Notes to Consolidated Financial Statements
(dollars in millions, except per share data)
Note
1
-
Company and Basis of Presentation
TimkenSteel Corporation (the Company or TimkenSteel) manufactures alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately
2 million
tons and shipment capacity of
1.5 million
tons. TimkenSteel’s portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), value-add solutions such as precision steel components, and billets. In addition, TimkenSteel supplies machining and thermal treatment services and we manage raw material recycling programs, which are used as a feeder system for the Company’s melt operations. The Company’s products and services are used in a diverse range of demanding applications in the following market sectors: oil and gas; oil country tubular goods (OCTG); automotive; industrial equipment; mining; construction; rail; aerospace and defense; heavy truck; agriculture; and power generation.
The SBQ bars, tubes, and billets production processes take place at the Company’s Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets the Company produces and includes
three
manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. TimkenSteel’s value-add solutions production processes take place at
three
downstream manufacturing facilities: TimkenSteel Material Services (Houston, TX), Tryon Peak (Columbus, NC), and St. Clair (Eaton, OH). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of the Company’s market sectors. As a result, investments in the Company’s facilities and resource allocation decisions affecting the Company’s operations are designed to benefit the overall business of the Company, not any specific aspect of the business.
Effective January 1, 2016, TimkenSteel eliminated our segment reporting as a result of organizational changes made in the second half of 2015 to reflect the integrated nature of the Company’s business as described above. These organizational changes were made to better align resources to support the business strategy of operating in a leaner, more efficient environment. Specifically, the Company centralized our customer-facing activities under one leadership role and eliminated the former
two
segment operating structure. Since that change, we are organized in a centralized manner based on functionality. As a result, TimkenSteel conducts its business activities and reports financial results as
one
business segment.
The presentation of financial results as
one
reportable segment is consistent with the way the Company operates its business under the realigned organization and is consistent with the manner in which the Chief Operating Decision Maker (CODM) evaluates performance and makes resource and operating decisions for the business as described above. Furthermore, the Company notes that monitoring financial results as
one
reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of the operations.
Presentation
Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal
2017
presentation.
Note
2
-
Significant Accounting Policies
Basis of Combination:
The Consolidated Financial Statements include the combined assets, liabilities, revenues and expenses related to TimkenSteel as of
December 31, 2017
and
2016
and for the years ended
December 31, 2017
,
2016
and
2015
. All significant intercompany accounts and transactions within TimkenSteel have been eliminated in the preparation of the Consolidated Financial Statements.
Use of Estimates:
The preparation of these Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. These estimates and assumptions are reviewed and updated regularly to reflect recent experience.
Revenue Recognition:
TimkenSteel recognizes revenue when title passes to the customer, which includes related-party sales to The Timken Company and its subsidiaries for the periods prior to spinoff. This occurs at the shipping point except for goods sold by certain of the Company’s foreign entities and certain exported goods, where title passes when the goods reach their destination. Selling
prices are fixed based on purchase orders or contractual arrangements. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold in the Consolidated Statements of Operations.
Cash Equivalents:
TimkenSteel considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Allowance for Doubtful Accounts:
TimkenSteel maintains an allowance for doubtful accounts, which represents an estimate of losses expected from the accounts receivable portfolio, to reduce accounts receivable to their net realizable value. The allowance is based upon historical trends in collections and write-offs, management’s judgment of the probability of collecting accounts and management’s evaluation of business risk. TimkenSteel extends credit to customers satisfying pre-defined credit criteria. TimkenSteel believes it has limited concentration of credit risk due to the diversity of its customer base.
Inventories, Net:
Inventories are valued at the lower of cost or market. The majority of TimkenSteel’s domestic inventories are valued by the last-in, first-out (LIFO) method. The remaining inventories, including manufacturing supplies inventory as well as international (outside the U.S.) inventories, are valued by the first-in, first-out (FIFO), average cost or specific identification methods. Reserves are established for product inventory that is identified to be surplus and/or obsolete based on future requirements.
Property, Plant and Equipment, Net:
Property, plant and equipment, net are valued at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. The provision for depreciation is computed principally by the straight-line method based upon the estimated useful lives of the assets. The useful lives are approximately
30 years
for buildings and
three
to
20 years
for machinery and equipment.
Intangible Assets, Net:
Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from
three
to
15 years
.
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350-40, “Internal-Use Software,” (ASC 350-40), TimkenSteel capitalizes certain costs incurred for computer software developed or obtained for internal use. TimkenSteel capitalizes substantially all external costs and qualifying internal costs related to the purchase and implementation of software projects used for business operations. Capitalized software costs primarily include purchased software and external consulting fees. Capitalized software projects are amortized over the estimated useful lives of the software.
Long-lived Asset Impairment:
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 that the carrying value of the assets may not be recoverable.
TimkenSteel tests 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 TimkenSteel’s 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 TimkenSteel’s business strategy and 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, TimkenSteel uses 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 the result of the discontinued use of certain assets, TimkenSteel recorded an impairment charge of $
0.7 million
for the year ended
December 31, 2017
and
$0.9 million
for the year ended
December 31, 2015
.
No
impairment charges were recorded for the year ended
December 31, 2016
.
Product Warranties:
TimkenSteel accrues liabilities for warranties based upon specific claim incidents in accordance with accounting rules relating to contingent liabilities. Should TimkenSteel become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. TimkenSteel had no significant warranty claims for the years ended
December 31, 2017
,
2016
and
2015
.
Income Taxes:
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. TimkenSteel accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. TimkenSteel recognizes deferred tax assets to the extent TimkenSteel believes these assets are more likely than not to be realized. In making such a determination, TimkenSteel considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If TimkenSteel determines that it would be able to realize deferred tax assets in the future in excess of their net recorded amount, TimkenSteel would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. TimkenSteel records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) TimkenSteel determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, TimkenSteel recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
TimkenSteel recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Statements of Operations. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheets.
Foreign Currency Translation:
Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date. Income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Gains and losses resulting from foreign currency transactions are included in the Consolidated Statements of Operations. TimkenSteel realized foreign currency exchange gain of $
.3 million
in
2017
, and losses of
$0.8 million
in
2016
and $
1.3 million
in
2015
.
Pension and Other Postretirement Benefits:
TimkenSteel recognizes an overfunded status or underfunded status (e.g., the difference between the fair value of plan assets and the benefit obligations) as either an asset or a liability for its defined benefit pension and other postretirement benefit plans on the Consolidated Balance Sheets. The Company recognizes actuarial gains and losses immediately through net periodic benefit cost in the Statement of Operations upon the annual remeasurement at December 31, or on an interim basis as triggering events warrant remeasurement. In addition, the Company uses fair value to account for the market-related value of plan assets.
Stock-Based Compensation:
TimkenSteel recognizes stock-based compensation expense based on the grant date fair value of the stock-based awards over their required vesting period on a straight-line basis, whether the awards were granted with graded or cliff vesting. Stock options are issued with an exercise price equal to the opening market price of TimkenSteel common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. The fair value of stock-based awards that will settle in TimkenSteel common shares, other than stock options, is based on the opening market price of
TimkenSteel common shares on the grant date. The fair values of stock-based awards that will settle in cash are remeasured at each reporting period until settlement of the awards.
TimkenSteel early adopted ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” in the fourth quarter of 2016, with the effect recorded as of January 1, 2016. Under ASU 2016-09, TimkenSteel recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the consolidated statement of operations. The Company recorded an adjustment to beginning retained earnings of $
4.2 million
for previously unrecognized excess tax benefits. The excess tax benefits and tax deficiencies are considered discrete items in the reporting period they occur and are not included in the estimate of an entity’s annual effective tax rate.
TimkenSteel’s additional paid in capital pool as of December 31, 2015 was not affected by ASU 2016-09, because those excess benefits have already been recognized in the financial statements, and the recognition of excess tax benefits and tax deficiencies in the income statement is prospective only in the fiscal year of adoption. As a result, there was not a reclassification between additional paid in capital and retained earnings in the fiscal years before adoption.
Research and Development:
Expenditures for TimkenSteel research and development amounted to
$8.0
million
for both years ended December 31, 2017 and 2016, and $
8.6 million
for the year ended December 31,
2015
, and were recorded as a component of selling, general and administrative expenses in the Consolidated Statements of Operations. These expenditures may fluctuate from year to year depending on special projects and the needs of TimkenSteel and its customers.
Adoption of New Accounting Standards
The Company adopted the following ASUs during the year ended
December 31, 2017
. With the exception of ASU 2017-07, which is discussed below, the adoption of these standards did not have a material impact on the Consolidated Financial Statements or the related Notes to the Consolidated Financial Statements.
|
|
|
Standard
|
|
|
|
2015-11
|
Inventory: Simplifying the Measurement of Inventory (Topic 330)
|
2016-15
|
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force)
|
2016-16
|
Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740)
|
2017-07
|
Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715)
|
In the first quarter of 2017, the FASB issued and the Company early adopted ASU 2017-07, “Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715).” This ASU requires entities to present non-service cost components of net periodic benefit cost in a caption below operating loss and provides that only service cost is eligible to be capitalized in inventory or construction of an asset. This ASU requires retrospective application of the change in the statement of operations and prospective application for the capitalization of service cost in assets. This ASU permits previously disclosed components of net periodic benefit costs as an estimation basis for applying the retrospective presentation as a practical expedient. Utilizing the practical expedient approach, based on amounts previously disclosed, the Company reclassified non-service components of net periodic benefit cost from cost of products sold and selling, general and administrative expenses, respectively, into other income (expense), net on the Consolidated Statements of Operations.
