RELIANCE, INC. (RS) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, and the discussion of cautionary statements and significant risks to the Company’s business under Item 1A. “Risk Factors” of this Annual Report on Form 10-K.
Overview
In 2023, our earnings per diluted share of $22.64 and operating cash flow of $1.67 billion were the second highest in our history.
Tons sold increased 3.7% in 2023 compared to 2022 due to healthy demand in our key end markets, including non-residential construction (our largest end market), automotive and aerospace, as well as contributions from our organic growth activities. The increase in our tons sold in 2023 significantly outperformed the 1.5% increase in shipments for the industry as reported by the Metals Service Center Institute (“MSCI”).
Our net sales of $14.81 billion declined 13.0% in 2023 compared to record levels of $17.03 billion in 2022 due to a decline in our average selling price per ton sold of 16.4% that was partially offset by an increase in our tons sold.
We believe record metals pricing in 2022 was largely driven by supply chain disruptions caused by the onset of the conflict between Russia and Ukraine, labor supply and microchip shortages, and impacts of the COVID-19 pandemic, including the omicron variant surge and lockdowns in China.
Gross profit margin of 30.7% in 2023 compared to 30.8% in 2022.
Second highest annual earnings per diluted share of $22.64 in 2023 compared to record earnings per diluted share of $29.92 in 2022. Lower gross profit, driven by lower metals prices that outweighed an increase in tons sold, contributed to a decrease in earnings per share from our 2022 record.
Cash flow from operations of $1.67 billion in 2023, also the second highest in our history, decreased from a record $2.12 billion in 2022 due to lower profitability, partially offset by lower working capital needs.
Organic growth activities were substantially comprised of capital expenditures of $468.8 million in 2023 compared to $341.8 million in 2022. We also acquired Southern Steel Supply, LLC (“Southern Steel”) in May 2023.
Returns to stockholders totaled $717.6 million in 2023, comprised of $238.1 million of cash dividends and $479.5 million of share repurchases.
Effect of Demand and Pricing Changes on our Operating Results
Customer demand can have a significant impact on our results of operations. When volume increases, our revenue dollars generally increase, which contributes to increased gross profit dollars. Conversely, when volume declines, we typically produce fewer revenue dollars, which can reduce our gross profit dollars. Variable costs also increase with volume, primarily our warehouse, delivery, selling, general and administrative expenses. We can reduce certain variable expenses when volumes decline, but we cannot easily reduce our fixed costs.
Pricing for our products generally has a much more significant impact on our results of operations than customer demand levels. As discussed above, our record profitability in 2022 was mainly driven by increases in metals prices to record levels and to a lesser extent the moderate increase in our tons sold. Our revenues generally increase as a result of pricing increases as overall customer demand is not usually impacted by typical mill pricing increases, although customer buying patterns may change. Our selling prices generally increase when the cost of the metals we purchase increase as 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,
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if pricing declines, we will typically generate lower levels of gross profit and pretax income dollars. For more information, see Item 1A. “Risk Factors”.
In addition, when volume or pricing increases, our working capital requirements typically increase which decreases operating cash flow. Conversely, when customer demand falls, our working capital needs typically decrease which has the effect of increasing operating cash flow.
Acquisitions
2024 Acquisitions
On February 1, 2024, we acquired Cooksey Iron & Metal Company (“Cooksey Steel”), a metals service center that processes and distributes finished steel products, including tubing, beams, plates and bars, with cash on hand. Headquartered in Tifton, Georgia, Cooksey Steel operates three locations, servicing a diverse range of customers in Georgia, Florida, Alabama and South Carolina.
On February 14, 2024, we announced that we had entered into a definitive agreement to acquire American Alloy Steel, Inc. (“American Alloy”) subject to regulatory approval and other customary closing conditions, which have not yet occurred. American Alloy is headquartered in Houston, Texas and is a distributor of specialty carbon and alloy steel plate and round bar, including pressure vessel quality (PVQ) material.
Combined unaudited revenues for Cooksey Steel and American Alloy for the twelve months ended December 31, 2023 were approximately $400 million.
2023 Acquisition
On May 1, 2023, we acquired Southern Steel with cash on hand. Southern Steel is headquartered in Memphis, Tennessee and offers merchant and structural steel, pipe and tube, steel plate, ornamental products and laser cut and fabricated parts. Included in our net sales for the year ended December 31, 2023 were net sales of $30.6 million from Southern Steel.
