TIMKENSTEEL CORP, 10-K filed on 2/20/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Jan. 31, 2018
Jun. 30, 2017
Document and Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
Q4 
 
 
Entity Registrant Name
TimkenSteel Corporation 
 
 
Entity Central Index Key
0001598428 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
44,475,795 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 682,807,485 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Net sales
$ 1,329.2 
$ 869.5 
$ 1,106.2 
Cost of products sold
1,261.4 
841.6 
1,091.5 
Gross Profit
67.8 
27.9 
14.7 
Selling, general and administrative expenses
90.5 
90.2 
107.6 
Impairment and restructuring charges
0.3 
 
Restructuring Costs and Asset Impairment Charges
0.7 
0.3 
6.5 
Operating Loss
(23.4)
(62.6)
(99.4)
Interest expense
14.8 
11.4 
3.4 
Other income (expense) , net
(4.1)
(68.0)
31.1 
Loss Before Income Taxes
(42.3)
(142.0)
(71.7)
Provision (benefit) for income taxes
1.5 
(36.5)
(26.7)
Net Loss
$ (43.8)
$ (105.5)
$ (45.0)
Per Share Data:
 
 
 
Basic loss per share (in dollars per share)
$ (0.99)
$ (2.39)
$ (1.01)
Diluted loss per share (in dollars per share)
$ (0.99)
$ (2.39)
$ (1.01)
Dividends per share (in dollars per share)
$ 0.00 
$ 0.00 
$ 0.42 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net Loss
$ (43.8)
$ (105.5)
$ (45.0)
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
1.1 
(2.0)
(1.1)
Pension and postretirement liability adjustments
0.7 
0.5 
1.0 
Other comprehensive income (loss), net of tax
1.8 
(1.5)
(0.1)
Comprehensive Loss, net of tax
$ (42.0)
$ (107.0)
$ (45.1)
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current Assets
 
 
Cash and cash equivalents
$ 24.5 
$ 25.6 
Accounts receivable, net of allowances (2017 - $1.4 million; 2016 - $2.1 million)
149.8 
91.6 
Inventories, net
224.0 
164.2 
Deferred charges and prepaid expenses
3.9 
2.8 
Other current assets
8.0 
6.2 
Total Current Assets
410.2 
290.4 
Other Assets
 
 
Property, Plant and Equipment, Net
706.7 
741.9 
Pension assets
14.6 
6.2 
Intangible assets, net
19.9 
25.0 
Other non-current assets
5.2 
6.4 
Total Other Assets
39.7 
37.6 
Total Assets
1,156.6 
1,069.9 
Current Liabilities
 
 
Accounts payable, trade
135.3 
87.0 
Salaries, wages and benefits
32.4 
20.3 
Accrued pension and postretirement costs
11.5 
3.0 
Other current liabilities
27.6 
20.4 
Total Current Liabilities
206.8 
130.7 
Non-Current Liabilities
 
 
Convertible notes, net
70.1 
66.4 
Other long-term debt
95.2 
70.2 
Accrued pension and postretirement costs
210.8 
192.1 
Deferred income taxes
0.3 
Other non-current liabilities
12.7 
13.1 
Total Non-Current Liabilities
389.1 
341.8 
Shareholders’ Equity
 
 
Preferred shares, without par value; authorized 10.0 million shares, none issued
Common shares, without par value; authorized 200.0 million shares; issued 2017 and 2016 - 45.7 million shares
Additional paid-in capital
843.7 
845.6 
Retained deficit
(238.0)
(193.9)
Treasury shares - 2017 - 1.3 million; 2016 - 1.5 million
(37.4)
(44.9)
Accumulated other comprehensive loss
(7.6)
(9.4)
Total Shareholders’ Equity
560.7 
597.4 
Total Liabilities and Shareholders’ Equity
$ 1,156.6 
$ 1,069.9 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]
 
 
Allowances for accounts receivable
$ 1.4 
$ 2.1 
Company preferred stock, no par value, authorized (in shares)
10,000,000 
10,000,000 
Preferred shares, issued (in shares)
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)
1,300,000 
1,500,000 
Consolidated Statements of Shareholders' Equity Statement (USD $)
In Millions, unless otherwise specified
Total
Additional Paid-in Capital
Retained Earnings (Deficit)
Treasury Shares
Accumulated Other Comprehensive Loss
Beginning balance at Dec. 31, 2014
$ 749.9 
$ 821.3 
$ (28.9)
$ (34.7)
$ (7.8)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Net Loss
(45.0)
 
(45.0)
 
 
Pension and postretirement adjustment, net of tax
1.0 
 
 
 
1.0 
Foreign currency translation adjustments
(1.1)
 
 
 
(1.1)
Stock-based compensation expense
7.0 
7.0 
 
 
 
Dividends – $0.42 per share
(18.7)
 
(18.7)
 
 
Adjustments to net parent investment and additional paid-in capital
4.7 
4.7 
 
 
 
Stock option exercise activity
1.5 
1.5 
 
 
 
Purchase of treasury shares
(15.2)
 
 
(15.2)
 
Issuance of treasury shares
(5.7)
5.7 
 
Issuance of treasury shares
(2.1)
 
 
 
 
Cumulative adjustment for adoption of ASU 2016-09
4.2 
 
4.2 
 
 
Ending balance at Dec. 31, 2015
682.0 
828.8 
(92.6)
(46.3)
(7.9)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Net Loss
(105.5)
 
(105.5)
 
 
Pension and postretirement adjustment, net of tax
0.5 
 
 
 
0.5 
Foreign currency translation adjustments
(2.0)
 
 
 
(2.0)
Stock-based compensation expense
6.7 
6.7 
 
 
 
Issuance of treasury shares
(1.4)
 
1.4 
 
Equity component of convertible notes, net
18.7 
18.7 
 
 
 
Deferred tax liability on convertible notes
(7.2)
(7.2)
 
 
 
Ending balance at Dec. 31, 2016
597.4 
845.6 
(193.9)
(44.9)
(9.4)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Net Loss
(43.8)
 
(43.8)
 
 
Pension and postretirement adjustment, net of tax
0.7 
 
 
 
(0.7)
Foreign currency translation adjustments
1.1 
 
 
 
1.1 
Stock-based compensation expense
6.5 
6.5 
 
 
 
Stock option exercise activity
0.2 
0.2 
 
 
 
Issuance of treasury shares
(8.6)
(0.3)
8.9 
 
Issuance of treasury shares
(1.4)
 
 
(1.4)
 
Ending balance at Dec. 31, 2017
$ 560.7 
$ 843.7 
$ (238.0)
$ (37.4)
$ (7.6)
Consolidated Statements of Shareholders' Equity (Parenthetical)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Stockholders' Equity [Abstract]
 
 
 
Dividends per share (in dollars per share)
$ 0.00 
$ 0.00 
$ 0.42 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Operating Activities
 
 
 
Net Loss
$ (43.8)
$ (105.5)
$ (45.0)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
74.9 
74.9 
73.4 
Amortization related to other long-term debt
4.0 
2.9 
0.3 
Impairment charges and loss on sale or disposal of assets
1.6 
1.2 
1.9 
Deferred income taxes
(0.3)
(36.8)
(25.6)
Stock-based compensation expense
6.5 
6.7 
7.0 
Pension and postretirement expense, net
24.7 
83.4 
(15.5)
Pension and postretirement contributions and payments
(4.3)
(4.9)
(15.6)
Reimbursement from postretirement plan assets
13.3 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(58.2)
(10.7)
86.2 
Inventories, net
(59.8)
9.7 
122.7 
Accounts payable, trade
45.7 
37.5 
(70.7)
Other accrued expenses
18.3 
(8.2)
(31.5)
Deferred charges and prepaid expenses
(0.5)
8.3 
22.7 
Other, net
(0.7)
2.6 
(3.2)
Net Cash Provided by Operating Activities
8.1 
74.4 
107.1 
Investing Activities
 
 
 
Capital expenditures
(33.0)
(42.7)
(78.2)
Proceeds from disposals of property, plant and equipment
0.4 
Net Cash Used by Investing Activities
(33.0)
(42.7)
(77.8)
Financing Activities
 
 
 
