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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            .

Commission File Number 333-152102

 

 

RYERSON INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   36-3425828

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2621 West 15th Place

Chicago, Illinois 60608

(Address of principal executive offices)

(773) 762-2121

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 30, 2010 there were 100 shares of Common Stock outstanding.

 

 

 


Table of Contents

RYERSON INC. AND SUBSIDIARY COMPANIES

INDEX

 

      PAGE NO.
Part I. Financial Information:   
   Item 1.    Financial Statements:   
      Condensed Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended June 30, 2010 and 2009    1
      Condensed Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2010 and 2009    2
      Condensed Consolidated Balance Sheets – June 30, 2010 (Unaudited) and December 31, 2009    3
      Notes to Condensed Consolidated Financial Statements    4
   Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    18
   Item 3.    Quantitative and Qualitative Disclosures About Market Risk    25
   Item 4.    Controls and Procedures    26
Part II. Other Information:   
   Item 1.    Legal Proceedings    26
   Item 1A.    Risk Factors    26
   Item 6.    Exhibits    26

Signature

   27


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

RYERSON INC. AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Operations (Unaudited)

(In millions)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Net sales

   $ 1,020.2      $ 743.1      $ 1,891.7      $ 1,547.8   

Cost of materials sold

     887.6        657.5        1,625.3        1,336.7   
                                

Gross profit

     132.6        85.6        266.4        211.1   

Warehousing, delivery, selling, general and administrative

     126.6        118.2        244.9        242.3   

Gain on insurance settlement

     (2.6     —          (2.6     —     

Gain on sale of assets

     —          —          —          (3.3

Impairment charge on fixed assets

     0.5        —          1.0        —     

Other postretirement benefits curtailment gain

     —          —          —          (1.3
                                

Operating profit (loss)

     8.1        (32.6     23.1        (26.6

Other income and (expense), net

     2.4        (4.5     (0.1     (1.8

Interest and other expense on debt

     (18.9     (18.2     (37.8     (36.4
                                

Loss before income taxes

     (8.4     (55.3     (14.8     (64.8

Provision for income taxes

     3.7        75.2        6.3        72.0   
                                

Net loss

     (12.1     (130.5     (21.1     (136.8

Less: Net loss attributable to noncontrolling interest

     (0.2     (0.5     (0.2     (2.5
                                

Net loss attributable to Ryerson Inc.

   $ (11.9   $ (130.0   $ (20.9   $ (134.3
                                

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

RYERSON INC. AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

 

     Six Months Ended
June 30,
 
     2010     2009  

Operating activities:

    

Net loss

   $ (21.1   $ (136.8
                

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     18.4        17.7   

Deferred income taxes

     3.3        87.5   

Gain on sale of assets

     —          (3.3

Impairment charge on fixed assets

     1.0        —     

Other postretirement benefits curtailment gain

     —          (1.3

Gain on retirement of debt

     —          (2.7

Change in operating assets and liabilities, net of the effects of acquisitions:

    

Receivables

     (180.7     117.2   

Inventories

     (73.9     247.6   

Other assets

     (2.3     1.2   

Accounts payable

     100.3        40.4   

Accrued liabilities

     3.9        (25.0

Accrued taxes payable/receivable

     (0.1     12.6   

Deferred employee benefit costs

     (13.2     (1.7

Other items

     (0.3     0.7   
                

Net adjustments

     (143.6     490.9   
                

Net cash provided by (used in) operating activities

     (164.7     354.1   
                

Investing activities:

    

Decrease in restricted cash

     4.0        0.2   

Capital expenditures

     (15.0     (13.0

Proceeds from sales of property, plant and equipment

     1.5        14.7   

Other

     (8.2     —     
                

Net cash provided by (used in) investing activities

     (17.7     1.9   
                

Financing activities:

    

Repayment of debt

     (10.6     (3.3

Proceeds from credit facility borrowings

     180.0        —     

Net repayments of credit facility borrowings

     (30.4     (398.9

Net increase (decrease) in book overdrafts

     14.2        (27.5
                

Net cash provided by (used in) financing activities

     153.2        (429.7
                

Net decrease in cash and cash equivalents

     (29.2     (73.7

Effect of exchange rate changes on cash and cash equivalents

     0.5        2.9   
                

Net change in cash and cash equivalents

     (28.7     (70.8

Cash and cash equivalents—beginning of period

     114.9        108.9   
                

Cash and cash equivalents—end of period

   $ 86.2      $ 38.1   
                

Supplemental disclosures:

    

Cash paid (received) during the period for:

    

Interest paid to third parties

   $ 32.1      $ 34.3   

Income taxes, net

     3.9        (25.5

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

RYERSON INC. AND SUBSIDIARY COMPANIES

Condensed Consolidated Balance Sheets

(In millions, except shares)

 

     June 30,
2010
    December 31,
2009
 
     (unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 86.2      $ 114.9   

Restricted cash

     15.5        19.5   

Receivables less provision for allowances, claims and doubtful accounts of $9.6 and $10.5, respectively

     538.7        357.6   

Inventories

     679.7        601.7   

Prepaid expenses and other current assets

     63.9        46.1   
                

Total current assets

     1,384.0        1,139.8   

Property, plant, and equipment, at cost

     569.2        556.6   

Less: Accumulated depreciation

     82.7        67.9   
                

Property, plant and equipment, net

     486.5        488.7   

Deferred income taxes

     49.6        53.1   

Other intangible assets

     12.0        12.6   

Goodwill

     73.0        71.4   

Deferred charges and other assets

     19.3        22.0   
                

Total assets

   $ 2,024.4      $ 1,787.6   
                

Liabilities

    

Current liabilities:

    

Accounts payable

   $ 289.2      $ 173.4   

Salaries, wages and commissions

     42.7        36.7   

Deferred income taxes

     96.3        96.1   

Other accrued liabilities

     37.2        35.5   

Short-term credit facility borrowings

     10.6        28.4   

Current portion of deferred employee benefits

     15.5        15.6   
                

Total current liabilities

     491.5        385.7   

Long-term debt

     893.2        725.8   

Deferred employee benefits

     483.5        497.8   

Taxes and other credits

     11.9        11.9   
                

Total liabilities

     1,880.1        1,621.2   

Commitments and contingencies

    

Equity

    

Ryerson Inc. stockholders’ equity:

    

Common stock, $0.01 par value; 1,000 shares authorized; 100 shares issued at 2010 and 2009

     —          —     

Capital in excess of par value

     456.2        456.2   

Accumulated deficit

     (210.2     (189.3

Accumulated other comprehensive loss

     (137.5     (136.1
                

Total Ryerson Inc. stockholders’ equity

     108.5        130.8   

Noncontrolling interest

     35.8        35.6   
                

Total equity

     144.3        166.4   
                

Total liabilities and equity

   $ 2,024.4      $ 1,787.6   
                

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

RYERSON INC. AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1: FINANCIAL STATEMENTS

Ryerson Inc. (“Ryerson”), a Delaware corporation, is a wholly-owned subsidiary of Ryerson Holding Corporation (“Ryerson Holding”). Ryerson Holding is 99% owned by affiliates of Platinum Equity, LLC (“Platinum”).

Ryerson conducts materials distribution operations in the United States through its wholly-owned direct subsidiary Joseph T. Ryerson & Son, Inc. (“JT Ryerson”), and in Canada through its indirect wholly-owned subsidiary Ryerson Canada, Inc., a Canadian corporation (“Ryerson Canada”). Unless the context indicates otherwise, Ryerson, JT Ryerson, and Ryerson Canada, together with their subsidiaries, are collectively referred to herein as “we,” “us,” “our,” or the “Company.”

In addition to our United States and Canada operations, we conduct materials distribution operations in China through Ryerson China Limited (“Ryerson China”), formerly named VSC-Ryerson China Limited, a company in which we have a 50% direct ownership percentage and an additional 30% interest through affiliates of Ryerson Holding as of June 30, 2010 (see Note 13). We conducted material distribution operations in India through Tata Ryerson Limited, a joint venture with Tata Steel Limited, an integrated steel manufacturer in India until July 10, 2009, the date on which we sold our ownership interest to our joint venture partner.

The following table shows our percentage of sales by major product lines for the three and six months ended June 30, 2010 and 2009, respectively:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Product Line

   2010     2009     2010     2009  

Stainless

   28   24   28   24

Aluminum

   21      22      22      21   

Carbon flat rolled

   29      28      29      28   

Bars, tubing and structurals

   8      7      8      8   

Fabrication and carbon plate

   10      12      9      13   

Other

   4      7      4      6   
                        

Total

   100   100   100   100
                        

Results of operations for any interim period are not necessarily indicative of results of any other periods or for the year. The financial statements as of June 30, 2010 and for the three-month and six-month periods ended June 30, 2010 and 2009 are unaudited, but in the opinion of management include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results for such periods. The year-end condensed consolidated balance sheet data contained in this report was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Certain prior period amounts have been reclassified to conform to the 2010 presentation.

Accounting Standards Codification (“ASC”) 280, “Segment Reporting” (“ASC 280”), establishes standards for reporting information on operating segments in interim and annual financial statements. Our Chief Executive Officer, together with the Operating Committee selected by our Board of Directors, serve as our Chief Operating Decision Maker (CODM). Our CODM reviews our financial information for purposes of making operational decisions and assessing financial performance. During the second quarter of 2010, a strategic decision was made by the CODM to view our business globally as metals service centers. As such, the financial information provided to the CODM to evaluate performance and allocate resources has been revised to reflect this global view as opposed to geographic regions. We have one operating and reportable segment, metal service centers, per criteria set forth in ASC 280.

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued ASU 2010-6, “Improving Disclosures About Fair Value Measurements” (“ASU 2010-6”), which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. ASU 2010-6 is effective for interim and annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for interim and annual periods beginning after December 15, 2010. We adopted the requirements within ASU 2010-6 as of January 1, 2010, except for the Level 3 reconciliation disclosures. The adoption did not have an impact on our financial statements.

 

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NOTE 3: INVENTORIES

The Company uses the last-in, first-out (LIFO) method of valuing inventory. Interim LIFO calculations are based on actual inventory levels.