2021 Acquisitions
In the fourth quarter of 2021, we acquired each of United Pipe & Steel Corp. (formerly known as Merfish United, Inc.), Admiral Metals Servicenter Company, Incorporated, Nu-Tech Precision Metals Inc. and Rotax Metals Inc. with cash on hand for a combined transaction value of $440.3 million. Included in our net sales for the year ended December 31, 2023 were combined net sales of $722.1 million from our 2021 acquisitions.
Internal Growth Activities
We continued to maintain our focus on internal growth by building new facilities, expanding existing facilities, replacing leased facilities with those we own and adding to our processing capabilities, upgrading processing equipment, improving the safety and energy efficiency of our operations and enhancing the working environments of our employees. Our capital expenditure budgets have been at historically high levels in recent years. Our 2024 capital expenditure budget is approximately $425 million.
We have made significant capital expenditure investments totaling approximately $2.2 billion over the past nine years. These significant investments have expanded our value-added processing capabilities that our managers in the field have successfully leveraged to increase the percentage of our orders with value-added processing, which has significantly contributed to increased gross profit margins compared to our historical range. In 2023 and 2022, we performed value-added processing on approximately 50% to 51% of the orders we shipped, significantly higher than our historical range of 40% to 45%, with a gross profit margin of 30.7% in 2023 that was approximately 400 basis points higher than our historical range of 25% to 27%. For reference, in 2014 and 2013, our value-added processing percentages/gross profit margins were 45%/25.1% and 40%/26.0%, respectively.
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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. We believe many metals service center company competitors do not have the ability to expand their processing services in response to their customers’ needs as quickly and at the same scale as Reliance.
Results of Operations
The following sets forth certain income statement data for each of the last three years ended December 31, 2023 (dollars are shown in millions, except per share amounts, and certain percentages may not calculate due to rounding):
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | | |||||||||||||||
| | 2023 | | 2022 | | 2021 | | |||||||||||
| | | | | % of | | | | | | % of | | | | | | % of | |
| | $ | Net Sales | | | $ | Net Sales | | | $ | Net Sales | | ||||||
| Net sales | $ | 14,805.9 | | 100.0 | % | | $ | 17,025.0 | | 100.0 | % | | $ | 14,093.3 | | 100.0 | % |
| Cost of sales (exclusive of depreciation and amortization expense shown below)(1) | | 10,258.6 | | 69.3 | | | | 11,773.7 | | 69.2 | | | | 9,603.0 | | 68.1 | |
| Gross profit(2) | | 4,547.3 | | 30.7 | | | | 5,251.3 | | 30.8 | | | | 4,490.3 | | 31.9 | |
| Warehouse, delivery, selling, general and administrative expense (“SG&A”) | | 2,562.4 | | 17.3 | | | | 2,504.2 | | 14.7 | | | | 2,306.5 | | 16.4 | |
| Depreciation and amortization expense | | 245.4 | | 1.7 | | | | 240.2 | | 1.4 | | | | 230.2 | | 1.6 | |
| Impairment of intangible assets | | — | | — | | | | — | | — | | | | 4.7 | | — | |
| Operating income | $ | 1,739.5 | | 11.7 | % | | $ | 2,506.9 | | 14.7 | % | | $ | 1,948.9 | | 13.8 | % |
| | | | | | | | | | | | | | | | | | |
| Net income attributable to Reliance | $ | 1,335.9 | | 9.0 | % | | $ | 1,840.1 | | 10.8 | % | | $ | 1,413.0 | | 10.0 | % |
| Diluted earnings per share attributable to Reliance stockholders | $ | 22.64 | | | | | $ | 29.92 | | | | | $ | 21.97 | | | |
| Column 1 | Column 2 |
|---|---|
| (1) | Cost of sales included $8.1 million and $13.7 million of amortization of inventory step-up to fair value adjustments in 2022 and 2021, respectively, relating to our 2021 acquisitions. |
| Column 1 | Column 2 |
|---|---|
| (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 “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 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. |
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Net Sales
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | | | | Percentage | | |||||
| | 2023 | 2022 | Change | Change | | ||||||
| | (dollars in millions; tons in thousands) | | | | | | | ||||
| Net sales | $ | 14,805.9 | | $ | 17,025.0 | | $ | (2,219.1) | | (13.0) | % |
| Tons sold | | 5,779.2 | | | 5,570.8 | | | 208.4 | | 3.7 | % |
| Average selling price per ton sold | $ | 2,570 | | $ | 3,073 | | $ | (503) | | (16.4) | % |
Our tons sold and average selling price per ton sold exclude our tons toll processed. Our average selling price per ton sold includes intercompany transactions that are eliminated from our consolidated net sales.
