TIMKENSTEEL CORP, 10-Q filed on 5/7/2020
Quarterly Report
v3.20.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2020
Apr. 30, 2020
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Trading Symbol TMST  
Title of 12(b) Security Common shares  
Security Exchange Name NYSE  
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   44,965,976
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Shell Company false  
Document Quarterly Report true  
Document Transition Report false  
Entity Incorporation, State or Country Code OH  
Entity Address, Address Line One 1835 Dueber Avenue SW  
Entity Address, City or Town Canton  
Entity Address, State or Province OH  
City Area Code 330  
Local Phone Number 471.7000  
Entity Address, Postal Zip Code 44706  
Entity Tax Identification Number 46-4024951  
Entity File Number 1-36313  
v3.20.1
Consolidated Statements of Operations (Unaudited) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Income Statement [Abstract]    
Net sales $ 259.7 $ 371.0
Cost of products sold 251.9 342.6
Gross Profit 7.8 28.4
Selling, general and administrative expenses 23.4 23.3
Restructuring charges 0.6  
Loss (gain) on sale or asset disposals (2.3) 0.0
Interest expense 3.2 4.2
Other expense (income), net 2.7 (2.7)
Income (Loss) Before Income Taxes (19.8) 3.6
Provision (benefit) for income taxes 0.1 0.1
Net Income (Loss) $ (19.9) $ 3.5
Per Share Data:    
Basic earnings (loss) per share $ (0.44) $ 0.08
Diluted earnings (loss) per share $ (0.44) $ 0.08
v3.20.1
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Statement Of Income And Comprehensive Income [Abstract]    
Net income (loss) $ (19.9) $ 3.5
Other comprehensive income (loss), net of tax:    
Foreign currency translation adjustments (1.8) 0.4
Pension and postretirement liability adjustments (1.1) 0.1
Other comprehensive income (loss), net of tax (2.9) 0.5
Comprehensive Income (Loss), net of tax $ (22.8) $ 4.0
v3.20.1
Consolidated Balance Sheets (Unaudited) - USD ($)
$ in Millions
Mar. 31, 2020
Dec. 31, 2019
Current Assets    
Cash and cash equivalents $ 65.6 $ 27.1
Accounts receivable, net of allowances (2020 - $2.8 million; 2019 - $1.5 million) 94.9 77.5
Inventories, net 240.5 281.9
Deferred charges and prepaid expenses 3.6 3.3
Assets held for sale 2.2 4.1
Other current assets 5.3 7.8
Total Current Assets 412.1 401.7
Property, plant and equipment, net 608.7 626.4
Operating lease right-of-use assets 16.3 14.3
Pension assets 17.2 25.2
Intangible assets, net 12.4 14.3
Other non-current assets 3.3 3.3
Total Assets 1,070.0 1,085.2
Current Liabilities    
Accounts payable 96.0 69.3
Salaries, wages and benefits 21.3 13.9
Accrued pension and postretirement costs 3.0 3.0
Current operating lease liabilities 6.6 6.2
Other current liabilities 16.5 19.9
Total Current Liabilities 143.4 112.3
Non-Current Liabilities    
Convertible notes, net 79.8 78.6
Credit Agreement 60.0 90.0
Non-current operating lease liabilities 9.7 8.2
Accrued pension and postretirement costs 222.3 222.1
Deferred income taxes 0.9 0.9
Other non-current liabilities 11.8 10.0
Total Liabilities 527.9 522.1
Shareholders’ Equity    
Preferred shares, without par value; authorized 10.0 million shares, none issued 0.0 0.0
Common shares, without par value; authorized 200.0 million shares; issued 2020 and 2019 - 45.7 million shares 0.0 0.0
Additional paid-in capital 841.1 844.8
Retained deficit (321.4) (301.5)
Treasury shares - 2020 - 0.8 million; 2019 - 0.9 million (19.4) (24.9)
Accumulated other comprehensive income (loss) 41.8 44.7
Total Shareholders’ Equity 542.1 563.1
