EDGAR 10-K Filing

Company CIK: 1598428
Filing Year: 2021
Filename: 1598428_10-K_2021_0001564590-21-008896.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Overview
TimkenSteel Corporation (we, us, our, the Company or TimkenSteel) was incorporated in Ohio on October 24, 2013, and became an independent, publicly traded company as the result of a spinoff from The Timken Company (Timken) on June 30, 2014. In the spinoff, Timken transferred to us all of the assets and generally all of the liabilities related to Timken’s steel business.
We manufacture alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. Our portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), value-added solutions such as precision steel components, and billets. In addition, we supply machining and thermal treatment services, and we manage raw material recycling programs, which are also used as a feeder system for our melt operations. Our products and services are used in a diverse range of demanding applications in the following market sectors: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and oil country tubular goods (OCTG).
SBQ steel is made to restrictive chemical compositions and high internal purity levels and is used in critical mechanical applications. We make these products from nearly 100% recycled steel, using our expertise in raw materials to create custom steel products. We focus on creating tailored products and services for our customers’ most demanding applications. Our engineers are experts in both materials and applications, so we can work closely with each customer to deliver flexible solutions related to our products as well as to their applications and supply chains.
The SBQ bar, tube, and billet production processes take place at our Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets we produce and includes three manufacturing facilities: the Faircrest, Harrison and Gambrinus facilities. Our value-added solutions production processes take place at two downstream manufacturing facilities: Tryon Peak (Columbus, North Carolina) and St. Clair (Eaton, Ohio). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of our market sectors. As a result, investments in our facilities and resource allocation decisions affecting our operations are designed to benefit the overall business, not any specific aspect of the business.
During the first quarter of 2020, management completed its previously announced plan to close the Company’s TimkenSteel Material Services facility in Houston, Texas. See “Note 6 - Disposition of Non-Core Assets” in the Notes to the Consolidated Financial Statements for additional information on the closure of this facility.
On February 16, 2021, management announced a plan to indefinitely idle our Harrison melt and cast assets, late in the first quarter of 2021. Going forward, all of the Company’s melting and casting activities will take place at the Faircrest location. We are working collaboratively with employees, suppliers and a number of customers to ensure a well-organized and efficient transition. Our rolling and finishing operations at Harrison will not be impacted by these actions. See “Note 20 - Subsequent Events” in the Notes to the Consolidated Financial Statements for additional information.
Operating Segments
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.
Industry Segments and Geographical Financial Information
Information required by this Item is incorporated herein by reference to “Note 3 - Segment Information” in the Notes to the Consolidated Financial Statements.
Strengths and Strategy
Our customers depend on us to be the leader in solving their industries’ constantly evolving challenges. Our team, including engineers and experienced manufacturing professionals in both materials and applications, works closely with customers to deliver flexible solutions related to our products as well as our customers’ applications and supply chains.
The TimkenSteel business model delivers these tailored solutions based on the following foundation:
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Experienced management and technical team.
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Close and trusted working relationship with customers across diverse end-markets.
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Leadership position in niche markets with differentiated products.
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Track record of innovation rooted in a deep technical knowledge of steel materials, manufacturing processes and a focus on end-user applications. Our research and development efforts focus on creating solutions for our customers’ toughest challenges.
Major Customers
We sell products and services that are used in a range of demanding applications around the world. We have over 400 diverse customers in the following market sectors: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and OCTG.
Products
We believe we produce some of the cleanest, highest performing alloy air-melted steels in the world for our customers’ most demanding applications. We leverage our technical knowledge, development expertise and production and engineering capabilities across all of our products and end-markets to deliver high-performance products to our customers.
SBQ Steel Bar, Seamless Mechanical Steel Tubes, and Billets. Our focus is on alloy steel, although in total we manufacture more than 400 grades of high-performance carbon, micro-alloy and alloy steel, sold as ingots, bars, tubes and billets. These products are custom-made in a variety of chemistries, lengths and finishes. Our metallurgical expertise and what we believe to be unique operational capabilities drive high-value solutions for industrial, energy and mobile customers. Our specialty steels are featured in a wide variety of end products including: gears; hubs; axles; crankshafts and connecting rods; oil country drill pipe; bits and collars; bearing races and rolling elements; bushings; fuel injectors; wind energy shafts; anti-friction bearings; and other demanding applications where mechanical power transmission is critical to the end customer.
Value-added Precision Products and Services. In addition to our customized steels, we also custom-make precision components that provide us with the opportunity to further expand our market for bar and tube products and capture additional sales. These products provide customers, especially those in the automotive industry, with ready-to-finish components that simplify vendor management, streamline supply chains and often cost less than other alternatives. We also customize products and services for the industrial and energy market sectors.
Sales and Distribution
Our sales force is made up largely of engineers that are backed by a team of metallurgists and other technical experts. While most of our products are sold directly to original equipment (OE) manufacturers, a portion of our sales are made through authorized distributors and steel service centers, representing approximately 17% of net sales during 2020. The majority of our customers are served through individually negotiated price agreements.
Competition
The steel industry, both domestically and globally, is highly competitive and is expected to remain so. Maintaining high standards of product quality and reliability, while keeping production costs competitive, is essential to our ability to compete with domestic and foreign manufacturers of alloy steel and mechanical components. For bar products less than 6-inch in diameter, principal competitors include foreign-owned domestic producers Gerdau Special Steel North America (a unit of Brazilian steelmaker Gerdau, S.A) and Republic Steel (a unit of Mexican steel producer ICH). For bar products up to 9-inch in diameter, domestic producers Steel Dynamics, Inc. and Nucor Corporation (in some cases up to 10-inch) are our principal competitors. For very large bars from 10 to 16 inches in diameter, offshore producers as well as specialty forging companies in North America such as Scot Forge are the primary competitors. For seamless mechanical tubing, offshore producers such as Tenaris, S.A., Vallourec, S.A. and TMK Group are our primary competitors as well as the foreign-owned domestic producer ArcelorMittal Tubular Products (a unit of Luxembourg-based ArcelorMittal, S.A.). We also provide unique value-added steel products and supply chain solutions to our customers in the mobile, industrial and energy sectors. Competitors within the value-added market sector include both integrated and non-integrated component producers.
Lead Time
The lead time for our products varies based on the product type and specifications. As of the date of this filing, lead times for SBQ bars are averaging approximately 9 to 10 weeks and lead times for tubes are averaging approximately 13 weeks.
Raw Materials
The principal raw materials that we use to manufacture steel are recycled scrap metal, chrome, nickel, molybdenum oxide, vanadium and other alloy materials. Raw materials comprise a significant portion of the steelmaking cost structure and are subject to price and availability changes due to global demand fluctuations and local supply limitations. Proper selection and management of raw materials can have a significant impact on procurement cost, flexibility to supply changes, steelmaking energy costs and mill productivity. In addition to accessing scrap and alloys through the open market, we have established a scrap return supply chain with many of our customers. This part of our business leverages our knowledge of the raw material supply industry and an extensive network of relationships that result in steady, reliable supply from our raw
material sources. We previously operated a scrap processing facility as an additional source of raw materials; however, during the fourth quarter of 2019 we marketed and subsequently entered into an agreement to dispose of the assets associated with the operation. The disposal was completed in January 2020. See “Note 6 - Disposition of Non-Core Assets” in the Notes to the Consolidated Financial Statements for additional information.
Research and Development
Our engineers analyze customer application challenges and develop solutions to address the customers’ needs. With a century of experience in materials science and steelmaking, we leverage our technical know-how to improve the performance of our customers’ products and supply chains.
This expertise extends to advanced process technology in which material conversion, finishing, gaging and assembly enables high quality production of our products. With resources dedicated to studying, developing and implementing new manufacturing processes and technologies, we are able to support our customers’ requirements.
Our research and development expense for the years ended December 31, 2020, 2019 and 2018 were $1.8 million, $4.1 million and $8.1 million, respectively.
Environmental Matters and Governmental Regulations
We consider compliance with environmental regulations and environmental sustainability a key strategic focus area and integral to our responsibility as a good corporate citizen. All our domestic steel making and processing operations, and our water treatment plant, have obtained and maintain ISO 14001 certification.
We believe we have established appropriate reserves to cover our environmental expenses. We have a well-established environmental compliance audit program that measures performance against applicable laws as well as against internal standards that have been established for all facilities. It is difficult to assess the possible effect of compliance with future requirements that differ from existing ones both domestically and internationally. As previously reported, we are unsure of the future financial impact to us from the U.S. Environmental Protection Agency’s (EPA) rule changes related to the Clean Air Act (CAA), Clean Water Act (CWA), waste and other environmental rules and regulations.
We and certain of our subsidiaries located in the U.S. have been identified as potentially responsible parties under the Toxic Substances Control Act (TSCA), Resource Conservation and Recovery Act (RCRA), CAA and CWA, as well as other laws. In general, certain cost allocations for investigation and remediation have been asserted by us against other entities, which are believed to be financially solvent and are expected to substantially fulfill their proportionate share of any obligations.
From time to time, we may be a party to lawsuits, claims or other proceedings related to environmental matters and/or receive notices of potential violations of environmental laws and regulations from the EPA and similar state or local authorities. As of December 31, 2020 and 2019, we recorded reserves for such environmental matters of $0.2 million and $1.2 million, respectively. 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 the ultimate disposition of these matters should not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Legal Proceedings
Information required by this section is incorporated herein by reference to “Item 3. Legal Proceedings”.
Patents, Trademarks and Licenses
While we own a number of U.S. and foreign patents, trademarks, licenses and copyrights, none are material to our products and production processes.
Human Capital
Employment
At December 31, 2020, we had approximately 2,000 employees, with about 62% of our employees covered under a collective bargaining agreement that expires in September 2021.
Health and safety
At TimkenSteel, operating safely and responsibly is our top priority. We have rigorous safety policies and practices in place to ensure that our workspaces provide a secure environment for our employees. We help ensure these policies are followed through education, training, evaluation and enforcement. To help emphasize that safety is of the upmost importance, a safety modifier is included in our annual incentive compensation plan for salaried employees. The safety modifier has the effect of increasing the overall incentive payout by five percent if the target safety
metrics are achieved and decreasing the overall incentive payout by five percent if the target safety metric are not achieved. As of December 31, 2020, our OSHA recordable incident rate was 1.70 and our lost time incident rate was 0.34. Both rates came in below their respective targets for the year ended December 31, 2020.
Diversity and inclusion
Our commitment to diverse perspectives fuels our success and has enabled us to deliver innovate solutions throughout the life our business. We recognize that a diverse workforce and inclusive, engaging culture is key to our continued business success. Within our organization, we maintain employee resource groups which further promote diversity and inclusion. TimkenSteel is also proudly involved in several organizations that promote and foster diversity and inclusion in our community and industry.
Compensation and total rewards
We provide competitive compensation programs to help meet the needs of our employees. Our programs are designed to support the profitable growth of our business; attract, reward, and retain the talent we need to succeed; support the health and overall well-being of our employees; and reinforce a performance-based culture.
In addition to base compensation, we offer quarterly and annual incentive compensation, stock awards, and participation in various retirement plans. Furthermore, our Company also provides employer-sponsored health and wellness benefits to our employees.
Employee retention
We seek to retain the best people by providing them with opportunities to grow, build skills and be appreciated for their contributions as they work to serve our customers. Our employees are critical to our success and are the reason we continue to execute at a high level. We believe our continued focus on making employee engagement a top priority will help us provide high quality products to our customers.
We diligently track our employee retention and management continuously evaluates our employees’ retention risk. Additionally, our Company has an established voluntary turnover metric, which was not exceeded during the year ended December 31, 2020.
Employee training and development
We invest significant resources to develop talent with the right capabilities to deliver the growth and innovation needed to support our business strategy. We have designed curated training programs for employees at all levels in our SAP SuccessFactors learning software. For new managers, we have developed a rigorous training program to provide them with the resources needed to cultivate their skillset and aid them in becoming effective leaders in our business. TimkenSteel encourages our employees to constantly learn and grow and has aligned our performance management system to support this focus on continuous learning and development.
COVID-19 pandemic
At the onset of the COVID-19 pandemic, TimkenSteel was considered an "essential business" and therefore, the Company has been fully operational and serving its customers while strictly following all public health directives to ensure the safety of its employees.
Our cross-functional pandemic response team meets weekly to oversee and coordinate the Company’s overall response. The Company is committed to frequent communications with our employees and their families as well as customers, suppliers and other key stakeholders of TimkenSteel.
We have taken several necessary actions to keep our workforce safe. Employees who can work from home are doing so, and employees onsite are strictly following safe workplace practices including guidelines established by federal, state and local authorities for the areas in which we operate. We have added enhanced cleaning procedures in all plants and offices using the best practices provided by the Centers for Disease Control and Prevention (CDC). It is strongly encouraged that employees be vigilant with their personal hygiene and workplace hygiene and we regularly communicate the requirement for wearing of masks and that no one should come to work sick. To help reinforce these safety measures, we work closely with the United Steelworkers (USW). The Company also utilizes its onsite medical clinic - operated by a local health system - to provide additional support to its employees during the crisis. Since March 2020, TimkenSteel has performed hundreds of audits in its plants to ensure its employees remain diligent in these efforts.
As a result of the pandemic, the Company has implemented demand-driven layoffs, unpaid furloughs and temporary compensation reductions to both its employees and board of directors for a portion of 2020. In order to mitigate some of these actions, the Company extended health insurance to furloughed employees for a certain period. Further, the Company offered paid sick leave for certain periods and encouraged the use of our existing employee assistance programs to address wellness and mental health concerns.
Available Information
We use our Investor Relations website at http://investors.timkensteel.com, as a channel for routine distribution of important information, including news releases, analyst presentations and financial information. We post filings (including our annual, quarterly and current reports on
Forms 10-K, 10-Q and 8-K, respectively; our proxy statements; and any amendments to those reports or statements) as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). All such postings and filings are available on our website free of charge. In addition, our website allows investors and other interested persons to sign up to automatically receive e-mail alerts when we post news releases and financial information on our website. The SEC also maintains a website, www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Annual Report unless expressly noted.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
The following are certain risk factors that could affect our business, financial condition and results of operations. The risks that are highlighted below are not the only ones we face. You should carefully consider each of the following risks and all of the other information contained in this Annual Report on Form 10-K. Some of these risks relate principally to our business and the industry in which we operate, while others relate principally to our debt, the securities markets in general, ownership of our common shares and our spinoff from The Timken Company. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected.
Risks relating to our industry and our business
Competition in the steel industry, together with potential global overcapacity, could result in significant pricing pressure for our products.
Competition within the steel industry, both domestically and worldwide, is intense and is expected to remain so. The steel industry has historically been characterized by periods of excess global capacity and supply. Excess global capacity and supply has negatively affected and could continue to negatively affect domestic steel prices, which could adversely impact our results of operations and financial condition. High levels of steel imports into the U.S. could exacerbate a decrease in domestic steel prices.
In an effort to protect the domestic steel industry, the United States government implemented tariffs, duties and quotas for certain steel products imported from a number of countries into the United States. If these tariffs, duties and quotas expire or are repealed, it could result in substantial imports of foreign steel and create pressure on United States steel prices and the overall industry. This could have a material adverse effect on our operations.
Weakness in global economic conditions or in any of the industries or geographic regions in which we or our customers operate, as well as the cyclical nature of our customers’ businesses generally or sustained uncertainty in financial markets, could adversely impact our revenues and profitability by reducing demand and margins.
Our results of operations may be materially affected by conditions in the global economy generally and in global capital markets. There has been volatility in the capital markets and in the end-markets and geographic regions in which we or our customers operate, which has negatively affected our revenues. Many of the markets in which our customers participate are also cyclical in nature and experience significant fluctuations in demand for our steel products based on economic conditions, consumer demand, raw material and energy costs, and government actions, and many of these factors are beyond our control.
A decline in consumer and business confidence and spending, together with severe reductions in the availability and increased cost of credit, as well as volatility in the capital and credit markets, could adversely affect the business and economic environment in which we operate and the profitability of our business. We also are exposed to risks associated with the creditworthiness of our suppliers and customers. If the availability of credit to fund or support the continuation and expansion of our customers’ business operations is curtailed or if the cost of that credit is increased, the resulting inability of our customers or of their customers to either access credit or absorb the increased cost of that credit could adversely affect our business by reducing our sales or by increasing our exposure to losses from uncollectible customer accounts. These conditions and a disruption of the credit markets could also result in financial instability of some of our suppliers and customers. The consequences of such adverse effects could include the interruption of production at the facilities of our customers, the reduction, delay or cancellation of customer orders, delays or interruptions of the supply of raw materials or other inputs we purchase, and bankruptcy of customers, suppliers or other creditors. Any of these events could adversely affect our profitability, cash flow and financial condition.
We are dependent on our key customers.
As a result of our dependence on our key customers, we could experience a material adverse effect on our business, financial condition and results of operations if any of the following, among other things, were to occur: (a) a loss of any key customer, or a material amount of business from such key customer; (b) the insolvency or bankruptcy of any key customer; (c) a declining market in which customers reduce orders; or (d) a strike or work stoppage at a key customer facility, which could affect both its suppliers and customers. For the year ended December 31, 2020, sales to our 10 largest customers accounted for approximately 44% of our net sales. Additionally, customers continue to demand stronger and lighter products, among other adaptations to traditional products. We may not be successful in meeting these technological challenges and there may be increased liability exposure connected with the supply of additional products and services.
Any change in the operation of our raw material surcharge mechanisms, a raw material market index or the availability or cost of raw materials could materially affect our revenues, earnings, and cash flows.
We require substantial amounts of raw materials, including scrap metal and alloys, to operate our business. Many of our customer agreements contain surcharge pricing provisions that are designed to enable us to recover raw material cost increases. The surcharges are generally tied to a market index for that specific raw material. Historically, many raw material market indices have reflected significant fluctuations. Any change in a raw material market index could materially affect our revenues. Any change in the relationship between the market indices and our underlying costs could materially affect our earnings.
We rely on third parties to supply certain raw materials that are critical to the manufacture of our products. Purchase prices and availability of these critical raw materials are subject to volatility. At any given time we may be unable to obtain an adequate supply of these critical raw
materials on a timely basis, on acceptable price and other terms, or at all. If suppliers increase the price of critical raw materials, we may not have alternative sources of supply. In addition, to the extent we have quoted prices to customers and accepted customer orders or entered into agreements for products prior to purchasing necessary raw materials, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials.
Our operating results depend in part on continued successful research, development and marketing of products and services.
The success of products and services depends on their initial and continued acceptance by our customers. Our business is affected, to varying degrees, by technological change and corresponding shifts in customer demand, which could result in unpredictable product transitions or shortened life cycles. We may experience difficulties or delays in the research, development, production, or marketing of products and services that may prevent us from recouping or realizing a return on the investments required to bring products and services to market.
New technologies in the steel industry may: (a) improve cost competitiveness; (b) increase production capabilities; or (c) improve operational efficiency compared to our current production methods. However, we may not have sufficient capital to invest in such technologies or to make certain capital improvements, and may, from time to time, incur cost over-runs and difficulties adapting and fully integrating these technologies or capital improvements into our existing operations. We may also encounter control or production restrictions, or not realize the cost benefit from such capital-intensive technology adaptations or capital improvements to our current production processes.
Product liability, warranty and product quality claims could adversely affect our operating results.
We produce high-performance carbon and alloy steel, sold as ingots, bars, tubes and billets in a variety of chemistries, lengths and finishes designed for our customers’ demanding applications. Failure of the materials that are included in our customers’ applications could give rise to product liability or warranty claims. There can be no assurance that our insurance coverage will be adequate or continue to be available on terms acceptable to us. If we fail to meet a customer’s specifications for its products, we may be subject to product quality costs and claims. A successful warranty or product liability claim against us could have a material adverse effect on our earnings.
