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TimkenSteel Corp - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission file number: 1-36313
tmstlogomastera20.jpg
 
TIMKENSTEEL CORPORATION
(Exact name of registrant as specified in its charter)
 
Ohio
 
46-4024951
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1835 Dueber Avenue SW, Canton, OH
 
44706
(Address of principal executive offices)
 
(Zip Code)
330.471.7000
(Registrant’s telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading symbol
Name of exchange in which registered
Common shares
TMST
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý   No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   ý   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
Large accelerated filer
 
o
  
 
Accelerated filer
ý
 
 
 
 
 
 
 
Non-accelerated filer
 
o
 
 
Smaller reporting company
o
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial reporting accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at October 31, 2019
 
 
Common Shares, without par value
 
44,820,153
 


TimkenSteel Corporation
Table of Contents
 
 
PAGE
 
 
 
 
 
 
 


2


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TimkenSteel Corporation
Consolidated Statements of Operations (Unaudited)
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
(Dollars in millions, except per share data)
 
 
 
 
 
 
 
Net sales

$274.2

 

$409.9

 

$981.9

 

$1,204.2

Cost of products sold
261.0

 
385.3

 
914.2

 
1,126.4

Gross Profit
13.2

 
24.6

 
67.7

 
77.8

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
21.4

 
24.0

 
64.9

 
73.6

Restructuring charges
—

 
—

 
3.6

 
—

Impairment charges and loss on asset disposals
0.1

 
—

 
1.9

 
0.9

Interest expense
3.6

 
4.4

 
12.0

 
12.9

Other income, net
5.2

 
6.1

 
8.1

 
18.7

Income (Loss) Before Income Taxes
(6.7
)

2.3


(6.6
)

9.1

Provision (benefit) for income taxes
(2.1
)
 
0.9

 
(1.8
)
 
1.2

Net Income (Loss)

($4.6
)


$1.4

 

($4.8
)
 

$7.9

 
 
 
 
 
 
 
 
Per Share Data:
 
 
 
 
 
 
 
Basic earnings (loss) per share

($0.10
)
 

$0.03

 

($0.11
)
 

$0.18

Diluted earnings (loss) per share

($0.10
)
 

$0.03

 

($0.11
)
 

$0.17

See accompanying Notes to the unaudited Consolidated Financial Statements.


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Table of Contents

TimkenSteel Corporation
Consolidated Statement of Comprehensive Income (Loss) (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019

2018
 
2019
 
2018
 
(Dollars in millions)
 
 
 
 
 
 
 
 
Net income (loss)

($4.6
)
 

$1.4

 

($4.8
)
 

$7.9

 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1.0
)
 
(0.5
)
 
(1.2
)
 
(0.9
)
 
Pension and postretirement liability adjustments, net of tax of $2.2
 million for the three and nine months ended September 30, 2019
 (net of tax of $0 for the three and nine months ended September
 30, 2018)
(3.4
)
 
0.2

 
66.1

 
0.5

 
Other comprehensive income (loss), net of tax
(4.4
)
 
(0.3
)
 
64.9

 
(0.4
)
 
Comprehensive Income (Loss), net of tax

($9.0
)
 

$1.1

 

$60.1

 

$7.5

 
See accompanying Notes to the unaudited Consolidated Financial Statements.


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Table of Contents

TimkenSteel Corporation
Consolidated Balance Sheets (Unaudited)
 
September 30,
2019
 
December 31,
2018
(Dollars in millions)
 
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents

$18.4

 

$21.6

Accounts receivable, net of allowances (2019 - $1.2 million; 2018 - $1.7 million)
107.4

 
163.4

Inventories, net
279.4

 
296.8

Deferred charges and prepaid expenses
4.9

 
3.5

Other current assets
7.9

 
6.1

Total Current Assets
418.0

 
491.4

 
 
 
 
Property, plant and equipment, net
643.0

 
674.4

Operating lease right-of-use assets
14.2

 
—

Pension assets
13.2

 
10.5

Intangible assets, net
16.2

 
17.8

Other non-current assets
2.7

 
3.5

Total Assets

$1,107.3

 

$1,197.6

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable

$79.0

 

$160.6

Salaries, wages and benefits
17.0

 
36.8

Accrued pension and postretirement costs
3.0

 
3.0

Current operating lease liabilities
6.1

 
—

Other current liabilities
17.4

 
20.4

Total Current Liabilities
122.5

 
220.8

 
 
 
 
Convertible notes, net
77.4

 
74.1

Credit Agreement
110.0

 
115.0

Non-current operating lease liabilities
8.2

 
—

Accrued pension and postretirement costs
178.5

 
240.0

Deferred income taxes
0.6

 
0.8

Other non-current liabilities
10.4

 
11.7

Total Liabilities
507.6

 
662.4

 
 
 
 
Shareholders’ Equity
 
 
 
Preferred shares, without par value; authorized 10.0 million shares, none issued
—

 
—

Common shares, without par value; authorized 200.0 million shares;
   issued 2019 and 2018 - 45.7 million shares
—

 
—

Additional paid-in capital
842.8

 
846.3

Retained deficit
(274.0
)
 
(269.2
)
Treasury shares - 2019 - 0.9 million; 2018 - 1.1 million
(25.1
)
 
(33.0
)
Accumulated other comprehensive income (loss)
56.0

 
(8.9
)
Total Shareholders’ Equity
599.7

 
535.2

Total Liabilities and Shareholders’ Equity

$1,107.3

 

$1,197.6

See accompanying Notes to the unaudited Consolidated Financial Statements.


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Table of Contents

TimkenSteel Corporation
Consolidated Statements of Shareholders’ Equity (Unaudited)
(Dollars in millions)
Common Shares Outstanding
 
Additional Paid-in Capital
 
Retained Deficit
 
Treasury Shares
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance as of December 31, 2018
44,584,668

 

$846.3

 

($269.2
)
 

($33.0
)
 

($8.9
)
 

$535.2

Net income (loss)
—

 
—

 
4.2

 
—

 
—

 
4.2

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
0.5

 
0.5

Stock-based compensation expense
—

 
2.2

 
—

 
—

 
—

 
2.2

Stock option activity
—

 
0.2

 
—

 
—

 
—

 
0.2

Issuance of treasury shares
261,130

 
(7.5
)
 
—

 
7.5

 
—

 
—

Shares surrendered for taxes
(79,889
)
 
—

 
—

 
(1.0
)
 
—

 
(1.0
)
Balance at March 31, 2019
44,765,909

 

$841.2



($265.0
)


($26.5
)


($8.4
)
 

$541.3

Net income (loss)
—

 
—

 
(4.4
)
 
—

 
—

 
(4.4
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
68.8

 
68.8

Stock-based compensation expense
—

 
1.6

 
—

 
—

 
—

 
1.6

Issuance of treasury shares
50,185

 
(1.4
)
 
—

 
1.4

 
—

 
—

Balance at June 30, 2019
44,816,094

 

$841.4



($269.4
)


($25.1
)


$60.4



$607.3

Net income (loss)
—

 
—

 
(4.6
)
 
—

 
—

 
(4.6
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
(4.4
)
 
(4.4
)
Stock-based compensation expense
—

 
1.4

 
—

 
—

 
—

 
1.4

Issuance of treasury shares
1,704

 
—

 
—

 
—

 
—

 
—

Shares surrendered for taxes
(720
)
 
—

 
—

 
—

 
—

 
—

Balance at September 30, 2019
44,817,078

 

$842.8

 

($274.0
)
 

($25.1
)
 

$56.0

 

$599.7

See accompanying Notes to the unaudited Consolidated Financial Statements.
