Inventories, at stated LIFO value, were classified as follows:

 

     June 30,
         2010        
   December 31,
2009
     (In millions)

In process and finished products

   $ 679.7    $ 601.7

If current cost had been used to value inventories, such inventories would have been $24 million and $72 million lower than reported at June 30, 2010 and December 31, 2009, respectively. Approximately 86% and 85% of inventories were accounted for under the LIFO method at June 30, 2010 and December 31, 2009, respectively. Non-LIFO inventories consist primarily of inventory at our foreign facilities accounted for by the weighted-average cost and the specific cost methods. Substantially all of our inventories consist of finished products.

NOTE 4: DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS

Derivatives

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk, foreign currency risk, and commodity price risk. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s floating-rate borrowings. We use foreign currency exchange contracts to hedge our Canadian subsidiaries’ variability in cash flows from the forecasted payment of currencies other than the functional currency. From time to time, we may enter into fixed price sales contracts with our customers for certain of our inventory components. We may enter into metal commodity futures and options contracts periodically to reduce volatility in the price of metals. The Company currently does not account for its derivative contracts as hedges but rather marks them to market with a corresponding offset to current earnings.

The following table summarizes the location and fair value amount of our derivative instruments reported in our consolidated balance sheet as of June 30, 2010 and December 31, 2009:

 

     Asset Derivatives    Liability Derivatives
     June 30, 2010    December 31, 2009    June 30, 2010    December 31, 2009
     Balance
Sheet
Location
   Fair Value    Balance
Sheet
Location
   Fair Value    Balance
Sheet
Location
   Fair Value    Balance
Sheet
Location
   Fair Value
     (In millions)

Derivatives not designated as hedging instruments under ASC 815

                       

Interest rate contracts

   N/A      N/A    N/A      N/A    Non-current
taxes and
other
credits
   $ 1.1    Non-current
taxes and
other
credits
   $ 1.0

Foreign exchange contracts

   Deferred
charges and
other assets
   $ 0.2    N/A      N/A    N/A      N/A    Non-current
taxes and
other
credits
     0.1

Commodity contracts

   Receivables
less provision
for allowances,
claims and
doubtful
accounts
     0.4    Receivables
less provision
for allowances,
claims and
doubtful
accounts
   $ 0.7    N/A      N/A    N/A      N/A
                                       

Total derivatives

      $ 0.6       $ 0.7       $ 1.1       $ 1.1
                                       

 

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The Company’s interest rate forward contracts had a notional amount of $100 million as of June 30, 2010 and December 31, 2009. As of June 30, 2010 and December 31, 2009, the Company’s foreign currency exchange contracts had a U.S. dollar notional amount of $9.0 million and $15.9 million, respectively. As of June 30, 2010 and December 31, 2009, the Company had 255 and 428 metric tons, respectively, of nickel futures or option contracts related to forecasted purchases.

The following table summarizes the location and amount of gains and losses reported in our consolidated statement of operations for the three months and six months ended June 30, 2010 and 2009:

 

          Amount of Gain/(Loss) Recognized in Income on Derivatives  

Derivatives not designated as

hedging instruments under

ASC 815

  

Location of Gain/(Loss)

Recognized in Income on

Derivatives

   Three Months
Ended June 30,
2010
    Three Months
Ended June 30,
2009
    Six Months
Ended June 30,
2010
    Six Months
Ended June 30,
2009
 
          (In millions)  

Interest rate contracts

  

Interest and other

expense on debt

   $ (0.2   $ (0.9   $ (0.8   $ (0.5

Foreign exchange contracts

  

Other income and

(expense), net

     0.5        (0.2     0.1        (0.6

Commodity contracts

   Cost of materials sold      (1.8     2.2        (0.2     1.9   
                                   

Total

      $ (1.5   $ 1.1      $ (0.9   $ 0.8   
                                   

Fair Value of Financial Instruments

As permitted by ASC 820-10-65-1, the Company adopted the nonrecurring fair value measurement disclosures of nonfinancial assets and liabilities. To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

 

  1. Level 1—quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date.

 

  2. Level 2—inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

 

  3. Level 3—unobservable inputs, such as internally-developed pricing models for the asset or liability due to little or no market activity for the asset or liability.

The following table presents assets and liabilities measured and recorded at fair value on our Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy as of June 30, 2010:

 

     Level 1    Level 2    Level 3
     (In millions)

Assets

        

Cash equivalents:

        

Commercial paper

   $ 53.1    $ —      $ —  
                    

Mark-to-market derivatives:

        

Foreign exchange contracts

   $ —      $ 0.2    $ —  

Commodity contracts

     —        0.4      —  
                    

Total asset derivatives

   $ —      $ 0.6    $ —  
                    

Liabilities

        

Mark-to-market derivatives:

        

Interest rate contracts

   $ —      $ 1.1    $ —  
                    

The fair value of each derivative contract is determined using Level 2 inputs and the market approach valuation technique, as described in ASC 820. The Company has various commodity derivatives to lock in nickel prices for varying time periods. The fair value of these derivatives is determined based on the spot price each individual contract was purchased at and compared with the one-month daily average actual spot price on the London Metals Exchange for nickel on the valuation date. The Company also has an interest rate swap to fix a portion of the Company’s interest payments on its debt obligations. The interest rate swap, which has a notional amount of $100 million, fixes a portion of our interest payments at an interest rate of 1.59%. The contract expires on July 15, 2011. The interest rate swap is valued using estimated future one-month LIBOR interest rates as compared to the fixed interest rate of 1.59%. In addition, the Company has numerous foreign exchange contracts to hedge our Canadian subsidiaries variability in cash flows from the forecasted payment of currencies other than the functional currency, the US dollar. The Company defines the fair

 

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value of foreign exchange contracts as the amount of the difference between the contracted and current market value at the end of the period. The Company estimates the current market value of foreign exchange contracts by obtaining month-end market quotes of foreign exchange rates and forward rates for contracts with similar terms. The Company uses the exchange rates provided by Reuters. Each contract term varies in the number of months, but on average is between 3 to 12 months in length.

The carrying and estimated fair values of the Company’s financial instruments at June 30, 2010 and December 31, 2009 were as follows:

 

     June 30, 2010    December 31, 2009
     Carrying
Amount
   Fair Value    Carrying
Amount
   Fair Value
     (In millions)

Cash and cash equivalents

   $ 86.2    $ 86.2    $ 114.9    $ 114.9

Receivables less provision for allowances, claims and doubtful accounts

     538.7      538.7      357.6      357.6

Accounts payable

     289.2      289.2      173.4      173.4

Long-term debt, including current portion

     903.8      905.4      754.2      750.1

The estimated fair value of the Company’s cash and cash equivalents, receivables less provision for allowances, claims and doubtful accounts and accounts payable approximate their carrying amounts due to the short-term nature of these financial instruments. The estimated fair value of the Company’s long-term debt and the current portions thereof is determined by using quoted market prices of Company debt securities, where available, and from analyses performed using current interest rates considering credit ratings and the remaining terms of maturity.

Assets Held for Sale

The Company had $26.2 and $24.0 million of assets held for sale, classified within other current assets, as of June 30, 2010 and December 31, 2009, respectively.

NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $73.0 million at June 30, 2010. Pursuant to ASC 350, “Intangibles – Goodwill and Other,” we review the recoverability of goodwill and other intangible assets deemed to have indefinite lives annually or whenever significant events or changes occur which might impair the recovery of recorded amounts. The most recently completed impairment test of goodwill was performed as of October 1, 2009 and it was determined that no impairment existed. Other intangible assets with finite useful lives continue to be amortized over their useful lives. We review the recoverability of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable.

NOTE 6: ACQUISITIONS

On January 26, 2010, JT Ryerson acquired all of the issued and outstanding capital stock of Texas Steel Processing, Inc. (“TSP”), a steel plate processor based in Houston, Texas. The acquisition is not material to our consolidated financial statements.

 

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NOTE 7: LONG-TERM DEBT

Long-term debt consisted of the following at June 30, 2010 and December 31, 2009:

 

     June 30,
2010
   December 31,
2009
     (In millions)

Secured Credit Facility

   $ 410.0    $ 250.2

12% Senior Secured Notes due 2015

     376.2      376.2

Floating Rate Senior Secured Notes due 2014

     102.9      102.9

8    1/4% Senior Secured Notes due 2011

     4.1      4.1

Foreign debt

     10.6      20.8
             

Total debt

     903.8      754.2

Less:

     

Short-term credit facility borrowings

     —        7.6

Foreign debt

     10.6      20.8
             

Total long-term debt

   $       893.2    $ 725.8
             

Ryerson Credit Facility

On October 19, 2007, the Company entered into a 5-year, $1.35 billion revolving credit facility agreement (“Ryerson Credit Facility”) with a maturity date of October 18, 2012. At June 30, 2010, the Company had $410.0 million of outstanding borrowings, $29 million of letters of credit issued and $335 million available under the Ryerson Credit Facility compared to $250.2 million of outstanding borrowings, $32 million of letters of credit issued and $268 million available at December 31, 2009. Total credit availability is limited by the amount of eligible account receivables and inventory pledged as collateral under the agreement insofar as the Company is subject to a borrowing base comprised of the aggregate of these two amounts, less applicable reserves. Eligible account receivables, at any date of determination, are comprised of the aggregate value of all accounts directly created by a borrower in the ordinary course of business arising out of the sale of goods or the rendition of services, each of which has been invoiced, with such receivables adjusted to exclude various ineligible accounts, including, among other things, those to which a borrower does not have sole and absolute title and accounts arising out of a sale to an employee, officer, director, or affiliate of the borrower. The weighted-average interest rate on the borrowings under the Ryerson Credit Facility was 2.2% and 2.1% at June 30, 2010 and December 31, 2009, respectively.

