METALLUS INC. (dollars in millions, except per share data)
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. 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 services are used in a diverse range of demanding applications in the following market sectors: industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; automotive; and oil and gas.
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
During the second half of 2022, the Faircrest melt shop experienced unplanned
operational downtime. During the first quarter of 2023,
The lead time for our products varies based on product type and specifications. As of the date of this filing, our order book is full for the second quarter and we are currently booking into the third quarter.
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 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
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.
18
--------------------------------------------------------------------------------
Table of Contents
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 months
ended
Results of Operations
The charts below present net sales and shipments for the three months ended
[[Image Removed: img191554291_1.jpg]] [[Image Removed: img191554291_2.jpg]]
Net sales for the three months ended
19
--------------------------------------------------------------------------------
Table of Contents
Gross Profit
The chart below presents the drivers of the gross profit variance from the three
months ended
[[Image Removed: img191554291_3.jpg]]
Gross profit for the three months ended
20
--------------------------------------------------------------------------------
Table of Contents
Selling, General and Administrative Expenses
The charts below present selling, general and administrative ("SG&A") expense
for the three months ended
[[Image Removed: img191554291_4.jpg]]
SG&A expense for the three months ended
Interest (Income) Expense, net
Net interest income for the three months ended
Other (Income) Expense, net
Three Months Ended March 31,
2023 2022 $ Change
Pension and postretirement non-service
benefit (income) loss $ (1.2 ) $ (8.7 ) $ 7.5
Loss (gain) from remeasurement benefit plan 2.2 (6.5 ) 8.7
Insurance recoveries (9.8 ) - (9.8 )
Total other (income) expense, net $ (8.8 ) $ (15.2 ) $ 6.4 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 Bargaining Plan, Salaried Plan, and the Supplemental Plan have a provision that permits employees to elect to receive their pension benefits in a lump sum upon retirement. In the first quarter of 2023, the cumulative cost of all lump sum payments was projected to exceed the sum of the service 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 2023 and is required to complete a full remeasurement of the plan each quarter for the remainder of 2023.
21
--------------------------------------------------------------------------------
Table of Contents
A loss of
A total gain of
For more details on the aforementioned remeasurements, refer to "Note 11 - Retirement and Postretirement Plans."
After remeasurement of certain pension plans during the first quarter of 2023,
the aggregate net periodic pension expense for the remaining three quarters of
2023 is currently forecasted to be
Other postretirement benefit income for 2023 is still forecasted to be
During the second half of 2022, the Faircrest melt shop experienced unplanned
operational downtime. During the first quarter of 2023,
Provision for Income Taxes
Three Months Ended March 31,
2023 2022 $ Change
Provision (benefit) for income taxes
21.0 % 2.4 % 18.6 %
The provision for income taxes for the quarter ended
22
--------------------------------------------------------------------------------
Table of Contents Non-GAAP Financial Measures
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
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 natural gas 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, tons in thousands)
Three Months Ended March 31, 2023
Industrial Mobile Energy Other Total
Tons 72.2 80.4 20.3 - 172.9
Net Sales $ 143.7 $ 127.8 $ 46.2 $ 5.8 $ 323.5
Less: Surcharges 38.0 31.7 13.1 - 82.8
Base Sales $ 105.7 $ 96.1 $ 33.1 $ 5.8 $ 240.7
Net Sales / Ton $ 1,990 $ 1,590 $ 2,276 $ - $ 1,871
Surcharges / Ton $ 526 $ 394 $ 645 $ - $ 479
Base Sales / Ton $ 1,464 $ 1,196 $ 1,631 $ - $ 1,392
Three Months Ended March 31, 2022
Industrial Mobile Energy Other Total
Tons 94.9 88.9 12.6 - 196.4
Net Sales $ 175.0 $ 144.1 $ 25.0 $ 7.9 $ 352.0
Less: Surcharges 54.9 45.7 8.0 - 108.6
Base Sales $ 120.1 $ 98.4 $ 17.0 $ 7.9 $ 243.4
Net Sales / Ton $ 1,844 $ 1,621 $ 1,984 $ - $ 1,792
Surcharges / Ton $ 578 $ 514 $ 635 $ - $ 553
Base Sales / Ton $ 1,266 $ 1,107 $ 1,349 $ - $ 1,239
23
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Amended Credit Agreement
On
The Amended Credit Agreement extended the maturity date of the asset-based
revolving credit facility (the "Credit Facility") from
Refer to "Note 10 - Financing Arrangements" in the Notes to the unaudited Consolidated Financial Statements for additional information.
Convertible Notes
In
In
The remaining Convertible Senior Notes due 2021 matured on
The Convertible Senior Notes due 2025 bear cash interest at a rate of 6.0% per
year, payable semiannually on
The Convertible Senior Notes due 2025 are convertible at the option of holders
in certain circumstances and during certain periods into the Company's common
shares, cash, or a combination thereof, at the Company's election. The Indenture
for the Convertible Senior Notes due 2025 provides that notes will become
convertible during a quarter when the share price for 20 trading days during the
final 30 trading days of the immediately preceding quarter was greater than 130%
of the conversion price. This criterion was met during the first quarter of 2023
and as such the notes can be converted at the option of the holders beginning
In the first quarter of 2023,
In the first quarter of 2022,
24
--------------------------------------------------------------------------------
Table of Contents
a charge of
Additional Liquidity Considerations
The following represents a summary of key liquidity measures under the Amended
Credit Agreement as of
March 31, December 31,
2023 2022
Cash and cash equivalents $ 227.4 $ 257.2
Credit Agreement:
Maximum availability $ 400.0 $ 400.0
Suppressed availability(1) (91.4 ) (161.2 )
Availability 308.6 238.8
Amount borrowed - -
Letter of credit obligations (5.3 ) (5.3 )
Availability not borrowed $ 303.3 $ 233.5
Total liquidity $ 530.7 $ 490.7 (1) As of
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
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 expect capital expenditures to be approximately
In the first quarter of 2023,
During the first half of 2022, we privately negotiated early repurchases of
For the three months ended
25
--------------------------------------------------------------------------------
Table of Contents
In
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
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
Cash Flows
The following table reflects the major categories of cash flows for the three
months ended
Three Months Ended March 31,
2023 2022
Net cash provided (used) by operating activities $ 9.8
(9.1 ) (6.5 )
Net cash provided (used) by financing activities (30.2 ) (25.5 )
Increase (Decrease) in Cash and Cash Equivalents
Operating activities
Net cash provided by operating activities for the three months ended
Investing activities
Net cash used by investing activities for the three months ended
Financing activities
Net cash used by financing activities for the three months ended
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with
26
--------------------------------------------------------------------------------
Table of Contents 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:
•
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
•
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
•
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;
27
--------------------------------------------------------------------------------
Table of Contents
•
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;
•
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
•
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 consistency of melt production to meet forecasted demand levels following unplanned downtime in the second half of 2022;
•
additional amounts, if any, that the company is able to obtain from its business interruption insurance in connection with the unplanned downtime;
•
the impacts from any repurchases of our common shares and convertible notes, 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
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.
© Edgar Online, source
