RELIANCE, INC. (RS) FY 2022 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
We again generated record financial performance in 2022 across nearly every key metric. Outstanding execution resulted in record profitability in the face of declining metals pricing throughout the second half of 2022 and supply chain disruptions on us, our customers and suppliers. We believe our record performance in 2022 demonstrated the resiliency of our business model during a year that included significant volatility and varying trends in metals pricing, but fundamentally strong demand in most of our end markets.
Key results in 2022:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Record net sales of $17.03 billion in 2022, up from $14.09 billion in 2021. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Record earnings per diluted share of $29.92 were up from $21.97 in 2021 and were nearly triple our pre-pandemic earnings per diluted share in 2019. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Record cash generated by our operations of $2.12 billion eclipsed our previous record of $1.30 billion in 2019. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Record stockholder returns of $847.4 million, comprised of $217.1 million of dividends and $630.3 million of share repurchases, increased from $500.5 million of such returns in 2021. |
Our record net sales in 2022 were mainly the result of a record average selling price per ton sold of $3,073, up 18.5% from our previous record set last year, and a 1.8% increase in tons sold. However, unlike in 2021, during which metals pricing improved throughout the year, our average selling price per ton sold reached a quarterly record of $3,240 in the second quarter of 2022 and declined for the remainder of the year. We experienced healthy demand across a majority of our end markets, however our same-store tons sold decreased slightly from 2021. We believe that the continued, though diminishing, supply chain disruptions on our customers continue to constrain economic activity and negatively impact our tons sold.
Our record profitability in 2022 was the result of our ability to maintain a strong gross profit margin and exercise effective expense control in an environment of elevated metals pricing and healthy demand.
We believe our success in generating strong gross profit margins during periods of economic strength and weakness, and during increasing and declining metal pricing cycles is supported by our continued significant capital expenditure investments. See further discussion, below, under “Internal Growth Activities.”
In 2022, we generated over $2 billion of operating cash flow for the first time in our history as a result of record profitability and reduced working capital investment mainly as a result of the declining metals pricing trends in the second half of 2022. The strong cash flow generation enabled us to grow our business and provide additional returns to our stockholders. During 2022, we invested into our future growth with $341.8 million of capital expenditures and returned $847.4 million to our stockholders through record levels of cash dividends and share repurchases. We also increased our regular quarterly dividend rate by 14.3%, effective in the first quarter of 2023.
We believe our strong liquidity position that includes significant cash on hand, strong cash flow generation and $1.5 billion of availability under our revolving credit facility will support our continued disciplined use of capital as we maintain a flexible approach focused on growth, both organically and through acquisitions, and stockholder return activities.
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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 primarily driven by record metals prices. Our revenues generally increase as a result of pricing increases as customer demand is not usually impacted by typical mill pricing increases. Our selling prices usually increase when the cost of the metals we purchase increase. We are typically able to pass higher prices on to our customers. If prices increase and we maintain the same gross profit percentage, we generate higher levels of gross profit and 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 incentive compensation, the impact on our results of operations from changes in pricing is typically much greater than the effect of volume changes. For more information, see Item 1A. “Risk Factors” under the caption “The costs that we pay for metals fluctuate due to a number of factors beyond our control, and such fluctuations could adversely affect our operating results, particularly if we cannot pass on higher metal prices to our customers.”
In addition, when volume or pricing increases, our working capital (primarily accounts receivable and inventories less accounts payable) requirements typically increase, resulting in lower levels of cash flow from operations, which may also require us to increase our outstanding debt and incur higher interest expense. Conversely, when customer demand falls, our operations typically generate increased cash flow as our working capital needs decrease.
Acquisitions
2021 Acquisitions
In the fourth quarter of 2021, we acquired each of 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, 2022 were combined net sales of $863.0 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 2023 capital expenditure budget, is $500 million, the highest in our history.
