UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20202021
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
(Exact name of registrant as specified in its charter)
| | |
(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, Suite 5100
Los Angeles, California
90071
(Address of principal executive offices, including zip code)
(213) 687-7700
(Registrant’s telephone number, including area 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 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ⌧ No ◻
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 ☐ |
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of OctoberJuly 23, 2020, 63,756,2872021, 63,483,196 shares of the registrant’s common stock, $0.001 par value, were outstanding.
RELIANCE STEEL & ALUMINUM CO.
TABLE OF CONTENTS
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions, except number of shares which are reflected in thousands and par value)
| | | | | |
| September 30, | | December 31, | ||
| 2020 |
| 2019* | ||
ASSETS | |||||
Current assets: | | | | | |
Cash and cash equivalents | $ | 591.6 | | $ | 174.3 |
Accounts receivable, less allowance for credit losses of $22.8 at September 30, 2020 and $17.8 at December 31, 2019 | | 943.9 | | | 1,067.8 |
Inventories | | 1,423.0 | | | 1,645.7 |
Prepaid expenses and other current assets | | 66.6 | | | 85.2 |
Income taxes receivable | | 6.9 | | | 37.2 |
Total current assets | | 3,032.0 | | | 3,010.2 |
Property, plant and equipment: | | | | | |
Land | | 258.2 | | | 239.8 |
Buildings | | 1,231.9 | | | 1,195.1 |
Machinery and equipment | | 2,086.9 | | | 2,044.4 |
Accumulated depreciation | | (1,777.6) | | | (1,684.1) |
Property, plant and equipment, net | | 1,799.4 | | | 1,795.2 |
| | | | | |
Operating lease right-of-use assets | | 195.0 | | | 201.5 |
Goodwill | | 1,924.8 | | | 2,003.8 |
Intangible assets, net | | 955.8 | | | 1,031.1 |
Cash surrender value of life insurance policies, net | | 29.6 | | | 42.7 |
Other assets | | 62.1 | | | 46.6 |
Total assets | $ | 7,998.7 | | $ | 8,131.1 |
| | | | | |
LIABILITIES AND EQUITY | |||||
| | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 260.0 | | $ | 275.0 |
Accrued expenses | | 103.2 | | | 67.4 |
Accrued compensation and retirement costs | | 137.5 | | | 172.1 |
Accrued insurance costs | | 45.2 | | | 43.4 |
Current maturities of long-term debt and short-term borrowings | | 5.8 | | | 64.9 |
Current maturities of operating lease liabilities | | 50.2 | | | 52.5 |
Total current liabilities | | 601.9 | | | 675.3 |
Long-term debt | | 1,638.3 | | | 1,523.6 |
Operating lease liabilities | | 145.9 | | | 149.5 |
Long-term retirement costs | | 87.3 | | | 87.0 |
Other long-term liabilities | | 32.3 | | | 12.3 |
Deferred income taxes | | 445.7 | | | 469.3 |
Commitments and contingencies | | | | | |
Equity: | | | | | |
Preferred stock, $0.001 par value: | | | | | |
Authorized shares — 5,000 | | | | | |
None issued or outstanding | | — | | | — |
Common stock and additional paid-in capital, $0.001 par value: | | | | | |
Authorized shares — 200,000 | | | | | |
Issued and outstanding shares — 63,756 at September 30, 2020 and 66,854 at December 31, 2019 | | 11.1 | | | 122.2 |
Retained earnings | | 5,125.5 | | | 5,189.5 |
Accumulated other comprehensive loss | | (96.8) | | | (105.1) |
Total Reliance stockholders’ equity | | 5,039.8 | | | 5,206.6 |
Noncontrolling interests | | 7.5 | | | 7.5 |
Total equity | | 5,047.3 | | | 5,214.1 |
Total liabilities and equity | $ | 7,998.7 | | $ | 8,131.1 |
| | | | | |
| June 30, | | December 31, | ||
| 2021 |
| 2020* | ||
ASSETS | |||||
Current assets: | | | | | |
Cash and cash equivalents | $ | 727.6 | | $ | 683.5 |
Accounts receivable, less allowance for credit losses of $24.6 at June 30, 2021 and $19.0 at December 31, 2020 | | 1,492.6 | | | 926.3 |
Inventories | | 1,644.8 | | | 1,420.4 |
Prepaid expenses and other current assets | | 79.6 | | | 80.5 |
Income taxes receivable | | — | | | 2.1 |
Total current assets | | 3,944.6 | | | 3,112.8 |
Property, plant and equipment: | | | | | |
Land | | 256.4 | | | 260.1 |
Buildings | | 1,253.1 | | | 1,240.0 |
Machinery and equipment | | 2,184.8 | | | 2,107.8 |
Accumulated depreciation | | (1,897.2) | | | (1,815.7) |
Property, plant and equipment, net | | 1,797.1 | | | 1,792.2 |
| | | | | |
Operating lease right-of-use assets | | 209.7 | | | 204.0 |
Goodwill | | 1,936.3 | | | 1,935.2 |
Intangible assets, net | | 928.9 | | | 947.1 |
Cash surrender value of life insurance policies, net | | 35.7 | | | 43.7 |
Other assets | | 77.7 | | | 71.8 |
Total assets | $ | 8,930.0 | | $ | 8,106.8 |
| | | | | |
LIABILITIES AND EQUITY | |||||
| | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 473.6 | | $ | 259.3 |
Accrued expenses | | 116.6 | | | 88.9 |
Accrued compensation and retirement costs | | 198.6 | | | 165.8 |
Accrued insurance costs | | 42.8 | | | 42.0 |
Current maturities of long-term debt and short-term borrowings | | 5.3 | | | 6.0 |
Current maturities of operating lease liabilities | | 50.1 | | | 51.0 |
Income taxes payable | | 17.9 | | | — |
Total current liabilities | | 904.9 | | | 613.0 |
Long-term debt | | 1,640.6 | | | 1,638.9 |
Operating lease liabilities | | 160.6 | | | 154.1 |
Long-term retirement costs | | 105.4 | | | 95.8 |
Other long-term liabilities | | 23.3 | | | 26.7 |
Deferred income taxes | | 456.2 | | | 455.6 |
Commitments and contingencies | | | | | |
Equity: | | | | | |
Preferred stock, $0.001 par value: | | | | | |
Authorized shares — 5,000 | | | | | |
None issued or outstanding | | — | | | — |
Common stock and additional paid-in capital, $0.001 par value: | | | | | |
Authorized shares — 200,000 | | | | | |
Issued and outstanding shares — 63,568 at June 30, 2021 and 63,600 at December 31, 2020 | | 5.7 | | | 0.1 |
Retained earnings | | 5,700.6 | | | 5,193.2 |
Accumulated other comprehensive loss | | (74.6) | | | (77.9) |
Total Reliance stockholders’ equity | | 5,631.7 | | | 5,115.4 |
Noncontrolling interests | | 7.3 | | | 7.3 |
Total equity | | 5,639.0 | | | 5,122.7 |
Total liabilities and equity | $ | 8,930.0 | | $ | 8,106.8 |
* Amounts derived from audited financial statements.
See accompanying notes to unaudited consolidated financial statements.
1
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except number of shares which are reflected in thousands and per share amounts)
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | ||||||||
| September 30, | | September 30, | ||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net sales | $ | 2,085.6 | | $ | 2,685.9 | | $ | 6,677.8 | | $ | 8,526.0 |
| | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | |
Cost of sales (exclusive of depreciation and amortization shown below) | | 1,409.5 | | | 1,871.2 | | | 4,606.3 | | | 5,990.8 |
Warehouse, delivery, selling, general and administrative | | 449.2 | | | 518.7 | | | 1,410.4 | | | 1,582.2 |
Depreciation and amortization | | 56.4 | | | 54.8 | | | 170.8 | | | 163.2 |
Impairment of long-lived assets | | 10.0 | | | — | | | 107.9 | | | 1.2 |
| | 1,925.1 | | | 2,444.7 | | | 6,295.4 | | | 7,737.4 |
| | | | | | | | | | | |
Operating income | | 160.5 | | | 241.2 | | | 382.4 | | | 788.6 |
| | | | | | | | | | | |
Other expense: | | | | | | | | | | | |
Interest expense | | 15.7 | | | 20.5 | | | 47.2 | | | 68.4 |
Other expense, net | | 17.8 | | | 2.3 | | | 23.1 | | | 0.5 |
Income before income taxes | | 127.0 | | | 218.4 | | | 312.1 | | | 719.7 |
Income tax provision | | 28.7 | | | 54.5 | | | 70.2 | | | 179.9 |
Net income | | 98.3 | | | 163.9 | | | 241.9 | | | 539.8 |
Less: Net income attributable to noncontrolling interests | | 0.7 | | | 1.2 | | | 2.4 | | | 3.9 |
Net income attributable to Reliance | $ | 97.6 | | $ | 162.7 | | $ | 239.5 | | $ | 535.9 |
| | | | | | | | | | | |
Earnings per share attributable to Reliance stockholders: | | | | | | | | | | | |
Diluted | $ | 1.51 | | $ | 2.40 | | $ | 3.66 | | $ | 7.90 |
Basic | $ | 1.53 | | $ | 2.44 | | $ | 3.71 | | $ | 8.01 |
| | | | | | | | | | | |
Shares used in computing earnings per share: | | | | | | | | | | | |
Diluted | | 64,688 | | | 67,704 | | | 65,503 | | | 67,868 |
Basic | | 63,758 | | | 66,656 | | | 64,578 | | | 66,941 |
| | | | | | | | | | | |
Cash dividends per share | $ | 0.625 | | $ | 0.55 | | $ | 1.875 | | $ | 1.65 |
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | ||||||||
| June 30, | | June 30, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net sales | $ | 3,418.8 | | $ | 2,019.3 | | $ | 6,257.2 | | $ | 4,592.2 |
| | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | |
Cost of sales (exclusive of depreciation and amortization shown below) | | 2,336.6 | | | 1,404.6 | | | 4,221.3 | | | 3,196.8 |
Warehouse, delivery, selling, general and administrative ("SG&A") | | 563.3 | | | 438.5 | | | 1,081.8 | | | 961.2 |
Depreciation and amortization | | 58.5 | | | 57.4 | | | 115.4 | | | 114.4 |
Impairment of long-lived assets | | — | | | 0.2 | | | — | | | 97.9 |
| | 2,958.4 | | | 1,900.7 | | | 5,418.5 | | | 4,370.3 |
| | | | | | | | | | | |
Operating income | | 460.4 | | | 118.6 | | | 838.7 | | | 221.9 |
| | | | | | | | | | | |
Other expense: | | | | | | | | | | | |
Interest expense | | 15.7 | | | 14.6 | | | 31.4 | | | 31.5 |
Other expense, net | | 0.6 | | | 2.0 | | | 4.2 | | | 5.3 |
Income before income taxes | | 444.1 | | | 102.0 | | | 803.1 | | | 185.1 |
Income tax provision | | 113.9 | | | 21.3 | | | 204.7 | | | 41.5 |
Net income | | 330.2 | | | 80.7 | | | 598.4 | | | 143.6 |
Less: Net income attributable to noncontrolling interests | | 1.1 | | | 0.5 | | | 2.4 | | | 1.7 |
Net income attributable to Reliance | $ | 329.1 | | $ | 80.2 | | $ | 596.0 | | $ | 141.9 |
| | | | | | | | | | | |
Earnings per share attributable to Reliance stockholders: | | | | | | | | | | | |
Diluted | $ | 5.08 | | $ | 1.24 | | $ | 9.20 | | $ | 2.15 |
Basic | $ | 5.17 | | $ | 1.26 | | $ | 9.36 | | $ | 2.18 |
| | | | | | | | | | | |
Shares used in computing earnings per share: | | | | | | | | | | | |
Diluted | | 64,793 | | | 64,582 | | | 64,752 | | | 65,915 |
Basic | | 63,663 | | | 63,647 | | | 63,654 | | | 64,992 |
| | | | | | | | | | | |
Cash dividends per share | $ | 0.6875 | | $ | 0.6250 | | $ | 1.3750 | | $ | 1.2500 |
See accompanying notes to unaudited consolidated financial statements.
2
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
| | | | | | | | | | | | | | | | | | | | | ||
| Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended | ||||||||||||||||
| September 30, | | September 30, | June 30, | | June 30, | ||||||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
Net income | $ | 98.3 | | $ | 163.9 | | $ | 241.9 | | $ | 539.8 | $ | 330.2 | | $ | 80.7 | | $ | 598.4 | | $ | 143.6 |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | ||
Foreign currency translation gain (loss) | | 11.5 | | | (8.7) | | | (11.2) | | | (0.7) | | 4.5 | | | 8.7 | | 3.3 | | (22.7) | ||
Pension and postretirement benefit adjustments, net of tax | | 15.8 | | | — | | | 19.5 | | | — | | — | | | 3.7 | | | — | | | 3.7 |
Total other comprehensive income (loss) | | 27.3 | | | (8.7) | | | 8.3 | | | (0.7) | | 4.5 | | | 12.4 | | | 3.3 | | | (19.0) |
Comprehensive income | | 125.6 | | | 155.2 | | | 250.2 | | | 539.1 | | 334.7 | | | 93.1 | | 601.7 | | 124.6 | ||
Less: Comprehensive income attributable to noncontrolling interests | | 0.7 | | | 1.2 | | | 2.4 | | | 3.9 | | 1.1 | | | 0.5 | | | 2.4 | | | 1.7 |
Comprehensive income attributable to Reliance | $ | 124.9 | | $ | 154.0 | | $ | 247.8 | | $ | 535.2 | $ | 333.6 | | $ | 92.6 | | $ | 599.3 | | $ | 122.9 |
See accompanying notes to unaudited consolidated financial statements.
