Metallus Inc

(dollars in millions, except per share data)

Note 1 - Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared by Metallus Inc. (the “Company” or “Metallus”) in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to Metallus' audited Consolidated Financial Statements and Notes included in its Annual Report on Form 10-K for the year ended December 31, 2023.

Note 2 - Recent Accounting Pronouncements

In November 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-10, "Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance", which requires business entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around (1) the nature of the assistance, (2) the related accounting policies used to account for government assistance, (3) the effect of government assistance on the entity’s financial statements, and (4) any significant terms and conditions of the agreements, including commitments and contingencies.

The Company prospectively applied the guidance in conjunction with the agreement with United States Army entered into during the first quarter of 2024. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures during the first quarter of 2024; however, the Company anticipates that the adoption of this ASU will have a material impact on the consolidated financial statements and related disclosures beginning in the second quarter of 2024.

The Company will apply the guidance within “International Accounting Standards (“IAS”) 20 - Accounting for Government Grants and Disclosure of Government Assistance” and will record the funding received as a reduction to property, plant and equipment, as the primary conditions for receipt of these funds are to build-out new assets to support increased artillery shell production for the United States Army. The Company anticipates funding to begin in the second quarter of 2024 and will continue to receive funding related to this program into 2025.

There are no other current ASUs issued, but not adopted, that are expected to have a material impact on the Company.

Note 3 - Revenue Recognition

The following table provides the major sources of revenue by end-market sector for thethree months ended March 31, 2024 and 2023:

(1) “Aerospace & Defense” sales by end-market were previously included in "Industrial."

(2) “Other” sales by end-market includes the Company’s scrap sales.

The following table provides the major sources of revenue by product type for the three months ended March 31, 2024 and 2023:

(3)“Other” sales by product type relates to the Company’s scrap sales.

Contract liabilities are recognized when the Company has received consideration from a customer to transfer goods at a future point in time. Contract liabilities are primarily related to deferred revenue resulting from any cash payments received in advance of shipment to customers and are included in other current liabilities on the Consolidated Balance Sheets. Contract liabilities totaled $0.7 million and $1.8 million as of March 31, 2024 and 2023, respectively.

Note 4 – Other (Income) Expense, net

The following table provides the components of other (income) expense, net for thethree months ended March 31, 2024 and 2023:

Non-service related pension and other postretirement benefit income, for all years, consists primarily of the interest cost, expected return on plan assets and amortization components of net periodic cost.

The Company's Bargaining Unit Pension Plan ("Bargaining Plan"), Retirement Plan (“Salaried Plan”), and the Supplemental Pension Plan ("Supplemental Plan") each have a provision that permits employees to elect to receive their pension benefits in a lump sum upon retirement. In the first quarter of 2024, the cumulative cost of all lump sum payments was expected 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 during the first quarter of 2024. The Company is required to complete a full remeasurement of the plan each quarter for the remainder of 2024 or until the plan is annuitized with assets and liabilities transferred to a highly-rated insurance company, which is expected to occur in the second quarter of 2024.

A loss of $0.8 million from the remeasurement of the Salaried Plan was recognized for thethree months ended March 31, 2024. This loss was due to $1.5 million of investment losses on plan assets and lump sum basis losses, partially offset by a $0.7 million decrease in the liability due to an increase in the discount rate.

A loss of $2.2 million from the remeasurement of the Salaried Planwas recognized for the three months ended March 31, 2023. This loss was due to a $4.6 million increase in the liability driven by a decrease in the discount rate and lump sum basis losses, partially offset by $2.4 million of investment gains on plan assets.

For more details on the aforementioned remeasurements, refer to “Note 9 - Retirement and Postretirement Plans.”

