ITEM 1A. RISK FACTORS.
Our business faces many risks. You should carefully consider the risks and uncertainties described below, together with the other information in this report, including the consolidated financial statements and notes to consolidated financial statements. We cannot assure you that any of the events discussed in the risk factors below will not occur. These risks could have a material and adverse impact on our business, results of operations, financial condition, and cash flows.
RISKS RELATED TO OUR INDUSTRY
Weakness in the economy, market trends, and other conditions affecting the profitability and financial stability of our customers could negatively impact our sales growth and results of operations.
Economic and industry trends affect our business environments. We serve several metals-consuming industries in which the demand for our products and services is sensitive to the production activity, capital spending, and demand for products and services of our customers. Many of these customers operate in markets that are subject to highly cyclical fluctuations resulting from seasonality, market uncertainty, costs of goods sold, currency exchange rates, foreign competition, offshoring of production, oil and natural gas prices, geopolitical developments, and a variety of other factors beyond our control. Any of these factors could cause customers to idle or close facilities, delay purchases, reduce production levels, or experience reductions in the demand for their own products or services.
Any of these events could impair the ability of our customers to make full and timely payments or reduce the volume of products and services these customers purchase from us and could cause increased pressure on our selling prices and terms of sale.
We do not expect the cyclical nature of our industry to change and any downturn in our customers’ industries could reduce our revenues and profitability or a significant or prolonged slowdown in activity in the U.S., Canada, or any other major world economy, or a segment of any such economy, could negatively impact our sales growth and results of operations.
The metals services business is very competitive and increased competition could reduce our revenues and gross margins.
We face competition in all markets we serve, from metals producers that sell directly to certain customers or segments of the market, to other metal services companies. The metals services industry itself is highly fragmented and competitive. There are a few large competitors, but most of the market is served by small local and regional competitors. Competition is based principally on price, service, quality, production capabilities, inventory availability, and timely delivery.
We are experiencing increased pressure from online businesses that compete with price transparency. We expect technological advancements and the increased use of e-commerce solutions within the industry to continue to evolve at a rapid pace. As a result, our ability to effectively compete requires us to respond and adapt to new industry trends and developments, and implement new technology and innovations that may result in unexpected costs or may take longer than expected.
To remain competitive, we must be willing and able to respond to market pressures. These pressures, and the implementation, timing, and results of our strategic pricing and other responses, could have a material effect on our sales and profitability. If we are unable to grow sales or reduce costs, among other actions, to wholly or partially offset the effect on profitability of our pricing actions, our results of operations and financial condition may be adversely affected.
Changing metals prices may have a significant impact on our liquidity, net sales, gross margins, operating income, and net income.
The metals services industry as a whole is cyclical and, at times, pricing and availability of metal can be volatile due to numerous factors beyond our control, including general domestic and international economic conditions, labor costs, sales levels, competition, levels of inventory held by other metals service centers, consolidation of metals producers, higher raw material costs for the producers of metals, import duties and tariffs, and currency exchange rates. This volatility can significantly affect the availability and cost of materials for us. Our ability to pass on increases in costs in a timely manner depends on market conditions and may result in lower gross margins. In addition, higher prices could impact demand for these products, resulting in lower sales volumes. Moreover, we maintain substantial inventories of metal to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain inventory at levels that we believe to be appropriate to satisfy
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the anticipated needs of our customers based upon historic buying practices, contracts with customers, and market conditions. Commitments for metal purchases are generally at prevailing market prices in effect at the time orders are placed or at the time of shipment. During periods of rising metal prices, we may be negatively impacted by delays between the time of increases in the cost of metals to us and increases in the prices that we charge for our products if we are unable to pass these increased costs on to our customers. In addition, when metal prices decline, this could result in lower selling prices for our products and, as we use existing inventory that we purchased at higher metal prices, lower gross profit margins. Declines in prices or further reductions in sales volumes could adversely impact our ability to maintain our liquidity and to remain in compliance with certain financial covenants under our $1.0 billion revolving credit facility (“the Ryerson Credit Facility”), as well as result in us incurring inventory or goodwill impairment charges. Consequently, changing metals prices could significantly impact our liquidity, net sales, gross margins, operating income, and net income.
Unexpected product shortages could negatively impact customer relationships, resulting in an adverse impact on results of operations.
Disruptions could occur due to factors beyond our control, including economic downturns, political unrest, port slowdowns, trade issues, including increased export or import duties or trade restrictions, health crises, and other factors, any of which could adversely affect a supplier’s ability to manufacture ordeliver products to us. Public health problems may result in quarantines, business closures, transportation restrictions, import and export complications, and otherwise cause shortages in the supply of materials, higher costs for available supplies, or cause other disruptions within our operations and supply chain. Public health problems may cause increased costs of certain supplies and disruptions and delays within our supply chain, and may expose us to unanticipated liability or require us to change our business practices.
Any disruption resulting from these events could cause significant delays in shipments of products or difficulties in obtaining products, any of which may expose us to unanticipated liability or require us to change our business practices in a manner materially adverse to our business, results of operations, and financial condition. For our sources of lower cost products from Asia and other areas of the world, the effect of disruptions is typically increased due to the additional lead time required and distances involved. Further, the risk of disruption is increased due to the current political climate seeking trade reform. In addition, we have strategic relationships with a number of vendors. In the event we are unable to maintain those relations, there might be a loss of competitive pricing advantages which could, in turn, adversely affect results of operations.
Changes in customer or product mix could cause our gross margin percentage to decline.
From time to time, we experience changes in customer and product mix that affect gross margin. Changes in customer and product mix result primarily from business acquisitions, changes in customer demand, customer acquisitions, selling and marketing activities, and competition. If rapid growth with lower margin customers occurs, we will face pressure to maintain current gross margins, as these customers receive more discounted pricing due to their higher sales volume. There can be no assurance that we will be able to maintain historical gross margins in the future.
We may not be able to retain or expand our customer base if the North American manufacturing industry erodes through acquisition and merger or consolidation activity in our customers’ industries.
Our customer base primarily includes manufacturing and industrial firms. Some of our customers operate in industries that are undergoing consolidation through acquisition and merger activity and some customers have closed as they were unable to compete successfully with overseas competitors. Our facilities are predominately located in the United States and Canada. To the extent that our customers cease U.S. operations or relocate to regions in which we do not have a presence, we could lose their business. Acquirers of manufacturing and industrial firms may have suppliers of choice that do not include us, which could impact our customer base and market share.
Global metal overcapacity and imports of metal products into the United States have adversely affected, and may again adversely affect, United States metal prices, which could impact our sales and results of operations.
At times, global metal production capacity may exceed global consumption of metal products. Such excess capacity sometimes results in metal manufacturers in certain countries exporting steel at prices that are lower than prevailing domestic prices and sometimes at or below their cost of production. Excessive imports of metal into the United States, such as in recent years, have exerted and may exert in the future, downward pressure on United States steel prices which may negatively affect our results of operations.
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Lead time and the cost of our products could increase if we were to lose one of our primary suppliers.
If, for any reason, our primary suppliers of aluminum, carbon steel, stainless steel, or other metals should curtail or discontinue their delivery of such metals in the quantities needed and at prices that are competitive, our business could suffer. The number of available suppliers could be reduced by factors such as industry consolidation and bankruptcies affecting steel and metal producers. For the year ended December 31, 2021, our top 25 suppliers represented approximately 77% of our purchases. We could be significantly and adversely affected if delivery were disrupted from a major supplier. If, in the future, we were unable to obtain sufficient amounts of the necessary metals at competitive prices and on a timely basis from our traditional suppliers, we may not be able to obtain such metals from alternative sources at competitive prices to meet our delivery schedules, which could have a material adverse effect on our sales and profitability.
RISKS RELATED TO MARKET AND ECONOMIC VOLATILITY
Changes in inflation may adversely affect financial performance.
Fluctuations in inflation, could result in lower revenues, higher costs, and decreased margins, profits, and earnings. Rapid or significant inflation could increase the costs we incur to procure, process, package, and deliver our metal to customers and we may not be able to increase selling prices to customers at the same rate, resulting in decreased margins and operating profits. Prolonged periods of deflation could adversely affect the degree to which we are able to maintain or increase selling prices resulting in decreased revenues, margins, and operating profits.
We monitor the risk that the principal markets in which we operate could experience increased inflationary conditions. The onset, duration, and severity of an inflationary period cannot be estimated with precision.
The volatility of the market could result in a material impairment of goodwill.
We evaluate goodwill annually on October 1 and whenever events or changes in circumstances indicate potential impairment. Events or changes in circumstances that could trigger an impairment review include significant underperformance relative to our historical or projected future operating results, significant changes in the manner or the use of our assets or the strategy for our overall business, and significant negative industry or economic trends. We test for impairment of goodwill by assessing various qualitative factors with respect to development in our business and the overall economy and calculating the fair value of a reporting unit using a combination of an income approach based on discounted future cash flows and a market approach at the date of valuation, as necessary. Under the discounted cash flow method, the fair value of each reporting unit is estimated based on expected future economic benefits discounted to a present value at a rate of return commensurate with the risk associated with the investment. Projected cash flows are discounted to present value using an estimated weighted average cost of capital, which considers both returns to equity and debt investors. Please refer to the Section titled “Critical Accounting Estimates - Goodwill,” of Item 7, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” and Note 1 — “Summary of Accounting and Financial Policies” of Part II, Item 8 "Financial Statements and Supplementary Data" for further information.
Poor investment performance or other factors could require us to make significant unplanned contributions to our pension plan and future funding for postretirement employee benefits other than pensions also may require substantial payments from current cash flow.
We provide defined benefit pension plans for certain eligible employees and retirees. The performance of the debt and equity markets affect the value of plan assets. A decline in the market value may increase the funding requirements for these plans. The cost of providing pension benefits is also affected by other factors, including interest rates used to measure the required minimum funding levels, the rate of return on plan assets, discount rates used in determining future benefit obligations, future government regulation, and prior contributions to the plans. Significant unanticipated changes in any of these factors may have an adverse effect on our financial condition, results of operations, liquidity, and cash flows.
RISKS RELATED TO EXPANSION AND INTERNATIONAL OPERATIONS
We may not be able to successfully consummate and complete the integration of future acquisitions, and if we are unable to do so, it could disrupt operations and cause unanticipated increases in costs and/or decreases in revenues and results of operations.
We have grown through a combination of internal expansion, acquisitions, and joint ventures. We intend to continue to grow through selective acquisitions, but we may not be able to identify appropriate acquisition candidates, obtain financing on satisfactory terms, consummate acquisitions, or integrate acquired businesses effectively and profitably into our existing operations. Restrictions contained in the agreements governing our notes, the Ryerson Credit Facility, or our other existing or future debt may also inhibit our ability to make certain investments, including acquisitions, and participations in joint ventures.
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Acquisitions, partnerships, joint ventures, and other business combination transactions, both foreign and domestic, involve various inherent risks, such as uncertainties in assessing value, strengths, weaknesses, liabilities, and potential profitability. There is also risk relating to our ability to achieve identified operating and financial synergies anticipated to result from the transactions. Additionally, problems could arise from the integration of acquired businesses, including unanticipated changes in the business or industry or general economic conditions that affect the assumptions underlying the acquisition. Our future success will depend on our ability to complete the integration of these future acquisitions successfully into our operations. Specifically, after any acquisition, customers may choose to diversify their supply chains to reduce reliance on a single supplier for a portion of their metals needs. We may not be able to retain all of our and an acquisition’s customers, which may adversely affect our business and sales. Integrating acquisitions, particularly large acquisitions, requires us to enhance our operational and financial systems and employ additional qualified personnel, management, and financial resources, and may adversely affect our business by diverting management away from day-to-day operations. Further, failure to successfully integrate acquisitions may adversely affect our profitability by creating significant operating inefficiencies that could increase our operating expenses as a percentage of sales and reduce our operating income. In addition, we may not realize expected cost savings from acquisitions. Any one or more of these factors could cause us to not realize the benefits anticipated or have a negative impact on the fair value of the reporting units. Accordingly, goodwill and intangible assets recorded as a result of acquisitions could become impaired.
Certain of our operations are located outside of the United States, which subjects us to risks associated with international activities.
Certain of our operations are located outside of the United States, primarily in Canada, China, and Mexico. We are subject to the Foreign Corrupt Practices Act (“FCPA”), which generally prohibits U.S. companies and their intermediaries from making corrupt payments or otherwise corruptly giving anything of value to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices. The FCPA applies to covered companies, individual directors, officers, employees, and agents. Under the FCPA, U.S. companies may be held liable for some actions taken by strategic or local partners or representatives. If we or our intermediaries fail to comply with the requirements of the FCPA, governmental authorities in the United States could seek to impose civil and/or criminal penalties.