Total Liabilities and Shareholders’ Equity $ 1,070.0 $ 1,085.2
v3.20.1
Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($)
$ in Millions
Mar. 31, 2020
Dec. 31, 2019
Statement Of Financial Position [Abstract]    
Allowances for accounts receivable $ 2.8 $ 1.5
Preferred shares, authorized (in shares) 10,000,000 10,000,000
Preferred shares, issued (in shares) 0 0
Common shares, authorized (in shares) 200,000,000 200,000,000
Common shares, issued (in shares) 45,700,000 45,700,000
Treasury shares (in shares) 800,000 900,000
v3.20.1
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 at Dec. 31, 2018 $ 612.9   $ 846.3 $ (191.5) $ (33.0) $ (8.9)
Beginning balance (in shares) at Dec. 31, 2018   44,584,668        
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss) 3.5     3.5    
Other comprehensive income (loss) 0.5         0.5
Stock-based compensation expense 2.2   2.2      
Stock option activity 0.2   0.2      
Issuance of treasury shares     (7.5)   7.5  
Issuance of treasury shares (in shares)   261,130        
Shares surrendered for taxes (1.0)       (1.0)  
Shares surrendered for taxes (in shares)   (79,889)        
Ending balance at Mar. 31, 2019 618.3   841.2 (188.0) (26.5) (8.4)
Ending balance (in shares) at Mar. 31, 2019   44,765,909        
Beginning balance at Dec. 31, 2019 563.1   844.8 (301.5) (24.9) 44.7
Beginning balance (in shares) at Dec. 31, 2019   44,820,153        
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss) (19.9)     (19.9)    
Other comprehensive income (loss) (2.9)         (2.9)
Stock-based compensation expense 2.0   2.0      
Issuance of treasury shares     (5.7)   5.7  
Issuance of treasury shares (in shares)   215,708        
Shares surrendered for taxes (0.2)       (0.2)  
Shares surrendered for taxes (in shares)   (70,033)        
Ending balance at Mar. 31, 2020 $ 542.1   $ 841.1 $ (321.4) $ (19.4) $ 41.8
Ending balance (in shares) at Mar. 31, 2020   44,965,828        
v3.20.1
Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Operating Activities    
Net income (loss) $ (19.9) $ 3.5
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:    
Depreciation and amortization 18.6 17.8
Amortization of deferred financing fees and debt discount 1.3 1.3
Loss (gain) on sale or asset disposals (2.3) 0.0
Deferred income taxes 0.2 (0.2)
Stock-based compensation expense 2.0 2.2
Pension and postretirement expense (benefit), net 8.1 1.8
Pension and postretirement contributions and payments (2.5) (2.4)
Changes in operating assets and liabilities:    
Accounts receivable, net (16.3) 12.1
Inventories, net 41.2 (26.8)
Accounts payable 26.7 (30.7)
Other accrued expenses 5.7 (11.4)
Deferred charges and prepaid expenses (0.3) 0.1
Other, net 1.3 (0.9)
Net Cash Provided (Used) by Operating Activities 63.8 (33.6)
Investing Activities    
Capital expenditures (2.9) (4.4)
Proceeds from disposals of property, plant and equipment 7.8 0.0
Net Cash Provided (Used) by Investing Activities 4.9 (4.4)
Financing Activities    
Proceeds from exercise of stock options 0.0 0.2
Shares surrendered for employee taxes on stock compensation (0.2) (1.0)
Repayments on credit agreements (30.0) (5.0)
Borrowings on credit agreements 0.0 30.0
Net Cash Provided (Used) by Financing Activities (30.2) 24.2
Increase (Decrease) in Cash and Cash Equivalents 38.5 (13.8)
Cash and cash equivalents at beginning of period 27.1 21.6
Cash and Cash Equivalents at End of Period $ 65.6 $ 7.8
v3.20.1
Basis of Presentation
3 Months Ended
Mar. 31, 2020
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Basis of Presentation

