Third Quarter – 2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the period ended September 30, 2005
or
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 1-9117
I.R.S. Employer Identification Number 36-3425828
RYERSON INC.
(a Delaware Corporation)
2621 West 15th Place
Chicago, Illinois 60608
Telephone: (773) 762-2121
Formerly Known as Ryerson Tull, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 25,238,941 shares of the Company’s Common Stock ($1.00 par value per share) were outstanding as of October 31, 2005.
This amended Quarterly Report on Form 10-Q contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places, Item 2. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.” Such statements can be identified by the use of forward-looking terminology such as “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 in the forward-looking statements as a result of various factors. Among the factors that significantly impact the metals distribution industry and the Company’s business are: cyclicality of our business, due to the cyclical nature of our customers’ businesses; managing the costs of purchased metals relative to the price at which we sell our products during periods of rapid price escalation, when we may not be able to pass through pricing increases fully to our customers quickly enough to maintain desirable gross margins; managing inventory and other costs and expenses; consolidation in the metals manufacturing industry, from which we purchase product, which could limit our ability to effectively negotiate and manage costs of inventory or cause material shortages, either of which would impact profitability; remaining competitive and maintaining market share in the highly fragmented metals distribution industry, in which price is a competitive tool and in which customers who purchase commodity products are often able to source metals from a variety of sources; whether our growth strategies, including our marketing programs and acquisitions, will generate sufficient additional sales to increase our market share or profitability; whether we can integrate acquisitions such as Integris Metal successfully without loss of key employees or customers; the timing and cost of our consolidation of our multiple information technology platforms to a single SAP platform, particularly in light of the number of facilities acquired when we purchased Integris Metals; our ability to improve financial controls over financial reporting and remediate our material weakness; our customer base, which, unlike many of our competitors, contains a substantial percentage of large customers, so that the potential loss of one or more large customers could negatively impact tonnage sold and our profitability; and our substantial debt, with a debt-to-capitalization ratio of 67% at September 30, 2005, with $409 million available under our credit facility and with $425 million in outstanding notes, including $100 million 9 1/8% Notes due July 15, 2006. This report identifies other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements.
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
EXPLANATORY NOTE
This amendment to the Company’s Form 10-Q is being filed as a result of the Company’s decision to amend and restate its 2004 and 2003 annual consolidated financial statements, the interim consolidated financial statements for each of the 2004 quarters and for each of the first three 2005 quarters. The restatement relates to corrections for errors in the previously reported financial statements as described below and as more fully described in Note 2 to the Consolidated Financial Statements. In addition, as described in Notes 2 and 3 of the Consolidated Financial Statements, the restatement also reflects the impact on the financial statements as of September 30, 2005 and for the three month and nine month periods ended September 30, 2005 of a change in the method of applying LIFO inventory costing.
The restatement decision arose as a result of management’s determination in March 2006 that it had incorrectly classified metals processing cost as a component of warehousing and delivery expenses in its consolidated statements of operations. Generally accepted accounting principles requires such processing costs to be classified as a component of costs of materials sold. The Company previously concluded, incorrectly, that the classification was appropriate as it is what we believe to be the common presentation format for the statement of operations in the metals distribution industry. The Company’s incorrect classification resulted in an understatement of costs of material sold and an equal overstatement of gross profit and warehousing and delivery expense, but had no impact on net earnings or earnings per share. This restatement also relates to properly recording the impact of nickel surcharges on stainless steel inventory by one of the Company’s Canadian subsidiaries, correcting an out-of-period adjustment in the Company’s deferred tax liabilities and recording other immaterial miscellaneous adjustments. The restatement does not materially impact the Company’s net income and balance sheet, and has no impact on the Company’s net cash flow.
The Company has also revised its disclosure in this amended Form 10-Q to state that management has concluded that the Company did not maintain effective disclosure controls and procedures as of September 30, 2005. See Item 4. Controls and Procedures in Part I of this amended Form 10-Q for additional information.
Note Regarding Forward-Looking Statements
| PAGE NO. | ||||
Part I. Financial Information: | ||||
Item 1. | Financial Statements: | |||
Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2005 and 2004 | 1 | |||
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2005 and 2004 | 3 | |||
Consolidated Balance Sheets – September 30, 2005 and December 31, 2004 | 4 | |||
| 5 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28 | ||
Item 3. | 38 | |||
Item 4. | 38 | |||
Part II. Other Information: | ||||
Item 6. | 39 | |||
| 40 | ||||
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements |
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
Consolidated Statements of Operations (Unaudited)
| Dollars in Millions | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| (restated) | (restated) | (restated) | (restated) | |||||||||||||
NET SALES | $ | 1,416.5 | $ | 898.7 | $ | 4,476.7 | $ | 2,398.3 | ||||||||
Cost of materials sold | 1,203.3 | 765.9 | 3,786.2 | 2,013.0 | ||||||||||||
GROSS PROFIT | 213.2 | 132.8 | 690.5 | 385.3 | ||||||||||||
Warehousing and delivery | 80.4 | 44.5 | 239.8 | 129.8 | ||||||||||||
Selling, general and administrative | 93.1 | 56.8 | 268.9 | 161.9 | ||||||||||||
Restructuring and plant closure costs | 0.3 | 3.0 | 3.3 | 3.6 | ||||||||||||
Pension curtailment gain | (21.0 | ) | — | (21.0 | ) | — | ||||||||||
Gain on the sale of assets | (6.6 | ) | (2.3 | ) | (6.6 | ) | (4.7 | ) | ||||||||
OPERATING PROFIT | 67.0 | 30.8 | 206.1 | 94.7 | ||||||||||||
Other revenue and expense, net | 0.3 | — | 3.1 | 0.1 | ||||||||||||
Interest and other expense on debt | (19.9 | ) | (6.0 | ) | (59.7 | ) | (16.0 | ) | ||||||||
INCOME BEFORE INCOME TAXES | 47.4 | 24.8 | 149.5 | 78.8 | ||||||||||||
PROVISION FOR INCOME TAXES | 16.7 | 9.5 | 57.7 | 30.2 | ||||||||||||
INCOME FROM CONTINUING OPERATIONS | 30.7 | 15.3 | 91.8 | 48.6 | ||||||||||||
DISCONTINUED OPERATIONS | ||||||||||||||||
Adjustment to gain on sale, net of tax | — | 2.3 | — | 3.5 | ||||||||||||
NET INCOME | 30.7 | 17.6 | 91.8 | 52.1 | ||||||||||||
DIVIDENDS ON PREFERRED STOCK | 0.1 | — | 0.2 | 0.2 | ||||||||||||
NET INCOME APPLICABLE TO COMMON STOCK | $ | 30.6 | $ | 17.6 | $ | 91.6 | $ | 51.9 | ||||||||
See notes to consolidated financial statements
1
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
Consolidated Statements of Operations (Unaudited)
| Dollars in Millions (except per share data) | ||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||
| (restated) | (restated) | (restated) | (restated) | |||||||||||
EARNINGS PER SHARE OF COMMON STOCK | ||||||||||||||
Basic: | ||||||||||||||
Income from continuing operations | $ | 1.22 | $ | 0.61 | $ | 3.64 | $ | 1.95 | ||||||
Discontinued operations – adjustment to gain on sale | — | 0.09 | — | 0.14 | ||||||||||
Basic earnings per share | $ | 1.22 | $ | 0.70 | $ | 3.64 | $ | 2.09 | ||||||
Diluted: | ||||||||||||||
Income from continuing operations | $ | 1.18 | $ | 0.60 | $ | 3.54 | $ | 1.89 | ||||||
Discontinued operations – adjustment to gain on sale | — | 0.09 | — | 0.14 | ||||||||||
Diluted earnings per share | $ | 1.18 | $ | 0.69 | $ | 3.54 | $ | 2.03 | ||||||
STATEMENTS OF COMPREHENSIVE INCOME | ||||||||||||||
NET INCOME | $ | 30.7 | $ | 17.6 | $ | 91.8 | $ | 52.1 | ||||||
OTHER COMPREHENSIVE INCOME: | ||||||||||||||
Unrealized gain (loss) on derivative instruments | 0.2 | (0.1 | ) | 0.3 | (0.1 | ) | ||||||||
Foreign currency translation adjustments | 6.3 | 1.6 | 4.2 | 2.2 | ||||||||||
COMPREHENSIVE INCOME | $ | 37.2 | $ | 19.1 | $ | 96.3 | $ | 54.2 | ||||||
See notes to consolidated financial statements
2
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows (Unaudited)
| Dollars in Millions | ||||||||
Nine Months Ended September 30, | ||||||||
| 2005 | 2004 | |||||||
| (restated) | (restated) | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 91.8 | $ | 52.1 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 30.3 | 16.3 | ||||||
Deferred income taxes | 23.4 | 11.7 | ||||||
Deferred employee benefit funding/cost | 5.5 | (12.2 | ) | |||||
Restructuring and plant closure costs | 1.3 | 3.3 | ||||||
Discontinued operations – adjustment to the gain on sale, net of tax | — | (3.5 | ) | |||||
Pension curtailment gain | (21.0 | ) | — | |||||
Gain on the sale of assets | (6.6 | ) | (4.7 | ) | ||||
Change in operating assets and liabilities, net of the effects of acquisitions: | ||||||||
Receivables | (15.4 | ) | (204.7 | ) | ||||
Inventories | 115.3 | (84.8 | ) | |||||
Other assets and income tax receivable | (2.0 | ) | 4.6 | |||||
Accounts payable | (40.9 | ) | 96.1 | |||||
Accrued liabilities | (8.9 | ) | 3.0 | |||||
Accrued taxes payable | (44.3 | ) | 6.1 | |||||
Other items | (1.3 | ) | (1.6 | ) | ||||
Net adjustments | 35.4 | (170.4 | ) | |||||
Net cash provided by (used in) operating activities | 127.2 | (118.3 | ) | |||||
INVESTING ACTIVITIES | ||||||||
Acquisitions, net of cash acquired | (410.3 | ) | (37.9 | ) | ||||
Capital expenditures | (24.3 | ) | (21.4 | ) | ||||
Investment in joint venture | (0.7 | ) | (2.0 | ) | ||||
Loan to joint venture | — | (3.2 | ) | |||||
Loan repayment from joint venture | — | 2.0 | ||||||
Proceeds from sales of assets | 19.6 | 16.0 | ||||||
Net cash used in investing activities | (415.7 | ) | (46.5 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Repayment of debt assumed in acquisition | (234.0 | ) | (13.5 | ) | ||||
Proceeds from credit facility borrowings | 1,490.6 | 486.0 | ||||||
Repayment of credit facility borrowings | (961.3 | ) | (305.0 | ) | ||||
Net short-term proceeds/(repayments) under credit facility | 27.6 | (6.0 | ) | |||||
Credit facility issuance costs | (10.1 | ) | (1.2 | ) | ||||
Bond issuance costs | (0.6 | ) | — | |||||
Net increase/(decrease) in book overdrafts | (5.6 | ) | 20.5 | |||||
Dividends paid | (3.9 | ) | (3.9 | ) | ||||
Proceeds from exercise of common stock options | 0.9 | 1.6 | ||||||
Net cash provided by financing activities | 303.6 | 178.5 | ||||||
Net increase in cash and cash equivalents | 15.1 | 13.7 | ||||||
Effect of exchange rate changes on cash | (0.4 | ) | 1.2 | |||||
Net change in cash and cash equivalents | 14.7 | 14.9 | ||||||
Cash and cash equivalents - beginning of period | 18.4 | 13.7 | ||||||
Cash and cash equivalents - end of period | $ | 33.1 | $ | 28.6 | ||||
SUPPLEMENTAL DISCLOSURES | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 47.1 | $ | 16.2 | ||||
Income taxes, net | 75.5 | 8.8 | ||||||
See notes to consolidated financial statements
3
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets (Unaudited)
| Dollars in Millions | ||||||||||||
| September 30, 2005 | December 31, 2004 | |||||||||||
| (restated) | (restated) | |||||||||||
ASSETS | ||||||||||||
CURRENT ASSETS: | ||||||||||||
Cash and cash equivalents | $ | 33.1 | $ | 18.4 | ||||||||
Restricted cash | 0.6 | 0.8 | ||||||||||
Receivables less provision for allowances, claims and doubtful accounts of $23.3 and $14.0, respectively | 724.4 | 465.4 | ||||||||||
Inventories | 897.5 | 606.9 | ||||||||||
Prepaid expenses and other assets | 19.8 | 2.6 | ||||||||||
Deferred income taxes | — | 10.0 | ||||||||||
Total current assets | 1,675.4 | 1,104.1 | ||||||||||
INVESTMENTS AND ADVANCES | 22.1 | 18.0 | ||||||||||
PROPERTY, PLANT AND EQUIPMENT | ||||||||||||
Valued on basis of cost | $ | 780.2 | $ | 616.1 | ||||||||
Less accumulated depreciation | 377.5 | 402.7 | 376.8 | 239.3 | ||||||||
DEFERRED INCOME TAXES | 144.6 | 154.5 | ||||||||||
INTANGIBLE PENSION ASSET | 9.0 | 9.0 | ||||||||||
OTHER INTANGIBLES | 11.8 | — | ||||||||||
GOODWILL | 66.8 | — | ||||||||||
OTHER ASSETS | 24.5 | 15.9 | ||||||||||
Total Assets | $ | 2,356.9 | $ | 1,540.8 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
CURRENT LIABILITIES: | ||||||||||||
Accounts payable | $ | 273.2 | $ | 222.3 | ||||||||
Salaries, wages and commissions | 43.9 | 31.9 | ||||||||||
Other accrued liabilities | 61.2 | 71.0 | ||||||||||
Short-term credit facility borrowings | 27.6 | — | ||||||||||
Current portion of long-term debt | 100.1 | — | ||||||||||
Total current liabilities | 506.0 | 325.2 | ||||||||||
LONG-TERM DEBT | 955.0 | 526.2 | ||||||||||
DEFERRED EMPLOYEE BENEFITS AND OTHER CREDITS | 361.7 | 249.8 | ||||||||||
Total liabilities | 1,822.7 | 1,101.2 | ||||||||||
COMMITMENTS & CONTINGENCIES | ||||||||||||
STOCKHOLDERS’ EQUITY (Schedule A) | 534.2 | 439.6 | ||||||||||
Total Liabilities and Stockholders’ Equity | $ | 2,356.9 | $ | 1,540.8 | ||||||||
See notes to consolidated financial statements
4
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1/FINANCIAL STATEMENTS
Ryerson Inc., formerly Ryerson Tull, Inc. (“Ryerson Tull”), a Delaware corporation, is the sole stockholder of Joseph T. Ryerson & Son, Inc. (“Ryerson”), J. M. Tull Metals Company, Inc. (“Tull”) and Integris Metals, Inc. (“Integris Metals”) (unless the context indicates otherwise, Ryerson Tull, Ryerson, Tull, and Integris Metals, together with their subsidiaries, are collectively referred to herein as the “Company”).
The Company conducts its materials distribution operations in the United States through its operating subsidiaries, Ryerson, Tull and Integris Metals; in Canada through Integris Metals, Ltd. and Ryerson Tull Canada, Inc., in Mexico through Coryer, S.A. de C.V., a joint venture with G. Collado S.A. de C.V.; and in India through Tata Ryerson Limited, a joint venture with the Tata Iron & Steel Corporation, an integrated steel manufacturer in India. The Company distributes and processes metals and other materials throughout the continental United States. The Company continues to report its results as one reportable operating segment with the acquisition of Integris Metals on January 4, 2005, because of the substantial geographic overlap in facilities and similar economic characteristics, customer bases, distribution methods, regulatory environment and products and processes among the Company’s operating subsidiaries. The following table shows the Company’s percentage of sales revenue by major product lines for the three-month and nine-month periods ended September 30, 2005 and 2004:
| Percentage of Sales Revenue | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
Product Line | 2005 | 2004 | 2005 | 2004 | ||||||||
Carbon flat rolled | 25 | % | 40 | % | 25 | % | 37 | % | ||||
Stainless and aluminum | 51 | 30 | 51 | 32 | ||||||||
Fabrication and carbon plate | 10 | 13 | 10 | 14 | ||||||||
Bars, tubing and structurals | 9 | 13 | 10 | 14 | ||||||||
Other | 5 | 4 | 4 | 3 | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||
Results of operations for any interim period are not necessarily indicative of results of any other periods or for the year. The financial statements as of September 30, 2005, and for the three-month and nine-month periods ended September 30 of 2005 and of 2004 are unaudited, but in the opinion of management include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results for such periods. These financial statements should be read in conjunction with the financial statements and related notes contained in the Annual Report on Form 10-K for the year ended December 31, 2005.
NOTE 2/RESTATEMENT OF FINANCIAL STATEMENTS
The consolidated financial statements as of September 30, 2005 and December 31, 2004 and for the three month and nine month periods ended September 30, 2005 and 2004 have been restated to correct for errors in the previously reported financial statements as described below. In addition, as described below and as more fully described in Note 3 of the Consolidated Financial Statements, the financial statements as of September 30, 2005 and for the three month and nine month periods ended September 30, 2005 have been restated to reflect the impact of a change in the method of applying LIFO inventory costing.
Restatement of previously issued financial statements.The following adjustments have been made to restate previously issued financial statements to correct the classification of metal processing costs, to properly record the impact of nickel surcharges on stainless steel inventory by one of our Canadian subsidiaries, to correct an out-of-period adjustment in our deferred tax liabilities and to record the impact of other immaterial miscellaneous adjustments.
Metal processing costs were previously misclassified as a warehousing and delivery expense and should have been reported as a cost of materials sold. The correction of the classification of metal processing costs results in the reduction of warehousing and delivery expense and an equal increase in the cost of materials sold of $21.4 million and $18.8 million for the three month periods ended September 30, 2005 and 2004 and $65.5 million and $53.7 million for the nine month periods ended September 30, 2005 and 2004, respectively. There was no impact on net income related to the correction of the classification of metal processing costs.
One of our Canadian subsidiaries excluded nickel surcharges from the cost of stainless steel inventory. The restatement to correct the impact of nickel surcharges increased cost of materials sold $0.4 million and $0.6 million and decreased provision for income taxes $0.1 million and $0.2 million for the three and nine month periods ended September 30, 2005 and decreased the cost of materials sold $0.3 million and $2.3 million and increased provision for income taxes $0.1 million and $0.9 million for the three and nine month periods ended September 30, 2004, respectively. The nickel surcharge adjustment increased inventory by $5.7 million at September 30, 2005 and $6.3 million at December 31, 2004. The cumulative impact of
5
this adjustment increased other accrued liabilities by $1.6 million, increased retained earnings by $2.8 million and increased accumulated other comprehensive income by $1.3 million at September 30, 2005 and increased other accrued liabilities by $1.8 million, increased retained earnings by $3.2 million and increased accumulated other comprehensive income by $1.3 million at December 31, 2004.
Other restatement adjustments were recorded for immaterial miscellaneous adjustments. These adjustments increased costs of materials sold $1.0 million and $0.9 million, decreased selling, general and administrative costs $0.4 million and $1.1 million, decreased interest expense zero and $0.2 million, decreased other income $1.1 million and zero and provision for income taxes decreased $0.7 million and increased $0.1 million for the three and nine month periods ended September 30, 2005, respectively. The aggregate impact of these miscellaneous adjustments decreased net income $1.0 million and increased net income $0.3 million for the three and nine month periods ended September 30, 2005, respectively. There was no impact on net income for the three and nine month periods ended September 30, 2004. The cumulative effect of miscellaneous adjustments at September 30, 2005 decreased inventory by $0.4 million, increased prepaid expenses and other assets by $1.1 million, decreased goodwill by $0.5 million, increased other accrued liabilities by $0.3 million and decreased retained earnings $0.1 million. The cumulative effect of miscellaneous adjustments at December 31, 2004 was a decrease in inventory of $0.4 million, a decrease in deferred charges and other assets of $0.2 million, an increase in deferred tax assets of $0.1 million, a decrease in retained earnings of $0.4 million and a $0.1 million decrease in other accrued liabilities. Prior to the periods presented, an adjustment of $2.7 million was made to increase retained earnings, to increase deferred tax liabilities by $2.6 million and to increase current deferred tax assets by $0.1 million to correct deferred taxes related to an excess deferred tax credit arising from an acquisition.
Restatement due to accounting change effective January 1, 2005. In the fourth quarter of 2005, we changed our method of applying LIFO inventory costing for the domestic component of our inventory. The change has been applied retroactive to January 1, 2005. The three and nine month periods ended September 30, 2005 includes an increase in cost of materials sold of $3.1 million and $6.5 million for the impact of the change in method of applying LIFO costing, respectively. See Note 3 for further discussion.
