RYERSON HOLDING CORPORATION This Quarterly Report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as "objectives," "goals," "preliminary," "range," "believes," "expects," "may," "estimates," "will," "should," "plans," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those anticipated or implied in the forward-looking statements as a result of various factors. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under "Special Note Regarding Forward-Looking Statements" and "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 filed onMarch 4, 2020 and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Industry and Operating Trends" and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with our Condensed
Consolidated Financial Statements and related Notes thereto in Item 1,
"Financial Statements" in this Quarterly Report on Form 10-Q and our
Consolidated Financial Statements and related Notes thereto for the year ended
Industry and Operating Trends
We are a metals service center with over 175 years of experience providing value-added processing and distribution of industrial metals with operations inthe United States ,Canada ,Mexico , andChina . We purchase large quantities of metal products from primary producers and sell these materials in smaller quantities to a wide variety of metals-consuming industries. We carry a full line of nearly 75,000 products in stainless steel, aluminum, carbon steel, and alloy steels and a limited line of nickel and red metals in various shapes and forms. In addition to our metals products, we offer numerous value-added processing and fabrication services, and more than 75% of the products we sell are processed to meet customer requirements. See Note 12: Revenue Recognition in Part I, Item I - Notes to the Consolidated Financial Statements. Similar to other metals service centers, we maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon customer forecasts, historic buying practices, supply agreements with customers, mill lead times, and market conditions. Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders. At the request of our customers, we have entered into swaps in order to mitigate our customers' risk of volatility in the price of metals and we have entered into metals hedges to mitigate our own risk of volatility in the price of metals. We have no long-term, fixed-price metals purchase contracts. When metals prices decline, customer demands for lower prices and our competitors' responses to those demands could result in lower sale prices and, consequently, lower gross profits and earnings as we sell existing metals inventory. Conversely, when metals prices increase, competitive conditions will influence how much of the price increase we may pass on to our customers. The metals service center industry is cyclical and volatile in both pricing and demand, and therefore difficult to predict. In the first half of 2020, Ryerson experienced both weaker pricing and demand compared to the six-month period endedJune 30, 2019 , with shipments 17.2% lower and average selling prices 11.6% lower, affected by economic impacts of the novel coronavirus ("COVID-19") inNorth America andChina and end-market weakness in theU.S. prior to the start of the pandemic. Changes in average selling prices are primarily driven by commodity metals prices, which typically impact Ryerson's selling prices over the subsequent three to six-month period. Recently, indicators in the key steel industry end markets have reported weakness as demand conditions have been impacted by temporary customer closures in-line with stay-at-home orders and virus driven demand shocks as a result of the COVID-19 pandemic. This is evidenced by theInstitute for Supply Management's Purchasing Managers' Index ("PMI"), which reported softness in March, April, and May with readings below 50%, indicating contraction in factory activity. However, PMI reported sharp recovery in June, with a strong reading of 52.6%, indicating general economic expansion. According to theMetal Service Center Institute , North American service center volumes declined by 26% in the second quarter of 2020 compared to the first quarter of 2020. On a North American basis, Ryerson performed better than the industry with volumes declining by 21% over the same period. Demand softness was experienced across all of Ryerson's end markets in the first six months of 2020, most significantly in construction, oil and gas, commercial ground transportation, and consumer durable sectors on a year-over-year basis. When customer demand falls, our operations typically generate countercyclical cash flow as our working capital needs decrease. 23 --------------------------------------------------------------------------------
Recent Developments
OnJuly 22, 2020 , Ryerson and its wholly-owned subsidiary, JT Ryerson, issued$500 million in aggregate principal amount of its 8.50% Senior Secured Notes due 2028 (the "2028 Notes"). JT Ryerson's obligations under the 2028 Notes are guaranteed by the Company as well as certain subsidiaries of the Company. The 2028 Notes and the related guarantees are secured by a first-priority security interest in substantially all of JT Ryerson's and each guarantor's present and future assets located inthe United States (other than receivables, inventory, money, deposit accounts and related general intangibles, certain other assets, and proceeds thereof), subject to certain exceptions and customary permitted liens. The 2028 Notes and the related guarantees are also secured on a second-priority basis by a lien on the assets that secure JT Ryerson's and the Company's obligations under the$1.0 billion revolving credit facility (the "Ryerson Credit Facility"). The net proceeds from the issuance of the 2028 Notes, along with available cash, was used to (i) redeem in full the$530.3 million balance of JT Ryerson's 11.00% Senior Secured Notes due 2022 (the "2022 Notes"), plus accrued and unpaid interest thereon up to, but not including, the repayment date, and (ii) pay related fees, expenses, and premiums. The Company will complete the accounting for this transaction during the third quarter of 2020. Due to the limited amount of time between the closure of the 2028 Notes offering and the date of this filing, the accounting for the transaction is not complete and the impacts of the transaction are not yet known.
