# Metallus Inc. (MTUS) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Metallus Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1598428/000095017022001977/tmst-20211231.htm
Accession: 0000950170-22-001977
Filing date: 2022-02-24
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MTUS/
All MD&A years: /company/MTUS/mda/
Next year: /company/MTUS/mda/fy2022/ (FY 2022)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

(dollars in millions, except per share data)

Business Overview

We manufacture alloy steel, as well as carbon and micro-alloy steel. Our portfolio includes special bar quality ("SBQ") bars, seamless mechanical tubing ("tubes"), manufactured components (formerly known as the "value-add" product type) such as precision steel components, and billets. In addition, we supply machining and thermal treatment services, and we manage raw material recycling programs, which are also used as a feeder system for our melt operations. Our products and services 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 custom steel products. We focus on creating tailored products and services for our customers’ most demanding applications. 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.

On February 16, 2021, management announced a plan to indefinitely idle our Harrison melt and casting assets, which was completed in the first quarter of 2021. All of our melt and casting activities now take place at the Faircrest location. We worked collaboratively with employees, suppliers and a number of customers to ensure a well-organized and efficient transition. Our rolling and finishing operations at Harrison were not impacted by this action. For additional details regarding this matter please refer to “Note 6 – Disposition of Non-Core Assets.”

Prior to indefinitely idling these assets, we had an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. After indefinitely idling these assets, our annual melt capacity is approximately 1.2 million tons and our shipment capacity is approximately 0.9 million tons.

On March 31, 2021, the Company entered into an agreement pursuant to which Daido Steel (Shanghai) Co., Ltd. agreed to acquire all of the Company’s ownership interest in TimkenSteel (Shanghai) Corporation Limited in an all-cash transaction. The sale closed on July 30, 2021. TimkenSteel’s consolidated financial statements include activity for TimkenSteel (Shanghai) Corporation Limited through July 30, 2021.

On October 29, 2021, the United Steelworkers ("USW") Local 1123 voted to ratify a new four-year contract (the “Contract”). The Contract, which is in effect until September 27, 2025, offers TimkenSteel's Canton-based bargaining employees an increase to base wages every year (3% beginning as of September 26, 2021 and thereafter 2.5% until 2024), competitive healthcare and retirement benefits for all members, and a continued focus on employee wellbeing as well as safe and sustainable operations. A contract ratification bonus was paid to bargaining employees during the fourth quarter of 2021 at a cost of approximately $2 million. The Contract covers approximately 1,170 bargaining employees at the Company’s Canton, Ohio operations.

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.

Markets We Serve

We sell products and services that are used in a diverse range of demanding applications around the world. No one customer accounted for 10% or more of net sales in 2021.

Key indicators for our market include the U.S. light vehicle production Seasonally Adjusted Annual Rate, oil and gas rig count activity and U.S. footage drilled, and industrial production for agriculture and construction markets, distribution, and mining and oil field machinery products. In addition, we closely monitor the Purchasing Managers’ Index, which is a leading indicator for our overall business.

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Impact of Raw Material Prices

In the ordinary course of business, we are exposed to the volatility of the costs of our raw materials. 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 utilize a raw material surcharge mechanism when pricing products to our customers, which is 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.

Results of Operations

Net Sales

The charts below present net sales and shipments for the years ended December 31, 2021, 2020 and 2019.

Net sales for the year ended December 31, 2021 were $1,282.9 million, an increase of $452.2 million, or 54.4% compared with the year ended December 31, 2020. The increase in sales was driven by an increase in surcharges and higher volumes, partially offset by unfavorable price/mix. The increase in surcharges of $272.1 million was due to higher market prices for scrap and alloy across all end-market sectors. Higher volumes of 178.2 thousand ship tons resulted in a net sales increase of $220.5 million, primarily due to higher customer demand in the industrial, mobile and energy end-market sectors, despite an approximate 45 thousand ton decrease in expected ship tons for the year ended December 31, 2021 due to the semiconductor chip shortage in the mobile end-market sector. This increase in demand was partially offset by no OCTG billet shipments during the year ended December 31, 2021. Unfavorable price/mix of $40.4 million was driven primarily by unfavorable mix within the industrial end-market sector. Excluding surcharges, net sales increased $180.1 million or 25.9%.

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Gross Profit

The chart below presents the drivers of the gross profit variance from the year ended December 31, 2020 to December 31, 2021.

