TimkenSteel(TMST) - 2021 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements This section presents TimkenSteel Corporation's unaudited consolidated financial statements and detailed notes for the three and nine months ended September 30, 2021 and 2020 Consolidated Statements of Operations (Unaudited) TimkenSteel reported significant improvements in net sales and profitability for both the three and nine months ended September 30, 2021, compared to the same periods in 2020, moving from net losses to substantial net income | Metric (Millions USD) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $343.7 | $205.9 | $944.6 | $619.5 | | Gross Profit | $66.7 | $(2.4) | $164.6 | $1.4 | | Income (Loss) Before Income Taxes | $50.6 | $(13.6) | $116.0 | $(48.5) | | Net Income (Loss) | $50.1 | $(13.9) | $113.9 | $(49.1) | | Basic EPS | $1.08 | $(0.31) | $2.49 | $(1.09) | | Diluted EPS | $0.94 | $(0.31) | $2.12 | $(1.09) | - Net sales increased by 66.9% for the three months and 52.5% for the nine months ended September 30, 2021, compared to the prior year periods[10] - The company achieved a gross profit of $66.7 million for the three months and $164.6 million for the nine months ended September 30, 2021, a significant turnaround from losses in the prior year[10] Consolidated Statements of Comprehensive Income (Loss) (Unaudited) The company reported comprehensive income for both the three and nine months ended September 30, 2021, a notable improvement from comprehensive losses in the prior year, primarily driven by the strong net income | Metric (Millions USD) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $50.1 | $(13.9) | $113.9 | $(49.1) | | Other comprehensive income (loss), net of tax | $(1.5) | $(0.3) | $(4.0) | $(4.5) | | Comprehensive Income (Loss), net of tax | $48.6 | $(14.2) | $109.9 | $(53.6) | Consolidated Balance Sheets (Unaudited) As of September 30, 2021, TimkenSteel's total assets increased, primarily driven by higher cash, accounts receivable, and inventories, with a significant increase in shareholders' equity | Metric (Millions USD) | Sep 30, 2021 | Dec 31, 2020 | | :-------------------- | :----------- | :----------- | | Total Current Assets | $529.4 | $357.6 | | Total Assets | $1,116.4 | $994.0 | | Total Current Liabilities | $242.5 | $181.0 | | Total Liabilities | $495.8 | $486.5 | | Total Shareholders' Equity | $620.6 | $507.5 | - Cash and cash equivalents increased from $102.8 million at December 31, 2020, to $172.0 million at September 30, 2021[15] - Accounts receivable and inventories significantly increased, reflecting higher sales and production levels[15] Consolidated Statements of Shareholders' Equity (Unaudited) Shareholders' equity increased significantly from December 31, 2020, to September 30, 2021, primarily due to net income and accounting standard adjustments | Metric (Millions USD) | Dec 31, 2020 | Sep 30, 2021 | | :-------------------- | :----------- | :----------- | | Total Shareholders' Equity | $507.5 | $620.6 | | Retained Deficit | $(363.4) | $(245.3) | | Additional Paid-in Capital | $843.4 | $829.5 | - Net income contributed $113.9 million to retained deficit reduction during the nine months ended September 30, 2021[17] - The adoption of ASU 2020-06 resulted in a $10.6 million decrease in additional paid-in capital and a $4.2 million reduction in retained deficit[17][24] Consolidated Statements of Cash Flows (Unaudited) Operating cash flow decreased due to increased working capital, while investing and financing activities used less cash due to lower debt repayments | Metric (Millions USD) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | | Net Cash Provided (Used) by Operating Activities | $106.2 | $121.0 | | Net Cash Provided (Used) by Investing Activities | $(0.9) | $(3.0) | | Net Cash Provided (Used) by Financing Activities | $(36.1) | $(70.3) | | Increase (Decrease) in Cash and Cash Equivalents | $69.2 | $47.7 | - The decrease in operating cash flow was primarily due to an increase in working capital, particularly inventory, to support increasing customer demand and production levels in 2021[138] - Financing cash outflow decreased due to lower repayments on outstanding borrowings and increased proceeds from stock option exercises[140] Notes to Unaudited Consolidated Financial Statements The notes provide detailed explanations and disclosures for the unaudited consolidated financial statements, covering accounting policies, recent pronouncements, and various financial components Note 1 - Basis of