Ryerson Holding Corp quarterly report, Q1 FY2012

Business context and reporting period

Ryerson Holding Corporation, a metals distributor and processor operating in North America, China and Brazil, reported unaudited results for the three months ended March 31, 2012. The comparison is with the three months ended March 31, 2011. Figures are in millions of dollars unless stated otherwise.

Financial performance and position

• Tons sold fell 10.7% year over year; average selling price rose 5.8%. Management attributed lower volume partly to its focus on higher-margin, less price-sensitive transactional customers.
• Gross profit improved as revenue per ton rose faster than material cost per ton. LIFO income was $8.1, versus LIFO expense of $33.3 in Q1 2011.
• Operating expenses were $131.5, down from $135.5. Lower compensation and bad-debt expense were partly offset by higher reorganization and technical-services costs.
• Cash and equivalents were $42.3 at quarter-end, down from $61.7 at year-end 2011. Total liquidity, as defined by the company, was $352, versus $358, including $310 of revolver and foreign-facility availability.
• Debt carrying value, including current maturities, was $1,306.4, versus $1,316.2 at year-end; debt-to-capitalization was 121%, versus 125%. Gross debt before unamortized discount was $1,484.8. The $1.35 billion revolving facility had $503.8 outstanding and $292 available; borrowings carried a 2.4% weighted-average rate.
• Current assets were $1,447.8 and current liabilities $615.2 at March 31. Stockholders’ equity remained in deficit at $(234.9).

Material changes versus the prior comparable period

• Sales declined despite higher average selling prices, reflecting the 10.7% reduction in tons sold. Product mix shifted: carbon steel long sales share increased to 15% from 10%, while stainless steel flat declined to 15% from 21%.
• Profitability improved substantially, with operating profit up $38.1 and a return to net income. The year-ago comparison included a $5.8 bargain-purchase gain from the Singer Steel acquisition; Q1 2012 had no comparable gain.
• Operating cash flow swung positive, principally reflecting net income and a $98.7 increase in accounts payable, partly offset by higher receivables and inventory. Cash flow therefore benefited materially from working-capital timing.
• In February 2012, the company acquired a 50% interest in Brazilian distributor Açofran for $2.9, with a put arrangement for the minority interest. The filing says the acquisition was not material.

Outlook, risks and unusual items

• No specific revenue or earnings guidance is provided. Management states that operating cash flow and revolver proceeds are expected to fund normal operating needs and contractual obligations.
• Management anticipated approximately $41 of additional required pension contributions during the remaining nine months of 2012, after contributing $10.1 in Q1.
• Debt is substantial. The senior discount notes accrete at 16.5% through April 30, 2012 and 17.0% thereafter; the 2014 floating-rate notes and 2015 notes also carry material interest costs. Revolver maturity can move forward to 90 days before the applicable notes’ maturity if those notes remain outstanding.
• Liquidity depends partly on a borrowing base tied to eligible receivables and inventory. Facility covenants include a minimum fixed-charge coverage ratio if availability falls below a specified level.
• The company was named as a potentially responsible party in the Portland Harbor Superfund matter. It cannot estimate the potential cost or loss range. Other ordinary-course legal claims were not expected by management to have a material adverse effect.
• Metals prices, industrial demand, interest rates, foreign exchange and pension funding are key risks. Derivatives are marked to market through current earnings rather than designated as accounting hedges.
• Management noted that a portion of the deferred-tax-asset valuation allowance might be released within the next 12 months, but this is uncertain. The Q1 tax expense was $2.6; no U.S. federal income tax expense on earnings was recorded due to tax loss carryforwards and a valuation allowance.

Important facts for investors to verify

1. Whether improved gross margins persist given lower shipment volumes, metal-price volatility and the Q1 LIFO benefit.
2. Whether operating cash generation is repeatable, particularly the impact of receivables, inventory and accounts-payable movements.
3. Current borrowing-base availability, covenant headroom and refinancing plans for the 2014 and 2015 notes and revolving facility.
4. The timing and funding of the remaining approximately $41 in 2012 pension contributions, and any subsequent changes to required funding.
5. Any developments or estimates regarding Portland Harbor investigation or remediation costs.
6. Whether the deferred-tax valuation allowance changes and whether Açofran’s put option or contingent obligations affect future cash needs.