METALLUS INC. (dollars in millions, except per share data)
Business Overview
We manufacture alloy steel, as well as carbon and micro-alloy steel. Our portfolio includes special bar quality ("SBQ") bars, seamless mechanical tubing ("tubes"), manufactured components (formerly known as value-added solutions) such as precision steel components, and billets. In addition, we supply machining and thermal treatment services and manage raw material recycling programs, which are also used as a feeder system for our melt operations. Our products and services are used in a diverse range of demanding applications in the following market sectors: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and oil country tubular goods ("OCTG").
SBQ steel is made to restrictive chemical compositions and high internal purity levels and is used in critical mechanical applications. We make these products from nearly 100% recycled steel, using our expertise in raw materials to create custom steel products. We focus on creating tailored products and services for our customers' most demanding applications. Our engineers are experts in both materials and applications, so we can work closely with each customer to deliver flexible solutions related to our products as well as to their applications and supply chains.
The SBQ bar, tube, and billet production processes take place at our
The lead time for our products varies based on product type and specifications. As of the date of this filing, lead times for SBQ bars and tubes extend into the second quarter of 2022.
On
Prior to indefinitely idling these assets, we had an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. After indefinitely idling these assets, our annual melt capacity is approximately 1.2 million tons and our shipment capacity is approximately 0.9 million tons.
On
We conduct our business activities and report financial results as one business segment. The presentation of financial results as one reportable segment is consistent with the way we operate our business and is consistent with the manner in which the Chief Operating Decision Maker ("CODM") evaluates performance and makes resource and operating decisions for the business as described above. Furthermore, the Company notes that monitoring financial results as one reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of our operations.
Impact of Raw Material Prices
In the ordinary course of business, we are exposed to the volatility of the costs of our raw materials. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing process. We utilize a raw material surcharge mechanism when pricing products to our customers, which is designed to mitigate the impact of increases or decreases in raw material costs, although generally with a one-month lag effect. This timing effect can result in raw material spread whereby costs can be over- or under-recovered in certain periods. While the surcharge generally protects gross profit, it has the effect of diluting gross margin as a percent of sales.
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Table of Contents Results of OperationsNet Sales
The charts below present net sales and shipments for the three months ended
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Net sales for the three months ended
The charts below present net sales and shipments for the nine months ended
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Net sales for the nine months ended
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Table of Contents Gross Profit
The chart below presents the drivers of the gross profit variance from the three
months ended
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Gross profit for the three months ended
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Table of Contents
The chart below presents the drivers of the gross profit variance from the nine
months ended
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Gross profit for the nine months ended
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Selling, General and Administrative Expenses
The charts below present selling, general and administrative ("SG&A") expense
for the three and nine months ended
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SG&A expense for the three and nine months ended
Restructuring Charges
Over the past several years,
During this period of organizational changes, the Company has eliminated
approximately 230 salaried positions through restructuring actions and
recognized restructuring charges of
In
Refer to "Note 4 - Restructuring Charges" and "Note 15 - Subsequent Events" in the Notes to the unaudited Consolidated Financial Statements for additional information.
Interest Expense
Interest expense for the three and nine months ended
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Other (Income) Expense, net
Three Months Ended September 30,
2021 2020 $ Change
Pension and postretirement non-service
benefit (income) loss $ (9.2 ) $ (6.7 ) $ (2.5 )
Loss (gain) from remeasurement benefit plan 2.7 (4.1 ) 6.8
Foreign currency exchange loss (gain) - (0.1 ) 0.1
Miscellaneous (income) expense (0.1 ) 0.3 (0.4 )
Total other (income) expense, net $ (6.6 ) $ (10.6 ) $ 4.0
Nine Months Ended September 30,
2021 2020 $ Change
Pension and postretirement non-service
benefit (income) loss $ (28.0 ) $ (19.7 ) $ (8.3 )
Loss (gain) from remeasurement benefit plan 2.2 3.5 (1.3 )
Foreign currency exchange loss (gain) - 0.3 (0.3 )
Sales and use tax refund (2.5 ) - (2.5 )
Miscellaneous (income) expense - (0.1 ) 0.1
Total other (income) expense, net $ (28.3 ) $ (16.0 ) $ (12.3 ) Non-service related pension and other postretirement benefit income, for all years, consists of the interest cost, expected return on plan assets and amortization components of net periodic cost.
