Business context and reporting period
This is TimkenSteel Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The filing identifies the registrant as TimkenSteel Corporation (NYSE: TMST), not Metallus Inc.; verify that this is the intended filing. The company manufactures alloy, carbon and micro-alloy steel products and reports one business segment.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $154.0 million | $336.7 million | $413.6 million | $707.7 million |
| Gross profit (loss) | $(4.0) million | $14.8 million | $3.8 million | $43.2 million |
| Gross margin | (2.6)% | 4.4% | 0.9% | 6.1% |
| Net income (loss) | $(15.3) million | $(11.9) million | $(35.2) million | $(8.4) million |
| Diluted loss per share | $(0.34) | $(0.27) | $(0.78) | $(0.19) |
| Operating cash flow | Not separately provided for the quarter | $79.9 million | $(17.6) million |
Q2 sales fell 54.3% year over year; first-half sales declined 41.6%. Management attributed the sharp volume decline to COVID-19 disruptions across end markets and weakness in energy, with lower surcharges also reducing sales. The company estimated pandemic-related sales shortfalls of approximately $120 million in Q2 versus its pre-pandemic forecast and $130 million for the first half versus its forecast.
First-half operating cash flow improved by $97.5 million year over year, principally due to working-capital actions and lower activity. Inventory reduction contributed $75.5 million to operating cash flow; this cash generation should not be assumed to represent recurring earnings power. Capital expenditures were $9.6 million in the first half, versus $12.3 million in 2019.
Financial position, liquidity and debt
- At June 30, 2020, cash was $75.5 million, total current assets were $355.1 million and current liabilities were $169.9 million. The current ratio was approximately 2.1.
- Total debt was reported at $141.0 million: $60.0 million under the variable-rate credit agreement and $81.0 million net carrying value of convertible notes. The $86.3 million principal convertible notes mature June 1, 2021 and were classified as current.
- Credit-agreement availability was $176.4 million; total liquidity, including cash, was $251.9 million. The company reported compliance with all credit covenants at June 30.
- Shareholders’ equity was $527.0 million, down from $563.1 million at December 31, 2019. Pension and postretirement liabilities were $223.0 million.
Material changes, outlook and risks
- Lower volumes and unfavorable inventory adjustments drove gross profit down; Q2 included an approximately $3.1 million additional inventory reserve tied to energy-market weakness and the closed Houston facility. Cost reductions and favorable product mix partly offset the decline.
- Management expected customer demand in Q3 2020 to remain below the prior-year quarter, with possible periodic production outages. It stated that the pandemic’s further effects on operations, results and liquidity were uncertain.
- 2020 capital-spending expectations were reduced to $15–$20 million from a prior maximum of $25 million. Management said liquidity was sufficient for at least 12 months and expected to address the 2021 convertible-note maturity through cash, credit availability and/or refinancing; no assurance of refinancing terms was given.
- COVID-19 responses included executive and board pay reductions, suspended 401(k) matching for salaried employees, unpaid furloughs affecting about 90% of salaried employees, production cuts and deferred payroll taxes. The company said these measures preserved about $7 million of cash and reduced Q2 administrative expense by about $5 million.
- Restructuring since 2019 eliminated approximately 180 salaried positions, incurred $9.5 million of charges and was expected to generate about $21 million in annual savings. The Houston TMS facility was closed; asset sales generated gains, while remaining equipment valued at $2.1 million was held for sale.
- Other unusual items included a $7.6 million first-half pension-plan remeasurement loss (non-cash) and a $4.2 million gain on asset sales for the first half. U.S. deferred tax assets remained subject to a full valuation allowance.
- Raw-material surcharge timing can affect margins. Other disclosed risks include continued pandemic effects, customer demand and pricing, raw-material and energy costs, pension obligations, and the ability to refinance debt.
- Environmental matter: negotiations over EPA notices concerning alleged Clean Air Act violations were essentially concluded; an anticipated settlement included an approximately $0.4 million civil penalty and $1.0 million of clean-air capital improvements, subject to finalization. Management did not expect ordinary-course claims to materially affect results.
Most important facts to verify
- Confirm the filing’s issuer identity: the document is for TimkenSteel Corporation, although the request names Metallus Inc.
- Assess whether first-half operating cash flow is sustainable given its dependence on inventory and other working-capital reductions.
- Review the company’s ability to refinance or repay the $86.3 million convertible-note principal due June 2021 and maintain credit availability under a prolonged downturn.
- Track actual demand, production levels, inventory reserves and realized restructuring savings against management’s statements and expectations.
- Confirm the final terms and timing of the anticipated EPA settlement and related capital improvements.