Metallus Inc

Previous wording

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help investors understand our results of operations, financial condition and current business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q for the three months ended March 31, 2024.

Current wording

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help investors understand our results of operations, financial condition and current business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2024.

Previous wording

Critical Accounting Policies: An overview of accounting policies identified by the Company as critical that, as a result of the judgments, uncertainties, and the operations involved, could result in material changes to its financial condition or results of operations under different conditions or using different assumptions.

Current wording

Critical Accounting Policies: An overview of accounting policies identified by the Company as critical that, as a result of the judgments, uncertainties, and the operations involved, could result in material changes to the Company's financial condition or results of operations under different conditions or using different assumptions.

Previous wording

The following items represent key trends and events during the three months ended March 31, 2024:

Current wording

The following items represent key trends and events during the three and six months ended June 30, 2024:

Previous wording

Aerospace & Defense end market: We continue to optimize our product portfolio, increasing aerospace & defense ship tons by approximately 136% compared with the three months ended March 31, 2023.

Current wording

Aerospace & Defense end-market: We continue to optimize our product portfolio, increasing aerospace & defense ship tons by approximately 116% in the first half of 2024 in comparison to the same time period in 2023.

Previous wording

Base sales: The Company’s products continued to demand strong base sales prices throughout the first quarter of 2024, with average base sales price per ton improving in all end-markets compared with the same time period in 2023.

Current wording

Base sales: The Company’s products continued to demand solid base sales prices throughout the first half of 2024, with average base sales price per ton improving in all end-markets compared with the same time period in 2023.

Previous wording

Capital investments: The Company continues to invest organically with $17.4 million of capital investments during the first quarter of 2024. Investments included targeted spending for improved safety, equipment automation, and continuous improvement to drive best-in-class quality and asset reliability, as well as additional manufactured component capacity for profitable growth.

Current wording

Capital investments: The Company continues to invest organically with capital investments of $14.1 million during the second quarter of 2024 and $31.5 million in the first half of 2024. Investments included targeted spending for improved safety, equipment automation, and continuous improvement to drive best-in-class quality and asset reliability, as well as additional manufactured component capacity for profitable growth.

Previous wording

Liquidity: Our balance sheet has remained strong, with total liquidity of $549.0 million, including cash and cash equivalents of $278.1 million as of March 31, 2024. Operating cash flow of $33.4 million in the first quarter 2024 was primarily driven by profitability and insurance recoveries.

Current wording

Liquidity: Our balance sheet has remained strong, with total liquidity of $512.1 million, including cash and cash equivalents of $272.8 million as of June 30, 2024. Operating cash flow of $8.3 million in the second quarter was primarily driven by lower working capital and profitability, partially offset by required pension contributions. Operating cash flow totaled $41.7 million in the first half of 2024.

Previous wording

Net sales for the three months ended March 31, 2024 were $321.6 million, a decrease of $1.9 million, or 0.6%, compared with the three months ended March 31, 2023. The decrease in sales was primarily driven by lower volume and a decrease in surcharges, mostly offset by favorable price/mix. Lower volume of 17.7 thousand ship tons resulted in a net sales decrease of $25.3 million. Lower market prices for alloy drove the unfavorable surcharges of $13.2 million, partially offset by higher scrap prices. Favorable price/mix of $36.6 million was primarily due to higher base prices across all end-markets as well as a larger proportion of aerospace and defense shipments. Excluding surcharges, net sales increased $11.2 million or 4.7%.

Current wording

Net sales for the three months ended June 30, 2024 were $294.7 million, a decrease of $61.9 million, or 17.4% compared with the three months ended June 30, 2023. The decrease in net sales was driven by unfavorable surcharges and lower shipments, partially offset by favorable price/mix. Lower market prices for scrap and alloy drove the unfavorable surcharges of $44.8 million. Lower volume of 27.4 thousand ship tons resulted in a net sales decrease of $39.0 million. Favorable price/mix of $21.9 million was primarily due to higher base prices across automotive, energy and aerospace & defense end-market sectors. Excluding surcharges, net sales decreased $17.1 million or 6.8%.

Previous wording

The chart below presents the drivers of the gross profit variance for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023.

Current wording

The chart below presents the drivers of the gross profit variance from the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.

Previous wording

The charts below present selling, general and administrative (“SG&A”) expense for the three months ended March 31, 2024 and 2023.

