# RELIANCE, INC. (RS) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from RELIANCE, INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/861884/000155837022001918/rs-20211231x10k.htm
Accession: 0001558370-22-001918
Filing date: 2022-02-24
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RS/
All MD&A years: /company/RS/mda/
Next year: /company/RS/mda/fy2022/ (FY 2022)

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, and the discussion of cautionary statements and significant risks to the Company’s business under Item 1A “Risk Factors” of this Annual Report on Form 10-K.

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Overview

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We generated record financial performance in 2021 across nearly every key metric. Outstanding execution again resulted in record profitability in the face of significant operational challenges that included supply chain challenges, including raw material shortages and labor constraints on us, our customers and suppliers. We believe that our resilient business model enables us to increase our average selling price and gross profit margin during operating environments that include rising prices and low levels of metal inventories and availability.

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Certain key results for 2021 included the following:

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[[GREPCENT_TABLE]]
[["","\u25cf","Record net sales of $14.09 billion in 2021, up $5.28 billion, or 59.9%, from $8.81 billion in 2020 with a record average selling price per ton sold of $2,594 in 2021."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Record gross profit of $4.49 billion in 2021 eclipsed our previous, pre-pandemic record gross profit of $3.33 billion in 2019."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Record gross profit margin of 31.9% in 2021 eclipsed our previous record of 31.5% set in 2020, despite a significant last-in, first-out (\u201cLIFO\u201d) charge in 2021."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Record pretax income and margin of $1.88 billion and 13.4% in 2021, which increased by 293.8% and 800 basis points, respectively. Excluding $177.2 million of impairment, restructuring and postretirement benefit plan settlement charges in 2020, our 2021 pretax income and margin improved 187.3% and 600 basis points, respectively, compared to 2020."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Record earnings per diluted share of $21.97 were more than triple that of 2020. As adjusted for the 2020 nonrecurring charges noted above, our 2021 earnings per diluted share increased 185.7% from 2020."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","$177.0 million of dividends and $323.5 million of share repurchases compared to $164.1 million of dividends and $337.3 million of share repurchases in 2020."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","We improved our inventory turnover rate (based on tons) to 4.8 times from 4.7 times in 2020 despite significant supply chain disruptions."]]
[[/GREPCENT_TABLE]]

​

Our record net sales in 2021 were the result of a record average selling price per ton sold of $2,594, up 54.3% from 2020, which surpassed our previous average selling price per ton sold record set in 2008 by 24.9%, and a 4.6% increase in tons sold. However, our tons sold were below pre-pandemic levels of 2019 and record levels during 2018. We believe our tons sold in 2021 in most end markets we served was limited by factors that constrained economic activity such as metal supply constraints, labor shortages and other supply chain disruptions.  

​

Our record profitability in 2021 was driven by record metals prices, fundamentally strong underlying demand in most end markets, a record gross profit margin, despite a significant LIFO charge of $704.8 million, and effective expense control. Our gross profit margins in each quarter of 2021 exceeded an approximate range of 29% to 31%. Our same-store SG&A expense increased 22.1% in 2021 compared to 2020 primarily due to increased incentive compensation as a result of our record gross profit and earnings; higher variable expenses associated with increased shipment levels. Same-store SG&A expense also increased to a lesser extent due to increases in headcount and inflationary increases in certain warehouse and delivery expenses including, fuel, trucking services and packaging costs.

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Our SG&A expense is largely comprised of people-related compensation costs (approximately 60-65% historically) with changes from period to period being comprised of both changes in our incentive compensation and costs associated with changes in our headcount levels. In 2021, a larger portion of the increase in compensation expense was attributable to the significant increase in our earnings more so than changes in our headcount with our 2021 same-store headcount 4.4% higher than 2020, consistent with the increase in our tons sold, but 10.2% below our pre-pandemic levels in 2019 with our same-store tons sold down only 7.2%.

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Our success in generating strong gross profit margins during periods of economic strength and weakness, and during increasing and declining metal pricing cycles is supported by our continued significant capital expenditure investments. We have made significant capital expenditure investments totaling approximately $1.40 billion over the past seven years, with approximately 50% spent on processing equipment. These significant investments have expanded our processing capabilities and enhanced the quality of our products through improvements in processing equipment technology. Our family of companies have been successful in increasing our gross profit margins utilizing these operational enhancements as they provide our managers the ability to focus on sales of higher margin value-added services, which is reflected in the increase in the percentage of orders that include these services. Our gross profit margin of 31.9% in 2021 was a record and approximately 500 basis points above our historical range of approximately 25% to 27% with 50% of our sales orders including value-added processing compared to our historical range of approximately 40% to 45%.