Presentation The unaudited consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information, with certain prior-period reclassifications - Statements are prepared in accordance with U.S. GAAP for interim financial information, not including all footnotes required for complete financial statements[21] - Certain items from prior periods were reclassified to conform with current year presentation[22] Note 2 - Recent Accounting Pronouncements TimkenSteel adopted ASU 2019-12 with immaterial impact and early adopted ASU 2020-06, materially impacting the balance sheet by reclassifying convertible notes as a liability | Standard Adopted | Description | Adoption Impact | | :--------------- | :---------- | :-------------- | | ASU 2019-12, Income Taxes (Topic 740) | Simplifies accounting for income taxes | January 1, 2021: Immaterial impact on tax provision | | 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) | Simplifies accounting for convertible instruments and diluted EPS calculation | January 1, 2021: Material impact; all outstanding Convertible Notes classified as liability, no separate equity component, no debt discount amortization. Decreased additional paid-in capital by $10.6 million, increased current and non-current convertible notes by $1.1 million and $5.3 million respectively, and reduced retained deficit by $4.2 million. No effect on cash flows or liquidity | - The company took advantage of the CARES Act to defer $6.4 million in Social Security payroll taxes in 2020, payable in two equal installments by December 31, 2021, and December 31, 2022[26] - The ARPA is expected to materially impact the Company by delaying required contributions for domestic defined benefit pension plans until 2030 due to enhanced interest rate stabilization and extended amortization of funding shortfalls[30][31] Note 3 - Revenue Recognition Net sales significantly increased across all end-market sectors and product types for both the three and nine months ended September 30, 2021, driven by higher demand Net Sales by End-Market Sector (Millions USD): | End-Market Sector | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :---------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Mobile | $133.5 | $103.1 | $400.0 | $236.9 | | Industrial | $182.0 | $90.7 | $480.3 | $302.0 | | Energy | $20.4 | $7.0 | $41.4 | $46.8 | | Other | $7.8 | $5.1 | $22.9 | $33.8 | | Total Net Sales | $343.7 | $205.9 | $944.6 | $619.5 | Net Sales by Product Type (Millions USD): | Product Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :---------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Bar | $238.0 | $118.5 | $636.5 | $379.3 | | Tube | $43.8 | $21.6 | $120.8 | $77.6 | | Manufactured components | $54.1 | $61.4 | $164.3 | $149.8 | | Other | $7.8 | $4.4 | $23.0 | $12.8 | | Total Net Sales | $343.7 | $205.9 | $944.6 | $619.5 | Note 4 - Restructuring Charges TimkenSteel incurred restructuring charges of $0.4 million and $2.0 million for the three and nine months ended September 30, 2021, primarily due to severance from organizational changes Restructuring Charges (Millions USD): | Period | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | | Restructuring Charges | $0.4 | $2.0 | Restructuring Reserve (Millions USD): | Item | Balance at Dec 31, 2020 | Balance at Sep 30, 2021 | | :-------------------- | :---------------------- | :---------------------- | | Reserve Balance | $1.5 | $0.6 | - Approximately 15 salaried positions were eliminated through restructuring actions in 2021[36] - The remaining $0.3 million of charges for the nine months ended September 30, 2021, related to the discontinuation of specific small-diameter seamless mechanical tube manufacturing and the indefinite idling of Harrison melt and casting activities[36] Note 5 - Disposition of Non-Core Assets TimkenSteel continued its disposition of non-core assets, including facility sales and idling operations, resulting in various gains, losses, and impairment charges - The company recognized impairment charges of $0.3 million in Q1 2021 for remaining TMS machinery and equipment classified as held for sale[40] - Non-cash charges of $9.5 million were recognized in Q1 2021 related to the write-down of Harrison melt and casting assets, including $7.9 million impairment of machinery and equipment[44] - The sale of TimkenSteel (Shanghai) Corporation Limited closed on July 30, 2021, generating $6.2 million in net cash proceeds and resulting in a $1.1 million loss on sale[45] Note 6 – Other (Income) Expense, net Other (income) expense, net, shifted from income to expense for the nine months, primarily influenced by pension and postretirement non-service benefit income and remeasurement gains/losses, and a tax refund Other (Income) Expense, net (Millions USD): | Component | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Pension and postretirement non-service benefit (income) loss | $(9.2) | $(6.7) | $(28.0) | $(19.7) | | Loss (gain) from remeasurement of benefit plans | $2.7 | $(4.1) | $2.2 | $3.5 | | Sales and use tax refund | — | — | $(2.5) | — | | Total other (income) expense, net | $(6.6) | $(10.6) | $(28.3) | $(16.0) | - A full remeasurement of pension obligations and plan assets for the Salaried Plan was required each quarter in 2021 and 2020 due to lump sum payments exceeding service and interest costs[47] - A $2.5 million sales and use tax refund was recognized in Q2 2021 for an overpayment from 2016-2019[48] Note 7 - Income Tax Provision The provision for income taxes increased for both periods in 2021, with effective tax rates of 1.0% and 1.8%, primarily due to higher earnings in international jurisdictions and increased U.S. income Income Tax Provision (Millions USD): | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Provision (benefit) for income taxes | $0.5 | $0.3 | $2.1 | $0.6 | | Effective tax rate | 1.0% | (2.2)% | 1.8% | (1.2)% | - The effective tax rate is lower than the U.S. federal statutory rate of 21% primarily due to a full valuation allowance on deferred tax assets in the U.S[51][52] - The majority of TimkenSteel's income taxes are derived from foreign operations[52] Note 8 - Earnings (Loss) Per Share Basic and diluted earnings per share significantly improved for the three and nine months ended September 30, 2021, with dilutive effects from equity-based awards and convertible notes Earnings (Loss) Per Share: | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic earnings (loss) per share | $1.08 | $(0.31) | $2.49 | $(1.09) | | Diluted earnings (loss) per share | $0.94 | $(0.31) | $2.12 | $(1.09) | Weighted Average Shares Outstanding (Millions): | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic | 46.2 | 45.0 | 45.8 | 45.0 | | Diluted | 53.9 | 45.0 | 55.2 | 45.0 | - For 2021, equity-based awards and convertible notes had a dilutive effect on EPS, while in 2020, they were anti-dilutive and excluded[56][57][58] Note 9 - Inventories Total inventories, net, increased to $214.4 million at September 30, 2021, driven by work in process and finished products, while inventory reserves decreased Inventories, Net (Millions USD): | Component | Sep 30, 2021 | Dec 31, 2020 | | :------------------ | :----------- | :----------- | | Manufacturing supplies | $27.7 | $37.6 | | Raw materials | $22.8 | $20.0 | | Work in process | $107.1 | $79.1 | | Finished products | $58.2 | $55.6 | | Gross inventory | $215.8 | $192.3 | | Allowance for inventory reserves | $(1.4) | $(13.9) | | Total inventories, net | $214.4 | $178.4 | - The allowance for inventory reserves decreased in 2021 due to sales of TimkenSteel Material Services (TMS) inventory and scrapping of aged inventory[61] Note 10 - Financing Arrangements Total debt decreased to $44.8 million due to the settlement of 2021 Convertible Senior Notes, and 2025 Convertible Senior Notes are now classified as a current liability Debt Summary (Millions USD): | Debt Type | Sep 30, 2021 | Dec 31, 2020 | | :-------------------- | :----------- | :----------- | | Convertible Senior Notes due 2021 | — | $38.9 | | Convertible Senior Notes due 2025 | $44.8 | $39.3 | | Total debt | $44.8 | $78.2 | | Less current portion of debt | $44.8 | $38.9 | | Total non-current portion of debt | — | $39.3 | - The Convertible Senior Notes due 2021 matured on June 1, 2021, and were settled with $38.9 million cash and 0.1 million shares[66] - The Convertible Senior Notes due 2025 (principal $46.0 million) are classified as a current liability as of September 30, 2021, because they became convertible at the option of holders from October 1 through December 31, 2021, due to the share price criterion being met[67][68] Convertible Notes Interest Expense (Millions USD): | Component | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Contractual interest expense | $0.7 | $1.3 | $3.0 | $3.9 | | Amortization of debt issuance costs | $0.1 | $0.1 | $0.3 | $0.3 | | Amortization of debt discount | — | $1.1 | — | $3.3 | | Total | $0.8 | $2.5 | $3.3 | $7.5 | Note 11 - Retirement and Postretirement Plans Net periodic benefit cost (income) for