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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

 

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020 OR

 

 

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to            

Commission file number: 1-36313

 

 

 

 

TIMKENSTEEL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Ohio

 

46-4024951

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

1835 Dueber Avenue SW, Canton, OH

 

44706

(Address of principal executive offices)

 

(Zip Code)

 

330.471.7000 (Registrant’s telephone number, including area code) 

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

 

Trading symbol

 

Name of exchange in which registered

Common shares

 

TMST

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ☐    No  ☒    

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes   ☐  No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

☐

 

Accelerated filer

☒

Non-accelerated filer

☐

 

Smaller reporting company

☐

 

 

 

Emerging growth company

☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial reporting accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐  No  ☒

As of June 30, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates was $160,935,221 based on the closing sale price as reported on the New York Stock Exchange for that date.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at February 15, 2021

Common Shares, without par value

 

45,175,486

DOCUMENTS INCORPORATED BY REFERENCE

 

Document

 

Parts Into Which Incorporated

Proxy Statement for the 2021 Annual Meeting of Shareholders

 

Part III

 

 

 

 

TimkenSteel Corporation

Table of Contents

 

 

 

PAGE

PART I.

 

Item 1.

Business

3

Item 1A.

Risk Factors

8

Item 1B.

Unresolved Staff Comments

15

Item 2.

Properties

15

Item 3.

Legal Proceedings

16

Item 4A.

Executive Officers of the Registrant

16

PART II.

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

17

Item 6.

Selected Financial Data

19

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

32

Item 8.

Financial Statements and Supplementary Data

33

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

67

Item 9A.

Controls and Procedures

67

Item 9B.

Other Information

67

PART III.

 

Item 10.

Directors, Executive Officers and Corporate Governance

68

Item 11.

Executive Compensation

68

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

68

Item 13.

Certain Relationships and Related Transactions, and Director Independence

68

Item 14.

Principal Accounting Fees and Services

68

PART IV.

 

Item 15.

Exhibits, Financial Statement Schedules

69

 

Signatures

72

 

 

 

2

Table of Contents

 

 

PART I.

ITEM 1. BUSINESS

Overview

TimkenSteel Corporation (we, us, our, the Company or TimkenSteel) was incorporated in Ohio on October 24, 2013, and became an independent, publicly traded company as the result of a spinoff from The Timken Company (Timken) on June 30, 2014. In the spinoff, Timken transferred to us all of the assets and generally all of the liabilities related to Timken’s steel business.

We manufacture alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. Our portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), value-added solutions such as precision steel components, and billets. In addition, we supply machining and thermal treatment services, and we manage raw material recycling programs, which are also used as a feeder system for our melt operations. Our products and services are used in a diverse range of demanding applications in the following market sectors: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and oil country tubular goods (OCTG).

SBQ steel is made to restrictive chemical compositions and high internal purity levels and is used in critical mechanical applications. We make these products from nearly 100% recycled steel, using our expertise in raw materials to create custom steel products. We focus on creating tailored products and services for our customers’ most demanding applications. Our engineers are experts in both materials and applications, so we can work closely with each customer to deliver flexible solutions related to our products as well as to their applications and supply chains.

The SBQ bar, tube, and billet production processes take place at our Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets we produce and includes three manufacturing facilities: the Faircrest, Harrison and Gambrinus facilities. Our value-added solutions production processes take place at two downstream manufacturing facilities: Tryon Peak (Columbus, North Carolina) and St. Clair (Eaton, Ohio). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of our market sectors. As a result, investments in our facilities and resource allocation decisions affecting our operations are designed to benefit the overall business, not any specific aspect of the business.

During the first quarter of 2020, management completed its previously announced plan to close the Company’s TimkenSteel Material Services facility in Houston, Texas. See “Note 6 - Disposition of Non-Core Assets” in the Notes to the Consolidated Financial Statements for additional information on the closure of this facility.

 

On February 16, 2021, management announced a plan to indefinitely idle our Harrison melt and cast assets, late in the first quarter of 2021. Going forward, all of the Company’s melting and casting activities will take place at the Faircrest location. We are working collaboratively with employees, suppliers and a number of customers to ensure a well-organized and efficient transition. Our rolling and finishing operations at Harrison will not be impacted by these actions. See “Note 20 – Subsequent Events” in the Notes to the Consolidated Financial Statements for additional information.

Operating Segments

We conduct our business activities and report financial results as one business segment. The presentation of financial results as one reportable segment is consistent with the way we operate our business and is consistent with the manner in which the Chief Operating Decision Maker (CODM) evaluates performance and makes resource and operating decisions for the business as described above. Furthermore, the Company notes that monitoring financial results as one reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of our operations.

Industry Segments and Geographical Financial Information

Information required by this Item is incorporated herein by reference to “Note 3 - Segment Information” in the Notes to the Consolidated Financial Statements.

Strengths and Strategy

Our customers depend on us to be the leader in solving their industries’ constantly evolving challenges. Our team, including engineers and experienced manufacturing professionals in both materials and applications, works closely with customers to deliver flexible solutions related to our products as well as our customers’ applications and supply chains.

The TimkenSteel business model delivers these tailored solutions based on the following foundation:

 

•

Experienced management and technical team.

 

•

Close and trusted working relationship with customers across diverse end-markets.

3

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•

Leadership position in niche markets with differentiated products.

 

•

Track record of innovation rooted in a deep technical knowledge of steel materials, manufacturing processes and a focus on end-user applications. Our research and development efforts focus on creating solutions for our customers’ toughest challenges.

Major Customers

We sell products and services that are used in a range of demanding applications around the world. We have over 400 diverse customers in the following market sectors: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and OCTG.

Products

We believe we produce some of the cleanest, highest performing alloy air-melted steels in the world for our customers’ most demanding applications. We leverage our technical knowledge, development expertise and production and engineering capabilities across all of our products and end-markets to deliver high-performance products to our customers.

SBQ Steel Bar, Seamless Mechanical Steel Tubes, and Billets. Our focus is on alloy steel, although in total we manufacture more than 400 grades of high-performance carbon, micro-alloy and alloy steel, sold as ingots, bars, tubes and billets. These products are custom-made in a variety of chemistries, lengths and finishes. Our metallurgical expertise and what we believe to be unique operational capabilities drive high-value solutions for industrial, energy and mobile customers. Our specialty steels are featured in a wide variety of end products including: gears; hubs; axles; crankshafts and connecting rods; oil country drill pipe; bits and collars; bearing races and rolling elements; bushings; fuel injectors; wind energy shafts; anti-friction bearings; and other demanding applications where mechanical power transmission is critical to the end customer.

Value-added Precision Products and Services. In addition to our customized steels, we also custom-make precision components that provide us with the opportunity to further expand our market for bar and tube products and capture additional sales. These products provide customers, especially those in the automotive industry, with ready-to-finish components that simplify vendor management, streamline supply chains and often cost less than other alternatives. We also customize products and services for the industrial and energy market sectors.

Sales and Distribution

Our sales force is made up largely of engineers that are backed by a team of metallurgists and other technical experts. While most of our products are sold directly to original equipment (OE) manufacturers, a portion of our sales are made through authorized distributors and steel service centers, representing approximately 17% of net sales during 2020. The majority of our customers are served through individually negotiated price agreements.

Competition

The steel industry, both domestically and globally, is highly competitive and is expected to remain so. Maintaining high standards of product quality and reliability, while keeping production costs competitive, is essential to our ability to compete with domestic and foreign manufacturers of alloy steel and mechanical components. For bar products less than 6-inch in diameter, principal competitors include foreign-owned domestic producers Gerdau Special Steel North America (a unit of Brazilian steelmaker Gerdau, S.A) and Republic Steel (a unit of Mexican steel producer ICH). For bar products up to 9-inch in diameter, domestic producers Steel Dynamics, Inc. and Nucor Corporation (in some cases up to 10-inch) are our principal competitors. For very large bars from 10 to 16 inches in diameter, offshore producers as well as specialty forging companies in North America such as Scot Forge are the primary competitors. For seamless mechanical tubing, offshore producers such as Tenaris, S.A., Vallourec, S.A. and TMK Group are our primary competitors as well as the foreign-owned domestic producer ArcelorMittal Tubular Products (a unit of Luxembourg-based ArcelorMittal, S.A.). We also provide unique value-added steel products and supply chain solutions to our customers in the mobile, industrial and energy sectors. Competitors within the value-added market sector include both integrated and non-integrated component producers.

Lead Time

The lead time for our products varies based on the product type and specifications. As of the date of this filing, lead times for SBQ bars are averaging approximately 9 to 10 weeks and lead times for tubes are averaging approximately 13 weeks.

Raw Materials

The principal raw materials that we use to manufacture steel are recycled scrap metal, chrome, nickel, molybdenum oxide, vanadium and other alloy materials. Raw materials comprise a significant portion of the steelmaking cost structure and are subject to price and availability changes due to global demand fluctuations and local supply limitations. Proper selection and management of raw materials can have a significant impact on procurement cost, flexibility to supply changes, steelmaking energy costs and mill productivity. In addition to accessing scrap and alloys through the open market, we have established a scrap return supply chain with many of our customers. This part of our business leverages our knowledge of the raw material supply industry and an extensive network of relationships that result in steady, reliable supply from our raw

4

Table of Contents

 

material sources. We previously operated a scrap processing facility as an additional source of raw materials; however, during the fourth quarter of 2019 we marketed and subsequently entered into an agreement to dispose of the assets associated with the operation. The disposal was completed in January 2020. See “Note 6 - Disposition of Non-Core Assets” in the Notes to the Consolidated Financial Statements for additional information.

Research and Development

Our engineers analyze customer application challenges and develop solutions to address the customers’ needs. With a century of experience in materials science and steelmaking, we leverage our technical know-how to improve the performance of our customers’ products and supply chains.

This expertise extends to advanced process technology in which material conversion, finishing, gaging and assembly enables high quality production of our products. With resources dedicated to studying, developing and implementing new manufacturing processes and technologies, we are able to support our customers’ requirements.

Our research and development expense for the years ended December 31, 2020, 2019 and 2018 were $1.8 million, $4.1 million and $8.1 million, respectively.

Environmental Matters and Governmental Regulations

We consider compliance with environmental regulations and environmental sustainability a key strategic focus area and integral to our responsibility as a good corporate citizen. All our domestic steel making and processing operations, and our water treatment plant, have obtained and maintain ISO 14001 certification.

We believe we have established appropriate reserves to cover our environmental expenses. We have a well-established environmental compliance audit program that measures performance against applicable laws as well as against internal standards that have been established for all facilities. It is difficult to assess the possible effect of compliance with future requirements that differ from existing ones both domestically and internationally. As previously reported, we are unsure of the future financial impact to us from the U.S. Environmental Protection Agency’s (EPA) rule changes related to the Clean Air Act (CAA), Clean Water Act (CWA), waste and other environmental rules and regulations.

We and certain of our subsidiaries located in the U.S. have been identified as potentially responsible parties under the Toxic Substances Control Act (TSCA), Resource Conservation and Recovery Act (RCRA), CAA and CWA, as well as other laws. In general, certain cost allocations for investigation and remediation have been asserted by us against other entities, which are believed to be financially solvent and are expected to substantially fulfill their proportionate share of any obligations.

From time to time, we may be a party to lawsuits, claims or other proceedings related to environmental matters and/or receive notices of potential violations of environmental laws and regulations from the EPA and similar state or local authorities. As of December 31, 2020 and 2019, we recorded reserves for such environmental matters of $0.2 million and $1.2 million, respectively. Accruals related to such environmental matters represent management’s best estimate of the fees and costs associated with these matters. Although it is not possible to predict with certainty the outcome of such matters, management believes the ultimate disposition of these matters should not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Legal Proceedings

Information required by this section is incorporated herein by reference to “Item 3. Legal Proceedings”.

Patents, Trademarks and Licenses

While we own a number of U.S. and foreign patents, trademarks, licenses and copyrights, none are material to our products and production processes.

Human Capital

Employment

At December 31, 2020, we had approximately 2,000 employees, with about 62% of our employees covered under a collective bargaining agreement that expires in September 2021.

Health and safety

At TimkenSteel, operating safely and responsibly is our top priority. We have rigorous safety policies and practices in place to ensure that our workspaces provide a secure environment for our employees. We help ensure these policies are followed through education, training, evaluation and enforcement. To help emphasize that safety is of the upmost importance, a safety modifier is included in our annual incentive compensation plan for salaried employees. The safety modifier has the effect of increasing the overall incentive payout by five percent if the target safety

5

Table of Contents

 

metrics are achieved and decreasing the overall incentive payout by five percent if the target safety metric are not achieved. As of December 31, 2020, our OSHA recordable incident rate was 1.70 and our lost time incident rate was 0.34. Both rates came in below their respective targets for the year ended December 31, 2020.

Diversity and inclusion

Our commitment to diverse perspectives fuels our success and has enabled us to deliver innovate solutions throughout the life our business. We recognize that a diverse workforce and inclusive, engaging culture is key to our continued business success. Within our organization, we maintain employee resource groups which further promote diversity and inclusion. TimkenSteel is also proudly involved in several organizations that promote and foster diversity and inclusion in our community and industry.

Compensation and total rewards

We provide competitive compensation programs to help meet the needs of our employees. Our programs are designed to support the profitable growth of our business; attract, reward, and retain the talent we need to succeed; support the health and overall well-being of our employees; and reinforce a performance-based culture.

In addition to base compensation, we offer quarterly and annual incentive compensation, stock awards, and participation in various retirement plans. Furthermore, our Company also provides employer-sponsored health and wellness benefits to our employees.

Employee retention

We seek to retain the best people by providing them with opportunities to grow, build skills and be appreciated for their contributions as they work to serve our customers. Our employees are critical to our success and are the reason we continue to execute at a high level. We believe our continued focus on making employee engagement a top priority will help us provide high quality products to our customers.

We diligently track our employee retention and management continuously evaluates our employees’ retention risk. Additionally, our Company has an established voluntary turnover metric, which was not exceeded during the year ended December 31, 2020.

Employee training and development

We invest significant resources to develop talent with the right capabilities to deliver the growth and innovation needed to support our business strategy. We have designed curated training programs for employees at all levels in our SAP SuccessFactors learning software. For new managers, we have developed a rigorous training program to provide them with the resources needed to cultivate their skillset and aid them in becoming effective leaders in our business. TimkenSteel encourages our employees to constantly learn and grow and has aligned our performance management system to support this focus on continuous learning and development.

COVID-19 pandemic

At the onset of the COVID-19 pandemic, TimkenSteel was considered an "essential business" and therefore, the Company has been fully operational and serving its customers while strictly following all public health directives to ensure the safety of its employees.

Our cross-functional pandemic response team meets weekly to oversee and coordinate the Company’s overall response. The Company is committed to frequent communications with our employees and their families as well as customers, suppliers and other key stakeholders of TimkenSteel.

We have taken several necessary actions to keep our workforce safe. Employees who can work from home are doing so, and employees onsite are strictly following safe workplace practices including guidelines established by federal, state and local authorities for the areas in which we operate. We have added enhanced cleaning procedures in all plants and offices using the best practices provided by the Centers for Disease Control and Prevention (CDC). It is strongly encouraged that employees be vigilant with their personal hygiene and workplace hygiene and we regularly communicate the requirement for wearing of masks and that no one should come to work sick. To help reinforce these safety measures, we work closely with the United Steelworkers (USW). The Company also utilizes its onsite medical clinic - operated by a local health system - to provide additional support to its employees during the crisis. Since March 2020, TimkenSteel has performed hundreds of audits in its plants to ensure its employees remain diligent in these efforts.

As a result of the pandemic, the Company has implemented demand-driven layoffs, unpaid furloughs and temporary compensation reductions to both its employees and board of directors for a portion of 2020. In order to mitigate some of these actions, the Company extended health insurance to furloughed employees for a certain period. Further, the Company offered paid sick leave for certain periods and encouraged the use of our existing employee assistance programs to address wellness and mental health concerns.

Available Information

We use our Investor Relations website at http://investors.timkensteel.com, as a channel for routine distribution of important information, including news releases, analyst presentations and financial information. We post filings (including our annual, quarterly and current reports on

6

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Forms 10-K, 10-Q and 8-K, respectively; our proxy statements; and any amendments to those reports or statements) as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). All such postings and filings are available on our website free of charge. In addition, our website allows investors and other interested persons to sign up to automatically receive e-mail alerts when we post news releases and financial information on our website. The SEC also maintains a website, www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Annual Report unless expressly noted.

7

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ITEM 1A. RISK FACTORS

The following are certain risk factors that could affect our business, financial condition and results of operations. The risks that are highlighted below are not the only ones we face. You should carefully consider each of the following risks and all of the other information contained in this Annual Report on Form 10-K. Some of these risks relate principally to our business and the industry in which we operate, while others relate principally to our debt, the securities markets in general, ownership of our common shares and our spinoff from The Timken Company. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected.

Risks relating to our industry and our business

Competition in the steel industry, together with potential global overcapacity, could result in significant pricing pressure for our products.

Competition within the steel industry, both domestically and worldwide, is intense and is expected to remain so. The steel industry has historically been characterized by periods of excess global capacity and supply. Excess global capacity and supply has negatively affected and could continue to negatively affect domestic steel prices, which could adversely impact our results of operations and financial condition. High levels of steel imports into the U.S. could exacerbate a decrease in domestic steel prices.

In an effort to protect the domestic steel industry, the United States government implemented tariffs, duties and quotas for certain steel products imported from a number of countries into the United States. If these tariffs, duties and quotas expire or are repealed, it could result in substantial imports of foreign steel and create pressure on United States steel prices and the overall industry. This could have a material adverse effect on our operations.

Weakness in global economic conditions or in any of the industries or geographic regions in which we or our customers operate, as well as the cyclical nature of our customers’ businesses generally or sustained uncertainty in financial markets, could adversely impact our revenues and profitability by reducing demand and margins.

Our results of operations may be materially affected by conditions in the global economy generally and in global capital markets. There has been volatility in the capital markets and in the end-markets and geographic regions in which we or our customers operate, which has negatively affected our revenues. Many of the markets in which our customers participate are also cyclical in nature and experience significant fluctuations in demand for our steel products based on economic conditions, consumer demand, raw material and energy costs, and government actions, and many of these factors are beyond our control.

A decline in consumer and business confidence and spending, together with severe reductions in the availability and increased cost of credit, as well as volatility in the capital and credit markets, could adversely affect the business and economic environment in which we operate and the profitability of our business. We also are exposed to risks associated with the creditworthiness of our suppliers and customers. If the availability of credit to fund or support the continuation and expansion of our customers’ business operations is curtailed or if the cost of that credit is increased, the resulting inability of our customers or of their customers to either access credit or absorb the increased cost of that credit could adversely affect our business by reducing our sales or by increasing our exposure to losses from uncollectible customer accounts. These conditions and a disruption of the credit markets could also result in financial instability of some of our suppliers and customers. The consequences of such adverse effects could include the interruption of production at the facilities of our customers, the reduction, delay or cancellation of customer orders, delays or interruptions of the supply of raw materials or other inputs we purchase, and bankruptcy of customers, suppliers or other creditors. Any of these events could adversely affect our profitability, cash flow and financial condition.

We are dependent on our key customers.

As a result of our dependence on our key customers, we could experience a material adverse effect on our business, financial condition and results of operations if any of the following, among other things, were to occur: (a) a loss of any key customer, or a material amount of business from such key customer; (b) the insolvency or bankruptcy of any key customer; (c) a declining market in which customers reduce orders; or (d) a strike or work stoppage at a key customer facility, which could affect both its suppliers and customers. For the year ended December 31, 2020, sales to our 10 largest customers accounted for approximately 44% of our net sales. Additionally, customers continue to demand stronger and lighter products, among other adaptations to traditional products. We may not be successful in meeting these technological challenges and there may be increased liability exposure connected with the supply of additional products and services.

Any change in the operation of our raw material surcharge mechanisms, a raw material market index or the availability or cost of raw materials could materially affect our revenues, earnings, and cash flows.

We require substantial amounts of raw materials, including scrap metal and alloys, to operate our business. Many of our customer agreements contain surcharge pricing provisions that are designed to enable us to recover raw material cost increases. The surcharges are generally tied to a market index for that specific raw material. Historically, many raw material market indices have reflected significant fluctuations. Any change in a raw material market index could materially affect our revenues. Any change in the relationship between the market indices and our underlying costs could materially affect our earnings.

We rely on third parties to supply certain raw materials that are critical to the manufacture of our products. Purchase prices and availability of these critical raw materials are subject to volatility. At any given time we may be unable to obtain an adequate supply of these critical raw

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materials on a timely basis, on acceptable price and other terms, or at all. If suppliers increase the price of critical raw materials, we may not have alternative sources of supply. In addition, to the extent we have quoted prices to customers and accepted customer orders or entered into agreements for products prior to purchasing necessary raw materials, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials.

Our operating results depend in part on continued successful research, development and marketing of products and services.

The success of products and services depends on their initial and continued acceptance by our customers. Our business is affected, to varying degrees, by technological change and corresponding shifts in customer demand, which could result in unpredictable product transitions or shortened life cycles. We may experience difficulties or delays in the research, development, production, or marketing of products and services that may prevent us from recouping or realizing a return on the investments required to bring products and services to market.

New technologies in the steel industry may: (a) improve cost competitiveness; (b) increase production capabilities; or (c) improve operational efficiency compared to our current production methods. However, we may not have sufficient capital to invest in such technologies or to make certain capital improvements, and may, from time to time, incur cost over-runs and difficulties adapting and fully integrating these technologies or capital improvements into our existing operations. We may also encounter control or production restrictions, or not realize the cost benefit from such capital-intensive technology adaptations or capital improvements to our current production processes.

Product liability, warranty and product quality claims could adversely affect our operating results.

We produce high-performance carbon and alloy steel, sold as ingots, bars, tubes and billets in a variety of chemistries, lengths and finishes designed for our customers’ demanding applications. Failure of the materials that are included in our customers’ applications could give rise to product liability or warranty claims. There can be no assurance that our insurance coverage will be adequate or continue to be available on terms acceptable to us. If we fail to meet a customer’s specifications for its products, we may be subject to product quality costs and claims. A successful warranty or product liability claim against us could have a material adverse effect on our earnings.

We are subject to extensive environmental, health and safety laws and regulations, which impose substantial costs and limitations on our operations, and environmental, health and safety compliance and liabilities may be more costly than we expect.

We are subject to extensive federal, state, and local environmental, health and safety laws and regulations concerning matters such as worker health and safety, air emissions, wastewater discharges, hazardous material and solid and hazardous waste use, generation, handling, treatment and disposal and the investigation and remediation of contamination. We are subject to the risk of substantial liability and limitations on our operations due to such laws and regulations. The risks of substantial costs and liabilities related to compliance with these laws and regulations, which tend to become more stringent over time, are an inherent part of our business, and future conditions may develop, arise or be discovered that create substantial environmental compliance or remediation or other liabilities and costs.

Compliance with environmental, health and safety legislation and regulatory requirements may prove to be more limiting and costly than we anticipate. To date, we have committed significant expenditures in our efforts to achieve and maintain compliance with these requirements, and we expect that we will continue to make significant expenditures related to such compliance in the future. From time to time, we may be subject to legal proceedings brought by private parties or governmental authorities with respect to environmental matters, including matters involving alleged contamination, property damage or personal injury. New laws and regulations, including those that may relate to emissions of greenhouse gases, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements, could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition or results of operations.

From both a medium- and long-term perspective, we are likely to see an increase in costs relating to our assets that emit relatively significant amounts of greenhouse gases as a result of new and existing legal and regulatory initiatives. These initiatives will be either voluntary or mandatory and may impact our operations directly or through our suppliers or customers. Until the timing, scope and extent of any future legal and regulatory initiatives become known, we cannot predict the effect on our business, financial condition or results of operations.

Unexpected equipment failures or other disruptions of our operations may increase our costs and reduce our sales and earnings due to production curtailments or shutdowns.

Interruptions in production capabilities would likely increase our production costs and reduce sales and earnings for the affected period. In addition to equipment failures, our facilities and information technology systems are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. Our manufacturing processes are dependent upon critical pieces of equipment for which there may be only limited or no production alternatives, such as furnaces, continuous casters and rolling equipment, as well as electrical equipment, such as transformers, and this equipment may, on occasion, be out of service as a result of unanticipated failures. In the future, we may experience material plant shutdowns or periods of reduced production as a result of these types of equipment failures, which could cause us to lose or prevent us from taking advantage of various business opportunities or prevent us from responding to competitive pressures.

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Our business is capital-intensive, and if there are downturns in the industries we serve, we may be forced to significantly curtail or suspend operations with respect to those industries, which could result in our recording asset impairment charges or taking other measures that may adversely affect our results of operations and profitability.

Our business operations are capital-intensive. If there are downturns in the industries we serve, we may be forced to significantly curtail or suspend our operations with respect to those industries, including laying-off employees, recording asset impairment charges and other measures. In addition, we may not realize the benefits or expected returns from announced plans, programs, initiatives and capital investments. Any of these events could adversely affect our results of operations and profitability.

The cost and availability of electricity and natural gas are also subject to volatile market conditions.

Steel producers like us consume large amounts of energy. We rely on third parties for the supply of energy resources we consume in our steelmaking activities. The prices for and availability of electricity, natural gas, oil and other energy resources are also subject to volatile market conditions, often affected by weather conditions as well as political and economic factors beyond our control. Any increase in the prices for electricity, natural gas, oil and other energy resources could materially affect our costs and therefore our earnings and cash flows.

As a large consumer of electricity and gas, we must have dependable delivery in order to operate. Accordingly, we are at risk in the event of an energy disruption. Prolonged black-outs or brown-outs or disruptions caused by natural disasters or governmental action would substantially disrupt our production.

Moreover, many of our finished steel products are delivered by truck. Unforeseen fluctuations in the price of fuel would also have a negative impact on our costs or on the costs of many of our customers.

In addition, changes in certain environmental laws and regulations, including those that may impose output limitations or higher costs associated with climate change or greenhouse gas emissions, could substantially increase the cost of manufacturing and raw materials, such as energy, to us and other U.S. steel producers.

Work stoppages or similar difficulties could significantly disrupt our operations, reduce our revenues and materially affect our earnings.

A work stoppage at one or more of our facilities could have a material adverse effect on our business, financial condition and results of operations. As of December 31, 2020, approximately 62% of our employees were covered under a collective bargaining agreement that expires in September 2021. Any failure to negotiate and conclude a new collective bargaining agreement with the union when the existing agreement expires could cause work interruptions or stoppages. Also, if one or more of our customers were to experience a work stoppage, that customer may halt or limit purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations.

A significant portion of our manufacturing facilities are located in Stark County, Ohio, which increases the risk of a significant disruption to our business as a result of unforeseeable developments in this geographic area.

It is possible that we could experience prolonged periods of reduced production due to unforeseen catastrophic events occurring in or around our manufacturing facilities in Stark County, Ohio. As a result, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers, meet customer shipment deadlines or address other significant issues, any of which could have a material adverse effect on our business, financial condition or results of operations.

We have significant pension and retiree health care costs, as well as future cash contribution requirements, which may negatively affect our results of operations and cash flows.

We maintain retiree health care and defined benefit pension plans covering many of our domestic employees and former employees upon their retirement. These benefit plans have significant liabilities that are not fully funded, which will require additional cash funding in future years. Minimum contributions to domestic qualified pension plans are regulated under the Employee Retirement Income Security Act of 1974 (ERISA) and the Pension Protection Act of 2006 (PPA).

The level of cash funding for our defined benefit pension plans in future years depends upon various factors, including voluntary contributions that we may make, future pension plan asset performance, actual interest rates, union negotiated benefit changes, future government regulations, and other factors, many of which are not within our control. In addition, assets held by the trusts for our pension plan and our trust for retiree health care and life insurance benefits are subject to the risks, uncertainties and variability of the financial markets. See “Note 15 - Retirement and Postretirement Plans” in the Notes to the Consolidated Financial Statements for a discussion of assumptions and further information associated with these benefit plans.

We may incur restructuring and impairment charges that could materially affect our profitability.

Changes in business or economic conditions, or our business strategy, may result in actions that require us to incur restructuring and impairment charges in the future, which could have a material adverse effect on our earnings. For additional information on current restructuring and impairment charges, refer to “Note 5 - Restructuring Charges” and “Note 6 - Disposition of Non-Core Assets” in the Notes to Consolidated Financial Statements.

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Our ability to use our net operating loss, interest, and credit carryforwards to offset future taxable income may be subject to certain limitations.

As of December 31, 2020, we have loss carryforwards totaling $406.8 million (of which $348.3 million relates to the U.S. and $58.5 million relates to various non-U.S. jurisdictions), having various expiration dates, as well as certain credit carryforwards. The majority of the non-U.S. loss carryforwards represent local country net operating losses for entities treated as branches of TimkenSteel under U.S. tax law. Operating losses generated in the U.S. resulted in a decrease in the carrying value of our U.S. deferred tax liability to the point of a net U.S. deferred tax asset at December 31, 2016. At that time, we assessed, based upon operating performance in the U.S. and industry conditions that it was more likely than not we would not realize a portion of our U.S. deferred tax assets. The Company recorded a valuation allowance in 2016 and remained in a valuation allowance position in 2020. Going forward, the need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in our effective tax rate. We will maintain a valuation allowance against our deferred tax assets in the U.S. and applicable foreign countries until sufficient positive evidence exists to eliminate them. Our ability to utilize our net operating loss, interest, and credit carryforwards is dependent upon our ability to generate taxable income in future periods and may be limited due to restrictions imposed on utilization of net operating loss, interest, and credit carryforwards under federal and state laws upon a change in ownership. Refer to “Note 8 - Income Tax Provision” in the Notes to the Consolidated Financial Statements for more information.

Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended (the Code), provide an annual limitation on our ability to utilize our U.S. net operating loss and credit carryforwards against future U.S. taxable income in the event of a change in ownership, as defined in the Code, which could result from one or more transactions involving our shares, including transactions that are outside of our control, as well as the issuance of shares upon conversion of our 6.00% Convertible Senior Notes due 2021 (Convertible Senior Notes due 2021) or our 6.00% Convertible Senior Notes due 2025 (Convertible Senior Notes due 2025, and together with the Convertible Senior Notes due 2021, the Convertible Notes). Accordingly, such transactions could adversely impact our ability to offset future tax liabilities and, therefore, adversely affect our financial condition, net income and cash flow. Refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements for more information.

Risks related to our debt

Deterioration in our asset borrowing base could adversely affect our financial health and restrict our ability to borrow necessary cash to support the needs of our business and fulfill our pension obligations.

As of December 31, 2020, we had outstanding debt of approximately $78.2 million. Our debt may:

 

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make it more difficult for us to satisfy our financial obligations under our indebtedness and our contractual and commercial commitments and increase the risk that we may default on our debt obligations;

 

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require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available for working capital, capital expenditures and other general corporate purposes;

 

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limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other investments, or general corporate purposes, which may limit the ability to execute our business strategy and affect the market price of our common shares;

 

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heighten our vulnerability to downturns in our business, our industry or in the general economy and restrict us from exploiting business opportunities or making acquisitions;

 

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place us at a competitive disadvantage compared to those of our competitors that may have less debt;

 

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limit management’s discretion in operating our business;

 

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limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate or the general economy; and

 

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result in higher interest expense if interest rates increase and we have outstanding floating rate borrowings.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our debt. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Further, we may need to refinance all or a portion of our debt on or before maturity, and we cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms or at all.

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Restrictive covenants in the agreements governing our indebtedness may restrict our ability to operate our business, which may affect the market price of our common shares.

On October 15, 2019, the Company, as borrower, and certain domestic subsidiaries of the Company, as subsidiary guarantors, entered into a Third Amended and Restated Credit Agreement (the Amended Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent (the Administrative Agent), Bank of America, N.A., as syndication agent, and the other lenders party thereto (collectively, the Lenders), which further amended and restated the Company’s existing Credit Agreement dated as of January 26, 2018.

A breach of any of our covenants in the agreements governing our indebtedness could result in a default, which could allow the lenders to declare all amounts outstanding under the applicable debt immediately due and payable and which may affect the market price of our common shares. We may also be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under our indebtedness. Refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements for more detail on the Amended Credit Agreement.

The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the Convertible Notes (refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements) is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely our common shares (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, under certain circumstances, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

Our capital resources may not be adequate to provide for all of our cash requirements, and we are exposed to risks associated with financial, credit, capital and banking markets.

In the ordinary course of business, we will seek to access competitive financial, credit, capital and/or banking markets. Currently, we believe we have adequate capital available to meet our reasonably anticipated business needs based on our historic financial performance, as well as our expected financial position. However, if we need to obtain additional financing in the future, to the extent our access to competitive financial, credit, capital and/or banking markets was to be impaired, our operations, financial results and cash flows could be adversely impacted.

Risks related to our common shares

The price of our common shares may fluctuate significantly.

The market price of our common shares may fluctuate significantly in response to many factors, including:

 

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actual or anticipated changes in operating results or business prospects;

 

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changes in financial estimates by securities analysts;

 

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an inability to meet or exceed securities analysts’ estimates or expectations;

 

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conditions or trends in our industry or sector;

 

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the performance of other companies in our industry or sector and related market valuations;

 

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announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives;

 

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general financial, economic or political instability;

 

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hedging or arbitrage trading activity in our common shares;

 

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changes in interest rates;

 

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capital commitments;

 

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additions or departures of key personnel; and

 

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future sales of our common shares or securities convertible into, or exchangeable or exercisable for, our common shares.

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Many of the factors listed above are beyond our control. These factors may cause the market price of our common shares to decline, regardless of our financial condition, results of operations, business or prospects.

We may issue preferred shares with terms that could dilute the voting power or reduce the value of our common shares.

Our articles of incorporation authorize us to issue, without the approval of our shareholders, one or more classes or series of preferred shares having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common shares respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred shares could dilute the voting power or reduce the value of our common shares. For example, we could grant holders of preferred shares the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred shares could affect the residual value of the common shares.

Provisions in our corporate documents and Ohio law could have the effect of delaying, deferring or preventing a change in control of us, even if that change may be considered beneficial by some of our shareholders, which could reduce the market price of our common shares.

The existence of some provisions of our articles of incorporation and regulations and Ohio law could have the effect of delaying, deferring or preventing a change in control of us that a shareholder may consider favorable. These provisions include:

 

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providing that our board of directors fixes the number of members of the board;

 

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providing for the division of our board of directors into three classes with staggered terms;

 

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establishing advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted on by shareholders at shareholder meetings; and

 

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authorizing the issuance of “blank check” preferred shares, which could be issued by our board of directors to increase the number of outstanding securities of ours with voting rights and thwart a takeover attempt.

As an Ohio corporation, we are subject to Chapter 1704 of the Ohio Revised Code. Chapter 1704 prohibits certain corporations from engaging in a “Chapter 1704 transaction” (described below) with an “interested shareholder” for a period of three years after the date of the transaction in which the person became an interested shareholder, unless, among other things, prior to the interested shareholder’s share acquisition date, the directors of the corporation have approved the transaction or the purchase of shares on the share acquisition date.

After the three-year moratorium period, the corporation may not consummate a Chapter 1704 transaction unless, among other things, it is approved by the affirmative vote of the holders of at least two-thirds of the voting power in the election of directors and the holders of a majority of the voting shares, excluding all shares beneficially owned by an interested shareholder or an affiliate or associate of an interested shareholder, or the shareholders receive certain minimum consideration for their shares. A Chapter 1704 transaction includes certain mergers, sales of assets, consolidations, combinations and majority share acquisitions involving an interested shareholder. An interested shareholder is defined to include, with limited exceptions, any person who, together with affiliates and associates, is the beneficial owner of a sufficient number of shares of the corporation to entitle the person, directly or indirectly, alone or with others, to exercise or direct the exercise of 10% or more of the voting power in the election of directors after taking into account all of the person’s beneficially owned shares that are not then outstanding.

We are also subject to Section 1701.831 of the Ohio Revised Code, which requires the prior authorization of the shareholders of certain corporations in order for any person to acquire, either directly or indirectly, shares of that corporation that would entitle the acquiring person to exercise or direct the exercise of 20% or more of the voting power of that corporation in the election of directors or to exceed specified other percentages of voting power. The acquiring person may complete the proposed acquisition only if the acquisition is approved by the affirmative vote of the holders of at least a majority of the voting power of all shares entitled to vote in the election of directors represented at the meeting, excluding the voting power of all “interested shares.” Interested shares include any shares held by the acquiring person and those held by officers and directors of the corporation.

We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal, and are not intended to make our Company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some shareholders and could delay, defer or prevent an acquisition that our board of directors determines is not in the best interests of our Company and our shareholders, which under certain circumstances could reduce the market price of our common shares.

Risks relating to the spinoff

We remain subject to continuing contingent liabilities of The Timken Company following the spinoff.

There are several significant areas where the liabilities of The Timken Company may yet become our obligations. The separation and distribution agreement and employee matters agreement generally provide that we are responsible for substantially all liabilities that relate to our steel business

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activities, whether incurred prior to or after the spinoff, as well as those liabilities of The Timken Company specifically assumed by us. In addition, under the Internal Revenue Code (Code) and the related rules and regulations, each corporation that was a member of The Timken Company consolidated tax reporting group during any taxable period or portion of any taxable period ending on or before the completion of the spinoff is jointly and severally liable for the federal income tax liability of the entire The Timken Company consolidated tax reporting group for that taxable period. In connection with the spinoff, we entered into a tax sharing agreement with The Timken Company that allocated the responsibility for prior period taxes of The Timken Company consolidated tax reporting group between us and The Timken Company. However, if The Timken Company is unable to pay any prior period taxes for which it is responsible, we could be required to pay the entire amount of such taxes. Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans as well as other contingent liabilities.

Potential liabilities associated with certain assumed obligations under the tax sharing agreement cannot be precisely quantified at this time.

Under the tax sharing agreement with The Timken Company, we are responsible generally for all taxes paid after the spinoff attributable to us or any of our subsidiaries, whether accruing before, on or after the spinoff. We also have agreed to be responsible for, and to indemnify The Timken Company with respect to, all taxes arising as a result of the spinoff (or certain internal restructuring transactions) failing to qualify as transactions under Sections 368(a) and 355 of the Code for U.S. federal income tax purposes (which could result, for example, from a merger or other transaction involving an acquisition of our shares) to the extent such tax liability arises as a result of any breach of any representation, warranty, covenant or other obligation by us or certain affiliates made in connection with the issuance of the tax opinion relating to the spinoff or in the tax sharing agreement. As described above, such tax liability would be calculated as though The Timken Company (or its affiliate) had sold its common shares of our Company in a taxable sale for their fair market value, and The Timken Company (or its affiliate) would recognize taxable gain in an amount equal to the excess of the fair market value of such shares over its tax basis in such shares. That tax liability could have a material adverse effect on our Company. As of December 31, 2020, there are no known or recorded liabilities associated with the spinoff.

Risks related to COVID-19

The COVID-19 pandemic could have a material, adverse impact on our operations and financial results including cash flows and liquidity.   

The COVID-19 pandemic has had a negative impact on our 2020 results of operations. Although it is not possible to predict the ultimate impact of COVID-19, including on our business, results of operations, financial position or cash flows, such impacts that may be material include, but are not limited to: (i) reduced sales and profit levels; (ii) slower collection of accounts receivable and potential increases in uncollectible accounts receivable; (iii) increased operational risks as a result of manufacturing facility disruptions; (iv) delays and disruptions in the availability of and timely delivery of materials and components used in our operations, as well as increased costs for such material and components, and (v) increased cybersecurity risks including vulnerability to security breaches, information technology disruptions and other similar events as a result of a substantial number of employees utilizing remote work arrangements. We will continue to closely monitor the impact of the COVID-19 pandemic on our Company.

General risk factors

We may be subject to risks relating to our information technology systems and cybersecurity.

We rely on information technology systems to process, transmit and store electronic information and manage and operate our business. We face the challenge of supporting our older systems and implementing upgrades when necessary. Additionally, a breach in security could expose us and our customers and suppliers to risks of misuse of confidential information, manipulation and destruction of data, production downtimes and operations disruptions, which in turn could adversely affect our reputation, competitive position, business or results of operations. While we have taken reasonable steps to protect the Company from cybersecurity risks and security breaches (including enhancing our firewall, workstation, email security and network monitoring and alerting capabilities, and training employees around phishing, malware and other cybersecurity risks), and we have policies and procedures to prevent or limit the impact of systems failures, interruptions, and security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. Although we rely on commonly used security and processing systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from all potential compromises or breaches of security.

We may not be able to execute successfully on our business strategies or achieve the intended results.

Our business strategy includes driving organizational changes to reduce costs and enhance profitable and sustainable growth. We have taken company-wide actions including the restructuring of the business support functions and the evaluation of non-core assets. If we are unsuccessful in executing on our business strategies, it could negatively impact profitability and liquidity, requiring us to alter our strategy.