​

Our business model enables us to increase our average selling price and gross profit margin during operating environments that include rising prices and low levels of metal inventories and availability. Consequently, we were able

to generate a record gross profit margin and record pretax income margin in 2021 during which period we observed ongoing strength in metals pricing with historically high levels for carbon steel products (58% of our gross sales dollars in 2021) and stainless steel products (16% of our gross sales dollars in 2021) due to solid demand, increased input costs and limited metal supply.

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During 2020, we recorded significant impairment and restructuring charges of $157.8 million, mainly due to our reduced long-term outlook for our businesses serving the energy (oil and natural gas) market and to a lesser extent charges related to the closure of certain locations where our outlook had turned negative based on the impacts from COVID-19, and postretirement benefit plan settlement charges of $19.4 million related to the termination of a frozen defined benefit plan. We recorded $4.8 million of impairment and restructuring charges in 2021. See Note 19—“Impairment and Restructuring Charges” and Note 13—“Employee Benefits” to our consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” for further information on our impairment and restructuring, and postretirement benefit plan settlement charges.

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We generated cash flow from operations in 2021 of $799.4 million compared to $1.17 billion in 2020, despite significant investments in working capital resulting from significantly higher metals prices and to a lesser extent the increase in our tons sold.

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The strong cash flow generation inherent in our business model enabled us to execute on our capital allocation priorities during 2021. During 2021, we acquired four companies for $439.3 million that aligned with our business model and strategy of investing in profitable, high quality businesses that expand our product, end market and geographic diversity. We also invested into our future growth with $236.6 million of capital expenditures in 2021 compared to $172.0 million in 2020. During 2021, our stockholder return activity totaled $500.5 million, generally consistent with 2020 in amount, and was comprised of $177.0 million of dividends and $323.5 million of share repurchases. In addition, we increased our regular quarterly dividend rate by 27.3% from $0.6875 to $0.8750 per share for the first quarter of 2022.

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We believe our strong liquidity position that includes significant cash on hand, strong cash flow generation and $1.5 billion revolving credit facility with no borrowings outstanding will support our continued prudent use of capital as we maintain a flexible approach focused on growth, both organically and through acquisitions, and stockholder return activities.

​

We initially experienced adverse impacts to our operations from COVID-19 during 2020, and in 2021 continued to face a challenging operating environment presented by the pandemic and its related impacts, including supply chain disruptions and labor shortages for us and our customers. While our results of operations and customer demand in most of

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our end markets have returned to or exceeded pre-pandemic levels, we will continue to evaluate the nature and extent of future impacts of COVID-19 on our business. Given the dynamic nature of COVID-19 and the related circumstances, including any potential resurgences of the virus or its variants or the failure to contain the spread of the pandemic by governments, we cannot reasonably estimate the full impact of the COVID-19 pandemic on our ongoing business, results of operations, and overall financial performance.

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We believe our industry-leading results are due to our unique business model and strong operational execution of our strategies. We believe our business model characteristics, including broad end market exposure, a wide geographical footprint, diverse product offerings with significant value-added processing capabilities, and focus on small order sizes and when-needed delivery, differentiate us from our metals service center industry peers. We believe these unique business model characteristics and strong operational execution of our strategies that include pricing discipline, concentrating on higher margin business and cross selling inventory within our operating locations enabled us to persevere during the pandemic in 2020 and were the cornerstone of our record financial results in 2021.

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Effect of Demand and Pricing Changes on our Operating Results

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Customer demand can have a significant impact on our results of operations. When volume increases, our revenue dollars generally increase, which contributes to increased gross profit dollars. Variable costs also increase with volume, primarily our warehouse, delivery, selling, general and administrative expenses. Conversely, when volume declines, we typically produce fewer revenue dollars, which can reduce our gross profit dollars. We can reduce certain variable expenses when volumes decline, but we cannot easily reduce our fixed costs.

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Pricing for our products generally has a much more significant impact on our results of operations than customer demand levels. As discussed above, our record profitability in 2021 was driven by record metals prices. Our revenues generally increase in conjunction with pricing increases as customer demand is not usually impacted by typical mill pricing increases. Our pricing usually increases when the cost of our materials increases. We are typically able to pass higher prices on to our customers. If prices increase and we maintain the same gross profit percentage, we generate higher levels of gross profit and pretax income dollars for the same operational efforts. Conversely, if pricing declines, we will typically generate lower levels of gross profit and pretax income dollars. Because changes in metals pricing do not require us to adjust our expense structure other than for profit-based compensation, the impact on our results of operations from changes in pricing is typically much greater than the effect of volume changes. For more information, see Item 1A. “Risk Factors” under the caption “The costs that we pay for metals fluctuate due to a number of factors beyond our control, and such fluctuations could adversely affect our operating results, particularly if we cannot pass on higher metal prices to our customers.”

