. dollar relative to foreign currencies may result in increased prices for metals and metal products in the United States and reduce the amount of metal imported into the U.S. as imported metals become relatively more expensive. We may not be able to pass these increased costs on to our customers. If the value of the U.S. dollar improves relative to foreign currencies, this may result in increased metal being imported into the U.S., which in turn may pressure existing domestic prices for metal. This could also occur if global economies are weaker than the U.S. economy, creating a significant price spread between the U.S. and foreign markets.
We operate in an industry that is subject to cyclical fluctuations and any downturn in general economic conditions or in our customers’ specific industries could negatively impact our profitability and cash flows.
The metals service center industry is cyclical and impacted by both market demand and metals supply. Periods of economic slowdown (such as global or recession in the United States or other countries, or the public perception that these may occur, couldregional recessions) decrease the demand for our products and adversely affect our pricing. If either demand or pricing were to decline from the current levels, this could reduce our profitability and cash flows.
We sell many products to industries that are cyclical, such as the non‑residentialnon-residential construction, semiconductor, energy, automotive, aerospace and heavy equipment industries. Although many of our direct sales are to sub‑contractorssub-contractors or job shops that may serve many customers and industries, the demand for our products is directly related to, and quickly impacted by, demand for the finished goods manufactured by customers in these industries, which may change as a result of changes in the general U.S. or worldwide economy, inflation, domestic exchange rates, energy prices or other factors beyond our control. As a recent example, the significant decline in oil prices experienced late in 2014 that continued through 2016
Our business may continue to be negatively impacted by the coronavirus (COVID-19) pandemic and could be negatively impacted by other pandemics and outbreaks.
Our operations were adversely affected in 2022 by the impacts of the COVID-19 pandemic and related macroeconomic effects, including labor shortages, raw material constraints and other supply chain disruptions. The ongoing impacts of the COVID-19 pandemic could further affect general economic conditions, our salesbusiness and results of operations. Future developments would dictate the type and level of these potential impacts, which are highly uncertain and are difficult to predict.
In addition, the COVID-19 pandemic has resulted in a widespread health crisis that is adversely affecting the economies and financial markets of many countries, which could result in a prolonged economic downturn that may negatively affect demand for our products and services. The imposition of quarantine and travel restrictions has negatively affected and, if reimposed, may continue to negatively affect our business. The extent to which COVID-19 continues to impact our business, results of operations and financial condition is highly uncertain and will depend on future developments. Such developments may include the geographic spread and duration of the virus, including the emergence of new variants, the severity of the disease, vaccination rates and the actions that may be taken by various governmental authorities and other third parties in response to the energy market.pandemic. Other outbreaks of contagious diseases, or other adverse public health developments in countries where we operate or our customers are located, could similarly adversely affect our business, results of operations and financial condition in the future.
We compete with a large number of companies in the metals service center industry, and, if we are unable to compete effectively, our profitability and cash flows may decline.
We compete with a large number of other general-line distributors and processors, and specialty distributors in the metals service center industry. Competition is based principally on price, inventory availability, timely delivery, customer service, quality and processing capabilities. Competition in the various markets in which we participate comes from companies of various sizes, some of which have more established brand names in the local markets that we serve. These competitors may be better able to withstand adverse changes in conditions within our customers’ industries and may have greater operating and financial flexibility than we have. To compete for customer sales, we may lower prices or offer increased services at a higher cost, which could reduce our profitability and cash flows. Rapidly declining prices and/or demand levels may escalate competitive pressures, with service centers selling at substantially reduced prices, and sometimes at a loss, in an effort to reduce their high costhigh-cost inventory and generate cash. Currently elevated levels of import material into the U.S. has increased competition between metals service centers as supply exceeds demand. These competitive pressures could further intensify if demand and particularly pricing decline significantly from current levels. Any increased and/or sustained competitive pressure could cause our share of industry sales to decline along with our profitability and cash flows.
If we were to lose any of our primary suppliers or otherwise be unable to obtain sufficient amounts of necessary metals on a timely basis, we may not be able to meet our customers’ needs and may suffer reduced sales.
We have few long‑termlong-term contracts to purchase metals. Therefore, our primary suppliers of aluminum, carbon, steel,stainless and alloy steel stainless steel, aluminum or other metals could curtail or discontinue their delivery of these metals to us in the quantities
we need with little or no notice. Our ability to meet our customers’ needs and provide value‑addedvalue-added inventory management services depends on our ability to maintain an uninterrupted supply of high qualityhigh-quality metal products from our suppliers. If our suppliers experience production problems, lack of capacity or transportation disruptions, the lead times for receiving our supply of metal products could be extended and the cost of our inventory may increase. If, in the future, we are unable to obtain sufficient amounts of the necessary metals at competitive prices and on a timely basis from our customary suppliers, we may not be able to obtain these metals from acceptable alternative sources at competitive prices to meet our delivery schedules. Even if we do find acceptable alternative suppliers, the process of locating and securing these alternatives may be disruptive to our business, which could have an adverse impact on our ability to meet our customers’ needs and reduce our profitability and cash flows. In addition, if a significant domestic supply source is discontinued and we cannot find
acceptable domestic alternatives, we may need to find foreign sources of supply. Using foreign sources of supply could result in longer lead times, increased price volatility, less favorable payment terms, increased exposure to foreign currency movements and certain tariffs and duties and require greater levels of working capital. Alternative sources of supply may not maintain the quality standards that are in place with our current suppliers that could impact our ability to provide the same quality of products to our customers that we have provided in the past, which could cause our customers to move their business to our competitors or to file claims against us, and such claims may be more difficult to pass through to foreign suppliers.
There has been significant consolidation at the metal producer level both globally and within the U.S. This consolidation has reduced the number of suppliers available to us, which could result in increased metals costs to us that we may not be able to pass on to our customers and may limit our ability to obtain the necessary metals to service our customers. The number of available suppliers may be further reduced if the general economy enters into another recession. Lower metal prices and lower demand levels may cause certain mills to reduce their production capacitycapacity; and, in that case, the mill may operate at a loss, which could cause one or more mills to discontinue operations if the losses continue over an extended period of time or if the mill cannot obtain the necessary financing to fund its operating costs.
We rely upon our suppliers as to the specifications of the metals we purchase from them.
We rely on mill certifications that attest to the physical and chemical specifications of the metal received from our suppliers for resale and generally, consistent with industry practice, we do not undertake independent testing of such metals unless independent tests are required by customers. We rely on customers to notify us of any metal that does not conform to the specifications certified by the supplying mill. Although our primary sources of products have been domestic mills, we have and will continue to purchase product from foreign suppliers when we believe it is appropriate. In the event that metal purchased from domestic suppliers is deemed to not meet quality specifications as set forth in the mill certifications or customer specifications, we generally have recourse against these suppliers for both the cost of the products purchased and possible claims from our customers. However, such recourse will not compensate us for the damage to our reputation that may arise from sub‑standardsubstandard products and possible losses of customers. Moreover, there is a greater level of risk that similar recourse will not be available to us in the event of claims by our customers related to products from foreign suppliers that do not meet the specifications set forth in the mill certifications. In such circumstances, we may be at greater risk of loss for claims for which we do not carry, or carry insufficient, insurance.
Climate change might adversely impact our supply chain or our operations.
Concern about climate change might result in new legal and regulatory requirements to reduce or mitigate the effects of climate change. While we believe our operations do not emit significant amounts of carbon dioxide or other greenhouse gases, legal or regulatory changes related to climate change may result in higher prices for metal, higher prices for utilities required to run our facilities, higher fuel costs for us and our suppliers, increased compliance costs and other adverse impacts. To the extent that new legislation or regulations increase our costs, we may not be able to fully pass these costs on to our customers without a resulting decline in sales and adverse impact to our profits.
Changing market dynamics, global policy developments, and the increasing frequency and impact of extreme weather events on critical infrastructure in the U.S. and elsewhere have the potential to disrupt our business, the business of our third-party suppliers, and the business of our customers, and may cause us to experience higher attrition, losses and additional costs to maintain or resume operations.
There is also increased focus by governmental and non-governmental entities on sustainability matters. Any perception that we have failed to act responsibly regarding climate change could result in negative publicity and adversely affect our business and reputation.
