RELIANCE, INC. 
This report contains certain statements that are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Our forward-looking statements may include, but
are not limited to, discussions of our industry, our end markets, our business
strategies and our expectations concerning future demand and our results of
operations, margins, profitability, impairment and restructuring charges, taxes,
liquidity, litigation matters and capital resources. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "preliminary," "range" and "continue," the
negative of these terms, and similar expressions. All statements contained in
this report, other than statements of historical fact, are forward-looking
statements. These forward-looking statements are based on management's
estimates, projections and assumptions as of the date of such statements.
Forward-looking statements involve known and unknown risks and uncertainties and
are not guarantees of future performance. Actual outcomes and results may differ
materially from what is expressed or forecasted in these forward-looking
statements as a result of various important factors, including, but not limited
to, actions taken by us, including restructuring or cash-preservation
initiatives, as well as developments beyond our control, including, but not
limited to, the impact of the novel strain of coronavirus ("COVID-19") outbreak
and changes in worldwide and U.S. economic conditions that materially impact our
customers and the demand for our products and services. The extent to which the
COVID-19 pandemic will continue to negatively impact our operations will depend
on future developments which are highly uncertain and cannot be predicted,
including the duration of the outbreak, new information which may emerge
concerning the severity of the COVID-19 pandemic, the actions taken to control
the spread of COVID-19 or treat its impact, and changes in worldwide and U.S.
economic conditions. Further deteriorations in economic conditions, as a result
of COVID-19 or otherwise, could lead to a further or prolonged decline in demand
for our products and services and negatively impact our business, and may also
impact financial markets and corporate credit markets which could adversely
impact our access to financing, or the terms of any financing. We cannot at this
time predict the extent of the impact of the COVID-19 pandemic and resulting
economic impact, but it could have a material adverse effect on our business,
financial position, results of operations and cash flows. Other factors which
could cause actual results to differ materially from our forward-looking
statements include those disclosed in this report and in other reports we have
filed with the United States Securities and Exchange Commission (the "SEC").
Important risks and uncertainties about our business can be found elsewhere in
this Quarterly Report on Form 10-Q, including in Item 1A "Risk Factors," and in
Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2019 filed with the SEC . As a result, these statements speak only
as of the date that they were made, and we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required by law.
Except as required by law, we disclaim any obligation or undertaking to update
or revise any forward-looking statements contained herein to reflect any change
in assumptions, beliefs, or expectations or any change in events, conditions, or
circumstances upon which any such forward-looking statements are based. You
should review any additional disclosures we make in our press releases and Forms
10-K, 10-Q and 8-K filed with or furnished to the SEC .
Overview
We delivered solid financial results with healthy demand levels through most of the first quarter of 2020 offset by downward pricing pressure mainly attributable to uncertainty regarding COVID-19.
