Thank you for standing by, and welcome to the TimkenSteel third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Jennifer Beeman. Thank you. Please go ahead.
Thanks, and good morning. Welcome to TimkenSteel's third quarter 2021 conference call. I'm Jennifer Beeman, Senior Manager of Communications and Investor Relations for TimkenSteel. Joining me today is Mike Williams, President and Chief Executive Officer, Kris Westbrooks, Executive Vice President and Chief Financial Officer, and Kevin Raketich, Executive Vice President of Sales, Marketing, and Business Development. You all should have received a copy of our press release, which was issued last night. During today's conference call, we may make forward-looking statements as defined by the SEC. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in yesterday's release. Please refer to our SEC filings, including our most recent Form 10-K and Form 10-Q, and the list of factors included in our earnings release, all of which are available on the TimkenSteel website.
Where non-GAAP financial information is referenced, additional details and reconciliations to its GAAP equivalent are also included in the earnings release. With that, I'd like to turn the call over to Mike. Mike?
Thank you, Jennifer, and thanks to everyone on the call for joining us this morning. During the third quarter, our end market demand remained robust, and I'm pleased the first half of our 2022 order book is filling up in a strong pricing environment. While our sales to the mobile market continued to be impacted by the semiconductor supply chain disruption during the quarter, we had steady industrial sales thanks to the hard work of the team and continued focus on our customer needs. In addition to our top priorities of employee safety and customer service, we remain committed to cost control and working capital discipline, and therefore, we were able to achieve record-adjusted EBITDA in the third quarter and significant operating cash flow. Turning to our efforts around ESG, in the third and fourth quarters, we successfully completed all of our annual maintenance outages.
I'd like to thank the teams for careful planning, execution, and adhering to our high safety standards. Nothing is more important than returning our employees and contractors home safely at the end of each shift. In October, we published our 2030 environmental goals. These goals included a 40% absolute reduction in combined Scope 1 and Scope 2 greenhouse gas emissions, a 30% absolute reduction in total energy consumption, a 35% absolute reduction of fresh water withdrawn, and a 10% reduction in waste-to-landfill intensity. We believe these environmental targets are aligned with regional, national, and international environmental priorities and are firmly supported by efforts throughout our manufacturing, supply chain, and corporate operations. Initiatives around energy conservation and renewables, recycled metal sourcing and handling, and water management and reuse positions the company as an environmental leader.
We have confidence that steel will continue to be a critical component of a reduced carbon future, and we remain committed to making progress toward and achieving our long-term goals and building on our long-lasting reputation as a sustainable steel supplier. Before I comment on our end market demand environment, a word on pricing in general. We are currently in the process of negotiating customer pricing agreements for roughly 70% of our business. To date, we've completed about half of our 2022 pricing negotiations. Thus far, we have been pleased with the positive outcomes and expect our average base sales price will be higher than 2021. Turning to market demand, in mobile, the semiconductor supply chain disruption continued to negatively impact the quarter. Our mobile shipments decreased by 5% sequentially, due in part to supply chain issues.
We expect fourth quarter mobile shipments to continue to be negatively impacted by customer production schedule changes. I know many of you have asked what TimkenSteel's role will be in an EV world, and I am pleased to say that we are currently working with our automotive customers as they roll out new EV or hybrid models. In fact, we have been awarded over 20 applications on different EV programs or base sales well in excess of $50 million and expect that to increase even further. For example, today we provide our manufactured components products in the form of ring gears and pinion shafts to major OEMs. In future years, we expect that we will continue to earn additional applications on EV platforms. As I mentioned earlier, our industrial market demand remained steady in the third quarter.
Customer inventory levels, although up slightly compared with the second quarter, remain relatively low. Therefore, we have a positive view for 2022 market demand. Moving to energy, while the short-term demand remains historically low, we continue to see more and more activity as larger players begin to replenish inventories and the rig counts are increasing. With these improving industry statistics, our shipments into this market increased sequentially by 50% as we experienced some demand recovery. From an operational and strategic standpoint, we are currently working on initiatives centered around people, profitability, cash management, and business development. As such, we are focused on projects such as simplifying our administrative functions and improving our manufacturing processes. More to come on these projects in the future.