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Our 2023 net sales declined from 2022 record levels due to declines in our average selling price per ton sold that were partially offset by increases in tons sold. The increases in our tons sold were due to healthy demand in our key end markets, including non-residential construction (our largest end market), aerospace, and automotive as well as contributions from our organic growth activities.
Our average selling price per ton sold peaked in the second quarter of 2022 and subsequently declined thereafter, including throughout 2023. We believe record metals pricing in 2022 was largely driven by supply chain disruptions caused by the onset of the conflict between Russia and Ukraine, labor supply and microchip shortages, and impacts of the COVID-19 pandemic, including the omicron variant surge and lockdowns in China.
Since we primarily purchase and sell our inventories in the spot market, our average selling prices generally fluctuate similarly with the changes in the costs of the various metals we purchase; the mix of products sold can also have an impact on our overall average selling price per ton sold. As carbon steel sales represented 53% of our gross sales in 2023, changes in carbon steel prices have the most significant impact on changes in our overall average selling price per ton sold. Year-over-year changes in the selling prices of our major commodity products and related mix of our tons sold are presented below:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | Change in | | | Change in | |
| | | Average Selling | | | Percentage of | |
| | | Price Per | | | Total | |
| | | Ton Sold | | Tons Sold | | |
| Carbon steel | | (19.0) | % | | 1.0 | % |
| Aluminum | | (6.6) | % | | (0.3) | % |
| Stainless steel | | (10.6) | % | | (0.7) | % |
| Alloy | | 5.1 | % | | (0.3) | % |
Cost of Sales and Gross Profit
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | | | | | | | | |||||||||
| | 2023 | | | 2022 | | | | | | | | ||||||
| | | | | % of | | | | | | % of | | | Dollar | | Percentage | | |
| | $ | Net Sales | | $ | Net Sales | | Change | Change | | ||||||||
| | (dollars in millions) | | | | | | | | |||||||||
| Cost of sales | $ | 10,258.6 | | 69.3 | % | | $ | 11,773.7 | | 69.2 | % | | $ | (1,515.1) | | (12.9) | % |
| Gross profit | $ | 4,547.3 | | 30.7 | % | | $ | 5,251.3 | | 30.8 | % | | $ | (704.0) | | (13.4) | % |
| LIFO income | $ | (164.5) | | (1.1) | % | | $ | (76.6) | | (0.4) | % | | $ | (87.9) | | | |
Gross profit in 2023 decreased from 2022 mainly due to lower sales as a result of a decrease in average selling price per ton sold that exceeded the increase in tons sold.
In addition, we record in cost of sales non-cash adjustments to our LIFO method inventory valuation reserve that, in effect, reflects cost of sales at current replacement costs. The inventory caption of our consolidated balance sheet included a LIFO method inventory valuation reserve of $579.3 million at December 31, 2023.
Furthermore, cost of sales in 2022 included $8.1 million of non-recurring amortization of inventory step-up to fair value adjustments related to our 2021 acquisitions that decreased gross profit margin by 10 basis points.
We were able to achieve stable gross profit margins despite the significantly different metals pricing environments in 2023 and 2022, with our year-over-year average selling price per ton sold declining 16.4% in 2023 compared to an 18.5% increase in 2022. We believe that our gross profit margins are supported by our product diversity, small order sizes, investments in value-added processing capabilities and healthy demand in the majority of end markets we serve.
See “Net Sales” above for further discussion on product pricing trends.
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Expenses
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | | | | | | | | |||||||||
| | 2023 | | | 2022 | | | | | | | | ||||||
| | | | | % of | | | | | | % of | | | Dollar | | Percentage | | |
| | $ | Net Sales | | $ | Net Sales | | Change | Change | | ||||||||
| | (dollars in millions) | | | | | | | | |||||||||
| SG&A expense | $ | 2,562.4 | | 17.3 | % | | $ | 2,504.2 | | 14.7 | % | | $ | 58.2 | | 2.3 | % |
| Depreciation & amortization expense | $ | 245.4 | | 1.7 | % | | $ | 240.2 | | 1.4 | % | | $ | 5.2 | | 2.2 | % |
Our SG&A expense is made up largely of compensation costs (approximately 60-65% historically), which fluctuate based on changes in our headcount levels in response to demand levels and general inflation, and the level of incentive-based compensation.
