Business context and reporting period
The supplied Form 10-Q identifies the registrant as TimkenSteel Corporation, not Metallus Inc. It covers the quarter and nine months ended September 30, 2019. TimkenSteel manufactures specialty alloy, carbon and micro-alloy steel products and reports as one business segment.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $274.2m | $409.9m | $981.9m | $1,204.2m |
| Gross profit | $13.2m | $24.6m | $67.7m | $77.8m |
| Gross margin | 4.8% | 6.0% | 6.9% | 6.5% |
| Net income (loss) | ($4.6m) | $1.4m | ($4.8m) | $7.9m |
| Diluted EPS | ($0.10) | $0.03 | ($0.11) | $0.17 |
| Operating cash flow | — | $24.3m | ($28.4m) |
For the nine months, capital expenditures were $21.7m; cash declined $3.2m to $18.4m. At September 30, total debt was $187.4m: $110.0m under the credit agreement and $77.4m of convertible notes, net. The company reported $187.0m of undrawn credit availability and total liquidity of $205.4m. It was compliant with credit-agreement covenants. The filing states that a 1 percentage-point increase in rates on variable-rate debt would add about $1.1m to annual interest expense.
Material changes versus prior periods
- Q3 sales fell 33.1% year over year; nine-month sales fell 18.5%. Management attributed the declines mainly to lower shipments and surcharges, including weaker industrial and energy demand and fewer OCTG billet shipments. Shipments declined about 86,000 tons in Q3 and 186,000 tons year to date.
- Q3 gross profit fell 46.3%; year-to-date gross profit fell 13.0%. Lower melt utilization and fixed-cost absorption, unfavorable raw-material spread and lower volumes pressured results. Favorable price/mix and LIFO inventory valuation partly offset the pressure.
- SG&A declined $2.6m in Q3 and $8.7m year to date, reflecting cost-reduction efforts and lower variable compensation. Operating cash flow improved by $52.7m year over year, primarily from lower working-capital use and pension payments.
- Q3 sales by end market were $110.2m mobile, $116.9m industrial, $32.6m energy and $14.5m other. Each was below the prior-year quarter.
Outlook, commentary, risks and unusual items
- Management expected about $2m of savings in fiscal 2019 from the 2019 restructuring and approximately $7m in annual savings beginning in 2020. The filing provides no specific sales or earnings guidance.
- Management believed cash, projected operating cash generation and available borrowing capacity would meet needs for at least the next 12 months and through the amended facility’s maturity, while noting that weaker cash generation or greater liquidity needs could require additional financing or cost and capital-spending reductions.
- On October 15, 2019, after quarter-end, the company amended its revolving facility: capacity increased from $300m to $400m and maturity extended to October 15, 2024. The amendment also improved pricing terms; borrowing availability remains subject to a borrowing-base calculation and other conditions.
- A second-quarter postretirement plan amendment reduced the benefit obligation by $70.2m, recorded in other comprehensive income and amortized over 12 years. A $4.4m remeasurement loss was recognized in earnings. The resulting pension/postretirement accounting contributed to a substantial year-to-date increase in comprehensive income despite a net loss.
- The CEO and President stepped down October 8, 2019. The company expected fourth-quarter charges of about $4.0m for severance and $1.5m–$2.0m for accelerated equity awards; October organizational changes were expected to add about $1.7m of restructuring charges.
- Risks include cyclical customer demand, raw-material and energy prices and surcharge timing, manufacturing utilization, interest rates, pension obligations, and litigation or environmental matters. EPA Notices of Violation concerning two Ohio plants remained under negotiation; management did not expect a material adverse effect. Ordinary-course contingency reserves were $1.4m.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for TimkenSteel Corporation, although the request metadata names Metallus Inc.
- Track order volumes and demand, especially in industrial and energy markets, and the pace of OCTG billet shipments.
- Assess whether price/mix, surcharge recovery, LIFO benefits and utilization can offset continued volume and cost pressure.
- Review liquidity and borrowing-base availability under the amended facility, covenant conditions, and the convertible notes’ June 2021 maturity.
- Monitor restructuring savings and the fourth-quarter leadership-transition and reorganization charges.
- Follow the EPA matter and the effects of the postretirement plan amendment, including future benefit costs and tax valuation allowances.