Ryerson Holding Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Ryerson distributes and processes metals in North America, China, and Brazil. The interim financial statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $840.4 million | $931.5 million | $1,708.4 million | $1,805.9 million |
| Gross profit | $165.8 million | $154.4 million | $315.8 million | $302.1 million |
| Gross margin | 19.7% | 16.6% | 18.5% | 16.7% |
| Operating profit | $50.2 million | $34.2 million | $83.8 million | $64.1 million |
| Net income attributable to Ryerson | $15.8 million | $2.6 million | $13.3 million | $4.2 million |
| Diluted EPS | $0.49 | $0.13 | $0.41 | $0.20 |
Cash flow and liquidity: First-half operating cash flow was $162.9 million, versus $9.5 million a year earlier. Investing used $10.0 million, including $12.7 million of capital expenditures; financing used $145.0 million. Cash ended June at $66.0 million, up from $60.0 million at year-end. The cash generation principally reflected an $80.0 million inventory reduction and a $53.0 million increase in accounts payable; pension contributions of $23.2 million partly offset inflows.
Debt and balance sheet: Total debt was $1,145.0 million at June 30, down from $1,259.1 million at December 31, 2014. Debt comprised $366.5 million drawn on the revolving facility, $583.2 million of 9% secured notes due 2017, $172.2 million of 11.25% unsecured notes due 2018, and $23.1 million of foreign debt. Revolver availability was $193 million; the company also reported $19 million of letters of credit. Total equity remained in deficit at $115.6 million, and the reported debt-to-capitalization ratio was 111%.
Changes versus the prior comparable period
- Q2 sales declined 9.8%; average selling price fell 7.8% and tons sold declined 2.2%. For the first half, sales fell 5.4% as tons sold decreased 6.9%, partly offset by a 1.5% increase in average selling price.
- Gross profit and operating profit increased in both comparisons despite lower sales. Lower material cost per ton and LIFO income contributed: Q2 LIFO income was $37.0 million versus $13.7 million of expense in Q2 2014; first-half LIFO income was $49.0 million versus $22.9 million of expense.
- Interest expense declined as debt was repurchased. First-half other expense included a $12.3 million other-than-temporary impairment of an available-for-sale investment; metal commodity derivatives produced a $7.4 million first-half loss.
- Debt repayments included retirement of $16.8 million principal of 2017 notes and $28.3 million principal of 2018 notes. First-half EPS comparisons are also affected by the 11 million shares issued in the August 2014 IPO.
Outlook, risks, contingencies, and unusual items
- Management said operating cash flow and credit-facility proceeds should be sufficient for normal operating needs and the minimum required 2015 pension contribution. The filing provides no specific sales or earnings guidance.
- After quarter-end, Ryerson replaced its $1.35 billion revolver with a $1.0 billion facility, effective July 24, 2015. The new facility extends maturity to the earlier of July 24, 2020 or 60 days before qualifying debt maturity, and reduces borrowing rates by 50 basis points and unused commitment fees by 12.5 basis points. Ryerson expected a $2.9 million third-quarter charge to write off prior facility issuance costs.
- The company expected approximately $20 million of additional pension contributions in the second half of 2015, following $23 million in the first half. Pension funding needs may vary with asset returns, discount rates, and regulation.
- Metals distribution is cyclical; demand, commodity prices, and customer-industry conditions can pressure sales and margins. Derivative contracts are marked to market through earnings rather than accounted for as hedges, exposing reported results to commodity and currency volatility.
- Ryerson is among potentially responsible parties for the Portland Harbor Superfund site; it says it cannot estimate a loss range. It does not expect ordinary-course claims to have a material adverse effect. The filing reports no material risk-factor changes from the 2014 Form 10-K.
- Inventory is primarily valued using LIFO. At June 30, reported inventory was $74 million below current cost, compared with $25 million at year-end; proposed repeal of tax LIFO could increase cash taxes over a ten-year period.
Important facts for investors to verify
- Reconcile the liquidity disclosure: the narrative states $291 million at June 30, while its component table sums to and reports $290 million ($66 million cash, $9 million marketable securities, and $215 million facility availability).
- Assess sustainability of earnings and operating cash flow, particularly the sizable LIFO benefit and cash generated by inventory reduction and higher accounts payable.
- Review the new revolver’s borrowing-base availability, covenants, maturity triggers, and the effect of reducing facility capacity from $1.35 billion to $1.0 billion.
- Monitor high leverage and negative equity, scheduled note maturities, pension funding, and the unquantified Portland Harbor exposure.