Certain key financial results for the first quarter of 2020 included:
? Net sales of
in the first quarter of 2019;
14
Table of Contents
Gross profit of
? of
million restructuring charge that decreased our gross profit margin by 160
basis points;
? Gross profit margin of 30.3% (or 31.9%, excluding the impact of a
restructuring charge) compared to 29.3% in the first quarter of 2019;
Pretax income of
? million in the first quarter of 2019. Pretax income included a
impairment and restructuring charge that decreased pretax income margin by 540
basis points; and
Earnings per diluted share of
? or 67.1%, from
restructuring charge noted above decreased earnings per diluted share by
Our same-store tons sold decreased 2.3% and our average selling price per ton sold decreased 11.8% in the first quarter of 2020 compared to the first quarter of 2019. The decline in our average selling price per ton sold was mainly due to carbon steel pricing that has trended lower over the past four quarters. Our investments in value-added processing equipment during the past several years and focus on specialty products supported our strong gross profit margin of 30.3% (or 31.9%, excluding the impact of a$39.8 million restructuring charge) in the first quarter of 2020. As ofMarch 31, 2020 , our net debt-to-total capital ratio was 25.4%, up from 21.4% as ofDecember 31, 2019 , but below our historical range of 30% to 40%. As ofMarch 31, 2020 , we had ample liquidity with$831.5 million available for borrowing on our revolving credit facility and$172.1 million in cash and cash equivalents. Due to the spread of COVID-19, many government orders were issued to curb non-essential businesses beginning in the US in mid-March. As a result, certain of our customers closed. However, most of our locations continue to operate to support our customers albeit at reduced levels as essential businesses under theUnited States Department of Homeland Security Cybersecurity andInfrastructure Security Agency guidance. Our toll processing operations servicing the automotive market experienced significant declines in mid to late March as many auto manufacturers and steel and aluminum mills suddenly closed. We took decisive, immediate action, by reducing the workforce at our largestU.S. tolling operations by about 50%. Demand in the non-residential end market, our largest, remained solid through most of the first quarter. However, we have begun to see some second quarter projects being deferred. Demand for the products we sell to the aerospace market remained relatively steady through the first quarter, with strength noted in our sales to the defense portion of this market. We expect activity for commercial aerospace to decline beginning in the second quarter as the direct result of COVID-19 and are uncertain as to the long-term impact. We will continue to evaluate the nature and extent of future impacts of COVID-19 on our business. Given the dynamic nature of these circumstances, the full impact of the COVID-19 pandemic on our ongoing business, results of operations, and overall financial performance cannot be reasonably estimated at this time. In addition, changes in drilling technology and increased global oil production led to significantly lower crude oil prices in the first quarter of 2020. As a result, we made a decision to close three of our energy-related businesses and reduced our long-term outlook for certain of our remaining energy-related businesses, resulting in an impairment and restructuring charge of$137.5 million . We believe that our broad end market exposure, diverse product offerings, focus on small order sizes, when-needed delivery and significant value-added processing capabilities along with our wide geographic footprint will enable us to persevere during these difficult and uncertain times. We believe that these business model characteristics combined with pricing discipline and our strategy of concentrating on higher margin business differentiate us from our peers and will continue to allow us to achieve industry-leading results.
In addition to ensuring the health, safety and well-being of our employees during this challenging time, with the significant uncertainty that currently exists, we have adjusted our capital allocation priorities to focus on cash preservation,
15
Table of Contents
including rightsizing our inventory and pausing non-essential capital
expenditures. Due to the significant uncertainty that remains regarding the
duration of the COVID-19 pandemic, we have reduced our 2020 capital expenditure
budget from approximately $250 million to approximately $190 million .
Nevertheless, we remain committed to concurrently making investments that
support the long-term growth and sustainability of our company as well as
continuing to provide returns to our stockholders. We believe our sources of
liquidity and access to capital markets will continue to be adequate for the
foreseeable future to maintain operations, finance strategic initiatives, pay
dividends, and execute opportunistic purchases under our share repurchase
program.
For more information, please see Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q.
Acquisitions 2020 Acquisition OnMarch 31, 2020 , through our wholly owned subsidiary,Feralloy Corporation , we purchased the remaining 49% noncontrolling interest of joint venture partnershipFeralloy Processing Company ("FPC"), a toll processor inPortage, Indiana , that increased our ownership from 51% to 100%. We have consolidated the results of FPC sinceAugust 1, 2008 , when we acquiredPNA Group Holding Corporation and its subsidiaries. The difference between the$8.0 million consideration paid for the noncontrolling interest with a carrying amount of$1.1 million was recognized as a decrease in total Reliance stockholders' equity.
We funded our 2020 acquisition of FPC with borrowings on our revolving credit facility and cash on hand.
2019 Acquisition OnDecember 31, 2019 , we acquiredFry Steel Company ("Fry Steel"). Fry Steel is a general line and long bar distributor located inSanta Fe Springs, California . Fry Steel specializes in the cutting of various bar products including stainless, alloy, aluminum, carbon, brass and bronze. Sales of Fry Steel were$25.5 million in the first quarter of 2020.
