METALLUS INC. (dollars in millions, except per share data)
Business Overview
We manufacture alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. Our portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), 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 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
In the first quarter of 2020, we closed our TimkenSteel Material Services (TMS)
facility in
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 COVID-19 Pandemic
We continue to closely monitor the impact of the COVID-19 pandemic on our
Company, employees, customers and supply chain. The full extent to which the
COVID-19 pandemic will impact our operations and financial results is uncertain
and ultimately will depend on, among many other factors, the duration of the
pandemic, further Federal and State government actions and the speed of economic
recovery. We estimate the primary impact on our second quarter of 2020 results
was lost sales of approximately
In response to the significant reduction in customer demand resulting from the COVID-19 crisis, the Company has taken additional actions to further reduce operating expenses, conserve cash and maximize liquidity, such as:
• Reduced interim CEO and senior executives' base salaries by 20 percent and
other executives' base salaries by 10 percent, effective May 1 ;
• Reduced cash retainer for its board of directors by 20 percent beginning
with the second-quarter 2020, and reduced the value of the board's annual
equity grant by 20 percent;
• Suspended company's 401(k) plan matching contributions for salaried
employees, effective June 1 ;
• Implemented unpaid rolling furloughs for approximately 90 percent of
salaried employees, with an average 5 weeks of unpaid furloughs per
employee, beginning in early April and continuing through July; and
• Deferred Social Security payroll tax remittance as permitted by the CARES
Act.
In total, the Company's COVID-19 related actions preserved approximately
• Aggressively reduced production schedules at all plants to align operations
with customer demand, resulting in the temporary layoff of manufacturing
employees;
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Table of Contents • Reduced planned 2020 capital expenditures to$15 million to$20 million , a$10 million to$15 million reduction from the original guidance.
Despite the negative impact on our business, these actions resulted in the
Company having total liquidity of
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 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.
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 six months ended
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Net sales for the six months ended
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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The chart below presents the drivers of the gross profit variance from the six
months ended
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Gross profit for the six 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 six months ended
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Selling, general and administrative (SG&A) expense for the three and six months
ended
Restructuring Charges
During 2019 and the first half of 2020,
Interest Expense
Interest expense for the three months ended
Other Expense (Income), net
Three Months Ended June 30,
2020 2019 $ Change
Pension and postretirement non-service
benefit loss (income) $ (6.5 ) $ (4.5 ) $ (2.0 )
(Gain) loss from remeasurement benefit plan (1.9 ) 4.4 (6.3 )
Foreign currency exchange loss (gain) 0.3 (0.2 ) 0.5
Miscellaneous expense (income) - 0.1 (0.1 )
Total other expense (income), net $ (8.1 ) $ (0.2 ) $ (7.9 )
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Six Months Ended June 30,
2020 2019 $ Change
Pension and postretirement non-service
benefit income $ (13.0 ) $ (7.3 ) $ (5.7 )
Loss from remeasurement of benefit plans 7.6 4.4 3.2
Foreign currency exchange loss (gain) 0.4 (0.1 ) 0.5
Miscellaneous income (expense) (0.4 ) 0.1 (0.5 )
Total other expense (income), net $ (5.4 ) $ (2.9 ) $ (2.5 ) Non-service benefit income is derived from the Company's pension and other
postretirement plans. The Company's expected return on assets has exceeded the
interest cost component, resulting in income for the three and six months ended
The TimkenSteel Corporation Retirement Plan (Salaried Plan) has a provision that
permits employees to elect to receive their pension benefits in a lump sum. In
the first quarter of 2020, the cumulative cost of all lump sum payments was
projected to exceed 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 as of
Provision for Income Taxes
Three Months Ended June 30,
2020 2019 $ Change
Provision (benefit) for income taxes $ 0.2 $ (2.9 ) $ 3.1
Effective tax rate (2.2 )% 19.6 % NM
Six Months Ended June 30,
2020 2019 $ Change
Provision (benefit) for income taxes