Cash dividends paid to shareholders
(18.7)
Purchase of treasury shares
(15.2)
Proceeds from exercise of stock options
0.2 
1.5 
Shares surrendered for employee taxes on stock compensation
(1.4)
(2.1)
Credit agreement repayments
(5.0)
(130.0)
(50.0)
Credit agreement borrowings
30.0 
65.0 
Proceeds from issuance of convertible notes
86.3 
Debt issuance costs
(4.8)
(1.4)
Net transfers to The Timken Company and affiliates
(0.5)
Net Cash Provided (Used) by Financing Activities
23.8 
(48.5)
(21.4)
Effect of exchange rate changes on cash
(Decrease) Increase In Cash and Cash Equivalents
(1.1)
(16.8)
7.9 
Cash and cash equivalents at beginning of period
25.6 
42.4 
34.5 
Cash and Cash Equivalents at End of Period
$ 24.5 
$ 25.6 
$ 42.4 
Company and Basis of Presentation
Company and Basis of Presentation
Company and Basis of Presentation
TimkenSteel Corporation (the Company or TimkenSteel) manufactures alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. TimkenSteel’s portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), value-add solutions such as precision steel components, and billets. In addition, TimkenSteel supplies machining and thermal treatment services and we manage raw material recycling programs, which are used as a feeder system for the Company’s melt operations. The Company’s products and services are used in a diverse range of demanding applications in the following market sectors: oil and gas; oil country tubular goods (OCTG); automotive; industrial equipment; mining; construction; rail; aerospace and defense; heavy truck; agriculture; and power generation.
The SBQ bars, tubes, and billets 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-add solutions production processes take place at three downstream manufacturing facilities: TimkenSteel Material Services (Houston, TX), Tryon Peak (Columbus, NC), and St. Clair (Eaton, OH). 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 of the Company, not any specific aspect of the business.
Effective January 1, 2016, TimkenSteel eliminated our segment reporting as a result of organizational changes made in the second half of 2015 to reflect the integrated nature of the Company’s business as described above. These organizational changes were made to better align resources to support the business strategy of operating in a leaner, more efficient environment. Specifically, the Company centralized our customer-facing activities under one leadership role and eliminated the former two segment operating structure. Since that change, we are organized in a centralized manner based on functionality. As a result, TimkenSteel conducts its business activities and reports 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 under the realigned organization 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.
Presentation
Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2017 presentation.
Inventories
Inventories
Inventories
The components of inventories, net as of December 31, 2017 and 2016 were as follows:
 
December 31,
 
2017
 
2016
Inventories:
 
 
 
Manufacturing supplies

$36.3

 

$37.9

Raw materials
31.9

 
16.9

Work in process
137.8

 
85.8

Finished products
82.9

 
76.3

Gross inventory
288.9

 
216.9

Allowance for surplus and obsolete inventory
(7.8
)
 
(8.1
)
LIFO reserve
(57.1
)
 
(44.6
)
Total Inventories, net

$224.0

 

$164.2


Inventories are valued at the lower of cost or market, with approximately 65% valued by the LIFO method, and the remaining inventories, including manufacturing supplies inventory as well as international (outside the United States) inventories, valued by FIFO, average cost or specific identification methods.
TimkenSteel recognized an increase in its LIFO reserve of $12.5 million during 2017 and a decrease in its LIFO reserve of $5.0 million during 2016, recognized in cost of products sold. The increase in the LIFO reserve recognized during 2017 was due to higher manufacturing costs, higher scrap steel costs, and higher inventory quantities. The decrease in the LIFO reserve recognized during 2016 was due to lower product costs and lower inventory quantities.
Significant Accounting Policies
Significant Accounting Policies
Significant Accounting Policies
Basis of Combination:
The Consolidated Financial Statements include the combined assets, liabilities, revenues and expenses related to TimkenSteel as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015. 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 U.S. GAAP 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.
Revenue Recognition:
TimkenSteel recognizes revenue when title passes to the customer, which includes related-party sales to The Timken Company and its subsidiaries for the periods prior to spinoff. This occurs at the shipping point except for goods sold by certain of the Company’s foreign entities and certain exported goods, where title passes when the goods reach their destination. Selling prices are fixed based on purchase orders or contractual arrangements. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold in the Consolidated Statements of Operations.
Cash Equivalents:
TimkenSteel considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Allowance for Doubtful Accounts:
TimkenSteel maintains an allowance for doubtful accounts, which represents an estimate of losses expected from the accounts receivable portfolio, to reduce accounts receivable to their net realizable value. The allowance is based upon historical trends in collections and write-offs, management’s judgment of the probability of collecting accounts and management’s evaluation of business risk. TimkenSteel extends credit to customers satisfying pre-defined credit criteria. TimkenSteel believes it has limited concentration of credit risk due to the diversity of its customer base.
Inventories, Net:
Inventories are valued at the lower of cost or market. The majority of TimkenSteel’s domestic inventories are valued by the last-in, first-out (LIFO) method. The remaining inventories, including manufacturing supplies inventory as well as international (outside the U.S.) inventories, are valued by the first-in, first-out (FIFO), average cost or specific identification methods. Reserves are established for product inventory that is identified to be surplus and/or obsolete based on future requirements.
Property, Plant and Equipment, Net:
Property, plant and equipment, net are valued at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. The provision for depreciation is computed principally by the straight-line method based upon the estimated useful lives of the assets. The useful lives are approximately 30 years for buildings and three to 20 years for machinery and equipment.
Intangible Assets, Net:
Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from three to 15 years.
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350-40, “Internal-Use Software,” (ASC 350-40), TimkenSteel capitalizes certain costs incurred for computer software developed or obtained for internal use. TimkenSteel capitalizes substantially all external costs and qualifying internal costs related to the purchase and implementation of software projects used for business operations. Capitalized software costs primarily include purchased software and external consulting fees. Capitalized software projects are amortized over the estimated useful lives of the software.
Long-lived Asset Impairment:
Long-lived assets (including tangible assets and intangible assets subject to amortization) are reviewed for impairment when events or changes in circumstances have occurred indicating that the carrying value of the assets may not be recoverable.
TimkenSteel tests recoverability of long-lived assets at the lowest level for which there are identifiable cash flows that are independent from the cash flows of other assets. Assets and asset groups held and used are measured for recoverability by comparing the carrying amount of the asset or asset group to the sum of future undiscounted net cash flows expected to be generated by the asset or asset group.
Assumptions and estimates about future values and remaining useful lives of TimkenSteel’s long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in TimkenSteel’s business strategy and internal forecasts.
If an asset or asset group is considered to be impaired, the impairment loss that would be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. To determine fair value, TimkenSteel uses internal cash flow estimates discounted at an appropriate interest rate, third party appraisals, as appropriate, and/or market prices of similar assets, when available.
As the result of the discontinued use of certain assets, TimkenSteel recorded an impairment charge of $0.7 million for the year ended December 31, 2017 and $0.9 million for the year ended December 31, 2015. No impairment charges were recorded for the year ended December 31, 2016.
Product Warranties:
TimkenSteel accrues liabilities for warranties based upon specific claim incidents in accordance with accounting rules relating to contingent liabilities. Should TimkenSteel become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. TimkenSteel had no significant warranty claims for the years ended December 31, 2017, 2016 and 2015.
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 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 income tax expense 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.
Foreign Currency Translation:
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 the Consolidated Statements of Operations. TimkenSteel realized foreign currency exchange gain of $.3 million in 2017, and losses of $0.8 million in 2016 and $1.3 million in 2015.
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 Statement of Operations upon the annual remeasurement at December 31, or on an interim basis as triggering events warrant remeasurement. In addition, the Company uses fair value to account for the market-related value of plan assets.
Stock-Based Compensation:
TimkenSteel recognizes stock-based compensation expense based on the grant date fair value of the stock-based awards over their required vesting period on a straight-line basis, whether the awards were granted with graded or cliff vesting. Stock options are issued with an exercise price equal to the opening market price of TimkenSteel common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. The fair value of stock-based awards that will settle in TimkenSteel common shares, other than stock options, is based on the opening market price of TimkenSteel common shares on the grant date. The fair values of stock-based awards that will settle in cash are remeasured at each reporting period until settlement of the awards.
TimkenSteel early adopted ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” in the fourth quarter of 2016, with the effect recorded as of January 1, 2016. Under ASU 2016-09, TimkenSteel recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the consolidated statement of operations. The Company recorded an adjustment to beginning retained earnings of $4.2 million for previously unrecognized excess tax benefits. The excess tax benefits and tax deficiencies are considered discrete items in the reporting period they occur and are not included in the estimate of an entity’s annual effective tax rate.
TimkenSteel’s additional paid in capital pool as of December 31, 2015 was not affected by ASU 2016-09, because those excess benefits have already been recognized in the financial statements, and the recognition of excess tax benefits and tax deficiencies in the income statement is prospective only in the fiscal year of adoption. As a result, there was not a reclassification between additional paid in capital and retained earnings in the fiscal years before adoption.
Research and Development:
Expenditures for TimkenSteel research and development amounted to $8.0 million for both years ended December 31, 2017 and 2016, and $8.6 million for the year ended December 31, 2015, and were recorded as a component of selling, general and administrative expenses in the Consolidated Statements of Operations. These expenditures may fluctuate from year to year depending on special projects and the needs of TimkenSteel and its customers.
Adoption of New Accounting Standards
The Company adopted the following ASUs during the year ended December 31, 2017. With the exception of ASU 2017-07, which is discussed below, the adoption of these standards did not have a material impact on the Consolidated Financial Statements or the related Notes to the Consolidated Financial Statements.
Standard
 
