TimkenSteel Corporation — Q1 2019 Form 10-Q
Period and business: Quarter ended March 31, 2019. The filing is for TimkenSteel Corporation, a producer of specialty alloy, carbon and micro-alloy steel and related products and services. The request identifies Metallus Inc.; investors should verify the issuer identity and filing before relying on this summary.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $371.0 million | $380.8 million |
| Gross profit / margin | $29.1 million / 7.8% | $21.1 million / 5.5% |
| Operating income (loss) / margin | $5.8 million / 1.6% | ($3.6) million / (0.9%) |
| Net income (loss) | $4.2 million; $0.09 per diluted share | ($1.9) million; ($0.04) per diluted share |
| Operating cash flow | ($33.6) million | ($19.4) million |
| Capital expenditures | $4.4 million | $2.2 million |
| Cash and cash equivalents | $7.8 million at March 31 | $21.6 million at December 31, 2018 |
| Debt | $215.2 million total: $140.0 million variable-rate credit borrowings and $75.2 million net convertible notes | — |
| Credit availability / total liquidity | $157.4 million / $165.2 million | $182.4 million / $204.0 million at December 31, 2018 |
Changes and drivers
- Sales fell 2.6%. Shipments declined 39,000 tons, mainly reflecting a planned reduction in OCTG billet shipments; favorable price and mix added approximately $29.5 million and sales per ton rose 11.9%.
- Gross profit improved $8.0 million, driven by higher prices and a more favorable product mix, partly offset by increased manufacturing costs from planned downtime and an unfavorable raw-material spread.
- Operating cash use increased by $14.2 million year over year, primarily due to timing of supplier payments, partly offset by lower receivables and improved operating income. Inventory rose $27.5 million during the quarter; financing included $25.0 million of net credit-agreement borrowings.
- Other income declined to $2.7 million from $6.4 million, principally because pension and postretirement non-service benefit income was lower. Interest expense was $4.2 million, down from $4.6 million.
Outlook, risks and unusual items
- Management said available cash, expected operating cash flows and credit availability should cover working capital, capital spending and other needs for at least 12 months and through the credit facility’s January 2023 maturity. This outlook depends on assumptions including demand growth, lower operating costs and continued working-capital management. No specific revenue or earnings guidance was provided.
- Management expected approximately $28 million of spending over the next one to three years to complete ongoing projects, including about $21 million for growth initiatives and $7 million for continuous improvement. First-quarter capital expenditures were $4.4 million.
- On April 9, 2019, the company announced a Medicare-exchange transition for Medicare-eligible union retirees. It estimates a $65–$70 million reduction in accumulated postretirement benefit obligation and approximately $5 million lower expected 2019 postretirement benefit cost, excluding an undetermined mark-to-market adjustment. The change is to be accounted for in Q2 2019, following an April 30 remeasurement.
- The company adopted lease accounting on January 1, 2019, recognizing operating lease right-of-use assets and liabilities; it reported no material effect on earnings or cash flows and no effect on debt-covenant compliance. At March 31, operating lease assets were $15.9 million and lease liabilities totaled $15.9 million.
- The company was in compliance with credit covenants. A 1 percentage-point rise in rates on variable-rate debt would increase annual interest expense by an estimated $1.4 million. U.S. deferred tax assets remained subject to a full valuation allowance.
- EPA notices allege Clean Air Act violations at the Faircrest and Harrison plants; the company disputes many allegations and negotiations are ongoing. Management did not expect a material adverse effect. Ordinary-course contingency reserves were $1.3 million.
Important facts to verify
- Confirm the issuer: this filing names TimkenSteel Corporation, not Metallus Inc.
- Assess the sustainability of improved pricing and mix, shipment trends, and the impact of planned downtime, raw-material prices and surcharge timing on margins.
- Monitor working-capital cash use, particularly inventory and supplier-payment timing, alongside declining cash and credit availability.
- Review debt maturities, variable-rate exposure, covenant headroom and the assumptions underlying management’s liquidity outlook.
- Follow the retiree health-plan remeasurement and the actual accounting and earnings effects, including the unresolved mark-to-market impact.
- Track the EPA matter and other contingencies; the filing does not quantify a potential outcome for the EPA notices.