Notes to Unaudited Consolidated Financial Statements
(dollars in millions, except per share data)
Note
1
-
Company and Basis of Presentation
The accompanying Unaudited Consolidated Financial Statements have been prepared 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, 2016
.
TimkenSteel Corporation (the Company or TimkenSteel) manufactures alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately
2 million
tons and shipment capacity of
1.5 million
tons. TimkenSteel’s portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes) and value-add solutions, such as precision steel components. In addition, TimkenSteel supplies machining and thermal treatment services, as well as manages raw material recycling programs, which are used as a feeder system for the Company’s melt operations. The Company’s products and services are used in a diverse range of demanding applications in the following market sectors: oil and gas; oil country tubular goods (OCTG); automotive; industrial equipment; mining; construction; rail; aerospace and defense; heavy truck; agriculture; and power generation.
The SBQ bars and tubes production processes take place at the Company’s Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars and seamless mechanical tubes the Company produces and includes
three
manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. TimkenSteel’s value-add solutions production processes take place at
three
downstream manufacturing facilities: TimkenSteel Material Services (Houston, TX), Tryon Peak (Columbus, NC), and St. Clair (Eaton, OH). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of the Company’s market sectors. As a result, investments in the Company’s facilities and resource allocation decisions affecting the Company’s operations are designed to benefit the overall business of the Company, not any specific aspect of the business.
Presentation
Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal
2017
presentation.
Change in Accounting Principle
On December 31, 2016, TimkenSteel voluntarily changed its accounting principle for recognizing actuarial gains and losses and expected returns on plan assets for its defined benefit pension and other postretirement benefit plans. Prior to 2016, the Company amortized, as a component of pension and other postretirement expense, unrecognized actuarial gains and losses (included within accumulated other comprehensive income (loss)) over the average remaining service period of active employees expected to receive benefits under the plan, or average remaining life expectancy of inactive participants when all or almost all of plan participants are inactive. The Company historically has calculated the market-related value of plan assets based on a
5
-year market adjustment. The value was determined by adjusting the fair value of plan assets to reflect the investment gains and losses during each of the last
5
years. The difference between the expected return on assets and actual return on assets was recognized at the rate of
20%
per year (e.g., recognized over
five
years). Under the new principle, actuarial gains and losses are immediately recognized through net periodic benefit cost in the Statement of Operations upon the annual remeasurement at December 31, or on an interim basis as triggering events warrant remeasurement. In addition, the Company changed its accounting for measuring the market-related value of plan assets from a calculated amount (based on a
five
-year smoothing of asset returns) to fair value. The Company believes these changes are preferable, as they result in an accelerated recognition of changes in assumptions and market return on plan assets, as compared to the minimum amortization approach and market-related value of plan assets (i.e. delayed approach). Additionally, the Company believes the new accounting principles provide a better representation of the operating results of the Company and the impact of its benefit obligations (through the income statement) in the period when changes occur.
These changes have been applied retrospectively to prior periods beginning with the formation of the TimkenSteel pension and postretirement benefit plans during the second quarter of 2014. The cumulative effect of the change in accounting principles resulted in a reduction of additional paid in capital of $
229.4 million
as of the date of establishment of the TimkenSteel pension and other postretirement plans. For further information refer to our Annual Report on Form 10-K for the year ended
December 31, 2016
filed with the SEC.
Note
2
-
Recent Accounting Pronouncements
Adoption of New Accounting Standards
The Company adopted the following Accounting Standard Updates (ASU) during the
six months ended
June 30, 2017
. With the exception of ASU 2017-07, which is discussed below, the adoption of these standards did not have a material impact on the Unaudited Consolidated Financial Statements or the related Notes to the Unaudited Consolidated Financial Statements.
|
|
|
Standard
|
|
|
|
2015-11
|
Inventory: Simplifying the Measurement of Inventory (Topic 330)
|
2016-15
|
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force)
|
2016-16
|
Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740)
|
2017-07
|
Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715)
|
In the first quarter of 2017, the FASB issued and the Company early adopted ASU 2017-07, “Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715).” This ASU is effective for annual periods beginning after December 31, 2018, with early adoption permitted. This ASU requires entities to present non-service cost components of net periodic benefit cost in a caption below operating loss and provides that only service cost is eligible to be capitalized in inventory or construction of an asset. This ASU requires retrospective application of the change in the statement of operations and prospective application for the capitalization of service cost in assets. This ASU permits previously disclosed components of net benefit costs as an estimation basis for applying the retrospective presentation as a practical expedient. Utilizing the practical expedient approach, based on amounts previously disclosed, the Company reclassified non-service components of net periodic benefit cost from cost of products sold and selling, general and administrative expenses, respectively, into other income, net on the Unaudited Consolidated Statements of Operations. See
Note 9 - Retirement and Postretirement Plans
for additional information.