Amounts outstanding under the Ryerson Credit Facility bear interest at a rate determined by reference to the base rate (Bank of America’s prime rate) or a LIBOR rate or, for Ryerson’s Canadian subsidiary which is a borrower, a rate determined by reference to the Canadian base rate (Bank of America-Canada Branch’s “Base Rate” for loans in U.S. Dollars in Canada) or the BA rate (average annual rate applicable to Canadian Dollar bankers’ acceptances) or a LIBOR rate and the Canadian prime rate (Bank of America-Canada Branch’s “Prime Rate”). The spread over the base rate and Canadian prime rate is between 0.25% and 1.00% and the spread over the LIBOR and the bankers’ acceptances is between 1.25% and 2.00%, depending on the amount available to be borrowed. Overdue amounts and all amounts owed during the existence of a default bear interest at 2% above the rate otherwise applicable thereto. The Company also pays commitment fees on amounts not borrowed at a rate between 0.25% and 0.35% depending on the average borrowings as a percentage of the total $1.35 billion agreement during a rolling three month period.

Borrowings under the Ryerson Credit Facility are secured by first-priority liens on all of the inventory, accounts receivable, lockbox accounts and related assets of Ryerson, subsidiary borrowers and certain other U.S. subsidiaries of Ryerson that act as guarantors.

The Ryerson Credit Facility contains covenants that, among other things, restrict Ryerson with respect to the incurrence of debt, the creation of liens, transactions with affiliates, mergers and consolidations, sales of assets and acquisitions. The Ryerson Credit Facility also requires that, if availability under such facility declines to a certain level, the Company maintain a minimum fixed charge coverage ratio as of the end of each fiscal quarter.

The Ryerson Credit Facility contains events of default with respect to, among other things, default in the payment of principal when due or the payment of interest, fees and other amounts after a specified grace period, material misrepresentations, failure to perform certain specified covenants, certain bankruptcy events, the invalidity of certain security agreements or guarantees, material judgments and the occurrence of a change of control of Ryerson Holding. If such an event of default occurs, the lenders under the Ryerson Credit Facility will be entitled to various remedies, including acceleration of amounts outstanding under the Ryerson Credit Facility and all other actions permitted to be taken by secured creditors.

 

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The lenders under the Ryerson Credit Facility have the ability to reject a borrowing request if any event, circumstance or development has occurred that has had or could reasonably be expected to have a material adverse effect on Ryerson. If Ryerson or any significant subsidiaries of the other borrowers becomes insolvent or commences bankruptcy proceedings, all amounts borrowed under the Ryerson Credit Facility will become immediately due and payable.

Ryerson Notes

On October 19, 2007, Ryerson issued $150 million Floating Rate Senior Secured Notes due November 1, 2014 (“2014 Notes”) and $425 million 12% Senior Secured Notes due November 1, 2015 (“2015 Notes”) (together, the “Ryerson Notes”). The 2014 Notes bear interest at a rate, reset quarterly, of LIBOR plus 7.375% per annum. The 2015 Notes bear interest at a rate of 12% per annum. The Ryerson Notes are fully and unconditionally guaranteed on a senior secured basis by certain of our existing and future subsidiaries (including those existing and future domestic subsidiaries that are co-borrowers or guarantee obligations under our Ryerson Credit Facility).

At June 30, 2010, $376.2 million of the 2015 Notes and $102.9 million of the 2014 Notes remain outstanding. During the first six months of 2009, $6.0 million principal amount of the 2015 Notes were repurchased for $3.3 million and retired, resulting in the recognition of a $2.7 million gain within other income and (expense), net on the condensed consolidated statement of operations.

The Ryerson Notes and guarantees are secured by a first-priority lien on substantially all of our and our guarantors’ present and future assets located in the United States (other than receivables, inventory, related general intangibles, certain other assets and proceeds thereof) including equipment, owned real property interests valued at $1 million or more, and all present and future shares of capital stock or other equity interests of each of our and each guarantor’s directly owned domestic subsidiaries and 65% of the present and future shares of capital stock or other equity interests, of each of our and each guarantor’s directly owned foreign restricted subsidiaries, in each case subject to certain exceptions and customary permitted liens. The Ryerson Notes and guarantees are secured on a second-priority basis by a lien on the assets that secure our obligations under the Ryerson Credit Facility. The Ryerson Notes contain customary covenants that, among other things, limit, subject to certain exceptions, our ability, and the ability of our restricted subsidiaries, to incur additional indebtedness, pay dividends on our capital stock or repurchase our capital stock, make investments, sell assets, engage in acquisitions, mergers or consolidations or create liens or use assets as security in other transactions. Subject to certain exceptions, Ryerson may only pay dividends to Ryerson Holding to the extent of 50% of future net income, once prior losses are offset.

The Ryerson Notes will be redeemable by Ryerson, in whole or in part, at any time on or after November 1, 2011, at specified redemption prices. Additionally, on or prior to November 1, 2010, Ryerson Holding or the Company may redeem up to 35% of the outstanding 2015 Notes, with the net proceeds of specified equity offerings at specified redemption prices. If a change of control occurs, Ryerson must offer to purchase the Ryerson Notes at 101% of their principal amount, plus accrued and unpaid interest.

Pursuant to a registration rights agreement, Ryerson agreed to file with the SEC by July 15, 2008 a registration statement with respect to an offer to exchange each of the notes for a new issue of our debt securities registered under the Securities Act, with terms substantially identical to those of the Ryerson Notes and to consummate an exchange offer no later than November 12, 2008. Ryerson did not consummate an exchange offer by November 12, 2008 and therefore, was required to pay additional interest to the holders of the Ryerson Notes. As a result, Ryerson paid an additional approximately $0.6 million in interest to the holders of the Ryerson Notes with the interest payment on May 1, 2009. Ryerson completed the exchange offer on April 9, 2009. Upon completion of the exchange offer, Ryerson’s obligation to pay additional interest ceased.

$150 Million 8    1/4% Senior Notes due 2011

At June 30, 2010, $4.1 million of the 8    1/4% Senior Notes due 2011 (“2011 Notes”) remain outstanding. The 2011 Notes pay interest semi-annually and mature on December 15, 2011.

The 2011 Notes contained covenants, substantially all of which were removed pursuant to an amendment of the 2011 Notes as a result of the tender offer to repurchase the notes during 2007.

Foreign Debt

At June 30, 2010, Ryerson China’s total foreign borrowings were $10.6 million, of which, $8.5 million was owed to banks in Asia at a weighted average interest rate of 2.5% secured by inventory and property, plant and equipment. Ryerson China also owed $2.1 million at June 30, 2010 to Van Shung Chong Holdings Limited (“VSC”), our joint venture partner, at a weighted average interest rate of 0.2%. Of the total borrowings of $20.8 million outstanding at December 31, 2009, $12.6 million was owed to banks in Asia at a weighted average interest rate of 2.2% secured by inventory and property, plant and equipment. Ryerson China also owed $8.2 million at December 31, 2009 to VSC at a weighted average interest rate of 1.8%. Availability under the foreign credit lines was $17 million and $8 million at June 30, 2010 and December 31, 2009, respectively.

 

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Ryerson Holding Notes

On January 29, 2010, Ryerson Holding issued $483 million aggregate principal amount at maturity of 14 1/2% Senior Discount Notes due 2015 (the “Ryerson Holding Notes”). No cash interest accrues on the Ryerson Holding Notes. The Ryerson Holding Notes had an initial accreted value of $455.98 per $1,000 principal amount and will accrete from the date of issuance until maturity on a semi-annual basis. The accreted value of each Ryerson Holding Note increases from the date of issuance until October 31, 2010 at a rate of 14.50%. Thereafter the interest rate increases by 1% (to 15.50%) until July 31, 2011, an additional 1.00% (to 16.50%) on August 1, 2011 until April 30, 2012, and increases by an additional 0.50% (to 17.00%) on May 1, 2012 until the maturity date. Interest compounds semi-annually such that the accreted value will equal the principal amount at maturity of each note on that date. At June 30, 2010, the accreted value of the Ryerson Holding Notes was $233.7 million. The Ryerson Holding Notes are not guaranteed by any of Ryerson Holding’s subsidiaries and are secured by a first priority security interest in the capital stock of Ryerson. The Ryerson Holding Notes rank equally in right of payment with all of Ryerson Holding’s senior debt and senior in right of payment to all of Ryerson Holding’s subordinated debt. The Ryerson Holding Notes are effectively junior to Ryerson Holding’s other secured debt to the extent of the collateral securing such debt (other than the capital stock of Ryerson). Because the Ryerson Holding Notes are not guaranteed by any of Ryerson Holding’s subsidiaries, the notes are structurally subordinated to all indebtedness and other liabilities (including trade payables) of Ryerson Holding’s subsidiaries, including Ryerson.

The Ryerson Holding Notes contain customary covenants that, among other things, limit, subject to certain exceptions, Ryerson Holding’s ability to incur additional indebtedness, pay dividends on its capital stock or repurchase its capital stock, make certain investments or other restricted payments, create liens or use assets as security in other transactions, enter into sale and leaseback transactions, merge, consolidate or transfer or dispose of substantially all of Ryerson Holding’s assets, and engage in certain transactions with affiliates.

The Ryerson Holding Notes are redeemable, at the option of Ryerson Holding, in whole or in part, at any time at specified redemption prices. The Ryerson Holding Notes are required to be redeemed upon the receipt of net proceeds of certain qualified equity issuances, specified change of controls and/or specified receipt of dividends.

Although the Ryerson Holding Notes are not recorded on the Company’s balance sheet, Ryerson plans to provide funds, in the form of dividends, to service the Ryerson Holding Notes to Ryerson Holding. The terms of the Ryerson Notes (discussed above) restrict Ryerson from making dividends to Ryerson Holding. Subject to certain exceptions, Ryerson may only pay dividends to Ryerson Holding to the extent of 50% of future net income, once prior losses are offset. In the event Ryerson is restricted from providing Ryerson Holding with sufficient distributions to fund interest and principal payments on the Ryerson Holding Notes when due, Ryerson Holding may default on the Ryerson Holding Notes unless other sources of funding are available.

