10-Q 1 tmst-10q_20200331.htm 10-Q tmst-10q_20200331.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission file number: 1-36313

 

TIMKENSTEEL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Ohio

 

46-4024951

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1835 Dueber Avenue SW, Canton, OH

 

44706

(Address of principal executive offices)

 

(Zip Code)

 

330.471.7000

(Registrant’s telephone number, including area code) 

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

 

Trading symbol

 

Name of exchange in which registered

Common shares

 

TMST

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial reporting accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at April 30, 2020

Common Shares, without par value

 

44,965,976

 

 

 

 


Table of Contents

 

TimkenSteel Corporation

Table of Contents

 

 

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Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TimkenSteel Corporation

Consolidated Statements of Operations (Unaudited)

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2020

 

 

2019

 

(Dollars in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

$

259.7

 

 

$

371.0

 

Cost of products sold

 

 

 

 

 

 

251.9

 

 

 

342.6

 

Gross Profit

 

 

 

 

 

 

7.8

 

 

 

28.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

 

 

 

 

23.4

 

 

 

23.3

 

Restructuring charges

 

 

 

 

 

 

0.6

 

 

 

 

Loss (gain) on sale or asset disposals

 

 

 

 

 

 

(2.3

)

 

 

 

Interest expense

 

 

 

 

 

 

3.2

 

 

 

4.2

 

Other expense (income), net

 

 

 

 

 

 

2.7

 

 

 

(2.7

)

Income (Loss) Before Income Taxes

 

 

 

 

 

 

(19.8

)

 

 

3.6

 

Provision (benefit) for income taxes

 

 

 

 

 

 

0.1

 

 

 

0.1

 

Net Income (Loss)

 

 

 

 

 

$

(19.9

)

 

$

3.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

 

 

 

 

$

(0.44

)

 

$

0.08

 

Diluted earnings (loss) per share

 

 

 

 

 

$

(0.44

)

 

$

0.08

 

See accompanying Notes to the unaudited Consolidated Financial Statements.

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TimkenSteel Corporation

Consolidated Statement of Comprehensive Income (Loss) (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

(Dollars in millions)

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(19.9

)

 

$

3.5

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1.8

)

 

 

0.4

 

Pension and postretirement liability adjustments

 

 

(1.1

)

 

 

0.1

 

Other comprehensive income (loss), net of tax

 

 

(2.9

)

 

 

0.5

 

Comprehensive Income (Loss), net of tax

 

$

(22.8

)

 

$

4.0

 

See accompanying Notes to the unaudited Consolidated Financial Statements.

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TimkenSteel Corporation

Consolidated Balance Sheets (Unaudited)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

(Dollars in millions)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

65.6

 

 

$

27.1

 

Accounts receivable, net of allowances (2020 - $2.8 million; 2019 - $1.5 million)

 

 

94.9

 

 

 

77.5

 

Inventories, net

 

 

240.5

 

 

 

281.9

 

Deferred charges and prepaid expenses

 

 

3.6

 

 

 

3.3

 

Assets held for sale

 

 

2.2

 

 

 

4.1

 

Other current assets

 

 

5.3

 

 

 

7.8

 

Total Current Assets

 

 

412.1

 

 

 

401.7

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

608.7

 

 

 

626.4

 

Operating lease right-of-use assets

 

 

16.3

 

 

 

14.3

 

Pension assets

 

 

17.2

 

 

 

25.2

 

Intangible assets, net

 

 

12.4

 

 

 

14.3

 

Other non-current assets

 

 

3.3

 

 

 

3.3

 

Total Assets

 

$

1,070.0

 

 

$

1,085.2

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

96.0

 

 

$

69.3

 

Salaries, wages and benefits

 

 

21.3

 

 

 

13.9

 

Accrued pension and postretirement costs

 

 

3.0

 

 

 

3.0

 

Current operating lease liabilities

 

 

6.6

 

 

 

6.2

 

Other current liabilities

 

 

16.5

 

 

 

19.9

 

Total Current Liabilities

 

 

143.4

 

 

 

112.3

 

 

 

 

 

 

 

 

 

 

Convertible notes, net

 

 

79.8

 

 

 

78.6

 

Credit Agreement

 

 

60.0

 

 

 

90.0

 

Non-current operating lease liabilities

 

 

9.7

 

 

 

8.2

 

Accrued pension and postretirement costs

 

 

