Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-13122
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
95-1142616
(I.R.S. Employer
Identification No.)
16100 N. 71st Street, Suite 400
Scottsdale, Arizona 85254
(Address of principal executive offices, including zip code)
(480) 564-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
RS
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 27, 2023, there were 57,471,229 shares of the registrant’s common stock, $0.001 par value, outstanding.
RELIANCE STEEL & ALUMINUM CO.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
1
Unaudited Consolidated Balance Sheets
Unaudited Consolidated Statements of Income
2
Unaudited Consolidated Statements of Comprehensive Income
3
Unaudited Consolidated Statements of Equity
4
Unaudited Consolidated Statements of Cash Flows
5
Notes to Unaudited Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
22
Item 4.
Controls and Procedures
PART II — OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
23
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
24
SIGNATURE
25
Item 1. Financial Statements
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions, except number of shares which are reflected in thousands and par value)
September 30,
December 31,
2023
2022*
ASSETS
Current assets:
Cash and cash equivalents
$
976.9
1,173.4
Accounts receivable, less allowance for credit losses of $27.1 at September 30, 2023 and $26.1 at December 31, 2022
1,666.3
1,565.7
Inventories
2,110.2
1,995.3
Prepaid expenses and other current assets
104.7
115.6
Income taxes receivable
1.0
36.6
Total current assets
4,859.1
4,886.6
Property, plant and equipment:
Land
281.6
262.7
Buildings
1,469.3
1,359.3
Machinery and equipment
2,645.9
2,446.9
Accumulated depreciation
(2,207.8)
(2,094.3)
Property, plant and equipment, net
2,189.0
1,974.6
Operating lease right-of-use assets
227.7
216.4
Goodwill
2,108.7
2,105.9
Intangible assets, net
990.1
1,019.6
Cash surrender value of life insurance policies, net
28.0
42.0
Other assets
90.3
84.8
Total assets
10,492.9
10,329.9
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
445.4
412.4
Accrued expenses
130.3
118.8
Accrued compensation and retirement benefits
203.3
240.0
Accrued insurance costs
43.7
43.4
Current maturities of long-term debt and short-term borrowings
0.3
508.2
Current maturities of operating lease liabilities
55.7
52.5
Total current liabilities
878.7
1,375.3
Long-term debt
1,141.6
1,139.4
Operating lease liabilities
174.7
165.2
Long-term retirement benefits
30.4
26.1
Other long-term liabilities
56.8
51.4
Deferred income taxes
475.5
476.6
Commitments and contingencies
Equity:
Preferred stock, $0.001 par value: 5,000 shares authorized; none issued or outstanding
—
Common stock and additional paid-in capital, $0.001 par value and 200,000 shares authorized
Issued and outstanding shares—58,090 at September 30, 2023 and 58,787 at December 31, 2022
0.1
Retained earnings
7,823.6
7,173.6
Accumulated other comprehensive loss
(99.4)
(86.3)
Total Reliance stockholders’ equity
7,724.3
7,087.4
Noncontrolling interests
10.9
8.5
Total equity
7,735.2
7,095.9
Total liabilities and equity
* Amounts derived from audited financial statements.
