Business Context and Reporting Period
TimkenSteel Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2015. The company manufactures alloy, carbon and micro-alloy steel products and reports two segments: Industrial & Mobile and Energy & Distribution. The 2014 comparison reflects pre-spinoff historical results prepared as if the business had operated independently; those results may not be directly indicative of a standalone company.
Financial Performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $388.7 million | $389.5 million |
| Gross profit / margin | $41.6 million / 10.7% | $73.5 million / 18.9% |
| Operating income | $12.1 million | $49.2 million |
| Net income | $6.9 million | $33.6 million |
| Diluted EPS | $0.15 | $0.73 |
| Operating cash flow | $14.6 million | $45.4 million |
| Capital expenditures | $17.9 million | $33.0 million |
Sales excluding raw-material surcharges, a non-GAAP measure, rose 4.5% to $313.6 million. Shipments increased 8.5% to 271,102 tons, while average selling price including surcharges fell 8.0% to $1,434 per ton. Segment EBIT declined sharply: Industrial & Mobile was $4.5 million (1.9% margin), versus $27.3 million (11.8%); Energy & Distribution was $4.6 million (3.0%), versus $28.2 million (17.9%).
Balance Sheet, Debt and Liquidity
At March 31, 2015, cash was $31.0 million, current assets $512.5 million and current liabilities $169.0 million. Long-term debt was $195.2 million, all variable-rate, compared with $185.2 million at year-end 2014. Shareholders’ equity was $752.2 million. The company had $134.0 million available under its $300 million revolving credit facility and reported $165.0 million of liquidity, in compliance with its covenants. A 1 percentage-point increase in interest rates would add approximately $2.0 million of annual interest expense, based on quarter-end variable-rate debt.
Material Changes and Management Commentary
Despite higher shipment volumes, gross profit fell $31.9 million year over year. Management attributed the decline chiefly to approximately $22 million of unfavorable raw-material spread from surcharge timing, $16 million of higher manufacturing costs and $7 million of unfavorable price/mix, partly offset by $8 million from volume and $6 million of LIFO income. Higher maintenance and consumable costs, caster-related depreciation, and increased pension and postretirement costs contributed to manufacturing cost pressure. SG&A rose 19.8% to $29.1 million, primarily reflecting costs of operating as an independent public company. Operating cash flow decreased by $30.8 million, mainly due to lower earnings and cash use from accounts payable and accrued expenses.
Outlook, Risks and Unusual Items
Management said existing cash, operating cash generation, credit availability and potential capital-market access should meet working-capital, investment, dividend, repurchase and other liquidity needs for at least 12 months. No specific earnings or revenue guidance was provided. The company expected an approximately $11 million of remaining project costs over the next one to three years. Its approximately $200 million jumbo bloom vertical caster began its first heat in October 2014; about $198 million had been incurred by March 31, 2015. Management expects the fully ramped caster to improve yield by approximately 15%, add up to 125,000 tons of annual finished capacity and broaden product capability. A separate $40 million quench-and-temper facility was expected to be operational within two years.
Key risks include variable interest rates, commodity-price volatility and the lag in passing raw-material costs through surcharges, changing customer demand and product mix, and execution of major capital projects. The company recorded a $0.4 million impairment charge and held $1.2 million in environmental reserves; management did not expect the disposition of environmental matters or ordinary-course legal claims to materially adversely affect results or financial position. The company reported no material changes to its previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether margin pressure from surcharge timing, manufacturing costs and price/mix continued after Q1.
- Progress, remaining spending and expected benefits of the jumbo bloom caster and quench-and-temper facility.
- Debt, unused revolving capacity and covenant compliance, particularly given that all debt is variable-rate.
- Whether shipment and sales growth excluding surcharges translated into improved segment EBIT.
- How pension costs, environmental reserves and any legal or product-liability contingencies develop.