TimkenSteel(TMST) - 2023 Q4 - Annual Report

Part I Business Overview Metallus Inc. manufactures and sells special bar quality alloy steel products, including bars, seamless mechanical tubes, and components, for diverse industrial, automotive, aerospace, and energy markets - Metallus Inc. officially changed its name from TimkenSteel Corporation on February 26, 2024[9] - Metallus operates as a single reportable business segment due to integrated manufacturing and centralized decision-making[14][155] - The company's annual melt capacity is approximately 1.2 million tons, with a shipment capacity of about 0.9 million tons[13][289] Products and Markets Metallus specializes in over 500 grades of high-performance steel, including SBQ bars, seamless tubes, and manufactured components, serving diverse customers directly and through distributors - Specialty metals are used in critical end products such as gears, axles, crankshafts, drill pipes, and artillery bodies[20] - Manufactured components offer customers, especially in the automotive sector, ready-to-finish parts that streamline supply chains[21] - In 2023, no single customer accounted for 10% or more of net sales, with approximately 25% of net sales through distributors and service centers[18][22] Competition and Raw Materials The company faces intense competition in the steel industry and manages volatile raw material costs through a surcharge mechanism, which can lead to timing-related cost recovery issues - Key competitors include Gerdau, Steel Dynamics, and Nucor for bar products, and Tenaris, Vallourec, and ArcelorMittal for seamless mechanical tubing[23][25] - Principal raw materials are recycled scrap metal, chrome, nickel, and molybdenum, with price volatility managed via supplier agreements and a customer surcharge mechanism[27][29] - The surcharge mechanism mitigates raw material cost fluctuations but can cause a timing lag, resulting in over- or under-recovery of costs[31] Governance and Human Capital Metallus focuses on environmental stewardship with 2030 reduction goals and manages human capital through safety, inclusion, and development initiatives, noting a significant decrease in voluntary turnover 2030 Environmental Goals (vs. 2018 Baseline) | Goal | Target Reduction | | :--- | :--- | | Scope 1 & 2 GHG Emissions | 40% absolute reduction | | Total Energy Consumption | 30% absolute reduction | | Fresh Water Withdrawn | 35% absolute reduction | | Waste-to-Landfill Intensity | 10% reduction | - As of December 31, 2023, the company had approximately 1,840 employees, with about 64% covered by a collective bargaining agreement expiring September 27, 2025[45][46] - The voluntary employee turnover rate significantly decreased to approximately 8.9% in 2023 from 16% in 2022[56][57] - The company invested approximately $10 million in safety initiatives in 2023 and plans to invest around $7 million in 2024[50] Risk Factors The company faces significant risks including intense competition, customer concentration, volatile raw material costs, potential operational disruptions, substantial pension liabilities, and challenges related to ESG and cybersecurity - The steel industry is highly competitive, with risks from global overcapacity and high imports potentially pressing domestic prices[64] - The company is dependent on key customers, with its 10 largest customers accounting for approximately 46% of net sales in 2023[66] - A work stoppage could significantly disrupt operations, as approximately 64% of employees are unionized with an agreement expiring in September 2025[81] - The company has significant unfunded pension and retiree healthcare liabilities requiring future cash contributions[84] Cybersecurity Metallus maintains a cybersecurity program aligned with the NIST framework, overseen by the Board, and has not identified any material threats to date - The cybersecurity program is integrated into the company's ERM and aligns with the NIST Cybersecurity framework[119] - The Board of Directors oversees the cybersecurity program, receiving regular updates and consulting with a board-level cybersecurity expert[121] - As of the report date, no material cybersecurity threats have been identified that have or are reasonably likely to materially affect the business[122] Properties