See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except number of shares which are reflected in thousands and per share amounts)
Three Months Ended
Nine Months Ended
2022
Net sales
3,623.0
4,247.2
11,468.6
13,414.2
Costs and expenses:
Cost of sales (exclusive of depreciation and amortization shown below)
2,546.0
3,008.2
7,942.9
9,292.7
Warehouse, delivery, selling, general and administrative (“SG&A”)
626.9
630.1
1,928.8
1,890.6
Depreciation and amortization
60.6
60.4
182.5
178.8
3,233.5
3,698.7
10,054.2
11,362.1
Operating income
389.5
548.5
1,414.4
2,052.1
Other (income) expense:
Interest expense
9.7
15.6
30.3
46.8
Other (income) expense, net
(8.2)
8.9
(23.3)
21.5
Income before income taxes
388.0
524.0
1,407.4
1,983.8
Income tax provision
92.0
129.6
340.7
490.9
Net income
296.0
394.4
1,066.7
1,492.9
Less: net income attributable to noncontrolling interests
0.9
3.5
3.3
Net income attributable to Reliance
295.0
393.5
1,063.2
1,489.6
Earnings per share attributable to Reliance stockholders:
Basic
5.05
6.55
18.13
24.35
Diluted
4.99
6.45
17.92
23.98
Shares used in computing earnings per share:
58,427
60,055
58,648
61,175
59,124
60,984
59,333
62,114
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Other comprehensive (loss) income:
Foreign currency translation loss
(11.9)
(32.0)
(10.7)
(51.3)
Postretirement benefit plan adjustments, net of tax
(0.9)
6.4
(2.4)
6.3
Total other comprehensive loss
(12.8)
(25.6)
(13.1)
(45.0)
Comprehensive income
283.2
368.8
1,053.6
1,447.9
Less: comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Reliance
282.2
367.9
1,050.1
1,444.6
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per share amounts)
Total equity, beginning balances
7,625.5
6,863.1
6,093.7
Common stock and additional paid-in capital:
Beginning balances
Stock-based compensation
16.8
18.6
48.4
Taxes paid related to net share settlement of restricted stock units
(4.0)
(4.5)
(41.3)
(21.6)
Repurchase of common shares
(11.6)
(14.1)
(5.3)
(26.8)
Excise tax on repurchase of common shares
(1.2)
(1.8)
Ending balances
Retained earnings:
7,702.1
6,942.5
6,155.3
Cash dividends and dividend equivalents
(58.7)
(52.9)
(179.3)
(163.5)
(114.8)
(322.6)
(233.9)
(520.9)
6,960.5
Accumulated other comprehensive loss:
(86.6)
(88.3)
(68.9)
Other comprehensive loss
(113.9)
Total Reliance stockholders' equity, ending balances
6,846.7
Noncontrolling interests:
9.9
8.8
7.2
Capital contribution
Dividends paid
(1.1)
(2.0)
Total equity, ending balances
6,855.5
Cash dividends declared per common share
1.00
0.875
3.00
2.625
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense
Provision for credit losses
4.2
5.6
Stock-based compensation expense
Net loss on life insurance policies and deferred compensation plan assets
8.0
22.8
Other
(4.7)
2.9
Changes in operating assets and liabilities (excluding effect of businesses acquired):
Accounts receivable
(102.0)
(191.6)
(113.5)
(126.6)
Prepaid expenses and other assets
91.1
20.0
Accounts payable and other liabilities
(35.0)
(143.3)
Net cash provided by operating activities
1,145.7
1,309.9
Investing activities:
Acquisition, net of cash acquired
(24.1)
Purchases of property, plant and equipment
(358.6)
(249.7)
Proceeds from sales of property, plant and equipment
9.8
5.0
Net cash used in investing activities
(367.8)
(244.4)
Financing activities:
Net short-term debt repayments
(2.2)
(0.8)
Principal payments on long-term debt
(505.7)
Share repurchases
(239.2)
(547.7)
(3.0)
22.5
Net cash used in financing activities
(970.7)
(711.1)
Effect of exchange rate changes on cash and cash equivalents
(3.7)
(11.2)
(Decrease) increase in cash and cash equivalents
(196.5)
343.2
Cash and cash equivalents at beginning of year
300.5
Cash and cash equivalents at end of the period
643.7
Supplemental cash flow information:
Interest paid during the period
32.5
39.1
Income taxes paid during the period, net
305.2
596.8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of Reliance Steel & Aluminum Co. and its subsidiaries (collectively “Reliance”, the “Company”, “we”, “our” or “us”). These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the consolidated financial statements reflect all material adjustments, which are of a normal recurring nature, necessary for presentation of financial statements for interim periods in accordance with U.S. GAAP. Interim results are not necessarily indicative of the results for a full year. All significant intercompany accounts and transactions have been eliminated. The ownership of the other interest holders of consolidated subsidiaries is reflected as noncontrolling interests. Investments in unconsolidated subsidiaries are recorded under the equity method of accounting. These consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and accompanying notes included in Reliance’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates.
The majority of our inventory is valued using the last-in, first-out (“LIFO”) method, which is not in excess of market. Under this method, older costs are included in inventory, which may be higher or lower than current costs. We estimate the effect of LIFO on interim periods by allocating the projected year-end LIFO calculation to interim periods on a pro rata basis.
Inflation Reduction Act
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted. The IRA includes a new 15% minimum tax on book income of certain large corporations. Additionally, the IRA imposes a 1% excise tax, which is paid annually and recorded in paid-in-capital, on the excess of the fair market value of our share repurchases over the fair market value of share issuances, made after December 31, 2022. See our consolidated statements of equity for further information on our accrued 2023 excise tax.
