Notes to Unaudited Consolidated Financial Statements
(dollars in millions, except per share data)
Note 1 - Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared by TimkenSteel Corporation (the Company or TimkenSteel) in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. Certain items previously reported in specific financial statement captions have been reclassified to conform with the current year presentation. For further information, refer to TimkenSteel’s audited Consolidated Financial Statements and Notes included in its Annual Report on Form 10-K for the year ended December 31, 2018.
Note 2 - Recent Accounting Pronouncements
Adoption of New Accounting Standards
The Company adopted the following Accounting Standard Updates (ASU) in the first quarter of 2019, all of which were effective as of January 1, 2019. The adoption of these standards had no impact on the unaudited Consolidated Financial Statements or the related Notes to the unaudited Consolidated Financial Statements.
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Standards Adopted
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Description
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ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
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The standard provides an expanded scope of Topic 718, to include share-based payment transactions for acquiring goods and services from nonemployees.
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ASU 2018-02, Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
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The standard permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings.
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ASU 2017-11, Distinguishing Liabilities from Equity; Derivatives and Hedging
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The standard 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.
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On January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topics 842),” which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for not only finance (previously capital) leases but also operating leases. The standard also requires additional quantitative and qualitative disclosures. The Company adopted the standard using the modified retrospective transition approach without adjusting comparative periods.
The Company elected certain of the practical expedients permitted under the transition guidance within the new standard as follows:
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•
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A package of practical expedients to not reassess:
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◦
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Whether a contract is or contains a lease
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•
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A practical expedient to not reassess certain land easements
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The Company has implemented internal controls and lease accounting software to enable the quantification of the expected impact on the unaudited Consolidated Balance Sheets and to facilitate the calculations of the related accounting entries and disclosures. Adoption of the lease standard resulted in recognition of right-to-use assets and lease liabilities of $16.0 million as of January 1, 2019. Adoption of the lease standard had no impact on the Company’s debt-covenant compliance under its current agreements. Also, the standard did not materially affect the Company’s results of operations or its cash flows. Refer to “Note 11 - Leases” for additional information.
Accounting Standards Issued But Not Yet Adopted
The Company has considered the recent ASUs issued by the Financial Accounting Standards Board summarized below:
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Standard Pending Adoption
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Description
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Effective Date
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Anticipated Impact
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ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)
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The standard aligns the requirements for capitalizing implementation costs in cloud computing software arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
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January 1, 2020
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The Company plans on adopting this ASU using the prospective method. The Company does not expect the ASU to have a material impact on its results of operations or financial condition.
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ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)
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The standard eliminates, modifies and adds disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.
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January 1, 2021
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The Company is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.
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ASU 2018-13, Fair Value Measurement (Topic 820)
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The standard eliminates, modifies and adds disclosure requirements for fair value measurements.
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January 1, 2020
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The Company does not expect the ASU to have a material impact on its results of operations or financial condition.
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ASU 2016-13, Measurement of Credit Losses on Financial Instruments
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The standard changes how entities will measure credit losses for most financial assets, including trade and other receivables and replaces the current incurred loss approach with an expected loss model.
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January 1, 2020
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The Company does not expect the ASU to have a material impact on its results of operations or financial condition.
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Note 3 - Revenue Recognition
TimkenSteel recognizes revenue from contracts at a point in time when it has satisfied its performance obligation and the customer obtains control of the goods, at the amount that reflects the consideration the Company expects to receive for those goods. The Company receives and acknowledges purchase orders from its customers which define the quantity, pricing, payment and other applicable terms and conditions. In some cases, the Company receives a blanket purchase order from its customer, which includes pricing, payment and other terms and conditions. Quantities are defined at the time the customer issues periodic releases against the blanket purchase order. Certain contracts contain variable consideration, which primarily consists of rebates that are accounted for in net sales and accrued based on the estimated probability of the requirements being met. Amounts billed to customers related to shipping and handling costs are included in net sales and related costs are included in costs of products sold in the unaudited Consolidated Financial Statements.
The following table provides the major sources of revenue by end-market sector for the three and nine months ended September 30, 2019 and 2018:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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Mobile
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$110.2
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$136.4
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$389.7
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$420.5
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Industrial
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116.9
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169.7
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388.2
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484.3
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Energy
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32.6
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70.1
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147.5
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188.0
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Other(1)
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14.5
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33.7
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56.5
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111.4
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Total Net Sales
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$274.2
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$409.9
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$981.9
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$1,204.2
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(1) “Other” for sales by end-market sector includes the Company’s scrap and oil country tubular goods (OCTG) billet sales.
