Ryerson Holding Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also provides quarterly results, including Q4 2017. Ryerson processes and distributes industrial metals in the U.S., Canada, Mexico, and China; it reports one operating segment. Affiliates of Platinum Equity owned approximately 57% of the common stock.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $3,364.7 million | $2,859.7 million |
| Gross profit / margin | $582.5 million / 17.3% | $570.6 million / 20.0% |
| Operating profit / margin | $110.0 million / 3.3% | $133.2 million / 4.7% |
| Net income attributable to Ryerson Holding | $17.1 million | $18.7 million |
| Diluted EPS | $0.46 | $0.54 |
| Cash from operating activities | $(2.1) million | $24.9 million |
| Capital expenditures | $25.1 million | $23.0 million |
| Cash and cash equivalents at year-end | $77.4 million | $80.7 million |
| Total debt at year-end | $1,045.7 million | $963.5 million |
| Working capital at year-end | $701.2 million | $665.4 million |
Net sales rose 17.7%, reflecting a 5.1% increase in tons sold and an 11.9% increase in average selling price per ton. Cost of materials per ton increased 15.6%, faster than selling prices, compressing gross margin. Operating expenses rose in dollars but declined to 14.0% of sales from 15.3%.
Q4 2017 sales were $810.6 million and gross profit was $136.5 million; pretax results were a loss of $6.3 million, net income was $0.3 million, and diluted EPS was nil. Q4 2016 sales were $682.2 million, gross profit $114.6 million, pretax loss $15.2 million, net loss $8.4 million, and diluted loss per share $0.23.
Operating cash flow turned negative as higher sales and metal costs increased receivables and inventory; accounts payable partially offset the working-capital use. The company reported total liquidity of $338 million, a non-GAAP measure that includes cash and borrowing availability under credit facilities. Availability under the $750 million revolving credit facility was $264 million. Cash flow was also affected by pension contributions and retiree medical payments.
Material changes and notable items
- Debt increased $82.2 million year over year, mainly reflecting acquisitions and capital spending funded through the revolving facility. Debt included $650 million of 11% senior secured notes due 2022 and $384.2 million drawn under the revolving facility, which matures in 2021.
- The company acquired Laserflex and Guy Metals in 2017 to expand fabrication and processing capabilities; management said neither acquisition was material to consolidated financial statements.
- The 2017 tax provision was a $1.3 million benefit, including a $10.6 million benefit from revaluing deferred tax assets under the Tax Cuts and Jobs Act and $7.2 million of estimated transition-tax expense on deemed repatriated foreign earnings.
- At year-end, the pension plan was underfunded by $165 million and the postretirement benefit obligation was $69 million. The company expected a minimum pension contribution of approximately $28 million in 2018.
Outlook, risks, and contingencies
Management cited improved 2017 demand and higher metal prices, but did not provide company-specific numerical guidance for 2018. It expected 2018 capital expenditures, excluding acquisitions, of up to approximately $25 million. On March 1, 2018, after year-end, the U.S. announced proposed tariffs of 25% on imported steel and 10% on imported aluminum; Ryerson said enactment would bias U.S. pricing upward. The effect on costs, customer demand, and margins remains uncertain.
Principal risks include the metals industry’s cyclicality, volatile commodity prices and inventory exposure, competition and margin pressure, substantial debt and restrictive covenants, and sensitivity to interest rates. A 100-basis-point change in floating rates was estimated to affect annual interest expense by approximately $2.7 million. Other risks include pension funding needs, foreign exchange exposure, supplier concentration, cyber and operational disruptions, and environmental liabilities.
Ryerson is among more than 100 potentially responsible parties at the Portland Harbor Superfund Site. The EPA’s initial remediation plan had an estimated total present-value cost of $1.05 billion, but responsibility has not been allocated; the company said it could not estimate its potential share or a loss range. Management stated that other pending claims were not expected to materially affect the company, although amounts were not determinable.
The company expects to adopt a new revenue standard in 2018, including recognizing some custom-fabrication revenue over time rather than on delivery; it estimated a transition adjustment to opening retained earnings of $1 million to $4 million. Management and the auditor reported effective internal control over financial reporting, and the auditor issued an unqualified opinion on the financial statements.
Key facts for investors to verify
- Whether selling prices and gross margins recover relative to metal procurement costs, and whether shipment growth continues.
- Working-capital trends and cash conversion, especially receivables, inventory, and LIFO effects, given negative operating cash flow in 2017.
- Debt repayment and refinancing capacity, facility availability and covenants, and the cost of servicing 11% notes and floating-rate borrowings.
- Required pension contributions and changes in pension assumptions or funded status.
- Developments in the Portland Harbor matter, including EPA remediation revisions and allocation of responsibility.
- Implementation impacts of the new revenue standard and the final transition adjustment; also assess the uncertain effects of announced metal tariffs.