Our international operations and potential joint ventures may cause us to incur costs and risks that may distract management from effectively operating our North American business, and such operations or joint ventures may not be profitable.
We maintain foreign operations in Canada, China, and Mexico. International operations are subject to certain risks inherent in conducting business in, and with, foreign countries, including price controls, exchange controls, export controls, economic sanctions, duties, tariffs, limitations on participation in local enterprises, nationalization, expropriation and other governmental action, and changes in currency exchange rates. In addition, we may be subject to business disruptions created by health crises and outbreaks of communicable diseases. While we believe that our current arrangements with local partners provide us with experienced business partners in foreign countries, events or issues, including disagreements with our partners, may occur that require attention of our senior executives and may result in expenses or losses that erode the profitability of our foreign operations or cause our capital investments abroad to be unprofitable.
We may be adversely affected by currency fluctuations in the U.S. dollar versus the Canadian dollar, the Chinese renminbi, and the Hong Kong dollar.
We have significant operations in Canada which incur the majority of their metal supply costs in U.S. dollars but earn the majority of their sales in Canadian dollars. Additionally, we have significant assets in China. We may from time to time experience losses when the value of the U.S. dollar strengthens against the Canadian dollar, the Chinese renminbi, or the Hong Kong dollar, which could have a material adverse effect on our results of operations. In addition, we are subject to translation risk when we consolidate our Canadian and Chinese subsidiaries’ net assets into our balance sheet. Fluctuations in the value of the U.S. dollar versus the Canadian dollar, Chinese renminbi, or the Hong Kong dollar could reduce the value of these assets as reported in our financial statements, which could, as a result, reduce our stockholders’ equity.
The Chinese government exerts substantial influence over the manner in which we must conduct our business activities, particularly with regards to the land our facilities are located on.
The Chinese government has exercised and continues to exercise substantial control over the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
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Moreover, the Chinese court system does not provide the same property and contract right guarantees as do courts in the United States and, accordingly, disputes may be protracted and resolution of claims may result in significant economic loss.
Additionally, there is no private ownership of land in China and all land ownership is held by the government of China, its agencies, and collectives, which issue land use rights that are generally renewable. We lease the land where our Chinese facilities are located from the Chinese government. If the Chinese government decided to terminate our land use rights agreements, our assets could become impaired and our ability to meet customer orders could be impacted.
RISKS RELATED TO CYBERSECURITY
Damage to our information technology infrastructure could harm our business.
The unavailability of any of our computer-based systems for any significant period of time could have a material adverse effect on our operations. In particular, our ability to manage inventory levels successfully largely depends on the efficient operation of our computer hardware and software systems. We use management information systems to track inventory information at individual facilities, communicate customer information, and aggregate daily sales, margin, and promotional information. Difficulties associated with upgrades, installations of major software or hardware, and integration with new systems could have a material adverse effect on results of operations. We could be required to expend substantial resources to integrate our information systems with the systems of companies we have acquired. The integration of these systems may disrupt our business or lead to operating inefficiencies. In addition, these systems are vulnerable to, among other things, damage or interruption from fire, flood, tornado, and other natural disasters, power loss, computer system and network failures, operator negligence, physical and electronic loss of data, or security breaches and computer viruses.
We are subject to cybersecurity risks and may incur increasing costs in an effort to minimize those risks.
We depend on the proper functioning and availability of our information technology platform, including communications and data processing systems, in operating our business. These systems include software programs that are integral to the efficient operation of our business. We have established security measures, controls, and procedures, including established recovery procedures for critical systems and business functions, to safeguard our information technology systems and to prevent unauthorized access to such systems and any data processed or stored in such systems, and we periodically evaluate and test the adequacy of such systems, measures, controls, and procedures; however, there can be no guarantee that such systems, measures, controls, and procedures will be effective. Security breaches could expose us to a risk of loss or misuse of our information, litigation, and potential liability. In addition, cyber incidents that impact the availability, reliability, speed, accuracy, or other proper functioning of these systems could have a significant impact on our operations, and potentially on our results. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyberattacks. A significant cyber incident, including system failure, security breach, disruption by malware, or other damage could interrupt or delay our operations, result in a violation of applicable privacy and other laws, damage our reputation, cause a loss of customers, or give rise to monetary fines and other penalties, which could be significant.
RISKS RELATED TO OPERATING OUR BUSINESS
Any significant work stoppages can harm our business.
As of December 31, 2021, we employed approximately 3,700 persons in North America and 300 persons in China. Our North American workforce was comprised of approximately 1,600 office employees and approximately 2,100 plant employees. Seventeen percent of our plant employees were members of various unions, including the United Steel Workers and The International Brotherhood of Teamsters.
Five renewal contracts covering 100 employees were successfully negotiated in 2021. Four contracts covering 104 employees are currently scheduled to expire in 2022.
Certain employee retirement benefit plans are underfunded and the actual cost of those benefits could exceed current estimates, which would require us to fund the shortfall.
As of December 31, 2021, our pension plan had an unfunded liability of $96 million. Our actual costs for benefits required to be paid may exceed those projected and future actuarial assessments to the extent that those costs exceed the current assessment. Under those circumstances, the adjustments required to be made to our recorded liability for these benefits could have a material adverse effect on our results of operations and financial condition and cash payments to fund these plans could have a material adverse effect on our cash flows. We may be required to make substantial future contributions to improve the plan’s funded status.
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Any prolonged disruption of our processing centers could harm our business.
We have dedicated processing centers that permit us to produce standardized products in large volumes while maintaining low operating costs. We may suffer prolonged disruption in the operations of any of these facilities, whether due to labor or technical difficulties, destruction, or damage to any of the facilities or otherwise, which could adversely affect our operating results.
If we are unable to retain, attract, and motivate management and key personnel, it may adversely affect our business.
In order to compete and have continued growth, we must attract, retain, and motivate executives and other key employees, including those in managerial, technical, sales, marketing, and support positions. We believe that our success is due, in part, to our experienced management team. Losing the services of one or more members of our management team such as our CEO, Edward J. Lehner, could adversely affect our business and possibly prevent us from improving our operational, financial, and information management systems and controls. We compete to hire employees and then must train them and develop their skills and competencies. In the future, we may need to retain and hire additional qualified sales, marketing, administrative, operating, and technical personnel, and to train and manage new personnel. Our ability to implement our business plan is dependent on our ability to retain, hire, and train a large number of qualified employees each year. Our results of operations could be adversely affected by increased costs due to increased competition for employees, higher employee turnover, or increased employee benefit costs.
Our risk management strategies may result in losses.
From time to time, we may use fixed-price and/or fixed-volume supplier contracts to offset contracts with customers. Some of our existing supply agreements have required minimum purchase quantities. Under adverse economic conditions, those minimums may exceed our needs. Absent exceptions for force majeure and other circumstances affecting the legal enforceability of the agreements, these minimum purchase requirements may compel us to purchase quantities of raw materials that could significantly exceed our anticipated needs or pay damages to the supplier for shortfalls. In these circumstances, we would attempt to negotiate agreements for new purchase quantities. There is a risk, however, that we would not be successful in reducing purchase quantities, either through negotiation or litigation. If that occurred, we would likely be required to purchase more of a particular raw material in a particular year than we need, negatively affecting our results of operations and cash flows.
Additionally, we may use commodity contracts, foreign exchange contracts, and interest rate swaps to manage our exposure to commodity price risk, foreign currency exchange risk, and interest rate risk. These risk management strategies pose certain risks, including the risk that losses on a hedge position may exceed the amount invested in such instruments. Moreover, a party in a hedging transaction may be unavailable or unwilling to settle our obligations, which could cause us to suffer corresponding losses. A hedging instrument may not be effective in eliminating all of the risks inherent in any particular position. Our profitability may be adversely affected during any period as a result of the use of such instruments.
RISKS RELATED TO REGULATORY AND LEGAL MATTERS
We could incur substantial costs related to environmental, health, and safety laws.
Our operations are subject to increasingly stringent environmental, health, and safety laws. These include laws that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage, and disposal of regulated materials, and the investigation and remediation of contaminated soil, surface water, and groundwater. Failure to maintain or achieve compliance with these laws or with the permits required for our operations could result in substantial increases in operating costs and capital expenditures. In addition, we may be subject to fines and civil or criminal sanctions, third party claims for property damage or personal injury, worker’s compensation or personal injury claims, cleanup costs, or temporary or permanent discontinuance of operations. Certain of our facilities are located in industrial areas, have a history of heavy industrial use, and have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled, and disposed of hazardous and other regulated wastes. Environmental liabilities could exist, including cleanup obligations at these facilities or at off-site locations where materials from our operations were disposed of, which could result in future expenditures that cannot be currently quantified and which could have a material adverse effect on our financial position, results of operations, or cash flows. Such liabilities may be imposed without regard to fault or the legality of a party’s conduct and may, in certain circumstances, be joint and several. Future changes to environmental, health, and safety laws, including those related to climate change, could result in material liabilities and costs, constrain operations, or make such operations more costly for us, our suppliers, and our customers.
In October 2011, the United States Environmental Protection Agency (the “EPA”) named JT Ryerson as one of more than 100 businesses that may be a potentially responsible party for the Portland Harbor Superfund Site. See Note 13: Commitments and Contingencies in the notes to the consolidated financial statements included in Part II, Item 8 of this Report on Form 10-K.
As the EPA has not yet allocated responsibility for the contamination among the potentially responsible parties, including JT Ryerson, we do not currently have sufficient information available to us to determine whether the Record of Decision will be executed
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as currently stated, whether and to what extent JT Ryerson may be held responsible for any of the identified contamination, and how much (if any) of the final plan’s costs might ultimately be allocated to JT Ryerson. Therefore, management cannot predict the ultimate outcome of this matter or estimate a range of potential loss at this time.
Regulations related to conflict-free minerals may force us to incur additional expenses and place us at a competitive disadvantage.
On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the SEC adopted new requirements for reporting companies that use certain minerals and metals, known as “conflict minerals”, in their products, whether or not these products are manufactured by third parties. These requirements require companies to diligence, disclose, and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. Since our supply chain is complex, we may not be able to conclusively verify the origins for all metals used in our products and we may face reputational challenges with our customers. Additionally, as there may be only a limited number of suppliers offering “conflict free” metals, we cannot be sure that we will be able to obtain necessary metals from such suppliers in sufficient quantities or at competitive prices. Accordingly, we could incur significant costs related to the compliance process, including potential difficulty or added costs in satisfying the disclosure requirements. Moreover, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict free which could place us at a competitive disadvantage if we are unable to do so.
Tax changes could affect our effective tax rate, the value of our deferred tax assets, and future profitability.
Our future results could be adversely affected by changes in the effective tax rate or changes in the treatment of deferred tax assets as a result of changes in Ryerson’s overall profitability, changes in the mix of earnings in countries with differing statutory tax rates, changes in tax legislation, the results of the examination of previously filed tax returns, and continuing assessment of the Company’s tax exposures. In particular, although the passage of the Tax Cut and Jobs Act of 2017 reduced the U.S. tax rate to 21%, our future earnings could be negatively impacted by changes in tax legislation including changing tax rates and tax base such as limiting, phasing-out, or eliminating deductions or tax credits, changing rules for earnings repatriations, and changing other tax laws in the U.S. or other countries.
We are subject to litigation that could strain our resources and distract management.
From time to time, we are involved in a variety of claims, lawsuits, and other disputes arising in the ordinary course of business. These suits concern issues including product liability, contract disputes, employee-related matters, and personal injury matters. It is not feasible to predict the outcome of all pending suits and claims, and the ultimate resolution of these matters as well as future lawsuits that could have a material adverse effect on our business, financial condition, results of operations, cash flows, or reputation.
We may face product liability claims that are costly and create adverse publicity.
If any of the products that we sell cause harm to any of our customers, we could be exposed to product liability lawsuits. If we were found liable under product liability claims, we could be required to pay substantial monetary damages. Further, even if we successfully defended ourselves against this type of claim, we could be forced to spend a substantial amount of money in litigation expenses, our management could be required to spend valuable time in the defense against these claims, and our reputation could suffer.
Changes in the method of determining the London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on our outstanding variable rate indebtedness.
