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 and six months ended June 30, 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 nine months ended September 30, 2024.

Previous wording

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

Current wording

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

Previous 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.

Current wording

Base sales: The Company’s products continued to demand solid base sales prices throughout the three and nine months ended September 30, 2024, with average base sales price per ton improving in automotive and aerospace & defense end-markets compared with the same time period in 2023.

Previous 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.

Current wording

Capital investments: The Company continues to invest organically with capital investments of $17.6 million and $49.1 million in the three and nine months ended September 30, 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 $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.

Current wording

Liquidity: Our balance sheet has remained strong, with total liquidity of $496.8 million, including cash and cash equivalents of $254.6 million as of September 30, 2024. Operating cash outflows of $13.6 million in the third quarter were primarily driven by a net loss, higher working capital and required pension contributions. Operating cash flow totaled $26.4 million in the nine months ended September 30, 2024.

Previous wording

Defense Contract: During the second quarter, the company received its first payment of $10 million from the U.S. government as part of the previously announced funding agreement for up to $99 million. The company expects the funding to be provided as mutually agreed upon milestones are achieved throughout the project. The Company is targeting late 2025 for the new assets to be operational.

Current wording

Defense Contract: In the three and nine months ended September 30, 2024, the Company received $35.5 million and $45.5 million, respectively, from the U.S. government as part of the previously announced $99 million funding agreement. The company expects the funding to be provided as mutually agreed upon milestones are achieved throughout the project. The Company is targeting late 2025 for the new bloom reheat furnace to be operational and the first half of 2026 for the new roller furnace to be operational.

Previous wording

Share repurchase program: The Company repurchased 0.4 million and 0.7 million common shares in the open market at an aggregate cost of $9.6 million and $14.0 million for the three and six months ended June 30, 2024, respectively. As of June 30, 2024, the Company had a balance of $126.4 million remaining on its authorized share repurchase program.

Current wording

Share repurchase program: The Company repurc hased 1.2 million and 1.8 million common shares in the open market at an aggregate cost of $20.1 million and $34.1 million for the three and nine months ended September 30, 2024, respectively. As of September 30, 2024, the Company had a balance of $106.3 million remaining on its authorized share repurchase program.

Previous wording

Net sales for the six months ended June 30, 2024 were $616.3 million, a decrease of $63.8 million, or 9.4% compared with the six months ended June 30, 2023. The decrease in net sales was driven by lower volumes and surcharges, partially offset by favorable price/mix. Lower volume of 45.1 thousand ship tons, and lower alloy surcharge per ton, resulted in a net sales decrease of $122.3 million. Favorable price/mix of $58.5 million was primarily due to higher base prices across all end-market sectors. Excluding surcharges, net sales decreased $5.9 million or 1.2%.

Current wording

Net sales for the three months ended September 30, 2024 were $227.2 million, a decrease of $127.0 million, or 35.9% compared with the three months ended September 30, 2023. The decrease in net sales was primarily driven by lower volumes, unfavorable surcharges and price/mix. Lower volumes of 55.9 thousand ship tons resulted in a net sales decrease of $83.3 million. The decrease in surcharges of $41.4 million was primarily due to a reduction in raw material surcharge revenue per ton as a result of lower scrap and alloy prices. Unfavorable price/mix of $2.3 million was driven by lower base prices across industrial and energy end-market sectors, partially offset by favorable base prices in automotive and aerospace & defense end-market sectors. Excluding surcharges, net sales decreased $85.6 million or 32.0%.

Previous wording

The charts below present net sales and shipments for the six months ended June 30, 2024 and 2023.

Current wording

The charts below present net sales and shipments for the nine months ended September 30, 2024 and 2023.

Previous 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%.

Current wording

Net sales for the nine months ended September 30, 2024 were $843.5 million, a decrease of $190.8 million, or 18.4% compared with the nine months ended September 30, 2023. The decrease in net sales was driven by lower volumes and surcharges, partially offset by favorable price/mix. Lower volumes of 100.9 thousand ship tons resulted in a net sales decrease of $147.7 million. Lower market prices for alloy and scrap per ton drove the unfavorable surcharges of $99.3 million. Favorable price/mix of $56.2 million was primarily due to higher base prices in the automotive, aerospace & defense and energy end-markets. Excluding surcharges, net sales decreased $91.5 million or 12.0%.