We have made significant capital expenditure investments totaling over $1.7 billion over the past eight years. These significant investments have expanded our value-added processing capabilities that our managers in the field have successfully leveraged to increase the percentage of our orders with value-added processing, which has significantly contributed to increased gross profit margins in recent years. In 2022 and 2021, we performed value-added processing on about 50% of the orders we shipped, significantly higher than our historical range of 40% to 45%, with a gross profit margin of 30.8% in 2022 that was approximately 400 basis points higher than our historical gross profit margin range of 25% to 27% that existed prior to our undertaking of these significant capital expenditure investments.
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
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them. We believe many metals service center company competitors do not have the ability to expand their processing services in response to their customer’ 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, 2022 (dollars are shown in millions and certain percentages may not calculate due to rounding):
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | | |||||||||||||||
| | 2022 | | | 2021 | | | 2020 | | |||||||||
| | | | | % of | | | | | | % of | | | | | | % of | |
| | $ | | Net Sales | | | $ | | Net Sales | | | $ | | Net Sales | | |||
| Net sales | $ | 17,025.0 | | 100.0 | % | | $ | 14,093.3 | | 100.0 | % | | $ | 8,811.9 | | 100.0 | % |
| Cost of sales (exclusive of depreciation and amortization expense shown below)(1) | | 11,773.7 | | 69.2 | | | | 9,603.0 | | 68.1 | | | | 6,036.8 | | 68.5 | |
| Gross profit(2) | | 5,251.3 | | 30.8 | | | | 4,490.3 | | 31.9 | | | | 2,775.1 | | 31.5 | |
| Warehouse, delivery, selling, general and administrative expense ("SG&A") | | 2,504.2 | | 14.7 | | | | 2,306.5 | | 16.4 | | | | 1,874.0 | | 21.3 | |
| Depreciation and amortization expense | | 240.2 | | 1.4 | | | | 230.2 | | 1.6 | | | | 227.3 | | 2.6 | |
| Impairment of long-lived assets | | — | | — | | | | 4.7 | | - | | | | 108.0 | | 1.2 | |
| Operating income | $ | 2,506.9 | | 14.7 | % | | $ | 1,948.9 | | 13.8 | % | | $ | 565.8 | | 6.4 | % |
| Net income attributable to Reliance | $ | 1,840.1 | | 10.8 | % | | $ | 1,413.0 | | 10.0 | % | | $ | 369.1 | | 4.2 | % |
| Diluted earnings per share attributable to Reliance stockholders | $ | 29.92 | | | | | $ | 21.97 | | | | | $ | 5.66 | | | |
| 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. Cost of sales included $38.2 million of inventory provisions relating to the planned closure of certain energy-related operations in 2020. |
| 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. |
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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Net Sales
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | | Dollar | | Percentage | | |||||
| | 2022 | | 2021 | | Change | | Change | | |||
| | (dollars in millions) | | | | | | | ||||
| Net sales | $ | 17,025.0 | $ | 14,093.3 | | $ | 2,931.7 | | 20.8 | % | |
| Net sales, same-store | $ | 16,162.0 | $ | 13,922.2 | | $ | 2,239.8 | | 16.1 | % | |
| | | | | | | | | | | | |
| | Year Ended December 31, | | Tons | | Percentage | | |||||
| | 2022 | 2021 | | Change | | Change | | ||||
| | (tons in thousands) | | | | | | | ||||
| Tons sold | 5,570.8 | | | 5,472.9 | | | 97.9 | | 1.8 | % | |
| Tons sold, same-store | 5,404.5 | | | 5,438.1 | | | (33.6) | | (0.6) | % | |
| | | | | | | | | | | | |
| | Year Ended December 31, | Price | Percentage | | |||||||
| | 2022 | 2021 | Change | Change | | ||||||
| Average selling price per ton sold | $ | 3,073 | | $ | 2,594 | | $ | 479 | | 18.5 | % |
| Average selling price per ton sold, same-store | $ | 3,001 | | $ | 2,578 | | $ | 423 | | 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. Same-store amounts exclude the results of our 2021 acquisitions.