In our efforts to achieve sustainable, profitable growth, we are continuing to evaluate and refine our organizational structure to ensure we have the agility to best serve our customers and the cost structure to remain competitive during all business cycles. In October, we offered a voluntary exit incentive to certain U.S.-based salaried, non-operative employees. Not only will this action result in savings for the company, but we expect that this move will provide opportunities for some employees eager to take on new challenges. Kris will cover the financial impact of this action in a moment. Finally, I am pleased that we reached an agreement with United Steelworkers Local 1123, and they have voted in favor of a new four-year contract. We believe this contract provides some of the area's best wages and benefits, while also addressing some of our long-term competitive challenges.
The contract, which is in effect until September 27, 2025, offers our Canton-based bargaining workforce increases to base wages every year, competitive healthcare, and retirement benefits for all members, and a continued focus on employee safety, productivity, and quality. With that, I'd like to turn the call over to Kris. Kris?
Thanks, Mike. Good morning, everyone, and thanks for joining us today. I'm extremely pleased with the team's continued focus and execution in this strong demand environment. As a result, the company was once again able to deliver record third quarter adjusted EBITDA, strong operating cash flow, and record quarter-end cash and total liquidity. Turning to our third quarter of 2021 results. Net income on a GAAP basis was $50.1 million or $0.94 per diluted share. Comparatively, the company reported a net loss in the third quarter of 2020 of $13.9 million, or a loss of $0.31 per diluted share. Second quarter of 2021 net income was $54 million or $0.98 per diluted share. On an adjusted basis, net income for the third quarter was $55.2 million or $1.04 per diluted share.
For comparison purposes, the third quarter of 2020 adjusted net loss was $17.3 million, or a loss of $0.38 per diluted share. Adjusted net income in the second quarter of 2021 was $52.5 million, or $0.96 per diluted share. As it relates to earnings per share, our diluted share count in the third quarter was 53.9 million shares, down 2.2 million shares from the second quarter, primarily due to the prior quarter convertible debt settlement. For further details, please refer to the earnings per share disclosure in our Form 10-Q filed yesterday. Returning to profitability, adjusted EBITDA improved to a record $72 million in the third quarter.
This was a substantial improvement of $69.4 million from the third quarter of last year, and a slight improvement from a previous adjusted EBITDA record of $71 million in the second quarter of 2021. Through the first three quarters of the year, adjusted EBITDA totaled $183.8 million, representing the company's strongest adjusted EBITDA performance since energy markets peaked in 2014. Turning to the drivers of the financial results. Shipments in the third quarter were 212,700 tons, essentially flat to the second quarter of 2021 and in line with the previously stated guidance. Third quarter shipments increased 58,400 tons or 38% from the third quarter of 2020, primarily driven by a significant increase in industrial and energy shipments.
In the industrial end market, third quarter shipments of 111,000 tons remained essentially flat compared with the second quarter, reflecting continued strength in shipments to a diverse group of general industrial and distribution customers. We continued to be successful in filling open capacity created by semiconductor-related delays with short lead time industrial demand. Mobile customer shipments were 88,800 tons in the third quarter, a decrease of 4,800 tons sequentially or 5%, due in part to the ongoing impact of the semiconductor chip shortage. During the third quarter and year-to-date periods, we estimate that semiconductor supply chain disruption negatively impacted our mobile shipments by approximately 15,000 tons and 33,000 tons respectively, as mobile customers adjusted their operating schedules and delayed shipments to future periods.
Lastly, from an end markets perspective, energy shipments increased sequentially by approximately 50% to 12,900 tons in the third quarter. Net sales of $343.7 million in the third quarter increased 5% compared with the second quarter of 2021, and improved 67% compared with the third quarter of 2020. The majority of the sequential increase is due to higher surcharge revenue as a result of a 17% increase in the average raw material surcharge per ton as a result of higher market prices for scrap and alloys. The remainder of the sequential increase in net sales is primarily due to higher base selling prices as a result of previous spot price increases.
As anticipated, manufacturing costs increased sequentially by $4 million in the third quarter, primarily due to the successful completion of our planned annual maintenance shutdown at the company's rolling and finishing operations. In comparison to the prior year quarter, manufacturing costs improved by $29 million as a result of improved fixed cost leverage on significantly higher melt utilization and continued cost discipline. The operation of a single melt shop at our Faircrest facility, coupled with strength in end market demand, drove third quarter melt utilization of 85%, a slight improvement compared to the second quarter of 2021. This compares to the COVID-impacted third quarter of 2020 when total company melt utilization was 36% and Faircrest-only melt utilization was 44%. Now turning to SG&A expense.
