Business context and reporting period
TimkenSteel Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2018, with comparisons to Q1 2017 unless otherwise noted. The company manufactures specialty alloy, carbon and micro-alloy steel products and related value-added solutions. The filing identifies the registrant as TimkenSteel Corporation, not Metallus Inc.; verify the intended issuer.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $380.8 million | $309.4 million; up 23% |
| Gross profit and margin | $21.1 million; 5.5% | $17.0 million; 5.5% |
| Operating loss and margin | $(3.6) million; (0.9)% | $(5.9) million; (1.9)% |
| Net loss / diluted loss per share | $(1.9) million / $(0.04) | $(5.3) million / $(0.12) |
| Operating cash flow | $(19.4) million | $(26.3) million |
| Capital expenditures | $2.2 million | $2.7 million |
| Cash and cash equivalents | $35.4 million at March 31, 2018 | $24.5 million at December 31, 2017 |
Sales excluding surcharges increased 16%, reflecting approximately $22 million of higher volume and $18 million of price/mix. Shipments rose 7% to 299.7 thousand tons. Industrial and energy demand contributed to growth; reported sales by end market were $147.7 million industrial, $49.1 million energy, $142.5 million mobile and $41.5 million other.
Working capital used $37 million of cash, principally as receivables and inventory grew; operating cash use was funded in part by borrowing. Cash increased $10.9 million during the quarter, with $32.5 million provided by financing activities. Total liquidity was $202.8 million, including $167.4 million of available credit-facility capacity. Total debt was approximately $201.1 million: $130.0 million under the variable-rate credit agreement and $71.1 million of convertible notes, net. Debt and liquidity figures are as of March 31, 2018.
Material changes and unusual items
- Gross profit increased $4.1 million, supported by favorable raw-material spread, higher prices and demand; higher manufacturing costs, production inefficiencies, and non-recurring legal costs and employee-benefit claims partly offset the improvement.
- Interest expense rose $1.0 million to $4.6 million, including write-offs of financing costs related to the credit-agreement amendment and bond redemption, and higher average borrowings.
- In January 2018, the company replaced its prior facility with a $300 million asset-based revolving credit agreement maturing in 2023, and used proceeds in part to redeem $30.2 million of Ohio revenue-refunding bonds. The new facility’s stated rate was 3.9% at quarter-end.
- Adoption of the new revenue-recognition standard produced a $0.7 million increase to opening retained earnings; management said its Q1 effect on the financial statements was not material.
- The company had a U.S. deferred-tax-asset valuation allowance and reported a $0.1 million tax provision. Management did not anticipate a material overall effect from the Tax Cuts and Jobs Act, but noted the tax accounting remained under evaluation.
Outlook, risks and contingencies
No specific earnings or sales guidance was provided. Management expected cash, operating cash flows and available borrowing capacity to meet working-capital, capital-spending and debt-service needs for at least the next 12 months, subject to assumptions including market demand, lower operating costs and improved liquidity. The company reported compliance with credit covenants at quarter-end and expected continued compliance for at least 12 months. It cited approximately $25 million of additional project costs expected over the next one to three years.
Risks include demand and pricing cyclicality, raw-material and energy costs and surcharge timing, manufacturing costs and execution, pension obligations, variable interest rates, and access to financing. A 1% increase in rates on the $130 million of variable-rate debt outstanding would increase annual interest expense by approximately $1 million. The company reported a $0.9 million reserve for environmental matters and a $0.8 million reserve for other ordinary-course loss exposures. EPA notices concerning alleged Clean Air Act violations at two Canton plants remained under negotiation; management did not expect a material adverse effect.
Important facts for investors to verify
- Confirm that TimkenSteel Corporation is the intended filing issuer given the request’s reference to Metallus Inc.
- Track whether sales growth, industrial and energy demand, and shipment gains persist, and whether surcharge timing continues to support gross profit.
- Monitor working-capital consumption, operating cash flow, borrowing-base availability and total debt as activity grows.
- Assess the effects of variable rates, covenant headroom, and the convertible notes’ $86.3 million principal amount and 2021 maturity.
- Follow progress on manufacturing-cost improvements, planned capital projects, the EPA matter, and the tax valuation allowance.