The following table reconciles the impact of the restatement and change in method of applying LIFO on net income and diluted earnings per share for the three and nine month periods ended September 30, 2005 and 2004 (in millions, except per share data):
Three Months Ended | Nine Months Ended September 30, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||
Net income applicable to common stock, as previously reported | $ | 33.8 | $ | 17.4 | $ | 95.7 | $ | 50.5 | ||||||
Classification of metal processing costs | — | — | — | — | ||||||||||
Nickel surcharges on stainless steel inventory purchases | (0.4 | ) | 0.3 | (0.6 | ) | 2.3 | ||||||||
Other restatement items | (1.7 | ) | — | 0.4 | — | |||||||||
| (2.1 | ) | 0.3 | (0.2 | ) | 2.3 | |||||||||
Income tax effects on above items | (0.8 | ) | 0.1 | (0.1 | ) | 0.9 | ||||||||
Adjustments to net income | (1.3 | ) | 0.2 | (0.1 | ) | 1.4 | ||||||||
Net income applicable to common stock, as restated | 32.5 | 17.6 | 95.6 | 51.9 | ||||||||||
Adjustment for change in accounting, net of tax | (1.9 | ) | — | (4.0 | ) | — | ||||||||
Net income applicable to common stock, as adjusted | $ | 30.6 | $ | 17.6 | $ | 91.6 | $ | 51.9 | ||||||
Diluted earnings per share, as previously reported | $ | 1.30 | $ | 0.68 | $ | 3.70 | $ | 1.97 | ||||||
Restatement adjustments | (0.04 | ) | 0.01 | (0.01 | ) | 0.06 | ||||||||
Diluted earnings per share, as restated | 1.26 | 0.69 | 3.69 | 2.03 | ||||||||||
Impact of change in accounting | (0.08 | ) | — | (0.15 | ) | — | ||||||||
Diluted earnings per share, as adjusted | $ | 1.18 | $ | 0.69 | $ | 3.54 | $ | 2.03 | ||||||
6
The following is a summary of the impact of the restatement on the consolidated statements of operations for the three and nine month periods ended September 30, 2005 and 2004, the consolidated statements of cash flows for the nine months ended September 30, 2005 and 2004 and the consolidated balance sheets at September 30, 2005 and December 31, 2004 (in millions, except per share data):
RYERSON INC. (formerly Ryerson Tull, Inc.) AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In millions, except per share data)
| Three Months Ended September 30, | ||||||||||||||||||||||||||||||||
| 2005 | 2004 | |||||||||||||||||||||||||||||||
| As previously reported | Restatement adjustment | As restated | Change in accounting | As adjusted | As previously reported | Restatement adjustment | As restated | |||||||||||||||||||||||||
Net sales | $ | 1,416.5 | $ | — | $ | 1,416.5 | $ | — | $ | 1,416.5 | $ | 898.7 | $ | — | $ | 898.7 | ||||||||||||||||
Cost of materials sold | 1,177.4 | 22.8 | 1,200.2 | 3.1 | 1,203.3 | 747.4 | 18.5 | 765.9 | ||||||||||||||||||||||||
Gross profit | 239.1 | (22.8 | ) | 216.3 | (3.1 | ) | 213.2 | 151.3 | (18.5 | ) | 132.8 | |||||||||||||||||||||
Warehousing and delivery | 101.8 | (21.4 | ) | 80.4 | — | 80.4 | 63.3 | (18.8 | ) | 44.5 | ||||||||||||||||||||||
Selling, general and administrative | 93.5 | (0.4 | ) | 93.1 | — | 93.1 | 56.8 | — | 56.8 | |||||||||||||||||||||||
Restructuring and plant closure costs | 0.3 | — | 0.3 | — | 0.3 | 3.0 | — | 3.0 | ||||||||||||||||||||||||
Pension curtailment gain | (21.0 | ) | — | (21.0 | ) | — | (21.0 | ) | — | — | — | |||||||||||||||||||||
Gain on sale of assets | (6.6 | ) | — | (6.6 | ) | — | (6.6 | ) | (2.3 | ) | — | (2.3 | ) | |||||||||||||||||||
Operating profit | 71.1 | (1.0 | ) | 70.1 | (3.1 | ) | 67.0 | 30.5 | 0.3 | 30.8 | ||||||||||||||||||||||
Other expense: | ||||||||||||||||||||||||||||||||
Other income and expense, net | 1.4 | (1.1 | ) | 0.3 | — | 0.3 | — | — | — | |||||||||||||||||||||||
Interest and other expense on debt | (19.9 | ) | — | (19.9 | ) | — | (19.9 | ) | (6.0 | ) | — | (6.0 | ) | |||||||||||||||||||
Income before income taxes | 52.6 | (2.1 | ) | 50.5 | (3.1 | ) | 47.4 | 24.5 | 0.3 | 24.8 | ||||||||||||||||||||||
Provision for income taxes | 18.7 | (0.8 | ) | 17.9 | (1.2 | ) | 16.7 | 9.4 | 0.1 | 9.5 | ||||||||||||||||||||||
Income from continuing operations | 33.9 | (1.3 | ) | 32.6 | (1.9 | ) | 30.7 | 15.1 | 0.2 | 15.3 | ||||||||||||||||||||||
Discontinued operations—Inland Steel Company Gain on sale, net of tax provision | — | — | — | — | — | 2.3 | — | 2.3 | ||||||||||||||||||||||||
Net income | 33.9 | (1.3 | ) | 32.6 | (1.9 | ) | 30.7 | 17.4 | 0.2 | 17.6 | ||||||||||||||||||||||
Dividend requirements for preferred stock | 0.1 | — | 0.1 | — | 0.1 | — | — | — | ||||||||||||||||||||||||
Net income applicable to common stock | $ | 33.8 | $ | (1.3 | ) | $ | 32.5 | $ | (1.9 | ) | $ | 30.6 | $ | 17.4 | $ | 0.2 | $ | 17.6 | ||||||||||||||
Earnings per share of common stock | ||||||||||||||||||||||||||||||||
Basic: | ||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 1.34 | $ | (0.05 | ) | $ | 1.29 | $ | (0.07 | ) | $ | 1.22 | $ | 0.61 | $ | — | $ | 0.61 | ||||||||||||||
Inland Steel Company—gain on sale | — | — | — | — | — | 0.09 | — | 0.09 | ||||||||||||||||||||||||
Basic earnings per share | $ | 1.34 | $ | (0.05 | ) | $ | 1.29 | $ | (0.07 | ) | $ | 1.22 | $ | 0.70 | $ | — | $ | 0.70 | ||||||||||||||
Diluted: | ||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 1.30 | $ | (0.04 | ) | $ | 1.26 | $ | (0.08 | ) | $ | 1.18 | $ | 0.59 | $ | 0.01 | $ | 0.60 | ||||||||||||||
Inland Steel Company—gain on sale | — | — | — | — | — | 0.09 | — | 0.09 | ||||||||||||||||||||||||
Diluted earnings per share | $ | 1.30 | $ | (0.04 | ) | $ | 1.26 | $ | (0.08 | ) | $ | 1.18 | $ | 0.68 | $ | 0.01 | $ | 0.69 | ||||||||||||||
7
RYERSON INC. (formerly Ryerson Tull, Inc.) AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In millions, except per share data)
| Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| 2005 | 2004 | |||||||||||||||||||||||||||||||
| As previously reported | Restatement adjustment | As restated | Change in accounting | As adjusted | As previously reported | Restatement adjustment | As restated | |||||||||||||||||||||||||
Net sales | $ | 4,476.7 | $ | — | $ | 4,476.7 | $ | — | $ | 4,476.7 | $ | 2,398.3 | $ | — | $ | 2,398.3 | ||||||||||||||||
Cost of materials sold | 3,712.7 | 67.0 | 3,779.7 | 6.5 | 3,786.2 | 1,961.6 | 51.4 | 2,013.0 | ||||||||||||||||||||||||
Gross profit | 764.0 | (67.0 | ) | 697.0 | (6.5 | ) | 690.5 | 436.7 | (51.4 | ) | 385.3 | |||||||||||||||||||||
Warehousing and delivery | 305.3 | (65.5 | ) | 239.8 | — | 239.8 | 183.5 | (53.7 | ) | 129.8 | ||||||||||||||||||||||
Selling, general and administrative | 270.0 | (1.1 | ) | 268.9 | — | 268.9 | 161.9 | — | 161.9 | |||||||||||||||||||||||
Restructuring and plant closure costs | 3.3 | — | 3.3 | — | 3.3 | 3.6 | — | 3.6 | ||||||||||||||||||||||||
Pension curtailment gain | (21.0 | ) | — | (21.0 | ) | — | (21.0 | ) | — | — | ��� | |||||||||||||||||||||
Gain on sale of assets | (6.6 | ) | — | (6.6 | ) | — | (6.6 | ) | (4.7 | ) | — | (4.7 | ) | |||||||||||||||||||
Operating profit | 213.0 | (0.4 | ) | 212.6 | (6.5 | ) | 206.1 | 92.4 | 2.3 | 94.7 | ||||||||||||||||||||||
Other expense: | ||||||||||||||||||||||||||||||||
Other income and expense, net | 3.1 | — | 3.1 | — | 3.1 | 0.1 | — | 0.1 | ||||||||||||||||||||||||
Interest and other expense on debt | (59.9 | ) | 0.2 | (59.7 | ) | — | (59.7 | ) | (16.0 | ) | — | (16.0 | ) | |||||||||||||||||||
Income before income taxes | 156.2 | (0.2 | ) | 156.0 | (6.5 | ) | 149.5 | 76.5 | 2.3 | 78.8 | ||||||||||||||||||||||
Provision for income taxes | 60.3 | (0.1 | ) | 60.2 | (2.5 | ) | 57.7 | 29.3 | 0.9 | 30.2 | ||||||||||||||||||||||
Income from continuing operations | 95.9 | (0.1 | ) | 95.8 | (4.0 | ) | 91.8 | 47.2 | 1.4 | 48.6 | ||||||||||||||||||||||
Discontinued operations—Inland Steel Company Gain on sale, net of tax provision | — | — | — | — | — | 3.5 | — | 3.5 | ||||||||||||||||||||||||
Net income | 95.9 | (0.1 | ) | 95.8 | (4.0 | ) | 91.8 | 50.7 | 1.4 | 52.1 | ||||||||||||||||||||||
Dividend requirements for preferred stock | 0.2 | — | 0.2 | — | 0.2 | 0.2 | — | 0.2 | ||||||||||||||||||||||||
Net income applicable to common stock | $ | 95.7 | $ | (0.1 | ) | $ | 95.6 | $ | (4.0 | ) | $ | 91.6 | $ | 50.5 | $ | 1.4 | $ | 51.9 | ||||||||||||||
Earnings per share of common stock | ||||||||||||||||||||||||||||||||
Basic: | ||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 3.80 | $ | (0.01 | ) | $ | 3.79 | $ | (0.15 | ) | $ | 3.64 | $ | 1.89 | $ | 0.06 | $ | 1.95 | ||||||||||||||
Inland Steel Company—gain on sale | — | — | — | — | — | 0.14 | — | 0.14 | ||||||||||||||||||||||||
Basic earnings per share | $ | 3.80 | $ | (0.01 | ) | $ | 3.79 | $ | (0.15 | ) | $ | 3.64 | $ | 2.03 | $ | 0.06 | $ | 2.09 | ||||||||||||||
Diluted: | ||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 3.70 | $ | (0.01 | ) | $ | 3.69 | $ | (0.15 | ) | $ | 3.54 | $ | 1.83 | $ | 0.06 | $ | 1.89 | ||||||||||||||
Inland Steel Company—gain on sale | — | — | — | — | — | 0.14 | — | 0.14 | ||||||||||||||||||||||||
Diluted earnings per share | $ | 3.70 | $ | (0.01 | ) | $ | 3.69 | $ | (0.15 | ) | $ | 3.54 | $ | 1.97 | $ | 0.06 | $ | 2.03 | ||||||||||||||
8
RYERSON INC. (formerly Ryerson Tull, Inc.) AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions) Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| 2005 | 2004 | |||||||||||||||||||||||||||||||
| As previously reported | Restatement adjustment | As restated | Change in accounting | As adjusted | As previously reported | Restatement adjustment | As restated | |||||||||||||||||||||||||
Operating Activities: | ||||||||||||||||||||||||||||||||
Net income | $ | 95.9 | $ | (0.1 | ) | $ | 95.8 | $ | (4.0 | ) | $ | 91.8 | $ | 50.7 | $ | 1.4 | $ | 52.1 | ||||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||||||||||||||||||
Depreciation and amortization | 30.3 | — | 30.3 | — | 30.3 | 16.3 | — | 16.3 | ||||||||||||||||||||||||
Deferred income taxes | 25.8 | 0.1 | 25.9 | (2.5 | ) | 23.4 | 11.7 | — | 11.7 | |||||||||||||||||||||||
Deferred employee benefit funding/cost | 5.5 | — | 5.5 | — | 5.5 | (12.2 | ) | — | (12.2 | ) | ||||||||||||||||||||||
Restructuring and plant closure costs | 1.3 | — | 1.3 | — | 1.3 | 3.3 | — | 3.3 | ||||||||||||||||||||||||
Gain from sale of ISC, net of tax | — | — | — | — | — | (3.5 | ) | — | (3.5 | ) | ||||||||||||||||||||||
Pension curtailment gain | (21.0 | ) | — | (21.0 | ) | — | (21.0 | ) | — | — | — | |||||||||||||||||||||
Gain on sale of assets | (6.6 | ) | — | (6.6 | ) | — | (6.6 | ) | (4.7 | ) | — | (4.7 | ) | |||||||||||||||||||
Change in: | ||||||||||||||||||||||||||||||||
Receivables | (15.4 | ) | — | (15.4 | ) | — | (15.4 | ) | (204.7 | ) | — | (204.7 | ) | |||||||||||||||||||
Inventories | 108.2 | 0.6 | 108.8 | 6.5 | 115.3 | (82.5 | ) | (2.3 | ) | (84.8 | ) | |||||||||||||||||||||
Other assets and income tax receivable | (1.4 | ) | (0.6 | ) | (2.0 | ) | — | (2.0 | ) | 3.7 | 0.9 | 4.6 | ||||||||||||||||||||
Accounts payable | (40.9 | ) | — | (40.9 | ) | — | (40.9 | ) | 96.1 | — | 96.1 | |||||||||||||||||||||
Accrued liabilities | (8.9 | ) | — | (8.9 | ) | — | (8.9 | ) | 3.0 | — | 3.0 | |||||||||||||||||||||
Accrued taxes payable | (44.3 | ) | — | (44.3 | ) | — | (44.3 | ) | 6.1 | — | 6.1 | |||||||||||||||||||||
Other items | (1.3 | ) | — | (1.3 | ) | — | (1.3 | ) | (1.6 | ) | — | (1.6 | ) | |||||||||||||||||||
Net adjustments | 31.3 | 0.1 | 31.4 | 4.0 | 35.4 | (169.0 | ) | (1.4 | ) | (170.4 | ) | |||||||||||||||||||||
Net cash provided by (used in) operating activities | 127.2 | — | 127.2 | — | 127.2 | (118.3 | ) | — | (118.3 | ) | ||||||||||||||||||||||
Investing Activities: | ||||||||||||||||||||||||||||||||
Acquisitions, net of cash acquired | (410.3 | ) | — | (410.3 | ) | — | (410.3 | ) | (37.9 | ) | — | (37.9 | ) | |||||||||||||||||||
Capital expenditures | (24.3 | ) | — | (24.3 | ) | — | (24.3 | ) | (21.4 | ) | — | (21.4 | ) | |||||||||||||||||||
Investment in joint venture | (0.7 | ) | — | (0.7 | ) | — | (0.7 | ) | (2.0 | ) | — | (2.0 | ) | |||||||||||||||||||
Loan to joint venture | — | — | — | — | — | (3.2 | ) | — | (3.2 | ) | ||||||||||||||||||||||
Loan repayment from joint venture | — | — | — | — | — | 2.0 | — | 2.0 | ||||||||||||||||||||||||
Proceeds from sales of assets | 19.6 | — | 19.6 | — | 19.6 | 16.0 | — | 16.0 | ||||||||||||||||||||||||
Net cash used in investing activities | (415.7 | ) | — | (415.7 | ) | — | (415.7 | ) | (46.5 | ) | — | (46.5 | ) | |||||||||||||||||||
Financing Activities: | ||||||||||||||||||||||||||||||||
Repayment of debt assumed in acquisition | (234.0 | ) | — | (234.0 | ) | — | (234.0 | ) | (13.5 | ) | — | (13.5 | ) | |||||||||||||||||||
Proceeds from credit facility borrowings | 1,490.6 | — | 1,490.6 | — | 1,490.6 | 486.0 | — | 486.0 | ||||||||||||||||||||||||
Repayment of credit facility borrowings | (961.3 | ) | — | (961.3 | ) | — | (961.3 | ) | (305.0 | ) | — | (305.0 | ) | |||||||||||||||||||
Net short-term proceeds/(repayments) under credit facility | 27.6 | — | 27.6 | — | 27.6 | (6.0 | ) | — | (6.0 | ) | ||||||||||||||||||||||
Credit facility issuance costs | (10.1 | ) | — | (10.1 | ) | — | (10.1 | ) | (1.2 | ) | — | (1.2 | ) | |||||||||||||||||||
Bond issuance costs | (0.6 | ) | — | (0.6 | ) | — | (0.6 | ) | — | — | — | |||||||||||||||||||||
Net increase/(decrease) in book overdrafts | (5.6 | ) | — | (5.6 | ) | — | (5.6 | ) | 20.5 | — | 20.5 | |||||||||||||||||||||
Dividends paid | (3.9 | ) | — | (3.9 | ) | — | (3.9 | ) | (3.9 | ) | — | (3.9 | ) | |||||||||||||||||||
Proceeds from exercise of common stock options | 0.9 | — | 0.9 | — | 0.9 | 1.6 | — | 1.6 | ||||||||||||||||||||||||
Net cash provided by financing activities | 303.6 | — | 303.6 | — | 303.6 | 178.5 | — | 178.5 | ||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 15.1 | — | 15.1 | — | 15.1 | 13.7 | — | 13.7 | ||||||||||||||||||||||||
Effect of exchange rate changes on cash | (0.4 | ) | — | (0.4 | ) | — | (0.4 | ) | 1.2 | — | 1.2 | |||||||||||||||||||||
Net change in cash and cash equivalents | 14.7 | — | 14.7 | — | 14.7 | 14.9 | — | 14.9 | ||||||||||||||||||||||||
Cash and cash equivalents-beginning of period | 18.4 | — | 18.4 | — | 18.4 | 13.7 | — | 13.7 | ||||||||||||||||||||||||
Cash and cash equivalents-end of period | $ | 33.1 | $ | — | $ | 33.1 | $ | — | $ | 33.1 | $ | 28.6 | $ | — | $ | 28.6 | ||||||||||||||||
9
RYERSON INC. (formerly Ryerson Tull, Inc.) AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions)
| At September 30, 2005 | At December 31, 2004 | |||||||||||||||||||||||||||||||
| As previously reported | Restatement adjustment | As restated | Change in accounting | As adjusted | As previously reported | Restatement adjustment | As restated | |||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 33.1 | $ | — | $ | 33.1 | $ | — | $ | 33.1 | $ | 18.4 | $ | — | $ | 18.4 | ||||||||||||||||
Restricted cash | 0.6 | — | 0.6 | — | 0.6 | 0.8 | — | 0.8 | ||||||||||||||||||||||||
Receivables less provision for allowances, claims and doubtful accounts | 724.4 | — | 724.4 | — | 724.4 | 465.4 | — | 465.4 | ||||||||||||||||||||||||
Inventories | 898.7 | 5.3 | 904.0 | (6.5 | ) | 897.5 | 601.0 | 5.9 | 606.9 | |||||||||||||||||||||||
Prepaid expenses and other assets | 18.7 | 1.1 | 19.8 | — | 19.8 | 2.6 | — | 2.6 | ||||||||||||||||||||||||
Deferred income taxes | — | — | — | — | — | 9.8 | 0.2 | 10.0 | ||||||||||||||||||||||||
Total current assets | 1,675.5 | 6.4 | 1,681.9 | (6.5 | ) | 1,675.4 | 1,098.0 | 6.1 | 1,104.1 | |||||||||||||||||||||||
Investments and advances | 22.1 | — | 22.1 | — | 22.1 | 18.0 | — | 18.0 | ||||||||||||||||||||||||
Property plant and equipment, at cost, less accumulated depreciation | 402.7 | — | 402.7 | — | 402.7 | 239.3 | — | 239.3 | ||||||||||||||||||||||||
Deferred income taxes | 142.0 | 2.6 | 144.6 | — | 144.6 | 151.9 | 2.6 | 154.5 | ||||||||||||||||||||||||
Intangible pension asset | 9.0 | — | 9.0 | — | 9.0 | 9.0 | — | 9.0 | ||||||||||||||||||||||||
Other intangibles | 11.8 | — | 11.8 | — | 11.8 | — | — | — | ||||||||||||||||||||||||
Goodwill | 67.3 | (0.5 | ) | 66.8 | — | 66.8 | — | — | — | |||||||||||||||||||||||
Deferred charges and other assets | 24.5 | — | 24.5 | — | 24.5 | 16.1 | (0.2 | ) | 15.9 | |||||||||||||||||||||||
Total assets | $ | 2,354.9 | $ | 8.5 | $ | 2,363.4 | $ | (6.5 | ) | $ | 2,356.9 | $ | 1,532.3 | $ | 8.5 | $ | 1,540.8 | |||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||||||||
Accounts payable | $ | 273.2 | $ | — | $ | 273.2 | $ | — | $ | 273.2 | $ | 222.3 | $ | — | $ | 222.3 | ||||||||||||||||
Accrued liabilities: | ||||||||||||||||||||||||||||||||
Salaries, wages and commissions | 43.9 | — | 43.9 | — | 43.9 | 31.9 | — | 31.9 | ||||||||||||||||||||||||
Income and other taxes | 11.5 | 1.9 | 13.4 | — | 13.4 | 50.9 | 1.7 | 52.6 | ||||||||||||||||||||||||
Other accrued liabilities | 50.4 | (0.1 | ) | 50.3 | (2.5 | ) | 47.8 | 18.4 | — | 18.4 | ||||||||||||||||||||||
Short-term credit facility borrowings | 27.6 | — | 27.6 | — | 27.6 | — | — | — | ||||||||||||||||||||||||
Current portion of long-term debt | 100.1 | — | 100.1 | — | 100.1 | — | — | — | ||||||||||||||||||||||||
Total current liabilities | 506.7 | 1.8 | 508.5 | (2.5 | ) | 506.0 | 323.5 | 1.7 | 325.2 | |||||||||||||||||||||||
Long-term debt | 955.0 | — | 955.0 | — | 955.0 | 526.2 | — | 526.2 | ||||||||||||||||||||||||
Deferred employee benefits and other credits | 361.7 | — | 361.7 | — | 361.7 | 249.8 | — | 249.8 | ||||||||||||||||||||||||
Total liabilities | 1,823.4 | 1.8 | 1,825.2 | (2.5 | ) | 1,822.7 | 1,099.5 | 1.7 | 1,101.2 | |||||||||||||||||||||||
Commitments and contingencies | ||||||||||||||||||||||||||||||||
Stockholders’ Equity | ||||||||||||||||||||||||||||||||
Preferred stock | 0.1 | — | 0.1 | — | 0.1 | 0.1 | — | 0.1 | ||||||||||||||||||||||||
Common stock | 50.6 | — | 50.6 | — | 50.6 | 50.6 | — | 50.6 | ||||||||||||||||||||||||
Capital in excess of par value | 853.6 | — | 853.6 | — | 853.6 | 857.5 | — | 857.5 | ||||||||||||||||||||||||
Retained earnings | 461.9 | 5.4 | 467.3 | (4.0 | ) | 463.3 | 370.0 | 5.5 | 375.5 | |||||||||||||||||||||||
Restricted stock awards | (0.6 | ) | — | (0.6 | ) | — | (0.6 | ) | (0.1 | ) | — | (0.1 | ) | |||||||||||||||||||
Treasury stock at cost | (739.5 | ) | — | (739.5 | ) | — | (739.5 | ) | (746.2 | ) | — | (746.2 | ) | |||||||||||||||||||
Accumulated other comprehensive income | (94.6 | ) | 1.3 | (93.3 | ) | — | (93.3 | ) | (99.1 | ) | 1.3 | (97.8 | ) | |||||||||||||||||||
Total stockholders’ equity | 531.5 | 6.7 | 538.2 | (4.0 | ) | 534.2 | 432.8 | 6.8 | 439.6 | |||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 2,354.9 | $ | 8.5 | $ | 2,363.4 | $ | (6.5 | ) | $ | 2,356.9 | $ | 1,532.3 | $ | 8.5 | $ | 1,540.8 | |||||||||||||||
10
NOTE 3/INVENTORIES
Inventories were classified as follows (in millions):
| September 30, 2005 | December 31, 2004 | |||||
| (restated) | (restated) | |||||
In process and finished products | $ | 896.9 | $ | 606.7 | ||
Supplies | 0.6 | 0.2 | ||||
Total | $ | 897.5 | $ | 606.9 | ||
The difference between replacement cost and current cost of inventory as compared to the stated LIFO value was $277 million and $335 million at September 30, 2005 and December 31, 2004, respectively. Approximately 88% and 93% of inventories are accounted for under the LIFO method at September 30, 2005 and December 31, 2004, respectively. Non-LIFO inventories consist primarily of inventory at our foreign facilities accounted for by using the weighted-average cost method.