 

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NOTE 8: EMPLOYEE BENEFITS

The following table summarizes the components of net periodic benefit cost for the three-month and six-month periods ended June 30, 2010 and 2009 for the Ryerson pension plans and postretirement benefits other than pension:

 

     Three Months Ended June 30,  
     Pension Benefits     Other Benefits  
     2010     2009     2010     2009  
     (In millions)  

Components of net periodic benefit cost

        

Service cost

   $ 1      $ 1      $ —        $ —     

Interest cost

     11        11        2        3   

Expected return on assets

     (12     (12     —          —     

Recognized actuarial net (gain) loss

     1        —          (1     —     
                                

Net periodic benefit cost (credit)

   $ 1      $ —        $ 1      $ 3   
                                
     Six Months Ended June 30,  
     Pension Benefits     Other Benefits  
     2010     2009     2010     2009  
     (In millions)  

Components of net periodic benefit cost

        

Service cost

   $ 2      $ 1      $ 1      $ 1   

Interest cost

     22        22        4        6   

Expected return on assets

     (24     (24     —          —     

Recognized actuarial net (gain) loss

     3       —          (2     (1

Curtailment gain

     —          —          —          (1
                                

Net periodic benefit cost (credit)

   $ 3      $ (1   $ 3      $ 5   
                                

In February 2009, the Company amended the terms of one of our Canadian post-retirement medical and life insurance plans which effectively eliminated benefits to a group of employees unless these individuals agreed to retire within 18 months of the effective date of April 1, 2009. This benefit curtailment action resulted in a gain of approximately $1.3 million during the first quarter of 2009.

Contributions

The Company has contributed $13 million to the pension plan fund through the six months ended June 30, 2010 and anticipates that it will have a minimum required pension contribution funding of approximately $33 million for the remaining six months of 2010.

NOTE 9: COMMITMENTS AND CONTINGENCIES

From time to time, we are named as a defendant in legal actions incidental to our ordinary course of business. We do not believe that the resolution of these claims will have a material adverse effect on our financial position, results of operations or cash flows. We maintain liability insurance coverage to assist in protecting our assets from losses arising from or related to activities associated with business operations.

 

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NOTE 10: STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME

The following table details changes in capital accounts:

 

     Ryerson Inc. Stockholders             
                     Accumulated Other
Comprehensive Income
(Loss)
            
     Common Stock    Capital in
Excess of
Par Value
   Accumulated
Deficit
    Foreign
Currency
Translation
    Benefit Plan
Liabilities
    Available-For-Sale
Investment
   Noncontrolling
Interest
    Total  
     Shares    Dollars    Dollars    Dollars     Dollars     Dollars     Dollars    Dollars     Dollars  
     (In millions)  

Balance at December 31, 2009

   —      $ —      $ 456.2    $ (189.3   $ (17.4   $ (118.7   $ —      $ 35.6      $ 166.4   

Net loss

   —        —        —        (20.9     —          —          —        (0.2     (21.1

Foreign currency translation

   —        —        —        —          (2.1     —          —        0.4        (1.7

Benefit plan liabilities – adjustment for recognition of prior service cost and net loss, (net of tax provision of $0.3)

   —        —        —        —          —          0.5        —        —          0.5   

Unrealized gain on available-for-sale investment (net of tax provision of $0.1)

   —        —        —        —          —          —          0.2      —          0.2   
                                                                  

Balance at June 30, 2010

   —      $ —      $ 456.2    $ (210.2   $ (19.5   $ (118.2   $ 0.2    $ 35.8      $ 144.3   
                                                                  

The following sets forth the components of comprehensive income:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  
     (In millions)  

Net loss

   $ (12.1   $ (130.5   $ (21.1   $ (136.8

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     (7.7     16.3        (1.7     6.5   

Changes in unrecognized benefit costs, net of tax provision of $0.7 in 2009

     —          —          —          1.4   

Benefit plan liabilities – adjustment for recognition of prior service cost and net loss, net of tax provision of $0.3 in 2010 and tax benefit of $0.4 in 2009

     0.3        (0.3     0.5        (0.6

Unrealized gain on available-for-sale investment, net of tax provision of $0.1 in 2010

     0.2        —          0.2        —     
                                

Total comprehensive loss

     (19.3     (114.5     (22.1     (129.5

Less: Comprehensive income (loss) attributable to noncontrolling interest

     0.1        (0.9     0.2        (3.2
                                

Comprehensive loss attributable to Ryerson Inc.

   $ (19.4   $ (113.6   $ (22.3   $ (126.3
                                

NOTE 11: RELATED PARTIES

JT Ryerson pays an affiliate of Platinum an annual monitoring fee of up to $5.0 million pursuant to a corporate advisory services agreement. The monitoring fee recorded in the first six months of 2010 and 2009 was $2.5 million.

 

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NOTE 12: INCOME TAXES

For the three months ended June 30, 2010, the Company recorded income tax expense from operations of $3.7 million compared to a $75.2 million income tax expense in the prior year. The $3.7 million tax provision in the second quarter of 2010 primarily related to an increase to the valuation allowance on foreign tax credits and to foreign income tax expense. The valuation allowance was adjusted to increase the allowance for changes in our deferred tax assets.

In accordance with ASC 740, “Income Taxes,” the Company assesses, on a quarterly basis, the realizability of its deferred tax assets. A valuation allowance must be established 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 analyzed, among other things, our recent history of earnings and cash flows, the nature and timing of future deductions and benefits represented by the deferred tax assets and our cumulative earnings for the last twelve quarters. As a result of the historical twelve quarters of cumulative U.S. pre-tax losses incurred during the second quarter of 2009, we were unable to rely on the positive evidence of projected future income. We reviewed all of the other future sources of taxable income such as: 1) the expected reversal of existing taxable temporary differences, 2) our ability to carryback taxable losses, and 3) the availability of prudent and feasible tax planning strategies. After considering both the positive and negative evidence for the second quarter of fiscal year 2009, the Company determined that it was more-likely-than-not that it would not realize the full value of a portion of its U.S. deferred tax assets. As a result, during the second quarter of 2009, the Company established a valuation allowance against its deferred tax assets in the U.S. to reduce them to the amount that is more-likely-than-not to be realized. The valuation allowance is reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of some or all of the valuation allowance. The valuation allowance balance was $101.4 million at June 30, 2010.

For the six months ended June 30, 2010, the Company recorded income tax expense of $6.3 million compared to $72.0 million of expense in the prior year. As discussed above, during the first six months of 2009 the Company recorded non-cash charges of $74.3 million to establish a valuation allowance against its U.S. deferred tax assets. The first six months of 2009 also included a $13.5 million charge to increase deferred tax liabilities related to the Company’s joint venture in India, which we determined was no longer permanently reinvested.

NOTE 13: SUBSEQUENT EVENTS

On July 12, 2010, Ryerson Holding, our parent company, acquired VSC’s 20 percent ownership in Ryerson China. Ryerson China is now a wholly-owned subsidiary of Ryerson Holding. The acquisition is not material to our consolidated financial statements.

NOTE 14: CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS

On October 19, 2007, Ryerson issued the Ryerson Notes. The Ryerson Notes are fully and unconditionally guaranteed on a senior secured basis by each of Ryerson’s existing and future domestic subsidiaries that are co-borrowers or guarantee our obligations under the Ryerson Credit Facility. Each guarantor of the Ryerson Notes is 100% owned by Ryerson and the guarantees are joint and several. Subject to certain exceptions, Ryerson may only pay dividends to Ryerson Holding to the extent of 50% of future net income, once prior losses are offset.

 

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The following are condensed consolidating financial information of Ryerson and its guarantor and non-guarantor subsidiaries and affiliates as of June 30, 2010 and December 31, 2009 and for the three-month and six-month periods ended June 30, 2010 and 2009:

RYERSON INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

THREE MONTHS ENDED JUNE 30, 2010

(In millions)

 

     Parent     Guarantor     Non-guarantor     Eliminations     Consolidated  

Net sales

   $ —        $ 877.1      $ 144.5      $ (1.4   $ 1,020.2   

Cost of materials sold

     —          764.9        124.1        (1.4     887.6   
                                        

Gross profit

     —          112.2        20.4        —          132.6   

Warehousing, delivery, selling, general and administrative

     1.3        108.0        17.3        —          126.6   

Gain on insurance settlement

     (2.6     —          —          —          (2.6

Impairment charge on fixed assets

     —          0.5        —          —          0.5   
                                        

Operating profit

     1.3        3.7        3.1        —          8.1   

Other income and (expense), net

     —          —          2.4        —          2.4   

Interest and other expense on debt

     (17.6     (0.3     (1.0     —          (18.9

Intercompany transactions:

          

Interest expense on intercompany loans

     (13.7     —          (0.1     13.8        —     

Interest income on intercompany loans

     —          13.8        —          (13.8     —     
                                        

Loss before income taxes

     (30.0     17.2        4.4        —          (8.4

Provision (benefit) for income taxes

     (1.9     3.3        2.3        —          3.7   

Equity in (earnings) loss of subsidiaries

     (16.2     (2.5     —          18.7        —     
                                        

Net loss

     (11.9     16.4        2.1        (18.7     (12.1

Less: Net loss attributable to noncontrolling interest

     —          —          (0.2     —          (0.2
                                        

Net loss attributable to Ryerson Inc.

   $ (11.9   $ 16.4      $ 2.3      $ (18.7   $ (11.9
                                        

RYERSON INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

THREE MONTHS ENDED JUNE 30, 2009

(In millions)

 

     Parent     Guarantor     Non-guarantor     Eliminations     Consolidated  

Net sales

   $ —        $ 646.5      $ 97.9      $ (1.3   $ 743.1   

Cost of materials sold

     —          572.7        86.1        (1.3     657.5   
                                        

Gross profit

     —          73.8        11.8        —          85.6   

Warehousing, delivery, selling, general and administrative

     1.2        100.8        16.2        —          118.2   
                                        

Operating loss

     (1.2     (27.0     (4.4     —          (32.6

Other income and (expense), net

     —          —          (4.5     —          (4.5

Interest and other expense on debt

     (17.1     (0.9     (0.2     —          (18.2

Intercompany transactions:

          

Interest expense on intercompany loans

     (14.1     —          —          14.1        —     

Interest income on intercompany loans

     —          13.5        0.6        (14.1     —     
                                        

Loss before income taxes

     (32.4     (14.4     (8.5     —          (55.3

Provision for income taxes

     (11.3     88.6        (2.1     —          75.2   

Equity in (earnings) loss of subsidiaries

     108.9        6.3        —          (115.2     —     
                                        

Net loss

     (130.0     (109.3     (6.4     115.2        (130.5

Less: Net loss attributable to noncontrolling interest

     —          —          (0.5     —          (0.5
                                        

Net loss attributable to Ryerson Inc.

   $ (130.0   $ (109.3   $ (5.9   $ 115.2      $ (130.0
                                        

 

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RYERSON INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2010

(In millions)

 

     Parent     Guarantor     Non-guarantor     Eliminations     Consolidated  

Net sales

   $ —        $ 1,625.1      $ 269.6      $ (3.0   $ 1,891.7   

Cost of materials sold

     —          1,399.8        228.5        (3.0     1,625.3   
                                        

Gross profit

     —          225.3        41.1        —          266.4   

Warehousing, delivery, selling, general and administrative

     2.5        208.8        33.6        —          244.9   

Gain on insurance settlement

     (2.6     —          —          —          (2.6

Impairment charge on fixed assets

     —          1.0        —          —          1.0   
                                        

Operating profit

     0.1        15.5        7.5        —          23.1   

Other income and (expense), net

     —          —          (0.1     —          (0.1

Interest and other expense on debt

     (34.7     (1.0     (2.1     —          (37.8

Intercompany transactions:

          

Interest expense on intercompany loans

     (27.9     —          (0.3     28.2        —     

Interest income on intercompany loans

     —          28.2        —          (28.2     —     
                                        

Loss before income taxes

     (62.5     42.7        5.0        —          (14.8

Provision for income taxes

     (9.9     12.9        3.3        —          6.3   

Equity in (earnings) loss of subsidiaries

     (31.7     (2.1     —          33.8        —     
                                        

Net loss

     (20.9     31.9        1.7        (33.8     (21.1

Less: Net loss attributable to noncontrolling interest

     —          —          (0.2     —          (0.2
                                        

Net loss attributable to Ryerson Inc.

   $ (20.9   $ 31.9      $ 1.9      $ (33.8   $ (20.9
                                        

RYERSON INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2009

(In millions)

 

     Parent     Guarantor     Non-guarantor     Eliminations     Consolidated  

Net sales

   $ —        $ 1,341.0      $ 208.7      $ (1.9   $ 1,547.8   

Cost of materials sold

     —          1,151.0        187.6        (1.9     1,336.7   
                                        

Gross profit

     —          190.0        21.1        —          211.1   

Warehousing, delivery, selling, general and administrative

     2.2        210.1        30.0        —          242.3   

Gain on sale of assets

     —          (3.3     —          —          (3.3

Other postretirement benefits curtailment gain

     —          —          (1.3     —          (1.3
                                        

Operating loss

     (2.2     (16.8     (7.6     —          (26.6

Other income and (expense), net

     2.7        —          (4.5     —          (1.8

Interest and other expense on debt

     (35.3     (0.5     (0.6     —          (36.4

Intercompany transactions:

          

Interest expense on intercompany loans

     (26.3     —          (0.2     26.5        —     

Interest income on intercompany loans

     —          25.9        0.6        (26.5     —     
                                        

Loss before income taxes

     (61.1     8.6        (12.3     —          (64.8

Provision for income taxes

     (22.9     97.7        (2.8     —          72.0   

Equity in (earnings) loss of subsidiaries

     96.1        7.3        —          (103.4     —     
                                        

Net loss

     (134.3     (96.4     (9.5     103.4        (136.8

Less: Net loss attributable to noncontrolling interest

     —          —          (2.5     —          (2.5
                                        

Net loss attributable to Ryerson Inc.

   $ (134.3   $ (96.4   $ (7.0   $ 103.4      $ (134.3
                                        

 

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RYERSON INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2010

(In millions)

 

 

     Parent     Guarantor     Non-guarantor     Eliminations     Consolidated  

Operating activities:

          

Net income (loss)

   $ (20.9   $ 31.9      $ 1.7      $ (33.8   $ (21.1
                                        

Non-cash expenses

     (11.7     31.7        2.4       —          22.4   

Equity in (earnings) loss of subsidiaries

     (31.7     (2.1     —          33.8        —     

Changes in working capital

     (40.9     (107.0     (18.1     —          (166.0
                                        

Net adjustments

     (84.3     (77.4     (15.7     33.8        (143.6
                                        

Net cash provided by (used in) operating activities

     (105.2     (45.5     (14.0     —          (164.7
                                        

Investing activities:

          

Net cash provided by (used in) investing activities

     (0.9     45.6        1.2        (63.6     (17.7
                                        

Financing activities:

          

Net cash provided by (used in) financing activities

     106.2        2.8        (19.4     63.6        153.2   
                                        

Net increase (decrease) in cash and cash equivalents

     0.1        2.9        (32.2     —          (29.2

Effect of exchange rate changes on cash

     —          (0.1     0.6        —          0.5   
                                        

Net change in cash and cash equivalents

     0.1        2.8        (31.6     —          (28.7

Beginning cash and cash equivalents

     —          4.6        110.3        —          114.9   
                                        

Ending cash and cash equivalents

   $ 0.1      $ 7.4      $ 78.7      $ —        $ 86.2   
                                        

RYERSON INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2009

(In millions)

 

 

     Parent     Guarantor     Non-guarantor     Eliminations     Consolidated  

Operating activities:

          

Net income (loss)

   $ (134.3   $ (96.4   $ (9.5   $ 103.4      $ (136.8
                                        

Non-cash expenses

     (10.6     109.4        (0.2     —          98.6   

Equity in (earnings) loss of subsidiaries

     96.1        7.3        —          (103.4     —     

Changes in working capital

     11.2        429.8        (48.7     —          392.3   
                                        

Net adjustments

     96.7        546.5        (48.9     (103.4     490.9   
                                        

Net cash provided by (used in) operating activities

     (37.6     450.1        (58.4     —          354.1   
                                        

Investing activities:

          

Net cash provided by (used in) investing activities

     —          (425.3     (1.5     428.7        1.9   
                                        

Financing activities:

          

Net cash provided by (used in) financing activities

     37.6        (27.5     (11.1     (428.7     (429.7
                                        

Net increase (decrease) in cash and cash equivalents

     —          (2.7     (71.0     —          (73.7

Effect of exchange rate changes on cash

     —          —          2.9        —          2.9   
                                        

Net change in cash and cash equivalents

     —          (2.7     (68.1     —          (70.8

Beginning cash and cash equivalents

     0.1        7.6        101.2        —          108.9   
                                        

Ending cash and cash equivalents

   $ 0.1      $ 4.9      $ 33.1      $ —        $ 38.1   
                                        

 

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RYERSON INC.

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

JUNE 30, 2010

(In millions)

 

     Parent    Guarantor    Non-guarantor    Eliminations     Consolidated

Assets

             

Current assets

   $ 1,713.1    $ 1,075.8    $ 270.6    $ (1,675.5   $ 1,384.0

Property, plant and equipment, net of accumulated depreciation

     —        424.4      62.1      —          486.5

Other noncurrent assets

     934.4      1,830.3      14.1      (2,624.9     153.9
                                   

Total Assets

   $ 2,647.5    $ 3,330.5    $ 346.8    $ (4,300.4   $ 2,024.4
                                   

Liabilities and Equity

             

Current liabilities

   $ 37.1    $ 2,060.0    $ 69.9    $ (1,675.5   $ 491.5

Noncurrent liabilities

     2,501.9      472.6      23.2      (1,609.1     1,388.6

Ryerson Inc. stockholders’ equity

     108.5      797.9      217.9      (1,015.8     108.5

Noncontrolling interest

     —        —        35.8      —          35.8
                                   

Total Liabilities and Equity

   $ 2,647.5    $ 3,330.5    $ 346.8    $ (4,300.4   $ 2,024.4
                                   

RYERSON INC.

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2009

(In millions)

 

     Parent    Guarantor    Non-guarantor    Eliminations     Consolidated

Assets

             

Current Assets

   $ 1,662.4    $ 849.3    $ 261.8    $ (1,633.7   $ 1,139.8

Property, plant and equipment net of accumulated depreciation

     —        427.7      61.0      —          488.7

Other noncurrent assets

     810.6      1,896.0      14.8      (2,562.3     159.1
                                   

Total Assets

   $ 2,473.0    $ 3,173.0    $ 337.6    $ (4,196.0   $ 1,787.6
                                   

Liabilities and Equity

             

Current liabilities

   $ 46.8    $ 1,921.8    $ 50.8    $ (1,633.7   $ 385.7

Noncurrent liabilities

     2,295.4      485.9      33.1      (1,578.9     1,235.5

Ryerson Inc. stockholders’ equity

     130.8      765.3      218.1      (983.4     130.8

Noncontrolling interest

     —        —        35.6      —          35.6
                                   

Total Liabilities and Equity

   $ 2,473.0    $ 3,173.0    $ 337.6    $ (4,196.0   $ 1,787.6
                                   

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and the caption “Industry and Operating Trends” included herein “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report. Moreover, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events.

The following discussion should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and related Notes thereto in Item 1, “FINANCIAL STATEMENTS” in this Quarterly Report on Form 10-Q and the Company’s Consolidated Financial Statements and related Notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Industry and Operating Trends

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. More than one-half of the metals products sold are processed by us by burning, sawing, slitting, blanking, cutting to length or other techniques. We sell our products and services to many industries, including machinery manufacturers, metals fabricators, electrical machinery, transportation equipment, construction, wholesale distributors, and metals mills and foundries. 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.

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 is 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 both to improve purchasing leverage with suppliers, as we buy larger quantities of metals inventories, and to reduce operating expenses per ton sold.

Gross profit. Gross profit is the difference between net sales and the cost of materials sold. 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.

The metals service center industry is generally considered cyclical with periods of strong demand and higher prices followed by periods of weaker demand and lower prices due to the cyclical nature of the industries in which the largest consumers of metals operate. However, domestic metals prices are volatile and remain difficult to predict due to its commodity nature and the extent which prices are affected by interest rates, foreign exchange rates, energy prices, international supply/demand imbalances, surcharges and other factors.