3
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except number of shares which are reflected in thousands and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reliance Stockholders’ Equity | | | | | | | Reliance Stockholders’ Equity | | | | | | | ||||||||||||||||||
| Common Stock | | | | | Accumulated | | | | | | | Common Stock and Additional | | | | | Accumulated Other | | | | | | |||||||||
| and Additional | | | | | Other | | Non- | | | | Paid-In Capital | | Retained | | Comprehensive | | Noncontrolling | | | | |||||||||||
| Paid-In Capital | | Retained | | Comprehensive | | controlling | | | | ||||||||||||||||||||||
| Shares |
| Amount |
| Earnings |
| (Loss) Income |
| Interests |
| Total | |||||||||||||||||||||
Balance at January 1, 2019 | 66,882 | | $ | 136.4 | | $ | 4,637.9 | | $ | (102.7) | | $ | 7.9 | | $ | 4,679.5 | ||||||||||||||||
Net income | — | | | — | | | 190.1 | | | — | | | 1.5 | | | 191.6 | ||||||||||||||||
Other comprehensive income | — | | | — | | | — | | | 6.8 | | | — | | | 6.8 | ||||||||||||||||
Stock-based compensation, net | 333 | | | (1.3) | | | — | | | — | | | — | | | (1.3) | ||||||||||||||||
Stock options exercised | 20 | | | 0.8 | | | — | | | — | | | — | | | 0.8 | ||||||||||||||||
Cash dividends — $0.55 per share and dividend equivalents | — | | | — | | | (38.2) | | | — | | | — | | | (38.2) | ||||||||||||||||
Balance at March 31, 2019 | 67,235 | | | 135.9 | | | 4,789.8 | | | (95.9) | | | 9.4 | | | 4,839.2 | ||||||||||||||||
Net income | — | | | — | | | 183.1 | | | — | | | 1.2 | | | 184.3 | ||||||||||||||||
Other comprehensive income | — | | | — | | | — | | | 1.2 | | | — | | | 1.2 | ||||||||||||||||
Dividends to noncontrolling interest holders | — | | | — | | | — | | | — | | | (1.7) | | | (1.7) | ||||||||||||||||
Noncontrolling interest purchased | — | | | — | | | — | | | — | | | (0.4) | | | (0.4) | ||||||||||||||||
Stock-based compensation, net | 12 | | | 13.8 | | | — | | | — | | | — | | | 13.8 | ||||||||||||||||
Repurchase of common shares | (593) | | | (50.0) | | | — | | | — | | | — | | | (50.0) | ||||||||||||||||
Cash dividends — $0.55 per share and dividend equivalents | — | | | — | | | (36.9) | | | — | | | — | | | (36.9) | ||||||||||||||||
Balance at June 30, 2019 | 66,654 | | | 99.7 | | | 4,936.0 | | | (94.7) | | | 8.5 | | | 4,949.5 | ||||||||||||||||
Net income | — | | | — | | | 162.7 | | | — | | | 1.2 | | | 163.9 | ||||||||||||||||
Other comprehensive loss | — | | | — | | | — | | | (8.7) | | | — | | | (8.7) | ||||||||||||||||
Dividends to noncontrolling interest holders | — | | | — | | | — | | | — | | | (1.4) | | | (1.4) | ||||||||||||||||
Stock-based compensation, net | 2 | | | 15.2 | | | — | | | — | | | — | | | 15.2 | ||||||||||||||||
Cash dividends — $0.55 per share and dividend equivalents | — | | | — | | | (36.8) | | | — | | | — | | | (36.8) | ||||||||||||||||
Balance at September 30, 2019 | 66,656 | | $ | 114.9 | | $ | 5,061.9 | | $ | (103.4) | | $ | 8.3 | | $ | 5,081.7 | ||||||||||||||||
| | | | | | | | | | | | | | | | | Shares |
| Amount |
| Earnings |
| (Loss) Income |
| Interests |
| Total | |||||
Balance at January 1, 2020 | 66,854 | | $ | 122.2 | | $ | 5,189.5 | | $ | (105.1) | | $ | 7.5 | | $ | 5,214.1 | 66,854 | | $ | 122.2 | | $ | 5,189.5 | | $ | (105.1) | | $ | 7.5 | | $ | 5,214.1 |
Net income | — | | | — | | | 61.7 | | | — | | | 1.2 | | | 62.9 | — | | | — | | | 61.7 | | | — | | | 1.2 | | | 62.9 |
Other comprehensive loss | — | | | — | | | — | | | (31.4) | | | — | | | (31.4) | — | | | — | | | — | | | (31.4) | | | — | | | (31.4) |
Noncontrolling interest purchased | — | | | (6.9) | | | — | | | — | | | (1.1) | | | (8.0) | — | | | (6.9) | | | — | | | — | | | (1.1) | | | (8.0) |
Dividend to noncontrolling interest holder | — | | | — | | | — | | | — | | | (0.5) | | | (0.5) | — | | | — | | | — | | | — | | | (0.5) | | | (0.5) |
Stock-based compensation, net | 111 | | | 3.8 | | | — | | | — | | | — | | | 3.8 | 111 | | | 3.8 | | | — | | | — | | | — | | | 3.8 |
Stock options exercised | 6 | | | 0.3 | | | — | | | — | | | — | | | 0.3 | 6 | | | 0.3 | | | — | | | — | | | — | | | 0.3 |
Repurchase of common shares | (3,330) | | | (119.3) | | | (180.7) | | | — | | | — | | | (300.0) | (3,330) | | | (119.3) | | | (180.7) | | | — | | | — | | | (300.0) |
Cash dividends — $0.625 per share and dividend equivalents | — | | | — | | | (41.9) | | | — | | | — | | | (41.9) | — | | | — | | | (41.9) | | | — | | | — | | | (41.9) |
Balance at March 31, 2020 | 63,641 | | | 0.1 | | | 5,028.6 | | | (136.5) | | | 7.1 | | | 4,899.3 | 63,641 | | | 0.1 | | | 5,028.6 | | | (136.5) | | | 7.1 | | | 4,899.3 |
Net income | — | | | — | | | 80.2 | | | — | | | 0.5 | | | 80.7 | — | | | — | | | 80.2 | | | — | | | 0.5 | | | 80.7 |
Other comprehensive income | — | | | — | | | — | | | 12.4 | | | — | | | 12.4 | — | | | — | | | — | | | 12.4 | | | — | | | 12.4 |
Stock-based compensation, net | 13 | | | 9.0 | | | — | | | — | | | — | | | 9.0 | 13 | | | 9.0 | | | — | | | — | | | — | | | 9.0 |
Cash dividends — $0.625 per share and dividend equivalents | — | | | — | | | (39.9) | | | — | | | — | | ��� | (39.9) | — | | | — | | | (39.9) | | | — | | | — | | | (39.9) |
Balance at June 30, 2020 | 63,654 | | | 9.1 | | | 5,068.9 | | | (124.1) | | | 7.6 | | | 4,961.5 | 63,654 | | $ | 9.1 | | $ | 5,068.9 | | $ | (124.1) | | $ | 7.6 | | $ | 4,961.5 |
| | | | | | | | | | | | | | | | | ||||||||||||||||
Balance at January 1, 2021 | 63,600 | | $ | 0.1 | | $ | 5,193.2 | | $ | (77.9) | | $ | 7.3 | | $ | 5,122.7 | ||||||||||||||||
Net income | — | | | — | | | 266.9 | | | — | | | 1.3 | | | 268.2 | ||||||||||||||||
Other comprehensive loss | — | | | — | | | — | | | (1.2) | | | — | | | (1.2) | ||||||||||||||||
Dividend to noncontrolling interest holder | — | | | — | | | — | | | — | | | (2.4) | | | (2.4) | ||||||||||||||||
Stock-based compensation, net | 107 | | | 6.5 | | | — | | | — | | | — | | | 6.5 | ||||||||||||||||
Cash dividends — $0.6875 per share and dividend equivalents | — | | | — | | | (44.8) | | | — | | | — | | | (44.8) | ||||||||||||||||
Balance at March 31, 2021 | 63,707 | | | 6.6 | | | 5,415.3 | | | (79.1) | | | 6.2 | | | 5,349.0 | ||||||||||||||||
Net income | — | | | — | | | 97.6 | | | — | | | 0.7 | | | 98.3 | — | | | — | | | 329.1 | | | — | | | 1.1 | | | 330.2 |
Other comprehensive income | — | | | — | | | — | | | 27.3 | | | — | | | 27.3 | — | | | — | | | — | | | 4.5 | | | — | | | 4.5 |
Dividends to noncontrolling interest holders | — | | | — | | | — | | | — | | | (0.8) | | | (0.8) | ||||||||||||||||
Stock-based compensation, net | 104 | | | 2.2 | | | — | | | — | | | — | | | 2.2 | 8 | | | 23.1 | | | — | | | — | | | — | | | 23.1 |
Repurchase of common shares | (2) | | | (0.2) | | | — | | | — | | | — | | | (0.2) | (147) | | | (24.0) | | | — | | | — | | | — | | | (24.0) |
Cash dividends — $0.625 per share and dividend equivalents | — | | | — | | | (41.0) | | | — | | | — | | | (41.0) | ||||||||||||||||
Balance at September 30, 2020 | 63,756 | | $ | 11.1 | | $ | 5,125.5 | | $ | (96.8) | | $ | 7.5 | | $ | 5,047.3 | ||||||||||||||||
Cash dividends — $0.6875 per share and dividend equivalents | — | | | — | | | (43.8) | | | — | | | — | | | (43.8) | ||||||||||||||||
Balance at June 30, 2021 | 63,568 | | $ | 5.7 | | $ | 5,700.6 | | $ | (74.6) | | $ | 7.3 | | $ | 5,639.0 |
See accompanying notes to unaudited consolidated financial statements.
4
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | |
| Nine Months Ended | ||||
| September 30, | ||||
| 2020 |
| 2019 | ||
Operating activities: | | | | | |
Net income | $ | 241.9 | | $ | 539.8 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization expense | | 170.8 | | | 163.2 |
Impairment of long-lived assets | | 107.9 | | | 1.2 |
Provision for uncollectible accounts | | 8.3 | | | 5.2 |
Deferred income tax benefit | | (26.7) | | | (0.3) |
Stock-based compensation expense | | 29.9 | | | 37.3 |
Postretirement benefit plan settlement expense | | 19.4 | | | — |
Other | | 10.3 | | | 5.2 |
Changes in operating assets and liabilities (excluding effect of businesses acquired): | | | | | |
Accounts receivable | | 114.4 | | | (14.2) |
Inventories | | 221.9 | | | 147.0 |
Prepaid expenses and other assets | | 81.9 | | | 59.7 |
Accounts payable and other liabilities | | (37.2) | | | 10.0 |
Net cash provided by operating activities | | 942.8 | | | 954.1 |
| | | | | |
Investing activities: | | | | | |
Purchases of property, plant and equipment | | (134.7) | | | (182.8) |
Acquisitions, net of cash acquired | | — | | | (1.0) |
Other | | 7.0 | | | 11.9 |
Net cash used in investing activities | | (127.7) | | | (171.9) |
| | | | | |
Financing activities: | | | | | |
Net short-term debt borrowings | | 0.7 | | | — |
Proceeds from long-term debt borrowings | | 1,673.7 | | | 742.0 |
Principal payments on long-term debt | | (1,615.4) | | | (1,304.3) |
Debt issuance costs | | (6.4) | | | — |
Dividends and dividend equivalents paid | | (122.8) | | | (113.3) |
Share repurchases | | (300.2) | | | (50.0) |
Noncontrolling interest purchased | | (8.0) | | | — |
Other | | (16.5) | | | (13.2) |
Net cash used in financing activities | | (394.9) | | | (738.8) |
Effect of exchange rate changes on cash and cash equivalents | | (2.9) | | | (5.6) |
Increase in cash and cash equivalents | | 417.3 | | | 37.8 |
Cash and cash equivalents at beginning of year | | 174.3 | | | 128.2 |
Cash and cash equivalents at end of period | $ | 591.6 | | $ | 166.0 |
| | | | | |
Supplemental cash flow information: | | | | | |
Interest paid during the period | $ | 34.6 | | $ | 57.2 |
Income taxes paid during the period, net | $ | 68.3 | | $ | 173.7 |
- | | | | | |
| Six Months Ended | ||||
| June 30, | ||||
| 2021 |
| 2020 | ||
Operating activities: | | | | | |
Net income | $ | 598.4 | | $ | 143.6 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization expense | | 115.4 | | | 114.4 |
Impairment of long-lived assets | | — | | | 97.9 |
Provision for credit losses | | 6.7 | | | 7.0 |
Deferred income tax benefit | | (0.2) | | | (33.3) |
Stock-based compensation expense | | 37.9 | | | 18.0 |
Postretirement benefit plan settlement expense | | — | | | 4.8 |
Other | | (1.7) | | | 8.5 |
Changes in operating assets and liabilities (excluding effect of businesses acquired): | | | | | |
Accounts receivable | | (568.3) | | | 136.0 |
Inventories | | (217.8) | | | 150.5 |
Prepaid expenses and other assets | | 32.1 | | | 55.5 |
Accounts payable and other liabilities | | 260.9 | | | (56.4) |
Net cash provided by operating activities | | 263.4 | | | 646.5 |
| | | | | |
Investing activities: | | | | | |
Purchases of property, plant and equipment | | (123.8) | | | (96.5) |
Proceeds from sales of property, plant and equipment | | 26.1 | | | 1.7 |
Other | | (0.9) | | | (1.6) |
Net cash used in investing activities | | (98.6) | | | (96.4) |
| | | | | |
Financing activities: | | | | | |
Net short-term debt repayments | | (0.8) | | | — |
Proceeds from long-term debt borrowings | | — | | | 770.0 |
Principal payments on long-term debt | | — | | | (868.0) |
Dividends and dividend equivalents paid | | (88.6) | | | (81.8) |
Share repurchases | | (24.0) | | | (300.0) |
Noncontrolling interest purchased | | — | | | (8.0) |
Other | | (9.0) | | | (5.8) |
Net cash used in financing activities | | (122.4) | | | (493.6) |
Effect of exchange rate changes on cash and cash equivalents | | 1.7 | | | (8.1) |
Increase in cash and cash equivalents | | 44.1 | | | 48.4 |
Cash and cash equivalents at beginning of year | | 683.5 | | | 174.3 |
Cash and cash equivalents at end of period | $ | 727.6 | | $ | 222.7 |
| | | | | |
Supplemental cash flow information: | | | | | |
Interest paid during the period | $ | 30.3 | | $ | 30.1 |
Income taxes paid during the period, net | $ | 181.3 | | $ | 16.1 |
See accompanying notes to unaudited consolidated financial statements.
5
RELIANCE STEEL & ALUMINUM CO.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20202021
Note 1. Basis of Presentation
Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, our financial statements reflect all adjustments, which are of a normal recurring nature, necessary for presentation of financial statements for interim periods in accordance with U.S. GAAP. The results of operations for the ninesix months ended SeptemberJune 30, 20202021 are not necessarily indicative of the results for the full year ending December 31, 2020.2021. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2019,2020, included in the Reliance Steel & Aluminum Co. (“Reliance,” the “Company,” “we,” “our” or “us”) Annual Report on Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Our consolidated financial statements include the assets, liabilities and operating results of majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The ownership of the other interest holders of consolidated subsidiaries is reflected as noncontrolling interests. During the nine months ended September 30, 2020, we purchased the remaining 49% noncontrolling interest of Feralloy Processing Company, which increased our ownership from 51% to 100%. See Note 10—“Equity” for further discussion of our noncontrolling interest transaction. Our investments in unconsolidated subsidiaries are recorded under the equity method of accounting.
Note 2. Impact of Recently Issued Accounting Guidance
Impact of Recently Issued Accounting Standards—Adopted
Financial Instruments – Credit LossesIncome Taxes—In June 2016,December 2019, the Financial Accounting Standards Board (“FASB”) issued accounting guidancechanges that changes how entities accountsimplify the accounting for credit losses for most financial assets, including the allowance for doubtful accounts for trade receivables, and certain other instruments that are not measured at fair value through net income. The new guidance replaces the current incurred loss model with an expected credit loss model that requires consideration of a broader range of information to estimate credit losses over the lifetimeincome taxes as part of the asset.FASB’s overall initiative to reduce complexity in accounting standards. We adopted the new standardaccounting changes on January 1, 2020.2021. The adoption of thisthese accounting changechanges did not have a material impact on our consolidated financial statements.
Impact of Recently Issued Accounting Standards—Not Yet Adopted
Income Taxes—In December 2019, the FASB issued accounting changes that simplify the accounting for income taxes as part of the FASB’s overall initiative to reduce complexity in accounting standards. The guidance will be effective for fiscal years and interim periods beginning after December 15, 2020, or January 1, 2021 for the Company. Early adoption is permitted. The adoption of this standard will not have a material impact on our consolidated financial statements.
Reference Rate Reform—In March 2020, the FASB issued accounting changes that provide optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The accounting changes may be applied prospectively through December 31, 2022. The Company expects to adopt this guidance for any contracts that are modified as a result of reference rate reform. We are continuing
6
currently do not expect the transition from LIBOR to evaluate which contracts may be impacted by reference rate reform, but believe our use of these accounting changes will not have a material impact on our consolidated financial statements.
Note 3. Acquisitions
2019 Acquisition
On December 31, 2019, we acquired Fry Steel Company (“Fry Steel”). Fry Steel is a general line and long bar distributor located in Santa Fe Springs, California. Fry Steel performs cutting services on its diverse product assortment and provides “in-stock” next day delivery of its products. Sales of Fry Steel were $60.9 million in the nine months ended September 30, 2020.
We funded our 2019 acquisition of Fry Steel with borrowings on our revolving credit facility and cash on hand.
The allocation of the total purchase price of our acquisition of Fry Steel to the fair values of the assets acquired and liabilities assumed was as follows:
| | |
| (in millions) | |
Cash | $ | 17.1 |
Accounts receivable | | 5.7 |
Inventories | | 39.3 |
Property, plant and equipment | | 29.9 |
Goodwill | | 53.6 |
Intangible assets subject to amortization | | 26.0 |
Intangible assets not subject to amortization | | 30.3 |
Other current and long-term assets | | 0.3 |
Total assets acquired | | 202.2 |
Other current and long-term liabilities | | 8.3 |
Total liabilities assumed | | 8.3 |
Net assets acquired | $ | 193.9 |
The purchase price allocation for our acquisition of Fry Steel is pending the completion of purchase price adjustments, based on the completion of pre-acquisition period tax returns.