The Company anticipates approximately
COVID-19 The global outbreak of COVID-19 was declared a pandemic by theWorld Health Organization and a national emergency by theU.S. government inMarch 2020 and has negatively affected theU.S. and global economies, disrupted global supply chains, resulted in significant travel and transport restrictions, mandated closures and stay-at-home orders, and created significant disruption of the financial markets.
In response to the COVID-19 pandemic, Ryerson has implemented several policies and procedures to protect the health and welfare of our employees first and foremost while operating as an essential business, and maintaining our liquidity.
We have communicated and enforced social distancing practices by implementing work from home arrangements, alternating employee shifts, eliminating congregation, and suspending non-essential travel. We have also mobilized a task force and engaged our communications team to establish open lines of communications for our employees to ensure that all members of the Ryerson team are informed and supported throughout the pandemic. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by theU.S. government and state and local government officials to prevent disease spread, all of which are uncertain and cannot be predicted. Certain of our facilities have experienced temporary work disruptions as a result of COVID-19, but we have generally continued to operate during stay-at-home mandates due to Ryerson being deemed an essential business by state and local government authorities. However, facility closures, work slowdowns, or temporary stoppages could occur, and we are seeing negative impacts on demand from closures among our customers. Throughout the first and second quarters of 2020, a number of Ryerson's customers either temporarily closed operations or reduced activity in response to the COVID-19 pandemic and government-mandated stay-at-home orders or decreasing demand for their products. Ryerson's second quarter demand has been negatively impacted by the pandemic and we expect the third quarter to be impacted given continued economic pressure, although the ultimate impact of COVID-19 remains uncertain. Further, we anticipate that the weakened economic environment and the recent announcements of increased mill capacity coming back online will negatively impact metals pricing, which may result in gross margin contraction. As the COVID-19 pandemic's effects on the manufacturing economy continue to develop, Ryerson is carefully monitoring the current and potential future impacts to its supply chain. In response to decreased demand upon the spread of the virus inNorth America , several mills announced temporary closures and/or idled facilities, effectively reducing overall capacity. In late June, with the reopening of several original equipment manufacturers and automotive manufacturers, a number of mills restarted production, an early sign of demand improvement. During the pandemic, Ryerson has not experienced a disruption to its supply chain and has been able to meet customer demand as there exists an abundance of material available with short lead times. With Ryerson's national scale and interconnected network, including 94 facilities inNorth America , we are able to move inventory intelligently throughout the network to meet customer's needs. We remain diligently responsive to the depressed demand environment, limiting our material purchases, and effectively managing inventory levels while continuing to monitor market prices and lead times through the pervasive market uncertainty. Furthermore, although Ryerson is always mindful of our liquidity position, in response to the COVID-19 pandemic, we deployed a dedicated team to closely monitor all critical areas daily including cash positioning and credit line availability and projections, while being ever mindful of our covenant requirements and working capital needs. We are actively managing relationships with our customers and vendors to ensure that we balance our receivables and payables cycles. Examples of specific 24 -------------------------------------------------------------------------------- actions taken in response to COVID-19 include increased focus on working capital management with targeted inventory reductions, receivables risk assessment, limiting discretionary spending, temporarily furloughing employees or reducing work hours, reducing executive and salaried employee pay, delaying salary increases, eliminating non-essential travel, delaying or reducing hiring activities, deferring certain discretionary capital expenditures, payroll tax and pension contribution deferrals, and accelerating Alternative Minimum Tax credit refunds as provided for under the Coronavirus Aid, Relief, and Economic Security Act ("The CARES Act"). The CARES Act, among other newly issued legislation, contains numerous other provisions which may benefit the Company. The Company intends to continue to assess the effect of the CARES Act and ongoing government guidance related to COVID-19 that may be issued and intends to take advantage of all opportunities to further support our balance sheet. With respect to liquidity, we took the actions listed above to bolster our financial condition and have contingency plans in place to reduce costs while supporting business operations. As ofJune 30, 2020 , Ryerson had liquidity of$350 million , composed of$239 million of availability under the Ryerson Credit Facility and foreign debt facilities,$100 million of cash and cash equivalents, and$11 million of restricted cash from sales of property, plant, and equipment. As ofJune 30, 2020 , we had excess borrowings of$80 million under the Ryerson Credit Facility to ensure access to cash during the COVID-19 pandemic.
