Ryerson Holding Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014, compared with the same 2013 periods. Ryerson distributes and processes metals across North America, China, and Brazil. Results are unaudited. Platinum Equity affiliates owned approximately 66% of Ryerson Holding.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $947.9 million | $859.8 million | $2,753.8 million | $2,657.8 million |
| Gross profit / margin | $149.5 million / 15.8% | $155.1 million / 18.0% | $451.6 million / 16.4% | $469.4 million / 17.7% |
| Operating income (loss) | $(3.3) million | $33.8 million | $60.8 million | $95.3 million |
| Net income (loss) attributable to Ryerson | $(34.7) million | $3.0 million | $(30.5) million | $9.1 million |
| Basic and diluted EPS | $(1.26) | $0.14 | $(1.31) | $0.43 |
- Sales drivers: Q3 sales rose 10.2%; average selling price increased 10.4%, while tons sold declined 0.2%. For nine months, sales increased 3.6%, with average selling price up 4.0% and tons down 0.4%.
- Margins and expenses: Material costs rose faster than selling prices. LIFO expense was $19.1 million in Q3 and $42.0 million for nine months, versus LIFO income of $9.5 million and $26.6 million, respectively, in 2013. Q3 operating expenses included a $25.0 million charge to terminate the Platinum advisory agreement and $7.7 million of IPO-related compensation; incentive compensation also increased.
- Interest and unusual items: Q3 interest and other debt expense was $27.9 million. Other expense included an $11.2 million early-redemption loss on 2018 Notes, partly offset by foreign currency gains. Nine-month interest and other debt expense was $82.8 million; other expense was $8.2 million.
- Cash flow: Nine-month operating cash flow was negative $34.7 million, versus positive $88.0 million in 2013. The 2014 outflow reflected an $88.3 million increase in receivables, $50.2 million of pension contributions, and the net loss, partly offset by higher payables and accrued liabilities. Investing cash outflow was $9.9 million, including $13.7 million of capital expenditures. Financing cash inflow was $55.3 million, including IPO proceeds.
- Liquidity and debt at September 30: Cash was $80.5 million; total debt was $1,227.8 million, down from $1,294.8 million at year-end 2013. Total liquidity, a non-GAAP measure defined by the company, was $394 million, including $301 million of credit-facility and foreign-facility availability. The $1.35 billion revolving facility had $397.6 million drawn and $293 million available; availability is subject to a borrowing base. Debt-to-capitalization was 103%, versus 109% at year-end.
- Balance sheet: Current assets were $1,322.6 million and current liabilities $573.1 million. Stockholders’ equity remained in deficit at $(39.4) million, improving from $(110.1) million at year-end 2013, largely reflecting IPO proceeds.
Material changes and capital transactions
- Ryerson completed an IPO on August 13, 2014, issuing 11 million shares at $11 per share and receiving net proceeds of $112.4 million. Proceeds funded redemption of $99.5 million principal of 11.25% 2018 Notes, payment of $15 million toward the $25 million Platinum advisory termination fee, and related costs. The remaining $10 million termination payment is due in August 2015; the termination fee was expensed in Q3.
- After the redemption, $200.5 million of 2018 Notes remained outstanding. Ryerson also had $600 million of 9% 2017 Notes, $397.6 million drawn on the revolving facility, and $29.7 million of foreign debt.
- A September amendment to a retiree medical plan reduced the accumulated postretirement benefit obligation by $5.1 million. The company contributed $50.2 million to pension plans through September and expected to contribute approximately $5 million more in the final quarter.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or sales guidance. Management said operating cash flow and revolving-credit-facility proceeds should be sufficient for normal operating needs and contractual obligations, including the minimum 2014 pension contribution.
- Management describes metals distribution as cyclical and metal prices as volatile. Demand, commodity pricing, purchasing costs, inventory valuation, and fixed operating costs can affect sales and margins. A hypothetical 1% increase in variable interest rates would have increased nine-month 2014 interest expense by approximately $2.7 million.
- The company reported a $27.7 million jury judgment in a motor-vehicle case; after appellate proceedings, insurance carriers paid the judgment in full in October 2014. A potential Superfund matter at Portland Harbor remains unquantifiable; management said it could not estimate a loss range. Other ordinary-course claims were not expected by management to have a material adverse effect.
- Pension funding needs may vary with investment returns, discount rates, and regulation. The filing notes that the company cannot determine the amount or timing of future required contributions beyond the stated minimum expectation.
- The company uses LIFO for most inventory; current-cost inventory would have been $25 million below reported inventory at September 30. Proposed U.S. legislation to repeal tax LIFO, if enacted, could increase cash taxes over a ten-year period.
- Management reported disclosure controls were effective at September 30, 2014 and no material change in internal controls during the quarter. The filing said there were no material changes to the risk factors previously disclosed in the IPO prospectus.
Important facts for investors to verify
- Whether sales volumes and gross margins recover, given falling tons sold in Q3 and faster growth in material costs than selling prices.
- Cash conversion and working-capital trends, particularly receivables, and the impact of pension contributions on operating cash flow.
- Liquidity and borrowing-base availability under the revolving facility, alongside debt maturities, interest burden, and covenant requirements.
- Remaining IPO-related obligations, including the $10 million Platinum payment due in August 2015 and any further effects of the IPO or debt redemption.
- Future pension funding requirements and developments that could clarify potential exposure at Portland Harbor.