METALLUS INC. (dollars in millions, except per share data)
Business Overview
We manufacture alloy steel, as well as carbon and micro-alloy steel using
electric arc furnace ("EAF") technology. Our portfolio includes special bar
quality ("SBQ") bars, seamless mechanical tubing ("tubes"), manufactured
components such as precision steel components, and billets. Additionally, we
manage raw material recycling programs, which are used internally as a feeder
system for our melt operations and allow us to sell scrap not used in our
operations to third parties. Our products and solutions 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; and power generation.
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
high-quality steel products. We focus on creating tailored products for our
respective end-market sectors. 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
production of manufactured components takes 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 second half of 2022, the Faircrest melt shop experienced unplanned
operational downtime. During the fourth quarter of 2022, TimkenSteel recognized
an insurance recovery of $33.0 million related to the unplanned downtime. Of the
total recovery, $13.0 million was received in the fourth quarter of 2022 and
$20.0 million was collected in the first quarter of 2023. The Company
anticipates an additional insurance recovery, although the timing and amount of
potential recovery are uncertain at this time. Refer to "Note 7 - Other (Income)
Expense, net" 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 2022.
Key indicators for our market include theU.S. light vehicle production Seasonally Adjusted Annual Rate, oil and gas rig count activity andU.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 Raw Material Prices
In the ordinary course of business, we are exposed to the volatility of the costs of our raw materials. For example, the currentRussia -Ukraine conflict could exacerbate inflationary pressures throughout the global economy and lead to potential market disruptions, such as significant volatility in commodity prices and supply chain disruptions. Although our business has not been materially impacted by this conflict to date, it is difficult to predict the extent to which our operations, or those of our suppliers, will be impacted in the future. 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 also utilize a raw material and natural gas surcharge mechanism when pricing products to our customers. There are two components of our raw material surcharge. One component is related to the scrap metal content in our finished product and is based on the published No. 1 busheling scrap index. The other component is related to alloy material content in our finished product and is 21
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based on published prices for nickel, molybdenum, vanadium, chromium, and manganese. The natural gas surcharge is only applicable when the price of natural gas exceeds a certain dollar amount per MMBtu.
Our surcharge mechanisms are 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. We present the raw material spread impact on gross profit for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 in the gross profit charts included within the results of operations section below.
Results of Operations
The charts below present net sales and shipments for the years ended
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Net sales for the year endedDecember 31, 2022 were$1,329.9 million , an increase of$47.0 million , or 3.7%, compared with the year endedDecember 31, 2021 . The increase in sales was primarily driven by favorable price/mix and an increase in surcharges, partially offset by lower volumes. Favorable price/mix of$174.2 million was primarily due to higher base prices across all end-market sectors, as well as sales mix improvement within all end-market sectors. The increase in surcharges of$7.2 million was due to higher scrap and alloy market prices. Customer demand remained solid throughout 2022; however, shipments in the second half of the year were negatively impacted by the availability of inventory for shipment as a result of unplanned operation downtime. This resulted in lower volumes of 126.5 thousand ship tons, or a net sales decrease of$134.4 million . Excluding surcharges, net sales increased$39.8 million or 4.5%. 22
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Gross Profit
The chart below presents the drivers of the gross profit variance from the year
ended
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Gross profit for the year ended December 31, 2022 decreased $93.3 million , or
42.4%, compared with the year ended December 31, 2021 . The decrease was driven
by higher manufacturing costs, unfavorable raw material spread, and decreased
volume, partially offset by favorable price/mix. Higher manufacturing costs were
primarily due to an unfavorable impact of lower production levels on fixed cost
leverage, as well as higher plant spend, inflationary cost increases and repair
costs related to unplanned operational downtime. Raw material spread was
unfavorable due to lower scrap and alloy spreads. Customer demand remained
strong throughout 2022; however, shipments were negatively impacted by the
availability of inventory for shipment as a result of the unplanned operational
downtime. Favorable price/mix was due to higher base prices across all
end-market sectors, as well as an improvement of product mix within all
end-market sectors.
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Selling, General and Administrative Expenses
The charts below present selling, general and administrative ("SG&A") expense
for the years ended
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SG&A expense for the year ended December 31, 2022 decreased by $3.4 million , or
4.4%, compared with the year ended December 31, 2021 . This decrease is primarily
due to lower employee wages and benefits expense as a result of a reduction in
employee headcount following the Company's restructuring actions and lower
variable compensation expense. This was partially offset by higher spend on
professional services, primarily driven by the ongoing information technology
transformation project.