Effective January 1, 2005, the Company changed its method of applying LIFO inventory costing for the domestic component of its inventory. The change reduced the number of pools and combined inventory items with similarities into three pools consistent with our significant product lines. The accounting change is also in line with Company’s Integris Metals’ integration plan and the January 1, 2006 planned merger of the Company’s U.S. operating subsidiaries into its Joseph T. Ryerson and Son, Inc. subsidiary. Management believes that the change in application of the LIFO method of valuing inventory is preferable because it results in a better matching of current costs with current revenues. The cumulative effect of this accounting change for the periods prior to January 1, 2005 is not determinable. Accordingly, such change has been accounted for prospectively from January 1, 2005. In addition, pro forma amounts prior to January 1, 2005 cannot be reasonably estimated and have not been disclosed.
Cost of material sold after the change in application of the LIFO inventory costing method was $3.1 million and $6.5 million higher for the three and nine month periods ended September 30, 2005 than it would have been under the previous LIFO method. The impact of the change on net income for the three and nine month periods ended September 30, 2005 was an after-tax charge of $1.9 million and $4.0 million, or $0.08 and $0.15 diluted earnings per share, respectively.
NOTE 4/EARNINGS PER SHARE
Dollars and Shares in Millions (except per share data) | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
| (restated) | (restated) | (restated) | (restated) | |||||||||
Basic earnings per share | ||||||||||||
Income from continuing operations | $ | 30.7 | $ | 15.3 | $ | 91.8 | $ | 48.6 | ||||
Less preferred stock dividends | 0.1 | — | 0.2 | 0.2 | ||||||||
Income from continuing operations available to common shareholders | $ | 30.6 | $ | 15.3 | $ | 91.6 | $ | 48.4 | ||||
Discontinued operations - adjustment to the gain on sale | — | 2.3 | — | 3.5 | ||||||||
Net income available to common stockholders | $ | 30.6 | $ | 17.6 | $ | 91.6 | $ | 51.9 | ||||
Average shares of common stock outstanding | 25.2 | 25.0 | 25.2 | 24.9 | ||||||||
Basic earnings per share from continuing operations | $ | 1.22 | $ | 0.61 | $ | 3.64 | $ | 1.95 | ||||
Discontinued operations - adjustment to the gain on sale | — | 0.09 | — | 0.14 | ||||||||
Basic earnings per share | $ | 1.22 | $ | 0.70 | $ | 3.64 | $ | 2.09 | ||||
Diluted earnings per share | ||||||||||||
Income from continuing operations available to common stockholders | $ | 30.6 | $ | 15.3 | $ | 91.6 | $ | 48.4 | ||||
Discontinued operations - adjustment to the gain on sale | — | 2.3 | — | 3.5 | ||||||||
Effect of convertible preferred stock | 0.1 | — | 0.2 | 0.2 | ||||||||
Net income available to common stockholders and assumed conversions | $ | 30.7 | $ | 17.6 | $ | 91.8 | $ | 52.1 | ||||
Average shares of common stock outstanding | 25.2 | 25.0 | 25.2 | 24.9 | ||||||||
Dilutive effect of stock options | 0.7 | 0.6 | 0.6 | 0.6 | ||||||||
Stock based compensation | 0.1 | — | — | 0.1 | ||||||||
Convertible preferred stock | 0.1 | 0.1 | 0.1 | 0.1 | ||||||||
Shares outstanding for diluted earnings per share calculation | 26.1 | 25.7 | 25.9 | 25.7 | ||||||||
Diluted earnings per share from continuing operations | $ | 1.18 | $ | 0.60 | $ | 3.54 | $ | 1.89 | ||||
Discontinued operations - adjustment to the gain on sale | — | 0.09 | — | 0.14 | ||||||||
Diluted earnings per share | $ | 1.18 | $ | 0.69 | $ | 3.54 | $ | 2.03 | ||||
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Options to purchase 936,497 shares of common stock at prices ranging from $19.56 per share to $33.22 per share were outstanding during the third quarter and first nine months of 2005, but were not included in the computation of diluted earnings per share (“EPS”) because the options’ exercise price was greater than the average market price of the common shares during those periods. In the third quarter and the first nine months of 2004, options to purchase 1,564,890 shares of common stock at prices ranging from $16.03 per share to $38.35 per share were outstanding, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares during those periods.
Upon conversion of the Company’s 3.50% Convertible Senior Notes due 2024 (the “2024 Notes”), the holder of each 2024 Note will receive cash equal to the lesser of the aggregate principal amount of the 2024 Notes being converted and the Company’s total conversion obligation (the market value of the common stock into which the 2024 Notes are convertible), and common stock in respect of the remainder. During the third quarter and first nine months of 2005, the Company’s average share price has not exceeded the conversion price of the 2024 Notes, therefore the conversion value was less than the principal amount of the 2024 Notes. Under the net share settlement method and in accordance with EITF 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” there were no potential shares issuable under the 2024 Notes to be used in the calculation of diluted EPS. Therefore, the shares used in the calculation of diluted EPS exclude the potential shares contingently issuable under the Company’s 3.50% Convertible Senior Notes due 2024 because those potential shares are not dilutive. The maximum number of shares the Company may issue with respect to the 2024 Notes is 11,872,455.
NOTE 5/STOCK OPTION PLANS
The Company has adopted the disclosure-only provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Accordingly, no compensation cost has been recognized for the stock option plans. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation for the three-month and nine-month periods ended September 30 of 2005, and 2004, respectively:
| (In Millions, Except Per Share Data) | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
| (restated) | (restated) | (restated) | (restated) | |||||||||
Net income applicable to common stock - as reported | $ | 30.6 | $ | 17.6 | $ | 91.6 | $ | 51.9 | ||||
Deduct: Total stock-based employee compensation expense determined under fair value method for all stock option awards, net of related tax effects | 0.2 | 0.2 | 0.5 | 0.6 | ||||||||
Net income applicable to common stock - pro forma | $ | 30.4 | $ | 17.4 | $ | 91.1 | $ | 51.3 | ||||
Earnings per share: | ||||||||||||
Basic - as reported | $ | 1.22 | $ | 0.70 | $ | 3.64 | $ | 2.09 | ||||
Basic - pro forma | $ | 1.21 | $ | 0.70 | $ | 3.62 | $ | 2.07 | ||||
Diluted - as reported | $ | 1.18 | $ | 0.69 | $ | 3.54 | $ | 2.03 | ||||
Diluted - pro forma | $ | 1.16 | $ | 0.68 | $ | 3.51 | $ | 2.01 | ||||
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NOTE 6/RESTRUCTURING RESERVE
The following summarizes restructuring accrual activity for the first nine months ended September 30, 2005:
| (In Millions) | ||||||||||||
Employee related costs | Tenancy and other costs | Total restructuring costs | ||||||||||
Balance at January 1, 2005 | $ | 1.0 | $ | 2.5 | $ | 3.5 | ||||||
Restructuring charges | 2.4 | — | 2.4 | |||||||||
Cash payments | (0.4 | ) | (0.3 | ) | (0.7 | ) | ||||||
Non-cash utilization of reserve | (0.8 | ) | — | (0.8 | ) | |||||||
Balance at March 31, 2005 | 2.2 | 2.2 | 4.4 | |||||||||
Restructuring charges | 0.6 | — | 0.6 | |||||||||
Cash payments | (0.6 | ) | (0.1 | ) | (0.7 | ) | ||||||
Non-cash utilization of reserve | (0.4 | ) | — | (0.4 | ) | |||||||
Balance at June 30, 2005 | 1.8 | 2.1 | 3.9 | |||||||||
Restructuring charges | 0.3 | — | 0.3 | |||||||||
Cash payments | (0.7 | ) | (0.2 | ) | (0.9 | ) | ||||||
Non-cash utilization of reserve | (0.1 | ) | — | (0.1 | ) | |||||||
Reclassifications | (0.1 | ) | 0.1 | — | ||||||||
Balance at September 30, 2005 | $ | 1.2 | $ | 2.0 | $ | 3.2 | ||||||
2005
The Company recorded a charge of $2.4 million in the first quarter and additional charges of $0.6 million in the second quarter and $0.3 million in the third quarter due to workforce reductions resulting from the integration of Integris Metals with the Company. The charges consist of costs for employees that were employed by the Company prior to the acquisition, including severance for 24 employees and other future cash outlays totaling $2.0 million and non-cash costs totaling $1.3 million for pensions and other post-retirement benefits. The September 30, 2005, accrual balance of $1.2 million will be paid through mid-2007. The Company may record additional charges for workforce reductions related to employees that were employed by the Company prior to the acquisition of Integris Metals as the integration process continues.
2004
The 2004 restructuring and plant closure costs totaled $3.6 million for facility consolidations and workforce reductions. The charge consisted of employee-related costs. The restructuring actions associated with the charge have been completed. During the third quarter of 2005, the Company completed the utilization of the reserve.
2003
In 2003, the Company recorded a charge of $5.3 million as a result of facility consolidations and workforce reductions. The charge consisted of employee-related costs. The Company also recorded a $0.9 million charge for additional rent at a facility that was closed in the 2000 restructuring. The restructuring actions associated with the 2003 charges have been completed. During the third quarter of 2005, the Company completed the utilization of the $5.3 million reserve.
NOTE 7/COMMITMENTS AND CONTINGENCIES
Ryerson Tull and its subsidiary Integris Metals are each named defendants in antitrust litigation. The Company believes that this suit is without merit and has answered the complaint denying all claims and allegations. The trial court entered judgment on June 15, 2004 sustaining the summary judgment motion of all of the defendants on all claims. On September 15, 2005, the U.S. Court of Appeals for the Tenth Circuit heard oral arguments on plaintiff’s appeal. The Company cannot determine at this time whether any potential liability related to this litigation would materially affect its financial position, results of operations, or cash flows.
One of Integris Metals’ predecessors, RASCO, sold approximately 736,000 pounds of aluminum plate for use in the Northwest marine industry during the period RASCO was a division of Reynolds Metals Company. The aluminum plate, manufactured by Alcan, has now been determined to be unsuitable for marine use. Alcoa, the parent company of Reynolds Metals Company, has agreed to provide Integris Metals with defense and indemnity as to legal matters and claims associated
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with this matter for shipments prior to November 1, 2001. Based on the percentage of product purchased and shipped after November 2001, Integris Metals has recorded a $250,000 liability at December 31, 2004, related to its exposure. Alcoa has also organized an aluminum boat solutions team to identify and notify customers, involve the U.S. Coast Guard in inspection protocols and resolve any claims related to this matter.
As of September 30, 2005, there has been no change in the status of the antitrust litigation or the aluminum plate claim since the end of 2004.
In the third quarter of 2003, the Company and G. Collado S.A. de C.V. formed Coryer, S.A. de C.V. (“Coryer”), a joint venture that enables the Company to provide expanded service capability in Mexico. The Company has guaranteed the borrowings of Coryer under Coryer’s credit facility. At September 30, 2005, the amount of the guaranty was $4.2 million.
NOTE 8/RETIREMENT BENEFITS
During the third quarter of 2005, the Company adopted a change to freeze the benefits accrued under the Integris Non-Union Pension Plan, a defined benefit pension plan, for certain salaried and wage employees of Integris Metals as of December 31, 2005, and instituted a defined contribution plan effective January 1, 2006. As a result of this action, the Company recognized a pension curtailment gain of $21.0 million in the third quarter of 2005 in accordance with FASB Statement No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.” This curtailment gain does not impact the net periodic benefit cost presented below.
The following tables summarizes the components of net periodic benefit cost for the three-month and nine-month periods ended September 30 of 2005 and 2004 for employees covered by the Ryerson Tull Pension Plan, the Integris Non-Union Pension Plan, the Integris Union Pension Plan and postretirement benefits other than pensions:
(In Millions) Three Months Ended September 30, | ||||||||||||||||
| Pension Benefits | Other Benefits | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Components of net periodic benefit cost | ||||||||||||||||
Service cost | $ | 2 | $ | 1 | $ | 1 | $ | 1 | ||||||||
Interest cost | 11 | 6 | 3 | 2 | ||||||||||||
Expected return on assets | (11 | ) | (7 | ) | — | — | ||||||||||
Amortization of prior service cost | — | — | (1 | ) | (1 | ) | ||||||||||
Recognized actuarial loss | 3 | 2 | 1 | 1 | ||||||||||||
Net periodic benefit cost | $ | 5 | $ | 2 | $ | 4 | $ | 3 | ||||||||
(In Millions) Nine Months Ended September 30, | ||||||||||||||||
| Pension Benefits | Other Benefits | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Components of net periodic benefit cost | ||||||||||||||||
Service cost | $ | 7 | $ | 2 | $ | 3 | $ | 2 | ||||||||
Interest cost | 30 | 19 | 10 | 8 | ||||||||||||
Expected return on assets | (33 | ) | (22 | ) | — | — | ||||||||||
Amortization of prior service cost | 1 | 1 | (3 | ) | (3 | ) | ||||||||||
Recognized actuarial loss | 9 | 6 | 2 | 2 | ||||||||||||
Net periodic benefit cost | $ | 14 | $ | 6 | $ | 12 | $ | 9 | ||||||||
Contributions
The Company has no required ERISA contributions for 2005, but elected to make a voluntary contribution of $10.3 million to improve the funded ratio of the Ryerson Tull and the Integris Metals pension plans during the third quarter of 2005. At September 30, 2005, the Company does not have an estimate of potential contributions in the next twelve months.
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NOTE 9/ACQUISITIONS
On January 4, 2005, Ryerson Tull acquired all of the capital stock of Integris Metals for a cash purchase price of $410 million, plus assumption of approximately $234 million of Integris Metals’ debt. The Company has also incurred fees of $1.4 million in connection with the acquisition. Integris Metals is the fourth largest metals service center in North America with leading market positions in aluminum and stainless steel. The Company paid for the acquisition with funds borrowed under the Company’s new credit facility.
The Company is in the process of finalizing third-party valuations of property, plant and equipment and intangible assets, and has not completed its assessment of exit costs related to the acquisition. Therefore, the allocation of the purchase price is subject to revision. Such revision could result in a material adjustment to the recorded assets and liabilities assumed.
On June 23, 2005, the Board of Directors of the Company approved a preliminary plan of facility consolidations and organizational restructuring resulting from the Company’s acquisition of Integris Metals. The detailed plan to integrate the operations of Integris Metals has not been completed. At this time, the Company expects to record exit costs of approximately $8 million to $12 million as part of the allocation of the acquisition cost of Integris Metals. As of September 30, 2005, the Company has recorded an $8.2 million liability for exit costs related to the acquisition of Integris Metals. The liability consists of future cash outlays for Integris Metals employee-related costs, including severance and other post-employment benefits, totaling $3.8 million, future cash outlays for tenancy and other costs totaling $3.3 million and non-cash costs of $1.1 million for pensions and other post-retirement benefits. During the first nine months of 2005, the Company made cash payments of $3.0 million for these employee-related and tenancy and other costs and utilized the $1.1 million reserve for pensions and other post-retirement benefits. The September 30, 2005 accrual balance of $4.1 million will be paid through 2010. The Company expects to finalize the allocation of the acquisition cost by the end of 2005, when the detailed integration plan is completed.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed for Integris Metals at January 4, 2005:
(In Millions) At January 4, 2005 | ||||||||
Cash and cash equivalents | $ | 1.1 | ||||||
Accounts receivable | 241.5 | |||||||
Inventories | 404.0 | |||||||
Other current assets | 13.9 | |||||||
Property, plant and equipment | 176.6 | |||||||
Intangible assets | 14.7 | |||||||
Goodwill | 66.8 | |||||||
Other assets | 10.8 | |||||||
Total assets acquired | 929.4 | |||||||
Current liabilities | (159.7 | ) | ||||||
Long-term debt | (234.0 | ) | ||||||
Deferred employee benefits and other credits | (124.3 | ) | ||||||
Total liabilities assumed | (518.0 | ) | ||||||
Net assets acquired | $ | 411.4 | ||||||
The financial statements of the Company presented in this amended Form 10-Q include the financial results of Integris Metals since the date of acquisition, January 4, 2005. Since the difference between the reported results and pro forma results as if the acquisition had occurred on January 1, 2005 is immaterial, no pro forma third quarter or first nine months of 2005 results are presented. Goodwill recorded in connection with the Integris Metals acquisition is not deductible for income tax purposes.
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The following table compares third quarter and first nine months of 2005 reported results to the unaudited 2004 pro forma results of the Company which reflect the Company’s acquisitions of Integris Metals and J&F Steel, which was acquired on July 30, 2004, the terms of the Company’s amended and restated credit agreement dated January 4, 2005 and the Company’s issuances of $175 million Convertible Senior Notes due 2024 and of $150 million of Senior Notes due 2011, as if all such events had occurred at January 1, 2004 (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Pro Forma Results Reconciliation” for reconciliation of the reported historical results to the pro forma data):
| (In Millions, Except Per Share Data) | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2005 | 2004 Pro forma | 2005 | 2004 Pro forma | |||||||||
| (restated) | (restated) | (restated) | (restated) | |||||||||
Net sales | $ | 1,416.5 | $ | 1,436.1 | $ | 4,476.7 | $ | 3,993.1 | ||||
Income from continuing operations | 30.7 | 23.5 | 91.8 | 85.4 | ||||||||
Net income | 30.7 | 25.8 | 91.8 | 88.9 | ||||||||
Income from continuing operations per share: | ||||||||||||
Basic | $ | 1.22 | $ | 0.94 | $ | 3.64 | $ | 3.43 | ||||
Diluted | $ | 1.18 | $ | 0.91 | $ | 3.54 | $ | 3.32 | ||||
Net income per share: | ||||||||||||
Basic | $ | 1.22 | $ | 1.03 | $ | 3.64 | $ | 3.57 | ||||
Diluted | $ | 1.18 | $ | 1.00 | $ | 3.54 | $ | 3.46 | ||||
NOTE 10/INTANGIBLE ASSETS
The following summarizes the components of intangible assets at September 30, 2005:
(In Millions) At September 30, 2005 | ||||||
Amortized intangible assets | Gross Carrying Amount | Accumulated Amortization | ||||
Customer relationships | $ | 13.8 | $ | 2.9 | ||
Trademarks | 0.9 | — | ||||
Total | $ | 14.7 | $ | 2.9 | ||
The weighted-average amortization period is 4.67 years in total, 3.67 years for customer relationships and 20 years for trademarks.
