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 nine months ended September 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 months ended March 31, 2025.

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 the Company's 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 its 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 and nine months ended September 30, 2024:

Current wording

The following items represent key trends and events during the three months ended March 31, 2025:

Previous 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.

Current wording

Capital investments: The Company continues to invest organically with $27.5 million of capital investments during the first quarter of 2025 including $13.9 million for projects funded by the U.S. government. Investments included targeted spending for improved safety, equipment automation, and continuous improvement to drive best-in-class quality and asset reliability, as well as new assets to increase throughput and efficiency which are being substantially funded by the U.S. government.

Previous 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.

Current wording

Defense contract: The Company received $12.9 million from the U.S. government as part of the previously announced $99.75 million funding agreement to support the U.S. Army's mission of increasing munitions production for national security in the upcoming years. The agreement supports the commissioning of two major assets: a continuous bloom reheat furnace and a roller hearth heat treat furnace. The Company expects the remaining 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. To date, the Company has received $66.4 million of government funding, with total spend of $21.9 million, and expects additional funding to be provided under the previously announced agreements throughout 2025 and into early 2026 as mutually agreed upon milestones are achieved.

Previous 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.

Current wording

Liquidity: Our balance sheet has remained strong, with total liquidity of $432.0 million, including cash and cash equivalents of $180.3 million as of March 31, 2025. Operating cash outflow of $38.9 million in the first quarter 2025 was primarily driven by required pension contributions and higher working capital.

Previous 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%.

Current wording

Net sales for the three months ended March 31, 2025 were $280.5 million, a decrease of $41.1 million, or 12.8%, compared with the three months ended March 31, 2024. The decrease in sales was primarily driven by unfavorable price/mix, a decrease in surcharges and lower volume. Unfavorable price/mix of $25.9 million was primarily due to lower base prices across end-markets as well as a smaller proportion of aerospace & defense shipments. Lower market prices for scrap primarily drove the unfavorable surcharges of $11.4 million. Lower volume of 2.3 thousand ship tons resulted in a net sales decrease of $3.8 million. Excluding surcharges, net sales increased $29.7 million or 11.8%.

Previous wording

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

Current wording

The chart below presents the drivers of the gross profit variance for the three months ended March 31, 2025 as compared to the three months ended March 31, 2024.

Previous 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.

Current wording

Gross profit for the three months ended March 31, 2025 decreased $28.7 million, or 56.7%, compared with the three months ended March 31, 2024. The decrease was driven by unfavorable price/mix and lower volume, partially offset by lower manufacturing costs. Unfavorable price/mix was due to lower base prices across end-markets as well as a smaller proportion of aerospace & defense shipments. The aerospace & defense and automotive end-markets were unfavorably impacted by lower shipments, partially offset by higher shipments to the industrial and energy end-markets. Favorable manufacturing costs were primarily due to lower maintenance and manufacturing consumables spend.

Previous wording

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

Current wording

The charts below present selling, general and administrative (“SG&A”) expense for the three months ended March 31, 2025 and 2024.

Previous 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.

Current wording

SG&A expense for the three months ended March 31, 2025 increased by $0.2 million, or 0.8%, compared with the three months ended March 31, 2024. The increase was primarily due to higher salary and benefits, variable pay compensation and professional services, primarily driven by the ongoing information technology transformation project.

Previous 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.

Current wording

Net interest income for the three months ended March 31, 2025 was $1.5 million compared with $2.8 million for the three months ended March 31, 2024. The change was due to interest earned on lower 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 2025. Refer to “Note 10 - 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"), 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.

Current wording

The Company's Bargaining Unit Pension Plan ("Bargaining Plan"), the Supplemental Pension Plan ("Supplemental Plan") and the Retirement Plan ("Salaried Plan"), which was terminated during the second quarter of 2024, 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 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.

Current 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.

Previous 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.

Current wording

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

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 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.

Current 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 fourth quarter of 2024, and, as such, the notes can be converted at the option of the holder beginning January 1 through March 31, 2025. During the first quarter of 2025, the Company received notice of conversion from the remaining Convertible Senior Note holder to convert the outstanding notes. The Company expects to settle the convertible obligation, including the outstanding principal of $5.5 million, in cash, during the second quarter of 2025.

