Ryerson Holding Corporation — Q3 2019 Form 10-Q
Business and period: Ryerson distributes and processes industrial metals in the U.S., Canada, Mexico, and China. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,104.4 million | $1,250.0 million | $3,540.1 million | $3,248.4 million |
| Gross profit / margin | $204.4 million / 18.5% | $208.2 million / 16.7% | $647.5 million / 18.3% | $558.4 million / 17.2% |
| Operating profit / margin | $40.0 million / 3.6% | $31.5 million / 2.5% | $153.4 million / 4.3% | $112.3 million / 3.5% |
| Net income attributable to Ryerson | $10.1 million | $77.5 million | $56.0 million | $105.4 million |
| Diluted EPS | $0.27 | $2.06 | $1.48 | $2.80 |
Cash flow and balance sheet: Nine-month operating cash flow was $130.5 million, versus cash used of $62.4 million in 2018; investing used $21.9 million, including $32.5 million of capital expenditures, and financing used $109.9 million. Cash and cash equivalents were $21.8 million at September 30, 2019. Total debt was $1,038.6 million, down from $1,153.3 million at year-end 2018; debt-to-capitalization was 88%, compared with 94%. Total liquidity, a company-defined non-GAAP measure, was $455 million, including $433 million of availability under credit facilities. Current assets were $1,387.7 million and current liabilities $627.1 million.
Changes and drivers
- Q3 sales fell 11.6%; tons sold declined 3.9% and average selling price per ton declined 8.1%. Management attributed the revenue decline to a slowing metals market. Lower materials cost per ton helped lift gross margin despite lower sales.
- For the nine-month period, sales rose 9.0%, largely reflecting the 2018 acquisition of Central Steel & Wire (CS&W). On a same-store basis, sales increased 0.3%, tons sold declined 1.6%, and average selling price per ton rose 2.0%. Management reported North American service-center volumes down 6.9% year over year and Ryerson same-store tons down 0.6%.
- Results are affected by an unusual prior-year item: Q3 2018 included a $73.2 million bargain-purchase gain from CS&W. This materially inflates the prior-year comparison for other income and net income. CS&W contributed $134.3 million of Q3 2019 revenue and a $0.8 million net loss.
- LIFO accounting provided income of $29.6 million in Q3 and $62.6 million in the first nine months of 2019, versus LIFO expense of $32.1 million and $89.3 million, respectively, in 2018.
Debt, outlook, and risks
- The revolving credit facility remained $1.0 billion, with $440.6 million borrowed and $395 million available at quarter-end. A September 2019 amendment added a $67.9 million first-in, last-out subfacility maturing June 30, 2020, with higher borrowing spreads. The $587.9 million of 11.00% senior secured notes are due 2022.
- Management said operating cash flow and credit-facility proceeds are expected to cover normal operating needs and contractual obligations. No specific earnings or sales guidance is provided in the filing.
- Management anticipated about $5 million of additional minimum pension contributions in the final quarter of 2019; approximately $21 million had been contributed through September.
- Metals pricing and demand are cyclical. Risks include weaker industrial demand, metal-price declines and inventory effects, global overcapacity and trade-policy changes, variable-rate debt and LIBOR transition, and commodity and foreign-exchange volatility. The company reported a $12.3 million nine-month loss on non-hedge derivatives.
- For the Portland Harbor Superfund matter, the EPA has not allocated responsibility among potentially responsible parties. Ryerson said it cannot determine its potential responsibility or estimate a loss range. Other pending claims were not expected by management to materially affect the company.
Investor verification priorities
- Separate underlying operating performance from the prior-year $73.2 million CS&W bargain-purchase gain and from the significant LIFO benefit in 2019.
- Monitor same-store volumes, metal selling prices, and margin resilience as market demand weakens.
- Review borrowing-base availability, the June 2020 FILO maturity, the 11.00% notes due 2022, and refinancing needs.
- Track pension funding requirements and developments in the Portland Harbor matter, for which potential exposure remains unquantified.
- Assess whether reported operating cash flow is sustainable, given the contribution from deferred taxes and working-capital movements.