Aggregate Amortization Expense (Dollars in millions) | |||
For the three months ended September 30, 2005 | $ | 1.0 | |
For the nine months ended September 30, 2005 | $ | 2.9 | |
Estimated Amortization Expense (Dollars in millions) | |||
For the year ended 12/31/05 | $ | 3.9 | |
For the year ended 12/31/06 | $ | 3.9 | |
For the year ended 12/31/07 | $ | 3.9 | |
For the year ended 12/31/08 | $ | 2.3 | |
For the year ended 12/31/09 | $ | — | |
For the years ended thereafter | $ | 0.7 | |
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NOTE 11/LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 2005 and December 31, 2004, respectively:
| (In Millions) | ||||||
| September 30, 2005 | December 31, 2004 | |||||
Credit Facility | $ | 657.6 | $ | 101.0 | ||
9 1/8% Notes due July 15, 2006 | 100.1 | 100.2 | ||||
3.50% Convertible Senior Notes due 2024 | 175.0 | 175.0 | ||||
8 1/4% Senior Notes due 2011 | 150.0 | 150.0 | ||||
Total debt | 1,082.7 | 526.2 | ||||
Less: | ||||||
Short-term credit facility borrowings | 27.6 | — | ||||
9 1/8% Notes due within one year | 100.1 | — | ||||
Long-term debt | $ | 955.0 | $ | 526.2 | ||
Credit Facility
On January 4, 2005, the Company entered into an amendment and restatement of its existing $525 million revolving credit facility, and Integris Metals’ existing $350 million revolving credit facility resulting in a new 5-year, $1.1 billion revolving credit facility (the “New Credit Facility”). The amount of the New Credit Facility may be increased by up to $200 million under certain circumstances.
Proceeds from the initial disbursement of $750 million under the New Credit Facility were used (1) to finance the January 4, 2005 acquisition of Integris Metals, Inc., (2) to repay amounts outstanding under the pre-amended credit facilities and (3) for general corporate purposes. At January 4, 2005, the Company had $753 million outstanding funded borrowing, $28 million of letters of credit issued and $300 million available under the $1.1 billion revolving credit agreement.
At September 30, 2005, the Company had $658 million outstanding funded borrowing under its revolving credit agreement, $29 million of letters of credit issued under the credit facility and $409 million available under the $1.1 billion revolving credit agreement, compared to $373 million available on December 31, 2004 under the then existing $525 million credit facility. At September 30, 2005, the weighted average interest rate on the borrowings under the revolving credit agreement was 5.7 percent.
Amounts outstanding under the New Credit Facility bear interest, at the Company’s option, at a rate determined by reference to the base rate (the greater of the Federal Funds Rate plus 0.50% and JPMorgan Chase Bank’s prime rate) or a LIBOR rate or, for the Company’s Canadian subsidiaries that are borrowers, a rate determined by reference to the Canadian base rate (the greater of the Federal Funds Rate plus 0.50% and JP Morgan Chase Bank’s Toronto Branch’s reference rate for Canadian Dollar loans in Canada), the prime rate (the greater of the Canadian Dollar bankers’ acceptance rate plus 0.50% and JP Morgan Chase Bank’s Toronto Branch’s reference rate for Canadian Dollar loans in Canada) or an “acceptance fee” rate payable upon the sale of a bankers’ acceptance. The spread over the base rate is between 0.75% and 1.50% and the spread over the LIBOR rate and for bankers’ acceptances is between 1.75% and 2.50%, depending on the amount available to be borrowed. Overdue amounts and all amounts owed during the existence of a default bear interest at 2% above the rate otherwise applicable.
In addition to paying interest on outstanding principal, the Company (and certain of its subsidiaries that also are permitted to borrow under the facility) is required to pay a commitment fee of up to 0.50% of the daily average unused portion of the committed loans under the New Credit Facility (i.e., the difference between the commitment amount and the daily average balance of loans plus letter of credit liabilities).
Borrowings under the New Credit Facility are secured by first-priority liens on all of the inventory, accounts receivable, lockbox accounts and the related assets (including proceeds) of the Company, other subsidiary borrowers and certain other U.S. and Canadian subsidiaries that act as guarantors.
In addition to funded borrowings under the New Credit Facility, the transaction documents also provide collateral for certain letters of credit that the Company may obtain thereunder and for certain derivative obligations that are identified by the Company from time to time.
The New Credit Facility permits stock repurchases, the payment of dividends and the prepayment/repurchase of the Company’s debt (including its 9 1/8% Notes due in 2006 (the “2006 Notes”), its 3.50% Convertible Senior Notes due 2024 (the “2024 Notes”)
17
and its 8 1/4% Senior Notes due 2011 (the “2011 Notes” and collectively, with the 2006 Notes and the 2024 Notes, the “Bonds”)). Stock repurchases, dividends and (with respect to the Bonds, if not made from the proceeds of new debt or equity) prepayment/repurchase of the Company’s debt are subject to specific liquidity tests (the breach of which would result in the application of more stringent aggregate limits). In the most restrictive case, the Company (except from the proceeds of new debt or equity) is prohibited from prepaying/repurchasing any of the Bonds until the applicable maturity date and is limited to a maximum payment of $10 million in dividends on common stock (and $200,000 on preferred stock) in any fiscal year, a maximum of $5 million during any twelve month period for equity purchases relating to stock, options or similar rights issued in connection with an employee benefit plan and a maximum of $5 million in aggregate with respect to other stock purchases. Beginning on January 15, 2006, an availability block of $50 million (which will increase to $100 million on April 15, 2006) will be set aside under the New Credit Facility in order to repay the 2006 Notes (which availability block would be reduced appropriately to the extent that the Company prepays any of the 2006 Notes).
The New Credit Facility also contains covenants that, among other things, limit the Company and its subsidiaries with respect to the incurrence of debt, the creation of liens, take or pay contracts, transactions with affiliates, mergers and consolidations, sales of assets and acquisitions. The New Credit Facility also requires that, if availability under the New Credit Facility declines to a certain level, the Company maintain a minimum fixed charge coverage ratio as of the end of each fiscal quarter and provides for a default upon (among other things) the occurrence of a change of control of the Company and a cross-default to other financing arrangements.
The lenders under the New Credit Facility have the ability to reject a borrowing request if there has occurred any event, circumstance or development that has had or could reasonably be expected to have a material adverse effect on the Company. Furthermore, if availability under the New Credit Facility declines to a certain level and the 2006 Notes have been repaid, the lenders would have the right to request the pledge of the stock of certain of the Company’s subsidiaries.
If the Company, any of the other borrowers or any significant subsidiaries of the other borrowers becomes insolvent or commences bankruptcy proceedings, all amounts borrowed under the New Credit Facility will become immediately due and payable.
Proceeds from credit facility borrowings and repayments of credit facility borrowings in the Consolidated Statement of Cash Flows represent borrowings under the Company’s revolving credit agreement with original maturities greater than three months. Net short-term proceeds/(repayments) under the credit facility represent borrowings under the Company’s revolving credit facility with original maturities less than three months.
$100 Million 9 1/8% Notes due 2006
At September 30, 2005, $100 million of the 2006 Notes remain outstanding. Interest on the 2006 Notes is payable semi-annually. The indenture under which the 2006 Notes were issued in 1996 contains covenants limiting, among other things, the creation of certain types of secured indebtedness, sale and leaseback transactions, the repurchase of capital stock, transactions with affiliates and mergers, consolidations and certain sales of assets. In addition, the 2006 Notes restrict the payment of dividends if the Company’s Consolidated Net Worth does not exceed a minimum level. The 2006 Notes also include a cross-default provision in the event of a default in the revolving credit facility.
$175 Million 3.50% Convertible Senior Notes due 2024
At September 30, 2005, $175 million of the 2024 Notes remain outstanding. The 2024 Notes pay interest semi-annually and are fully and unconditionally guaranteed by Ryerson Tull Procurement Corporation, one of the Company’s subsidiaries, on a senior unsecured basis and are convertible into the Company’s common stock at an initial conversion price of approximately $21.37 per share. The 2024 Notes mature on November 1, 2024.
Holders of the 2024 Notes have the right to require the Company to repurchase some or all of their 2024 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the repurchase date, on November 1, 2009, November 1, 2014 and November 1, 2019, or following a fundamental change (as defined in the Indenture dated as of November 10, 2004 by and among Ryerson Tull, Inc. and Ryerson Tull Procurement Corporation and The Bank of New York Trust Company, N.A., as Trustee, for the 2024 Notes (the “2024 Notes Indenture”)) that occurs at any time prior to maturity of the 2024 Notes.
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The 2024 Notes are convertible into shares of the Company’s common stock on or prior to the trading day preceding the stated maturity, under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after December 31, 2004 and before January 1, 2020, if the last reported sale price of the Company’s common stock is greater than or equal to 125% of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) at any time on or after January 1, 2020, if the last reported sale price of the Company’s common stock on any date on or after December 31, 2019 is greater than or equal to 125% of the conversion price; (3) subject to certain limitations, during the five business day period after any five consecutive trading day period in which the trading price per note for each day of that period was less than 98% of the product of the conversion rate and the last reported sale price of the Company’s common stock; (4) if the Company calls the 2024 Notes for redemption; or (5) upon the occurrence of certain corporate transactions.
The 2024 Notes are convertible into the Company’s common stock at an initial conversion price of approximately $21.37 per share (equal to an initial conversion rate of 46.7880 shares per $1,000 principal amount) upon the occurrence of certain events. Article 15 of the 2024 Notes Indenture provides for the conversion terms. The 2024 Notes Indenture provides that the conversion price will be adjusted downward (resulting in more shares of common stock being issued) if the Company (1) issues shares of common stock as a dividend or distribution on outstanding shares of common stock or effects a share split of its common stock, (2) issues to its holders of common stock short-term rights or warrants to subscribe for or purchase shares of common stock at a price per share less than current market value (subject to readjustment to the extent that such rights or warrants are not exercised prior to their expiration), (3) distributes shares of capital stock, evidences of indebtedness or other assets or property to its common stockholders, (4) makes any cash dividend or distribution to common stockholders in excess of $0.05 per share during any fiscal quarter or (5) makes a payment in respect of a tender offer or exchange offer for common stock at a price per share in excess of the then-current market price. Conversely, the conversion price will be adjusted upward to reflect any reverse stock split or share combination involving the common stock. Upon conversion, the Company will deliver cash equal to the lesser of the aggregate principal amount of the 2024 Notes being converted and the Company’s total conversion obligation (the market value of the common stock into which the 2024 Notes are convertible), and common stock in respect of the remainder.
$150 Million 8 1/4% Senior Notes due 2011
At September 30, 2005, $150 million of the 2011 Notes remain outstanding. The 2011 Notes pay interest semi-annually and are fully and unconditionally guaranteed by Ryerson Tull Procurement Corporation, on a senior unsecured basis. The 2011 Notes mature on December 15, 2011. The 2011 Notes contain covenants that limit the Company’s ability to incur additional debt; issue redeemable stock and preferred stock; repurchase capital stock; make other restricted payments including, without limitation, paying dividends and making investments; redeem debt that is junior in right of payment to the 2011 Notes; create liens without securing the 2011 Notes; sell or otherwise dispose of assets, including capital stock of subsidiaries; enter into agreements that restrict the payment of dividends from subsidiaries; merge, consolidate and sell or otherwise dispose of substantially all of the Company’s assets; enter into sale/leaseback transactions; enter into transactions with affiliates; guarantee indebtedness; and enter into new lines of business. These covenants are subject to a number of exceptions and qualifications. If the 2011 Notes receive an investment grade rating from both Moody’s Investors Services Inc. and Standard & Poor’s Ratings Group, certain of these covenants will be suspended for so long as the 2011 Notes continue to be rated as investment grade.
NOTE 12/TAX PROVISION
In the third quarter of 2005, the Company recognized a tax benefit of $2.1 million as a result of a favorable settlement from an IRS examination.
In the second quarter of 2005, the Company recorded a $1.6 million valuation allowance against deferred tax assets as a result of changes in tax laws in the State of Ohio in the period.
NOTE 13/CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
In November 2004, the Company issued the 2024 Notes that are fully and unconditionally guaranteed on a senior unsecured basis by Ryerson Tull Procurement Corporation, an indirect wholly-owned subsidiary of the Company. In December 2004, the Company issued the 2011 Notes that are fully and unconditionally guaranteed by Ryerson Tull Procurement Corporation. The following condensed consolidating financial information as of September 30, 2005 and December 31, 2004 and for the three-month and nine-month periods ended September 30 of 2005 and 2004 is provided in lieu of separate financial statements for the Company and Ryerson Tull Procurement Corporation.
19
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005
(Dollars in millions)
| Parent | Guarantor | Non-guarantor | Eliminations | Consolidated | ||||||||||||||||
| (restated) | (restated) | (restated) | (restated) | (restated) | ||||||||||||||||
Net sales | $ | — | $ | 933.2 | $ | 1,442.2 | $ | (958.9 | ) | $ | 1,416.5 | |||||||||
Cost of materials sold | — | 923.1 | 1,239.1 | (958.9 | ) | 1,203.3 | ||||||||||||||
Gross profit | — | 10.1 | 203.1 | — | 213.2 | |||||||||||||||
Warehousing and delivery | — | — | 80.4 | — | 80.4 | |||||||||||||||
Selling, general and administrative expenses | 0.3 | 0.8 | 92.0 | — | 93.1 | |||||||||||||||
Restructuring and plant closure costs | — | — | 0.3 | — | 0.3 | |||||||||||||||
Pension curtailment gain | — | — | (21.0 | ) | — | (21.0 | ) | |||||||||||||
Gain on sale of assets | — | — | (6.6 | ) | — | (6.6 | ) | |||||||||||||
Operating profit (loss) | (0.3 | ) | 9.3 | 58.0 | — | 67.0 | ||||||||||||||
Other income and expense, net | 0.2 | — | 0.1 | — | 0.3 | |||||||||||||||
Interest and other expense on debt | (10.4 | ) | — | (9.5 | ) | — | (19.9 | ) | ||||||||||||
Intercompany transactions: | ||||||||||||||||||||
Interest expense on intercompany loans | (11.5 | ) | (2.3 | ) | (3.8 | ) | 17.6 | — | ||||||||||||
Interest income on intercompany loans | 1.1 | 0.9 | 15.6 | (17.6 | ) | — | ||||||||||||||
Income (loss) before income taxes | (20.9 | ) | 7.9 | 60.4 | — | 47.4 | ||||||||||||||
Provision (benefit) for income taxes | (9.9 | ) | 3.2 | 23.4 | — | 16.7 | ||||||||||||||
Equity in (earnings) loss of subsidiaries | (41.7 | ) | — | (4.7 | ) | 46.4 | — | |||||||||||||
Net income (loss) | $ | 30.7 | $ | 4.7 | $ | 41.7 | $ | (46.4 | ) | $ | 30.7 | |||||||||
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004
(Dollars in millions)
| Parent | Guarantor | Non-guarantor | Eliminations | Consolidated | ||||||||||||||||
| (restated) | (restated) | (restated) | (restated) | (restated) | ||||||||||||||||
Net sales | $ | — | $ | 746.3 | $ | 907.6 | $ | (755.2 | ) | $ | 898.7 | |||||||||
Cost of materials sold | — | 738.2 | 782.9 | (755.2 | ) | 765.9 | ||||||||||||||
Gross profit | — | 8.1 | 124.7 | — | 132.8 | |||||||||||||||
Warehousing and delivery | — | — | 44.5 | — | 44.5 | |||||||||||||||
Selling, general and administrative expenses | 2.8 | 0.7 | 53.3 | — | 56.8 | |||||||||||||||
Restructuring and plant closure costs | — | — | 3.0 | — | 3.0 | |||||||||||||||
Gain on sale of assets | — | — | (2.3 | ) | — | (2.3 | ) | |||||||||||||
Operating profit (loss) | (2.8 | ) | 7.4 | 26.2 | — | 30.8 | ||||||||||||||
Interest and other expense on debt | (3.1 | ) | — | (2.9 | ) | — | (6.0 | ) | ||||||||||||
Intercompany transactions: | ||||||||||||||||||||
Interest expense on intercompany loans | (6.2 | ) | (1.5 | ) | (5.8 | ) | 13.5 | — | ||||||||||||
Interest income on intercompany loans | 0.5 | 0.9 | 12.1 | (13.5 | ) | — | ||||||||||||||
Income (loss) before income taxes | (11.6 | ) | 6.8 | 29.6 | — | 24.8 | ||||||||||||||
Provision (benefit) for income taxes | (2.1 | ) | 2.7 | 8.9 | 9.5 | |||||||||||||||
Equity in (earnings) loss of subsidiaries | (24.8 | ) | — | (4.1 | ) | 28.9 | — | |||||||||||||
Income (loss) from continuing operations | 15.3 | 4.1 | 24.8 | (28.9 | ) | 15.3 | ||||||||||||||
Discontinued operations – Inland Steel Company | 2.3 | — | — | — | 2.3 | |||||||||||||||
Net income (loss) | $ | 17.6 | $ | 4.1 | $ | 24.8 | $ | (28.9 | ) | $ | 17.6 | |||||||||
20
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2005
(Dollars in millions)
| Parent | Guarantor | Non-guarantor | Eliminations | Consolidated | ||||||||||||||||
| (restated) | (restated) | (restated) | (restated) | (restated) | ||||||||||||||||
Net sales | $ | — | $ | 2,442.0 | $ | 4,541.3 | $ | (2,506.6 | ) | $ | 4,476.7 | |||||||||
Cost of materials sold | — | 2,415.6 | 3,877.2 | (2,506.6 | ) | 3,786.2 | ||||||||||||||
Gross profit | — | 26.4 | 664.1 | — | 690.5 | |||||||||||||||
Warehousing and delivery | — | — | 239.8 | — | 239.8 | |||||||||||||||
Selling, general and administrative expenses | 0.8 | 2.5 | 265.6 | — | 268.9 | |||||||||||||||
Restructuring and plant closure costs | — | — | 3.3 | — | 3.3 | |||||||||||||||
Pension curtailment gain | — | — | (21.0 | ) | — | (21.0 | ) | |||||||||||||
Gain on sale of assets | — | — | (6.6 | ) | — | (6.6 | ) | |||||||||||||
Operating profit (loss) | (0.8 | ) | 23.9 | 183.0 | — | 206.1 | ||||||||||||||
Other revenue and expense, net | 0.3 | — | 2.8 | — | 3.1 | |||||||||||||||
Interest and other expense on debt | (32.0 | ) | — | (27.7 | ) | — | (59.7 | ) | ||||||||||||
Intercompany transactions: | ||||||||||||||||||||
Interest expense on intercompany loans | (29.7 | ) | (6.4 | ) | (12.0 | ) | 48.1 | — | ||||||||||||
Interest income on intercompany loans | 3.7 | 3.2 | 41.2 | (48.1 | ) | — | ||||||||||||||
Income (loss) before income taxes | (58.5 | ) | 20.7 | 187.3 | — | 149.5 | ||||||||||||||
Provision (benefit) for income taxes | (23.6 | ) | 8.3 | 73.0 | 57.7 | |||||||||||||||