pension plans shifted to an income of $(8.0) million in 2021, primarily due to higher expected returns on plan assets, with quarterly remeasurements Net Periodic Benefit Cost (Income) (Millions USD): | Component | 3 Months Ended Sep 30, 2021 (Pension) | 3 Months Ended Sep 30, 2021 (Postretirement) | 9 Months Ended Sep 30, 2021 (Pension) | 9 Months Ended Sep 30, 2021 (Postretirement) | | :-------------------- | :------------------------------------ | :------------------------------------------- | :------------------------------------ | :------------------------------------------- | | Service cost | $4.4 | $0.3 | $13.1 | $0.9 | | Interest cost | $8.9 | $0.9 | $27.2 | $2.5 | | Expected return on plan assets | $(16.8) | $(0.8) | $(50.7) | $(2.6) | | Amortization of prior service cost | $0.1 | $(1.5) | $0.2 | $(4.5) | | Net remeasurement (gains) losses | $2.7 | — | $2.2 | — | | Net Periodic Benefit Cost (Income) | $(0.7) | $(1.1) | $(8.0) | $(3.7) | - The Salaried Plan required a full remeasurement of pension obligations and plan assets each quarter in 2021 and 2020 because cumulative lump sum payments exceeded service and interest costs[74] Note 12 – Stock-Based Compensation Stock-based compensation expense increased in 2021, with 938,995 time-based and 651,240 performance-based restricted stock units granted, and $11.9 million in future expense expected Stock-Based Compensation Expense (Millions USD): | Period | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Expense | $1.9 | $1.6 | $5.5 | $5.2 | - In the nine months ended September 30, 2021, 938,995 time-based restricted stock units (weighted average fair value $7.70/share) and 651,240 performance-based restricted stock units (weighted average fair value $7.57/share) were granted[75][76][77] - Future stock-based compensation expense related to unvested awards is approximately $11.9 million, to be recognized through 2024[78] Note 13 - Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) decreased to $36.4 million at September 30, 2021, primarily due to pension and postretirement liability adjustments Accumulated Other Comprehensive Income (Loss) (Millions USD): | Component | Dec 31, 2020 | Sep 30, 2021 | | :-------------------- | :----------- | :----------- | | Foreign Currency Translation Adjustments | $(5.4) | $(5.1) | | Pension and Postretirement Liability Adjustments | $45.8 | $41.5 | | Total | $40.4 | $36.4 | - Net current period other comprehensive loss, net of income taxes, was $(4.0) million for the nine months ended September 30, 2021, mainly from pension and postretirement liability adjustments[79] Note 14 – Contingencies TimkenSteel maintains a contingency reserve for various loss exposures, with management believing their ultimate disposition will not materially adversely affect financial position Contingency Reserve (Millions USD): | Date | Reserve Balance | | :------------ | :-------------- | | Sep 30, 2021 | $2.3 | | Dec 31, 2020 | $1.0 | - The reserve balance increased from $1.0 million at December 31, 2020, to $2.3 million at September 30, 2021[80] Note 15 – Subsequent Events Subsequent events include a planned $4 million restructuring charge in Q4 2021 for an exit incentive program, and a $2 million contract ratification bonus for a new USW contract - A restructuring charge of approximately $4 million is anticipated in Q4 2021 for a voluntary exit incentive program, with cash severance payments primarily in 2022 and estimated annual savings of $5 million[81][107] - A new four-year contract with USW Local 1123 was ratified on October 29, 2021, covering approximately 1,180 employees, resulting in a $2 million contract ratification bonus payable in Q4 2021[82][90] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on TimkenSteel's financial performance, highlighting improvements in net sales and profitability, operational changes, and liquidity Business Overview TimkenSteel manufactures alloy, carbon, and micro-alloy steel products, consolidating melt and casting operations to the Faircrest facility and ratifying a new four-year contract with USW Local 1123 - TimkenSteel manufactures SBQ bars, seamless mechanical tubing, manufactured components, and billets, primarily from nearly 100% recycled steel[84][85] - All melt and casting activities are now consolidated at the Faircrest location, with annual melt capacity reduced to approximately 1.2 million tons and shipment capacity to 0.9 million tons[88][89] - A new four-year contract with USW Local 1123, covering approximately 1,180 