Note 1 - Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared by TimkenSteel Corporation (the Company or TimkenSteel) in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to TimkenSteel’s audited Consolidated Financial Statements and Notes included in its Annual Report on Form 10-K for the year ended December 31, 2019.

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

Customer Receivables

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

Change in Accounting Principle

During the fourth quarter of 2019, TimkenSteel elected to change its method for valuing its inventories that previously used the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The Company believes that the FIFO method is preferable as it improves comparability with our peers, more closely resembles the physical flow of our inventory and aligns with how the Company internally manages the business. The effects of the change in accounting principle from LIFO to FIFO were retrospectively applied. As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the Company’s consolidated balance sheets as of March 31, 2019 and the consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the three months ended March 31, 2019 were adjusted as necessary. For further information, refer to TimkenSteel’s audited Consolidated Financial Statements and Notes included in its Annual Report on Form 10-K for the year ended December 31, 2019.

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

 

Consolidated Statement of Operations

 

Three Months Ended

March 31, 2019

 

 

 

As

Reported

 

 

Adjustments

 

 

As

Adjusted

 

Cost of products sold

 

$

341.9

 

 

$

0.7

 

 

$

342.6

 

Gross profit

 

 

29.1

 

 

 

(0.7

)

 

 

28.4

 

Income (loss) before income taxes

 

 

4.3

 

 

 

(0.7

)

 

 

3.6

 

Net income (loss)

 

 

4.2

 

 

 

(0.7

)

 

 

3.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

 

0.09

 

 

 

(0.01

)

 

 

0.08

 

Diluted earnings (loss) per share

 

 

0.09

 

 

 

(0.01

)

 

 

0.08

 

 

Consolidated Statement of Comprehensive Income (Loss)

 

Three Months Ended

March 31, 2019

 

 

 

As

Reported

 

 

Adjustments

 

 

As

Adjusted

 

Net income (loss)

 

$

4.2

 

 

$

(0.7

)

 

$

3.5

 

Comprehensive income (loss), net of tax

 

 

4.7

 

 

 

(0.7

)

 

 

4.0

 

 

Consolidated Statement of Cash Flows

 

Three Months Ended

March 31, 2019

 

 

 

As

Reported

 

 

Adjustments

 

 

As

Adjusted

 

Net income (loss)

 

$

4.2

 

 

$

(0.7

)

 

$

3.5

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Inventories, net

 

 

(27.5

)

 

 

0.7

 

 

 

(26.8

)

 

v3.20.1
Recent Accounting Pronouncements
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
Recent Accounting Pronouncements

Note 2 - Recent Accounting Pronouncements

Adoption of New Accounting Standards

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

Standards Adopted

Description

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

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

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

The standard aligns the requirements for capitalizing implementation costs in cloud computing software arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

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

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

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

The standard changes how entities will measure credit losses for most financial assets, including trade and other receivables, and replaces the current incurred loss approach with an expected loss model.

Accounting Standards Issued But Not Yet Adopted

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

Standard Pending Adoption

Description

Effective

Date

Anticipated Impact

ASU 2019-12, Income Taxes (Topic 740)

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

January 1, 2021

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

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

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

January 1, 2021

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

ASU 2020-03, Codification Improvements to Financial Instruments

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

January 1, 2021

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

 

v3.20.1
Revenue Recognition
3 Months Ended
Mar. 31, 2020
Revenue From Contract With Customer [Abstract]  
Revenue Recognition

Note 3 - Revenue Recognition

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

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Mobile

 

$

97.7

 

 

$

144.2

 

Industrial

 

 

113.3

 

 

 

147.0

 

Energy

 

 

25.2

 

 

 

60.8

 

Other(1)

 

 

23.5

 

 

 

19.0

 

Total Net Sales

 

$

259.7

 

 

$

371.0

 

(1) “Other” for sales by end-market sector includes the Company’s scrap and oil country tubular goods (OCTG) billet sales.

The following table provides the major sources of revenue by product type for the three months ended March 31, 2020 and 2019:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Bar

 

$

168.1

 

 

$

239.9

 

Tube

 

 

30.4

 

 

 

49.6

 

Value-add

 

 

55.5

 

 

 

73.7

 

Other(2)

 

 

5.7

 

 

 

7.8

 

Total Net Sales

 

$

259.7

 

 

$

371.0

 

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

 

v3.20.1
Restructuring Charges
3 Months Ended
Mar. 31, 2020
Restructuring And Related Activities [Abstract]  
Restructuring Charges

Note 4 - Restructuring Charges

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

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

Balance at December 31, 2019

 

$

6.0

 

Expenses

 

 

0.6

 

Payments

 

 

(4.0

)

Balance at March 31, 2020

 

$

2.6

 

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

 

v3.20.1
Disposition of Non-Core Assets
3 Months Ended
Mar. 31, 2020
Discontinued Operations And Disposal Groups [Abstract]  
Disposition of Non-Core Assets

Note 5 - Disposition of Non-Core Assets

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

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

 

v3.20.1
Other Expense (Income), Net
3 Months Ended
Mar. 31, 2020
Other Income And Expenses [Abstract]  
Other Expense (Income), Net

Note 6 Other Expense (Income), net

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

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Pension and postretirement non-service benefit loss (income)

 

$

(6.6

)

 

$

(2.8

)

Loss from remeasurement of benefit plan

 

 

9.5

 

 

 

 

Foreign currency exchange loss (gain)

 

 

 

 

 

0.1

 

Miscellaneous expense (income)

 

 

(0.2

)

 

 

 

Total other expense (income), net

 

$

2.7

 

 

$

(2.7

)

Non-service benefit income is derived from the Company’s pension and other postretirement plans. The Company’s expected return on assets has exceeded the interest cost component, resulting in income for the three months ended March 31, 2020 and 2019.

The TimkenSteel Corporation Retirement Plan (Salaried Plan) has a provision that permits employees to elect to receive their pension benefits in a lump sum. In the first quarter of 2020, the cumulative cost of all lump sum payments was projected to exceed the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. The Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan as of March 31, 2020, which resulted in a non-cash loss from remeasurement of $9.5 million. For more details on the remeasurement, refer to “Note 11 - Retirement and Postretirement Plans.”

 

v3.20.1
Income Tax Provision
3 Months Ended
Mar. 31, 2020
Income Tax Disclosure [Abstract]  
Income Tax Provision

Note 7 - Income Tax Provision

TimkenSteel’s provision for income taxes in interim periods is computed by applying the appropriate estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items, including interest on prior-year tax liabilities, are recorded during the periods in which they occur.

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Provision (benefit) for incomes taxes

 

$

0.1

 

 

$

0.1

 

Effective tax rate

 

 

(0.5

)%

 

 

1.3

%

In light of TimkenSteel’s recent operating performance in the U.S. and current industry conditions, the Company assessed its U.S. deferred tax assets and concluded, based upon all available evidence, that it was more likely than not that it would not realize the assets. As a result, the Company maintains a full valuation allowance against its deferred tax assets in the U.S. and applicable foreign countries until sufficient positive evidence exists to conclude that a valuation allowance is not necessary. Going forward, the need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s effective tax rate. The majority of TimkenSteel’s income taxes are derived from foreign operations.

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

 

v3.20.1
Earnings (Loss) Per Share
3 Months Ended
Mar. 31, 2020
Earnings Per Share [Abstract]  
Earnings (Loss) Per Share

Note 8 - Earnings (Loss) Per Share

Basic earnings (loss) per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based upon the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the treasury stock method or if-converted method. For the Convertible Notes, the Company utilizes the if-converted method to calculate diluted earnings (loss) per share. Under the if-converted method, the Company adjusts net earnings to add back interest expense (including amortization of debt discount) recognized on the Convertible Notes and includes the number of shares potentially issuable related to the Convertible Notes in the weighted average shares outstanding. Treasury stock is excluded from the denominator in calculating both basic and diluted earnings (loss) per share.

Common share equivalents for shares issuable for equity-based awards were excluded from the computation of diluted earnings (loss) per share for the three months ended March 31, 2020 because the effect of their inclusion would have been anti-dilutive. Common share equivalents for shares issuable upon the conversion of outstanding convertible notes were excluded from the computation of diluted earnings (loss) per share for the three months ended March 31, 2020 and 2019 because the effect of their inclusion would have been anti-dilutive.

The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings (loss) per share for the three months ended March 31, 2020 and 2019:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(19.9

)

 

$

3.5

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

 

44.9

 

 

 

44.7

 

Dilutive effect of stock-based awards

 

 

 

 

 

0.5

 

Weighted average shares outstanding, diluted

 

 

44.9

 

 

 

45.2

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(0.44

)

 

$

0.08

 

Diluted earnings (loss) per share

 

$

(0.44

)

 

$

0.08

 

 

v3.20.1
Inventories
3 Months Ended
Mar. 31, 2020
Inventory Disclosure [Abstract]  
Inventories

Note 9 - Inventories

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

 

 

March 31,

2020

 

 

December 31,

2019

 

Manufacturing supplies

 

$

43.5

 

 

$

49.8

 

Raw materials

 

 

16.2

 

 

 

26.0

 

Work in process

 

 

111.6

 

 

 

123.7

 

Finished products

 

 

79.5

 

 

 

93.1

 

Gross inventory

 

 

250.8

 

 

 

292.6

 

Allowance for inventory reserves

 

 

(10.3

)

 

 

(10.7

)

Total Inventories, net

 

$

240.5

 

 

$

281.9

 

 

v3.20.1
Financing Arrangements
3 Months Ended
Mar. 31, 2020
Debt Disclosure [Abstract]  
Financing Arrangements

Note 10 - Financing Arrangements

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

Convertible Notes

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

 

 

March 31,

2020

 

 

December 31,

2019

 

Principal

 

$

86.3

 

 

$

86.3

 

Less: Debt issuance costs, net of amortization

 

 

(0.6

)

 

 

(0.7

)

Less: Debt discount, net of amortization

 

 

(5.9

)

 

 

(7.0

)

Convertible notes, net

 

$

79.8

 

 

$

78.6

 

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

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

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Contractual interest expense

 

$

1.3

 

 

$

1.3

 

Amortization of debt issuance costs

 

 

0.1

 

 

 

0.1

 

Amortization of debt discount

 

 

1.1

 

 

 

1.0

 

Total

 

$

2.5

 

 

$

2.4

 

Amended Credit Agreement

On October 15, 2019, the Company, as borrower, and certain domestic subsidiaries of the Company, as subsidiary guarantors, entered into a Third Amended and Restated Credit Agreement (the Amended Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent (the Administrative Agent), Bank of America, N.A., as syndication agent, and the other lenders party thereto (collectively, the Lenders), which further amended and restated the Company’s Second Amended and Restated Credit Agreement dated as of January 26, 2018. The interest rate under the Amended Credit Agreement was 2.2% as of March 31, 2020. The amount available for borrowings under the credit agreement as of March 31, 2020 was $224.4 million. As of March 31, 2020, the Company was in compliance with all covenants.

Fair Value Measurement

The fair value of the Convertible Notes was approximately $69.0 million as of March 31, 2020. The fair value of the Convertible Notes, which falls within Level 1 of the fair value hierarchy as defined by Accounting Standards Codification (ASC) 820, Fair Value Measurements, is based on the last price traded in March 2020.

TimkenSteel’s Credit Agreement is variable-rate debt. As such, the carrying value is a reasonable estimate of fair value as interest rates on these borrowings approximate current market rates. This valuation falls within Level 2 of the fair value hierarchy and is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly.

Interest Paid

The total cash interest paid for the three months ended March 31, 2020 and 2019 was $0.8 million and $1.5 million, respectively.