The TimkenSteel Corporation Retirement Plan ("Salaried Plan") has a provision that permits employees to elect to receive their pension benefits in a lump sum upon retirement. In the first quarter of 2021, the cumulative cost of all lump sum payments exceeded the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. As a result, the Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan during each quarter of 2021. A full remeasurement of the pension obligations and plan assets associated with the Salaried Plan was also required throughout each quarter of 2020. For more details on the remeasurement refer to "Note 11 - Retirement and Postretirement Plans".
During the second quarter of 2021,
Provision for Income Taxes
Three Months Ended September 30,
2021 2020 $ Change
Provision (benefit) for income taxes $ 0.5 $ 0.3 $ 0.2
Effective tax rate 1.0 % (2.2 )% NM(1)
Nine Months Ended September 30,
2021 2020 $ Change
Provision (benefit) for income taxes
1.8 % (1.2 )% NM(1)
(1) "NM" represents data that is not meaningful.
The majority of the Company's income tax expense is derived from foreign, state,
and local taxes. The Company remains in a full valuation for the
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Table of Contents Non-GAAP Financial Measures
The table below presents net sales by end-market sector, adjusted to exclude
surcharges, which represents a financial measure that has not been determined in
accordance with accounting principles generally accepted in
(dollars in millions, tons in thousands)
Three Months Ended September 30, 2021
Mobile Industrial Energy Other Total
Tons 88.8 111.0 12.9 - 212.7
Net Sales $ 133.5 $ 182.0 $ 20.4 $ 7.8 $ 343.7
Less: Surcharges 47.0 66.6 7.4 - 121.0
Base Sales $ 86.5 $ 115.4 $ 13.0 $ 7.8 $ 222.7
Net Sales / Ton $ 1,503 $ 1,640 $ 1,581 $ - $ 1,616
Surcharges / Ton $ 529 $ 600 $ 573 $ - $ 569
Base Sales / Ton $ 974 $ 1,040 $ 1,008 $ - $ 1,047
Three Months Ended September 30, 2020
Mobile Industrial Energy Other Total
Tons 90.3 59.3 4.7 0.0 154.3
Net Sales $ 103.1 $ 90.7 $ 7.0 $ 5.1 $ 205.9
Less: Surcharges 17.0 13.0 1.1 0.0 31.1
Base Sales $ 86.1 $ 77.7 $ 5.9 $ 5.1 $ 174.8
Net Sales / Ton $ 1,142 $ 1,530 $ 1,489 $ - $ 1,334
Surcharges / Ton $ 189 $ 220 $ 234 $ - $ 201
Base Sales / Ton $ 953 $ 1,310 $ 1,255 $ - $ 1,133
Nine Months Ended September 30, 2021
Mobile Industrial Energy Other Total
Tons 285.9 307.3 27.1 - 620.3
Net Sales $ 400.0 $ 480.3 $ 41.4 $ 22.9 $ 944.6
Less: Surcharges 121.5 156.9 14.1 - 292.5
Base Sales $ 278.5 $ 323.4 $ 27.3 $ 22.9 $ 652.1
Net Sales / Ton $ 1,399 $ 1,563 $ 1,528 $ - $ 1,523
Surcharges / Ton $ 425 $ 511 $ 521 $ - $ 472
Base Sales / Ton $ 974 $ 1,052 $ 1,007 $ - $ 1,051
Nine Months Ended September 30, 2020
Mobile Industrial Energy Other Total
Tons 211.8 203.7 32.2 28.7 476.4
Net Sales $ 236.9 $ 302.0 $ 46.8 $ 33.8 $ 619.5
Less: Surcharges 40.3 46.4 7.5 7.1 101.3
Base Sales $ 196.6 $ 255.6 $ 39.3 $ 26.7 $ 518.2
Net Sales / Ton $ 1,119 $ 1,483 $ 1,453 $ 1,178 $ 1,300
Surcharges / Ton $ 191 $ 228 $ 233 $ 248 $ 212
Base Sales / Ton $ 928 $ 1,255 $ 1,220 $ 930 $ 1,088
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Liquidity and Capital Resources
Amended Credit Agreement
On
For additional details regarding the Amended Credit Agreement please refer to
"Note 14 - Financing Arrangements" in the Company's Annual Report on Form 10-K
for the year ended
Convertible Notes
In
In
The Convertible Senior Notes due 2025 bear cash interest at a rate of 6.0% per
