TimkenSteel(TMST) - 2021 Q4 - Annual Report

Part I Business TimkenSteel manufactures alloy and carbon steel products for diverse markets, reducing melt capacity to 1.2 million tons in 2021 - The company manufactures alloy, carbon, and micro-alloy steel products like SBQ bars, seamless tubes, and precision components for various markets including automotive, oil and gas, and industrial equipment[10] - In Q1 2021, TimkenSteel indefinitely idled its Harrison melt and casting assets, reducing its annual melt capacity from approximately 2 million tons to 1.2 million tons and shipment capacity from 1.5 million to 0.9 million tons[13] Research and Development Expense | Year | Expense (in millions) | | :--- | :--- | | 2021 | $1.7 | | 2020 | $1.8 | | 2019 | $4.1 | 2030 Environmental Goals (vs. 2018 Baseline) | Metric | Target Reduction | | :--- | :--- | | Scope 1 & 2 GHG Emissions | 40% absolute reduction | | Total Energy Consumption | 30% absolute reduction | | Fresh Water Withdrawn | 35% absolute reduction | | Waste-to-Landfill Intensity | 10% reduction | - As of December 31, 2021, the company had approximately 1,850 employees, with 63% covered by a collective bargaining agreement with the United Steelworkers (USW) that is effective until September 27, 2025[39][40] Risk Factors The company faces industry, operational, debt, and common stock risks, including competition, raw material volatility, and regulations - The steel industry is highly competitive with historical periods of excess global capacity, which can negatively affect domestic steel prices and the company's financial condition[53] - The company is dependent on key customers, with sales to its 10 largest customers accounting for approximately 44% of net sales for the year ended December 31, 2021[57] - The company is subject to extensive environmental, health, and safety regulations, which impose substantial costs, with future regulations related to climate change potentially increasing costs[65][69] - As of December 31, 2021, approximately 63% of employees were covered under a collective bargaining agreement expiring in September 2025, where a work stoppage could significantly disrupt operations[75] - The company has significant unfunded pension and retiree health care liabilities that will require future cash contributions, with funding levels dependent on factors like asset performance and interest rates[78] - The company's ability to use its net operating loss carryforwards of $224.6 million (as of Dec 31, 2021) to offset future taxable income may be limited by Section 382 of the Internal Revenue Code in the event of an ownership change[81][82] - The COVID-19 pandemic continues to pose risks, including potential for reduced sales, supply chain disruptions, and increased operational and cybersecurity risks due to remote work arrangements[100] Unresolved Staff Comments The company reports no unresolved staff comments - None[108] Properties TimkenSteel operates manufacturing facilities in Ohio and North Carolina, with 3.6 million square feet of owned and leased properties - The company's main manufacturing facilities are located in Canton and Eaton, Ohio, and Columbus, North Carolina[110] - The aggregate floor area of the company's facilities is 3.6 million square feet, with the vast majority being owned rather than leased[110] Legal Proceedings Management expects ongoing legal proceedings to have no material adverse effect on the company's financial position - Management does not expect ongoing legal proceedings from the ordinary course of business to have a material adverse effect on the company's financials[112] Executive Officers of the Registrant This section lists the executive officers of TimkenSteel as of February 24, 2022, including their key positions Executive Officers (as of Feb 24, 2022) | Name | Age | Position | | :--- | :--- | :--- | | Michael S. Williams | 61 | Chief Executive Officer and President | | Kristopher R. Westbrooks | 43 | Executive Vice President and Chief Financial Officer | | Kristine C. Syrvalin | 53 | Executive Vice President, General Counsel and Secretary | | Kevin A. Raketich | 55 | Executive Vice President, Sales, Marketing and Business Development | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities TimkenSteel's common shares trade on NYSE, with a $50 million share repurchase program authorized in December 2021 - On December 20, 2021, the Board of Directors authorized a share repurchase program for up to $50 million of the company's outstanding common shares[119] Securities Authorized for Issuance Under Equity Compensation Plans (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 3,854,704 | $20.41 | 4,041,178 | | Not approved by security holders | 1,058,500 | — | — | | Total | 4,913,204 | $20.41 | 4,041,178 | Selected Financial Data This section has been intentionally omitted from the report - Intentionally omitted[129] Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales increased 54.4% to $1,282.9 million in 2021, driven by higher surcharges and shipment volume, with strong liquidity Results of Operations Net sales increased 54.4% to $1,282.9 million in 2021, driven by higher surcharges and shipment volumes, boosting gross profit Net Sales Comparison (2021 vs. 2020) | Metric | 2021 | 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,282.9M | $830.7M | +$452.2M | +54.4% | | Ship Tons | 818.6k | 640.4k | +178.2k | +27.8% | - The increase in 2021 net sales was driven by a $272.1 million increase in surcharges due to higher scrap/alloy prices and a $220.5 million increase from higher shipment volumes, partially offset by $40.4 million in unfavorable price/mix[142] - Gross profit for 2021 increased by $204.4 million compared to 2020, primarily due to favorable raw material spread, lower manufacturing costs, increased volume, and favorable inventory adjustments[145] - SG&A expense increased by $0.5 million (0.7%) in 2021, as higher variable compensation expense was largely offset by lower wages and benefits from headcount reductions[148] - The company recorded restructuring charges of $6.7 million in 2021, eliminating approximately 75 salaried positions, with total restructuring actions