The acquisition of Fry Steel has been accounted for under the acquisition method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on the estimated fair values at December 31, 2019. The accompanying consolidated statements of income include the revenues and expenses of Fry Steel since its acquisition date. The consolidated balance sheets reflect the allocation of Fry Steel’s purchase price as of September 30, 2020 and December 31, 2019. The measurement periods for purchase price allocations do not exceed 12 months from the acquisition date.
As part of the purchase price allocation for the acquisition of Fry Steel, $30.3 million was allocated to the trade name acquired. We determined that the trade name acquired in this acquisition had an indefinite life since its economic life is expected to approximate the life of Fry Steel. Additionally, we recorded an additional identifiable intangible asset related to customer relationships of $26.0 million with a 10.0 year life. The goodwill arising from our acquisition of Fry Steel consists largely of expected strategic benefits, including enhanced financial and operational scale, as well as expansion of acquired product and processing know-how across our enterprise. The goodwill is deductible for income tax purposes.
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Note 4.3. Revenues
The following table presents our net sales disaggregated by product and service. Certain sales taxes and value-added taxes collected from customers are excluded from our reported net sales.
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended | ||||||||||||||||
| September 30, | | September 30, | June 30, | | June 30, | ||||||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
| (in millions) | (in millions) | ||||||||||||||||||||
Carbon steel | $ | 1,100.8 | | $ | 1,416.1 | | $ | 3,490.8 | | $ | 4,542.4 | $ | 2,098.1 | | $ | 1,073.8 | | $ | 3,757.3 | | $ | 2,390.0 |
Stainless steel | | 539.5 | | | 336.4 | | | 992.4 | | | 741.3 | |||||||||||
Aluminum | | 394.3 | | | 532.4 | | | 1,299.9 | | | 1,662.6 | | 498.8 | | | 393.4 | | | 961.6 | | | 905.6 |
Stainless steel | | 341.8 | | | 388.7 | | | 1,083.1 | | | 1,202.4 | |||||||||||
Alloy | | 91.0 | | | 160.7 | | | 342.3 | | | 515.0 | | 134.9 | | | 99.9 | | | 252.2 | | | 251.3 |
Toll processing and logistics | | 105.7 | | | 111.8 | | | 279.6 | | | 343.6 | | 115.6 | | | 61.4 | | | 231.2 | | | 173.9 |
Other and eliminations | | 52.0 | | | 76.2 | | | 182.1 | | | 260.0 | | 31.9 | | | 54.4 | | | 62.5 | | | 130.1 |
Total | $ | 2,085.6 | | $ | 2,685.9 | | $ | 6,677.8 | | $ | 8,526.0 | $ | 3,418.8 | | $ | 2,019.3 | | $ | 6,257.2 | | $ | 4,592.2 |
Note 5.4. Goodwill
The change in the carrying amount of goodwill is as follows:
| | |
| (in millions) | |
Balance at January 1, 2020 | $ | 2,003.8 |
Purchase price allocation adjustments | | (77.2) |
Foreign currency translation loss | | (1.8) |
Balance at September 30, 2020 | $ | 1,924.8 |
| | |
| (in millions) | |
Balance at January 1, 2021 | $ | 1,935.2 |
Foreign currency translation gain | | 1.1 |
Balance at June 30, 2021 | $ | 1,936.3 |
We had 0 accumulated impairment losses related to goodwill at SeptemberJune 30, 2020.2021.
Note 6.5. Intangible Assets, net
Intangible assets, net consisted of the following:
| | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 | ||||||||
| Weighted Average | | Gross | | | | | Gross | | | | ||
| Amortizable | | Carrying | | Accumulated | | Carrying | | Accumulated | ||||
| Life in Years |
| Amount |
| Amortization |
| Amount |
| Amortization | ||||
| | | (in millions) | ||||||||||
Intangible assets subject to amortization: | | | | | | | | | | | | | |
Covenants not to compete | 5.0 | | $ | 0.7 | | $ | (0.4) | | $ | 0.7 | | $ | (0.4) |
Customer lists/relationships | 14.8 | | | 624.1 | | | (388.6) | | | 710.1 | | | (438.1) |
Software | 10.0 | | | 8.1 | | | (8.1) | | | 8.1 | | | (8.1) |
Other | 7.5 | | | 1.0 | | | (0.9) | | | 1.1 | | | (0.9) |
| | | | 633.9 | | | (398.0) | | | 720.0 | | | (447.5) |
Intangible assets not subject to amortization: | | | | | | | | | | | | | |
Trade names | | | | 719.9 | | | — | | | 758.6 | | | — |
| | | $ | 1,353.8 | | $ | (398.0) | | $ | 1,478.6 | | $ | (447.5) |
Intangible assets recorded in connection with our 2019 acquisition of Fry Steel were $56.3 million; $30.3 million was allocated to trade names, which is not subject to amortization, and $26.0 million was allocated to customer lists/relationships, which amortizes over a 10.0 year life.
| | | | | | | | | | | | | |
| | | June 30, 2021 | | December 31, 2020 | ||||||||
| Weighted Average | | Gross | | | | | Gross | | | | ||
| Amortizable | | Carrying | | Accumulated | | Carrying | | Accumulated | ||||
| Life in Years |
| Amount |
| Amortization |
| Amount |
| Amortization | ||||
| | | (in millions) | ||||||||||
Intangible assets subject to amortization: | | | | | | | | | | | | | |
Covenants not to compete | 5.0 | | $ | 0.7 | | $ | (0.5) | | $ | 0.7 | | $ | (0.5) |
Customer lists/relationships | 14.9 | | | 623.4 | | | (415.2) | | | 623.2 | | | (396.7) |
Software | 10.0 | | | 8.1 | | | (8.1) | | | 8.1 | | | (8.1) |
Other | 5.2 | | | 0.8 | | | (0.6) | | | 1.1 | | | (0.9) |
| | | | 633.0 | | | (424.4) | | | 633.1 | | | (406.2) |
Intangible assets not subject to amortization: | | | | | | | | | | | | | |
Trade names | | | | 720.3 | | | — | | | 720.2 | | | — |
| | | $ | 1,353.3 | | $ | (424.4) | | $ | 1,353.3 | | $ | (406.2) |
Amortization expense for intangible assets was $30.3$18.4 million and $32.3$20.9 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. Foreign currency translation lossesgains related to intangible assets, net, were $2.8$0.2 million for the six months ended June 30, 2021 compared to foreign currency translation losses of $3.2 million for the same period in 2020.
In the six months ended June 30, 2020, we recognized impairment losses of $64.3 million on our trade names and $24.7 million on our customer lists/relationships intangible assets, mainly related to certain of our energy-related businesses. See Note 12—“Impairment and Restructuring Charges” for further discussion.
87
the nine months ended September 30, 2020 compared to foreign currency translation gains of $1.0 million in the same period in 2019.
In the nine months ended September 30, 2020, we recognized impairment losses of $67.8 million on our trade names and $30.7 million on our customer lists/relationships intangible assets, mainly related to certain of our energy-related businesses. See Note 13—“Impairment and Restructuring Charges” for further discussion of our impairment losses.
The following is a summary of estimated future amortization expense for the remaining threesix months of 20202021 and each of the succeeding five years:
| | | | |
| (in millions) | (in millions) | ||
2020 (remaining three months) | $ | 9.3 | ||
2021 | | 36.5 | ||
2021 (remaining six months) | $ | 18.1 | ||
2022 | | 35.8 | | 35.9 |
2023 | | 31.6 | | 31.6 |
2024 | | 28.1 | | 28.1 |
2025 | | 23.9 | | 23.9 |
2026 | | 14.4 |
Note 7.6. Debt
Debt consisted of the following:
| | | | | | | | | | |
| September 30, | | December 31, | June 30, | | December 31, | ||||
| 2020 |
| 2019 | 2021 |
| 2020 | ||||
| (in millions) | (in millions) | ||||||||
Unsecured revolving credit facility expiring September 2, 2025 | $ | — | | $ | 368.0 | |||||
Unsecured term loan repaid August 3, 2020 | | — | | 465.0 | ||||||
Unsecured revolving credit facility maturing September 3, 2025 | $ | — | | $ | — | |||||
Senior unsecured notes due April 15, 2023 | | 500.0 | | 500.0 | | 500.0 | | | 500.0 | |
Senior unsecured notes due August 15, 2025 | | 400.0 | | — | | 400.0 | | | 400.0 | |
Senior unsecured notes due August 15, 2030 | | 500.0 | | — | | 500.0 | | | 500.0 | |
Senior unsecured notes due November 15, 2036 | | 250.0 | | 250.0 | | 250.0 | | | 250.0 | |
Other notes and revolving credit facilities | | 13.8 | | | 13.3 | | 13.0 | | | 13.7 |
Total | | 1,663.8 | | 1,596.3 | | 1,663.0 | | | 1,663.7 | |
Less: unamortized discount and debt issuance costs | | (19.7) | | (7.8) | | (17.1) | | | (18.8) | |
Less: amounts due within one year and short-term borrowings | | (5.8) | | | (64.9) | | (5.3) | | | (6.0) |
Total long-term debt | $ | 1,638.3 | | $ | 1,523.6 | $ | 1,640.6 | | $ | 1,638.9 |
Unsecured Credit Facility
On September 3, 2020, we entered into a $1.5 billion unsecured five-year Amended and Restated Credit Agreement (“Credit Agreement”) that amended and restated our existing $1.5 billion unsecured revolving credit facility. At SeptemberJune 30, 2020,2021, borrowings under the Credit Agreement were available at variable rates based on LIBOR plus 1.25% or the bank prime rate plus 0.25% and we currently pay a commitment fee at an annual rate of 0.20% on the unused portion of the revolving credit facility. The applicable margins over LIBOR and base rate borrowings, along with commitment fees, are subject to adjustment every quarter based on our total net leverage ratio, as defined in the Credit Agreement. All borrowings under the Credit Agreement may be prepaid without penalty. Our Credit Agreement includes provisions to change the reference rate to the then-prevailing market convention for similar agreements if a replacement rate for LIBOR is necessary during its term.
Weighted average interest rates on borrowings outstanding on the revolving credit facility and term loan were 3.69% and 2.80% as of December 31, 2019, respectively. As of SeptemberJune 30, 2020,2021, we had 0 outstanding borrowings $37.1and $31.2 million of letters of credit issued and $1.46 billion available for borrowing on the revolving credit facility.
Senior Unsecured Notes
On November 20, 2006, we entered into an indenture (the “2006 Indenture”) for the issuance of $600.0 million of unsecured debt securities. The total issuance was comprised of (a) $350.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.20% per annum, which matured and were repaid on November 15, 2016
9
and (b) $250.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.85% per annum, maturing on November 15, 2036.
On April 12, 2013, we entered into an indenture (the “2013 Indenture”) for the issuance of $500.0 million aggregate principal amount of senior unsecured notes at the rate of 4.50% per annum, maturing on April 15, 2023.
8
On August 3, 2020, we entered into an indenture (the “2020 Indenture” and, together with the 2013 Indenture and 20162006 Indenture, the “Indentures”) for the issuance of $900.0 million of unsecured debt securities. The total issuance was comprised of (a) $400.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 1.30% per annum, maturing on August 15, 2025 and (b) $500.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 2.15% per annum, maturing on August 15, 2030.
Under the Indentures, the notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. If we experience a change in control accompanied by a downgrade in our credit rating, we will be required to make an offer to repurchase each series of the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest.
Other Notes, and Revolving Credit and Letter of Credit/Letters of Guarantee Facilities
A revolving credit facility with a credit limit of $8.0$8.4 million is in place for an operation in Asia with an outstanding balance of $5.2$4.7 million and $4.3$5.4 million as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively.
Various industrial revenue bonds had combined outstanding balances of $8.6$8.3 million as of SeptemberJune 30, 20202021 and $9.0 million as of December 31, 2019,2020, and have maturities through 2027.
A standby letters of credit/letters of guarantee agreement with one of the lenders under our Credit Agreement is in place that provides letters of credit or letters of guarantee in an amount not to exceed $50.0 million in the aggregate. As of June 30, 2021, a total of $1.4 million letters of credit/guarantee were issued on the facility.
Covenants
The Credit Agreement and the Indentures include customary representations, warranties, covenants and events of default provisions. The covenants under the Credit Agreement include, among other things, 2 financial maintenance covenants that require us to comply with a minimum interest coverage ratio and a maximum leverage ratio. We were in compliance with all financial maintenance covenants in our Credit Agreement at SeptemberJune 30, 2020.2021.
Note 8.7. Leases
Our metals service center leases are comprised of processing and distribution facilities, equipment, trucks and trailers, ground leases and other leased spaces, such as depots, sales offices, storage and data centers. We also lease various office buildings, including our corporate headquarters in Los Angeles, California.space. Our leases of facilities and other spaces expire at various times through 20312045 and our ground leases expire at various times through 2068. Nearly all of our leases are operating leases. Information regarding our insignificant finance leases is not included as it is not meaningful to an understanding of our lease obligations.
The following is a summary of our lease cost:
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended | ||||||||||||||||
| September 30, | | September 30, | June 30, | | June 30, | ||||||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
| (in millions) | | (in millions) | (in millions) | | (in millions) | ||||||||||||||||
Operating lease cost | $ | 20.4 | | $ | 20.9 | | $ | 61.9 | | $ | 62.8 | $ | 19.3 | | $ | 20.4 | | $ | 39.0 | | $ | 41.5 |
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Supplemental cash flow and balance sheet information is presented below:
| | | | | | | | | | |
| Nine Months Ended | Six Months Ended | ||||||||
| September 30, | June 30, | ||||||||
| 2020 |
| 2019 | 2021 |
| 2020 | ||||
| (in millions) | (in millions) | ||||||||
Supplemental cash flow information | | | | | | |||||
Supplemental cash flow information: | | | | | | |||||
Cash payments for operating leases | $ | 61.5 | | $ | 62.6 | $ | 39.1 | | $ | 41.3 |
Right-of-use assets obtained in exchange for operating lease obligations | $ | 35.8 | | $ | 53.2 | $ | 33.0 | | $ | 27.5 |
| | | | | | | | | | |
| September 30, | | December 31, | June 30, | | December 31, | ||||
| 2020 | | 2019 | 2021 | | 2020 | ||||
Other lease information | | | | | | |||||
Other lease information: | | | | | | |||||
Weighted average remaining lease term—operating leases | | 6.0 years | | | 5.6 years | | 6.2 years | | | 5.7 years |
Weighted average discount rate—operating leases | | 4.0% | | | 4.3% | | 3.6% | | | 3.7% |
Maturities of operating lease liabilities as of SeptemberJune 30, 20202021 are as follows:
| | | | | | | |
| (in millions) | | | | (in millions) | ||
2020 (remaining three months) | $ | 15.4 | |||||
2021 | | 54.1 | |||||
2021 (remaining six months) | | | | $ | 29.4 | ||
2022 | | 42.5 | | | | 51.6 | |
2023 | | 33.3 | | | | 41.9 | |
2024 | | 26.1 | | | | 33.7 | |
2025 | | | | 23.9 | |||
Thereafter | | 55.0 | | | | | 60.5 |
Total operating lease payments | | 226.4 | | | | | 241.0 |
Less: imputed interest | | (30.3) | | | | | (30.3) |
Total operating lease liabilities | $ | 196.1 | | | | $ | 210.7 |
Note 9.8. Income Taxes
Our effective income tax rates for the thirdsecond quarter and ninesix months ended SeptemberJune 30, 20202021 were 22.6%25.6% and 22.5%25.5%, respectively, compared to 25.0% for20.9% and 22.4% in the comparable 2019 periods.same 2020 periods, respectively. The declinesincrease in our effective income tax rates were mainly due to the significant increases in our lower income levels.profitability in 2021. The differences between our effective income tax rates and the U.S. federal statutory rate of 21.0% were mainly due to state income taxes partially offset by the effects of company-owned life insurance policies.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer’s share of social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We continue to examine the impacts the CARES Act may have on our business.
