Ryerson Holding Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Ryerson distributes and processes metals across North America, China, and Brazil. Results are unaudited.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Net sales | $702.6 million | $868.0 million |
| Gross profit / margin | $147.6 million / 21.0% | $150.0 million / 17.3% |
| Operating profit / margin | $38.3 million / 5.5% | $33.6 million / 3.9% |
| Net income (loss) attributable to Ryerson / EPS | $13.5 million / $0.42 | ($2.5) million / ($0.08) |
| Operating cash flow | $47.0 million | $101.6 million |
| Capital expenditures | $5.4 million | $5.7 million |
| Cash and cash equivalents | $70.5 million | $63.2 million at Dec. 31, 2015 |
| Total debt | $976.6 million | $1,023.5 million at Dec. 31, 2015 |
| Total liquidity | $313 million | $273 million at Dec. 31, 2015 |
| Stockholders’ equity (deficit) | ($118.6) million | ($140.9) million at Dec. 31, 2015 |
Debt comprised $249.9 million under the revolving credit facility, $569.9 million of 9% notes due 2017, $145.3 million of 11.25% notes due 2018, and $20.8 million of foreign debt, net of unamortized issuance costs. Debt-to-capitalization was 114% at quarter-end. The company reported $240 million available under its revolving facility, in addition to foreign facility availability.
Material changes versus Q1 2015
- Sales fell 19.1%, principally because average selling prices declined 19.4% amid weaker metals-market conditions. Tons sold increased 0.4%.
- Cost of materials sold per ton declined to $1,161 from $1,509, faster than selling prices; gross profit margin consequently improved despite slightly lower gross profit dollars.
- Operating expenses decreased $7.1 million, mainly from lower employee benefit, facility, and salary costs.
- Interest and debt expense declined to $22.0 million from $25.3 million. Other income included an $8.2 million gain from repurchasing $25.1 million principal of 2018 notes for $16.9 million. Q1 2015 included a $12.3 million investment impairment charge.
- Operating cash flow decreased by $54.6 million. Q1 2016 cash generation included increased accounts payable, partly offset by increased receivables and inventory; Q1 2015 benefited from a $70.8 million inventory reduction.
Liquidity, outlook, risks, and unusual items
- Management said operating cash flow and the revolving facility should provide sufficient funds for normal operating and contractual requirements. No quantified revenue, earnings, or operating guidance is provided.
- Cash flow from operations and financing availability are important given high leverage and negative stockholders’ equity. The 2017 and 2018 notes represent significant maturities; the credit facility may mature earlier than its stated July 2020 date if certain debt remains outstanding.
- Management anticipated approximately $22 million in required 2016 pension contributions; $2 million had been contributed through March 31, leaving approximately $20 million expected during the remaining nine months.
- Falling metal prices are a significant business risk. A $11.8 million lower-of-cost-or-market inventory charge was recorded in Q1 2016; LIFO income was $26.6 million, compared with $12.0 million a year earlier.
- The company is a potentially responsible party for the Portland Harbor Superfund site. It said available information was insufficient to estimate potential investigation or remediation costs or a loss range. The EPA’s proposed plan had not been released as of May 5, 2016.
- Q1 tax expense was $8.1 million, and the company generally did not recognize tax benefits for losses in jurisdictions with historical losses. A $24.3 million valuation allowance was maintained against certain deferred tax assets.
- Metals service-center results are cyclical and exposed to volatile commodity prices, demand, and competition. The company uses derivatives for currency, metals, and fuel exposures but does not account for them as hedges; changes are recognized in current earnings.
Important facts for investors to verify
- Whether improved gross and operating margins can persist if metals prices, demand, or LIFO effects change.
- Debt refinancing plans and repayment capacity for the 2017 and 2018 notes, alongside the revolving facility’s maturity provisions and covenants.
- Whether working-capital movements and lower operating cash flow affect liquidity, especially as pension contributions continue.
- Potential financial exposure from the Portland Harbor matter and developments in the EPA cleanup process.
- How inventory valuation, including the LIFO reserve and lower-of-cost-or-market charges, affects reported earnings and cash taxes.