Accounting Standards Issued But Not Yet Adopted
In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718), Scope of Modification Accounting. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. This ASU shall be applied prospectively to awards modified on or after the adoption date. It is effective for annual periods beginning after December 31, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. TimkenSteel does not expect this ASU to have a material impact on its results of operations or financial condition.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations - Clarifying the Definition of a Business.” This guidance clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. It is effective for annual periods beginning after December 31, 2017. TimkenSteel will apply this ASU to business combinations effective after January 1, 2018, as applicable.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU changes how entities will measure credit losses for most financial assets, including trade and other receivables. This guidance will replace the current incurred loss approach with an expected loss model. It is effective for annual periods beginning after December 31, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018 and interim periods therein. TimkenSteel is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for operating leases, and requires additional quantitative and qualitative disclosures. It is effective for annual reporting periods beginning after December 15, 2018. The Company regularly enters into operating leases. TimkenSteel is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provides guidance for revenue recognition and will supersede Topic 605, “Revenue Recognition,” and most industry-specific guidance. Under ASU 2014-09 and the subsequently issued amendments, the core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Additional disclosures will be required about the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. This standard is effective for reporting periods after December 15, 2017. TimkenSteel is currently reviewing its significant customer pricing agreements and associated revenue streams, accounting policies, systems and related internal controls in anticipation of adopting ASU 2014-09 as of January 1, 2018. Based on the analysis completed to date, the Company’s preliminary expectation is that this standard will not materially impact the amount or timing of revenue recognized. TimkenSteel anticipates adopting this standard using the modified retrospective approach.
Note
3
-
Inventories
The components of inventories, net as of
June 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Inventories, net:
|
|
|
|
Manufacturing supplies
|
|
$35.0
|
|
|
|
$37.9
|
|
Raw materials
|
25.6
|
|
|
16.2
|
|
Work in process
|
94.1
|
|
|
58.6
|
|
Finished products
|
53.0
|
|
|
59.6
|
|
Subtotal
|
207.7
|
|
|
172.3
|
|
Allowance for surplus and obsolete inventory
|
(8.4
|
)
|
|
(8.1
|
)
|
Total Inventories, net
|
|
$199.3
|
|
|
|
$164.2
|
|
Inventories are valued at the lower of cost or market, with approximately
64%
valued by the LIFO method, and the remaining inventories, including manufacturing supplies inventory as well as international (outside the United States) inventories, valued by FIFO, average cost or specific identification methods.
An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation.
The LIFO reserve as of
June 30, 2017
and
December 31, 2016
was
$49.3 million
and
$44.6 million
, respectively. TimkenSteel projects that its LIFO reserve will increase for the year ending
December 31, 2017
due primarily to higher anticipated raw material costs and inventory quantities.
Note
4
-
Property, Plant and Equipment
The components of property, plant and equipment, net as of
June 30, 2017
and
December 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Property, Plant and Equipment, net:
|
|
|
|
Land
|
|
$13.4
|
|
|
|
$13.3
|
|
Buildings and improvements
|
421.9
|
|
|
420.6
|
|
Machinery and equipment
|
1,363.1
|
|
|
1,352.0
|
|
Construction in progress
|
51.4
|
|
|
63.9
|
|
Subtotal
|
1,849.8
|
|
|
1,849.8
|
|
Less allowances for depreciation
|
(1,136.1
|
)
|
|
(1,107.9
|
)
|
Property, Plant and Equipment, net
|
|
$713.7
|
|
|
|
$741.9
|
|
Total depreciation expense was
$34.2 million
and
$33.7 million
for the
six months ended
June 30, 2017
and
2016
, respectively. TimkenSteel recorded capitalized interest related to construction projects of
$0.3 million
and
$0.4 million
for the
six months ended
June 30, 2017
and
2016
, respectively. During the three and
six months ended
June 30, 2017
, TimkenSteel recorded impairment charges of
$0.4 million
in the caption cost of products sold on the Unaudited Consolidated Statements of
Operations, related to the discontinued use of certain assets. There were
no
impairment charges recorded during the three or
six months ended
June 30,
2016
.
Note
5
-
Intangible Assets
The components of intangible assets, net as of
June 30, 2017
and
December 31, 2016
were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Intangible Assets Subject to Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$6.3
|
|
|
$3.9
|
|
|
|
$2.4
|
|
|
|
$6.3
|
|
|
|
$3.7
|
|
|
|
$2.6
|
|
Technology use
|
9.0
|
|
|
5.6
|
|
|
3.4
|
|
|
9.0
|
|
|
5.2
|
|
|
3.8
|
|
Capitalized software
|
59.1
|
|
|
42.7
|
|
|
16.4
|
|
|
58.9
|
|
|
40.3
|
|
|
18.6
|
|
Total Intangible Assets
|
|
$74.4
|
|
|
|
$52.2
|
|
|
|
$22.2
|
|
|
|
$74.2
|
|
|
|
$49.2
|
|
|
|
$25.0
|
|
Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives. Amortization expense for intangible assets for the
six months ended
June 30, 2017
and
2016
was
$3.6 million
and
$3.4 million
, respectively.
Note
6
-
Financing Arrangements
Convertible Notes
In
May 2016
, the Company issued
$75.0 million
aggregate principal amount of Convertible Senior Notes, and an additional
$11.3 million
principal amount to cover over-allotments (Convertible Notes). The Indenture for the Convertible Notes dated May 31, 2016, which was filed with the Securities and Exchange Commission as an exhibit to a Form 8-K filed on May 31, 2016, contains a complete description of the terms of the Convertible Notes. The key terms are as follows:
Maturity Date:
June 1, 2021
unless repurchased or converted earlier
Interest Rate:
6.0%
cash interest per year
Interest Payments Dates:
June 1
and
December 1
of each year, beginning on
December 1, 2016
Initial Conversion Price: Approximately
$12.58
per common share of the Company
Initial Conversion Rate:
79.5165
common shares per
$1,000
principal amount of Notes
The net proceeds to the Company from the offering were
$83.2 million
, after deducting the initial underwriters’ discount and fees and the offering expenses payable by the Company. The Company used the net proceeds to repay a portion of the amounts outstanding under the Amended Credit Agreement.
The components of the Convertible Notes as of
June 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Principal
|
|
$86.3
|
|
|
|
$86.3
|
|
Less: Debt issuance costs, net of amortization
|
(1.9
|
)
|
|
(2.1
|
)
|
Less: Debt discount, net of amortization
|
(16.2
|
)
|
|
(17.8
|
)
|
Convertible notes, net
|
|
$68.2
|
|
|
|
$66.4
|
|
The initial value of the principal amount recorded as a liability at the date of issuance was
$66.9 million
, using an effective interest rate of
12.0%
. The remaining
$19.4 million
of principal amount was allocated to the conversion feature and recorded as a component of shareholders’ equity at the date of issuance. This amount represents a discount to the debt to be amortized through interest expense using the effective interest method through the maturity of the Convertible Notes.
Transaction costs were allocated to the liability and equity components based on their relative values. Transaction costs attributable to the liability component of
$2.4 million
are amortized to interest expense over the term of the Convertible Notes, and transaction costs attributable to the equity component of
$0.7 million
are included in shareholders’ equity.
The following table sets forth total interest expense recognized related to the Convertible Notes:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
2016
|
Contractual interest expense
|
|
$1.3
|
|
|
|
$0.4
|
|
|
|
$2.6
|
|
|
$0.4
|
|
Amortization of debt issuance costs
|
0.1
|
|
|
0.1
|
|
0.1
|
|
0.2
|
|
0.1
|
|
Amortization of debt discount
|
0.8
|
|
|
0.2
|
|
|
1.6
|
|
0.2
|
|
Total
|
|
$2.2
|
|
|
|
$0.7
|
|
|
|
$4.4
|
|
|
$0.7
|
|
The fair value of the Convertible Notes was approximately
$149.4 million
as of
June 30, 2017
. The fair value of the Convertible Notes, which falls within Level 1 of the fair value hierarchy, is based on the last price traded in
June 2017
.
