TimkenSteel Corporation (now Metallus Inc.) — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015. The filing is issued under the name TimkenSteel Corporation. The company manufactures specialty steel, seamless mechanical tubes, and related value-added products for markets including automotive, industrial, and energy.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $213.8 million | $232.7 million | $654.8 million | $899.6 million |
| Gross profit (loss) | $2.5 million | ($20.5 million) | $16.1 million | $15.0 million |
| Gross margin | 1.2% | (8.8%) | 2.5% | 1.7% |
| Operating loss | ($22.5 million) | ($47.9 million) | ($55.8 million) | ($73.2 million) |
| Net loss | ($16.6 million) | ($30.8 million) | ($40.7 million) | ($48.2 million) |
| Diluted loss per share | ($0.38) | ($0.69) | ($0.92) | ($1.08) |
- For Q3, sales fell 8.1%; sales excluding raw-material surcharges declined 8.3%. Shipments were nearly flat, down 0.5%, while average selling price per ton including surcharges decreased 7.7%.
- For the first nine months, sales fell 27.2% and shipments declined 16.3%. Energy shipments were down about 76% and industrial shipments 19.9%, year over year; management linked weakness in energy to lower U.S. rig counts and industrial softness partly to the oil-and-gas downturn.
- Management attributed Q3 gross-profit improvement mainly to lower manufacturing costs and favorable raw-material spread, partly offset by price/mix, lower LIFO income, and settlement expenses. SG&A declined 6.0% in Q3 and 16.2% year to date, primarily from cost reductions.
- Interest expense increased to $3.9 million in Q3 and $8.0 million year to date, primarily due to the convertible notes issued in May 2016. The filing does not report a net profit or positive operating income for either period.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $55.5 million, compared with $63.8 million a year earlier. Capital expenditures were $26.1 million, versus $52.9 million; financing used $48.5 million, including $130 million of credit-agreement repayments partly funded by convertible-note proceeds.
- Cash was $23.3 million at September 30, down from $42.4 million at year-end. Working capital included $103.8 million in receivables and $155.4 million in inventory.
- Debt carrying amounts were $65.6 million of convertible notes and $70.2 million of other long-term debt, or $135.8 million in total. The notes have $86.3 million principal, a 6% cash coupon, and mature June 1, 2021; proceeds were used to repay the revolving facility.
- The asset-based revolver had $40.0 million borrowed and $129.4 million net availability after the availability block. Total liquidity, including cash, was $152.7 million. The revolver bears variable rates; its stated rate was 4.6% at quarter-end. A 1 percentage-point increase in rates was estimated to add about $0.7 million in annual interest expense.
- Shareholders’ equity was $659.8 million, down from $686.4 million at year-end. The cash dividend remained suspended, and no shares were repurchased in the first nine months of 2016.
Outlook, risks, and notable items
- Management said available cash, expected operating cash flows, and revolver capacity were expected to cover liquidity needs for at least 12 months and through the June 2019 revolver maturity. This expectation depends on operating and cash-flow assumptions and is not assured.
- The credit agreement limits 2016 capital expenditures to $45 million. It requires fixed-charge coverage tests for specified 2017 year-to-date periods. Management estimated approximately $10 million of EBITDA in the first half of 2017, before considering capital expenditures, would be needed for the June 2017 test and expected covenant compliance.
- Management said approximately 50% melt utilization would generally produce breakeven EBITDA in normalized scrap markets; Q3 utilization was 44%, versus 40% a year earlier. It cautioned that break-even utilization varies with volume, mix, pricing, costs, and market conditions.
- The approximately $40 million advanced quench-and-temper project was deferred in response to weak energy and some industrial markets. The company reported $63 million of construction in progress and expected about $34 million of additional project costs over the following one to three years.
- A third-quarter pension remeasurement resulted in a $5.4 million non-cash pretax settlement loss; management anticipated additional settlement losses in Q4. A change to retiree medical plans is effective January 1, 2017.
- Key risks include continued weak customer demand, raw-material and energy price movements and surcharge timing, variable interest rates, and the possibility of failing future debt covenants. The company reported ordinary-course legal and environmental matters and said their disposition was not expected to materially affect its financial position, results, or cash flows.
Important facts for investors to verify
- Whether energy and industrial demand, shipments, selling prices, and melt utilization improve enough to support management’s liquidity and covenant assumptions.
- Revolver borrowing-base availability, covenant calculations, and the company’s ability to meet the 2017 fixed-charge coverage tests.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside the remaining capital spending commitments.
- The full economics and potential dilution or repayment outcomes of the convertible notes, including their conversion provisions and effective interest cost.
- The magnitude of additional pension settlement charges and the effects of the planned retiree medical change.