employees in Canton, Ohio, was ratified on October 29, 2021, effective until September 27, 2025[90] Impact of Raw Material Prices TimkenSteel manages raw material price volatility through supplier pricing agreements and a raw material surcharge mechanism, which generally mitigates cost increases with a one-month lag - The company manages commodity risks primarily through supplier pricing agreements[92] - A raw material surcharge mechanism is used to mitigate the impact of increases or decreases in raw material costs, typically with a one-month lag effect[92] - While the surcharge generally protects gross profit, it can dilute gross margin as a percentage of sales[92] Results of Operations TimkenSteel experienced substantial improvements in net sales and gross profit for both periods in 2021, driven by increased surcharges, higher volumes, and favorable manufacturing costs and raw material spreads Net Sales Net sales increased significantly due to higher surcharges from increased scrap and alloy prices, and higher volumes driven by customer demand in industrial and mobile sectors Net Sales (Millions USD): | Period | 2021 | 2020 | Change ($) | Change (%) | | :----- | :--- | :--- | :--------- | :--------- | | 3 Months Ended Sep 30 | $343.7 | $205.9 | $137.8 | 66.9% | | 9 Months Ended Sep 30 | $944.6 | $619.5 | $325.1 | 52.5% | Drivers of Net Sales Increase (3 Months Ended Sep 30, 2021 vs 2020): | Driver | Impact (Millions USD) | | :----- | :-------------------- | | Surcharges | $89.9 | | Higher Volumes | $70.6 | | Unfavorable Price/Mix | $(22.7) | Drivers of Net Sales Increase (9 Months Ended Sep 30, 2021 vs 2020): | Driver | Impact (Millions USD) | | :----- | :-------------------- | | Surcharges | $191.2 | | Higher Volumes | $179.5 | | Unfavorable Price/Mix | $(45.6) | - Higher volumes for the three months ended September 30, 2021, were approximately 58 thousand ship tons, primarily from industrial and energy sectors, partially offset by a 15 thousand ton decrease in mobile due to the semiconductor chip shortage[94] - Higher volumes for the nine months ended September 30, 2021, were approximately 144 thousand ship tons, primarily from mobile and industrial sectors, despite a 33 thousand ton decrease in mobile due to the semiconductor chip shortage[96] Gross Profit Gross profit significantly increased for both periods in 2021, driven by favorable manufacturing costs, raw material spread, and increased volume, with inventory adjustments also contributing positively Gross Profit (Millions USD): | Period | 2021 | 2020 | Change ($) | | :----- | :--- | :--- | :--------- | | 3 Months Ended Sep 30 | $66.7 | $(2.4) | $69.1 | | 9 Months Ended Sep 30 | $164.6 | $1.4 | $163.2 | - Favorable manufacturing costs were due to improved fixed cost leverage and labor productivity on higher production volumes, partially offset by higher variable compensation[98][101] - Raw material spread was favorable due to higher scrap and alloy spreads[98][101] - For the nine-month period, favorable inventory adjustments were noted, as additional reserves were recorded in 2020 due to market conditions[101] Selling, General and Administrative Expenses Selling, General and Administrative (SG&A) expenses increased for both periods in 2021, primarily due to higher variable compensation, partially offset by lower wages and benefits from reduced headcount SG&A Expense (Millions USD): | Period | 2021 | 2020 | Change ($) | Change (%) | | :----- | :--- | :--- | :--------- | :--------- | | 3 Months Ended Sep 30 | $19.9 | $17.9 | $2.0 | 11.2% | | 9 Months Ended Sep 30 | $60.4 | $58.1 | $2.3 | 4.0% | - The increase was primarily due to higher variable compensation in the current year[104] - This was partially offset by lower wages and benefits expense resulting from a reduction in employee headcount due to restructuring[104] Restructuring Charges Restructuring charges totaled $0.4 million and $2.0 million for the three and nine months ended September 30, 2021, as part of ongoing organizational changes that eliminated approximately 230 salaried positions Restructuring Charges (Millions USD): | Period | 2021 | | :----- | :--- | | 3 Months Ended Sep 30 | $0.4 | | 9 Months Ended Sep 30 | $2.0 | - Approximately 230 salaried positions have been eliminated through restructuring actions over several years, resulting in ongoing annual savings of approximately $30 million[106] - A restructuring charge of approximately $4 million is anticipated in Q4 2021 for a voluntary exit incentive program, with estimated