Restructuring Charges
Over the past several years, TimkenSteel has made numerous organizational
changes to enhance profitable and sustainable growth. These company-wide actions
included the restructuring of its business support functions, the reduction of
management layers throughout the organization and other domestic and
international actions to further improve the Company's overall cost structure.
For the year ended December 31, 2022 , restructuring charges totaled $0.8 million
and were related to severance and employee-related benefits as a result of
continued organizational changes.
For the year ended December 31, 2021 , restructuring charges totaled $6.7
million , of which $6.4 million related to severance and employee-related
benefits as a result of continued organizational changes. The remaining $0.3
million of charges related to the transition of customers to other TimkenSteel
manufacturing equipment due to the discontinuation of specific small-diameter
seamless mechanical tube manufacturing and the indefinite idling of our Harrison
melt and casting activities.
Refer to "Note 5 - Restructuring Charges" and "Note 6 - Disposition of Non-Core
Assets" in the Notes to the Consolidated Financial Statements for additional
information.
Impairment Charges & Loss (Gain) on Sale or Disposal of Assets, net
TimkenSteel recorded no impairment charges for the year endedDecember 31, 2022 . During the year endedDecember 31, 2021 , TimkenSteel recorded approximately$10.6 million of impairment charges. This was driven by$7.9 million of impairment charges related to the indefinite idling of our Harrison melt and casting assets. Other impairment charges included$2.4 million related to the impairment of certain assets at ourSt. Clair facility due to the early termination of a customer program and$0.3 million related to the disposition of assets at the Company's former TimkenSteel Material Services ("TMS") facility inHouston . For the year endedDecember 31, 2022 , TimkenSteel recorded a loss on sale and disposal of assets of$1.9 million primarily related to the loss recognized on the sale of the remaining land and buildings at the Company's former TMS facility. This compares with a net loss on sale of assets of$1.3 million related to the disposition of excess assets for the year endedDecember 31, 2021 . 24
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Refer to "Note 6 - Disposition of Non-Core Assets" and "Note 11 - Property, Plant and Equipment" in the Notes to the Consolidated Financial Statements for additional information.
Interest (Income) Expense, net
Interest (income) expense, net for the year endedDecember 31, 2022 was$0.6 million , a decrease of$5.3 million , compared with the year endedDecember 31, 2021 . The change in net interest expense was due to a reduction in average outstanding borrowings for the year endedDecember 31, 2022 compared to the same period in 2021, as well as interest earned on cash invested in a money market fund and deposits with financial institutions. 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, 2022 2021 $ Change Pension and postretirement non-service benefit (income) loss$ (20.3 ) $ (37.2 ) $ 16.9 Loss (gain) from remeasurement of benefit plans (35.4 ) (20.1 ) (15.3 ) Foreign currency exchange loss (gain) (0.2 ) 0.1 (0.3 ) Insurance recoveries (34.5 ) - (34.5 ) Sales and use tax refund - (2.5 ) 2.5 Miscellaneous (income) expense (0.2 ) 0.2 (0.4 ) Total other (income) expense, net$ (90.6 ) $ (59.5 ) $ (31.1 ) Year Ended December 31, 2021 2020 $ Change Pension and postretirement non-service benefit (income) loss$ (37.2 ) $ (26.6 ) $ (10.6 ) Loss (gain) from remeasurement of benefit plans (20.1 ) 14.7 (34.8 ) Foreign currency exchange loss (gain) 0.1 0.2 (0.1 ) Sales and use tax refund (2.5 ) - (2.5 ) Employee retention credit - (2.3 ) 2.3 Miscellaneous (income) expense 0.2 (0.2 ) 0.4 Total other (income) expense, net$ (59.5 ) $ (14.2
)
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 remeasurement of benefit plans is due to lump sum payments exceeding the sum
of the service cost and interest cost components of the net periodic pension
cost for certain plans, as well as the partial annuitization of the TimkenSteel
Corporation Bargaining Unit Pension Plan ("Bargaining Plan"). The lump sum
payments and partial annuitization constitute partial settlements, which are
significant events requiring remeasurement of both plan assets and benefit
obligations.
