Ryerson Holding Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Ryerson processes and distributes industrial metals in the U.S., Canada, Mexico, and China. Results are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,250.0 million | $864.2 million | $3,248.4 million | $2,554.1 million |
| Gross profit / margin | $208.2 million / 16.7% | $145.0 million / 16.8% | $558.4 million / 17.2% | $446.0 million / 17.5% |
| Operating profit / margin | $31.5 million / 2.5% | $23.3 million / 2.7% | $112.3 million / 3.5% | $86.3 million / 3.4% |
| Net income attributable to Ryerson | $77.5 million | $1.7 million | $105.4 million | $17.1 million |
| Diluted EPS | $2.06 | $0.05 | $2.80 | $0.46 |
- Q3 sales rose 44.6%; same-store sales increased 24.0%. For the first nine months, sales rose 27.2% and same-store sales rose 20.2%.
- Same-store tons sold increased 2.5% in Q3 and 4.4% year to date; average selling prices rose 21.0% and 15.2%, respectively. Management attributed growth to improved demand and higher metal prices, as well as the Central Steel acquisition.
- Cash flow from operations was negative $62.4 million for the nine months, versus negative $93.3 million in 2017. Investing cash flow was negative $200.5 million; financing provided $218.1 million. Cash, cash equivalents, and restricted cash ended at $31.7 million, down from $78.5 million at year-end 2017.
- At September 30, total debt was $1,261.8 million, including $650 million of 11% senior secured notes due 2022 and $589.4 million drawn on the revolving credit facility. Cash was $30.6 million. Debt-to-capitalization was 93%, compared with 101% at year-end 2017.
- Reported total liquidity was $446 million, including $415 million of availability under the revolving and foreign credit facilities; the revolver had $396 million available. The company reports this liquidity measure as non-GAAP.
Changes, acquisitions, and unusual items
- Ryerson acquired Central Steel & Wire on July 2, 2018 for consideration valued at $163.5 million. Central Steel contributed $178.2 million in revenue after acquisition. Purchase accounting included a $73.2 million bargain-purchase gain, which materially lifted reported earnings; acquisition valuation remained preliminary at quarter-end.
- Excluding that nonrecurring gain, the company’s unaudited pro forma results assuming Central Steel had been acquired January 1, 2017 show Q3 2018 net income attributable to Ryerson of $4.3 million and nine-month income of $13.7 million. These figures are pro forma, not reported results.
- LIFO expense was $32.1 million in Q3 2018 versus LIFO income of $1.7 million in Q3 2017; year-to-date LIFO expense was $89.3 million versus $35.7 million. Gross margins declined modestly year over year.
- Q3 included $2.7 million of restructuring charges, mainly severance and two facility closures. Interest expense increased with higher borrowing levels and rates. Total debt rose from $1,045.7 million at year-end 2017.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management said operating cash flow and credit-facility proceeds were expected to cover contractual obligations and normal operating requirements; it anticipated approximately $5 million of additional minimum pension contributions in Q4 2018.
- Management described improved demand and pricing in the first nine months of 2018. U.S. tariffs on steel and aluminum supported higher selling prices and margins, but changing trade measures and retaliatory actions create uncertainty for pricing, imports, supply, and demand. A relaxation of tariffs or renewed imports could pressure U.S. metal prices.
- The metals distribution industry is cyclical and exposed to metal-price volatility. Declining prices may reduce sales and gross profit as inventory is sold, while competition may limit the ability to pass higher costs to customers.
- Ryerson is a potentially responsible party in the Portland Harbor Superfund matter. The EPA’s proposed remedy has an estimated site-wide present value cost of $1.05 billion, but responsibility has not been allocated. The company cannot estimate its potential share or a range of loss.
- Other financial exposures include $650 million of 11% notes, revolving-credit covenants and borrowing-base availability, pension funding requirements, and $17 million of letters of credit and other off-balance-sheet arrangements. A hypothetical 1% rise in variable interest rates would have increased nine-month interest expense by approximately $2.9 million.
Most important facts for investors to verify
- Underlying earnings and operating performance excluding the $73.2 million bargain-purchase gain, and the final Central Steel purchase-price allocation.
- Whether working-capital investment in receivables and inventory converts to cash as sales and metal prices change.
- Debt, interest expense, revolver availability, and compliance with borrowing-base and covenant requirements.
- How tariffs and other trade actions affect Ryerson’s selling prices, costs, volumes, and margins.
- Any later EPA allocation or revised remedy for Portland Harbor, and the company’s resulting exposure.