If we are unable to attract and retain key personnel, our business could be materially adversely affected.

Our business substantially depends on the continued service of key members of our management. The loss of the services of a significant number of members of our management could have a material adverse effect on our business. Modern steel-making uses specialized techniques and advanced equipment that requires experienced engineers and skilled laborers. Our future success will depend on our ability to attract and retain

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such highly skilled personnel, as well as finance, marketing and senior management professionals. Competition for these employees is intense, and we could experience difficulty from time to time in hiring and retaining the personnel necessary to support our business. If we do not succeed in retaining our current employees and attracting new high-quality employees, our business could be materially adversely affected.

We are subject to a wide variety of domestic and foreign laws and regulations that could adversely affect our results of operations, cash flow or financial condition.

We are subject to a wide variety of domestic and foreign laws and regulations, and legal compliance risks, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trading laws, privacy laws and laws governing improper business practices. We are affected by new laws and regulations, and changes to existing laws and regulations, including interpretations by courts and regulators. With respect to tax laws, with the finalization of specific actions (Actions) contained within the Organization for Economic Development and Cooperation’s (OECD) Base Erosion and Profit study, many OECD countries have acknowledged their intent to implement the Actions and update their local tax regulations. The extent, if any, to which countries in which we operate adopt and implement the Actions could affect our effective tax rate and our future results from non-U.S. operations.

Compliance with the laws and regulations described above or with other applicable foreign, federal, state, and local laws and regulations currently in effect or that may be adopted in the future could materially adversely affect our competitive position, operating results, financial condition and liquidity.

If our internal controls are found to be ineffective, our financial results or our stock price may be adversely affected.

Our most recent evaluation resulted in our conclusion that, as of December 31, 2020, our internal control over financial reporting was effective. We believe that we currently have adequate internal control procedures in place for future periods. However, if our internal control over financial reporting is found to be ineffective, investors may lose confidence in the reliability of our financial statements, which may adversely affect our stock price.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We are headquartered in Canton, Ohio, at a facility we own in fee. We have facilities in three countries: U.S., China and Mexico.

We have manufacturing facilities at multiple locations in the U.S. These manufacturing facilities are located in Canton and Eaton, Ohio and Columbus, North Carolina. In addition to these manufacturing facilities, we own or lease warehouses and distribution facilities in the U.S., Mexico and China. The aggregate floor area of these facilities is 3.6 million square feet, of which approximately 70,000 square feet is leased and the rest is owned in fee. The buildings occupied by us are principally made of brick, steel, reinforced concrete and concrete block construction.

Our facilities vary in age and condition, and each of them has an active maintenance program to ensure a safe operating environment and to keep the facilities in good condition. We believe our facilities are in satisfactory operating condition and are suitable and adequate to conduct our business and support future growth.

Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of our melt capacity utilization.

 

 

 

 

 

 

 

 

 

 

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We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of our management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Canton, Ohio U.S. EPA Notice of Violation

The U.S. Environmental Protection Agency (EPA) issued two related Notices of Violation (NOV) to TimkenSteel on August 5, 2014 and November 2, 2015, respectively. Those matters were settled pursuant to a Consent Agreement and Final Order (CAFO) effective on August 17, 2020 and an Administrative Consent Order (ACO) effective on August 13, 2020. Pursuant to the CAFO, the company paid a civil penalty of $0.35 million on or about August 20, 2020, and under the ACO the company committed to make approximately $1.0 million in clean-air related capital improvements, principally at the Harrison manufacturing facility, within one year from the effective date of the ACO.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of our Company as of February 25, 2021, are as follows:

 

Name

 

Age

 

Current Position

Michael S. Williams

 

60

 

Chief Executive Officer and President

Kristopher R. Westbrooks

 

42

 

Executive Vice President and Chief Financial Officer

Kristine C. Syrvalin

 

52

 

Executive Vice President, General Counsel and Secretary

Thomas D. Moline

 

58

 

Executive Vice President, Commercial Operations

William P. Bryan

 

61

 

Executive Vice President, Manufacturing, Supply Chain and Information Technology

Michael S. Williams is the President and Chief Executive Officer of TimkenSteel Corporation, a position he has held since January 2021. Previously, Mr. Williams served as CEO of Bayou Steel Group, a U.S. producer of structural steel and merchant bar, from May 2019 to September 2019, and as President of Outokumpu Americas for Outokumpu Oyj, a global leader in the stainless steel industry, from 2015 to 2019. Before that, Mr. Williams held a number of leadership roles at US Steel Corporation, a Fortune 250 company and leading integrated steel producer, from 2006 to 2015, including Senior Vice President, North American Flat Rolled and, most recently, Senior Vice President, Strategic Planning and Business Development. Earlier in his career, Mr. Williams served as Vice President of Commercial Products at Special Metals Corporation (a leader in the invention, production and supply of high-nickel alloys) and, prior to that, as Chairman and Chief Executive Officer of Ormet Corporation (a manufacturer of foil, sheet, billet and other aluminum products). Mr. Williams earned his bachelor’s of science degree in information science from the University of Pittsburgh.

Kristopher R. Westbrooks is Executive Vice President and Chief Financial Officer, a position he has held since September 2018. Previously, Mr. Westbrooks served from April 2015 until August 2018 as Vice President, Corporate Controller and Chief Accounting Officer at A. Schulman, Inc., a global supplier of high-performance plastic compounds, composites and powders. From 2011 until his appointment as Chief Accounting Officer in 2015, Mr. Westbrooks held various finance roles of increasing responsibility at A. Schulman, Inc. He earned his bachelor’s of science degree in business and master’s degree in accountancy from Miami University of Ohio and is a certified public accountant.

Kristine C. Syrvalin is Executive Vice President, General Counsel and Secretary of TimkenSteel Corporation, a position she has held since January 2021. Prior to assuming her current role, she had served as Assistant General Counsel and Vice President - Ethics and Compliance for TimkenSteel since October 2014. Previously, Ms. Syrvalin served as Vice President, Assistant General Counsel and Corporate Secretary for OMNOVA Solutions Inc., a global manufacturer of emulsion polymers, specialty chemicals, and functional and decorative surfaces, from September 2001 until October 2014. She earned her bachelor’s degree from Miami University of Ohio and her juris doctor degree from Case Western Reserve University School of Law.

Thomas D. Moline is Executive Vice President of Commercial Operations, a position he has held since July 2017. Prior to assuming his current role, Mr. Moline served as Executive Vice President of Manufacturing, where he led steel plant operations. Since joining The Timken Company in 1984, Mr. Moline held a variety of leadership positions, including as an engineer on the team that built the Faircrest facility. He earned his bachelor’s degree in manufacturing engineering from Miami University of Ohio.

William P. Bryan is Executive Vice President of Manufacturing, Supply Chain and Information Technology, a position he has held since assuming responsibility for manufacturing operations in addition to his then existing role as Executive Vice President, Supply Chain and Information Technology in 2017. Since joining The Timken Company in 1977, Mr. Bryan served in various positions related to supply chain, economics and information technology in both the U.S. and Europe. He holds bachelor's and master's degrees in business administration from Kent State University. Mr. Bryan also completed the Executive Development for Global Excellence (EDGE) program at the University of Virginia's Darden School of Business.

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PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Quarterly Common Stock Prices and Cash Dividends Per Share:

Our common shares are traded on the New York Stock Exchange (NYSE) under the symbol “TMST.” The estimated number of record holders of our common shares at December 31, 2020 was 3,421.

Our Amended Credit Agreement places certain limitations on the payment of cash dividends. Please refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements and the Results of Operations for additional discussion.

Issuer Purchases of Common Shares:

Our Amended Credit Agreement places certain limitations on our ability to purchase our common shares. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional discussion.

Securities Authorized for Issuance Under Equity Compensation Plans:

The following table sets forth certain information as of December 31, 2020, regarding equity compensation plans maintained by us on that date, the TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan (“2014 Plan”) and the TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan (the “2020 Plan” and, together with the 2014 Plan, the “Equity Plans”):

 

 

(a)

 

 

(b)

 

 

(c)

 

Plan category

 

Number of

securities to be

issued upon exercise of

outstanding options,

warrants and rights (1)

 

 

Weighted-average

exercise price

of outstanding options,

warrants and rights (2)

 

 

Number of securities

remaining available for

future issuance under

equity compensation plans reflected in column (a) (3)

 

Equity compensation plans approved by security holders(4)

 

 

4,571,736

 

 

$

18.61

 

 

 

2,160,931

 

Equity compensation plans not approved by security holders

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

 

4,571,736

 

 

$

18.61

 

 

 

2,160,931

 

(1) The amount shown in column (a) includes the following: nonqualified stock options - 2,931,065; deferred shares – 369,340; performance-based restricted stock units – 258,447; and time-based restricted stock units – 1,012,884 (which includes 684,407 cliff-vested restricted stock units).

(2)  The weighted average exercise price in column (b) includes nonqualified stock options only.

(3)  The amount shown in column (c) represents common shares remaining available under the 2020 Plan, under which the Compensation Committee is authorized to make awards of option rights, appreciation rights, restricted shares, restricted stock units, deferred shares, performance shares, performance units and cash incentive awards. Awards may be credited with dividend equivalents payable in the form of common shares. No additional awards may be under the 2014 Plan.

(4) The Company also maintains the Director Deferred Compensation Plan pursuant to which non-employee Directors may defer receipt of common shares authorized for issuance under the Equity Plan. The table does not include separate information about this plan because it merely provides for the deferral, rather than the issuance, of common shares.                         

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Performance Graph:

The following graph compares the cumulative total return of our common shares with the cumulative total return of the Standard & Poor’s (S&P) MidCap 400 Index and S&P Steel Group Index, assuming $100 was invested and that cash dividends were reinvested for the period from July 1, 2014 through December 31, 2020.

 

 

Date

 

TimkenSteel

Corporation

 

 

S&P MidCap

400 Index

 

 

S&P 500

Steel Index

 

July 1, 2014

 

$

100.00

 

 

$

100.00

 

 

$

100.00

 

December 31, 2014

 

$

96.71

 

 

$

102.11

 

 

$

95.49

 

December 31, 2015

 

$

22.29

 

 

$

99.89

 

 

$

80.49

 

December 31, 2016

 

$

41.18

 

 

$

120.61

 

 

$

122.43

 

December 31, 2017

 

$

37.59

 

 

$

131.51

 

 

$

135.49

 

December 31, 2018

 

$

21.63

 

 

$

115.08

 

 

$

127.04

 

December 31, 2019

 

$

19.95

 

 

$

142.75

 

 

$

107.22

 

December 31, 2020

 

$

11.85

 

 

$

159.61

 

 

$

101.33

 

 

This performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.

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ITEM 6. SELECTED FINANCIAL DATA

 

 

Year Ended December 31,

 

(dollars and shares in millions, except per share data)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

830.7

 

 

$

1,208.8

 

 

$

1,610.6

 

 

$

1,329.2

 

 

$

869.5

 

Net (loss) income

 

 

(61.9

)

 

 

(110.0

)

 

 

(10.0

)

 

 

(31.3

)

 

 

(105.5

)

Earnings (loss) per share(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.38

)

 

$

(2.46

)

 

$

(0.22

)

 

$

(0.70

)

 

$

(2.39

)

Diluted

 

$

(1.38

)

 

$

(2.46

)

 

$

(0.22

)

 

$

(0.70

)

 

$

(2.39

)

Cash dividends declared per share

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Weighted average shares outstanding, diluted

 

 

45.0

 

 

 

44.8

 

 

 

44.6

 

 

 

44.4

 

 

 

44.2

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

994.0

 

 

$

1,085.2

 

 

$

1,275.3

 

 

$

1,212.6

 

 

$

1,069.9

 

Long-term debt

 

 

39.3

 

 

 

168.6

 

 

 

189.1

 

 

 

165.3

 

 

 

136.6

 

Total shareholders’ equity

 

 

507.5

 

 

 

563.1

 

 

 

612.9

 

 

 

616.7

 

 

 

597.4

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per share(2)

 

$

11.28

 

 

$

12.57

 

 

$

13.74

 

 

$

13.89

 

 

$

13.52

 

(1) See “Note 9 - Earnings (Loss) Per Share” in the Notes to the Consolidated Financial Statements for additional information.

(2) Book value per share is calculated by dividing total shareholders’ equity (as of the period end) by the weighted average shares outstanding, diluted.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in millions, except per share data)

Business Overview

We manufacture alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. Our portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), value-added solutions such as precision steel components, and billets. In addition, we supply machining and thermal treatment services and manage raw material recycling programs, which are also used as a feeder system for our melt operations. Our products and services are used in a diverse range of demanding applications in the following market sectors: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and OCTG.

SBQ steel is made to restrictive chemical compositions and high internal purity levels and is used in critical mechanical applications. We make these products from nearly 100% recycled steel, using our expertise in raw materials to create custom steel products. We focus on creating tailored products and services for our customers’ most demanding applications. Our engineers are experts in both materials and applications, so we can work closely with each customer to deliver flexible solutions related to our products as well as to their applications and supply chains.

The SBQ bar, tube, and billet production processes take place at our Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets we produce and includes three manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. Our value-added solutions production processes take place at two downstream manufacturing facilities: Tryon Peak (Columbus, North Carolina) and St. Clair (Eaton, Ohio). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of our market sectors. As a result, investments in our facilities and resource allocation decisions affecting our operations are designed to benefit the overall business, not any specific aspect of the business.

During the first quarter of 2020, management completed its previously announced plan to close the Company’s TimkenSteel Material Services facility in Houston, Texas. See “Note 6 - Disposition of Non-Core Assets” in the Notes to the Consolidated Financial Statements for additional information.

 

On February 16, 2021, management announced a plan to indefinitely idle our Harrison melt and cast assets, late in the first quarter of 2021. Going forward, all of the Company’s melting and casting activities will take place at the Faircrest location. We are working collaboratively with employees, suppliers and a number of customers to ensure a well-organized and efficient transition. Our rolling and finishing operations at Harrison will not be impacted by these actions. Estimated annual cash savings from the idling of Harrison’s melt and cast assets are $15 million to $20 million. See “Note 20 – Subsequent Events” in the Notes to the Consolidated Financial Statements for additional information.

We conduct our business activities and report financial results as one business segment. The presentation of financial results as one reportable segment is consistent with the way we operate our business and is consistent with the manner in which the CODM evaluates performance and makes resource and operating decisions for the business as described above. Furthermore, the Company notes that monitoring financial results as one reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of our operations.

Markets We Serve

We sell products and services that are used in a diverse range of demanding applications around the world. No one customer accounted for 10% or more of net sales in 2020.

Key indicators for our market include the U.S. light vehicle production Seasonally Adjusted Annual Rate, oil and gas rig count activity and U.S. footage drilled, and industrial production for agriculture and construction markets, distribution, and mining and oil field machinery products. In addition, we closely monitor the Purchasing Managers’ Index, which is a leading indicator for our overall business.

Impact of COVID-19 Pandemic

We continue to closely monitor the impact of the COVID-19 pandemic on our Company, employees, customers and supply chain. The full extent to which the COVID-19 pandemic will impact our operations and financial results is uncertain and ultimately will depend on, among many other factors, the duration of the pandemic, further Federal and State government actions and the speed of economic recovery. We estimate the primary impact of COVID-19 on the Company was lost sales of approximately $265 million for the year ended December 31, 2020, as compared to expectations established prior to the onset of the pandemic.

In response to the significant reduction in customer demand resulting from the COVID-19 crisis, the Company has taken additional actions to further reduce operating expenses, conserve cash and maximize liquidity. The following actions began in the second quarter of 2020:

 

•

Reduced interim CEO and senior executives’ base salaries by 20 percent and other executives’ base salaries by 10 percent, began on May 1, 2020 and ended on December 1, 2020;

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•

Reduced cash retainer for its board of directors by 20 percent beginning with the second-quarter 2020, and reduced the value of the board’s annual equity grant by 20 percent, this was reinstated to its full amount going forward on December 1, 2020;

 

•

Suspended the Company’s 401(k) plan matching contributions for salaried employees, effective June 1 and will be reinstated as of March 1, 2021;

 

•

Implemented unpaid rolling furloughs for approximately 90 percent of salaried employees, with an average 5 weeks of unpaid furloughs per employee, beginning in early April 2020 and ending in late July 2020;

 

•

Deferred Social Security payroll tax remittance as permitted by the CARES Act;

 

•

Continued to maintain flexible production schedules at all plants to align operations with customer demand, resulting in the temporary layoff of manufacturing employees; and

 

•

Reduced 2020 capital expenditures to $16.9 million which was below planned spending of approximately $30 million at the beginning of 2020.

Since implementation in the second quarter of 2020, the Company’s COVID-19 related actions saved approximately $15 million in cash and reduced administrative expenses by approximately $8 million in total.

Despite the negative impact of COVID-19 on our business, total liquidity was $314.1 million as of December 31, 2020, as a result of the above COVID-19 related actions as well as other working capital management efficiency improvement activities. We believe this level of liquidity is sufficient to meet the Company’s needs for at least the next 12 months. The Company will continue to take actions such as those described above in order to preserve liquidity for the duration of this pandemic.

Impact of Raw Material Prices

In the ordinary course of business, we are exposed to the volatility of the costs of our raw materials. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing process. We utilize a raw material surcharge mechanism when pricing products to our customers, which is designed to mitigate the impact of increases or decreases in raw material costs, although generally with a lag effect. This timing effect can result in raw material spread whereby costs can be over- or under-recovered in certain periods. While the surcharge generally protects gross profit, it has the effect of diluting gross margin as a percent of sales.

Results of Operations

Net Sales

The charts below present net sales and shipments for the years ended December 31, 2020, 2019 and 2018.

 

  

Net sales for the year ended December 31, 2020 were $830.7 million, a decrease of $378.1 million, or 31.3%, compared to the year ended December 31, 2019. The decrease was due to a reduction in volume of approximately 258 thousand ship tons, resulting in a decrease of $286.4 million of net sales and lower surcharges of $117.5 million. These decreases in net sales were partially offset by a positive mix primarily due to the industrial end-market resulting in an increase in net sales of $42.7 million. The primary driver in the decrease in volume was lower customer demand across all end-markets primarily as a result of the COVID-19 pandemic and a weak energy market. The decrease in surcharges was

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primarily due to an approximate 25% decline in average surcharge per ton due to lower market prices for scrap and alloys. We estimate the impact of the COVID-19 pandemic on our net sales during 2020 was a reduction of approximately $265 million, as compared to our forecast prior to the onset of the pandemic. Approximately half of this decrease was related to lower than forecasted volume in our mobile end-market sector, as production was halted by all major automotive manufacturers for various lengths of time during the second quarter. Excluding surcharges, net sales decreased $260.6 million, or 27.3%.

Gross Profit

The chart below presents the drivers of the gross profit variance from the year ended December 31, 2019 to December 31, 2020.

 

 

Gross profit for the year ended December 31, 2020 decreased $7 million, or 31.0%, compared with the year ended December 31, 2019. The decrease was driven primarily by lower volumes, partially offset by favorable manufacturing costs, raw material spread, and inventory adjustments. The primary driver in the decrease in volume was lower customer demand across all end-markets primarily as a result of the COVID-19 pandemic and a weak energy market. Favorable manufacturing costs in 2020 were primarily due to the Company’s significant cost reduction actions and lower annual shutdown maintenance, slightly offset by the unfavorable impact of lower production levels on fixed cost leverage. Raw material spread was favorable due to higher scrap spread specifically during the second half of the year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Selling, General and Administrative Expenses

 

The charts below present selling, general and administrative (SG&A) expense for the years ended December 31, 2020, 2019 and 2018.

 

SG&A expense for the year ended December 31, 2020 decreased by $15.1 million, or 16.4%, compared with the year ended December 31, 2019. The decrease in 2020 is primarily due to lower wages and benefits expense which are a result of a reduction in employee headcount following the Company’s recent restructuring actions, as well as unpaid rolling furloughs for salaried employees during the second and third quarters. Additional reductions in SG&A are due to other COVID-19 related cost reduction actions, lower controllable spend as well as lower bad debt expense. The decrease is partially offset by an increase in variable compensation.

Restructuring Charges

During 2019 and throughout 2020, TimkenSteel made organizational changes to streamline its organizational structure to drive enhanced profitability and sustainable growth. These company-wide actions included the restructuring of its business support functions, the reduction of management layers throughout the organization, the closure of the TMS facility in Houston, Texas and other domestic and international actions to further improve the Company’s overall cost structure. Through these restructuring efforts, to date the Company has eliminated approximately 215 salaried positions and recognized restructuring charges of $11.7 million ($3.1 million in 2020 and $8.6 million in 2019), consisting of severance and employee-related benefits. Approximately 55 of these positions were eliminated in 2020. The Company expects to realize annual savings of approximately $27 million as a result of these actions. Refer to “Note 5 - Restructuring Charges” in the Notes to the Consolidated Financial Statements for additional information.

Interest Expense

Interest expense for the year ended December 31, 2020 was $12.2 million, a decrease of $3.5 million, compared with the year ended December 31, 2019. The decrease in interest expense was primarily due to a reduction in outstanding borrowings under the credit facility and a lower interest rate environment. Refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements for additional information.

Other (Income) Expense, net

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

$ Change

 

Pension and postretirement non-service benefit (income) loss

 

$

(26.6

)

 

$

(17.5

)

 

$

(9.1

)

Loss (gain) from remeasurement of benefit plans

 

 

14.7

 

 

 

40.6

 

 

 

(25.9

)

Foreign currency exchange loss (gain)

 

 

0.2

 

 

 

—

 

 

 

0.2

 

Employee retention credit

 

 

(2.3

)

 

 

—

 

 

 

—

 

Miscellaneous (income) expense

 

 

(0.2

)

 

 

0.2

 

 

 

(0.4

)

Total other (income) expense, net

 

$

(14.2

)

 

$

23.3

 

 

$

(35.2

)

 

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Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

$ Change

 

Pension and postretirement non-service benefit (income) loss

 

$

(17.5

)

 

$

(25.2

)

 

$

7.7

 

Loss (gain) from remeasurement of benefit plans

 

 

40.6

 

 

 

43.5

 

 

 

(2.9

)

Foreign currency exchange loss (gain)

 

 

—

 

 

 

0.2

 

 

 

(0.2

)

Miscellaneous (income) expense

 

 

0.2

 

 

 

0.1

 

 

 

0.1

 

Total other (income) expense, net

 

$

23.3

 

 

$

18.6

 

 

$

4.7

 

Non-service related pension and other postretirement benefit income, for all years, consists primarily of the interest cost, expected return on plan assets and amortization components of net periodic cost. The loss from remeasurement of benefit plans is due to the Company performing mark-to-market accounting on its pension and postretirement assets at year-end and upon the occurrence of certain triggering events. For more details on the remeasurement refer to “Note 15 - Retirement and Postretirement Plans.”

The Coronavirus Aid, Relief, and Economic Security ("CARES") Act provides for an employee retention credit (“Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee throughout the year. The Company qualified for the tax credit in the second and third quarters of 2020 and accrued a benefit of $2.3 million in the fourth quarter of 2020 related to the Employee Retention Credit in other (income) expense, net on the Company’s Consolidated Statements of Operations.

Provision for Income Taxes

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

$ Change

 

Provision (benefit) for income taxes

 

$

1.2

 

 

$

(16.1

)

 

$

17.3

 

Effective tax rate

 

 

(2.0

)%

 

 

12.8

%

 

NM(1)

 

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

$ Change

 

Provision (benefit) for income taxes

 

$

(16.1

)

 

$

1.8

 

 

$

(17.9

)

Effective tax rate

 

 

12.8

%

 

 

(5.9

)%

 

NM(1)

 

(1) “NM” is data that is not meaningful.

The majority of the Company’s tax expense is derived from foreign operations. The Company remains in a full valuation for the U.S. jurisdiction for the years ended December 31, 2020 and 2019. For the year ended December 31, 2019, the Company recorded an intraperiod tax allocation adjustment between continuing operations and other categories of comprehensive income. In periods in which the Company has a pre-tax loss from continuing operations and pre-tax income in other categories of comprehensive income, the Company must consider that income in determining the amount of tax benefit that results from a loss in continuing operations and that will be allocated to continuing operations. As a result of the intraperiod tax allocation for the year ended December 31, 2019, income tax expense of $16.7 million was recorded within other comprehensive income and a corresponding benefit was recorded to continuing operations.

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NON-GAAP FINANCIAL MEASURES

Net Sales Adjusted to Exclude Surcharges

The table below presents net sales by end-market sector, adjusted to exclude surcharges, which represents a financial measure that has not been determined in accordance with accounting principles generally accepted in the United States (U.S. GAAP). We believe presenting net sales by end-market sector adjusted to exclude raw material surcharges provides additional insight into key drivers of net sales such as base price and product mix.

(dollars in millions, tons in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

Mobile

 

 

Industrial

 

 

Energy

 

 

Other

 

 

Total

 

Tons

 

 

397.6

 

 

 

348.2

 

 

 

90.6

 

 

 

61.9

 

 

 

898.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

479.3

 

 

$

486.3

 

 

$

166.4

 

 

$

76.8

 

 

$

1,208.8

 

Less: Surcharges

 

 

104.1

 

 

 

99.9

 

 

 

32.8

 

 

 

16.7

 

 

 

253.5

 

Base Sales

 

$

375.2

 

 

$

386.4

 

 

$

133.6

 

 

$

60.1

 

 

$

955.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales / Ton

 

$

1,205

 

 

$

1,397

 

 

$

1,837

 

 

$

1,241

 

 

$

1,346

 

Surcharges / Ton

 

$

261

 

 

$

287

 

 

$

362

 

 

$

270

 

 

$

283

 

Base Sales / Ton

 

$

944

 

 

$

1,110

 

 

$

1,475

 

 

$

971

 

 

$

1,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

Mobile

 

 

Industrial

 

 

Energy

 

 

Other

 

 

Total

 

Tons

 

 

428.3

 

 

 

462.7

 

 

 

152.8

 

 

 

155.6

 

 

 

1,199.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

553.9

 

 

$

637.5

 

 

$

265.6

 

 

$

153.6

 

 

$

1,610.6

 

Less: Surcharges

 

 

134.4

 

 

 

161.5

 

 

 

61.2

 

 

 

48.3

 

 

 

405.4

 

Base Sales

 

$

419.5

 

 

$

476.0

 

 

$

204.4

 

 

$

105.3

 

 

$

1,205.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales / Ton

 

$

1,293

 

 

$

1,378

 

 

$

1,738

 

 

$

987

 

 

$

1,343

 

Surcharges / Ton

 

$

314

 

 

$

349

 

 

$

400

 

 

$

310

 

 

$

338

 

Base Sales / Ton

 

$

979

 

 

$

1,029

 

 

$

1,338

 

 

$

677

 

 

$

1,005

 

 

 

 

 

 

 

 

 

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LIQUIDITY AND CAPITAL RESOURCES

Amended Credit Agreement

On October 15, 2019, the Company entered into a Third Amended and Restated Credit Agreement (the Amended Credit Agreement) with JP Morgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and the other lenders party thereto, which further amended and restated the Company’s Second Amended and Restated Credit Agreement dated as of January 26, 2018.

The Amended Credit Agreement increased capacity to $400 million compared to $300 million in the previous facility and extended the maturity date to October 15, 2024. Furthermore, the Amended Credit Agreement provided for an enhanced asset base with reappraised fixed assets and investment grade foreign accounts receivable collateral in the borrowing base (up to $30 million), improved interest rate spread pricing by 50 basis points, and reduced the unused commitment fee to a fixed 25 basis points from the previous 37.5 to 50 basis point range.

The Amended Credit Agreement also requires the Company to (i) unless certain conditions are met, maintain certain minimum liquidity as specified in the Amended Credit Agreement during the period commencing on March 1, 2021 and ending on June 1, 2021 and (ii) maintain a minimum specified fixed charge coverage ratio on a springing basis if minimum availability requirements as specified in the Amended Credit Agreement are not maintained.

The minimum liquidity requirement for the period commencing on March 1, 2021 and ending on June 1, 2021 requires the Company to maintain a liquidity amount above the sum of the aggregate outstanding principal amount of the Convertible Senior Notes due 2021 plus an amount equal to 12.5% of the lesser of the borrowing base and the total capacity of $400 million. The Company expects to be compliant with this minimum liquidity requirement during the applicable time period.    

Refer to “Note 14 - Financing Arrangements” in the Notes of the Consolidated Financial Statements for additional information.

Convertible Notes

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

In December 2020, the Company entered into separate, privately negotiated exchange agreements with a limited number of holders of the Company’s currently outstanding Convertible Senior Notes due 2021. Pursuant to the exchange agreements, the Company exchanged $46.0 million aggregate principal amount of Convertible Senior Notes due 2021 for $46.0 million aggregate principal amount of its new Convertible Senior Notes due 2025. The Company did not receive any cash proceeds from the issuance of the Convertible Senior Notes due 2025.

The Convertible Senior Notes due 2025 bear cash interest at a rate of 6.0% per year, payable semiannually on June 1 and December 1, beginning on June 1, 2021. The Convertible Senior Notes due 2025 will mature on December 1, 2025, unless earlier repurchased or converted. The net amount of this exchange was $44.5 million, after deducting the initial underwriters’ fees and paying other transaction costs.

Refer to “Note 14 - Financing Arrangements” in the Notes of the Consolidated Financial Statements for additional information.


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Additional Liquidity Considerations

The following represents a summary of key liquidity measures under the credit agreement in effect as of December 31, 2020 and December 31, 2019:

 

 

December 31,

2020

 

 

December 31,

2019

 

Cash and cash equivalents

 

$

102.8

 

 

$

27.1

 

Credit Agreement:

 

 

 

 

 

 

 

 

Maximum availability

 

$

400.0

 

 

$

400.0

 

Suppressed availability(1)

 

 

(183.2

)

 

 

(103.0

)

Availability

 

 

216.8

 

 

 

297.0

 

Credit facility amount borrowed

 

 

—

 

 

 

(90.0

)

Letter of credit obligations

 

 

(5.5

)

 

 

(3.8

)

Availability not borrowed

 

 

211.3

 

 

 

203.2

 

Total liquidity

 

$

314.1

 

 

$

230.3

 

(1) As of December 31, 2020, TimkenSteel had less than $400 million in collateral assets to borrow against.

Our principal sources of liquidity are cash and cash equivalents, cash flows from operations and available borrowing capacity under our credit agreement. As of December 31, 2020, taking into account our view of mobile, industrial, and energy market demands for our products, and our 2021 operating and long-range plan, we believe that our cash balance as of December 31, 2020, projected cash generated from operations, and borrowings available under the Amended Credit Agreement, will be sufficient to satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations, including servicing our debt obligations, as well as our Convertible Senior Notes due 2021 with a maturity date of June 1, 2021, for at least the next twelve months. Regarding the Convertible Senior Notes due 2021, we plan to repay the remaining outstanding principal balance of $40.2 million upon maturity with available cash, or a combination of available cash and credit facility borrowings.

The full extent to which the COVID-19 pandemic will impact our operations and financial results is uncertain and ultimately will depend on, among other factors, the duration of the pandemic, further Federal and State government actions and the speed of economic recovery. To the extent our liquidity needs prove to be greater than expected or cash generated from operations is less than anticipated, and cash on hand or credit availability is insufficient, we would seek additional financing to provide additional liquidity. We regularly evaluate our potential access to the equity and debt capital markets as sources of liquidity and we believe additional financing would likely be available if necessary, although we can make no assurance as to the form or terms of any such financing. We would also consider additional cost reductions and restructuring, changes in working capital management and further reductions of capital expenditures. Regardless, we will continue to evaluate additional financing or may seek to refinance outstanding borrowings under the Amended Credit Agreement to provide us with additional flexibility and liquidity. Any additional financing beyond that incurred to refinance existing debt would increase our overall debt and could increase interest expense.

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, an economic stimulus package intended to provide support, principally in the form of tax benefits and additional liquidity, to companies and individuals negatively impacted by the COVID-19 pandemic. Although the majority of the provisions included in the CARES Act did not immediately benefit the Company from a cash tax perspective due to its significant net operating losses, the Company has taken advantage of the deferral of the employer share (6.2% of employee wages) of Social Security payroll taxes that would otherwise have been owed from the date of enactment of the legislation through December 31, 2020, as afforded by the Act. For the year ended December 31, 2020, the Company deferred approximately $6.4 million of payroll taxes as permitted by the CARES Act, all of which will be paid in two equal installments at December 31, 2021 and December 31, 2022. Additionally, the Company expects to file for and accrued a benefit of approximately $2.3 million related to the Employee Retention Credit in 2021.

For additional details regarding the Amended Credit Agreement and the Convertible Notes, please refer to “Note 14 - Financing Arrangements” in the Notes to the Consolidated Financial Statements, and for our discussion regarding risk factors related to our business and our debt, see Risk Factors in this Annual Report on Form 10-K.

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Cash Flows

The following table reflects the major categories of cash flows for the years ended December 31, 2020, 2019, and 2018. For additional details, please refer to the Consolidated Statements of Cash Flows included in Item 8 - Financial Statements and Supplemental Data of this Annual Report.

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Net cash provided (used) by operating activities

 

$

173.5

 

 

$

70.3

 

 

$

18.5

 

Net cash provided (used) by investing activities

 

 

(6.0

)

 

 

(38.0

)

 

 

(39.0

)

Net cash provided (used) by financing activities

 

 

(91.8

)

 

 

(26.8

)

 

 

17.6

 

Increase (Decrease) in Cash and Cash Equivalents

 

$

75.7

 

 

$

5.5

 

 

$

(2.9

)

Operating activities

Net cash provided by operating activities for the year ended December 31, 2020 was $173.5 million compared to net cash provided of $70.3 million for the year ended December 31, 2019. The increase in cash provided by operating activities of $103.2 million was primarily due to management actions to improve working capital processes and efficiency. Refer to the Consolidated Statements of Cash Flows for additional information.

Investing activities

Net cash used by investing activities for the year ended December 31, 2020 was $6.0 million compared to net cash used by investing activities of $38.0 million for the year ended December 31, 2019. The change was primarily due to lower capital expenditures and proceeds from sales of property, plant and equipment.

Financing activities

Net cash used by financing activities for the year ended December 31, 2020 was $91.8 million compared to net cash used by financing activities of $26.8 million for the year ended December 31, 2019. The change was mainly due to higher repayments on the Credit Agreement in 2020 as compared to 2019.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2020:

Contractual Obligations

 

Total

 

 

Less than

1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

More than

5 Years

 

Convertible Notes

 

$

86.2

 

 

$

40.2

 

 

$

—

 

 

$

46.0

 

 

$

—

 

Interest payments

 

 

18.4

 

 

 

4.8

 

 

 

7.5

 

 

 

6.1

 

 

 

—

 

Operating leases

 

 

22.5

 

 

 

8.4

 

 

 

10.5

 

 

 

3.6

 

 

 

—

 

Purchase commitments

 

 

117.5

 

 

 

27.3

 

 

 

20.0

 

 

 

16.9

 

 

 

53.3

 

Retirement benefits

 

 

298.8

 

 

 

3.7

 

 

 

63.1

 

 

 

81.9

 

 

 

150.1

 

Total

 

$

543.4

 

 

$

84.4

 

 

$

101.1

 

 

$

154.5

 

 

$

203.4

 

The caption Convertible Notes includes the outstanding principal balance of $40.2 million related to the Convertible Senior Notes due 2021 and the outstanding principal balance of $46.0 million related to the Convertible Senior Notes due 2025. Interest payments include interest on the Convertible Notes, as well as the unused commitment fee of 25 basis points related to the Amended Credit Agreement.

Operating leases include leases for office space, warehouses, land, machinery and equipment, vehicles and certain information technology equipment. Refer to “Note 13 – Leases” in the Notes to the Consolidated Financial Statement for additional information.

Purchase commitments are defined as agreements to purchase goods or services that are enforceable and legally binding. Included in purchase commitments are certain obligations related to capital commitments, service agreements and energy consumed in our production processes. These purchase commitments do not represent our entire anticipated purchases in the future but represent only those items for which we are presently contractually obligated. The majority of our products and services are purchased as needed, with no advance commitment. We do not have any off-balance sheet arrangements with unconsolidated entities or other persons.

Retirement benefits are paid from plan assets and our operating cash flow. The table above includes payments to meet minimum funding requirements of our defined benefit pension plans, estimated benefit payments for our unfunded supplemental executive retirement pension, and postretirement plans. The retirement benefit funding requirements included in the table above are estimated required contributions and are significantly affected by asset returns and several other variables. These amounts are subject to change year to year. These amounts are based on Company estimates and current funding laws; actual future payments may be different. Refer to “Note 15 - Retirement and Postretirement Plans”

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in the Notes to the Consolidated Financial Statements for further information related to the total pension and other postretirement benefit plans and expected benefit payments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We review our critical accounting policies throughout the year.

New Accounting Guidance

See “Note 2 - Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.

Revenue Recognition

We recognize revenue from contracts at a point in time when we have satisfied our performance obligation and the customer obtains control of the goods, at the amount that reflects the consideration we expect to receive for those goods. We receive and acknowledge purchase orders from our customers, which define the quantity, pricing, payment and other applicable terms and conditions. In some cases, we receive a blanket purchase order from our customer, which includes pricing, payment and other terms and conditions, with quantities defined at the time the customer issues periodic releases from the blanket purchase order. Certain contracts contain variable consideration, which primarily consists of rebates that are accounted for in net sales and accrued based on the estimated probability of the requirements being met.

Inventory

Inventories are stated at lower of cost or net realizable value. All inventories, including raw materials, manufacturing supplies inventory as well as international (outside the U.S.) inventories, have been valued using the FIFO or average cost method as of December 31, 2020 and 2019.

Long-lived Assets

Long-lived assets (including tangible assets and intangible assets subject to amortization) are reviewed for impairment when events or changes in circumstances have occurred indicating the carrying value of the assets may not be recoverable.

We test recoverability of long-lived assets at the lowest level for which there are identifiable cash flows that are independent from the cash flows of other assets. Assets and asset groups held and used are measured for recoverability by comparing the carrying amount of the asset or asset group to the sum of future undiscounted net cash flows expected to be generated by the asset or asset group.

Assumptions and estimates about future values and remaining useful lives of our long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts.

If an asset or asset group is considered to be impaired, the impairment loss that would be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. To determine fair value, we use internal cash flow estimates discounted at an appropriate interest rate, third party appraisals as appropriate, and/or market prices of similar assets, when available.

As a result of the discontinued use of certain assets, we recorded an impairment charge of $9.3 million in 2019. No impairment charge was recorded in 2020. Refer to “Note 6 – Disposition of Non-Core Assets” in the Notes to the Consolidated Financial Statements for further information.

Income Taxes

We are subject to income taxes in the U.S. and numerous non-U.S. jurisdictions, and we account for income taxes in accordance with applicable accounting guidance. Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. We record valuation allowances against deferred tax assets by tax jurisdiction when it is more likely than not that such assets will not be realized. In determining the need for a valuation allowance, the historical and projected financial performance of the entity recording the net deferred tax asset is considered along with any other pertinent information. Net deferred tax assets relate primarily to net operating losses and pension and other postretirement benefit obligations in the U.S., which we believe are more likely than not to result in future tax benefits. As of December 31, 2020, we have recorded a valuation allowance on our net deferred tax assets in the U.S., as we do not believe it is more likely than not that a portion of our U.S. deferred tax assets will be realized.

In the ordinary course of our business, there are many transactions and calculations regarding which the ultimate income tax determination is uncertain. We are regularly under audit by tax authorities. Accruals for uncertain tax positions are provided for in accordance with the requirements of applicable accounting guidance. We record interest and penalties related to uncertain tax positions as a component of income tax expense.

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The Company made the accounting policy election to treat taxes related to Global Intangible Low-Taxed Income as a current period expense when incurred.

Benefit Plans

We recognize an overfunded status or underfunded status (i.e. the difference between the fair value of plan assets and the benefit obligations) as either an asset or a liability for our defined benefit pension and other postretirement benefit plans on the Consolidated Balance Sheets. We recognize actuarial gains and losses immediately through net periodic benefit cost in the Consolidated Statements of Operations upon the annual remeasurement at December 31, or on an interim basis as triggering events warrant remeasurement. In addition, we use fair value to account for the value of plan assets.

As of December 31, 2020, our projected benefit obligations related to our pension and other postretirement benefit plans were $1,395.1 million and $128.3 million, respectively, and the underfunded status of our pension and other postretirement benefit obligations were $163.4 million and $46.1 million, respectively. These benefit obligations were valued using a weighted average discount rate of 2.68% for pension benefit plans and 2.65% for other postretirement benefit plans. The determination of the discount rate is generally based on an index created from a hypothetical bond portfolio consisting of high-quality fixed income securities with durations that match the timing of expected benefit payments. Changes in the selected discount rate could have a material impact on our projected benefit obligations and the unfunded status of our pension and other postretirement benefit plans.

