TimkenSteel Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; includes fourth-quarter results. The filing identifies the registrant as TimkenSteel Corporation. The company manufactures specialty alloy, carbon and micro-alloy steel, tubing and value-added products for automotive, industrial, energy and other markets. It reported as one business segment beginning in 2016.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $869.5 million | $1,106.2 million |
| Gross profit (loss) | $(27.1) million | $46.2 million |
| Operating income (loss) | $(128.9) million | $(65.4) million |
| Net income (loss) | $(105.5) million | $(45.0) million |
| Diluted loss per share | $(2.39) | $(1.01) |
| Cash from operations | $74.4 million | $107.1 million |
| Capital expenditures | $42.7 million | $78.2 million |
Net sales declined 21%; sales excluding raw-material surcharges fell 18%. Shipments decreased 10.8% to 746,729 tons, and average selling price per ton, including surcharges, fell 11.9% to $1,164. Melt utilization was 46%, down from 49%. The company reported year-end cash of $25.6 million, total debt of $136.6 million and shareholders’ equity of $597.4 million. Net availability under its asset-based credit facility was $119.7 million, for total liquidity of $145.3 million.
Fourth quarter: Net sales were $214.7 million versus $206.6 million in Q4 2015. Gross loss was $44.7 million versus gross profit of $9.3 million; net loss was $67.0 million versus $13.8 million.
Changes and unusual items
- Weak energy demand was a major sales headwind: energy shipments fell 74.2%, amid a 47% decline in the U.S. rig count. Industrial shipments fell 14.6%. Light vehicle sales represented 53% of 2016 net sales, up from 44% in 2015; oil and gas fell to 4% from 13%.
- The gross-profit deterioration reflected approximately $75 million of pension and postretirement mark-to-market expense, $36 million of unfavorable price/mix, $28 million of lower LIFO income and $24 million from lower volume. Offsets included approximately $51 million of favorable raw-material spread and $45 million of lower manufacturing costs.
- The company changed its pension and postretirement accounting in 2016, immediately recognizing actuarial gains and losses and measuring plan assets at fair value rather than smoothing returns. The change was applied retrospectively; it increased 2016 net loss by $49.6 million relative to the prior method. This materially affects period comparisons.
- A $15.6 million valuation allowance was recorded against U.S. deferred tax assets. The company reported approximately $306.5 million of tax-loss carryforwards.
- Cash from operations declined $32.7 million. Cash and equivalents fell $16.8 million during the year, while debt repayments and reduced capital spending shaped financing and investing cash flows.
Liquidity, outlook and risks
In May 2016, the company issued $86.3 million principal amount of 6.0% convertible senior notes due 2021 and used net proceeds to repay credit-facility borrowings. The notes’ initial conversion price was approximately $12.58 per share. At year-end, $40.0 million was drawn under the revolving facility, which matures June 30, 2019. The company stated it expected cash, operating cash flow and borrowing capacity to meet needs for at least 12 months and through the facility’s maturity, subject to assumptions about operating improvements and cash generation.
Management expected to comply with debt covenants for at least the following 12 months and estimated EBITDA of at least $10 million would be needed to meet the upcoming fixed-charge coverage tests. The filing does not provide a quantified revenue or earnings forecast. The company had suspended its dividend in late 2015 and made no 2016 dividend payments; its share-repurchase authorization expired at year-end 2016.
- Key exposures include steel overcapacity and pricing pressure, cyclical customer demand, raw-material and energy prices, and the lag in customer surcharges passing through input-cost changes.
- Approximately 58% of employees were union-covered; the agreement covering about 57% of employees expired in September 2017.
- Pension and postretirement obligations were underfunded by $88.6 million and $100.3 million, respectively. Lower discount rates and market returns can affect obligations and earnings.
- The company cited covenant compliance and refinancing risks, potential limits on liquidity, and possible cash or share settlement of convertible notes. Environmental reserves were $0.6 million; management did not expect ordinary-course legal and environmental matters to have a material adverse effect.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether operating demand, shipments and melt utilization recover enough to improve gross margins and cash generation.
- Actual covenant headroom and borrowing-base availability, especially against the fixed-charge coverage requirements and management’s EBITDA estimate.
- The cash and earnings effects of pension remeasurement, funding needs and the lower year-end discount rate.
- The terms and potential dilution or cash settlement associated with the convertible notes, alongside their market value and conversion conditions.
- Progress on planned capital projects and the estimated $29 million of remaining project costs over the following one to three years.
- Developments in the September 2017 labor agreement, environmental matters and the realizability of tax-loss carryforwards.