Ryerson Holding Corporation — Q2 2012 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 filing covers the quarter and six months ended June 30, 2012; comparisons are to the corresponding 2011 periods. Amounts are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $1,090.6 | $1,289.0 | $2,212.2 | $2,476.0 |
| Gross profit / margin | $184.0 / 16.9% | $163.9 / 12.7% | $374.8 / 16.9% | $320.6 / 12.9% |
| Operating profit / margin | $51.6 / 4.7% | $21.0 / 1.6% | $110.9 / 5.0% | $42.2 / 1.7% |
| Net income (loss) attributable to Ryerson Holding | $15.6 | $(18.0) | $40.6 | $(19.7) |
| Operating cash flow | Not separately stated for the quarter | $1.6 | $(175.4) |
- Q2 sales fell 15.4% year over year, as tons sold declined 12.2% and average selling prices declined 3.6%. For the first half, sales fell 10.7%; tons sold declined 11.5%, partly offset by a 0.9% increase in average selling prices.
- Cost of materials sold fell faster than sales, supporting margin expansion. Q2 operating expenses were $132.4 million, down from $142.9 million, although expense per ton rose to $233 from $221. First-half expenses were $263.9 million versus $278.4 million, but expense per ton increased to $231 from $215.
- Six-month operating cash flow was nearly breakeven despite $40.3 million of net income. Inventory increased $75.5 million and pension contributions were $21.2 million; higher accounts payable provided a $39.3 million offset. Capital expenditures were $25.9 million.
- Cash and cash equivalents were $33.9 million at June 30, down from $61.7 million at year-end 2011. Management-reported total liquidity was $335 million, comprising approximately $34 million of cash and $301 million of availability under credit facilities; this is a non-GAAP measure.
- Debt carrying value, including current portions, was approximately $1,334 million, versus $1,316 million at December 31, 2011. The filing reports a debt-to-capitalization ratio of 120%, compared with 125%. Stockholders’ equity remained in deficit at $(229.0) million.
- The $1.35 billion revolving credit facility had $521 million drawn, $22 million of letters of credit, and $279 million available. Its weighted-average borrowing rate was 2.6% at June 30. Separately, Ryerson Holding’s senior discount notes accrue at 17% from May 1, 2012; they do not pay cash interest, and their accreted value was $317 million.
Material changes versus the prior period
- Despite lower sales and shipment volumes, profitability improved substantially: Q2 attributable earnings turned positive from a loss, and first-half attributable earnings were $40.6 million versus a $19.7 million loss.
- Management attributed the improved gross margin to materials costs per ton falling faster than selling prices in Q2, and to higher selling prices combined with lower materials costs over the first half. The mix also shifted toward less price-sensitive transactional customers and away from large-volume program buyers.
- LIFO effects differed sharply: Q2 2012 had $8.6 million of LIFO income versus $48.1 million of LIFO expense in Q2 2011; first-half 2012 had $16.7 million of LIFO income versus $81.4 million of LIFO expense in first-half 2011. The 2011 comparison also included a $5.8 million bargain-purchase gain from Singer Steel, which was nonrecurring.
- Operating cash flow improved from a substantial use of cash in first-half 2011, when receivables rose $175.0 million, but cash still declined $27.8 million in first-half 2012.
Outlook, risks, contingencies and unusual items
- No quantified revenue or earnings guidance is provided. Management said operating cash flow and facility borrowings should be sufficient for normal operating requirements and contractual obligations, and expects approximately $30 million of additional pension contributions in the second half of 2012. Pension funding needs may vary with investment returns, discount rates and regulation.
- Management describes the metals service-center business as cyclical. Demand, metal prices and margins are exposed to industrial conditions, commodity-price volatility, supply and demand, foreign exchange and energy costs. A hypothetical 1% increase in rates on variable-rate debt would have increased first-half interest expense by approximately $3.1 million.
- A jury awarded $27.7 million against JT Ryerson and other defendants in a motor-vehicle injury case. Post-trial motions were pending; the company said it could not predict the outcome or estimate any potential loss. The company was also named as a potentially responsible party at the Portland Harbor Superfund site and could not estimate investigation or remediation costs.
- Ryerson China’s affiliate loan could trigger a $6.3 million withholding tax if not repaid or restructured before December 31, 2012; the tax would be refundable upon repayment, but could initially be expensed. Management was evaluating alternatives.
- The company held $18.8 million of cash in foreign subsidiaries deemed permanently reinvested. Repatriation could result in higher effective tax rates. A U.S. deferred-tax valuation allowance was $137.1 million; management noted that it might release some allowance within the next 12 months depending on operating trends or tax-law changes.
- Other notable items include $0.9 million of fixed-asset impairment charges in first-half 2012 and a $50 million minimum 2012 pension contribution expectation. The filing states that the company cannot determine whether future pension contributions could materially affect its financial position or cash flows.
Important facts for investors to verify
- Whether margin gains can persist as metal prices, shipment volumes and customer mix change, and how much the year-over-year improvement reflects different LIFO effects.
- Working-capital requirements, especially inventory growth, and whether operating cash flow can fund capital spending, interest and pension contributions without reducing liquidity.
- Debt maturities, covenant and borrowing-base headroom, and the capacity to address the 2014 and 2015 notes and the senior discount notes.
- Developments in the $27.7 million jury verdict, including post-trial motions, insurance coverage and any potential company exposure; and updates on Portland Harbor remediation.
- Resolution of the Ryerson China affiliate loan before year-end 2012 and any resulting tax or cash impact.
- The filing reports effective disclosure controls as of June 30, 2012 and no material changes to internal controls during the quarter; investors should review subsequent filings for updates to these matters and the company’s stated risks.