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Table of Contents

TimkenSteel Corporation
Consolidated Statements of Shareholders’ Equity (Unaudited)
 
Common Shares Outstanding
 
Additional Paid-in Capital
 
Retained Deficit
 
Treasury Shares
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance at December 31, 2017
44,445,747

 

$843.7

 

($238.0
)
 

($37.4
)
 

($7.6
)
 

$560.7

Net income (loss)
—

 
—

 
(1.9
)
 
—

 
—

 
(1.9
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
0.9

 
0.9

Revenue recognition accounting standard adoption
—

 
—

 
0.7

 
—

 
—

 
0.7

Stock-based compensation expense
—

 
2.2

 
—

 
—

 
—

 
2.2

Stock option activity
—

 
0.1

 
—

 
—

 
—

 
0.1

Issuance of treasury shares
121,012

 
(3.4
)
 
(0.1
)
 
3.5

 
—

 
—

Shares surrendered for taxes
(37,533
)
 
—

 
—

 
(0.7
)
 
—

 
(0.7
)
Balance at March 31, 2018
44,529,226

 

$842.6



($239.3
)


($34.6
)


($6.7
)


$562.0

Net income (loss)
—

 
—

 
8.4

 
—

 
—

 

$8.4

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
(1.0
)
 

($1.0
)
Stock-based compensation expense
—

 
1.5

 
—

 
—

 
—

 

$1.5

Stock option activity
—

 
0.1

 
—

 
—

 
—

 

$0.1

Issuance of treasury shares
55,442

 
(1.5
)
 
(0.1
)
 
1.6

 
—

 

$—

Balance at June 30, 2018
44,584,668

 

$842.7



($231.0
)


($33.0
)


($7.7
)


$571.0

Net income (loss)
—

 
—

 
1.4

 
—

 
—

 

$1.4

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
(0.3
)
 

($0.3
)
Stock-based compensation expense
—

 
2.2

 
—

 
—

 
—

 

$2.2

Balance at September 30, 2018
44,584,668

 

$844.9

 

($229.6
)
 

($33.0
)
 

($8.0
)
 

$574.3

See accompanying Notes to the unaudited Consolidated Financial Statements.

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Table of Contents

TimkenSteel Corporation
Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
(Dollars in millions)
 
 
 
CASH PROVIDED (USED)
 
 
 
Operating Activities
 
 
 
Net income (loss)

($4.8
)
 

$7.9

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
 
 
 
Depreciation and amortization
53.2

 
55.0

Amortization of deferred financing fees and debt discount
3.7

 
4.3

Impairment charges and loss on sale or disposal of assets
1.9

 
0.9

Deferred income taxes
(2.3
)
 
0.3

Stock-based compensation expense
5.2

 
5.9

Pension and postretirement expense (benefit), net
6.0

 
(4.3
)
Pension and postretirement contributions and payments
(2.3
)
 
(12.4
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
56.0

 
(22.3
)
Inventories, net
17.4

 
(61.3
)
Accounts payable
(81.6
)
 
3.5

Other accrued expenses
(24.7
)
 
(5.9
)
Deferred charges and prepaid expenses
(1.4
)
 
(0.8
)
Other, net
(2.0
)
 
0.8

Net Cash Provided (Used) by Operating Activities
24.3

 
(28.4
)
 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(21.7
)
 
(17.7
)
Proceeds from disposals of property, plant and equipment
—

 
1.0

Net Cash Used by Investing Activities
(21.7
)
 
(16.7
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from exercise of stock options
0.2

 
0.2

Shares surrendered for employee taxes on stock compensation
(1.0
)
 
(0.7
)
Refunding Bonds repayments
—

 
(30.2
)
Repayments on credit agreements
(45.0
)
 
(75.0
)
Borrowings on credit agreements
40.0

 
155.0

Debt issuance costs
—

 
(1.7
)
Net Cash Provided (Used) by Financing Activities
(5.8
)
 
47.6

Increase (Decrease) in Cash and Cash Equivalents
(3.2
)
 
2.5

Cash and cash equivalents at beginning of period
21.6

 
24.5

Cash and Cash Equivalents at End of Period

$18.4

 

$27.0

See accompanying Notes to the unaudited Consolidated Financial Statements.


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Table of Contents

TimkenSteel Corporation
Notes to Unaudited Consolidated Financial Statements
(dollars in millions, except per share data)

Note 1 - Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared by TimkenSteel Corporation (the Company or TimkenSteel) in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. Certain items previously reported in specific financial statement captions have been reclassified to conform with the current year presentation. For further information, refer to TimkenSteel’s audited Consolidated Financial Statements and Notes included in its Annual Report on Form 10-K for the year ended December 31, 2018.
Note 2 - Recent Accounting Pronouncements
Adoption of New Accounting Standards
The Company adopted the following Accounting Standard Updates (ASU) in the first quarter of 2019, all of which were effective as of January 1, 2019. The adoption of these standards had no impact on the unaudited Consolidated Financial Statements or the related Notes to the unaudited Consolidated Financial Statements.
Standards Adopted
Description
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
The standard provides an expanded scope of Topic 718, to include share-based payment transactions for acquiring goods and services from nonemployees.
ASU 2018-02, Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
The standard permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings.
ASU 2017-11, Distinguishing Liabilities from Equity; Derivatives and Hedging
The standard eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock.

On January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topics 842),” which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for not only finance (previously capital) leases but also operating leases. The standard also requires additional quantitative and qualitative disclosures. The Company adopted the standard using the modified retrospective transition approach without adjusting comparative periods.
The Company elected certain of the practical expedients permitted under the transition guidance within the new standard as follows:
•
A package of practical expedients to not reassess:
◦
Whether a contract is or contains a lease
◦
Lease classification
◦
Initial direct costs
•
A practical expedient to not reassess certain land easements

The Company has implemented internal controls and lease accounting software to enable the quantification of the expected impact on the unaudited Consolidated Balance Sheets and to facilitate the calculations of the related accounting entries and disclosures. Adoption of the lease standard resulted in recognition of right-to-use assets and lease liabilities of $16.0 million as of January 1, 2019. Adoption of the lease standard had no impact on the Company’s debt-covenant compliance under its current agreements. Also, the standard did not materially affect the Company’s results of operations or its cash flows. Refer to “Note 11 - Leases” for additional information.

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Table of Contents

Accounting Standards Issued But Not Yet Adopted
The Company has considered the recent ASUs issued by the Financial Accounting Standards Board summarized below:
Standard Pending Adoption
Description
Effective Date
Anticipated Impact
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)
The standard aligns the requirements for capitalizing implementation costs in cloud computing software arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
January 1, 2020
The Company plans on adopting this ASU using the prospective method. The Company does not expect the ASU to have a material impact on its results of operations or financial condition.
ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)
The standard eliminates, modifies and adds disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.
January 1, 2021
The Company is currently evaluating the impact of the adoption of this ASU on its results of operations and financial condition.

ASU 2018-13, Fair Value Measurement (Topic 820)
The standard eliminates, modifies and adds disclosure requirements for fair value measurements.
January 1, 2020
The Company does not expect the ASU to have a material impact on its results of operations or financial condition.


ASU 2016-13, Measurement of Credit Losses on Financial Instruments
The standard changes how entities will measure credit losses for most financial assets, including trade and other receivables and replaces the current incurred loss approach with an expected loss model.
January 1, 2020
The Company does not expect the ASU to have a material impact on its results of operations or financial condition.

Note 3 - Revenue Recognition
TimkenSteel recognizes revenue from contracts at a point in time when it has satisfied its performance obligation and the customer obtains control of the goods, at the amount that reflects the consideration the Company expects to receive for those goods. The Company receives and acknowledges purchase orders from its customers which define the quantity, pricing, payment and other applicable terms and conditions. In some cases, the Company receives a blanket purchase order from its customer, which includes pricing, payment and other terms and conditions. Quantities are defined at the time the customer issues periodic releases against the blanket purchase order. Certain contracts contain variable consideration, which primarily consists of rebates that are accounted for in net sales and accrued based on the estimated probability of the requirements being met. Amounts billed to customers related to shipping and handling costs are included in net sales and related costs are included in costs of products sold in the unaudited Consolidated Financial Statements.
The following table provides the major sources of revenue by end-market sector for the three and nine months ended September 30, 2019 and 2018:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Mobile

$110.2

 

$136.4

 

$389.7

 

$420.5

Industrial
116.9

 
169.7

 
388.2

 
484.3

Energy
32.6

 
70.1

 
147.5

 
188.0

Other(1)
14.5

 
33.7

 
56.5

 
111.4

Total Net Sales

$274.2

 

$409.9

 

$981.9

 

$1,204.2

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

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Table of Contents

The following table provides the major sources of revenue by product type for the three and nine months ended September 30, 2019 and 2018:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019

2018
 
2019
 
2018
Bar

$179.7

 

$262.2

 

$645.0

 

$759.0

Tube
32.2

 
66.7

 
122.6

 
201.0

Value-add
55.9

 
70.6

 
192.7

 
212.5

Other(2)
6.4

 
10.4

 
21.6

 
31.7

Total Net Sales

$274.2

 

$409.9

 

$981.9

 

$1,204.2

(2) “Other” for sales by product type includes the Company’s scrap sales.
Note 4 - Restructuring Charges
During the second quarter of 2019, TimkenSteel made organizational changes to enhance profitable and sustainable growth. These company-wide actions included the restructuring of its commercial and technology organizations to drive innovation and focus on the key growth areas identified by the Company such as value-added components, energy products and government business. Given these and other restructuring efforts, the Company implemented approximately 55 salaried position eliminations and recognized restructuring charges of $3.6 million consisting of severance and employee-related benefits. TimkenSteel recorded reserves for such restructuring charges as other current liabilities on the unaudited Consolidated Balance Sheets. The reserve balance at September 30, 2019 is expected to be substantially used in the next six months.