OnMarch 1, 2018 , theWhite House announced a 25% tariff on all imported steel products and 10% tariff on all imported aluminum products for an indefinite amount of time under Section 232 of the Trade Expansion Act. Subsequently, theWhite House announced steel quotas, in lieu of tariffs, withSouth Korea . OnMay 1, 2018 , theWhite House further announced agreements-in-principle withArgentina ,Australia , andBrazil for permanent exemptions from the tariffs in exchange for export quotas or voluntary export restraints, with the exception ofAustralia which has not agreed to quotas at the time of this report. InMay 2019 , steel tariffs put in place onTurkey in August of 2018 with the intention of offsetting the weakening Turkish Lira were revised down to 25% from 50%. Further trade actions announced by theU.S. under Section 301 of the Trade Act of 1974 imposed various levels of tariffs and duties on imported Chinese goods withChina reciprocating in kind on American goods. If these or other tariffs or duties expire or if others are relaxed or repealed, or if relatively higherU.S. metal prices make it attractive for foreign metal producers to export their products to theU.S. , despite the presence of duties or tariffs, the resurgence of substantial imports of foreign steel could create downward pressure onU.S. metal prices which could have a material adverse effect on our potential earnings and future results of operations. OnJanuary 15, 2020 ,the United States andChina signed a phase one trade agreement in which theU.S. agreed not to proceed with tariffs that had been scheduled to take effectDecember 15, 2019 and cut Section 301 duties related to theSeptember 1, 2019 tariffs on$120 billion in Chinese goods in half, from 15% to 7.5%, effectiveFebruary 14, 2020 . In return,China agreed to increase its purchases ofU.S. manufactured goods, agricultural products, energy, and services by a total of$200 billion over 2017 levels in the two years throughDecember 2021 . However, negotiations withChina are ongoing and as of the agreement theU.S. will maintain 25% tariffs on another$250 billion of Chinese products whileChina maintains retaliatory tariffs on someU.S. goods. Since the agreement,China has unveiled new tariff exemptions and the countries reaffirmed their phase one trade deal in early May. TheU.S. -Mexico -Canada-Agreement ("USMCA"), which is designed to replace the North American Free Trade Agreement ("NAFTA"), was ratified by all three countries as ofMarch 13, 2020 , and became effective onJuly 1, 2020 . Ryerson expects that implementation of the USMCA will support demand for North American steel through strengthening of rules of origin for steel-intensive goods and will continue to provide tariff-free trade access in North American markets.
Components of Results of Operations
We generate substantially all of our revenue from sales of our metals products. The majority of revenue is recognized upon delivery of product to customers. The timing of shipment is substantially the same as the timing of delivery to customers given the proximity of our distribution sites to our customers. Revenues associated with products which we believe have no alternative use, and where the Company has an enforceable right to payment, are recognized on an over-time basis. Over-time revenues are recorded in proportion with the progress made toward completing the performance obligation.
Sales, cost of materials sold, gross profit, and operating expense control are the principal factors that impact our profitability.
Net sales. Our sales volume and pricing are driven by market demand, which is
largely determined by overall industrial production and conditions in the
specific industries in which our customers operate. Sales prices are also
primarily driven by market factors such as overall demand and availability of
product. Our net sales include revenue from product sales, net of returns,
allowances, customer discounts, and incentives.
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Cost of materials sold. Cost of materials sold includes metal purchase and
in-bound freight costs, third-party processing costs, and direct and indirect
internal processing costs. The cost of materials sold fluctuates with our sales
volume and our ability to purchase metals at competitive prices. Increases in
sales volume generally enable us to improve purchasing leverage with suppliers,
as we buy larger quantities of metals inventories.
Gross profit. Gross profit is the difference between net sales and the cost of
materials sold. Our sales prices to our customers are subject to market
competition. Achieving acceptable levels of gross profit is dependent on our
acquiring metals at competitive prices, our ability to manage the impact of
changing prices, and efficiently managing our internal and external processing
costs.
Operating expenses. Optimizing business processes and asset utilization to
lower fixed expenses such as employee, facility, and truck fleet costs, which
cannot be rapidly reduced in times of declining volume, and maintaining a low
fixed cost structure in times of increasing sales volume, have a significant
impact on our profitability. Operating expenses include costs related to
warehousing and distributing our products as well as selling, general, and
administrative expenses.
Results of Operations - Comparison of Three and Six Months Ended
