UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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Title of each class |
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Trading symbol |
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Name of exchange in which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
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Large accelerated filer |
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☒ |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial reporting accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding at October 15, 2020 |
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Common Shares, without par value |
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TimkenSteel Corporation
Table of Contents
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PAGE |
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Consolidated Statements of Comprehensive Income (Loss) (Unaudited) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TimkenSteel Corporation
Consolidated Statements of Operations (Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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(Dollars in millions, except per share data) |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of products sold |
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Gross Profit |
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Selling, general and administrative expenses |
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Restructuring charges |
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— |
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Impairment charges and loss (gain) on sale or asset disposals |
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Interest expense |
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Other expense (income), net |
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( |
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( |
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Income (Loss) Before Income Taxes |
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( |
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( |
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( |
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( |
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Provision (benefit) for income taxes |
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( |
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( |
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Net Income (Loss) |
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$ |
( |
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$ |
( |
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$ |
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$ |
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Per Share Data: |
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Basic earnings (loss) per share |
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$ |
( |
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$ |
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$ |
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$ |
( |
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Diluted earnings (loss) per share |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
) |
See accompanying Notes to the unaudited Consolidated Financial Statements.
3
TimkenSteel Corporation
Consolidated Statement of Comprehensive Income (Loss) (Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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(Dollars in millions) |
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Net income (loss) |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments |
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Pension and postretirement liability adjustments |
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Other comprehensive income (loss), net of tax |
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Comprehensive Income (Loss), net of tax |
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$ |
( |
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$ |
( |
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$ |
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$ |
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See accompanying Notes to the unaudited Consolidated Financial Statements.
4
TimkenSteel Corporation
Consolidated Balance Sheets (Unaudited)
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September 30, 2020 |
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December 31, 2019 |
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(Dollars in millions) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net of allowances (2020 - $ |
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Inventories, net |
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Deferred charges and prepaid expenses |
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Assets held for sale |
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Other current assets |
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Total Current Assets |
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Property, plant and equipment, net |
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Operating lease right-of-use assets |
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Pension assets |
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Intangible assets, net |
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Other non-current assets |
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Total Assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
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$ |
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$ |
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Salaries, wages and benefits |
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Accrued pension and postretirement costs |
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Current operating lease liabilities |
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Convertible notes, net |
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— |
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Other current liabilities |
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Total Current Liabilities |
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Convertible notes, net |
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— |
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Credit Agreement |
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Non-current operating lease liabilities |
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Accrued pension and postretirement costs |
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Deferred income taxes |
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Other non-current liabilities |
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Total Liabilities |
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Shareholders’ Equity |
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Preferred shares, without par value; authorized |
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Common shares, without par value; authorized issued 2020 and 2019 - |
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Additional paid-in capital |
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Retained deficit |
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( |
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( |
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Treasury shares - 2020 - |
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( |
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( |
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Accumulated other comprehensive income (loss) |
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Total Shareholders’ Equity |
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Total Liabilities and Shareholders’ Equity |
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$ |
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$ |
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See accompanying Notes to the unaudited Consolidated Financial Statements.
5
TimkenSteel Corporation
Consolidated Statements of Shareholders’ Equity (Unaudited)
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(Dollars in millions) |
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Common Shares Outstanding |
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Additional Paid-in Capital |
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Retained Deficit |
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Treasury Shares |
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Accumulated Other Comprehensive Income (Loss) |
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Total |
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Balance at December 31, 2019 |
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$ |
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$ |
( |
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$ |
( |
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$ |
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$ |
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Net income (loss) |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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( |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Issuance of treasury shares |
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( |
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— |
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— |
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— |
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Shares surrendered for taxes |
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( |
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— |
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— |
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( |
) |
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— |
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( |
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Balance at March 31, 2020 |
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$ |
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$ |
( |
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$ |
( |
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$ |
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$ |
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Net income (loss) |
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— |
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— |
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( |
) |
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— |
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— |
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( |
) |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Issuance of treasury shares |
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( |
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— |
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— |
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— |
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Shares surrendered for taxes |
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( |
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— |
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— |
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( |
) |
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— |
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( |
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Balance at June 30, 2020 |
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$ |
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$ |
( |
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$ |
( |
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$ |
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$ |
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Net income (loss) |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Issuance of treasury shares |
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— |
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— |
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— |
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— |
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— |
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Shares surrendered for taxes |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Balance at September 30, 2020 |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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$ |
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Common Shares Outstanding |
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Additional Paid-in Capital |
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Retained Deficit |
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Treasury Shares |
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Accumulated Other Comprehensive Income (Loss) |
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Total |
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Balance at December 31, 2018 |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
( |
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$ |
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Net income (loss) |
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— |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Stock option activity |
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— |
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— |
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— |
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— |
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Issuance of treasury shares |
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( |
) |
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— |
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— |
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— |
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Shares surrendered for taxes |
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( |
) |
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— |
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— |
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( |
) |
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— |
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( |
) |
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Balance at March 31, 2019 |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Net income (loss) |
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— |
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— |
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( |
) |
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— |
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— |
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( |
) |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Stock option activity |
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— |
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— |
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— |
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— |
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— |
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— |
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|
Issuance of treasury shares |
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( |
) |
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— |
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— |
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— |
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|
Balance at June 30, 2019 |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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$ |
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|
Net income (loss) |
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— |
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— |
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( |
) |
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— |
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— |
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( |
) |
|
Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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|
( |
) |
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|
( |
) |
|
Stock-based compensation expense |
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— |
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— |
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— |
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— |
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|
Issuance of treasury shares |
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— |
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— |
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— |
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— |
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— |
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|
Shares surrendered for taxes |
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( |
) |
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— |
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— |
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— |
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— |
|
|
|
— |
|
|
Balance at September 30, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
See accompanying Notes to the unaudited Consolidated Financial Statements.
6
TimkenSteel Corporation
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
Nine Months Ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
CASH PROVIDED (USED) |
|
|
|
|
|
|
|
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Amortization of deferred financing fees and debt discount |
|
|
|
|
|
|
|
|
|
Impairment charges and loss (gain) on sale or disposal of assets |
|
|
( |
) |
|
|
|
|
|
Deferred income taxes |
|
|
( |
) |
|
|
( |
) |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
Pension and postretirement expense, net |
|
|
( |
) |
|
|
( |
) |
|
Pension and postretirement contributions and payments |
|
|
( |
) |
|
|
( |
) |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
( |
) |
|
|
|
|
|
Inventories, net |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
|
|
|
|
( |
) |
|
Other accrued expenses |
|
|
|
|
|
|
( |
) |
|
Deferred charges and prepaid expenses |
|
|
( |
) |
|
|
( |
) |
|
Other, net |
|
|
|
|
|
|
( |
) |
|
Net Cash Provided (Used) by Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from disposals of property, plant and equipment |
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Investing Activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
|
|
|
|
|
|
|
Shares surrendered for employee taxes on stock compensation |
|
|
( |
) |
|
|
( |
) |
|
Repayments on credit agreements |
|
|
( |
) |
|
|
( |
) |
|
Borrowings on credit agreements |
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Financing Activities |
|
|
( |
) |
|
|
( |
) |
|
Increase (Decrease) in Cash and Cash Equivalents |
|
|
|
|
|
|
( |
) |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
|
|
|
$ |
|
|
See accompanying Notes to the unaudited Consolidated Financial Statements.