Metallus's primary manufacturing facilities are in Ohio and North Carolina, totaling 3.6 million square feet, with 2023 melt capacity utilization at 70% - The company's manufacturing facilities in Ohio and North Carolina comprise 3.6 million square feet, mostly owned[124] Melt Capacity Utilization | Year | Utilization Rate | | :--- | :--- | | 2023 | 70% | | 2022 | 63% | | 2021 | 73% | Executive Officers The report lists the company's executive officers as of February 28, 2024, including the President and CEO, CFO, General Counsel and CHRO, and Chief Commercial Officer Executive Officers (as of Feb 28, 2024) | Name | Age | 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 Stock Market and Shareholder Matters Metallus common shares trade on the NYSE under "MTUS", and the company actively repurchases shares, with $40.4 million remaining under its $75.0 million authorization as of December 31, 2023 - On November 2, 2022, the Board authorized an additional $75.0 million share repurchase program[137] Q4 2023 Share Repurchases | Month (2023) | Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | October | 94,408 | $20.53 | | November | 56,251 | $20.25 | | December | 45,867 | $21.76 | | Q4 Total | 196,526 | $20.74 | - As of December 31, 2023, $40.4 million remained available for repurchase, decreasing to $39.2 million by February 15, 2024[138] Management's Discussion and Analysis (MD&A) Management's discussion analyzes the company's financial performance, highlighting increased net sales and gross profit in 2023, strong liquidity, and capital returns, with a focus on product mix optimization and cost management Results of Operations In 2023, net sales increased to $1,362.4 million driven by favorable price/mix, gross profit rose to $186.5 million, and net income reached $69.4 million, despite a $40.6 million loss from benefit plan remeasurement - Net sales for 2023 increased by $32.5 million (2.4%) to $1,362.4 million, driven by favorable price/mix despite lower surcharges and slightly decreased volume[162] - Gross profit for 2023 increased by $59.8 million (47.2%) to $186.5 million, primarily due to higher base prices across all end-markets[165] - A net loss of $40.6 million from benefit plan remeasurement was recognized in 2023, contrasting with a $35.4 million gain in 2022, significantly impacting 'Other (income) expense, net'[175][176] - The company recognized insurance recoveries of $31.3 million in 2023 and $34.5 million in 2022 for unplanned downtime at the Faircrest melt shop[173][179] Non-GAAP Financial Measures The company uses "Base Sales" as a non-GAAP measure to track core pricing, with Base Sales per ton increasing to $1,494 in 2023 from $1,322 in 2022, reflecting improved pricing and product mix Base Sales per Ton Comparison (2021-2023) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Ship Tons (thousands) | 683.8 | 692.1 | 818.6 | | Net Sales / Ton | $1,992 | $1,922 | $1,567 | | Surcharges / Ton | $498 | $600 | $498 | | Base Sales / Ton | $1,494 | $1,322 | $1,069 | Liquidity and Capital Resources As of December 31, 2023, Metallus maintained strong total liquidity of $539.4 million, generated $125.3 million in operating cash flow, and used cash for capital expenditures, share repurchases, and convertible note repayments Total Liquidity (in millions) | Component | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $280.6 | $257.2 | | Availability not borrowed | $258.8 | $233.5 | | Total liquidity | $539.4 | $490.7 | - In 2023, the company repurchased $7.5 million principal of Convertible Senior Notes for $18.7 million cash, incurring an $11.4 million loss on extinguishment[197] - The company repurchased approximately 1.7 million common shares for $32.6 million in 2023[209] - Net cash from operating activities was $125.3 million in 2023, a decrease from $134.5 million in 2022, primarily due to higher working capital usage[213] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgment, particularly in revenue recognition, inventory valuation, income tax accounting, and actuarial assumptions for pension and postretirement benefit plans - Revenue recognition for multi-year contracts involves estimating variable consideration, with $16.0 million in adjustments recognized in 2023[229] - Benefit