We are subject to extensive environmental, health and safety laws and regulations, which impose substantial costs and limitations on our operations, and environmental, health and safety compliance and liabilities may be more costly than we expect.
We are subject to extensive federal, state, and local environmental, health and safety laws and regulations concerning matters such as worker health and safety, air emissions, wastewater discharges, hazardous material and solid and hazardous waste use, generation, handling, treatment and disposal and the investigation and remediation of contamination. We are subject to the risk of substantial liability and limitations on our operations due to such laws and regulations. The risks of substantial costs and liabilities related to compliance with these laws and regulations, which tend to become more stringent over time, are an inherent part of our business, and future conditions may develop, arise or be discovered that create substantial environmental compliance or remediation or other liabilities and costs.
Compliance with environmental, health and safety legislation and regulatory requirements may prove to be more limiting and costly than we anticipate. To date, we have committed significant expenditures in our efforts to achieve and maintain compliance with these requirements, and we expect that we will continue to make significant expenditures related to such compliance in the future. From time to time, we may be subject to legal proceedings brought by private parties or governmental authorities with respect to environmental matters, including matters involving alleged contamination, property damage or personal injury. New laws and regulations, including those that may relate to emissions of greenhouse gases, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements, could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition or results of operations.
From both a medium- and long-term perspective, we are likely to see an increase in costs relating to our assets that emit relatively significant amounts of greenhouse gases as a result of new and existing legal and regulatory initiatives. These initiatives will be either voluntary or mandatory and may impact our operations directly or through our suppliers or customers. Until the timing, scope and extent of any future legal and regulatory initiatives become known, we cannot predict the effect on our business, financial condition or results of operations.
Unexpected equipment failures or other disruptions of our operations may increase our costs and reduce our sales and earnings due to production curtailments or shutdowns.
Interruptions in production capabilities would likely increase our production costs and reduce sales and earnings for the affected period. In addition to equipment failures, our facilities and information technology systems are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. Our manufacturing processes are dependent upon critical pieces of equipment for which there may be only limited or no production alternatives, such as furnaces, continuous casters and rolling equipment, as well as electrical equipment, such as transformers, and this equipment may, on occasion, be out of service as a result of unanticipated failures. In the future, we may experience material plant shutdowns or periods of reduced production as a result of these types of equipment failures, which could cause us to lose or prevent us from taking advantage of various business opportunities or prevent us from responding to competitive pressures.
Our business is capital-intensive, and if there are downturns in the industries we serve, we may be forced to significantly curtail or suspend operations with respect to those industries, which could result in our recording asset impairment charges or taking other measures that may adversely affect our results of operations and profitability.
Our business operations are capital-intensive. If there are downturns in the industries we serve, we may be forced to significantly curtail or suspend our operations with respect to those industries, including laying-off employees, recording asset impairment charges and other measures. In addition, we may not realize the benefits or expected returns from announced plans, programs, initiatives and capital investments. Any of these events could adversely affect our results of operations and profitability.
The cost and availability of electricity and natural gas are also subject to volatile market conditions.
Steel producers like us consume large amounts of energy. We rely on third parties for the supply of energy resources we consume in our steelmaking activities. The prices for and availability of electricity, natural gas, oil and other energy resources are also subject to volatile market conditions, often affected by weather conditions as well as political and economic factors beyond our control. Any increase in the prices for electricity, natural gas, oil and other energy resources could materially affect our costs and therefore our earnings and cash flows.
As a large consumer of electricity and gas, we must have dependable delivery in order to operate. Accordingly, we are at risk in the event of an energy disruption. Prolonged black-outs or brown-outs or disruptions caused by natural disasters or governmental action would substantially disrupt our production.
Moreover, many of our finished steel products are delivered by truck. Unforeseen fluctuations in the price of fuel would also have a negative impact on our costs or on the costs of many of our customers.
In addition, changes in certain environmental laws and regulations, including those that may impose output limitations or higher costs associated with climate change or greenhouse gas emissions, could substantially increase the cost of manufacturing and raw materials, such as energy, to us and other U.S. steel producers.
Work stoppages or similar difficulties could significantly disrupt our operations, reduce our revenues and materially affect our earnings.
A work stoppage at one or more of our facilities could have a material adverse effect on our business, financial condition and results of operations. As of December 31, 2020, approximately 62% of our employees were covered under a collective bargaining agreement that expires in September 2021. Any failure to negotiate and conclude a new collective bargaining agreement with the union when the existing agreement expires could cause work interruptions or stoppages. Also, if one or more of our customers were to experience a work stoppage, that customer may halt or limit purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations.
A significant portion of our manufacturing facilities are located in Stark County, Ohio, which increases the risk of a significant disruption to our business as a result of unforeseeable developments in this geographic area.
It is possible that we could experience prolonged periods of reduced production due to unforeseen catastrophic events occurring in or around our manufacturing facilities in Stark County, Ohio. As a result, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers, meet customer shipment deadlines or address other significant issues, any of which could have a material adverse effect on our business, financial condition or results of operations.
We have significant pension and retiree health care costs, as well as future cash contribution requirements, which may negatively affect our results of operations and cash flows.
We maintain retiree health care and defined benefit pension plans covering many of our domestic employees and former employees upon their retirement. These benefit plans have significant liabilities that are not fully funded, which will require additional cash funding in future years. Minimum contributions to domestic qualified pension plans are regulated under the Employee Retirement Income Security Act of 1974 (ERISA) and the Pension Protection Act of 2006 (PPA).
The level of cash funding for our defined benefit pension plans in future years depends upon various factors, including voluntary contributions that we may make, future pension plan asset performance, actual interest rates, union negotiated benefit changes, future government regulations, and other factors, many of which are not within our control. In addition, assets held by the trusts for our pension plan and our trust for retiree health care and life insurance benefits are subject to the risks, uncertainties and variability of the financial markets. See “Note 15 - Retirement and Postretirement Plans” in the Notes to the Consolidated Financial Statements for a discussion of assumptions and further information associated with these benefit plans.
We may incur restructuring and impairment charges that could materially affect our profitability.
Changes in business or economic conditions, or our business strategy, may result in actions that require us to incur restructuring and impairment charges in the future, which could have a material adverse effect on our earnings. For additional information on current restructuring and impairment charges, refer to “Note 5 - Restructuring Charges” and “Note 6 - Disposition of Non-Core Assets” in the Notes to Consolidated Financial Statements.
Our ability to use our net operating loss, interest, and credit carryforwards to offset future taxable income may be subject to certain limitations.
As of December 31, 2020, we have loss carryforwards totaling $406.8 million (of which $348.3 million relates to the U.S. and $58.5 million relates to various non-U.S. jurisdictions), having various expiration dates, as well as certain credit carryforwards. The majority of the non-U.S. loss carryforwards represent local country net operating losses for entities treated as branches of TimkenSteel under U.S. tax law. Operating losses generated in the U.S. resulted in a decrease in the carrying value of our U.S. deferred tax liability to the point of a net U.S. deferred tax asset at December 31, 2016. At that time, we assessed, based upon operating performance in the U.S. and industry conditions that it was more likely than not we would not realize a portion of our U.S. deferred tax assets. The Company recorded a valuation allowance in 2016 and remained in a valuation allowance position in 2020. Going forward, the need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in our effective tax rate. We will maintain a valuation allowance against our deferred tax assets in the U.S. and applicable foreign countries until sufficient positive evidence exists to eliminate them. Our ability to utilize our net operating loss, interest, and credit carryforwards is dependent upon our ability to generate taxable income in future periods and may be limited due to restrictions imposed on utilization of net operating loss, interest, and credit carryforwards under federal and state laws upon a change in ownership. Refer to “Note 8 - Income Tax Provision” in the Notes to the Consolidated Financial Statements for more information.
Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended (the Code), provide an annual limitation on our ability to utilize our U.S. net operating loss and credit carryforwards against future U.S. taxable income in the event of a change in ownership, as defined in the Code, which could result from one or more transactions involving our shares, including transactions that are outside of our control, as well as the issuance of shares upon conversion of our 6.00% Convertible Senior Notes due 2021 (Convertible Senior Notes due 2021) or our 6.00% Convertible Senior Notes due 2025 (Convertible Senior Notes due 2025, and together with the Convertible Senior Notes due 2021, the Convertible Notes). Accordingly, such transactions could adversely impact our ability to offset future tax liabilities and, therefore, adversely affect our financial condition, net income and cash flow. Refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements for more information.
Risks related to our debt
Deterioration in our asset borrowing base could adversely affect our financial health and restrict our ability to borrow necessary cash to support the needs of our business and fulfill our pension obligations.
As of December 31, 2020, we had outstanding debt of approximately $78.2 million. Our debt may:
•
make it more difficult for us to satisfy our financial obligations under our indebtedness and our contractual and commercial commitments and increase the risk that we may default on our debt obligations;
•
require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available for working capital, capital expenditures and other general corporate purposes;
•
limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other investments, or general corporate purposes, which may limit the ability to execute our business strategy and affect the market price of our common shares;
•
heighten our vulnerability to downturns in our business, our industry or in the general economy and restrict us from exploiting business opportunities or making acquisitions;
•
place us at a competitive disadvantage compared to those of our competitors that may have less debt;
•
limit management’s discretion in operating our business;
•
limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate or the general economy; and
•
result in higher interest expense if interest rates increase and we have outstanding floating rate borrowings.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our debt. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Further, we may need to refinance all or a portion of our debt on or before maturity, and we cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms or at all.
Restrictive covenants in the agreements governing our indebtedness may restrict our ability to operate our business, which may affect the market price of our common shares.
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.
A breach of any of our covenants in the agreements governing our indebtedness could result in a default, which could allow the lenders to declare all amounts outstanding under the applicable debt immediately due and payable and which may affect the market price of our common shares. We may also be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under our indebtedness. Refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements for more detail on the Amended Credit Agreement.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Notes (refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements) is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely our common shares (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, under certain circumstances, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
Our capital resources may not be adequate to provide for all of our cash requirements, and we are exposed to risks associated with financial, credit, capital and banking markets.
In the ordinary course of business, we will seek to access competitive financial, credit, capital and/or banking markets. Currently, we believe we have adequate capital available to meet our reasonably anticipated business needs based on our historic financial performance, as well as our expected financial position. However, if we need to obtain additional financing in the future, to the extent our access to competitive financial, credit, capital and/or banking markets was to be impaired, our operations, financial results and cash flows could be adversely impacted.
Risks related to our common shares
The price of our common shares may fluctuate significantly.
The market price of our common shares may fluctuate significantly in response to many factors, including:
•
actual or anticipated changes in operating results or business prospects;
•
changes in financial estimates by securities analysts;
•
an inability to meet or exceed securities analysts’ estimates or expectations;
•
conditions or trends in our industry or sector;
•
the performance of other companies in our industry or sector and related market valuations;
•
announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives;
•
general financial, economic or political instability;
•
hedging or arbitrage trading activity in our common shares;
•
changes in interest rates;
•
capital commitments;
•
additions or departures of key personnel; and
•
future sales of our common shares or securities convertible into, or exchangeable or exercisable for, our common shares.
Many of the factors listed above are beyond our control. These factors may cause the market price of our common shares to decline, regardless of our financial condition, results of operations, business or prospects.
We may issue preferred shares with terms that could dilute the voting power or reduce the value of our common shares.
Our articles of incorporation authorize us to issue, without the approval of our shareholders, one or more classes or series of preferred shares having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common shares respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred shares could dilute the voting power or reduce the value of our common shares. For example, we could grant holders of preferred shares the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred shares could affect the residual value of the common shares.
Provisions in our corporate documents and Ohio law could have the effect of delaying, deferring or preventing a change in control of us, even if that change may be considered beneficial by some of our shareholders, which could reduce the market price of our common shares.
The existence of some provisions of our articles of incorporation and regulations and Ohio law could have the effect of delaying, deferring or preventing a change in control of us that a shareholder may consider favorable. These provisions include:
•
providing that our board of directors fixes the number of members of the board;
•
providing for the division of our board of directors into three classes with staggered terms;
•
establishing advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted on by shareholders at shareholder meetings; and
•
authorizing the issuance of “blank check” preferred shares, which could be issued by our board of directors to increase the number of outstanding securities of ours with voting rights and thwart a takeover attempt.
As an Ohio corporation, we are subject to Chapter 1704 of the Ohio Revised Code. Chapter 1704 prohibits certain corporations from engaging in a “Chapter 1704 transaction” (described below) with an “interested shareholder” for a period of three years after the date of the transaction in which the person became an interested shareholder, unless, among other things, prior to the interested shareholder’s share acquisition date, the directors of the corporation have approved the transaction or the purchase of shares on the share acquisition date.
After the three-year moratorium period, the corporation may not consummate a Chapter 1704 transaction unless, among other things, it is approved by the affirmative vote of the holders of at least two-thirds of the voting power in the election of directors and the holders of a majority of the voting shares, excluding all shares beneficially owned by an interested shareholder or an affiliate or associate of an interested shareholder, or the shareholders receive certain minimum consideration for their shares. A Chapter 1704 transaction includes certain mergers, sales of assets, consolidations, combinations and majority share acquisitions involving an interested shareholder. An interested shareholder is defined to include, with limited exceptions, any person who, together with affiliates and associates, is the beneficial owner of a sufficient number of shares of the corporation to entitle the person, directly or indirectly, alone or with others, to exercise or direct the exercise of 10% or more of the voting power in the election of directors after taking into account all of the person’s beneficially owned shares that are not then outstanding.
We are also subject to Section 1701.831 of the Ohio Revised Code, which requires the prior authorization of the shareholders of certain corporations in order for any person to acquire, either directly or indirectly, shares of that corporation that would entitle the acquiring person to exercise or direct the exercise of 20% or more of the voting power of that corporation in the election of directors or to exceed specified other percentages of voting power. The acquiring person may complete the proposed acquisition only if the acquisition is approved by the affirmative vote of the holders of at least a majority of the voting power of all shares entitled to vote in the election of directors represented at the meeting, excluding the voting power of all “interested shares.” Interested shares include any shares held by the acquiring person and those held by officers and directors of the corporation.
We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal, and are not intended to make our Company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some shareholders and could delay, defer or prevent an acquisition that our board of directors determines is not in the best interests of our Company and our shareholders, which under certain circumstances could reduce the market price of our common shares.
Risks relating to the spinoff
We remain subject to continuing contingent liabilities of The Timken Company following the spinoff.
There are several significant areas where the liabilities of The Timken Company may yet become our obligations. The separation and distribution agreement and employee matters agreement generally provide that we are responsible for substantially all liabilities that relate to our steel business
activities, whether incurred prior to or after the spinoff, as well as those liabilities of The Timken Company specifically assumed by us. In addition, under the Internal Revenue Code (Code) and the related rules and regulations, each corporation that was a member of The Timken Company consolidated tax reporting group during any taxable period or portion of any taxable period ending on or before the completion of the spinoff is jointly and severally liable for the federal income tax liability of the entire The Timken Company consolidated tax reporting group for that taxable period. In connection with the spinoff, we entered into a tax sharing agreement with The Timken Company that allocated the responsibility for prior period taxes of The Timken Company consolidated tax reporting group between us and The Timken Company. However, if The Timken Company is unable to pay any prior period taxes for which it is responsible, we could be required to pay the entire amount of such taxes. Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans as well as other contingent liabilities.
Potential liabilities associated with certain assumed obligations under the tax sharing agreement cannot be precisely quantified at this time.
Under the tax sharing agreement with The Timken Company, we are responsible generally for all taxes paid after the spinoff attributable to us or any of our subsidiaries, whether accruing before, on or after the spinoff. We also have agreed to be responsible for, and to indemnify The Timken Company with respect to, all taxes arising as a result of the spinoff (or certain internal restructuring transactions) failing to qualify as transactions under Sections 368(a) and 355 of the Code for U.S. federal income tax purposes (which could result, for example, from a merger or other transaction involving an acquisition of our shares) to the extent such tax liability arises as a result of any breach of any representation, warranty, covenant or other obligation by us or certain affiliates made in connection with the issuance of the tax opinion relating to the spinoff or in the tax sharing agreement. As described above, such tax liability would be calculated as though The Timken Company (or its affiliate) had sold its common shares of our Company in a taxable sale for their fair market value, and The Timken Company (or its affiliate) would recognize taxable gain in an amount equal to the excess of the fair market value of such shares over its tax basis in such shares. That tax liability could have a material adverse effect on our Company. As of December 31, 2020, there are no known or recorded liabilities associated with the spinoff.
Risks related to COVID-19
The COVID-19 pandemic could have a material, adverse impact on our operations and financial results including cash flows and liquidity.
The COVID-19 pandemic has had a negative impact on our 2020 results of operations. Although it is not possible to predict the ultimate impact of COVID-19, including on our business, results of operations, financial position or cash flows, such impacts that may be material include, but are not limited to: (i) reduced sales and profit levels; (ii) slower collection of accounts receivable and potential increases in uncollectible accounts receivable; (iii) increased operational risks as a result of manufacturing facility disruptions; (iv) delays and disruptions in the availability of and timely delivery of materials and components used in our operations, as well as increased costs for such material and components, and (v) increased cybersecurity risks including vulnerability to security breaches, information technology disruptions and other similar events as a result of a substantial number of employees utilizing remote work arrangements. We will continue to closely monitor the impact of the COVID-19 pandemic on our Company.
General risk factors
We may be subject to risks relating to our information technology systems and cybersecurity.
We rely on information technology systems to process, transmit and store electronic information and manage and operate our business. We face the challenge of supporting our older systems and implementing upgrades when necessary. Additionally, a breach in security could expose us and our customers and suppliers to risks of misuse of confidential information, manipulation and destruction of data, production downtimes and operations disruptions, which in turn could adversely affect our reputation, competitive position, business or results of operations. While we have taken reasonable steps to protect the Company from cybersecurity risks and security breaches (including enhancing our firewall, workstation, email security and network monitoring and alerting capabilities, and training employees around phishing, malware and other cybersecurity risks), and we have policies and procedures to prevent or limit the impact of systems failures, interruptions, and security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. Although we rely on commonly used security and processing systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from all potential compromises or breaches of security.
We may not be able to execute successfully on our business strategies or achieve the intended results.
Our business strategy includes driving organizational changes to reduce costs and enhance profitable and sustainable growth. We have taken company-wide actions including the restructuring of the business support functions and the evaluation of non-core assets. If we are unsuccessful in executing on our business strategies, it could negatively impact profitability and liquidity, requiring us to alter our strategy.
If we are unable to attract and retain key personnel, our business could be materially adversely affected.
Our business substantially depends on the continued service of key members of our management. The loss of the services of a significant number of members of our management could have a material adverse effect on our business. Modern steel-making uses specialized techniques and advanced equipment that requires experienced engineers and skilled laborers. Our future success will depend on our ability to attract and retain
such highly skilled personnel, as well as finance, marketing and senior management professionals. Competition for these employees is intense, and we could experience difficulty from time to time in hiring and retaining the personnel necessary to support our business. If we do not succeed in retaining our current employees and attracting new high-quality employees, our business could be materially adversely affected.
We are subject to a wide variety of domestic and foreign laws and regulations that could adversely affect our results of operations, cash flow or financial condition.
We are subject to a wide variety of domestic and foreign laws and regulations, and legal compliance risks, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trading laws, privacy laws and laws governing improper business practices. We are affected by new laws and regulations, and changes to existing laws and regulations, including interpretations by courts and regulators. With respect to tax laws, with the finalization of specific actions (Actions) contained within the Organization for Economic Development and Cooperation’s (OECD) Base Erosion and Profit study, many OECD countries have acknowledged their intent to implement the Actions and update their local tax regulations. The extent, if any, to which countries in which we operate adopt and implement the Actions could affect our effective tax rate and our future results from non-U.S. operations.
