TIMKENSTEEL CORP, 10-K filed on 2/20/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2018
Feb. 15, 2019
Jun. 30, 2018
Document and Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Entity Registrant Name TimkenSteel Corporation    
Entity Central Index Key 0001598428    
Current Fiscal Year End Date --12-31    
Entity Filer Category Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Common Stock, Shares Outstanding   44,626,294  
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Shell Company false    
Entity Public Float     $ 658,609,457
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Consolidated Statements of Operations - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Income Statement [Abstract]      
Net sales $ 1,610.6 $ 1,329.2 $ 869.5
Cost of products sold 1,505.7 1,261.4 841.6
Gross Profit 104.9 67.8 27.9
Selling, general and administrative expenses 98.2 90.5 90.2
Impairment and restructuring charges 0.9 0.7 0.3
Operating Income (Loss) 5.8 (23.4) (62.6)
Interest expense 17.1 14.8 11.4
Other expense, net 18.6 4.1 68.0
Loss Before Income Taxes (29.9) (42.3) (142.0)
Provision (benefit) for income taxes 1.8 1.5 (36.5)
Net Loss $ (31.7) $ (43.8) $ (105.5)
Per Share Data:      
Basic loss per share (in dollars per share) $ (0.71) $ (0.99) $ (2.39)
Diluted loss per share (in dollars per share) $ (0.71) $ (0.99) $ (2.39)
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Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Comprehensive Income [Abstract]      
Net Loss $ (31.7) $ (43.8) $ (105.5)
Other comprehensive income (loss), net of tax:      
Foreign currency translation adjustments (1.4) 1.1 (2.0)
Pension and postretirement liability adjustments 0.1 0.7 0.5
Other comprehensive income (loss), net of tax (1.3) 1.8 (1.5)
Comprehensive Loss, net of tax $ (33.0) $ (42.0) $ (107.0)
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Consolidated Balance Sheets - USD ($)
$ in Millions
Dec. 31, 2018
Dec. 31, 2017
Current Assets    
Cash and cash equivalents $ 21.6 $ 24.5
Accounts receivable, net of allowances (2018 - $1.7 million; 2017 - $1.4 million) 163.4 149.8
Inventories, net 296.8 224.0
Deferred charges and prepaid expenses 3.5 3.9
Other current assets 6.1 8.0
Total Current Assets 491.4 410.2
Property, Plant and Equipment, Net 674.4 706.7
Other Assets    
Pension assets 10.5 14.6
Intangible assets, net 17.8 19.9
Other non-current assets 3.5 5.2
Total Other Assets 31.8 39.7
Total Assets 1,197.6 1,156.6
Current Liabilities    
Accounts payable 160.6 135.3
Salaries, wages and benefits 36.8 32.4
Accrued pension and postretirement costs 3.0 11.5
Other current liabilities 20.4 27.6
Total Current Liabilities 220.8 206.8
Non-Current Liabilities    
Convertible notes, net 74.1 70.1
Other long-term debt 115.0 95.2
Accrued pension and postretirement costs 240.0 210.8
Deferred income taxes 0.8 0.3
Other non-current liabilities 11.7 12.7
Total Non-Current Liabilities 441.6 389.1
Shareholders’ Equity    
Preferred shares, without par value; authorized 10.0 million shares; none issued 0.0 0.0
Common shares, without par value; authorized 200.0 million shares; issued 2018 and 2017- 45.7 million shares 0.0 0.0
Additional paid-in capital 846.3 843.7
Retained deficit (269.2) (238.0)
Treasury shares - 2018 - 1.1 million; 2017 - 1.3 million (33.0) (37.4)
Accumulated other comprehensive loss (8.9) (7.6)
Total Shareholders’ Equity 535.2 560.7
Total Liabilities and Shareholders’ Equity $ 1,197.6 $ 1,156.6
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Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Dec. 31, 2018
Dec. 31, 2017
Statement of Financial Position [Abstract]    
Allowances for accounts receivable $ 1.7 $ 1.4
Preferred shares, authorized (in shares) 10,000,000.0 10,000,000.0
Preferred shares, issued (in shares) 0 0
Common shares, authorized (in shares) 200,000,000.0 200,000,000.0
Common shares, issued (in shares) 45,700,000 45,700,000
Treasury shares (in shares) 1,100,000 1,300,000
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Consolidated Statements of Shareholder's Equity - USD ($)
$ in Millions
Total
Additional Paid-in Capital
Retained Earnings (Deficit)
Treasury Shares
Accumulated Other Comprehensive Loss
Beginning balance at Dec. 31, 2015 $ 682.0 $ 828.8 $ (92.6) $ (46.3) $ (7.9)
Net Loss (105.5)   (105.5)    
Pension and postretirement adjustment, net of tax 0.5       0.5
Foreign currency translation adjustments (2.0)       (2.0)
Stock-based compensation expense 6.7 6.7      
Issuance of treasury shares   (1.4)   1.4  
Equity component of convertible notes, net 18.7 18.7      
Deferred tax liability on convertible notes (7.2) (7.2)      
Ending balance at Dec. 31, 2016 597.4 845.6 (193.9) (44.9) (9.4)
Net Loss (43.8)   (43.8)    
Pension and postretirement adjustment, net of tax 0.7       0.7
Foreign currency translation adjustments 1.1       1.1
Stock-based compensation expense 6.5 6.5      
Stock option activity 0.2 0.2      
Issuance of treasury shares   (8.6) (0.3) 8.9  
Shares surrendered for taxes (1.4)     (1.4)  
Ending balance at Dec. 31, 2017 560.7 843.7 (238.0) (37.4) (7.6)
Net Loss (31.7)   (31.7)    
Pension and postretirement adjustment, net of tax 0.1       0.1
Foreign currency translation adjustments (1.4)       (1.4)
Stock-based compensation expense 7.3 7.3      
Stock option activity 0.2 0.2      
Issuance of treasury shares   (4.9) (0.2) 5.1  
Shares surrendered for taxes (0.7)     (0.7)  
Ending balance at Dec. 31, 2018 $ 535.2 $ 846.3 $ (269.2) $ (33.0) $ (8.9)
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Consolidated Statements of Cash Flows - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Operating Activities      
Net Loss $ (31.7) $ (43.8) $ (105.5)
Adjustments to reconcile net loss to net cash provided by operating activities:      
Depreciation and amortization 73.0 74.9 74.9
Amortization of deferred financing fees and debt discount 5.5 4.0 2.9
Impairment charges and loss on sale or disposal of assets 0.9 1.6 1.2
Deferred income taxes 0.8 (0.3) (36.8)
Stock-based compensation expense 7.3 6.5 6.7
Pension and postretirement expense, net 37.4 24.7 83.4
Pension and postretirement contributions and payments (13.1) (4.3) (4.9)
Reimbursement from postretirement plan assets 0.0 0.0 13.3
Changes in operating assets and liabilities:      
Accounts receivable, net (13.6) (58.2) (10.7)
Inventories, net (72.8) (59.8) 9.7
Accounts payable 24.4 45.7 37.5
Other accrued expenses (3.8) 18.3 (8.2)
Deferred charges and prepaid expenses 0.4 (0.5) 8.3
Other, net 3.8 (0.7) 2.6
Net Cash Provided by Operating Activities 18.5 8.1 74.4
Investing Activities      
Capital expenditures (40.0) (33.0) (42.7)
Proceeds from disposals of property, plant and equipment 1.0 0.0 0.0
Net Cash Used by Investing Activities (39.0) (33.0) (42.7)
Financing Activities      
Proceeds from exercise of stock options 0.2 0.2 0.0
Shares surrendered for employee taxes on stock compensation (0.7) (1.4) 0.0
Revenue Refunding Bonds repayments (30.2) 0.0 0.0
Repayments on credit agreements (105.0) (5.0) (130.0)
Borrowings on credit agreements 155.0 30.0 0.0
Proceeds from issuance of convertible notes 0.0 0.0 86.3
Debt issuance costs (1.7) 0.0 (4.8)
Net Cash Provided by Financing Activities 17.6 23.8 (48.5)
Effect of exchange rate changes on cash 0.0 0.0 0.0
Decrease In Cash and Cash Equivalents (2.9) (1.1) (16.8)
Cash and cash equivalents at beginning of period 24.5 25.6 42.4
Cash and Cash Equivalents at End of Period $ 21.6 $ 24.5 $ 25.6
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Company and Basis of Presentation
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Company and Basis of Presentation
Company and Basis of Presentation
TimkenSteel Corporation (the Company or TimkenSteel) manufactures alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. TimkenSteel’s portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), value-added solutions such as precision steel components, and billets. In addition, TimkenSteel supplies machining and thermal treatment services and manages raw material recycling programs, which are used as a feeder system for the Company’s melt operations. The Company’s products and services are used in a diverse range of demanding applications in the following market sectors: oil and gas; oil country tubular goods (OCTG); automotive; industrial equipment; mining; construction; rail; aerospace and defense; heavy truck; agriculture; and power generation.
The SBQ bar, tube, and billet production processes take place at the Company’s Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets the Company produces and includes three manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. TimkenSteel’s value-added solutions production processes take place at three downstream manufacturing facilities: TimkenSteel Material Services (Houston, Texas), Tryon Peak (Columbus, North Carolina), and St. Clair (Eaton, Ohio). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of the Company’s market sectors. As a result, investments in the Company’s facilities and resource allocation decisions affecting the Company’s operations are designed to benefit the overall business, not any specific aspect of the business.
Basis of Consolidation:
The Consolidated Financial Statements include the consolidated assets, liabilities, revenues and expenses related to TimkenSteel as of December 31, 2018, 2017, and 2016. All significant intercompany accounts and transactions within TimkenSteel have been eliminated in the preparation of the Consolidated Financial Statements.
Use of Estimates:
The preparation of these Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. These estimates and assumptions are reviewed and updated regularly to reflect recent experience.
Presentation:
Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2018 presentation.
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Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
New Accounting Pronouncements and Changes in Accounting Principles
Significant Accounting Policies
Revenue Recognition:
TimkenSteel recognizes revenue from contracts at a point in time when it has satisfied its performance obligation and the customer obtains control of the goods, at the amount that reflects the consideration the Company expects to receive for those goods. The Company receives and acknowledges purchase orders from its customers, which define the quantity, pricing, payment and other applicable terms and conditions. In some cases, the Company receives a blanket purchase order from its customer, which includes pricing, payment and other terms and conditions, with quantities defined at the time the customer issues periodic releases from the blanket purchase order. Certain contracts contain variable consideration, which primarily consists of rebates that are accounted for in net sales and accrued based on the estimated probability of the requirements being met.
Cash Equivalents:
TimkenSteel considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Allowance for Doubtful Accounts:
TimkenSteel maintains an allowance for doubtful accounts, which represents an estimate of losses expected from the accounts receivable portfolio, to reduce accounts receivable to their net realizable value. The allowance is based upon historical trends in collections and write-offs, management’s judgment of the probability of collecting accounts and management’s evaluation of business risk. TimkenSteel extends credit to customers satisfying pre-defined credit criteria. TimkenSteel believes it has limited concentration of credit risk due to the diversity of its customer base.
Inventories, Net:
Inventories are valued at the lower of cost or market. The majority of TimkenSteel’s domestic inventories are valued by the last-in, first-out (LIFO) method. The remaining inventories, including manufacturing supplies inventory as well as international (outside the U.S.) inventories, are valued by the first-in, first-out (FIFO), average cost or specific identification methods. Reserves are established for product inventory that is identified to be surplus and/or obsolete based on future requirements.
Property, Plant and Equipment, Net:
Property, plant and equipment, net are valued at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. The provision for depreciation is computed principally by the straight-line method based upon the estimated useful lives of the assets. The useful lives are approximately 30 years for buildings and three to 20 years for machinery and equipment.
Intangible Assets, Net:
Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from three to 15 years.
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350-40, “Internal-Use Software,” (ASC 350-40), TimkenSteel capitalizes certain costs incurred for computer software developed or obtained for internal use. TimkenSteel capitalizes substantially all external costs and qualifying internal costs related to the purchase and implementation of software projects used for business operations. Capitalized software costs primarily include purchased software and external consulting fees. Capitalized software projects are amortized over the estimated useful lives of the software.
Long-lived Assets:
Long-lived assets (including tangible assets and intangible assets subject to amortization) are reviewed for impairment when events or changes in circumstances have occurred indicating that the carrying value of the assets may not be recoverable.
TimkenSteel tests recoverability of long-lived assets at the lowest level for which there are identifiable cash flows that are independent from the cash flows of other assets. Assets and asset groups held and used are measured for recoverability by comparing the carrying amount of the asset or asset group to the sum of future undiscounted net cash flows expected to be generated by the asset or asset group.
Assumptions and estimates about future values and remaining useful lives of TimkenSteel’s long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in TimkenSteel’s business strategy and internal forecasts.
If an asset or asset group is considered to be impaired, the impairment loss that would be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. To determine fair value, TimkenSteel uses internal cash flow estimates discounted at an appropriate interest rate, third party appraisals, as appropriate, and/or market prices of similar assets, when available.
As the result of the discontinued use of certain assets, TimkenSteel recorded an impairment charge of $0.9 million and $0.7 million for the years ended December 31, 2018 and 2017. No impairment charges were recorded for the year ended December 31, 2016.
Product Warranties:
TimkenSteel accrues liabilities for warranties based upon specific claim incidents in accordance with accounting rules relating to contingent liabilities. Should TimkenSteel become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. TimkenSteel had no significant warranty claims for the years ended December 31, 2018, 2017 and 2016.
Income Taxes:
Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. TimkenSteel accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. TimkenSteel recognizes deferred tax assets to the extent TimkenSteel believes these assets are more likely than not to be realized. In making such a determination, TimkenSteel considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If TimkenSteel determines that it would be able to realize deferred tax assets in the future in excess of their net recorded amount, TimkenSteel would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
TimkenSteel records uncertain tax positions in accordance with FASB ASC Topic 740, “Income Taxes” (ASC 740), on the basis of a two-step process whereby (1) TimkenSteel determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, TimkenSteel recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
TimkenSteel recognizes interest and penalties related to unrecognized tax benefits within the provision (benefit) for income taxes line in the accompanying Consolidated Statements of Operations. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheets.
During the year ended December 31, 2018, the Company made the accounting policy election to treat taxes related to Global Intangible Low-Taxed Income (GILTI) as a current period expense when incurred.
Foreign Currency:
Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date. Income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Gains and losses resulting from foreign currency transactions are included in other expense, net in the Consolidated Statements of Operations. TimkenSteel realized foreign currency exchange losses of $0.2 million in 2018 and $0.8 million in 2016, and gains of $0.3 million in 2017.
Pension and Other Postretirement Benefits:
TimkenSteel recognizes an overfunded status or underfunded status (e.g., the difference between the fair value of plan assets and the benefit obligations) as either an asset or a liability for its defined benefit pension and other postretirement benefit plans on the Consolidated Balance Sheets. The Company recognizes actuarial gains and losses immediately through net periodic benefit cost in the Consolidated Statement of Operations upon the annual remeasurement at December 31, or on an interim basis as triggering events warrant remeasurement. In addition, the Company uses fair value to account for the value of plan assets.
Stock-Based Compensation:
TimkenSteel recognizes stock-based compensation expense based on the grant date fair value of the stock-based awards over their required vesting period on a straight-line basis, whether the awards were granted with graded or cliff vesting. Stock options are issued with an exercise price equal to the opening market price of TimkenSteel common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. The fair value of stock-based awards that will settle in TimkenSteel common shares, other than stock options, is based on the opening market price of TimkenSteel common shares on the grant date. The fair values of stock-based awards that will settle in cash are remeasured at each reporting period until settlement of the awards.
TimkenSteel early adopted Accounting Standard Update (ASU) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” in the fourth quarter of 2016, with the effect recorded as of January 1, 2016. Under ASU 2016-09, TimkenSteel recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the Consolidated Statement of Operations. The Company recorded an adjustment to beginning retained earnings in 2016 of $4.2 million for previously unrecognized excess tax benefits. The excess tax benefits and tax deficiencies are considered discrete items in the reporting period they occur and are not included in the estimate of an entity’s annual effective tax rate.
TimkenSteel’s additional paid in capital pool as of December 31, 2015 was not affected by ASU 2016-09, because those excess benefits have already been recognized in the financial statements, and the recognition of excess tax benefits and tax deficiencies in the income statement is prospective only in the fiscal year of adoption. As a result, there was not a reclassification between additional paid in capital and retained earnings in the fiscal years before adoption.
Research and Development:
Expenditures for TimkenSteel research and development amounted to $8.1 million for the year ended December 31, 2018 and $8.0 million for the years ended December 31, 2017 and 2016, and were recorded as a component of selling, general and administrative expenses in the Consolidated Statements of Operations. These expenditures may fluctuate from year to year depending on special projects and the needs of TimkenSteel and its customers.
Adoption of New Accounting Standards
The Company adopted the following ASUs in the first quarter of 2018, all of which were effective as of January 1, 2018. The adoption of these standards did not have a material impact on the Consolidated Financial Statements or the related Notes to the Consolidated Financial Statements.
Standards Adopted
Description
ASU 2017-01, Clarifying the Definition of a Business
The standard clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions, or disposals of assets or businesses.
ASU 2017-09, Stock Compensation, Scope of Modification Accounting
The standard provides guidance intended to reduce diversity in practice when accounting for a modification to the terms and conditions of a share-based payment award.


On January 1, 2018, TimkenSteel adopted the new revenue recognition standard using the modified retrospective approach as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning on or after January 1, 2018, are presented in accordance with the new revenue recognition standard. Comparative financial information for reporting periods beginning prior to January 1, 2018, has not been adjusted and continues to be reported in accordance with the Company’s revenue recognition policies prior to the adoption of the new revenue standard. The cumulative effect was an adjustment to the opening balance of retained earnings. Under the new revenue standard, the Company will continue to recognize revenue at a point in time when it transfers promised goods or services to customers. Refer to Note 9 - Revenue Recognition for further discussion.
The following table outlines the cumulative effect of adopting the new revenue recognition standard as of January 1, 2018:
Consolidated Balance Sheet Caption
As of
December 31, 2017
 
ASU 2014-09 Adjustment
 
As of
January 1, 2018
Inventories, net

$224.0

 

($3.3
)
 

$220.7

Other current liabilities

$27.6

 

($4.0
)
 

$23.6

Retained deficit

($238.0
)
 
0.7

 

($237.3
)

The ASU 2014-09 adoption adjustment is due to transactions in which the Company bills a customer for product but retains physical possession of the product until it is transferred to the customer at a point in time in the future. Prior to the adoption of the new revenue standard, TimkenSteel would recognize revenue when the product was physically transferred to the customer. Under the new revenue standard, the Company has satisfied its performance obligation and the customer obtains control when the goods are ready to be transferred to the customer and revenue is recorded at that time.

For the year ended December 31, 2018, the adoption of the new revenue standard did not have a material impact on the Consolidated Financial Statements or the related Notes to the Consolidated Financial Statements.
Accounting Standards Issued But Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, “Leases (Topics 842),” which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for not only finance (previously capital) leases but also operating leases. The standard also requires additional quantitative and qualitative disclosures, and is effective for annual reporting periods beginning after December 15, 2018. As such, TimkenSteel adopted the standard using the modified retrospective transition approach as of January 1, 2019, the beginning of fiscal 2019, without adjusting comparative periods.
The Company elected certain of the practical expedients permitted under the transition guidance within the new standard as follows: 

A package of practical expedients to not reassess:
Whether a contract is or contains a lease
Lease classification
Initial direct costs
A practical expedient to not reassess certain land easements

The Company has implemented internal controls and lease accounting software to enable the quantification of the expected impact on the Consolidated Balance Sheets and to facilitate the calculations of the related accounting entries and disclosures going forward. Adoption of the lease standard is estimated to result in recognition of right-to-use assets and lease liabilities of approximately $15 million, as of January 1, 2019. Adoption of the lease standard will have no impact on the Company’s debt-covenant compliance under its current agreements. Also, the Company does not expect the standard will materially affect its results of operations or its liquidity.

The Company has considered the recent ASUs issued by the FASB summarized below.
Standard Pending Adoption
Description
Effective Date
Anticipated Impact
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.
January 1, 2020
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 2018-13, Fair Value Measurement (Topic 820)
The standard eliminates, modifies and adds disclosure requirements for fair value measurements.
January 1, 2020
The Company is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
The standard provides an expanded scope of Topic 718, to include share-based payment transactions for acquiring goods and services from nonemployees.
January 1, 2019
The Company evaluated the impact of the adoption of this ASU on its results of operations and financial condition and determined that the impact is immaterial.
ASU 2018-02, Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
The standard permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings.
January 1, 2019
The Company evaluated the impact of the adoption of this ASU on its results of operations and financial condition and determined that the impact is immaterial.
ASU 2017-11, Distinguishing Liabilities from Equity; Derivatives and Hedging
The standard eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock.
January 1, 2019
The Company evaluated the impact of the adoption of this ASU on its results of operations and financial condition and determined that the impact is immaterial.
ASU 2016-13, Measurement of Credit Losses on Financial Instruments
The standard changes how entities will measure credit losses for most financial assets, including trade and other receivables and replaces the current incurred loss approach with an expected loss model.
January 1, 2020
The Company is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.
v3.10.0.1
Inventories
12 Months Ended
Dec. 31, 2018
Inventory Disclosure [Abstract]  
Inventories
Inventories
The components of inventories, net of reserves as of December 31, 2018 and 2017 were as follows:
 
December 31,
 
2018
 
2017
Manufacturing supplies

$46.9

 

$36.3

Raw materials
35.2

 
31.9

Work in process
155.7

 
137.8

Finished products
142.8

 
82.9

Gross inventory
380.6

 
288.9

Allowance for surplus and obsolete inventory
(5.1
)
 
(7.8
)
LIFO reserve
(78.7
)
 
(57.1
)
Total Inventories, net

$296.8

 

$224.0


Inventories are valued at the lower of cost or market, with approximately 74% valued by the LIFO method, and the remaining inventories, including manufacturing supplies inventory as well as international (outside the United States) inventories, valued by FIFO, average cost or specific identification methods.
TimkenSteel recognized an increase in its LIFO reserve of $21.6 million and $12.5 million for the years ended December 31, 2018 and 2017, respectively. The increase in the LIFO reserve recognized during 2018 was due to higher scrap prices and inflation on certain consumables. The increase in the LIFO reserve recognized during 2017 was due to higher manufacturing costs and high scrap prices.
v3.10.0.1
Property, Plant and Equipment
12 Months Ended
Dec. 31, 2018
Property, Plant and Equipment [Abstract]  
Property, Plant and Equipment
Property, Plant and Equipment
The components of property, plant and equipment, net as of December 31, 2018 and 2017 were as follows:
 
December 31,
 
2018
 
2017
Land

$14.1

 

$13.4

Buildings and improvements
424.4

 
420.6

Machinery and equipment
1,404.2

 
1,387.4

Construction in progress
28.5

 
30.4

Subtotal
1,871.2

 
1,851.8

Less allowances for depreciation
(1,196.8
)
 
(1,145.1
)
Property, Plant and Equipment, net

$674.4

 

$706.7


Total depreciation expense was $67.5 million, $68.3 million and $68.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
TimkenSteel recorded capitalized interest related to construction projects of $0.1 million, $0.6 million and $0.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.
As the result of the discontinued use of certain assets, TimkenSteel recorded an impairment charge of $0.5 million and $0.7 million for the years ended December 31, 2018 and 2017, respectively. No impairment charges were recorded for the year ended December 31, 2016.
v3.10.0.1
Intangible Assets
12 Months Ended
Dec. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets
Intangible Assets
The components of intangible assets, net as of December 31, 2018 and 2017 were as follows:
 
December 31, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
 Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
 Accumulated Amortization
 
Net Carrying Amount
Customer relationships

$6.3

 

$4.6

 

$1.7

 

$6.3

 

$4.1

 

$2.2

Technology use
9.0

 
6.5

 
2.5

 
9.0

 
5.9

 
3.1

Capitalized software
61.6

 
48.0

 
13.6

 
59.1

 
44.5

 
14.6

Total Intangible Assets

$76.9

 

$59.1

 

$17.8

 

$74.4

 

$54.5

 

$19.9


Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives. The weighted average useful lives of the customer relationships, technology use and capitalized software are 15 years, 15 years and 6 years, respectively. The weighted average useful life of total intangible assets is 8 years.
As a result of discontinued use of certain capitalized software, TimkenSteel recorded an impairment charge of $0.4 million for the year ended December 31, 2018. No impairment charges were recorded for the years ended December 31, 2017 and 2016.
Amortization expense for intangible assets for the years ended December 31, 2018, 2017 and 2016 was $5.5 million, $6.6 million and $6.9 million, respectively. Based upon the intangible assets subject to amortization as of December 31, 2018, TimkenSteel’s estimated annual amortization for the five succeeding years is shown below (in millions):
Year
Amortization Expense
2019
$4.7
2020
$3.5
2021
$2.6
2022
$2.1
2023
$1.2
v3.10.0.1
Financing Arrangements
12 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
Financing Arrangements
Financing Arrangements
Convertible Notes
In May 2016, the Company issued $75.0 million aggregate principal amount of Convertible Senior Notes, and an additional $11.3 million principal amount to cover over-allotments (Convertible Notes). The Indenture for the Convertible Notes dated May 31, 2016, which was filed with the Securities and Exchange Commission as an exhibit to a Form 8-K filed on May 31, 2016, contains a complete description of the terms of the Convertible Notes. The key terms are as follows:
Maturity Date:         June 1, 2021 unless repurchased or converted earlier
Interest Rate:         6.0% cash interest per year
Interest Payments Dates:     June 1 and December 1 of each year, beginning on December 1, 2016
Initial Conversion Price:    Approximately $12.58 per common share of the Company
Initial Conversion Rate:    79.5165 common shares per $1,000 principal amount of Notes
The net proceeds to the Company from the offering were $83.2 million, after deducting the initial underwriters’ discount and fees and the offering expenses payable by the Company. The Company used the net proceeds to repay a portion of the amounts outstanding under the Credit Agreement.
The components of the Convertible Notes as of December 31, 2018 and 2017 were as follows:
 
Year Ended December 31,
 
2018
 
2017
Principal

$86.3

 

$86.3

Less: Debt issuance costs, net of amortization
(1.2
)
 
(1.6
)
Less: Debt discount, net of amortization
(11.0
)
 
(14.6
)
Convertible notes, net

$74.1

 

$70.1


The initial value of the principal amount recorded as a liability at the date of issuance was $66.9 million, using an effective interest rate of 12.0%. The remaining $19.4 million of principal amount was allocated to the conversion feature and recorded as a component of shareholders’ equity at the date of issuance. This amount represents a discount to the debt to be amortized through interest expense using the effective interest method through the maturity of the Convertible Notes.
Transaction costs were allocated to the liability and equity components based on their relative values. Transaction costs attributable to the liability component of $2.4 million are amortized to interest expense over the term of the Convertible Notes, and transaction costs attributable to the equity component of $0.7 million are included in shareholders’ equity.
The following table sets forth total interest expense recognized related to the Convertible Notes:
 
Year Ended December 31,
 
2018
 
2017
Contractual interest expense

$5.2

 

$5.2

Amortization of debt issuance costs
0.4

 
0.5

Amortization of debt discount
3.6

 
3.2

Total

$9.2

 

$8.9


The fair value of the Convertible Notes was approximately $113.0 million as of December 31, 2018. The fair value of the Convertible Notes, which falls within Level 1 of the fair value hierarchy, is based on the last price traded in December 2018.
Holders may convert all or any portion of their Convertible Notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding March 1, 2021 only under certain circumstances described in the Convertible Notes Indenture, based on the reported sale price of the Company’s common shares for specified trading days as a percentage of the conversion price of the Convertible Notes, and upon the occurrence of specified corporate events. On or after March 1, 2021 until the business day preceding the maturity date, holders may convert all or any portion of their Convertible Notes, in multiples of $1,000 principal amount, at their option.
Upon conversion, the Company will pay or deliver, as the case may be, cash, common shares or a combination of cash and common shares, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and common shares, the amount of cash and number of common shares, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40-trading day period.
If the Company undergoes a fundamental change, subject to certain conditions, holders may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to the repurchase date.
Upon certain events of default occurring and continuing (including failure to pay principal or interest on the Convertible Notes when due and payable), the Trustee or the holders of at least 25% in principal amount may declare 100% of the principal and accrued and unpaid interest, if any, on all the Convertible Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary, 100% of the principal and accrued and unpaid interest on the Convertible Notes will become due and payable immediately.
Other Long-Term Debt
The components of other long-term debt as of December 31, 2018 and 2017 were as follows:
 
December 31,
 
2018
 
2017
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (1.58% as of December 31, 2017)

$—

 

$12.2

Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (1.60% as of December 31, 2017)

 
9.5

Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (1.60% as of December 31, 2017)

 
8.5

Credit Agreement, due 2019 (LIBOR plus applicable spread)

 
65.0

Amended Credit Agreement, due 2023 (LIBOR plus applicable spread)
115.0

 

Total Other Long-Term Debt

$115.0

 

$95.2


Credit Agreement
On February 26, 2016, the Company, as borrower, and certain domestic subsidiaries, as subsidiary guarantors, entered into the Amended and Restated Credit Agreement (the Credit Agreement), with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. The Credit Agreement provided for a $265.0 million asset based revolving credit facility.
Amended Credit Agreement
On January 26, 2018, the Company as borrower, and certain domestic subsidiaries, as subsidiary guarantors, entered into the Second Amended and Restated Credit Agreement (Amended Credit Agreement), with JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and the other lenders party thereto, which amended and restated the Company’s Credit Agreement.
The Amended Credit Agreement provides for a $300.0 million asset-based revolving credit facility, including a $15.0 million sublimit for the issuance of commercial and standby letters of credit and a $30.0 million sublimit for swingline loans. Pursuant to the terms of the Amended Credit Agreement, the Company is entitled, on up to two occasions and subject to the satisfaction of certain conditions, to request increases in the commitments under the Amended Credit Agreement in the aggregate principal amount of up to $50.0 million, to the extent that existing or new lenders agree to provide such additional commitments.
The availability of borrowings under the Amended Credit Agreement is subject to a borrowing base calculation based upon a valuation of the eligible accounts receivable, inventory and machinery and equipment of the Company and the subsidiary guarantors, each multiplied by an applicable advance rate. The availability of borrowings may be further modified by reserves established from time to time by the administrative agent in its permitted discretion.
The interest rate per annum applicable to loans under the Amended Credit Agreement will be, at the Company’s option, equal to either (i) the alternate base rate plus the applicable margin or (ii) the relevant adjusted LIBO rate for an interest period of one, two, three or six months (as selected by the Company) plus the applicable margin. The base rate will be a fluctuating rate per annum equal to the greatest of (i) the prime rate of the administrative agent, (ii) the effective Federal Reserve Bank of New York rate plus 0.50% and (iii) the adjusted LIBO rate for a one-month interest period on the applicable date, plus 1.00%. The adjusted LIBO rate will be equal to the applicable London interbank offered rate for the selected interest period, as adjusted for statutory reserve requirements for eurocurrency liabilities. The applicable margin will be determined by a pricing grid based on the Company’s average quarterly availability. In addition, the Company will pay a commitment fee on the average daily unused amount of the credit facility in a percentage determined by the Company’s average daily availability for the most recently completed calendar month. The interest rate under the Amended Credit Agreement was 4.4% as of December 31, 2018. The amount available under the Amended Credit Agreement as of December 31, 2018 was $182.4 million.
The proceeds of the Amended Credit Agreement will be used to finance working capital, capital expenditures, certain permitted acquisitions and other general corporate purposes. In addition, $30.2 million of the proceeds were used to redeem the revenue refunding bonds (discussed below). All of the indebtedness under the Amended Credit Agreement is guaranteed by the Company’s material domestic subsidiaries, as well as any other domestic subsidiary the Company elects to make a party to the Amended Credit Agreement, and is secured by substantially all of the personal property of the Company and the subsidiary guarantors.
The Amended Credit Agreement matures on January 26, 2023. Prior to the maturity date, amounts outstanding are required to be repaid (without reduction of the commitments thereunder) upon the occurrence of mandatory prepayment events including proceeds of certain asset sales, equity or debt issuances or casualty events.
The Amended Credit Agreement contains certain customary covenants, including covenants that limit the ability of the Company and its subsidiaries to, among other things, (i) incur or suffer to exist certain liens, (ii) make investments, (iii) incur or guaranty additional indebtedness, (iv) enter into consolidations, mergers, acquisitions, sale-leaseback transactions and sales of assets, (v) make distributions and other restricted payments, (vi) change the nature of its business, (vii) engage in transactions with affiliates and (viii) enter into restrictive agreements, including agreements that restrict the ability to incur liens or make distributions. In addition, the Amended Credit Agreement requires the Company to (i) unless certain conditions are met, maintain certain minimum liquidity as specified in the Amended Credit Agreement during the period commencing on March 1, 2021 and ending on June 1, 2021 and (ii) maintain a minimum specified fixed charge coverage ratio on a springing basis if minimum availability requirements as specified in the Amended Credit Agreement are not maintained. As of December 31, 2018, the Company was in compliance with all covenants.
The Amended Credit Agreement contains certain customary events of default. If any event of default occurs and is continuing, the Lenders would be entitled to take various actions, including the acceleration of amounts due under the Amended Credit Agreement, and exercise other rights and remedies.
Revenue Refunding Bonds
In connection with entering into the Amended Credit Agreement, on January 23, 2018, the Company redeemed in full $12.2 million of Ohio Water Development Revenue Refunding Bonds (originally due on November 1, 2025), $9.5 million of Ohio Air Quality Development Revenue Refunding Bonds (originally due on November 1, 2025) and $8.5 million of Ohio Pollution Control Revenue Refunding Bonds (originally due on June 1, 2033).
All of TimkenSteel’s other long-term debt is variable-rate debt. As such, the carrying value of variable-rate debt is a reasonable estimate of fair value as interest rates on these borrowings approximate current market rates, which is considered a Level 2 fair value input as defined by ASC 820, Fair Value Measurements. The valuation of Level 2 is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly.
Leases
TimkenSteel leases a variety of equipment and real property, including warehouses, distribution centers, offices spaces, and land. Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the date we take possession of the property. At lease inception, we determine the lease term by assuming the exercise of those renewable options that are reasonably assured. The exercise of lease renewal options is at our sole discretion. The lease term is used to determine whether a lease is capital or operating and is used to calculate straight-line rent expense.
Rent expense under operating leases amounted to $11.0 million, $9.0 million, and $8.6 million in 2018, 2017 and 2016, respectively. As of December 31, 2018, future minimum lease payments for non-cancelable operating leases totaled $16.4 million and are payable as follows: 2019 - $6.3 million; 2020 - $5.2 million; 2021 - $3.3 million; 2022 - $1.0 million; and 2023 and after - $0.6 million.
v3.10.0.1
Accumulated Other Comprehensive Loss
12 Months Ended
Dec. 31, 2018
Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract]  
Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the years ended December 31, 2018 and 2017 by component are as follows:

 
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

 
1.5

 
1.5

Income tax

 
(0.8
)
 
(0.8
)
Net current period other comprehensive income, net of income taxes
1.1

 
0.7

 
1.8

Balance at December 31, 2017

($5.9
)
 

($1.7
)
 

($7.6
)
Other comprehensive income before reclassifications, before income tax
(1.4
)
 
(0.5
)
 
(1.9
)
Amounts reclassified from accumulated other comprehensive loss, before income tax

 
0.7

 
0.7

Income tax

 
(0.1
)
 
(0.1
)
Net current period other comprehensive (loss) income, net of income taxes
(1.4
)
 
0.1

 
(1.3
)
Balance at December 31, 2018

($7.3
)
 

($1.6
)
 

($8.9
)


The amount reclassified from accumulated other comprehensive loss for the pension and postretirement liability adjustment was included in other expense, net in the Consolidated Statements of Operations. These accumulated other comprehensive loss components are components of net periodic benefit cost. See “Note 8 - Retirement and Postretirement Plans” for additional information.
v3.10.0.1
Retirement and Postretirement Benefits
12 Months Ended
Dec. 31, 2018
Defined Benefit Plan [Abstract]  
Retirement and Postretirement Plans
Retirement and Postretirement Plans
Eligible TimkenSteel employees, including certain employees in foreign countries, participate in the following TimkenSteel-sponsored plans: TimkenSteel Corporation Retirement Plan; TimkenSteel Corporation Bargaining Unit Pension Plan, Supplemental Pension Plan of TimkenSteel Corporation, TimkenSteel U.K. Pension Scheme, TimkenSteel Corporation Bargaining Unit Welfare Benefit Plan for Retirees, and TimkenSteel Corporation Welfare Benefit Plan for Retirees.
Pension benefits earned are generally based on years of service and compensation during active employment. TimkenSteel’s funding policy is consistent with the funding requirements of applicable laws and regulations. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for the various asset classes. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets for the defined benefit pension plans as of December 31, 2018 and 2017:
 
Pension
 
Postretirement
Change in benefit obligation:
2018
2017
 
2018
2017
Benefit obligation at the beginning of year

$1,282.1


$1,220.3

 

$216.2


$214.2

Service cost
17.2

18.2

 
1.6

1.6

Interest cost
45.6

49.1

 
7.6

8.4

Actuarial (gains) losses
(70.4
)
65.4

 
(11.7
)
13.5

Benefits paid
(92.4
)
(78.4
)
 
(19.0
)
(21.5
)
Plan amendment
0.5

0.5

 


Foreign currency translation adjustment
(4.3
)
7.0

 


Benefit obligation at the end of year

$1,178.3


$1,282.1

 

$194.7


$216.2

 
Pension
 
Postretirement
Change in plan assets:
2018
2017
 
2018
2017
Fair value of plan assets at the beginning of year

$1,186.6


$1,131.7

 

$104.0


$113.9

Actual return on plan assets
(45.5
)
123.6

 
(1.3
)
9.5

Company contributions / payments
10.6

2.1

 
2.4

2.1

Benefits paid
(92.4
)
(78.4
)
 
(19.0
)
(21.5
)
Foreign currency translation adjustment
(4.9
)
7.6

 


Fair value of plan assets at end of year

$1,054.4


$1,186.6

 

$86.1


$104.0

Funded status at end of year

($123.9
)

($95.5
)
 

($108.6
)

($112.2
)

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 fourth quarter of 2018 and third quarter of 2017, the cumulative cost of all settlements exceeded the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. For the years ended December 31, 2018 and 2017 total settlements were $26.0 million and $14.4 million, respectively. These settlement are included in benefits paid in the tables above and in the net remeasurement losses (gains) as a component of net periodic benefit cost. The Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan as of September 30, 2017, due to the cumulative cost of all settlements exceeding the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan.
For the years ended December 31, 2018 and 2017 the pension plan had expenses of $2.2 million and $1.6 million, respectively. These expenses are included in benefits paid in the tables above.
The accumulated benefit obligation at December 31, 2018 exceeded the fair value of plan assets for two of the Company’s pension plans. For these plans, the benefit obligation was $881.0 million, the accumulated benefit obligation was $860.3 million and the fair value of plan assets was $749.1 million as of December 31, 2018.
The total pension accumulated benefit obligation for all plans was $1,149.8 million and $1,254.1 million as of December 31, 2018 and 2017, respectively.
Amounts recognized on the balance sheet at December 31, 2018 and 2017, for TimkenSteel’s pension and postretirement benefit plans include:
 
Pension
 
Postretirement
 
2018
2017
 
2018
2017
Non-current assets

$10.5


$14.6

 

$—


$—

Current liabilities
(0.6
)
(9.0
)
 
(2.4
)
(2.5
)
Non-current liabilities
(133.8
)
(101.1
)
 
(106.2
)
(109.7
)
 

($123.9
)

($95.5
)
 

($108.6
)

($112.2
)

Included in accumulated other comprehensive loss at December 31, 2018 and 2017, were the following before-tax amounts that had not been recognized in net periodic benefit cost:
 
Pension
 
Postretirement
 
2018
2017
 
2018
2017
Unrecognized prior service cost

$1.6


$1.5

 

$0.9


$1.1


Amounts expected to be amortized from accumulated other comprehensive loss and included in total net periodic benefit cost during the year ended December 31, 2019 are as follows:
 
Pension
 
Postretirement
Prior service cost

$0.4

 

$0.1


The weighted average assumptions used in determining benefit obligation as of December 31, 2018 and 2017 were as follows:
 
Pension
 
Postretirement
Assumptions:
2018
2017
 
2018
2017
Discount rate
4.30
%
3.68
%
 
4.34
%
3.66
%
Future compensation assumption
2.36
%
2.37
%
 
n/a

n/a

The weighted average assumptions used in determining benefit cost for the years ended December 31, 2018 and 2017 were as follows:
 
Pension
 
Postretirement
Assumptions:
2018
2017
 
2018
2017
Discount rate
3.68
%
4.17
%
 
3.66
%
4.09
%
Future compensation assumption
2.37
%
3.09
%
 
n/a

n/a

Expected long-term return on plan assets
6.45
%
6.46
%
 
5.00
%
5.00
%

The discount rate assumption is based on current rates of high-quality long-term corporate bonds over the same period that benefit payments will be required to be made. The expected rate of return on plan assets assumption is based on the weighted-average expected return on the various asset classes in the plans’ portfolios. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.
For measurement purposes, TimkenSteel assumed a weighted-average annual rate of increase in the per capita cost (health care cost trend rate) of 6.00% and 6.25% for 2018 and 2017, respectively, declining gradually to 5.00% in 2023 and thereafter for medical and prescription drug benefits, and 8.00% and 8.25% for 2018 and 2017, respectively, declining gradually to 5.00% in 2031 and thereafter for HMO benefits. A one percentage point increase in the assumed health care cost trend rate would have increased the 2018 and 2017 postretirement benefit obligation by $1.1 million and $1.8 million, respectively and increased the total service and interest cost components by $0.1 million in both the years ended December 31, 2018 and 2017. A one percentage point decrease would have decreased the 2018 and 2017 postretirement benefit obligation by $1.0 million and $1.6 million, respectively and decreased the total service and interest cost components by $0.1 million in both the years ended December 31, 2018 and 2017.
The components of net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016 were as follows:
 
Pension
 
Postretirement
 
Years Ended December 31,
 
Years Ended December 31,
Components of net periodic benefit cost (income):
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Service cost

$17.2

 

$18.2

 

$15.6

 

$1.6

 

$1.6

 

$1.5

Interest cost
45.6

 
49.1

 
52.4

 
7.6

 
8.4

 

$9.4

Expected return on plan assets
(74.0
)
 
(70.7
)
 
(71.1
)
 
(4.8
)
 
(5.2
)
 
(5.8
)
Amortization of prior service cost
0.5

 
0.5

 
0.6

 
0.2

 
1.0

 
1.1

Net remeasurement losses (gains)
49.1

 
12.5

 
73.4

 
(5.6
)
 
9.3

 
6.3

Net Periodic Benefit Cost (Income)

$38.4

 

$9.6

 

$70.9

 

($1.0
)
 

$15.1

 

$12.5


TimkenSteel recognizes its overall responsibility to ensure that the assets of its various defined benefit pension plans are managed effectively and prudently and in compliance with its policy guidelines and all applicable laws. Preservation of capital is important; however, TimkenSteel also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the pension funds. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes. The expected rate of return for the investment portfolios is based on expected rates of return for various asset classes, as well as historical asset class and fund performance. The target allocations for plan assets are 19% equity securities, 59% debt securities and 22% in all other types of investments.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
Level 1 -
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 -
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 -
Unobservable inputs for the asset or liability.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s pension assets measured at fair value on a recurring basis as of December 31, 2018:
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Cash and cash equivalents

$22.5


$0.6


$21.9


$—

U.S government and agency securities
234.2

229.1

5.1


Corporate bonds
97.4


97.4


Equity securities
37.1

37.1



Mutual fund - fixed income
33.1

33.1



Mutual fund - real estate
7.7

7.7



Total Assets in the fair value hierarchy

$432.0


$307.6


$124.4


$—

Assets measured at net asset value (1)
622.4




Total Assets

$1,054.4


$307.6


$124.4


$—

(1) Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, hedge funds, and risk parity investments. As of December 31, 2018, these assets are redeemable at net asset value within 90 days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s pension assets measured at fair value on a recurring basis as of December 31, 2017:
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Cash and cash equivalents

$19.6


$4.5


$15.1


$—

U.S government and agency securities
240.7

234.6

6.1


Corporate bonds
110.0


110.0


Equity securities
50.8

50.8



Mutual fund - equity
35.2

35.2



Mutual fund - real estate
16.5

16.5



Total Assets in the fair value hierarchy

$472.8


$341.6


$131.2


$—

Assets measured at net asset value (1)
713.8




Total Assets

$1,186.6


$341.6


$131.2


$—

(1) Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, and risk parity investments. As of December 31, 2017, these assets were redeemable at net asset value within 90 days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s postretirement assets measured at fair value on a recurring basis as of December 31, 2018:
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Cash and cash equivalents

$5.6


$5.6


$—


$—

Mutual fund - fixed income
8.9

8.9



Total Assets in the fair value hierarchy

$14.5


$14.5


$—


$—

Assets measured at net asset value (1)
71.6




Total Assets

$86.1


$14.5


$—


$—

(1) Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, hedge funds, and risk parity investments. As of December 31, 2018, these assets are redeemable at net asset value within 90 days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s postretirement assets measured at fair value on a recurring basis as of December 31, 2017:
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Cash and cash equivalents

$2.2


$2.2


$—


$—

Mutual fund - fixed income
11.4

11.4



Total Assets in the fair value hierarchy

$13.6


$13.6


$—


$—

Assets measured at net asset value (1)
90.4




Total Assets

$104.0


$13.6


$—


$—

(1) Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, and risk parity investments. As of December 31, 2017, these assets were redeemable at net asset value within 90 days.
Future benefit payments are expected to be as follows:
 
 
 
Postretirement
Benefit Payments:
Pension
 
Gross
 
Medicare Part D Subsidy Receipts
2019

$80.9

 

$19.0

 

$0.7

2020
79.4

 
18.3

 
0.8

2021
78.1

 
17.6

 
0.8

2022
81.7

 
16.8

 
0.8

2023
75.5

 
15.9

 
0.9

2024-2028
366.8

 
67.5

 
4.7


The Company expects to make contributions to its U.K. pension plan in 2019 of approximately $1.4 million.
Defined Contribution Plans
The Company recorded expense primarily related to employer matching and non-discretionary contributions to these defined contribution plans of $6.3 million in 2018, $5.4 million in 2017, and $4.6 million in 2016.
v3.10.0.1
Revenue Recognition
12 Months Ended
Dec. 31, 2018
Revenue from Contract with Customer [Abstract]  
Revenue Recognition
Revenue Recognition
As discussed in ‘Note 2 - Significant Accounting Policies,’ on January 1, 2018, TimkenSteel adopted the new revenue recognition standard. Under this new standard, TimkenSteel recognizes revenue from contracts at a point in time when it has satisfied its performance obligation and the customer obtains control of the goods, at the amount that reflects the consideration the Company expects to receive for those goods. The Company receives and acknowledges purchase orders from its customers, which define the quantity, pricing, payment and other applicable terms and conditions. In some cases, the Company receives a blanket purchase order from its customer, which includes pricing, payment and other terms and conditions, with quantities defined at the time the customer issues periodic releases from the blanket purchase order. Certain contracts contain variable consideration, which primarily consists of rebates that are accounted for in net sales and accrued based on the estimated probability of the requirements being met. Amounts billed to customers related to shipping and handling costs are included in net sales and related costs are included in costs of products sold in the Consolidated Financial Statements.
The following table provides the major sources of revenue by end market sector for the years ended December 31, 2018 and 2017:
 
Years Ended December 31,
 
2018
 
2017
 
2016
Mobile

$553.9

 

$528.6

 

$475.4

Industrial
637.5

 
486.4

 
323.7

Energy
265.6

 
141.7

 
35.7

Other(1)
153.6

 
172.5

 
34.7

Total Net Sales

$1,610.6

 

$1,329.2



$869.5

(1)”Other” for sales by end market sector includes the Company’s scrap and OCTG billet sales.
The following table provides the major sources of revenue by product type for the years ended December 31, 2018 and 2017:
 
Years Ended December 31,
 
2018
 
2017
 
2016
Bar

$1,030.7

 

$850.0

 

$512.9

Tube
254.7

 
176.9

 
94.9

Value-add
284.3

 
265.3

 
240.4

Other(2)
40.9

 
37.0

 
21.3

Total Net Sales

$1,610.6

 

$1,329.2

 

$869.5

(2)”Other” for sales by product type includes the Company’s scrap sales.
v3.10.0.1
Earnings Per Share
12 Months Ended
Dec. 31, 2018
Earnings Per Share [Abstract]  
Earnings Per Share
Basic loss per share is computed based upon the weighted average number of common shares outstanding. Diluted 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 loss per share. Under the if-converted method, the Company adjusts net earnings to add back interest expense (including amortization of debt discount) recognized on the Convertible Notes and includes the number of shares potentially issuable related to the Convertible Notes in the weighted average shares outstanding. Treasury stock is excluded from the denominator in calculating both basic and diluted loss per share.
For the years ended December 31, 2018, 2017 and 2016, 3.3 million, 3.1 million, and 2.8 million shares issuable for equity-based awards, respectively, were excluded from the computation of diluted loss per share because the effect of their inclusion would have been anti-dilutive. In periods in which a net loss has occurred, as is the case for years ended December 31, 2018, 2017 and 2016, the dilutive effect of equity-based awards is not recognized and thus not utilized in the calculation of diluted loss per share, because the effect of their inclusion would have been anti-dilutive. The shares potentially issuable of 6.9 million, related to the Convertible Notes, were also anti-dilutive for the years ended December 31, 2018, 2017 and 2016, respectively.
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted loss per share for the years ended December 31, 2018, 2017 and 2016:
 
Years Ended December 31,
 
2018
 
2017
 
2016
Numerator:
 
 
 
 
 
Net loss

($31.7
)
 

($43.8
)
 

($105.5
)
 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted average shares outstanding, basic
44.6

 
44.4

 
44.2

Weighted average shares outstanding, diluted
44.6

 
44.4

 
44.2

 
 
 
 
 
 
Basic loss per share

($0.71
)
 

($0.99
)
 

($2.39
)
Diluted loss per share

($0.71
)
 

($0.99
)
 