Note 10.9. Equity
Dividends
On OctoberJuly 20, 2020,2021, our Board of Directors declared the 2020 fourth2021 third quarter cash dividend of $0.625$0.6875 per share of common stock, payable on December 4, 2020August 27, 2021 to stockholders of record as of November 20, 2020.August 13, 2021.
During the thirdsecond quarters of 20202021 and 2019,2020, we declared and paid quarterly dividends of $0.625$0.6875 and $0.55$0.625 per share, or $39.8$43.8 million and $36.7$39.9 million in total, respectively. During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, we declared and paid quarterly dividends of $1.875$1.375 and $1.65$1.25 per share, or $120.7$87.6 million and $110.6$80.9 million in total,
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respectively. In addition, we paid $2.1$1.0 million and $2.7$0.9 million in dividend equivalents with respect to vested restricted stock units (“RSUs”) during the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively.
Stock-Based Compensation
We make annual grants of long-term incentive awards to officers and key employees in the forms of service-based and performance-based RSUs that have approximately 3-year vesting periods. The performance-based RSU awards are
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subject to both service criteria and performance goal criteria.goals based on the Company’s return on assets. We also make annual grants of stock to the non-employee members of the Board of Directors that vest immediately upon grant. The fair value of the RSUs and stock grants is determined based on the closing stock price of our common stock on the grant date.
On May 20, 2020, our stockholders approved an amendment to the Reliance Steel & Aluminum Co. Amended and Restated 2015 Incentive Award Plan to, in part, increase the number of shares available for issuance under the plan by 1.5 million. In addition, our stockholders approved extending the term of the Reliance Steel & Aluminum Co. Directors Equity Plan for ten years until December 31, 2030.
In the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, we made payments of $14.9$8.3 million and $9.6$5.2 million, respectively, to tax authorities on our employees’ behalf for shares withheld related to net share settlements. These payments are reflected in the Stock-based compensation, net caption of our consolidated statements of equity.
A summary of the status of our unvested service-based and performance-based RSUs as of SeptemberJune 30, 20202021 and changes during the nine-month periodquarter then ended is as follows:
| | | | | | | | | ||
| | | | Weighted | | | | Weighted | ||
| | | | Average | | | | Average | ||
| | | | Grant Date | | | | Grant Date | ||
| | | | Fair Value | | | | Fair Value | ||
Unvested RSUs | | Shares | | Per RSU | | Shares | | Per RSU | ||
Unvested at January 1, 2020 | | 859,005 | | $ | 86.40 | |||||
Unvested at January 1, 2021 | | 995,720 | | $ | 85.27 | |||||
Granted(1) | | 540,547 | | | 82.81 | | 318,495 | | | 141.41 |
Vested | | (4,925) | | | 85.40 | | (5,977) | | | 85.38 |
Cancelled or forfeited | | (25,466) | | | 85.39 | | (12,529) | | | 87.42 |
Unvested at September 30, 2020 | | 1,369,161 | | $ | 85.01 | |||||
Unvested at June 30, 2021 | | 1,295,709 | | $ | 99.05 | |||||
Shares reserved for future grants (all plans) | | 2,104,770 | | | | 1,864,400 | | |
(1) | Comprised of |
Share Repurchase Plan
On October 23, 2018,July 20, 2021, our Board of Directors amended ourauthorized a $1.0 billion share repurchase plan, increasing the totalprogram that replaced our existing share repurchase program authorized in October 2018. The share repurchase program does not obligate us to repurchase any specific number of shares, available todoes not have a specific expiration date and may be repurchased by 5.0 millionsuspended or discontinued at any time.
We repurchase shares through open market purchases, privately negotiated transactions and extending the duration of the plantransactions structured through December 31, 2021. As of September 30, 2020, we had authorizationinvestment banking institutions under plans relying on Rule 10b5-1 or Rule 10b-18 under the plan to repurchase approximately 3.1 million shares, or about 5%Securities Exchange Act of our current outstanding shares.1934, as amended. Repurchased and subsequently retired shares are restored to the status of authorized but unissued shares.
During the thirdsecond quarter of 2020,and six months ended June 30, 2021, we repurchased 2,466approximately 147,016 shares at an average cost of $100.00$163.50 per share, for a total of $0.2$24.0 million compared to 0 repurchases in the thirdsecond quarter of 2019. In the nine months ended September 30, 2020 we repurchasedand repurchases of approximately 3.3 million shares at an average cost of $90.10, for a total of $300.2 million, compared to repurchases of approximately 0.6 million shares at an average cost of $84.33$90.09 per share, for a total of $50.0$300.0 million in the same period in 2019.six months ended June 30, 2020.
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Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss included the following:
| | | | | | | | | | | | | | | | |
| | | | Pension and | | Accumulated | | | | Pension and | | Accumulated | ||||
| Foreign Currency | | Postretirement | | Other | Foreign Currency | | Postretirement | | Other | ||||||
| Translation | | Benefit Adjustments, | | Comprehensive | Translation | | Benefit Adjustments, | | Comprehensive | ||||||
| Loss |
| Net of Tax |
| (Loss) Income | (Loss) Gain |
| Net of Tax |
| (Loss) Income | ||||||
| | | | (in millions) | | | | | | | (in millions) | | | | ||
Balance as of January 1, 2020 | $ | (64.4) | | $ | (40.7) | | $ | (105.1) | ||||||||
Balance as of January 1, 2021 | $ | (52.7) | | $ | (25.2) | | $ | (77.9) | ||||||||
Current-period change | | (11.2) | | | 19.5 | | | 8.3 | | 3.3 | | | — | | | 3.3 |
Balance as of September 30, 2020 | $ | (75.6) | | $ | (21.2) | | $ | (96.8) | ||||||||
Balance as of June 30, 2021 | $ | (49.4) | | $ | (25.2) | | $ | (74.6) |
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Foreign currency translation adjustments have not been adjusted for income taxes. Pension and postretirement benefit adjustments are net of taxes of $4.5 million and $7.9$5.8 million as of SeptemberJune 30, 20202021 and December 31, 2019, respectively. Income2020. The income tax effects relating to our pension and postretirement benefit adjustments are released from accumulated other comprehensive loss as defined benefit plan and supplemental executive retirement plan obligations are settled.
Noncontrolling Interest Transaction
On March 31, 2020, through our wholly owned subsidiary, Feralloy Corporation, we purchased the remaining 49% noncontrolling interest of Feralloy Processing Company (“FPC”), a toll processor in Portage, Indiana. The increasereflected in our ownership from 51% to 100% was accounted forincome tax provision in future periods as an equity transaction. The difference between the $8.0 million consideration paid forpension and postretirement benefit adjustments are amortized over service periods and reflected in the noncontrolling interest with a carrying amountamortization of $1.1 million wasnet loss component of our net periodic benefit cost or are otherwise released and recognized as a decrease in total Reliance stockholders’ equity.settlement loss as a result of a plan termination.
Note 11.10. Commitments and Contingencies
Environmental Contingencies
We are currently involved with an environmental remediation project related to activities at former manufacturing operations of Earle M. Jorgensen Company (“EMJ”), our wholly owned subsidiary, that were sold many years prior to our acquisition of EMJ in 2006. Although the potential cleanup costs could be significant, EMJ maintained insurance policies during the time it owned the manufacturing operations that have covered costs incurred to date and are expected to continue to cover the majority of the related costs. We do not expect that this obligation will have a material adverse impact on our consolidated financial position, results of operations or cash flows.
Legal Matters
From time to time, we are named as a defendant in legal actions. Generally, theseThese actions generally arise in the ordinary course of business. We are not currently a party to any pending legal proceedings other than routine litigation incidental to the business. We maintain general liability insurance against risks arising in the ordinary course of business. We expect that these matters will be resolved without having a material adverse impact on our consolidated financial position, results of operations or cash flows. We maintain general liability insurance against risks arising in the ordinary course of business.
COVID-19 Risks and Uncertainties
In March 2020, the World Health Organization declared the outbreak of the novel strain of coronavirus ("COVID-19") aThe global pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has had, and we expect will continue to have, an adverse effect on ourfinancial position and operating results due to numerous uncertainties. The duration and severity of the outbreak and its long-termassociated countermeasures implemented by governments around the world, as well as increased business uncertainty and economic contraction, had an adverse impact on our financial results during 2020. We took a variety of actions during 2020 to help mitigate the financial impact, including rightsizing our inventory, reducing our workforce and furloughing employees. Activity in many of the end markets we serve sequentially improved as 2020 progressed, and this trend continued in the six months ended June 30, 2021, although the long-term impact of COVID-19 on our business areis uncertain at this time. The impacts of the COVID-19 pandemic increase uncertainty. Accordingly, our estimates and judgments may be subject to greater volatility than in the past.
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Note 12.11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended | ||||||||||||||||
| September 30, | | September 30, | June 30, | | June 30, | ||||||||||||||||
| 2020 |
| 2019 | | 2020 | | 2019 | 2021 |
| 2020 | | 2021 | | 2020 | ||||||||
| (in millions, except number of shares which are reflected in thousands and per share amounts) | (in millions, except number of shares which are reflected in thousands and per share amounts) | ||||||||||||||||||||
Numerator: | | |
| | |
| | |
| | | | |
| | |
| | |
| | |
Net income attributable to Reliance | $ | 97.6 |
| $ | 162.7 |
| $ | 239.5 |
| $ | 535.9 | $ | 329.1 |
| $ | 80.2 |
| $ | 596.0 |
| $ | 141.9 |
Denominator: | | |
| | |
| | |
| | | | |
| | |
| | |
| | |
Weighted average shares outstanding | | 63,758 |
| | 66,656 |
| | 64,578 |
| | 66,941 | | 63,663 |
| | 63,647 |
| | 63,654 |
| | 64,992 |
Dilutive effect of stock-based awards | | 930 |
| | 1,048 |
| | 925 |
| | 927 | | 1,130 |
| | 935 |
| | 1,098 |
| | 923 |
Weighted average diluted shares outstanding | | 64,688 |
| | 67,704 |
| | 65,503 |
| | 67,868 | | 64,793 |
| | 64,582 |
| | 64,752 |
| | 65,915 |
| | | | | | | | | | | | | | | | | | | | | | |
Earnings per share attributable to Reliance stockholders: | | | | | | | | | | | | | | | | | | | | | | |
Diluted | $ | 1.51 | | $ | 2.40 | | $ | 3.66 | | $ | 7.90 | $ | 5.08 | | $ | 1.24 | | $ | 9.20 | | $ | 2.15 |
Basic | $ | 1.53 | | $ | 2.44 | | $ | 3.71 | | $ | 8.01 | $ | 5.17 | | $ | 1.26 | | $ | 9.36 | | $ | 2.18 |
Potentially dilutive securities were not significant for the thirdsecond quarters of 20202021 and 2019.2020. The computations of earnings per share for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 do not include 244,006230,186 and 234,429358,082 weighted average shares, respectively, in respect of RSUs, because their inclusion would have been anti-dilutive.
Note 13.12. Impairment and Restructuring Charges
Our impairment and restructuring charges consisted of the following:
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | ||||||||
| June 30, | | June 30, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| (in millions) | ||||||||||
Intangible assets, net | $ | — | | $ | 0.2 | | $ | — | | $ | 89.0 |
Property, plant and equipment | | — | | | — | | | — | | | 8.7 |
Operating lease right-of-use assets | | — | | | — | | | — | | | 0.2 |
Total impairment charges | | — | | | 0.2 | | | — | | | 97.9 |
Restructuring––cost of sales | | — | | | — | | | — | | | 39.8 |
Restructuring––SG&A | | — | | | 5.4 | | | 0.1 | | | 5.4 |
Total impairment and restructuring charges | $ | — | | $ | 5.6 | | $ | 0.1 | | $ | 143.1 |
We recorded impairment and restructuring charges of $157.7$143.1 million in the ninesix months ended SeptemberJune 30, 2020 which wasthat were mainly comprised of a $137.5 million impairment and restructuring charge recognized during the first quarter of 2020 due to our reduced long-term outlook for our businesses serving the energy (oil and natural gas) market and charges at certain of our other businesses for which our outlook hashad turned negative based on the continued impacts from COVID-19.
The Our first quarter of 2020 impairment and restructuring charges consisted of the following:
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | ||||||||
| September 30, | | September 30, | ||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| (in millions) | ||||||||||
Intangible assets, net | $ | 9.5 | | $ | — | | $ | 98.5 | | $ | — |
Property, plant and equipment | | 0.5 | | | — | | | 9.2 | | | 1.2 |
Operating lease right-of-use assets | | — | | | — | | | 0.2 | | | — |
Total impairment charges | | 10.0 | | | — | | | 107.9 | | | 1.2 |
Restructuring––cost of sales | | (0.2) | | | — | | | 39.6 | | | — |
Restructuring––warehouse, delivery, selling, general and administrative expense | | 4.8 | | | — | | | 10.2 | | | — |
Total impairment and restructuring charges | $ | 14.6 | | $ | — | | $ | 157.7 | | $ | 1.2 |
The 2020charge also included a property, plant and equipment impairment charge and restructuring – cost of sales charges relatean inventory provision related to the closure of certain locations where we anticipated losses on the disposition of certain real property, machinery and equipment and inventories.
The measurement of the intangible assets at fair value in the second quarter of 2020 was determined using discounted cash flow techniques. The use of discounted cash flow models requires significant judgment and requires the use of inputs by management that are unobservable, including revenue forecasts, discount rates and long-term growth rates. Unobservable inputs are inputs that reflectreflected the Company’s expectations of the assumptions market participants would use in pricing the eventual recovery of the oil and natural gas and aerospace industries based on the best information available in the circumstances.circumstances at that time.
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RELIANCE STEEL & ALUMINUM CO.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains certain statements that are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our forward-looking statements may include, but are not limited to, discussions of our industry ourand end markets, our business strategies and our expectations concerning future demand and our results of operations, margins, profitability, impairment and restructuring charges, taxes, liquidity, litigation matters and capital resources. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “preliminary,” “range,” “intend” and “continue,” the negative of these terms, and similar expressions. All statements contained in this report, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date of such statements.
Forward-looking statements involve known and unknown risks and uncertainties and are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in theseour forward-looking statements as a result of various important factors, including, but not limited to, actions taken by us, including restructuring or cash-preservation initiatives, as well as developments beyond our control, including, but not limited to, the impact of the COVID-19 pandemic and changes in worldwide and U.S. economic conditions that materially impact our customers and the demand for our products and services. The extent to which the COVID-19 pandemic will continue to negatively impact our operations will depend on future developments which are highly uncertain and cannot be predicted, including the duration of the outbreak, new information which may emerge concerning the severity or duration of the COVID-19 pandemic, the actions taken to control the spread of COVID-19 or treat its impact, and changes in worldwide and U.S. economic conditions. Further deteriorations in economic conditions, as a result of COVID-19 or otherwise, could lead to a further or prolonged decline in demand for our products and services and negatively impact our business, and may also impact financial markets and corporate credit markets which could adversely impact our access to financing, or the terms of any financing. We cannot at this time predict the extent of the impact of the COVID-19 pandemic and resulting economic impact, but it could have a material adverse effect on our business, financial position, results of operations and cash flows. Other factors which could cause actual results to differ materially from our forward-looking statements include those disclosed in this report and in other reports we have filed with the United States Securities and Exchange Commission (the “SEC”). Important risks and uncertainties about our business can be found elsewhere in this Quarterly Report on Form 10-Q, including in Item 1A “Risk Factors,” and in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the SEC as updated in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 and in other documents Reliance files or furnishes with the SEC. As a result, these
The statements contained in this quarterly report on Form 10-Q speak only as of the date that they were made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. Except as required by law, we disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein to reflect any change in assumptions, beliefs, or expectations or any change in events, conditions, or circumstances upon which any such forward-looking statements are based. You should review any additional disclosures we make in ourany subsequent press releases and Forms 10-K, 10-Q and 8-K filed with or furnished to the SEC.