Holders may convert all or any portion of their Convertible Notes, in multiples of
$1,000
principal amount, at their option at any time prior to the close of business on the business day immediately preceding
March 1, 2021
only under certain circumstances described in the Convertible Notes Indenture, based on the reported sale price of the Company’s common shares for specified trading days as a percentage of the conversion price of the Convertible Notes, and upon the occurrence of specified corporate events. On or after
March 1, 2021
until the business day preceding the maturity date, holders may convert all or any portion of their Convertible Notes, in multiples of
$1,000
principal amount, at their option.
Upon conversion, the Company will pay or deliver, as the case may be, cash, common shares or a combination of cash and common shares, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and common shares, the amount of cash and number of common shares, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a
40
-trading day period.
If the Company undergoes a fundamental change, subject to certain conditions, holders may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to the repurchase date.
Upon certain events of default occurring and continuing (including failure to pay principal or interest on the Convertible Notes when due and payable), the Trustee or the holders of at least
25%
in principal amount may declare
100%
of the principal and accrued and unpaid interest, if any, on all the Convertible Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary,
100%
of the principal and accrued and unpaid interest on the Convertible Notes will become due and payable immediately.
Other Long-Term Debt
The components of other long-term debt as of
June 30, 2017
and
December 31, 2016
were as follows:
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|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.84% as of June 30, 2017)
|
|
$12.2
|
|
|
|
$12.2
|
|
Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.84% as of June 30, 2017)
|
9.5
|
|
|
9.5
|
|
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (0.84% as of June 30, 2017)
|
8.5
|
|
|
8.5
|
|
Amended Credit Agreement, due 2019 (LIBOR plus applicable spread)
|
70.0
|
|
|
40.0
|
|
Total Other Long-Term Debt
|
|
$100.2
|
|
|
|
$70.2
|
|
Amended Credit Agreement
On February 26, 2016, the Company, as borrower, and certain domestic subsidiaries, as subsidiary guarantors, entered into Amendment No. 1 to the Amended and Restated Credit Agreement (as amended by the Amendment, the Amended Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto.
The Amended Credit Agreement provides for a
$265.0 million
asset-based revolving credit facility, including a
$13.3 million
sublimit for the issuance of commercial and standby letters of credit, and a
$26.5 million
sublimit for swingline loans. The availability of borrowings is subject to a borrowing base calculation based upon a valuation of the eligible accounts receivable, inventory and machinery and equipment of TimkenSteel and the subsidiary guarantors, each multiplied by an applicable advance rate. The Amended Credit Agreement includes a block on availability equal to the greater of
$28.9 million
or
12.5%
of the aggregate commitments (except that in the event of a mandatory reduction in the commitments, the block on availability will be equal to the greater of
$20.0 million
or
12.5%
of the aggregate commitments), effectively reducing the Company’s borrowing base by the availability block.
The Amended Credit Agreement contains certain customary covenants, including covenants that limit TimkenSteel’s and its subsidiaries’ ability to, among other things, (i) incur or suffer to exist certain liens, (ii) make investments, (iii) incur or guaranty additional indebtedness, (iv) enter into consolidations, mergers, acquisitions and sales of assets, (v) make distributions and other restricted payments, (vi) change the nature of its business, (vii) engage in transactions with affiliates and (viii) enter into restrictive agreements, including agreements that restrict the ability to incur liens or make distributions. Further, the Amended Credit Agreement contains financial covenants that (i) limit the amount of capital expenditures TimkenSteel may make to
$45.0 million
in fiscal year 2016 and
$50.0 million
in fiscal years thereafter and (ii) require the Company to maintain a minimum specified fixed charge coverage ratio for the year-to-date periods beginning January 1, 2017 and ending June 30, 2017, July 31, 2017 and August 31, 2017. As of
June 30, 2017
, we are in compliance with all covenants.
Borrowings under the Amended Credit Agreement bear interest based on the daily balance outstanding at LIBOR (with no rate floor), plus an applicable margin (varying from
3.00%
to
3.50%
) and an additional
0.75%
on the machinery and equipment component or, in certain cases, an alternate base rate (based on certain lending institutions’ Prime Rate or as otherwise specified in the Amended and Restated Credit Agreement, with no rate floor), plus an applicable margin (varying from
2.00%
to
2.50%
). The Amended Credit Agreement also carries a commitment fee equal to the unused borrowings multiplied by an applicable margin of
0.50%
. The applicable margins are calculated quarterly and vary based on TimkenSteel’s average quarterly availability as set forth in the Amended Credit Agreement. The interest rate under the Amended Credit Agreement was
5.3%
as of
June 30, 2017
. The amount available under the Amended Credit Agreement as of
June 30, 2017
was
$152.4 million
net, after reducing for the block on availability of
$33.1 million
.
Revenue Refunding Bonds
On June 1, 2014, The Timken Company (Timken) purchased, in lieu of redemption, the State of Ohio Water Development Revenue Refunding Bonds (Water Bonds), State of Ohio Air Quality Development Revenue Refunding Bonds (Air Quality Bonds) and State of Ohio Pollution Control Revenue Refunding Bonds (Pollution Control Bonds) (collectively, Bonds). Pursuant to an Assignment and Assumption Agreement dated June 24, 2014 between Timken and TimkenSteel, Timken assigned all of its right, title and interest in and to the loan agreements and the notes associated with the Bonds to, and these obligations were assumed by, TimkenSteel. Additionally, replacement letters of credit were issued for the Water Bonds and the Pollution Control Bonds. The Bonds were remarketed on June 24, 2014 (Remarketing Date) in connection with the conversion of the interest rate mode for the Bonds to the weekly rate and the delivery of the replacement letters of credit, as applicable. TimkenSteel is responsible for payment of the interest and principal associated with the Bonds subsequent to the Remarketing Date.
On September 1, 2016, the Water Bonds were remarketed in connection with the delivery of a replacement letter of credit issued by JP Morgan Chase Bank, N.A. The key terms of the Water Bonds did not change as a result of the remarketing.
All of TimkenSteel’s other long-term debt is variable-rate debt. As such, the carrying value of this debt is a reasonable estimate of fair value as interest rates on these borrowings approximate current market rates, which is considered a Level 2 fair value input as defined by Accounting Standard Codification (ASC) 820, Fair Value Measurements. The valuation of Level 2 is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly.
Advanced Quench-and-Temper Facility
In the second quarter of 2015, TimkenSteel entered into a lease arrangement with the Stark County Port Authority in connection with the construction of a new advanced quench-and-temper facility in Perry Township, Ohio and the issuance of an Industrial Revenue Bond. The bond is held
100%
by TimkenSteel Material Services, LLC (a wholly-owned subsidiary of TimkenSteel) and, accordingly, the obligation under the lease agreement and investment in the Industrial Revenue Bond, as well as the related interest income and expense, are eliminated in the Unaudited Consolidated Financial Statements. As of
June 30,
2017
,
$39.2 million
has been spent on the new advanced quench-and-temper facility and is reported in property, plant and equipment, net in the Unaudited Consolidated Balance Sheets. Of this amount,
$11.8 million
has been financed through the lease arrangement described above.
Note
7
-
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the
six months ended
June 30, 2017
and
2016
by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Postretirement Liability Adjustments
|
|
Total
|
Balance at December 31, 2016
|
|
($7.0
|
)
|
|
|
($2.4
|
)
|
|
|
($9.4
|
)
|
Other comprehensive income before reclassifications, before income tax
|
0.8
|
|
|
—
|
|
|
0.8
|
|
Amounts reclassified from accumulated other comprehensive loss, before income tax
|
—
|
|
|
0.8
|
|
|
0.8
|
|
Income tax benefit
|
—
|
|
|
(0.5
|
)
|
|
(0.5
|
)
|
Net current period other comprehensive income, net of income taxes
|
0.8
|
|
|
0.3
|
|
|
1.1
|
|
Balance at June 30, 2017
|
|
($6.2
|
)
|
|
|
($2.1
|
)
|
|
|
($8.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Postretirement Liability Adjustments
|
|
Total
|
Balance at December 31, 2015
|
|
($5.0
|
)
|
|
|
($2.9
|
)
|
|
|
($7.9
|
)
|
Other comprehensive (loss) income before reclassifications, before income tax
|
(2.3
|
)
|
|
—
|
|
|
(2.3
|
)
|
Amounts reclassified from accumulated other comprehensive loss, before income tax
|
—
|
|
|
0.9
|
|
|
0.9
|
|
Income tax benefit
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Net current period other comprehensive (loss) income, net of income taxes
|
(2.3
|
)
|
|
0.8
|
|
|
(1.5
|
)
|
Balance at June 30, 2016
|
|
($7.3
|
)
|
|
|
($2.1
|
)
|
|
|
($9.4
|
)
|
The amount reclassified from accumulated other comprehensive loss for the pension and postretirement liability adjustment was included in other income, net in the Unaudited Consolidated Statements of Operations. These accumulated other comprehensive loss components are components of net periodic benefit cost. See
Note 9 - Retirement and Postretirement Plans
for additional information.
Note
8
-
Changes in Shareholders' Equity
Changes in the components of shareholders’ equity for the
six months ended
June 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Additional Paid-in Capital
|
|
Retained Deficit
|
|
Treasury Shares
|
|
Accumulated Other Comprehensive Loss
|
Balance at December 31, 2016
|
|
$597.4
|
|
|
|
$845.6
|
|
|
|
($193.9
|
)
|
|
|
($44.9
|
)
|
|
|
($9.4
|
)
|
Net loss
|
(4.0
|
)
|
|
—
|
|
|
(4.0
|
)
|
|
—
|
|
|
—
|
|
Pension and postretirement adjustment, net of tax
|
0.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Foreign currency translation adjustments
|
0.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
Stock-based compensation expense
|
3.4
|
|
|
3.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock option activity
|
0.2
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of treasury shares
|
—
|
|
|
(7.6
|
)
|
|
(0.3
|
)
|
|
7.9
|
|
|
—
|
|
Shares surrendered for taxes
|
(1.2
|
)
|
|
—
|
|
|
—
|
|
|
(1.2
|
)
|
|
—
|
|
Balance at June 30, 2017
|
|
$596.9
|
|
|
|
$841.6
|
|
|
|
($198.2
|
)
|
|
|
($38.2
|
)
|
|
|
($8.3
|
)
|
Note
9
-
Retirement and Postretirement Plans
The components of net periodic benefit cost for the
three and six months ended
June 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2017
|
|
Three Months Ended
June 30, 2016
|
Components of net periodic benefit cost:
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
Service cost
|
|
$4.6
|
|
|
|
$0.4
|
|
|
|
$3.6
|
|
|
|
$0.4
|
|
Interest cost
|
12.3
|
|
|
2.1
|
|
|
13.5
|
|
|
2.4
|
|
Expected return on plan assets
|
(17.7
|
)
|
|
(1.3
|
)
|
|
(17.7
|
)
|
|
(1.4
|
)
|
Amortization of prior service cost
|
0.1
|
|
|
0.3
|
|
|
0.1
|
|
|
0.3
|
|
Net Periodic Benefit Cost
|
|
($0.7
|
)
|
|
|
$1.5
|
|
|
|
($0.5
|
)
|
|
|
$1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2016
|
Components of net periodic benefit cost:
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
Service cost
|
|
$9.2
|
|
|
|
$0.8
|
|
|
|
$7.8
|
|
|
|
$0.8
|
|
Interest cost
|
24.5
|
|
|
4.2
|
|
|
26.6
|
|
|
4.7
|
|
Expected return on plan assets
|
(35.2
|
)
|
|
(2.7
|
)
|
|
(35.5
|
)
|
|
(2.9
|
)
|
Amortization of prior service cost
|
0.2
|
|
|
0.6
|
|
|
0.3
|
|
|
0.6
|
|
Net Periodic Benefit Cost
|
|
($1.3
|
)
|
|
|
$2.9
|
|
|
|
($0.8
|
)
|
|
|
$3.2
|
|
The service cost component is included in cost of products sold and selling, general and administrative expenses. The non-service cost components of net periodic benefit costs are included in other income, net in the Unaudited Consolidated Statements of Operations. The Company utilized the practical expedient approach, based on amounts previously disclosed, to reclassify non-service components of net periodic benefit cost from cost of products sold and selling, general and administrative expenses, into other income, net on the Unaudited Consolidated Statements of Operations.
