# Metallus Inc.: Form 10-Q for the period ended Jun 30, 2022

- Company: [Metallus Inc.](/companies/mtus.md) (CIK 1598428)
- Form: 10-Q
- Filed: 2022-08-04
- Accepted by EDGAR: Aug 4, 2022, 16:27 ET
- Period: 2022-06-30
- Accession: 0000950170-22-014785
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1598428/000095017022014785/tmst-20220630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1598428/000095017022014785/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-04-01 to 2022-06-30 | $415.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2022-01-01 to 2022-06-30 | $767.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-04-01 to 2022-06-30 | $334.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2022-01-01 to 2022-06-30 | $626.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-04-01 to 2022-06-30 | $81.4m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2022-01-01 to 2022-06-30 | $141.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-04-01 to 2022-06-30 | $21.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2022-01-01 to 2022-06-30 | $40.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Interest expense | 3 months, 2022-04-01 to 2022-06-30 | $600.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-01-01 to 2022-06-30 | $1.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-04-01 to 2022-06-30 | $1.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-01-01 to 2022-06-30 | $2.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | $74.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-01-01 to 2022-06-30 | $111.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | $1.42 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-01-01 to 2022-06-30 | $2.12 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | $1.60 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-01-01 to 2022-06-30 | $2.40 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-04-01 to 2022-06-30 | 52,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-01-01 to 2022-06-30 | 53,300,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-01-01 to 2022-06-30 | $64.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 6 months, 2022-01-01 to 2022-06-30 | $12.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-06-30 | $238.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-06-30 | $669.6m | us-gaap:AssetsCurrent |
| Total assets | at 2022-06-30 | $1.22bn | us-gaap:Assets |
| Current liabilities | at 2022-06-30 | $260.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-06-30 | $448.4m | us-gaap:Liabilities |
| Long-term debt | at 2022-06-30 | $0 | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-06-30 | $20.4m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-06-30 | $768.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,866 characters.

#### (dollars in millions, except per share data)

### Business Overview

We manufacture alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 1.2 million tons and shipment capacity of approximately 0.9 million tons. Our portfolio includes special bar quality (“SBQ”) bars, seamless mechanical tubing (“tubes”), manufactured components such as precision steel components, and billets. Additionally, we manage raw material recycling programs, which are used internally as a feeder system for our melt operations and allow us to sell scrap not used in our operations to third parties. Our products and solutions are used in a diverse range of demanding applications in the following market sectors: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and oil country tubular goods (“OCTG”).

SBQ steel is made to restrictive chemical compositions and high internal purity levels and is used in critical mechanical applications. We make these products from nearly 100% recycled steel, using our expertise in raw materials to create high-quality steel products. We focus on creating tailored products for our respective end-market sectors. Our engineers are experts in both materials and applications, so we can work closely with each customer to deliver flexible solutions related to our products as well as to their applications and supply chains.

The SBQ bar, tube, and billet production processes take place at our Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets we produce and includes three manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. Our production of manufactured components takes place at two downstream manufacturing facilities: Tryon Peak (Columbus, North Carolina) and St. Clair (Eaton, Ohio). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of our market sectors. As a result, investments in our facilities and resource allocation decisions affecting our operations are designed to benefit the overall business, not any specific aspect of the business.

The lead time for our products varies based on product type and specifications. As of the date of this filing, lead times for SBQ bars and tubes are through the end of the year.

On July 26, 2022, we had an incident at our Faircrest facility, which has resulted in unexpected downtime for our melt activities at this location. We do not expect a significant shipment impact in the near term given inventories on hand. We are targeting mid-August to complete the necessary repairs and expect to resume melt activities shortly thereafter. As of the date of this filing, we are unable to estimate the full impact this incident will have on our business or results of operations, including but not limited to, incremental capital expenditures, manufacturing costs, and expenses related to employee matters.

We conduct our business activities and report financial results as one business segment. The presentation of financial results as one reportable segment is consistent with the way we operate our business and is consistent with the manner in which the Chief Operating Decision Maker ("CODM") evaluates performance and makes resource and operating decisions for the business as described above. Furthermore, the Company notes that monitoring financial results as one reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of our operations.

### Impact of Raw Material Prices

In the ordinary course of business, we are exposed to the volatility of the costs of our raw materials. For example, the current Russia-Ukraine conflict could exacerbate inflationary pressures throughout the global economy and lead to potential market disruptions, such as significant volatility in commodity prices and supply chain disruptions. Although our business has not been materially impacted by this conflict to date, it is difficult to predict the extent to which our operations, or those of our suppliers, will be impacted in the future.

Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing process. We also utilize a raw material and natural gas surcharge mechanism when pricing products to our customers.