The following table reflects the changes applied retrospectively to cost of products sold, selling, general and administrative expenses and other income (expense), net, as a result of the adoption of ASU 2017-07 for the prior periods presented in the accompanying financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
As Reported
|
Adjustments
|
Adjusted
|
|
As Reported
|
Adjustments
|
Adjusted
|
Cost of products sold
|
|
$896.6
|
|
|
($55.0
|
)
|
|
$841.6
|
|
|
|
$1,060.0
|
|
|
$31.5
|
|
|
$1,091.5
|
|
Selling, general and administrative expenses
|
|
$101.5
|
|
|
($11.3
|
)
|
|
$90.2
|
|
|
|
$105.1
|
|
|
$2.5
|
|
|
$107.6
|
|
Other income (expense), net
|
|
($1.7
|
)
|
|
($66.3
|
)
|
|
($68.0
|
)
|
|
|
($2.9
|
)
|
|
$34.0
|
|
|
$31.1
|
|
Accounting Standards Issued But Not Yet Adopted
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This ASU eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. It is effective for annual periods beginning after December 31, 2018. Early adoption is permitted. TimkenSteel is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.
In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718), Scope of Modification Accounting. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. This ASU shall be applied prospectively to awards modified on or after the adoption date. It is effective for annual periods beginning after December 31, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. TimkenSteel will apply this ASU for awards modified on or after January 1, 2018, as applicable. TimkenSteel does not expect this ASU to have a material impact on its results of operations or financial condition.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations - Clarifying the Definition of a Business.” This guidance clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. It is effective for annual periods beginning after December 31, 2017. TimkenSteel will apply this ASU to business combinations effective after January 1, 2018, as applicable.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU changes how entities will measure credit losses for most financial assets, including trade and other receivables. This guidance will replace the current incurred loss approach with an expected loss model. It is effective for annual periods beginning after December 31, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018 and interim periods therein. TimkenSteel is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for operating leases, and requires additional quantitative and qualitative disclosures. It is effective for annual reporting periods beginning after December 15, 2018. The Company regularly enters into operating leases. TimkenSteel is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provides guidance for revenue recognition and will supersede Topic 605, “Revenue Recognition,” and most industry-specific guidance. Under ASU 2014-09 and the subsequently issued amendments, the core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Additional disclosures will be required about the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. This standard is effective for reporting periods after December 15, 2017. TimkenSteel completed a review of its customer contracts and has determined that its revenue transactions will continue to be recognized at a point in time and, therefore, this standard does not materially impact the amount or timing of revenue recognized. The Company has adopted ASU 2014-09 as of January 1, 2018, using the modified retrospective approach, and has updated its accounting policies, systems and related internal controls.
Note
3
-
Inventories
The components of inventories, net as of
December 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Inventories:
|
|
|
|
Manufacturing supplies
|
|
$36.3
|
|
|
|
$37.9
|
|
Raw materials
|
31.9
|
|
|
16.9
|
|
Work in process
|
137.8
|
|
|
85.8
|
|
Finished products
|
82.9
|
|
|
76.3
|
|
Gross inventory
|
288.9
|
|
|
216.9
|
|
Allowance for surplus and obsolete inventory
|
(7.8
|
)
|
|
(8.1
|
)
|
LIFO reserve
|
(57.1
|
)
|
|
(44.6
|
)
|
Total Inventories, net
|
|
$224.0
|
|
|
|
$164.2
|
|
Inventories are valued at the lower of cost or market, with approximately
65%
valued by the LIFO method, and the remaining inventories, including manufacturing supplies inventory as well as international (outside the United States) inventories, valued by FIFO, average cost or specific identification methods.
TimkenSteel recognized an increase in its LIFO reserve of $
12.5 million
during
2017
and a decrease in its LIFO reserve of $
5.0 million
during 2016, recognized in cost of products sold. The increase in the LIFO reserve recognized during 2017 was due to higher manufacturing costs, higher scrap steel costs, and higher inventory quantities. The decrease in the LIFO reserve recognized during 2016 was due to lower product costs and lower inventory quantities.
Note
4
-
Property, Plant and Equipment
The components of property, plant and equipment, net as of
December 31, 2017
and
2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Property, Plant and Equipment, net:
|
|
|
|
Land
|
|
$13.4
|
|
|
|
$13.3
|
|
Buildings and improvements
|
420.6
|
|
|
420.6
|
|
Machinery and equipment
|
1,387.4
|
|
|
1,352.0
|
|
Construction in progress
|
30.4
|
|
|
63.9
|
|
Subtotal
|
1,851.8
|
|
|
1,849.8
|
|
Less allowances for depreciation
|
(1,145.1
|
)
|
|
(1,107.9
|
)
|
Property, Plant and Equipment, net
|
|
$706.7
|
|
|
|
$741.9
|
|
Total depreciation expense was
$68.3 million
,
$68.0 million
and
$67.2 million
for the years ended
December 31, 2017
,
2016
and 2015, respectively.
TimkenSteel recorded capitalized interest related to construction projects of $
0.6 million
,
$0.7 million
and
$1.0 million
for the years ended
December 31, 2017
,
2016
and 2015, respectively.
As the result of the discontinued use of certain assets, TimkenSteel recorded an impairment charge of $
0.7 million
for the year ended
December 31, 2017
and
$0.9 million
for the year ended
December 31, 2015
.
No
impairment charges were recorded for the year ended
December 31, 2016
.
Note
5
-
Intangible Assets
The components of intangible assets, net as of
December 31, 2017
and
2016
were as follows:
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Intangible Assets Subject to Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$6.3
|
|
|
|
$4.1
|
|
|
|
$2.2
|
|
|
|
$6.3
|
|
|
|
$3.7
|
|
|
|
$2.6
|
|
Technology use
|
9.0
|
|
|
5.9
|
|
|
3.1
|
|
|
9.0
|
|
|
5.2
|
|
|
3.8
|
|
Capitalized software
|
59.1
|
|
|
44.5
|
|
|
14.6
|
|
|
58.9
|
|
|
40.3
|
|
|
18.6
|
|
Total Intangible Assets
|
|
$74.4
|
|
|
|
$54.5
|
|
|
|
$19.9
|
|
|
|
$74.2
|
|
|
|
$49.2
|
|
|
|
$25.0
|
|
Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives. The weighted average useful lives of the customer relationships, technology use and capitalized software are
15
years,
15
years and
6.5
years, respectively. The weighted average useful life of total intangible assets is
8.3
years.
Amortization expense for intangible assets for the years ended
December 31, 2017
,
2016
and 2015 was
$6.6 million
, $
6.9 million
and
$6.2 million
, respectively. Based upon the intangible assets subject to amortization as of December 31, 2017, TimkenSteel’s estimated annual amortization for the five succeeding years is shown below (in millions):
|
|
|
|
|
Year
|
Amortization Expense
|
2018
|
|
$5.5
|
|
2019
|
|
$4.4
|
|
2020
|
|
$3.2
|
|
2021
|
|
$2.3
|
|
2022
|
|
$2.0
|
|
Note
6
-
Financing Arrangements
Convertible Notes
In
May 2016
, the Company issued
$75.0 million
aggregate principal amount of Convertible Senior Notes, and an additional
$11.3 million
principal amount to cover over-allotments (Convertible Notes). The Indenture for the Convertible Notes dated May 31, 2016, which was filed with the Securities and Exchange Commission as an exhibit to a Form 8-K filed on May 31, 2016, contains a complete description of the terms of the Convertible Notes. The key terms are as follows:
Maturity Date:
June 1, 2021
unless repurchased or converted earlier
Interest Rate:
6.0%
cash interest per year
Interest Payments Dates:
June 1
and
December 1
of each year, beginning on
December 1, 2016
Initial Conversion Price: Approximately
$12.58
per common share of the Company
Initial Conversion Rate:
79.5165
c
ommon shares per
$1,000
principal amount of Notes
The net proceeds to the Company from the offering were
$83.2 million
, after deducting the initial underwriters’ discount and fees and the offering expenses payable by the Company. The Company used the net proceeds to repay a portion of the amounts outstanding under the Credit Agreement.
The components of the Convertible Notes as of
December 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
Principal
|
|
$86.3
|
|
|
|
$86.3
|
|
Less: Debt issuance costs, net of amortization
|
(1.6
|
)
|
|
(2.1
|
)
|
Less: Debt discount, net of amortization
|
(14.6
|
)
|
|
(17.8
|
)
|
Convertible notes, net
|
|
$70.1
|
|
|
|
$66.4
|
|
The initial value of the principal amount recorded as a liability at the date of issuance was
$66.9 million
, using an effective interest rate of
12.0%
. The remaining
$19.4 million
of principal amount was allocated to the conversion feature and recorded as a component of shareholders’ equity at the date of issuance. This amount represents a discount to the debt to be amortized through interest expense using the effective interest method through the maturity of the Convertible Notes.
Transaction costs were allocated to the liability and equity components based on their relative values. Transaction costs attributable to the liability component of
$2.4 million
are amortized to interest expense over the term of the Convertible Notes, and transaction costs attributable to the equity component of
$0.7 million
are included in shareholders’ equity.
The following table sets forth total interest expense recognized related to the Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
2016
|
Contractual interest expense
|
|
|
$5.2
|
|
|
$3.0
|
|
Amortization of debt issuance costs
|
|
0.5
|
|
0.2
|
|
Amortization of debt discount
|
|
3.2
|
|
1.7
|
|
Total
|
|
|
$8.9
|
|
|
$4.9
|
|
The fair value of the Convertible Notes was approximately $
149.5 million
as of
December 31, 2017
. The fair value of the Convertible Notes, which falls within Level 1 of the fair value hierarchy, is based on the last price traded in
December 2017
.
Holders may convert all or any portion of their Convertible Notes, in multiples of
$1,000
principal amount, at their option at any time prior to the close of business on the business day immediately preceding
March 1, 2021
only under certain circumstances described in the Convertible Notes Indenture, based on the reported sale price of the Company’s common shares for specified trading days as a percentage of the conversion price of the Convertible Notes, and upon the occurrence of specified corporate events. On or after
March 1, 2021
until the business day preceding the maturity date, holders may convert all or any portion of their Convertible Notes, in multiples of
$1,000
principal amount, at their option.