annual savings of $5 million[107] Interest Expense Interest expense decreased significantly for both periods in 2021, primarily due to the adoption of ASU 2020-06, which eliminated debt discount amortization, and a reduction in outstanding borrowings Interest Expense (Millions USD): | Period | 2021 | 2020 | Change ($) | | :----- | :--- | :--- | :--------- | | 3 Months Ended Sep 30 | $1.2 | $3.0 | $(1.8) | | 9 Months Ended Sep 30 | $4.7 | $9.2 | $(4.5) | - The decrease was primarily due to the adoption of ASU 2020-06 on January 1, 2021, which eliminated the amortization of debt discount for Convertible Notes[109] - A reduction in outstanding borrowings also contributed to the decrease[109] Other (Income) Expense, net Other (income) expense, net, decreased for the three months but increased for the nine months ended September 30, 2021, mainly influenced by pension and postretirement non-service benefit income, remeasurement gains/losses, and a $2.5 million tax refund Other (Income) Expense, net (Millions USD): | Component | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | | :-------- | :-------------------------- | :-------------------------- | :--------- | :-------------------------- | :-------------------------- | :--------- | | Pension and postretirement non-service benefit (income) loss | $(9.2) | $(6.7) | $(2.5) | $(28.0) | $(19.7) | $(8.3) | | Loss (gain) from remeasurement benefit plan | $2.7 | $(4.1) | $6.8 | $2.2 | $3.5 | $(1.3) | | Sales and use tax refund | — | — | — | $(2.5) | — | $(2.5) | | Total other (income) expense, net | $(6.6) | $(10.6) | $4.0 | $(28.3) | $(16.0) | $(12.3) | - A $2.5 million sales and use tax refund was recognized in Q2 2021[112] - Full remeasurements of pension obligations and plan assets were completed each quarter in 2021 and 2020[111] Provision for Income Taxes The provision for income taxes increased for both periods in 2021, with effective tax rates of 1.0% and 1.8%, while maintaining a full valuation allowance for U.S. deferred tax assets Provision for Income Taxes (Millions USD): | Period | 2021 | 2020 | Change ($) | | :----- | :--- | :--- | :--------- | | 3 Months Ended Sep 30 | $0.5 | $0.3 | $0.2 | | 9 Months Ended Sep 30 | $2.1 | $0.6 | $1.5 | Effective Tax Rate: | Period | 2021 | 2020 | | :----- | :--- | :--- | | 3 Months Ended Sep 30 | 1.0% | (2.2)% | | 9 Months Ended Sep 30 | 1.8% | (1.2)% | - The company maintains a full valuation allowance for U.S. deferred tax assets[114] - The majority of income tax expense is derived from foreign, state, and local taxes[114] Non-GAAP Financial Measures This section presents net sales by end-market sector, adjusted to exclude surcharges, providing additional insight into base price and product mix drivers Net Sales, Excluding Surcharges Net sales, excluding surcharges (Base Sales), increased for both periods in 2021, reflecting growth in underlying demand and pricing, particularly in the mobile and industrial sectors Net Sales, Excluding Surcharges (Millions USD, Tons in Thousands): | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Net Sales | $343.7 | $205.9 | $944.6 | $619.5 | | Less: Surcharges | $121.0 | $31.1 | $292.5 | $101.3 | | Base Sales | $222.7 | $174.8 | $652.1 | $518.2 | | Total Tons | 212.7 | 154.3 | 620.3 | 476.4 | | Base Sales / Ton | $1,047 | $1,133 | $1,051 | $1,088 | - Base Sales increased by $47.9 million (27.4%) for the three months and $133.9 million (25.8%) for the nine months ended September 30, 2021, excluding surcharges[94][96] - Surcharges per ton significantly increased from $201 in Q3 2020 to $569 in Q3 2021, and from $212 in 9M 2020 to $472 in 9M 2021, reflecting higher raw material prices[117] Liquidity and Capital Resources TimkenSteel's total liquidity significantly increased to $444.4 million as of September 30, 2021, driven by higher cash and increased availability under the Amended Credit Agreement Amended Credit Agreement As of September 30, 2021, TimkenSteel had $272.4 million available under its Amended Credit Agreement, with no outstanding borrowings, and was in compliance with all covenants - Amount available under the Amended Credit Agreement was $272.4 million as of September 30, 2021[64][126] - No outstanding borrowings on the Credit Agreement as of September 30, 2021[65][126] - The company is in compliance with all covenants outlined in the Amended Credit Agreement[65] Convertible Notes The Convertible Senior Notes due 2021 were settled, and the 2025 Convertible Senior Notes (principal $46.0 million) became