There are two components of our raw material surcharge. One component is related to the scrap metal content in our finished product and is based on the published No. 1 busheling scrap index. The other component is related to alloy material content in our finished product and is based on published prices for nickel, molybdenum, vanadium, chromium, and manganese. The natural gas surcharge is only applicable when the price of natural gas exceeds a certain dollar amount per MMBtu.

Our surcharge mechanisms are designed to mitigate the impact of increases or decreases in raw material costs, although generally with a lag effect. This timing effect can result in raw material spread whereby costs can be over- or under-recovered in certain periods. While the surcharge generally protects gross profit, it has the effect of diluting gross margin as a percent of sales. We present the raw material spread impact on gross profit for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 in the gross profit charts included within the results of operations section below.

### Results of Operations

### Net Sales

The charts below present net sales and shipments for the three months ended June 30, 2022 and 2021.

Net sales for the three months ended June 30, 2022 were $415.7 million, an increase of $88.4 million, or 27.0% compared with the three months ended June 30, 2021. The increase in net sales was primarily driven by an increase in surcharges and favorable price/mix. The increase in surcharges of $48.3 million was primarily due to higher market prices for scrap and alloys. Favorable price/mix of $42.4 million was primarily due to higher base prices across all end-market sectors, as well as an improvement of sales mix within the mobile and energy end-market sectors. Excluding surcharges, net sales increased $40.1 million or 17.9%.

The charts below present net sales and shipments for the six months ended June 30, 2022 and 2021.

Net sales for the six months ended June 30, 2022 were $767.7 million, an increase of $166.8 million, or 27.8% compared with the three months ended June 30, 2021. The increase in net sales was primarily driven by an increase in surcharges and favorable price/mix. The increase in surcharges of $89.3 million was primarily due to higher market prices for scrap and alloys. Favorable price/mix of $74.6 million was primarily due to higher base prices across all end-market sectors, as well as an improvement of sales mix within the mobile and energy end-market sectors. Excluding surcharges, net sales increased $77.5 million or 18.0%.

### Gross Profit

The chart below presents the drivers of the gross profit variance from the three months ended June 30, 2021 to June 30, 2022.

Gross profit for the three months ended June 30, 2022 increased $14.2 million, or 21.1% compared with the three months ended June 30, 2021. The increase was driven by favorable price/mix, raw material spread, and other items. This was partially offset by higher manufacturing costs and unfavorable inventory adjustments. Favorable price/mix was due to higher base prices across all end-market sectors, as well as an improvement of product mix within the energy and industrial end-market sectors. Raw material spread was favorable due to higher scrap spread, partially offset by lower alloy spread. Other items were favorable primarily due to an increase in natural gas surcharges. Higher manufacturing costs were driven by inflation and increased spend on plant maintenance. Inventory adjustments were unfavorable when comparing the three months ended June 30, 2021 to the three months ended June 30, 2022. During the second quarter of 2021, there were favorable inventory adjustments due to the reversal of reserves, as inventory was sold or scrapped. There were no similar adjustments in the second of quarter of 2022.

The chart below presents the drivers of the gross profit variance from the six months ended June 30, 2021 to June 30, 2022.

Gross profit for the six months ended June 30, 2022 increased $43.5 million, or 44.4% compared with the six months ended June 30, 2021. The increase was driven by favorable price/mix and other items. This was partially offset by higher manufacturing costs, unfavorable raw material spread, and unfavorable inventory adjustments. Favorable price/mix was due to higher base prices across all end-market sectors, as well as an improvement of product mix within all end-market sectors. Other items were favorable primarily due to an increase in natural gas surcharges. Higher manufacturing costs were driven by inflation and increased spend on plant maintenance. Unfavorable raw material spread was due to lower scrap and alloy spreads. Inventory adjustments were unfavorable when comparing the six months ended June 30, 2021 to the six months ended June 30, 2022. During the first half of 2021, there were favorable inventory adjustments due to the reversal of reserves, as inventory was sold or scrapped. There were no similar adjustments in the first half of 2022.

### Selling, General and Administrative Expenses

The charts below present selling, general and administrative (“SG&A”) expense for the three and six months ended June 30, 2022 and 2021.

SG&A expense for the three months ended June 30, 2022 increased by $0.7 million, or 3.3% compared with the three months ended June 30, 2021. This increase was primarily due to higher spend on professional services, driven by the ongoing information technology transformation project. This was partially offset by lower employee expense as a result of prior restructuring actions.

SG&A expense for the six months ended June 30, 2022 decreased by $0.3 million, or 0.7% compared with the six months ended June 30, 2021. This decrease was primarily due to lower employee expense as a result of prior restructuring actions. This was partially offset by higher spend on professional services, driven by the ongoing information technology transformation project.

