Ryerson Holding Corporation — Q1 2017 Form 10-Q
Business context and period. Ryerson distributes and processes industrial metals in the United States, Canada, Mexico, and China. This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016; balance-sheet figures are compared with December 31, 2016.
Key financial results
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $814.5 million | $702.6 million; up 15.9% |
| Shipment volume and average selling price | Volume up 4.0%; average selling price up 11.5% | Year-over-year |
| Gross profit / gross margin | $160.6 million / 19.7% | $147.6 million / 21.0% |
| Operating profit / operating margin | $43.3 million / 5.3% | $38.3 million / 5.5% |
| Net income attributable to Ryerson | $14.8 million | $13.5 million |
| Basic and diluted EPS | $0.40 | $0.42 |
| Operating cash flow | $(32.5) million | $47.0 million |
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $72.1 million at quarter-end, down from $80.7 million at year-end. Total liquidity, a company-defined non-GAAP measure, was $302 million, versus $301 million; this included $271 million of availability under credit and foreign debt facilities, net of qualified cash pledged as collateral.
- Total debt was $992.5 million, compared with $963.5 million at December 31, 2016. Debt-to-capitalization was 103%, versus 105%. Stockholders’ equity remained in deficit at $(32.7) million.
- The $750 million revolving credit facility matures November 2021. At March 31, $334.3 million was drawn, $16 million of letters of credit were issued, and $250 million was available. The $650 million senior secured notes carry an 11.00% coupon and mature in 2022.
- Operating cash use primarily reflected increases in receivables of $81.9 million and inventory of $52.8 million, partly offset by higher accounts payable of $60.1 million. Investing cash use was $51.9 million, including $49.4 million for acquisitions; financing provided $75.3 million, including increased borrowings and sale-leaseback proceeds.
Changes, management commentary, and outlook
- Management attributed higher sales to improving metals-market conditions: average selling prices rose 11.5% and tons sold 4.0%. Industry shipment volumes, as measured by the Metals Service Center Institute, increased 5.9% year over year. Management reported volume growth in oil and gas, construction equipment, food and agriculture, and industrial machinery, offset by modest declines in some other end markets.
- Cost of materials sold rose 17.8%, faster than sales, as cost per ton increased to $1,316 from $1,161. Gross margin fell 1.3 percentage points. Q1 2017 included $23.2 million of LIFO expense, offset by a $23.9 million reversal of the lower-of-cost-or-market inventory reserve; Q1 2016 included $26.6 million of LIFO income and an $11.8 million inventory-reserve charge.
- Operating expenses increased $8.0 million, primarily from incentive compensation, wages, benefits, and delivery costs. EPS declined despite higher attributable net income, reflecting a larger weighted-average share count following a 2016 share offering.
- Ryerson acquired Laserflex and Guy Metals in Q1 for $26.7 million and $22.7 million, respectively, net of cash acquired. Management said the acquisitions were not individually material; purchase accounting remained preliminary.
- No specific earnings or revenue guidance was provided. Management stated it believed operating cash flow and credit-facility availability would fund normal operating needs and the expected 2017 minimum pension contributions. It anticipated approximately $19 million of additional pension contributions during the remaining nine months of 2017.
Risks, contingencies, and unusual items
- The EPA’s Portland Harbor Superfund remedy has an estimated present-value cost of $1.05 billion, but responsibility among more than 100 potentially responsible parties has not been allocated. Ryerson said it could not determine its potential responsibility or estimate a loss range.
- The metals distribution business is cyclical and exposed to volatile metal prices. Falling prices can pressure selling prices and margins on existing inventory; rising costs may not be fully passed through to customers.
- Debt is substantial, and the credit facility includes covenants and default provisions. The 2022 Notes are structurally subordinated to liabilities of non-guarantor subsidiaries; those subsidiaries accounted for 11.9% of sales and 7.4% of EBITDA in Q1.
- Pension liabilities exceeded plan assets by $216 million at year-end 2016. Required future contributions may vary with investment returns, discount rates, and regulation.
- Of quarter-end cash, $65.8 million was held outside the United States and deemed permanently reinvested. Management said it did not currently foresee a need to repatriate these funds.
- The filing noted proposed U.S. legislation to repeal LIFO for tax purposes; if enacted, Ryerson expects higher cash taxes over a 10-year period. It also anticipated a possible approximately $1.3 million tax benefit from statutes of limitation closing within the next 12 months.
Important facts for investors to verify
- Whether stronger pricing and shipment volumes persist, and whether margin pressure from rising metal costs and LIFO accounting eases.
- Receivables and inventory growth, working-capital cash needs, and the sustainability of reported total liquidity and facility availability.
- Debt levels, the 11.00% notes’ interest burden, credit-facility covenant headroom, and refinancing requirements.
- Integration and performance of the two acquisitions, including final purchase-accounting allocations.
- Any EPA allocation or other developments in the Portland Harbor matter, and the scale and timing of pension funding obligations.
- Potential tax effects of deferred-tax-asset valuation allowances, possible LIFO tax-law changes, and any cash-tax consequences of repatriating offshore cash.