Overview
OurWe generated record financial resultsperformance in the thirdsecond quarter of 2020 continued to demonstrate the strength2021, including, generating sequential record quarterly gross profit, pretax income and resiliency of ourearnings per share. Our resilient business model, despite the challenging economic circumstances experiencedcoupled with outstanding execution during the period.a period of rising metals prices that achieved record levels, once again resulted in record profitability.
Certain key results for the second quarter and six months ended June 30, 2021 included the following:
● | Record net sales of $3.42 billion in the second quarter of 2021 were up 69.3% from $2.02 billion in the second quarter of 2020. Record net sales of $6.26 billion in the six months ended June 30, 2021 were up 36.3% from $4.59 billion in the six months ended June 30, 2020. |
● | Sequential record quarterly gross profit of $1.08 billion in the second quarter of 2021 increased 76.1% compared to the second quarter in 2020 due to our record sales and strong gross profit margin of 31.7%, which increased 130 basis points from the second quarter of 2020. Gross profit of $2.04 billion in the six months ended June 30, 2021, increased 41.9%, and gross profit margin of 32.5% improved 120 basis points from the same period in 2020, as adjusted for a $39.8 million inventory provision in the 2020 six-month period related to our planned closure of certain energy-related operations. |
● | Sequential record quarterly pretax income of $444.1 million and sequential record quarterly pretax income margin of 13.0% in the second quarter of 2021 increased 335.4% and 790 basis points, respectively, from the |
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Certain key financial results for the third quarter and nine months ended September 30, 2020 included the following (dollars are shown in millions):
second quarter of 2020. Pretax income of $803.1 million and pretax income margin of 12.8% in the six months ended June 30, 2021 increased 144.7% and 570 basis points, respectively, compared to the same period in 2020, as adjusted for $143.1 million of impairment and restructuring charges in the 2020 six-month period. |
● |
● |
Our record quarterly net sales were lower in the thirdsecond quarter of 2021 were the result of a 17.5% increase in tons sold and a record average selling price per ton sold that increased 43.8% compared to the second quarter in 2020; however our second quarter of 2021 tons sold were below our second quarter of 2019 tons sold (pre-pandemic quarterly tons sold). Our net sales for the six months ended June 30, 2021 increased due to a 29.5% increase in our average selling price and a 5.7% increase in our tons sold compared to the same period in 2020, which was adversely impacted by COVID-19.
We experienced healthy and improving demand in most end markets we serve in the second quarter of 2021 compared to the second quarter of 2020; however our tons sold were 5.6% below second quarter of 2019 tons sold (pre-pandemic quarterly tons sold), excluding the impact of our 2019 acquisition, for which approximately 2.9% of the decline was due to decreases in tons sold to the commercial aerospace and energy end markets.
Demand in most end markets we serve in the second quarter of 2021 improved from the first quarter of 2021. However, the commercial aerospace market re-commenced its decline in the second quarter of 2021, reversing the positive signs of improving demand we experienced in the first quarter of 2021 mainly as a result of additional COVID-19-related shutdowns in Europe. We believe our tons sold in the second quarter of 2021 to most of the end markets we serve were limited by factors that constrained economic activity such as metal supply constraints, labor shortages and other supply chain disruptions. We also believe our toll processing volumes, while at strong levels during the second quarter of 2021, were somewhat limited by the impact of semiconductor shortages on certain of our automotive customers’ production schedules.
Our record profitability in the second quarter and ninesix months ended SeptemberJune 30, 2021 was driven by strong gross profit margins, despite significant LIFO charges and effective expense control. In the second quarter of 2021, our gross profit margin increased 130 basis points from the second quarter in 2020 and our six month gross profit margin increased 120 basis points from the same period in 2020, as adjusted for a $39.8 million nonrecurring charge in the 2020 six-month period, despite significant LIFO charges of $200.0 million and $300.0 million in the second quarter and six months ended June 30, 2021 compared to less significant credits of $5.0 million and $25.0 million, respectively, in the same periods in 2020. Our SG&A expenses for the second quarter and six months ended June 30, 2021 increased $124.8 million, or 28.5%, and $120.6 million, or 12.5%, respectively, over the same periods in 2020. The increases in our SG&A expense were consistent with higher incentive-based compensation related to our record profitability, and higher shipments in the 2021 periods compared to the same periods in 2019 due to lower tons sold and lower average selling prices per ton sold as a result of2020, which were adversely impacted by the impacts of COVID-19 on nearly all of the end markets we serve.pandemic.
We experienced improving demand in nearly allOur business model enables us to increase our average selling price and gross profit margin during operating environments that include rising prices and low levels of the end marketsmetal inventories and availability. Consequently, we serve in the third quarter of 2020 comparedwere able to the second quarter of 2020 as the economy continued to slowly reopen following COVID-19-related shutdowns and project delays.
Demand for the toll processing services we provide to the automotive market rebounded significantly with our toll processing volumes increasing 81.5% in the third quarter of 2020 from the lows experienced in the second quarter of 2020, as many automotive original equipment manufacturers (“OEMs”) and steel and aluminum mills supplying the automotive industry re-opened following COVID-19-related shutdowns. Despite normal seasonal customer shutdowns and vacation schedules in the third quarter of 2020, we saw improved demand levels in most of our other end markets, with the most notable strength in non-residential construction, our largest end market, during the third quarter of 2020 as compared to the second quarter of 2020 as the economy continued to slowly re-open following COVID-19-related shutdowns and project delays. However, the commercial aerospace market, which represents about half of our aerospace end market exposure, declined further in the third quarter of 2020 compared to the second quarter of 2020 as reduced air travel persisted and commercial airplane build rates remained at low levels. Demand in the other segments of the aerospace market we serve, which include military, defense and space, remained strong. As a result of the continuing decline in commercial airplane build rates that informed our negative outlook for certain of our businesses that serve the commercial aerospace market, we closed some facilities, further reduced our workforce, and recorded impairment and restructuring charges in the third quarter of 2020.
Ourgenerate strong gross profit margins in the thirdsecond quarter and ninesix months ended SeptemberJune 30, 2020 were supported by our investments2021 during which we observed ongoing strength in value-added processing equipment during the past several years and the outstanding performance by our managers in the field who, despite the challenging circumstances, continued to maintainmetals pricing discipline by focusing on specialtywith historically high levels for carbon steel products and higher margin orders.
16
In the third quarter of 2020, we strengthened our liquidity position and extended our debt maturity profile through a $900.0 million senior notes offering and amendment and restatement(58% of our $1.5 billion credit agreement. We used a portionfirst half of the proceeds from the notes offering to repay all outstanding borrowings under2021 gross sales dollars) and stainless steel products (15% of our revolving credit facility and term loan. Asfirst half of September 30, 2020, we had no outstanding borrowings on our credit agreement and a net debt-to-total capital ratio of 17.3%, down significantly from 21.4% as of December 31, 2019, and significantly below our historical range of 30% to 40%.
Our same-store SG&A expense in the third quarter and nine months ended September 30, 2020 declined $74.0 million, or 14.3%, and $186.5 million, or 11.8%, respectively, from the same periods in 2019 mainly2021 gross sales dollars) due to our temporarysolid demand, increased input costs and permanent workforce reduction actions in response to lower demand levels and decreases in incentive compensation attributable to COVID-19. Our same-store SG&A expenses as a percentage of sales during the 2020 periods increased from the 2019 periods due to our lower sales levels.limited metal supply.
During the thirdsecond quarter ofand six months ended June 30, 2020, we recorded impairment and restructuring charges of $14.6$5.6 million and $143.1 million, respectively, mainly related to continued COVID-19 downsizing at certain of our businesses, ourpermanent headcount reductions, location closures and revised negative long-term outlook for certain businesses serving the commercial aerospace marketenergy-related (oil and planned facility closures.gas) businesses. See Note 13 — “Impairment12—“Impairment and Restructuring Charges”Charges” of our Unaudited Consolidated Financial Statements for further information on our 2020 impairment and restructuring charges.
In the third quarter15
We generated strong cash flow from operations duringin the first ninesecond quarter and six months ended June 30, 2021 of 2020 of $942.8$101.6 million which was slightly less than the $954.1and $263.4 million, we generatedrespectively, compared to $475.7 million and $646.5 million, respectively, in the same period of the prior year, and free cash flow (cash flowperiods in 2020, despite significant investments in working capital resulting from operations less capital expenditures of $134.7 million) of $808.1 million that increased $36.8 million, or 4.8%, from $771.3 million in first nine months of 2019. We also remain committed to concurrently making investments that support the long-term growth and sustainability of our company as well as continuing to provide returns to our stockholders. We believe our sources of liquidity and access to capital markets will continue to be adequate for the foreseeable future to maintain operations, finance strategic growth initiatives, pay dividends, and execute opportunistic purchases under our share repurchase program. significantly higher metals prices.
We believe our strong liquidity position that includes significant cash on hand, strong cash flow generation, an extended long-term debt maturity profile and substantially all borrowing availability on our $1.5 billion revolving credit facility will support our prudent use of capital as we maintain a flexible approach focused on growth, both through acquisitions and organically, and stockholder return activities.
We experienced the initial adverse impacts to our operations from COVID-19 during the final weeks of the first quarter of 2020. While our results of operations and customer demand in most of our end markets have returned or exceeded levels of that period, we will continue to evaluate the nature and extent of future impacts of COVID-19 on our business, but givenbusiness. Given the dynamic nature of these unprecedentedCOVID-19 and the related circumstances, including any potential resurgences of the virus or its variants or the failure to contain the spread of the pandemic by governments, we cannot reasonably estimate the full impact of the COVID-19 pandemic on our ongoing business, results of operations, and overall financial performance.
We believe that our industry-leading results are due to our unique business model and strong operational execution of our strategies. We believe our business model characteristics including, broad end market exposure, a wide geographical footprint, diverse product offerings with significant value-added processing capabilities, and focus on small order sizes and when-needed delivery and significant value-added processing capabilities along withdifferentiate us from our wide geographic footprint will enable us to persevere during these difficult and uncertain times.industry peers. We believe that these unique business model characteristics combined withand strong operational execution of our strategies that include pricing discipline, and our strategy of concentrating on higher margin business differentiate us fromand cross selling inventory among our industry peers and will allowoperating locations enabled us to continue achieving industry-leading results.
For more information, please see Item 1A “Risk Factors”persevere during the pandemic in this Quarterly Report on Form 10-Q.
Acquisitions
2020 Acquisition
On March 31, 2020, Feralloy Corporation (our wholly-owned subsidiary), purchasedand were the remaining 49% noncontrolling interestcornerstone of our sequential record quarterly financial results in Feralloy Processing Company (“FPC”), a toll processor in Portage, Indiana, that increased Feralloy Corporation’s ownership in FPC from 51% to 100%. We have consolidated the resultsfirst and second quarters of FPC since August 1, 2008, when we acquired PNA Group Holding Corporation and its subsidiaries. The difference between the $8.0 million consideration paid for the noncontrolling interest with a carrying amount of $1.1 million was recognized as a decrease in total Reliance stockholders’ equity.2021.
1716
We funded our 2020 acquisition of FPC with borrowings on our revolving credit facility and cash on hand.
2019 Acquisition
On December 31, 2019, we acquired Fry Steel Company (“Fry Steel”). Fry Steel is a general line and long bar distributor located in Santa Fe Springs, California. Fry Steel performs cutting services on its diverse product assortment and provides “in-stock” next day delivery of its products. Sales of Fry Steel were $60.9 million in the nine months ended September 30, 2020.
We funded our 2019 acquisition of Fry Steel with borrowings on our revolving credit facility and cash on hand.
Results of Operations
The following table sets forth certain income statement data for the three-monthsecond quarter and nine-month periodssix months ended SeptemberJune 30, 20202021 and 20192020 (dollars are shown in millions and certain amounts may not calculate due to rounding):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | Nine Months Ended September 30, | | ||||||||||||||||||
| 2020 | | | 2019 | | | 2020 | | | 2019 | | ||||||||||||
| | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | |
| $ |
| Net Sales | |
| $ |
| Net Sales | |
| $ |
| Net Sales |
|
| $ |
| Net Sales | | ||||
Net sales | $ | 2,085.6 | | 100.0 | % | | $ | 2,685.9 | | 100.0 | % | | $ | 6,677.8 | | 100.0 | % | | $ | 8,526.0 | | 100.0 | % |
Cost of sales (exclusive of depreciation and amortization expenses shown below)(1) | | 1,409.5 | | 67.6 | | | | 1,871.2 | | 69.7 | | | | 4,606.3 | | 69.0 | | | | 5,990.8 | | 70.3 | |
Gross profit(2) | | 676.1 | | 32.4 | | | | 814.7 | | 30.3 | | | | 2,071.5 | | 31.0 | | | | 2,535.2 | | 29.7 | |
Warehouse, delivery, selling, general and administrative expense ("SG&A") | | 449.2 | | 21.5 | | | | 518.7 | | 19.3 | | | | 1,410.4 | | 21.1 | | | | 1,582.2 | | 18.6 | |
Depreciation expense | | 47.0 | | 2.3 | | | | 44.0 | | 1.6 | | | | 140.5 | | 2.1 | | | | 130.9 | | 1.5 | |
Amortization expense | | 9.4 | | 0.5 | | | | 10.8 | | 0.4 | | | | 30.3 | | 0.5 | | | | 32.3 | | 0.4 | |
Impairment of long-lived assets | | 10.0 | | 0.5 | | | | — | | — | | | | 107.9 | | 1.6 | | | | 1.2 | | — | |
Operating income | $ | 160.5 | | 7.7 | % | | $ | 241.2 | | 9.0 | % | | $ | 382.4 | | 5.7 | % | | $ | 788.6 | | 9.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | | ||||||||||||||||||
| 2021 | | | 2020 | | | 2021 | | | 2020 | | ||||||||||||
| | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | |
| $ |
| Net Sales | |
| $ |
| Net Sales | |
| $ |
| Net Sales |
|
| $ |
| Net Sales | | ||||
Net sales | $ | 3,418.8 | | 100.0 | % | | $ | 2,019.3 | | 100.0 | % | | $ | 6,257.2 | | 100.0 | % | | $ | 4,592.2 | | 100.0 | % |
Cost of sales (exclusive of depreciation and amortization expenses shown below)(1) | | 2,336.6 | | 68.3 | | | | 1,404.6 | | 69.6 | | | | 4,221.3 | | 67.5 | | | | 3,196.8 | | 69.6 | |
Gross profit(2) | | 1,082.2 | | 31.7 | | | | 614.7 | | 30.4 | | | | 2,035.9 | | 32.5 | | | | 1,395.4 | | 30.4 | |
Warehouse, delivery, selling, general and administrative expense ("SG&A") | | 563.3 | | 16.5 | | | | 438.5 | | 21.7 | | | | 1,081.8 | | 17.3 | | | | 961.2 | | 20.9 | |
Depreciation expense | | 49.3 | | 1.4 | | | | 47.3 | | 2.3 | | | | 97.0 | | 1.6 | | | | 93.5 | | 2.0 | |
Amortization expense | | 9.2 | | 0.3 | | | | 10.1 | | 0.5 | | | | 18.4 | | 0.3 | | | | 20.9 | | 0.5 | |
Impairment of long-lived assets | | — | | — | | | | 0.2 | | — | | | | — | | — | | | | 97.9 | | 2.1 | |
Operating income | $ | 460.4 | | 13.5 | % | | $ | 118.6 | | 5.9 | % | | $ | 838.7 | | 13.4 | % | | $ | 221.9 | | 4.8 | % |
(1) | Cost of sales in the |
(2) | Gross profit, calculated as net sales less cost of sales, and gross profit margin, calculated as gross profit divided by net sales, are non-GAAP financial measures as they exclude depreciation and amortization expenses associated with the corresponding sales. About half of our orders are basic distribution with no processing services performed. For the remainder of our sales orders, we perform “first-stage” processing, which is generally not labor intensive as we are simply cutting the metal to size. Because of this, the amount of related labor and overhead, including depreciation and amortization, is not significant and is excluded from our cost of sales. Therefore, our cost of sales is substantially comprised of the cost of the material we sell. We use gross profit and gross profit margin as shown above as measures of operating performance. Gross profit and gross profit margin are important operating and financial measures, as their fluctuations can have a significant impact on our earnings. Gross profit and gross profit margin, as presented, are not necessarily comparable with similarly titled measures for other companies. |
Second Quarter and Six Months Ended June 30, 2021 Compared to Second Quarter and Six Months Ended June 30, 2020
Net Sales
| | | | | | | | | | | |
| | | | | | | | ||||
| June 30, | | Dollar | | Percentage | | |||||
| 2021 |
| 2020 | | Change | | Change | | |||
| (in millions) | | | | | | | ||||
Net sales (three months ended) | $ | 3,418.8 | | $ | 2,019.3 | | $ | 1,399.5 |
| 69.3 | % |
Net sales (six months ended) | $ | 6,257.2 | | $ | 4,592.2 | | $ | 1,665.0 |
| 36.3 | % |
| | | | | | | | | | | |
| June 30, | | | | Percentage | | |||||
| 2021 |
| 2020 | | Change | | Change | | |||
| (tons in thousands) | | | | | | | ||||
Tons sold (three months ended) |
| 1,424.0 |
| | 1,211.8 | | | 212.2 |
| 17.5 | % |
Tons sold (six months ended) |
| 2,833.7 |
| | 2,680.6 |
| | 153.1 |
| 5.7 | % |
Average selling price per ton sold (three months ended) | $ | 2,418 |
| $ | 1,681 |
| $ | 737 |
| 43.8 | % |
Average selling price per ton sold (six months ended) | $ | 2,220 |
| $ | 1,714 |
| $ | 506 |
| 29.5 | % |
1817
Third Quarter and Nine Months Ended September 30, 2020 Compared to Third Quarter and Nine Months Ended September 30, 2019
Net Sales
| | | | | | | | | | | |
| September 30, | | Dollar | | Percentage | | |||||
| 2020 |
| 2019 | | Change | | Change | | |||
| (dollars in millions) | | | | | | | ||||
Net sales (three months ended) | $ | 2,085.6 | | $ | 2,685.9 | | $ | (600.3) |
| (22.4) | % |
Net sales (nine months ended) | $ | 6,677.8 |
| $ | 8,526.0 | | $ | (1,848.2) |
| (21.7) | % |
Net sales, same-store (three months ended) | $ | 2,068.4 | | $ | 2,685.9 | | $ | (617.5) |
| (23.0) | % |
Net sales, same-store (nine months ended) | $ | 6,616.8 |
| $ | 8,526.0 | | $ | (1,909.2) | | (22.4) | % |
| | | | | | | | | | | |
| September 30, | | Tons | | Percentage | | |||||
| 2020 |
| 2019 | | Change | | Change | | |||
| (tons in thousands) | | | | | | | ||||
Tons sold (three months ended) |
| 1,283.5 |
| | 1,476.6 | | | (193.1) |
| (13.1) | % |
Tons sold (nine months ended) |
| 3,964.1 |
| | 4,485.9 |
| | (521.8) |
| (11.6) | % |
Tons sold, same-store (three months ended) |
| 1,282.2 | | | 1,476.6 | | | (194.4) |
| (13.2) | % |
Tons sold, same-store (nine months ended) |
| 3,959.6 |
| | 4,485.9 |
| | (526.3) |
| (11.7) | % |
| | | | | | | | | | | |
| September 30, |
| Price |
| Percentage | | |||||
| 2020 |
| 2019 |
| Change |
| Change | | |||
Average selling price per ton sold (three months ended) | $ | 1,609 |
| $ | 1,807 |
| $ | (198) |
| (11.0) | % |
Average selling price per ton sold (nine months ended) | $ | 1,680 |
| $ | 1,890 |
| $ | (210) |
| (11.1) | % |
Average selling price per ton sold, same-store (three months ended) | $ | 1,597 |
| $ | 1,807 |
| $ | (210) |
| (11.6) | % |
Average selling price per ton sold, same-store (nine months ended) | $ | 1,667 |
| $ | 1,890 |
| $ | (223) |
| (11.8) | % |
Same-store amounts exclude the results of our 2019 acquisition.
TonsOur tons sold exclude the volumes processed by our toll processing volumes atoperations. Our average selling price per ton sold includes insignificant intercompany transactions that are eliminated from our tolling operations.consolidated net sales.
Our net sales were lowerhigher in the thirdsecond quarter and ninesix months ended SeptemberJune 30, 20202021 compared to the same periods in 20192020 due to lower tons sold and lowerrecord average selling prices per ton sold.
Our same-storesold and higher tons sold decreased 13.2% and 11.7%sold. Demand was healthy in most of the third quarter and nine months ended September 30, 2020, respectively, compared to the same periods in 2019, despite one additional shipping day in the 2020 nine-month period, due to the significant decline in demand for the productsend markets we sell as a result of COVID-19.
Demand in the automotive end market (which we serve primarily through our toll processing operations in the U.S. and Mexico) rebounded significantly in the third quarter of 2020 as automotive OEMs and steel and aluminum mills continued to increase production following COVID-19-related shutdownsserved in the second quarter of 2020. Demand2021. However, we believe our tons sold in non-residential construction (including infrastructure), our largest end market served, continued to grow slowly in the third quarter of 2020 due to new projects and continuation of projects that had been previously put on hold. In the aerospace end market, demand in the military, defense and space portions of the market remained strong; however commercial aerospace demand continued to decline as a direct result of reduced air travel due to COVID-19. Demand in heavy industry for both agricultural and construction equipment were at levels consistent with the second quarter of 2020 and production schedules in some areas have steadily increased following customer re-openings from COVID-19-related shutdowns. Demand for the products we sell to the energy (oilsix months ended June 30, 2021 were limited by factors that constrained economic activity such as metal supply constraints, labor shortages and natural gas) end market remained under considerable pressure during the third quarter of 2020. During the third quarter of 2020, our tons sold increased 5.9% compared to the second quarter of 2020. However, our third quarter of 2020 same-store tons sold were still down 12.6% and 13.2% compared to pre-pandemic levels in the first quarter of 2020 and the third quarter of 2019, respectively. Our tons sold are expected to decline in the fourth quarter of 2020 compared to the third quarter of 2020 due to normal seasonal factors, including fewer shipping days; however, based on current trends, we expect overall demand in the fourth quarter of 2020 to slowly improve. other supply chain disruptions.
19
Since we primarily purchase and sell our inventories in the “spot” market, the changes in our average selling prices generally fluctuate in accordance with the changes in the costs of the various metals we purchase. The mix of products sold can also have an impact on our average selling prices.
Our same-store average selling priceprices per ton sold declinedincreased significantly in the thirdsecond quarter and ninesix months ended SeptemberJune 30, 20202021 compared to the same periods in 2019,2020, mainly due to several announced mill price decreases on many of theincreases for carbon and stainless steel products we sell. In addition, the decline in our same-store average selling price per ton sold in third quarter of 2020 compared to the third quarter of 2019 was due to shifts in our product mix with sales of higher-priced products to the commercial aerospace market representing a smaller percentage of our tons sold in the third quarter of 2020 compared to the third quarter of 2019. Our same-store average selling price per ton sold has declined sequentially for the past eight quarters.2021. As carbon steel sales representrepresented approximately 51%58% of our gross sales dollars,during the six months ended June 30, 2021, changes in carbon steel prices have the most significant impact on changes in our overall average selling price per ton sold.
Our major commodity selling prices changed year-over-year as follows:
| | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||
| | September 30 | | September 30 | | ||||
| | | Same-store | | | Same-store | | ||
| | Average Selling | | Average Selling | | Average Selling | | Average Selling | |
|
| Price per Ton Sold |
| Price per Ton Sold | | Price per Ton Sold | | Price per Ton Sold | |
| | (percentage change) | | (percentage change) | | ||||
Carbon steel | | (11.3) | % | (11.3) | % | (14.1) | % | (14.1) | % |
Aluminum | | (10.5) | % | (10.5) | % | (8.6) | % | (8.6) | % |
Stainless steel | | (2.3) | % | (4.1) | % | (2.4) | % | (4.4) | % |
Alloy | | (3.3) | % | (8.0) | % | (1.4) | % | (5.8) | % |
| | | | | | |
| | Average Selling Price per Ton Sold | | |||
| | Three Months Ended | | | Six Months Ended | |
| | June 30 | |
| June 30 | |
| | (percentage change) | ||||
Carbon steel | | 66.8 | % | | 48.2 | % |
Stainless steel | | 32.8 | % | | 21.0 | % |
Aluminum | | 10.2 | % | | 4.3 | % |
Alloy | | 10.9 | % | | 7.6 | % |
Cost of Sales
| | | | | | | | | | | | | | | | | |
| September 30, | | | | | | | | |||||||||
| 2020 | | | 2019 | | | | | | | | ||||||
| | |
| % of | | | | | | % of | | | Dollar | | Percentage | | |
| $ |
| Net Sales |
| | $ |
| Net Sales |
| | Change |
| Change | | |||
| (dollars in millions) |
| | | | | | ||||||||||
Cost of sales (three months ended) | $ | 1,409.5 |
| 67.6 | % |
| $ | 1,871.2 | | 69.7 | % |
| $ | (461.7) | | (24.7) | % |
Cost of sales (nine months ended) | $ | 4,606.3 | | 69.0 | % |
| $ | 5,990.8 | | 70.3 | % |
| $ | (1,384.5) | | (23.1) | % |
| | | | | | | | | | | | | | | | | |
| June 30, | | | | | | | | |||||||||
| 2021 | | | 2020 | | | | | | | | ||||||
| | |
| % of | | | | | | % of | | | Dollar | | Percentage | | |
| $ |
| Net Sales |
| | $ |
| Net Sales |
| | Change |
| Change | | |||
| (dollars in millions) | |
| | | | | | |||||||||
Cost of sales (three months ended) | $ | 2,336.6 |
| 68.3 | % |
| $ | 1,404.6 | | 69.6 | % |
| $ | 932.0 | | 66.4 | % |
Cost of sales (six months ended) | $ | 4,221.3 | | 67.5 | % |
| $ | 3,196.8 | | 69.6 | % |
| $ | 1,024.5 | | 32.0 | % |
The decreasesincreases in cost of sales in the thirdsecond quarter and ninesix months ended SeptemberJune 30, 20202021 compared to the same periods in 2019 are2020 were mainly due to lower tons sold and lowerhigher average costs per ton sold and higher tons sold. See “Net Sales” above for trends in both demand and costs of our products.
Cost of sales included ($0.2)a $39.8 million and $39.6 million net inventory provisions relatingprovision related to the planned closure of certain energy-related operations in the third quarter and ninesix months ended SeptemberJune 30, 2020, respectively.2020. See Note 13 — “Impairment12—“Impairment and Restructuring Charges”Charges” of our Unaudited Consolidated Financial Statements for further information on our 2020 restructuring charges.
In addition, our last-in, first-out (“LIFO”) method inventory valuation reserve adjustment, which is included in cost of sales and, in effect, reflects cost of sales at current replacement costs, resulted in credits,charges, or income,expenses, of $12.5$200.0 million and $37.5$300.0 million in the thirdsecond quarter and ninesix months ended SeptemberJune 30, 2020,2021, respectively, compared to credits, or income, of $40.0$5.0 million and $75.0$25.0 million in the same periods in 2019,2020, respectively. At SeptemberJune 30, 2020,2021, our LIFO method inventory valuation reserve on our balance sheet was $100.1$415.6 million.
2018
Gross Profit
| | | | | | | | | | | | | | | | | |
| September 30, | | | | | | | | |||||||||
| 2020 | | | 2019 | | | | | | | | ||||||
| | |
| % of | | | | | | % of | | | Dollar | | Percentage | | |
| $ |
| Net Sales |
| | $ |
| Net Sales |
| | Change |
| Change | | |||
| (dollars in millions) |
| | | | | | ||||||||||
Gross profit (three months ended) | $ | 676.1 |
| 32.4 | % |
| $ | 814.7 |
| 30.3 | % |
| $ | (138.6) | | (17.0) | % |
Gross profit (nine months ended) | $ | 2,071.5 | | 31.0 | % |
| $ | 2,535.2 | | 29.7 | % |
| $ | (463.7) | | (18.3) | % |
| | | | | | | | | | | | | | | | | |
| June 30, | | | | | | | | |||||||||
| 2021 | | | 2020 | | | | | | | | ||||||
| | |
| % of | | | | | | % of | | | Dollar | | Percentage | | |
| $ |
| Net Sales |
| | $ |
| Net Sales |
| | Change |
| Change | | |||
| (dollars in millions) | |
| | | | | | |||||||||
Gross profit (three months ended) | $ | 1,082.2 |
| 31.7 | % |
| $ | 614.7 |
| 30.4 | % |
| $ | 467.5 | | 76.1 | % |
Gross profit (six months ended) | $ | 2,035.9 | | 32.5 | % |
| $ | 1,395.4 | | 30.4 | % |
| $ | 640.5 | | 45.9 | % |
OurWe generated record gross profits in the second quarter and six months ended June 30, 2021 as a result of strong net sales and improved gross profit margins. We were able to expand our strong gross profit margin continues to benefit from the increasesmargins in the percentagesecond quarter and six months ended June 30, 2021 compared to the same periods in 2020 due to rising metals pricing, supported by solid demand and limited metal availability, our significant investments to expand our value-added metal processing capabilities and the ability of our ordersmetals service center managers to appropriately price the value we provide to our customers. Throughout 2021, we experienced ongoing strength in metals pricing, led by several mill price increases for carbon steel products (58% of our first half of 2021 gross sales dollars), and stainless steel products (15% of our first half of 2021 gross sales dollars), along with improving demand that include value-added processing supportedallowed us to increase our selling prices before the higher metal costs were reflected in our average cost per ton sold.
Gross profit was reduced by our ongoing investments in processing equipment in recent years. The ($0.2)a $39.8 million and $39.6 million net inventory provisionsprovision in the third quarter and ninesix months ended SeptemberJune 30, 2020. Excluding the impact of the 2020 respectively, reducedinventory provision and our LIFO inventory valuation method inventory reserve adjustments in the comparable periods, our gross profit margin 0.6 percentagemargins improved 730 and 660 basis points in the nine-month period.second quarter and six months ended June 30, 2021, respectively, compared to the same periods in 2020. See “Net Sales” and “Cost of Sales” above for further discussion on product pricing trends and our LIFO inventory valuation reserve adjustments, respectively.
Expenses
| | | | | | | | | | | | | | | | | |
| September 30, | | | | | | | | |||||||||
| 2020 | | | 2019 | | | | | | | | ||||||
| | |
| % of | | | | | | % of | | | Dollar | | Percentage | | |
| $ |
| Net Sales |
| | $ |
| Net Sales |
| | Change |
| Change | | |||
| (dollars in millions) | | | | | | | ||||||||||
SG&A expense (three months ended) | $ | 449.2 | | 21.5 | % | | $ | 518.7 | | 19.3 | % |
| $ | (69.5) | | (13.4) | % |
SG&A expense (nine months ended) | $ | 1,410.4 | | 21.1 | % |
| $ | 1,582.2 | | 18.6 | % |
| $ | (171.8) | | (10.9) | % |
SG&A expense, same-store (three months ended) | $ | 444.7 | | 21.5 | % | | $ | 518.7 | | 19.3 | % | | $ | (74.0) | | (14.3) | % |
SG&A expense, same-store (nine months ended) | $ | 1,395.7 | | 21.1 | % |
| $ | 1,582.2 | | 18.6 | % |
| $ | (186.5) | | (11.8) | % |
Depreciation & amortization expense (three months ended) | $ | 56.4 | | 2.7 | % | | $ | 54.8 | | 2.0 | % | | $ | 1.6 | | 2.9 | % |
Depreciation & amortization expense (nine months ended) | $ | 170.8 | | 2.6 | % |
| $ | 163.2 | | 1.9 | % |
| $ | 7.6 | | 4.7 | % |
Impairment of long-lived assets (three months ended) | $ | 10.0 | | 0.5 | % | | $ | — | | — | % |
| $ | 10.0 | | * | |
Impairment of long-lived assets (nine months ended) | $ | 107.9 | | 1.6 | % | | $ | 1.2 | | — | % | | $ | 106.7 | | * | |
* Percentage data not meaningful.