eliminating ~290 salaried positions expected to yield ongoing annual savings of approximately $39 million[149][150] - Impairment charges of $10.6 million were recorded in 2021, primarily $7.9 million related to the indefinite idling of the Harrison melt and casting assets[151] Liquidity and Capital Resources Total liquidity reached $510.7 million as of December 31, 2021, with $46.0 million in Convertible Senior Notes due 2025 Key Liquidity Measures (as of Dec 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $259.6M | $102.8M | | Availability not borrowed | $251.1M | $211.3M | | Total liquidity | $510.7M | $314.1M | - The company's primary liquidity sources are cash on hand, cash from operations, and its $400 million asset-based revolving credit facility, which matures in October 2024[162][172] - The American Rescue Plan Act of 2021 (ARPA) provided pension funding relief, and the company now believes required contributions to its Bargaining Plan have been delayed until after 2031[181][293] - Anticipated capital expenditures for 2022 are approximately $40 million, with over half allocated to profitability improvement projects[174] Cash Flow Summary | (in millions) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $196.9 | $173.5 | $70.3 | | Net cash used by investing activities | ($4.8) | ($6.0) | ($38.0) | | Net cash used by financing activities | ($35.3) | ($91.8) | ($26.8) | Critical Accounting Policies and Estimates Critical accounting policies involve estimates for asset impairment, deferred tax assets, and benefit plans, with significant pension obligations - Long-lived assets are reviewed for impairment when events indicate the carrying value may not be recoverable, with the company recording an impairment charge of $10.6 million in 2021[196][200] - The company maintains a full valuation allowance on its net deferred tax assets in the U.S. as of December 31, 2021, concluding it is more likely than not that a portion will not be realized[201] Benefit Plan Obligations (as of Dec 31, 2021) | Plan Type | Projected Benefit Obligation | Underfunded Status | | :--- | :--- | :--- | | Pension | $1,319.2M | $143.2M | | Postretirement | $117.8M | $41.0M | Sensitivity of Benefit Plan Assumptions | Change in Assumption | Impact on Net Periodic Benefit Income | Impact on Benefit Obligation | | :--- | :--- | :--- | | Discount Rate | | | | +0.25% | +$1.9M | -$36.3M | | -0.25% | -$2.0M | +$38.0M | | Return on Plan Assets | | | | +0.25% | -$3.0M | N/A | | -0.25% | +$3.0M | N/A | Quantitative and Qualitative Disclosures about Market Risk The company faces commodity price risk for raw materials and energy, mitigated by supplier agreements and surcharges - As of December 31, 2021, the company had no outstanding variable-rate debt, thus a rise in interest rates would not impact interest expense at that time[215] - The company's primary market risk is commodity price fluctuation for raw materials (scrap steel, alloys) and energy (natural gas, electricity)[217] - To mitigate commodity price risk, the company uses supplier pricing agreements and a raw material surcharge mechanism to pass through cost changes to customers[217] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2021, including key figures like $1,282.9 million in net sales Consolidated Statement of Operations Highlights (Year Ended Dec 31) | (in millions, except per share) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net sales | $1,282.9 | $830.7 | $1,208.8 | | Gross Profit | $220.0 | $15.6 | $22.6 | | Income (Loss) Before Income Taxes | $176.7 | ($60.7) | ($126.1) | | Net Income (Loss) | $171.0 | ($61.9) | ($110.0) | | Diluted earnings (loss) per share | $3.18 | ($1.38) | ($2.46) | Consolidated Balance Sheet Highlights (as of Dec 31) | (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $259.6 | $102.8 | | Total Current Assets | $582.3 | $357.6 | | Total Assets | $1,158.9 | $994.0 | | Total Current Liabilities | $250.8 | $181.0 | | Total Liabilities | $494.3 | $486.5 | | Total Shareholders' Equity | $664.6 | $507.5 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting or financial disclosure - None[420] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[421] - Based on the COSO framework, management believes the company's internal control over financial reporting was effective as of December 31, 2021[423] Other Information The company reports no other information for this item - None[425] Part III Directors, Executive Officers and Corporate Governance Required information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 proxy statement - Required information is incorporated by reference from the proxy statement for the 2022 Annual Meeting of Shareholders[427] Executive Compensation Required information on executive compensation is incorporated by reference from the 2022 Annual Meeting of Shareholders proxy statement - Required information is incorporated by reference from the proxy statement for the 2022 Annual Meeting of Shareholders[430] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information on security ownership is incorporated by reference from the 2022 Annual Meeting of Shareholders proxy statement - Required information is incorporated by reference from the proxy statement for the 2022 Annual Meeting of Shareholders[431] Certain Relationships and Related Transactions, and Director Independence Required information on related-party transactions and director independence is incorporated by reference from the 2022 proxy statement - Required information is incorporated by reference from the proxy statement for the 2022 Annual Meeting of Shareholders[432] Principal Accounting Fees and Services Required information on principal accounting fees and services is incorporated by reference from the 2022 Annual Meeting of Shareholders proxy statement - Required information is incorporated by reference from the proxy statement for the 2022 Annual Meeting of Shareholders[433] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Annual Report on Form 10-K - This section provides a comprehensive list of all exhibits filed with the 10-K, including governance documents, material contracts, and executive certifications[435]