The following table sets forth our condensed consolidated statements of income data for the three-month and six-month periods endedJune 30, 2020 and 2019: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 % of Net % of Net % of Net % of Net $ Sales $ Sales $ Sales $ Sales ($ in millions) ($ in millions) Net sales$ 771.8 100.0 %$ 1,204.9 100.0 %$ 1,782.1 100.0 %$ 2,435.7 100.0 % Cost of materials sold 656.3 85.0 993.1 82.4 1,470.8 82.5$ 1,992.6 81.8 Gross profit 115.5 15.0 211.8 17.6 311.3 17.5 443.1 18.2 Warehousing, delivery, selling, general, and administrative expenses 124.1 16.1 164.6 13.7 279.8 15.7 328.3
13.5
Restructuring and other charges 2.0 0.3 1.1 0.1 2.0 0.1 1.4 - Operating profit (loss) (10.6 ) (1.4 ) 46.1 3.8 29.5 1.7 113.4 4.7 Other (expenses) and income (19.4 ) (2.5 )
(24.1 ) (2.0 ) (40.2 ) (2.3 ) (48.8 ) (2.0 ) Income (loss) before income taxes (30.0 ) (3.9 ) 22.0
1.8 (10.7 ) (0.6 ) 64.6 2.7
Provision (benefit) for income taxes (4.5 ) (0.6 ) 5.5 0.4 (1.6 ) (0.1 ) 18.5 0.8 Net income (loss) (25.5 ) (3.3 ) 16.5 1.4 (9.1 ) (0.5 ) 46.1 1.9 Less: Net income attributable to noncontrolling interest 0.1 - 0.1 - 0.1 - 0.2 - Net income (loss) attributable to Ryerson Holding Corporation$ (25.6 ) (3.3 )%$ 16.4 1.4 %$ (9.2 ) (0.5 )%$ 45.9 1.9 % Basic earnings (loss) per share$ (0.67 ) $ 0.43 $ (0.24 ) $ 1.22 Diluted earnings (loss) per share$ (0.67 ) $ 0.43 $ (0.24 ) $ 1.21 26
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Net sales
The following table shows our percentage of sales revenue by major product lines
for the three and six month periods ended
Three Months Ended June 30, Six Months Ended June 30,
Product Line 2020 2019 2020 2019
Carbon Steel Flat 28 % 25 % 26 % 25 %
Carbon Steel Plate 9 11 10 12
Carbon Steel Long 15 16 15 16
Stainless Steel Flat 15 15 16 15
Stainless Steel Plate 5 4 5 4
Stainless Steel Long 5 4 5 4
Aluminum Flat 13 16 13 15
Aluminum Plate 3 2 3 2
Aluminum Long 5 5 5 5
Other 2 2 2 2
Total 100 % 100 % 100 % 100 %
June 30, Dollar Percentage
2020 2019 change change
($ in millions)
Net sales (three-months ended) $ 771.8 $ 1,204.9 $ (433.1 ) (35.9 )%
Net sales (six-months ended) $ 1,782.1 $ 2,435.7 $ (653.6 ) (26.8 )%
June 30, Tons Percentage
2020 2019 change change
(in thousands)
Tons sold (three-months ended) 462 623 (161 ) (25.8 )%
Tons sold (six-months ended) 1,028 1,242 (214 ) (17.2 )%
June 30, Price Percentage
2020 2019 change change
Average selling price per ton sold
(three-months ended) $ 1,671 $ 1,934 $ (263 ) (13.6 )%
Average selling price per ton sold
(six-months ended) $ 1,734 $ 1,961 $ (227 ) (11.6 )%
Revenue for the three-month and six-month periods endedJune 30, 2020 decreased from the same periods a year ago reflecting the impact of the global outbreak of COVID-19 and a slowdown in the metals market that was a continuation from the decline in the industry in 2019. Compared to the year ago period, average selling price decreased for all of our product lines in the three-month and six-month periods endedJune 30, 2020 with the largest decreases in our carbon plate, aluminum plate, carbon flat, and aluminum flat products. Tons sold decreased in the three-month and six-month periods endedMarch 31, 2020 for all of our product lines with the largest decreases in our aluminum flat, carbon long, and carbon plate product lines. 27 --------------------------------------------------------------------------------
Cost of materials sold
June 30,
2020 2019
% of Net % of Net Dollar Percentage
$ Sales $ Sales change change
($ in millions)
Cost of materials sold (three-months ended) $ 656.3 85.0 % $ 993.1 82.4 % $ (336.8 ) (33.9 )%
Cost of materials sold (six-months ended) $ 1,470.8 82.5 % $ 1,992.6 81.8 % $ (521.8 ) (26.2 )%
June 30, Cost Percentage
2020 2019 change change
Average cost of materials sold per ton
sold (three-months ended) $ 1,421 $ 1,594 $ (173 ) (10.9 )%
Average cost of materials sold per ton
sold (six-months ended) $ 1,431 $ 1,604 The decrease in cost of materials sold in the three-month and six-month periods endedJune 30, 2020 compared to the year ago period is primarily due to the decrease in tons sold and to a decrease in average cost of materials sold per ton. The average cost of materials sold decreased across almost all product lines with the average cost of materials sold for our carbon plate, carbon flat, and carbon long product lines decreasing more than our other product lines during the three-month and six-month periods endedJune 30, 2020 . During the second quarter of 2020, LIFO expense was$14.1 million compared to LIFO income of$12.9 million in the second quarter of 2019. During the first six months of 2020, LIFO income was$6.1 million compared to LIFO income of$33.0 million in the first six months of 2019. Gross profit June 30, 2020 2019 % of Net % of Net Dollar Percentage $ Sales $ Sales change change ($ in millions) Gross profit (three-months ended)$ 115.5 15.0 %$ 211.8 17.6 %$ (96.3 ) (45.5 )% Gross profit (six-months ended)$ 311.3 17.5 %$ 443.1 18.2 %$ (131.8 ) (29.7 )% Gross profit decreased in the three-month and six-month periods endedJune 30, 2020 compared to the year ago periods due to the decrease in tons sold. While our revenue per ton decreased in the three and six months endedJune 30, 2020 as compared to the three and six months endedJune 30, 2019 , cost of materials sold per ton decreased at a slower pace resulting in lower gross margins. 28
