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 SeptemberJune 30, 2017
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
toCommission 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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes
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
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 July 31, 2020 | |||
Common Shares, without par value | 45,036,324 |
TimkenSteel Corporation
Table of Contents
PAGE | |||
2
PART I. FINANCIAL INFORMATION
ITEM I.1. FINANCIAL STATEMENTS
TimkenSteel Corporation
Consolidated Statements of Operations (Unaudited)
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
(Dollars in millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 154.0 |
|
| $ | 336.7 |
|
| $ | 413.6 |
|
| $ | 707.7 |
|
Cost of products sold |
|
| 158.0 |
|
|
| 321.9 |
|
|
| 409.8 |
|
|
| 664.5 |
|
Gross Profit |
|
| (4.0 | ) |
|
| 14.8 |
|
|
| 3.8 |
|
|
| 43.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 16.8 |
|
|
| 20.2 |
|
|
| 40.2 |
|
|
| 43.5 |
|
Restructuring charges |
|
| 0.3 |
|
|
| 3.6 |
|
|
| 0.9 |
|
|
| 3.6 |
|
Impairment charges and loss (gain) on sale or asset disposals |
|
| (0.9 | ) |
|
| 1.8 |
|
|
| (3.2 | ) |
|
| 1.8 |
|
Interest expense |
|
| 3.0 |
|
|
| 4.2 |
|
|
| 6.2 |
|
|
| 8.4 |
|
Other expense (income), net |
|
| (8.1 | ) |
|
| (0.2 | ) |
|
| (5.4 | ) |
|
| (2.9 | ) |
Income (Loss) Before Income Taxes |
|
| (15.1 | ) |
|
| (14.8 | ) |
|
| (34.9 | ) |
|
| (11.2 | ) |
Provision (benefit) for income taxes |
|
| 0.2 |
|
|
| (2.9 | ) |
|
| 0.3 |
|
|
| (2.8 | ) |
Net Income (Loss) |
| $ | (15.3 | ) |
| $ | (11.9 | ) |
| $ | (35.2 | ) |
| $ | (8.4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
| $ | (0.34 | ) |
| $ | (0.27 | ) |
| $ | (0.78 | ) |
| $ | (0.19 | ) |
Diluted earnings (loss) per share |
| $ | (0.34 | ) |
| $ | (0.27 | ) |
| $ | (0.78 | ) |
| $ | (0.19 | ) |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(Dollars in millions, except per share data) | |||||||||||||||
Net sales | $339.1 | $213.8 | $987.8 | $654.8 | |||||||||||
Cost of products sold | 320.6 | 206.3 | 928.5 | 629.6 | |||||||||||
Gross Profit | 18.5 | 7.5 | 59.3 | 25.2 | |||||||||||
Selling, general and administrative expenses | 22.5 | 21.8 | 67.7 | 66.8 | |||||||||||
Restructuring charges | — | — | — | 0.3 | |||||||||||
Operating Loss | (4.0 | ) | (14.3 | ) | (8.4 | ) | (41.9 | ) | |||||||
Interest expense | 3.7 | 3.9 | 11.0 | 8.0 | |||||||||||
Other income (expense), net | 1.9 | (17.3 | ) | 10.7 | (12.1 | ) | |||||||||
Loss Before Income Taxes | (5.8 | ) | (35.5 | ) | (8.7 | ) | (62.0 | ) | |||||||
Provision (benefit) for income taxes | 0.1 | (13.3 | ) | 1.2 | (23.5 | ) | |||||||||
Net Loss | ($5.9 | ) | ($22.2 | ) | ($9.9 | ) | ($38.5 | ) | |||||||
Per Share Data: | |||||||||||||||
Basic loss per share | ($0.13 | ) | ($0.50 | ) | ($0.22 | ) | ($0.87 | ) | |||||||
Diluted loss per share | ($0.13 | ) | ($0.50 | ) | ($0.22 | ) | ($0.87 | ) | |||||||
Dividends per share | $— | $— | $— | $— |
See accompanying Notes to Unauditedthe unaudited Consolidated Financial Statements.
3
TimkenSteel Corporation
Consolidated StatementsStatement of Comprehensive LossIncome (Loss) (Unaudited)
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (15.3 | ) |
| $ | (11.9 | ) |
| $ | (35.2 | ) |
| $ | (8.4 | ) |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| 0.1 |
|
|
| (0.6 | ) |
|
| (1.7 | ) |
|
| (0.2 | ) |
Pension and postretirement liability adjustments |
|
| (1.4 | ) |
|
| 66.3 |
|
|
| (2.5 | ) |
|
| 66.4 |
|
Other comprehensive income (loss), net of tax |
|
| (1.3 | ) |
|
| 65.7 |
|
|
| (4.2 | ) |
|
| 66.2 |
|
Comprehensive Income (Loss), net of tax |
| $ | (16.6 | ) |
| $ | 53.8 |
|
| $ | (39.4 | ) |
| $ | 57.8 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Net Loss | ($5.9 | ) | ($22.2 | ) | ($9.9 | ) | ($38.5 | ) | |||||||
Other comprehensive income, net of tax: | |||||||||||||||
Foreign currency translation adjustments | 0.3 | (0.5 | ) | 1.1 | (2.8 | ) | |||||||||
Pension and postretirement liability adjustments | 0.1 | — | 0.4 | 0.8 | |||||||||||
Other comprehensive income, net of tax | 0.4 | (0.5 | ) | 1.5 | (2.0 | ) | |||||||||
Comprehensive Loss, net of tax | ($5.5 | ) | ($22.7 | ) | ($8.4 | ) | ($40.5 | ) |
See accompanying Notes to Unauditedthe unaudited Consolidated Financial Statements.
4
TimkenSteel Corporation
Consolidated Balance Sheets (Unaudited)
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||
(Dollars in millions) |
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 75.5 |
|
| $ | 27.1 |
|
Accounts receivable, net of allowances (2020 - $1.7 million; 2019 - $1.5 million) |
|
| 63.6 |
|
|
| 77.5 |
|
Inventories, net |
|
| 206.4 |
|
|
| 281.9 |
|
Deferred charges and prepaid expenses |
|
| 1.9 |
|
|
| 3.3 |
|
Assets held for sale |
|
| 2.1 |
|
|
| 4.1 |
|
Other current assets |
|
| 5.6 |
|
|
| 7.8 |
|
Total Current Assets |
|
| 355.1 |
|
|
| 401.7 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 595.4 |
|
|
| 626.4 |
|
Operating lease right-of-use assets |
|
| 18.5 |
|
|
| 14.3 |
|
Pension assets |
|
| 20.4 |
|
|
| 25.2 |
|
Intangible assets, net |
|
| 11.2 |
|
|
| 14.3 |
|
Other non-current assets |
|
| 3.1 |
|
|
| 3.3 |
|
Total Assets |
| $ | 1,003.7 |
|
| $ | 1,085.2 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 48.1 |
|
| $ | 69.3 |
|
Salaries, wages and benefits |
|
| 19.4 |
|
|
| 13.9 |
|
Accrued pension and postretirement costs |
|
| 3.0 |
|
|
| 3.0 |
|
Current operating lease liabilities |
|
| 7.0 |
|
|
| 6.2 |
|
Convertible notes, net |
|
| 81.0 |
|
|
| — |
|
Other current liabilities |
|
| 11.4 |
|
|
| 19.9 |
|
Total Current Liabilities |
|
| 169.9 |
|
|
| 112.3 |
|
|
|
|
|
|
|
|
|
|
Convertible notes, net |
|
| — |
|
|
| 78.6 |
|
Credit Agreement |
|
| 60.0 |
|
|
| 90.0 |
|
Non-current operating lease liabilities |
|
| 11.5 |
|
|
| 8.2 |
|
Accrued pension and postretirement costs |
|
| 223.0 |
|
|
| 222.1 |
|
Deferred income taxes |
|
| 0.9 |
|
|
| 0.9 |
|
Other non-current liabilities |
|
| 11.4 |
|
|
| 10.0 |
|
Total Liabilities |
|
| 476.7 |
|
|
| 522.1 |
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity |
|
|
|
|
|
|
|
|
Preferred shares, without par value; authorized 10.0 million shares, NaN issued |
|
| — |
|
|
| — |
|
Common shares, without par value; authorized 200.0 million shares; issued 2020 and 2019 - 45.7 million shares |
|
| — |
|
|
| — |
|
Additional paid-in capital |
|
| 840.7 |
|
|
| 844.8 |
|
Retained deficit |
|
| (336.7 | ) |
|
| (301.5 | ) |
Treasury shares - 2020 - 0.7 million; 2019 - 0.9 million |
|
| (17.5 | ) |
|
| (24.9 | ) |
Accumulated other comprehensive income (loss) |
|
| 40.5 |
|
|
| 44.7 |
|
Total Shareholders’ Equity |
|
| 527.0 |
|
|
| 563.1 |
|
Total Liabilities and Shareholders’ Equity |
| $ | 1,003.7 |
|
| $ | 1,085.2 |
|
September 30, 2017 | December 31, 2016 | ||||||
(Dollars in millions) | |||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $25.8 | $25.6 | |||||
Accounts receivable, net of allowances (2017 - $2.6 million; 2016 - $2.1 million) | 160.6 | 91.6 | |||||
Inventories, net | 219.5 | 164.2 | |||||
Deferred charges and prepaid expenses | 4.2 | 2.8 | |||||
Other current assets | 7.4 | 6.2 | |||||
Total Current Assets | 417.5 | 290.4 | |||||
Property, Plant and Equipment, Net | 701.6 | 741.9 | |||||
Other Assets | |||||||
Pension assets | 9.8 | 6.2 | |||||
Intangible assets, net | 20.9 | 25.0 | |||||
Other non-current assets | 6.0 | 6.4 | |||||
Total Other Assets | 36.7 | 37.6 | |||||
Total Assets | $1,155.8 | $1,069.9 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable, trade | $133.8 | $87.0 | |||||
Salaries, wages and benefits | 30.4 | 20.3 | |||||
Accrued pension and postretirement costs | 3.0 | 3.0 | |||||
Other current liabilities | 21.4 | 20.4 | |||||
Total Current Liabilities | 188.6 | 130.7 | |||||
Non-Current Liabilities | |||||||
Convertible notes, net | 69.2 | 66.4 | |||||
Other long-term debt | 95.2 | 70.2 | |||||
Accrued pension and postretirement costs | 196.2 | 192.1 | |||||
Deferred income taxes | 0.7 | — | |||||
Other non-current liabilities | 13.2 | 13.1 | |||||
Total Non-Current Liabilities | 374.5 | 341.8 | |||||
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 2017 and 2016 - 45.7 million shares | — | — | |||||
Additional paid-in capital | 842.3 | 845.6 | |||||
Retained deficit | (204.1 | ) | (193.9 | ) | |||
Treasury shares - 2017 - 1.3 million; 2016 - 1.5 million | (37.6 | ) | (44.9 | ) | |||
Accumulated other comprehensive loss | (7.9 | ) | (9.4 | ) | |||
Total Shareholders’ Equity | 592.7 | 597.4 | |||||
Total Liabilities and Shareholders’ Equity | $1,155.8 | $1,069.9 |
See accompanying Notes to Unauditedthe unaudited Consolidated Financial Statements.
5
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 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| (15.3 | ) |
|
| — |
|
|
| — |
|
|
| (15.3 | ) |
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.3 | ) |
|
| (1.3 | ) |
Stock-based compensation expense |
|
| — |
|
|
| 1.6 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1.6 |
|
Issuance of treasury shares |
|
| 75,689 |
|
|
| (2.0 | ) |
|
| — |
|
|
| 2.0 |
|
|
| — |
|
|
| — |
|
Shares surrendered for taxes |
|
| (5,341 | ) |
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| (0.1 | ) |
Balance at June 30, 2020 |
|
| 45,036,176 |
|
| $ | 840.7 |
|
| $ | (336.7 | ) |
| $ | (17.5 | ) |
| $ | 40.5 |
|
| $ | 527.0 |
|
|
| 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 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| (11.9 | ) |
|
| — |
|
|
| — |
|
| $ | (11.9 | ) |
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 65.7 |
|
|
| 65.7 |
|
Stock-based compensation expense |
|
| — |
|
|
| 1.6 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1.6 |
|
Stock option activity |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of treasury shares |
|
| 50,185 |
|
|
| (1.4 | ) |
|
| — |
|
|
| 1.4 |
|
|
| — |
|
|
| — |
|
Balance at June 30, 2019 |
|
| 44,816,094 |
|
| $ | 841.4 |
|
| $ | (199.9 | ) |
| $ | (25.1 | ) |
| $ | 57.3 |
|
| $ | 673.7 |
|
See accompanying Notes to the unaudited Consolidated Financial Statements.
6
TimkenSteel Corporation
Consolidated Statements of Cash Flows (Unaudited)
|
| Six Months Ended June 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
(Dollars in millions) |
|
|
|
|
|
|
|
|
CASH PROVIDED (USED) |
|
|
|
|
|
|
|
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (35.2 | ) |
| $ | (8.4 | ) |
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 35.4 |
|
|
| 35.7 |
|
Amortization of deferred financing fees and debt discount |
|
| 2.7 |
|
|
| 2.5 |
|
Impairment charges and loss (gain) on sale or disposal of assets |
|
| (3.2 | ) |
|
| 1.8 |
|
Deferred income taxes |
|
| 0.3 |
|
|
| (0.2 | ) |
Stock-based compensation expense |
|
| 3.6 |
|
|
| 3.8 |
|
Pension and postretirement expense, net |
|
| 4.9 |
|
|
| 3.3 |
|
Pension and postretirement contributions and payments |
|
| (3.2 | ) |
|
| (3.5 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
| 13.9 |
|
|
| 17.0 |
|
Inventories, net |
|
| 75.5 |
|
|
| 3.3 |
|
Accounts payable |
|
| (17.2 | ) |
|
| (50.3 | ) |
Other accrued expenses |
|
| (2.0 | ) |
|
| (22.3 | ) |
Deferred charges and prepaid expenses |
|
| 1.4 |
|
|
| 0.9 |
|
Other, net |
|
| 3.0 |
|
|
| (1.2 | ) |
Net Cash Provided (Used) by Operating Activities |
|
| 79.9 |
|
|
| (17.6 | ) |
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (9.6 | ) |
|
| (12.3 | ) |
Proceeds from disposals of property, plant and equipment |
|
| 8.4 |
|
|
| — |
|
Net Cash Provided (Used) by Investing Activities |
|
| (1.2 | ) |
|
| (12.3 | ) |
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
| — |
|
|
| 0.2 |
|
Shares surrendered for employee taxes on stock compensation |
|
| (0.3 | ) |
|
| (1.0 | ) |
Repayments on credit agreements |
|
| (30.0 | ) |
|
| (10.0 | ) |
Borrowings on credit agreements |
|
| — |
|
|
| 40.0 |
|
Net Cash Provided (Used) by Financing Activities |
|
| (30.3 | ) |
|
| 29.2 |
|
Increase (Decrease) in Cash and Cash Equivalents |
|
| 48.4 |
|
|
| (0.7 | ) |
Cash and cash equivalents at beginning of period |
|
| 27.1 |
|
|
| 21.6 |
|
Cash and Cash Equivalents at End of Period |
| $ | 75.5 |
|
| $ | 20.9 |
|
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
(Dollars in millions) | |||||||
CASH PROVIDED (USED) | |||||||
Operating Activities | |||||||
Net loss | ($9.9 | ) | ($38.5 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Depreciation and amortization | 56.4 | 56.2 | |||||
Amortization of deferred financing fees and debt discount | 3.1 | 1.9 | |||||
Impairment charges and loss on sale or disposal of assets | 0.4 | 1.0 | |||||
Deferred income taxes | 0.7 | (24.9 | ) | ||||
Stock-based compensation expense | 4.9 | 4.6 | |||||
Pension and postretirement expense | 4.6 | 23.4 | |||||
Pension and postretirement contributions and payments | (2.5 | ) | (3.1 | ) | |||
Reimbursement from postretirement plan assets | — | 13.3 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable, net | (69.0 | ) | (23.0 | ) | |||
Inventories, net | (55.3 | ) | 18.5 | ||||
Accounts payable, trade | 46.8 | 23.6 | |||||
Other accrued expenses | 10.7 | (8.4 | ) | ||||
Deferred charges and prepaid expenses | (1.4 | ) | 7.6 | ||||
Other, net | (1.2 | ) | 3.3 | ||||
Net Cash (Used) Provided by Operating Activities | (11.7 | ) | 55.5 | ||||
Investing Activities | |||||||
Capital expenditures | (11.9 | ) | (26.1 | ) | |||
Net Cash Used by Investing Activities | (11.9 | ) | (26.1 | ) | |||
Financing Activities | |||||||
Proceeds from exercise of stock options | 0.2 | — | |||||
Shares surrendered for employee taxes on stock compensation | (1.4 | ) | — | ||||
Credit agreement repayments | (5.0 | ) | (130.0 | ) | |||
Credit agreement borrowings | 30.0 | — | |||||
Debt issuance costs | — | (4.8 | ) | ||||
Proceeds from issuance of convertible notes | — | 86.3 | |||||
Net Cash Provided (Used) by Financing Activities | 23.8 | (48.5 | ) | ||||
Effect of exchange rate changes on cash | — | — | |||||
Increase (Decrease) In Cash and Cash Equivalents | 0.2 | (19.1 | ) | ||||
Cash and cash equivalents at beginning of period | 25.6 | 42.4 | |||||
Cash and Cash Equivalents at End of Period | $25.8 | $23.3 |
See accompanying Notes to Unauditedthe unaudited Consolidated Financial Statements.
7
TimkenSteel Corporation
Notes to Unaudited Consolidated Financial Statements
(dollars in millions, except per share data)
Note1- Company and Basis of Presentation
The accompanying Unauditedunaudited 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 Auditedaudited Consolidated Financial Statements and Notes included in its Annual Report on Form 10-K for the year ended December 31, 2016.
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 TimkenSteel) manufactures alloy steel,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, the allowance for doubtful accounts in 2020 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 carbon and micro-alloy steel, with an annual melt capacitygeo-political factors facing the energy end market. At this time, the full impact of approximately 2 million tons and shipment capacity of 1.5 million tons. TimkenSteel’s portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes) and value-add solutions, such as precision steel components. In addition, TimkenSteel supplies machining and thermal treatment services, as well as manages raw material recycling programs, which are used as a feeder system forCOVID-19 is difficult to predict due to uncertainty surrounding the Company’s melt operations. The Company’s products and services are used in a diverse range of demanding applications in the following market sectors: oil and gas; oil country tubular goods (OCTG); automotive; industrial equipment; mining; construction; rail; aerospace and defense; heavy truck; agriculture; and power generation.
Change in Accounting Principle
During the fourth quarter of 2019, TimkenSteel changedelected to change its accounting principlemethod for recognizing actuarial gains and losses and expected returns on plan assets forvaluing its defined benefit pension and other postretirement benefit plans. Priorinventories that previously used the last-in, first-out (LIFO) method to 2016, the Company amortized, as a component of pension and other postretirement expense, unrecognized actuarial gains and losses (included within accumulated other comprehensive income (loss)) over the average remaining service period of active employees expected to receive benefits under the plan, or average remaining life expectancy of inactive participants when all or almost all of plan participants are inactive. The Company historically has calculated the market-related value of plan assets based on a 5-year market adjustment. The value was determined by adjusting the fair value of plan assets to reflect the investment gains and losses during each of the last 5 years. The difference between the expected return on assets and actual return on assets was recognized at the rate of 20% per year (e.g., recognized over five years). Under the new principle, actuarial gains and losses are immediately recognized through net periodic benefit cost in the Statement of Operations upon the annual remeasurement at December 31, or on an interim basis as triggering events warrant remeasurement. In addition, the Company changed its accounting for measuring the market-related value of plan assets from a calculated amount (based on a five-year smoothing of asset returns) to fair value.first-in, first-out (FIFO) method. The Company believes these changes arethat the FIFO method is preferable as they result in an accelerated recognitionit improves comparability with its peers, more closely resembles the physical flow of changes in assumptionsits inventory and market return on plan assets, as compared to the minimum amortization approach and market-related value of plan assets (i.e. delayed approach). Additionally,aligns with how the Company believesinternally manages the new accounting principles provide a better representation of the operating results of the Company and the impact of its benefit obligations (through the income statement) in the period when changes occur.
The following tables reflect the SEC.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 June 30, 2019 |
|
| Six Months Ended June 30, 2019 |
| ||||||||||||||||||
|
| As Reported |
|
| Adjustments |
|
| As Adjusted |
|
| As Reported |
|
| Adjustments |
|
| As Adjusted |
| ||||||
Cost of products sold |
| $ | 311.3 |
|
| $ | 10.6 |
|
| $ | 321.9 |
|
| $ | 653.2 |
|
| $ | 11.3 |
|
| $ | 664.5 |
|
Gross profit |
|
| 25.4 |
|
|
| (10.6 | ) |
|
| 14.8 |
|
|
| 54.5 |
|
|
| (11.3 | ) |
|
| 43.2 |
|
Income (loss) before income taxes |
|
| (4.2 | ) |
|
| (10.6 | ) |
|
| (14.8 | ) |
|
| 0.1 |
|
|
| (11.3 | ) |
|
| (11.2 | ) |
Provision (benefit) for income taxes |
|
| 0.2 |
|
|
| (3.1 | ) |
|
| (2.9 | ) |
|
| 0.3 |
|
|
| (3.1 | ) |
|
| (2.8 | ) |
Net income (loss) |
|
| (4.4 | ) |
|
| (7.5 | ) |
|
| (11.9 | ) |
|
| (0.2 | ) |
|
| (8.2 | ) |
|
| (8.4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
| (0.10 | ) |
|
| (0.17 | ) |
|
| (0.27 | ) |
|
| — |
|
|
| (0.19 | ) |
|
| (0.19 | ) |
Diluted earnings (loss) per share |
|
| (0.10 | ) |
|
| (0.17 | ) |
|
| (0.27 | ) |
|
| — |
|
|
| (0.19 | ) |
|
| (0.19 | ) |
Consolidated Statement of Comprehensive Income (Loss) |
| Three Months Ended June 30, 2019 |
|
| Six Months Ended June 30, 2019 |
| ||||||||||||||||||
|
| As Reported |
|
| Adjustments |
|
| As Adjusted |
|
| As Reported |
|
| Adjustments |
|
| As Adjusted |
| ||||||
Net income (loss) |
| $ | (4.4 | ) |
| $ | (7.5 | ) |
| $ | (11.9 | ) |
| $ | (0.2 | ) |
| $ | (8.2 | ) |
| $ | (8.4 | ) |
Pension and postretirement liability adjustments |
|
| 69.4 |
|
|
| (3.1 | ) |
|
| 66.3 |
|
|
| 69.5 |
|
|
| (3.1 | ) |
|
| 66.4 |
|
Comprehensive income (loss), net of tax |
|
| 64.4 |
|
|
| (10.6 | ) |
|
| 53.8 |
|
|
| 69.1 |
|
|
| (11.3 | ) |
|
| 57.8 |
|
8
Consolidated Statement of Cash Flows |
| Six Months Ended June 30, 2019 |
| |||||||||
|
| As Reported |
|
| Adjustments |
|
| As Adjusted |
| |||
Net income (loss) |
| $ | (0.2 | ) |
| $ | (8.2 | ) |
| $ | (8.4 | ) |
Pension and postretirement expense (benefit), net |
|
| 6.4 |
|
|
| (3.1 | ) |
|
| 3.3 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net |
|
| (8.0 | ) |
|
| 11.3 |
|
|
| 3.3 |
|
Note2-Recent Accounting Pronouncements
Adoption of New Accounting Standards
The Company adopted the following Accounting Standard Updates (ASU) duringin the nine months ended September 30, 2017. With the exceptionfirst quarter of 2020, all of which were effective as of January 1, 2020, except ASU 2017-07,2020-04, which is discussed below, thebecame effective upon issuance on March 12, 2020. The adoption of these standards did not have a material impact on the Unauditedunaudited Consolidated Financial Statements or the related Notes to the Unauditedunaudited 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 | |
The standard changes how entities will measure credit losses for most financial assets, including trade and | |
Accounting Standards Issued But Not Yet Adopted
The Company has considered the FASBrecent ASUs issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivativesby 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. |
9
Note3-Revenue Recognition
The following table provides the major sources of revenue by end-market sector for the three and Hedging (Topic 815): (Part I) Accountingsix months ended June 30, 2020 and 2019:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Mobile |
| $ | 36.1 |
|
| $ | 135.3 |
|
| $ | 133.8 |
|
| $ | 279.5 |
|
Industrial |
|
| 98.0 |
|
|
| 124.3 |
|
|
| 211.3 |
|
|
| 271.3 |
|
Energy |
|
| 14.6 |
|
|
| 54.1 |
|
|
| 39.8 |
|
|
| 114.9 |
|
Other(1) |
|
| 5.3 |
|
|
| 23.0 |
|
|
| 28.7 |
|
|
| 42.0 |
|
Total Net Sales |
| $ | 154.0 |
|
| $ | 336.7 |
|
| $ | 413.6 |
|
| $ | 707.7 |
|
(1)“Other” 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 Certain Financial Instruments with Down Round Features, (Part II) Replacementthe three and six months ended June 30, 2020 and 2019:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Bar |
| $ | 92.7 |
|
| $ | 225.4 |
|
| $ | 260.8 |
|
| $ | 465.3 |
|
Tube |
|
| 25.6 |
|
|
| 40.8 |
|
|
| 56.0 |
|
|
| 90.4 |
|
Value-add |
|
| 32.9 |
|
|
| 63.1 |
|
|
| 88.4 |
|
|
| 136.8 |
|
Other(2) |
|
| 2.8 |
|
|
| 7.4 |
|
|
| 8.4 |
|
|
| 15.2 |
|
Total Net Sales |
| $ | 154.0 |
|
| $ | 336.7 |
|
| $ | 413.6 |
|
| $ | 707.7 |
|
(2) “Other” sales by product type includes the Company’s scrap sales.
Note4-Restructuring Charges
During 2019 and the first half 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 Indefinite DeferralTimkenSteel 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 180 salaried positions and recognized restructuring charges of $9.5 million, primarily consisting of severance and employee-related benefits. Approximately 20 of these positions were eliminated in the first half of 2020. TimkenSteel recorded reserves for Mandatorily Redeemable Financial Instrumentssuch restructuring charges as other current liabilities on the Consolidated Balance Sheets. The reserve balance at June 30, 2020 is expected to be substantially used in the next twelve months.
The following is a summary of Certain Nonpublic Entitiesthe restructuring reserve for the six months ended June 30, 2020 and Certain Mandatorily Redeemable Noncontrolling Interests2019:
Balance at December 31, 2019 |
| $ | 6.0 |
|
Expenses |
|
| 0.9 |
|
Payments |
|
| (5.9 | ) |
Balance at June 30, 2020 |
| $ | 1.0 |
|
Balance at December 31, 2018 |
| $ | — |
|
Expenses |
|
| 3.6 |
|
Payments |
|
| (0.2 | ) |
Balance at June 30, 2019 |
| $ | 3.4 |
|
Note 5 - Disposition of Non-Core Assets
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 $1.0 million and $4.2 million was recognized for the three and six months ended June 30, 2020, respectively. At June 30, 2020, the remaining associated machinery and equipment, with a Scope Exception. This ASU eliminatesnet book value of $2.1 million, was classified as held for sale on the requirementConsolidated 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. While 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 established in the fourth quarter of 2019, excess inventory related to consider “down round” features when determining whether certain equity-linked financial instrumentsour Energy end-market sector resulted in an additional reserve of approximately $3.1 million being recorded in the second quarter of 2020. The excess inventory is the result of continued weakness in this end-market sector, as well as recent closures of several distributors that were holding considerable amounts of similar inventory.
10
Note6–Other Expense (Income), net
The following table provides the components of other expense (income), net for the three and six months ended June 30, 2020 and 2019:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Pension and postretirement non-service benefit loss (income) |
| $ | (6.5 | ) |
| $ | (4.5 | ) |
| $ | (13.0 | ) |
| $ | (7.3 | ) |
Loss (gain) from remeasurement of benefit plans |
|
| (1.9 | ) |
|
| 4.4 |
|
|
| 7.6 |
|
|
| 4.4 |
|
Foreign currency exchange loss (gain) |
|
| 0.3 |
|
|
| (0.2 | ) |
|
| 0.4 |
|
|
| (0.1 | ) |
Miscellaneous expense (income) |
|
| — |
|
|
| 0.1 |
|
|
| (0.4 | ) |
|
| 0.1 |
|
Total other expense (income), net |
| $ | (8.1 | ) |
| $ | (0.2 | ) |
| $ | (5.4 | ) |
| $ | (2.9 | ) |
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 six months ended June 30, 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. As a result, the Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan as of June 30, 2020 and March 31, 2020, which resulted in a non-cash (gain) loss from remeasurement of ($1.9) million and $7.6 million for the three and six months ended June 30, 2020, respectively. For more details on the remeasurement, refer to “Note 11 - Retirement and Postretirement Plans.”
Note7-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 embedded featuresloss before income taxes for the period. In addition, non-recurring or discrete items, including interest on prior-year tax liabilities, are indexedrecorded during the periods in which they occur.
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Provision (benefit) for incomes taxes |
| $ | 0.2 |
|
| $ | (2.9 | ) |
| $ | 0.3 |
|
| $ | (2.8 | ) |
Effective tax rate |
|
| (1.1 | )% |
|
| 19.6 | % |
|
| (0.8 | )% |
|
| 25.0 | % |
In light of TimkenSteel’s 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 entity’s own stock. It is effective for annual periods beginning aftereconomic 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, 2018. Early adoption is permitted. TimkenSteel2020, as afforded by the Act. Through June 30, 2020, the Company has deferred $2.0 million in cash payments, and expects additional deferred cash payments of approximately $4 million to $5 million for the remainder of 2020, with total deferred amounts to be paid in 2 equal installments at December 31, 2021 and December 31, 2022. The Company is currently evaluating its eligibility and potential benefit related to the impactEmployee Retention Credit.
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.
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 six months ended June 30, 2020 and 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 six months ended June 30, 2020 and 2019 because the effect of their inclusion would have been anti-dilutive.
11
The following table sets forth the reconciliation of the adoption of this ASU on its results of operations and financial condition.
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (15.3 | ) |
| $ | (11.9 | ) |
| $ | (35.2 | ) |
| $ | (8.4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic |
|
| 45.0 |
|
|
| 44.8 |
|
|
| 44.9 |
|
|
| 44.7 |
|
Dilutive effect of stock-based awards |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Weighted average shares outstanding, diluted |
|
| 45.0 |
|
|
| 44.8 |
|
|
| 44.9 |
|
|
| 44.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
| $ | (0.34 | ) |
| $ | (0.27 | ) |
| $ | (0.78 | ) |
| $ | (0.19 | ) |
Diluted earnings (loss) per share |
| $ | (0.34 | ) |
| $ | (0.27 | ) |
| $ | (0.78 | ) |
| $ | (0.19 | ) |
Note 3 9-Inventories
The components of inventories, net of reserves as of SeptemberJune 30, 20172020 and December 31, 20162019 were as follows:
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Manufacturing supplies |
| $ | 43.3 |
|
| $ | 49.8 |
|
Raw materials |
|
| 12.2 |
|
|
| 26.0 |
|
Work in process |
|
| 89.6 |
|
|
| 123.7 |
|
Finished products |
|
| 75.4 |
|
|
| 93.1 |
|
Gross inventory |
|
| 220.5 |
|
|
| 292.6 |
|
Allowance for inventory reserves |
|
| (14.1 | ) |
|
| (10.7 | ) |
Total Inventories, net |
| $ | 206.4 |
|
| $ | 281.9 |
|
September 30, 2017 | December 31, 2016 | ||||||
Inventories, net: | |||||||
Manufacturing supplies | $36.6 | $37.9 | |||||
Raw materials | 31.7 | 16.2 | |||||
Work in process | 96.3 | 58.6 | |||||
Finished products | 63.5 | 59.6 | |||||
Subtotal | 228.1 | 172.3 | |||||
Allowance for surplus and obsolete inventory | (8.6 | ) | (8.1 | ) | |||
Total Inventories, net | $219.5 | $164.2 |
In the lowersecond quarter of cost or2020, the Company recorded an additional allowance for inventory reserve of approximately $3.1 million. The additional reserve is associated with the Energy end market with approximately 64% valued by the LIFO method, and the remaining inventories, including manufacturing supplies inventory as well as international (outside the United States) inventories, valued by FIFO, average cost or specific identification methods.
Note10-Financing Arrangements
For a detailed discussion of the LIFO method can be made only atCompany's long-term debt and credit arrangements, refer to “Note 14 - Financing Arrangements” in the end of each year basedCompany’s Annual Report 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.
September 30, 2017 | December 31, 2016 | ||||||
Property, Plant and Equipment, net: | |||||||
Land | $13.4 | $13.3 | |||||
Buildings and improvements | 418.9 | 420.6 | |||||
Machinery and equipment | 1,354.1 | 1,352.0 | |||||
Construction in progress | 51.6 | 63.9 | |||||
Subtotal | 1,838.0 | 1,849.8 | |||||
Less allowances for depreciation | (1,136.4 | ) | (1,107.9 | ) | |||
Property, Plant and Equipment, net | $701.6 | $741.9 |
September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Intangible Assets Subject to Amortization: | |||||||||||||||||||||||
Customer relationships | $6.3 | $4.0 | $2.3 | $6.3 | $3.7 | $2.6 | |||||||||||||||||
Technology use | 9.0 | 5.8 | 3.2 | 9.0 | 5.2 | 3.8 | |||||||||||||||||
Capitalized software | 58.5 | 43.1 | 15.4 | 58.9 | 40.3 | 18.6 | |||||||||||||||||
Total Intangible Assets | $73.8 | $52.9 | $20.9 | $74.2 | $49.2 | $25.0 |
Convertible Notes
The components of the Convertible Notes as of SeptemberJune 30, 20172020 and December 31, 20162019 were as follows:
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Principal |
| $ | 86.3 |
|
| $ | 86.3 |
|
Less: Debt issuance costs, net of amortization |
|
| (0.5 | ) |
|
| (0.7 | ) |
Less: Debt discount, net of amortization |
|
| (4.8 | ) |
|
| (7.0 | ) |
Convertible notes, net |
| $ | 81.0 |
|
| $ | 78.6 |
|
September 30, 2017 | December 31, 2016 | ||||||
Principal | $86.3 | $86.3 | |||||
Less: Debt issuance costs, net of amortization | (1.8 | ) | (2.1 | ) | |||
Less: Debt discount, net of amortization | (15.3 | ) | (17.8 | ) | |||
Convertible notes, net | $69.2 | $66.4 |
The initial value of the principal amount recorded as a liability at the date of issuance was $66.9 million, using an effective interest rate of 12.0%. The remaining $19.4 million of principal amount was allocated to the conversion feature and recorded as a component of shareholders’ equity at the date of issuance. This amount represents a discount to the debt to be amortized through interest expense using the effective interest method through the maturity of the Convertible Notes.
12
The following table sets forth total interest expense recognized related to the Convertible Notes:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Contractual interest expense |
| $ | 1.3 |
|
| $ | 1.3 |
|
| $ | 2.6 |
|
| $ | 2.6 |
|
Amortization of debt issuance costs |
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.2 |
|
|
| 0.2 |
|
Amortization of debt discount |
|
| 1.1 |
|
|
| 1.0 |
|
|
| 2.2 |
|
|
| 2.0 |
|
Total |
| $ | 2.5 |
|
| $ | 2.4 |
|
| $ | 5.0 |
|
| $ | 4.8 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Contractual interest expense | $1.3 | $1.3 | $3.9 | $1.7 | |||||||||||
Amortization of debt issuance costs | 0.1 | 0.1 | 0.1 | 0.3 | 0.2 | ||||||||||
Amortization of debt discount | 0.9 | 0.7 | 2.5 | 0.9 | |||||||||||
Total | $2.3 | $2.1 | $6.7 | $2.8 |
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 1.7% as of June 30, 2020. The amount available for borrowings under the credit agreement as of June 30, 2020 was $176.4 million. As of June 30, 2020, the Company was in compliance with all covenants.
Fair Value Measurement
The fair value of the Convertible Notes was approximately $162.8$72.6 million as of SeptemberJune 30, 2017.2020. 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 September 2017 .
September 30, 2017 | December 31, 2016 | ||||||
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.862% as of September 30, 2017) | $12.2 | $12.2 | |||||
Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.862% as of September 30, 2017) | 9.5 | 9.5 | |||||
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (0.862% as of September 30, 2017) | 8.5 | 8.5 | |||||
Amended Credit Agreement, due 2019 (LIBOR plus applicable spread) | 65.0 | 40.0 | |||||
Total Other Long-Term Debt | $95.2 | $70.2 |
TimkenSteel’s Credit Agreement
Interest Paid
The bond is held 100% by TimkenSteel Material Services, LLC (a wholly-owned subsidiary of TimkenSteel) and, accordingly, the obligation under the lease agreement and investment in the Industrial Revenue Bond, as well as the relatedtotal cash interest income and expense, are eliminated in the Unaudited Consolidated Financial Statements. As of September 30, 2017, $39.6 million has been spent on the new advanced quench-and-temper facility and is reported in property, plant and equipment, net in the Unaudited Consolidated Balance Sheets. Of this amount, $11.8 million has been financed through the lease arrangement described above.
Foreign Currency Translation Adjustments | Pension and Postretirement Liability Adjustments | Total | |||||||||
Balance at December 31, 2016 | ($7.0 | ) | ($2.4 | ) | ($9.4 | ) | |||||
Other comprehensive income before reclassifications, before income tax | 1.1 | — | 1.1 | ||||||||
Amounts reclassified from accumulated other comprehensive loss, before income tax | — | 1.1 | 1.1 | ||||||||
Income tax benefit | — | (0.7 | ) | (0.7 | ) | ||||||
Net current period other comprehensive income, net of income taxes | 1.1 | 0.4 | 1.5 | ||||||||
Balance at September 30, 2017 | ($5.9 | ) | ($2.0 | ) | ($7.9 | ) |
Foreign Currency Translation Adjustments | Pension and Postretirement Liability Adjustments | Total | |||||||||
Balance at December 31, 2015 | ($5.0 | ) | ($2.9 | ) | ($7.9 | ) | |||||
Other comprehensive loss before reclassifications, before income tax | (2.8 | ) | — | (2.8 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss, before income tax | — | 1.2 | 1.2 | ||||||||
Income tax benefit | — | (0.4 | ) | (0.4 | ) | ||||||
Net current period other comprehensive (loss) income, net of income taxes | (2.8 | ) | 0.8 | (2.0 | ) | ||||||
Balance as of September 30, 2016 | ($7.8 | ) | ($2.1 | ) | ($9.9 | ) |
Note 9 11-Retirement and Postretirement Plans for additional information.
Total | Additional Paid-in Capital | Retained Deficit | Treasury Shares | Accumulated Other Comprehensive Loss | |||||||||||||||
Balance at December 31, 2016 | $597.4 | $845.6 | ($193.9 | ) | ($44.9 | ) | ($9.4 | ) | |||||||||||
Net loss | (9.9 | ) | — | (9.9 | ) | — | — | ||||||||||||
Pension and postretirement adjustment, net of tax | 0.4 | — | — | — | 0.4 | ||||||||||||||
Foreign currency translation adjustments | 1.1 | — | — | — | 1.1 | ||||||||||||||
Stock-based compensation expense | 4.9 | 4.9 | — | — | — | ||||||||||||||
Stock option activity | 0.2 | 0.2 | — | — | — | ||||||||||||||
Issuance of treasury shares | — | (8.4 | ) | (0.3 | ) | 8.7 | — | ||||||||||||
Shares surrendered for taxes | (1.4 | ) | — | — | (1.4 | ) | — | ||||||||||||
Balance at September 30, 2017 | $592.7 | $842.3 | ($204.1 | ) | ($37.6 | ) | ($7.9 | ) |
The components of net periodic benefit cost (income) for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 were as follows:
|
| Three Months Ended June 30, 2020 |
|
| Three Months Ended June 30, 2019 |
| ||||||||||
|
| Pension |
|
| Postretirement |
|
| Pension |
|
| Postretirement |
| ||||
Service cost |
| $ | 4.8 |
|
| $ | 0.3 |
|
| $ | 4.4 |
|
| $ | 0.3 |
|
Interest cost |
|
| 10.7 |
|
|
| 1.0 |
|
|
| 12.3 |
|
|
| 1.5 |
|
Expected return on plan assets |
|
| (16.0 | ) |
|
| (0.9 | ) |
|
| (16.4 | ) |
|
| (1.0 | ) |
Amortization of prior service cost |
|
| 0.1 |
|
|
| (1.5 | ) |
|
| 0.1 |
|
|
| (1.0 | ) |
Net remeasurement losses (gains) |
|
| (1.9 | ) |
|
| — |
|
|
| — |
|
|
| 4.4 |
|
Net Periodic Benefit Cost (Income) |
| $ | (2.3 | ) |
| $ | (1.1 | ) |
| $ | 0.4 |
|
| $ | 4.2 |
|
|
| Six Months Ended June 30, 2020 |
|
| Six Months Ended June 30, 2019 |
| ||||||||||
|
| Pension |
|
| Postretirement |
|
| Pension |
|
| Postretirement |
| ||||
Service cost |
| $ | 9.7 |
|
| $ | 0.6 |
|
| $ | 8.7 |
|
| $ | 0.6 |
|
Interest cost |
|
| 21.7 |
|
|
| 2.1 |
|
|
| 24.5 |
|
|
| 3.5 |
|
Expected return on plan assets |
|
| (32.2 | ) |
|
| (1.8 | ) |
|
| (32.6 | ) |
|
| (1.9 | ) |
Amortization of prior service cost |
|
| 0.2 |
|
|
| (3.0 | ) |
|
| 0.2 |
|
|
| (1.0 | ) |
Net remeasurement losses (gains) |
|
| 7.6 |
|
|
| — |
|
|
| — |
|
|
| 4.4 |
|
Net Periodic Benefit Cost (Income) |
| $ | 7.0 |
|
| $ | (2.1 | ) |
| $ | 0.8 |
|
| $ | 5.6 |
|
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | ||||||||||||||
Components of net periodic benefit cost: | Pension | Postretirement | Pension | Postretirement | |||||||||||
Service cost | $4.6 | $0.4 | $3.9 | $0.4 | |||||||||||
Interest cost | 12.3 | 2.1 | 13.2 | 2.4 | |||||||||||
Expected return on plan assets | (17.7 | ) | (1.3 | ) | (18.1 | ) | (1.5 | ) | |||||||
Amortization of prior service cost | 0.1 | 0.2 | 0.1 | 0.2 | |||||||||||
Net remeasurement loss | 2.3 | — | 20.4 | — | |||||||||||
Net Periodic Benefit Cost | $1.6 | $1.4 | $19.5 | $1.5 |
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | ||||||||||||||
Components of net periodic benefit cost: | Pension | Postretirement | Pension | Postretirement | |||||||||||
Service cost | $13.8 | $1.2 | $11.7 | $1.2 | |||||||||||
Interest cost | 36.8 | 6.3 | 39.8 | 7.1 | |||||||||||
Expected return on plan assets | (52.9 | ) | (4.0 | ) | (53.6 | ) | (4.4 | ) | |||||||
Amortization of prior service cost | 0.3 | 0.8 | 0.4 | 0.8 | |||||||||||
Net remeasurement loss | 2.3 | — | 20.4 | — | |||||||||||
Net Periodic Benefit Cost | $0.3 | $4.3 | $18.7 | $4.7 |
The service cost component is included in cost of products sold and selling, general and administrative expenses. The non-service cost components of net periodic benefit costs are included in other income (expense), net in the Unaudited Consolidated Statements of Operations. The Company utilized the practical expedient approach, based on amounts previously disclosed, to reclassify non-service components of net periodic benefit cost from cost of products sold and selling, general and administrative expenses, into other income (expense), net on the Unaudited Consolidated Statements of Operations.
Three | Nine | |||||||
Months ended September 30, 2016 | ||||||||
Cost of products sold | ($13.3 | ) | ($7.7 | ) | ||||
Selling, general and administrative expenses | (3.4 | ) | (2.8 | ) | ||||
($16.7 | ) | ($10.5 | ) |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Numerator: | |||||||||||||||
Net loss for basic and diluted earnings per share | ($5.9 | ) | ($22.2 | ) | ($9.9 | ) | ($38.5 | ) | |||||||
Denominator: | |||||||||||||||
Weighted average shares outstanding, basic | 44,433,094 | 44,221,310 | 44,373,264 | 44,215,373 | |||||||||||
Dilutive effect of stock-based awards | — | — | — | — | |||||||||||
Weighted average shares outstanding, diluted | 44,433,094 | 44,221,310 | 44,373,264 | 44,215,373 | |||||||||||
Basic loss per share | ($0.13 | ) | ($0.50 | ) | ($0.22 | ) | ($0.87 | ) | |||||||
Diluted loss per share | ($0.13 | ) | ($0.50 | ) | ($0.22 | ) | ($0.87 | ) |
13
Note 11 - Income Taxes
During the six months ended June 30, 2020 the Board of Directors granted 931,244 time-vested restricted stock units, 143,280 performance-vested restricted stock units, and 511,020 stock options.
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 income taxes in interim periodsvesting. Expense is computed by applyingrecognized over the appropriate estimated annual effective tax rates to income or loss before income taxesservice period, adjusted for the period. In addition, non-recurring or discrete items, including interest on prior-year tax liabilities, are recordedany forfeitures that should occur during the periods in which they occur.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Provision (benefit) for income taxes | $0.1 | ($13.3 | ) | $1.2 | ($23.5 | ) | |||||||||
Effective tax rate | (1.5 | )% | 37.5 | % | (14.0 | )% | 37.9 | % |
Performance-vested restricted stock units issued in 2020 vest based on achievement of a total shareholder return (TSR) metric. The TSR metric is considered a market condition, which requires TimkenSteel to the point that would result in a net U.S. deferred tax asset at September 30, 2017 and December 31, 2016. In light of TimkenSteel’s recent operating performancereflect it in the U.S.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 current industry conditions,considers the Company assessed, based upon all available evidence, and concluded that it was more likely than not that it would not realize its U.S. deferred tax assets. As a result,correlation of peer company returns in determining fair value. The weighted average fair value of the fourth quarter of 2016,performance-vested restricted stock units granted during the Company recorded full valuation allowance on its net U.S. deferred tax asset of $15.6 million. Going forward, the need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s effective tax rate. The Company will maintain a 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. The increase in the effective tax rate for the ninesix months ended SeptemberJune 30, 2017 is primarily due to a discrete charge of approximately $1.0 million recorded2020 was $5.23 per share. There were 0 performance-vested restricted stock units granted in the second quarter of 2017.2020.
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 six months ended June 30, 2020 were $5.26 per share and $2.23 per share, respectively. There were 0 stock option grants in the second quarter of 2020.
TimkenSteel recognized stock-based compensation expense of $1.6 million and $3.6 million for the three and six months ended June 30, 2020, compared to $1.5 million and $3.1 for the same periods in 2019, respectively. Future stock-based compensation expense regarding the unvested portion of all awards is approximately $6.7 million. The future expense is expected to be recognized over the remaining vesting periods through 2024.
Note13-Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2020 and 2019 by component were as follows:
|
| Foreign Currency Translation Adjustments |
|
| Pension and Postretirement Liability Adjustments |
|
| Total |
| |||
Balance as of December 31, 2019 |
| $ | (6.8 | ) |
| $ | 51.5 |
|
| $ | 44.7 |
|
Other comprehensive income before reclassifications, before income tax |
|
| (1.7 | ) |
|
| — |
|
|
| (1.7 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), before income tax |
|
| — |
|
|
| (2.8 | ) |
|
| (2.8 | ) |
Amounts deferred to accumulated other comprehensive income (loss), before income tax |
|
| — |
|
|
| — |
|
|
| — |
|
Tax effect |
|
| — |
|
|
| 0.3 |
|
|
| 0.3 |
|
Net current period other comprehensive income, net of income taxes |
|
| (1.7 | ) |
|
| (2.5 | ) |
|
| (4.2 | ) |
Balance as of June 30, 2020 |
| $ | (8.5 | ) |
| $ | 49.0 |
|
| $ | 40.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign Currency Translation Adjustments |
|
| Pension and Postretirement Liability Adjustments |
|
| Total |
| |||
Balance at December 31, 2018 |
| $ | (7.3 | ) |
| $ | (1.6 | ) |
| $ | (8.9 | ) |
Other comprehensive income before reclassifications, before income tax |
|
| (0.2 | ) |
|
| — |
|
|
| (0.2 | ) |
Amounts reclassified from accumulated other comprehensive loss, before income tax |
|
| — |
|
|
| (0.7 | ) |
|
| (0.7 | ) |
Amounts deferred to accumulated other comprehensive income (loss), before income tax |
|
| — |
|
|
| 67.1 |
|
|
| 67.1 |
|
Tax effect |
|
| — |
|
|
| — |
|
|
| — |
|
Net current period other comprehensive income, net of income taxes |
|
| (0.2 | ) |
|
| 66.4 |
|
|
| 66.2 |
|
Balance as of June 30, 2019 |
| $ | (7.5 | ) |
| $ | 64.8 |
|
| $ | 57.3 |
|
The amount reclassified from accumulated other comprehensive income (loss) in the six months ended June 30, 2020 for the pension and postretirement liability adjustment was included in other income, net in the unaudited Consolidated Statements of Operations.
Note 12 - 14–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 SeptemberJune 30, 20172020 and December 31, 2016,2019, TimkenSteel had a $0.7$1.3 million and $0.2a $1.5 million contingency reserve, respectively, related to loss exposures incurred in the ordinary course of business.
Nine Months Ended September 30, | ||||||
2017 | 2016 | |||||
Beginning Balance, January 1 | $0.6 | $0.8 | ||||
Expenses | 0.1 | — | ||||
Payments | (0.2 | ) | (0.2 | ) | ||
Ending Balance, September 30 | $0.5 | $0.6 |
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
(dollars in millions, except per share data)
Business Overview
We manufacture alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. Our portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes) and value-add, value-added solutions such as precision steel components.components, and billets. In addition, we supply machining and thermal treatment services as well asand manage raw material recycling programs, which are used as a feeder system for our melt operations. Our products and services are used in a diverse range of demanding applications in the following market sectors: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and oil country tubular goods (OCTG); automotive; industrial equipment; mining; construction; rail; aerospace and defense; heavy truck; agriculture; and power generation.
SBQ steel is made to restrictive chemical compositions and high internal purity levels and is used in critical mechanical applications. We make these products from nearly 100% recycled steel, using our expertise in raw materials to create custom steel products with a competitive cost structure similar to that of a high-volume producer.products. We focus on creating tailored products and services for our customers’ most demanding applications. Our engineers are experts in both materials and applications, so we can work closely with each customer to deliver flexible solutions related to our products as well as to their applications and supply chains. We believe our unique operating model and production assets give us a competitive advantage in our industry.
The SBQ barsbar, tube, and tubesbillet production processes take place at our Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, and seamless mechanical tubes and billets we produce and includes three manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. Our value-addvalue-added solutions production processes take place at threetwo downstream manufacturing facilities: TimkenSteel Material Services (Houston, TX), Tryon Peak (Columbus, NC)North Carolina), and St. Clair (Eaton, OH)Ohio). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of our market sectors. As a result, investments in our facilities and resource allocation decisions affecting our operations are designed to benefit the overall business, not any specific aspect of the business.
In the first quarter of 2020, we closed our TimkenSteel Material Services (TMS) facility in Houston, Texas. See “Note 5 - Disposition of Non-Core Assets” in the Notes to the unaudited Consolidated Financial Statements for additional information.
We conduct our business activities and report financial results as one business segment. The collective bargaining agreement betweenpresentation of financial results as one reportable segment is consistent with the way we operate our business and is consistent with the manner in which the Chief Operating Decision Maker (CODM) evaluates performance and makes resource and operating decisions for the business as described above. Furthermore, the Company andnotes that monitoring financial results as one reportable segment helps the United Steelworkers (USW) Local 1123, which had an expiration dateCODM manage costs on a consolidated basis, consistent with the integrated nature of September 25, 2017 has been extended, and we remain in discussions with USW representatives regarding a new collective bargaining agreement. our operations.
Impact of COVID-19 Pandemic
We continue to operate uninterrupted underclosely monitor the termsimpact of the existing collective bargaining agreement.COVID-19 pandemic on our Company, employees, customers and supply chain. The full extent to which the COVID-19 pandemic will impact our operations and financial results is uncertain and ultimately will depend on, among many other factors, the duration of the pandemic, further Federal and State government actions and the speed of economic recovery. We estimate the primary impact on our second quarter of 2020 results was lost sales of approximately $120 million, as compared to expectations established prior to the onset of the pandemic. The negative impact on the remainder of the year and beyond remains unknown but at a minimum, we expect customer demand in the COVID-19 environment to continue to be lower in the third quarter of 2020 in comparison to the prior year third quarter, resulting in periodic production outages as the Company continues to balance production schedules with demand.
In response to the significant reduction in customer demand resulting from the COVID-19 crisis, the Company has taken additional actions to further reduce operating expenses, conserve cash and maximize liquidity, such as:
• | Reduced interim CEO and senior executives’ base salaries by 20 percent and other executives’ base salaries by 10 percent, effective May 1; |
• | Reduced cash retainer for its board of directors by 20 percent beginning with the second-quarter 2020, and reduced the value of the board’s annual equity grant by 20 percent; |
• | Suspended company’s 401(k) plan matching contributions for salaried employees, effective June 1; |
• | Implemented unpaid rolling furloughs for approximately 90 percent of salaried employees, with an average 5 weeks of unpaid furloughs per employee, beginning in early April and continuing through July; and |
• | Deferred Social Security payroll tax remittance as permitted by the CARES Act. |
In total, the Company’s COVID-19 related actions preserved approximately $7 million in cash and reduced administrative expenses by approximately $5 million during the second quarter of 2020. Additionally, the Company took the following operational actions:
• | Aggressively reduced production schedules at all plants to align operations with customer demand, resulting in the temporary layoff of manufacturing employees; |
16
• | Reduced planned 2020 capital expenditures to $15 million to $20 million, a $10 million to $15 million reduction from the original guidance. |
Despite the negative impact on our business, these actions resulted in the Company having total liquidity of $251.9 million as of June 30, 2020. We believe this level of liquidity is sufficient to significantly strengthen our positionmeet the Company’s needs for at least the next 12 months. The Company will continue to take actions such as a leaderthose taken during the second quarter in providing differentiated solutionsorder to preserve liquidity for the energy, industrial and automotive market sectors, while enhancing our operational performance and customer service capabilities.
Impact of Raw Material Prices and LIFO
In the ordinary course of business, we are exposed to the volatility of the costs of our raw materials. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing process. We utilize a raw material surcharge mechanism thatwhen pricing products to our customers, which is designed to mitigate the impact of increases or decreases in raw material costs, although generally with a lag effect. This timing effect can result in raw material spread whereby costs can be over- or under-recovered in certain periods. While the surcharge generally protects gross profit, it has the effect of diluting gross margin as a percent of sales.
Results of Operations
Net Sales
The charts below present net sales and shipments for the three months ended June 30, 2020 and 2019.
Net sales for the three months ended June 30, 2020 were $154.0 million, a decrease of $182.7 million, or 54.3%, compared with the three months ended June 30, 2019. The decrease was due to a reduction in volume of approximately 139 thousand ship tons, resulting in a decrease of $148.4 million of net sales and lower surcharges of $53.6 million. These decreases in net sales were slightly offset by a positive mix across all end markets resulting in an increase in net sales of $21.1 million. The primary driver in the decrease in volume was lower customer demand across all end markets primarily as a result of the COVID-19 pandemic and weak energy market. The decrease in surcharges was primarily due to a 28.9% decline in the average surcharge per ton due to lower market prices for scrap and alloys. We estimate the impact of the COVID-19 pandemic on our net sales was a reduction of approximately $120 million, as compared to our forecast prior to the onset of the pandemic. The majority of this decrease was related to our mobile end-market sector, as production was halted by all major automotive manufacturers for various lengths of time during the second quarter of 2020. Excluding surcharges, net sales decreased $129.1 million, or 49.9%.
The charts below present net sales and shipments for the six months ended June 30, 2020 and 2019.
17
Net sales for the six months ended June 30, 2020 were $413.6 million, a decrease of $294.1 million, or 41.6%, compared with the six months ended June 30, 2019. The decrease was due to a reduction in volume of approximately 64%187 thousand ship tons, resulting in a decrease of our inventory utilizing the LIFO inventory valuation method. Changes$202.5 million of net sales and lower surcharges of $97.4 million. These decreases in net sales were slightly offset by a positive mix across all end markets resulting in an increase in net sales of $11.8 million. The primary driver in the cost of raw materials and production activities are recognizeddecrease in cost of products soldvolume was lower customer demand across all end markets. The decrease in surcharges was primarily due to a 33.8% decline in the current period even though these materialsaverage surcharge per ton due to lower market prices for scrap and otheralloys. We estimate the impact of the COVID-19 pandemic on our net sales during the first half of 2020 was a reduction of approximately $130 million. The majority of this decrease was related to our mobile end-market sector, as production was halted by all major automotive manufacturers for various lengths of time from March through June 2020. Excluding surcharges, net sales decreased $196.7 million, or 36.4%.
Gross Profit
The chart below presents the drivers of the gross profit variance from the three months ended June 30, 2019 to June 30, 2020.
Gross profit for the three months ended June 30, 2020 decreased $18.8 million, or 127.0% compared with the three months ended June 30, 2019. The decrease was driven primarily by lower volumes and unfavorable inventory adjustments, partially offset by favorable manufacturing costs may have been incurredand improvements in different periodsprice/mix. The primary driver in the decrease in volume was lower customer demand across all end markets primarily as a result of the COVID-19 pandemic and a weak energy market. Unfavorable inventory reserve adjustments relate primarily to a lower of cost or net realizable adjustment for inventory at significantly different valuesour exited TMS facility. Favorable manufacturing costs in 2020 were primarily due to the lengthCompany’s significant cost reduction actions, slightly offset by the unfavorable impact of timelower production levels in fixed cost leverage. Improvements in price/mix were driven by favorable mix with a lower proportion of mobile and OCTG billet shipments in 2020 in comparison to the prior year, slightly offset by unfavorable pricing across all end markets.
18
The chart below presents the drivers of the gross profit variance from the six months ended June 30, 2019 to June 30, 2020.
Gross profit for the six months ended June 30, 2020 decreased $39.4 million, or 91.2%, compared with the six months ended June 30, 2019. The decrease was driven primarily by lower volumes, additional inventory adjustments, and unfavorable price/mix, offset by favorable manufacturing costs. The primary driver in the decrease in volume was lower customer demand across all end markets primarily as a result of the COVID-19 pandemic and a weak energy market. Additional inventory reserve adjustments relate primarily to a lower of cost or net realizable adjustment for inventory at our exited TMS facility. Unfavorable price/mix was driven by lower pricing and favorable mix across all end markets. Favorable manufacturing costs in 2020 were primarily due to the Company’s significant cost reduction actions, slightly offset by the unfavorable impact of lower production cycle.levels on fixed cost leverage.
19
Selling, General and Administrative Expenses
The charts below present selling, general and administrative (SG&A) expense for the three and six months ended June 30, 2020 and 2019.
Selling, general and administrative (SG&A) expense for the three and six months ended June 30, 2020 decreased by $3.4 million, or 16.8%, and $3.3 million, or 7.6%, respectively, compared with the same periods in 2019. The decreases are primarily due to unpaid furloughs for salaried employees and other COVID-19 related cost reduction actions, as well as lower in wages and benefits which are a result of a reduction in employees following the Company’s recent restructuring actions. These decreases are slightly offset by increases in variable compensation.
Restructuring Charges
During 2019 and the first half 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 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 180 salaried positions and recognized restructuring charges of $9.5 million, consisting of severance and employee-related benefits. Approximately 20 of these positions were eliminated in the first half of 2020. The Company expects to realize annual savings of approximately $21 million as a result of these actions. Refer to “Note 4 - Restructuring Charges” in the Notes to the unaudited Consolidated Financial Statements for additional information.
Interest Expense
Interest expense for the three months ended June 30, 2020 was $3.0 million, a decrease of $1.2 million, compared with the three months ended June 30, 2019. Interest expense for the six months ended June 30, 2020 was $6.2 million, a decrease of $2.2 million, compared with the six months ended June 30, 2019.The decrease in interest expense in both periods was primarily due to a reduction in outstanding borrowings as well as a lower interest rate environment. Refer to “Note 10 - Financing Arrangements” in the Notes to the unaudited Consolidated Financial Statements for additional information.
Other Expense (Income), net
|
| Three Months Ended June 30, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| $ Change |
| |||
Pension and postretirement non-service benefit loss (income) |
| $ | (6.5 | ) |
| $ | (4.5 | ) |
| $ | (2.0 | ) |
(Gain) loss from remeasurement benefit plan |
|
| (1.9 | ) |
|
| 4.4 |
|
|
| (6.3 | ) |
Foreign currency exchange loss (gain) |
|
| 0.3 |
|
|
| (0.2 | ) |
|
| 0.5 |
|
Miscellaneous expense (income) |
|
| — |
|
|
| 0.1 |
|
|
| (0.1 | ) |
Total other expense (income), net |
| $ | (8.1 | ) |
| $ | (0.2 | ) |
| $ | (7.9 | ) |
20
|
| Six Months Ended June 30, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| $ Change |
| |||
Pension and postretirement non-service benefit income |
| $ | (13.0 | ) |
| $ | (7.3 | ) |
| $ | (5.7 | ) |
Loss from remeasurement of benefit plans |
|
| 7.6 |
|
|
| 4.4 |
|
|
| 3.2 |
|
Foreign currency exchange loss (gain) |
|
| 0.4 |
|
|
| (0.1 | ) |
|
| 0.5 |
|
Miscellaneous income (expense) |
|
| (0.4 | ) |
|
| 0.1 |
|
|
| (0.5 | ) |
Total other expense (income), net |
| $ | (5.4 | ) |
| $ | (2.9 | ) |
| $ | (2.5 | ) |
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 six months ended June 30, 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 a periodthe first quarter of rising raw material prices,2020, the cumulative cost of products sold recognized under LIFO is generally higher thanall lump sum payments was projected to exceed the cash costs incurred to acquiresum of the inventory sold. Conversely,service cost and interest cost components of net periodic pension cost for the Salaried Plan. As a result, the Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan as of June 30, 2020 and March 31, 2020, which resulted in a periodnon-cash loss (gain) from remeasurement of declining raw material prices, cost($1.9) million and $7.6 million for the three and six months ended June 30, 2020, respectively. For more details on the remeasurement, refer to “Note 11 - Retirement and Postretirement Plans.”
Provision for Income Taxes
|
| Three Months Ended June 30, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| $ Change |
| |||
Provision (benefit) for income taxes |
| $ | 0.2 |
|
| $ | (2.9 | ) |
| $ | 3.1 |
|
Effective tax rate |
|
| (2.2 | )% |
|
| 19.6 | % |
| NM |
|
|
| Six Months Ended June 30, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| $ Change |
| |||
Provision (benefit) for income taxes |
| $ | 0.3 |
|
| $ | (2.8 | ) |
| $ | 3.1 |
|
Effective tax rate |
|
| (0.1 | )% |
|
| 25.0 | % |
| NM |
|
The majority of products sold recognized under LIFOthe Company’s income tax expense is generally lower than cash costs incurred to acquirederived from foreign operations. The Company remains in a full valuation for the inventory sold. In periodsU.S. jurisdiction for the three and six months ended June 30, 2020 and 2019.
21
Three Months Ended September 30, | ||||||||||||||
2017 | 2016 | Increase (Decrease) | % Change | |||||||||||
Net sales | $339.1 | $213.8 | $125.3 | 58.6 | % | |||||||||
Net sales, excluding surcharges | 261.2 | 184.9 | 76.3 | 41.3 | % | |||||||||
Gross profit | 18.5 | 7.5 | 11.0 | 146.7 | % | |||||||||
Gross margin | 5.5 | % | 3.5 | % | NM | 200 bps | ||||||||
Selling, general and administrative expenses | 22.5 | 21.8 | 0.7 | 3.2 | % | |||||||||
Net income | (5.9 | ) | (22.2 | ) | 16.3 | (73.4 | )% | |||||||
Average scrap index per ton (30 day lag) | 374 | 272 | 102 | 37.5 | % | |||||||||
Average selling price per ton, including surcharges | $1,170 | $1,202 | ($32 | ) | (2.7 | )% | ||||||||
Shipments (in tons) | 289,942 | 177,823 | 112,119 | 63.1 | % | |||||||||
Melt utilization | 74 | % | 44 | % | NM | 30 | pp |
Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | Increase (Decrease) | % Change | |||||||||||
Net sales | $987.8 | $654.8 | $333.0 | 50.9 | % | |||||||||
Net sales, excluding surcharges | 773.8 | 587.2 | 186.6 | 31.8 | % | |||||||||
Gross profit | 59.3 | 25.2 | 34.1 | 135.3 | % | |||||||||
Gross margin | 6.0 | % | 3.8 | % | NM | 220 bps | ||||||||
Selling, general and administrative expenses | 67.7 | 66.8 | 0.9 | 1.3 | % | |||||||||
Net loss | (9.9 | ) | (38.5 | ) | 28.6 | 74.3 | % | |||||||
Average scrap index per ton (30 day lag) | 353 | 229 | 124 | 54.1 | % | |||||||||
Average selling price per ton, including surcharges | $1,143 | $1,183 | ($40 | ) | (3.4 | )% | ||||||||
Shipments (in tons) | 864,446 | 553,646 | 310,800 | 56.1 | % | |||||||||
Melt utilization | 74 | % | 45 | % | NM | 29 | pp |
NON-GAAP FINANCIAL MEASURES
Net Sales, Excluding Surcharges
The table abovebelow presents net sales by end market sector, adjusted to exclude raw material surcharges, which represents a financial measure that has not been determined in accordance with U.S. GAAP. We believe presenting net sales adjusted to exclude raw material surcharges provides additional insight into key drivers of net sales such as base price and product mix.
Three Months Ended September 30, | |||||||||||
2017 | 2016 | $ Change | |||||||||
Cash interest paid | $0.8 | $0.9 | ($0.1 | ) | |||||||
Accrued interest | 1.9 | 1.9 | — | ||||||||
Amortization of convertible notes discount and deferred financing | 1.0 | 1.1 | (0.1 | ) | |||||||
Total Interest Expense | $3.7 | $3.9 | ($0.2 | ) |
Nine Months Ended September 30, | |||||||||||
2017 | 2016 | $ Change | |||||||||
Cash interest paid | $6.0 | $4.2 | $1.8 | ||||||||
Accrued interest | 1.9 | 1.9 | — | ||||||||
Amortization of convertible notes discount and deferred financing | 3.1 | 1.9 | 1.2 | ||||||||
Total Interest Expense | $11.0 | $8.0 | $3.0 |
Three Months Ended September 30, | ||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||
Non-service components of benefit cost | $4.3 | $3.7 | ($0.6 | ) | 16.2 | % | ||||||||
Loss from remeasurement of benefit plans | (2.3 | ) | (20.4 | ) | ($18.1 | ) | (88.7 | )% | ||||||
Other | (0.1 | ) | (0.6 | ) | ($0.5 | ) | (83.3 | )% | ||||||
Other income (expense), net | $1.9 | ($17.3 | ) | ($19.2 | ) | (111.0 | )% |
Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||
Non-service components of benefit cost | $12.7 | $9.9 | ($2.8 | ) | 28.3 | % | ||||||||
Loss from remeasurement of benefit plans | (2.3 | ) | (20.4 | ) | ($18.1 | ) | (88.7 | )% | ||||||
Other | 0.3 | (1.6 | ) | ($1.9 | ) | (118.8 | )% | |||||||
Other income (expense), net | $10.7 | ($12.1 | ) | ($22.8 | ) | (188.4 | )% |
Three Months Ended September 30, | ||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||
Provision (benefit) for income taxes | $0.1 | ($13.3 | ) | ($13.4 | ) | (100.8 | )% | |||||||
Effective tax rate | (1.5 | )% | 37.5 | % | NM | (3900) bps |
Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||
Provision (benefit) for income taxes | $1.2 | ($23.5 | ) | ($24.7 | ) | (105.1 | )% | |||||||
Effective tax rate | (14.0 | )% | 37.9 | % | NM | (5,190 | ) bps |
(dollars in millions, tons in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| Three Months Ended June 30, 2020 |
| |||||||||||||||||
|
| Mobile |
|
| Industrial |
|
| Energy |
|
| Other |
|
| Total |
| |||||
Tons |
|
| 32.7 |
|
|
| 63.2 |
|
|
| 9.1 |
|
|
| 3.7 |
|
|
| 108.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
| $ | 36.1 |
|
| $ | 98.0 |
|
| $ | 14.6 |
|
| $ | 5.3 |
|
| $ | 154.0 |
|
Less: Surcharges |
|
| 6.7 |
|
|
| 14.6 |
|
|
| 2.2 |
|
|
| 0.8 |
|
|
| 24.3 |
|
Base Sales |
| $ | 29.4 |
|
| $ | 83.4 |
|
| $ | 12.4 |
|
| $ | 4.5 |
|
| $ | 129.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales / Ton |
| $ | 1,104 |
|
| $ | 1,551 |
|
| $ | 1,604 |
|
| $ | 1,432 |
|
| $ | 1,417 |
|
Surcharges / Ton |
| $ | 205 |
|
| $ | 231 |
|
| $ | 241 |
|
| $ | 216 |
|
| $ | 224 |
|
Base Sales / Ton |
| $ | 899 |
|
| $ | 1,320 |
|
| $ | 1,363 |
|
| $ | 1,216 |
|
| $ | 1,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2019 |
| |||||||||||||||||
|
| Mobile |
|
| Industrial |
|
| Energy |
|
| Other |
|
| Total |
| |||||
Tons |
|
| 110.3 |
|
|
| 86.4 |
|
|
| 31.0 |
|
|
| 20.4 |
|
|
| 248.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
| $ | 135.3 |
|
| $ | 124.3 |
|
| $ | 54.1 |
|
| $ | 23.0 |
|
| $ | 336.7 |
|
Less: Surcharges |
|
| 32.1 |
|
|
| 27.4 |
|
|
| 12.0 |
|
|
| 6.4 |
|
|
| 77.9 |
|
Base Sales |
| $ | 103.2 |
|
| $ | 96.9 |
|
| $ | 42.1 |
|
| $ | 16.6 |
|
| $ | 258.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales / Ton |
| $ | 1,227 |
|
| $ | 1,439 |
|
| $ | 1,745 |
|
| $ | 1,127 |
|
| $ | 1,357 |
|
Surcharges / Ton |
| $ | 291 |
|
| $ | 317 |
|
| $ | 387 |
|
| $ | 313 |
|
| $ | 314 |
|
Base Sales / Ton |
| $ | 936 |
|
| $ | 1,122 |
|
| $ | 1,358 |
|
| $ | 814 |
|
| $ | 1,043 |
|
|
| Six Months Ended June 30, 2020 |
| |||||||||||||||||
|
| Mobile |
|
| Industrial |
|
| Energy |
|
| Other |
|
| Total |
| |||||
Tons |
|
| 121.5 |
|
|
| 144.4 |
|
|
| 27.5 |
|
|
| 28.7 |
|
|
| 322.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
| $ | 133.8 |
|
| $ | 211.3 |
|
| $ | 39.8 |
|
| $ | 28.7 |
|
| $ | 413.6 |
|
Less: Surcharges |
|
| 23.3 |
|
|
| 33.4 |
|
|
| 6.4 |
|
|
| 7.1 |
|
|
| 70.2 |
|
Base Sales |
| $ | 110.5 |
|
| $ | 177.9 |
|
| $ | 33.4 |
|
| $ | 21.6 |
|
| $ | 343.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales / Ton |
| $ | 1,101 |
|
| $ | 1,463 |
|
| $ | 1,447 |
|
| $ | 1,000 |
|
| $ | 1,284 |
|
Surcharges / Ton |
| $ | 192 |
|
| $ | 231 |
|
| $ | 232 |
|
| $ | 247 |
|
| $ | 218 |
|
Base Sales / Ton |
| $ | 909 |
|
| $ | 1,232 |
|
| $ | 1,215 |
|
| $ | 753 |
|
| $ | 1,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2019 |
| |||||||||||||||||
|
| Mobile |
|
| Industrial |
|
| Energy |
|
| Other |
|
| Total |
| |||||
Tons |
|
| 223.1 |
|
|
| 188.9 |
|
|
| 62.4 |
|
|
| 34.6 |
|
|
| 509.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
| $ | 279.5 |
|
| $ | 271.3 |
|
| $ | 114.9 |
|
| $ | 42.0 |
|
| $ | 707.7 |
|
Less: Surcharges |
|
| 69.6 |
|
|
| 62.5 |
|
|
| 24.5 |
|
|
| 11.0 |
|
|
| 167.6 |
|
Base Sales |
| $ | 209.9 |
|
| $ | 208.8 |
|
| $ | 90.4 |
|
| $ | 31.0 |
|
| $ | 540.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales / Ton |
| $ | 1,253 |
|
| $ | 1,436 |
|
| $ | 1,841 |
|
| $ | 1,214 |
|
| $ | 1,390 |
|
Surcharges / Ton |
| $ | 312 |
|
| $ | 331 |
|
| $ | 392 |
|
| $ | 318 |
|
| $ | 329 |
|
Base Sales / Ton |
| $ | 941 |
|
| $ | 1,105 |
|
| $ | 1,449 |
|
| $ | 896 |
|
| $ | 1,061 |
|
Net Sales adjusted to exclude surcharges | |||||||||||||||||||||||||||||||||
(dollars in millions, tons in thousands) | |||||||||||||||||||||||||||||||||
Three Months Ended September 30, | |||||||||||||||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||||||||||||
Mobile | Industrial | Energy | Other | Total | Mobile | Industrial | Energy | Other | Total | ||||||||||||||||||||||||
Tons | 100.8 | 106.2 | 26.7 | 56.2 | 289.9 | 100.5 | 70.2 | 7.1 | — | 177.8 | |||||||||||||||||||||||
Net Sales | $127.5 | $126.3 | $37.7 | $47.6 | $339.1 | $120.4 | $79.7 | $8.7 | $5.0 | $213.8 | |||||||||||||||||||||||
Less: Surcharges | 27.1 | 28.8 | 6.4 | 15.6 | 77.9 | 16.3 | 11.3 | 1.3 | — | 28.9 | |||||||||||||||||||||||
Base Sales | $100.4 | $97.5 | $31.3 | $32.0 | $261.2 | $104.1 | $68.4 | $7.4 | $5.0 | $184.9 | |||||||||||||||||||||||
Net Sales / Ton | $1,265 | $1,189 | $1,412 | $847 | $1,170 | $1,198 | $1,135 | $1,225 | N/A | $1,202 | |||||||||||||||||||||||
Base Sales / Ton | $996 | $918 | $1,172 | $569 | $901 | $1,036 | $974 | $1,042 | N/A | $1,040 | |||||||||||||||||||||||
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||||||||||||
Mobile | Industrial | Energy | Other | Total | Mobile | Industrial | Energy | Other | Total | ||||||||||||||||||||||||
Tons | 324.4 | 308.4 | 69.3 | 162.3 | 864.4 | 317.4 | 216.8 | 19.4 | — | 553.6 | |||||||||||||||||||||||
Net Sales | $399.7 | $357.1 | $99.0 | $132.0 | $987.8 | $365.8 | $246.2 | $27.7 | $15.1 | $654.8 | |||||||||||||||||||||||
Less: Surcharges | 78.2 | 76.9 | 15.3 | 43.4 | 213.8 | 38.0 | 26.9 | 2.7 | — | 67.6 | |||||||||||||||||||||||
Base Sales | $321.5 | $280.2 | $83.7 | $88.6 | $774.0 | $327.8 | $219.3 | $25.0 | $15.1 | $587.2 | |||||||||||||||||||||||
Net Sales / Ton | $1,232 | $1,158 | $1,429 | $813 | $1,143 | $1,152 | $1,136 | $1,428 | N/A | $1,183 | |||||||||||||||||||||||
Base Sales / Ton | $991 | $909 | $1,208 | $546 | $895 | $1,033 | $1,012 | $1,289 | N/A | $1,061 |
Current Assets | September 30, 2017 | December 31, 2016 | |||||
Cash and cash equivalents | $25.8 | $25.6 | |||||
Accounts receivable, net | 160.6 | 91.6 | |||||
Inventories, net | $219.5 | $164.2 | |||||
Deferred charges and prepaid expenses | 4.2 | 2.8 | |||||
Other current assets | 7.4 | 6.2 | |||||
Total Current Assets | $417.5 | $290.4 |
Property, Plant and Equipment | September 30, 2017 | December 31, 2016 | |||||
Property, plant and equipment, net | $701.6 | $741.9 |
Other Assets | September 30, 2017 | December 31, 2016 | |||||
Pension assets | $9.8 | $6.2 | |||||
Intangible assets, net | 20.9 | 25.0 | |||||
Other non-current assets | 6.0 | 6.4 | |||||
Total Other Assets | $36.7 | $37.6 |
Liabilities and Shareholders’ Equity | September 30, 2017 | December 31, 2016 | |||||
Current liabilities | $188.6 | $130.7 | |||||
Convertible notes, net | 69.2 | 66.4 | |||||
Other long-term debt | 95.2 | 70.2 | |||||
Accrued pension and postretirement costs - long-term | 196.2 | 192.1 | |||||
Deferred income taxes | 0.7 | — | |||||
Other non-current liabilities | 13.2 | 13.1 | |||||
Total shareholders’ equity | 592.7 | 597.4 | |||||
Total Liabilities and Shareholders’ Equity | $1,155.8 | $1,069.9 |
LIQUIDITY AND CAPITAL RESOURCES
Convertible Notes
In May 2016, wethe Company issued $75.0 million aggregate principal amount of Convertible Notes, plus an additional $11.3 million principal amount to cover over-allotments. The Convertible Notes bear cash interest at a rate of 6.0% per year, payable semiannually on June 1 and December 1, beginning on December 1, 2016. The Convertible Notes will mature on June 1, 2021, unless earlier repurchased or converted. The net proceeds received from the offering were $83.2 million, after deducting the initial underwriters’ discount and fees and paying the offering expenses payable.expenses. The Convertible Notes will mature on June 1, 2021, unless earlier repurchased or converted, and accordingly are classified as a current liability in the Consolidated Balance Sheet as of June 30, 2020. We usedexpect to have adequate liquidity to retire the net proceeds to repayConvertible Notes using a portioncombination of cash and borrowing capacity on the amounts outstanding under our Amended Credit Agreement.
Amended Credit Agreement
On October 15, 2019, the third quarter of 2015, we projected that at December 31, 2015, we would not be in compliance with the interest coverage ratio covenant contained in our then-existing revolving credit facility, due to a steeper-than-expected drop in industrial demand driven by depressed commodity prices. Accordingly, on December 21, 2015, we amended and restated our existing revolving credit facility, effectively converting it from a cash flow-based facility to an asset-based facility in order to eliminate various financial covenants that are customary in cash flow-based facilities, including the interest coverage ratio covenant.
The Amended Credit Agreement also includes a block on availability equalincreases capacity to the greater of $28.9$400 million or 12.5% of the aggregate commitments (except thatcompared to $300 million in the event of a mandatory reduction inprevious facility and extends the commitments, the block on availability will be equalmaturity date to the greater of $20.0 million or 12.5% of the aggregate commitments), effectively reducing our borrowing base by the availability block. Refer to Note 6 - Financing Arrangements in the Notes to the Unaudited Consolidated Financial Statements and the Covenant Compliance section within Management’s Discussion and Analysis for details onOctober 15, 2024. Furthermore, the Amended Credit Agreement covenants.
23
Table of five years through June 30, 2019. Contents
Additional Liquidity Considerations
The following represents a summary of key liquidity measures under the Amended Credit Agreement as of SeptemberJune 30, 20172020 and December 31, 2016:2019:
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Cash and cash equivalents |
| $ | 75.5 |
|
| $ | 27.1 |
|
|
|
|
|
|
|
|
|
|
Credit Agreement: |
|
|
|
|
|
|
|
|
Maximum availability |
| $ | 400.0 |
|
| $ | 400.0 |
|
Suppressed availability(1) |
|
| (159.9 | ) |
|
| (103.0 | ) |
Availability |
|
| 240.1 |
|
|
| 297.0 |
|
Amount borrowed |
|
| (60.0 | ) |
|
| (90.0 | ) |
Letter of credit obligations |
|
| (3.7 | ) |
|
| (3.8 | ) |
Availability not borrowed |
| $ | 176.4 |
|
| $ | 203.2 |
|
|
|
|
|
|
|
|
|
|
Total liquidity |
| $ | 251.9 |
|
| $ | 230.3 |
|
September 30, 2017 | December 31, 2016 | |
Cash and cash equivalents | $25.8 | $25.6 |
Amended Credit Agreement: | ||
Maximum availability | $265.0 | $194.4 |
Amount borrowed | 65.0 | 40.0 |
Letter of credit obligations | 2.6 | 1.6 |
Availability not borrowed | 197.4 | 152.8 |
Availability block | 33.1 | 33.1 |
Net availability | $164.3 | $119.7 |
Total liquidity | $190.1 | $145.3 |
(1) As of June 30, 2020 and December 31, 2019, TimkenSteel had less than $400 million in collateral assets to borrow against.
Our principal sources of liquidity are cash and cash equivalents, cash flows from operations and available borrowing capacity under our Amended Credit Agreement. We currently expect that our cash and cash equivalents on hand, expected cash flows from operations and borrowings available under the Amended Credit Agreement will be sufficient to meet liquidity needs; however, these plans rely on certain underlying assumptions and estimates that may differ from actual results. Such assumptions include growing market demand and maintaining the benefits to our operating results and cash flows driven by the restructuring and cost reduction activities taken during 2015 that streamlined our organizational structure, lowered operating costs and increased liquidity.
The full extent to which the COVID-19 pandemic will impact our operations and through June 30, 2019,financial results is uncertain and ultimately will depend on, among many other factors, the maturity dateduration of the pandemic, further Federal and State government actions and the speed of economic recovery. While the negative impact on our Amended Credit Agreement.
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 and additional liquidity, to companies and individuals negatively impacted by the COVID-19 pandemic. Although the majority of the provisions included in the CARES Act did not immediately benefit the Company from a cash tax perspective due to its significant net operating losses, the Company 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. Through June 30, 2020, the Company deferred approximately $2 million of payroll taxes as permitted by the CARES Act. Payroll tax deferrals in the second half of 2020 are expected to total $4 million to $5 million, all of which will be paid in two equal installments at December 31, 2021 and December 31, 2022. The Company is currently evaluating its eligibility and potential benefit related to the Employee Retention Credit.
For additional discussiondetails regarding risk factors relatedthe Amended Credit Agreement and the Convertible Notes, please refer to our business and our debt, see Risk Factors“Note 14 - Financing Arrangements” in ourthe Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Cash Flows
The following table reflects the major categories of cash flows for the ninesix months ended SeptemberJune 30, 20172020 and 2016.2019. For additional details, please seerefer to the Unauditedunaudited Consolidated Statements of Cash Flows contained elsewhereincluded in this quarterly report.
|
| Six Months Ended June 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Net cash provided (used) by operating activities |
| $ | 79.9 |
|
| $ | (17.6 | ) |
Net cash provided (used) by investing activities |
|
| (1.2 | ) |
|
| (12.3 | ) |
Net cash provided (used) by financing activities |
|
| (30.3 | ) |
|
| 29.2 |
|
Increase (Decrease) in Cash and Cash Equivalents |
| $ | 48.4 |
|
| $ | (0.7 | ) |
Cash Flows | Nine Months Ended September 30, | ||||||
2017 | 2016 | ||||||
Net cash (used) provided by operating activities | ($11.7 | ) | $55.5 | ||||
Net cash used by investing activities | (11.9 | ) | (26.1 | ) | |||
Net cash provided (used) by financing activities | 23.8 | (48.5 | ) | ||||
Increase (Decrease) in Cash and Cash Equivalents | $0.2 | ($19.1 | ) |
Operating activities
Net cash usedprovided by operating activities for the ninesix months ended SeptemberJune 30, 20172020 was approximately $12$79.9 million compared to net cash used of $17.6 million for the six months ended June 30, 2019. The increase in cash provided by operating activities of approximately $56$97.5 million for the nine months ended September 30, 2016. The $68 million decrease was primarily due to cash used bymanagement actions to improve working capital as well as the impact of $68 million forlower customer demand and production levels in the nine months ended September 30, 2017first half of 2020 as compared to cash provided by working capital of $18 million during the same period in 2016.the prior year. Refer to the Unauditedunaudited Consolidated Statements of Cash Flows for additional information.
Investing activities
Net cash used by investing activities for the ninesix months ended SeptemberJune 30, 2017 and 20162020 was approximately $12$1.2 million, and $26as compared to net cash used of $12.3 million respectively.for the six months ended June 30, 2019. Cash used forby investing activities in the first half of 2020 primarily relates to capital investments in our production processes. Capital spending decreased approximately $14 million due to lower spending compared to the nine months ended September 30, 2016, as a resultmaintenance of targeted strategic capital allocations.
The Company expects its capital expenditures to remain competitivebe between $15 million and ensure we can implement strategic initiatives. Our $52$20 million construction in progress balance as2020, a reduction from the previous outlook of September 30, 2017 includes: (a) $42a maximum of $25 million (made up of approximately $6 million relating to growth initiatives (i.e., new product offerings, additional capacity and new capabilities) andthe remainder related to continuous improvement projects; and (b) $10 million relating primarily to routineimprovement). The Company has no material capital costs to maintain the reliability, integrity and safety of our manufacturing equipment and facilities. We expect to incur approximately $31 million of additional costs including approximately $23 million relating to additional growth initiatives and continuous improvement and approximately $8 million of additional costs to complete other remaining projects. These additional costs are expected to be incurred during the next one to three years.
Financing activities
Net cash used by financing activities for the six months ended June 30, 2020 was $30.3 million compared to net cash provided by financing activities of $29.2 million for the ninesix months ended SeptemberJune 30, 2017 was approximately $24 million compared to net cash used by financing activities of approximately
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We review our critical accounting policies throughout the year.
New Accounting Guidance
See Note“Note 2 - Recent Accounting PronouncementsPronouncements” in the Notes to our Unauditedthe unaudited Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain statements set forth in this Quarterly Report on Form 10-Q (including our forecasts, beliefs and expectations) that are not historical in nature are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, Management’s Discussion and Analysis of Financial Condition and Results of Operations contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “outlook,” “intend,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or other similar words, phrases or expressions that convey the uncertainty of future events or outcomes. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-Q. We caution readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of us due to a variety of factors, such as:
• | deterioration in world economic conditions, or in economic conditions in any of the geographic regions in which we conduct business, including additional adverse effects from global economic slowdown, terrorism or hostilities. This includes: political risks associated with the potential instability of governments and legal systems in countries in which we or our customers conduct business, and changes in currency valuations; |
• | the effects of fluctuations in customer demand on sales, product mix and prices in the industries in which we operate. This includes: our ability to respond to rapid changes in customer demand; the effects of customer bankruptcies or liquidations; the impact of changes in industrial business cycles; and whether conditions of fair trade exist in the U.S. markets; |
25
• | the potential impact of the COVID-19 pandemic on our operations, financial results, and liquidity; |
• | competitive factors, including changes in market penetration; increasing price competition by existing or new foreign and domestic competitors; the introduction of new products by existing and new competitors; and new technology that may impact the way our products are sold or distributed; |
• | changes in operating costs, including the effect of changes in our manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; availability of raw materials and energy; our ability to mitigate the impact of fluctuations in raw materials and energy costs and the effectiveness of our surcharge mechanism; changes in the expected costs associated with product warranty claims; changes resulting from inventory management, cost reduction initiatives and different levels of customer demands; the effects of unplanned work stoppages; and changes in the cost of labor and benefits; |
• | the success of our operating plans, announced programs, initiatives and capital investments; and our ability to maintain appropriate relations with unions that represent our associates in certain locations in order to avoid disruptions of business; |
• | unanticipated litigation, claims or assessments, including claims or problems related to intellectual property, product liability or warranty, and environmental issues and taxes, among other matters; |
• | the availability of financing and interest rates, which affect our cost of funds and/or ability to raise capital, including our ability to refinance and/or repay prior to or at maturity the Convertible Notes; our pension obligations and investment performance; and/or customer demand and the ability of customers to obtain financing to purchase our products or equipment that contain our products; and the amount of any dividend declared by our Board of Directors on our common shares; |
• | the overall impact of the |
• | those items identified under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019. |
You are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results, and that the above list should not be considered to be a complete list. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our borrowings include both fixed and variable-rate debt. The variable debt consists principally of borrowings under our Amended Credit Agreement. We are exposed to the risk of rising interest rates to the extent we fund our operations with these variable-rate borrowings. As of SeptemberJune 30, 2017,2020, we have $164.4$141.0 million of aggregate debt outstanding, of which $95.2$60.0 million consists of debt with variable interest rates. Based on the amount of debt with variable-rate interest outstanding, a 1% rise in interest rates would result in an increase in interest expense of approximately $1$0.6 million annually, with a corresponding increase in loss before income taxes of the same amount.
Foreign Currency Exchange Rate Risk
Fluctuations in the value of the U.S. dollar compared to foreign currencies may impact our earnings. Geographically, our sales are primarily made to customers in the United States. Currency fluctuations could impact us to the extent they impact the currency or the price of raw materials in foreign countries in which our competitors operate or have significant sales.
Commodity Price Risk
In the ordinary course of business, we are exposed to market risk with respect to commodity price fluctuations, primarily related to our purchases of raw materials and energy, principally scrap steel, other ferrous and non-ferrous metals, alloys, natural gas and electricity. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing business. We utilize a raw material surcharge as a component of pricing steel to pass through the cost increases of scrap, alloys and other raw materials, as well as natural gas. From time to time, we may use derivative financial instruments to hedge a portion of our exposure to price risk related to natural gas and electricity purchases. In periods of stable demand for our products, the surcharge mechanism has worked effectively to reduce the normal time lag in passing through higher raw material costs so that we can maintain our gross margins. When demand and cost of raw materials isare lower, however, the surcharge impacts sales prices to a lesser extent.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the principal executive officer and
26
principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
(b) Changes in Internal Control Over Financial Reporting
During the Company’s most recent fiscal quarter, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of our management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Canton, Ohio U.S. Environmental Protection Agency Notice of Violation
The U.S. Environmental Protection Agency (EPA) issued two related Notices of Violation (NOV) to TimkenSteel on August 5, 2014 and November 2, 2015, respectively. The EPA alleges violations under the Clean Air Act based on purported violations of permitted emission limits and engineering requirements at TimkenSteel’s Faircrest and Harrison manufacturing facilities. TimkenSteel disputes many of EPA’s allegations but has worked cooperatively with EPA and the U.S. Department of Justice to resolve the government’s claims. Negotiations to resolve the NOVs are essentially concluded. The settlement of these matters is expected to include a civil penalty of approximately $0.4 million and a commitment by the company to make approximately $1.0 million in clean-air related capital improvements, principally at the Harrison manufacturing facility, within one year after the settlement is finalized.
ITEM 1A. Risk Factors
We are subject to various risks and uncertainties in the course of our business. The discussion of such risks and uncertainties may be found under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 20162019 filed with the SEC. There
Risks Related to COVID-19
The COVID-19 pandemic could have been noa material, changesadverse impact on our operations and financial results including cash flows and liquidity.
We continue to suchclosely monitor the impact of the COVID-19 pandemic on our Company, customers, employees and supply chain. The full extent to which the COVID-19 pandemic will impact our operations and financial results is uncertain and ultimately will depend on, among many other factors, the duration of the pandemic, further Federal and State government actions and the speed of economic recovery. The negative impact on our third quarter of 2020, remainder of the year and beyond remains unknown.
The effects of the COVID-19 pandemic also may impact other risk factors.
28
ITEM 6. Exhibits
Exhibit Number | Exhibit Description | |
10.1* | ||
31.1* | ||
31.2* | ||
32.1** | ||
101.INS* | Inline XBRL Instance | |
101.SCH* | Inline XBRL Taxonomy Extension Schema | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Filed herewith. |
** | |
Furnished herewith. |
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TIMKENSTEEL CORPORATION | ||
Date: | August 6, 2020 | /s/Kristopher R. Westbrooks |
Kristopher R. Westbrooks Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
30