Equity in (earnings) loss of subsidiaries | (126.7 | ) | — | (12.4 | ) | 139.1 | — | |||||||||||||
Net income (loss) | $ | 91.8 | $ | 12.4 | $ | 126.7 | $ | (139.1 | ) | $ | 91.8 | |||||||||
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Dollars in millions)
| Parent | Guarantor | Non-guarantor | Eliminations | Consolidated | ||||||||||||||||
| (restated) | (restated) | (restated) | (restated) | (restated) | ||||||||||||||||
Net sales | $ | — | $ | 1,903.7 | $ | 2,419.8 | $ | (1,925.2 | ) | $ | 2,398.3 | |||||||||
Cost of materials sold | — | 1,883.1 | 2,055.1 | (1,925.2 | ) | 2,013.0 | ||||||||||||||
Gross profit | — | 20.6 | 364.7 | — | 385.3 | |||||||||||||||
Warehousing and delivery | — | — | 129.8 | — | 129.8 | |||||||||||||||
Selling, general and administrative expenses | (0.2 | ) | 2.0 | 160.1 | — | 161.9 | ||||||||||||||
Restructuring and plant closure costs | — | — | 3.6 | — | 3.6 | |||||||||||||||
Gain on sale of assets | — | — | (4.7 | ) | — | (4.7 | ) | |||||||||||||
Operating profit (loss) | 0.2 | 18.6 | 75.9 | — | 94.7 | |||||||||||||||
Other revenue and expense, net | 0.1 | — | — | — | 0.1 | |||||||||||||||
Interest and other expense on debt | (9.3 | ) | — | (6.7 | ) | — | (16.0 | ) | ||||||||||||
Intercompany transactions: | ||||||||||||||||||||
Interest expense on intercompany loans | (17.2 | ) | (4.4 | ) | (18.2 | ) | 39.8 | — | ||||||||||||
Interest income on intercompany loans | 1.3 | 3.5 | 35.0 | (39.8 | ) | — | ||||||||||||||
Income (loss) before income taxes | (24.9 | ) | 17.7 | 86.0 | — | 78.8 | ||||||||||||||
Provision (benefit) for income taxes | (3.3 | ) | 7.1 | 26.4 | 30.2 | |||||||||||||||
Equity in (earnings) loss of subsidiaries | (70.2 | ) | — | (10.6 | ) | 80.8 | — | |||||||||||||
Income (loss) from continuing operations | 48.6 | 10.6 | 70.2 | (80.8 | ) | 48.6 | ||||||||||||||
Discontinued operations – Inland Steel Company | 3.5 | — | — | — | 3.5 | |||||||||||||||
Net income (loss) | $ | 52.1 | $ | 10.6 | $ | 70.2 | $ | (80.8 | ) | $ | 52.1 | |||||||||
21
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005
(Dollars in Millions)
| Parent | Guarantor | Non-guarantor | Eliminations | Consolidated | ||||||||||||||||
| (restated) | (restated) | (restated) | (restated) | (restated) | ||||||||||||||||
CASH FLOW FROM OPERATING ACTIVITIES | ||||||||||||||||||||
Net income (loss) | $ | 91.8 | $ | 12.4 | $ | 126.7 | $ | (139.1 | ) | $ | 91.8 | |||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation and amortization | — | — | 30.3 | — | 30.3 | |||||||||||||||
Equity in earnings of subsidiaries | (126.7 | ) | — | (12.4 | ) | 139.1 | — | |||||||||||||
Deferred income taxes | 11.2 | — | 12.2 | — | 23.4 | |||||||||||||||
Deferred employee benefit cost/funding | (0.1 | ) | — | 5.6 | — | 5.5 | ||||||||||||||
Restructuring and plant closure costs | — | — | 1.3 | — | 1.3 | |||||||||||||||
Pension curtailment gain | — | — | (21.0 | ) | — | (21.0 | ) | |||||||||||||
Gain on sale of assets | — | — | (6.6 | ) | — | (6.6 | ) | |||||||||||||
Change in: | ||||||||||||||||||||
Receivables | — | — | (15.4 | ) | — | (15.4 | ) | |||||||||||||
Inventories | — | — | 115.3 | — | 115.3 | |||||||||||||||
Other assets | 4.6 | — | (6.6 | ) | — | (2.0 | ) | |||||||||||||
Intercompany receivable/payable | (50.8 | ) | (48.1 | ) | 98.9 | — | — | |||||||||||||
Accounts payable | (0.8 | ) | (9.1 | ) | (31.0 | ) | — | (40.9 | ) | |||||||||||
Accrued liabilities and accrued taxes payable | (40.5 | ) | 1.1 | (13.8 | ) | — | (53.2 | ) | ||||||||||||
Other items | 1.1 | — | (2.4 | ) | — | (1.3 | ) | |||||||||||||
Net adjustments | (202.0 | ) | (56.1 | ) | 154.4 | 139.1 | 35.4 | |||||||||||||
Net cash provided by (used in) operating activities | (110.2 | ) | (43.7 | ) | 281.1 | — | 127.2 | |||||||||||||
INVESTING ACTIVITIES | ||||||||||||||||||||
Acquisitions, net of cash acquired | (411.4 | ) | — | 1.1 | — | (410.3 | ) | |||||||||||||
Capital expenditures | — | — | (24.3 | ) | — | (24.3 | ) | |||||||||||||
Investment in joint venture | — | — | (0.7 | ) | — | (0.7 | ) | |||||||||||||
Loan to related companies | — | — | (485.3 | ) | 485.3 | — | ||||||||||||||
Loan repayment from related companies | — | 33.3 | 3.7 | (37.0 | ) | — | ||||||||||||||
Proceeds from sales of assets | — | — | 19.6 | — | 19.6 | |||||||||||||||
Net cash provided by (used in) investing activities | (411.4 | ) | 33.3 | (485.9 | ) | 448.3 | (415.7 | ) | ||||||||||||
FINANCING ACTIVITIES | ||||||||||||||||||||
Repayment of debt assumed in acquisition | — | — | (234.0 | ) | — | (234.0 | ) | |||||||||||||
Proceeds from credit facility borrowings | 245.0 | — | 1,245.6 | — | 1,490.6 | |||||||||||||||
Repayment of credit facility borrowings | (150.0 | ) | — | (811.3 | ) | — | (961.3 | ) | ||||||||||||
Net short-term proceeds under credit facility | — | — | 27.6 | — | 27.6 | |||||||||||||||
Proceeds from intercompany borrowing | 485.3 | — | — | (485.3 | ) | — | ||||||||||||||
Repayment of intercompany borrowing | (33.3 | ) | (3.7 | ) | — | 37.0 | — | |||||||||||||
Credit facility issuance costs | (10.1 | ) | — | — | — | (10.1 | ) | |||||||||||||
Bond issuance costs | (0.6 | ) | — | — | — | (0.6 | ) | |||||||||||||
Net decrease in book overdrafts | — | 14.1 | (19.7 | ) | — | (5.6 | ) | |||||||||||||
Dividends paid | (3.9 | ) | — | — | — | (3.9 | ) | |||||||||||||
Proceeds from stock option exercises | 0.9 | — | — | — | 0.9 | |||||||||||||||
Net cash provided by (used in) financing activities | 533.3 | 10.4 | 208.2 | (448.3 | ) | 303.6 | ||||||||||||||
Net increase in cash and cash equivalents | 11.7 | — | 3.4 | — | 15.1 | |||||||||||||||
Effect of exchange rate changes on cash | — | — | (0.4 | ) | — | (0.4 | ) | |||||||||||||
Net change in cash and cash equivalents | 11.7 | — | 3.0 | — | 14.7 | |||||||||||||||
Beginning cash and cash equivalents | 0.6 | — | 17.8 | — | 18.4 | |||||||||||||||
Ending cash and cash equivalents | $ | 12.3 | $ | — | $ | 20.8 | $ | — | $ | 33.1 | ||||||||||
22
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Dollars in Millions)
| Parent | Guarantor | Non-guarantor | Eliminations | Consolidated | ||||||||||||||||
| (restated) | (restated) | (restated) | (restated) | (restated) | ||||||||||||||||
CASH FLOW FROM OPERATING ACTIVITIES | ||||||||||||||||||||
Net income (loss) | $ | 52.1 | $ | 10.6 | $ | 70.2 | $ | (80.8 | ) | $ | 52.1 | |||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation | $ | — | $ | — | $ | 16.3 | $ | — | 16.3 | |||||||||||
Equity in earnings of subsidiaries | (70.2 | ) | — | (10.6 | ) | 80.8 | — | |||||||||||||
Deferred income taxes | (0.3 | ) | — | 12.0 | — | 11.7 | ||||||||||||||
Deferred employee benefit cost/funding | — | — | (12.2 | ) | — | (12.2 | ) | |||||||||||||
Restructuring and plant closure costs | — | — | 3.3 | — | 3.3 | |||||||||||||||
Discontinued operations – adjustment to the gain on sale, net of tax | (3.5 | ) | — | — | — | (3.5 | ) | |||||||||||||
Gain on the sale of assets | — | — | (4.7 | ) | — | (4.7 | ) | |||||||||||||
Change in: | ||||||||||||||||||||
Receivables | 0.6 | — | (205.3 | ) | — | (204.7 | ) | |||||||||||||
Inventories | — | — | (84.8 | ) | — | (84.8 | ) | |||||||||||||
Income tax receivable and other assets | 5.0 | — | (0.4 | ) | — | 4.6 | ||||||||||||||
Intercompany receivable/payable | (1.8 | ) | (108.0 | ) | 109.8 | — | — | |||||||||||||
Accounts payable | (0.5 | ) | 67.5 | 29.1 | — | 96.1 | ||||||||||||||
Accrued liabilities and accrued taxes payable | (0.1 | ) | 0.8 | 8.4 | — | 9.1 | ||||||||||||||
Other items | 0.5 | — | (2.1 | ) | — | (1.6 | ) | |||||||||||||
Net adjustments | (70.3 | ) | (39.7 | ) | (141.2 | ) | 80.8 | (170.4 | ) | |||||||||||
Net cash used in operating activities | (18.2 | ) | (29.1 | ) | (71.0 | ) | — | (118.3 | ) | |||||||||||
INVESTING ACTIVITIES | ||||||||||||||||||||
Acquisitions, net of cash acquired | — | — | (37.9 | ) | — | (37.9 | ) | |||||||||||||
Capital expenditures | — | — | (21.4 | ) | — | (21.4 | ) | |||||||||||||
Investments in joint venture | — | — | (2.0 | ) | — | (2.0 | ) | |||||||||||||
Investment in non-guarantor subsidiaries | (0.7 | ) | — | — | 0.7 | — | ||||||||||||||
Loan to joint venture | (0.5 | ) | — | (2.7 | ) | — | (3.2 | ) | ||||||||||||
Loan repayment from joint venture | — | — | 2.0 | — | 2.0 | |||||||||||||||
Loan to related companies | — | — | (43.7 | ) | 43.7 | — | ||||||||||||||
Loan repayment from related companies | — | 3.8 | — | (3.8 | ) | — | ||||||||||||||
Proceeds from sales of assets | — | — | 16.0 | — | 16.0 | |||||||||||||||
Net cash provided by (used in) investing activities | (1.2 | ) | 3.8 | (89.7 | ) | 40.6 | (46.5 | ) | ||||||||||||
FINANCING ACTIVITIES | ||||||||||||||||||||
Redemption of debt assumed in acquisition | — | — | (13.5 | ) | — | (13.5 | ) | |||||||||||||
Proceeds from credit facility borrowings | — | — | 486.0 | — | 486.0 | |||||||||||||||
Repayment of credit facility borrowings | — | — | (305.0 | ) | — | (305.0 | ) | |||||||||||||
Net short-term repayments under credit facility | — | — | (6.0 | ) | — | (6.0 | ) | |||||||||||||
Proceeds from intercompany borrowing | 39.6 | 4.1 | — | (43.7 | ) | — | ||||||||||||||
Repayment of intercompany borrowing | (3.8 | ) | — | — | 3.8 | — | ||||||||||||||
Capital contribution from parent | — | — | 0.7 | (0.7 | ) | — | ||||||||||||||
Borrowing agreement issuance costs | (1.2 | ) | — | — | — | (1.2 | ) | |||||||||||||
Net increase/(decrease) in book overdrafts | — | 21.2 | (0.7 | ) | — | 20.5 | ||||||||||||||
Dividends paid | (3.9 | ) | — | — | — | (3.9 | ) | |||||||||||||
Stock option exercise | 1.6 | — | — | — | 1.6 | |||||||||||||||
Net cash provided by (used in) financing activities | 32.3 | 25.3 | 161.5 | (40.6 | ) | 178.5 | ||||||||||||||
Net increase in cash and cash equivalents | 12.9 | — | 0.8 | — | 13.7 | |||||||||||||||
Effect of exchange rate changes on cash | — | — | 1.2 | — | 1.2 | |||||||||||||||
Net change in cash and cash equivalents | 12.9 | — | 2.0 | — | 14.9 | |||||||||||||||
Beginning cash and cash equivalents | 1.0 | — | 12.7 | — | 13.7 | |||||||||||||||
Ending cash and cash equivalents | $ | 13.9 | $ | — | $ | 14.7 | $ | — | $ | 28.6 | ||||||||||
23
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2005
(Dollars in Millions)
| Parent | Guarantor | Non-guarantor | Eliminations | Consolidated | ||||||||||||
| (restated) | (restated) | (restated) | (restated) | (restated) | ||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 12.3 | $ | — | $ | 20.8 | $ | — | $ | 33.1 | ||||||
Restricted cash | — | — | 0.6 | — | 0.6 | |||||||||||
Receivables less provision for allowances, claims and doubtful accounts | — | — | 724.4 | — | 724.4 | |||||||||||
Inventories | — | — | 897.5 | — | 897.5 | |||||||||||
Prepaid expenses and other current assets | 3.0 | — | 19.1 | (2.3 | ) | 19.8 | ||||||||||
Intercompany receivable | 23.7 | 271.4 | — | (295.1 | ) | — | ||||||||||
Total Current Assets | 39.0 | 271.4 | 1,662.4 | (297.4 | ) | 1,675.4 | ||||||||||
Investments and advances | 1,582.5 | — | 93.8 | (1,654.2 | ) | 22.1 | ||||||||||
Intercompany notes receivable | — | — | 727.0 | (727.0 | ) | — | ||||||||||
Property, plant and equipment, at cost, less accumulated depreciation | — | — | 402.7 | — | 402.7 | |||||||||||
Deferred income taxes | 81.4 | — | 63.2 | — | 144.6 | |||||||||||
Intangible pension asset | — | — | 9.0 | — | 9.0 | |||||||||||
Other intangibles | — | — | 11.8 | — | 11.8 | |||||||||||
Excess of cost over net assets acquired | — | — | 66.8 | — | 66.8 | |||||||||||
Deferred charges and other assets | 20.0 | — | 4.5 | — | 24.5 | |||||||||||
Total Assets | $ | 1,722.9 | $ | 271.4 | $ | 3,041.2 | $ | (2,678.6 | ) | $ | 2,356.9 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable | $ | 2.5 | $ | 129.8 | $ | 140.9 | $ | — | $ | 273.2 | ||||||
Intercompany payable | — | — | 295.1 | (295.1 | ) | — | ||||||||||
Salaries, wages and commissions | — | — | 43.9 | — | 43.9 | |||||||||||
Other current liabilities | 3.8 | 4.1 | 55.6 | (2.3 | ) | 61.2 | ||||||||||
Current portion of long-term debt | 100.1 | — | 27.6 | — | 127.7 | |||||||||||
Total Current Liabilities | 106.4 | 133.9 | 563.1 | (297.4 | ) | 506.0 | ||||||||||
Long-term debt | 420.0 | — | 535.0 | — | 955.0 | |||||||||||
Long-term debt—Intercompany | 661.2 | 65.8 | — | (727.0 | ) | — | ||||||||||
Deferred employee benefits and other credits | 1.1 | — | 360.6 | — | 361.7 | |||||||||||
Total Liabilities | 1,188.7 | 199.7 | 1,458.7 | (1,024.4 | ) | 1,822.7 | ||||||||||
Commitments and contingent liabilities | ||||||||||||||||
Stockholders’ Equity: | ||||||||||||||||
Preferred stock | 0.1 | — | — | — | 0.1 | |||||||||||
Common stock | 50.6 | — | 11.8 | (11.8 | ) | 50.6 | ||||||||||
Other stockholders’ equity | 483.5 | 71.7 | 1,570.7 | (1,642.4 | ) | 483.5 | ||||||||||
Total Stockholders’ Equity | 534.2 | 71.7 | 1,582.5 | (1,654.2 | ) | 534.2 | ||||||||||
Total Liabilities and Stockholders’ Equity | $ | 1,722.9 | $ | 271.4 | $ | 3,041.2 | $ | (2,678.6 | ) | $ | 2,356.9 | |||||
24
RYERSON INC. ( FORMERLY RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
(Dollars in Millions)
| Parent | Guarantor | Non-guarantor | Eliminations | Consolidated | ||||||||||||
| (restated) | (restated) | (restated) | (restated) | (restated) | ||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 0.6 | $ | — | $ | 17.8 | $ | — | $ | 18.4 | ||||||
Restricted cash | — | — | 0.8 | — | 0.8 | |||||||||||
Receivables less provision for allowances, claims and doubtful accounts | — | — | 465.4 | — | 465.4 | |||||||||||
Inventories | — | — | 606.9 | — | 606.9 | |||||||||||
Prepaid expenses and other assets | 0.8 | — | 1.8 | — | 2.6 | |||||||||||
Deferred income taxes | — | — | 12.7 | (2.7 | ) | 10.0 | ||||||||||
Intercompany receivable | — | 223.3 | — | (223.3 | ) | — | ||||||||||
Total Current Assets | 1.4 | 223.3 | 1,105.4 | (226.0 | ) | 1,104.1 | ||||||||||
Investments and advances | 1,039.9 | — | 77.3 | (1,099.2 | ) | 18.0 | ||||||||||
Intercompany notes receivable | — | — | 245.4 | (245.4 | ) | — | ||||||||||
Property, plant and equipment, at cost, less accumulated depreciation | — | — | 239.3 | — | 239.3 | |||||||||||
Deferred income taxes | 92.6 | — | 61.9 | — | 154.5 | |||||||||||
Intangible pension asset | — | — | 9.0 | — | 9.0 | |||||||||||
Deferred charges and other assets | 13.6 | — | 2.3 | — | 15.9 | |||||||||||
Total Assets | $ | 1,147.5 | $ | 223.3 | $ | 1,740.6 | $ | (1,570.6 | ) | $ | 1,540.8 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable | $ | 3.2 | $ | 124.7 | $ | 94.4 | $ | — | $ | 222.3 | ||||||
Intercompany payable | 27.1 | — | 196.2 | (223.3 | ) | — | ||||||||||
Salaries, wages and commissions | — | — | 31.9 | — | 31.9 | |||||||||||
Deferred income taxes | 2.7 | — | — | (2.7 | ) | — | ||||||||||
Other current liabilities | 39.4 | 3.1 | 28.5 | — | 71.0 | |||||||||||
Total current liabilities | 72.4 | 127.8 | 351.0 | (226.0 | ) | 325.2 | ||||||||||
Long-term debt | 425.2 | — | 101.0 | — | 526.2 | |||||||||||
Long-term debt—intercompany | 209.2 | 36.2 | — | (245.4 | ) | — | ||||||||||
Deferred employee benefits and other credits | 1.1 | — | 248.7 | — | 249.8 | |||||||||||
Total liabilities | 707.9 | 164.0 | 700.7 | (471.4 | ) | 1,101.2 | ||||||||||
Commitments and contingent liabilities | ||||||||||||||||
Stockholders’ Equity: | ||||||||||||||||
Preferred stock | 0.1 | — | — | — | 0.1 | |||||||||||
Common stock | 50.6 | — | 11.8 | (11.8 | ) | 50.6 | ||||||||||
Other stockholders’ equity | 388.9 | 59.3 | 1,028.1 | (1,087.4 | ) | 388.9 | ||||||||||
Total stockholders’ equity | 439.6 | 59.3 | 1,039.9 | (1,099.2 | ) | 439.6 | ||||||||||
Total liabilities and stockholders’ equity | $ | 1,147.5 | $ | 223.3 | $ | 1,740.6 | $ | (1,570.6 | ) | $ | 1,540.8 | |||||
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NOTE 14/RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 123R
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). SFAS 123R requires the cost of employee services received in exchange for an award of equity instruments to be based upon the grant-date fair value of the award (with limited exceptions). Additionally, this cost is to be recognized as expense over the period during which an employee is required to provide services in exchange for the award (usually the vesting period). SFAS 123R eliminates APB 25’s intrinsic value method which the Company has historically used to account for stock option grants.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107) which summarizes the views of the SEC staff regarding the interaction between SFAS 123R and certain SEC rules and regulations. SAB 107 provides guidance on several topics including: valuation methods, the classification of compensation expense, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements, and disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS 123R.
In April 2005, the SEC issued FR-74, “Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Statement of Financial Accounting Standards No. 123 (Revised 2004), SHARE-BASED PAYMENT” (FR-74). FR-74 allows companies to implement SFAS 123R at the beginning of their next fiscal year (January 1, 2006 for the Company), instead of the next reporting period that begins after June 15, 2005. FR-74 does not change the accounting required by SFAS 123R; it only changes the required implementation date of the standard.
The Company has not yet determined the full impact of implementing SFAS 123R, but it is not expected to have a material impact on the Company’s financial position, results of operations or cash flows because the Company ceased granting stock options in 2003. The Company plans to implement SFAS 123R as of January 1, 2006.
FIN 47
In March 2005, the FASB issued FIN 47 which clarifies that the term “conditional asset retirement obligation,” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143), refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement.
Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred — generally upon acquisition, construction, or development and/or through the normal operation of the asset. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005 for the Company).
The Company has not yet determined the full impact of implementing FIN 47, but it is not expected to have a material impact on the Company’s financial position, results of operations or cash flows. The Company plans to implement FIN 47 by December 31, 2005.
FSP 109-1
In December 2004, the FASB issued FASB Staff Positions (FSP) No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”. This FSP provides guidance on how an enterprise should account for the deduction for qualified production activities provided by the American Jobs Act of 2004. The Company is currently evaluating the impact of this new deduction, the benefit of which will be considered in our future tax provisions. The Company does not expect FSP 109-1 will have a material impact on the Company’s financial position, results of operations or cash flows.
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FSP 109-2
In December 2004, the FASB issued FSP No. 109-2. “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (FSP 109-2). This FSP allows additional time for companies to determine how the new law affects a company’s accounting for the deferred tax liabilities on un-remitted foreign earnings. The new law provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated and which meet certain requirements. The Company is currently evaluating whether any of the earnings of its non-U.S. operations will be repatriated in accordance with the terms of this law, but the Company does not expect FSP 109-2 to have a material impact on the Company’s financial position, results of operations or cash flows.
SFAS 151
In November 2004, the FASB issued SFAS 151, “Inventory Costs,” (SFAS 151) an amendment of ARB No. 43, which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS 151 requires idle facility expenses, freight, handling costs and wasted material costs to be recognized as current-period charges. It also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact of SFAS 151, but does not believe it will have a material impact on the Company’s consolidated financial statements.
