TimkenSteel Corporation — FY 2019 Form 10-K
Issuer note: The supplied filing identifies the registrant as TimkenSteel Corporation, not Metallus Inc. The reporting period is the fiscal year ended December 31, 2019; the filing was signed February 25, 2020.
Business context and reporting period
TimkenSteel manufactures specialty alloy, carbon and micro-alloy steel, tubes, billets and value-added components for mobile, industrial, energy and other markets. It reports one operating segment. The filing covers full-year results and provides unaudited quarterly data.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $1,208.8 million | $1,610.6 million |
| Gross profit (margin) | $22.6 million (1.9%) | $126.6 million (7.9%) |
| Net income (loss) | ($110.0) million | ($10.0) million |
| Diluted loss per share | ($2.46) | ($0.22) |
| Cash from operating activities | $70.3 million | $18.5 million |
| Capital expenditures | $38.0 million | $40.0 million |
| Cash and cash equivalents at year-end | $27.1 million | $21.6 million |
Operating cash flow less capital expenditures was $32.3 million in 2019, a derived measure. Year-end total assets were $1,085.2 million and shareholders’ equity was $563.1 million. Debt was $168.6 million on the balance sheet, net of discounts and issuance costs; principal outstanding was $176.3 million ($90.0 million under the revolver and $86.3 million of convertible notes).
Total liquidity was $230.3 million, comprising cash and $203.2 million of unused credit availability. The amended asset-based revolver has a $400 million commitment and matures October 15, 2024; availability is subject to the borrowing base. The company reported no dividends for 2019.
Material changes versus the prior comparable period
- Sales declined 24.9%. Shipments fell by approximately 301,000 tons, primarily due to weaker demand across key end markets; lower surcharge revenue also reduced sales. Improved price and mix partly offset the decline.
- Gross profit fell $104.0 million, or 82.1%. Melt utilization dropped to 50% from 74%, weakening fixed-cost absorption; lower volume and unfavorable raw-material spread also weighed on results.
- The company generated more operating cash despite its larger net loss, primarily through working-capital reductions in receivables and inventory. It used $25.0 million of net cash to repay debt.
- During Q4, the company changed inventory accounting from LIFO to FIFO and retrospectively adjusted prior periods. FIFO reduced reported 2019 gross profit and net income by $25.7 million, or $0.57 per share, versus LIFO; 2019 year-end inventory was $52.1 million higher under FIFO.
Outlook, management commentary, risks and unusual items
- Management said cash, projected operating cash flow and borrowing availability should cover working capital, capital expenditures and other liquidity needs for at least the next 12 months and through the revolver’s maturity. The filing gives no numerical sales or earnings guidance.
- Management expected approximately $18 million of annual savings beginning in 2020 from restructuring that eliminated about 150 salaried positions, roughly 15% of the salaried workforce. The company recorded $8.6 million of restructuring charges in 2019.
- The board approved closure of the Houston TimkenSteel Material Services facility in Q1 2020. Related 2019 charges included $4.8 million of inventory write-downs and $2.8 million of accelerated depreciation and amortization; a further $1.6 million of accelerated depreciation was expected in Q1 2020.
- The company agreed to sell its Akron scrap-processing facility and recorded a $7.3 million impairment; the sale was completed in January 2020 for approximately $4.0 million. The disposal was not treated as a discontinued operation.
- Other income and expense included a $40.6 million loss from remeasurement of benefit plans, partly offset by $17.5 million of non-service benefit income. Pension and postretirement obligations remain material and sensitive to discount rates, investment returns and other assumptions.
- Key risks include cyclical demand, steel-industry competition and import pressure, raw-material and energy costs, operational disruption, customer concentration, debt and covenant restrictions, pension funding, and environmental compliance. EPA notices allege Clean Air Act violations at the Canton facilities; negotiations were ongoing, and management did not expect a material adverse effect. Environmental reserves were $1.2 million at year-end.
Important facts for investors to verify
- Whether customer demand and melt utilization recovered after 2019, and how that affects margins and cash generation.
- Whether the anticipated $18 million of annual savings was achieved and whether facility closures or restructuring generated further costs.
- Current revolver borrowing-base availability, covenant compliance, and the company’s ability to address the $86.3 million convertible notes due June 2021.
- Actual pension and postretirement cash contributions, funded status and sensitivity to market assumptions.
- Final disposition and financial impact of the EPA notices and any other environmental matters.
- The effects of the retrospective LIFO-to-FIFO change when comparing reported results with earlier company disclosures or peers.