Gross profit for the year ended December 31, 2021 increased $204.4 million compared with the year ended December 31, 2020. The increase was driven by favorable raw material spread, lower manufacturing costs, increased volume, and favorable inventory adjustments, partially offset by unfavorable price/mix. Raw material spread was favorable due to higher scrap and alloy spreads. Lower manufacturing costs were primarily due to the Company’s significant cost reduction actions and a favorable impact of higher production levels on fixed cost leverage, partially offset by higher variable compensation costs. The increase in volume was due to higher customer demand in the industrial, mobile, and energy end-market sectors for the year ended December 31, 2021. Inventory adjustments were also favorable as additional reserves were recorded during the year ended December 31, 2020 due to market conditions at the time, specifically in the energy end-market sector, which were reversed throughout 2021 as the related inventory was sold or scrapped. These increases were partially offset by unfavorable price/mix, driven by unfavorable mix within the industrial end-market sector.

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Selling, General and Administrative Expenses

The charts below present selling, general and administrative ("SG&A") expense for the years ended December 31, 2021, 2020 and 2019.

SG&A expense for the year ended December 31, 2021 increased by $0.5 million, or 0.7%, compared with the year ended December 31, 2020. This increase is primarily due to higher 2021 variable compensation expense given the Company's improved financial performance, partially offset by lower wages and benefits expense as a result of a reduction in employee headcount following the Company’s restructuring actions.

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 for the year ended December 31, 2021 totaled $6.7 million. Approximately 75 salaried positions were eliminated through restructuring actions in 2021. Over half of these positions and approximately $4 million of the aforementioned 2021 restructuring charges were due to a voluntary exit incentive offered by the Company in the fourth quarter of 2021 to certain U.S.-based salaried non-operative employees who would have been eligible for retirement by December 31, 2023.

During this overall period of organizational changes, the Company has eliminated approximately 290 salaried positions through restructuring actions and recognized restructuring charges of $18.4 million. The Company expects to realize ongoing annual savings of approximately $39 million as a result of these actions.

Refer to “Note 5 - Restructuring Charges” in the Notes to the Consolidated Financial Statements for additional information.

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

TimkenSteel recorded approximately $10.6 million of impairment charges for the year ended December 31, 2021. This was driven by $7.9 million of impairment charges related to the indefinite idling of our Harrison melt and casting assets. Other impairment charges included $2.4 million related to the impairment of certain assets at our St. Clair facility due to the early termination of a customer program and $0.3 million related to the disposition of assets at our former TMS facility. No impairment charge was recorded for the year ended December 31, 2020.

Additionally, the Company recorded a net loss on sale of assets for the year ended December 31, 2021 of $1.3 million related to the disposition of excess assets. For the year ended December 31, 2020, TimkenSteel recorded a net gain on the sale and disposal of assets of $2.6 million, primarily related to the sale of certain assets related to our closed TMS facility.

Refer to “Note 6 - Disposition of Non-Core Assets” and “Note 11 - Property, Plant and Equipment” in the Notes to the Consolidated Financial Statements for additional information.

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Interest Expense

Interest expense for the year ended December 31, 2021 was $5.9 million, a decrease of $6.3 million, compared with the year ended December 31, 2020. The decrease in interest expense was primarily due to the adoption of the Accounting Standard Update 2020-06 on January 1, 2021, which caused the Convertible Notes to no longer have a debt discount that is amortized. The remaining decrease is driven by a reduction in outstanding borrowings. Refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements for additional information.

Other (Income) Expense, net

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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 loss from remeasurement of benefit plans is due to the Company performing mark-to-market accounting on its pension and postretirement assets at year-end and upon the occurrence of certain triggering events. For more details on the remeasurement refer to “Note 15 - 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, for the year ended December 31, 2021.

During the year ended December 31, 2020, the Company recognized a $2.3 million benefit related to the Employee Retention Credit in other (income) expense, net. For more details on this credit refer to "Note 2 - Significant Accounting Policies."

Provision for Income Taxes

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(1) “NM” is data that is not meaningful.

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 years ended December 31, 2021 and 2020.

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Non-GAAP Financial Measures

Net Sales Adjusted to Exclude Surcharges

The table below presents 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 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.

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Liquidity and Capital Resources

Amended Credit Agreement

On October 15, 2019, the Company entered into 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.

The Amended Credit Agreement increased capacity to $400 million compared to $300 million in the previous facility and extended the maturity date to October 15, 2024. Furthermore, the Amended Credit Agreement provided for an enhanced asset base with reappraised fixed assets and investment grade foreign accounts receivable collateral in the borrowing base (up to $30 million), improved interest rate spread pricing by 50 basis points, and reduced the unused commitment fee to a fixed 25 basis points from the previous 37.5 to 50 basis point range.