We funded our 2019 acquisition of Fry Steel with borrowings on our revolving credit facility and cash on hand.
16
Table of Contents
Results of Operations
The following table sets forth certain income statement data for the first quarters of 2020 and 2019 (dollars are shown in millions and certain amounts may not calculate due to rounding):
Three Months Ended March 31,
2020 2019
% of % of
$ Net Sales $ Net Sales
Net sales $ 2,572.9 100.0 % $ 2,956.6 100.0 %
Cost of sales (exclusive of depreciation and
amortization expenses shown below)(1) 1,792.2 69.7 2,089.7 70.7
Gross profit(2) 780.7 30.3 866.9 29.3
Warehouse, delivery, selling, general and
administrative expense ("S,G&A") 522.7 20.3
532.1 18.0
Depreciation expense 46.2 1.8 43.2 1.5
Amortization expense 10.8 0.4 10.8 0.4Impairment of long-lived assets 97.7 3.8
- -
Operating income $ 103.3 4.0 % $ 280.8 9.5 %
(1) Cost of sales in the first quarter of 2020 included a
provision relating to the planned closure of certain energy-related
operations.
(2) Gross profit, calculated as net sales less cost of sales, and gross profit
margin, calculated as gross profit divided by net sales, are non-GAAP
financial measures as they exclude depreciation and amortization expenses
associated with the corresponding sales. About half of our orders are basic
distribution with no processing services performed. For the remainder of our
sales orders, we perform "first-stage" processing, which is generally not
labor intensive as we are simply cutting the metal to size. Because of this,
the amount of related labor and overhead, including depreciation and
amortization, is not significant and is excluded from our cost of sales.
Therefore, our cost of sales is substantially comprised of the cost of the
material we sell. We use gross profit and gross profit margin as shown above
as measures of operating performance. Gross profit and gross profit margin
are important operating and financial measures, as their fluctuations can
have a significant impact on our earnings. Gross profit and gross profit
margin, as presented, are not necessarily comparable with similarly titled
measures for other companies.
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Net Sales
Three Months Ended March 31, Dollar Percentage
2020 2019 Change Change
(dollars in millions)
Net sales $ 2,572.9 $ 2,956.6 $ (383.7) (13.0) %
Net sales, same-store $ 2,547.4 $ 2,956.6 $ (409.2) (13.8) %
Three Months Ended March 31, Tons Percentage
2020 2019 Change Change
(tons in thousands)
Tons sold 1,468.8 1,502.0 (33.2) (2.2) %
Tons sold, same-store 1,466.8 1,502.0 (35.2) (2.3) %
Three Months Ended March 31, Price Percentage
2020 2019 Change Change
Average selling price per ton sold $ 1,742 $
1,958
Same-store amounts exclude the results of our acquisition completed in 2019.
17
Table of Contents
Our net sales were lower in the first quarter of 2020 compared to the first quarter of 2019 due to a lower average selling price per ton sold and lower tons sold.
Demand in non-residential construction (including infrastructure), our largest end market served, remained solid for most of the first quarter of 2020 before slowing in late March. Demand in the automotive end market (which we serve primarily through our toll processing operations in theU.S. andMexico ) was strong until mid-March when demand declined as many automotive OEM and steel and aluminum mills suspended operations. The aerospace end market remained steady during the first quarter of 2020, but is expected to be challenged in future quarters. Demand in heavy industry was steady in the first half of the first quarter of 2020, but both agricultural and construction equipment spending declined significantly in the last month of the quarter. Demand for the products we sell to the energy (oil and natural gas) end market continued to decline throughout the quarter from already low levels. We expect the aforementioned end market trends to continue until COVID-19 restrictions are lifted and economic conditions improve. Our tons sold have trended significantly lower, declining about 20% in the first two-and-a-half weeks in April of 2020 compared to the same period ofMarch 2020 ; a trend that may continue, get worse or get better. Since we primarily purchase and sell our inventories in the "spot" market, the changes in our average selling prices generally fluctuate in accordance with the changes in the costs of the various metals we purchase. The mix of products sold can also have an impact on our average selling prices. The first quarter of 2020 same-store average selling price per ton sold decreased 11.8%, mainly due to mill price decreases on many of the carbon steel products we sell. Our same-store average selling price per ton sold has declined sequentially for the past five quarters. As carbon steel sales represent approximately 50% of our sales dollars, changes in carbon steel prices have the most significant impact on changes in our overall average selling price per
ton sold.
