Ryerson Holding Corporation — Q1 2018 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended March 31, 2017 unless otherwise stated. Ryerson processes and distributes industrial metals across the U.S., Canada, Mexico, and China. Results are unaudited.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Net sales | $941.3 million | $814.5 million; up 15.6% |
| Tons sold | 526,000 | 497,000; up 5.8% |
| Average selling price per ton | $1,790 | $1,639; up 9.2% |
| Gross profit / gross margin | $164.9 million / 17.5% | $160.6 million / 19.7% |
| Operating profit / margin | $34.4 million / 3.7% | $41.2 million / 5.1% |
| Net income attributable to Ryerson / diluted EPS | $10.4 million / $0.28 | $14.8 million / $0.40 |
| Operating cash flow | $31.7 million provided | $32.7 million used |
| Capital expenditures | $7.6 million | $4.0 million |
| Cash and restricted cash | $68.8 million at March 31 | $78.5 million at December 31, 2017 |
| Total debt | $1,034.5 million | $1,045.7 million at December 31, 2017 |
| Total liquidity | $381 million | $338 million at December 31, 2017 |
Cost of materials sold was $776.4 million, or 82.5% of sales, versus $653.9 million, or 80.3%. Operating expenses were $130.5 million, up $11.1 million, but declined as a share of sales to 13.8% from 14.6%. Interest and other expense on debt was $23.3 million, compared with $21.8 million. The effective tax expense was $4.1 million, compared with $6.8 million.
At March 31, current assets were $1,249.4 million and current liabilities were $562.3 million. Ryerson reported a 99% debt-to-capitalization ratio, versus 101% at year-end. The $750 million revolving credit facility had $366.2 million drawn, $12 million of letters of credit, and $323 million available; availability is subject to borrowing-base limits. Total liquidity is a non-GAAP measure and includes cash and borrowing availability, net of qualified cash pledged as collateral.
Material changes and drivers
- Sales growth reflected both higher prices and volume amid improved metals demand. Management reported year-over-year shipment growth in nearly all end markets, particularly commercial ground transportation, HVAC, and oil and gas.
- Gross profit dollars increased 2.7%, but gross margin fell 2.2 percentage points. Cost of materials per ton rose 12.2%, faster than the 9.2% increase in selling price per ton. Q1 2018 LIFO expense was $13.3 million; Q1 2017 LIFO expense of $23.2 million was offset by a $23.9 million lower-of-cost-or-market reserve credit.
- Operating profit fell 16.5%, and attributable net income declined to $10.4 million from $14.8 million, reflecting margin pressure, higher operating expenses, and increased debt expense.
- Operating cash flow improved from an outflow to an inflow, largely because accounts payable rose $145.4 million. Receivables increased $95.7 million and inventories increased $62.0 million, absorbing cash as sales and inventory levels rose.
- Debt decreased $11.2 million from year-end, while total liquidity rose $43 million. The $650 million of 11.00% senior secured notes due 2022 remained outstanding; revolving-facility borrowings were $366.2 million. The facility matures in November 2021.
Outlook, risks, and unusual items
- Outlook: No specific financial guidance was provided. Management said it expected cash from operations and facility availability to fund normal operating needs and the anticipated 2018 minimum pension contributions.
- Industry and trade: Management described the metals service-center market as cyclical and volatile. Section 232 steel and aluminum tariffs, quotas, exemptions, and other trade measures were creating uncertainty around U.S. metal pricing and supply. Management expected upward U.S. price pressure if tariffs or negotiated trade actions took effect.
- Commodity and interest-rate exposure: Metal-price declines could reduce sales, gross profit, and net income. A hypothetical 1% increase in variable interest rates was estimated to add approximately $0.7 million to Q1 interest expense. Derivatives are used for interest-rate, currency, and commodity exposures; some commodity and foreign-exchange contracts are marked through current earnings.
- Debt and liquidity: The 2022 notes carry an 11% coupon and debt agreements impose covenants and restrictions. Credit-facility availability depends on eligible collateral; specified low availability may trigger a minimum fixed-charge coverage requirement. Letters of credit totaled $17 million across arrangements.
- Pensions: Ryerson contributed $5 million through March 31 and anticipated approximately $23 million of additional minimum contributions during the rest of 2018. Future funding depends on asset returns, discount rates, and regulatory requirements.
- Contingency: Ryerson is among more than 100 potentially responsible parties for the Portland Harbor Superfund Site. The EPA’s remediation plan had an estimated present value cost of $1.05 billion, but responsibility had not been allocated. The company could not estimate its potential share or a range of loss.
- Accounting and other items: Adoption of ASC 606 increased opening retained earnings by $2.3 million and changed the timing of revenue recognition for certain custom products. The standard reduced reported Q1 2018 attributable net income by $0.3 million versus the amount without adoption; prior periods were not restated. On April 2, 2018, Ryerson acquired Fanello Industries; the acquisition was described as not material.
- Other risk disclosure: The 2022 notes are structurally subordinated to liabilities of non-guarantor subsidiaries. Those subsidiaries represented 11.3% of Q1 sales and 9.8% of Q1 EBITDA.
Important facts for investors to verify
- Whether stronger shipment volumes and pricing persist, and whether Ryerson can prevent input-cost increases from further compressing gross margins.
- How working-capital needs, especially receivables and inventory, affect operating cash flow and borrowing-base availability.
- The company’s ability to service high-cost debt, comply with covenants, and address the 2022 notes’ maturity and refinancing needs.
- Actual pension contributions and any change in the estimated funding requirement for the remainder of 2018.
- Developments in Section 232 trade actions and their effects on metal supply, prices, and customer demand.
- Any EPA allocation or revised remediation plan for Portland Harbor, and whether Ryerson’s potential exposure becomes estimable.