Ryerson Holding Corp. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Ryerson is a value-added industrial metals processor and distributor operating in the U.S., Canada, Mexico, and China.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $771.8 million | $1,204.9 million | $1,782.1 million | $2,435.7 million |
| Gross profit / margin | $115.5 million / 15.0% | $211.8 million / 17.6% | $311.3 million / 17.5% | $443.1 million / 18.2% |
| Operating profit (loss) | ($10.6 million) / (1.4%) | $46.1 million / 3.8% | $29.5 million / 1.7% | $113.4 million / 4.7% |
| Net income (loss) attributable to Ryerson | ($25.6 million) | $16.4 million | ($9.2 million) | $45.9 million |
| Diluted EPS | ($0.67) | $0.43 | ($0.24) | $1.21 |
- Q2 sales fell 35.9% year over year; tons sold declined 25.8% and average selling price per ton fell 13.6%. For the first half, sales declined 26.8%, tons sold fell 17.2%, and average selling price fell 11.6%.
- Gross margin contracted as selling prices declined faster than materials cost per ton. Q2 LIFO expense was $14.1 million, compared with $12.9 million of LIFO income in Q2 2019. First-half LIFO income was $6.1 million versus $33.0 million a year earlier.
- Six-month operating cash flow was $176.1 million, versus $48.0 million in 2019, supported chiefly by lower receivables and inventory. Capital expenditures were $11.8 million, down from $23.4 million.
Liquidity and debt
- At June 30, 2020, cash and cash equivalents were $99.9 million and restricted cash was $12.0 million. Total liquidity, as defined by the company, was $350 million, including $239 million of availability under credit and foreign debt facilities. Liquidity was $439 million at December 31, 2019.
- Total debt was $903.8 million, compared with $981.8 million at year-end 2019; net debt was $793 million versus $923 million. The debt-to-capitalization ratio was 85% at both dates.
- The $1.0 billion revolving credit facility had $357.9 million drawn and $204 million available at quarter-end; foreign debt facilities provided additional availability. The facility matures in November 2021.
Changes, outlook, and key risks
- Management attributed weaker results to COVID-19-related customer closures and demand declines, as well as a metals-market slowdown that predated the pandemic. First-half demand weakened across end markets, particularly construction, oil and gas, commercial ground transportation, and consumer durables.
- Ryerson’s Q2 volumes declined 21% from Q1, compared with a 26% decline for North American service centers overall, according to the company. Management reported a sharp June PMI recovery but expected Q3 demand to remain affected by economic pressure. No quantified earnings or revenue guidance was provided.
- Management warned that renewed mill capacity and weak demand could pressure metal prices and contract gross margins. It reduced its annual capital expenditure budget from $45 million to $25 million and cited cost controls, workforce and compensation reductions, inventory reductions, and deferred pension contributions as pandemic responses.
- On July 22, 2020, Ryerson issued $500 million of 8.50% secured notes due 2028 and used the proceeds, with available cash, to redeem the $530.3 million balance of its 11.00% notes due 2022 and pay related costs. Management anticipated approximately $16 million of annual interest savings; transaction accounting and final impacts were not complete at filing.
- COVID-19 could further affect demand, operations, liquidity, covenant compliance, asset valuations, and pension funding. A May 2020 goodwill test found no impairment; estimated fair value of the U.S. reporting unit exceeded carrying value by 9%, but management warned future deterioration could trigger impairment.
- Ryerson’s potential responsibility at the Portland Harbor Superfund Site remains unallocated. The company could not estimate its share or a range of loss. The EPA’s stated site remedy had an estimated present value cost of $1.05 billion overall; that is not an estimate of Ryerson’s liability.
- The company deferred $13 million of expected 2020 U.S. pension contributions until January 1, 2021 under the CARES Act. It had contributed $7 million through June 30.
Important facts for investors to verify
- Whether customer demand, shipment volumes, selling prices, and gross margins recovered after Q2, and whether Q3 was affected as management expected.
- Final refinancing costs and realized interest savings from the 2028 notes, along with ongoing credit-facility availability, covenants, and debt maturities.
- Whether working-capital cash generation is sustainable or primarily reflects inventory and receivables reductions during contraction.
- Updates on EPA allocation and potential Ryerson exposure at Portland Harbor, plus any material change in goodwill impairment assumptions.
- Future pension funding needs and the effects of market returns and deferred contributions on cash requirements.