Our major commodity selling prices changed year-over-year as follows:
Same-store
Average Selling Average Selling
Price per Ton Sold Price per Ton Sold
(percentage change)
Carbon steel (16.4) % (16.5) %
Aluminum (5.8) % (5.8) %
Stainless steel (1.0) % (3.3) %
Alloy (0.4) % (4.4) %
18
Table of Contents
Cost of Sales
Three Months Ended
March 31,
2020 2019
% of % of Dollar Percentage
$ Net Sales $ Net Sales Change Change
(dollars in millions)
Cost of sales $ 1,792.2 69.7 % $ 2,089.7 70.7 % $ (297.5) (14.2) %
The decrease in cost of sales in the first quarter of 2020 compared to the first quarter of 2019 is mainly due to a lower average cost per ton sold and lower tons sold. See "Net Sales" above for trends in both demand and costs of our products. Cost of sales in the first quarter of 2020 included a$39.8 million inventory provision relating to the planned closure of certain energy-related operations. See Note 12 - "Impairment and Restructuring Charge" of our Unaudited Consolidated Financial Statements for further information on our 2020 restructuring charge. In addition, our last-in, first-out ("LIFO") method inventory valuation reserve adjustment, which is included in cost of sales and, in effect, reflects cost of sales at current replacement costs, resulted in a credit, or income, of$20.0 million in the first quarter of 2020 compared to a credit, or income, of$12.5 million in the first quarter of 2019. AtMarch 31, 2020 , our LIFO reserve balance was$117.6 million . Gross Profit Three Months Ended March 31, 2020 2019 % of % of Dollar Percentage $ Net Sales $ Net Sales Change Change (dollars in millions)
Gross profit$ 780.7 30.3 %$ 866.9 29.3 %$ (86.2) (9.9) % Our strong gross profit margin continues to benefit from the increases in the percentage of our orders that include value-added processing in recent years that is supported by our ongoing investments in processing equipment. The$39.8 million inventory provision in the first quarter of 2020 reduced our gross profit margin by 160 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. Expenses Three Months Ended March 31, 2020 2019 % of % of Dollar Percentage $ Net Sales $ Net Sales Change Change (dollars in millions) S,G&A expense$ 522.7 20.3 %$ 532.1 18.0 %$ (9.4) (1.8) % S,G&A expense, same-store$ 516.8 20.3 %$ 532.1 18.0 %$ (15.3) (2.9) % Depreciation & amortization expense$ 57.0 2.2 %$ 54.0 1.8 %$ 3.0 5.6 % Impairment of long-lived assets$ 97.7 3.8 % $ - - %$ 97.7 * * Not meaningful.
Same-store amounts exclude the results of our acquisition completed in 2019.
Our same-store S,G&A expense was lower in the first quarter of 2020 compared to
the first quarter of 2019 due to decreases in incentive compensation related to
lower profitability levels and due to certain warehouse and delivery expenses
that were lower due to our lower tons sold that offset the impact of general
inflation, including wage increases.
19
Table of Contents
Our S,G&A expense as a percentage of sales increased in the first quarter of 2020 compared to the first quarter of 2019, mainly due to our lower sales levels.
