Metallus(MTUS) - 2019 Q3 - Quarterly Report

PART I. Financial Information Financial Statements The company presents its unaudited consolidated financial statements for the three and nine months ended September 30, 2019 Consolidated Statements of Operations (Unaudited) | (Dollars in millions) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $274.2 | $409.9 | $981.9 | $1,204.2 | | Gross Profit | $13.2 | $24.6 | $67.7 | $77.8 | | Income (Loss) Before Income Taxes | ($6.7) | $2.3 | ($6.6) | $9.1 | | Net Income (Loss) | ($4.6) | $1.4 | ($4.8) | $7.9 | | Diluted earnings (loss) per share | ($0.10) | $0.03 | ($0.11) | $0.17 | Consolidated Balance Sheet Highlights (Unaudited) | (Dollars in millions) | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $418.0 | $491.4 | | Total Assets | $1,107.3 | $1,197.6 | | Total Current Liabilities | $122.5 | $220.8 | | Total Liabilities | $507.6 | $662.4 | | Total Shareholders' Equity | $599.7 | $535.2 | Consolidated Statements of Cash Flows Highlights (Unaudited) | (Dollars in millions) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net Cash Provided (Used) by Operating Activities | $24.3 | ($28.4) | | Net Cash Used by Investing Activities | ($21.7) | ($16.7) | | Net Cash Provided (Used) by Financing Activities | ($5.8) | $47.6 | Notes to Unaudited Consolidated Financial Statements The notes detail the adoption of a new lease standard, revenue declines, restructuring charges, and subsequent events - The company adopted the new lease standard ASU 2016-02 on January 1, 2019, resulting in the recognition of right-to-use assets and lease liabilities of $16.0 million[29][30] Net Sales by End-Market Sector (Nine Months Ended Sep 30) | End-Market | 2019 (in millions) | 2018 (in millions) | Change | | :--- | :--- | :--- | :--- | | Mobile | $389.7 | $420.5 | -7.3% | | Industrial | $388.2 | $484.3 | -19.8% | | Energy | $147.5 | $188.0 | -21.5% | | Other | $56.5 | $111.4 | -49.3% | | Total Net Sales | $981.9 | $1,204.2 | -18.5% | - In Q2 2019, the company implemented restructuring actions, including 55 salaried position eliminations, and recognized charges of $3.6 million for severance and benefits[35] - On October 15, 2019, the company entered into a Third Amended and Restated Credit Agreement, increasing its asset-based revolving credit facility to $400.0 million and extending the maturity to October 15, 2024[64][65] - Subsequent events in October 2019 include the CEO stepping down, resulting in a Q4 charge of approximately $4.0 million, and further restructuring actions with an expected Q4 charge of approximately $1.7 million[82][83] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant declines in sales and profit, cost-reduction efforts, and stable liquidity Business Overview The company operates as a focused North American producer of Special Bar Quality (SBQ) steel products - TimkenSteel manufactures alloy, carbon, and micro-alloy steel, with an annual melt capacity of approximately 2 million tons[85] - The company believes it is the only focused Special Bar Quality (SBQ) steel producer in North America and has the largest SBQ large bar production capacity among North American producers[86] Results of Operations Q3 and nine-month results show sharp declines in net sales and gross profit due to lower volumes and costs Q3 2019 vs Q3 2018 Performance | Metric | Q3 2019 | Q3 2018 | Change | Reason for Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $274.2M | $409.9M | -33.1% | Lower volume (-$92.4M) and lower surcharges (-$55.8M), partially offset by favorable price/mix (+$12.6M) | | Gross Profit | $13.2M | $24.6M | -46.3% | Unfavorable manufacturing costs, raw material spread, and lower volumes, partially offset by favorable LIFO and price/mix | | SG&A | $21.4M | $24.0M | -10.8% | Profitability improvement plans reducing headcount, professional fees, and variable compensation | Nine Months 2019 vs 2018 Performance | Metric | YTD 2019 | YTD 2018 | Change | Reason for Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $981.9M | $1,204.2M | -18.5% | Lower volume (-$196.5M) and lower surcharges (-$82.7M), partially offset by favorable price/mix (+$55.8M) | | Gross Profit | $67.7M | $77.8M | -13.0% | Unfavorable manufacturing costs, raw material spread, and lower volumes, partially offset by favorable LIFO and price/mix | Liquidity and Capital Resources Liquidity remains sufficient, supported by improved operating cash flow and an expanded credit facility - On October 15, 2019, the company entered into a Third Amended and Restated Credit Agreement, which increased capacity to $400 million, extended maturity to 2024, and improved interest rate pricing[115][116] Liquidity Summary | (Dollars in millions) | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $18.4 | $21.6 | | Availability not borrowed | $187.0 | $182.4 | | Total liquidity | $205.4 | $204.0 | - Net cash provided by operating activities was $24.3 million for the nine months ended Sep 30, 2019, a $52.7 million improvement from the same period in 2018, primarily due to lower cash used for working capital[125] Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from interest rates, foreign currency, and commodity prices - The company has $110.0 million in variable-rate debt; a 1% increase in interest rates would result in an additional $1.1 million in annual interest expense[138] - Exposure to commodity price fluctuations (scrap steel, alloys, natural gas, electricity) is managed through supplier agreements and a raw material surcharge passed to customers[140] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[141] - 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[142] PART II. Other Information Legal Proceedings Ongoing legal actions, including an EPA matter, are not expected to have a material adverse effect - The company is working with the U.S. EPA and Department of Justice to resolve Notices of Violation related to the Clean Air Act at its Canton, Ohio plants, and does not anticipate the resolution will have a material adverse effect[145] Risk Factors No material changes were made to previously disclosed risk factors from the company's latest Annual Report - No material changes have been made to the risk factors as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[146] Exhibits This section lists filed exhibits, including Sarbanes-Oxley certifications and XBRL data files - The report includes certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, as well as XBRL filings[148] Signatures - The report was signed on November 6, 2019, by Kristopher R. Westbrooks, Executive Vice President and Chief Financial Officer[151][153]