Metallus(MTUS) - 2019 Q1 - Quarterly Report

PART I. Financial Information Financial Statements The company's Q1 2019 financials show a return to profitability driven by higher gross profit, alongside the adoption of new lease accounting standards which impacted the balance sheet Consolidated Statements of Operations (Unaudited) In Q1 2019, the company's net income reached $4.2 million, a reversal from a $1.9 million loss in Q1 2018, despite a slight decline in net sales Consolidated Statements of Operations (Unaudited) | | Three Months Ended March 31, | | | :--- | :--- | :--- | | (Dollars in millions, except per share data) | 2019 | 2018 | | Net sales | $371.0 | $380.8 | | Cost of products sold | 341.9 | 359.7 | | Gross Profit | 29.1 | 21.1 | | Selling, general and administrative expenses | 23.3 | 24.7 | | Operating Income (Loss) | 5.8 | (3.6) | | Income (Loss) Before Income Taxes | 4.3 | (1.8) | | Net Income (Loss) | $4.2 | ($1.9) | | Diluted earnings (loss) per share | $0.09 | ($0.04) | Consolidated Balance Sheets (Unaudited) Total assets and liabilities remained stable as of March 31, 2019, with notable changes in decreased cash, increased inventories, and the recognition of new lease assets and liabilities Balance Sheet Highlights | (Dollars in millions) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $7.8 | $21.6 | | Inventories, net | $324.3 | $296.8 | | Total Current Assets | $494.2 | $491.4 | | Total Assets | $1,204.7 | $1,197.6 | | Total Current Liabilities | $185.7 | $220.8 | | Total Liabilities | $663.4 | $662.4 | | Total Shareholders' Equity | $541.3 | $535.2 | - The adoption of the new lease standard (ASU 2016-02) resulted in the recognition of right-to-use assets and lease liabilities of $16.0 million as of January 1, 2019[22] Consolidated Statements of Cash Flows (Unaudited) Net cash used by operating activities increased in Q1 2019 due to working capital changes, while financing activities provided cash primarily from credit agreement borrowings Cash Flow Summary | (Dollars in millions) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Cash Used by Operating Activities | ($33.6) | ($19.4) | | Net Cash Used by Investing Activities | (4.4) | (2.2) | | Net Cash Provided by Financing Activities | 24.2 | 32.5 | | Decrease (Increase) In Cash and Cash Equivalents | (13.8) | 10.9 | Notes to Unaudited Consolidated Financial Statements The notes detail the adoption of new lease standards, sales performance by sector, tax valuation allowances, and a significant subsequent event related to retiree health plans - The company adopted ASU 2016-02, "Leases (Topics 842)," on January 1, 2019, recognizing right-to-use assets and lease liabilities of $16.0 million[21][22] Net Sales by End-Market Sector (in millions) | End-Market Sector | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Mobile | $144.2 | $142.5 | | Industrial | $147.0 | $147.7 | | Energy | $60.8 | $49.1 | | Other | $19.0 | $41.5 | | Total Net Sales | $371.0 | $380.8 | - The company maintains a full valuation allowance against its U.S. deferred tax assets due to recent operating performance, resulting in a low effective tax rate of 1.1% for Q1 2019[53] - Subsequent to the quarter end, on April 9, 2019, the company announced a change to its retiree health plan, which is estimated to reduce the accumulated postretirement benefit obligation (APBO) by approximately $65 to $70 million[56][57] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a slight sales decrease offset by improved gross profit from favorable price/mix, along with solid liquidity and negative operating cash flow from working capital changes Results of Operations Q1 2019 net sales decreased due to lower shipment volume, but gross profit rose significantly from favorable price/mix, which also helped lower SG&A expenses - Net sales decreased 2.6% due to a 39 thousand ship ton reduction in volume, mainly from planned lower OCTG billet shipments, partially offset by a favorable price/mix of approximately $29.5 million[66] - Gross profit increased by $8.0 million (37.9%) primarily due to favorable price/mix, partially offset by higher manufacturing costs and a raw material spread headwind[69] - SG&A expense decreased by $1.4 million (5.7%) compared to Q1 2018, mainly due to a decrease in variable compensation[72] Liquidity and Capital Resources The company maintained total liquidity of $165.2 million as of March 31, 2019, which management deems sufficient for its needs through at least January 2023 Liquidity Summary (in millions) | | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $7.8 | $21.6 | | Credit Agreement Availability | 157.4 | 182.4 | | Total liquidity | $165.2 | $204.0 | - Management believes that cash on hand, projected cash from operations, and available borrowings will be sufficient to satisfy liquidity requirements for at least the next twelve months and through the Credit Agreement's maturity date of January 26, 2023[83] Cash Flows In Q1 2019, operating cash usage increased due to supplier payment timing, while financing activities provided $24.2 million from net borrowings - Net cash used by operating activities increased by $14.2 million YoY, mainly due to the timing of payments to suppliers, partially offset by reduced accounts receivable and improved operating income[88] - Net cash provided by financing activities was $24.2 million, primarily from net borrowings of $25.0 million on the Credit Agreement[91] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks include interest rate fluctuations on its variable-rate debt and commodity price volatility for raw materials like scrap steel - The company has $140.0 million in variable-rate debt; a 1% rise in interest rates would increase annual interest expense by $1.4 million[98] - The company is exposed to commodity price fluctuations for raw materials, principally scrap steel, and uses a raw material surcharge to pass through cost changes to customers[100] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal controls - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective as of the end of the quarter[101] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[102] PART II. Other Information Legal Proceedings The company is addressing two Notices of Violation from the U.S. EPA regarding its Canton plants but does not expect a material adverse financial impact - The U.S. EPA issued Notices of Violation in 2014 and 2015 alleging Clean Air Act violations at the company's Canton, Ohio plants; negotiations are ongoing, and the company does not expect a material adverse effect from the resolution[105] Risk Factors No material changes were reported to the risk factors previously disclosed in the company's 2018 Annual Report on Form 10-K - No material changes have occurred to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[106] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[107] Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL data files Signatures The report was duly signed by the Executive Vice President and Chief Financial Officer on May 2, 2019