 
 
2015-11
Inventory: Simplifying the Measurement of Inventory (Topic 330)
2016-15
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force)
2016-16
 Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740)
2017-07
Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715)


In the first quarter of 2017, the FASB issued and the Company early adopted ASU 2017-07, “Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715).” This ASU requires entities to present non-service cost components of net periodic benefit cost in a caption below operating loss and provides that only service cost is eligible to be capitalized in inventory or construction of an asset. This ASU requires retrospective application of the change in the statement of operations and prospective application for the capitalization of service cost in assets. This ASU permits previously disclosed components of net periodic benefit costs as an estimation basis for applying the retrospective presentation as a practical expedient. Utilizing the practical expedient approach, based on amounts previously disclosed, the Company reclassified non-service components of net periodic benefit cost from cost of products sold and selling, general and administrative expenses, respectively, into other income (expense), net on the Consolidated Statements of Operations.

The following table reflects the changes applied retrospectively to cost of products sold, selling, general and administrative expenses and other income (expense), net, as a result of the adoption of ASU 2017-07 for the prior periods presented in the accompanying financial statements:
 
2016
 
2015
 
As Reported
Adjustments
Adjusted
 
As Reported
Adjustments
Adjusted
Cost of products sold

$896.6


($55.0
)

$841.6

 

$1,060.0


$31.5


$1,091.5

Selling, general and administrative expenses

$101.5


($11.3
)

$90.2

 

$105.1


$2.5


$107.6

Other income (expense), net

($1.7
)

($66.3
)

($68.0
)
 

($2.9
)

$34.0


$31.1



Accounting Standards Issued But Not Yet Adopted
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This ASU 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. It is effective for annual periods beginning after December 31, 2018. Early adoption is permitted. TimkenSteel is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.

In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718), Scope of Modification Accounting. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. This ASU shall be applied prospectively to awards modified on or after the adoption date. It is effective for annual periods beginning after December 31, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. TimkenSteel will apply this ASU for awards modified on or after January 1, 2018, as applicable. TimkenSteel does not expect this ASU to have a material impact on its results of operations or financial condition.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations - Clarifying the Definition of a Business.” This guidance clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. It is effective for annual periods beginning after December 31, 2017. TimkenSteel will apply this ASU to business combinations effective after January 1, 2018, as applicable.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU changes how entities will measure credit losses for most financial assets, including trade and other receivables. This guidance will replace the current incurred loss approach with an expected loss model. It is effective for annual periods beginning after December 31, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018 and interim periods therein. TimkenSteel is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for operating leases, and requires additional quantitative and qualitative disclosures. It is effective for annual reporting periods beginning after December 15, 2018. The Company regularly enters into operating leases. TimkenSteel is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provides guidance for revenue recognition and will supersede Topic 605, “Revenue Recognition,” and most industry-specific guidance. Under ASU 2014-09 and the subsequently issued amendments, the core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Additional disclosures will be required about the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. This standard is effective for reporting periods after December 15, 2017. TimkenSteel completed a review of its customer contracts and has determined that its revenue transactions will continue to be recognized at a point in time and, therefore, this standard does not materially impact the amount or timing of revenue recognized. The Company has adopted ASU 2014-09 as of January 1, 2018, using the modified retrospective approach, and has updated its accounting policies, systems and related internal controls.
Property, Plant and Equipment
Property, Plant and Equipment
Property, Plant and Equipment
The components of property, plant and equipment, net as of December 31, 2017 and 2016 , were as follows:
 
December 31,
 
2017
 
2016
Property, Plant and Equipment, net:
 
 
 
Land

$13.4

 

$13.3

Buildings and improvements
420.6

 
420.6

Machinery and equipment
1,387.4

 
1,352.0

Construction in progress
30.4

 
63.9

Subtotal
1,851.8

 
1,849.8

Less allowances for depreciation
(1,145.1
)
 
(1,107.9
)
Property, Plant and Equipment, net

$706.7

 

$741.9


Total depreciation expense was $68.3 million, $68.0 million and $67.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
TimkenSteel recorded capitalized interest related to construction projects of $0.6 million, $0.7 million and $1.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
As the result of the discontinued use of certain assets, TimkenSteel recorded an impairment charge of $0.7 million for the year ended December 31, 2017 and $0.9 million for the year ended December 31, 2015. No impairment charges were recorded for the year ended December 31, 2016.
Intangible Assets
Intangible Assets
Intangible Assets
The components of intangible assets, net as of December 31, 2017 and 2016 were as follows:
 
December 31, 2017
 
December 31, 2016
 
Gross Carrying Amount
 
 Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
 Accumulated Amortization
 
Net Carrying Amount
Intangible Assets Subject to Amortization:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships

$6.3

 

$4.1

 

$2.2

 

$6.3

 

$3.7

 

$2.6

Technology use
9.0

 
5.9

 
3.1

 
9.0

 
5.2

 
3.8

Capitalized software
59.1

 
44.5

 
14.6

 
58.9

 
40.3

 
18.6

Total Intangible Assets

$74.4

 

$54.5

 

$19.9

 

$74.2

 

$49.2

 

$25.0


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 6.5 years, respectively. The weighted average useful life of total intangible assets is 8.3 years.
Amortization expense for intangible assets for the years ended December 31, 2017, 2016 and 2015 was $6.6 million, $6.9 million and $6.2 million, respectively. Based upon the intangible assets subject to amortization as of December 31, 2017, TimkenSteel’s estimated annual amortization for the five succeeding years is shown below (in millions):
Year
Amortization Expense
2018

$5.5

2019

$4.4

2020

$3.2

2021

$2.3

2022

$2.0

Financing Arrangements
Financing Arrangements
Financing Arrangements
Convertible Notes
In May 2016, the Company issued $75.0 million aggregate principal amount of Convertible Senior Notes, and an additional $11.3 million principal amount to cover over-allotments (Convertible Notes). The Indenture for the Convertible Notes dated May 31, 2016, which was filed with the Securities and Exchange Commission as an exhibit to a Form 8-K filed on May 31, 2016, contains a complete description of the terms of the Convertible Notes. The key terms are as follows:
Maturity Date:         June 1, 2021 unless repurchased or converted earlier
Interest Rate:         6.0% cash interest per year
Interest Payments Dates:     June 1 and December 1 of each year, beginning on December 1, 2016
Initial Conversion Price:    Approximately $12.58 per common share of the Company
Initial Conversion Rate:    79.5165 common shares per $1,000 principal amount of Notes
The net proceeds to the Company from the offering were $83.2 million, after deducting the initial underwriters’ discount and fees and the offering expenses payable by the Company. The Company used the net proceeds to repay a portion of the amounts outstanding under the Credit Agreement.
The components of the Convertible Notes as of December 31, 2017 and 2016 were as follows:
 
Year Ended December 31,
 
2017
 
2016
Principal

$86.3

 

$86.3

Less: Debt issuance costs, net of amortization
(1.6
)
 
(2.1
)
Less: Debt discount, net of amortization
(14.6
)
 
(17.8
)
Convertible notes, net

$70.1

 

$66.4


The initial value of the principal amount recorded as a liability at the date of issuance was $66.9 million, using an effective interest rate of 12.0%. The remaining $19.4 million of principal amount was allocated to the conversion feature and recorded as a component of shareholders’ equity at the date of issuance. This amount represents a discount to the debt to be amortized through interest expense using the effective interest method through the maturity of the Convertible Notes.
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,
 
