TimkenSteel Corporation (now Metallus Inc.) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing was made under the name TimkenSteel Corporation. The company manufactures specialty alloy, carbon and micro-alloy steel products and related value-added services.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $339.3 million | $223.1 million | $648.7 million | $441.0 million |
| Gross profit | $23.8 million | $12.3 million | $40.8 million | $17.7 million |
| Gross margin | 7.0% | 5.5% | 6.3% | 4.0% |
| Operating income (loss) | $1.5 million | $(10.9) million | $(4.4) million | $(27.6) million |
| Net income (loss) | $1.3 million | $(6.6) million | $(4.0) million | $(16.3) million |
| Diluted EPS | $0.03 | $(0.15) | $(0.09) | $(0.37) |
- Sales excluding raw-material surcharges, a non-GAAP measure, rose 31% in Q2 and 27% in the first half. Shipments increased 55% in Q2 and 53% in the first half; melt utilization improved to 76% and 74%, respectively.
- Reported average selling price per ton, including surcharges, fell 2.0% in Q2 and 3.8% in the first half. Management attributed sales growth principally to volume, with price/mix partly offsetting gains.
- Management attributed the gross-profit improvement to greater volume and production efficiencies, favorable raw-material spread, and a roughly $5 million supplier refund. Lower LIFO income and unfavorable price/mix were offsets. The supplier refund is a notable period item.
- Six-month operating cash flow was a use of $11.6 million, versus $48.0 million provided in the prior-year period. Working capital used approximately $51 million, driven in part by higher receivables and inventories. Capital expenditures were $6.8 million; cash rose to $36.2 million from $25.6 million at year-end.
Balance sheet, debt and liquidity
- At June 30, cash was $36.2 million; current assets were $397.0 million and current liabilities $176.8 million. Inventory was $199.3 million, up from $164.2 million at December 31, 2016.
- Debt totaled $168.4 million: $68.2 million of convertible notes, net, and $100.2 million of other long-term debt, including $70.0 million drawn on the revolving credit agreement. Revolver borrowings increased $30 million during the first half, primarily to fund working capital.
- Net availability under the $265 million asset-based credit facility was $152.4 million; reported total liquidity, including cash, was $188.6 million. The company reported compliance with its covenants at quarter-end and expected to remain compliant.
- The convertible notes have $86.3 million principal, bear 6% cash interest and mature June 1, 2021. Their reported fair value was approximately $149.4 million at June 30, compared with $68.2 million net carrying value.
- All other long-term debt was variable-rate. The company estimated that a 1 percentage-point rise in rates would increase annual interest expense by about $1.0 million.
Outlook, risks and unusual matters
- Management stated that cash, expected operating cash flow and available revolver capacity should meet working-capital, capital-spending and debt-service needs for at least the next 12 months and through the credit facility’s June 2019 maturity. This outlook depends on assumptions including market demand and operating performance; the company said additional financing or cost reductions could be considered if liquidity falls short.
- The company expected to begin operations at its approximately $40 million advanced quench-and-temper facility in Q4 2017. It reported $39.2 million spent by June 30 and expected about $29 million in further project costs over the next one to three years.
- U.S. deferred tax assets remained subject to a full valuation allowance because management concluded they were more likely than not to be unrealized. A roughly $1.0 million discrete tax charge affected Q2 2017.
- Raw-material surcharges generally mitigate cost changes but operate with a lag; the filing notes that this can affect recovery and margins. The company also projected an increase in its LIFO reserve for 2017, primarily from anticipated higher raw-material costs and inventory quantities.
- Ordinary-course litigation, environmental, warranty and other loss exposures were described as not expected to materially harm the company. The environmental reserve was $0.6 million at June 30. No material changes to the risk factors in the 2016 Form 10-K were reported.
- The board had suspended cash dividends in 2015; no dividend was paid in the periods shown. The filing provides no clear numerical earnings or sales guidance for upcoming periods.
Important facts for investors to verify
- Whether shipment growth and higher utilization persist, and whether underlying gross margins improve after separating surcharge effects, price/mix, LIFO and the supplier refund.
- Whether working-capital investment converts to cash, given the first-half operating cash outflow and increased revolver borrowing.
- Future fixed-charge covenant headroom and borrowing availability under the asset-based facility, particularly if demand or operating results weaken.
- Progress, timing and remaining cost of the quench-and-temper facility and other capital projects.
- The potential effects of raw-material price changes, LIFO valuation, tax valuation allowances and variable interest rates on reported results.