year, payable semiannually on
The Convertible Senior Notes due 2025 are convertible at the option of holders
in certain circumstances and during certain periods into the Company's common
shares, cash, or a combination thereof, at the Company's election. The Indenture
for the Convertible Senior Notes due 2025 provides that notes will become
convertible during a quarter when the share price for 20 trading days during the
final 30 trading days of the immediately preceding quarter was greater than 130%
of the conversion price. This criterion was met during the third quarter of 2021
and as such the notes can be converted at the option of the holders beginning
For additional details regarding the Convertible Notes please refer to "Note 14
- Financing Arrangements" in the Company's Annual Report on Form 10-K for the
year ended
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Additional Liquidity Considerations
The following represents a summary of key liquidity measures under the Amended
Credit Agreement as of
September 30, December 31,
2021 2020
Cash and cash equivalents $ 172.0 $ 102.8
Credit Agreement:
Maximum availability $ 400.0 $ 400.0
Suppressed availability(1) (122.2 ) (183.2 )
Availability 277.8 216.8
Amount borrowed - -
Letter of credit obligations (5.4 ) (5.5 )
Availability not borrowed $ 272.4 $ 211.3
Total liquidity $ 444.4 $ 314.1 (1) As of
Our principal sources of liquidity are cash and cash equivalents, cash flows
from operations and available borrowing capacity under our credit agreement. As
of
To the extent our liquidity needs prove to be greater than expected or cash generated from operations is less than anticipated, and cash on hand or credit availability is insufficient, we would seek additional financing to provide additional liquidity. We regularly evaluate our potential access to the equity and debt capital markets as sources of liquidity and we believe additional financing would likely be available if necessary, although we can make no assurance as to the form or terms of any such financing.
For additional details regarding the Amended Credit Agreement and the
Convertible Notes please refer to "Note 14 - Financing Arrangements" in the
Company's Annual Report on Form 10-K for the year ended
Coronavirus Aid, Relief, and Economic Security Act
On
The CARES Act also provided for an employee retention credit ("Employee
Retention Credit"), which is a refundable tax credit against certain employment
taxes of up to
Consolidated Appropriations Act, 2021
On
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employee furloughs related to the COVID-19 pandemic ceased in 2020. Furthermore, the Company does not expect any of the other provisions within the CAA to provide a benefit.
American Rescue Plan Act of 2021
On
Specifically, the ARPA provides enhanced interest rate stabilization, as well as extended amortization of funding shortfalls. The Company has evaluated and made final the elections permitted by the ARPA related to the required contributions for our domestic defined benefit pension plans. At this time based on current assumptions, the elections made under ARPA and expected asset returns, we believe that required Company contributions have been delayed until 2030. However, these estimates are subject to significant uncertainty. Prior to the ARPA, we had expected to make required pension contributions for our domestic defined benefit pension plans beginning in 2022.