Certain of our variable rate debt, including the Ryerson Credit Facility, currently uses LIBOR as a benchmark for establishing certain interest rates. LIBOR is the subject of recent proposals for reform, and on July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In March 2021, the U.K. Financial Conduct Authority confirmed its intention to cease publication of the one-week and two-month USD LIBOR tenors and all tenors for EUR, CHF, JPY, and GBP LIBOR after December 31, 2021 and to cease publication of all other USD LIBOR after June 30, 2023. The Alternative Reference Rates Committee, which was convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has identified the Secured Overnight Financing Rate (“SOFR”) as the recommended risk-free alternative rate for USD LIBOR. On June 30, 2023, when LIBOR rates cease to be published, the interest rate on the Ryerson Credit Facility will be replaced with SOFR. At this time, it is not possible to predict the effect any discontinuance, modification, or other reforms to LIBOR, or the establishment of alternative reference rates such as SOFR, or any other reference rate, will have on the Company or its borrowing costs. The consequences of these developments with respect to LIBOR cannot be entirely predicted but may result in an increase in the interest cost of our variable rate indebtedness. In addition, the overall financial market may be disrupted as a result of the phase-out or replacement of LIBOR. Disruption in the financial market could have a material adverse effect on our financial position, results of operations, and liquidity.
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RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
The market price for our common stock may be volatile.
Historically, there has been volatility in the market price for our common stock. Furthermore, the market price of our common stock could fluctuate substantially in the future in response to a number of factors, including, but not limited to, the risk factors described herein. Examples include:
• changes in commodity prices, especially metals;
• sales of our common stock by large or controlling shareholders;
• the amount of shares acquired for short-term investments;
In the past, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their specific operating performance. These factors may adversely affect the trading price of our common stock, regardless of actual operating performance.
In addition, stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. In the past, some shareholders have brought securities class action lawsuits against companies following periods of volatility in the market price of their securities. In the future we may be the target of similar litigation. Securities litigation, regardless of whether our defense is ultimately successful, could result in substantial costs and divert management’s attention and resources.
We paid cash dividends on our common stock in the third and fourth quarter of 2021 but any future dividend payments are at the discretion of our Board of Directors.
The amounts that may be available to us to pay cash dividends are restricted under our debt agreements. Any payment of cash dividends on our common stock in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions, and other factors deemed relevant by our Board of Directors. Therefore, you should not rely on dividend income from shares of our common stock. For more information, see “Dividend Policy.” Your only opportunity to achieve a return on your investment in us may be if the market price of our common stock appreciates and you sell your shares at a profit, but there is no guarantee that the market price for our common stock will ever exceed the price that you pay for our common stock.
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Our corporate documents and Delaware law contain provisions that could discourage, delay, or prevent a change in control of the Company.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors. These provisions:
These anti-takeover provisions and other provisions under Delaware law could discourage, delay, or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire.
Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.
Our Board of Directors will have the authority to issue preferred stock and to determine the preferences, limitations, and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend, and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium over the market price, and adversely affect the market price and the voting and other rights of the holders of our common stock.
RISKS RELATED TO OUR CAPITAL STRUCTURE
We have a substantial amount of indebtedness, which could adversely affect our financial position and prevent us from fulfilling our financial obligations.
We currently have a substantial amount of indebtedness. As of December 31, 2021, our total indebtedness was $639.3 million and we had approximately $670 million of unused capacity under the Ryerson Credit Facility. Our substantial indebtedness may:
We may also incur additional indebtedness in the future. The terms of the Ryerson Credit Facility and the indenture governing our outstanding notes restrict but do not prohibit us from doing so, and the indebtedness incurred in compliance with these restrictions could be substantial. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.
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The covenants in the Ryerson Credit Facility and the indenture governing our notes impose, and covenants contained in agreements governing indebtedness that we incur in the future may impose, restrictions that may limit our operating and financial flexibility.
The Ryerson Credit Facility and the indenture governing our outstanding notes contain a number of significant restrictions and covenants that limit our ability and the ability of our restricted subsidiaries, including JT Ryerson, to:
• incur additional debt;
• pay dividends on our capital stock or repurchase our capital stock;
• make certain investments or other restricted payments;
• create liens or use assets as security in other transactions;
• engage in transactions with affiliates.
The terms of the Ryerson Credit Facility require that, in the event availability under the facility declines to a certain level, we maintain a minimum fixed charge coverage ratio at the end of each fiscal quarter. Total credit availability is limited by the amount of eligible accounts receivable, inventory, and qualified cash pledged as collateral under the agreement insofar as the Company is subject to a borrowing base comprised of the aggregate of these three amounts, less applicable reserves. As of December 31, 2021, total credit availability under the Ryerson Credit Facility was $670 million. See discussion regarding the Ryerson Credit Facility in Note 10: “Debt” of Part II, Item 8 “Financial Statements and Supplementary Data” as well as the discussion within the “Liquidity and Capital Resources” section of Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Additionally, subject to certain exceptions, the indenture governing the outstanding notes restricts JT Ryerson’s ability to pay Ryerson Holding dividends. Our future indebtedness may contain covenants more restrictive in certain respects than the restrictions contained in the Ryerson Credit Facility and the indenture governing the notes. Operating results below current levels or other adverse factors, including a significant increase in interest rates, could result in our being unable to comply with financial covenants that are contained in the Ryerson Credit Facility or that may be contained in any future indebtedness. In addition, complying with these covenants may also cause us to take actions that are not favorable to holders of our notes and may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
We may not be able to generate sufficient cash to service all of our indebtedness.
We are highly leveraged. Our ability to make payments on our indebtedness depends on our ability to generate cash in the future. Our outstanding notes, the Ryerson Credit Facility, and our other outstanding indebtedness are expected to account for significant cash interest expenses. Accordingly, we will have to generate significant cash flows from operations to meet our debt service requirements. If we do not generate sufficient cash flow to meet our debt service and working capital requirements, we may be required to sell assets, seek additional capital, reduce capital expenditures, restructure or refinance all or a portion of our existing indebtedness, or seek additional financing. Moreover, insufficient cash flow may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all.
The right to receive payment on the 2028 Notes and the guarantees will be subordinated to the liabilities of non-guarantor subsidiaries.
The notes and related guarantees are structurally subordinated to all indebtedness of our subsidiaries that are non-guarantors of the 2028 Senior Secured Notes (the “2028 Notes”). While the indenture governing the 2028 Notes limits the indebtedness and activities of these non-guarantor subsidiaries, holders of indebtedness of, and trade creditors of, non-guarantor subsidiaries, including lenders under bank financing agreements, are entitled to payments of their claims from the assets of such subsidiaries before those assets are made available for distribution to any guarantor, as direct or indirect shareholder. While the non-guarantor subsidiaries have agreed under the indenture not to pledge or encumber their assets (other than with respect to permitted liens) without equally and ratably securing the notes, they will not guarantee the 2028 Notes notwithstanding any such pledge or encumbrance in favor of the 2028 Notes.
The non-guarantor subsidiaries represented, respectively, 9.7% and 14.3% of our net sales and EBITDA for the fiscal year ended December 31, 2021. In addition, these non-guarantor subsidiaries represented respectively, 12.7% and 8.5% of our assets and liabilities, as of December 31, 2021.
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Accordingly, in the event that any of the non-guarantor subsidiaries or joint venture entities become insolvent, liquidates, or otherwise reorganizes:
Because a portion of our indebtedness bears interest at rates that fluctuate with changes in certain prevailing short-term interest rates, we are vulnerable to interest rate increases.
A portion of our indebtedness, including the Ryerson Credit Facility, bears interest at rates that fluctuate with changes in certain short-term prevailing interest rates. As of December 31, 2021, we had $316.0 million of outstanding borrowings under the Ryerson Credit Facility, with an additional $670 million available for borrowing under such facility. Assuming a consistent level of debt through-out 2021 and considering the impact of interest rate swaps, a 100 basis point increase in the interest rate on our floating rate debt effective from the beginning of the year would increase our interest expense under the Ryerson Credit Facility and the China credit facility by approximately $2.0 million, on an annual basis. If interest rates increase dramatically, we could be unable to service our debt, which could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Changes in our credit ratings and outlook may reduce access to capital and increase borrowing costs.
Our credit ratings are based on a number of factors, including our financial strength and factors outside of our control, such as conditions affecting our industry generally or the introduction of new rating practices and methodologies. We cannot provide assurances that our current credit ratings will remain in effect or that the ratings will not be lowered, suspended, or withdrawn entirely by the rating agencies. If rating agencies lower, suspend, or withdraw the ratings, the market price or marketability of our securities may be adversely affected. In addition, any negative change in ratings could make it more difficult for us to raise capital on acceptable terms, impact the ability to obtain adequate financing, and result in higher interest costs for our existing credit facilities, including the Ryerson Credit Facility, or on future financings.
RISKS RELATED TO OUR STOCKHOLDER BASE
Platinum owns a significant percentage of our stock and has the right to nominate a majority of the members of the Corporation’s board and will be able to exert control over matters subject to stockholder approval.
Platinum owns approximately 21,037,500 shares of our common stock, which is approximately 55% of our issued and outstanding common stock. Therefore, Platinum may be able to determine all matters requiring stockholder approval. For example, Platinum may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that our stockholders may believe are in their best interest as stockholders.
The Company is party to an investor rights agreement (the “Investor Rights Agreement”) with certain affiliates of Platinum which provides, among other things, that for so long as Platinum collectively beneficially owns (i) at least 30% of the voting power of the outstanding capital stock of the Company, Platinum will have the right to nominate for election to the board of directors of the Company no fewer than that number of directors that would constitute a majority of the number of directors if there were no vacancies on the board, (ii) at least 15% but less than 30% of the voting power of the outstanding capital stock of the Company, Platinum will have the right to nominate two directors, and (iii) at least 5% but less than 15% of the voting power of the outstanding capital stock of the Company, Platinum will have the right to nominate one director. The agreement also provides that if the size of the board of directors is increased or decreased at any time, Platinum’s nomination rights will be proportionately increased or decreased, respectively, rounded up to the nearest whole number. As a result of Platinum’s ownership of a majority of the Company’s outstanding capital stock as well its board nomination rights pursuant to the Investor Rights Agreement, Platinum may significantly influence or effectively control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, and the payment of dividends. In addition, Platinum has significant control over our decisions to enter into any other corporate transaction.
The interests of Platinum may not in all cases be aligned with the interests of the other holders of our common stock. For example, a sale of a substantial number of shares of stock in the future by Platinum could cause our stock price to decline. Further, Platinum could cause us to make acquisitions that increase the amount of the indebtedness that is secured or senior to the Company’s existing debt or sell revenue-generating assets, impairing our ability to make payments under such debt. Additionally, Platinum is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete
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directly or indirectly with us. Accordingly, Platinum may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. In addition, Platinum may have an interest in pursuing acquisitions, divestitures, and other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to holders of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
As of December 31, 2021, the Company’s facilities are set forth below:
Operations in the United States
JT Ryerson maintains 78 operational facilities, including 6 locations that are dedicated to administration services. All of our metals service center facilities are in good condition and are adequate for JT Ryerson’s existing operations. Approximately 65% of these facilities are leased. The lease terms expire at various times through 2036. JT Ryerson’s properties and facilities are adequate to serve its present and anticipated needs.
Location Own/Lease
Birmingham, AL Owned
Mobile, AL Owned
Fort Smith, AR Owned
Hickman, AR** Leased
Little Rock, AR** Leased
Phoenix, AZ Leased
Fresno, CA Leased
Livermore, CA Leased
Vernon, CA Owned
Commerce City, CO Owned
Wilmington, DE Leased
Jacksonville, FL Owned
Tampa Bay, FL Leased
Lavonia, GA Leased
Norcross, GA Owned
Des Moines, IA Owned
Eldridge, IA** Leased
Marshalltown, IA Owned
Chicago, IL (Headquarters)* Leased
Chicago, IL Leased
Dekalb, IL Leased
Elgin, IL Leased
Lisle, IL* Leased
Burns Harbor, IN Owned
Indianapolis, IN Owned
Portage, IN** Owned
Wichita, KS Leased
Shelbyville, KY** Leased
Shreveport, LA Owned
St. Rose, LA Owned
Devens, MA Owned
Grand Rapids, MI* Leased
Lansing, MI Leased
Minneapolis, MN Leased
Plymouth, MN Owned
Maryland Heights, MO Leased
North Kansas City, MO Leased
Jackson, MS Owned
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Charlotte, NC** Owned
Greensboro, NC (2) Owned
Pikeville, NC Leased
Youngsville, NC Leased
Omaha, NE Owned
Hampstead, NH* Leased
Lancaster, NY Leased
Cincinnati, OH Owned
Columbus, OH Leased
Hamilton, OH* Leased
Hilliard, OH Leased
Stow, OH Leased
Streetsboro, OH Leased
Strongsville, OH Leased
Oklahoma City, OK Leased
Tulsa, OK Leased
Ambridge, PA** Leased
Fairless Hills, PA Leased/Vacated
Charleston, SC** Owned
Greenville, SC Owned
Wellford, SC Owned
Chattanooga, TN Leased
Gallatin, TN Leased
Knoxville, TN* Leased
Memphis, TN Leased
Dallas, TX Leased
El Paso, TX Leased
Houston, TX Leased
Houston, TX (2) Leased
McAllen, TX Leased
Odessa, TX Leased/Vacated
Salt Lake City, UT Leased
Pounding Mill, VA Leased
Richmond, VA Leased
Renton, WA Leased
Spokane, WA Leased
Green Bay, WI Owned
Green Bay, WI Leased
Hammond, WI Leased
Milwaukee, WI Owned
* Office space only
** Processing centers
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Operations in Canada
Ryerson Canada, a wholly-owned indirect Canadian subsidiary of Ryerson Holding, has nine operational facilities in Canada. All of the metals service center facilities are in good condition and are adequate for Ryerson Canada’s existing and anticipated operations. Four facilities are leased. The lease terms expire at various times through 2025.