During 2023, the Company recognized insurance recoveries of $31.3 million related to the 2022 Faircrest melt shop unplanned downtime. In the first quarter of 2023, the Company recognized recoveries of $9.8 million, of which $0.8 million was received during the first quarter and $9.0 million was received in the second quarter of 2023. In the second quarter of 2023, a $1.5 million insurance recovery was received, and the remaining $20.0 million was received in the first quarter of 2024. The 2022 insurance claims were closed in the first quarter of 2024. For further information related to previous insurance recoveries, refer to "Note 7 - Other (Income) Expense, net" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Note 5 - Income Tax Provision

Metallus' provision for income taxes in interim periods is computed by applying the appropriate estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items, including interest on prior-year tax liabilities, are recorded during the periods in which they occur.

Income tax expense for the three months ended March 31, 2024 was calculated using forecasted multi-jurisdictional annual effective tax rates to determine a blended annual effective tax rate. The effective tax rate of 20.0% for the three months ended March 31, 2024 was lower than the rate of 21.0% for the three months ended March 31, 2023. The change is primarily related to limitations on the tax deductibility of the loss on extinguishment of debt on the Convertible Senior Notes due 2025 and a state net operating loss discrete adjustment that impacted the first quarter of 2023, partially offset by higher book income in the first quarter of 2024.

Cash taxes were minimal in the first quarter of 2024. In April 2024, the Company made $17.8 million in U.S. federal tax payments and $3.6 million in state and local tax payments.

Note 6 - Earnings (Loss) Per Share

Basic earnings (loss) per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based upon the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the treasury stock method or if-converted method. For the Convertible Notes, the Company utilizes the if-converted method to calculate diluted earnings (loss) per share. Under the if-converted method, the Company adjusts net earnings to add back interest expense (including amortization of debt issuance costs) recognized on the Convertible Notes and includes the number of shares potentially issuable related to the Convertible Notes in the weighted average shares outstanding. Treasury shares are excluded from the denominator in calculating both basic and diluted earnings (loss) per share.

Equity-based Awards

Common share equivalents for shares issuable for equity-based awards amounted to 2.9 million shares for thethree months ended March 31, 2024. For the three months ended March 31, 2024,0.6 million shares were excluded from the computation of diluted earnings (loss) per share, primarily related to options with exercise prices above the average market price of our common shares(i.e., “underwater” options), because the effect of their inclusion would have been anti-dilutive. The difference between the remaining 2.3 million shares and 0.8 million shares assumed purchased with potential proceeds for thethree months ended March 31, 2024, were included in the denominator of the diluted earnings (loss) per share calculation.

Common share equivalents for shares issuable for equity-based awards amounted to 3.5 million shares for thethree months ended March 31, 2023. For the three months ended March 31, 2023,0.5 million shares were excluded from the computation of diluted earnings (loss) per share, primarily related to options with exercise prices above the average market price of our common shares (i.e., “underwater” options), because the effect of their inclusion would have been anti-dilutive. The difference between the remaining 3.0 million shares and 0.9 million shares assumed purchased with potential proceeds for the three months ended March 31, 2023, were included in the denominator of the diluted earnings (loss) per share calculation.

Convertible Notes

Common share equivalents for shares issuable upon the conversion of outstanding Convertible Notes were included in the computation of diluted earnings (loss) per share for the three months ended March 31, 2024 and 2023 as these shares would be dilutive.

The reduction in the dilutive effect on convertible notes is attributable to the repurchase of outstanding Convertible Notes that occurred in the first quarter of 2023. For additional details regarding the Convertible Notes please refer to “Note 14 - Financing Arrangements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings (loss) per share for thethree months ended March 31, 2024 and 2023:

Note 7 - Inventories

The components of inventories, net of reserves as of March 31, 2024 and December 31, 2023 were as follows:

Note 8 - Financing Arrangements

For a detailed discussion of the Company's long-term debt and credit arrangements, refer to “Note 14 - Financing Arrangements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

The following table summarizes the current and non-current debt as of March 31, 2024 and December 31, 2023.