222.3

 

 

 

222.1

 

Deferred income taxes

 

 

0.9

 

 

 

0.9

 

Other non-current liabilities

 

 

11.8

 

 

 

10.0

 

Total Liabilities

 

 

527.9

 

 

 

522.1

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Preferred shares, without par value; authorized 10.0 million shares, none issued

 

 

 

 

 

 

Common shares, without par value; authorized 200.0 million shares;

   issued 2020 and 2019 - 45.7 million shares

 

 

 

 

 

 

Additional paid-in capital

 

 

841.1

 

 

 

844.8

 

Retained deficit

 

 

(321.4

)

 

 

(301.5

)

Treasury shares - 2020 - 0.8 million; 2019 - 0.9 million

 

 

(19.4

)

 

 

(24.9

)

Accumulated other comprehensive income (loss)

 

 

41.8

 

 

 

44.7

 

Total Shareholders’ Equity

 

 

542.1

 

 

 

563.1

 

Total Liabilities and Shareholders’ Equity

 

$

1,070.0

 

 

$

1,085.2

 

See accompanying Notes to the unaudited Consolidated Financial Statements.

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TimkenSteel Corporation

Consolidated Statements of Shareholders’ Equity (Unaudited)

 

(Dollars in millions)

 

Common

Shares

Outstanding

 

 

Additional

Paid-in

Capital

 

 

Retained

Deficit

 

 

Treasury

Shares

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

Balance at December 31, 2019

 

 

44,820,153

 

 

$

844.8

 

 

$

(301.5

)

 

$

(24.9

)

 

$

44.7

 

 

$

563.1

 

Net income (loss)

 

 

 

 

 

 

 

 

(19.9

)

 

 

 

 

 

 

 

 

(19.9

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.9

)

 

 

(2.9

)

Stock-based compensation expense

 

 

 

 

 

2.0

 

 

 

 

 

 

 

 

 

 

 

 

2.0

 

Issuance of treasury shares

 

 

215,708

 

 

 

(5.7

)

 

 

 

 

 

5.7

 

 

 

 

 

 

 

Shares surrendered for taxes

 

 

(70,033

)

 

 

 

 

 

 

 

 

(0.2

)

 

 

 

 

 

(0.2

)

Balance at March 31, 2020

 

 

44,965,828

 

 

$

841.1

 

 

$

(321.4

)

 

$

(19.4

)

 

$

41.8

 

 

$

542.1

 

 

 

 

Common

Shares

Outstanding

 

 

Additional

Paid-in

Capital

 

 

Retained

Deficit

 

 

Treasury

Shares

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

Balance at December 31, 2018

 

 

44,584,668

 

 

$

846.3

 

 

$

(191.5

)

 

$

(33.0

)

 

$

(8.9

)

 

$

612.9

 

Net income (loss)

 

 

 

 

 

 

 

 

3.5

 

 

 

 

 

 

 

 

 

3.5

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.5

 

 

 

0.5

 

Stock-based compensation expense

 

 

 

 

 

2.2

 

 

 

 

 

 

 

 

 

 

 

 

2.2

 

Stock option activity

 

 

 

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

0.2

 

Issuance of treasury shares

 

 

261,130

 

 

 

(7.5

)

 

 

 

 

 

7.5

 

 

 

 

 

 

 

Shares surrendered for taxes

 

 

(79,889

)

 

 

 

 

 

 

 

 

(1.0

)

 

 

 

 

 

(1.0

)

Balance at March 31, 2019

 

 

44,765,909

 

 

$

841.2

 

 

$

(188.0

)

 

$

(26.5

)

 

$

(8.4

)

 

$

618.3

 

See accompanying Notes to the unaudited Consolidated Financial Statements.

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TimkenSteel Corporation

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

(Dollars in millions)

 

 

 

 

 

 

 

 

CASH PROVIDED (USED)

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(19.9

)

 

$

3.5

 

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

18.6

 

 

 

17.8

 

Amortization of deferred financing fees and debt discount

 

 

1.3

 

 

 

1.3

 

Loss (gain) on sale or disposal of assets

 

 

(2.3

)

 

 

 

Deferred income taxes

 

 

0.2

 

 

 

(0.2

)

Stock-based compensation expense

 

 

2.0

 

 

 

2.2

 

Pension and postretirement expense (benefit), net

 

 

8.1

 

 

 

1.8

 

