TIMKENSTEEL CORP, 10-K filed on 2/25/2020
Annual Report
v3.19.3.a.u2
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2019
Feb. 15, 2020
Jun. 30, 2019
Document and Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2019    
Document Fiscal Year Focus 2019    
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 Emerging Growth Company false    
Entity Small Business false    
Entity Current Reporting Status Yes    
Entity Well-known Seasoned Issuer No    
Entity Voluntary Filers No    
Entity Shell Company false    
Entity Public Float     $ 337,525,844
Entity Common Stock, Shares Outstanding   44,821,588  
v3.19.3.a.u2
Consolidated Statements of Operations (Unaudited) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Income Statement [Abstract]      
Net sales $ 1,208,800,000 $ 1,610,600,000 $ 1,329,200,000
Cost of products sold 1,186,200,000 1,484,000,000 1,248,900,000
Gross Profit 22,600,000 126,600,000 80,300,000
Selling, general and administrative expenses 91,800,000 98,200,000 90,500,000
Restructuring charges 8,600,000 0 0
Impairment charges and loss on sale or disposal of assets 9,300,000 900,000 700,000
Interest expense 15,700,000 17,100,000 14,800,000
Other income (expense), net (23,300,000) (18,600,000) (4,100,000)
Income (Loss) Before Income Taxes (126,100,000) (8,200,000) (29,800,000)
Provision (benefit) for income taxes (16,100,000) 1,800,000 1,500,000
Net Income (Loss) $ (110,000,000) $ (10,000,000) $ (31,300,000)
Per Share Data:      
Basic earnings (loss) per share (in dollars per share) $ (2.46) $ (0.22) $ (0.70)
Diluted earnings (loss) per share (in dollars per share) $ (2.46) $ (0.22) $ (0.70)
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Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Statement of Comprehensive Income [Abstract]    
Net income (loss) $ (10.0) $ (31.3)
Other comprehensive income (loss), net of tax of $16.7 million in 2019:    
Foreign currency translation adjustments (1.4) 1.1
Pension and postretirement liability adjustments 0.1 0.7
Other comprehensive income (loss), net of tax (1.3) 1.8
Comprehensive Income (Loss), net of tax $ (11.3) $ (29.5)
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Consolidated Balance Sheets (Unaudited) - USD ($)
$ in Millions
Dec. 31, 2019
Dec. 31, 2018
Current Assets    
Cash and cash equivalents $ 27.1 $ 21.6
Accounts receivable, net of allowances (2019 - $1.5 million; 2018 - $1.7 million) 77.5 163.4
Inventories, net 281.9 374.5
Deferred charges and prepaid expenses 3.3 3.5
Assets held for sale 4.1 0.0
Other current assets 7.8 6.1
Total Current Assets 401.7 569.1
Property, Plant and Equipment, Net 626.4 674.4
Operating lease right-of-use assets 14.3  
Pension assets 25.2 10.5
Intangible assets, net 14.3 17.8
Other non-current assets 3.3 3.5
Total Assets 1,085.2 1,275.3
Current Liabilities    
Accounts payable 69.3 160.6
Salaries, wages and benefits 13.9 36.8
Accrued pension and postretirement costs 3.0 3.0
Current operating lease liabilities 6.2 0.0
Other current liabilities 19.9 20.4
Total Current Liabilities 112.3 220.8
Non-Current Liabilities    
Convertible notes, net 78.6 74.1
Credit Agreement 90.0 115.0
Non-current operating lease liabilities 8.2  
Accrued pension and postretirement costs 222.1 240.0
Deferred income taxes 0.9 0.8
Other non-current liabilities 10.0 11.7
Total Liabilities 522.1 662.4
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 2019 and 2018 - 45.7 million shares 0.0 0.0
Additional paid-in capital 844.8 846.3
Retained deficit (301.5) (191.5)
Treasury shares - 2019 - 0.9 million; 2018 - 1.1 million (24.9) (33.0)
Accumulated other comprehensive loss 44.7 (8.9)
Total Shareholders’ Equity 563.1 612.9
Total Liabilities and Shareholders’ Equity $ 1,085.2 $ 1,275.3
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Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($)
$ in Millions
Dec. 31, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Allowances for accounts receivable $ 1.5 $ 1.7
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) 900,000 1,100,000
v3.19.3.a.u2
Consolidated Statements of Shareholder's Equity (Unaudited) - USD ($)
$ in Millions
Total
Common Shares Outstanding
Additional Paid-in Capital
Retained Deficit
Treasury Shares
Accumulated Other Comprehensive Income (Loss)
Beginning balance (in shares) at Dec. 31, 2016   44,228,213        
Beginning balance at Dec. 31, 2016 $ 597.4   $ 845.6 $ (193.9) $ (44.9) $ (9.4)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss) (31.3)          
Other comprehensive income (loss) 1.8         1.8
Stock-based compensation expense 6.5   6.5      
Stock option activity 0.2   0.2      
Issuance of treasury shares (in shares)   300,130        
Issuance of treasury shares 0.0   (8.6) (0.3) 8.9  
Shares surrendered for taxes (in shares   (82,596)        
Shares surrendered for taxes (1.4)       (1.4)  
Ending balance (in shares) at Dec. 31, 2017   44,445,747        
Ending balance at Dec. 31, 2017 616.7   843.7 (182.0) (37.4) (7.6)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss) (10.0)          
Other comprehensive income (loss) (1.3)         (1.3)
Stock-based compensation expense 7.3   7.3      
Stock option activity 0.2   0.2      
Issuance of treasury shares (in shares)   176,454        
Issuance of treasury shares 0.0   (4.9) (0.2) 5.1  
Shares surrendered for taxes (in shares   (37,533)        
Shares surrendered for taxes (0.7)       (0.7)  
Ending balance (in shares) at Dec. 31, 2018   44,584,668        
Ending balance at Dec. 31, 2018 612.9   846.3 (191.5) (33.0) (8.9)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss) (110.0)     (110.0)    
Other comprehensive income (loss) 53.6         53.6
Stock-based compensation expense 7.4   7.4      
Stock option activity 0.2   0.2      
Issuance of treasury shares (in shares)   321,739        
Issuance of treasury shares 0.0   (9.1)   9.1  
Shares surrendered for taxes (in shares   (86,254)        
Shares surrendered for taxes (1.0)       (1.0)  
Ending balance (in shares) at Dec. 31, 2019   44,820,153        
Ending balance at Dec. 31, 2019 $ 563.1   $ 844.8 $ (301.5) $ (24.9) $ 44.7
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Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Operating Activities      
Net income (loss) $ (110.0) $ (10.0) $ (31.3)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:      
Depreciation and amortization 73.5 73.0 74.9
Amortization of deferred financing fees and debt discount 5.1 5.5 4.0
Impairment charges and loss on sale or disposal of assets 9.3 0.9 1.6
Deferred income taxes (16.6) 0.8 (0.3)
Stock-based compensation expense 7.4 7.3 6.5
Pension and postretirement expense (benefit), net 41.6 37.4 24.7
Pension and postretirement contributions and payments (3.8) (13.1) (4.3)
Changes in operating assets and liabilities:      
Accounts receivable, net 85.9 (13.6) (58.2)
Inventories, net 92.6 (94.5) (72.3)
Accounts payable (87.7) 24.4 45.7
Other accrued expenses (26.0) (3.8) 18.3
Deferred charges and prepaid expenses 0.2 0.4 (0.5)
Other, net (1.2) 3.8 (0.7)
Net Cash Provided (Used) by Operating Activities 70.3 18.5 8.1
Investing Activities      
Capital expenditures (38.0) (40.0) (33.0)
Proceeds from disposals of property, plant and equipment 0.0 1.0 0.0
Net Cash Provided (Used) by Investing Activities (38.0) (39.0) (33.0)
Financing Activities      
Proceeds from exercise of stock options 0.2 0.2 0.2
Shares surrendered for employee taxes on stock compensation (1.0) (0.7) (1.4)
Refunding Bonds repayments 0.0 (30.2) 0.0
Repayments on credit agreements (65.0) (105.0) (5.0)
Borrowings on credit agreements 40.0 155.0 30.0
Debt issuance costs (1.0) (1.7) 0.0
Net Cash Provided by Financing Activities (26.8) 17.6 23.8
Increase (Decrease) in Cash and Cash Equivalents 5.5 (2.9) (1.1)
Cash and cash equivalents at beginning of period 21.6 24.5 25.6
Cash and Cash Equivalents at End of Period $ 27.1 $ 21.6 $ 24.5
v3.19.3.a.u2
Basis of Presentation
12 Months Ended
Dec. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation
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: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and oil country tubular goods (OCTG);.
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. In the fourth quarter of 2019, our Board of Directors approved a plan to close our TimkenSteel Material Services facility during the first quarter of 2020.
Basis of Consolidation:
The Consolidated Financial Statements include the consolidated assets, liabilities, revenues and expenses related to TimkenSteel as of December 31, 2019, 2018 and 2017. 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 2019 presentation.
Change in Accounting Principle:
During the fourth quarter of 2019, TimkenSteel elected to change its method for valuing its inventories that previously used the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. Total inventories accounted for under the LIFO method represented approximately 70% of the Company's total inventories prior to this change in method. The Company believes that the FIFO method is preferable as it improves comparability with our peers, more closely resembles the physical flow of our inventory, and aligns with how the Company internally manages the business.
The effects of the change in accounting principle from LIFO to FIFO have been retrospectively applied to all periods presented. As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the Company’s consolidated balance sheets as of December 31, 2018 and the consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the years ended December 31, 2018 and 2017 were adjusted as necessary.
The following table reflects the effect of the change in the accounting principle on the 2019 Consolidated Financial Statements (dollars in million, except per share data):
For the Year Ended December 31, 2019
As Computed under LIFO
As Reported under FIFO
Effect of Change
Statement of Operations
 