The increase in our SG&A expense in 2023 compared to 2022 was mainly due to higher variable costs associated with an increase in our tons sold, including increased headcount, and inflationary impacts on wages, which were partially offset by lower incentive-based compensation.
Our 2023 SG&A expense as a percentage of sales increased compared to 2022 mainly due to lower sales levels.
Operating Income
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | | | | | | | | |||||||||
| | 2023 | | 2022 | | | | | | | ||||||||
| | | | | % of | | | | | | % of | | | Dollar | | Percentage | | |
| | $ | Net Sales | | $ | Net Sales | | Change | Change | | ||||||||
| | (dollars in millions) | | | | | | | ||||||||||
| Operating income | $ | 1,739.5 | | 11.7 | % | | $ | 2,506.9 | | 14.7 | % | | $ | (767.4) | | (30.6) | % |
The decrease in our operating income in 2023 as compared to 2022 was mainly a result of lower gross profit, driven by a lower average selling price per ton sold that outweighed an increase in tons sold, along with moderate increases in volume-related SG&A expenses and inflationary impacts on wages.
Our 2023 gross profit margin was generally consistent with 2022 and consequently the decrease in our operating income margin in 2023 from a record level in 2022 was mainly due to lower net sales that decreased operating leverage of our SG&A expense.
See “Net Sales” above for discussion of trends in demand and product costs and “Expenses” for trends in our operating expenses.
Other (Income) Expense, Net
| | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | | | | | |||||||||
| | 2023 | | | 2022 | | | | | ||||||
| | | | | % of | | | | | | % of | | | Dollar | |
| | $ | Net Sales | | $ | Net Sales | | Change | |||||||
| | (dollars in millions) | | | | ||||||||||
| Other (income) expense, net | $ | (41.3) | | (0.3) | % | | $ | 14.2 | | 0.1 | % | | $ | (55.5) |
The change in other (income) expense, net in 2023 compared to 2022 was mainly due to an increase in interest income as a result of higher cash and cash equivalent balances and interest earned thereon. See Note 15—“Other (Income) Expense, Net” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" for further information on other (income) expense, net.
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Income Tax Rate
Our effective income tax rate in 2023 was 23.0%, compared to 24.1% in 2022. The decrease in our effective income tax rate was mainly due to the effects of company-owned life insurance policies and lower income taxes on our foreign earnings.
The difference between our 2023 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. See Note 11—“Income Taxes” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" for further information on the differences between our effective income tax rates and the U.S. federal statutory rate.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
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, 2022.
Financial Condition
Operating Activities
Net cash provided by operations of $1.67 billion in 2023 decreased from $2.12 billion in 2022. The impact of lower profitability on operating cash flow was partially offset by lower working capital needs. 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 40.5 days in 2023 compared to 39.9 days in 2022. Our inventory turnover rate (based on tons) during 2023 was 4.7 times (or 2.6 months on hand) compared to 4.4 times (or 2.7 months on hand) in 2022.
Income taxes paid were $386.3 million in 2023, a significant decrease from $692.4 million in 2022, mainly due to our lower pretax income.
Investing Activities
Net cash used in investing activities of $483.9 million in 2023 compared to $348.5 million in 2022 was substantially comprised of capital expenditures and the purchase price for an acquisition in 2023. Capital expenditures were $468.8 million in 2023 compared to $341.8 million in 2022. The majority of our capital expenditures in 2023 and 2022 were related to growth initiatives.
Financing Activities
Net cash used in financing activities was $1.28 billion in 2023 compared to $892.6 million in 2022, mainly due to the redemption of $500.0 million aggregate outstanding principal amount of senior notes in January 2023 offset by decreased share repurchases. In 2023, we repurchased $479.5 million of our common stock, which reduced our common shares 3.2%, compared to $630.3 million of share repurchases in 2022. Our other stockholder returns in 2023 included an increase in our quarterly dividend rate of 14.3% with total dividend payments of $238.1 million compared to $217.1 million in 2022.