### Restructuring Charges

Over the past several years, TimkenSteel has made numerous organizational changes to enhance profitable and sustainable growth. These company-wide actions included the restructuring of its business support functions, the reduction of management layers throughout the organization and other domestic and international actions to further improve the Company’s overall cost structure. Restructuring charges totaled $0.4 million and $0.8 million for the three and six months ended June 30, 2022 compared with restructuring charges of $1.0 million and $1.6 million for the three and six months ended June 30, 2021. Refer to “Note 4 - Restructuring Charges” in the Notes to the unaudited Consolidated Financial Statements for additional information.

### Impairment Charges & Loss (Gain) on Sale or Disposal of Assets, net

TimkenSteel recorded no impairment charges for the three and six months ended June 30, 2022. There were also no impairment charges for the three months ended June 30, 2021. For the six months ended June 30, 2021, the Company recorded $8.2 million of impairment charges driven by $7.9 million related to the indefinite idling of our Harrison melt and casting assets in the first quarter of 2021. Other impairment charges in the prior year included $0.3 million related to the disposition of assets at our former TMS facility in the first quarter of 2021. Refer to “Note 5 - Disposition of Non-Core Assets” in the Notes to the unaudited Consolidated Financial Statements for additional information.

Additionally, the Company recorded a net loss on the sale or disposal of assets for the three and six months ended June 30, 2022 of $0.5 million and $0.6 million, respectively. This compares with a net loss on the sale or disposal of assets of $0.4 million and $0.4 million for the three and six months ended June 30, 2021, respectively. The net loss on the sale or disposal of assets for these periods primarily consisted of write-offs of aged assets removed from service.

### Interest Expense, net

Interest expense, net for the three and six months ended June 30, 2022 was $0.6 million and $1.8 million, a decrease of $1.1 million and $1.7 million, respectively, compared with the three and six months ended June 30, 2021. The decrease in net interest expense for both periods was due to a reduction in average outstanding borrowings, as well as interest earned on cash invested in a money market fund during the second quarter of 2022. Refer to “Note 10 - Financing Arrangements” in the Notes to the unaudited Consolidated Financial Statements for additional information.

### Other (Income) Expense, net

|  | Three Months Ended June 30, 2022 | 2021 | $ Change |
| --- | ---: | ---: | ---: |
| Pension and postretirement non-service benefit (income) loss | **$(8.1)** | $(9.2) | $1.1 |
| Loss (gain) from remeasurement benefit plans | **(35.5)** | (0.7) | (34.8) |
| Sales and use tax refund | **—** | (2.5) | 2.5 |
| Foreign currency exchange (gain) loss | **(0.1)** | — | (0.1) |
| Miscellaneous (income) expense | **(0.1)** | 0.1 | (0.2) |
| **Total other (income) expense, net** | **$(43.8)** | $(12.3) | $(31.5) |

|  | Six Months Ended June 30, 2022 | 2021 | $ Change |
| --- | ---: | ---: | ---: |
| Pension and postretirement non-service benefit (income) loss | **$(16.8)** | $(18.8) | $2.0 |
| Loss (gain) from remeasurement of benefit plans | **(42.0)** | (0.5) | (41.5) |
| Sales and use tax refund | **—** | (2.5) | 2.5 |
| Foreign currency exchange (gain) loss | **(0.1)** | — | (0.1) |
| Miscellaneous (income) expense | **(0.1)** | 0.1 | (0.2) |
| **Total other (income) expense, net** | **$(59.0)** | $(21.7) | $(37.3) |

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 gain from remeasurement of benefit plans is due to all lump sum payments exceeding or expected to exceed the sum of the service cost and interest cost components of the net periodic pension cost for certain plans. These payments constitute a partial settlement, which is a significant event requiring remeasurement of both plan assets and benefit obligations. A total gain of $35.5 million and $42.0 million from the remeasurement of these benefit plans was recognized for the three and six months ended June 30, 2022, respectively. This gain was primarily due to a $205.5 million and $231.1 million decrease in the liability due to the increase in discount rates during the three and six months ended June 30, 2022, respectively. This is partially offset by losses of $170.0 million and $189.1 million for the three and six months ended June 30, 2022, respectively, primarily driven by investment losses on plan assets.

A total gain of $0.7 million and $0.5 million from the remeasurement of these benefit plans was recognized for the three and six months ended June 30, 2021, respectively. For the three months ended June 30, 2021, this gain was due to $9.5 million of favorable investment returns on plan assets, partially offset by losses of $8.8 million primarily driven by an increase in the pension liability due to a reduction in discount rate. For the six months ended June 30, 2021, this gain was driven by a $10.0 million decrease in the liability due to the increase in discount rate during the first half of 2021, partially offset by losses of $9.5 million primarily driven by investment losses on plan assets.