 
2017
2016
Contractual interest expense
 

$5.2


$3.0

Amortization of debt issuance costs
 
0.5

0.2

Amortization of debt discount
 
3.2

1.7

Total
 

$8.9


$4.9


The fair value of the Convertible Notes was approximately $149.5 million as of December 31, 2017. The fair value of the Convertible Notes, which falls within Level 1 of the fair value hierarchy, is based on the last price traded in December 2017.
Holders may convert all or any portion of their Convertible Notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding March 1, 2021 only under certain circumstances described in the Convertible Notes Indenture, based on the reported sale price of the Company’s common shares for specified trading days as a percentage of the conversion price of the Convertible Notes, and upon the occurrence of specified corporate events. On or after March 1, 2021 until the business day preceding the maturity date, holders may convert all or any portion of their Convertible Notes, in multiples of $1,000 principal amount, at their option.
Upon conversion, the Company will pay or deliver, as the case may be, cash, common shares or a combination of cash and common shares, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and common shares, the amount of cash and number of common shares, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40-trading day period.
If the Company undergoes a fundamental change, subject to certain conditions, holders may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to the repurchase date.
Upon certain events of default occurring and continuing (including failure to pay principal or interest on the Convertible Notes when due and payable), the Trustee or the holders of at least 25% in principal amount may declare 100% of the principal and accrued and unpaid interest, if any, on all the Convertible Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary, 100% of the principal and accrued and unpaid interest on the Convertible Notes will become due and payable immediately.
Other Long-Term Debt
The components of other long-term debt as of December 31, 2017 and 2016 were as follows:
 
December 31,
 
2017
 
2016
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (1.58% as of December 31, 2017)

$12.2

 

$12.2

Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (1.60% as of December 31, 2017)
9.5

 
9.5

Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (1.60% as of December 31, 2017)
8.5

 
8.5

Credit Agreement, due 2019 (LIBOR plus applicable spread)
65.0

 
40.0

Total Other Long-Term Debt

$95.2

 

$70.2


Credit Agreement
On February 26, 2016, the Company, as borrower, and certain domestic subsidiaries, as subsidiary guarantors, entered into Amendment No. 1 to the Amended and Restated Credit Agreement (as amended by the Amendment, the Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto.
The Credit Agreement provides for a $265.0 million asset-based revolving credit facility, including a $13.3 million sublimit for the issuance of commercial and standby letters of credit, and a $26.5 million sublimit for swingline loans. The availability of borrowings is subject to a borrowing base calculation based upon a valuation of the eligible accounts receivable, inventory and machinery and equipment of TimkenSteel and the subsidiary guarantors, each multiplied by an applicable advance rate. The Credit Agreement includes a block on availability equal to the greater of $28.9 million or 12.5% of the aggregate commitments (except that in the event of a mandatory reduction in the commitments, the block on availability will be equal to the greater of $20.0 million or 12.5% of the aggregate commitments), effectively reducing the Company’s borrowing base by the availability block.
The Credit Agreement contains certain customary covenants, including covenants that limit TimkenSteel’s and its subsidiaries’ ability 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 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. Further, the Credit Agreement contains financial covenants that (i) limit the amount of capital expenditures TimkenSteel may make to $45.0 million in fiscal year 2016 and $50.0 million in fiscal years thereafter and (ii) required the Company to maintain a minimum specified fixed charge coverage ratio for the year-to-date periods beginning January 1, 2017 and ending June 30, 2017, July 31, 2017 and August 31, 2017. As of December 31, 2017, we were in compliance with all covenants.
Borrowings under the Credit Agreement bear interest based on the daily balance outstanding at LIBOR (with no rate floor), plus an applicable margin (varying from 3.00% to 3.50%) and an additional 0.75% on the machinery and equipment component or, in certain cases, an alternate base rate (based on certain lending institutions’ Prime Rate or as otherwise specified in the Credit Agreement, with no rate floor), plus an applicable margin (varying from 2.00% to 2.50%). The Credit Agreement also carries a commitment fee equal to the unused borrowings multiplied by an applicable margin of 0.50%. The applicable margins are calculated quarterly and vary based on TimkenSteel’s average quarterly availability as set forth in the Credit Agreement. The interest rate under the Credit Agreement was 4.9% as of December 31, 2017. The amount available under the Credit Agreement as of December 31, 2017 was $164.3 million net, after reducing for the block on availability of $33.1 million.
Please refer to Note 16 - Subsequent Events for a discussion of the Second Amended and Restated Credit Agreement (Amended Credit Agreement) entered into by the Company effective January 26, 2018.
Revenue Refunding Bonds
On June 1, 2014, The Timken Company purchased, in lieu of redemption, the State of Ohio Water Development Revenue Refunding Bonds (Water Bonds), State of Ohio Air Quality Development Revenue Refunding Bonds (Air Quality Bonds) and State of Ohio Pollution Control Revenue Refunding Bonds (Pollution Control Bonds) (collectively, Bonds). Pursuant to an Assignment and Assumption Agreement dated June 24, 2014 between The Timken Company and TimkenSteel, The Timken Company assigned all of its right, title and interest in and to the loan agreements and the notes associated with the Bonds to, and these obligations were assumed by, TimkenSteel. Additionally, replacement letters of credit were issued for the Water Bonds and the Pollution Control Bonds. The Bonds were remarketed on June 24, 2014 (Remarketing Date) in connection with the conversion of the interest rate mode for the Bonds to the weekly rate and the delivery of the replacement letters of credit, as applicable. The replacement letters of credit had an initial stated term of one year that, upon request by the Company, and with approval by the issuing bank, can be renewed annually thereafter for subsequent one year terms. 
On September 1, 2016, the Water Bonds were remarketed in connection with the delivery of a replacement letter of credit issued by JP Morgan Chase Bank, N.A. The key terms of the Water Bonds did not change as a result of the remarketing.
As of September 30, 2017, the Company has requested and the issuing banks have approved renewal of the Air Quality Bonds and Pollution Control Bonds through June 2018 and the Water Bonds through August 2018.  TimkenSteel is responsible for payment of the interest and principal associated with the Bonds subsequent to the Remarketing Date.
Please refer to Note 16 - Subsequent Events for a discussion regarding the redemption of the Revenue Refunding Bonds, effective January 23, 2018.
All of TimkenSteel’s other long-term debt is variable-rate debt. As such, the carrying value of this debt is a reasonable estimate of fair value as interest rates on these borrowings approximate current market rates, which is considered a Level 2 fair value input as defined by Accounting Standard Codification (ASC) 820, Fair Value Measurements. The valuation of Level 2 is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly.


Advanced Quench-and-Temper Facility
In the second quarter of 2015, TimkenSteel entered into a lease arrangement with the Stark County Port Authority in connection with the construction of a new advanced quench-and-temper facility in Perry Township, Ohio and the issuance of an Industrial Revenue Bond. The bond is held 100% by TimkenSteel Material Services, LLC (a wholly-owned subsidiary of TimkenSteel) and, accordingly, the obligation under the lease agreement and investment in the Industrial Revenue Bond, as well as the related interest income and expense, are eliminated in the Consolidated Financial Statements. As of December 31, 2017, $42.6 million has been spent on the new advanced quench-and-temper facility and is reported in property, plant and equipment, net in the Consolidated Balance Sheets. Of this amount, $11.8 million has been financed through the lease arrangement described above.
Leases
TimkenSteel leases a variety of equipment and real property, including warehouses, distribution centers, offices spaces, and land. Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the date we take possession of the property. At lease inception, we determine the lease term by assuming the exercise of those renewable options that are reasonably assured. The exercise of lease renewal options is at our sole discretion. The lease term is used to determine whether a lease is capital or operating and is used to calculate straight-line rent expense.
Rent expense under operating leases amounted to $9.0 million, $8.6 million, and $11.0 million in 2017, 2016 and 2015, respectively. As of December 31, 2017, future minimum lease payments for non-cancelable operating leases totaled $16.6 million and are payable as follows: 2018 - $6.7 million; 2019 - $4.5 million; 2020 - $3.5 million; and 2021 - $1.9 million. TimkenSteel has no significant lease commitments after 2021.
Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the years ended December 31, 2017 and 2016 by component are as follows:

 
Foreign Currency Translation Adjustments
 
Pension and Postretirement Liability Adjustments
 
Total
Balance at December 31, 2015

($5.0
)
 