Location Own/Lease
Calgary, AB Owned
Edmonton, AB Owned
Richmond, BC Owned
Winnipeg, MB Owned
Winnipeg, MB Leased
Saint John, NB Owned
Brampton, ON Leased
Burlington, ON (includes Canadian Headquarters) Leased
Vaudreuil, QC Leased
Operations in China
Ryerson China, an indirect wholly-owned subsidiary of Ryerson Holding, has four service and processing centers in China, in Guangzhou, Dongguan, Kunshan, and Tianjin, performing coil processing, sheet metal fabrication, and plate processing. Ryerson China’s headquarters office building is located in Kunshan. We own all of our China facilities and have purchased the related land use rights. All of the facilities are in good condition and are adequate for Ryerson China’s existing and anticipated operations.
Operations in Mexico
Ryerson Mexico, an indirect wholly-owned subsidiary of Ryerson Holding, has four facilities in Mexico. We have service centers in Monterrey, Tijuana, Hermosillo, and Queretaro, all of which are leased. The lease terms expire at various times through 2029. The facilities are in good condition and are adequate for Ryerson Mexico’s existing and anticipated operations.
ITEM 3. LEGAL PROCEEDINGS.
For information concerning legal proceedings as of December 31, 2021, please refer to Note 13: Commitments and Contingencies in the notes to the consolidated financial statements included in Part II, Item 8 of this Report on Form 10-K, which is incorporated into this item by reference.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
Market Information for Common Stock
Our common stock has been listed on the New York Stock Exchange under the symbol “RYI” and was first traded on August 13, 2014.
Holders
As of February 21, 2022, there were 2 stockholders of record of our common stock. Because many shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these record holders.
Dividend Policy
We paid cash dividends on our common stock in the third and fourth quarter of 2021, of $0.08 and $0.085 per share, respectively. Any payment of cash dividends on our common stock in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions, including under the Ryerson Credit Facility and our outstanding notes, and other factors deemed relevant by our Board of Directors.
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Performance Graph
The following graph and accompanying table show the cumulative total return to stockholders of Ryerson Holding’s common stock relative to the cumulative total returns of the S&P 500 and a metals service center peer group (the “Peer Group”). The graph tracks the performance of a $100 investment in each of the indices (with reinvestment of dividends) from December 31, 2016 to December 31, 2021. While there is no nationally-recognized industry index consisting of metals service center companies, Ryerson considers its Peer Group to consist of Reliance Steel & Aluminum Co., Olympic Steel Inc., and Worthington Industries, Inc., each of which has securities listed for trading on the NASDAQ; and Russel Metals Inc., which has securities listed for trading on the Toronto Stock Exchange. The returns of each member of the Peer Group are weighted according to that member’s stock market capitalization. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
This graph is not deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 (“the Exchange Act”), and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933 or the Exchange Act.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On August 4, 2021, our Board of Directors authorized a share repurchase program that permits the purchase of up to $50 million of the Company’s outstanding shares of common stock. The authorization is effective through August 4, 2023, unless terminated. Under the share repurchase program, management is not obligated to repurchase, but has discretion in determining the conditions under which shares may be purchased from time to time. We may opportunistically repurchase shares through open market purchases, privately negotiated transactions, and transactions structured through investment banking institutions under plans relying on Rule 10b5-1 or Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. Repurchased shares are reverted to the status of Treasury Stock. During the year ended December 31, 2021, we repurchased 80,432 shares at an average cost of $22.39 per share, or $1.8 million in total. As of December 31, 2021, we had remaining authorization to purchase an additional $48.2 million of shares.
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Our share repurchase activity during the three months ended December 31, 2021 was as follows:
(In millions, except shares and per share data)
Recent Sale of Unregistered Securities and Use of Proceeds
None.
ITEM 6. RESERVED.
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The following discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements of Ryerson Holding Corporation and Subsidiaries and the Notes thereto in Item 8. “Financial Statements and Supplementary Data.” This discussion contains forward-looking statements that involve risks and uncertainties. See the section entitled “Special Note Regarding Forward-Looking Statements.” Our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including those discussed in Item 1A. “Risk Factors” and elsewhere in this Form 10-K.
This section of this Form 10-K generally discusses 2021 and 2020 items and year-over-year comparisons between 2021 and 2020. Discussions of 2019 items and year-over-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Overview
Business
Ryerson Holding Corporation (“Ryerson Holding”), a Delaware corporation, is the parent company of Joseph T. Ryerson & Son, Inc. (“JT Ryerson”), a Delaware corporation. Affiliates of Platinum Equity, LLC (“Platinum”) own approximately 21,037,500 shares of our common stock, which is approximately 55% of our issued and outstanding common stock.
We are a leading metals service center, value-added processor, and distributor of industrial metals with operations in the United States through JT Ryerson, in Canada through our indirect wholly-owned subsidiary Ryerson Canada, Inc., a Canadian corporation (“Ryerson Canada”), and in Mexico through our indirect wholly-owned subsidiary Ryerson Metals de Mexico, S. de R.L. de C.V., a Mexican corporation (“Ryerson Mexico”). In addition to our North American operations, we conduct processing and distribution operations in China through an indirect wholly-owned subsidiary, Ryerson China Limited, a Chinese limited liability company (“Ryerson China”). Unless the context indicates otherwise, Ryerson Holding, JT Ryerson, Ryerson Canada, Ryerson China, and Ryerson Mexico, together with their subsidiaries, are collectively referred to herein as “Ryerson,” “we,” “us,” “our,” or the “Company.”
Industry and Operating Trends
We are a metals service center providing value-added processing and distribution of industrial metals with operations in the United States, Canada, Mexico, and China. We purchase large quantities of metal products from primary producers and sell these materials in smaller quantities to a wide variety of metals-consuming industries. We carry a full line of nearly 75,000 products in stainless steel, aluminum, carbon steel, and alloy steels and a limited line of nickel and red metals in various shapes and forms. In addition to our metals products, we offer numerous value-added processing and fabrication services, and nearly 80% of the metals products we sell are processed by us by bending, beveling, blanking, blasting, burning, cutting-to-length, drilling, embossing, flattening, forming, grinding, laser cutting, machining, notching, painting, perforating, polishing, punching, rolling, sawing, scribing, shearing, slitting, stamping, tapping, threading, welding, or other techniques to process materials to a specified thickness, length, width, shape, and surface quality pursuant to specific customer orders.
Similar to other metals service centers, we maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon customer forecasts, historic buying practices, supply agreements with customers, mill lead times, and market conditions. Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders. At the request of our customers, we have entered into swaps in order to mitigate our customers’ risk of volatility in the price of metals and we have entered into metals hedges to mitigate our own risk of volatility in the price of metals. We have no long-term, fixed-price metals purchase contracts. When metals prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits and earnings as we sell existing metals inventory. When metals prices increase, competitive conditions will influence how much of the price increase we may pass on to our customers.
The metals service center industry is cyclical and volatile in both demand and pricing, and difficult to predict. In 2021, Ryerson experienced both stronger pricing and demand compared to 2020, with average selling prices 57.0% higher and shipments 4.3% higher, as steel supply was limited throughout much of the year while end-market demand was strong. Changes in average selling
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prices are primarily driven by commodity metals prices, which impact Ryerson’s selling prices over the subsequent three to six-month period.
Throughout 2021, indicators in the key steel industry end markets that had previously reported weakness as a result of the COVID-19 pandemic, reported growth. This is evidenced by the Institute for Supply Management’s Purchasing Managers’ Index (“PMI”), which reported strength in each month of the year with readings above 50%, indicating general expansion in factory activity. This strength has continued into 2022 with a January reading of 57.6, which marks the twentieth consecutive month of expansion. Similarly, U.S. Industrial Production, which reports year-over-year industrial sector business output, reported growth in output for the eleventh consecutive month in January 2022.
According to the Metal Service Center Institute, North American service center volumes increased by 7.6% in 2021 compared to 2020. On a North American basis, this volume growth outpaced Ryerson’s, as Ryerson’s North American volumes increased by 4.5% over the same period. Ryerson’s demand growth was experienced most significantly in HVAC, commercial ground transportation, and construction sectors on a year-over-year basis.
COVID-19
At this time, our business, financial results, and the business of our customers continue to be impacted by COVID-19, including economic pressures, as well as supply chain disruptions and tightness stemming from COVID-19. This is perpetuated by increasing demand momentum. There is uncertainty in the nature and degree of COVID-19’s continued effects over time. Meanwhile, we remain committed to ensuring the safety of our employees and protecting the health and well-being of the communities in which we operate. We continue to operate our business under COVID-19 safety policies until we are certain that related risks have subsided.
2021 Performance Highlights
These key metrics illustrate Ryerson’s financial performance for the full year 2021 compared to 2020:
64% increase 230bps increase $360M increase
Diluted EPS Adjusted Diluted EPS Cash from Operating Activities
A reconciliation of diluted EPS to adjusted diluted EPS is provided below.
Domestic steel demand was strong in 2021 while supply remained limited throughout much of the year, driving significant increases in average selling prices. Compared to 2020, average selling prices increased by 57.0% and tons shipped increased by 4.3%, resulting in a year-over-year revenue increase of 63.7%. Gross margin expanded by 230 bps from 2020 as rapidly increasing market prices outpaced inventory costs. Warehousing, delivery, selling, general, and administrative expenses for 2021 increased by $156.9 million compared to 2020 driven by increased variable compensation. However, expenses as a percentage of sales decreased from 16.0% to 12.5% as the Company effectively managed inflationary pressures in labor, logistics, and operating supplies. As a result of the Company’s exceptional performance amidst the year’s supportive conditions, we generated record net income attributable to Ryerson Holding Corporation of $294.3 million, or $7.56 per diluted share, in 2021. This compares to a net loss attributable to Ryerson Holding Corporation of $65.8 million, or a loss of $1.73 per diluted share, for 2020.
To provide greater insight into the Company’s 2021 operating trends apart from the year’s one-time transactions, Ryerson provides adjusted net income (loss) and diluted adjusted earnings (loss) per share figures, which are not U.S. generally accepted accounting principles (“GAAP”) financial measures, to compliment the reported GAAP net income (loss) and diluted earnings (loss) per share figures. Management uses these metrics to assess year-over-year performance excluding non-recurring transactions. Adjusted net income (loss) and adjusted diluted earnings (loss) per share do not represent, and should not be used as a substitute for, net income or earnings per share determined in accordance with GAAP. Illustrated in the below table, the 2021 net income attributable to Ryerson Holding Corporation of $294.3 million includes a $109.6 million gain related to the sale-leaseback transactions
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completed during the year. It also includes $5.5 million of expenses related to the redemption of $100.0 million of the 8.50% senior secured notes due 2028 (the “2028 Notes”),which was enabled by the sale-leaseback transaction proceeds, as well as a $50 million redemption utilizing cash on hand. Both of these 2028 Notes redemptions were exercised in-line with the optional redemption features secured in the Company’s 2020 bond issuance. 2021 net income additionally includes $98.3 million of nonrecurring pension settlement expenses drivenby the third quarter partial annuitization of our pension liabilities. See “Pension Funding” discussion below for further details on this transaction. After adjusting for these non-core business transactions and the related provision for income taxes,the adjusted net income attributable to Ryerson Holding Corporation for 2021 is $290.0 million, anincrease of $293.1 million compared to the prior year’s adjusted net loss attributable to Ryerson Holding Corporation of $3.1 million which included adjustments for restructuring and other charges, loss on retirement of debt related to the redemption price paid to creditors as well as unamortized debt issuance costs written off related to the refinance of the 11.0% Senior Secured Notes,pension settlement charges related to a partial annuitization of pension liabilities, and a lump sum settlement offering in 2020, and related income taxes.