The following table provides the major sources of revenue by product type for the three and nine months ended September 30, 2019 and 2018:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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Bar
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$179.7
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$262.2
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$645.0
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$759.0
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Tube
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32.2
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66.7
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122.6
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201.0
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Value-add
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55.9
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70.6
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192.7
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212.5
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Other(2)
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6.4
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10.4
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21.6
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31.7
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Total Net Sales
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$274.2
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$409.9
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$981.9
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$1,204.2
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(2) “Other” for sales by product type includes the Company’s scrap sales.
Note 4 - Restructuring Charges
During the second quarter of 2019, TimkenSteel made organizational changes to enhance profitable and sustainable growth. These company-wide actions included the restructuring of its commercial and technology organizations to drive innovation and focus on the key growth areas identified by the Company such as value-added components, energy products and government business. Given these and other restructuring efforts, the Company implemented approximately 55 salaried position eliminations and recognized restructuring charges of $3.6 million consisting of severance and employee-related benefits. TimkenSteel recorded reserves for such restructuring charges as other current liabilities on the unaudited Consolidated Balance Sheets. The reserve balance at September 30, 2019 is expected to be substantially used in the next six months.
The following is a summary of the restructuring reserve for the nine months ended September 30, 2019:
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Balance at December 31, 2018
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$—
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Expenses
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3.6
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Payments
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(1.5
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)
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Balance at September 30, 2019
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$2.1
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Note 5 - Other Income, net
The following table provides the components of other income, net for the three and nine months ended September 30, 2019 and 2018:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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Pension and postretirement non-service benefit income
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$5.1
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$6.2
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$12.4
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$18.7
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Loss from remeasurement of benefit plans
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—
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—
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(4.4
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)
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—
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Foreign currency exchange gain (loss)
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(0.1
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)
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—
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—
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—
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Miscellaneous income (expense)
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0.2
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(0.1
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)
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0.1
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—
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Total other income, net
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$5.2
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$6.1
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$8.1
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$18.7
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Non-service benefit income is derived from the Company’s pension and other postretirement plans. The Company’s expected return on assets has exceeded the interest cost component, resulting in income for the three and nine months ended September 30, 2019 and 2018.
In the second quarter of 2019, the Company amended its postretirement benefit plan. This amendment reduced the postretirement liability and therefore required the Company to perform a full remeasurement of its postretirement obligations and plan assets as of April 30, 2019. The reduction in the Accumulated Postretirement Benefit Obligation (APBO) was recognized in Other Comprehensive Income and subsequently amortized as an offset to postretirement benefit cost. For more details on the remeasurement, refer to “Note 13 - Retirement and Postretirement Plans.”
Note 6 - Income Tax Provision
TimkenSteel’s provision for income taxes in interim periods is computed by applying the appropriate estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items, including interest on prior-year tax liabilities, are recorded during the periods in which they occur.
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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Provision (benefit) for incomes taxes
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($2.1
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)
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$0.9
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($1.8
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)
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$1.2
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Effective tax rate
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31.4
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%
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41.0
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%
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27.1
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%
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13.4
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%
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Intraperiod tax allocation rules require the allocation of income taxes between continuing operations and other categories of comprehensive income. In periods in which the Company has a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of comprehensive income, the Company must consider that income in determining the amount of tax benefit that results from a loss in continuing operations and that will be allocated to continuing operations. As a result of the intraperiod tax allocation rules, the Company recorded an income tax benefit of $2.2 million within other comprehensive income for the three and nine months ended September 30, 2019.
In light of TimkenSteel’s recent operating performance in the U.S. and current industry conditions, the Company assessed its U.S. deferred tax assets and concluded, based upon all available evidence, that it was more likely than not that it would not realize the assets. As a result, the Company maintains a full valuation allowance against its deferred tax assets in the U.S. and applicable foreign countries until sufficient positive evidence exists to conclude that a valuation allowance is not necessary. 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 majority of TimkenSteel’s taxes are derived from foreign operations.
Note 7 - Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is 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 earnings (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 earnings (loss) per share.
