Ryerson Holding Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparative periods are the corresponding periods in 2010. Ryerson distributes and processes metals across North America and China. Affiliates of Platinum Equity owned 99% of Ryerson Holding.
Financial performance and position
| Metric (millions, except margins) | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Net sales | $1,289.0 | $1,020.2 | $2,476.0 | $1,891.7 |
| Gross profit | $163.9 | $132.6 | $320.6 | $266.4 |
| Gross margin | 12.7% | 13.0% | 12.9% | 14.1% |
| Operating profit | $21.0 | $6.9 | $42.2 | $21.9 |
| Operating margin | 1.6% | 0.7% | 1.7% | 1.1% |
| Net loss attributable to Ryerson Holding | $(18.0) | $(21.7) | $(19.7) | $(36.4) |
| Interest and other expense on debt | $30.6 | $27.3 | $60.3 | $52.0 |
- Revenue drivers: Q2 sales rose 26.3%, with tons sold up 11.2% and average selling prices up 13.7%. H1 sales rose 30.9%, with tons sold up 16.5% and average selling prices up 12.3%.
- Cash flow: H1 operating cash use was $175.4 million, versus $164.9 million used in H1 2010. The principal driver was a $175.0 million increase in receivables associated with higher sales. Investing cash use was $15.4 million, including $19.1 million of capital expenditures and $19.7 million net cash used for the Singer acquisition. Financing provided $173.9 million, mainly through credit-facility borrowings. Ending cash was $46.8 million, down from $62.6 million at year-end 2010.
- Debt and liquidity: Debt carrying value, including current portions, was $1,402.8 million, up from $1,211.3 million at December 31, 2010. The company reported a 116% debt-to-capitalization ratio and total liquidity of $378 million, versus $394 million at year-end. The $1.35 billion revolving facility had $623.9 million borrowed, $27 million of letters of credit and $313 million available at June 30. Stockholders’ deficit was $201.6 million; total equity deficit was $197.2 million.
- Other key metrics: H1 pension contributions were $17.8 million, with approximately $26 million of minimum required contributions anticipated in the second half. The company reported $802.5 million of inventory; LIFO liquidation reduced H1 cost of materials sold by approximately $5.8 million.
Material changes versus the prior comparable periods
- Higher sales volumes and metal prices drove substantial revenue growth and improved operating profit, but cost of materials rose faster than sales, compressing gross margins in both Q2 and H1.
- Q2 operating expenses increased by $17.2 million year over year; H1 operating expenses increased by $33.9 million. Higher employee, delivery and facility costs contributed, as did China operating expenses and the absence of the prior-year $2.6 million insurance settlement gain. Q2 and H1 2011 also included a $2.5 million fixed-asset impairment charge.
- Debt expense increased, reflecting greater revolving-facility borrowings to fund working capital, higher interest on the Holding notes, and, for H1, a $1.1 million write-off of prior credit-facility issuance costs.
- The March 2011 Singer Steel acquisition added $15.8 million of revenue from its acquisition date through June 30. The transaction generated a $5.8 million bargain-purchase gain, a nonrecurring item included in H1 other income.
Outlook, risks and unusual items
- No quantitative earnings or revenue guidance is provided. Management said operating cash flow and credit-facility proceeds were expected to be sufficient for normal-course operating and contractual requirements.
- Management described metals distribution as cyclical and metal prices as volatile. Results are sensitive to industrial demand, product prices, metal procurement costs, inventory levels, and the ability to manage processing and operating costs.
- Liquidity and financing risks include working-capital needs, borrowing-base limits, debt covenants and maturities. The credit facility matures no later than March 2016, subject to earlier maturity triggers tied to the secured notes. Ryerson had $4.1 million of notes due December 2011. The Holding senior discount notes accrete at high rates and are structurally subordinated to subsidiary liabilities; the filing notes a potential default risk if distributions from Ryerson are insufficient to repay them at maturity.
- Additional exposures include variable interest rates, foreign exchange and commodity prices. A hypothetical 1% increase in rates on variable-rate debt would have increased H1 2011 interest expense by approximately $3.2 million. Derivatives are marked to market through current earnings rather than accounted for as hedges.
- The company had a $135.0 million U.S. deferred-tax valuation allowance at June 30, 2011 and recorded income-tax expense despite pretax losses. Litigation was described as incidental to ordinary business, with no material adverse effect expected; no material risk-factor changes from the 2010 Form 10-K were reported.
- Unusual or nonrecurring items include the Singer bargain-purchase gain, LIFO inventory liquidation benefit, asset impairment and restructuring charges. The filing reports $0.6 million of Q2 and $0.9 million of H1 restructuring and other charges.
Important facts for investors to verify
- Whether higher sales volumes and pricing can be sustained without further gross-margin deterioration, and how metal-price movements affect inventory and LIFO costs.
- Receivables, operating cash conversion, borrowing-base availability and the trend in total liquidity as sales and working-capital needs change.
- Debt maturities, interest-rate exposure, facility covenant headroom, and the Holding notes’ accretion and repayment resources.
- Required pension contributions, deferred-tax-asset realizability, and whether Singer’s operations deliver benefits apart from the one-time bargain-purchase gain.