Previous wording

Gross profit for the three months ended June 30, 2024 decreased $29.6 million, or 55.1% compared with the three months ended June 30, 2023. The decrease was driven by higher manufacturing costs, unfavorable raw material spread and lower volume, partially offset by favorable price/mix. Higher manufacturing costs were primarily due to lower fixed cost leverage on decreased production levels. Raw material spread was unfavorable due to lower scrap and alloy prices. All end-market sectors except aerospace & defense were unfavorably impacted by lower volume.

Current wording

Gross profit for the three months ended September 30, 2024 decreased $38.9 million, or 76.3% compared with the three months ended September 30, 2023. The decrease was primarily driven by lower volume, unfavorable price/mix and raw material spread. All end-market sectors were unfavorably impacted by lower volume. Unfavorable price/mix was due to lower industrial and aerospace & defense shipments and unfavorable base prices in industrial and energy end-markets. Raw material spread was unfavorable due to lower shipments and scrap prices.

Previous wording

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

Current wording

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

Previous wording

Gross profit for the six months ended June 30, 2024 decreased $19.4 million, or 20.6% compared with the six months ended June 30, 2023. The decrease was driven by higher manufacturing costs, lower volume and unfavorable raw material spread, partially offset by favorable price/mix. Lower fixed cost leverage on decreased production resulted in unfavorable manufacturing costs. Raw material spread was unfavorable due to lower shipments. The industrial, automotive and energy end-market sectors were unfavorably impacted by lower volume.

Current wording

Gross profit for the nine months ended September 30, 2024 decreased $58.3 million, or 40.2% compared with the nine months ended September 30, 2023. The decrease was driven by lower volume, higher manufacturing costs and unfavorable raw material spread, partially offset by favorable price/mix. The industrial, automotive and energy end-market sectors were unfavorably impacted by lower volume. Lower fixed cost leverage on decreased production resulted in unfavorable manufacturing costs. Raw material spread was unfavorable due to lower shipments and alloy prices.

Previous wording

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

Current wording

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

Previous 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.

Current wording

SG&A expense for the three months ended September 30, 2024 increased by $2.0 million, or 9.8%, compared with the same period in 2023. The increase was primarily due to higher salary and benefits, stock-based compensation and professional services, primarily driven by the ongoing information technology transformation project.

Previous wording

SG&A expense for the six months ended June 30, 2024 increased by $3.4 million, or 8.2% compared with the six months ended June 30, 2023. The increase was primarily due to higher salary and benefits, stock-based compensation and professional services, primarily driven by the ongoing information technology transformation project, partially offset by lower variable pay.

Current wording

SG&A expense for the nine months ended September 30, 2024 increased by $5.4 million, or 8.7% compared with the nine months ended September 30, 2023. The increase was primarily due to higher salary and benefits, stock-based compensation and professional services, primarily driven by the ongoing information technology transformation project, partially offset by lower variable compensation.

Previous 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.

Current wording

Net interest income for the three and nine months ended September 30, 2024 was $2.4 million and $7.6 million, respectively, compared with net interest income of $1.8 million and $5.0 million for the three and nine months ended September 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.

Current wording

The Company's Bargaining Unit Pension Plan ("Bargaining Plan"), the Supplemental Pension Plan ("Supplemental Plan") and the recently terminated Retirement Plan ("Salaried 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 and recorded a loss of $0.8 million.

Previous wording

In the second quarter of 2024, the Company entered into an agreement to purchase a group annuity contract from The Prudential Insurance Company of America (“Prudential”) in connection with the annuitization of the Salaried Plan. The Company remeasured the Salaried Plan ahead of the annuitization on May 15, 2024. A loss of $1.0 million and $1.8 million from the remeasurement of the Salaried Plan was recognized for the three and six months ended June 30, 2024, respectively. For the three and six months ended June 30, 2024, the loss was primarily due to investment losses on plan assets of $1.8 million and $3.3 million, respectively, partially offset by a decrease in the liability due to an increase in the discount rate of $0.7 million and $1.4 million, respectively. In addition, the three months ended June 30, 2024 included a $0.1 million gain as a result of the completion of the Salaried Plan annuitization.