Current wording

The charts below present selling, general and administrative (“SG&A”) expense for the three and six months ended June 30, 2024 and 2023.

Previous wording

SG&A expense for the three months ended March 31, 2024 increased by $3.1 million, or 14.8%, compared with the three months ended March 31, 2023. The increase was primarily due to higher salaries and benefits, stock-based compensation, and rebranding expenses.

Current wording

SG&A expense for the three months ended June 30, 2024 increased by $0.3 million, or 1.5% compared with the three months ended June 30, 2023. The increase was primarily due to higher salary and benefits and stock-based compensation, partially offset by lower variable pay.

Previous wording

Net interest income for the three months ended March 31, 2024 was $2.8 million compared with $1.5 million for the three months ended March 31, 2023. The change was due to interest earned on greater cash invested in a money market fund and in other accounts which generate interest income at a rate similar to the money market fund during 2024. Refer to “Note 8 - Financing Arrangements” in the Notes to the unaudited Consolidated Financial Statements for additional information.

Current wording

Net interest income for the three and six months ended June 30, 2024 was $2.4 million and $5.2 million, respectively, compared with net interest income of $1.7 million and $3.2 million for the three and six months ended June 30, 2023, respectively. The change was due to interest earned on greater cash invested in a money market fund and in other accounts which generate interest income at a rate similar to the money market fund during 2024. Refer to “Note 8 - Financing Arrangements” in the Notes to the unaudited Consolidated Financial Statements for additional information.

Previous wording

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.

Current wording

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.

Previous wording

A loss of $0.8 million from the remeasurement of the Salaried Plan was recognized for the three 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.

Current wording

A loss of $0.5 million and $2.7 million from the remeasurement of the Salaried Plan was recognized for the three and six months ended June 30, 2023, respectively. For the three months ended June 30, 2023, the loss was primarily due to $2.6 million of investment losses on plan assets, partially offset by a $2.1 million decrease in the liability driven by an increase in the discount rate. For the six months ended June 30, 2023, the loss was due to a $2.6 million increase in the liability driven by changes in the discount rate and lump sum basis losses, plus $0.1 million due to investment losses on plan assets.

Previous wording

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.

Current wording

On September 30, 2023, 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 existing secured Third Amended and Restated Credit Agreement, dated as of October 15, 2019.

Previous wording

The Amended Credit Agreement extended the maturity date of the asset-based revolving credit facility (the “Credit Facility”) from October 2024 to September 2027. Following the amendment, Credit Facility capacity remained at $400.0 million. Pursuant to the terms of the Amended Credit Agreement, the interest rate to be paid on any borrowings under the Credit Facility is now based on a two-tiered schedule rather than a three-tiered schedule with applicable rates decreasing by 25 basis points, references to LIBOR rates have been updated with references to SOFR rates, the advance rate on investment-grade eligible accounts receivable has been increased from 85% to 90%, and there has been an improvement in the springing fixed charge coverage ratio from 1.1x to 1.0x. The Credit Facility remains undrawn at this time.

Current wording

The Amended Credit Agreement extended the maturity date of the asset-based revolving credit facility (the “Credit Facility”) from October 2024 to September 2027. Following the amendment, Credit Facility capacity remained at $400.0 million. Pursuant to the terms of the Amended Credit Agreement, the interest rate to be paid on any borrowings under the Credit Facility is now based on a two-tiered schedule rather than a three-tiered schedule with applicable rates decreasing by 25 basis points, references to LIBOR rates were updated with references to SOFR rates, the advance rate on investment-grade eligible accounts receivable was increased from 85% to 90%, and there was an improvement in the springing fixed charge coverage ratio from 1.1x to 1.0x. The Credit Facility remains undrawn at this time.

Previous wording

In December 2020, the Company entered into separate, privately negotiated exchange agreements with a limited number of holders of the Company’s then outstanding Convertible Senior Notes due 2021. Pursuant to the exchange agreements, the Company exchanged $46.0 million aggregate principal amount of Convertible Senior Notes due 2021 for $46.0 million aggregate principal amount of its new Convertible Senior Notes due 2025. The Company did not receive any cash proceeds from the issuance of the Convertible Senior Notes due 2025.