(Dollars and shares in millions, except per share data) 2021 2020
Net income (loss) attributable to Ryerson Holding Corporation $ 294.3 $ (65.8)
Gain on sale of assets (109.6) —
Restructuring and other charges — 2.2
Loss on retirement of debt 5.5 17.7
Pension settlement charge 98.3 64.6
Provision (benefit) for income taxes 1.5 (21.8)
Diluted earnings (loss) per share $ 7.56 $ (1.73)
Adjusted diluted earnings (loss) per share 7.46 (0.08)
Shares outstanding - diluted 38.9 38.0
Ryerson generated cash from operating activities of $35 million in 2021, a decrease compared to $278 million generated in 2020 driven by increased working capital requirements amidst recovering demand and rising costs in the industry.
Ryerson’s 2021 Strategy Achievements
Ryerson’s market strategy focuses on providing excellent customer experiences consistently with speed at scale. Our culture is based on our trademarked “say yes, figure it out” mantra as we strive to grow volume and sustainably expand margins by increasing our fabrication business and improving our speed through our use of both tools and analytics.
Ryerson’s financial strategy includes a focus on generating strong cash from operating activities, enabled by industry-leading working capital management and an improved through the cycle operating model to effectively decrease both net debt and fixed cash commitments. In 2021, the Company continued to progress its financial strategy and recorded several milestone achievements. During the year, Ryerson successfully executed sale-leaseback transactions pursuant to which the Company sold thirteen properties and generated proceeds of $163 million. The Company subsequently utilized the proceeds to redeem $100 million of its 2028 Notes. In addition to this redemption, Ryerson also redeemed another $50 million of the 2028 Notes at a price of 103%. After these partial redemptions, $300 million aggregate principal amount of the 2028 Notes remains outstanding, a decrease of 40% compared to the $500 million in original principal issued in July of 2020. This $200 million reduction in the Notes decreased the Company’s annual interest expense by $17 million. As a result of the Notes redemptions, total debt decreased from $740 million as of December 31, 2020 to $639 million as of December 31, 2021 and net debt (defined as total debt less cash and cash equivalents, and restricted cash from sales of property, plant, and equipment) decreased from $679 million to $588 million. Net debt is not a GAAP financial measure. We believe that net debt provides a clearer perspective of the Company’s overall debt situation. Net debt should not be used as a substitute for total debt outstanding as determined in accordance with GAAP. A reconciliation of debt to net debt is provided with the “Liquidity and Capital Resources” discussion below.
In addition, Ryerson furthered its financial transformation by completing another partial pension obligation annuitization in the third quarter of 2021. This $206 million annuitization not only reduced the Company’s legacy liability risks but is also expected to yield economic savings of approximately $5 million on a net present value basis.
In August, Ryerson’s Board of Directors declared a first-time quarterly cash dividend of $0.08 per share of common stock which was paid on September 16, 2021. At the same time, the Board also approved a share repurchase program authorizing the Company to purchase up to an aggregate of $50 million of the Company’s common stock over the following two years. These additions to Ryerson’s capital allocation plan reflect the Company’s commitment of delivering value to shareholders and underscore its confidence in its transformed balance sheet and improved operating model while also providing the ability to purchase shares below intrinsic value. Further underscoring this commitment and confidence, Ryerson’s Board of Directors approved a half-cent increase to the dividend in November 2021. The Company distributed this increased dividend of $0.085 per share of common stock to
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holders on December 16, 2021. As of December 31, 2021, the Company had repurchased approximately 80,000 shares at an average price of $22.46, resulting in a return to shareholders of approximately $1.8 million. Combined with distributed dividend payments, Ryerson returned a total of $8.2 million to shareholders in 2021.
In recognition of the Company’s substantially reduced debt, Ryerson received credit upgrades from each of its covering agencies in 2021. Moody’s upgraded Ryerson’s corporate rating to B1 from B2, Standard & Poor’s (“S&P”) upgraded it to B+ from B, and Fitch issued an upgrade to BB- from B+. The following table summarizes the Company’s ratings by agency as of December 31, 2021.
Agency Corporate Revolving Credit Facility Senior Secured Outlook
Moody's B1 N/A B2 Stable
S&P B+ N/A B+ Stable
Fitch BB- BB+ BB- Stable
As a result of the July 2020 bond refinance and subsequent debt reductions, cash interest payments in 2021 totaled $51 million, compared to $62 million in 2020. Pension and retiree medical contributions increased compared to the prior year to $27 million as Ryerson paid an additional $12 million of pension contributions in 2021 that were deferred from 2020 as allowed under the Coronavirus Aid, Relief, and Economic Security Act (“The CARES Act”). Additionally, given the improved operating environment of 2021, the Company increased its capital expenditure budget, driving cash contributions to maintenance capital expenditures up to $37 million for the year, which includes maintenance capital expenditures that were deferred from 2020 as spending was reduced due to uncertainties surrounding the COVID-19 pandemic. In all, fixed cash commitments totaled $115 million in 2021, an increase compared to $88 million in the previous year.
Industry Developments
On August 10, 2021, the Senate passed the Infrastructure Investment and Jobs Act, a $1.2 trillion bill which features $550 billion in new federal spending over 5 years. Included in this spending is investment in roads, bridges, passenger and freight rail, electrical grid improvements, expansion of broadband access, transit systems, infrastructure for electric vehicles, and improvements to water systems. As of the date of this report, the bill is yet to receive passage by the House of Representatives. The Company believes that the additional government spending on infrastructure projects contemplated under the Infrastructure Investment and Jobs Act, as proposed, may generate additional demand for our products especially within the industrial equipment, construction, green energy, and transportation industries. Accordingly, we would anticipate that the Infrastructure Investment and Jobs Act would be beneficial to the Company, but ultimately the impact on the Company’s operations is unclear.
On April 22, 2021, the U.S. International Trade Commission (“USITC”) confirmed the Department of Commerce’s affirmative antidumping duty determinations and injury determinations regarding US imports of common alloy aluminum sheet. As a result, the USITC has issued final antidumping duty orders on U.S. imports of common alloy aluminum sheet from the following sixteen countries: Bahrain, Brazil, Croatia, Egypt, Germany, India, Indonesia, Italy, Oman, Romania, Serbia, Slovenia, South Africa, Spain, Taiwan, and Turkey. Antidumping rates differ greatly depending on country of origin and producing mill and range from the low single digits to as high as 243%. Ryerson anticipates that the actions of the USITC will support the prices of domestically produced aluminum sheet and therefore benefit the Company’s average selling prices.
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On March 1, 2018, the White House announced a 25% tariff on all imported steel products and 10% tariff on all imported aluminum products for an indefinite amount of time under Section 232 of the Trade Expansion Act (“Section 232”). These tariffs, while in effect, have discouraged metal imports from non-exempt countries and have had a favorable impact on the prices of the products we sell and our results of operations. Over the weekend of October 30th and 31st, 2021, the US and European Union agreed to revise Section 232 tariffs applied to the import of European steel and aluminum, allowing for the duty-free import of European steel and aluminum into the US, subject to tariff rate quotas. Specifically, the tariff rate quota includes the duty-free import of 3.3 million metric tons of steel melted and poured in the EU, 18 thousand metric tons of unwrought aluminum, and 366 thousand metric tons of semi-finished aluminum. The revision was to be applied on January 1, 2022. At this time, the scope of this agreement and its impact to Ryerson are unclear.
Acquisitions
On September 1, 2021, JT Ryerson acquired Specialty Metals Processing, Inc. (“SMP”), a toll processor located in Stow, Ohio, for $14.0 million, net of cash acquired. SMP processes stainless steel, aluminum, titanium, and nickel alloy products in a variety of industries including aerospace. SMP's expertise in buffing, grinding, and polishing finishes adds to Ryerson's value-added processing capabilities.
Components of Results of Operations
We generate substantially all of our revenue from sales of our metals products. The majority of revenue is recognized upon delivery of product to customers. The timing of shipment is substantially the same as the timing of delivery to customers given the proximity of our distribution sites to our customers. Revenues associated with products which we believe have no alternative use, and where the Company has an enforceable right to payment, are recognized on an over-time basis. Over-time revenues are recorded in proportion with the progress made toward completing the performance obligation.
Sales, cost of materials sold, gross profit, and operating expense control are the principal factors that impact our profitability:
Net Sales. Our sales volume and pricing are driven by market demand, which is largely determined by overall industrial production and conditions in specific industries in which our customers operate. Sales prices are also primarily driven by market factors such as overall demand and availability of product. Our net sales include revenue from product sales, net of returns, allowances, customer discounts, and incentives.
Cost of materials sold. Cost of materials sold includes metal purchase and in-bound freight costs, third-party processing costs, and direct and indirect internal processing costs. The cost of materials sold fluctuates with our sales volume and our ability to purchase metals at competitive prices. Increases in sales volume generally enable us to improve purchasing leverage with suppliers as we buy larger quantities of metals inventories.
Gross profit. Gross profit is the difference between net sales and the cost of materials sold. Our sales prices to our customers are subject to market competition. Achieving acceptable levels of gross profit is dependent on our acquiring metals at competitive prices, our ability to manage the impact of changing prices, and efficiently managing our internal and external processing costs.
Operating expenses. Optimizing business processes and asset utilization to lower fixed expenses such as employee, facility, and truck fleet costs, which cannot be rapidly reduced in times of declining volume, and maintaining low fixed cost structure in times of increasing sales volume, have a significant impact on our profitability. Operating expenses include costs related to warehousing and distributing our products as well as selling, general, and administrative expenses.
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Results of Operations
The following table sets forth our condensed consolidated statements of operations data:
Gain on sale of assets (109.6 ) (1.9 ) — —
Restructuring and other charges — — 2.2 —
Income (loss) before income taxes 389.1 6.9 (90.1 ) (2.6 )
Provision (benefit) for income taxes 93.7 1.7 (24.8 ) (0.7 )
Less: Net income attributable to noncontrolling interest 1.1 — 0.5 —
Basic earnings (loss) per share $ 7.67 $ (1.73 )
Diluted earnings (loss) per share $ 7.56 $ (1.73 )
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The following charts show the Company’s percentage of sales by major product lines for 2021 and 2020:
Comparison of the year ended December 31, 2021 with the year ended December 31, 2020
Net Sales
Year Ended December 31, Dollar Percentage
($ in millions)
Year Ended December 31, Tons Percentage
(in thousands)
Year Ended December 31, Price Percentage
Revenue for the year ended December 31, 2021, increased from the same period a year ago due to higher average selling prices caused by supply constraints in 2021 and higher tons sold as metals market conditions began to improve in the second half of 2020 after declining sharply at the beginning of 2020 due to the global outbreak of COVID-19. Compared to the year ago period, average selling price increased for all of our product lines in 2021 with the largest increases in our carbon plate, carbon flat, stainless flat, and stainless plate products. Tons sold increased in 2021 overall, with increases in our aluminum flat, stainless flat, and aluminum long product lines partially offset by decreases in our carbon plate, aluminum plate, and stainless plate product lines. Tons sold per ship day were 8,313 in 2021 as compared to 7,941 in 2020.
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Cost of Materials Sold
Year Ended December 31,
$ % of Net Sales $ % of Net Sales Dollar change Percentage change
($ in millions)
Year Ended December 31, Dollar Percentage
The increase in cost of materials sold in 2021 compared to the year ago period is primarily due to an increase in average cost of materials sold per ton driven by supply constraints and the increase in tons sold. The average cost of materials sold increased across all of our product lines with the average cost of materials sold for our carbon plate, carbon flat, and carbon long product lines increasing more than our other product lines during 2021.
During 2021, LIFO expense was $366 million related to increases in pricing for all product lines with the largest impact from carbon products. During 2020, LIFO income was $12 million related to decreases in pricing for all product lines, which was muted by the impact of a reduction in tons in inventory, which led to the liquidation of older LIFO layers that were at a higher cost.
Gross Profit
Year Ended December 31,
$ % of Net Sales $ % of Net Sales Dollar change Percentage change
($ in millions)
Gross profit dollars increased in 2021 compared to 2020 due to an increase in volume as well as average selling price increasing faster than the increase in the average cost of materials sold, which resulted in an increase in gross margin.