 

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Results of Operations - Comparison of Second Quarter 2010 to Second Quarter 2009

 

     Three months ended
June 30, 2010
    % of Net
Sales
    Three months ended
June 30, 2009
    % of Net
Sales
 

Net sales

   $ 1,020.2      100.0   $ 743.1      100.0

Cost of materials sold

     887.6      87.0        657.5      88.5   
                            

Gross profit

     132.6      13.0        85.6      11.5   

Warehousing, delivery, selling, general and administrative expenses

     126.6      12.4        118.2      15.9   

Impairment charge on fixed assets

     0.5      0.1        —        —     

Gain on insurance settlement

     (2.6   (0.3     —        —     
                            

Operating profit (loss)

     8.1      0.8        (32.6   (4.4

Other expenses

     (16.5   (1.6     (22.7   (3.1

Provision for income taxes

     3.7      0.4        75.2      10.1   
                            

Net loss

     (12.1   (1.2     (130.5   (17.6

Noncontrolling interest

     (0.2   —          (0.5   (0.1
                            

Net loss attributable to Ryerson Inc.

   $ (11.9   (1.2 )%    $ (130.0   (17.5 )% 
                            

For the second quarter of 2010, the Company reported a net loss of $12.1 million, as compared with a net loss of $130.5 million, in the second quarter of 2009.

Included in the second quarter of 2010 results is a gain on an insurance settlement of $2.6 million.

The following table shows the Company’s percentage of sales revenue by major product lines for the second quarter of 2010 and 2009:

 

     Percentage of Sales Revenue
Three Months Ended
June 30,
 

Product Line

   2010     2009  

Stainless

   28   24

Aluminum

   21      22   

Carbon flat rolled

   29      28   

Bars, tubing and structurals

   8      7   

Fabrication and carbon plate

   10      12   

Other

   4      7   
            

Total

   100   100
            

Net sales. Revenue for the second quarter of 2010 increased 37.3% from the same period a year ago to $1,020.2 million. Tons sold for the second quarter of 2010 increased 21.8% from the second quarter of 2009 reflecting improvement in market conditions. Tons sold in the second quarter of 2010 increased across all products compared to the year-ago quarter. Average selling price increased 12.7% against the price levels in the second quarter of 2009, as metals prices increased as market conditions improved.

Cost of materials sold. Cost of materials sold increased 35.0% to $887.6 million compared to $657.5 million in the second quarter of 2009. The increase in cost of materials sold in 2010 compared to 2009 is due to the increase in tons sold. The average cost of materials sold per ton increased to $1,525 in 2010 from $1,377 in 2009 primarily due to increased stainless steel and aluminum product cost.

Gross profit. Gross profit increased by $47.0 million to $132.6 million in the second quarter of 2010. Gross profit per ton increased to $228 per ton in the second quarter of 2010 from $179 per ton in the second quarter of 2009 due to the greater increase in average selling price relative to the increase in average cost of materials sold. Gross profit as a percent of sales in the second quarter of 2010 increased slightly to 13.0% from 11.5% a year ago.

Operating expenses. Total operating expenses increased by $6.3 million to $124.5 million in the second quarter of 2010 from $118.2 million a year ago. The increase was primarily due to increased bonus and commission expenses of $6.5 million resulting from increased profitability, higher delivery expenses of $2.9 million, higher salaries and wages of $2.2 million and higher employee benefit costs of $2.2 million, partially offset by lower reorganization costs of $3.0 million, lower legal expenses of $2.4 million, and the recognition of a gain on an insurance settlement of $2.6 million. On a per ton basis, second quarter of 2010 operating expenses decreased to $214 per ton from $247 per ton in the second quarter of 2009.

Operating profit. For the second quarter of 2010, the Company reported an operating profit of $8.1 million, or $14 per ton, compared to an operating loss of $32.6 million, or a loss of $68 per ton, in the second quarter of 2009, as a result of the factors discussed above.

 

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Other expenses. Interest and other expense on debt increased to $18.9 million from $18.2 million in the second quarter of 2009, primarily due to higher amortization of credit facility issuance costs in China and higher average borrowings on our credit facility in the United States. Other income and (expense), net was income of $2.4 million in the second quarter of 2010 as compared to a charge of $4.5 million in the same period a year ago. The second quarter of 2010 benefited from foreign exchange gains related to our Canadian operations. The second quarter of 2009 was negatively impacted by a $4.7 million foreign exchange loss related to a short term loan from our Canadian operations.

Provision for income taxes. In the second quarter of 2010, the Company recorded income tax expense of $3.7 million compared to $75.2 million in the second quarter of 2009. The $3.7 million income tax expense in the second quarter of 2010 primarily related to an increase to the valuation allowance on foreign tax credits and to foreign income tax expense. The valuation allowance was adjusted to increase the allowance for changes in our deferred tax assets. During the second quarter of 2009, the Company recorded a charge of $74.3 million to establish a valuation allowance against its U.S. deferred tax assets, as the Company determined that it was more-likely-than-not that it would not realize the full value of a portion of its U.S. deferred tax assets. The second quarter of 2009 also included a $13.5 million charge to increase deferred tax liabilities related to the Company’s joint venture in India, which we determined was no longer permanently reinvested.

Results of Operations - Comparison of First Six Months 2010 to First Six Months 2009

 

     Six months ended
June 30, 2010
    % of Net
Sales
    Six months ended
June 30, 2009
    % of Net
Sales
 

Net sales

   $ 1,891.7      100.0   $ 1,547.8      100.0

Cost of materials sold

     1,625.3      85.9        1,336.7      86.4   
                            

Gross profit

     266.4      14.1        211.1      13.6   

Warehousing, delivery, selling, general and administrative expenses

     244.9      12.9        242.3      15.6   

Gain on insurance settlement

     (2.6   (0.1     —        —     

Gain on sale of assets

     —        —          (3.3   (0.2

Impairment charge on fixed assets

     1.0      0.1        —        —     

Other postretirement benefits curtailment gain

     —        —          (1.3   (0.1
                            

Operating profit (loss)

     23.1      1.2        (26.6   (1.7

Other expenses

     (37.9   (2.0     (38.2   (2.4

Provision benefit for income taxes

     6.3      0.3        72.0      4.7   
                            

Net loss

     (21.1   (1.1     (138.6   (8.8

Noncontrolling interest

     (0.2   —          (2.5   (0.1
                            

Net loss attributable to Ryerson Inc.

   $ (20.9   (1.1 )%    $ (134.3   (8.7 )% 
                            

For the first six months of 2010, the Company reported a net loss of $21.1 million, as compared with a net loss of $138.6 million, in the first six months of 2009.

Included in the first six months of 2010 results is gain on an insurance settlement of $2.6 million. Included in the first six months of 2009 results is a pretax gain on sale of assets of $3.3 million or $2.0 million after-tax. The first six months of 2009 also included a pretax other postretirement benefit curtailment gain of $1.3 million or $0.9 million after-tax.

The following table shows the Company’s percentage of sales revenue by major product lines for the first six months of 2010 and 2009:

 

     Percentage of Sales Revenue
Six Months Ended
June 30,
 

Product Line

   2010     2009  

Stainless

   28   24

Aluminum

   22      21   

Carbon flat rolled

   29      28   

Bars, tubing and structurals

   8      8   

Fabrication and carbon plate

   9      13   

Other

   4      6   
            

Total

   100   100
            

Net sales. Revenue for the first six months of 2010 increased 22.2% from the same period a year ago to $1,891.7 million. Tons sold for the first six months of 2010 increased 18.1% from the first six months of 2009 reflecting improvement in market conditions. Tons sold in the first six months of 2010 increased across all products compared to the year-ago quarter. Average selling price increased 3.5% against the price levels in the first six months of 2009, primarily due to an increase in average selling price in stainless steel.

 

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Table of Contents

Cost of materials sold. Cost of materials sold increased 21.6% in the first six months to $1,625.3 million compared to $1,336.7 million for the same period in 2009. The increase in cost of materials sold in 2010 compared to 2009 is due to the increase in tons sold. The average cost of materials sold per ton increased to $1,466 in 2010 from $1,424 in 2009 primarily due to increased stainless steel product cost.

Gross profit. Gross profit increased by $55.3 million to $266.4 million in the first six months of 2010. Gross profit per ton increased to $240 per ton in the first six months of 2010 from $225 per ton in the year-ago period due to the greater increase in average selling price relative to the increase in average cost of materials sold. Gross profit as a percent of sales in the first six months of 2010 increased slightly to 14.1% from 13.6% a year ago.

Operating expenses. Total operating expenses increased by $5.6 million to $243.3 million in the first six months of 2010 from $237.7 million in the first six months of 2009. The increase was primarily due to increased bonus and commission expenses of $11.4 million resulting from increased profitability, higher facility costs of $3.1 million, higher delivery expenses of $3.0 million, the $3.3 million gain on the sale of assets in the first six months of 2009 and the $1.3 million postretirement benefits curtailment gain in the first six months of 2009, partially offset by lower bad debt expense of $7.0 million, lower reorganization costs of $4.7 million, lower legal expenses of $2.2 million, and the recognition of a gain on an insurance settlement of $2.6 million in the first six months of 2010. On a per ton basis, first six months of 2010 operating expenses decreased to $219 per ton from $253 per ton in the first six months of 2009.

Operating profit. For the first six months of 2010, the Company reported an operating profit of $23.1 million, or $21 per ton, compared to an operating loss of $26.6 million, or a loss of $28 per ton, in the first six months of 2009, as a result of the factors discussed above.

Other expenses. Interest and other expense on debt increased to $37.8 million from $36.4 million in the first six months of 2009, primarily due to higher amortization of credit facility issuance costs in China and higher expense associated with our interest rate swaps, which are marked-to-market with a corresponding offset to interest and other expense on debt. Other income and (expense), net was a charge of $0.1 million in the first six months of 2010 as compared to a charge of $1.8 million in the same period a year ago. The first six months of 2009 was negatively impacted by a $4.7 million foreign exchange loss related to a short term loan from our Canadian operations, offset by the recognition of a $2.7 million gain on the retirement of a portion of our 2015 Notes.

Provision for income taxes. In the first six months of 2010, the Company recorded income tax expense of $6.3 million compared to $72.0 million in the first six months of 2009. The $6.3 million income tax expense in the first six months of 2010 primarily related to an increase to the valuation allowance on foreign tax credits and to foreign income tax expense. The valuation allowance was adjusted to increase the allowance for changes in our deferred tax assets. During the first six months of 2009, the Company recorded a charge of $74.3 million to establish a valuation allowance against its U.S. deferred tax assets, as the Company determined that it was more-likely-than-not that it would not realize the full value of a portion of its U.S. deferred tax assets. The first six months of 2009 also included a $13.5 million charge to increase deferred tax liabilities related to the Company’s joint venture in India, which we determined was no longer permanently reinvested.

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. Its principal source of operating cash is from the sale of metals and other materials. Its principal uses of cash are for payments associated with the procurement and processing of metals and other materials inventories, costs incurred for the warehousing and delivery of inventories and the selling and administrative costs of the business, capital expenditures, and for interest payments on debt.

The following table summarizes the Company’s cash flows:

 

     Six months ended
June 30,
 
     2010     2009  
     (In millions)  

Net cash provided by (used in) operating activities

   $ (164.7   $ 354.1   

Net cash provided by (used in) investing activities

     (17.7     1.9   

Net cash provided by (used in) financing activities

     153.2        (429.7

Effect of exchange rates on cash and cash equivalents

     0.5        2.9   
                

Net decrease in cash and cash equivalents

   $ (28.7   $ (70.8
                

 

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The Company had cash and cash equivalents at June 30, 2010 of $86.2 million, compared to $114.9 million at December 31, 2009. The Company had $904 million and $754 million of total debt outstanding and a debt-to-capitalization ratio of 86% and 82% at June 30, 2010 and December 31, 2009, respectively. The Company had total liquidity (defined as cash and cash equivalents plus availability under the Ryerson Credit Facility and foreign debt facilities) of $438 million at June 30, 2010 versus $391 million at December 31, 2009. Total liquidity is a non-GAAP financial measure. 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 generally accepted accounting principles and total liquidity is not necessarily an indication of whether cash flow will be sufficient to fund our cash requirements.

Net cash used by operating activities of $164.7 million in the first six months of 2010 was primarily due to an increase in inventories of $73.9 million resulting from higher inventory purchases to support increased sales levels in the first six months of 2010 and an increase in accounts receivable of $180.7 million reflecting higher net sales in the first six months of 2010, partially offset by an increase in accounts payable of $100.3 million.

Capital expenditures during the first six months of 2010 totaled $15.0 million compared to $13.0 million in the first six months of 2009. The Company sold property, plant and equipment and assets held for sale generating cash proceeds of $1.5 million and $14.7 million during the six-month periods ended June 30, 2010 and 2009, respectively.

Net cash provided by (used in) financing activities in the first six months of 2010 and 2009 was $153.2 million and $(429.7) million, respectively. Net cash provided by financing activities in the first six months of 2010 was primarily related to credit facility borrowings related to increased inventory purchases for the economic recovery. Net cash used in financing activities in the first six months of 2009 was primarily related to credit facility repayments made possible from lower working capital requirements.

We believe that cash flow from operations and proceeds from the Ryerson Credit Facility will provide sufficient funds to meet our contractual obligations and operating requirements in the normal course of business.

Total Debt

As a result of the net cash used in operating activities, total debt in the Condensed Consolidated Balance Sheet increased to $903.8 million at June 30, 2010 from $754.2 million at December 31, 2009.

Total debt outstanding as of June 30, 2010 consisted of the following amounts: $410.0 million borrowing under the Ryerson Credit Facility, $102.9 million under the 2014 Notes, $376.2 million under the 2015 Notes, $10.6 million of foreign debt and $4.1 million under the 2011 Notes. Discussion of each of these borrowings follows.

Ryerson Credit Facility

On October 19, 2007, the Company entered into a 5-year, $1.35 billion revolving credit facility agreement (“Ryerson Credit Facility”) with a maturity date of October 18, 2012. At June 30, 2010, the Company had $410.0 million of outstanding borrowings, $29 million of letters of credit issued and $335 million available under the Ryerson Credit Facility compared to $250.2 million of outstanding borrowings, $32 million of letters of credit issued and $268 million available at December 31, 2009. Total credit availability is limited by the amount of eligible account receivables and inventory pledged as collateral under the agreement insofar as the Company is subject to a borrowing base comprised of the aggregate of these two amounts, less applicable reserves. Eligible account receivables, at any date of determination, are comprised of the aggregate value of all accounts directly created by a borrower in the ordinary course of business arising out of the sale of goods or the rendition of services, each of which has been invoiced, with such receivables adjusted to exclude various ineligible accounts, including, among other things, those to which a borrower does not have sole and absolute title and accounts arising out of a sale to an employee, officer, director, or affiliate of the borrower. The weighted-average interest rate on the borrowings under the Ryerson Credit Facility was 2.2% and 2.1% at June 30, 2010 and December 31, 2009, respectively.

Amounts outstanding under the Ryerson Credit Facility bear interest at a rate determined by reference to the base rate (Bank of America’s prime rate) or a LIBOR rate or, for Ryerson’s Canadian subsidiary which is a borrower, a rate determined by reference to the Canadian base rate (Bank of America-Canada Branch’s “Base Rate” for loans in U.S. Dollars in Canada) or the BA rate (average annual rate applicable to Canadian Dollar bankers’ acceptances) or a LIBOR rate and the Canadian prime rate (Bank of America-Canada Branch’s “Prime Rate”). The spread over the base rate and Canadian prime rate is between 0.25% and 1.00% and the spread over the LIBOR and the bankers’ acceptances is between 1.25% and 2.00%, depending on the amount available to be borrowed. Overdue amounts and all amounts owed during the existence of a default bear interest at 2% above the rate otherwise applicable thereto. The Company also pays commitment fees on amounts not borrowed at a rate between 0.25% and 0.35% depending on the average borrowings as a percentage of the total $1.35 billion agreement during a rolling three month period.

 

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Borrowings under the Ryerson Credit Facility are secured by first-priority liens on all of the inventory, accounts receivable, lockbox accounts and related assets of Ryerson, subsidiary borrowers and certain other U.S. subsidiaries of Ryerson that act as guarantors.

The Ryerson Credit Facility contains covenants that, among other things, restrict Ryerson with respect to the incurrence of debt, the creation of liens, transactions with affiliates, mergers and consolidations, sales of assets and acquisitions. The Ryerson Credit Facility also requires that, if availability under such facility declines to a certain level, the Company maintain a minimum fixed charge coverage ratio as of the end of each fiscal quarter.

The Ryerson Credit Facility contains events of default with respect to, among other things, default in the payment of principal when due or the payment of interest, fees and other amounts after a specified grace period, material misrepresentations, failure to perform certain specified covenants, certain bankruptcy events, the invalidity of certain security agreements or guarantees, material judgments and the occurrence of a change of control of Ryerson Holding. If such an event of default occurs, the lenders under the Ryerson Credit Facility will be entitled to various remedies, including acceleration of amounts outstanding under the Ryerson Credit Facility and all other actions permitted to be taken by secured creditors.

The lenders under the Ryerson Credit Facility have the ability to reject a borrowing request if any event, circumstance or development has occurred that has had or could reasonably be expected to have a material adverse effect on Ryerson. If Ryerson or any significant subsidiaries of the other borrowers becomes insolvent or commences bankruptcy proceedings, all amounts borrowed under the Ryerson Credit Facility will become immediately due and payable.

Ryerson Notes

On October 19, 2007, Ryerson issued $150 million Floating Rate Senior Secured Notes due November 1, 2014 (“2014 Notes”) and $425 million 12% Senior Secured Notes due November 1, 2015 (“2015 Notes”) (together, the “Ryerson Notes”). The 2014 Notes bear interest at a rate, reset quarterly, of LIBOR plus 7.375% per annum. The 2015 Notes bear interest at a rate of 12% per annum. The Ryerson Notes are fully and unconditionally guaranteed on a senior secured basis by certain of our existing and future subsidiaries (including those existing and future domestic subsidiaries that are co-borrowers or guarantee obligations under our Ryerson Credit Facility).

At June 30, 2010, $376.2 million of the 2015 Notes and $102.9 million of the 2014 Notes remain outstanding. During the first six months of 2009, $6.0 million principal amount of the 2015 Notes were repurchased for $3.3 million and retired, resulting in the recognition of a $2.7 million gain within other income and (expense), net on the condensed consolidated statement of operations.

The Ryerson Notes and guarantees are secured by a first-priority lien on substantially all of our and our guarantors’ present and future assets located in the United States (other than receivables, inventory, related general intangibles, certain other assets and proceeds thereof) including equipment, owned real property interests valued at $1 million or more, and all present and future shares of capital stock or other equity interests of each of our and each guarantor’s directly owned domestic subsidiaries and 65% of the present and future shares of capital stock or other equity interests, of each of our and each guarantor’s directly owned foreign restricted subsidiaries, in each case subject to certain exceptions and customary permitted liens. The Ryerson Notes and guarantees are secured on a second-priority basis by a lien on the assets that secure our obligations under the Ryerson Credit Facility. The Ryerson Notes contain customary covenants that, among other things, limit, subject to certain exceptions, our ability, and the ability of our restricted subsidiaries, to incur additional indebtedness, pay dividends on our capital stock or repurchase our capital stock, make investments, sell assets, engage in acquisitions, mergers or consolidations or create liens or use assets as security in other transactions. Subject to certain exceptions, Ryerson may only pay dividends to Ryerson Holding to the extent of 50% of future net income, once prior losses are offset.

