Metallus Inc. (Registrant: TimkenSteel Corporation) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The filing is for TimkenSteel Corporation, which became independent from The Timken Company on June 30, 2014. The 2013 comparative results reflect historical operations within Timken and may not represent results as a standalone company.
Business context and performance
TimkenSteel manufactures special bar quality steel, seamless mechanical tubing, precision components, and related services. It reported two segments: Industrial & Mobile and Energy & Distribution.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $434.2 million | $350.5 million | $1,265.9 million | $1,050.9 million |
| Gross profit | $71.2 million | $50.0 million | $217.4 million | $167.3 million |
| Gross margin | 16.4% | 14.3% | 17.2% | 15.9% |
| Operating income | $40.1 million | $26.9 million | $135.9 million | $98.1 million |
| Net income | $25.7 million | $17.1 million | $88.0 million | $63.4 million |
| Diluted EPS | $0.56 | $0.37 | $1.91 | $1.37 |
Q3 shipments rose 22% to 284,106 tons; nine-month shipments rose 17% to 823,442 tons. Net sales excluding raw-material surcharges increased 20% in Q3 and 18% year to date. Management attributed growth principally to higher volume, with better manufacturing utilization and favorable mix supporting profitability. Surcharges can lag changes in input costs and may dilute reported gross margin.
Segments and material period changes
- Industrial & Mobile: Q3 sales increased 10% to $240.8 million, while segment EBIT fell 6% to $20.3 million and margin declined to 8.4% from 9.8%. Nine-month EBIT was essentially flat at $67.7 million.
- Energy & Distribution: Q3 sales increased 47% to $193.4 million and EBIT more than doubled to $27.8 million; margin rose to 14.4% from 9.7%. Nine-month sales increased 38% and EBIT 84% to $84.2 million, reflecting volume, mix, and utilization improvements.
- SG&A increased 35% in Q3 and 18% year to date, mainly due to standalone-company costs and, year to date, higher incentive compensation. Segment cost allocations were revised to reflect post-spinoff management practices; prior periods were adjusted and consolidated results were unchanged.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $68.5 million, down from $148.4 million, chiefly due to cash absorbed by receivables and inventory. Capital expenditures were $83.1 million; investing cash use was $83.1 million.
- Cash at September 30 was $37.5 million. Current assets were $549.7 million and current liabilities $246.2 million. The filing reports liquidity of $237.0 million under its credit-facility calculation.
- Total debt was $130.2 million, all variable-rate, including $100.0 million drawn on a $300 million revolving facility due 2019. Remaining availability was $199.5 million. The company reported compliance with covenants; the required minimum liquidity was $50 million.
- Interest expense was $0.2 million in Q3 and $0.9 million for nine months. A 1 percentage-point rate increase was estimated to raise annual interest expense by about $1.3 million, based on debt outstanding at the time of the spinoff.
- The company paid a $50 million special dividend to Timken in connection with the separation and $6.4 million in shareholder dividends during the first nine months. A quarterly dividend of $0.14 per share was paid in September.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management said available cash, operating cash generation, credit availability, and potential capital-market access should meet liquidity needs for at least the next 12 months, while noting borrowings might need to be limited to maintain covenant compliance.
- Capital plans included approximately $42 million of remaining costs on projects underway. The approximately $200 million vertical continuous caster project had incurred about $187 million by September 30; first steel was cast in Q4 2014, and management expected the project to begin production in Q4. A separate planned quench-and-temper facility was expected to cost $40 million and be operational within two years.
- Management expected an additional $1 million to $3 million of LIFO expense for 2014, reflecting anticipated higher costs, particularly scrap. A 1% rise in costs would increase the current LIFO expense estimate by approximately $2 million.
- Environmental reserves were $1.5 million; management did not expect the matters’ ultimate disposition to materially affect financial position, cash flows, or results. Other ordinary-course legal matters were also not expected to have a material adverse effect.
- Key risks identified include demand and steel-industry cyclicality, raw-material and energy costs and surcharge timing, standalone-company costs, execution of major capital projects, variable interest rates, pensions, and litigation or environmental matters. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Compare standalone-period performance with the historical Timken-based comparative statements, accounting for the filing’s warning that pre-spinoff results may not be indicative.
- Track whether Energy & Distribution growth and Industrial & Mobile margins persist, and whether surcharges recover input-cost changes promptly.
- Monitor working-capital investment, operating cash flow, capital spending, and completion and ramp-up of the vertical caster and planned heat-treat facility.
- Confirm debt covenant headroom, variable-rate exposure, and availability under the revolving facility.
- Review year-end LIFO expense and developments in environmental and other contingencies.