($2.9
)
 

($7.9
)
Other comprehensive loss before reclassifications, before income tax
(2.0
)
 
(0.9
)
 
(2.9
)
Amounts reclassified from accumulated other comprehensive loss, before income tax

 
1.7

 
1.7

    Income tax expense

 
(0.3
)
 
(0.3
)
Net current period other comprehensive (loss) income, net of income taxes
(2.0
)
 
0.5

 
(1.5
)
Balance as of December 31, 2016

($7.0
)


($2.4
)


($9.4
)
     Other comprehensive income before reclassifications, before income tax
1.1

 

 
1.1

      Amounts reclassified from accumulated other comprehensive loss, before income tax

 
1.5

 
1.5

              Income tax expense

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

 
0.7

 
1.8

Balance at December 31, 2017

($5.9
)
 

($1.7
)
 

($7.6
)

The amount reclassified from accumulated other comprehensive loss for the pension and postretirement liability adjustment was included in other income (expense), net in the Consolidated Statements of Operations. These accumulated other comprehensive loss components are components of net periodic benefit cost. See Note 8 - Retirement and Postretirement Plans for additional information.
Retirement and Postretirement Benefits
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, TimkenSteel U.K. Pension Scheme, TimkenSteel Corporation Bargaining Unit Welfare Benefit Plan for Retirees, and TimkenSteel Corporation Welfare Benefit Plan for Retirees.
Pension benefits earned are generally based on years of service and compensation during active employment. TimkenSteel’s funding policy is consistent with the funding requirements of applicable laws and regulations. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for the various asset classes. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets for the defined benefit pension plans as of December 31, 2017 and 2016:
 
Pension
 
Postretirement
Change in benefit obligation:
2017
2016

2017
2016
Benefit obligation at the beginning of year

$1,220.3


$1,163.5

 

$214.2


$215.3

Service cost
18.2

15.6

 
1.6

1.5

Interest cost
49.1

52.4

 
8.4

9.4

Actuarial losses
65.4

81.1

 
13.5

6.6

Benefits paid
(78.4
)
(79.1
)
 
(21.5
)
(19.5
)
Plan amendment
0.5


 

0.9

Foreign currency translation adjustment
7.0

(13.2
)
 


Benefit obligation at the end of year

$1,282.1


$1,220.3

 

$216.2


$214.2

 
Pension
 
Postretirement
Change in plan assets:
2017
2016
 
2017
2016
Fair value of plan assets at the beginning of year

$1,131.7


$1,144.3

 

$113.9


$137.9

Actual return on plan assets
123.6

78.7

 
9.5

6.1

Company contributions / payments
2.1

2.2

 
2.1

2.7

Benefits paid
(78.4
)
(79.1
)
 
(21.5
)
(19.5
)
Reimbursement from postretirement plan assets


 

(13.3
)
Foreign currency translation adjustment
7.6

(14.4
)
 


Fair value of plan assets at end of year

$1,186.6


$1,131.7

 

$104.0


$113.9

Funded status at end of year

($95.5
)

($88.6
)
 

($112.2
)

($100.3
)

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 third quarter of 2017 and 2016, the cumulative cost of all settlements exceeded the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. The Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan as of September 30, 2017 and 2016. These settlement losses are included in benefits paid in the tables above and in the net remeasurement losses (gains) as a component of net periodic benefit cost.
In the third quarter of 2016, the Company amended its postretirement benefit plans relating to its non-bargaining retirees, effective January 1, 2017, to provide for the transition of certain Medicare-eligible retirees and their eligible dependents from Company-sponsored group retiree medical coverage to individual health insurance purchased through an insurance company private exchange. This change is reflected in the Change in benefit obligation table as the Plan amendment for $0.9 million.
The accumulated benefit obligation at December 31, 2017 exceeded the fair value of plan assets for two of the Company’s pension plans. For these plans, the benefit obligation was $942.8 million, the accumulated benefit obligation was $924.2 million and the fair value of plan assets was $832.7 million as of December 31, 2017.
The total pension accumulated benefit obligation for all plans was $1,254.1 million and $1,192.1 million as of December 31, 2017 and 2016, respectively.
Amounts recognized on the balance sheet at December 31, 2017 and 2016, for TimkenSteel’s pension and postretirement benefit plans include:
 
Pension
 
Postretirement
 
2017
2016
 
2017
2016
Non-current assets

$14.6


$6.2

 

$—


$—

Current liabilities
(9.0
)
(0.6
)
 
(2.5
)
(2.4
)
Non-current liabilities
(101.1
)
(94.2
)
 
(109.7
)
(97.9
)
 

($95.5
)

($88.6
)
 

($112.2
)

($100.3
)

Included in accumulated other comprehensive loss at December 31, 2017 and 2016, were the following before-tax amounts that had not been recognized in net periodic benefit cost:
 
Pension
 
Postretirement
 
2017
2016
 
2017
2016
Unrecognized prior service cost

$1.5


$1.5

 

$1.1


$2.1


Amounts expected to be amortized from accumulated other comprehensive loss and included in total net periodic benefit cost during the year ended December 31, 2018 are as follows:
 
Pension
 
Postretirement
 
 
 
 
Prior service cost

$0.5

 

$0.2


The weighted average assumptions used in determining benefit obligation as of December 31, 2017 and 2016 were as follows:
 
Pension
 
Postretirement
Assumptions:
2017
2016
 
2017
2016
Discount rate
3.68
%
4.17
%
 
3.66
%
4.09
%
Future compensation assumption
2.37
%
3.09
%
 
n/a

n/a

The weighted average assumptions used in determining benefit cost for the years ended December 31, 2017 and 2016 were as follows:
 
Pension
 
Postretirement
Assumptions:
2017
2016
 
2017
2016
Discount rate
4.17
%
4.67
%
 
4.09
%
4.51
%
Future compensation assumption
3.09
%
3.08
%
 
n/a

n/a

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

The discount rate assumption is based on current rates of high-quality long-term corporate bonds over the same period that benefit payments will be required to be made. The expected rate of return on plan assets assumption is based on the weighted-average expected return on the various asset classes in the plans’ portfolios. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.
For measurement purposes, TimkenSteel assumed a weighted-average annual rate of increase in the per capita cost (health care cost trend rate) of 6.25% and 6.50% for 2017 and 2016, respectively, declining gradually to 5.00% in 2023 and thereafter for medical and prescription drug benefits, and 8.25% and 8.50% for 2017 and 2016, respectively, declining gradually to 5.00% in 2031 and thereafter for HMO benefits. A one percentage point increase in the assumed health care cost trend rate would have increased the 2017 and 2016 postretirement benefit obligation by $1.8 million and $1.6 million, respectively and increased the total service and interest cost components by $0.1 million in both the years ended December 31, 2017 and 2016. A one percentage point decrease would have decreased the 2017 and 2016 postretirement benefit obligation by $1.6 million and $1.4 million, respectively and decreased the total service and interest cost components by $0.1 million in both the years ended December 31, 2017 and 2016.
The components of net periodic benefit cost for the years ended December 31, 2017, 2016 and 2015 were as follows:
 
Pension
 
Postretirement
 
Years Ended December 31,
 
Years Ended December 31,
Components of net periodic benefit cost:
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Service cost

$18.2

 

$15.6

 

$16.8

 

$1.6

 

$1.5

 

$1.7

Interest cost
49.1

 
52.4

 
51.3

 
8.4

 
9.4

 
9.4

Expected return on plan assets
(70.7
)
 
(71.1
)
 
(82.8
)
 
(5.2
)
 
(5.8
)
 
(7.1
)
Amortization of prior service cost
0.5

 
0.6

 
0.6

 
1.0

 
1.1

 
1.1

Net remeasurement losses (gains)
12.5

 
73.4

 
5.7

 
9.3

 
6.3

 
(12.2
)
Net Periodic Benefit Cost

$9.6



$70.9



($8.4
)
 

$15.1



$12.5



($7.1
)

TimkenSteel recognizes its overall responsibility to ensure that the assets of its various defined benefit pension plans are managed effectively and prudently and in compliance with its policy guidelines and all applicable laws. Preservation of capital is important; however, TimkenSteel also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the pension funds. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes. The expected rate of return for the investment portfolios is based on expected rates of return for various asset classes, as well as historical asset class and fund performance. The target allocations for plan assets are 15% equity securities, 60% debt securities and 25% in all other types of investments.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
Level 1 -
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 -
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 -
Unobservable inputs for the asset or liability.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s pension assets measured at fair value on a recurring basis as of December 31, 2017:
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Cash and cash equivalents

