Why Reliance Steel’s profit margins fell in the 3Q

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Dec. 4 2020, Updated 10:53 a.m. ET

Reliance Steel’s profit margins 

In the last part of the series, we discussed how Reliance Steel and Aluminum’s (RS) earnings before interest, tax, depreciation, and amortization (or EBITDA) margins decreased in the third quarter. In this part of the series, we’ll analyze why the profit margins fell.

It’s important to note that although Reliance Steel’s profit margins decreased, they’re still better than most of its competitors.

Metals USA impacts Reliance Steel’s profit margins

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Metals USA was a major acquisition that RS completed last year. Metals USA’s margins are a bit lower than Reliance Steel’s profit margins. This has negatively impacted Reliance Steel’s profit margins. Reliance Steel’s management is hoping that Metals USA’s profit margins increase. If this happens, RS investors are expected to benefit. The previous chart shows Metals USA’s key financials.

Reliance Steel gets a LIFO charge in the third quarter

A last in first out (or LIFO) charge is a technique used for a valuation of inventories. In this technique, the most recent purchase of inventories are expensed first. This means that the cost of goods sold (or COGS) contains the most recently purchased inventories.

If the raw material prices are rising, this can lead to lower profits for a company. In the third quarter, Reliance Steel got a LIFO charge of $20 million. This was because of an increase in metal prices. Aluminum prices increased considerably over the past few months.

Litigation costs

RS incurred a charge of $13.5 million as a result of a settlement in an anti-trust litigation. This led to higher selling, general, and administrative (or SG&A) expense. This was a onetime charge.

In the next part of the series, we’ll discuss some of the actions that Reliance Steel’s management took to protect its profit margins.

In this series, we’re analyzing Reliance Steel’s third quarter results. RS is a distributor for primary metal producers like U.S. Steel Corp. (X), Alcoa (AA), and ArcelorMittal (MT). Currently, X is among the top ten holdings of the SPDR S&P Metals and Mining ETF (XME).

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