A net gain of $35.4 million from the remeasurement of these benefit plans was
recognized for the year ended December 31, 2022 . This gain was driven by a
$359.9 million decrease in the pension liability primarily due to an increase in
discount rates and a $2.7 million non-cash settlement related to the partial
annuitization of the Bargaining Plan. This was partially offset by a loss of
$327.2 million driven primarily by investment losses on plan assets and lump sum
basis losses.
A net gain of $20.1 million from the remeasurement of these benefit plans was
recognized for the year ended December 31, 2021 . This gain was driven by a $55.7
million decrease in the pension liability primarily due to an increase in
discount rates, partially offset by a loss of $35.6 million driven primarily by
investment losses on plan assets.
For more details on the aforementioned remeasurements, refer to "Note 15 - Retirement and Postretirement Plans."
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During the second half of 2022, the Faircrest melt shop experienced unplanned operational downtime. During the fourth quarter of 2022, TimkenSteel recognized an insurance recovery of$33.0 million related to the unplanned downtime. Of the total recovery,$13.0 million was received in the fourth quarter of 2022 and$20.0 million was collected in the first quarter of 2023. The Company anticipates an additional insurance recovery, although the timing and amount of potential recovery are uncertain at this time. Additionally, during the third quarter of 2022, TimkenSteel recognized an insurance recovery of$1.5 million related to an unplanned outage at our Faircrest facility inNovember 2021 . TimkenSteel recognizes an insurance recovery when it is realized or considered realizable, in accordance with the accounting guidance, and records this activity within other (income) expense, net on the Consolidated Statements of Operations. During the second quarter of 2021, TimkenSteel received a refund from theState of Ohio related to an overpayment of sales and use taxes for the period ofOctober 1, 2016 throughSeptember 30, 2019 . This resulted in a gain recognized of$2.5 million , net of related professional fees, for the year endedDecember 31, 2021 . During the year endedDecember 31, 2020 , the Company recognized a$2.3 million benefit related to the Employee Retention Credit in other (income) expense, net. For more details on this credit refer to "Note 2 - Significant Accounting Policies." Provision for Income Taxes Year Ended December 31, 2022 2021 $ Change Provision (benefit) for income taxes$ 32.0 $ 5.7 $ 26.3 Effective tax rate 32.9 % 3.2 % NM(1) Year Ended December 31, 2021 2020 $ Change
Provision (benefit) for income taxes
3.2 % (2.0 )% NM(1)
(1) "NM" is data that is not meaningful.
The provision for incomes taxes for the year endedDecember 31, 2022 was$32.0 million compared to a provision for income taxes of$5.7 million in 2021. The change from the prior year is primarily related to state and local taxes, permanent items, and an operating loss in theUK that does not have a consolidated provision benefit due to a full valuation allowance in theUK . These items are partially offset by the release of the Company's income tax valuation allowance on domestic deferred tax assets due to consecutive years of positive net income and the utilization of the majority of loss carryforwards generated in prior years. 26
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Non-GAAP Financial Measures
Net Sales Adjusted to Exclude Surcharges
The tables below present 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 inthe United States ("U.S. GAAP"). We believe presenting net sales by end-market sector, both on a gross basis and on a per ton basis, adjusted to exclude raw material and natural gas surcharges, provides additional insight into key drivers of net sales such as base price and product mix. Due to the fact that the surcharge mechanism can introduce volatility to our net sales, net sales adjusted to exclude surcharges provides management and investors clarity of our core pricing and results. Presenting net sales by end-market sector, adjusted to exclude surcharges including on a per ton basis, allows management and investors to better analyze key market indicators and trends and allows for enhanced comparison between our end-market sectors. When surcharges are included in a customer agreement and are applicable (i.e., reach the threshold amount), based on the terms outlined in the respective agreement, surcharges are then included as separate line items on a customer's invoice. These additional surcharge line items adjust base prices to match cost fluctuations due to market conditions. Each month, the company will post on the surcharges page of its external website, as well as our customer portal, the scrap, alloy, and natural gas surcharges that will be applied (as a separate line item) to invoices dated in the following month (based upon shipment volumes in the following month). All surcharges invoiced are included in GAAP net sales.
