Business context and reporting period
This is TimkenSteel Corporation’s unaudited Form 10-Q for the quarter ended March 31, 2016. Although the request identifies Metallus Inc., the filing names TimkenSteel Corporation as the registrant. The company makes alloy, carbon and micro-alloy steel, seamless mechanical tubes, and related value-added products and services. Beginning January 1, 2016, it reported as one operating segment after centralizing customer-facing activities and eliminating its two-segment structure.
Financial results and key metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $217.9 million | $388.7 million |
| Gross profit | $3.4 million | $41.6 million |
| Gross margin | 1.6% | 10.7% |
| Operating income (loss) | ($19.5 million) | $12.1 million |
| Net income (loss) | ($13.6 million) | $6.9 million |
| Diluted EPS | ($0.31) | $0.15 |
| Operating cash flow | $20.1 million | $14.6 million |
| Capital expenditures | $8.5 million | $17.9 million |
Cash and cash equivalents were $37.5 million at March 31, 2016, versus $42.4 million at December 31, 2015. Total debt was $185.2 million, all variable-rate, down from $200.2 million at year-end. Net availability under the asset-based credit facility was $17.1 million after the availability block; reported total liquidity, including cash, was $54.6 million. Current assets were $305.7 million and current liabilities $98.3 million. Shareholders’ equity was $678.0 million.
Changes versus the prior comparable period
- Sales fell 43.9%; excluding raw-material surcharges, sales declined 35.5%. Shipments fell 31.3% to 186,152 tons, while average selling price including surcharges declined 18.3% to $1,171 per ton.
- Management attributed the sales decline primarily to lower volume, including energy shipments down 86.9% and industrial shipments down 38.1%. It cited a U.S. rig-count decline of more than 65%, weak commodity markets, and elevated distribution inventories.
- Gross profit fell $38.2 million. Drivers included lower volume (about $27 million), higher manufacturing costs (about $10 million), price/mix (about $7 million) and lower LIFO income (about $4 million), partly offset by favorable raw-material spread (about $10 million).
- Capacity utilization declined to 47% from 66%. SG&A decreased 21.3% to $22.9 million, primarily reflecting cost reductions.
- Operating cash flow improved by $5.5 million, aided by a $13.3 million reimbursement from postretirement plan assets and a tax refund; cash nevertheless declined $4.9 million after investing and financing outflows.
Outlook, management commentary, risks and unusual items
- The company said approximately 50% melt utilization could produce EBITDA breakeven in normalized scrap markets, while noting that volume, mix, price and costs affect that threshold. Q1 utilization was 47%.
- A $75 million cost-reduction initiative was underway, alongside reduced capital spending and a suspended dividend. The 2016 credit-agreement capital expenditure limit is $45 million; management said it expected to spend within that limit.
- Management believed cash, operating cash flow, facility availability and proceeds expected from a planned $20 million sale-and-leaseback of its Canton offices would meet liquidity needs for at least 12 months and through the credit facility’s June 2019 maturity. The transaction was expected to close late in Q2 2016; it had not yet closed at quarter-end.
- The amended $265 million asset-based revolving facility had $155 million borrowed and $17.1 million net availability at quarter-end. The agreement includes a minimum fixed-charge-coverage covenant for specified 2017 measurement periods. Management estimated about $10 million of EBITDA would be needed in the first half of 2017 for the June test and expected covenant compliance, but warned that failure to comply could trigger default and acceleration if not amended or refinanced.
- All debt is variable-rate; the company estimated a 1 percentage-point rate increase would raise annual interest expense by about $1.9 million. Other key exposures include weak customer demand, steel and energy input costs, surcharge timing, competition, and environmental, product-liability and other claims.
- The company deferred installation of the advanced quench-and-temper facility amid weak energy and industrial markets. It reported $62 million of construction in progress and expected about $31 million of additional project costs over the next one to three years.
- Environmental reserves were $1.3 million. Management stated that pending ordinary-course legal and environmental matters were not expected to have a material adverse effect. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Whether demand, shipments and utilization recover sufficiently to improve margins and reach the company’s stated EBITDA breakeven utilization level.
- Actual availability under the asset-based facility, compliance with its covenants, and the assumptions supporting management’s liquidity outlook.
- Completion, timing and net liquidity benefit of the planned $20 million office sale-and-leaseback.
- Execution and realized savings from the $75 million cost-reduction program, and remaining capital commitments for projects in progress.
- Effects of variable interest rates, raw-material surcharge timing, LIFO estimates and pension-related cash flows on future results.