Operating Expenses
Year Ended December 31,
$ % of Net Sales $ % of Net Sales Dollar change Percentage change
($ in millions)
Gain on sale of assets $ (109.6 ) (1.9 )% $ — — $ (109.6 ) —
Restructuring and other charges $ — — $ 2.2 — $ (2.2 ) (100.0 )%
Total operating expenses in 2021 were $45.1 million higher than in 2020. The increase in operating expenses in 2021 was primarily due to higher employee related costs as incentive compensation increased $76.3 million due to higher profitability, employee benefit expense increased by $21.0 million due to higher discretionary bonus program expenses, medical costs, and payroll taxes on higher incentive compensation, and salaries and wages expense increased by $16.2 million due to an increase in headcount, and higher salaries as 2020 included workforce and compensation reductions as a result of the pandemic, as well as higher overtime and temporary help due to labor shortages in some areas in 2021. In addition, expenses were impacted by changes in the following categories:
• higher depreciation of $2.1 million.
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Partially offsetting these increases were gains on the sale and leaseback of facilities in 2021. In the first quarter of 2021, we recognized a gain on sale of assets of $20.3 million from the sale and leaseback of our Renton, Washington, facility. In the second quarter of 2021, we recognized a gain of $87.4 million on the sale-leaseback of twelve of our facilities across the United States. In the fourth quarter of 2021, we recognized a gain of $1.9 million on the sale of a purchase option for a facility in Ohio.
In addition, reorganization costs were $9.6 million lower in 2021 compared to 2020. Included in the reorganization costs in 2020 was $3.7 million of system implementation costs and a restructuring charge of $2.2 million of severance costs for staff reductions.
On a per ton basis, operating expenses increased to $287 per ton in 2021 from $277 per ton in 2020.
Operating Profit
Year Ended December 31,
$ % of Net Sales $ % of Net Sales Dollar change Percentage change
($ in millions)
Our operating profit increased in 2021 compared to 2020 primarily due to increases in average selling prices and the increase in tons sold.
Other Expenses
Year Ended December 31,
$ % of Net Sales $ % of Net Sales Dollar change Percentage change
($ in millions)
Other income and (expense), net $ (0.9 ) — $ 5.3 0.1 % $ (6.2 ) (117.0 )%
Loss on retirement of debt $ (5.5 ) (0.1 )% $ (17.7 ) (0.5 )% $ 12.2 (68.9 )%
Interest and other expense on debt decreased in 2021 compared to 2020 primarily due to the redemption of our 11.00% Senior Secured Notes due 2022 (the “2022 Notes”) which had an outstanding balance of $530.3 million at the redemption date of August 21, 2020 following the redemption of $57.6 million of the 2022 Notes during the first six months of 2020. The 2022 Notes were replaced by a lower level of debt at a lower interest rate with the issuance of $500.0 million of 8.50% senior secured notes due 2028 (the “2028 Notes”). In October 2020, $50.0 million of the 2028 Notes were redeemed and in July 2021, $150 million of the 2028 Notes were redeemed. In addition, interest and other expense on debt was lower in 2021 due to a lower level of borrowings outstanding under our $1.0 billion revolving credit facility (“the Ryerson Credit Facility”) compared to 2020 as excess funds were borrowed in 2020 to maintain access to cash during the COVID-19 pandemic. Interest expense in 2021 included a $2.8 million charge to write-off unamortized bond issuance costs related to the $150.0 million of 2028 Notes redeemed in July 2021. Interest expense in 2020 included a $1.0 million charge to write-off unamortized bond issuance costs related to the $50.0 million of 2028 Notes redeemed in October 2020 and a $0.4 million charge to write-off unamortized bond issuance costs related to the $57.6 million of 2022 Notes repurchased during the first six months of 2020.
The year 2021 includes a $98.7 million pension settlement loss due to the annuitization and lump-sum payouts of a portion of our pension liability and a $5.5 million loss on the repurchase of $150.0 million of the 2028 Notes. In addition, the other income and (expense), net in 2021 includes a $2.1 million loss from the change in the fair value of an embedded derivative within the 2028 Notes indenture, and a $0.7 million credit from net periodic benefit cost other than service cost. The year 2020 includes a $65.9 million pension settlement loss due the annuitization and lump-sum buyouts of a portion of our pension liability, a $16.2 million loss on the repurchase and redemption of the 2022 Notes, and a $1.5 million loss on the redemption of $50.0 million of the 2028 Notes. In addition, other income and (expense), net in 2020 included a $2.3 million gain on the recognition of the fair value of an embedded derivative in the 2028 Notes indenture and a $2.1 million credit from net periodic benefit cost other than service cost. See the Pension Funding section below for further details on the transactions that resulted in the pension settlement losses in both years.
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Provision for Income Taxes
The $93.7 million income tax provision in 2021 primarily represents taxes at federal and local statutory rates where the Company operates, but generally excludes any tax benefit for losses in jurisdictions with historical losses. During 2021, the Company recorded a $1.6 million benefit as a result of releasing valuation allowances on certain state and foreign net operating losses, and a $0.8 million benefit related to the statute of limitations expiring on an uncertain tax position.
The $24.8 million income tax benefit in 2020 primarily represents taxes at federal and local statutory rates where the Company operates, but generally excludes any tax benefit for losses in jurisdictions with historical losses. During 2020, the Company recorded a benefit of $1.8 million related to the statute of limitations expiring on an uncertain tax position.
Noncontrolling Interest
In both 2021 and 2020, Ryerson China’s results of operations was income and the portion attributable to the noncontrolling interest was $1.1 million and $0.5 million, respectively.
Earnings Per Share
Basic and diluted earnings per share was $7.67 and $7.56, respectively, in 2021. Basic and diluted loss per share was $1.73 in 2020. The changes in earnings per share are due to the results of operations discussed above.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are cash and cash equivalents, cash flows from operations, and borrowing availability under the Ryerson Credit Facility that matures on November 5, 2025. 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 metals and other materials inventories, costs incurred for the warehousing and delivery of inventories, the selling and administrative costs of the business, capital expenditures, and for interest payments on debt.
The global COVID-19 pandemic led to disruption and volatility in the global capital markets, which, depending on future developments, could adversely impact our capital resources and liquidity in the future. As a proactive, precautionary measure, we borrowed approximately $166 million under the Ryerson Credit Facility in the first quarter of 2020 to maintain access to cash during the COVID-19 pandemic. As of December 31, 2021, we are no longer holding excess cash due to COVID-19 concerns. We had cash and cash equivalents of $51.2 million at December 31, 2021, compared to $61.4 million at December 31, 2020. Our total debt outstanding at December 31, 2021 decreased to $639 million compared to $740 million of total debt outstanding at December 31, 2020 due to proceeds received from the facility sale and leaseback transactions and cash flow from operations in 2021. See Part II. Item 8, Financial Statements and Supplementary Data, Note 5: Property, Plant, and Equipment for further discussion. We had a debt-to-capitalization ratio of 54% and 84% at December 31, 2021 and at December 31, 2020, respectively. We had total liquidity (defined as cash and cash equivalents, restricted cash from sales of property, plant, and equipment, and availability under the Ryerson Credit Facility and foreign debt facilities) of $741 million at December 31, 2021 versus $373 million at December 31, 2020. Our net debt (defined as total debt less cash and cash equivalents, and restricted cash from sales of property, plant, and equipment) was $588 million and $679 million at December 31, 2021 and December 31, 2020, respectively. Total liquidity and net debt are not U.S. generally accepted accounting principles (“GAAP”) financial measures. We believe that total liquidity provides additional information for measuring our ability to fund our operations. Total liquidity does not represent, and should not be used as a substitute for, net income or cash flows from operations as determined in accordance with GAAP and total liquidity is not necessarily an indication of whether cash flow will be sufficient to fund our cash requirements. We believe that net debt provides a clearer perspective of the Company’s overall debt situation given the excess borrowings discussed above. Net debt should not be used as a substitute for total debt outstanding as determined in accordance with GAAP.
Below is a reconciliation of cash and cash equivalents to total liquidity:
(In millions)
Cash and cash equivalents $ 51 $ 61 $ 11
Restricted cash from sales of property, plant, and equipment — — 48
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Below is a reconciliation of total debt to net debt:
(In millions)
Less: cash and cash equivalents (51 ) (61 ) (11 )
Less: restricted cash from sales of property, plant, and equipment — — (48 )
Of the total cash and cash equivalents, as of December 31, 2021, $20.9 million was held in subsidiaries outside the United States which is deemed to be permanently reinvested. Ryerson does not currently foresee a need to repatriate earnings from its non-U.S. subsidiaries. Although Ryerson has historically satisfied needs for more capital in the U.S. through debt or equity issuances, Ryerson could elect to repatriate earnings held in foreign jurisdictions, which could result in higher effective tax rates. We have not recorded a deferred tax liability for the effect of a possible repatriation of these earnings as management intends to permanently reinvest these earnings outside of the U.S. Specific plans for reinvestment include funding for future international acquisitions and funding of existing international operations.
The following table summarizes the Company’s cash flows:
Year Ended December 31,
(In millions)
Depreciation and amortization 55.9 53.9
Pension settlement charge 98.7 65.9
Gain on sale of assets (109.6 ) —
Change in operating assets and liabilities:
Deferred employee benefit costs (25.0 ) (10.6 )
Other operating asset and liability balances 1.9 11.8
All other operating cash flows 42.5 (5.9 )
Net cash provided by operating activities 35.0 277.9
Acquisitions (14.5 ) —
Capital expenditures (59.3 ) (26.0 )
Proceeds from sale of property, plant, and equipment 166.3 0.1
Proceeds from other investing activities 1.9 —
Net cash provided by (used in) investing activities 94.4 (25.9 )
Long term debt issued — 500.0
Net proceeds (repayments) of short-term borrowings 45.8 (93.8 )
Bond issuance costs — (10.9 )
Net increase (decrease) in book overdrafts (7.7 ) 27.4
All other financing cash flows (18.7 ) (18.2 )
Net cash used in financing activities (137.9 ) (250.2 )
Effect of exchange rates on cash and cash equivalents (1.6 ) 0.9
Net increase (decrease) in cash and cash equivalents $ (10.1 ) $ 2.7
Operating activities. Working capital fluctuates throughout the year based on business needs. Working capital needs tend to be counter-cyclical, meaning that in periods of expansion the Company will use cash to fund working capital requirements, but in periods of contraction the Company will generate cash from reduced working capital requirements. Working capital requirements in 2021 increased significantly as improved economic conditions increased demand and supply constraints increased metals pricing, which increased sales and the related accounts receivable. Inventory quantities were increased to meet the higher demand and inventory costs increased due to rising metal prices throughout the year. The higher inventory investment also increased accounts payable balances. In 2020, working capital requirements significantly decreased, contributing to the operating cash flows generated in the period, as the Company had lower sales levels driven by lower tons sold and lower average selling prices due to weak economic
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conditions resulting from the COVID-19 pandemic. Consequently, the Company brought inventory levels down significantly in line with the weak market conditions. The Company also increased the days payable cycle in 2020 by working with our vendors on payment terms resulting in an increase in accounts payable year over year. Pension contributions were higher in 2021 than in 2020 as the Company elected in 2020 to defer $12 million of U.S. contributions due in 2020 to 2021, as permitted under the CARES Act that was passed in March 2020. The Company made contributions of $23.7 million in 2021 to the Company’s pension plans compared to contributions of $7.1 million in 2020. Interest paid to third parties was $10.9 million lower in 2021 compared to 2020 due to lower outstanding debt and interest rates, mainly due to the repurchase in 2020 of our 2022 Notes at 11% and the issuance of our 2028 Notes at 8.5% and lower LIBOR rates on our revolving line of credit borrowings.
Investing activities. The Company's main investing activities are capital expenditures and proceeds from the sale of property, plant, and equipment. In 2021, we sold and leased back a group of properties with net proceeds of approximately $163.2 million. Capital expenditures increased year-over-year as the Company reduced the 2020 annual capital expenditures budget due to the COVID-19 pandemic. In 2021, we acquired SMP for $14.0 million, net of cash acquired.