Note 2. Revenues
The following table presents our net sales disaggregated by product and service:
Carbon steel
1,996.9
2,371.9
6,266.6
7,545.2
Aluminum
592.6
660.3
1,902.5
2,069.9
Stainless steel
557.5
712.7
1,818.8
2,284.7
Alloy
174.4
188.2
552.6
568.5
Toll processing and logistics
154.3
139.5
464.2
414.8
Copper and brass
72.2
81.0
232.1
260.4
Other and eliminations
75.1
93.6
231.8
270.7
Total
Note 3. Goodwill
The change in the carrying amount of goodwill is as follows:
Balance at January 1, 2023
Acquisition
2.6
Effect of foreign currency translation
0.2
Balance at September 30, 2023
We had no accumulated impairment losses related to goodwill at September 30, 2023 and December 31, 2022.
Note 4. Intangible Assets, net
Intangible assets, net consisted of the following:
September 30, 2023
December 31, 2022
Weighted Average
Gross
Amortizable
Carrying
Accumulated
Life in Years
Amount
Amortization
Intangible assets subject to amortization:
Customer lists/relationships
14.2
715.2
(510.7)
713.6
(479.3)
Backlog of orders
7.9
22.3
(5.2)
(3.1)
9.4
10.3
(9.6)
(9.5)
747.8
(525.5)
745.8
(491.9)
Intangible assets not subject to amortization:
Trade names
767.8
765.7
1,515.6
1,511.5
Amortization expense for intangible assets was $33.6 million and $36.3 million for the nine months ended September 30, 2023 and 2022, respectively. As part of the purchase price allocation of our acquisition of Southern Steel Supply, LLC on May 1, 2023, we allocated a total of $4.0 million to the intangible assets acquired. Foreign currency translation gain related to Intangible assets, net was $0.1 million for the nine months ended September 30, 2023 compared to foreign currency translation loss of $5.0 million for the nine months ended September 30, 2022.
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The following is a summary of estimated future amortization expense:
2023 (remaining three months)
10.2
2024
40.3
2025
36.1
2026
26.7
2027
26.0
Thereafter
83.0
222.3
Note 5. Debt
Debt consisted of the following:
Unsecured revolving credit facility maturing September 3, 2025
Senior unsecured notes, interest payable semi-annually at 4.50%, effective rate of 4.63%, redeemed on January 15, 2023
500.0
Senior unsecured notes, interest payable semi-annually at 1.30%, effective rate of 1.53%, maturing August 15, 2025
400.0
Senior unsecured notes, interest payable semi-annually at 2.15%, effective rate of 2.27%, maturing August 15, 2030
Senior unsecured notes, interest payable semi-annually at 6.85%, effective rate of 6.91%, maturing November 15, 2036
250.0
Other notes and revolving credit facilities
1.7
9.6
1,151.7
1,659.6
Less: unamortized discount and debt issuance costs
(9.8)
(12.0)
Less: amounts due within one year and short-term borrowings
(0.3)
(508.2)
Total long-term debt
The weighted average interest rate on the Company’s outstanding borrowings as of September 30, 2023 and December 31, 2022 was 2.88% and 3.37%, respectively.
Unsecured Credit Facility
On September 3, 2020, we entered into a $1.5 billion unsecured five-year Amended and Restated Credit Agreement that amended and restated our then-existing $1.5 billion unsecured revolving credit facility. On January 12, 2023, the agreement was amended to change the reference rate from LIBOR to SOFR (as amended, the “Credit Agreement”). As of September 30, 2023, borrowings under the Credit Agreement were available at variable rates based on SOFR plus 1.10% or the bank prime rate and we currently pay a commitment fee at an annual rate of 0.175% on the unused portion of the revolving credit facility. The applicable margins over SOFR and base rate borrowings, along with commitment fees, are subject to adjustment every quarter based on our leverage ratio, as defined in the Credit Agreement. All borrowings under the Credit Agreement may be prepaid without penalty.
As of September 30, 2023 and December 31, 2022, we had no outstanding borrowings on the revolving credit facility. We had $1.7 million and $7.7 million of letters of credit outstanding under the revolving credit facility as of September 30, 2023 and December 31, 2022, respectively.