The Ryerson Notes will be redeemable by Ryerson, in whole or in part, at any time on or after November 1, 2011, at specified redemption prices. Additionally, on or prior to November 1, 2010, Ryerson Holding or the Company may redeem up to 35% of the outstanding 2015 Notes, with the net proceeds of specified equity offerings at specified redemption prices. If a change of control occurs, Ryerson must offer to purchase the Ryerson Notes at 101% of their principal amount, plus accrued and unpaid interest.

Pursuant to a registration rights agreement, Ryerson agreed to file with the SEC by July 15, 2008 a registration statement with respect to an offer to exchange each of the notes for a new issue of our debt securities registered under the Securities Act, with terms substantially identical to those of the Ryerson Notes and to consummate an exchange offer no later than November 12, 2008. Ryerson did not consummate an exchange offer by November 12, 2008 and therefore, was required to pay additional interest to the holders of the Ryerson Notes. As a result, Ryerson paid an additional approximately $0.6 million in interest to the holders of the Ryerson Notes with the interest payment on May 1, 2009. Ryerson completed the exchange offer on April 9, 2009. Upon completion of the exchange offer, Ryerson’s obligation to pay additional interest ceased.

 

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Foreign Debt

At June 30, 2010, Ryerson China’s total foreign borrowings were $10.6 million, of which, $8.5 million was owed to banks in Asia at a weighted average interest rate of 2.5% secured by inventory and property, plant and equipment. Ryerson China also owed $2.1 million at June 30, 2010 to VSC, our joint venture partner, at a weighted average interest rate of 0.2%. Of the total borrowings of $20.8 million outstanding at December 31, 2009, $12.6 million was owed to banks in Asia at a weighted average interest rate of 2.2% secured by inventory and property, plant and equipment. Ryerson China also owed $8.2 million at December 31, 2009 to VSC at a weighted average interest rate of 1.8%. Availability under the foreign credit lines was $17 million and $8 million at June 30, 2010 and December 31, 2009, respectively.

$150 Million 8    1/4% Senior Notes due 2011

At June 30, 2010, $4.1 million of the 8    1/4% Senior Notes due 2011 (“2011 Notes”) remain outstanding. The 2011 Notes pay interest semi-annually and mature on December 15, 2011.

The 2011 Notes contained covenants, substantially all of which were removed pursuant to an amendment of the 2011 Notes as a result of the tender offer to repurchase the Notes during 2007.

Ryerson Holding Notes

On January 29, 2010, Ryerson Holding issued $483 million aggregate principal amount at maturity of 14 1/2% Senior Discount Notes due 2015 (the “Ryerson Holding Notes”). No cash interest accrues on the Ryerson Holding Notes. The Ryerson Holding Notes had an initial accreted value of $455.98 per $1,000 principal amount and will accrete from the date of issuance until maturity on a semi-annual basis. The accreted value of each Ryerson Holding Note increases from the date of issuance until October 31, 2010 at a rate of 14.50%. Thereafter the interest rate increases by 1% (to 15.50%) until July 31, 2011, an additional 1.00% (to 16.50%) on August 1, 2011 until April 30, 2012, and increases by an additional 0.50% (to 17.00%) on May 1, 2012 until the maturity date. Interest compounds semi-annually such that the accreted value will equal the principal amount at maturity of each note on that date. At June 30, 2010, the accreted value of the Ryerson Holding Notes was $233.7 million. The Ryerson Holding Notes are not guaranteed by any of Ryerson Holding’s subsidiaries and are secured by a first priority security interest in the capital stock of Ryerson. The Ryerson Holding Notes rank equally in right of payment with all of Ryerson Holding’s senior debt and senior in right of payment to all of Ryerson Holding’s subordinated debt. The Ryerson Holding Notes are effectively junior to Ryerson Holding’s other secured debt to the extent of the collateral securing such debt (other than the capital stock of Ryerson). Because the Ryerson Holding Notes are not guaranteed by any of Ryerson Holding’s subsidiaries, the notes are structurally subordinated to all indebtedness and other liabilities (including trade payables) of Ryerson Holding’s subsidiaries, including Ryerson.

The Ryerson Holding Notes contain customary covenants that, among other things, limit, subject to certain exceptions, Ryerson Holding’s ability to incur additional indebtedness, pay dividends on its capital stock or repurchase its capital stock, make certain investments or other restricted payments, create liens or use assets as security in other transactions, enter into sale and leaseback transactions, merge, consolidate or transfer or dispose of substantially all of Ryerson Holding’s assets, and engage in certain transactions with affiliates.

The Ryerson Holding Notes are redeemable, at the option of Ryerson Holding, in whole or in part, at any time at specified redemption prices. The Ryerson Holding Notes are required to be redeemed upon the receipt of net proceeds of certain qualified equity issuances, specified change of controls and/or specified receipt of dividends.

Although the Ryerson Holding Notes are not recorded on the Company’s balance sheet, Ryerson plans to provide funds, in the form of dividends, to service the Ryerson Holding Notes to Ryerson Holding. The terms of the Ryerson Notes (discussed above) restrict Ryerson from making dividends to Ryerson Holding. Subject to certain exceptions, Ryerson may only pay dividends to Ryerson Holding to the extent of 50% of future net income, once prior losses are offset. In the event Ryerson is restricted from providing Ryerson Holding with sufficient distributions to fund interest and principal payments on the Ryerson Holding Notes when due, Ryerson Holding may default on the Ryerson Holding Notes unless other sources of funding are available.

Pension Funding

At December 31, 2009, pension liabilities exceeded plan assets by $323 million. The Company anticipates that it will have a minimum required pension contribution of approximately $46 million in 2010 under the Employee Retirement Income Security Act of 1974 (“ERISA”) and Pension Protection Act (“PPA”) in the U.S and the Ontario Pension Benefits Act in Canada. Through the six months ended June 30, 2010, the Company has made $13 million in pension contributions, and anticipates an additional $33 million contribution in the remaining six months of 2010. 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

 

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amount or timing of any such contributions required by ERISA or whether any such contributions would have a material adverse effect on the Company’s financial position or cash flows. The Company believes that cash flow from operations and the Ryerson Credit Facility described above will provide sufficient funds to make the minimum required contribution in 2010.

Contractual Obligations

The following table presents contractual obligations at June 30, 2010:

 

     Payments Due by Period

Contractual Obligations(1)

   Total    Less than
1 year
   1 – 3
years
   4 – 5
years
   After 5
years
     (In millions)

Floating Rate Notes

   $ 103    $ —      $ —      $ 103    $ —  

Fixed Rate Long Term Notes

     376      —        —        —        376

Other Long Term Notes

     4      —        4      —        —  

Ryerson Credit Facility

     410      —        410      —        —  

Foreign Debt

     11      11      —        —        —  

Interest on Floating Rate Notes, Fixed Rate Notes, Other Long Term Notes, Ryerson Credit Facility and Foreign Debt (2)

     299      62      120      101      16

Purchase Obligations (3)

     27      27      —        —        —  

Operating leases

     92      19      26      16      31
                                  

Total

   $ 1,322    $ 119    $ 560    $ 220    $ 423
                                  

 

(1) The contractual obligations disclosed above do not include the Company’s potential future pension funding obligations (see discussion above).
(2) Interest payments related to the variable rate debt were estimated using the weighted average interest rate for the Ryerson Credit Facility and the 2014 Notes.
(3) The purchase obligations with suppliers are entered into when we receive firm sales commitments with certain of our customers.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk

We are exposed to market risk related to our fixed-rate and variable-rate long-term debt. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. 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 $905 million at June 30, 2010 and $750 million at December 31, 2009 as compared with the carrying value of $904 million and $754 million at June 30, 2010 and December 31, 2009, respectively.

We had forward agreements for $100 million notional amount of pay fixed, receive floating interest rate swaps at June 30, 2010 and December 31, 2009, to effectively convert the interest rate from floating to fixed through July 2011. We do not currently account for these contracts as hedges but rather mark them to market with a corresponding offset to current earnings. At June 30, 2010, these agreements had a liability value of $1.1 million. A hypothetical 1% increase in interest rates on variable rate debt would have increased interest expense in the first six months of 2010 by approximately $2.1 million.

Foreign exchange rate risk

We are subject to exposure from fluctuations in foreign currencies. We use foreign currency exchange contracts to hedge our Canadian subsidiaries variability in cash flows from the forecasted payment of currencies other than the functional currency. The Canadian subsidiaries’ foreign currency contracts were principally used to purchase U.S. dollars. We had foreign currency contracts with a U.S. dollar notional amount of $9.0 million outstanding at June 30, 2010, and an asset value of $0.2 million. We do not currently account for these contracts as hedges but rather mark these contracts to market with a corresponding offset to current earnings.

Commodity price risk

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. Declining metal prices could reduce our revenues, gross profit and net income. From time to time, we may enter into fixed price sales contracts with our customers for certain of our inventory components. We may enter into metal commodity futures and options contracts to reduce volatility in the price of these metals. We do not currently account for these contracts as hedges, but rather mark these contracts to market with a corresponding offset to current earnings. As of June 30, 2010, we had 255 metric tons of nickel futures or option contracts outstanding with an asset value of $0.4 million.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 15d-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2010.

Changes in Internal Controls Over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s controls over financial reporting during the quarter ended June 30, 2010.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

From time to time, we are named as a defendant in legal actions incidental to our ordinary course of business. We do not believe that the resolution of these claims will have a material adverse effect on our financial position, results of operations or cash flows. We maintain liability insurance coverage to assist in protecting our assets from losses arising from or related to activities associated with business operations.

 

Item 1A. Risk Factors

There have been no material changes relating to this Item from those set forth in Item 1A on the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

Item 6. Exhibits

The exhibits required to be filed by Item 601 of Regulation S-K are listed in the “Exhibit Index,” which is attached hereto and incorporated by reference herein.

Items 2, 3, 4, and 5 are not applicable and have been omitted.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

RYERSON INC.
By:  

/s/ Terence R. Rogers

  Terence R. Rogers
 

Chief Financial Officer

(duly authorized signatory and principal financial officer of the registrant)

Date: August 3, 2010

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

31.1    Certificate of the Principal Executive Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certificate of the Principal Financial Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Written Statement of Stephen E. Makarewicz, President and Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Written Statement of Terence R. Rogers, Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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