 
 
Cost of products sold

$1,160.5


$1,186.2


$25.7

Gross profit
48.3

22.6

(25.7
)
Income (loss) before income taxes
(100.4
)
(126.1
)
(25.7
)
Net income (loss)
(84.3
)
(110.0
)
(25.7
)
 
 
 
 
Per Share Data:
 
 
 
Basic earnings (loss) per share
(1.89
)
(2.46
)
(0.57
)
Diluted earnings (loss) per share
(1.89
)
(2.46
)
(0.57
)
For the Year Ended December 31, 2019
As Computed under LIFO
As Reported under FIFO
Effect of Change
Statement of Comprehensive Income (Loss)
 
 
 
Net (loss) income

($84.3
)

($110.0
)

($25.7
)
Comprehensive income (loss), net of tax
(30.7
)
(56.4
)
(25.7
)
As of December 31, 2019
As Computed under LIFO
As Reported under FIFO
Effect of Change
Balance Sheet
 
 
 
Inventories, net

$229.8


$281.9


$52.1

Retained deficit
(249.4
)
(301.5
)
(52.1
)
For the Year Ended December 31, 2019
As Computed under LIFO
As Reported under FIFO
Effect of Change
Statement of Cash Flows
 
 
 
Net (loss) income

($84.3
)

($110.0
)

($25.7
)
Changes in operating assets and liabilities:
 
 
 
  Inventories, net
66.9

92.6

25.7

The following tables reflect the impact to the financial statement line items as a result of the change in accounting principle for the prior periods presented in the accompanying financial statements (dollars in millions, except per share data):
Consolidated Statement of Operations
 
2018
 
2017
 
 
As Reported
Adjustments
As Adjusted
 
As Reported
Adjustments
As Adjusted
Cost of products sold
 
$
1,505.7

$
(21.7
)
$
1,484.0

 
$
1,261.4

$
(12.5
)
$
1,248.9

Gross profit
 
104.9

21.7

126.6

 
67.8

12.5

80.3

Income (loss) before income taxes
 
(29.9
)
21.7

(8.2
)
 
(42.3
)
12.5

(29.8
)
Net income (loss)
 
(31.7
)
21.7

(10.0
)
 
(43.8
)
12.5

(31.3
)
 
 
 
 
 
 
 
 
 
Per Share Data:
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
(0.71
)
$
0.49

$
(0.22
)
 
$
(0.99
)
$
0.29

$
(0.70
)
Diluted earnings (loss) per share
 
$
(0.71
)
$
0.49

$
(0.22
)
 
$
(0.99
)
$
0.29

$
(0.70
)
Consolidated Statement of Comprehensive Income (Loss)
 
 
2018
 
 
 
2017
 
 
 
As Reported
Adjustments
As Adjusted
 
As Reported
Adjustments
As Adjusted
Net income (loss)
 
$
(31.7
)
$
21.7

$
(10.0
)
 
$
(43.8
)
$
12.5

$
(31.3
)
Comprehensive income (loss), net of tax
 
(33.0
)
21.7

(11.3
)
 