8
Senior Unsecured Notes
On January 15, 2023, we redeemed in full the $500.0 million aggregate outstanding principal amount of our 4.50% senior notes due April 15, 2023 using cash on hand.
Under the indentures for each series of our senior notes (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 each series of the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest.
Other Notes, Revolving Credit and Letter of Credit/Letters of Guarantee Facilities
A revolving credit facility with a credit limit of $7.5 million is in place for an operation in Asia with no outstanding balance as of September 30, 2023 and $2.2 million outstanding as of December 31, 2022.
Various industrial revenue bonds had combined outstanding balances of $1.7 million and $7.4 million as of September 30, 2023 and December 31, 2022, respectively, and have maturities through 2027.
We have a $50.0 million standby letters of credit/letters of guarantee agreement with one of the lenders under our Credit Agreement. A total of $41.4 million and $18.7 million were outstanding under this facility as of September 30, 2023 and December 31, 2022, respectively.
Covenants
The Credit Agreement and the indentures 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. We were in compliance with all financial maintenance covenants in our Credit Agreement at September 30, 2023.
Note 6. Leases
Our metals service center leases are comprised of processing and distribution facilities, equipment, trucks and trailers, ground leases and other leased spaces, such as depots, sales offices, storage and data centers. We also lease various office spaces. Our leases of facilities and other spaces expire at various times through 2045 and our ground leases expire at various times through 2068. Nearly all of our leases are operating leases; we have recognized finance right-of-use assets and obligations of less than $1.0 million.
The following is a summary of our lease cost:
Operating lease cost
25.0
23.1
72.0
69.8
9
Supplemental cash flow and balance sheet information is presented below:
Cash payments for operating leases
70.6
65.4
Right-of-use assets obtained in exchange for operating lease obligations
55.6
39.0
Other lease information:
Weighted average remaining lease term—operating leases
5.8 years
6.6 years
Weighted average discount rate—operating leases
4.1%
3.8%
Maturities of operating lease liabilities as of September 30, 2023 are as follows:
61.2
48.2
35.3
26.5
79.6
Total operating lease payments
267.6
Less: imputed interest
(37.2)
Total operating lease liabilities
230.4
Note 7. Income Taxes
Our effective income tax rates for the third quarter and nine months ended September 30, 2023 were 23.7% and 24.2%, respectively, compared to 24.7% for the same 2022 periods. The differences between our effective income tax rates and the U.S. federal statutory rate of 21.0% were mainly due to state income taxes.
Note 8. Equity
Dividends
On October 24, 2023, our Board of Directors declared the 2023 fourth quarter cash dividend of $1.00 per share of common stock, payable on December 1, 2023 to stockholders of record as of November 17, 2023.
During the third quarters of 2023 and 2022, we declared and paid quarterly dividends of $1.00 and $0.875 per share, or $58.5 million and $52.5 million in total, respectively. During the nine months ended September 30, 2023 and 2022, we declared and paid aggregate quarterly dividends of $3.00 and $2.625 per share, or $176.1 million and $160.6 million in total, respectively. In addition, we paid $3.2 million and $2.9 million in dividend equivalents with respect to vested restricted stock units during the nine months ended September 30, 2023 and 2022, respectively.
Stock-Based Compensation
We make annual grants of long-term equity incentive awards to officers and key employees under our Second Amended and Restated 2015 Incentive Award Plan in the forms of service-based restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) that each have approximately 3-year vesting periods. The PSUs include the right to receive a maximum payout of two shares of our common stock based on performance goals tied to achieving a 3-year return on assets result and include service criteria. We also grant the non-management members of our Board of
10
Directors fully vested stock awards under our Directors Equity Plan. The fair values of the RSUs, PSUs and stock awards are determined based on the closing stock price of our common stock on the grant date.
In the nine months ended September 30, 2023 and 2022, we made payments of $41.3 million and $21.6 million, respectively, to tax authorities on our employees’ behalf for shares withheld related to net share settlement of vested restricted stock units.
A summary of the status of our unvested RSUs and PSUs as of September 30, 2023, and changes during the nine months then ended is as follows:
Weighted
Average
RSU and PSU
Grant Date
Aggregate Units
Fair Value
Unvested at January 1, 2023
582,012
164.60
Granted(1)
193,812
247.90
Vested
(4,075)
157.22
Cancelled or forfeited
(13,693)
177.18
Unvested at September 30, 2023
758,056
185.71
Shares reserved for future grants (all plans)
1,479,570
As of September 30, 2023, there was $82.5 million of total unrecognized compensation cost related to unvested RSUs and PSUs that is expected to be recognized, net of actual forfeitures and cancellations, over a weighted average period of 1.7 years.