SFAS 154
In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,” (SFAS 154). This statement replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See disclosure presented on the inside of the front cover of this Quarterly Report on Form 10-Q/A for cautionary information with respect to such forward-looking statements. The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes thereto in Item 1, “FINANCIAL STATEMENTS” in this Quarterly Report on Form 10-Q/A and Item 6 “SELECTED FINANCIAL DATA” and the Company’s Consolidated Financial Statements and related Notes thereto in Item 8 “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
Restatement of Financial Statements
The consolidated financial statements have been restated to correct for errors in the previously reported financial statements as described below. In addition, as described below and as more fully described in Note 3 of the Consolidated Financial Statements, the financial statements have been restated to reflect the impact of a change in the method of applying LIFO inventory costing.
Restatement of previously issued financial statements.We have restated our previously reported financial statements as of December 31, 2004 and for the years ended December 31, 2004 and 2003 and for each of the first three quarters of 2005 and the four quarters of 2004 to correct the classification of metal processing costs, to properly record the impact of nickel surcharges on stainless steel inventory by one of our Canadian subsidiaries, to correct an out-of-period adjustment in our deferred tax liabilities and to record the impact of other immaterial miscellaneous adjustments. This MD&A gives effect to the restatement of the consolidated financial statements. See Note 2 of the Consolidated Financial Statements for further discussion.
Restatement due to accounting change effective January 1, 2005.Effective January 1, 2005, the Company changed its method of applying LIFO inventory costing for the domestic component of its inventory. The impact of the change on net income for the three and nine month periods ended September 30, 2005 was an after-tax charge of $1.9 million and $4.0 million, or $0.08 and $0.15 diluted earnings per share, respectively. The cumulative effect of this accounting change for the periods prior to January 1, 2005 is not determinable. Accordingly, such change has been accounted for prospectively. The change conformed the Company’s inventory valuation for all domestic inventories to a single LIFO method consistent with the Company’s Integris Metals’ integration plan and the planned January 1, 2006 merger of its U.S. operating subsidiaries into its Joseph T. Ryerson and Son, Inc. subsidiary. The changed LIFO methodology combines groups of items with similarities into three LIFO pools tracking the Company’s significant product lines.
Industry and Operating Trends
The Company purchases large quantities of metal products from primary producers and sells these materials in smaller quantities to a wide variety of metals-consuming industries. More than one-half of the metals products sold are processed by the Company by burning, sawing, slitting, blanking, cutting to length or other techniques. The Company sells its products and services to many industries, including machinery manufacturers, fabricated metal products, electrical machinery, transportation equipment, construction, wholesale distributors, and metals mills and foundries. Revenue is recognized at the time of shipment to customers, which is substantially the same as recognizing revenue upon delivery given the proximity of the Company’s distribution sites to its customers.
Sales volume, gross profit and expense control are the principal factors that impact the Company’s profitability:
Sales volume. The Company’s sales volume is driven by market demand, which is largely determined by overall industrial production and conditions in specific industries in which the Company’s customers operate. Increases in sales volume generally enable the Company both to improve purchasing leverage with suppliers, as the Company buys larger quantities of metals inventories, and to reduce operating expenses per ton sold.
Gross profit. Gross profit is the difference between net sales and the cost of materials sold. The Company’s sales prices to its customers are subject to market competition. Achieving acceptable levels of gross profit is dependent on the Company acquiring metals at competitive prices and its ability to manage the impact of changing prices.
Operating expenses. Optimizing business processes and asset utilization to lower fixed expenses such as employee, facility and truck fleet costs which can not be rapidly reduced in times of declining volume, and maintaining low fixed cost structure in times of increasing sales volume, have a significant impact on the Company’s profitability.
The metals service center industry is generally considered cyclical with periods of strong demand and higher prices followed by periods of weaker demand and lower prices due to the cyclical nature of the industries in which the largest consumers of metals operate. The manufacturing sector in North America experienced a significant cyclical downturn from mid-2000 through 2003. During this period, sales volume measured in tons per shipping day decreased and adversely impacted the Company’s (excluding Integris Metals and J&F Steel) financial results. The metals service center industry experienced a significant recovery during 2004, which has continued through the first nine months of 2005, due to global economic factors including increased demand from China and in the United States, decreased imports into the United States, and consolidation in the steelmaking industry, all of which combined to substantially increase metals selling prices.
Integris Metals Acquisition
On January 4, 2005, Ryerson Tull acquired all of the capital stock of Integris Metals for a cash purchase price of $410 million, plus assumption of approximately $234 million of Integris Metals’ debt. Prior to the acquisition, Integris Metals was the fourth largest metals service center in North America with leading market positions in aluminum and stainless steel and the Company was a general line materials (primarily metals) distributor and processor, offering a broad line of sheet, bar, tube and plate products in carbon steel and stainless steel and to a lesser extent, aluminum.
The Integris Metals acquisition has substantially increased the size of the Company. The acquisition approximately doubled the number of service center facilities maintained by the Company; at the acquisition date Integris Metals had 59 service centers, including 14 in Canada, and three dedicated processing facilities. Integris Metals’ net sales for the 52-week period ended December 31, 2004 were $2.0 billion; the Company’s net sales for fiscal year 2004 (which did not include Integris Metals) were $3.3 billion.
The Company expects that the Integris Metals’ acquisition will enhance the efficiency of the Company’s supply chain, shift its product mix to higher-growth stainless and aluminum products, and enable the Company to increase its customer base through its ability to provide a wide array of product offerings, value-added services, and to meet local service needs for available inventory, on-time delivery, competitive prices, quality and rapid response.
The acquisition immediately increased the Company’s earnings. The Company expects to capture annualized cost synergies in excess of $50 million resulting from the consolidation of facilities and integration of administrative functions. The consolidation of facilities and integration of administrative functions will impact approximately 20 facilities and 400 employees. The detailed plan to integrate the operations of Integris Metals has not been completed. The Company has estimated that the expected total pre-tax charge related to the exit and disposal activities will range from $7 million to $11 million, primarily attributable to non-Integris facilities and employees. The charge consists of employee-related costs including severance and post-retirement benefits, and tenancy and other costs. Approximately half of the charge for exit and disposal activities is expected to result in cash expenditures. Most of this charge will be recorded during 2006 in accordance with FASB Statement of Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities and related accounting guidance.
The Company also expects to incur additional operating expenses and cash outflows totaling approximately $5 million to $8 million, primarily for the cost of moving equipment and inventory resulting from the facility closures and consolidation with existing locations during 2006.
In 2004, the Company commenced an upgrade of its systems capability through consolidating its multiple information technology operating platforms onto one integrated SAP platform, with an estimated completion date of late 2007. As previously disclosed, the Company also intends to consolidate systems at Integris Metals, acquired in January of 2005, and J&F Steel, acquired in July of 2004, to the SAP platform. Due to the number of Integris Metals and J&F Steel facilities that will need to be converted, the full implementation of SAP will require additional time and will incur additional capital expenditures and implementation expenses in future fiscal years. The Company now anticipates total expenditures of $65 million for the Company-wide conversion, $32 million of which are capital expenditures, with completion by the end of 2008. Through the third quarter of 2005, the Company has already spent $28 million, $21 million of which were capital expenditures.
Consistent with generally accepted accounting principles (GAAP), the discussion of Company results of operations for the nine months ended September 30, 2005 includes the financial results of Integris Metals for all but the first three days of the period. The inclusion of these results, plus the continuing integration process, may render direct comparison with the results for prior periods less meaningful. Accordingly, the discussion below addresses, where appropriate, trends that management believes are significant, separate and apart from the impact of the Integris Metals’ acquisition.
Supplemental information with comparisons of third quarter and first nine months of 2005 Statement of Operations data to pro forma data for the comparable periods in 2004 is presented in a separate section below under the subheading “Supplemental Information – Pro Forma Comparisons” and in “Pro Forma Results Reconciliation” below.
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Results of Operations - Comparison of Third Quarter 2005 to Third Quarter 2004
The Company continues to report its results as one reportable operating segment with the acquisition of Integris Metals on January 4, 2005 because of the substantial geographic overlap in facilities and similar economic characteristics, customer bases, distribution methods, regulatory environment and products and processes among its operating subsidiaries.
For the third quarter of 2005, the Company reported consolidated net income of $30.7 million, or $1.18 per diluted share, as compared with net income of $17.6 million, or $0.69 per diluted share, in the year-ago quarter.
Included in the third quarter 2005 results are a $21.0 million pension curtailment gain, $12.7 million after-tax or $0.49 per diluted share, a $6.6 million gain, $4.0 million after-tax or $0.15 per diluted share, on the sale of properties in Illinois, Florida and Georgia and a pretax charge of $0.3 million, $0.2 million after-tax or $0.01 per share, associated with workforce reductions resulting from the acquisition of Integris Metals. Of the $0.3 million accrual, $0.2 million represents future cash outflows. The Company expects to realize future annual cost and cash flow savings of $0.3 million from this restructuring action. The Company also recognized an income tax benefit of $2.1 million, or $0.08 per share, as a result of a favorable settlement from an IRS examination in the third quarter of 2005.
Included in the third quarter 2004 results are a pretax charge of $3.0 million, $1.8 million after-tax or $0.07 per share, associated with a plant consolidation and also includes a $2.3 million pretax, $1.4 million after-tax or $0.05 per share, gain on the sale of property in Oregon and Indiana and a $2.3 million, or $0.09 per share, favorable after-tax adjustment to the gain on sale of the Inland Steel Company, a discontinued operation.
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The following table shows the Company’s percentage of sales revenue by major product lines for the third quarter of 2005 and 2004, respectively:
Three Months Ended September 30, | ||||||
Product Line | 2005 | 2004 | ||||
Carbon flat rolled | 25 | % | 40 | % | ||
Stainless and aluminum | 51 | 30 | ||||
Fabrication and carbon plate | 10 | 13 | ||||
Bars, tubing and structurals | 9 | 13 | ||||
Other | 5 | 4 | ||||
Total | 100 | % | 100 | % | ||
Sales volume. Sales for the third quarter of 2005 increased 58 percent to $1,416.5 million from the same period a year ago. The increase in sales was primarily the result of the acquisition of Integris Metals on January 4, 2005. The Company also benefited from one additional month’s sales contribution from J&F Steel, which was purchased on July 30, 2004. Average selling price increased 27 percent, while volume increased 24 percent, from the third quarter of 2004. Tons shipped in the third quarter of 2005 increased to 883,000 from 710,000 in the year-ago period, due entirely to the effect of acquisitions.
Gross profit. Gross profit per ton of $241 in the third quarter of 2005 increased from $187 per ton in the year-ago quarter primarily due to an increased proportion of sales from higher priced stainless steel and aluminum products resulting from the acquisition of Integris Metals. Gross profit as a percent of sales in the third quarter of 2005 increased slightly to 15.1 percent from 14.8 percent a year ago.
Operating expenses. Total operating expenses increased 43 percent to $146.2 million in the third quarter of 2005 from $102.0 million a year ago. Warehousing and delivery expenses increased 81 percent to $80.4 million in the third quarter of 2005 from $44.5 million a year ago. The increase was due to three months’ expenses of Integris Metals ($32.3 million), and to higher delivery costs ($2.6 million) and labor costs ($0.8 million). Selling, general and administrative expenses increased 64 percent to $93.1 million in the third quarter of 2005 from $56.8 million a year ago. The increase was primarily due to three months’ expenses of Integris Metals ($35.4 million) and one month’s expenses of J&F Steel ($0.4 million) and to higher facility integration costs ($1.1 million) and higher stock-based compensation expense ($1.0 million). Third quarter 2005 operating expenses also include the $21.0 million pension curtailment gain, the $6.6 million gain on sales of assets and the $0.3 million restructuring charge discussed above. On a per ton basis, third quarter 2005 total operating expenses increased to $165 per ton from $144 per ton in the year-ago period. Aluminum is lighter in weight than carbon steel, and stainless steel is processed more slowly because of its surface-critical applications. Therefore, with the Company’s product mix shifted toward more aluminum and stainless steel after the acquisition of Integris Metals, operating expenses per ton are higher than historical levels.
Operating profit. For the quarter, the Company reported an operating profit of $67.0 million, or $76 per ton, compared to an operating profit of $30.8 million, or $43 per ton, in the year-ago period. The improvement was largely attributable to the strength in the economic environment, the acquisition of Integris Metals and the pension curtailment gain.
Interest and other expense on debt. Interest and other expense on debt increased to $19.9 million from $6.0 million in the year-ago quarter, primarily due to increased debt levels to fund the Integris Metals acquisition and increased working capital requirements. Interest and other expense on debt in the third quarter of 2005 was unfavorably impacted by the long-term debt issued in the fourth quarter of 2004, the increased borrowings under the amended credit facility, higher interest rates on credit facility debt and increased amortization of debt issuance costs associated with debt issued in the fourth quarter of 2004 and the amendment of the Company’s credit facility in the first quarter of 2005. See “Total Debt” in “Liquidity and Capital Resources” section below for further discussion of outstanding debt.
Provision for income taxes. In the third quarter of 2005, the Company recorded income tax expense of $16.7 million compared to a $9.5 million income tax expense in the third quarter of 2004. The effective tax rate was 35.2% in the third quarter of 2005 compared to 38.3% in the third quarter of 2004. The decrease in the effect tax rate is primarily due to recognizing a $2.1 million tax benefit as a result of a favorable settlement from an IRS examination.
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Results of Operations - Comparison of First Nine Months 2005 to First Nine Months 2004
In the first nine months of 2005, the Company reported consolidated net income of $91.8 million, or $3.54 per diluted share, as compared with net income of $52.1 million, or $2.03 per diluted share, in the year-ago quarter.
Included in the first nine months of 2005 results are a pension curtailment gain of $21.0 million, $12.7 million after-tax or $0.49 per diluted share, a pretax charge of $3.3 million, $2.0 million after-tax or $0.08 per diluted share, associated with workforce consolidations resulting from the acquisition of Integris Metals and a gain on the sale of assets of $6.6 million, $4.0 million after-tax or $0.16 per diluted share.
Included in the first nine months of 2004 results are a pretax charge of $3.6 million, or $2.2 million after-tax or $0.08 per share, associated with plant consolidations and workforce reductions. 2004 also included a $4.7 million pretax, $2.8 million after-tax or $0.11 per share, gain on the sale of property and a $3.5 million, or $0.14 per share, favorable after-tax adjustment to the gain on sale of the Inland Steel Company, a discontinued operation.
The following table shows the Company’s percentage of sales revenue by major product lines for the first nine months of 2005 and 2004, respectively:
Nine Months Ended September 30, | ||||||
Product Line | 2005 | 2004 | ||||
Carbon flat rolled | 25 | % | 37 | % | ||
Stainless and aluminum | 51 | 32 | ||||
Fabrication and carbon plate | 10 | 14 | ||||
Bars, tubing and structurals | 10 | 14 | ||||
Other | 4 | 3 | ||||
Total | 100 | % | 100 | % | ||
Sales volume. Sales in the first nine months of 2005 increased 87 percent to $4,476.7 million from the same period a year ago. The increase in sales was primarily the result of the acquisition of Integris Metals on January 4, 2005. The Company also benefited from seven additional months’ sales contribution from J&F Steel, which was purchased on July 30, 2004. Average selling price increased 48 percent, while volume increased 26 percent, from the first nine months of 2004. Tons shipped in the first nine months of 2005 increased to 2,679,000 from 2,125,000 in the year-ago period, due entirely to the effect of acquisitions.
Gross profit. Gross profit per ton of $258 in the first nine months of 2005 increased from $181 per ton in the year-ago period primarily due to an increased proportion of sales from higher priced stainless steel and aluminum products resulting from the acquisition of Integris Metals. Gross profit as a percent of sales in the first nine months of 2005 declined to 15.4 percent from 16.1 percent a year ago, primarily due to increased material cost surcharges, which are passed through without mark-up to contractual customers.
Operating expenses. Total operating expenses increased 67 percent to $484.4 million in the first nine months of 2005 from $290.6 million a year ago. Warehousing and delivery expenses increased 85 percent to $239.8 million in the first nine months of 2005 from $129.8 million a year ago. The increase was due to nine months’ expenses of Integris Metals ($96.1 million), and to higher delivery costs ($6.5 million), labor costs ($2.1 million), operating supplies ($0.4 million), repair and maintenance costs ($1.0 million) and employee benefit costs ($1.3 million). Selling, general and administrative expenses increased 66 percent to $268.9 million in the first nine months of 2005 from $161.9 million a year ago. The increase was primarily due to nine months’ expenses of Integris Metals ($102.6 million) and seven months’ expenses of J&F Steel ($4.7 million) and to higher professional fees ($1.9 million) and stock-based compensation expense ($1.8 million). First nine month 2005 operating expenses also include the $21.0 million pension curtailment gain, the $6.6 million gain on sale of assets and the $3.3 million restructuring charge discussed above. On a per ton basis, first nine month 2005 total operating expenses increased to $181 per ton from $136 per ton in the year-ago period. Aluminum is lighter in weight than carbon, and stainless is processed more slowly because of its surface-critical applications. Therefore, with the Company’s product mix shifted toward more aluminum and stainless after the acquisition of Integris Metals, operating expenses per ton are higher than historical levels.
Operating profit. For the first nine months of 2005, the Company reported an operating profit of $206.1 million, or $77 per ton, compared to an operating profit of $94.7 million, or $45 per ton, in the year-ago period. The improvement was largely attributable to the strength in the economic environment and the acquisition of Integris Metals.
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Interest and other expense on debt. Interest and other expense on debt increased to $59.7 million in the first nine months of 2005 from $16.0 million in the year-ago period, primarily due to increased debt levels to fund the Integris Metals acquisition and increased working capital requirements. Interest and other expense on debt in the first nine months of 2005 was unfavorably impacted by the long-term debt issued in the fourth quarter of 2004, the increased borrowings under the amended credit facility, higher interest rates on credit facility debt and increased amortization of debt issuance costs associated with debt issued in the fourth quarter of 2004 and the amendment of the Company’s credit facility in the first quarter of 2005. See “Total Debt” in “Liquidity and Capital Resources” section below for further discussion of outstanding debt.
Provision for income taxes. In the first nine months of 2005, the Company recorded income tax expense of $57.7 million compared to a $30.2 million income tax expense in the first nine months of 2004. The effective tax rate was 38.6% in the first nine months of 2005 compared to 38.3% in the first nine months of 2004. The tax expense for the first nine months of 2005 includes recording a $1.6 million valuation allowance against deferred tax assets as a result of tax law changes in the State of Ohio in the second quarter of 2005 and recognizing a benefit of $2.1 million in the third quarter of 2005 for the favorable settlement of an IRS examination.
Supplemental Information – Pro Forma Comparisons
Management’s discussion below reflects its analysis of the pro forma data presented below. Management believes that the comparison of the results of operations for the three months and nine months ended September 30, 2005 with unaudited pro forma 2004 data will assist in understanding trends in the Company’s business for the factors that management considers critical to assessing the Company’s operating and financial performance. The unaudited pro forma 2004 data for both the three-month and nine-month periods presented below reflects the Company’s acquisitions of J&F Steel and Integris Metals and its 2004 issuances of $175 million Convertible Senior Notes due 2024 and of $150 million of Senior Notes due 2011, as if all such events had occurred on January 1, 2004. See “Pro Forma Results Reconciliation” below for reconciliation of historical results to proforma data for these periods.
Comparison of Third Quarter 2005 Statement of Operations Data to Pro Forma Third Quarter 2004 Statement of Operations Data
(Dollars in Millions, Except Per Share Data) Three Months Ended September 30, | ||||
| 2005 | 2004 Pro forma | |||
| (restated) | (restated) | |||
Tons shipped | 883,000 | 903,000 | ||
Net sales | $1,416.5 | $1,436.1 | ||
Gross profit | 213.2 | 229.4 | ||
Operating expenses | 146.2 | 173.8 | ||
Operating profit | 67.0 | 55.6 | ||
Interest and other expense on debt | 19.9 | 16.3 | ||
Income from continuing operations | 30.7 | 23.5 | ||
Diluted earnings per share-from continuing operations | $ 1.18 | $ 0.91 | ||
Sales volume. The 1% decrease in net sales year-over-year reflects a 1% increase in average selling price offset by a 2% tonnage decline. The decline is largely in carbon flat-rolled steel products.
Gross profit.Gross profit of $213.2 million or $241 per ton in the third quarter 2005 declined from $229.4 million, or $254 per ton a year ago pro forma. Gross profit as a percent of sales in the third quarter of 2005 declined to 15.1% from 16.0% a year ago.
Operating expenses. Total operating expenses decreased 15.9% to $146.2 million in the third quarter of 2005 from $173.8 million a year ago pro forma. The 2005 period included a $21 million pension curtailment gain.
Interest and other expense on debt. Interest and other expense on debt increased to $19.9 million from $16.3 million in the year-ago quarter on a pro forma basis, primarily due to increased working capital requirements and higher interest rates on credit facility debt.
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Comparison of First Nine Months 2005 Statement of Operations Data to Pro forma First Nine Months 2004 Statement of Operations Data
(Dollars in Millions, Except Per Share Data) Nine Months Ended September 30, | ||||
| 2005 | 2004 Pro forma | |||
| (restated) | (restated) | |||
Tons shipped | 2,679,000 | 2,817,000 | ||
Net sales | $ 4,476.7 | $ 3,993.1 | ||
Gross profit | 690.5 | 676.3 | ||
Operating expenses | 484.4 | 493.7 | ||
Operating profit | 206.1 | 182.6 | ||
Interest and other expense on debt | 59.7 | 44.9 | ||
Income from continuing operations | 91.8 | 85.4 | ||
Diluted earnings per share - from continuing operations | $ 3.54 | $ 3.32 | ||
Sales volume. The 12% increase in net sales year-over-year reflects an 18% increase in average selling price offset by a 5% tonnage decline. The decline is largely in carbon flat-rolled steel products.