Common share equivalents for shares issuable for equity-based awards were excluded from the computation of diluted earnings (loss) per share for the three and nine months ended September 30, 2019 because the effect of their inclusion would have been anti-dilutive. Common share equivalents for shares issuable upon the conversion of outstanding convertible notes were excluded from the computation of diluted earnings (loss) per share for the three and nine months ended September 30, 2019 and 2018 because the effect of their inclusion would have been anti-dilutive.
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2019 and 2018:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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Numerator:
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Net income (loss)
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($4.6
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)
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$1.4
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($4.8
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)
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$7.9
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Denominator:
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Weighted average shares outstanding, basic
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44.8
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44.6
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44.8
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44.5
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Dilutive effect of stock-based awards
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—
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0.6
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—
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0.7
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Weighted average shares outstanding, diluted
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44.8
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45.2
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44.8
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45.2
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Basic earnings (loss) per share
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($0.10
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)
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$0.03
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($0.11
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)
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$0.18
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Diluted earnings (loss) per share
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($0.10
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)
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$0.03
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($0.11
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)
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$0.17
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Note 8 - Inventories
The components of inventories, net of reserves as of September 30, 2019 and December 31, 2018 were as follows:
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September 30,
2019
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December 31,
2018
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Manufacturing supplies
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$52.2
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$46.9
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Raw materials
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38.5
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35.2
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Work in process
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112.6
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155.7
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Finished products
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133.0
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142.8
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Gross inventory
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336.3
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380.6
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Allowance for surplus and obsolete inventory
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(5.5
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)
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(5.1
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)
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LIFO reserve
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(51.4
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)
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(78.7
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)
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Total Inventories, net
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$279.4
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$296.8
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Inventories are valued at the lower of cost or market, with approximately 74% valued by the last in, first out (LIFO) method, and the remaining inventories, including manufacturing supplies inventory as well as international (outside the United States) inventories, valued by the first-in, first-out, average cost or specific identification methods.
An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation.
TimkenSteel projects its LIFO reserve will decrease for the year ending December 31, 2019 due to lower anticipated raw material costs, manufacturing costs and quantities.
Note 9 - Property, Plant and Equipment
The components of property, plant and equipment, net as of September 30, 2019 and December 31, 2018 were as follows:
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September 30,
2019
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December 31,
2018
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Land
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$14.1
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$14.1
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Buildings and improvements
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426.4
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424.4
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Machinery and equipment
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1,409.0
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1,404.2
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Construction in progress
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25.8
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28.5
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Subtotal
|
1,875.3
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|
1,871.2
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Less allowances for depreciation
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(1,232.3
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)
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(1,196.8
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)
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Property, Plant and Equipment, net
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$643.0
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$674.4
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Total depreciation expense was $16.3 million and $16.8 million for the three months ended September 30, 2019 and 2018, respectively. Total depreciation expense was $49.2 million and $50.8 million for the nine months ended September 30, 2019 and 2018, respectively. There was a loss on disposal of $0.1 million during the three months ended September 30, 2019 and no losses on disposal during the three months ended September 30, 2018. For the nine months ended September 30, 2019 TimkenSteel recorded a loss on disposal of assets of $1.8 million primarily related to the abandonment of certain equipment. For the nine months ended September 30, 2018, TimkenSteel recorded approximately $0.5 million of impairment charges and loss on sale or disposals related to the discontinued use of certain assets.
Note 10 - Intangible Assets
The components of intangible assets, net as of September 30, 2019 and December 31, 2018 were as follows:
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September 30, 2019
|
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December 31, 2018
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Gross Carrying Amount
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Accumulated Amortization
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Net Carrying Amount
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Gross Carrying Amount
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Accumulated Amortization
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Net Carrying Amount
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Customer relationships
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$6.3
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|
|
|
$4.9
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|
|
$1.4
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|
$6.3
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$4.6
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$1.7
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Technology use
|
9.0
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|
6.9
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2.1
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|
9.0
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6.5
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|
2.5
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Capitalized software
|
61.2
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|
|
48.5
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|
|
12.7
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|
61.6
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|
48.0
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|
13.6
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Total Intangible Assets
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|
$76.5
|
|
|
|
$60.3
|
|
|
|
$16.2
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|
|
|
$76.9
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|
|
|
$59.1
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|
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$17.8
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Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives. Amortization expense for intangible assets for the three months ended September 30, 2019 and 2018 was $1.2 million and $1.3 million, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2019 and 2018 was $4.0 million and $4.2 million, respectively. During the nine months ended September 30, 2019, TimkenSteel recorded a loss on disposal of $0.1 million. For the nine months ended September 30, 2018, TimkenSteel recorded approximately $0.4 million of impairment charges due to the discontinued use of certain capitalized software.