Compliance with the laws and regulations described above or with other applicable foreign, federal, state, and local laws and regulations currently in effect or that may be adopted in the future could materially adversely affect our competitive position, operating results, financial condition and liquidity.
If our internal controls are found to be ineffective, our financial results or our stock price may be adversely affected.
Our most recent evaluation resulted in our conclusion that, as of December 31, 2020, our internal control over financial reporting was effective. We believe that we currently have adequate internal control procedures in place for future periods. However, if our internal control over financial reporting is found to be ineffective, investors may lose confidence in the reliability of our financial statements, which may adversely affect our stock price.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
We are headquartered in Canton, Ohio, at a facility we own in fee. We have facilities in three countries: U.S., China and Mexico.
We have manufacturing facilities at multiple locations in the U.S. These manufacturing facilities are located in Canton and Eaton, Ohio and Columbus, North Carolina. In addition to these manufacturing facilities, we own or lease warehouses and distribution facilities in the U.S., Mexico and China. The aggregate floor area of these facilities is 3.6 million square feet, of which approximately 70,000 square feet is leased and the rest is owned in fee. The buildings occupied by us are principally made of brick, steel, reinforced concrete and concrete block construction.
Our facilities vary in age and condition, and each of them has an active maintenance program to ensure a safe operating environment and to keep the facilities in good condition. We believe our facilities are in satisfactory operating condition and are suitable and adequate to conduct our business and support future growth.
Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of our melt capacity utilization.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. 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. EPA Notice of Violation
The U.S. Environmental Protection Agency (EPA) issued two related Notices of Violation (NOV) to TimkenSteel on August 5, 2014 and November 2, 2015, respectively. Those matters were settled pursuant to a Consent Agreement and Final Order (CAFO) effective on August 17, 2020 and an Administrative Consent Order (ACO) effective on August 13, 2020. Pursuant to the CAFO, the company paid a civil penalty of $0.35 million on or about August 20, 2020, and under the ACO the company committed to make approximately $1.0 million in clean-air related capital improvements, principally at the Harrison manufacturing facility, within one year from the effective date of the ACO.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of our Company as of February 25, 2021, are as follows:
Name
Age
Current Position
Michael S. Williams
Chief Executive Officer and President
Kristopher R. Westbrooks
Executive Vice President and Chief Financial Officer
Kristine C. Syrvalin
Executive Vice President, General Counsel and Secretary
Thomas D. Moline
Executive Vice President, Commercial Operations
William P. Bryan
Executive Vice President, Manufacturing, Supply Chain and Information Technology
Michael S. Williams is the President and Chief Executive Officer of TimkenSteel Corporation, a position he has held since January 2021. Previously, Mr. Williams served as CEO of Bayou Steel Group, a U.S. producer of structural steel and merchant bar, from May 2019 to September 2019, and as President of Outokumpu Americas for Outokumpu Oyj, a global leader in the stainless steel industry, from 2015 to 2019. Before that, Mr. Williams held a number of leadership roles at US Steel Corporation, a Fortune 250 company and leading integrated steel producer, from 2006 to 2015, including Senior Vice President, North American Flat Rolled and, most recently, Senior Vice President, Strategic Planning and Business Development. Earlier in his career, Mr. Williams served as Vice President of Commercial Products at Special Metals Corporation (a leader in the invention, production and supply of high-nickel alloys) and, prior to that, as Chairman and Chief Executive Officer of Ormet Corporation (a manufacturer of foil, sheet, billet and other aluminum products). Mr. Williams earned his bachelor’s of science degree in information science from the University of Pittsburgh.
Kristopher R. Westbrooks is Executive Vice President and Chief Financial Officer, a position he has held since September 2018. Previously, Mr. Westbrooks served from April 2015 until August 2018 as Vice President, Corporate Controller and Chief Accounting Officer at A. Schulman, Inc., a global supplier of high-performance plastic compounds, composites and powders. From 2011 until his appointment as Chief Accounting Officer in 2015, Mr. Westbrooks held various finance roles of increasing responsibility at A. Schulman, Inc. He earned his bachelor’s of science degree in business and master’s degree in accountancy from Miami University of Ohio and is a certified public accountant.
Kristine C. Syrvalin is Executive Vice President, General Counsel and Secretary of TimkenSteel Corporation, a position she has held since January 2021. Prior to assuming her current role, she had served as Assistant General Counsel and Vice President - Ethics and Compliance for TimkenSteel since October 2014. Previously, Ms. Syrvalin served as Vice President, Assistant General Counsel and Corporate Secretary for OMNOVA Solutions Inc., a global manufacturer of emulsion polymers, specialty chemicals, and functional and decorative surfaces, from September 2001 until October 2014. She earned her bachelor’s degree from Miami University of Ohio and her juris doctor degree from Case Western Reserve University School of Law.
Thomas D. Moline is Executive Vice President of Commercial Operations, a position he has held since July 2017. Prior to assuming his current role, Mr. Moline served as Executive Vice President of Manufacturing, where he led steel plant operations. Since joining The Timken Company in 1984, Mr. Moline held a variety of leadership positions, including as an engineer on the team that built the Faircrest facility. He earned his bachelor’s degree in manufacturing engineering from Miami University of Ohio.
William P. Bryan is Executive Vice President of Manufacturing, Supply Chain and Information Technology, a position he has held since assuming responsibility for manufacturing operations in addition to his then existing role as Executive Vice President, Supply Chain and Information Technology in 2017. Since joining The Timken Company in 1977, Mr. Bryan served in various positions related to supply chain, economics and information technology in both the U.S. and Europe. He holds bachelor's and master's degrees in business administration from Kent State University. Mr. Bryan also completed the Executive Development for Global Excellence (EDGE) program at the University of Virginia's Darden School of Business.
PART II.

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ITEM 4. MINE SAFETY DISCLOSURE

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Quarterly Common Stock Prices and Cash Dividends Per Share:
Our common shares are traded on the New York Stock Exchange (NYSE) under the symbol “TMST.” The estimated number of record holders of our common shares at December 31, 2020 was 3,421.
Our Amended Credit Agreement places certain limitations on the payment of cash dividends. Please refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements and the Results of Operations for additional discussion.
Issuer Purchases of Common Shares:
Our Amended Credit Agreement places certain limitations on our ability to purchase our common shares. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional discussion.
Securities Authorized for Issuance Under Equity Compensation Plans:
The following table sets forth certain information as of December 31, 2020, regarding equity compensation plans maintained by us on that date, the TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan (“2014 Plan”) and the TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan (the “2020 Plan” and, together with the 2014 Plan, the “Equity Plans”):
(a)
(b)
(c)
Plan category
Number of
securities to be
issued upon exercise of
outstanding options,
warrants and rights (1)
Weighted-average
exercise price
of outstanding options,
warrants and rights (2)
Number of securities
remaining available for
future issuance under
equity compensation plans reflected in column (a) (3)
Equity compensation plans approved by security holders(4)
4,571,736
$
18.61
2,160,931
Equity compensation plans not approved by security holders
-
-
-
Total
4,571,736
$
18.61
2,160,931
(1) The amount shown in column (a) includes the following: nonqualified stock options - 2,931,065; deferred shares - 369,340; performance-based restricted stock units - 258,447; and time-based restricted stock units - 1,012,884 (which includes 684,407 cliff-vested restricted stock units).
(2) The weighted average exercise price in column (b) includes nonqualified stock options only.
(3) The amount shown in column (c) represents common shares remaining available under the 2020 Plan, under which the Compensation Committee is authorized to make awards of option rights, appreciation rights, restricted shares, restricted stock units, deferred shares, performance shares, performance units and cash incentive awards. Awards may be credited with dividend equivalents payable in the form of common shares. No additional awards may be under the 2014 Plan.
(4) The Company also maintains the Director Deferred Compensation Plan pursuant to which non-employee Directors may defer receipt of common shares authorized for issuance under the Equity Plan. The table does not include separate information about this plan because it merely provides for the deferral, rather than the issuance, of common shares.
Performance Graph:
The following graph compares the cumulative total return of our common shares with the cumulative total return of the Standard & Poor’s (S&P) MidCap 400 Index and S&P Steel Group Index, assuming $100 was invested and that cash dividends were reinvested for the period from July 1, 2014 through December 31, 2020.
Date
TimkenSteel
Corporation
S&P MidCap
400 Index
S&P 500
Steel Index
July 1, 2014
$
100.00
$
100.00
$
100.00
December 31, 2014
$
96.71
$
102.11
$
95.49
December 31, 2015
$
22.29
$
99.89
$
80.49
December 31, 2016
$
41.18
$
120.61
$
122.43
December 31, 2017
$
37.59
$
131.51
$
135.49
December 31, 2018
$
21.63
$
115.08
$
127.04
December 31, 2019
$
19.95
$
142.75
$
107.22
December 31, 2020
$
11.85
$
159.61
$
101.33
This performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
(dollars and shares in millions, except per share data)
Statement of Operations Data:
Net sales
$
830.7
$
1,208.8
$
1,610.6
$
1,329.2
$
869.5
Net (loss) income
(61.9
)
(110.0
)
(10.0
)
(31.3
)
(105.5
)
Earnings (loss) per share(1):
Basic
$
(1.38
)
$
(2.46
)
$
(0.22
)
$
(0.70
)
$
(2.39
)
Diluted
$
(1.38
)
$
(2.46
)
$
(0.22
)
$
(0.70
)
$
(2.39
)
Cash dividends declared per share
$
-
$
-
$
-
$
-
$
-
Weighted average shares outstanding, diluted
45.0
44.8
44.6
44.4
44.2
Balance Sheet Data:
Total assets
$
994.0
$
1,085.2
$
1,275.3
$
1,212.6
$
1,069.9
Long-term debt
39.3
168.6
189.1
165.3
136.6
Total shareholders’ equity
507.5
563.1
612.9
616.7
597.4
Other Data:
Book value per share(2)
$
11.28
$
12.57
$
13.74
$
13.89
$
13.52
(1) See “Note 9 - Earnings (Loss) Per Share” in the Notes to the Consolidated Financial Statements for additional information.
(2) Book value per share is calculated by dividing total shareholders’ equity (as of the period end) by the weighted average shares outstanding, diluted.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except per share data)
Business Overview
We manufacture alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. Our portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), value-added solutions such as precision steel components, and billets. In addition, we supply machining and thermal treatment services and manage raw material recycling programs, which are also used as a feeder system for our melt operations. Our products and services are used in a diverse range of demanding applications in the following market sectors: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and OCTG.
SBQ steel is made to restrictive chemical compositions and high internal purity levels and is used in critical mechanical applications. We make these products from nearly 100% recycled steel, using our expertise in raw materials to create custom steel products. We focus on creating tailored products and services for our customers’ most demanding applications. Our engineers are experts in both materials and applications, so we can work closely with each customer to deliver flexible solutions related to our products as well as to their applications and supply chains.
The SBQ bar, tube, and billet production processes take place at our Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets we produce and includes three manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. Our value-added solutions production processes take place at two downstream manufacturing facilities: Tryon Peak (Columbus, North Carolina) and St. Clair (Eaton, Ohio). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of our market sectors. As a result, investments in our facilities and resource allocation decisions affecting our operations are designed to benefit the overall business, not any specific aspect of the business.
During the first quarter of 2020, management completed its previously announced plan to close the Company’s TimkenSteel Material Services facility in Houston, Texas. See “Note 6 - Disposition of Non-Core Assets” in the Notes to the Consolidated Financial Statements for additional information.
On February 16, 2021, management announced a plan to indefinitely idle our Harrison melt and cast assets, late in the first quarter of 2021. Going forward, all of the Company’s melting and casting activities will take place at the Faircrest location. We are working collaboratively with employees, suppliers and a number of customers to ensure a well-organized and efficient transition. Our rolling and finishing operations at Harrison will not be impacted by these actions. Estimated annual cash savings from the idling of Harrison’s melt and cast assets are $15 million to $20 million. See “Note 20 - Subsequent Events” in the Notes to the Consolidated Financial Statements for additional information.
We conduct our business activities and report financial results as one business segment. The presentation of financial results as one reportable segment is consistent with the way we operate our business and is consistent with the manner in which the 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.
Markets We Serve
We sell products and services that are used in a diverse range of demanding applications around the world. No one customer accounted for 10% or more of net sales in 2020.
Key indicators for our market include the U.S. light vehicle production Seasonally Adjusted Annual Rate, oil and gas rig count activity and U.S. footage drilled, and industrial production for agriculture and construction markets, distribution, and mining and oil field machinery products. In addition, we closely monitor the Purchasing Managers’ Index, which is a leading indicator for our overall business.
Impact of COVID-19 Pandemic
We continue to closely monitor the impact of the COVID-19 pandemic on our Company, employees, customers and supply chain. The full extent to which the COVID-19 pandemic will impact our operations and financial results is uncertain and ultimately will depend on, among many other factors, the duration of the pandemic, further Federal and State government actions and the speed of economic recovery. We estimate the primary impact of COVID-19 on the Company was lost sales of approximately $265 million for the year ended December 31, 2020, as compared to expectations established prior to the onset of the pandemic.
In response to the significant reduction in customer demand resulting from the COVID-19 crisis, the Company has taken additional actions to further reduce operating expenses, conserve cash and maximize liquidity. The following actions began in the second quarter of 2020:
•
Reduced interim CEO and senior executives’ base salaries by 20 percent and other executives’ base salaries by 10 percent, began on May 1, 2020 and ended on December 1, 2020;
•
Reduced cash retainer for its board of directors by 20 percent beginning with the second-quarter 2020, and reduced the value of the board’s annual equity grant by 20 percent, this was reinstated to its full amount going forward on December 1, 2020;
•
Suspended the Company’s 401(k) plan matching contributions for salaried employees, effective June 1 and will be reinstated as of March 1, 2021;
•
Implemented unpaid rolling furloughs for approximately 90 percent of salaried employees, with an average 5 weeks of unpaid furloughs per employee, beginning in early April 2020 and ending in late July 2020;
•
Deferred Social Security payroll tax remittance as permitted by the CARES Act;
•
Continued to maintain flexible production schedules at all plants to align operations with customer demand, resulting in the temporary layoff of manufacturing employees; and
•
Reduced 2020 capital expenditures to $16.9 million which was below planned spending of approximately $30 million at the beginning of 2020.
Since implementation in the second quarter of 2020, the Company’s COVID-19 related actions saved approximately $15 million in cash and reduced administrative expenses by approximately $8 million in total.
Despite the negative impact of COVID-19 on our business, total liquidity was $314.1 million as of December 31, 2020, as a result of the above COVID-19 related actions as well as other working capital management efficiency improvement activities. We believe this level of liquidity is sufficient to meet the Company’s needs for at least the next 12 months. The Company will continue to take actions such as those described above in order to preserve liquidity for the duration of this pandemic.
Impact of Raw Material Prices
In the ordinary course of business, we are exposed to the volatility of the costs of our raw materials. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing process. We utilize a raw material surcharge mechanism when pricing products to our customers, which is designed to mitigate the impact of increases or decreases in raw material costs, although generally with a lag effect. This timing effect can result in raw material spread whereby costs can be over- or under-recovered in certain periods. While the surcharge generally protects gross profit, it has the effect of diluting gross margin as a percent of sales.
Results of Operations
Net Sales
The charts below present net sales and shipments for the years ended December 31, 2020, 2019 and 2018.
Net sales for the year ended December 31, 2020 were $830.7 million, a decrease of $378.1 million, or 31.3%, compared to the year ended December 31, 2019. The decrease was due to a reduction in volume of approximately 258 thousand ship tons, resulting in a decrease of $286.4 million of net sales and lower surcharges of $117.5 million. These decreases in net sales were partially offset by a positive mix primarily due to the industrial end-market resulting in an increase in net sales of $42.7 million. The primary driver in the decrease in volume was lower customer demand across all end-markets primarily as a result of the COVID-19 pandemic and a weak energy market. The decrease in surcharges was
primarily due to an approximate 25% decline in average surcharge per ton due to lower market prices for scrap and alloys. We estimate the impact of the COVID-19 pandemic on our net sales during 2020 was a reduction of approximately $265 million, as compared to our forecast prior to the onset of the pandemic. Approximately half of this decrease was related to lower than forecasted volume in our mobile end-market sector, as production was halted by all major automotive manufacturers for various lengths of time during the second quarter. Excluding surcharges, net sales decreased $260.6 million, or 27.3%.
Gross Profit
The chart below presents the drivers of the gross profit variance from the year ended December 31, 2019 to December 31, 2020.
Gross profit for the year ended December 31, 2020 decreased $7 million, or 31.0%, compared with the year ended December 31, 2019. The decrease was driven primarily by lower volumes, partially offset by favorable manufacturing costs, raw material spread, and inventory adjustments. The primary driver in the decrease in volume was lower customer demand across all end-markets primarily as a result of the COVID-19 pandemic and a weak energy market. Favorable manufacturing costs in 2020 were primarily due to the Company’s significant cost reduction actions and lower annual shutdown maintenance, slightly offset by the unfavorable impact of lower production levels on fixed cost leverage. Raw material spread was favorable due to higher scrap spread specifically during the second half of the year.
Selling, General and Administrative Expenses
The charts below present selling, general and administrative (SG&A) expense for the years ended December 31, 2020, 2019 and 2018.
SG&A expense for the year ended December 31, 2020 decreased by $15.1 million, or 16.4%, compared with the year ended December 31, 2019. The decrease in 2020 is primarily due to lower wages and benefits expense which are a result of a reduction in employee headcount following the Company’s recent restructuring actions, as well as unpaid rolling furloughs for salaried employees during the second and third quarters. Additional reductions in SG&A are due to other COVID-19 related cost reduction actions, lower controllable spend as well as lower bad debt expense. The decrease is partially offset by an increase in variable compensation.
Restructuring Charges
During 2019 and throughout 2020, TimkenSteel made organizational changes to streamline its organizational structure to drive enhanced profitability and sustainable growth. These company-wide actions included the restructuring of its business support functions, the reduction of management layers throughout the organization, the closure of the TMS facility in Houston, Texas and other domestic and international actions to further improve the Company’s overall cost structure. Through these restructuring efforts, to date the Company has eliminated approximately 215 salaried positions and recognized restructuring charges of $11.7 million ($3.1 million in 2020 and $8.6 million in 2019), consisting of severance and employee-related benefits. Approximately 55 of these positions were eliminated in 2020. The Company expects to realize annual savings of approximately $27 million as a result of these actions. Refer to “Note 5 - Restructuring Charges” in the Notes to the Consolidated Financial Statements for additional information.
Interest Expense
Interest expense for the year ended December 31, 2020 was $12.2 million, a decrease of $3.5 million, compared with the year ended December 31, 2019. The decrease in interest expense was primarily due to a reduction in outstanding borrowings under the credit facility and a lower interest rate environment. Refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements for additional information.
Other (Income) Expense, net
Year Ended December 31,
$ Change
Pension and postretirement non-service benefit (income) loss
$
(26.6
)
$
(17.5
)
$
(9.1
)
Loss (gain) from remeasurement of benefit plans
14.7
40.6
(25.9
)
Foreign currency exchange loss (gain)
0.2
-
0.2
Employee retention credit
(2.3
)
-
-
Miscellaneous (income) expense
(0.2
)
0.2
(0.4
)
Total other (income) expense, net
$
(14.2
)
$
23.3
$
(35.2
)
Year Ended December 31,
$ Change
Pension and postretirement non-service benefit (income) loss
$
(17.5
)
$
(25.2
)
$
7.7
Loss (gain) from remeasurement of benefit plans
40.6
43.5
(2.9
)
Foreign currency exchange loss (gain)
-
0.2
(0.2
)
Miscellaneous (income) expense
0.2
0.1
0.1
Total other (income) expense, net
$
23.3
$
18.6
$
4.7
Non-service related pension and other postretirement benefit income, for all years, consists primarily of the interest cost, expected return on plan assets and amortization components of net periodic cost. The loss from remeasurement of benefit plans is due to the Company performing mark-to-market accounting on its pension and postretirement assets at year-end and upon the occurrence of certain triggering events. For more details on the remeasurement refer to “Note 15 - Retirement and Postretirement Plans.”