For more details on the aforementioned remeasurements, refer to “Note 11 - Retirement and Postretirement Plans.”

During the second quarter of 2021, TimkenSteel received a refund from the State of Ohio related to an overpayment of sales and use taxes for the period of October 1, 2016 through September 30, 2019. This resulted in a gain recognized of $2.5 million, net of related professional fees, during the second quarter of 2021.

### Provision for Income Taxes

|  | Three Months Ended June 30, 2022 | 2021 | $ Change |
| --- | ---: | ---: | ---: |
| Provision (benefit) for income taxes | **$1.5** | $1.4 | $0.1 |
| Effective tax rate | **2.0%** | 2.5% | (0.5)% |

|  | Six Months Ended June 30, 2022 | 2021 | $ Change |
| --- | ---: | ---: | ---: |
| Provision (benefit) for income taxes | **$2.4** | $1.6 | $0.8 |
| Effective tax rate | **2.1%** | 2.4% | (0.3)% |

The majority of the Company’s income tax expense is derived from domestic state and local taxes. The Company remains in a full valuation for the U.S. jurisdiction for the three and six months ended June 30, 2022 and 2021.

### Non-GAAP Financial Measures

### Net Sales, Excluding Surcharges

The tables below present net sales by end-market sector, adjusted to exclude surcharges, which represents a financial measure that has not been determined in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). We believe presenting net sales by end-market sector, both on a gross basis and on a per ton basis, adjusted to exclude raw material and natural gas surcharges, provides additional insight into key drivers of net sales such as base price and product mix. Due to the fact that the surcharge mechanism can introduce volatility to our net sales, net sales adjusted to exclude surcharges provides management and investors clarity of our core pricing and results. Presenting net sales by end-market sector, adjusted to exclude surcharges including on a per ton basis, allows management and investors to better analyze key market indicators and trends and allows for enhanced comparison between our end-market sectors.

*(dollars in millions, tons in thousands)*

|  | Three Months Ended June 30, 2022 Mobile | Industrial | Energy | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Tons | **85.4** | **102.1** | **21.4** | **—** | **208.9** |
| Net Sales | **$152.9** | **$208.2** | **$46.3** | **$8.3** | **$415.7** |
| Less: Surcharges | **55.2** | **80.0** | **17.0** | **—** | **152.2** |
| Base Sales | **$97.7** | **$128.2** | **$29.3** | **$8.3** | **$263.5** |
| Net Sales / Ton | **$1,790** | **$2,039** | **$2,164** | **$—** | **$1,990** |
| Surcharges / Ton | **$646** | **$783** | **$795** | **$—** | **$729** |
| Base Sales / Ton | **$1,144** | **$1,256** | **$1,369** | **$—** | **$1,261** |
|  | **Three Months Ended June 30, 2021** |  |  |  |  |
|  | **Mobile** | **Industrial** | **Energy** | **Other** | **Total** |
| Tons | 93.6 | 111.9 | 8.7 | — | 214.2 |
| Net Sales | $132.9 | $173.6 | $13.2 | $7.6 | $327.3 |
| Less: Surcharges | 41.7 | 57.6 | 4.6 | — | 103.9 |
| Base Sales | $91.2 | $116.0 | $8.6 | $7.6 | $223.4 |
| Net Sales / Ton | $1,420 | $1,551 | $1,517 | $— | $1,528 |
| Surcharges / Ton | $446 | $514 | $528 | $— | $485 |
| Base Sales / Ton | $974 | $1,037 | $989 | $— | $1,043 |

26

### (dollars in millions, tons in thousands)

|  | Six Months Ended June 30, 2022 Mobile | Industrial | Energy | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Tons | **174.3** | **197.0** | **34.0** | **—** | **405.3** |
| Net Sales | **$297.0** | **$383.2** | **$71.3** | **$16.2** | **$767.7** |
| Less: Surcharges | **100.9** | **134.9** | **25.0** | **—** | **260.8** |
| Base Sales | **$196.1** | **$248.3** | **$46.3** | **$16.2** | **$506.9** |
| Net Sales / Ton | **$1,704** | **$1,945** | **$2,097** | **$—** | **$1,894** |
| Surcharges / Ton | **$579** | **$685** | **$735** | **$—** | **$643** |
| Base Sales / Ton | **$1,125** | **$1,260** | **$1,362** | **$—** | **$1,251** |
|  | **Six Months Ended June 30, 2021** |  |  |  |  |
|  | **Mobile** | **Industrial** | **Energy** | **Other** | **Total** |
| Tons | 197.1 | 196.3 | 14.2 | — | 407.6 |
| Net Sales | $266.5 | $298.3 | $20.9 | $15.2 | $600.9 |
| Less: Surcharges | 74.5 | 90.3 | 6.7 | — | 171.5 |
| Base Sales | $192.0 | $208.0 | $14.2 | $15.2 | $429.4 |
| Net Sales / Ton | $1,352 | $1,520 | $1,472 | $— | $1,474 |
| Surcharges / Ton | $378 | $460 | $472 | $— | $421 |
| Base Sales / Ton | $974 | $1,060 | $1,000 | $— | $1,053 |

