Ryerson Holding Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Ryerson distributes and processes metals for customers across industrial markets, principally in North America, with operations also in China and Brazil. Unless stated otherwise, financial amounts are in millions of dollars.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $931.5 | $906.9 | $1,805.9 | $1,798.0 |
| Gross profit | $154.4 | $158.5 | $302.1 | $314.3 |
| Gross margin | 16.6% | 17.5% | 16.7% | 17.5% |
| Operating profit | $34.2 | $28.2 | $64.1 | $61.5 |
| Net income | $2.5 | $0.2 | $3.9 | $5.4 |
| Net income attributable to Ryerson Holding | $2.6 | $0.5 | $4.2 | $6.1 |
| Basic and diluted EPS | $0.13 | $0.02 | $0.20 | $0.29 |
- Q2 sales rose 2.7%; average selling price increased 2.9%, while tons sold declined 0.2%. For the first half, sales grew 0.4%, with average selling price up 0.9% and tons down 0.5%.
- Materials cost increased faster than sales: Q2 cost of materials sold rose 3.8% and first-half cost rose 1.4%. LIFO expense was $13.7 in Q2 and $22.9 for the first half, versus LIFO income of $12.7 and $17.1, respectively, in 2013.
- Operating profit improved despite lower gross profit, helped by lower operating expenses. Prior-year periods included impairment and restructuring charges; expense reductions were partly offset by higher incentive compensation.
- First-half operating cash flow was $9.5, down from $51.4. The 2014 result reflected an $81.9 increase in receivables and $24.4 of pension contributions, partly offset by higher accounts payable, lower inventory and other working-capital movements. Capital expenditures were $8.2 versus $10.5.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $82.9 (up from $74.4 at year-end 2013); total debt was $1,254.8 (down from $1,294.8). Stockholders’ equity remained in deficit at $111.4.
- Total liquidity, a non-GAAP measure defined by the company, was $451: $83 cash, $15 marketable securities and $353 credit-facility and foreign-facility availability. Ryerson’s $1.35 billion revolving facility had $325 outstanding, $27 of letters of credit and $344 available; availability is subject to a borrowing base.
- Debt included $600 of 9% secured notes due 2017, $300 of 11.25% unsecured notes due 2018, $325 under the revolving facility and $29.8 of foreign debt. The debt-to-capitalization ratio was 109%.
- Cash increased by $8.5 in the first half. Financing cash flow was $7.0, including a $47.5 increase in book overdrafts, partly offset by $40.0 of short-term borrowing repayments.
Outlook, notable events and risks
- No formal earnings or sales guidance is provided. Management said operating cash flow and facility availability were expected to fund normal operating needs and the minimum required 2014 pension contribution. Pension contributions totaled $24.4 through June, with approximately $42 remaining expected for the second half.
- Management described metals distribution as cyclical and noted that demand, metal prices, competitive pricing, purchasing costs and operating-cost control affect results. Falling metal prices may reduce revenue, gross profit and net income. The company uses derivatives for interest-rate, currency and commodity exposures, but does not apply hedge accounting to these contracts.
- A jury award of $27.7 in a personal-injury case was affirmed on appeal June 3, 2014. The company was considering further review, estimated potential loss at zero to $27.7 plus interest, believed insurance would cover any loss, and could not predict the outcome. Potential Portland Harbor Superfund investigation or remediation costs could not be estimated.
- After quarter-end, the August 13 IPO sold 11 million shares at $11 per share and generated $110.7 net proceeds. The company used proceeds to redeem $99.5 principal amount of 2018 notes, pay $25 to terminate the Platinum affiliate advisory agreement and cover approximately $15.7 of related fees, expenses and premiums; it estimated an additional $29.5 facility borrowing would be needed. It expected third-quarter expenses of $11.2 for the note redemption premium, $1.2 for debt-issuance-cost write-off and $7.3 of IPO-related compensation expense.
- Disclosure controls were concluded effective as of June 30, 2014. The filing reported no material changes to internal control over financial reporting and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether gross-margin pressure and the significant first-half LIFO expense persist as metal prices and inventory costs change.
- Working-capital trends, especially receivables and accounts payable, and the sustainability of operating cash flow.
- Post-IPO debt balances, interest expense, facility borrowings and the final costs and accounting effects of the transaction.
- Actual pension contributions and funding requirements, including sensitivity to asset returns, discount rates and regulatory changes.
- Developments in the affirmed $27.7 litigation award, insurance coverage and the unquantified Portland Harbor matter.