Our net sales and average selling price per ton sold in 2022 were the highest in our history, surpassing our previous records set in 2021. Our sales in 2022 were supported by ongoing healthy demand in most of the end markets we serve and elevated metals pricing. However, we believe our tons sold continue to be limited by supply chain disruptions on our customers that constrained economic activity.
Since we primarily purchase and sell our inventories in the spot market, our average selling prices generally fluctuate similarly as the changes in the costs of the various metals we purchase. Our average selling price per ton sold in 2022 was significantly higher than in 2021, mainly due to significant mill price increases for our major product categories in the first half of 2022 that offset declining metal prices in the second half of 2022.
The mix of products sold can also have an impact on our overall average selling price per ton sold. Year-over-year changes in selling prices of our major commodity products and related mix of gross sales dollars are presented below:
| | | | | | |
|---|---|---|---|---|---|
| | Change in | | | | |
| | Average Selling | | | | |
| | Price Per | | | % of | |
| | Ton Sold | | | Total Sales | |
| Carbon steel | 10.1 | % | 54 | % | |
| Stainless steel | 28.8 | % | | 17 | % |
| Aluminum | 22.3 | % | | 15 | % |
| Alloy | 31.7 | % | | 4 | % |
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Cost of Sales and Gross Profit
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | | | | | | | | |||||||||
| | 2022 | | | 2021 | | | | | | | | ||||||
| | | | | % of | | | | | | % of | | | Dollar | | Percentage | | |
| | $ | | Net Sales | | | $ | | Net Sales | | | Change | | Change | | |||
| | (dollars in millions) | | | | | | | | |||||||||
| Cost of sales | $ | 11,773.7 | | 69.2 | % | | $ | 9,603.0 | | 68.1 | % | | $ | 2,170.7 | | 22.6 | % |
| Gross profit | $ | 5,251.3 | | 30.8 | % | | $ | 4,490.3 | | 31.9 | % | | $ | 761.0 | | 16.9 | % |
We generated record gross profit in 2022 mainly as a result of a significant increase in our average selling price per ton sold that outpaced the increase in average cost per ton sold.
In addition, non-cash 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 a credit, or an increase to gross profit, of $76.6 million in 2022 compared to a charge, or a decrease to gross profit, of $704.8 million in 2021. Our 2022 and 2021 gross profit was further reduced by $8.1 million and $13.7 million, respectively, of non-recurring amortization of inventory step-up to fair value adjustments related to our 2021 acquisitions. As of December 31, 2022, the LIFO method inventory valuation reserve on our balance sheet was $743.8 million.
Our gross profit margin in 2022 was strong and higher than pre-pandemic levels, but declined from our record level in 2021 mainly due to different product pricing trends during the respective periods. Our gross profit margin in 2021 benefited from rapid and significant increases in metals prices and limited metals supply throughout the year, while our gross profit margin in 2022 compressed as our average selling price per ton sold reached a peak in the second quarter of 2022 and declined throughout the remainder of the year.
See “Net Sales” above for further discussion on product pricing trends.
Expenses
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | | | | | | | | |||||||||
| | 2022 | | | 2021 | | | | | | | | ||||||
| | | | | % of | | | | | | % of | | | Dollar | | Percentage | | |
| | $ | | Net Sales | | | $ | | Net Sales | | | Change | | Change | | |||
| | (dollars in millions) | | | | | | | | |||||||||
| SG&A expense | $ | 2,504.2 | | 14.7 | % | | $ | 2,306.5 | | 16.4 | % | | $ | 197.7 | | 8.6 | % |
| SG&A expense, same-store | $ | 2,419.2 | | 15.0 | % | | $ | 2,288.6 | | 16.4 | % | | $ | 130.6 | | 5.7 | % |
| Depreciation & amortization expense | $ | 240.2 | | 1.4 | % | | $ | 230.2 | | 1.6 | % | | $ | 10.0 | | 4.3 | % |
| Impairment of long-lived assets | $ | — | | — | % | | $ | 4.7 | | — | % | | $ | (4.7) | | (100.0) | % |
Same-store amounts exclude the results of our 2021 acquisitions.
