Metallus Inc. quarterly report, Q3 FY2021

Business context and reporting period

This is TimkenSteel Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The filing identifies the issuer as TimkenSteel Corporation (ticker TMST); it does not identify Metallus Inc. as the registrant. TimkenSteel manufactures specialty steel products and reports one business segment.

Financial performance and liquidity

Q3 sales rose 66.9%; nine-month sales rose 52.5%. Management attributed growth to higher surcharges and shipments, partly offset by unfavorable price/mix. Q3 shipments increased approximately 58,000 tons year over year; nine-month shipments increased approximately 144,000 tons. Gross profit improved on higher volume, improved manufacturing costs and favorable raw-material spreads. Higher scrap and alloy surcharges increased reported sales but can dilute gross margin as a percentage of sales.

For the nine months, investing cash outflow was $0.9 million and financing cash outflow was $36.1 million. Cash increased $69.2 million to $172.0 million. Operating cash flow declined from $121.0 million, principally reflecting working-capital investment as inventories and receivables grew with demand. Capital expenditures were $7.3 million.

At September 30, 2021, total debt carrying value was $44.8 million, all current, representing the 2025 convertible notes; principal was $46.0 million. The notes bear 6.0% interest and mature December 2025. No credit-facility borrowings were outstanding; unused availability was $272.4 million and total liquidity, including cash, was $444.4 million. The company reported compliance with credit-agreement covenants. Total liabilities were $495.8 million and shareholders’ equity was $620.6 million.

Material changes versus the prior comparable period

• Profitability rebounded from a Q3 2020 loss to Q3 2021 net income of $50.1 million; nine-month results likewise moved from a $49.1 million loss to $113.9 million income.
• Industrial and mobile demand supported shipment growth. The semiconductor shortage reduced expected mobile shipments by approximately 15,000 tons in Q3 and 33,000 tons for the nine-month period.
• TimkenSteel indefinitely idled Harrison melt and casting operations in Q1 2021, consolidating melting and casting at Faircrest. Annual melt capacity fell from about 2.0 million to 1.2 million tons; shipment capacity fell from about 1.5 million to 0.9 million tons. Harrison rolling and finishing continued.
• The 2021 notes matured in June and were settled with $38.9 million cash and approximately 0.1 million shares. The 2025 notes became convertible at holders’ option during October–December 2021 after the stock-price conversion test was met.
• Cash and working-capital balances increased: receivables were $130.1 million versus $63.3 million at year-end 2020, and inventory was $214.4 million versus $178.4 million.

Outlook, commentary, risks and unusual items

The filing provides no quantified revenue or earnings guidance. Management said bar and tube lead times extended into Q2 2022 and believed cash, projected operating cash flows and available credit would meet liquidity needs for at least 12 months. Management expects approximately $30 million in ongoing annual savings from prior restructuring actions. A further voluntary exit program announced in October is expected to generate about $5 million annual savings, with an approximately $4 million Q4 2021 restructuring charge and cash payments primarily in 2022.

• Management estimates ARPA pension relief has delayed required domestic defined-benefit contributions until 2030, based on current assumptions and expected asset returns; it cautions that estimates are significantly uncertain.
• The 2025 notes’ conditional conversion feature creates potential dilution or cash settlement exposure. Their $87.4 million estimated fair value exceeded their $46.0 million principal at quarter-end.
• Notable items included $28.0 million of nine-month non-service pension and postretirement benefit income, a $2.5 million Ohio sales-tax refund gain, $8.2 million of impairment charges, and a $1.1 million loss on the Shanghai subsidiary sale. The Harrison asset and spare-parts write-downs were non-cash.
• Other stated risks include raw-material and energy price volatility, surcharge timing, customer-demand and product-mix changes, supply-chain constraints including semiconductor shortages, COVID-19 impacts, competition, labor costs and relations, pension performance, and litigation or environmental claims. The company reported a $2.3 million contingency reserve and said ordinary-course claims were not expected to materially affect results.
• Subsequent events: a new four-year union contract covering approximately 1,180 employees was ratified October 29, 2021, with a contract bonus expected to cost about $2 million in Q4. An employee-retention tax-credit cash receipt was still pending.

Important facts for investors to verify

• Confirm the issuer and security: this supplied filing is for TimkenSteel Corporation, not an entity named Metallus Inc.
• Assess whether improved demand, production, price/mix and raw-material spreads are sustainable, particularly given the chip shortage and longer lead times.
• Track working-capital needs and cash conversion as receivables and inventory rose, despite positive nine-month operating cash flow.
• Review the 2025 convertible notes’ conversion and settlement terms, possible dilution, and the distinction between carrying value, principal and estimated fair value.
• Evaluate the assumptions underlying pension contribution deferrals, restructuring savings and future charges, as well as the company’s stated liquidity outlook.