Financing activities. The Company's main source of liquidity to fund working capital requirements is borrowings on our credit facility. In 2021, we redeemed $150.0 million of our 2028 Notes, which was partially offset by credit facility borrowings. At December 31, 2020, we borrowed approximately $40 million of excess credit facility funds to maintain access to cash during the COVID-19 pandemic. This borrowing was offset by credit facility repayments from operating cash flows that were generated in 2020. In addition, during 2020 we redeemed and repurchased the outstanding principal amount of $587.9 million of our 2022 Notes. In the third quarter of 2020, we issued $500 million of our 2028 Notes to replace the 2022 Notes at a lower interest rate and debt level and paid $10.9 million of issuance fees on the transaction. In the fourth quarter of 2020, we redeemed $50.0 million of our 2028 Notes. Book overdrafts fluctuate based on the timing of payments.
As market conditions warrant and subject to our contractual restrictions, liquidity position, and other factors, we may from time to time seek to repurchase or retire our outstanding debt through cash purchases and/or exchanges for other debt or equity securities in open market transactions, privately negotiated transactions, by tender offer, or otherwise. Any such cash repurchases by us may be funded by cash on hand or incurring new debt. The amounts involved in any such transactions, individually or in the aggregate, may be material. Furthermore, any such repurchases or exchanges may result in our acquiring and retiring a substantial amount of such indebtedness, which would impact the trading liquidity of such indebtedness.
In the normal course of business with customers, vendors, and others, we have entered into off-balance sheet arrangements, such as letters of credit, which totaled $20 million as of December 31, 2021. We do not have any other material off-balance sheet financing arrangements. Our off-balance sheet arrangements are not likely to have a material effect on our current or future financial condition, results of operations, liquidity, or capital resources.
Total Debt
Total debt at December 31, 2021 decreased $100.7 million to $639.3 million from $740.0 million at December 31, 2020, mainly due to cash generated from sale-leaseback transactions and the net cash provided by operating activities in 2021.
Total debt outstanding as of December 31, 2021 consisted of the following amounts: $316.0 million borrowings under the Ryerson Credit Facility, $300.0 million under the 2028 Notes, $27.0 million of foreign debt, and $6.0 million of other debt, less $9.7 million of unamortized debt issuance costs. Availability under the Ryerson Credit Facility was $670 million and $277 million at December 31, 2021 and December 31, 2020, respectively. For further information, see Note 10: Debt in Part II, Item 8 – Financial Statements and Supplementary Data.
Pension Funding
The Company made contributions of $23.7 million in 2021, $7.1 million in 2020, and $25.7 million in 2019 to improve the Company’s pension plans funded status. At December 31, 2021, as reflected in Part II. Item 8, Financial Statements and Supplementary Data, Note 11, pension liabilities exceeded plan assets by $95.8 million. The Company anticipates that it will have a minimum required pension contribution of approximately $5.8 million in 2022 under the Employee Retirement Income Security Act of 1974 (“ERISA”), Pension Protection Act in the U.S., and the Ontario Pension Benefits Act in Canada. The expected future contributions reflect recent pension funding relief measures under the American Rescue Plan Act (“ARPA”) passed in March 2021. Future contribution requirements depend on the investment returns on plan assets, the impact of discount rates on pension liabilities, 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.
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Effective September 24, 2021, the Ryerson Pension Plan purchased $206.6 million of annuities on behalf of a portion of plan participants which, due to the size of the transaction, resulted in settlement accounting. The pension plan was remeasured as of September 30, 2021. The remeasurement resulted in a settlement loss of $98.3 million which was recorded within Other income and (expense), net in the Statement of Operations as of September 30, 2021.
Changes in returns on plan assets may affect our plan funding, cash flows, and financial condition. Differences between actual plan asset returns and the expected long-term rate of return on plan assets impact the measurement of the following year’s pension expense and pension funding requirements. However, we believe that cash flow from operations and the Ryerson Credit Facility described above will provide sufficient funds to make the minimum required contributions.
Income Tax Payments
The Company made income tax payments of $70.2 million in 2021 and received income tax refunds of $5.7 million and $6.6 million in 2020 and 2019, respectively. Income tax payments in 2021 increased as the Company fully utilized existing federal income tax net operating loss carryforwards and had increased pre-tax income year over year. See Part II. Item 8, Financial Statements and Supplementary Data, Note 19: Income Taxes for further discussion.
Material Cash Requirements
The Company expects to make approximately $649 million in principal payments to satisfy its debt obligations, consisting of $27 million in foreign debt coming due in 2022, $6 million of other debt coming due between 2023 and 2024, $316 million for the Ryerson Credit Facility coming due in 2025, and $300 million for the 2028 Notes due in 2028. Please refer to Part II. Item 8, Financial Statements and Supplementary Data, Note 10: Debt for further information.
The Company leases various assets including real estate, trucks, trailers, mobile equipment, processing equipment, and IT equipment. We have noncancelable operating leases expiring at various times through 2036, and finance leases expiring at various times through 2027. The total amount of future lease payments is estimated to be $278 million with $44 million for the next 12 months. Including leases signed but not yet commenced as of December 31, 2021, total lease payments are $471 million. Please refer to Part II, Item 8 – Financial Statements and Supplementary Data, Note 6: Leases for further information.
The Company expects to pay approximately $32 million of interest on the 2028 Notes, Ryerson Credit Facility, foreign debt, and other debt over the next 12 months and $160 million thereafter. Interest payments related to the variable rate debt were estimated using the weighted average interest rate for the Ryerson Credit Facility, including the effect of the interest rate swaps.
Purchase obligations with suppliers are entered into when we receive firm sales commitments with certain of our customers. As of December 31, 2021, we had outstanding purchase obligations of approximately $14 million expiring in 2022.
Restructuring
2021
During 2021, the Company paid the remaining $0.5 million of employee-related costs related to prior year staff reductions. The Company has a $0.7 million reserve for tenancy-related costs for facilities closed in prior years, which are expected to be paid through 2025.
2020
In 2020, the Company recorded a $2.2 million charge for employee-related costs primarily for severance costs for corporate staff reductions. The Company paid $1.9 million of the employee costs related to these actions. In addition, the Company paid $0.8 million related to 2019 staff reductions.
During 2020, the Company also paid $0.3 million for costs related to facilities closed in prior years and recorded an addition of $0.1 million to the reserve for tenancy-related costs, which was charged to warehousing, delivery, selling, general, and administrative expense in the Consolidated Statements of Operations.
2019
In 2019, the Company recorded a $2.1 million charge for employee-related costs primarily for severance costs for corporate staff reductions. The Company paid $1.2 million for employee costs related to these actions. In addition, the Company paid $0.3 million related to 2018 staff reductions.
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During 2019, the Company also recorded a $0.3 million charge to increase the reserve for tenancy-related costs for a facility closed in 2013. The Company paid $0.9 million in 2019 for costs related to facilities closed in prior years.
Deferred Tax Amounts
At December 31, 2021, the Company had a net deferred tax liability of $94 million comprised primarily of a deferred tax asset of $24 million related to pension liabilities, a deferred tax asset related to postretirement benefits other than pensions of $15 million, deferred tax assets of $10 million related to state, local, and foreign tax loss carryforwards, and $26 million of other deferred taxes relating to accrued compensation and other items, offset by a valuation allowance of $5 million and deferred tax liabilities of $57 million related to fixed assets, $97 million related to inventory, and $10 million related to intangibles. The Company’s deferred tax assets include $10 million related to state net operating loss (“NOL”) carryforwards and $0.3 million related to foreign NOL carryforwards at December 31, 2021. Due to the volatile macro-economic conditions associated with the COVID-19 pandemic, we may experience fluctuations in our forecasted earnings before income taxes as a result of events which cannot be predicted, which could affect our deferred tax balances.
In accordance with ASC Topic 740, “Income Taxes,” the Company assesses the realizability of its deferred tax assets. The Company records a valuation allowance when, based upon the evaluation of all available evidence, it is more-likely-than-not that all or a portion of the deferred tax assets will not be realized. In making this determination, we analyze, among other things, our recent history of earnings, the nature and timing of reversing book-tax temporary differences, tax planning strategies, and future income. After considering both the positive and negative evidence available, in the second quarter of 2009, the Company determined that it was more-likely-than-not that it would not realize a portion of its U.S. deferred tax assets. As a result, the Company established a valuation allowance against a portion of its U.S. deferred tax assets. The Company released a portion of the valuation allowance related to one of its U.S. subsidiaries, JT Ryerson, during 2012. The Company released most of the remaining U.S. related valuation allowance during 2013. In 2018, the Company further reduced its valuation allowance related to state and foreign net operating losses. As of December 31, 2019, the Company had a valuation allowance of $13.7 million, a decrease of $15.6 million from the prior year mainly related to expiring NOLs and changes to U.S. foreign tax credits previously recorded.As of December 31, 2020, the company had a valuation allowance of $6.6 million, a decrease of $7.1 million from the prior year mainly related to expiring NOLs and changes to U.S foreign tax credits previously recorded. As of December 31, 2021, the Company had a valuation allowance of $5.0 million, a decrease of $1.6 million from the prior year mainly related to a release of a valuation allowance on state NOL deferred tax assets, which we now expect to realize due to improved profitability.
As described in Note 1 to the Consolidated Financial Statements, the Company assesses the need for a valuation allowance considering all available positive and negative evidence, including past operating results, projections of future taxable income, and the feasibility of ongoing tax planning strategies.
The Company will continue to maintain a valuation allowance on certain U.S. federal and foreign deferred tax assets until such time as in management’s judgment, considering all available positive and negative evidence, the Company determines that these deferred tax assets are more likely than not realizable.
Critical Accounting Estimates
Preparation of this Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of sales and expenses during the reporting period. Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in Item 8 within Note 1: Summary of Accounting and Financial Policies. These policies have been consistently applied and address such matters as revenue recognition, depreciation methods, inventory valuation, asset impairment recognition, and pension and postretirement expense. While policies associated with estimates and judgments may be affected by different assumptions or conditions, we believe our estimates and judgments associated with the reported amounts are appropriate in the circumstances. Actual results may differ from those estimates.
We consider the policies discussed below as critical to an understanding of our financial statements, as application of these policies places the most significant demands on management’s judgment, with financial reporting results relying on estimation of matters that are uncertain.
Provision for allowances, claims, and doubtful accounts: We perform ongoing credit evaluations of customers and set credit limits based upon review of the customers’ current credit information, payment history, and the current economic and industry environments. We monitor customer payments and maintain a provision for estimated credit losses based on historical experience and specific customer collection issues that we have identified. Estimation of such losses requires adjusting historical loss experience for current economic conditions and judgments about the probable effects of economic conditions on certain customers. We cannot
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guarantee that the rate of future credit losses will be similar to past experience. Provisions for allowances and claims are based upon historical rates, expected trends, and estimates of potential returns, allowances, customer discounts, and incentives. We consider all available information when assessing the adequacy of the provision for allowances, claims, and doubtful accounts.
Inventory valuation: Our inventories are stated at the lower of cost or market. The valuation of our inventories at the lower of cost or market could be subject to certain estimates; however, the measurement is primarily based on historical purchasing and sales information rather than forecasted metals pricing. Inventory costs reflect metal and in-bound freight purchase costs, third-party processing costs, and internal direct and allocated indirect processing costs. Cost is primarily determined by the LIFO method. We regularly review inventory on hand and record provisions for obsolete and slow-moving inventory based on historical and current sales trends. Changes in product demand and our customer base may affect the value of inventory on hand which may require higher provisions for obsolete inventory.
Income Taxes: Our income tax expense, deferred tax assets and liabilities, and reserve for uncertain tax positions reflect our best estimate of taxes to be paid. The Company is subject to income taxes in the U.S. and several foreign jurisdictions. The determination of the consolidated income tax expense requires judgment and estimation by management. It is possible that actual results could differ from the estimates that management has used to determine its consolidated income tax expense.
We record operating loss and tax credit carryforwards and the estimated effect of temporary differences between the tax basis of assets and liabilities and the reported amounts in the Consolidated Balance Sheet. We follow detailed guidelines in each tax jurisdiction when reviewing tax assets recorded on the balance sheet and provide for valuation allowances as required. Deferred tax assets are reviewed for recoverability based on historical taxable income, the expected reversals of existing temporary differences, tax planning strategies, and on forecasts of future taxable income. The forecasts of future taxable income require assumptions regarding volume, selling prices, margins, expense levels, and industry cyclicality. If we are unable to generate sufficient future taxable income in certain tax jurisdictions, we may be required to record additional valuation allowances against our deferred tax assets related to those jurisdictions.
The Company’s income tax provisions are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. Although the Company believes that the positions taken on filed tax returns are reasonable, it has established tax and interest reserves in recognition that various taxing authorities may challenge the positions taken. For uncertain tax positions, the Company applies the provisions of relevant authoritative guidance, which requires application of a “more likely than not” threshold to the recognition and derecognition of tax positions. The Company’s ongoing assessments of the more likely than not outcomes of tax authority examinations and related tax positions require significant judgment and can increase or decrease the Company’s effective tax rate.