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In addition, when volume or pricing increases, our working capital (primarily accounts receivable and inventories) requirements typically increase, resulting in lower levels of cash flow from operations, which may also require us to increase our outstanding debt and incur higher interest expense. Conversely, when customer demand falls, our operations typically generate increased cash flow as our working capital needs decrease.

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Acquisitions

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2021 Acquisitions

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On October 1, 2021, we acquired Merfish United, Inc. (“Merfish United”), a leading master distributor of tubular building products that are distributed to its independent wholesale distributor customers across a variety of end markets in the United States. Merfish United, headquartered in Ipswich, Massachusetts, serves 47 U.S. states through its twelve strategically located distribution centers.

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On December 10, 2021, we acquired Admiral Metals Servicenter Company, Inc. (“Admiral Metals”), a leading distributor of non-ferrous metals products in the Northeastern U.S. Admiral Metals, headquartered in Woburn, Massachusetts, serves a variety of end markets, including semiconductor, automotive, medical, infrastructure, aerospace and industrial markets through its eight strategically located service centers.

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On December 10, 2021, we acquired Nu-Tech Precision Metals Inc. (“Nu-Tech Precision Metals”), a custom manufacturer of specialty extruded metals, fabricated parts and welded components. Nu-Tech Precision Metals, services the nuclear energy, aerospace and defense end markets from its location near Ottawa, Ontario, Canada.

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On December 17, 2021, we acquired Rotax Metals, Inc. (“Rotax Metals”), a metals service center specializing in copper, bronze and brass alloys. Located in Brooklyn, New York, Rotax Metals will operate as a subsidiary of Yarde Metals, Inc., a wholly owned subsidiary of Reliance.

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Included in our net sales for the three months ended December 31, 2021 were $171.0 million of net sales from our 2021 acquisitions. Full year 2021 pro forma sales of these acquisitions were approximately $900 million.

​

We funded our 2021 acquisitions with cash on hand.

​

2019 Acquisition

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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. Fry Steel’s net sales in 2021 were $92.1 million.

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Internal Growth Activities

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We continued to maintain our focus on internal growth by opening new facilities, building or expanding existing facilities, adding and upgrading processing equipment, improving the safety and energy efficiency of our operations, and enhancing the working environments of our employees. Our capital expenditure budgets have been at historically high levels in recent years. Our 2022 capital expenditure budget is $350 million, the highest in our history.

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We have made significant capital expenditure investments totaling approximately $1.40 billion over the past seven years. In 2021, we performed value-added processing on 50% of the orders we shipped, up from 49% in 2020 and significantly higher than our historical range of approximately 40% to 45%. These significant investments have expanded our value-added processing capabilities that our managers in the field have successfully leveraged to increase the percentage of our orders with value-added processing, which has significantly contributed to increased gross profit margins in recent years and a record gross profit margin of 31.9% in 2021 that is approximately 500 basis points above our historical range of approximately 25% to 27%.

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We believe that our ability to make significant investments in processing equipment and facilities provides a competitive advantage for us, as we can provide our customers with a higher quality product and expand our services to them, which we believe many metal service center competitors do not have the ability to provide.

​

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Results of Operations

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The following table sets forth certain income statement data for each of the last three years ended December 31, 2021 (dollars are shown in millions and certain percentages may not calculate due to rounding):

