Ryerson Holding Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Ryerson distributes and processes metals across North America and China. Figures are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $735.1 | $790.0 | $2,177.5 | $2,498.4 |
| Gross profit | $145.4 | $150.3 | $456.0 | $466.1 |
| Gross margin | 19.8% | 19.0% | 20.9% | 18.7% |
| Operating profit | $33.8 | $37.0 | $122.0 | $120.8 |
| Net income attributable to Ryerson | $8.2 | $6.7 | $27.3 | $20.0 |
| Diluted EPS | $0.23 | $0.21 | $0.82 | $0.62 |
- Q3 sales fell 6.9%; average selling price declined 4.7% and tons sold declined 2.4%. For the first nine months, sales fell 12.8%, with average selling price down 13.3% while tons sold rose 0.5%.
- Gross margin improved as material cost per ton declined faster than selling price per ton. Operating expenses were $111.6 in Q3, including a $2.5 restructuring charge; nine-month operating expenses were $334.0.
- Interest and other expense on debt was $23.6 in Q3 and $67.5 for the nine months. The company reported a $13.2 net other expense for the nine months, including a net $7.2 loss on debt transactions, $3.2 foreign currency losses and a $2.8 investment impairment.
Cash flow, debt and liquidity
- Nine-month operating cash flow was negative $22.9, versus positive $192.6 in 2015. The 2016 outflow principally reflected higher inventory ($67.3 increase), receivables ($54.9 increase) and $21.0 of pension contributions; 2015 cash flow benefited from inventory reductions.
- Capital expenditures were $19.7. Cash and cash equivalents at September 30 were $73.2, up from $63.2 at year-end 2015.
- Total debt was $977.9 at September 30, compared with $1,023.5 at December 31, 2015. The debt-to-capitalization ratio was 104%, versus 116%. Stockholders’ equity remained in deficit at $34.3; total equity deficit was $33.0.
- Total liquidity, as defined by the company, was $364 at September 30, versus $273 at year-end. This included $73 of cash, $1 of marketable securities and $321 of availability under credit and foreign debt facilities, less $31 of qualified cash pledged as collateral. The $1.0 billion revolving facility had $295 of availability and $277.2 outstanding borrowings.
- In May, Ryerson issued $650 of 11.00% senior secured notes due 2022 and used proceeds and credit-facility borrowings to retire the $569.9 balance of 9.00% notes due 2017 and repurchase portions of its 11.25% notes due 2018. A July offering of 5 million shares generated $71.5 net proceeds. On October 15, 2016, the remaining $48.5 principal of the 2018 notes was redeemed; the company expected a $1.4 charge plus a $0.3 write-off of debt issuance costs in Q4.
Changes, outlook and risks
- Despite lower sales and gross profit, nine-month operating profit increased modestly and net income attributable to Ryerson rose to $27.3 from $20.0. EPS increased despite dilution from the July share offering.
- Inventory valuation effects were significant: Q3 included $25.1 of LIFO expense, partly offset by a $23.7 credit to the lower-of-cost-or-market reserve. Nine-month LIFO expense was $5.0, more than offset by a $25.4 reserve credit. These items affect comparability of margins.
- Management stated that operating cash flow and the revolving facility should provide sufficient funds for normal operations and the approximately $1 million remaining minimum pension contribution anticipated in 2016. The filing provides no formal earnings or sales guidance.
- Key risks include cyclical industrial demand, volatile metal prices and the ability to pass price changes through to customers. The company uses commodity and foreign-exchange derivatives, which are marked to market through earnings rather than designated as accounting hedges.
- Ryerson is a potentially responsible party at the Portland Harbor Superfund site. The EPA’s proposed plan estimated overall remediation costs of $745.7, but responsibility has not been allocated; management could not estimate Ryerson’s potential share or a loss range. The filing says other claims are not expected to have a material adverse effect.
- Pension obligations and funding needs may vary with asset returns, discount rates and regulatory requirements. Approximately $65.1 of cash was held outside the U.S. and considered permanently reinvested. The company noted that proposed repeal of LIFO for U.S. tax purposes could increase cash taxes over a ten-year period.
- Management reported effective disclosure controls as of September 30, 2016 and no material changes in internal control over financial reporting during the quarter. No material risk-factor changes were reported from the 2015 Form 10-K.
Important facts for investors to verify
- Whether sales volumes, pricing and gross margins improve or deteriorate as metal-market conditions change; distinguish underlying performance from LIFO and inventory-reserve effects.
- Whether working-capital investment continues to consume cash, and whether liquidity and borrowing-base availability remain adequate.
- The ongoing cost and refinancing implications of the 11.00% 2022 notes, revolving borrowings and the completed 2018-note redemption.
- Future pension contributions and the eventual allocation, if any, of Portland Harbor remediation costs to Ryerson.
- The effect of the July equity issuance on per-share results and the company’s ability to reduce its equity deficit and high debt burden.