Previous wording

The following represents a summary of key liquidity measures under the Amended Credit Agreement as of September 30, 2024 and December 31, 2023:

Current wording

The following represents a summary of key liquidity measures under the Credit Agreement as of March 31, 2025 and December 31, 2024:

Previous wording

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

Current wording

(1) As of March 31, 2025, and December 31, 2024, the Company 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 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.

Current wording

Our principal sources of liquidity are cash and cash equivalents, cash flows from operations and available borrowing capacity under our Credit Agreement. As of March 31, 2025, taking into account our view of industrial, automotive, aerospace & defense and energy market demand for our products, and our 2025 operating and long-range plan, we believe that our cash balance as of March 31, 2025, projected cash generated from operations, borrowings available under the 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 $125 million in 2025, inclusive of approximately $90 million of capital expenditures funded by the U.S. government.

Previous 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.

Current wording

In the first quarter of 2025, the Company contributed a total of $52.6 million in pension contributions, most of which related to the Bargaining Plan. In April 2025, the Company contributed an additional $5.9 million to the Bargaining Plan and anticipates additional contributions of approximately $10 million to the Bargaining Plan throughout the remainder of 2025.

Previous 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.

Current wording

For the three months ended March 31, 2025, the Company repurchased approximately 0.4 million common shares at an aggregate cost of $5.6 million in the open market, which equates to an average repurchase price of $14.23 per share. As of March 31, 2025, the Company had a balance of $97.2 million remaining under its share repurchase program. 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, extended or terminated by the Company at any time without prior notice. These authorizations reflect 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.

Previous 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.

Current wording

The following table reflects the major categories of cash flows for the three months ended March 31, 2025 and 2024. 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 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.

Current wording

Net cash used by operating activities for the three months ended March 31, 2025 was $38.9 million compared to net cash provided of $33.4 million for the three months ended March 31, 2024. The change was primarily driven by first quarter of 2025 profitability, an increase in first quarter of 2025 required pension contributions, a higher working capital use of cash in the first quarter 2025 to support a sequential increase in net sales, and insurance recoveries received in 2024.

Previous 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.

Current wording

Net cash used by investing activities for the three months ended March 31, 2025 was $12.9 million compared to net cash used of $17.4 million for the three months ended March 31, 2024. The change was due to proceeds from government funding in the three months ended March 31, 2025 compared to 2024, partially offset by higher capital spending in the three months ended March 31, 2025.

Previous 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.

Current wording

Net cash used by financing activities for the three months ended March 31, 2025 was $8.2 million compared to net cash used of $18.7 million for the three months ended March 31, 2024. The change was primarily due to lower shares surrendered for taxes during the first quarter of 2025 compared to the same period in 2024, partially offset by higher repurchases of common shares in 2025 compared to the same period in 2024.

Previous wording

the effects of fluctuations in customer demand on sales, product mix and prices in the industries in which we operate. This includes: our ability to respond to rapid changes in customer demand including but not limited to changes in customer operating schedules due to supply chain constraints or unplanned work stoppages; the ability of customers to obtain financing to purchase the Company’s products or equipment that contains its products; the effects of customer bankruptcies or liquidations; the impact of changes in industrial business cycles; and whether conditions of fair trade exist in the U.S. markets;

Current wording

the effects of fluctuations in customer demand on sales, product mix and prices in the industries in which the Company operates, including the ability of the Company to respond to rapid changes in customer demand including but not limited to changes in domestic and worldwide political and economic conditions due to, among other factors, U.S. and foreign trade policies and the impact on economic conditions, changes in customer operating schedules due to supply chain constraints or unplanned work stoppages, the ability of customers to obtain financing to purchase the Company’s products or equipment that contains its products, the effects of customer bankruptcies or liquidations, the impact of changes in industrial business cycles, and whether conditions of fair trade exist in U.S. markets;

Previous wording

the impacts from any repurchases of our common shares and convertible notes, including the timing and amount of any repurchases;

Current wording

the impacts from any repurchases of our common shares, including the timing and amount of any repurchases;