Note 11 - Leases
The Company has operating leases for office space, warehouses, land, machinery and equipment, vehicles and certain information technology equipment. These leases have remaining lease terms of less than one year to six years, some of which may include options to extend the leases for one or more years. Certain leases also include options to purchase the leased property. As of September 30, 2019, the Company has no financing leases. The weighted average remaining lease term for our operating leases as of September 30, 2019 was 2.8 years.
Leases with an initial term of 12 months or less (short-term leases) are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into after the adoption of ASC 842, the Company combines lease and non-lease components. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.
The Company recorded lease cost for the three and nine months ended September 30, 2019 as follows:
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Three Months Ended September 30, 2019
|
Nine Months Ended September 30, 2019
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Operating lease cost
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$1.9
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$5.5
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Short-term lease cost
|
0.5
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|
1.5
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Total lease cost
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$2.4
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|
$7.0
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When available, the rate implicit in the lease is used to discount lease payments to present value; however, the Company’s leases generally do not provide a readily determinable implicit rate. Therefore, the incremental borrowing rate to discount the lease payments is estimated using market-based information available at lease commencement. The weighted average discount rate used to measure our operating lease liabilities as of September 30, 2019 was 4.7%.
Supplemental cash flow information related to leases was as follows:
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Nine Months Ended September 30, 2019
|
Cash paid for amounts included in the measurement of operating lease liabilities
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$5.7
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Right-of-use assets obtained in exchange for operating lease obligations
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$2.8
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Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows:
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2019 (excluding the nine months ended September 30, 2019)
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$1.8
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2020
|
6.2
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|
2021
|
4.2
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2022
|
1.8
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2023
|
0.9
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|
After 2023
|
0.2
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|
Total future minimum lease payments
|
15.1
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|
Less amount of lease payment representing interest
|
(0.9
|
)
|
Total present value of lease payments
|
|
$14.2
|
|
Future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows:
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|
|
|
2019
|
|
$6.3
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|
2020
|
5.2
|
|
2021
|
3.3
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|
2022
|
1.0
|
|
2023
|
0.6
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|
After 2023
|
—
|
|
Total future minimum lease payments
|
|
$16.4
|
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As of September 30, 2019, we have additional operating leases that have not yet commenced for which the present value of lease payments over the respective lease terms totals approximately $6.0 million. These leases are primarily manufacturing equipment to support the Company’s mobile value-added powertrain component product sales. These operating leases will commence between the fourth quarter of 2019 and the first half of 2020 with lease terms of three to four years. Accordingly, these leases are not recorded on the unaudited Consolidated Balance Sheet at September 30, 2019.
Note 12 - Financing Arrangements
For a detailed discussion of the Company's long-term debt and credit arrangements, refer to “Note 6 - Financing Arrangements” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Convertible Notes
The components of the Convertible Notes as of September 30, 2019 and December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Principal
|
|
$86.3
|
|
|
|
$86.3
|
|
Less: Debt issuance costs, net of amortization
|
(0.8
|
)
|
|
(1.2
|
)
|
Less: Debt discount, net of amortization
|
(8.1
|
)
|
|
(11.0
|
)
|
Convertible notes, net
|
|
$77.4
|
|
|
|
$74.1
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
2019
|
|
2018
|
Contractual interest expense
|
|
$1.3
|
|
|
|
$1.3
|
|
|
$3.9
|
|
|
|
$3.9
|
|
Amortization of debt issuance costs
|
0.1
|
|
|
0.1
|
|
0.3
|
|
|
0.3
|
|
Amortization of debt discount
|
1.0
|
|
|
0.9
|
|
3.0
|
|
|
2.6
|
|
Total
|
|
$2.4
|
|
|
|
$2.3
|
|
|
$7.2
|
|
|
|
$6.8
|
|
Credit Agreement
On January 26, 2018, the Company, as borrower, and certain domestic subsidiaries, as subsidiary guarantors, entered into the Second Amended and Restated Credit Agreement (Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and the other lenders party thereto, which amended and restated the Company’s credit agreement. The interest rate under the credit agreement was 4.1% as of September 30, 2019. The amount available under the credit agreement as of September 30, 2019 was $187.0 million. As of September 30, 2019, the Company was in compliance with all covenants.
