Ryerson Holding Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Ryerson is a value-added processor and distributor of industrial metals operating in the U.S., Canada, Mexico, and China. Platinum Equity affiliates held approximately 56% of outstanding common shares.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $1,230.8 million | $941.3 million |
| Gross profit / margin | $231.3 million / 18.8% | $164.9 million / 17.5% |
| Operating profit / margin | $67.3 million / 5.5% | $34.4 million / 3.7% |
| Net income attributable to Ryerson | $29.5 million | $10.4 million |
| Diluted earnings per share | $0.78 | $0.28 |
| Net cash from (used in) operating activities | $(18.5) million | $31.7 million |
| Capital expenditures | $11.3 million | $7.6 million |
Sales increased 30.8%, reflecting higher average selling prices and the July 2018 acquisition of Central Steel & Wire Company (CS&W). Same-store sales rose 12.5%; same-store average selling prices increased 13.1%, while tons sold were reported down 0.6% in the operating-results table. Gross profit increased 40.3%. Management attributed margin improvement to selling prices rising faster than material cost per ton, as well as CS&W. Operating expenses rose 25.4%, largely due to CS&W, but declined as a share of sales to 13.3% from 13.8%.
CS&W contributed $172.2 million of Q1 2019 revenue and $4.4 million of net income. The company reported Q1 LIFO income of $20.1 million versus LIFO expense of $13.3 million a year earlier, an important contributor to the year-over-year cost and margin comparison.
Cash flow, debt, and liquidity
- Operating cash flow was negative $18.5 million, mainly reflecting increases in receivables of $69.8 million and inventory of $69.5 million, partly offset by an $81.0 million increase in accounts payable and net income.
- Cash and cash equivalents were $22.0 million at March 31, 2019, down from $23.2 million at year-end; cash, cash equivalents, and restricted cash totaled $23.1 million.
- Total debt was $1,156.5 million, compared with $1,153.3 million at December 31, 2018. Debt-to-capitalization was 91%, versus 94% at year-end. The debt included $587.9 million of 11.00% senior secured notes due 2022 and $558.3 million drawn on the revolving credit facility.
- Revolver availability was $411 million; total liquidity, a company-defined non-GAAP measure, was $460 million, up from $441 million at year-end.
- Interest and other expense on debt was $23.9 million, compared with $23.3 million. Management cited higher revolver borrowings, working-capital needs, and interest rates, partly offset by reduced notes outstanding.
Material changes and unusual items
- CS&W was acquired in July 2018 and materially affects year-over-year reported sales, volume, expenses, and debt comparisons. Its Q1 2019 contribution is included in reported results.
- Ryerson adopted ASC 842 lease accounting on January 1, 2019, recording operating lease assets and liabilities at adoption of $82.3 million and $87.6 million, respectively, and a $3.0 million retained-earnings adjustment. At March 31, operating lease liabilities were $85.5 million; finance lease liabilities were $39.6 million.
- Ryerson repurchased and retired $11.6 million principal amount of its 2022 notes for $11.8 million, recognizing a $0.2 million loss.
- Q1 restructuring charges were $0.3 million, primarily severance related to corporate staff reductions. The tax provision included $3.1 million of expense related to GILTI.
Outlook, risks, and contingencies
No numerical revenue or earnings guidance is provided in the supplied filing text. Management said operating cash flow and the revolving credit facility should provide sufficient funds for normal-course obligations and operating needs. It anticipated approximately $20 million of additional pension contributions in the remaining nine months of 2019, following $6 million contributed in Q1; estimated minimum required contributions for full-year 2019 were approximately $26 million.
- Management described metals service centers as cyclical and volatile. In Q1, Ryerson experienced improved pricing but weaker demand year over year. North American industry volumes fell 6.4%; management cited same-store market-share gains. Metal prices, demand, tariffs, and competitive pricing can affect revenue and margins.
- U.S. steel and aluminum tariffs and other trade actions, including tariffs on Chinese imports, create uncertainty for pricing and supply conditions. Management expected upward price pressure to the extent trade measures remain in effect.
- Ryerson is a potentially responsible party in the Portland Harbor Superfund matter. The EPA’s initial remediation plan had an estimated present value cost of $1.05 billion for the site, but responsibility has not been allocated. Ryerson said it could not determine whether it would be held liable or estimate a potential loss.
- Debt is substantial; the $1.0 billion revolving facility is secured by specified assets and has financial and other covenants, including a fixed-charge coverage requirement if availability falls below a specified level. The 2022 notes bear 11.00% interest and are redeemable beginning May 15, 2019 at stated premiums.
- The filing reports $16 million of letters of credit under off-balance-sheet arrangements and approximately $181 million of pension liabilities in excess of plan assets at December 31, 2018. Future pension contributions depend partly on plan returns, discount rates, and regulation.
Management reported that disclosure controls and procedures were effective as of March 31, 2019, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the filing’s same-store volume disclosures: the operating-results table reports tons sold down 0.6% (523,000 versus 526,000), while the industry discussion states same-store tons declined 1.7%.
- Assess how much of improved gross margin depended on Q1 LIFO income and elevated metal selling prices, and how margins could respond if prices or demand change.
- Monitor working-capital conversion: receivables and inventory growth drove negative operating cash flow despite higher earnings.
- Review debt refinancing, redemption costs, covenant headroom, and the effect of the 11.00% notes on interest expense and liquidity.
- Track CS&W integration and profitability, pension funding requirements, and developments in the unquantified Portland Harbor contingency.