(42.0
)
12.5

(29.5
)
Consolidated Balance Sheet
2018
 
As Reported
Adjustments
As Adjusted
Inventories, net
$
296.8

$
77.7

$
374.5

Retained deficit (1)
(269.2
)
77.7

(191.5
)
(1) As a result of the accounting change, retained deficit as of January 1, 2017 decreased from $193.9 million, as originally reported using the LIFO method, to $150.4 million using the FIFO method. The change of $43.5 million is reflected as a cumulative change in accounting principle in the Consolidated Statements of Shareholders’ Equity.
Consolidated Statement of Cash Flows
 
2018
 
2017
 
 
As Reported
Adjustments
As Adjusted
 
As Reported
Adjustments
As Adjusted
Net income (loss)
 
$
(31.7
)
$
21.7

$
(10.0
)
 
$
(43.8
)
$
12.5

$
(31.3
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
Inventories, net
 
(72.8
)
(21.7
)
(94.5
)
 
(59.8
)
(12.5
)
(72.3
)
v3.19.3.a.u2
Significant Accounting Policies
12 Months Ended
Dec. 31, 2019
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:
At December 31, 2019, inventories were stated at the lower of cost or net realizable value. During the fourth quarter of 2019, the Company elected to change its method for valuing its inventories that previously used the LIFO method to the FIFO method. The Company believes that the FIFO method is preferable as it improves comparability with our peers, more closely resembles the physical flow of our inventory, and aligns with how the Company internally manages the business. The remaining inventories, including raw materials, manufacturing supplies inventory as well as international (outside the U.S.) inventories, will continue to be valued using the FIFO or average cost method.
The effects of the change in accounting principle from LIFO to FIFO have been retrospectively applied to all periods presented. Refer to “Note 1 - Basis of Presentation” for more information.
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.
Refer to “Note 6 - Disposition of Non-Core Assets” and “Note 11 - Property, Plant and Equipment” for additional information.
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, 2019, 2018 or 2017.
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 a foreign currency exchange loss of $0.2 million in 2018 and a gain of $0.3 million in 2017. There were no foreign currency exchange gains or losses in 2019.
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 Statements 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 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 fair value of stock-based awards that will settle in TimkenSteel common shares, other than stock options, is based on the closing 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 recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the Consolidated Statements of Operations. 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.
Research and Development:
Expenditures for TimkenSteel research and development amounted to $4.1 million for the year ended December 31, 2019, $8.1 million for the year ended December 31, 2018 and $8.0 million for the years ended December 31, 2017, 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 Accounting Standard Updates (ASU) in the first quarter of 2019, all of which were effective as of January 1, 2019. The adoption of these standards had no impact on the Consolidated Financial Statements or the related Notes to the Consolidated Financial Statements.
Standards Adopted
Description
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.
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.
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.

On January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topics 842),” which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for not only finance (previously capital) leases but also operating leases. The standard also requires additional quantitative and qualitative disclosures. The Company adopted the standard using the modified retrospective transition approach without adjusting comparative periods.
The Company elected certain of the practical expedients permitted under the transition guidance within the new standard as follows:
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. Adoption of the lease standard resulted in recognition of right-to-use assets and lease liabilities of $16.0 million as of January 1, 2019. Adoption of the lease standard had no impact on the Company’s debt covenant compliance under its current agreements. Also, the standard did not materially affect the Company’s results of operations or its cash flows. Refer to “Note 13 - Leases” for additional information.
Accounting Standards Issued But Not Yet Adopted
The Company has considered the recent ASUs issued by the Financial Accounting Standards Board summarized below:
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 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 2018-14, 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 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 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 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.
v3.19.3.a.u2
Segment Information Segment Information
12 Months Ended
Dec. 31, 2019
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.
 
Year Ended December 31,
 
2019
 
2018
 
2017
Net Sales:
 
 
 
 
 
United States

$1,096.8

 

$1,456.2

 

$1,207.7

Foreign
112.0

 
154.4

 
121.5

 

$1,208.8

 

$1,610.6

 

$1,329.2


 
December 31,
 
2019
 
2018
Long-lived Assets, net:
 
 
 
United States

$654.8

 

$692.0

Foreign
0.2

 
0.2

 

$655.0

 

$692.2

v3.19.3.a.u2
Revenue Recognition
12 Months Ended
Dec. 31, 2019
Revenue from Contract with Customer [Abstract]  
Revenue Recognition
Revenue Recognition
The following table provides the major sources of revenue by end-market sector for the years ended December 31, 2019, 2018 and 2017:
 
Year Ended December 31,
 
2019
 
2018
 
2017
Mobile

$479.3

 

$553.9

 

$528.6

Industrial
486.3

 
637.5

 
486.4

Energy
166.4

 
265.6

 
141.7

Other(1)
76.8

 
153.6

 
172.5

Total Net Sales

$1,208.8

 

$1,610.6

 

$1,329.2

(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, 2019, 2018 and 2017:
 
Year Ended December 31,
 
2019
 
2018
 
2017
Bar

$783.0

 

$1,030.7

 

$850.0

Tube
151.8

 
254.7

 
176.9

Value-add
240.6

 
284.3

 
265.3

Other(2)
33.4

 
40.9

 
37.0

Total Net Sales

$1,208.8

 

$1,610.6

 

$1,329.2

(2) “Other” for sales by product type includes the Company’s scrap sales.
v3.19.3.a.u2
Restructuring Charges
12 Months Ended
Dec. 31, 2019
Restructuring and Related Activities [Abstract]  
Restructuring Charges
Restructuring Charges
During 2019, 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 announced closure of the TimkenSteel Material Services (TMS) facility in Houston, Texas (See “Note 6 - Disposition of Non-Core Assets”), and other actions to further improve the Company’s overall cost structure. Through these restructuring efforts, the Company eliminated approximately 150 salaried positions and recognized restructuring charges of $8.6 million, consisting of severance and employee-related benefits. TimkenSteel recorded reserves for such restructuring charges as other current liabilities on the Consolidated Balance Sheets. The reserve balance at December 31, 2019 is expected to be substantially used in the next twelve months.
The following is a summary of the restructuring reserve for the twelve months ended December 31, 2019:
Balance at December 31, 2018