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Operating expenses
June 30,
2020 2019
% of Net % of Net Dollar Percentage
$ Sales $ Sales change change
($ in millions)
Warehousing, delivery, selling, general, and
administrative expenses (three-months ended) $ 124.1 16.1 % $ 164.6 13.7 % $ (40.5 ) (24.6 )%
Warehousing, delivery, selling, general, and
administrative expenses (six-months ended) $ 279.8 15.7 % $ 328.3 13.5 % $ (48.5 ) (14.8 )%
Restructuring and other charges (three-months
ended) $ 2.0 0.3 % $ 1.1 0.1 % $ 0.9 81.8 %
Restructuring and other charges (six-months
ended) $ 2.0 0.1 % $ 1.4 - $ 0.6 42.9 %
Total operating expenses decreased in the three-month and six-month periods
ended June 30, 2020 compared to the year ago periods primarily due to lower
salaries and wages due to workforce and compensation reductions ($13.5 million
lower in the second quarter of 2020 and $15.2 million in the first six months of
2020) in response to the outbreak of COVID-19. The lower headcount also reduced
employee benefit expenses by $4.7 million in the second quarter of 2020 and $5.2
million in the first six months of 2020. In addition, selling, general, and
administrative expenses were $10.0 million lower in the second quarter of 2020
and $11.0 million lower in the first six months of 2020 primarily due to lower
use of outside technical services and reduced travel and entertainment expenses,
delivery expenses were $6.0 million lower in the second quarter of 2020 and $6.9
million lower in the first six months of 2020 due to lower shipments, operating
supplies were $3.8 million lower in the second quarter of 2020 and $4.9 million
lower in the first six months of 2020, incentive compensation decreased $1.9
million in the second quarter of 2020 and $4.9 million in the first six months
of 2020, and depreciation expense was $0.8 million lower in the second quarter
of 2020 and $1.8 million lower in the first six months of 2020. Partially
offsetting the decreases was higher rent expense of $0.6 million in the second
quarter of 2020 and $1.8 million in the first six months of 2020 due to a
sale-leaseback transaction on nine of our real estate properties that was
executed in the fourth quarter of 2019.
Operating profit
June 30,
2020 2019
% of Net % of Net Dollar Percentage
$ Sales $ Sales change change
($ in millions)
Operating profit (loss) (three-months
ended) $ (10.6 ) (1.4 )% $ 46.1 3.8 % $ (56.7 ) (123.0 )%
Operating profit (six-months ended) $ 29.5 1.7 % $ 113.4 4.7 % $ (83.9 ) (74.0 )%
Our operating profit decreased in the three-month and six-month periods ended
June 30, 2020 compared to the three-month and six-month periods ended June 30,
2019 , primarily due to decreases in tons sold and average selling prices,
slightly offset by lower operating expenses.
Other expenses
June 30,
2020 2019
% of Net % of Net Percentage
$ Sales $ Sales Dollar change change
($ in millions)
Interest and other expense on debt
(three-months ended) $ (19.3 ) (2.5 )% $ (23.9 ) (2.0 )% $ 4.6 (19.2 )%
Interest and other expense on debt
(six-months ended) $ (41.0 ) (2.3 )% $ (47.8 ) (2.0 )% $ 6.8 (14.2 )%
Other income and (expense), net
(three-months ended) $ (0.1 ) - $ (0.2 ) - $ 0.1 (50.0 )%
Other income and (expense), net
(six-months ended) $ 0.8 - $ (1.0 ) - $ 1.8 (180.0 )%
Interest and other expense on debt decreased in the three-month and six-month
periods ended June 30, 2020 compared to the year ago periods due to a lower
level of credit facility borrowings outstanding compared to the year ago period
related to lower working capital requirements resulting from a slowing metals
market, lower interest rates on credit facility borrowings, and to a $57.6
million decrease in the outstanding amount of our 2022 Notes which were
repurchased in the first six months of 2020. Credit facility borrowings were at
a lower level in the first six months of 2020 compared to the first six months
of 2019 despite having borrowed
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between $80 million and $166 million of excess funds during the first six months
of 2020 to maintain access to cash during the COVID-19 pandemic. Interest
expense in the first six months of 2020 included a $0.4 million charge to
writeoff unamortized bond issuance costs related to the $57.6 million of 2022
Notes repurchased during the period. The other income and (expense), net in the
second quarter and first six months of 2020 includes a $0.1 million gain and a
$0.9 million gain on the repurchase of the 2022 Notes, respectively. The other
expense in the three-month and six-month periods ended June 30, 2019 includes
$0.2 million and $0.8 million of foreign currency losses, respectively.
Provision for income taxes. In the second quarter of 2020, the Company recorded
an income tax benefit of $4.5 million compared to income tax expense of $5.5
million in the second quarter of 2019. In the first six months of 2020, the
Company recorded an income tax benefit of $1.6 million compared to income tax
expense of $18.5 million in the first six months of 2019. The income tax expense
recorded in all periods primarily represents taxes at federal and local
statutory rates where the Company operates, but generally excludes any tax
benefit for losses in jurisdictions with historical losses.