In the first quarter of 2020, we recorded a$64.1 million impairment charge on our intangibles with indefinite lives and a$33.6 million impairment charge on our long-lived assets. The impairment charge related to our decision to close three of our energy-related operations and our reduced long-term outlook for the energy market. See Note 12 - "Impairment and Restructuring Charge" of our Unaudited Consolidated Financial Statements for further information on our 2020 impairment charge. Operating Income Three Months Ended March 31, 2020 2019 % of % of Dollar Percentage $ Net Sales $ Net Sales Change Change (dollars in millions) Operating income$ 103.3 4.0 %$ 280.8 9.5 %$ (177.5) (63.2) %
Our operating income was lower in the first quarter of 2020 compared to the first quarter of 2019 mainly due to a$137.5 million impairment and restructuring charge. Excluding the non-recurring impairment and restructuring charge, our operating income declined$40.0 million , or 14.2%, and was mainly due to our lower sales levels partially offset by a higher gross profit margin. In addition, excluding the non-recurring impairment and restructuring charge, which reduced our first quarter of 2020 operating margin by 540 basis points, our operating income margin for the first quarter of 2020 was only 10 basis points lower than our first quarter of 2019 operating income margin. See Note 12 - "Impairment and Restructuring Charge" of our Unaudited Consolidated Financial Statements for further information on our 2020 impairment and restructuring charge. See "Net Sales" above for trends in both demand and costs of our products and "Expenses" for trends in our operating expenses. Other Expense Three Months Ended March 31, 2020 2019 % of % of Dollar Percentage $ Net Sales $ Net Sales Change Change (dollars in millions) Interest expense$ 16.9 0.7 %$ 24.2 0.8 %$ (7.3) (30.2) % Other expense, net$ 3.3 0.1 %$ 1.1 - %$ 2.2 200.0 % Interest expense was lower in the first quarter of 2020 due to lower interest rates on decreased borrowing levels on our revolving credit facility. See Note 6 - "Debt" of our Unaudited Consolidated Financial Statements for further information on the interest rates on our borrowings. Income Tax Rate
Our effective income tax rates for the first quarters of 2020 and 2019 were 24.3% and 25.0%, respectively. The differences between our effective income tax rates and theU.S. federal statutory rate of 21% were mainly due to state income taxes partially offset by the effects of company-owned life insurance policies. The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted onMarch 27, 2020 . The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer's share of social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We continue to examine the impacts the CARES Act may have on our business. 20 Table of Contents Net Income Three Months Ended March 31, 2020 2019 % of % of Dollar Percentage $ Net Sales $ Net Sales Change Change (dollars in millions)
Net income attributable to Reliance
6.4 %$ (128.4) (67.5) %
The decrease in our net income in the first quarter of 2020 compared to the first quarter of 2019 was mainly due to a$137.5 million impairment and restructuring charge and lower gross profit from our lower sales levels. Our net income margin in the first quarter of 2020, excluding the impact of the impairment and restructuring charge, was 6.4%, consistent with the first quarter of 2019.
Liquidity and Capital Resources
Operating Activities Net cash provided by operations of$170.8 million in the first quarter of 2020 increased$53.6 million , or 45.7%, from$117.2 million in the first quarter of 2019. Our increased operating cash flow was mainly due to decreased working capital investment (primarily accounts receivable and inventory less accounts payable) in the first quarter of 2020. Our inventory tons on hand at the end of the first quarter of 2020 were relatively flat compared toDecember 31, 2019 , due to effective inventory management. Conversely, in the first quarter of 2019 we increased our inventory tons on hand due to an expectation of a more favorable demand environment that did not materialize. Accordingly, we focused on reducing inventory levels through the remainder of 2019 to rightsize our inventory. 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. AtMarch 31, 2020 and 2019, our days sales outstanding rate was 42.4 days and 42.1 days, respectively. Our inventory turn rate (based on tons) during the first quarter of 2020 was 4.8 times (or 2.5 months on hand), compared to 4.2 times (or 2.9 months on hand) in the first quarter of 2019. Investing Activities