27

### Liquidity and Capital Resources

### Amended Credit Agreement

On October 15, 2019, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with JP Morgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and the other lenders party thereto, which further amended and restated the Company’s Second Amended and Restated Credit Agreement dated as of January 26, 2018.

For additional details regarding the Amended Credit Agreement please refer to “Note 14 - Financing Arrangements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

### Convertible Notes

In May 2016, the Company issued $75.0 million aggregate principal amount of Convertible Senior Notes due 2021, plus an additional $11.3 million principal amount to cover over-allotments.

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.

The remaining Convertible Senior Notes due 2021 matured on June 1, 2021 and were settled with a combination of cash of $38.9 million and 0.1 million shares, as most noteholders exercised their conversion option prior to maturity. The final cash payment for interest was also made to noteholders on June 1, 2021 in the amount of $1.2 million.

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 net amount of this exchange was $44.5 million, after deducting the initial underwriters’ fees and paying other transaction costs.

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 2022 and as such the notes can be converted at the option of the holders beginning July 1 through September 30, 2022. 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.

In the first half of 2022, TimkenSteel repurchased a total of $25.2 million aggregate principal amount of its Convertible Senior Notes Due 2025. Total cash paid to noteholders was $67.6 million. In the three and six months ended June 30, 2022, a loss on extinguishment of debt was recognized of $26.0 million and $43.0 million, respectively, including a charge of $0.4 million and $0.6 million, respectively, for unamortized debt issuance costs related to the portion of debt extinguished, as well as the related transaction costs.

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, 2021.

### Additional Liquidity Considerations

The following represents a summary of key liquidity measures under the Amended Credit Agreement as of June 30, 2022 and December 31, 2021:

|  | June 30, 2022 | December 31, 2021 |
| --- | ---: | ---: |
| Cash and cash equivalents | **$238.5** | $259.6 |
| **Credit Agreement:** |  |  |
| Maximum availability | **$400.0** | $400.0 |
| Suppressed availability(1) | **(74.3)** | (143.5) |
| Availability | **325.7** | 256.5 |
| Amount borrowed | **—** | — |
| Letter of credit obligations | **(5.5)** | (5.4) |
| Availability not borrowed | **$320.2** | $251.1 |
| Total liquidity | **$558.7** | $510.7 |

(1) As of June 30, 2022, and December 31, 2021, TimkenSteel had less than $400 million in collateral assets to borrow against.

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, 2022, taking into account our view of mobile, industrial, and energy market demand for our products, and our 2022 operating and long-range plan, we believe that our cash balance as of June 30, 2022, 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.

To the extent our liquidity needs prove to be greater than expected or cash generated from operations is less than anticipated, and cash on hand or credit availability is insufficient, we would seek additional financing to provide additional liquidity. We regularly evaluate our potential access to the equity and debt capital markets as sources of liquidity and we believe additional financing would likely be available if necessary, although we can make no assurance as to the form or terms of any such financing.

We continue to evaluate the best use of our liquidity which would allow us to invest in profitable growth, maintain a strong balance sheet, and return capital to shareholders. We are currently anticipating capital expenditures to be approximately $35 million in 2022.

During the first half of 2022, we privately negotiated the early repurchase of $25.2 million aggregate principal amount of our Convertible Senior Notes Due 2025. In addition to reducing outstanding debt and generating $1.5 million of annual interest savings, the convertible notes repurchase will have the effect of reducing diluted shares outstanding by a total of approximately 3.2 million shares beginning in the third quarter of 2022.

On December 20, 2021, TimkenSteel 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. Our share repurchase program is intended to return capital to shareholders while also offsetting dilution from annual equity compensation awards. The Company may utilize various methods to repurchase shares, which could include open market repurchases, including repurchases through Rule 10b5-1 plans, privately-negotiated transactions or by other means. The actual timing, number and value of shares repurchased under the program will depend on a number of factors, including the price of the Company's shares, general market and economic conditions, capital needs and other factors. 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. For the three months ended June 30, 2022, the Company repurchased approximately 0.4 million common shares in the open market at an aggregate cost of $9.3 million, which equates to an average repurchase price of $21.20 per share. For the six months ended June 30, 2022, the Company repurchased approximately 0.6 million common shares in the open market at an aggregate cost of $12.7 million, which equates to an average repurchase price of $20.94 per share. As of June 30, 2022, the Company had a balance of $37.3 million remaining on its previously approved $50.0 million share repurchase program.