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 fourth quarter of 2021 and as such the notes can be converted at the option of the holders beginning January 1 through March 31, 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 at any time during any optional conversion periods in the second half of 2021 or the first quarter of 2022.

In January 2022, TimkenSteel repurchased $5.0 million of outstanding principal related to the Convertible Senior Notes Due 2025. Total cash paid to noteholders was $12.4 million. A loss on extinguishment of debt will be recognized in the first quarter of 2022 in the amount of $7.5 million, which includes a charge of $0.1 million for unamortized debt issuance costs related to the portion of debt extinguished, as well as the related transaction costs.

For additional details regarding the Amended Credit Agreement and the Convertible Notes, please refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements, and for our discussion regarding risk factors related to our business and our debt, see Risk Factors in this Annual Report on Form 10-K.

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Additional Liquidity Considerations

The following represents a summary of key liquidity measures under the credit agreement in effect as of December 31, 2021 and December 31, 2020:

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(1) As of December 31, 2021 and 2020, 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 credit agreement. As of December 31, 2021, 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 December 31, 2021, 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. Currently, we are anticipating capital expenditures to be approximately $40 million in 2022, with over half of this budget allocated to profitability improvement projects.

We also privately negotiated the early repurchase of $5 million of our Convertible Senior Notes Due 2025 in the first quarter of 2022. In addition to reducing outstanding debt and generating $0.3 million of annual interest savings, the convertible notes repurchase will have the effect of reducing diluted shares outstanding by approximately 0.6 million shares beginning in the first quarter of 2022.

On December 20, 2021, TimkenSteel announced that its Board of Directors had authorized a share repurchase program under which the Company may repurchase up to $50 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, if any, 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.

Coronavirus Aid, Relief, and Economic Security Act

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, an economic stimulus package intended to provide support, principally in the form of tax benefits, to companies and individuals negatively impacted by the COVID-19 pandemic. Although the majority of the provisions included in the CARES Act did not immediately benefit the Company from a cash tax perspective due to its significant net operating losses, the Company took advantage of the deferral of the employer share (6.2% of employee wages) of Social Security payroll taxes that would otherwise have been owed from the date of enactment of the legislation through December 31, 2020, as afforded by the Act. During the year ended December 31, 2020, the Company had 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.

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The CARES Act also provided for an employee retention credit (“Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to five thousand dollars per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at ten thousand dollars of qualified wages per employee throughout the year. 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 Company’s 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, which was recorded as a receivable in other current assets on the Consolidated Balance Sheets as of December 31, 2021.

Consolidated Appropriations Act, 2021

On December 27, 2020, the President of the United States signed the Consolidated Appropriation Act, 2021 (“CAA”). The CAA includes additional COVID-19 relief that expands upon the relief provided in the CARES Act, including, but not limited to, the extension of tax deductions, credits, and incentives. The Company has evaluated the CAA for any potential impact. While it was determined that the CAA revised and extended the Employee Retention Credit into 2021, the CAA is not expected to have an impact on the Company as employee furloughs related to the COVID-19 pandemic ceased in 2020. Furthermore, the Company does not expect any of the other provisions within the CAA to provide a benefit.

American Rescue Plan Act of 2021

On March 11, 2021, the President of the United States signed the American Rescue Plan Act of 2021 (“ARPA”). The ARPA strengthens and extends certain programs enacted through the CARES Act and establishes new relief programs aimed at mitigating the financial impact of the COVID-19 pandemic. The provisions within the ARPA have been evaluated and at this time one provision, which offers funding relief for single-employer defined benefit pension plans, is expected to materially impact the Company.

Specifically, the ARPA provides enhanced interest rate stabilization, as well as extended amortization of funding shortfalls. The Company has evaluated and made final the elections permitted by the ARPA related to the required contributions for our TimkenSteel Corporation Bargaining Unit Pension Plan ("Bargaining Plan"). At this time based on current assumptions, the elections made under ARPA and expected asset returns, we believe that required Company contributions to the Bargaining Plan have been delayed until after 2031. However, these estimates are subject to significant uncertainty. Prior to the ARPA, we had expected to make required pension contributions for the Bargaining Plan beginning in 2022.

Cash Flows

The following table reflects the major categories of cash flows for the years ended December 31, 2021, 2020, and 2019. For additional details, please refer to the Consolidated Statements of Cash Flows included in Item 8, "Financial Statements and Supplemental Data" of this Annual Report on Form 10-K.

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Operating activities

Net cash provided by operating activities for the year ended December 31, 2021 was $196.9 million compared to net cash provided of $173.5 million for the year ended December 31, 2020. The change was primarily due to improved profitability, partially offset by an increase in working capital, principally inventory, during the year ended December 31, 2021 to support increasing customer demand and production levels, as compared to a drawdown of working capital based on economic conditions during the year ended December 31, 2020. Refer to the Consolidated Statements of Cash Flows for additional information.