7
TimkenSteel Corporation
Notes to Unaudited Consolidated Financial Statements
(dollars in millions, except per share data)
Note 1 - Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared by TimkenSteel Corporation (the Company or TimkenSteel) in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to TimkenSteel’s audited Consolidated Financial Statements and Notes included in its Annual Report on Form 10-K for the year ended December 31, 2019.
Customer Receivables
The Company’s accounts receivables arise from sales to customers across all end markets. Historically, TimkenSteel’s allowance for doubtful accounts write-offs have been immaterial. The allowance for doubtful account reserve has been established using qualitative and quantitative methods. In general, account balances greater than one year of age or sent to third party collection are fully reserved. Account balances for customers that are viewed as higher risk are also analyzed for a reserve. In addition to these methods, the allowance for doubtful accounts in 2020 was adjusted for forward looking uncollectible balances, primarily in the energy and automotive end markets. The amount recorded was based on the Company’s assessment of the risk presented to customers in these end markets as a result of the COVID-19 pandemic as well as geo-political factors facing the energy end market.
Change in Accounting Principle
During the fourth quarter of 2019, TimkenSteel elected to change its method for valuing its inventories that previously used the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The Company believes that the FIFO method is preferable as it improves comparability with its peers, more closely resembles the physical flow of its inventory and aligns with how the Company internally manages the business. The effects of the change in accounting principle from LIFO to FIFO were retrospectively applied. As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the Company’s consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the three and nine months ended September 30, 2019 were adjusted as necessary. For further information, refer to TimkenSteel’s audited Consolidated Financial Statements and Notes included in its Annual Report on Form 10-K for the year ended December 31, 2019.
The following tables reflect the impact to the financial statement line items as a result of the change in accounting principle for the prior periods presented in the accompanying financial statements (dollars in millions, except per share data):
|
Consolidated Statement of Operations |
|
Three Months Ended September 30, 2019 |
|
|
Nine Months Ended September 30, 2019 |
|
||||||||||||||||||
|
|
|
As Reported |
|
|
Adjustments |
|
|
As Adjusted |
|
|
As Reported |
|
|
Adjustments |
|
|
As Adjusted |
|
||||||
|
Cost of products sold |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Gross profit |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Income (loss) before income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Provision (benefit) for income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net income (loss) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Diluted earnings (loss) per share |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Consolidated Statement of Comprehensive Income (Loss) |
|
Three Months Ended September 30, 2019 |
|
|
Nine Months Ended September 30, 2019 |
|
||||||||||||||||||
|
|
|
As Reported |
|
|
Adjustments |
|
|
As Adjusted |
|
|
As Reported |
|
|
Adjustments |
|
|
As Adjusted |
|
||||||
|
Net income (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Pension and postretirement liability adjustments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Comprehensive income (loss), net of tax |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
8
|
Consolidated Statement of Cash Flows |
|
Nine Months Ended September 30, 2019 |
|
|||||||||
|
|
|
As Reported |
|
|
Adjustments |
|
|
As Adjusted |
|
|||
|
Net income (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Pension and postretirement expense (benefit), net |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net |
|
|
|
|
|
|
|
|
|
|
|
|
Note 2 - Recent Accounting Pronouncements
Adoption of New Accounting Standards
The Company adopted the following Accounting Standard Updates (ASU) in the first quarter of 2020, all of which were effective as of
|
Standards Adopted |
Description |
|
ASU 2020-04, Reference Rate Reform (Topic 848) |
The standard provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. |
|
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) |
The standard aligns the requirements for capitalizing implementation costs in cloud computing software arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. |
|
ASU 2018-13, Fair Value Measurement (Topic 820) |
The standard eliminates, modifies and adds disclosure requirements for fair value measurements. |
|
ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) |
The standard changes how entities will measure credit losses for most financial assets, including trade and other receivables, and replaces the current incurred loss approach with an expected loss model. |
Accounting Standards Issued But Not Yet Adopted
The Company has considered the recent ASUs issued by the Financial Accounting Standards Board summarized below:
|
Standard Pending Adoption |
Description |
Effective Date |
Anticipated Impact |
|
ASU 2019-12, Income Taxes (Topic 740) |
The standard simplifies the accounting for income taxes by removing various exceptions. |
January 1, 2021 |
The Company is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition. |
|
ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) |
The standard eliminates, modifies and adds disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. |
January 1, 2021 |
The Company is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition. |
|
ASU 2020-03, Codification Improvements to Financial Instruments |
The standard clarifies or improves the Codification. The amendments make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. |
January 1, 2021 |
The Company is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition. |
|
ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) |
The standard simplifies the accounting for convertible instruments, as well as the diluted net income per share calculation. The standard also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. |
January 1, 2022 |
The Company is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition. |
9
Note 3 - Revenue Recognition
The following table provides the major sources of revenue by end-market sector for the three and nine months ended September 30, 2020 and 2019:
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Mobile |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
(1) “Other” sales by end-market sector includes the Company’s scrap and oil country tubular goods (OCTG) billet sales.
The following table provides the major sources of revenue by product type for the three and nine months ended September 30, 2020 and 2019:
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Bar |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Tube |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value-add |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
(2) “Other” sales by product type includes the Company’s scrap sales.
Note 4 - Restructuring Charges
During 2019 and throughout 2020, TimkenSteel made organizational changes to enhance profitable and sustainable growth. These company-wide actions included the restructuring of its business support functions, the reduction of management layers throughout the organization, the closure of the TimkenSteel Material Services (TMS) facility in Houston, Texas and other domestic and international actions to further improve the Company’s overall cost structure. Through these restructuring efforts, to date the Company has eliminated approximately
The following is a summary of the restructuring reserve for the nine months ended September 30, 2020 and 2019:
|
Balance at December 31, 2019 |
|
$ |
|
|
|
Expenses |
|
|
|
|
|
Payments |
|
|
( |
) |
|
Balance at September 30, 2020 |
|
$ |
|
|
|
Balance at December 31, 2018 |
|
$ |
— |
|
|
Expenses |
|
|
|
|
|
Payments |
|
|
( |
) |
|
Balance at September 30, 2019 |
|
$ |
|
|
Note 5 - Disposition of Non-Core Assets
During the first quarter of 2020, management completed its previously announced plan to close the Company’s TMS facility in Houston and initiated a plan to market and sell the assets at the facility. Accelerated depreciation and amortization of $
10
value of the inventory established in the fourth quarter of 2019, excess inventory related to our energy end-market sector resulted in an additional reserve of approximately $
In the third quarter of 2020, TimkenSteel informed customers that as of December 31, 2020 the Company will discontinue the commercial offering of specific small-diameter seamless mechanical tubing product offerings. As a result, the Company recognized accelerated depreciation of $
Note 6 – Other Expense (Income), net
The following table provides the components of other expense (income), net for the three and nine months ended September 30, 2020 and 2019:
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Pension and postretirement non-service benefit loss (income) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Loss (gain) from remeasurement of benefit plans |
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange loss (gain) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
Miscellaneous expense (income) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total other expense (income), net |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Non-service benefit income is derived from the Company’s pension and other postretirement plans. The Company’s expected return on assets has exceeded the interest cost component, resulting in income for the three and nine months ended September 30, 2020 and 2019.
