Attached files

file filename
EX-32.2 - SECTION 906 CFO CERTIFICATION - RYERSON INC.dex322.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - RYERSON INC.dex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - RYERSON INC.dex311.htm
EX-21.2 - AUDITED 2010 ANNUAL SUBSIDIARY STATEMENT OF JOSEPH T. RYERSON & SON, INC. - RYERSON INC.dex212.htm
EX-21.3 - AUDITED 2010 ANNUAL SUBSIDIARY STATEMENT OF RYERSON CANADA, INC. - RYERSON INC.dex213.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - RYERSON INC.dex312.htm
EX-10.13 - OFFER LETTER AGREEMENT - RYERSON INC.dex1013.htm
EX-10.14 - AMENDMENT NO. 1, DATED AS OF MARCH 14, 2011, TO THE CREDIT AGREEMENT - RYERSON INC.dex1014.htm
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 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 No. 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)

 

 

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  x    No  ¨

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  ¨    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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 the definitions 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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Not applicable because no public equity market exists for such shares; the aggregate market value of the common stock held by non-affiliates of the Company is not determinable.

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

As of March 1, 2011, there were 100 shares of our Common Stock, par value $0.01 per share, outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

Special Note Regarding Forward-Looking Statements

  
PART I   
Item 1.    Business      1   
Item 1A.    Risk Factors      8   
Item 1B.    Unresolved Staff Comments      13   
Item 2.    Properties      13   
Item 3.    Legal Proceedings      16   
Item 4.    Removed and Reserved      16   
PART II   
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      16   
Item 6.    Selected Financial Data      17   
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      19   
Item 7A.    Quantitative and Qualitative Disclosures about Market Risk      30   
Item 8.    Financial Statements and Supplementary Data      32   
   Report of Independent Registered Public Accounting Firm      33   
   Notes to Consolidated Financial Statements      38   
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      69   
Item 9A.    Controls and Procedures      69   
Item 9B.    Other Information      70   
PART III   
Item 10.    Directors and Executive Officers, and Corporate Governance      70   
Item 11.    Executive Compensation      72   
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      78   
Item 13.    Certain Relationships and Related Transactions, and Director Independence      79   
Item 14.    Principal Accounting Fees and Services      80   
PART IV   
Item 15.    Exhibits and Financial Statement Schedules      81   
Signatures      82   


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains “forward-looking statements.” Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. Among the factors that significantly impact the metals distribution industry and our business are:

 

   

cyclicality of our business, due to the cyclical nature of our customers’ businesses;

 

   

remaining competitive and maintaining market share in the highly fragmented metals distribution industry, in which price is a competitive tool and in which customers who purchase commodity products are often able to source metals from a variety of sources;

 

   

impairment of goodwill that could result from, among other things, volatility in the markets in which we operate;

 

   

managing the costs of purchased metals relative to the price at which we sell our products during periods of rapid price escalation, when we may not be able to pass through pricing increases fully to our customers quickly enough to maintain desirable gross margins, or during periods of generally declining prices, when our customers may demand that price decreases be passed fully on to them more quickly than we are able to obtain similar discounts from our suppliers;

 

   

the failure to effectively integrate newly acquired operations;

 

   

our customer base, which, unlike many of our competitors, contains a substantial percentage of large customers, so that the potential loss of one or more large customers could negatively impact tonnage sold and our profitability;

 

   

fluctuating operating costs depending on seasonality;

 

   

our substantial indebtedness and the covenants in instruments governing such indebtedness;

 

   

potential damage to our information technology infrastructure;

 

   

work stoppages;

 

   

certain employee retirement benefit plans that are underfunded and the actual costs could exceed current estimates;

 

   

future funding for postretirement employee benefits may require substantial payments from current cash flow;

 

   

prolonged disruption of our processing centers;

 

   

ability to retain and attract management and key personnel;

 

   

ability of management to focus on North American and foreign operations;

 

   

termination of supplier arrangements;

 

   

the incurrence of substantial costs or liabilities to comply with, or as a result of violations of, environmental laws;

 

   

the impact of new or pending litigation against us;

 

   

a risk of product liability claims;

 

   

our risk management strategies may result in losses;

 

   

currency fluctuations in the U.S. dollar versus the Canadian dollar, the Chinese renminbi, and the Hong Kong dollar;

 

   

management of inventory and other costs and expenses; and

 

   

consolidation in the metals producer industry, in which we purchase products, which could limit our ability to effectively negotiate and manage costs of inventory or cause material shortages, both of which could impact profitability.

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 in this Annual Report under “Risk Factors” and the caption “Industry and Operating Trends” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual 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 Annual Report or to reflect the occurrence of unanticipated events.


Table of Contents

PART I

 

ITEM 1. BUSINESS.

Ryerson Inc. (“Ryerson”), a Delaware corporation, conducts materials distribution operations in the United States through its wholly-owned direct subsidiary Joseph T. Ryerson & Son, Inc. (“JT Ryerson”), in Canada through its indirect wholly-owned subsidiary Ryerson Canada, Inc., a Canadian corporation (“Ryerson Canada”) and in Mexico through its indirect wholly-owned subsidiary Ryerson Metals de Mexico, S. de R.L. de C.V., a Mexican corporation (“Ryerson Mexico”). Ryerson, through its predecessor, has been in business since 1842.

On October 19, 2007, the merger (the “Platinum Acquisition”) of Rhombus Merger Corporation (“Merger Sub”), a Delaware corporation and a wholly-owned subsidiary of Ryerson Holding Corporation (“Ryerson Holding”), with and into Ryerson, was consummated in accordance with the Agreement and Plan of Merger, dated July 24, 2007, by and among Ryerson, Ryerson Holding and Merger Sub (the “Merger Agreement”). Upon the closing of the Platinum Acquisition, Ryerson ceased to be a publicly traded company and became a wholly-owned subsidiary of Ryerson Holding. 99% of the issued and outstanding capital stock of Ryerson Holding is owned by affiliates of Platinum Equity, LLC (“Platinum”).

On October 31, 2008, Ryerson Holding acquired an additional 20% interest in Ryerson China Limited (“Ryerson China”), formerly named VSC-Ryerson China Limited, a joint venture with Van Shung Chong Holdings Limited (“VSC”), increasing Ryerson Holding’s ownership percentage to 60%. On December 31, 2008, VSC sold an additional 20% interest in Ryerson China: 10% was purchased by a wholly-owned subsidiary of Ryerson Holding and the remaining 10% was purchased by a subsidiary of Ryerson. Ryerson’s total contribution in 2008 was $7.1 million, increasing its direct ownership percentage to 50%. On July 12, 2010, we acquired VSC’s remaining 20% equity interest in Ryerson China. As a result, Ryerson China is now a wholly-owned subsidiary of Ryerson Holding. We consolidated the operations of Ryerson China as of October 31, 2008.

Unless the context indicates otherwise, Ryerson, JT Ryerson, Ryerson Canada, Ryerson China, and Ryerson Mexico together with their subsidiaries, are collectively referred to herein as “Ryerson”, “we,” “us,” “our,” or the “Company.”

In addition to our United States, Canada, Mexico and China operations, we conducted materials distribution operations in India through Tata Ryerson Limited, a joint venture with Tata Iron & Steel Corporation, an integrated steel manufacturer in India, until July 10, 2009, when we sold our 50% investment to our joint venture partner, Tata Steel Limited.

Our Company

We are a leading North American processor and distributor of metals measured in terms of sales, with operations in the United States, Canada, Mexico and China. We distribute and process various kinds of metals, including stainless and carbon steel and aluminum products. We are among the largest purchasers of metals in North America. For the year ended December 31, 2010, we purchased approximately 2.4 million tons of materials from many suppliers throughout the world. As of December 31, 2010, we operated approximately 100 facilities across North America and five facilities in China. For the year ended December 31, 2010, our net sales were $3.9 billion and our net loss was $70.0 million.

Our service center locations allow us to process and deliver the volumes of metal our customers demand. Due to our scale, we are able to process and distribute standardized products in large volumes while maintaining low operating costs. Our distribution capabilities include a fleet of tractors and trailers that are owned, leased or dedicated by third party carriers. With these capabilities, we are able to efficiently meet our customers’ just-in-time delivery demands.

We carry a full line of products in stainless steel, aluminum, carbon steel and alloy steels, and a limited line of nickel and red metals. These materials are inventoried in a number of shapes, including coils, sheets, rounds, hexagons, square and flat bars, plates, structurals and tubing. More than one-half of the materials we sell are processed. We use processing and fabricating techniques such as sawing, slitting, blanking, cutting to length, leveling, flame cutting, laser cutting, edge trimming, edge rolling, roll forming, tube manufacturing, polishing and shearing to process materials to specified thickness, length, width, shape and surface quality pursuant to specific customer orders. We also use third-party fabricators and processors to outsource certain processes to enhance our services.

We have approximately 40,000 customers across a wide range of end markets. For the year ended December 31, 2010, no single customer accounted for more than 5% of our sales and our top 10 customers accounted for less than 12% of our sales. Our customer base ranges in size from large, national, original equipment manufacturers, to local independently owned fabricators and machine shops. Our geographic network and customization capabilities allow us to serve large, national manufacturing companies in North America by providing a consistent standard of products and services across multiple locations. Many of our facilities possess processing capabilities, which allow us to provide customized products and solutions to local customers on a smaller scale while maintaining just-in-time deliveries to our customers.

 

1


Table of Contents

As part of securing customer orders, we also provide technical services to our customers to assure a cost effective material application while maintaining or improving the customers’ product quality. We have designed our services to reduce our customers’ costs by minimizing their investment in inventory and improving their production efficiency.

Since Platinum’s acquisition of Ryerson in October 2007, we have implemented numerous strategic initiatives aimed at reducing costs, improving working capital management, increasing efficiencies and enhancing liquidity. Our management team has decentralized our operations, improved inventory turns, rationalized facilities and reduced headcount. These changes position Ryerson for future growth and profitability.

Industry Overview

Metals service centers serve as key intermediaries between metal producers and end users of metal products. Metal producers offer commodity products and typically sell metals in the form of standard-sized coils, sheets, plates, structurals, bars and tubes. Producers prefer large order quantities, longer lead times and limited inventory in order to maximize capacity utilization. End users of metal products seek to purchase metals with customized specifications, including value-added processing. End market customers look for “one-stop” suppliers that can offer processing services along with lower order volumes, shorter lead times, and more reliable delivery. As an intermediary, metals service centers aggregate end-users’ demand, purchase metal in bulk to take advantage of economies of scale and then process and sell metal that meets specific customer requirements. The end-markets for metals service centers are highly diverse and include machinery, manufacturing, construction and transportation.

The metals service center industry is comprised of many companies, the majority of which have limited product lines and inventories, with customers located in a specific geographic area. The industry is highly fragmented with a large number of small companies and few relatively large companies. In general, competition is based on quality, service, price and geographic proximity.

The metals service center industry typically experiences cash flow trends that are counter-cyclical to the revenue and volume growth of the industry. Companies that participate in the industry have assets that are composed primarily of working capital. During an industry downturn, companies generally reduce working capital investments and generate cash as inventory and accounts receivable balances decline. As a result, operating cash flow and liquidity tend to increase during a downturn, which typically facilitates industry participants’ ability to cover fixed costs and repay outstanding debt.

The industry is divided into three major groups: general line service centers, specialized service centers, and processing centers, each of which targets different market segments. General line service centers handle a broad line of metals products and tend to concentrate on distribution rather than processing. General line service centers range in size from a single location to a nationwide network of locations. For general line service centers, individual order size in terms of dollars and tons tends to be small relative to processing centers, while the total number of orders is typically high. Specialized service centers focus their activities on a narrower range of product and service offerings than do general line companies. Such service centers provide a narrower range of services to their customers and emphasize product expertise and lower operating costs, while maintaining a moderate level of investment in processing equipment. Processing centers typically process large quantities of metals purchased from primary producers for resale to large industrial customers, such as the automotive industry. Because orders are typically large, operation of a processing center requires a significant investment in processing equipment.

We compete with many other general line service centers, specialized service centers and processing centers on a regional and local basis, some of which may have greater financial resources and flexibility than us. We also compete to a lesser extent with primary metal producers. Primary metal producers typically sell to very large customers that require regular shipments of large volumes of steel. Although these large customers sometimes use metals service centers to supply a portion of their metals needs, metals service center customers typically are consumers of smaller volumes of metals than are customers of primary steel producers. Although we purchase from foreign steelmakers, some of our competitors purchase a higher percentage of metals than us from foreign steelmakers. Such competitors may benefit from favorable exchange rates or other economic or regulatory factors that may result in a competitive advantage. This competitive advantage may be offset somewhat by higher transportation costs and less dependable delivery times associated with importing metals into North America.

Competitive Strengths

Leading Market Position with National Scale and a Strong International Presence.

We believe we are the second largest metals service center in the United States and Canada based on sales. We also believe we are the largest distributor of stainless steel, one of the two largest distributors of aluminum products, and one of the leading distributors of carbon flat roll, plate, bar and tubing products in the United States and Canada market. For the year ended December 31, 2010, we generated approximately $3.9 billion in net sales. We have a broad geographic presence with approximately 100 locations in the United States, Canada and Mexico and we believe we are the only major North American service center whose activities in China represent a sizeable portion of overall operations. Our China operations represented approximately 8% of our volume in 2010, where we have grown from three metals service centers in 2006 to five in 2009. We believe this presence positions us favorably in the largest metals market in the world.

 

2


Table of Contents

Our service centers are located near our customer locations, enabling us to provide timely delivery to customers across numerous geographic markets. Additionally, our widespread network of locations in the United States, Canada, Mexico and China utilize methodologies that allow us to target and serve customers with diverse supply chain requirements across multiple manufacturing locations. We believe our operating structure, coupled with sales and customer service employees focused on the complex needs of our larger customers, provides a competitive advantage in serving these customers. Our ability to transfer inventory among our facilities better enables us to timely and profitably source specialized items at regional locations throughout our network than if we were required to maintain inventory of all products at each location.

Diverse Customer Base and Product Offerings.

We believe that our broad and diverse customer base provides a strong platform for growth in a recovering economy and helps protect us from regional and industry-specific downturns. We have approximately 40,000 customers across a diverse range of industries, including metals fabrication, industrial machinery, commercial transportation, electrical equipment and appliances and construction equipment. During the year ended December 31, 2010, no single customer accounted for more than 5% of our sales, and our top 10 customers accounted for less than 12% of sales. Approximately 1,500 of our customers operate in multiple locations and our relationships with these customers provide us with stable demand and the ability to better manage profitability.

We carry a full range of products including stainless steel, aluminum, carbon steel and alloy steels and a limited line of nickel and red metals. In addition, we provide a broad range of processing and fabrication services such as sawing, slitting, blanking, cutting to length, leveling, flame cutting, laser cutting, edge trimming, edge rolling, roll forming, tube manufacturing, polishing and shearing to process materials to a specified thickness, length, width, shape and surface quality pursuant to specific customer orders. We also provide supply chain solutions, including just-in-time delivery, and value-added components to many original equipment manufacturers.

Experienced Management Team Driving a New Operating Philosophy.

Our senior management team has extensive industry and operational experience and has been instrumental in optimizing and implementing our transformation since Platinum’s acquisition of Ryerson. All of these managers, with the exception of two, were previously with us and were appointed to their current posts after Platinum’s acquisition of Ryerson. These senior managers have an average of more than 20 years of experience in the metals or service center industries and approximately 20 years with Ryerson or its predecessors. We believe our senior management has successfully managed Ryerson through past market cycles and is in a position to manage Ryerson successfully going forward.

Broad-Based Platform for Growth.

We believe we are in a position to grow sales and increase our profits, notwithstanding our net loss of $70.0 million for the year ended December 31, 2010. While industry analysts expect the service center industry to benefit from improving general economic conditions, we expect several end-markets where we have meaningful exposure (including the heavy and medium truck/transportation, machinery, industrial equipment and appliance sectors) will likely experience stronger shipment growth in the coming years compared to overall industrial growth. In addition, a number of our other characteristics will enhance our growth, including our comprehensive U.S. and Canada sales and operations network, our presence in China, our entry into the Mexican market as well as our experience and ability to execute on strategic acquisitions.

Strong Relationships with Suppliers.

We have long-term relationships with our suppliers and also opportunistically take advantage of purchasing opportunities abroad. We believe that we are frequently one of the largest customers of our suppliers and that concentrating our orders among a core group of suppliers is an effective method for obtaining favorable pricing and service. Suppliers worldwide are consolidating and large, geographically diversified customers, such as Ryerson, are desirable partners for these larger suppliers.

Industry Outlook

The U.S. manufacturing sector recovered in 2010 following the severe economic downturn in 2009. While this recovery led to an increase in sales activity for metals service centers, industry volume still remains below historical levels. We believe that manufacturers’ and service centers’ inventory levels will likely remain low relative to activity if the recovery continues due to improved discipline in inventory management practices.

According to the Institute for Supply Management, the Purchasing Managers’ Index (“PMI”) ended the year at 57.0%, marking a full year of month-over-month expansion in the manufacturing economy. The U.S. Congressional Budget Office is forecasting real GDP growth rates of 4.0% in 2011 and 4.1% in 2012.

Metals prices have increased significantly from the historically low levels in 2009. London Metal Exchange (“LME”) prices for nickel and aluminum declined during the middle of 2010, but have since recovered to close at or near yearly highs. The CRU price

 

3


Table of Contents

index for hot-rolled carbon was mostly flat in 2010, but still remains significantly higher than the historically low levels in 2009. As the economic recovery continues, we believe rising metals prices are sustainable if producers remain disciplined in matching production with demand.

China continues to be a key driver in the growth of global metals demand. Industry analysts are projecting China’s GDP to grow 9.0% in 2011 after growing 9.8% in 2010. We expect to continue to expand our operations in China, which we believe will allow us to benefit from the growth in this market.

Products and Services

We carry a full line of carbon steel, stainless steel, alloy steels and aluminum, and a limited line of nickel and red metals. These materials are inventoried in a number of shapes, including coils, sheets, rounds, hexagons, square and flat bars, plates, structurals and tubing.

The following table shows our percentage of sales by major product lines for 2008, 2009 and 2010:

 

     Year Ended December 31,  

Product Line

   2008     2009     2010  

Stainless

     30     25     28

Aluminum

     20        22        21   

Carbon flat rolled

     25        28        28   

Bars, tubing and structurals

     9        8        8   

Fabricated and carbon plate

     11        11        10   

Other

     5        6        5   
                        

Total

     100     100     100
                        

More than one-half of the materials sold by us are processed. We use processing and fabricating techniques such as sawing, slitting, blanking, cutting to length, leveling, flame cutting, laser cutting, edge trimming, edge rolling, polishing and shearing to process materials to specified thickness, length, width, shape and surface quality pursuant to specific customer orders. Among the most common processing techniques used by us are slitting, which involves cutting coiled metals to specified widths along the length of the coil, and leveling, which involves flattening metals and cutting them to exact lengths. We also use third-party fabricators to outsource certain processes that we are not able to perform internally (such as pickling, painting, forming and drilling) to enhance our value-added services.