Investing activities

Net cash used by investing activities for the year ended December 31, 2021 was $4.8 million compared to net cash used of $6.0 million for the year ended December 31, 2020. The change was primarily due to lower capital expenditures, as well as proceeds from the sale of TimkenSteel (Shanghai) Corporation Limited. This was partially offset by lower proceeds on disposals of property, plant, and equipment, during the year ended December 31, 2021 compared to the same period of 2020 in which assets were sold primarily related to our closed TMS facility.

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Financing activities

Net cash used by financing activities for the year ended December 31, 2021 was $35.3 million compared to net cash used of $91.8 million for the year ended December 31, 2020. The change was primarily due to lower repayments on outstanding borrowings and increased proceeds from the exercise of stock options during the year ended December 31, 2021 compared to the same period of 2020.

Contractual Obligations and Commitments

Our material cash commitments from known contractual and other obligations primarily consist of obligations for long-term debt and related interest, purchase commitments as part of normal operations, retirement benefits, and operating leases for property and equipment.

Refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements for more information regarding scheduled maturities of our long-term debt. Interest payments include interest on the Convertible Notes, as well as the unused commitment fee of 25 basis points related to the Amended Credit Agreement. Interest payable associated with our debt will be approximately $3.5 million due in the next twelve months and $9.0 million due in total starting in 2023 through 2025, the latest maturity date of our outstanding debt.

Purchase commitments are defined as agreements to purchase goods or services that are enforceable and legally binding. As of December 31, 2021, our undiscounted purchase commitments will be approximately $46.0 million due in the next twelve months and $81.6 million due thereafter. Included in purchase commitments are certain obligations related to capital asset commitments, service agreements and energy consumed in our production processes. These purchase commitments do not represent our entire anticipated purchases in the future but represent only those items for which we are contractually obligated as of December 31, 2021. The majority of our products and services are purchased as needed, with no advance commitment. We do not have any off-balance sheet arrangements with unconsolidated entities or other persons.

Retirement benefits are paid from plan assets and our operating cash flow. These include payments to meet minimum funding requirements of our defined benefit pension plans, estimated benefit payments for our unfunded supplemental executive retirement pension, and estimated benefit payments for our postretirement plans. The retirement benefit funding requirements are estimated required contributions and are significantly affected by asset returns and several other variables. These amounts are subject to change year to year. These amounts are based on Company estimates and current funding laws; actual future payments may be different. Refer to “Note 15 - Retirement and Postretirement Plans” in the Notes to the Consolidated Financial Statements for further information related to the total pension and other postretirement benefit plans and expected benefit payments.

Refer to “Note 13 – Leases” in the Notes to the Consolidated Financial Statement for additional information on leases.

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 - Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.

Revenue Recognition

We recognize revenue from contracts at a point in time when we have satisfied our performance obligation and the customer obtains control of the goods, at the amount that reflects the consideration we expect to receive for those goods. We receive and acknowledge purchase orders from our customers, which define the quantity, pricing, payment and other applicable terms and conditions. In some cases, we receive a blanket purchase order from our 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. 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.

Inventory

Inventories are stated at lower of cost or net realizable value. All inventories, including raw materials, manufacturing supplies inventory as well as international (outside the U.S.) inventories, have been valued using the FIFO or average cost method.

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Long-lived Assets

Long-lived assets (including tangible assets and intangible assets subject to amortization) are reviewed for impairment when events or changes in circumstances have occurred indicating the carrying value of the assets may not be recoverable.

We test recoverability of long-lived assets at the lowest level for which there are identifiable cash flows that are independent from the cash flows of other assets. Assets and asset groups held and used are measured for recoverability by comparing the carrying amount of the asset or asset group to the sum of future undiscounted net cash flows expected to be generated by the asset or asset group.

Assumptions and estimates about future values and remaining useful lives of our long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts.

If an asset or asset group is considered to be impaired, the impairment loss that would be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. To determine fair value, we use internal cash flow estimates discounted at an appropriate interest rate, third party appraisals as appropriate, and/or market prices of similar assets, when available.

As a result of the discontinued use of certain assets, we recorded an impairment charge of $10.6 million in 2021. No impairment charge was recorded in 2020. Refer to “Note 6 – Disposition of Non-Core Assets” in the Notes to the Consolidated Financial Statements for further information.