Current wording

In the second quarter of 2024, the Company entered into an agreement to purchase a group annuity contract from The Prudential Insurance Company of America (“Prudential”) in connection with the annuitization of the Salaried Plan. The Company remeasured the Salaried Plan upon annuitization on May 15, 2024. A loss of $1.0 million from the remeasurement of the Salaried Plan was recognized for the three months ended June 30, 2024. The loss was primarily due to investment losses on plan assets of $1.8 million partially offset by a decrease in the liability due to an increase in the discount rate of $0.7 million. In addition, the three months ended June 30, 2024 included a $0.1 million gain as a result of the completion of the Salaried Plan annuitization. The Salaried Plan may incur additional expenses in the fourth quarter of 2024 based on final plan expenses and participant transfers.

Previous 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.

Current wording

A gain of $1.0 million from the remeasurement of the Salaried Plan was recognized for the three months ended September 30, 2023. The gain for the three months ended September 30, 2023 was due to a $6.5 million decrease in the liability mainly driven by an increase in the discount rate, partially offset by $5.5 million of investment losses on plan assets. For the nine months ended September 30, 2023, the loss of $1.7 million was primarily related to investment losses on plan assets of $5.6 million and lump sum basis losses of $1.3 million, partially offset by a decrease in the pension liability of $5.2 million due to an increase in the discount rate.

Previous wording

The provision for income taxes for the quarter ended June 30, 2024 was $1.5 million compared to a provision for income taxes of $11.0 million in 2023. The change in the effective tax rate is primarily related to lower net income for the three and six months ended June 30, 2024. In addition to lower net income, the decrease for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 is also impacted by the deductibility of the loss on extinguishment of debt on the Convertible Senior Notes due 2025 and a state net operating loss discrete adjustment that both impacted 2023.

Current wording

The benefit for income taxes for the quarter ended September 30, 2024 was $1.2 million compared to a provision for income taxes of $9.8 million in 2023. The change in the effective tax rate is primarily related to lower income before income taxes for the three and nine months ended September 30, 2024. In addition to lower income before income taxes, the decrease for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 is also impacted by the deductibility of the loss on extinguishment of debt on the Convertible Senior Notes due 2025 and a state net operating loss discrete adjustment that both impacted 2023.

Previous 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.

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 third quarter of 2024 and as such the notes can be converted at the option of the holders beginning October 1 through December 31, 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

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.

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 September 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 September 30, 2024, projected cash generated from operations, borrowings available under the Amended Credit Agreement and committed government funding to support capital investments, 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 $65 million in 2024, inclusive of approximately $15 million of capital expenditures funded by the U.S. government.

Previous 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.

Current wording

In the nine months ended September 30, 2024, the Company contributed a total of $37.5 million in pension contributions, most of which related to the Bargaining Plan. In October 2024, the Company contributed an additional $5.3 million to the Bargaining Plan, resulting in total 2024 pension contributions of $42.8 million.

Previous 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.

Current wording

In the first quarter 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 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.

Previous 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.

Current wording

For the three months ended September 30, 2024, the Company repurchased approximately 1.2 million common shares in the open market at an aggregate cost of $20.1 million, which equates to an average repurchase price of $17.29 per share. For the nine months ended September 30, 2024, the Company repurchased approximately 1.8 million common shares in the open market at an aggregate cost of $34.1 million, which equates to an average repurchase price of $18.82 per share. As of September 30, 2024, the Company had a balance of $106.3 million remaining on its authorized share repurchase program.

Previous 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.

Current wording

The following table reflects the major categories of cash flows for the nine months ended September 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 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.

Current wording

Net cash provided by operating activities for the nine months ended September 30, 2024 was $26.4 million compared to net cash provided of $51.2 million for the nine months ended September 30, 2023. The change was primarily driven by lower profitability and pension contributions, partially offset by a decrease in the use of cash for working capital during the nine months ended September 30, 2024 compared to the same period in 2023.

Previous 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.

Current wording

Net cash used by investing activities for the nine months ended September 30, 2024 was $3.6 million compared to net cash used of $34.5 million for the nine months ended September 30, 2023. The change was due to proceeds from government funding in the nine months ended September 30, 2024 compared to 2023, partially offset by higher capital spending in the nine months ended September 30, 2024.

Previous 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.

Current wording

Net cash used by financing activities for the nine months ended September 30, 2024 was $48.2 million, consistent with the nine months ended September 30, 2023. Lower repurchases of Convertible Notes in 2024 were offset by higher shares surrendered for taxes and common share repurchases 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

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

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 these investments 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