The following table sets forth the amounts reclassified into other income, net for the three and
six months ended
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
Six
|
|
|
Months ended June 30, 2016
|
Cost of products sold
|
|
|
$2.5
|
|
|
|
$5.6
|
|
Selling, general and administrative expenses
|
|
0.3
|
|
|
0.6
|
|
|
|
|
$2.8
|
|
|
|
$6.2
|
|
Note
10
-
Earnings 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 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
six months ended
June 30, 2017
and the
three and six months ended
June 30, 2016
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 six months ended
June 30, 2017
and 2016 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 six months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss) for basic and diluted earnings per share
|
|
$1.3
|
|
|
|
($6.6
|
)
|
|
|
($4.0
|
)
|
|
|
($16.3
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
44,399,070
|
|
|
44,220,496
|
|
|
44,346,422
|
|
|
44,212,796
|
|
Dilutive effect of stock-based awards
|
431,244
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average shares outstanding, diluted
|
44,830,314
|
|
|
44,220,496
|
|
|
44,346,422
|
|
|
44,212,796
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$0.03
|
|
|
|
($0.15
|
)
|
|
|
($0.09
|
)
|
|
|
($0.37
|
)
|
Diluted earnings (loss) per share
|
|
$0.03
|
|
|
|
($0.15
|
)
|
|
|
($0.09
|
)
|
|
|
($0.37
|
)
|
Note
11
-
Income Taxes
TimkenSteel’s provision (benefit) 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
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Provision (benefit) for income taxes
|
|
$0.8
|
|
|
|
($3.8
|
)
|
|
|
$1.1
|
|
|
|
($10.2
|
)
|
Effective tax rate
|
39.6
|
%
|
|
36.5
|
%
|
|
(39.1
|
)%
|
|
38.5
|
%
|
For the six months ended
June 30, 2017
and the year ended December 31, 2016, operating losses generated in the U.S. resulted in a decrease in the carrying value of the Company’s U.S. net deferred tax liability to the point that would result in a net U.S. deferred tax asset at
June 30, 2017
and December 31, 2016. In light of TimkenSteel’s recent operating performance in the U.S. and current industry conditions, the Company assessed, based upon all available evidence, and concluded that it was more likely than not that it would not realize its U.S. deferred tax assets. As a result, in the fourth quarter of 2016, the Company recorded full valuation allowance on its net U.S. deferred tax asset of $
15.6 million
. Going forward, the need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s effective tax rate. The Company will maintain a 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. The increase in the effective tax rate for the three and six months ended
June 30, 2017
is primarily due to a discrete charge of approximately
$1.0 million
recorded in the second quarter of 2017.
Note
12
-
Contingencies
TimkenSteel has a number of loss exposures incurred in the ordinary course of business, such as environmental claims, product warranty claims, and litigation. Establishing loss reserves for these matters requires management’s estimate and judgment regarding risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances. As of
June 30, 2017
and December 31,
2016
, TimkenSteel had a
$0.6 million
and
$0.2 million
contingency reserve, respectively, related to loss exposures incurred in the ordinary course of business.
Environmental Matters
From time to time, TimkenSteel may be a party to lawsuits, claims or other proceedings related to environmental matters and/or may receive notices of potential violations of environmental laws and regulations from the U.S. Environmental Protection Agency (EPA) and similar state or local authorities. Accruals related to such environmental matters represent management’s best
estimate of the fees and costs associated with these matters. Although it is not possible to predict with certainty the outcome of such matters, management believes that their ultimate dispositions should not have a material adverse effect on TimkenSteel’s financial position, cash flows, or results of operations. As of
June 30, 2017
and December 31, 2016, TimkenSteel had a
$0.6 million
reserve for such environmental matters as other current and non-current liabilities on the Unaudited Consolidated Balance Sheets.
The following is a rollforward of the accrual related to environmental matters for the
six months ended
June 30, 2017
and 2016:
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2017
|
2016
|
Beginning Balance, January 1
|
|
$0.6
|
|
|
$0.8
|
|
Expenses
|
0.1
|
|
—
|
|
Payments
|
(0.1
|
)
|
(0.2
|
)
|
Ending Balance, June 30
|
|
$0.6
|
|
|
$0.6
|
|