The TimkenSteel Corporation Retirement Plan (Salaried Plan) has a provision that permits employees to elect to receive their pension benefits in a lump sum. In the first quarter of 2020, the cumulative cost of all lump sum payments was projected to exceed the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. As a result, the Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan during each quarter of 2020, which resulted in a non-cash (gain) loss from remeasurement of ($
Note 7 - Income Tax Provision
TimkenSteel’s provision for income taxes in interim periods is computed by applying the appropriate estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items, including interest on prior-year tax liabilities, are recorded during the periods in which they occur.
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Provision (benefit) for incomes taxes |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
Effective tax rate |
|
|
( |
)% |
|
|
|
% |
|
|
( |
)% |
|
|
|
% |
In light of TimkenSteel’s operating performance in the U.S. and current industry conditions, the Company assessed its U.S. deferred tax assets and concluded, based upon all available evidence, that it was more likely than not that it would not realize the assets. As a result, the Company maintains a full valuation allowance against its deferred tax assets in the U.S. and applicable foreign countries until sufficient positive evidence exists to conclude that a valuation allowance is not necessary. Going forward, the need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s effective tax rate. The majority of TimkenSteel’s income taxes are derived from foreign operations.
During the third quarter, TimkenSteel (Shanghai) Corporation Limited declared a dividend of $
On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, an economic stimulus package intended to provide support, principally in the form of tax benefits, to companies and individuals negatively impacted by the COVID-19 pandemic. Although the majority of the provisions included in the CARES Act did not immediately benefit the Company from a cash tax perspective due to its significant net operating losses, the Company has taken advantage of the deferral of the employer share (
11
installments at December 31, 2021 and December 31, 2022. The Company is currently evaluating the potential benefit related to the Employee Retention Credit and intends to file for this credit in the fourth quarter of 2020.
Note 8 - Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based upon the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the treasury stock method or if-converted method. For the Convertible Notes, the Company utilizes the if-converted method to calculate diluted earnings (loss) per share. Under the if-converted method, the Company adjusts net earnings to add back interest expense (including amortization of debt discount) recognized on the Convertible Notes and includes the number of shares potentially issuable related to the Convertible Notes in the weighted average shares outstanding. Treasury stock is excluded from the denominator in calculating both basic and diluted earnings (loss) per share.
Common share equivalents for shares issuable for equity-based awards were excluded from the computation of diluted earnings (loss) per share for the three and nine months ended September 30, 2020 and 2019 because the effect of their inclusion would have been anti-dilutive. Common share equivalents for shares issuable upon the conversion of outstanding convertible notes were excluded from the computation of diluted earnings (loss) per share for the three and nine months ended September 30, 2020 and 2019 because the effect of their inclusion would have been anti-dilutive.
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2020 and 2019:
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock-based awards |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Weighted average shares outstanding, diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Diluted earnings (loss) per share |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Note 9 - Inventories
The components of inventories, net of reserves as of September 30, 2020 and December 31, 2019 were as follows:
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Manufacturing supplies |
|
$ |
|
|
|
$ |
|
|
|
Raw materials |
|
|
|
|
|
|
|
|
|
Work in process |
|
|
|
|
|
|
|
|
|
Finished products |
|
|
|
|
|
|
|
|
|
Gross inventory |
|
|
|
|
|
|
|
|
|
Allowance for inventory reserves |
|
|
( |
) |
|
|
( |
) |
|
Total Inventories, net |
|
$ |
|
|
|
$ |
|
|
In the second quarter of 2020, the Company recorded an additional allowance for inventory reserve of approximately $
12
Note 10 - Financing Arrangements
For a detailed discussion of the Company's long-term debt and credit arrangements, refer to “Note 14 - Financing Arrangements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Convertible Notes
The components of the Convertible Notes as of September 30, 2020 and December 31, 2019 were as follows:
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Principal |
|
$ |
|
|
|
$ |
|
|
|
Less: Debt issuance costs, net of amortization |
|
|
( |
) |
|
|
( |
) |
|
Less: Debt discount, net of amortization |
|
|
( |
) |
|
|
( |
) |
|
Convertible notes, net |
|
$ |
|
|
|
$ |
|
|
The initial value of the principal amount recorded as a liability at the date of issuance was $
The following table sets forth total interest expense recognized related to the Convertible Notes:
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Contractual interest expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Amortization of debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Amended Credit Agreement
On October 15, 2019, the Company, as borrower, and certain domestic subsidiaries of the Company, as subsidiary guarantors, entered into a Third Amended and Restated Credit Agreement (the Amended Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent (the Administrative Agent), Bank of America, N.A., as syndication agent, and the other lenders party thereto (collectively, the Lenders), which further amended and restated the Company’s Second Amended and Restated Credit Agreement dated as of January 26, 2018. The interest rate under the Amended Credit Agreement was
In October 2020, the Company repaid the remaining $
Fair Value Measurement
The fair value of the Convertible Notes was approximately $
TimkenSteel’s Credit Agreement is variable-rate debt. As such, the carrying value is a reasonable estimate of fair value as interest rates on these borrowings approximate current market rates. This valuation falls within Level 2 of the fair value hierarchy and is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly.
Interest Paid
The total cash interest paid for the nine months ended September 30, 2020 and 2019 was $
13
Note 11 - Retirement and Postretirement Plans
The components of net periodic benefit cost (income) for the three and nine months ended September 30, 2020 and 2019 were as follows:
|
|
|
Three Months Ended September 30, 2020 |
|
|
Three Months Ended September 30, 2019 |
|
||||||||||
|
|
|
Pension |
|
|
Postretirement |
|
|
Pension |
|
|
Postretirement |
|
||||
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Amortization of prior service cost |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Net remeasurement (gains) losses |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net Periodic Benefit Cost (Income) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
Nine Months Ended September 30, 2020 |
|
|
Nine Months Ended September 30, 2019 |
|
||||||||||
|
|
|
Pension |
|
|
Postretirement |
|
|
Pension |
|
|
Postretirement |
|
||||
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Amortization of prior service cost |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Net remeasurement (gains) losses |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Net Periodic Benefit Cost (Income) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
The Salaried Plan has a provision that permits employees to elect to receive their pension benefits in a lump sum. In the first quarter of 2020, the cumulative cost of all lump sum payments was projected to exceed the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. As a result, the Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan during each quarter of 2020, which resulted in a non-cash (gain) loss from remeasurement of ($
Note 12 – Stock-Based Compensation
During the nine months ended September 30, 2020, the Board of Directors granted
Time-vested restricted stock units are issued with the fair value equal to the closing market price of TimkenSteel common shares on the date of grant. These restricted stock units do not have any performance conditions for vesting. Expense is recognized over the service period, adjusted for any forfeitures that should occur during the vesting period. The weighted average fair value of the restricted stock units granted during the nine months ended September 30, 2020 was $
Performance-vested restricted stock units issued in 2020 vest based on achievement of a total shareholder return (TSR) metric. The TSR metric is considered a market condition, which requires TimkenSteel to reflect it in the fair value on grant date using an advanced option-pricing model. The fair value of each performance share was therefore determined using a Monte Carlo valuation model, a generally accepted lattice pricing model under ASC 718 – Stock-based Compensation. The Monte Carlo valuation model, among other factors, uses commonly-accepted economic theory underlying all valuation models, estimates fair value using simulations of future share prices based on stock price behavior and considers the correlation of peer company returns in determining fair value. The weighted average fair value of the performance-vested restricted stock units granted during the nine months ended September 30, 2020 was $
Stock options are issued with an exercise price equal to the closing market price of TimkenSteel common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. The weighted average exercise price and weighted average fair value of the stock option grants during the nine months ended September 30, 2020 were $
TimkenSteel recognized stock-based compensation expense of $
14
Note 13 - Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2020 and 2019 by component were as follows:
|
|
|
Foreign Currency Translation Adjustments |
|
|
Pension and Postretirement Liability Adjustments |
|
|
Total |
|
|||
|
Balance as of December 31, 2019 |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
Other comprehensive income before reclassifications, before income tax |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive income (loss), before income tax |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income, net of income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance as of September 30, 2020 |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments |
|
|
Pension and Postretirement Liability Adjustments |
|
|
Total |
|
|||
|
Balance at December 31, 2018 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income before reclassifications, before income tax |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive income (loss), before income tax |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Amounts deferred to accumulated other comprehensive income (loss), before income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Net current period other comprehensive income, net of income taxes |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2019 |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
The amount reclassified from accumulated other comprehensive income (loss) in the nine months ended September 30, 2020 and 2019 for the pension and postretirement liability adjustment was included in other income, net in the unaudited Consolidated Statements of Operations.
Note 14 – Contingencies
TimkenSteel has a number of loss exposures incurred in the ordinary course of business, such as environmental claims, product warranty claims, and litigation. Establishing loss reserves for these matters requires management’s estimate and judgment regarding risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances. Accruals related to environmental claims represent management’s best estimate of the fees and costs associated with these claims. Although it is not possible to predict with certainty the outcome of such claims, management believes that their ultimate dispositions should not have a material adverse effect on our financial position, cash flows or results of operations. As of September 30, 2020 and December 31, 2019, TimkenSteel had a $
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except per share data)
Business Overview
We manufacture alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. Our portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), value-added solutions such as precision steel components, and billets. In addition, we supply machining and thermal treatment services and manage raw material recycling programs, which are used as a feeder system for our melt operations. Our products and services are used in a diverse range of demanding applications in the following market sectors: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and oil country tubular goods (OCTG).
SBQ steel is made to restrictive chemical compositions and high internal purity levels and is used in critical mechanical applications. We make these products from nearly 100% recycled steel, using our expertise in raw materials to create custom steel products. We focus on creating tailored products and services for our customers’ most demanding applications. Our engineers are experts in both materials and applications, so we can work closely with each customer to deliver flexible solutions related to our products as well as to their applications and supply chains.
The SBQ bar, tube, and billet production processes take place at our Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets we produce and includes three manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. Our value-added solutions production processes take place at two downstream manufacturing facilities: Tryon Peak (Columbus, North Carolina), and St. Clair (Eaton, Ohio). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of our market sectors. As a result, investments in our facilities and resource allocation decisions affecting our operations are designed to benefit the overall business, not any specific aspect of the business.
In the first quarter of 2020, we closed our TimkenSteel Material Services (TMS) facility in Houston, Texas. See “Note 5 - Disposition of Non-Core Assets” in the Notes to the unaudited Consolidated Financial Statements for additional information.
We conduct our business activities and report financial results as one business segment. The presentation of financial results as one reportable segment is consistent with the way we operate our business and is consistent with the manner in which the Chief Operating Decision Maker (CODM) evaluates performance and makes resource and operating decisions for the business as described above. Furthermore, the Company notes that monitoring financial results as one reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of our operations.
Impact of COVID-19 Pandemic
We continue to closely monitor the impact of the COVID-19 pandemic on our Company, employees, customers and supply chain. The full extent to which the COVID-19 pandemic will impact our operations and financial results is uncertain and ultimately will depend on, among many other factors, the duration of the pandemic, further Federal and State government actions and the speed of economic recovery. We estimate the primary impact of COVID-19 on the Company was lost sales of approximately $70 million for the third quarter of 2020 and approximately $200 million for the nine months ended September 30, 2020, as compared to expectations established prior to the onset of the pandemic. The negative impact on the remainder of the year and beyond remains unknown but at a minimum, we expect customer demand in the COVID-19 environment to continue to be lower in the fourth quarter of 2020 in comparison to the prior year fourth quarter, resulting in periodic production outages as the Company continues to balance production schedules with demand.
In response to the significant reduction in customer demand resulting from the COVID-19 crisis, the Company has taken additional actions to further reduce operating expenses, conserve cash and maximize liquidity. The following actions began in the second quarter of 2020 and unless otherwise noted, continued for the duration of the third quarter:
|
|
• |
Reduced interim CEO and senior executives’ base salaries by 20 percent and other executives’ base salaries by 10 percent, effective May 1; |
|
|
• |
Reduced cash retainer for its board of directors by 20 percent beginning with the second-quarter 2020, and reduced the value of the board’s annual equity grant by 20 percent; |
|
|
• |
Suspended the Company’s 401(k) plan matching contributions for salaried employees, effective June 1; |
|
|
• |
Implemented unpaid rolling furloughs for approximately 90 percent of salaried employees, with an average 5 weeks of unpaid furloughs per employee, beginning in early April and ending in late July; and |
|
|
• |
Deferred Social Security payroll tax remittance as permitted by the CARES Act. |
In the third quarter of 2020, the Company’s COVID-19 related actions saved approximately $5 million in cash and reduced administrative expenses by approximately $2 million. Since implementation in the second quarter of 2020, the Company’s COVID-19 related actions saved approximately $12 million in cash and reduced administrative expenses by approximately $7 million in total.
16
Additionally, in the third quarter of 2020, the Company took the following operational actions:
|
|
• |
Continued to maintain flexible production schedules at all plants to align operations with customer demand, resulting in the temporary layoff of manufacturing employees; |
|
|
• |
Maintained its forecasted 2020 capital expenditures at a lower level range of $15 million to $20 million, as previously communicated in the second quarter. |
These actions resulted in the Company having total liquidity of $280 million as of September 30, 2020, despite the negative impact of COVID-19 on our business. We believe this level of liquidity is sufficient to meet the Company’s needs for at least the next 12 months. The Company will continue to take actions such as those described above in order to preserve liquidity for the duration of this pandemic.
Impact of Raw Material Prices
In the ordinary course of business, we are exposed to the volatility of the costs of our raw materials. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing process. We utilize a raw material surcharge mechanism when pricing products to our customers, which is designed to mitigate the impact of increases or decreases in raw material costs, although generally with a lag effect. This timing effect can result in raw material spread whereby costs can be over- or under-recovered in certain periods. While the surcharge generally protects gross profit, it has the effect of diluting gross margin as a percent of sales.
Results of Operations
Net Sales
The charts below present net sales and shipments for the three months ended September 30, 2020 and 2019.
Net sales for the three months ended September 30, 2020 were $205.9 million, a decrease of $68.3 million, or 24.9%, compared with the three months ended September 30, 2019. The decrease was due to a reduction in volume of approximately 55 thousand ship tons, resulting in a decrease of $61.7 million of net sales and lower surcharges of $20.2 million. These decreases in net sales were slightly offset by a positive mix across all end markets resulting in an increase in net sales of $18.6 million. The primary driver in the decrease in volume was lower customer demand across all end markets. The decrease in surcharges was primarily due to a 18.0% decline in the average surcharge per ton due to lower market prices for scrap and alloys. We estimate the impact of the COVID-19 pandemic on our net sales was a reduction of approximately $70 million, as compared to our forecast prior to the onset of the pandemic. Excluding surcharges, net sales decreased $48.1 million, or 21.6%.
17
The charts below present net sales and shipments for the nine months ended September 30, 2020 and 2019.
Net sales for the nine months ended September 30, 2020 were $619.5 million, a decrease of $362.4 million, or 36.9%, compared with the nine months ended September 30, 2019. The decrease was due to a reduction in volume of approximately 242 thousand ship tons, resulting in a decrease of $264.2 million of net sales and lower surcharges of $117.6 million. These decreases in net sales were slightly offset by a positive mix across all end markets resulting in an increase in net sales of $30.3 million. The primary driver in the decrease in volume was lower customer demand across all end markets primarily as a result of the COVID-19 pandemic and weak energy market. The decrease in surcharges was primarily due to an approximate 30% decline in the average surcharge per ton due to lower market prices for scrap and alloys. We estimate the impact of the COVID-19 pandemic on our net sales during 2020 was a reduction of approximately $200 million, as compared to our forecast prior to the onset of the pandemic. Over half of this decrease was related to lower than forecasted volume in our mobile end-market sector, as production was halted by all major automotive manufacturers for various lengths of time during the second quarter. Excluding surcharges, net sales decreased $244.8 million, or 32.1%.
Gross Profit
The chart below presents the drivers of the gross profit variance from the three months ended September 30, 2019 to September 30, 2020.
Gross profit for the three months ended September 30, 2020 increased $0.2 million, or 7.7%, compared with the three months ended September 30, 2019. The increase was driven primarily by favorable raw material spread, manufacturing costs, and price/mix, partially offset by lower volumes. Raw material spread was favorable due to higher scrap spread in the third quarter of 2020. Favorable manufacturing costs were
18
primarily due to the Company’s significant cost reduction actions, slightly offset by the unfavorable impact of lower production levels on fixed cost leverage. Favorable price/mix was driven by favorable mix across all end markets and improved pricing. The primary driver in the decrease in volume was lower customer demand across all end markets as a result of the COVID-19 pandemic and a weak energy market.
The chart below presents the drivers of the gross profit variance from the nine months ended September 30, 2019 to September 30, 2020.
Gross profit for the nine months ended September 30, 2020 decreased $39.2 million, or 96.6%, compared with the nine months ended September 30, 2019. The decrease was driven primarily by lower volumes and additional inventory adjustments, partially offset by favorable manufacturing costs and raw material spread. The primary driver in the decrease in volume was lower customer demand across all end markets primarily as a result of the COVID-19 pandemic and a weak energy market. Additional inventory reserve adjustments relate primarily to a lower of cost or net realizable adjustment for inventory at our closed TMS facility. Favorable manufacturing costs in 2020 were primarily due to the Company’s significant cost reduction actions, including cost control efforts related to planned annual maintenance, slightly offset by the unfavorable impact of lower production levels on fixed cost leverage. Raw material spread was favorable due to higher scrap spread specifically during the third quarter of 2020.
19
Selling, General and Administrative Expenses
The charts below present selling, general and administrative (SG&A) expense for the three and nine months ended September 30, 2020 and 2019.
Selling, general and administrative (SG&A) expense for the three and nine months ended September 30, 2020 decreased by $3.5 million, or 16.4%, and $6.8 million, or 10.5%, respectively, compared with the same periods in 2019. The decreases are primarily due to lower wages and benefits expense which are a result of a reduction in employee headcount following the Company’s recent restructuring actions, as well as unpaid furloughs for salaried employees which began in the second quarter and ended in July 2020. Other COVID-19 related cost reduction actions and lower controllable spend also contributed to the decreases. These decreases are partially offset by increases in variable compensation.
Restructuring Charges
During 2019 and throughout 2020, TimkenSteel made organizational changes to enhance profitable and sustainable growth. These company-wide actions included the restructuring of its business support functions, the reduction of management layers throughout the organization, the closure of the TMS facility in Houston, Texas and other domestic and international actions to further improve the Company’s overall cost structure. Through these restructuring efforts, to date the Company has eliminated approximately
Interest Expense
Interest expense for the three months ended September 30, 2020 was $3.0 million, a decrease of $0.6 million, compared with the three months ended September 30, 2019. Interest expense for the nine months ended September 30, 2020 was $9.2 million, a decrease of $2.8 million, compared with the nine months ended September 30, 2019. The decrease in interest expense in both periods was primarily due to a reduction in outstanding borrowings as well as a lower interest rate environment. Refer to “Note 10 - Financing Arrangements” in the Notes to the unaudited Consolidated Financial Statements for additional information.
Other Expense (Income), net
|
|
|
Three Months Ended September 30, |
|
|||||||||
|
|
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|||
|
Pension and postretirement non-service benefit loss (income) |
|
$ |
(6.7 |
) |
|
$ |
(5.1 |
) |
|
$ |
(1.6 |
) |
|
(Gain) loss from remeasurement benefit plan |
|
|
(4.1 |
) |
|
|
— |
|
|
|
(4.1 |
) |
|
Foreign currency exchange (gain) loss |
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
|
Miscellaneous expense (income) |
|
|
0.3 |
|
|
|
(0.2 |
) |
|
|
0.5 |
|
|
Total other expense (income), net |
|
$ |
(10.6 |
) |
|
$ |
(5.2 |
) |
|
$ |
(5.4 |
) |
20
|
|
|
Nine Months Ended September 30, |
|
|||||||||
|
|
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|||
|
Pension and postretirement non-service benefit loss (income) |
|
$ |
(19.7 |
) |
|
$ |
(12.4 |
) |
|
$ |
(7.3 |
) |
|
Loss from remeasurement of benefit plans |
|
|
3.5 |
|
|
|
4.4 |
|
|
|
(0.9 |
) |
|
Foreign currency exchange (gain) loss |
|
|
0.3 |
|
|
|
— |
|
|
|
0.3 |
|
|
Miscellaneous income (expense) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
— |
|
|
Total other expense (income), net |
|
$ |
(16.0 |
) |
|
$ |
(8.1 |
) |
|
$ |
(7.9 |
) |
Non-service benefit income is derived from the Company’s pension and other postretirement plans. The Company’s expected return on assets has exceeded the interest cost component, resulting in income for the three and nine months ended September 30, 2020 and 2019.
The TimkenSteel Corporation Retirement Plan (Salaried Plan) has a provision that permits employees to elect to receive their pension benefits in a lump sum. In the first quarter of 2020, the cumulative cost of all lump sum payments was projected to exceed the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. As a result, the Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan during each quarter of 2020, which resulted in a non-cash (gain) loss from remeasurement of ($4.1) million and $3.5 million for the three and nine months ended September 30, 2020, respectively. For more details on the remeasurement, refer to “Note 11 - Retirement and Postretirement Plans.”
Provision for Income Taxes
|
|
|
Three Months Ended September 30, |
|
|||||||||
|
|
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|||
|
Provision (benefit) for income taxes |
|
$ |
0.3 |
|
|
$ |
(5.5 |
) |
|
$ |
5.8 |
|
|
Effective tax rate |
|
|
(2.2 |
)% |
|
|
24.4 |
% |
|
NM |
|
|
|
|
|
Nine Months Ended September 30, |
|
|||||||||
|
|
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|||
|
Provision (benefit) for income taxes |
|
$ |
0.6 |
|
|
$ |
(8.3 |
) |
|
$ |
8.9 |
|
|
Effective tax rate |
|
|
(1.2 |
)% |
|
|
24.6 |
% |
|
NM |
|
|
The majority of the Company’s income tax expense is derived from foreign operations. The Company remains in a full valuation for the U.S. jurisdiction for the three and nine months ended September 30, 2020 and 2019.
21
NON-GAAP FINANCIAL MEASURES
Net Sales, Excluding Surcharges
The table below presents net sales by end market sector, adjusted to exclude surcharges, which represents a financial measure that has not been determined in accordance with accounting principles generally accepted in the United States (U.S. GAAP). We believe presenting net sales by end market sector adjusted to exclude raw material surcharges provides additional insight into key drivers of net sales such as base price and product mix.
|
(dollars in millions, tons in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Three Months Ended September 30, 2020 |
|
|||||||||||||||||
|
|
|
Mobile |
|
|
Industrial |
|
|
Energy |
|
|
Other |
|
|
Total |
|
|||||
|
Tons |
|
|
90.3 |
|
|
|
59.3 |
|
|
|
4.7 |
|
|
|
— |
|
|
|
154.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
103.1 |
|
|
$ |
90.7 |
|
|
$ |
7.0 |
|
|
$ |
5.1 |
|
|
$ |
205.9 |
|
|
Less: Surcharges |
|
|
17.0 |
|
|
|
13.0 |
|
|
|
1.1 |
|
|
|
— |
|
|
|
31.1 |
|
|
Base Sales |
|
$ |
86.1 |
|
|
$ |
77.7 |
|
|
$ |
5.9 |
|
|
$ |
5.1 |
|
|
$ |
174.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales / Ton |
|
$ |
1,142 |
|
|
$ |
1,530 |
|
|
$ |
1,489 |
|
|
$ |
— |
|
|
$ |
1,334 |
|
|
Surcharges / Ton |
|
$ |
189 |
|
|
$ |
220 |
|
|
$ |
234 |
|
|
$ |
— |
|
|
$ |
201 |
|
|
Base Sales / Ton |
|
$ |
953 |
|
|
$ |
1,310 |
|
|
$ |
1,255 |
|
|
$ |
— |
|
|
$ |
1,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019 |
|
|||||||||||||||||
|
|
|
Mobile |
|
|
Industrial |
|
|
Energy |
|
|
Other |
|
|
Total |
|
|||||
|
Tons |
|
|
93.0 |
|
|
|
87.1 |
|
|
|
17.7 |
|
|
|
11.8 |
|
|
|
209.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
110.2 |
|
|
$ |
116.9 |
|
|
$ |
32.6 |
|
|
$ |
14.5 |
|
|
$ |
274.2 |
|
|
Less: Surcharges |
|
|
20.5 |
|
|
|
22.3 |
|
|
|
5.7 |
|
|
|
2.8 |
|
|
|
51.3 |
|
|
Base Sales |
|
$ |
89.7 |
|
|
$ |
94.6 |
|
|
$ |
26.9 |
|
|
$ |
11.7 |
|
|
$ |
222.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales / Ton |
|
$ |
1,185 |
|
|
$ |
1,342 |
|
|
$ |
1,842 |
|
|
$ |
1,229 |
|
|
$ |
1,308 |
|
|
Surcharges / Ton |
|
$ |
220 |
|
|
$ |
256 |
|
|
$ |
322 |
|
|
$ |
237 |
|
|
$ |
245 |
|
|
Base Sales / Ton |
|
$ |
965 |
|
|
$ |
1,086 |
|
|
$ |
1,520 |
|
|
$ |
992 |
|
|
$ |
1,063 |
|
|
|
|
Nine Months Ended September 30, 2020 |
|
|||||||||||||||||
|
|
|
Mobile |
|
|
Industrial |
|
|
Energy |
|
|
Other |
|
|
Total |
|
|||||
|
Tons |
|
|
211.8 |
|
|
|
203.7 |
|
|
|
32.2 |
|
|
|
28.7 |
|
|
|
476.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
236.9 |
|
|
$ |
302.0 |
|
|
$ |
46.8 |
|
|
$ |
33.8 |
|
|
$ |
619.5 |
|
|
Less: Surcharges |
|
|
40.3 |
|
|
|
46.4 |
|
|
|
7.5 |
|
|
|
7.1 |
|
|
|
101.3 |
|
|
Base Sales |
|
$ |
196.6 |
|
|
$ |
255.6 |
|
|
$ |
39.3 |
|
|
$ |
26.7 |
|
|
$ |
518.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales / Ton |
|
$ |
1,119 |
|
|
$ |
1,483 |
|
|
$ |
1,453 |
|
|
$ |
1,178 |
|
|
$ |
1,300 |
|
|
Surcharges / Ton |
|
$ |
191 |
|
|
$ |
228 |
|
|
$ |
233 |
|
|
$ |
248 |
|
|
$ |
212 |
|
|
Base Sales / Ton |
|
$ |
928 |
|
|
$ |
1,255 |
|
|
$ |
1,220 |
|
|
$ |
930 |
|
|
$ |
1,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019 |
|
|||||||||||||||||
|
|
|
Mobile |
|
|
Industrial |
|
|
Energy |
|
|
Other |
|
|
Total |
|
|||||
|
Tons |
|
|
316.1 |
|
|
|
276.0 |
|
|
|
80.1 |
|
|
|
46.4 |
|
|
|
718.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
389.7 |
|
|
$ |
388.2 |
|
|
$ |
147.5 |
|
|
$ |
56.5 |
|
|
$ |
981.9 |
|
|
Less: Surcharges |
|
|
90.1 |
|
|
|
84.8 |
|
|
|
30.2 |
|
|
|
13.8 |
|
|
|
218.9 |
|
|
Base Sales |
|
$ |
299.6 |
|
|
$ |
303.4 |
|
|
$ |
117.3 |
|
|
$ |
42.7 |
|
|
$ |
763.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales / Ton |
|
$ |
1,233 |
|
|
$ |
1,407 |
|
|
$ |
1,841 |
|
|
$ |
1,218 |
|
|
$ |
1,366 |
|
|
Surcharges / Ton |
|
$ |
285 |
|
|
$ |
308 |
|
|
$ |
377 |
|
|
$ |
298 |
|
|
$ |
304 |
|
|
Base Sales / Ton |
|
$ |
948 |
|
|
$ |
1,099 |
|
|
$ |
1,464 |
|
|
$ |
920 |
|
|
$ |
1,062 |
|
22
LIQUIDITY AND CAPITAL RESOURCES
Convertible Notes
In May 2016, the Company issued $75.0 million aggregate principal amount of Convertible Notes, plus an additional $11.3 million principal amount to cover over-allotments. The Convertible Notes bear cash interest at a rate of 6.0% per year, payable semi-annually on June 1 and December 1, beginning on December 1, 2016. The net proceeds received from the offering were $83.2 million, after deducting the initial underwriters’ discount and fees and paying the offering expenses. The Convertible Notes will mature on June 1, 2021, unless earlier repurchased or converted, and accordingly are classified as a current liability in the Consolidated Balance Sheet as of September 30, 2020. We expect to have adequate liquidity to retire the Convertible Notes using a combination of cash and borrowing capacity on the Amended Credit Agreement, and/or the ability to refinance prior to or at maturity.