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","Year Ended December 31,","\u200b"],["\u200b","2021","\u200b","\u200b","2020","\u200b","\u200b","2019","\u200b"],["\u200b","\u200b","\u200b","\u200b","% of","\u200b","\u200b","\u200b","\u200b","\u200b","% of","\u200b","\u200b","\u200b","\u200b","\u200b","% of","\u200b"],["\u200b","$","\u200b","Net Sales","\u200b","\u200b","$","\u200b","Net Sales","\u200b","\u200b","$","\u200b","Net Sales","\u200b"],["Net sales","$","14,093.3","\u200b","100.0","%","\u200b","$","8,811.9","\u200b","100.0","%","\u200b","$","10,973.8","\u200b","100.0","%"],["Cost of sales (exclusive of depreciation and amortization expense shown below)(1)","\u200b","9,603.0","\u200b","68.1","\u200b","\u200b","\u200b","6,036.8","\u200b","68.5","\u200b","\u200b","\u200b","7,644.4","\u200b","69.7","\u200b"],["Gross profit(2)","\u200b","4,490.3","\u200b","31.9","\u200b","\u200b","\u200b","2,775.1","\u200b","31.5","\u200b","\u200b","\u200b","3,329.4","\u200b","30.3","\u200b"],["Warehouse, delivery, selling, general and administrative expense (\u201cSG&A\u201d)(3)","\u200b","2,306.5","\u200b","16.4","\u200b","\u200b","\u200b","1,874.0","\u200b","21.3","\u200b","\u200b","\u200b","2,095.4","\u200b","19.1","\u200b"],["Depreciation expense","\u200b","191.5","\u200b","1.4","\u200b","\u200b","\u200b","187.7","\u200b","2.1","\u200b","\u200b","\u200b","176.2","\u200b","1.6","\u200b"],["Amortization expense","\u200b","38.7","\u200b","0.3","\u200b","\u200b","\u200b","39.6","\u200b","0.4","\u200b","\u200b","\u200b","43.1","\u200b","0.4","\u200b"],["Impairment of long-lived assets","\u200b","4.7","\u200b","0.0","\u200b","\u200b","\u200b","108.0","\u200b","1.2","\u200b","\u200b","\u200b","1.2","\u200b","\u2014","\u200b"],["Operating income","$","1,948.9","\u200b","13.8","%","\u200b","$","565.8","\u200b","6.4","%","\u200b","$","1,013.5","\u200b","9.2","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Cost of sales included $13.7 million of inventory step-up amortization in 2021 and $38.2 million of inventory provisions relating to the planned closure of certain energy-related operations in 2020."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(2)","Gross profit, calculated as net sales less cost of sales, and gross profit margin, calculated as gross profit divided by net sales, are non-GAAP financial measures as they exclude depreciation and amortization expense associated with the corresponding sales. About half of our orders are basic distribution with no processing services performed. For the remainder of our sales orders, we perform \u201cfirst-stage\u201d processing, which is generally not labor intensive as we are simply cutting the metal to size. Because of this, the amount of related labor and overhead, including depreciation and amortization, is not significant and is excluded from cost of sales. Therefore, our cost of sales is substantially comprised of the cost of the material we sell. We use gross profit and gross profit margin as shown above as measures of operating performance. Gross profit and gross profit margin are important operating and financial measures as their fluctuations can have a significant impact on our earnings. Gross profit and gross profit margin, as presented, are not necessarily comparable with similarly titled measures for other companies."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(3)","SG&A includes $5.7 million and $0.9 million of gains related to the sale of non-core property, plant and equipment in 2021 and 2019, respectively."]]
[[/GREPCENT_TABLE]]

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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Net Sales

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","Year Ended December 31,","\u200b","Dollar","\u200b","Percentage","\u200b"],["\u200b","2021","","2020","\u200b","Change","\u200b","Change","\u200b"],["\u200b","(in millions)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net sales","$","14,093.3","","$","8,811.9","\u200b","$","5,281.4","","59.9","%"],["Net sales, same-store","$","13,922.2","","$","8,811.9","\u200b","$","5,110.3","\u200b","58.0","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","Year Ended December 31,","\u200b","\u200b","\u200b","Percentage","\u200b"],["\u200b","2021","","2020","\u200b","Change","\u200b","Change","\u200b"],["\u200b","(tons in thousands)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Tons sold","","5,472.9","","\u200b","5,230.5","","\u200b","242.4","","4.6","%"],["Tons sold, same-store","","5,438.1","","\u200b","5,230.5","","\u200b","207.6","","4.0","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","Year Ended December 31,","","Price","","Percentage","\u200b"],["\u200b","2021","","2020","","Change","","Change","\u200b"],["Average selling price per ton sold","$","2,594","","$","1,681","","$","913","","54.3","%"],["Average selling price per ton sold, same-store","$","2,578","","$","1,681","","$","897","","53.4","%"]]
[[/GREPCENT_TABLE]]

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​

Our tons sold and average selling price per ton sold exclude the volumes processed by our toll processing operations. Our average selling price per ton sold includes insignificant intercompany transactions that are eliminated from our consolidated net sales. Same-store amounts exclude the results of our 2021 acquisitions.

​

Our net sales and average selling price per ton sold in 2021 were the highest in our history, surpassing our previous records set in 2018 and 2008, respectively. Underlying demand was fundamentally strong in most of the end markets we served in 2021. However, we believe our tons sold were limited by factors that constrained economic activity such as metal supply constraints, labor shortages and other supply chain disruptions.

​

Since we primarily purchase and sell our inventories in the spot market, the changes in our average selling prices generally fluctuate in accordance with the changes in the costs of the various metals we purchase. Our same-store average selling price per ton sold in 2021 was significantly higher than 2020, mainly due to several and significant mill price increases for carbon and stainless steel products in 2021.

​

The mix of products sold can also have an impact on our overall average selling price per ton sold. During 2021, as a result of significant increases in prices for the carbon and stainless steel products we sell, our mix of carbon products sales increased to 58% from 51% in 2020 and sales of aluminum products decreased to 14% from 19% in 2020.

​

Our major commodity selling prices changed year-over-year from 2020 to 2021 as follows:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","Same-store","\u200b"],["\u200b","Average Selling","\u200b","Average Selling","\u200b"],["\u200b","Price per Ton Sold","\u200b","Price per Ton Sold","\u200b"],["\u200b","(percentage change)","\u200b"],["Carbon steel","76.0","%","75.6","%"],["Stainless steel","43.3","%","43.3","%"],["Aluminum","15.7","%","15.7","%"],["Alloy","16.9","%","16.9","%"]]
[[/GREPCENT_TABLE]]

​

Cost of Sales

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","Year Ended December 31,","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","2021","\u200b","\u200b","2020","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","","% of","\u200b","\u200b","\u200b","\u200b","\u200b","% of","\u200b","\u200b","Dollar","\u200b","Percentage","\u200b"],["\u200b","$","","Net Sales","","\u200b","$","","Net Sales","","\u200b","Change","","Change","\u200b"],["\u200b","(dollars in millions)","\u200b","","\u200b","\u200b","\u200b","\u200b","\u200b"],["Cost of sales","$","9,603.0","\u200b","68.1","%","","$","6,036.8","\u200b","68.5","%","","$","3,566.2","\u200b","59.1","%"]]
[[/GREPCENT_TABLE]]

​

The increase in cost of sales in 2021 compared to 2020 was mainly due to higher average costs per ton sold and higher tons sold. See “Net Sales” above for trends in both demand and costs of our products.

​

Cost of sales in 2021 included $13.7 million of amortization of inventory step-up related to our 2021 acquisitions. Cost of sales in 2020 included $38.2 million of net inventory provisions relating to the planned closure of certain energy-related operations. See Note 19—“Impairment and Restructuring Charges” to our consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data" for further information on our 2020 restructuring charges.

​

In addition, adjustments to our LIFO method inventory valuation reserve, which are included in cost of sales and, in effect, reflects cost of sales at current replacement costs, resulted in expense of $704.8 million and income of $22.0 million in 2021 and 2020, respectively. Higher metal costs in our inventory as of December 31, 2021 as compared to December 31, 2020 resulted in significant LIFO expense in 2021.

​

As of December 31, 2021, the LIFO method inventory valuation reserve on our balance sheet was $820.4 million.

​

​

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Gross Profit

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

​

We generated record gross profits in 2021 as a result of a record average selling price per ton sold, a record gross profit margin, and increases in tons sold compared to 2020. Throughout 2021, we experienced ongoing strength in metals pricing, led by several mill price increases for carbon steel products (58% of our gross sales dollars in 2021), and stainless steel products (16% of our gross sales dollars in 2021), along with fundamentally strong underlying demand.

​

The $13.7 million of amortization of inventory step-up related to our 2021 acquisitions reduced our gross profit margin 10 basis points. The $38.2 million of net inventory provisions in 2020 reduced our gross profit margin 40 basis points. See Net Sales” and “Cost of Sales” above for further discussion on product pricing trends and our LIFO inventory valuation reserve adjustments, respectively.

​

Our gross profit margin in 2021 was a record, despite significant LIFO expense that reduced our gross profit margin by 500 basis points, surpassing our previous record set in 2020. We were able to increase our gross profit margin in 2021 compared to 2020 through the strong execution of our managers in the field, the strong metals pricing environment in 2021, the continuous improvements in our business and our ongoing investments in value-added processing equipment.

​

Expenses

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

​

Same-store amounts exclude the results of our 2021 acquisitions.

​

Our same-store SG&A expense was higher in 2021 compared to 2020 primarily due to increased incentive compensation as a result of our record gross profit and earnings; higher variable expenses associated with increased shipment levels. Same-store SG&A expense also increased to a lesser extent due to increases in headcount and inflationary increases in certain warehouse and delivery expenses including, fuel, trucking services and packaging costs.

​

Our SG&A expense is largely comprised of people-related compensation costs (approximately 60-65% historically) with changes from period to period being comprised of both changes in our incentive compensation and costs associated with changes in our headcount levels. In 2021, a larger portion of the increase in compensation expense was attributable to the significant increase in our earnings more so than changes in our headcount with our 2021 same-store headcount 4.4% higher than 2020, consistent with the increase in our tons sold, but 10.2% below our pre-pandemic levels in 2019 with our same-store tons sold down only 7.2%.

​

Included in Expenses are $4.8 million of impairment and restructuring charges in 2021 compared to impairment and restructuring charges of $119.6 million in 2020. Our 2020 charges were mainly due to closures of certain energy-related businesses (oil and natural gas) and our reduced long-term outlook for certain of our remaining energy-related businesses. Please refer to Note 7—“Intangible Assets, net” and Note 19—“Impairment and Restructuring Charges” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" for further information on our impairment and restructuring charges.

