Border Wall Boost: Reliance's Record Quarter Clouded by LIFO Noise

Reliance's DHS border-wall contract drives record volumes and EPS, while aluminum-driven LIFO expenses obscure margin expansion.

RS · Earnings Call · 2026-07-23

Border Wall Fuels Record Performance

Reliance, Inc. delivered a blowout second quarter 2026, with revenue reaching its second-highest level ever and tons sold setting a record. The stock has been on a tear, hitting an all-time high on August 10 before pulling back 9.5%—still near its peak. The biggest new driver is the U.S. Department of Homeland Security border-wall contract, which contributed 5.1 percentage points to sequential tons sold growth. As COO Steve Koch noted, “Record tons sold increased 7% from the prior quarter, and were up 10.8% compared to the second quarter of 2025, significantly exceeding our expectations of up 1% to 3% sequentially.” — Stephen Koch, Executive Vice President and Chief Operating Officer · 2026-07-23 CEO Karla Lewis added, “Yes. Satish, the volumes, we, you know, mentioned, were stronger than we had anticipated.” — Karla R. Lewis, President and Chief Executive Officer · 2026-07-23 The U.S. border wall project is a multi-billion-dollar opportunity—phase 1 alone is $1.4 billion through mid-2027, with a potential phase 2 of $800-900 million. Management expects shipments to stay at elevated levels, leveraging the company's existing infrastructure and deep relationships with domestic mills. This contract also reinforces pricing power across carbon steel, as seen in tight beam and plate markets.

LIFO Expenses Mask Underlying Margin Strength

The headline earnings growth was impressive—non-GAAP EPS surged 42% to $6.27, the highest since 2023—but the GAAP picture is muddied by an outsized LIFO charge. CFO Arthur Ajemyan explained, “Higher than anticipated carbon and aluminum product costs caused us to increase our full year LIFO expense outlook to $300 million from our prior estimate of $150 million.” — Arthur Ajemyan, Chief Financial Officer · 2026-07-23 The culprit is aluminum: tariffs have nearly doubled prices, and aluminum now accounts for about a third of the annual LIFO expense despite being only 17% of sales. Ajemyan emphasized the distinction between margin percentages and profit dollars:

Now what is on the flip side, though, 1 would assume that, you know, that is not you know, it is it is not contributing to, you know, higher profitability, but it is the exact opposite. Right? Our gross profit per unit and overall gross profit dollars are up significantly from, you know, a year or 2 years ago.
Arthur Ajemyan, Chief Financial Officer · 2026-07-23

This aluminum product price surge is a direct result of Section 232 tariffs, a theme echoed across the market. While the LIFO charge depresses FIFO gross margin, it also builds a reserve that can support future results if prices fall. As Arthur noted in the prior quarter, “Come next year, you're not going to have that headwind from LIFO on aluminum that's contributing to this temporary margin compression dynamics.” — Arthur Ajemyan, Chief Financial Officer · 2026-04-23

Demand and Fundamentals: Strong but Distorted

Beyond the contract, underlying demand is improving across multiple end markets—nonresidential construction, general manufacturing, aerospace, and semiconductors. Average selling prices rose 7.8% sequentially, far above guidance. The Pretax income (non-GAAP) jumped 40% year-over-year, and operating leverage from record volumes kept SG&A per ton flat. On a trailing basis, operating margin rebounded in the first quarter, and Q2 results are likely to show further expansion. The balance sheet remains strong, with net debt/EBITDA of 0.9x, supporting both growth investments and shareholder returns.

Outlook: Continued Momentum with LIFO Overhang

Reliance guided Q3 non-GAAP EPS to $6.40-$6.60, up 76-81% year-over-year, implying the border-wall ramp continues. While LIFO will remain a headwind—Q3 is estimated at $75 million—the company is well positioned to capitalize on structural tailwinds from reshoring, infrastructure, and data centers. The stock's proximity to its high suggests investors see the same opportunity. This quarter marks a distinct pivot for Reliance: a large, multi-year government contract that leverages its nationwide footprint and mill relationships, setting it apart from peers. The LIFO noise, while distracting, does not diminish the underlying profitability improvement.