Amended Credit Agreement
On October 15, 2019, the Company, entered into a Third Amended and Restated Credit Agreement (the Amended Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and the other lenders party thereto, which further amended and restated the Company’s Second Amended and Restated Credit Agreement dated as of January 26, 2018.
The Amended Credit Agreement increased capacity to $400 million compared to $300 million in the previous facility and extended the maturity date to October 15, 2024. Furthermore, the Amended Credit Agreement provided for an enhanced asset base with reappraised fixed assets and investment grade foreign accounts receivable collateral in the borrowing base, improved interest rate spread pricing by 50 basis points, and reduced the unused commitment fee to a fixed 25 basis points from the previous 37.5 to 50 basis point range.
23
Additional Liquidity Considerations
The following represents a summary of key liquidity measures under the Amended Credit Agreement as of September 30, 2020 and December 31, 2019:
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Cash and cash equivalents |
|
$ |
74.8 |
|
|
$ |
27.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement: |
|
|
|
|
|
|
|
|
|
Maximum availability |
|
$ |
400.0 |
|
|
$ |
400.0 |
|
|
Suppressed availability(1) |
|
|
(171.0 |
) |
|
|
(103.0 |
) |
|
Availability |
|
|
229.0 |
|
|
|
297.0 |
|
|
Amount borrowed |
|
|
(20.0 |
) |
|
|
(90.0 |
) |
|
Letter of credit obligations |
|
|
(3.8 |
) |
|
|
(3.8 |
) |
|
Availability not borrowed |
|
$ |
205.2 |
|
|
$ |
203.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liquidity |
|
$ |
280.0 |
|
|
$ |
230.3 |
|
(1) As of September 30, 2020, and December 31, 2019, TimkenSteel had less than $400 million in collateral assets to borrow against.
Our principal sources of liquidity are cash and cash equivalents, cash flows from operations and available borrowing capacity under our credit agreement. As of September 30, 2020, taking into account our view of automotive, industrial, and energy market demands for our products, and our 2020 operating and long-range plan, we believe that our cash balance as of September 30, 2020, projected cash generated from operations, and borrowings available under the Amended Credit Agreement, will be sufficient to satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations, including servicing our debt obligations, for at least the next twelve months.
The full extent to which the COVID-19 pandemic will impact our operations and financial results is uncertain and ultimately will depend on, among many other factors, the duration of the pandemic, further Federal and State government actions and the speed of economic recovery. While the negative impact on the remainder of the year and beyond remains unknown, at a minimum, we expect customer demand in the COVID-19 environment will continue to be lower in the fourth quarter of 2020 in comparison to the prior year fourth quarter. To the extent our liquidity needs prove to be greater than expected or cash generated from operations is less than anticipated, and cash on hand or credit availability is insufficient, we would seek additional financing to provide additional liquidity. We regularly evaluate our potential access to the equity and debt capital markets as sources of liquidity and we believe additional financing would likely be available if necessary, although we can make no assurance as to the form or terms of any such financing. We would also consider additional cost reductions and restructuring, changes in working capital management and further reductions of capital expenditures. Regardless, we will continue to evaluate additional financing or may seek to refinance outstanding borrowings under the Amended Credit Agreement to provide us with additional flexibility and liquidity. Any additional financing beyond that incurred to refinance existing debt would increase our overall debt and could increase interest expense.
On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, an economic stimulus package intended to provide support, principally in the form of tax benefits and additional liquidity, to companies and individuals negatively impacted by the COVID-19 pandemic. Although the majority of the provisions included in the CARES Act did not immediately benefit the Company from a cash tax perspective due to its significant net operating losses, the Company has taken advantage of the deferral of the employer share (6.2% of employee wages) of Social Security payroll taxes that would otherwise have been owed from the date of enactment of the legislation through December 31, 2020, as afforded by the Act. Through September 30, 2020, the Company deferred approximately $4.3 million of payroll taxes as permitted by the CARES Act. Payroll tax deferrals in the fourth quarter of 2020 are expected to total $2 million to $3 million, all of which will be paid in two equal installments at December 31, 2021 and December 31, 2022. The Company is currently evaluating the potential benefit related to the Employee Retention Credit and intends to file for this credit in the fourth quarter of 2020.
For additional details regarding the Amended Credit Agreement and the Convertible Notes, please refer to “Note 14 - Financing Arrangements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
24
Cash Flows
The following table reflects the major categories of cash flows for the nine months ended September 30, 2020 and 2019. For additional details, please refer to the unaudited Consolidated Statements of Cash Flows included in this quarterly report.
|
|
|
Nine Months Ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Net cash provided (used) by operating activities |
|
$ |
121.0 |
|
|
$ |
24.3 |
|
|
Net cash provided (used) by investing activities |
|
|
(3.0 |
) |
|
|
(21.7 |
) |
|
Net cash provided (used) by financing activities |
|
|
(70.3 |
) |
|
|
(5.8 |
) |
|
Increase (Decrease) in Cash and Cash Equivalents |
|
$ |
47.7 |
|
|
$ |
(3.2 |
) |
Operating activities
Net cash provided by operating activities for the nine months ended September 30, 2020 was $121.0 million compared to net cash provided of $24.3 million for the nine months ended September 30, 2019. The increase in cash provided by operating activities of $96.7 million was primarily due to management actions to improve working capital as well as the impact of lower customer demand and production levels as compared to the same period in the prior year. Refer to the unaudited Consolidated Statements of Cash Flows for additional information.
Investing activities
Net cash used by investing activities for the nine months ended September 30, 2020 was $3.0 million, as compared to net cash used of $21.7 million for the nine months ended September 30, 2019. Cash used by investing activities in the first nine months of 2020 decreased as compared to the same period in 2019 primarily due to lower capital expenditures and proceeds from sales of property, plant and equipment.
The Company expects its capital expenditures in 2020 to be within its previously stated range of $15 million to $20 million (of which approximately $6 million relates to growth initiatives and continuous improvement). The Company has no material capital expenditure plans or commitments beyond 2020 at this time.