The Coronavirus Aid, Relief, and Economic Security ("CARES") Act provides for an employee retention credit (“Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee throughout the year. The Company qualified for the tax credit in the second and third quarters of 2020 and accrued a benefit of $2.3 million in the fourth quarter of 2020 related to the Employee Retention Credit in other (income) expense, net on the Company’s Consolidated Statements of Operations.
Provision for Income Taxes
Year Ended December 31,
$ Change
Provision (benefit) for income taxes
$
1.2
$
(16.1
)
$
17.3
Effective tax rate
(2.0
)%
12.8
%
NM(1)
Year Ended December 31,
$ Change
Provision (benefit) for income taxes
$
(16.1
)
$
1.8
$
(17.9
)
Effective tax rate
12.8
%
(5.9
)%
NM(1)
(1) “NM” is data that is not meaningful.
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 years ended December 31, 2020 and 2019. For the year ended December 31, 2019, the Company recorded an intraperiod tax allocation adjustment between continuing operations and other categories of comprehensive income. In periods in which the Company has a 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 for the year ended December 31, 2019, income tax expense of $16.7 million was recorded within other comprehensive income and a corresponding benefit was recorded to continuing operations.
NON-GAAP FINANCIAL MEASURES
Net Sales Adjusted to Exclude Surcharges
The table below presents net sales by end-market sector, adjusted to exclude surcharges, which represents a financial measure that has not been determined in accordance with accounting principles generally accepted in the United States (U.S. GAAP). We believe presenting net sales by end-market sector adjusted to exclude raw material surcharges provides additional insight into key drivers of net sales such as base price and product mix.
(dollars in millions, tons in thousands)
Mobile
Industrial
Energy
Other
Total
Tons
308.1
267.0
36.3
29.0
640.4
Net Sales
$
346.0
$
391.7
$
53.2
$
39.8
$
830.7
Less: Surcharges
59.3
61.1
8.4
7.2
136.0
Base Sales
$
286.7
$
330.6
$
44.8
$
32.6
$
694.7
Net Sales / Ton
$
1,123
$
1,467
$
1,466
$
1,372
$
1,297
Surcharges / Ton
$
$
$
$
$
Base Sales / Ton
$
$
1,238
$
1,234
$
1,124
$
1,085
Mobile
Industrial
Energy
Other
Total
Tons
397.6
348.2
90.6
61.9
898.3
Net Sales
$
479.3
$
486.3
$
166.4
$
76.8
$
1,208.8
Less: Surcharges
104.1
99.9
32.8
16.7
253.5
Base Sales
$
375.2
$
386.4
$
133.6
$
60.1
$
955.3
Net Sales / Ton
$
1,205
$
1,397
$
1,837
$
1,241
$
1,346
Surcharges / Ton
$
$
$
$
$
Base Sales / Ton
$
$
1,110
$
1,475
$
$
1,063
Mobile
Industrial
Energy
Other
Total
Tons
428.3
462.7
152.8
155.6
1,199.4
Net Sales
$
553.9
$
637.5
$
265.6
$
153.6
$
1,610.6
Less: Surcharges
134.4
161.5
61.2
48.3
405.4
Base Sales
$
419.5
$
476.0
$
204.4
$
105.3
$
1,205.2
Net Sales / Ton
$
1,293
$
1,378
$
1,738
$
$
1,343
Surcharges / Ton
$
$
$
$
$
Base Sales / Ton
$
$
1,029
$
1,338
$
$
1,005
LIQUIDITY AND CAPITAL RESOURCES
Amended Credit Agreement
On October 15, 2019, the Company entered into a Third Amended and Restated Credit Agreement (the Amended Credit Agreement) with JP Morgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and the other lenders party thereto, which further amended and restated the Company’s Second Amended and Restated Credit Agreement dated as of January 26, 2018.
The Amended Credit Agreement increased capacity to $400 million compared to $300 million in the previous facility and extended the maturity date to October 15, 2024. Furthermore, the Amended Credit Agreement provided for an enhanced asset base with reappraised fixed assets and investment grade foreign accounts receivable collateral in the borrowing base (up to $30 million), 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.
The Amended Credit Agreement also 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 minimum liquidity requirement for the period commencing on March 1, 2021 and ending on June 1, 2021 requires the Company to maintain a liquidity amount above the sum of the aggregate outstanding principal amount of the Convertible Senior Notes due 2021 plus an amount equal to 12.5% of the lesser of the borrowing base and the total capacity of $400 million. The Company expects to be compliant with this minimum liquidity requirement during the applicable time period.
Refer to “Note 14 - Financing Arrangements” in the Notes of the Consolidated Financial Statements for additional information.
Convertible Notes
In May 2016, the Company issued $75.0 million aggregate principal amount of Convertible Senior Notes due 2021, plus an additional $11.3 million principal amount to cover over-allotments. The Convertible Senior Notes due 2021 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 Senior Notes due 2021 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.
In December 2020, the Company entered into separate, privately negotiated exchange agreements with a limited number of holders of the Company’s currently outstanding Convertible Senior Notes due 2021. Pursuant to the exchange agreements, the Company exchanged $46.0 million aggregate principal amount of Convertible Senior Notes due 2021 for $46.0 million aggregate principal amount of its new Convertible Senior Notes due 2025. The Company did not receive any cash proceeds from the issuance of the Convertible Senior Notes due 2025.
The Convertible Senior Notes due 2025 bear cash interest at a rate of 6.0% per year, payable semiannually on June 1 and December 1, beginning on June 1, 2021. The Convertible Senior Notes due 2025 will mature on December 1, 2025, unless earlier repurchased or converted. The net amount of this exchange was $44.5 million, after deducting the initial underwriters’ fees and paying other transaction costs.
Refer to “Note 14 - Financing Arrangements” in the Notes of the Consolidated Financial Statements for additional information.
Additional Liquidity Considerations
The following represents a summary of key liquidity measures under the credit agreement in effect as of December 31, 2020 and December 31, 2019:
December 31,
December 31,
Cash and cash equivalents
$
102.8
$
27.1
Credit Agreement:
Maximum availability
$
400.0
$
400.0
Suppressed availability(1)
(183.2
)
(103.0
)
Availability
216.8
297.0
Credit facility amount borrowed
-
(90.0
)
Letter of credit obligations
(5.5
)
(3.8
)
Availability not borrowed
211.3
203.2
Total liquidity
$
314.1
$
230.3
(1) As of December 31, 2020, TimkenSteel had less than $400 million in collateral assets to borrow against.
Our principal sources of liquidity are cash and cash equivalents, cash flows from operations and available borrowing capacity under our credit agreement. As of December 31, 2020, taking into account our view of mobile, industrial, and energy market demands for our products, and our 2021 operating and long-range plan, we believe that our cash balance as of December 31, 2020, projected cash generated from operations, and borrowings available under the Amended Credit Agreement, will be sufficient to satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations, including servicing our debt obligations, as well as our Convertible Senior Notes due 2021 with a maturity date of June 1, 2021, for at least the next twelve months. Regarding the Convertible Senior Notes due 2021, we plan to repay the remaining outstanding principal balance of $40.2 million upon maturity with available cash, or a combination of available cash and credit facility borrowings.
The full extent to which the COVID-19 pandemic will impact our operations and financial results is uncertain and ultimately will depend on, among other factors, the duration of the pandemic, further Federal and State government actions and the speed of economic recovery. To the extent our liquidity needs prove to be greater than expected or cash generated from operations is less than anticipated, and cash on hand or credit availability is insufficient, we would seek additional financing to provide additional liquidity. We regularly evaluate our potential access to the equity and debt capital markets as sources of liquidity and we believe additional financing would likely be available if necessary, although we can make no assurance as to the form or terms of any such financing. We would also consider additional cost reductions and restructuring, changes in working capital management and further reductions of capital expenditures. Regardless, we will continue to evaluate additional financing or may seek to refinance outstanding borrowings under the Amended Credit Agreement to provide us with additional flexibility and liquidity. Any additional financing beyond that incurred to refinance existing debt would increase our overall debt and could increase interest expense.
On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, an economic stimulus package intended to provide support, principally in the form of tax benefits and additional liquidity, to companies and individuals negatively impacted by the COVID-19 pandemic. Although the majority of the provisions included in the CARES Act did not immediately benefit the Company from a cash tax perspective due to its significant net operating losses, the Company has taken advantage of the deferral of the employer share (6.2% of employee wages) of Social Security payroll taxes that would otherwise have been owed from the date of enactment of the legislation through December 31, 2020, as afforded by the Act. For the year ended December 31, 2020, the Company deferred approximately $6.4 million of payroll taxes as permitted by the CARES Act, all of which will be paid in two equal installments at December 31, 2021 and December 31, 2022. Additionally, the Company expects to file for and accrued a benefit of approximately $2.3 million related to the Employee Retention Credit in 2021.
For additional details regarding the Amended Credit Agreement and the Convertible Notes, please refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements, and for our discussion regarding risk factors related to our business and our debt, see Risk Factors in this Annual Report on Form 10-K.
Cash Flows
The following table reflects the major categories of cash flows for the years ended December 31, 2020, 2019, and 2018. For additional details, please refer to the Consolidated Statements of Cash Flows included in Item 8 - Financial Statements and Supplemental Data of this Annual Report.
Year Ended December 31,
Net cash provided (used) by operating activities
$
173.5
$
70.3
$
18.5
Net cash provided (used) by investing activities
(6.0
)
(38.0
)
(39.0
)
Net cash provided (used) by financing activities
(91.8
)
(26.8
)
17.6
Increase (Decrease) in Cash and Cash Equivalents
$
75.7
$
5.5
$
(2.9
)
Operating activities
Net cash provided by operating activities for the year ended December 31, 2020 was $173.5 million compared to net cash provided of $70.3 million for the year ended December 31, 2019. The increase in cash provided by operating activities of $103.2 million was primarily due to management actions to improve working capital processes and efficiency. Refer to the Consolidated Statements of Cash Flows for additional information.
Investing activities
Net cash used by investing activities for the year ended December 31, 2020 was $6.0 million compared to net cash used by investing activities of $38.0 million for the year ended December 31, 2019. The change was primarily due to lower capital expenditures and proceeds from sales of property, plant and equipment.
Financing activities
Net cash used by financing activities for the year ended December 31, 2020 was $91.8 million compared to net cash used by financing activities of $26.8 million for the year ended December 31, 2019. The change was mainly due to higher repayments on the Credit Agreement in 2020 as compared to 2019.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2020:
Contractual Obligations
Total
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
Convertible Notes
$
86.2
$
40.2
$
-
$
46.0
$
-
Interest payments
18.4
4.8
7.5
6.1
-
Operating leases
22.5
8.4
10.5
3.6
-
Purchase commitments
117.5
27.3
20.0
16.9
53.3
Retirement benefits
298.8
3.7
63.1
81.9
150.1
Total
$
543.4
$
84.4
$
101.1
$
154.5
$
203.4
The caption Convertible Notes includes the outstanding principal balance of $40.2 million related to the Convertible Senior Notes due 2021 and the outstanding principal balance of $46.0 million related to the Convertible Senior Notes due 2025. Interest payments include interest on the Convertible Notes, as well as the unused commitment fee of 25 basis points related to the Amended Credit Agreement.
Operating leases include leases for office space, warehouses, land, machinery and equipment, vehicles and certain information technology equipment. Refer to “Note 13 - Leases” in the Notes to the Consolidated Financial Statement for additional information.
Purchase commitments are defined as agreements to purchase goods or services that are enforceable and legally binding. Included in purchase commitments are certain obligations related to capital commitments, service agreements and energy consumed in our production processes. These purchase commitments do not represent our entire anticipated purchases in the future but represent only those items for which we are presently contractually obligated. The majority of our products and services are purchased as needed, with no advance commitment. We do not have any off-balance sheet arrangements with unconsolidated entities or other persons.
Retirement benefits are paid from plan assets and our operating cash flow. The table above includes payments to meet minimum funding requirements of our defined benefit pension plans, estimated benefit payments for our unfunded supplemental executive retirement pension, and postretirement plans. The retirement benefit funding requirements included in the table above are estimated required contributions and are significantly affected by asset returns and several other variables. These amounts are subject to change year to year. These amounts are based on Company estimates and current funding laws; actual future payments may be different. Refer to “Note 15 - Retirement and Postretirement Plans”
in the Notes to the Consolidated Financial Statements for further information related to the total pension and other postretirement benefit plans and expected benefit payments.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We review our critical accounting policies throughout the year.
New Accounting Guidance
See “Note 2 - Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.
Revenue Recognition
We recognize revenue from contracts at a point in time when we have satisfied our performance obligation and the customer obtains control of the goods, at the amount that reflects the consideration we expect to receive for those goods. We receive and acknowledge purchase orders from our customers, which define the quantity, pricing, payment and other applicable terms and conditions. In some cases, we receive a blanket purchase order from our customer, which includes pricing, payment and other terms and conditions, with quantities defined at the time the customer issues periodic releases from 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.
Inventory
Inventories are stated at lower of cost or net realizable value. All inventories, including raw materials, manufacturing supplies inventory as well as international (outside the U.S.) inventories, have been valued using the FIFO or average cost method as of December 31, 2020 and 2019.
Long-lived Assets
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 the carrying value of the assets may not be recoverable.
We test 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 our 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 our business strategy and our 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, we use internal cash flow estimates discounted at an appropriate interest rate, third party appraisals as appropriate, and/or market prices of similar assets, when available.
As a result of the discontinued use of certain assets, we recorded an impairment charge of $9.3 million in 2019. No impairment charge was recorded in 2020. Refer to “Note 6 - Disposition of Non-Core Assets” in the Notes to the Consolidated Financial Statements for further information.
Income Taxes
We are subject to income taxes in the U.S. and numerous non-U.S. jurisdictions, and we account for income taxes in accordance with applicable accounting guidance. 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. We record valuation allowances against deferred tax assets by tax jurisdiction when it is more likely than not that such assets will not be realized. In determining the need for a valuation allowance, the historical and projected financial performance of the entity recording the net deferred tax asset is considered along with any other pertinent information. Net deferred tax assets relate primarily to net operating losses and pension and other postretirement benefit obligations in the U.S., which we believe are more likely than not to result in future tax benefits. As of December 31, 2020, we have recorded a valuation allowance on our net deferred tax assets in the U.S., as we do not believe it is more likely than not that a portion of our U.S. deferred tax assets will be realized.
In the ordinary course of our business, there are many transactions and calculations regarding which the ultimate income tax determination is uncertain. We are regularly under audit by tax authorities. Accruals for uncertain tax positions are provided for in accordance with the requirements of applicable accounting guidance. We record interest and penalties related to uncertain tax positions as a component of income tax expense.
The Company made the accounting policy election to treat taxes related to Global Intangible Low-Taxed Income as a current period expense when incurred.
Benefit Plans
We recognize an overfunded status or underfunded status (i.e. the difference between the fair value of plan assets and the benefit obligations) as either an asset or a liability for our defined benefit pension and other postretirement benefit plans on the Consolidated Balance Sheets. We recognize actuarial gains and losses immediately through net periodic benefit cost in the Consolidated Statements of Operations upon the annual remeasurement at December 31, or on an interim basis as triggering events warrant remeasurement. In addition, we use fair value to account for the value of plan assets.
As of December 31, 2020, our projected benefit obligations related to our pension and other postretirement benefit plans were $1,395.1 million and $128.3 million, respectively, and the underfunded status of our pension and other postretirement benefit obligations were $163.4 million and $46.1 million, respectively. These benefit obligations were valued using a weighted average discount rate of 2.68% for pension benefit plans and 2.65% for other postretirement benefit plans. The determination of the discount rate is generally based on an index created from a hypothetical bond portfolio consisting of high-quality fixed income securities with durations that match the timing of expected benefit payments. Changes in the selected discount rate could have a material impact on our projected benefit obligations and the unfunded status of our pension and other postretirement benefit plans.
For the year ended December 31, 2020, net periodic pension benefit cost was $10.2 million, and net periodic other postretirement benefit income was $1.7 million. In 2020, net periodic pension and other postretirement benefit costs were calculated using a variety of assumptions, including a weighted average discount rate of 3.42% and a weighted average expected return on plan assets of 5.80% and 4.50%, respectively. The expected return on plan assets is determined based on forward-looking current market pricing. The forward-looking analysis is performed using a building block approach incorporating inputs such as current yields, valuations, economic data and broad macroeconomic themes.
The net periodic benefit cost and benefit obligation are affected by applicable year-end assumptions. Sensitivities to these assumptions may be asymmetric and are specific to the time periods noted. The impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities. The sensitivity to changes in discount rate assumptions may not be linear. A sensitivity analysis of the projected incremental effect of a 0.25% increase (decrease), holding all other assumptions constant, is as follows:
Hypothetical Rate
Increase (decrease)
0.25%
(0.25)%
Discount Rate
Net periodic benefit cost, prior to annual remeasurement gains or losses
$
1.5
$
(1.6
)
Benefit obligation
$
(43.2
)
$
45.6
Return on plan assets
Net periodic benefit cost, prior to annual remeasurement gains or losses
$
(2.9
)
$
2.9
Aggregate net periodic pension and other postretirement benefit income for 2021 is forecasted to be $14.8 million and $5.0 million, respectively. This estimate is based on a weighted average discount rate of 2.68% for the pension benefit plans and 2.65% for other postretirement benefit plans, as well as a weighted average expected return on assets of 5.76% for the pension benefit plans and 4.50% for the other postretirement benefit plans. Actual cost also is dependent on various other factors related to the employees covered by these plans. Adjustments to our actuarial assumptions could have a material adverse impact on our operating results.
Please refer to “Note 15 - Retirement and Postretirement Plans” in the Notes to the Consolidated Financial Statements for further information related to our pension and other postretirement benefit plans.
Other Loss Reserves
We have a number of loss exposures that are incurred in the ordinary course of business, such as environmental claims, product liability claims, product warranty claims, litigation and accounts receivable reserves. Establishing loss reserves for these matters requires management’s estimate and judgment with regard to 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. These other loss reserves have an immaterial impact on the Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
Certain statements set forth in this Annual Report on Form 10-K (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-K. 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;
•
the potential impact of the COVID-19 pandemic on our operations and financial results, including cash flows and liquidity;
•
competitive factors, including changes in market penetration; increasing price competition by existing or new foreign and domestic competitors; the introduction of new products by existing and new competitors; and new technology that may impact the way our products are sold or distributed;
•
changes in operating costs, including the effect of changes in our manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; availability of raw materials and energy; our ability to mitigate the impact of fluctuations in raw materials and energy costs and the effectiveness of our surcharge mechanism; changes in the expected costs associated with product warranty claims; changes resulting from inventory management, cost reduction initiatives and different levels of customer demands; the effects of unplanned work stoppages; and changes in the cost of labor and benefits;
•
the success of our operating plans, announced programs, initiatives and capital investments; and our ability to maintain appropriate relations with unions that represent our associates in certain locations in order to avoid disruptions of business;
•
unanticipated litigation, claims or assessments, including claims or problems related to intellectual property, product liability or warranty, and environmental issues and taxes, among other matters;
•
the availability of financing and interest rates, which affect our cost of funds and/or ability to raise capital; 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 this Annual Report on Form 10-K.
You are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results, and that the above list should not be considered to be a complete list. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. 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 December 31, 2020, we have $78.2 million of aggregate debt outstanding. None of our outstanding debt as of December 31, 2020 has variable interest rates, thus a rise in interest rates would not impact our interest expense at this point in time.
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 commodities. 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, the surcharge impacts sales prices to a lesser extent.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of TimkenSteel Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TimkenSteel Corporation (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the financial statement schedule included at Item 15a (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 25, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for pension and other postretirement benefit obligations
Description of the Matter
At December 31, 2020, the Company’s aggregate defined benefit pension and other postretirement benefit obligation was $1,523.4 million and exceeded the fair value of defined benefit pension and other postretirement plan assets of $1,313.9 million, resulting in an unfunded defined benefit pension and other postretirement benefit obligation of $209.5 million. As explained in Note 2 and Note 15 to the consolidated financial statements, the Company recognizes actuarial gains and losses immediately through net periodic benefit cost upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement, through updating the estimates used to measure the defined benefit pension and other postretirement benefit obligations and plan assets to reflect the actual return on plan assets and updated actuarial assumptions.
Auditing the defined benefit pension and other postretirement benefit obligations was complex due to the highly judgmental nature of the actuarial assumptions (e.g., discount rate, mortality rate, and health care cost trend rates) used in the measurement process. These assumptions had a significant effect on the benefit obligations.
How we Addressed the Matter in our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the measurement of defined benefit pension and other postretirement benefit obligations. For example, we tested controls over management’s review of the defined benefit pension and other postretirement benefit obligation calculations, the relevant data inputs and the significant actuarial assumptions, discussed above, used in the calculations.
To test the defined benefit pension and other postretirement benefit obligations, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above, and the underlying data used by the Company. We compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension and other postretirement benefit obligations from prior year due to the change in service cost, interest cost, actuarial gains and losses, benefit payments, contributions and other activities. In addition, we involved an actuarial specialist to assist with our procedures. For example, we evaluated management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the defined benefit pension and other postretirement benefit obligations. In certain instances, as part of this assessment, we compared the projected cash flows to prior year and compared the current year benefits paid to the prior year projected cash flows. To evaluate the mortality rate and health care cost trend rates, we assessed whether the information is consistent with publicly available information, and whether any market data adjusted for entity-specific adjustments were applied. We also tested the completeness and accuracy of the underlying data, including the participant data used in the determination of the pension and other postretirement benefit obligations.
/s/ Ernst & Young LLP
We have served as the Company’s auditors since 2012.
Cleveland, Ohio
February 25, 2021
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of TimkenSteel Corporation
Opinion on Internal Control over Financial Reporting
We have audited TimkenSteel Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, TimkenSteel Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the financial statement schedule included at Item 15a and our report dated February 25, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 25, 2021
TimkenSteel Corporation
Consolidated Statements of Operations
Year Ended December 31,
(Dollars in millions, except per share data)
Net sales
$
830.7
$
1,208.8
$
1,610.6
Cost of products sold
815.1
1,186.2
1,484.0
Gross Profit
15.6
22.6
126.6
Selling, general and administrative expenses
76.7
91.8
98.2
Restructuring charges
3.1
8.6
-
Impairment charges and (gain) loss on sale or disposal of assets
(2.4
)
9.3
0.9
Interest expense
12.2
15.7
17.1
Loss on extinguishment of debt
0.9
-
-
Other (income) expense, net
(14.2
)
23.3
18.6
Income (Loss) Before Income Taxes
(60.7
)
(126.1
)
(8.2
)
Provision (benefit) for income taxes
1.2
(16.1
)
1.8
Net Income (Loss)
$
(61.9
)
$
(110.0
)
$
(10.0
)
Per Share Data:
Basic earnings (loss) per share
$
(1.38
)
$
(2.46
)
$
(0.22
)
Diluted earnings (loss) per share
$
(1.38
)
$
(2.46
)
$
(0.22
)
See accompanying Notes to the Consolidated Financial Statements.
TimkenSteel Corporation
Consolidated Statements of Comprehensive Income (Loss)
Year Ended December 31,
(Dollars in millions)
Net income (loss)
$
(61.9
)
$
(110.0
)
$
(10.0
)
Other comprehensive income (loss), net of tax of $0.1 million in 2020, $16.7 million in 2019 and $0.1 million in 2018:
Foreign currency translation adjustments
1.4
0.5
(1.4
)
Pension and postretirement liability adjustments
(5.7
)
53.1
0.1
Other comprehensive income (loss), net of tax
(4.3
)
53.6
(1.3
)
Comprehensive Income (Loss), net of tax
$
(66.2
)
$
(56.4
)
$
(11.3
)
See accompanying Notes to the Consolidated Financial Statements.
TimkenSteel Corporation
Consolidated Balance Sheets
December 31,
(Dollars in millions)
ASSETS
Current Assets
Cash and cash equivalents
$
102.8
$
27.1
Accounts receivable, net of allowances (2020 - $1.3 million; 2019 - $1.5 million)
63.3
77.5
Inventories, net
178.4
281.9
Deferred charges and prepaid expenses
4.0
3.3
Assets held for sale
0.3
4.1
Other current assets
8.8
7.8
Total Current Assets
357.6
401.7
Property, plant and equipment, net
569.8
626.4
Operating lease right-of-use assets
21.0
14.3
Pension assets
33.5
25.2
Intangible assets, net
9.3
14.3
Other non-current assets
2.8
3.3
Total Assets
$
994.0
$
1,085.2
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable
$
89.5
$
69.3
Salaries, wages and benefits
29.4
13.9
Accrued pension and postretirement costs
2.3
3.0
Current operating lease liabilities
7.5
6.2
Current convertible notes, net
38.9
-
Other current liabilities
13.4
19.9
Total Current Liabilities
181.0
112.3
Non-current convertible notes, net
39.3
78.6
Credit Agreement
-
90.0
Non-current operating lease liabilities
13.5
8.2
Accrued pension and postretirement costs
240.7
222.1
Deferred income taxes
1.0
0.9
Other non-current liabilities
11.0
10.0
Total Liabilities
486.5
522.1
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 2020 and 2019 - 45.7 million shares
-
-
Additional paid-in capital
843.4
844.8
Retained deficit
(363.4
)
(301.5
)
Treasury shares - 2020 - 0.6 million; 2019 - 0.9 million
(12.9
)
(24.9
)
Accumulated other comprehensive income (loss)
40.4
44.7
Total Shareholders’ Equity
507.5
563.1
Total Liabilities and Shareholders’ Equity
$
994.0
$
1,085.2
See accompanying Notes to the Consolidated Financial Statements.
TimkenSteel Corporation
Consolidated Statements of Shareholders’ Equity
Common
Shares
Outstanding
Additional
Paid-in
Capital
Retained
Deficit
Treasury
Shares
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance as of December 31, 2017
44,445,747
$
843.7
$
(182.0
)
$
(37.4
)
$
(7.6
)
$
616.7
Net income (loss)
-
-
(10.0
)
-
-
(10.0
)
Other comprehensive income (loss)
-
-
-
-
(1.3
)
(1.3
)
Adoption of new accounting standard
-
-
0.7
-
-
0.7
Stock-based compensation expense
-
7.3
-
-
-
7.3
Stock option activity
-
0.2
-
-
-
0.2
Issuance of treasury shares
176,454
(4.9
)
(0.2
)
5.1
-
-
Shares surrendered for taxes
(37,533
)
-
-
(0.7
)
-
(0.7
)
Balance as of December 31, 2018
44,584,668
$
846.3
$
(191.5
)
$
(33.0
)
$
(8.9
)
$
612.9
Net income (loss)
-
-
(110.0
)
-
-
(110.0
)
Other comprehensive income (loss)
-
-
-
-
53.6
53.6
Stock-based compensation expense
-
7.4
-
-
-
7.4
Stock option activity
-
0.2
-
-
-
0.2
Issuance of treasury shares
321,739
(9.1
)
-
9.1
-
-
Shares surrendered for taxes
(86,254
)
-
-
(1.0
)
-
(1.0
)
Balance at December 31, 2019
44,820,153
$
844.8
$
(301.5
)
$
(24.9
)
$
44.7
$
563.1
Net income (loss)
-
-
(61.9
)
-
-
(61.9
)
Other comprehensive income (loss)
-
-
-
-
(4.3
)
(4.3
)
Stock-based compensation expense
-
6.6
-
-
-
6.6
Issuance of treasury shares
486,260
(12.6
)
-
12.6
-
-
Shares surrendered for taxes
(142,105
)
-
-
(0.6
)
-
(0.6
)
Equity component of convertible notes, net
-
4.6
-
-
-
4.6
Balance at December 31, 2020
45,164,308
$
843.4
$
(363.4
)
$
(12.9
)
$
40.4
$
507.5
See accompanying Notes to the Consolidated Financial Statements.
TimkenSteel Corporation
Consolidated Statements of Cash Flows
Year Ended December 31,
(Dollars in millions)
CASH PROVIDED (USED)
Operating Activities
Net income (loss)
$
(61.9
)
$
(110.0
)
$
(10.0
)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and amortization
70.0
73.5
73.0
Amortization of deferred financing fees and debt discount
5.3
5.1
5.5
Loss on extinguishment of debt
0.9
-
-
Impairment charges and (gain) loss on sale or disposal of assets
(2.4
)
9.3
0.9
Deferred income taxes
-
(16.6
)
0.8
Stock-based compensation expense
6.6
7.4
7.3
Pension and postretirement expense (benefit), net
8.6
41.6
37.4
Changes in operating assets and liabilities:
Accounts receivable, net
14.2
85.9
(13.6
)
Inventories, net
103.5
92.6
(94.5
)
Accounts payable
23.1
(87.7
)
24.4
Other accrued expenses
9.4
(26.0
)
(3.8
)
Deferred charges and prepaid expenses
(0.7
)
0.2
0.4
Pension and postretirement contributions and payments
(4.1
)
(3.8
)
(13.1
)
Other, net
1.0
(1.2
)
3.8
Net Cash Provided (Used) by Operating Activities
173.5
70.3
18.5
Investing Activities
Capital expenditures
(16.9
)
(38.0
)
(40.0
)
Proceeds from disposals of property, plant and equipment
10.9
-
1.0
Net Cash Provided (Used) by Investing Activities
(6.0
)
(38.0
)
(39.0
)
Financing Activities
Proceeds from exercise of stock options
-
0.2
0.2
Shares surrendered for employee taxes on stock compensation
(0.6
)
(1.0
)
(0.7
)
Refunding bonds repayments
-
-
(30.2
)
Repayments on credit agreements
(90.0
)
(65.0
)
(105.0
)
Borrowings on credit agreements
-
40.0
155.0
Debt issuance costs
(1.2
)
(1.0
)
(1.7
)
Net Cash Provided (Used) by Financing Activities
(91.8
)
(26.8
)
17.6
Increase (Decrease) in Cash and Cash Equivalents
75.7
5.5
(2.9
)
Cash and cash equivalents at beginning of period
27.1
21.6
24.5
Cash and Cash Equivalents at End of Period
$
102.8
$
27.1
$
21.6
See accompanying Notes to the Consolidated Financial Statements.
TimkenSteel Corporation
Notes to Consolidated Financial Statements
(dollars in millions, except per share data)
Note 1 - Basis of Presentation
TimkenSteel Corporation (the Company or TimkenSteel) manufactures alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. TimkenSteel’s portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), value-added solutions such as precision steel components, and billets. In addition, TimkenSteel supplies machining and thermal treatment services and manages raw material recycling programs, which are also 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: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and oil country tubular goods (OCTG).
The SBQ bar, tube, and billet production processes take place at the Company’s Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets the Company produces and includes three manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. TimkenSteel’s value-added solutions production processes take place at two downstream manufacturing facilities: Tryon Peak (Columbus, North Carolina) and St. Clair (Eaton, Ohio). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of 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, not any specific aspect of the business. During the first quarter of 2020, management completed its previously announced plan to close the Company’s TimkenSteel Material Services facility in Houston, Texas.
Basis of Consolidation:
The Consolidated Financial Statements include the consolidated assets, liabilities, revenues and expenses related to TimkenSteel as of December 31, 2020, 2019 and 2018. All significant intercompany accounts and transactions within TimkenSteel have been eliminated in the preparation of the Consolidated Financial Statements.
Use of Estimates:
The preparation of these Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States 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.
Presentation:
Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2020 presentation.
Note 2 - Significant Accounting Policies
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, with quantities defined at the time the customer issues periodic releases from 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.
Cash Equivalents:
TimkenSteel considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivables, Net:
The Company’s accounts receivables arise from sales to customers across the mobile, industrial, energy, and other end-markets. The allowance for doubtful account reserve has been established using qualitative and quantitative methods. In general, account balances greater than one year of age or sent to third party collection are fully reserved. Account balances for customers that are viewed as higher risk are also analyzed for a reserve. In addition to these methods, the allowance for doubtful accounts is adjusted for forward looking uncollectible balances based on end-market outlook and dynamics, such as in the energy and mobile end-markets in 2020. The amount recorded was based on the Company’s
assessment of the risk presented by customers in these end-markets as a result of the COVID-19 pandemic as well as geo-political factors facing the energy end-market. Historically, TimkenSteel’s allowance for doubtful accounts write-offs have been immaterial.
Inventories, Net:
Inventories are stated at lower of cost or net realizable value. All inventories, including raw materials, manufacturing supplies inventory as well as international (outside the U.S.) inventories, have been valued using the FIFO or average cost method as of December 31, 2020 and 2019.
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 3 to 15 years.
In accordance with applicable accounting guidance, 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 Assets:
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.
Refer to “Note 6 - Disposition of Non-Core Assets” and “Note 11 - Property, Plant and Equipment” for additional information.
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, 2020, 2019 or 2018.
Income Taxes:
Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. TimkenSteel accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. TimkenSteel recognizes deferred tax assets to the extent TimkenSteel believes these assets are more likely than not to be realized. In making such a determination, TimkenSteel considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If TimkenSteel determines that it would be able to realize deferred tax assets in the future in excess of their net recorded amount, TimkenSteel would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
TimkenSteel records uncertain tax positions in accordance with applicable accounting guidance, 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 provision (benefit) for income taxes 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.
The Company made the accounting policy election to treat taxes related to Global Intangible Low-Taxed Income (GILTI) as a current period expense when incurred.
Foreign Currency:
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 other (income) expense, net in the Consolidated Statements of Operations. TimkenSteel realized a foreign currency exchange loss of $0.2 million in both 2020 and 2018. There were no foreign currency exchange gains or losses in 2019.
Pension and Other Postretirement Benefits:
TimkenSteel recognizes an overfunded status or underfunded status (e.g., the difference between the fair value of plan assets and the benefit obligations) as either an asset or a liability for its defined benefit pension and other postretirement benefit plans on the Consolidated Balance Sheets. The Company recognizes actuarial gains and losses immediately through net periodic benefit cost in the Consolidated Statements of Operations upon the annual remeasurement at December 31, or on an interim basis as triggering events warrant remeasurement. In addition, the Company uses fair value to account for the value of plan assets.
Stock-Based Compensation:
TimkenSteel recognizes stock-based compensation expense based on the grant date fair value of the stock-based awards over their required vesting period on a straight-line basis, whether the awards were granted with graded or cliff vesting. Stock options are issued with an exercise price equal to the closing market price of TimkenSteel common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield.
Performance-vested restricted stock units issued in 2020 vest based on achievement of a total shareholder return (TSR) metric. The TSR metric is considered a market condition, which requires TimkenSteel to reflect it in the fair value on grant date using an advanced option-pricing model. The fair value of each performance share was therefore determined using a Monte Carlo valuation model, a generally accepted lattice pricing model. The Monte Carlo valuation model, among other factors, uses commonly-accepted economic theory underlying all valuation models, estimates fair value using simulations of future share prices based on stock price behavior and considers the correlation of peer company returns in determining fair value.
The fair value of stock-based awards that will settle in TimkenSteel common shares, other than stock options and performance-vested restricted stock units, is based on the closing 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 recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the Consolidated Statements of Operations. 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.
Research and Development:
Expenditures for TimkenSteel research and development amounted to $1.8 million for the year ended December 31, 2020, $4.1 million for the year ended December 31, 2019 and $8.1 million for the year ended December 31, 2018, 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 Accounting Standard Updates (ASU) during the year ended December 31, 2020. The adoption of these standards did not have a material impact on the Consolidated Financial Statements or the related Notes to the Consolidated Financial Statements.
Standards Adopted
Description
Date of Adoption
ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326)
The standard changes how entities will measure credit losses for most financial assets, including trade and other receivables, and replaces the current incurred loss approach with an expected loss model.
January 1, 2020
ASU 2018-13, Fair Value Measurement (Topic 820)
The standard eliminates, modifies and adds disclosure requirements for fair value measurements.
January 1, 2020
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, 2020
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
ASU 2020-04, Reference Rate Reform (Topic 848)
The standard provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met.
March 12, 2020
Accounting Standards Issued But Not Yet Adopted
The Company has considered the recent ASUs issued by the Financial Accounting Standards Board summarized below:
Standard Pending Adoption
Description
Effective Date
Anticipated Impact
ASU 2019-12, Income Taxes (Topic 740)
The standard simplifies the accounting for income taxes by removing various exceptions.
January 1, 2021
The Company has evaluated the impact of adopting of this ASU and it will not have a material impact on the Consolidated Financial Statements.
ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)
The standard simplifies the accounting for convertible instruments, as well as the diluted net income per share calculation. The standard also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. The amendments in the standard are effective for fiscal years beginning after December 15, 2021, however early adoption is permitted for fiscal years beginning after December 15, 2020. Entities can adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition.
January 1, 2021 (Early Adoption Date)
The Company has elected to early adopt this standard as of January 1, 2021 using the modified retrospective method of transition. We expect this standard will have a material impact on the Consolidated Financial Statements. Refer to “Note 14 - Financing Arrangements” for additional information.
Note 3 - Segment Information
We conduct our business activities and report financial results as one business segment. The presentation of financial results as one reportable segment is consistent with the way the Company operates its 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 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.
Year Ended December 31,
Net Sales:
United States
$
746.8
$
1,096.8
$
1,456.2
Foreign
83.9
112.0
154.4
$
830.7
$
1,208.8
$
1,610.6
December 31,
Long-lived Assets, net:
United States
$
599.1
$
654.8
Foreign
1.0
0.2
$
600.1
$
655.0
Note 4 - Revenue Recognition
The following table provides the major sources of revenue by end-market sector for the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
Mobile
$
346.0
$
479.3
$
553.9
Industrial
391.7
486.3
637.5
Energy
53.2
166.4
265.6
Other(1)
39.8
76.8
153.6
Total Net Sales
$
830.7
$
1,208.8
$
1,610.6
(1) “Other” for sales by end-market sector includes the Company’s scrap and OCTG billet sales.
The following table provides the major sources of revenue by product type for the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
Bar
$
502.5
$
783.0
$
1,030.7
Tube
101.4
151.8
254.7
Value-add
208.1
240.6
284.3
Other(2)
18.7
33.4
40.9
Total Net Sales
$
830.7
$
1,208.8
$
1,610.6
(2) “Other” for sales by product type includes the Company’s scrap sales.