Current wording

In December 2020, the Company entered into separate, privately negotiated exchange agreements with a limited number of holders of the Company’s then outstanding Convertible Senior Notes due 2021. Pursuant to the exchange agreements, the Company exchanged $46.0 million aggregate principal amount of Convertible Senior Notes due 2021 for $46.0 million aggregate principal amount of its new Convertible Senior Notes due 2025. The net amount of this exchange was $44.5 million, after deducting the initial underwriters’ fees and paying other transaction costs. The Company did not receive any cash proceeds from the issuance of the Convertible Senior Notes due 2025.

Previous wording

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. To date, no holders have elected to convert their notes during any optional conversion periods. 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.

Current wording

The Convertible Senior Notes due 2025 bear cash interest at a rate of 6.0% per year, payable semiannually on June 1 and December 1, beginning on June 1, 2021. The Convertible Senior Notes due 2025 will mature on December 1, 2025, unless earlier repurchased or converted. 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 second quarter of 2024 and as such the notes can be converted at the option of the holders beginning July 1 through September 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. To date, no holders have elected to convert their notes during any optional conversion periods. 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.

Previous wording

(1) As of March 31, 2024, and December 31, 2023, the Company had less than $400.0 million in collateral assets to borrow against.

Current wording

(1) As of June 30, 2024, and December 31, 2023, Metallus had less than $400.0 million in collateral assets to borrow against.

Previous wording

Our principal sources of liquidity are cash and cash equivalents, cash flows from operations and available borrowing capacity under our Amended Credit Agreement. As of March 31, 2024, taking into account our view of industrial, automotive, aerospace & defense and energy market demand for our products, and our 2024 operating and long-range plan, we believe that our cash balance as of March 31, 2024, projected cash generated from operations, and borrowings available under the Amended Credit Agreement, will be sufficient to satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations, including servicing our debt and pension and postretirement benefit obligations, for at least the next twelve months. We expect capital expenditures to be approximately $60 million in 2024.

Current wording

Our principal sources of liquidity are cash and cash equivalents, cash flows from operations and available borrowing capacity under our Amended Credit Agreement. As of June 30, 2024, taking into account our view of industrial, automotive, aerospace & defense and energy market demand for our products, and our 2024 operating and long-range plan, we believe that our cash balance as of June 30, 2024, projected cash generated from operations, and borrowings available under the Amended Credit Agreement, will be sufficient to satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations, including servicing our debt and pension and postretirement benefit obligations, for at least the next twelve months. We expect capital expenditures to be approximately $55 million in 2024.

Previous wording

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.

Current wording

In the first half of 2024, the Company contributed a total of $34.3 million in pension contributions, most of which related to the Bargaining Plan. In July 2024, the Company contributed an additional $3.2 million to the Bargaining Plan and anticipates additional contributions of approximately $5.3 million to the Bargaining Plan throughout the remainder of 2024.

Previous wording

In the first quarter of 2023, the Company privately negotiated early repurchases of $7.5 million aggregate principal amount of our Convertible Senior Notes Due 2025. In addition to reducing outstanding debt and generating annual interest savings of $0.5 million, the repurchases of convertible notes reduced weighted average diluted shares outstanding for the year ended December 31, 2023 by 0.7 million shares and, on a go-forward basis, reduced diluted shares outstanding by 1.0 million shares.

Current wording

In the first half of 2023, we repurchased a total of $7.5 million aggregate principal amount of our Convertible Senior Notes Due 2025. In addition to reducing outstanding debt and generating interest savings of $0.5 million, the repurchases of convertible notes reduced weighted average diluted shares outstanding for the year ended December 31, 2023 by 0.7 million shares and, on a go-forward basis reduced diluted shares outstanding by 1.0 million shares.

Previous wording

On May 6, 2024, the Board of Directors authorized an additional $100.0 million share repurchase program. 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.

Current wording

For the three months ended June 30, 2024, the Company repurchased approximately 0.4 million common shares in the open market at an aggregate cost of $9.6 million, which equates to an average repurchase price of $21.88 per share. For the six months ended June 30, 2024, the Company repurchased approximately 0.7 million common shares in the open market at an aggregate cost of $14.0 million, which equates to an average repurchase price of $21.55 per share. As of June 30, 2024, the Company had a balance of $126.4 million remaining on its authorized share repurchase program.