The following is a summary of the restructuring reserve for the nine months ended September 30, 2019:
Balance at December 31, 2018

$—

Expenses
3.6

Payments
(1.5
)
Balance at September 30, 2019

$2.1

Note 5 - Other Income, net
The following table provides the components of other income, net for the three and nine months ended September 30, 2019 and 2018:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Pension and postretirement non-service benefit income

$5.1

 

$6.2

 

$12.4

 

$18.7

Loss from remeasurement of benefit plans
—

 
—

 
(4.4
)
 
—

Foreign currency exchange gain (loss)
(0.1
)
 
—

 
—

 
—

Miscellaneous income (expense)
0.2

 
(0.1
)
 
0.1

 
—

Total other income, net

$5.2



$6.1



$8.1



$18.7

Non-service benefit income is derived from the Company’s pension and other postretirement plans. The Company’s expected return on assets has exceeded the interest cost component, resulting in income for the three and nine months ended September 30, 2019 and 2018.
In the second quarter of 2019, the Company amended its postretirement benefit plan. This amendment reduced the postretirement liability and therefore required the Company to perform a full remeasurement of its postretirement obligations and plan assets as of April 30, 2019. The reduction in the Accumulated Postretirement Benefit Obligation (APBO) was recognized in Other Comprehensive Income and subsequently amortized as an offset to postretirement benefit cost. For more details on the remeasurement, refer to “Note 13 - Retirement and Postretirement Plans.”

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Note 6 - Income Tax Provision
TimkenSteel’s provision for income taxes in interim periods is computed by applying the appropriate estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items, including interest on prior-year tax liabilities, are recorded during the periods in which they occur.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019

2018
 
2019
 
2018
Provision (benefit) for incomes taxes

($2.1
)
 

$0.9

 

($1.8
)
 

$1.2

Effective tax rate
31.4
%
 
41.0
%
 
27.1
%
 
13.4
%
Intraperiod tax allocation rules require the allocation of income taxes between continuing operations and other categories of comprehensive income. In periods in which the Company has a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of comprehensive income, the Company must consider that income in determining the amount of tax benefit that results from a loss in continuing operations and that will be allocated to continuing operations. As a result of the intraperiod tax allocation rules, the Company recorded an income tax benefit of $2.2 million within other comprehensive income for the three and nine months ended September 30, 2019.
In light of TimkenSteel’s recent operating performance in the U.S. and current industry conditions, the Company assessed its U.S. deferred tax assets and concluded, based upon all available evidence, that it was more likely than not that it would not realize the assets. As a result, the Company maintains a full valuation allowance against its deferred tax assets in the U.S. and applicable foreign countries until sufficient positive evidence exists to conclude that a valuation allowance is not necessary. Going forward, the need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s effective tax rate. The majority of TimkenSteel’s taxes are derived from foreign operations.
Note 7 - Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based upon the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the treasury stock method or if-converted method. For the Convertible Notes, the Company utilizes the if-converted method to calculate diluted earnings (loss) per share. Under the if-converted method, the Company adjusts net earnings to add back interest expense (including amortization of debt discount) recognized on the Convertible Notes and includes the number of shares potentially issuable related to the Convertible Notes in the weighted average shares outstanding. Treasury stock is excluded from the denominator in calculating both basic and diluted earnings (loss) per share.
Common share equivalents for shares issuable for equity-based awards were excluded from the computation of diluted earnings (loss) per share for the three and nine months ended September 30, 2019 because the effect of their inclusion would have been anti-dilutive. Common share equivalents for shares issuable upon the conversion of outstanding convertible notes were excluded from the computation of diluted earnings (loss) per share for the three and nine months ended September 30, 2019 and 2018 because the effect of their inclusion would have been anti-dilutive.
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2019 and 2018:

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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019

2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net income (loss)

($4.6
)
 

$1.4

 

($4.8
)
 

$7.9

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding, basic
44.8

 
44.6

 
44.8

 
44.5

Dilutive effect of stock-based awards
—

 
0.6

 
—

 
0.7

Weighted average shares outstanding, diluted
44.8

 
45.2

 
44.8

 
45.2

 
 
 
 
 
 
 
 
Basic earnings (loss) per share

($0.10
)
 

$0.03

 

($0.11
)
 

$0.18

Diluted earnings (loss) per share

($0.10
)
 

$0.03

 

($0.11
)
 

$0.17

Note 8 - Inventories
The components of inventories, net of reserves as of September 30, 2019 and December 31, 2018 were as follows:
 
September 30,
2019
 
December 31,
2018
Manufacturing supplies

$52.2

 

$46.9

Raw materials
38.5

 
35.2

Work in process
112.6

 
155.7

Finished products
133.0

 
142.8

Gross inventory
336.3

 
380.6

Allowance for surplus and obsolete inventory
(5.5
)
 
(5.1
)
LIFO reserve
(51.4
)
 
(78.7
)
Total Inventories, net

$279.4

 

$296.8

Inventories are valued at the lower of cost or market, with approximately 74% valued by the last in, first out (LIFO) method, and the remaining inventories, including manufacturing supplies inventory as well as international (outside the United States) inventories, valued by the first-in, first-out, average cost or specific identification methods.
An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation.
TimkenSteel projects its LIFO reserve will decrease for the year ending December 31, 2019 due to lower anticipated raw material costs, manufacturing costs and quantities.

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Note 9 - Property, Plant and Equipment
The components of property, plant and equipment, net as of September 30, 2019 and December 31, 2018 were as follows:
 
September 30,
2019
 
December 31,
2018
Land

$14.1

 

$14.1

Buildings and improvements
426.4

 
424.4

Machinery and equipment
1,409.0

 
1,404.2

Construction in progress
25.8

 
28.5

Subtotal
1,875.3

 
1,871.2

Less allowances for depreciation
(1,232.3
)
 
(1,196.8
)
Property, Plant and Equipment, net

$643.0

 

$674.4

Total depreciation expense was $16.3 million and $16.8 million for the three months ended September 30, 2019 and 2018, respectively. Total depreciation expense was $49.2 million and $50.8 million for the nine months ended September 30, 2019 and 2018, respectively. There was a loss on disposal of $0.1 million during the three months ended September 30, 2019 and no losses on disposal during the three months ended September 30, 2018. For the nine months ended September 30, 2019 TimkenSteel recorded a loss on disposal of assets of $1.8 million primarily related to the abandonment of certain equipment. For the nine months ended September 30, 2018, TimkenSteel recorded approximately $0.5 million of impairment charges and loss on sale or disposals related to the discontinued use of certain assets.
Note 10 - Intangible Assets
The components of intangible assets, net as of September 30, 2019 and December 31, 2018 were as follows:
 
September 30, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
 Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
 Accumulated Amortization
 
Net Carrying Amount
Customer relationships

$6.3

 

$4.9

 

$1.4

 

$6.3

 

$4.6

 

$1.7

Technology use
9.0

 
6.9

 
2.1

 
9.0

 
6.5

 
2.5

Capitalized software
61.2

 
48.5

 
12.7

 
61.6

 
48.0

 
13.6

Total Intangible Assets

$76.5

 

$60.3

 

$16.2

 

$76.9

 

$59.1

 

$17.8

Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives. Amortization expense for intangible assets for the three months ended September 30, 2019 and 2018 was $1.2 million and $1.3 million, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2019 and 2018 was $4.0 million and $4.2 million, respectively. During the nine months ended September 30, 2019, TimkenSteel recorded a loss on disposal of $0.1 million. For the nine months ended September 30, 2018, TimkenSteel recorded approximately $0.4 million of impairment charges due to the discontinued use of certain capitalized software.

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Note 11 - Leases
The Company has operating leases for office space, warehouses, land, machinery and equipment, vehicles and certain information technology equipment. These leases have remaining lease terms of less than one year to six years, some of which may include options to extend the leases for one or more years. Certain leases also include options to purchase the leased property. As of September 30, 2019, the Company has no financing leases. The weighted average remaining lease term for our operating leases as of September 30, 2019 was 2.8 years.
Leases with an initial term of 12 months or less (short-term leases) are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into after the adoption of ASC 842, the Company combines lease and non-lease components. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.
The Company recorded lease cost for the three and nine months ended September 30, 2019 as follows:
 
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
Operating lease cost

$1.9


$5.5

Short-term lease cost
0.5

1.5

Total lease cost

$2.4


$7.0

When available, the rate implicit in the lease is used to discount lease payments to present value; however, the Company’s leases generally do not provide a readily determinable implicit rate. Therefore, the incremental borrowing rate to discount the lease payments is estimated using market-based information available at lease commencement. The weighted average discount rate used to measure our operating lease liabilities as of September 30, 2019 was 4.7%.
Supplemental cash flow information related to leases was as follows:
 
Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of operating lease liabilities

$5.7

Right-of-use assets obtained in exchange for operating lease obligations

$2.8

Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows:
2019 (excluding the nine months ended September 30, 2019)

$1.8

2020
6.2

2021
4.2

2022
1.8

2023
0.9

After 2023
0.2

Total future minimum lease payments
15.1

   Less amount of lease payment representing interest
(0.9
)
Total present value of lease payments

$14.2


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Future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows:
2019

$6.3

2020
5.2

2021
3.3

2022
1.0

2023
0.6

After 2023
—

Total future minimum lease payments

$16.4

As of September 30, 2019, we have additional operating leases that have not yet commenced for which the present value of lease payments over the respective lease terms totals approximately $6.0 million. These leases are primarily manufacturing equipment to support the Company’s mobile value-added powertrain component product sales. These operating leases will commence between the fourth quarter of 2019 and the first half of 2020 with lease terms of three to four years. Accordingly, these leases are not recorded on the unaudited Consolidated Balance Sheet at September 30, 2019.
Note 12 - Financing Arrangements
For a detailed discussion of the Company's long-term debt and credit arrangements, refer to “Note 6 - Financing Arrangements” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Convertible Notes
The components of the Convertible Notes as of September 30, 2019 and December 31, 2018 were as follows:
 
September 30,
2019
 
December 31,
2018
Principal

$86.3

 

$86.3

Less: Debt issuance costs, net of amortization
(0.8
)
 
(1.2
)
Less: Debt discount, net of amortization
(8.1
)
 
(11.0
)
Convertible notes, net

$77.4

 

$74.1

The initial value of the principal amount recorded as a liability at the date of issuance was $66.9 million, using an effective interest rate of 12.0%. The remaining $19.4 million of principal amount was allocated to the conversion feature and recorded as a component of shareholders’ equity at the date of issuance. This amount represents a discount to the debt to be amortized through interest expense using the effective interest method through the maturity of the Convertible Notes.
Transaction costs were allocated to the liability and equity components based on their relative values. Transaction costs attributable to the liability component of $2.4 million are amortized to interest expense over the term of the Convertible Notes, and transaction costs attributable to the equity component of $0.7 million are included in shareholders’ equity.
The following table sets forth total interest expense recognized related to the Convertible Notes:
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2019

2018
2019
 
2018
Contractual interest expense

$1.3

 

$1.3


$3.9

 

$3.9

Amortization of debt issuance costs
0.1

 
0.1

0.3

 
0.3

Amortization of debt discount
1.0

 
0.9

3.0

 
2.6

Total

$2.4

 

$2.3


$7.2

 

$6.8




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Credit Agreement
On January 26, 2018, the Company, as borrower, and certain domestic subsidiaries, as subsidiary guarantors, entered into the Second Amended and Restated Credit Agreement (Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and the other lenders party thereto, which amended and restated the Company’s credit agreement. The interest rate under the credit agreement was 4.1% as of September 30, 2019. The amount available under the credit agreement as of September 30, 2019 was $187.0 million. As of September 30, 2019, the Company was in compliance with all covenants.
Refunding Bonds
On January 23, 2018, the Company redeemed in full $12.2 million of Ohio Water Development Revenue Refunding Bonds (originally due on November 1, 2025), $9.5 million of Ohio Air Quality Development Revenue Refunding Bonds (originally due on November 1, 2025) and $8.5 million of Ohio Pollution Control Revenue Refunding Bonds (originally due on June 1, 2033).
Amended Credit Agreement
On October 15, 2019, the Company, as borrower, and certain domestic subsidiaries of the Company, as subsidiary guarantors, entered into a Third Amended and Restated Credit Agreement (the Amended Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent (the Administrative Agent), Bank of America, N.A., as syndication agent, and the other lenders party thereto (collectively, the Lenders), which further amended and restated the Company’s existing Credit Agreement dated as of January 26, 2018.
The Amended Credit Agreement provides for a $400.0 million asset-based revolving credit facility (the Credit Facility), including a $15.0 million sublimit for the issuance of commercial and standby letters of credit and a $40.0 million sublimit for swingline loans. Pursuant to the terms of the Amended Credit Agreement, the Company is entitled, on up to two occasions and subject to the satisfaction of certain conditions, to request increases in the commitments under the Amended Credit Agreement in the aggregate principal amount of up to $100.0 million, to the extent that existing or new lenders agree to provide such additional commitments. In addition to and independent of any increase described in the preceding sentence, the Company is entitled, subject to the satisfaction of certain conditions, to request a separate first-in, last-out (FILO) tranche in an aggregate principal amount of up to $30.0 million with a separate borrowing base and interest rate margins, in each case, to be agreed upon among the Company, the Administrative Agent and the Lenders providing the incremental FILO tranche.
The availability of borrowings under the Credit Facility is subject to a borrowing base calculation based upon a valuation of the eligible accounts receivable, inventory and machinery and equipment of the Company and the subsidiary guarantors, each multiplied by an applicable advance rate. The availability of borrowings may be further modified by reserves established from time to time by the Administrative Agent in its permitted discretion.
The interest rate per annum applicable to loans under the Credit Facility will be, at the Company’s option, equal to either (i) the alternate base rate plus the applicable margin or (ii) the relevant adjusted LIBO rate for an interest period of one, two, three or six months (as selected by the Company) plus the applicable margin. The base rate will be a fluctuating rate per annum equal to the greatest of (i) the prime rate as quoted in The Wall Street Journal, (ii) the effective Federal Reserve Bank of New York rate plus 0.50% and (iii) the adjusted LIBO rate for a one-month interest period on the applicable date, plus 1.00%. The adjusted LIBO rate will be equal to the applicable London interbank offered rate for the selected interest period, as adjusted for statutory reserve requirements for eurocurrency liabilities. The applicable margin will be determined by a pricing grid based on the Company’s average quarterly availability. In addition, the Company will pay a 0.25% per annum commitment fee on the average daily unused amount of the Credit Facility.
All of the indebtedness under the Credit Facility is guaranteed by the Company’s material domestic subsidiaries, as well as any other domestic subsidiary that the Company elects to make a party to the Amended Credit Agreement, and is secured by substantially all of the personal property of the Company and the subsidiary guarantors.
The Credit Facility matures on October 15, 2024. Prior to the maturity date, amounts outstanding are required to be repaid (without reduction of the commitments thereunder) from mandatory prepayment events from the proceeds of certain asset sales, equity or debt issuances or casualty events.
The Amended Credit Agreement contains certain customary covenants, including covenants that limit the ability of the Company and its subsidiaries to, among other things, (i) incur or suffer to exist certain liens, (ii) make investments, (iii) incur or guaranty additional indebtedness, (iv) enter into consolidations, mergers, acquisitions, sale-leaseback transactions and sales of assets, (v) make distributions and other restricted payments, (vi) change the nature of its business, (vii) engage in transactions

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Table of Contents

with affiliates and (viii) enter into restrictive agreements, including agreements that restrict the ability to incur liens or make distributions.
In addition, the Amended Credit Agreement requires the Company to (i) unless certain conditions are met, maintain certain minimum liquidity as specified in the Amended Credit Agreement during the period commencing on March 1, 2021 and ending on June 1, 2021 and (ii) maintain a minimum specified fixed charge coverage ratio on a springing basis if minimum availability requirements as specified in the Amended Credit Agreement are not maintained.
The Amended Credit Agreement contains certain customary events of default. If any event of default occurs and is continuing, the Lenders would be entitled to take various actions, including the acceleration of amounts due under the Amended Credit Agreement, and exercise other rights and remedies.
Fair Value Measurement
The fair value of the Convertible Notes was approximately $81.1 million as of September 30, 2019. The fair value of the Convertible Notes, which falls within Level 1 of the fair value hierarchy as defined by Accounting Standards Codification (ASC) 820, Fair Value Measurements, is based on the last price traded in September 2019.
TimkenSteel’s Credit Agreement is variable-rate debt. As such, the carrying value is a reasonable estimate of fair value as interest rates on these borrowings approximate current market rates. This valuation falls within Level 2 of the fair value hierarchy and is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly.
Interest Paid
The total cash interest paid for the nine months ended September 30, 2019 and 2018 was $7.6 million and $6.4 million, respectively.





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Table of Contents

Note 13 - Retirement and Postretirement Plans
The components of net periodic benefit cost (income) for the three and nine months ended September 30, 2019 and 2018 were as follows:

Three Months Ended
September 30, 2019

Three Months Ended
September 30, 2018

Pension

Postretirement

Pension

Postretirement
Service cost

$4.4



$0.3



$4.3



$0.4

Interest cost
12.2


1.3


11.4


1.9

Expected return on plan assets
(16.3
)

(1.0
)

(18.4
)

(1.2
)
Amortization of prior service cost
0.1


(1.4
)

0.1


0.1

Net Periodic Benefit Cost (Income)

$0.4



($0.8
)


($2.6
)


$1.2


Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018

Pension
 
Postretirement
 
Pension
 
Postretirement
Service cost

$13.1

 

$0.9

 

$12.9

 

$1.3

Interest cost
36.7

 
4.8

 
34.2

 
5.7

Expected return on plan assets
(48.9
)
 
(2.9
)
 
(55.3
)
 
(3.6
)
Amortization of prior service cost
0.3

 
(2.4
)
 
0.3

 
0.2

Net remeasurement losses (gains)
—

 
4.4

 
—

 
—

Net Periodic Benefit Cost (Income)

$1.2

 

$4.8

 

($7.9
)
 

$3.6

In the second quarter of 2019, the Company amended its postretirement benefit plan relating to moving Medicare-eligible union retirees to an individual plan on a Medicare healthcare exchange. This amendment reduced the postretirement liability by $70.2 million. This amendment required the Company to perform a full remeasurement of its postretirement obligations and plan assets as of April 30, 2019. The $70.2 million reduction in the APBO is recognized in Other Comprehensive Income (Loss) and subsequently amortized as an offset to postretirement benefit cost over a period of 12 years (average remaining service period). In addition to the reduction of the APBO, the Company recognized a net remeasurement loss of $4.4 million in the second quarter of 2019 related to the plan amendment.


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Table of Contents

Note 14 - Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2019 and 2018 by component were as follows:
 
Foreign Currency Translation Adjustments
 
Pension and Postretirement Liability Adjustments
 
Total
Balance as of December 31, 2018

($7.3
)
 

($1.6
)
 

($8.9
)
Other comprehensive income before reclassifications, before income tax
(1.2
)
 
—

 
(1.2
)
Amounts reclassified from accumulated other comprehensive income (loss), before income tax
—

 
(2.0
)
 
(2.0
)
Amounts deferred to accumulated other comprehensive income (loss), before income tax
—

 
70.2

 
70.2

Tax effect
—

 
(2.1
)
 
(2.1
)
Net current period other comprehensive income, net of income taxes
(1.2
)
 
66.1

 
64.9

Balance as of September 30, 2019

($8.5
)
 

$64.5

 

$56.0

 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
 
Pension and Postretirement Liability Adjustments
 
Total
Balance at December 31, 2017

($5.9
)
 

($1.7
)
 

($7.6
)
Other comprehensive income before reclassifications, before income tax
(0.9
)
 
—

 
(0.9
)
Amounts reclassified from accumulated other comprehensive loss, before income tax
—

 
0.5

 
0.5

Tax effect
—

 
—

 
—

Net current period other comprehensive income, net of income taxes
(0.9
)
 
0.5

 
(0.4
)
Balance as of September 30, 2018

($6.8
)
 

($1.2
)
 

($8.0
)

The amount reclassified from accumulated other comprehensive income (loss) in the nine months ended September 30, 2019 for the pension and postretirement liability adjustment was included in other income, net in the unaudited Consolidated Statements of Operations. The amount deferred to accumulated other comprehensive income in the nine months ended September 30, 2019, was a result of a plan amendment to the Company’s postretirement benefit plan. These accumulated other comprehensive income (loss) components are components of net periodic benefit cost. See “Note 13 - Retirement and Postretirement Plans” for additional information.
Note 15 - Contingencies
TimkenSteel has a number of loss exposures incurred in the ordinary course of business, such as environmental claims, product warranty claims, and litigation. Establishing loss reserves for these matters requires management’s estimate and judgment regarding risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances. Accruals related to environmental claims represent management’s best estimate of the fees and costs associated with these claims. Although it is not possible to predict with certainty the outcome of such claims, management believes that their ultimate dispositions should not have a material adverse effect on our financial position, cash flows or results of operations. As of September 30, 2019 and December 31, 2018, TimkenSteel had a $1.4 million and a $1.5 million contingency reserve, respectively, related to loss exposures incurred in the ordinary course of business.

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Table of Contents

Note 16 - Subsequent Events
Chief Executive Officer Transition    
On October 8, 2019, Ward J. Timken, Jr. stepped down as Chief Executive Officer and President of TimkenSteel Corporation and as Chairman of the Company’s Board of Directors. Per the terms of Mr. Timken’s severance agreement, the Company will recognize a charge of approximately $4.0 million in the fourth quarter. Additionally, a charge of approximately $1.5 million to $2.0 million will be recognized in the fourth quarter as a result of the accelerated vesting of stock-based compensation per the terms of the applicable award agreements.
Restructuring    
During October 2019, TimkenSteel continued to make organizational changes to enhance profitable and sustainable growth. These company-wide actions included the restructuring and reduction of management layers throughout the organization. The Company will recognize restructuring charges in the fourth quarter of approximately $1.7 million consisting of severance, employee-related benefits, and accelerated stock-based compensation.


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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except per share data)
Business Overview
TimkenSteel Corporation (we, us, our, 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 approximately 1.5 million tons. Our portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), value-add solutions such as precision steel components, and billets. In addition, we supply machining and thermal treatment services and manage raw material recycling programs, which are used as a feeder system for our melt operations. Our products and services are used in a diverse range of demanding applications in the following market categories: oil and gas; oil country tubular goods (OCTG); automotive; industrial equipment; mining; construction; rail; aerospace and defense; heavy truck; agriculture; and power generation.
Based on our knowledge of the steel industry, we believe we are the only focused SBQ steel producer in North America and have the largest SBQ steel large bar (6-inch diameter and greater) production capacity among North American steel producers. In addition, we are the only steel manufacturer able to produce rolled SBQ steel large bars up to 16-inches in diameter. SBQ steel is made to restrictive chemical compositions and high internal purity levels and is used in critical mechanical applications. We make these products from nearly all recycled steel, using our expertise in raw materials to create custom steel products. We focus on creating tailored products and services for our customers’ most demanding applications. Our engineers are experts in both materials and applications, so we can work closely with each customer to deliver flexible solutions related to our products as well as to their applications and supply chains. We believe our unique operating model and production assets give us a competitive advantage in our industry.
The SBQ bar, tube, and billet production processes take place at our Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets we produce and includes three manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. Our value-add solutions production processes take place at three downstream manufacturing facilities: TimkenSteel Material Services (Houston, Texas), Tryon Peak (Columbus, North Carolina), and St. Clair (Eaton, Ohio). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of our market sectors. As a result, investments in our facilities and resource allocation decisions affecting our operations are designed to benefit the overall business, not any specific aspect of the business.
We conduct our business activities and report financial results as one business segment. The presentation of financial results as one reportable segment is consistent with the way we operate our business and is consistent with the manner in which the Chief Operating Decision Maker (CODM) evaluates performance and makes resource and operating decisions for the business as described above. Furthermore, the Company notes that monitoring financial results as one reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of our operations.
Impact of Raw Material Prices and LIFO
In the ordinary course of business, we are exposed to the volatility of the costs of our raw materials. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing process. We utilize a raw material surcharge mechanism when pricing products to our customers which is designed to mitigate the impact of increases or decreases in raw material costs, although generally with a lag effect. This timing effect can result in raw material spread whereby costs can be over- or under-recovered in certain periods. While the surcharge generally protects gross profit, it has the effect of diluting gross margin as a percent of sales in a rising cost environment.
We value a majority of our inventory utilizing the LIFO inventory valuation method. Changes in the cost of raw materials and production activities are recognized in cost of products sold in the current period even though these materials and other costs may have been incurred in different periods at significantly different values due to the length of time of our production cycle. In periods of rising inventories and deflating raw material prices, the likely result will be a positive impact to net income. Conversely, in periods of rising inventories and increasing raw materials prices, the likely result will be a negative impact to net income.


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Table of Contents

Results of Operations
Net Sales
The charts below present net sales and shipments for the three months ended September 30, 2019 and 2018.
chart-fd7958487d3859b892c.jpg chart-3e571f8ad3f95577bfa.jpg
Net sales for the three months ended September 30, 2019 were $274.2 million, a decrease of $135.7 million, or 33.1%, compared with the three months ended September 30, 2018. The decrease was due to a reduction in volume of approximately 86 thousand ship tons, resulting in a decrease of $92.4 million of net sales, and lower surcharges of $55.8 million. The primary driver in the decrease in volume was lower customer demand in the industrial and energy end markets and the reduction of OCTG billet shipments. The decrease in surcharges was primarily due to lower volumes and decreasing scrap prices. These decreases were partially offset by favorable price/mix of $12.6 million, as the Company realized the benefit of previous price increases and continued focused efforts to sell our higher value products. Excluding surcharges, net sales decreased $79.9 million, or 26.4%.

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The charts below present net sales and shipments for the nine months ended September 30, 2019 and 2018.
chart-2a46d65ef1bd5a61b22.jpg chart-d7b9ca9579225d22b14.jpg
Net sales for the nine months ended September 30, 2019 were $981.9 million, a decrease of $222.3 million, or 18.5%, compared with the nine months ended September 30, 2018. The decrease was due to lower volumes of approximately 186 thousand ship tons, resulting in a decrease of $196.5 million of net sales, and lower surcharges of $82.7 million. The primary driver in the decrease in volume was lower customer demand in the industrial and energy end markets and the reduction of OCTG billet shipments. The decrease in surcharges was primarily due to lower volumes and decreasing scrap prices. These decreases were partially offset by favorable price/mix of $55.8 million, driven by increased pricing in early 2019 compared with the same period in 2018, and continued focused efforts to sell our higher value products. This resulted in net sales per ton increasing 2.7% from 2018. Excluding surcharges, net sales decreased $139.6 million, or 15.5%


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Gross Profit
The chart below presents the drivers of the gross profit variance from the three months ended September 30, 2018 to September 30, 2019.
chart-07848f43df695c54965.jpg
Gross profit for the three months ended September 30, 2019 decreased $11.4 million, or 46.3%, compared with the three months ended September 30, 2018. The decrease was driven primarily by unfavorable manufacturing costs, raw material spread, and lower volumes. Higher manufacturing costs in 2019 were primarily driven by a decline in melt utilization, resulting in lower fixed-cost leverage. Raw material spread was a headwind due to a decline in the No.1 Busheling scrap index and lower volumes during the three months ended September 30, 2019. These decreases were partially offset by a favorable LIFO inventory valuation and improved price/mix. LIFO benefited in 2019 from declining scrap prices and inventory quantities. Price/mix was favorable due to increased pricing in early 2019 compared with the same period in 2018, and continued focused efforts to sell our higher value products.

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Table of Contents


The chart below presents the drivers of the gross profit variance from the nine months ended September 30, 2018 to September 30, 2019.
chart-463acdf02bdd5cbf8fd.jpg
Gross profit for the nine months ended September 30, 2019 decreased $10.1 million, or 13.0%, compared with the nine months ended September 30, 2018. The decrease was driven primarily by unfavorable manufacturing costs, raw material spread, and lower volumes. Manufacturing costs were unfavorable primarily due to a decline in melt utilization, resulting in lower fixed-cost leverage during 2019. Raw material spread was a headwind due to a decline in the No.1 Busheling scrap index and lower volumes during the nine moths ended September 30, 2019. These decreases were partially offset with a favorable LIFO inventory valuation and favorable price/mix. LIFO benefited from declining scrap prices and a reduction in inventory quantities in 2019 compared with amounts in inventory at December 31, 2018. Price/mix was favorable due to increased pricing in early 2019 compared with the same period in 2018, and continued focused efforts to sell higher value products.


    



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Selling, General and Administrative Expenses
The charts below present selling, general and administrative (SG&A) expense for the three and nine months ended September 30, 2019 and 2018.
chart-7e2ddf3378e85606b5c.jpg chart-bdeafd39502d5c59bda.jpg
Selling, general and administrative (SG&A) expense for the three months and nine months ended September 30, 2019 decreased by $2.6 million, or 10.8%, and $8.7 million, or 11.8%, respectively, compared with the same periods in 2018. The decline in both periods is primarily the result of the Company’s profitability improvement plans that targeted, among other areas, a reduction in salaried employees, lower professional services fees, and benefit costs.  Additionally, variable compensation decreased year over year.
Restructuring Charges
During the second quarter of 2019, TimkenSteel made organizational changes to enhance profitable and sustainable growth. These company-wide actions included the restructuring of its commercial and technology organizations to drive innovation and focus on the key growth areas identified by the Company such as value-added components, energy products and government business. Given these and other restructuring efforts, the Company implemented approximately 55 salaried position eliminations. As a result of the headcount reduction, TimkenSteel recognized restructuring charges of $3.6 million consisting of severance and employee-related benefits. During the three months ended September 30, 2019, there were no additional restructuring charges. The Company expects to realize savings of approximately $2 million in fiscal 2019 with annual savings of approximately $7 million beginning in fiscal 2020. Refer to “Note 4 - Restructuring Charges” in the Notes to the unaudited Consolidated Financial Statements for additional information.
Interest Expense
Interest expense for the three months ended September 30, 2019 was $3.6 million, a decrease of $0.8 million, compared with the three months ended September 30, 2018. Interest expense for the nine months ended September 30, 2019 was $12.0 million, a decrease of $0.9 million compared with the same period in 2018. The decrease in interest expense in both periods was primarily due to a reduction in outstanding revolver debt and no deferred financing fee write-offs in 2019. Refer to “Note 12 - Financing Arrangements” in the Notes to the unaudited Consolidated Financial Statements for additional information.






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Table of Contents

Other Income, net
 
Three Months Ended September 30,
 
2019

2018
 
$ Change
Pension and postretirement non-service benefit income

$5.1

 

$6.2

 

($1.1
)
Foreign currency exchange gain (loss)
(0.1
)
 
—

 
(0.1
)
Miscellaneous income (expense)
0.2

 
(0.1
)
 
0.3

Total other income, net

$5.2

 

$6.1

 

($0.9
)
 
Nine Months Ended September 30,
 
2019
 
2018
 
$ Change
Pension and postretirement non-service benefit income

$12.4

 

$18.7

 

($6.3
)
Loss from remeasurement of benefit plans
(4.4
)
 
—

 
(4.4
)
Miscellaneous income (expense)
0.1

 
—

 
0.1

Total other income, net

$8.1

 

$18.7

 

($10.6
)
Non-service benefit income is derived from our pension and other postretirement plans. Expected return on assets has exceeded the interest cost component, resulting in income for the three and nine months ended September 30, 2019 and 2018.
In the second quarter of 2019, the Company amended its postretirement benefit plan. This amendment reduced the postretirement liability and therefore required a full remeasurement of the postretirement obligations and plan assets as of April 30, 2019. The reduction in the Accumulated Postretirement Benefit Obligation (APBO) is recognized in Other Comprehensive Income (Loss) and subsequently amortized as an offset to postretirement benefit cost. For more details on the remeasurement, refer to “Note 13 - Retirement and Postretirement Plans” in the Notes to unaudited Consolidated Financial Statements.
Provision for Income Taxes
 
Three Months Ended September 30,
 
2019

2018
 
$ Change
Provision (benefit) for income taxes

($2.1
)
 

$0.9

 

($3.0
)
Effective tax rate
31.4
%
 
41.0
%
 
NM

 
Nine Months Ended September 30,
 
2019
 
2018
 
$ Change
Provision (benefit) for income taxes

($1.8
)
 

$1.2

 

($3.0
)
Effective tax rate
27.1
%
 
13.4
%
 
NM

The majority of the Company’s tax expense is derived from foreign operations. The Company remains in a full valuation for the U.S. jurisdiction for the three and nine months ended September 30, 2019. Intraperiod tax allocation rules require the Company to allocate our provision for income taxes between continuing operations and other categories of comprehensive income. In periods in which the Company has a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of comprehensive income, the Company must consider that income in determining the amount of tax benefit that results from a loss in continuing operations and that will be allocated to continuing operations. As a result of the intraperiod tax allocation rules, for the three and nine months ended September 30, 2019, the Company recorded income tax expense of $2.2 million within other comprehensive income.


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NON-GAAP FINANCIAL MEASURES
Net Sales, Excluding Surcharges
The table below presents net sales by end market sector, adjusted to exclude raw material surcharges, which represents a financial measure that has not been determined in accordance with accounting principles generally accepted in the United States (U.S. GAAP). We believe presenting net sales by end market sector adjusted to exclude raw material surcharges provides additional insight into key drivers of net sales such as base price and product mix.
Net Sales adjusted to exclude surcharges
 
 
 
(dollars in millions, tons in thousands)
 
 
 
 
 
 
Three Months Ended September 30, 2019
 
Mobile
Industrial
Energy
Other
 
Total
Tons
93.0

87.1

17.7

11.8

 
209.6

 
 
 
 
 
 
 
Net Sales
$110.2

$116.9

$32.6

$14.5

 

$274.2

Less: Surcharges
20.5

22.3

5.7

2.8

 
51.3

Base Sales

$89.7


$94.6


$26.9


$11.7

 

$222.9

 




 

Net Sales / Ton
$1,185

$1,342

$1,842

$1,229

 
$1,308

Base Sales / Ton
$965

$1,086

$1,520

$992

 
$1,063

 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
Mobile
Industrial
Energy
Other
 
Total
Tons
103.6

119.9

40.4

31.6

 
295.5

 
 
 
 
 
 
 
Net Sales

$136.4


$169.7


$70.1


$33.7

 

$409.9

Less: Surcharges
34.2

45.1

17.7

10.1

 
107.1

Base Sales

$102.2


$124.6


$52.4


$23.6

 

$302.8

 
 
 
 
 
 
 
Net Sales / Ton

$1,317


$1,415


$1,735


$1,066

 

$1,387

Base Sales / Ton

$986


$1,039


$1,297


$747

 

$1,025

 
Nine Months Ended September 30, 2019
 
Mobile
Industrial
Energy
Other
 
Total
Tons
316.1

276.0

80.1

46.4

 
718.6

 
 
 
 
 
 
 
Net Sales

$389.7


$388.2


$147.5


$56.5

 

$981.9

Less: Surcharges
90.1

84.8

30.2

13.8

 
218.9

Base Sales

$299.6


$303.4


$117.3


$42.7

 

$763.0

 
 
 
 
 
 
 
Net Sales / Ton

$1,233


$1,407


$1,841


$1,218

 

$1,366

Base Sales / Ton

$948


$1,099


$1,464


$920

 

$1,062

 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
Mobile
Industrial
Energy
Other
 
Total
Tons
325.9

356.6

109.9

112.5

 
904.9

 
 
 
 
 
 
 
Net Sales

$420.5


$484.3


$188.0


$111.4

 

$1,204.2

Less: Surcharges
100.4

123.2

43.8

34.2

 
301.6

Base Sales

$320.1


$361.1


$144.2


$77.2

 

$902.6

 




 

Net Sales / Ton

$1,290


$1,358


$1,711


$990

 

$1,331

Base Sales / Ton

$982


$1,013


$1,312


$686

 

$997


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LIQUIDITY AND CAPITAL RESOURCES
Convertible Notes
In May 2016, we issued $75.0 million aggregate principal amount of Convertible Notes, plus an additional $11.3 million principal amount to cover over-allotments. The Convertible Notes bear cash interest at a rate of 6.0% per year, payable semiannually on June 1 and December 1, beginning on December 1, 2016. The Convertible Notes will mature on June 1, 2021, unless earlier repurchased or converted. The net proceeds received from the offering were $83.2 million, after deducting the initial underwriters’ discount and fees and paying the offering expenses. We used the net proceeds to repay a portion of the amounts outstanding under our Credit Agreement.

Credit Agreement
On January 26, 2018, we as borrower, and certain domestic subsidiaries, as subsidiary guarantors, entered into the Second Amended and Restated Credit Agreement (Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and the other lenders party thereto, which amended and restated the Company’s then existing credit agreement. The Credit Agreement matures on January 26, 2023. Prior to the maturity date, amounts outstanding are required to be repaid (without reduction of the commitments thereunder) from mandatory prepayment events from the proceeds of certain asset sales, equity or debt issuances or casualty events.
On October 15, 2019, the Company, entered into a Third Amended and Restated Credit Agreement (the Amended Credit Agreement), with JP Morgan Chase Bank, N.A. which further amends and restates the Company’s Second Amended and Restated Credit Agreement dated as of January 26, 2018.
The Amended Credit Agreement increased capacity to $400 million compared to $300 million in the previous facility and extended the maturity date to October 15, 2024. Furthermore, the Amended Credit Agreement included an enhanced asset base with reappraised fixed assets and investment grade foreign accounts receivable collateral in the borrowing base, improved interest rate spread pricing by 50 basis points and reduced the unused commitment fee to a fixed 25 basis points from the previous 37.5 to 50 basis point range.
Refer to “Note 12 - Financing Arrangements” for additional information.
Refunding Bonds
In connection with entering into the credit agreement, on January 23, 2018, we redeemed in full $12.2 million of Ohio Water Development Revenue Refunding Bonds (originally due on November 1, 2025), $9.5 million of Ohio Air Quality Development Revenue Refunding Bonds (originally due on November 1, 2025) and $8.5 million of Ohio Pollution Control Revenue Refunding Bonds (originally due on June 1, 2033).
Additional Liquidity Considerations
The following represents a summary of key liquidity measures under the Credit Agreement as of September 30, 2019 and December 31, 2018:
 
September 30,
2019
December 31,
2018
Cash and cash equivalents

$18.4


$21.6

 
 
 
Credit Agreement:
 
 
Maximum availability

$300.0


$300.0

Suppressed availability(1)
(0.4
)
—

Availability
299.6

300.0

Amount borrowed
(110.0
)
(115.0
)
Letter of credit obligations
(2.6
)
(2.6
)
Availability not borrowed
187.0

182.4

 
 
 
Total liquidity

$205.4


$204.0

(1) As of September 30, 2019, Timkensteel did not have $300 million in borrowing base assets.

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Our principal sources of liquidity are cash and cash equivalents, cash flows from operations and available borrowing capacity under our Credit Agreement. As of September 30, 2019, taking into account our view of industrial, energy, and automotive market demands for our products, our forecast for the remainder of 2019 and our long-range plan, we believe that our cash balance as of September 30, 2019, projected cash generated from operations, and borrowings available under the Amended Credit Agreement, will be sufficient to satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations, including servicing our debt obligations, for at least the next twelve months and through the maturity date of our Amended Credit Agreement.
To the extent our liquidity needs prove to be greater than expected or cash generated from operations is less than anticipated, and cash on hand or credit availability is insufficient, we would seek additional financing to provide additional liquidity. We regularly evaluate our potential access to the equity and debt capital markets as sources of liquidity and we believe additional financing would likely be available if necessary, although we can make no assurance as to the form or terms of any such financing. We would also consider additional cost reductions and further reductions of capital expenditures. Regardless, we will continue to evaluate additional financing or may seek to refinance outstanding borrowings under the Amended Credit Agreement to provide us with additional flexibility and liquidity. Any additional financing beyond that incurred to refinance existing debt would increase our overall debt and could increase interest expense.

For additional details regarding the Credit Agreement, the Amended Credit Agreement and the Convertible Notes, please refer to “Note 12 - Financing Arrangements” in the Notes to the unaudited Consolidated Financial Statements, and for our discussion regarding risk factors related to our business and our debt, see Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018.
Cash Flows
The following table reflects the major categories of cash flows for the nine months ended September 30, 2019 and 2018. For additional details, please refer to the unaudited Consolidated Statements of Cash Flows included in this quarterly report.
 