Note 5 - Restructuring Charges
During 2019 and throughout 2020, TimkenSteel made organizational changes to streamline its organizational structure to drive enhanced profitability and sustainable growth. These company-wide actions included the restructuring of its business support functions, the reduction of management layers throughout the organization, the closure of the TimkenSteel Material Services (TMS) facility in Houston, Texas and other domestic and international actions to further improve the Company’s overall cost structure. Through these restructuring efforts, to date the Company has eliminated approximately 215 salaried positions and recognized restructuring charges of $3.1 million in 2020 and $8.6 million in 2019, primarily consisting of severance and employee-related benefits. Approximately 55 of these positions were eliminated in 2020. TimkenSteel recorded reserves for such restructuring charges as other current liabilities on the Consolidated Balance Sheets. The reserve balance at December 31, 2020 is expected to be substantially used in the next twelve months.
The following is a summary of the restructuring reserve for the twelve months ended December 31, 2020 and 2019:
Balance at December 31, 2019
$
6.0
Expenses (1)
3.1
Payments
(7.6
)
Balance at December 31, 2020
$
1.5
(1)
Expenses of $3.1 million exclude stock compensation of $0.1 million that was accelerated as a result of the Company’s restructuring activities.
Balance at December 31, 2018
$
-
Expenses (2)
8.6
Payments
(2.6
)
Balance at December 31, 2019
$
6.0
(2)
Expenses of $8.6 million exclude stock compensation of $0.3 million that was accelerated as a result of the Company’s restructuring activities.
There were no restructuring charges for the year ended December 31, 2018.
Note 6 - Disposition of Non-Core Assets
Scrap Processing Facility
During the fourth quarter of 2019, management signed a letter of intent to dispose of the Company’s scrap processing facility in Akron, Ohio for cash consideration of approximately $4.0 million. This letter of intent and cash consideration were for the land, buildings, machinery and equipment associated with this facility.
As a result of the agreement to sell the scrap processing facility, the Company ceased depreciation of the assets and recorded them as assets held for sale on the Consolidated Balance Sheets as of December 31, 2019. This disposal does not represent a discontinued operation. Additionally, the Company recorded an impairment charge of $7.3 million in the fourth quarter of 2019 which represents the cash consideration to be received less cost to sell the assets compared with the $11.3 million carrying value of the assets being sold, including supplies inventory. An additional loss on disposal of $0.1 million was recognized in the first quarter of 2020 as the sale was completed.
TimkenSteel Material Services Facility
During the first quarter of 2020, management completed its previously announced plan to close the Company’s TMS facility in Houston and began selling the assets at the facility. Accelerated depreciation and amortization on TMS assets of $2.8 million was recorded in the fourth quarter of 2019, with an additional $1.6 million of accelerated depreciation and amortization recorded in the first quarter of 2020, to reduce the net book value of the machinery and equipment to its estimated fair value. Subsequent to the closure, certain assets were sold and a gain on sale of $3.6 million was recognized for the year ended December 31, 2020.
At December 31, 2020, the remaining associated machinery and equipment, with a net book value of $0.3 million, was classified as held for sale on the Consolidated Balance Sheets. The land and buildings associated with TMS were not classified as held for sale, as they were not considered available for immediate sale in their present condition.
Inventory write-downs of $4.8 million were recorded as of December 31, 2019, which represented the difference between the expected selling price and carrying value of the related inventory. The expected selling price was based upon the Company’s most recently published price lists related to this inventory. While the Company began selling the inventory associated with TMS in the first quarter of 2020 at prices that were in line with the net realizable value of the inventory established in the fourth quarter of 2019, excess inventory related to the energy end-market sector resulted in an additional reserve of approximately $3.1 million being recorded in the second quarter of 2020. The excess inventory is the
result of continued weakness in this end-market sector, as well as recent closures of several distributors that were holding considerable amounts of similar inventory.
Small-Diameter Seamless Mechanical Tubing Machinery and Equipment
In the third quarter of 2020, TimkenSteel informed customers that as of December 31, 2020 the Company will discontinue the commercial offering of specific small-diameter seamless mechanical tubing product offerings. As a result, the Company recognized accelerated depreciation of $1.8 million for the year ended December 31, 2020 on the machinery and equipment used in the manufacturing of these specific products. Additional accelerated depreciation of $1.3 million will be recognized in the first quarter of 2021 in alignment with the ramp down of this machinery and equipment.
Property Sales
In the fourth quarter of 2020, TimkenSteel sold portions of non-core property at the Canton, Ohio manufacturing location, resulting in a gain on sale of assets of $0.5 million for the year ended December 31, 2020.
Note 7 - Other (Income) Expense, net
The following table provides the components of other (income) expense, net for the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
Pension and postretirement non-service benefit (income) loss
$
(26.6
)
$
(17.5
)
$
(25.2
)
Loss (gain) from remeasurement of benefit plans
14.7
40.6
43.5
Foreign currency exchange loss (gain)
0.2
-
0.2
Employee retention credit
(2.3
)
-
-
Miscellaneous (income) expense
(0.2
)
0.2
0.1
Total other (income) expense, net
$
(14.2
)
$
23.3
$
18.6
Non-service related pension and other postretirement benefit income, for all years, consists primarily of the interest cost, expected return on plan assets and amortization components of net periodic cost. The loss from remeasurement of benefit plans is due to the Company performing mark-to-market accounting on its pension and postretirement assets at year-end and upon the occurrence of certain triggering events. For more details on the remeasurement refer to “Note 15 - Retirement and Postretirement Plans.”
Coronavirus Aid, Relief, and Economic Security ("CARES") Act
On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, an economic stimulus package intended to provide support, principally in the form of tax benefits, to companies and individuals negatively impacted by the COVID-19 pandemic. Although the majority of the provisions included in the CARES Act did not immediately benefit the Company from a cash tax perspective due to its significant net operating losses, the Company has taken advantage of the deferral of the employer share (6.2% of employee wages) of Social Security payroll taxes that would otherwise have been owed from the date of enactment of the legislation through December 31, 2020, as afforded by the Act. Through December 31, 2020, the Company has deferred $6.4 million in cash payments and recorded reserves for such deferred payroll taxes in salaries, wages and benefits on the Consolidated Balance Sheets. The deferred amount of payments is to be paid in two equal installments at December 31, 2021 and December 31, 2022.
The CARES Act also provided for an employee retention credit (“Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee throughout the year. The Company qualified for the tax credit in the second and third quarters of 2020 and accrued a benefit of $2.3 million in the fourth quarter of 2020 related to the Employee Retention Credit in other (income) expense, net on the Company’s Consolidated Statements of Operations.
Note 8 - Income Tax Provision
Income (loss) from operations before income taxes, based on geographic location of the operations to which such earnings are attributable, is provided below.
Years Ended December 31,
United States
$
(64.1
)
$
(130.8
)
$
(10.1
)
Non-United States
3.4
4.7
1.9
Loss from operations before income taxes
$
(60.7
)
$
(126.1
)
$
(8.2
)
The provision (benefit) for income taxes consisted of the following:
Years Ended December 31,
Current:
Federal
$
0.6
$
-
$
-
State and local
-
0.1
0.3
Foreign
0.5
0.4
0.7
Total current tax expense (benefit)
$
1.1
$
0.5
$
1.0
Deferred:
Federal
$
(0.4
)
$
(14.4
)
$
0.4
State and local
0.5
(2.0
)
-
Foreign
-
(0.2
)
0.4
Total deferred tax expense (benefit)
0.1
(16.6
)
0.8
Provision (benefit) for incomes taxes
$
1.2
$
(16.1
)
$
1.8
For the year ended December 31, 2020, TimkenSteel made $0.4 million in foreign tax payments, $0.1 million in state tax payments, and no U.S. federal payments, and had no refundable overpayments of state income taxes. For the year ended December 31, 2019, TimkenSteel made $0.6 million in foreign tax payments, $0.2 million in state tax payments, and no U.S. federal payments, and had no refundable overpayments of state income taxes.
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,
U.S. federal income tax provision (benefit) at statutory rate
$
(12.7
)
$
(26.5
)
$
(6.3
)
Adjustments:
State and local income taxes, net of federal tax benefit
2.3
(1.3
)
(0.5
)
Foreign earnings taxed at different rates
0.1
-
0.2
U.S. research tax credit
-
0.2
(0.2
)
Valuation allowance
10.3
10.2
7.5
Global intangible low-taxed income
-
0.2
0.5
Permanent differences
1.3
1.3
0.8
Other items, net
(0.1
)
(0.2
)
(0.2
)
Provision (benefit) for income taxes
$
1.2
$
(16.1
)
$
1.8
Effective tax rate
(2.0
)%
12.8
%
(5.9
)%
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. During the third quarter of 2020, TimkenSteel (Shanghai) Corporation Limited declared a dividend of $5.1 million to TimkenSteel. Foreign withholding taxes paid on this repatriation of previous profits were $0.5 million, resulting in $4.6 million of cash sent to the U.S.
Undistributed earnings of foreign subsidiaries outside of the U.S. were $2.7 million, $6.5 million and $5.5 million at December 31, 2020, 2019 and 2018, respectively. The Company has recognized a deferred tax liability in the amount of $0.3 million and $0.7 million at December 31, 2020 and 2019, respectively, for undistributed earnings at its TimkenSteel (Shanghai) Corporation Limited and TimkenSteel de Mexico S. de R.C. de C.V. subsidiaries, as those earnings are not permanently reinvested by the Company.
The effect of temporary differences giving rise to deferred tax assets and liabilities at December 31, 2020 and 2019 was as follows:
December 31,
Deferred tax liabilities:
Depreciation
$
(97.5
)
$
(98.6
)
Inventory
(16.2
)
(24.3
)
Convertible debt
(1.6
)
(1.7
)
Leases - right-of-use asset
(5.0
)
(3.4
)
Other, net
(0.3
)
(0.7
)
Deferred tax liabilities
$
(120.6
)
$
(128.7
)
Deferred tax assets:
Pension and postretirement benefits
$
50.3
$
47.9
Other employee benefit accruals
8.7
7.2
Tax loss carryforwards
94.4
86.0
Intangible assets
1.0
1.1
Inventory
4.5
5.4
State decoupling
2.8
4.5
Lease liability
5.0
3.4
Interest limitation
-
6.0
Other, net
0.6
1.2
Deferred tax assets subtotal
$
167.3
$
162.7
Valuation allowances
(47.7
)
(34.9
)
Deferred tax assets
119.6
127.8
Net deferred tax assets (liabilities)
$
(1.0
)
$
(0.9
)
As of December 31, 2020 and 2019, the Company had a deferred tax liability of $1.0 million and $0.9 million, respectively, on the Consolidated Balance Sheets.
As of December 31, 2020, TimkenSteel had loss carryforwards in the U.S. and various non-U.S. jurisdictions totaling $406.8 million (of which $348.3 million relates to the U.S. and $58.5 million relates to the UK jurisdiction), having various expiration dates. TimkenSteel has provided valuation allowances of $47.7 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 previously 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 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 a portion of its U.S. deferred tax assets. The Company recorded a valuation allowance in 2016 and as a result of current year activity, the Company remained in a full valuation allowance position through 2020. Going forward, the need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s effective tax rate. The Company will maintain a valuation allowance against its deferred tax assets in the U.S. and applicable foreign countries until sufficient positive evidence exists to eliminate them.
As of December 31, 2020, 2019 and 2018, 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, 2020, 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, 2020, 2019 and 2018.
As of December 31, 2020, TimkenSteel is not subject to examination by the IRS. Pursuant to the Tax Sharing Agreement dated June 30, 2014 between TimkenSteel and The Timken Company, TimkenSteel may be subject to results from tax examinations for The Timken Company for federal, state and local and various foreign tax jurisdictions in various open audit periods.
Consolidated Appropriations Act of 2021
On December 27, 2020 the Consolidated Appropriations Act of 2021 (“the Appropriations Act”) was signed into law. The Appropriations Act, among other things includes provisions related to the deductibility of paycheck protection program (“PPP”) expenses paid with PPP loan proceeds, payroll tax credits, modifications to the meals and entertainment deduction, increased limitations on charitable deductions for corporate taxpayers, and enhancements of expiring tax “extender” provisions. The Company has completed its assessment of the impact of the legislation, and there is no significant impact to the Consolidated Financial Statements.
Note 9 - Earnings (Loss) Per Share
Basic loss per share is computed based upon the weighted average number of common shares outstanding. Diluted 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 loss per share. Under the if-converted method, the Company adjusts net earnings to add back interest expense (including amortization of debt discount) recognized on the Convertible Notes and includes the number of shares potentially issuable related to the Convertible Notes in the weighted average shares outstanding. Treasury stock is excluded from the denominator in calculating both basic and diluted loss per share.
For the years ended December 31, 2020, 2019 and 2018, 4.6 million, 3.7 million, and 3.3 million shares issuable for equity-based awards, respectively, were excluded from the computation of diluted loss per share because the effect of their inclusion would have been anti-dilutive. The shares potentially issuable related to the Convertible Notes for the years ended December 31, 2020, 2019, and 2018 of 9.1 million, 6.9 million, and 6.9 million, respectively, were also anti-dilutive and therefore excluded from the computation of diluted loss per share.
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted loss per share for the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
Numerator:
Net income (loss)
$
(61.9
)
$
(110.0
)
$
(10.0
)
Denominator:
Weighted average shares outstanding, basic
45.0
44.8
44.6
Weighted average shares outstanding, diluted
45.0
44.8
44.6
Basic earnings (loss) per share
$
(1.38
)
$
(2.46
)
$
(0.22
)
Diluted earnings (loss) per share
$
(1.38
)
$
(2.46
)
$
(0.22
)
Note 10 - Inventories
The components of inventories as of December 31, 2020 and 2019 were as follows:
December 31,
Manufacturing supplies
$
37.6
$
49.8
Raw materials
20.0
26.0
Work in process
79.1
123.7
Finished products
55.6
93.1
Gross inventory
192.3
292.6
Allowance for inventory reserves
(13.9
)
(10.7
)
Total inventories, net
$
178.4
$
281.9
In connection with the closure of TMS, the Company recorded an additional reserve against inventory of $4.8 million in 2019 and increased this reserve by $3.1 million in the second quarter of 2020 to state it at the lower of cost or net realizable value. See “Note 6 - Disposition of Non-Core Assets.”
Note 11 - Property, Plant and Equipment
The components of property, plant and equipment, net as of December 31, 2020 and 2019 were as follows:
December 31,
Land
$
13.3
$
13.3
Buildings and improvements
422.5
419.0
Machinery and equipment
1,398.7
1,404.6
Construction in progress
11.0
30.9
Subtotal
1,845.5
1,867.8
Less allowances for depreciation
(1,275.7
)
(1,241.4
)
Property, plant and equipment, net
$
569.8
$
626.4
Total depreciation expense was $65.0 million, $67.4 million, and $67.5 million for the years ended December 31, 2020, 2019, and 2018 respectively. Depreciation expense for the years ended December 31, 2020 and 2019 includes $2.4 million and $1.9 million, respectively, of accelerated depreciation related to the closure of TMS which was announced in the fourth quarter of 2019 and the discontinuation of specific small-diameter seamless mechanical tube manufacturing announced in 2020. See “Note 6 - Disposition of Non-Core Assets” for additional information. For the year ended December 31, 2020, TimkenSteel recorded a net gain on the sale and disposal of assets of $2.6 million, primarily related to the sale of certain TMS assets. For the year ended December 31, 2019, TimkenSteel recorded impairments and loss on disposal of assets of $9.0 million primarily related to the abandonment of certain equipment and the impairment of assets held for sale. For the year ended December 31, 2018, TimkenSteel recorded approximately $0.5 of impairment charges and loss on sale or disposal of assets related to the discontinued use of certain assets.
Note 12 - Intangible Assets
The components of intangible assets, net as of December 31, 2020 and 2019 were as follows:
December 31, 2020
December 31, 2019
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Customer relationships
$
6.3
$
5.4
$
0.9
$
6.3
$
5.0
$
1.3
Technology use
9.0
9.0
-
9.0
8.0
1.0
Capitalized software
58.0
49.6
8.4
61.1
49.1
12.0
Total intangible assets
$
73.3
$
64.0
$
9.3
$
76.4
$
62.1
$
14.3
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 intangible assets are 15 years, 15 years and 6 years, respectively. The weighted average useful life of total intangible assets is 8 years. Amortization expense for intangible assets for the years ended December 31, 2020, 2019, and 2018 was $5.0 million, $6.1 million and $5.5 million, respectively. Amortization expense in 2020 and 2019 associated with capitalized software includes accelerated amortization of $1.0 million and $0.9 million, respectively, related to the closure of TMS. See “Note 6 - Disposition of Non-Core Assets” for additional information. During the years ended December 31, 2020, 2019, and 2018, TimkenSteel recorded a loss on disposal of $0.2 million, $0.1 million, and $0.4 million, respectively, related to capitalized software.
Based upon the intangible assets subject to amortization as of December 31, 2020, TimkenSteel’s estimated annual amortization for the five succeeding years is shown below (in millions):
Year
Amortization
Expense
$
3.1
2.6
2.0
1.0
0.1
Note 13 - 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 December 31, 2020, the Company has no financing leases. The weighted average remaining lease term for our operating leases as of December 31, 2020 was 3.4 years.
Leases with an initial term of 12 months or less (short-term leases) are not recorded on the balance sheet. Rather, the Company recognizes lease expense for these leases on a straight-line basis over the lease term in accordance with the applicable accounting guidance. For lease agreements entered into after the adoption of lease accounting guidance on January 1, 2019, 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 year ended December 31, 2020 as follows:
Year Ended December 31,
Operating lease cost
$
8.8
$
7.4
Short-term lease cost
0.7
1.9
Total lease cost
$
9.5
$
9.3
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 December 31, 2020 was 3.2%.
Supplemental cash flow information related to leases was as follows:
Year Ended December 31,
Cash paid for amounts included in the measurement of operating lease liabilities
$
8.8
$
7.5
Right-of-use assets obtained in exchange for operating lease obligations
$
12.5
$
4.3
Future minimum lease payments under non-cancellable leases as of December 31, 2020 were as follows:
$
8.4
5.7
4.8
2.7
After 2024
0.9
Total future minimum lease payments
22.5
Less amount of lease payment representing interest
(1.5
)
Total present value of lease payments
$
21.0
As of December 31, 2020, we do not have any significant operating leases that have not yet commenced.
Note 14 - Financing Arrangements
The following table summarizes the current and non-current debt as of December 31, 2020 and 2019:
Year Ended December 31,
Credit Agreement
$
-
$
90.0
Convertible Senior Notes due 2021
38.9
78.6
Convertible Senior Notes due 2025
39.3
0.0
Total debt
$
78.2
$
168.6
Less current portion of debt
38.9
-
Total non-current portion of debt
$
39.3
$
168.6
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. As of December 31, 2020, the amount available under the Amended Credit Agreement was $211.3 million, reflective of the Company’s asset borrowing base with no outstanding borrowings.
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 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.
Convertible Senior Notes due 2021
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 Senior Notes due 2021). 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 Senior Notes due 2021. 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: $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 its revolving credit agreement.
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 Senior Notes due 2021.
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 Senior Notes due 2021, and transaction costs attributable to the equity component of $0.7 million are included in shareholders’ equity.
Convertible Notes Exchange
In December 2020, TimkenSteel entered into separate, privately negotiated exchange agreements with a limited number of holders of the Company’s currently outstanding Convertible Senior Notes due 2021. Pursuant to the exchange agreements, the Company exchanged $46.0 million aggregate principal amount of Convertible Senior Notes due 2021 for $46.0 million aggregate principal amount of its new 6.0% Convertible Senior Notes due 2025 (Convertible Senior Notes due 2025 and, together with the Convertible Senior Notes due 2021, the Convertible Notes). The Company did not receive any cash proceeds from the issuance of the Convertible Senior Notes due 2025.