Gross profit.Gross profit of $690.5 million or $258 per ton in the first nine months of 2005 compared favorably to $676.3 million, or $240 per ton a year ago pro forma, mainly due to higher prices in the 2005 period. Gross profit as a percent of sales in the first nine months of 2005 declined to 15.4% from 16.9% a year-ago pro forma, largely due to the substantially higher material cost surcharges, which are passed through without mark-up to contractual customers.
Operating expenses. Total operating expenses declined 1.9% to $484.4 million in the first nine months of 2005 from $493.7 million a year-ago proforma. The first nine months of 2005 included a $21.0 million pension curtailment gain, partially offset by higher delivery costs ($6.0 million), data processing contractors, data network expenses and SAP implementation costs ($3.7 million) and operating supplies ($2.3 million).
Interest and other expense on debt. Interest and other expense on debt increased to $59.7 million from $44.9 million in the first nine months of 2004 on a pro forma basis, primarily due to increased working capital requirements and higher interest rates on credit facility debt.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are cash and cash equivalents, cash flows from operations and borrowing availability under our revolving credit facility. Our principal source of operating cash is from the sale of metals and other materials. Our principal uses of cash are for payments associated with the procurement and processing of our metals and other materials inventories, costs incurred for the warehousing and delivery of our inventories and the selling and administrative costs of our business, and for capital expenditures.
The Company had cash and cash equivalents at September 30, 2005 of $33.1 million, compared to $18.4 million at December 31, 2004. At September 30, 2005, the Company had $1,082.7 million total debt outstanding, a debt to capitalization ratio of 67% and $409 million available under its revolving credit facility.
Net cash provided by operating activities was $127.2 million in the first nine months of 2005, primarily due to net income of $91.8 million during the first nine months of 2005. Net cash provided by operating activities included a $115.3 million from the reduction of inventories, partially offset by reductions in accounts payable of $40.9 million and accrued taxes payable of $44.3 million. The cash provided by inventory reductions is due to better management of inventory levels and sharing of inventory stocks between the Integris Metals facilities and the Company’s other facilities. The reduction in accounts payable is attributable to reduced purchases of inventory as the Company uses its on-hand inventory. The Company also made income tax payments of $75.5 million in the first nine months of 2005.
During the first quarter of 2005, the Company acquired Integris Metals, in which the Company invested a total of approximately $644.3 million, by paying $410.3 million in cash, net of $1.1 million of cash acquired, and by assuming $234.0 million of Integris’ then-existing debt. Ryerson Tull paid for the acquisition with funds borrowed under the Company’s new credit facility discussed below under “Credit Facility.”
In addition to the Integris Metals acquisition, net cash used for investing included capital expenditures of $24.3 million. Separately, the Company received $5.5 million from the sale of a facility in the state of Washington in the first quarter of 2005 and $12.7 million from the sale of facilities in the states of Illinois, Florida and Georgia in the third quarter of 2005.
Net cash provided by financing activities during the first nine months of 2005 was $303.6 million, with the entire funding provided by borrowings under the Company’s revolving credit facility. During the first nine months of 2005, the Company also paid $10.1 million of fees associated with amending the revolving credit facility.
Total Debt
As a result of the increased borrowings under the revolving credit facility, primarily to purchase Integris Metals, total debt in the Consolidated Balance Sheet increased to $1,082.7 million at September 30, 2005 from $526.2 million at December 31, 2004.
Total debt outstanding as of September 30, 2005 consisted of the following amounts: $658 million borrowing under the Credit Facility, $100 million 9 1/8% Notes, $175 million 3.50% Convertible Senior Notes, and $150 million 8 1/4% Senior Notes. Discussion of each of these borrowing arrangements follows.
Credit Facility
On January 4, 2005, the Company entered into an amendment and restatement of its existing $525 million revolving credit facility, and Integris Metals’ existing $350 million revolving credit facility, resulting in a new 5-year, $1.1 billion revolving credit facility (the “New Credit Facility”). The amount of the New Credit Facility may be increased by up to $200 million under certain circumstances.
Proceeds from the initial disbursement of $750 million under the New Credit Facility were used (1) to finance the January 4, 2005 acquisition of Integris Metals, Inc., (2) to repay amounts outstanding under the pre-amended credit facilities and (3) for general corporate purposes. At January 4, 2005, the Company had $753 million outstanding funded borrowing, $28 million of letters of credit issued and $300 million available under the $1.1 billion revolving credit agreement.
At September 30, 2005, the Company had $658 million outstanding funded borrowing under its revolving credit agreement, $29 million of letters of credit issued under the credit facility and $409 million available under the $1.1 billion revolving credit agreement, compared to $373 million available on December 31, 2004 under the then-existing $525 million credit facility. The Company was in compliance with the revolving credit facility covenants at September 30, 2005. At September 30, 2005, the weighted average interest rate on the borrowings under the revolving credit agreement was 5.7 percent.
Amounts outstanding under the New Credit Facility bear interest, at the Company’s option, at a rate determined by reference to the base rate (the greater of the Federal Funds Rate plus 0.50% and JPMorgan Chase Bank’s prime rate) or a LIBOR rate or, for the Company’s Canadian subsidiaries that are borrowers, a rate determined by reference to the Canadian base rate (the greater of the Federal Funds Rate plus 0.50% and JP Morgan Chase Bank’s Toronto Branch’s reference rate for Canadian Dollar loans in Canada), the prime rate (the greater of the Canadian Dollar bankers’ acceptance rate plus 0.50% and JP Morgan Chase Bank’s Toronto Branch’s reference rate for Canadian Dollar loans in Canada) or an “acceptance fee” rate payable upon the sale of a bankers’ acceptance. The spread over the base rate is between 0.75% and 1.50% and the spread over the LIBOR rate and for bankers’ acceptances is between 1.75% and 2.50%, depending on the amount available to be borrowed. Overdue amounts and all amounts owed during the existence of a default bear interest at 2% above the rate otherwise applicable.
In addition to paying interest on outstanding principal, the Company (and certain of its subsidiaries that also are permitted to borrow under the facility) is required to pay a commitment fee of up to 0.50% of the daily average unused portion of the committed loans under the New Credit Facility (i.e., the difference between the commitment amount and the daily average balance of loans plus letter of credit liabilities).
Borrowings under the New Credit Facility are secured by first-priority liens on all of the inventory, accounts receivable, lockbox accounts and the related assets (including proceeds) of the Company, other subsidiary borrowers and certain other U.S. and Canadian subsidiaries that act as guarantors.
In addition to funded borrowings under the New Credit Facility, the transaction documents also provide collateral for certain letters of credit that the Company may obtain thereunder and for certain derivative obligations that are identified by the Company from time to time.
The New Credit Facility permits stock repurchases, the payment of dividends and the prepayment/repurchase of the Company’s debt (including its 9 1/8% Notes due in 2006 (the “2006 Notes”), its 3.50% Convertible Senior Notes due 2024 (the “2024 Notes”) and its 8 1/4% Senior Notes due 2011 (the “2011 Notes”) (collectively the “Bonds”)). Stock repurchases, dividends and (with respect to the Bonds, if not made from the proceeds of new debt or equity) prepayment/repurchase of the Company’s debt are subject to specific liquidity tests (the breach of which would result in the application of more stringent aggregate limits). In the most restrictive case, the Company (except from the proceeds of new debt or equity) is prohibited from prepaying/repurchasing any of the Bonds until the applicable maturity date and is limited to a maximum payment of $10 million in dividends on common stock (and $200,000 on preferred stock) in any fiscal year, a maximum of $5 million during any twelve month period for equity purchases relating to stock, options or similar rights issued in connection with an employee benefit plan and a maximum of $5 million in aggregate with respect to other stock purchases. Beginning on January 15, 2006, an availability block of $50 million (which will increase to $100 million on April 15, 2006) will be set aside under the New Credit Facility in order to repay the 2006 Notes (which availability block would be reduced appropriately to the extent that the Company prepays any of the 2006 Notes).
The New Credit Facility also contains covenants that, among other things, limit the Company and its subsidiaries with respect to the incurrence of debt, the creation of liens, take or pay contracts, transactions with affiliates, mergers and consolidations, sales of assets and acquisitions. The New Credit Facility also requires that, if availability under the New Credit Facility declines to a certain level, the Company maintain a minimum fixed charge coverage ratio as of the end of each fiscal quarter and provides for a default upon (among other things) the occurrence of a change of control of the Company and a cross-default to other financing arrangements.
The lenders under the New Credit Facility have the ability to reject a borrowing request if there has occurred any event, circumstance or development that has had or could reasonably be expected to have a material adverse effect on the Company. Furthermore, if availability under the New Credit Facility declines to a certain level and the 2006 Notes have been repaid, the lenders would have the right to request the pledge of the stock of certain of the Company’s subsidiaries.
If the Company, any of the other borrowers or any significant subsidiaries of the other borrowers becomes insolvent or commences bankruptcy proceedings, all amounts borrowed under the New Credit Facility will become immediately due and payable.
Proceeds from credit facility borrowings and repayments of credit facility borrowings in the Consolidated Statement of Cash Flows represent borrowings under the Company’s revolving credit agreement with original maturities greater than three months. Net short-term proceeds/(repayments) under the credit facility represent borrowings under the Company’s revolving credit facility with original maturities less than three months.
$100 Million 9 1/8% Notes due 2006
At September 30, 2005, $100 million of the Company’s 9 1/8% Notes due July 15, 2006 remain outstanding. Interest on the 2006 Notes is payable semi-annually. The indenture under which the 2006 Notes were issued in 1996 contains covenants limiting, among other things, the creation of certain types of secured indebtedness, sale and leaseback transactions, the repurchase of capital stock, transactions with affiliates and mergers, consolidations and certain sales of assets. In addition, the 2006 Notes restrict the payment of dividends if the Company’s Consolidated Net Worth does not exceed a minimum level. The Company is in compliance with this net worth test. The 2006 Notes also include a cross-default provision in the event of a default in the revolving credit facility. The Company was in compliance with the indenture covenants at September 30, 2005.
$175 Million 3.50% Convertible Senior Notes due 2024
At September 30, 2005, $175 million of the Company’s 3.50% Convertible Senior Notes due 2024 remain outstanding. The 2024 Notes pay interest semi-annually and are fully and unconditionally guaranteed by Ryerson Tull Procurement Corporation, one of the Company’s subsidiaries, on a senior unsecured basis and are convertible into the Company’s common stock at an initial conversion price of approximately $21.37 per share. The 2024 Notes mature on November 1, 2024.
Holders of the 2024 Notes have the right to require the Company to repurchase some or all of their 2024 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the repurchase date, on November 1, 2009, November 1, 2014 and November 1, 2019, or following a fundamental change (as defined in the 2024 Notes Indenture) that occurs at any time prior to maturity of the 2024 Notes.
The 2024 Notes are convertible into shares of the Company’s common stock on or prior to the trading day preceding the stated maturity, under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after December 31, 2004 and before January 1, 2020, if the last reported sale price of the Company’s common stock is greater than or equal to 125% of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) at any time on or after January 1, 2020, if the last reported sale price of the Company’s common stock on any date on or after December 31, 2019 is greater than or equal to 125% of the conversion price; (3) subject to certain limitations, during the five business day period after any five consecutive trading day period in which the trading price per note for each day of that period was less than 98% of the product of the conversion rate and the last reported sale price of the Company’s common stock; (4) if the Company calls the 2024 Notes for redemption; or (5) upon the occurrence of certain corporate transactions.
The 2024 Notes are convertible into the Company’s common stock at an initial conversion price of approximately $21.37 per share (equal to an initial conversion rate of 46.7880 shares per $1,000 principal amount) upon the occurrence of certain events. Article 15 of the 2024 Notes Indenture provides for the conversion terms. The 2024 Notes Indenture provides that the conversion price will be adjusted downward (resulting in more shares of common stock being issued) if the Company (1) issues shares of common stock as a dividend or distribution on outstanding shares of common stock or effects a share split of its common stock, (2) issues to its holders of common stock short-term rights or warrants to subscribe for or purchase shares of common stock at a price per share less than current market value (subject to readjustment to the extent that such rights or warrants are not exercised prior to their expiration), (3) distributes shares of capital stock, evidences of indebtedness or other assets or property to its common stockholders, (4) makes any cash dividend or distribution to common stockholders in excess of $0.05 per share during any fiscal quarter or (5) makes a payment in respect of a tender offer or exchange offer for common stock at a price per share in excess of the then-current market price. Conversely, the conversion price will be adjusted upward to reflect any reverse stock split or share combination involving the common stock. Upon conversion, the Company will deliver cash equal to the lesser of the aggregate principal amount of the 2024 Notes being converted and the Company’s total conversion obligation (the market value of the common stock into which the 2024 Notes are convertible), and common stock in respect of the remainder.
$150 Million 8 1/4% Senior Notes due 2011
At September 30, 2005, $150 million of the Company’s 8 1/4% Senior Notes due 2011 remain outstanding. The 2011 Notes pay interest semi-annually and are fully and unconditionally guaranteed by Ryerson Tull Procurement Corporation, on a senior unsecured basis. The 2011 Notes mature on December 15, 2011.
The 2011 Notes contain covenants that limit the Company’s ability to incur additional debt; issue redeemable stock and preferred stock; repurchase capital stock; make other restricted payments including, without limitation, paying dividends and making investments; redeem debt that is junior in right of payment to the 2011 Notes; create liens without securing the 2011 Notes; sell or otherwise dispose of assets, including capital stock of subsidiaries; enter into agreements that restrict the payment of dividends from subsidiaries; merge, consolidate and sell or otherwise dispose of substantially all of the Company’s assets; enter into sale/leaseback transactions; enter into transactions with affiliates; guarantee indebtedness; and enter into new lines of business. These covenants are subject to a number of exceptions and qualifications. The Company was in compliance with these covenants as of September 30, 2005. If the 2011 Notes receive an investment grade rating from both Moody’s Investors Services Inc. and Standard & Poor’s Ratings Group, certain of these covenants would be suspended for so long as the 2011 Notes continued to be rated as investment grade.
Pension Funding
At December 31, 2004, pension liabilities exceeded trust assets by $95 million for the Ryerson Tull Pension Plan and by $59 million for the Integris Pension Plans. The Company does not have any required pension contribution funding under the Employee Retirement Income Security Act of 1974 (“ERISA”) in 2005 but could have future sizable pension contribution requirements for the Ryerson Tull Pension Plan as well as the Integris Pension Plans. The Company made a voluntary contribution of $10.3 million in the third quarter of 2005 to improve the plans’ funded status. Future contribution requirements depend on the investment returns on plan assets, the impact on pension liabilities due to discount rates, and changes in regulatory requirements. The Company is 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 the Company’s financial position or cash flows. The Company believes that cash flow from operations and its credit facility described above will provide sufficient funds if the Company elects to make a contribution in 2006.
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Contractual Obligations
The following table presents the Company’s contractual obligations at September 30, 2005:
Payments Due by Period (Dollars in Millions) | |||||||||||||||
Contractual Obligations* | Total | Less than 1 year | 1 – 3 years | 4 – 5 years | After 5 years | ||||||||||
Long-Term Notes | $ | 250 | $ | 100 | $ | — | $ | — | $ | 150 | |||||
Convertible Senior Note | 175 | — | — | 175 | — | ||||||||||
Credit Facility | 658 | 28 | — | 630 | — | ||||||||||
Interest on Long-Term Notes, Convertible Senior Note and Credit Facility | 358 | 63 | 111 | 83 | 101 | ||||||||||
Purchase Obligations | 65 | 65 | — | — | — | ||||||||||
Operating leases | 99 | 24 | 35 | 19 | 21 | ||||||||||
Total | $ | 1,605 | $ | 280 | $ | 146 | $ | 907 | $ | 272 | |||||
| * | The contractual obligations disclosed above do not include the Company’s potential future pension funding obligations (see discussion above). |
Business Outlook
The Company’s business had been impacted by decreasing volumes and declining prices starting in the second half of 2000 and continuing through the third quarter of 2003, due to softening demand from customers in the manufacturing sector of the U.S. economy. Commencing in the fourth quarter of 2003 through year-end 2004, the Company experienced an increase in demand and prices for its product, including significant material surcharges imposed by the metal producers and availability constraints in certain products. The first three quarters of 2005 experienced continued strong demand and stable pricing in most products with some moderate softening in the third quarter of 2005 due to seasonal shutdown activity and customer inventory adjustments. The Company expects a seasonal slowdown in the fourth quarter due to the holiday season and customer shutdowns. In 2006 the Company expects moderately softer but reasonably stable metals pricing. However, higher inflation and short term interest rates and their subsequent impact on metals demand and pricing is difficult to predict. We expect demand and pricing to remain stronger in 2006 relative to 2000-03 levels but the Company is unable to predict the duration of the current economic cycle.
Liquidity Outlook
The Company believes that cash flow from operations and proceeds from its revolving credit facility will provide sufficient funds to meet the Company’s contractual obligations and operating requirements. During the third quarter of 2005, the Company actively worked down its inventory levels, and the resulting cash flow combined with operating earnings were the primary cause for a reduction in revolving credit borrowings of $167 million. The Company continues to pursue inventory reductions that will generate cash flow, which would be used primarily to reduce debt.
On July 15, 2006, the Company’s $100 million 2006 Notes will mature. As discussed above under “Credit Facility,” availability blocks under the Company’s revolving credit agreement will be set aside beginning January 15, 2006 to provide funds to repay the 2006 Notes.
The Company believes that new public or private debt or equity financing is a potential future source of funding. In the event the Company were to seek such financing, the ability to complete any future financing and the amount, terms and cost of any such future financing would be subject to market conditions at that time.
34
Pro Forma Results Reconciliation
The data below reflects pro forma data that will assist in understanding trends in the Company’s business for the factors that management considers critical to assessing the Company’s operating and financial performance. The unaudited pro forma 2004 data presented below reflects the Company’s acquisitions of J&F and Integris Metals, the terms of the Company’s amended and restated credit agreement dated January 4, 2005 and the Company’s 2004 issuances of $175 million of the 2024 Notes and of $150 million of the 2011 Notes as if all such events had occurred on January 1, 2004.
The following table presents the pro forma adjustments made to the Company’s historical consolidated statements of operations for the three-month and the nine-month periods ended September 30, 2004 to arrive at the 2004 pro forma amounts for the respective 2004 periods (see “Supplemental Information - Pro Forma Comparisons” above for comparison of 2005 results to 2004 pro forma data for these periods):
Condensed Consolidated Statement of Operations (Unaudited)
Three Months Ended September 30, 2004
(In millions, except per share data)
| The Company | J&F (A) | J&F pro forma adjustments (C) | Debt offerings pro forma adjustments (C) | Integris (B) | Integris pro forma adjustments (B) | Pro forma as adjusted | ||||||||||||||||||||||
| (restated) | (restated) | |||||||||||||||||||||||||||
Net sales | $ | 898.7 | $ | 15.5 | $ | — | $ | — | $ | 521.9 | $ | — | $ | 1,436.1 | ||||||||||||||
Cost of materials sold | 765.9 | 13.4 | — | (1) | — | 427.3 | 0.1 | (8) | 1,206.7 | |||||||||||||||||||
Gross profit | 132.8 | 2.1 | — | — | 94.6 | (0.1 | ) | 229.4 | ||||||||||||||||||||
Warehousing and delivery | 44.5 | 0.4 | — | — | — | 35.3 | (9) | 80.2 | ||||||||||||||||||||
Selling, general and administrative | 56.8 | 0.9 | — | — | 69.7 | (34.7 | )(9)(10)(11) | 92.7 | ||||||||||||||||||||
Restructuring and plant closure costs | 3.0 | — | — | — | 0.2 | — | 3.2 | |||||||||||||||||||||
Gain on sale of assets | (2.3 | ) | — | — | — | — | — | (2.3 | ) | |||||||||||||||||||
Operating profit (loss) | 30.8 | 0.8 | — | — | 24.7 | (0.7 | ) | 55.6 | ||||||||||||||||||||
Other revenue and expense, net | — | — | — | — | (1.1 | ) | — | (1.1 | ) | |||||||||||||||||||
Interest and other expense on debt | (6.0 | ) | (0.1 | ) | (0.1 | )(2) | (1.7 | )(4)(6) | (2.8 | ) | (5.6 | )(12) | (16.3 | ) | ||||||||||||||
Income (loss) before income taxes | 24.8 | 0.7 | (0.1 | ) | (1.7 | ) | 20.8 | (6.3 | ) | 38.2 | ||||||||||||||||||
Provision (benefit) for income taxes | 9.5 | 0.3 | — | (3) | (0.6 | )(5)(7) | 7.8 | (2.3 | )(13) | 14.7 | ||||||||||||||||||
Income (loss) from continuing operations | $ | 15.3 | $ | 0.4 | $ | (0.1 | ) | $ | (1.1 | ) | $ | 13.0 | $ | (4.0 | ) | $ | 23.5 | |||||||||||
Income from continuing operations per share of common stock | ||||||||||||||||||||||||||||
Basic income per share | $ | 0.61 | $ | 0.94 | ||||||||||||||||||||||||
Diluted income per share | $ | 0.60 | $ | 0.91 | ||||||||||||||||||||||||
35
Condensed Consolidated Statement of Operations (Unaudited)
Nine Months Ended September 30, 2004
(In millions, except per share data)
| The Company | J&F (A) | J&F pro forma adjustments (C) | Debt offerings pro forma adjustments (C) | Integris (B) | Integris pro forma adjustments (B) | Pro forma as adjusted | ||||||||||||||||||||||
| (restated) | (restated) | |||||||||||||||||||||||||||
Net sales | $ | 2,398.3 | $ | 103.4 | $ | — | $ | — | $ | 1,491.4 | $ | — | $ | 3,993.1 | ||||||||||||||
Cost of materials sold | 2,013.0 | 89.6 | (1 | ) | — | 1,213.9 | 0.3 | (8) | 3,316.8 | |||||||||||||||||||
Gross profit | 385.3 | 13.8 | — | — | 277.5 | (0.3 | ) | 676.3 | ||||||||||||||||||||
Warehousing and delivery | 129.8 | 2.4 | — | — | — | 88.6 | (9) | 220.8 | ||||||||||||||||||||
Selling, general and administrative | 161.9 | 5.6 | — | — | 194.3 | (87.0 | )(9)(10)(11) | 274.8 | ||||||||||||||||||||
Restructuring and plant closure costs | 3.6 | — | — | — | 1.6 | — | 5.2 | |||||||||||||||||||||
Gain on sale of assets | (4.7 | ) | (2.4 | ) | — | — | — | — | (7.1 | ) | ||||||||||||||||||
Operating profit (loss) | 94.7 | 8.2 | — | — | 81.6 | (1.9 | ) | 182.6 | ||||||||||||||||||||
Other revenue and expense, net | 0.1 | — | — | — | (1.2 | ) | — | (1.1 | ) | |||||||||||||||||||
Interest and other expense on debt | (16.0 | ) | (0.5 | ) | (1.0 | )(2) | (5.3 | )(4)(6) | (7.7 | ) | (14.4 | )(12) | (44.9 | ) | ||||||||||||||
Income (loss) before income taxes | 78.8 | 7.7 | (1.0 | ) | (5.3 | ) | 72.7 | (16.3 | ) | 136.6 | ||||||||||||||||||
Provision (benefit) for income taxes | 30.2 | 3.1 | (0.4 | )(3) | (2.0 | )(5)(7) | 26.2 | (5.9 | )(13) | 51.2 | ||||||||||||||||||
Income (loss) from continuing operations | $ | 48.6 | $ | 4.6 | $ | (0.6 | ) | $ | (3.3 | ) | $ | 46.5 | $ | (10.4 | ) | $ | 85.4 | |||||||||||
Income from continuing operations per share of common stock | ||||||||||||||||||||||||||||
Basic income per share | $ | 1.95 | $ | 3.43 | ||||||||||||||||||||||||
Diluted income per share | $ | 1.89 | $ | 3.32 | ||||||||||||||||||||||||
36
Notes to unaudited pro forma condensed
consolidated financial statements
The following adjustments have been reflected in the unaudited pro forma condensed consolidated statements of operations:
A. To reflect the pre-acquisition results of operations of J&F Steel for the periods presented. J&F Steel’s statements of operations for the periods presented include restructuring activities associated with the closure of a facility prior to acquisition of J&F Steel by us. Related to the restructuring is a $2.4 million gain on the sale of assets in the second quarter of 2004.
