Ryerson Holding Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Ryerson is a value-added processor and distributor of industrial metals operating in the U.S., Canada, Mexico, and China. Amounts are in millions of dollars except per-share data and where noted.
Business context and results
Business was affected by COVID-19, weaker end-market demand, and lower metal prices. For the first nine months, shipments fell 17.6% and average selling prices fell 10.4% year over year. Management said North American Ryerson volumes contracted more sharply than the industry, and cited particular weakness in oil and gas, commercial ground transportation, and food processing and agricultural equipment.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $831.5 | $1,104.4 | $2,613.6 | $3,540.1 |
| Gross profit | $155.9 | $204.4 | $467.2 | $647.5 |
| Gross margin | 18.7% | 18.5% | 17.9% | 18.3% |
| Operating profit | $30.3 | $40.0 | $59.8 | $153.4 |
| Net income (loss) attributable to Ryerson | $(39.9) | $10.1 | $(49.1) | $56.0 |
| Diluted earnings (loss) per share | $(1.05) | $0.27 | $(1.29) | $1.48 |
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $296.7, compared with $130.5 in 2019. Working-capital movements included a $169.0 cash benefit from lower inventory, plus $28.4 from receivables and $55.8 from accounts payable.
- Capital expenditures were $17.9, down from $32.5. The company reduced its planned annual capital expenditure budget from $45 to $25 and said spending was limited to critical sustaining projects.
- At September 30, cash and cash equivalents were $121.8; total debt was $814.0; and reported net debt was $692. Total liquidity, including facility availability and foreign debt facilities, was $398, versus $439 at December 31, 2019. Credit-facility availability was $237, and foreign-facility availability was $39.
- The company reported a debt-to-capitalization ratio of 86%, versus 85% at year-end 2019. Its $1.0 billion revolving credit facility matures November 16, 2021. Approximately $101 of facility borrowings were described as excess funds borrowed to preserve cash access during the pandemic.
- Operating cash generation and reduced working-capital needs supported debt reduction. The filing describes working capital as countercyclical: contractions can release cash as inventory and receivables decline.
Material changes and unusual items
- On July 22, Ryerson issued $500 of 8.50% senior secured notes due 2028 and used the proceeds, along with available cash, to redeem the remaining $530.3 principal of its 11.00% notes due 2022 and pay related costs. The 2022 notes were redeemed in August. Management estimated approximately $16 of annual interest savings from the refinancing.
- The refinancing generated a $17.1 loss on debt extinguishment in Q3, including redemption fees and write-off of unamortized issuance costs. The filing also reports a $16.2 loss-on-retirement adjustment in the cash-flow reconciliation; these are reported in different contexts.
- On September 30, the company gave notice to redeem $50 of the 2028 notes on October 30 at 103% of principal, using cash on hand. Management expected about $4.3 of annual interest savings; $450 principal was expected to remain after redemption.
- A pension-plan annuity purchase of $95.2 on September 28 triggered settlement accounting and a $52.5 settlement loss. The transaction settled a $99.5 benefit obligation. The reported Q3 loss also included this non-operating charge.
- Operating expenses fell, partly due to lower wages and benefits, reduced discretionary spending and travel, and lower delivery costs. Management attributed these measures to the downturn and COVID-19 response.
Outlook, risks, and contingencies
- Outlook: The filing provides no quantified revenue, earnings, or margin guidance. Management said recent PMI readings above 50 in June through September indicated expanding factory activity, while U.S. industrial production remained below prior-year levels. It viewed demand conditions as improved but still uncertain.
- COVID-19: The pandemic may continue to affect demand, customer operations, supply chains, facilities, workforce availability, liquidity, and financial markets. The duration and severity were unknown. Management maintained safety measures and said it was closely monitoring cash, credit availability, working capital, and covenants.
- Credit and refinancing: The credit facility has borrowing-base limits, covenants, and a minimum fixed-charge coverage requirement if availability falls to specified levels. The company’s substantial debt and facility maturity in 2021 remain relevant liquidity considerations.
- Pensions: The company deferred $12 of expected remaining 2020 U.S. pension contributions to January 1, 2021 under the CARES Act, after contributing $7 through September. Future funding depends on investment returns, discount rates, and regulatory requirements.
- Goodwill: A May 2020 impairment test found the U.S. reporting unit’s fair value 9% above carrying value; no impairment was recorded. The company warned that further deterioration or weaker-than-expected performance could lead to a future impairment.
- Environmental contingency: Ryerson is a potentially responsible party for the Portland Harbor Superfund Site. Responsibility has not been allocated, and management said it cannot estimate a potential loss or range at this time.
- Trade and market risks: Metal-price volatility, tariffs and trade actions may affect selling prices, inventory economics, and demand. Derivatives provide only partial protection against commodity, currency, and interest-rate movements.
- The filing states disclosure controls and procedures were effective as of September 30, 2020, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether shipment volumes and selling prices continue to recover, and whether gross margins hold as metal prices and customer demand change.
- Liquidity, borrowing-base availability, covenant headroom, and the company’s ability to address the November 2021 credit-facility maturity.
- Actual completion and savings from the October 2020 $50 note redemption, and the remaining debt and interest burden after refinancing.
- Future pension contributions and asset performance, and any developments that change the unestimated Portland Harbor environmental exposure.
- Whether COVID-19-related uncertainty causes further deterioration, liquidity pressure, or goodwill impairment; the filing’s impairment test had only 9% fair-value headroom.