Upon conversion, the Company will pay or deliver, as the case may be, cash, common shares or a combination of cash and common shares, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and common shares, the amount of cash and number of common shares, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a
40
-trading day period.
If the Company undergoes a fundamental change, subject to certain conditions, holders may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to
100%
of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to the repurchase date.
Upon certain events of default occurring and continuing (including failure to pay principal or interest on the Convertible Notes when due and payable), the Trustee or the holders of at least
25%
in principal amount may declare
100%
of the principal and accrued and unpaid interest, if any, on all the Convertible Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary,
100%
of the principal and accrued and unpaid interest on the Convertible Notes will become due and payable immediately.
Other Long-Term Debt
The components of other long-term debt as of
December 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (1.58% as of December 31, 2017)
|
|
$12.2
|
|
|
|
$12.2
|
|
Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (1.60% as of December 31, 2017)
|
9.5
|
|
|
9.5
|
|
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (1.60% as of December 31, 2017)
|
8.5
|
|
|
8.5
|
|
Credit Agreement, due 2019 (LIBOR plus applicable spread)
|
65.0
|
|
|
40.0
|
|
Total Other Long-Term Debt
|
|
$95.2
|
|
|
|
$70.2
|
|
Credit Agreement
On February 26, 2016, the Company, as borrower, and certain domestic subsidiaries, as subsidiary guarantors, entered into Amendment No. 1 to the Amended and Restated Credit Agreement (as amended by the Amendment, the Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto.
The Credit Agreement provides for a
$265.0 million
asset-based revolving credit facility, including a
$13.3 million
sublimit for the issuance of commercial and standby letters of credit, and a
$26.5 million
sublimit for swingline loans. The availability of borrowings is subject to a borrowing base calculation based upon a valuation of the eligible accounts receivable, inventory and machinery and equipment of TimkenSteel and the subsidiary guarantors, each multiplied by an applicable advance rate. The Credit Agreement includes a block on availability equal to the greater of
$28.9 million
or
12.5%
of the aggregate commitments (except that in the event of a mandatory reduction in the commitments, the block on availability will be equal to the greater of
$20.0 million
or
12.5%
of the aggregate commitments), effectively reducing the Company’s borrowing base by the availability block.
The Credit Agreement contains certain customary covenants, including covenants that limit TimkenSteel’s and its subsidiaries’ ability to, among other things, (i) incur or suffer to exist certain liens, (ii) make investments, (iii) incur or guaranty additional indebtedness, (iv) enter into consolidations, mergers, acquisitions and sales of assets, (v) make distributions and other restricted payments, (vi) change the nature of its business, (vii) engage in transactions with affiliates and (viii) enter into restrictive agreements, including agreements that restrict the ability to incur liens or make distributions. Further, the Credit Agreement contains financial covenants that (i) limit the amount of capital expenditures TimkenSteel may make to
$45.0 million
in fiscal year 2016 and
$50.0 million
in fiscal years thereafter and (ii) required the Company to maintain a minimum specified fixed charge coverage ratio for the year-to-date periods beginning January 1, 2017 and ending June 30, 2017, July 31, 2017 and August 31, 2017. As of
December 31, 2017
, we were in compliance with all covenants.
Borrowings under the Credit Agreement bear interest based on the daily balance outstanding at LIBOR (with no rate floor), plus an applicable margin (varying from
3.00%
to
3.50%
) and an additional
0.75%
on the machinery and equipment component or, in certain cases, an alternate base rate (based on certain lending institutions’ Prime Rate or as otherwise specified in the Credit Agreement, with no rate floor), plus an applicable margin (varying from
2.00%
to
2.50%
). The Credit Agreement also carries a commitment fee equal to the unused borrowings multiplied by an applicable margin of
0.50%
. The applicable margins are calculated quarterly and vary based on TimkenSteel’s average quarterly availability as set forth in the Credit Agreement. The interest rate under the Credit Agreement was
4.9%
as of
December 31, 2017
. The amount available under the Credit Agreement as of
December 31, 2017
was
$164.3 million
net, after reducing for the block on availability of
$33.1 million
.
Please refer to
Note 16 - Subsequent Events
for a discussion of the Second Amended and Restated Credit Agreement (Amended Credit Agreement) entered into by the Company effective January 26, 2018.
Revenue Refunding Bonds
On June 1, 2014, The Timken Company purchased, in lieu of redemption, the State of Ohio Water Development Revenue Refunding Bonds (Water Bonds), State of Ohio Air Quality Development Revenue Refunding Bonds (Air Quality Bonds) and State of Ohio Pollution Control Revenue Refunding Bonds (Pollution Control Bonds) (collectively, Bonds). Pursuant to an Assignment and Assumption Agreement dated June 24, 2014 between The Timken Company and TimkenSteel, The Timken Company assigned all of its right, title and interest in and to the loan agreements and the notes associated with the Bonds to, and these obligations were assumed by, TimkenSteel. Additionally, replacement letters of credit were issued for the Water Bonds and the Pollution Control Bonds. The Bonds were remarketed on June 24, 2014 (Remarketing Date) in connection with the conversion of the interest rate mode for the Bonds to the weekly rate and the delivery of the replacement letters of credit, as applicable. The replacement letters of credit had an initial stated term of
one
year that, upon request by the Company, and with approval by the issuing bank, can be renewed annually thereafter for subsequent
one
year terms.
On September 1, 2016, the Water Bonds were remarketed in connection with the delivery of a replacement letter of credit issued by JP Morgan Chase Bank, N.A. The key terms of the Water Bonds did not change as a result of the remarketing.
As of September 30, 2017, the Company has requested and the issuing banks have approved renewal of the Air Quality Bonds and Pollution Control Bonds through June 2018 and the Water Bonds through August 2018.
TimkenSteel is responsible for payment of the interest and principal associated with the Bonds subsequent to the Remarketing Date.
Please refer to
Note 16 - Subsequent Events
for a discussion regarding the redemption of the Revenue Refunding Bonds, effective January 23, 2018.
All of TimkenSteel’s other long-term debt is variable-rate debt. As such, the carrying value of this debt is a reasonable estimate of fair value as interest rates on these borrowings approximate current market rates, which is considered a Level 2 fair value input as defined by Accounting Standard Codification (ASC) 820, Fair Value Measurements. The valuation of Level 2 is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly.
Advanced Quench-and-Temper Facility
In the second quarter of 2015, TimkenSteel entered into a lease arrangement with the Stark County Port Authority in connection with the construction of a new advanced quench-and-temper facility in Perry Township, Ohio and the issuance of an Industrial Revenue Bond. The bond is held
100%
by TimkenSteel Material Services, LLC (a wholly-owned subsidiary of TimkenSteel) and, accordingly, the obligation under the lease agreement and investment in the Industrial Revenue Bond, as well as the related interest income and expense, are eliminated in the Consolidated Financial Statements. As of
December 31, 2017
,
$42.6 million
has been spent on the new advanced quench-and-temper facility and is reported in property, plant and equipment, net in the Consolidated Balance Sheets. Of this amount,
$11.8 million
has been financed through the lease arrangement described above.
Leases
TimkenSteel leases a variety of equipment and real property, including warehouses, distribution centers, offices spaces, and land. Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the date we take possession of the property. At lease inception, we determine the lease term by assuming the exercise of those renewable options that are reasonably assured. The exercise of lease renewal options is at our sole discretion. The lease term is used to determine whether a lease is capital or operating and is used to calculate straight-line rent expense.
Rent expense under operating leases amounted to
$9.0 million
,
$8.6 million
, and
$11.0 million
in
2017
,
2016
and
2015
, respectively. As of
December 31, 2017
, future minimum lease payments for non-cancelable operating leases totaled $
16.6 million
and are payable as follows: 2018 - $
6.7 million
; 2019 - $
4.5 million
; 2020 - $
3.5 million
; and 2021 - $
1.9 million
. TimkenSteel has no significant lease commitments after 2021.
Note
7
-
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the years ended
December 31, 2017
and
2016
by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Postretirement Liability Adjustments
|
|
Total
|
Balance at December 31, 2015
|
|
($5.0
|
)
|
|
|
($2.9
|
)
|
|
|
($7.9
|
)
|
Other comprehensive loss before reclassifications, before income tax
|
(2.0
|
)
|
|
(0.9
|
)
|
|
(2.9
|
)
|
Amounts reclassified from accumulated other comprehensive loss, before income tax
|
—
|
|
|
1.7
|
|
|
1.7
|
|
Income tax expense
|
—
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
Net current period other comprehensive (loss) income, net of income taxes
|
(2.0
|
)
|
|
0.5
|
|
|
(1.5
|
)
|
Balance as of December 31, 2016
|
|
($7.0
|
)
|
|
|
($2.4
|
)
|
|
|
($9.4
|
)
|
Other comprehensive income before reclassifications, before income tax
|
1.1
|
|
|
—
|
|
|
1.1
|
|
Amounts reclassified from accumulated other comprehensive loss, before income tax
|
—
|
|
|
1.5
|
|
|
1.5
|
|
Income tax expense
|
—
|
|
|
(0.8
|
)
|
|
(0.8
|
)
|
Net current period other comprehensive income, net of income taxes
|
1.1
|
|
|
0.7
|
|
|
1.8
|
|
Balance at December 31, 2017
|
|
($5.9
|
)
|
|
|
($1.7
|
)
|
|
|
($7.6
|
)
|
The amount reclassified from accumulated other comprehensive loss for the pension and postretirement liability adjustment was included in other income (expense), net in the Consolidated Statements of Operations. These accumulated other comprehensive loss components are components of net periodic benefit cost. See
Note 8 - Retirement and Postretirement Plans
for additional information.
