Notes to Consolidated Financial Statements
(dollars in millions, except per share data)
Note
1
-
Company and Basis of Presentation
TimkenSteel Corporation (the Company or TimkenSteel) manufactures alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately
2 million
tons and shipment capacity of
1.5 million
tons. TimkenSteel’s portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes) 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; automotive; industrial equipment; mining; construction; rail; aerospace and defense; heavy truck; agriculture; and power generation.
TimkenSteel became an independent company as a result of the distribution on June 30, 2014 by The Timken Company (Timken) of
100
percent of the outstanding common shares of TimkenSteel to Timken shareholders. Each Timken shareholder of record as of the close of business on June 23, 2014 received
one
TimkenSteel common share for every
two
Timken common shares held as of the record date for the distribution. TimkenSteel common shares trade on the New York Stock Exchange under the ticker symbol “TMST.”
Prior to the spinoff on June 30, 2014, what is now TimkenSteel was made up of Timken’s steelmaking operations and operated as a reportable segment of Timken. The accompanying Consolidated Financial Statements for periods prior to the separation have been prepared from Timken’s historical accounting records and are presented on a stand-alone basis as if the operations had been conducted independently from Timken. Accordingly, Timken and its subsidiaries’ net investment in the operations is shown as net parent investment in lieu of stockholders’ equity in the Consolidated Financial Statements. The Consolidated Financial Statements for periods prior to the separation include the historical results of operations, assets and liabilities of the legal entities that are considered to comprise TimkenSteel. The historical results of operations and cash flows of TimkenSteel presented in the Consolidated Financial Statements for periods prior to the separation may not be indicative of what they would have been had TimkenSteel actually been a separate stand-alone entity during such periods, nor are they necessarily indicative of TimkenSteel’s future results of operations and cash flows.
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.
Effective January 1, 2016, TimkenSteel eliminated its segment reporting as a result of organizational changes made in the second half of 2015, in addition to the integrated nature of the Company’s business as described above. These organizational changes were made to better align resources to support the business strategy of operating in a leaner, more efficient environment. Specifically, the Company has centralized its customer-facing activities under
one
leadership role and eliminated the former
two
segment operating structure. Since that change, the Company is organized in a centralized manner based on functionality. As a result, TimkenSteel conducts its business activities and reports financial results as
one
business segment.
The presentation of financial results as
one
reportable segment is consistent with the way the Company operates its business under the realigned organization and is consistent with the manner in which the Chief Operating Decision Maker (CODM) evaluates performance and makes resource and operating decisions for the business as described above. Furthermore, the Company notes that monitoring financial results as
one
reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of the operations.
Presentation
Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal
2016
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.
The following table reflects the effect of the change in accounting principles on the 2016 Consolidated Financial Statements (dollars in millions, except per share data):
|
|
|
|
|
|
|
|
Increase (decrease)
|
|
|
Statement of Operations
|
|
|
Cost of products sold
|
|
$44.1
|
|
|
Selling, general and administrative expenses
|
5.5
|
|
|
Provision for income taxes
|
—
|
|
|
Net (loss) income
|
(49.6
|
)
|
|
Diluted earnings (loss) per share
|
|
($1.12
|
)
|
|
|
|
|
|
|
|
|
Statement of Comprehensive (Loss) Income, net of tax
|
|
|
Foreign currency translation adjustments
|
|
$2.3
|
|
|
Pension and postretirement adjustment
|
47.3
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Additional paid in capital
|
|
($229.4
|
)
|
|
Retained deficit
|
|
($80.5
|
)
|
|
Accumulated other comprehensive loss
|
309.9
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows
|
|
|
|
|
|
Net (loss) income
|
|
($49.6
|
)
|
|
Pension and postretirement expense
|
49.6
|
|
Separately, the 2015 financial statements have been restated to correct immaterial errors related to deferred tax expense recognized on 2015 other comprehensive income associated with the Company’s U.K. pension plan ($
4.8 million
) and to correct the amount associated with the fair value of the Company’s U.K. pension plan ($
0.7 million
). The correction of these immaterial errors did not impact the 2015 statement of operations.
The following tables reflect the impact to the financial statement line items as a result of the change in accounting principles and the correction of immaterial errors discussed above for the prior periods presented in the accompanying financial statements (dollars in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
2015
|
|
2014
|
|
|
As Reported
|
Adjustments
|
Adjusted
|
|
As Reported
|
Adjustments
|
Adjusted
|
|
Net sales
|
|
$1,106.2
|
|
|
$—
|
|
|
$1,106.2
|
|
|
|
$1,674.2
|
|
|
$—
|
|
|
$1,674.2
|
|
|
Cost of products sold
|
1,097.4
|
|
(37.4
|
)
|
1,060.0
|
|
|
1,400.4
|
|
72.7
|
|
1,473.1
|
|
|
Gross Profit
|
8.8
|
|
37.4
|
|
46.2
|
|
|
273.8
|
|
(72.7
|
)
|
201.1
|
|
|
Selling, general and administrative expenses
|
111.0
|
|
(5.9
|
)
|
105.1
|
|
|
112.1
|
|
16.8
|
|
128.9
|
|
|
Impairment and restructuring charges
|
6.5
|
|
—
|
|
6.5
|
|
|
1.2
|
|
—
|
|
1.2
|
|
|
Operating (Loss) Income
|
(108.7
|
)
|
43.3
|
|
(65.4
|
)
|
|
160.5
|
|
(89.5
|
)
|
71.0
|
|
|
Interest expense
|
3.4
|
|
—
|
|
3.4
|
|
|
0.9
|
|
—
|
|
0.9
|
|
|
Other expenses, net
|
2.9
|
|
—
|
|
2.9
|
|
|
1.4
|
|
—
|
|
1.4
|
|
|
(Loss) Income Before Income Taxes
|
(115.0
|
)
|
43.3
|
|
(71.7
|
)
|
|
158.2
|
|
(89.5
|
)
|
68.7
|
|
|
(Benefit) provision for income taxes
|
(42.6
|
)
|
15.9
|
|
(26.7
|
)
|
|
53.8
|
|
(31.2
|
)
|
22.6
|
|
|
Net (Loss) Income
|
|
($72.4
|
)
|
|
$27.4
|
|
|
($45.0
|
)
|
|
|
$104.4
|
|
|
($58.3
|
)
|
|
$46.1
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
($1.63
|
)
|
|
$0.62
|
|
|
($1.01
|
)
|
|
|
$2.29
|
|
|
($1.28
|
)
|
|
$1.01
|
|
|
Diluted (loss) earnings per share
|
|
($1.63
|
)
|
|
$0.62
|
|
|
($1.01
|
)
|
|
|
$2.27
|
|
|
($1.27
|
)
|
|
$1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Comprehensive (Loss) Income, net of tax
|
|
2015
|
|
|
|
2014
|
|
|
As Reported
|
Adjustments
|
Adjusted
|
|
As Reported
|
Adjustments
|
Adjusted
|
|
Net (loss) income
|
|
($72.4
|
)
|
|
$27.4
|
|
|
($45.0
|
)
|
|
|
$104.4
|
|
|
($58.3
|
)
|
|
$46.1
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(1.5
|
)
|
0.4
|
|
(1.1
|
)
|
|
(1.2
|
)
|
0.9
|
|
(0.3
|
)
|
|
Pension and postretirement adjustment
|
35.0
|
|
(29.7
|
)
|
5.3
|
|
|
(58.6
|
)
|
59.2
|
|
0.6
|
|
|
Correction of pension and postretirement adjustment
(1)
|
—
|
|
(4.3
|
)
|
(4.3
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Total pension and postretirement liability adjustments, net of tax
|
35.0
|
|
(34.0
|
)
|
1.0
|
|
|
(58.6
|
)
|
59.2
|
|
0.6
|
|
|
Other comprehensive income (loss), net of tax
|
33.5
|
|
(33.6
|
)
|
(0.1
|
)
|
|
(59.8
|
)
|
60.1
|
|
0.3
|
|
|
Comprehensive (Loss) Income, net of tax
|
|
($38.9
|
)
|
|
($6.2
|
)
|
|
($45.1
|
)
|
|
|
$44.6
|
|
|
$1.8
|
|
|
$46.4
|
|
(1)
Adjustment to correct immaterial errors associated with the fair market value of the Company’s U.K. pension plan and deferred taxes related to other comprehensive income recognized during 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
2015
|
|
|
As Reported
|
Adjustments
|
Adjusted
|
|
Other Assets
|
|
|
|
|
Correction to non-current pension assets
(1)
|
|
$20.0
|
|
|
$0.7
|
|
|
$20.7
|
|
|
|
|
|
|
|
Non-Current Liabilities
|
|
|
|
|
Deferred income taxes
|
|
$26.9
|
|
|
$—
|
|
|
$26.9
|
|
|
Correction to deferred income taxes
(1)
|
—
|
|
5.1
|
|
5.1
|
|
|
Total deferred income taxes
|
|
$26.9
|
|
|
$5.1
|
|
|
$32.0
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
Additional paid-in-capital
|
|
$1,058.2
|
|
|
($229.4
|
)
|
|
$828.8
|
|
|
Retained earnings (deficit)
|
|
($61.7
|
)
|
|
($30.9
|
)
|
|
($92.6
|
)
|
|
Accumulated other comprehensive income
|
|
($263.8
|
)
|
|
$260.2
|
|
|
($3.6
|
)
|
|
Correction to accumulated other comprehensive loss
(1)
|
—
|
|
(4.3
|
)
|
(4.3
|
)
|
|
Total accumulated other comprehensive income
|
|
($263.8
|
)
|
|
$255.9
|
|
|
($7.9
|
)
|
(1)
Adjustment to correct immaterial errors associated with the fair market value of the Company’s U.K. pension plan and deferred taxes related to other comprehensive income recognized during 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
2015
|
|
2014
|
|
|
As Reported
|
Adjustments
|
Adjusted
|
|
As Reported
|
Adjustments
|
Adjusted
|
|
Net (loss) income
|
|
($72.4
|
)
|
|
$27.4
|
|
|
($45.0
|
)
|
|
|
$104.4
|
|
|
($58.3
|
)
|
|
$46.1
|
|
|
Deferred income taxes
|
(41.5
|
)
|
15.9
|
|
(25.6
|
)
|
|
1.4
|
|
(31.2
|
)
|
(29.8
|
)
|
|
Pension and postretirement expense
|
30.7
|
|
(46.2
|
)
|
(15.5
|
)
|
|
14.9
|
|
92.3
|
|
107.2
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Inventories, net
|
119.9
|
|
2.8
|
|
122.7
|
|
|
(66.8
|
)
|
(2.8
|
)
|
(69.6
|
)
|
|
Net Cash Provided by Operating Activities
|
107.1
|
|
—
|
|
107.1
|
|
|
93.9
|
|
—
|
|
93.9
|
|
Note
2
-
Significant Accounting Policies
Basis of Combination:
The Consolidated Financial Statements include the combined assets, liabilities, revenues and expenses related to TimkenSteel as of
December 31, 2016
and
2015
and for the years ended
December 31, 2016
,
2015
and
2014
. All significant intercompany accounts and transactions within TimkenSteel have been eliminated in the preparation of the Consolidated Financial Statements. All significant intercompany transactions with Timken prior to the spinoff are deemed to have been paid in the period the cost was incurred.
Use of Estimates:
The preparation of these Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. These estimates and assumptions are reviewed and updated regularly to reflect recent experience.
Revenue Recognition:
TimkenSteel recognizes revenue when title passes to the customer, which includes related-party sales to Timken and its subsidiaries for the periods prior to spinoff. This occurs at the shipping point except for goods sold by certain of the Company’s foreign entities and certain exported goods, where title passes when the goods reach their destination. Selling prices are fixed based on purchase orders or contractual arrangements. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold in the Consolidated Statements of Operations.
Cash Equivalents:
TimkenSteel considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Allowance for Doubtful Accounts:
TimkenSteel maintains an allowance for doubtful accounts, which represents an estimate of losses expected from the accounts receivable portfolio, to reduce accounts receivable to their net realizable value. The allowance is based upon historical trends in collections and write-offs, management’s judgment of the probability of collecting accounts and management’s evaluation of business risk. TimkenSteel extends credit to customers satisfying pre-defined credit criteria. TimkenSteel believes it has limited concentration of credit risk due to the diversity of its customer base.
Inventories, Net:
Inventories are valued at the lower of cost or market. The majority of TimkenSteel’s domestic inventories are valued by the last-in, first-out (LIFO) method. The remaining inventories, including manufacturing supplies inventory as well as international (outside the U.S.) inventories are valued by the first-in, first-out (FIFO), average cost or specific identification methods. Reserves are established for product inventory that is identified to be surplus and/or obsolete based on future requirements.
Property, Plant and Equipment, Net:
Property, plant and equipment, net are valued at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. The provision for depreciation is computed principally by the straight-line method based upon the estimated useful lives of the assets. The useful lives are approximately
30 years
for buildings and
three
to
20 years
for machinery and equipment.
Intangible Assets, Net:
Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from
three
to
15 years
.
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350-40, “Internal-Use Software,” (ASC 350-40), TimkenSteel capitalizes certain costs incurred for computer software developed or obtained for internal use. TimkenSteel capitalizes substantially all external costs and qualifying internal costs related to the purchase and implementation of software projects used for business operations. Capitalized software costs primarily include purchased software and external consulting fees. Capitalized software projects are amortized over the estimated useful lives of the software.
Long-lived Asset Impairment:
Long-lived assets (including tangible assets and intangible assets subject to amortization) are reviewed for impairment when events or changes in circumstances have occurred indicating that the carrying value of the assets may not be recoverable.
TimkenSteel tests recoverability of long-lived assets at the lowest level for which there are identifiable cash flows that are independent from the cash flows of other assets. Assets and asset groups held and used are measured for recoverability by comparing the carrying amount of the asset or asset group to the sum of future undiscounted net cash flows expected to be generated by the asset or asset group.
Assumptions and estimates about future values and remaining useful lives of TimkenSteel’s long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in TimkenSteel’s business strategy and internal forecasts.
If an asset or asset group is considered to be impaired, the impairment loss that would be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. To determine fair value, TimkenSteel uses internal cash flow estimates discounted at an appropriate interest rate, third party appraisals, as appropriate, and/or market prices of similar assets, when available.
In the years ending
December 31, 2015
and
2014
, TimkenSteel recorded impairment charges of $
0.9 million
and $
1.2 million
respectively, related to the discontinued use of certain long-lived assets.
No
impairment charges were recorded for the year ended
December 31, 2016
.
Product Warranties:
TimkenSteel accrues liabilities for warranties based upon specific claim incidents in accordance with accounting rules relating to contingent liabilities. Should TimkenSteel become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. TimkenSteel had no significant warranty claims for the years ended
December 31, 2016
,
2015
and
2014
.
Income Taxes:
For the periods ending prior to and on June 30, 2014, income taxes, as presented herein, attribute current and deferred income taxes of Timken to the TimkenSteel standalone financial statements in a manner that is systematic, rational and consistent with the asset and liability method prescribed by the FASB ASC Topic 740, “Accounting for Income Taxes” (ASC 740). Accordingly, the TimkenSteel income tax provision was prepared following the “separate return method.” The separate return method applies ASC 740 to the standalone financial statements of each member of the consolidated group as if the group member were a separate taxpayer and a stand-alone enterprise. As a result, actual tax transactions included in the financial statements of Timken may not be included in the Consolidated Financial Statements of TimkenSteel. Similarly, the tax treatment of certain items reflected in the Consolidated Financial Statements of TimkenSteel may not be reflected in the financial statements and tax returns of Timken; therefore, such items as alternative minimum tax, net operating losses, credit carryforwards, and valuation allowances may exist in the stand-alone financial statements that may or may not exist in Timken’s financial statements.
Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. TimkenSteel recognizes valuation allowances against deferred tax assets by tax jurisdiction when it is more likely than not that such assets will not be realized. Accruals for uncertain tax positions are provided for in accordance with ASC 740. TimkenSteel recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.
In general, the taxable income (loss) of various steel entities was included in Timken’s consolidated tax returns, where applicable, in jurisdictions around the world. As such, separate income tax returns were not prepared for any entities of TimkenSteel. Consequently, income taxes currently payable are deemed to have been remitted to Timken, in cash, in the period the liability arose and income taxes currently receivable are deemed to have been received from Timken in the period that a refund could have been recognized by TimkenSteel had TimkenSteel been a separate taxpayer. Accrued U.S. federal, state and certain foreign current income tax balances, including penalties and interest, are treated as being settled without payment as of the end of each year. Therefore, the settlement of the current income tax liability without payment is treated as a Parent contribution and is included in net transfer (to)/from Timken and affiliates in the accompanying Consolidated Statements of Shareholders’ Equity.
Following the spinoff on June 30, 2014, TimkenSteel accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. TimkenSteel recognizes deferred tax assets to the extent TimkenSteel believes these assets are more likely than not to be realized. In making such a determination, TimkenSteel considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If TimkenSteel determines that it would be able to realize deferred tax assets in the future in excess of their net recorded amount, TimkenSteel would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. TimkenSteel records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) TimkenSteel determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, TimkenSteel recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
TimkenSteel recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Statements of Operations. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheets.
Foreign Currency Translation:
Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Gains and losses resulting from foreign currency transactions are included in the Consolidated Statements of Operations. TimkenSteel realized foreign currency exchange losses of $
0.8 million
in 2016,
$1.3 million
in
2015
and
$1.1 million
in
2014
.
Net Parent Investment:
Prior to the spinoff, Timken’s net investment in TimkenSteel was presented as net parent investment in lieu of stockholders’ equity. The Consolidated Statements of Shareholders’ Equity included net cash transfers and other property transfers between Timken and TimkenSteel. Timken performed cash management and other treasury-related functions on a centralized basis for nearly all of its legal entities, which included TimkenSteel. The net parent investment account included assets and liabilities incurred by Timken on behalf of TimkenSteel such as accrued liabilities related to corporate allocations including administrative expenses for legal, accounting, treasury, information technology, human resources and other services. Other assets and liabilities recorded by Timken, whose related income and expense had been pushed down to TimkenSteel, were also included in net parent investment.
All intercompany transactions effected through net parent investment in the accompanying Consolidated Balance Sheets were considered cash receipts and payments and are reflected in financing activities in the accompanying Consolidated Statements of Cash Flows.
The following table is a reconciliation of the amounts related to the spinoff, presented in the Consolidated Statements of Shareholders’ Equity as net transfer (to)/from Timken and affiliates and the amounts presented as net transfers from/(to) Timken and affiliates on the Consolidated Statements of Cash Flows.
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31, 2014
|
|
Net transfer (to)/from Timken and affiliates - Equity
|
|
($62.0
|
)
|
|
Dividend paid to Timken
|
50.0
|
|
|
Net transfer of (assets) and liabilities from Timken
|
25.0
|
|
|
Settlement of (assets) and liabilities with Timken
|
(9.2
|
)
|
|
Cash received from Timken for settlement of separation
|
3.0
|
|
|
Net transfers from/(to) Timken and affiliates - Cash Flow
|
|
$6.8
|
|
Additionally, during 2015, additional paid in capital was adjusted to reflect final adjustments between the Company and Timken related primarily to the allocation of certain temporary differences calculated for tax purposes.
Pension and Other Postretirement Benefits:
TimkenSteel recognizes an overfunded status or underfunded status (e.g., the difference between the fair value of plan assets and the benefit obligations) as either an asset or a liability for its defined benefit pension and other postretirement benefit plans on the Consolidated Balance Sheets. As discussed in
Note 1 - Company and Basis of Presentation
, 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. the 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.
Prior to the spinoff, certain of TimkenSteel’s employees participated in defined benefit pension and other postretirement benefit plans sponsored by Timken and accounted for by Timken in accordance with accounting guidance for defined benefit pension and other postretirement benefit plans. Expense allocations for these benefits were determined based on a review of personnel by business unit and based on allocations of corporate and other shared functional personnel.
Stock-Based Compensation:
TimkenSteel recognizes stock-based compensation expense based on the grant date fair value of the stock-based awards over their required vesting period on a straight-line basis, whether the awards were granted with graded or cliff vesting. Stock options are issued with an exercise price equal to the opening market price of TimkenSteel common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. The fair value of stock-based awards that will settle in TimkenSteel common shares, other than stock options, is based on the opening market price of TimkenSteel common shares on the grant date. The fair values of stock-based awards that will settle in cash are remeasured at each reporting period until settlement of the awards.
TimkenSteel early adopted Accounting Standards Update (ASU) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” in the fourth quarter of 2016, with the effect recorded as of January 1, 2016.
Under ASU 2016-09, TimkenSteel recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the consolidated statement of operations. The Company recorded an adjustment to beginning retained earnings of $
4.2 million
for previously unrecognized excess tax benefits. The excess tax benefits and tax deficiencies are considered discrete items in the reporting period they occur and are not included in the estimate of an entity’s annual effective tax rate.
TimkenSteel’s prior year additional paid in capital pool will be not be affected because those excess benefits have already been recognized in the financial statements, and the recognition of excess tax benefits and tax deficiencies in the income statement is prospective only in the fiscal year of adoption. As a result, there was not a reclassification between additional paid in capital and retained earnings in the fiscal years before adoption.
Derivative Instruments:
TimkenSteel recognizes all derivatives on the Consolidated Balance Sheets at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. Forward contracts on various foreign currencies may be entered into in order to manage the foreign currency exchange rate risk on forecasted revenue denominated in foreign currencies. Other forward exchange contracts on various foreign currencies may be entered into in order to manage the foreign currency exchange rate risk associated with certain of TimkenSteel’s commitments denominated in foreign currencies.
As of
December 31, 2016
, TimkenSteel had no outstanding foreign currency forward contracts. As of December 31,
2015
, TimkenSteel had foreign currency forward contracts with a fair value of less than
$0.1 million
based on level 2 inputs.
Research and Development:
Expenditures for TimkenSteel research and development amounted to
$8.0 million
,
$8.6 million
and
$8.5 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, and were recorded as a component of selling, general and administrative expenses in the Consolidated Statements of Operations. These expenditures may fluctuate from year to year depending on special projects and the needs of TimkenSteel and its customers.
Adoption of New Accounting Standards
The Company adopted the following standards during 2016, none of which had a material impact on the Consolidated Financial Statements or the related Notes to the Consolidated Financial Statements.
|
|
|
|
|
|
|
Standard
|
|
Effective Date
|
|
|
|
|
|
2015-05
|
Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
|
January 1, 2016
|
|
2016-09
|
Stock Compensation: Improvements to Employee Share-Based Payment Accounting - See Note 10
|
January 1, 2016
|
|
2015-03
|
Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs - See Note 6
|
March 31, 2016
|
Accounting Standards Issued But Not Yet Adopted
In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). This ASU requires immediate recognition of the income tax consequences of intercompany asset transfers other than inventory. The ASU is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force),” The guidance is intended to reduce diversity in practice in how certain items are classified in the cash flow statement. It is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted, provided that all the issues addressed in the standard are adopted in the same period. Retrospective transition is required. TimkenSteel plans to adopt ASU 2016-15 effective January 1, 2017, and does not expect the adoption to have a material effect on its Statements of Cash Flows.
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 July 2015, the FASB issued ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory (Topic 330),” which requires that certain inventory be measured at the lower of cost or net realizable value. The guidance applies only to inventories for which cost is determined by methods other than last-in, first-out (LIFO). The Company values certain portions of its inventory using the FIFO, average cost, or specific identification methods. This standard is effective for annual reporting periods beginning after December 15, 2016. TimkenSteel plans to adopt this standard effective January 1, 2017, and does not expected the adoption to have a material effect 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 annual reporting periods after December 15, 2017. TimkenSteel is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition. TimkenSteel anticipates adopting this standard using the modified retrospective approach as of January 1, 2018.
Note
3
-
Inventories
The components of inventories, net as of
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Inventories, net:
|
|
|
|
|
Manufacturing supplies
|
|
$37.9
|
|
|
|
$43.3
|
|
|
Raw materials
|
16.2
|
|
|
14.6
|
|
|
Work in process
|
58.6
|
|
|
59.5
|
|
|
Finished products
|
59.6
|
|
|
64.9
|
|
|
Subtotal
|
172.3
|
|
|
182.3
|
|
|
Allowance for surplus and obsolete inventory
|
(8.1
|
)
|
|
(8.4
|
)
|
|
Total Inventories, net
|
|
$164.2
|
|
|
|
$173.9
|
|
Inventories are valued at the lower of cost or market, with approximately
64%
valued by the LIFO method, and the remaining inventories valued by the FIFO, average cost or specific identification methods.
The LIFO reserve as of
December 31, 2016
and
December 31, 2015
was
$44.6 million
and
$49.6 million
, respectively. TimkenSteel recognized a decrease in its LIFO reserve of $
5.0 million
and $
50.7 million
during
2016
and
2015
, respectively, in cost of products sold. The decreases in the LIFO reserve recognized during
2016
and
2015
were due to lower manufacturing costs, lower scrap steel costs, and lower inventory quantities.
Note
4
-
Property, Plant and Equipment
The components of property, plant and equipment, net as of
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Property, Plant and Equipment, net:
|
|
|
|
|
Land
|
|
$13.3
|
|
|
|
$13.4
|
|
|
Buildings and improvements
|
420.6
|
|
|
418.2
|
|
|
Machinery and equipment
|
1,352.0
|
|
|
1,298.2
|
|
|
Construction-in-progress
|
63.9
|
|
|
74.9
|
|
|
Subtotal
|
1,849.8
|
|
|
1,804.7
|
|
|
Less allowances for depreciation
|
(1,107.9
|
)
|
|
(1,035.4
|
)
|
|
Property, Plant and Equipment, net
|
|
$741.9
|
|
|
|
$769.3
|
|
Total depreciation expense was
$68.0 million
,
$67.2 million
and
$50.8 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
TimkenSteel recorded capitalized interest related to construction projects of $
0.7 million
,
$1.0 million
and
$6.9 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The amount of capitalized interest for
2014
includes
$5.7 million
that was allocated to TimkenSteel from Timken prior to the spinoff.
TimkenSteel recorded impairment charges of
$0.9 million
and
$0.3 million
for the years ended
December 31, 2015
and
2014
, respectively, related to the discontinued use of certain assets. No impairment charges were recorded for the year ended
December 31, 2016
.
Note
5
-
Intangible Assets
The components of intangible assets, net as of
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
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
|
|
|
|
$3.7
|
|
|
|
$2.6
|
|
|
|
$6.8
|
|
|
|
$3.7
|
|
|
|
$3.1
|
|
|
|
Technology use
|
9.0
|
|
|
5.2
|
|
|
3.8
|
|
|
9.0
|
|
|
4.7
|
|
|
4.3
|
|
|
|
Capitalized software
|
58.9
|
|
|
40.3
|
|
|
18.6
|
|
|
57.9
|
|
|
34.7
|
|
|
23.2
|
|
|
|
Total Intangible Assets
|
|
$74.2
|
|
|
|
$49.2
|
|
|
|
$25.0
|
|
|
|
$73.7
|
|
|
|
$43.1
|
|
|
|
$30.6
|
|
|
Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives. The weighted-average useful lives of the customer relationships, technology use and capitalized software are
15
years,
15
years and
6.3
years, respectively. The weighted-average useful life of total intangible assets is
8.1
years.
Amortization expense for intangible assets was $
6.9 million
,
$6.2 million
and
$7.2 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Based upon the intangible assets subject to amortization as of
December 31, 2016
, TimkenSteel’s estimated annual amortization expense for the five succeeding years is shown below (in millions):
|
|
|
|
|
|
|
|
Year
|
Amortization Expense
|
|
2017
|
|
$6.3
|
|
|
2018
|
5.1
|
|
|
2019
|
4.0
|
|
|
2020
|
2.9
|
|
|
2021
|
1.0
|
|
In the fourth quarter of 2014, TimkenSteel made a final determination to discontinue the use of a trade name acquired in 2008, resulting in an impairment charge of
$0.9 million
to reduce the asset to its estimated fair value of zero.
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
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
Principal
|
|
$86.3
|
|
|
Less: Debt issuance costs, net of amortization
|
(2.1
|
)
|
|
Less: Debt discount, net of amortization
|
(17.8
|
)
|
|
Convertible notes, net
|
|
$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 for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
Contractual interest expense
|
|
$3.0
|
|
|
Amortization of debt issuance costs
|
0.2
|
|
|
Amortization of debt discount
|
1.7
|
|
|
Total
|
|
$4.9
|
|
The fair value of the Convertible Notes was approximately $
135.0 million
as of
December 31, 2016
. The fair value of the Convertible Notes, which falls within Level 1 of the fair value hierarchy, is based on the last price traded in December 2016.
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 deliver, 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 observation period.
If the Company undergoes a fundamental change, subject to certain conditions, holders may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to
100%
of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to the repurchase date.
Upon certain events of default occurring and continuing (including failure to pay principal or interest on the Convertible Notes when due and payable), the Trustee or the holders of at least
25%
in principal amount may declare
100%
of the principal and accrued and unpaid interest, if any, on all the Convertible Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary,
100%
of the principal and accrued and unpaid interest on the Convertible Notes will become due and payable immediately.
Other Long-Term Debt
The components of other long-term debt as of
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.71% as of December 31, 2016)
|
|
$12.2
|
|
|
|
$12.2
|
|
|
Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.70% as of December 31, 2016)
|
9.5
|
|
|
9.5
|
|
|
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (0.70% as of December 31, 2016)
|
8.5
|
|
|
8.5
|
|
|
Amended Credit Agreement, due 2019 (LIBOR plus applicable spread)
|
40.0
|
|
|
170.0
|
|
|
Total Other Long-Term Debt
|
|
$70.2
|
|
|
|
$200.2
|
|
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 December 31, 2016, 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 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
4.80%
as of
December 31, 2016
. The amount available under the Amended Credit Agreement as of
December 31, 2016
was
$119.7 million
net, after reducing for the block on availability of
$33.1 million
.
Revenue Refunding Bonds
On June 1, 2014, 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 ASC 820, “Fair Value Measurements.” The valuation of Level 2 is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly
Advanced Quench-and-Temper Facility
In the second quarter of 2015, TimkenSteel entered into a lease arrangement with the Stark County Port Authority in connection with the construction of a new advanced quench-and-temper facility in Perry Township, Ohio and the issuance of an Industrial Revenue Bond. The bond is held
100%
by TimkenSteel Material Services, LLC (a wholly-owned subsidiary of TimkenSteel) and, accordingly, the obligation under the lease agreement and investment in the Industrial Revenue Bond, as well as the related interest income and expense, are eliminated in the Consolidated Financial Statements. As of
December 31, 2016
,
$38.2 million
has been spent on the new advanced quench-and-temper facility and is reported in the caption Property, plant and equipment, net in the Consolidated Balance Sheets. Of this amount,
$10.8 million
has been financed through the capital lease arrangement described above.
Leases
TimkenSteel leases a variety of real property and equipment. Rent expense under operating leases amounted to
$8.6 million
,
$11.0 million
and
$9.2 million
in
2016
,
2015
and
2014
, respectively. As of
December 31, 2016
, future minimum lease payments for non-cancelable operating leases totaled
$20.0 million
and are payable as follows:
2017
-
$6.5 million
;
2018
-
$5.5 million
;
2019
-
$3.7 million
;
2020
-
$2.7 million
; and 2021-
$1.6 million
. TimkenSteel has
no
significant lease commitments after 2021.
Note
7
-
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the years ended
December 31, 2016
and
2015
by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Postretirement Liability Adjustments
|
|
Total
|
|
Balance at December 31, 2014
|
|
($3.9
|
)
|
|
|
($3.9
|
)
|
|
|
($7.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income before reclassifications, before income tax
|
(1.1
|
)
|
|
—
|
|
|
(1.1
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss, before income tax
|
—
|
|
|
1.7
|
|
|
1.7
|
|
|
Income tax (expense)
|
—
|
|
|
(0.7
|
)
|
|
(0.7
|
)
|
|
Net current period other comprehensive income, net of income taxes
|
(1.1
|
)
|
|
1.0
|
|
|
(0.1
|
)
|
|
Balance at December 31, 2015
|
(5.0
|
)
|
|
(2.9
|
)
|
|
(7.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income before reclassifications, before income tax
|
(2.0
|
)
|
|
(0.9
|
)
|
|
(2.9
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss, before income tax
|
—
|
|
|
1.7
|
|
|
1.7
|
|
|
Income tax (expense)
|
—
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
|
Net current period other comprehensive (loss) income, net of income taxes
|
(2.0
|
)
|
|
0.5
|
|
|
(1.5
|
)
|
|
Balance at December 31, 2016
|
(7.0
|
)
|
|
(2.4
|
)
|
|
(9.4
|
)
|
The above table reflects the adjustments discussed in
Note 1 - Company and Basis of Presentation
.
The amount reclassified from accumulated other comprehensive loss for the pension and postretirement liability adjustment was included in cost of products sold and selling, general and administrative expenses in the Consolidated Statements of Operations. These components are included in the computation of pension and postretirement net periodic benefit cost.
Note
8
-
Retirement and Postretirement Benefit Plans
Defined Benefit Pensions
Prior to the spinoff, eligible TimkenSteel employees, including certain employees in foreign countries, participated in the following Timken-sponsored plans: The Timken Company Pension Plan; The Timken-Latrobe-MPB-Torrington Retirement Plan; and the Timken U.K. Pension Scheme. During 2014, the assets and liabilities of these pension plans related to TimkenSteel employees and retirees were transferred to pension plans sponsored by TimkenSteel as follows: TimkenSteel Corporation Retirement Plan; TimkenSteel Corporation Bargaining Unit Pension Plan and the TimkenSteel U.K. Pension Scheme. Plan assets of
$1,193.6 million
, benefit plan obligations of
$1,134.8 million
and accumulated other comprehensive losses of
$361.8 million
(
$228.9 million
, net of tax) were recorded by TimkenSteel related to these plans, prior to the change in accounting principle discussed below and in
Note 1 - Company and Basis of Presentation
.
Pension benefits earned are generally based on years of service and compensation during active employment. TimkenSteel’s funding policy is consistent with the funding requirements of applicable laws and regulations. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for the various asset classes. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
Postretirement Benefits
Prior to the spinoff, eligible retirees of TimkenSteel and their dependents were provided health care and life insurance benefits from the following Timken-sponsored plans: The Timken Company Bargaining Unit Welfare Benefit Plan for Retirees and The Timken Company Welfare Plan for Retirees. During 2014, the assets and liabilities of these postretirement plans related to TimkenSteel employees and retirees were transferred to postretirement plans sponsored by TimkenSteel as follows: TimkenSteel Corporation Bargaining Unit Welfare Benefit Plan for Retirees and TimkenSteel Corporation Welfare Benefit Plan for Retirees.
Plan assets of
$130.1 million
, benefit plan obligations of
$232.2 million
and accumulated other comprehensive losses of
$8.2 million
(
$5.0 million
, net of tax) were recorded by TimkenSteel related to these plans, prior to the change in accounting principle discussed below and in
Note 1 - Company and Basis of Presentation
.
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. See
Note 1 - Company and Basis of Presentation
for amounts recognized as a result of the change in accounting principle and for further discussion. The information within this Note has been adjusted to reflect the change in accounting principle.
The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets for the defined benefit pension plans as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
Change in benefit obligation:
|
2016
|
2015
|
|
2016
|
2015
|
|
Benefit obligation at the beginning of year
|
|
$1,163.5
|
|
|
$1,257.5
|
|
|
|
$215.3
|
|
|
$243.3
|
|
|
Service cost
|
15.6
|
|
16.8
|
|
|
1.5
|
|
1.7
|
|
|
Interest cost
|
52.4
|
|
51.3
|
|
|
9.4
|
|
9.4
|
|
|
Actuarial losses (gains)
|
81.1
|
|
(88.2
|
)
|
|
6.6
|
|
(19.9
|
)
|
|
Benefits paid
|
(79.1
|
)
|
(70.2
|
)
|
|
(19.5
|
)
|
(19.2
|
)
|
|
Plan amendment
|
—
|
|
—
|
|
|
0.9
|
|
—
|
|
|
Foreign currency translation adjustment
|
(13.2
|
)
|
(3.7
|
)
|
|
—
|
|
—
|
|
|
Benefit obligation at the end of year
|
|
$1,220.3
|
|
|
$1,163.5
|
|
|
|
$214.2
|
|
|
$215.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
Change in plan assets:
|
2016
|
2015
|
|
2016
|
2015
|
|
Fair value of plan assets at the beginning of year
|
|
$1,144.3
|
|
|
$1,230.0
|
|
|
|
$137.9
|
|
|
$142.6
|
|
|
Actual return on plan assets
|
78.7
|
|
(12.0
|
)
|
|
6.1
|
|
(0.6
|
)
|
|
Company contributions / payments
|
2.2
|
|
0.5
|
|
|
2.7
|
|
15.1
|
|
|
Benefits paid
|
(79.1
|
)
|
(70.2
|
)
|
|
(19.5
|
)
|
(19.2
|
)
|
|
Reimbursement from postretirement plan assets
|
—
|
|
—
|
|
|
(13.3
|
)
|
—
|
|
|
Foreign currency translation adjustment
|
(14.4
|
)
|
(4.0
|
)
|
|
—
|
|
—
|
|
|
Fair value of plan assets at end of year
|
|
$1,131.7
|
|
|
$1,144.3
|
|
|
|
$113.9
|
|
|
$137.9
|
|
|
Funded status at end of year
|
|
($88.6
|
)
|
|
($19.2
|
)
|
|
|
($100.3
|
)
|
|
($77.4
|
)
|
In the third quarter of 2016, the Company amended its postretirement benefit plans relating to its non-bargaining retirees, effective January 1, 2017, to provide for the transition of certain Medicare-eligible retirees and their eligible dependents from Company-sponsored group retiree medical coverage to individual health insurance purchased through an insurance company private exchange. This change is reflected in the Change in benefit obligation table as the Plan amendment for $
0.9 million
.
The TimkenSteel Corporation Retirement Plan (Salaried Plan) has a provision that permits employees to elect to receive their pension benefits in a lump sum. In the third quarter of 2016, the cumulative cost of all settlements exceeded the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. The Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan as of September 30, 2016
. This settlement loss is included in the net remeasurement losses (gains) as a component of net periodic benefit cost.
The accumulated benefit obligation at December 31, 2016 exceeded the fair value of plan assets for two of the Company’s pension plans. For these plans, the benefit obligation was
$886.5 million
, the accumulated benefit obligation was
$866.5 million
and the fair value of plan assets was
$791.6 million
as of December 31, 2016.
The total pension accumulated benefit obligation for all plans was
$1,192.1 million
and
$1,132.8 million
as of
December 31, 2016
and
2015
, respectively.
Amounts recognized on the balance sheet at
December 31, 2016
and
2015
, for TimkenSteel’s pension and postretirement benefit plans include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
|
2016
|
2015
|
|
2016
|
2015
|
|
Non-current assets
|
|
$6.2
|
|
|
$20.7
|
|
|
|
$—
|
|
|
$—
|
|
|
Current liabilities
|
(0.6
|
)
|
(0.6
|
)
|
|
(2.4
|
)
|
(2.6
|
)
|
|
Non-current liabilities
|
(94.2
|
)
|
(39.3
|
)
|
|
(97.9
|
)
|
(74.8
|
)
|
|
|
|
($88.6
|
)
|
|
($19.2
|
)
|
|
|
($100.3
|
)
|
|
($77.4
|
)
|
Included in accumulated other comprehensive loss at
December 31, 2016
and
2015
, were the following before-tax amounts that had not been recognized in net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
|
2016
|
2015
|
|
2016
|
2015
|
|
Unrecognized prior service cost
|
|
$1.5
|
|
|
$2.1
|
|
|
|
$2.1
|
|
|
$2.4
|
|
Amounts expected to be amortized from accumulated other comprehensive loss and included in total net periodic benefit cost during the year ended December 31, 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
|
|
|
|
|
Prior service cost
|
|
$0.5
|
|
|
|
$1.0
|
|
The weighted-average assumptions used in determining benefit obligation as of
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
Assumptions:
|
2016
|
2015
|
|
2016
|
2015
|
|
Discount rate
|
4.17
|
%
|
4.67
|
%
|
|
4.09
|
%
|
4.51
|
%
|
|
Future compensation assumption
|
3.09
|
%
|
2.76
|
%
|
|
n/a
|
|
n/a
|
|
The weighted-average assumptions used in determining benefit cost for the years ended
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
Assumptions:
|
2016
|
2015
|
|
2016
|
2015
|
|
Discount rate
|
4.67
|
%
|
4.21
|
%
|
|
4.51
|
%
|
4.05
|
%
|
|
Future compensation assumption
|
3.08
|
%
|
3.09
|
%
|
|
n/a
|
|
n/a
|
|
|
Expected long-term return on plan assets
|
6.46
|
%
|
6.98
|
%
|
|
5.00
|
%
|
5.00
|
%
|
The discount rate assumption is based on current rates of high-quality long-term corporate bonds over the same period that benefit payments will be required to be made. The expected rate of return on plan assets assumption is based on the weighted-average expected return on the various asset classes in the plans’ portfolios. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.
For measurement purposes, TimkenSteel assumed a weighted-average annual rate of increase in the per capita cost (health care cost trend rate) of
6.50%
and
6.75%
for
2016
and
2015
, respectively, declining gradually to
5.00%
in
2023
and thereafter for medical and prescription drug benefits, and
8.50%
and
8.75%
for
2016
and
2015
, respectively, declining gradually to
5.00%
in
2031
and thereafter for HMO benefits. A one percentage point increase in the assumed health care cost trend rate would have increased the
2016
and
2015
postretirement benefit obligation by
$1.6 million
and
$2.3 million
, respectively and increased the total service and interest cost components by
$0.1 million
in both the years ended December 31,
2016
and
2015
. A one percentage point decrease would have decreased the
2016
and
2015
postretirement benefit obligation by
$1.4 million
and
$2.1 million
, respectively and decreased the total service and interest cost components by
$0.1 million
in both the years ended
December 31, 2016
and
2015
.
The components of net periodic benefit cost for the years ended
December 31, 2016
,
2015
and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
|
Years Ended December 31,
|
|
Years Ended December 31,
|
|
Components of net periodic benefit cost:
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Service cost
|
|
$15.6
|
|
|
|
$16.8
|
|
|
|
$10.2
|
|
|
|
$1.5
|
|
|
|
$1.7
|
|
|
|
$1.1
|
|
|
Interest cost
|
52.4
|
|
|
51.3
|
|
|
33.3
|
|
|
9.4
|
|
|
9.4
|
|
|
6.5
|
|
|
Expected return on plan assets
|
(71.1
|
)
|
|
(82.8
|
)
|
|
(54.6
|
)
|
|
(5.8
|
)
|
|
(7.1
|
)
|
|
(4.6
|
)
|
|
Amortization of prior service cost
|
0.6
|
|
|
0.6
|
|
|
0.5
|
|
|
1.1
|
|
|
1.1
|
|
|
0.6
|
|
|
Net remeasurement losses (gains)
|
73.4
|
|
|
5.7
|
|
|
98.3
|
|
|
6.3
|
|
|
(12.2
|
)
|
|
15.9
|
|
|
Allocated benefit cost from Timken
|
—
|
|
|
—
|
|
|
5.2
|
|
|
—
|
|
|
—
|
|
|
2.2
|
|
|
Net Periodic Benefit Cost
|
|
$70.9
|
|
|
|
($8.4
|
)
|
|
|
$92.9
|
|
|
|
$12.5
|
|
|
|
($7.1
|
)
|
|
|
$21.7
|
|
As discussed above, prior to the spinoff, employees of TimkenSteel participated in various retirement and postretirement benefits sponsored by The Timken Company. Because Timken provided these benefits to eligible employees and retirees of TimkenSteel, the costs to participating employees of TimkenSteel in these plans were reflected in the Consolidated Financial Statements, while the related assets and liabilities were retained by Timken. Expense allocations for these benefits were determined based on a review of personnel by business unit and based on allocations of corporate and other shared functional personnel. All cost allocations related to the various retirement benefit plans have been deemed paid by TimkenSteel to Timken in the period in which the cost was recorded in the Consolidated Statements of Operations as a component of cost of products sold and selling, general and administrative expenses. Allocated benefit cost from Timken were funded through intercompany transactions, which were reflected within the net parent investment on the Consolidated Balance Sheets.
TimkenSteel recognizes its overall responsibility to ensure that the assets of its various defined benefit pension plans are managed effectively and prudently and in compliance with its policy guidelines and all applicable laws. Preservation of capital is important; however, TimkenSteel also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the pension funds. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes. The expected rate of return for the investment portfolios is based on expected rates of return for various asset classes, as well as historical asset class and fund performance. The target allocations for plan assets are
15%
equity securities,
60%
debt securities and
25%
in all other types of investments.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
|
|
|
|
Level 1 -
|
Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
Level 2 -
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
|
|
|
|
|
Level 3 -
|
Unobservable inputs for the asset or liability.
|
The following table presents the fair value hierarchy for those investments of TimkenSteel’s pension assets measured at fair value on a recurring basis as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$45.2
|
|
|
$4.6
|
|
|
$40.6
|
|
|
$—
|
|
|
U.S government and agency securities
|
220.3
|
|
214.2
|
|
6.1
|
|
—
|
|
|
Corporate bonds
|
105.2
|
|
—
|
|
105.2
|
|
—
|
|
|
Equity securities
|
52.2
|
|
52.2
|
|
—
|
|
—
|
|
|
Mutual fund - equity
|
15.3
|
|
—
|
|
15.3
|
|
—
|
|
|
Mutual fund - real estate
|
24.8
|
|
24.8
|
|
—
|
|
—
|
|
|
Total Assets in the fair value hierarchy
|
|
$463.0
|
|
|
$295.8
|
|
|
$167.2
|
|
|
$—
|
|
|
Assets measured at net asset value
(1)
|
668.7
|
|
—
|
|
—
|
|
—
|
|
|
Total Assets
|
|
$1,131.7
|
|
|
$295.8
|
|
|
$167.2
|
|
|
$—
|
|
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, hedge funds, and risk parity investments. As of December 31, 2016, these assets are redeemable at net asset value within
90
days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s pension assets measured at fair value on a recurring basis as of
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$27.8
|
|
|
$2.1
|
|
|
$25.7
|
|
|
$—
|
|
|
U.S government and agency securities
|
220.7
|
|
213.1
|
|
7.6
|
|
—
|
|
|
Corporate bonds
|
125.6
|
|
—
|
|
125.6
|
|
—
|
|
|
Equity securities
|
78.8
|
|
78.8
|
|
—
|
|
—
|
|
|
Mutual fund - equity
|
16.1
|
|
—
|
|
16.1
|
|
—
|
|
|
Mutual fund - real estate
|
33.9
|
|
33.9
|
|
—
|
|
—
|
|
|
Total Assets in the fair value hierarchy
|
|
$502.9
|
|
|
$327.9
|
|
|
$175.0
|
|
|
$—
|
|
|
Assets measured at net asset value
(1)
|
641.4
|
|
—
|
|
—
|
|
—
|
|
|
Total Assets
|
|
$1,144.3
|
|
|
$327.9
|
|
|
$175.0
|
|
|
$—
|
|
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, and risk parity investments. As of December 31, 2015, these assets were redeemable at net asset value within
90
days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s postretirement assets measured at fair value on a recurring basis as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$1.4
|
|
|
$1.4
|
|
|
$—
|
|
|
$—
|
|
|
Total Assets in the fair value hierarchy
|
|
$1.4
|
|
|
$1.4
|
|
|
$—
|
|
|
$—
|
|
|
Assets measured at net asset value
(1)
|
112.5
|
|
—
|
|
—
|
|
—
|
|
|
Total Assets
|
|
$113.9
|
|
|
$1.4
|
|
|
$—
|
|
|
$—
|
|
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, hedge funds, and risk parity investments. As of December 31, 2016, these assets are redeemable at net asset value within
90
days.
The following table presents the fair value hierarchy for those investments of TimkenSteel’s postretirement assets measured at fair value on a recurring basis as of
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$1.0
|
|
|
$1.0
|
|
|
$—
|
|
|
$—
|
|
|
Total Assets in the fair value hierarchy
|
|
$1.0
|
|
|
$1
|
|
|
$—
|
|
|
$—
|
|
|
Assets measured at net asset value
(1)
|
136.9
|
|
—
|
|
—
|
|
—
|
|
|
Total Assets
|
|
$137.9
|
|
|
$1.0
|
|
|
$—
|
|
|
$—
|
|
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, and risk parity investments. As of December 31, 2015, these assets were redeemable at net asset value within
90
days.
Future benefit payments are expected to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
Benefit Payments:
|
Pension
|
|
Gross
|
|
Medicare Part D Subsidy Receipts
|
|
2017
|
|
$78.2
|
|
|
|
$20.3
|
|
|
|
$0.7
|
|
|
2018
|
88.1
|
|
|
19.8
|
|
|
0.7
|
|
|
2019
|
76.2
|
|
|
19.3
|
|
|
0.8
|
|
|
2020
|
75.2
|
|
|
18.4
|
|
|
0.9
|
|
|
2021
|
75.8
|
|
|
17.6
|
|
|
0.9
|
|
|
2022-2026
|
373.8
|
|
|
77.2
|
|
|
5.0
|
|
The Company expects to make contributions to its U.K. pension plan in 2017 of approximately $
1.4 million
.
Defined Contribution Plans
Prior to the spinoff, substantially all of TimkenSteel’s employees in the U.S. and employees at certain non-U.S. locations participated in defined contribution retirement and savings plans sponsored by Timken. TimkenSteel established similar defined contribution plans in connection with the spinoff. The Company recorded expense primarily related to employer matching contributions to these defined contribution plans of
$4.6 million
in 2016,
$5.8 million
in 2015 and
$4.7 million
in 2014.
Note
9
-
Earnings Per Share
On June 30, 2014,
45.4 million
TimkenSteel common shares were distributed to Timken shareholders in conjunction with the spinoff. For comparative purposes, and to provide a more meaningful calculation for weighted average shares, this number of shares was assumed to be outstanding as of the beginning of each period prior to the spinoff in the calculation of basic weighted average shares. In addition, for the dilutive weighted average share calculations, the dilutive securities outstanding at June 30, 2014 were assumed to also be outstanding as of the beginning of each period prior to the spinoff.
Basic earnings (loss) per share are computed based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share are computed based upon the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the treasury stock method or if-converted method. For the Convertible Notes, the Company utilizes the if-converted method to calculate diluted 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.
For the years ended
December 31, 2016
,
2015
and
2014
,
2.8 million
,
2.0 million
and
0.1 million
of shares issuable for equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their inclusion would have been anti-dilutive. In periods in which a net loss has occurred, as is the case for years ended December 31, 2016 and 2015, the dilutive effect of equity-based awards is not recognized and thus not utilized in the calculation
of diluted earnings (loss) per share, because the effect of their inclusion would have been anti-dilutive. The shares potentially issuable of
6.9 million
, related to the Convertible Notes, were also anti-dilutive for the year ended December 31, 2016.
The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share and diluted earnings per share for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Numerator:
|
|
|
|
|
|
|
Net (loss) income for basic and diluted earnings per share
|
|
($105.5
|
)
|
|
|
($45.0
|
)
|
|
|
$46.1
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
44,217,577
|
|
|
44,533,725
|
|
|
45,541,705
|
|
|
Dilutive effect of stock-based awards
|
—
|
|
|
—
|
|
|
502,438
|
|
|
Weighted average shares outstanding, diluted
|
44,217,577
|
|
|
44,533,725
|
|
|
46,044,143
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
($2.39
|
)
|
|
|
($1.01
|
)
|
|
|
$1.01
|
|
|
Diluted (loss) earnings per share
|
|
($2.39
|
)
|
|
|
($1.01
|
)
|
|
|
$1.00
|
|
Note
10
-
Stock-Based Compensation
Description of the Plan
Prior to the spinoff, employees of Timken’s steel business, now TimkenSteel, were eligible to participate in The Timken Company Long-Term Incentive Plan (Timken LTIP Plan) and The Timken Company 2011 Long-Term Incentive Plan (Timken 2011 Plan) and were eligible to receive Timken stock-based awards including stock options, restricted share awards and performance-based restricted share units. Effective June 30, 2014, TimkenSteel employees and non-employee directors began participating in the TimkenSteel Corporation 2014 Equity and Incentive Compensation Plan. On April 28, 2016, shareholders of TimkenSteel approved the amendment and restatement of the TimkenSteel Corporation 2014 Equity and Incentive Compensation Plan to, among other matters, increase the number of shares available for awards and to adjust the fungible share adjustment factor going forward. The TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan is referred to herein as the TimkenSteel 2014 Plan.
The TimkenSteel 2014 Plan authorizes the Compensation Committee of the TimkenSteel Board of Directors to grant non-qualified or incentive stock options, stock appreciation rights, stock awards (including restricted shares, restricted share unit awards, performance shares, performance units, deferred shares and common shares) and cash awards to TimkenSteel employees and non-employee directors. No more than
11.05 million
TimkenSteel common shares may be delivered under the TimkenSteel 2014 Plan. The TimkenSteel 2014 Plan contains fungible share counting mechanics, which generally means that awards other than stock options and stock appreciation rights will be counted against the aggregate share limit as
2.50
common shares for every one common share that is actually issued or transferred under such awards. The TimkenSteel 2014 Plan authorized up to
3.0 million
common shares for use in granting “replacement awards” to current holders of Timken equity awards under Timken’s equity compensation plans at the time of the spinoff.
As of December 31, 2016, approximately
6.1 million
shares of TimkenSteel common stock remained available for grants under the TimkenSteel 2014 Plan.
In connection with the spinoff, stock compensation awards granted under the Timken LTIP Plan and the Timken 2011 Plan were adjusted as follows:
|
|
|
|
•
|
Vested and unvested stock options were adjusted so that the grantee holds options to purchase both Timken and TimkenSteel common shares.
|
|
|
|
|
•
|
The adjustment to the Timken and TimkenSteel stock options, when combined, were intended to generally preserve the intrinsic value of each original option grant and the ratio of the exercise price to the fair market value of Timken common shares on June 30, 2014.
|
|
|
|
|
•
|
Unvested restricted stock awards were replaced with adjusted, substitute awards for restricted shares or units, as applicable, of Timken and TimkenSteel common shares. The new awards of restricted stock were intended to generally preserve the intrinsic value of the original award determined as of June 30, 2014.
|
|
|
|
|
•
|
Vesting periods of awards were unaffected by the adjustment and substitution.
|
Awards granted in connection with the adjustment of awards originally issued under the Timken LTIP Plan and the Timken 2011 Plan are referred to as replacement awards under the TimkenSteel 2014 Plan and, as noted above, reduce the maximum
number of TimkenSteel common shares available for delivery under the TimkenSteel 2014 Plan. TimkenSteel records compensation expense for both TimkenSteel and Timken common shares for awards held by TimkenSteel employees only.
As discussed in
Note 2 - Significant Accounting Policies
, TimkenSteel early adopted Accounting Standards Update (ASU) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” in the fourth quarter of 2016, with the effect recorded as of January 1, 2016. Under ASU 2016-09, TimkenSteel recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the Consolidated Statements of Operations.
The following table provides the significant assumptions used to calculate the grant date fair market values of options granted using a Black-Scholes option pricing method:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
Subsequent to Spinoff
|
|
2014
Prior to Spinoff
|
|
Weighted-average fair value per option
|
$3.32
|
|
$11.21
|
|
$18.43
|
|
$23.17
|
|
Risk-free interest rate
|
1.34%
|
|
1.47%
|
|
1.78%
|
|
1.80%
|
|
Dividend yield
|
—%
|
|
1.93%
|
|
1.22%
|
|
1.75%
|
|
Expected stock volatility
|
41.71%
|
|
47.10%
|
|
47.00%
|
|
50.35%
|
|
Expected life - years
|
6
|
|
6
|
|
6
|
|
6
|
The expected life of stock option awards granted is based on historical data and represents the period of time that options granted are expected to be held prior to exercise. Because of the absence of adequate stock price history of TimkenSteel common stock, expected volatility related to stock option awards granted subsequent to the spinoff is based on the historical volatility of a selected group of peer companies’ stock. Prior to the spinoff, volatility was calculated using the historical volatility of Timken stock. Expected annual dividends per share are estimated using the most recent dividend payment per share as of the grant date. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The following summarizes TimkenSteel stock option activity from January 1, 2016 to
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Term
|
Aggregate Intrinsic Value (millions)
|
|
Outstanding as of December 31, 2015
|
1,617,503
|
|
|
$28.68
|
|
|
|
|
Granted
|
644,580
|
|
|
$7.47
|
|
|
|
|
Exercised
|
(6,825
|
)
|
|
$11.24
|
|
|
|
|
Canceled, forfeited or expired
|
(35,861
|
)
|
|
$24.05
|
|
|
|
|
Outstanding as of December 31, 2016
|
2,219,397
|
|
|
$22.64
|
|
6.22
|
$5.5
|
|
Options expected to vest
|
968,982
|
|
|
$15.90
|
|
8.53
|
$5.1
|
|
Options exercisable
|
1,239,280
|
|
|
$27.82
|
|
4.41
|
$0.4
|
Stock options presented in this table represent TimkenSteel awards only, including those held by Timken employees.
The total intrinsic value, the cash proceeds and the related tax benefit associated with stock options exercised during the period from January 1,
2016
to
December 31, 2016
each were less than $
0.1 million
.
The following summarizes TimkenSteel stock-settled restricted share award activity from January 1, 2016 to
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
Weighted Average Grant Date Fair Value
|
|
Outstanding as of December 31, 2015
|
339,410
|
|
|
$30.31
|
|
|
Granted
|
426,090
|
|
|
$7.16
|
|
|
Vested
|
(38,641
|
)
|
|
$30.60
|
|
|
Canceled, forfeited or expired
|
(30,706
|
)
|
|
$3.93
|
|
|
Outstanding as of December 31, 2016
|
696,153
|
|
|
$17.57
|
|
Restricted share awards presented in this table represent TimkenSteel awards only, including those held by Timken employees.
TimkenSteel recognized stock-based compensation expense of
$6.7 million
($
4.2 million
after tax),
$7.0 million
(
$4.3 million
after tax) and
$6.0 million
(
$3.8 million
after tax) for the years ended
December 31, 2016
,
2015
and
2014
, respectively, related to stock option awards and stock-settled restricted share awards. 2014 compensation expense includes the recognition of
$0.3 million
of incremental compensation expense in the second quarter of 2014 resulting from the adjustment and substitution of stock-settled awards. The adjustment of the stock compensation awards occurred in conjunction with the distribution of TimkenSteel common shares to Timken shareholders in the June 30, 2014 after-market distribution.
Outstanding restricted share awards include restricted shares, restricted stock units, performance-based restricted stock units and deferred shares that will settle in common shares. Outstanding restricted shares and restricted stock units generally cliff-vest after
three
years or vest in
25%
increments annually beginning on the first anniversary of the date of grant. Performance-based restricted stock units vest based on achievement of specified performance objectives.
As of
December 31, 2016
, unrecognized compensation cost related to stock option awards and stock-settled restricted shares and restricted stock units was $
7.3 million
, which is expected to be recognized over a weighted average period of
1.6
years. The calculations of unamortized expense and weighted-average periods include awards based on both TimkenSteel and Timken stock awards held by TimkenSteel employees.
Certain restricted stock units, including performance-based restricted stock units, are settled in cash and were adjusted and substituted as described above. TimkenSteel accrued $
0.8 million
and
$1.6 million
as of
December 31, 2016
and
2015
, respectively, which was included in salaries, wages and benefits, and other non-current liabilities on the Consolidated Balance Sheets. TimkenSteel paid
$1.0 million
and $
2.9 million
for cash-settled restricted stock units during
2016
and
2015
, respectively.
Note
11
-
Segment Information
TimkenSteel manufactures alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately
2 million
tons and shipment capacity of
1.5 million
tons. TimkenSteel’s portfolio includes SBQ bars, seamless mechanical tubing (tubes) 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; 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, Tryon Peak, and St. Clair. Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of the Company’s market sectors. As a result, investments in the Company’s facilities and resource allocation decisions affecting the Company’s operations are designed to benefit the overall business of the Company, not any specific aspect of the business.
Effective January 1, 2016, TimkenSteel eliminated its segment reporting as a result of organizational changes made in the second half of 2015, in addition to the integrated nature of the Company’s business as described above. These organizational changes were made to better align resources to support the business strategy of operating in a leaner, more efficient environment. Specifically, the Company has centralized its customer-facing activities under
one
leadership role and eliminated the former
two
segment operating structure. Since that change, the Company is organized in a centralized manner based on functionality. As a result, TimkenSteel conducts its business activities and reports financial results as
one
business segment.
The presentation of financial results as
one
reportable segment is consistent with the way the Company operates its business under the realigned organization and is consistent with the manner in which the Chief Operating Decision Maker (CODM) evaluates performance and makes resource and operating decisions for the business as described above. Furthermore the Company notes that monitoring financial results as
one
reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of the operations.
Geographic Information
Net sales by geographic area are reported by the country in which the customer is domiciled. Long-lived assets include property, plant and equipment and intangible assets subject to amortization. Long-lived assets by geographic area are reported by the location of the TimkenSteel operations to which the asset is attributed.
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
Net Sales:
|
|
|
|
|
United States
|
|
$763.4
|
|
|
|
$979.5
|
|
|
Foreign
|
106.1
|
|
|
126.7
|
|
|
|
|
$869.5
|
|
|
|
$1,106.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
2015
|
|
Long-lived Assets:
|
|
|
|
United States
|
|
$766.6
|
|
|
$799.3
|
|
|
Foreign
|
0.3
|
|
0.6
|
|
|
|
|
$766.9
|
|
|
$799.9
|
|
Note
12
-
Income Tax Provision
(Loss) income from operations before income taxes, based on geographic location of the operations to which such earnings are attributable, is provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
United States
|
|
($136.2
|
)
|
|
|
($82.2
|
)
|
|
|
$69.0
|
|
|
Non-United States
|
(5.8
|
)
|
|
10.5
|
|
|
(0.3
|
)
|
|
(Loss) income from operations before income taxes
|
|
($142.0
|
)
|
|
|
($71.7
|
)
|
|
|
$68.7
|
|
The (benefit) provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$—
|
|
|
|
$—
|
|
|
|
$32.3
|
|
|
State and local
|
0.1
|
|
|
(1.2
|
)
|
|
5.3
|
|
|
Foreign
|
0.2
|
|
|
0.1
|
|
|
0.5
|
|
|
|
|
$0.3
|
|
|
|
($1.1
|
)
|
|
|
$38.1
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
($32.9
|
)
|
|
|
($28.7
|
)
|
|
|
($10.4
|
)
|
|
State and local
|
(3.6
|
)
|
|
0.2
|
|
|
(3.5
|
)
|
|
Foreign
|
(0.3
|
)
|
|
2.9
|
|
|
(1.6
|
)
|
|
|
(36.8
|
)
|
|
(25.6
|
)
|
|
(15.5
|
)
|
|
United States and foreign tax (benefit) expense on (loss) income
|
|
($36.5
|
)
|
|
|
($26.7
|
)
|
|
|
$22.6
|
|
For the year ended
December 31, 2016
, TimkenSteel made
no
U.S. state tax payments and, as of
December 31, 2016
, had
$0.5 million
of refundable overpayments of state incomes and
no
federal income taxes. For the year ended December 31,
2015
, TimkenSteel made
$0.5 million
in U.S. state payments, and as of December 31,
2015
, had refundable overpayments of federal income taxes of
$6.9 million
and state income taxes of
$1.7 million
. The Company recorded these receivables as a component of prepaid expenses on the Consolidated Balance Sheets.
The reconciliation between TimkenSteel’s effective tax rate on income (loss) from continuing operations and the statutory tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Tax at the U.S. federal statutory rate
|
|
($49.7
|
)
|
|
|
($25.2
|
)
|
|
|
$24.2
|
|
|
Adjustments:
|
|
|
|
|
|
|
State and local income taxes, net of federal tax benefit
|
(3.5
|
)
|
|
(2.2
|
)
|
|
1.1
|
|
|
Foreign earnings taxed at different rates including tax holidays
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
U.S. domestic manufacturing deduction
|
—
|
|
|
—
|
|
|
(3.2
|
)
|
|
U.S. research tax credit
|
(0.4
|
)
|
|
(0.5
|
)
|
|
(0.6
|
)
|
|
Valuation allowance
|
15.6
|
|
|
—
|
|
|
—
|
|
|
Other items, net
|
1.6
|
|
|
1.2
|
|
|
1.1
|
|
|
(Benefit) provision for income taxes
|
|
($36.5
|
)
|
|
|
($26.7
|
)
|
|
|
$22.6
|
|
|
Effective income tax rate
|
25.7
|
%
|
|
37.2
|
%
|
|
32.9
|
%
|
Income tax expense includes U.S. and international income taxes. Except as required under U.S. tax law, U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the U.S. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. Undistributed earnings of foreign subsidiaries outside of the U.S. were
$1.6 million
,
$1.6 million
and
$1.5 million
at
December 31, 2016
,
2015
and
2014
, respectively. The Company recognized a deferred tax liability in the amount of $
0.1 million
during 2016 for current-year earnings at its Chinese subsidiary, as those earnings are not permanently reinvested by the Company.
The effect of temporary differences giving rise to deferred tax assets and liabilities at
December 31, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
Pension and postretirement benefits
|
|
$70.3
|
|
|
|
$34.6
|
|
|
Other employee benefit accruals
|
9.1
|
|
|
7.2
|
|
|
Tax loss carryforwards
|
107.4
|
|
|
63.7
|
|
|
Intangible assets
|
2.5
|
|
|
2.9
|
|
|
Inventory
|
2.9
|
|
|
2.9
|
|
|
State decoupling
|
0.5
|
|
|
1.6
|
|
|
Other, net
|
5.3
|
|
|
3.7
|
|
|
Deferred tax assets subtotal
|
|
$198.0
|
|
|
|
$116.6
|
|
|
Valuation allowances
|
(24.4
|
)
|
|
(10.2
|
)
|
|
Deferred tax assets
|
173.6
|
|
|
106.4
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation
|
|
($156.8
|
)
|
|
|
($136.3
|
)
|
|
Inventory
|
(9.7
|
)
|
|
(1.0
|
)
|
|
Convertible debt
|
(6.6
|
)
|
|
—
|
|
|
Other, net
|
(0.2
|
)
|
|
(1.1
|
)
|
|
Deferred tax liabilities subtotal
|
(173.3
|
)
|
|
(138.4
|
)
|
|
Net deferred tax assets (liabilities)
|
|
$0.3
|
|
|
|
($32.0
|
)
|
As of
December 31, 2016
, net deferred tax assets of $
0.3 million
are recorded as a component of other non-current assets on the Consolidated Balance Sheets.
As of
December 31, 2016
, TimkenSteel had loss carryforwards in the U.S. and various non-U.S. jurisdictions totaling
$306.5 million
having various expirations dates. TimkenSteel has provided valuation allowances of
$24.4 million
against these carryforwards. The majority of the non-U.S. loss carryforwards represent local country net operating losses for branches of TimkenSteel or entities treated as branches of TimkenSteel under U.S. tax law. Tax benefits have been recorded for these losses in the U.S. The related local country net operating loss carryforwards are offset fully by valuation allowances.
During 2016, operating losses generated in the U.S. resulted in a decrease in the carrying value of the Company’s U.S. deferred tax liability to the point that would result in a net U.S. deferred tax asset at December 31, 2016. In light of TimkenSteel’s 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 a $
15.6 million
full valuation allowance on its net U.S. deferred tax asset. 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 eliminate them.
As of
December 31, 2016
, TimkenSteel had
no
total gross unrecognized tax benefits, and
no
amounts which represented unrecognized tax benefits that would favorably impact TimkenSteel’s effective income tax rate in any future periods if such benefits were recognized. As of
December 31, 2016
, TimkenSteel does not anticipate a change in its unrecognized tax positions during the next 12 months. TimkenSteel had
no
accrued interest and penalties related to uncertain tax positions as of
December 31, 2016
. TimkenSteel records interest and penalties related to uncertain tax positions as a component of income tax expense. As of
December 31, 2015
, TimkenSteel had
no
total gross unrecognized tax benefits and
no
amount of unrecognized tax benefits that would favorably impact TimkenSteel’s effective income tax rate in any future periods if such benefits were recognized. TimkenSteel had
no
interest and penalties related to uncertain tax positions as of
December 31, 2015
. TimkenSteel records interest and penalties related to uncertain tax positions as a component of (benefit) provision for income taxes.
The reconciliation of TimkenSteel’s total gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Beginning balance, January 1
|
|
$—
|
|
|
|
$—
|
|
|
|
$0.7
|
|
|
Tax positions related to prior years:
|
|
|
|
|
|
|
Reductions
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
|
Ending balance, December 31
|
|
$—
|
|
|
|
$—
|
|
|
|
$—
|
|
As of
December 31, 2016
, Timken is subject to examination by the IRS for tax years 2006 to 2009 and 2012 to the present. Timken also is subject to tax examination in various U.S. state and local tax jurisdictions for tax years 2006 to the present. Timken also is subject to tax examination in various foreign tax jurisdictions, including Mexico, China and the U.K. for tax years 2002 to the present. TimkenSteel is subject to examination by the IRS for the period June 30, 2014 through December 31, 2016. TimkenSteel also is subject to tax examinations in various foreign tax jurisdictions, including Mexico, China, Poland, Singapore and the U.K. for the period June 30, 2014 through December 31, 2016.
Note
13
-
Contingencies
TimkenSteel has a number of loss exposures incurred in the ordinary course of business, such as environmental claims, product warranty claims, and litigation. Establishing loss reserves for these matters requires management’s estimate and judgment regarding risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances. As of December 31, 2016 and 2015, TimkenSteel had contingency reserves related to loss exposures incurred in the ordinary course of business of $
0.2 million
and $
0.5 million
, respectively.
Environmental Matters
From time to time, TimkenSteel may be a party to lawsuits, claims or other proceedings related to environmental matters and/or may receive notices of potential violations of environmental laws and regulations from the U.S. Environmental Protection Agency (EPA) and similar state or local authorities. TimkenSteel recorded reserves for such environmental matters as other current and non-current liabilities on the Consolidated Balance Sheets. Accruals related to such environmental matters represent management’s best estimate of the fees and costs associated with these matters. Although it is not possible to predict with certainty the outcome of such matters, management believes that their ultimate dispositions should not have a material adverse effect on TimkenSteel’s financial position, cash flows, or results of operations.