Share Repurchases
Our share repurchase activity during the nine months ended September 30, 2023 and 2022 was as follows:
Average Cost
Shares
Per Share
First quarter
160,224
242.86
38.9
113,529
150.97
17.1
Second quarter
308,454
239.55
73.9
1,085,635
178.61
193.9
Third quarter
467,213
270.49
126.4
1,883,093
178.79
336.7
935,891
255.56
239.2
3,082,257
177.70
547.7
From October 2, 2023 through October 24, 2023, we repurchased 575,060 shares at an average cost per share of $255.15, for a total of $146.7 million, resulting in $294.8 million of our common stock remaining available for repurchase under our July 2022 authorization. Our Board of Directors subsequently amended our share repurchase program to increase the repurchase authorization to $1.5 billion effective October 30, 2023. 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. Repurchased and subsequently retired shares are restored to the status of authorized but unissued shares.
We may repurchase shares through a variety of methods including, but not limited to, open market purchases, accelerated share repurchases, negotiated block purchases and transactions structured through investment banking institutions under plans relying on Rule 10b5-1 and/or Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
11
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss included the following:
Pension and
Foreign Currency
Postretirement Benefit
Accumulated Other
Translation
Plan Adjustments,
Comprehensive
Loss
Net of Tax
Balance as of January 1, 2023
(84.0)
(2.3)
Current-period change
Balance as of September 30, 2023
(94.7)
Foreign currency translation adjustments have not been adjusted for income taxes. Pension and postretirement benefit plan adjustments are amortized over service periods and reflected in the amortization of net loss component of our net periodic benefit cost or are otherwise recognized as a loss as a result of plan settlements. Pension and postretirement benefit plan adjustments are net of taxes of $1.3 million as of September 30, 2023 and December 31, 2022. The income tax effects are released from accumulated other comprehensive loss and included in our income tax provision as obligations under our pension and postretirement plans are settled.
Note 9. Commitments and Contingencies
Environmental Contingencies
We are currently involved with an environmental remediation project related to activities at former manufacturing operations of Earle M. Jorgensen Company (“EMJ”), our wholly owned subsidiary, that were sold many years prior to our acquisition of EMJ in 2006. Although the potential cleanup costs could be significant, EMJ maintained insurance policies during the time it owned the manufacturing operations that have covered costs incurred to date and are expected to continue to cover the majority of the related costs. We do not expect that this obligation will have a material adverse impact on our consolidated financial position, results of operations or cash flows.
Legal Matters
From time to time, we are named as a defendant in legal actions. These actions generally arise in the ordinary course of business. We are not currently a party to any pending legal proceedings other than routine litigation incidental to the business. We expect that these matters will be resolved without having a material adverse impact on our consolidated financial position, results of operations or cash flows. We maintain general liability insurance against risks arising in the ordinary course of business.
12
Note 10. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Denominator:
Weighted average shares outstanding
Dilutive effect of stock-based awards
697
929
685
939
Weighted average diluted shares outstanding
The computations of earnings per share for the nine months ended September 30, 2023 and 2022 do not include 68,453 and 111,251 weighted average shares, respectively, in respect of outstanding RSUs and PSUs, because their inclusion would have been anti-dilutive.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The terms “Company,” “Reliance,” “we,” “our,” and “us” refer to Reliance Steel & Aluminum Co. and all its subsidiaries that are consolidated in accordance with U.S. generally accepted accounting principles, unless otherwise indicated.
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 and end markets, our business strategies and our expectations concerning future demand and major commodity product pricing and our results of operations, margins, profitability, taxes, liquidity, macroeconomic conditions, including inflation and the possibility of an economic recession or slowdown, 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,” “intend” 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. We caution readers not to place undue reliance on forward-looking 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, as well as developments beyond our control, including, but not limited to, the impacts of labor constraints and supply chain disruptions and changes in worldwide and U.S. political and economic conditions such as inflation, a prolonged higher interest rate environment and the possibility of an economic recession that could materially impact us, our customers and suppliers and demand for our products and services. Deteriorations in economic conditions, as a result of inflation, elevated interest rates, economic recession, slowing growth, outbreaks of infectious disease, conflicts such as the war in Ukraine and the evolving events in Israel and Gaza or otherwise, could lead to a 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. 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 and in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC and in other documents Reliance files or furnishes with the SEC.