Pension and postretirement contributions and payments

 

 

(2.5

)

 

 

(2.4

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(16.3

)

 

 

12.1

 

Inventories, net

 

 

41.2

 

 

 

(26.8

)

Accounts payable

 

 

26.7

 

 

 

(30.7

)

Other accrued expenses

 

 

5.7

 

 

 

(11.4

)

Deferred charges and prepaid expenses

 

 

(0.3

)

 

 

0.1

 

Other, net

 

 

1.3

 

 

 

(0.9

)

Net Cash Provided (Used) by Operating Activities

 

 

63.8

 

 

 

(33.6

)

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2.9

)

 

 

(4.4

)

Proceeds from disposals of property, plant and equipment

 

 

7.8

 

 

 

 

Net Cash Provided (Used) by Investing Activities

 

 

4.9

 

 

 

(4.4

)

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

 

 

 

0.2

 

Shares surrendered for employee taxes on stock compensation

 

 

(0.2

)

 

 

(1.0

)

Repayments on credit agreements

 

 

(30.0

)

 

 

(5.0

)

Borrowings on credit agreements

 

 

 

 

 

30.0

 

Net Cash Provided (Used) by Financing Activities

 

 

(30.2

)

 

 

24.2

 

Increase (Decrease) in Cash and Cash Equivalents

 

 

38.5

 

 

 

(13.8

)

Cash and cash equivalents at beginning of period

 

 

27.1

 

 

 

21.6

 

Cash and Cash Equivalents at End of Period

 

$

65.6

 

 

$

7.8

 

See accompanying Notes to the unaudited Consolidated Financial Statements.

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TimkenSteel Corporation

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. 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, 2019.

Certain items previously reported in specific financial statement captions have been reclassified to conform with the current year presentation.

Customer Receivables

The Company’s accounts receivables arise from sales to customers across all end markets.  Historically, TimkenSteel’s allowance for doubtful accounts write-offs have been immaterial.  The allowance for doubtful account reserve has been established using qualitative and quantitative methods.  In general, account balances greater than one year of age or sent to third party collection are fully reserved.  Account balances for customers that are viewed as higher risk are also analyzed for a reserve.  In addition to these methods, for the first quarter of 2020 the allowance for doubtful accounts was adjusted for forward looking uncollectible balances, primarily in the energy and automotive end markets. The amount recorded was based on the Company’s assessment of the risk presented to customers in these end markets as a result of the COVID-19 pandemic as well as geo-political factors facing the energy end market. At this time, the full impact of COVID-19 is difficult to predict with the current uncertainty surrounding the pandemic and the timeline for economic activities to recover.

Change in Accounting Principle

During the fourth quarter of 2019, TimkenSteel elected to change its method for valuing its inventories that previously used the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The Company believes that the FIFO method is preferable as it improves comparability with our peers, more closely resembles the physical flow of our inventory and aligns with how the Company internally manages the business. The effects of the change in accounting principle from LIFO to FIFO were retrospectively applied. As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the Company’s consolidated balance sheets as of March 31, 2019 and the consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the three months ended March 31, 2019 were adjusted as necessary. 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, 2019.

The following tables reflect the impact to the financial statement line items as a result of the change in accounting principle for the prior periods presented in the accompanying financial statements (dollars in millions, except per share data):

 

Consolidated Statement of Operations

 

Three Months Ended

March 31, 2019

 

 

 

As

Reported

 

 

Adjustments

 

 

As

Adjusted

 

Cost of products sold

 

$

341.9

 

 

$

0.7

 

 

$

342.6

 

Gross profit

 

 

29.1

 

 

 

(0.7

)

 

 

28.4

 

Income (loss) before income taxes

 

 

4.3

 

 

 

(0.7

)

 

 

3.6

 

Net income (loss)

 

 

4.2

 

 

 

(0.7

)

 

 

3.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

 

0.09

 

 

 

(0.01

)

 

 

0.08

 

Diluted earnings (loss) per share

 

 

0.09

 

 

 

(0.01

)

 

 

0.08

 

 

Consolidated Statement of Comprehensive Income (Loss)

 

Three Months Ended

March 31, 2019

 

 

 

As

Reported

 

 

Adjustments

 

 

As

Adjusted

 

Net income (loss)

 

$

4.2

 

 

$

(0.7

)

 

$

3.5

 

Comprehensive income (loss), net of tax

 

 

4.7

 

 