B. To reflect the results of operations of Integris Metals for the periods presented. Integris Metals’ statements of operations for the periods presented include restructuring activities associated with employee reductions, changes to certain distribution operations and other merger related costs in connection with the integration of business processes and systems, which totaled $1.6 million in the first nine months of 2004.
C. To reflect the following adjustments for the impact of the acquisition of J&F Steel:
| (1) | To adjust depreciation expense to reflect the estimated fair value of property, plant and equipment at the date of acquisition; |
| (2) | Estimated increase in interest expense related to increased borrowing to finance the acquisition; and |
| (3) | Estimated effect on income tax expense (benefit) resulting from above adjustments assuming our on-going effective tax rates. |
To reflect the following adjustments for the impact of the issuance of the convertible 2024 Notes:
| (4) | Estimated increase in interest expense, including amortization of the issuance cost of the convertible 2024 Notes; and |
| (5) | Estimated effect on income tax expense (benefit) resulting from above adjustment assuming our on-going effective tax rates. |
To reflect the following adjustments for the impact of the issuance of the senior 2011 Notes:
| (6) | Estimated increase in interest expense, including amortization of the issuance cost of the 2011 Notes; and |
| (7) | Estimated effect on income tax expense (benefit) resulting from above adjustment assuming our on-going effective tax rates. |
To reflect the following adjustments for the impact of the acquisition of Integris Metals:
| (8) | To increase depreciation and lease expense to reflect the estimated fair value of property, plant and equipment and leases at the date of acquisition. |
| (9) | To reclassify balances to conform to our presentation; |
| (10) | To increase amortization of intangible assets to reflect the estimated fair value of intangible assets at the date of acquisition. |
| (11) | To adjust post-retirement benefit expense to reflect the estimated fair value of deferred employee benefits at the date of acquisition; |
| (12) | Estimated increase in interest expense related to increased borrowing under the revolving credit facilities to finance the acquisition and additional amortization of deferred debt issuance costs under the revolving credit facilities and the bridge loan facility; and |
| (13) | Estimated effect on income tax expense (benefit) resulting from above adjustments assuming our on-going effective tax rates. |
37
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. The Company has pay fixed, receive floating interest rate swaps to effectively convert the interest rate from floating to fixed on $85.0 million of debt, through June 2006. These interest rate swaps were designated as cash flow hedges and had an asset value of approximately $1.5 million at September 30, 2005.
The Company is subject to exposure from fluctuations in foreign currencies. Foreign currency exchange contracts are used by the Company’s Canadian subsidiaries to hedge the variability in cash flows from the forecasted payment of currencies other than the functional currency. The Canadian subsidiaries’ foreign currency contracts were principally used to purchase U.S. dollars. The Company had foreign currency contracts with a U.S. dollar notional amount of $3.7 million outstanding at September 30, 2005, and a liability value of $0.2 million. The Company currently does not account for these contracts as hedges but rather marks these contracts to market with a corresponding offset to current earnings.
From time to time, the Company may enter into fixed price sales contracts with its customers for certain of its inventory components. The Company may enter into metal commodity futures and options contracts to reduce volatility in the price of these metals. The Company currently does not account for these contracts as hedges, but rather marks these contracts to market with a corresponding offset to current earnings. As of September 30, 2005, the Company had no metal commodity futures or options contracts outstanding.
Cash equivalents are highly liquid, short-term investments with maturities of three months or less that are an integral part of the Company’s cash management portfolio. The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments. The estimated fair value of the Company’s long-term debt and the current portions thereof using quoted market prices of Company debt securities recently traded and market-based prices of similar securities for those securities not recently traded was $1,123 million at September 30, 2005 and $542 million at December 31, 2004, as compared with the carrying value of $1,083 million and $526 million at September 30, 2005 and December 31, 2004, respectively. Approximately 39.3 percent and 80.8 percent of the Company’s debt was at fixed rates of interest at September 30, 2005 and December 31, 2004, respectively.
| Item 4. | Controls and procedures |
Restatement of previously issued Interim Consolidated Financial Statements
As described in Note 2 to the consolidated financial statements, the Company identified the following errors in the Company’s previously issued consolidated financial statements: (i) classification of metal processing costs, (ii) the effect of including nickel surcharges in inventory value and other out-of period adjustments, and (iii) other immaterial miscellaneous adjustments. As a result of these errors, the Company has restated its 2004 and 2003 annual consolidated financial statements, the interim consolidated financial statements for each of the 2004 quarters and for each of the first three 2005 quarters.
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) refers to the controls and procedures of the Company that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the supervision and participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2005.
Based upon that evaluation and because of the material weakness described below, the Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2005 the Company’s disclosure controls and procedures were not effective. As a result of this material weakness, the Chief Executive Officer and Chief Financial Officer have further concluded that the Company’s disclosure controls and procedures were also not effective as of September 30, 2004, and that their earlier conclusions that the Company’s disclosure controls and procedures were effective in our previously filed Form 10-Q for the quarters ended September 30, 2005 and 2004, respectively, should no longer be relied upon.
Notwithstanding the material weakness described below, the company’s management has concluded that the financial statements included in this amended Form 10-Q fairly present in all material respects the Company’s financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.
38
Material Weakness in Internal Control Over Financial Reporting
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual of interim consolidated financial statements will not be prevented or detected. Management’s assessment of the Company’s internal control over financial reporting as of December 31, 2005 identified the following material weakness in the Company’s internal control over financial reporting which existed as of September 30, 2005.
The Company did not maintain effective controls over the completeness, accuracy, valuation and presentation of inventory and related cost of material sold accounts. Specifically, the Company did not have controls designed and in place over the completeness, accuracy and valuation of inventory in accordance with generally accepted accounting principles and the presentation of processing costs within the Company’s consolidated statements of operations and reinvested earnings. Certain processing costs were classified as warehousing and delivery costs that should have been classified as cost of materials sold. Additionally, the Company did not maintain a sufficient complement of personnel with the appropriate skills, training and experience to ensure complete, accurate and timely evaluation of the selection, application and implementation of generally accepted accounting principles relative to inventory and related cost of material sold. This control deficiency resulted in the restatement of the Company’s 2004 and 2003 annual consolidated financial statements, the interim consolidated financial statements for each of the 2004 quarters and for each of the first three 2005 quarters, as well as audit adjustments to the fourth quarter of 2005 consolidated financial statements. Additionally, this control deficiency could result in a misstatement of inventory and cost of materials sold that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness as of September 30, 2005.
Remediation Plan for Material Weakness
We believe the steps described below will remediate the material weakness described above.
During the fourth quarter of 2005, we:
| 1. | augmented our accounting resources by adding an experienced accounting executive with significant SEC reporting experience and GAAP knowledge to help balance the workload; |
| 2. | completed the transition and centralization of the accounting function related to the Integris Metals acquisition, which will enable better communication and information flow; and |
| 3. | continued the upgrade of our information systems capability and consolidation of our multiple information technology operating platforms onto one integrated platform. |
During 2006, we will:
| 1. | move toward a more centralized system and database, reducing the workload and the strain on our accounting resources; |
| 2. | conduct training of personnel at operating locations to ensure accuracy of inventory records; |
| 3. | augment GAAP training for our corporate accounting staff; and |
| 4. | put controls in place to ensure that we do not divert our accounting resources to support acquisition or other activities not directly related to accounting until all critical accounting matters have been handled. |
Management believes that these measures, when effectively implemented and maintained, will remediate the material weakness discussed above.
Changes in Internal Control Over Financial Reporting
Our management, with the supervision and participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the period covered by this amended quarterly report on Form 10-Q (“Report”) and they have concluded that, there have been no changes in the Company’s internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the “Exhibit Index,” which is attached hereto and incorporated by reference herein.
39
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| RYERSON INC. | ||
| By: | /s/ Lily L. May | |
| Lily L. May | ||
| Vice President, Controller and | ||
| Chief Accounting Officer | ||
Date: March30, 2006
40
Part I — Schedule A
RYERSON INC. (formerly RYERSON TULL, INC.)
AND SUBSIDIARY COMPANIES
SUMMARY OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In millions, except share and per share amounts)
| September 30, 2005 | December 31, 2004 | |||||||||||||||
| (restated)(1) | (restated)(1) | |||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||||
Series A preferred stock ($1 par value) 79,968 shares issued and outstanding as of September 30, 2005 and December 31, 2004 | $ | 0.1 | $ | 0.1 | ||||||||||||
Common stock ($1 par value) 50,556,350 shares issued as of September 30, 2005 and December 31, 2004 | 50.6 | 50.6 | ||||||||||||||
Capital in excess of par value | 853.6 | 857.5 | ||||||||||||||
Retained earnings | ||||||||||||||||
Balance beginning of year | $ | 375.5 | $ | 324.7 | ||||||||||||
Net income | 91.8 | 56.0 | ||||||||||||||
Dividends | ||||||||||||||||
Series A preferred stock - $1.80 per share in 2005 and $2.40 per share in 2004 | (0.2 | ) | (0.2 | ) | ||||||||||||
Common Stock - $0.15 per share in 2005 and $0.20 per share in 2004 | (3.8 | ) | 463.3 | (5.0 | ) | 375.5 | ||||||||||
Restricted stock awards | (0.6 | ) | (0.1 | ) | ||||||||||||
Treasury stock, at cost - 25,318,182 as of September 30, 2005 and 25,539,305 as of December 31, 2004 | (739.5 | ) | (746.2 | ) | ||||||||||||
Accumulated other comprehensive income (loss) | ||||||||||||||||
Minimum pension liability | (104.6 | ) | (104.6 | ) | ||||||||||||
Unrealized gain on interest rate swaps | 0.3 | — | ||||||||||||||
Foreign currency translation | 11.0 | (93.3 | ) | 6.8 | (97.8 | ) | ||||||||||
Total Stockholders’ Equity | $ | 534.2 | $ | 439.6 | ||||||||||||
| (1) | See Item 1 “NOTE 2/RESTATEMENT OF FINANCIAL STATEMENTS” for reconciliation of previously reported amounts to restated amounts. |
41
EXHIBIT INDEX
Exhibit Number | Description | |
| 2.1 | Stock Purchase Agreement dated October 26, 2004 between the Company, Alcoa, Inc. and BHP Billiton for Integris Metals, Inc. (Filed as Exhibit 10.1 to the Company’s to the Company’s Current Report on Form 8-K filed on October 29, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 3.1 | Copy of the Restated Certificate of Incorporation of Ryerson Tull. (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 28, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 3.2 | By-Laws, as amended (Filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.1 | Rights Agreement as amended and restated as of April 1, 2004, between Ryerson Tull and The Bank of New York, as Rights Agent. (Filed as Exhibit 4.1 to the Company’s Registration Statement on Form 8-A/A-3 filed on April 1, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.2 | Indenture, dated as of July 1, 1996, between Pre-merger Ryerson Tull and The Bank of New York. (Filed as Exhibit 4.1 to Pre-merger Ryerson Tull’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 1-11767), and incorporated by reference herein.) | |
| 4.3 | First Supplemental Indenture, dated as of February 25, 1999, between Ryerson Tull and The Bank of New York. (Filed as Exhibit 4.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.4 | Specimen of 9 1/8% Notes due July 15, 2006. (Filed as Exhibit 4.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.5 | Registration Rights Agreement dated as of November 10, 2004, between Ryerson Tull, Ryerson Tull Procurement Corporation, J.P. Morgan Securities Inc. and UBS Securities LLC. (Filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on November 10, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.6 | Indenture dated as of November 10, 2004, between Ryerson Tull, Ryerson Tull Procurement Corporation and The Bank of New York Trust Company, N.A. (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 10, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.7 | Specimen of 3.50% Convertible Senior Note (Filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on November 10, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.8 | Registration Rights Agreement dated as of December 13, 2004, between Ryerson Tull, Ryerson Tull Procurement Corporation, J.P. Morgan Securities Inc. and UBS Securities LLC. (Filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on December 13, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.9 | Indenture dated as of on December 13, 2004, between Ryerson Tull, Ryerson Tull Procurement Corporation and The Bank of New York Trust Company, N.A. (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 13, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.10 | Specimen of 144A 8.25% Senior Note due 2011 (Filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 13, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.11 | Specimen of Regulation S 8.25% Senior Note due 2011 (Filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on December 13, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.12 | Amended and Restated Credit Agreement, dated as of January 4, 2005, among Ryerson Tull, Inc., Joseph T. Ryerson & Son, Inc., J. M. Tull Metals Company, Inc., Integris Metals, Inc., Integris Metals Ltd., Ryerson Tull Canada, Inc., the lenders party thereto, JPMorgan Chase Bank, N.A., as General Administrative Agent, Collateral Agent and Swingline Lender, JPMorgan Chase Bank, National Association Toronto Branch, as Canadian Administrative Agent and General Electric Capital Corporation, as Syndication Agent and Co-Collateral Agent. (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 10, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.13 | Amended and Restated Guarantee And Security Agreement, dated as of December 20, 2002 and amended and restated as of January 4, 2005 among Ryerson Tull, Inc., the U.S. Subsidiaries of Ryerson Tull, Inc. and JPMorgan Chase Bank, N.A. (formerly known as JPMorgan Chase Bank), as Collateral Agent. Agent (Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 10, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 4.14 | Amended and Restated Canadian Guarantee and Security Agreement, made as of January 4, 2005, among Integris Metals Ltd. and Ryerson Tull Canada, INC., the Canadian Subsidiary Guarantors party thereto, and JPMorgan Chase Bank, N.A. as Collateral Agent. (Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 10, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| [The registrant hereby agrees to provide a copy of any other agreement relating to long-term debt at the request of the Commission.] | ||
| * | Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company’s Annual Report on Form 10-K. |
| Exhibit Number | Description | |
| 10.1* | Ryerson Tull Annual Incentive Plan, as amended (Filed as Exhibit A to the Company’s definitive Proxy Statement on Schedule 14A (File No. 1-11767) dated March 5, 2003 that was furnished to stockholders in connection with the annual meeting held April 16, 2003, and incorporated by reference herein.) | |
| 10.2* | Ryerson Tull 2002 Incentive Stock Plan, as amended (Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.3* | Ryerson Tull 1999 Incentive Stock Plan, as amended (Filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-11767), and incorporated by reference herein.) | |
| 10.4* | Ryerson Tull 1996 Incentive Stock Plan, as amended (Filed as Exhibit 10.D to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-11767), and incorporated by reference herein.) | |
| 10.5* | Ryerson Tull 1995 Incentive Stock Plan, as amended (Filed as Exhibit 10.E to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.6* | Ryerson Tull 1992 Incentive Stock Plan, as amended (Filed as Exhibit 10.C to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.7* | Ryerson Tull Supplemental Retirement Plan for Covered Employees, as amended (Filed as Exhibit 10.6 to Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-11767), and incorporated by reference herein.) | |
| 10.8* | Ryerson Tull Nonqualified Savings Plan, as amended (Filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.9* | Excerpt of Company’s Accident Insurance Policy as related to outside directors insurance (Filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.10* | Excerpt of 2005 Endorsement of Company’s Accident Insurance Policy as related to outside directors’ insurance (Filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended March 30, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.11* | Ryerson Tull Directors’ 1999 Stock Option Plan (Filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.12* | Amended and Restated Directors’ Compensation Plan (Filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on January 28, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.13* | Severance Agreement dated January 28, 1998, between the Company and Jay M. Gratz. (Filed as Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2002 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.14* | Amendment dated November 6, 1998 to the Severance Agreement dated January 28, 1998 referred to in Exhibit 10.13 above between the Company and Jay M. Gratz. (Filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.15* | Amendment dated June 30, 2000 to the Severance Agreement dated January 28, 1998 referred to in Exhibit 10.13 between the Company and Jay M. Gratz. (Filed as Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.16* | Form of Change in Control Agreement (Filed as Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| * | Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company’s Annual Report on Form 10-K. |
| Exhibit Number | Description | |
| 10.17* | Schedule to Form of Change in Control Agreement referred to in Exhibit 10.16 (Filed as Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.18* | Form of Change in Control Agreement (Filed as Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.19* | Schedule to Form of Change in Control Agreement referred to in Exhibit 10.18 (Filed as Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.20* | Employment Agreement dated September 1, 1999 between the Company and Jay M. Gratz. (Filed as Exhibit 10.22 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.21* | Employment Agreement dated September 1, 1999 between the Company and Gary J. Niederpruem. (Filed as Exhibit 10.23 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.22* | Employment Agreement dated December 1, 1999 between the Company and Neil S. Novich. (Filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.23* | Employment Agreement dated as of July 23, 2001 between the Company and James M. Delaney. (Filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.24* | Confidentiality and Non-Competition Agreement dated July 1, 1999 between the Company and Stephen E. Makarewicz. (Filed as Exhibit 10.24 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.25* | Form of Indemnification Agreement, dated June 24, 2003, between the Company and the parties listed on the schedule thereto (Filed as Exhibit 10.24 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.26* | Schedule to Form of Indemnification Agreement, dated June 24, 2003 (Filed as Exhibit 10.25 to the Company’s Current Report on Form 8-K filed on October 5, 2004 (File No. 1-9117), and incorporated by reference herein.) | |
| * | Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company’s Annual Report on Form 10-K. |
| Exhibit Number | Description | |
| 10.27* | Schedule of special achievement awards to certain named executive officers. (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 28, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.28* | Form of restricted stock award agreement (Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 28, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.29* | Form of 2004 performance award agreement (Filed as Exhibit 10.31 to the Company’s Annual Report on Form 10-K filed on March 22, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.30* | Form of 2005 performance award agreement (Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 28, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.31* | 2004 Performance Measures under the Annual Incentive Plan (Filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on January 28, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.32* | 2005 Performance Measures under the Annual Incentive Plan (Filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on January 28, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.33* | Named Executive Officer Merit Increases effective January 31, 2005 (Filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on January 28, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.34* | Director Compensation Summary (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 22, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 10.35* | Form of Option Agreement Under the Ryerson Tull Directors’ Compensation Plan (Filed as Exhibit 10.37 to the Company’s Annual Report on Form 10-K filed on March 22, 2005 (File No. 1-9117), and incorporated by reference herein.) | |
| 31.1 | Certificate of the Principal Executive Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certificate of the Principal Financial Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Written Statement of Neil S. Novich, Chairman, President and Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Written Statement of Jay M. Gratz, Executive Vice President and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| * | Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company’s Annual Report on Form 10-K. |