The plate burning and fabrication processes are particularly important to us. These processes require sophisticated and expensive processing equipment. As a result, rather than making investments in such equipment, manufacturers have increasingly outsourced these processes to metals service centers.

As part of securing customer orders, we also provide services to customers to assure cost effective material application while maintaining or improving the customers’ product quality.

Our services include: just-in-time inventory programs, production of kits containing multiple products for ease of assembly by the customer, consignment arrangements and the placement of our employees at a customer’s site for inventory management and production and technical assistance. We also provide special stocking programs in which products that would not otherwise be stocked by us are held in inventory to meet certain customers’ needs. These services are designed to reduce customers’ costs by minimizing their investment in inventory and improving their production efficiency.

Customers

Our customer base is diverse, numbering approximately 40,000 and includes most metal-consuming industries, most of which are cyclical. No single customer accounted for more than 5% of our sales for the year ended December 31, 2010, and the top 10 customers accounted for less than 12% of our sales in 2010. Substantially all of our sales are attributable to our U.S. operations and substantially all of our long-lived assets are located in the United States. Our Canadian operations comprised 10% of our sales in each of 2008, 2009 and 2010 and our China operations comprised 0%, 4% and 4% of our sales in 2008, 2009 and 2010, respectively. In addition, our Canadian operations’ assets comprised 9%, 13% and 10% of consolidated assets at December 31, 2008, 2009 and 2010, respectively and our Chinese operations’ assets comprised 4%, 4% and 5% of consolidated assets at December 31, 2008, 2009 and 2010, respectively. During 2010, we started operations in Mexico. Our Mexican operations’ sales and assets were less than 1% of our worldwide sales and assets in 2010.

 

4


Table of Contents

The following table shows the Company’s percentage of sales by class of customers for 2008, 2009 and 2010:

 

     Percentage of Sales  

Class of Customer

   2008     2009     2010  

Fabricated metal products producers

     29     32     37

Machinery manufacturers

     26        28        29   

Electrical machinery producers

     10        12        10   

Transportation equipment producers

     11        14        11   

Construction-related purchasers

     6        3        3   

Wholesale distributors

     5        4        4   

Metals mills and foundries

     2        2        1   

Other

     11        5        5   
                        

Total

     100     100     100
                        

Some of our largest customers have procurement programs with us, typically ranging from three months to one year in duration. Pricing for these contracts is generally based on a pricing formula rather than a fixed price for the program duration. However, certain customer contracts are at fixed prices; in order to minimize our financial exposure, we generally match these fixed-price sales programs with fixed-price supply programs. In general, sales to customers are priced at the time of sale based on prevailing market prices.

Suppliers

For the year ended December 31, 2010, our top 25 suppliers accounted for approximately 77% of our purchase dollars.

We purchase the majority of our inventories at prevailing market prices from key suppliers with which we have established relationships to obtain improvements in price, quality, delivery and service. We are generally able to meet our materials requirements because we use many suppliers, because there is a substantial overlap of product offerings from these suppliers, and because there are a number of other suppliers able to provide identical or similar products. Because of the competitive nature of the business, when metal prices increase due to product demand, mill surcharges, supplier consolidation or other factors that in turn lead to supply constraints or longer mill lead times, we may not be able to pass our increased material costs fully to customers. In recent years there have been significant consolidations among suppliers of carbon steel, stainless steel, and aluminum. Continued consolidation among suppliers could lead to disruptions in our ability to meet our material requirements as the sources of our products become more concentrated from fewer producers. We believe we will be able to meet our material requirements because we believe that we have good relationships with our suppliers and believe we will continue to be among the largest customers of our suppliers.

Sales and Marketing

We maintain our own sales force. In addition to our office sales staff, we market and sell our products through the use of our field sales force that has extensive product and customer knowledge and through a comprehensive catalog of our products. Our office and field sales staffs, which together consist of approximately 900 employees, include technical and metallurgical personnel.

A portion of our customers experience seasonal slowdowns. Our sales in the months of July, November and December traditionally have been lower than in other months because of a reduced number of shipping days and holiday or vacation closures for some customers. Consequently, our sales in the first two quarters of the year are usually higher than in the third and fourth quarters.

Capital Expenditures

In recent years we have made capital expenditures to maintain, improve and expand processing capabilities. Additions by us to property, plant and equipment, together with retirements for the five years ended December 31, 2010, excluding the initial purchase price of acquisitions and the initial effect of fully consolidating a joint venture, are set forth below. The net capital change during such period aggregated to a reduction of $4.7 million.

 

     Additions      Retirements
or Sales
     Net  
     (In millions)  

2010

   $ 27.0       $ 5.5       $ 21.5   

2009

     22.8         17.4         5.4   

2008

     30.1         52.0         (21.9

2007

     60.7         54.4         6.3   

2006

     35.7         51.7         (16.0

 

5


Table of Contents

We currently anticipate capital expenditures, excluding acquisitions, of up to approximately $50 million for 2011. We expect capital expenditures will be funded from cash generated by operations and available borrowings.

Employees

As of December 31, 2010, we employed approximately 3,600 persons in North America and 600 persons in China. Our North American workforce was comprised of approximately 1,800 office employees and approximately 1,800 plant employees. Forty percent of our plant employees were members of various unions, including the United Steel Workers and the International Brotherhood of Teamsters. Our relationship with the various unions has generally been good. There has been one work stoppage over the last five years. On January 31, 2006, the agreement with the then joint United Steelworkers and the International Brotherhood of Teamsters unions, which represented approximately 540 employees at three Chicago area facilities, expired. The membership of the joint unions representing the Chicago-area employees initiated a week-long strike on March 6, 2006. On July 9, 2006, the joint United Steelworkers and Teamster unions representing the Chicago-area employees ratified a three-year collective bargaining agreement, lasting through March 31, 2009.

Six collective bargaining agreements expired in 2008, a year in which we reached agreement on the renewal of four contracts covering 53 employees. Two contracts covering 52 employees were extended into 2009. We reached agreement in 2009 on one of the extended contracts covering 45 employees and the single remaining contract from 2008, covering approximately five persons, remains on an extension. In addition, negotiations over a new collective bargaining agreement at a newly certified location employing four persons began in late 2008 and concluded in 2009. Nine contracts covering 339 persons were scheduled to expire in 2009. We reached agreement on the renewal of eight contracts covering approximately 258 persons and one contract covering approximately 81 persons was extended. During 2010, the parties to this extended contract covering two Chicago area facilities agreed to sever the bargaining unit between the two facilities and bargaining was concluded for one facility which covers approximately 50 employees. This new contract expires on December 31, 2011. The other facility’s contract which covers approximately 31 employees remains on extension. Seven contracts covering approximately 85 persons were scheduled to expire in 2010. We reached agreement on the renewal of all seven contracts. Ten contracts covering approximately 293 persons are scheduled to expire in 2011. One of these contracts which covers 50 employees will not be renewed due to facility closure. We may not be able to negotiate extensions of these agreements or new agreements prior to their expiration date. As a result, we may experience additional labor disruptions in the future. A widespread work stoppage could have a material adverse effect on our results of operations, financial position and cash flows if it were to last for a significant period of time.

Environmental, Health and Safety Matters

Our operations are subject to many foreign, federal, state and local laws and regulations relating to the protection of the environment and to health and safety. In particular, our operations are subject to extensive requirements relating to waste disposal, recycling, air and water emissions, the handling of hazardous substances, environmental protection, remediation, underground storage tanks, asbestos-containing building materials, workplace exposure and other matters. Our management believes that our operations are presently in substantial compliance with all such laws and does not presently anticipate that we will be required to expend any substantial amounts in the foreseeable future in order to meet present environmental, workplace health or safety requirements. Any related proceedings or investigations regarding personal injury or governmental claims could result in substantial costs to us, divert our management’s attention and result in significant liabilities, fines, or the suspension or interruption of our facilities.

We continue to analyze and implement improvements for protection of the environment, health and safety risks. As a result, additional costs and liabilities may be incurred to comply with future requirements or to address newly discovered conditions, which costs and liabilities could have a material adverse effect on our results of operations, financial condition or cash flows. For example, there is increasing likelihood that additional regulation of greenhouse gas emissions will occur at the foreign, federal, state and local level, which could affect us, our suppliers and our customers. While the costs of compliance could be significant, given the highly uncertain outcome and timing of future action by the U.S. federal government and states on this issue, we cannot predict the financial impact of future greenhouse gas emission reduction programs on our operations or our customers at this time. We do not currently anticipate any new programs disproportionately impacting us compared to our competitors.

Some of the properties owned or leased by us are located in industrial areas or have a history of heavy industrial use. We may incur environmental liabilities with respect to these properties in the future that could have a material adverse effect on our financial condition or results of operations. We may also incur environmental liabilities at sites to which we sent our waste. We do not expect any related investigation or remediation costs or any pending remedial actions or claims at properties presently or formerly used for our operations or to which we sent waste that are expected to have a material adverse effect on our financial condition, results of operations or cash flows. However, we cannot rule out the possibility that we could be notified of such claims in the future.

Capital and operating expenses for pollution control projects were less than $500,000 per year for the past five years. Excluding any potential additional remediation costs resulting from the environmental remediation for the properties described above, we expect spending for pollution control projects to remain at historical levels.

 

6


Table of Contents

Our United States operations are also subject to the Department of Transportation Federal Motor Carrier Safety Regulations. We operate a private trucking motor fleet for making deliveries to some of our customers. Our drivers do not carry any material quantities of hazardous materials. Our foreign operations are subject to similar regulations. Future regulations could increase maintenance, replacement, and fuel costs for our fleet. These costs could have a material adverse effect on our results of operations, financial condition or cash flows.

Intellectual Property

We own several U.S. and foreign trademarks, service marks and copyrights. Certain of the trademarks are registered with the U.S. Patent and Trademark Office and, in certain circumstances, with the trademark offices of various foreign countries. We consider certain other information owned by us to be trade secrets. We protect our trade secrets by, among other things, entering into confidentiality agreements with our employees regarding such matters and implementing measures to restrict access to sensitive data and computer software source code on a need-to-know basis. We believe that these safeguards adequately protect our proprietary rights and vigorously defend these rights. While we consider all of our intellectual property rights as a whole to be important, we do not consider any single right to be essential to our operations as a whole. Our Floating Rate Senior Secured Notes due November 1, 2014 (“2014 Notes”) and 12% Senior Secured Notes due November 1, 2015 (“2015 Notes”) (together, the “Ryerson Notes”) are secured by our intellectual property.

Foreign Operations

Ryerson Canada

Ryerson Canada, an indirect wholly-owned Canadian subsidiary of Ryerson, is a metals service center and processor. Ryerson Canada has facilities in Calgary (AB), Edmonton (AB), Richmond (BC), Winnipeg (MB), Saint John (NB), Brampton (ON), Sudbury (ON), Toronto (ON) (includes Canadian headquarters), Laval (QC), Vaudreuil (QC) and Saskatoon (SK), Canada.

Ryerson China

In 2006, Ryerson and VSC and its subsidiary, CAMP BVI, formed Ryerson China to enable us, through this foreign operation, to provide metals distribution services in China. We invested $28.3 million in Ryerson China for a 40% equity interest. On October 31, 2008, Ryerson Holding purchased an additional 20% in Ryerson China. We consolidated the operations of Ryerson China as of October 31, 2008. On December 31, 2008, VSC sold an additional 20% interest in Ryerson China: 10% interest was purchased by an affiliate of Ryerson Holding, with the remaining 10% interest purchased by a subsidiary of Ryerson. Ryerson’s total contribution in 2008 was $7.1 million, increasing its direct ownership percentage to 50%. On July 12, 2010, we acquired VSC’s remaining 20% equity interest in Ryerson China. As a result, Ryerson China is now a wholly-owned subsidiary of Ryerson Holding. Ryerson China is based in Shanghai and operates processing and service centers in Guangzhou, Dongguan, Kunshan, Tianjin and Wuhan and a sales office in Shanghai.

Ryerson Mexico

Ryerson Mexico, an indirect wholly-owned subsidiary of Ryerson, operates as a metals service center and processor. Ryerson formed Ryerson Mexico in 2010 to expand operations into the Mexican market. Ryerson Mexico has a service center in Monterrey, Mexico and a sales office in Mexicali, Mexico.

Available Information

All periodic and current reports and other filings that we are required to file with the Securities and Exchange Commission (“SEC”), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant Section 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge from the SEC’s website (http://www.sec.gov) or public reference room at 100 F Street N.E., Washington, D.C. 20549 (1-800-SEC-0330) or through our website at http://www.ryerson.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Copies of these reports (excluding exhibits) may also be obtained free of charge, upon written request to: Legal Department, Ryerson Inc., 2621 West 15th Place, Chicago, Illinois 60608.

The Company also posts its Code of Ethics on the website. See “Directors, Executive Officers and Corporate Governance—Code of Ethics“ for more information regarding our Code of Ethics.

Our website address is included in this report for information purposes only. Our website and the information contained therein or connected thereto are not incorporated into this annual report on Form 10-K.

 

7


Table of Contents
ITEM 1A. RISK FACTORS.

Our business faces many risks. You should carefully consider the risks and uncertainties described below, together with the other information in this report, including the consolidated financial statements and notes to consolidated financial statements. We cannot assure you that any of the events discussed in the risk factors below will not occur. These risks could have a material and adverse impact on our business, results of operations, financial condition and cash flows.

We service industries that are highly cyclical, and any downturn in our customers’ industries could reduce our sales and profitability. The economic downturn has reduced demand for our products and may continue to reduce demand until an economic recovery.

Many of our products are sold to industries that experience significant fluctuations in demand based on economic conditions, energy prices, seasonality, consumer demand and other factors beyond our control. These industries include manufacturing, electrical products and transportation. We do not expect the cyclical nature of our industry to change.

The U.S. economy entered an economic recession in December 2007, which spread to many global markets in 2008 and 2009 and affected Ryerson and other metals service centers. Beginning in late 2008 and continuing through 2010, the metals industry, including Ryerson and other service centers, felt additional effects of the global economic crisis and recovery thereto and the impact of the credit market disruption. These events contributed to a rapid decline in both demand for our products and pricing levels for those products. The Company has implemented a number of actions to conserve cash, reduce costs and strengthen its competitiveness, including curtailing non-critical capital expenditures, initiating headcount reductions and reductions of certain employee benefits, among other actions. However, there can be no assurance that these actions, or any others that the Company may take in response to further deterioration in economic and financial conditions, will be sufficient.

The volatility of the market could result in a material impairment of goodwill.

We evaluate goodwill on an annual basis and whenever events or changes in circumstances indicate potential impairment. Events or changes in circumstances that could trigger an impairment review include significant underperformance relative to our historical or projected future operating results, significant changes in the manner or the use of our assets or the strategy for our overall business, and significant negative industry or economic trends. We test for impairment of goodwill by calculating the fair value of a reporting unit using an income approach based on discounted future cash flows. Under this method, the fair value of each reporting unit is estimated based on expected future economic benefits discounted to a present value at a rate of return commensurate with the risk associated with the investment. Projected cash flows are discounted to present value using an estimated weighted average cost of capital, which considers both returns to equity and debt investors. The income approach is subject to a comparison for reasonableness to a market approach at the date of valuation. Significant changes in any one of the assumptions made as part of our analysis, which could occur as a result of actual events, or further declines in the market conditions for our products, could significantly impact our impairment analysis. An impairment charge, if incurred, could be material.

The global financial and banking crises have caused a lack of credit availability that has limited and may continue to limit the ability of our customers to purchase our products or to pay us in a timely manner.

In climates of global financial and banking crises, such as those from which we are currently recovering, the ability of our customers to maintain credit availability has become more challenging. In particular, the financial viability of many of our customers is threatened, which may impact their ability to pay us amounts due, further affecting our financial condition and results of operations.

The metals distribution business is very competitive and increased competition could reduce our gross margins and net income.

The principal markets that we serve are highly competitive. The metals distribution industry is fragmented and competitive, consisting of a large number of small companies and a few relatively large companies. Competition is based principally on price, service, quality, production capabilities, inventory availability and timely delivery. Competition in the various markets in which we participate comes from companies of various sizes, some of which have greater financial resources than we have and some of which have more established brand names in the local markets served by us. Increased competition could force us to lower our prices or to offer increased services at a higher cost, which could reduce our profitability.

The economic downturn has reduced metals prices. Though prices have risen since the onset of the economic downturn, we cannot assure you that prices will continue to rise. Changing metals prices may have a significant impact on our liquidity, net sales, gross margins, operating income and net income.

The metals industry as a whole is cyclical and, at times, pricing and availability of metal can be volatile due to numerous factors beyond our control, including general domestic and international economic conditions, labor costs, sales levels, competition, levels of inventory held by other metals service centers, consolidation of metals producers, higher raw material costs for the producers of metals, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of materials for us.

 

8


Table of Contents

We, like many other metals service centers, maintain substantial inventories of metal to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, contracts with customers and market conditions. When metals prices decline, as they did in 2008 and 2009, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower margins as we use existing metals inventory. Notwithstanding recent price increases, metals prices may decline in 2011, and declines in those prices or further reductions in sales volumes could adversely impact our ability to maintain our liquidity and to remain in compliance with certain financial covenants under our $1.35 billion revolving credit facility agreement that matures on the earliest of (a) March 14, 2016, (b) the date that occurs 90 days prior to the scheduled maturity date of the 2014 Notes, if the 2014 Notes are then outstanding and (c) the date that occurs 90 days prior to the scheduled maturity date of the 2015 Notes, if the 2015 Notes are then outstanding (as amended, the “Ryerson Credit Facility”), as well as result in us incurring inventory or goodwill impairment charges. Changing metals prices therefore could significantly impact our liquidity, net sales, gross margins, operating income and net income.

We have a substantial amount of indebtedness, which could adversely affect our financial position and prevent us from fulfilling our financial obligations.

We currently have a substantial amount of indebtedness. As of December 31, 2010, our total indebtedness was approximately $960 million. We may also incur additional indebtedness in the future. As of December 31, 2010, we had approximately $317 million of unused capacity under the Ryerson Credit Facility. Our substantial indebtedness may:

 

   

make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments on our outstanding notes and our other indebtedness;

 

   

limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions and general corporate and other purposes;

 

   

limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general corporate purposes;

 

   

require us to use a substantial portion of our cash flow from operations to make debt service payments;

 

   

limit our flexibility to plan for, or react to, changes in our business and industry;

 

   

place us at a competitive disadvantage compared to our less leveraged competitors; and

 

   

increase our vulnerability to the impact of adverse economic and industry conditions.

We may be able to incur substantial additional indebtedness in the future. The terms of the Ryerson Credit Facility and the indentures governing our outstanding notes restrict but do not prohibit us from doing so. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

The covenants in the Ryerson Credit Facility and the indentures governing our notes impose, and covenants contained in agreements governing indebtedness that we incur in the future may impose, restrictions that may limit our operating and financial flexibility.

The Ryerson Credit Facility and the indentures governing our notes contain a number of significant restrictions and covenants that limit our ability and the ability of our restricted subsidiaries to:

 

   

incur additional debt;

 

   

pay dividends on our capital stock or repurchase our capital stock;

 

   

make certain investments or other restricted payments;

 

   

create liens or use assets as security in other transactions;

 

   

merge, consolidate or transfer or dispose of substantially all of our assets; and

 

   

engage in transactions with affiliates.

The terms of the Ryerson Credit Facility require that, in the event availability under the facility declines to a certain level, we maintain a minimum fixed charge coverage ratio at the end of each fiscal quarter. Additionally, our future indebtedness may contain covenants more restrictive in certain respects than the restrictions contained in the Ryerson Credit Facility and the indentures governing our notes. Operating results below current levels or other adverse factors, including a significant increase in interest rates, could result in our being unable to comply with financial covenants that are contained in the Ryerson Credit Facility or that may be contained in any future indebtedness. If our indebtedness is in default for any reason, our business, financial condition and results of operations could be materially and adversely affected. In addition, complying with these covenants may also cause us to take actions that are not favorable to holders of our notes and may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.

 

9


Table of Contents

We may not be able to generate sufficient cash to service all of our indebtedness.

Our ability to make payments on our indebtedness depends on our ability to generate cash in the future. Our outstanding notes, the Ryerson Credit Facility and our other outstanding indebtedness are expected to account for significant cash interest expenses. Accordingly, we will have to generate significant cash flows from operations to meet our debt service requirements. If we do not generate sufficient cash flow to meet our debt service and working capital requirements, we may be required to sell assets, seek additional capital, reduce capital expenditures, restructure or refinance all or a portion of our existing indebtedness, or seek additional financing. Moreover, insufficient cash flow may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. Furthermore, Platinum has no obligation to provide us with debt or equity financing and we therefore may be unable to generate sufficient cash to service all of our indebtedness.

Because a substantial portion of our indebtedness bears interest at rates that fluctuate with changes in certain prevailing short-term interest rates, we are vulnerable to interest rate increases.

A substantial portion of our indebtedness, including the Ryerson Credit Facility and the 2014 Notes, bears interest at rates that fluctuate with changes in certain short-term prevailing interest rates. As of December 31, 2010, we had approximately $102.9 million of the 2014 Notes and approximately $457.3 million of outstanding borrowings under the Ryerson Credit Facility, with an additional $317 million available for borrowing under such facility. Assuming a consistent level of debt, a 100 basis point change in the interest rate on our floating rate debt effective from the beginning of the year would increase or decrease our fiscal 2010 interest expense under the Ryerson Credit Facility and the 2014 Notes by approximately $4.7 million on an annual basis. We use derivative financial instruments to manage a portion of the potential impact of our interest rate risk. To some extent, derivative financial instruments can protect against increases in interest rates, but they do not provide complete protection over the long term. If interest rates increase dramatically, we could be unable to service our debt which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

We may not be able to successfully consummate and complete the integration of future acquisitions, and if we are unable to do so, we may be unable to increase our growth rates.

We have grown through a combination of internal expansion, acquisitions and joint ventures. We intend to continue to grow through selective acquisitions, but we may not be able to identify appropriate acquisition candidates, obtain financing on satisfactory terms, consummate acquisitions or integrate acquired businesses effectively and profitably into our existing operations. Restrictions contained in the agreements governing our notes, the Ryerson Credit Facility or our other existing or future debt may also inhibit our ability to make certain investments, including acquisitions and participations in joint ventures.

Our future success will depend on our ability to complete the integration of these future acquisitions successfully into our operations. After any acquisition, customers may choose to diversify their supply chains to reduce reliance on a single supplier for a portion of their metals needs. We may not be able to retain all of our and an acquisition’s customers, which may adversely affect our business and sales. Integrating acquisitions, particularly large acquisitions, requires us to enhance our operational and financial systems and employ additional qualified personnel, management and financial resources, and may adversely affect our business by diverting management away from day-to-day operations. Further, failure to successfully integrate acquisitions may adversely affect our profitability by creating significant operating inefficiencies that could increase our operating expenses as a percentage of sales and reduce our operating income. In addition, we may not realize expected cost savings from acquisitions, which may also adversely affect our profitability.

We may not be able to retain or expand our customer base if the North American manufacturing industry continues to erode through moving offshore or through acquisition and merger or consolidation activity in our customers’ industries.

Our customer base primarily includes manufacturing and industrial firms. Some of our customers operate in industries that are undergoing consolidation through acquisition and merger activity; some are considering or have considered relocating production operations overseas or outsourcing particular functions overseas; and some customers have closed as they were unable to compete successfully with overseas competitors. Our facilities are predominately located in the United States and Canada. To the extent that our customers cease U.S. operations, relocate or move operations overseas to regions in which we do not have a presence, we could lose their business. Acquirers of manufacturing and industrial firms may have suppliers of choice that do not include us, which could impact our customer base and market share.

Certain of our operations are located outside of the United States, which subjects us to risks associated with international activities.

Certain of our operations are located outside of the United States, primarily in Canada, Mexico and China. We are subject to the Foreign Corrupt Practices Act (“FCPA”), which generally prohibits U.S. companies and their intermediaries from making corrupt payments or otherwise corruptly giving any other thing of value to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices. The FCPA applies to covered companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies may be held liable for some actions taken by strategic or local partners or representatives. If we or our intermediaries fail to comply with the requirements of the FCPA, governmental authorities in the United States could seek to impose civil and/or criminal penalties, which could have a material adverse effect on our business, operations, financial conditions and cash flows.

 

10


Table of Contents

Operating results experience seasonal fluctuations.

A portion of our customers experience seasonal slowdowns. Our sales in the months of July, November and December traditionally have been lower than in other months because of a reduced number of shipping days and holiday or vacation closures for some customers. Consequently, our sales in the first two quarters of the year are usually higher than in the third and fourth quarters.

Damage to our information technology infrastructure could harm our business.

The unavailability of any of our computer-based systems for any significant period of time could have a material adverse effect on our operations. In particular, our ability to manage inventory levels successfully largely depends on the efficient operation of our computer hardware and software systems. We use management information systems to track inventory information at individual facilities, communicate customer information and aggregate daily sales, margin and promotional information. Difficulties associated with upgrades, installations of major software or hardware, and integration with new systems could have a material adverse effect on results of operations. We will be required to expend substantial resources to integrate our information systems with the systems of companies we have acquired. The integration of these systems may disrupt our business or lead to operating inefficiencies. In addition, these systems are vulnerable to, among other things, damage or interruption from fire, flood, tornado and other natural disasters, power loss, computer system and network failures, operator negligence, physical and electronic loss of data, or security breaches and computer viruses.

Any significant work stoppages can harm our business.

As of December 31, 2010, we employed approximately 3,600 persons in North America and 600 persons in China. Our North American workforce was comprised of approximately 1,800 office employees and approximately 1,800 plant employees. Forty percent of our plant employees were members of various unions, including the United Steel Workers and the International Brotherhood of Teamsters. Our relationship with the various unions has generally been good. There has been one work stoppage over the last five years. On January 31, 2006, the agreement with the then joint United Steelworkers and the International Brotherhood of Teamsters unions, which represented approximately 540 employees at three Chicago area facilities, expired. The membership of the joint unions representing the Chicago-area employees initiated a week-long strike on March 6, 2006. On July 9, 2006, the joint United Steelworkers and Teamster unions representing the Chicago-area employees ratified a three-year collective bargaining agreement, lasting through March 31, 2009.

Six collective bargaining agreements expired in 2008, a year in which we reached agreement on the renewal of four contracts covering 53 employees. Two contracts covering 52 employees were extended into 2009. We reached agreement in 2009 on one of the extended contracts covering 45 employees and the single remaining contract from 2008, covering approximately five persons, remains on an extension. In addition, negotiations over a new collective bargaining agreement at a newly certified location employing four persons began in late 2008 and concluded in 2009. Nine contracts covering 339 persons were scheduled to expire in 2009. We reached agreement on the renewal of eight contracts covering approximately 258 persons and one contract covering approximately 81 persons was extended. During 2010, the parties to this extended contract covering two Chicago area facilities agreed to sever the bargaining unit between the two facilities and bargaining was concluded for one facility which covers approximately 50 employees. This new contract expires on December 31, 2011. The other facility’s contract which covers approximately 31 employees remains on extension. Seven contracts covering approximately 85 persons were scheduled to expire in 2010. We reached agreement on the renewal of all seven contracts. Ten contracts covering approximately 293 persons are scheduled to expire in 2011. One of these contracts which covers 50 employees will not be renewed due to facility closure. We may not be able to negotiate extensions of these agreements or new agreements prior to their expiration date. As a result, we may experience additional labor disruptions in the future. A widespread work stoppage could have a material adverse effect on our results of operations, financial position and cash flows if it were to last for a significant period of time.

Certain employee retirement benefit plans are underfunded and the actual cost of those benefits could exceed current estimates, which would require us to fund the shortfall.

As of December 31, 2010, our pension plan had an unfunded liability of $306 million. Our actual costs for benefits required to be paid may exceed those projected and future actuarial assessments to the extent those costs may exceed the current assessment. Under those circumstances, the adjustments required to be made to our recorded liability for these benefits could have a material adverse effect on our results of operations and financial condition and cash payments to fund these plans could have a material adverse effect on our cash flows. We may be required to make substantial future contributions to improve the plan’s funded status, which may have a material adverse effect on our results of operations, financial condition or cash flows.

 

11


Table of Contents

Future funding for postretirement employee benefits other than pensions also may require substantial payments from current cash flow.

We provide postretirement life insurance and medical benefits to eligible retired employees. Our unfunded postretirement benefit obligation as of December 31, 2010 was $176 million. Our actual costs for benefits required to be paid may exceed those projected and future actuarial assessments to the extent those costs may exceed the current assessment. Under those circumstances, the adjustments required to be made to our recorded liability for these benefits could have a material adverse effect on our results of operations and financial condition and cash payments to fund these plans could have a material adverse effect on our cash flows.

Any prolonged disruption of our processing centers could harm our business.

We have dedicated processing centers that permit us to produce standardized products in large volumes while maintaining low operating costs. Any prolonged disruption in the operations of any of these facilities, whether due to labor or technical difficulties, destruction or damage to any of the facilities or otherwise, could materially adversely affect our business and results of operations.

If we are unable to retain and attract management and key personnel, it may adversely affect our business.

We believe that our success is due, in part, to our experienced management team. Losing the services of one or more members of our management team could adversely affect our business and possibly prevent us from improving our operational, financial and information management systems and controls. In the future, we may need to retain and hire additional qualified sales, marketing, administrative, operating and technical personnel, and to train and manage new personnel. Our ability to implement our business plan is dependent on our ability to retain and hire a large number of qualified employees each year. If we are unable to hire sufficient qualified personnel, it could have a material adverse effect on our business, results of operations and financial condition.

Our existing international operations and potential joint ventures may cause us to incur costs and risks that may distract management from effectively operating our North American business, and such operations or joint ventures may not be profitable.

We maintain foreign operations in Canada, China and Mexico. International operations are subject to certain risks inherent in conducting business in foreign countries, including price controls, exchange controls, limitations on participation in local enterprises, nationalization, expropriation and other governmental action, and changes in currency exchange rates. While we believe that our current arrangements with local partners provide us with experienced business partners in foreign countries, events or issues, including disagreements with our partners, may occur that require attention of our senior executives and may result in expenses or losses that erode the profitability of our foreign operations or cause our capital investments abroad to be unprofitable.

Lead time and the cost of our products could increase if we were to lose one of our primary suppliers.

If, for any reason, our primary suppliers of aluminum, carbon steel, stainless steel or other metals should curtail or discontinue their delivery of such metals in the quantities needed and at prices that are competitive, our business could suffer. The number of available suppliers could be reduced by factors such as industry consolidation and bankruptcies affecting steel and metal producers. For the year ended December 31, 2010, our top 25 suppliers represented approximately 77% of our purchases. We could be significantly and adversely affected if delivery were disrupted from a major supplier. If, in the future, we were unable to obtain sufficient amounts of the necessary metals at competitive prices and on a timely basis from our traditional suppliers, we may not be able to obtain such metals from alternative sources at competitive prices to meet our delivery schedules, which could have a material adverse effect on our sales and profitability.

We could incur substantial costs in order to comply with, or to address any violations or liability under, environmental, health and safety laws that could significantly increase our operating expenses and reduce our operating income.

Our operations are subject to various environmental, health and safety statutes and regulations, including laws and regulations governing materials we use. In addition, certain of our operations are subject to foreign, federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes and remediation of contaminated soil, surface waters and groundwater. Failure to maintain or achieve compliance with these laws and regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures, in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury, worker’s compensation or personal injury claims, cleanup costs or temporary or permanent discontinuance of operations. Certain of our facilities are located in industrial areas, have a history of heavy industrial use and have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Environmental liabilities could exist, including cleanup obligations at these facilities or at off-site locations where materials from our operations were disposed of, which could result in future expenditures that cannot be currently quantified and which could have a material adverse effect on our financial position, results of operations or cash flows. Future changes to environmental, health and safety laws or regulations, including those related to climate change, could result in material liabilities and costs, constrain operations or make such operations more costly for us, our suppliers and our customers.

 

12


Table of Contents

We are subject to litigation that could strain our resources and distract management.

From time to time, we are involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. These suits concern issues including product liability, contract disputes, employee-related matters and personal injury matters. It is not feasible to predict the outcome of all pending suits and claims, and the ultimate resolution of these matters as well as future lawsuits could have a material adverse effect on our business, financial condition, results of operations or cash flows or reputation.

We may face product liability claims that are costly and create adverse publicity.

If any of the products that we sell cause harm to any of our customers, we could be exposed to product liability lawsuits. If we were found liable under product liability claims, we could be required to pay substantial monetary damages. Further, even if we successfully defended ourself against this type of claim, we could be forced to spend a substantial amount of money in litigation expenses, our management could be required to spend valuable time in the defense against these claims and our reputation could suffer, any of which could harm our business.

Substantially all of our capital stock is indirectly owned by a single investor group and its interests as an equity holder may conflict with those of a creditor.

We are a wholly-owned subsidiary of Ryerson Holding, which is controlled by Platinum. As a result, Platinum controls all matters submitted for approval to Ryerson Holding. These matters include the election of all of the members of our board of directors, amendments to our organizational documents, or the approval of any mergers, tender offers, sales of assets or other major corporate transactions.

The interests of Platinum may not in all cases be aligned with interests of holders of the Ryerson Notes. For example, Platinum could cause us to make acquisitions that increase the amount of the indebtedness that is secured or senior to the notes or to sell revenue-generating assets, impairing our ability to make payments under the notes. Additionally, Platinum is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Accordingly, Platinum may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. In addition, Platinum may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its equity investment, even though such transactions might involve risks to holders of the Ryerson Notes.

Our risk management strategies may result in losses.

From time to time, we may use fixed-price and/or fixed-volume supplier contracts to offset contracts with customers. Additionally, we may use foreign exchange contracts and interest rate swaps to hedge Canadian dollar and floating rate debt exposures. These risk management strategies pose certain risks, including the risk that losses on a hedge position may exceed the amount invested in such instruments. Moreover, a party in a hedging transaction may be unavailable or unwilling to settle our obligations, which could cause us to suffer corresponding losses. A hedging instrument may not be effective in eliminating all of the risks inherent in any particular position. Our profitability may be adversely affected during any period as a result of use of such instruments.

We may be adversely affected by currency fluctuations in the U.S. dollar versus the Canadian dollar and the Chinese renminbi.

We have significant operations in Canada which incur the majority of their metal supply costs in U.S. dollars but earn the majority of their sales in Canadian dollars. Additionally, we have significant assets in China. We may from time to time experience losses when the value of the U.S. dollar strengthens against the Canadian dollar or the Chinese renminbi, which could have a material adverse effect on our results of operations. In addition, we will be subject to translation risk when we consolidate our Canadian and Chinese subsidiaries’ net assets into our balance sheet. Fluctuations in the value of the U.S. dollar versus the Canadian dollar or Chinese renminbi could reduce the value of these assets as reported in our financial statements, which could, as a result, reduce our stockholders’ equity.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

 

ITEM 2. PROPERTIES.

As of December 31, 2010, the Company’s facilities are set forth below:

Operations in the United States

JT Ryerson maintains 84 operational facilities, including 8 locations that are dedicated to administration services. All of our metals service center facilities are in good condition and are adequate for JT Ryerson’s existing operations. Approximately 40% of

 

13


Table of Contents

these facilities are leased. The lease terms expire at various times through 2025. Owned properties noted as vacated below have been closed and are in the process of being sold. JT Ryerson’s properties and facilities are adequate to serve its present and anticipated needs.

The following table sets forth certain information with respect to each facility as of December 31, 2010:

 

Location

  

Own/Lease

Birmingham, AL

   Owned

Mobile, AL

   Leased

Fort Smith, AR

   Owned

Hickman, AR**

   Leased

Little Rock, AR (2)

   Owned

Phoenix, AZ

   Owned

Fresno, CA

   Leased

Livermore, CA

   Leased

Vernon, CA

   Owned

Commerce City, CO

   Owned

Greenwood, CO*

   Leased

Wilmington, DE

   Owned

Jacksonville, FL

   Owned

Miami, FL

   Owned

Orlando, FL*

   Leased

Tampa Bay, FL

   Owned

Duluth, GA

   Owned

Norcross, GA

   Owned

Cedar Rapids, IA

   Owned

Des Moines, IA

   Owned

Marshalltown, IA

   Owned

Boise, ID

   Leased

Elgin, IL

   Leased

Chicago, IL (Headquarters)*

   Owned

Chicago, IL (16th Street Facility)

   Owned

Lisle, IL*

   Leased

Burns Harbor, IN

   Owned

Indianapolis, IN

   Owned

Wichita, KS

   Leased

Louisville, KY

   Owned

Shelbyville, KY**

   Owned

Shreveport, LA

   Owned

St. Rose, LA

   Owned

Devens, MA

   Owned

 

14


Table of Contents

Location

  

Own/Lease

Grand Rapids, MI*

   Leased

Jenison, MI

   Owned

Lansing, MI

   Leased

Minneapolis, MN

   Owned

Plymouth, MN

   Owned

Maryland Heights, MO

   Leased

North Kansas City, MO

   Owned

St. Louis, MO

   Leased

Greenwood, MS

   Leased

Jackson, MS

   Owned

Billings, MT

   Leased

Charlotte, NC

   Owned

Charlotte, NC

   Owned/Vacated

Greensboro, NC

   Owned

Pikeville, NC

   Leased

Youngsville, NC

   Leased

Omaha, NE

   Owned

Lancaster, NY

   Owned

Liverpool, NY

   Leased

New York, NY*

   Leased/Vacated

Cincinnati, OH

   Owned/Vacated

Cleveland, OH

   Owned

Columbus, OH

   Leased

Hamilton, OH*

   Leased

Tulsa, OK

   Owned

Oklahoma City, OK

   Owned

Portland, OR (2)

   Leased

Ambridge, PA**

   Owned

Fairless Hills, PA

   Leased

Pittsburgh, PA*

   Leased

Charleston, SC

   Owned

Greenville, SC

   Owned

Chattanooga, TN

   Owned

Knoxville, TN

   Leased/Vacated

Memphis, TN

   Owned

Nashville, TN

   Owned/Vacated

Nashville, TN*

   Leased

Dallas, TX (2)

   Owned

El Paso, TX

   Leased

Houston, TX

   Owned

Houston, TX (2)

   Leased

Houston, TX

   Leased/Vacated

McAllen, TX

   Leased

Clearfield, UT (2)

   Leased

Pounding Mill, VA

   Owned

Richmond, VA

   Owned

Renton, WA

   Owned

Spokane, WA

   Owned

Baldwin, WI

   Leased

Green Bay, WI

   Owned

Milwaukee, WI

   Owned

 

* Office space only
** Processing centers

 

15


Table of Contents

Operations in Canada

Ryerson Canada, a wholly-owned indirect Canadian subsidiary of Ryerson, has 12 facilities in Canada. All of the metals service center facilities are in good condition and are adequate for Ryerson Canada’s existing and anticipated operations. Four facilities are leased.

 

Location

   Own/Lease  

Calgary, AB

     Owned   

Edmonton, AB

     Owned   

Richmond, BC

     Owned   

Winnipeg, MB

     Owned   

Winnipeg, MB

     Leased   

Saint John, NB

     Owned   

Brampton, ON

     Leased   

Sudbury, ON

     Owned   

Toronto, ON (includes Canadian Headquarters)

     Owned   

Laval, QC

     Leased   

Vaudreuil, QC

     Leased   

Saskatoon, SK

     Owned   

Operations in China

Ryerson China, a company in which we directly own a 50% interest and Ryerson Holding owns the other 50% interest, has five service and processing centers in China, at Guangzhou, Dongguan, Kunshan, Tianjin and Wuhan, performing coil processing, sheet metal fabrication and plate processing. Ryerson China’s headquarters office building is located in Shanghai. Ryerson China also has three sales offices in Beijing, Wuxi, and Shenzhen. Of the nine total facilities, three facilities are owned, with the remaining being leased. All of the facilities are in good condition and are adequate for Ryerson China’s existing and anticipated operations.

Operations in Mexico

Ryerson Mexico, an indirect wholly-owned subsidiary of Ryerson, has two facilities as of December 31, 2010. We have one sales office in Mexicali, Mexico, and a service center in Monterrey, Mexico, both of which are leased. The facilities are in good condition and are adequate for our existing and anticipated operations.

 

ITEM 3. 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 4. REMOVED AND RESERVED.

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

There is no public trading market for our common stock. All of our issued and outstanding capital stock is held by Ryerson Holding, of which Platinum owns 99% of the issued and outstanding capital stock.

The Company declared and paid a dividend of $35.0 million to Ryerson Holding in July 2009. The indentures governing the Ryerson Notes restrict our ability to pay dividends on our common stock. Any payment of cash dividends on our common stock in the future will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions and other factors deemed relevant by our board of directors.

 

16


Table of Contents
ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth our selected historical consolidated financial information. Our selected historical consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010 and the summary historical balance sheet data as of December 31, 2009 and 2010 have been derived from our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” The selected historical consolidated statements of operations data of our predecessor for the year ended December 31, 2006 and the period from January 1, 2007 through October 19, 2007 and Ryerson as successor for the period from October 20, 2007 through December 31, 2007 and the summary historical balance sheet data of our predecessor as of December 31, 2006 and the summary historical balance sheet data of Ryerson as successor as of December 31, 2007 were derived from the audited financial statements and related notes thereto, which are not included in this Annual Report.

The following consolidated financial information should be read together with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited Consolidated Financial Statements of Ryerson and the Notes thereto included in Item 8. “Financial Statements and Supplementary Data.”

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA AND OPERATING RESULTS

(Dollars in millions, except per ton data)

 

     Predecessor            Successor  
     Year Ended
December 31,
2006
    Period from
January 1 to
October 19, 2007
           Period from
October 20 to
December 31, 2007
    Year Ended
December 31,
2008
    Year Ended
December 31,
2009
    Year Ended
December 31,
2010
 

Statements of Operations Data:

                 

Net sales

   $ 5,908.9      $ 5,035.6           $ 966.3      $ 5,309.8      $ 3,066.1      $ 3,895.5   

Cost of materials sold

     5,050.9        4,307.1             829.1        4,597.7        2,610.6        3,355.7   
                                                     

Gross profit (1)

     858.0        728.5             137.2        712.1        455.5        539.8   

Warehousing, selling, general and administrative

     691.2        569.5             126.9        586.1        483.9        505.7   

Restructuring and other charges

     4.5        5.1             —          —          —          12.0   

Gain on insurance settlement

     —          —               —          —          —          (2.6

Gain on sale of assets

     (21.6     (7.2          —          —          (3.3     —     

Impairment charge on fixed assets

     —          —               —          —          19.3        1.4   

Pension and other postretirement benefits curtailment (gain) loss

     —          —               —          —          (2.0     2.0   
                                                     

Operating profit (loss)

     183.9        161.1             10.3        126.0        (42.4     21.3   

Other income and (expense), net (2)

     1.0        (1.0          2.4        21.4        (10.2     (3.2

Interest and other expense on debt (3)

     (70.7     (55.1          (30.8     (109.9     (72.9     (75.2
                                                     

Income (loss) before income taxes

     114.2        105.0             (18.1     37.5        (125.5     (57.1

Provision (benefit) for income taxes (4)

     42.4        36.9             (6.9     11.7        66.9        12.9   
                                                     

Net income (loss)

     71.8        68.1             (11.2     25.8        (192.4     (70.0

Less: Net loss attributable to noncontrolling interest

     —          —               —          (1.6     (3.1     (4.6
                                                     

Net income (loss) attributable to Ryerson Inc.

   $ 71.8      $ 68.1           $ (11.2   $ 27.4      $ (189.3   $ (65.4
                                                     

 

17


Table of Contents
     Predecessor            Successor  
     Year Ended
December 31,
2006
    Period from
January 1 to
October 19, 2007
           Period from
October 20 to
December 31, 2007
    Year Ended
December 31,
2008
    Year Ended
December 31,
2009
    Year Ended
December 31,
2010
 

Balance Sheet Data (at period end):

                 

Cash and cash equivalents

   $ 55.1             $ 35.2      $ 108.9      $ 114.9      $ 62.2   

Restricted cash

     0.1               4.5        7.0        19.5        15.6   

Working capital

     1,420.1               1,235.7        1,066.5        754.1        862.7   

Property, plant and equipment, net

     401.1               587.0        556.3        488.7        490.4   

Total assets

     2,537.3               2,576.5        2,272.5        1,787.6        2,061.3   

Long-term debt, including current maturities

     1,206.5               1,228.8        1,030.3        754.2        960.2   

Total equity

     648.7               499.2        382.9        166.4        77.4   

Other Financial Data:

                 

Cash flows provided by (used in) operations

   $ (261.0   $ 564.0           $ 54.1      $ 279.3      $ 284.7      $ (198.4

Cash flows provided by (used in) investing activities

     (16.7     (24.0          (1,069.6     24.0        32.1        (44.4

Cash flows provided by (used in) financing activities

     305.4        (565.6          1,021.2        (222.0     (320.9     184.5   

Capital expenditures

     35.7        51.6             9.1        30.1        22.8        27.0   

Depreciation and amortization

     40.0        32.5             7.3        37.7        37.1        38.6   

Volume and Per Ton Data:

                 

Tons shipped (000)

     3,292        2,535             498        2,505        1,881        2,252   

Average selling price per ton

   $ 1,795      $ 1,987           $ 1,939      $ 2,120      $ 1,630      $ 1,730   

Gross profit per ton

     261        287             275        284        242        240   

Operating expenses per ton

     205        224             254        234        265        230   

Operating profit (loss) per ton

     56        63             21        50        (23     10   

 

(1) The period from January 1 to October 19, 2007 includes a LIFO liquidation gain of $69.5 million, or $42.3 million after-tax. The year ended December 31, 2008 includes a LIFO liquidation gain of $15.6 million, or $9.9 million after-tax.
(2) The year ended December 31, 2008 included a $18.2 million gain on the retirement of debt. The year ended December 31, 2009 included $11.8 million of foreign exchange losses related to short-term loans from our Canadian operations, offset by the recognition of a $2.7 million gain on the retirement of debt. The year ended December 31, 2010 included $2.6 million of foreign exchange losses related to the repayment of a long-term loan to our Canadian operations.
(3) The period from January 1 to October 19, 2007 includes a $2.9 million write off of unamortized debt issuance costs associated with the 2024 Notes that was classified as short term debt and $2.7 million write off of debt issuance costs associated with our prior credit facility upon entering into an amended revolving credit facility relating to that facility during the first quarter of 2007.
(4) The period from January 1 to October 19, 2007 includes a $3.9 million income tax benefit as a result of a favorable settlement from an Internal Revenue Service examination. The year ended December 31, 2009 includes a $92.3 million tax expense related to the establishment of a valuation allowance against the Company’s US deferred tax assets and a $14.5 million income tax charge on the sale of our joint venture in India.

 

18


Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with Item 6. “Selected Financial Data” and the audited Consolidated Financial Statements of Ryerson Inc. and Subsidiaries and the Notes thereto in Item 8. “Financial Statements and Supplementary Data.” This discussion contains forward-looking statements that involve risks and uncertainties. See the section entitled “Special Note Regarding Forward-Looking Statements.” Our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including those discussed in Item 1A. “Risk Factors” and elsewhere in this Form 10-K.

Overview

Business

Ryerson Inc. (“Ryerson”), a Delaware corporation, conducts materials distribution operations in the United States through its wholly-owned direct subsidiary Joseph T. Ryerson & Son, Inc. (“JT Ryerson”), in Canada through its indirect wholly-owned subsidiary Ryerson Canada, Inc., a Canadian corporation (“Ryerson Canada”) and in Mexico through its indirect wholly-owned subsidiary Ryerson Metals de Mexico, S. de R.L. de C.V., a Mexican corporation (“Ryerson Mexico”). Ryerson, through its predecessor, has been in business since 1842.

On October 19, 2007, the merger (the “Platinum Acquisition”) of Rhombus Merger Corporation (“Merger Sub”), a Delaware corporation and a wholly-owned subsidiary of Ryerson Holding Corporation (“Ryerson Holding”), formerly named Rhombus Holding Corporation, with and into Ryerson, was consummated in accordance with the Agreement and Plan of Merger, dated July 24, 2007, by and among Ryerson, Ryerson Holding and Merger Sub (the “Merger Agreement”). Upon the closing of the Platinum Acquisition, Ryerson ceased to be a publicly traded company and became a wholly-owned subsidiary of Ryerson Holding. 99% of the issued and outstanding capital stock of Ryerson Holding is owned by affiliates of Platinum Equity, LLC (“Platinum”).

On October 31, 2008, Ryerson Holding acquired an additional 20% interest in Ryerson China Limited (“Ryerson China”), formerly named VSC-Ryerson China Limited, a joint venture with Van Shung Chong Holdings Limited (“VSC”), increasing Ryerson Holding’s ownership percentage to 60%. On December 31, 2008, VSC sold an additional 20% interest in Ryerson China: 10% was purchased by a wholly-owned subsidiary of Ryerson Holding and the remaining 10% was purchased by a subsidiary of Ryerson. Ryerson’s total contribution in 2008 was $7.1 million, increasing its direct ownership percentage to 50%. On July 12, 2010, we acquired VSC’s remaining 20% equity interest in Ryerson China. As a result, Ryerson China is now a wholly-owned subsidiary of Ryerson Holding. We consolidated the operations of Ryerson China as of October 31, 2008.

Unless the context indicates otherwise, Ryerson, JT Ryerson, Ryerson Canada, Ryerson China, and Ryerson Mexico together with their subsidiaries, are collectively referred to herein as “Ryerson,” “we,” “us,” “our,” “Successor” or the “Company”.

In addition to our United States, Canada, Mexico and China operations, we conducted materials distribution operations in India through Tata Ryerson Limited, a joint venture with the Tata Iron & Steel Corporation, an integrated steel manufacturer in India until July 10, 2009 when we sold our 50% investment to our joint venture partner, Tata Steel Limited.

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.

 

19


Table of Contents

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.

Results of Operations

 

     Year Ended
December 31,
2010
    % of Net
Sales
    Year Ended
December 31,
2009
    % of Net
Sales
    Year Ended
December 31,
2008
    % of Net
Sales
 

Net sales

   $ 3,895.5        100.0   $ 3,066.1        100.0   $ 5,309.8        100.0

Cost of materials sold

     3,355.7        86.1        2,610.6        85.1        4,597.7        86.6   
                                                

Gross profit

     539.8        13.9        455.5        14.9        712.1        13.4   

Warehousing, delivery, selling, general and administrative expenses

     505.7        13.0        483.9        15.8        586.1        11.0   

Restructuring and other charges

     12.0        0.3        —          —          —          —     

Gain on insurance settlement

     (2.6     (0.1     —          —          —          —     

Gain on sale of assets

     —          —          (3.3     (0.1     —          —     

Impairment charge on fixed assets

     1.4        0.1        19.3        0.6        —          —     

Pension and other postretirement benefits curtailment (gain) loss

     2.0        0.1        (2.0     —          —          —     
                                                

Operating profit (loss)

     21.3        0.5        (42.4     (1.4     126.0        2.4   

Other expenses

     (78.4     (2.0     (83.1     (2.7     (88.5     (1.7
                                                

Income (loss) before income taxes

     (57.1     (1.5     (125.5     (4.1     37.5        0.7   

Provision for income taxes

     12.9        0.3        66.9        2.2        11.7        0.2   
                                                

Net income (loss)

     (70.0     (1.8     (192.4     (6.3     25.8        0.5   

Less: Net loss attributable to noncontrolling interest

     (4.6     (0.1     (3.1     (0.1     (1.6     —     
                                                

Net income (loss) attributable to Ryerson Inc.

   $ (65.4     (1.7 )%    $ (189.3     (6.2 )%    $ 27.4        0.5
                                                

Comparison of the year ended December 31, 2009 with the year ended December 31, 2010

Net Sales

Net sales increased 27.1% to $3.9 billion in 2010 as compared to $3.1 billion in 2009. Tons sold per ship day were 8,972 in 2010 as compared to 7,496 in 2009. Volume increased 19.7% in 2010 as improvement in the manufacturing sector of the economy favorably impacted all of our product lines. The average selling price per ton increased in 2010 to $1,730 from $1,630 in 2009 reflecting the improvement in market conditions compared to 2009. Average selling prices per ton increased for all of our product lines in 2010 with the largest increase in our stainless steel product line.

 

20


Table of Contents

Cost of Materials Sold

Cost of materials sold increased 28.5% to $3.4 billion in 2010 compared to $2.6 billion in 2009. The increase in cost of materials sold in 2010 compared to 2009 was due to the increase in tons sold resulting from the improvement in the economy along with increases in mill prices. The average cost of materials sold per ton increased to $1,490 in 2010 from $1,388 in 2009. The average cost of materials sold for our stainless steel product line increased more than our other products, in line with the change in average selling price per ton.

During 2010, LIFO expense was $52 million, primarily related to increases in the costs of stainless and carbon steel. During 2009, LIFO income was $174 million primarily related to decreases in inventory prices.

Gross Profit

Gross profit as a percentage of sales was 13.9% in 2010 as compared to 14.9% in 2009. While revenue per ton increased in 2010 as compared to 2009, our cost of materials sold per ton increased at a faster pace resulting in lower gross margins. Gross profit increased 18.5% to $539.8 million in 2010 as compared to $455.5 million in 2009.

Operating Expenses

Operating expenses as a percentage of sales decreased to 13.4% in 2010 from 16.3% in 2009. Operating expenses in 2010 increased $20.6 million from $497.9 million in 2009 primarily due to the following reasons:

 

   

increased bonus and commission expenses of $14.4 million resulting from increased profitability,

 

   

higher salaries and wages of $10.0 million and higher employee benefit costs of $6.7 million,

 

   

higher delivery costs of $7.9 million resulting from higher volume,

 

   

higher facility costs of $7.6 million primarily due to higher operating supply costs,

 

   

the $12.0 million restructuring and other charges along with the $2.0 million pension curtailment loss in 2010, and

 

   

the $1.4 million impairment charges on fixed assets included in 2010 results.

These changes were partially offset by:

 

   

the impairment charge of $19.3 million in 2009 to reduce the carrying value of certain assets to their net realizable value,

 

   

lower reorganization costs of $14.7 million in 2010 excluding the $12.0 million restructuring and other charges,

 

   

lower bad debt expense of $5.5 million, and

 

   

lower legal expenses of $3.0 million.

On a per ton basis, 2010 operating expenses decreased to $230 per ton from $265 per ton in 2009 due to the relatively greater increase in volume being partially offset by higher operating expenses.

Operating Profit (Loss)

As a result of the factors above, in 2010 we reported an operating profit of $21.3 million, or 0.5% of sales, compared to an operating loss of $42.4 million, or 1.4% of sales, in 2009.

Other Expenses

Interest and other expense on debt increased to $75.2 million in 2010 from $72.9 million in 2009 primarily due to higher amortization of credit facility issuance costs in China and higher average credit agreement borrowings in the U.S. as compared to the prior year. Other income and (expense), net was an expense of $3.2 million in 2010 compared to expense of $10.2 million in 2009. The year 2010 was negatively impacted by $2.6 million of foreign exchange loss realized upon the repayment of a long-term loan to our Canadian operations. The year 2009 was negatively impacted by $11.8 million of foreign exchange losses related to short-term loans from our Canadian operations, partially offset by the recognition of a $2.7 million gain on the retirement of a portion of the 2014 and 2015 Notes we repurchased at a discount.

Provision for Income Taxes

Income tax expense was $12.9 million in 2010 as compared to $66.9 million in 2009. The $12.9 million income tax expense in 2010 primarily relates to additional valuation allowance recorded against deferred tax assets due to changes in the deferred tax asset amounts, adjustments to reflect the filing of the Company’s 2009 federal income tax return and to foreign income tax expense. During

 

21


Table of Contents

2009, the Company recorded a charge of $92.3 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. In 2009, we also incurred a $14.5 million income tax charge and an $8.5 million capital gains withholding tax in India on the sale of our joint venture interest. Partially offsetting the charges in 2009 is the tax benefit recognized for losses at the statutory tax rates and an $8.5 million foreign tax credit in the jurisdictions of our foreign subsidiaries.

Noncontrolling Interest

Ryerson China’s results of operations was a loss in 2010 and 2009. The portion of the loss attributable to the noncontrolling interest in Ryerson China was $4.6 million for 2010 and $3.1 million for 2009.

Comparison of the year ended December 31, 2008 with the year ended December 31, 2009

Net Sales

Net sales decreased 42.3% to $3.1 billion in 2009 as compared to $5.3 billion in 2008. Tons sold per ship day were 7,496 in 2009 as compared to 9,902 in 2008. Volume decreased 24.9% in 2009 due to significant economic weakness in the manufacturing sector impacting all of our product lines. Revenue per ship day was $12.2 million in 2009 as compared to $21.0 million in 2008. The average selling price per ton decreased in 2009 to $1,630 from $2,120 in 2008 reflecting the significant deterioration of market conditions compared to 2008. Average selling prices per ton decreased for each of our product lines in 2009 with the largest decline in our stainless steel product line.

Cost of Materials Sold

Cost of materials sold decreased 43.2% to $2.6 billion as compared to $4.6 billion in 2008. The decrease in cost of materials sold in 2009 compared to 2008 is due to the decrease in tons sold resulting from the economic recession along with decreases in average mill prices. The average cost of materials sold per ton decreased to $1,388 in 2009 from $1,836 in 2008. Our average cost of materials sold per ton decreased for each of our product lines in 2009. The average cost of materials sold for our stainless steel product line declined more than our other products, in line with the change in average selling prices per ton.

Inventory reductions during the year 2008 resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of purchases in the year. The LIFO liquidation gain was $16 million for the year 2008. During 2008, LIFO expense was $91 million, which included the $16 million LIFO liquidation gain primarily related to increases in the costs of carbon steel. During 2009, LIFO income was $174 million primarily related to decreases in inventory prices.

Gross Profit

Gross profit as a percentage of sales was 14.9% in 2009 as compared to 13.4% in 2008. While revenue per ton declined in 2009 as compared to 2008, we were able to reduce our cost of materials sold per ton at a faster pace resulting in higher gross margins. Gross profit decreased 36.0% to $455.5 million in 2009 as compared to $712.1 million in 2008.

Operating Expenses

Operating expenses as a percentage of sales increased to 16.3% in 2009 from 11.0% in 2008. Operating expenses in 2009 decreased primarily due to lower wages and salaries of $36.0 million and lower employee benefit expenses of $17.7 million resulting from lower employment levels after workforce reductions, lower bonus and commission expenses of $17.8 million resulting from reduced profitability, lower delivery expenses of $27.6 million resulting from reduced volume, lower facility expenses of $13.8 million primarily due to plant closures, the $3.3 million gain on the sale of assets, and the $2.0 million other postretirement benefit curtailment gain, partially offset by an impairment charge of $19.3 million to reduce the carrying value of certain assets to their net realizable value, an incremental $8.4 million impact from a full year of expenses for our joint venture in China, Ryerson China, which we began to fully consolidate in November of 2008 and higher legal expenses of $2.7 million. On a per ton basis, the 2009 operating expenses increased to $265 per ton from $234 per ton in 2008 due to the relatively greater decline in volume being partially offset by lower operating expenses.

Operating Profit (Loss)

As a result of the factors above, in 2009 we incurred an operating loss of $42.4 million, or 1.4% of sales, compared to an operating profit of $126.0 million, or 2.4% of sales, in 2008.

 

22


Table of Contents

Other Expenses

Interest and other expense on debt decreased to $72.9 million in the year 2009 from $109.9 million in 2008 primarily due to lower average borrowings and lower interest rates on variable rate debt as compared to the same period in the prior year, as well as the impact of retirement of a portion of the 2014 and 2015 Notes. Other income and (expense), net was an expense in 2009 in the amount of $10.2 million compared to income of $21.4 million in 2008. The year 2009 was negatively impacted by $11.8 million of foreign exchange losses related to short-term loans from our Canadian operations, partially offset by the recognition of a $2.7 million gain on the retirement of a portion of the 2014 and 2015 Notes we repurchased at a discount. In 2008, we recognized a gain of $18.2 million on the retirement of a portion of the 2014 and 2015 Notes, which we repurchased at a discount.

Provision for Income Taxes

Income tax expense was $66.9 million in 2009 as compared to $11.7 million in 2008. During 2009, the Company recorded a charge of $92.3 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. In 2009, we also incurred a $14.5 million income tax charge and an $8.5 million capital gains withholding tax in India on the sale of our joint venture interest. Partially offsetting the charges in 2009 is the tax benefit recognized for losses at the statutory tax rates and an $8.5 million foreign tax credit in the jurisdictions of our foreign subsidiaries. The effective tax rate was 31.2% in 2008. The tax rate in 2008 reflected a higher proportion of pretax income from joint ventures with lower foreign income tax rates and the Company’s qualification for and the recognition of a manufacturing tax deduction for the first time in 2008.

Noncontrolling Interest

Based on our 50% direct ownership of Ryerson China and the additional 30% of Ryerson China owned by Ryerson Holding and its affiliates, we consolidated the operations of Ryerson China as of October 31, 2008. In the period from October 31, 2008 to December 31, 2008, Ryerson China’s results of operations was a loss. The portion of the loss attributable to the noncontrolling interest in Ryerson China was $1.6 million. Ryerson China also incurred a loss in 2009 due to the economic weakness in the manufacturing industry in China. The portion attributable to the noncontrolling interest in Ryerson China was $3.1 million for 2009.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash and cash equivalents, cash flows from operations and borrowing availability under our $1.35 billion revolving credit facility agreement that matures on the earliest of (a) March 14, 2016, (b) the date that occurs 90 days prior to the scheduled maturity date of the Floating Rate Senior Secured Notes due November 1, 2014 (“2014 Notes”), if the 2014 Notes are then outstanding and (c) the date that occurs 90 days prior to the scheduled maturity date of the 12% Senior Secured Notes due November 1, 2015 (“2015 Notes”) (together, with the 2014 Notes, the “Ryerson Notes”), if the 2015 Notes are then outstanding (as amended, 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:

 

     Year Ended December 31,  
     2010     2009     2008  
     (In millions)  

Net cash provided by (used in) operating activities

   $ (198.4   $ 284.7      $ 279.3   

Net cash provided by (used in) investing activities

     (44.4     32.1        24.0   

Net cash provided by (used in) financing activities

     184.5        (320.9     (222.0

Effect of exchange rates on cash

     5.6        10.1        (7.6
                        

Net increase (decrease) in cash and cash equivalents

   $ (52.7   $ 6.0      $ 73.7   
                        

The Company had cash and cash equivalents at December 31, 2010 of $62.2 million, compared to $114.9 million at December 31, 2009 and $108.9 million at December 31, 2008. The Company had $960 million and $754 million of total debt outstanding, a debt-to-capitalization ratio of 93% and 82% and $317 million and $268 million available under the Ryerson Credit Facility at December 31, 2010 and 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 $393 million at December 31, 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 GAAP and total liquidity is not necessarily an indication of whether cash flow will be sufficient to fund our cash requirements. At December 31, 2008, the Company had $1,030 million of total debt outstanding, a debt-to-capitalization ratio of 73% and $469 million available under the Ryerson Credit Facility.

 

23


Table of Contents

During the year ended December 31, 2010, net cash used by operating activities was $198.4 million. During the years ended December 31, 2009 and 2008, net cash provided by operating activities was $284.7 million and $279.3 million, respectively. Net income (loss) was $(70.0) million, $(192.4) million and $25.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. Cash used by operating activities was $198.4 million during the year ended December 31, 2010 and was primarily the result of an increase in inventories of $170.9 million resulting from higher inventory purchases to support increased sales levels, an increase in accounts receivable of $138.5 million reflecting higher sales levels, partially offset by an increase in accounts payable of $102.4 million. Cash provided by operating activities of $284.7 million during the year ended December 31, 2009 was primarily the result of a decrease in inventories of $227.5 million resulting from management’s efforts to reduce inventory in a weak economic environment, a decrease in accounts receivable of $150.7 million reflecting lower volume in 2009 and a decrease in taxes receivable of $43.1 million. Cash provided by operating activities of $279.3 million during the year ended December 31, 2008 was primarily the result of a decrease in inventories of $263.1 million resulting from management’s efforts to reduce inventory in a weak economic environment and a decrease in accounts receivable of $120.0 million reflecting lower volume in 2008, partially offset by a decrease in accounts payable of $80.1 million and a decrease in accrued liabilities of $50.3 million.

Net cash used by investing activities was $44.4 million in 2010. Net cash provided by investing activities was $32.1 million and $24.0 million in 2009 and 2008, respectively. Capital expenditures for the years ended December 31, 2010, 2009 and 2008, was $27.0 million, $22.8 million and $30.1 million, respectively. The Company sold property, plant and equipment generating cash proceeds of $5.5 million, $18.4 million and $31.7 million during the years ended December 31, 2010, 2009 and 2008, respectively. In 2010, the Company made two acquisitions, resulting in a cash outflow of $12.0 million. The Company sold its 50 percent investment in Tata Ryerson Limited to its joint venture partner, Tata Steel Limited, during the third quarter of 2009, generating cash proceeds of $49.0 million. In 2008, cash increased $30.5 million due to fully consolidating the results of Ryerson China as of October 31, 2008.

Net cash provided by financing activities was $184.5 million for the year ended December 31, 2010, primarily related to increased credit facility borrowings to finance accounts receivable and inventory to support increased sales levels in 2010. We also acquired VSC’s, our former joint venture partner, remaining 20 percent ownership in Ryerson China for $17.5 million. Net cash used in financing activities was $320.9 million for the year ended December 31, 2009, primarily related to credit facility repayments made possible from lower working capital requirements as well as a $35.0 million dividend paid to Ryerson Holding. Net cash used in financing activities was $222.0 million for the year ended December 31, 2008, primarily due to the repurchase of our Ryerson Notes for $71.7 million, a net reduction in borrowings under the Ryerson Credit Facility of $133.2 million and the payment of a $25.0 million dividend to Ryerson Holding.

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 Consolidated Balance Sheet increased to $960.2 million at December 31, 2010 from $754.2 million at December 31, 2009.

Total debt outstanding as of December 31, 2010 consisted of the following amounts: $457.3 million borrowing under the Ryerson Credit Facility, $102.9 million under the 2014 Notes, $376.2 million under the 2015 Notes, $19.7 million of foreign debt and $4.1 million under the 8 1/4% Senior Notes due 2011 (“2011 Notes”). Availability at December 31, 2010 and 2009 under the Ryerson Credit Facility was $317 million and $268 million, respectively. Discussion of our outstanding debt follows.

Ryerson Credit Facility

On October 19, 2007, Ryerson entered into the Ryerson Credit Facility, a 5-year, $1.35 billion revolving credit facility agreement with a maturity date of October 18, 2012. On March 14, 2011, Ryerson amended the terms of the Ryerson Credit Facility to, among other things, extend the maturity date to the earliest of (a) March 14, 2016, (b) the date that occurs 90 days prior to the scheduled maturity date of the 2014 Notes, if the 2014 Notes are then outstanding and (c) the date that occurs 90 days prior to the scheduled maturity date of the 2015 Notes, if the 2015 Notes are then outstanding. At December 31, 2010, Ryerson had $457.3 million of outstanding borrowings, $24 million of letters of credit issued and $317 million available under the $1.35 billion 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 a borrower. The weighted average interest rate on the borrowings under the Ryerson Credit Facility was 2.1 percent at December 31, 2010 and 2009.

 

24


Table of Contents

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 the Company’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 for 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. Ryerson 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, Ryerson 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. 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.

Proceeds from borrowings under the Ryerson Credit Facility and repayments of borrowings thereunder that are reflected in the Consolidated Statements of Cash Flows represent borrowings under the Company’s revolving credit agreement with original maturities greater than three months. Net proceeds (repayments) under the Ryerson Credit Facility represent borrowings under the Ryerson Credit Facility with original maturities less than three months.

On March 14, 2011, we amended the Ryerson Credit Facility to, among other things in addition to extending the maturity date, modify the lending syndicate and amend certain financial covenants and pricing terms as described therein. A copy of the amendment to the Ryerson Credit Facility is attached hereto as Exhibit 10.14 and is incorporated in this Annual Report by reference.

Ryerson Notes

On October 19, 2007, Merger Sub issued 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 Ryerson’s existing and future subsidiaries (including those existing and future domestic subsidiaries that are co-borrowers or guarantee obligations under the Ryerson Credit Facility).

At December 31, 2010, $376.2 million of the 2015 Notes and $102.9 million of the 2014 Notes remain outstanding. During 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 consolidated statement of operations. During 2008, $42.8 million principal amount of the 2015 Notes and $47.1 million principal amount of the 2014 Notes were repurchased and retired, resulting in the recognition of an $18.2 million gain within other income and (expense), net on the 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.

 

25


Table of Contents

The Ryerson Notes will be redeemable by the Company, in whole or in part, at any time on or after November 1, 2011 at a specified redemption price. If a change of control occurs, the Company must offer to purchase the Ryerson Notes at 101% of their principal amount, plus accrued and unpaid interest.

Pursuant to a registration rights agreement, we 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. The Company did not consummate an exchange offer by November 12, 2008 and therefore, we were required to pay additional interest to the holders of the Ryerson Notes. As a result, the Company paid an additional approximately $0.6 million in interest to the holders of the Ryerson Notes with the interest payment on May 1, 2009. The Company completed the exchange offer on April 9, 2009. Upon completion of the exchange offer, our obligation to pay additional interest ceased.

Foreign Debt

At December 31, 2010, Ryerson China’s total foreign borrowings were $19.7 million, of which, $17.9 million was owed to banks in Asia at a weighted average interest rate of 4.3% secured by inventory and property, plant and equipment. Ryerson China also owed $1.8 million at December 31, 2010 to other parties at a weighted average interest rate of 1.0%. 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 $14 million and $8 million at December 31, 2010 and 2009, respectively. Letters of credit issued by our foreign subsidiaries totaled $7 million and $12 million at December 31, 2010 and 2009, respectively.

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

At December 31, 2010 and 2009, $4.1 million of the 8   1/4% Senior Notes due 2011 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 (“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 December 31, 2010, the accreted value of the Ryerson Holding Notes was $251.1 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 Ryerson Holding, to service the Ryerson Holding Notes. 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 the retirement of the Ryerson Holding Notes at maturity, Ryerson Holding may default on the Ryerson Holding Notes unless other sources of funding are available.

 

26


Table of Contents

Pursuant to a registration rights agreement, Ryerson Holding agreed to file with the SEC by October 26, 2010, a registration statement with respect to an offer to exchange each of the Ryerson Holding Notes for a new issue of Ryerson Holding’s debt securities registered under the Securities Act, with terms substantially identical to those of the Ryerson Holding Notes and to consummate an exchange offer no later than February 23, 2011. Ryerson Holding completed the exchange offer on December 7, 2010. As a result of completing the exchange offer, Ryerson Holding satisfied its obligations under the registration rights agreement covering the Ryerson Holding Notes.

Pension Funding

The Company made contributions of $46.6 million in 2010, $7.5 million in 2009, and $16.8 million in 2008 to improve the Company’s pension plans funded status. At December 31, 2010, as reflected in “NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Note 10: Employee Benefits” pension liabilities exceeded plan assets by $306 million. The Company anticipates that it will have a minimum required pension contribution of approximately $44 million in 2011 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. Future contribution requirements depend on the investment returns on plan assets, the impact of discount rates on pension liabilities, and changes in regulatory requirements. The Company is unable to determine the amount or timing of any such contributions required by ERISA or whether any such contributions would have a material adverse effect on the Company’s financial position or cash flows. 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 2011.

Income Tax Payments

The Company received income tax refunds of $46.8 million and $29.1 million in 2010 and 2009, respectively. The Company paid income taxes of $9.7 million in 2008.

Off-Balance Sheet Arrangements

In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as letters of credit, which totaled $31 million as of December 31, 2010. Additionally, other than normal course long-term operating leases included in the following Contractual Obligations table, we do not have any material off-balance sheet financing arrangements. None of these off-balance sheet arrangements are likely to have a material effect on our current or future financial condition, results of operations, liquidity or capital resources.

Contractual Obligations

The following table presents contractual obligations at December 31, 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

     457         —           457         —           —     

Foreign Debt

     20         20         —           —           —     

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

     266         63         114         89         —     

Purchase Obligations(3)

     35         35         —           —           —     

Capital leases

     1         —           1         —           —     

Operating leases

     97         20         27         17         33   
                                            

Total

   $ 1,359       $ 142       $ 599       $ 585       $ 33   
                                            

 

(1) The contractual obligations disclosed above do not include our potential future pension funding obligations (see previous discussion under “Pension Funding” caption).
(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.

 

27


Table of Contents

Capital Expenditures

Capital expenditures during 2010, 2009 and 2008 totaled $27.0 million, $22.8 million and $30.1 million, respectively. Capital expenditures were primarily for machinery and equipment in 2010, 2009 and 2008.

The Company anticipates capital expenditures, excluding acquisitions, to be approximately $50 million in 2011, which will maintain or improve the Company’s processing capacity.

Restructuring

2010

During 2010, the Company paid $0.7 million related to the exit plan liability recorded on October 19, 2007, as part of the Platinum Acquisition. The remaining balance of $0.2 million of tenancy and other costs related to the Platinum Acquisition exit plan liability as of December 31, 2010 is expected to be paid during 2011.

In the fourth quarter of 2010, the Company recorded a $12.5 million charge related to the closure of one of its facilities. The charge consists of restructuring expenses of $0.4 million for employee-related costs, including severance for 66 employees, and additional non-cash pensions and other post-retirement benefits costs totaling $12.1 million. Included in the non-cash pension charge is a pension curtailment loss of $2.0 million. In the fourth quarter of 2010, the Company paid $0.3 million in employee costs related to this facility closure. The remaining $0.1 million balance is expected be paid in 2011. The Company expects to record additional restructuring charges of less than $1 million related to this facility closure in 2011.

2009

During 2009, the Company paid $6.4 million related to the exit plan liability recorded on October 19, 2007, as part of the Platinum Acquisition. The Company also recorded a $0.3 million reduction to the exit plan liability primarily due to lower property taxes on closed facilities than estimated in the initial restructuring plan.

2008

During 2008, the Company paid $29.3 million related to the exit plan liability recorded on October 19, 2007, as part of the Platinum Acquisition. The Company also recorded a $4.4 million reduction to the exit plan liability primarily due to 277 fewer employee terminations than anticipated in the initial restructuring plan. The reduction to the exit plan liability reduced goodwill by $2.6 million, net of tax. The Company also recorded a $0.4 million reduction to the exit plan liability in the fourth quarter of 2008 which was credited to “Warehousing, delivery, selling, general and administrative expense.”

Other Charges

In the fourth quarter of 2010, the Company also recorded a charge of $1.5 million for costs related to the retirement of its former Chief Executive Officer, which is recorded within the “Restructuring and other charges” line of the consolidated statement of operations.

Deferred Tax Amounts

At December 31, 2010, the Company had a net deferred tax liability of $91 million comprised primarily of a deferred tax asset of $120 million related to pension liabilities, a deferred tax asset related to postretirement benefits other than pensions of $67 million, $38 million of Alternative Minimum Tax (“AMT”) credit carryforwards, and deferred tax assets of $41 million related to federal and local tax loss carryforwards, offset by a valuation allowance of $125 million, and deferred tax liabilities of $117 million related to fixed assets and $135 million related to inventory.

The Company’s deferred tax assets include $26 million related to US federal net operating loss (“NOL”) carryforwards, $12 million related to state NOL carryforwards and $3 million related to non-U.S. NOL carryforwards, available at December 31, 2010.

In accordance with FASB 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 analyze, among other things, our recent history of earnings and cash flows, and the nature and timing of future deductions and benefits represented by the deferred tax assets. As a result of U.S. pre-tax losses incurred in periods leading up to the second quarter of 2009, we were unable to rely on the positive evidence of projected future income to support all deferred tax assets. After considering both the positive and negative

 

28


Table of Contents

evidence available at the end of 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 with a corresponding non-cash charge of $74.3 million to the provision for income taxes. During the second half of 2009, an additional non-cash charge of $23.9 million was recorded, increasing the valuation allowance to $98.4 million at December 31, 2009. Of the charges recorded during 2009, $92.3 million of this valuation allowance was charged to income tax provision and $5.9 million was charged to other comprehensive income. The valuation allowance was increased to $124.8 million at December 31, 2010. Of the charges recorded during 2010, $24.5 million was charged to income tax provision and $4.4 million was charged to other comprehensive income offset by $2.5 million of a change in net deferred tax assets for which a valuation allowance was fully provided. 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.

Critical Accounting Estimates

Preparation of this Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of sales and expenses during the reporting period. Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in Item 8 under the caption “NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Note 1: Statement of Accounting and Financial Policies.” These policies have been consistently applied and address such matters as revenue recognition, depreciation methods, inventory valuation, asset impairment recognition and pension and postretirement expense. While policies associated with estimates and judgments may be affected by different assumptions or conditions, we believe our estimates and judgments associated with the reported amounts are appropriate in the circumstances. Actual results may differ from those estimates.

We consider the policies discussed below as critical to an understanding of our financial statements, as application of these policies places the most significant demands on management’s judgment, with financial reporting results relying on estimation of matters that are uncertain.

Provision for allowances, claims and doubtful accounts: We perform ongoing credit evaluations of customers and set credit limits based upon review of the customers’ current credit information and payment history. We monitor customer payments and maintain a provision for estimated credit losses based on historical experience and specific customer collection issues that we have identified. Estimation of such losses requires adjusting historical loss experience for current economic conditions and judgments about the probable effects of economic conditions on certain customers. We cannot guarantee that the rate of future credit losses will be similar to past experience. Provisions for allowances and claims are based upon historical rates, expected trends and estimates of potential returns, allowances, customer discounts and incentives. We consider all available information when assessing the adequacy of the provision for allowances, claims and doubtful accounts.

Inventory valuation: Our inventories are valued at cost, which is not in excess of market. Inventory costs reflect metal and in-bound freight purchase costs, third-party processing costs and internal direct and allocated indirect processing costs. Cost is primarily determined by the LIFO method. We regularly review inventory on hand and record provisions for obsolete and slow-moving inventory based on historical and current sales trends. Changes in product demand and our customer base may affect the value of inventory on hand which may require higher provisions for obsolete inventory.

Deferred tax asset: We record operating loss and tax credit carryforwards and the estimated effect of temporary differences between the tax basis of assets and liabilities and the reported amounts in the Consolidated Balance Sheet. We follow detailed guidelines in each tax jurisdiction when reviewing tax assets recorded on the balance sheet and provide for valuation allowances as required. Deferred tax assets are reviewed for recoverability based on historical taxable income, the expected reversals of existing temporary differences, tax planning strategies and on forecasts of future taxable income. The forecasts of future taxable income require assumptions regarding volume, selling prices, margins, expense levels and industry cyclicality. If we are unable to generate sufficient future taxable income in certain tax jurisdictions, we will be required to record additional valuation allowances against our deferred tax assets related to those jurisdictions.

Long-lived Assets and Other Intangible Assets: Long-lived assets held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment is recognized. Any related impairment loss is calculated based upon comparison of the fair value to the carrying value of the asset. Separate intangible assets that have finite useful lives are amortized over their useful lives. An impaired intangible asset would be written down to fair value, using the discounted cash flow method.

Goodwill: In assessing the recoverability of our goodwill and other intangibles we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded

 

29


Table of Contents

goodwill is impaired. Our impairment review is a two-step process. In step one, we compare the fair value of the reporting unit in which goodwill resides to its carrying value. If the carrying amount exceeds the fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. We estimate the reporting unit’s fair value using an income approach based on discounted future cash flows that requires us to estimate income from operations based on projected results and discount rates based on a weighted average cost of capital of comparable companies. The income approach is subject to a comparison for reasonableness to a market approach at the date of valuation. If these estimates or their related assumptions for commodity prices and demand change in the future, we may be required to record impairment charges for these assets not previously recorded. The Company cannot predict the occurrence of events that might adversely affect the reported value of goodwill. During the fourth quarter of 2010, we reviewed goodwill for impairment and determined that none of the reporting units were at risk of failing step one of the impairment testing.

Pension and postretirement benefit plan assumptions: We sponsor various benefit plans covering a substantial portion of its employees for pension and postretirement medical costs. Statistical methods are used to anticipate future events when calculating expenses and liabilities related to the plans. The statistical methods include assumptions about, among other things, the discount rate, expected return on plan assets, rate of increase of health care costs and the rate of future compensation increases. Our actuarial consultants also use subjective factors such as withdrawal and mortality rates when estimating expenses and liabilities. The discount rate used for U.S. plans reflects the market rate for high-quality fixed-income investments on our annual measurement date (December 31) and is subject to change each year. The discount rate was determined by matching, on an approximate basis, the coupons and maturities for a portfolio of corporate bonds (rated Aa or better by Moody’s Investor Services or AA or better by Standard and Poor’s) to the expected plan benefit payments defined by the projected benefit obligation. The discount rates used for plans outside the U.S. are based on a combination of relevant indices regarding corporate and government securities, the duration of the liability and appropriate judgment. The assumptions used in the actuarial calculation of expenses and liabilities may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact on the amount of pension or postretirement benefit expense we may record in the future.

Legal contingencies: We are involved in a number of legal and regulatory matters including those discussed in Item 8 “NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Note 11: Commitments and Contingencies.” We determine whether an estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We analyze our legal matters based on available information to assess potential liability. We consult with outside counsel involved in our legal matters when analyzing potential outcomes. We cannot determine at this time whether any potential liability related to this litigation would materially affect our financial position, results of operations or cash flows.

Recent Accounting Pronouncements

Recent accounting pronouncements are discussed within Item 8 in the “NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Note 1: Statement of Accounting and Financial Policies.”

 

ITEM 7A. 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 $969 million at December 31, 2010 and $750 million at December 31, 2009 as compared with the carrying value of $960 million and $754 million at December 31, 2010 and 2009, respectively.

We had interest rate swap agreements for $100 million notional amount of pay fixed, receive floating interest rate swaps at December 31, 2010 and 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 December 31, 2010, these agreements had a liability value of $0.8 million. A hypothetical 1% increase in interest rates on variable rate debt would have increased interest expense in 2010 by approximately $4.7 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 $7.1 million outstanding at December 31, 2010 and a liability value of $0.3 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.

 

30


Table of Contents

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 December 31, 2010, we had 1,345 tons of nickel futures or option contracts, 2,325 tons of hot roll coil swaps, and 64 tons of aluminum price swaps outstanding with an asset value of $0.6 million, liability value of $0.1 million, and a value of zero, respectively.

As of December 31, 2010, we had a variable to fixed natural gas price swap with respect to the purchase of 225,000 million British thermal units of natural gas in order to fix the prices at which we purchase that volume of natural gas for our service centers until March 2011. We do not currently account for this contract as a hedge, but rather mark this contract to market with a corresponding offset to current earnings. As of December 31, 2010, our natural gas contract outstanding had a liability value of $0.1 million.

 

31


Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Consolidated Financial Statements

 

     Page  

Financial Statements

  

Report of Independent Registered Public Accounting Firm

     33   

Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008

     34   

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008

     35   

Consolidated Balance Sheets at December 31, 2010 and 2009

     36   

Consolidated Statements of Stockholders’ Equity for the years ended December  31, 2010, 2009 and 2008

     37   

Notes to Consolidated Financial Statements

     38   

Financial Statements Schedule

  

II—Valuation and Qualifying Accounts

     69   

All other schedules are omitted because they are not applicable. The required information is shown in the Financial Statements or Notes thereto.

  

 

32


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Ryerson Inc.

We have audited the accompanying consolidated balance sheets of Ryerson Inc. and Subsidiary Companies (“the Company”) as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2010, 2009 and 2008. Our audits also included the financial statement schedule listed in the index to the consolidated financial statements. These financial statements and schedule are the responsibility of management of the Company. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows, for the years ended December 31, 2010, 2009 and 2008 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Ernst & Young LLP

Chicago, Illinois

March 15, 2011

 

33


Table of Contents

RYERSON INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions)

 

     Year Ended December 31,  
     2010     2009     2008  

Net sales

   $ 3,895.5      $ 3,066.1      $ 5,309.8   

Cost of materials sold

     3,355.7        2,610.6        4,597.7   
                        

Gross profit

     539.8        455.5        712.1   

Warehousing, delivery, selling, general and administrative

     505.7        483.9        586.1   

Restructuring and other charges

     12.0        —          —     

Gain on insurance settlement

     (2.6     —          —     

Gain on sale of assets

     —          (3.3     —     

Impairment charge on fixed assets

     1.4        19.3        —     

Pension and other postretirement benefits curtailment (gain) loss

     2.0        (2.0     —     
                        

Operating profit (loss)

     21.3        (42.4     126.0   

Other expense:

      

Other income and (expense), net

     (3.2     (10.2     21.4   

Interest and other expense on debt

     (75.2     (72.9     (109.9
                        

Income (loss) before income taxes

     (57.1     (125.5     37.5   

Provision for income taxes

     12.9        66.9        11.7   
                        

Net income (loss)

     (70.0     (192.4     25.8   

Less: Net loss attributable to noncontrolling interest

     (4.6     (3.1     (1.6
                        

Net income (loss) attributable to Ryerson Inc.

   $ (65.4   $ (189.3   $ 27.4   
                        

See Notes to Consolidated Financial Statements.

 

34


Table of Contents

RYERSON INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

     Year Ended December 31,  
     2010     2009     2008  

Operating Activities:

      

Net income (loss)

   $ (70.0   $ (192.4   $ 25.8   
                        

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

      

Depreciation and amortization

     38.6        37.1        37.7   

Deferred income taxes

     58.2        56.2        (12.8

Provision for allowances, claims and doubtful accounts

     3.0       8.5        11.5   

Restructuring and other charges

     12.0        —          —     

Gain on sale of assets

     —          (3.3     —     

Impairment charge on fixed assets

     1.4        19.3        —     

Pension and other postretirement benefits curtailment (gain) loss

     2.0        (2.0     —     

Gain on retirement of debt

     —          (2.7     (18.2

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

      

Receivables

     (138.5     142.2        108.5   

Inventories

     (170.9     227.5        263.1   

Other assets

     8.6        (1.3     3.7   

Accounts payable

     102.4        (0.7     (80.1

Accrued liabilities

     (2.5     (38.8     (50.3

Accrued taxes payable/receivable

     (5.5     43.1        15.7   

Deferred employee benefit costs

     (36.9     (10.0     (19.2

Other items

     (0.3     2.0        (6.1
                        

Net adjustments

     (128.4     477.1        253.5   
                        

Net cash provided by (used in) operating activities

     (198.4     284.7        279.3   
                        

Investing Activities:

      

Acquisitions, net of cash acquired

     (12.0     —          —     

Decrease (increase) in restricted cash

     3.9        (12.5     (1.7

Capital expenditures

     (27.0     (22.8     (30.1

Investment in joint venture

     —          —          (7.1

Increase in cash due to consolidation of joint venture

     —          —          30.5   

Loan to joint venture

     —          —          (0.3

Proceeds from sale of joint venture interest

     —          49.0        1.0   

Proceeds from sales of property, plant and equipment

     5.5        18.4        31.7   

Other investments

     (14.8     —          —     
                        

Net cash provided by (used in) investing activities

     (44.4     32.1        24.0   
                        

Financing Activities:

      

Repayment of debt

     (10.6     (3.3     (71.7

Proceeds from credit facility borrowings

     180.0        —          1,210.0   

Repayment of credit facility borrowings

     (180.0     —          (1,770.0

Net proceeds/(repayments) of short-term borrowings

     206.0        (270.1     426.8   

Credit facility issuance costs

     —          —          (0.3

Long-term debt issuance costs

     —          —          (1.7

Purchase of subsidiary shares from noncontrolling interest

     (17.5     —          —     

Net increase (decrease) in book overdrafts

     6.6        (12.5     9.9   

Dividends paid

     —          (35.0     (25.0
                        

Net cash provided by (used in) financing activities

     184.5        (320.9     (222.0
                        

Net increase (decrease) in cash and cash equivalents

     (58.3     (4.1     81.3   

Effect of exchange rate changes on cash and cash equivalents

     5.6        10.1        (7.6
                        

Net change in cash and cash equivalents

     (52.7     6.0        73.7   

Cash and cash equivalents—beginning of period

     114.9        108.9        35.2   
                        

Cash and cash equivalents—end of period

   $ 62.2      $ 114.9      $ 108.9   
                        

Supplemental Disclosures

      

Cash paid (received) during the period for:

      

Interest paid to third parties

   $ 66.1      $ 66.6      $ 106.9   

Income taxes, net

     (46.8     (29.1     9.7   

See Notes to Consolidated Financial Statements.

 

35


Table of Contents

RYERSON INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(In millions, except shares)

 

     At December 31,  
     2010     2009  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 62.2      $ 114.9   

Restricted cash (Note 3)

     15.6        19.5   

Receivables less provision for allowances, claims and doubtful accounts of $8.7 in 2010 and $10.5 in 2009

     499.1        357.6   

Inventories (Note 4)

     783.4        601.7   

Prepaid expenses and other assets

     60.5        46.1   
                

Total current assets

     1,420.8        1,139.8   

Property, plant and equipment, net of accumulated depreciation (Note 5)

     490.4        488.7   

Deferred income taxes (Note 18)

     44.5        53.1   

Other intangible assets (Note 6)

     16.1        12.6   

Goodwill (Note 7)

     73.7        71.4   

Deferred charges and other assets

     15.8        22.0   
                

Total assets

   $ 2,061.3      $ 1,787.6   
                

Liabilities

    

Current liabilities:

    

Accounts payable

   $ 287.3      $ 173.4   

Accrued liabilities:

    

Salaries, wages and commissions

     43.2        36.7   

Deferred income taxes (Note 18)

     135.7        96.1   

Interest on debt

     10.0        9.5   

Other accrued liabilities

     39.4        26.0   

Short-term debt (Note 9)

     26.7        28.4   

Current portion of deferred employee benefits

     15.8        15.6   
                

Total current liabilities

     558.1        385.7   

Long-term debt (Note 9)

     933.5        725.8   

Taxes and other credits

     10.0        11.9   

Deferred employee benefits (Note 10)

     482.3        497.8   
                

Total liabilities

     1,983.9        1,621.2   

Commitments and contingencies (Note 11)

    

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

     (254.7     (189.3

Accumulated other comprehensive loss

     (139.0     (136.1
                

Total Ryerson Inc. stockholders’ equity

     62.5        130.8   

Noncontrolling interest

     14.9        35.6   
                

Total equity

     77.4        166.4   
                

Total liabilities and equity

   $ 2,061.3      $ 1,787.6   
                

See Notes to Consolidated Financial Statements.

 

36


Table of Contents

RYERSON INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions, except shares)

 

     Ryerson Inc. Stockholders               
                               Accumulated Other Comprehensive Income (Loss)               
     Common Stock      Capital in
Excess of
Par Value
    Accumulated
Deficit
    Foreign
Currency
Translation
    Benefit Plan
Liabilities
    Unrealized
Gain on
Available-For-Sale

Investment
     Noncontrolling
Interest
    Total  
     Shares      Dollars      Dollars     Dollars     Dollars     Dollars     Dollars      Dollars     Dollars  

Balance at January 1, 2008

     100       $ —         $ 500.0      $ (11.2   $ (2.6   $ 13.0      $ —         $ —        $ 499.2   

Consolidation of joint venture

     —           —           —          —          —          —          —           47.6        47.6   

Net income

     —           —           —          27.4        —          —          —           (1.6     25.8   

Foreign currency translation

     —           —           —          —          (43.0     —          —           (0.1     (43.1

Dividends

     —           —           (8.8     (16.2     —          —          —           —          (25.0

Additional investment in joint venture

     —           —           —          —          —          —          —           (6.9     (6.9

Changes in unrecognized benefit costs (net of tax benefit of $72.7)

     —           —           —          —          —          (114.7     —           —          (114.7
                                                                           

Balance at December 31, 2008

     100       $ —         $ 491.2      $ —        $ (45.6   $ (101.7   $ —         $ 39.0      $ 382.9   

Net loss

     —           —           —          (189.3     —          —          —           (3.1     (192.4

Foreign currency translation

     —           —           —          —          28.2        —          —           (0.3     27.9   

Dividends

     —           —           (35.0     —          —          —          —           —          (35.0

Changes in unrecognized benefit costs (net of tax benefit of $1.8)

     —           —           —          —          —          (17.0     —           —          (17.0
                                                                           

Balance at December 31, 2009

     100       $ —         $ 456.2      $ (189.3   $ (17.4   $ (118.7   $ —         $ 35.6      $ 166.4   

Net loss

     —           —           —          (65.4     —          —          —           (4.6     (70.0

Foreign currency translation

     —           —           —          —          10.0        —          —           1.4        11.4   

Purchase of subsidiary shares from noncontrolling interest

     —           —           —          —          —          —          —           (17.5     (17.5

Changes in unrecognized benefit costs (net of tax benefit of $0.7)

     —           —           —          —          —          (18.3     —           —          (18.3

Unrealized gain on available-for-sale investment

     —           —           —          —          —          —          5.4         —          5.4   
                                                                           

Balance at December 31, 2010

     100       $ —         $ 456.2      $ (254.7   $ (7.4   $ (137.0   $ 5.4       $ 14.9      $ 77.4   
                                                                           

See Notes to Consolidated Financial Statements.

 

37


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Statement of Accounting and Financial Policies

Business Description and Basis of Presentation. Ryerson Inc. (“Ryerson”), a Delaware corporation, is a wholly-owned subsidiary of Ryerson Holding Corporation (“Ryerson Holding”), formerly named Rhombus Holding Corporation.

On October 19, 2007, the merger (the “Platinum Acquisition”) of Rhombus Merger Corporation (“Merger Sub”), a Delaware corporation and a wholly-owned subsidiary of Ryerson Holding, with and into Ryerson, was consummated in accordance with the Agreement and Plan of Merger, dated July 24, 2007, by and among Ryerson, Ryerson Holding and Merger Sub (the “Merger Agreement”). Upon the closing of the Platinum Acquisition, Ryerson, including JT Ryerson, became wholly-owned direct and indirect subsidiaries of 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”), in Canada through its indirect wholly-owned subsidiary Ryerson Canada, Inc., a Canadian corporation (“Ryerson Canada”) and in Mexico through its indirect wholly-owned subsidiary Ryerson Metals de Mexico, S. de R.L. de C.V., a Mexican corporation (“Ryerson Mexico”). In addition to our North American operations, we conduct 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 50% interest through affiliates of Ryerson Holding. We conducted material distribution operations in India through Tata Ryerson Limited, a joint venture with Tata Steel Limited, an integrated steel manufacturer in India through July 10, 2009, the date on which we sold our ownership interest to our joint venture partner (see Note 15). Unless the context indicates otherwise, Ryerson, JT Ryerson, Ryerson Canada, Ryerson China, and Ryerson Mexico together with their subsidiaries, are collectively referred to herein as “we,” “us,” “our,” or the “Company.”

Principles of Consolidation. The Company consolidates entities in which it owns or controls more than 50% of the voting shares. All significant intercompany balances and transactions have been eliminated in consolidation. Additionally, variable interest entities that do not have sufficient equity investment to permit the entity to finance its activities without additional subordinated support from other parties or whose equity investors lack the characteristics of a controlling financial interest for which the Company is the primary beneficiary are included in the consolidated financial statements.

Business Segments. Financial Accounting Standards Board (“FASB”) 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, in accordance with the criteria set forth in ASC 280.

Use of Estimates. The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to the financial statements. Changes in such estimates may affect amounts reported in future periods.

Reclassifications. Certain prior period amounts have been reclassified to conform to the 2010 presentation.

Equity Investments. Investments in affiliates in which the Company’s ownership is 20% to 50% are accounted for by the equity method. Equity income is reported in “Cost of materials sold” in the Consolidated Statements of Operations. Equity income during the years ended December 31, 2010, 2009 and 2008 totaled zero, $0.7 million and $7.6 million, respectively.

Revenue Recognition. Revenue is recognized in accordance with FASB ASC 605, “Revenue Recognition.” 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 the Company’s distribution sites to its customers. Revenue is recorded net of returns, allowances, customer discounts and incentives. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis.

Provision for allowances, claims and doubtful accounts. We perform ongoing credit evaluations of customers and set credit limits based upon review of the customers’ current credit information and payment history. The Company monitors customer payments and maintains a provision for estimated credit losses based on historical experience and specific customer collection issues that the Company has identified. Estimation of such losses requires adjusting historical loss experience for current economic conditions and judgments about the probable effects of economic conditions on certain customers. The Company cannot guarantee that the rate of future credit losses will be similar to past experience. Provisions for allowances and claims are based upon historical rates, expected trends and estimates of potential returns, allowances, customer discounts and incentives. The Company considers all available information when assessing the adequacy of the provision for allowances, claims and doubtful accounts.

 

38


Table of Contents

Shipping and Handling Fees and Costs. Shipping and handling fees billed to customers are classified in “Net Sales” in our Consolidated Statement of Operations. Shipping and handling costs, primarily distribution costs, are classified in “Warehousing, delivery, selling, general and administrative” expenses in our Consolidated Statement of Operations. These costs totaled $82.1 million, $73.0 million and $100.6 million for the years ended December 31, 2010, 2009 and 2008, respectively.

Benefits for Retired Employees. The Company recognizes the funded status of its defined benefit pension and other postretirement plans in the Consolidated Balance Sheets, with changes in the funded status recognized through accumulated other comprehensive income (loss), net of tax, in the year in which the changes occur. The estimated cost of the Company’s defined benefit pension plan and its postretirement medical benefits are determined annually after considering information provided by consulting actuaries. Key factors used in developing estimates of these liabilities include assumptions related to discount rates, rates of return on investments, future compensation costs, healthcare cost trends, benefit payment patterns and other factors. The cost of these benefits for retirees is accrued during their term of employment. Pensions are funded primarily in accordance with the requirements of the Employee Retirement Income Security Act (“ERISA”) of 1974 and the Pension Protection Act of 2006 into a trust established for the Ryerson Pension Plan. Costs for retired employee medical benefits are funded when claims are submitted. Certain salaried employees are covered by a defined contribution plan, for which the cost is expensed in the period earned.

Cash Equivalents. Cash equivalents reflected in the financial statements are highly liquid, short-term investments with original maturities of three months or less that are an integral part of the Company’s cash management portfolio. Checks issued in excess of funds on deposit at the bank represent “book” overdrafts and are reclassified to accounts payable. Amounts reclassified totaled $32.3 million and $25.7 million at December 31, 2010 and 2009, respectively.

Inventory Valuation. Inventories are stated at the lower of cost or market value. We use the last-in, first-out (“LIFO”) method for valuing our domestic inventories. We use the weighted-average cost and the specific cost methods for valuing our foreign inventories.

Property, Plant and Equipment. Property, plant and equipment are depreciated, for financial reporting purposes, using the straight-line method over the estimated useful lives of the assets. The provision for depreciation in all periods presented is based on the following estimated useful lives of the assets:

 

Land improvements

     20 years   

Buildings

     45 years   

Machinery and equipment

     15 years   

Furniture and fixtures

     10 years   

Transportation equipment

     6 years   

Expenditures for normal repairs and maintenance are charged against income in the period incurred.

Goodwill. In accordance with FASB ASC 350, “Intangibles – Goodwill and Other” (“ASC 350”), goodwill is reviewed at least annually for impairment using a two-step approach. In the first step, the Company tests for impairment of goodwill by estimating the fair values of its reporting units using the present value of future cash flows approach, subject to a comparison for reasonableness to a market approach at the date of valuation. If the carrying amount exceeds the fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. In the second step the implied fair value of the goodwill is estimated as the fair value of the reporting unit used in the first step less the fair value of all other net tangible and intangible assets of the reporting unit. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. In addition, goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company performs its annual impairment testing during the fourth quarter and determined that there was no impairment in 2010.

Long-lived Assets and Other Intangible Assets. Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment is recognized. Any related impairment loss is calculated based upon comparison of the fair value to the carrying value of the asset. Separate intangible assets that have finite useful lives are amortized over their useful lives. An impaired intangible asset would be written down to fair value, using the discounted cash flow method.

Deferred financing costs associated with the issuance of debt are being amortized using the effective interest method over the life of the debt.

 

39


Table of Contents

Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company follows detailed guidelines in each tax jurisdiction when reviewing tax assets recorded on the balance sheet and provides for valuation allowances when it is more likely than not that the asset will not be realized.

Earnings Per Share Data. As the Company’s stock is not publicly traded, earnings (loss) per common share data is excluded from presentation.

Foreign Currency. The Company translates assets and liabilities of its foreign subsidiaries, where the functional currency is the local currency, into U.S. dollars at the current rate of exchange on the last day of the reporting period. Revenues and expenses are translated at the average monthly exchange rates prevailing during the year.

For foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the period. The Company recognized a $2.7 million exchange loss, a $14.9 million exchange loss and a $2.1 million exchange gain for the years ended December 31, 2010, 2009 and 2008, respectively. These amounts are primarily classified in “Other income and (expense), net” in our Consolidated Statement of Operations.

Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update (“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 which will be adopted as of January 1, 2011. The adoption did not have an impact on our financial statements.

In December 2010, the FASB issued ASU No. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” This ASU updates ASC Topic 350, “Intangibles—Goodwill and Other,” to amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company does not have any reporting units with zero or negative carrying amounts as of December 31, 2010. We will adopt this guidance prospectively beginning January 1, 2011.

In December 2010, the FASB issued ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations” to specify that if a company presents comparative financial statements, it should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current period, occurred at the beginning of the comparable prior annual reporting period only. This guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. We will adopt this guidance prospectively beginning January 1, 2011. It is not expected to have a significant impact on the Company.

Note 2: Business Combinations

On January 26, 2010, the Company acquired, through its subsidiary JT Ryerson, 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.

On August 4, 2010, the Company acquired, through its subsidiary JT Ryerson, all of the issued and outstanding capital stock of SFI-Gray Steel Inc. (“SFI”), a steel plate processor based in Houston, Texas. The acquisition is not material to our consolidated financial statements.

On October 31, 2008, Ryerson Holding purchased an additional 20% in Ryerson China from Van Shung Chong Holdings Limited (“VSC”). On December 31, 2008, VSC sold an additional 20% interest in Ryerson China: 10% was purchased by a wholly-owned subsidiary of Ryerson Holding and the remaining 10% was purchased by a subsidiary of Ryerson. Ryerson’s total contribution in 2008 was $7.1 million, increasing its direct ownership percentage to 50%. On July 12, 2010, we acquired VSC’s remaining 20% equity interest in Ryerson China. As a result, Ryerson China is now a wholly-owned subsidiary of Ryerson Holding. We consolidated the operations of Ryerson China as of October 31, 2008. The acquisition did not materially impact the financial statements of Ryerson.

 

40


Table of Contents

Note 3: Restricted Cash

On October 19, 2007, prior to the Platinum Acquisition, the Company deposited $5.0 million in a trust account to fund payments arising from the Platinum Acquisition, primarily payments to the Predecessor Board of Directors. The balance in this trust account totaled $1.8 million and $1.7 million at December 31, 2010 and 2009, respectively. As part of one of our note indentures, proceeds from the sale of property, plant, and equipment are deposited in a restricted cash account. Cash can be withdrawn from this restricted account upon meeting certain requirements. The balance in this account was $6.6 million and $3.0 million at December 31, 2010 and 2009, respectively. In addition, Ryerson China has a restricted cash balance of $2.3 million as of December 31, 2010, which is primarily related to letters of credit that can be presented for product material purchases. At December 31, 2009, Ryerson China had a restricted cash balance of $9.9 million, which was primarily related to a structured foreign currency deposit that could not be withdrawn until its maturity date in March 2010. We also have cash restricted for purposes of covering letters of credit that can be presented for potential insurance claims, which totaled $4.9 million as of December 31, 2010 and 2009.

Note 4: Inventories

Inventories were classified at December 31, 2010 and 2009 as follows:

 

     At December 31,  
     2010      2009  
     (In millions)  

In process and finished products

   $ 783.4       $ 601.7   

If current cost had been used to value inventories, such inventories would have been $20 million and $72 million lower than reported at December 31, 2010 and 2009, respectively. Approximately 86% and 85% of inventories are accounted for under the LIFO method at December 31, 2010 and 2009, respectively. Non-LIFO inventories consist primarily of inventory at our foreign facilities using the weighted-average cost and the specific cost methods. Substantially all of our inventories consist of finished products.

During 2008, inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of current year purchases. The effect of the LIFO liquidation decreased cost of materials sold during 2008 by approximately $16 million and increased net income by approximately $10 million.

Note 5: Property, Plant and Equipment

Property, plant and equipment consisted of the following at December 31, 2010 and 2009:

 

     At December 31,  
     2010     2009  
     (In millions)  

Land and land improvements

   $ 104.0      $ 100.0   

Buildings and leasehold improvements

     198.4        191.4   

Machinery, equipment and other

     290.4        261.7   

Construction in progress

     2.6        3.5   
                

Total

     595.4        556.6   

Less: Accumulated depreciation

     (105.0     (67.9
                

Net property, plant and equipment

   $ 490.4      $ 488.7   
                

The Company recorded $1.4 million and $19.3 million of impairment charges in 2010 and 2009, respectively, related to fixed assets. The impairment charge recorded in 2010 related to certain assets held for sale in order to recognize the assets at their fair value less cost to sell in accordance with FASB ASC 360-10-35-43, “Property, Plant and Equipment – Other Presentation Matters.” Of the $19.3 million impairment charge recorded in 2009, $1.8 million related to certain assets that we determined did not have a recoverable carrying value based on the projected undiscounted cash flows and $17.5 million related to certain assets held for sale in order to recognize the assets at their fair value less cost to sell. The fair values of each property were determined based on appraisals obtained from a third party, pending sales contracts, or recent listing agreements with third party brokerage firms. In total, the Company had $14.3 million and $24.0 million of assets held for sale, classified within “Other current assets” as of December 31, 2010 and 2009, respectively.

 

41


Table of Contents

Note 6: Intangible Assets

The following summarizes the components of intangible assets at December 31, 2010 and 2009:

 

     At December 31, 2010      At December 31, 2009  

Amortized intangible assets

   Gross
Carrying
Amount
     Accumulated
Amortization
    Net      Gross
Carrying
Amount
     Accumulated
Amortization
    Net  
     (In millions)  

Customer relationships

   $ 16.5       $ (3.9   $ 12.6       $ 15.1       $ (2.6   $ 12.5   

Developed technology / product know-how

     1.9         (0.1     1.8         —           —          —     

Non-compete agreements

     1.2         (0.2     1.0         0.1         —          0.1   

Trademarks

     0.8         (0.1     0.7         —           —          —     
                                                   

Total intangible assets

   $ 20.4       $ (4.3   $ 16.1       $ 15.2       $ (2.6   $ 12.6   
                                                   

Amortization expense related to intangible assets for the years ended December 31, 2010, 2009 and 2008 was $1.7 million, $1.2 million and $1.2 million, respectively.

Other intangible assets are amortized over a period between 2 and 13 years. Estimated amortization expense related to intangible assets at December 31, 2010, for each of the years in the five year period ending December 31, 2015 and thereafter is as follows:

 

     Estimated
Amortization Expense
 
     (In millions)  

For the year ended December 31, 2011

   $ 2.2   

For the year ended December 31, 2012

     2.2   

For the year ended December 31, 2013

     2.2   

For the year ended December 31, 2014

     2.1   

For the year ended December 31, 2015

     1.8   

For the years ended thereafter

     5.6   

Note 7: Goodwill

The following is a summary of changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2009:

 

     Carrying
Amount
 
     (In millions)  

Balance at January 1, 2009

   $ 76.4   

Adjustments to purchase price

     (4.5

Changes due to foreign currency translation

     (0.5
        

Balance at December 31, 2009

   $ 71.4   

Acquisitions and adjustments to purchase price

     1.9   

Changes due to foreign currency translation

     0.4   
        

Balance at December 31, 2010

   $ 73.7   
        

In 2010, the Company recognized $5.9 million of goodwill related to the TSP and SFI acquisitions. The goodwill balance for TSP, $3.1 million, is not deductible for income tax purposes. The goodwill balance for SFI, $2.8 million, is deductible for income tax purposes. The Company made adjustments to the purchase price of $4.0 million and $4.5 million during the years ended December 31, 2010 and 2009, respectively.

 

42


Table of Contents

Note 8: Restructuring and Other Charges

The following summarizes restructuring accrual activity for the years ended December 31, 2010, 2009 and 2008:

 

     Employee
Related
Costs
    Tenancy
and Other
Costs
    Total
Restructuring
Costs
 
     (In millions)  

Balance at January 1, 2008

   $ 38.8      $ 3.0      $ 41.8   

Adjustment to plan liability

     (4.1     (0.3     (4.4

Cash payments

     (28.1     (1.2     (29.3

Reduction to reserve

     (0.4     —          (0.4
                        

Balance at December 31, 2008

   $ 6.2      $ 1.5      $ 7.7   

Adjustment to plan liability

     —          (0.3     (0.3

Cash payments

     (6.1     (0.3     (6.4

Reclassifications

     0.4        (0.4     —     

Reduction to reserve

     (0.1     —          (0.1
                        

Balance at December 31, 2009

   $ 0.4      $ 0.5      $ 0.9   

Restructuring charges

     12.5        —          12.5   

Cash payments

     (0.6     (0.4     (1.0

Adjustments for pension and other post-retirement termination non-cash charges

     (12.1     —          (12.1

Reclassifications

     (0.1     0.1        —     
                        

Balance at December 31, 2010

   $ 0.1      $ 0.2      $ 0.3   
                        

2010

During 2010, the Company paid $0.7 million related to the exit plan liability recorded on October 19, 2007, as part of the Platinum Acquisition. The remaining balance of $0.2 million of tenancy and other costs related to the Platinum Acquisition exit plan liability as of December 31, 2010 is expected to be paid during 2011.

In the fourth quarter of 2010, the Company recorded a $12.5 million charge related to the closure of one of its facilities. The charge consists of restructuring expenses of $0.4 million for employee-related costs, including severance for 66 employees, and additional non-cash pensions and other post-retirement benefits costs totaling $12.1 million. Included in the non-cash pension charge is a pension curtailment loss of $2.0 million. In the fourth quarter of 2010, the Company paid $0.3 million in employee costs related to this facility closure. The remaining $0.1 million balance is expected be paid in 2011. The Company expects to record additional restructuring charges of less than $1 million related to this facility closure in 2011.

2009

During 2009, the Company paid $6.4 million related to the exit plan liability recorded on October 19, 2007, as part of the Platinum Acquisition. The Company also recorded a $0.3 million reduction to the exit plan liability primarily due to lower property taxes on closed facilities than estimated in the initial restructuring plan.

2008

During 2008, the Company paid $29.3 million related to the exit plan liability recorded on October 19, 2007, as part of the Platinum Acquisition. The Company also recorded a $4.4 million reduction to the exit plan liability primarily due to 277 fewer employee terminations than anticipated in the initial restructuring plan. The reduction to the exit plan liability reduced goodwill by $2.6 million, net of tax. The Company also recorded a $0.4 million reduction to the exit plan liability in the fourth quarter of 2008 which was credited to “Warehousing, delivery, selling, general and administrative expense.”

Other Charges

In the fourth quarter of 2010, the Company also recorded a charge of $1.5 million for costs related to the retirement of its former Chief Executive Officer, which is recorded within the “Restructuring and other charges” line of the consolidated statement of operations.

 

43


Table of Contents

Note 9: Debt

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

 

     At December 31,  
     2010      2009  
     (In millions)  

Ryerson Secured Credit Facility

   $ 457.3       $ 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 Notes due 2011

     4.1         4.1   

Foreign debt

     19.7         20.8   
                 

Total debt

     960.2         754.2   

Less:

     

Short-term credit facility borrowings

     2.9         7.6   

8  1/4% Senior Notes due 2011

     4.1         —     

Foreign debt

     19.7         20.8   
                 

Total long-term debt

   $ 933.5       $ 725.8   
                 

The principal payments required to be made on debt during the next five fiscal years are shown below:

 

     Amount  
     (In millions)  

For the year ended December 31, 2011

   $ 23.8   

For the year ended December 31, 2012

     457.3   

For the year ended December 31, 2013

     —     

For the year ended December 31, 2014

     102.9   

For the year ended December 31, 2015

     376.2   

For the years ended thereafter

     —     

Ryerson Credit Facility

On October 19, 2007, Merger Sub entered into a 5-year, $1.35 billion revolving credit facility agreement (as amended, the “Ryerson Credit Facility”) with a maturity date of October 18, 2012 which has since been amended to the earliest of (a) March 14, 2016, (b) the date that occurs 90 days prior to the scheduled maturity date of the Floating Rate Senior Secured Notes due November 1, 2014 (“2014 Notes”), if the 2014 Notes are then outstanding and (c) the date that occurs 90 days prior to the scheduled maturity date of the 12% Senior Secured Notes due November 1, 2015 (“2015 Notes”) (together, with the 2014 Notes, the “Ryerson Notes”), if the 2015 Notes are then outstanding. At December 31, 2010, the Company had $457.3 million of outstanding borrowings, $24 million of letters of credit issued and $317 million available under the $1.35 billion 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 2.1 percent at December 31, 2010 and 2009.

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 the Company’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 for 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.

 

44


Table of Contents

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. 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.

Proceeds from borrowings under the Ryerson Credit Facility and repayments of borrowings thereunder that are reflected in the Consolidated Statements of Cash Flows represent borrowings under the Company’s revolving credit agreement with original maturities greater than three months. Net proceeds (repayments) under the Ryerson Credit Facility represent borrowings under the Ryerson Credit Facility with original maturities less than three months.

Ryerson Notes

On October 19, 2007, Merger Sub issued 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 Ryerson’s existing and future subsidiaries (including those existing and future domestic subsidiaries that are co-borrowers or guarantee obligations under the Ryerson Credit Facility).

At December 31, 2010, $376.2 million of the 2015 Notes and $102.9 million of the 2014 Notes remain outstanding. During 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 consolidated statement of operations. During 2008, $42.8 million principal amount of the 2015 Notes and $47.1 million principal amount of the 2014 Notes were repurchased and retired, resulting in the recognition of an $18.2 million gain within “Other income and (expense), net” on the 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 the Company, in whole or in part, at any time on or after November 1, 2011 at a specified redemption price. If a change of control occurs, the Company must offer to purchase the Ryerson Notes at 101% of their principal amount, plus accrued and unpaid interest.

Pursuant to a registration rights agreement, we 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. The Company did not consummate an exchange offer by November 12, 2008 and therefore, we were required to pay additional interest to the holders of the Ryerson Notes. As a result, the Company paid an additional approximately $0.6 million in interest to the holders of the Ryerson Notes with the interest payment on May 1, 2009. The Company completed the exchange offer on April 9, 2009. Upon completion of the exchange offer, our obligation to pay additional interest ceased.

 

45


Table of Contents

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

As a result of the Platinum Acquisition, $145.9 million principal of the 8 1/4% Senior Notes due 2011 (“2011 Notes”) were repurchased between October 20, 2007 and December 31, 2007 with $4.1 million outstanding at December 31, 2010 and 2009. 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 upon the Platinum Acquisition.

Foreign Debt

At December 31, 2010, Ryerson China’s total foreign borrowings were $19.7 million, of which, $17.9 million was owed to banks in Asia at a weighted average interest rate of 4.3% secured by inventory and property, plant and equipment. Ryerson China also owed $1.8 million at December 31, 2010 to other parties at a weighted average interest rate of 1.0%. 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 $14 million and $8 million at December 31, 2010 and 2009, respectively. Letters of credit issued by our foreign subsidiaries totaled $7 million and $12 million at December 31, 2010 and 2009, respectively.

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 (“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 December 31, 2010, the accreted value of the Ryerson Holding Notes was $251.1 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 the retirement of the Ryerson Holding Notes at maturity, Ryerson Holding may default on the Ryerson Holding Notes unless other sources of funding are available.

Pursuant to a registration rights agreement, Ryerson Holding agreed to file with the SEC by October 26, 2010, a registration statement with respect to an offer to exchange each of the Ryerson Holding Notes for a new issue of Ryerson Holding’s debt securities registered under the Securities Act, with terms substantially identical to those of the Ryerson Holding Notes and to consummate an exchange offer no later than February 23, 2011. Ryerson Holding completed the exchange offer on December 7, 2010. As a result of completing the exchange offer, Ryerson Holding satisfied its obligations under the registration rights agreement covering the Ryerson Holding Notes.

 

46


Table of Contents

Note 10: Employee Benefits

The Company accounts for its pension and postretirement plans in accordance with FASB ASC 715, “Compensation – Retirement Benefits” (“ASC 715”). In addition to requirements for an employer to recognize in its consolidated balance sheet an asset for a plan’s overfunded status or a liability for a plan’s underfunded status and to recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur, ASC 715 requires an employer to measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year.

Prior to January 1, 1998, the Company’s non-contributory defined benefit pension plan covered certain employees, retirees and their beneficiaries. Benefits provided to participants of the plan were based on pay and years of service for salaried employees and years of service and a fixed rate or a rate determined by job grade for all wage employees, including employees under collective bargaining agreements.

Effective January 1, 1998, the Company froze the benefits accrued under its defined benefit pension plan for certain salaried employees and instituted a defined contribution plan. Effective March 31, 2000, benefits for certain salaried employees of J. M. Tull Metals Company and AFCO Metals, subsidiaries that were merged into JT Ryerson, were similarly frozen, with the employees becoming participants in the Company’s defined contribution plan. Salaried employees who vested in their benefits accrued under the defined benefit plan at December 31, 1997 and March 31, 2000, are entitled to those benefits upon retirement. Certain transition rules have been established for those salaried employees meeting specified age and service requirements. For the years ended December 31, 2010, 2009 and 2008, expense recognized for its defined contribution plans was $8.6 million, $4.2 million and $9.7 million, respectively. The Company temporarily froze company matching 401(k) contributions beginning in February 2009 through January 22, 2010, resulting in the decrease in expense in 2009 as compared to 2010 and 2008. Effective January 22, 2010, the Company resumed matching 401(k) contributions.

In February and December 2009, the Company amended the terms of two 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 by October 1, 2010. These actions meet the definition of a curtailment under FASB ASC 715-30-15 and resulted in a curtailment gain of $2.0 million for the year ended December 31, 2009.

In the fourth quarter of 2010, the Company announced the closure of one of its facilities, which significantly reduced the expected years of future service of active accruing participants in the Company’s defined benefit pension plan. As a result, the Company recorded a pension curtailment loss of $2.0 million in 2010.

The Company has other deferred employee benefit plans, including supplemental pension plans, the liability for which totaled $16.1 million and $15.7 million at December 31, 2010 and 2009, respectively.

Summary of Assumptions and Activity

The tables included below provide reconciliations of benefit obligations and fair value of plan assets of the Company plans as well as the funded status and components of net periodic benefit costs for each period related to each plan. The Company uses a December 31 measurement date to determine the pension and other postretirement benefit information. For the year 2010, the Company had an additional measurement date of November 18 for our U.S. pension plan due to the announced closure of one of its facilities as discussed above. The assumptions used to determine benefit obligations at the end of the periods and net periodic benefit costs for the Pension Benefits for U.S. plans were as follows:

 

     November 18 to
December 31,
2010
    January 1 to
November 17,
2010
    Year Ended
December 31,
2009
    Year Ended
December 31,
2008
 

Discount rate for calculating obligations

     5.35     N/A        5.80     6.30

Discount rate for calculating net periodic benefit cost

     5.40        5.80     6.30        6.50   

Expected rate of return on plan assets

     8.75        8.75        8.75        8.75   

Rate of compensation increase

     3.00        4.00        4.00        4.00   

The expected rate of return on U.S. plan assets is 8.75% for 2011.

 

47


Table of Contents

The assumptions used to determine benefit obligations at the end of the periods and net periodic benefit costs for the Other Postretirement Benefits, primarily health care, for U.S. plans were as follows:

 

     Year Ended December 31,  
     2010     2009     2008  

Discount rate for calculating obligations

     5.25     5.70     6.30

Discount rate for calculating net periodic benefit cost

     5.70        6.30        6.40   

Rate of compensation increase – benefit obligations

     3.00        4.00        4.00   

Rate of compensation increase – net period benefit cost

     4.00        4.00        4.00   

The assumptions used to determine benefit obligations at the end of the periods and net periodic benefit costs for the Pension Benefits for Canadian plans were as follows:

 

     Year Ended December 31,  
     2010     2009     2008  

Discount rate for calculating obligations

     5.25     5.75     7.50

Discount rate for calculating net periodic benefit cost

     5.75        7.50        5.50   

Expected rate of return on plan assets

     7.00        7.00        7.00   

Rate of compensation increase

     3.50        3.50        3.50   

The expected rate of return on Canadian plan assets is 7.00% for 2011.

The assumptions used to determine benefit obligations at the end of the periods and net periodic benefit costs for the Other Postretirement Benefits, primarily healthcare, for Canadian plans were as follows:

 

     Year Ended December 31,  
     2010     2009     2008  

Discount rate for calculating obligations

     5.25     5.75     7.50

Discount rate for calculating net periodic benefit cost

     5.75        7.50        5.50   

Rate of compensation increase

     3.50        3.50        3.50   

 

48


Table of Contents
     Year Ended December 31,  
     Pension Benefits     Other Benefits  
     2010     2009     2010     2009  
     (In millions)  

Change in Benefit Obligation

        

Benefit obligation at beginning of period

   $ 769      $ 726      $ 174      $ 194   

Service cost

     3        2        1        2   

Interest cost

     43        44        10        12   

Plan amendments

     —          2        —          (1

Actuarial (gain) loss

     37        37        (1     (22

Special termination benefits

     7        —          3        —     

Curtailment (gain) loss

     2        —          —          (2

Effect of changes in exchange rates

     3        7        1        2   

Benefits paid (net of participant contributions and Medicare subsidy)

     (49     (49     (12     (11
                                

Benefit obligation at end of period

   $ 815      $ 769      $ 176      $ 174   
                                

Accumulated benefit obligation at end of period

   $ 810      $ 765        N/A        N/A   
                                

Change in Plan Assets

        

Plan assets at fair value at beginning of period

   $ 446      $ 430      $ —        $ —     

Actual return on plan assets

     63        51        —          —     

Employer contributions

     47        8        14        12   

Effect of changes in exchange rates

     2        6        —          —     

Benefits paid (net of participant contributions)

     (49     (49     (14     (12
                                

Plan assets at fair value at end of period

   $ 509      $ 446      $ —        $ —     
                                

Reconciliation of Amount Recognized

        

Funded status

   $ (306   $ (323   $ (176   $ (174
                                

Amounts recognized in balance sheet consist of:

        

Current liabilities

   $ —        $ —        $ (15   $ (14

Noncurrent liabilities

     (306     (323     (161     (160
                                

Net benefit liability at the end of the period

   $ (306   $ (323   $ (176   $ (174
                                

Canadian benefit obligations represented $55 million and $49 million of the Company’s total Pension Benefits obligations at December 31, 2010 and 2009, respectively. Canadian plan assets represented $51 million and $46 million of the Company’s total plan assets at fair value at December 31, 2010 and 2009, respectively. In addition, Canadian benefit obligations represented $17 million and $15 million of the Company’s total Other Benefits obligation at December 31, 2010 and 2009, respectively.

Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2010 and 2009 consist of the following:

 

     At December 31,  
     Pension Benefits      Other Benefits  
     2010      2009      2010     2009  
     (In millions)  

Amounts recognized in accumulated other comprehensive income (loss), pre–tax, consists of

          

Net actuarial (gain) loss

   $ 264       $ 249       $ (63   $ (67

Prior service cost

     2         2         —          1   
                                  

Total

   $ 266       $ 251       $ (63   $ (66
                                  

Net actuarial losses of $6.0 million and prior service costs of $0.2 million for pension benefits and net actuarial gains of $4.7 million for other postretirement benefits are expected to be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year.

 

49


Table of Contents

Amounts recognized in other comprehensive income (loss) for the years ended December 31, 2010 and 2009 consist of the following:

 

     Year Ended December 31,  
     Pension Benefits      Other Benefits  
     2010     2009      2010     2009  
     (In millions)  

Amounts recognized in other comprehensive income (loss), pre–tax, consists of

         

Net actuarial loss (gain)

   $ 21      $ 35       $ (1   $ (22

Amortization of net actuarial loss (gain)

     (6     —           5        3   

Prior service cost (credit)

     —          2         —          (1
                                 

Total recognized in other comprehensive income (loss)

   $ 15      $ 37       $ 4      $ (20
                                 

For measurement purposes for U.S. plans at December 31, 2010, the annual rate of increase in the per capita cost of covered health care benefits was 8.5 percent for all participants, grading down to 5 percent in 2017, the level at which it is expected to remain. For measurement purposes for U.S. plans at December 31, 2009, the annual rate of increase in the per capita cost of covered health care benefits was 9 percent for all participants, grading down to 5 percent in 2017, the level at which it is expected to remain. For measurement purposes for U.S. plans at December 31, 2008, the annual rate of increase in the per capita cost of covered health care benefits was 8.5 percent for participants less than 65 years old and 9 percent for participants greater than 65 years old in 2008, grading down to 5 percent in 2015, the level at which it is expected to remain. For measurement purposes for Canadian plans at December 31, 2010, the annual rate of increase in the per capita cost of covered health care benefits was 12 percent per annum, grading down to 5 percent in 2023, the level at which it is expected to remain. For measurement purposes for Canadian plans at December 31, 2009, the annual rate of increase in the per capita cost of covered health care benefits was 12 percent per annum, grading down to 5 percent in 2023, the level at which it is expected to remain. For measurement purposes for Canadian plans at December 31, 2008, the annual rate of increase in the per capita cost of covered health care benefits for the Company’s salaried plan was 10 percent per annum, grading down to 6 percent in 2012, and 12 percent per annum, grading down to 6 percent in 2014 for the Company’s bargaining plan, the level at which it is expected to remain.

The components of the Company’s net periodic benefit cost for the years ended December 31, 2010, 2009 and 2008 are as follows:

 

     Year Ended December 31,  
     Pension Benefits     Other Benefits  
     2010     2009     2008     2010     2009     2008  
     (In millions)  

Components of net periodic benefit cost

            

Service cost

   $ 3      $ 2      $ 3      $ 1      $ 2      $ 3   

Interest cost

     43        45        45        10        12        13   

Expected return on assets

     (46     (49     (52     —          —          —     

Recognized actuarial loss (gain)

     6        —          —          (4     (3     —     

Special termination benefits

     7        —          —          3        —          —     

Curtailment loss (gain)

     2        —          —          —          (2     —     
                                                

Net periodic benefit cost (credit)

   $ 15      $ (2   $ (4   $ 10      $ 9      $ 16   
                                                

 

50


Table of Contents

The assumed health care cost trend rate has an effect on the amounts reported for the health care plans. For purposes of determining net periodic benefit cost for U.S plans, the annual rate of increase in the per capita cost of covered health care benefits was 9 percent for all participants for the year ended December 31, 2010, grading down to 5 percent in 2017. For purposes of determining net periodic benefit cost for Canadian plans, the annual rate of increase in the per capita cost of covered health care benefits was 12 percent for the year ended December 31, 2010, grading down to 5 percent in 2023. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:

 

     1% increase      1% decrease  
     (In millions)  

Effect on service cost plus interest cost

   $ 0.7       $ (0.5

Effect on postretirement benefit obligation

     9.0         (7.4

Pension Trust Assets

The expected long-term rate of return on pension trust assets is 7.00% to 8.75% based on the historical investment returns of the trust, the forecasted returns of the asset classes and a survey of comparable pension plan sponsors.

The Company’s pension trust weighted-average asset allocations at December 31, 2010 and 2009, by asset category are as follows:

 

     Trust Assets at
December 31,
 
     2010     2009  

Equity securities

     63.1     64.0

Debt securities

     26.8        26.6   

Real Estate

     0.7        4.8   

Other

     9.4        4.6   
                

Total

     100.0     100.0
                

The Board of Directors of Ryerson has general supervisory authority over the Pension Trust Fund and approves the investment policies and plan asset target allocation. An internal management committee provides on-going oversight of plan assets in accordance with the approved policies and asset allocation ranges and has the authority to appoint and dismiss investment managers. The investment policy objectives are to maximize long-term return from a diversified pool of assets while minimizing the risk of large losses, and to maintain adequate liquidity to permit timely payment of all benefits. The policies include diversification requirements and restrictions on concentration in any one single issuer or asset class. The currently approved asset investment classes are cash; fixed income; dome