 

v3.20.1
Retirement and Postretirement Plans
3 Months Ended
Mar. 31, 2020
Defined Benefit Pension Plans And Defined Benefit Postretirement Plans Disclosure [Abstract]  
Retirement and Postretirement Plans

Note 11 - Retirement and Postretirement Plans

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

 

 

Three Months Ended

March 31, 2020

 

 

Three Months Ended

March 31, 2019

 

 

 

Pension

 

 

Postretirement

 

 

Pension

 

 

Postretirement

 

Service cost

 

$

4.9

 

 

$

0.3

 

 

$

4.3

 

 

$

0.3

 

Interest cost

 

 

10.9

 

 

 

1.0

 

 

 

12.2

 

 

 

2.0

 

Expected return on plan assets

 

 

(16.2

)

 

 

(0.9

)

 

 

(16.2

)

 

 

(0.9

)

Amortization of prior service cost

 

 

0.1

 

 

 

(1.5

)

 

 

0.1

 

 

 

 

Net remeasurement losses

 

 

9.5

 

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Cost (Income)

 

$

9.2

 

 

$

(1.1

)

 

$

0.4

 

 

$

1.4

 

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

 

v3.20.1
Stock-Based Compensation
3 Months Ended
Mar. 31, 2020
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Stock-Based Compensation

Note 12 – Stock-Based Compensation

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

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

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

Stock options are issued with an exercise price equal to the closing market price of TimkenSteel common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. The weighted average exercise price and weighted average fair value of the stock option grants during the three months ended March 31, 2020 were $5.26 per share and $2.23 per share, respectively.

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

 

v3.20.1
Accumulated Other Comprehensive Income (Loss)
3 Months Ended
Mar. 31, 2020
Accumulated Other Comprehensive Income Loss Net Of Tax [Abstract]  
Accumulated Other Comprehensive Income (Loss)

Note 13 - Accumulated Other Comprehensive Income (Loss)

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

 

 

 

Foreign Currency

Translation

Adjustments

 

 

Pension and

Postretirement

Liability Adjustments

 

 

Total

 

Balance as of December 31, 2019

 

$

(6.8

)

 

$

51.5

 

 

$

44.7

 

Other comprehensive income before reclassifications, before income tax

 

 

(1.8

)

 

 

 

 

 

(1.8

)

Amounts reclassified from accumulated other comprehensive income (loss),

   before income tax

 

 

 

 

 

(1.4

)

 

 

(1.4

)

Amounts deferred to accumulated other comprehensive income (loss), before

   income tax

 

 

 

 

 

0.3

 

 

 

0.3

 

Tax effect

 

 

 

 

 

 

 

 

 

Net current period other comprehensive income, net of income taxes

 

 

(1.8

)

 

 

(1.1

)

 

 

(2.9

)

Balance as of March 31, 2020

 

$

(8.6

)

 

$

50.4

 

 

$

41.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

Translation

Adjustments

 

 

Pension and

Postretirement

Liability Adjustments

 

 

Total

 

Balance at December 31, 2018

 

$

(7.3

)

 

$

(1.6

)

 

$

(8.9

)

Other comprehensive income before reclassifications, before income tax

 

 

0.4

 

 

 

 

 

 

0.4

 

Amounts reclassified from accumulated other comprehensive loss,

   before income tax

 

 

 

 

 

0.1

 

 

 

0.1

 

Tax effect

 

 

 

 

 

 

 

 

 

Net current period other comprehensive income, net of income taxes

 

 

0.4

 

 

 

0.1

 

 

 

0.5

 

Balance as of March 31, 2019

 

$

(6.9

)

 

$

(1.5

)

 

$

(8.4

)

The amount reclassified from accumulated other comprehensive income (loss) in the three months ended March 31, 2020 for the pension and postretirement liability adjustment was included in other income, net in the unaudited Consolidated Statements of Operations.

 

v3.20.1
Contingencies
3 Months Ended
Mar. 31, 2020
Loss Contingency Accrual Disclosures [Abstract]  
Contingencies

Note 14 Contingencies

TimkenSteel has a number of loss exposures incurred in the ordinary course of business, such as environmental claims, product warranty claims, and litigation. Establishing loss reserves for these matters requires management’s estimate and judgment regarding risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances. Accruals related to environmental claims represent management’s best estimate of the fees and costs associated with these claims. Although it is not possible to predict with certainty the outcome of such claims, management believes that their ultimate dispositions should not have a material adverse effect on our financial position, cash flows or results of operations. As of March 31, 2020 and December 31, 2019, TimkenSteel had a $1.0 million and a $1.5 million contingency reserve, respectively, related to loss exposures incurred in the ordinary course of business.

v3.20.1
Recent Accounting Pronouncements (Policies)
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
Adoption of New Accounting Standards

Adoption of New Accounting Standards

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

Standards Adopted

Description

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

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

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

The standard aligns the requirements for capitalizing implementation costs in cloud computing software arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

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

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

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

The standard changes how entities will measure credit losses for most financial assets, including trade and other receivables, and replaces the current incurred loss approach with an expected loss model.