Our SG&A expense is made up largely of people-related compensation costs (approximately 60-65% historically), which change based on our headcount levels in response to demand levels and general inflation, and the level of incentive-based compensation that is primarily tied to first-in, first-out (“FIFO”) pretax income profitability at our operating locations and to a lesser extent our overall profitability for our executive officers and senior management.
The increase in our same-store SG&A expense in 2022 compared to 2021 was mainly due to higher variable expenses associated with inflationary impacts on wage rates, fuel, freight and packaging costs, partially offset by lower incentive-based compensation as our FIFO pretax income declined 9.0% in 2022 compared to 2021. See “Cost of Sales and Gross Profit” above for discussion of our LIFO method inventory valuation reserve.
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Operating Income
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | | | | | | | | |||||||||
| | 2022 | | | 2021 | | | | | | | | ||||||
| | | | | % of | | | | | | % of | | | Dollar | | Percentage | | |
| | $ | | Net Sales | | | $ | | Net Sales | | | Change | | Change | | |||
| | (dollars in millions) | | | | | | | | |||||||||
| Operating income | $ | 2,506.9 | | 14.7 | % | | $ | 1,948.9 | | 13.8 | % | | $ | 558.0 | | 28.6 | % |
The increase in our operating income in 2022 compared to 2021 was mainly due to record gross profit driven by a record average selling price per ton sold and fundamentally strong demand that offset a decline in our gross profit margin and inflationary increases in certain SG&A expenses.
Our operating income margin for 2022 was a record and increased from 2021 mainly due to better operating leverage relating to the significant increase in our net sales as our operating expenses as a percentage of sales decreased approximately 200 basis points, despite a significant increase in our SG&A expense, that offset the 110 basis point decline in our gross profit margin.
See “Net Sales” above for discussion of trends in demand and product costs and “Expenses” for trends in our operating expenses.
Income Tax Rate
Our effective income tax rate in 2022 was 24.1%, compared to 24.7% in 2021. The decrease in our effective income tax rate was due to lower state income taxes as a result of changes in the allocation of our U.S. income to the states in which we operate and an increase in tax benefit realized from our stock-based compensation plans.
The difference between our effective income tax rate and the U.S. federal statutory rate of 21.0% was mainly due to state income taxes and higher foreign income tax rates 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 in 2022 and 2021.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
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, 2021.
Financial Condition
Operating Activities
We generated record net cash provided by operations of $2.12 billion in 2022, compared to $799.4 million in 2021. Our record operating cash flow in 2022 was mainly due to a $426.8 million, or 30.1%, increase in net income and reduced working capital investment when compared with 2021. During 2021, significant and rapid increases in metals pricing and limited metals availability required a significantly higher investment in working capital than in 2022 during which our working capital needs peaked during the second quarter and as metals prices and our tons sold declined for the remainder of the year, we reduced our working capital levels and, as consequence, generated significant operating cash flow. 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 39.9 days in 2022 compared to 38.9 days in 2021. Our inventory turnover rate (based on tons) during 2022 was 4.4 times (or 2.7 months on hand), a decrease from 4.8 times (or 2.5 months on hand) in 2021.
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Income taxes paid were $692.4 million in 2022, a significant increase from $444.4 million in 2021, due to our significantly higher pretax income.
Investing Activities
Net cash used in investing activities of $348.5 million in 2022 compared to $652.3 million in 2021 was substantially comprised of reduced spending on acquisitions and lower proceeds from sales of property, plant and equipment partially offset by increased capital expenditures. In 2022, we had no acquisition spending compared to $439.3 million spent in 2021. Capital expenditures were $341.8 million in 2022 compared to $236.6 million in 2021. The majority of our capital expenditures in 2022 and 2021 were related to growth initiatives.
Financing Activities
Net cash used in financing activities was $892.6 million in 2022 compared to $528.9 million in 2021, mainly due to increased share repurchases. In 2022, we spent $630.3 million to repurchase shares of our common stock compared to $323.5 million in 2021. Our other stockholder return activities in 2022 included an increase in our quarterly dividend rate with total cash dividends and dividend equivalents of $217.1 million compared to $177.0 million in 2021.