Earnings (loss) per share. Basic loss per share was $0.67 in the second quarter
of 2020 and $0.24 in the first six months of 2020 compared to basic earnings per
share of $0.43 in the second quarter of 2019 and $1.22 in the first six months
of 2019. Diluted loss per share was $0.67 in the second quarter of 2020 and
$0.24 in the first six months of 2020 compared to diluted earnings per share of
$0.43 in the second quarter of 2019 and $1.21 in the first six months of 2019.
The changes in earnings per share are due to the results of operations discussed
above.
Liquidity and Cash Flows
Our primary sources of liquidity are cash and cash equivalents, cash flows from
operations, and borrowing availability under the Ryerson Credit Facility that
matures on November 16, 2021 . Its principal source of operating cash is from the
sale of metals and other materials. Its principal uses of cash are for payments
associated with the procurement and processing of metals and other materials
inventories, costs incurred for the warehousing and delivery of inventories, and
the selling and administrative costs of the business, capital expenditures, and
for interest payments on debt.
The global COVID-19 pandemic has led to disruption and volatility in the global
capital markets, which, depending on future developments, could adversely impact
our capital resources and liquidity in the future. As a proactive, precautionary
measure, we borrowed approximately $166 million under the Ryerson Credit
Facility in the first quarter of 2020 to maintain access to cash during the
COVID-19 pandemic. We reduced this balance to approximately $80 million as of
June 30, 2020 . Accordingly, we had cash and cash equivalents of $99.9 million at
June 30, 2020 , compared to $11.0 million at December 31, 2019 . Despite the extra
borrowing, our total debt outstanding at June 30, 2020 decreased to $904 million
compared to $982 million of total debt outstanding at December 31, 2019 due to
decreased working capital requirements. We had a debt-to-capitalization ratio of
85% at June 30, 2020 and at December 31, 2019 . We had total liquidity (defined
as cash and cash equivalents, restricted cash from sales of property, plant, and
equipment, marketable securities, and availability under the Ryerson Credit
Facility and foreign debt facilities of $350 million at June 30, 2020 versus
$439 million at December 31, 2019 . Our net debt (defined as total debt less cash
and cash equivalents, and restricted cash from sales of property, plant, and
equipment) was $793 million and $923 million at June 30, 2020 and December 31,
2019 , respectively. Total liquidity and net debt are not U.S. generally accepted
accounting principles ("GAAP") financial measures. We believe that total
liquidity provides additional information for measuring our ability to fund our
operations. Total liquidity does not represent, and should not be used as a
substitute for, net income or cash flows from operations as determined in
accordance with GAAP and total liquidity is not necessarily an indication of
whether cash flow will be sufficient to fund our cash requirements. We believe
that net debt provides a clearer perspective of the Company's overall debt
situation given the excess borrowings discussed above. Net debt should not be
used as a substitute for total debt outstanding as determined in accordance with
GAAP.
Below is a reconciliation of cash and cash equivalents to total liquidity:
June 30, 2020 December 31, 2019
(In millions)
Cash and cash equivalents $ 100 $ 11
Restricted cash from sales of property, plant, and equipment
11 48
Availability under Ryerson Credit Facility and foreign debt
facilities 239 380
Total liquidity $ 350 $ 439
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Below is a reconciliation of total debt to net debt:
June 30, 2020 December 31, 2019
(In millions)
Total debt $ 904 $ 982
Less: cash and cash equivalents (100 ) (11 )
Less: restricted cash from sales of property, plant, and
equipment (11 ) (48 )
Net debt $ 793 $ 923
Of the total cash and cash equivalents, as of June 30, 2020 , $11.3 million was
held in subsidiaries outside the United States which is deemed to be permanently
reinvested. Ryerson does not currently foresee a need to repatriate earnings
from its non-U.S. subsidiaries. Although Ryerson has historically satisfied
needs for more capital in the U.S. through debt or equity issuances, Ryerson
could elect to repatriate earnings held in foreign jurisdictions, which could
result in higher effective tax rates. We have not recorded a deferred tax
liability for the effect of a possible repatriation of these earnings as
management intends to permanently reinvest these earnings outside of the U.S.
Specific plans for reinvestment include funding for future international
acquisitions and funding of existing international operations.
