Ryerson Holding Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless stated otherwise. Ryerson is a metals service center operating in the U.S., Canada, Mexico and China. It distributes and processes industrial metals.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $875.4 million | $739.8 million | $1,689.9 million | $1,442.4 million |
| Gross profit / margin | $140.4 million / 16.0% | $163.0 million / 22.0% | $301.0 million / 17.8% | $310.6 million / 21.5% |
| Operating profit / margin | $23.7 million / 2.7% | $49.9 million / 6.7% | $67.0 million / 4.0% | $88.2 million / 6.1% |
| Net income attributable to Ryerson | $0.6 million | $5.6 million | $15.4 million | $19.1 million |
| Diluted EPS | $0.02 | $0.17 | $0.41 | $0.59 |
- Sales rose 18.3% in Q2 and 17.2% in the first half. Management attributed growth to higher average selling prices and modestly higher shipment volumes: Q2 tons sold increased 2.6%, and first-half tons increased 3.3%.
- Profitability weakened as materials cost per ton rose faster than selling price per ton. Q2 average selling price per ton was $1,690 versus $1,465; cost per ton was $1,419 versus $1,142. First-half figures were $1,665 versus $1,467 and $1,368 versus $1,151, respectively.
- Q2 LIFO expense was $14.2 million, compared with $6.5 million in Q2 2016. First-half LIFO expense was $37.4 million, versus LIFO income of $20.1 million in 2016; an inventory lower-of-cost-or-market reserve credit partly offset 2017 expense.
- Interest and other debt expense was $22.8 million in Q2 and $44.6 million for the first half. First-half other expense, net, was $0.6 million, compared with $13.0 million in 2016, which included debt-redemption losses and an investment impairment.
Cash flow, debt and liquidity
- First-half operating cash flow was negative $81.1 million, versus positive $2.6 million in 2016. Working capital absorbed cash, including $101.4 million from receivables and $75.8 million from inventory, partly offset by a $68.7 million increase in payables.
- Investing cash outflow was $56.0 million, including $49.2 million for the Laserflex and Guy Metals acquisitions and $10.2 million of capital expenditures. Financing cash inflow was $131.9 million, including $69.3 million of net short-term borrowings and $22.4 million of sale-leaseback proceeds.
- Cash and cash equivalents were $76.9 million at June 30, 2017, down from $80.7 million at year-end 2016. Total liquidity, a company-defined non-GAAP measure, was $326 million, up from $301 million.
- Total debt was $1.036 billion, up from $963.5 million at year-end; debt-to-capitalization was 102%. Debt included $650 million of 11.00% senior secured notes due 2022 and $377.4 million drawn under the $750 million revolving credit facility. The revolver had $266 million available; availability is subject to a borrowing base. Stockholders’ equity remained in deficit at $22.6 million.
Changes, outlook and risks
- Management described stronger industry demand and pricing in Q2, but noted that hot-rolled coil and average nickel prices fell by more than 10% from March to June, amid increased U.S. steel imports. Price volatility and inventory-cost timing pressured margins. Metals service center demand and pricing are cyclical.
- Management stated that operating cash flow and revolver availability should fund normal operating needs and the anticipated minimum 2017 pension contribution. The filing provides no specific revenue or earnings guidance.
- Ryerson acquired Laserflex and Guy Metals during the first half. The company also entered a swap fixing the rate on $150 million of floating-rate debt at 1.658% through March 2020; the revolver’s weighted average rate, including the swap, was 2.7% at quarter-end.
- Required pension contributions were expected to total approximately $22 million in 2017; $9 million had been contributed through June, with approximately $13 million anticipated in the second half.
- For the Portland Harbor Superfund Site, the EPA’s proposed remedy has an estimated present-value cost of $1.05 billion across the site. Responsibility has not been allocated; Ryerson said it could not estimate its potential share or a loss range.
- The 2022 notes are structurally subordinated to liabilities of non-guarantor subsidiaries. Those subsidiaries represented 11.8% of first-half sales and 7.1% of EBITDA. Other disclosed risks include debt covenants, rate and commodity-price exposure, and possible higher cash taxes if U.S. law repeals LIFO tax accounting.
- Management reported disclosure controls were effective as of June 30, 2017, with no material changes to internal controls during the quarter.
Investor verification priorities
- Assess whether improved sales volumes and pricing can translate into margin recovery, given the sharp gross-margin decline and LIFO expense.
- Track working-capital needs and operating cash flow, particularly receivables and inventory growth, alongside revolver availability and borrowing-base limits.
- Evaluate the company’s high debt burden, 11.00% notes, negative equity and ability to meet interest and pension-funding obligations.
- Monitor developments in the Portland Harbor matter; potential company exposure remains unquantified in the filing.
- Review acquisition contributions, the effect of the pension-plan freeze and remeasurement, and future adoption impacts of new accounting standards, especially revenue recognition for custom-fabricated products.