Business context and reporting period
This is TimkenSteel Corporation’s Form 10-K for the fiscal year ended December 31, 2015 (including fourth-quarter results). The company manufactured specialty alloy, carbon and micro-alloy steel products, tubing and precision components. The filing identifies the registrant as TimkenSteel Corporation; it does not use the name Metallus Inc.
In 2015, results were reported in two segments: Industrial & Mobile and Energy & Distribution. Effective January 1, 2016, the company planned to report as one business segment following an organizational realignment.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $1,106.2 million | $1,674.2 million |
| Gross profit (margin) | $8.8 million (0.8%) | $273.8 million (16.4%) |
| Operating income (loss) | ($108.7 million) | $160.5 million |
| Net income (loss) | ($72.4 million) | $104.4 million |
| Diluted earnings (loss) per share | ($1.63) | $2.27 |
| Cash provided by operating activities | $107.1 million | $93.9 million |
| Capital expenditures | $78.2 million | $129.6 million |
Full-year sales fell 33.9%; excluding raw-material surcharges, sales declined 26.6%. Shipments fell 23.5% to 837,135 tons, and capacity utilization declined to 49% from 72%. The company attributed the gross-profit collapse chiefly to approximately $138 million of higher manufacturing costs and $93 million of lower-volume impact; lower utilization raised unit costs. Other cited effects included unfavorable raw-material spread and price/mix, partly offset by $42 million of higher LIFO income.
Segment results deteriorated sharply: Industrial & Mobile reported sales of $804.0 million and EBIT loss of $60.1 million (2014 EBIT: $79.8 million); Energy & Distribution reported sales of $302.2 million and EBIT loss of $72.1 million (2014 EBIT: $98.8 million). Energy-related shipment tons fell approximately 65%, reflecting lower rig activity and customer inventory levels. Automotive demand was comparatively resilient.
In Q4 2015, sales were $206.6 million, gross loss was $6.2 million and net loss was $24.2 million, or $0.55 per share. Q4 2014 sales were $408.3 million, gross profit $56.4 million and net income $16.4 million.
At year-end, cash was $42.4 million, long-term debt was $200.2 million and reported available borrowing capacity was $41.9 million. Operating cash flow was positive, supported in part by reductions in receivables and inventory. All debt was variable-rate; management estimated a 1 percentage-point rate increase would add about $2 million to annual interest expense. Shareholders’ equity was $686.4 million. The company declared $0.42 per share in 2015 dividends, but suspended the cash dividend on November 13, 2015.
Material changes, outlook and notable items
- Sales and profitability reversed from 2014 growth to a substantial 2015 loss, amid weak energy and commodity-related industrial demand, lower shipments and underutilized production capacity.
- The company recognized $5.6 million of restructuring charges under cost-reduction plans and $0.9 million of impairment charges. The 2015 annual income-tax benefit was $42.6 million; the effective tax rate was 37.0%.
- Capital spending declined as the approximately $200 million jumbo bloom vertical caster entered service in 2014. Management deferred installation of a planned $40 million quench-and-temper facility until market conditions offered a better expected return.
- No formal revenue or earnings guidance is provided in the filing. Management said available borrowing under the credit agreement was expected to meet working-capital, capital-expenditure and other liquidity needs for at least 12 months, and expected covenant compliance over that period.
- A February 26, 2016 credit-facility amendment reduced commitments from $300 million to $265 million, removed a one-time $100 million liquidity requirement and increased borrowing-rate margins by 0.75% (with a possible further 0.75% increase under specified circumstances). It also revised availability restrictions and covenant terms.
- The same day, the company agreed to a $20 million sale-and-leaseback of its Canton office facilities, with a 20-year lease; closing was anticipated in the second quarter of 2016. The 2016 credit agreement capped capital expenditures at $45 million.
- Key risks include continued oil and gas weakness, steel overcapacity and pricing pressure, raw-material and energy volatility, customer concentration (the 10 largest customers represented about 44% of 2015 sales), fixed-cost exposure at low utilization, variable-rate debt, and environmental and labor obligations. Approximately 58% of employees were covered by collective bargaining agreements expiring in December 2016 and September 2017.
- The company disclosed $1.3 million of environmental reserves and said ordinary-course litigation was not expected to have a material adverse effect. It also identified potential contingent obligations relating to its separation from Timken, including tax-sharing and indemnification exposures.
Important facts for investors to verify
- Whether demand, shipments and plant utilization recovered after the steep 2015 decline, particularly in energy and industrial markets.
- Current borrowing availability, applicable interest margins, covenant compliance and the effect of the February 2016 credit amendment on liquidity.
- Whether the Canton sale-and-leaseback closed on the anticipated terms and how the proceeds and long-term lease affect financing needs.
- Actual capital spending and returns from the jumbo caster, deferred heat-treatment project and other growth investments.
- Whether the dividend remains suspended and how management balances cash preservation, debt reduction and shareholder returns.
- Developments in Timken-related tax-sharing or indemnification obligations, environmental matters and labor negotiations.