The following table summarizes the Company's cash flows:
Six Months Ended June 30,
2020 2019
(In millions)
Net income (loss) $ (9.1 ) $ 46.1
Depreciation and amortization 26.9 28.7
Change in operating assets and liabilities: Receivables 50.5 (31.8 ) Inventories 141.4 (15.2 ) Accounts payable (26.7 ) 30.8 Accrued liabilities (11.9 ) (24.7 ) Other operating asset and liability balances (7.4 ) (14.0 ) All other operating cash flows 12.4
28.1
Net cash provided by operating activities 176.1
48.0
Capital expenditures (11.8 ) (23.4 ) Proceeds from sale of property, plant, and equipment 0.1
8.6
Net cash used in investing activities (11.7 ) (14.8 ) Repayment of debt (57.5 ) (12.0 ) Net repayments of short-term borrowings (21.5 ) (29.8 ) Net increase (decrease) in book overdrafts (24.4 )
7.1
All other financing cash flows (6.9 )
1.1
Net cash used in financing activities (110.3 ) (33.6 ) Effect of exchange rates on cash and cash equivalents (2.0 ) -
Net increase (decrease) in cash and cash equivalents
Operating activities. Working capital fluctuates throughout the year based on business needs. Working capital needs tend to be counter-cyclical, meaning that in periods of expansion the Company will use cash to fund working capital requirements, but in periods of contraction the Company will generate cash from reduced working capital requirements. The decrease in accounts receivable in the first six months of 2020 is the result of lower sales levels due to the weak market conditions resulting from the COVID-19 outbreak in 2020. Inventory levels also decreased significantly in the first six months of 2020 as the Company brought inventory levels in line with the weak market conditions. In comparison, accounts receivable increased in the first six months of 2019 as sales levels increased compared to the second half of the fourth quarter of 2018 and inventory increased in the first six months of 2019 to support the higher sales. The decrease in accounts payable for the first six months of 2020 is related to decreased purchases and operating activities compared to the fourth quarter of the prior year and in comparison to an increase in accounts payable in the first six months of 2019 as purchases and operating activity increased compared to the fourth quarter of 2018. Accrued liabilities decreased$11.9 million and$24.7 million in the first six months of 2020 and 2019, respectively, resulting mainly from lower accrued incentive compensation compared to the prior year end. 31 -------------------------------------------------------------------------------- Investing activities. The Company's main investing activities are capital expenditures and proceeds from the sale of property, plant, and equipment. Capital expenditures have decreased year-over-year as the Company reduced the annual capital expenditures budget from$45 million to$25 million due to the COVID-19 pandemic. At this time, we are limiting capital spending to critical sustaining projects. Financing activities. The Company's main source of liquidity to fund working capital requirements is borrowings on its credit facility. While the Company anticipates its current cash balances, cash flows from operations, and available sources of liquidity will be sufficient to meet its cash requirements, approximately$80 million of excess funds were borrowed atJune 30, 2020 to maintain access to cash during the COVID-19 pandemic. This borrowing was offset by credit facility repayments from the operating cash flow that was generated in the first six months of 2020. In addition, we repurchased a principal amount of$57.6 million and$11.6 million of our 2022 Notes in the first six months of 2020 and 2019, respectively. Book overdrafts fluctuate based on the timing of payments. Capital Resources We believe that cash flow from operations and proceeds from the Ryerson Credit Facility will provide sufficient funds to meet our contractual obligations and operating requirements in the normal course of business. Total debt in the Condensed Consolidated Balance Sheet decreased to$903.8 million atJune 30, 2020 from$981.8 million atDecember 31, 2019 , mainly due to$57.6 million of the 2022 Notes repurchased in addition to the net cash provided by operating activities in the first six months of 2020. Total debt outstanding as ofJune 30, 2020 consisted of the following amounts:$357.9 million borrowings under the Ryerson Credit Facility,$530.3 million under the 2022 Notes,$11.5 million of foreign debt, and$8.7 million of other debt, less$4.6 million of unamortized debt issuance costs. For further information, see Note 7: Long Term Debt in Part I, Item I - Notes to the Consolidated Financial Statements.
Pension Funding
AtDecember 31, 2019 , pension liabilities exceeded plan assets by$140 million . Through the six months endedJune 30, 2020 , we have made$7 million in pension contributions. The Company has elected to defer the remaining expected 2020 U.S. contributions of$13 million untilJanuary 1, 2021 , as permitted under The CARES Act that was passed inMarch 2020 . We anticipate that we will have zero minimum required pension contributions in 2020 under the Ontario Pension Benefits Act inCanada . Future contribution requirements depend on the investment returns on plan assets, the impact of discount rates on pension liabilities, and changes in regulatory requirements. We are unable to determine the amount or timing of any such contributions required by ERISA or whether any such contributions would have a material adverse effect on our financial position or cash flows. COVID-19 has negatively affected the financial markets and our returns on pension assets. Changes in returns on plan assets may affect our plan funding, cash flows, and financial condition. Differences between actual plan asset returns and the expected long-term rate of return on plan assets (5.75% for the Ryerson Pension Plans, 3.20% for CS&W Pension Plan, and between 3.00% and 4.75% for the Canadian Plans as ofDecember 31, 2019 ) impact the measurement of the following year's pension expense and pension funding requirements. However, we believe that cash flow from operations and the Ryerson Credit Facility described above will provide sufficient funds to make the minimum required contributions in 2021.