The statements contained in this quarterly report on Form 10-Q 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 any subsequent press releases and Forms 10-K, 10-Q and 8-K filed with or furnished to the SEC.
Overview
Tons sold increased 1.1% and 3.4% for the third quarter and nine months ended September 30, 2023 compared to the same periods in 2022, respectively, due to healthy demand in our key end markets, including non-residential construction (our largest end market) and aerospace, as well as contributions from our organic growth activities. The 3.4% increase in our tons sold for the nine months ended September 30, 2023 outperformed the 1.0% increase in industry shipments as reported by the Metals Service Center Institute (“MSCI”).
Our net sales declined in the third quarter and nine months ended September 30, 2023 compared to the same periods in 2022 due to declines in our average selling price per ton sold that were partially offset by increases in our tons sold. Our average selling price per ton sold peaked at an ultimate record in the second quarter of 2022 and subsequently declined thereafter, including through the nine months ended September 30, 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.
Gross profit margins for the third quarter and nine months ended September 30, 2023 were 29.7% and 30.7%, respectively, compared to 29.2% and 30.7% for the respective 2022 periods.
Earnings per diluted share were $4.99 and $17.92 for the third quarter and nine months ended September 30, 2023, respectively, compared to $6.45 and $23.98 for the respective 2022 periods. Lower gross profit, driven by lower metals prices that more than offset increases in tons sold, contributed to decreases in earnings per share.
Cash flow from operations of $1.15 billion for the nine months ended September 30, 2023 decreased from $1.31 billion for the same period in 2022 due to lower profitability partially offset by lower working capital needs.
Organic growth activities were substantially comprised of capital expenditures of $358.6 million for the nine months ended September 30, 2023 compared to $249.7 million for the same period in 2022.
Returns to stockholders for the nine months ended September 30, 2023 totaled $418.5 million, comprised of $179.3 million of cash dividends and $239.2 million of share repurchases.
On May 1, 2023, we acquired Southern Steel Supply, LLC (“Southern Steel”), a metals service center that offers merchant and structural steel, pipe and tube, steel plate, ornamental products and laser cut and fabricated parts. Located in Memphis, Tennessee, Southern Steel now operates as a subsidiary of Siskin Steel & Supply Company, Inc., a wholly owned subsidiary of Reliance. The acquisition was funded with cash on hand. Included in our net sales for the nine months ended September 30, 2023 were net sales of $20.2 million from Southern Steel.
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Results of Operations
The following sets forth certain income statement data for the third quarter and nine months ended September 30, 2023 and 2022 (dollars are shown in millions, except per share amounts, and certain amounts may not calculate due to rounding):
% of
Net Sales
100.0
%
Cost of sales (exclusive of depreciation and amortization expense shown below)(1)
70.3
70.8
69.3
Gross profit(2)
1,077.0
29.7
1,239.0
29.2
3,525.7
30.7
4,121.5
Warehouse, delivery, selling, general and administrative expense (“SG&A”)
17.3
14.8
14.1
1.4
1.6
1.3
10.8
12.9
12.3
15.3
8.1
9.3
11.1
Diluted earnings per share attributable to Reliance stockholders
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Third Quarter and Nine Months Ended September 30, 2023 Compared to Third Quarter and Nine Months Ended September 30, 2022
Dollar
Percentage
Change
(dollars in millions)
Net sales (three months ended)
(624.2)
(14.7)
Net sales (nine months ended)
(1,945.6)
(14.5)
Tons
(tons in thousands)
Tons sold (three months ended)
1,420.8
1,406.0
1.1
Tons sold (nine months ended)
4,425.0
4,279.6
145.4
3.4
Price
Average selling price per ton sold (three months ended)
2,552
3,039
(487)
(16.0)
Average selling price per ton sold (nine months ended)
2,602
3,156
(554)
(17.6)
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.
