Metallus(MTUS) - 2023 Q4 - Annual Report

PART I Item 1. Business Metallus Inc. manufactures alloy, carbon, and micro-alloy steel products for diverse industrial, automotive, aerospace, and energy markets as a single segment - Metallus Inc. manufactures alloy, carbon, and micro-alloy steel products like SBQ bars, seamless mechanical tubing, and billets using electric arc furnace (EAF) technology[9][10] - Products serve diverse end-markets including industrial, automotive, aerospace & defense, and energy[10] - The company operates as a single business segment, aligning with the Chief Operating Decision Maker's (CODM) performance evaluation and resource allocation[14][155] Operational Capacity | Metric | Value | | :----- | :---- | | Annual Melt Capacity | ~1.2 million tons | | Shipment Capacity | ~0.9 million tons | - In 2023, no single customer accounted for 10% or more of net sales, serving approximately 350 diverse customers[18] - Commodity risks are managed via supplier pricing agreements and raw material/natural gas surcharge mechanisms, mitigating cost increases but potentially diluting gross margin percentage[29][31] Faircrest Melt Shop Unplanned Downtime Insurance Recoveries | Year | Insurance Recoveries Recognized ($M) | | :--- | :--------------------------------- | | 2022 | 33.0 (of which $13.0 million received in 2022, $20.0 million in Q1 2023) | | 2023 | 31.3 (of which $11.3 million received in 2023, $20.0 million in Q1 2024) | - Metallus holds ISO 14001 certification and targets 2030 environmental goals including 40% GHG reduction, 30% energy reduction, 35% fresh water reduction, and 10% waste-to-landfill intensity reduction (vs. 2018 baseline)[34][42][43][48] - As of December 31, 2023, the company had approximately 1,840 employees, with about 64% covered by a collective bargaining agreement expiring in September 2025[45][46] Voluntary Employee Turnover Rate | Year | Overall Voluntary Turnover Rate | | :--- | :------------------------------ | | 2023 | 8.9% (7.5% salaried, 9.5% hourly) | | 2022 | 16% | | 2021 | 10% | Overview This section provides a general introduction to Metallus Inc.'s business, products, and operational scope Operating Segments Details on how the company's operations are structured and reported Industry Segments and Geographical Financial Information Breakdown of financial performance by industry and geographic regions Strengths and Strategy Key competitive advantages and strategic initiatives Major Customers Information on significant customer relationships Products Description of the company's product offerings Sales and Distribution Methods and channels for product sales and delivery Competition Analysis of the competitive landscape in the steel industry Lead Time Information regarding product delivery timelines Raw Materials Details on sourcing and management of raw materials Faircrest Melt Shop Unplanned Downtime Specific event and its financial implications Environmental Matters and Governmental Regulations Compliance with environmental laws and regulatory impacts Legal Proceedings Overview of ongoing legal disputes and their potential impact Patents, Trademarks and Licenses Intellectual property assets and their protection Governance and Environmental Stewardship Corporate governance practices and environmental commitments Human Capital Information on the company's workforce and related policies Available Information Where to find additional company information Item 1A. Risk Factors Metallus Inc. faces risks from intense competition, customer dependence, volatile costs, regulatory compliance, and cybersecurity threats - The steel industry is highly competitive, with potential global overcapacity leading to pricing pressure, and tariffs impacting domestic prices[64][65] - The company is dependent on key customers; sales to its 10 largest customers accounted for approximately 46% of net sales in 2023[66] - Raw material and energy costs are volatile, and while surcharges are used, changes in market indices or underlying costs could materially affect revenues, earnings, and cash flows[67][69] - The company is subject to extensive environmental, health, and safety regulations, with future compliance potentially more costly, especially regarding climate change and greenhouse gas emissions[75][77][78] - As of December 31, 2023, approximately 64% of employees were covered