Ryerson Holding Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. Financial statements are unaudited. Ryerson distributes and processes metals across North America, China and Brazil.
Financial results and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Net sales | $868.0 million | $874.4 million |
| Gross profit / margin | $150.0 million / 17.3% | $147.7 million / 16.9% |
| Operating profit / margin | $33.6 million / 3.9% | $29.9 million / 3.4% |
| Net income (loss) attributable to Ryerson / diluted EPS | $(2.5) million / $(0.08) | $1.6 million / $0.08 |
| Operating cash flow | $101.6 million | $25.1 million |
| Capital expenditures | $5.7 million | $3.4 million |
| Cash and cash equivalents | $70.8 million | $60.0 million at Dec. 31, 2014 |
| Total debt | $1,202.4 million | $1,259.1 million at Dec. 31, 2014 |
| Total liquidity | $332 million | $328 million at Dec. 31, 2014 |
Q1 2015 gross margin and operating margin improved year over year, but the company swung to a net loss. Interest and other expense on debt declined to $25.3 million from $27.4 million. Total equity remained in deficit at $(135.8) million, and the debt-to-capitalization ratio was 113% at March 31, 2015.
Material changes and cash flow
- Sales fell 0.7%; tons sold declined 5.9%, while average selling price rose 5.6%. Management attributed lower volume mainly to weaker shipments of stainless steel plate and carbon flat and long products.
- Cost of materials sold declined 1.2%. Gross profit increased by $2.3 million, with revenue per ton increasing faster than material cost per ton. LIFO income was $12.0 million versus LIFO expense of $9.2 million in Q1 2014.
- Operating expenses decreased $1.4 million, but rose to $244 per ton from $233 per ton as lower shipment volume affected cost absorption.
- Operating cash flow was driven principally by a $70.8 million inventory reduction and a $31.9 million increase in accounts payable; $11.0 million of pension contributions partly offset these inflows. Cash generation therefore reflected working-capital movements, not net earnings.
- Financing activities used $82.7 million, including $30.3 million to repurchase and retire notes and $26.9 million of net short-term borrowings repayments. Debt declined by $56.7 million from year-end.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management said operating cash flow and credit-facility proceeds are expected to fund normal operating requirements and contractual obligations.
- A $12.3 million other-than-temporary impairment charge on an available-for-sale investment was the principal unusual item, contributing to $11.3 million of net other expense. The investment had been in an unrealized loss position for 12 months.
- Metal commodity derivatives generated a $3.0 million loss recorded in cost of materials sold. The derivatives are marked to market through current earnings rather than accounted for as hedges.
- Debt totaled $1.20 billion, including $583.2 million of 9% notes due 2017 and $187.5 million of 11.25% notes due 2018. The $1.35 billion revolving facility had $235 million available at quarter-end and may mature August 16, 2017 if the 2017 notes remain outstanding, rather than its scheduled April 2018 maturity.
- Ryerson had a minimum required pension contribution of approximately $43 million for 2015; $11 million had been contributed by quarter-end, with approximately $32 million expected over the remaining nine months.
- For the Portland Harbor Superfund site, the company said it could not estimate potential investigation or remediation costs. Management did not expect ordinary-course legal claims to have a material adverse effect. The company reported no material risk-factor changes from its 2014 Form 10-K.
- Metal-price volatility and cyclical industrial demand may affect sales and margins. Management also noted that proposed repeal of LIFO for U.S. tax purposes, if enacted, could increase cash taxes over a ten-year period.
Important facts for investors to verify
- Whether the margin improvement can be sustained if shipment volumes remain weak, and how metal prices and LIFO adjustments affect reported gross profit.
- How much of operating cash flow is repeatable after the inventory reduction and payable increase, and whether liquidity remains adequate under the borrowing-base limits.
- Plans and funding options for the 2017 notes and the revolving facility’s potential 2017 maturity, including covenant and refinancing implications.
- Future pension funding needs and developments in the unquantified Portland Harbor contingency.
- Valuation and subsequent developments related to the impaired investment and the earnings impact of commodity derivatives.