$—

Expenses (1)
8.6

Payments
(2.6
)
Balance at December 31, 2019

$6.0

(1) Expenses of $8.6 million exclude stock compensation of $0.3 million that was accelerated as a result of the Company’s restructuring activities.
There were no restructuring charges for the years ended December 31, 2018 and 2017.
v3.19.3.a.u2
Disposition of Non-Core Assets (Notes)
12 Months Ended
Dec. 31, 2019
Discontinued Operations and Disposal Groups [Abstract]  
Disposal Groups, Including Discontinued Operations, Disclosure [Text Block]
Note 6 - Disposition of Non-Core Assets
During the fourth quarter of 2019, management signed a letter of intent to dispose of the Company’s scrap processing facility in Akron, Ohio for cash consideration of approximately $4.0 million. This letter of intent and cash consideration were for the land, buildings, machinery and equipment associated with this facility.
As a result of the agreement to sell the scrap processing facility, the Company ceased depreciation of the assets and recorded them as assets held for sale on the Consolidated Balance Sheet as of December 31, 2019. This disposal does not represent a discontinued operation. Additionally, the Company recorded an impairment charge of $7.3 million in the fourth quarter of 2019 which represents the cash consideration to be received less cost to sell the assets compared with the $11.3 million carrying value of the assets being sold, including supplies inventory. The sale of the assets was completed in the first quarter of 2020.
Additionally, in the fourth quarter of 2019, the Board of Directors approved a plan to close the Company’s TMS facility in Houston, Texas in the first quarter of 2020. The closure of the facility does not qualify as a discontinued operation. At December 31, 2019, the associated assets did not meet the criteria to be classified as held for sale. As a result of the plan, the Company recorded the following charges in the fourth quarter of 2019:
Restructuring charges of approximately $0.7 million, primarily related to severance and other employee termination charges;
Inventory write-downs of $4.8 million, which represents the difference between the expected selling price and carrying value of the related inventory. The expected selling price was based upon the Company’s most recently published price lists related to this inventory;
Accelerated depreciation and amortization on TMS assets of $2.8 million in the fourth quarter of 2019, with an additional $1.6 million of accelerated depreciation to be recorded in the first quarter of 2020.
v3.19.3.a.u2
Other Income, Net
12 Months Ended
Dec. 31, 2019
Other Income and Expenses [Abstract]  
Other Income (Expense), Net
Other Income (Expense), net
The following table provides the components of other income (expense), net for the years ended December 31, 2019, 2018 and 2017:
 
Year Ended December 31,
 
2019
 
2018
 
2017
Pension and postretirement non-service benefit income

$17.5

 

$25.2

 

$17.5

Loss from remeasurement of benefit plans
(40.6
)
 
(43.5
)
 
(21.8
)
Foreign currency exchange gain (loss)

 
(0.2
)
 
0.3

Miscellaneous income (expense)
(0.2
)
 
(0.1
)
 
(0.1
)
Total other income (expense), net

($23.3
)


($18.6
)
 

($4.1
)

Non-service benefit income from all years is derived from the Company’s pension and other postretirement plans. The Company has had a favorable return on assets for its benefit plans, resulting in a benefit for all years. The loss from remeasurement of benefit plans is due to the Company performing mark-to-market accounting on its pension and postretirement assets at year-end and upon the occurrence of certain triggering events, partially offset with curtailments of $8.9 million due to the freezing of the salaried pension plan. For more details on the remeasurement and curtailments, refer to “Note 15 - Retirement and Postretirement Plans.”
v3.19.3.a.u2
Income Tax Provision
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
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,
 
2019

2018 ADJUSTED

2017 ADJUSTED
United States

($130.8
)
 

($10.1
)
 

($37.0
)
Non-United States
4.7

 
1.9

 
7.2

Loss from operations before income taxes

($126.1
)
 

($8.2
)
 

($29.8
)

The provision (benefit) for income taxes consisted of the following:
 
Years Ended December 31,
 
2019
 
2018
 
2017
Current:
 
 
 
 
 
Federal

$—

 

$—

 

$1.1

State and local
0.1

 
0.3

 
0.1

Foreign
0.4

 
0.7

 
0.6

Total current tax expense (benefit)

$0.5

 

$1.0

 

$1.8

Deferred:
 
 
 
 
 
Federal

($14.4
)
 

$0.4

 

($0.4
)
State and local
(2.0
)
 

 

Foreign
(0.2
)
 
0.4

 
0.1

Total deferred tax expense (benefit)
(16.6
)
 
0.8

 
(0.3
)
Provision (benefit) for incomes taxes

($16.1
)
 

$1.8

 

$1.5


For the year ended December 31, 2019, TimkenSteel made $0.6 million in foreign tax payments, $0.2 million in state tax payments, and no U.S. federal payments, and had no refundable overpayments of state income taxes. For the year ended December 31, 2018, TimkenSteel made $0.6 million in foreign tax payments, $0.2 million in state tax payments, and no U.S. federal payments, and had no refundable overpayments of state income taxes.
The reconciliation between TimkenSteel’s effective tax rate on income (loss) from continuing operations and the statutory tax rate is as follows:
 
Years Ended December 31,
 
2019
 
2018
 
2017
Tax at the U.S. federal statutory rate

($26.5
)
 

($6.3
)
 

($14.8
)
Adjustments:
 
 
 
 
 
State and local income taxes, net of federal tax benefit
(1.3
)
 
(0.5
)
 
(0.7
)
Foreign earnings taxed at different rates

 
0.2

 
(0.2
)
U.S. research tax credit
0.2

 
(0.2
)
 
(0.2
)
Valuation allowance
10.2

 
7.5

 
6.3

Global intangible low-taxed income
0.2

 
0.5

 

Tax reform impact - transition tax and rate change

 

 
10.2

Permanent differences
1.3

 
0.8

 
0.3

Other items, net
(0.2
)
 
(0.2
)
 
0.6

Provision (benefit) for income taxes

($16.1
)
 

$1.8

 

$1.5

Effective tax rate
12.8
%
 
(5.9
)%
 
(3.7
)%

Income tax expense includes U.S. and international income taxes. Except as required under U.S. tax law, U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the U.S. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. Undistributed earnings of foreign subsidiaries outside of the U.S. were $6.5 million, $5.5 million and $2.9 million at December 31, 2019, 2018 and 2017, respectively. The 2017 cumulative earnings amounts were recognized through the transition tax calculation pursuant to the Tax and Jobs Act enacted on December 22, 2017. The Company has recognized a deferred tax liability in the amount of $0.7 million and $0.6 million at December 31, 2019 and 2018, respectively, for undistributed earnings at its TimkenSteel (Shanghai) Corporation Limited and TimkenSteel de Mexico S. de R.C. de C.V. subsidiaries, as those earnings are not permanently reinvested by the Company.
The effect of temporary differences giving rise to deferred tax assets and liabilities at December 31, 2019 and 2018 was as follows:
 