There also has been increased stakeholder focus, including by U.S. and foreign governmental authorities, investors, customers, media and nongovernmental organizations, on environmental sustainability matters, such as climate change, the reduction of greenhouse gases and water consumption. Legislative, regulatory or other efforts to combat climate change or other environmental concerns could result in future increases in taxes, restrictions on or increases in the costs of supplies, transportation and utilities, any of which could increase our operating costs, and necessitate future investments in facilities
and equipment. Further, our customers we serve may impose emissions reduction or other environmental standards and requirements. As a result, we may experience increased compliance burdens and the sourcing of our products may be adversely affected. These risks also include the increased pressure to make commitments, set targets, or establish additional goals to take actions to meet them, which could expose us to market, operational, execution and reputational costs or risks.
Developing and acting on initiatives within the scope of social and environmental sustainability, and collecting, measuring and reporting environmental sustainability-related information and metrics can be costly, difficult and time consuming and is subject to evolving reporting standards. Further, statements about our social and environmental sustainability-related initiatives and goals, and progress against those goals, may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. If our social and environmental sustainability-related data, processes and reporting are incomplete or inaccurate, or if we fail to achieve progress with respect to our goals within the scope of social and environmental sustainability on a timely basis, or at all, our reputation, business, financial performance and growth could be adversely affected.
We face increased competition from alternative materials and risks concerning innovation, new technologies, products and increasing customer requirements.
As a result of increasingly stringent regulatory requirements, designers, engineers and industrial manufacturers, especially those in the automotive industry, are increasing their use of lighter weight and alternative materials, such as composites, plastics, glass and carbon fiber. In addition, higher sustained market prices of metal products could cause new alternative material producers to enter the market. New or increased use of such materials could reduce the demand for metal products, which may reduce our profitability and cash flow.
If metals prices increase compared to certain substitute materials, the demand for our products could be negatively impacted, which could have an adverse effect on our financial results.
In certain applications, metal products compete with other materials, such as composites, glass, carbon fiber, wood and plastic. Prices of all of these materials fluctuate widely, and differences between the prices of these materials and the price of metal products may adversely affect demand for our products and/or encourage material substitution, which could adversely affect the prices of and demand for metal products. The higher cost of metal relative to certain other materials may make material substitution more attractive for certain uses.
Our insurance coverage, customer indemnifications or other liability protections may be unavailable or inadequate to cover all of our significant risks or our insurers may deny coverage of or be unable to pay for material losses we incur, which could adversely affect our profitability and overall financial position.
We endeavorstrive to obtain insurance agreements from financially solid, highly rated counterparties in established markets to cover significant risks and liabilities. Not every risk or liability can be insured, and for risks that are insurable, the policy limits and terms of coverage reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. Even if insurance coverage is available, we may not be able to obtain it at a price or on terms acceptable to us. Disputes with insurance carriers, including over policy terms, reservation of rights, the applicability of coverage (including exclusions), compliance with provisions (including notice) and/or the insolvency of one or more of our insurers may significantly affect the amount or timing of recovery.
In some circumstances we may be entitled to certain legal protections or indemnifications from our customers through contractual provisions, laws, regulations or otherwise. However, these protections are not always available, are typically
subject to certain terms or limitations, including the availability of funds, and may not be sufficient to cover all losses or liabilities incurred.
If insurance coverage, customer indemnifications and/or other legal protections are not available or are not sufficient to cover our risks or losses, it could have a material adverse effect on our financial position, results of operations and/or cash flows.
An increase in delinquencies or net losses of customers could adversely affect our results.
Inherent in the operation of our business is the credit risk associated with our customers. The creditworthiness of each customer and the rate of delinquencies and net losses on customer obligations are directly impacted by several factors, including relevant industry and economic conditions, the availability of capital, the experience and expertise of the customer'scustomer’s management team, commodity prices and political events. Any increase in delinquencies and netcredit losses on customer obligations could have a material adverse effect on our earnings and cash flows. In addition, although we evaluate and adjust allowances for credit losses related to past due and non-performing receivables on a regular basis, adverse economic conditions or other factors that might cause deterioration of the financial health of our customers could change the timing and level of payments received and thus necessitate an increase in our estimated losses, which could also have a material adverse effect on our earnings and cash flows.
If we do not successfully implement our growth strategy, our ability to grow our business could be impaired.
We may not be able to identify suitable acquisition candidates or successfully complete any acquisitions or integrate any other businesses into our operations. If we cannot identify suitable acquisition candidates or are otherwise unable to complete acquisitions, we may not be able to continue to grow our business as expected and, if we cannot successfully integrate theserecently acquired businesses, we may incur increased or redundant expenses. Moreover, any additional indebtedness we incur to pay for these acquisitions could adversely affect our liquidity and financial condition.
We have invested a significant amount of capital in new locations and new processing capabilities. We may not continuebe able to identify sufficient opportunities for internal growth to be able to sustain growth at similar levels. In addition, we may not realize the expected returns from these investments.
Acquisitions present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of each transaction.
Since our initial public offering in September 1994, we have successfully purchased 6371 businesses. We continue to evaluate acquisition opportunities and expect to continue to grow our business through acquisitions in the future. Risks we may encounter in acquisitions include:
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● | | the acquired company may not perform as anticipated or expected strategic benefits may not be realized, which could result in an impairment charge or otherwise impact our results of operations; |
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● | | we may not realize the anticipated increase in our revenues if a larger than predicted number of customers decline to continue purchasing products from us; |
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● | | we may have to delay or not proceed with a substantial acquisition if we cannot obtain the necessary funding to complete the acquisition in a timely manner; |
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● | | we may significantly increase our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition or assume existing debt of an acquired company, which, among other things, may result in a downgrade of our credit ratings; |
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● | | we may have multiple and overlapping product lines that may be offered, priced and supported differently, which could cause our gross profit margin to decline; |
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● | | we may have increased inventory exposure for a short time period if the acquired company has significant amounts of material on order; |
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● | | our relationship with current and new employees, customers and suppliers could be impaired; |
| ● | our safety performance may decline, and our incidence rates increase; |
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● | | our due diligence process may fail to identify risks that could negatively impact our financial condition; |
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● | | we may lose anticipated tax benefits or have additional legal or tax exposures if we have prematurely or improperly combined entities; |
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● | | we may face contingencies related to product liability, intellectual property, financial disclosures, environmental issues, violations of regulations/policies, tax positions and accounting practices or internal controls; |
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● | | the acquisition may result in litigation from terminated employees or third parties; |
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● | | our management’s attention may be diverted by transition or integration issues; |
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● | | higher than expectedcosts and investments in excess of our expectations may be required to implement necessary compliance processes and related systems, including IT systems, accounting systems and internal controls over financial reporting;
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● | | we may pay more than the acquired company is worth; |
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● | | we may be unable to obtain timely approvals from governmental authorities under competition and antitrust laws; and |
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● | we may assume substantial additional environmental exposures, commitments, contingencies and remediation and reclamation projects; and |
| ● | we may undertake acquisitions financed in part through public offerings or private placements of debt or equity securities, or other arrangements. Such acquisition financing could result in a decrease in our earnings and adversely affect other leverage measures. If we issue equity securities or equity-linked securities, the issued securities may have a dilutive effect on the interests of the holders of our common stock. |
These factors could have a material adverse effect on our business, results of operations, financial condition or cash flows, particularly in the case of a larger acquisition or the completion of a number of acquisitions in any short period of time.
In addition, most of the acquisition agreements we have entered into require the former owners to indemnify us against certain liabilities related to the operation of those companies before we acquired them. In most of these agreements, however, the liability of the former owners is limited and certain former owners may be unable to meet their indemnification responsibilities. Similarly, the purchasers of our non-core businesses may from time to time agree to indemnify us for operations of such businesses after the closing. We cannot be assured that any of these indemnification provisions will fully protect us, and as a result we may face unexpected liabilities that adversely affect our consolidated results of operations, financial condition and cash flows.
We are a decentralized company, which presents certain risks.
With a diverse geographic footprint in both North America and internationally, we believe our decentralized structure has catalyzed our growth and enabled us to remain responsive to opportunities and to our customers’ needs it necessarily placesby leaving significant control and decision‑makingdecision-making authority and accountability in the hands of local management. Because we are decentralized, we may be slower to detect compliance-related problems (e.g., a rogue employee undertaking activities that are prohibited by applicable law or by our internal policies) and “company‑wide”“company-wide” business initiatives, such as the integration of disparate information technology systems, are often more challenging and costly to implement than they would be in a more centralized environment. Depending on the nature of the problem or initiative in question, such failure could materially adversely affect our business, financial condition or results of operations.
As a decentralized business, we depend on both senior management and our key operating employees. If we are unable to attract and retain these individuals, our ability to operate and grow our business may be adversely affected.
Because of our decentralized operating style, we depend on the efforts of our senior management, including our President and Chief Executive Officer, Gregg J. Mollins, our Senior Executive Vice President and Chief Financial Officer, Karla Lewis, our Executive Vice President and Chief Operating Officer, James Hoffman and other senior management, as well as our key operating employees. We may not be able to retain these individuals or attract and retain additional qualified personnel when needed. We do not have employment agreements with any of our corporate officers or most of our key employees, so they may have less of an incentive to stay with us when presented with alternative employment opportunities. The compensation of our officers and key employees is heavily dependent on our financial performance and in times of reduced financial performance this may cause our employees to seek employment opportunities that provide a more stable compensation structure. The loss of any key officer or employee will require remaining officers and employees to direct immediate and substantial attention to seeking and training a replacement. Our inability to retain members of our senior management or key operating employees or to find adequate replacements for any departing key officer or employee on a timely basis could adversely affect our ability to operate and grow our business.
We could fail to maintain effective internal control over financial reporting.
The accuracy of our financial reporting depends on the effectiveness of our internal control over financial reporting. Internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements because of its inherent limitations. These limitations include, among others, the possibility of human error, inadequacy or circumvention of controls and fraud. If we do not maintain effective internal control over financial reporting or design and implement controls sufficient to provide reasonable assurance with respect to the preparation and fair presentation of our financial statements, we might fail to timely detect any misappropriation of corporate assets or inappropriate allocation or use of funds and could be unable to file accurate financial reports on a timely basis. As a result, our reputation, results of operations and stock price could be materially adversely affected.
We are subject to various environmental, employee safety and health, and customs and export laws and regulations, which could subject us to significant liabilities and compliance expenditures.
We are subject to various foreign, federal, state and local environmental laws and regulations concerning air emissions, wastewater discharges, underground storage tanks and solid and hazardous waste disposal at or from our facilities. Our operations are also subject to various employee safety and health laws and regulations, including those concerning occupational injury and illness, employee exposure to hazardous materials and employee complaints. We are also subject to customs and export laws and regulations for international shipment of our products. Environmental, employee safety and health, and customs and export laws and regulations are comprehensive, complex and frequently changing. Some of these laws and regulations are subject to varying and conflicting interpretations. We may beare subject from time to time to administrative and/or judicial proceedings or investigations brought by private parties or governmental agencies with respect to environmental matters, employee safety and health issues or customs and export issues. Proceedings and investigations with respect to environmental matters, any employee safety and health issues or customs and export issues could result in substantial costs to us, divert our management’s attention and result in significant liabilities, fines or the suspension or interruption of our service center activities. Some of our current properties are located in industrial areas with histories of heavy industrial use. The location of these properties may require us to incur environmental expenditures and to establish accruals for environmental liabilities that arise from causes other than our operations. In addition, we are currently remediating contamination in connection with a certain property related to activities at former manufacturing operations of a subsidiary we acquired. Future events, such as changes in existing laws and regulations or their enforcement, new laws and regulations or the discovery of conditions not currently known to us, could result in material environmental or export compliance or remedial liabilities and costs, constrain our operations or make such operations more costly.
We operate internationally and are subject to exchange rate fluctuations, exchange controls, political risks and other risks relating to international operations.
ElevenSix percent of our 20172022 consolidated net sales were to international customers,from operations outside the U.S., subjecting us to the risks of doing business on a global level. These risks include fluctuations in currency exchange rates, economic instability and disruptions, restrictions on the transfer of funds and the imposition of duties and tariffs. Additional risks from our multinational business include transportation delays and interruptions, war, terrorist activities, epidemics, pandemics, political instability, import and export controls, local regulation, changes in governmental policies, inflation, labor unrest and current and changing regulatory environments. International political and military conflict, such as the current conflict between Russia and Ukraine, or increasing tensions between Taiwan and China, could materially adversely affect the global economy. In addition, government policies on international trade and investment such as import quotas, tariffs, and capital controls, whether adopted by individual governments or addressed by regional trade blocs, can affect the demand for our customers’ products and services. The implementation of more restrictive trade policies, such as higher tariffs or new barriers to entry, in countries in which our customers sell large quantities of products and services could negatively impact our business, results of operations and financial condition.
Our operating results could be negatively affected by the global laws, rules and regulations, as well as political environments in the jurisdictions in which we operate. There could be reduced demand for our products, decreases in the prices at which we can sell our products and disruptions of production or other operations. Additionally, there may be substantial capital and other costs to comply with regulations and/or increased security costs or insurance premiums, any of which could negatively impact our operating results.
Our international operations continue to expand, exposing us to additional risks.
Our international presence has grown, so the risk of incurring liabilities or fines resulting from non‑compliance with various U.S. or international laws and regulations has increased. For example, we are subject to the FCPA, and similar worldwide anti‑briberyanti-bribery laws in non‑U.S.non-U.S. jurisdictions such as the United Kingdom’s Bribery Act 2010, which generally prohibit companies and their intermediaries from corruptly paying, offering to pay, or authorizing the payment of money, a gift, or anything of value, to a foreign official or foreign political party, for purposes of obtaining or retaining business. A company can be held liable under these anti‑briberyanti-bribery laws not just for its own direct actions, but also for the actions of its foreign subsidiaries or other third parties, such as agents or distributors. In addition, we could be held liable for actions taken by employees or third parties on behalf of a company that we acquire. If we fail to comply with the requirements under these laws and other laws, we are subject to due to our international operations, we may face possible civil and/or criminal penalties, which could have a material adverse effect on our business or financial results.result
We may be subject to risks relating to changes in our tax rates or exposure to additional income tax liabilities.
We are subject to income taxes in the United States and various non‑U.S. jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective income tax rate could be affected by changes in the mix of earnings among countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets or changes in tax rates or tax laws or regulations. In particular, although the passage of the Tax Cut and Jobs Act of 2017 reduced the U.S. tax rate to 21%, our future earnings could be negatively impacted by changes in tax legislation including changing tax rates and tax base such as limiting, phasing-out or eliminating deductions or tax credits, changing rules for earnings repatriations and changing other tax laws in the U.S. or other countries. In addition, it is uncertain if, and to what extent, various states will conform to the new tax law and foreign countries will react by adopting tax legislation or taking other actions that could adversely affect our business.
In addition, the amount of income taxes we pay is subject to audits by U.S. federal, state and local tax authorities and by non‑U.S. tax authorities. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable adjustments to our income tax liabilities, which could have an adverse effect on our results of operations and liquidity.
We rely on information management systems and any damage, interruption or compromise of our information technology management systems, networks or data could disrupt and harm our business.
We rely upon information technology systems and networks, some of which are managed by third parties, to process, transmit, and store electronic information in connection with the operation of our business. These systems and networks may include operational technology systems that we use to operate and manage our equipment and inventory. Additionally, we collect and store data that is sensitive to our company.company, including proprietary business information and the personal information of our employees or others. Operating these information technology systems and networks and processing and maintaining this data, in a secure manner, areis critical to our business operations and strategy. Our information management systems and the data contained therein may beare vulnerable, to damage, including interruption due to power loss, system and network failures, operator negligence and similar causes.