In the third quarter, SG&A decreased $1.1 million on a sequential basis to $19.9 million, primarily as a result of lower variable compensation and employee benefits expense. In comparison to the third quarter of 2020, SG&A increased by $2 million, largely driven by the following factors. First, the third quarter of 2021 SG&A includes an additional $1.7 million of variable compensation expense given significantly improved adjusted EBITDA and continued strong operating cash flow. Second, SG&A in the prior year quarter benefited by $800,000 from COVID-19 related temporary cost reduction actions. These increases were partially offset by savings from employment restructuring actions. As Mike mentioned, in an effort to further refine our cost structure, we offered a voluntary exit incentive to certain U.S.-based salaried non-operative employees.
As a result of this program, we will recognize a restructuring charge of approximately $4 million in the fourth quarter of 2021, with cash severance expected primarily in 2022. Run rate savings are estimated to be approximately $5 million as a result of this action, with a fairly even split of the savings between SG&A and cost of goods sold. In 2022, we expect to realize approximately 70% of the run rate savings based on planned exit dates, with full run rate savings being realized in 2023. Moving on to cash flow and liquidity. Working capital was a use of cash in the third quarter of $14 million, driven by an increase in accounts receivable given higher sales activity and modestly higher inventory to support near-term demand.
Quarterly net income significantly exceeded working capital requirements and drove operating cash flow of $53.8 million in the third quarter, a $14.6 million sequential improvement. Thanks to our entire team for another strong cash flow performance in the quarter. This marks the company's tenth consecutive quarter of generating positive operating cash flow, during which time we generated over $380 million of operating cash flow. We finished September with a record $172 million of cash, a nearly 50% increase from the end of June. Total liquidity was a record $444 million at the end of September, a $68 million increase since the end of June, primarily due to a higher cash balance.
Regarding pensions, the company recorded a non-cash remeasurement loss of approximately $2.7 million in the third quarter as a result of the required salary pension plan remeasurements. Additionally, during the quarter, the company finalized elections permitted by the American Rescue Plan Act of 2021. At this time, based on current assumptions, we believe that required cash contributions to domestic defined benefit pension plans have been delayed until 2030. Prior to the act, we had expected to make required contributions beginning in 2022. In total, as of September 30, 2021, the funded status of all company plans was 86%. Internationally, the company has a legacy pension scheme in the United Kingdom from a previous manufacturing operation. We're currently working towards a termination and annuity buyout for the U.K. pension scheme with expected completion by the end of 2023.
Assets and liabilities associated with the U.K. pension scheme total approximately $102 million and $78 million respectively as of September 30, 2021. To this end, we contributed an additional $1.4 million to the U.K. pension scheme in October to further enable pension scheme termination in the future. As further information is available regarding our pension plans, we will provide an update. Turning now to the outlook. While the company's order book is full for the remainder of 2021 and into the second quarter of 2022, fourth quarter shipments are expected to be less than the third quarter given the recently completed annual Faircrest melt shop maintenance shutdown. The planned outage lasted 10 days at a cost of approximately $5 million, and the resulting impact was a reduction of approximately 30,000 melt tons during the fourth quarter.
Additionally, periodic customer manufacturing outages due to the semiconductor chip shortage may negatively impact fourth quarter mobile shipments. Expected to be at or above 75%. In accordance with the recently ratified labor agreement, a one-time ratification bonus, total cost of approximately $2 million. Lastly, we expect our $20 million. To wrap up, we are well positioned to finish cash flow and further build on positive business momentum in 2022. Thanks for your interest in TimkenSteel. We look forward to sharing our continued progress in the future. We would now like to open the call for questions.
Your first question comes from the line of Phil Gibbs with KeyBanc.
You said 70% of your business is repriced. You've implicitly moved more of your business to spot because I think from what I remember, it was about 80%-85% most recently. Just wanted to affirm that you said you have roughly half of that 70% put to bed.
Yeah, that's correct, Phil. Our strategic approach to the market in 2022 is to be more of a 70 contract, 30 spot. 50% of that 70% has already been negotiated and settled upon.