In July 2022, the Company repurchased approximately 0.2 million common shares in the open market at an aggregate cost of $3.3 million, which equates to an average repurchase price of $17.72 per share. As of July 31, 2022, the Company had $34.0 million remaining under its previously approved $50.0 million share repurchase program.

#### Coronavirus Aid, Relief, and Economic Security Act

Due to a provision in the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, the Company was able to defer the employer share of Social Security payroll taxes for a specified time during 2020. During the year ended December 31, 2020, the Company deferred $6.4 million in cash payments and recorded reserves for such deferred payroll taxes in salaries, wages and benefits on the Consolidated Balance Sheets, to be paid in two equal installments. The first installment in the amount of $3.2 million was paid during the fourth quarter of 2021. The second installment is due on December 31, 2022.

The CARES Act also provided for an employee retention credit (“Employee Retention Credit”), which is a refundable tax credit against certain employment taxes. The Company qualified for the tax credit in the second and third quarters of 2020 and accrued a benefit of $2.3 million in the fourth quarter of 2020 related to the Employee Retention Credit in other (income) expense, net on the Consolidated Statements of Operations. The Company filed for this credit in the second quarter of 2021 and received a portion of the proceeds from the Internal Revenue Service ("IRS") in the amount of $0.5 million during the fourth quarter of 2021. The Company received the remaining $1.8 million of cash proceeds in the first quarter of 2022.

### Cash Flows

The following table reflects the major categories of cash flows for the six months ended June 30, 2022 and 2021. For additional details, please refer to the unaudited Consolidated Statements of Cash Flows included in this quarterly report.

|  | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash provided (used) by operating activities | **$64.0** | $52.4 |
| Net cash provided (used) by investing activities | **(9.9)** | (3.8) |
| Net cash provided (used) by financing activities | **(74.2)** | (36.2) |
| **Increase (Decrease) in Cash and Cash Equivalents** | **$(20.1)** | $12.4 |

#### Operating activities

Net cash provided by operating activities for the six months ended June 30, 2022 was $64.0 million compared to net cash provided of $52.4 million for the six months ended June 30, 2021. The increase in net cash provided by operating activities is due to an increase in profitability during the first half of 2022 compared to the first half of 2021. This is partially offset by an increased use of cash for working capital purposes and an increase in the cash payment related to variable compensation earned in 2021 compared to 2020, which is paid out in the first quarter of the subsequent year.

#### Investing activities

Net cash used by investing activities for the six months ended June 30, 2022 was $9.9 million compared to net cash used of $3.8 million for the six months ended June 30, 2021. The change was due to higher capital expenditures in the first half of 2022 compared to the first half of 2021.

#### Financing activities

Net cash used by financing activities for the six months ended June 30, 2022 was $74.2 million compared to net cash used of $36.2 million for the six months ended June 30, 2021. The change was primarily due to the increased repayments on convertible notes in the first half of 2022 compared to the first half of 2021, due to early repurchases of a portion of the Convertible Senior Notes due 2025 in the first half of 2022. Also contributing to this increased use of cash was the repurchase of common shares in the first half of 2022 under the share repurchase program, which is discussed in more detail in “Note 10 - Financing Arrangements”. This is partially offset by increased proceeds from the exercise of stock options in the first half of 2022 compared to the first half of 2021.

### Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We review our critical accounting policies throughout the year.

For a detailed discussion of the Company's critical accounting policies and estimates, refer to the section “Critical Accounting Policies and Estimates” within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

### New Accounting Guidance

See “Note 2 - Recent Accounting Pronouncements” in the Notes to the unaudited Consolidated Financial Statements.

### Revenue Recognition

TimkenSteel recognizes revenue from contracts at a point in time when it has satisfied its performance obligation and the customer obtains control of the goods, at the amount that reflects the consideration the Company expects to receive for those goods.

Substantially all performance obligations arise from the sale of manufactured steel products. The Company receives and acknowledges purchase orders from its customers, which define the quantity, pricing, payment and other applicable terms and conditions. In some cases, the Company receives a blanket purchase order from its customer, which includes pricing, payment and other terms and conditions, with quantities defined at the time the customer issues periodic releases from the blanket purchase order.

Transfer of control and revenue recognition for substantially all the Company’s sales occur upon shipment or delivery of the product, which is when title, ownership, and risk of loss pass to the customer and is based on the applicable customer shipping terms.