(dollars in millions, tons in thousands)
2022
Mobile Industrial Energy Other Total
Tons 313.2 315.8 63.1 - 692.1
Net Sales $ 539.1 $ 628.7 $ 136.6 $ 25.5 $ 1,329.9
Less: Surcharges 171.6 200.6 43.1 - 415.3
Base Sales $ 367.5 $ 428.1 $ 93.5 $ 25.5 $ 914.6
Net Sales / Ton $ 1,721 $ 1,991 $ 2,165 $ - $ 1,922
Surcharges / Ton $ 548 $ 635 $ 683 $ - $ 600
Base Sales / Ton $ 1,173 $ 1,356 $ 1,482 $ - $ 1,322
2021
Mobile Industrial Energy Other Total
Tons 370.4 408.9 39.3 - 818.6
Net Sales $ 527.9 $ 661.2 $ 62.9 $ 30.9 $ 1,282.9
Less: Surcharges 167.7 218.3 22.1 - 408.1
Base Sales $ 360.2 $ 442.9 $ 40.8 $ 30.9 $ 874.8
Net Sales / Ton $ 1,425 $ 1,617 $ 1,601 $ - $ 1,567
Surcharges / Ton $ 453 $ 534 $ 563 $ - $ 498
Base Sales / Ton $ 972 $ 1,083 $ 1,038 $ - $ 1,069
2020
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 $ 192 $ 229 $ 232 $ 248 $ 212
Base Sales / Ton $ 931 $ 1,238 $ 1,234 $ 1,124 $ 1,085
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Liquidity and Capital Resources
Amended Credit Agreement
OnSeptember 30, 2022 ,TimkenSteel Corporation (the "Company"), as borrower, and certain domestic subsidiaries of the Company, as subsidiary guarantors (the "Subsidiary Guarantors"), entered into a Fourth Amended and Restated Credit Agreement (the "Amended Credit Agreement"), withJPMorgan Chase Bank, N.A ., as administrative agent (the "Administrative Agent"), and the lenders party thereto (collectively, the "Lenders"), which further amends and restates the Company's existing secured Third Amended and Restated Credit Agreement, dated as ofOctober 15, 2019 . The Amended Credit Agreement extended the maturity date of the asset-based revolving credit facility (the "Credit Facility") fromOctober 2024 toSeptember 2027 . Following the amendment, Credit Facility capacity remained at$400.0 million . Pursuant to the terms of the Amended Credit Agreement, the interest rate to be paid on any borrowings under the Credit Facility is now based on a two-tiered schedule rather than a three-tiered schedule with applicable rates decreasing by 25 basis points, references to LIBOR rates have been updated with references to SOFR rates, the advance rate on investment-grade eligible accounts receivable has been increased from 85% to 90%, and there has been an improvement in the springing fixed charge coverage ratio from 1.1x to 1.0x. The Credit Facility remains undrawn at this time.
Refer to "Note 14 - Financing Arrangements" in the Notes to the unaudited Consolidated Financial Statements for additional information.
Convertible Notes
In
InDecember 2020 , the Company entered into separate, privately negotiated exchange agreements with a limited number of holders of the Company's then 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 remaining Convertible Senior Notes due 2021 matured onJune 1, 2021 and were settled with a combination of cash of$38.9 million and 0.1 million shares, as most noteholders exercised their conversion option prior to maturity. The final cash payment for interest was also made to noteholders onJune 1, 2021 in the amount of$1.2 million . The Convertible Senior Notes due 2025 bear cash interest at a rate of 6.0% per year, payable semiannually onJune 1 andDecember 1 , beginning onJune 1, 2021 . The Convertible Senior Notes due 2025 will mature onDecember 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. The Convertible Senior Notes due 2025 are convertible at the option of holders in certain circumstances and during certain periods into the Company's common shares, cash, or a combination thereof, at the Company's election. The Indenture for the Convertible Senior Notes due 2025 provides that notes will become convertible during a quarter when the share price for 20 trading days during the final 30 trading days of the immediately preceding quarter was greater than 130% of the conversion price. This criterion was met during the fourth quarter of 2022 and as such the notes can be converted at the option of the holders beginningJanuary 1 through March 31, 2023 . Whether the notes will be convertible following such period will depend on if this criterion, or another conversion condition, is met in the future. To date, no holders have elected to convert their notes during any optional conversion periods. In the first half of 2022, TimkenSteel repurchased a total of$25.2 million aggregate principal amount of its Convertible Senior Notes Due 2025. There were no repurchases related to the Convertible Notes during the second half of 2022. Total cash paid to noteholders was$67.6 million . A loss on extinguishment of debt was recognized of$43.0 million , including a charge of$0.6 million for unamortized debt issuance costs related to the portion of debt extinguished, as well as the related transaction costs. The principal amount of the Convertible Senior Notes due 2025 as ofDecember 31, 2022 is$20.8 million , while the Convertible Senior Notes due 2025, net is$20.4 million . For additional details regarding the Amended Credit Agreement and the Convertible Notes, please refer to "Note 14 - Financing Arrangements" in the Notes to the Consolidated Financial Statements, and for our discussion regarding risk factors related to our business and our debt, see Risk Factors in this Annual Report on Form 10-K. 28
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Additional Liquidity Considerations
The following represents a summary of total liquidity available under the Amended Credit Agreement in effect as ofDecember 31, 2022 andDecember 31, 2021 : December 31, 2022 2021 Cash and cash equivalents$ 257.2 $ 259.6 Credit Agreement: Maximum availability$ 400.0 $ 400.0 Suppressed availability(1) (161.2 ) (143.5 ) Availability 238.8 256.5 Credit facility amount borrowed - - Letter of credit obligations (5.3 ) (5.4 ) Availability not borrowed 233.5 251.1 Total liquidity$ 490.7 $ 510.7
(1) As of
Our principal sources of liquidity are cash and cash equivalents, cash flows from operations and available borrowing capacity under our Amended Credit Agreement. As ofDecember 31, 2022 , taking into account our view of mobile, industrial, and energy market demand for our products, and our 2023 operating and long-range plan, we believe that our cash balance as ofDecember 31, 2022 , 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 and pension and postretirement benefit obligations, for at least the next twelve months. 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 continue to evaluate the best use of our liquidity which would allow us to invest in profitable growth, maintain a strong balance sheet, and return capital to shareholders. Currently, we are anticipating capital expenditures to be approximately$45 million in 2023, with$10 million allocated to profitability improvement projects. During the first half of 2022, we privately negotiated early repurchases of$25.2 million aggregate principal amount of our Convertible Senior Notes Due 2025. In addition to reducing outstanding debt and generating$1.5 million of annual interest savings, the repurchases of convertible notes reduced diluted shares outstanding for the year endedDecember 31, 2022 by 2.3 million shares and, on a go-forward basis, reduced diluted shares outstanding by 3.2 million shares. OnDecember 20, 2021 , TimkenSteel announced that its Board of Directors authorized a share repurchase program under which the Company may repurchase up to$50.0 million of its outstanding common shares. The share repurchase program was intended to return capital to shareholders while also offsetting dilution from annual equity compensation awards. As ofDecember 31, 2022 , we consumed the previously approved$50.0 million repurchase program. OnNovember 2, 2022 , the Board of Directors authorized an additional$75.0 million share repurchase program. This authorization reflects the continued confidence of the Board and senior leadership in the Company's ability to generate sustainable through-cycle profitability while maintaining a strong balance sheet and cash flow. The share repurchase program does not require the Company to acquire any dollar amount or number of shares and may be modified, suspended, extended or terminated by the Company at any time without prior notice. For the year endedDecember 31, 2022 , the Company repurchased approximately 3.0 million common shares in the open market at an aggregate cost of$52.0 million , which equates to an average repurchase price of$17.18 per share. As ofDecember 31, 2022 , the Company had a balance of$73.0 million remaining under its share repurchase program. The Company did not repurchase shares during the years endedDecember 31, 2021 orDecember 31, 2020 . 29
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Subsequent toDecember 31, 2022 , the Company repurchased 0.2 million additional common shares in the open market at an aggregate cost of$4.5 million , which equates to an average repurchase price of$19.19 per share. As ofFebruary 24, 2023 , the Company has$68.5 million remaining under its authorized share repurchase program.
Legislation related to the COVID-19 Pandemic
Due to a provision in the Coronavirus Aid, Relief, and Economic Security
("CARES") Act, the Company was able to defer the employer share of Social
Security payroll taxes for a specified time during 2020. During the year ended
December 31, 2020 , the Company 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, to be paid in two equal
installments. The first installment in the amount of $3.2 million was paid
during the fourth quarter of 2021 and the second installment of $3.2 million was
paid during the fourth quarter of 2022.
The CARES Act also provided for an employee retention credit ("Employee
Retention Credit"), which is a refundable tax credit against certain employment
taxes. 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
Consolidated Statements of Operations. The Company filed for this credit in the
second quarter of 2021 and received a portion of the proceeds from the Internal
Revenue Service ("IRS") in the amount of $0.5 million during the fourth quarter
of 2021. The Company received the remaining $1.8 million of cash proceeds in the
first quarter of 2022.
Cash Flows
The following table reflects the major categories of cash flows for the years
ended December 31, 2022 , 2021, and 2020. 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 on Form 10-K.
Year Ended December 31,
2022 2021 2020
Net cash provided (used) by operating activities
(6.0 )
Net cash provided (used) by financing activities (114.6 ) (35.3 )
(91.8 )
Increase (Decrease) in Cash and Cash Equivalents
Operating activities Net cash provided by operating activities for the year endedDecember 31, 2022 was$134.5 million compared to net cash provided of$196.9 million for the year endedDecember 31, 2021 . The change was primarily due to lower profitability, partially offset by a reduction in working capital, during the year endedDecember 31, 2022 . Refer to the Consolidated Statements of Cash Flows for additional information.
Investing activities
Net cash used by investing activities for the year ended
Financing activities
Net cash used by financing activities for the year endedDecember 31, 2022 was$114.6 million compared to net cash used of$35.3 million for the year endedDecember 31, 2021 . The change was primarily due to the purchase of treasury shares and the repurchase of our Convertible Senior Notes due in 2025, partially offset by increased proceeds from the exercise of stock options during the year endedDecember 31, 2022 compared to the same period of 2021.
Contractual Obligations and Commitments
Our material cash commitments from known contractual and other obligations primarily consist of obligations for long-term debt and related interest, purchase commitments as part of normal operations, retirement benefits, and operating leases for property and equipment.
Refer to "Note 14 - Financing Arrangements" in the Notes to the Consolidated
Financial Statements for more information regarding scheduled maturities of our
long-term debt. Interest payments include interest on the Convertible Notes, as
well as the unused commitment
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fee of 25 basis points related to the Amended Credit Agreement. Interest payable
associated with our debt will be approximately
Purchase commitments are defined as agreements to purchase goods or services that are enforceable and legally binding. As ofDecember 31, 2022 , our undiscounted purchase commitments will be approximately$83.1 million due in the next twelve months and$77.3 million due thereafter. Included in purchase commitments are certain obligations related to capital asset 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 contractually obligated as ofDecember 31, 2022 . 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. These include payments to meet minimum funding requirements of our defined benefit pension plans, estimated benefit payments for our unfunded supplemental executive retirement pension, and estimated benefit payments for our postretirement plans. The retirement benefit funding requirements 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.
Refer to "Note 13 - Leases" in the Notes to the Consolidated Financial Statement for additional information on leases.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance withU.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 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. Substantially all performance obligations arise from the sale of manufactured steel products. 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. Transfer of control and revenue recognition for substantially all the Company's sales occur upon shipment or delivery of the product, which is when title, ownership, and risk of loss pass to the customer and is based on the applicable customer shipping terms. The Company invoices its customers at the time of title transfer. Payment terms are generally 30 days from the invoice date. Invoiced amounts are usually inclusive of shipping and handling activities incurred. Shipping and handling activities billed are included in net sales in the Consolidated Statements of Operations. The related costs incurred by the Company for the delivery of goods are classified as cost of products sold in the Consolidated Statements of Operations. 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.
Sales returns and allowances are treated as a reduction to net sales and are provided for primarily based on historical experience. These reserves also capture any potential warranty claims, which normally result in returned or replaced product.
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 theU.S. ) inventories, have been valued using the FIFO or average cost method. 31
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Table of Contents 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. No impairment charges were recorded in 2022. As a result of the discontinued use of certain assets, we recorded an impairment charge of$10.6 million in 2021. 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 theU.S. and 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 theU.S. , which we believe are more likely than not to result in future tax benefits. As ofDecember 31, 2022 , we have recorded a partial valuation allowance on our net deferred tax assets in theU.S. , as we do not believe it is more likely than not that a portion of ourU.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.
Benefit Plans
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 atDecember 31 , or on an interim basis as triggering events warrant remeasurement. An example of a potential triggering event would be settlements. The Company's accounting policy is to recognize settlements during the quarter in which it is projected that the costs of all settlements during the year will be greater than the sum of the service cost and interest cost components of net periodic benefit cost. In addition, the Company uses fair value to account for the value of plan assets. As ofDecember 31, 2022 , our projected benefit obligations related to our pension and other postretirement benefit plans were$666.6 million and$87.4 million , respectively, and the underfunded status of our pension and other postretirement benefit obligations were$117.2 million and$28.2 million , respectively. These benefit obligations were valued using a weighted average discount rate of 5.61% for pension benefit plans and 5.70% 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 32
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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 endedDecember 31, 2022 , net periodic pension and postretirement benefit income was$23.3 million and$16.7 million , respectively. In 2022, net periodic pension and other postretirement benefit income was calculated using a variety of assumptions, including a weighted average discount rate of 2.96% and 3.00%, respectively, and a weighted average expected return on plan assets of 5.96% and 4.75%, 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 income 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 income, prior to annual remeasurement gains or losses $ 0.7$ (0.7 ) Benefit obligation$ (16.0 ) $ 16.6 Return on plan assets Net periodic benefit income, prior to annual remeasurement gains or losses $ (1.4 ) $ 1.4 In 2023, the aggregate net periodic pension is forecasted to be expense of$10.3 million , while other postretirement is forecasted to be income of$4.0 million . This estimate is based on a weighted average discount rate of 5.61% for the pension benefit plans and 5.70% for other postretirement benefit plans, as well as a weighted average expected return on assets of 7.13% for the pension benefit plans and 6.25% 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 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 warranty claims,
employee-related matters, 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.
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Table of Contents 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," ,"aspire," "believe," "could," "estimate," "expect," "forecast," "outlook," "intend," "may," "plan," "possible," "potential," "predict," "project," "seek," "should," "strategic direction," "strategy," "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:
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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;
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the impact of the
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climate-related risks, including environmental and severe weather caused by climate changes, and legislative and regulatory initiatives addressing global climate change or other environmental concerns;
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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 including but not limited to changes in customer operating schedules due to supply chain constraints; the effects of customer bankruptcies or liquidations; the impact of changes in industrial business cycles; and whether conditions of fair trade exist in theU.S. markets;
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the potential impact of the COVID-19 pandemic on our operations and financial results, including cash flows and liquidity;
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whether we are able to successfully implement actions designed to improve profitability on anticipated terms and timetables and whether we are able to fully realize the expected benefits of such actions;
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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;
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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;
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the success of our operating plans, announced programs, initiatives and capital investments; and our ability to maintain appropriate relations with the union that represents our associates in certain locations in order to avoid disruptions of business;
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unanticipated litigation, claims or assessments, including claims or problems related to intellectual property, product liability or warranty, employment matters, and environmental issues and taxes, among other matters;
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cyber-related risks, including information technology system failures, interruptions and security breaches;
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with respect to the company's ability to achieve its sustainability goals,
including its 2030 environmental goals, the ability to meet such goals within
the expected timeframe, changes in laws, regulations, prevailing standards or
public policy, the alignment of the scientific community on measurement and
reporting approaches, the complexity of commodity supply chains and the
evolution of and adoption of new technology, including traceability practices,
tools and processes;
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the availability of financing and interest rates, which affect our cost of funds and/or ability to raise capital, including our ability to refinance and/or repay prior to or at maturity the Convertible Notes dueDecember 1, 2025 ; 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;
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the overall impact of the pension and postretirement mark-to-market accounting;
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the effects of the conditional conversion feature of the Convertible Senior Notes due 2025, which, if triggered, entitles holders to convert the notes at any time during specified periods at their option and therefore could result in potential dilution if the holder elects to convert and the Company elects to satisfy a portion or all of the conversion obligation by delivering common shares instead of cash;
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the timing required to ramp up melt production to forecasted demand levels, as the Company recovers from unplanned operational downtime in the second half of 2022, as well as the amount that the Company is able to recover from its insurance policies in connection with the related unplanned downtime;
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the impacts from any repurchases of our common shares and convertible notes, including the timing and amount of any repurchases; and
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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. Further, this report includes our
current policy and intent and is not intended to create legal rights or
obligations. Certain standards of measurement and performance contained in this
report are developing and based on assumptions, and no assurance can be given
that any plan, objective, initiative, projection, goal, mission, commitment,
expectation, or prospect set forth in this report can or will be achieved.
Inclusion of information in this report is not an indication that the subject or
information is material to our business or operating results.
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