TimkenSteel Corporation — Q2 2019 Form 10-Q
Period: Quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. The filing identifies the registrant as TimkenSteel Corporation (NASDAQ: TMST), not Metallus Inc., as stated in the request metadata. Figures are in millions of dollars except per-share data.
Business context and financial performance
TimkenSteel manufactures specialty alloy, carbon and micro-alloy steel products and related services, reporting as one business segment. Q2 sales fell 18.6% to $336.7 million, while first-half sales declined 10.9% to $707.7 million. Management attributed the decreases mainly to lower shipment volumes, especially in industrial markets and OCTG billets, and lower raw-material surcharges. Higher realized pricing and favorable product mix partly offset the volume declines.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $336.7 | $413.5 | $707.7 | $794.3 |
| Gross profit | $25.4 | $32.1 | $54.5 | $53.2 |
| Gross margin | 7.5% | 7.8% | 7.7% | 6.7% |
| Net income (loss) | ($4.4) | $8.4 | ($0.2) | $6.5 |
| Basic EPS | ($0.10) | $0.19 | $0.00 | $0.15 |
| Interest expense | $4.2 | $3.9 | $8.4 | $8.5 |
Q2 gross profit declined 20.9%, reflecting lower volumes, unfavorable manufacturing costs and raw-material spread, partly offset by higher price/mix and a favorable LIFO adjustment. First-half gross profit increased 2.4%, with pricing and LIFO benefits more than offsetting those headwinds. Q2 included $3.6 million of restructuring charges and a $1.7 million loss on asset disposals. Other income fell to $0.2 million from $6.2 million in Q2 2018, including a $4.4 million postretirement-plan remeasurement loss.
Cash flow, debt and liquidity
- First-half operating cash used was $17.6 million, versus $30.1 million used in 2018; capital expenditures were $12.3 million, versus $9.0 million.
- Financing provided $29.2 million, including $30.0 million of net credit-agreement borrowings. Cash declined $0.7 million to $20.9 million.
- At June 30, cash was $20.9 million; credit-agreement borrowings were $145.0 million, with $152.4 million of unused availability. Reported total liquidity was $173.3 million.
- Balance-sheet debt was $145.0 million under the Credit Agreement plus $76.3 million of convertible notes, net; the notes have $86.3 million principal and mature June 1, 2021. The Credit Agreement matures January 26, 2023. The company reported compliance with all covenants.
- Current assets were $482.3 million and current liabilities $155.0 million. The company reported $221.3 million of aggregate debt outstanding, including $145.0 million variable-rate debt; a 1% rate increase was estimated to raise annual interest expense by $1.4 million.
Material changes, outlook and risks
Management said it expects cash, operating cash flows and available borrowings to cover working capital, capital spending and other liquidity requirements for at least the next 12 months and through the Credit Agreement maturity. This expectation depends on assumptions including stable demand, lower operating costs and continued working-capital management; it is not specific earnings guidance.
The company eliminated approximately 55 salaried positions in Q2, recording $3.6 million of severance-related charges. It expects approximately $2 million of savings in 2019 and approximately $7 million annually beginning in 2020. Management cited accelerated maintenance at two plants and lower melt utilization as factors weighing on manufacturing costs, while saying the maintenance was intended to free capacity later in 2019. It expects to spend approximately $47 million over the next one to three years to complete ongoing projects.
A postretirement-plan amendment for Medicare-eligible union retirees reduced the benefit obligation by $70.2 million. The reduction was recorded in other comprehensive income and is expected to offset postretirement benefit cost over 12 years; a separate $4.4 million remeasurement loss was recognized. Accordingly, comprehensive income included a large noncash OCI benefit and should not be read as operating earnings.
Principal risks include weaker customer demand and cyclical markets, competition and pricing, raw-material and energy cost volatility, and the timing and effectiveness of surcharges. Management noted that surcharges can lag cost changes and may dilute gross margin as a percentage of sales. The company maintained a full valuation allowance against U.S. deferred tax assets. It reported ongoing EPA Clean Air Act Notices of Violation concerning its Canton plants, disputed some allegations, and said resolution was not expected to materially affect financial results. The general contingency reserve was $1.5 million; management said ordinary-course claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the registrant identity: this filing is for TimkenSteel Corporation, not Metallus Inc.
- Track shipment volumes, especially industrial and OCTG billet demand, and the extent to which price/mix can offset weaker volumes.
- Assess the persistence of manufacturing-cost and raw-material-spread pressures, LIFO effects, and the timing of surcharge recovery.
- Monitor operating cash flow, working capital, borrowing availability, covenant compliance and variable-rate exposure.
- Verify delivery of the announced restructuring savings and planned capital-project spending.
- Review the postretirement-plan accounting effects and the status and potential consequences of the EPA proceedings.