Refunding Bonds
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).
Amended Credit Agreement
On October 15, 2019, the Company, as borrower, and certain domestic subsidiaries of the Company, as subsidiary guarantors, entered into a Third Amended and Restated Credit Agreement (the Amended Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent (the Administrative Agent), Bank of America, N.A., as syndication agent, and the other lenders party thereto (collectively, the Lenders), which further amended and restated the Company’s existing Credit Agreement dated as of January 26, 2018.
The Amended Credit Agreement provides for a $400.0 million asset-based revolving credit facility (the Credit Facility), including a $15.0 million sublimit for the issuance of commercial and standby letters of credit and a $40.0 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 $100.0 million, to the extent that existing or new lenders agree to provide such additional commitments. In addition to and independent of any increase described in the preceding sentence, the Company is entitled, subject to the satisfaction of certain conditions, to request a separate first-in, last-out (FILO) tranche in an aggregate principal amount of up to $30.0 million with a separate borrowing base and interest rate margins, in each case, to be agreed upon among the Company, the Administrative Agent and the Lenders providing the incremental FILO tranche.
The availability of borrowings under the Credit Facility 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 Credit Facility 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 as quoted in The Wall Street Journal, (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 0.25% per annum commitment fee on the average daily unused amount of the Credit Facility.
All of the indebtedness under the Credit Facility is guaranteed by the Company’s material domestic subsidiaries, as well as any other domestic subsidiary that 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 Credit Facility matures on October 15, 2024. 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.
Fair Value Measurement
The fair value of the Convertible Notes was approximately $81.1 million as of September 30, 2019. The fair value of the Convertible Notes, which falls within Level 1 of the fair value hierarchy as defined by Accounting Standards Codification (ASC) 820, Fair Value Measurements, is based on the last price traded in September 2019.
TimkenSteel’s Credit Agreement is variable-rate debt. As such, the carrying value is a reasonable estimate of fair value as interest rates on these borrowings approximate current market rates. This valuation falls within Level 2 of the fair value hierarchy and is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly.
Interest Paid
The total cash interest paid for the nine months ended September 30, 2019 and 2018 was $7.6 million and $6.4 million, respectively.
Note 13 - Retirement and Postretirement Plans
The components of net periodic benefit cost (income) for the three and nine months ended September 30, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2019
|
|
Three Months Ended
September 30, 2018
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
Service cost
|
|
$4.4
|
|
|
|
$0.3
|
|
|
|
$4.3
|
|
|
|
$0.4
|
|
Interest cost
|
12.2
|
|
|
1.3
|
|
|
11.4
|
|
|
1.9
|
|
Expected return on plan assets
|
(16.3
|
)
|
|
(1.0
|
)
|
|
(18.4
|
)
|
|
(1.2
|
)
|
Amortization of prior service cost
|
0.1
|
|
|
(1.4
|
)
|
|
0.1
|
|
|
0.1
|
|
Net Periodic Benefit Cost (Income)
|
|
$0.4
|
|
|
|
($0.8
|
)
|
|
|
($2.6
|
)
|
|
|
$1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2018
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
Service cost
|
|
$13.1
|
|
|
|
$0.9
|
|
|
|
$12.9
|
|
|
|
$1.3
|
|
Interest cost
|
36.7
|
|
|
4.8
|
|
|
34.2
|
|
|
5.7
|
|
Expected return on plan assets
|
(48.9
|
)
|
|
(2.9
|
)
|
|
(55.3
|
)
|
|
(3.6
|
)
|
Amortization of prior service cost
|
0.3
|
|
|
(2.4
|
)
|
|
0.3
|
|
|
0.2
|
|
Net remeasurement losses (gains)
|
—
|
|
|
4.4
|
|
|
—
|
|
|
—
|
|
Net Periodic Benefit Cost (Income)
|
|
$1.2
|
|
|
|
$4.8
|
|
|
|
($7.9
|
)
|
|
|
$3.6
|
|
In the second quarter of 2019, the Company amended its postretirement benefit plan relating to moving Medicare-eligible union retirees to an individual plan on a Medicare healthcare exchange. This amendment reduced the postretirement liability by $70.2 million. This amendment required the Company to perform a full remeasurement of its postretirement obligations and plan assets as of April 30, 2019. The $70.2 million reduction in the APBO is recognized in Other Comprehensive Income (Loss) and subsequently amortized as an offset to postretirement benefit cost over a period of 12 years (average remaining service period). In addition to the reduction of the APBO, the Company recognized a net remeasurement loss of $4.4 million in the second quarter of 2019 related to the plan amendment.