$19.6


$4.5


$15.1


$—

U.S government and agency securities
240.7

234.6

6.1


Corporate bonds
110.0


110.0


Equity securities
50.8

50.8



Mutual fund - fixed income
35.2

35.2



Mutual fund - real estate
16.5

16.5



Total Assets in the fair value hierarchy

$472.8


$341.6


$131.2


$—

Assets measured at net asset value (1)
713.8




Total Assets

$1,186.6


$341.6


$131.2


$—

(1) Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, hedge funds, and risk parity investments. As of December 31, 2017, these assets are redeemable at net asset value within 90 days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s pension assets measured at fair value on a recurring basis as of December 31, 2016:
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Cash and cash equivalents

$45.2


$4.6


$40.6


$—

U.S government and agency securities
220.3

214.2

6.1


Corporate bonds
105.2


105.2


Equity securities
52.2

52.2



Mutual fund - equity
15.3


15.3


Mutual fund - real estate
24.8

24.8



Total Assets in the fair value hierarchy

$463.0


$295.8


$167.2


$—

Assets measured at net asset value (1)
668.7




Total Assets

$1,131.7


$295.8


$167.2


$—

(1) Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, and risk parity investments. As of December 31, 2016, these assets were redeemable at net asset value within 90 days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s postretirement assets measured at fair value on a recurring basis as of December 31, 2017:
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Cash and cash equivalents

$2.2


$2.2


$—


$—

Mutual fund - fixed income
11.4

11.4



Total Assets in the fair value hierarchy

$13.6


$13.6


$—


$—

Assets measured at net asset value (1)
90.4




Total Assets

$104.0


$13.6


$—


$—

(1) Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, hedge funds, and risk parity investments. As of December 31, 2017, these assets are redeemable at net asset value within 90 days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s postretirement assets measured at fair value on a recurring basis as of December 31, 2016:
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Cash and cash equivalents

$1.4


$1.4


$—


$—

Total Assets in the fair value hierarchy

$1.4


$1.4


$—


$—

Assets measured at net asset value (1)
112.5




Total Assets

$113.9


$1.4


$—


$—

(1) Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, and risk parity investments. As of December 31, 2016, these assets were redeemable at net asset value within 90 days.

Future benefit payments are expected to be as follows:
 
 
 
Postretirement
Benefit Payments:
Pension
 
Gross
 
Medicare Part D Subsidy Receipts
2018

$87.2

 

$20.1

 

$0.8

2019
78.0

 
19.5

 
0.8

2020
78.5

 
18.7

 
0.9

2021
77.3

 
17.9

 
0.9

2022
81.7

 
17.2

 
1.0

2023-2027
369.9

 
75.5

 
5.3


The Company expects to make contributions to its U.K. pension plan in 2018 and 2019 of approximately $1.5 million in each year.
Defined Contribution Plans
The Company recorded expense primarily related to employer matching contributions to these defined contribution plans of $5.4 million in 2017, $4.6 million in 2016, and $5.8 million in 2015.
Earnings Per Share
Earnings Per Share
Earnings Per Share
Basic loss per share is computed based upon the weighted average number of common shares outstanding. Diluted loss per share are 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, 2017, 2016 and 2015, 3.1 million, 2.8 million and 2.0 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, 2017, 2016 and 2015, 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, 2017 and 2016, respectively.
The following table sets forth the reconciliation of the numerator and the denominator of basic loss per share and diluted loss per share for the years ended December 31, 2017, 2016 and 2015:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Numerator:
 
 
 
 
 
Net loss for basic and diluted earnings per share

($43.8
)
 

($105.5
)
 

($45.0
)
 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted average shares outstanding, basic
44.4

 
44.2

 
44.5

Weighted average shares outstanding, diluted
44.4

 
44.2

 
44.5

 
 
 
 
 
 
Basic loss per share

($0.99
)
 

($2.39
)
 

($1.01
)
Diluted loss per share

($0.99
)
 

($2.39
)
 

($1.01
)
Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation
Description of the Plan
On April 28, 2016, shareholders of TimkenSteel approved the amendment and restatement of the TimkenSteel Corporation 2014 Equity and Incentive Compensation Plan to, among other matters, increase the number of shares available for awards and to adjust the fungible share adjustment factor going forward. The TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan is referred to herein as the TimkenSteel 2014 Plan.
The TimkenSteel 2014 Plan authorizes the Compensation Committee of the TimkenSteel Board of Directors to grant non-qualified or incentive stock options, stock appreciation rights, stock awards (including restricted shares, restricted share unit awards, performance shares, performance units, deferred shares and common shares) and cash awards to TimkenSteel employees and non-employee directors. No more than 11.05 million TimkenSteel common shares may be delivered under the TimkenSteel 2014 Plan. The TimkenSteel 2014 Plan contains fungible share counting mechanics, which generally means that awards other than stock options and stock appreciation rights will be counted against the aggregate share limit as 2.50 common shares for every one common share that is actually issued or transferred under such awards. The TimkenSteel 2014 Plan authorized up to 3.0 million common shares for use in granting “replacement awards” to current holders of The Timken Company equity awards under The Timken Company’s equity compensation plans at the time of the spinoff.
As of December 31, 2017, approximately 5.1 million shares of TimkenSteel common stock remained available for grants under the TimkenSteel 2014 Plan.
In connection with the spinoff, stock compensation awards granted under the The Timken Company LTIP Plan and the The Timken Company 2011 Plan were adjusted as follows:
Vested and unvested stock options were adjusted so that the grantee holds options to purchase both The Timken Company and TimkenSteel common shares.
The adjustment to the The Timken Company and TimkenSteel stock options, when combined, were intended to generally preserve the intrinsic value of each original option grant and the ratio of the exercise price to the fair market value of The Timken Company common shares on June 30, 2014.
Unvested restricted stock awards were replaced with adjusted, substitute awards for restricted shares or units, as applicable, of The Timken Company and TimkenSteel common shares. The new awards of restricted stock were intended to generally preserve the intrinsic value of the original award determined as of June 30, 2014.
Vesting periods of awards were unaffected by the adjustment and substitution.
Awards granted in connection with the adjustment of awards originally issued under the The Timken Company LTIP Plan and the Timken 2011 Plan are referred to as replacement awards under the TimkenSteel 2014 Plan and, as noted above, reduce the maximum number of TimkenSteel common shares available for delivery under the TimkenSteel 2014 Plan. TimkenSteel records compensation expense for both TimkenSteel and The Timken Company common shares for awards held by TimkenSteel employees only.
As discussed in Note 2 - Significant Accounting Policies, TimkenSteel early adopted Accounting Standards Update (ASU) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” in the fourth quarter of 2016, with the effect recorded as of January 1, 2016. Under ASU 2016-09, TimkenSteel recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the Consolidated Statements of Operations.
The following table provides the significant assumptions used to calculate the grant date fair market values of options granted using a Black-Scholes option pricing method:
 
2017
 
2016
 
2015
Weighted-average fair value per option
$7.68
 
$3.32
 
$11.21
Risk-free interest rate
2.21%
 
1.34%
 
1.47%
Dividend yield
—%
 
—%
 
1.93%
Expected stock volatility
43.23%
 
41.71%
 
47.10%
Expected life - years
6
 
6
 
6

The expected life of stock option awards granted is based on historical data and represents the period of time that options granted are expected to be held prior to exercise. Because of the absence of adequate stock price history of TimkenSteel common stock, expected volatility related to stock option awards granted subsequent to the spinoff is based on the historical volatility of a selected group of peer companies’ stock. Prior to the spinoff, volatility was calculated using the historical volatility of The Timken Company stock. Expected annual dividends per share are estimated using the most recent dividend payment per share as of the grant date. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The following summarizes TimkenSteel stock option activity from January 1, 2017 to December 31, 2017:
 
Number of Shares
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value (millions)
Outstanding as of December 31, 2016
2,219,397


$22.64

 
 
Granted
353,808


$17.46

 
 
Exercised
(38,592
)

$8.94

 
 
Canceled, forfeited or expired
(196,258
)

$23.34

 
 