plan accounting is highly sensitive to assumptions; a 0.25% discount rate change would impact benefit obligation by approximately $16 million and net periodic benefit income by $0.8 million[238] - Pension and postretirement benefit obligations were valued using weighted average discount rates of 5.33% and 5.43%, respectively, as of December 31, 2023[236] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021-2023, including statements of operations, balance sheets, and cash flows, with detailed notes Consolidated Statements of Operations For 2023, Metallus reported net sales of $1,362.4 million, gross profit of $186.5 million, income before taxes of $96.4 million, and net income of $69.4 million, with diluted EPS of $1.47 Key Financial Performance (in millions, except per share data) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $1,362.4 | $1,329.9 | $1,282.9 | | Gross Profit | $186.5 | $126.7 | $220.0 | | Income Before Taxes | $96.4 | $97.1 | $176.7 | | Net Income | $69.4 | $65.1 | $171.0 | | Diluted EPS | $1.47 | $1.30 | $3.18 | Consolidated Balance Sheets As of December 31, 2023, total assets increased to $1,175.3 million, total liabilities rose to $443.7 million, and total shareholders' equity grew to $731.6 million Key Balance Sheet Items (in millions) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $280.6 | $257.2 | | Inventories, net | $228.0 | $192.4 | | 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 In 2023, the company generated $125.3 million from operations, used $49.9 million in investing activities, and $51.9 million in financing activities, resulting in a $23.5 million increase in cash Summary of Cash Flows (in millions) | Cash Flow Category | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $125.3 | $134.5 | $196.9 | | Net Cash used in Investing Activities | ($49.9) | ($21.7) | ($4.8) | | Net Cash used in Financing Activities | ($51.9) | ($114.6) | ($35.3) | | Increase (Decrease) in Cash | $23.5 | ($1.8) | $156.8 | Note 15 - Retirement and Postretirement Plans As of December 31, 2023, the company's pension plans were underfunded by $163.0 million, with the Salaried Plan termination expected to settle in 2024 and $40 million in contributions anticipated for the Bargaining Plan Funded Status of Benefit Plans (Dec 31, 2023, in millions) | Plan Type | Benefit Obligation | Plan Assets | Funded Status | | :--- | :--- | :--- | :--- | | Pension | $688.6 | $525.6 | ($163.0) | | Postretirement | $84.9 | $53.8 | ($31.1) | - The Salaried Plan, terminated effective March 31, 2022, is expected to be fully settled via an annuity purchase in 2024[413] - The company estimates required contributions of approximately $40 million to the Bargaining Unit Pension Plan in 2024[412] Note 19 – Subsequent Event On February 27, 2024, Metallus secured an agreement with the U.S. Army for up to $99 million in funding to increase artillery shell production, targeting late 2025 for operational readiness - On February 27, 2024, the company secured an agreement with the U.S. Army for up to $99 million in funding[461] - The funding will support new assets for artillery shell production, targeting an operational date of late 2025[461] Part III Directors, Executive Compensation, and Corporate Governance Information for Items 10-14, covering directors, executive compensation, and corporate governance, is incorporated by reference from the forthcoming 2024 proxy statement - Information for Items 10-14, including Directors, Executive Compensation, and Corporate Governance, is incorporated by reference from the forthcoming proxy statement[474][477][478][479][480] Part IV Exhibits and Financial Statement Schedules This section lists exhibits filed with the Form 10-K, including governance documents and material contracts, and presents Schedule II detailing valuation and qualifying accounts Schedule II - Valuation and Qualifying Accounts (in millions) | Account | Balance at Dec 31, 2022 | Additions (Charged to Costs) | Deductions (Write-offs/Releases) | Balance at Dec 31, 2023 | | :--- | :--- | :--- | :--- | :--- | | Allowance for uncollectible accounts | $1.0 | $1.2 | ($0.2) | $2.0 | | Allowance for inventory reserves | $0.5 | $1.1 | ($0.9) | $0.7 | | Valuation allowance on deferred tax assets | $13.0 | $2.5 | $0.0 | $15.5 |