In addition, our systems and data may be subjectare susceptible to security breaches,incidents, such as viruses, malware, and other cybersecurity attacks. Cybersecurity attacks are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced threats. These threats pose a risk to the security of our information technology systems and networks and the confidentiality, availability and integrity of our data. We have experienced cybersecurity events such as viruses and attacks on the Company’s and certain of our affiliates’ networks and/orIT systems. To date, none of these events has had a material impact on our or our affiliates’ operations or financial results. We
Despite our efforts to protect our systems, networks and data, we cannot guarantee protection from all security incidents, including theft, misplaced or lost data, programming errors, or employee errors that could potentially lead to the compromise of such data, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions. Furthermore, data protection laws and regulations around the world often require “reasonable,” “appropriate” or “adequate” technical and organizational security measures, and the interpretation and application of those laws and regulations are often uncertain and evolving; there can be no assurance that our security measures will be deemed adequate, appropriate or reasonable by a regulator or court. Moreover, even security measures that are deemed appropriate, reasonable, and/or in accordance with applicable legal requirements may experience similar or more sophisticated events innot be able to protect the future. We believe thatinformation we have adopted appropriate measures to mitigate potential risks to our technology and our operations from these information technology‑related and other potential disruptions. However, givenmaintain.
Given the unpredictability of the timing, nature and scope of security incidents such as cybersecurity attacks or potential disruptions, we could potentially beare subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromising, of confidential or otherwise protected information, misappropriation, destruction or corruption of data, security breaches,unauthorized access to or acquisition of data, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. Any significant compromise of our information management systems and networks or data could impede or interrupt our business operations and may result in negative consequences including loss of revenue, fines, penalties, litigation, reputational damage, regulatory actions or increased regulatory scrutiny, inability to accurately and/or timely complete required filings with government entities including the SEC and the Internal Revenue Service, unavailability or disclosure of confidential information (including personal information) anddata), negative impact on our stock price.
An inabilityprice, environmental damage, and personal injury or death. Furthermore, we may be required to successfully developexpend significant attention and managefinancial resources to protect against physical or security incidents that could result in the implementationmisappropriation of our newinformation or the information of our employees and customers.
While we have purchased cybersecurity insurance, there are no assurances that the coverage would be adequate in relation to any incurred losses. Moreover, as cyber-attacks increase in frequency and magnitude, we may be unable to obtain cybersecurity insurance in amounts and on terms we view as adequate for our operations.
Our enterprise resource planning (“ERP”) system could adversely affectdata practices, including the collection, use, sharing, and security of the personal identifiable information of our operationscustomers, employees, or suppliers are subject to increasingly complex, restrictive, and operating results.punitive regulations in all key market regions.
We areVarious federal, state, and foreign laws and regulations as well as industry standards and contractual obligations govern the collection, use, retention, protection, disclosure, cross-border transfer, localization, sharing, and security of the data we receive from and about our customers, employees, suppliers, and other individuals. The regulatory environment for the collection and use of personal information for companies is evolving in the process of customizing a third party ERP system to be deployed at certain of our operating locations overUnited States and internationally. The U.S. federal government, U.S. states, and foreign governments, including those in Europe, the next few years, on a subsidiary by subsidiary basis. The Company has committed significant resources to this new ERP system, which, when implemented, will replace certain of our legacy systems. The Company plans to implement this system, when available, on a subsidiary by subsidiary, or location by location, basis to minimize risks of disruption to the business. A project of this sizeUnited Kingdom, China, Singapore, South Korea, and elsewhere have enacted (or are considering) laws and regulations that may result in cost overruns, project delays, or business interruptions. Any business disruption could adversely affectrestrict our ability to process orders, shipcollect, use, and disclose personal information and may increase or change our obligations with respect to storing or managing our employees’ personal information, as well as our customers’ or suppliers’ data, which may include individuals’ personal information.
Under global data privacy and data protection regulations, the failure to maintain compliant data practices could result in consumer complaints, regulatory inquiry, civil or criminal penalties, litigation, legal liability, as well as brand impact or other harm to our business. In addition, increased consumer sensitivity to real or perceived failures in maintaining acceptable data practices could damage our reputation and deter current and potential users or customers from using our products and services. Because many of these laws are new, there is little clarity as to their interpretation, as well as a lack of precedent for the scope of enforcement. The cost of compliance with these laws and regulations will be high and is likely to increase in the future. For example, in Europe, the General Data Protection Regulation applies to all of our ongoing operations in the EU as well as some of our operations outside of the EU that involve the processing of EU personal data. This regulation imposes significant potential financial penalties for noncompliance, including fines of up to 4% of worldwide revenue. Other foreign, state and local jurisdictions have adopted and are considering adopting, laws and regulations imposing obligations regarding personal data. In some cases, these laws provide services and customer support, send invoices and track payments, fulfill contractual obligationsa private right of action that would allow customers to bring suit directly against us for mishandling their data or otherwise operate our business at those locations where deployed.security incidents involving their personal information.
Our financial results may be affected by various legal and regulatory proceedings, including those involving antitrust, tax, environmental, or other matters.
We are subject to a variety of litigation and legal compliance risks. These risks include, among other things, possible liability relating to product liability, personal injuries, intellectual property rights, contract‑relatedcontract-related claims, government contracts, taxes, environmental matters and compliance with U.S. and foreign laws, including competition laws and laws governing improper business practices. We or one of our subsidiaries could be charged with wrongdoing as a result of such matters. If convicted or found liable, we could be subject to significant fines, penalties, repayments, or other damages (in certain cases, treble damages). As a global business, we are subject to complex laws and regulations in the U.S. and other countries in which we operate. Those laws and regulations may be interpreted in different ways. They may also change from time to time and so may their related interpretations. Changes in laws or regulations could result in higher
expenses and payments, and uncertainty relating to laws or regulations may also affect how we conduct our operations and structure our investments and could limit our ability to enforce our rights.
The volatility of the stock market could result in a material impairment of goodwill or indefinite‑livedindefinite-lived intangible assets.
We review the recoverability of goodwill and indefinite‑livedindefinite-lived intangible assets annually or whenever significant events or changes in circumstances occur that might impair the recovery of recorded costs. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or indefinite‑livedindefinite-lived intangible assets may not be recoverable, include a decline in stock price and market capitalization, declines in the market conditions offor our products, viability of end markets, (such as the energy market due to lower oil prices - see discussion of impairment charges taken in 2016 and 2015 in Note 17 — “Impairment and Restructuring Charges” of Part II, Item 8 “Financial Statements and Supplementary Data”), loss of customers, reduced future cash flow estimates, and slower growth rates in our industry. For example, we recognized $137.5 million of impairment and restructuring charges in the first quarter of 2020 due to our reduced long-term outlook for our energy-related businesses related to declines in the energy (oil and natural gas) market. If prices for the products our customers sell fall substantially or remain low for a sustained period, we may be (i) unable to realize a profit from businesses that service such customers, (ii) required to record additional impairments, or (iii)
required to suspend or reorganize operations that service such customers. An impairment charge, if incurred, could be material.
Our business operations and financial performance could be adversely affected by changes in our relationship with our employees or changes to U.S. or foreign employment regulations.
We had approximately 14,90014,500 employees worldwide as of December 31, 2017.2022. This means we have a significant exposure to changes in domestic and foreign laws governing our relationships with our employees, including wage and hour laws and regulations, fair labor standards, minimum wage requirements, overtime pay, unemployment tax rates, workers’ compensation rates, citizenship requirements and payroll taxes, which likely would have a direct impact on our operating costs. A significant increase in minimum wage or overtime rates in jurisdictions where we have employees could have a significant impact on our operating costs and may require that we relocate those operations or take other steps to mitigate such increases, all of which may cause us to incur additional costs, expend resources responding to such increases and lower our profitability.
We face certain risks associated with potential labor disruptions.
Approximately 12%13% of our employees are covered by collective bargaining agreements and/or are represented by unions or workers’ councils. Approximately 600500 employees are covered by 23 different collective bargaining agreements that expire in 2018.2023. While we believe that our relations with our employees are generally good, we cannot provide assurances that we will be completely free of labor disruptions such as work stoppages, work slowdowns, union organizing campaigns, strikes, lockouts or that any existing labor disruption will be favorably resolved. We could incur additional costs and/or experience work stoppages that could adversely affect our business operations through a loss of revenue and strained relationships with customers.
Risks Related to our Indebtedness
Our indebtedness could impair our financial condition or cause a downgrade of our credit rating and reduce the funds available to us for other purposes and our failure to comply with the covenants contained in our debt instruments could result in an event of default that could adversely affect our operating results.
We have substantial debt service obligations. As of December 31, 2017,2022, we had aggregate outstanding indebtedness of approximately $1.91 billion.$1.66 billion, which was reduced to $1.16 billion in January 2023 as a result of the redemption of $500.0 million of senior unsecured notes. This indebtedness could adversely affect us in the following ways:
| ·
● | | additional financing may not be available to us in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes and, if available, may be considerably more costly than our current debt costs; |
| ·
● | | a significant portion of our cash flow from operations must be dedicated to the payment of interest and principal on our debt, which reduces the funds available to us for our operations, dividends or other purposes; |
| ·
● | | some of the interest on our debt is, and will continue to be, accrued at variable rates, which could result in higher interest expense in the event of increases in interest rates, which is expected to occur in future periods;
|
| ·
| | our leverage may increase our vulnerability to economic downturns and limit our ability to withstand adverse events in our business by limiting our financial alternatives; and |
| ·
● | | our ability to capitalize on significant business opportunities, including potential acquisitions, and to plan for, or respond to, competition and changes in our business may be limited due to our indebtedness. |
Our existing debt agreements contain financial and restrictive covenants that limit the total amount of debt that we may incur and may limit our ability to engage in other activities that we may believe are in our long‑termlong-term best interests. Our failure to comply with these covenants may result in an event of default, which, if not cured or waived, could accelerate the maturity of our indebtedness or prevent us from accessing additional funds under our revolving credit facility. If the maturity of our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and we may not be able to continue our operations as planned. See discussion regarding our financial covenants in the
“Liquidity and Capital Resources” section of Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We may not be able to generate sufficient cash flow to meet our existing debt service obligations.
Our ability to generate sufficient cash flow from operations, draw onavailable under our revolving credit facility or access the capital markets to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. For example, we may not generate sufficient cash flow from our operations or new acquisitions to repay amounts drawn under our revolving credit facility when it matures in 2021, amortization paymentsdue on our term loan, or our debt securities when they mature in 20232025, 2030 and 2036. If we do not generate sufficient cash flow from operations or have availability to borrow on our revolving credit facility to satisfy our debt obligations, we would expect to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We may not be able to consummate any such transactions at all or on a timely basis or on terms, and for proceeds, that are acceptable to us. These transactions may not be permitted under the terms of our various debt instruments then in effect. Our inability to generate sufficient cash flow to satisfy our debt obligations or to timely refinance our obligations on acceptable terms could adversely affect our ability to serve our customers or we may not be able to continue our operations as planned.
Changes in the Company’s credit ratings could increase cost of funding.
Our credit ratings are important to our cost of capital. The major rating agencies routinely evaluate our credit profile and assign debt ratings to Reliance. This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as transparency with rating agencies and timeliness of financial reporting. Any downgrade in our credit rating could increase our cost of capital and have a material adverse effect on our business, financial condition, results of operations or cash flows.
We are permitted to incur more debt, which may intensify the risks associated with our current leverage, including the risk that we will be unable to service our debt or that our credit rating may be downgraded.
We may be able to incur substantial additional indebtedness in the future. Although the terms governing our indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to numerous qualifications and exceptions, and the indebtedness we may incur in compliance with these restrictions could be substantial. If we incur additional debt, the risks associated with our leverage, including the risk that we will be unable to service our debt or that we may be subject to a credit rating downgrade, may increase.
Our acquisition strategy and growth capital expenditures may require access to external capital, and limitations on our access to external financing sources could impair our ability to grow.
We may have to rely on external financing sources, including commercial borrowings and issuances of debt and equity securities, to fund our acquisitions and growth capital expenditures. Limitations on our access to external financing sources, whether due to tightened capital markets, more expensive capital or otherwise, could impair our ability to execute our growth strategy.
Because a substantial portionall of our indebtednessavailable borrowing capacity on our revolving credit facility bears interest at rates that fluctuate with changes in certain prevailing short‑termshort-term interest rates, if we increase our leverage in the future, we are vulnerable to increases in interest rate increases.rates.
A substantial portion ofThe available borrowing on our indebtednessrevolving credit facility bears interest at rates that fluctuate with changes in certain short‑termshort-term prevailing interest rates. Atrates, primarily based on the Secured Overnight Finance Rate for deposits of U.S. dollars (“SOFR”). SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. As of December 31, 2017,2022, we had $1.16$1.49 billion in total variable interest rate debt outstanding with $908.7 million available for borrowing underon our revolving credit facility. Assuming a consistent level of debt, a 100 basis point increasefacility with interest on borrowings at variable rates based on SOFR following an amendment to our credit agreement in the interest rate on our floating rate debt would result in approximately $11.6 million of additional interest expense on an annual basis.January 2023. We currently do not use derivative financial instruments to manage the potential impact of interest rate risk. IfAccordingly, our interest expense for any particular period will fluctuate based on SOFR and other variable interest rates continue to increase,if we could experience increased interest expense which could have a material adverse effectborrow on our business, financial condition, results of operations or cash flows.revolving credit facility.
Item 1B. Unresolved Staff Comments
Comments
None.
Item 2. Properties
Properties
As of December 31, 2017,2022, we maintained more than 300 metals service center processing and distribution facilitiesoperated a network of approximately 315 locations in 40 states in the U.S. and in 13 other countries, and our corporate headquarters.12 foreign countries. In the opinion of management, all of our service center facilities are in good or excellent condition and are adequate for our existing operations. These facilities currently operate at about 50‑60%50-60% of capacity based upon a 24‑hour seven‑day24-hour seven-day week,
with each location averaging approximately two shifts operating at full capacity for a five‑dayfive-day work week. We have the ability to increase our operating capacity significantly without further investment in facilities or equipment if demand levels increase.
Of the more than 300 processing and distribution facilities that we maintained, weWe leased 9497 of thoseour metals service center facilities as of December 31, 2017.2022. In addition, we have ground leases and other leased spaces, such as depots, sales offices and storage, for a total of approximately 6.5totaling 6.9 million square feet. Total square footage on all company‑ownedcompany-owned properties is approximately 26.929.6 million and represents approximately 80%81% of the total square footage of our operating facilities. In addition, we lease our corporate headquarters in Los Angeles, California. Our leases of facilities and other spaces expire at various times through 20282045 and ourcertain ground leases expire at various times through 2041.2068. The aggregate monthly rent amount for these properties is approximately $2.7$2.9 million.
Item 3. Legal Proceedings
Proceedings
From time The information contained under the captions “Legal Matters” and “Environmental Contingencies” in Note 16—“Commitments and Contingencies”to time, we are named as a defendantour consolidated financial statements in legal actions. Generally, these actions arise out of our normal course of business. We are not currently a party to any pending legal proceedings other than routine litigation incidental to the business. We expect that these matters will be resolved without having a material adverse effect on our results of operations or financial condition. We maintain liability insurance against risks arising out of our normal course of business.Part II, Item 8 “Financial Statements and Supplementary Data” is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Disclosures
Not applicable.
PART II
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listedowned by 171 stockholders of record as of February 24, 2023. Our common stock has traded for the past 29 years on the New York Stock Exchange (“NYSE”)NYSE under the symbol “RS” and was first traded on September 16, 1994. The following table sets forth the high and low sales pricesOur stockholders of our common stock for the stated calendar quarters.
| | | | | | | | | | | |
| 2017 | | 2016 |
| High | | Low | | High | | Low |
First Quarter | $ | 88.58 | | $ | 76.18 | | $ | 71.34 | | $ | 50.08 |
Second Quarter | $ | 82.28 | | $ | 69.31 | | $ | 78.38 | | $ | 67.57 |
Third Quarter | $ | 76.98 | | $ | 68.46 | | $ | 84.25 | | $ | 67.66 |
Fourth Quarter | $ | 87.33 | | $ | 72.69 | | $ | 87.58 | | $ | 65.10 |
As of February 23, 2018, there were 203 record holders of our common stock. Our record holders exclude holdersthose stockholders whose shares wereare held for them in street name through bank,banks, brokers or other nominee accounts.
We have paid quarterly cash dividends on our common stock for 5863 consecutive years and have never reduced or suspended our regular quarterly dividend. In February 2018,2023, our Board of Directors increased the regular quarterly dividend amount 11.1%14.3% to $0.50$1.00 per share from $0.875 per share. Our Board of Directors has increasedThis recent increase is the 30th increase in our regular quarterly dividend rate on a periodic basis with the most recent being our 25th increase since our IPO in 1994. Further increases in the quarterly dividend rate will be evaluated by the Board based on conditions then existing, including our earnings, cash flows, financial condition and capital requirements, or other factors the Board may deem relevant. We expect to continue to declare and pay dividends in the future, if earnings are available to pay dividends, but we also intend to continue to retain a portion of earnings for reinvestment in our operations and expansion of our businesses. We cannot assure you that any dividends will be paid in the future or that, if paid, the dividends will be at the same amount or frequency as paid in the past. Our payment of dividends in the future will depend on business conditions, our financial condition, earnings, liquidity and capital requirements and other factors.
Our credit agreement contains covenants, which, among other things, restrictsOn July 26, 2022, our abilityBoard of Directors amended our share repurchase program authorized on July 20, 2021 to pay dividends ifincrease the remaining repurchase authorization to $1.0 billion. 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. We repurchase shares of our common stock from time to time pursuant to a combination of one or more open market repurchases and transactions structured through investment banking institutions in reliance upon Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act.
During 2022, we cannot satisfy certain financial tests. See discussion regardingrepurchased approximately 3.5 million shares of our financial covenants incommon stock at an average cost of $178.81 per share, for a total of $630.3 million. As of December 31, 2022, we had remaining authorization under the “Liquidity and Capital Resources” sectionplan to repurchase $680.7 million of Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For 2015 through 2017, we have paid between 21% and 39% of earnings to our stockholders as dividends.common shares.
The following table contains certain information with respect to our cash dividends declared during the past two fiscal years:
| | | | | | | |
Date of Declaration
| | Record Date
| | Payment Date
| | Dividends
|
10/24/2017
| | 11/17/2017
| | 12/8/2017
| | $
| 0.45 per share
|
7/25/2017
| | 8/18/2017
| | 9/8/2017
| | $
| 0.45 per share
|
4/25/2017
| | 5/26/2017
| | 6/16/2017
| | $
| 0.45 per share
|
2/14/2017
| | 3/10/2017
| | 3/24/2017
| | $
| 0.45 per share
|
10/19/2016
| | 11/18/2016
| | 12/16/2016
| | $
| 0.425 per share
|
7/20/2016
| | 8/12/2016
| | 9/9/2016
| | $
| 0.425 per share
|
4/19/2016
| | 5/27/2016
| | 6/17/2016
| | $
| 0.40 per share
|
2/16/2016
| | 3/11/2016
| | 3/31/2016
| | $
| 0.40 per share
|
ShareOur share repurchase activity during the three months ended December 31, 20172022 was as follows:
| | | | | | | | |
Period | | Total Number of
Shares Purchased | | Average Price Paid
Per Share ($) | | Total Number of Shares Purchased as Part of Publicly Announced Plan | | Maximum Number of Shares That May Yet Be Purchased Under the Plan(1) |
October 1 - October 31, 2017 | | — | | — | | — | | 8,428,592 |
November 1 - November 30, 2017 | | 336,616 | | 74.27 | | 336,616 | | 8,091,976 |
December 1 - December 31, 2017 | | — | | — | | — | | 8,091,976 |
Total | | 336,616 | | | | 336,616 | | |
| | | | | | | | | | |
| | | | | | | Total Number of | | Maximum Dollar |
| | Total Number | | Average Price | | Shares Purchased | | Value That May |
| | of Shares | | Paid | | as Part of Publicly | | Yet Be Purchased |
Period | | Purchased | | Per Share | | Announced Plan | | Under the Plan |
| | | | | | | | | (in millions) |
October 1 - October 31, 2022 | | 335,430 | | $ | 182.61 | | 335,430 | | $ | 702.1 |
November 1 - November 30, 2022 | | 67,004 | | $ | 198.30 | | 67,004 | | $ | 688.8 |
December 1 - December 31, 2022 | | 40,413 | | $ | 199.35 | | 40,413 | | $ | 680.7 |
Total | | 442,847 | | $ | 186.51 | | 442,847 | | | |
| (1)
| | On October 20, 2015, our Board of Directors amended our share repurchase plan increasing by 7,500,000 shares the total number of shares authorized to be repurchased and extending the program through December 31, 2018. Our share repurchase plan does not obligate us to acquire any specific number of shares. Under the share repurchase plan, shares may be repurchased in the open market or privately negotiated transactions, including plans complying with Rule 10b5-1 under the Exchange Act.
|
Additional information regardingInformation relating to compensation plans under which our equity securities are authorized for issuance under all stock‑based compensation plans will be included under the caption “EXECUTIVE COMPENSATION — Equity Compensation Plan Information” in our definitive Proxy Statement for theour 2023 Annual Meeting of Stockholders to be held on May 16, 2018.17, 2023 and is incorporated herein by reference.
Stock Performance Graph
This graph is not deemed to be “filed” with the United States Securities and Exchange Commission (“SEC”) or subject to the liabilities of Section 18 of the Exchange Act and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933 or the Exchange Act.
The following graph compares the performance of our common stock with that of the S&P 500, the Russell 2000 and an industry peer group consisting of publicly-traded metals service center companies (the “industry peer group”) for the five‑yearfive-year period from December 31, 20122017 through December 31, 2017.2022. The comparison of total returngraph assumes, in each case, that a fixedan initial investment of $100 was invested on December 31, 2012 in all common stockis made at the beginning of the five-year period. The cumulative total return reflects market prices at the end of each year and assumes the reinvestment of dividends. Since there is no nationally‑recognizednationally-recognized industry index consisting of metals service center companies to be used as a peer group index, Reliance constructed the industry peer group. As of December 31, 2017,2022, the industry peer group consisted of Olympic Steel Inc., which has securities listed for trading on NASDAQ; Ryerson Holding Corporation and Worthington Industries, Inc., each of which has securities listed for trading on the NYSE; and Russel Metals Inc., which has securities listed for trading on the Toronto Stock Exchange. The returns of each member of the industry peer group are weighted according to that member’s stock market capitalization.
The stock price performance shown on the graph below is not necessarily indicative of future price performance.
Comparison of 5 Year Cumulative Total Return Among Reliance Steel & Aluminum Co.,
the S&P 500 Index, the Russell 2000 Index and an Industry Peer Group
Copyright© 2023 Russell Investment Group. All rights reserved.