We have paid regular quarterly dividends to our stockholders for 63 consecutive years and increased the quarterly dividend on our common stock 30 times since our IPO in 1994, with the most recent increase of 14.3% from $0.875 per share to $1.00 per share effective in the first quarter of 2023. We have never reduced or suspended our regular quarterly dividend.
Share Repurchases
See Note 14—“Equity” to our consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" for information on our share repurchases.
On July 26, 2022, our Board of Directors amended our share repurchase program to increase the remaining repurchase authorization to $1.0 billion. As of December 31, 2022, we had remaining authorization under the plan to repurchase $680.7 million of our common shares. 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 5 years, we have repurchased approximately 16 million shares at an average cost of $114.38 per share, for a total of $1.83 billion, resulting in a 22% reduction in our common shares issued and outstanding.
Purchase Obligations
The Company had $217.7 million of operating lease obligations as of December 31, 2022 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 $59.1 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 pension and postretirement benefit plans. A total of $17.1 million of net liabilities was recognized on the balance sheet at December 31, 2022 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 2023 capital expenditure budget is a record $500 million. As of December 31, 2022, we had entered into contracts related to capital expenditures in the amount of $133.2 million which is all expected to be paid over the next 12 months. Our actual capital expenditure spending over
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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 $320.1 million, with amounts in 2023, 2024 and thereafter being $179.1 million, $44.9 million and $96.1 million, respectively.
We have other contractual commitments under long-term agreements, generally for services, totaling $39.3 million at December 31, 2022, with amounts in 2023, 2024 and thereafter being $22.3 million, $12.2 million and $4.8 million, respectively.
Debt
We have a $1.5 billion unsecured revolving credit facility with no outstanding borrowings at December 31, 2022 under our Amended and Restated Credit Agreement (as amended, the “Credit Agreement”). We also had an aggregate of $1.65 billion principal amount of senior unsecured note obligations with various maturities through 2036 issued under indentures as of December 31, 2022.
In January 2023, we redeemed the $500.0 million aggregate outstanding principal amount of our 4.50% senior notes due 2023 in full. We funded this redemption using cash on hand. 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 obligations and indentures governing our debt securities.
Liquidity and Capital Resources
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 stockholder return activities over the next 12 months and beyond. As of December 31, 2022, we had $1.2 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 6.3%, down from 18.1% as of December 31, 2021.
As of December 31, 2022, we had $908.5 million of debt obligations coming due before our $1.5 billion revolving credit facility expires on September 3, 2025; $500.0 million of these debt obligations were redeemed in January 2023.
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 nearly $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 opportunistically repurchase shares. Additionally, we believe our investment grade credit ratings enhance our ability to effectively raise capital, if needed.
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, 2022 was 41.2 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, 2022, calculated in accordance with the terms of the Credit Agreement, was 17.3% compared to the debt covenant maximum
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amount of 60% (leverage ratio is calculated as total debt, inclusive of finance lease obligations and outstanding letters of credit, minus the lesser of cash held by our domestic subsidiaries and $200.0 million, divided by Reliance stockholders’ equity plus total debt).
We were in compliance with all financial maintenance covenants in our Credit Agreement at December 31, 2022.
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, 2022, or approximately 20% of total assets and 30% of total equity. Additionally, other intangible assets, net amounted to $1.02 billion at December 31, 2022, or approximately 10% of total assets and 14% 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 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.
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 2022, 2021 or 2020. We recorded impairment losses on our intangible assets with indefinite lives in the amounts of $4.7 million and $67.8 million in 2021 and 2020, respectively. No impairment of intangible assets with indefinite lives was recognized in 2022. See
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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 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. In 2020, we recorded impairment charges on intangible assets subject to amortization and property, plant and equipment of $30.7 million and $9.3 million, respectively. There were no impairments of long-lived assets recognized in 2022 and 2021. 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 analyses. An impairment charge, if incurred, could be material.