December 31,
 
2019
 
2018
 
 
 
 
Deferred tax liabilities:
 
 
 
Depreciation

($98.6
)
 

($101.4
)
Inventory
(24.3
)
 
(9.9
)
Convertible debt
(1.7
)
 
(2.6
)
Lease liability
(3.4
)
 

Other, net
(0.7
)
 
(0.7
)
Deferred tax liabilities

($128.7
)
 

($114.6
)
 
 
 
 
Deferred tax assets:
 
 
 
Pension and postretirement benefits

$47.9

 

$55.2

Other employee benefit accruals
7.2

 
7.1

Tax loss carryforwards
86.0

 
82.0

Intangible assets
1.1

 
1.1

Inventory
5.4

 
1.2

State decoupling
4.5

 
5.1

Leases - right-of-use asset
3.4

 

Interest limitation
6.0

 
3.2

Other, net
1.2

 
2.6

Deferred tax assets subtotal

$162.7

 

$157.5

Valuation allowances
(34.9
)
 
(43.7
)
Deferred tax assets
127.8

 
113.8

Net deferred tax assets (liabilities)

($0.9
)
 

($0.8
)

As of December 31, 2019 and 2018, the Company had a deferred tax liability of $0.9 million and $0.8 million, respectively, on the Consolidated Balance Sheets.
As of December 31, 2019, TimkenSteel had loss carryforwards in the U.S. and various non-U.S. jurisdictions totaling $370.1 million (of which $314.9 relates to the U.S. and $55.2 million relates to the UK jurisdiction), having various expiration dates. TimkenSteel has provided valuation allowances of $34.9 million against these carryforwards. The majority of the non-U.S. loss carryforwards represent local country net operating losses for branches of TimkenSteel or entities treated as branches of TimkenSteel under U.S. tax law. Tax benefits have previously been recorded for these losses in the U.S. The related local country net operating loss carryforwards are offset fully by valuation allowances. As of December 31, 2019, TimkenSteel had a gross deferred tax asset for disallowed business interest in the U.S. of $25.2 million, which carries forward indefinitely.

During the fourth quarter of 2019, TimkenSteel elected to change its method for valuing its inventories that previously used the LIFO method to the FIFO method. For tax purposes, prior to this change, the Company had a LIFO reserve of approximately $130 million. The LIFO reserve will be treated as taxable income over a four year period beginning in 2019. The Company expects this income to be fully offset by our net operating losses resulting in no cash tax liability. A deferred tax liability has been established for the future reversal amount and is included in the inventory line in the table above.

During 2016, operating losses generated in the U.S. resulted in a decrease in the carrying value of the Company’s U.S. deferred tax liability to the point that would result in a net U.S. deferred tax asset at December 31, 2016. In light of TimkenSteel’s operating performance in the U.S. and current industry conditions, the Company assessed, based upon all available evidence, and concluded that it was more likely than not that it would not realize a portion of its U.S. deferred tax assets. The Company recorded a valuation allowance in 2016 and as a result of current year activity, the Company remained in a full valuation allowance position through 2019. Going forward, the need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s effective tax rate. The Company will maintain a valuation allowance against its deferred tax assets in the U.S. and applicable foreign countries until sufficient positive evidence exists to eliminate them.

TimkenSteel records interest and penalties related to uncertain tax positions as a component of provision (benefit) for income taxes. As of December 31, 2019, 2018 and 2017, TimkenSteel had no total gross unrecognized tax benefits, and no amounts which represented unrecognized tax benefits that would favorably impact TimkenSteel’s effective income tax rate in any future periods if such benefits were recognized. As of December 31, 2019, TimkenSteel does not anticipate a change in its unrecognized tax positions during the next 12 months. TimkenSteel had no accrued interest and penalties related to uncertain tax positions as of December 31, 2019, 2018 and 2017.
TimkenSteel does not have any unrecognized tax benefits as of years ended December 31, 2019, 2018, and 2017.
As of December 31, 2019, TimkenSteel is not subject to examination by the IRS. Pursuant to the Tax Sharing Agreement dated June 30, 2014 between TimkenSteel and The Timken Company, TimkenSteel may be subject to results from tax examinations for The Timken Company for federal, state and local and various foreign tax jurisdictions in various open audit periods.
Tax Cuts and Jobs Act Bill

On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law, which resulted in significant changes to U.S. tax and related laws. Some of the provisions of the Act affecting corporations include, but are not limited to, a reduction in the federal corporate income tax rate from 35% to 21%, expensing the cost of acquired qualified property, the elimination of alternative minimum tax, a modification of the net operating loss deduction, and the creation of global intangible low-taxed income. Further, several changes and limitations to deductions were encompassed in the new law and were effective for TimkenSteel in 2018, including, interest expense, performance-based compensation, meals and entertainment expenses, transportation fringe benefits, and elimination of the domestic production activities deduction. We have evaluated the impact of the new tax law on TimkenSteel’s financial condition and results of operations. We did not experience a significant reduction in our effective income tax rate or our net deferred federal income tax assets as a result of the income tax rate reduction or changes to U.S. tax law.
v3.19.3.a.u2
Earnings (Loss) Per Share
12 Months Ended
Dec. 31, 2019
Earnings Per Share [Abstract]  
Earnings (Loss) Per Share
Note 9 - Earnings (Loss) 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, 2019, 2018 and 2017, 3.7 million, 3.3 million, and 3.1 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, 2019, 2018 and 2017, 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, 2019, 2018 and 2017.
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, 2019, 2018 and 2017:
 
Year Ended December 31,
 
2019
 
2018 ADJUSTED
 
2017 ADJUSTED
Numerator:
 
 
 
 
 
Net income (loss)

($110.0
)
 

($10.0
)
 

($31.3
)
 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted average shares outstanding, basic
44.8

 
44.6

 
44.4

Weighted average shares outstanding, diluted
44.8

 
44.6

 
44.4

 
 
 
 
 
 
Basic earnings (loss) per share

($2.46
)
 

($0.22
)
 

($0.70
)
Diluted earnings (loss) per share

($2.46
)
 

($0.22
)
 

($0.70
)
v3.19.3.a.u2
Inventories
12 Months Ended
Dec. 31, 2019
Inventory Disclosure [Abstract]  
Inventories
Inventories
The components of inventories as of December 31, 2019 and 2018 were as follows:
 
December 31,
 
2019
 
2018 ADJUSTED
Manufacturing supplies

$49.8

 

$46.9

Raw materials
26.0

 
35.2

Work in process
123.7

 
155.7

Finished products
93.1

 
142.8

Gross inventory
292.6

 
380.6

Allowance for inventory reserves
(10.7
)
 
(6.1
)
Total inventories, net

$281.9

 

$374.5


Previously, the Company utilized the LIFO method to account for a substantial portion of its inventory. As described in Note 1, in the fourth quarter of 2019 the Company elected to change the method of accounting for the inventory under the LIFO method to the FIFO method. The effects of this change in accounting principle have been retrospectively applied to all periods presented. The remaining inventories, including raw materials, manufacturing supplies inventory as well as international inventories, were not impacted by this change in accounting principle and continue to be valued by the average cost or FIFO methods.
In connection with the announced closure of TMS, the company recorded an additional reserve against inventory of $4.8 million to state it at the lower of cost or net realizable value. See “Note 6 - Disposition of Non-Core Assets.”
v3.19.3.a.u2
Property, Plant and Equipment
12 Months Ended
Dec. 31, 2019
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, 2019 and 2018 were as follows:
 
December 31,
 
2019
 
2018
Land

$13.3

 

$14.1

Buildings and improvements
419.0

 
424.4

Machinery and equipment
1,404.6

 
1,404.2

Construction in progress
30.9

 
28.5

Subtotal
1,867.8

 
1,871.2

Less allowances for depreciation
(1,241.4
)
 
(1,196.8
)
Property, plant and equipment, net

$626.4

 

$674.4


Total depreciation expense was $67.4 million, $67.5 million, and $68.3 million for the years ended December 31, 2019, 2018, and 2017 respectively. Depreciation expense in 2019 includes $1.9 million of accelerated depreciation related to the announced closure of TMS. See “Note 6 - Disposition of Non-Core Assets” for additional information. For the year ended December 31, 2019, TimkenSteel recorded impairments and loss on disposal of assets of $9.0 million primarily related to the abandonment of certain equipment and the impairment of assets held for sale. For the years ended December 31, 2018 and 2017, TimkenSteel recorded approximately $0.5 million and $0.7 million, respectively, of impairment charges and loss on sale or disposal of assets related to the discontinued use of certain assets.
v3.19.3.a.u2
Intangible Assets
12 Months Ended
Dec. 31, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets
Intangible Assets
The components of intangible assets, net as of December 31, 2019 and 2018 were as follows:
 
December 31, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
 Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
 Accumulated Amortization
 
Net Carrying Amount
Customer relationships

$6.3

 

$5.0

 

$1.3

 

$6.3

 

$4.6

 

$1.7

Technology use
9.0

 
8.0

 
1.0

 
9.0

 
6.5

 
2.5

Capitalized software
61.1

 
49.1

 
12.0

 
61.6

 
48.0

 
13.6

Total intangible assets

$76.4

 

$62.1

 

$14.3

 

$76.9

 

$59.1

 

$17.8


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. Amortization expense for intangible assets for the years ended December 31, 2019, 2018, and 2017 was $6.1 million, $5.5 million and $6.6 million, respectively. Amortization expense in 2019 includes accelerated amortization of $0.9 million related to the announced closure of TMS. See “Note 6 - Disposition of Non-Core Assets” for additional information. During the year ended December 31, 2019, TimkenSteel recorded a loss on disposal of $0.1 million. For the year ended December 31, 2018, TimkenSteel recorded approximately $0.4 million of impairment charges due to the discontinued use of certain capitalized software. No impairment charges were recorded for the year ended December 31, 2017.
Based upon the intangible assets subject to amortization as of December 31, 2019, TimkenSteel’s estimated annual amortization for the five succeeding years is shown below (in millions):
Year
Amortization Expense
2020
$3.3
2021
2.0
2022
1.8
2023
1.7
2024
0.8
v3.19.3.a.u2
Leases
12 Months Ended
Dec. 31, 2019
Leases [Abstract]  
Leases
Leases
The Company has operating leases for office space, warehouses, land, machinery and equipment, vehicles and certain information technology equipment. These leases have remaining lease terms of less than one year to six years, some of which may include options to extend the leases for one or more years. Certain leases also include options to purchase the leased property. As of December 31, 2019, the Company has no financing leases. The weighted average remaining lease term for our operating leases as of December 31, 2019 was 2.9 years
Leases with an initial term of 12 months or less (short-term leases) are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into after the adoption of ASC 842, the Company combines lease and non-lease components. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.
The Company recorded lease cost for the year ended December 31, 2019 as follows:
 
Year Ended December 31, 2019
Operating lease cost

$7.4

Short-term lease cost
1.9

Total lease cost

$9.3


When available, the rate implicit in the lease is used to discount lease payments to present value; however, the Company’s leases generally do not provide a readily determinable implicit rate. Therefore, the incremental borrowing rate to discount the lease payments is estimated using market-based information available at lease commencement. The weighted average discount rate used to measure our operating lease liabilities as of December 31, 2019 was 4.5%.
Supplemental cash flow information related to leases was as follows:
 
Year Ended December 31, 2019
Cash paid for amounts included in the measurement of operating lease liabilities

$7.5

Right-of-use assets obtained in exchange for operating lease obligations

$4.3


Future minimum lease payments under non-cancellable leases as of December 31, 2019 were as follows:
2020

$6.8

2021
4.6

2022
2.2

2023
1.3

After 2023
0.5

Total future minimum lease payments
15.4

   Less amount of lease payment representing interest
(1.0
)
Total present value of lease payments