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​

Operating Income

​

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[[/GREPCENT_TABLE]]

​

The increase in our operating income in 2021 compared to 2020 was due to record gross profit, as the result of a record average selling price per ton sold, fundamentally strong demand and a record gross profit margin, which was partially offset by higher incentive compensation, increases in certain SG&A expenses related to our increased shipments and to a lesser extent inflationary increases for certain warehouse and delivery expenses.

​

Excluding the impact of significant impairment and restructuring charges in 2020, our operating income of $1.95 billion in 2021 increased $1.23 billion, or 169.3%, compared to $723.6 million in 2020, and our operating income margin improved 560 basis points. The increase in our operating income margin, as adjusted, was mainly due to our significantly higher sales that decreased our SG&A expense as a percentage of sales, despite a significant increase in our SG&A expense.

​

See Note 19—“Impairment and Restructuring Charges” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" for further information on our 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 (Income), net

​

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[[/GREPCENT_TABLE]]

​

The decrease in other expense, net in 2021 compared to 2020 was mainly due to postretirement benefit plan settlement charges of $19.4 million in 2020. See Note 13—“Employee Benefits” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" for further information on our 2020 postretirement benefit plan settlement charges.

​

Income Tax Rate

​

Our effective income tax rate in 2021 was 24.7%, compared to 22.1% in 2020. The increase in our effective income tax rate was mainly due to the significant increase in our profitability. The differences between our effective income tax rate and the U.S. federal statutory rate of 21.0% was mainly due to state income taxes partially offset by the effects of company-owned life insurance policies.

​

Net Income

​

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[[/GREPCENT_TABLE]]

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​

The increases in our net income and net income margin in 2021 compared to 2020 were mainly due to increased operating income and operating income margin as a result of record gross profit and a record gross profit margin partially offset by a significantly higher SG&A expense and higher effective income tax rate.

​

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

​

See discussion in the “Results of Operations” and “Liquidity and Capital Resources” section of Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020.

​

Liquidity and Capital Resources

​

Operating Activities

​

Net cash provided by operations of $799.4 million in 2021 decreased from $1.17 billion in 2020. Our decreased operating cash flow was mainly the result of significantly increased working capital requirements in 2021 compared to 2020, mainly due to strong demand and rising metals pricing during 2021 that achieved record levels compared to the declining demand and pricing trends in 2020 related to the initial impacts from the COVID-19 pandemic. The strong demand and rising metals pricing environment required more investment in accounts receivable and inventories partially offset by an increase in accounts payable. 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. Our average days sales outstanding rate was 38.9 days in 2021 compared to 41.9 days in 2020. Our inventory turnover rate (based on tons) during 2021 was 4.8 times (or 2.5 months on hand), an increase from 4.7 times (or 2.6 months on hand) in 2020.

​

Income taxes paid were $444.4 million in 2021, a significant increase from $87.5 million in 2020, due to our significantly higher pretax income.

​

Investing Activities

​

Net cash used in investing activities of $652.3 million in 2021 increased $463.9 million from $188.4 million used in 2020, mainly due to $439.3 million spent to fund our 2021 acquisitions and increased capital expenditures partially offset by increased proceeds from sales of property, plant and equipment. Capital expenditures were $236.6 million in 2021 compared to $172.0 million in 2020. The majority of our 2021 and 2020 capital expenditures related to growth initiatives. Proceeds from sales of property, plant and equipment were $36.0 million in 2021 compared to $6.7 million in 2020 and included $29.7 million from the sale of non-core assets for which we recognized $5.7 million of gains.

​

Financing Activities

​

Net cash used in financing activities of $528.9 million in 2021 increased from $483.0 million used in 2020, mainly due to decreased net debt borrowings. Net debt repayments were $1.5 million in 2021 compared to net debt borrowings of $58.8 million in 2020. Our shareholder return activities in 2021 included $177.0 million of dividends and $323.5 million of share repurchases compared to $164.1 million of dividends and $337.3 million of share repurchases in 2020.

​

We have paid regular quarterly dividends to our stockholders for 62 consecutive years and increased the quarterly dividend on our common stock 29 times since our IPO in 1994, with the most recent increase of 27.3% from $0.6875 per share to $0.8750 per share effective in the first quarter of 2022. We increased our dividend from $0.50 per share to $0.55 per share in February 2019, to $0.625 in February 2020, and to $0.6875 in February 2021. We have never reduced or suspended our regular quarterly dividend.

​

On July 20, 2021, our Board of Directors authorized a $1.0 billion share repurchase program that amended and restated our prior share repurchase program authorized in October 2018. The share repurchase program does not obligate us to

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repurchase any specific amount or number of shares, does not have a specific expiration date and may be suspended or discontinued at any time.

​

We repurchase shares through open market purchases, privately negotiated transactions and transactions structured through investment banking institutions under plans relying on Rule 10b5-1 or Rule 10b-18 under the Exchange Act. Repurchased and subsequently retired shares are restored to the status of authorized but unissued shares.

​

During 2021, we repurchased approximately 2.1 million shares of our common stock at an average cost of $153.55 per share, for a total of $323.5 million. During 2020, we repurchased approximately 3.7 million shares of our common stock at an average cost of $91.80 per share, for a total of $337.3 million. As of December 31, 2021, we had remaining authorization under the plan to repurchase approximately $712.6 million of our common stock. Through December 31, 2021, we have repurchased approximately 34.9 million shares at an average cost of $54.56 per share for a total of $1.91 billion since the inception of our share repurchase programs in 1994, including approximately 12.8 million shares repurchased at an average cost of $95.54 for a total of $1.22 billion during the last five years. We expect to continue to be opportunistic in our approach to repurchasing shares of our common stock.

​

Liquidity

​

We believe our primary sources of liquidity, including funds generated from operations, cash and cash equivalents and our $1.5 billion revolving credit facility, will be sufficient to satisfy our cash requirements and shareholder return activities over the next 12 months and beyond. Our total outstanding debt at December 31, 2021 was $1.66 billion which was unchanged from December 31, 2020. As of December 31, 2021, we had no outstanding borrowings and $8.9 million of letters of credit issued. As of December 31, 2021, we had $300.5 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 18.1%, up from 15.8% as of December 31, 2020.

​

On September 3, 2020, we entered into a $1.5 billion unsecured five-year Amended and Restated Credit Agreement (“Credit Agreement”) that amended and restated our existing $1.5 billion unsecured revolving credit facility. At December 31, 2021, borrowings under the Credit Agreement were available at variable rates based on LIBOR plus 1.25% or the bank prime rate plus 0.25% and we pay a commitment fee at an annual rate of 0.20% on the unused portion of the revolving credit facility. The applicable margins over LIBOR and base rate borrowings, along with commitment fees, are subject to adjustment every quarter based on our leverage ratio, as defined in the Credit Agreement. All borrowings under the Credit Agreement may be prepaid without penalty. Our Credit Agreement includes provisions to change the reference rate to the then-prevailing market convention for similar agreements if a replacement rate for LIBOR is necessary during its term.

​

A revolving credit facility with a credit limit of $8.5 million is in place for an operation in Asia with an outstanding balance of $4.7 million and $5.4 million as of December 31, 2021 and 2020, respectively.

​

The Company had $221.1 million of operating lease obligations as of December 31, 2021 for processing and distribution facilities, equipment, trucks and trailers, ground leases and other leased spaces, such as depots, sales offices, storage and data centers. Our expected payments over the next 12 months under these operating leases are $62.1 million. See Note 10—“Leases” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data.") for information regarding the maturities of our operating lease obligations.

​

The Company has obligations pursuant to certain qualified and non-qualified pension plans. A total of $40.0 million of liabilities was recognized on the balance sheet at December 31, 2021 and the Company expects to make plan contributions and benefit payments totaling $15.2 million over the next 12 months. See Note 13—“Benefits” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data.") for information regarding our expected payments under these plans.

​

Our capital expenditures have been at elevated levels in recent years and our 2022 capital expenditure budget, including unspent amounts from 2021, is a record $350 million. As of December 31, 2021, we had entered into contracts related to capital expenditures in the amount of $69.2 million which is all expected to be paid over the next 12 months.

​

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We primarily purchase and sell in the spot market and consequently our purchase orders are based on our current needs and are typically fulfilled by our vendors within short time periods (lead times). In addition, some of our purchase orders represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of goods specifying minimum quantities and set prices that exceed our expected requirements for three months. The total amount of commitments under long-term inventory purchase agreements is estimated at approximately $442.2 million, with amounts in 2022, 2023 and thereafter being $196.1 million, $131.0 million and $115.1 million, respectively.

​

We have other contractual commitments under long-term agreements, generally for services, totaling $38.7 million at December 31, 2021, with amounts in 2022, 2023 and thereafter being $18.0 million, $13.8 million and $6.9 million, respectively.

​

In addition, the Company maintains a $1.0 billion share repurchase program with $712.6 million of remaining repurchase authorization as of December 31, 2021, which does not obligate the Company to acquire a specific amount or number of shares. We have also paid regular quarterly cash dividends on our common stock for 62 consecutive years. Our Board of Directors increased the quarterly dividend to $0.55 per share in February 2019 from $0.50 per share, to $0.625 per share in February 2020, to $0.6875 per share in February 2021 and to $0.8750 per share in February 2022. The holders of Reliance common stock are entitled to one vote per share on each matter submitted to a vote of stockholders.

​

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.

​

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 bearing interest 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 2006 Indenture, the “Indentures”) for the issuance of $900.0 million of unsecured debt securities. The total issuance under the 2020 Indenture was comprised of (a) $400.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 1.30% (1.53% effective interest rate) 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 $7.7 million and $8.3 million as of December 31, 2021 and 2020, respectively, and have maturities through 2027.

​

As of December 31, 2021, we had $911.3 million of debt obligations coming due before our $1.5 billion revolving credit facility expires on September 3, 2025.

​

We believe that we will continue to have sufficient liquidity to fund our future operating needs and to repay our debt obligations as they become due. In addition to funds generated from operations and 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 believe our sources of liquidity will continue to be adequate to maintain operations, make necessary capital expenditures, finance strategic growth through acquisitions and internal initiatives, pay dividends and opportunistically repurchase shares. Additionally, we believe our investment grade credit ratings enhance our ability to effectively raise capital, if needed. We

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expect to continue our acquisition and internal growth and stockholder return activities and anticipate that we will be able to fund such activities as they arise.

​

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 December 31, 2021 was 32.4 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 December 31, 2021, calculated in accordance with the terms of the Credit Agreement, was 20.4% 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 December 31, 2021.

​

Goodwill and Other Intangible Assets

​

We have one operating segment and also one reporting unit for goodwill impairment purposes. There have been no changes in our reportable segments; we have one reportable segment – metals service centers.

​

Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $2.11 billion at December 31, 2021, or approximately 22% of total assets and 35% of total equity. Additionally, other intangible assets, net amounted to $1.08 billion at December 31, 2021, or approximately 11% of total assets and 18% 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 that the carrying amount of the assets may not be recoverable. Refer to Critical Accounting Policies and Estimates for further information regarding our 2021 and 2020 impairment charges and discussion regarding judgments involved in testing for recoverability of our goodwill and other intangible assets.

​

Critical Accounting Estimates

​

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The Company’s significant accounting policies, including recently issued accounting pronouncements, are fully described in Note 1—“Summary of Significant Accounting Policies” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data.” 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 are critical due to the fact that they involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operation. Our most critical accounting estimates include those related to the recoverability of goodwill and other indefinite-lived intangible assets and long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

​

We believe the following critical accounting estimates, as discussed with our Audit Committee, affect our more significant judgments and estimates used in preparing our consolidated financial statements. There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements.

​

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Goodwill and Other Indefinite-Lived Intangible Assets

​

We test for impairment of goodwill and intangible assets deemed to have indefinite lives annually and, between annual tests, whenever significant events or changes occur based on an assessment of qualitative factors to determine if it is more likely than not that the fair value is less than the carrying value. The qualitative factors we review include a decline in our stock price and market capitalization, a decline in the market conditions of our products and viability of end markets, and developments in our business and the overall economy. We make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets, including calculating the fair value of a reporting unit using the discounted cash flow method, as necessary. We perform the required annual goodwill and indefinite-lived intangible asset impairment test as of November 1 of each year. No impairment of goodwill was determined to exist in 2021, 2020 or 2019. We recorded impairment losses on our intangible assets with indefinite lives in the amount of $4.7 million and $67.8 million in 2021 and 2020, respectively. No impairment of intangible assets with indefinite lives was recognized in 2019. See Note 19—“Impairment and Restructuring Charges” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data” for further information on our impairment charges.

​

Long-Lived Assets

​

We periodically review the recoverability of our other long-lived assets, primarily property, plant and equipment and intangible assets subject to amortization. The evaluation is performed at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets. An impairment loss is recognized if the estimated undiscounted cash flows are less than the carrying amount of the assets. We must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges. We recorded impairment charges on property, plant and equipment of $9.3 million and $1.2 million in 2020 and 2019, respectively. No impairment of property, plant and equipment was recognized in 2021. We recorded impairment charges of $30.7 million on our intangible assets subject to amortization in 2020. No impairment of intangible assets subject to amortization was recognized in 2021 and 2019. See Note 19—"Impairment and Restructuring Charges” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data” for further information on our impairment charges.

​

Impairment tests inherently involve judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Additionally, considerable declines in the market conditions for our products from current levels as well as in the price of our common stock could also significantly impact our impairment analysis. An impairment charge, if incurred, could be material. In 2021, the evaluation of our indefinite-lived intangible assets and long-lived assets included estimates regarding the eventual recovery of the commercial aerospace market for cash-generating units that have incurred losses in recent years. If the commercial aerospace market does not recover as we currently anticipate, an impairment charge may be incurred, that could be significant.

​