The Company evaluated this exchange and determined that $46.0 million of the Convertible Senior Notes due 2021 were deemed to be extinguished, as the present value of the cash flows under the terms of the Convertible Senior Notes due 2025 is at least 10 percent different from the present value of the remaining cash flows under the terms of the Convertible Senior Notes due 2021, as defined by the relevant accounting standards.
Pursuant to applicable accounting guidance, the fair value of the extinguished portion of Convertible Senior Notes due 2021 was calculated using a market rate of 9.0%, based on comparable debt instruments, and a remaining term of five and a half months. The difference between the fair value and the net carrying amount of the liability component, calculated below, was recognized on the Consolidated Statements of Operations as a loss on extinguishment of debt.
Net carrying amount of extinguished Convertible Senior Notes due 2021 as of December 15, 2020
Principal
$
46.0
Less: Debt issuance costs, net of amortization
(0.1
)
Less: Debt discount, net of amortization
(1.5
)
Fair value of extinguished Convertible Senior Notes due 2021 as of December 15, 2020
45.3
Loss on extinguishment of debt
$
(0.9
)
The amount allocated to the reacquisition of the equity component, included as a reduction to additional paid-in capital on the Consolidated Balance Sheets, was calculated as follows:
Fair value of extinguished Convertible Senior Notes due 2021 as of December 15, 2020
$
45.3
Principal of extinguished Convertible Senior Notes due 2021
46.0
Reduction of additional paid-in capital
$
(0.7
)
The remaining accrued and unpaid interest on the $46.0 million of the extinguished Convertible Senior Notes due 2021 was paid in the amount of $0.1 million to the holders on December 15, 2020.
The components of the Convertible Senior Notes due 2021 as of December 31, 2020 and December 31, 2019 were as follows:
Year Ended December 31,
Principal
$
40.2
$
86.3
Less: Debt issuance costs, net of amortization
(0.1
)
(0.7
)
Less: Debt discount, net of amortization
(1.2
)
(7.0
)
Convertible Senior Notes due 2021, net
$
38.9
$
78.6
The Convertible Senior Notes due 2021 mature on June 1, 2021, and accordingly are classified as a current liability in the consolidated balance sheet as of December 31, 2020.
Convertible Senior Notes due 2025
The Convertible Senior Notes due 2025 were issued pursuant to the provisions of the indenture dated May 31, 2016, as supplemented by a supplemental indenture dated December 15, 2020, which was filed with the Securities and Exchange Commission as an exhibit to a Form 8-K on December 15, 2020. The indentures contain a complete description of the terms of the Convertible Senior Notes due 2025. The key terms are as follows:
Maturity Date: December 1, 2025 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, 2021
Initial Conversion Price: $7.82 per common share of the Company
Initial Conversion Rate: 127.8119 common shares per $1,000 principal amount of Notes
The initial value of the principal amount recorded as a liability at the date of issuance was $40.6 million, using an effective interest rate of 9.0%. The remaining $5.5 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 Senior Notes due 2025.
Transaction costs were allocated to the liability and equity components based on their relative values. Transaction costs attributable to the liability component of $1.3 million are amortized through interest expense over the term of the Convertible Senior Notes due 2025, and transaction costs attributable to the equity component of $0.2 million are included in shareholders’ equity.
The components of the Convertible Senior Notes due 2025 as of December 31, 2020 is as follows:
Year Ended December 31, 2020
Principal
$
46.0
Less: Debt issuance costs, net of amortization
(1.3
)
Less: Debt discount, net of amortization
(5.4
)
Convertible Senior Notes due 2025, net
$
39.3
Fair Value Measurement
The fair value of the Convertible Senior Notes due 2021 was approximately $34.6 million as of December 31, 2020. The fair value of the Convertible Senior Notes due 2021, which falls within Level 1 of the fair value hierarchy as defined by applicable accounting guidance, is based on the last price traded in December 2020.
The fair value of the Convertible Senior Notes due 2025 was approximately $39.3 million as of December 31, 2020. The fair value of the Convertible Senior Notes due 2025, which falls within Level 2 of the fair value hierarchy as defined by applicable accounting guidance, is based on market rates of comparable debt instruments without a conversion option.
TimkenSteel’s Credit Facility is variable-rate debt. As such, any outstanding 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. There were no outstanding borrowings on the Credit Facility as of December 31, 2020.
Convertible Notes Interest Expense
The following table sets forth total interest expense recognized related to the Convertible Notes:
Year Ended December 31,
Contractual interest expense
$
5.2
$
5.2
Amortization of debt issuance costs
0.5
0.4
Amortization of debt discount
4.4
4.0
Total
$
10.1
$
9.6
Cash Interest Paid
The total cash interest paid for the year ended December 31, 2020 and 2019 was $7.6 million and $11.5 million, respectively.
New Accounting Standard related to the Convertible Notes
In August 2020, the FASB issued ASU 2020-06, “Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)”, which simplifies the accounting for convertible debt and other equity-linked instruments. The Company has elected to early adopt this standard as of January 1, 2021 using the modified retrospective method of transition. Upon adoption, all outstanding Convertible Notes will be fully classified as a liability, and there will no longer be a separate equity component. We expect this impact will result in a decrease of approximately $10.6 million to additional paid-in capital and an increase of approximately $1.1 million and $5.3 million to current convertible notes, net and non-current convertible notes, net, respectively, on the Consolidated Balance Sheets. Additionally, retained earnings will be adjusted to remove amortization expense recognized in prior periods related to the debt discount and the Convertible Notes will no longer have a debt discount that will be amortized. The impact to retained deficit on the Consolidated Balance Sheets as of January 1, 2021 is a decrease of approximately $4.3 million. We do not expect the new standard to affect the Company’s earnings per share, cash flows and liquidity.
Note 15 - Retirement and Postretirement Plans
Eligible TimkenSteel employees, including certain employees in foreign countries, participate in the following TimkenSteel-sponsored plans: TimkenSteel Corporation Retirement Plan (Salaried Plan); TimkenSteel Corporation Bargaining Unit Pension Plan, Supplemental Pension Plan of TimkenSteel Corporation, TimkenSteel U.K. Pension Scheme, TimkenSteel Corporation Bargaining Unit Welfare Benefit Plan for Retirees, and TimkenSteel Corporation Welfare Benefit Plan for Retirees.
During the second quarter of 2019, the Company amended the TimkenSteel Corporation Bargaining Unit Welfare Plan for Retirees relating to moving Medicare-eligible retirees to an individual plan on a Medicare healthcare exchange. The amendment reduced the postretirement liability by $70.2 million and required the Company to perform a full remeasurement of its obligation and plan assets as of April 30, 2019. The $70.2 million reduction in the APBO was recognized in Other Comprehensive Income (Loss) in 2019 and is being 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 for the year ended December 31, 2019.
During the fourth quarter of 2019, the Company amended the Supplemental Pension Plan of TimkenSteel Corporation, which provides for the payment of nonqualified supplemental pension benefits to certain salaried participants in the TimkenSteel Corporation Retirement Plan. The amendment provides for the cessation of benefit accruals under the Supplemental Plan, effective as of December 31, 2020. Effective January 1, 2021, there will be no new accruals of benefits, including with respect to service accruals and the final average compensation determination. Certain of the Company’s named executive officers are participants in the plan. Existing benefits under the plan, as of December 31, 2020, will otherwise continue in accordance with the terms of the plan. This amendment reduced the pension liability, resulting in a curtailment gain of $0.8 million for the year ended December 31, 2019. This curtailment gain was recognized in Other Income (Expense) in the Consolidated Statement of Operations.
During the fourth quarter of 2019, the Company amended the TimkenSteel Corporation Retirement Plan, which provides payments of tax-qualified pension benefits to certain salaried employees of the Company and its subsidiaries, to cease benefit accruals under the Pension Plan for all remaining active participants, effective as of December 31, 2020. This plan amendment reduced the pension liability, resulting in a curtailment gain of $8.1 million for the year ended December 31, 2019. This curtailment gain was recognized in Other Income (Expense) in the Consolidated Statement of Operations.
During the fourth quarter of 2019, the Company also amended the TimkenSteel Corporation Welfare Benefit Plan for Retirees, under which certain retired salaried employees of the Company and its subsidiaries are eligible to receive a Company contribution for their medical and prescription drug benefits under the retiree welfare plan. The amendment was to eliminate the retiree medical subsidy, effective as of December 31, 2019, for all remaining active salaried participants who retire after December 31, 2019 (provided, however, that participants who were laid off on or before March 31, 2020 and who otherwise qualified for the retiree medical subsidy under the terms of the retiree welfare plan remained entitled to receive the retiree medical subsidy). This plan amendment reduced the postretirement liability by $2.3 million in 2019, was recognized in Other Comprehensive Income (Loss) in 2019 and is being amortized as an offset to postretirement benefit cost in future periods.
Pension benefits earned are generally based on years of service and compensation during active employment. TimkenSteel’s funding policy is consistent with the funding requirements of applicable laws and regulations. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for the various asset classes. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets for the defined benefit pension plans as of December 31, 2020 and 2019:
Pension
Postretirement
Change in benefit obligation:
Benefit obligation at the beginning of year
$
1,311.4
$
1,178.3
$
126.2
$
194.7
Service cost
19.4
17.4
1.0
1.1
Interest cost
42.7
48.9
4.2
5.9
Actuarial (gains) losses
114.8
145.7
6.1
11.4
Benefits paid
(71.2
)
(72.3
)
(9.2
)
(14.4
)
Plan amendment
-
(0.7
)
-
(72.5
)
Curtailments
-
(8.9
)
-
-
Settlements
(24.7
)
-
-
-
Foreign currency translation adjustment
2.7
3.0
-
-
Benefit obligation at the end of year
$
1,395.1
$
1,311.4
$
128.3
$
126.2
Significant actuarial losses related to changes in benefit obligations for 2020 and 2019 primarily resulted from decreases in discount rates.
Pension
Postretirement
Change in plan assets:
Fair value of plan assets at the beginning of year
$
1,155.4
$
1,054.4
$
82.3
$
86.1
Actual return on plan assets
167.0
167.7
7.0
8.9
Company contributions / payments
1.9
2.0
-
1.7
Benefits paid
(71.2
)
(72.3
)
(7.1
)
(14.4
)
Settlements
(24.7
)
-
-
-
Foreign currency translation adjustment
3.3
3.6
-
-
Fair value of plan assets at end of year
$
1,231.7
$
1,155.4
$
82.2
$
82.3
Funded status at end of year
$
(163.4
)
$
(156.0
)
$
(46.1
)
$
(43.9
)
The Salaried Plan has a provision that permits employees to elect to receive their pension benefits in a lump sum. In the first quarter of 2020, the cumulative cost of all lump sum payments was projected to exceed the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. As a result, the Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan during each quarter of 2020. For the year ended December 31, 2020, total settlements were $24.7 million. These settlements are included in the tables above and in the net remeasurement losses (gains) as a component of net periodic benefit cost. The cumulative cost of all lump sums did not exceed service cost and interest cost components of net periodic pension cost for the year ended December 31, 2019.
For the years ended December 31, 2020 and 2019, the pension plan had administrative expenses of $3.8 million and $3.5 million, respectively. These expenses are included in benefits paid in the tables above.
The accumulated benefit obligation at December 31, 2020 exceeded the fair value of plan assets for two of the Company’s pension plans. For these plans, the benefit obligation was $1,081.2 million, the accumulated benefit obligation was $1,063.9 million and the fair value of plan assets was $884.3 million as of December 31, 2020.
The total pension accumulated benefit obligation for all plans was $1,377.6 million and $1,294.5 million as of December 31, 2020 and 2019, respectively.
Amounts recognized on the balance sheet at December 31, 2020 and 2019 for TimkenSteel’s pension and postretirement benefit plans include:
Pension
Postretirement
Non-current assets
$
33.5
$
25.2
$
-
$
-
Current liabilities
(0.6
)
(0.6
)
(1.7
)
(2.4
)
Non-current liabilities
(196.3
)
(180.6
)
(44.4
)
(41.5
)
Total
$
(163.4
)
$
(156.0
)
$
(46.1
)
$
(43.9
)
Included in accumulated other comprehensive loss at December 31, 2020 and 2019, were the following before-tax amounts that had not been recognized in net periodic benefit cost:
Pension
Postretirement
Unrecognized prior service (benefit) cost
$
0.2
$
0.5
$
(61.9
)
$
(67.8
)
The weighted average assumptions used in determining benefit obligation as of December 31, 2020 and 2019 were as follows:
Pension
Postretirement
Assumptions:
Discount rate
2.68
%
3.42
%
2.65
%
3.42
%
Future compensation assumption
2.29
%
2.32
%
n/a
n/a
The weighted average assumptions used in determining benefit cost for the years ended December 31, 2020 and 2019 were as follows:
Pension
Postretirement
Assumptions:
Discount rate(1)
3.42
%
4.30
%
3.42
%
4.34% / 3.94%
Future compensation assumption
2.32
%
2.36
%
n/a
n/a
Expected long-term return on plan assets
5.80
%
6.41
%
4.50
%
5.00
%
(1)
The discount rate for the postretirement plans was adjusted after the second quarter 2019 amendment. To calculate benefit costs, the discount rate of 4.34% was used for January to April 2019 and the discount rate of 3.94% was used for May to December 2019.
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 5.50% and 5.75% for 2020 and 2019, respectively.
The components of net periodic benefit cost (income) for the years ended December 31, 2020, 2019 and 2018 were as follows:
Pension
Postretirement
Years Ended December 31,
Years Ended December 31,
Components of net periodic benefit cost (income):
Service cost
$
19.4
$
17.4
$
17.2
$
1.0
$
1.1
$
1.6
Interest cost
42.7
48.9
45.6
4.2
5.9
7.6
Expected return on plan assets
(64.3
)
(65.0
)
(74.0
)
(3.5
)
(3.9
)
(4.8
)
Amortization of prior service cost
0.3
0.4
0.5
(6.0
)
(3.8
)
0.2
Curtailment
-
(8.9
)
-
-
-
-
Net remeasurement losses (gains)
12.1
43.1
49.1
2.6
6.4
(5.6
)
Net Periodic Benefit Cost (Income)
$
10.2
$
35.9
$
38.4
$
(1.7
)
$
5.7
$
(1.0
)
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 21% equity securities, 61% debt securities and 18% 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, 2020:
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
9.2
$
0.9
$
8.3
$
-
U.S government and agency securities
345.7
337.4
8.3
-
Corporate bonds
276.9
-
276.9
-
Equity securities
68.5
68.5
-
-
Mutual fund - fixed income
0.1
0.1
-
-
Mutual fund - equities
22.0
22.0
-
-
Other
0.2
-
0.2
-
Total Assets in the fair value hierarchy
$
722.6
$
428.9
$
293.7
$
-
Assets measured at net asset value (1)
509.1
-
-
-
Total Assets
$
1,231.7
$
428.9
$
293.7
$
-
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not 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, 2020, 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, 2019:
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
12.2
$
0.9
$
11.3
$
-
U.S government and agency securities
250.3
246.1
4.2
-
Corporate bonds
102.7
-
102.7
-
Equity securities
49.8
49.8
-
-
Mutual fund - fixed income
56.4
56.4
-
-
Total Assets in the fair value hierarchy
$
471.4
$
353.2
$
118.2
$
-
Assets measured at net asset value (1)
684.0
-
-
-
Total Assets
$
1,155.4
$
353.2
$
118.2
$
-
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not 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, 2019, 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, 2020:
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
3.0
$
3.0
$
-
$
-
Mutual fund - fixed income
11.7
11.7
-
-
Mutual fund - equities
5.0
5.0
-
-
Total Assets in the fair value hierarchy
$
19.7
$
19.7
$
-
$
-
Assets measured at net asset value (1)
62.5
-
-
-
Total Assets
$
82.2
$
19.7
$
-
$
-
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not 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, 2020, 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, 2019:
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
3.0
$
3.0
$
-
$
-
Mutual fund - fixed income
15.8
15.8
-
-
Total Assets in the fair value hierarchy
$
18.8
$
18.8
$
-
$
-
Assets measured at net asset value (1)
63.5
-
-
-
Total Assets
$
82.3
$
18.8
$
-
$
-
(1)
Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not 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, 2019, these assets were redeemable at net asset value within 90 days.
Future benefit payments are expected to be as follows:
Benefit Payments:
Pension
Postretirement
$
79.1
$
11.1
86.2
10.3
81.6
9.5
74.5
8.8
74.3
8.4
2026-2030
366.0
37.9
The Company expects to make required contributions to its U.K. pension plan in 2021 of approximately $1.4 million.
Defined Contribution Plans
The Company recorded expense primarily related to employer matching and non-discretionary contributions to these defined contribution plans of $3.2 million in 2020, $7.1 million in 2019, and $6.3 million in 2018. Effective June 1, 2020, the Company suspended employer matching contributions for all salaried employees. In December 2020, the Company announced that employer matching contributions would be reinstated effective March 1, 2021.
Note 16 - Stock-Based Compensation
Description of the Plan
On April 28, 2016, shareholders of TimkenSteel approved the TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan (TimkenSteel 2014 Plan), which authorized 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 (including up to 3.0 million common shares for “replacement awards” to current holders of The Timken Company equity awards under The Timken Company’s equity compensation plans at the time of the spinoff). 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. With the approval of the TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan, as discussed below, no additional grants may be made under the TimkenSteel 2014 Plan.
On May 6, 2020, shareholders of TimkenSteel approved the TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan (TimkenSteel 2020 Plan), which replaced the previously approved TimkenSteel 2014 Plan. The TimkenSteel 2020 Plan authorizes the Compensation Committee to provide cash awards and equity-based compensation in the form of stock options, stock appreciation rights, restricted shares, restricted share units, performance shares, performance units, dividend equivalents, and certain other awards for the primary purpose of providing our employees, officers and directors incentives and rewards for service and/or performance. Subject to adjustment as described in the TimkenSteel 2020 Plan, and subject to the TimkenSteel 2020 Plan share counting rules, a total of 2.0 million common shares of the Company are available for awards granted under the TimkenSteel 2020 Plan (plus shares subject to awards granted under the TimkenSteel 2020 Plan or the TimkenSteel 2014 Plan that are canceled or forfeited, expire, are settled for cash, or are unearned to the extent of such cancellation, forfeiture, expiration, cash settlement or unearned amount, as further described in the TimkenSteel 2020 Plan). These shares may be shares of original issuance or treasury shares, or a combination of both. The aggregate number of shares available under the TimkenSteel 2020 Plan will generally be reduced by one common share for every one share subject to an award granted under the TimkenSteel 2020 Plan. The TimkenSteel 2020 Plan also provides that, subject to adjustment as described in the TimkenSteel 2020 Plan: (1) the aggregate number of common shares actually issued or transferred upon the exercise of incentive stock options will not exceed 2.0 million common shares; and (2) no non-employee director of the Company will be granted, in any period of one calendar year, compensation for such service having an aggregate maximum value (measured at the grant date as applicable, and calculating the value of any awards based on the grant date fair value for financial reporting purposes) in excess of $0.5 million.
As of December 31, 2020, approximately 2.2 million shares of TimkenSteel common stock remained available for grants under the TimkenSteel 2020 Plan.
Stock Options
The following table provides the significant assumptions used to calculate the grant date fair values of stock options granted using a Black-Scholes option pricing method:
Weighted-average fair value per option
$
2.23
$
5.54
$
7.46
Risk-free interest rate
0.96
%
2.63
%
2.77
%
Dividend yield
-
%
-
%
-
%
Expected stock volatility
42.67
%
41.36
%
41.67
%
Expected life - years
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. Expected annual dividend yield is estimated using the most recent dividend payment per share as of the grant date, of which no dividends were paid in these grant periods. 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. 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.