Same-store amounts exclude the results of our 2019 acquisition.
| | | | | | | | | | | | | | | | | |
| June 30, | | | | | | | | |||||||||
| 2021 | | | 2020 | | | | | | | | ||||||
| | |
| % of | | | | | | % of | | | Dollar | | Percentage | | |
| $ |
| Net Sales |
| | $ |
| Net Sales |
| | Change |
| Change | | |||
| (dollars in millions) | | | | | | | | |||||||||
SG&A expense (three months ended) | $ | 563.3 | | 16.5 | % | | $ | 438.5 | | 21.7 | % |
| $ | 124.8 | | 28.5 | % |
SG&A expense (six months ended) | $ | 1,081.8 | | 17.3 | % |
| $ | 961.2 | | 20.9 | % |
| $ | 120.6 | | 12.5 | % |
Depreciation & amortization expense (three months ended) | $ | 58.5 | | 1.7 | % | | $ | 57.4 | | 2.8 | % | | $ | 1.1 | | 1.9 | % |
Depreciation & amortization expense (six months ended) | $ | 115.4 | | 1.8 | % |
| $ | 114.4 | | 2.5 | % |
| $ | 1.0 | | 0.9 | % |
Impairment of long-lived assets (three months ended) | $ | — | | — | % | | $ | 0.2 | | — | % |
| $ | (0.2) | | (100.0) | % |
Impairment of long-lived assets (six months ended) | $ | — | | — | % | | $ | 97.9 | | 2.1 | % | | $ | (97.9) | | (100.0) | % |
Our same-store SG&A expenses were lowerhigher in the thirdsecond quarter and ninesix months ended SeptemberJune 30, 20202021 compared to the same periods in 20192020 mainly due to decreasesincreases in incentive compensation relatedas a result of our record profitability, increased shipment levels and to lower profitability levels, lower employee-related expenses due to temporary and permanent workforce reductions in response to lower activity levels due to COVID-19 and decreasesa lesser extent inflationary increases in certain warehouse and delivery expenses that were lower due to our lower tons sold that offset the impact of general inflation.including, fuel, trucking services and packaging costs. Our SG&A expensesexpense as a percentage of sales increaseddecreased in the 2020 periodssecond quarter and six months ended June 30, 2021 compared to the same periods in 20192020 mainly due to our lower sales levels.higher sales.
InDuring the ninesecond quarter and six months ended SeptemberJune 30, 2020, we recorded $67.8 million of impairment charges on our intangibles with indefinite lives and $30.7 million of impairment charges on our long-lived assets. See Note 13 — “Impairment and Restructuring Charges” of our Unaudited Consolidated Financial Statements for further information on our 2020 impairment charges.
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Operating Income
| | | | | | | | | | | | | | | | | |
| September 30, | | | | | | | | |||||||||
| 2020 | | | 2019 | | | | | | | | ||||||
| | | | % of | | | | | | % of | | | Dollar | | Percentage | | |
| $ |
| Net Sales |
| | $ |
| Net Sales |
| | Change |
| Change | | |||
| (dollars in millions) | | | | | | | ||||||||||
Operating income (three months ended) | $ | 160.5 | | 7.7 | % | | $ | 241.2 | | 9.0 | % | | $ | (80.7) | | (33.5) | % |
Operating income (nine months ended) | $ | 382.4 | | 5.7 | % | | $ | 788.6 | | 9.2 | % | | $ | (406.2) | | (51.5) | % |
The decreases in our operating income in the third quarter and nine months ended September 30, 2020 compared to the same periods in 2019 were mainly due to lower gross profit, resulting from significantly lower sales levels offset by higher gross profit margins, and impairment and restructuring charges that were partially offset by lower SG&A expenses. The decreases in our operating income margins in the third quarter and nine months ended September 30, 2020 compared to the same periods in 2019 were due to our significantly lower sales levels that increased our SG&A expenses as a percentage of sales, despite significant decreases in our SG&A expenses, and impairment and restructuring charges that were partially offset by higher gross profit margins. Impairment and restructuring charges of $14.6$5.6 million and $157.7$143.1 million, in the third quarterrespectively, mainly related to COVID-19 permanent headcount reductions, location closures and nine months ended September 30, 2020 reduced our operating margins 0.7revised negative long-term outlook for certain energy-related (oil and 2.4 percentage points, respectively.gas) businesses. See Note 13 — “Impairment12—“Impairment and Restructuring Charges”Charges” of our Unaudited Consolidated Financial Statements for further information on our 2020 impairment and restructuring charges. See “Net Sales” above for trends in both demand and costs
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ExpensesOperating Income” for trends
| | | | | | | | | | | | | | | | | |
| June 30, | | | | | | | | |||||||||
| 2021 | | | 2020 | | | | | | | | ||||||
| | | | % of | | | | | | % of | | | Dollar | | Percentage | | |
| $ |
| Net Sales |
| | $ |
| Net Sales |
| | Change |
| Change | | |||
| (dollars in millions) | | | | | | | | |||||||||
Operating income (three months ended) | $ | 460.4 | | 13.5 | % | | $ | 118.6 | | 5.9 | % | | $ | 341.8 | | 288.2 | % |
Operating income (six months ended) | $ | 838.7 | | 13.4 | % | | $ | 221.9 | | 4.8 | % | | $ | 616.8 | | 278.0 | % |
The increase in our operating income in the second quarter of 2021 compared to the same period in 2020 was due to record gross profit, as the result of significantly higher demand and a strong gross profit margin, that was partially offset by higher incentive compensation, increases in certain SG&A expenses related to our increased shipments and to a lesser extent inflationary increases for certain warehouse and delivery expenses. The increase in our operating margin in the second quarter of 2021 was mainly due to our significantly higher sales that decreased our SG&A expense as a percentage of sales, despite an increase in our SG&A expense.
Other Expense
| | | | | | | | | | | | | | | | | |
| September 30, | | | | | | | | |||||||||
| 2020 | | | 2019 | | | | | | | | ||||||
| | | | % of | | | | | | % of | | | Dollar | | Percentage | | |
| $ |
| Net Sales |
| | $ |
| Net Sales |
| | Change |
| Change | | |||
| (dollars in millions) | | | | | | | ||||||||||
Interest expense (three months ended) | $ | 15.7 | | 0.8 | % | | $ | 20.5 | | 0.8 | % | | $ | (4.8) | | (23.4) | % |
Interest expense (nine months ended) | $ | 47.2 | | 0.7 | % | | $ | 68.4 | | 0.8 | % | | $ | (21.2) | | (31.0) | % |
Other expense, net (three months ended) | $ | 17.8 | | 0.9 | % | | $ | 2.3 | | 0.1 | % | | $ | 15.5 | | * | |
Other expense, net (nine months ended) | $ | 23.1 | | 0.3 | % | | $ | 0.5 | | — | % | | $ | 22.6 | | * | |
* Percentage data not meaningful.
Interest expense was lowerOur operating income and operating income margins in the third quarter and ninesix months ended SeptemberJune 30, 2021 increased $473.7 million, or 129.8%, and 550 basis points from the same period in 2020, as adjusted for $143.1 million of impairment and restructuring charges in the 2020 six-month period. The 550-basis point increase in our operating income margin, as adjusted, was mainly due to lower interest rates onour significantly higher sales that decreased borrowing levels on our term loan and revolving credit facility.SG&A expense as a percentage of sales, despite an increase in our SG&A expense. See Note 7 — “Debt”12—“Impairment and Restructuring Charges” of our Unaudited Consolidated Financial Statements for further information on our third quarter of 2020 issuance of unsecured debt securities, the amendmentimpairment and restatement of our credit agreement, and the interest rates on our borrowings.
The changes in other expense, net in the third quarter and nine months ended September 30, 2020 compared to the same periods in 2019 were mainly due to postretirement benefit plan settlement charges of $14.6 million and $19.4 million in the respective 2020 periods.restructuring charges.
Income Tax Rate
Our effective income tax rates for the thirdsecond quarter and ninesix months ended SeptemberJune 30, 20202021 were 22.6%25.6% and 22.5%25.5%, respectively, compared to 25.0% for20.9% and 22.4% in the comparable 2019 periods.same 2020 periods, respectively. The declinesincrease in our effective income tax rates were mainly due to the significant increases in our lower income levels.profitability in 2021. The differences between our effective income tax rates and the U.S. federal
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statutory rate of 21.0% were mainly due to state income taxes partially offset by the effects of company-owned life insurance policies.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer’s share of social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We continue to examine the impacts the CARES Act may have on our business and results of operations.
Net Income
| | | | | | | | | | | | | | | | | |
| September 30, | | | | | | | | |||||||||
| 2020 | | | 2019 | | | | | | | | ||||||
| | | | % of | | | | | | % of | | | Dollar | | Percentage | | |
| $ |
| Net Sales |
| | $ |
| Net Sales |
| | Change |
| Change | | |||
| (dollars in millions) | | | | | | | ||||||||||
Net income attributable to Reliance (three months ended) | $ | 97.6 | | 4.7 | % | | $ | 162.7 | | 6.1 | % | | $ | (65.1) | | (40.0) | % |
Net income attributable to Reliance (nine months ended) | $ | 239.5 | | 3.6 | % | | $ | 535.9 | | 6.3 | % | | $ | (296.4) | | (55.3) | % |
| | | | | | | | | | | | | | | | | |
| June 30, | | | | | | | | |||||||||
| 2021 | | | 2020 | | | | | | | | ||||||
| | | | % of | | | | | | % of | | | Dollar | | Percentage | | |
| $ |
| Net Sales |
| | $ |
| Net Sales |
| | Change |
| Change | | |||
| (dollars in millions) | | | | | | | | |||||||||
Net income attributable to Reliance (three months ended) | $ | 329.1 | | 9.6 | % | | $ | 80.2 | | 4.0 | % | | $ | 248.9 | | 310.3 | % |
Net income attributable to Reliance (six months ended) | $ | 596.0 | | 9.5 | % | | $ | 141.9 | | 3.1 | % | | $ | 454.1 | | 320.0 | % |
The decreaseincreases in our net income and net income margins in the thirdsecond quarter and nine months ended September 30, 2020of 2021 compared to the same periodsperiod in 20192020 were mainly due to our decreasedincreased operating income and operating income margins,margin as discussed above,a result of record gross profit and a strong gross profit margin partially offset by lowerhigher SG&A expense and effective income tax rates. Impairmentrate.
Our net income in the six months ended June 30, 2021 increased $346.8 million, or 139.2%, and our net income margin increased from 5.4% to 9.5%, as adjusted for impairment and restructuring charges and other non-recurring expenses in the third quarter and nine months ended September 30, 2020 lowered2020. The increase in our net income and net income margins, as adjusted, were mainly due to record gross profit and a strong gross profit margin partially offset by 1.1%higher SG&A expense and 2.0%, respectively, compared to the same periods in 2019.effective income tax rate.
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Liquidity and Capital Resources
Operating Activities
Net cash provided by operations of $942.8$263.4 million in the ninesix months ended SeptemberJune 30, 20202021 decreased slightly$383.1 million, or 59.3%, from $954.1$646.5 million in the same period in 2019.2020. Our relatively flatdecreased operating cash flow was mainly the result of our lower net income offset by increases in non-cash impairment of long-lived asset charges and decreasedsignificantly increased working capital requirements in the 2021 six-month period compared to the same period in 2020, mainly due to strong demand and rising metal pricing during the 2021 six-month period that achieved record levels compared to the declining demand and pricing trends in the same period in 2020 due to COVID-19. The strong and rising metals pricing environment combined with healthy demand during the six months ended June 30, 2021 required more investment (primarilyin accounts receivable and to a lesser extent increased spending to replenish our inventory less accounts payable) in the nine months ended September 30, 2020.tons at higher costs. To manage our working capital, we focus on our days sales outstanding and on our inventory turnover rate as receivables and inventory are the two most significant elements of our working capital. At SeptemberJune 30, 20202021 and 2019,2020, our days sales outstanding rate was 42.439.8 days and 42.542.8 days, respectively. Our inventory turn rate (based on tons) during the ninesix months ended SeptemberJune 30, 20202021 was 4.75.2 times (or 2.3 months on hand), compared to 4.6 times (or 2.6 months on hand), compared to 4.4 times (or 2.7 months on hand) for in the same period in 2019.2020.
Income taxes paid were $68.3$181.3 million in the ninesix months ended SeptemberJune 30, 2020,2021, a significant decreaseincrease from $173.7$16.1 million in the ninesix months ended SeptemberJune 30, 2019. The decrease is mainly2020, due to the utilization of tax overpayments for the 2019 tax year that lowered taxes paid in the nine months ended September 30, 2020, and lower estimated taxableour significantly higher pretax income for 2020 compared to 2019.2021.
Investing Activities
Net cash used in investing activities was $127.7$98.6 million in the ninesix months ended SeptemberJune 30, 20202021 compared to $171.9$96.4 million used in the same period in 20192020 and was substantially comprised of our capital expenditures.expenditures partially offset by proceeds from sales of property, plant and equipment. Capital expenditures were $134.7$123.8 million in the ninesix months ended SeptemberJune 30, 20202021 compared to $182.8$96.5 million in the same period in 2019. In the third quarter of 2020, we increased our 2020 capital expenditure budget from approximately $190 million to approximately $270 million in response to opportunities to better service our customers.2020. The majority of our 20202021 and 20192020 capital expenditures related to growth initiatives.
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Table Proceeds from sales of Contentsproperty, plant and equipment were $26.1 million in the six months ended June 30, 2021 compared to $1.7 million in the same period in 2020 and included $24.4 million from the sale of non-core assets for which we recognized $3.3 million of gains.
Financing Activities
Net cash used in financing activities of $394.9$122.4 million in the ninesix months ended SeptemberJune 30, 20202021 decreased significantly from $738.8$493.6 million net cash used in the nine months ended September 30, 2019,same period in 2020 mainly due to our third quarter of 2020 issuance of unsecureddecreased share repurchases and net debt securities offset by increased share repurchases. Net debt borrowings inrepayments. In the ninesix months ended September 30, 2020 were $59.0 million compared to net debt repayments of $562.3 million in the nine months ended September 30, 2019. In the third quarter of 2020, net proceeds of $891.7 million from our issuance of $900.0 million of unsecured debt securities were partially used to repay $735.0 million of outstanding borrowings under our existing credit agreement as of June 30, 2020. In the nine months ended September 30, 2020,2021, we repurchased a total $300.2spent $24.0 million to repurchase shares of our common stock compared to $50.0$300.0 million in the ninesame period in 2020. We had $0.8 million of net debt repayments in the six months ended SeptemberJune 30, 2019.2021 compared to $98.0 million of net debt repayments in the same period in 2020.
On OctoberJuly 20, 2020,2021, our Board of Directors declared the 2020 fourth2021 third quarter cash dividend of $0.625$0.6875 per share. We have increased our quarterly dividend 2728 times since our IPO in 1994, with the most recent increase of 13.6%10.0% from $0.55$0.625 per share to $0.625$0.6875 per share effective in the first quarter of 2020. 2021. We have paid quarterly cash dividends on our common stock for 62 consecutive years and have never reduced or suspended our dividend and have paid regular quarterly dividends to our stockholders for 61 consecutive years.dividend.
On October 23, 2018,July 20, 2021, our Board of Directors amended ourauthorized a $1.0 billion share repurchase plan, increasing the totalprogram that replaced our existing share repurchase program authorized in October 2018. The share repurchase program does not obligate us to repurchase any specific number of shares, availabledoes not have a specific expiration date and may be suspended or discontinued at any time.
We repurchase shares through open market purchases, privately negotiated transactions and transactions structured through investment banking institutions under plans relying on Rule 10b5-1 or Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Repurchased and subsequently retired shares are restored to be repurchased by 5.0 million and extending the durationstatus of the plan through December 31, 2021. authorized but unissued shares.
