Metallus Inc.: Form 10-Q for the period ended Mar 31, 2025

(dollars in millions, except per share data)

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.

The MD&A is organized as follows:

• Overview: From management’s point of view, we discuss the following:
• Summary of our business and the markets in which we operate
• Key trends and events during the current year
• Results of Operations: An analysis of our results of operations as reflected in our consolidated financial statements.
• Non GAAP (1) Financial Measures: An analysis of our net sales by end-market, adjusted to exclude surcharges, which management uses to better analyze key market indicators and trends and allows for enhanced comparison between our end markets.
• Liquidity and Capital Resources: An analysis of our cash flows, working capital, debt structure, contractual obligations and other commercial commitments.
• 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.

Overview

Business Overview

We manufacture alloy steel, as well as carbon and micro-alloy steel, using electric arc furnace ("EAF") technology. Our portfolio includes special bar quality (“SBQ”) bars, seamless mechanical tubing (“tubes”), manufactured components such as precision steel components, and billets. Our products and solutions are used in a diverse range of demanding applications in the following end-markets: industrial, automotive, aerospace & defense, and energy.

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.

Q1 2025 Business Highlights

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

• 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.
• 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.
• 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.
• Share repurchase program: The Company repurchased approximately 0.4 million common shares at a cost of $5.6 million, or $14.23 per share. As of March 31, 2025, the Company has $97.2 million remaining under its authorized share repurchase program.
• Recent trade developments: The Company is closely monitoring recent trade developments, including increased, additional, and expanded tariffs on goods imported from various countries imposed by the U.S. government, as well as reciprocal tariffs on U.S. exports imposed by various countries. As a domestic steel producer, the recent actions taken to enact a minimum 25% tariff on steel imports and close loopholes in the tariff exclusion process are expected to have a positive impact on the demand for Metallus products and our financial results. The ultimate impact to the Company remains uncertain and will depend on several factors, including whether additional or incremental U.S. tariffs or other measures are announced or imposed, to what extent other countries implement tariffs or other retaliatory measures, and the overall magnitude and duration of these measures.

(1) Please see discussion of non-GAAP financial measures in Form 10-Q – Net Sales Adjusted to Exclude Surcharges

Results of Operations

Net Sales

The charts below present net sales and shipments for the three months ended March 31, 2025 and 2024.

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%.

Gross Profit

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.

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.

Selling, General and Administrative Expenses

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

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.

Interest (Income) Expense, net

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.

Other (Income) Expense, net

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

The Company's Bargaining Unit Pension Plan ("Bargaining Plan"), 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.

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.

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

Provision for Income Taxes

The provision for income taxes for the quarter ended March 31, 2025 was $1.6 million compared to $6.0 million in 2024. The change is primarily related lower pre-tax income in the first quarter of 2025.

Non-GAAP Financial Measures

Net Sales Adjusted to Exclude Surcharges

The tables below present net sales by end-markets, 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-markets, both on a gross basis and on a per ton basis, adjusted to exclude raw material and energy 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-markets, 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-markets.

When surcharges are included in a customer agreement and are applicable (i.e., reach the threshold amount), based on the terms outlined in the respective agreement, surcharges are then included as separate line items on a customer’s invoice. These additional surcharge line items adjust base prices to match cost fluctuations due to market conditions. Each month, the Company will post on the surcharges page of its external website, as well as our customer portal, the scrap, alloy, and energy surcharges that will be applied (as a separate line item) to invoices dated in the following month (based upon shipment volumes in the following month). All surcharges invoiced are included in GAAP net sales.

(dollars in millions, ship tons in thousands)

24

Liquidity and Capital Resources

Credit Agreement

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.

Refer to “Note 10 - Financing Arrangements” in the Notes to the unaudited Consolidated Financial Statements for additional information.

Convertible Notes

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.

For additional details regarding the Convertible Notes please refer to “Note 11 - Financing Arrangements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.

Additional Liquidity Considerations

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

(1) As of March 31, 2025, and December 31, 2024, the Company had less than $400.0 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 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.

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.

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.

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.

Cash Flows

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.

Operating activities

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.

Investing activities

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.

Financing activities

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.

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.

New Accounting Guidance

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

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:

• 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;
• 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; availability of skilled labor; and changes in the cost of labor and benefits;
• the success of our operating plans, announced programs, initiatives and capital investments; the consistency to meet demand levels following unplanned downtime; and our ability to maintain appropriate relations with the union that represents our associates in certain locations in order to avoid disruptions of business;
• 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;
• the Company's pension obligations and investment performance;
• with respect to the Company's ability to achieve its sustainability goals, including its 2030 environmental goals, the ability to meet such goals within the expected timeframe, changes in laws, regulations, prevailing standards or public policy, the alignment of the scientific community on measurement and reporting approaches, the complexity of commodity supply chains and the evolution of and adoption of new technology, including traceability practices, tools and processes;
• availability of property insurance coverage at commercially reasonable rates or insufficient insurance coverage to cover claims or damages;
• the availability of financing and interest rates, which affect the Company's cost of funds and/or ability to raise capital;
• the impacts from any repurchases of our common shares, including the timing and amount of any repurchases;
• 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;
• deterioration in global 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 global conflicts on the 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;
• unanticipated litigation, claims or assessments, including claims or problems related to intellectual property, product liability or warranty, employment matters, regulatory compliance and environmental issues and taxes, among other matters;
• cyber-related risks, including information technology system failures, interruptions and security breaches;
• the potential impact of pandemics, epidemics, widespread illness or other health issues;
• 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
• those items identified under the caption Risk Factors in our Annual Report on Form 10-K.

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.

For quantitative and qualitative disclosures about market risk, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. There were no material changes in our exposure to market risk since December 31, 2024.

(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.

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, 2024 filed with the SEC.