Accounting Standards Issued But Not Yet Adopted

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

Standard Pending Adoption

Description

Effective

Date

Anticipated Impact

ASU 2019-12, Income Taxes (Topic 740)

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

January 1, 2021

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

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

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

January 1, 2021

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

ASU 2020-03, Codification Improvements to Financial Instruments

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

January 1, 2021

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

v3.20.1
Basis of Presentation (Tables)
3 Months Ended
Mar. 31, 2020
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Schedule of Change in Accounting Principle

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

 

Consolidated Statement of Operations

 

Three Months Ended

March 31, 2019

 

 

 

As

Reported

 

 

Adjustments

 

 

As

Adjusted

 

Cost of products sold

 

$

341.9

 

 

$

0.7

 

 

$

342.6

 

Gross profit

 

 

29.1

 

 

 

(0.7

)

 

 

28.4

 

Income (loss) before income taxes

 

 

4.3

 

 

 

(0.7

)

 

 

3.6

 

Net income (loss)

 

 

4.2

 

 

 

(0.7

)

 

 

3.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

 

0.09

 

 

 

(0.01

)

 

 

0.08

 

Diluted earnings (loss) per share

 

 

0.09

 

 

 

(0.01

)

 

 

0.08

 

 

Consolidated Statement of Comprehensive Income (Loss)

 

Three Months Ended

March 31, 2019

 

 

 

As

Reported

 

 

Adjustments

 

 

As

Adjusted

 

Net income (loss)

 

$

4.2

 

 

$

(0.7

)

 

$

3.5

 

Comprehensive income (loss), net of tax

 

 

4.7

 

 

 

(0.7

)

 

 

4.0

 

 

Consolidated Statement of Cash Flows

 

Three Months Ended

March 31, 2019

 

 

 

As

Reported

 

 

Adjustments

 

 

As

Adjusted

 

Net income (loss)

 

$

4.2

 

 

$

(0.7

)

 

$

3.5

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Inventories, net

 

 

(27.5

)

 

 

0.7

 

 

 

(26.8

)

v3.20.1
Revenue Recognition (Tables)
3 Months Ended
Mar. 31, 2020
Revenue From Contract With Customer [Abstract]  
Disaggregation of Revenue

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

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Mobile

 

$

97.7

 

 

$

144.2

 

Industrial

 

 

113.3

 

 

 

147.0

 

Energy

 

 

25.2

 

 

 

60.8

 

Other(1)

 

 

23.5

 

 

 

19.0

 

Total Net Sales

 

$

259.7

 

 

$

371.0

 

(1) “Other” for sales by end-market sector includes the Company’s scrap and oil country tubular goods (OCTG) billet sales.

The following table provides the major sources of revenue by product type for the three months ended March 31, 2020 and 2019:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Bar

 

$

168.1

 

 

$

239.9

 

Tube

 

 

30.4

 

 

 

49.6

 

Value-add

 

 

55.5

 

 

 

73.7

 

Other(2)

 

 

5.7

 

 

 

7.8

 

Total Net Sales

 

$

259.7

 

 

$

371.0

 

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

 

v3.20.1
Restructuring Charges (Tables)
3 Months Ended
Mar. 31, 2020
Restructuring And Related Activities [Abstract]  
Schedule of Restructuring Reserve

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

Balance at December 31, 2019

 

$

6.0

 

Expenses

 

 

0.6

 

Payments

 

 

(4.0

)

Balance at March 31, 2020

 

$

2.6

 

v3.20.1
Other Expense (Income), Net (Tables)
3 Months Ended
Mar. 31, 2020
Other Income And Expenses [Abstract]  
Schedule of Other Expense (Income), net

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