The Company invoices its customers at the time of title transfer. Payment terms are generally 30 days from the invoice date. Invoiced amounts are usually inclusive of shipping and handling activities incurred. Shipping and handling activities billed are included in net sales in the Consolidated Statements of Operations. The related costs incurred by the Company for the delivery of goods are classified as cost of products sold in the Consolidated Statements of Operations.

Certain contracts contain variable consideration, which primarily consists of rebates that are accounted for in net sales and accrued based on the estimated probability of the requirements being met.

Sales returns and allowances are treated as a reduction to net sales and are provided for primarily based on historical experience. These reserves also capture any potential warranty claims, which normally result in returned or replaced product.

### Benefit Plans

TimkenSteel recognizes an overfunded status or underfunded status (e.g., the difference between the fair value of plan assets and the benefit obligations) as either an asset or a liability for its defined benefit pension and other postretirement benefit plans on the Consolidated Balance Sheets. The Company recognizes actuarial gains and losses immediately through net periodic benefit cost in the Consolidated Statements of Operations upon the annual remeasurement at December 31, or on an interim basis as triggering events warrant remeasurement. An example of a potential triggering event would be settlements. 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 addition, the Company uses fair value to account for the value of plan assets.

After remeasurement of certain pension plans during the first half of 2022, the aggregate net periodic pension expense for the second half of 2022 is currently forecasted to be $3.0 million, resulting in total 2022 net periodic pension income now estimated at $2.3 million, compared to the estimated net periodic pension income at December 31, 2021 of $11.5 million. This estimate is based on an updated weighted average discount rate of 4.63% as of June 30, 2022 for all of the pension benefit plans, which reflects updated discount rates for the plans that have been remeasured during 2022. Actual asset returns have been recognized for the plans that were remeasured throughout the first half of 2022. For more details on the pension plan remeasurements, refer to "Note 6 - Other (Income) Expense, net" and “Note 11 - Retirement and Postretirement Plans” in the Notes to the unaudited Consolidated Financial Statements. As of June 30, 2022, the weighted average expected return on assets remains at 5.96%, consistent with the December 31, 2021 assumption. Actual cost is dependent on various other factors related to the employees covered by these plans, as well as subsequent remeasurement of the Bargaining and Salaried Plans in the second half of 2022, due to lump sum payments and partial annuitization of the Bargaining Plan, as discussed further below.

On July 7, 2022, the Company entered into an agreement with The Prudential Insurance Company of America ("Prudential") to purchase an irrevocable group annuity contract and transfer approximately $256.2 million of the Bargaining Plan's obligations. In connection with the agreement, Prudential will pay future benefits under the group annuity contract starting October 1, 2022, for a specified group of approximately 1,900 participants and beneficiaries who are currently receiving payments from the Bargaining Plan. Benefits payable to these participants and beneficiaries will not be reduced as a result of this transaction. Plan participants and beneficiaries not included in the transaction remain in the Bargaining Plan. The Company will record a settlement gain of approximately $2.7 million in the third quarter of 2022 related to this partial plan annuitization. This settlement is a significant event which requires remeasurement of the Bargaining Plan. This remeasurement will be performed during the third quarter. The transaction is funded directly by the assets of the Bargaining Plan and requires no cash contribution from the Company.

The timing and amount of future required pension contributions is significantly affected by asset returns and actuarial assumptions. Plan asset losses in the first half of 2022, combined with current actuarial assumptions, have resulted in potentially accelerated timing of future required pension contributions to as early as 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.

Other postretirement benefit income for 2022 is still forecasted to be $5.0 million for the full year, which is unchanged from the December 31, 2021 forecast. This estimate is based on an unchanged weighted average discount rate of 3.00%, as well as an unchanged weighted average expected return on assets of 4.75%. Actual cost is dependent on various other factors related to the employees covered by these plans.

Adjustments to our actuarial assumptions for both pension and postretirement plans could have a material adverse impact on our operating results.

### Forward-Looking Statements

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:

