TimkenSteel Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The supplied filing identifies the registrant as TimkenSteel Corporation; it does not identify Metallus Inc. as the registrant.
Business context and financial results
TimkenSteel manufactures alloy, carbon and micro-alloy steel, including special bar quality bars, seamless mechanical tubing and value-added products. Its products serve mobile, industrial, energy and other markets.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $309.4 million | $217.9 million |
| Sales excluding raw-material surcharges | $251.1 million | $202.4 million |
| Gross profit / margin | $17.0 million / 5.5% | $5.4 million / 2.5% |
| Operating loss | $5.9 million | $16.7 million |
| Net loss / diluted loss per share | $5.3 million / $0.12 | $9.7 million / $0.22 |
| Cash from (used in) operations | ($26.3 million) | $20.1 million |
| Capital expenditures | $2.7 million | $8.5 million |
Shipments rose 50.4% to 279,904 tons and melt utilization increased to 71% from 47%. Average selling price including surcharges fell 5.6% to $1,105 per ton. Sales growth excluding surcharges was 24.1%.
Liquidity, debt and balance sheet
At March 31, cash was $20.6 million, down from $25.6 million at year-end. Total liquidity was $173.8 million, comprising cash and $153.2 million net availability under the asset-based revolving credit facility. The facility had $65.0 million drawn; availability was subject to borrowing-base limits and a $33.1 million block.
Debt carrying value was $162.5 million: $67.3 million of convertible notes, net, and $95.2 million of other long-term debt. The notes have $86.3 million principal, bear 6% cash interest and mature in 2021. Variable-rate debt totaled $95.2 million; management estimated a 1-percentage-point rate increase would add approximately $1.0 million in annual interest expense. The company reported compliance with its debt covenants.
Operating cash use reflected a $41.0 million working-capital outflow, including increases in receivables and inventory; the company also borrowed $25.0 million under its credit agreement. Current assets were $370.1 million and current liabilities $173.7 million. Shareholders’ equity was $593.2 million.
Material changes and drivers
- Sales increased $91.5 million year over year. Higher volumes added approximately $107 million and favorable raw-material spread approximately $43 million; price and mix reduced sales by approximately $58 million.
- Gross profit improved $11.6 million. Management attributed the improvement mainly to volume, favorable raw-material spread and approximately $12 million of production efficiencies, partly offset by approximately $30 million from price/mix and $4 million of lower LIFO income.
- Sales included $58.3 million of surcharges, compared with $15.5 million in Q1 2016. Management noted surcharge timing can affect margin and may not fully offset raw-material cost changes in every period.
- Interest expense increased to $3.6 million from $2.0 million, primarily following the 2016 convertible-note issuance. SG&A rose modestly to $22.9 million.
Outlook, risks and unusual items
Management said cash, projected operating cash flows and available credit were expected to cover working capital, capital spending and debt service for at least the next 12 months and through the credit facility’s June 2019 maturity, subject to assumptions about operating improvement and demand. No quantified quarterly earnings or revenue guidance is provided in the supplied filing text. Management expected to commission its approximately $40 million advanced quench-and-temper facility in Q4 2017; it estimated a further $34 million of project costs over the next one to three years.
Key risks include weaker industrial, energy or automotive demand; pricing and product-mix pressure; raw-material and energy cost volatility and surcharge timing; working-capital needs; and covenant compliance. Failure to meet credit covenants without an amendment or refinancing could make revolving debt immediately due. Management reported no material changes to the risk factors in its 2016 Form 10-K. Ordinary-course legal matters were not expected to have a material adverse effect; environmental reserves were $0.6 million.
The company early adopted ASU 2017-07, changing presentation of non-service pension and postretirement costs; Q1 2016 amounts were reclassified for comparability. A full valuation allowance against U.S. deferred tax assets may contribute to effective-tax-rate variability. The cash dividend remained suspended.
Most important facts for investors to verify
- Whether the strong shipment recovery and higher utilization persist, and whether price/mix continues to offset volume gains.
- Whether operating cash flow improves as receivables and inventories normalize; Q1 operating cash use was $26.3 million.
- Current borrowing-base availability, covenant headroom and the assumptions supporting management’s liquidity outlook.
- Project completion timing and remaining spending for the advanced quench-and-temper facility and other capital projects.
- Future tax-allowance developments, raw-material surcharge recovery and the effect of variable interest rates.