Ryerson Holding Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Ryerson distributes and processes metals in the U.S., Canada, Mexico, and China.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $864.2 million | $735.1 million | $2,554.1 million | $2,177.5 million |
| Gross profit / margin | $145.0 million / 16.8% | $145.4 million / 19.8% | $446.0 million / 17.5% | $456.0 million / 20.9% |
| Operating profit / margin | $25.8 million / 3.0% | $33.8 million / 4.6% | $92.8 million / 3.6% | $122.0 million / 5.6% |
| Net income attributable to Ryerson | $1.7 million | $8.2 million | $17.1 million | $27.3 million |
| Basic and diluted EPS | $0.05 | $0.23 | $0.46 | $0.82 |
Q3 sales rose 17.6% year over year as tons sold increased 7.3% to 515,000 and average selling price per ton rose 9.6% to $1,678. For the first nine months, sales increased 17.3%, tons sold rose 4.6% to 1.53 million, and average selling price increased 12.2% to $1,669.
Cash flow from operations was negative $93.3 million for the first nine months, versus negative $22.9 million in 2016. Investing cash outflow was $61.6 million, including $49.2 million for acquisitions; financing provided $144.0 million. Cash ended the period at $73.6 million, down from $80.7 million at year-end 2016. Capital expenditures were $15.8 million.
At September 30, total debt was $1,041.6 million, compared with $963.5 million at December 31, 2016. This included $650 million of 11% senior secured notes due 2022 and $385.1 million borrowed under the revolving credit facility. The company reported a 101% debt-to-capitalization ratio and total liquidity of $355 million, including $291 million available under the revolving facility. Total stockholders’ equity was negative $14.4 million.
Changes and management commentary
- Despite higher sales, gross profit fell $0.4 million in Q3 and $10.0 million year to date. Management attributed weaker margins to competitive pricing and metal costs rising faster than selling prices. In Q3, average selling prices were down 1% sequentially from Q2, while procured metal costs increased.
- Operating profit declined 23.7% in Q3 and 23.9% year to date. Operating expenses rose in dollars with demand, employment, wages, benefits, and delivery costs, but declined as a share of sales. No restructuring charge was recorded in 2017; the prior-year period included $2.5 million related to a facility closure.
- Demand improved year over year across nearly all end markets, particularly commercial ground transportation, oil and gas, and construction equipment; consumer durables shipments declined. Management noted elevated imports and well-supplied markets constrained pricing power.
- Acquisitions of Laserflex and Guy Metals were completed in January and February 2017, respectively; the company paid $49.2 million net of cash acquired. Management said the businesses enhance fabrication and processing capabilities.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said cash flow from operations and borrowing availability were expected to fund normal operating needs and contractual obligations.
- Operating cash use reflected working-capital investment: receivables increased $91.5 million and inventories increased $117.5 million, partly offset by a $66.3 million increase in accounts payable. Inventory growth reflected higher value and tonnage as market conditions improved.
- Q3 included a $0.7 million income tax benefit, primarily from reversal of uncertain tax provisions after statutes of limitation lapsed. Management anticipated a further approximately $1.1 million tax benefit from expected statute expirations within 12 months. A valuation allowance of $19.5 million remained against certain deferred tax assets.
- LIFO accounting affected reported costs: Q3 2017 recorded $1.7 million of LIFO income versus $25.1 million of LIFO expense in Q3 2016. Year-to-date LIFO expense was $35.7 million in 2017 versus $5.0 million in 2016; the 2017 amount was partly offset by a $23.9 million lower-of-cost-or-market reserve credit.
- Ryerson is a potentially responsible party for the Portland Harbor Superfund Site. The EPA’s 2017 plan has estimated present-value costs of $1.05 billion, but responsibility has not been allocated; the company cannot estimate its potential share or loss range.
- Other risks include volatile metal prices, margin pressure, floating-rate debt, pension funding needs, and debt covenants. Required 2017 pension contributions were estimated at approximately $21 million; $16 million had been contributed through September. A 1% rate increase on variable-rate debt would have increased nine-month interest expense by approximately $1.9 million.
- The company planned to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. It expected over-time revenue recognition for a subset of custom-fabricated products, but had not quantified the financial impact.
Important facts for investors to verify
- Whether selling prices and gross margins recover as metal costs and competitive conditions change.
- Whether working-capital requirements, particularly inventory and receivables, ease and operating cash flow improves.
- Revolving-credit availability, borrowing-base capacity, covenant compliance, and the cost and terms of the 11% notes.
- Potential exposure and developments in the Portland Harbor matter, which remains unquantifiable in the filing.
- The quantified effects of adopting the revenue-recognition standard and any resulting changes to reported results.