Financing activities
Net cash used by financing activities for the nine months ended September 30, 2020 was $70.3 million compared to net cash used by financing activities of $5.8 million for the nine months ended September 30, 2019, primarily due to higher repayments on credit agreements in 2020 as compared to the same period in 2019.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We review our critical accounting policies throughout the year.
New Accounting Guidance
See “Note 2 - Recent Accounting Pronouncements” in the Notes to the unaudited Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
Certain statements set forth in this Quarterly Report on Form 10-Q (including our forecasts, beliefs and expectations) that are not historical in nature are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, Management’s Discussion and Analysis of Financial Condition and Results of Operations contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “outlook,” “intend,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or other similar words, phrases or expressions that convey the uncertainty of future events or outcomes. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-Q. We caution readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of us due to a variety of factors, such as:
|
|
• |
deterioration in world economic conditions, or in economic conditions in any of the geographic regions in which we conduct business, including additional adverse effects from global economic slowdown, terrorism or hostilities. This includes: political risks associated with the potential instability of governments and legal systems in countries in which we or our customers conduct business, and changes in currency valuations; |
|
|
• |
the effects of fluctuations in customer demand on sales, product mix and prices in the industries in which we operate. This includes: our ability to respond to rapid changes in customer demand; the effects of customer bankruptcies or liquidations; the impact of changes in industrial business cycles; and whether conditions of fair trade exist in the U.S. markets; |
25
|
|
• |
the potential impact of the COVID-19 pandemic on our operations and financial results, including cash flows and liquidity; |
|
|
• |
competitive factors, including changes in market penetration; increasing price competition by existing or new foreign and domestic competitors; the introduction of new products by existing and new competitors; and new technology that may impact the way our products are sold or distributed; |
|
|
• |
changes in operating costs, including the effect of changes in our manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; availability of raw materials and energy; our ability to mitigate the impact of fluctuations in raw materials and energy costs and the effectiveness of our surcharge mechanism; changes in the expected costs associated with product warranty claims; changes resulting from inventory management, cost reduction initiatives and different levels of customer demands; the effects of unplanned work stoppages; and changes in the cost of labor and benefits; |
|
|
• |
the success of our operating plans, announced programs, initiatives and capital investments; and our ability to maintain appropriate relations with unions that represent our associates in certain locations in order to avoid disruptions of business; |
|
|
• |
unanticipated litigation, claims or assessments, including claims or problems related to intellectual property, product liability or warranty, and environmental issues and taxes, among other matters; |
|
|
• |
the availability of financing and interest rates, which affect our cost of funds and/or ability to raise capital, including our ability to refinance and/or repay prior to or at maturity the Convertible Notes; our pension obligations and investment performance; and/or customer demand and the ability of customers to obtain financing to purchase our products or equipment that contain our products; and the amount of any dividend declared by our Board of Directors on our common shares; |
|
|
• |
the overall impact of the pension and postretirement mark-to-market accounting; and |
|
|
• |
those items identified under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 and as updated herein. |
You are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results, and that the above list should not be considered to be a complete list. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our borrowings include both fixed and variable-rate debt. The variable debt consists principally of borrowings under our Credit Agreement. We are exposed to the risk of rising interest rates to the extent we fund our operations with these variable-rate borrowings. As of September 30, 2020, we have $102.2 million of aggregate debt outstanding, of which $20 million consists of debt with variable interest rates. Based on the amount of outstanding debt with variable-rate interest, a 1% rise in interest rates would result in an increase in interest expense of $0.2 million annually.
Foreign Currency Exchange Rate Risk
Fluctuations in the value of the U.S. dollar compared to foreign currencies may impact our earnings. Geographically, our sales are primarily made to customers in the United States. Currency fluctuations could impact us to the extent they impact the currency or the price of raw materials in foreign countries in which our competitors operate or have significant sales.
Commodity Price Risk
In the ordinary course of business, we are exposed to market risk with respect to commodity price fluctuations, primarily related to our purchases of raw materials and energy, principally scrap steel, other ferrous and non-ferrous metals, alloys, natural gas and electricity. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing business. We utilize a raw material surcharge as a component of pricing steel to pass through the cost increases of scrap, alloys and other raw materials, as well as natural gas. From time to time, we may use financial instruments to hedge a portion of our exposure to price risk related to natural gas and electricity purchases. In periods of stable demand for our products, the surcharge mechanism has worked effectively to reduce the normal time lag in passing through higher raw material costs so that we can maintain our gross margins. When demand and cost of raw materials are lower, however, the surcharge impacts sales prices to a lesser extent.
26
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
(b) Changes in Internal Control Over Financial Reporting
During the Company’s most recent fiscal quarter, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of our management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Canton, Ohio U.S. Environmental Protection Agency Notice of Violation
The U.S. Environmental Protection Agency (EPA) issued two related Notices of Violation (NOV) to TimkenSteel on August 5, 2014 and November 2, 2015, respectively. Those matters were settled pursuant to a Consent Agreement and Final Order (CAFO) effective on August 17, 2020 and an Administrative Consent Order (ACO) effective on August 13, 2020. Pursuant to the CAFO, the company paid a civil penalty of $0.35 million on or about August 20, 2020, and under the ACO the company committed to make approximately $1.0 million in clean-air related capital improvements, principally at the Harrison manufacturing facility, within one year from the effective date of the ACO.
ITEM 1A. RISK FACTORS
We are subject to various risks and uncertainties in the course of our business. The discussion of such risks and uncertainties may be found under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC.
Risks Related to COVID-19
The COVID-19 pandemic could have a material, adverse impact on our operations and financial results including cash flows and liquidity.
The COVID-19 pandemic has had a negative impact on our 2020 results of operations. Although it is not possible to predict the ultimate impact of COVID-19, including on our business, results of operations, financial position or cash flows, such impacts that may be material include, but are not limited to: (i) reduced sales and profit levels; (ii) slower collection of accounts receivable and potential increases in uncollectible accounts receivable; (iii) increased operational risks as a result of manufacturing facility disruptions; (iv) delays and disruptions in the availability of and timely delivery of materials and components used in our operations, as well as increased costs for such material and components, and (v) increased cybersecurity risks including vulnerability to security breaches, information technology disruptions and other similar events as a result of a substantial number of employees utilizing remote work arrangements. We will continue to closely monitor the impact of the COVID-19 pandemic on our Company.
The effects of the COVID-19 pandemic also may impact other risk factors previously disclosed in Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. This impact could be to cause previously disclosed risks to occur or to increase the severity of the negative affect inherent in those other risk factors.
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ITEM 6. EXHIBITS
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Exhibit Number |
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Exhibit Description |
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10.1* |
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31.1* |
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31.2* |
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32.1** |
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101.INS* |
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Inline XBRL Instance Document. |
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101.SCH* |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.PRE* |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.CAL* |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB* |
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Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.DEF* |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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* |
Filed herewith. |
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** |
Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TIMKENSTEEL CORPORATION |
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Date: |
October 29, 2020 |
/s/Kristopher R. Westbrooks |
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Kristopher R. Westbrooks Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
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