Our net sales declined from record third-quarter levels in the comparable 2022 periods 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) and aerospace, 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 through the nine months ended September 30, 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 average selling price per ton sold. As carbon steel sales represented 53% of our gross sales for the nine months ended September 30, 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:
September 30
Change in
Average Selling
Percentage of
Price Per
Ton Sold
Tons Sold
(17.2)
0.5
(20.7)
(7.8)
(0.2)
(5.9)
(0.5)
(11.1)
4.5
7.5
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Cost of Sales and Gross Profit
Cost of sales (three months ended)
(462.2)
(15.4)
Cost of sales (nine months ended)
(1,349.8)
Gross profit (three months ended)
(162.0)
Gross profit (nine months ended)
(595.8)
LIFO (income) expense (three months ended)
(27.5)
(0.6)
(17.5)
*
LIFO (income) expense (nine months ended)
(105.0)
(127.5)
* Not meaningful.
Gross profit in the third quarter and nine months ended September 30, 2023 decreased from the same periods in 2022 mainly due to lower sales as a result of decreases in average selling price per ton sold that more than offset increases 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 $638.8 million at September 30, 2023.
Furthermore, cost of sales for the nine months ended September 30, 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 ten basis points.
We were able to achieve stable gross profit margins despite the significantly different metals pricing environments, with our average selling price per ton sold declining 17.6% during the nine months ended September 30, 2023 compared to the 30.0% increase in our average selling price per ton sold during the nine months ended September 30, 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.
Expenses
SG&A expense (three months ended)
(3.2)
SG&A expense (nine months ended)
38.2
2.0
Depreciation & amortization expense (three months ended)
Depreciation & amortization expense (nine months ended)
3.7
2.1
Our SG&A expense increased for the nine months ended September 30, 2023 compared to the same period in 2022 mainly due to higher variable costs associated with increases in our tons sold, including increased headcount, and inflationary impacts on wages, which were partially offset by lower incentive-based compensation that is primarily tied to first-in, first-out (“FIFO”) pretax income profitability, which declined 35.1% compared to the same period in 2022.
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Our SG&A expense as a percentage of sales for the third quarter and nine months ended September 30, 2023 compared to the same periods in 2022 mainly increased due to lower sales levels.
See “Cost of Sales and Gross Profit” above for discussion of our LIFO method inventory valuation reserve.
Operating Income
Operating income (three months ended)
(159.0)
(29.0)
Operating income (nine months ended)
(637.7)
(31.1)
The decreases in our operating income for the third quarter and nine months ended September 30, 2023 as compared to the same periods in 2022 were mainly a result of lower gross profit, driven by lower metals prices that more than offset increases in tons sold, along with moderate changes in SG&A expense attributable to increases in our tons sold and inflationary impacts on wages.
Our gross profit margins were generally consistent with the same periods in 2022 and consequently the decreases in our operating income margins for the third quarter and nine months ended September 30, 2023 were mainly due to our lower sales levels that decreased operating leverage of our SG&A expenses.
Other (Income) Expense, Net
Other (income) expense, net (three months ended)
(17.1)
Other (income) expense, net (nine months ended)
(44.8)
The changes in other (income) expense, net in the third quarter and nine months ended September 30, 2023 compared to the same periods in 2022 were mainly due to increases in interest income as a result of higher cash and cash equivalent balances and interest rates earned on bank deposits and cash equivalents.
Income Tax Rate
Financial Condition
Operating Activities
Net cash provided by operations of $1.15 billion for the nine months ended September 30, 2023 decreased slightly from $1.31 billion for the same period in 2022. The impact of lower profitability on operating cash flow was offset by
19
lower working capital needs, resulting in relatively consistent levels of operating cash flow in both periods. To manage our working capital, we focus on our days sales outstanding and inventory turnover rate as receivables and inventory are the two most significant elements of our working capital. As of September 30, 2023 and 2022, our days sales outstanding rates were 40.3 days and 39.6 days, respectively. Our inventory turnover rate (based on tons) during the nine months ended September 30, 2023 was 4.7 times (or 2.6 months on hand), compared to 4.3 times (or 2.8 months on hand) for the same period in 2022.
Income taxes paid were $305.2 million in the nine months ended September 30, 2023 compared to $596.8 million in the same period in 2022. The decrease in our taxes paid was mainly due to lower estimated tax payments in the nine months ended September 30, 2023 compared to the same period in 2022 as a result of decreased pretax income.
Investing Activities
Net cash used in investing activities was $367.8 million for the nine months ended September 30, 2023 compared to $244.4 million for the same period in 2022 and was substantially comprised of capital expenditures and the purchase price for our acquisition of Southern Steel on May 1, 2023. The majority of our capital expenditures in the nine months ended September 30, 2023 and 2022 were related to growth initiatives.