 

(0.7

)

 

 

4.0

 

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Consolidated Statement of Cash Flows

 

Three Months Ended

March 31, 2019

 

 

 

As

Reported

 

 

Adjustments

 

 

As

Adjusted

 

Net income (loss)

 

$

4.2

 

 

$

(0.7

)

 

$

3.5

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Inventories, net

 

 

(27.5

)

 

 

0.7

 

 

 

(26.8

)

 

Note 2 - Recent Accounting Pronouncements

Adoption of New Accounting Standards

The Company adopted the following Accounting Standard Updates (ASU) in the first quarter of 2020, all of which were effective as of January 1, 2020, except ASU 2020-04, which became effective upon issuance on March 12, 2020. The adoption of these standards did not have a material impact on the unaudited Consolidated Financial Statements or the related Notes to the unaudited Consolidated Financial Statements.

Standards Adopted

Description

ASU 2020-04, Reference Rate Reform (Topic 848)

The standard provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met.

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)

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.

ASU 2018-13, Fair Value Measurement (Topic 820)

The standard eliminates, modifies and adds disclosure requirements for fair value measurements.

ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326)

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.

Accounting Standards Issued But Not Yet Adopted

The Company has considered the recent ASUs issued by the Financial Accounting Standards Board summarized below:

Standard Pending Adoption

Description

Effective

Date

Anticipated Impact

ASU 2019-12, Income Taxes (Topic 740)

The standard simplifies the accounting for income taxes by removing various exceptions.

January 1, 2021

The Company is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.

ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)

The standard eliminates, modifies and adds disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

January 1, 2021

The Company is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.

ASU 2020-03, Codification Improvements to Financial Instruments

The standard clarifies or improves the Codification. The amendments make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications.

January 1, 2021

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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Note 3 - Revenue Recognition

The following table provides the major sources of revenue by end-market sector for the three months ended March 31, 2020 and 2019:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Mobile

 

$

97.7

 

 

$

144.2

 

Industrial

 

 

113.3

 

 

 

147.0

 

Energy

 

 

25.2

 

 

 

60.8

 

Other(1)

 

 

23.5

 

 

 

19.0

 

Total Net Sales

 

$

259.7

 

 

$

371.0

 

(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 months ended March 31, 2020 and 2019:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Bar

 

$

168.1

 

 

$

239.9

 

Tube

 

 

30.4

 

 

 

49.6

 

Value-add

 

 

55.5

 

 

 

73.7

 

Other(2)

 

 

5.7

 

 

 

7.8

 

Total Net Sales

 

$

259.7

 

 

$

371.0

 

(2) “Other” for sales by product type includes the Company’s scrap sales.

 

Note 4 - Restructuring Charges

During 2019 and into the first quarter of 2020, TimkenSteel made organizational changes to enhance profitable and sustainable growth. These company-wide actions included the restructuring of its business support functions, the reduction of management layers throughout the organization, the closure of the TimkenSteel Material Services (TMS) facility in Houston, Texas and other actions to further improve the Company’s overall cost structure. Through these restructuring efforts, to date the Company has eliminated approximately 160 salaried positions and recognized restructuring charges of $9.1 million, consisting of severance and employee-related benefits. Approximately 10 of these positions were eliminated in the first quarter of 2020. TimkenSteel recorded reserves for such restructuring charges as other current liabilities on the Consolidated Balance Sheets. The reserve balance at March 31, 2020 is expected to be substantially used in the next twelve months.

The following is a summary of the restructuring reserve for the three months ended March 31, 2020:

Balance at December 31, 2019

 

$

6.0

 

Expenses

 

 

0.6

 

Payments

 

 

(4.0

)

Balance at March 31, 2020

 

$

2.6

 

There was no reserve for restructuring at March 31, 2019.

 

Note 5 - Disposition of Non-Core Assets

During the fourth quarter of 2019, management entered into an agreement to dispose of the Company’s scrap processing facility in Akron, Ohio for cash consideration of approximately $4.0 million. An impairment charge of $7.3 million was recognized in the fourth quarter of 2019 in connection with the sale.  The sale was completed, and the Company received all cash consideration in the first quarter of 2020.  An additional loss on disposal of $0.2 million was recognized in the first quarter as the sale was completed.