We have paid regular quarterly dividends to our stockholders for 64 consecutive years and increased the quarterly dividend on our common stock 31 times since our IPO in 1994, with the most recent increase of 10.0% from $1.00 per share to $1.10 per share effective in the first quarter of 2024. We have never reduced or suspended our regular quarterly dividend.
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Share Repurchases
See Note 14—“Equity” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" for further information on our 2023 share repurchases.
On October 24, 2023, our Board of Directors renewed our share repurchase program to increase the remaining repurchase authorization to $1.5 billion effective October 30, 2023. As of December 31, 2023, we had remaining authorization under the plan to repurchase $1.44 billion of shares of our common stock. The share repurchase program does not obligate us to repurchase any specific number of shares, does not have a specific expiration date and may be suspended or discontinued at any time.
During the last five years, we reduced our issued and outstanding shares of common stock by 17.6% through the repurchase of approximately 11.8 million shares at an average cost of $154.59 per share, for a total of $1.82 billion.
Purchase Obligations
We had $235.1 million of operating lease obligations as of December 31, 2023 for processing and distribution facilities, equipment, automobiles, 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 $64.9 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.
We have obligations pursuant to pension and postretirement benefit plans. A total of $16.4 million of net liabilities was recognized on the balance sheet at December 31, 2023 and the Company expects to make plan contributions and benefit payments totaling $0.8 million over the next 12 months. See Note 13—“Employee 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 2024 capital expenditure budget is $425 million. As of December 31, 2023, we had entered into contracts related to capital expenditures in the amount of $126.3 million, of which $111.1 million is expected to be paid over the next 12 months. Our actual capital expenditure spending over the next 12 months is ultimately dependent on market conditions, lead times and availability of property, plant and equipment when the capital project is initiated.
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 $301.4 million, with amounts in 2024, 2025 and thereafter being $195.7 million, $54.7 million and $51.0 million, respectively.
We have other contractual commitments under long-term service agreements, totaling $24.6 million at December 31, 2023, with amounts in 2024, 2025 and thereafter being $12.9 million, $6.9 million and $4.8 million, respectively.
Debt
We have a $1.5 billion unsecured revolving credit facility with no outstanding borrowings at December 31, 2023 under our Amended and Restated Credit Agreement (as amended, the “Credit Agreement”). We also had an aggregate of $1.15 billion principal amount of senior unsecured note obligations with various maturities through 2036 issued under indentures as of December 31, 2023.
See Note 9—“Debt” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" for further information on our amended credit agreement, debt maturities and indentures governing our debt securities.
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Liquidity and Capital Resources
We believe our primary sources of liquidity, including funds generated from operations, cash and cash equivalents and our Credit Agreement, will be sufficient to satisfy our cash requirements and stockholder return activities over the next 12 months and beyond. As of December 31, 2023, we had $1.1 billion in cash and cash equivalents and our net debt-to-total capital ratio (net debt-to-total capital is calculated as carrying amount of debt, net of cash, divided by total Reliance stockholders’ equity plus carrying amount of debt, net of cash) was 0.8%, down from 6.3% as of December 31, 2022.
As of December 31, 2023, we had $400.3 million of debt obligations coming due before our Credit Agreement matures 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 approximately $1.5 billion 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 repurchase shares. Additionally, we believe our investment grade credit ratings enhance our ability to effectively raise capital, if desired.
Covenants
The Credit Agreement and indentures governing our debt securities include customary representations, warranties, covenants 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, 2023 was 45.9 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, 2023, calculated in accordance with the terms of the Credit Agreement, was 11.4% 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 maintenance covenants under our Credit Agreement at December 31, 2023.
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, 2023, or approximately 20% of total assets and 27% of total equity. Additionally, other intangible assets, net amounted to $1.0 billion at December 31, 2023, or approximately 9% of total assets and 13% 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 Estimates for further information 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
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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 operations. 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.
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 during the periods presented in the consolidated financial statements. We recorded $4.7 million of impairment losses on our intangible assets with indefinite lives in 2021. No impairment of intangible assets with indefinite lives was recognized in 2023 and 2022.
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 may be 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 estimate the fair value of the respective assets to determine the amount of the impairment loss. If these estimates or their related assumptions change in the future, we may be required to record impairment charges. No impairment of long-lived assets was recognized during the periods presented in the consolidated financial statements.
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 analyses. An impairment charge, if incurred, could be material.