Financing Activities
Net cash used in financing activities was $970.7 million for the nine months ended September 30, 2023 compared to $711.1 million for the same period 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 the nine months ended September 30, 2023, we spent $239.2 million to repurchase shares of our common stock compared to $547.7 million in the same period in 2022. Our other stockholder returns included an increase in our quarterly dividend rate with total dividend payments of $179.3 million in the nine months ended September 30, 2023 compared to $163.5 million in the same period in 2022. We also spent $41.3 million on taxes relating to net share settlement of restricted stock units in the nine months ended September 30, 2023 compared to $21.6 million in the same period in 2022.
On October 24, 2023, our Board of Directors declared the 2023 fourth quarter cash dividend of $1.00 per share. We have increased our quarterly dividend 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 paid quarterly cash dividends on our common stock for 64 consecutive years and have never reduced or suspended our regular quarterly dividend.
See Note 8—“Equity” to our consolidated financial statements in Part I, Item 1 “Financial Statements” for further information on our 2023 share repurchases.
On October 24, 2023, our Board of Directors amended our share repurchase program to increase the repurchase authorization to $1.5 billion effective October 30, 2023. 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.
From 2018 through September 30, 2023, we have repurchased approximately 16.9 million shares at an average cost of $122.20 per share, for a total of $2.07 billion, resulting in a 23.3% reduction in our common shares outstanding.
Debt
We have a $1.5 billion unsecured revolving credit facility with no outstanding borrowings at September 30, 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 September 30, 2023.
On January 15, 2023, we redeemed in full the $500.0 million aggregate outstanding principal amount of our 4.50% senior notes due April 15, 2023 using cash on hand. See Note 5—“Debt” to our consolidated financial statements in Part I, Item 1 “Financial Statements” for further information on our debt obligations.
20
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 September 30, 2023, we had $976.9 million 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 2.1%, down from 6.3% as of December 31, 2022.
As of September 30, 2023, we had $400.6 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 $1.5 billion available under our Credit Agreement, 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.
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.
We were in compliance with all financial maintenance covenants in our Credit Agreement at September 30, 2023.
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. The number of shipping days in each quarter also has an impact on our quarterly sales and profitability. 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 and Other Intangible Assets
Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $2.11 billion at September 30, 2023, or approximately 20% of total assets and 27% of total equity. Additionally, other intangible assets, net amounted to $990.1 million at September 30, 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 the carrying amount of such assets may not be recoverable.
Critical Accounting 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 with U.S. GAAP. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of
21
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.
During the third quarter ended September 30, 2023, there were no material changes to our critical accounting estimates as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.
Website Disclosure
The Company may use its website as a distribution channel of material company information. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at www.rsac.com, and our investors relations website, investor.rsac.com. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Alerts” section at investor.rsac.com. The website is for informational purposes only and is not intended for use as a hyperlink. The Company is not incorporating any material on its website into this quarterly report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For the Company’s disclosures about market risk, please see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to the Company’s exposures to market risk as disclosed in Part II—Item 7A of the Company’s 2022 Annual Report.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to and as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered in this report, the Company’s disclosure controls and procedures are effective to ensure information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the third quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
The information contained under the heading “Legal Matters” in Note 9—“Commitments and Contingencies” to our Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our share repurchase activity for the third quarter of 2023 was as follows:
Total Number of
Maximum Dollar
Total Number
Average Price
Shares Purchased
Value That May
of Shares
Paid
as Part of Publicly
Yet Be Purchased
Period
Purchased
Announced Plan
Under the Plan(1)
July 1 - July 31, 2023
567.9
August 1 - August 31, 2023
115,435
282.43
535.3
September 1 - September 30, 2023
351,778
266.57
441.6
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the third quarter ended September 30, 2023, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408(a) of Regulation S-K).
Item 6. Exhibits
ExhibitNumber
Description
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32**
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
The following unaudited financial information from Reliance Steel & Aluminum Co.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 formatted in iXBRL (Inline eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these consolidated financial statements.
104*
Cover Page Interactive Data File (formatting as Inline XBRL and contained in Exhibit 101).
* Filed herewith.
** Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: November 2, 2023
By:
/s/ Arthur Ajemyan
Arthur Ajemyan
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)