Note 14 - Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2019 and 2018 by component were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Postretirement Liability Adjustments
|
|
Total
|
Balance as of December 31, 2018
|
|
($7.3
|
)
|
|
|
($1.6
|
)
|
|
|
($8.9
|
)
|
Other comprehensive income before reclassifications, before income tax
|
(1.2
|
)
|
|
—
|
|
|
(1.2
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss), before income tax
|
—
|
|
|
(2.0
|
)
|
|
(2.0
|
)
|
Amounts deferred to accumulated other comprehensive income (loss), before income tax
|
—
|
|
|
70.2
|
|
|
70.2
|
|
Tax effect
|
—
|
|
|
(2.1
|
)
|
|
(2.1
|
)
|
Net current period other comprehensive income, net of income taxes
|
(1.2
|
)
|
|
66.1
|
|
|
64.9
|
|
Balance as of September 30, 2019
|
|
($8.5
|
)
|
|
|
$64.5
|
|
|
|
$56.0
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Postretirement Liability Adjustments
|
|
Total
|
Balance at December 31, 2017
|
|
($5.9
|
)
|
|
|
($1.7
|
)
|
|
|
($7.6
|
)
|
Other comprehensive income before reclassifications, before income tax
|
(0.9
|
)
|
|
—
|
|
|
(0.9
|
)
|
Amounts reclassified from accumulated other comprehensive loss, before income tax
|
—
|
|
|
0.5
|
|
|
0.5
|
|
Tax effect
|
—
|
|
|
—
|
|
|
—
|
|
Net current period other comprehensive income, net of income taxes
|
(0.9
|
)
|
|
0.5
|
|
|
(0.4
|
)
|
Balance as of September 30, 2018
|
|
($6.8
|
)
|
|
|
($1.2
|
)
|
|
|
($8.0
|
)
|
The amount reclassified from accumulated other comprehensive income (loss) in the nine months ended September 30, 2019 for the pension and postretirement liability adjustment was included in other income, net in the unaudited Consolidated Statements of Operations. The amount deferred to accumulated other comprehensive income in the nine months ended September 30, 2019, was a result of a plan amendment to the Company’s postretirement benefit plan. These accumulated other comprehensive income (loss) components are components of net periodic benefit cost. See “Note 13 - Retirement and Postretirement Plans” for additional information.
Note 15 - 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. Accruals related to environmental claims represent management’s best estimate of the fees and costs associated with these claims. Although it is not possible to predict with certainty the outcome of such claims, management believes that their ultimate dispositions should not have a material adverse effect on our financial position, cash flows or results of operations. As of September 30, 2019 and December 31, 2018, TimkenSteel had a $1.4 million and a $1.5 million contingency reserve, respectively, related to loss exposures incurred in the ordinary course of business.
Note 16 - Subsequent Events
Chief Executive Officer Transition
On October 8, 2019, Ward J. Timken, Jr. stepped down as Chief Executive Officer and President of TimkenSteel Corporation and as Chairman of the Company’s Board of Directors. Per the terms of Mr. Timken’s severance agreement, the Company will recognize a charge of approximately $4.0 million in the fourth quarter. Additionally, a charge of approximately $1.5 million to $2.0 million will be recognized in the fourth quarter as a result of the accelerated vesting of stock-based compensation per the terms of the applicable award agreements.
Restructuring
During October 2019, TimkenSteel continued to make organizational changes to enhance profitable and sustainable growth. These company-wide actions included the restructuring and reduction of management layers throughout the organization. The Company will recognize restructuring charges in the fourth quarter of approximately $1.7 million consisting of severance, employee-related benefits, and accelerated stock-based compensation.