Amended Credit Agreement

On September 30, 2022, the Company, as borrower, and certain domestic subsidiaries of the Company, as subsidiary guarantors (the “Subsidiary Guarantors”), entered into a Fourth Amended and Restated Credit Agreement (the “Amended Credit Agreement”), with JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), and the lenders party thereto (collectively, the “Lenders”), which further amended and restated the Company’s secured Third Amended and Restated Credit Agreement, dated as of October 15, 2019.

As of March 31, 2024, the amount available under the Amended Credit Agreement was$270.9 million, reflective of the Company’s asset borrowing base withno outstanding borrowings. Additionally, the Company is in compliance with all covenants outlined in the Amended Credit Agreement.

Convertible Senior Notes due 2025

The principal amount of the Convertible Senior Notes due 2025 upon issuance was $46.0 million. Transaction costs related to the Convertible Senior Notes due 2025 incurred upon issuance were $1.5 million. These costs are amortized to interest expense over the term of the notes. The Convertible Senior Notes due 2025 mature on December 1, 2025. The Convertible Senior Notes due 2025 are convertible at the option of holders in certain circumstances and during certain periods into the Company’s common shares, cash, or a combination thereof, at the Company’s election.

The Indenture for the Convertible Senior Notes due 2025 provides that notes will become convertible during a quarter when the share price for 20 trading days during the final 30 trading days of the immediately preceding quarter was greater than 130%of the conversion price. This criterion was met during the first quarter of 2024 and as such the notes can be converted at the option of the holders beginning April 1 through June 30, 2024. Whether the notes will be convertible following such period will depend on if this criterion, or another conversion condition, is met in the future. As such, the Convertible Senior Notes due 2025 are classified as a current liability in the Consolidated Balance Sheets as of March 31, 2024. This criterion was also met as of December 31, 2023. To date, no holders have elected to convert their notes during any optional conversion periods.

For details regarding all conversion mechanics and methods of settlement, refer to the Indenture for the Convertible Senior Notes due 2025 filed as an exhibit to a Form 8-K on December 15, 2020 and incorporated by reference in our most recent 10-K filing.

In the first quarterof 2023, the Company repurchased a total of $7.5 million aggregate principal amount of its Convertible Senior Notes due 2025. Total cash paid to noteholders was $18.7 million. A loss on extinguishment of debt of $11.4 million was recognized, including a charge of $0.2 million for unamortized debt issuance costs related to the portion of debt extinguished, as well as the related transaction costs.

The components of the Convertible Senior Notes due 2025 as of March 31, 2024 and December 31, 2023 were as follows:

The following table sets forth total interest expense recognized related to the Convertible Notes:

The total cash interest paid for the three months ended March 31, 2024 and 2023 was $0.3 million and $0.4 million, respectively.

Fair Value Measurement

The fair value of the Convertible Senior Notes due 2025 was approximately $39.2 million as of March 31, 2024. The fair value of the Convertible Senior Notes due 2025, which falls within Level 2 of the fair value hierarchy as defined by applicable accounting guidance, is based on a valuation model primarily using observable market inputs and requires a recurring fair value measurement on a quarterly basis.

Metallus' Credit Facility is variable-rate debt. As such, any outstanding carrying value is a reasonable estimate of fair value as interest rates on these borrowings approximate current market rates. This valuation falls within Level 2 of the fair value hierarchy and is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly. There wereno outstanding borrowings on the Credit Facility as of March 31, 2024.

Interest (Income) Expense, net

The following table provides the components of interest (income) expense, net for thethree months ended March 31, 2024 and 2023:

Interest income primarily relates to interest earned on cash invested in a money market fund and deposits with financial institutions. As of March 31, 2024, the carrying value of the Company's money market investment was $146.4 million, which approximates the fair value. The Company had $94.1 million in cash invested in a money market fund as of March 31, 2023. The money market fund is a cash equivalent and is included in cash and cash equivalents on the Consolidated Balance Sheets. The fund consists of highly liquid investments with an average maturity of three months or less and falls within Level 1 of the fair value hierarchy as defined by applicable accounting guidance. Additionally as of March 31, 2024 and 2023, the Company has $121.3 and $116.0 million of cash held in other accounts which generate interest income at a rate similar to the money market fund.