Net cash used in investing activities of$55.0 million in the first quarter of 2020 was fairly consistent with the$48.7 million used in the first quarter of 2019 and was substantially comprised of our capital expenditures. Capital expenditures were$55.5 million for the first quarter of 2020 compared to$53.0 million in the first quarter of 2019. The majority of our 2020 and 2019 capital expenditures related to growth initiatives. Financing Activities Net cash used in financing activities of$107.4 million in the first quarter of 2020 increased from$65.4 million net cash used in the first quarter of 2019 mainly due to share repurchases, partially offset by increased net debt borrowings. In the first quarter of 2020, we repurchased a total of$300.0 million of our common stock compared to no repurchases in the first quarter of 2019. Net debt borrowings in the first quarter of 2020 were$248.0 million compared to$17.0 million of net debt repayments in the first quarter of 2019. OnApril 21, 2020 , our Board of Directors declared the 2020 second quarter cash dividend of$0.625 per share. We have increased our quarterly dividend 27 times since our IPO in 1994, with the most recent increase of 13.6% from$0.55 per share to$0.625 per share effective in the first quarter of 2020. We have never reduced or suspended our dividend and have paid regular quarterly dividends to our stockholders for 61 consecutive years. OnOctober 23, 2018 , our Board of Directors amended our share repurchase plan, increasing the total authorized number of shares available to be repurchased by 5.0 million and extending the duration of the plan throughDecember 31, 2021 . In the first quarter of 2020, we repurchased 3,329,824 shares of our common stock at an average cost of$90.09 per share, for a total of$300.0 million . As ofMarch 31, 2020 , we had authorization under the plan to repurchase approximately 21 Table of Contents
3.1 million shares, or about 5% of our current outstanding shares. From the inception of the plan in 1994 throughMarch 31, 2020 , we have repurchased approximately 32.5 million shares at an average cost of$47.57 per share. We expect to continue to be opportunistic in our approach to repurchasing shares of our common stock. Liquidity Our primary sources of liquidity are funds generated from operations and our$1.5 billion revolving credit facility. Our total outstanding debt atMarch 31, 2020 was$1.84 billion , compared to$1.60 billion atDecember 31, 2019 . As ofMarch 31, 2020 , we had$631.0 million of outstanding borrowings,$37.5 million of letters of credit issued and$831.5 million available for borrowing on our revolving credit facility. As ofMarch 31, 2020 , we had$172.1 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 25.4%, up from 21.4%
as ofDecember 31, 2019 . OnSeptember 30, 2016 , we entered into a$2.1 billion unsecured five-year credit agreement ("Credit Agreement") comprised of a$1.5 billion unsecured revolving credit facility and a$600.0 million unsecured term loan, with an option to increase the revolving credit facility up to an additional$500.0 million at our request, subject to approval of the lenders and certain other customary conditions. We intend to use the revolving credit facility for working capital and general corporate purposes, including, but not limited to, capital expenditures, dividend payments, repayment of debt, share repurchases, internal growth initiatives and acquisitions. The$600.0 million term loan dueSeptember 30, 2021 amortizes in quarterly installments, with an annual amortization of 10% untilJune 2021 , with the balance to be paid at maturity. All borrowings under the Credit Agreement may be prepaid without penalty.
A revolving credit facility with a credit limit of
Capital Resources OnNovember 20, 2006 , we entered into an indenture (the "2006 Indenture") for the issuance of$600.0 million of unsecured debt securities. The total debt issued was comprised of two tranches, (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 onNovember 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 onNovember 15, 2036 .