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| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
Reliance Steel & Aluminum Co. | $ | 100.00 | | $ | 84.86 | | $ | 146.17 | | $ | 149.83 | | $ | 206.49 | | $ | 262.31 |
S&P 500 | | 100.00 | | | 95.62 | | | 125.72 | | | 148.85 | | | 191.58 | | | 156.89 |
Russell 2000 | | 100.00 | | | 88.99 | | | 111.70 | | | 134.00 | | | 153.85 | | | 122.41 |
Industry Peer Group | | 100.00 | | | 98.21 | | | 95.32 | | | 112.11 | | | 166.30 | | | 147.30 |
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| 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
Reliance Steel & Aluminum Co. | $ | 100.00 | | $ | 124.35 | | $ | 102.51 | | $ | 99.51 | | $ | 139.80 | | $ | 154.44 |
S&P 500 | | 100.00 | | | 132.39 | | | 150.51 | | | 152.59 | | | 170.84 | | | 208.14 |
Russell 2000 | | 100.00 | | | 138.82 | | | 145.62 | | | 139.19 | | | 168.85 | | | 193.58 |
Industry Peer Group | | 100.00 | | | 138.36 | | | 102.80 | | | 82.23 | | | 142.43 | | | 143.55 |
Item 6. [Reserved]
Item 6. Selected Financial Data
We have derived the following selected summary consolidated financial and operating data for each of the five years ended December 31, 2017 from our audited consolidated financial statements. You should read the information below with Part II, Item 8“Financial Statements and Supplementary Data” and Part II, Item 7 “Management’s7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
SELECTED CONSOLIDATED FINANCIAL DATA
| | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (in millions, except share and per share data) |
Income Statement Data: | | | | | | | | | | | | | | |
Net sales | $ | 9,721.0 | | $ | 8,613.4 | | $ | 9,350.5 | | $ | 10,451.6 | | $ | 9,223.8 |
Cost of sales (exclusive of depreciation and amortization expense) | | 6,933.2 | | | 6,023.1 | | | 6,803.6 | | | 7,830.6 | | | 6,826.2 |
Gross profit (1) | | 2,787.8 | | | 2,590.3 | | | 2,546.9 | | | 2,621.0 | | | 2,397.6 |
Warehouse, delivery, selling, general and administrative expense ("S,G&A") | | 1,902.8 | | | 1,798.1 | | | 1,725.3 | | | 1,789.8 | | | 1,636.0 |
Depreciation and amortization expense | | 218.4 | | | 222.0 | | | 218.5 | | | 213.8 | | | 192.4 |
Impairment of long-lived assets | | 4.2 | | | 52.4 | | | 53.3 | | | — | | | 14.9 |
Operating income | | 662.4 | | | 517.8 | | | 549.8 | | | 617.4 | | | 554.3 |
Other (income) expense: | | | | | | | | | | | | | | |
Interest expense | | 73.9 | | | 84.6 | | | 84.3 | | | 81.9 | | | 77.5 |
Other expense (income), net | | 4.7 | | | 4.0 | | | 6.8 | | | (10.8) | | | (1.5) |
Income before income taxes | | 583.8 | | | 429.2 | | | 458.7 | | | 546.3 | | | 478.3 |
Income tax (benefit) provision (3) | | (37.2) | | | 120.1 | | | 142.5 | | | 170.0 | | | 153.6 |
Net income | | 621.0 | | | 309.1 | | | 316.2 | | | 376.3 | | | 324.7 |
Less: Net income attributable to noncontrolling interests | | 7.6 | | | 4.8 | | | 4.7 | | | 4.8 | | | 3.1 |
Net income attributable to Reliance | $ | 613.4 | | $ | 304.3 | | $ | 311.5 | | $ | 371.5 | | $ | 321.6 |
Earnings per share attributable to Reliance stockholders: | | | | | | | | | | | | | | |
Diluted | $ | 8.34 | | $ | 4.16 | | $ | 4.16 | | $ | 4.73 | | $ | 4.14 |
Basic | $ | 8.42 | | $ | 4.21 | | $ | 4.20 | | $ | 4.78 | | $ | 4.19 |
Shares used in computing earnings per share: | | | | | | | | | | | | | | |
Diluted | | 73,539,424 | | | 73,120,918 | | | 74,902,064 | | | 78,615,939 | | | 77,646,192 |
Basic | | 72,851,021 | | | 72,362,513 | | | 74,096,349 | | | 77,682,943 | | | 76,844,912 |
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Other Data: | | | | | | | | | | | | | | |
Cash flow provided by operations | $ | 399.0 | | $ | 626.5 | | $ | 1,025.0 | | $ | 356.0 | | $ | 633.3 |
Capital expenditures | | 161.6 | | | 154.9 | | | 172.2 | | | 190.4 | | | 168.0 |
Cash dividends per share | | 1.80 | | | 1.65 | | | 1.60 | | | 1.40 | | | 1.26 |
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Balance Sheet Data (December 31): | | | | | | | | | | | | | | |
Working capital | $ | 2,347.6 | | $ | 2,032.5 | | $ | 1,564.5 | | $ | 2,458.3 | | $ | 2,165.5 |
Total assets | | 7,751.0 | | | 7,411.3 | | | 7,121.6 | | | 7,822.4 | | | 7,323.6 |
Short-term debt | | 92.0 | | | 82.5 | | | 500.8 | | | 93.9 | | | 36.5 |
Long-term debt (2) | | 1,809.6 | | | 1,847.2 | | | 1,428.9 | | | 2,209.6 | | | 2,055.1 |
Reliance stockholders’ equity | | 4,667.1 | | | 4,148.8 | | | 3,914.1 | | | 4,099.0 | | | 3,874.6 |
| (1)
| | Gross profit, calculated as net sales less cost of sales, is a non‑GAAP financial measure as it excludes depreciation and amortization expense associated with the corresponding sales. The majority 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 as shown above as a measure of operating performance. Gross profit is an important operating and financial measure, as fluctuations in our gross profit can have a significant impact on our earnings. Gross profit, as presented, is not necessarily comparable with similarly titled measures for other companies.
|
| (2)
| | Long‑term debt includes the long‑term portion of capital lease obligations.
|
| (3)
| | Income tax (benefit) provision includes a provisional $207.3 million net tax benefit in 2017 relating to the Tax Cuts and Jobs Act of 2017. See Note 9 — “Income Taxes” of Part II, Item 8 “Financial Statements and Supplementary Data” for further information on the impact of the tax legislation.
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, and the discussion of cautionary statements and significant risks to the Company’s business under Item 1A “Risk Factors” of this Annual Report on Form 10-K.
Overview
We had excellentagain generated record financial performance in 2022 across nearly every key metric. Outstanding execution throughout 2017 resultingresulted in record gross profit. Our sales increased $1.11 billion, or 12.9%, from $8.61 billionprofitability in 2016 to $9.72 billion in 2017,the face of declining metals pricing throughout the second highest annual saleshalf of 2022 and supply chain disruptions on us, our customers and suppliers. We believe our record performance in 2022 demonstrated the resiliency of our history. Bothbusiness model during a year that included significant volatility and varying trends in metals pricing, andbut fundamentally strong demand levels improved from 2016. Pricing levels were higher in 2017 compared to the same periodmost of our end markets.
Key results in 2016 for substantially all of the products we sell, which had a favorable impact on our revenues and earnings. We achieved several successes in 2017:2022:
| ·
● | | Gross profit was $2.79Record net sales of $17.03 billion in 2017, the highest2022, up from $14.09 billion in our history;
2021. |
| ·
● | | Our gross profit margin in each quarter of 2017 was within or above our target range of 27% to 29%;
|
| ·
| | Pre-tax income increased by $154.6 million, or 36.0%, from $429.2 million in 2016 to $583.8 million in 2017; and
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| ·
| | OurRecord earnings per diluted share of $29.92 were $8.34 per share. Excluding the impact of tax reform,up from $21.97 in 2021 and were nearly triple our pre-pandemic earnings per diluted share were $5.52 per share, the second highest in our history, trailing only 2008.
2019. |
| ● | Record cash generated by our operations of $2.12 billion eclipsed our previous record of $1.30 billion in 2019. |
| ● | Record stockholder returns of $847.4 million, comprised of $217.1 million of dividends and $630.3 million of share repurchases, increased from $500.5 million of such returns in 2021. |
Our same-store tons sold increased 3.6%record net sales in 2017 compared to 2016, due to improved demand levels in most end markets we serve, including2022 were mainly the energy end market, which had experienced significant declines in 2016 and 2015.
Our same-storeresult of a record average selling price per ton sold increased 9.1%of $3,073, up 18.5% from our previous record set last year, and a 1.8% increase in 2017 compared to 2016. Our same-storetons sold. However, unlike in 2021, during which metals pricing improved throughout the year, our average selling price per ton sold has increased sequentiallyreached a quarterly record of $3,240 in eachthe second quarter of 2022 and declined for the remainder of the past seven quarters,year. We experienced healthy demand across a majority of our end markets, however our same-store tons sold decreased slightly from 2021. We believe that the continued, though diminishing, supply chain disruptions on our customers continue to constrain economic activity and negatively impact our tons sold.
Our record profitability in 2022 was the result of our ability to maintain a strong gross profit margin and exercise effective expense control in an environment of elevated metals pricing and healthy demand.
We believe our success in generating strong gross profit margins during periods of economic strength and weakness, and during increasing and declining metal pricing cycles is supported by our continued significant capital expenditure investments. See further discussion, below, under “Internal Growth Activities.”