convertible, leading to their classification as a current liability - Convertible Senior Notes due 2021 matured on June 1, 2021, and were settled with $38.9 million cash and 0.1 million shares[120] - The Convertible Senior Notes due 2025 (principal $46.0 million) became convertible at the option of holders from October 1 through December 31, 2021, due to the share price criterion being met[123] - As a result, the Convertible Senior Notes due 2025 are classified as a current liability[68] Additional Liquidity Considerations Total liquidity increased to $444.4 million as of September 30, 2021, and management believes current liquidity sources are sufficient for the next twelve months Key Liquidity Measures (Millions USD): | Metric | Sep 30, 2021 | Dec 31, 2020 | | :----- | :----------- | :----------- | | Cash and cash equivalents | $172.0 | $102.8 | | Availability not borrowed (Credit Agreement) | $272.4 | $211.3 | | Total liquidity | $444.4 | $314.1 | - Management believes current cash balance, projected cash from operations, and credit availability will be sufficient for working capital, capital expenditures, debt servicing, and pension obligations for at least the next twelve months[127] Coronavirus Aid, Relief, and Economic Security Act (CARES Act) TimkenSteel deferred $6.4 million in Social Security payroll taxes in 2020 under the CARES Act, with payments due by December 31, 2021, and December 31, 2022 - Deferred $6.4 million in employer share of Social Security payroll taxes in 2020, payable in two equal installments by December 31, 2021, and December 31, 2022[130] - Accrued a $2.3 million Employee Retention Credit benefit in Q4 2020, filed for in Q2 2021[131] Consolidated Appropriations Act, 2021 (CAA) The Consolidated Appropriations Act, 2021, extended the Employee Retention Credit into 2021, but is not expected to impact TimkenSteel as employee furloughs ceased in 2020 - The CAA extended the Employee Retention Credit into 2021, but is not expected to impact the company as employee furloughs ceased in 2020[132][133] American Rescue Plan Act of 2021 (ARPA) The American Rescue Plan Act of 2021 is expected to materially impact TimkenSteel by delaying required contributions for its domestic defined benefit pension plans until 2030 - ARPA is expected to materially impact the company by delaying required contributions for domestic defined benefit pension plans until 2030[134][135] - This delay is due to enhanced interest rate stabilization and extended amortization of funding shortfalls provided by ARPA[135] Cash Flows Net cash provided by operating activities decreased due to increased working capital, while investing and financing activities used less cash due to lower debt repayments Cash Flows (Millions USD): | Category | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------- | :-------------------------- | :-------------------------- | | Operating Activities | $106.2 | $121.0 | | Investing Activities | $(0.9) | $(3.0) | | Financing Activities | $(36.1) | $(70.3) | | Increase (Decrease) in Cash and Cash Equivalents | $69.2 | $47.7 | - Operating cash flow decreased due to an increase in working capital (principally inventory) to support increasing customer demand and production levels in 2021[138] - Investing cash flow change was primarily due to lower capital expenditures and proceeds from the sale of TimkenSteel (Shanghai) Corporation Limited[139] - Financing cash flow change was primarily due to lower repayments on outstanding borrowings and increased proceeds from stock option exercises[140] Critical Accounting Policies and Estimates TimkenSteel's financial statements are prepared using U.S. GAAP, requiring management to make estimates and assumptions that affect reported amounts, with critical policies reviewed throughout the year - Financial statements are prepared in accordance with U.S. GAAP, requiring management estimates and assumptions[142] - Critical accounting policies are reviewed throughout the year[142] New Accounting Guidance For information on new accounting guidance, refer to Note 2 - Recent Accounting Pronouncements in the unaudited Consolidated Financial Statements - Refer to Note 2 - Recent Accounting Pronouncements for details on new accounting guidance[143] Forward-Looking Statements This section contains forward-looking statements regarding future events and outcomes, cautioning that actual results may differ materially due to various factors, and the company undertakes no obligation to update these statements - Forward-looking