Cash Flows
The following table reflects the major categories of cash flows for the nine
months ended
Nine Months Ended September 30,
2021 2020
Net cash provided (used) by operating activities $ 106.2 $ 121.0 Net cash provided (used) by investing activities
(0.9 ) (3.0 )
Net cash provided (used) by financing activities (36.1 ) (70.3 )
Increase (Decrease) in Cash and Cash Equivalents $ 69.2 $ 47.7
Operating activities
Net cash provided by operating activities for the nine months ended
Investing activities
Net cash used by investing activities for the nine months ended
Financing activities
Net cash used by financing activities for the nine months ended
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Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with
New Accounting Guidance
See "Note 2 - Recent Accounting Pronouncements" in the Notes to the unaudited Consolidated Financial Statements.
Forward-Looking Statements
Certain statements set forth in this Quarterly Report on Form 10-Q (including our forecasts, beliefs and expectations) that are not historical in nature are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, Management's Discussion and Analysis of Financial Condition and Results of Operations contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "outlook," "intend," "may," "plan," "possible," "potential," "predict," "project," "seek," "should," "target," "will," "would," or other similar words, phrases or expressions that convey the uncertainty of future events or outcomes. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-Q. We caution readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of us due to a variety of factors, such as:
• deterioration in world economic conditions, or in economic conditions in any
of the geographic regions in which we conduct business, including additional
adverse effects from global economic slowdown, terrorism or hostilities.
This includes: political risks associated with the potential instability of
governments and legal systems in countries in which we or our customers
conduct business, and changes in currency valuations;
• climate-related risks, including environmental and severe weather caused by
climate changes, and legislative and regulatory initiatives addressing
global climate change or other environmental concerns;
• the effects of fluctuations in customer demand on sales, product mix and
prices in the industries in which we operate. This includes: our ability to
respond to rapid changes in customer demand including but not limited to
changes in customer operating schedules due to supply chain constraints; the
effects of customer bankruptcies or liquidations; the impact of changes in
industrial business cycles; and whether conditions of fair trade exist in
the U.S. markets;
• the potential impact of the COVID-19 pandemic on our operations and
financial results, including cash flows and liquidity;
• competitive factors, including changes in market penetration; increasing
price competition by existing or new foreign and domestic competitors; the
introduction of new products by existing and new competitors; and new
technology that may impact the way our products are sold or distributed;
• changes in operating costs, including the effect of changes in our
manufacturing processes; changes in costs associated with varying levels of
operations and manufacturing capacity; availability of raw materials and
energy; our ability to mitigate the impact of fluctuations in raw materials
and energy costs and the effectiveness of our surcharge mechanism; changes
in the expected costs associated with product warranty claims; changes
resulting from inventory management, cost reduction initiatives and
different levels of customer demands; the effects of unplanned work
stoppages; and changes in the cost of labor and benefits;
• the success of our operating plans, announced programs, initiatives and
capital investments; and our ability to maintain appropriate relations with
unions that represent our associates in certain locations in order to avoid
disruptions of business;
• unanticipated litigation, claims or assessments, including claims or
problems related to intellectual property, product liability or warranty,
and environmental issues and taxes, among other matters;
• the availability of financing and interest rates, which affect our cost of
funds and/or ability to raise capital, including our ability to refinance
and/or repay prior to or at maturity the Convertible Notes; our pension
obligations and investment performance; and/or customer demand and the
ability of customers to obtain financing to purchase our products or
equipment that contain our products; and the amount of any dividend declared
by our Board of Directors on our common shares;
• the overall impact of the pension and postretirement mark-to-market
accounting;
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• the effects of the conditional conversion feature of the Convertible Senior
Notes due 2025, which, if triggered, entitles holders to convert the notes
at any time during specified periods at their option and therefore could
result in potential dilution if the holder elects to convert and the company
elects to satisfy a portion or all of the conversion obligation by
delivering common shares instead of cash; and
• those items identified under the caption Risk Factors in our Annual Report
on Form 10-K for the year ended December 31, 2020 .
You are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results, and that the above list should not be considered to be a complete list. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
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