The following summarizes TimkenSteel contingency reserves and activity related to EPA matters from January 1, 2015 to
December 31, 2016
:
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2015
|
|
$1.3
|
|
|
Expenses
|
—
|
|
|
Payments
|
(0.5
|
)
|
|
Ending balance, December 31, 2015
|
|
$0.8
|
|
|
Expenses
|
—
|
|
|
Payments
|
(0.2
|
)
|
|
Ending balance, December 31, 2016
|
|
$0.6
|
|
Note
14
-
Restructuring Charges
During the second quarter of 2015, TimkenSteel approved and began implementing a cost reduction plan that resulted in the reduction of TimkenSteel’s salaried and hourly headcount. As a result, TimkenSteel recognized restructuring charges consisting of severance, benefits and other associated expenses of
$0.3 million
and
$5.6 million
for the years ended
December 31, 2016
and
2015
. TimkenSteel recorded reserves for such restructuring charges as other current liabilities on the Consolidated Balance Sheets. The following is a roll forward of the consolidated restructuring accrual for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2015
|
|
$—
|
|
|
Expenses
|
5.6
|
|
|
Payments
|
(3.3
|
)
|
|
Ending balance, December 31, 2015
|
|
$2.3
|
|
|
Expenses
|
0.3
|
|
|
Payments
|
(2.5
|
)
|
|
Ending balance, December 31, 2016
|
|
$0.1
|
|
Note
15
-
Relationship with Timken and Related Entities
Prior to the spinoff on June 30, 2014, TimkenSteel was managed and operated in the normal course of business with other affiliates of Timken. Transactions between Timken and TimkenSteel, with the exception of sale and purchase transactions and reimbursements for payments made to third-party service providers by Timken on TimkenSteel’s behalf, are reflected in equity in the Consolidated Balance Sheets as net parent investment and in the Consolidated Statements of Cash Flows as a financing activity in net transfers (to)/from Timken and affiliates.
Corporate Costs/Allocations
For the periods prior to April 1, 2014, the Consolidated Financial Statements include corporate costs incurred by Timken for services that were provided to or on behalf of Timken’s steel business, now TimkenSteel, including but not limited to legal, treasury, corporate administration, technology and human resource services. These costs consist of allocated cost pools and direct costs. Corporate costs were directly charged to, or allocated to, TimkenSteel using methods management believes are consistent and reasonable. TimkenSteel direct costs were incurred directly by TimkenSteel based on negotiated usage rates and dedicated employee assignments. These corporate charges and allocations were deemed paid by TimkenSteel to Timken in the period in which the costs were recorded in the Consolidated Statements of Operations. Net charges from Timken for these services, reflected in selling, general and administrative expenses, were
$7.4 million
for the year ended
December 31, 2014
. Effective April 1, 2014, TimkenSteel performed these functions using internal resources or services provided by third parties, certain of which were provided by Timken and directly charged to TimkenSteel.
Transactions with Other Timken Businesses
TimkenSteel sold finished goods to Timken. During the years ended
December 31, 2016
,
2015
and
2014
, respectively, revenues from related-party sales of products totaled
$32.7 million
or
3.8%
of net sales,
$46.5 million
, or
4.2%
of net sales and
$84.6 million
or
5.1%
, respectively. Prior to the spinoff, TimkenSteel recorded related-party receivables from Timken as Accounts receivable due from related-party in its Consolidated Balance Sheets. Upon separation, outstanding amounts were reclassified to trade receivables.
TimkenSteel did not purchase material from Timken during the year ending December 31, 2016. TimkenSteel purchased less than $
1.0 million
during the year ended December 31, 2015, and approximately
$1.0 million
during the year ended
December 31, 2014
. In addition, certain of TimkenSteel’s third-party service providers were paid by Timken on behalf of TimkenSteel. TimkenSteel would subsequently reimburse Timken in cash for such payments. Prior to the spinoff, TimkenSteel recorded related-party payables to Timken as Accounts payable due to related party in its Consolidated Balance Sheets. Upon separation, outstanding amounts were reclassified to trade payables.
Material Agreements Between TimkenSteel and Timken
On June 30, 2014, TimkenSteel entered into a separation and distribution agreement and several other agreements with Timken to affect the spinoff and to provide a framework for the relationship with Timken. These agreements govern the relationship between TimkenSteel and Timken subsequent to the completion of the spinoff and provide for the allocation between TimkenSteel
and Timken of assets, liabilities and obligations attributable to periods prior to the spinoff. Because these agreements were entered into in the context of a related party transaction, the terms may not be comparable to terms that would be obtained in a transaction between unaffiliated parties.
Separation and Distribution Agreement
— The separation and distribution agreement contains the key provisions relating to the spinoff, including provisions relating to the principal intercompany transactions required to effect the spinoff, the conditions to the spinoff and provisions governing the relationships between TimkenSteel and Timken after the spinoff.
Tax Sharing Agreement
— The tax sharing agreement generally governs TimkenSteel’s and Timken’s respective rights, responsibilities and obligations after the spinoff with respect to taxes for any tax period ending on or before the distribution date, as well as tax periods beginning before and ending after the distribution date. Generally, TimkenSteel is liable for all pre-distribution U.S. federal income taxes, foreign income taxes and non-income taxes attributable to TimkenSteel’s business, and all other taxes attributable to TimkenSteel, paid after the distribution. In addition, the tax sharing agreement addresses the allocation of liability for taxes that are incurred as a result of restructuring activities undertaken to effectuate the distribution. The tax sharing agreement also provides that TimkenSteel is liable for taxes incurred by Timken that arise as a result of TimkenSteel’s taking or failing to take, as the case may be, certain actions that result in the distribution failing to meet the requirements of a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended.
Employee Matters Agreement
— TimkenSteel entered into an employee matters agreement with Timken, which generally provides that TimkenSteel and Timken each has responsibility for its own employees and compensation plans, subject to certain exceptions as described in the agreement. In general, prior to the spinoff, TimkenSteel employees participated in various retirement, health and welfare, and other employee benefit and compensation plans maintained by Timken. Following the spinoff (or earlier, in the case of the tax-qualified defined benefit plans and retiree medical plans), pursuant to the employee matters agreement, TimkenSteel employees and former employees generally participate in similar plans and arrangements established and maintained by TimkenSteel. The employee matters agreement provides for the bifurcation of equity awards as described in
Note 10 - Stock-Based Compensation
. Among other things, the employee matters agreement also provides for TimkenSteel’s assumption of certain employment-related contracts that its employees originally entered into with Timken, the allocation of certain employee liabilities and the cooperation between TimkenSteel and Timken in the sharing of employee information.
Transition Services Agreement
— The transition services agreement, which expired on July 1, 2016, governed the process under which TimkenSteel and Timken provide and/or make available various administrative services and assets to each other. Services provided by Timken to TimkenSteel included certain services related to finance, facilities, information technology and employee benefits under LTA.
SUPPLEMENTAL DATA
Selected Quarterly Financial Data (Unaudited)
(dollars in millions, except per share data)
The following selected quarterly operating results for each quarter of fiscal
2016
and
2015
have been adjusted to reflect the change in accounting principle and correction of immaterial errors as described in
Note 1 - Company and Basis of Presentation
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
|
2016
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$214.7
|
|
|
|
$213.8
|
|
|
|
$223.1
|
|
|
|
$217.9
|
|
|
Gross (Loss) Profit
|
(44.7
|
)
|
|
(6.2
|
)
|
|
15.3
|
|
|
8.5
|
|
|
Net (Loss) Income
(1)
|
(67.0
|
)
|
|
(22.2
|
)
|
|
(6.6
|
)
|
|
(9.7
|
)
|
|
Per Share Data:
(2)
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
($1.52
|
)
|
|
|
($0.50
|
)
|
|
|
($0.15
|
)
|
|
|
($0.22
|
)
|
|
Diluted (loss) earnings per share
|
|
($1.52
|
)
|
|
|
($0.50
|
)
|
|
|
($0.15
|
)
|
|
|
($0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
|
2015
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$206.6
|
|
|
|
$232.7
|
|
|
|
$278.2
|
|
|
|
$388.7
|
|
|
Gross Profit
|
9.3
|
|
|
(12.3
|
)
|
|
2.1
|
|
|
47.1
|
|
|
Net Income
(1)
|
(13.8
|
)
|
|
(24.5
|
)
|
|
(18.1
|
)
|
|
11.4
|
|
|
Per Share Data:
(2)
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
($0.31
|
)
|
|
|
($0.55
|
)
|
|
|
($0.40
|
)
|
|
|
$0.25
|
|
|
Diluted earnings per share
|
|
($0.31
|
)
|
|
|
($0.55
|
)
|
|
|
($0.40
|
)
|
|
|
$0.25
|
|
Previously reported quarterly financial information for fiscal year 2016 and 2015 were as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
September 30
|
|
June 30
|
|
March 31
|
|
2016
|
|
|
|
|
|
|
Net Sales
|
|
$213.8
|
|
|
|
$223.1
|
|
|
|
$217.9
|
|
|
Gross (Loss) Profit
|
2.5
|
|
|
10.2
|
|
|
3.4
|
|
|
Net Loss
(1)
|
(16.6
|
)
|
|
(10.5
|
)
|
|
(13.6
|
)
|
|
Per Share Data:
(2)
|
|
|
|
|
|
|
Basic loss per share
|
|
($0.38
|
)
|
|
|
($0.24
|
)
|
|
|
($0.31
|
)
|
|
Diluted loss per share
|
|
($0.38
|
)
|
|
|
($0.24
|
)
|
|
|
($0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
|
2015
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$206.6
|
|
|
|
$232.7
|
|
|
|
$278.2
|
|
|
|
$388.7
|
|
|
Gross (Loss) Profit
|
(6.2
|
)
|
|
(20.5
|
)
|
|
(6.1
|
)
|
|
41.6
|
|
|
Net (Loss) Income
(1)
|
(24.2
|
)
|
|
(30.8
|
)
|
|
(24.3
|
)
|
|
6.9
|
|
|
Per Share Data:
(2)
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
($0.55
|
)
|
|
|
($0.69
|
)
|
|
|
($0.54
|
)
|
|
|
$0.15
|
|
|
Diluted (loss) earnings per share
|
|
($0.55
|
)
|
|
|
($0.69
|
)
|
|
|
($0.54
|
)
|
|
|
$0.15
|
|
(1)
Net Loss for the second, third, and fourth quarters of 2015 included restructuring charges of
$1.6 million
,
$0.3 million
and
$3.7 million
, respectively. The restructuring charges related to a cost reduction plan that reduced TimkenSteel’s salaried and hourly headcount. See
Note 14 - Restructuring Charges
in the Notes to the Consolidated Financial Statements.
(2)
Basic and diluted earnings per share are computed independently for each of the periods presented. Accordingly, the sum of the quarterly earnings per share amounts may not equal the total for the year. For comparative purposes, and to provide a more meaningful calculation for weighted average shares, this amount was assumed to be outstanding as of the beginning of each period presented prior to the spinoff in the calculation of basic weighted average shares. See
Note 9 - Earnings Per Share
in the Notes to the Consolidated Financial Statements.