Ryerson Holding Corporation — Q2 2016 Form 10-Q
Business context and period. Ryerson distributes and processes metals in the United States, Canada, Mexico, and China. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the same 2015 periods unless noted. The business is cyclical and exposed to industrial demand and volatile metal prices.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $739.8M | $840.4M | $1,442.4M | $1,708.4M |
| Gross profit / margin | $163.0M / 22.0% | $165.8M / 19.7% | $310.6M / 21.5% | $315.8M / 18.5% |
| Operating profit / margin | $49.9M / 6.7% | $50.2M / 6.0% | $88.2M / 6.1% | $83.8M / 4.9% |
| Net income attributable to Ryerson | $5.6M | $15.8M | $19.1M | $13.3M |
| EPS, diluted | $0.17 | $0.49 | $0.59 | $0.41 |
- Revenue and margins: Q2 sales fell 12.0%, while tons sold rose 3.5%; average selling price declined 14.9%. For the first half, sales fell 15.6%, tons sold increased 2.0%, and average selling price declined 17.2%. Management attributed the price declines to weaker metals-market conditions. Materials cost per ton declined faster than revenue per ton, lifting gross margin despite slightly lower gross profit.
- Cash flow: First-half operating cash flow was $2.6M, down from $162.9M. Receivables increased $54.7M and inventory increased $41.6M, partly offset by a $64.9M increase in accounts payable. Capital expenditures were $13.3M. Cash ended the period at $74.5M, versus $63.2M at year-end 2015.
- Debt and liquidity: Total debt was $1,028.4M, versus $1,023.5M at December 31, 2015; the debt-to-capitalization ratio was 112%, compared with 116%. Reported total liquidity was $292M, versus $273M, including $219M available under the $1.0B revolving facility. The company reported a shareholders’ deficit of $113.0M.
- Interest and taxes: Interest and other debt expense was $21.9M for Q2 and $43.9M for the first half. First-half income tax expense was $12.4M; management noted that tax expense generally excludes benefits for losses in jurisdictions with historical losses.
Material changes and unusual items
- On May 24, Ryerson issued $650M of 11.00% secured notes due 2022. Proceeds, together with revolving-credit borrowings, funded repayment of the $569.9M 2017 notes, repurchase of $95M of 2018 notes, and related costs. At quarter-end, $48.5M of 2018 notes and $650M of 2022 notes remained outstanding.
- Debt transactions generated a $15.7M Q2 loss; a separate $2.8M other-than-temporary impairment charge was recorded on an available-for-sale investment. First-half debt transactions, including gains on open-market note repurchases, resulted in a net $6.9M loss. These items contributed to the steep year-over-year decline in Q2 net income.
- Inventory accounting affected cost of materials sold: Q2 included $6.5M of LIFO expense, versus $37.0M of LIFO income in Q2 2015, partly offset by a $13.5M credit from reducing the lower-of-cost-or-market reserve. First-half LIFO income was $20.1M, versus $49.0M.
- After quarter-end, the company completed a public offering of 5.0M shares on July 25, expected to yield $70.6M net (up to approximately $81.3M if underwriters exercised their additional-share option). Ryerson said it intended to use proceeds to repay or otherwise address outstanding debt.
Outlook, risks, and contingencies
- No specific earnings or sales guidance is provided. Management said operating cash flow and the revolving facility were expected to fund normal operating needs and contractual obligations.
- The metals service-center industry is cyclical; sales, margins, and inventory values are sensitive to industrial demand, competition, and changes in metal prices. The filing also identifies interest-rate, foreign-exchange, and commodity-price exposures. Derivative contracts are marked to market through current earnings rather than accounted for as hedges.
- Ryerson expects approximately $12M of additional minimum pension contributions in the second half of 2016, following $10M contributed in the first half. Future funding needs depend on investment returns, discount rates, and regulation.
- For the Portland Harbor Superfund matter, the EPA’s proposed plan estimated overall cleanup costs of $745.7M, but responsibility had not been allocated among potentially responsible parties. Ryerson said it could not determine whether it would be liable or estimate a potential loss.
- The company reported $1,646M of contractual obligations, including debt principal, estimated interest, leases, and other obligations; this excludes potential future pension funding. The credit facility and notes include restrictive covenants and default provisions. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Investor verification priorities
- Track whether sales volumes and gross margins can offset continued pricing weakness, and distinguish underlying operating results from inventory-accounting effects.
- Review liquidity and working-capital trends, including receivables, inventory, payable balances, borrowing-base availability, and cash conversion.
- Confirm the use of equity-offering proceeds and subsequent changes in debt balances, interest costs, and covenant headroom.
- Assess pension funding requirements and any developments in the Portland Harbor matter, where the company could not estimate its exposure.
- Monitor metal-price, interest-rate, and foreign-exchange movements and the earnings impact of marked-to-market derivatives.