TimkenSteel Corporation — FY 2017 Form 10-K
Filing identity: The supplied filing is for TimkenSteel Corporation, not Metallus Inc. It covers the fiscal year ended December 31, 2017; quarterly figures include the fourth quarter ended that date.
Business context and reporting period
TimkenSteel manufactures specialty carbon, micro-alloy and alloy steel products, including SBQ bars, seamless mechanical tubing, billets and precision components. It reported one integrated business segment. Its products serve energy, mobile and industrial markets, among others.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $1,329.2 million | $869.5 million |
| Gross profit | $67.8 million | $27.9 million |
| Operating loss | $23.4 million | $62.6 million |
| Net loss | $43.8 million | $105.5 million |
| Diluted loss per share | $0.99 | $2.39 |
| Cash from operating activities | $8.1 million | $74.4 million |
| Capital expenditures | $33.0 million | $42.7 million |
Sales rose 53% year over year; excluding surcharges, they increased 34%. Shipments rose 54%, or 403,000 tons, driven by market recovery, market penetration and new billet sales to tube manufacturers serving OCTG. Gross margin was approximately 5.1%, versus 3.2% in 2016. Management attributed improved gross profit to higher volume, utilization and manufacturing efficiencies, partly offset by product mix and price pressure.
Fourth-quarter 2017 sales were $341.4 million and gross profit was $8.5 million; net loss was $33.9 million, compared with a $67.0 million net loss in fourth-quarter 2016.
At year-end, cash was $24.5 million, current assets $410.2 million and current liabilities $206.8 million. Debt was $165.3 million, comprising $86.3 million principal on 6% convertible notes due 2021 and $79.0 million of other debt. Shareholders’ equity was $560.7 million. Operating cash flow fell sharply, chiefly because receivables and inventories increased to support higher sales. Cash flow less capital expenditures was negative $24.9 million.
Net availability under the then-current asset-based revolver was $164.3 million; reported total liquidity, including cash, was $188.8 million. The company reported compliance with debt covenants at December 31, 2017. No dividend was declared in 2017; the cash dividend had been suspended in 2015.
Material changes versus the prior comparable period
- Sales increased $459.7 million and shipments grew 54%, reversing the 2016 decline in sales and shipments.
- Gross profit increased $39.9 million and operating loss narrowed by $39.2 million; the company nevertheless remained loss-making.
- Net loss improved by $61.7 million, helped by other expense declining to $4.1 million from $68.0 million. The prior-year amount included a larger benefit-plan remeasurement loss.
- Operating cash flow decreased $66.3 million as working capital expanded. Receivables rose $58.2 million and inventory rose $59.8 million.
- Debt increased from $136.6 million to $165.3 million, including $25 million of additional revolver borrowings. Equity fell from $597.4 million to $560.7 million.
Outlook, management commentary and risks
Management expected year-end cash, projected operating cash flow and available credit to fund working capital, capital expenditures and debt service for at least the following 12 months, subject to assumptions about demand and cash generation. This is a liquidity assessment, not earnings guidance. The company expected approximately $28 million of additional project costs over the next one to three years. It launched an advanced quench-and-temper line in fourth-quarter 2017; the investment was approximately $40 million, with annual capacity of up to 50,000 process-tons.
After year-end, the company entered a $300 million asset-based revolving credit agreement maturing in January 2023 and redeemed $30.2 million of Ohio revenue-refunding bonds. The company cited risks from cyclical demand, steel overcapacity and pricing, raw-material and energy volatility, surcharge timing, customer concentration, operational disruption, environmental obligations and debt requirements. Its 10 largest customers represented about 50% of 2017 net sales. Environmental reserves were $0.5 million; management did not expect ordinary-course legal matters to have a material adverse effect.
Other notable items include a $12.5 million increase in the LIFO reserve, a $0.7 million impairment charge, and a $24 million benefit-plan remeasurement loss. The company maintained a valuation allowance against U.S. deferred tax assets and reported $335 million of tax loss carryforwards. It was evaluating the Tax Cuts and Jobs Act and stated that it did not anticipate a significant net deferred-tax impact in 2017 due to its valuation allowance position.
Important facts for investors to verify
- Confirm the issuer identity: the filing names TimkenSteel Corporation, whereas the request identifies Metallus Inc.
- Assess whether the 2017 shipment recovery and backlog increase to approximately 410,000 tons translate into sustainable sales, margins and cash generation; management cautioned backlog may not predict future shipments.
- Review working-capital requirements, particularly receivables and inventory growth, and the effect on operating cash flow.
- Check the terms, availability, covenants and borrowing-base limits of the post-year-end credit facility, alongside the 2021 convertible notes and potential conversion dilution or cash settlement.
- Monitor pension and postretirement obligations, tax valuation allowances, environmental exposures, and the effect of raw-material surcharges and LIFO accounting.