Previous wording

For the three months ended March 31, 2024, the Company repurchased approximately 0.2 million common shares in the open market at an aggregate cost of $4.4 million, which equates to an average repurchase price of $20.87 per share. As of March 31, 2024, the Company had a balance of $36.0 million remaining under its share repurchase program.

Current wording

In July 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 $21.00 per share. As of July 31, 2024, the Company had a balance of $122.5 million remaining under its authorized share repurchase program.

Previous wording

The following table reflects the major categories of cash flows for the three months ended March 31, 2024 and 2023. For additional details, please refer to the unaudited Consolidated Statements of Cash Flows included in this quarterly report.

Current wording

The following table reflects the major categories of cash flows for the six months ended June 30, 2024 and 2023. For additional details, please refer to the unaudited Consolidated Statements of Cash Flows included in this quarterly report.

Previous wording

Net cash provided by operating activities for the three months ended March 31, 2024 was $33.4 million compared to net cash provided of $9.8 million for the three months ended March 31, 2023. The change was primarily driven by higher profitability, lower working capital and insurance recoveries, partially offset by pension contributions during the first quarter of 2024 compared to the first quarter of 2023.

Current wording

Net cash provided by operating activities for the six months ended June 30, 2024 was $41.7 million compared to net cash provided of $23.1 million for the six months ended June 30, 2023. The change was primarily driven by a decrease in the use of cash for working capital, partially offset by pension contributions and lower profitability during the first half of 2024 compared to the first half of 2023.

Previous wording

Net cash used by investing activities for the three months ended March 31, 2024 was $17.4 million compared to net cash used of $9.1 million for the three months ended March 31, 2023. The change was due to higher capital expenditures in the first quarter of 2024 compared to the same time period in 2023.

Current wording

Net cash used by investing activities for the six months ended June 30, 2024 was $21.5 million compared to net cash used of $17.0 million for the six months ended June 30, 2023. The change was due to higher capital expenditures in the first half of 2024 compared to the first half of 2023, partially offset by proceeds from government funding.

Previous wording

Net cash used by financing activities for the three months ended March 31, 2024 was $18.7 million compared to net cash used of $30.2 million for the three months ended March 31, 2023. The change was primarily due to lower repurchases of common shares and Convertible Notes in 2024, partially offset by higher shares surrendered for taxes during the first quarter of 2024 compared to the same period in 2023. Refer to “Note 8 - Financing Arrangements” for more detail related to the Convertible Senior Notes due in 2025 and the share repurchase program.

Current wording

Net cash used by financing activities for the six months ended June 30, 2024 was $28.1 million compared to net cash used of $41.1 million for the six months ended June 30, 2023. The change was primarily due to lower repurchases of Convertible Notes and common shares in 2024, partially offset by higher shares surrendered for taxes in 2024 compared to the same period in 2023. Refer to “Note 8 - Financing Arrangements” for more detail related to the Convertible Senior Notes due in 2025 and the share repurchase program.

Previous wording

“possible,” “potential,” “predict,” “project,” “seek,” “should,” “strategic direction,” “strategy,” “target,” “will,” “would,” or other similar words, phrases or expressions that convey the uncertainty of future events or outcomes. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-Q. We caution readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of us due to a variety of factors, such as:

Current wording

Certain statements set forth in this Quarterly Report on Form 10-Q (including our forecasts, beliefs and expectations) that are not historical in nature are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, Management’s Discussion and Analysis of Financial Condition and Results of Operations contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as “anticipate,” “aspire,” “believe,” “could,” “estimate,” “expect,” “forecast,” “outlook,” “intend,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “strategic direction,” “strategy,” “target,” “will,” “would,” or other similar words, phrases or expressions that convey the uncertainty of future events or outcomes. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-Q. We caution readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of us due to a variety of factors, such as:

Previous wording

with respect to the continuous bloom reheat furnace investment, whether the funding awarded to support this investment is received on the anticipated timetable, whether the Company is able to successfully complete the installation and commissioning of the new assets on the targeted budget and timetable, and whether the anticipated increase in throughput is achieved; and

Current wording

with respect to the equipment investments to support the U.S. Army’s mission of ramping up munitions production in the coming years, whether the funding awarded to support this investment is received on the anticipated timetable, whether the Company is able to successfully complete the installation and commissioning of the new assets on the targeted budget and timetable, and whether the anticipated increase in throughput is achieved; and