Ryerson Holding Corp. — Q3 2015 Form 10-Q
Business context and reporting period
Ryerson distributes and processes metals, primarily in North America, with operations also in China and Brazil. This unaudited quarterly report covers the three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $790.0m | $947.9m | $2,498.4m | $2,753.8m |
| Gross profit / margin | $150.3m / 19.0% | $149.5m / 15.8% | $466.1m / 18.7% | $451.6m / 16.4% |
| Operating profit (loss) | $37.0m | $(3.3)m | $120.8m | $60.8m |
| Net income (loss) attributable to Ryerson | $6.7m | $(34.7)m | $20.0m | $(30.5)m |
| Diluted EPS | $0.21 | $(1.26) | $0.62 | $(1.31) |
- Q3 sales fell 16.7% year over year: average selling price decreased 12.2% and tons sold fell 5.0%. For the nine months, sales declined 9.3%, with tons down 6.2% and average selling price down 3.2%.
- Gross margin improved as cost of materials per ton declined faster than selling price. Nine-month gross profit per ton increased to $320 from $291.
- Operating expenses were $113.3m in Q3 and $345.3m for nine months. Comparisons benefited from prior-year IPO-related advisory termination and transaction compensation charges; Q3 2014 included $25.0m and $7.7m, respectively.
- Operating cash flow was $192.6m for the first nine months, versus cash used of $34.7m in 2014. It reflected a $91.8m inventory reduction and other working-capital movements; pension contributions of $42.1m partly offset the inflow. Investing cash use was $27.0m; financing cash use was $174.2m.
- Cash and equivalents were $48.3m at September 30, down from $60.0m at year-end. Total debt was $1,094.2m, down from $1,259.1m; debt-to-capitalization was 112%, and stockholders’ equity remained in deficit at $(120.9)m.
- Management-defined total liquidity was $269m, including $48m cash, $3m marketable securities, and $218m availability under the revolving and foreign facilities. New revolving facility availability was $196m; foreign facility availability was $22m.
Material changes and unusual items
- On July 24, 2015, Ryerson replaced its $1.35bn revolving facility with a $1.0bn facility maturing July 24, 2020, or earlier if specified debt-maturity conditions apply. The new facility had $331m drawn and $196m available at quarter-end; a $2.9m charge related to writing off old facility issuance costs.
- During the first nine months, Ryerson repurchased and retired $30.1m principal of 9% 2017 Notes and $30.1m principal of 11.25% 2018 Notes. Remaining principal was $569.9m and $170.4m, respectively.
- A $12.3m other-than-temporary impairment of an available-for-sale investment was recorded in Q1. Metal-price declines also caused a $9.0m inventory lower-of-cost-or-market charge; this partly offset $79.3m of nine-month LIFO income. Fixed-asset impairment charges were $1.9m for the nine months.
- Commodity derivatives generated a $10.5m loss for the nine months; these instruments are marked to market through current earnings rather than accounted for as hedges.
- Southern Tool Steel was acquired in August for $7.7m net of cash acquired; management described the acquisition as not material.
Outlook, risks and contingencies
- No quantified earnings or sales guidance is provided. Management stated that operating cash flow and the new credit facility were expected to provide sufficient funds for normal operating requirements and contractual obligations, including the approximately $1m minimum pension contribution anticipated for the remainder of 2015.
- Management describes metals distribution as cyclical and notes volatile metal prices, industrial demand, foreign exchange, energy prices, and global supply-demand conditions. Falling metal prices may reduce revenue, gross profit, and net income.
- Debt maturities and financing terms warrant attention: the 2017 Notes mature within the 1–3 year contractual-obligation period, while the 2018 Notes are scheduled in the 4–5 year period. The revolver includes restrictive covenants, a fixed-charge-coverage requirement if availability falls below a threshold, and cross-default and change-of-control provisions.
- Pension liabilities and future funding needs depend on investment returns, discount rates, and regulation. The company had contributed $42m through September and estimated minimum 2015 contributions of about $43m.
- Ryerson cannot estimate a potential loss or range of loss for its involvement as a potentially responsible party in the Portland Harbor Superfund matter. Management said ordinary-course legal claims were not expected to have a material adverse effect.
- Management cited a possible future increase in cash taxes if U.S. legislation repeals LIFO tax accounting. It also maintains valuation allowances on certain deferred tax assets.
- Disclosure controls were concluded effective at September 30, 2015; no material change in internal controls was reported. No material risk-factor changes from the 2014 Form 10-K were reported.
Important facts for investors to verify
- Whether lower shipment volumes and selling prices persist, and whether the improved gross margin can be sustained as LIFO benefits change.
- Revolver borrowing-base availability, covenant headroom, and the company’s plan for upcoming 2017 and 2018 note maturities.
- How much of reported operating cash flow reflects repeatable operations versus inventory reduction and other working-capital changes.
- Future pension contributions, the Portland Harbor matter, and the value and recoverability of the impaired available-for-sale investment.
- Potential earnings volatility from commodity derivatives and metal-price movements, and the effect of any LIFO tax-law changes.