Treasury Shares

On December 20, 2021, the Company announced that its Board of Directors authorized a share repurchase program under which the Company may repurchase up to $50.0 million of its outstanding common shares. The share repurchase program is intended to return capital to shareholders while also offsetting dilution from annual equity compensation awards. The share repurchase program does not require the Company to acquire any dollar amount or number of shares and may be modified, suspended, or terminated by the Company at any time without prior notice. On November 2, 2022, the Board of Directors authorized an additional $75.0 million share repurchase program.

For the three months ended March 31, 2024, the Company repurchased approximately 0.2 million common shares at an aggregate cost of $4.4 million in the open market, which equates to an average repurchase price of$20.87 per share. For the three months ended March 31, 2023, the Company repurchased approximately 0.5 million common shares at an aggregate cost of $9.4 million in the open market, which equates to an average repurchase price of $18.20 per share.

On May 6, 2024, the Board of Directors authorized an additional $100.0 million share repurchase program. This authorization reflects the continued confidence of the Board and senior leadership in the Company’s ability to generate sustainable through-cycle profitability while maintaining a strong balance sheet and cash flow. From April 1,2024 through May 6, 2024, the Company repurchased approximately 0.2 million common shares at an aggregate cost of $3.9 million, which equates to an average repurchase price of $21.69 per share. In aggregate as of May 6, 2024, the Company has $132.1 million remaining under its authorized share repurchase programs.

Note 9 - Retirement and Postretirement Plans

Plan Amendments and Updates

Bargaining Plan

On October 29, 2021, the United Steelworkers ("USW") Local 1123 voted to ratify a newfour-year contract (the “Contract”). The Contract, which is in effect until September 27, 2025, resulted in several changes to the Bargaining Plan including but not limited to closing the plan to new entrants effective January 1, 2022. For a detailed discussion of the Company's Bargaining Plan changes, refer to “Note 14 - Financing Arrangements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

In the first quarter of 2024, the Company contributed a total of $28.4 million in pension contributions, most of which related to the Bargaining Plan. In April 2024, the Company contributed an additional $5.9 million to the Bargaining Plan and anticipates additional contributions of approximately $12.0 million to the Bargaining Plan throughout the remainder of 2024. Required future pension contribution timing and amounts are subject to significant change based on future investment performance, Company estimates and actuarial assumptions, as well as current funding laws.

Salaried Plan

During the fourth quarter of 2021, termination of the Salaried Plan was approved by the Company's Board of Directors. Participants were notified in January 2022 and the plan was terminated effective March 31, 2022, subject to regulatory approval which was received in the fourth quarter of 2023. The purchase of an irrevocable annuity contract from an insurance company is expected to occur in the second quarter of 2024, after which time the insurance company selected will be responsible for all participant benefit payments.

Pension Net Periodic Benefit Cost (Income)

The components of net periodic benefit cost (income) for thethree months ended March 31, 2024 were as follows:

The components of net periodic benefit cost (income) for the three months ended March 31, 2023 were as follows:

The Bargaining Plan, Salaried Plan, and Supplemental Plan each have a provision that permits employees to elect to receive their pension benefits in a lump sum upon retirement. The Company's accounting policy is to recognize settlements during the quarter in which it is projected that the costs of all settlements during the year will be greater than the sum of the service cost and interest cost components.

In the first quarter of 2024, the cumulative cost of all lump sum payments was expected 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 during the first quarter of 2024. The Company is required to complete a full remeasurement of the plan each quarter for the remainder of 2024 or until the plan is annuitized with assets and liabilities transferred to a highly-rated insurance company, which is expected to occur in the second quarter of 2024. Subsequent to the first quarter of 2024, on May 1, 2024, the Company made $20.8 million in lump sum payments in advance of the annuitization of the Salaried Plan.