($2.39
)
v3.10.0.1
Stock-Based Compensation
12 Months Ended
Dec. 31, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation
Stock-Based Compensation
Description of the Plan
On April 28, 2016, shareholders of TimkenSteel approved the TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan (TimkenSteel 2014 Plan), which authorizes the Compensation Committee of the TimkenSteel Board of Directors to grant non-qualified or incentive stock options, stock appreciation rights, stock awards (including restricted shares, restricted share unit awards, performance shares, performance units, deferred shares and common shares) and cash awards to TimkenSteel employees and non-employee directors. No more than 11.05 million TimkenSteel common shares may be delivered under the TimkenSteel 2014 Plan. The TimkenSteel 2014 Plan contains fungible share counting mechanics, which generally means that awards other than stock options and stock appreciation rights will be counted against the aggregate share limit as 2.50 common shares for every one common share that is actually issued or transferred under such awards. The TimkenSteel 2014 Plan authorized up to 3.0 million common shares for use in granting “replacement awards” to current holders of The Timken Company equity awards under The Timken Company’s equity compensation plans at the time of the spinoff.
As of December 31, 2018, approximately 4.2 million shares of TimkenSteel common stock remained available for grants under the TimkenSteel 2014 Plan.
In connection with the spinoff, stock compensation awards granted under The Timken Company Long-Term Incentive Plan (Timken LTIP Plan) and The Timken Company 2011 Long-Term Incentive Plan (Timken 2011 Plan) were adjusted as follows:
Vested and unvested stock options were adjusted so that the grantee holds options to purchase both The Timken Company and TimkenSteel common shares.
The adjustment to The Timken Company and TimkenSteel stock options, when combined, were intended to generally preserve the intrinsic value of each original option grant and the ratio of the exercise price to the fair market value of The Timken Company common shares on June 30, 2014.
Unvested restricted stock awards were replaced with adjusted, substitute awards for restricted shares or units, as applicable, of The Timken Company and TimkenSteel common shares. The new awards of restricted stock were intended to generally preserve the intrinsic value of the original award determined as of June 30, 2014.
Vesting periods of awards were unaffected by the adjustment and substitution.
Awards granted in connection with the adjustment of awards originally issued under The Timken Company LTIP Plan and the Timken 2011 Plan are referred to as replacement awards under the TimkenSteel 2014 Plan and, as noted above, reduce the maximum number of TimkenSteel common shares available for delivery under the TimkenSteel 2014 Plan. TimkenSteel records compensation expense for both TimkenSteel and The Timken Company common shares for awards held by TimkenSteel employees only.
As discussed in ‘Note 2 - Significant Accounting Policies,’ TimkenSteel early adopted ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” effective as of January 1, 2016. Under ASU 2016-09, TimkenSteel recognizes all excess tax benefits and tax deficiencies as provision (benefit) for income taxes in the Consolidated Statements of Operations.
The following table provides the significant assumptions used to calculate the grant date fair market values of options granted using a Black-Scholes option pricing method:
 
2018
 
2017
 
2016
Weighted-average fair value per option
$7.46
 
$7.68
 
$3.32
Risk-free interest rate
2.77%
 
2.21%
 
1.34%
Dividend yield
—%
 
—%
 
—%
Expected stock volatility
41.67%
 
43.23%
 
41.71%
Expected life - years
6
 
6
 
6

The expected life of stock option awards granted is based on historical data and represents the period of time that options granted are expected to be held prior to exercise. Because of the absence of adequate stock price history of TimkenSteel common stock, expected volatility related to stock option awards granted subsequent to the spinoff is based on the historical volatility of a selected group of peer companies’ stock. Expected annual dividends per share are estimated using the most recent dividend payment per share as of the grant date. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The following summarizes TimkenSteel stock option activity from January 1, 2018 to December 31, 2018:
 
Number of Shares
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value (millions)
Outstanding as of December 31, 2017
2,338,355


$22.03

 
 
Granted
389,640


$16.53

 
 
Exercised
(18,242
)

$9.74

 
 
Canceled, forfeited or expired
(177,084
)

$21.16

 
 
Outstanding as of December 31, 2018
2,532,669


$21.33

8.12
$0.7
Options expected to vest
897,771


$14.59

8.12
$0.3
Options exercisable
1,634,898


$25.04

4.61
$0.4

Stock options presented in this table represent TimkenSteel awards only, including those held by The Timken Company employees.
For stock options exercised during the period of January 1, 2018 to December 31, 2018, the total intrinsic value was $0.1 million with cash proceeds of $0.2 million. There was a tax deduction that was less than $0.1 million associated with these stock option exercises.
The following summarizes TimkenSteel stock-settled restricted share award activity from January 1, 2018 to December 31, 2018:
 
Number of Shares
Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2017
714,316


$14.53

Granted
356,966


$16.47

Vested
(184,522
)

$18.28

Canceled, forfeited or expired
(68,876
)

$19.08

Outstanding as of December 31, 2018
817,884


$14.15


Restricted share awards presented in this table represent TimkenSteel awards only, including those held by The Timken Company employees.
TimkenSteel recognized stock-based compensation expense of $7.3 million ($7.3 million after tax), $6.5 million ($6.5 million after tax) and $6.7 million ($4.2 million after tax) for the years ended December 31, 2018, 2017 and 2016, respectively, related to stock option awards and stock-settled restricted share awards.
Outstanding restricted share awards include restricted shares, restricted stock units, performance-based restricted stock units and deferred shares that will settle in common shares. Outstanding restricted shares and restricted stock units generally cliff-vest after three years or vest in 25% increments annually beginning on the first anniversary of the date of grant. Performance-based restricted stock units vest based on achievement of specified performance objectives.
As of December 31, 2018, unrecognized compensation cost related to stock option awards and stock-settled restricted shares and restricted stock units was $8.9 million, which is expected to be recognized over a weighted average period of 1.5 years. The calculations of unamortized expense and weighted-average periods include awards based on both TimkenSteel and The Timken Company stock awards held by TimkenSteel employees.
Certain restricted stock units, including performance-based restricted stock units, are settled in cash and were adjusted and substituted as described above. TimkenSteel accrued $0.8 million and $0.7 million as of December 31, 2018 and 2017, respectively, which was included in salaries, wages and benefits, and other non-current liabilities on the Consolidated Balance Sheets. TimkenSteel paid $0.1 million and $0.5 million for cash-settled restricted stock units during 2018 and 2017, respectively.
v3.10.0.1
Segment Information Segment Information
12 Months Ended
Dec. 31, 2018
Segment Reporting [Abstract]  
Segment Information
Segment Information
We conduct our business activities and report financial results as one business segment. The presentation of financial results as one reportable segment is consistent with the way the Company operates its 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 notes that monitoring financial results as one reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of the operations.
Geographic Information
Net sales by geographic area are reported by the country in which the customer is domiciled. Long-lived assets include property, plant and equipment and intangible assets subject to amortization. Long-lived assets by geographic area are reported by the location of the TimkenSteel operations to which the asset is attributed.
 
Years Ended December 31,
 
2018
 
2017
Net Sales:
 
 
 
United States

$1,456.2

 

$1,207.7

Foreign
154.4

 
121.5

 

$1,610.6

 

$1,329.2


 
December 31,
 
2018
 
2017
Long-lived Assets, net:
 
 
 
United States

$692.0

 

$726.4

Foreign
0.2

 
0.2

 

$692.2

 

$726.6

v3.10.0.1
Income Tax Provision
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Tax Provision
Income Tax Provision
Income (loss) from operations before income taxes, based on geographic location of the operations to which such earnings are attributable, is provided below.
 
Years Ended December 31,
 
2018
 
2017
 
2016
United States

($31.8
)
 

($49.5
)
 

($136.2
)
Non-United States
1.9

 
7.2

 
(5.8
)
Loss from operations before income taxes

($29.9
)
 

($42.3
)
 

($142.0
)

The provision (benefit) for income taxes consisted of the following:
 
Years Ended December 31,
 
2018
 
2017
 
2016
Current:
 
 
 
 
 
Federal

$—

 

$1.1

 

$—

State and local
0.3