On
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
As of
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 be able to access the capital markets to
raise funds, if desired. We have taken steps to mitigate the impact of COVID-19
on our business, including, adjusting our capital allocation priorities to focus
on cash preservation, including rightsizing our inventory and pausing
non-essential capital expenditures. Due to the significant uncertainty that
22
Table of Contents
remains regarding the duration of the COVID-19 pandemic, we have reduced our 2020 capital expenditure budget from approximately$250 million to approximately$190 million . We believe our sources of liquidity will continue to be adequate to maintain operations, make necessary capital expenditures, finance strategic initiatives, and pay dividends. Additionally, based on current market conditions, we believe our investment grade credit rating enhances our ability to effectively raise capital, if needed. We expect to continue our acquisition and other growth and stockholder return activities and anticipate that we will be able to fund such activities as they arise. The COVID-19 pandemic has had, and we expect will continue to have, an adverse effect on our net sales and pretax income. Future decreases in cash flow from operations would decrease the cash available for the capital uses described above, including capital expenditures, dividend payments, repayment of debt, internal growth initiatives and acquisitions. However, since the ultimate severity and length of the COVID-19 pandemic is unknown, we cannot predict the impact it will have on our customers and suppliers and on the debt and equity capital markets, and we cannot estimate the ultimate impact it will have on our liquidity and capital resources. Covenants
The Credit Agreement and the Indentures include customary representations, warranties, covenants, acceleration, indemnity and events of default provisions. The covenants under the Credit Agreement include, among other things, two financial maintenance covenants that require us to comply with a minimum interest coverage ratio and a maximum leverage ratio. Our interest coverage ratio for the twelve-month period endedMarch 31, 2020 was 13.1 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 ofMarch 31, 2020 , calculated in accordance with the terms of the Credit Agreement, was 27.7% 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, divided by Reliance stockholders' equity plus total debt).
We were in compliance with all financial covenants in our Credit Agreement at
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
As ofMarch 31, 2020 andDecember 31, 2019 , we were contingently liable under standby letters of credit in the aggregate amount of$28.4 million . The letters of credit relate to insurance policies and construction projects.
Contractual Obligations and Other Commitments
We had no material changes in commitments for capital expenditures or purchase obligations as ofMarch 31, 2020 , as compared to those disclosed in our table of contractual obligations included in our Annual Report on Form 10-K for the
year endedDecember 31, 2019 . Inflation
Our operations have not been, and we do not expect them to be, materially affected by general inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in metal prices.
Seasonality
Some of our customers are in seasonal businesses, especially customers in the
construction industry and related businesses. However, our overall operations
have not shown any material seasonal trends as a result of our geographic,
product and customer diversity. Typically, revenues in the months of July,
November and December have been lower than in other months because of a reduced
number of working days for shipments of our products, resulting from holidays
observed by the Company as well as vacation and extended holiday closures at
some of our customers. Reduced shipping
23
Table of Contents
days also have a significant impact on our profitability. Particularly in light of COVID-19, we cannot predict whether period-to-period fluctuations will be consistent with historical patterns. Results of any one or more quarters are therefore not necessarily indicative of annual results.
Goodwill , which represents the excess of cost over the fair value of net assets acquired, amounted to$2.00 billion atMarch 31, 2020 , or approximately 25% of total assets and 41% of total equity. Additionally, other intangible assets, net amounted to$928.0 million atMarch 31, 2020 , or approximately 11% of total assets and 19% of total equity.Goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests and further evaluation when certain events occur. Other intangible assets with finite useful lives are amortized over their useful lives. We review the recoverability of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. In the first quarter of 2020, we recorded impairment losses of$64.1 million on our intangible assets with indefinite lives and$24.7 million on our intangible assets subject to amortization. See Note 12-"Impairment and Restructuring Charge" for further information on our impairment charge.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our Unaudited Consolidated Financial Statements, which have been prepared in accordance withU.S. GAAP. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical accounting estimates include those related to goodwill and other indefinite-lived intangible assets and long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. The impacts of the COVID-19 pandemic increases uncertainty, which has reduced our ability to use past results to estimate future performance. Accordingly, our estimates and judgments may be subject to greater volatility than in the past. See "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 for further information regarding the accounting policies that we believe to be critical accounting policies and that affect our more significant judgments and estimates used in preparing our consolidated financial statements. We do not believe that the new accounting guidance implemented in 2020 changed our critical accounting policies. New Accounting Guidance
See Note 2-"Impact of Recently Issued Accounting Guidance" of our Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for disclosure on new accounting guidance issued or implemented.
© Edgar Online, source