In the first quarter of 2023, in anticipation of receiving the regulatory approval to move forward with the plan termination process, the cumulative costs of all lump sum payments and other settlements were projected to exceed this threshold during 2023 for the Salaried Plan. Ultimately, these costs did not exceed this threshold for the Salaried Plan during 2023. The Salaried Plan's pension obligations and plan assets were remeasured during each quarter of 2023.

Note 10 – Stock-Based Compensation

During the three months ended March 31, 2024, the Board of Directors granted 370,296 time-based restricted stock units and 205,944 performance-based restricted stock units, which relates to the annual grant to our employees. During thethree months ended March 31, 2023, the Board of Directors granted 314,194 time-based restricted stock units and 211,639 performance-based restricted stock units, which relates to the annual grant to our employees.

Time-based restricted stock units are issued with the fair value equal to the closing market price of Metallus common shares on the date of grant. These restricted stock units do not have any performance conditions for vesting. Expense is recognized over the service period, adjusted for any forfeitures that occur during the vesting period. The fair value of the restricted stock units granted during the three months ended March 31, 2024 was $20.66 per share.

Performance-based restricted stock units issued in 2024 vest based on achievement of a total shareholder return (“TSR”) metric. The TSR metric is considered a market condition, which requires Metallus to reflect it in the fair value on grant date using an advanced option-pricing model. The fair value of each performance share was therefore determined using a Monte Carlo valuation model, a generally accepted lattice pricing model under ASC 718 – Stock-based Compensation. The Monte Carlo valuation model, among other factors, uses commonly-accepted economic theory underlying all valuation models, estimates fair value using simulations of future share prices based on stock price behavior and considers the correlation of peer company returns in determining fair value. The fair value of the performance-based restricted stock units granted during the three months ended March 31, 2024 was $18.73 per share.

In the fourth quarter of 2023, the Board approved and authorized a performance-based Transformation Incentive Grant program (the “Transformation Incentive Grant Program”). Under the Transformation Incentive Grant Program, certain employees were granted performance-based restricted stock unit awards designed to be earned based upon the closing price performance of the Company's common shares during a performance period running from December 1, 2023 through December 31, 2026. Similar to the annual performance-based restricted stock units, the fair value of each share is determined using a Monte Carlo valuation model, a generally accepted lattice pricing model. There were no additional grants under the Transformation Incentive Grant Program in the first quarter of 2024. For further information, refer to Metallus' Stock Based Compensation note included in its Annual Report on Form 10-K for the year ended December 31, 2023.

Metallus recognized stock-based compensation expense of $3.5 million for thethree months ended March 31, 2024, compared to $2.6 million for thethree months ended March 31, 2023. Future stock-based compensation expense related to the unvested portion of all awards is approximately $28.2 million. The future expense is expected to be recognized over the remaining vesting periods through 2027.

Note 11 - Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) for thethree months ended March 31, 2024 and 2023 by component were as follows:

The amount reclassified from accumulated other comprehensive income (loss) in the three months ended March 31, 2024 and 2023 for the pension and postretirement liability adjustment was included in other (income) expense, net in the unaudited Consolidated Statements of Operations.

Note 12 – Contingencies

Metallus has a number of loss exposures incurred in the ordinary course of business, such as environmental claims, product warranty claims, employee-related matters, and other litigation. Establishing loss reserves for these matters requires management’s estimate and judgment regarding risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances. Accruals related to environmental claims represent management’s best estimate of the fees and costs associated with these claims. Although it is not possible to predict with certainty the outcome of such claims, management believes that their ultimate dispositions should not have a material adverse effect on our financial position, cash flows or results of operations. As of March 31, 2024 and December 31, 2023, Metallus had a $1.0 million and a $1.1 million contingency reserve, respectively, related to loss exposures incurred in the ordinary course of business.