Okay. Just generally speaking, your thoughts on capital returns, your net cash right now, your financial performance, your 2022 visibility is above average it appears. Your pension contributions from what I heard Kris say, paying you back.
Let me make a few comments and then I'll turn it over to Kris to make a few comments as well. First of all, I want to say that we're very confident in our near-term outlook. Given the current demand environment, the upcoming reset of all our customer pricing arrangements, and the ongoing benefits of our cost reduction efforts, both over the last two years as well as the number of additional opportunities that we're pursuing right now. Our cost reduction efforts, both over the last two years as well as the number of additional opportunities that we're pursuing right now to improve our cost. Of course, we're very pleased with the flexibility that our improved balance sheet provides us. You have to recall that our objective is to generate sustainable profitability through the business cycles.
For that, I'll turn it over to Kris for a few of his thoughts.
Thanks, Mike, and thanks, Phil for the question. I completely agree with Mike's comments. I would like to add that we're actively collaborating with our board on the topic of capital allocation. Although we can't yet share the specifics of the strategy because it's an active and ongoing evaluation, our capital allocation framework, it's going to be balanced, and it's going to be focused on a few things. First, it's about maintaining a strong balance sheet with adequate liquidity to provide us that necessary flexibility throughout the cycle. We also like to use our operating cash flow and balance sheet flexibility to execute on strategic projects with returns in excess of our cost of capital. Our initial focus here will be on internal investments with strong returns to drive manufacturing excellence, asset reliability, and also with an eye on ESG. We have several of these projects in the pipeline.
We're in the process of evaluating and prioritizing those to ensure we maximize returns in 2022. All of this is being done while ensuring that our shareholders are rewarded as well. We look forward to sharing our capital allocation framework details with you in the first quarter of next year. While we continue our analysis, our
Thanks, Chris. I would think more to come then. Your maintenance item was $5 million. I think you said that was completed. Was it $5 million overall for the year? Did you take some in the third quarter and some in the fourth or was it $5 million in total for both quarters?
It was $5 million in the third quarter, and it was $5 million actually early in the third quarter at Harrison and Gambrinus plants, $5 million in total.
Yes. Nothing incremental in Q4, Phil. A continuation.
Okay. Thank you.
Thank you.
From the line of Tristan Gresser with
My questions. The first one, I was wondering if you could provide a bit of color on what you expect in terms of mix and maybe ASP. Order book is full, and I guess you have a bit of visibility there. Do you expect a similar increase in terms of ASP compared to Q3 or something a bit lower?
Yeah.
That's my first question.
Yeah. We do expect ASP to continue to improve. As you know, there was a price increase announcement effective November 1 on our spot business. Expect it to continue to improve. Of course, I just wanna reiterate that we're in negotiations right now with remaining contracts for 2022. I'm very positive about the price environment that we've been successful to achieve and expect that to continue with the remaining contracts.
Tristan, if I could add on the mix side of things on mobile and the chip shortage and what shipments ultimately look like there and our ability to flex into industrial, as we've done in the past.
All right. That's really helpful. To follow up on that, so you flagged the auto shipments that you kind of missed in Q3 and Q4. What are your expectations for Q4? Sorry for Q3 and Q2. Do you see those 15,000 tons could be higher in Q4? Or you see maybe some improvement on the demand side or not yet?
Well, honestly, your guess is as good as ours. The best we expect right now is Q4 to be similar to Q3. However, you know, the automotive OEMs have been making changes to their production schedules at short notice. That's the best we can predict right now.
All right. Thank you. Maybe a last one on the ESG announcement and your targets for 2030 you made. Is there any CapEx associated with it you can share at this stage, or you're still work in progress in determining how much you will have to spend to meet those targets?
Yes, there is CapEx associated to our overall plan to achieve those targets. There'll be CapEx spent every year between now and 2030 to deliver those targets. When we come out with 2022, we'll be a little more specific on how much is allocated to the ESG investment.
Tristan, just to add a little bit to that. We believe it's gonna be modest. It's gonna be impactful to the outcome of our ESG program, but be balanced with our remaining CapEx spend, similar to what we've done in the past.
All right. Perfect. Thanks a lot.
As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. There are no further questions at this time.
Great. Thank you all for joining us today.
Thank you for participating. This concludes today's conference call.