Income Taxes

We are subject to income taxes in the U.S. and non-U.S. jurisdictions, and we account for income taxes in accordance with applicable accounting guidance. Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. We record valuation allowances against deferred tax assets by tax jurisdiction when it is more likely than not that such assets will not be realized. In determining the need for a valuation allowance, the historical and projected financial performance of the entity recording the net deferred tax asset is considered along with any other pertinent information. Net deferred tax assets relate primarily to net operating losses and pension and other postretirement benefit obligations in the U.S., which we believe are more likely than not to result in future tax benefits. As of December 31, 2021, we have recorded a valuation allowance on our net deferred tax assets in the U.S., as we do not believe it is more likely than not that a portion of our U.S. deferred tax assets will be realized.

In the ordinary course of our business, there are many transactions and calculations regarding which the ultimate income tax determination is uncertain. We are regularly under audit by tax authorities. Accruals for uncertain tax positions are provided for in accordance with the requirements of applicable accounting guidance. We record interest and penalties related to uncertain tax positions as a component of income tax expense.

Benefit Plans

We recognize an overfunded status or underfunded status (i.e. the difference between the fair value of plan assets and the benefit obligations) as either an asset or a liability for our defined benefit pension and other postretirement benefit plans on the Consolidated Balance Sheets. We recognize 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. In addition, we use fair value to account for the value of plan assets.

As of December 31, 2021, our projected benefit obligations related to our pension and other postretirement benefit plans were $1,319.2 million and $117.8 million, respectively, and the underfunded status of our pension and other postretirement benefit obligations were $143.2 million and $41.0 million, respectively. These benefit obligations were valued using a weighted average discount rate of 2.96% for pension benefit plans and 3.00% for other postretirement benefit plans. The determination of the discount rate is generally based on an index created from a hypothetical bond portfolio consisting of high-quality fixed income securities with durations that match the timing of expected benefit payments. Changes in the selected discount rate could have a material impact on our projected benefit obligations and the unfunded status of our pension and other postretirement benefit plans.

For the year ended December 31, 2021, net periodic pension and postretirement benefit income was $28.8 million and $9.9 million, respectively. In 2021, net periodic pension and other postretirement benefit income was calculated using a variety of assumptions, including a weighted average discount rate of 2.68% and 2.65%, respectively, and a weighted average expected return on plan assets of 5.76% and 4.50%, respectively. The expected return on plan assets is determined based on forward-looking current market pricing. The forward-looking analysis

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is performed using a building block approach incorporating inputs such as current yields, valuations, economic data and broad macroeconomic themes.

The net periodic benefit income and benefit obligation are affected by applicable year-end assumptions. Sensitivities to these assumptions may be asymmetric and are specific to the time periods noted. The impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities. The sensitivity to changes in discount rate assumptions may not be linear. A sensitivity analysis of the projected incremental effect of a 0.25% increase (decrease), holding all other assumptions constant, is as follows:

[[GREPCENT_TABLE]]
[["","","Hypothetical Rate"],["","","Increase (decrease)"],["","","0.25%","","","(0.25)%"],["Discount Rate"],["Net periodic benefit income, prior to annual remeasurement gains or losses","","$","1.9","","","$","(2.0",")"],["Benefit obligation","","$","(36.3",")","","$","38.0"],["Return on plan assets"],["Net periodic benefit income, prior to annual remeasurement gains or losses","","$","(3.0",")","","$","3.0"]]
[[/GREPCENT_TABLE]]

Aggregate net periodic pension and other postretirement benefit income for 2022 is forecasted to be $11.5 million and $5.0 million, respectively. This estimate is based on a weighted average discount rate of 2.96% for the pension benefit plans and 3.00% for other postretirement benefit plans, as well as a weighted average expected return on assets of 5.96% for the pension benefit plans and 4.75% for the other postretirement benefit plans. Actual cost also is dependent on various other factors related to the employees covered by these plans. Adjustments to our actuarial assumptions could have a material adverse impact on our operating results.

Please refer to “Note 15 - Retirement and Postretirement Plans” in the Notes to the Consolidated Financial Statements for further information related to our pension and other postretirement benefit plans.

Other Loss Reserves

We have a number of loss exposures that are incurred in the ordinary course of business, such as environmental claims, product liability claims, product warranty claims, litigation and accounts receivable reserves. Establishing loss reserves for these matters requires management’s estimate and judgment with regard to risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances. These other loss reserves have an immaterial impact on the Consolidated Financial Statements.

Forward-Looking Statements

Certain statements set forth in this Annual Report on Form 10-K (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-K. 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;

•
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;

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•
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, and environmental issues and taxes, among other matters;

•
the Company's ability to achieve its 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 this 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.

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