Ryerson Holding Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Ryerson distributes and processes industrial metals in the U.S., Canada, Mexico, and China. Results are unaudited.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1,057.1 million | $875.4 million | $1,998.4 million | $1,689.9 million |
| Gross profit / margin | $185.3 million / 17.5% | $140.4 million / 16.0% | $350.2 million / 17.5% | $301.0 million / 17.8% |
| Operating profit / margin | $46.4 million / 4.4% | $21.8 million / 2.5% | $80.8 million / 4.0% | $63.0 million / 3.7% |
| Net income attributable to Ryerson | $17.5 million | $0.6 million | $27.9 million | $15.4 million |
| Diluted EPS | $0.46 | $0.02 | $0.74 | $0.41 |
- Q2 sales rose 20.8%; tons sold increased 4.8% and average selling price per ton rose 15.2%. For the first half, sales rose 18.3%, tons sold 5.3%, and average selling price per ton 12.3%.
- Q2 gross margin improved year over year as selling prices per ton rose faster than materials cost per ton. First-half gross margin was slightly lower year over year.
- Q2 2018 LIFO expense was $43.9 million versus $14.2 million in Q2 2017; first-half expense was $57.2 million versus $37.4 million. First-half 2017 LIFO expense was partly offset by a $23.9 million reversal of a lower-of-cost-or-market inventory reserve.
Cash flow, debt, and liquidity
- First-half operating cash flow was negative $17.9 million, versus negative $81.5 million in 2017. Working-capital uses included a $127.0 million increase in receivables and a $94.3 million increase in inventory, partly offset by a $145.5 million increase in accounts payable.
- First-half investing cash use was $37.2 million, including $21.4 million of capital expenditures and $16.2 million for the Fanello acquisition. Financing provided $7.5 million. Cash and restricted cash ended at $28.7 million, down from $78.5 million at year-end 2017.
- Total debt was $1.053 billion at June 30, including $650 million of 11% senior secured notes due 2022. Debt-to-capitalization was 98%, compared with 101% at year-end 2017. Interest and other debt expense was $23.9 million in Q2 and $47.2 million for the first half.
- The revolving credit facility was increased from $750 million to $1 billion on June 28. Ryerson reported $363 million of facility availability and total liquidity of $414 million at June 30. Management said operating cash flow and facility proceeds were expected to fund normal operating requirements and 2018 minimum pension contributions.
Changes, outlook, and notable items
- Management attributed stronger sales and operating profit to improved metals demand, higher selling prices, and higher volumes. North American service-center volumes increased 4.3% year over year, according to the Metal Service Center Institute.
- Trade actions included U.S. Section 232 tariffs on imported steel and aluminum and additional duties on certain Chinese imports effective July 6, 2018. Management expected upward price pressure in the U.S. if tariffs or other trade actions remained in effect, while noting that foreign responses increased uncertainty around pricing and supply. The filing gives no specific financial guidance.
- On July 2, after quarter-end, Ryerson completed its acquisition of Central Steel & Wire for approximately $150.8 million, subject to purchase-price adjustments, and assumed approximately $8.9 million of transaction-related obligations. The acquisition was financed with credit-facility borrowings; purchase-price allocation and pro forma results were not yet available.
- Ryerson adopted ASC 606 in 2018. The adoption increased opening retained earnings by $2.3 million; reported first-half net income was $0.8 million higher than it would have been without adoption. The company also adopted other accounting updates, generally with no material financial-statement impact.
- Contingencies include potential responsibility for the Portland Harbor Superfund Site. The EPA’s estimated present-value remediation cost for the site was $1.05 billion, but responsibility has not been allocated and Ryerson could not estimate its potential loss. Minimum pension contributions were expected to total approximately $27 million for 2018; $12 million had been contributed by June 30.
- Other key risks include cyclical metals demand and pricing, inventory exposure if metal prices decline, interest-rate and commodity-price fluctuations, and structural subordination of the 2022 notes to liabilities of non-guarantor subsidiaries. Management reported disclosure controls were effective and no material quarter-specific change in internal control over financial reporting.
Important facts for investors to verify
- Whether price increases and volume growth persist, and how tariffs, trade responses, and metal-price movements affect margins and inventory valuation.
- Working-capital trends and cash conversion, particularly receivables and inventory growth relative to operating cash flow.
- Post-acquisition debt, liquidity, integration costs, and Central Steel & Wire’s contribution once final acquisition and pro forma information becomes available.
- Ability to service the 11% notes and meet pension funding needs, alongside compliance with credit-facility covenants and availability conditions.
- Developments in the Portland Harbor matter, including the revised EPA remedy, allocation of responsibility, and any estimable exposure.