The following summarizes TimkenSteel stock option activity from January 1, 2020 to December 31, 2020:
Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic Value
(millions)
Outstanding as of December 31, 2019
2,641,570
$
20.64
Granted
511,020
$
5.26
Exercised
-
$
-
Canceled, forfeited or expired
(221,525
)
$
12.08
Outstanding as of December 31, 2020
2,931,065
$
18.61
5.2
$
-
Options expected to vest
641,392
$
8.21
8.7
$
-
Options exercisable
2,289,673
$
21.52
4.2
$
-
Stock options presented in the table above represent TimkenSteel awards only, including those held by The Timken Company employees.
There were no stock options that were exercised during 2020.
Time-Based Restricted Stock Units
Time-based restricted stock units are issued with the fair value equal to the closing market price of TimkenSteel common shares on the date of grant. These restricted stock units do not have any performance conditions for vesting. Expense is recognized over the service period, adjusted for any forfeitures that should occur during the vesting period.
The following summarizes TimkenSteel stock-settled, time-based restricted stock unit activity from January 1, 2020 to December 31, 2020:
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Outstanding as of December 31, 2019
1,103,487
$
11.89
Granted
931,244
$
4.24
Vested
(548,301
)
$
10.55
Canceled, forfeited or expired
(114,104
)
$
7.23
Outstanding as of December 31, 2020
1,372,326
$
7.62
Time-based restricted stock units presented in the table above represent TimkenSteel awards only.
Performance-Based Restricted Stock Units
Performance-based restricted stock units issued in 2020 are earned based on the average payout (determined under a Compensation Committee approved matrix) for the Company’s relative total shareholder return as compared to an identified peer group of steel companies. The overall vesting period is generally three years, with relative total shareholder return measured for the one, two and three-year periods creating effectively a “nested” 1-year, 2-year, and 3-year plan to support rapid and sustained shareholder value creation. Relative total shareholder return is calculated for each nested performance period by taking the beginning and ending price points based off a 20-trading day average closing stock price as of December 31.
The following summarizes TimkenSteel stock-settled performance-based restricted stock unit activity from January 1, 2020 to December 31, 2020:
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Outstanding as of December 31, 2019
-
$
-
Granted
182,180
$
4.98
Canceled, forfeited or expired
(6,216
)
$
4.97
Outstanding as of December 31, 2020
175,964
$
4.98
The table above does not include the stock-settled performance units that were granted before 2020 as these grants are not expected to payout.
Other Information
TimkenSteel recognized stock-based compensation expense of $6.6 million, $7.4 million and $7.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
As of December 31, 2020, future stock-based compensation expense related to the unvested portion of all awards is approximately $6.1 million, which is expected to be recognized over a weighted average period of 1.5 years.
Certain restricted stock units, including some performance-based restricted stock units, are settled in cash and were adjusted and substituted. TimkenSteel has a liability of $0.1 million as of December 31, 2020 and 2019 for these awards which was included in salaries, wages and benefits, and other non-current liabilities on the Consolidated Balance Sheets. There were no cash-settled restricted stock units granted during 2020 or 2019.
On December 16, 2020, the Board of Directors of TimkenSteel appointed and elected Michael S. Williams as President and Chief Executive Officer of the Company, effective January 1, 2021. The Board further appointed and elected Mr. Williams as a director, also effective January 1, 2021. The Compensation Committee of TimkenSteel’s Board of Directors approved grants of inducement equity awards to Mr. Williams consisting of time-based restricted share units covering 423,400 TimkenSteel’s common shares, with a grant date fair value of $5.17 and performance-based restricted share units covering a target number of 423,400 of TimkenSteel’s common shares (with a maximum payout opportunity of 635,100 common shares), with a grant date fair value of $5.68. The design of the performance-based restricted share units are similar to the performance-vested restricted stock units discussed above. These awards were granted outside of the TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan as inducements material to Mr. Williams' acceptance of employment with TimkenSteel. The grant date for the awards is January 5, 2021 with future stock-based compensation expense of $4.6 million, which is expected to be recognized over three years.
Note 17 - Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2020 and 2019 by component were as follows:
Foreign Currency
Translation
Adjustments
Pension and
Postretirement
Liability
Adjustments
Total
Balance as of December 31, 2019
$
(6.8
)
$
51.5
$
44.7
Other comprehensive income before reclassifications, before income tax
1.4
-
1.4
Amounts reclassified from accumulated other comprehensive income
(loss), before income tax
-
(5.6
)
(5.6
)
Tax effect
-
(0.1
)
(0.1
)
Net current period other comprehensive income, net of income taxes
1.4
(5.7
)
(4.3
)
Balance as of December 31, 2020
$
(5.4
)
$
45.8
$
40.4
Foreign Currency
Translation
Adjustments
Pension and
Postretirement
Liability
Adjustments
Total
Balance at December 31, 2018
$
(7.3
)
$
(1.6
)
$
(8.9
)
Other comprehensive income before reclassifications, before income tax
0.5
-
0.5
Amounts reclassified from accumulated other comprehensive income
(loss), before income tax
-
(2.4
)
(2.4
)
Amounts deferred to accumulated other comprehensive income (loss),
before income tax
-
72.2
72.2
Tax effect
-
(16.7
)
(16.7
)
Net current period other comprehensive income, net of income taxes
0.5
53.1
53.6
Balance as of December 31, 2019
$
(6.8
)
$
51.5
$
44.7
The amount reclassified from accumulated other comprehensive income (loss) in the year ended December 31, 2020 for the pension and postretirement liability adjustment was included in other (income) expense, net in the Consolidated Statements of Operations.
Note 18 - 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 December 31, 2020 and 2019, TimkenSteel had a $1.0 million and $1.5 million contingency reserve, respectively, related to loss exposures incurred in the ordinary course of business.
Note 19 - Relationships with The Timken Company 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 The Timken Company. Transactions between The Timken Company and TimkenSteel, with the exception of sale and purchase transactions and reimbursements for payments made to third-party service providers by The Timken Company 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 The Timken Company and affiliates.
Transactions with The Timken Company
TimkenSteel sold finished goods to The Timken Company. During the years ended December 31, 2020, 2019 and 2018, revenues from related-party sales of products totaled $23.4 million or 2.8% of net sales, $26.1 million or 2.2% of net sales, and $43.2 million or 2.7% of net sales, respectively.
TimkenSteel did not purchase material from The Timken Company during the years ending December 31, 2020, 2019 or 2018. In addition, certain TimkenSteel third-party service providers were paid by The Timken Company on behalf of TimkenSteel. TimkenSteel would subsequently reimburse The Timken Company in cash for such payments.
Material Agreements Between TimkenSteel and The Timken Company
On June 30, 2014, TimkenSteel entered into a separation and distribution agreement and several other agreements with The Timken Company to effect the spinoff and to provide a framework for the relationship with The Timken Company. These agreements govern the relationship between TimkenSteel and The Timken Company subsequent to the completion of the spinoff and provide for the allocation between TimkenSteel and The Timken Company 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 The Timken Company after the spinoff.
Tax Sharing Agreement - The tax sharing agreement generally governs TimkenSteel’s and The Timken Company’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 The Timken Company 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 The Timken Company, which generally provides that TimkenSteel and The Timken Company 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 The Timken Company. 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 16 - 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 The Timken Company, the allocation of certain employee liabilities and the cooperation between TimkenSteel and The Timken Company in the sharing of employee information.
Note 20 - Subsequent Events
On February 16, 2021, management announced a plan to indefinitely idle its Harrison melt and cast assets, late in the first quarter of 2021. Going forward, all of the Company’s melting and casting activities will take place at the Faircrest location. The Company is working collaboratively with employees, suppliers and a number of customers to ensure a well-organized and efficient transition. The Company’s rolling and finishing operations at Harrison will not be impacted by these actions.
At this time, the Company is still reviewing Harrison melt and cast related assets to determine potential alternative uses for selected assets. As a result, the Company estimates that it will recognize non-cash charges of between $8 million and $10 million related to the write down of the associated Harrison melt and cast assets in the first quarter of 2021. The Company does not anticipate incurring any required cash expenditures related to these charges.
There are approximately 100 Canton-based hourly employees, represented by the United Steelworkers, potentially impacted by this decision. Position eliminations will be processed in accordance with the terms and conditions of the 2017 Basic Labor Agreement between TimkenSteel Corporation and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, Local 2003. As such, the ultimate number of employees impacted is unknown at this time.
SUPPLEMENTAL DATA
Selected Quarterly Financial Data (Unaudited)
(dollars in millions, except per share data)
The following is selected quarterly operating results for each quarter of fiscal 2020 and 2019 for TimkenSteel.
Quarters ended
December 31,
September 30,
June 30,
March 31,
Net sales
$
211.2
$
205.9
$
154.0
$
259.7
Gross profit
14.2
(2.4
)
(4.0
)
7.8
Net income (loss)
(12.8
)
(13.9
)
(15.3
)
(19.9
)
Per share data:
Basic earnings (loss) per share
$
(0.28
)
$
(0.31
)
$
(0.34
)
$
(0.44
)
Diluted earnings (loss) per share
$
(0.28
)
$
(0.31
)
$
(0.34
)
$
(0.44
)
Quarters ended
December 31,
September 30. 2019
June 30,
March 31,
Net sales
$
226.9
$
274.2
$
336.7
$
371.0
Gross profit
(18.0
)
(2.6
)
14.8
28.4
Net income (loss)
(84.6
)
(17.0
)
(11.9
)
3.5
Per share data:
Basic earnings (loss) per share
$
(1.89
)
$
(0.38
)
$
(0.27
)
$
0.08
Diluted earnings (loss) per share
$
(1.89
)
$
(0.38
)
$
(0.27
)
$
0.08

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, our management carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s 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 the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
Report of Management on Internal Control Over Financial Reporting
The management of TimkenSteel is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. TimkenSteel’s internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
TimkenSteel management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment under COSO’s “Internal Control-Integrated Framework (2013 framework),” management believes that, as of December 31, 2020, TimkenSteel’s internal control over financial reporting is effective.
Ernst & Young LLP, an independent registered public accounting firm, has issued an audit report on our assessment of TimkenSteel’s internal control over financial reporting as of December 31, 2020. Please refer to Item 8, “Reports of Independent Registered Public Accounting Firm.”
Changes in Internal Controls
There have been no changes during the Company’s fourth quarter of 2020 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Required information will be set forth under the captions “Proposal 1: Election of directors” in the proxy statement to be filed within 120 days of December 31, 2020 in connection with the annual meeting of shareholders to be held on May 5, 2021, and is incorporated herein by reference. Information regarding the executive officers of the registrant is included in Part I hereof. Information regarding the Company’s Audit Committee and its Audit Committee Financial Expert is set forth under the caption “Board of directors information - Audit committee” in the proxy statement filed in connection with the annual meeting of shareholders to be held on May 5, 2021, and is incorporated herein by reference.
The Company’s Corporate Governance Guidelines and the charters of its Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are available on the Company’s website at www.timkensteel.com. The information on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K.
The Company has adopted a code of ethics that applies to all of its employees, including its principal executive officer, principal financial officer and principal accounting officer or controller, as well as to its directors. The Company’s code of ethics, the TimkenSteel Code of Conduct, is available on its website at www.timkensteel.com. The Company intends to disclose any amendment to its code of ethics or waiver from its code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or any director, by posting such amendment or waiver, as applicable, on its website at www.timkensteel.com.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Required information will be set forth under the captions “Compensation discussion and analysis”; “2020 Summary compensation table”; “2020 Grants of plan-based awards table”; “Outstanding equity awards at 2020 year-end table”; “2020 Option exercises and stock vested table”; “Pension benefits”; “2020 Nonqualified deferred compensation table”; “Potential payments upon termination or change in control”; “Director compensation”; “CEO pay ratio”; “Board of directors information - Compensation committee”; “Board of directors information - Compensation committee interlocks and insider participation”; and “Board of directors information - Compensation committee report” in the proxy statement to be filed within 120 days of December 31, 2020 in connection with the annual meeting of shareholders to be held on May 5, 2021, and is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Required information, including with respect to institutional investors owning more than 5% of the Company’s common shares, will be set forth under the caption “Beneficial ownership of common stock” in the proxy statement to be filed within 120 days of December 31, 2020 in connection with the annual meeting of shareholders to be held on May 5, 2021, and is incorporated herein by reference. Required information regarding securities authorized for issuance under the Company’s equity compensation plans is included in Item 5 of this Annual Report on Form 10-K and is incorporated herein by reference.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Required information will be set forth under the captions “Corporate governance - Director independence” and “ Corporate governance - Related-party transactions approval policy” in the proxy statement to be filed within 120 days of December 31, 2020 in connection with the annual meeting of shareholders to be held on May 5, 2021, and is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Required information regarding fees paid to and services provided by the Company’s independent auditor during the years ended December 31, 2020 and 2019 and the pre-approval policies and procedures of the Audit Committee of the Company’s Board of Directors will be set forth under the captions “ Proposal 2: Ratification of appointment of independent auditors - Services of independent auditor for 2020“ and “Proposal 2: Ratification of appointment of independent auditors - Audit committee pre-approval policies and procedures” in the proxy statement to be filed within 120 days of December 31, 2020 in connection with the annual meeting of shareholders to be held on May 5, 2021, and is incorporated herein by reference.
PART IV.

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) - Financial Statements are included in Part II, Item 8 of the Annual Report on Form 10-K.
(a)(2) - Schedule II - Valuation and Qualifying Accounts is submitted as a separate section of this report. Schedules I, III, IV and V are not applicable to the Company and, therefore, have been omitted.
(a)(3) Listing of Exhibits
Exhibit Number
Exhibit Description
2.1†
Separation and Distribution Agreement, dated as of June 30, 2014, by and between TimkenSteel Corporation and The Timken Company.
3.1
Amended and Restated Articles of Incorporation of TimkenSteel Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 13, 2014, File No. 001-36313).
3.2
Code of Regulations of TimkenSteel Corporation (incorporated by reference to Exhibit 3.2 of Amendment No. 3 to the Company’s Registration Statement on Form 10 filed on May 15, 2014, File No. 001-36313).
4.1
Indenture, dated May 31, 2016, by and between the Company and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 31, 2016, File No. 001-36313).
4.2
First Supplemental Indenture, dated May 31, 2016, by and between the Company and U.S. Bank National Association, as Trustee (including Form of Note) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on May 31, 2016, File No. 001-36313).
4.3
Description of Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K filed on February 25, 2020, File No. 001-36313).
4.4
Second Supplemental Indenture, dated December 15, 2020, by and between the Company and U.S. Bank National Association, as Trustee (including Form of New Convertible Note) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 15, 2020, File No. 001-36313).
10.1†
Tax Sharing Agreement, dated as of June 30, 2014, by and between TimkenSteel Corporation and The Timken Company.
10.2†
Employee Matters Agreement, dated as of June 30, 2014, by and between TimkenSteel Corporation and The Timken Company.
10.3
Form of Amended and Restated Employee Excess Benefits Agreement with TimkenSteel Corporation (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 13, 2014, File No. 001-36313).
10.4†
Trademark License Agreement, dated as of June 30, 2014, by and between TimkenSteel Corporation and The Timken Company.
10.5
TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8 filed on October 28, 2016, Registration No. 333-214297).
10.6
TimkenSteel Corporation Amended and Restated Annual Performance Award Plan, effective January 1, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed April 26, 2018, File No. 001-36313).
10.7
Supplemental Pension Plan of TimkenSteel Corporation (Effective June 30, 2014) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 13, 2014, File No. 001-36313).
10.8
Form of Severance Agreement with TimkenSteel Corporation (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 13, 2014, File No. 001-36313).
10.9††
Form of Director Indemnification Agreement.
10.10††
Form of Officer Indemnification Agreement.
10.11††
Form of Director and Officer Indemnification Agreement.
10.12
Form of Severance Agreement between TimkenSteel and Certain Executive Officers (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on October 26, 2017, File No. 001-36313).\
10.13
Amended and Restated TimkenSteel Corporation 2014 Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 11, 2015, File No. 001-36313).
10.14
Amended and Restated TimkenSteel Corporation Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 11, 2015, File No. 001-36313).
10.15
Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on April 27, 2017, File No. 001-36313).
10.16
Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 2, 2019, File No. 001-36313).
10.17
Form of Time-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 2, 2019, File No. 001-36313).
10.18
Form of Time-Based Ratable Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 2, 2019, File No. 001-36313).
10.19
Form of Deferred Shares Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 4, 2016, File No. 001-36313).
10.20
Third Amended and Restated Credit Agreement dated as of October 15, 2019, by and among TimkenSteel Corporation, the other loan parties and lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and BMO Harris Bank N.A. and U.S. Bank National Association, as co-documentation agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 17, 2019, File No. 001-36313).
10.21
Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 7, 2020, File No. 001-36313).
10.22
Form of Director Restricted Share Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2020, File No. 001-36313).
10.23
Form of Performance-Based Restricted Share Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on October 29, 2020, File No. 001-36313).
10.24*
Restricted Share Unit Inducement Award Agreement dated as of January 5, 2021 by and between TimkenSteel Corporation and Michael S. Williams.
10.25*
Performance-Based Restricted Share Unit Inducement Award Agreement dated as of January 5, 2021 by and between TimkenSteel Corporation and Michael S. Williams.
10.26*
Severance Agreement dated as of January 1, 2021 between TimkenSteel Corporation and Michael S. Williams.
10.27*
Form of Severance Agreement between TimkenSteel and Certain Executive Officers.
10.28
TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 7, 2020, File No. 001-36313).
21.1*
A list of subsidiaries of the Registrant.
23.1*
Consent of Independent Registered Public Accounting Firm.
24.1*
Power of Attorney.
31.1*
Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
Inline XBRL Instance Document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
†
Incorporated by reference to the exhibit filed under the corresponding Exhibit Number of the Company’s Current Report on Form 8-K filed on July 3, 2014, File No. 001-36313.
††
Incorporated by reference to the exhibit filed under the corresponding Exhibit Number of Amendment No. 3 to the Company’s Registration Statement on Form 10 filed on May 15, 2014, File No. 001-36313.
*
Filed herewith.
**
Furnished herewith.
Schedule II-Valuation and Qualifying Accounts
Allowance for uncollectible accounts:
Balance at Beginning of Period
$
1.5
$
1.7
$
1.4
Additions:
Charged to Costs and Expenses (1)
-
-
0.3
Deductions (2)
(0.2
)
(0.2
)
-
Balance at End of Period
$
1.3
$
1.5
$
1.7
Allowance for inventory reserves
Balance at Beginning of Period
$
10.7
$
6.1
$
8.9
Additions:
Charged to Costs and Expenses (3)
4.1
9.0
1.6
Deductions (4)
(0.9
)
(4.4
)
(4.4
)
Balance at End of Period
$
13.9
$
10.7
$
6.1
Valuation allowance on deferred tax assets:
Balance at Beginning of Period
$
34.9
$
43.7
$
36.6
Additions:
Charged to Costs and Expenses (5)
12.4
-
7.1
Charged to Other Accounts (6)
1.4
16.7
-
Deductions (7)
(1.0
)
(25.5
)
-
Balance at End of Period
$
47.7
$
34.9
$
43.7
(1)
Provision for uncollectible accounts included in expenses.
(2)
Actual accounts written off against the allowance, net of recoveries.
(3)
Provisions for surplus and obsolete inventory and lower cost or net realizable value included in expenses.
(4)
Inventory items written off against the allowance.
(5)
Increase in valuation allowance is recorded as a component of the provision for income taxes.
(6)
Amount relates to valuation allowances recorded against other comprehensive income (loss).
(7)
Amount primarily relates to an additional paid-in capital adjustment associated with the Convertible Notes for the year ended December 31, 2020 and the change in accounting principle from LIFO to FIFO for the year ended December 31, 2019.