$14.4


Future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows:
2019

$6.3

2020
5.2

2021
3.3

2022
1.0

2023
0.6

After 2023

Total future minimum lease payments

$16.4


As of December 31, 2019, we have additional operating leases that have not yet commenced for which the present value of lease payments over the respective lease terms totals approximately $7.6 million. These leases are primarily manufacturing equipment to support the Company’s mobile value-added powertrain component product sales. These operating leases will commence in the first half of 2020 with lease terms of three to four years. Accordingly, these leases are not recorded on the Consolidated Balance Sheet at December 31, 2019.
v3.19.3.a.u2
Financing Arrangements
12 Months Ended
Dec. 31, 2019
Debt Disclosure [Abstract]  
Financing Arrangements
Financing Arrangements
Credit Agreement
On January 26, 2018, the Company, as borrower, and certain domestic subsidiaries, as subsidiary guarantors, entered into the Second Amended and Restated Credit Agreement (Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and the other lenders party thereto, which amended and restated the Company’s credit agreement dated as of February 26, 2016.
Amended Credit Agreement
On October 15, 2019, the Company, as borrower, and certain domestic subsidiaries of the Company, as subsidiary guarantors, entered into a Third Amended and Restated Credit Agreement (the Amended Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent (the Administrative Agent), Bank of America, N.A., as syndication agent, and the other lenders party thereto (collectively, the Lenders), which further amended and restated the Company’s existing Credit Agreement dated as of January 26, 2018.
The Amended Credit Agreement provides for a $400.0 million asset-based revolving credit facility (the Credit Facility), including a $15.0 million sublimit for the issuance of commercial and standby letters of credit and a $40.0 million sublimit for swingline loans. Pursuant to the terms of the Amended Credit Agreement, the Company is entitled, on up to two occasions and subject to the satisfaction of certain conditions, to request increases in the commitments under the Amended Credit Agreement in the aggregate principal amount of up to $100.0 million, to the extent that existing or new lenders agree to provide such additional commitments. In addition to and independent of any increase described in the preceding sentence, the Company is entitled, subject to the satisfaction of certain conditions, to request a separate first-in, last-out (FILO) tranche in an aggregate principal amount of up to $30.0 million with a separate borrowing base and interest rate margins, in each case, to be agreed upon among the Company, the Administrative Agent and the Lenders providing the incremental FILO tranche.
The availability of borrowings under the Credit Facility is subject to a borrowing base calculation based upon a valuation of the eligible accounts receivable, inventory and machinery and equipment of the Company and the subsidiary guarantors, each multiplied by an applicable advance rate. The availability of borrowings may be further modified by reserves established from time to time by the Administrative Agent in its permitted discretion.
The interest rate per annum applicable to loans under the Credit Facility will be, at the Company’s option, equal to either (i) the alternate base rate plus the applicable margin or (ii) the relevant adjusted LIBO rate for an interest period of one, two, three or six months (as selected by the Company) plus the applicable margin. The base rate will be a fluctuating rate per annum equal to the greatest of (i) the prime rate as quoted in The Wall Street Journal, (ii) the effective Federal Reserve Bank of New York rate plus 0.50% and (iii) the adjusted LIBO rate for a one-month interest period on the applicable date, plus 1.00%. The adjusted LIBO rate will be equal to the applicable London interbank offered rate for the selected interest period, as adjusted for statutory reserve requirements for eurocurrency liabilities. The applicable margin will be determined by a pricing grid based on the Company’s average quarterly availability. In addition, the Company will pay a 0.25% per annum commitment fee on the average daily unused amount of the Credit Facility. The interest rate under the Amended Credit Agreement was 3.3% as of December 31, 2019. The amount available under the Amended Credit Agreement as of December 31, 2019 was $203.2 million.
All of the indebtedness under the Credit Facility is guaranteed by the Company’s material domestic subsidiaries, as well as any other domestic subsidiary that the Company elects to make a party to the Amended Credit Agreement, and is secured by substantially all of the personal property of the Company and the subsidiary guarantors.
The Credit Facility matures on October 15, 2024. Prior to the maturity date, amounts outstanding are required to be repaid (without reduction of the commitments thereunder) from mandatory prepayment events from the proceeds of certain asset sales, equity or debt issuances or casualty events.
The Amended Credit Agreement contains certain customary covenants, including covenants that limit the ability of the Company and its subsidiaries to, among other things, (i) incur or suffer to exist certain liens, (ii) make investments, (iii) incur or guaranty additional indebtedness, (iv) enter into consolidations, mergers, acquisitions, sale-leaseback transactions and sales of assets, (v) make distributions and other restricted payments, (vi) change the nature of its business, (vii) engage in transactions with affiliates and (viii) enter into restrictive agreements, including agreements that restrict the ability to incur liens or make distributions.
In addition, the Amended Credit Agreement requires the Company to (i) unless certain conditions are met, maintain certain minimum liquidity as specified in the Amended Credit Agreement during the period commencing on March 1, 2021 and ending on June 1, 2021 and (ii) maintain a minimum specified fixed charge coverage ratio on a springing basis if minimum availability requirements as specified in the Amended Credit Agreement are not maintained.
The Amended Credit Agreement contains certain customary events of default. If any event of default occurs and is continuing, the Lenders would be entitled to take various actions, including the acceleration of amounts due under the Amended Credit Agreement, and exercise other rights and remedies.
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 its revolving credit agreement.
The components of the Convertible Notes as of December 31, 2019 and December 31, 2018 were as follows:
 
Year Ended December 31,
 
2019
 
2018
Principal

$86.3

 

$86.3

Less: Debt issuance costs, net of amortization
(0.7
)
 
(1.2
)
Less: Debt discount, net of amortization
(7.0
)
 
(11.0
)
Convertible notes, net

$78.6

 

$74.1


The initial value of the principal amount recorded as a liability at the date of issuance was $66.9 million, using an effective interest rate of 12.0%. The remaining $19.4 million of principal amount was allocated to the conversion feature and recorded as a component of shareholders’ equity at the date of issuance. This amount represents a discount to the debt to be amortized through interest expense using the effective interest method through the maturity of the Convertible Notes.
Transaction costs were allocated to the liability and equity components based on their relative values. Transaction costs attributable to the liability component of $2.4 million are amortized to interest expense over the term of the Convertible Notes, and transaction costs attributable to the equity component of $0.7 million are included in shareholders’ equity.
The following table sets forth total interest expense recognized related to the Convertible Notes:
 
Year Ended December 31,
 
2019
 
2018
Contractual interest expense

$5.2

 

$5.2

Amortization of debt issuance costs
0.4

 
0.4

Amortization of debt discount
4.0

 
3.6

Total

$9.6

 

