TimkenSteel(TMST) - 2023 Q1 - Quarterly Report

Part I Financial Statements Unaudited Q1 2023 financial statements indicate reduced profitability and cash flow, with increased assets and ongoing capital returns to shareholders Consolidated Statements of Operations (Unaudited) Q1 2023 operations show significant declines in net sales, net income, and diluted EPS compared to Q1 2022 Q1 2023 vs Q1 2022 Statement of Operations Highlights | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net Sales | $323.5 | $352.0 | -8.1% | | Gross Profit | $40.4 | $60.0 | -32.7% | | Loss on extinguishment of debt | $11.4 | $17.0 | -32.9% | | Net Income | $14.4 | $37.1 | -61.2% | | Diluted EPS | $0.30 | $0.70 | -57.1% | Consolidated Balance Sheets (Unaudited) As of March 31, 2023, total assets and liabilities increased, primarily due to higher inventories and accounts receivable, while cash decreased Balance Sheet Summary | Metric (in millions) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $227.4 | $257.2 | | Inventories, net | $244.7 | $192.4 | | Total Current Assets | $614.7 | $556.6 | | Total Assets | $1,135.3 | $1,082.0 | | Total Current Liabilities | $231.0 | $186.7 | | Total Liabilities | $443.9 | $395.5 | | Total Shareholders' Equity | $691.4 | $686.5 | Consolidated Statements of Cash Flows (Unaudited) Q1 2023 cash flow shows decreased operating cash, increased investing outflows, and higher financing usage, leading to a net cash decrease Cash Flow Summary (Q1 2023 vs Q1 2022) | Cash Flow Activity (in millions) | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $9.8 | $13.3 | | Net Cash from Investing Activities | $(9.1) | $(6.5) | | Net Cash from Financing Activities | $(30.2) | $(25.5) | | Net Decrease in Cash | $(29.5) | $(18.7) | Notes to Unaudited Consolidated Financial Statements Notes detail revenue sources, financing activities including debt and share repurchases, pension plan changes, and an insurance recovery Net Sales by End-Market Sector (in millions) | End-Market | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Industrial | $143.7 | $175.0 | | Mobile | $127.8 | $144.1 | | Energy | $46.2 | $25.0 | | Other | $5.8 | $7.9 | | Total | $323.5 | $352.0 | - In Q1 2023, the company repurchased $7.5 million of its Convertible Senior Notes, paying $18.7 million in cash and recognizing an $11.4 million loss on extinguishment of debt[55] - The company recognized a $9.8 million insurance recovery in Q1 2023 related to unplanned operational downtime at the Faircrest melt shop in 2022[37] - The effective tax rate for Q1 2023 was 21.0%, significantly higher than 2.4% in Q1 2022, primarily due to the reversal of the company's valuation allowance at the end of 2022[40] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A discusses Q1 2023 sales and gross profit declines, strong liquidity, and capital allocation priorities including growth investments and shareholder returns - The decrease in Q1 2023 net sales was driven by lower volumes (23.5 thousand ship tons) and unfavorable surcharges ($25.8 million), partially offset by favorable price/mix ($28.4 million)[93] - Gross profit decreased by $19.6 million (32.7%) YoY, driven by higher manufacturing costs, lower volume, and unfavorable raw material spread[96] - Total liquidity as of March 31, 2023, was $530.7 million, comprising $227.4 million in cash and $303.3 million in available credit[122] - The company expects capital expenditures to be approximately $45 million in 2023[125] Business Overview TimkenSteel manufactures alloy and carbon steel products for diverse markets, managing costs via surcharges, with a full Q2 order book and Q3 bookings underway - The company manufactures alloy steel, carbon, and micro-alloy steel products (SBQ bars, tubes, components) using EAF technology and nearly 100% recycled steel[81][82] - As of the filing date, the company's order book is full for the second quarter of 2023, and it is currently booking orders for the third quarter[85] Liquidity and Capital Resources The company maintains strong liquidity of $530.7 million, with Q1 2023 capital allocation focused on convertible note and common share repurchases Liquidity Summary | Metric (in millions) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $227.4 | $257.2 | | Availability not borrowed | $303.3 | $233.5 | | Total liquidity | $530.7 | $490.7 | - In Q1 2023, the company repurchased $7.5 million principal amount of its Convertible Senior Notes for $18.7 million in cash[119] - During Q1 2023, the company repurchased approximately 0.5 million common shares for $9.4 million As of March 31, 2023, $63.7 million remained under the share repurchase authorization[128] Cash Flows Q1 2023 cash flows show decreased operating cash, increased investing outflows, and higher financing usage from share and note repurchases - Net cash from operating activities decreased to $9.8 million in Q1 2023 from $13.3 million in Q1 2022, primarily due to lower profitability and increased use of cash for working capital[134] - Net cash used in financing activities increased to $30.2 million in Q1 2023 from $25.5 million in Q1 2022, due to more share repurchases and lower proceeds from stock option exercises[136] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, foreign currency, and commodity prices, managing the latter through a raw material surcharge mechanism - As of March 31, 2023, the company's $13.1 million of debt is fixed-rate, so a rise in interest rates would not impact current interest expense[144] - The company is exposed to commodity price risk for raw materials and energy It manages this risk through supplier agreements and a raw material surcharge mechanism in its pricing[146][148] - The Russia-Ukraine conflict is noted as a potential factor that could exacerbate commodity price volatility and supply chain disruptions, though it has not had a material impact to date[146] Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting - 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[150] - No changes in the company's internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[151] Part II Legal Proceedings The company is involved in various legal claims, with management expecting no material adverse effect on financial position or operations - Management does not expect that the ultimate disposition of various ongoing claims and legal actions will have a material adverse effect on the company's financial condition[152] Risk Factors No material changes to risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022 - The report refers to the Risk Factors section in the Annual Report on Form 10-K for the year ended December 31, 2022, for a discussion of risks and uncertainties[153] Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2023, the company repurchased 514,086 common shares for $9.4 million, with $63.7 million remaining under authorization Share Repurchases for Q1 2023 | Month (2023) | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January | 157,986 | $18.93 | | February | 83,140 | $19.60 | | March | 272,960 | $17.36 | | Q1 Total | 514,086 | $18.20 | - As of March 31, 2023, the maximum dollar value of shares that may yet be purchased under the company's repurchase programs was $63.7 million[155] Exhibits The report lists exhibits filed with Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - Exhibits filed include CEO and CFO certifications and Inline XBRL data files[158]