under a collective bargaining agreement expiring in September 2025, posing a risk of work stoppages[81] - The company has significant pension and retiree health care costs, with unfunded liabilities requiring future cash funding dependent on asset performance, interest rates, and regulations[84][85] - As of December 31, 2023, the company had outstanding debt of $13.2 million and total liquidity of $539.4 million, with borrowing capacity potentially restricted by asset borrowing base deterioration[92][93] - The conditional conversion feature of the Convertible Notes, if triggered, could require cash settlement, adversely affecting liquidity[96] - The market price of common shares may fluctuate significantly due to operating results, industry trends, economic instability, and analyst estimates[98][99] - Provisions in corporate documents and Ohio law could delay, defer, or prevent a change in control, potentially reducing the market price of common shares[102][103][105][107] - The company relies on information technology systems and faces cybersecurity risks, which could lead to misuse of confidential information, data manipulation, and operational disruptions[111] Item 1B. Unresolved Staff Comments There are no unresolved staff comments as of the reporting date - No unresolved staff comments were reported[117] Item 1C. Cyber Security Metallus Inc. maintains a robust cybersecurity program, led by a dedicated team and external advisors, with an incident response plan aligned with the NIST Cybersecurity framework - The company has a robust cybersecurity program, including a detailed incident response plan and playbook aligned with the NIST Cybersecurity framework[118][119][120] - The Board of Directors, with input from management, assesses cybersecurity measures and receives regular updates from the IT leadership team[121] - As of the report date, no material risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect the company's business strategy, results of operations, or financial condition have been identified[122] Item 2. Properties Metallus Inc. operates manufacturing facilities in Ohio and North Carolina, with headquarters in Canton, Ohio, totaling 3.6 million square feet, and 70% melt capacity utilization in 2023 - The company's headquarters are in Canton, Ohio, with manufacturing facilities in Canton and Eaton, Ohio, and Columbus, North Carolina, and a leased distribution facility in Mexico[123][124] - Total aggregate floor area of facilities is 3.6 million square feet, with most being owned[124] Melt Capacity Utilization | Year | Utilization Rate | | :--- | :--------------- | | 2023 | 70% | | 2022 | 63% | | 2021 | 73% | Item 3. Legal Proceedings Metallus Inc. is involved in various claims and legal actions in the ordinary course of business, which management believes will not have a material adverse effect on its financial position - The company is involved in various claims and legal actions in the ordinary course of business[127] - Management believes the ultimate disposition of these matters will not materially adversely affect the consolidated financial position, results of operations, or cash flows[127] Information about our Executive Officers This section provides a list and brief biographies of Metallus Inc.'s executive officers as of February 28, 2024 Executive Officers (as of February 28, 2024) | Name | Age | Current Position | | :------------------- | :-- | :------------------------------------------------------ | | Michael S. Williams | 63 | President and Chief Executive Officer | | Kristopher R. Westbrooks | 45 | Executive Vice President and Chief Financial Officer | | Kristine C. Syrvalin | 55 | Executive Vice President, General Counsel and Chief Human Resources Officer | | Kevin A. Raketich | 57 | Executive Vice President and Chief Commercial Officer | PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Metallus Inc.'s common shares trade on the NYSE under 'MTUS', with an active share repurchase program and equity compensation plans - Metallus Inc. common shares are traded on the New York Stock Exchange (NYSE) under the symbol 'MTUS'[2] - As of December 31, 2023, there were an estimated 3,040 record holders of common shares[134] - The Board of Directors authorized an additional $75.0 million share repurchase program on November 2, 2022, reflecting confidence in profitability and balance sheet strength[137][208] Common Share Repurchases (Q4 2023) | Month | Total Shares Purchased | Average Price Paid Per Share | | :-------------- | :--------------------- | :--------------------------- | | October, 2023 | 94,408 | $20.53 | | November, 2023 | 56,251 | $20.25 | | December, 2023 | 45,867 | $21.76 | | Quarter ended Dec 31, 2023 | 196,526 | $20.74 | - For the year ended December 31, 2023, the company repurchased approximately 1.7 million common shares at an aggregate cost of $32.6 million, averaging $19.03 per share[209] - As of February 15, 2024, $39.2 million remained under the authorized share repurchase program[138][210] Equity Compensation Plan Summary (as of Dec 31, 2023) | Category | Number of Securities to be Issued | Weighted-Average Exercise Price | Number of Securities Remaining Available | | :------------------------------------------- | :-------------------------------- | :------------------------------ | :--------------------------------------- | | Equity compensation plans approved by security holders | 3,583,065 | $17.95 | 3,253,585 | | Equity compensation plans not approved by security holders | 1,058,500 | — | — | | Total | 4,641,565 | $17.95 | 3,253,585 | Cumulative Total Return (Dec 31, 2018 - Dec 31, 2023) | Date | Metallus Inc. | S&P MidCap 400 | S&P 500 Steel | S&P 1500 Steel | | :---------------- | :------------ | :------------- | :------------ | :------------- | | December 31, 2018 | $100.00 | $100.00 | $100.00 | $100.00 | | December 31, 2019 | $85.22 | $109.21 | $125.29 | $115.36 | | December 31, 2020 | $53.26 | $100.40 | $140.27 | $115.68 | | December 31, 2021 | $190.38 | $220.52 | $172.02 | $195.82 | | December 31, 2022 | $202.18 | $256.51 | $145.44 | $236.70 | | December 31, 2023 | $273.31 | $325.28 | $170.48 | $323.96 | Item 6. Selected Financial Data This item is intentionally omitted from the report - Selected Financial Data is intentionally omitted from this report[151] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Metallus Inc.'s financial condition, results of operations, and cash flows, including key performance drivers and liquidity - Metallus Inc. manufactures alloy, carbon, and micro-alloy steel products for industrial, automotive, aerospace & defense, and energy end-markets, operating as a single business segment[154][155] - In 2023, the Aerospace & Defense end market saw a significant increase in ship tons, growing approximately 70% compared to 2022[158] - The company invested $51.6 million in capital expenditures in 2023, focusing on safety, equipment automation, quality, and manufactured component capacity[160] - On January 10, 2024, the company announced its rebranding to Metallus Inc., effective February 26, 2024, to reflect its expertise in high-performance specialty metals and growth beyond carbon steel[160] Net Sales and Shipments (2021-2023) | Metric | 2023 ($M) | 2022 ($M) | 2021 ($M) | | :---------- | :-------- | :-------- | :-------- | | Net Sales | 1,362.4 | 1,329.9 | 1,282.9 | | Ship Tons (thousands) | 683.8 | 692.1 | 818.6 | - Net sales for 2023 increased by $32.5 million (2.4%) to $1,362.4 million, primarily due to favorable price/mix ($116.9 million) offset by lower surcharges ($75.0 million) and lower volume ($9.4 million); excluding surcharges, net sales increased 11.8%[162] Gross Profit (2021-2023) | Year | Gross Profit ($M) | | :--- | :---------------- | | 2023 | 186.5 | | 2022 | 126.7 | | 2021 | 220.0 | - Gross profit increased by $59.8 million (47.2%) in 2023 compared to 2022, driven by favorable price/mix (higher base prices) partially offset by higher manufacturing costs[165] Selling, General and Administrative (SG&A) Expenses (2021-2023) | Year | SG&A Expense ($M) | | :--- | :---------------- | | 2023 | 84.6 | | 2022 | 73.8 | | 2021 | 77.2 | - SG&A expense increased by $10.8 million (14.6%) in 2023, mainly due to higher stock-based compensation, variable compensation, and professional services for an ongoing IT transformation project[168] Impairment Charges & Loss (Gain) on Sale or Disposal of Assets, net (2021-2023) | Year | Impairment Charges ($M) | Loss (Gain) on Sale or Disposal of Assets, net ($M) | | :--- | :---------------------- | :-------------------------------------------------- | | 2023 | — | (2.5) (gain) | | 2022 | — | 1.9 (loss) | | 2021 | 10.6 | 1.3 (loss) | Interest (Income) Expense, net (2021-2023) | Year | Interest (Income) Expense, net ($M) | | :--- | :---------------------------------- | | 2023 | (7.1) (income) | | 2022 | 0.6 (expense) | | 2021 | 5.9 (expense) | - Net interest income was $7.1 million in 2023, a significant improvement from a $0.6 million expense in 2022, primarily due to interest earned on cash invested in money market funds and deposits, and a reduction in outstanding convertible notes[172] Other (Income) Expense, net (2021-2023) | Component | 2023 ($M) | 2022 ($M) | 2021 ($M) | | :------------------------------------------ | :-------- | :-------- | :-------- | | Pension and postretirement non-service benefit (income) loss | (4.6) | (20.3) | (37.2) | | Loss (gain) from remeasurement of benefit plans | 40.6 | (35.4) | (20.1) | | Foreign currency exchange loss (gain) | — | (0.2) | 0.1 | | Insurance recoveries | (31.3) | (34.5) | — | | Sales and use tax refund | (1.4) | — | (2.5) | | Miscellaneous (income) expense | 0.4 | (0.2) | 0.2 | | Total other (income) expense, net | 3.7 | (90.6) | (59.5) | - A net loss of $40.6 million from the remeasurement of benefit plans was recognized in 2023, driven by a $36.6 million increase in pension liability due to a decrease in discount rate and investment losses[175][344] Provision for Income Taxes and Effective Tax Rate (2021-2023) | Year | Provision (benefit) for income taxes ($M) | Effective tax rate | | :--- | :---------------------------------------- | :----------------- | | 2023 | 27.0 | 28.0% | | 2022 | 32.0 | 32.9% | | 2021 | 5.7 | 3.2% | - The provision for income taxes decreased to $27.0 million in 2023 from $32.0 million in 2022, primarily due to higher permanent items in 2022 and the release of the valuation allowance on domestic deferred tax assets in 2022[182] - Total liquidity was $539.4 million as of December 31, 2023, including $280.6 million in cash and cash equivalents[160][201] - The company anticipates capital expenditures of approximately $60 million in 2024[204] Cash Flows Summary (2021-2023) | Activity | 2023 ($M) | 2022 ($M) | 2021 ($M) | | :----------------------- | :-------- | :-------- | :-------- | | Operating Activities | 125.3 | 134.5 | 196.9 | | Investing Activities | (49.9) | (21.7) | (4.8) | | Financing Activities | (51.9) | (114.6) | (35.3) | | Increase (Decrease) in Cash and Cash Equivalents | 23.5 | (1.8) | 156.8 | - Net cash provided by operating activities decreased to $125.3 million in 2023 from $134.5 million in 2022, primarily due to higher use of cash for working capital, partially offset by improved profitability[213] - Net cash used by investing activities increased to $49.9 million in 2023 from $21.7 million in 2022, mainly due to higher capital expenditures[214] - Net cash used by financing activities decreased to $51.9 million in 2023 from $114.6 million in 2022, primarily due to lower repurchases of common shares and Convertible Notes[215] Overview This section provides a general overview of Metallus Inc.'s financial performance and operational highlights Net Sales Analysis of the company's revenue performance, including key drivers and changes Gross Profit Discussion of gross profit trends and factors influencing profitability Selling, General and Administrative Expenses Review of SG&A expenses, including changes and underlying causes Impairment Charges & Loss (Gain) on Sale or Disposal of Assets, net Details on impairment charges and gains/losses from asset sales or disposals Interest (Income) Expense, net Analysis of net interest income and expense, including factors affecting it Other (Income) Expense, net Review of other non-operating income and expenses, such as pension remeasurements Provision for Income Taxes Discussion of income tax provision and effective tax rate changes Non-GAAP Financial Measures Explanation and reconciliation of financial measures not prepared in accordance with GAAP Liquidity and Capital Resources Assessment of the company's cash position, debt, and capital expenditure plans Critical Accounting Policies and Estimates Overview of significant accounting policies and management's critical judgments Forward-Looking Statements Disclaimer regarding statements about future events and financial performance Item 7A. Quantitative and Qualitative Disclosures about Market Risk Metallus Inc. is exposed to market risks from interest rates, foreign currency, and commodity prices, managed through pricing agreements and surcharges - As of December 31, 2023, the company had $13.3 million of aggregate debt outstanding, none of which had variable interest rates, thus a rise in interest rates would not impact interest expense at this time[246] - The company's sales are primarily to customers in the United States, but currency fluctuations can impact raw material prices in foreign countries where competitors operate[247] - The company is exposed to commodity price risk from raw materials (recycled scrap metal, chrome, nickel, molybdenum oxide, vanadium, other alloys) and energy (natural gas, electricity)[27][248] - Commodity risks are managed through supplier pricing agreements and raw material surcharge mechanisms, which aim to pass through cost increases, though with a potential lag effect[29][249] Item 8. Financial Statements and Supplementary Data This section presents Metallus Inc.'s audited consolidated financial statements for 2021-2023, with an unqualified audit opinion and detailed notes - Ernst & Young LLP issued an unqualified opinion on Metallus Inc.'s consolidated financial statements and internal control over financial reporting as of December 31, 2023[255][256] - A critical audit matter identified was the accounting for pension and other postretirement benefit obligations due to the highly judgmental nature of actuarial assumptions[260][261] Consolidated Statements of Operations Summary | Metric | 2023 ($M) | 2022 ($M) | 2021 ($M) | | :--------------------- | :-------- | :-------- | :-------- | | Net sales | 1,362.4 | 1,329.9 | 1,282.9 | | Gross Profit | 186.5 | 126.7 | 220.0 | | Selling, general and administrative expenses | 84.6 | 73.8 | 77.2 | | Income (Loss) Before Income Taxes | 96.4 | 97.1 | 176.7 | | Provision (benefit) for income taxes | 27.0 | 32.0 | 5.7 | | Net Income (Loss) | 69.4 | 65.1 | 171.0 | | Basic earnings (loss) per share | 1.58 | 1.42 | 3.73 | | Diluted earnings (loss) per share | 1.47 | 1.30 | 3.18 | Consolidated Balance Sheets Summary (as of Dec 31) | Metric | 2023 ($M) | 2022 ($M) | | :--------------------- | :-------- | :-------- | | Total Current Assets | 656.8 | 556.6 | | Property, plant and equipment, net | 492.5 | 486.1 | | Total Assets | 1,175.3 | 1,082.0 | | Total Current Liabilities | 248.4 | 186.7 | | Total Liabilities | 443.7 | 395.5 | | Total Shareholders' Equity | 731.6 | 686.5 | Consolidated Statements of Cash Flows Summary | Activity | 2023 ($M) | 2022 ($M) | 2021 ($M) | | :----------------------- | :-------- | :-------- | :-------- | | Net Cash Provided (Used) by Operating Activities | 125.3 | 134.5 | 196.9 | | Net Cash Provided (Used) by Investing Activities | (49.9) | (21.7) | (4.8) | | Net Cash Provided (Used) by Financing Activities | (51.9) | (114.6) | (35.3) | | Increase (Decrease) in Cash and Cash Equivalents | 23.5 | (1.8) | 156.8 | - On February 27, 2024, the company entered an agreement with the United States Army for up to $99 million in funding to bolster artillery shell production, with new assets targeted to be operational by late 2025[461] Reports of Independent Registered Public Accounting Firm This section contains the audit reports from the independent registered public accounting firm Consolidated Statements of Operations Presents the company's revenues, expenses, and net income over a period Consolidated Statements of Comprehensive Income (Loss) Details the company's comprehensive income or loss, including other comprehensive income items Consolidated Balance Sheets Provides a snapshot of the company's assets, liabilities, and equity at a specific point in time Consolidated Statements of Shareholders' Equity Shows changes in the company's equity accounts over a period Consolidated Statements of Cash Flows Reports the cash generated and used by operating, investing, and financing activities Notes to Consolidated Financial Statements Provides detailed explanations and additional information about the financial statements Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure were reported[463] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[464] - The company's internal control over financial reporting was assessed as effective as of December 31, 2023, based on COSO's 'Internal Control-Integrated Framework (2013 framework)'[466] - No material changes in internal control over financial reporting occurred during the fourth quarter of 2023[467] Item 9B. Other Information During Q4 2023, officers adopted Rule 10b5-1 trading arrangements, and the company formally changed its corporate name to 'Metallus Inc.' effective February 26, 2024 - Officers adopted Rule 10b5-1 trading arrangements in Q4 2023 for potential sales of common shares upon vesting of performance-based and time-based restricted stock units[468][469] - On February 26, 2024, the company amended its Articles of Incorporation and Code of Regulations to change its corporate name to 'Metallus Inc.'[470][471] PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2024 Annual Meeting of Shareholders proxy statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the proxy statement for the 2024 Annual Meeting of Shareholders[474] - The company's Corporate Governance Guidelines and committee charters are available on its website, as is the Metallus Code of Conduct, which applies to all employees and directors[475][476] Item 11. Executive Compensation Details on executive compensation are incorporated by reference from the company's proxy statement for the 2024 Annual Meeting of Shareholders - Information on executive compensation is incorporated by reference from the proxy statement for the 2024 Annual Meeting of Shareholders[477] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding beneficial ownership and equity compensation plans is incorporated by reference from the proxy statement and Item 5 of this report - Information on security ownership of beneficial owners and management, and related stockholder matters, is incorporated by reference from the proxy statement and Item 5 of this report[478] Item 13. Certain Relationships and Related Transactions, and Director Independence Information concerning director independence and related-party transaction policies is incorporated by reference from the company's 2024 Annual Meeting of Shareholders proxy statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the proxy statement for the 2024 Annual Meeting of Shareholders[479] Item 14. Principal Accounting Fees and Services Information regarding fees paid to and services provided by the independent auditor is incorporated by reference from the company's 2024 Annual Meeting of Shareholders proxy statement - Information on principal accounting fees and services is incorporated by reference from the proxy statement for the 2024 Annual Meeting of Shareholders[480] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists all exhibits and financial statement schedules, including Schedule II – Valuation and Qualifying Accounts, detailing allowances and reserves for 2021-2023 - Financial Statements are included in Part II, Item 8 of the Annual Report on Form 10-K[482] - Schedule II - Valuation and Qualifying Accounts is submitted separately, detailing allowances for uncollectible accounts, inventory reserves, and valuation allowance on deferred tax assets[482][488] Allowance for Uncollectible Accounts | Metric | 2023 ($M) | 2022 ($M) | 2021 ($M) | | :------------------------- | :-------- | :-------- | :-------- | | Balance at Beginning of Period | 1.0 | 1.9 | 1.3 | | Charged to Costs and Expenses | 1.2 | — | 0.6 | | Deductions | (0.2) | (0.9) | — | | Balance at End of Period | 2.0 | 1.0 | 1.9 | Allowance for Inventory Reserves | Metric | 2023 ($M) | 2022 ($M) | 2021 ($M) | | :------------------------- | :-------- | :-------- | :-------- | | Balance at Beginning of Period | 0.5 | 0.8 | 13.9 | | Charged to Costs and Expenses | 1.1 | 0.5 | 2.8 | | Deductions | (0.9) | (0.8) | (15.9) | | Balance at End of Period | 0.7 | 0.5 | 0.8 | Valuation Allowance on Deferred Tax Assets | Metric | 2023 ($M) | 2022 ($M) | 2021 ($M) | | :------------------------- | :-------- | :-------- | :-------- | | Balance at Beginning of Period | 13.0 | 15.5 | 47.7 | | Charged to Costs and Expenses | 2.5 | — | — | | Charged to Other Accounts | — | — | 4.8 | | Deductions | — | (2.5) | (37.0) | | Balance at End of Period | 15.5 | 13.0 | 15.5 | Signatures The report is duly signed by Metallus Inc.'s executive officers and directors on February 28, 2024 - The report is signed by Michael S. Williams (President and CEO), Kristopher R. Westbrooks (EVP and CFO), and Nicholas A. Yacobozzi (Chief Accounting Officer), along with other directors, on February 28, 2024[493][494]