Additionally, during the first quarter of 2020, management completed its previously announced plan to close the Company’s TMS facility in Houston, and initiated a plan to market and sell the assets at the facility.  Accelerated depreciation and amortization of $1.6 million was recorded in the first quarter to reduce the net book value of the machinery and equipment to its expected fair value.  Subsequent to the closure, certain assets were sold and a gain on sale of $3.2 million was recognized.  At March 31, 2020, the remaining associated machinery and equipment, with a net book value of $2.2 million, was classified as held for sale on the Consolidated Balance Sheet.  The land and buildings associated with TMS were not classified as held for sale, as they were not considered available for immediate sale in their present condition. The Company began selling the inventory associated with TMS in the first quarter of 2020 at prices that were in line with the net realizable value of the inventory that was established in the fourth quarter of 2019.  

 

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Note 6 Other Expense (Income), net

The following table provides the components of other expense (income), net for the three months ended March 31, 2020 and 2019:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Pension and postretirement non-service benefit loss (income)

 

$

(6.6

)

 

$

(2.8

)

Loss from remeasurement of benefit plan

 

 

9.5

 

 

 

 

Foreign currency exchange loss (gain)

 

 

 

 

 

0.1

 

Miscellaneous expense (income)

 

 

(0.2

)

 

 

 

Total other expense (income), net

 

$

2.7

 

 

$

(2.7

)

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 months ended March 31, 2020 and 2019.

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 first quarter of 2020, the cumulative cost of all lump sum payments was projected to exceed 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 March 31, 2020, which resulted in a non-cash loss from remeasurement of $9.5 million. For more details on the remeasurement, refer to “Note 11 - Retirement and Postretirement Plans.”

 

Note 7 - 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.

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Provision (benefit) for incomes taxes

 

$

0.1

 

 

$

0.1

 

Effective tax rate

 

 

(0.5

)%

 

 

1.3

%

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 income taxes are derived from foreign operations.

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, an economic stimulus package intended to provide support, principally in the form of tax benefits, to companies and individuals negatively impacted by the COVID-19 pandemic. Although the majority of the provisions included in the CARES Act will not immediately benefit the Company from a cash tax perspective due to its significant net operating losses, the Company has taken advantage of the deferral of the employer share (6.2% of employee wages) of Social Security payroll taxes that would otherwise have been owed from the date of enactment of the legislation through December 31, 2020, as afforded by the Act. The Company expects this to result in deferred cash payments of approximately $7 million to $10 million for the remainder of 2020, to be paid in two equal installments at December 31, 2021 and December 31, 2022. 

 

Note 8 - 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.

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Common share equivalents for shares issuable for equity-based awards were excluded from the computation of diluted earnings (loss) per share for the three months ended March 31, 2020 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 months ended March 31, 2020 and 2019 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 months ended March 31, 2020 and 2019:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(19.9

)

 

$

3.5

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

 

44.9

 

 

 

44.7

 

Dilutive effect of stock-based awards

 

 

 

 

 

0.5

 

Weighted average shares outstanding, diluted

 

 

44.9

 

 

 

45.2

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(0.44

)

 

$

0.08

 

Diluted earnings (loss) per share

 

$

(0.44

)

 

$

0.08

 

 

Note 9 - Inventories

The components of inventories, net of reserves as of March 31, 2020 and December 31, 2019 were as follows:

 

 

March 31,

2020

 

 

December 31,

2019

 

Manufacturing supplies

 

$

43.5

 

 

$

49.8

 

Raw materials

 

 

16.2

 

 

 

26.0

 

Work in process

 

 

111.6

 

 

 

123.7

 

Finished products

 

 

79.5

 

 

 

93.1

 

Gross inventory

 

 

250.8

 

 

 

292.6

 

Allowance for inventory reserves

 

 

(10.3

)

 

 

(10.7

)

Total Inventories, net

 

$

240.5

 

 

$

281.9

 

 

Note 10 - Financing Arrangements

For a detailed discussion of the Company's long-term debt and credit arrangements, refer to “Note 14 - Financing Arrangements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Convertible Notes

The components of the Convertible Notes as of March 31, 2020 and December 31, 2019 were as follows:

 

 

March 31,

2020

 

 

December 31,

2019

 

Principal

 

$

86.3

 

 

$

86.3

 

Less: Debt issuance costs, net of amortization

 

 

(0.6

)

 

 

(0.7

)

Less: Debt discount, net of amortization

 

 

(5.9

)

 

 

(7.0

)

Convertible notes, net

 

$

79.8

 

 

$

78.6

 

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.

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The following table sets forth total interest expense recognized related to the Convertible Notes:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Contractual interest expense

 

$

1.3

 

 

$

1.3

 

Amortization of debt issuance costs

 

 

0.1

 

 

 

0.1

 

Amortization of debt discount

 

 

1.1

 

 

 

1.0

 

Total

 

$

2.5

 

 

$

2.4

 

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 Second Amended and Restated Credit Agreement dated as of January 26, 2018. The interest rate under the Amended Credit Agreement was 2.2% as of March 31, 2020. The amount available for borrowings under the credit agreement as of March 31, 2020 was $224.4 million. As of March 31, 2020, the Company was in compliance with all covenants.

Fair Value Measurement

The fair value of the Convertible Notes was approximately $69.0 million as of March 31, 2020. 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 March 2020.

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 three months ended March 31, 2020 and 2019 was $0.8 million and $1.5 million, respectively.

 

Note 11 - Retirement and Postretirement Plans

The components of net periodic benefit cost (income) for the three months ended March 31, 2020 and 2019 were as follows:

 

 

Three Months Ended

March 31, 2020

 

 

Three Months Ended

March 31, 2019

 

 

 

Pension

 

 

Postretirement

 

 

Pension

 

 

Postretirement

 

Service cost

 

$

4.9

 

 

$

0.3

 

 

$

4.3

 

 

$

0.3

 

Interest cost

 

 

10.9

 

 

 

1.0

 

 

 

12.2

 

 

 

2.0

 

Expected return on plan assets

 

 

(16.2

)

 

 

(0.9

)

 

 

(16.2

)

 

 

(0.9

)

Amortization of prior service cost

 

 

0.1

 

 

 

(1.5

)

 

 

0.1

 

 

 

 

Net remeasurement losses

 

 

9.5

 

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Cost (Income)

 

$

9.2

 

 

$

(1.1

)

 

$

0.4

 

 

$

1.4

 

The Salaried Plan has a provision that permits employees to elect to receive their pension benefits in a lump sum. In the first quarter of 2020, the cumulative cost of all lump sum payments was projected to exceed 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 March 31, 2020, which resulted in a non-cash loss from remeasurement of $9.5 million, included in other expense (income), net on the Unaudited Consolidated Statements of Operation.  As of March 31, 2019, the cumulative cost of the 2019 settlements did not exceed the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan.

 

Note 12 – Stock-Based Compensation

During the first quarter of 2020 the Board of Directors granted 598,919 time-vested restricted stock units, 143,280 performance-vested restricted stock units, and 511,020 stock options.

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Time-vested restricted stock units are issued with the fair value equal to the closing market price of TimkenSteel common shares on the date of grant. These restricted stock units do not have any performance conditions for vesting. Expense is recognized over the service period, adjusted for any forfeitures that should occur during the vesting period. The weighted average fair value of the restricted stock units granted during the three months ended March 31, 2020 was $5.26 per share.

Performance-vested restricted stock units issued in the first quarter of 2020 vest based on achievement of a total shareholder return (TSR) metric. The TSR metric is considered a market condition, which requires TimkenSteel to reflect it in the fair value on grant date using an advanced option-pricing model. The fair value of each performance share was therefore determined using a Monte Carlo valuation model, a generally accepted lattice pricing model under ASC 718 – Stock-based Compensation. The Monte Carlo valuation model, among other factors, uses commonly-accepted economic theory underlying all valuation models, estimates fair value using simulations of future share prices based on stock price behavior and considers the correlation of peer company returns in determining fair value. The weighted average fair value of the performance-vested restricted stock units granted during the three months ended March 31, 2020 was $5.23 per share.   

Stock options are issued with an exercise price equal to the closing 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 weighted average exercise price and weighted average fair value of the stock option grants during the three months ended March 31, 2020 were $5.26 per share and $2.23 per share, respectively.

TimkenSteel recognized stock-based compensation expense of $2.0 million and $2.1 million during the three months ended March 31, 2020 and 2019, respectively. Future stock-based compensation expense regarding the unvested portion of all awards is approximately $9.9 million. The future expense is expected to be recognized over the remaining vesting periods through 2024.

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Note 13 - Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2020 and 2019 by component were as follows:

 

 

 

Foreign Currency

Translation

Adjustments

 

 

Pension and

Postretirement

Liability Adjustments