$9.2


Revenue Refunding Bonds
On January 23, 2018, the Company redeemed in full $12.2 million of Ohio Water Development Revenue Refunding Bonds (originally due on November 1, 2025), $9.5 million of Ohio Air Quality Development Revenue Refunding Bonds (originally due on November 1, 2025) and $8.5 million of Ohio Pollution Control Revenue Refunding Bonds (originally due on June 1, 2033).
Fair Value Measurement
The fair value of the Convertible Notes was approximately $89.3 million as of December 31, 2019. The fair value of the Convertible Notes, which falls within Level 1 of the fair value hierarchy as defined by Accounting Standards Codification (ASC) 820, Fair Value Measurements, is based on the last price traded in December 2019.
TimkenSteel’s Credit Facility is variable-rate debt. As such, the carrying value is a reasonable estimate of fair value as interest rates on these borrowings approximate current market rates. This valuation falls within Level 2 of the fair value hierarchy and is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly.
Interest Paid
The total cash interest paid for the year ended December 31, 2019 and 2018 was $11.5 million and $11.8 million, respectively.
v3.19.3.a.u2
Retirement and Postretirement Benefits
12 Months Ended
Dec. 31, 2019
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.
During the second quarter of 2019, the Company amended the TimkenSteel Corporation Bargaining Unit Welfare Plan for Retirees relating to moving Medicare-eligible retirees to an individual plan on a Medicare healthcare exchange. The amendment reduced the postretirement liability by $70.2 million, and required the Company to perform a full remeasurement of its obligation and plan assets as of April 30, 2019. The $70.2 million reduction in the APBO was recognized in Other Comprehensive Income (Loss) and is being amortized as an offset to postretirement benefit cost over a period of 12 years (average remaining service period). In addition to the reduction of the APBO, the Company recognized a net remeasurement loss of $4.4 million.
During the fourth quarter of 2019, the Company amended the Supplemental Pension Plan of TimkenSteel Corporation, which provides for the payment of nonqualified supplemental pension benefits to certain salaried participants in the TimkenSteel Corporation Retirement Plan. The amendment provides for the cessation of benefit accruals under the Supplemental Plan, effective as of December 31, 2020. Effective January 1, 2021, there will be no new accruals of benefits, including with respect to service accruals and the final average compensation determination. Certain of the Company’s named executive officers are participants in the plan. Existing benefits under the plan, as of December 31, 2020, will otherwise continue in accordance with the terms of the plan. This amendment reduced the pension liability, resulting in a curtailment gain of $0.8 million. This curtailment gain was recognized in Other Income (Expense) in the Consolidated Statement of Operations.
During the fourth quarter of 2019, the Company amended the TimkenSteel Corporation Retirement Plan, which provides payments of tax-qualified pension benefits to certain salaried employees of the Company and its subsidiaries, to cease benefit accruals under the Pension Plan for all remaining active participants, effective as of December 31, 2020. This plan amendment reduced the pension liability, resulting in a curtailment gain of $8.1 million. This curtailment gain was recognized in Other Income (Expense) in the Consolidated Statement of Operations.
During the fourth quarter of 2019, the Company also amended the TimkenSteel Corporation Welfare Benefit Plan for Retirees, under which certain retired salaried employees of the Company and its subsidiaries are eligible to receive a Company contribution for their medical and prescription drug benefits under the retiree welfare plan. The amendment was to eliminate the retiree medical subsidy, effective as of December 31, 2019, for all remaining active salaried participants who retire after December 31, 2019 (provided, however, that participants who are laid off on or before March 31, 2020 and who otherwise qualify for the retiree medical subsidy under the terms of the retiree welfare plan remain entitled to receive the retiree medical subsidy). This plan amendment reduced the pension liability by $2.3 million, was recognized in Other Comprehensive Income (Loss) and is being amortized as an offset to postretirement benefit cost in future periods.
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, 2019 and 2018:
 
Pension
 
Postretirement
Change in benefit obligation:
2019
2018
 
2019
2018
Benefit obligation at the beginning of year

$1,178.3


$1,282.1

 

$194.7


$216.2

Service cost
17.4

17.2

 
1.1

1.6

Interest cost
48.9

45.6

 
5.9

7.6

Actuarial (gains) losses
145.7

(70.4
)
 
11.4

(11.7
)
Benefits paid
(72.3
)
(92.4
)
 
(14.4
)
(19.0
)
Plan amendment
(0.7
)
0.5

 
(72.5
)

Curtailments
(8.9
)

 


Foreign currency translation adjustment
3.0

(4.3
)
 


Benefit obligation at the end of year

$1,311.4


$1,178.3

 

$126.2


$194.7


 
Pension
 
Postretirement
Change in plan assets:
2019
2018
 
2019
2018
Fair value of plan assets at the beginning of year

$1,054.4


$1,186.6

 

$86.1


$104.0

Actual return on plan assets
167.7

(45.5
)
 
8.9

(1.3
)
Company contributions / payments
2.0

10.6

 
1.7

2.4

Benefits paid
(72.3
)
(92.4
)
 
(14.4
)
(19.0
)
Foreign currency translation adjustment
3.6

(4.9
)
 


Fair value of plan assets at end of year

$1,155.4


$1,054.4

 

$82.3


$86.1

Funded status at end of year

($156.0
)

($123.9
)
 

($43.9
)

($108.6
)

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 2018, the cumulative cost of all lump sums exceeded the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. For the year ended December 31, 2018 total settlements were $26.0 million. These settlements 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 cumulative cost of all lump sums did not exceed service cost and interest cost components of net periodic pension cost for the year ended December 31, 2019.
For the years ended December 31, 2019 and 2018, the pension plan had administrative expenses of $3.5 million and $2.2 million, respectively. These expenses are included in benefits paid in the tables above.
The accumulated benefit obligation at December 31, 2019 exceeded the fair value of plan assets for two of the Company’s pension plans. For these plans, the benefit obligation was $998.5 million, the accumulated benefit obligation was $983.6 million and the fair value of plan assets was $817.3 million as of December 31, 2019.
The total pension accumulated benefit obligation for all plans was $1,294.5 million and $1,149.8 million as of December 31, 2019 and 2018, respectively.
Amounts recognized on the balance sheet at December 31, 2019 and 2018, for TimkenSteel’s pension and postretirement benefit plans include:
 
Pension
 
Postretirement
 
2019
2018
 
2019
2018
Non-current assets

$25.2


$10.5

 

$—


$—

Current liabilities
(0.6
)
(0.6
)
 
(2.4
)
(2.4
)
Non-current liabilities
(180.6
)
(133.8
)
 
(41.5
)
(106.2
)
Total

($156.0
)

($123.9
)
 

($43.9
)

($108.6
)

Included in accumulated other comprehensive loss at December 31, 2019 and 2018, were the following before-tax amounts that had not been recognized in net periodic benefit cost:
 
Pension
 
Postretirement
 
2019
2018
 
2019
2018
Unrecognized prior service (benefit) cost

$0.5


$1.6

 

($67.8
)

$0.9


Amounts expected to be amortized from accumulated other comprehensive loss (income) and included in total net periodic benefit cost during the year ended December 31, 2020 are as follows: