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RS Reliance Steel & Aluminum

Filed: 29 Oct 20, 3:25pm

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 September 30, 2020

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

Graphic

(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 October 23, 2020, 63,756,287 shares of the registrant’s common stock, $0.001 par value, were outstanding.

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

* 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

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

September 30,

September 30,

2020

    

2019

   

2020

   

2019

Net income

$

98.3

$

163.9

$

241.9

$

539.8

Other comprehensive income (loss):

Foreign currency translation gain (loss)

11.5

(8.7)

(11.2)

(0.7)

Pension and postretirement benefit adjustments, net of tax

15.8

19.5

Total other comprehensive income (loss)

27.3

(8.7)

8.3

(0.7)

Comprehensive income

125.6

155.2

250.2

539.1

Less: Comprehensive income attributable to noncontrolling interests

0.7

1.2

2.4

3.9

Comprehensive income attributable to Reliance

$

124.9

$

154.0

$

247.8

$

535.2

See accompanying notes to unaudited consolidated financial statements.

3

RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

(in millions, except number of shares which are reflected in thousands and per share amounts)

Reliance Stockholders’ Equity

Common Stock

Accumulated

and Additional

Other

Non-

Paid-In Capital

Retained

Comprehensive

controlling

Shares

    

Amount

    

Earnings

    

(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

Balance at January 1, 2020

66,854

$

122.2

$

5,189.5

$

(105.1)

$

7.5

$

5,214.1

Net income

61.7

1.2

62.9

Other comprehensive loss

(31.4)

(31.4)

Noncontrolling interest purchased

(6.9)

(1.1)

(8.0)

Dividend to noncontrolling interest holder

(0.5)

(0.5)

Stock-based compensation, net

111

3.8

3.8

Stock options exercised

6

0.3

0.3

Repurchase of common shares

(3,330)

(119.3)

(180.7)

(300.0)

Cash dividends — $0.625 per share and dividend equivalents

(41.9)

(41.9)

Balance at March 31, 2020

63,641

0.1

5,028.6

(136.5)

7.1

4,899.3

Net income

80.2

0.5

80.7

Other comprehensive income

12.4

12.4

Stock-based compensation, net

13

9.0

9.0

Cash dividends — $0.625 per share and dividend equivalents

(39.9)

���

(39.9)

Balance at June 30, 2020

63,654

9.1

5,068.9

(124.1)

7.6

4,961.5

Net income

97.6

0.7

98.3

Other comprehensive income

27.3

27.3

Dividends to noncontrolling interest holders

(0.8)

(0.8)

Stock-based compensation, net

104

2.2

2.2

Repurchase of common shares

(2)

(0.2)

(0.2)

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

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

See accompanying notes to unaudited consolidated financial statements.

5

RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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 nine months ended September 30, 2020 are not necessarily indicative of the results for the full year ending December 31, 2020. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2019, 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 Losses—In June 2016, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that changes how entities account 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 lifetime of the asset. We adopted the new standard on January 1, 2020. The adoption of this accounting change 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

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.  

7

Note 4. Revenues

The following table presents our 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

September 30,

September 30,

2020

    

2019

    

2020

    

2019

(in millions)

Carbon steel

$

1,100.8

$

1,416.1

$

3,490.8

$

4,542.4

Aluminum

394.3

532.4

1,299.9

1,662.6

Stainless steel

341.8

388.7

1,083.1

1,202.4

Alloy

91.0

160.7

342.3

515.0

Toll processing and logistics

105.7

111.8

279.6

343.6

Other and eliminations

52.0

76.2

182.1

260.0

Total

$

2,085.6

$

2,685.9

$

6,677.8

$

8,526.0

Note 5. 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

We had 0 accumulated impairment losses related to goodwill at September 30, 2020.

Note 6. 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.

Amortization expense for intangible assets was $30.3 million and $32.3 million for the nine months ended September 30, 2020 and 2019, respectively. Foreign currency translation losses related to intangible assets, net, were $2.8 million for

8

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 three months of 2020 and each of the succeeding five years:

(in millions)

2020 (remaining three months)

$

9.3

2021

36.5

2022

35.8

2023

31.6

2024

28.1

2025

23.9

Note 7. Debt

Debt consisted of the following:

September 30,

December 31,

2020

    

2019

(in millions)

Unsecured revolving credit facility expiring September 2, 2025

$

$

368.0

Unsecured term loan repaid August 3, 2020

465.0

Senior unsecured notes due April 15, 2023

500.0

500.0

Senior unsecured notes due August 15, 2025

400.0

Senior unsecured notes due August 15, 2030

500.0

Senior unsecured notes due November 15, 2036

250.0

250.0

Other notes and revolving credit facilities

13.8

13.3

Total

1,663.8

1,596.3

Less: unamortized discount and debt issuance costs

(19.7)

(7.8)

Less: amounts due within one year and short-term borrowings

(5.8)

(64.9)

Total long-term debt

$

1,638.3

$

1,523.6

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 September 30, 2020, 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 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.

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 September 30, 2020, we had 0 outstanding borrowings, $37.1 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. 

On August 3, 2020, we entered into an indenture (the “2020 Indenture” and, together with the 2013 Indenture and 2016 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 the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest.

Other Notes and Revolving Credit Facilities

A revolving credit facility with a credit limit of $8.0 million is in place for an operation in Asia with an outstanding balance of $5.2 million and $4.3 million as of September 30, 2020 and December 31, 2019, respectively.

Various industrial revenue bonds had combined outstanding balances of $8.6 million as of September 30, 2020 and $9.0 million as of December 31, 2019, and have maturities through 2027.

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 covenants in our Credit Agreement at September 30, 2020.

Note 8.  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. Our leases of facilities and other spaces expire at various times through 2031 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

September 30,

September 30,

2020

    

2019

    

2020

    

2019

(in millions)

(in millions)

Operating lease cost

$

20.4

$

20.9

$

61.9

$

62.8

10

Supplemental cash flow and balance sheet information is presented below:

Nine Months Ended

September 30,

2020

    

2019

(in millions)

Supplemental cash flow information

Cash payments for operating leases                 

$

61.5

$

62.6

Right-of-use assets obtained in exchange for operating lease obligations                

$

35.8

$

53.2

September 30,

December 31,

2020

2019

Other lease information

Weighted average remaining lease term—operating leases

6.0 years

5.6 years

Weighted average discount rate—operating leases

4.0%

4.3%

Maturities of operating lease liabilities as of September 30, 2020 are as follows:

(in millions)

2020 (remaining three months)

$

15.4

2021

54.1

2022

42.5

2023

33.3

2024

26.1

Thereafter

55.0

Total operating lease payments

226.4

Less: imputed interest

(30.3)

Total operating lease liabilities

$

196.1

Note 9.  Income Taxes

Our effective income tax rates for the third quarter and nine months ended September 30, 2020 were 22.6% and 22.5%, respectively, compared to 25.0% for the comparable 2019 periods. The declines in our effective income tax rates were mainly due to our lower income levels. 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. Equity

Dividends

On October 20, 2020, our Board of Directors declared the 2020 fourth quarter cash dividend of $0.625 per share of common stock, payable on December 4, 2020 to stockholders of record as of November 20, 2020.

During the third quarters of 2020 and 2019, we declared and paid quarterly dividends of $0.625 and $0.55 per share, or $39.8 million and $36.7 million in total, respectively. During the nine months ended September 30, 2020 and 2019, we declared and paid quarterly dividends of $1.875 and $1.65 per share, or $120.7 million and $110.6 million in total,

11

respectively. In addition, we paid $2.1 million and $2.7 million in dividend equivalents with respect to vested restricted stock units (“RSUs”) during the nine months ended September 30, 2020 and 2019, 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 subject to both service and performance goal criteria. 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 nine months ended September 30, 2020 and 2019, we made payments of $14.9 million and $9.6 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 September 30, 2020 and changes during the nine-month period then ended is as follows:

Weighted

Average

Grant Date

Fair Value

Unvested RSUs

Shares

Per RSU

Unvested at January 1, 2020

859,005

$

86.40

Granted(1)

540,547

82.81

Vested

(4,925)

85.40

Cancelled or forfeited

(25,466)

85.39

Unvested at September 30, 2020

1,369,161

$

85.01

Shares reserved for future grants (all plans)

2,104,770

(1)Comprised of 330,144 service-based RSUs and 210,403 performance-based RSUs granted in March 2020 with a fair value of $82.81 per RSU. The service-based RSUs cliff vest on December 1, 2022 and the performance-based RSUs are subject to a three-year performance period ending December 31, 2022.

Share Repurchase Plan

On October 23, 2018, our Board of Directors amended our share repurchase plan, increasing the total authorized number of shares available to be repurchased by 5.0 million and extending the duration of the plan through December 31, 2021. As of September 30, 2020, we had authorization under the plan to repurchase approximately 3.1 million shares, or about 5% of our current outstanding shares. Repurchased and subsequently retired shares are restored to the status of authorized but unissued shares. During the third quarter of 2020, we repurchased 2,466 shares at an average cost of $100.00 per share, for a total of $0.2 million, compared to 0 repurchases in the third quarter of 2019. In the nine months ended September 30, 2020, we repurchased 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 per share, for a total of $50.0 million, in the same period in 2019.

12

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss included the following:

Pension and

Accumulated

Foreign Currency

Postretirement

Other

Translation

Benefit Adjustments,

Comprehensive

Loss

    

Net of Tax

    

(Loss) Income

(in millions)

Balance as of January 1, 2020

$

(64.4)

$

(40.7)

$

(105.1)

Current-period change

(11.2)

19.5

8.3

Balance as of September 30, 2020

$

(75.6)

$

(21.2)

$

(96.8)

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 million as of September 30, 2020 and December 31, 2019, respectively. Income tax effects 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 increase in our ownership from 51% to 100% was accounted for as an equity transaction. 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.

Note 11.  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, these actions 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 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") a 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 our financial position and operating results due to numerous uncertainties. The duration and severity of the outbreak and its long-term impact on our business are 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.

13

Note 12.  Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

  

2019

2020

2019

(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

Denominator:

   

   

   

Weighted average shares outstanding

63,758

   

66,656

   

64,578

   

66,941

Dilutive effect of stock-based awards

930

   

1,048

   

925

   

927

Weighted average diluted shares outstanding

64,688

   

67,704

   

65,503

   

67,868

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

Potentially dilutive securities were not significant for the third quarters of 2020 and 2019. The computations of earnings per share for the nine months ended September 30, 2020 and 2019 do not include 244,006 and 234,429 weighted average shares, respectively, in respect of RSUs, because their inclusion would have been anti-dilutive.

Note 13.  Impairment and Restructuring Charges

We recorded impairment and restructuring charges of $157.7 million in the nine months ended September 30, 2020, which was 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 market and charges at certain of our other businesses for which our outlook has turned negative based on the continued impacts from COVID-19.

The 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 2020 property, plant and equipment and restructuring – cost of sales charges relate 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 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 reflect 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.

14

RELIANCE STEEL & ALUMINUM CO.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains certain statements that are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our forward-looking statements may include, but are not limited to, discussions of our industry, our 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 these 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, 2019 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 statements 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 our press releases and Forms 10-K, 10-Q and 8-K filed with or furnished to the SEC.

Overview

Our financial results in the third quarter of 2020 continued to demonstrate the strength and resiliency of our business model despite the challenging economic circumstances experienced during the period.

15

Certain key financial results for the third quarter and nine months ended September 30, 2020 included the following (dollars are shown in millions):

Net sales of $2.09 billion in the third quarter of 2020, down $600.3 million, or 22.4%, from $2.69 billion in the third quarter of 2019. Net sales of $6.68 billion in the nine months ended September 30, 2020, down $1.85 billion, or 21.7%, from $8.53 billion in the same period in 2019;

Gross profit margin of 32.4% in the third quarter of 2020 compared to 30.3% in the third quarter of 2019. Our third quarter of 2020 gross profit margin of 32.4% equaled our quarterly record set in the fourth quarter of 2019. Gross profit margin of 31.0% (or 31.6%, excluding the impact of $39.6 million of restructuring charges) in the nine months ended September 30, 2020 compared to 29.7% in the same period in 2019;

Pretax income of $127.0 million in the third quarter of 2020, down $91.4 million, or 41.8%, from $218.4 million in the third quarter of 2019. Pretax income of $312.1 million in the nine months ended September 30, 2020, down $407.6 million, or 56.6%, from $719.7 million in the same period in 2019. Pretax income margins of 6.1% and 4.7% in the third quarter and nine months ended September 30, 2020 compared to 8.1% and 8.4% in the same periods in 2019, respectively. Pretax income in the third quarter and nine months ended September 30, 2020 included $31.0 million and $178.9 million of non-recurring charges, respectively, that decreased our pretax income margins 1.5 and 2.7 percentage points, respectively; and

Earnings per diluted share of $1.51 for the third quarter of 2020, down $0.89, or 37.1%, from $2.40 in the third quarter of 2019. Earnings per diluted share of $3.66 for the nine months ended September 30, 2020, down $4.24, or 53.7%, from $7.90 in the same period in 2019. The impairment and restructuring charges and other non-recurring items noted above decreased earnings per diluted share by $0.36 and $2.05 in the third quarter and nine months ended September 30, 2020, respectively.

Our net sales were lower in the third quarter and nine months ended September 30, 2020 compared to the same periods in 2019 due to lower tons sold and lower average selling prices per ton sold as a result of the impacts of COVID-19 on nearly all of the end markets we serve.

We experienced improving demand in nearly all of the end markets we serve in the third quarter of 2020 compared 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.

Our strong gross profit margins in the third quarter and nine months ended September 30, 2020 were supported by our investments 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 maintain pricing discipline by focusing on  specialty 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 of our $1.5 billion credit agreement. We used a portion of the proceeds from the notes offering to repay all outstanding borrowings under our revolving credit facility and term loan. As 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 mainly due to our temporary 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.

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. See Note 13 — “Impairment and Restructuring Charges” of our Unaudited Consolidated Financial Statements for further information on our 2020 impairment and restructuring charges.

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 serve our customers, including the expansion of our tolling capabilities, and to maintain and upgrade our metal processing equipment. As a result of our quick actions in response to the pandemic, we generated strong cash flow from operations during the first nine months of 2020 of $942.8 million, which was slightly less than the $954.1 million we generated in the same period of the prior year, and free cash flow (cash flow 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. 

We will continue to evaluate the nature and extent of future impacts of COVID-19 on our business, but given the dynamic nature of these unprecedented circumstances, 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 broad end market exposure, diverse product offerings, focus on small order sizes, when-needed delivery and significant value-added processing capabilities along with our wide geographic footprint will enable us to persevere during these difficult and uncertain times. We believe that these business model characteristics combined with pricing discipline and our strategy of concentrating on higher margin business differentiate us from our industry peers and will allow us to continue achieving industry-leading results.

For more information, please see Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q.  

Acquisitions

2020 Acquisition

On March 31, 2020, Feralloy Corporation (our wholly-owned subsidiary), purchased the remaining 49% noncontrolling interest 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 results 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.

17

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-month and nine-month periods ended September 30, 2020 and 2019 (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

%

(1)Cost of sales in the nine months ended September 30, 2020 included ($0.2) million and $39.6 million net inventory provisions relating to the planned closure of certain operations in the third quarter and nine months ended September 30, 2020, respectively.

(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.

18

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.

Tons sold exclude the processing volumes at our tolling operations.

Our net sales were lower in the third quarter and nine months ended September 30, 2020 compared to the same periods in 2019 due to lower tons sold and lower average selling prices per ton sold.

Our same-store tons sold decreased 13.2% and 11.7% in 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 products 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 shutdowns in the second quarter of 2020. Demand 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 (oil 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.    

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 price per ton sold declined in the third quarter and nine months ended September 30, 2020 compared to the same periods in 2019, mainly due to mill price decreases on many of the carbon 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. As carbon steel sales represent approximately 51% of our gross sales dollars, 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)

%

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)

%

The decreases in cost of sales in the third quarter and nine months ended September 30, 2020 compared to the same periods in 2019 are mainly due to lower tons sold and lower average costs per ton sold. See “Net Sales” above for trends in both demand and costs of our products.

Cost of sales included ($0.2) million and $39.6 million net inventory provisions relating to the planned closure of certain operations in the third quarter and nine months ended September 30, 2020, respectively. See Note 13 — “Impairment and Restructuring 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, or income, of $12.5 million   and $37.5 million in the third quarter and nine months ended September 30, 2020, respectively, compared to credits, or income, of $40.0 million and $75.0 million in the same periods in 2019, respectively. At September 30, 2020, our LIFO reserve was $100.1 million.

20

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)

%

Our strong gross profit margin continues to benefit from the increases in the percentage of our orders that include value-added processing supported by our ongoing investments in processing equipment in recent years. The ($0.2) million and $39.6 million net inventory provisions in the third quarter and nine months ended September 30, 2020, respectively, reduced our gross profit margin 0.6 percentage points in the nine-month period. 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.

Our same-store SG&A expenses were lower in the third quarter and nine months ended September 30, 2020 compared to the same periods in 2019 mainly due to decreases in incentive compensation related 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 decreases in certain warehouse and delivery expenses that were lower due to our lower tons sold that offset the impact of general inflation. Our SG&A expenses as a percentage of sales increased in the 2020 periods compared to the same periods in 2019 due to our lower sales levels.

In the nine months ended September 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.

21

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 million and $157.7 million in the third quarter and nine months ended September 30, 2020 reduced our operating margins 0.7 and 2.4 percentage points, respectively. See Note 13 — “Impairment and Restructuring 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 of our products and “Expenses” for trends in our operating expenses.

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 lower in the third quarter and nine months ended September 30, 2020 due to lower interest rates on decreased borrowing levels on our term loan and revolving credit facility. See Note 7 — “Debt” of our Unaudited Consolidated Financial Statements for further information on our third quarter of 2020 issuance of unsecured debt securities, the amendment 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.

Income Tax Rate

Our effective income tax rates for the third quarter and nine months ended September 30, 2020 were 22.6% and 22.5%, respectively, compared to 25.0% for the comparable 2019 periods. The declines in our effective income tax rates were mainly due to our lower income levels. The differences between our effective income tax rates and the U.S. federal

22

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)

%

The decrease in our net income and net income margins in the third quarter and nine months ended September 30, 2020 compared to the same periods in 2019 were mainly due to our decreased operating income and operating income margins, as discussed above, offset by lower effective income tax rates. Impairment and restructuring charges and other non-recurring expenses in the third quarter and nine months ended September 30, 2020 lowered our net income margins by 1.1% and 2.0%, respectively, compared to the same periods in 2019.

Liquidity and Capital Resources

Operating Activities

Net cash provided by operations of $942.8 million in the nine months ended September 30, 2020 decreased slightly from $954.1 million in the same period in 2019. Our relatively flat 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 decreased working capital investment (primarily accounts receivable and inventory less accounts payable) in the nine months ended September 30, 2020. 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 September 30, 2020 and 2019, our days sales outstanding rate was 42.4 days and 42.5 days, respectively. Our inventory turn rate (based on tons) during the nine months ended September 30, 2020 was 4.7 times (or 2.6 months on hand), compared to 4.4 times (or 2.7 months on hand) for the same period in 2019.

Income taxes paid were $68.3 million in the nine months ended September 30, 2020, a significant decrease from $173.7 million in the nine months ended September 30, 2019. The decrease is mainly 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 taxable income for 2020 compared to 2019.

Investing Activities

Net cash used in investing activities was $127.7 million in the nine months ended September 30, 2020 compared to $171.9 million used in the same period in 2019 and was substantially comprised of our capital expenditures. Capital expenditures were $134.7 million in the nine months ended September 30, 2020 compared to $182.8 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. The majority of our 2020 and 2019 capital expenditures related to growth initiatives.

23

Financing Activities

Net cash used in financing activities of $394.9 million in the nine months ended September 30, 2020 decreased significantly from $738.8 million net cash used in the nine months ended September 30, 2019, mainly due to our third quarter of 2020 issuance of unsecured debt securities offset by increased share repurchases. Net debt borrowings in the nine 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, we repurchased a total $300.2 million of our common stock compared to $50.0 million in the nine months ended September 30, 2019.

On October 20, 2020, our Board of Directors declared the 2020 fourth quarter cash dividend of $0.625 per share. We have increased our quarterly dividend 27 times since our IPO in 1994, with the most recent increase of 13.6% from $0.55 per share to $0.625 per share effective in the first quarter of 2020. We have never reduced or suspended our dividend and have paid regular quarterly dividends to our stockholders for 61 consecutive years.

On October 23, 2018, our Board of Directors amended our share repurchase plan, increasing the total authorized number of shares available to be repurchased by 5.0 million and extending the duration of the plan through December 31, 2021. In the third quarter of 2020, we repurchased 2,466 shares at an average cost of $100.00 per share, for a total of $0.2 million, and in the nine months ended September 30, 2020, we repurchased approximately 3.3 million shares at an average cost of $90.10, for a total of $300.2 million. As of September 30, 2020, we had authorization under the plan to repurchase approximately 3.1 million shares, or about 5% of our current outstanding shares. From the inception of the plan in 1994 through September 30, 2020, we have repurchased approximately 32.5 million shares at an average cost of $47.58 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 September 30, 2020 was $1.66 billion, compared to $1.60 billion at December 31, 2019. As of September 30, 2020, we had no outstanding borrowings, $37.1 million of letters of credit issued and $1.46 billion available for borrowing on the revolving credit facility. As of September 30, 2020, we had $591.6 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%, down significantly from 21.4% as of December 31, 2019.

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 September 30, 2020, 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 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.

A revolving credit facility with a credit limit of $8.0 million is in place for an operation in Asia with an outstanding balance of $5.2 million and $4.3 million as of September 30, 2020 and December 31, 2019, 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.

24

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 2016 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 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 million as of September 30, 2020 and $9.0 million as of December 31, 2019, and have maturities through 2027.

As of September 30, 2020, we had $912.7 million of debt obligations coming due before our $1.5 billion revolving credit facility expires on September 2, 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 enhances our ability to effectively raise capital, if needed. We expect to continue our acquisition and other 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 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 covenants in our Credit Agreement at September 30, 2020.

25

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 September 30, 2020 and December 31, 2019, we were contingently liable under standby letters of credit in the aggregate amount of $28.4 million. The letters of credit 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 September 30, 2020, 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.

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. Reduced shipping days also have a significant impact on our 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.

Goodwill and Other Intangible Assets

Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $1.92 billion at September 30, 2020, or approximately 24% of total assets and 38% of total equity. Additionally, other intangible assets, net amounted to $955.8 million at September 30, 2020, or approximately 12% of total assets and 19% 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 nine months ended September 30, 2020, we recorded impairment losses of $67.8 million on our intangible assets with indefinite lives and $30.7 million on our intangible assets subject to amortization. See Note 13—“Impairment and Restructuring Charges” of our Unaudited Consolidated Financial Statements for further information on our 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, 2019 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 2020 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.

Item 3. Quantitative And 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, 2019 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 of current and potential risks of the COVID-19 pandemic on our business and financial performance.

Item 4. Controls And 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 September 30, 2020 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—“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 amending the risk factors described under Item 1A “Risk Factors” 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.

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 third quarter of 2020 were made in the open market pursuant to a pre-set trading plan meeting the requirements of Rule 10b5-1 or 10b-18 under the Securities Exchange Act of 1934. Our share repurchase activity for the third quarter of 2020 was as follows:

Period

Total Number of
Shares Purchased

Average Price Paid
Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plan

Maximum Number of Shares That May Yet Be Purchased Under the Plan(1)

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

Total

2,466

$

100.00

2,466

(1)Share repurchases were made pursuant to a share repurchase program authorized by our Board of Directors on October 20, 2015. On October 23, 2018, our Board of Directors amended our share repurchase plan increasing by 5,000,000 shares the total number of shares authorized to be repurchased and extending the duration of the program through December 31, 2021. Our share repurchase plan does not obligate us to acquire any specific number of shares. Under the share repurchase plan, shares may be repurchased pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 or 10b-18 under the Securities Exchange Act of 1934, in the open market, in privately negotiated transactions or otherwise.

Item 3.  Defaults Upon Senior Securities  

None.

Item 4.  Mine Safety Disclosures  

Not applicable.

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Item 5.  Other Information  

None.

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Item 6.  Exhibits

Exhibit No.

Description

4.1

Indenture, dated August 3, 2020, among Reliance Steel & Aluminum Co. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed by Reliance Steel & Aluminum Co. on August 3, 2020).  

4.2

First Supplemental Indenture, dated August 3, 2020, among Reliance Steel & Aluminum Co. and Wells Fargo Bank, National Association, as trustee (including forms of note for the 1.300% Senior Notes due 2025 and 2.150% Senior Notes due 2030) (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed by Reliance Steel & Aluminum Co. on August 3, 2020).

10.1

Amended and Restated Credit Agreement dated as of September 3, 2020, among Reliance Steel & Aluminum Co., as Borrower, Bank of America N.A., as the Administrative Agent, JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association, as Co-Syndication Agents, PNC Bank, National Association and TD Bank, N.A., as Co-Documentation Agents, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Reliance Steel & Aluminum Co. on September 10, 2020).  

31.1*

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32**

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*

The following unaudited financial information from Reliance Steel & Aluminum Co.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 formatted in iXBRL (Inline eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these consolidated financial statements.

101.SCH*

XBRL Taxonomy Extension Schema Document.

101.CAL*

XBRL Taxonomy Calculation Linkbase Document.

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

XBRL Taxonomy Label Linkbase Document.

101.PRE*

XBRL Taxonomy Presentation Linkbase Document.

104*

Cover Page Interactive Data File (formatting as Inline XBRL and contained in Exhibit 101).

*      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.

RELIANCE STEEL & ALUMINUM CO.

(Registrant)

Dated: October 29, 2020

By:

/s/ Karla R. Lewis

Karla R. Lewis

Senior Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

By:

/s/ Arthur Ajemyan

Arthur Ajemyan

Vice President and Corporate Controller

(Principal Accounting Officer)

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