Business context and reporting period
The supplied filing is TimkenSteel Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020; it identifies the issuer as TimkenSteel Corporation (NYSE: TMST), not Metallus Inc. The filing describes a single-segment steel manufacturer serving mobile, industrial, energy and other markets. It was signed October 29, 2020.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $205.9 million | $274.2 million | $619.5 million | $981.9 million |
| Gross profit (loss) | $(2.4) million | $(2.6) million | $1.4 million | $40.6 million |
| Net income (loss) | $(13.9) million | $(17.0) million | $(49.1) million | $(25.4) million |
| Loss per diluted share | $(0.31) | $(0.38) | $(1.09) | $(0.57) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $121.0 million | $24.3 million |
Q3 gross margin was approximately negative 1.2% (gross loss divided by sales); nine-month gross margin was approximately 0.2%. Cash and equivalents were $74.8 million at September 30, versus $27.1 million at year-end 2019. Total liquidity was reported as $280.0 million, including $205.2 million of unused credit availability. Current assets were $343.8 million and current liabilities $202.9 million.
Debt at September 30 included $86.3 million principal of 6.0% convertible notes, classified as current and due June 1, 2021, and $20.0 million outstanding under the credit agreement. The credit agreement had $400 million maximum capacity, subject to collateral-based availability. The company repaid the remaining $20 million credit-agreement balance in October 2020. Total liabilities were $469.3 million; shareholders’ equity was $514.4 million.
Material changes versus the prior comparable period
- Q3 sales fell 24.9% year over year; nine-month sales fell 36.9%. The company attributed the declines primarily to lower shipment volumes and surcharges, reflecting COVID-19 disruption, weaker demand and a weak energy market.
- Management estimated COVID-19 reduced sales by approximately $70 million in Q3 and $200 million in the first nine months, versus pre-pandemic forecasts.
- Q3 gross loss narrowed by $0.2 million, while nine-month gross profit fell $39.2 million. Lower volumes and inventory adjustments weighed on year-to-date results; cost reductions, favorable raw-material spread and price/mix partly offset those pressures.
- Nine-month operating cash flow rose to $121.0 million from $24.3 million, primarily due to working-capital actions and lower activity. Inventory declined to $174.3 million from $281.9 million at year-end.
- Credit-agreement borrowing fell from $90.0 million at year-end to $20.0 million at September 30. Cash increased despite the operating loss, supported by working-capital release and reduced investment spending.
Outlook, commentary, risks and unusual items
- Management expected Q4 2020 demand to remain below the prior-year quarter and anticipated periodic production outages to align output with demand. The filing provides no quantified revenue or earnings guidance.
- 2020 capital expenditures were expected to be $15 million to $20 million; approximately $6 million was associated with growth and continuous-improvement initiatives. Management said liquidity was sufficient for at least 12 months, while noting pandemic duration and recovery remained uncertain.
- Cost and cash actions included executive and director compensation reductions, suspended salaried 401(k) matching, temporary salaried furloughs, manufacturing layoffs and deferred payroll taxes. Restructuring had eliminated about 210 salaried positions; management expected approximately $25 million in annual savings.
- Unusual items included a $3.1 million additional inventory reserve in Q2, a $4.7 million gain on asset sales for the nine months, and pension remeasurement effects (a $4.1 million gain in Q3 and a $3.5 million loss year to date). Q3 and nine-month results also included pension non-service benefit income.
- The company closed its Houston TMS facility and announced discontinuation of certain small-diameter tubing products effective December 31, 2020. It expected additional accelerated depreciation of $1.2 million in each of Q4 2020 and Q1 2021.
- Risks include pandemic-related demand, collections and supply disruption; energy-market weakness; raw-material price and surcharge timing; pension obligations; and refinancing or repayment of the convertible notes. The company reported compliance with credit covenants at September 30 and a $0.9 million reserve for ordinary-course contingencies.
- EPA matters were settled in August 2020: a $0.35 million civil penalty was paid, and approximately $1.0 million of clean-air capital improvements were committed within one year. Management said ordinary-course claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm issuer identity: the supplied metadata says Metallus Inc., but the filing cover identifies TimkenSteel Corporation and ticker TMST.
- Monitor demand recovery, shipment volumes and the extent of further COVID-19-related production outages, especially in mobile and energy markets.
- Assess the ability to repay, convert or refinance the $86.3 million principal of notes due June 2021, and verify post-October credit-agreement balances and borrowing availability.
- Distinguish cash generated from sustainable operations from working-capital release, particularly inventory reductions.
- Track execution of expected restructuring savings, capital spending, planned tubing-product exit costs and the stated liquidity outlook.