In 2022, we generated over $2 billion of operating cash flow for the first time in our history as a result of record profitability and reduced working capital investment mainly for certain carbon and stainless steel products. Metal prices fluctuated throughout 2017 but generally trended higher, especiallyas a result of the declining metals pricing trends in the second half of 2017, which we believe was primarily due to improved demand and increased raw material costs.
Our same-store S,G&A expense as a percent of sales of 19.5% in 2017 decreased from 20.8% in 2016 mainly due to higher metals pricing that increased our sales levels. In addition, we exercised effective expense control.
We generated2022. The strong cash flow from operationsgeneration enabled us to grow our business and provide additional returns to our stockholders. During 2022, we invested into our future growth with $341.8 million of $399.0 million in 2017, down from $626.5 million in 2016, primarily due to increased working capital requirements from higher metal prices and an improved demand environment in 2017. As of December 31, 2017, our net debt-to-total capital ratio was 27.2%, down from 30.3% as of December 31, 2016. We believe we have sufficient liquidity as of December 31, 2017, with $908.7 million available for borrowing on our revolving credit facility.
We used cash generated from operations to further grow the Company in 2017 by completing one acquisition and investing $161.6 million in capital expenditures while also returning valueand returned $847.4 million to our stockholders with $132.0 millionthrough record levels of cash dividends and $25.0 million of share repurchases. In addition, duringWe also increased our regular quarterly dividend rate by 14.3%, effective in the first quarter of 2018 we increased our quarterly dividend by 11.1%.2023.
The recently enacted tax reform legislation will have a favorable impact on our profitability and cash flows through a reduction in our effective income tax rate. In 2017, we recognized a provisional $207.3 million net tax benefit relating to the remeasurement of deferred tax assets and liabilities at the lowered income tax rate, which was partially offset by tax liabilities relating to the deemed repatriation of accumulated foreign profits. Earnings per diluted share, excluding the impact of tax reform, is not a performance measure under U.S. GAAP. We believe it is appropriate to disclose this performance measureour strong liquidity position that includes significant cash on hand, strong cash flow generation and $1.5 billion of availability under our revolving credit facility will support our continued disciplined use of capital as it helps investors analyze business performancewe maintain a flexible approach focused on growth, both organically and trends. Earnings per diluted share, excluding the impact of tax reform, should be considered neither in isolation nor as a substitute for reported earnings per diluted share prepared in accordance with U.S. GAAP.
We believe that our exposure to diverse end markets, broad product base and wide geographic footprint will continue to mitigate earnings volatility compared to many of our competitors.
We will continue to focus on working capital management and maximizing profitability of our existing businesses, as well as executing our proven growth strategiesthrough acquisitions, and stockholder return activities.
Effect of Demand and Pricing Changes on our Operating Results
Customer demand can have a significant impact on our results of operations. When volume increases, our revenue dollars generally increase, which contributes to increased gross profit dollars. Variable costs also increase with volume, primarily our warehouse, delivery, selling, general and administrative expenses. Conversely, when volume declines, we typically produce fewer revenue dollars, which can reduce our gross profit dollars. Variable costs also increase with volume, primarily our warehouse, delivery, selling, general and administrative expenses. We can reduce certain variable expenses when volumes decline, but we cannot easily reduce our fixed costs.
Pricing for our products can havegenerally has a much more significant impact on our results of operations than customer demand levels. As discussed above, our record profitability in 2022 was primarily driven by record metals prices. Our revenues generally increase as a result of pricing increases so do our revenue dollars.as customer demand is not usually impacted by typical mill pricing increases. Our pricingselling prices usually increasesincrease when the cost of our materialsthe metals we purchase increase. We are typically able to pass higher prices on to our customers. If prices increase and we maintain the same gross profit percentage, we generate higher levels of gross profit and pre‑taxpretax income dollars for the same operational efforts. Conversely, if pricing declines, we will typically generate lower levels of gross profit and pre‑taxpretax income dollars. Because changes in metals pricing do not require us to adjust our expense structure other than for profit‑basedprofit-based incentive compensation, the impact on our results of operations from changes in pricing is typically much greater than the effect of volume changes. For more information, see Item 1A. “Risk Factors” under the caption “The costs that we pay for metals fluctuate due to a number of factors beyond our control, and such fluctuations could adversely affect our operating results, particularly if we cannot pass on higher metal prices to our customers.”
In addition, when volume or pricing increases, our working capital (primarily accounts receivable and inventories)inventories less accounts payable) requirements typically increase, resulting in lower levels of cash flow from operations, which may also require us to increase our outstanding debt and incur higher interest expense. Conversely, when customer demand falls, our operations typically generate strongerincreased cash flow as our working capital needs decrease.
Acquisitions
2017 Acquisition2021 Acquisitions
On October 2, 2017, through our wholly owned subsidiary Diamond Manufacturing Company,In the fourth quarter of 2021, we acquired Ferguson Perforatingeach of Merfish United, Inc., Admiral Metals Servicenter Company, (“Ferguson”). Ferguson, headquarteredIncorporated, Nu-Tech Precision Metals Inc. and Rotax Metals Inc. with cash on hand for a combined transaction value of $440.3 million. Included in Providence, Rhode Island, specializes in manufacturing highly engineered and complex perforated metal parts that have application in diverse end markets including industrial machinery, automotive, aerospace, sugar products and consumer electronics manufacturers. Ferguson’sour net sales duringfor the period from October 2, 2017 toyear ended December 31, 20172022 were $7.8 million.
2016 Acquisitions
On August 1, 2016, through our wholly owned subsidiary American Metals Corporation, we acquired Alaska Steel Company (“Alaska Steel”), a full-line metal distributor headquartered in Anchorage, Alaska. Our acquisition of Alaska Steel was our first entry into the Alaska market. Alaska Steel provides steel, aluminum, stainless and specialty metals and related processing services to a variety of customers in diverse industries including infrastructure and energy throughout Alaska. Alaska Steel’scombined net sales in 2017 were $22.0 million.of $863.0 million from our 2021 acquisitions.
On April 1, 2016, we acquired Best Manufacturing, Inc. (“Best Manufacturing”), a custom sheet metal fabricator of steel and aluminum products on both a direct and toll basis. Best Manufacturing, headquartered in Jonesboro, Arkansas, provides various precision fabrication services including laser cutting, shearing, computer numerated control (“CNC”) punching, CNC forming and rolling, as well as welding, assembly, painting, inventory management and engineering expertise. Best Manufacturing’s net sales in 2017 were $21.6 million.
On January 1, 2016, we acquired Tubular Steel, Inc. (“Tubular Steel”), a distributor and processor of carbon, alloy and stainless steel pipe, tubing and bar products. Tubular Steel, headquartered in St. Louis, Missouri, has six locations and a fabrication business that supports its diverse customer base. Tubular Steel’s net sales in 2017 were $135.5 million.
Internal Growth Activities
We continued to maintain our focus on internal growth by openingbuilding new facilities, building or expanding existing facilities, replacing leased facilities with those we own and adding to our processing capabilities, upgrading processing equipment, improving the safety and energy efficiency of our operations and enhancing the working environments of our employees. Our capital expenditure budgets have been at historically high levels in recent years. Our 2023 capital expenditure budget, is $500 million, the highest in our history.
We have made significant capital expenditure investments totaling over $1.7 billion over the past eight years.These significant investments have expanded our value-added processing capabilities that our managers in the field have successfully leveraged to increase the percentage of our orders with total capital expendituresvalue-added processing, which has significantly contributed to increased gross profit margins in recent years. In 2022 and 2021, we performed value-added processing on about 50% of $161.6 millionthe orders we shipped, significantly higher than our historical range of 40% to 45%, with a gross profit margin of 30.8% in 2017, with the majority spent on growth activities. We also continued2022 that was approximately 400 basis points higher than our historical gross profit margin range of 25% to add and upgrade processing equipment27% that enables us to provide higher quality and additional servicesexisted prior to our existing and potential customers, resulting in increased market share and higher gross profit margins. undertaking of these significant capital expenditure investments.
We believe that our ability to finance ourmake significant investments in processing equipment and facilities provides a competitive advantage for us, as we can provide our customers with a higher quality product and expand our services to them, which