(0.1 )% 25.0 % NM
The majority of the Company's income tax expense is derived from foreign
operations. 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 June 30, 2020
Mobile Industrial Energy Other Total
Tons 32.7 63.2 9.1 3.7 108.7
Net Sales $ 36.1 $ 98.0 $ 14.6 $ 5.3 $ 154.0
Less: Surcharges 6.7 14.6 2.2 0.8 24.3
Base Sales $ 29.4 $ 83.4 $ 12.4 $ 4.5 $ 129.7
Net Sales / Ton $ 1,104 $ 1,551 $ 1,604 $ 1,432 $ 1,417
Surcharges / Ton $ 205 $ 231 $ 241 $ 216 $ 224
Base Sales / Ton $ 899 $ 1,320 $ 1,363 $ 1,216 $ 1,193
Three Months Ended June 30, 2019
Mobile Industrial Energy Other Total
Tons 110.3 86.4 31.0 20.4 248.1
Net Sales $ 135.3 $ 124.3 $ 54.1 $ 23.0 $ 336.7
Less: Surcharges 32.1 27.4 12.0 6.4 77.9
Base Sales $ 103.2 $ 96.9 $ 42.1 $ 16.6 $ 258.8
Net Sales / Ton $ 1,227 $ 1,439 $ 1,745 $ 1,127 $ 1,357
Surcharges / Ton $ 291 $ 317 $ 387 $ 313 $ 314
Base Sales / Ton $ 936 $ 1,122 $ 1,358 $ 814 $ 1,043
Six Months Ended June 30, 2020
Mobile Industrial Energy Other Total
Tons 121.5 144.4 27.5 28.7 322.1
Net Sales $ 133.8 $ 211.3 $ 39.8 $ 28.7 $ 413.6
Less: Surcharges 23.3 33.4 6.4 7.1 70.2
Base Sales $ 110.5 $ 177.9 $ 33.4 $ 21.6 $ 343.4
Net Sales / Ton $ 1,101 $ 1,463 $ 1,447 $ 1,000 $ 1,284
Surcharges / Ton $ 192 $ 231 $ 232 $ 247 $ 218
Base Sales / Ton $ 909 $ 1,232 $ 1,215 $ 753 $ 1,066
Six Months Ended June 30, 2019
Mobile Industrial Energy Other Total
Tons 223.1 188.9 62.4 34.6 509.0
Net Sales $ 279.5 $ 271.3 $ 114.9 $ 42.0 $ 707.7
Less: Surcharges 69.6 62.5 24.5 11.0 167.6
Base Sales $ 209.9 $ 208.8 $ 90.4 $ 31.0 $ 540.1
Net Sales / Ton $ 1,253 $ 1,436 $ 1,841 $ 1,214 $ 1,390
Surcharges / Ton $ 312 $ 331 $ 392 $ 318 $ 329
Base Sales / Ton $ 941 $ 1,105 $ 1,449 $ 896 $ 1,061
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LIQUIDITY AND CAPITAL RESOURCES
Convertible Notes
In
Amended Credit Agreement
On
The Amended Credit Agreement increases capacity to
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Additional Liquidity Considerations
The following represents a summary of key liquidity measures under the Amended
Credit Agreement as of
June 30, December 31,
2020 2019
Cash and cash equivalents $ 75.5 $ 27.1
Credit Agreement:
Maximum availability $ 400.0 $ 400.0
Suppressed availability(1) (159.9 ) (103.0 )
Availability 240.1 297.0
Amount borrowed (60.0 ) (90.0 )
Letter of credit obligations (3.7 ) (3.8 )
Availability not borrowed $ 176.4 $ 203.2
Total liquidity $ 251.9 $ 230.3 (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
The full extent to which the COVID-19 pandemic will impact our operations and financial results is uncertain and ultimately will depend on, among many other factors, the duration of the pandemic, further Federal and State government actions and the speed of economic recovery. While the negative impact on our third quarter, remainder of the year and beyond remains unknown, at a minimum, we expect customer demand in the COVID-19 environment continue to be lower in the third quarter of 2020 in comparison to the prior year third quarter. 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. We would also consider additional cost reductions and restructuring, changes in working capital management and further reductions of capital expenditures. Regardless, we will continue to evaluate additional financing or may seek to refinance outstanding borrowings under the Amended Credit Agreement to provide us with additional flexibility and liquidity. Any additional financing beyond that incurred to refinance existing debt would increase our overall debt and could increase interest expense.
On
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
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Table of Contents Cash Flows
The following table reflects the major categories of cash flows for the six
months ended
Six Months Ended June 30,
2020 2019
Net cash provided (used) by operating activities
(1.2 ) (12.3 )
Net cash provided (used) by financing activities (30.3 ) 29.2
Increase (Decrease) in Cash and Cash Equivalents
Operating activities
Net cash provided by operating activities for the six months ended
Investing activities
Net cash used by investing activities for the six months ended
The Company expects its capital expenditures to be between
Financing activities
Net cash used by financing activities for the six months ended
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;
• 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; 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;
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• the potential impact of the COVID-19 pandemic on our operations, financial
results, 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; and
• those items identified under the caption Risk Factors in our Annual Report
on Form 10-K for the year ended December 31, 2019 .
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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