- deterioration in world economic conditions, or in economic conditions in any of the geographic regions in which we conduct business, including additional adverse effects from global economic slowdown, terrorism or hostilities. This includes: political risks associated with the potential instability of governments and legal systems in countries in which we or our customers conduct business, and changes in currency valuations;
- the impact of the Russia-Ukraine conflict on the global economy, sourcing of raw materials, and commodity prices;
- climate-related risks, including environmental and severe weather caused by climate changes, and legislative and regulatory initiatives addressing global climate change or other environmental concerns;
- 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; 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;
- the potential impact of the COVID-19 pandemic on our operations and financial results, including cash flows and liquidity;
- whether we are able to successfully implement actions designed to improve profitability on anticipated terms and timetables and whether we are able to fully realize the expected benefits of such actions;
- competitive factors, including changes in market penetration; increasing price competition by existing or new foreign and domestic competitors; the introduction of new products by existing and new competitors; and new technology that may impact the way our products are sold or distributed;
- changes in operating costs, including the effect of changes in our manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; availability of raw materials and energy; our ability to mitigate the impact of fluctuations in raw materials and energy costs and the effectiveness of our surcharge mechanism; changes in the expected costs associated with product warranty claims; changes resulting from inventory management, cost reduction initiatives and different levels of customer demands; the effects of unplanned work stoppages; and changes in the cost of labor and benefits;
- the success of our operating plans, announced programs, initiatives and capital investments; and our ability to maintain appropriate relations with the union that represents our associates in certain locations in order to avoid disruptions of business;
- unanticipated litigation, claims or assessments, including claims or problems related to intellectual property, product liability or warranty, employment matters, and environmental issues and taxes, among other matters;
- cyber-related risks, including information technology system failures, interruptions and security breaches;
- the Company's ability to achieve its environmental, social, and governance ("ESG") goals, including its 2030 ESG goals;
- the availability of financing and interest rates, which affect our cost of funds and/or ability to raise capital, including our ability to refinance and/or repay prior to or at maturity the Convertible Notes due December 1, 2025; our pension obligations and investment performance; and/or customer demand and the ability of customers to obtain financing to purchase our products or equipment that contain our products;
- the overall impact of the pension and postretirement mark-to-market accounting;
- the effects of the conditional conversion feature of the Convertible Senior Notes due 2025, which, if triggered, entitles holders to convert the notes at any time during specified periods at their option and therefore could result in potential dilution if the holder elects to convert and the Company elects to satisfy a portion or all of the conversion obligation by delivering common shares instead of cash;
- the impacts from any repurchases of our common shares, including the timing and amount of any repurchases; and
- those items identified under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021.

You are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results, and that the above list should not be considered to be a complete list. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Further, this report includes our current policy and intent and is not intended to create legal rights or obligations. Certain standards of measurement and performance contained in this report are developing and based on assumptions, and no assurance can be given that any plan, objective, initiative, projection, goal, mission, commitment, expectation, or prospect set forth in this report can or will be achieved. Inclusion of information in this report is not an indication that the subject or information is material to our business or operating results.

## Market risk

As filed, 2,526 characters.

### Interest Rate Risk

Our borrowings include both fixed and variable-rate debt. The variable debt consists principally of borrowings under our Credit Agreement. We are exposed to the risk of rising interest rates to the extent we fund our operations with these variable-rate borrowings. As of June 30, 2022, we have $20.8 million of aggregate debt outstanding. None of our outstanding debt as of June 30, 2022 has variable interest rates, thus a rise in interest rates would not impact our interest expense at this point in time.

### Foreign Currency Exchange Rate Risk

Fluctuations in the value of the U.S. dollar compared to foreign currencies may impact our earnings. Geographically, our sales are primarily made to customers in the United States. Currency fluctuations could impact us to the extent they impact the currency or the price of raw materials in foreign countries in which our competitors operate or have significant sales.

### Commodity Price Risk

In the ordinary course of business, we are exposed to market risk with respect to commodity price fluctuations, primarily related to our purchases of raw materials and energy, principally scrap steel, other ferrous and non-ferrous metals, alloys, natural gas and electricity. Additionally, the current Russia-Ukraine conflict could also exacerbate inflationary pressures throughout the global economy and lead to potential market disruptions, such as significant volatility in commodity prices and supply chain disruptions. Although our business has not been materially impacted by this conflict to date, it is difficult to predict the extent to which our operations, or those of our suppliers, will be impacted in the future.

Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing business. We utilize a raw material surcharge as a component of pricing steel to pass through the cost increases of scrap, alloys and other raw materials, as well as natural gas. From time to time, we may use financial instruments to hedge a portion of our exposure to commodity price risk. In periods of stable demand for our products, the surcharge mechanism has worked effectively to reduce the normal time lag in passing through higher raw material costs so that we can maintain our gross margins. When demand and cost of raw materials are lower, however, the surcharge impacts sales prices to a lesser extent.

## Controls and procedures

As filed, 962 characters.

(a) Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

(b) Changes in Internal Control Over Financial Reporting

During the Company’s most recent fiscal quarter, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 250 characters.

We are subject to various risks and uncertainties in the course of our business. The discussion of such risks and uncertainties may be found under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC.

Filed Aug 4, 2022.
Source: SEC EDGAR, the filing index for accession 0000950170-22-014785. Last ingested by Listed: Nov 6, 2026, 02:00 ET. No prices; not investment advice.