Business context and reporting period
TimkenSteel Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. The company manufactures specialty alloy, carbon and micro-alloy steel, steel bars and tubing, and related value-added services for mobile, industrial, energy and other markets. The filing identifies the registrant as TimkenSteel Corporation.
Financial performance and liquidity
Dollars in millions except per-share data; comparative periods are the three and nine months ended September 30.
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $339.1 | $213.8 | $987.8 | $654.8 |
| Gross profit / margin | $18.5 / 5.5% | $7.5 / 3.5% | $59.3 / 6.0% | $25.2 / 3.8% |
| Operating loss | ($4.0) | ($14.3) | ($8.4) | ($41.9) |
| Net loss | ($5.9) | ($22.2) | ($9.9) | ($38.5) |
| Basic and diluted loss per share | ($0.13) | ($0.50) | ($0.22) | ($0.87) |
| Operating cash flow | Not presented by quarter | ($11.7) | $55.5 |
- Sales increased 58.6% in Q3 and 50.9% for nine months. Excluding raw-material surcharges, sales rose 41.3% and 31.8%, respectively.
- Shipments rose 63% in Q3 and 56% for nine months; melt utilization improved to 74% from 44% and 45%, respectively. Average selling price per ton including surcharges declined 2.7% in Q3 and 3.4% for nine months.
- Management attributed improved gross profit chiefly to volume, production efficiencies and favorable raw-material spread, partly offset by unfavorable price/mix and higher LIFO expense. Nine-month gross profit also benefited from a supplier refund.
- Nine-month operating cash flow swung to a use of $11.7 million, principally reflecting $68 million of working-capital use, including increased receivables and inventory. Investing cash use was $11.9 million; financing provided $23.8 million. Cash increased $0.2 million to $25.8 million.
- At September 30, current assets were $417.5 million and current liabilities were $188.6 million. Debt consisted of $69.2 million of convertible notes, net, and $95.2 million of other long-term debt, or $164.4 million combined. Shareholders’ equity was $592.7 million.
- The $265 million asset-based revolving facility had $65.0 million drawn and $164.3 million net availability after the borrowing-base availability block. Total liquidity, including cash, was $190.1 million. The company reported compliance with debt covenants.
Material changes, outlook and risks
- Compared with 2016, substantially higher shipment volumes and utilization improved sales and gross profit, while losses narrowed. Operating cash flow nevertheless deteriorated because of working-capital investment.
- Q3 other income was $1.9 million versus expense of $17.3 million a year earlier; nine-month other income was $10.7 million versus expense of $12.1 million. The principal driver was a smaller noncash pension remeasurement loss: $2.3 million in 2017 versus $20.4 million in 2016.
- Management expected cash, operating cash flow and available credit to meet working-capital, capital expenditure and debt-service needs for at least 12 months and through the credit facility’s June 30, 2019 maturity, subject to assumptions about demand and cash generation. No specific earnings or revenue guidance was provided.
- The company anticipated beginning operations at its approximately $40 million advanced quench-and-temper facility in Q4 2017. It expected about $31 million of additional project costs over the next one to three years.
- Raw-material cost volatility and the lag in surcharges can affect margins; rising anticipated raw-material costs and inventory quantities were expected to increase the LIFO reserve. Variable-rate debt exposes the company to higher interest expense; management estimated a 1 percentage-point rate increase would add about $1 million of annual interest expense.
- The collective bargaining agreement with USW Local 1123 had been extended beyond its September 25, 2017 expiration, with negotiations continuing; operations were uninterrupted. The company maintained a full valuation allowance against U.S. deferred tax assets, which may make the effective tax rate volatile. The dividend remained suspended.
- Management said ordinary-course legal matters and environmental exposures were not expected to have a material adverse effect; the environmental reserve was $0.5 million at September 30. The filing reported no material changes to the previously disclosed risk factors.
Most important facts for investors to verify
- Whether shipment growth and 74% melt utilization can be sustained without further deterioration in price/mix or margins.
- Whether working-capital demands, especially receivables and inventory, reverse sufficiently to support positive operating cash flow.
- Available borrowing capacity and covenant compliance under the asset-based facility, including sensitivity to changes in eligible receivables, inventory and equipment.
- Progress and remaining cost to complete the advanced quench-and-temper facility, and whether it begins operations as planned.
- Developments in union negotiations, raw-material surcharge recovery, LIFO costs and pension obligations.