statements are subject to various factors that may cause actual results to differ materially[144] - Key risk factors include deterioration in world economic conditions, climate-related risks, fluctuations in customer demand, impact of COVID-19, competitive factors, changes in operating costs, success of operating plans, litigation, financing availability, and pension obligations[145][150] - The company undertakes no obligation to publicly update or revise any forward-looking statement[147] Item 3. Quantitative and Qualitative Disclosures about Market Risk TimkenSteel is exposed to market risks related to interest rates, foreign currency exchange rates, and commodity prices, which are managed through various strategies Interest Rate Risk As of September 30, 2021, TimkenSteel's $46.0 million outstanding debt consists entirely of fixed-rate debt, mitigating immediate interest rate risk - All $46.0 million of outstanding debt as of September 30, 2021, has fixed interest rates[148] - A rise in interest rates would not impact the company's interest expense at this point[148] Foreign Currency Exchange Rate Risk TimkenSteel's foreign currency exchange rate risk is limited as its sales are primarily to U.S. customers, though currency fluctuations could indirectly impact the company - Sales are primarily to customers in the United States, limiting direct foreign currency exchange rate risk[149] - Currency fluctuations could indirectly impact the company through raw material prices or competitors' foreign operations[149] Commodity Price Risk TimkenSteel is exposed to commodity price fluctuations for raw materials and energy, managed through supplier pricing agreements and a raw material surcharge mechanism to pass through cost increases - Exposed to market risk from commodity price fluctuations, primarily for raw materials (scrap steel, metals, alloys) and energy (natural gas, electricity)[150] - Manages exposure through supplier pricing agreements and a raw material surcharge mechanism to pass through cost increases[150] - The surcharge mechanism effectively reduces time lag in passing through higher raw material costs in periods of stable demand, but impacts sales prices less when demand and costs are lower[150] Item 4. Controls and Procedures Management concluded that TimkenSteel's disclosure controls and procedures were effective as of September 30, 2021, with no material changes in internal control over financial reporting Disclosure Controls and Procedures TimkenSteel's management, including the principal executive and financial officers, evaluated and concluded that the company's disclosure controls and procedures were effective - Disclosure controls and procedures were evaluated and deemed effective as of the end of the reporting period[151] Changes in Internal Control Over Financial Reporting There have been no material changes in TimkenSteel's internal control over financial reporting during the most recent fiscal quarter - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[152] Part II. Other Information Item 1. Legal Proceedings TimkenSteel is involved in various claims and legal actions, but management believes their ultimate disposition will not have a material adverse effect on the company's financial position - Involved in various claims and legal actions arising in the ordinary course of business[153] - Management believes the ultimate disposition of these matters will not have a material adverse effect on financial position, results of operations, or cash flows[153] Item 1A. Risk Factors For a comprehensive discussion of the risks and uncertainties affecting TimkenSteel's business, readers are directed to the Risk Factors section in the company's Annual Report on Form 10-K - Refer to the Risk Factors section in the Annual Report on Form 10-K for the year ended December 31, 2020, for a discussion of business risks and uncertainties[154] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer, as well as Inline XBRL documents Exhibits Filed: | Exhibit Number | Exhibit Description | | :------------- | :------------------ | | 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 | | 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | Signatures The report is duly signed on behalf of TimkenSteel Corporation by Kristopher R. Westbrooks, Executive Vice President and Chief Financial Officer, on November 4, 2021 - The report was signed by Kristopher R. Westbrooks, Executive Vice President and Chief Financial Officer, on November 4, 2021[160]