Note
8
-
Retirement and Postretirement Plans
Eligible TimkenSteel employees, including certain employees in foreign countries, participate in the following TimkenSteel-sponsored plans: TimkenSteel Corporation Retirement Plan; TimkenSteel Corporation Bargaining Unit Pension Plan, TimkenSteel U.K. Pension Scheme, TimkenSteel Corporation Bargaining Unit Welfare Benefit Plan for Retirees, and TimkenSteel Corporation Welfare Benefit Plan for Retirees.
Pension benefits earned are generally based on years of service and compensation during active employment. TimkenSteel’s funding policy is consistent with the funding requirements of applicable laws and regulations. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for the various asset classes. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets for the defined benefit pension plans as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
Change in benefit obligation:
|
2017
|
2016
|
|
2017
|
2016
|
Benefit obligation at the beginning of year
|
|
$1,220.3
|
|
|
$1,163.5
|
|
|
|
$214.2
|
|
|
$215.3
|
|
Service cost
|
18.2
|
|
15.6
|
|
|
1.6
|
|
1.5
|
|
Interest cost
|
49.1
|
|
52.4
|
|
|
8.4
|
|
9.4
|
|
Actuarial losses
|
65.4
|
|
81.1
|
|
|
13.5
|
|
6.6
|
|
Benefits paid
|
(78.4
|
)
|
(79.1
|
)
|
|
(21.5
|
)
|
(19.5
|
)
|
Plan amendment
|
0.5
|
|
—
|
|
|
—
|
|
0.9
|
|
Foreign currency translation adjustment
|
7.0
|
|
(13.2
|
)
|
|
—
|
|
—
|
|
Benefit obligation at the end of year
|
|
$1,282.1
|
|
|
$1,220.3
|
|
|
|
$216.2
|
|
|
$214.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
Change in plan assets:
|
2017
|
2016
|
|
2017
|
2016
|
Fair value of plan assets at the beginning of year
|
|
$1,131.7
|
|
|
$1,144.3
|
|
|
|
$113.9
|
|
|
$137.9
|
|
Actual return on plan assets
|
123.6
|
|
78.7
|
|
|
9.5
|
|
6.1
|
|
Company contributions / payments
|
2.1
|
|
2.2
|
|
|
2.1
|
|
2.7
|
|
Benefits paid
|
(78.4
|
)
|
(79.1
|
)
|
|
(21.5
|
)
|
(19.5
|
)
|
Reimbursement from postretirement plan assets
|
—
|
|
—
|
|
|
—
|
|
(13.3
|
)
|
Foreign currency translation adjustment
|
7.6
|
|
(14.4
|
)
|
|
—
|
|
—
|
|
Fair value of plan assets at end of year
|
|
$1,186.6
|
|
|
$1,131.7
|
|
|
|
$104.0
|
|
|
$113.9
|
|
Funded status at end of year
|
|
($95.5
|
)
|
|
($88.6
|
)
|
|
|
($112.2
|
)
|
|
($100.3
|
)
|
The TimkenSteel Corporation Retirement Plan (Salaried Plan) has a provision that permits employees to elect to receive their pension benefits in a lump sum. In the third quarter of 2017 and 2016, the cumulative cost of all settlements exceeded the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. The Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan as of September 30, 2017 and 2016
. These settlement losses are included in benefits paid in the tables above and in the net remeasurement losses (gains) as a component of net periodic benefit cost.
In the third quarter of 2016, the Company amended its postretirement benefit plans relating to its non-bargaining retirees, effective January 1, 2017, to provide for the transition of certain Medicare-eligible retirees and their eligible dependents from Company-sponsored group retiree medical coverage to individual health insurance purchased through an insurance company private exchange. This change is reflected in the Change in benefit obligation table as the Plan amendment for $
0.9 million
.
The accumulated benefit obligation at
December 31, 2017
exceeded the fair value of plan assets for
two
of the Company’s pension plans. For these plans, the benefit obligation was $
942.8 million
, the accumulated benefit obligation was $
924.2 million
and the fair value of plan assets was $
832.7 million
as of
December 31, 2017
.
The total pension accumulated benefit obligation for all plans was
$1,254.1 million
and $
1,192.1 million
as of
December 31, 2017
and
2016
, respectively.
Amounts recognized on the balance sheet at
December 31, 2017
and
2016
, for TimkenSteel’s pension and postretirement benefit plans include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
2017
|
2016
|
|
2017
|
2016
|
Non-current assets
|
|
$14.6
|
|
|
$6.2
|
|
|
|
$—
|
|
|
$—
|
|
Current liabilities
|
(9.0
|
)
|
(0.6
|
)
|
|
(2.5
|
)
|
(2.4
|
)
|
Non-current liabilities
|
(101.1
|
)
|
(94.2
|
)
|
|
(109.7
|
)
|
(97.9
|
)
|
|
|
($95.5
|
)
|
|
($88.6
|
)
|
|
|
($112.2
|
)
|
|
($100.3
|
)
|
Included in accumulated other comprehensive loss at
December 31, 2017
and
2016
, were the following before-tax amounts that had not been recognized in net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
2017
|
2016
|
|
2017
|
2016
|
Unrecognized prior service cost
|
|
$1.5
|
|
|
$1.5
|
|
|
|
$1.1
|
|
|
$2.1
|
|
Amounts expected to be amortized from accumulated other comprehensive loss and included in total net periodic benefit cost during the year ended December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
|
|
|
Prior service cost
|
|
$0.5
|
|
|
|
$0.2
|
|
The weighted average assumptions used in determining benefit obligation as of
December 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
Assumptions:
|
2017
|
2016
|
|
2017
|
2016
|
Discount rate
|
3.68
|
%
|
4.17
|
%
|
|
3.66
|
%
|
4.09
|
%
|
Future compensation assumption
|
2.37
|
%
|
3.09
|
%
|
|
n/a
|
|
n/a
|
|
The weighted average assumptions used in determining benefit cost for the years ended
December 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
Assumptions:
|
2017
|
2016
|
|
2017
|
2016
|
Discount rate
|
4.17
|
%
|
4.67
|
%
|
|
4.09
|
%
|
4.51
|
%
|
Future compensation assumption
|
3.09
|
%
|
3.08
|
%
|
|
n/a
|
|
n/a
|
|
Expected long-term return on plan assets
|
6.46
|
%
|
6.46
|
%
|
|
5.00
|
%
|
5.00
|
%
|
The discount rate assumption is based on current rates of high-quality long-term corporate bonds over the same period that benefit payments will be required to be made. The expected rate of return on plan assets assumption is based on the weighted-average expected return on the various asset classes in the plans’ portfolios. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.
For measurement purposes, TimkenSteel assumed a weighted-average annual rate of increase in the per capita cost (health care cost trend rate) of
6.25%
and
6.50%
for
2017
and
2016
, respectively, declining gradually to
5.00%
in 2023 and thereafter for medical and prescription drug benefits, and
8.25%
and
8.50%
for
2017
and
2016
, respectively, declining gradually to
5.00%
in 2031 and thereafter for HMO benefits. A one percentage point increase in the assumed health care cost trend rate would have increased the
2017
and
2016
postretirement benefit obligation by $
1.8 million
and $
1.6 million
, respectively and increased the total service and interest cost components by $
0.1 million
in both the years ended December 31,
2017
and
2016
. A one percentage
point decrease would have decreased the
2017
and
2016
postretirement benefit obligation by $
1.6 million
and $
1.4 million
, respectively and decreased the total service and interest cost components by $
0.1 million
in both the years ended
December 31, 2017
and
2016
.
The components of net periodic benefit cost for the years ended
December 31, 2017
,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
Years Ended December 31,
|
|
Years Ended December 31,
|
Components of net periodic benefit cost:
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Service cost
|
|
$18.2
|
|
|
|
$15.6
|
|
|
|
$16.8
|
|
|
|
$1.6
|
|
|
|
$1.5
|
|
|
|
$1.7
|
|
Interest cost
|
49.1
|
|
|
52.4
|
|
|
51.3
|
|
|
8.4
|
|
|
9.4
|
|
|
9.4
|
|
Expected return on plan assets
|
(70.7
|
)
|
|
(71.1
|
)
|
|
(82.8
|
)
|
|
(5.2
|
)
|
|
(5.8
|
)
|
|
(7.1
|
)
|
Amortization of prior service cost
|
0.5
|
|
|
0.6
|
|
|
0.6
|
|
|
1.0
|
|
|
1.1
|
|
|
1.1
|
|
Net remeasurement losses (gains)
|
12.5
|
|
|
73.4
|
|
|
5.7
|
|
|
9.3
|
|
|
6.3
|
|
|
(12.2
|
)
|
Net Periodic Benefit Cost
|
|
$9.6
|
|
|
|
$70.9
|
|
|
|
($8.4
|
)
|
|
|
$15.1
|
|
|
|
$12.5
|
|
|
|
($7.1
|
)
|
TimkenSteel recognizes its overall responsibility to ensure that the assets of its various defined benefit pension plans are managed effectively and prudently and in compliance with its policy guidelines and all applicable laws. Preservation of capital is important; however, TimkenSteel also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the pension funds. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes. The expected rate of return for the investment portfolios is based on expected rates of return for various asset classes, as well as historical asset class and fund performance. The target allocations for plan assets are
15%
equity securities,
60%
debt securities and
25%
in all other types of investments.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
|
|
Level 1 -
|
Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2 -
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
|
|
|
Level 3 -
|
Unobservable inputs for the asset or liability.
|
The following table presents the fair value hierarchy for those investments of TimkenSteel’s pension assets measured at fair value on a recurring basis as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$19.6
|
|
|
$4.5
|
|
|
$15.1
|
|
|
$—
|
|
U.S government and agency securities
|
240.7
|
|
234.6
|
|
6.1
|
|
—
|
|
Corporate bonds
|
110.0
|
|
—
|
|
110.0
|
|
—
|
|
Equity securities
|
50.8
|
|
50.8
|
|
—
|
|
—
|
|
Mutual fund - fixed income
|
35.2
|
|
35.2
|
|
—
|
|
—
|
|
Mutual fund - real estate
|
16.5
|
|
16.5
|
|
—
|
|
—
|
|
Total Assets in the fair value hierarchy
|
|
$472.8
|
|
|
$341.6
|
|
|
$131.2
|
|
|
$—
|
|
Assets measured at net asset value
(1)
|
713.8
|
|
—
|
|
—
|
|
—
|
|
Total Assets
|
|
$1,186.6
|
|
|
$341.6
|
|
|
$131.2
|
|
|
$—
|
|
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, hedge funds, and risk parity investments. As of
December 31, 2017
, these assets are redeemable at net asset value within
90
days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s pension assets measured at fair value on a recurring basis as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$45.2
|
|
|
$4.6
|
|
|
$40.6
|
|
|
$—
|
|
U.S government and agency securities
|
220.3
|
|
214.2
|
|
6.1
|
|
—
|
|
Corporate bonds
|
105.2
|
|
—
|
|
105.2
|
|
—
|
|
Equity securities
|
52.2
|
|
52.2
|
|
—
|
|
—
|
|
Mutual fund - equity
|
15.3
|
|
—
|
|
15.3
|
|
—
|
|
Mutual fund - real estate
|
24.8
|
|
24.8
|
|
—
|
|
—
|
|
Total Assets in the fair value hierarchy
|
|
$463.0
|
|
|
$295.8
|
|
|
$167.2
|
|
|
$—
|
|
Assets measured at net asset value
(1)
|
668.7
|
|
—
|
|
—
|
|
—
|
|
Total Assets
|
|
$1,131.7
|
|
|
$295.8
|
|
|
$167.2
|
|
|
$—
|
|
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, and risk parity investments. As of
December 31, 2016
, these assets were redeemable at net asset value within
90
days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s postretirement assets measured at fair value on a recurring basis as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$2.2
|
|
|
$2.2
|
|
|
$—
|
|
|
$—
|
|
Mutual fund - fixed income
|
11.4
|
|
11.4
|
|
—
|
|
—
|
|
Total Assets in the fair value hierarchy
|
|
$13.6
|
|
|
$13.6
|
|
|
$—
|
|
|
$—
|
|
Assets measured at net asset value
(1)
|
90.4
|
|
—
|
|
—
|
|
—
|
|
Total Assets
|
|
$104.0
|
|
|
$13.6
|
|
|
$—
|
|
|
$—
|
|
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, hedge funds, and risk parity investments. As of
December 31, 2017
, these assets are redeemable at net asset value within
90
days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s postretirement assets measured at fair value on a recurring basis as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$1.4
|
|
|
$1.4
|
|
|
$—
|
|
|
$—
|
|
Total Assets in the fair value hierarchy
|
|
$1.4
|
|
|
$1.4
|
|
|
$—
|
|
|
$—
|
|
Assets measured at net asset value
(1)
|
112.5
|
|
—
|
|
—
|
|
—
|
|
Total Assets
|
|
$113.9
|
|
|
$1.4
|
|
|
$—
|
|
|
$—
|
|
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, and risk parity investments. As of
December 31, 2016
, these assets were redeemable at net asset value within
90
days.
Future benefit payments are expected to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
Benefit Payments:
|
Pension
|
|
Gross
|
|
Medicare Part D Subsidy Receipts
|
2018
|
|
$87.2
|
|
|
|
$20.1
|
|
|
|
$0.8
|
|
2019
|
78.0
|
|
|
19.5
|
|
|
0.8
|
|
2020
|
78.5
|
|
|
18.7
|
|
|
0.9
|
|
2021
|
77.3
|
|
|
17.9
|
|
|
0.9
|
|
2022
|
81.7
|
|
|
17.2
|
|
|
1.0
|
|
2023-2027
|
369.9
|
|
|
75.5
|
|
|
5.3
|
|
The Company expects to make contributions to its U.K. pension plan in 2018 and 2019 of approximately $
1.5 million
in each year.
Defined Contribution Plans
The Company recorded expense primarily related to employer matching contributions to these defined contribution plans of $
5.4 million
in 2017, $
4.6 million
in 2016, and $
5.8 million
in 2015.
Note
9
-
Earnings Per Share
Basic loss per share is computed based upon the weighted average number of common shares outstanding. Diluted loss per share are computed based upon the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the treasury stock method or if-converted method. For the Convertible Notes, the Company utilizes the if-converted method to calculate diluted loss per share. Under the if-converted method, the Company adjusts net earnings to add back interest expense (including amortization of debt discount) recognized on the Convertible Notes and includes the number of shares potentially issuable related to the Convertible Notes in the weighted average shares outstanding. Treasury stock is excluded from the denominator in calculating both basic and diluted loss per share.
For the years ended
December 31, 2017
,
2016
and
2015
,
3.1 million
,
2.8 million
and
2.0 million
shares issuable for equity-based awards, respectively, were excluded from the computation of diluted loss per share because the effect of their inclusion would have been anti-dilutive. In periods in which a net loss has occurred, as is the case for years ended December 31, 2017, 2016 and 2015, the dilutive effect of equity-based awards is not recognized and thus not utilized in the calculation of diluted loss per share, because the effect of their inclusion would have been anti-dilutive. The shares potentially issuable of
6.9 million
, related to the Convertible Notes, were also anti-dilutive for the years ended December 31, 2017 and 2016, respectively.
The following table sets forth the reconciliation of the numerator and the denominator of basic loss per share and diluted loss per share for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
Net loss for basic and diluted earnings per share
|
|
($43.8
|
)
|
|
|
($105.5
|
)
|
|
|
($45.0
|
)
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
44.4
|
|
|
44.2
|
|
|
44.5
|
|
Weighted average shares outstanding, diluted
|
44.4
|
|
|
44.2
|
|
|
44.5
|
|
|
|
|
|
|
|
Basic loss per share
|
|
($0.99
|
)
|
|
|
($2.39
|
)
|
|
|
($1.01
|
)
|
Diluted loss per share
|
|
($0.99
|
)
|
|
|
($2.39
|
)
|
|
|
($1.01
|
)
|
Note
10
-
Stock-Based Compensation
Description of the Plan
On April 28, 2016, shareholders of TimkenSteel approved the amendment and restatement of the TimkenSteel Corporation 2014 Equity and Incentive Compensation Plan to, among other matters, increase the number of shares available for awards and to adjust the fungible share adjustment factor going forward. The TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan is referred to herein as the TimkenSteel 2014 Plan.
The TimkenSteel 2014 Plan authorizes the Compensation Committee of the TimkenSteel Board of Directors to grant non-qualified or incentive stock options, stock appreciation rights, stock awards (including restricted shares, restricted share unit awards, performance shares, performance units, deferred shares and common shares) and cash awards to TimkenSteel employees and non-employee directors. No more than
11.05 million
TimkenSteel common shares may be delivered under the TimkenSteel 2014 Plan. The TimkenSteel 2014 Plan contains fungible share counting mechanics, which generally means that awards other than stock options and stock appreciation rights will be counted against the aggregate share limit as
2.50
common shares for every one common share that is actually issued or transferred under such awards. The TimkenSteel 2014 Plan authorized up to
3.0 million
common shares for use in granting “replacement awards” to current holders of The Timken Company equity awards under The Timken Company’s equity compensation plans at the time of the spinoff.
As of
December 31, 2017
, approximately
5.1 million
shares of TimkenSteel common stock remained available for grants under the TimkenSteel 2014 Plan.
In connection with the spinoff, stock compensation awards granted under the The Timken Company LTIP Plan and the The Timken Company 2011 Plan were adjusted as follows:
|
|
•
|
Vested and unvested stock options were adjusted so that the grantee holds options to purchase both The Timken Company and TimkenSteel common shares.
|
|
|
•
|
The adjustment to the The Timken Company and TimkenSteel stock options, when combined, were intended to generally preserve the intrinsic value of each original option grant and the ratio of the exercise price to the fair market value of The Timken Company common shares on June 30, 2014.
|
|
|
•
|
Unvested restricted stock awards were replaced with adjusted, substitute awards for restricted shares or units, as applicable, of The Timken Company and TimkenSteel common shares. The new awards of restricted stock were intended to generally preserve the intrinsic value of the original award determined as of June 30, 2014.
|
|
|
•
|
Vesting periods of awards were unaffected by the adjustment and substitution.
|
Awards granted in connection with the adjustment of awards originally issued under the The Timken Company LTIP Plan and the Timken 2011 Plan are referred to as replacement awards under the TimkenSteel 2014 Plan and, as noted above, reduce the maximum number of TimkenSteel common shares available for delivery under the TimkenSteel 2014 Plan. TimkenSteel records compensation expense for both TimkenSteel and The Timken Company common shares for awards held by TimkenSteel employees only.
As discussed in Note 2 - Significant Accounting Policies, TimkenSteel early adopted Accounting Standards Update (ASU) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” in the fourth quarter of 2016, with the effect recorded as of January 1, 2016. Under ASU 2016-09, TimkenSteel recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the Consolidated Statements of Operations.
The following table provides the significant assumptions used to calculate the grant date fair market values of options granted using a Black-Scholes option pricing method:
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Weighted-average fair value per option
|
$7.68
|
|
$3.32
|
|
$11.21
|
Risk-free interest rate
|
2.21%
|
|
1.34%
|
|
1.47%
|
Dividend yield
|
—%
|
|
—%
|
|
1.93%
|
Expected stock volatility
|
43.23%
|
|
41.71%
|
|
47.10%
|
Expected life - years
|
6
|
|
6
|
|
6
|
The expected life of stock option awards granted is based on historical data and represents the period of time that options granted are expected to be held prior to exercise. Because of the absence of adequate stock price history of TimkenSteel common stock, expected volatility related to stock option awards granted subsequent to the spinoff is based on the historical volatility of a selected group of peer companies’ stock. Prior to the spinoff, volatility was calculated using the historical volatility of The Timken Company stock. Expected annual dividends per share are estimated using the most recent dividend payment per share as of the grant date. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The following summarizes TimkenSteel stock option activity from January 1,
2017
to
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Term
|
Aggregate Intrinsic Value (millions)
|
Outstanding as of December 31, 2016
|
2,219,397
|
|
|
$22.64
|
|
|
|
Granted
|
353,808
|
|
|
$17.46
|
|
|
|
Exercised
|
(38,592
|
)
|
|
$8.94
|
|
|
|
Canceled, forfeited or expired
|
(196,258
|
)
|
|
$23.34
|
|
|
|
Outstanding as of December 31, 2017
|
2,338,355
|
|
|
$22.03
|
|
6.00
|
$4.9
|
Options expected to vest
|
944,403
|
|
|
$15.00
|
|
8.25
|
$3.5
|
Options exercisable
|
1,393,952
|
|
|
$26.80
|
|
4.47
|
$1.4
|
Stock options presented in this table represent TimkenSteel awards only, including those held by The Timken Company employees.
For stock options exercised during the period of January 1, 2017 to December 31, 2017, the total intrinsic value was $
0.4 million
with cash proceeds of $
0.2 million
. There was
no
tax benefit associated with these stock option exercises.
The following summarizes TimkenSteel stock-settled restricted share award activity from January 1,
2017
to
December 31, 2017
:
|
|
|
|
|
|
|
|
Number of Shares
|
Weighted Average Grant Date Fair Value
|
Outstanding as of December 31, 2016
|
696,153
|
|
|
$17.57
|
|
Granted
|
323,132
|
|
|
$16.92
|
|
Vested
|
(286,732
|
)
|
|
$23.97
|
|
Canceled, forfeited or expired
|
(18,237
|
)
|
|
$24.53
|
|
Outstanding as of December 31, 2017
|
714,316
|
|
|
$14.53
|
|
Restricted share awards presented in this table represent TimkenSteel awards only, including those held by The Timken Company employees.
TimkenSteel recognized stock-based compensation expense of $
6.5 million
($
6.5 million
after tax), $
6.7 million
($
4.2 million
after tax) and $
7.0 million
($
4.3 million
after tax) for the years ended
December 31, 2017
,
2016
and
2015
, respectively, related to stock option awards and stock-settled restricted share awards.
Outstanding restricted share awards include restricted shares, restricted stock units, performance-based restricted stock units and deferred shares that will settle in common shares. Outstanding restricted shares and restricted stock units generally cliff-vest after
three
years or vest in
25%
increments annually beginning on the first anniversary of the date of grant. Performance-based restricted stock units vest based on achievement of specified performance objectives.
As of
December 31, 2017
, unrecognized compensation cost related to stock option awards and stock-settled restricted shares and restricted stock units was $
8.1 million
, which is expected to be recognized over a weighted average period of
1.5
years. The calculations of unamortized expense and weighted-average periods include awards based on both TimkenSteel and The Timken Company stock awards held by TimkenSteel employees.
Certain restricted stock units, including performance-based restricted stock units, are settled in cash and were adjusted and substituted as described above. TimkenSteel accrued $
0.7 million
and $
0.8 million
as of
December 31, 2017
and
2016
, respectively, which was included in salaries, wages and benefits, and other non-current liabilities on the Consolidated Balance Sheets. TimkenSteel paid $
5.1 million
and $
1.0 million
for cash-settled restricted stock units during
2017
and
2016
, respectively.
Note
11
-
Segment Information
TimkenSteel manufactures alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately
2 million
tons and shipment capacity of
1.5 million
tons. TimkenSteel’s portfolio includes SBQ bars, seamless mechanical tubing (tubes), value-add solutions such as precision steel components, and billets. In addition, TimkenSteel supplies machining and thermal treatment services, as well as manages raw material recycling programs, which are used as a feeder system for the Company’s melt operations. The Company’s products and services are used in a diverse range of demanding applications in the following market sectors: oil and gas; oil country tubular goods; automotive; industrial equipment; mining; construction; rail; aerospace and defense; heavy truck; agriculture; and power generation.
The SBQ bars, tubes and billet production processes take place at the Company’s Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets that the Company produces and includes three manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. TimkenSteel’s value-add solutions production processes take place at three downstream manufacturing facilities: TimkenSteel Material Services, Tryon Peak, and St. Clair. Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of the Company’s market sectors. As a result, investments in the Company’s facilities and resource allocation decisions affecting the Company’s operations are designed to benefit the overall business of the Company, not any specific aspect of the business.
Effective January 1, 2016, TimkenSteel eliminated its segment reporting as a result of organizational changes made in the second half of 2015, to reflect the integrated nature of the Company’s business as described above. These organizational changes were made to better align resources to support the business strategy of operating in a leaner, more efficient environment. Specifically, the Company has centralized its customer-facing activities under one leadership role and eliminated the former
two
segment operating structure. Since that change, the Company is organized in a centralized manner based on functionality. As a result, TimkenSteel conducts its business activities and reports financial results as
one
business segment.
The presentation of financial results as
one
reportable segment is consistent with the way the Company operates its business under the realigned organization and is consistent with the manner in which the Chief Operating Decision Maker (CODM) evaluates performance and makes resource and operating decisions for the business as described above. Furthermore the Company notes that monitoring financial results as
one
reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of the operations.
Geographic Information
Net sales by geographic area are reported by the country in which the customer is domiciled. Long-lived assets include property, plant and equipment and intangible assets subject to amortization. Long-lived assets by geographic area are reported by the location of the TimkenSteel operations to which the asset is attributed.
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
Net Sales:
|
|
|
|
United States
|
|
$1,207.7
|
|
|
|
$763.4
|
|
Foreign
|
121.5
|
|
|
106.1
|
|
|
|
$1,329.2
|
|
|
|
$869.5
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
2016
|
Long-lived Assets, net:
|
|
|
United States
|
|
$726.4
|
|
|
$766.6
|
|
Foreign
|
0.2
|
|
0.3
|
|
|
|
$726.6
|
|
|
$766.9
|
|
Note
12
-
Income Tax Provision
Loss from operations before income taxes, based on geographic location of the operations to which such earnings are attributable, is provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
United States
|
|
($49.5
|
)
|
|
|
($136.2
|
)
|
|
|
($82.2
|
)
|
Non-United States
|
7.2
|
|
|
(5.8
|
)
|
|
10.5
|
|
Loss income from operations before income taxes
|
|
($42.3
|
)
|
|
|
($142.0
|
)
|
|
|
($71.7
|
)
|
The provision (benefit) for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
|
$1.1
|
|
|
|
$—
|
|
|
|
$—
|
|
State and local
|
0.1
|
|
|
0.1
|
|
|
(1.2
|
)
|
Foreign
|
0.6
|
|
|
0.2
|
|
|
0.1
|
|
|
|
$1.8
|
|
|
|
$0.3
|
|
|
|
($1.1
|
)
|
Deferred:
|
|
|
|
|
|
Federal
|
|
($0.4
|
)
|
|
|
($32.9
|
)
|
|
|
($28.7
|
)
|
State and local
|
—
|
|
|
(3.6
|
)
|
|
0.2
|
|
Foreign
|
0.1
|
|
|
(0.3
|
)
|
|
2.9
|
|
|
(0.3
|
)
|
|
(36.8
|
)
|
|
(25.6
|
)
|
U.S. and foreign tax expense (benefit) on loss from operations before income taxes
|
|
$1.5
|
|
|
|
($36.5
|
)
|
|
|
($26.7
|
)
|
For the year ended
December 31, 2017
, TimkenSteel made $
0.4 million
in foreign tax payments,
no
U.S. federal and state tax payments, and had $
0.4 million
of refundable overpayments of state income taxes. For the year ended
December 31, 2016
, TimkenSteel made $
0.2
million in foreign tax payments,
no
U.S. federal and state tax payments, and had $
0.5 million
of refundable overpayments of state income taxes. The Company recorded these receivables as a component of prepaid expenses on the Consolidated Balance Sheets.
The reconciliation between TimkenSteel’s effective tax rate on loss from continuing operations and the statutory tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Tax at the U.S. federal statutory rate
|
|
($14.8
|
)
|
|
|
($49.7
|
)
|
|
|
($25.2
|
)
|
Adjustments:
|
|
|
|
|
|
State and local income taxes, net of federal tax benefit
|
(0.7
|
)
|
|
(3.5
|
)
|
|
(2.2
|
)
|
Foreign earnings taxed at different rates
|
(0.2
|
)
|
|
(0.1
|
)
|
|
—
|
|
U.S. research tax credit
|
(0.2
|
)
|
|
(0.4
|
)
|
|
(0.5
|
)
|
Valuation allowance
|
6.3
|
|
|
15.6
|
|
|
—
|
|
Tax Reform impact - transition tax and rate change
|
10.2
|
|
|
—
|
|
|
—
|
|
Other items, net
|
0.9
|
|
|
1.6
|
|
|
1.2
|
|
Provision (benefit) for income taxes
|
|
$1.5
|
|
|
|
($36.5
|
)
|
|
|
($26.7
|
)
|
Effective income tax rate
|
(3.7
|
)%
|
|
25.7
|
%
|
|
37.2
|
%
|
Income tax expense includes U.S. and international income taxes. Except as required under U.S. tax law, U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the U.S. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. Undistributed earnings of foreign subsidiaries outside of the U.S. were $
2.9 million
, $
1.6 million
and $
1.6 million
at
December 31, 2017
,
2016
and
2015
, respectively. The 2017 earnings amounts were recognized through the transition tax calculation pursuant to the Tax and Jobs Act enacted in December 2017. The Company recognized a deferred tax liability in the amount of $
0.3 million
during 2017 for current-year earnings at its TimkenSteel (Shanghai) Corporation Limited and TimkenSteel de Mexico S. de R.L. de C.V. subsidiaries, as those earnings are not permanently reinvested by the Company.
The effect of temporary differences giving rise to deferred tax assets and liabilities at
December 31, 2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation
|
|
($103.4
|
)
|
|
|
($156.8
|
)
|
Inventory
|
|
($5.4
|
)
|
|
|
($9.7
|
)
|
Convertible debt
|
|
($3.5
|
)
|
|
|
($6.6
|
)
|
Other, net
|
|
($0.3
|
)
|
|
|
($0.2
|
)
|
Deferred tax liabilities subtotal
|
|
($112.6
|
)
|
|
|
($173.3
|
)
|
|
|
|
|
Deferred tax assets:
|
|
|
|
Pension and postretirement benefits
|
|
$50.6
|
|
|
|
$70.3
|
|
Other employee benefit accruals
|
6.6
|
|
|
9.1
|
|
Tax loss carryforwards
|
80.9
|
|
|
107.4
|
|
Foreign tax credit
|
0.6
|
|
|
—
|
|
Intangible assets
|
1.4
|
|
|
2.5
|
|
Inventory
|
1.8
|
|
|
2.9
|
|
State decoupling
|
5.4
|
|
|
0.5
|
|
Other, net
|
2.0
|
|
|
5.3
|
|
Deferred tax assets subtotal
|
|
$149.3
|
|
|
|
$198.0
|
|
Valuation allowances
|
(36.6
|
)
|
|
(24.4
|
)
|
Deferred tax assets
|
112.7
|
|
|
173.6
|
|
Net deferred tax assets
|
|
$0.1
|
|
|
|
$0.3
|
|
As of
December 31, 2017
, The Company had a deferred tax asset of $
0.4 million
recorded as a component of other non-current assets and a deferred tax liability of $
0.3 million
recorded as a component of non-current liabilities, netted to a deferred tax asset of $
0.1 million
, on the Consolidated Balance Sheets.
As of
December 31, 2017
, TimkenSteel had loss carryforwards in the U.S. and various non-U.S. jurisdictions totaling
$335 million
having various expirations dates. TimkenSteel has provided valuation allowances of $
36.6 million
against these carryforwards. The majority of the non-U.S. loss carryforwards represent local country net operating losses for branches of TimkenSteel or entities treated as branches of TimkenSteel under U.S. tax law. Tax benefits have been recorded for these losses in the U.S. The related local country net operating loss carryforwards are offset fully by valuation allowances.
Operating losses generated in the U.S. resulted in a decrease in the carrying value of our U.S. deferred tax liability to the point of a net U.S. deferred tax asset at December 31, 2016. At that time, we assessed, based upon operating performance in the U.S. and industry conditions that it was more likely than not we would not realize a portion of our U.S. deferred tax assets. The Company recorded a valuation allowance in 2016 and remained in a valuation allowance position in 2017. Going forward, the need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s effective tax rate. The Company will maintain a valuation allowance against its deferred tax assets in the U.S. and applicable foreign countries until sufficient positive evidence exists to eliminate them.
TimkenSteel records interest and penalties related to uncertain tax positions as a component of provision (benefit) for income taxes. As of December 31, 2017, 2016, and 2015 TimkenSteel had
no
total gross unrecognized tax benefits, and
no
amounts which represented unrecognized tax benefits that would favorably impact TimkenSteel’s effective income tax rate in any future periods if such benefits were recognized. As of December 31, 2017, TimkenSteel does not anticipate a change in its unrecognized tax positions during the next 12 months. TimkenSteel had
no
accrued interest and penalties related to uncertain tax positions as of December 31, 2017, 2016, and 2015.
The reconciliation of TimkenSteel’s total gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance, January 1
|
|
$—
|
|
|
|
$—
|
|
|
|
$—
|
|
Tax positions related to prior years:
|
|
|
|
|
|
Reductions
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance, December 31
|
|
$—
|
|
|
|
$—
|
|
|
|
$—
|
|
As of
December 31, 2017
, TimkenSteel is subject to examination by the IRS for the period June 30, 2014 through December 31, 2017. TimkenSteel also is subject to tax examination in various tax jurisdictions, including Mexico, China, Poland, Singapore, and the U.K. for the period June 30, 2014 through December 31, 2017. Pursuant to the Tax Sharing Agreement dated June 30, 2014 between TimkenSteel and The Timken Company, TimkenSteel may be subject to results from tax examinations for The Timken Company related to steel business activities, for federal, state and local and various foreign tax jurisdictions in various open audit periods.
Tax Cuts and Jobs Act Bill
On December 22, 2017, the Tax Cut and Jobs Act (the Act) was signed into law, which resulted in significant changes to U.S. tax and related laws. Some of the provisions of the Act affecting corporations include, but are not limited to reducing the federal corporate income tax rate from 35% to 21%, limiting the interest expense deduction, expensing of cost of acquired qualified property and eliminating the domestic production activities deduction. We are currently evaluating the impact the Act will have on our financial condition and results of operations. At this time, we do not anticipate a significant reduction in our effective income tax rate or our net deferred federal income tax assets as a result of the income tax rate reduction, as we expect to be in a valuation allowance in 2018. The company estimates, based on currently available information, that the enactment of the Act will not result in any one-time (net of any required repatriation taxes) non-cash tax impact in the fourth quarter of 2017, primarily due to the fact that the company is in a valuation allowance position.
Other provisions of the Act include a new minimum tax on certain foreign earnings, the Global Intangibles Low-taxed Income, a new tax on certain payments to foreign related parties, the Base Erosion Anti-avoidance Tax, a new incentive for Foreign-derived Intangibles Income, changes to the limitation on the deductibility of certain executive compensation, and new limitations on the deductibility of interest expense. Generally, these other provisions take effect for the Company in the year ending December 31, 2018. On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118). This guidance allows registrants a “measurement period,” not to exceed one year from the date of enactment, to complete their accounting for the tax effects of the Act. SAB 118 further directs that, during the measurement period, registrants that are able to make reasonable estimates of the tax effects of the Act should include those amounts in their financial statements as “provisional” amounts. Registrants should reflect adjustments over subsequent periods as they are able to refine their estimates and complete their accounting for the tax effects of the Act. The tax effects related to the Act described in the paragraph above represent the Company’s reasonable estimates within the meaning of SAB 118. Also, it is expected that the U.S. Treasury will issue regulations and other guidance on the application of certain provisions of the Act. In subsequent periods, but within the measurement period, the Company will analyze that guidance and other necessary information.
Note
13
-
Contingencies
TimkenSteel has a number of loss exposures incurred in the ordinary course of business, such as environmental claims, product warranty claims, and litigation. Establishing loss reserves for these matters requires management’s estimate and judgment regarding 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. As of December 31,
2017
and
2016
, TimkenSteel had a $
0.9 million
and a $
0.2 million
contingency reserve, respectively, related to loss exposures incurred in the ordinary course of business.
Environmental Matters
From time to time, TimkenSteel may be a party to lawsuits, claims or other proceedings related to environmental matters and/or may receive notices of potential violations of environmental laws and regulations from the U.S. Environmental Protection Agency (EPA) and similar state or local authorities. TimkenSteel recorded reserves for such environmental matters as other current and non-current liabilities on the Consolidated Balance Sheets. Accruals related to such environmental matters represent management’s best estimate of the fees and costs associated with these matters. Although it is not possible to predict with certainty the outcome of such matters, management believes that their ultimate dispositions should not have a material adverse effect on TimkenSteel’s financial position, cash flows, or results of operations.
The following summarizes TimkenSteel contingency reserves and activity related to EPA matters from January 1, 2016 to
December 31, 2017
:
|
|
|
|
|
Beginning balance, January 1, 2016
|
|
$0.8
|
|
Expenses
|
—
|
|
Payments
|
(0.2
|
)
|
Ending balance, December 31, 2016
|
|
$0.6
|
|
Expenses
|
0.2
|
|
Payments
|
(0.3
|
)
|
Ending balance, December 31, 2017
|
|
$0.5
|
|
Note
14
-
Restructuring Charges
TimkenSteel did not recognize restructuring charges for the year ended December 31,
2017
. For the year ended December 31,
2016
, TimkenSteel did recognize $
0.3 million
in restructuring charges, due to a reduction plan in salaried and hourly employees. TimkenSteel recorded reserves for such restructuring charges as other current liabilities on the Consolidated Balance Sheets.
The following is a roll forward of the consolidated restructuring accrual for the years ended
December 31, 2017
and
2016
:
|
|
|
|
|
Beginning balance, January 1, 2016
|
|
$2.3
|
|
Expenses
|
0.3
|
|
Payments
|
(2.5
|
)
|
Ending balance, December 31, 2016
|
|
$0.1
|
|
Expenses
|
—
|
|
Payments
|
(0.1
|
)
|
Ending balance, December 31, 2017
|
|
$—
|
|
Note
15
-
Relationships with The Timken Company and Related Entities
Prior to the spinoff on June 30, 2014, TimkenSteel was managed and operated in the normal course of business with other affiliates of The Timken Company. Transactions between The Timken Company and TimkenSteel, with the exception of sale and purchase transactions and reimbursements for payments made to third-party service providers by The Timken Company on TimkenSteel’s behalf, are reflected in equity in the Consolidated Balance Sheets as net parent investment and in the Consolidated Statements of Cash Flows as a financing activity in net transfers (to)/from The Timken Company and affiliates.
Transactions with Other Timken Businesses
TimkenSteel sold finished goods to The Timken Company. During the years ended
December 31, 2017
,
2016
and
2015
, revenues from related-party sales of products totaled
$48.5 million
or
3.6%
of net sales, $
32.7 million
, or
3.8%
of net sales, and
46.5 million
or
4.2%
of net sales, respectively.
TimkenSteel did not purchase material from The Timken Company during the year ending December 31, 2017 as well as the year ending December 31, 2016. TimkenSteel purchased less than $
1.0 million
during the year ended December 31, 2015. In addition, certain of TimkenSteel’s third-party service providers were paid by The Timken Company on behalf of TimkenSteel. TimkenSteel would subsequently reimburse The Timken Company in cash for such payments.
Material Agreements Between TimkenSteel and The Timken Company
On June 30, 2014, TimkenSteel entered into a separation and distribution agreement and several other agreements with The Timken Company to affect the spinoff and to provide a framework for the relationship with The Timken Company. These agreements govern the relationship between TimkenSteel and The Timken Company subsequent to the completion of the spinoff and provide for the allocation between TimkenSteel and The Timken Company of assets, liabilities and obligations attributable to periods prior to the spinoff. Because these agreements were entered into in the context of a related party transaction, the terms may not be comparable to terms that would be obtained in a transaction between unaffiliated parties.
Separation and Distribution Agreement
— The separation and distribution agreement contains the key provisions relating to the spinoff, including provisions relating to the principal intercompany transactions required to effect the spinoff, the conditions to the spinoff and provisions governing the relationships between TimkenSteel and The Timken Company after the spinoff.
Tax Sharing Agreement
— The tax sharing agreement generally governs TimkenSteel’s and The Timken Company’s respective rights, responsibilities and obligations after the spinoff with respect to taxes for any tax period ending on or before the distribution date, as well as tax periods beginning before and ending after the distribution date. Generally, TimkenSteel is liable for all pre-distribution U.S. federal income taxes, foreign income taxes and non-income taxes attributable to TimkenSteel’s business, and all other taxes attributable to TimkenSteel, paid after the distribution. In addition, the tax sharing agreement addresses the allocation of liability for taxes that are incurred as a result of restructuring activities undertaken to effectuate the distribution. The tax sharing agreement also provides that TimkenSteel is liable for taxes incurred by The Timken Company that arise as a result of TimkenSteel’s taking or failing to take, as the case may be, certain actions that result in the distribution failing to meet the requirements of a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended.
Employee Matters Agreement
— TimkenSteel entered into an employee matters agreement with The Timken Company, which generally provides that TimkenSteel and The Timken Company each has responsibility for its own employees and compensation plans, subject to certain exceptions as described in the agreement. In general, prior to the spinoff, TimkenSteel employees participated in various retirement, health and welfare, and other employee benefit and compensation plans maintained by The Timken Company. Following the spinoff (or earlier, in the case of the tax-qualified defined benefit plans and retiree medical plans), pursuant to the employee matters agreement, TimkenSteel employees and former employees generally participate in similar plans and arrangements established and maintained by TimkenSteel. The employee matters agreement provides for the bifurcation of equity awards as described in
Note 10 - Stock-Based Compensation
. Among other things, the employee matters agreement also provides for TimkenSteel’s assumption of certain employment-related contracts that its employees originally entered into with The Timken Company, the allocation of certain employee liabilities and the cooperation between TimkenSteel and The Timken Company in the sharing of employee information.
Note
16
-
Subsequent Events
On January 23, 2018, the Company redeemed in full
$12.2 million
of Ohio Water Development Revenue Refunding Bonds (originally due on November 1, 2025),
$9.5 million
of Ohio Air Quality Development Revenue Refunding Bonds (originally due on November 1, 2025) and
$8.5 million
of Ohio Pollution Control Revenue Refunding Bonds (originally due on June 1, 2033).
On January 26, 2018, the Company entered into the Amended Credit Agreement, which amends and restates the Company’s existing Credit Agreement. The Amended Credit Agreement provides for a $
300.0 million
asset-based revolving credit facility, including a $
15.0 million
sublimit for the issuance of commercial and standby letters of credit and a $
30.0 million
sublimit for swingline loans. Pursuant to the terms of the Amended Credit Agreement, the Company is entitled, on up to
two
occasions and subject to the satisfaction of certain conditions, to request increases in the commitments under the Amended Credit Agreement in the aggregate principal amount of up to $
50.0 million
, to the extent that existing or new lenders agree to provide such additional commitments.
The availability of borrowings under the Amended Credit Agreement is subject to a borrowing base calculation based upon a valuation of the eligible accounts receivable, inventory and machinery and equipment of the Company and the Subsidiary Guarantors, each multiplied by an applicable advance rate. The availability of borrowings may be further modified by reserves established from time to time by the Administrative Agent in its permitted discretion.
The interest rate per annum applicable to loans under the Amended Credit Agreement will be, at the Company’s option, equal to either (i) the alternate base rate plus the applicable margin or (ii) the relevant adjusted LIBO rate for an interest period of one, two, three or six months (as selected by the Company) plus the applicable margin. The base rate will be a fluctuating rate per annum equal to the greatest of (i) the prime rate of the Administrative Agent, (ii) the effective Federal Reserve Bank of New York rate plus
0.50%
and (iii) the adjusted LIBO rate for a one-month interest period on the applicable date, plus
1.00%
. The adjusted LIBO rate will be equal to the applicable London interbank offered rate for the selected interest period, as adjusted for statutory reserve requirements for eurocurrency liabilities. The applicable margin will be determined by a pricing grid based on the Company’s average quarterly availability. In addition, the Company will pay a commitment fee on the average daily unused amount of the credit facility in a percentage determined by the Company’s average daily availability for the most recently completed calendar month.
The proceeds of the credit facility will be used to finance working capital, capital expenditures, certain permitted acquisitions and other general corporate purposes. All of the indebtedness under the Amended Credit Agreement is guaranteed by the Company’s material domestic subsidiaries, as well as any other domestic subsidiary the Company elects to make a party to the Amended Credit Agreement, and is secured by substantially all of the personal property of the Company and the Subsidiary Guarantors.
The Amended Credit Agreement matures on January 26, 2023. Prior to the maturity date, amounts outstanding are required to be repaid (without reduction of the commitments thereunder) from mandatory prepayment events from the proceeds of certain asset sales, equity or debt issuances or casualty events.
The Amended Credit Agreement contains certain customary covenants, including covenants that limit the ability of the Company and its subsidiaries to, among other things, (i) incur or suffer to exist certain liens, (ii) make investments, (iii) incur or guaranty additional indebtedness, (iv) enter into consolidations, mergers, acquisitions, sale-leaseback transactions and sales of assets, (v) make distributions and other restricted payments, (vi) change the nature of its business, (vii) engage in transactions with affiliates and (viii) enter into restrictive agreements, including agreements that restrict the ability to incur liens or make distributions.
In addition, the Amended Credit Agreement requires the Company to (i) unless certain conditions are met, maintain certain minimum liquidity as specified in the Amended Credit Agreement during the period commencing on March 1, 2021 and ending on June 1, 2021 and (ii) maintain a minimum specified fixed charge coverage ratio on a springing basis if minimum availability requirements as specified in the Amended Credit Agreement are not maintained.
The Amended Credit Agreement contains certain customary events of default. If any event of default occurs and is continuing, the Lenders would be entitled to take various actions, including the acceleration of amounts due under the Amended Credit Agreement and exercise other rights and remedies.
SUPPLEMENTAL DATA
Selected Quarterly Financial Data (Unaudited)
(dollars in millions, except per share data)
Selected quarterly operating results for each quarter of fiscal
2017
and
2016
for TimkenSteel are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
2017
|
|
|
|
|
|
|
|
Net Sales
|
|
$341.4
|
|
|
|
$339.1
|
|
|
|
$339.3
|
|
|
|
$309.4
|
|
Gross Profit
|
8.5
|
|
|
18.5
|
|
|
23.8
|
|
|
17.0
|
|
Net (Loss) Income
|
(33.9
|
)
|
|
(5.9
|
)
|
|
1.3
|
|
|
(5.3
|
)
|
Per Share Data:
(1)
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
($0.76
|
)
|
|
|
($0.13
|
)
|
|
|
$0.03
|
|
|
|
($0.12
|
)
|
Diluted (loss) earnings per share
|
|
($0.76
|
)
|
|
|
($0.13
|
)
|
|
|
$0.03
|
|
|
|
($0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
2016
|
|
|
|
|
|
|
|
Net Sales
|
|
$214.7
|
|
|
|
$213.8
|
|
|
|
$223.1
|
|
|
|
$217.9
|
|
Gross Profit
|
2.7
|
|
|
7.5
|
|
|
12.3
|
|
|
5.4
|
|
Net Income
|
(67.0
|
)
|
|
(22.2
|
)
|
|
(6.6
|
)
|
|
(9.7
|
)
|
Per Share Data:
(1)
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
($1.52
|
)
|
|
|
($0.50
|
)
|
|
|
($0.15
|
)
|
|
|
($0.22
|
)
|
Diluted earnings per share
|
|
($1.52
|
)
|
|
|
($0.50
|
)
|
|
|
($0.15
|
)
|
|
|
($0.22
|
)
|
(1)
Basic and diluted earnings per share are computed independently for each of the periods presented. Accordingly, the sum of the quarterly earnings per share amounts may not equal the total for the year. For comparative purposes, and to provide a more meaningful calculation for weighted average shares, this amount was assumed to be outstanding as of the beginning of each period presented prior to the spinoff in the calculation of basic weighted average shares. See
Note 9 - Earnings Per Share
in the Notes to the Consolidated Financial Statements.