Off-Balance Sheet Arrangements
In the normal course of business with customers, vendors, and others, we have entered into off-balance sheet arrangements, such as letters of credit, which totaled$15 million as ofJune 30, 2020 . We do not have any other material off-balance sheet financing arrangements. None of these off-balance sheet arrangements are likely to have a material effect on our current or future financial condition, results of operations, liquidity, or capital resources. 32
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Contractual Obligations
The following table presents contractual obligations at
Payments Due by Period
Less than 1 - 3 4 - 5 After 5
Contractual Obligations (1) (2) Total 1 year years years years
(In millions)
2022 Notes 530 - 530 - -
Ryerson Credit Facility 358 - 358 - -
Foreign Debt 11 11 - - -
Other Debt 9 2 4 3 -
Interest on 2022 Notes, Foreign
Debt, Other Debt, and Ryerson
Credit Facility (3) 122 67 55 - -
Purchase Obligations (4) 11 11 - - -
Operating Leases (5) 140 25 40 30 45
Finance Lease Obligations (5) 29 12 12 5 -
Pension Withdrawal Liability 1 - - - 1
Total $ 1,211 $ 128 $ 999 $ 38 $ 46 (1) The contractual obligations disclosed above do not include the Company's
potential future pension funding obligations (see discussion under "Pension
Funding" caption).
(2) Due to uncertainty regarding the completion of tax audits and possible
outcomes, we do not know when our obligations related to unrecognized tax
benefits will occur, if at all.
(3) Interest payments related to the variable rate debt were estimated using the
weighted average interest rate for the Ryerson Credit Facility, including the
effect of the interest rate swaps.
(4) The purchase obligations with suppliers are entered into when we receive firm
sales commitments with certain of our customers.
(5) Future lease payments are undiscounted.
Income Taxes
In accordance with ASC 740, "Income Taxes," the Company calculates its quarterly tax provision based on an estimated effective tax rate for the year, applies it to the results of each interim period, and then adjusts that amount by certain discrete items. Due to volatile macro-economic conditions associated with the COVID-19 pandemic, we may experience fluctuations in our forecasted earnings before income taxes as a result of events which cannot be predicted. As such, the Company's effective tax rate could be subject to unusual volatility as forecasted earnings before income taxes change. We maintain a valuation allowance on certain foreign andU.S. federal and state deferred tax assets until such time as in management's judgment, considering all available positive and negative evidence, and consistent with its past determinations, we determine that these deferred tax assets are more likely than not realizable. We anticipate that certain statutes of limitation will close within the next twelve months resulting in the reduction of the reserve for uncertain tax benefits related to various intercompany transactions. Although we released$1.9 million of reserves in the second quarter of 2020, we do not believe future amounts will be material.
Critical Accounting Estimates
Goodwill : We assess the recoverability of goodwill annually in the fourth quarter of every year or whenever indicators of potential impairment exist. We test for impairment of goodwill by assessing various qualitative factors with respect to developments in our business and the overall economy and calculating the fair value of a reporting unit using the discounted cash flow method, as necessary. If we determine that it is more likely than not that the fair value of a reporting unit is less than the carrying value based on our qualitative assessment, we will proceed to the quantitative goodwill impairment test, in which we compare the fair value of the reporting unit where the goodwill resides to its carrying value. If the carrying amount of the goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of goodwill. The fair value of the reporting unit is estimated using a combination of an income approach and a market approach as this combination is deemed to be the most indicative of fair value in an orderly transaction between market participants. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows, and discount rates. The market approach estimates fair value using market multiples of various financial measures of comparable public companies. 33 -------------------------------------------------------------------------------- Due to the COVID-19 pandemic and its effect on our business and the overall economy, we performed a quantitative impairment test of goodwill as ofMay 31, 2020 . The entire balance of goodwill for the Company as of the date of our quantitative assessment andJune 30, 2020 of$120.3 million , resides at theU.S. reporting unit. Based upon the quantitative assessment performed for theU.S. reporting unit, the fair value of theU.S. reporting unit exceeded its carrying value by 9% and as such it was determined that no impairment existed. The determination of the fair value of the reporting units requires the Company to make significant estimates including business and financial performance of the Company's reporting units, taking into consideration how such performance may be impacted by COVID-19. These estimates and assumptions primarily include but are not limited to: the selection of appropriate peer group companies, control premiums appropriate for acquisitions in the industries in which we compete, discount rates, terminal growth rates, and forecasts of revenue, operating income, depreciation, amortization, and capital expenditures. In evaluating theU.S. reporting unit significant weight is placed on forecasted EBITDA and the weighted average cost of capital ("WACC") used in the discounted cash flow model, as we determined these items have the most significant impact on the fair value of the reporting unit.
• EBITDA is expected to recover provided that pricing and volumes
stabilize, and we expect to gain operating leverage through some of the
cost savings initiatives undertaken in response to the COVID-19 pandemic
that are expected to continue post-pandemic.
• We used a WACC of 15.5% based upon market participants assumptions. We
performed a sensitivity analysis on our estimated fair value noting that
a 100 basis points increase in the discount rate results in a decrease
of 4% of the excess fair value over the carrying value of the reporting
unit.
Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to inherent uncertainty in making such estimates. A lack of recovery or further deterioration in market conditions, a trend of weaker than expected financial performance in our business, or a lack of recovery or further decline in the Company's market capitalization, among other factors, could result in an impairment charge in future periods which could have a material adverse effect on our financial statements.
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