For the year ended December 31, 2020, net periodic pension benefit cost was $10.2 million, and net periodic other postretirement benefit income was $1.7 million. In 2020, net periodic pension and other postretirement benefit costs were calculated using a variety of assumptions, including a weighted average discount rate of 3.42% and a weighted average expected return on plan assets of 5.80% and 4.50%, respectively. The expected return on plan assets is determined based on forward-looking current market pricing. The forward-looking analysis is performed using a building block approach incorporating inputs such as current yields, valuations, economic data and broad macroeconomic themes.

The net periodic benefit cost and benefit obligation are affected by applicable year-end assumptions. Sensitivities to these assumptions may be asymmetric and are specific to the time periods noted. The impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities. The sensitivity to changes in discount rate assumptions may not be linear. A sensitivity analysis of the projected incremental effect of a 0.25% increase (decrease), holding all other assumptions constant, is as follows:

 

 

 

Hypothetical Rate

 

 

 

Increase (decrease)

 

 

 

0.25%

 

 

(0.25)%

 

Discount Rate

 

 

 

 

 

 

 

 

Net periodic benefit cost, prior to annual remeasurement gains or losses

 

$

1.5

 

 

$

(1.6

)

Benefit obligation

 

$

(43.2

)

 

$

45.6

 

Return on plan assets

 

 

 

 

 

 

 

 

Net periodic benefit cost, prior to annual remeasurement gains or losses

 

$

(2.9

)

 

$

2.9

 

 

Aggregate net periodic pension and other postretirement benefit income for 2021 is forecasted to be $14.8 million and $5.0 million, respectively. This estimate is based on a weighted average discount rate of 2.68% for the pension benefit plans and 2.65% for other postretirement benefit plans, as well as a weighted average expected return on assets of 5.76% for the pension benefit plans and 4.50% for the other postretirement benefit plans. Actual cost also is dependent on various other factors related to the employees covered by these plans. Adjustments to our actuarial assumptions could have a material adverse impact on our operating results.

Please refer to “Note 15 - Retirement and Postretirement Plans” in the Notes to the Consolidated Financial Statements for further information related to our pension and other postretirement benefit plans.

Other Loss Reserves

We have a number of loss exposures that are incurred in the ordinary course of business, such as environmental claims, product liability claims, product warranty claims, litigation and accounts receivable reserves. Establishing loss reserves for these matters requires management’s estimate and judgment with regard to risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances. These other loss reserves have an immaterial impact on the Consolidated Financial Statements.

FORWARD-LOOKING STATEMENTS

Certain statements set forth in this Annual Report on Form 10-K (including our forecasts, beliefs and expectations) that are not historical in nature are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, Management’s Discussion and Analysis of Financial Condition and Results of Operations contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “outlook,” “intend,”

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“may,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or other similar words, phrases or expressions that convey the uncertainty of future events or outcomes. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-K. We caution readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of us due to a variety of factors, such as:

 

 

 

•

deterioration in world economic conditions, or in economic conditions in any of the geographic regions in which we conduct business, including additional adverse effects from global economic slowdown, terrorism or hostilities. This includes: political risks associated with the potential instability of governments and legal systems in countries in which we or our customers conduct business, and changes in currency valuations;

 

•

the effects of fluctuations in customer demand on sales, product mix and prices in the industries in which we operate. This includes: our ability to respond to rapid changes in customer demand; the effects of customer bankruptcies or liquidations; the impact of changes in industrial business cycles; and whether conditions of fair trade exist in the U.S. markets;

 

•

the potential impact of the COVID-19 pandemic on our operations and financial results, including cash flows and liquidity;

 

•

competitive factors, including changes in market penetration; increasing price competition by existing or new foreign and domestic competitors; the introduction of new products by existing and new competitors; and new technology that may impact the way our products are sold or distributed;

 

•

changes in operating costs, including the effect of changes in our manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; availability of raw materials and energy; our ability to mitigate the impact of fluctuations in raw materials and energy costs and the effectiveness of our surcharge mechanism; changes in the expected costs associated with product warranty claims; changes resulting from inventory management, cost reduction initiatives and different levels of customer demands; the effects of unplanned work stoppages; and changes in the cost of labor and benefits;

 

•

the success of our operating plans, announced programs, initiatives and capital investments; and our ability to maintain appropriate relations with unions that represent our associates in certain locations in order to avoid disruptions of business;

 

•

unanticipated litigation, claims or assessments, including claims or problems related to intellectual property, product liability or warranty, and environmental issues and taxes, among other matters;

 

•

the availability of financing and interest rates, which affect our cost of funds and/or ability to raise capital; our pension obligations and investment performance; and/or customer demand and the ability of customers to obtain financing to purchase our products or equipment that contain our products; and the amount of any dividend declared by our Board of Directors on our common shares;

 

•

the overall impact of the pension and postretirement mark-to-market accounting; and

 

•

those items identified under the caption Risk Factors in this Annual Report on Form 10-K.

You are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results, and that the above list should not be considered to be a complete list. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

 

 

 

 

 

 

 

31

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our borrowings include both fixed and variable-rate debt. The variable debt consists principally of borrowings under our Credit Agreement. We are exposed to the risk of rising interest rates to the extent we fund our operations with these variable-rate borrowings. As of December 31, 2020, we have $78.2 million of aggregate debt outstanding. None of our outstanding debt as of December 31, 2020 has variable interest rates, thus a rise in interest rates would not impact our interest expense at this point in time.

Foreign Currency Exchange Rate Risk

Fluctuations in the value of the U.S. dollar compared to foreign currencies may impact our earnings. Geographically, our sales are primarily made to customers in the United States. Currency fluctuations could impact us to the extent they impact the currency or the price of raw materials in foreign countries in which our competitors operate or have significant sales.

Commodity Price Risk

In the ordinary course of business, we are exposed to market risk with respect to commodity price fluctuations, primarily related to our purchases of raw materials and energy, principally scrap steel, other ferrous and non-ferrous metals, alloys, natural gas and electricity. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing business. We utilize a raw material surcharge as a component of pricing steel to pass through the cost increases of scrap, alloys and other raw materials, as well as natural gas. From time to time, we may use financial instruments to hedge a portion of our exposure to price risk related to commodities. In periods of stable demand for our products, the surcharge mechanism has worked effectively to reduce the normal time lag in passing through higher raw material costs so that we can maintain our gross margins. When demand and cost of raw materials are lower, the surcharge impacts sales prices to a lesser extent.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

PAGE

Reports of Independent Registered Public Accounting Firm

34

Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018

37

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019 and 2018

38

Consolidated Balance Sheets as of December 31, 2020 and 2019

39

Consolidated Statements of Shareholders’ Equity

40

Consolidated Statements of Cash Flows

41

Notes to Consolidated Financial Statements

42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33

Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

 

To the Shareholders and the Board of Directors of TimkenSteel Corporation

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of TimkenSteel Corporation (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the financial statement schedule included at Item 15a (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 25, 2021, expressed an unqualified opinion thereon.


Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

 

Accounting for pension and other postretirement benefit obligations

Description of the Matter

 

At December 31, 2020, the Company’s aggregate defined benefit pension and other postretirement benefit obligation was $1,523.4 million and exceeded the fair value of defined benefit pension and other postretirement plan assets of $1,313.9 million, resulting in an unfunded defined benefit pension and other postretirement benefit obligation of $209.5 million.  As explained in Note 2 and Note 15 to the consolidated financial statements, the Company recognizes actuarial gains and losses immediately through net periodic benefit cost upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement, through updating the estimates used to measure the defined benefit pension and other postretirement benefit obligations and plan assets to reflect the actual return on plan assets and updated actuarial assumptions.

Auditing the defined benefit pension and other postretirement benefit obligations was complex due to the highly judgmental nature of the actuarial assumptions (e.g., discount rate, mortality rate, and health care cost trend rates) used in the measurement process. These assumptions had a significant effect on the benefit obligations.

How we Addressed the Matter in our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the measurement of defined benefit pension and other postretirement benefit obligations. For example, we tested controls over management’s review of the defined benefit pension and other postretirement benefit obligation calculations, the relevant data inputs and the significant actuarial assumptions, discussed above, used in the calculations.

To test the defined benefit pension and other postretirement benefit obligations, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above, and the underlying data used by the Company. We compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension and other postretirement benefit obligations from prior year due to the change in service cost, interest cost, actuarial gains and losses, benefit payments, contributions and other activities. In addition, we involved an actuarial specialist to assist with our procedures. For example, we evaluated management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the defined benefit pension and other postretirement benefit obligations. In certain instances, as part of this assessment, we compared the projected cash flows to prior year and compared the current year benefits paid to the prior year projected cash flows. To evaluate the mortality rate and health care cost trend rates, we assessed whether the information is consistent with publicly available information, and whether any market data adjusted for entity-specific adjustments were applied. We also tested the completeness and accuracy of the underlying data, including the participant data used in the determination of the pension and other postretirement benefit obligations.

34

Table of Contents

 

 

 

 

 

/s/ Ernst & Young LLP

 

We have served as the Company’s auditors since 2012.

 

Cleveland, Ohio

February 25, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35

Table of Contents

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Shareholders and the Board of Directors of TimkenSteel Corporation

 

Opinion on Internal Control over Financial Reporting

 

We have audited TimkenSteel Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, TimkenSteel Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the financial statement schedule included at Item 15a and our report dated February 25, 2021 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

 

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ Ernst & Young LLP

Cleveland, Ohio

February 25, 2021

36

Table of Contents

 

TimkenSteel Corporation

Consolidated Statements of Operations

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

(Dollars in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

830.7

 

 

$

1,208.8

 

 

$

1,610.6

 

Cost of products sold

 

 

815.1

 

 

 

1,186.2

 

 

 

1,484.0

 

Gross Profit

 

 

15.6

 

 

 

22.6

 

 

 

126.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

76.7

 

 

 

91.8

 

 

 

98.2

 

Restructuring charges

 

 

3.1

 

 

 

8.6

 

 

 

—

 

Impairment charges and (gain) loss on sale or disposal of assets

 

 

(2.4

)

 

 

9.3

 

 

 

0.9

 

Interest expense

 

 

12.2

 

 

 

15.7

 

 

 

17.1

 

Loss on extinguishment of debt

 

 

0.9

 

 

 

—

 

 

 

—

 

Other (income) expense, net

 

 

(14.2

)

 

 

23.3

 

 

 

18.6

 

Income (Loss) Before Income Taxes

 

 

(60.7

)

 

 

(126.1

)

 

 

(8.2

)

Provision (benefit) for income taxes

 

 

1.2

 

 

 

(16.1

)

 

 

1.8

 

Net Income (Loss)

 

$

(61.9

)

 

$

(110.0

)

 

$

(10.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(1.38

)

 

$

(2.46

)

 

$

(0.22

)

Diluted earnings (loss) per share

 

$

(1.38

)

 

$

(2.46

)

 

$

(0.22

)

See accompanying Notes to the Consolidated Financial Statements.

37

Table of Contents

 

TimkenSteel Corporation

Consolidated Statements of Comprehensive Income (Loss)

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(61.9

)

 

$

(110.0

)

 

$

(10.0

)

Other comprehensive income (loss), net of tax of $0.1 million in 2020, $16.7 million in 2019 and $0.1 million in 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1.4

 

 

 

0.5

 

 

 

(1.4

)

Pension and postretirement liability adjustments

 

 

(5.7

)

 

 

53.1

 

 

 

0.1

 

Other comprehensive income (loss), net of tax

 

 

(4.3

)

 

 

53.6

 

 

 

(1.3

)

Comprehensive Income (Loss), net of tax

 

$

(66.2

)

 

$

(56.4

)

 

$

(11.3

)

See accompanying Notes to the Consolidated Financial Statements.

38

Table of Contents

 

TimkenSteel Corporation

Consolidated Balance Sheets

 

 

December 31,

 

 

 

2020

 

 

2019

 

(Dollars in millions)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

102.8

 

 

$

27.1

 

Accounts receivable, net of allowances (2020 - $1.3 million; 2019 - $1.5 million)

 

 

63.3

 

 

 

77.5

 

Inventories, net

 

 

178.4

 

 

 

281.9

 

Deferred charges and prepaid expenses

 

 

4.0

 

 

 

3.3

 

Assets held for sale

 

 

0.3

 

 

 

4.1

 

Other current assets

 

 

8.8

 

 

 

7.8

 

Total Current Assets

 

 

357.6

 

 

 

401.7

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

569.8

 

 

 

626.4

 

Operating lease right-of-use assets

 

 

21.0

 

 

 

14.3

 

Pension assets

 

 

33.5

 

 

 

25.2

 

Intangible assets, net

 

 

9.3

 

 

 

14.3

 

Other non-current assets

 

 

2.8

 

 

 

3.3

 

Total Assets

 

$

994.0

 

 

$

1,085.2

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

89.5

 

 

$

69.3

 

Salaries, wages and benefits

 

 

29.4

 

 

 

13.9

 

Accrued pension and postretirement costs

 

 

2.3

 

 

 

3.0

 

Current operating lease liabilities

 

 

7.5

 

 

 

6.2

 

Current convertible notes, net

 

 

38.9

 

 

 

—

 

Other current liabilities

 

 

13.4

 

 

 

19.9

 

Total Current Liabilities

 

 

181.0

 

 

 

112.3

 

 

 

 

 

 

 

 

 

 

Non-current convertible notes, net

 

 

39.3

 

 

 

78.6

 

Credit Agreement

 

 

—

 

 

 

90.0

 

Non-current operating lease liabilities

 

 

13.5

 

 

 

8.2

 

Accrued pension and postretirement costs

 

 

240.7

 

 

 

222.1

 

Deferred income taxes

 

 

1.0

 

 

 

0.9

 

Other non-current liabilities

 

 

11.0

 

 

 

10.0

 

Total Liabilities

 

 

486.5

 

 

 

522.1

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Preferred shares, without par value; authorized 10.0 million shares, none issued

 

 

—

 

 

 

—

 

Common shares, without par value; authorized 200.0 million shares; issued 2020 and 2019 - 45.7 million shares

 

 

—

 

 

 

—

 

Additional paid-in capital

 

 

843.4

 

 

 

844.8

 

Retained deficit

 

 

(363.4

)

 

 

(301.5

)

Treasury shares - 2020 - 0.6 million; 2019 - 0.9 million

 

 

(12.9

)

 

 

(24.9

)

Accumulated other comprehensive income (loss)

 

 

40.4

 

 

 

44.7

 

Total Shareholders’ Equity

 

 

507.5

 

 

 

563.1

 

Total Liabilities and Shareholders’ Equity

 

$

994.0

 

 

$

1,085.2

 

See accompanying Notes to the Consolidated Financial Statements.

39

Table of Contents

 

TimkenSteel Corporation

Consolidated Statements of Shareholders’ Equity

 

 

Common

Shares

Outstanding

 

 

Additional

Paid-in

Capital

 

 

Retained

Deficit

 

 

Treasury

Shares

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

Balance as of December 31, 2017

 

 

44,445,747

 

 

$

843.7

 

 

$

(182.0

)

 

$

(37.4

)

 

$

(7.6

)

 

$

616.7

 

Net income (loss)

 

 

—

 

 

 

—

 

 

 

(10.0

)

 

 

—

 

 

 

—

 

 

 

(10.0

)

Other comprehensive income (loss)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1.3

)

 

 

(1.3

)

Adoption of new accounting standard

 

 

—

 

 

 

—

 

 

 

0.7

 

 

 

—

 

 

 

—

 

 

 

0.7

 

Stock-based compensation expense

 

 

—

 

 

 

7.3

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7.3

 

Stock option activity

 

 

—

 

 

 

0.2

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

0.2

 

Issuance of treasury shares

 

 

176,454

 

 

 

(4.9

)

 

 

(0.2

)

 

 

5.1

 

 

 

—

 

 

 

—

 

Shares surrendered for taxes

 

 

(37,533

)

 

 

—

 

 

 

—

 

 

 

(0.7

)

 

 

—

 

 

 

(0.7

)

Balance as of December 31, 2018

 

 

44,584,668

 

 

$

846.3

 

 

$

(191.5

)

 

$

(33.0

)

 

$

(8.9

)

 

$

612.9

 

Net income (loss)

 

 

—

 

 

 

—

 

 

 

(110.0

)

 

 

—

 

 

 

—

 

 

 

(110.0

)

Other comprehensive income (loss)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

53.6

 

 

 

53.6

 

Stock-based compensation expense

 

 

—

 

 

 

7.4

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7.4

 

Stock option activity

 

 

—

 

 

 

0.2

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

0.2

 

Issuance of treasury shares

 

 

321,739

 

 

 

(9.1

)

 

 

—

 

 

 

9.1

 

 

 

—

 

 

 

—

 

Shares surrendered for taxes

 

 

(86,254

)

 

 

—

 

 

 

—

 

 

 

(1.0

)

 

 

—

 

 

 

(1.0

)

Balance at December 31, 2019

 

 

44,820,153

 

 

$

844.8

 

 

$

(301.5

)

 

$

(24.9

)

 

$

44.7

 

 

$

563.1

 

Net income (loss)

 

 

—

 

 

 

—

 

 

 

(61.9

)

 

 

—

 

 

 

—

 

 

 

(61.9

)

Other comprehensive income (loss)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4.3

)

 

 

(4.3

)

Stock-based compensation expense

 

 

—

 

 

 

6.6

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

6.6

 

Issuance of treasury shares

 

 

486,260

 

 

 

(12.6

)

 

 

—

 

 

 

12.6

 

 

 

—

 

 

 

—

 

Shares surrendered for taxes

 

 

(142,105

)

 

 

—

 

 

 

—

 

 

 

(0.6

)

 

 

—

 

 

 

(0.6

)

Equity component of convertible notes, net

 

 

—

 

 

 

4.6

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4.6

 

Balance at December 31, 2020

 

 

45,164,308

 

 

$

843.4

 

 

$

(363.4

)

 

$

(12.9

)

 

$

40.4

 

 

$

507.5

 

See accompanying Notes to the Consolidated Financial Statements.

40

Table of Contents

 

TimkenSteel Corporation

Consolidated Statements of Cash Flows

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

CASH PROVIDED (USED)

 

 

 

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(61.9

)

 

$

(110.0

)

 

$

(10.0

)

Adjustments to reconcile net loss to net cash provided (used) by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

70.0

 

 

 

73.5

 

 

 

73.0

 

Amortization of deferred financing fees and debt discount

 

 

5.3

 

 

 

5.1

 

 

 

5.5

 

Loss on extinguishment of debt

 

 

0.9

 

 

 

—

 

 

 

—

 

Impairment charges and (gain) loss on sale or disposal of assets

 

 

(2.4

)

 

 

9.3

 

 

 

0.9

 

Deferred income taxes

 

 

—

 

 

 

(16.6

)

 

 

0.8

 

Stock-based compensation expense

 

 

6.6

 

 

 

7.4

 

 

 

7.3

 

Pension and postretirement expense (benefit), net

 

 

8.6

 

 

 

41.6

 

 

 

37.4

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

14.2

 

 

 

85.9

 

 

 

(13.6

)

Inventories, net

 

 

103.5

 

 

 

92.6

 

 

 

(94.5

)

Accounts payable

 

 

23.1

 

 

 

(87.7

)

 

 

24.4

 

Other accrued expenses

 

 

9.4

 

 

 

(26.0

)

 

 

(3.8

)

Deferred charges and prepaid expenses

 

 

(0.7

)

 

 

0.2

 

 

 

0.4

 

Pension and postretirement contributions and payments

 

 

(4.1

)

 

 

(3.8

)

 

 

(13.1

)

Other, net

 

 

1.0

 

 

 

(1.2

)

 

 

3.8

 

Net Cash Provided (Used) by Operating Activities

 

 

173.5

 

 

 

70.3

 

 

 

18.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(16.9

)

 

 

(38.0

)

 

 

(40.0

)

Proceeds from disposals of property, plant and equipment

 

 

10.9

 

 

 

—

 

 

 

1.0

 

Net Cash Provided (Used) by Investing Activities

 

 

(6.0

)

 

 

(38.0

)

 

 

(39.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

—

 

 

 

0.2

 

 

 

0.2

 

Shares surrendered for employee taxes on stock compensation

 

 

(0.6

)

 

 

(1.0

)

 

 

(0.7

)

Refunding bonds repayments

 

 

—

 

 

 

—

 

 

 

(30.2

)

Repayments on credit agreements

 

 

(90.0

)

 

 

(65.0

)

 

 

(105.0

)

Borrowings on credit agreements

 

 

—

 

 

 

40.0

 

 

 

155.0

 

Debt issuance costs

 

 

(1.2

)

 

 

(1.0

)

 

 

(1.7

)

Net Cash Provided (Used) by Financing Activities

 

 

(91.8

)

 

 

(26.8

)

 

 

17.6

 

Increase (Decrease) in Cash and Cash Equivalents

 

 

75.7

 

 

 

5.5

 

 

 

(2.9

)

Cash and cash equivalents at beginning of period

 

 

27.1

 

 

 

21.6

 

 

 

24.5

 

Cash and Cash Equivalents at End of Period

 

$

102.8

 

 

$

27.1

 

 

$

21.6

 

See accompanying Notes to the Consolidated Financial Statements.

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TimkenSteel Corporation

Notes to Consolidated Financial Statements

(dollars in millions, except per share data)

 

Note 1 - Basis of Presentation

TimkenSteel Corporation (the Company or TimkenSteel) manufactures alloy steel, as well as carbon and micro-alloy steel, with an annual melt capacity of approximately 2 million tons and shipment capacity of 1.5 million tons. TimkenSteel’s portfolio includes special bar quality (SBQ) bars, seamless mechanical tubing (tubes), value-added solutions such as precision steel components, and billets. In addition, TimkenSteel supplies machining and thermal treatment services and manages raw material recycling programs, which are also used as a feeder system for the Company’s melt operations. The Company’s products and services are used in a diverse range of demanding applications in the following market sectors: automotive; oil and gas; industrial equipment; mining; construction; rail; defense; heavy truck; agriculture; power generation; and oil country tubular goods (OCTG).

The SBQ bar, tube, and billet production processes take place at the Company’s Canton, Ohio manufacturing location. This location accounts for all of the SBQ bars, seamless mechanical tubes and billets the Company produces and includes three manufacturing facilities: the Faircrest, Harrison, and Gambrinus facilities. TimkenSteel’s value-added solutions production processes take place at two downstream manufacturing facilities: Tryon Peak (Columbus, North Carolina) and St. Clair (Eaton, Ohio). Many of the production processes are integrated, and the manufacturing facilities produce products that are sold in all of the Company’s market sectors. As a result, investments in the Company’s facilities and resource allocation decisions affecting the Company’s operations are designed to benefit the overall business, not any specific aspect of the business. During the first quarter of 2020, management completed its previously announced plan to close the Company’s TimkenSteel Material Services facility in Houston, Texas.

Basis of Consolidation:

The Consolidated Financial Statements include the consolidated assets, liabilities, revenues and expenses related to TimkenSteel as of December 31, 2020, 2019 and 2018. All significant intercompany accounts and transactions within TimkenSteel have been eliminated in the preparation of the Consolidated Financial Statements.

Use of Estimates:

The preparation of these Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. These estimates and assumptions are reviewed and updated regularly to reflect recent experience.

Presentation:

Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2020 presentation.

 

Note 2 - Significant Accounting Policies

Revenue Recognition:

TimkenSteel recognizes revenue from contracts at a point in time when it has satisfied its performance obligation and the customer obtains control of the goods, at the amount that reflects the consideration the Company expects to receive for those goods. The Company receives and acknowledges purchase orders from its customers, which define the quantity, pricing, payment and other applicable terms and conditions. In some cases, the Company receives a blanket purchase order from its customer, which includes pricing, payment and other terms and conditions, with quantities defined at the time the customer issues periodic releases from the blanket purchase order. Certain contracts contain variable consideration, which primarily consists of rebates that are accounted for in net sales and accrued based on the estimated probability of the requirements being met.

Cash Equivalents:

TimkenSteel considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Accounts Receivables, Net:

The Company’s accounts receivables arise from sales to customers across the mobile, industrial, energy, and other end-markets. The allowance for doubtful account reserve has been established using qualitative and quantitative methods. In general, account balances greater than one year of age or sent to third party collection are fully reserved. Account balances for customers that are viewed as higher risk are also analyzed for a reserve. In addition to these methods, the allowance for doubtful accounts is adjusted for forward looking uncollectible balances based on end-market outlook and dynamics, such as in the energy and mobile end-markets in 2020. The amount recorded was based on the Company’s

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assessment of the risk presented by customers in these end-markets as a result of the COVID-19 pandemic as well as geo-political factors facing the energy end-market. Historically, TimkenSteel’s allowance for doubtful accounts write-offs have been immaterial.

Inventories, Net:

Inventories are stated at lower of cost or net realizable value. All inventories, including raw materials, manufacturing supplies inventory as well as international (outside the U.S.) inventories, have been valued using the FIFO or average cost method as of December 31, 2020 and 2019.

Property, Plant and Equipment, Net:

Property, plant and equipment, net are valued at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. The provision for depreciation is computed principally by the straight-line method based upon the estimated useful lives of the assets. The useful lives are approximately 30 years for buildings and three to 20 years for machinery and equipment.

Intangible Assets, Net:

Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from 3 to 15 years.

In accordance with applicable accounting guidance, TimkenSteel capitalizes certain costs incurred for computer software developed or obtained for internal use. TimkenSteel capitalizes substantially all external costs and qualifying internal costs related to the purchase and implementation of software projects used for business operations. Capitalized software costs primarily include purchased software and external consulting fees. Capitalized software projects are amortized over the estimated useful lives of the software.

Long-lived Assets:

Long-lived assets (including tangible assets and intangible assets subject to amortization) are reviewed for impairment when events or changes in circumstances have occurred indicating that the carrying value of the assets may not be recoverable.

TimkenSteel tests recoverability of long-lived assets at the lowest level for which there are identifiable cash flows that are independent from the cash flows of other assets. Assets and asset groups held and used are measured for recoverability by comparing the carrying amount of the asset or asset group to the sum of future undiscounted net cash flows expected to be generated by the asset or asset group.

Assumptions and estimates about future values and remaining useful lives of TimkenSteel’s long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in TimkenSteel’s business strategy and internal forecasts.

If an asset or asset group is considered to be impaired, the impairment loss that would be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. To determine fair value, TimkenSteel uses internal cash flow estimates discounted at an appropriate interest rate, third party appraisals, as appropriate, and/or market prices of similar assets, when available.

Refer to “Note 6 - Disposition of Non-Core Assets” and “Note 11 - Property, Plant and Equipment” for additional information.

Product Warranties:

TimkenSteel accrues liabilities for warranties based upon specific claim incidents in accordance with accounting rules relating to contingent liabilities. Should TimkenSteel become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. TimkenSteel had no significant warranty claims for the years ended December 31, 2020, 2019 or 2018.

Income Taxes:

Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. TimkenSteel accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. TimkenSteel recognizes deferred tax assets to the extent TimkenSteel believes these assets are more likely than not to be realized. In making such a determination, TimkenSteel considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If TimkenSteel determines that it would be able to realize deferred tax assets in the future in excess of their net recorded amount, TimkenSteel would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

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TimkenSteel records uncertain tax positions in accordance with applicable accounting guidance, on the basis of a two-step process whereby (1) TimkenSteel determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position, and (2) for those tax positions that meet the more-likely-than-not recognition threshold, TimkenSteel recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

TimkenSteel recognizes interest and penalties related to unrecognized tax benefits within the provision (benefit) for income taxes line in the accompanying Consolidated Statements of Operations. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheets.

The Company made the accounting policy election to treat taxes related to Global Intangible Low-Taxed Income (GILTI) as a current period expense when incurred.

Foreign Currency:

Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date. Income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Gains and losses resulting from foreign currency transactions are included in other (income) expense, net in the Consolidated Statements of Operations. TimkenSteel realized a foreign currency exchange loss of $0.2 million in both 2020 and 2018. There were no foreign currency exchange gains or losses in 2019.

Pension and Other Postretirement Benefits:

TimkenSteel recognizes an overfunded status or underfunded status (e.g., the difference between the fair value of plan assets and the benefit obligations) as either an asset or a liability for its defined benefit pension and other postretirement benefit plans on the Consolidated Balance Sheets. The Company recognizes actuarial gains and losses immediately through net periodic benefit cost in the Consolidated Statements of Operations upon the annual remeasurement at December 31, or on an interim basis as triggering events warrant remeasurement. In addition, the Company uses fair value to account for the value of plan assets.

Stock-Based Compensation:

TimkenSteel recognizes stock-based compensation expense based on the grant date fair value of the stock-based awards over their required vesting period on a straight-line basis, whether the awards were granted with graded or cliff vesting. Stock options are issued with an exercise price equal to the closing market price of TimkenSteel common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield.

Performance-vested restricted stock units issued in 2020 vest based on achievement of a total shareholder return (TSR) metric. The TSR metric is considered a market condition, which requires TimkenSteel to reflect it in the fair value on grant date using an advanced option-pricing model. The fair value of each performance share was therefore determined using a Monte Carlo valuation model, a generally accepted lattice pricing model. The Monte Carlo valuation model, among other factors, uses commonly-accepted economic theory underlying all valuation models, estimates fair value using simulations of future share prices based on stock price behavior and considers the correlation of peer company returns in determining fair value.

The fair value of stock-based awards that will settle in TimkenSteel common shares, other than stock options and performance-vested restricted stock units, is based on the closing market price of TimkenSteel common shares on the grant date. The fair values of stock-based awards that will settle in cash are remeasured at each reporting period until settlement of the awards.

TimkenSteel recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the Consolidated Statements of Operations. The excess tax benefits and tax deficiencies are considered discrete items in the reporting period they occur and are not included in the estimate of an entity’s annual effective tax rate.

Research and Development:

Expenditures for TimkenSteel research and development amounted to $1.8 million for the year ended December 31, 2020, $4.1 million for the year ended December 31, 2019 and $8.1 million for the year ended December 31, 2018, and were recorded as a component of selling, general and administrative expenses in the Consolidated Statements of Operations. These expenditures may fluctuate from year to year depending on special projects and the needs of TimkenSteel and its customers.

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Adoption of New Accounting Standards

The Company adopted the following Accounting Standard Updates (ASU) during the year ended December 31, 2020. The adoption of these standards did not have a material impact on the Consolidated Financial Statements or the related Notes to the Consolidated Financial Statements.

Standards Adopted

Description

Date of Adoption

ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326)

The standard changes how entities will measure credit losses for most financial assets, including trade and other receivables, and replaces the current incurred loss approach with an expected loss model.

January 1, 2020

ASU 2018-13, Fair Value Measurement (Topic 820)

The standard eliminates, modifies and adds disclosure requirements for fair value measurements.

January 1, 2020

ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)

The standard eliminates, modifies and adds disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

January 1, 2020

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)

The standard aligns the requirements for capitalizing implementation costs in cloud computing software arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

January 1, 2020

ASU 2020-04, Reference Rate Reform (Topic 848)

The standard provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met.

March 12, 2020

Accounting Standards Issued But Not Yet Adopted

The Company has considered the recent ASUs issued by the Financial Accounting Standards Board summarized below:

 

Standard Pending Adoption

Description

Effective Date

Anticipated Impact

ASU 2019-12, Income Taxes (Topic 740)

The standard simplifies the accounting for income taxes by removing various exceptions.

January 1, 2021

The Company has evaluated the impact of adopting of this ASU and it will not have a material impact on the Consolidated Financial Statements.

ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)

The standard simplifies the accounting for convertible instruments, as well as the diluted net income per share calculation. The standard also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. The amendments in the standard are effective for fiscal years beginning after December 15, 2021, however early adoption is permitted for fiscal years beginning after December 15, 2020. Entities can adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition.

January 1, 2021 (Early Adoption Date)

The Company has elected to early adopt this standard as of January 1, 2021 using the modified retrospective method of transition. We expect this standard will have a material impact on the Consolidated Financial Statements. Refer to “Note 14 – Financing Arrangements” for additional information.

 

 

 

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Note 3 - Segment Information

We conduct our business activities and report financial results as one business segment. The presentation of financial results as one reportable segment is consistent with the way the Company operates its business and is consistent with the manner in which the Chief Operating Decision Maker (CODM) evaluates performance and makes resource and operating decisions for the business as described above. Furthermore, the Company notes that monitoring financial results as one reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of the operations.

Geographic Information

Net sales by geographic area are reported by the country in which the customer is domiciled. Long-lived assets include property, plant and equipment and intangible assets subject to amortization. Long-lived assets by geographic area are reported by the location of the TimkenSteel operations to which the asset is attributed.

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

746.8

 

 

$

1,096.8

 

 

$

1,456.2

 

Foreign

 

 

83.9

 

 

 

112.0

 

 

 

154.4

 

 

 

$

830.7

 

 

$

1,208.8

 

 

$

1,610.6

 

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

Long-lived Assets, net:

 

 

 

 

 

 

 

 

United States

 

$

599.1

 

 

$

654.8

 

Foreign

 

 

1.0

 

 

 

0.2

 

 

 

$

600.1

 

 

$

655.0

 

 

Note 4 - Revenue Recognition

The following table provides the major sources of revenue by end-market sector for the years ended December 31, 2020, 2019 and 2018:

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Mobile

 

$

346.0

 

 

$

479.3

 

 

$

553.9

 

Industrial

 

 

391.7

 

 

 

486.3

 

 

 

637.5

 

Energy

 

 

53.2

 

 

 

166.4

 

 

 

265.6

 

Other(1)

 

 

39.8

 

 

 

76.8

 

 

 

153.6

 

Total Net Sales

 

$

830.7

 

 

$

1,208.8

 

 

$

1,610.6

 

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

The following table provides the major sources of revenue by product type for the years ended December 31, 2020, 2019 and 2018:

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Bar

 

$

502.5

 

 

$

783.0

 

 

$

1,030.7

 

Tube

 

 

101.4

 

 

 

151.8

 

 

 

254.7

 

Value-add

 

 

208.1

 

 

 

240.6

 

 

 

284.3

 

Other(2)

 

 

18.7

 

 

 

33.4

 

 

 

40.9

 

Total Net Sales

 

$

830.7

 

 

$

1,208.8

 

 

$

1,610.6

 

 

(2) “Other” for sales by product type includes the Company’s scrap sales.

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Note 5 - Restructuring Charges

During 2019 and throughout 2020, TimkenSteel made organizational changes to streamline its organizational structure to drive enhanced profitability and sustainable growth. These company-wide actions included the restructuring of its business support functions, the reduction of management layers throughout the organization, the closure of the TimkenSteel Material Services (TMS) facility in Houston, Texas and other domestic and international actions to further improve the Company’s overall cost structure. Through these restructuring efforts, to date the Company has eliminated approximately 215 salaried positions and recognized restructuring charges of $3.1 million in 2020 and $8.6 million in 2019, primarily consisting of severance and employee-related benefits. Approximately 55 of these positions were eliminated in 2020. TimkenSteel recorded reserves for such restructuring charges as other current liabilities on the Consolidated Balance Sheets. The reserve balance at December 31, 2020 is expected to be substantially used in the next twelve months.

The following is a summary of the restructuring reserve for the twelve months ended December 31, 2020 and 2019:

Balance at December 31, 2019

 

$

6.0

 

Expenses (1)

 

 

3.1

 

Payments

 

 

(7.6

)

Balance at December 31, 2020

 

$

1.5

 

 

(1)

Expenses of $3.1 million exclude stock compensation of $0.1 million that was accelerated as a result of the Company’s restructuring activities.

 

Balance at December 31, 2018

 

$

—

 

Expenses (2)

 

 

8.6

 

Payments

 

 

(2.6

)

Balance at December 31, 2019

 

$

6.0

 

 

(2)

Expenses of $8.6 million exclude stock compensation of $0.3 million that was accelerated as a result of the Company’s restructuring activities.

There were no restructuring charges for the year ended December 31, 2018.

Note 6 - Disposition of Non-Core Assets

Scrap Processing Facility

During the fourth quarter of 2019, management signed a letter of intent to dispose of the Company’s scrap processing facility in Akron, Ohio for cash consideration of approximately $4.0 million. This letter of intent and cash consideration were for the land, buildings, machinery and equipment associated with this facility.

As a result of the agreement to sell the scrap processing facility, the Company ceased depreciation of the assets and recorded them as assets held for sale on the Consolidated Balance Sheets as of December 31, 2019. This disposal does not represent a discontinued operation. Additionally, the Company recorded an impairment charge of $7.3 million in the fourth quarter of 2019 which represents the cash consideration to be received less cost to sell the assets compared with the $11.3 million carrying value of the assets being sold, including supplies inventory. An additional loss on disposal of $0.1 million was recognized in the first quarter of 2020 as the sale was completed.

TimkenSteel Material Services Facility

During the first quarter of 2020, management completed its previously announced plan to close the Company’s TMS facility in Houston and began selling the assets at the facility. Accelerated depreciation and amortization on TMS assets of $2.8 million was recorded in the fourth quarter of 2019, with an additional $1.6 million of accelerated depreciation and amortization recorded in the first quarter of 2020, to reduce the net book value of the machinery and equipment to its estimated fair value. Subsequent to the closure, certain assets were sold and a gain on sale of $3.6 million was recognized for the year ended December 31, 2020.

At December 31, 2020, the remaining associated machinery and equipment, with a net book value of $0.3 million, was classified as held for sale on the Consolidated Balance Sheets. The land and buildings associated with TMS were not classified as held for sale, as they were not considered available for immediate sale in their present condition.

Inventory write-downs of $4.8 million were recorded as of December 31, 2019, which represented the difference between the expected selling price and carrying value of the related inventory. The expected selling price was based upon the Company’s most recently published price lists related to this inventory. While the Company began selling the inventory associated with TMS in the first quarter of 2020 at prices that were in line with the net realizable value of the inventory established in the fourth quarter of 2019, excess inventory related to the energy end-market sector resulted in an additional reserve of approximately $3.1 million being recorded in the second quarter of 2020. The excess inventory is the

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result of continued weakness in this end-market sector, as well as recent closures of several distributors that were holding considerable amounts of similar inventory.

 

Small-Diameter Seamless Mechanical Tubing Machinery and Equipment

 

In the third quarter of 2020, TimkenSteel informed customers that as of December 31, 2020 the Company will discontinue the commercial offering of specific small-diameter seamless mechanical tubing product offerings. As a result, the Company recognized accelerated depreciation of $1.8 million for the year ended December 31, 2020 on the machinery and equipment used in the manufacturing of these specific products. Additional accelerated depreciation of $1.3 million will be recognized in the first quarter of 2021 in alignment with the ramp down of this machinery and equipment.

 

Property Sales

 

In the fourth quarter of 2020, TimkenSteel sold portions of non-core property at the Canton, Ohio manufacturing location, resulting in a gain on sale of assets of $0.5 million for the year ended December 31, 2020.

Note 7 - Other (Income) Expense, net

The following table provides the components of other (income) expense, net for the years ended December 31, 2020, 2019 and 2018:

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Pension and postretirement non-service benefit (income) loss

 

$

(26.6

)

 

$

(17.5

)

 

$

(25.2

)

Loss (gain) from remeasurement of benefit plans

 

 

14.7

 

 

 

40.6

 

 

 

43.5

 

Foreign currency exchange loss (gain)

 

 

0.2

 

 

 

—

 

 

 

0.2

 

Employee retention credit

 

 

(2.3

)

 

 

—

 

 

 

—

 

Miscellaneous (income) expense

 

 

(0.2

)

 

 

0.2

 

 

 

0.1

 

Total other (income) expense, net

 

$

(14.2

)

 

$

23.3

 

 

$

18.6

 

Non-service related pension and other postretirement benefit income, for all years, consists primarily of the interest cost, expected return on plan assets and amortization components of net periodic cost. The loss from remeasurement of benefit plans is due to the Company performing mark-to-market accounting on its pension and postretirement assets at year-end and upon the occurrence of certain triggering events. For more details on the remeasurement refer to “Note 15 - Retirement and Postretirement Plans.”

Coronavirus Aid, Relief, and Economic Security ("CARES") Act

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, an economic stimulus package intended to provide support, principally in the form of tax benefits, to companies and individuals negatively impacted by the COVID-19 pandemic. Although the majority of the provisions included in the CARES Act did not immediately benefit the Company from a cash tax perspective due to its significant net operating losses, the Company has taken advantage of the deferral of the employer share (6.2% of employee wages) of Social Security payroll taxes that would otherwise have been owed from the date of enactment of the legislation through December 31, 2020, as afforded by the Act. Through December 31, 2020, the Company has deferred $6.4 million in cash payments and recorded reserves for such deferred payroll taxes in salaries, wages and benefits on the Consolidated Balance Sheets. The deferred amount of payments is to be paid in two equal installments at December 31, 2021 and December 31, 2022.

The CARES Act also provided for an employee retention credit (“Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee throughout the year. The Company qualified for the tax credit in the second and third quarters of 2020 and accrued a benefit of $2.3 million in the fourth quarter of 2020 related to the Employee Retention Credit in other (income) expense, net on the Company’s Consolidated Statements of Operations.

Note 8 - Income Tax Provision

Income (loss) from operations before income taxes, based on geographic location of the operations to which such earnings are attributable, is provided below.

 

 

Years Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

United States

 

$

(64.1

)

 

$

(130.8

)

 

$

(10.1

)

Non-United States

 

 

3.4

 

 

 

4.7

 

 

 

1.9

 

Loss from operations before income taxes

 

$

(60.7

)

 

$

(126.1

)

 

$

(8.2

)

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The provision (benefit) for income taxes consisted of the following:

 

 

Years Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

0.6

 

 

$

—

 

 

$

—

 

State and local

 

 

—

 

 

 

0.1

 

 

 

0.3

 

Foreign

 

 

0.5

 

 

 

0.4

 

 

 

0.7

 

Total current tax expense (benefit)

 

$

1.1

 

 

$

0.5

 

 

$

1.0

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

(0.4

)

 

$

(14.4

)

 

$

0.4

 

State and local

 

 

0.5

 

 

 

(2.0

)

 

 

—

 

Foreign

 

 

—

 

 

 

(0.2

)

 

 

0.4

 

Total deferred tax expense (benefit)

 

 

0.1

 

 

 

(16.6

)

 

 

0.8

 

Provision (benefit) for incomes taxes

 

$

1.2

 

 

$

(16.1

)

 

$

1.8

 

For the year ended December 31, 2020, TimkenSteel made $0.4 million in foreign tax payments, $0.1 million in state tax payments, and no U.S. federal payments, and had no refundable overpayments of state income taxes. For the year ended December 31, 2019, TimkenSteel made $0.6 million in foreign tax payments, $0.2 million in state tax payments, and no U.S. federal payments, and had no refundable overpayments of state income taxes.

The reconciliation between TimkenSteel’s effective tax rate on income (loss) from continuing operations and the statutory tax rate is as follows:

 

 

Years Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

U.S. federal income tax provision (benefit) at statutory rate

 

$

(12.7

)

 

$

(26.5

)

 

$

(6.3

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

State and local income taxes, net of federal tax benefit

 

 

2.3

 

 

 

(1.3

)

 

 

(0.5

)

Foreign earnings taxed at different rates

 

 

0.1

 

 

 

—

 

 

 

0.2

 

U.S. research tax credit

 

 

—

 

 

 

0.2

 

 

 

(0.2

)

Valuation allowance

 

 

10.3

 

 

 

10.2

 

 

 

7.5

 

Global intangible low-taxed income

 

 

—

 

 

 

0.2

 

 

 

0.5

 

Permanent differences

 

 

1.3

 

 

 

1.3

 

 

 

0.8

 

Other items, net

 

 

(0.1

)

 

 

(0.2

)

 

 

(0.2

)

Provision (benefit) for income taxes

 

$

1.2

 

 

$

(16.1

)

 

$

1.8

 

Effective tax rate

 

 

(2.0

)%

 

 

12.8

%

 

 

(5.9

)%

Income tax expense includes U.S. and international income taxes. Except as required under U.S. tax law, U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the U.S. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. During the third quarter of 2020, TimkenSteel (Shanghai) Corporation Limited declared a dividend of $5.1 million to TimkenSteel. Foreign withholding taxes paid on this repatriation of previous profits were $0.5 million, resulting in $4.6 million of cash sent to the U.S.

Undistributed earnings of foreign subsidiaries outside of the U.S. were $2.7 million, $6.5 million and $5.5 million at December 31, 2020, 2019 and 2018, respectively. The Company has recognized a deferred tax liability in the amount of $0.3 million and $0.7 million at December 31, 2020 and 2019, respectively, for undistributed earnings at its TimkenSteel (Shanghai) Corporation Limited and TimkenSteel de Mexico S. de R.C. de C.V. subsidiaries, as those earnings are not permanently reinvested by the Company.

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The effect of temporary differences giving rise to deferred tax assets and liabilities at December 31, 2020 and 2019 was as follows:

 

 

December 31,

 

 

 

2020

 

 

2019

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Depreciation

 

$

(97.5

)

 

$

(98.6

)

Inventory

 

 

(16.2

)

 

 

(24.3

)

Convertible debt

 

 

(1.6

)

 

 

(1.7

)

Leases - right-of-use asset

 

 

(5.0

)

 

 

(3.4

)

Other, net

 

 

(0.3

)

 

 

(0.7

)

Deferred tax liabilities

 

$

(120.6

)

 

$

(128.7

)

Deferred tax assets:

 

 

 

 

 

 

 

 

Pension and postretirement benefits

 

$

50.3

 

 

$

47.9

 

Other employee benefit accruals

 

 

8.7

 

 

 

7.2

 

Tax loss carryforwards

 

 

94.4

 

 

 

86.0

 

Intangible assets

 

 

1.0

 

 

 

1.1

 

Inventory

 

 

4.5

 

 

 

5.4

 

State decoupling

 

 

2.8

 

 

 

4.5

 

Lease liability

 

 

5.0

 

 

 

3.4

 

Interest limitation

 

 

—

 

 

 

6.0

 

Other, net

 

 

0.6

 

 

 

1.2

 

Deferred tax assets subtotal

 

$

167.3

 

 

$

162.7

 

Valuation allowances

 

 

(47.7

)

 

 

(34.9

)

Deferred tax assets

 

 

119.6

 

 

 

127.8

 

Net deferred tax assets (liabilities)

 

$

(1.0

)

 

$

(0.9

)

As of December 31, 2020 and 2019, the Company had a deferred tax liability of $1.0 million and $0.9 million, respectively, on the Consolidated Balance Sheets.

As of December 31, 2020, TimkenSteel had loss carryforwards in the U.S. and various non-U.S. jurisdictions totaling $406.8 million (of which $348.3 million relates to the U.S. and $58.5 million relates to the UK jurisdiction), having various expiration dates. TimkenSteel has provided valuation allowances of $47.7 million against these carryforwards. The majority of the non-U.S. loss carryforwards represent local country net operating losses for branches of TimkenSteel or entities treated as branches of TimkenSteel under U.S. tax law. Tax benefits have previously been recorded for these losses in the U.S. The related local country net operating loss carryforwards are offset fully by valuation allowances.  

During 2016, operating losses generated in the U.S. resulted in a decrease in the carrying value of the Company’s U.S. deferred tax liability to the point that would result in a net U.S. deferred tax asset at December 31, 2016. In light of TimkenSteel’s operating performance in the U.S. and current industry conditions, the Company assessed, based upon all available evidence, and concluded that it was more likely than not that it would not realize a portion of its U.S. deferred tax assets. The Company recorded a valuation allowance in 2016 and as a result of current year activity, the Company remained in a full valuation allowance position through 2020. Going forward, the need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s effective tax rate. The Company will maintain a valuation allowance against its deferred tax assets in the U.S. and applicable foreign countries until sufficient positive evidence exists to eliminate them.

As of December 31, 2020, 2019 and 2018, TimkenSteel had no total gross unrecognized tax benefits, and no amounts which represented unrecognized tax benefits that would favorably impact TimkenSteel’s effective income tax rate in any future periods if such benefits were recognized. As of December 31, 2020, TimkenSteel does not anticipate a change in its unrecognized tax positions during the next 12 months. TimkenSteel had no accrued interest and penalties related to uncertain tax positions as of December 31, 2020, 2019 and 2018.

As of December 31, 2020, TimkenSteel is not subject to examination by the IRS. Pursuant to the Tax Sharing Agreement dated June 30, 2014 between TimkenSteel and The Timken Company, TimkenSteel may be subject to results from tax examinations for The Timken Company for federal, state and local and various foreign tax jurisdictions in various open audit periods.

Consolidated Appropriations Act of 2021

On December 27, 2020 the Consolidated Appropriations Act of 2021 (“the Appropriations Act”) was signed into law. The Appropriations Act, among other things includes provisions related to the deductibility of paycheck protection program (“PPP”) expenses paid with PPP loan proceeds, payroll tax credits, modifications to the meals and entertainment deduction, increased limitations on charitable deductions for corporate taxpayers, and enhancements of expiring tax “extender” provisions. The Company has completed its assessment of the impact of the legislation, and there is no significant impact to the Consolidated Financial Statements.

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Note 9 - Earnings (Loss) Per Share

 

Basic loss per share is computed based upon the weighted average number of common shares outstanding. Diluted loss per share is computed based upon the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the treasury stock method or if-converted method. For the Convertible Notes, the Company utilizes the if-converted method to calculate diluted loss per share. Under the if-converted method, the Company adjusts net earnings to add back interest expense (including amortization of debt discount) recognized on the Convertible Notes and includes the number of shares potentially issuable related to the Convertible Notes in the weighted average shares outstanding. Treasury stock is excluded from the denominator in calculating both basic and diluted loss per share.

For the years ended December 31, 2020, 2019 and 2018, 4.6 million, 3.7 million, and 3.3 million shares issuable for equity-based awards, respectively, were excluded from the computation of diluted loss per share because the effect of their inclusion would have been anti-dilutive. The shares potentially issuable related to the Convertible Notes for the years ended December 31, 2020, 2019, and 2018 of 9.1 million, 6.9 million, and 6.9 million, respectively, were also anti-dilutive and therefore excluded from the computation of diluted loss per share.

The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted loss per share for the years ended December 31, 2020, 2019 and 2018:

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(61.9

)

 

$

(110.0

)

 

$

(10.0

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

 

45.0

 

 

 

44.8

 

 

 

44.6

 

Weighted average shares outstanding, diluted

 

 

45.0

 

 

 

44.8

 

 

 

44.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(1.38

)

 

$

(2.46

)

 

$

(0.22

)

Diluted earnings (loss) per share

 

$

(1.38

)

 

$

(2.46

)

 

$

(0.22

)

 

Note 10 – Inventories

The components of inventories as of December 31, 2020 and 2019 were as follows:

 

 

December 31,

 

 

 

2020

 

 

2019

 

Manufacturing supplies

 

$

37.6

 

 

$

49.8

 

Raw materials

 

 

20.0

 

 

 

26.0

 

Work in process

 

 

79.1

 

 

 

123.7

 

Finished products

 

 

55.6

 

 

 

93.1

 

Gross inventory

 

 

192.3

 

 

 

292.6

 

Allowance for inventory reserves

 

 

(13.9

)

 

 

(10.7

)

Total inventories, net

 

$

178.4

 

 

$

281.9

 

In connection with the closure of TMS, the Company recorded an additional reserve against inventory of $4.8 million in 2019 and increased this reserve by $3.1 million in the second quarter of 2020 to state it at the lower of cost or net realizable value. See “Note 6 - Disposition of Non-Core Assets.”

Note 11 - Property, Plant and Equipment

The components of property, plant and equipment, net as of December 31, 2020 and 2019 were as follows:

 

 

December 31,

 

 

 

2020

 

 

2019

 

Land

 

$

13.3

 

 

$

13.3

 

Buildings and improvements

 

 

422.5

 

 

 

419.0

 

Machinery and equipment

 

 

1,398.7

 

 

 

1,404.6

 

Construction in progress

 

 

11.0

 

 

 

30.9

 

Subtotal

 

 

1,845.5

 

 

 

1,867.8

 

Less allowances for depreciation

 

 

(1,275.7

)

 

 

(1,241.4

)

Property, plant and equipment, net

 

$

569.8

 

 

$

626.4

 

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Total depreciation expense was $65.0 million, $67.4 million, and $67.5 million for the years ended December 31, 2020, 2019, and 2018 respectively. Depreciation expense for the years ended December 31, 2020 and 2019 includes $2.4 million and $1.9 million, respectively, of accelerated depreciation related to the closure of TMS which was announced in the fourth quarter of 2019 and the discontinuation of specific small-diameter seamless mechanical tube manufacturing announced in 2020. See “Note 6 - Disposition of Non-Core Assets” for additional information. For the year ended December 31, 2020, TimkenSteel recorded a net gain on the sale and disposal of assets of $2.6 million, primarily related to the sale of certain TMS assets. For the year ended December 31, 2019, TimkenSteel recorded impairments and loss on disposal of assets of $9.0 million primarily related to the abandonment of certain equipment and the impairment of assets held for sale. For the year ended December 31, 2018, TimkenSteel recorded approximately $0.5 of impairment charges and loss on sale or disposal of assets related to the discontinued use of certain assets.

Note 12 - Intangible Assets

The components of intangible assets, net as of December 31, 2020 and 2019 were as follows:

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Customer relationships

 

$

6.3

 

 

$

5.4

 

 

$

0.9

 

 

$

6.3

 

 

$

5.0

 

 

$

1.3

 

Technology use

 

 

9.0

 

 

 

9.0

 

 

 

—

 

 

 

9.0

 

 

 

8.0

 

 

 

1.0

 

Capitalized software

 

 

58.0

 

 

 

49.6

 

 

 

8.4

 

 

 

61.1

 

 

 

49.1

 

 

 

12.0

 

Total intangible assets

 

$

73.3

 

 

$

64.0

 

 

$

9.3

 

 

$

76.4

 

 

$

62.1

 

 

$

14.3

 

Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives. The weighted average useful lives of the customer relationships, technology use and capitalized software intangible assets are 15 years, 15 years and 6 years, respectively. The weighted average useful life of total intangible assets is 8 years. Amortization expense for intangible assets for the years ended December 31, 2020, 2019, and 2018 was $5.0 million, $6.1 million and $5.5 million, respectively. Amortization expense in 2020 and 2019 associated with capitalized software includes accelerated amortization of $1.0 million and $0.9 million, respectively, related to the closure of TMS. See “Note 6 - Disposition of Non-Core Assets” for additional information. During the years ended December 31, 2020, 2019, and 2018, TimkenSteel recorded a loss on disposal of $0.2 million, $0.1 million, and $0.4 million, respectively, related to capitalized software.

Based upon the intangible assets subject to amortization as of December 31, 2020, TimkenSteel’s estimated annual amortization for the five succeeding years is shown below (in millions):

Year

 

Amortization

Expense

 

2021

 

$

3.1

 

2022

 

 

2.6

 

2023

 

 

2.0

 

2024

 

 

1.0

 

2025

 

 

0.1

 

 

Note 13 - Leases

The Company has operating leases for office space, warehouses, land, machinery and equipment, vehicles and certain information technology equipment. These leases have remaining lease terms of less than one year to six years, some of which may include options to extend the leases for one or more years. Certain leases also include options to purchase the leased property. As of December 31, 2020, the Company has no financing leases. The weighted average remaining lease term for our operating leases as of December 31, 2020 was 3.4 years.

Leases with an initial term of 12 months or less (short-term leases) are not recorded on the balance sheet. Rather, the Company recognizes lease expense for these leases on a straight-line basis over the lease term in accordance with the applicable accounting guidance. For lease agreements entered into after the adoption of lease accounting guidance on January 1, 2019, the Company combines lease and non-lease components. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.

The Company recorded lease cost for the year ended December 31, 2020 as follows:

 

 

Year Ended December 31,

 

 

 

2020

 

2019

 

Operating lease cost

 

$

8.8

 

$

7.4

 

Short-term lease cost

 

 

0.7

 

 

1.9

 

Total lease cost

 

$

9.5

 

$

9.3

 

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When available, the rate implicit in the lease is used to discount lease payments to present value; however, the Company’s leases generally do not provide a readily determinable implicit rate. Therefore, the incremental borrowing rate to discount the lease payments is estimated using market-based information available at lease commencement. The weighted average discount rate used to measure our operating lease liabilities as of December 31, 2020 was 3.2%.

Supplemental cash flow information related to leases was as follows:

 

 

 

Year Ended December 31,

 

 

 

2020

 

2019

 

Cash paid for amounts included in the measurement of operating lease liabilities

 

$

8.8

 

$

7.5

 

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

 

$

12.5

 

$

4.3

 

Future minimum lease payments under non-cancellable leases as of December 31, 2020 were as follows:

2021

 

$

8.4

 

2022

 

 

5.7

 

2023

 

 

4.8

 

2024

 

 

2.7

 

After 2024

 

 

0.9

 

Total future minimum lease payments

 

 

22.5

 

    Less amount of lease payment representing interest

 

 

(1.5

)

Total present value of lease payments

 

$

21.0

 

As of December 31, 2020, we do not have any significant operating leases that have not yet commenced.

Note 14 - Financing Arrangements

The following table summarizes the current and non-current debt as of December 31, 2020 and 2019:

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Credit Agreement

 

$

—

 

 

$

90.0

 

Convertible Senior Notes due 2021

 

 

38.9

 

 

 

78.6

 

Convertible Senior Notes due 2025

 

 

39.3

 

 

 

0.0

 

Total debt

 

$

78.2

 

 

$

168.6

 

     Less current portion of debt

 

 

38.9

 

 

 

—

 

Total non-current portion of debt

 

$

39.3

 

 

$

168.6

 

Amended Credit Agreement

On October 15, 2019, the Company, as borrower, and certain domestic subsidiaries of the Company, as subsidiary guarantors, entered into a Third Amended and Restated Credit Agreement (the Amended Credit Agreement), with JP Morgan Chase Bank, N.A., as administrative agent (the Administrative Agent), Bank of America, N.A., as syndication agent, and the other lenders party thereto (collectively, the Lenders), which further amended and restated the Company’s existing Credit Agreement dated as of January 26, 2018.

The Amended Credit Agreement provides for a $400.0 million asset-based revolving credit facility (the Credit Facility), including a $15.0 million sublimit for the issuance of commercial and standby letters of credit and a $40.0 million sublimit for swingline loans. Pursuant to the terms of the Amended Credit Agreement, the Company is entitled, on up to two occasions and subject to the satisfaction of certain conditions, to request increases in the commitments under the Amended Credit Agreement in the aggregate principal amount of up to $100.0 million, to the extent that existing or new lenders agree to provide such additional commitments. In addition to, and independent of any increase described in the preceding sentence, the Company is entitled, subject to the satisfaction of certain conditions, to request a separate first-in, last-out (FILO) tranche in an aggregate principal amount of up to $30.0 million with a separate borrowing base and interest rate margins, in each case, to be agreed upon among the Company, the Administrative Agent and the Lenders providing the incremental FILO tranche.

The availability of borrowings under the Credit Facility is subject to a borrowing base calculation based upon a valuation of the eligible accounts receivable, inventory and machinery and equipment of the Company and the subsidiary guarantors, each multiplied by an applicable advance rate. The availability of borrowings may be further modified by reserves established from time to time by the Administrative Agent in its permitted discretion.

The interest rate per annum applicable to loans under the Credit Facility will be, at the Company’s option, equal to either (i) the alternate base rate plus the applicable margin or (ii) the relevant adjusted LIBO rate for an interest period of one, two, three or six months (as selected by the

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Company) plus the applicable margin. The base rate will be a fluctuating rate per annum equal to the greatest of (i) the prime rate as quoted in The Wall Street Journal, (ii) the effective Federal Reserve Bank of New York rate plus 0.50% and (iii) the adjusted LIBO rate for a one-month interest period on the applicable date, plus 1.00%. The adjusted LIBO rate will be equal to the applicable London interbank offered rate for the selected interest period, as adjusted for statutory reserve requirements for eurocurrency liabilities. The applicable margin will be determined by a pricing grid based on the Company’s average quarterly availability. In addition, the Company will pay a 0.25% per annum commitment fee on the average daily unused amount of the Credit Facility. As of December 31, 2020, the amount available under the Amended Credit Agreement was $211.3 million, reflective of the Company’s asset borrowing base with no outstanding borrowings.

All of the indebtedness under the Credit Facility is guaranteed by the Company’s material domestic subsidiaries, as well as any other domestic subsidiary that the Company elects to make a party to the Amended Credit Agreement, and is secured by substantially all of the personal property of the Company and the subsidiary guarantors.

The Credit Facility matures on October 15, 2024. Prior to the maturity date, amounts outstanding are required to be repaid (without reduction of the commitments thereunder) from mandatory prepayment events from the proceeds of certain asset sales, equity or debt issuances or casualty events.

The Amended Credit Agreement contains certain customary covenants, including covenants that limit the ability of the Company and its subsidiaries to, among other things, (i) incur or suffer to exist certain liens, (ii) make investments, (iii) incur or guaranty additional indebtedness, (iv) enter into consolidations, mergers, acquisitions, sale-leaseback transactions and sales of assets, (v) make distributions and other restricted payments, (vi) change the nature of its business, (vii) engage in transactions with affiliates and (viii) enter into restrictive agreements, including agreements that restrict the ability to incur liens or make distributions.

In addition, the Amended Credit Agreement requires the Company to (i) unless certain conditions are met, maintain certain minimum liquidity as specified in the Amended Credit Agreement during the period commencing on March 1, 2021 and ending on June 1, 2021 and (ii) maintain a minimum specified fixed charge coverage ratio on a springing basis if minimum availability requirements as specified in the Amended Credit Agreement are not maintained.

The Amended Credit Agreement contains certain customary events of default. If any event of default occurs and is continuing, the Lenders would be entitled to take various actions, including the acceleration of amounts due under the Amended Credit Agreement, and exercise other rights and remedies.

Convertible Senior Notes due 2021

In May 2016, the Company issued $75.0 million aggregate principal amount of Convertible Senior Notes, and an additional $11.3 million principal amount to cover over-allotments (Convertible Senior Notes due 2021). The Indenture for the Convertible Notes dated May 31, 2016, which was filed with the Securities and Exchange Commission as an exhibit to a Form 8-K filed on May 31, 2016, contains a complete description of the terms of the Convertible Senior Notes due 2021. The key terms are as follows:

Maturity Date:          June 1, 2021 unless repurchased or converted earlier

Interest Rate:             6.0% cash interest per year

Interest Payments Dates:    June 1 and December 1 of each year, beginning on December 1, 2016

Initial Conversion Price:    $12.58 per common share of the Company

Initial Conversion Rate:     79.5165 common shares per $1,000 principal amount of Notes

The net proceeds to the Company from the offering were $83.2 million, after deducting the initial underwriters’ discount and fees and the offering expenses payable by the Company. The Company used the net proceeds to repay a portion of the amounts outstanding under its revolving credit agreement.

The initial value of the principal amount recorded as a liability at the date of issuance was $66.9 million, using an effective interest rate of 12.0%. The remaining $19.4 million of principal amount was allocated to the conversion feature and recorded as a component of shareholders’ equity at the date of issuance. This amount represents a discount to the debt to be amortized through interest expense using the effective interest method through the maturity of the Convertible Senior Notes due 2021.

Transaction costs were allocated to the liability and equity components based on their relative values. Transaction costs attributable to the liability component of $2.4 million are amortized to interest expense over the term of the Convertible Senior Notes due 2021, and transaction costs attributable to the equity component of $0.7 million are included in shareholders’ equity.

 

 

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Convertible Notes Exchange

In December 2020, TimkenSteel entered into separate, privately negotiated exchange agreements with a limited number of holders of the Company’s currently outstanding Convertible Senior Notes due 2021. Pursuant to the exchange agreements, the Company exchanged $46.0 million aggregate principal amount of Convertible Senior Notes due 2021 for $46.0 million aggregate principal amount of its new 6.0% Convertible Senior Notes due 2025 (Convertible Senior Notes due 2025 and, together with the Convertible Senior Notes due 2021, the Convertible Notes). The Company did not receive any cash proceeds from the issuance of the Convertible Senior Notes due 2025.

The Company evaluated this exchange and determined that $46.0 million of the Convertible Senior Notes due 2021 were deemed to be extinguished, as the present value of the cash flows under the terms of the Convertible Senior Notes due 2025 is at least 10 percent different from the present value of the remaining cash flows under the terms of the Convertible Senior Notes due 2021, as defined by the relevant accounting standards.

Pursuant to applicable accounting guidance, the fair value of the extinguished portion of Convertible Senior Notes due 2021 was calculated using a market rate of 9.0%, based on comparable debt instruments, and a remaining term of five and a half months. The difference between the fair value and the net carrying amount of the liability component, calculated below, was recognized on the Consolidated Statements of Operations as a loss on extinguishment of debt.

 

Net carrying amount of extinguished Convertible Senior Notes due 2021 as of December 15, 2020

 

 

 

 

    Principal

 

$

46.0

 

    Less: Debt issuance costs, net of amortization

 

 

(0.1

)

    Less: Debt discount, net of amortization

 

 

(1.5

)

Fair value of extinguished Convertible Senior Notes due 2021 as of December 15, 2020

 

 

45.3

 

Loss on extinguishment of debt

 

$

(0.9

)

 

The amount allocated to the reacquisition of the equity component, included as a reduction to additional paid-in capital on the Consolidated Balance Sheets, was calculated as follows:

 

Fair value of extinguished Convertible Senior Notes due 2021 as of December 15, 2020

 

$

45.3

 

Principal of extinguished Convertible Senior Notes due 2021

 

 

46.0

 

Reduction of additional paid-in capital

 

$

(0.7

)

 

The remaining accrued and unpaid interest on the $46.0 million of the extinguished Convertible Senior Notes due 2021 was paid in the amount of $0.1 million to the holders on December 15, 2020.

The components of the Convertible Senior Notes due 2021 as of December 31, 2020 and December 31, 2019 were as follows:

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Principal

 

$

40.2

 

 

$

86.3

 

Less: Debt issuance costs, net of amortization

 

 

(0.1

)

 

 

(0.7

)

Less: Debt discount, net of amortization

 

 

(1.2

)

 

 

(7.0

)

Convertible Senior Notes due 2021, net

 

$

38.9

 

 

$

78.6

 

 

The Convertible Senior Notes due 2021 mature on June 1, 2021, and accordingly are classified as a current liability in the consolidated balance sheet as of December 31, 2020.

Convertible Senior Notes due 2025

The Convertible Senior Notes due 2025 were issued pursuant to the provisions of the indenture dated May 31, 2016, as supplemented by a supplemental indenture dated December 15, 2020, which was filed with the Securities and Exchange Commission as an exhibit to a Form 8-K on December 15, 2020. The indentures contain a complete description of the terms of the Convertible Senior Notes due 2025. The key terms are as follows:

Maturity Date:          December 1, 2025 unless repurchased or converted earlier

Interest Rate:              6.0% cash interest per year

Interest Payments Dates:    June 1 and December 1 of each year, beginning on December 1, 2021

Initial Conversion Price:    $7.82 per common share of the Company

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Initial Conversion Rate:     127.8119 common shares per $1,000 principal amount of Notes

The initial value of the principal amount recorded as a liability at the date of issuance was $40.6 million, using an effective interest rate of 9.0%. The remaining $5.5 million of principal amount was allocated to the conversion feature and recorded as a component of shareholders’ equity at the date of issuance. This amount represents a discount to the debt to be amortized through interest expense using the effective interest method through the maturity of the Convertible Senior Notes due 2025.

Transaction costs were allocated to the liability and equity components based on their relative values. Transaction costs attributable to the liability component of $1.3 million are amortized through interest expense over the term of the Convertible Senior Notes due 2025, and transaction costs attributable to the equity component of $0.2 million are included in shareholders’ equity.

The components of the Convertible Senior Notes due 2025 as of December 31, 2020 is as follows:

 

 

 

Year Ended December 31, 2020

Principal

 

$

46.0

 

 

Less: Debt issuance costs, net of amortization

 

 

(1.3

)

 

Less: Debt discount, net of amortization

 

 

(5.4

)

 

Convertible Senior Notes due 2025, net

 

$

39.3

 

 

 

Fair Value Measurement

The fair value of the Convertible Senior Notes due 2021 was approximately $34.6 million as of December 31, 2020. The fair value of the Convertible Senior Notes due 2021, which falls within Level 1 of the fair value hierarchy as defined by applicable accounting guidance, is based on the last price traded in December 2020.

The fair value of the Convertible Senior Notes due 2025 was approximately $39.3 million as of December 31, 2020. The fair value of the Convertible Senior Notes due 2025, which falls within Level 2 of the fair value hierarchy as defined by applicable accounting guidance, is based on market rates of comparable debt instruments without a conversion option.

TimkenSteel’s Credit Facility is variable-rate debt. As such, any outstanding carrying value is a reasonable estimate of fair value as interest rates on these borrowings approximate current market rates. This valuation falls within Level 2 of the fair value hierarchy and is based on quoted prices for similar assets and liabilities in active markets that are observable either directly or indirectly. There were no outstanding borrowings on the Credit Facility as of December 31, 2020.

Convertible Notes Interest Expense

The following table sets forth total interest expense recognized related to the Convertible Notes:

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Contractual interest expense

 

$

5.2

 

 

$

5.2

 

Amortization of debt issuance costs

 

 

0.5

 

 

 

0.4

 

Amortization of debt discount

 

 

4.4

 

 

 

4.0

 

Total

 

$

10.1

 

 

$

9.6

 

Cash Interest Paid

The total cash interest paid for the year ended December 31, 2020 and 2019 was $7.6 million and $11.5 million, respectively.

New Accounting Standard related to the Convertible Notes

In August 2020, the FASB issued ASU 2020-06, “Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)”, which simplifies the accounting for convertible debt and other equity-linked instruments. The Company has elected to early adopt this standard as of January 1, 2021 using the modified retrospective method of transition. Upon adoption, all outstanding Convertible Notes will be fully classified as a liability, and there will no longer be a separate equity component. We expect this impact will result in a decrease of approximately $10.6 million to additional paid-in capital and an increase of approximately $1.1 million and $5.3 million to current convertible notes, net and non-current convertible notes, net, respectively, on the Consolidated Balance Sheets. Additionally, retained earnings will be adjusted to remove amortization expense recognized in prior periods related to the debt discount and the Convertible Notes will no longer have a debt discount that will be amortized. The impact to retained deficit on the Consolidated Balance Sheets as of January 1, 2021 is a decrease of approximately $4.3 million. We do not expect the new standard to affect the Company’s earnings per share, cash flows and liquidity.

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Note 15 - Retirement and Postretirement Plans

Eligible TimkenSteel employees, including certain employees in foreign countries, participate in the following TimkenSteel-sponsored plans: TimkenSteel Corporation Retirement Plan (Salaried Plan); TimkenSteel Corporation Bargaining Unit Pension Plan, Supplemental Pension Plan of TimkenSteel Corporation, TimkenSteel U.K. Pension Scheme, TimkenSteel Corporation Bargaining Unit Welfare Benefit Plan for Retirees, and TimkenSteel Corporation Welfare Benefit Plan for Retirees.

During the second quarter of 2019, the Company amended the TimkenSteel Corporation Bargaining Unit Welfare Plan for Retirees relating to moving Medicare-eligible retirees to an individual plan on a Medicare healthcare exchange. The amendment reduced the postretirement liability by $70.2 million and required the Company to perform a full remeasurement of its obligation and plan assets as of April 30, 2019. The $70.2 million reduction in the APBO was recognized in Other Comprehensive Income (Loss) in 2019 and is being amortized as an offset to postretirement benefit cost over a period of 12 years (average remaining service period). In addition to the reduction of the APBO, the Company recognized a net remeasurement loss of $4.4 million for the year ended December 31, 2019.

During the fourth quarter of 2019, the Company amended the Supplemental Pension Plan of TimkenSteel Corporation, which provides for the payment of nonqualified supplemental pension benefits to certain salaried participants in the TimkenSteel Corporation Retirement Plan. The amendment provides for the cessation of benefit accruals under the Supplemental Plan, effective as of December 31, 2020. Effective January 1, 2021, there will be no new accruals of benefits, including with respect to service accruals and the final average compensation determination. Certain of the Company’s named executive officers are participants in the plan. Existing benefits under the plan, as of December 31, 2020, will otherwise continue in accordance with the terms of the plan. This amendment reduced the pension liability, resulting in a curtailment gain of $0.8 million for the year ended December 31, 2019. This curtailment gain was recognized in Other Income (Expense) in the Consolidated Statement of Operations.

During the fourth quarter of 2019, the Company amended the TimkenSteel Corporation Retirement Plan, which provides payments of tax-qualified pension benefits to certain salaried employees of the Company and its subsidiaries, to cease benefit accruals under the Pension Plan for all remaining active participants, effective as of December 31, 2020. This plan amendment reduced the pension liability, resulting in a curtailment gain of $8.1 million for the year ended December 31, 2019. This curtailment gain was recognized in Other Income (Expense) in the Consolidated Statement of Operations.

During the fourth quarter of 2019, the Company also amended the TimkenSteel Corporation Welfare Benefit Plan for Retirees, under which certain retired salaried employees of the Company and its subsidiaries are eligible to receive a Company contribution for their medical and prescription drug benefits under the retiree welfare plan. The amendment was to eliminate the retiree medical subsidy, effective as of December 31, 2019, for all remaining active salaried participants who retire after December 31, 2019 (provided, however, that participants who were laid off on or before March 31, 2020 and who otherwise qualified for the retiree medical subsidy under the terms of the retiree welfare plan remained entitled to receive the retiree medical subsidy). This plan amendment reduced the postretirement liability by $2.3 million in 2019, was recognized in Other Comprehensive Income (Loss) in 2019 and is being amortized as an offset to postretirement benefit cost in future periods.

Pension benefits earned are generally based on years of service and compensation during active employment. TimkenSteel’s funding policy is consistent with the funding requirements of applicable laws and regulations. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for the various asset classes. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.

The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets for the defined benefit pension plans as of December 31, 2020 and 2019:

 

 

Pension

 

 

Postretirement

 

Change in benefit obligation:

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Benefit obligation at the beginning of year

 

$

1,311.4

 

 

$

1,178.3

 

 

$

126.2

 

 

$

194.7

 

Service cost

 

 

19.4

 

 

 

17.4

 

 

 

1.0

 

 

 

1.1

 

Interest cost

 

 

42.7

 

 

 

48.9

 

 

 

4.2

 

 

 

5.9

 

Actuarial (gains) losses

 

 

114.8

 

 

 

145.7

 

 

 

6.1

 

 

 

11.4

 

Benefits paid

 

 

(71.2

)

 

 

(72.3

)

 

 

(9.2

)

 

 

(14.4

)

Plan amendment

 

 

—

 

 

 

(0.7

)

 

 

—

 

 

 

(72.5

)

Curtailments

 

 

—

 

 

 

(8.9

)

 

 

—

 

 

 

—

 

Settlements

 

 

(24.7

)

 

 

—

 

 

 

—

 

 

 

—

 

Foreign currency translation adjustment

 

 

2.7

 

 

 

3.0

 

 

 

—

 

 

 

—

 

Benefit obligation at the end of year

 

$

1,395.1

 

 

$

1,311.4

 

 

$

128.3

 

 

$

126.2

 

Significant actuarial losses related to changes in benefit obligations for 2020 and 2019 primarily resulted from decreases in discount rates.

 

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Table of Contents

 

 

 

 

Pension

 

 

Postretirement

 

Change in plan assets:

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Fair value of plan assets at the beginning of year

 

$

1,155.4

 

 

$

1,054.4

 

 

$

82.3

 

 

$

86.1

 

Actual return on plan assets

 

 

167.0

 

 

 

167.7

 

 

 

7.0

 

 

 

8.9

 

Company contributions / payments

 

 

1.9

 

 

 

2.0

 

 

 

—

 

 

 

1.7

 

Benefits paid

 

 

(71.2

)

 

 

(72.3

)

 

 

(7.1

)

 

 

(14.4

)

Settlements

 

 

(24.7

)

 

 

—

 

 

 

—

 

 

 

—

 

Foreign currency translation adjustment

 

 

3.3

 

 

 

3.6

 

 

 

—

 

 

 

—

 

Fair value of plan assets at end of year

 

$

1,231.7

 

 

$

1,155.4

 

 

$

82.2

 

 

$

82.3

 

Funded status at end of year

 

$

(163.4

)

 

$

(156.0

)

 

$

(46.1

)

 

$

(43.9

)

The Salaried Plan has a provision that permits employees to elect to receive their pension benefits in a lump sum. In the first quarter of 2020, the cumulative cost of all lump sum payments was projected to exceed the sum of the service cost and interest cost components of net periodic pension cost for the Salaried Plan. As a result, the Company completed a full remeasurement of its pension obligations and plan assets associated with the Salaried Plan during each quarter of 2020. For the year ended December 31, 2020, total settlements were $24.7 million. These settlements are included in the tables above and in the net remeasurement losses (gains) as a component of net periodic benefit cost. The cumulative cost of all lump sums did not exceed service cost and interest cost components of net periodic pension cost for the year ended December 31, 2019.

For the years ended December 31, 2020 and 2019, the pension plan had administrative expenses of $3.8 million and $3.5 million, respectively. These expenses are included in benefits paid in the tables above.

The accumulated benefit obligation at December 31, 2020 exceeded the fair value of plan assets for two of the Company’s pension plans. For these plans, the benefit obligation was $1,081.2 million, the accumulated benefit obligation was $1,063.9 million and the fair value of plan assets was $884.3 million as of December 31, 2020.

The total pension accumulated benefit obligation for all plans was $1,377.6 million and $1,294.5 million as of December 31, 2020 and 2019, respectively.

Amounts recognized on the balance sheet at December 31, 2020 and 2019 for TimkenSteel’s pension and postretirement benefit plans include:

 

 

Pension

 

 

Postretirement

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Non-current assets

 

$

33.5

 

 

$

25.2

 

 

$

—

 

 

$

—

 

Current liabilities

 

 

(0.6

)

 

 

(0.6

)

 

 

(1.7

)

 

 

(2.4

)

Non-current liabilities

 

 

(196.3

)

 

 

(180.6

)

 

 

(44.4

)

 

 

(41.5

)

Total

 

$

(163.4

)

 

$

(156.0

)

 

$

(46.1

)

 

$

(43.9

)

Included in accumulated other comprehensive loss at December 31, 2020 and 2019, were the following before-tax amounts that had not been recognized in net periodic benefit cost:

 

 

Pension

 

 

Postretirement

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Unrecognized prior service (benefit) cost

 

$

0.2

 

 

$

0.5

 

 

$

(61.9

)

 

$

(67.8

)

The weighted average assumptions used in determining benefit obligation as of December 31, 2020 and 2019 were as follows:

 

 

Pension

 

 

Postretirement

 

Assumptions:

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Discount rate

 

 

2.68

%

 

 

3.42

%

 

 

2.65

%

 

 

3.42

%

Future compensation assumption

 

 

2.29

%

 

 

2.32

%

 

n/a

 

 

n/a

 

The weighted average assumptions used in determining benefit cost for the years ended December 31, 2020 and 2019 were as follows:

 

 

Pension

 

 

Postretirement

 

Assumptions:

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Discount rate(1)

 

 

3.42

%

 

 

4.30

%

 

 

3.42

%

 

4.34% / 3.94%

 

Future compensation assumption

 

 

2.32

%

 

 

2.36

%

 

n/a

 

 

n/a

 

Expected long-term return on plan assets

 

 

5.80

%

 

 

6.41

%

 

 

4.50

%

 

 

5.00

%

(1)

The discount rate for the postretirement plans was adjusted after the second quarter 2019 amendment. To calculate benefit costs, the discount rate of 4.34% was used for January to April 2019 and the discount rate of 3.94% was used for May to December 2019.

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The discount rate assumption is based on current rates of high-quality long-term corporate bonds over the same period that benefit payments will be required to be made. The expected rate of return on plan assets assumption is based on the weighted-average expected return on the various asset classes in the plans’ portfolios. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.

For measurement purposes, TimkenSteel assumed a weighted-average annual rate of increase in the per capita cost (health care cost trend rate) of 5.50% and 5.75% for 2020 and 2019, respectively.

The components of net periodic benefit cost (income) for the years ended December 31, 2020, 2019 and 2018 were as follows:

 

 

Pension

 

 

Postretirement

 

 

 

Years Ended December 31,

 

 

Years Ended December 31,

 

Components of net periodic benefit cost (income):

 

2020

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2018

 

Service cost

 

$

19.4

 

 

$

17.4

 

 

$

17.2

 

 

$

1.0

 

 

$

1.1

 

 

$

1.6

 

Interest cost

 

 

42.7

 

 

 

48.9

 

 

 

45.6

 

 

 

4.2

 

 

 

5.9

 

 

 

7.6

 

Expected return on plan assets

 

 

(64.3

)

 

 

(65.0

)

 

 

(74.0

)

 

 

(3.5

)

 

 

(3.9

)

 

 

(4.8

)

Amortization of prior service cost

 

 

0.3

 

 

 

0.4

 

 

 

0.5

 

 

 

(6.0

)

 

 

(3.8

)

 

 

0.2

 

Curtailment

 

 

—

 

 

 

(8.9

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Net remeasurement losses (gains)

 

 

12.1

 

 

 

43.1

 

 

 

49.1

 

 

 

2.6

 

 

 

6.4

 

 

 

(5.6

)

Net Periodic Benefit Cost (Income)

 

$

10.2

 

 

$

35.9

 

 

$

38.4

 

 

$

(1.7

)

 

$

5.7

 

 

$

(1.0

)

TimkenSteel recognizes its overall responsibility to ensure that the assets of its various defined benefit pension plans are managed effectively and prudently and in compliance with its policy guidelines and all applicable laws. Preservation of capital is important; however, TimkenSteel also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the pension funds. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes. The expected rate of return for the investment portfolios is based on expected rates of return for various asset classes, as well as historical asset class and fund performance. The target allocations for plan assets are 21% equity securities, 61% debt securities and 18% in all other types of investments.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 - Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

Level 3 - Unobservable inputs for the asset or liability.

The following table presents the fair value hierarchy for those investments of TimkenSteel’s pension assets measured at fair value on a recurring basis as of December 31, 2020:

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9.2

 

 

$

0.9

 

 

$

8.3

 

 

$

—

 

U.S government and agency securities

 

 

345.7

 

 

 

337.4

 

 

 

8.3

 

 

 

—

 

Corporate bonds

 

 

276.9

 

 

 

—

 

 

 

276.9

 

 

 

—

 

Equity securities

 

 

68.5

 

 

 

68.5

 

 

 

—

 

 

 

—

 

Mutual fund - fixed income

 

 

0.1

 

 

 

0.1

 

 

 

—

 

 

 

—

 

Mutual fund - equities

 

 

22.0

 

 

 

22.0

 

 

 

—

 

 

 

—

 

Other

 

 

0.2

 

 

 

—

 

 

 

0.2

 

 

 

—

 

Total Assets in the fair value hierarchy

 

$

722.6

 

 

$

428.9

 

 

$

293.7

 

 

$

—

 

Assets measured at net asset value (1)

 

 

509.1

 

 

 

—

 

 

 

—

 

 

 

—

 

Total Assets

 

$

1,231.7

 

 

$

428.9

 

 

$

293.7

 

 

$

—

 

(1)

Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, hedge funds, and risk parity investments. As of December 31, 2020, these assets are redeemable at net asset value within 90 days.

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Table of Contents

 

The following table presents the fair value hierarchy for those investments of TimkenSteel’s pension assets measured at fair value on a recurring basis as of December 31, 2019:

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12.2

 

 

$

0.9

 

 

$

11.3

 

 

$

—

 

U.S government and agency securities

 

 

250.3

 

 

 

246.1

 

 

 

4.2

 

 

 

—

 

Corporate bonds

 

 

102.7

 

 

 

—

 

 

 

102.7

 

 

 

—

 

Equity securities

 

 

49.8

 

 

 

49.8

 

 

 

—

 

 

 

—

 

Mutual fund - fixed income

 

 

56.4

 

 

 

56.4

 

 

 

—

 

 

 

—

 

Total Assets in the fair value hierarchy

 

$

471.4

 

 

$

353.2

 

 

$

118.2

 

 

$

—

 

Assets measured at net asset value (1)

 

 

684.0

 

 

 

—

 

 

 

—

 

 

 

—

 

Total Assets

 

$

1,155.4

 

 

$

353.2

 

 

$

118.2

 

 

$

—

 

(1)

Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, and risk parity investments. As of December 31, 2019, these assets were redeemable at net asset value within 90 days.

The following table presents the fair value hierarchy for those investments of TimkenSteel’s postretirement assets measured at fair value on a recurring basis as of December 31, 2020:

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3.0

 

 

$

3.0

 

 

$

—

 

 

$

—

 

Mutual fund - fixed income

 

 

11.7

 

 

 

11.7

 

 

 

—

 

 

 

—

 

Mutual fund - equities

 

 

5.0

 

 

 

5.0

 

 

 

—

 

 

 

—

 

Total Assets in the fair value hierarchy

 

$

19.7

 

 

$

19.7

 

 

$

—

 

 

$

—

 

Assets measured at net asset value (1)

 

 

62.5

 

 

 

—

 

 

 

—

 

 

 

—

 

Total Assets

 

$

82.2

 

 

$

19.7

 

 

$

—

 

 

$

—

 

(1)

Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, hedge funds, and risk parity investments. As of December 31, 2020, these assets are redeemable at net asset value within 90 days.

The following table presents the fair value hierarchy for those investments of TimkenSteel’s postretirement assets measured at fair value on a recurring basis as of December 31, 2019:

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3.0

 

 

$

3.0

 

 

$

—

 

 

$

—

 

Mutual fund - fixed income

 

 

15.8

 

 

 

15.8

 

 

 

—

 

 

 

—

 

Total Assets in the fair value hierarchy

 

$

18.8

 

 

$

18.8

 

 

$

—

 

 

$

—

 

Assets measured at net asset value (1)

 

 

63.5

 

 

 

—

 

 

 

—

 

 

 

—

 

Total Assets

 

$

82.3

 

 

$

18.8

 

 

$

—

 

 

$

—

 

(1)

Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. Such assets include common collective trusts that invest in equity securities and fixed income securities, limited partnerships, real estate partnerships, and risk parity investments. As of December 31, 2019, these assets were redeemable at net asset value within 90 days.

Future benefit payments are expected to be as follows:

Benefit Payments:

 

Pension

 

 

Postretirement

 

2021

 

$

79.1

 

 

$

11.1

 

2022

 

 

86.2

 

 

 

10.3

 

2023

 

 

81.6

 

 

 

9.5

 

2024

 

 

74.5

 

 

 

8.8

 

2025

 

 

74.3

 

 

 

8.4

 

2026-2030

 

 

366.0

 

 

 

37.9

 

The Company expects to make required contributions to its U.K. pension plan in 2021 of approximately $1.4 million.

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Defined Contribution Plans

The Company recorded expense primarily related to employer matching and non-discretionary contributions to these defined contribution plans of $3.2 million in 2020, $7.1 million in 2019, and $6.3 million in 2018. Effective June 1, 2020, the Company suspended employer matching contributions for all salaried employees. In December 2020, the Company announced that employer matching contributions would be reinstated effective March 1, 2021.

Note 16 - Stock-Based Compensation

Description of the Plan

On April 28, 2016, shareholders of TimkenSteel approved the TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan (TimkenSteel 2014 Plan), which authorized the Compensation Committee of the TimkenSteel Board of Directors to grant non-qualified or incentive stock options, stock appreciation rights, stock awards (including restricted shares, restricted share unit awards, performance shares, performance units, deferred shares and common shares) and cash awards to TimkenSteel employees and non-employee directors. No more than 11.05 million TimkenSteel common shares may be delivered under the TimkenSteel 2014 Plan (including up to 3.0 million common shares for “replacement awards” to current holders of The Timken Company equity awards under The Timken Company’s equity compensation plans at the time of the spinoff). The TimkenSteel 2014 Plan contains fungible share counting mechanics, which generally means that awards other than stock options and stock appreciation rights will be counted against the aggregate share limit as 2.50 common shares for every one common share that is actually issued or transferred under such awards. With the approval of the TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan, as discussed below, no additional grants may be made under the TimkenSteel 2014 Plan.

On May 6, 2020, shareholders of TimkenSteel approved the TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan (TimkenSteel 2020 Plan), which replaced the previously approved TimkenSteel 2014 Plan. The TimkenSteel 2020 Plan authorizes the Compensation Committee to provide cash awards and equity-based compensation in the form of stock options, stock appreciation rights, restricted shares, restricted share units, performance shares, performance units, dividend equivalents, and certain other awards for the primary purpose of providing our employees, officers and directors incentives and rewards for service and/or performance. Subject to adjustment as described in the TimkenSteel 2020 Plan, and subject to the TimkenSteel 2020 Plan share counting rules, a total of 2.0 million common shares of the Company are available for awards granted under the TimkenSteel 2020 Plan (plus shares subject to awards granted under the TimkenSteel 2020 Plan or the TimkenSteel 2014 Plan that are canceled or forfeited, expire, are settled for cash, or are unearned to the extent of such cancellation, forfeiture, expiration, cash settlement or unearned amount, as further described in the TimkenSteel 2020 Plan). These shares may be shares of original issuance or treasury shares, or a combination of both. The aggregate number of shares available under the TimkenSteel 2020 Plan will generally be reduced by one common share for every one share subject to an award granted under the TimkenSteel 2020 Plan. The TimkenSteel 2020 Plan also provides that, subject to adjustment as described in the TimkenSteel 2020 Plan: (1) the aggregate number of common shares actually issued or transferred upon the exercise of incentive stock options will not exceed 2.0 million common shares; and (2) no non-employee director of the Company will be granted, in any period of one calendar year, compensation for such service having an aggregate maximum value (measured at the grant date as applicable, and calculating the value of any awards based on the grant date fair value for financial reporting purposes) in excess of $0.5 million.

As of December 31, 2020, approximately 2.2 million shares of TimkenSteel common stock remained available for grants under the TimkenSteel 2020 Plan.

Stock Options

The following table provides the significant assumptions used to calculate the grant date fair values of stock options granted using a Black-Scholes option pricing method:

 

 

 

2020

 

 

 

2019

 

 

 

2018

 

 

Weighted-average fair value per option

 

$

2.23

 

 

 

$

5.54

 

 

 

$

7.46

 

 

Risk-free interest rate

 

 

0.96

 

%

 

 

2.63

 

%

 

 

2.77

 

%

Dividend yield

 

 

—

 

%

 

 

—

 

%

 

 

—

 

%

Expected stock volatility

 

 

42.67

 

%

 

 

41.36

 

%

 

 

41.67

 

%

Expected life - years

 

 

6

 

 

 

 

6

 

 

 

 

6

 

 

 

The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected annual dividend yield is estimated using the most recent dividend payment per share as of the grant date, of which no dividends were paid in these grant periods. Because of the absence of adequate stock price history of TimkenSteel common stock, expected volatility related to stock option awards granted subsequent to the spinoff is based on the historical volatility of a selected group of peer companies’ stock. The expected life of stock option awards granted is based on historical data and represents the period of time that options granted are expected to be held prior to exercise.

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The following summarizes TimkenSteel stock option activity from January 1, 2020 to December 31, 2020:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term (Years)

 

 

Aggregate

Intrinsic Value

(millions)

 

Outstanding as of December 31, 2019

 

 

2,641,570

 

 

$

20.64

 

 

 

 

 

 

 

 

 

Granted

 

 

511,020

 

 

$

5.26

 

 

 

 

 

 

 

 

 

Exercised

 

 

—

 

 

$

—

 

 

 

 

 

 

 

 

 

Canceled, forfeited or expired

 

 

(221,525

)

 

$

12.08

 

 

 

 

 

 

 

 

 

Outstanding as of December 31, 2020

 

 

2,931,065

 

 

$

18.61

 

 

 

5.2

 

 

$

—

 

Options expected to vest

 

 

641,392

 

 

$

8.21

 

 

 

8.7

 

 

$

—

 

Options exercisable

 

 

2,289,673

 

 

$

21.52

 

 

 

4.2

 

 

$

—

 

 

Stock options presented in the table above represent TimkenSteel awards only, including those held by The Timken Company employees.

There were no stock options that were exercised during 2020.

Time-Based Restricted Stock Units

Time-based restricted stock units are issued with the fair value equal to the closing market price of TimkenSteel common shares on the date of grant. These restricted stock units do not have any performance conditions for vesting. Expense is recognized over the service period, adjusted for any forfeitures that should occur during the vesting period.

The following summarizes TimkenSteel stock-settled, time-based restricted stock unit activity from January 1, 2020 to December 31, 2020:

 

 

 

Number of

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

Outstanding as of December 31, 2019

 

 

1,103,487

 

 

$

11.89

 

Granted

 

 

931,244

 

 

$

4.24

 

Vested

 

 

(548,301

)

 

$

10.55

 

Canceled, forfeited or expired

 

 

(114,104

)

 

$

7.23

 

Outstanding as of December 31, 2020

 

 

1,372,326

 

 

$

7.62

 

 

Time-based restricted stock units presented in the table above represent TimkenSteel awards only.

Performance-Based Restricted Stock Units

Performance-based restricted stock units issued in 2020 are earned based on the average payout (determined under a Compensation Committee approved matrix) for the Company’s relative total shareholder return as compared to an identified peer group of steel companies. The overall vesting period is generally three years, with relative total shareholder return measured for the one, two and three-year periods creating effectively a “nested” 1-year, 2-year, and 3-year plan to support rapid and sustained shareholder value creation. Relative total shareholder return is calculated for each nested performance period by taking the beginning and ending price points based off a 20-trading day average closing stock price as of December 31.

The following summarizes TimkenSteel stock-settled performance-based restricted stock unit activity from January 1, 2020 to December 31, 2020:

 

 

 

Number of

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

Outstanding as of December 31, 2019

 

 

—

 

 

$

—

 

Granted

 

 

182,180

 

 

$

4.98

 

Canceled, forfeited or expired

 

 

(6,216

)

 

$

4.97

 

Outstanding as of December 31, 2020

 

 

175,964

 

 

$

4.98

 

 

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The table above does not include the stock-settled performance units that were granted before 2020 as these grants are not expected to payout.

Other Information

TimkenSteel recognized stock-based compensation expense of $6.6 million, $7.4 million and $7.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, future stock-based compensation expense related to the unvested portion of all awards is approximately $6.1 million, which is expected to be recognized over a weighted average period of 1.5 years.

Certain restricted stock units, including some performance-based restricted stock units, are settled in cash and were adjusted and substituted. TimkenSteel has a liability of $0.1 million as of December 31, 2020 and 2019 for these awards which was included in salaries, wages and benefits, and other non-current liabilities on the Consolidated Balance Sheets. There were no cash-settled restricted stock units granted during 2020 or 2019.

On December 16, 2020, the Board of Directors of TimkenSteel appointed and elected Michael S. Williams as President and Chief Executive Officer of the Company, effective January 1, 2021. The Board further appointed and elected Mr. Williams as a director, also effective January 1, 2021. The Compensation Committee of TimkenSteel’s Board of Directors approved grants of inducement equity awards to Mr. Williams consisting of time-based restricted share units covering 423,400 TimkenSteel’s common shares, with a grant date fair value of $5.17 and performance-based restricted share units covering a target number of 423,400 of TimkenSteel’s common shares (with a maximum payout opportunity of 635,100 common shares), with a grant date fair value of $5.68. The design of the performance-based restricted share units are similar to the performance-vested restricted stock units discussed above. These awards were granted outside of the TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan as inducements material to Mr. Williams' acceptance of employment with TimkenSteel. The grant date for the awards is January 5, 2021 with future stock-based compensation expense of $4.6 million, which is expected to be recognized over three years.

Note 17 - Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2020 and 2019 by component were as follows:

 

 

 

Foreign Currency

Translation

Adjustments

 

 

Pension and

Postretirement

Liability

Adjustments

 

 

Total

 

Balance as of December 31, 2019

 

$

(6.8

)

 

$

51.5

 

 

$

44.7

 

Other comprehensive income before reclassifications, before income tax

 

 

1.4

 

 

 

—

 

 

 

1.4

 

Amounts reclassified from accumulated other comprehensive income

   (loss), before income tax

 

—

 

 

 

(5.6

)

 

 

(5.6

)

Tax effect

 

—

 

 

 

(0.1

)

 

 

(0.1

)

Net current period other comprehensive income, net of income taxes

 

 

1.4

 

 

 

(5.7

)

 

 

(4.3

)

Balance as of December 31, 2020

 

$

(5.4

)

 

$

45.8

 

 

$

40.4

 

 

 

 

Foreign Currency

Translation

Adjustments

 

 

Pension and

Postretirement

Liability

Adjustments

 

 

Total

 

 

Balance at December 31, 2018

 

$

(7.3

)

 

$

(1.6

)

 

$

(8.9

)

Other comprehensive income before reclassifications, before income tax

 

 

0.5

 

 

—

 

 

 

0.5

 

Amounts reclassified from accumulated other comprehensive income

   (loss), before income tax

 

—

 

 

 

(2.4

)

 

 

(2.4

)

Amounts deferred to accumulated other comprehensive income (loss),

   before income tax

 

—

 

 

 

72.2

 

 

 

72.2

 

Tax effect

 

—

 

 

 

(16.7

)

 

 

(16.7

)

Net current period other comprehensive income, net of income taxes

 

 

0.5

 

 

 

53.1

 

 

 

53.6

 

Balance as of December 31, 2019

 

$

(6.8

)

 

$

51.5

 

 

$

44.7

 

 

The amount reclassified from accumulated other comprehensive income (loss) in the year ended December 31, 2020 for the pension and postretirement liability adjustment was included in other (income) expense, net in the Consolidated Statements of Operations.

 

 

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Note 18 – Contingencies

TimkenSteel has a number of loss exposures incurred in the ordinary course of business, such as environmental claims, product warranty claims, and litigation. Establishing loss reserves for these matters requires management’s estimate and judgment regarding risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances. Accruals related to environmental claims represent management’s best estimate of the fees and costs associated with these claims. Although it is not possible to predict with certainty the outcome of such claims, management believes that their ultimate dispositions should not have a material adverse effect on our financial position, cash flows or results of operations. As of December 31, 2020 and 2019, TimkenSteel had a $1.0 million and $1.5 million contingency reserve, respectively, related to loss exposures incurred in the ordinary course of business.

Note 19 - Relationships with The Timken Company and Related Entities

Prior to the spinoff on June 30, 2014, TimkenSteel was managed and operated in the normal course of business with other affiliates of The Timken Company. Transactions between The Timken Company and TimkenSteel, with the exception of sale and purchase transactions and reimbursements for payments made to third-party service providers by The Timken Company on TimkenSteel’s behalf, are reflected in equity in the Consolidated Balance Sheets as net parent investment and in the Consolidated Statements of Cash Flows as a financing activity in net transfers (to)/from The Timken Company and affiliates.

Transactions with The Timken Company

TimkenSteel sold finished goods to The Timken Company. During the years ended December 31, 2020, 2019 and 2018, revenues from related-party sales of products totaled $23.4 million or 2.8% of net sales, $26.1 million or 2.2% of net sales, and $43.2 million or 2.7% of net sales, respectively.

TimkenSteel did not purchase material from The Timken Company during the years ending December 31, 2020, 2019 or 2018. In addition, certain TimkenSteel third-party service providers were paid by The Timken Company on behalf of TimkenSteel. TimkenSteel would subsequently reimburse The Timken Company in cash for such payments.

Material Agreements Between TimkenSteel and The Timken Company

On June 30, 2014, TimkenSteel entered into a separation and distribution agreement and several other agreements with The Timken Company to effect the spinoff and to provide a framework for the relationship with The Timken Company. These agreements govern the relationship between TimkenSteel and The Timken Company subsequent to the completion of the spinoff and provide for the allocation between TimkenSteel and The Timken Company of assets, liabilities and obligations attributable to periods prior to the spinoff. Because these agreements were entered into in the context of a related party transaction, the terms may not be comparable to terms that would be obtained in a transaction between unaffiliated parties.

Separation and Distribution Agreement — The separation and distribution agreement contains the key provisions relating to the spinoff, including provisions relating to the principal intercompany transactions required to effect the spinoff, the conditions to the spinoff and provisions governing the relationships between TimkenSteel and The Timken Company after the spinoff.

Tax Sharing Agreement — The tax sharing agreement generally governs TimkenSteel’s and The Timken Company’s respective rights, responsibilities and obligations after the spinoff with respect to taxes for any tax period ending on or before the distribution date, as well as tax periods beginning before and ending after the distribution date. Generally, TimkenSteel is liable for all pre-distribution U.S. federal income taxes, foreign income taxes and non-income taxes attributable to TimkenSteel’s business, and all other taxes attributable to TimkenSteel, paid after the distribution. In addition, the tax sharing agreement addresses the allocation of liability for taxes that are incurred as a result of restructuring activities undertaken to effectuate the distribution. The tax sharing agreement also provides that TimkenSteel is liable for taxes incurred by The Timken Company that arise as a result of TimkenSteel’s taking or failing to take, as the case may be, certain actions that result in the distribution failing to meet the requirements of a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended.

Employee Matters Agreement — TimkenSteel entered into an employee matters agreement with The Timken Company, which generally provides that TimkenSteel and The Timken Company each has responsibility for its own employees and compensation plans, subject to certain exceptions as described in the agreement. In general, prior to the spinoff, TimkenSteel employees participated in various retirement, health and welfare, and other employee benefit and compensation plans maintained by The Timken Company. Following the spinoff (or earlier, in the case of the tax-qualified defined benefit plans and retiree medical plans), pursuant to the employee matters agreement, TimkenSteel employees and former employees generally participate in similar plans and arrangements established and maintained by TimkenSteel. The employee matters agreement provides for the bifurcation of equity awards as described in Note 16 - Stock-Based Compensation. Among other things, the employee matters agreement also provides for TimkenSteel’s assumption of certain employment-related contracts that its employees originally entered into with The Timken Company, the allocation of certain employee liabilities and the cooperation between TimkenSteel and The Timken Company in the sharing of employee information.

 

 

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Note 20 – Subsequent Events

On February 16, 2021, management announced a plan to indefinitely idle its Harrison melt and cast assets, late in the first quarter of 2021. Going forward, all of the Company’s melting and casting activities will take place at the Faircrest location. The Company is working collaboratively with employees, suppliers and a number of customers to ensure a well-organized and efficient transition. The Company’s rolling and finishing operations at Harrison will not be impacted by these actions.

At this time, the Company is still reviewing Harrison melt and cast related assets to determine potential alternative uses for selected assets. As a result, the Company estimates that it will recognize non-cash charges of between $8 million and $10 million related to the write down of the associated Harrison melt and cast assets in the first quarter of 2021. The Company does not anticipate incurring any required cash expenditures related to these charges.

There are approximately 100 Canton-based hourly employees, represented by the United Steelworkers, potentially impacted by this decision. Position eliminations will be processed in accordance with the terms and conditions of the 2017 Basic Labor Agreement between TimkenSteel Corporation and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, Local 2003. As such, the ultimate number of employees impacted is unknown at this time.    

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SUPPLEMENTAL DATA

Selected Quarterly Financial Data (Unaudited)

(dollars in millions, except per share data)

The following is selected quarterly operating results for each quarter of fiscal 2020 and 2019 for TimkenSteel.

 

 

Quarters ended

 

 

 

December 31,

2020

 

 

September 30,

2020

 

 

June 30,

2020

 

 

March 31,

2020

 

Net sales

 

$

211.2

 

 

$

205.9

 

 

$

154.0

 

 

$

259.7

 

Gross profit

 

 

14.2

 

 

 

(2.4

)

 

 

(4.0

)

 

 

7.8

 

Net income (loss)

 

 

(12.8

)

 

 

(13.9

)

 

 

(15.3

)

 

 

(19.9

)

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(0.28

)

 

$

(0.31

)

 

$

(0.34

)

 

$

(0.44

)

Diluted earnings (loss) per share

 

$

(0.28

)

 

$

(0.31

)

 

$

(0.34

)

 

$

(0.44

)

 

 

 

Quarters ended

 

 

 

December 31,

2019

 

 

September 30. 2019

 

 

June 30,

2019

 

 

March 31,

2019

 

Net sales

 

$

226.9

 

 

$

274.2

 

 

$

336.7

 

 

$

371.0

 

Gross profit

 

 

(18.0

)

 

 

(2.6

)

 

 

14.8

 

 

 

28.4

 

Net income (loss)

 

 

(84.6

)

 

 

(17.0

)

 

 

(11.9

)

 

 

3.5

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(1.89

)

 

$

(0.38

)

 

$

(0.27

)

 

$

0.08

 

Diluted earnings (loss) per share

 

$

(1.89

)

 

$

(0.38

)

 

$

(0.27

)

 

$

0.08

 

 

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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-K, our management carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.

Report of Management on Internal Control Over Financial Reporting

The management of TimkenSteel is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. TimkenSteel’s internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

TimkenSteel management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment under COSO’s “Internal Control-Integrated Framework (2013 framework),” management believes that, as of December 31, 2020, TimkenSteel’s internal control over financial reporting is effective.

Ernst & Young LLP, an independent registered public accounting firm, has issued an audit report on our assessment of TimkenSteel’s internal control over financial reporting as of December 31, 2020. Please refer to Item 8, “Reports of Independent Registered Public Accounting Firm.”

Changes in Internal Controls

There have been no changes during the Company’s fourth quarter of 2020 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

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PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Required information will be set forth under the captions “Proposal 1: Election of directors” in the proxy statement to be filed within 120 days of December 31, 2020 in connection with the annual meeting of shareholders to be held on May 5, 2021, and is incorporated herein by reference. Information regarding the executive officers of the registrant is included in Part I hereof. Information regarding the Company’s Audit Committee and its Audit Committee Financial Expert is set forth under the caption “Board of directors information - Audit committee” in the proxy statement filed in connection with the annual meeting of shareholders to be held on May 5, 2021, and is incorporated herein by reference.

The Company’s Corporate Governance Guidelines and the charters of its Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are available on the Company’s website at www.timkensteel.com. The information on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K.

The Company has adopted a code of ethics that applies to all of its employees, including its principal executive officer, principal financial officer and principal accounting officer or controller, as well as to its directors. The Company’s code of ethics, the TimkenSteel Code of Conduct, is available on its website at www.timkensteel.com. The Company intends to disclose any amendment to its code of ethics or waiver from its code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or any director, by posting such amendment or waiver, as applicable, on its website at www.timkensteel.com.

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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

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

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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

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PART IV.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) - Financial Statements are included in Part II, Item 8 of the Annual Report on Form 10-K.

(a)(2) - Schedule II - Valuation and Qualifying Accounts is submitted as a separate section of this report. Schedules I, III, IV and V are not applicable to the Company and, therefore, have been omitted.

(a)(3) Listing of Exhibits

 

 

 

 

 

 

Exhibit Number

 

Exhibit Description

  2.1†

 

Separation and Distribution Agreement, dated as of June 30, 2014, by and between TimkenSteel Corporation and The Timken Company.

  3.1

 

Amended and Restated Articles of Incorporation of TimkenSteel Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 13, 2014, File No. 001-36313).

  3.2

 

Code of Regulations of TimkenSteel Corporation (incorporated by reference to Exhibit 3.2 of Amendment No. 3 to the Company’s Registration Statement on Form 10 filed on May 15, 2014, File No. 001-36313).

  4.1

 

Indenture, dated May 31, 2016, by and between the Company and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 31, 2016, File No. 001-36313).

  4.2

 

First Supplemental Indenture, dated May 31, 2016, by and between the Company and U.S. Bank National Association, as Trustee (including Form of Note) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on May 31, 2016, File No. 001-36313).

  4.3

 

Description of Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K filed on February 25, 2020, File No. 001-36313).

  4.4

 

Second Supplemental Indenture, dated December 15, 2020, by and between the Company and U.S. Bank National Association, as Trustee (including Form of New Convertible Note) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 15, 2020, File No. 001-36313).

10.1†

 

Tax Sharing Agreement, dated as of June 30, 2014, by and between TimkenSteel Corporation and The Timken Company.

10.2†

 

Employee Matters Agreement, dated as of June 30, 2014, by and between TimkenSteel Corporation and The Timken Company.

10.3

 

Form of Amended and Restated Employee Excess Benefits Agreement with TimkenSteel Corporation (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 13, 2014, File No. 001-36313).

10.4†

 

Trademark License Agreement, dated as of June 30, 2014, by and between TimkenSteel Corporation and The Timken Company.

10.5

 

TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8 filed on October 28, 2016, Registration No. 333-214297).

10.6

 

TimkenSteel Corporation Amended and Restated Annual Performance Award Plan, effective January 1, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed April 26, 2018, File No. 001-36313).

10.7

 

Supplemental Pension Plan of TimkenSteel Corporation (Effective June 30, 2014) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 13, 2014, File No. 001-36313).

10.8

 

Form of Severance Agreement with TimkenSteel Corporation (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 13, 2014, File No. 001-36313).

10.9††

 

Form of Director Indemnification Agreement.

10.10††

 

Form of Officer Indemnification Agreement.

10.11††

 

Form of Director and Officer Indemnification Agreement.

10.12

 

Form of Severance Agreement between TimkenSteel and Certain Executive Officers (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on October 26, 2017, File No. 001-36313).\

10.13

 

Amended and Restated TimkenSteel Corporation 2014 Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 11, 2015, File No. 001-36313).

10.14

 

Amended and Restated TimkenSteel Corporation Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 11, 2015, File No. 001-36313).

 

 

 

10.15

 

Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on April 27, 2017, File No. 001-36313).

10.16

 

Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 2, 2019, File No. 001-36313).

10.17

 

Form of Time-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 2, 2019, File No. 001-36313).

10.18

 

Form of Time-Based Ratable Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 2, 2019, File No. 001-36313).

10.19

 

Form of Deferred Shares Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 4, 2016, File No. 001-36313).

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10.20

 

Third Amended and Restated Credit Agreement dated as of October 15, 2019, by and among TimkenSteel Corporation, the other loan parties and lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and BMO Harris Bank N.A. and U.S. Bank National Association, as co-documentation agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 17, 2019, File No. 001-36313).

10.21

 

Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 7, 2020, File No. 001-36313).

10.22

 

Form of Director Restricted Share Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2020, File No. 001-36313).

10.23

 

Form of Performance-Based Restricted Share Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on October 29, 2020, File No. 001-36313).

10.24*

 

Restricted Share Unit Inducement Award Agreement dated as of January 5, 2021 by and between TimkenSteel Corporation and Michael S. Williams.

10.25*

 

Performance-Based Restricted Share Unit Inducement Award Agreement dated as of January 5, 2021 by and between TimkenSteel Corporation and Michael S. Williams.

10.26*

 

Severance Agreement dated as of January 1, 2021 between TimkenSteel Corporation and Michael S. Williams.

10.27*

 

Form of Severance Agreement between TimkenSteel and Certain Executive Officers.

10.28

 

TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 7, 2020, File No. 001-36313).

21.1*

 

A list of subsidiaries of the Registrant.

23.1*

 

Consent of Independent Registered Public Accounting Firm.

24.1*

 

Power of Attorney.

31.1*

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

 

Inline XBRL Instance Document.

101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document.

101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

†

 

Incorporated by reference to the exhibit filed under the corresponding Exhibit Number of the Company’s Current Report on Form 8-K filed on July 3, 2014, File No. 001-36313.

††

 

Incorporated by reference to the exhibit filed under the corresponding Exhibit Number of Amendment No. 3 to the Company’s Registration Statement on Form 10 filed on May 15, 2014, File No. 001-36313.

*

 

Filed herewith.

**

 

Furnished herewith.

 

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Schedule II-Valuation and Qualifying Accounts

 

Allowance for uncollectible accounts:

 

2020

 

 

2019

 

 

2018

 

Balance at Beginning of Period

 

$

1.5

 

 

$

1.7

 

 

$

1.4

 

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

Charged to Costs and Expenses (1)

 

—

 

 

—

 

 

 

0.3

 

Deductions (2)

 

 

(0.2

)

 

 

(0.2

)

 

—

 

Balance at End of Period

 

$

1.3

 

 

$

1.5

 

 

$

1.7

 

Allowance for inventory reserves

 

2020

 

 

2019

 

 

2018

 

Balance at Beginning of Period

 

$

10.7

 

 

$

6.1

 

 

$

8.9

 

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

Charged to Costs and Expenses (3)

 

 

4.1

 

 

 

9.0

 

 

 

1.6

 

Deductions (4)

 

 

(0.9

)

 

 

(4.4

)

 

 

(4.4

)

Balance at End of Period

 

$

13.9

 

 

$

10.7

 

 

$

6.1

 

Valuation allowance on deferred tax assets:

 

2020

 

 

2019

 

 

2018

 

Balance at Beginning of Period

 

$

34.9

 

 

$

43.7

 

 

$

36.6

 

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

Charged to Costs and Expenses (5)

 

 

12.4

 

 

—

 

 

 

7.1

 

Charged to Other Accounts (6)

 

 

1.4

 

 

 

16.7

 

 

—

 

Deductions (7)

 

 

(1.0

)

 

 

(25.5

)

 

—

 

Balance at End of Period

 

$

47.7

 

 

$

34.9

 

 

$

43.7

 

(1)

Provision for uncollectible accounts included in expenses.

(2)

Actual accounts written off against the allowance, net of recoveries.

(3)

Provisions for surplus and obsolete inventory and lower cost or net realizable value included in expenses.

(4)

Inventory items written off against the allowance.

(5)

Increase in valuation allowance is recorded as a component of the provision for income taxes.

(6)

Amount relates to valuation allowances recorded against other comprehensive income (loss).

(7)

Amount primarily relates to an additional paid-in capital adjustment associated with the Convertible Notes for the year ended December 31, 2020 and the change in accounting principle from LIFO to FIFO for the year ended December 31, 2019.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

TIMKENSTEEL CORPORATION

 

 

 

Date:

February 25, 2021

/s/ Kristopher R. Westbrooks

 

 

Kristopher R. Westbrooks

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ Michael S. Williams

 

Chief Executive Officer and President

(Principal Executive Officer)

 

February 25, 2021

Michael S. Williams

 

 

 

 

 

 

 

 

 

/s/ Kristopher R. Westbrooks

 

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

February 25, 2021

Kristopher R. Westbrooks

 

 

 

 

 

 

 

 

 

/s/ Nicholas A. Yacobozzi

 

Corporate Controller

(Principal Accounting Officer)

 

February 25, 2021

Nicholas A. Yacobozzi

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 25, 2021

Joseph A. Carrabba

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 25, 2021

Leila L. Vespoli

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 25, 2021

Diane C. Creel

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 25, 2021

Randall H. Edwards

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 25, 2021

Donald T. Misheff

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 25, 2021

John P. Reilly

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 25, 2021

Ronald A. Rice

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 25, 2021

Terry L. Dunlap

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 25, 2021

Randall A. Wotring

 

 

 

 

 

 

 

 

 

*Signed by the undersigned as attorney-in-fact and agent for the directors indicated.  

 

 

 

 

 

 

 

/s/ Kristopher R. Westbrooks

 

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

February 25, 2021

Kristopher R. Westbrooks

 

 

 

 

 

72

 

 

Exhibit 10.24

TIMKENSTEEL CORPORATION

 

Restricted Share Unit Inducement Award Agreement

 

 

WHEREAS, Michael S. Williams (“Grantee”) is an employee of TimkenSteel Corporation or a Subsidiary thereof;

 

WHEREAS, the grant of service-based restricted share units evidenced hereby (the “Grant”) was authorized by a resolution of the Compensation Committee (including any successors, the “Committee”) of the Board, and the execution of a restricted share unit inducement award agreement substantially in the form hereof (this “Agreement”) was authorized by a resolution of the Committee;

 

WHEREAS, this Grant is intended to be an inducement that is material to Grantee, who has entered into employment with the Company, and to encourage stock ownership by Grantee, thereby aligning Grantee’s interests with those of the Shareholders; and

 

WHEREAS, this Agreement is intended to comply with Section 303A.08 of the New York Stock Exchange (“NYSE”) Listed Company Manual, which provides an exception to NYSE’s shareholder approval requirement for the issuance of securities with respect to grants to employees of the Company as an inducement material to such individuals entering into employment with the Company, and shall be administered and interpreted consistent with such intent.

 

NOW, THEREFORE, subject to the terms and conditions hereinafter set forth and the Committee’s resolutions, the Company hereby confirms to Grantee the Grant, effective January 5, 2021 (the “Date of Grant”), of 423,400 restricted share units (the “RSUs”).  Although this Grant and Agreement are not made pursuant to the TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan (the “Plan”), all terms used in this Agreement with initial capital letters that are defined in the Plan and not otherwise defined herein have the meanings assigned to them in the Plan.

 

 

1.

Payment of RSUs.  The RSUs will become payable if the restriction period for the RSUs lapses and Grantee’s right to receive payment for the RSUs becomes nonforfeitable (“Vest,” “Vesting” or “Vested”) in accordance with Section 3 and Section 4 of this Agreement.

 

2.

RSUs Not Transferrable.  None of the RSUs nor any interest therein or in any Common Shares underlying such RSUs will be transferable prior to payment other than by will or the laws of descent and distribution.

 

3.

Vesting of RSUs.  Subject to the terms and conditions of Section 4 and Section 5 of this Agreement, the RSUs will Vest on January 5, 2024 (the “Vesting Date”) if the Grantee shall have been in the continuous employ of the Company or a Subsidiary from the Date of Grant until the Vesting Date.  For purposes of this Agreement, the continuous employment of Grantee with the Company or a Subsidiary will not be deemed to have been interrupted, and Grantee shall not be

NAI-1515547991v5

 

 

deemed to have ceased to be an employee of the Company or a Subsidiary, by reason of the transfer of Grantee’s employment between or among the Company and its Subsidiaries.  

 

4.

Alternative Vesting of RSUs.  Notwithstanding the provisions of Section 3 of this Agreement, and subject to the payment provisions of Section 6 hereof, the RSUs will Vest earlier than the time provided for in Section 3 under the following circumstances:

 

(a)

Death or Disability:  If Grantee should die or become permanently disabled while in the employ of the Company or a Subsidiary, then the RSUs will immediately Vest in full.  If Grantee dies or becomes permanently disabled during the period that Grantee is deemed to be in the continuous employ of the Company or a Subsidiary pursuant to Section 4(b), 4(d) or 4(e), then the RSUs will immediately Vest in full, except that to the extent that Section 4(e) applies, the RSUs will immediately Vest only to the extent that the RSUs would have become Vested pursuant to Section 4(e).  For purposes of this Agreement, “permanently disabled” means that Grantee has qualified for long-term disability benefits under a disability plan or program of the Company or a Subsidiary or, in the absence of a disability plan or program of the Company or a Subsidiary, under a government-sponsored disability program and is “disabled” within the meaning of Section 409A(a)(2)(C) of the Code. As used in this Agreement, “Code” means the Internal Revenue Code of 1986, as amended, including any regulations or any other formal guidance promulgated by the U.S. Department of the Treasury or the Internal Revenue Service with respect to the sections of the Code referenced in this Agreement.

 

(b)

Retirement: If Grantee should retire with the Company’s consent, then Grantee shall Vest in the RSUs in accordance with the terms and conditions of Section 3 as if Grantee had remained in the continuous employ of the Company or a Subsidiary from the Date of Grant until the Vesting Date as described in Section 3 or the occurrence of a circumstance referenced in Section 4(a) or Section 4(c), whichever occurs first. As used herein, “retire with the Company’s consent” means: (i) the retirement of Grantee prior to age 62 and eligible to retire under a retirement plan of the Company or a Subsidiary, if the Board or the Committee determines that Grantee’s retirement is for the convenience of the Company or a Subsidiary; or (ii) the retirement of Grantee at or after age 62 and eligible to retire under a retirement plan of the Company or a Subsidiary.  

 

(c)

Change in Control:  

 

(i)

Upon a Change in Control occurring during the Restriction Period while Grantee is an employee of the Company or a Subsidiary, to the extent the RSUs have not been forfeited, the RSUs will immediately Vest in full (except to the extent that a Replacement

2

NAI-1515547991v5

 

 

Award is provided to Grantee for the RSUs).  If Grantee is deemed to be in the continuous employ of the Company or a Subsidiary pursuant to Section 4(b), 4(d) or 4(e), upon a Change in Control during the Restriction Period, then the RSUs will immediately Vest in full, except that to the extent Section 4(e) applies, the RSUs will Vest only to the extent the RSUs would have become Vested pursuant to Section 4(e).

 

(ii)

As used herein, a “Replacement Award” means an award (A) of service-based restricted share units, (B) that has a value at least equal to the value of the RSUs, (C) that relates to publicly traded equity securities of the Company or its successor in the Change in Control (or another entity that is affiliated with the Company or its successor following the Change in Control), (D) the tax consequences of which, under the Code, if Grantee is subject to U.S. federal income tax under the Code, are not less favorable to Grantee than the tax consequences relative to the RSUs, (E) that vests in full upon a termination of Grantee’s employment with Company or a Subsidiary or their successors in a Change in Control (or another entity that is affiliated with the Company or a Subsidiary or their successors following the Change in Control) (as applicable, the “Successor”) for Good Reason by Grantee or without Cause by such Successor, or upon the death of Grantee or Grantee becoming permanently disabled, within a period of two years after the Change in Control, and (F) the other terms and conditions of which are not less favorable to Grantee than the terms and conditions of the RSUs (including the provisions that would apply in the event of a subsequent Change in Control).  A Replacement Award may be granted only to the extent it conforms to the requirements of Treasury Regulation 1.409A-3(i)(5)(iv)(B) or otherwise does not result in the RSUs or Replacement Award failing to comply with or be exempt from Section 409A of the Code.  Without limiting the generality of the foregoing, the Replacement Award may take the form of a continuation of the RSUs if the requirements of the preceding sentence are satisfied. The determination of whether the conditions of this Section 4(c)(ii) are satisfied will be made by the Committee, as constituted immediately before the Change in Control, in its sole discretion.

 

(iii)

For purposes of Sections 4(c) and 4(e), “Cause” means, with respect to Grantee:  (A) any intentional act of fraud, embezzlement or theft in connection with the Grantee’s duties with the Company, its Subsidiaries, or Successor, (B) any intentional wrongful disclosure of secret processes or confidential information of the Company, its Subsidiaries, or Successor, or (C) any intentional wrongful engagement in any competitive activity that would constitute a material breach of Grantee’s duty of loyalty to the Company, its

3

NAI-1515547991v5

 

 

Subsidiaries, or Successor, and no act, or failure to act, on the part of Grantee shall be deemed “intentional” unless done or omitted to be done by Grantee not in good faith and without reasonable belief that Grantee’s action or omission was in or not opposed to the best interest of the Company, its Subsidiaries, or Successor; provided, that for any Grantee who is party to an individual severance or employment agreement defining Cause, “Cause” will have the meaning set forth in such agreement.  Also for purposes of Section 4(c)(ii), “Good Reason” means a material reduction in the nature or scope of the responsibilities, authorities or duties of Grantee attached to Grantee’s position held immediately prior to the Change in Control, a change of more than 60 miles in the location of Grantee’s principal office immediately prior to the Change in Control, or a material reduction in Grantee’s remuneration upon or after the Change in Control; provided, that no later than 90 days following an event constituting Good Reason Grantee gives notice to the Successor of the occurrence of such event and the Successor fails to cure the event within 30 days following the receipt of such notice.

 

(iv)

Notwithstanding anything in this Agreement to the contrary, if a Replacement Award is provided, any outstanding RSUs which at the time of a Change in Control are not subject to a “substantial risk of forfeiture” (within the meaning of Section 409A of the Code) will be deemed to be Vested at the time of such Change in Control.

 

(d)

Divestiture:  If Grantee’s employment with the Company or a Subsidiary terminates as the result of a divestiture, then Grantee shall Vest in the RSUs in accordance with the terms and conditions of Section 3 as if Grantee had remained in the continuous employ of the Company or a Subsidiary from the Date of Grant until the Vesting Date as described in Section 3 or the occurrence of a circumstance referenced in Section 4(a) or Section 4(c), whichever occurs first.  As used herein, the term “divestiture”  means a permanent disposition to a Person other than the Company or any Subsidiary of a plant or other facility or property at which Grantee performs a majority of Grantee’s services whether such disposition is effected by means of a sale of assets, a sale of Subsidiary stock or otherwise.

 

(e)

Layoff:  If (i) Grantee’s employment with the Company or a Subsidiary terminates as the result of a layoff and (ii) Grantee is entitled to receive severance pay pursuant to the terms of any severance pay plan of the Company in effect at the time of Grantee’s termination of employment that provides for severance pay calculated by multiplying Grantee’s base compensation by a specified severance period, then Grantee shall Vest in a number of RSUs equal to the product of (x) the number of RSUs in which Grantee would have Vested in accordance with the terms and conditions of Section 3 if Grantee had remained in the continuous employ of the

4

NAI-1515547991v5

 

 

Company or a Subsidiary from the Date of Grant until the Vesting Date or the occurrence of a circumstance referenced in Section 4(a) or Section 4(c), whichever occurs first, multiplied by (y) a fraction (in no case greater than 1), the numerator of which is the number of whole months from the Date of Grant through the end of the specified severance period and the denominator of which is 36.  For purposes of this Agreement, a “layoff” shall mean the involuntary termination by the Company or any Subsidiary of Grantee’s employment with the Company or any Subsidiary due to (A) a reduction in force leading to a permanent downsizing of the salaried workforce, (B) a permanent shutdown of the plant, department or subdivision in which Grantee works, (C) an elimination of position, or (D) any or no reason, except for Cause (as defined in Section 4(c)), at the Company’s discretion; provided that a termination under clause (D) shall constitute a “layoff” for purposes of this Agreement only (i) upon the prior approval of the Compensation Committee in the case of an executive officer, or (ii) upon the prior approval of the Executive Vice President & Chief Financial Officer or the Executive Vice President, General Counsel & Secretary in the case of any other terminated Grantee.  

 

5.

Forfeiture of RSUs.  Any RSUs that have not Vested pursuant to Section 3 or Section 4 by the Vesting Date will be forfeited automatically and without further notice on such date (or earlier if, and on such date Grantee ceases to be an employee of the Company or a Subsidiary prior to the Vesting Date for any reason other than as described in Section 4).

 

6.

Form and Time of Payment of RSUs.  

 

(a)

General:  Subject to Section 5 and Section 6(b), payment for Vested RSUs will be made in cash or Common Shares (as determined by the Committee) within 10 days following the Vesting Date specified in Section 3.

 

(b)

Other Payment Events.  Notwithstanding Section 6(a), to the extent the RSUs are Vested on the dates set forth below, payment with respect to the RSUs will be made as follows:

 

(i)

Change in Control.  Upon a Change in Control, Grantee is entitled to receive payment for Vested RSUs in cash or Common Shares (as determined by the Committee) on the date of the Change in Control; provided, however, that if such Change in Control would not qualify as a permissible date of distribution under Section 409A(a)(2)(A) of the Code, and where Section 409A of the Code applies to such distribution, Grantee is entitled to receive the corresponding payment on the date that would have otherwise applied pursuant to Sections 6(a) or 6(b)(ii) as though such Change in Control had not occurred.  

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(ii)

Death or Disability.  On the date of Grantee’s death or the date Grantee becomes permanently disabled, Grantee is entitled to receive payment for Vested RSUs in cash or Common Shares (as determined by the Committee) on such date.

 

7.

Payment of Dividend Equivalents.  With respect to each of the RSUs covered by this Agreement, Grantee shall be credited on the records of the Company with dividend equivalents in an amount equal to the amount per Common Share of any cash dividends declared by the Board on the outstanding Common Shares during the period beginning on the Date of Grant and ending either on the date on which Grantee receives payment for the RSUs pursuant to Section 6 hereof or at the time when the RSUs are forfeited in accordance with Section 5 of this Agreement.  These dividend equivalents will accumulate without interest and, subject to the terms and conditions of this Agreement, will be paid at the same time, to the same extent and in the same manner, in cash or Common Shares (as determined by the Committee) as the RSUs for which the dividend equivalents were credited.

 

8.

Detrimental Activity and Recapture.

 

(a)

Notwithstanding anything in this Agreement, in the event that, as determined by the Committee, Grantee engages in Detrimental Activity during employment with the Company or a Subsidiary, the RSUs will be forfeited automatically and without further notice at the time of that determination.  As used herein,  “Detrimental Activity” means:  

 

(i)

engaging in any activity, as an employee, principal, agent, or consultant for another entity that competes with the Company in any actual, researched, or prospective product, service, system, or business activity for which Grantee has had any direct responsibility during the last two years of his or her employment with the Company or a Subsidiary, in any territory in which the Company or a Subsidiary manufactures, sells, markets, services, or installs such product, service, or system, or engages in such business activity;

 

(ii)

soliciting any employee of the Company or a Subsidiary to terminate his or her employment with the Company or a Subsidiary;

 

(iii)

the disclosure to anyone outside the Company or a Subsidiary, or the use in other than the Company or a Subsidiary’s business, without prior written authorization from the Company, of any confidential, proprietary or trade secret information or material relating to the business of the Company and its Subsidiaries, acquired by Grantee during his or her employment with the Company or its Subsidiaries or while acting as a director of or consultant for the Company or its Subsidiaries thereafter;

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(iv)

the failure or refusal to disclose promptly and to assign to the Company upon request all right, title and interest in any invention or idea, patentable or not, made or conceived by Grantee during employment by the Company and any Subsidiary, relating in any manner to the actual or anticipated business, research or development work of the Company or any Subsidiary or the failure or refusal to do anything reasonably necessary to enable the Company or any Subsidiary to secure a patent where appropriate in the United States and in other countries;

 

(v)

activity that results in Termination for Cause.  As used herein, “Termination for Cause” means a termination: (A) due to Grantee’s willful and continuous gross neglect of his or her duties for which he or she is employed; or (B) due to an act of dishonesty on the part of Grantee constituting a felony resulting or intended to result, directly or indirectly, in his or her gain for personal enrichment at the expense of the Company or a Subsidiary; or

 

(vi)

any other conduct or act determined to be injurious, detrimental or prejudicial to any significant interest of the Company or any Subsidiary unless Grantee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company.

Nothing in this Agreement prevents Grantee from providing, without prior notice to the Company, information to governmental authorities regarding possible legal violations or otherwise testifying or participating in any investigation or proceeding by any governmental authorities regarding possible legal violations, and for purpose of clarity, Grantee is not prohibited from providing information voluntarily to the Securities and Exchange Commission pursuant to Section 21F of the Exchange Act.

 

(b)

If a Restatement occurs and the Committee determines that Grantee is personally responsible in whole or in part for causing the Restatement as a result of Grantee’s personal misconduct or any fraudulent activity on the part of Grantee, then the Committee has discretion to, based on applicable facts and circumstances and subject to applicable law, cause the Company to recover all or any portion (but no more than 100%) of the RSUs (plus dividend equivalent payments) earned or payable to Grantee for some or all of the years covered by the Restatement. The amount of any earned or payable RSUs (and dividend equivalent payments) recovered by the Company shall be limited to the amount by which such earned or payable RSUs (and dividend equivalent payments) exceeded the amount that would have been earned by or paid to Grantee had the Company’s financial statements for the applicable restated fiscal year or years been initially filed as restated, as reasonably determined by the Committee. The Committee shall also determine whether the Company shall effect any recovery under

7

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this Section 8(b) by: (i) seeking repayment from Grantee; (ii) reducing, except with respect to any non-qualified deferred compensation under Section 409A of the Code, the amount that would otherwise be payable to Grantee under any compensatory plan, program or arrangement maintained by the Company (subject to applicable law and the terms and conditions of such plan, program or arrangement); (iii) by withholding, except with respect to any non-qualified deferred compensation under Section 409A of the Code, payment of future increases in compensation (including the payment of any discretionary bonus amount) that would otherwise have been made to Grantee in accordance with the Company’s compensation practices; or (iv) by any combination of these alternatives.  As used herein, “Restatement” means a restatement (made within 36 months of the publication of the financial statements that are required to be restated) of any part of the Company’s financial statements for any fiscal year or years beginning with the year in which the Date of Grant occurs due to material noncompliance with any financial reporting requirement under the U.S. securities laws applicable to such fiscal year or years.

 

9.

Compliance with Law.  Notwithstanding any other provision of this Agreement, the Company shall not be obligated to issue any of the Common Shares covered by this Agreement if the issuance thereof would result in violation of any applicable law or regulation.

 

10.

Adjustments.  The Committee shall make or provide for such adjustments in the number of and kind of Common Shares covered by the RSUs and in other award terms, as the Committee, in its sole discretion, exercised in good faith, determines is equitably required to prevent dilution or enlargement of the rights of Grantee that otherwise would result from (a) any extraordinary cash dividend, stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (b) any merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities, or (c) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event or in the event of a Change in Control, the Committee may provide in substitution for the Grant (or any part thereof) such alternative consideration (including cash), if any, as it, in good faith, may determine to be equitable in the circumstances and shall require in connection therewith the surrender of the portion of the Grant so replaced in a manner that complies with Section 409A of the Code.

 

11.

Withholding Taxes.  If the Company is required to withhold federal, state, local or foreign taxes or other amounts in connection with Grantee’s right to receive Common Shares or cash under this Agreement, and the amounts available to the Company for such withholding are insufficient, it shall be a condition to the receipt of any such Common Shares or cash (or the realization of any other benefit provided for under this Agreement) that Grantee make arrangements satisfactory to the Company for payment of the balance of such taxes or other

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amounts.  Grantee may satisfy such tax obligation by paying the Company cash via personal check.  Alternatively, unless otherwise determined by the Committee, Grantee may elect that all or any part of such tax obligation be satisfied by the Company’s retention of a portion of the Common Shares provided for under this Agreement or by Grantee’s surrender of a portion of the Common Shares that he or she has owned.  In no event, however, shall the Company accept Common Shares for payment of taxes in excess of required tax withholding rates (unless such higher withholding amounts would not result in adverse accounting implications for the Company and the additional withholding amount is authorized by the Committee).  If Grantee’s benefit is to be received in the form of Common Shares, and Grantee fails to make arrangements for the payment of required taxes or other amounts, then, unless otherwise determined by the Committee, the Company will withhold Common Shares having a value equal to the amount required to be withheld.  The Common Shares used for required tax withholding will be valued at an amount equal to the fair market value of such Common Shares on the date the applicable benefit is to be included in Grantee’s income.

 

12.

Right to Terminate Employment.  No provision of this Agreement will limit in any way whatsoever any right that the Company or a Subsidiary may otherwise have to terminate the employment of Grantee at any time.

 

13.

Relation to Other Benefits.  Any economic or other benefit to Grantee under this Agreement will not be taken into account in determining any benefits to which Grantee may be entitled under any profit‑sharing, retirement or other benefit or compensation plan maintained by the Company or a Subsidiary and will not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company or a Subsidiary.

 

14.

Amendments.  The Committee may at any time and from time to time amend this Agreement in whole or in part, prospectively or retroactively; provided, however, that if an amendment to this Agreement requires approval by the Shareholders in order to comply with applicable law or the rules of the NYSE or, if the Common Shares are not traded on the NYSE, the principal national securities exchange upon which the Common Shares are traded or quoted, then such amendment will be subject to Shareholder approval and will not be effective unless and until such approval has been obtained; provided, further, that no amendment will adversely affect the rights of Grantee with respect to the Common Shares or other securities covered by this Agreement without Grantee’s consent.  Notwithstanding the foregoing, the limitation requiring the consent of Grantee to certain amendments will not apply to any amendment that is deemed necessary by the Company to ensure compliance with Section 409A of the Code.  If permitted by Section 409A of the Code, including in the case of termination of employment or service, or in the case of unforeseeable emergency or other circumstances or in the event of a Change in Control, at any point in time, to the extent the Grant has not yet been fully vested, the Committee may, in its sole discretion, provide for continued vesting or accelerate the time at which some or all of the Grant will be deemed to

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have been vested (or may waive any other limitation or requirement under the Grant).

 

15.

Severability.  In the event that one or more of the provisions of this Agreement is invalidated for any reason by a court of competent jurisdiction, any provision so invalidated will be deemed to be separable from the other provisions of this Agreement, and the remaining provisions of this Agreement will continue to be valid and fully enforceable.

 

16.

Governing Law.  This Agreement is made under, and shall be construed in accordance with, the internal substantive laws of the State of Ohio.

 

17.

Compliance with Section 409A of the Code.  To the extent applicable, it is intended that this Agreement comply Section 409A of the Code, so that the income inclusion provisions of Section 409A(a)(1) of the Code do not apply to Grantee.  This Agreement shall be administered in a manner consistent with this intent.  Reference to Section 409A of the Code is to Section 409A of the Internal Revenue Code of 1986, as amended, and will also include any regulations or any other formal guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.  Notwithstanding any provision of the Agreement to the contrary, if, at the time of Grantee's separation from service (within the meaning of Section 409A of the Code), (a) Grantee is a specified employee (within the meaning of Section 409A of the Code and using the identification methodology selected by the Company from time to time) and (b) the Company makes a good faith determination that an amount payable hereunder constitutes deferred compensation (within the meaning of Section 409A of the Code) the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A of the Code in order to avoid taxes or penalties under Section 409A of the Code, then the Company will not pay such amount on the otherwise scheduled payment date but will instead pay it, without interest, on the first business day of the seventh month after Grantee's separation from service.

 

18.

Administration.  This Agreement will be administered by the Committee or any other committee of the Board designated by the Board to administer this Agreement (which members meet the requirements for independence under the NYSE Listed Company Manual). For purposes of this Agreement and the Grant, any references to “Committee” in the Plan shall be deemed references to the Committee as described herein. The interpretation and construction by the Committee of any provision of this Agreement and any determination by the Committee pursuant to any provision of this Agreement or of any notification or document related hereto will be final and conclusive. No member of the Committee shall be liable for any such action or determination made in good faith. In addition, subject to Section 14, the Committee is authorized to take any action it determines in its sole discretion to be appropriate subject only to the express limitations contained or referenced in this Agreement, and no authorization in any section or other provision of this Agreement is intended or

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may be deemed to constitute a limitation on the authority of the Committee.  The Company will not be required to issue any fractional Common Shares pursuant to the Grant or this Agreement. The Committee may provide for the elimination of fractions or for the settlement of fractions in cash.

 

19.

Relation to Plan.  This Grant has not been awarded pursuant to the Plan, but this Grant and Agreement are subject to terms and conditions that are substantially the same as those set forth in the Plan that are in many cases applicable to Restricted Share Units. Notwithstanding the foregoing, and for the avoidance of doubt, the share limitations and share counting and recycling rules set forth in the Plan shall not apply with respect to the Grant.

 

[SIGNATURES ON FOLLOWING PAGE]

 

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The undersigned Grantee hereby acknowledges receipt of an executed original of this Agreement and accepts the award of RSUs covered hereby, subject to the terms and conditions herein above set forth.

 

 

 

_/s/ Michael S. Williams________________

                               Grantee

 

Date:   _January 5, 2021________________

 

 

This Agreement is executed by the Company on this 5th day of January, 2021

 

TimkenSteel Corporation

 

 

By  _/s/ Kristine C. Syrvalin_________________________

        Kristine C. Syrvalin

        Executive Vice President, General Counsel and            Secretary

NAI-1515547991v5

 

 

Exhibit 10.25

TIMKENSTEEL CORPORATION

 

Performance-Based Restricted Share Unit Inducement Award Agreement

 

 

WHEREAS, Michael S. Williams (“Grantee”) is an employee of TimkenSteel Corporation (the “Company”) or a Subsidiary thereof;

 

WHEREAS, the grant of performance-based restricted share units evidenced hereby (the “Grant”) was authorized by a resolution of the Compensation Committee (including any successors, the “Committee”) of the Board and the execution of a performance-based restricted share unit inducement award agreement substantially in the form hereof (this “Agreement”) was authorized by a resolution of the Committee;

 

WHEREAS, this Grant is intended to be an inducement that is material to Grantee, who has entered into employment with the Company, and to encourage stock ownership by Grantee, thereby aligning Grantee’s interests with those of the Shareholders; and

 

WHEREAS, this Agreement is intended to comply with Section 303A.08 of the New York Stock Exchange (“NYSE”) Listed Company Manual, which provides an exception to NYSE’s shareholder approval requirement for the issuance of securities with respect to grants to employees of the Company as an inducement material to such individuals entering into employment with the Company, and shall be administered and interpreted consistent with such intent.

 

NOW, THEREFORE, subject to the terms and conditions hereinafter set forth and the Committee’s resolutions, the Company hereby confirms to Grantee the Grant, effective January 5, 2021 (the “Date of Grant”), of 423,400 performance-based restricted share units (the “PRSUs”). Although this Grant and Agreement are not made pursuant to the TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan (the “Plan”), all terms used in this Agreement with initial capital letters that are defined in the Plan and not otherwise defined herein will have the meanings assigned to them in the Plan.  Subject to the attainment of the Management Objectives described in Section 3 and Exhibit A of this Agreement, Grantee may earn from 0% to 150% of the PRSUs.

 

 

1.

Payment of PRSUs.  The PRSUs will become payable in accordance with the provisions of Section 6 of this Agreement if the restriction period for the PRSUs lapses and Grantee’s right to receive payment for the PRSUs becomes nonforfeitable (“Vest,” “Vesting” or “Vested”) in accordance with Section 3 and Section 4 of this Agreement.

 

2.

PRSUs Not Transferrable.  None of the PRSUs nor any interest therein or in any Common Shares underlying such PRSUs is transferable prior to payment other than by will or the laws of descent and distribution upon the death of the Grantee.

 

3.

Vesting of PRSUs.  

 

(a)

Subject to the terms and conditions of Section 4 and Section 5 of this Agreement, the PRSUs will be earned and Vest on the basis of the relative

NAI-1515521604v3

 

 

achievement of the Management Objectives approved by the Committee (the “Performance Metrics”) for the period from January 1, 2021 through December 31, 2023, inclusive (the “Performance Period”), as set forth on Exhibit A of this Agreement. The Vesting of the PRSUs pursuant to this Section 3 or pursuant to Section 4 is contingent upon a determination of the Committee that the Performance Metrics have been satisfied and the PRSUs have been earned, as described in this Section 3 and set forth in Exhibit A.

 

(b)

If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, the manner in which it conducts business or other events or circumstances render the Performance Metrics specified in this Section 3 to be unsuitable, the Committee may modify such Performance Metrics or the goals or actual levels of achievement regarding the Performance Metrics, in whole or in part, as the Committee deems appropriate.

 

(c)

Subject to Section 3(a) and Section 3(b), the PRSUs earned with respect to the Performance Period will Vest if Grantee is in the continuous employ of the Company or a Subsidiary from the Date of Grant through the last day of the Performance Period.  For purposes of this Agreement, the continuous employment of Grantee with the Company or a Subsidiary will not be deemed to have been interrupted, and Grantee will not be deemed to have ceased to be an employee of the Company or a Subsidiary, by reason of the transfer of Grantee’s employment among the Company and its Subsidiaries or if Grantee is absent on leave approved by a duly constituted officer of the Company or its Subsidiaries.

 

4.

Alternative Vesting of PRSUs.  Notwithstanding the provisions of Section 3 of this Agreement, and subject to the payment provisions of Section 6 hereof, some or all of the PRSUs will Vest under the following circumstances:

 

(a)

Death or Disability:  If Grantee dies or becomes permanently disabled while in the employ of the Company or a Subsidiary, then Grantee will Vest in a number of PRSUs equal to the product of (i) the number of PRSUs in which Grantee would have Vested in accordance with the terms and conditions of Section 3 if Grantee had remained in the continuous employ of the Company or a Subsidiary from the Date of Grant until the end of the Performance Period or the occurrence of a Change in Control to the extent a Replacement Award is not provided, whichever occurs first, multiplied by (ii) a fraction (in no case greater than 1) the numerator of which is the number of whole months from the first day of the Performance Period through the date of such death or permanent disability and the denominator of which is 36.  PRSUs that Vest in accordance with this Section 4(a) will be paid as provided for in Section 6 of this Agreement.  As used herein, “permanently disabled” means that Grantee has qualified for long-term disability benefits under a disability plan or program of the Company or a Subsidiary  or, in the absence of a disability plan or program of the

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Company or a Subsidiary, under a government-sponsored disability program, and is “disabled” within the meaning of Section 409A(a)(2)(C) of the Code.  As used in this Agreement, “Code” means the Internal Revenue Code of 1986, as amended, including any regulations or any other formal guidance promulgated by the U.S. Department of the Treasury or the Internal Revenue Service with respect to the Sections of the Code referenced in this Agreement.

 

(b)

Retirement:  If Grantee retires with the Company’s consent, then Grantee will Vest in a number of PRSUs equal to the product of (i) the number of PRSUs in which Grantee would have Vested in accordance with the terms and conditions of Section 3 if Grantee had remained in the continuous employ of the Company or a Subsidiary from the Date of Grant until the end of the Performance Period or the occurrence of a Change in Control to the extent a Replacement Award is not provided, whichever occurs first, multiplied by (ii) a fraction (in no case greater than 1) the numerator of which is the number of whole months from the first day of the Performance Period through the date of such retirement and the denominator of which is 36.  PRSUs that Vest in accordance with this Section 4(b) will be paid as provided for in Section 6 of this Agreement.  As used herein, “retire with the Company’s consent” means: (i) the retirement of Grantee prior to age 62 and when eligible to retire under a retirement plan of the Company or a Subsidiary, if the Board or the Committee determines that his or her retirement is for the convenience of the Company or a Subsidiary; or (ii) the retirement of Grantee at or after age 62 and when eligible to retire under a retirement plan of the Company or a Subsidiary.

 

(c)

Change in Control:

 

(i)

Upon a Change in Control occurring during the Restriction Period while Grantee is an employee of the Company or a Subsidiary or during the period that Grantee is deemed to be in the continuous employ of the Company or a Subsidiary pursuant to Section 4(a), 4(b), 4(d) or 4(e), to the extent the PRSUs have not been forfeited, then, notwithstanding any provision of this Agreement (including Exhibit A) to the contrary, (A) the Committee as constituted immediately before such Change in Control will determine and certify the number of earned PRSUs in accordance with Exhibit A to this Agreement which will be equal to the greater of (I) the actual achievement of the Performance Metrics as of the date of the Change in Control or (II) the target performance level of the PRSUs (the greater of clause (I) or (II), the “Change in Control Payout Level”), and (B) a number of the PRSUs will Vest (except to the extent that a Replacement Award is provided to Grantee for the PRSUs to continue, replace or assume the PRSUs covered by this Agreement) equal to the number of PRSUs earned at the Change in Control Payout Level, but in no event may negative discretion be exercised

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with respect to the number of PRSUs Vested.  Any PRSUs that are not earned and do not Vest in accordance with this Section 4(c)(i) will terminate and be forfeited (except to the extent that a Replacement Award is provided).  PRSUs that Vest in accordance with this Section 4(c)(i) will be paid as provided for in Section 6 of this Agreement.  

 

(ii)

As used in this Agreement, a “Replacement Award” means an award (A) of service-based restricted share units with no performance-based vesting requirements, (B) that has a value at least equal to the value of the PRSUs earned at the Change in Control Payout Level, (C) that relates to publicly traded equity securities of the Company or its successor in the Change in Control (or another entity that is affiliated with the Company or its successor following the Change in Control), (D) the tax consequences of which, under the Code, if Grantee is subject to U.S. federal income tax under the Code, are not less favorable to Grantee than the tax consequences relative to the PRSUs, (E) that Vests in full (i.e., in a number that is no less than the Change in Control Payout Level) upon a termination of Grantee’s employment with the Company or a Subsidiary or their successors in the Change in Control (or another entity that is affiliated with the Company or a Subsidiary or their successors following the Change in Control) (as applicable, the “Successor”) for Good Reason by Grantee or without Cause by such employer or upon the death of Grantee or Grantee becoming permanently disabled (as defined in Section 4(a)), in each case prior to the end of the Performance Period and within a period of two years after the Change in Control, and (F) the other terms and conditions of which are not less favorable to Grantee than the terms and conditions of the PRSUs (including the provisions that would apply in the event of a subsequent Change in Control).  A Replacement Award may be granted only to the extent it conforms to the requirements of Treasury Regulation 1.409A-3(i)(5)(iv)(B) or otherwise does not result in the PRSUs or Replacement Award failing to comply with or be exempt from Section 409A of the Code.  Without limiting the generality of the foregoing, the Replacement Award may take the form of a continuation of the PRSUs if the requirements of the preceding sentence are satisfied.  The determination of whether the conditions of this Section 4(c)(ii) are satisfied will be made by the Committee, as constituted immediately before the Change in Control, in its sole discretion.

 

(iii)

For purposes of Section 4(c)(ii), “Cause” will be defined not less favorably with respect to Grantee than: any intentional act of fraud, embezzlement or theft in connection with the Grantee’s duties with the Successor, any intentional wrongful disclosure of secret

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processes or confidential information of the Successor, or any intentional wrongful engagement in any competitive activity that would constitute a material breach of Grantee’s duty of loyalty to the Successor, and no act, or failure to act, on the part of Grantee will be deemed “intentional” unless done or omitted to be done by Grantee not in good faith and without reasonable belief that Grantee’s action or omission was in or not opposed to the best interest of the Successor; provided, that for any Grantee who is party to an individual severance or employment agreement defining Cause, “Cause” will have the meaning set forth in such agreement.  Also for purposes of Section 4(c)(ii), “Good Reason” means: a material reduction in the nature or scope of the responsibilities, authorities or duties of Grantee attached to Grantee’s position held immediately prior to the Change in Control, or a change of more than 60 miles in the location of Grantee’s principal office immediately prior to the Change in Control, or a material reduction in Grantee’s remuneration upon or after the Change in Control; provided, that, no later than 90 days following an event constituting Good Reason, Grantee gives notice to the Successor of the occurrence of such event and the Successor fails to cure the event within 30 days following the receipt of such notice.  

 

(iv)

If a Replacement Award is provided, notwithstanding anything in this Agreement to the contrary, any outstanding PRSUs which at the time of the Change in Control are not subject to a “substantial risk of forfeiture” (within the meaning of Section 409A of the Code) will be deemed to be Vested at the time of such Change in Control and will be paid as provided for in Section 6 of this Agreement.

 

(d)

Divestiture:  If Grantee’s employment with the Company or a Subsidiary terminates as the result of a divestiture, then Grantee will Vest in a number of PRSUs equal to the product of (i) the number of PRSUs in which Grantee would have Vested in accordance with the terms and conditions of Section 3 if Grantee had remained in the continuous employ of the Company or a Subsidiary from the Date of Grant until the end of the Performance Period or the occurrence of a Change in Control to the extent a Replacement Award is not provided, whichever occurs first, multiplied by (ii) a fraction (in no case greater than 1) the numerator of which is the number of whole months from the first day of the Performance Period through the date of such termination and the denominator of which is 36.  PRSUs that Vest in accordance with this Section 4(d) will be paid as provided for in Section 6 of this Agreement.  As used herein, the term “divestiture” means a permanent disposition to a Person other than the Company or any Subsidiary of a plant or other facility or property at which Grantee performs a majority of Grantee’s services, whether such disposition

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is effected by means of a sale of assets, a sale of Subsidiary stock or otherwise.

 

(e)

Layoff:  If (i) Grantee’s employment with the Company or a Subsidiary terminates as the result of a layoff and (ii) Grantee is entitled to receive severance pay pursuant to the terms of any severance pay plan of the Company in effect at the time of Grantee’s termination of employment that provides for severance pay calculated by multiplying Grantee’s base compensation by a specified severance period, then Grantee will Vest in a number of PRSUs equal to the product of (x) the number of PRSUs in which Grantee would have Vested in accordance with the terms and conditions of Section 3 if Grantee had remained in the continuous employ of the Company or a Subsidiary from the Date of Grant until the end of the Performance Period or the occurrence of a Change in Control to the extent a Replacement Award is not provided, whichever occurs first, multiplied by (y) a fraction (in no case greater than 1) the numerator of which is the number of whole months from the first day of the Performance Period through the end of the specified severance period and the denominator of which is 36.  PRSUs that Vest in accordance with this Section 4(e) will be paid as provided for in Section 6 of this Agreement.  As used herein, “layoff” means the involuntary termination by the Company or any Subsidiary of Grantee’s employment with the Company or any Subsidiary due to (A) a reduction in force leading to a permanent downsizing of the salaried workforce, (B) a permanent shutdown of the plant, department or subdivision in which Grantee works, (C) an elimination of position, or (D) any or no reason, except for Cause, at the Company’s discretion; provided that a termination under clause (D) will constitute a “layoff” for purposes of this Agreement only (i) upon the prior approval of the Compensation Committee in the case of an executive officer, or (ii) upon the prior approval of the Executive Vice President & Chief Financial Officer or the Executive Vice President,  General Counsel and Secretary in the case of any other terminated Grantee.

 

5.

Forfeiture of PRSUs.  Any PRSUs that have not Vested pursuant to Section 3 or Section 4 at the end of the Performance Period will be forfeited automatically and without further notice after the end of the Performance Period (or earlier if, and on such date that, Grantee ceases to be an employee of the Company or a Subsidiary prior to the end of the Performance Period for any reason other than as described in Section 4).

 

6.

Form and Time of Payment of PRSUs.

 

(a)

General.  Subject to Section 5, Section 6(b), and Section 6(c), payment for Vested PRSUs will be made in cash or Common Shares (as determined by the Committee) in the year following the last day of the Performance Period but in no event later than March 15 of that year.

NAI-1515521604v3-6-

 

 

(b)

Change in Control.  Notwithstanding Section 6(a), to the extent PRSUs are Vested on the date of a Change in Control, Grantee will receive payment for Vested PRSUs in cash or Common Shares (as determined by the Committee) on the date of the Change in Control; provided, however, that if such Change in Control would not qualify as a permissible date of distribution under Section 409A(a)(2)(A) of the Code, and where Section 409A of the Code applies to such distribution, Grantee will receive the corresponding payment on the date that would have otherwise applied pursuant to this Section 6.

 

(c)

Payment Following a Change in Control.  Notwithstanding Section 6(a), if, during the two-year period following a Change in Control, Grantee experiences a “separation from service” (within the meaning of Treasury Regulation section 1.409A-1(h)), the PRSUs that are Vested as of the date of such separation from service will be paid in cash or Common Shares (as determined by the Committee) within 10 days of the separation from service to the extent they have not been previously paid to Grantee; provided, however, that if such Change in Control would not qualify as a permissible date of distribution under Section 409A(a)(2)(A) of the Code, and where Section 409A of the Code applies to such distribution, Grantee will receive the corresponding payment on the date that would have otherwise applied pursuant to this Section 6.  

 

7.

Dividend Equivalents.  Grantee will be credited with cash per PRSU equal to the amount of each cash dividend paid by the Company (if any) to holders of Common Shares generally with a record date occurring on or after the Date of Grant and prior to the time when the PRSUs are paid in accordance with Section  6 hereof.  Any amounts credited pursuant to the immediately preceding sentence will be subject to the same applicable terms and conditions (including earning, Vesting, payment, and forfeitability) as apply to the PRSUs based on which the dividend equivalents were credited, and such amounts will be paid in either cash or Common Shares, as determined by the Committee in its sole discretion, at the same time as the PRSUs to which they relate.  If such amounts are paid in Common Shares, the number of shares so paid will be rounded down to the nearest whole number and will be determined by dividing such credited amounts by the Market Value per Share on the payment date.

 

8.

Detrimental Activity and Recapture.  

 

(a)

Notwithstanding anything in this Agreement to the contrary, in the event that, as determined by the Committee, Grantee engages in Detrimental Activity during employment with the Company or a Subsidiary, the PRSUs will be forfeited automatically and without further notice at the time of that determination.  As used herein, “Detrimental Activity” means:

 

(i)

engaging in any activity, as an employee, principal, agent, or consultant, for another entity that competes with the Company in

NAI-1515521604v3-7-

 

 

any actual, researched, or prospective product, service, system, or business activity for which Grantee has had any direct responsibility during the last two years of his or her employment with the Company or a Subsidiary, in any territory in which the Company or a Subsidiary manufactures, sells, markets, services, or installs such product, service, or system, or engages in such business activity;

 

(ii)

soliciting any employee of the Company or a Subsidiary to terminate his or her employment with the Company or a Subsidiary;

 

(iii)

the disclosure to anyone outside the Company or a Subsidiary, or the use in other than the Company’s or one of its Subsidiary’s business, without prior written authorization from the Company, of any confidential, proprietary or trade secret information or material relating to the business of the Company and its Subsidiaries, acquired by Grantee during his or her employment with the Company or its Subsidiaries or while acting as a director of or consultant for the Company or its Subsidiaries thereafter;

 

(iv)

the failure or refusal to disclose promptly and to assign to the Company upon request all right, title and interest in any invention or idea, patentable or not, made or conceived by Grantee during employment by the Company and any Subsidiary, relating in any manner to the actual or anticipated business, research or development work of the Company or any Subsidiary or the failure or refusal to do anything reasonably necessary to enable the Company or any Subsidiary to secure a patent where appropriate in the United States and in other countries;

 

(v)

activity that results in Termination for Cause.  For purposes of this Section 8(a)(v), “Termination for Cause” means a termination: (A) due to Grantee’s willful and continuous gross neglect of his or her duties for which he or she is employed; or (B) due to an act of dishonesty on the part of Grantee constituting a felony resulting or intended to result, directly or indirectly, in his or her gain for personal enrichment at the expense of the Company or a Subsidiary; or

 

(vi)

any other conduct or act determined to be injurious, detrimental or prejudicial to any significant interest of the Company or any Subsidiary unless Grantee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company.

Nothing in this Agreement prevents Grantee from providing, without prior notice to the Company, information to governmental authorities regarding possible legal violations or otherwise testifying or participating in any

NAI-1515521604v3-8-

 

investigation or proceeding by any governmental authorities regarding possible legal violations, and for purpose of clarity, Grantee is not prohibited from providing information voluntarily to the Securities and Exchange Commission pursuant to Section 21F of the Exchange Act.

 

(b)

If a Restatement occurs and the Committee determines that Grantee is personally responsible in whole or in part for causing the Restatement as a result of Grantee’s personal misconduct or any fraudulent activity on the part of Grantee, then the Committee has discretion to, based on applicable facts and circumstances and subject to applicable law, cause the Company to recover all or any portion (but no more than 100%) of the PRSUs (plus dividend equivalent payments) earned or payable to Grantee for some or all of the years covered by the Restatement.  The amount of any earned or payable PRSUs (and dividend equivalent payments)  recovered by the Company will be limited to the amount by which such earned or payable PRSUs (and dividend equivalent payments) exceeded the amount that would have been earned by or paid to Grantee had the Company’s financial statements for the applicable restated fiscal year or years been initially filed as restated, as reasonably determined by the Committee. The Committee also will determine whether the Company will effect any recovery under this Section 8(b) by: (i) seeking repayment from Grantee; (ii) reducing, except with respect to any non-qualified deferred compensation under Section 409A of the Code, the amount that would otherwise be payable to Grantee under any compensatory plan, program or arrangement maintained by the Company (subject to applicable law and the terms and conditions of such plan, program or arrangement); (iii) by withholding, except with respect to any non-qualified deferred compensation under Section 409A of the Code, payment of future increases in compensation (including the payment of any discretionary bonus amount) that would otherwise have been made to Grantee in accordance with the Company’s compensation practices; or (iv) by any combination of these alternatives.  As used herein, “Restatement” means a restatement (made within 24 months of the publication of the financial statements that are required to be restated) of any part of the Company’s financial statements for any fiscal year or years beginning with the year in which the Date of Grant occurs due to material noncompliance with any financial reporting requirement under the U.S. securities laws applicable to such fiscal year or years.  Notwithstanding anything in this Agreement to the contrary, Grantee acknowledges and agrees that this Agreement and the award described herein (and any settlement thereof) are subject to the terms and conditions of the Company’s clawback policy (if any) as may be in effect from time to time, including specifically to implement Section 10D of the Exchange Act and any applicable rules or regulations promulgated thereunder (including applicable rules and regulations of any national securities exchange on which the Common Shares are traded) (the “Compensation Recovery Policy”), and that this Section 8 will be deemed superseded by and subject

NAI-1515521604v3-9-

 

 

to the terms and conditions of the Compensation Recovery Policy from and after the effective date thereof.

 

9.

Compliance with Law.  The Company will not be obligated to issue any of the Common Shares covered by this Agreement if the issuance thereof would result in violation of any law or regulation to which the Company is subject.

 

10.

Adjustments.  The Committee will make or provide for such adjustments in the number of and kind of Common Shares covered by the PRSUs, or in other award terms, as the Committee, in its sole discretion, exercised in good faith, determines is equitably required to prevent dilution or enlargement of Grantee’s rights under this Agreement that otherwise would result from any (a) extraordinary cash dividend, stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (b) merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities involving the Company or (c) any other transaction or event having an effect similar to any of those referred to in Section 10(a) or 10(b) hereof.  Moreover, in the event of any such transaction or event or in the event of a Change in Control, the Committee may provide in substitution for the Grant (or any part thereof) such alternative consideration (including cash), if any, as it, in good faith, may determine to be equitable in the circumstances and shall require in connection therewith the surrender of the portion of the Grant so replaced in a manner that complies with Section 409A of the Code.

 

11.

Withholding Taxes.  If the Company is required to withhold federal, state, local or foreign taxes or other amounts in connection with Grantee’s right to receive Common Shares or cash under this Agreement, and the amounts available to the Company for such withholding are insufficient, it will be a condition to the receipt of any such Common Shares or cash (or the realization of any other benefit provided for under this Agreement) that Grantee make arrangements satisfactory to the Company for payment of the balance of such taxes or other amounts.  Grantee may satisfy such tax obligation by paying the Company cash via personal check.  Alternatively, unless otherwise determined by the Committee, Grantee may elect that all or any part of such tax obligation be satisfied by the Company’s retention of a portion of the Common Shares provided for under this Agreement or by Grantee’s surrender of a portion of the Common Shares that he or she has owned.  In no event, however, shall the Company accept Common Shares for payment of taxes in excess of required tax withholding rates (unless such higher withholding amounts would not result in adverse accounting implications for the Company and the additional withholding amount is authorized by the Committee).  If Grantee’s benefit is to be received in the form of Common Shares, and Grantee fails to make arrangements for the payment of required taxes or other amounts, then, unless otherwise determined by the Committee, the Company will withhold Common Shares having a value equal to the amount required to be withheld.  The Common Shares used for tax withholding will be

NAI-1515521604v3-10-

 

 

valued at an amount equal to the fair market value of such Common Shares on the date the applicable benefit is to be included in Grantee’s income.

 

12.

Rights as a Shareholder. Grantee will not have any rights as a Shareholder with respect to any Common Shares granted to him or her under this Agreement prior to the date as of which he or she is actually recorded as the holder of such Common Shares upon the share records of the Company.

 

13.

Right to Terminate Employment.  Nothing in this Agreement limits in any way whatsoever any right the Company or a Subsidiary may otherwise have to terminate the employment of Grantee at any time.

 

14.

Relation to Other Benefits.  Any economic or other benefit to Grantee under this Agreement will not be taken into account in determining any benefits to which Grantee may be entitled under any profit‑sharing, retirement or other benefit or compensation plan maintained by the Company or a Subsidiary and will not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company or a Subsidiary.

 

15.

Amendments.  The Committee may at any time and from time to time amend this Agreement in whole or in part, prospectively or retroactively; provided, however, that if an amendment to this Agreement requires approval by the Shareholders in order to comply with applicable law or the rules of the NYSE or, if the Common Shares are not traded on the NYSE, the principal national securities exchange upon which the Common Shares are traded or quoted, then such amendment will be subject to Shareholder approval and will not be effective unless and until such approval has been obtained; provided, further, that (a) no amendment will adversely affect in a material manner the rights of Grantee with respect to the Common Shares or other securities covered by this Agreement without Grantee’s consent and (b) Grantee’s consent will not be required to an amendment that is deemed necessary by the Company to ensure compliance with Section 10D of the Exchange Act.  Notwithstanding the foregoing, the limitation requiring the consent of Grantee to certain amendments will not apply to any amendment that is deemed necessary by the Company to ensure compliance with Section 409A of the Code.  If permitted by Section 409A of the Code, including in the case of termination of employment or service, or in the case of unforeseeable emergency or other circumstances or in the event of a Change in Control, at any point in time, to the extent the Grant has not yet been fully earned or vested, the Committee may, in its sole discretion, provide for continued vesting or accelerate the time at which some or all of the Grant will be deemed to have been earned or vested (or may waive any other limitation or requirement under the Grant).

 

16.

Severability.  In the event one or more of the provisions of this Agreement is unenforceable or is invalidated for any reason by a court of competent jurisdiction, such provision will be deemed to be separable from the other provisions of this Agreement, construed or deemed amended or limited in scope to confirm to the applicable laws or, in the discretion of the Committee, such provision will be

NAI-1515521604v3-11-

 

 

stricken and the remaining provisions of this Agreement will continue to be valid and fully enforceable.

 

17.

Governing Law.  This Agreement is made under, and will be construed in accordance with, the internal substantive laws of the State of Ohio.

 

18.

Compliance with Section 409A of the Code.  To the extent applicable, it is intended that this Agreement comply with the provisions of Section 409A of the Code, so that the income inclusion provisions of Section 409A(a)(1) of the Code do not apply to Grantee.  This Agreement will be administered in a manner consistent with this intent.  Notwithstanding any provision of the Agreement to the contrary, if, at the time of Grantee’s separation from service (within the meaning of Section 409A of the Code), (a) Grantee is a specified employee (within the meaning of Section 409A of the Code and using the identification methodology selected by the Company from time to time) and (b) the Company makes a good faith determination that an amount payable hereunder constitutes deferred compensation (within the meaning of Section 409A of the Code) the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A of the Code in order to avoid taxes or penalties under Section 409A of the Code, then the Company will not pay such amount on the otherwise scheduled payment date but will instead pay it, without interest, on the first business day of the seventh month after Grantee’s separation from service.

 

19.

Administration.  This Agreement will be administered by the Committee or any other committee of the Board designated by the Board to administer this Agreement (which members meet the requirements for independence under the NYSE Listed Company Manual). For purposes of this Agreement and the Grant, any references to “Committee” in the Plan shall be deemed references to the Committee as described herein. The interpretation and construction by the Committee of any provision of this Agreement and any determination by the Committee pursuant to any provision of this Agreement or of any notification or document related hereto will be final and conclusive. No member of the Committee shall be liable for any such action or determination made in good faith. In addition, subject to Section 15, the Committee is authorized to take any action it determines in its sole discretion to be appropriate subject only to the express limitations contained or referenced in this Agreement, and no authorization in any section or other provision of this Agreement is intended or may be deemed to constitute a limitation on the authority of the Committee.  The Company will not be required to issue any fractional Common Shares pursuant to the Grant or this Agreement. The Committee may provide for the elimination of fractions or for the settlement of fractions in cash.

 

20.

Relation to Plan.  This Grant has not been awarded pursuant to the Plan, but this Grant and Agreement are subject to terms and conditions that are substantially the same as those set forth in the Plan that are in many cases applicable to performance-based Restricted Share Units. Notwithstanding the foregoing, and

NAI-1515521604v3-12-

 

 

for the avoidance of doubt, the share limitations and share counting and recycling rules set forth in the Plan shall not apply with respect to the Grant.

[SIGNATURES ON FOLLOWING PAGE]

 

NAI-1515521604v3-13-

 

 

The undersigned Grantee hereby acknowledges receipt of an executed original of this Agreement and accepts the award of PRSUs covered hereby, subject to the terms and conditions herein above set forth.

 

 

 

_/s/ Michael S. Williams________________

                               Grantee

 

Date:   _January 5, 2021________________

 

 

This Agreement is executed by the Company on this 5th day of January, 2021

 

TimkenSteel Corporation

 

 

By  _/s/ Kristine C. Syrvalin_________________________

        Kristine C. Syrvalin

        Executive Vice President, General Counsel and            Secretary


NAI-1515521604v3

 

Exhibit A

Statement of Management Objectives

This Statement of Management Objectives applies to the PRSUs granted to the Grantee on the Date of Grant memorialized by the Agreement.  Capitalized terms used in the Agreement that are not specifically defined in this Statement of Management Objectives have the meanings assigned to them in the Agreement or in the Plan, as applicable.

Section 1.

Definitions.  For purposes hereof:

 

(a)

“Peer Group” means, of a benchmark group of 16 entities, the names of which are attached hereto as Annex A, those entities that remain in the Peer Group as of the end of the Performance Period (or the date of the Change in Control if Section 1(e)(ii) of this Exhibit A is applicable) after application of the Peer Group Adjustment Protocol.

 

(b)

“Peer Group Adjustment Protocol” means:  (i) if an entity listed in Annex A files for bankruptcy and/or liquidation, is operating under bankruptcy protection, or is delisted from its primary stock exchange because it fails to meet the exchange listing requirement, then such entity will remain in the Peer Group, but RTSR for the Performance Period will be calculated as if such entity achieved Total Shareholder Return placing it at the bottom (chronologically, if more than one such entity) of the Peer Group; (ii) if, by the last day of the Performance Period (or the date of the Change in Control if Section 1(e)(ii) of this Exhibit A is applicable), an entity listed in Annex A has been acquired, or has announced that it has entered into a definitive agreement the consummation of which will result in such entity’s acquisition, and/or the entity is no longer existing as a public company that is traded on its primary stock exchange (other than for the reasons as described in subsection (i) above), then such entity will not remain in the Peer Group and RTSR for the Performance Period will be calculated as if such entity had never been a member of the Peer Group; and (iii) except as otherwise described in subsection (i) and (ii) above, for purposes of this Statement of Management Objectives, for each of the entities listed in Annex A, such entity will be deemed to include any successor to all or substantially all of the primary business of such entity at end of the Performance Period.

 

(c)

“Relative Total Shareholder Return” or “RTSR” means the percentile rank of the Company’s Total Shareholder Return among the Total Shareholder Returns of all members of the Peer Group (including the Company), ranked in descending order, at the end of the Performance Period (or the date of the Change in Control if Section 1(e)(ii) of this Exhibit A is applicable).  

 

(e)

“Total Shareholder Return” means, with respect to each of the Common Shares and the common stock of each of the members of the Peer Group, a rate of return reflecting stock price appreciation, plus the reinvestment of dividends in additional shares of stock, from the beginning of the Performance Period through the end of the Performance Period.  Total Shareholder Return will be calculated as follows:

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(i) Except as provided in clause (ii), Total Shareholder Return will be calculated for the Company and each member of the Peer Group by averaging the Company’s and member’s shareholder return for each calendar year during the Performance Period measured at the last day of each calendar year against the beginning price at the start of the Performance Period.  For purposes of calculating Total Shareholder Return for each of the Company and the members of the Peer Group, the beginning stock price will be based on the average closing stock price for the 20 trading days immediately preceding the first day of the Performance Period on the principal stock exchange on which the stock then traded and the ending stock price for each calendar year during the Performance Period will be based on the average closing stock price for the 20 trading days ending on December 31 of each calendar year in the Performance Period on the principal stock exchange on which the stock then trades.

(ii)If a Change in Control occurs during the Restriction Period, and Section 4(c) of the Agreement applies to the PRSUs, (A) for purposes of determining Total Shareholder Return, the last day of the Performance Period will be the date of the Change in Control, and (B) Total Shareholder Return will be calculated for the Company and each member of the Peer Group using a beginning stock price based on the average closing stock price for the 20 trading days immediately preceding the first day of the Performance Period on the principal stock exchange on which the stock then traded, and the ending stock price for the Company will be the “Sale Price” (as defined below) and for each member of the Peer Group will be based on the average closing stock price for the 20 trading days ending on the date of the Change in Control on the principal stock exchange on which the stock then traded.  The “Sale Price” will be the amount of consideration per Common Share that shareholders of the Company receive upon consummation of the Change in Control (including the fair market value, as determined by the Committee, of any non-cash consideration); provided that if the Change in Control is not the result of a transaction in which shareholders receive consideration, the “Sale Price” will be the closing price of a Common Share on the last trading day immediately preceding the date of the Change in Control.

Section 2.

Performance Matrices.

From 0% to 150% of the PRSUs will be earned based on achievement of the Management Objectives measured by RTSR performance during the Performance Period, in each case as follows:

 

Performance Level

Relative Total Shareholder Return

PRSUs Earned

Below Threshold

Ranked below 25th percentile

0%

Threshold

Ranked at 25th percentile

50%

Target

Ranked at 50th percentile

100%

Maximum

Ranked at or above 75th percentile

150%

Section 3.

Number of PRSUs Earned.  The Committee will determine whether and to what extent the goals relating to the Management Objectives have been satisfied for the

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Performance Period and will determine the number of PRSUs that will become earned hereunder and under the Agreement on the basis of the following:

 

(a)

Below Threshold.  If, upon the conclusion of the Performance Period (or the date of the Change in Control if Section 1(e)(ii) of this Exhibit A is applicable), RTSR for the Performance Period falls below the threshold level, as set forth in the Performance Matrices, no PRSUs will become earned.

 

(b)

Threshold.  If, upon the conclusion of the Performance Period (or the date of the Change in Control if Section 1(e)(ii) of this Exhibit A is applicable), RTSR for the Performance Period equals the threshold level, as set forth in the Performance Matrices, 50% of the PRSUs (rounded down to the nearest whole number of PRSUs) will become earned.

 

(c)

Between Threshold and Target.  If, upon the conclusion of the Performance Period (or the date of the Change in Control if Section 1(e)(ii) of this Exhibit A is applicable), RTSR for the Performance Period exceeds the threshold level, but is less than the target level, as set forth in the Performance Matrices, a percentage between 50% and 100% (determined on the basis of straight-line mathematical interpolation) of the PRSUs (rounded down to the nearest whole number of PRSUs) will become earned.

 

(d)

Target.  If, upon the conclusion of the Performance Period (or the date of the Change in Control if Section 1(e)(ii) of this Exhibit A is applicable), RTSR for the Performance Period equals the target level, as set forth in the Performance Matrices, 100% of the PRSUs will become earned.

 

(e)

Between Target and Maximum.  If, upon the conclusion of the Performance Period (or the date of the Change in Control if Section 1(e)(ii) of this Exhibit A is applicable), RTSR for the Performance Period exceeds the target level, but is less than the maximum level, as set forth in the Performance Matrices, a percentage between 100% and 150% (determined on the basis of straight-line mathematical interpolation) of the PRSUs (rounded down to the nearest whole number of PRSUs) will become earned.

 

(f)

Equals or Exceeds Maximum.  If, upon the conclusion of the Performance Period (or the date of the Change in Control if Section 1(e)(ii) of this Exhibit A is applicable), RTSR for the Performance Period equals or exceeds the maximum level, as set forth in the Performance Matrices, 150% of the PRSUs will become earned.

 

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Annex A

2021 Peer Group

Company Name

Ticker Symbol

Allegheny Technologies Incorporated

 

Ampco-Pittsburgh Corporation

 

Carpenter Technology Corporation

 

Commercial Metals Company

 

Friedman Industries, Incorporated

 

Haynes International, Inc.

 

Nucor Corporation

 

Olympic Steel, Inc.

 

Reliance Steel & Aluminum Company

 

Ryerson Holding Corporation

 

Schnitzer Steel Industries

 

Steel Dynamics, Inc.

 

Synalloy Corporation

 

United States Steel Corporation

 

Universal Stainless & Alloy Products, Inc.

 

Worthington Industries, Inc.

 

 

 

NAI-1515521604v3

Exhibit 10.26

SEVERANCE AGREEMENT

This Severance Agreement (the “Agreement”) is dated as of January 1, 2021 between TimkenSteel Corporation, an Ohio corporation (the “Company”), and Michael S. Williams (the “Employee”).

Recitals

WHEREAS, the Employee is a key employee of the Company and has made and/or is expected to make major contributions to the profitability, growth and financial strength of the Company;

WHEREAS, the Company wishes to induce its key employees to remain in the employment of the Company and to assure itself of stability and continuity of operations by providing severance protection to those key employees who are expected to make major contributions to the success of the Company.  In addition, the Company recognizes that a termination of employment may occur following a change in control in circumstances where the Employee should receive additional compensation for services theretofore rendered and for other good reasons, the appropriate amount of which would be difficult to ascertain.  Hence, the Company has agreed to provide special severance in the event of a change in control of the Company;

NOW, THEREFORE, in consideration of the premises provided for in this Agreement, including the Release provided for in Section 7 hereof, the Company and the Employee agree as follows:

1. Definitions:

1.1Base Salary:  The term “Base Salary” shall mean the Employee’s annual base salary as in effect on the date this Agreement becomes operative, as the same may be increased from time to time.

1.2Board:  The term “Board” shall mean the Board of Directors of the Company.

1.3Change in Control:  “Change in Control” means the occurrence during the Term of any of the following events:

(a)The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either:  (i) the then-outstanding Common Shares; or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (“Voting Shares”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change in Control:  (A) any acquisition directly from the Company; (B) any acquisition by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the

NAI-1509265674v6

 

 

Company or any of its Subsidiaries; or (D) any acquisition by any Person pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c); or

(b)Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason (other than death or disability) to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote or the approval of at least a majority of the directors then comprising the Incumbent Board (either by a specific vote or written action or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be considered as though such individual were a member of the Incumbent Board, but excluding for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

(c)Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Common Shares and Voting Shares immediately prior to such Business Combination beneficially own, directly or indirectly, more than 66-2/3% of, respectively, the then-outstanding common shares and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions relative to each other as their ownership, immediately prior to such Business Combination, of the Common Shares and Voting Shares of the Company, as the case may be, (ii) no Person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) sponsored or maintained by the Company or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then-outstanding common shares of the entity resulting from such Business Combination, or the combined voting power of the then-outstanding voting securities of such entity except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(d)Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

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The Company shall give the Employee written notice, delivered to the Employee in the manner specified in Section 9 hereof, of the occurrence of any event constituting a Change in Control as promptly as practical, and in no case later than 10 calendar days, after the occurrence of such event.

1.4CIC Severance Amount:  The term “CIC Severance Amount” shall mean an amount equal to the sum of:

(a)Two and one-half times the greater of (i) the Employee’s Base Salary in effect immediately prior to the Employee’s Termination of Employment or (ii) the Employee’s Base Salary in effect immediately prior to the Change in Control; and

(b)Two and one-half times the greater of (i) the Employee’s target Incentive Pay opportunity for the year in which the Employee’s employment is terminated or (ii) the Employee’s target Incentive Pay opportunity for the year in which the Change in Control occurred.

1.5Code:  The term “Code” shall mean the Internal Revenue Code of 1986, as amended, and the regulations thereunder, as such law and regulations may be amended from time to time.

1.6Common Shares:  The term “Common Shares” means the common shares, without par value, of the Company.

1.7Company Termination Event:  The term “Company Termination Event” shall mean the Termination of Employment of the Employee by the Company or otherwise in any of the following events and prior to any Employee Termination Event:

(a)The Employee’s death;

(b)If the Employee shall become eligible to receive and begins actually to receive long-term disability benefits under a disability plan or program of the Company or a Subsidiary or, in the absence of such a disability plan or program of the Company or a Subsidiary, under a government-sponsored disability program, and the Employee is “disabled” within the meaning of Section 409A(a)(2)(C) of the Code; or

(c)For Cause.  Termination of Employment shall be deemed to be for “Cause” only if based on the fact that the Employee has done any of the following:

(i)An intentional act of fraud, embezzlement or theft in connection with his duties with the Company;

(ii)Intentional wrongful disclosure of secret processes or confidential information of the Company or a Company subsidiary; or

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(iii)Intentional wrongful engagement in any Competitive Activity which would constitute a material breach of the Employee’s duty of loyalty to the Company.

For purposes of this Agreement, no act, or failure to act, on the part of the Employee shall be deemed “intentional” unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that his action or omission was in or not opposed to the best interest of the Company.

1.8Competitive Activity:  The term “Competitive Activity” shall mean the Employee’s participation, without the written consent of a superior officer of the Company or the Board, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise’s sales of any product or service competitive with any product or service of the Company amounted to 25% of such enterprise’s net sales for its most recently completed fiscal year and if the Company’s net sales of said product or service amounted to 25% of the Company’s net sales for its most recently completed fiscal year. “Competitive Activity” shall not include (a) the mere ownership of securities in any enterprise and exercise of rights appurtenant thereto or (b) participation in management of any enterprise or business operation thereof other than in connection with the competitive operation of such enterprise.

1.9Employee Termination Event:  The term “Employee Termination Event” shall mean the Termination of Employment of the Employee (including retirement) by the Employee in any of the following events:

(a)A determination by the Employee made in good faith that upon or after the occurrence of a Change in Control:  (i) a material reduction in the nature or scope of the responsibilities, authorities or duties of the Employee attached to the Employee’s position held immediately prior to the Change in Control has occurred; or (ii) a change of more than 60 miles has occurred in the location of the Employee’s principal office immediately prior to the Change in Control;

(b)A material reduction by the Company in the Employee’s Base Salary or annual Incentive Pay opportunity upon or after the occurrence of a Change in Control (for purposes of this Agreement, the amount of any reduction in annual base salary or incentive pay elected by the Employee pursuant to any qualified or non-qualified salary reduction arrangement maintained by the Company shall be included in the determination of Base Salary and annual Incentive Pay opportunity); or

(c)An action or inaction that constitutes a material breach by the Company of this Agreement (including, but not limited to, a breach of Section 8.1 hereof) upon or after the occurrence of a Change in Control.

Notwithstanding the foregoing, no Termination of Employment by the Employee will be an Employee Termination Event unless (x) the Employee gives the Company notice of the existence of a condition described in subsection (a), (b), or (c), above within 90 days of the initial

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existence of such condition, and (y) the Company does not remedy such condition described in clause (a), (b), or (c) above, as applicable, within 30 days of receiving the notice described in the preceding clause (x), and (z) the Employee terminates employment within two years after the initial existence of a condition described in subsection (a), (b), or (c), above.

1.11Exchange Act:  The term “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, as such law, rules and regulations may be amended from time to time.  

1.12Incentive Pay:  The term “Incentive Pay” shall mean any cash incentive compensation award(s) based on an annual (or other applicable short-term, as opposed to long-term) performance period.

1.13Limited Period:  The term “Limited Period” shall mean that period of time commencing on the date of a Change in Control and continuing for a period of two years.

1.14Notice of Termination:  The term “Notice of Termination” shall mean a written notice delivered to the Employee in the manner specified in Section 9 of this Agreement, which notice indicates the specific termination provision in this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee’s employment.

1.16Sale Termination:  The term “Sale Termination” shall mean a Termination of Employment with the Company or a Subsidiary of the Company in connection with:

(a)a sale by the Company or a Subsidiary of the Company of a plant or other facility or property or assets; or

(b)a sale of the ownership of the Company or a Subsidiary of the Company,

when the acquirer in such sale described in subsection (a) or (b) or its affiliate makes an offer of employment to the Employee in connection with such sale.  Notwithstanding the foregoing, a Termination of Employment shall not be a Sale Termination if such Termination of Employment occurs during the Limited Period or during the 90 days prior to a Change in Control under the circumstances described in Section 4.1(a).

1.17Severance Amount:  The term “Severance Amount” shall mean an amount equal to the sum of:

(a)One and one-half times the Employee’s Base Salary in effect immediately prior to the Employee’s Termination of Employment; and

(b)One and one-half times the Employee’s target Incentive Pay opportunity for the year in which Employee's employment is terminated.

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1.18Subsidiary:  The term “Subsidiary” means a corporation, partnership, joint venture, unincorporated association or other entity in which the Company directly or indirectly beneficially owns 50% or more ownership or other equity interest.

1.19 Termination Date:  The term “Termination Date” shall mean the effective date of the Employee’s Termination of Employment with the Company.

1.20Termination of Employment:  The term “Termination of Employment” means termination of employment within the meaning of Treasury Regulation Section 1.409A-1(h)(1)(ii).

2. Operation of Agreement:  This Agreement shall be effective immediately upon its execution.

3. Conditions During the Limited Period:  During the Limited Period:

(a)the Employee shall remain in the same office and position in the Company (or a successor thereto) or any Subsidiary that (or better office and position in the Company (or a successor thereto) or any Subsidiary than) the Employee held immediately prior to the Change in Control;

(b)if the Employee was a Director of the Company or a Subsidiary immediately prior to a Change in Control, the Employee shall remain a Director of the Company or a Director of such Subsidiary;

(c)during the Employee’s employment with the Company and its Subsidiaries: (i) the Company shall continue in effect without material negative change any compensation or benefit plan in which the Employee participated immediately prior to the Change in Control and, as applicable, the Company shall continue Employee’s participation in any such compensation or benefit plan; (ii) neither the Company nor its Subsidiaries shall take any action that would directly or indirectly materially reduce any of the benefits of any compensation or benefit plan enjoyed by the Employee at the time of the Change in Control; (iii) the Employee shall continue to be entitled to no less than the same number of paid vacation days to which the Employee was entitled immediately prior to the Change in Control, based on years of service with the Company or its Subsidiaries in accordance with the normal vacation policy, in effect immediately prior to the Change in Control, of the Company or any of its Subsidiaries that employ Employee immediately prior to the Change in Control; and (iv) neither the Company nor any of its Subsidiaries shall take any other action which would materially adversely change the conditions or prerequisites of the Employee’s employment as in effect immediately prior to the Change in Control; and

(d)the termination of Employee’s employment by the Company or its Subsidiaries shall only be effected pursuant to a Notice of Termination satisfying the requirements of Section 1.14 of this Agreement.

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The Employee acknowledges that if the Company fails to fulfill any of its obligations under this Section 3, the Employee’s only recourse is to cause such failure to be considered an Employee Termination Event if the breach is considered a material breach of this Agreement and the Employee’s damages will be limited to the payments provided for in Section 4, as applicable.

4. Severance Compensation:

4.1Severance Compensation:  

(a)If the Employee experiences a Termination of Employment during the Limited Period because the Company terminated the Employee’s employment during the Limited Period other than pursuant to a Company Termination Event, or because the Employee voluntarily terminated his employment during the Limited Period pursuant to an Employee Termination Event, then the Company shall pay as severance compensation to the Employee a lump sum cash payment in the amount of the CIC Severance Amount.  Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and, not more than 90 days prior to the date on which the Change in Control occurs, the Employee experiences a Termination of Employment because the Company terminated the Employee’s employment, such Termination of Employment will be deemed to be a Termination of Employment during the Limited Period for purposes of this Agreement if the Employee has reasonably demonstrated that such Termination of Employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or in anticipation of a Change in Control.  In the event the Employee is entitled to the benefits under this Agreement as a result of the preceding sentence, then the 60-calendar-day period specified in Section 4.1(c) shall be deemed to commence on the date on which the Employee receives the notice contemplated by the last sentence of Section 1.3 hereof.

(b)If the Employee experiences a Termination of Employment because the Company has terminated the Employee’s employment, the Company shall pay as severance compensation to the Employee a lump sum cash payment in the amount of the Severance Amount, unless the Termination of Employment occurs:

(i)during the Limited Period; or

(ii)pursuant to a Company Termination Event; or

(iii)for reasons of (A) criminal activity or (B) willful misconduct or gross negligence in the performance of the Employee’s duties; or

(iv)pursuant to a Sale Termination.

(c)The payment of the Severance Amount or the CIC Severance Amount required by this Section 4.1 shall, subject to Section 19.2 and to the execution and delivery by the Employee of the Release described in Section 7

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hereof, and the expiration of all applicable rights of the Employee to revoke the Release or any provision thereof, be made to the Employee within 60 calendar days after the Termination Date.  In no event will the Employee have a right to designate the taxable year of any such payment.

4.2Compensation through Termination:  If the Employee experiences a Termination of Employment, the Company shall pay the Employee any Base Salary that has accrued but is unpaid through the Termination Date.  If the Employee experiences a Termination of Employment not during the Limited Period because his employment is terminated by the Company other than for Cause and other than pursuant to a Sale Termination, the Company shall pay the Employee an amount equivalent to the Incentive Pay actually earned based on actual performance and subject to the generally applicable terms for the Incentive Pay opportunity for the calendar year in which the Termination Date occurs multiplied by a fraction, the numerator of which is the number of days in the calendar year in which the Termination Date occurs that have expired prior to the Termination Date and the denominator of which is 365.  If the Employee experiences a Termination of Employment during the Limited Period because his employment is terminated by the Company other than for Cause, the Company shall pay the Employee an amount equivalent to the target Incentive Pay opportunity for the calendar year in which the Termination Date occurs multiplied by a fraction, the numerator of which is the number of days in the calendar year in which the Termination Date occurs that have expired prior to the Termination Date and the denominator of which is 365.  Subject to Section 19 of this Agreement, such payment shall be made, in the case of a Termination of Employment during the Limited Period, in accordance with the provisions governing payment of the Severance Amount or CIC Severance Amount under Section 4.1(c), and in the case of a Termination of Employment other than during the Limited Period, in the year following the year in which the Termination Date occurs but no later than March 15th of such year.

4.3Offset:  To the full extent permitted by applicable law, the Company retains the right to offset against the Severance Amount otherwise due to the Employee hereunder any amounts then owing and payable by such Employee to the Company or any of its affiliates.  

4.4Interest on Overdue Payments:  Without limiting the rights of the Employee at law or in equity, if the Company fails to make any payment required to be made under this Agreement on a reasonably or substantially timely basis, the Company shall pay interest on the amount thereof at an annualized rate of interest equal to the “prime rate” as set forth from time to time during the relevant period in The Wall Street Journal, plus 1%.

4.5Adjustments of Payments and Benefits:  Notwithstanding any provision of this Agreement to the contrary, if any payment or benefit to be paid or provided hereunder or under any other plan or agreement would be an “Excess Parachute Payment,” within the meaning of Section 280G of the Code, or any successor provision thereto, but for the application of this sentence, then the payments and benefits to be paid or provided hereunder shall be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any such payment or benefit, as so reduced, constitutes an Excess Parachute Payment; provided, however, that the foregoing reduction shall be made only if and to the extent that such reduction would result in an increase in the aggregate payments and benefits to be provided, determined on an after-tax basis (taking into account the excise tax imposed pursuant to Section 4999 of the Code, or any

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successor provision thereto, any tax imposed by any comparable provision of state law, and any applicable federal, state and local income taxes).  The determination of whether any reduction in such payments or benefits to be provided hereunder is required pursuant to the preceding sentence shall be made at the expense of the Company, if requested by Employee or the Company, by the Company’s independent accountants or a nationally recognized law firm chosen by the Company.  The fact that Employee’s right to payments or benefits may be reduced by reason of the limitations contained in this Section shall not of itself limit or otherwise affect any other rights of Employee under this Agreement.  In the event that any payment or benefit intended to be provided hereunder is required to be reduced pursuant to this Section, then the reduction shall occur in the following order: (a) reduction of the portion of the CIC Severance Amount described under Section 1.4(a); (b) reduction of the portion of the CIC Severance Amount described under Section 1.4(b); and (c) reduction of the cash reimbursements described in Section 4.6(a).

4.6Continuation of Certain Benefits.

(a)If the Company terminates the Employee’s employment during the Limited Period other than pursuant to a Company Termination Event, or if the Employee voluntarily terminates his employment during the Limited Period pursuant to an Employee Termination Event, then the Employee, and the Employee’s eligible dependents, shall be entitled to continue to participate in the Company’s medical, dental, vision and life insurance plans for which the Employee was eligible immediately prior to the Employee’s Termination Date, until the earlier of (i) Employee’s eligibility for any such coverage under another employer’s or any other medical plan or (ii) 30 months following the termination of Employee’s employment (the “CIC Benefit Continuation Period”).  The Employee’s continued participation in the Company’s life insurance plans shall be on the terms (including access fees) not less favorable than those in effect for actively employed key employees of the Company.  The Employee’s continued participation in the Company’s medical, dental, and vision plans shall be on the terms not less favorable than those in effect for actively employed key employees of the Company but only if the Employee makes a payment to the Company in an amount equal to the monthly premium payments (both the employee and employer portion) required to maintain such coverage on the first day of each calendar month during the CIC Benefit Continuation Period commencing with the first calendar month following the Termination Date.  Subject to Section 19.2, the Company shall reimburse the Employee on an after-tax basis for the amount of such premiums paid by the Employee pursuant to the preceding sentence, if any, in excess of any employee contributions (access fees) necessary to maintain such coverage during the CIC Benefit Continuation Period (the “CIC Reimbursement Payments”), and such CIC Reimbursement Payments shall be paid to the Employee on the 15th day of each calendar month during the CIC Benefit Continuation Period commencing with the calendar month in which the Employee’s first premium payment is due pursuant to the preceding sentence or, if later, the calendar month following the calendar month in which the release provided for in Section 7 becomes irrevocable.  Each CIC Reimbursement Payment shall be considered a separate payment and not one of a series of payments for purposes of Section 409A.  Employee agrees that the period of coverage under such plan shall count against the medical plan’s

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obligation to provide continuation coverage pursuant to Part 6 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974, as amended (“COBRA”).

(b)If the Company terminates the Employee’s employment other than during the Limited Period and other than: (i) pursuant to a Company Termination Event; (ii) for reasons of (A) criminal activity or (B) willful misconduct or gross negligence in the performance of the Employee’s duties; or (iii) pursuant to a Sale Termination; then the Employee, and the Employee’s eligible dependents, shall be entitled to continue to participate in the Company’s medical, dental, vision and life insurance plans for which the Employee was eligible immediately prior to the Employee’s Termination Date, until the earlier of (x) Employee’s eligibility for any such coverage under another employer’s or any other medical plan or (y) 18 months following the termination of Employee’s employment (the “Severance Benefit Continuation Period”).  The Employee’s continued participation in the Company’s life insurance plans shall be on the terms (including access fees) not less favorable than those in effect for actively employed key employees of the Company.  The Employee’s continued participation in the Company’s medical, dental, and vision plans shall be on the terms not less favorable than those in effect for actively employed key employees of the Company but only if the Employee makes a payment to the Company in an amount equal to the monthly premium payments (both the employee and employer portion) required to maintain such coverage on the first day of each calendar month during the Severance Benefit Continuation Period commencing with the first calendar month following the Termination Date.  Subject to Section 19.2, the Company shall reimburse the Employee on an after-tax basis for the amount of such premiums paid by the Employee pursuant to the preceding sentence, if any, in excess of any employee contributions (access fees) necessary to maintain such coverage during the Benefit Continuation Period (the “Severance Reimbursement Payments”), and such Severance Reimbursement Payments shall be paid to the Employee on the 15th day of each calendar month during the Severance Benefit Continuation Period commencing with the calendar month in which the Employee’s first premium payment is due pursuant to the preceding sentence or, if later, the calendar month following the calendar month in which the release provided for in Section 7 becomes irrevocable.  Each Severance Reimbursement Payment shall be considered a separate payment and not one of a series of payments for purposes of Section 409A.  Employee agrees that the period of coverage under such plan shall count against the medical plan’s obligation to provide continuation coverage pursuant to COBRA.

5. No Obligation to Mitigate Damages:  The Employee shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, and, except as provided in Sections 4.6(a) and 4.6(b), the amount of any payment or benefit provided for under this Agreement shall not be reduced by any compensation earned by the Employee as the result of employment by another employer after the Termination Date, or otherwise.


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6. Confidential Information; Non-Disparagement; Covenant Not To Compete:

6.1The Employee acknowledges that all trade secrets, customer lists and other confidential business information are the exclusive property of the Company.  The Employee shall not (following the execution of this Agreement, during the Limited Period, or at any time thereafter) disclose such trade secrets, customer lists, or confidential business information without the prior written consent of the Company.

6.2The Employee also shall not (following the execution of this Agreement, during the Limited Period, and for a period of time beginning upon the Termination Date and ending upon the second anniversary of the Termination Date) directly or indirectly, or by acting in concert with others, employ or attempt to employ or solicit for any employment competitive with the Company any person(s) employed by the Company.  

6.3For a period of time beginning upon the Termination Date and ending upon the second anniversary of the Termination Date, the Employee shall not (a) engage or participate, directly or indirectly, in any Competitive Activity, as defined in Section 1.8 or (b) solicit or cause to be solicited on behalf of a competitor any person or entity which was a customer of the Company during the term of this Agreement, if the Employee had any direct or indirect responsibility for such customer while employed by the Company.

6.4Following the execution of this Agreement, during the Limited Period, and for a period of time beginning upon the Termination Date and ending upon the second anniversary of the Termination Date, the Employee agrees to refrain from communicating, directly or indirectly, whether in writing, orally or electronically (a) any defamatory comment concerning the Company or (b) any other comment that could reasonably be expected to be detrimental to the business or financial prospects of the Company.

6.5The Employee recognizes that any violation of this Section 6 is likely to result in immediate and irreparable harm to the Company for which money damages are likely to be inadequate.  Accordingly, the Employee consents to the entry of injunctive and other appropriate equitable relief by a court of competent jurisdiction, after notice and hearing and the court’s finding of irreparable harm and the likelihood of prevailing on a claim alleging violation of this Section 6, in order to protect the Company’s rights under this Section.  Such relief shall be in addition to any other relief to which the Company may be entitled at law or in equity.  The Employee agrees that the state and federal courts located in the State of Ohio shall have jurisdiction in any action, suit or proceeding against Employee based on or arising out of this Agreement and Employee hereby: (a) submits to the personal jurisdiction of such courts; (b) consents to service of process in connection with any action, suit or proceeding against Employee; and (c) waives any other requirement (whether imposed by statute, rule of court or otherwise) with respect to personal jurisdiction, venue or service of process.

6.6  The U.S. Defend Trade Secrets Act of 2016 (“DTSA”) provides that an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that (a) is made in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney, and solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other

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document filed in a lawsuit or other proceeding, if such filing is made under seal.  In addition, the DTSA provides that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.

6.7Nothing in this Agreement prevents the Employee from providing, without prior notice to the Company, information to governmental authorities regarding possible legal violations or otherwise testifying or participating in any investigation or proceeding by any governmental authorities regarding possible legal violations (and for purpose of clarity the Employee is not prohibited from providing information voluntarily to the Securities and Exchange Commission pursuant to Section 21F of the Exchange Act).

7. Release:

Payment of the severance payments and benefits set forth in Section 4 hereof is conditioned upon the Employee executing and delivering, and not revoking, a full and complete release of all claims satisfactory to the Company within 50 days of the Employee’s Termination Date.

8. Successors, Binding Agreement and Complete Agreement:

8.1Successors:   The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Employee, to assume and agree to perform this Agreement.

8.2Binding Agreement:  This Agreement shall inure to the benefit of and be enforceable by the Employee’s personal or legal representative, executor, administrators, successors, heirs, distributees and legatees.  This Agreement shall be binding upon and inure to the benefit of the Company and any successor of or to the Company, including, without limitation, any person acquiring directly or indirectly all or substantially all of the assets of the Company whether by merger, consolidation, sale or otherwise (and such successor shall thereafter be deemed “the Company” for the purposes of this Agreement), but shall not otherwise be assignable by the Company.

8.3Complete Agreement.  This Agreement embodies the complete agreement and understanding between the parties with respect to the subject matter hereof and effective as of its date supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way.

9. Notices:  For the purpose of this Agreement, all communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered, e-mailed or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as indicated below, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of change of address shall be effective only upon receipt.

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If to the Company:TimkenSteel Corporation

1835 Dueber Avenue, S.W.

Canton, Ohio 44706

 

If to the Employee:At the then-current address shown on the payroll

records of the Company.

 

10.Governing Law:  The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such State.

11.Miscellaneous:  No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in writing signed by the Employee and the Company.  No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.  No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement.  If the Employee files a claim for benefits under this Agreement with the Company, the Company will follow the claims procedures set out in 29 C.F.R. Section 2560.503-1.  

12.Validity:  The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect.

13.Counterparts:  This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same Agreement.

14.Employment Rights:  Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Company or the Employee to have the Employee remain in the employment of the Company.

15.Withholding of Taxes:  The Company may withhold from any amount payable under this Agreement all federal, state, city or other taxes or other amounts as shall be required pursuant to any law or government regulation or ruling.

16.Nonassignability:  This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations, hereunder, except as provided in Sections 8.1 and 8.2 above.  Without limiting the foregoing, the Employee’s right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by his will or by the laws of descent and distribution and in the event of any attempted assignment or transfer contrary to this Section the Company shall have no liability to pay any amounts so attempted to be assigned or transferred.

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17.Termination of Agreement:  The term of this Agreement (the “Term”) shall commence as of the date hereof and shall expire at the end of December 31, 2022; provided, however, that (a) commencing on January 1, 2023 and each January 1 thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than September 30 of the immediately preceding year, the Company or the Employee shall have given notice that it or the Employee, as the case may be, does not wish to have the Term extended; (b) if a Change in Control occurs during the Term, the Term will not expire until the last day of the Limited Period; and (c) subject to Section 4.1, if the Employee ceases for any reason to be a key employee of the Company or any Subsidiary, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect.  For purposes of this Section 17, the Employee shall not be deemed to have ceased to be an employee of the Company or any Subsidiary by reason of the transfer of Employee’s employment between the Company and any Subsidiary, or among any Subsidiaries.

18.Indemnification of Legal Fees and Expenses; Security for Payment:

18.1Indemnification of Legal Fees.  It is the intent of the Company that in the case of a Change in Control, the Employee not be required to incur the expenses associated with the enforcement of his rights under this Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Employee hereunder.  Accordingly, after a Change in Control, if it should appear to the Employee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation designed to deny, or to recover from, the Employee the benefits intended to be provided to the Employee hereunder, the Company irrevocably authorizes the Employee from time to time to retain counsel of his choice, at the expense of the Company as hereafter provided, to represent the Employee in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction.  The Company shall pay or cause to be paid and shall be solely responsible for any and all attorneys’ and related fees and expenses incurred by the Employee after a Change in Control and as a result of the Company’s failure to perform this Agreement or any provision hereof or as a result of the Company or any person contesting the validity or enforceability of this Agreement or any provision hereof as aforesaid.  

If the Employee is entitled to reimbursement pursuant to this Section 18.1, this Section shall apply to any such eligible costs and expenses incurred during the Employee’s lifetime.  Subject to Section 19.2, any amounts the Company owes to the Employee pursuant to this Section 18.1 will be paid to the Employee by the Company within 30 days following the Company’s receipt of a statement or statements prepared by Employee or Employee’s legal counsel that sets forth the amount of such costs and expenses eligible for reimbursement but in no event will such amounts be paid later than December 31 of the year following the year in which Employee incurs such expenses.  In no event will the costs and expenses paid by the Company pursuant to this Section 18.1 in one year affect the amount of costs and expenses the Company is obligated to pay pursuant to this Section 18.1 in any other taxable year.

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18.2Trust Agreements.  To ensure that the provisions of this Agreement can be enforced by the Employee, two agreements (the “Trust Agreement” and the “Trust Agreement No. 2”), as they may be amended, have been established with a Trustee selected by the members of the Compensation Committee of the Board or any officer (the “Trustee”) and the Company.  The Trust Agreement sets forth the terms and conditions relating to payment pursuant to the Trust Agreement of the CIC Severance Amount owed by the Company, and Trust Agreement No. 2 sets forth the terms and conditions relating to payment pursuant to Trust Agreement No. 2 of attorneys’ and related fees and expenses pursuant to Section 18.1 owed by the Company.  Employee shall make demand on the Company for any payments due Employee pursuant to Section 18.1 prior to making demand therefor on the Trustee under Trust Agreement No. 2.  Payments by such Trustee shall discharge the Company’s liability under Section 18.1 only to the extent that trust assets are used to satisfy such liability.  

18.3Obligation of the Company to Fund Trusts.  Upon the earlier to occur of (a) a Change in Control that involves a transaction that was not approved by the Board, and was not recommended to the Company’s shareholders by the Board, (b) a declaration by the Board that the trusts under the Trust Agreement and Trust Agreement No. 2 should be funded in connection with a Change in Control that involves a transaction that was approved by the Board, or was recommended to shareholders by the Board, or (c) a declaration by the Board that a Change in Control is imminent, the Company shall promptly to the extent it has not previously done so, and in any event within five business days:

(x)transfer to the Trustee to be added to the principal of the trust under the Trust Agreement a sum equal to the aggregate value on the date of the Change in Control of the CIC Severance Amount, which could become payable to the Employee under the provisions of Section 4.1 hereof.  The payment of any CIC Severance Amount or other payment by the Trustee pursuant to the Trust Agreement shall, to the extent thereof, discharge the Company’s obligation to pay the CIC Severance Amount or other payment hereunder, it being the intent of the Company that assets in such Trust Agreement be held as security for the Company’s obligation to pay the CIC Severance Amount and other payments under this Agreement; and

(y)transfer to the Trustee to be added to the principal of the trust under Trust Agreement No. 2 the sum authorized by the members of the Compensation Committee from time to time.  

Any payments of attorneys’ and related fees and expenses, which are the obligation of the Company under Section 18.1, by the Trustee pursuant to Trust Agreement No. 2 shall, to the extent thereof, discharge the Company’s obligation hereunder, it being the intent of the Company that such assets in such Trust Agreement No. 2 be held as security for the Company’s obligation under Section 18.1.

Notwithstanding any provision of this Agreement to the contrary, no amounts shall be transferred to the Trustee with respect to the Trust Agreement or the Trust Agreement No. 2 for payments of any amount under this Agreement if, pursuant to Section 409A(b)(3)(A) of the Code,

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such amount would, for purposes of Section 83 of the Code, be treated as property transferred in connection with the performance of services.

19.Code Section 409A of the Code.  

19.1General.  To the extent applicable, it is intended that this Agreement comply with the provisions of Section 409A of the Code, so that the income inclusion provisions of Section 409A(a)(1) of the Code do not apply to the Employee.  This Agreement shall be administered and interpreted in a manner consistent with this intent.  

19.2Delayed Payments.  Notwithstanding any provision of this Agreement to the contrary, if the Employee is a “specified employee,” determined pursuant to procedures adopted by the Company in compliance with Section  409A of the Code, on his Termination Date and if any portion of the payments or benefits to be received by the Employee upon Termination of Employment would constitute a “deferral of compensation” subject to Section 409A, then to the extent necessary to comply with Section 409A, amounts that would otherwise be payable pursuant to this Agreement during the six-month period immediately following the Employee’s Termination Date will instead be paid or made available on the earlier of (a) the first business day of the seventh month after Employee’s Termination Date, or (b) the Employee’s death.

19.3Amendments.  Notwithstanding any provision of this Agreement to the contrary, in light of the uncertainty with respect to the proper application of Section 409A of the Code, the Company reserves the right to make amendments to this Agreement as the Company deems necessary or desirable to avoid the imposition of taxes or penalties under Section 409A of the Code.  In any case, Employee shall be solely responsible and liable for the satisfaction of all taxes and penalties that may be imposed on Employee in connection with this Agreement (including any taxes and penalties under Section 409A of the Code), and neither the Company nor any of its affiliates shall have any obligation to indemnify or otherwise hold Employee harmless from any or all of such taxes or penalties.  

20.Recoupment.  Notwithstanding anything in this Agreement to the contrary, the Employee acknowledges and agrees that this Agreement and any compensation described herein are subject to the terms and conditions of the Company’s clawback policy (if any) as may be in effect from time to time, including specifically to implement Section 10D of the Exchange Act and any applicable rules or regulations promulgated thereunder (including applicable rules and regulations of any national securities exchange on which the Common Shares may be traded) (the “Compensation Recovery Policy”), and that applicable sections of this Agreement and any related documents shall be deemed superseded by and subject to the terms and conditions of the Compensation Recovery Policy from and after the effective date thereof.

[signatures on next page]


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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the date first set forth above.

 

 

By:/s/ Michael S. Williams                      

Employee

 

 

TIMKENSTEEL CORPORATION

By:/s/ Kristine C. Syrvalin                        

Its:Executive Vice President, General Counsel & Secretary

 

 

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Exhibit 10.27

SEVERANCE AGREEMENT

This Severance Agreement (the “Agreement”) is dated as of __________ ___, 20__ between TimkenSteel Corporation, an Ohio corporation (the “Company”), and __________ (the “Employee”).

Recitals

WHEREAS, the Employee is a key employee of the Company and has made and/or is expected to make major contributions to the profitability, growth and financial strength of the Company;

WHEREAS, the Company wishes to induce its key employees to remain in the employment of the Company and to assure itself of stability and continuity of operations by providing severance protection to those key employees who are expected to make major contributions to the success of the Company.  In addition, the Company recognizes that a termination of employment may occur following a change in control in circumstances where the Employee should receive additional compensation for services theretofore rendered and for other good reasons, the appropriate amount of which would be difficult to ascertain.  Hence, the Company has agreed to provide special severance in the event of a change in control of the Company;

NOW, THEREFORE, in consideration of the premises provided for in this Agreement, including the Release provided for in Section 7 hereof, the Company and the Employee agree as follows:

1. Definitions:

1.1Base Salary:  The term “Base Salary” shall mean the Employee’s annual base salary as in effect on the date this Agreement becomes operative, as the same may be increased from time to time.

1.2Board:  The term “Board” shall mean the Board of Directors of the Company.

1.3Change in Control:  “Change in Control” means the occurrence during the Term of any of the following events:

(a)The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either:  (i) the then-outstanding Common Shares; or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (“Voting Shares”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change in Control:  (A) any acquisition directly from the Company; (B) any acquisition by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the

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Company or any of its Subsidiaries; or (D) any acquisition by any Person pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c); or

(b)Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason (other than death or disability) to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote or the approval of at least a majority of the directors then comprising the Incumbent Board (either by a specific vote or written action or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be considered as though such individual were a member of the Incumbent Board, but excluding for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

(c)Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Common Shares and Voting Shares immediately prior to such Business Combination beneficially own, directly or indirectly, more than 66-2/3% of, respectively, the then-outstanding common shares and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions relative to each other as their ownership, immediately prior to such Business Combination, of the Common Shares and Voting Shares of the Company, as the case may be, (ii) no Person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) sponsored or maintained by the Company or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then-outstanding common shares of the entity resulting from such Business Combination, or the combined voting power of the then-outstanding voting securities of such entity except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(d)Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

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The Company shall give the Employee written notice, delivered to the Employee in the manner specified in Section 9 hereof, of the occurrence of any event constituting a Change in Control as promptly as practical, and in no case later than 10 calendar days, after the occurrence of such event.

1.4CIC Severance Amount:  The term “CIC Severance Amount” shall mean an amount equal to the sum of:

(a)[Two/ One and one-half] times the greater of (i) the Employee’s Base Salary in effect immediately prior to the Employee’s Termination of Employment or (ii) the Employee’s Base Salary in effect immediately prior to the Change in Control; and

(b)[Two/ One and one-half] times the greater of (i) the Employee’s target Incentive Pay opportunity for the year in which the Employee’s employment is terminated or (ii) the Employee’s target Incentive Pay opportunity for the year in which the Change in Control occurred.

1.5Code:  The term “Code” shall mean the Internal Revenue Code of 1986, as amended, and the regulations thereunder, as such law and regulations may be amended from time to time.

1.6Common Shares:  The term “Common Shares” means the common shares, without par value, of the Company.

1.7Company Termination Event:  The term “Company Termination Event” shall mean the Termination of Employment of the Employee by the Company or otherwise in any of the following events and prior to any Employee Termination Event:

(a)The Employee’s death;

(b)If the Employee shall become eligible to receive and begins actually to receive long-term disability benefits under a disability plan or program of the Company or a Subsidiary or, in the absence of such a disability plan or program of the Company or a Subsidiary, under a government-sponsored disability program, and the Employee is “disabled” within the meaning of Section 409A(a)(2)(C) of the Code; or

(c)For Cause.  Termination of Employment shall be deemed to be for “Cause” only if based on the fact that the Employee has done any of the following:

(i)An intentional act of fraud, embezzlement or theft in connection with his duties with the Company;

(ii)Intentional wrongful disclosure of secret processes or confidential information of the Company or a Company subsidiary; or

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(iii)Intentional wrongful engagement in any Competitive Activity which would constitute a material breach of the Employee’s duty of loyalty to the Company.

For purposes of this Agreement, no act, or failure to act, on the part of the Employee shall be deemed “intentional” unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that his action or omission was in or not opposed to the best interest of the Company.

1.8Competitive Activity:  The term “Competitive Activity” shall mean the Employee’s participation, without the written consent of a superior officer of the Company or the Board, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise’s sales of any product or service competitive with any product or service of the Company amounted to 25% of such enterprise’s net sales for its most recently completed fiscal year and if the Company’s net sales of said product or service amounted to 25% of the Company’s net sales for its most recently completed fiscal year. “Competitive Activity” shall not include (a) the mere ownership of securities in any enterprise and exercise of rights appurtenant thereto or (b) participation in management of any enterprise or business operation thereof other than in connection with the competitive operation of such enterprise.

1.9Employee Termination Event:  The term “Employee Termination Event” shall mean the Termination of Employment of the Employee (including retirement) by the Employee in any of the following events:

(a)A determination by the Employee made in good faith that upon or after the occurrence of a Change in Control:  (i) a material reduction in the nature or scope of the responsibilities, authorities or duties of the Employee attached to the Employee’s position held immediately prior to the Change in Control has occurred; or (ii) a change of more than 60 miles has occurred in the location of the Employee’s principal office immediately prior to the Change in Control;

(b)A material reduction by the Company in the Employee’s Base Salary or annual Incentive Pay opportunity upon or after the occurrence of a Change in Control (for purposes of this Agreement, the amount of any reduction in annual base salary or incentive pay elected by the Employee pursuant to any qualified or non-qualified salary reduction arrangement maintained by the Company shall be included in the determination of Base Salary and annual Incentive Pay opportunity); or

(c)An action or inaction that constitutes a material breach by the Company of this Agreement (including, but not limited to, a breach of Section 8.1 hereof) upon or after the occurrence of a Change in Control.

Notwithstanding the foregoing, no Termination of Employment by the Employee will be an Employee Termination Event unless (x) the Employee gives the Company notice of the existence of a condition described in subsection (a), (b), or (c), above within 90 days of the initial

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existence of such condition, and (y) the Company does not remedy such condition described in clause (a), (b), or (c) above, as applicable, within 30 days of receiving the notice described in the preceding clause (x), and (z) the Employee terminates employment within two years after the initial existence of a condition described in subsection (a), (b), or (c), above.

1.11Exchange Act:  The term “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, as such law, rules and regulations may be amended from time to time.  

1.12Incentive Pay:  The term “Incentive Pay” shall mean any cash incentive compensation award(s) based on an annual (or other applicable short-term, as opposed to long-term) performance period.

1.13Limited Period:  The term “Limited Period” shall mean that period of time commencing on the date of a Change in Control and continuing for a period of two years.

1.14Notice of Termination:  The term “Notice of Termination” shall mean a written notice delivered to the Employee in the manner specified in Section 9 of this Agreement, which notice indicates the specific termination provision in this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee’s employment.

1.16Sale Termination:  The term “Sale Termination” shall mean a Termination of Employment with the Company or a Subsidiary of the Company in connection with:

(a)a sale by the Company or a Subsidiary of the Company of a plant or other facility or property or assets; or

(b)a sale of the ownership of the Company or a Subsidiary of the Company,

when the acquirer in such sale described in subsection (a) or (b) or its affiliate makes an offer of employment to the Employee in connection with such sale.  Notwithstanding the foregoing, a Termination of Employment shall not be a Sale Termination if such Termination of Employment occurs during the Limited Period or during the 90 days prior to a Change in Control under the circumstances described in Section 4.1(a).

1.17Severance Amount:  The term “Severance Amount” shall mean an amount equal to the sum of:

(a)[One and one-half/ One] times the Employee’s Base Salary in effect immediately prior to the Employee’s Termination of Employment; and

(b)[One and one-half/ One] times the Employee’s target Incentive Pay opportunity for the year in which Employee's employment is terminated.

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1.18Subsidiary:  The term “Subsidiary” means a corporation, partnership, joint venture, unincorporated association or other entity in which the Company directly or indirectly beneficially owns 50% or more ownership or other equity interest.

1.19 Termination Date:  The term “Termination Date” shall mean the effective date of the Employee’s Termination of Employment with the Company.

1.20Termination of Employment:  The term “Termination of Employment” means termination of employment within the meaning of Treasury Regulation Section 1.409A-1(h)(1)(ii).

2. Operation of Agreement:  This Agreement shall be effective immediately upon its execution.

3. Conditions During the Limited Period:  During the Limited Period:

(a)the Employee shall remain in the same office and position in the Company (or a successor thereto) or any Subsidiary that (or better office and position in the Company (or a successor thereto) or any Subsidiary than) the Employee held immediately prior to the Change in Control;

(b)if the Employee was a Director of the Company or a Subsidiary immediately prior to a Change in Control, the Employee shall remain a Director of the Company or a Director of such Subsidiary;

(c)during the Employee’s employment with the Company and its Subsidiaries: (i) the Company shall continue in effect without material negative change any compensation or benefit plan in which the Employee participated immediately prior to the Change in Control and, as applicable, the Company shall continue Employee’s participation in any such compensation or benefit plan; (ii) neither the Company nor its Subsidiaries shall take any action that would directly or indirectly materially reduce any of the benefits of any compensation or benefit plan enjoyed by the Employee at the time of the Change in Control; (iii) the Employee shall continue to be entitled to no less than the same number of paid vacation days to which the Employee was entitled immediately prior to the Change in Control, based on years of service with the Company or its Subsidiaries in accordance with the normal vacation policy, in effect immediately prior to the Change in Control, of the Company or any of its Subsidiaries that employ Employee immediately prior to the Change in Control; and (iv) neither the Company nor any of its Subsidiaries shall take any other action which would materially adversely change the conditions or prerequisites of the Employee’s employment as in effect immediately prior to the Change in Control; and

(d)the termination of Employee’s employment by the Company or its Subsidiaries shall only be effected pursuant to a Notice of Termination satisfying the requirements of Section 1.14 of this Agreement.

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The Employee acknowledges that if the Company fails to fulfill any of its obligations under this Section 3, the Employee’s only recourse is to cause such failure to be considered an Employee Termination Event if the breach is considered a material breach of this Agreement and the Employee’s damages will be limited to the payments provided for in Section 4, as applicable.

4. Severance Compensation:

4.1Severance Compensation:  

(a)If the Employee experiences a Termination of Employment during the Limited Period because the Company terminated the Employee’s employment during the Limited Period other than pursuant to a Company Termination Event, or because the Employee voluntarily terminated his employment during the Limited Period pursuant to an Employee Termination Event, then the Company shall pay as severance compensation to the Employee a lump sum cash payment in the amount of the CIC Severance Amount.  Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and, not more than 90 days prior to the date on which the Change in Control occurs, the Employee experiences a Termination of Employment because the Company terminated the Employee’s employment, such Termination of Employment will be deemed to be a Termination of Employment during the Limited Period for purposes of this Agreement if the Employee has reasonably demonstrated that such Termination of Employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or in anticipation of a Change in Control.  In the event the Employee is entitled to the benefits under this Agreement as a result of the preceding sentence, then the 60-calendar-day period specified in Section 4.1(c) shall be deemed to commence on the date on which the Employee receives the notice contemplated by the last sentence of Section 1.3 hereof.

(b)If the Employee experiences a Termination of Employment because the Company has terminated the Employee’s employment, the Company shall pay as severance compensation to the Employee a lump sum cash payment in the amount of the Severance Amount, unless the Termination of Employment occurs:

(i)during the Limited Period; or

(ii)pursuant to a Company Termination Event; or

(iii)for reasons of (A) criminal activity or (B) willful misconduct or gross negligence in the performance of the Employee’s duties; or

(iv)pursuant to a Sale Termination.

(c)The payment of the Severance Amount or the CIC Severance Amount required by this Section 4.1 shall, subject to Section 19.2 and to the execution and delivery by the Employee of the Release described in Section 7

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hereof, and the expiration of all applicable rights of the Employee to revoke the Release or any provision thereof, be made to the Employee within 60 calendar days after the Termination Date.  In no event will the Employee have a right to designate the taxable year of any such payment.

4.2Compensation through Termination:  If the Employee experiences a Termination of Employment, the Company shall pay the Employee any Base Salary that has accrued but is unpaid through the Termination Date.  If the Employee experiences a Termination of Employment not during the Limited Period because his employment is terminated by the Company other than for Cause and other than pursuant to a Sale Termination, the Company shall pay the Employee an amount equivalent to the Incentive Pay actually earned based on actual performance and subject to the generally applicable terms for the Incentive Pay opportunity for the calendar year in which the Termination Date occurs multiplied by a fraction, the numerator of which is the number of days in the calendar year in which the Termination Date occurs that have expired prior to the Termination Date and the denominator of which is 365.  If the Employee experiences a Termination of Employment during the Limited Period because his employment is terminated by the Company other than for Cause, the Company shall pay the Employee an amount equivalent to the target Incentive Pay opportunity for the calendar year in which the Termination Date occurs multiplied by a fraction, the numerator of which is the number of days in the calendar year in which the Termination Date occurs that have expired prior to the Termination Date and the denominator of which is 365.  Subject to Section 19 of this Agreement, such payment shall be made, in the case of a Termination of Employment during the Limited Period, in accordance with the provisions governing payment of the Severance Amount or CIC Severance Amount under Section 4.1(c), and in the case of a Termination of Employment other than during the Limited Period, in the year following the year in which the Termination Date occurs but no later than March 15th of such year.

4.3Offset:  To the full extent permitted by applicable law, the Company retains the right to offset against the Severance Amount otherwise due to the Employee hereunder any amounts then owing and payable by such Employee to the Company or any of its affiliates.  

4.4Interest on Overdue Payments:  Without limiting the rights of the Employee at law or in equity, if the Company fails to make any payment required to be made under this Agreement on a reasonably or substantially timely basis, the Company shall pay interest on the amount thereof at an annualized rate of interest equal to the “prime rate” as set forth from time to time during the relevant period in The Wall Street Journal, plus 1%.

4.5Adjustments of Payments and Benefits:  Notwithstanding any provision of this Agreement to the contrary, if any payment or benefit to be paid or provided hereunder or under any other plan or agreement would be an “Excess Parachute Payment,” within the meaning of Section 280G of the Code, or any successor provision thereto, but for the application of this sentence, then the payments and benefits to be paid or provided hereunder shall be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any such payment or benefit, as so reduced, constitutes an Excess Parachute Payment; provided, however, that the foregoing reduction shall be made only if and to the extent that such reduction would result in an increase in the aggregate payments and benefits to be provided, determined on an after-tax basis (taking into account the excise tax imposed pursuant to Section 4999 of the Code, or any

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successor provision thereto, any tax imposed by any comparable provision of state law, and any applicable federal, state and local income taxes).  The determination of whether any reduction in such payments or benefits to be provided hereunder is required pursuant to the preceding sentence shall be made at the expense of the Company, if requested by Employee or the Company, by the Company’s independent accountants or a nationally recognized law firm chosen by the Company.  The fact that Employee’s right to payments or benefits may be reduced by reason of the limitations contained in this Section shall not of itself limit or otherwise affect any other rights of Employee under this Agreement.  In the event that any payment or benefit intended to be provided hereunder is required to be reduced pursuant to this Section, then the reduction shall occur in the following order: (a) reduction of the portion of the CIC Severance Amount described under Section 1.4(a); (b) reduction of the portion of the CIC Severance Amount described under Section 1.4(b); and (c) reduction of the cash reimbursements described in Section 4.6(a).

4.6Continuation of Certain Benefits.

(a)If the Company terminates the Employee’s employment during the Limited Period other than pursuant to a Company Termination Event, or if the Employee voluntarily terminates his employment during the Limited Period pursuant to an Employee Termination Event, then the Employee, and the Employee’s eligible dependents, shall be entitled to continue to participate in the Company’s medical, dental, vision and life insurance plans for which the Employee was eligible immediately prior to the Employee’s Termination Date, until the earlier of (i) Employee’s eligibility for any such coverage under another employer’s or any other medical plan or (ii) [24/ 18] months following the termination of Employee’s employment (the “CIC Benefit Continuation Period”).  The Employee’s continued participation in the Company’s life insurance plans shall be on the terms (including access fees) not less favorable than those in effect for actively employed key employees of the Company.  The Employee’s continued participation in the Company’s medical, dental, and vision plans shall be on the terms not less favorable than those in effect for actively employed key employees of the Company but only if the Employee makes a payment to the Company in an amount equal to the monthly premium payments (both the employee and employer portion) required to maintain such coverage on the first day of each calendar month during the CIC Benefit Continuation Period commencing with the first calendar month following the Termination Date.  Subject to Section 19.2, the Company shall reimburse the Employee on an after-tax basis for the amount of such premiums paid by the Employee pursuant to the preceding sentence, if any, in excess of any employee contributions (access fees) necessary to maintain such coverage during the CIC Benefit Continuation Period (the “CIC Reimbursement Payments”), and such CIC Reimbursement Payments shall be paid to the Employee on the 15th day of each calendar month during the CIC Benefit Continuation Period commencing with the calendar month in which the Employee’s first premium payment is due pursuant to the preceding sentence or, if later, the calendar month following the calendar month in which the release provided for in Section 7 becomes irrevocable.  Each CIC Reimbursement Payment shall be considered a separate payment and not one of a series of payments for purposes of Section 409A.  Employee agrees that the period of coverage under such plan shall count against the medical plan’s

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obligation to provide continuation coverage pursuant to Part 6 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974, as amended (“COBRA”).

(b)If the Company terminates the Employee’s employment other than during the Limited Period and other than: (i) pursuant to a Company Termination Event; (ii) for reasons of (A) criminal activity or (B) willful misconduct or gross negligence in the performance of the Employee’s duties; or (iii) pursuant to a Sale Termination; then the Employee, and the Employee’s eligible dependents, shall be entitled to continue to participate in the Company’s medical, dental, vision and life insurance plans for which the Employee was eligible immediately prior to the Employee’s Termination Date, until the earlier of (x) Employee’s eligibility for any such coverage under another employer’s or any other medical plan or (y) [18/ 12] months following the termination of Employee’s employment (the “Severance Benefit Continuation Period”).  The Employee’s continued participation in the Company’s life insurance plans shall be on the terms (including access fees) not less favorable than those in effect for actively employed key employees of the Company.  The Employee’s continued participation in the Company’s medical, dental, and vision plans shall be on the terms not less favorable than those in effect for actively employed key employees of the Company but only if the Employee makes a payment to the Company in an amount equal to the monthly premium payments (both the employee and employer portion) required to maintain such coverage on the first day of each calendar month during the Severance Benefit Continuation Period commencing with the first calendar month following the Termination Date.  Subject to Section 19.2, the Company shall reimburse the Employee on an after-tax basis for the amount of such premiums paid by the Employee pursuant to the preceding sentence, if any, in excess of any employee contributions (access fees) necessary to maintain such coverage during the Benefit Continuation Period (the “Severance Reimbursement Payments”), and such Severance Reimbursement Payments shall be paid to the Employee on the 15th day of each calendar month during the Severance Benefit Continuation Period commencing with the calendar month in which the Employee’s first premium payment is due pursuant to the preceding sentence or, if later, the calendar month following the calendar month in which the release provided for in Section 7 becomes irrevocable.  Each Severance Reimbursement Payment shall be considered a separate payment and not one of a series of payments for purposes of Section 409A.  Employee agrees that the period of coverage under such plan shall count against the medical plan’s obligation to provide continuation coverage pursuant to COBRA.

5. No Obligation to Mitigate Damages:  The Employee shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, and, except as provided in Sections 4.6(a) and 4.6(b), the amount of any payment or benefit provided for under this Agreement shall not be reduced by any compensation earned by the Employee as the result of employment by another employer after the Termination Date, or otherwise.

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6. Confidential Information; Non-Disparagement; Covenant Not To Compete:

6.1The Employee acknowledges that all trade secrets, customer lists and other confidential business information are the exclusive property of the Company.  The Employee shall not (following the execution of this Agreement, during the Limited Period, or at any time thereafter) disclose such trade secrets, customer lists, or confidential business information without the prior written consent of the Company.

6.2The Employee also shall not (following the execution of this Agreement, during the Limited Period, and for a period of time beginning upon the Termination Date and ending upon the first anniversary of the Termination Date) directly or indirectly, or by acting in concert with others, employ or attempt to employ or solicit for any employment competitive with the Company any person(s) employed by the Company.  

6.3For a period of time beginning upon the Termination Date and ending upon the first anniversary of the Termination Date, the Employee shall not (a) engage or participate, directly or indirectly, in any Competitive Activity, as defined in Section 1.8 or (b) solicit or cause to be solicited on behalf of a competitor any person or entity which was a customer of the Company during the term of this Agreement, if the Employee had any direct or indirect responsibility for such customer while employed by the Company.

6.4The Employee agrees, following the execution of this Agreement, during the Limited Period, or at any time thereafter, to refrain from communicating, directly or indirectly, whether in writing, orally or electronically (a) any defamatory comment concerning the Company or (b) any other comment that could reasonably be expected to be detrimental to the business or financial prospects of the Company.

6.5The Employee recognizes that any violation of this Section 6 is likely to result in immediate and irreparable harm to the Company for which money damages are likely to be inadequate.  Accordingly, the Employee consents to the entry of injunctive and other appropriate equitable relief by a court of competent jurisdiction, after notice and hearing and the court’s finding of irreparable harm and the likelihood of prevailing on a claim alleging violation of this Section 6, in order to protect the Company’s rights under this Section.  Such relief shall be in addition to any other relief to which the Company may be entitled at law or in equity.  The Employee agrees that the state and federal courts located in the State of Ohio shall have jurisdiction in any action, suit or proceeding against Employee based on or arising out of this Agreement and Employee hereby: (a) submits to the personal jurisdiction of such courts; (b) consents to service of process in connection with any action, suit or proceeding against Employee; and (c) waives any other requirement (whether imposed by statute, rule of court or otherwise) with respect to personal jurisdiction, venue or service of process.

6.6  The U.S. Defend Trade Secrets Act of 2016 (“DTSA”) provides that an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that (a) is made in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney, and solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.  In addition, the

NAI-1509265674v6

 

 

DTSA provides that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.

6.7Nothing in this Agreement prevents the Employee from providing, without prior notice to the Company, information to governmental authorities regarding possible legal violations or otherwise testifying or participating in any investigation or proceeding by any governmental authorities regarding possible legal violations (and for purpose of clarity the Employee is not prohibited from providing information voluntarily to the Securities and Exchange Commission pursuant to Section 21F of the Exchange Act).

7. Release:

Payment of the severance payments and benefits set forth in Section 4 hereof is conditioned upon the Employee executing and delivering, and not revoking, a full and complete release of all claims satisfactory to the Company within 50 days of the Employee’s Termination Date.

8. Successors, Binding Agreement and Complete Agreement:

8.1Successors:   The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Employee, to assume and agree to perform this Agreement.

8.2Binding Agreement:  This Agreement shall inure to the benefit of and be enforceable by the Employee’s personal or legal representative, executor, administrators, successors, heirs, distributees and legatees.  This Agreement shall be binding upon and inure to the benefit of the Company and any successor of or to the Company, including, without limitation, any person acquiring directly or indirectly all or substantially all of the assets of the Company whether by merger, consolidation, sale or otherwise (and such successor shall thereafter be deemed “the Company” for the purposes of this Agreement), but shall not otherwise be assignable by the Company.

8.3Complete Agreement.  This Agreement embodies the complete agreement and understanding between the parties with respect to the subject matter hereof and effective as of its date supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way.

9. Notices:  For the purpose of this Agreement, all communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered, e-mailed or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as indicated below, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of change of address shall be effective only upon receipt.

If to the Company:TimkenSteel Corporation

NAI-1509265674v6

 

 

1835 Dueber Avenue, S.W.

Canton, Ohio 44706

 

If to the Employee:At the then-current address shown on the payroll

records of the Company.

 

10.Governing Law:  The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such State.

11.Miscellaneous:  No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in writing signed by the Employee and the Company.  No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.  No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement.  If the Employee files a claim for benefits under this Agreement with the Company, the Company will follow the claims procedures set out in 29 C.F.R. Section 2560.503-1.  

12.Validity:  The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect.

13.Counterparts:  This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same Agreement.

14.Employment Rights:  Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Company or the Employee to have the Employee remain in the employment of the Company.

15.Withholding of Taxes:  The Company may withhold from any amount payable under this Agreement all federal, state, city or other taxes or other amounts as shall be required pursuant to any law or government regulation or ruling.

16.Nonassignability:  This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations, hereunder, except as provided in Sections 8.1 and 8.2 above.  Without limiting the foregoing, the Employee’s right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by his will or by the laws of descent and distribution and in the event of any attempted assignment or transfer contrary to this Section the Company shall have no liability to pay any amounts so attempted to be assigned or transferred.

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17.Termination of Agreement:  The term of this Agreement (the “Term”) shall commence as of the date hereof and shall expire at the end of [December 31, 20__]; provided, however, that (a) commencing on [January 1, 20__] and each January 1 thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than September 30 of the immediately preceding year, the Company or the Employee shall have given notice that it or the Employee, as the case may be, does not wish to have the Term extended; (b) if a Change in Control occurs during the Term, the Term will not expire until the last day of the Limited Period; and (c) subject to Section 4.1, if the Employee ceases for any reason to be a key employee of the Company or any Subsidiary, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect.  For purposes of this Section 17, the Employee shall not be deemed to have ceased to be an employee of the Company or any Subsidiary by reason of the transfer of Employee’s employment between the Company and any Subsidiary, or among any Subsidiaries.

18.Indemnification of Legal Fees and Expenses; Security for Payment:

18.1Indemnification of Legal Fees.  It is the intent of the Company that in the case of a Change in Control, the Employee not be required to incur the expenses associated with the enforcement of his rights under this Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Employee hereunder.  Accordingly, after a Change in Control, if it should appear to the Employee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation designed to deny, or to recover from, the Employee the benefits intended to be provided to the Employee hereunder, the Company irrevocably authorizes the Employee from time to time to retain counsel of his choice, at the expense of the Company as hereafter provided, to represent the Employee in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction.  The Company shall pay or cause to be paid and shall be solely responsible for any and all attorneys’ and related fees and expenses incurred by the Employee after a Change in Control and as a result of the Company’s failure to perform this Agreement or any provision hereof or as a result of the Company or any person contesting the validity or enforceability of this Agreement or any provision hereof as aforesaid.  

If the Employee is entitled to reimbursement pursuant to this Section 18.1, this Section shall apply to any such eligible costs and expenses incurred during the Employee’s lifetime.  Subject to Section 19.2, any amounts the Company owes to the Employee pursuant to this Section 18.1 will be paid to the Employee by the Company within 30 days following the Company’s receipt of a statement or statements prepared by Employee or Employee’s legal counsel that sets forth the amount of such costs and expenses eligible for reimbursement but in no event will such amounts be paid later than December 31 of the year following the year in which Employee incurs such expenses.  In no event will the costs and expenses paid by the Company pursuant to this Section 18.1 in one year affect the amount of costs and expenses the Company is obligated to pay pursuant to this Section 18.1 in any other taxable year.

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18.2Trust Agreements.  To ensure that the provisions of this Agreement can be enforced by the Employee, two agreements (the “Trust Agreement” and the “Trust Agreement No. 2”), as they may be amended, have been established with a Trustee selected by the members of the Compensation Committee of the Board or any officer (the “Trustee”) and the Company.  The Trust Agreement sets forth the terms and conditions relating to payment pursuant to the Trust Agreement of the CIC Severance Amount owed by the Company, and Trust Agreement No. 2 sets forth the terms and conditions relating to payment pursuant to Trust Agreement No. 2 of attorneys’ and related fees and expenses pursuant to Section 18.1 owed by the Company.  Employee shall make demand on the Company for any payments due Employee pursuant to Section 18.1 prior to making demand therefor on the Trustee under Trust Agreement No. 2.  Payments by such Trustee shall discharge the Company’s liability under Section 18.1 only to the extent that trust assets are used to satisfy such liability.  

18.3Obligation of the Company to Fund Trusts.  Upon the earlier to occur of (a) a Change in Control that involves a transaction that was not approved by the Board, and was not recommended to the Company’s shareholders by the Board, (b) a declaration by the Board that the trusts under the Trust Agreement and Trust Agreement No. 2 should be funded in connection with a Change in Control that involves a transaction that was approved by the Board, or was recommended to shareholders by the Board, or (c) a declaration by the Board that a Change in Control is imminent, the Company shall promptly to the extent it has not previously done so, and in any event within five business days:

(x)transfer to the Trustee to be added to the principal of the trust under the Trust Agreement a sum equal to the aggregate value on the date of the Change in Control of the CIC Severance Amount, which could become payable to the Employee under the provisions of Section 4.1 hereof.  The payment of any CIC Severance Amount or other payment by the Trustee pursuant to the Trust Agreement shall, to the extent thereof, discharge the Company’s obligation to pay the CIC Severance Amount or other payment hereunder, it being the intent of the Company that assets in such Trust Agreement be held as security for the Company’s obligation to pay the CIC Severance Amount and other payments under this Agreement; and

(y)transfer to the Trustee to be added to the principal of the trust under Trust Agreement No. 2 the sum authorized by the members of the Compensation Committee from time to time.  

Any payments of attorneys’ and related fees and expenses, which are the obligation of the Company under Section 18.1, by the Trustee pursuant to Trust Agreement No. 2 shall, to the extent thereof, discharge the Company’s obligation hereunder, it being the intent of the Company that such assets in such Trust Agreement No. 2 be held as security for the Company’s obligation under Section 18.1.

Notwithstanding any provision of this Agreement to the contrary, no amounts shall be transferred to the Trustee with respect to the Trust Agreement or the Trust Agreement No. 2 for payments of any amount under this Agreement if, pursuant to Section 409A(b)(3)(A) of the Code,

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such amount would, for purposes of Section 83 of the Code, be treated as property transferred in connection with the performance of services.

19.Code Section 409A of the Code.  

19.1General.  To the extent applicable, it is intended that this Agreement comply with the provisions of Section 409A of the Code, so that the income inclusion provisions of Section 409A(a)(1) of the Code do not apply to the Employee.  This Agreement shall be administered and interpreted in a manner consistent with this intent.  

19.2Delayed Payments.  Notwithstanding any provision of this Agreement to the contrary, if the Employee is a “specified employee,” determined pursuant to procedures adopted by the Company in compliance with Section  409A of the Code, on his Termination Date and if any portion of the payments or benefits to be received by the Employee upon Termination of Employment would constitute a “deferral of compensation” subject to Section 409A, then to the extent necessary to comply with Section 409A, amounts that would otherwise be payable pursuant to this Agreement during the six-month period immediately following the Employee’s Termination Date will instead be paid or made available on the earlier of (a) the first business day of the seventh month after Employee’s Termination Date, or (b) the Employee’s death.

19.3Amendments.  Notwithstanding any provision of this Agreement to the contrary, in light of the uncertainty with respect to the proper application of Section 409A of the Code, the Company reserves the right to make amendments to this Agreement as the Company deems necessary or desirable to avoid the imposition of taxes or penalties under Section 409A of the Code.  In any case, Employee shall be solely responsible and liable for the satisfaction of all taxes and penalties that may be imposed on Employee in connection with this Agreement (including any taxes and penalties under Section 409A of the Code), and neither the Company nor any of its affiliates shall have any obligation to indemnify or otherwise hold Employee harmless from any or all of such taxes or penalties.  

20.Recoupment.  Notwithstanding anything in this Agreement to the contrary, the Employee acknowledges and agrees that this Agreement and any compensation described herein are subject to the terms and conditions of the Company’s clawback policy (if any) as may be in effect from time to time, including specifically to implement Section 10D of the Exchange Act and any applicable rules or regulations promulgated thereunder (including applicable rules and regulations of any national securities exchange on which the Common Shares may be traded) (the “Compensation Recovery Policy”), and that applicable sections of this Agreement and any related documents shall be deemed superseded by and subject to the terms and conditions of the Compensation Recovery Policy from and after the effective date thereof.

[signatures on next page]


NAI-1509265674v6

 

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the date first set forth above.

 

 

By:

Employee

 

 

TIMKENSTEEL CORPORATION

By:

Its:

 

 

NAI-1509265674v6

Exhibit 21.1

Exhibit 21.1

 

Subsidiaries of the Registrant

 

The active subsidiaries of the Company (all of which are included in the Consolidated Financial Statements of the Company and its subsidiaries) are as follows:

 

 

 

 

Name

United States

 

 

State or sovereign power under laws of which organized

 

Percentage of voting securities owned directly or indirectly by Company

 

EDC, Inc.Ohio100.0%

TimkenSteel Material Services, LLCDelaware100.0%

TSB Metal Recycling LLCOhio100.0%

 

International

TimkenSteel UK LimitedEngland100.0%

TimkenSteel de Mexico S. de R.L. de C.V.Mexico100.0%

TimkenSteel (Shanghai) Corporation LimitedChina100.0%

 

 

 

 

Exhibit 23.1

 

 

 

Consent of Independent Registered Public Accounting Firm

 

 

We consent to the incorporation by reference in the following Registration Statements:

 

(1)

Registration Statement (Form S-8 No. 333-214297) pertaining to the TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan;

(2)

Registration Statement (Form S-8 No. 333-197078) pertaining to the TimkenSteel Corporation 2014 Equity and Incentive Compensation Plan;

(3)

Registration Statement (Form S-3 No. 333-208930) of TimkenSteel Corporation;

(4)

Registration Statement (Form S-3 No. 333-216781) pertaining to the TimkenSteel Corporation Amended and Restated 2014 Equity and Incentive Compensation Plan;

(5)

Registration Statement (Form S-8 No. 333-238034) pertaining to the TimkenSteel Corporation 2020 Equity and Incentive Compensation Plan; and

(6)

Registration Statement (Form S-8 No. 333-251892) pertaining to the TimkenSteel Corporation Time-Based Restricted Share Unit Inducement Award Agreement and Performance-Based Restricted Share Unit Inducement Award Agreement

 

of our reports dated February 25, 2021, with respect to the consolidated financial statements and schedule of TimkenSteel Corporation and the effectiveness of internal control over financial reporting of TimkenSteel Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2020.

 

 

 

 

/s/ Ernst & Young LLP

 

 

Cleveland, Ohio

February 25, 2021

Exhibit 24.1

 

TIMKENSTEEL CORPORATIONANNUAL REPORT ON FORM 10-KPOWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of TimkenSteel Corporation hereby constitutes and appoints Kristine C. Syrvalin and Kristopher R. Westbrooks, and each of them (each with full power to act alone), his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of TimkenSteel Corporation for the fiscal year ended December 31, 2020, including any amendments thereto, on his or her behalf, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original with respect to the person executing it. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the 25th day of February 2021: /s/ Joseph A. Carrabba Joseph A. Carrabba Director /s/ Diane C. Creel Diane C. Creel Director /s/ Terry L. Dunlap Terry L. Dunlap Director /s/ Randall H. Edwards                                           Randall H. Edwards Director /s/ Donald T. Misheff Donald T. Misheff Director /s/ John P. Reilly John P. Reilly Director /s/ Ronald A. Rice Ronald A. Rice Director /s/ Leila L. Vespoli Leila L. Vespoli Director /s/ Randall A. Wotring Randall A. Wotring Director

 

Exhibit 31.1

 

CERTIFICATION

 

 

 

I, Michael S. Williams, certify that:

 

I have reviewed this annual report on Form 10-K of TimkenSteel Corporation;

 

 

1.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

 

2.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

 

3.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

 

 

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

 

4.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

Date:February 25, 2021/s/ Michael S. Williams

Michael S. Williams

Chief Executive Officer and President

(Principal Executive Officer)

 

Exhibit 31.2

 

CERTIFICATION

I, Kristopher R. Westbrooks, certify that:

 

I have reviewed this annual report on Form 10-K of TimkenSteel Corporation;

 

 

1.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

 

2.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

 

3.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

 

 

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

 

4.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

Date:February 25, 2021/s/ Kristopher R. Westbrooks

Kristopher R. Westbrooks

Executive Vice President and Chief Financial Officer (Principal Financial Officer)

 

 

Exhibit 32.1

 

CERTIFICATION

 

 

 

Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the Annual Report of TimkenSteel Corporation (the “Company”) on Form 10-K for the period ended December 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:

 

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

 

 

 

Date:

February 25, 2021

/s/ Michael S. Williams

 

 

Michael S. Williams

Chief Executive Officer and President (Principal Executive Officer)

 

Date:

 

February 25, 2021

 

/s/ Kristopher R. Westbrooks

 

 

Kristopher R. Westbrooks

Executive Vice President and Chief Financial Officer (Principal Financial Officer)