Business context and reporting period
TimkenSteel Corporation (NYSE: TMST; the filing entity, notwithstanding the request’s “Metallus Inc.” label) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. It manufactures specialty steel bars, seamless mechanical tubing, billets and components, and reports one business segment.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $327.3 million | $154.0 million | $600.9 million | $413.6 million |
| Gross profit (margin) | $67.2 million (20.5%) | $(4.0) million (-2.6%) | $97.9 million (16.3%) | $3.8 million (0.9%) |
| Net income (loss) | $54.0 million | $(15.3) million | $63.8 million | $(35.2) million |
| Diluted EPS | $0.98 | $(0.34) | $1.19 | $(0.78) |
| Operating cash flow | Not separately stated for Q2 | $52.4 million | $79.9 million |
Q2 sales more than doubled, primarily on higher shipments to mobile and industrial customers and increased raw-material surcharges. For the quarter, shipments rose approximately 106,000 tons; surcharges added $79.6 million to sales, while unfavorable price/mix reduced sales by $34.5 million. Six-month sales increased 45.3%, with shipments up approximately 86,000 tons. Excluding surcharges, sales grew 72.2% in Q2 and 25.0% year to date. Management attributed improved gross profit to better raw-material spreads, lower manufacturing costs, higher volume and favorable inventory adjustments, partly offset by unfavorable price/mix.
Balance sheet, cash flow and liquidity
At June 30, cash was $115.2 million, current assets $456.3 million and current liabilities $235.7 million. Total assets were $1.063 billion and shareholders’ equity $570.0 million. Debt was $44.7 million, all current; the company had no Credit Agreement borrowings and reported $261.3 million of unused borrowing availability after letters of credit. Total liquidity, including cash, was $376.5 million. The 2025 convertible notes had $46.0 million principal and a reported fair value of approximately $93.8 million.
First-half operating cash flow was $52.4 million, down from $79.9 million, mainly because higher receivables and inventory absorbed cash as demand and production increased. Investing used $3.8 million and financing used $36.2 million, including $38.9 million to settle the 2021 convertible notes. Cash increased $12.4 million over the half-year. Management said available cash, forecast operating cash generation and credit capacity should cover operating, capital and benefit obligations for at least 12 months.
Material changes, outlook and risks
- Management indefinitely idled Harrison melt and casting assets in Q1; all melting and casting moved to Faircrest, while Harrison rolling and finishing continued. Annual melt capacity fell from about 2.0 million to 1.2 million tons, and shipment capacity from 1.5 million to 0.9 million tons. The related Q1 noncash charges included $7.9 million of impairment and $1.6 million of spare-parts write-downs.
- About 15 salaried positions were eliminated in the first half. The company reported approximately 230 cumulative salaried-position reductions, $13.3 million of related charges and expected ongoing annual savings of about $29 million.
- SBQ bar and tube lead times extended into Q1 2022. The semiconductor shortage reduced expected Q2 shipments by about 16,000 tons in mobile markets. No formal earnings or revenue guidance was provided.
- The 2025 notes became convertible at holders’ option from July 1 through September 30, 2021 after the share-price condition was met; the filing said no holders had elected conversion to date. Potential conversion could dilute shareholders depending on settlement.
- Other items affecting results included a $2.5 million Ohio sales-tax refund gain, pension-related income and remeasurement effects, and $8.2 million of first-half impairment charges. The company maintains a full U.S. deferred-tax-asset valuation allowance.
- ARPA pension funding provisions were expected, subject to assumptions and further IRS guidance, to potentially defer required domestic pension contributions until 2028; management emphasized uncertainty. Risks include demand and supply-chain changes, COVID-19 effects, raw-material and energy costs, surcharge timing, competition, pension obligations, litigation and environmental claims.
Key facts for investors to verify
- Whether stronger mobile and industrial demand, long lead times and improved margins persisted after June 30, including the effects of semiconductor constraints and raw-material surcharge timing.
- Cash conversion and working-capital needs as receivables and inventory rose; compare operating cash generation with reported earnings.
- Conversion, settlement and dilution outcomes for the 2025 notes, and ongoing access to the asset-based credit facility.
- Execution and savings from the Harrison idling and restructuring, and the operational effect of lower melt and shipment capacity.
- Actual pension contribution timing under ARPA, and realization of the employee retention credit and proceeds from the Shanghai subsidiary sale.