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In the thirdsecond quarter of 2020,and six months ended June 30, 2021, we repurchased 2,466147,016 shares at an average cost of $100.00$163.50 per share, for a total of $0.2$24.0 million andcompared to no repurchases in the nine months ended September 30,second quarter of 2020 we repurchasedand repurchases of approximately 3.3 million shares at an average cost of $90.10,$90.09 per share, for a total of $300.2 million. As of September$300.0 million in the six months ended June 30, 2020, we had authorization under the plan to repurchase approximately 3.1 million shares, or about 5% of our current outstanding shares. 2020. From the inception of the plan in 1994 through SeptemberJune 30, 2020,2021, we have repurchased approximately 32.533.0 million shares at an average cost of $47.58$48.72 per share. We expect to continue to be opportunistic in our approach to repurchasing shares of our common stock.
Liquidity
Our primary sources of liquidity are funds generated from operations, cash on hand and our $1.5 billion revolving credit facility. Our total outstanding debt at SeptemberJune 30, 2021 and December 31, 2020 was $1.66 billion, compared to $1.60 billion at December 31, 2019.billion. As of SeptemberJune 30, 2020,2021, we had no outstanding borrowings $37.1and $31.2 million of letters of credit issued and $1.46 billion available for borrowing on the revolving credit facility. As of SeptemberJune 30, 2020,2021, we had $591.6$727.6 million in cash and cash equivalents and our net debt-to-total capital ratio (net debt-to-total capital is calculated as total debt, net of cash, divided by total Reliance stockholders’ equity plus total debt, net of cash) was 17.3%14.0%, down significantly from 21.4%15.8% as of December 31, 2019.2020.
On September 3, 2020, we entered into a $1.5 billion unsecured five-year Amended and Restated Credit Agreement (“Credit Agreement”) that amended and restated our existing $1.5 billion unsecured revolving credit facility. At SeptemberJune 30, 2020,2021, borrowings under the Credit Agreement were available at variable rates based on LIBOR plus 1.25% or the bank prime rate plus 0.25% and we currently pay a commitment fee at an annual rate of 0.20% on the unused portion of the revolving credit facility. The applicable margins over LIBOR and base rate borrowings, along with commitment fees, are subject to adjustment every quarter based on our leverage ratio, as defined in the Credit Agreement. All borrowings under the Credit Agreement may be prepaid without penalty. Our Credit Agreement includes provisions to change the reference rate to the then-prevailing market convention for similar agreements if a replacement rate for LIBOR is necessary during its term.
A revolving credit facility with a credit limit of $8.0$8.4 million is in place for an operation in Asia with an outstanding balance of $5.2$4.7 million and $4.3$5.4 million as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively.
Capital Resources
On November 20, 2006, we entered into an indenture (the “2006 Indenture”) for the issuance of $600.0 million of unsecured debt securities. The total issuance was comprised of (a) $350.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.20% per annum, which matured and were repaid on November 15, 2016 and (b) $250.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.85% per annum, maturing on November 15, 2036.
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On April 12, 2013, we entered into an indenture (the “2013 Indenture”) for the issuance of $500.0 million aggregate principal amount of senior unsecured notes at the rate of 4.50% per annum, maturing on April 15, 2023.
On August 3, 2020, we entered into an indenture (the “2020 Indenture” and, together with the 2013 Indenture and 20162006 Indenture, the “Indentures”) for the issuance of $900.0 million of unsecured debt securities. The total issuance was comprised of (a) $400.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 1.30% per annum, maturing on August 15, 2025 and (b) $500.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 2.15% per annum, maturing on August 15, 2030.
Under the Indentures, the notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. If we experience a change in control accompanied by a downgrade in our credit rating, we will be required to make an offer to repurchase each series of the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest.
Various industrial revenue bonds had combined outstanding balances of $8.6$8.3 million as of SeptemberJune 30, 20202021 and $9.0 million as of December 31, 2019,2020, and have maturities through 2027.
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As of SeptemberJune 30, 2020,2021, we had $912.7$911.9 million of debt obligations coming due before our $1.5 billion revolving credit facility expires on September 2,3, 2025.
We believe that we will continue to have sufficient liquidity to fund our future operating needs and to repay our debt obligations as they become due. In addition to funds generated from operations and funds available under our revolving credit facility, we expect to continue to be able to access the capital markets to raise funds, if desired. We have taken steps to mitigate the impact of COVID-19 on our business. We believe our sources of liquidity will continue to be adequate to maintain operations, make necessary capital expenditures, finance strategic growth through acquisitions and internal initiatives, pay dividends and opportunistically repurchase shares. Additionally, based on current market conditions, we believe our investment grade credit rating enhancesratings enhance our ability to effectively raise capital, if needed. We expect to continue our acquisition and otherinternal growth and stockholder return activities and anticipate that we will be able to fund such activities as they arise.
The COVID-19 pandemic has had, and we expect will continue to have, an adverse effect on our net sales and pretax income. Future decreases in cash flow from operations would decrease the cash available for the capital uses described above, including capital expenditures, dividend payments, repayment of debt, share repurchases and acquisitions. However, since the ultimate severity and length of the COVID-19 pandemic is unknown, we cannot predict the impact it will have on our customers and suppliers and on the debt and equity capital markets, and we cannot estimate the ultimate impact it will have on our liquidity and capital resources.
Covenants
The Credit Agreement and the Indentures include customary representations, warranties, covenants acceleration, indemnity and events of default provisions. The covenants under the Credit Agreement include, among other things, two financial maintenance covenants that require us to comply with a minimum interest coverage ratio and a maximum total net leverage ratio. Our interest coverage ratio for the twelve-month period ended September 30, 2020 was 12.4 times compared to the debt covenant minimum requirement of 3.0 times (interest coverage ratio is calculated as earnings before interest and taxes (“EBIT”), as defined in the Credit Agreement, divided by interest expense). Our leverage ratio as of September 30, 2020, calculated in accordance with the terms of the Credit Agreement, was 25.9% compared to the debt covenant maximum amount of 60% (leverage ratio is calculated as total debt, inclusive of finance lease obligations and outstanding letters of credit, minus the lesser of cash held by our domestic subsidiaries and $200.0 million, divided by Reliance stockholders’ equity plus total debt).
We were in compliance with all financial maintenance covenants in our Credit Agreement at SeptemberJune 30, 2020.2021.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
As of SeptemberJune 30, 20202021 and December 31, 2019,2020, we were contingently liable under standby letters of credit and letters of guarantee in the aggregate amount of $28.4 million.$24.1 million and $27.8 million, respectively. The letters of creditcredit/guarantee relate to insurance policies and construction projects.
Contractual Obligations and Other Commitments
We had no material changes in commitments for capital expenditures or purchase obligations as of SeptemberJune 30, 2020,2021, as compared to those disclosed in our table of contractual obligations included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Inflation
Our operations have not been, and we do not expect them to be, materially affected by general inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in metal prices.
Seasonality
Some of our customers are in seasonal businesses, especially customers in the construction industry and related businesses. However, our overall operations have not shown any material seasonal trends as a result of our geographic, product and customer diversity. Typically, revenues in the months of July, November and December have been lower than in other months because of a reduced number of working days for shipments of our products, resulting from holidays observed by the Company as well as vacation and extended holiday closures at some of our customers. ReducedThe number of shipping days in each quarter also havehas a significant impact on our quarterly sales and profitability. Particularly in light of COVID-19, 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.
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Goodwill and Other Intangible Assets
Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $1.92$1.94 billion at SeptemberJune 30, 2020,2021, or approximately 24%22% of total assets and 38%34% of total equity. Additionally, other intangible assets, net amounted to $955.8$928.9 million at SeptemberJune 30, 2020,2021, or approximately 12%10% of total assets and 19%16% of total equity. Goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests and further evaluation when certain events occur. Other intangible assets with finite useful lives are amortized over their useful lives. We review the recoverability of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. In the ninesix months ended SeptemberJune 30, 2020, we recorded impairment losses of $67.8$64.3 million on our intangible assets with indefinite lives and $30.7$24.7 million on our intangible assets subject to amortization. See Note 13—12—“Impairment and Restructuring Charges” of our Unaudited Consolidated Financial Statements for further information on our 2020 impairment charges.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our Unaudited Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical accounting estimates include those related to goodwill and other indefinite-lived intangible assets and long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and
26
liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. The impacts of the COVID-19 pandemic increase uncertainty, which has reduced our ability to use past results to estimate future performance. Accordingly, our estimates and judgments may be subject to greater volatility than in the past.
See “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 20192020 for further information regarding the accounting policies that we believe to be critical accounting policies and that affect our more significant judgments and estimates used in preparing our consolidated financial statements. We do not believe that the new accounting guidance implemented in 20202021 changed our critical accounting policies.
New Accounting Guidance
See Note 2—“Impact of Recently Issued Accounting Guidance” of our Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for disclosure on new accounting guidance issued or implemented.
Website Disclosure
The Company may use its website as a distribution channel of material company information. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at https://investor.rsac.com. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Alerts” section at https://investor.rsac.com. The website is for informational purposes only and is not intended for use as a hyperlink. The Company is not incorporating any material on its website into this report.
Item 3. Quantitative Andand Qualitative Disclosures About Market Risk
In the ordinary course of business, we are exposed to various market risk factors, including fluctuations in interest rates, changes in general economic conditions, domestic and foreign competition, foreign currency exchange rates and metals pricing, demand and availability. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 20192020 for further discussion on quantitative and qualitative disclosures about market risk. Refer to Item 1A “Risk Factors” within this Quarterly Report on Form 10-Q for additional discussion
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Item 4. Controls Andand Procedures
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to and as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered in this report, the Company’s disclosure controls and procedures are effective to ensure information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended SeptemberJune 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that many of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The information contained under the heading “Legal Matters” in Note 11—10—“Commitments and Contingencies” to our Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1.
Item 1A. Risk Factors
We are supplementing and amendingThere have been no material changes to the risk factors described under Item 1A “Risk Factors”disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 as updated in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 with the additional risk factor set forth below, which supplements, amends and to the extent inconsistent, supersedes such risk factors.
The COVID-19 global pandemic may materially and adversely impact our business, financial condition, results of operations and cash flows.
The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. These factors have led to reduced demand of our products and services, particularly for our businesses that service the automotive, oil and gas, commercial aerospace and non-residential construction (infrastructure) sectors. During the third quarter of 2020, our tons sold increased 5.9% compared to the second quarter of 2020. However, our third quarter of 2020 same-store tons sold were still down 12.6% and 13.2% compared to pre-pandemic levels in the first quarter of 2020 and the third quarter of 2019, respectively. Our tons sold are expected to decline in the fourth quarter of 2020 compared to the third quarter of 2020 due to the continued impact of COVID-19, and normal seasonal factors, including fewer shipping days. In addition, during the third quarter of 2020, we recorded impairment and restructuring charges of $14.6 million mainly related to continued COVID-19 downsizing at certain of our businesses, our revised negative outlook for certain businesses serving the commercial aerospace market and planned facility closures. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, the duration of the current economic contraction and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain and cannot be predicted.
The volatility in the market largely due to COVID-19 has resulted, and could continue to result, in a material impairment of goodwill or indefinite-lived intangible assets. Continued negative impacts to the markets we service due to COVID-19 or additional stock market volatility could result in a decline in our market capitalization that may result in goodwill and/or indefinite-lived intangible asset impairment charges that could be material.
While most of our facilities continue to operate as essential businesses under the United States Department of Homeland Security Cybersecurity and Infrastructure Security Agency guidance, facility closures or work slowdowns or temporary stoppages could occur at all or some of our facilities due to new government regulations, decreased demand for our products and services or otherwise. In many cases, our facilities are not operating under full staffing as a result of COVID-19, which could have a longer-term adverse impact on our business. Any prolonged slowdown or stoppage at our facilities may adversely affect our business, financial condition and results of operations and such impact may be material. We may face unpredictable increases in demand for certain of our products when restrictions on business and travel end. If demand for our products exceeds our capacity, it could adversely affect our financial results and customer relationships. In addition, the ability of our employees and our suppliers’ and customers’ employees to work may be impacted by individuals contracting or being exposed to COVID-19, and any such impact may be material.
We continue to work with our stakeholders (including customers, employees, suppliers, business partners and local communities) to responsibly address this global pandemic. We will continue to monitor the situation and assess possible
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implications to our business and our stakeholders and will take appropriate actions in an effort to mitigate adverse consequences, including through adjusting our capital allocation priorities to focus on cash preservation. We cannot assure you that we will be successful in any such mitigation efforts. Although the duration and ultimate impact of these factors is unknown at this time, the decline in economic conditions due to COVID-19, or another disease causing similar impacts, may adversely affect our business, financial condition and results of operations and such impact may be material. Further deteriorations in economic and public health conditions, as a result of the COVID-19 pandemic or otherwise, could lead to disruptions in our supply chain and metals commodities pricing, a further or prolonged decline in demand for our products, potential closures of additional of our facilities, recognition of additional impairment charges, and otherwise negatively impact our business. We have a substantial amount of indebtedness outstanding, and if we experience continued significant declines in sales as a result of the pandemic, our business may not be able to generate cash flow from operations or access additional borrowings on our revolving credit facility in amounts sufficient to enable us to pay our debts and fund our other liquidity needs. The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets and credit markets, which depending on future developments could impact our capital resources and liquidity in the future. In addition, we may be susceptible to increased litigation related to, among other things, the financial impacts of COVID-19 on our business, our ability to meet contractual obligations due to the pandemic, employment practices or policies adopted during the pandemic, or litigation related to individuals contracting COVID-19 as a result of alleged exposures on our premises.
In addition, to the extent COVID-19 adversely affects the Company's business and financial results, it may also have the effect of heightening many of the other risks described under Part I, Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We repurchase shares of our common stock from time to time pursuant to our publicly announced share repurchase program. All of our share repurchases during the thirdsecond quarter of 20202021 were made in the open market pursuant to a pre-set trading plan meeting the requirements ofunder plans relying on Rule 10b5-1 or 10b-18 under the Securities Exchange Act of 19341934..
Our share repurchase activity for the thirdsecond quarter of 2020 was as follows:2021 is presented below.
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Period | | Total Number of | | | Average Price Paid | | Total Number of Shares Purchased as Part of Publicly Announced Plan | | Maximum Number of Shares That May Yet Be Purchased Under the Plan(1) | | Total Number of | | Average Price Paid | | Total Number of Shares Purchased as Part of Publicly Announced Plan | | Maximum Number of Shares That May Yet Be Purchased Under the Plan(1) | |
July 1 - July 31, 2020 | | — | | $ | — | | — | | 3,103,997 | |||||||||
August 1 - August 31, 2020 | | — | | $ | — | | — | | 3,103,997 | |||||||||
September 1 - September 30, 2020 | | 2,466 | | $ | 100.00 | | 2,466 | | 3,101,531 | |||||||||
April 1 - April 30, 2021 | | — | | $ | — | | — | | 2,759,817 | |||||||||
May 1 - May 31, 2021 | | 105,543 | | $ | 166.64 | | 105,543 | | 2,654,274 | |||||||||
June 1 - June 30, 2021 | | 41,473 | | $ | 155.50 | | 41,473 | | 2,612,801 | |||||||||
Total | | 2,466 | | $ | 100.00 | | 2,466 | | | | 147,016 | | $ | 163.50 | | 147,016 | | |
(1) | Share repurchases were made |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 6. Exhibits
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Exhibit No. | | Description |
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31.1* | | |
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32** | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101* | | The following unaudited financial information from Reliance Steel & Aluminum Co.’s Quarterly Report on Form 10-Q for the quarter ended |
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101.SCH* | | XBRL Taxonomy Extension Schema Document. |
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101.CAL* | | XBRL Taxonomy Calculation Linkbase Document. |
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101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB* | | XBRL Taxonomy Label Linkbase Document. |
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101.PRE* | | XBRL Taxonomy Presentation Linkbase Document. |
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104* | | Cover Page Interactive Data File (formatting as Inline XBRL and contained in Exhibit 101). |
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* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| RELIANCE STEEL & ALUMINUM CO. | ||||
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| By: | /s/ Arthur Ajemyan | | ||
| | Arthur Ajemyan | |||
| | Vice President and | |||
| | (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer) | |||
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