Outstanding as of December 31, 2017
2,338,355


$22.03

6.00
$4.9
Options expected to vest
944,403


$15.00

8.25
$3.5
Options exercisable
1,393,952


$26.80

4.47
$1.4
Stock options presented in this table represent TimkenSteel awards only, including those held by The Timken Company employees.
For stock options exercised during the period of January 1, 2017 to December 31, 2017, the total intrinsic value was $0.4 million with cash proceeds of $0.2 million. There was no tax benefit associated with these stock option exercises.
The following summarizes TimkenSteel stock-settled restricted share award activity from January 1, 2017 to December 31, 2017:
 
Number of Shares
Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2016
696,153


$17.57

Granted
323,132


$16.92

Vested
(286,732
)

$23.97

Canceled, forfeited or expired
(18,237
)

$24.53

Outstanding as of December 31, 2017
714,316


$14.53

Restricted share awards presented in this table represent TimkenSteel awards only, including those held by The Timken Company employees.
TimkenSteel recognized stock-based compensation expense of $6.5 million ($6.5 million after tax), $6.7 million ($4.2 million after tax) and $7.0 million ($4.3 million after tax) for the years ended December 31, 2017, 2016 and 2015, respectively, related to stock option awards and stock-settled restricted share awards.
Outstanding restricted share awards include restricted shares, restricted stock units, performance-based restricted stock units and deferred shares that will settle in common shares. Outstanding restricted shares and restricted stock units generally cliff-vest after three years or vest in 25% increments annually beginning on the first anniversary of the date of grant. Performance-based restricted stock units vest based on achievement of specified performance objectives.
As of December 31, 2017, unrecognized compensation cost related to stock option awards and stock-settled restricted shares and restricted stock units was $8.1 million, which is expected to be recognized over a weighted average period of 1.5 years. The calculations of unamortized expense and weighted-average periods include awards based on both TimkenSteel and The Timken Company stock awards held by TimkenSteel employees.
Certain restricted stock units, including performance-based restricted stock units, are settled in cash and were adjusted and substituted as described above. TimkenSteel accrued $0.7 million and $0.8 million as of December 31, 2017 and 2016, respectively, which was included in salaries, wages and benefits, and other non-current liabilities on the Consolidated Balance Sheets. TimkenSteel paid $5.1 million and $1.0 million for cash-settled restricted stock units during 2017 and 2016, respectively.
Segment Information
Segment Information
Segment Information
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 SBQ bars, seamless mechanical tubing (tubes), value-add solutions such as precision steel components, and billets. In addition, TimkenSteel supplies machining and thermal treatment services, as well as manages raw material recycling programs, which are used as a feeder system for the Company’s melt operations. The Company’s products and services are used in a diverse range of demanding applications in the following market sectors: oil and gas; oil country tubular goods; automotive; industrial equipment; mining; construction; rail; aerospace and defense; heavy truck; agriculture; and power generation.
The SBQ bars, tubes 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 that the Company produces and includes three manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. TimkenSteel’s value-add solutions production processes take place at three downstream manufacturing facilities: TimkenSteel Material Services, Tryon Peak, and St. Clair. 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 of the Company, not any specific aspect of the business.
Effective January 1, 2016, TimkenSteel eliminated its segment reporting as a result of organizational changes made in the second half of 2015, to reflect the integrated nature of the Company’s business as described above. These organizational changes were made to better align resources to support the business strategy of operating in a leaner, more efficient environment. Specifically, the Company has centralized its customer-facing activities under one leadership role and eliminated the former two segment operating structure. Since that change, the Company is organized in a centralized manner based on functionality. As a result, TimkenSteel conducts its business activities and reports 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 under the realigned organization and is consistent with the manner in which the Chief Operating Decision Maker (CODM) evaluates performance and makes resource and operating decisions for the business as described above. Furthermore the Company notes that monitoring financial results as one reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of the operations.
Geographic Information
Net sales by geographic area are reported by the country in which the customer is domiciled. Long-lived assets include property, plant and equipment and intangible assets subject to amortization. Long-lived assets by geographic area are reported by the location of the TimkenSteel operations to which the asset is attributed.
 
Years Ended December 31,
 
2017
 
2016
Net Sales:
 
 
 
United States

$1,207.7

 

$763.4

Foreign
121.5

 
106.1

 

$1,329.2

 

$869.5


 
December 31,
 
2017
2016
Long-lived Assets, net:
 
 
United States

$726.4


$766.6

Foreign
0.2

0.3

 

$726.6


$766.9

Income Tax Provision
Income Tax Provision
Income Tax Provision
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,
 
2017
 
2016
 
2015
United States

($49.5
)
 

($136.2
)
 

($82.2
)
Non-United States
7.2

 
(5.8
)
 
10.5

Loss income from operations before income taxes

($42.3
)
 

($142.0
)
 

($71.7
)

The provision (benefit) for income taxes consisted of the following:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal

$1.1

 

$—

 

$—

State and local
0.1

 
0.1

 
(1.2
)
Foreign
0.6

 
0.2

 
0.1

 

$1.8

 

$0.3

 

($1.1
)
Deferred:
 
 
 
 
 
Federal

($0.4
)
 

($32.9
)
 

($28.7
)
State and local

 
(3.6
)
 
0.2

Foreign
0.1

 
(0.3
)
 
2.9

 
(0.3
)
 
(36.8
)
 
(25.6
)
U.S. and foreign tax expense (benefit) on loss from operations before income taxes

$1.5

 

($36.5
)
 

($26.7
)

For the year ended December 31, 2017, TimkenSteel made $0.4 million in foreign tax payments, no U.S. federal and state tax payments, and had $0.4 million of refundable overpayments of state income taxes. For the year ended December 31, 2016, TimkenSteel made $0.2 million in foreign tax payments, no U.S. federal and state tax payments, and had $0.5 million of refundable overpayments of state income taxes. The Company recorded these receivables as a component of prepaid expenses on the Consolidated Balance Sheets.
The reconciliation between TimkenSteel’s effective tax rate on loss from continuing operations and the statutory tax rate is as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Tax at the U.S. federal statutory rate

($14.8
)
 

($49.7
)
 

($25.2
)
Adjustments:
 
 
 
 
 
State and local income taxes, net of federal tax benefit
(0.7
)
 
(3.5
)
 
(2.2
)
Foreign earnings taxed at different rates
(0.2
)
 
(0.1
)
 

U.S. research tax credit
(0.2
)
 
(0.4
)
 
(0.5
)
Valuation allowance
6.3

 
15.6

 

Tax Reform impact - transition tax and rate change
10.2

 

 

Other items, net
0.9

 
1.6

 
1.2

Provision (benefit) for income taxes

$1.5

 

($36.5
)
 

($26.7
)
Effective income tax rate
(3.7
)%
 
25.7
%
 
37.2
%

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 $2.9 million, $1.6 million and $1.6 million at December 31, 2017, 2016 and 2015, respectively. The 2017 earnings amounts were recognized through the transition tax calculation pursuant to the Tax and Jobs Act enacted in December 2017. The Company recognized a deferred tax liability in the amount of $0.3 million during 2017 for current-year earnings at its TimkenSteel (Shanghai) Corporation Limited and TimkenSteel de Mexico S. de R.L. 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, 2017 and 2016 was as follows:
 
December 31,
 
2017
 
2016
 
 
 
 
Deferred tax liabilities:
 
 
 
Depreciation

($103.4
)
 

($156.8
)
Inventory

($5.4
)
 

($9.7
)
Convertible debt

($3.5
)
 

($6.6
)
Other, net

($0.3
)
 

($0.2
)
Deferred tax liabilities subtotal

($112.6
)
 

($173.3
)
 
 
 
 
Deferred tax assets:
 
 
 
Pension and postretirement benefits

$50.6

 

$70.3

Other employee benefit accruals
6.6

 
9.1

Tax loss carryforwards
80.9

 
107.4

Foreign tax credit
0.6

 

Intangible assets
1.4

 
2.5

Inventory
1.8

 
2.9

State decoupling
5.4

 
0.5

Other, net
2.0

 
5.3

Deferred tax assets subtotal

$149.3

 

$198.0

Valuation allowances
(36.6
)
 
(24.4
)
Deferred tax assets
112.7

 
173.6

Net deferred tax assets

$0.1

 

