TimkenSteel Corporation (TMST) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The filing issuer is TimkenSteel Corporation; the request metadata names Metallus Inc. The company manufactures alloy, carbon and micro-alloy steel products and reports as one business segment.
Financial results and position
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $259.7 million | $371.0 million |
| Gross profit / margin | $7.8 million / 3.0% | $28.4 million / 7.7% |
| Net income (loss) | $(19.9) million | $3.5 million |
| Diluted EPS | $(0.44) | $0.08 |
| Cash from (used in) operations | $63.8 million | $(33.6) million |
| Capital expenditures | $2.9 million | $4.4 million |
At March 31, 2020, cash was $65.6 million, total assets were $1.07 billion and shareholders’ equity was $542.1 million. Debt was $139.8 million in aggregate, including $60.0 million of variable-rate Credit Agreement borrowings and $86.3 million principal of convertible notes (carrying value $79.8 million). Credit availability not borrowed was $224.4 million; reported total liquidity was $290.0 million. The company reported compliance with all credit covenants and believed available liquidity would cover needs for at least 12 months.
Material changes and drivers
- Sales fell $111.3 million, or 30.0%, year over year. Shipments declined about 47,500 tons; lower surcharges reduced sales by $43.6 million, and mix reduced them by $9.3 million. Sales excluding surcharges fell 24.0%.
- Lower volumes, unfavorable price and product mix, and weaker manufacturing cost absorption drove gross profit down $20.6 million. SG&A was broadly flat at $23.4 million.
- Operating cash flow improved by $97.4 million, principally from working-capital changes, including inventory reductions and higher accounts payable. This improvement should be distinguished from earnings performance.
- Net cash from investing activities included $7.8 million of asset-disposal proceeds. Financing cash use of $30.2 million principally reflected repayment of Credit Agreement borrowings; the balance declined from $90.0 million at year-end 2019 to $60.0 million.
Outlook, risks and unusual items
- Management estimated COVID-19 reduced Q1 sales by about $10 million and expected customer demand to be sharply lower in Q2, with periodic production outages. The impact for the remainder of 2020 was uncertain.
- Cost and liquidity actions included executive and director compensation reductions, suspended salaried-employee 401(k) matching, rolling furloughs, temporary manufacturing layoffs and reduced production schedules. 2020 capital spending was capped at $25 million, $5 million below prior guidance.
- Restructuring had eliminated approximately 160 salaried positions and incurred $9.1 million of charges to date; management expected about $20 million of annual savings in 2020 and beyond. Q1 restructuring charges were $0.6 million.
- Q1 included a $9.5 million non-cash pension remeasurement loss, $1.6 million of accelerated depreciation related to the Houston facility closure, and a $3.2 million gain on sale of certain facility assets. The Akron scrap facility sale also generated a $0.2 million disposal loss.
- The company deferred employer Social Security payroll taxes under the CARES Act, expecting $7–$10 million of deferred payments, payable in equal installments in December 2021 and December 2022. A full valuation allowance remained against U.S. deferred tax assets.
- Key uncertainties include the duration and effects of COVID-19, customer demand and recovery, raw-material and energy costs, pension obligations, and access to financing. Management said additional financing might be sought if liquidity needs exceed expectations; no assurance was given on its terms or availability.
- Ordinary-course legal and environmental exposures included EPA notices alleging Clean Air Act violations at two Ohio plants; negotiations were ongoing, and management did not expect a material adverse effect. The contingency reserve was $1.0 million at quarter-end.
Important facts for investors to verify
- Whether subsequent filings confirm the scale and duration of COVID-related demand declines, outages and liquidity effects.
- Whether the reported cash-flow benefit from working capital is repeatable and how inventory and payables evolve.
- Progress toward the expected $20 million annual restructuring savings and the remaining restructuring costs.
- Credit-facility availability, collateral-based borrowing limits, covenant compliance and the June 2021 convertible-note maturity.
- Outcome and potential costs of the EPA matter, and the assumptions behind pension remeasurement and deferred-tax valuation allowances.