Business context and reporting period
This summary covers the quarter and six months ended June 30, 2018. The filing identifies the registrant as TimkenSteel Corporation; the request metadata names Metallus Inc., so investors should verify the intended issuer. TimkenSteel manufactures specialty alloy, carbon and micro-alloy steel products, including bars, tubes, billets and value-added products, serving mobile, industrial, energy and other markets.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $413.5 million | $339.3 million | $794.3 million | $648.7 million |
| Gross profit / margin | $32.1 million / 7.8% | $23.8 million / 7.0% | $53.2 million / 6.7% | $40.8 million / 6.3% |
| Operating income (loss) | $6.3 million | $1.5 million | $2.7 million | ($4.4) million |
| Net income (loss) | $8.4 million | $1.3 million | $6.5 million | ($4.0) million |
| Diluted EPS | $0.19 | $0.03 | $0.14 | ($0.09) |
- Sales rose 22% in both the quarter and first half. Excluding surcharges, sales increased 18% in Q2 and 17% in the first half; higher volumes and price/mix contributed. Shipments increased 5% in Q2 and 6% in the first half.
- Industrial and energy demand were key growth drivers. First-half revenue by end market was $314.6 million industrial, $284.1 million mobile, $117.9 million energy and $77.7 million other.
- Other income was $6.2 million in Q2 and $12.6 million in the first half; the filing text does not provide a clear explanation of its principal sources.
- First-half operating cash flow was negative $30.1 million, versus negative $11.6 million a year earlier. Investing cash outflow was $8.0 million; financing provided $52.6 million. Cash increased $14.5 million to $39.0 million.
- Working capital used $65.0 million of cash in the first half, primarily reflecting higher inventory and receivables. Net inventory increased $70.5 million from year-end to $294.5 million.
- At June 30, cash was $39.0 million and net availability under the asset-based credit facility was $147.4 million, for total liquidity of $186.4 million. Debt carrying amounts were $150.0 million under the revolving facility and $72.0 million for convertible notes, or $222.0 million in total. The revolver rate was 4.0% and it matures January 2023; the notes mature June 2021 and carry 6.0% cash interest.
Material changes versus the prior comparable period
- Improved sales and earnings reflected stronger industrial and energy demand and favorable price/mix. Gross profit also benefited from favorable raw-material spread in the first half.
- Higher inflation, raw-material costs and manufacturing costs partly offset gross-profit improvement. Q2 results also faced higher costs of obsolete scrap grades and the absence of a prior-year supplier refund; first-half costs included non-recurring legal costs and employee benefit claims.
- SG&A rose $2.6 million in Q2 and $4.4 million in the first half, primarily from variable compensation and employee costs. First-half interest expense increased $1.2 million, reflecting financing-cost write-offs and higher average borrowings, partly offset by lower rates.
- The January 2018 credit agreement increased revolving commitments from $265 million to $300 million and extended maturity to 2023. The company redeemed $30.2 million of Ohio revenue refunding bonds and had $150.0 million outstanding under the new facility at quarter-end.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said cash, projected operating cash flow and available borrowing capacity were expected to cover working capital, capital spending and debt service for at least 12 months and through the revolver’s January 2023 maturity, subject to assumptions including market demand, lower operating costs and increased liquidity.
- Management expected approximately $35 million of additional project costs over the next one to three years, including about $26 million for growth initiatives and $9 million for continuous improvement. The company also cited a new advanced heat-treatment line launched in late 2017.
- Raw-material and energy price volatility, inflation, demand and product mix, and the lag in customer surcharges may affect margins and cash needs. Management projected an increase in the 2018 LIFO reserve, primarily due to anticipated higher scrap prices and inflation.
- Variable-rate debt totaled $150.0 million; a 1 percentage-point rate increase would raise annual interest expense by approximately $1.5 million. The company reported compliance with credit covenants at June 30, 2018.
- The company maintained a valuation allowance against U.S. and certain foreign deferred tax assets, contributing to variability in its effective tax rate. Management did not anticipate a material overall impact from the Tax Cuts and Jobs Act.
- Q2 included $0.9 million of impairment and asset-disposal charges; first-half disclosures attribute about $0.5 million to discontinued-use property and $0.4 million to software. The company also reported ongoing EPA Clean Air Act notices concerning its Canton plants; negotiations were ongoing, and management did not expect a material adverse effect.
- The cash dividend remained suspended. Management said it would review dividends as business conditions improve.
Important facts for investors to verify
- Confirm whether the intended filing is TimkenSteel Corporation’s 2018 Q2 10-Q or a filing for Metallus Inc.; the submitted filing names TimkenSteel.
- Assess whether operating cash generation can improve as inventory and receivables absorb working capital, and whether available borrowing capacity remains adequate.
- Monitor the effect of scrap, energy and other input costs, surcharge timing, LIFO estimates and manufacturing costs on margins.
- Review revolver availability, covenant headroom, floating-rate exposure and the refinancing or conversion terms of the 2021 notes.
- Track the outcome and potential financial effects of the EPA notices, as well as planned capital spending and expected project costs.