$0.3


As of December 31, 2017, The Company had a deferred tax asset of $0.4 million recorded as a component of other non-current assets and a deferred tax liability of $0.3 million recorded as a component of non-current liabilities, netted to a deferred tax asset of $0.1 million, on the Consolidated Balance Sheets.
As of December 31, 2017, TimkenSteel had loss carryforwards in the U.S. and various non-U.S. jurisdictions totaling $335 million having various expirations dates. TimkenSteel has provided valuation allowances of $36.6 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 been recorded for these losses in the U.S. The related local country net operating loss carryforwards are offset fully by valuation allowances.
Operating losses generated in the U.S. resulted in a decrease in the carrying value of our U.S. deferred tax liability to the point of a net U.S. deferred tax asset at December 31, 2016. At that time, we assessed, based upon operating performance in the U.S. and industry conditions that it was more likely than not we would not realize a portion of our U.S. deferred tax assets. The Company recorded a valuation allowance in 2016 and remained in a valuation allowance position in 2017. 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, 2017, 2016, and 2015 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, 2017, 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, 2017, 2016, and 2015.
The reconciliation of TimkenSteel’s total gross unrecognized tax benefits is as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Beginning balance, January 1

$—

 

$—

 

$—

Tax positions related to prior years:
 
 
 
 
 
Reductions

 

 

Ending balance, December 31

$—

 

$—

 

$—


As of December 31, 2017, TimkenSteel is subject to examination by the IRS for the period June 30, 2014 through December 31, 2017. TimkenSteel also is subject to tax examination in various tax jurisdictions, including Mexico, China, Poland, Singapore, and the U.K. for the period June 30, 2014 through December 31, 2017. 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 related to steel business activities, 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 Cut 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 reducing the federal corporate income tax rate from 35% to 21%, limiting the interest expense deduction, expensing of cost of acquired qualified property and eliminating the domestic production activities deduction. We are currently evaluating the impact the Act will have on our financial condition and results of operations. At this time, we do not anticipate 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, as we expect to be in a valuation allowance in 2018. The company estimates, based on currently available information, that the enactment of the Act will not result in any one-time (net of any required repatriation taxes) non-cash tax impact in the fourth quarter of 2017, primarily due to the fact that the company is in a valuation allowance position.
Other provisions of the Act include a new minimum tax on certain foreign earnings, the Global Intangibles Low-taxed Income, a new tax on certain payments to foreign related parties, the Base Erosion Anti-avoidance Tax, a new incentive for Foreign-derived Intangibles Income, changes to the limitation on the deductibility of certain executive compensation, and new limitations on the deductibility of interest expense. Generally, these other provisions take effect for the Company in the year ending December 31, 2018. On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118). This guidance allows registrants a “measurement period,” not to exceed one year from the date of enactment, to complete their accounting for the tax effects of the Act. SAB 118 further directs that, during the measurement period, registrants that are able to make reasonable estimates of the tax effects of the Act should include those amounts in their financial statements as “provisional” amounts. Registrants should reflect adjustments over subsequent periods as they are able to refine their estimates and complete their accounting for the tax effects of the Act. The tax effects related to the Act described in the paragraph above represent the Company’s reasonable estimates within the meaning of SAB 118. Also, it is expected that the U.S. Treasury will issue regulations and other guidance on the application of certain provisions of the Act. In subsequent periods, but within the measurement period, the Company will analyze that guidance and other necessary information.
Contingencies
Contingencies
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. As of December 31, 2017 and 2016, TimkenSteel had a $0.9 million and a $0.2 million contingency reserve, respectively, related to loss exposures incurred in the ordinary course of business.
Environmental Matters
From time to time, TimkenSteel may be a party to lawsuits, claims or other proceedings related to environmental matters and/or may receive notices of potential violations of environmental laws and regulations from the U.S. Environmental Protection Agency (EPA) and similar state or local authorities. TimkenSteel recorded reserves for such environmental matters as other current and non-current liabilities on the Consolidated Balance Sheets. Accruals related to such environmental matters represent management’s best estimate of the fees and costs associated with these matters. Although it is not possible to predict with certainty the outcome of such matters, management believes that their ultimate dispositions should not have a material adverse effect on TimkenSteel’s financial position, cash flows, or results of operations.
The following summarizes TimkenSteel contingency reserves and activity related to EPA matters from January 1, 2016 to December 31, 2017:
Beginning balance, January 1, 2016

$0.8

Expenses

Payments
(0.2
)
Ending balance, December 31, 2016

$0.6

Expenses
0.2

Payments
(0.3
)
Ending balance, December 31, 2017

$0.5

Restructuring Charges
Restructuring Charges
Restructuring Charges
TimkenSteel did not recognize restructuring charges for the year ended December 31, 2017. For the year ended December 31, 2016, TimkenSteel did recognize $0.3 million in restructuring charges, due to a reduction plan in salaried and hourly employees. TimkenSteel recorded reserves for such restructuring charges as other current liabilities on the Consolidated Balance Sheets.
The following is a roll forward of the consolidated restructuring accrual for the years ended December 31, 2017 and 2016:
Beginning balance, January 1, 2016

$2.3

Expenses
0.3

Payments
(2.5
)
Ending balance, December 31, 2016

$0.1

Expenses

Payments
(0.1
)
Ending balance, December 31, 2017

$—

Subsequent Events
Subsequent Events
Subsequent Events
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).
On January 26, 2018, the Company entered into the Amended Credit Agreement, which amends and restates the Company’s existing Credit Agreement. The Amended Credit Agreement provides for a $300.0 million asset-based revolving credit facility, including a $15.0 million sublimit for the issuance of commercial and standby letters of credit and a $30.0 million sublimit for swingline loans. Pursuant to the terms of the Amended Credit Agreement, the Company is entitled, on up to two occasions and subject to the satisfaction of certain conditions, to request increases in the commitments under the Amended Credit Agreement in the aggregate principal amount of up to $50.0 million, to the extent that existing or new lenders agree to provide such additional commitments.
The availability of borrowings under the Amended Credit Agreement is subject to a borrowing base calculation based upon a valuation of the eligible accounts receivable, inventory and machinery and equipment of the Company and the Subsidiary Guarantors, each multiplied by an applicable advance rate. The availability of borrowings may be further modified by reserves established from time to time by the Administrative Agent in its permitted discretion.
The interest rate per annum applicable to loans under the Amended Credit Agreement will be, at the Company’s option, equal to either (i) the alternate base rate plus the applicable margin or (ii) the relevant adjusted LIBO rate for an interest period of one, two, three or six months (as selected by the Company) plus the applicable margin. The base rate will be a fluctuating rate per annum equal to the greatest of (i) the prime rate of the Administrative Agent, (ii) the effective Federal Reserve Bank of New York rate plus 0.50% and (iii) the adjusted LIBO rate for a one-month interest period on the applicable date, plus 1.00%. The adjusted LIBO rate will be equal to the applicable London interbank offered rate for the selected interest period, as adjusted for statutory reserve requirements for eurocurrency liabilities. The applicable margin will be determined by a pricing grid based on the Company’s average quarterly availability. In addition, the Company will pay a commitment fee on the average daily unused amount of the credit facility in a percentage determined by the Company’s average daily availability for the most recently completed calendar month.
The proceeds of the credit facility will be used to finance working capital, capital expenditures, certain permitted acquisitions and other general corporate purposes. All of the indebtedness under the Amended Credit Agreement is guaranteed by the Company’s material domestic subsidiaries, as well as any other domestic subsidiary the Company elects to make a party to the Amended Credit Agreement, and is secured by substantially all of the personal property of the Company and the Subsidiary Guarantors.
The Amended Credit Agreement matures on January 26, 2023. Prior to the maturity date, amounts outstanding are required to be repaid (without reduction of the commitments thereunder) 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.
Selected Quarterly Financial Data (Unaudited)
Selected Quarterly Financial Data (Unaudited)
Selected Quarterly Financial Data (Unaudited)
(dollars in millions, except per share data)

Selected quarterly operating results for each quarter of fiscal 2017 and 2016 for TimkenSteel are as follows:
 
Quarters Ended
 
December 31
 
September 30
 
June 30
 
March 31
2017
 
 
 
 
 
 
 
Net Sales

$341.4

 

$339.1



$339.3



$309.4

Gross Profit
8.5

 
18.5


23.8


17.0

Net (Loss) Income
(33.9
)
 
(5.9
)

1.3


(5.3
)
Per Share Data: (1) 
 
 





Basic (loss) earnings per share

($0.76
)
 

($0.13
)


$0.03