Nine Months Ended September 30,
 
2019
 
2018
Net cash provided (used) by operating activities

$24.3

 

($28.4
)
Net cash used by investing activities
(21.7
)
 
(16.7
)
Net cash (used) provided by financing activities
(5.8
)
 
47.6

(Decrease) Increase in Cash and Cash Equivalents

($3.2
)
 

$2.5

Operating activities
Net cash provided by operating activities for the nine months ended September 30, 2019 was $24.3 million compared to net cash used of $28.4 million for the nine months ended September 30, 2018. The increase in cash provided by operating activities of $52.7 million was primarily due to lower cash used for working capital as well as pension and postretirement benefit payments, partially offset by lower accrued liabilities, primarily due to lower variable compensation.
The improvement in cash used for working capital between periods was due to inventories and accounts receivable, partially offset by accounts payable. The decrease in cash used for inventory was driven by the impact of declining scrap prices combined with a lower quantity of inventory on hand during the first nine months of 2019 as compared to the opposite trend during the same period in the prior year. The increase in cash provided by accounts receivable was primarily due to declining sales in the first nine months of 2019, which resulted in collections exceeding billings, as compared to increasing sales in the same period in the prior year. The increase in cash used for accounts payable was driven by lower raw material purchases and declining scrap prices during the first nine months of 2019 as compared to the impact of increasing raw material purchases and scrap prices during the same period in the prior year. Refer to the unaudited Consolidated Statements of Cash Flows for additional information.





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Table of Contents

Investing activities
Net cash used by investing activities for the nine months ended September 30, 2019 and 2018 was $21.7 million and $16.7 million, respectively. Cash used for investing activities primarily relates to capital investments in our manufacturing facilities.
Our business requires capital investments to maintain our plants and equipment to remain competitive and ensure we can implement strategic initiatives. Our construction in progress balance of approximately $26 million as of September 30, 2019 includes: (a) approximately $10 million relating to growth initiatives (e.g. new product offerings, additional capacity and new capabilities) and continuous improvement projects; and (b) approximately $16 million relating primarily to routine capital costs to maintain the reliability, integrity and safety of our manufacturing equipment and facilities. In the next one to three years, we expect to spend approximately $40 million to complete existing ongoing projects (made up of approximately $34 million relating to additional growth initiatives and approximately $6 million related to continuous improvement).
Financing activities
Net cash used by financing activities for the nine months ended September 30, 2019 was $5.8 million compared to net cash provided by financing activities of $47.6 million for the nine months ended September 30, 2018. The change was mainly due to net repayments of debt of $5.0 million during the nine months ended September 30, 2019 as compared to net borrowings of $49.8 million during the nine months ended September 30, 2018.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We review our critical accounting policies throughout the year.
On January 1, 2019, TimkenSteel adopted ASU 2016-02, “Leases” and ASU 2018-11, “Leases - Targeted Improvements”. Refer to “Note 2 - Recent Accounting Pronouncements” and “Note 11 - Leases” for additional information.

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On January 1, 2018, TimkenSteel adopted ASU 2014-09, “Revenue from Contracts with Customers.” Refer to “Note 2 - Recent Accounting Pronouncements” and “Note 3 - Revenue Recognition” for additional information.
New Accounting Guidance
See “Note 2 - Recent Accounting Pronouncements” in the Notes to the unaudited Consolidated Financial Statements.

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Table of Contents

FORWARD-LOOKING STATEMENTS
Certain statements set forth in this Quarterly Report on Form 10-Q (including our forecasts, beliefs and expectations) that are not historical in nature are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, Management’s Discussion and Analysis of Financial Condition and Results of Operations contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “outlook,” “intend,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or other similar words, phrases or expressions that convey the uncertainty of future events or outcomes. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-Q. We caution readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of us due to a variety of factors, such as:
•
deterioration in world economic conditions, or in economic conditions in any of the geographic regions in which we conduct business, including additional adverse effects from global economic slowdown, terrorism or hostilities. This includes: political risks associated with the potential instability of governments and legal systems in countries in which we or our customers conduct business, and changes in currency valuations;
•
the effects of fluctuations in customer demand on sales, product mix and prices in the industries in which we operate. This includes: our ability to respond to rapid changes in customer demand; the effects of customer bankruptcies or liquidations; the impact of changes in industrial business cycles; and whether conditions of fair trade exist in the U.S. markets;
•
competitive factors, including changes in market penetration; increasing price competition by existing or new foreign and domestic competitors; the introduction of new products by existing and new competitors; and new technology that may impact the way our products are sold or distributed;
•
changes in operating costs, including the effect of changes in our manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; availability of raw materials and energy; our ability to mitigate the impact of fluctuations in raw materials and energy costs and the effectiveness of our surcharge mechanism; changes in the expected costs associated with product warranty claims; changes resulting from inventory management, cost reduction initiatives and different levels of customer demands; the effects of unplanned work stoppages; and changes in the cost of labor and benefits;
•
the success of our operating plans, announced programs, initiatives and capital investments; the ability to integrate acquired companies; the ability of acquired companies to achieve satisfactory operating results, including results being accretive to earnings; and our ability to maintain appropriate relations with unions that represent our associates in certain locations in order to avoid disruptions of business;
•
unanticipated litigation, claims or assessments, including claims or problems related to intellectual property, product liability or warranty, and environmental issues and taxes, among other matters;
•
the availability of financing and interest rates, which affect our cost of funds and/or ability to raise capital; our pension obligations and investment performance; and/or customer demand and the ability of customers to obtain financing to purchase our products or equipment that contain our products; and the amount of any dividend declared by our Board of Directors on our common shares;
•
the overall impact of the pension and postretirement mark-to-market accounting; and
•
those items identified under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018.
You are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results, and that the above list should not be considered to be a complete list. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our borrowings include both fixed and variable-rate debt. The variable debt consists principally of borrowings under our Credit Agreement. We are exposed to the risk of rising interest rates to the extent we fund our operations with these variable-rate borrowings. As of September 30, 2019, we have $187.4 million of aggregate debt outstanding, of which $110.0 million consists of debt with variable interest rates. Based on the amount of debt with variable-rate interest outstanding, a 1% rise in interest rates would result in an increase in interest expense of $1.1 million annually.
Foreign Currency Exchange Rate Risk
Fluctuations in the value of the U.S. dollar compared to foreign currencies may impact our earnings. Geographically, our sales are primarily made to customers in the United States. Currency fluctuations could impact us to the extent they impact the currency or the price of raw materials in foreign countries in which our competitors operate or have significant sales.
Commodity Price Risk
In the ordinary course of business, we are exposed to market risk with respect to commodity price fluctuations, primarily related to our purchases of raw materials and energy, principally scrap steel, other ferrous and non-ferrous metals, alloys, natural gas and electricity. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing business. We utilize a raw material surcharge as a component of pricing steel to pass through the cost increases of scrap, alloys and other raw materials, as well as natural gas. From time to time, we may use financial instruments to hedge a portion of our exposure to price risk related to natural gas and electricity purchases. In periods of stable demand for our products, the surcharge mechanism has worked effectively to reduce the normal time lag in passing through higher raw material costs so that we can maintain our gross margins. When demand and cost of raw materials are lower, however, the surcharge impacts sales prices to a lesser extent.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

(b) Changes in Internal Control Over Financial Reporting

During the Company’s most recent fiscal quarter, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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Table of Contents

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of our management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Canton, Ohio  U.S. Environmental Protection Agency Notice of Violation

The U.S. Environmental Protection Agency (EPA) issued two related Notices of Violation (NOV) to TimkenSteel on August 5, 2014 and November 2, 2015.  The EPA alleges violations under the Clean Air Act based on alleged violations of permitted emission limits and engineering requirements at TimkenSteel’s Faircrest and Harrison Steel Plants in Canton, Ohio. TimkenSteel disputes many of EPA’s allegations but is working cooperatively with EPA and the U.S. Department of Justice to resolve the government’s claims.  Negotiations to resolve the NOVs are ongoing, but it is not anticipated that the ultimate resolution of the NOVs will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
ITEM 1A. RISK FACTORS
We are subject to various risks and uncertainties in the course of our business. The discussion of such risks and uncertainties may be found under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC. There have been no material changes to such risk factors.

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Table of Contents

ITEM 6. EXHIBITS
Exhibit Number
 
Exhibit Description
31.1*
 
31.2*
 
32.1**
 
101.INS*
 
XBRL Instance Document.
101.SCH*
 
XBRL Taxonomy Extension Schema Document.
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document.
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document.
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document.
* Filed herewith.
** Furnished herewith.


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Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
TIMKENSTEEL CORPORATION
 
 
 
 
 
 
Date:
November 6, 2019
/s/ Kristopher R. Westbrooks
 
 
Kristopher R. Westbrooks
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)




38