Long-lived Assets and Other Intangible Assets: Long-lived assets held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment is recognized. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. Any related impairment loss is calculated based upon comparison of the fair value to the carrying value of the asset. Separate intangible assets that have finite useful lives are amortized over their useful lives. An impaired long-lived or intangible asset would be written down to fair value, based on various available valuation techniques, including the discounted cash flow method.
Goodwill: We assess the recoverability of the carrying value of recorded goodwill annually in the fourth quarter of each year or whenever indicators of potential impairment exist. We test for impairment of goodwill by assessing various qualitative factors with respect to developments in our business and the overall economy. Factors that may be considered indicators of impairment include: deterioration in general economic conditions; declines in the market conditions of our products, including metals prices; a sustained significant decline in our share price and market capitalization; reduced future cash flow estimates; and slower growth rates in our industry, among others. If we determine that it is more likely than not that the fair value of a reporting unit is less than the carrying value based on our qualitative assessment, we will proceed to the goodwill impairment test. We compare the fair value of the reporting unit in which goodwill resides to its carrying value. If the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. The fair value of the reporting unit is estimated using a combination of an income approach and a market approach as this combination is deemed to be the most indicative of our fair value in an orderly transaction between market participants. An income approach based on discounted future cash flows requires us to estimate income from operations based on projected results and discount rates based on a weighted average cost of capital of comparable companies. A market approach estimates fair value using market multiples of various financial measures of comparable
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public companies. If these estimates or their related assumptions for commodity prices and demand change in the future, we may be required to record impairment charges for these assets.
Based on the impairment test performed on October 1, 2021, the Company concluded that the fair value of the reporting unit tested for impairment exceeded the carrying value. The discount rate for the reporting unit was estimated to be 15.5% at October 1, 2021. The Company determines a discount rate based on an estimate of a reasonable risk-adjusted return an investor would expect to realize on an investment in the reporting unit. Deterioration in market conditions in our industry or products, changes in expected future cash flows, expected growth rates, or to discount rates could result in impairment charges in future periods.
Purchase Price Accounting: Business combinations are accounted for using the acquisition method of accounting. This method requires the Company to record assets and liabilities of the business acquired at their estimated fair market values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. Any shortfall in the cost of the acquisition compared to the fair value of the net assets acquired is recorded in the Statement of Operations as a bargain gain. The Company uses valuation specialists, where necessary, to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions that are critical in determining the fair values of the assets and liabilities.
Pension and postretirement benefit plan assumptions: We sponsor various benefit plans covering a portion of our employees for pension and postretirement medical costs. Statistical methods are used to anticipate future events when calculating expenses and liabilities related to the plans. The statistical methods include assumptions about, among other things, the discount rate, expected return on plan assets, rate of increase of health care costs, and the rate of future compensation increases. Our actuarial consultants also use subjective factors such as withdrawal and mortality rates when estimating expenses and liabilities. The discount rate used for U.S. plans reflects the market rate for high-quality fixed-income investments on our annual measurement date (December 31) and is subject to change each year. The discount rate was determined by matching, on an approximate basis, the coupons and maturities for a portfolio of corporate bonds (rated Aa or better by Moody’s Investor Services or AA or better by Standard and Poor’s) to the expected plan benefit payments defined by the projected benefit obligation. The discount rates used for plans outside the U.S. are based on the yield of long term high quality corporate bonds, the duration of the liability, and appropriate judgment.
When calculating pension expense for 2021, we assumed the pension plans’ assets would generate a long-term rate of return between 4.35% and 5.05% for the JT Ryerson plan (adjusted for the remeasurement in 2021) and 2.05% for the Central Steel and Wire Company, a JT Ryerson subsidiary, plan, and between 1.75% and 4.25% for the Canadian plans. The expected long-term rate of return assumption was developed based on historical experience and input from the trustee managing the plans’ assets. The expected long-term rate of return on plan assets is based on a target allocation of assets, which is based on a goal of earning the highest rate of return while maintaining risk at acceptable levels. Our projected long-term rate of return for the JT Ryerson pension plan is slightly higher than some market indices due to the active management of our plans’ assets, and is supported by the historical returns on our plans’ assets. The plans strive to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. We regularly review actual asset allocation and the pension plans’ investments are periodically rebalanced to the targeted allocation when considered appropriate. Pension expense increases as the expected rate of return on plan assets decreases. Lowering the expected long-term rate of return on plan assets by 50 basis points would have increased 2021 pension expense by approximately $2 million.
Future pension obligations for the U.S. plans were discounted using rates between of 2.84% and 3.27% at December 31, 2021. Future pension obligations for the Canadian plans were discounted using 2.85% at December 31, 2021. Lowering the discount rate by 50 basis points would increase the pension liability at December 31, 2021 by approximately $26 million.
The calculation of other postretirement benefit obligations requires the use of a number of assumptions, including the assumed discount rate for measuring future payment obligations. A decrease in the weighted average discount rate of 50 basis points would increase the postretirement benefit liability by approximately $3 million.
The assumptions used in the actuarial calculation of expenses and liabilities may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may result in a significant impact on the amount of pension or postretirement benefit expense we may record in the future.
Legal contingencies: We are involved in a number of legal and regulatory matters including those discussed in Item 8 within Note 13: Commitments and Contingencies. We determine whether an estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We analyze our legal matters based on available information to assess potential liability. We consult with outside counsel involved in our legal matters when analyzing potential outcomes. We cannot determine at this time whether any potential liability related to this litigation would materially affect our financial position, results of operations, or cash flows.
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Recent Accounting Pronouncements
Recent accounting pronouncements are discussed within Note 1: Summary of Accounting and Financial Policies in Part II, Item 8 Financial Statements and Supplementary Data.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary areas of market risk include changes in interest rates, foreign currency exchange rates, and commodity prices. We continually monitor these risks and develop strategies to manage them.
Interest rate risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. We are exposed to market risk related to our fixed-rate and variable-rate long-term debt. Changes in interest rates may affect the market value of our fixed-rate debt. The estimated fair value of our 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 $666.8 million at December 31, 2021 and $800.3 million at December 31, 2020 as compared with the carrying value of $639.3 million and $740.0 million at December 31, 2021 and 2020, respectively. We manage interest rate risk in our capital structure by holding a combination of variable and fixed-rate debt.
We use interest rate swaps to manage our exposure to interest rate changes. As of December 31, 2021, we have two receive variable, pay fixed, interest rate swaps to manage the exposure to variable interest rates of the Ryerson Credit Facility. In June 2019, we entered into a forward agreement for $60 million of “pay fixed” interest at 1.729% through June 2022, and in November 2019, we entered into a forward agreement for $100 million of “pay fixed” interest at 1.539% through November 2022.
Effective November 1, 2020, the Company de-designated its interest rate swaps as cash flow hedges and terminated its hedge accounting treatment. Prior to de-designation, the Company would mark these interest rate swaps to market with all changes in fair value recorded in accumulated other comprehensive income. Subsequent to de-designation, changes in fair value are recorded in current earnings. The fair value of the interest rate swaps as of December 31, 2021 was a net liability of $1.4 million. For the year ended December 31, 2021, the Company recognized a mark-to-market gain of $2.6 million, which was partially offset by a $2.5 million loss recognized from other comprehensive income. After de-designation, the amounts reclassified from other comprehensive income relate to prior gains and losses that are being amortized into income as the forecasted interest payments affect earnings.
After considering the effects of our interest rate swaps, 71% of our debt was at fixed interest rates as of December 31, 2021. Considering the impact of interest rate swaps, a hypothetical 1% increase in interest rates on variable debt would have increased interest expense for 2021 by approximately $2.0 million.
Foreign exchange rate risk
We are subject to foreign currency risks primarily through our operations in Canada, Mexico, and China and we use foreign currency exchange contracts to reduce our exposure to currency price fluctuations. Foreign currency contracts are principally used to purchase U.S. dollars. We had foreign currency contracts with a U.S. dollar notional amount of $4.5 million outstanding at December 31, 2021 and a net liability value of zero. We do not currently account for these contracts as hedges but rather mark these contracts to market with a corresponding offset to current earnings. For the year ended December 31, 2021, the Company recognized a gain of $0.2 million associated with its foreign currency contracts. A hypothetical strengthening or weakening of 10% in the foreign exchange rates underlying the foreign currency contracts from the market rate as of December 31, 2021 would increase or decrease the fair value of the foreign currency contracts by $0.4 million and $0.5 million, respectively.
The currency effects of translating the financial statements of our foreign subsidiaries are included in accumulated other comprehensive loss and will not be recognized in the statement of operations until there is a liquidation or sale of those foreign subsidiaries.
Commodity price risk
In general, we purchase metals in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, customer contracts, and market conditions. Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders.
Metal prices can fluctuate significantly due to several factors including changes in foreign and domestic production capacity, raw material availability, metals consumption, and foreign currency rates. Derivative financial instruments have been used to manage a limited portion of our exposure to fluctuations in the cost of certain commodities. No derivatives are held for trading purposes.
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As of December 31, 2021, we had 176,859 tons of hot roll coil swap contracts with a net liability value of $19.8 million, 857 tons of nickel swap contracts with a net liability value of $1.6 million, 20,949 tons of aluminum swap contracts with a net liability value of $0.7 million, and 840,000 gallons of diesel swap contracts with a net value of zero. We do not currently account for these contracts as hedges, but rather mark these contracts to market with a corresponding offset to current earnings. For the year ended December 31, 2021, the Company recognized a loss of $47.3 million associated with its commodity derivatives.
A hypothetical strengthening or weakening of 10% in the commodity prices underlying the commodity derivative contracts from the market rate as of December 31, 2021 would increase or decrease the fair value of the commodity derivative contracts by $2.8 million.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Page
Financial Statements
Management’s Report on Internal Control over Financial Reporting 50
Reports of Independent Registered Public Accounting Firm 51
Notes to Consolidated Financial Statements 59
Financial Statements Schedule
I—Condensed Financial Information of Registrant 93
II—Valuation and Qualifying Accounts 98
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Ryerson Holding Corporation (“the Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements under all potential conditions. Therefore, effective internal control over financial reporting provides only reasonable, and not absolute, assurance with respect to the preparation and presentation of financial statements.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on its assessment under that framework and the criteria established therein, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021.
Ernst & Young LLP, an independent registered public accounting firm, has audited the Company’s internal control over financial reporting as of December 31, 2021, as stated in their report, which is included herein.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Ryerson Holding Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ryerson Holding Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedules listed in the Index at 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework, and our report dated February 23, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Defined Benefit Pension Obligation
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2006.
Chicago, Illinois
February 23, 2022
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Ryerson Holding Corporation
Opinion on Internal Control over Financial Reporting
We have audited Ryerson Holding Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Ryerson Holding Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2021 consolidated financial statements of the Company and our report dated February 23, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Chicago, Illinois
February 23, 2022
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RYERSON HOLDING CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Year Ended December 31,
Warehousing, delivery, selling, general, and administrative 711.2 554.3 636.8
Gain on sale of assets (109.6 ) — (20.6 )
Gain on insurance settlement — — (1.5 )
Restructuring and other charges — 2.2 2.4
Other income (expense):
Interest and other expense on debt (51.0 ) (76.4 ) (93.2 )
Pension settlement charges (98.7 ) (65.9 ) (1.6 )
Loss on retirement of debt (5.5 ) (17.7 ) (0.2 )
Other income and (expense), net (0.9 ) 5.3 (0.6 )
Provision (benefit) for income taxes 93.7 (24.8 ) 32.5
Less: Net income attributable to noncontrolling interest 1.1 0.5 0.3
Basic earnings (loss) per share $ 7.67 $ (1.73 ) $ 2.19
Diluted earnings (loss) per share $ 7.56 $ (1.73 ) $ 2.17
Dividends declared per share $ 0.165 $ — $ —
See Notes to Consolidated Financial Statements
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RYERSON HOLDING CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Year Ended December 31,
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments (2.1 ) 1.6 4.3
Gain (loss) on cash flow hedges 2.1 (3.8 ) (1.8 )
Other comprehensive income, before tax 142.4 39.6 16.5
Income tax provision related to items of other comprehensive income 35.6 9.5 2.6
Comprehensive income (loss), after tax 402.2 (35.2 ) 96.6
See Notes to Consolidated Financial Statements
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RYERSON HOLDING CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
Operating activities: