UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended December 31, 20142017 |
OR
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| o | 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: 1-1169
THE TIMKEN COMPANY
(Exact name of registrant as specified in its charter)
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| Ohio | | 34-0577130 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification No.) |
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4500 Mt. Pleasant St., N.W., NW, North Canton, Ohio | | 44720-5450 |
| (Address of principal executive offices) | | (Zip Code) |
234.262.3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
Common Stock,Shares, without par value | | 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 x No o
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 o No x
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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.
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| Large accelerated filer | x | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of June 30, 2014,2017, the aggregate market value of the registrant’s common shares held by non-affiliates of the registrant was $5,811,740,662$3,097,156,335 based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| Class | | Outstanding at January 31, 20152018 |
| Common Shares, without par value | | 88,214,40377,882,884 shares |
DOCUMENTS INCORPORATED BY REFERENCE |
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| Document | | Parts Into Which Incorporated |
Proxy Statement for the Annual Meeting of Shareholders to be held on or about May 7, 20158, 2018 (Proxy Statement) | | Part III |
THE TIMKEN COMPANY
INDEX TO FORM 10-K REPORT
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| I. | | | |
| | Item 1. | | |
| | Item 1A. | | |
| | Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| | Item 2.4. | | |
| Item 3. | | |
| Item 4. | | |
| | Item 4A. | | |
| II. | | | |
| | Item 5. | | |
| | Item 6. | | |
| | Item 7. | | |
| | Item 7A. | | |
| | Item 8. | | |
| | Item 9. | | |
| | Item 9A. | | |
| | Item 9B. | | |
| III. | | | |
| | Item 10. | | |
| | Item 11. | | |
| | Item 12. | | |
| | Item 13. | | |
| | Item 14. | | |
| IV. | | | |
| | Item 15. | | |
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| Exhibit 12 | Computation of Ratio of Earnings to Fixed Charges | |
| Exhibit 21 | Subsidiaries of the Registrant | |
| Exhibit 23 | Consent of Independent Registered Public Accounting Firm | |
| Exhibit 24 | Power of Attorney | |
| Exhibit 31.1 | Principal Executive Officer’s Certifications | |
| Exhibit 31.2 | Principal Financial Officer’s Certifications | |
| Exhibit 32 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| Exhibit 101 | Extensible Business Reporting Language (XBRL) | |
PART I.
Item 1. Business
General:
As used herein, the term “Timken” or the “Company” refers to The Timken Company and its subsidiaries unless the context otherwise requires. Timken engineers, manufactures and markets bearings, transmissions, gearboxes, belts, chain, lubrication systems, couplings, industrial clutches and brakes, and related products and offers a spectrum of power system rebuild and repair services around the world. The Company’s growing product and services portfolio features many strong industrial brands, such as Timken, Fafnir,including Timken®, Fafnir®, Philadelphia Gear, DrivesGear®, Drives®, Lovejoy® and Interlube.Groeneveld®.
The Company was founded in 1899 by Henry Timken, who received two patents on the design of a tapered roller bearing. Timken later became, and continues to be, the world's largest manufacturer of tapered roller bearings, leveraging its expertise to develop a full portfolio of industry-leading products and services. Timken built its reputation as a global leader by applying its knowledge of metallurgy, friction management and mechanical power transmission to increase the reliability and efficiency of its customers' equipment across a diverse range of industries. Today, the Company's global footprint consists of 6197 manufacturing facilities/service centers, 1223 technology and engineering centers, and 2341 distribution centers and warehouses, supported by a team comprised of approximately 16,000more than 15,000 employees. Timken operates in 2833 countries and territories around the globe.
For nearly 100 years, the Company also made and marketed steel within its steel business. However, on June 30, 2014, the Company announced that it had completed the tax-free spinoff of its steel business (the Spinoff) into a separate independent publicly traded company, TimkenSteel Corporation (TimkenSteel). The Company's Board of Directors declared a distribution of all outstanding common shares of TimkenSteel through a dividend. At the close of business on June 30, 2014, the Company's shareholders received one common share of TimkenSteel for every two common shares of the Company they held as of the close of business on June 23, 2014. The steel business has been reclassified to discontinued operations for all periods presented.
Industry Segments and Geographical Financial Information:
Information required by this Item is incorporated herein by reference to Note 1516 - Segment Information in the Notes to the Consolidated Financial Statements.Information.
Major Customers:
The Company sells products and services to a diverse customer base globally, including customers in the following market sectors: industrial distribution, general industrial original equipment, mining, construction, agriculture, rail, aerospace and defense, automotive, heavy truck, metals and energy. No single customer accounts for 5% or more of total net sales.
Products:
Timken manufactures and manages global supply chains for multiple product lines including anti-friction bearings and mechanical power transmission products designed to operate in demanding environments. The Company leverages its technical knowledge, research expertise, and production and engineering capabilities across all of its products and end markets to deliver high-performance products and services to its customers. Differentiation inamong these product lines is achieved by either: (1)generally based on either product type or (2) the targeted applications utilizing the product.
Engineered Bearings:
The Timken® bearing portfolio features a broad range of anti-friction bearing products, including tapered, spherical and cylindrical roller bearings; thrust and ball bearings; and housed units. Timken is a leading authority on tapered roller bearings, and leverages its position by applying engineering know-how and technology across its entire bearing portfolio.
A bearing is a mechanical device that reduces friction between moving parts. The purpose of a bearing is to carry a load while allowing a machine shaft to rotate freely. The basic elements of the bearing include two rings, called races; a set of rollers that rotate around the bearing raceway; and a cage to separate and guide the rolling elements. Bearings come in a number of designs, featuring tapered, spherical, cylindrical or ball rolling elements. The various bearing designs accommodate radial and/or thrust loads differently, making certain bearing types better suited for specific applications.
Selection and development of bearings for customer applications and demand for high reliability require sophisticated engineering and analytical techniques. Deep knowledge of friction management combined with highHigh precision tolerances, proprietary internal geometries and quality materials provide Timken bearings with high load-carrying capacity, excellent friction-reducing qualities and long service lives. The uses for bearings are diverse and can be found in transportation applications that include passenger cars and trucks, heavy trucks, helicopters, airplanes and trains. Ranging in size from precision bearings the size of a pencil eraser to those roughly three meters in diameter, Timken components also are also used in a wide variety of industrial applications: paper and steel mills, mining, oil and gas extraction and production, machine tools, gear drives, health and positioning control, wind turbines and food processing.
Tapered Roller Bearings. Timken tapered roller bearings can increase power density and can include customized geometries, engineered surfaces and specialized sealing solutions. The Company’s tapered roller bearing line comes in thousands of combinations in single-, double- and four-row configurations. Tapered roller designs permit ready absorption of both radial and axial load combinations, which makes them particularly well-adapted to reducing friction where shafts, gears or wheels are used.
Spherical and Cylindrical Roller Bearings. Timken also produces spherical and cylindrical roller bearings that are used in large gear drives, rolling mills and other industrial and infrastructure development applications. These products are sold worldwide to original equipment manufacturers ("OEMs") and industrial distributors serving major end-market sectors, including construction and mining, natural resources, defense, pulp and paper production, rolling mills and general industrial goods.
Ball Bearings. Timken radial, angular and precision ball bearings are used by customers in a variety of market sectors, including aerospace, agriculture, construction, health, machine tool, the automotive aftermarket and general industries. Radial ball bearings are designed to tolerate relatively high-speed operation under a range of load conditions. BearingsThese bearing types consist of an inner and outer ring with a cage containing a complement of precision balls. Angular contact ball bearings are designed for a combination of radial and axial loading. Precision ball bearings are manufactured to tight tolerances and come in miniature and instrument, thin section and ball screw support designs.
Housed Units. Timken markets among the broadest range of bearing housed units in the industry. These products deliver durable, heavy-duty components designed to protect spherical, tapered and ball bearings in debris-filled, contaminated or high-moisture environments. Common housed unit applications include material handling and processing equipment.
Mechanical Power Transmission:
Chains.Belts. Timken makes and markets a full line of Carlisle® belts used in industrial, commercial and consumer applications. The portfolio features more than 20,000 parts designed for demanding applications, which are sold to original equipment and aftermarket customers. Carlisle® belts are engineered for maximum performance and durability, with products available in wrap molded, raw edge, v-ribbed and synchronous belt designs. Common applications include agriculture, construction, industrial machinery, outdoor power equipment and powersports.
Chain. Timken manufactures precision Drives® roller chain, pintle chain, agricultural conveyor chain, engineering class chain and oil field roller chain. These highly engineered products are used in a wide range of mobile and industrial machinery applications, including agriculture, oil and gas, aggregate and mining, primary metals, forest products and other heavy industries. These products also are also utilized in the food and beverage and packaged goods sectors, which often require high-end, specialty products, including stainless-steel and corrosion-resistant roller chain.
Couplings. The Company offers a full range of industrial couplings within its mechanical power transmission products portfolio. The Lovejoy brand is widely known for its flexible coupling design and as the creator of the jaw-style coupling. Lovejoy® couplings are available in curved jaw, jaw in-shear, s-flex, gear-torsional and disc style configurations. These components are used in a wide range of industries such as steel, pulp and paper, power generation, food processing, mining and construction. The Company also offers an extensive line of torsional couplings offered under the Torsional Control Products brand.
Lubrication Systems. The CompanyCompany's Groeneveld® lubrication solutions include a wide variety of automatic lubrication delivery devices, oil management systems and safety support systems designed to enhance vehicle and machine uptime in on- and off-highway applications. These systems complement the Company's Interlube® line of lubrication systems, which are used by the commercial vehicle, mining, and heavy and general industries. Timken also offers 27 formulations of grease, leveraging its knowledge of tribology and anti-friction bearings to enable smooth equipment operation. Interlube® automated lubrication delivery systems dispense precise amounts of Timken grease, saving users from having to manually apply lubrication. These multifaceted delivery systems are used by the commercial vehicle, construction, mining, and heavy and general industries.
Aerospace ProductsDrive Systems. The Company's portfolio of parts, systems and services for the aerospace market sector includes products used in helicopters and fixed-wing aircraft for the military and commercial aviation industries.use. Timken designs, manufactures and tests a wide variety of power transmission and drive train components, including bearings, transmissions, turbine engine components, gears and rotor-head assemblies and housings. In addition to original equipment, Timken provides a wide range of aftermarket products, including replacement partsoverhaul and repair services for gas turbine engines, transmissions, and fuel controls, gearboxes and accessory systems in helicopters and fixed-wing aircraft. Other parts include airfoils (such as blades, vanes, rotors and diffusers), nozzles and other precision flight-critical components.
Industrial Gearboxes.The Company’s Philadelphia Gear® line of low- and high-speed gear drive designs are used in large-scale industrial applications. These gear drive configurations are custom-madecustom made to meet user specifications, offering a wide-array of size, footprint and gear arrangements. Low-speed drives commonly are commonly used in crushing and pulverizing equipment, cooling towers, conveyors and pumps. High-speed drives typically are typically used by power generation, oil and gas, marine and pipeline industries.
Industrial Clutches and Brakes. Timken offers a selection of engineered clutches, brakes, hydraulic power take-off units and other torque management devices marketed under the PT Tech brand. These products are custom engineered for original equipment manufacturers and used in mining, aggregate, wood recycling and metals industries.
Other Products.The Company also offers a full line of seals, couplings, augers and other mechanical power transmission components. Timken industrial sealing solutions come in a variety of types and material options that are used in manufacturing, food processing, mining, power generation, chemical processing, primary metals, pulp and paper, and oil and gas industry applications. Timken couplings, another mechanical power transmission component, are commonly found in gear drives, motors and pump applications. The Company also designs and manufactures Drives helicoid and sectional augers for agricultural applications, like conveying, digging and combines.
Services:
Power Systems. Timken services components in the industrial customer's drive train, including switch gears, electric motors and generators, gearboxes, bearings, couplings and central panels. The Company’s Philadelphia Gear services for gear drive applications include onsite technical services; inspection, repair and upgrade capabilities; and manufacturing of parts to OEM specifications. In addition, the Company’s Wazee, Smith Services, Schulz, Standard Machine and H&N brandsservice centers provide customers with services that include motor and generator rewind and repair and uptower wind turbine maintenance and repair. Timken power systemsPower Systems commonly serves customers in the power, wind energy, hydro and fossil fuel, water management, paper, mining and general manufacturing sectors.
Bearing Repair. Timken bearing repair services return worn bearings to like-new specifications, which increases bearing service life and often can often restore bearings in less time than required to manufacture new. Bearing remanufacturing is available for any bearing type or brand - including competitor products - and is well-suited to heavy industrial applications such as paper, metals, mining, power generation and cement; railroad locomotives, passenger cars and freight cars; and aerospace engines and gearboxes.
Services accounted for approximately 7%6% of the Company’s net sales for the year ended December 31, 2014.2017.
Sales and Distribution:
Timken products are sold principally by its own internal sales organizations. A portion of each segment's sales are made through authorized distributors.
Customer collaboration is central to the Company's sales strategy. Therefore, Timken goes where its customers need them, with sales engineers primarily working in close proximity to customers rather than at production sites. In some cases, Timken may co-locate with a customer at theirits facility to ensure optimized collaboration. The Company's sales force constantlycontinuously updates the team's training and knowledge regarding all friction management products and market sector trends, and Timken employees assist customers during development and implementation phases and provide ongoing service and support.
The Company has a joint venture in North America focused on joint logistics and e-business services. This joint venture, CoLinx, LLC, includes five equity members: Timken, SKF Group, the Schaeffler Group, Rockwell AutomationABB Group and Gates Corporation.Industrial Corp. The e-business service focuses on information and business services for authorized distributors in the Process Industries segment.
Timken has entered into individually negotiated contracts with some of its customers. These contracts may extend for one or more years and, if a price is fixed for any period extending beyond current shipments, customarily include a commitment by the customer to purchase a designated percentage of its requirements from Timken. Timken does not believe that there is any significant loss of earnings risk associated with any given contract.
Competition:
The anti-friction bearing business is highly competitive in every country where Timken sells products. Timken primarily competes primarily based on total value, including price, quality, timeliness of delivery, product design and the ability to provide engineering support and service on a global basis. The Company competes with domestic manufacturers and many foreign manufacturers of anti-friction bearings, including SKF Group, the Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd.
Joint Ventures:
Investments in affiliated companies accounted for under the equity method were approximately $1.8$2.5 million and $1.6$3.1 million, respectively, at December 31, 20142017 and 2013.2016. The amountinvestment balance at December 31, 20142017 was reported in other non-current assets on the Consolidated Balance Sheets.
Backlog:
The following table provides the backlog of orders offor the Company's domestic and overseas operations at December 31, 20142017 and 2013:2016:
| | | | December 31, | December 31, |
| (Dollars in millions) | 2014 | 2013 | 2017 | 2016 |
| Segment: | | |
| Mobile Industries | $ | 719.2 |
| $ | 945.1 |
| $ | 882.3 |
| $ | 644.7 |
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| Process Industries | 569.9 |
| 370.8 |
| 588.3 |
| 398.4 |
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| Total Company | $ | 1,289.1 |
| $ | 1,315.9 |
| $ | 1,470.6 |
| $ | 1,043.1 |
|
Approximately 90% of the Company’s backlog at December 31, 20142017 is scheduled for delivery in the succeeding twelve12 months. Actual shipments depend upon customers' ever-changing production schedules. Accordingly, Timken does not believe that its backlog data and comparisons thereof, as of different dates, reliably indicate future sales or shipments.
Raw Materials:
The principal raw materialmaterials used by the Company to make anti-friction bearings isare special bar quality (SBQ) steel.("SBQ") steel and steel components. SBQ steel isand components are produced around the world by various suppliers. SBQ steel is purchased in bar, tube and wire forms.forms, while components are commonly purchased as forgings, semi-finished or finished components. The primary inputs to SBQ steel include scrap metal, iron ore, alloys, energy and labor. The availability and price of SBQ steel are subject to changes in supply and demand, commodity prices for ferrous scrap, ore, alloy, electricity, natural gas, transportation fuel, and labor costs. The Company manages price variability of commodities by using surcharge mechanisms on some of its contracts with its customers that provides for partial recovery of these cost increases in the price of bearing products.
Any significant increase in the cost of steel could materially affect the Company’s earnings. Disruptions in the supply of SBQ steel could temporarily impair the Company’s ability to manufacture bearings for its customers, or require the Company to pay higher prices in order to obtain SBQ steel or components, which could affect the Company’s revenues andor profitability. The availability of bearing qualitybearing-quality tubing is relatively limited, and the Company is takinghas taken steps to diversify its processes to limit its exposure to this particular form of SBQ steel. Overall, the Company believes that the number of suppliers of SBQ steel is adequate to support the needs of global bearing production, and, in general, the Company is not dependent on any single source of supply.
Research:
Timken operates a network of technology and engineering centers to support its global customers with sites in North America, Europe and Asia. This network develops and delivers innovative friction management and mechanical power transmission solutions and technical services. Timken's largest technical center is located at the Company's world headquarters in North Canton, Ohio, near Timken's world headquarters.Ohio. Other sites in the United States include Mesa, Arizona; Manchester, Connecticut; Downer's Grove and Fulton, Illinois; Springfield, Massachusetts; Springfield, Missouri; Keene and Lebanon, New Hampshire; and King of Prussia, Pennsylvania. Within Europe, the Company has technology facilities in Plymouth, England; Colmar, France; Werdohl, Germany; and Ploiesti, Romania. In Asia, Timken operates technology and engineering facilities in Bangalore, India and Shanghai, China.
Expenditures for research and development amounted to approximately $38.8$35.3 million,, $39.3 million and $45.7 million in 2014, 2013 and 2012, respectively. Of these amounts, approximately $0.3 million, $0.4 $31.8 million and $0.8$32.6 million in 2017, 2016 and 2015, respectively. No amounts were funded by others in 2014, 20132017, 2016 and 2012, respectively.2015.
Environmental Matters:
The Company continues its efforts to protect the environment and comply with environmental protection laws. Additionally, it has invested in pollution control equipment and updated plant operational practices. The Company is committed to implementing a documented environmental management system worldwide and to becoming certified under the ISO 14001 standard where appropriate to meet or exceed customer requirements. As of the end of 2014, 162017, 17 of the Company’s plants had obtained ISO 14001 certification.
The Company believes it has established appropriate reserves to cover its environmental expenses and has a well-established environmental compliance audit program for its domestic and international units. This program measures performance against applicable laws, as well as against internal standards that have been established for all units worldwide. It is difficult to assess the possible effect of compliance with future requirements that differ from existing ones.requirements.
The Company and certain of its United Stated ("U.S.") subsidiaries previously have been and could in the future be identified as potentially responsible parties for investigation and remediation at off-site disposal or recycling facilities under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)("CERCLA"), known as the Superfund, or state laws similar to CERCLA. In general, such claims for investigation and remediation also have also been asserted against numerous other entities.
Management believes any ultimate liability with respect to pending actions will not materially affect the Company’s operations, cash flows or consolidated financial position. The Company also is also conducting environmental investigation and/or remediation activities at a number ofcertain current or former operating sites. The costs of such investigation and remediation activities, in the aggregate, are not expected to be material to the operations or financial position of the Company.
New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements may require Timken to incur costs or become the basis for new or increased liabilities that could have a materially adverse effect on the Company's business, financial condition or results of operations.
Patents, Trademarks and Licenses:
Timken owns numerous U.S. and foreign patents, trademarks and licenses relating to certain products. While Timken regards these as important, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items.
Employment:
At December 31, 2014,2017, Timken had approximately 16,000 employees.more than 15,000 employees worldwide. Approximately 3%7% of Timken’s U.S. employees are covered under collective bargaining agreements.
Available Information:
The Company uses its Investor Relations website at www.timken.com/investors,http://investors.timken.com, as a channel for routine distribution of important information, including news releases, analyst presentations and financial information. The Company posts filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the SEC)"SEC"), including its annual, quarterly and current reports on Forms 10-K, 10-Q and 8-K; its proxy statements; and any amendments to those reports or statements. All such postings and filings are available on the Company’s website free of charge. In addition, this website allows investors and other interested persons to sign up to automatically receive e-mail alerts when the Company posts news releases and financial information on the Company’s website. The SEC also maintains a web site,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.
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 highlighteddescribed below are not the only ones that we face. These risk factors should be considered in connection with evaluating forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results and financial condition to differ materially from those projected in forward-looking statements. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected.
Risk Relating to our Business
The bearing industry is highly competitive, and this competition results in significant pricing pressure for our products that could affect our revenues and profitability.
The global bearing industry is highly competitive. We compete with domestic manufacturers and many foreign manufacturers of anti-friction bearings, including SKF Group, the Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd. The bearing industry is also capital intensive, and profitability is dependent on factors such as labor compensation and productivity and inventory management, which are subject to risks that we may not be able to control.an increasing number of emerging market competitors. Due to the competitiveness within the bearing industry, we may not be able to increase prices for our products to cover increases in our costs.costs or to achieve desired profitability. In many cases we face pressure from our customers to reduce prices, which could adversely affect our revenues and profitability. In addition, our customers may choose to purchase products from one of our competitors rather than pay the prices we seek for our products, which could adversely affect our revenues and profitability.
Our business is capital intensive, and if there are downturns in the industries that 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, and we devote a significant amount of capital to certain industries. Our profitability is dependent on factors such as labor compensation and productivity and inventory management, which are subject to risks that we may not be able to control. If there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend our operations with respect to those industries, including laying-off employees, reducing production, recording asset impairment charges and other measures, which may adversely affect our results of operations and profitability.
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 the conditions in the global economy generally and in global capital markets. There has been extremesignificant volatility in the capital markets and in the end markets and geographic regions in which we and our customers operate, which has negatively affected our revenues. Our revenues also may also be negatively affected by changes in customer demand, additional changes in the product mix and negative pricing pressure in the industries in which we operate. Margins in those industries are highly sensitive to demand cycles, and our customers in those industries historically have tended to delay large capital projects, including expensive maintenance and upgrades, during economic downturns. As a result, our revenues and earnings are impacted by overall levels of industrial production.
Our results of operations may be materially affected by the conditions in the global financial markets or in any of the geographic regions in which we, our customers and our suppliers, operate. If an end user cannot obtain financing to purchase our products, either directly or indirectly contained in machinery or equipment, demand for our products will be reduced, which could have a material adverse effect on our financial condition and earnings.
Global financial markets have experienced volatility in recent years, including volatility in securities prices and diminished liquidity and credit availability. Our access to the financial markets cannot be assured and is dependent on, among other things, market conditions and company performance. Accordingly, we may be forced to delay raising capital, issue shorter tenors than we prefer or pay unattractive interest rates, which could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility.
If a customer becomes insolvent or files for bankruptcy, our ability to recover accounts receivable from that customer would be affected adversely affected and any payment we received during the preference period prior to a bankruptcy filing potentially may be potentially recoverable by the bankruptcy estate. Furthermore, if certain of our customers liquidate in bankruptcy, we may incur impairment charges relating to obsolete inventory and machinery and equipment.
In addition, financial instability of certain companies in the supply chain could disrupt production in any particular industry. A disruption of production in any of the industries where we participate could have a material adverse effect on our financial condition and earnings. If any of our suppliers are unable or unwilling to provide the products or services that we require or materially increase their costs, our ability to offer and deliver our products on a timely and profitable basis could be impaired. We cannot assure you that any or all of our relationships will not be terminated or that such relationships will continue as presently in effect. Furthermore, if any of our suppliers were to become subject to bankruptcy, receivership or similar proceedings, we may be unable to arrange for alternate or replacement relationships on favorable terms, which could harm our sales and operating results.
Any change in raw material prices or the availability or cost of raw materials could adversely affect our results of operations and profit margins.
We require substantial amounts of raw materials, including steel, to operate our business. Our supply of raw materials could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and could do so in the future. We generally attempt to manage these fluctuations by passing along increased raw material prices to our customers in the form of price increases;increases or surcharges; however, we may be unable to increase the price of our products due to pricing pressure, contract terms or other factors. Additionally, certain of our long term customer contracts contain raw material surcharge mechanisms, which are generally tied to a market index or indexes. The index or indexes may be ineffective in mitigating our exposure to changes in raw material costs,factors, which could adversely impact our revenue and profit margins.
Moreover, future disruptions in the supply of our raw materials could impair our ability to manufacture our products for our customers or require us to pay higher prices in order to obtain these raw materials from other sources. Any significant increase in the prices for such raw materials could adversely affect our results of operations and profit margins.
Warranty, recall, quality or product liability claims could materially adversely affect our earnings.
In our business, we are exposed to warranty and product liability claims. In addition, we may be required to participate in the recall of a product. If we fail to meet customer specifications for their products, we may be subject to product quality costs and claims. A successful warranty or product liability claim against us, or a requirement that we participate in a product recall, could have a material adverse effect on our earnings.
We may incur further impairment and restructuring charges that could materially affect our profitability.
We have taken $187.7approximately $163 million in impairment and restructuring charges in the aggregate during the last five years. Changes in business or economic conditions, or our business strategy, may result in additional restructuring programs and may require us to take additional charges in the future, which could have a material adverse effect on our earnings.
Environmental laws and regulations impose substantial costs and limitations on our operations and environmental compliance may be more costly than we expect.
We are subject to the risk of substantial environmental liability and limitations on our operations due to environmental laws and regulations. We are subject to extensive federal, state, local and foreign environmental, health and safety laws and regulations concerning matters such as air emissions, wastewater discharges, solid and hazardous waste handling and disposal and the investigation and remediation of contamination. The risks of substantial costs and liabilities related to compliance with these laws and regulations are an inherent part of our business, and future conditions may develop, arise or be discovered that create substantial environmental compliance or remediation 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 at our facilities, 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 noncompliance with or liability underarising from environmental, health and safety laws, property damage or personal injury. New laws and regulations, including those whichthat 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.
The Company may be subject to risks relating to its information technology systems.
The Company relies on information technology systems to process, transmit and store electronic information and manage and operate its business. A breach in security could expose the Company, its employees and its customers and suppliers to risks of misuse of confidential information, manipulation and destruction of data, production downtimes and operationsoperational disruptions, which in turn could adversely affect the Company's reputation, competitive position, business or results of operations.
The global nature of our business exposes us to foreign currency fluctuations that may affect our asset values, results of operations and competitiveness.
We are exposed to the risks of currency exchange rate fluctuations because a significant portion of our net sales, costs, assets and liabilities, are denominated in currencies other than the U.S. dollar. These risks include a reduction in our asset values, net sales, operating income and competitiveness.
For those countries outside the United States where we have significant sales, a strengthening in the U.S. dollar or devaluation in the local currency would reduce the value of our local inventory as presented in our Consolidated Financial Statements. In addition, a stronger U.S. dollar or a weaker local currency would result in reduced revenue, operating profit and shareholders' equity due to the impact of foreign exchange translation on our Consolidated Financial Statements. Fluctuations in foreign currency exchange rates may make our products more expensive for others to purchase or increase our operating costs, affecting our competitiveness and our profitability.
Changes in exchange rates between the U.S. dollar and other currencies and volatile economic, political and market conditions in emerging market countries have in the past adversely affected our financial performance and may in the future adversely affect the value of our assets located outside the United States, our gross profit and our results of operations.
Global political instability and other risks of international operations may adversely affect our operating costs, revenues and the price of our products.
Our international operations expose us to risks not present in a purely domestic business, including primarily:
changes in tariff regulations, which may make our products more costly to export or import;
difficulties establishing and maintaining relationships with local original equipment manufacturers (OEMs),OEMs, distributors and dealers;
import and export licensing requirements;
compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and environmental or other regulatory requirements, which could increase our operating and other expenses and limit our operations;
disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the Foreign Corrupt Practices Act (FCPA)("FCPA");
difficulty in staffing and managing geographically diverse operations; and
tax exposures related to cross-border intercompany transfer pricing and other tax risks unique to international operations.
These and other risks also may also increase the relative price of our products compared to those manufactured in other countries, reducing the demand for our products in the markets in which we operate, which could have a material adverse effect on our revenues and earnings.
The funded status of our defined benefitExpenses and other postretirement plans has caused and may in the future cause a significant reduction in our shareholders' equity.
We recorded a decrease in shareholders' equitycontributions related to pension and postretirement benefit liabilities in 2014 primarily due to a decrease in discount rates and changes in mortality assumptions, and in the future, we may be required to record charges related to pension and other postretirement liabilities as a result of asset returns, discount rate changes or other actuarial adjustments. These charges may be significant and would cause a reduction in our shareholders' equity.
The funded status of our pension plans may require additional contributions, which may divert funds from other uses.
The funded status of our pension plans may require us to make additional contributions to such plans. We made cash contributions of approximately $21 million, $121 million and $326 million in 2014, 2013 and 2012, respectively, to our defined benefit pension plans and currently expect to make cash contributions of approximately $15 million in 2015 to such plans. However, we cannot predict whether changing economic conditions, the future performance of assets in the plans or other factors will lead us or require us to make contributions in excess of our current expectations, diverting funds we would otherwise apply to other uses.
Our defined benefit plans' assets and liabilities are substantial and expenses and contributions related to those plans are affected by factors outside our control, including the performance of plan assets, interest rates, actuarial data and experience, and changes in laws and regulations.regulations, all of which could impact our funded status.
Our defined benefit pension plans had assets with an estimated value of approximately $1.8 billion and liabilities with an estimated value of approximately $1.7 billion, both as of December 31, 2014. Our future expense and funding obligations for the defined benefit pension plans depend upon a number of factors, including the level of benefits provided for by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine the discount rate to calculate the amount of liabilities, actuarial data and experience and any changes in government laws and regulations. In addition, if the various investments held by our pension trusts do not perform as expected or the liabilities increase as a result of discount rates and other actuarial changes, our pension expense and required contributions would increase and, as a result, could materially adversely affect our business. Duebusiness or require us to the value ofrecord charges that could be significant and would cause a reduction in our defined benefit plan assets and liabilities, even a minor decrease in interest rates, to the extent not offset by contributions or asset returns, could increase our obligations under such plans.shareholders' equity. We may be required legally required to make contributions to the pension plans in the future in excess of our current expectations, and those contributions could be material.
9
Future actions involving our defined benefit and other postretirement plans, such as annuity purchases, lump sum payouts, and/or plan terminations could cause us to incur significant pension and postretirement settlement and curtailment charges, and require cash contributions.
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, or at facilities of one or more of our suppliers, could have a material adverse effect on our business, financial condition and results of operations. Also, if one or more of our customers were to experience a work stoppage, that customer likely would likely halt or limit purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations.
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 tradingtrade 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.
In addition, we could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws as well as export controls and economic sanction laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S.non-U.S government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with theseRecently, there has been a substantial increase in the global enforcement of anti-corruption laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. WeOur policies mandate compliance with these laws, but we cannot assure you that our internal controls and procedures always will always protect us from the improper acts committed by our employees or agents. If we are found to be liable for FCPA, export control or sanction violations, we could suffer from criminal or civil penalties or other sanctions, including loss of export privileges or authorization needed to conduct aspects of our international business, which could have a material adverse effect on our business.
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 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.management and other key employees. The loss of the services of a significant number of members of our management or other key employees could have a material adverse effect on our business. Our future success also will also depend on our ability to attract and retain highly skilled personnel, such as engineering, finance, marketing and senior management professionals. Competition for these types of 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 may not realize the improved operating results that we anticipate from past and future acquisitions and we may experience difficulties in integrating acquired businesses.
We seek to grow, in part, through strategic acquisitions, and joint ventures and other alliances, which are intended to complement or expand our businesses, and expect to continue to do so in the future. These acquisitions involve challenges and risks. In the event that we do not successfully integrate these acquisitions into our existing operations so as to realize the expected return on our investment, our results of operations, cash flow or financial condition could be adversely affected.
Our operating results depend in part on continued successful research, development and marketing of new and/or improved products and services, and there can be no assurance that we will continue to successfully introduce new products and services.
The success of new and improved products and services depends on their initial and continued acceptance by our customers. Our businesses are affected, to varying degrees, by technological change and corresponding shifts in customer demand, which could result in unpredictable product transitions or shortened life cycles.cycles, especially as it relates to market and technological changes driven by electrification, climate change requirements or increased digitization. We may experience difficulties or delays in the research, development, production, or marketing of new products and services whichthat may prevent us from recouping or realizing a return on the investments required to bring new products and services to market. The end result could be a negative impact on our operating results.
Risks Relating
If our internal controls are found to the Spinoffbe ineffective, our financial results or our stock price may be adversely affected.
Our most recent evaluation resulted in our conclusion that, as of TimkenSteel
December 31, 2017, our internal control over financial reporting was effective. We may not realize the potential benefits from the Spinoff.
We may not realize the potential financial, operational, managerial or other benefitsbelieve that we expect from the recently completed Spinoff, or may not realize the potential benefitscurrently have adequate internal control procedures in place for future periods, including processes related to newly acquired businesses; however, increased risk of internal control breakdowns generally exists in a timely fashion. Additionally,business environment that is decentralized. In addition, if our internal control over financial reporting is found to be ineffective, investors may lose confidence in the Company’s operational andreliability of our financial profile has changed as a result of the Spinoff. As a result, the Company’s diversification of revenue sources has decreased, and it is possible that the Company’s results of operations, cash flows, working capital and financing requirementsstatements, which may be subject to increased volatility. If we do not realize the potential benefits of the Spinoff, itadversely affect our stock price.
Changes in accounting guidance could have a materialan adverse effect on our financial condition.
Potential indemnification liabilities to TimkenSteel pursuant to the separation and distribution agreement could materially and adversely affect our business, financial condition, results of operations, and cash flows.as reported in our financial statements.
In connectionOur consolidated financial statements are prepared in accordance with the Spinoff, we entered into a separation and distribution agreement, an employee matters agreement and a tax sharing agreement, all with TimkenSteel,U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), which provide for, among other things, the principal corporate transactions requiredis periodically revised and/or expanded. Accordingly, from time to effect the spinoff, certain conditions to the Spinoff and provisions governing the relationship between the Company and TimkenSteel with respect to and resulting from the Spinoff. Among other things, the separation and distribution agreement provides for indemnification obligations designed to make us financially responsible for substantially all liabilities that may exist relating to our continuing business operations, whether incurred prior to or after the spinoff, as well as those obligations of TimkenSteel assumed by us pursuant to the separation and distribution agreement. Iftime we are required to indemnify TimkenSteel underadopt new or revised accounting guidance and related interpretations issued by recognized authoritative bodies, including the circumstances set forth in the separation and distribution agreement, we could be subject to substantial liabilities.
The employee matters agreement generally provides that each of the Company and TimkenSteel has responsibility for its own employees and compensation plans, subject to certain exceptions as described in the agreement. The tax sharing agreement generally governs the Company’s and TimkenSteel’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 will be liable for all pre-spinoff 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 spinoff. In addition, the tax sharing agreement will address the allocation of liability for taxes that are incurred as a result of restructuring activities undertaken to effectuate the Spinoff. The tax sharing agreement will also provide that TimkenSteel is liable for taxes incurred by the 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 Spinoff failing to meet the requirements of a tax-free distribution under Section 355 of the Code.
Pursuant to the separation and distribution agreement, the employee matters agreementFinancial Accounting Standards Board and the tax sharing agreement, TimkenSteel will agree to indemnify us for certain liabilities related to its steel business operations. However, third parties could seek to hold us responsible for anySEC. The impact of the liabilitiesaccounting pronouncements that TimkenSteel has agreed to retain,have been issued but not yet implemented is disclosed in this Annual Report on Form 10-K and there can be no assuranceour Quarterly Reports on Form 10-Q. It is possible that the indemnity from TimkenSteel will be sufficient to protect us against the full amount of such liabilities, or that TimkenSteel will be able to fully satisfy its indemnification obligations. In particular, if TimkenSteel is unable to pay any prior period taxes for which it is responsible, the Company could befuture accounting guidance we are required to payadopt, or future changes in accounting principles, could change the entire amount ofcurrent accounting treatment that we apply to our consolidated financial statements and that 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. Moreover, even if we ultimately succeed in recovering from TimkenSteel any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. If TimkenSteel is unable to satisfy its indemnification obligations, the underlying liabilitieschanges could have a materialan adverse effect on our business, financial condition, results of operations, and cash flows.as reported in our consolidated financial statements.
If the Spinoff does not qualify as a tax-free transaction, the Company and its shareholders could be subject to substantial tax liabilities.
The Spinoff was conditioned on our receipt of an opinion from Covington & Burling LLP, special tax counsel to the Company, that the distribution of TimkenSteel common shares in the spinoff qualified as tax-free (except for cash received by shareholders in lieu of fractional shares) to the Company, TimkenSteel and the Company’s shareholders for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) and related provisions of the Code. The opinion relied on, among other things, various assumptions and representations as to factual matters made by the Company and TimkenSteel, which, if inaccurate or incomplete in any material respect, could jeopardize the conclusions reached by such counsel in its opinion. We are not aware of any facts or circumstances that would cause the assumptions or representations that were relied on in the opinion of counsel to be inaccurate or incomplete in any material respect. The opinion is not binding on the Internal Revenue Service, or IRS, or the courts, and there can be no assurance that the qualification of the Spinoff as a transaction under Sections 355 and 368(a) of the Code will not be challenged by the IRS or by others in court, or that any such challenge would not prevail. If the Spinoff is determined to be taxable for U.S. federal income tax purposes, the Company and its shareholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities, as each U.S. holder of the Company’s common shares that received TimkenSteel common shares in the Spinoff would generally be treated as having received a taxable distribution of property in an amount equal to the fair market value of the TimkenSteel common shares received.
Certain members of our Board of Directors and management may have actual or potential conflicts of interest because of their ownership of shares of TimkenSteel Corporation ("TimkenSteel") or their relationships with TimkenSteel following the spinoff.spinoff of TimkenSteel into an independent publicly traded company on June 30, 2015 (the "Spinoff").
Certain members of our Board of Directors and management own shares of TimkenSteel and/or options to purchase shares of TimkenSteel, which could create, or appear to create, potential conflicts of interest when our directors and executive officers are faced with decisions that could have different implications for us and TimkenSteel. TwoOne of our directors, Ward J. Timken, Jr. and John P. Reilly, are, is also directors of TimkenSteel and, in the case of Mr. Timken, Chairman, President and Chief Executive Officer of TimkenSteel. This may create, or appear to create, potential conflicts of interest if these directors areMr. Timken is faced with decisions that could have different implications for TimkenSteel thenthan the decisions have for us.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Timken has manufacturing facilities at multiple locations in the United States and in a number of countries outside the United States. The aggregate floor area of these facilities worldwide is approximately 9,823,91710.8 million square feet, all of which, except for approximately 1,876,9741.8 million square feet, is owned in fee. The facilities not owned in fee are leased. The buildings occupied by Timken are principally made of brick, steel, reinforced concrete and concrete block construction. AllThe Company believes all buildings are in satisfactory operating condition to conduct business.
Timken’s Mobile Industries segment's manufacturing facilities and service centers in the United States are located in Bucyrus and New Philadelphia, Ohio; Mesa, Arizona; Los Alamitos, California; Manchester, and New Haven, Connecticut; Carlyle, Illinois; Lenexa, Kansas; Rochester Hills, Michigan; Keene and Lebanon, New Hampshire; Iron Station, North Carolina; Bucyrus, Canton, New Philadelphia and Sharon Center, Ohio; Gaffney and Honea Path, South Carolina; Pulaski and Knoxville, Tennessee; and Ogden, Utah. These facilities, including warehouses at plant locations and a technology center in North Canton, Ohio, have an aggregate floor area of 3,809,836approximately 3.5 million square feet.
Timken’s Mobile Industries segment’s manufacturing plants and service centers outside the United States are located in Benoni, South Africa;Belo Horizonte Curitiba, and Rio Clara, Brazil; Yantai, China; Cheltenham, Northampton and Plymouth, England; Colmar, France; Jamshedpur, India; Karmiel, Israel; Cassago, Valmadrea and Villa Carcina, Italy; Colmar, France; Cheltenham, Northampton, Plymouth, and Wolverhampton, England; Belo Horizonte, Curtiba, and Sorocaba, Brazil; Jamshedpur, India; Sosnowiec, Poland; St. Thomas, Canada; and Yantai, China.Gauteng, South Africa. These facilities, including warehouses at plant locations, have an aggregate floor area of 2,536,359approximately 2.3 million square feet.
Timken's Process Industries segment's manufacturing plants and service centers in the United States are located in Canton and Niles, Ohio; Hueytown, Alabama; Sante Fe Springs, California; Broomfield and Denver, Colorado; New Haven, Connecticut; New Castle, Delaware; Downers Grove, Fulton and Mokena, Illinois; Mishawaka, Indiana; Lenexa,Fort Scott, Kansas; Augusta and Portland, Maine; Springfield, Massachusetts; South Haven, Michigan; Springfield, Missouri; Randleman and Rutherfordton, North Carolina; Union, South Carolina; Altavista, Virginia; Ferndale, Pasco and Pasco,Vancouver, Washington; Princeton, West Virginia; and Casper, and Rock Springs, Wyoming. These facilities, including warehouses at plant locations and a technologywind center in North Canton, Ohio, have an aggregate floor area of 1,773,950approximately 2.8 million square feet.
Timken's Process Industries segment's manufacturing plants and service centers outside the United States are located in Mississauga, Prince George and Sasakatoon, Canada; Chengdu, XiangtanJiangsu and Wuxi, China; Dudley, England; Werdohl, Germany; Chennai and Durg, India; Dudley, England; SaskatoonKarmiel, Israel; and Prince George, Canada;Ploiesti and Ploiesti,Prahova, Romania. These facilities, including warehouses at plant locations, have an aggregate floor area of 1,703,772approximately 2.2 million square feet.
In addition to the manufacturing and distribution facilities discussed above, Timken owns or leases warehouses and distribution facilities in Argentina, Australia, Brazil, Canada, China, France, England, Mexico, New Zealand, Poland, South Africa, Singapore, Spain and the United States, France, Mexico, Singapore, Argentina, Australia, and China.States.
The extent to which the Company uses its properties varies by property and from time to time. The Company believes that its capacity levels are adequate for its present and anticipated future needs. Most of the Company’s manufacturing facilities remain capable of handling additional volume increases.
Item 3. Legal Proceedings
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
In October 2014, the Brazilian government antitrust agency announced that it had opened an investigation of alleged antitrust violations in the bearing industry. The Company’s Brazilian subsidiary, Timken do Brasil Comercial Importadora Ltda, was included in the investigation. While the Company is unable to predict the ultimate length, scope or results
of the investigation, management believes that the outcome will not have a material effect on the Company’s consolidated financial position; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Based on current facts and circumstances, the low end of the range for potential penalties, if any, would be immaterial to the Company.
Item 4. Mine Safety Disclosures
Not applicable.
Item 4A. Executive Officers of the Registrant
The executive officers are elected by the Board of Directors normally for a term of one year and until the election of their successors. All executive officers have been employed by Timken or by a subsidiary of the Company during the past five-year period.period other than Ms. Cheverine, who was hired by the Company in May 2017. The executive officers of the Company as of March 2, 2015February 15, 2018 are as follows:
|
| | | | |
| Name | | Age | | Current Position and Previous Positions During Last Five Years |
William R. BurkhartCarolyn E. Cheverine | | 4955 | | 20142017 Executive Vice President, General Counsel and Secretary |
| | | | | 20002016 Vice President & Chief Counsel, Tax & International Transactions - Eaton Corporation |
| | | | 2014 Senior Vice President and Chief Counsel, Industrial Sector - Eaton Corporation |
| | | | 2011 Vice President, General Counsel and Secretary - Cliffs Natural Resources Inc. (subsequently renamed Cleveland-Cliffs Inc.) |
| Christopher A. Coughlin | | 5457 | | 2014 Executive Vice President, Group President |
| | | | | 2012 Group President |
| | | | 2011 President - Process Industries |
| | | | 2010 President - Process Industries & Supply Chain |
| Philip D. Fracassa | | 4749 | | 2014 Executive Vice President and Chief Financial Officer |
| | | | | 2012 Senior Vice President - Planning and Development |
| | | | 2010 Senior Vice President and Controller - B&PT |
| Richard G. Kyle | | 4952 | | 2014 President and Chief Executive Officer; Director |
| | | | | 2013 Chief Operating Officer - B&PT; Director |
| | | | | 2012 Group President |
| Ronald J. Myers | | 59 | | 20112017 Executive Vice President - Mobile Industries & AerospaceHuman Resources |
| | | | | 20092015 Vice President of Human Resources |
| | | | 2014 Vice President of Organizational Advancement Operations |
| | | | 2012 Vice President - Mobile Industries |
J. Ted Mihaila | | 60 | | 2006 Senior Vice President and ControllerOperational Organizational Advancement |
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common shares are traded on the New York Stock Exchange under the symbol “TKR.” The estimated number of record holders of the Company’s common shares at December 31, 20142017 was 4,733.4,005. The estimated number of beneficial shareholders at December 31, 20142017 was 31,616.56,244.
The following table provides information about the high and low sales prices for the Company’s common shares and dividends paid for each quarter for the last two fiscal years.
| | | | 2014 | | 2013 | 2017 | | 2016 |
| | Stock prices | Dividends | | Stock prices | Dividends | Stock prices | Dividends | | Stock prices | Dividends |
| | High | Low | per share | | High | Low | per share | High | Low | per share | | High | Low | per share |
| First quarter | $ | 61.37 |
| $ | 52.51 |
| $ | 0.25 |
| | $ | 58.50 |
| $ | 47.67 |
| $ | 0.23 |
| $ | 46.45 |
| $ | 40.05 |
| $ | 0.26 |
| | $ | 33.64 |
| $ | 22.22 |
| $ | 0.26 |
|
| Second quarter | $ | 69.51 |
| $ | 57.69 |
| $ | 0.25 |
| | $ | 59.44 |
| $ | 50.22 |
| $ | 0.23 |
| $ | 51.75 |
| $ | 42.50 |
| $ | 0.27 |
| | $ | 37.07 |
| $ | 28.72 |
| $ | 0.26 |
|
| Third quarter | $ | 49.96 |
| $ | 42.34 |
| $ | 0.25 |
| | $ | 64.35 |
| $ | 55.00 |
| $ | 0.23 |
| $ | 49.95 |
| $ | 42.55 |
| $ | 0.27 |
| | $ | 35.28 |
| $ | 29.31 |
| $ | 0.26 |
|
| Fourth quarter | $ | 44.30 |
| $ | 37.62 |
| $ | 0.25 |
| | $ | 61.57 |
| $ | 50.22 |
| $ | 0.23 |
| $ | 53.10 |
| $ | 44.73 |
| $ | 0.27 |
| | $ | 41.15 |
| $ | 31.60 |
| $ | 0.26 |
|
At the close of business on June 30, 2014, the Company's shareholders received one common share of TimkenSteel for every two common shares of the Company they held as of the close of business on June 23, 2014. On June 30, 2014, the last trading day before the Spinoff became effective, the closing price of our common shares, trading “regular way” (that is with an entitlement to common shares of TimkenSteel distributed in the Spinoff), was $67.84. On July 1, 2014, the first trading day after the Spinoff, the opening price of our common shares was $48.56 per share and the opening price of TimkenSteel common shares was $39.55 per share. These stock prices were as quoted on the New York Stock Exchange.
Issuer Purchases of Common Shares:
The following table provides information about purchases of its common shares by the Company during the quarter ended December 31, 2014.2017.
|
| | | | | | | | | | |
| Period | Total number of shares purchased (1) | Average price paid per share (2) | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs (3) |
| 10/1/2014 - 10/31/2014 | 150 |
| $ | 42.68 |
| $ | — |
| 8,997,807 |
|
| 11/1/2014 - 11/30/2014 | 30 |
| 43.64 |
| — |
| 8,997,807 |
|
| 12/1/2014 - 12/31/2014 | 100,036 |
| 43.54 |
| 100,000 |
| 8,897,807 |
|
| Total | 100,216 |
| $ | 43.54 |
| 100,000 |
| 8,897,807 |
|
|
| | | | | | | | | |
| Period | Total number of shares purchased (1) | Average price paid per share (2) | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs (3) |
| 10/1/2017 - 10/31/2017 | 50,791 |
| $ | 49.71 |
| 44,000 |
| 9,076,000 |
|
| 11/1/2017 - 11/30/2017 | 4,341 |
| 47.26 |
| 4,000 |
| 9,072,000 |
|
| 12/1/2017 - 12/31/2017 | 5,080 |
| 50.12 |
| — |
| 9,072,000 |
|
| Total | 60,212 |
| $ | 49.57 |
| 48,000 |
| — |
|
| |
| (1) | Of the shares purchased in October, November and December, 150, 306,791, 341 and 36,5,080, respectively, represent common shares of the Company that were owned and tendered by employees to exercise stock options, and to satisfy withholding obligations in connection with the exercise of stock options and vesting of restricted shares. |
| |
| (2) | For shares tendered in connection with the vesting of restricted shares, the average price paid per share is an average calculated using the daily high and low of the Company’s common shares as quoted on the New York Stock Exchange at the time of vesting. For shares tendered in connection with the exercise of stock options, the price paid is the real-time trading share price at the time the options are exercised. |
| |
| (3) | On February 10, 2012,6, 2017, the Company's Board of Directors of the Company approved a share purchaserepurchase plan pursuant to which the Company may purchase up to ten million of its common shares, in the aggregate. On June 13, 2014, the Board of Directors of the Company authorized an additional ten million common shares for repurchase under this plan. This new share purchase plan expires on December 31, 2015. TheFebruary 28, 2021. Under this plan the Company may purchasepurchased shares from time to time in open market purchases or privately negotiated transactions and was able to make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans. |
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (continued)
from time to time in open market purchases or privately negotiated transactions. The Company may make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans.
*Total return assumes reinvestment of dividends. Fiscal years ending December 31.
|
|
|
| | | 2010 | 2011 | 2012 | 2013 | 2014 | 2013 | 2014 | 2015 | 2016 | 2017 |
| Timken | $ | 204 |
| $ | 169 |
| $ | 213 |
| $ | 249 |
| $ | 275 |
| $ | 117 |
| $ | 129 |
| $ | 89 |
| $ | 128 |
| $ | 162 |
|
| S&P 500 | 115 |
| 117 |
| 136 |
| 180 |
| 205 |
| 132 |
| 151 |
| 153 |
| 171 |
| 208 |
|
| S&P 400 Industrials | 131 |
| 129 |
| 158 |
| 227 |
| 230 |
| 144 |
| 146 |
| 141 |
| 182 |
| 225 |
|
The line graph compares the cumulative total shareholder returns over five years for The Timken Company, the S&P 500 Stock Index and the S&P 400 Industrials Index. The graph assumes, in each case, an initial investment of $100 on January 1, 2010,2012, in Timken common shares, S&P 500 Index and S&P 400 Industrials Index, based on market prices at the end of each fiscal year through and including December 31, 2014,2017, and reinvestment of dividends (and taking into account the value of the TimkenSteel common shares distributed in the Spinoff).
Item 6. Selected Financial Data
Summary of Operations and Other Comparative Data:
| | | (Dollars in millions, except per share and per employee data) | 2014 | 2013 | 2012 | 2011 | 2010 | 2017 | 2016 | 2015 | 2014 | 2013 |
| Statements of Income | | |
| Net sales | $ | 3,076.2 |
| $ | 3,035.4 |
| $ | 3,359.5 |
| $ | 3,333.6 |
| $ | 2,798.6 |
| $ | 3,003.8 |
| $ | 2,669.8 |
| $ | 2,872.3 |
| $ | 3,076.2 |
| $ | 3,035.4 |
|
| Gross profit | 898.0 |
| 868.4 |
| 1,028.0 |
| 1,018.0 |
| 803.9 |
| 810.4 |
| 668.5 |
| 819.5 |
| 851.2 |
| 1,041.7 |
|
| Selling, general and administrative expenses | 542.5 |
| 546.6 |
| 554.5 |
| 540.6 |
| 484.8 |
| 521.4 |
| 470.7 |
| 457.7 |
| 611.8 |
| 324.8 |
|
| Impairment and restructuring charges | 113.4 |
| 8.7 |
| 29.5 |
| 14.4 |
| 21.7 |
| 4.3 |
| 21.7 |
| 14.7 |
| 113.4 |
| 8.7 |
|
Operating income | 208.4 |
| 305.9 |
| 444.0 |
| 463.0 |
| 297.4 |
| 284.7 |
| 174.5 |
| 255.9 |
| 125.8 |
| 708.0 |
|
Continued Dumping and Subsidy Offset Act income, net
| | — |
| 59.6 |
| — |
| — |
| — |
|
| Other income (expense), net | 19.9 |
| 6.7 |
| 102.0 |
| (0.4 | ) | 4.2 |
| 9.4 |
| (0.9 | ) | (7.5 | ) | 19.9 |
| 6.7 |
|
| Interest expense, net | 24.3 |
| 22.5 |
| 28.2 |
| 31.2 |
| 34.5 |
| 34.2 |
| 31.6 |
| 30.7 |
| 24.3 |
| 22.5 |
|
| Income from continuing operations | 149.3 |
| 175.5 |
| 331.5 |
| 280.8 |
| 179.2 |
| 202.3 |
| 141.1 |
| 191.4 |
| 85.2 |
| 434.0 |
|
| Income from discontinued operations, net of income taxes | 24.0 |
| 87.5 |
| 164.4 |
| 175.8 |
| 97.8 |
| — |
| — |
| — |
| 30.5 |
| 224.7 |
|
| Net income attributable to The Timken Company | $ | 170.8 |
| $ | 262.7 |
| $ | 495.5 |
| $ | 454.3 |
| $ | 274.8 |
| $ | 203.4 |
| $ | 140.8 |
| $ | 188.6 |
| $ | 113.2 |
| $ | 658.4 |
|
| Balance Sheets | | |
| Inventories, net | $ | 585.5 |
| $ | 582.6 |
| $ | 611.5 |
| $ | 669.6 |
| $ | 602.4 |
| $ | 738.9 |
| $ | 553.7 |
| $ | 551.1 |
| $ | 593.7 |
| $ | 590.6 |
|
| Property, plant and equipment, net | 780.5 |
| 855.8 |
| 834.1 |
| 868.6 |
| 880.3 |
| 864.2 |
| 804.4 |
| 777.8 |
| 780.5 |
| 855.8 |
|
| Total assets | 3,001.4 |
| 4,477.9 |
| 4,244.2 |
| 4,327.4 |
| 4,180.4 |
| 3,402.4 |
| 2,763.2 |
| 2,789.0 |
| 3,002.9 |
| 4,480.3 |
|
| Total debt: | | |
| Short-term debt | 7.4 |
| 18.6 |
| 14.3 |
| 22.0 |
| 22.4 |
| 105.4 |
| 19.2 |
| 62.0 |
| 7.4 |
| 18.6 |
|
| Current portion of long-term debt | 0.6 |
| 250.7 |
| 9.6 |
| 5.8 |
| 9.5 |
| 2.7 |
| 5.0 |
| 15.1 |
| 0.6 |
| 250.7 |
|
| Long-term debt | 522.1 |
| 176.4 |
| 424.9 |
| 448.6 |
| 443.0 |
| 854.2 |
| 635.0 |
| 579.4 |
| 518.4 |
| 175.6 |
|
| Total debt | $ | 530.1 |
| $ | 445.7 |
| $ | 448.8 |
| $ | 476.4 |
| $ | 474.9 |
| $ | 962.3 |
| $ | 659.2 |
| $ | 656.5 |
| $ | 526.4 |
| $ | 444.9 |
|
| Net debt (cash) | | |
| Net debt | | |
| Total debt | 530.1 |
| 445.7 |
| 448.8 |
| 476.4 |
| 474.9 |
| 962.3 |
| 659.2 |
| 656.5 |
| 526.4 |
| 444.9 |
|
| Less: cash and cash equivalents and restricted cash | (294.1 | ) | (399.7 | ) | (601.5 | ) | (468.4 | ) | (877.1 | ) | (125.4 | ) | (151.5 | ) | (129.8 | ) | (294.1 | ) | (399.7 | ) |
Net debt (cash): (1) | $ | 236.0 |
| $ | 46.0 |
| $ | (152.7 | ) | $ | 8.0 |
| $ | (402.2 | ) | |
Net debt (2) | | $ | 836.9 |
| $ | 507.7 |
| $ | 526.7 |
| $ | 232.3 |
| $ | 45.2 |
|
| Total liabilities | 1,412.3 |
| 1,829.3 |
| 1,997.6 |
| 2,284.9 |
| 2,238.6 |
| 1,927.5 |
| 1,452.3 |
| 1,439.5 |
| 1,408.7 |
| 1,828.4 |
|
| Shareholders’ equity | $ | 1,589.1 |
| $ | 2,648.6 |
| $ | 2,246.6 |
| $ | 2,042.5 |
| $ | 1,940.7 |
| |
| Total equity | | $ | 1,474.9 |
| $ | 1,310.9 |
| $ | 1,349.5 |
| $ | 1,594.2 |
| $ | 2,651.9 |
|
| Capital: | | |
| Net debt (cash) | 236.0 |
| 46.0 |
| (152.7 | ) | 8.0 |
| (402.2 | ) | |
| Shareholders’ equity | 1,589.1 |
| 2,648.6 |
| 2,246.6 |
| 2,042.5 |
| 1,940.7 |
| |
| Net debt (cash) + shareholders’ equity (capital) | $ | 1,825.1 |
| $ | 2,694.6 |
| $ | 2,093.9 |
| $ | 2,050.5 |
| $ | 1,538.5 |
| |
| Net debt | | 836.9 |
| 507.7 |
| 526.7 |
| 232.3 |
| 45.2 |
|
| Total equity | | 1,474.9 |
| 1,310.9 |
| 1,349.5 |
| 1,594.2 |
| 2,651.9 |
|
| Net debt + total equity (capital) | | $ | 2,311.8 |
| $ | 1,818.6 |
| $ | 1,876.2 |
| $ | 1,826.5 |
| $ | 2,697.1 |
|
| Other Comparative Data | | |
| Income from continuing operations / Net sales | 4.9 | % | 5.8 | % | 9.9 | % | 8.4 | % | 6.4 | % | |
| Net income attributable to The Timken Company / Net sales | 5.6 | % | 8.7 | % | 14.7 | % | 13.6 | % | 9.8 | % | |
Return on equity (2) | 9.4 | % | 6.6 | % | 14.8 | % | 13.7 | % | 9.2 | % | |
Net sales per employee (3) | $ | 188.2 |
| $ | 181.6 |
| $ | 192.0 |
| $ | 189.9 |
| $ | 169.3 |
| |
| Income from continuing operations / net sales | | 6.7 | % | 5.3 | % | 6.7 | % | 2.8 | % | 14.3 | % |
| Net income attributable to The Timken Company / net sales | | 6.8 | % | 5.3 | % | 6.6 | % | 3.7 | % | 21.7 | % |
Return on equity (3) | | 13.7 | % | 10.8 | % | 14.2 | % | 5.3 | % | 16.4 | % |
Net sales per employee (4) | | $ | 206.3 |
| $ | 185.3 |
| $ | 197.5 |
| $ | 210.9 |
| $ | 203.1 |
|
| Capital expenditures | 126.8 |
| 133.6 |
| 118.3 |
| 105.5 |
| 72.1 |
| 104.7 |
| 137.5 |
| 105.6 |
| 126.8 |
| 133.6 |
|
| Depreciation and amortization | 137.0 |
| 142.4 |
| 149.6 |
| 146.7 |
| 143.7 |
| 137.7 |
| 131.7 |
| 130.8 |
| 137.0 |
| 142.4 |
|
| Capital expenditures / Net sales | 4.1 | % | 4.4 | % | 3.5 | % | 3.2 | % | 2.6 | % | |
| Capital expenditures / net sales | | 3.5 | % | 5.2 | % | 3.7 | % | 4.1 | % | 4.4 | % |
| Dividends per share | $ | 1.00 |
| $ | 0.92 |
| $ | 0.92 |
| $ | 0.78 |
| $ | 0.53 |
| $ | 1.07 |
| $ | 1.04 |
| $ | 1.03 |
| $ | 1.00 |
| $ | 0.92 |
|
Basic earnings per share - continuing operations (4) | $ | 1.62 |
| $ | 1.84 |
| $ | 3.41 |
| $ | 2.84 |
| $ | 1.84 |
| |
Diluted earnings per share - continuing operations (4) | $ | 1.61 |
| $ | 1.82 |
| $ | 3.38 |
| $ | 2.81 |
| $ | 1.82 |
| |
Basic earnings per share (5) | $ | 1.89 |
| $ | 2.76 |
| $ | 5.11 |
| $ | 4.65 |
| $ | 2.83 |
| |
Diluted earnings per share (5) | $ | 1.87 |
| $ | 2.74 |
| $ | 5.07 |
| $ | 4.59 |
| $ | 2.81 |
| |
Net debt (cash) to capital (1) | 12.9 | % | 1.7 | % | (7.3 | )% | 0.4 | % | (26.1 | )% | |
Number of employees at year-end (6) | 16,345 |
| 16,717 |
| 17,500 |
| 17,558 |
| 16,534 |
| |
Number of shareholders (7) | 44,217 |
| 52,218 |
| 50,783 |
| 44,238 |
| 39,118 |
| |
Basic earnings per share - continuing operations (5) | | 2.62 |
| 1.79 |
| 2.23 |
| 0.92 |
| 4.56 |
|
Diluted earnings per share - continuing operations (5) | | 2.58 |
| 1.78 |
| 2.21 |
| 0.91 |
| 4.52 |
|
Basic earnings per share (6) | | 2.62 |
| 1.79 |
| 2.23 |
| 1.25 |
| 6.92 |
|
Diluted earnings per share (6) | | 2.58 |
| 1.78 |
| 2.21 |
| 1.24 |
| 6.86 |
|
Net debt to capital (2) | | 36.2 | % | 27.9 | % | 28.1 | % | 12.7 | % | 1.7 | % |
Number of employees at year-end (7) | | 15,006 |
| 14,111 |
| 14,709 |
| 14,378 |
| 14,794 |
|
Number of shareholders (8) | | 56,244 |
| 43,458 |
| 40,257 |
| 44,271 |
| 52,218 |
|
| |
| (1) | Operating income included pension settlement charges of $119.9 million during 2015. |
| |
| (2) | The Company presents net debt (cash) because it believes net debt (cash) is more representative of the Company’s financial position than total debt due to the amount of cash and cash equivalents. |
| |
(2)(3) | Return on equity is defined as income from continuing operations divided by ending shareholders’total equity. |
| |
(3) | Based on average number of employees employed during the year. |
| |
| (4) | BasedDollars in thousands, based on average number of shares outstandingemployees employed during the year. |
| |
| (5) | Based on average number of shares outstanding during the year and includes discontinued operations for all periods presented.year. |
| |
| (6) | Based on average number of shares outstanding during the year and includes discontinued operations for 2013 and 2014. |
| |
| (7) | Adjusted to exclude temporary employees from the former Steel segment (which was spunoff in June 2014) for all periods. |
| |
(7)(8) | Includes an estimated count of shareholders having common shares held for their accounts by banks, brokers and trustees for benefit plans. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in millions, except per share data)
OVERVIEW
Introduction:
The Timken Company engineers, manufactures and markets bearings, transmissions, gearboxes, belts, chain, lubrication systems, couplings, industrial clutches and brakes and related products and offers a spectrumvariety of power system rebuild and repair services around the world.services. The Company’s growing product and services portfolio features many strong industrial brands, such as Timken, Fafnir,Timken®, Fafnir®, Philadelphia Gear, DrivesGear®, Drives®, Lovejoy® and Interlube.Groeneveld®. Timken today applies its deep knowledge of metallurgy, tribologyfriction management and mechanical power transmission across the broad spectrum of bearings and related systems to improve the reliability and efficiency of machinery and equipment all around the world. Known for its quality products and collaborative technical sales model, Timken focuses on providing value to diverse markets worldwide through both original equipment manufacturers (OEMs)("OEMs") and aftermarket channels. With approximately 16,000more than 15,000 people operating in 2833 countries, Timken makes the world more productive and keeps industry in motion. Beginning in the fourth quarter of 2014, theThe Company began operatingoperates under two reportable segments: (1) Mobile Industries and (2) Process Industries. Refer to Note 15 - Segment Information for additional information on the resegmentation of the Company's business segments. The following further describes these business segments:
| |
| • | Mobile Industries serves OEM customers that manufacture off-highway equipment for the agricultural, mining and construction markets; on-highway vehicles including passenger cars, light trucks, and medium- and heavy-duty trucks; rail cars and locomotives; outdoor power equipment; rotorcraft and fixed-wing aircraft; and other mobile equipment. Beyond service parts sold to OEMs, aftermarket sales and services to individual end users, equipment owners, operators and maintenance shops are handled directly or through the Company's extensive network of authorized automotive and heavy-truck distributors. |
| |
| • | Process Industries serves OEM and end-user customers in industries that place heavy demands on the fixed operating equipment they make or use in heavy and other general industrial sectors. This includes metals, cement and aggregate production; coal and wind power generation; oil and gas extraction and refining; pulp and paper and food processing; and health and critical motion control equipment. Other applications include marine equipment, gear drives, cranes, hoists and conveyors. This segment also supports aftermarket sales and service needs through its global network of authorized industrial distributors and through the provision of services directly to end users. |
Mobile Industries offers an extensive portfolioTimken creates value by understanding customer needs and applying its know-how in attractive market sectors, serving a broad range of bearings, seals, lubrication devicescustomers and systems, as well as power transmission components,industries across the globe. The Company’s business strengths include its product technology, end-market diversity, geographic reach and aftermarket mix. Timken collaborates with OEMs to improve equipment efficiency with its engineered chain, augers and related products and maintenance services, to OEMs of: off-highwaycaptures subsequent equipment forreplacement cycles by selling largely through independent channels in the agricultural, constructionaftermarket. Timken focuses its international efforts and mining markets; on-highway vehicles including passenger cars, light trucks, and medium- and heavy-duty trucks; and rail cars, locomotives, rotor craft and fixed-wing aircraft. Beyond service parts sold to OEMs, aftermarket sales to individual end users, equipment owners, operators and maintenance shops are handled throughfootprint in regions of the Company's extensive network of authorized automotive and heavy-truck distributors, and include hub units, specialty kits and more. Mobile Industries also provides power transmission systems and flight-critical components for civil and military aircraft, which include bearings, helicopter transmission systems, rotor-head assemblies, turbine engine components, gears and housings.
Process Industries supplies industrial bearings and assemblies, power transmission componentsworld where strong macroeconomic factors such as gearsurbanization, infrastructure development and gearboxes, couplings, seals, lubricants, chains and relatedsustainability create demand for its products and services to OEMs and end users in industries that place heavy demands on operating equipment they make or use. This includes; metals, mining, cement and aggregate production; coal and wind power generation; oil and gas; pulp and paper in applications including printing presses; and cranes, hoists, drawbridges, wind energy turbines, gear drives, drilling equipment, coal conveyors, health and critical motion control equipment, marine equipment and food processing equipment. This segment also supports aftermarket sales and service needs through its global network of authorized industrial distributors. In addition, the Company’s industrial services group offers end users a broad portfolio of maintenance support and capabilities that include repair and service for bearings and gearboxes as well as electric motor rewind, repair and services.
For nearly 100 years, the Company also made and marketed steel within its steel business. However, on June 30, 2014, the Company announced that it had completed the Spinoff into a separate independent publicly traded company, TimkenSteel. The Company's Board of Directors declared a distribution of all outstanding common shares of TimkenSteel through a dividend. At the close of business on June 30, 2014, the Company's shareholders received one common share of TimkenSteel for every two common shares of the Company they held as of the close of business on June 23, 2014. The steel business has been reclassified to discontinued operations for all periods presented.
Currently,
The Timken Business Model is the specific framework for how the Company focuses its strategy on creating value that leads to growthevaluates opportunities and sustained levels of profitability. differentiates itself in the market.
Outgrowing Our Markets. The Company worksintends to create value by:
Expanding inexpand into new and existing markets by applying the Timken team’sleveraging its collective knowledge of metallurgy, friction management and mechanical power transmission to create value for ourTimken customers. Using a highly collaborative technical selling model,approach, the Company places particular emphasis on creating unique solutions for challenging and/or demanding applications. The Company intends to grow in attractive market sectors around the world, emphasizing those spaces that are highly fragmented, demand high service and value the reliability and efficiency offered by the Company'sTimken products. The Company also targets those applications that offer significant aftermarket demand, thereby providing product and services revenue throughout the equipment’s lifetime.
PerformingOperating With Excellence. Timken operates with excellence, drivinga relentless drive for exceptional results withand a passion for superior execution, theexecution. The Company embraces a continuous improvement culture that is charged with increasing efficiency, lowering costs, eliminating waste, increasing efficiency, encouraging organizational agility and building greater brand equity.equity to fuel future growth. This requires the Company’s ongoing commitment to attract, retain and develop the best talent across the world.
Deploying Capital to Drive Shareholder Value. The Company is intently focused on providing the highest returns for shareholders through its capital allocation framework, which includes: (1) investing in the core business through capital expenditures, research and development and organic growth initiatives; (2) pursuing strategic acquisitions to broaden our portfolio and capabilities, with a focus on bearings, adjacent power transmission products and related services; and (3) returning capital to shareholders through dividends and share repurchases. As part of this effort,framework, the Company also may alsorestructure, reposition or divest underperforming product lines and segments and divest non-strategicor assets.
The following items highlight certain of the Company's more significant strategic accomplishments in 2014:2017:
On November 30, 2014, the Company completed the acquisition of the assets of Revolvo Ltd. (Revolvo), a specialty bearing company based in Dudley, United Kingdom (U.K.). Revolvo makes and markets ball and roller bearings for industrial applications in process and heavy industries. Revolvo's split roller bearing housed units are widely used by mining, power generation, food and beverage, pulp and paper, metals, cements, marine and waste-water end users. Revolvo had full-year 2014 sales of approximately $9 million.Acquisitions
| |
| • | On April 3, 2017, the Company completed the acquisition of the shares of Torsion Control Products, Inc. ("Torsion Control Products"), a manufacturer of engineered torsional couplings used in the construction, agriculture and mining industries. Torsion Control Products, located in Rochester Hills, Michigan, had sales of approximately $20 million for the 12 months ended December 31, 2016. Based on markets and customers served, substantially all of the results for Torsion Control Products are reported in the Mobile Industries segment. |
| |
| • | On May 5, 2017, the Company completed the acquisition of the assets of PT Tech, Inc. ("PT Tech"), a manufacturer of engineered clutches, brakes, hydraulic power take-off units and other torque management devices used in mining, aggregate, wood recycling and metals industries. PT Tech, located in Sharon Center, Ohio, had sales of approximately $22 million for the 12 months ended April 30, 2017. Based on markets and customers served, substantially all of the results for PT Tech are reported in the Mobile Industries segment. |
| |
| • | On July 3, 2017, the Company completed the acquisition of the shares of Wenjo B.V. ("Groeneveld"), a leading provider of automated lubrication solutions used in on- and off-highway applications. Groeneveld, located in Gorinchem, Netherlands with manufacturing facilities in Italy, had sales of approximately $105 million for the 12 months ended May 31, 2017. Based on markets and customers served, substantially all of the results for Groeneveld are reported in the Mobile Industries segment. |
| |
| • | On July 5, 2017, the Company announced that the Company's majority-owned subsidiary, Timken India Ltd. ("Timken India"), entered into a definitive agreement to acquire ABC Bearings Limited ("ABC Bearings"), a manufacturer of tapered, cylindrical and spherical roller bearings and slewing rings in India. The transaction is structured as a merger of ABC Bearings into Timken India, whereby shareholders of ABC Bearings will receive shares of Timken India as consideration. The transaction is subject to receipt of various approvals in India, which are expected to be completed in the first half of 2018. ABC Bearings, located in Mumbai, India, operates primarily out of manufacturing facilities in Bharuch, Gujarat and Dehradun, Uttarakhand and had sales of approximately $29 million for the 12 months ended May 31, 2017. |
On September 8, 2014, the Company announced plans to eliminate its Aerospace segment leadership positions and integrate substantially all aerospace business activities into Mobile Industries under the direction of its Group President. The Company also announced plans to close its aerospace engine overhaul business, located in Mesa, Arizona. The Company subsequently sold the aerospace engine overhaul assets in November 2014. In addition, the Company announced plans to evaluate strategic alternatives for its aerospace MRO parts business, also located in Mesa, and close its aerospace bearing facility located in Wolverhampton, U.K., which is expected to close in early 2016. The Company began reporting the aerospace business results primarily within the Mobile Industries segment starting with the fourth quarter of 2014.Operational Highlights
| |
| • | On June 13, 2017, the Company held the grand opening for its new state-of-the-art bearing plant in Prahova, Romania, where Timken® metric tapered roller bearings are manufactured. The new plant strengthens the Company's global footprint and product offering. |
In June 2014, the Company announced that it was committing $60 million to the DeltaX initiative, a multi-year investment to improve the Company's concept-to-commercialization efforts. DeltaX will integrate technology and tools designated to enable the Company to be more agile and competitive. The Company will replace its traditional functional infrastructure with a more product-focused infrastructure, supported by new customer-facing systems. DeltaX is intended to help the Company to execute on its strategy to grow, delivering to the market place much faster and more efficently those products that customers value. As part of the $60 million DeltaX initiative, the XSell project will leverage the SAP infrastructure deployed throughout our global operations. It will provide the global sales team with new customer relationship management capabilities, as well as more consistent, mobility-enabled sales processes and business tools.
On June 13, 2014, the Company's Board of Directors authorized the Company to purchase an additional 10 million of its common shares. The total number of shares that remained authorized for repurchase was 8.9 million shares at December 31, 2014.
On April 28, 2014, the Company completed the acquisition of assets from Schulz Group (Schulz). Based in New Haven, Connecticut, Schulz provides electric motor and generator repairs, motor rewinds, custom controls and panels, systems integration, pump services, machine rebuilds, hydro services and diagnostics for a broad range of commercial and industrial applications. Schulz had full-year 2013 sales of approximately $18 million and employed 125 associates.
RESULTS OF OPERATIONS
2014 compared to 20132017 vs. 2016
Overview:
|
| | | | | | | | | | | |
| | 2014 | 2013 | $ Change | % Change |
| Net sales | $ | 3,076.2 |
| $ | 3,035.4 |
| $ | 40.8 |
| 1.3 | % |
| Income from continuing operations | 149.3 |
| 175.5 |
| (26.2 | ) | (14.9 | )% |
| Income from discontinued operations | 24.0 |
| 87.5 |
| (63.5 | ) | (72.6 | )% |
| Income attributable to noncontrolling interest | 2.5 |
| 0.3 |
| 2.2 |
| NM |
|
| Net income attributable to The Timken Company | $ | 170.8 |
| $ | 262.7 |
| $ | (91.9 | ) | (35.0 | )% |
| Diluted earnings per share: | | | |
|
|
| Continuing operations | $ | 1.61 |
| $ | 1.82 |
| $ | (0.21 | ) | (11.5 | )% |
| Discontinued operations | 0.26 |
| 0.92 |
| (0.66 | ) | (71.7 | )% |
| Diluted earnings per share | $ | 1.87 |
| $ | 2.74 |
| $ | (0.87 | ) | (31.8 | )% |
| Average number of shares—diluted | 91,224,328 |
| 95,823,728 |
| — |
| (4.8 | )% |
|
| | | | | | | | | | | |
| | 2017 | 2016 | $ Change | % Change |
| Net sales | $ | 3,003.8 |
| $ | 2,669.8 |
| $ | 334.0 |
| 12.5 | % |
| Net income | 202.3 |
| 141.1 |
| 61.2 |
| 43.4 | % |
| Net (loss) income attributable to noncontrolling interest | (1.1 | ) | 0.3 |
| (1.4 | ) | (466.7 | %) |
| Net income attributable to The Timken Company | $ | 203.4 |
| $ | 140.8 |
| $ | 62.6 |
| 44.5 | % |
| Diluted earnings per share | $ | 2.58 |
| $ | 1.78 |
| $ | 0.80 |
| 44.9 | % |
| Average number of shares—diluted | 78,911,149 |
| 79,234,324 |
| — |
| (0.4 | %) |
On January 29, 2015, the Company furnished a Current Report on Form 8-K to the Securities and Exchange Commission that included an earnings release issued that same day reporting results for the fourth quarter and full year of 2014, which was furnished as Exhibit 99.1 thereto (the Earning Release). For the twelve months ended December 31, 2014, the Earnings Release reported: (a) income from continuing operations of $147.0 million, or $1.58 per diluted share; (b) income from discontinued operations of $21.7 million, or $0.24 per diluted share; (c)The increase in net income of $168.7 million; and (d) net income attributable to The Timken Company of $166.2 million. Between the issuance of the Earnings Release and the filing of this Annual Report on Form 10-K, the Company adjusted an entry in its provision for income taxes for the three and twelve months ended December 31, 2014, reducing the provision for income taxes and increasing net income by $4.6 million, or $0.05 per diluted share.
The Company reported net sales for 2014 of approximately $3.1 billion, compared to approximately $3.0 billion in 2013, a 1.3%increase. The increase in sales was primarily due to higher volumeend-market demand and the benefit of acquisitions. The increase in net income in 2017 compared with 2016 was primarily due to improved performance across the Process Industries segment,business, as well as lower net actuarial losses due to the remeasurement of pension and other postretirement assets and obligations ("Mark-to-Market Charges"), restructuring charges, and income tax expense, partially offset by decreasedlower pre-tax U.S. Continued Dumping and Subsidy Offset Act ("CDSOA") income of $59.6 million. The improvement in business performance reflects higher volume, infavorable manufacturing performance, the Mobile Industries segment. The lower volume inbenefit of acquisitions and the Mobile Industries segment was primarily driven by planned program exits that concluded in 2013. In 2014, diluted earnings per share from continuing operations was $1.61, compared to $1.82 in 2013. The Company's net income from continuing operations in 2014, compared to 2013, was lower due to higher impairment and restructuring charges, thefavorable impact of planned program exits that concluded at the end of 2013, and pension settlement charges,foreign currency exchange rate changes, partially offset by the impact ofunfavorable price/mix and higher volume, lower manufacturing costmaterial, logistics and the gain on the sale of real estate in Sao Paulo, Brazil (Sao Paulo). Income from continuing operations also benefited from a lower effective tax rate. Impairmentselling, general and restructuring charges primarily related to goodwill impairment for two of the Company's aerospace reporting units within the Mobile Industries segment. Discontinued operations related to Company's former steel business that was spun off on June 30, 2014. Income from discontinued operations was lower in 2014 compared to 2013 as a result of separation costs incurred as a result of the Spinoff.administrative ("SG&A") expenses.
Outlook:
The Company expects 2018 full-year sales to increase approximately 1% in 20159% to 10% compared with 2017 primarily due to 2014, primarily driven byincreased demand across most end-market sectors, higher demand inpricing, the light vehicle, wind energy, marinebenefit of acquisitions and industrial aftermarket sectors, offset in large part by the favorable impact of currency-rateforeign currency exchange rate changes. The Company's earnings are expected to be lowerhigher in 2015 compared to 2014,2018 than 2017, primarily due to non-cash charges related to the settlement of certain U.S. pension obligations, partially offset by lower impairment and restructuring charges and the impact of higher demand. On January 22, 2015,volume, favorable price/mix, the Company entered into an agreement pursuant to whichbenefit of acquisitions and the Timken-Latrobe-MPB-Torrington Retirement Plan (the Plan) purchasedfavorable impact of foreign currency exchange rate changes, partially offset by higher operating costs, a group annuity contract from Prudential Insurance Company of America (Prudential) to pay future pension benefits for approximately 5,000 U.S. Timken retirees. The Company has transferred approximately $600 million of the Company's pension obligationshigher income tax rate and approximately $635 million of the pension assets to Prudential. The Company expects to incur pension settlement charges of approximately $220 million during the first quarter of 2015 in connection with this group annuity purchase.higher interest expense.
The Company expects to generate operating cash from continuing operations of approximately $345$350 million in 2015,2018, an increase from 2017 of approximately $65$113 million or 23%48%, compared to 2014, as the Company anticipates higher net income from continuing operations, excluding non-cash impairment and pension settlement charges. Pension contributions are expected to be approximately $15 million in 2015, compared to $21.1 million in 2014.lower working capital requirements. The Company expects capital expenditures of approximately 4%to be 3.5% to 4.0% of sales in 2015,2018, compared to 4.2%with 3.5% of sales in 2014.2017.
THE STATEMENTS OF INCOME
Sales by Segment:Sales:
|
| | | | | | | | | | | |
| | 2014 | 2013 | $ Change | % Change |
| Mobile Industries | $ | 1,685.4 |
| $ | 1,775.8 |
| $ | (90.4 | ) | (5.1 | )% |
| Process Industries | 1,390.8 |
| 1,259.6 |
| 131.2 |
| 10.4 | % |
| Total Company | $ | 3,076.2 |
| $ | 3,035.4 |
| $ | 40.8 |
| 1.3 | % |
|
| | | | | | | | | | | |
| | 2017 | 2016 | $ Change | % Change |
| Net sales | $ | 3,003.8 |
| $ | 2,669.8 |
| $ | 334.0 |
| 12.5 | % |
Net sales for 2014increased$40.8 million, or 1.3%, in 2017 compared to 2013,with 2016 primarily due to higher volumeorganic revenue of approximately $150$186 million, driven by increases in the Process Industries' wind energy and industrial aftermarket sectors and the Mobile Industries' rail market sector, as well as the benefit of acquisitions of $25$131 million and the favorable impact of foreign currency exchange rate changes of $17 million. The increase in organic revenue was driven by higher demand across most of the Company's market sectors led by the off-highway, industrial distribution and heavy truck sectors, partially offset by lower demand in the rail sector.
Gross Profit:
|
| | | | | | | | | | | |
| | 2017 | 2016 | $ Change | Change |
| Gross profit | $ | 810.4 |
| $ | 668.5 |
| $ | 141.9 |
| 21.2 | % |
| Gross profit % to net sales | 27.0 | % | 25.0 | % | — |
| 200 | bps |
Gross profit increased in 2017 compared with 2016 primarily due to the impact of higher volume of $74 million, the benefit of acquisitions of $52 million, favorable manufacturing performance of $49 million and lower Mark-to-Market Charges of $31 million. These factors were partially offset by planned program exits in the Mobile Industries segment that concluded in 2013higher material and logistics costs of approximately $110$34 million and the impactunfavorable price/mix of foreign currency of approximately $30$34 million.
Gross Profit:
|
| | | | | | | | | | | |
| | 2014 | 2013 | $ Change | Change |
| Gross profit | $ | 898.0 |
| $ | 868.4 |
| $ | 29.6 |
| 3.4 | % |
| Gross profit % to net sales | 29.2 | % | 28.6 | % | — |
| 60 | bps |
| Rationalization expenses included in cost of products sold | $ | 3.6 |
| $ | 5.9 |
| $ | (2.3 | ) | (39.0 | %) |
Gross profit increased in 2014 compared to 2013, primarily due to lower manufacturing costs of approximately $30 million and the impact of higher sales volume and mix, including the impact of planned program exits, of approximately $10 million. These factors were partially offset by inventory valuation adjustments of approximately $20 million.
Selling, General and Administrative Expenses:
| | | | 2014 | 2013 | $ Change | Change | 2017 | 2016 | $ Change | Change |
| Selling, general and administrative expenses | $ | 542.5 |
| $ | 546.6 |
| $ | (4.1 | ) | (0.8)% |
| $ | 521.4 |
| $ | 470.7 |
| $ | 50.7 |
| 10.8% |
Selling, general and administrative expenses % to net sales | 17.6 | % | 18.0 | % | — |
| (40 | ) bps | 17.4 | % | 17.6 | % | — |
| (20) bps |
The decreaseincrease in selling, general and administrativeSG&A expenses of $4.1 millionin 20142017 compared to 2013with 2016 was primarily due to the benefitimpact of cost reduction initiatives of approximately $25 million,acquisitions and higher incentive compensation expense, partially offset by higher expense related to incentive compensation plans of approximately $15 million and the impact of acquisitions of approximately $5 million.lower Mark-to-Market Charges.
Impairment and Restructuring Charges:
| | | | 2014 | 2013 | $ Change | 2017 | 2016 | $ Change |
| Impairment charges | $ | 98.9 |
| $ | 0.1 |
| $ | 98.8 |
| $ | 0.1 |
| $ | 3.9 |
| $ | (3.8 | ) |
| Severance and related benefit costs | 10.7 |
| 9.2 |
| 1.5 |
| 3.5 |
| 15.3 |
| (11.8 | ) |
| Exit costs | 3.8 |
| (0.6 | ) | 4.4 |
| 0.7 |
| 2.5 |
| (1.8 | ) |
| Total | $ | 113.4 |
| $ | 8.7 |
| $ | 104.7 |
| $ | 4.3 |
| $ | 21.7 |
| $ | (17.4 | ) |
Impairment and restructuring charges of $113.44.3 million in 20142017 were primarily due to goodwill and other intangible impairment chargescomprised of $96.2 million for two of the Company's aerospace reporting units within the Mobile Industries segment that were recorded in 2014. Impairment and restructuring charges for 2013 were primarily due to severance and related benefit costs associated with initiatives to reduce headcount and right-size the Company's manufacturing footprint, including the planned closure of approximately $6its bearing plant in Pulaski, Tennessee ("Pulaski").
Impairment and restructuring charges of $21.7 million due to cost-reduction initiatives relating to reductions in headcount in the bearings and power transmission business and the recognition2016 were primarily comprised of severance and related benefitsbenefit costs associated with initiatives to reduce headcount and right-size the Company's manufacturing footprint, including the planned closures of approximately $3its bearing plants in Altavista, Virginia ("Altavista"), Pulaski and Benoni, South Africa ("Benoni"). In addition, the Company recognized impairment charges of $3.9 million related toduring 2016 that were primarily associated with the closureplanned closures of the manufacturing facilityAltavista and Benoni bearing plants.
Interest Expense and Income:
|
| | | | | | | | | | | |
| | 2017 | 2016 | $ Change | % Change |
| Interest expense | $ | (37.1 | ) | $ | (33.5 | ) | $ | (3.6 | ) | 10.7 | % |
| Interest income | 2.9 |
| 1.9 |
| 1.0 |
| 52.6 | % |
Interest expense increased in St. Thomas, Ontario, Canada (St. Thomas).2017 compared to 2016 primarily due to an increase in outstanding debt mostly associated with the Groeneveld acquisition. Refer to Note 1110 - Impairment and Restructuring Charges Financing Arrangements in the Notes to the Consolidated Financial Statements for additionalfurther discussion.
Pension Settlement Charges:
|
| | | | | | | | | |
| | 2014 | 2013 | $ Change |
| Pension Settlement Charges | $ | 33.7 |
| $ | 7.2 |
| $ | 26.5 |
|
Pension settlement charges recorded in 2014 were primarily the result of the settlement of approximately $110 million of the Company's pension obligations related to its defined benefit pension plan in the United States as a result of the lump sum distributions to new retirees and certain deferred vested plan participants in 2014. Pension settlement charges in 2013 primarily related to the settlement of pension obligations for the Company's Canadian defined pension plans as a result of the closure of the Company's manufacturing facility in St. Thomas.
InterestOther Income (Expense):
|
| | | | | | | | | | | |
| | 2014 | 2013 | $ Change | % Change |
| Interest (expense) | $ | (28.7 | ) | $ | (24.4 | ) | $ | (4.3 | ) | 17.6 | % |
| Interest income | 4.4 |
| 1.9 |
| 2.5 |
| 131.6 | % |
|
| | | | | | | | | | | |
| | 2017 | 2016 | $ Change | % Change |
| CDSOA income, net | $ | — |
| $ | 59.6 |
| $ | (59.6 | ) | (100.0 | %) |
| Other income (expense), net | 9.4 |
| (0.9 | ) | 10.3 |
| NM |
|
| Total other income (expense) | $ | 9.4 |
| $ | 58.7 |
| $ | (49.3 | ) | (84.0 | %) |
CDSOA income, net in 2016 represents income recorded in connection with funds distributed to the Company from monies collected by U.S. Customs and Border Protection ("U.S. Customs") from antidumping cases, net of related professional fees. Refer to Note 21 - Continued Dumping and Subsidy Offset Act in the Notes to the Consolidated Financial Statements for further discussion.
Interest expense
The increase in other income (expense), net for 2014increased2017, compared to 20132016 was primarily due to higher average debtlower foreign currency exchange losses and lower capitalized interest. Interest income increased for 2014 compared to 2013 primarily due to interest income recognized on the deferred payments related togains recorded from the sale of the Company's former manufacturing sitefacilities in Sao Paulo.Benoni and Altavista during 2017.
Other Income (Expense):
|
| | | | | | | | | | | |
| | 2014 | 2013 | $ Change | % Change |
| Gain on sale of real estate | $ | 22.6 |
| $ | 5.4 |
| $ | 17.2 |
| 318.5 | % |
| Other income (expense), net | (2.7 | ) | 1.3 |
| (4.0 | ) | 307.7 | % |
| Total | $ | 19.9 |
| $ | 6.7 |
| $ | 13.2 |
| 197.0 | % |
During 2014, the Company recognized a gain of $22.6 million, compared to $5.4 million in 2013, related to the sale of its former manufacturing site in Sao Paulo. Refer to Note 7 - Property, Plant and Equipment for additional information on the gain.
The Company reported other expense, net in 2014 compared to other income, net in 2013 primarily due to higher charitable donations in 2014. The Company also incurred higher foreign currency exchange losses in 2014 compared to 2013.
Income Tax Expense:
| | | | 2014 | 2013 | $ Change | Change | 2017 | 2016 | $ Change | Change |
| Income tax expense | $ | 54.7 |
| $ | 114.6 |
| $ | (59.9 | ) | (52.3)% |
| $ | 57.6 |
| $ | 60.5 |
| $ | (2.9 | ) | (4.8%) |
| Effective tax rate | 26.8 | % | 39.5 | % | — |
| (1,270 | ) bps | 22.2 | % | 30.0 | % | — |
| (780) bps |
The effective tax rate for 2017 was 22.2%, which was favorable to the U.S. federal statutory rate of 35% due to earnings in certain foreign jurisdictions where the effective rate is less than 35%, U.S. foreign tax credits realized on pretaxearnings distributed to the United States, and favorable U.S. permanent deductions and tax credits. The effective tax rate was further impacted favorably by the net reversal of accruals for prior year uncertain tax positions, a valuation allowance release, and other discrete items.
These favorable impacts were partially offset by provisional amounts for the one-time net charge related to the taxation of unremitted foreign earnings and the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate enacted under the Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform"). U.S. Tax Reform includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for 2014tax years beginning after December 31, 2017. U.S. Tax Reform also requires companies to pay a one-time net charge related to the taxation of unremitted foreign earnings, creates new taxes on certain foreign sourced earnings and allows for immediate expensing of certain depreciable assets after September 27, 2017.
The effective tax rate for 2016 was favorable relative to the U.S. federal statutory rate primarily due to U.S. foreign tax credits, earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, the U.S. manufacturing deduction, the U.S. research tax credit and certain discrete tax benefits.benefits (net). These factorsfavorable impacts were partially offset by U.S. taxation of foreign income and losses at certain foreign subsidiaries where no tax benefit could be recorded, non-deductible intangible asset impairment charges recorded in the Mobile Industries segment and U.S. state and local taxes.recorded.
The effective tax rate on pretax income for 2013 was unfavorable relative to the U.S. federal statutory rate primarily due to U.S. taxation of foreign income including cash repatriation, losses at certain foreign subsidiaries where no tax benefit could be recorded and U.S. state and local taxes. These factors were partially offset by earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, U.S. foreign tax credits, the U.S. manufacturing deduction and certain discrete U.S. tax benefits.
The change in the effective tax rate in 2014for 2017 compared to 2013with 2016 was primarily due to lowerfavorable discrete tax items. Refer to the table below for additional detail of the impact of each item on income tax expense.
|
| | | |
| | 2016 to 2017 $ Change |
| Impact of global earnings at the U.S. statutory rate of 35% | $ | 20.4 |
|
| Foreign taxation impact | (10.3 | ) |
U.S. taxation (1) | (9.5 | ) |
| U.S. Tax Reform | 35.3 |
|
Net reversal of accruals for uncertain tax positions (2) | (26.3 | ) |
| Other discrete items, net | (12.5 | ) |
| Total | $ | (2.9 | ) |
(1) U.S. taxation includes the impact of foreign tax credits, U.S. Manufacturing deductions, U.S. Research and Experimentation credit, U.S. state and local taxation, U.S. taxation of foreign income, lower losses at certain foreign subsidiaries where noearnings and other U.S. items.
(2) Net reversal of accruals for uncertain tax benefit could be recorded and lower U.S. state and local taxes, partially offsetpositions were primarily driven by lower U.S. foreign tax credits, lower U.S. manufacturing deduction, non-deductible intangible asset impairment charges recorded in the Mobile Industries segment and the net effectexpiration of other discrete items.applicable statutes of limitations.
Discontinued Operations:
|
| | | | | | | | | | | |
| | 2014 | 2013 | $ Change | Change |
| Net Sales | $ | 786.2 |
| $ | 1,305.8 |
| $ | (519.6 | ) | (39.8)% |
|
| Income before income taxes | 40.0 |
| 127.1 |
| (87.1 | ) | (68.5)% |
|
| Income taxes | 16.0 |
| 39.6 |
| (23.6 | ) | (59.6)% |
|
| Operating results, net of tax | $ | 24.0 |
| $ | 87.5 |
| $ | (110.7 | ) | (72.6)% |
|
On June 30, 2014, the Company completed the Spinoff. The operating results, net of tax, included one-time transaction costs in connection with the separation of the two companies of $57.1 million and $13.0 million during 2014 and 2013, respectively. These costs included consulting and professional fees associated with preparing for and executing the Spinoff, as well as lease cancellation fees. For further discussion, please referRefer to Note 217 - Spinoff TransactionIncome Taxes in the Notes to the Consolidated Financial Statements.Statements for more information on the computation of the income tax expense in interim periods.
BUSINESS SEGMENTS
The Company's reportable segments are business units that serve different industry sectors. While the segments often operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. The primary measurement used by management to measure the financial performance of each segment is earnings before interest and taxes (EBIT).EBIT. Refer to Note 1516 - Segment Information in the Notes to the Consolidated Financial Statements for the reconciliation of EBIT by segment to consolidated income before income taxes. Effective October 1, 2014, the Company began operating under new reportable segments. The Company's two reportable segments are: Mobile Industries and Process Industries. Results of the Company's former Aerospace segment are now primarily included in the Mobile Industries segment. In addition, the Company made adjustments to the allocation of certain selling, general and administrative expenses and certain foreign currency exchange gains or losses for all prior periods presented to better reflect the Company’s operating model and new cost structure following the Spinoff and the elimination of the former Aerospace segment.
The presentation of segment results below includes a reconciliation of the changes in net sales for each segment reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of acquisitions made in 2014 and 2013 and changes in foreign currency exchange rates. The effects of acquisitions and currency exchange rates on net sales are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period. During the first quarter of 2013, the Company completed the acquisition of Interlube Systems Ltd. (Interlube). Results for Interlube are reported in the Mobile Industries segment. During the second quarter of 2013, the Company completed the acquisition of Hamilton Gear Ltd., d/b/a Standard Machine (Standard Machine), as well as substantially all of the assets of Smith Services, Inc. (Smith Services). During the second quarter of 2014, the Company acquired the assets of Schulz. During the fourth quarter of 2014, the Company acquired the assets of Revolvo. Results for Standard Machine, Smith Services, Schulz and Revolvo are reported in the Process Industries segment.
Mobile Industries Segment:
|
| | | | | | | | | | | |
| | 2014 | 2013 | $ Change | Change |
| Net sales | $ | 1,685.4 |
| $ | 1,775.8 |
| $ | (90.4 | ) | (5.1)% |
|
| EBIT | $ | 65.6 |
| $ | 193.7 |
| $ | (128.1 | ) | (66.1)% |
|
| EBIT margin | 3.9 | % | 10.9 | % | — |
| (700) bps |
|
| | | | | |
| | | | | |
| 2014 | 2013 | $ Change | % Change |
| Net sales | $ | 1,685.4 |
| $ | 1,775.8 |
| $ | (90.4 | ) | (5.1)% |
|
| Less: Acquisitions | 3.6 |
| — |
| 3.6 |
| NM |
|
| Currency | (17.1 | ) | — |
| (17.1 | ) | NM |
|
| Net sales, excluding the impact of acquisitions and currency | $ | 1,698.9 |
| $ | 1,775.8 |
| $ | (76.9 | ) | (4.3)% |
|
The Mobile Industries segment’s net sales, excluding the impact of acquisitions and currency-rate changes, decreased4.3% in 2014 compared to 2013, primarily due to lower volume of approximately $80 million. The lower volume was primarily driven by a reduction in sales to the light vehicle sector due to planned program exits that concluded in 2013 of approximately $110 million. In addition, heavy truck volume declined approximately $15 million, aerospace aftermarket volume declined approximately $5 million and aerospace original equipment volume declined approximately $5 million. These factors were partially offset by higher volume in the rail market sector of approximately $65 million. EBIT decreased in 2014 compared to 2013, primarily due to the impact of the aerospace business impairment and restructuring charges of approximately $125 million and the impact of lower sales volume and mix, including planned program exits of approximately $35 million. These factors were partially offset by the sale of real estate in Sao Paulo of approximately $25 million.
Sales for the Mobile Industries segment are expected to be flat to down approximately 2% in 2015 compared to 2014, reflecting organic growth primarily from the light vehicle market sector, offset by the impact of currency rate changes and a decline in the agriculture market sector. EBIT for the Mobile Industries segment is expected to increase in 2015 compared to 2014 as a result of lower impairment and restructuring charges and lower material costs, offset by the sale of real estate in Sao Paulo.
Process Industries Segment:
|
| | | | | | | | | | | |
| | 2014 | 2013 | $ Change | Change |
| Net sales | $ | 1,390.8 |
| $ | 1,259.6 |
| $ | 131.2 |
| 10.4% |
|
| EBIT | $ | 267.1 |
| $ | 189.3 |
| $ | 77.8 |
| 41.1% |
|
| EBIT margin | 19.2 | % | 15.0 | % | — |
| 420 | bps |
| | | | | |
| | | | | |
| 2014 | 2013 | $ Change | % Change |
| Net sales | $ | 1,390.8 |
| $ | 1,259.6 |
| $ | 131.2 |
| 10.4% |
|
| Less: Acquisitions | 16.0 |
| — |
| 16.0 |
| NM |
|
| Currency | (13.3 | ) | — |
| (13.3 | ) | NM |
|
| Net sales, excluding the impact of acquisitions and currency | $ | 1,388.1 |
| $ | 1,259.6 |
| $ | 128.5 |
| 10.2% |
|
The Process Industries segment’s net sales, excluding the impact of acquisitions and currency-rate changes, increased10.2% for 2014 compared to 2013, primarily due to an increase in volume of approximately $120 million and favorable pricing of approximately $5 million. The higher volume was primarily due to higher demand in the wind energy market sector of approximately $75 million and higher demand from the industrial aftermarket of approximately $35 million. EBIT in 2014 increased compared to 2013 primarily due to the impact of higher volume of approximately $60 million and lower material and manufacturing costs of approximately $35 million, partially offset by unfavorable sales mix of approximately $15 million and higher selling, general and administrative expenses of approximately $10 million.
Sales for the Process Industries segment are expected to increase approximately 2% to 4% in 2015 compared to 2014, driven by organic growth in the industrial aftermarket, targeted original equipment sectors, including wind energy and military marine, and the benefit of acquisitions, partially offset by the impact of currency rate changes. EBIT for the Process Industries segment is expected to increase in 2015 compared to 2014 due to increased volume.
Corporate:
|
| | | | | | | | | | | |
| | 2014 | 2013 | $ Change | Change |
| Corporate expenses | $ | 71.4 |
| $ | 70.4 |
| $ | 1.0 |
| 1.4 % |
|
| Corporate expenses % to net sales | 2.3 | % | 2.3 | % | — |
| — |
|
Corporate expenses increased in 2014 compared to 2013 primarily due to higher expense related to incentive compensation plans and foreign currency exchange losses, which were partially offset by cost reduction initiatives.
RESULTS OF OPERATIONS:
2013 compared to 2012
Overview:
|
| | | | | | | | | | | |
| | 2013 | 2012 | $ Change | % Change |
| Net sales | $ | 3,035.4 |
| $ | 3,359.5 |
| $ | (324.1 | ) | (9.6 | )% |
| Income from continuing operations | 175.5 |
| 331.5 |
| (156.0 | ) | (47.1 | )% |
| Income from discontinued operations | 87.5 |
| 164.4 |
| (76.9 | ) | (46.8 | )% |
| Income attributable to noncontrolling interest | 0.3 |
| 0.4 |
| (0.1 | ) | (25.0 | )% |
| Net income attributable to The Timken Company | $ | 262.7 |
| $ | 495.5 |
| $ | (232.8 | ) | (47.0 | )% |
| Diluted earnings per share: | | | | |
| Continuing operations | $ | 1.82 |
| $ | 3.38 |
| $ | (1.56 | ) | (46.2 | )% |
| Discontinued operations | 0.92 |
| 1.69 |
| (0.77 | ) | (45.6 | )% |
| Diluted earnings per share | $ | 2.74 |
| $ | 5.07 |
| $ | (2.33 | ) | (46.0 | )% |
| Average number of shares - diluted | 95,823,728 |
| 97,602,481 |
| — |
| (1.8 | )% |
The Company reported net sales for 2013 of approximately $3.0 billion, compared to approximately $3.4 billion in 2012, a 9.6%decrease. The sales decrease reflected lower volume across most market sectors, and the effect of currency rate changes, partially offset by favorable pricing and the impact of acquisitions. The Company's net income from continuing operations for 2013, compared to 2012, was lower due to the impact of lower volume, unfavorable sales mix and higher manufacturing costs, partially offset by lower selling, general and administrative expenses, favorable pricing and lower restructuring charges. In addition, net income from continuing operations for 2013 was lower due to the U.S. Continued Dumping and Subsidy Offset Act (CDSOA) receipts, net of expense, of $108.0 million ($68.0 million after tax, or approximately $0.69 per diluted share), received in 2012.
THE STATEMENTS OF INCOME
Sales by Segment:
|
| | | | | | | | | | | |
| | 2013 | 2012 | $ Change | % Change |
| Mobile Industries | $ | 1,775.8 |
| $ | 1,987.4 |
| $ | (211.6 | ) | (10.6 | )% |
| Process Industries | 1,259.6 |
| 1,372.1 |
| (112.5 | ) | (8.2 | )% |
| Total Company | $ | 3,035.4 |
| $ | 3,359.5 |
| $ | (324.1 | ) | (9.6 | )% |
Net sales for 2013decreased$324.1 million, or 9.6%, compared to 2012, primarily due to lower volume of approximately $315 million across most market sectors. In addition, the decrease in sales reflected planned program exits that concluded at the end of 2013 of approximately $90 million and the effect of currency rate changes of approximately $10 million, partially offset by the impact of prior-year acquisitions of $70 million and favorable pricing of $30 million.
Gross Profit:
|
| | | | | | | | | | | |
| | 2013 | 2012 | $ Change | Change |
| Gross profit | $ | 868.4 |
| $ | 1,028.0 |
| $ | (159.6 | ) | (15.5) % |
|
| Gross profit % to net sales | 28.6 | % | 30.6 | % | — |
| (200 | ) bps |
| Rationalization expenses included in cost of products sold | $ | 5.9 |
| $ | 8.3 |
| $ | (2.4 | ) | (28.9) % |
|
Gross profit decreased in 2013 compared to 2012, primarily due to the impact of lower sales volume of approximately $130 million, higher manufacturing costs of approximately $40 million and the impact of planned program exits that concluded at the end of 2013 of approximately $35 million, partially offset by favorable pricing of approximately $30 million and the impact from prior-year acquisitions of approximately $15 million.
Selling, General and Administrative Expenses:
|
| | | | | | | | | | | |
| | 2013 | 2012 | $ Change | Change |
| Selling, general and administrative expenses | $ | 546.6 |
| $ | 554.5 |
| $ | (7.9 | ) | (1.4) % |
|
| Selling, general and administrative expenses % to net sales | 18.0 | % | 16.5 | % | — |
| 150 | bps |
The decrease in selling, general and administrative expenses of $7.9 million in 2013 compared to 2012 was primarily due to lower expenses related to incentive compensation plans of approximately $30 million, partially offset by the full year impact of acquisitions of approximately $15 million.
Impairment and Restructuring Charges:
|
| | | | | | | | | |
| | 2013 | 2012 | $ Change |
| Impairment charges | $ | 0.1 |
| $ | 6.6 |
| $ | (6.5 | ) |
| Severance and related benefit costs | 9.2 |
| 18.4 |
| (9.2 | ) |
| Exit costs | (0.6 | ) | 4.5 |
| (5.1 | ) |
| Total | $ | 8.7 |
| $ | 29.5 |
| $ | (20.8 | ) |
Impairment and restructuring charges of $8.7 million in 2013 were primarily due to severance and related benefit costs of approximately $6 million due to cost-reduction initiatives relating to reductions in headcount in the bearings and power transmission business. In addition, impairment and restructuring charges for 2013 included to the recognition of severance and related benefits of approximately $3 million related to the closure of the manufacturing facility in St. Thomas. Impairment and restructuring charges of $29.5 million in 2012 were primarily due to the recognition of severance and related benefits, including approximately $10.7 million of pension curtailment charges, as well as impairment charges related to the closure of the manufacturing facility in St. Thomas and the recognition of environmental remediation costs at the former manufacturing facility in Sao Paulo. Refer to Note 11 - Impairment and Restructuring Charges in the Notes to the Consolidated Financial Statements for additional discussion.
Interest Income and (Expense):
|
| | | | | | | | | | | |
| | 2013 | 2012 | $ Change | % Change |
| Interest (expense) | $ | (24.4 | ) | $ | (31.1 | ) | $ | 6.7 |
| (21.5 | )% |
| Interest income | $ | 1.9 |
| $ | 2.9 |
| $ | (1.0 | ) | (34.5 | )% |
Interest expense for 2013 decreased compared to 2012 primarily due to lower average debt and higher capitalized interest. Interest income decreased for 2013 compared to 2012 primarily due to lower invested cash balances.
Other Income (Expense):
|
| | | | | | | | | | | |
| | 2013 | 2012 | $ Change | % Change |
| CDSOA receipts (expense), net | $ | (2.8 | ) | $ | 108.0 |
| $ | (110.8 | ) | (102.6 | )% |
| Gain on sale of real estate in Sao Paulo | 5.4 |
| — |
| 5.4 |
| NM |
|
| Other income (expense) | 4.1 |
| (6.0 | ) | 10.1 |
| (168.3 | )% |
| Total | 6.7 |
| 102.0 |
| (95.3 | ) | (93.4 | )% |
In 2013, the Company reported expenses in connection with CDSOA of $2.8 million. The Company reported CDSOA receipts, net of expense, of $108.0 million in 2012. Refer to Note 20 - Continued Dumping and Subsidy Offset Act (CDSOA) in the Notes to the Consolidated Financial Statements for additional information
In November 2013, the Company finalized the sale of its former manufacturing facility in Sao Paulo, resulting in a $5.4 million gain. The Company is recognizing the gain on the sale of this facility on the installment method. The Company recognized an additional gain of approximately $25 million in 2014 related to this transaction.
Income Tax Expense:
|
| | | | | | | | | | | |
| | 2013 | 2012 | $ Change | Change |
| Income tax expense | $ | 114.6 |
| $ | 186.3 |
| $ | (71.7 | ) | (38.5) % |
|
| Effective tax rate | 39.5 | % | 36.0 | % | — |
| 350 | bps |
The effective tax rate on pretax income for 2013 was unfavorable relative to the U.S. federal statutory rate primarily due to U.S. taxation of foreign income including cash repatriation, losses at certain foreign subsidiaries where no tax benefit could be recorded, U.S. non-deductible items and U.S. state and local taxes. These factors were partially offset by discrete U.S. tax benefits, including certain settlements related to tax audits, U.S. foreign tax credits, earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, the U.S. manufacturing deduction and the U.S research tax credit.
The effective tax rate for 2012 was slightly favorable relative to the U.S. federal statutory rate primarily due to earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, U.S. Foreign tax credits, the U.S. manufacturing deduction and certain discrete U.S. tax benefits. These factors were partially offset by losses at certain foreign subsidiaries where no tax benefits could be recorded, U.S. state and local taxes and U.S. taxation of foreign income. The change in the effective tax rate in 2013 compared to 2012 was primarily due to U.S. taxation of foreign income, including U.S. taxation on cash repatriation, losses at certain foreign subsidiaries where no tax benefit could be recorded and higher U.S. state and local taxes, partially offset by U.S. foreign tax credits, higher U.S. manufacturing deduction and the net effect of other discrete items.
BUSINESS SEGMENTS
The primary measurement used by management to measure the financial performance of each segment is EBIT. Refer to Note 15 - Segment Information in the Notes to the Consolidated Financial Statements for the reconciliation of EBIT by segment to consolidated income before income taxes.
The presentation of segment results below includes a reconciliation of the changes in net sales for each segment reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of acquisitions and divestitures completed in 2017 and 2016 and foreign currency exchange rates.rate changes. The effects of acquisitions and foreign currency exchange ratesrate changes on net sales are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period. During
The following items highlight the fourthCompany's acquisitions completed in 2017 and 2016 by segment based on the customers and underlying markets served:
The Company acquired Groeneveld during the third quarter of 2012, the Company completed the acquisition of substantially2017. Substantially all of the assets of Wazee Companies, LLC (Wazee). The acquisition of the assets of Wazee, which was completed on December 31, 2012, had no impact on the 2012 operating results. During the first quarter of 2013, the Company completed the acquisition of Interlube. Resultsresults for InterlubeGroeneveld are reported in the Mobile Industries segment. During
The Company acquired Torsion Control Products and PT Tech during the second quarter of 2013, the Company completed the acquisition of Standard Machine, as well as substantially2017. Substantially all of the assetsresults for both businesses are reported in the Mobile Industries segment.
The Company acquired the shares of Smith Services. ResultsEDT Corp. ("EDT") during the fourth quarter of 2016. Substantially all of the results for Standard Machine, Smith Services and WazeeEDT are reported in the Process Industries segment.
The Company acquired the shares of Lovejoy, Inc. ("Lovejoy") during the third quarter of 2016. Substantially all of the results for Lovejoy are reported in the Process Industries segment.
Mobile Industries Segment:
| | | | 2013 | 2012 | $ Change | Change | 2017 | 2016 | $ Change | Change |
| Net sales | $ | 1,775.8 |
| $ | 1,987.4 |
| $ | (211.6 | ) | (10.6 | )% | $ | 1,640.0 |
| $ | 1,446.4 |
| $ | 193.6 |
| 13.4 | % |
| EBIT | $ | 193.7 |
| $ | 245.2 |
| $ | (51.5 | ) | (21.0 | )% | $ | 132.1 |
| $ | 87.1 |
| $ | 45.0 |
| 51.7 | % |
| EBIT margin | 10.9 | % | 12.3 | % | — |
| (140) bps | 8.1 | % | 6.0 | % | — |
| 210 | bps |
| | | | |
| | 2017 | 2016 | $ Change | % Change |
| Net sales | | $ | 1,640.0 |
| $ | 1,446.4 |
| $ | 193.6 |
| 13.4 | % |
| Less: Acquisitions | | 96.9 |
| — |
| 96.9 |
| NM |
|
| Currency | | 9.7 |
| — |
| 9.7 |
| NM |
|
| Net sales, excluding the impact of acquisitions and currency | | $ | 1,533.4 |
| $ | 1,446.4 |
| $ | 87.0 |
| 6.0 | % |
|
| | | | | | | | | | | |
| 2013 | 2012 | $ Change | % Change |
| Net sales | $ | 1,775.8 |
| $ | 1,987.4 |
| $ | (211.6 | ) | (10.6 | )% |
| Less: Acquisitions | 27.0 |
| — |
| 27.0 |
| NM |
|
| Currency | (11.0 | ) | — |
| (11.0 | ) | NM |
|
| Net sales, excluding the impact of acquisitions and currency | $ | 1,759.8 |
| $ | 1,987.4 |
| $ | (227.6 | ) | (11.5 | )% |
The Mobile Industries segment’ssegment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased by $87.0 million or 6.0% in 2017 compared with 2016, reflecting organic growth in the off-highway and heavy truck market sectors, partially offset by decreased demand in the rail sector. EBIT increased by $45.0 million or 51.7% in 2017 compared with 2016 primarily due to higher volume of $32 million, lower Mark-to-Market Charges of $23 million, favorable manufacturing performance of $21 million, the benefit of acquisitions of $16 million, lower restructuring charges of $9 million and the impact of foreign currency exchange rate changes of $6 million. These factors were offset partially by higher material and logistics costs of $26 million, increased SG&A expense of $19 million and unfavorable price/mix of $16 million. The higher SG&A expense was primarily due to higher incentive compensation expense.
Full-year sales for the Mobile Industries segment are expected to be up approximately 9% to 11% in 2018 compared with 2017. This reflects improved demand in the off-highway and heavy truck sectors, higher pricing, the benefit of acquisitions and the favorable impact of foreign currency exchange rate changes. EBIT for the Mobile Industries segment is expected to increase in 2018 compared with 2017 primarily due to the impact of higher volume and the impact of acquisitions and currency-ratefavorable price/mix, partially offset by higher operating costs. The results for 2017 include the impacts of pension and other postretirement benefit Mark-to-Market Charges, which are not accounted for in the 2018 outlook because the amount will not be known until the fourth quarter of 2018.
Process Industries Segment:
|
| | | | | | | | | | | |
| | 2017 | 2016 | $ Change | Change |
| Net sales | $ | 1,363.8 |
| $ | 1,223.4 |
| $ | 140.4 |
| 11.5 | % |
| EBIT | $ | 220.5 |
| $ | 149.5 |
| $ | 71.0 |
| 47.5 | % |
| EBIT margin | 16.2 | % | 12.2 | % | — |
| 400 | bps |
| | | | | |
| 2017 | 2016 | $ Change | % Change |
| Net sales | $ | 1,363.8 |
| $ | 1,223.4 |
| $ | 140.4 |
| 11.5 | % |
| Less: Acquisitions | 33.9 |
| — |
| 33.9 |
| NM |
|
| Currency | 7.4 |
| — |
| 7.4 |
| NM |
|
| Net sales, excluding the impact of acquisitions and currency | $ | 1,322.5 |
| $ | 1,223.4 |
| $ | 99.1 |
| 8.1 | % |
The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, decreased11.5%increased by $99.1 million or 8.1% in 20132017 compared with 2016. The increase was primarily driven by organic growth in the industrial distribution, general industrial OE and military marine sectors. EBIT increased by $71.0 million or 47.5% in 2017 compared with 2016 primarily due to 2012,the impact of higher volume of $49 million, favorable manufacturing performance of $29 million, lower Mark-to-Market Charges of $18 million, lower restructuring charges of $7 million and the benefit of acquisitions. These factors were partially offset by unfavorable price/mix of $26 million, higher material and logistics costs of $8 million and higher SG&A expense of $7 million. The higher SG&A expense was due to higher incentive compensation expense.
Full-year sales for the Process Industries segment are expected to be up approximately 8% to 10% in 2018 compared with 2017. This reflects expected growth across most end-market sectors, led by industrial distribution, general industrial OE and industrial services, higher pricing and the favorable impact of foreign currency exchange rate changes. EBIT for the Process Industries segment is expected to increase in 2018 compared with 2017 primarily due to the impact of higher volume, favorable price/mix and the favorable impact of foreign currency exchange rate changes, partially offset by higher operating costs. The results for 2017 include the impacts of pension and other postretirement benefit Mark-to-Market Charges, which are not accounted for in the 2018 outlook because the amount will not be known until the fourth quarter of 2018.
Corporate:
|
| | | | | | | | | | |
| | 2017 | 2016 | $ Change | Change |
| Corporate expenses | $ | 58.5 |
| $ | 61.4 |
| $ | (2.9 | ) | (4.7%) |
| Corporate expenses % to net sales | 1.9 | % | 2.3 | % | — |
| (40) bps |
RESULTS OF OPERATIONS:
2016 vs. 2015
Overview:
|
| | | | | | | | | | | |
| | 2016 | 2015 | $ Change | % Change |
| Net sales | $ | 2,669.8 |
| $ | 2,872.3 |
| $ | (202.5 | ) | (7.1 | %) |
| Net income | 141.1 |
| 191.4 |
| (50.3 | ) | (26.3 | %) |
| Income attributable to noncontrolling interest | 0.3 |
| 2.8 |
| (2.5 | ) | (89.3 | %) |
| Net income attributable to The Timken Company | $ | 140.8 |
| $ | 188.6 |
| $ | (47.8 | ) | (25.3 | %) |
| Diluted earnings per share | $ | 1.78 |
| $ | 2.21 |
| $ | (0.43 | ) | (19.5 | %) |
| Average number of shares - diluted | 79,234,324 |
| 85,346,246 |
| — |
| (7.2 | %) |
The decrease in net sales was primarily due to lower end-market demand and the impact of foreign currency exchange rate changes, partially offset by the net benefit of acquisitions and divestitures. The decrease in net income in 2016 compared with 2015 was primarily due to the impact of lower volume across most market sectors, unfavorable price/mix, higher Mark-to-Market Charges, higher restructuring charges and the impact of approximately $220foreign currency exchange rate changes. These factors were offset partially by pretax CDSOA income of $59.6 million recorded in 2016, lower material and manufacturing costs and lower SG&A expenses. The prior year also included a gain from the divestiture of Timken Alcor Aerospace Technologies, Inc. ("Alcor") and higher discrete income tax benefits.
THE STATEMENTS OF INCOME
Sales:
|
| | | | | | | | | | | |
| | 2016 | 2015 | $ Change | % Change |
| Net sales | $ | 2,669.8 |
| $ | 2,872.3 |
| $ | (202.5 | ) | (7.1 | %) |
Net sales decreased in 2016 compared with 2015 primarily due to lower organic sales of $239 million, the effect of foreign currency exchange rate changes of $47 million and divestitures of $15 million, partially offset by favorable pricingthe benefit of $10acquisitions of $99 million. The lower volume was led by a decrease in off-highway volume of approximately $105 million, and a decrease in heavy truck volume of approximately $30 million,organic sales was driven by exited business. EBITlower demand across most market sectors, partially offset by growth in the automotive market sector.
Gross Profit:
|
| | | | | | | | | | |
| | 2016 | 2015 | $ Change | Change |
| Gross profit | $ | 668.5 |
| $ | 819.5 |
| $ | (151.0 | ) | (18.4%) |
| Gross profit % to net sales | 25.0 | % | 28.5 | % | — |
| (350) bps |
| Rationalization expenses included in cost of products sold | $ | 6.4 |
| $ | 3.6 |
| $ | 2.8 |
| 77.8% |
Gross profit decreased in 20132016 compared to 2012,with 2015 primarily due to the impact of lower volume of approximately $80$91 million, unfavorable price/mix of $65 million, higher Mark-to-Market Charges of $43 million, higher restructuring charges and the impact of foreign currency exchange rate changes. These factors were offset partially by lower material and manufacturing costs net of manufacturing underutilization of $52 million and the benefit of acquisitions.
Selling, General and Administrative Expenses:
|
| | | | | | | | | | | |
| | 2016 | 2015 | $ Change | Change |
| Selling, general and administrative expenses | $ | 470.7 |
| $ | 457.7 |
| $ | 13.0 |
| 2.8 | % |
| Selling, general and administrative expenses % to net sales | 17.6 | % | 15.9 | % | — |
| 170 | bps |
The increased in SG&A expenses in 2016 compared with 2015 was primarily due to higher Mark-to-Market Charges of $42 million, additional expenses from Carlstar Belt LLC ("Timken Belts"), Lovejoy and EDT acquired in September 2015, July 2016, and October 2016, respectively, partially offset by the benefit of cost reduction initiatives of $26 million, the impact of foreign currency exchange rate changes, lower depreciation expense and lower non-income tax expense.
Impairment and Restructuring Charges:
|
| | | | | | | | | |
| | 2016 | 2015 | $ Change |
| Impairment charges | $ | 3.9 |
| $ | 3.3 |
| $ | 0.6 |
|
| Severance and related benefit costs | 15.3 |
| 7.7 |
| 7.6 |
|
| Exit costs | 2.5 |
| 3.7 |
| (1.2 | ) |
| Total | $ | 21.7 |
| $ | 14.7 |
| $ | 7.0 |
|
Impairment and restructuring charges of $21.7 million in 2016 were comprised primarily of severance and related benefit costs associated with initiatives to reduce headcount and right-size the Company's manufacturing footprint, including the planned closures of the Altavista, Pulaski and Benoni bearing plants. In addition, the Company recognized impairment charges of $3.9 million during 2016 that were primarily associated with the planned closures of the Altavista and Benoni bearing plants.
Impairment and restructuring charges of $14.7 million in 2015 were primarily due to severance and related benefit costs associated with initiatives to reduce headcount, impairment charges of $3.0 million related to the Company's service center in Niles, Ohio and exit costs of approximately $35$3.0 million partially offsetrelated to the Company's termination of its relationship with one of its third-party sales representatives in Colombia.
Pension Settlement Charges:
|
| | | | | | | | | |
| | 2016 | 2015 | $ Change |
| Pension settlement charges | $ | 1.6 |
| $ | 119.9 |
| $ | (118.3 | ) |
Pension settlement charges in 2015 were primarily due to the purchase of group annuity contracts from Prudential Insurance Company of America ("Prudential") by lower restructuringtwo of the Company's U.S. defined benefit pension plans. The two group annuity contracts require Prudential to pay and administer future pension benefits for approximately 8,400 U.S. Timken retirees in the aggregate. The Company transferred a total of approximately $1.1 billion of its pension obligations and a total of approximately $1.2 billion of pension assets to Prudential in these transactions. The Company also incurred pension settlement and curtailment charges related to one of its Canadian defined benefit pension plans. As a result of the group annuity contracts, as well as pension settlement and curtailment charges related to the Canadian pension plan, the Company incurred total pension settlement and curtailment charges of approximately $15$119.9 million, lower raw material costsincluding professional fees of approximately $15$2.6 million, lower selling, general and administrative expenses of approximately $10 million, favorable sale mix of approximately $10 million, favorable pricing of $10 million and ain 2015.
Gain on Divestiture:
|
| | | | | | | | | |
| | 2016 | 2015 | $ Change |
| Gain on divestiture | $ | — |
| $ | 28.7 |
| $ | (28.7 | ) |
Gain on divestiture in 2015 was related primarily to the gain on the sale of Alcor of $29.0 million in the Company's formerfourth quarter of 2015.
Interest Expense and Income:
|
| | | | | | | | | | | |
| | 2016 | 2015 | $ Change | % Change |
| Interest expense | $ | (33.5 | ) | $ | (33.4 | ) | $ | (0.1 | ) | 0.3 | % |
| Interest income | $ | 1.9 |
| $ | 2.7 |
| $ | (0.8 | ) | (29.6 | %) |
Other Income (Expense):
|
| | | | | | | | | | | |
| | 2016 | 2015 | $ Change | % Change |
| CDSOA income, net | $ | 59.6 |
| $ | — |
| $ | 59.6 |
| NM |
|
| Fixed asset write-off | — |
| (9.7 | ) | 9.7 |
| (100.0 | %) |
| Other income (expense), net | (0.9 | ) | 2.2 |
| (3.1 | ) | (140.9 | %) |
| Total other income (expense) | $ | 58.7 |
| $ | (7.5 | ) | $ | 66.2 |
| NM |
|
CDSOA income, net in 2016 represents income recorded in connection with funds awarded to the Company from monies collected by U.S. Customs from antidumping cases, net of related professional fees.
During the fourth quarter of 2015, the Company wrote-off $9.7 million that remained in construction in process ("CIP") after the related assets were placed into service. The majority of these assets were placed into service between 2008 and 2012. This item was identified during an examination of aged balances in the CIP account. Management of the Company concluded that the correction of this error in the fourth quarter of 2015 and the presence of this error in prior periods was immaterial to all periods presented.
Income Tax Expense:
|
| | | | | | | | | | | |
| | 2016 | 2015 | $ Change | Change |
| Income tax expense | $ | 60.5 |
| $ | 26.3 |
| $ | 34.2 |
| 130.0 | % |
| Effective tax rate | 30.0 | % | 12.1 | % | — |
| 1,790 | bps |
The effective tax rate for 2016 was favorable relative to the U.S. federal statutory rate primarily due to U.S. foreign tax credits, earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, the U.S. manufacturing facilitydeduction, and certain discrete tax benefits (net). These favorable impacts were partially offset by U.S. taxation of foreign income and losses at certain foreign subsidiaries where no tax benefit could be recorded.
The effective tax rate for 2015 was 12.1%. The tax rate of 12.1% was less than the U.S. statutory rate of 35% primarily due to the tax benefits from the reversals of certain valuation allowances in Sao Pauloforeign jurisdictions, U.S. foreign tax credits, earnings in certain foreign jurisdictions where the effective tax rate was less than 35%, reversals of approximately $5 million. Restructuring chargesreserves for uncertain tax positions, state and local taxes, the U.S. manufacturing deduction, the U.S. research tax credit and other U.S. tax benefits. These factors were offset by U.S. taxation of foreign earnings, recording of deferred tax liabilities related to foreign branch operations, and losses at certain foreign subsidiaries where no tax benefit could be recorded.
The change in the closureeffective tax rate for 2016 compared with 2015 was primarily due to unfavorable discrete items. Refer to the table below for additional detail of the manufacturing facilityimpact of each item on income tax expense.
|
| | | |
| | 2015 to 2016 $ Change |
| Impact of global earnings at the U.S. statutory rate of 35% | $ | (5.6 | ) |
| Foreign taxation impact | 10.8 |
|
U.S. taxation (1) | (5.8 | ) |
| Other discrete items, net | 34.8 |
|
| Total | $ | 34.2 |
|
(1) U.S. taxation includes the impact of foreign tax credits, U.S. Manufacturing deductions, U.S. Research and Experimentation credit, U.S. state and local taxation, U.S. taxation of foreign earnings and other U.S. items.
BUSINESS SEGMENTS
The primary measurement used by management to measure the financial performance of each segment is EBIT. Refer to Note 16 - Segment Information in St. Thomasthe Notes to the Consolidated Financial Statements for the reconciliation of EBIT by segment to consolidated income before income taxes.
The presentation of segment results below includes a reconciliation of the changes in net sales for each segment reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of acquisitions and divestitures completed in 2016 and 2015 and foreign currency exchange rate changes. The effects of acquisitions, divestitures and foreign currency exchange rate changes on net sales are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period.
The following items highlight the Company's acquisitions and divestitures completed in 2016 and 2015:
The Company acquired EDT during the fourth quarter of 2016. Results for EDT are reported in the Process Industries segment.
The Company acquired Lovejoy during the third quarter of 2016. Substantially all of the results for Lovejoy are reported in the Process Industries segment based on the customers and underlying markets served.
The Company sold Alcor during the fourth quarter of 2015. Results for Alcor prior to the sale were reported in the Mobile Industries segment.
The Company acquired Timken Belts during the third quarter of 2015. Results for Timken Belts are reported in the Mobile Industries and Process Industries segments based on the customers and underlying markets served.
Mobile Industries Segment:
|
| | | | | | | | | | |
| | 2016 | 2015 | $ Change | Change |
| Net sales | $ | 1,446.4 |
| $ | 1,558.3 |
| $ | (111.9 | ) | (7.2%) |
| EBIT | $ | 87.1 |
| $ | 205.5 |
| $ | (118.4 | ) | (57.6%) |
| EBIT margin | 6.0 | % | 13.2 | % | — |
| (720) bps |
|
| | | | | | | | | | | |
| 2016 | 2015 | $ Change | % Change |
| Net sales | $ | 1,446.4 |
| $ | 1,558.3 |
| $ | (111.9 | ) | (7.2 | %) |
| Less: Acquisitions | 46.8 |
| — |
| 46.8 |
| NM |
|
| Divestitures | (15.7 | ) | — |
| (15.7 | ) | NM |
|
| Currency | (22.8 | ) | — |
| (22.8 | ) | NM |
|
Net sales, excluding the impact of acquisitions,
divestitures and currency | $ | 1,438.1 |
| $ | 1,558.3 |
| $ | (120.2 | ) | (7.7 | %) |
The Mobile Industries segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, decreased $120.2 million or 7.7% in 2016 compared with 2015. The decline in net sales was primarily driven by a decrease in the rail, off-highway, aerospace and heavy truck market sectors, partially offset by organic growth in the automotive market sector. EBIT was lower in 20132016 compared with 2015 primarily due to 2012.unfavorable price/mix of $52 million, higher Mark-to-Market Charges of $43 million, the impact of lower volume of $35 million, higher restructuring charges, the impact of foreign currency exchange rate changes and the net unfavorable impact of acquisitions and divestitures, partially offset by lower material and manufacturing costs net of manufacturing underutilization of $46 million and lower SG&A expenses. EBIT for 2015 also included a $29 million gain on the sale of Alcor.
Process Industries Segment:
| | | | 2013 | 2012 | $ Change | Change | 2016 | 2015 | $ Change | Change |
| Net sales | $ | 1,259.6 |
| $ | 1,372.1 |
| $ | (112.5 | ) | (8.2) % |
| $ | 1,223.4 |
| $ | 1,314.0 |
| $ | (90.6 | ) | (6.9%) |
| EBIT | $ | 189.3 |
| $ | 261.8 |
| $ | (72.5 | ) | (27.7) % |
| $ | 149.5 |
| $ | 207.6 |
| $ | (58.1 | ) | (28.0%) |
| EBIT margin | 15.0 | % | 19.1 | % | — |
| (410 | ) bps | 12.2 | % | 15.8 | % | — |
| (360) bps |
| | | | | |
| 2013 | 2012 | $ Change | % Change | 2016 | 2015 | $ Change | % Change |
| Net sales | $ | 1,259.6 |
| $ | 1,372.1 |
| $ | (112.5 | ) | (8.2) % |
| $ | 1,223.4 |
| $ | 1,314.0 |
| $ | (90.6 | ) | (6.9 | %) |
| Less: Acquisitions | 58.8 |
| — |
| 58.8 |
| NM |
| 52.4 |
| — |
| 52.4 |
| NM |
|
| Currency | 0.7 |
| — |
| 0.7 |
| NM |
| (23.8 | ) | — |
| (23.8 | ) | NM |
|
| Net sales, excluding the impact of acquisitions and currency | $ | 1,200.1 |
| $ | 1,372.1 |
| $ | (172.0 | ) | (12.5) % |
| $ | 1,194.8 |
| $ | 1,314.0 |
| $ | (119.2 | ) | (9.1 | %) |
The Process Industries segment’ssegment's net sales, excluding the effecteffects of acquisitions and currency-rateforeign currency exchange rate changes, decreased12.5% for 2013 $119.2 million or 9.1% in 2016 compared to 2012,with 2015. The decline was primarily due to lower volume of approximately $190 million, primarily offset by favorable pricing of $20 million. The lower volume was seendemand across allthe heavy industries (mainly oil and gas), industrial aftermarket, military marine and wind energy market sectors. EBIT decreasedwas lower in 20132016 compared to 2012with 2015 primarily due to the impact of lower volume of approximately $80$56 million, the impacthigher Mark-to-Market Charges of higher manufacturing costs$25 million and unfavorable price/mix, partially offset by lower SG&A expenses of approximately $20 million and unfavorable sales mixlower material and manufacturing costs net of approximately $15manufacturing underutilization. EBIT in 2015 also included a charge of $8.2 million related to the write-off of certain CIP balances.
Corporate:
|
| | | | | | | | | | | |
| | 2016 | 2015 | $ Change | Change |
| Corporate expenses | $ | 61.4 |
| $ | 44.8 |
| $ | 16.6 |
| 37.1 | % |
| Corporate expenses % to net sales | 2.3 | % | 1.6 | % | — |
| 70 | bps |
Corporate expenses increased in 2016 compared with 2015 primarily due to higher Mark-to-Market Charges of $17 million, partially offset by favorable pricing of approximately $20 million, lower selling, general and administrative expenses of approximately $10 million and lower material costs of approximately $10 million.cost reduction initiatives.
Corporate:
|
| | | | | | | | | | | |
| | 2013 | 2012 | $ Change | Change |
| Corporate expenses | $ | 70.4 |
| $ | 69.0 |
| $ | 1.4 |
| 2.0% |
|
| Corporate expenses % to net sales | 2.3 | % | 2.1 | % | — |
| 20 | bps |
Corporate expenses decreased in 2013 compared to 2012, primarily due to lower expense related to incentive compensation plans.
THE BALANCE SHEETS
The following discussion is a comparison of the Consolidated Balance Sheets at December 31, 20142017 and 2013.2016.
Current Assets:
| | | December 31, | | | December 31, | | |
| 2014 | 2013 | $ Change | % Change | 2017 | 2016 | $ Change | % Change |
| Cash and cash equivalents | $ | 278.8 |
| $ | 384.6 |
| $ | (105.8 | ) | (27.5 | )% | $ | 121.6 |
| $ | 148.8 |
| $ | (27.2 | ) | (18.3 | %) |
| Restricted cash | 15.3 |
| 15.1 |
| 0.2 |
| 1.3 | % | 3.8 |
| 2.7 |
| 1.1 |
| 40.7 | % |
| Accounts receivable, net | 475.7 |
| 444.0 |
| 31.7 |
| 7.1 | % | 524.9 |
| 438.0 |
| 86.9 |
| 19.8 | % |
| Inventories, net | 585.5 |
| 582.6 |
| 2.9 |
| 0.5 | % | 738.9 |
| 553.7 |
| 185.2 |
| 33.4 | % |
| Deferred income taxes | 49.9 |
| 56.2 |
| (6.3 | ) | (11.2 | )% | |
| Deferred charges and prepaid expenses | 25.2 |
| 26.8 |
| (1.6 | ) | (6.0 | )% | 29.7 |
| 20.3 |
| 9.4 |
| 46.3 | % |
| Other current assets | 51.5 |
| 61.7 |
| (10.2 | ) | (16.5 | )% | 81.2 |
| 48.4 |
| 32.8 |
| 67.8 | % |
| Current assets, discontinued operations | — |
| 366.5 |
| (366.5 | ) | (100.0 | )% | |
| Total current assets | $ | 1,481.9 |
| $ | 1,937.5 |
| $ | (455.6 | ) | (23.5 | )% | $ | 1,500.1 |
| $ | 1,211.9 |
| $ | 288.2 |
| 23.8 | % |
Refer to the "Cash Flows" section for discussion on the change in cash and cash equivalents decreased primarily due to the Company's purchase of approximately 5.2 million of its common shares for an aggregate of $270.9 million during 2014.equivalents. Accounts receivable, net increased as a result of primarily due to higher sales in December 20142017 compared to December 2013, partially offset by2016, current-year acquisitions of $28 million and the impact of foreign currency exchange rate changes of $17 million.
Inventories, net increased due to higher allowance for doubtful accountsdemand, current-year acquisitions of $3.6$29 million and the impact of foreign currency exchange rate changes of $27 million. Other current assets decreasedincreased primarily due to the liquidation of a portion of the Company's short-term investments of approximately $10 million. Current assets, discontinued operations at December 31, 2013an increase in receivables for value-added taxes for several foreign legal entities and an income tax receivable related to the Spinoff on June 30, 2014 and primarily included accounts receivable and inventory.overpayment of current year income taxes in the United States.
Property, Plant and Equipment, Net:
| | | December 31, | | | December 31, | | |
| 2014 | 2013 | $ Change | % Change | 2017 | 2016 | $ Change | % Change |
| Property, plant and equipment | $ | 2,164.1 |
| $ | 2,395.3 |
| $ | (231.2 | ) | (9.7 | )% | $ | 2,405.6 |
| $ | 2,233.0 |
| $ | 172.6 |
| 7.7 | % |
| Less: allowances for depreciation | (1,383.6 | ) | (1,539.5 | ) | 155.9 |
| 10.1 | % | |
| Less: accumulated depreciation | | (1,541.4 | ) | (1,428.6 | ) | (112.8 | ) | (7.9 | %) |
| Property, plant and equipment, net | $ | 780.5 |
| $ | 855.8 |
| $ | (75.3 | ) | (8.8 | )% | $ | 864.2 |
| $ | 804.4 |
| $ | 59.8 |
| 7.4 | % |
The decreaseincrease in property, plant and equipment, net in 20142017 was primarily due to the reclassification of approximately $45 million of capitalized software from property, plant and equipment to intangible assets in 2014, and the impact of currency-rateforeign currency exchange rate changes of approximately $20$34 million and acquisitions in 2017 of $32 million. See "Other Disclosures - Capital Expenditures" for more information.
Other Assets:
| | | December 31, | | | December 31, | | |
| 2014 | 2013 | $ Change | % Change | 2017 | 2016 | $ Change | % Change |
| Goodwill | $ | 259.5 |
| $ | 346.1 |
| $ | (86.6 | ) | (25.0 | )% | $ | 511.8 |
| $ | 357.5 |
| $ | 154.3 |
| 43.2 | % |
| Non-current pension assets | 176.2 |
| 223.5 |
| (47.3 | ) | (21.2 | )% | 19.7 |
| 32.1 |
| (12.4 | ) | (38.6 | %) |
| Other intangible assets | 239.8 |
| 207.4 |
| 32.4 |
| 15.6 | % | 420.6 |
| 271.0 |
| 149.6 |
| 55.2 | % |
| Deferred income taxes | | 61.0 |
| 51.4 |
| 9.6 |
| 18.7 | % |
| Other non-current assets | 63.5 |
| 58.4 |
| 5.1 |
| 8.7 | % | 25.0 |
| 34.9 |
| (9.9 | ) | (28.4 | %) |
| Non-current assets, discontinued operations | — |
| 849.2 |
| (849.2 | ) | (100.0 | )% | |
| Total other assets | $ | 739.0 |
| $ | 1,684.6 |
| $ | (945.6 | ) | (56.1 | )% | $ | 1,038.1 |
| $ | 746.9 |
| $ | 291.2 |
| 39.0 | % |
The decreaseincrease in goodwill was primarily due to $150 million of goodwill acquired from acquisitions in 2017 and the impairmentimpact of two of the Company's aerospace reporting units in 2014.foreign currency exchange rate changes. The decrease in non-current pension assets was primarily due to a decrease in the discount rate used to measureimplementation of new mortality assumptions and experience losses for the Company'sCompany’s U.S. defined benefit pension plans, as well aswhich negatively impacted funded status. See Note 14 - Retirement Benefit Plans in the adoption ofNotes to the new RP-2014 mortality tables. Consolidated Financial Statements for additional information.
The increase in other intangible assets was primarily due to the reclassification of approximately $45$174 million of capitalizedintangible assets acquired from the current-year acquisitions and current-year expenditures for software from property, plant and equipment to other intangible assets,of $8 million, partially offset by current year amortization expense. Non-currentin 2017 of $40 million. The decrease in other non-current assets discontinued operations at December 31, 2013 relatedis primarily due to the Spinoff and primarily included property, plant and equipment.decrease in the fair value of derivative assets.
Current Liabilities:
| | | December 31, | | | December 31, | | |
| 2014 | 2013 | $ Change | % Change | 2017 | 2016 | $ Change | % Change |
| Short-term debt | $ | 7.4 |
| $ | 18.6 |
| $ | (11.2 | ) | (60.2 | )% | $ | 105.4 |
| $ | 19.2 |
| $ | 86.2 |
| 449.0 | % |
| Current portion of long-term debt | | 2.7 |
| 5.0 |
| (2.3 | ) | (46.0 | %) |
| Accounts payable | 143.9 |
| 139.9 |
| 4.0 |
| 2.9 | % | 265.2 |
| 176.2 |
| 89.0 |
| 50.5 | % |
| Salaries, wages and benefits | 146.7 |
| 131.1 |
| 15.6 |
| 11.9 | % | 127.9 |
| 85.9 |
| 42.0 |
| 48.9 | % |
| Income taxes payable | 80.2 |
| 106.7 |
| (26.5 | ) | (24.8 | )% | 9.8 |
| 16.9 |
| (7.1 | ) | (42.0 | %) |
| Other current liabilities | 155.0 |
| 180.8 |
| (25.8 | ) | (14.3 | )% | 160.7 |
| 149.5 |
| 11.2 |
| 7.5 | % |
| Current portion of long-term debt | 0.6 |
| 250.7 |
| (250.1 | ) | (99.8 | )% | |
| Current liabilities, discontinued operations | — |
| 152.3 |
| (152.3 | ) | (100.0 | )% | |
| Total current liabilities | $ | 533.8 |
| $ | 980.1 |
| $ | (446.3 | ) | (45.5 | )% | $ | 671.7 |
| $ | 452.7 |
| $ | 219.0 |
| 48.4 | % |
The decreaseincrease in short-term debt during 2014 was primarily due to lowerthe change in classification of the outstanding borrowings of $63 million under the Amended and Restated Asset Securitization Agreement ("Accounts Receivable Facility"), as the agreement is expected to expire in November 2018, and higher borrowings of $23 million under foreign lines of credit. Salaries, wages and benefits increased primarily due to theThe increase in accruals for incentive based compensation plans. The decrease in income taxesaccounts payable was primarily due to lower current year income tax expense compared to 2013,increased purchasing activity, as well as higher taxes paid. days outstanding driven by the Company's ongoing initiative to extend payment terms with its suppliers.
The decreaseincrease in accrued salaries, wages and benefits was primarily due to higher accruals for incentive compensation expense, as well as current-year acquisitions. The increase in other current liabilities was primarily due to the recognition of deferred revenue related to the sale of the Company's former manufacturing sitehigher accrued customer rebates, partially offset by lower restructuring accruals.
Non-Current Liabilities:
|
| | | | | | | | | | | |
| December 31, | | |
| 2017 | 2016 | $ Change | % Change |
| Long-term debt | $ | 854.2 |
| $ | 635.0 |
| $ | 219.2 |
| 34.5 | % |
| Accrued pension cost | 167.3 |
| 154.7 |
| 12.6 |
| 8.1 | % |
| Accrued postretirement benefits cost | 122.6 |
| 131.5 |
| (8.9 | ) | (6.8 | %) |
| Deferred income taxes | 44.0 |
| 3.9 |
| 40.1 |
| NM |
|
| Other non-current liabilities | 67.7 |
| 74.5 |
| (6.8 | ) | (9.1 | %) |
| Total non-current liabilities | $ | 1,255.8 |
| $ | 999.6 |
| $ | 256.2 |
| 25.6 | % |
The increase in Sao Paulo, as well as a reduction in accrued restructuring charges. The decrease in the current portion of long-term debt was primarily due to the Company’s $250issuance of €150 million aggregate principal amount($179.3 million at December 31, 2017) of fixed-rate 6.0%2.02% senior unsecured notes (2014 Notes) being repaid at maturity inon September 2014. Current liabilities, discontinued operations7, 2017 ("2027 Notes") and new borrowings of €100 million ($119.7 million at December 31, 2013 related2017) under a variable-rate term loan ("2020 Term Loan") that were both used to refinance the SpinoffGroeneveld acquisition, partially offset by the change in classification of the outstanding borrowings under the Accounts Receivable Facility in accordance with the terms of the agreement and primarily included accounts payable and other accruals.the reduction in borrowings of $32 million under the Company's Senior Credit Facility.
Non-Current Liabilities:
|
| | | | | | | | | | | |
| December 31, | | |
| 2014 | 2013 | $ Change | % Change |
| Long-term debt | $ | 522.1 |
| $ | 176.4 |
| $ | 345.7 |
| 196.0 | % |
| Accrued pension cost | 165.9 |
| 159.0 |
| 6.9 |
| 4.3 | % |
| Accrued postretirement benefits cost | 141.8 |
| 138.3 |
| 3.5 |
| 2.5 | % |
| Deferred income taxes | 4.1 |
| 82.9 |
| (78.8 | ) | (95.1 | )% |
| Other non-current liabilities | 44.6 |
| 55.9 |
| (11.3 | ) | (20.2 | )% |
| Non-current liabilities, discontinued operations | — |
| 236.7 |
| (236.7 | ) | (100.0 | )% |
| Total non-current liabilities | $ | 878.5 |
| $ | 849.2 |
| $ | 29.3 |
| 3.5 | % |
The increase in long-term debt during 2014 was primarily due to the issuance of $350 million aggregate principal amount of fixed-rate 3.875% senior unsecured notes that mature on September 1, 2024 (2024 Notes). The increase in accrued pension cost was primarily due to a decrease in the discount rate used to measure the projectedobligation for the Company's unfunded defined benefit obligation, as well as the adoption of the new RP-2014 mortality tables.pension plans. The increase in accrued postretirement benefits costdeferred income taxes was primarily due to deferred taxes recognized as a decrease inresult of the discount rate used to measure the accumulated benefit obligation. The decrease in deferred income taxes related primarily to the reductionacquisition of pre-paid pension assets, impairment of intangible assets and depreciation of fixed assets. Non-current liabilities, discontinued operations at December 31, 2013 related to the Spinoff and primarily included long-term debt, accrued pension cost and accrued postretirement benefits cost.Groeneveld.
Shareholders’ Equity:
| | | December 31, | | | December 31, | | |
| 2014 | 2013 | $ Change | % Change | 2017 | 2016 | $ Change | % Change |
| Common stock | $ | 952.5 |
| $ | 949.5 |
| $ | 3.0 |
| 0.3 | % | $ | 956.9 |
| $ | 960.0 |
| $ | (3.1 | ) | (0.3 | %) |
| Earnings invested in the business | 1,615.4 |
| 2,586.4 |
| (971.0 | ) | (37.5 | )% | 1,408.4 |
| 1,289.3 |
| 119.1 |
| 9.2 | % |
| Accumulated other comprehensive loss | (482.5 | ) | (626.1 | ) | 143.6 |
| (22.9 | )% | (38.3 | ) | (77.9 | ) | 39.6 |
| (50.8 | %) |
| Treasury shares | (509.2 | ) | (273.2 | ) | (236.0 | ) | (86.4 | )% | (884.3 | ) | (891.7 | ) | 7.4 |
| 0.8 | % |
| Noncontrolling interest | 12.9 |
| 12.0 |
| 0.9 |
| 7.5 | % | 32.2 |
| 31.2 |
| 1.0 |
| 3.2 | % |
| Total equity | $ | 1,589.1 |
| $ | 2,648.6 |
| $ | (1,059.5 | ) | (40.0 | )% | $ | 1,474.9 |
| $ | 1,310.9 |
| $ | 164.0 |
| 12.5 | % |
Earnings invested in the business decreasedin 2014 primarily due2017 increased by net income attributable to the Spinoff. Company of $203.4 million, partially offset by dividends declared of $83.3 million.
The decrease in accumulated other comprehensive loss was primarily due to a $228.4 million after-tax adjustment related to the Spinoff, partially offset by a pension and postretirement liability adjustment of $43.1 million and a foreign currency translation adjustmentadjustments of $41.3$44.7 million. The pension and postretirement liability adjustment was primarily due to a decrease in the discount rate used to measure the pension and postretirement plan obligations, as well as the adoption of the new RP-2014 mortality tables, partially offset by higher than expected returns on plan assets, amortization of net actuarial losses and pension settlement charges. The foreign currency translation adjustment wasadjustments were due to the strengtheningweakening of the U.S. dollar against mostrelative to other currencies. The increase in treasury shares was primarily due toforeign currencies, including the Company's purchase during 2014Chinese Yuan, Romanian Leu, Indian Rupee and Polish Zloty. See "Other Matters - Foreign Currency" for further discussion regarding the impact of 5.2 million of its common shares for an aggregate of $270.9 million, partially offset by shares issued pursuant to stock compensation plans.foreign currency translation.
CASH FLOWS
|
| | | | | | | | | |
| | 2014 | 2013 | $ Change |
| Net cash provided by operating activities - continuing operations | $ | 281.5 |
| $ | 292.8 |
| $ | (11.3 | ) |
| Net cash provided by operating activities - discontinued operations | 25.5 |
| 137.2 |
| (111.7 | ) |
| Net cash provided by operating activities | 307.0 |
| 430.0 |
| (123.0 | ) |
| Net cash used by investing activities - continuing operations | (117.7 | ) | (184.1 | ) | 66.4 |
|
| Net cash used by investing activities - discontinued operations | (77.0 | ) | (191.9 | ) | 114.9 |
|
| Net cash used by investing activities | (194.7 | ) | (376.0 | ) | 181.3 |
|
| Net cash used by financing activities - continuing operations | (302.2 | ) | (249.3 | ) | (52.9 | ) |
| Net cash provided by financing activities - discontinued operations | 100.0 |
| — |
| 100.0 |
|
| Net cash used by financing activities | (202.2 | ) | (249.3 | ) | 47.1 |
|
| Effect of exchange rate changes on cash | (15.9 | ) | (6.5 | ) | (9.4 | ) |
| (Decrease) in cash and cash equivalents | $ | (105.8 | ) | $ | (201.8 | ) | $ | 96.0 |
|
|
| | | | | | | | | |
| | 2017 | 2016 | $ Change |
| Net cash provided by operating activities | $ | 236.8 |
| $ | 403.9 |
| $ | (167.1 | ) |
| Net cash used in investing activities | (448.7 | ) | (211.0 | ) | (237.7 | ) |
| Net cash provided by (used in) financing activities | 167.0 |
| (171.3 | ) | 338.3 |
|
| Effect of exchange rate changes on cash | 17.7 |
| (2.4 | ) | 20.1 |
|
| (Decrease) increase in cash and cash equivalents | $ | (27.2 | ) | $ | 19.2 |
| $ | (46.4 | ) |
Operating Activities:
Operating activities provided net cash of $307.0$236.8 million in 2014,2017, compared to $430.0with net cash of $403.9 million provided in 2013.2016. The decrease in cash from operating activities was primarily due to an increase in cash used for working capital items of $107.2 million, the unfavorable impact of income taxes on cash of $45.1 million, the non-cash impact of lower pension and other postretirement expense of $55.1 million and the impact of foreign currency exchange rate changes of $15.6 million, partially offset by higher net income of $61.2 million and the non-cash impact of higher stock-based compensation expense of $10.6 million. Refer to the tables below for additional detail of the impact of the factors on net cash provided by discontinued operations and higher cash used for income taxes and working capital items, partially offset by lower pension contributions and other postretirement benefit payments and an increase in income from continuing operations adjusted for impairment charges. Net cash provided by discontinued operations decreased to $25.5 million in 2014 from $137.2 million in 2013 primarily as a result of separation costs incurred to effect the Spinoff. Income taxes represented a use of cash of $15.3 million in 2014, after representing a source of cash of $67.5 million in 2013, as the Company incurred lower tax expense and paid higher taxes in 2014 compared to 2013. Net income from continuing operations decreased $30.7 million in 2014 compared to 2013, largely due to the impact from $98.9 million of impairment charges that were incurred in 2014. Pension and other postretirement benefit contributions and payments were $49.9 million in 2014, compared to $93.4 million in 2013.operating activities.
The following chart displays the impact of working capital items on cash during 20142017 and 2013:
2016, respectively:
| | | | 2014 | 2013 | 2017 | 2016 | $ Change |
| Cash Provided (Used): | | |
| Cash (used in) provided: | | |
| Accounts receivable | $ | (48.3 | ) | $ | (4.6 | ) | $ | (42.3 | ) | $ | 20.3 |
| $ | (62.6 | ) |
| Inventories | (26.8 | ) | 34.6 |
| (132.1 | ) | 10.1 |
| (142.2 | ) |
| Trade accounts payable | 8.0 |
| 0.9 |
| 70.7 |
| 12.2 |
| 58.5 |
|
| Other accrued expenses | 2.2 |
| (39.6 | ) | 36.3 |
| (2.8 | ) | 39.1 |
|
| Cash (used in) provided in working capital items | | $ | (67.4 | ) | $ | 39.8 |
| $ | (107.2 | ) |
The following table displays the impact of income taxes on cash during 2017 and 2016, respectively:
|
| | | | | | | | | |
| | 2017 | 2016 | $ Change |
| Accrued income tax expense | $ | 57.6 |
| $ | 60.5 |
| $ | (2.9 | ) |
| Income tax payments | (89.9 | ) | (49.7 | ) | (40.2 | ) |
| Other miscellaneous | (4.3 | ) | (2.3 | ) | (2.0 | ) |
| Change in income taxes | $ | (36.6 | ) | $ | 8.5 |
| $ | (45.1 | ) |
Investing Activities:
Net cash used in investing activities used cash of $194.7$448.7 million in 2014 compared to $376.0 million2017 increased from the same period in 2013. The decrease was2016 primarily due to a $114.9$274.2 million decrease in investing activities from discontinued operations, a $42.5 million decreaseincrease in cash used for acquisitions, partially offset by a $6.8$32.8 million decreasereduction in cash used for capital expenditures, as well as a $18.9 million increase in cash from the disposal of property, plant and equipment primarily due to the sale of real estate in Sao Paulo and South Africa.expenditures.
Financing Activities:
Net cash usedprovided by financing activities was $202.2 million and $249.3$167.0 million in 2014 and 2013, respectively.2017 compared with net cash of $171.3 million used in financing activities in 2016. The decreased cash used by financing activitiesincrease was primarily due to net cash provided by discontinued operations and a decreasean increase in net borrowings partially offset by increased purchases of common shares$274.9 million, primarily used to fund the Groeneveld acquisition that closed on July 3, 2017, and lower cash used in 2014 and cash transferred to TimkenSteel. The Company purchased 5.2share repurchases of $57.6 million of its common shares for an aggregate of $270.9 million in 2014 after purchasing 3.4 million of its common shares for an aggregate of $189.2 million in 2013. In addition, the Company transferred cash of $46.5 million to TimkenSteel in connectionduring 2017 compared with the Spinoff. Net cash from discontinued operations provided $100 million in the first six months of 2014 as TimkenSteel borrowed $100 million under its line of credit prior to the Spinoff. Net borrowings provided cash of $85.7 million in 2014 after using cash of $3.2 million in 2013.2016.
LIQUIDITY AND CAPITAL RESOURCES
Total debt was $530.1 million and $445.7 million at December 31, 2014 and 2013, respectively. Debt exceeded cash and cash equivalents by $236.0 million and $46.0 million at December 31, 2014 and 2013, respectively. The ratio of net debt to capital was 12.9% and 1.7% at December 31, 2014 and 2013, respectively.
Reconciliation of total debt to net debt and the ratio of net debt to capital:
Net Debt:
| | | December 31, | December 31, |
| 2014 | 2013 | 2017 | 2016 |
| Short-term debt | $ | 7.4 |
| $ | 18.6 |
| $ | 105.4 |
| $ | 19.2 |
|
| Current portion of long-term debt | 0.6 |
| 250.7 |
| 2.7 |
| 5.0 |
|
| Long-term debt | 522.1 |
| 176.4 |
| 854.2 |
| 635.0 |
|
| Total debt | $ | 530.1 |
| $ | 445.7 |
| $ | 962.3 |
| $ | 659.2 |
|
| Less: Cash and cash equivalents | 278.8 |
| 384.6 |
| 121.6 |
| 148.8 |
|
| Restricted cash | 15.3 |
| 15.1 |
| 3.8 |
| 2.7 |
|
| Net debt | $ | 236.0 |
| $ | 46.0 |
| $ | 836.9 |
| $ | 507.7 |
|
Ratio of Net Debt to Capital:
| | | December 31, | December 31, |
| 2014 | 2013 | 2017 | 2016 |
| Net debt | $ | 236.0 |
| $ | 46.0 |
| $ | 836.9 |
| $ | 507.7 |
|
| Total equity | 1,589.1 |
| 2,648.6 |
| 1,474.9 |
| 1,310.9 |
|
| Capital (net debt + total equity) | $ | 1,825.1 |
| $ | 2,694.6 |
| $ | 2,311.8 |
| $ | 1,818.6 |
|
| Ratio of net debt to capital | 12.9 | % | 1.7 | % | 36.2 | % | 27.9 | % |
The Company presents net debt because it believes net debt is more representative of the Company’sCompany's financial position than total debt due to the amount of cash and cash equivalents.equivalents held by the Company.
At December 31, 2014, approximately $130.92017, $118.9 million or 46.9%, of the Company's $121.6 million of cash and cash equivalents resided in jurisdictions outside the United States. Repatriation of these fundsIt is the Company's practice to use available cash in the United States to pay down its Senior Credit Facility or Accounts Receivable Facility in order to minimize total interest expense. Repatriation of non-U.S. cash could be subject to domestic and foreign taxes and some portion may be subject to governmental restrictions. Part of the Company's strategy is to grow in attractive market sectors, many of which are outside the United States. This strategy may includeincludes making investments in facilities, and equipment and potential new acquisitions. The Company plans to fund these investments, as well as meet working capital requirements, with cash and cash equivalents and unused lines of credit within the geographic location of these investments when possible.where feasible.
On April 30, 2014,The Company expects that any cash requirements in excess of cash on hand and cash generated from operating activities will be met by the committed funds available under its Accounts Receivable Facility and the Senior Credit Facility. Management believes it has sufficient liquidity to meet its obligations through at least the term of the Senior Credit Facility.
The Company amended its three-year Asset Securitization Agreement, reducing its aggregate borrowing availability from $200has a $100.0 million to $100 million. The Asset Securitization AgreementAccounts Receivable Facility that matures on November 30, 2015,2018. The Company is exploring opportunities to refinance the facility prior to its maturity. The Accounts Receivable Facility is subject to certain borrowing base limitations and is secured by certain domestic trade receivablesaccounts receivable of the Company. At December 31, 2014, the Company had no outstanding borrowings under the Asset Securitization Agreement; however, certainCertain borrowing base limitations reduced the availability of the Accounts Receivable Facility to $82.3 million at December 31, 2017. As of December 31, 2017, the Company had $62.9 million in outstanding borrowings, which reduced the availability under the Asset Securitization Agreementfacility to $72.7$19.4 million. The interest rate on the Accounts Receivable Facility is variable and was 2.15% as of December 31, 2017, which reflects the prevailing commercial paper rate plus facility fees.
The Company has a $500$500.0 million Senior Credit Facility that matures on May 11, 2016.June 19, 2020. At December 31, 2014, the Company had no outstanding borrowings under2017, the Senior Credit Facility but had lettersoutstanding borrowings of credit outstanding totaling $8.6$52.0 million,, which reduced the availability under theto $448.0 million. The Senior Credit Facility to $491.4 million. Under the Senior Credit Facility, the Company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At December 31, 2014, the Company was in full compliance with the covenants under the Senior Credit Facility. The maximum consolidated leverage ratio permitted under the Senior Credit Facility is 3.253.5 to 1.0. As of December 31, 20142017, the Company’s consolidated leverage ratio was 1.032.0 to 1.0. The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility is 4.03.5 to 1.0. As of December 31, 2014,2017, the Company’s consolidated interest coverage ratio was 16.3213.8 to 1.0.
The interest rate under the Senior Credit Facility is variable and represents a blended U.S. Dollar and Euro rate with a spread based on the Company’s consolidated leverage ratio.debt rating. This rate was 1.83% as of December 31, 2017. In addition, the Company pays a facility fee based on the consolidated leverage ratio multiplied by the aggregate commitments of all of the lenders under the Senior Credit Facility.
Other sources of liquidity include short-term and long-term lines of credit for certain of the Company’s foreign subsidiaries, which provide for borrowings up to approximately $234.0288.9 million in the aggregate. The majority. Most of these credit lines are uncommitted. At December 31, 20142017, the Company had borrowings outstanding of $7.4$42.5 million and bank guarantees of $5.8$0.2 million, which reduced the availability under these facilities to $220.8246.2 million.
TheOn September 7, 2017, the Company expects that any cash requirementsissued the 2027 Notes in excessthe aggregate principal amount of cash on hand will be met by€150 million. On September 18, 2017, the committed funds available under its Asset Securitization AgreementCompany entered into the €100 million 2020 Term Loan. Proceeds from the 2027 Notes and 2020 Term Loan were used to repay amounts drawn from the Senior Credit Facility. Management believes it has sufficient liquidityFacility to meet its obligations through at leastfund the term ofGroeneveld acquisition. Refer to Note 10 - Financing Arrangements in the Notes to the Consolidated Financial Statements for additional information.
At December 31, 2017, the Company was in full compliance with the covenants under the Senior Credit Facility.
Facility and its other debt agreements. The Company expects to remain in compliance with its debt covenants. However, the Company may need to limit its borrowings under the Senior Credit Facility or other facilities in order to remain in compliance. As of December 31, 2014,2017, the Company could have borrowed the full amounts available under the Senior Credit Facility and Asset Securitization Agreement,Accounts Receivable Facility and still would have still been in compliance with all of its debt covenants.
In August 2014, the Company issued $350 million of fixed-rate unsecured notes that mature in September 2024. The Company used a portion of the net proceeds from this issuance to repay the $250 million of fixed-rated unsecured notes that matured on September 15, 2014.
The Company expects to generate operating cash from continuing operations of approximately $345$350 million in 2015,2018, an increase from 2017 of approximately $65$113 million or 23%, compared to 201448%, as the Company anticipates higher net income from continuing operations, excluding non-cash impairment and pension settlement charges. Pension contributions are expected to be approximately $15 million in 2015, compared to $21.1 million in 2014.lower working capital requirements. The Company expects capital expenditures of approximately 4%to be 3.5% to 4.0% of sales in 2015,2018, compared to 4.2%with 3.5% of sales in 2014.2017.
CONTRACTUAL OBLIGATIONS
The Company’s contractual debt obligations and contractual commitments outstanding as of December 31, 20142017 were as follows:
Payments due by Period:period:
| | | Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years |
| Interest payments | $ | 272.4 |
| $ | 25.8 |
| $ | 49.5 |
| $ | 48.4 |
| $ | 148.7 |
| $ | 239.3 |
| $ | 31.1 |
| $ | 59.6 |
| $ | 56.0 |
| $ | 92.6 |
|
| Long-term debt, including current portion | 522.7 |
| 0.6 |
| 20.7 |
| — |
| 501.4 |
| 856.9 |
| 2.7 |
| 171.7 |
| 1.7 |
| 680.8 |
|
| Short-term debt | 7.4 |
| 7.4 |
| — |
| — |
| — |
| 105.4 |
| 105.4 |
| — |
| — |
| — |
|
| Purchase commitments | | 41.3 |
| 38.2 |
| 3.1 |
| — |
| — |
|
| Operating leases | 96.3 |
| 28.6 |
| 37.9 |
| 19.5 |
| 10.3 |
| 105.4 |
| 33.5 |
| 46.6 |
| 18.9 |
| 6.4 |
|
| Purchase commitments | 44.8 |
| 16.0 |
| 7.3 |
| 21.5 |
| — |
| |
| Retirement benefits | 1,736.9 |
| 206.9 |
| 353.0 |
| 362.7 |
| 814.3 |
| 250.9 |
| 15.0 |
| 73.7 |
| 57.9 |
| 104.3 |
|
| Total | $ | 2,680.5 |
| $ | 285.3 |
| $ | 468.4 |
| $ | 452.1 |
| $ | 1,474.7 |
| $ | 1,599.2 |
| $ | 225.9 |
| $ | 354.7 |
| $ | 134.5 |
| $ | 884.1 |
|
The interest payments beyond five years primarily relate to medium-term notes that mature overlong-term fixed-rate notes. Refer to Note 10 - Financing Arrangements in the next 16 years.Notes to the Consolidated Financial Statements for additional information.
Purchase commitments are defined as an agreement to purchase goods or services that are enforceable and legally binding on the Company. Included in purchase commitments above are certain obligations related to take or paytake-or-pay contracts, capital commitments, service agreements and utilities. Many of these commitments relate to take or paytake-or-pay contracts in which the Company guarantees payment to ensure availability of products or services. These purchase commitments do not represent the entire anticipated purchases in the future, but represent only those items for whichthat the Company contractually is contractually obligated.obligated to purchase. The majority of the products and services purchased by the Company are purchased as needed, with no commitment.
Retirement benefits representIn order to maintain minimum funding requirements, the Company is required to make contributions to the trusts established for its defined benefit pension plans and other postretirement benefit plans. The table above shows the expected future minimum cash contributions to the trusts for the funded plans as well as estimated future benefit payments to participants for the unfunded plans. Those minimum funding requirements and estimated benefit payments can vary significantly. The amounts in the table above are based on actuarial estimates using current assumptions for, among other things, discount rates, expected return on assets and health care payments, including lump sum distributions, expected to be paid to retirees or their beneficiaries over the next ten years. These payments are largely covered by pension and postretirement benefit plan assets. The table above does not reflect the group annuity contract purchased on January 22, 2015, which transferred approximately $600 million of pension obligations to Prudential.cost trend rates. Refer to Note 2114 - Subsequent Events Retirement Benefit Plans and Note 15 - Other Postretirement Benefit Plansin the Notes to the Consolidated Financial Statements for additional information.
During 2014,2017, the Company made cash contributions of approximately $21.1$11.5 million to its global defined benefit pension plans and $12.4 million to its other postretirement benefit plans. The Company currently expects to make contributions to its global defined benefit pension plans totaling approximately $15$10 million in 2015. Returns for2018. The Company also expects to make payments of approximately $5 million to its other postretirement benefit plans in 2018. Excluding Mark-to-Market Charges, the Company’s global defined benefit pension plan assets in 2014 were 11.15%, above the expected rate of return of 7.25% due to broad increases in global equity markets. The higher returns positively impacted the funded status of the plans at the end of 2014 and are expected to result inCompany expects slightly lower pension expenseexpense. Mark-to-Market Charges are not accounted for in future years.the 2018 outlook because the amount will not be known until the fourth quarter of 2018. Refer to Note 1314 - Retirement Benefit Plans and Note 1415 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for additional information.
The Company's 2012 common share purchase plan authorized the CompanyRefer to buy, in the open market or in privately negotiated transactions, up to 10 million common shares, which are to be held as treasury shares Note 11 - Contingencies and used for specified purposes. On June 13, 2014, the Company's Board of Directors authorized an additional 10 million common shares for repurchase under this plan. The authorization expires on December 31, 2015. During 2014, the Company purchased 5.2 million of its common shares for approximately $270.9 million in the aggregate under this plan. As of December 31, 2014, 8.9 million common shares remain authorized for purchase under this plan.
As disclosed in Note 10 – Contingencies and Note 16 –17 - Income Taxes in the Notes to the Consolidated Financial Statements, the Company has exposure for certain legal and tax matters.
As of December 31, 2014, the Company had approximately $57.5 million of total gross unrecognized tax benefits. The Company anticipates a decrease in its unrecognized tax positions of $40 million to $45 million during the next 12 months. The anticipated decrease is primarily due to settlements with tax authorities. Future tax positions are not known at this time and therefore not included in the above summary of the Company’s fixed contractual obligations. Refer to Note 16 – Income Taxes in the Notes to the Consolidated Financial Statements for additional information.information regarding the Company's exposure for certain legal and tax matters.
The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.
RECENTLY ADOPTED ACCOUNTING PRONOUNCMENTS
Information required for this Item is incorporated by reference to Note 1 - Significant Accounting Policiesin the Notes to the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. 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. The following paragraphs include a discussion of some critical areas that require a higher degree of judgment, estimates and complexity.
Revenue recognition:
The Company generally recognizes revenue when title passes to the customer. This occurs at the shipping point except for goods sold by certain foreign entities and certain exported goods, where title passes when the goods reach their destination. Selling prices are fixed based on purchase orders or contractual arrangements. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold in the Consolidated Statements of Income.
The Company recognizes a portion of its revenues on the percentage of completion method.percentage-of-completion method measured on the cost-to-cost basis. In 20142017, 2016 and 2013,2015, the Company recognized approximately $50$83 million, $68 million and $55$66 million,, respectively, in net sales under the percentage-of-completion method. As of December 31, 2017 and 2016, $67.3 million and $63.5 million of accounts receivable, net, respectively, related to these net sales.
Inventory:
Inventories are valued at the lower of cost or market, with approximately 48%55% valued by the first-in, first-out ("FIFO") method and the remaining 45% valued by the last-in, first-out (LIFO) method and the remaining 52% valued by the first-in, first-out (FIFO)("LIFO") method. The majority of the Company’s domestic inventories are valued by the LIFO method, andwhile all of the Company’s international inventories are valued by the FIFO method. An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation. The Company recognized a decrease in its LIFO reserve of $11.9 million during 2017 compared to an increase in its LIFO reserve of $0.4$4.7 million during 2014 compared to a decrease in its LIFO reserve of $3.8 million during 2013.2016.
Goodwill:Goodwill and Indefinite-lived Intangible Assets:
The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually. The Company performsannually, performing its annual impairment test as of October first, after the annual forecasting process is completed.1st. Furthermore, goodwill isand indefinite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Each interim period, management of the Company assesses whether or not an indicator of impairment is present that would necessitate that a goodwill and indefinite-lived intangible assets impairment analysis be performed in an interim period other than during the fourth quarter.
The Company reviews goodwill for impairment at the reporting unit level. The Mobile Industries segment has four reporting units and the Process Industries segment has two reporting units. The reporting units within the Mobile Industries segment are Mobile Industries, Lubrication Systems, Aerospace Drive Systems (formerly Aerospace Transmissions) and Aerospace Bearing Inspection (formerly Aerospace Aftermarket). The reporting units within the Process Industries segment are Process Industries and Industrial Services. The Lubrication Systems reporting unit was established as a result of the Groeneveld acquisition.
Accounting guidance permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required. The Company chose to utilize this qualitative assessment in the annual goodwill impairment testing of the Process Industries, Industrial Services and Lubrication Systems reporting units in the fourth quarter of 2017. Based on this qualitative assessment, the Company concluded that it was not more likely than not that the fair values of these reporting units were less than their respective carrying values.
The Company chose to perform a quantitative goodwill impairment analysis in the annual goodwill impairment testing of the Mobile Industries, Aerospace Drive Systems and Aerospace Bearing Inspection reporting units in the fourth quarter of 2017. The quantitative goodwill impairment analysis is a two-step process. Step one compares the carrying amount of the reporting unit to its estimated fair value. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, step two is performed, where the reporting unit’s carrying value of goodwill is compared towith the implied fair value of goodwill. To the extent that the carrying value of goodwill exceeds the implied fair value of goodwill, impairment exists and must be recognized.
The Company reviews goodwill for impairment at the reporting unit level. The Mobile Industries segment has four reporting units and the Process Industries segment has two reporting units. The reporting units within the Mobile Industries segment are Mobile Industries, Aerospace Bearing, Aerospace Transmissions and Aerospace Aftermarket. The reporting units within the Process Industries segment are Process Industries and Industrial Services.
The Company prepares its quantitative goodwill impairment analysis by comparing the estimated fair value of each reporting unit, using an income approach (a discounted cash flow model), as well as a market approach, with its carrying value. The income approach and market approach are weighted in arriving at fair value based on the relative merits of the methods used and the quantity and quality of collected data to arrive at the indicated fair value.
During the third quarter of 2014, the Company determined there was an indicator for impairment for two of its three Aerospace reporting units, specifically Aerospace Transmissions and Aerospace Aftermarket, within its former Aerospace segment (now included in the Mobile Industries segment) as a result of declining sales forecasts and financial performance within the reporting units. The Company utilized currently updated forecasts for the income approach as part of the goodwill impairment analysis. As a result of the lower earnings and cash flow forecasts, the Company determined that the goodwill associated with the Aerospace Transmissions and the Aerospace Aftermarket reporting units could not support the carrying value of their goodwill. As a result, the Company recorded a pretax impairment charge of $86.3 million during the third quarter of 2014, which was reported in impairment and restructuring charges in the Consolidated Statement of Income. Refer to Note 8 - Goodwill and Other Intangible Assets in the Notes to the Consolidated Financial Statements for additional information.
During the fourth quarter of 2014, the Company completed its annual goodwill impairment testing with no further impairment identified.
The income approach requires several assumptions including future sales growth, EBIT (earnings before interest and taxes) margins and capital expenditures. The Company’s reporting units each provide their forecast of results for the next threefour years. These forecasts are the basis for the information used in the discounted cash flow model. The discounted cash flow model also requires the use of a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the three years forecastedforecast by the reporting units), as well as projections of future operating margins (for the period beyond the forecastedforecast three years). During the fourth quarter of 2014,2017, the Company used a discount raterates for its reporting units of 10.5%8.5% to 13.0%12.5% and a terminal revenue growth rate of 3%1.0% to 3.0%.
The market approach requires several assumptions including sales and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples for comparable companies that operate in the same markets as the Company’s reporting units. During the fourth quarter of 2014,2017, the Company used sales multiples of 0.750.85 to 1.802.75 for its reporting units. During the fourth quarter of 2014,2017, the Company used EBITDA multiples of 6.06.8 to 9.0 for its reporting units.
As of December 31, 2014,2017, the Company had $259.5$511.8 million of goodwill on its Consolidated Balance Sheet, of which $89.6$254.3 million was attributable to the Mobile Industries segment and $169.9$257.5 million was attributable to the Process Industries segment. See Note 89 - Goodwill and Other Intangible Assets in the Notes to the Consolidated Financial Statements for the carrying amount of goodwill by segment.
The fair value of the Aerospace Bearing and Industrial Services Material goodwill does not exist at reporting units was $225.3 million and $356.7 million, respectively, compared to their carrying valuethat are at risk of $205.9 million and $294.8 million, respectively. The fair value of the Mobile Industries and Process Industries reporting units exceeded its carrying value by a significant amount. As a result, the Company did not recognize any goodwill impairment charges during the fourth quarter of 2014.
A 30 basis point increase in the discount rate would have resulted in the Aerospace Bearing reporting units failing step one of the goodwill impairment analysis, which would have required the completion of step two of the goodwill impairment analysis to arrive at a potential goodwill impairment loss. A 300 basis point increase in the discount rate would have resulted in the Industrial Services reporting unit failing step one of thequantitative goodwill impairment analysis. The projected cash flows could have declined by 4.2% for the Aerospace Bearing reporting unit and the fair value would have still exceeded its carrying value. The projected cash flows could have declined by as much as 29.3% for the Industrial Services reporting unit and the fair value would have still exceeded its carrying value.
In 2014, the income approach for the Aerospace Bearing and Industrial Services reporting units was weighted by 70% and the market approach was weighted by 30% in arriving at fair value. The 70/30 weighting was selected to give consideration for the fact that the metrics for the last twelve months for the Aerospace Bearing and Industrial Services reporting units were not reflective of expected performance and the discounted-cash flow model provided a more normalized view of future operating conditions for the Aerospace Bearing and Industrial Services reporting units. Had the Company used a 50/50 weighting, the Company would still have passed step one of the goodwill impairment test for the Aerospace Bearing and Industrial Services reporting units for the year ended December 31, 2014.
Restructuring costs:
The Company’s policy is to recognize restructuring costs in accordance with Accounting Standards Codification (ASC)("ASC") Topic 420, “Exit or Disposal Cost Obligations,” and ASC Topic 712, “Compensation and Non-retirement Post-Employment Benefits.” Detailed contemporaneous documentation is maintained and updated to ensure that accruals are properly supported. If management determines that there is a change in estimate, the accruals are adjusted to reflect this change.
Income taxes:
Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, valuation allowances against deferred tax assets, and accruals for uncertain tax positions.
The Company, which is subject to income taxes in the United States and numerous non-U.S. jurisdictions, accounts for income taxes in accordance with ASC Topic 740, “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 losses 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. Deferred tax assets relate primarily to pension and postretirement benefit obligations in the United States, which the Company believes are more likely than not to result in future tax benefits. The Company records 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. DeferredThe Company recorded $12.6 million of tax assets relate primarilybenefit related to pensionthe reversal of valuation allowances in 2017 and postretirement$34.7 million of tax benefit obligationsrelated to the reversal of valuation allowances in 2015. There were no valuation allowance reversals in 2016. Refer to Note 17 - Income Taxes in the United States, whichNotes to the Company believes are more likely than not to result in future tax benefits.Consolidated Financial Statements for further discussion on the valuation allowance reversals.
In the ordinary course of the Company’s business, there are many transactions and calculations where the ultimate income tax determination is uncertain. The Company is regularly under audit by tax authorities. Accruals for uncertain tax positions are provided for in accordance with the requirements of ASC Topic 740. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.
Significant management judgment is required in determining In 2017, the provision for income taxes, deferredCompany recorded $30.6 million of net tax assets and liabilities, valuation allowances against deferred tax assets, and accruals forbenefits related to uncertain tax positions, which consist of recorded tax items of $40.2 million related to expiration of applicable statues of limitations in multiple jurisdictions, a reduction in prior year reserves and a reduction in accrued interest that is partially offset by $9.6 million related to current and prior year tax positions. Refer to Note 17 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion on the uncertain tax positions reserve reversals.
Benefit Plans:
The Company sponsors a number of defined benefit pension plans that cover eligible associates. The Company also sponsors several funded and unfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and their dependents. These plans are accounted for in accordance with ASC Topic 715-30, "Defined Benefit Plans – Pension," and ASC Topic 715-60, "Defined Benefit Plans – Other Postretirement."
The measurement of liabilities related to these plans is based on management's assumptions related to future events, including discount rates, rates of return on pension plan assets, rates of compensation increases and health care cost trend rates. Management regularly evaluates these assumptions and adjusts them as required and appropriate. Other plan assumptions also are also reviewed on a regular basis to reflect recent experience and the Company's future expectations. Actual experience that differs from these assumptions may affect future liquidity, expense and the overall financial position of the Company. While the Company believes that current assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may affect materially affect the Company's pension and other postretirement employee benefit obligations and its future expense and cash flow.
The discount rate is used to calculate the present value of expected future pension and postretirement cash flows as of the measurement date. The Company establishes the discount rate by constructing a notional portfolio of high-quality corporate bonds and matching the coupon payments and bond maturities to projected benefit payments under the Company's pension and postretirement welfare plans. The bonds included in the portfolio generally are generally non-callable. A lower discount rate will result in a higher benefit obligation; conversely, a higher discount rate will result in a lower benefit obligation. The discount rate also is also used to calculate the annual interest cost, which is a component of net periodic benefit cost.
The expected rate of return on plan assets is determined by analyzing the historical long-term performance of the Company's pension plan assets, as well as the mix of plan assets between equities, fixed incomefixed-income securities and other investments, the expected long-term rate of return expected for those asset classes and long-term inflation rates. Short-term asset performance can differ significantly from the expected rate of return, especially in volatile markets. A lower-than-expected rate of return on pension plan assets will increase pension expense and future contributions.
Effective January 1, 2017, the Company voluntarily changed its accounting principles for recognizing actuarial gains and losses and expected returns on plan assets for its defined benefit pension and other postretirement benefit plans, with retrospective application to prior periods. Prior to 2017, the Company amortized, as a component of pension and other postretirement expense, unrecognized actuarial gains and losses (included within Accumulated other comprehensive income (loss)) over the average remaining service period of active plan participants expected to receive benefits under the plan, or average remaining life expectancy of inactive plan participants when all or almost all of individual plan participants were inactive. The Company also historically calculated the market-related value of plan assets based on a five-year market adjustment. Under the new principles, actuarial gains and losses will be immediately recognized through net periodic benefit cost in the Statement of Income, upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement. In addition, the Company has changed its accounting policy for measuring the market-related value of plan assets from a calculated amount (based on a five-year smoothing of asset returns) to fair value. The Company believes these changes are preferable as they result in an accelerated recognition of actuarial gains and losses and changes in fair value of plan assets in its Consolidated Statement of Income, which provides greater transparency and better aligns with fair value principles by fully reflecting the impact of interest rate and economic changes on the Company's pension and other postretirement benefit liabilities and assets in the Company's operating results in the year in which the gains and losses are incurred.
Defined Benefit Pension Plans:
The Company recognized net periodic benefit cost of $54.6$30.3 million in 20142017 for defined benefit pension plans, excluding the steel business spunoff on June 30, 2014, compared to $45.9with net periodic benefit cost of $73.4 million in 2013.2016. The increase in net periodic costdecrease was primarily due to higher pension settlement charges andactuarial losses of $23.2 million recognized in 2017, compared with actuarial losses of $60.9 million in 2017. In addition, the Company recognized lower expected rateinterest expense of return,$5.0 million, partially offset by lower amortization of net actuarial losses. The higher pension settlement charges of $33.5 million for 2014, compared to $7.2 million for 2013, was the result of lump sum distributions in 2014 for retirees and a special lump sum offering to certain deferred vested participants. Pension settlement charges in 2013 related to the closure of the Company's manufacturing facility in St. Thomas. The lower expected return fromon plan assets for 2014, compared to 2013, wasof $1.7 million. In 2017, the Company recognized actuarial losses of $23.2 million primarily due to the impact of a 75 basis pointnet reduction in the discount rate used to measure its defined benefit pension obligations of $52.9 million and the impact of experience losses and other changes in valuation assumptions of $8.7 million, partially offset by higher than expected returns on plan assets of $38.4 million. The impact of the net reduction in the discount rate of return onused to measure the Company's defined benefit pension plan assets. The lower amortization of net actuarial lossesobligations was primarily due todriven by a 10054 basis point reduction in the discount rate used to measure the defined benefit pension obligation from 4.0% at December 31, 2012 to 5.02% at December 31, 2013. The discount rate used to remeasure the defined benefit pension obligation as a result of the spinoff of TimkenSteel at April 30, 2014 was 4.68% also resulted in lower amortization compared to 2013. Net actuarial losses are amortized over the average remaining service period of participants in the defined benefit pension plans.
In 2015, the Company expects net periodic benefit cost to increase to approximately $273 million for defined benefit pension plans. The expected increase is primarily due to higher pension settlement charges and a lower expected rate of return on plan assets, partially offset by lower amortization of net actuarial losses and lower interest cost. Pension settlement charges are expected to increase approximately $210 million. The Company entered into an agreement on January 22, 2015 pursuant to which the Plan purchased a group annuity contract from Prudential to transfer approximately $600 million of its pension obligations related to one of its U.S. defined benefit plan obligations. The higher than expected asset returns of $38.4 million resulted from a net asset gain of $77.5 million on actual assets in 2017, or positive 10.6% weighted average return on pension plans. This is expected to result in a pension settlement chargeplan assets of approximately $220 million. The lower$824.3 million, compared with an expected return from plan assets for 2015 isof $39.1 million, or 4.44%, in 2017.
In 2016, the Company recognized actuarial losses of $60.9 million primarily due to the impact of a 125 basis pointnet reduction in the expected return on pension assets for 2014. The decrease in the expected rate of return is due to the Company's move to a higher level of debt securities, offset by a lower level of equity securities to maintain its overfunded status on U.S. pension plans.
Interest cost is expected to decrease in 2015, compared to 2014, primarily due to a decrease in the Company's discount rate used for expense purposes from 5.02% for the first four months of 2014 and 4.68% for the last eight months of 2014 compared to 4.20% for 2015. Amortization of net actuarial losses is expected to decrease as a result of the impact of pension settlement charges that were recorded in 2014 and will be recorded in 2015, as well as favorable asset returns over the last several years, partially offset by a reduction in the discount rate to measure the pension obligation from 4.68% at April 30, 2014 (the measurement date for the spinoff of the defined benefit pension plans related to TimkenSteel) to 4.20% at December 31, 2014 and the adoption of the new RP-2014 mortality tables. The weighted-average amortization period for the Company's global defined pension plans is approximately 11 years.
The Company expects to contribute approximately $15 million to its defined benefit pension plans in 2015 compared to $21.1 million in 2014.
The following table below presents a reconciliation of the cumulative net actuarial losses at December 31, 2009 and the cumulative net actuarial losses at December 31, 2014:
|
| | | | | | | |
| Net actuarial losses at December 31, 2009 | | | $ | 1,072.3 |
|
| | | | |
| Plus/minus actuarial (gains) and losses recognized: | | | |
| Net actuarial gains recognized in 2010 | | $ | (51.1 | ) | |
| Net actuarial losses recognized in 2011 | | 404.6 |
| |
| Net actuarial losses recognized in 2012 | | 263.1 |
| |
| Net actuarial gains recognized in 2013 | | (376.3 | ) | |
| Net actuarial losses recognized in 2014 | | 161.2 |
| |
| | | | 401.5 |
|
| Minus amortization of net actuarial losses: | | | |
| Amortization of net actuarial losses in 2010 | | $ | (51.9 | ) | |
| Amortization of net actuarial losses in 2011 | | (56.0 | ) | |
| Amortization of net actuarial losses in 2012 | | (83.3 | ) | |
| Amortization of net actuarial losses in 2013 | | (116.8 | ) | |
| Amortization of net actuarial losses in 2014 | | (60.9 | ) | |
| | | | (368.9 | ) |
| Curtailment loss recognized in 2012 | | | (9.5 | ) |
| Settlement loss recognized in 2013 | | | (7.2 | ) |
| Settlement loss recognized in 2014 | | | (33.5 | ) |
| Spinoff of TimkenSteel | | | (347.4 | ) |
| Foreign currency impact | | | (8.5 | ) |
| Net actuarial losses at December 31, 2014 | | | $ | 698.8 |
|
During the period between December 31, 2009 and December 31, 2014, the Company recognized net actuarial losses totaling $401.5 million for defined benefit pension plans. These actuarial losses primarily occurred in 2011, 2012 and 2014, offset by gains in 2010 and 2013. In 2011, the net actuarial loss of $404.6 million was primarily due to a 75 basis point reduction in the Company's discount rate used to measure its defined benefit pension obligation.obligations of $86.9 million and the impact of experience losses and other changes in valuation assumptions of $10.2 million, partially offset by higher than expected returns on plan assets of $36.2 million. The changeimpact of the net reduction in the discount rate accounted for $234.1 million ofused to measure the net actuarial loss. The remaining portion of the net actuarial loss for 2011 was due to lower than expected asset returns of $100.4 million and other changes in actuarial assumptions of $70.1 million.
In 2012, the net actuarial loss of $263.1 millionCompany's defined benefit pension obligations was primarily due todriven by a 100125 basis point reduction in the Company's discount rate used to measure its defined benefit pension obligation. The changeplan obligations in the discount rate accounted for approximately $370 million of the net actuarial loss. Net actuarial losses asUnited Kingdom and a result of the discount rate were partially offset by higher than expected asset returns of approximately $140 million (a net asset gain of $361.7 million on actual assets in 2012, or positive 13.8% on pension plan assets of $3.1 billion, compared to an expected return of $221.1 million, or 8.25%, in 2012). The remaining portion of the net actuarial loss for 2012 was due to other changes in actuarial assumptions.
In 2014, the net actuarial loss of $161.2 million was primarily due to a 8236 basis point reduction in the Company's discount rate used to measure its defined benefit pension obligation, as well as the impact of adopting the new RP-2014 mortality tables for pension obligations. The changeplan obligations in the discount rate accounted for approximately $226 million of the net actuarial loss, and the change due to the adoption of the new RP-2014 mortality tables accounted for approximately $59 million. Net actuarial losses as a result of the discount rate and the adoption of the new mortality tables were partially offset byUnited States. The higher than expected asset returns of approximately $117$36.2 million (aresulted from a net asset gain of $292.7$77.0 million on actual assets in 2014,2016, or positive 11.2%8.5% weighted average return on pension plan assets of $2.1 billion,$798.3 million, compared towith an expected return of $175.7$40.8 million, or 7.25%5.09%, in 2014). The remaining portion of2016.
In 2018, the Company expects net actuarial loss for 2014 was due to other changes in actuarial assumptions.
In 2013, the net actuarial gain of $376.3 million was primarily due to a 102 basis point increase in the Company's discount rate used to measure its definedperiodic benefit pension obligation. The change in the discount rate accounted for approximately $320 million of the net actuarial gain. In addition to the change in the discount rate, higher than expected asset returnscost of approximately $100$6 million (a net asset gain of $334.0 million on actual assets in 2013, or positive 10.8% on pension plan assets of $3.3 billion, compared to an expected return of $232.0 million, or 8.0%, in 2013). The remaining portion of the net actuarial gain for 2013 was due to other changes in actuarial assumptions. The impact of these net actuarial losses for defined benefit pension plans, as well ascompared with net periodic benefit cost of $30.3 million in 2017. Net periodic benefit cost for 2018 does not include Mark-to-Market Charges that will be recognized immediately through earnings in the fourth quarter of 2018, or on an interim basis if specific events trigger a remeasurement. Excluding the actuarial losses relatedof $23.2 million recognized in 2017, the expected net periodic benefit cost of $5.8 million in 2018 compares to postretirementnet periodic benefit planscost of $7.1 million in 2017 as the Company expects higher expected return on plan assets of $2.1 million and net priorlower interest costs of $1.4 million, partially offset by lower curtailment of $1.1 million and higher service costs for defined benefit pension and postretirement plans, has increased total equity by $102.4 million after tax for the period between December 31, 2009 and December 31, 2014.of $0.8 million.
During this same time period, the Company contributed a total of $988.7 million to its global defined benefit pension plans, of which approximately $910.7 million was discretionary. As discussed above, theThe Company expects to contribute approximately $15$10 million to its global defined benefit pension plans in 2014. Despite the net actuarial losses recorded for the period between December 31, 2009 and December 31, 2014, only approximately $212018 compared with $11.5 million in 2017.
For expense purposes in 2014,2017, the Company applied a weighted-average discount rate of 5.02% for the first four months of 2014, and a discount rate of 4.68% for the last eight months of 20144.34% to its U.S. defined benefit pension plans as a result of a remeasurement of the U.S. defined benefit pension plans due to the spinoff of the plans related to TimkenSteel. For expense purposes for 2015, the Company has applied a discount rate of 4.20% for the defined benefit pension plans. For expense purposes in 2014,2018, the Company will apply a weighted-average discount rate of 3.80% to its U.S. defined benefit pension plans.
For expense purposes in 2017, the Company applied an expected weighted-average rate of return of 7.25%5.92% for the Company’s U.S. pension plan assets. For expense purposes in 2015,2018, the Company will apply an expected weighted-average rate of return on plan assets of 6.00%5.78%. The reduction in expected rate of return on plan assets is due to the Company's move to a higher level of debt securities offset by a lower level of equity securities to maintain its overfunded status on U.S. pension plans.
The following table presents the sensitivity of the Company's U.S. projected pension benefit obligation (PBO), total equity("PBO") and 20152017 expense to the indicated increase/decrease in key assumptions:
| | | | | + / - Change at December 31, 2015 | | + / - Change at December 31, 2017 | | Change to |
| | | Change | | PBO | | Equity | | 2014 Expense | | Change | | PBO | | 2017 Expense |
| Assumption: | | | | | | | | | | |
| Discount rate | | +/- 0.25% | | $ | 48.4 |
| | $ | 48.4 |
| | $ | 3.0 |
| | +/- 0.25% | | $ | 22.7 |
| | $ | 22.7 |
|
| Actual return on plan assets | | +/- 0.25% | | N/A |
| | 4.4 |
| | 0.2 |
| | +/- 0.25% | | N/A |
| | 1.2 |
|
| Expected return on assets | | +/- 0.25% | | N/A |
| | N/A |
| | 4.1 |
| | +/- 0.25% | | N/A |
| | — |
|
In the table above, a 25 basis point decrease in the discount rate will increase the PBO by $48.4$22.7 million and decrease total equityincome before income taxes by $48.4$22.7 million. The change in equity in the table above is reflected on a pre-tax basis. Defined benefit pension plans in the United States represent 80%66% of the Company's benefit obligation and 84%65% of the fair value of the Company's plan assets at December 31, 2014. The Company uses a combined U.S. federal and state statutory rate of approximately 37% to calculate the after tax impact on equity for U.S. plans. The Company uses the local statutory tax rate in effect to calculate the after tax impact on equity for all remaining non-U.S. plans. For some non-U.S. plans, a valuation allowance has been recorded against the tax benefits recorded in equity and, therefore, no tax benefits are recognized on an after tax basis.2017.
Other Postretirement Benefit Plans:
The Company recognized net periodic benefit costcredit of $7.4$1.4 million in 20142017 for other postretirement benefit plans, excluding the steel business spun off on June 30, 2014, compared to $9.2with net periodic benefit cost of $10.6 million in 2013.2016. The decrease was primarily due to actuarial gains of $4.0 million recognized in 2017, compared with actuarial losses of $4.5 million in 2016. In addition, the Company recognized lower amortization of prior service cost of $2.0 million and lower interest expense of $1.9 million. In 2017, the Company offered a financial incentive for eligible participants of the Company's retiree health and life insurance plans to opt-out of coverage from the plans. The Company recognized actuarial losses. gains in 2017 as a result of the opt-out program impact of $14.4 million and higher than expected returns on plan assets of $3.7 million, partially offset by the net impact of assumption changes of $14.1 million, including the impact of a 40 basis point reduction in the Company's discount rate used to measure its defined benefit postretirement obligations of $6.9 million and the impact of other assumption changes of $7.2 million.
The Company recognized actuarial losses in 2016 as a result of the net impact of assumption changes of $4.3 million, including the impact of a 42 basis point reduction in the Company's discount rate used to measure its defined benefit postretirement obligations of $8.2 million, offset by the impact of other assumption changes of $3.9 million, and lower than expected asset returns on plan assets of $0.2 million.
The lower amortization of net actuarial lossesprior service costs in 2017 was due to an amendment to the Company's postretirement benefit plan in 2016. As a result of this amendment, the Company has ceased offering company-subsidized postretirement medical benefits to certain U.S. employees who retire after December 31, 2016. This amendment reduced the accumulated benefit obligation by $11.4 million in 2016. This amount is being amortized over the remaining service period of the employees affected by this amendment. The lower interest expense in 2017 was primarily due to a 7942 basis point increasereduction in the discount rate used to measure the defined benefit pension obligation from 3.80% at December 31, 2012 to 4.59% at December 31, 2013. The discount rate used to remeasure the defined benefit pension obligation as a result of the Spinoff at April 30, 2014 was 4.33% also resulted in lower amortization compared to 2013.for expense purposes.
In 2015,2018, the Company expects net periodic benefit cost to decrease to approximately $5of $2.2 million for other postretirement benefit plans.plans, compared to net periodic benefit credit of $1.4 million in 2017. Net periodic benefit cost for 2018 does not include Mark-to-Market Charges that will be recognized immediately through earnings in the fourth quarter of 2018, or on an interim basis if specific events trigger a remeasurement. Excluding the actuarial gain of $4.0 million recognized in 2017, the expected net periodic benefit cost of $2.2 million in 2018 compares to net periodic benefit cost of $2.6 million in 2017 as the Company expects lower interest costs of $1.6 million and lower amortization of prior service cost of $0.6 million, partially offset by a lower expected return on plan assets of $1.9 million. The expected decrease is primarily due to lowerin interest cost of approximately $1 million and a higher expected rate of return of approximately $1 million. The lower expected interest cost for 2014costs is primarily due to a 6440 basis point decreasereduction in the Company's discount raterated used for expense purposes from 4.59% for 2014 to 3.95% for 2015.2018. The higherlower expected return fromon plan assets for 2015 is primarily due to a 125 basis point increasereduction in return on assets in the Company's Voluntary Employee Beneficiary Association ("VEBA") trust in 2017 that will affect the expected return on pensionplan assets for 2015.in 2018.
For expense purposes in 2014,2017, the Company applied a discount rate of 4.59% for the first four months of 2014, and a discount rate of 4.33% for the last eight months of 20143.97% to its other postretirement benefit plans. For expense purposes in 2015,2018, the Company will apply a discount rate of 3.95%3.57% to its other postretirement benefit plans. For expense purposes in 2014,2017, the Company applied an expected rate of return of 5.00%6.00% to the Voluntary Employee Beneficiary Association (VEBA)VEBA trust assets. For expense purposes in 2015,2018, the Company will apply an expected rate of return of 6.25%4.50% to the VEBA trust assets.
The following table presents the sensitivity of the Company's accumulated other postretirement benefit obligation (ABO), total equity("ABO") and 20152017 expense to the indicated increase/decrease in key assumptions:
| | | | | + / - Change at December 31, 2015 | | + / - Change at December 31, 2017 | | Change to |
| | | Change | | ABO | | Equity | | 2014 Expense | | Change | | ABO | | 2017 Expense |
| Assumption: | | | | | | | | | | |
| Discount rate | | +/- 0.25% | | $ | 5.8 |
| | $ | 5.8 |
| | $ | 0.4 |
| | +/- 0.25% | | $ | 4.4 |
| | $ | 4.4 |
|
| Actual return on plan assets | | +/- 0.25% | | N/A |
| | 0.3 |
| | — |
| | +/- 0.25% | | N/A |
| | 0.2 |
|
| Expected return on assets | | +/- 0.25% | | N/A |
| | N/A |
| | 0.3 |
| | +/- 0.25% | | N/A |
| | — |
|
In the table above, a 25 basis point decrease in the discount rate will increase the ABO by $5.8$4.4 million and decrease equityincome before income taxes by $5.8$4.4 million. The change in total equity in the table above is reflected on a pre-tax basis.
For measurement purposes for postretirement benefits, the Company assumed a weighted-average annual rate of increase in per capita cost (health care cost trend rate) for medical and prescription drug benefits of 7.0%6.25% for 2015,2018, declining steadily for the next eightsix years to 5.0%5.00%; and 9.0%8.25% for HMO benefits for 2015,2018, declining gradually for the next 1613 years to 5.0%. The assumed health care cost trend rate may have a significant effect on the amounts reported. A one percentage point increase in the assumed health care cost trend rate would have increased the 20142017 total service and interest cost components by $0.4$0.2 million and would have increased the postretirement obligation by $7.6$4.4 million. A one percentage point decrease would provide corresponding reductions of $0.3$0.2 million and $6.7$3.9 million, respectively.
Other loss reserves:
The Company has a number of loss exposures that are incurred in the ordinary course of business such as environmental claims,clean-up, product liability, product warranty, litigation and accounts receivable reserves. Establishing loss reserves for these matters requires management’s estimate and judgment with regards to estimating 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.
OTHER DISCLOSURES:
Capital Expenditures:
The Company made capital expenditures of $126.8 million and $133.6 million in the years ended December 31, 2014 and December 31, 2013, respectively. These capital expenditures support on-going business needs, including facility maintenance, organic growth, continuous improvement and other business initiatives. The Company invested in the construction of a new building connected to its technology center in North Canton, Ohio, to serve as the Company’s world headquarters subsequent to the Spinoff. The new building was completed in 2014, and the total cost was approximately $67 million.
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 reporting period. Related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions are included in the Consolidated Statements of Income.
The Company recognized a foreign currency exchange loss resulting from transactions of $9.93.7 million, $9.15.6 million and $6.5$0.3 million for the years ended December 31, 20142017, 20132016 and 2012,2015, respectively. For the year ended December 31, 20142017, the Company recorded a positive non-cash foreign currency translation adjustment of $44.7 million that increased shareholders’ equity, compared with a negative non-cash foreign currency translation adjustment of $41.3 million that decreased shareholders’ equity, compared to a negative non-cash foreign currency translation adjustment of $11.5$24.5 million that decreased shareholders’ equity for the year ended December 31, 20132016. The foreign currency translation adjustments for the year ended December 31, 20142017 were negatively impacted positively by the strengtheningweakening of the U.S. dollar relative to most other currencies.
Trade Law Enforcement:
The U.S. government has an antidumping duty order in effect covering tapered roller bearings from China. The Company is a producer of these bearings, as well as ball bearings and other bearing types, in the United States. In 2012, theThe U.S. government extendedcurrently is conducting a review of whether or not this antidumping duty order should continue in place for an additional five years. AntidumpingFurthermore, in 2017 the U.S. government initiated, after receipt of a petition from the Company, an antidumping duty orders covering ballinvestigation of certain tapered roller bearings from Japan and the United Kingdom were sunset, as expected, by the U.S. DepartmentRepublic of Commerce in March 2014, retroactive to September 2011.Korea ("Korea"). The Korea antidumping duty investigation is ongoing.
Quarterly Dividend:
On February 14, 2015,9, 2018, the Company’s Board of Directors declared a quarterly cash dividend of $0.25$0.27 per common share. The quarterly dividend will be paid on March 6, 20152, 2018 to shareholders of record as of February 23, 2015.20, 2018. This will be the 371383strdconsecutive quarterly dividend paid on the common shares of the Company.
Forward-Looking Statements
Certain statements set forth in this Annual Report on Form 10-K and in the Company’s 20142017 Annual Report to Shareholders (including the Company’s 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 on pages 2017 through 4745 contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “outlook,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. The Company cautions readers that actualActual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of the Company due to a variety of factors, such as:
| |
| (a) | deterioration in world economic conditions, or in economic conditions in any of the geographic regions in which the Company or its customers or suppliers conducts business, including additional adverse effects from the global economic slowdown, terrorism or hostilities. This includes: political risks associated with the potential instability of governments and legal systems in countries in which the Company, or its customers or suppliers conduct business, and changes in foreign currency valuations; |
| |
| (b) | the effects of fluctuations in customer demand on sales, product mix and prices in the industries in which the Company operates. This includes: the ability of the Company to respond to rapid changes in customer demand, the effects of customer or supplier bankruptcies or liquidations, the impact of changes in industrial business cycles, and whether conditions of fair trade continue in the U.S.our markets; |
| |
| (c) | 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 the Company’s products are produced, sold or distributed; |
| |
| (d) | changes in operating costs. This includes: the effect of changes in the Company’s manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; availability and cost of raw materials and energy;materials; changes in the expected costs associated with product warranty claims; changes resulting from inventory management and cost reduction initiatives and different levels of customer demands;initiatives; the effects of unplanned plant shutdowns; and changes in the cost of labor and benefits; |
| |
| (e) | the success of the Company’s operating plans, announced programs, initiatives and capital investments; the ability to integrate acquired companies; the ability of acquired companies to achieve satisfactory operating results, including results being accretive to earnings; and the Company’s ability to maintain appropriate relations with unions that represent Company associates in certain locations in order to avoid disruptions of business; |
| |
| (f) | unanticipated litigation, claims or assessments. This includes: claims or problems related to intellectual property, product liability or warranty, environmental issues, and taxes; |
| |
| (g) | changes in worldwide financialcapital markets, including availability of financing and interest rates on satisfactory terms, which affect: the Company’s cost of funds and/or ability to raise capital; and customer demand and the ability of customers to obtain financing to purchase the Company’s products or equipment that contain the Company’s products; |
| |
| (h) | the impact on the Company's pension obligations due to changes in interest rates, investment performance, changes in law or regulation, and other tactics designed to reduce risk; |
| |
| (i) | retentionthe impact of CDSOA distributions;changes to the Company's accounting methods, including the actual impact of the adoption of mark-to-market accounting; |
| |
| (j) | the Company's ability to realize the benefitsretention of the SpinoffCDSOA distributions; and avoid possible indemnification liabilities entered into with TimkenSteel in connection with the Spinoff; |
| |
| (k) | the taxable nature of the Spinoff; and |
| |
(l) | those items identified under Item 1A. Risk Factors on pages 76 through 14.11. |
Additional risks relating to the Company’s business, the industries in which the Company operates or the Company’s common shares may be described from time to time in the Company’s filings with the Securities and Exchange Commission. All of these risk factors are difficult to predict, are subject to material uncertainties that may affect actual results and may be beyond the Company’s control.
Readers 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, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk:
Changes in short-term interest rates related to several separate funding sources impact the Company’s earnings. These sources are borrowings under the Asset Securitization Agreement,Accounts Receivable Facility, borrowings under the Senior Credit Facility and short-term bank borrowings by its international subsidiaries. If the market rates for short-term borrowings increased by one-percentage-point around the globe, the impact would be an increase in interest expense of $0.1$2.8 million annually, with a corresponding decrease in income from continuing operations before income taxes of the same amount. This amount was determined by considering the impact of hypothetical interest rates on the Company’s borrowing cost and year-end debt balances by category.
Foreign Currency Exchange Rate Change Risk:
Fluctuations in the value of the U.S. dollar compared to foreign currencies, including the Euro, also impact the Company’s earnings. The greatest risk relates to products shipped between the Company’s European operations and the United States.States, as well as intercompany loans between Timken affiliates. Foreign currency forward contracts are used to hedge a portion of these intercompany transactions. Additionally, hedges are used to cover third-party purchases of productproducts and equipment. As of December 31, 2014,2017, there were $194.1$386.9 million of hedges in place. A uniform 10% weakening of the U.S. dollar against all currencies would have resulted in a charge of $16.6$26.3 million related to these hedges, which would have partially offset the otherwise favorable impact of the underlying currency fluctuation. In addition to the direct impact of the hedged amounts, changes in exchange rates also affect the volume of sales or foreign currency sales price as competitors’ products become more or less attractive.
Commodity Price Risk:
In the ordinary course of business, the Company is exposed to market risk with respect to commodity price fluctuations, primarily related to our purchases of raw materials and energy, principally steel and natural gas. Whenever possible, the Company manages its exposure to commodity risks primarily through the use of supplier pricing agreements that enable the Company to establish the purchase prices for certain inputs that are used in our manufacturing and distribution business.
Item 8. Financial Statements and Supplementary Data
| Consolidated Statements of Income |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | 2013 | 2012 |
| (Dollars in millions, except per share data) | | | |
| Net sales | $ | 3,076.2 |
| $ | 3,035.4 |
| $ | 3,359.5 |
|
| Cost of products sold | 2,178.2 |
| 2,167.0 |
| 2,331.5 |
|
| Gross Profit | 898.0 |
| 868.4 |
| 1,028.0 |
|
| Selling, general and administrative expenses | 542.5 |
| 546.6 |
| 554.5 |
|
| Impairment and restructuring charges | 113.4 |
| 8.7 |
| 29.5 |
|
| Pension settlement charges | 33.7 |
| 7.2 |
| — |
|
| Operating Income | 208.4 |
| 305.9 |
| 444.0 |
|
| Interest expense | (28.7 | ) | (24.4 | ) | (31.1 | ) |
| Interest income | 4.4 |
| 1.9 |
| 2.9 |
|
| Gain on sale of real estate | 22.6 |
| 5.4 |
| — |
|
| Continued Dumping and Subsidy Offset Act (expenses) receipts, net | (2.3 | ) | (2.8 | ) | 108.0 |
|
| Other (expense) income, net | (0.4 | ) | 4.1 |
| (6.0 | ) |
| Income From Continuing Operations Before Income Taxes | 204.0 |
| 290.1 |
| 517.8 |
|
| Provision for income taxes | 54.7 |
| 114.6 |
| 186.3 |
|
| Income From Continuing Operations | 149.3 |
| 175.5 |
| 331.5 |
|
| Income from discontinued operations, net of income taxes | 24.0 |
| 87.5 |
| 164.4 |
|
| Net Income | 173.3 |
| 263.0 |
| 495.9 |
|
| Less: Net income attributable to noncontrolling interest | 2.5 |
| 0.3 |
| 0.4 |
|
| Net Income Attributable to The Timken Company | $ | 170.8 |
| $ | 262.7 |
| $ | 495.5 |
|
| | | | |
| Amounts Attributable to The Timken Company's Common Shareholders: | | | |
| Income from continuing operations, net of income taxes | $ | 146.8 |
| $ | 175.2 |
| $ | 331.1 |
|
| Income from discontinued operations, net of income taxes | 24.0 |
| 87.5 |
| 164.4 |
|
| Net Income Attributable to The Timken Company | $ | 170.8 |
| $ | 262.7 |
| $ | 495.5 |
|
| | | | |
Net Income per Common Share Attributable to The Timken Company Common Shareholders | | | |
| Earnings per share - continuing operations | $ | 1.62 |
| $ | 1.84 |
| $ | 3.41 |
|
| Earnings per share - discontinued operations | 0.27 |
| 0.92 |
| 1.70 |
|
| Basic earnings per share | $ | 1.89 |
| $ | 2.76 |
| $ | 5.11 |
|
| | | | |
| Diluted earnings per share - continuing operations | $ | 1.61 |
| $ | 1.82 |
| $ | 3.38 |
|
| Diluted earnings per share - discontinued operations | 0.26 |
| 0.92 |
| 1.69 |
|
| Diluted earnings per share | $ | 1.87 |
| $ | 2.74 |
| $ | 5.07 |
|
| | | | |
| Dividends per share | $ | 1.00 |
| $ | 0.92 |
| $ | 0.92 |
|
See accompanying Notes to the Consolidated Financial Statements.
| Consolidated Statements of Comprehensive Income |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | 2013 | 2012 |
| (Dollars in millions) | | | |
| Net Income | $ | 173.3 |
| $ | 263.0 |
| $ | 495.9 |
|
| Other comprehensive income, net of tax: | | | |
| Foreign currency translation adjustments | (41.8 | ) | (19.0 | ) | 10.5 |
|
| Unrealized loss on marketable securities | — |
| — |
| (0.8 | ) |
| Pension and postretirement liability adjustment | (43.1 | ) | 398.3 |
| (133.2 | ) |
| Change in fair value of derivative financial instruments | (0.4 | ) | 0.3 |
| (0.4 | ) |
| Other comprehensive (loss) income, net of tax | (85.3 | ) | 379.6 |
| (123.9 | ) |
| Comprehensive Income, net of tax | 88.0 |
| 642.6 |
| 372.0 |
|
| Less: comprehensive income (loss) attributable to noncontrolling interest | 2.0 |
| (7.2 | ) | 0.2 |
|
| Comprehensive Income Attributable to The Timken Company | $ | 86.0 |
| $ | 649.8 |
| $ | 371.8 |
|
| Consolidated Statements of Income |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | 2016 | 2015 |
| (Dollars in millions, except per share data) | | (Revised) | (Revised) |
| Net sales | $ | 3,003.8 |
| $ | 2,669.8 |
| $ | 2,872.3 |
|
| Cost of products sold | 2,193.4 |
| 2,001.3 |
| 2,052.8 |
|
| Gross Profit | 810.4 |
| 668.5 |
| 819.5 |
|
| Selling, general and administrative expenses | 521.4 |
| 470.7 |
| 457.7 |
|
| Impairment and restructuring charges | 4.3 |
| 21.7 |
| 14.7 |
|
| Gain on divestiture | — |
| — |
| (28.7 | ) |
| Pension settlement charges | — |
| 1.6 |
| 119.9 |
|
| Operating Income | 284.7 |
| 174.5 |
| 255.9 |
|
| Interest expense | (37.1 | ) | (33.5 | ) | (33.4 | ) |
| Interest income | 2.9 |
| 1.9 |
| 2.7 |
|
| Continued Dumping and Subsidy Offset Act income, net | — |
| 59.6 |
| — |
|
| Other income (expense), net | 9.4 |
| (0.9 | ) | (7.5 | ) |
| Income Before Income Taxes | 259.9 |
| 201.6 |
| 217.7 |
|
| Provision for income taxes | 57.6 |
| 60.5 |
| 26.3 |
|
| Net Income | 202.3 |
| 141.1 |
| 191.4 |
|
| Less: Net (loss) income attributable to noncontrolling interest | (1.1 | ) | 0.3 |
| 2.8 |
|
| Net Income Attributable to The Timken Company | $ | 203.4 |
| $ | 140.8 |
| $ | 188.6 |
|
| | | | |
Net Income per Common Share Attributable to The Timken Company Common Shareholders | | | |
| Basic earnings per share | $ | 2.62 |
| $ | 1.79 |
| $ | 2.23 |
|
| | | | |
| Diluted earnings per share | $ | 2.58 |
| $ | 1.78 |
| $ | 2.21 |
|
| | | | |
| Dividends per share | $ | 1.07 |
| $ | 1.04 |
| $ | 1.03 |
|
See accompanying Notes to the Consolidated Financial Statements.
| Consolidated Balance Sheets |
| | | | | | |
| | December 31, |
| | 2014 | 2013 |
| (Dollars in millions) | | |
| ASSETS | | |
| Current Assets | | |
| Cash and cash equivalents | $ | 278.8 |
| $ | 384.6 |
|
| Restricted cash | 15.3 |
| 15.1 |
|
| Accounts receivable, less allowances (2014 - $13.7 million; 2013 - $10.1 million) | 475.7 |
| 444.0 |
|
| Inventories, net | 585.5 |
| 582.6 |
|
| Deferred income taxes | 49.9 |
| 56.2 |
|
| Deferred charges and prepaid expenses | 25.2 |
| 26.8 |
|
| Other current assets | 51.5 |
| 61.7 |
|
| Current assets, discontinued operations | — |
| 366.5 |
|
| Total Current Assets | 1,481.9 |
| 1,937.5 |
|
| Property, Plant and Equipment, Net | 780.5 |
| 855.8 |
|
| Other Assets | | |
| Goodwill | 259.5 |
| 346.1 |
|
| Non-current pension assets | 176.2 |
| 223.5 |
|
| Other intangible assets | 239.8 |
| 207.4 |
|
| Other non-current assets | 63.5 |
| 58.4 |
|
| Non-current assets, discontinued operations | — |
| 849.2 |
|
| Total Other Assets | 739.0 |
| 1,684.6 |
|
| Total Assets | $ | 3,001.4 |
| $ | 4,477.9 |
|
| LIABILITIES AND EQUITY | | |
| Current Liabilities | | |
| Short-term debt | $ | 7.4 |
| $ | 18.6 |
|
| Current portion of long-term debt | 0.6 |
| 250.7 |
|
| Accounts payable, trade | 143.9 |
| 139.9 |
|
| Salaries, wages and benefits | 146.7 |
| 131.1 |
|
| Income taxes payable | 80.2 |
| 106.7 |
|
| Other current liabilities | 155.0 |
| 180.8 |
|
| Current liabilities, discontinued operations | — |
| 152.3 |
|
| Total Current Liabilities | 533.8 |
| 980.1 |
|
| Non-Current Liabilities | | |
| Long-term debt | 522.1 |
| 176.4 |
|
| Accrued pension cost | 165.9 |
| 159.0 |
|
| Accrued postretirement benefits cost | 141.8 |
| 138.3 |
|
| Deferred income taxes | 4.1 |
| 82.9 |
|
| Other non-current liabilities | 44.6 |
| 55.9 |
|
| Non-current liabilities, discontinued operations | — |
| 236.7 |
|
| Total Non-Current Liabilities | 878.5 |
| 849.2 |
|
| Shareholders’ Equity | | |
| Class I and II Serial Preferred Stock without par value: | | |
| Authorized - 10,000,000 shares each class, none issued | — |
| — |
|
| Common stock without par value: | | |
| Authorized - 200,000,000 shares | | |
| Issued (including shares in treasury) (2014 - 98,375,135; 2013 - 98,375,135 shares) | | |
| Stated capital | 53.1 |
| 53.1 |
|
| Other paid-in capital | 899.4 |
| 896.4 |
|
| Earnings invested in the business | 1,615.4 |
| 2,586.4 |
|
| Accumulated other comprehensive loss | (482.5 | ) | (626.1 | ) |
| Treasury shares at cost (2014 - 9,783,375; 2013 - 5,252,441 shares) | (509.2 | ) | (273.2 | ) |
| Total Shareholders’ Equity | 1,576.2 |
| 2,636.6 |
|
| Noncontrolling interest | 12.9 |
| 12.0 |
|
| Total Equity | 1,589.1 |
| 2,648.6 |
|
| Total Liabilities and Equity | $ | 3,001.4 |
| $ | 4,477.9 |
|
See accompanying Notes to the Consolidated Financial Statements.
| Consolidated Statements of Cash Flows |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | 2013 | 2012 |
| (Dollars in millions) | | | |
| CASH PROVIDED (USED) | | | |
| Operating Activities | | | |
| Net income attributable to The Timken Company | $ | 170.8 |
| $ | 262.7 |
| $ | 495.5 |
|
| Net income from discontinued operations | (24.0 | ) | (87.5 | ) | (164.4 | ) |
| Net income attributable to noncontrolling interest | 2.5 |
| 0.3 |
| 0.4 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 137.0 |
| 142.4 |
| 149.6 |
|
| Impairment charges | 98.9 |
| 0.1 |
| 6.6 |
|
| (Gain) loss on sale of assets | (20.2 | ) | (1.1 | ) | 5.2 |
|
| Deferred income tax (benefit) provision | (53.3 | ) | (33.0 | ) | 91.6 |
|
| Stock-based compensation expense | 21.8 |
| 16.3 |
| 15.9 |
|
| Excess tax benefits related to stock-based compensation | (7.1 | ) | (10.9 | ) | (9.9 | ) |
| Pension and other postretirement expense | 62.0 |
| 55.1 |
| 63.5 |
|
| Pension and other postretirement benefit contributions | (49.9 | ) | (93.4 | ) | (341.1 | ) |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | (48.3 | ) | (4.6 | ) | 8.3 |
|
| Inventories | (26.8 | ) | 34.6 |
| 57.6 |
|
| Accounts payable, trade | 8.0 |
| 0.9 |
| (36.0 | ) |
| Other accrued expenses | 2.2 |
| (39.6 | ) | (36.8 | ) |
| Income taxes | (15.3 | ) | 67.5 |
| 53.3 |
|
| Other, net | 23.2 |
| (17.0 | ) | 28.1 |
|
| Net Cash Provided by Operating Activities - continuing operations | 281.5 |
| 292.8 |
| 387.4 |
|
| Net Cash Provided by Operating Activities - discontinued operations | 25.5 |
| 137.2 |
| 236.7 |
|
| Net Cash Provided by Operating Activities | 307.0 |
| 430.0 |
| 624.1 |
|
| Investing Activities | | | |
| Capital expenditures | (126.8 | ) | (133.6 | ) | (118.3 | ) |
| Acquisitions, net of cash acquired of $0.4 million in 2013 | (21.7 | ) | (64.2 | ) | (20.7 | ) |
| Proceeds from disposals of property, plant and equipment | 25.9 |
| 7.1 |
| 1.8 |
|
| Investments in short-term marketable securities, net | 4.9 |
| 5.5 |
| 14.3 |
|
| Other | — |
| 1.1 |
| 4.0 |
|
| Net Cash Used by Investing Activities - continuing operations | (117.7 | ) | (184.1 | ) | (118.9 | ) |
| Net Cash Used by Investing Activities - discontinued operations | (77.0 | ) | (191.9 | ) | (178.8 | ) |
| Net Cash Used by Investing Activities | (194.7 | ) | (376.0 | ) | (297.7 | ) |
| Financing Activities | | | |
| Cash dividends paid to shareholders | (90.3 | ) | (87.5 | ) | (89.0 | ) |
| Purchase of treasury shares | (270.9 | ) | (189.2 | ) | (112.3 | ) |
| Proceeds from exercise of stock options | 16.8 |
| 13.1 |
| 13.8 |
|
| Excess tax benefits related to stock-based compensation | 7.1 |
| 10.9 |
| 9.9 |
|
| Proceeds from issuance of long-term debt | 346.2 |
| 1.9 |
| — |
|
| Deferred financing costs | (3.2 | ) | — |
| — |
|
| Accounts receivable securitization financing borrowings | 90.0 |
| — |
| — |
|
| Accounts receivable securitization financing payments | (90.0 | ) | — |
| — |
|
| Payments on long-term debt | (250.7 | ) | (9.9 | ) | (18.4 | ) |
| Short-term debt activity, net | (9.8 | ) | 4.8 |
| (7.7 | ) |
| Cash transferred to TimkenSteel Corporation | (46.5 | ) | — |
| — |
|
| Other | (0.9 | ) | 6.6 |
| 3.6 |
|
| Net Cash Used by Financing Activities - continuing operations | (302.2 | ) | (249.3 | ) | (200.1 | ) |
| Net Cash Provided (Used) by Financing Activities - discontinued operations | 100.0 |
| — |
| (8.5 | ) |
| Net Cash Used by Financing Activities | (202.2 | ) | (249.3 | ) | (208.6 | ) |
| Effect of exchange rate changes on cash | (15.9 | ) | (6.5 | ) | 3.8 |
|
| (Decrease) Increase In Cash and Cash Equivalents | (105.8 | ) | (201.8 | ) | 121.6 |
|
| Cash and cash equivalents at beginning of year | 384.6 |
| 586.4 |
| 464.8 |
|
| Cash and Cash Equivalents at End of Year | $ | 278.8 |
| $ | 384.6 |
| $ | 586.4 |
|
| Consolidated Statements of Comprehensive Income |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | 2016 | 2015 |
| (Dollars in millions) | | (Revised) | (Revised) |
| Net Income | $ | 202.3 |
| $ | 141.1 |
| $ | 191.4 |
|
| Other comprehensive income (loss), net of tax: | | | |
| Foreign currency translation adjustments | 47.1 |
| (22.8 | ) | (64.8 | ) |
| Pension and postretirement liability adjustment | (1.8 | ) | 1.1 |
| (2.4 | ) |
| Change in fair value of derivative financial instruments | (3.3 | ) | 0.1 |
| 1.1 |
|
| Other comprehensive income (loss), net of tax | 42.0 |
| (21.6 | ) | (66.1 | ) |
| Comprehensive Income, net of tax | 244.3 |
| 119.5 |
| 125.3 |
|
| Less: comprehensive income attributable to noncontrolling interest | 1.3 |
| 2.0 |
| 0.7 |
|
| Comprehensive Income Attributable to The Timken Company | $ | 243.0 |
| $ | 117.5 |
| $ | 124.6 |
|
See accompanying Notes to the Consolidated Financial Statements.
| Consolidated Statements of Shareholders’ Equity |
| | | | | | | | | | | | | | | | | | | | | |
| | | The Timken Company Shareholders | |
| | Total | Stated Capital | Other Paid-In Capital | Earnings Invested in the Business | Accumulated Other Comprehensive Income (Loss) | Treasury Shares | Non- controlling Interest |
| (Dollars in millions, except per share data) | | | | | | | |
| Year Ended December 31, 2012 | | | | | | | |
| Balance at January 1, 2012 | $ | 2,042.5 |
| $ | 53.1 |
| $ | 889.2 |
| $ | 2,004.7 |
| $ | (889.5 | ) | $ | (29.2 | ) | $ | 14.2 |
|
| Net income | 495.9 |
| | | 495.5 |
| | | 0.4 |
|
| Foreign currency translation adjustments | 10.5 |
| | | | 10.5 |
| | |
Pension and postretirement liability adjustment (net of income tax of $55.3 million) | (133.2 | ) | | | | (133.2 | ) | | |
| Unrealized loss on marketable securities | (0.8 | ) | | | | (0.6 | ) | | (0.2 | ) |
Change in fair value of derivative financial instruments, net of reclassifications | (0.4 | ) | | | | (0.4 | ) | | |
| Dividends – $0.92 per share | (89.0 | ) | | | (89.0 | ) | | | |
| Excess tax benefit from stock compensation | 9.9 |
| | 9.9 |
| | | | |
| Stock-based compensation expense | 18.0 |
| | 18.0 |
| | | | |
| Stock purchased at cost | (112.3 | ) | | | | | (112.3 | ) | |
| Stock option exercise activity | 13.4 |
| | (21.9 | ) | | | 35.3 |
| |
| Restricted shares (issued) surrendered | 0.2 |
| | (3.8 | ) | | | 4.0 |
| |
| Shares surrendered for taxes | (8.1 | ) | | | | | (8.1 | ) | |
| Balance at December 31, 2012 | $ | 2,246.6 |
| $ | 53.1 |
| $ | 891.4 |
| $ | 2,411.2 |
| $ | (1,013.2 | ) | $ | (110.3 | ) | $ | 14.4 |
|
| Year Ended December 31, 2013 | | | | | | | |
| Net income | 263.0 |
| | | 262.7 |
| | | 0.3 |
|
| Foreign currency translation adjustments | (19.0 | ) | | | | (11.5 | ) | | (7.5 | ) |
Pension and postretirement liability adjustment (net of income tax of $226.5 million) | 398.3 |
| | | | 398.3 |
| | |
Change in fair value of derivative financial instruments, net of reclassifications | 0.3 |
| | | | 0.3 |
| | |
| Change in ownership of noncontrolling interest | 8.9 |
| | 1.3 |
| | | | 7.6 |
|
| Dividends declared to noncontrolling interest | (2.8 | ) | | | | | | (2.8 | ) |
| Dividends – $0.92 per share | (87.5 | ) | | | (87.5 | ) | | | |
| Excess tax benefit from stock compensation | 10.9 |
| | 10.9 |
| | | | |
| Stock-based compensation expense | 18.6 |
| | 18.6 |
| | | | |
| Stock purchased at cost | (189.2 | ) | | | | | (189.2 | ) | |
| Stock option exercise activity | 7.8 |
| | (22.0 | ) | | | 29.8 |
| |
| Restricted shares (issued) surrendered | 1.0 |
| | (3.8 | ) | | | 4.8 |
| |
| Shares surrendered for taxes | (8.3 | ) | | | | | (8.3 | ) | |
| Balance at December 31, 2013 | $ | 2,648.6 |
| $ | 53.1 |
| $ | 896.4 |
| $ | 2,586.4 |
| $ | (626.1 | ) | $ | (273.2 | ) | $ | 12.0 |
|
| Year Ended December 31, 2014 | | | | | | | |
| Net income | 173.3 |
| | | 170.8 |
| | | 2.5 |
|
| Foreign currency translation adjustments | (41.8 | ) | | | | (41.3 | ) | | (0.5 | ) |
Pension and postretirement liability adjustment (net of income tax of $23.9 million) | (43.1 | ) | | | | (43.1 | ) | | |
Change in fair value of derivative financial instruments, net of reclassifications | (0.4 | ) | | | | (0.4 | ) | | |
| Dividends declared to noncontrolling interest | (1.1 | ) | | | | | | (1.1 | ) |
| Dividends – $1.00 per share | (90.3 | ) | | | (90.3 | ) | | | |
| Distribution of TimkenSteel | (823.1 | ) | | | (1,051.5 | ) | 228.4 |
| | |
| Excess tax benefit from stock compensation | 7.1 |
| | 7.1 |
| | | | |
| Stock-based compensation expense | 23.9 |
| | 23.9 |
| | | | |
| Stock purchased at cost | (270.9 | ) | | | | | (270.9 | ) | |
| Stock option exercise activity | 16.7 |
| | (23.8 | ) | | | 40.5 |
| |
| Restricted shares (issued) surrendered | 0.9 |
| | (4.2 | ) | | | 5.1 |
| |
| Shares surrendered for taxes | (10.7 | ) | | | | | (10.7 | ) | |
| Balance at December 31, 2014 | $ | 1,589.1 |
| $ | 53.1 |
| $ | 899.4 |
| $ | 1,615.4 |
| $ | (482.5 | ) | $ | (509.2 | ) | $ | 12.9 |
|
| Consolidated Balance Sheets |
| | | | | | |
| | December 31, |
| | 2017 | 2016 |
| (Dollars in millions) | | (Revised) |
| ASSETS | | |
| Current Assets | | |
| Cash and cash equivalents | $ | 121.6 |
| $ | 148.8 |
|
| Restricted cash | 3.8 |
| 2.7 |
|
| Accounts receivable, less allowances (2017 - $20.3 million; 2016 - $20.2 million) | 524.9 |
| 438.0 |
|
| Inventories, net | 738.9 |
| 553.7 |
|
| Deferred charges and prepaid expenses | 29.7 |
| 20.3 |
|
| Other current assets | 81.2 |
| 48.4 |
|
| Total Current Assets | 1,500.1 |
| 1,211.9 |
|
| Property, Plant and Equipment, Net | 864.2 |
| 804.4 |
|
| Other Assets | | |
| Goodwill | 511.8 |
| 357.5 |
|
| Other intangible assets | 420.6 |
| 271.0 |
|
| Non-current pension assets | 19.7 |
| 32.1 |
|
| Deferred income taxes | 61.0 |
| 51.4 |
|
| Other non-current assets | 25.0 |
| 34.9 |
|
| Total Other Assets | 1,038.1 |
| 746.9 |
|
| Total Assets | $ | 3,402.4 |
| $ | 2,763.2 |
|
| LIABILITIES AND EQUITY | | |
| Current Liabilities | | |
| Short-term debt | $ | 105.4 |
| $ | 19.2 |
|
| Current portion of long-term debt | 2.7 |
| 5.0 |
|
| Accounts payable, trade | 265.2 |
| 176.2 |
|
| Salaries, wages and benefits | 127.9 |
| 85.9 |
|
| Income taxes payable | 9.8 |
| 16.9 |
|
| Other current liabilities | 160.7 |
| 149.5 |
|
| Total Current Liabilities | 671.7 |
| 452.7 |
|
| Non-Current Liabilities | | |
| Long-term debt | 854.2 |
| 635.0 |
|
| Accrued pension cost | 167.3 |
| 154.7 |
|
| Accrued postretirement benefits cost | 122.6 |
| 131.5 |
|
| Deferred income taxes | 44.0 |
| 3.9 |
|
| Other non-current liabilities | 67.7 |
| 74.5 |
|
| Total Non-Current Liabilities | 1,255.8 |
| 999.6 |
|
| Shareholders’ Equity | | |
| Class I and II Serial Preferred Stock without par value: | | |
| Authorized - 10,000,000 shares each class, none issued | — |
| — |
|
| Common stock without par value: | | |
| Authorized - 200,000,000 shares | | |
| Issued (including shares in treasury) (2017 - 98,375,135; 2016 - 98,375,135 shares) | | |
| Stated capital | 53.1 |
| 53.1 |
|
| Other paid-in capital | 903.8 |
| 906.9 |
|
| Earnings invested in the business | 1,408.4 |
| 1,289.3 |
|
| Accumulated other comprehensive loss | (38.3 | ) | (77.9 | ) |
| Treasury shares at cost (2017 - 20,672,133; 2016 - 20,925,492 shares) | (884.3 | ) | (891.7 | ) |
| Total Shareholders’ Equity | 1,442.7 |
| 1,279.7 |
|
| Noncontrolling interest | 32.2 |
| 31.2 |
|
| Total Equity | 1,474.9 |
| 1,310.9 |
|
| Total Liabilities and Equity | $ | 3,402.4 |
| $ | 2,763.2 |
|
See accompanying Notes to the Consolidated Financial Statements.
| Consolidated Statements of Cash Flows |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | 2016 | 2015 |
| (Dollars in millions) | | (Revised) | (Revised) |
| CASH PROVIDED (USED) | | | |
| Operating Activities | | | |
| Net income attributable to The Timken Company | $ | 203.4 |
| $ | 140.8 |
| $ | 188.6 |
|
| Net (loss) income attributable to noncontrolling interest | (1.1 | ) | 0.3 |
| 2.8 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 137.7 |
| 131.7 |
| 130.8 |
|
| Impairment charges | 0.1 |
| 3.9 |
| 3.3 |
|
| (Gain) loss on sale of assets | (2.1 | ) | 1.6 |
| 11.8 |
|
| Gain on divestitures | — |
| — |
| (28.7 | ) |
| Deferred income tax benefit | (0.4 | ) | (15.0 | ) | (22.2 | ) |
| Stock-based compensation expense | 24.7 |
| 14.1 |
| 18.4 |
|
| Pension and other postretirement expense | 28.9 |
| 84.0 |
| 95.3 |
|
| Pension and other postretirement benefit contributions | (23.9 | ) | (24.7 | ) | (29.8 | ) |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | (42.3 | ) | 20.3 |
| 11.9 |
|
| Inventories | (132.1 | ) | 10.1 |
| 53.1 |
|
| Accounts payable, trade | 70.7 |
| 12.2 |
| 11.6 |
|
| Other accrued expenses | 36.3 |
| (2.8 | ) | (47.7 | ) |
| Income taxes | (36.2 | ) | 23.5 |
| (40.4 | ) |
| Other, net | (26.9 | ) | 3.9 |
| 21.5 |
|
| Net Cash Provided by Operating Activities | 236.8 |
| 403.9 |
| 380.3 |
|
| | | | |
| Investing Activities | | | |
| Capital expenditures | (104.7 | ) | (137.5 | ) | (105.6 | ) |
Acquisitions, net of cash acquired of $35.0 million in 2017, $2.5 million in 2016 and $0.1 million in 2015 | (346.8 | ) | (72.6 | ) | (213.3 | ) |
| Proceeds from disposals of property, plant and equipment | 7.1 |
| 1.5 |
| 9.8 |
|
| Divestitures | — |
| — |
| 46.2 |
|
| Investments in short-term marketable securities, net | (3.6 | ) | (2.6 | ) | (1.8 | ) |
| Other | (0.7 | ) | 0.2 |
| (0.5 | ) |
| Net Cash Used in Investing Activities | (448.7 | ) | (211.0 | ) | (265.2 | ) |
| | | | |
| Financing Activities | | | |
| Cash dividends paid to shareholders | (83.3 | ) | (81.6 | ) | (87.0 | ) |
| Purchase of treasury shares | (43.4 | ) | (101.0 | ) | (309.7 | ) |
| Proceeds from exercise of stock options | 32.9 |
| 4.3 |
| 4.1 |
|
| Shares surrendered for taxes | (11.4 | ) | (1.9 | ) | (4.0 | ) |
| Proceeds from issuance of long-term debt | 927.8 |
| 340.5 |
| 265.7 |
|
| Payments on long-term debt | (684.5 | ) | (345.3 | ) | (190.6 | ) |
| Deferred financing costs | (1.2 | ) | — |
| (2.0 | ) |
| Accounts receivable securitization financing borrowings | 56.7 |
| 50.0 |
| 116.0 |
|
| Accounts receivable securitization financing payments | (42.7 | ) | (50.1 | ) | (67.0 | ) |
| Short-term debt activity, net | 19.9 |
| 7.2 |
| 6.0 |
|
| (Increase) decrease in restricted cash | (1.2 | ) | (2.5 | ) | 14.8 |
|
| Other | (2.6 | ) | 9.1 |
| 6.6 |
|
| Net Cash Provided by (Used in) Financing Activities | 167.0 |
| (171.3 | ) | (247.1 | ) |
| Effect of exchange rate changes on cash | 17.7 |
| (2.4 | ) | (17.2 | ) |
| (Decrease) increase In Cash and Cash Equivalents | (27.2 | ) | 19.2 |
| (149.2 | ) |
| Cash and cash equivalents at beginning of year | 148.8 |
| 129.6 |
| 278.8 |
|
| Cash and Cash Equivalents at End of Year | $ | 121.6 |
| $ | 148.8 |
| $ | 129.6 |
|
See accompanying Notes to the Consolidated Financial Statements.
| Consolidated Statements of Shareholders’ Equity |
| | | | | | | | | | | | | | | | | | | | | |
| | | The Timken Company Shareholders | |
| | Total | Stated Capital | Other Paid-In Capital | Earnings Invested in the Business | Accumulated Other Comprehensive Income (Loss) | Treasury Shares | Non- controlling Interest |
| (Dollars in millions, except per share data) | | | | | | | |
| Year Ended December 31, 2015 | | | | | | | |
| Balance at January 1, 2015 (Revised) | $ | 1,594.3 |
| $ | 53.1 |
| $ | 899.4 |
| $ | 1,128.5 |
| $ | 9.4 |
| $ | (509.2 | ) | $ | 13.1 |
|
| Net income | 191.4 |
| | | 188.6 |
| | | 2.8 |
|
| Foreign currency translation adjustments | (64.8 | ) | | | | (62.7 | ) | | (2.1 | ) |
Pension and other postretirement liability adjustment
(net of income tax expense of $6.2 million) | (2.4 | ) | | | | (2.4 | ) | | |
Change in fair value of derivative financial instruments, net of reclassifications | 1.1 |
| | | | 1.1 |
| | |
Investment in joint venture by noncontrolling interest party | 6.6 |
| | | | | | 6.6 |
|
| Dividends declared to noncontrolling interest | (0.2 | ) | | | | | | (0.2 | ) |
| Dividends – $1.03 per share | (87.0 | ) | | | (87.0 | ) | | | |
| Excess tax benefit from stock compensation | 1.5 |
| | 1.5 |
| | | | |
| Stock-based compensation expense | 18.4 |
| | 18.4 |
| | | | |
| Purchase of treasury shares | (309.7 | ) | | | | | (309.7 | ) | |
| Stock option exercise activity | 4.2 |
| | (7.5 | ) | | | 11.7 |
| |
| Restricted share activity | 0.2 |
| | (6.7 | ) | | | 6.9 |
| |
| Shares surrendered for taxes | (4.0 | ) | | | | | (4.0 | ) | |
| Balance at December 31, 2015 (Revised) | $ | 1,349.6 |
| $ | 53.1 |
| $ | 905.1 |
| $ | 1,230.1 |
| $ | (54.6 | ) | $ | (804.3 | ) | $ | 20.2 |
|
| Year Ended December 31, 2016 | | | | | | | |
| Net income | 141.1 |
| | | 140.8 |
| | | 0.3 |
|
| Foreign currency translation adjustments | (22.8 | ) | | | | (24.5 | ) | | 1.7 |
|
Pension and other postretirement liability adjustment
(net of income tax expense of $13.1 million) | 1.1 |
| | | | 1.1 |
| | |
Change in fair value of derivative financial instruments, net of reclassifications | 0.1 |
| | | | 0.1 |
| | |
Investment in joint venture by noncontrolling interest party | 9.3 |
| | | | | | 9.3 |
|
| Dividends declared to noncontrolling interest | (0.3 | ) | | | | | | (0.3 | ) |
| Dividends – $1.04 per share | (81.6 | ) | | | (81.6 | ) | | | |
| Excess tax benefit from stock compensation | (1.1 | ) | | (1.1 | ) | | | | |
| Stock-based compensation expense | 14.1 |
| | 14.1 |
| | | | |
| Purchase of treasury shares | (101.0 | ) | | | | | (101.0 | ) | |
| Stock option exercise activity | 4.3 |
| | (2.5 | ) | | | 6.8 |
| |
Restricted share activity
| — |
| | (8.7 | ) | | | 8.7 |
| |
| Shares surrendered for taxes | (1.9 | ) | | | | | (1.9 | ) | |
| Balance at December 31, 2016 (Revised) | $ | 1,310.9 |
| $ | 53.1 |
| $ | 906.9 |
| $ | 1,289.3 |
| $ | (77.9 | ) | $ | (891.7 | ) | $ | 31.2 |
|
| Year Ended December 31, 2017 | | | | | | | |
| Cumulative effect of ASU 2016-09 | 0.5 |
| | 1.5 |
| (1.0 | ) | | | |
| Net income (loss) | 202.3 |
| | | 203.4 |
| | | (1.1 | ) |
| Foreign currency translation adjustments | 47.1 |
| | | | 44.7 |
| | 2.4 |
|
Pension and other postretirement liability adjustment
(net of $1.1 income tax benefit) | (1.8 | ) | | | | (1.8 | ) | | |
Change in fair value of derivative financial instruments, net of reclassifications | (3.3 | ) | | | | (3.3 | ) | | |
| Dividends declared to noncontrolling interest | (0.3 | ) | | | | | | (0.3 | ) |
| Dividends – $1.07 per share | (83.3 | ) | | | (83.3 | ) | | | |
| Stock-based compensation expense | 24.7 |
| | 24.7 |
| | | | |
| Purchase of treasury shares | (43.4 | ) | | | | | (43.4 | ) | |
| Stock option exercise activity | 32.9 |
| | (10.7 | ) | | | 43.6 |
| |
Restricted share activity
| — |
| | (18.6 | ) | | | 18.6 |
| |
| Shares surrendered for taxes | (11.4 | ) | | | | | (11.4 | ) | |
| Balance at December 31, 2017 | $ | 1,474.9 |
| $ | 53.1 |
| $ | 903.8 |
| $ | 1,408.4 |
| $ | (38.3 | ) | $ | (884.3 | ) | $ | 32.2 |
|
See accompanying Notes to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Note 1 - Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts and operations of the Company in which a controlling interest is maintained. Investments in affiliated companies thatwhere the Company exercises significant influence, but does not control, and the activities of which it is not the primary beneficiary, are accounted for using the equity method. All significant intercompany accounts and transactions are eliminated upon consolidation.
Revenue Recognition:
The Company recognizes revenue when title passes to the customer. This occurs at the shipping point except for goods sold by certain foreign entities and certain exported goods, where title passes when the goods reach their destination. Selling prices are fixed based on purchase orders or contractual arrangements. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold in the Consolidated Statements of Income.
The Company recognizes a portion of its revenues on the percentage-of-completion method measured on the cost-to-cost basis. In 20142017, 2016 and 2013,2015, the Company recognized approximately $50$83 million, $68 million, and $55$66 million, respectively, in net sales under the percentage-of-completion method. As of December 31, 2017 and 2016, net accounts receivable included costs in excess of billings of $67.3 million and $63.5 million, respectively, related to these net sales.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Restricted Cash:
Cash of $15.3$3.8 million and $15.1$2.7 million at December 31, 20142017 and 2013,2016, respectively, was restricted. The increase was primarily due to cash restricted for usebank guarantees of $0.5 million and for workers compensation claims.unclaimed dividends by foreign subsidiaries to minority shareholders of $0.6 million.
Allowance for Doubtful Accounts:
The Company maintains an allowance for doubtful accounts, which represents an estimate of the losses expected from the accounts receivable portfolio, to reduce accounts receivable to their net realizable value. The allowance is based upon historical trends in collections and write-offs, management’s judgment of the probability of collecting accounts and management’s evaluation of business risk. The Company extends credit to customers satisfying pre-defined credit criteria. The Company believes it has limited concentration of credit risk due to the diversity of its customer base.
Inventories:
Inventories are valued at the lower of cost or market.market, with approximately 55% valued by the FIFO method and the remaining 45% valued by the LIFO method. The majority of the Company’s domestic inventories are valued by the LIFO method, and the balancewhile all of the Company'sCompany’s international inventories isare valued by the FIFO method.
Investments:
Short-term investments are investments with maturities between four months and one year and are valued at amortized cost, which approximates fair value. The Company held short-term investments as of December 31, 20142017 and 20132016 with a fair value and cost basis of $8.4$16.4 million and $13.9$11.7 million, respectively, which were included in other current assets on the Consolidated Balance Sheets.
Property, Plant and Equipment:
Property, plant and equipment, net is 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, three to ten10 years for computer software and three to 20 years for machinery and equipment.
Note 1 – Significant Accounting Policies (continued)
The impairment of long-lived assets is evaluated when events or changes in circumstances indicate that the carrying amount of the asset or related group of assets may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time to reduce the asset to the lower of its fair value or its net book value.
Note 1 - Significant Accounting Policies (continued)
Goodwill and Other Intangible Assets:
Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from one to 20 years.years. Goodwill and indefinite-lived intangible assets not subject to amortization are tested for impairment at least annually. The Company performs its annual impairment test as of October 1, after the annual forecasting process is completed.1st. Furthermore, goodwill and indefinite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable in accordance with accounting rules related to goodwill and other intangible assets.
Product Warranties:
The Company provides limited warranties on certain of its products. The Company accrues liabilities for warranties generally based upon specific claims and a review ofin certain instances based on historical warranty claim experience in accordance with accounting rules relating to contingent liabilities. The Company records and accounts for its warranty reserve based on specific claim incidents. ShouldWhen the Company becomebecomes aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. Adjustments are made quarterly to the accruals as claim data and historical experience change.
Income Taxes:
The Company accounts for income taxes in accordance with ASC 740, “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. The Company recognizes valuation allowances against deferred tax assets by tax jurisdiction when it is more likely than not that suchthose assets will not be realized. Accruals for uncertain tax positions are provided for in accordance with ASC 740-10. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.
Foreign Currency:
Assets and liabilities of subsidiaries other than those located in highly inflationary countries, 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 translationreporting period. Translation adjustments for assets and liabilities are reflected as a separate component of accumulated other comprehensive loss. GainsForeign currency gains and losses resulting from foreign currency transactions and the translation of financial statements of subsidiaries in highly inflationary countries are included in the Consolidated Statements of Income.
For the year ended December 31, 2017, the Company recorded a non-cash foreign currency translation adjustment of $44.7 million that increased shareholders’ equity, compared with a non-cash foreign currency translation adjustment of $24.5 million that decreased shareholders’ equity for the year ended December 31, 2016. The foreign currency translation adjustments for the year ended December 31, 2017 were positively impacted by the weakening of the U.S. dollar relative to most other currencies.
The Company realizedrecognized a foreign currency exchange lossesloss resulting from transactions of $9.9$3.7 million,, $9.1 $5.6 million and $6.5$0.3 million in 2014, 2013for the years ended December 31, 2017, 2016 and 2012,2015, respectively.
Pension and Other Postretirement Benefits:
ThePrior to January 1, 2017, the Company recognizesrecognized 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 its defined benefit pension and other postretirement benefit plans on the Consolidated Balance Sheets, with a corresponding adjustment to accumulated other comprehensive loss,income, net of tax. The adjustment to accumulated other comprehensive loss representsincome represented the current year net unrecognized actuarial gains and losses and unrecognized prior service costs. These amounts will be recognizedcosts that were amortized in future periods as a component of net periodic benefit cost.
Note 1 – Significant Accounting Policies (continued)
Beginning on January 1, 2017, the Company changed its accounting principles for recognizing actuarial gains and losses and expected returns on plan assets. The Company now recognizes actuarial gains and losses immediately through net periodic benefit cost included in cost of products sold and SG&A expense upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement. Also, the market-related value of plan assets is measured at fair value. These changes in accounting principles were applied retrospectively; therefore, prior period amounts impacted have been revised accordingly herein. For further information, refer to Note 2 - Change in Accounting Principles in the Notes to the Consolidated Financial Statements.
Stock-Based Compensation:
The Company recognizes stock-based compensation expense over the related vesting period of the awards based on the grant date fair value ofon the stock-based awards over their required vesting period.grant date. Stock options are issued with an exercise price equal to the opening market price of Timken 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. The fair value of stock-based awards that will settle in Timken common shares, other than stock options, is based on the opening market price of Timken common shares on the grant date. The fair value of stock-based awards that will settle in cash are remeasured at each reporting period until settlement of the awards.
Note 1 - Significant Accounting Policies (continued)
Earnings Per Share:
UnvestedOnly certain unvested restricted sharesshare grants provide for the payment of nonforfeitable dividends. The Company considers these awards as participating securities. Earnings per share are computed using the two-class method. Basic earnings per share are computed by dividing net income less undistributed earnings allocated to unvested restricted shares by the weighted-average number of common shares outstanding during the year. Diluted earnings per share are computed by dividing net income less undistributed earnings allocated to unvested restricted shares by the weighted-average number of common shares outstanding, adjusted for the dilutive impact of outstanding stock-based awards.
Derivative Instruments:
The Company recognizes all derivatives on the Consolidated Balance Sheets at fair value. Derivatives that are not designated as hedges must beare adjusted to fair value through earnings. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive loss until the hedged item is recognized in earnings. The Company’s holdings of forward foreign currency exchange contracts qualify as derivatives pursuant to the criteria established in derivative accounting guidance, and the Company has designated certain of those derivatives as hedges.
Use of Estimates:
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Because actual results could differ from these estimates, the Company reviews and updates these estimates and assumptions regularly to reflect recent experience.
Note 1 – Significant Accounting Policies (continued)
Recent Accounting Pronouncements:
New Accounting Guidance Adopted:
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies various aspects of the accounting for stock-based payments. The simplifications include:
| |
| a. | recording all tax effects associated with stock-based compensation through the income statement, as opposed to recording certain amounts in other paid-in capital, which eliminates the requirements to calculate a “windfall pool”; |
| |
| b. | allowing entities to withhold shares to satisfy the employer’s statutory tax withholding requirement up to the highest marginal tax rate applicable to employees rather than the employer’s minimum statutory rate, without requiring liability classification for the award; |
| |
| c. | modifying the requirement to estimate the number of awards that will ultimately vest by providing an accounting policy election to either estimate the number of forfeitures or recognize forfeitures as they occur; |
| |
| d. | changing certain presentation requirements in the statement of cash flows, including removing the requirement to present excess tax benefits as an inflow from financing activities and an outflow from operating activities and requiring the cash paid to taxing authorities arising from withheld shares to be classified as a financing activity; and |
| |
| e. | amending the assumed proceeds from applying the treasury stock method when computing earnings per share to exclude the amount of excess tax benefits that would be recognized in additional paid-in capital. |
On January 1, 2017, the Company adopted the provisions of ASU 2016-09. The presentation of shares surrendered by employees to meet the minimum statutory withholding requirement was applied retrospectively in the Consolidated Statement of Cash Flows. As a result of the adoption of ASU 2016-09, $1.9 million and $4.0 million was reclassified from the other accrued expenses line in the operating activities section of the Consolidated Statement of Cash Flows to the shares surrendered for taxes line in the financing activities section for the 12 months ended December 31, 2016 and December 31, 2015, respectively.
In addition, the adoption of ASU 2016-09 resulted in the Company making an accounting policy election to change how it will recognize the number of stock awards that will ultimately vest. In the past, the Company applied a forfeiture rate to shares granted. With the adoption of ASU 2016-09, the Company will recognize forfeitures as they occur. This change resulted in the Company recording a cumulative effect decrease to retained earnings of $1.0 million, as reflected in the Consolidated Statements of Shareholders' Equity. In addition, the Company began recording the tax effects associated with stock-based compensation through the income statement on a prospective basis, which resulted in a tax benefit of $1.9 million for the 12 months ended December 31, 2017. Finally, the Company adjusted dilutive shares to remove the excess tax benefits from the calculation of earnings per share on a prospective basis. The revised calculation is more dilutive, but it did not change earnings per share for prior years.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value, which is defined as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. Under existing guidance, net realizable value is one of several acceptable measures of market value that could be used to measure inventory at the lower of cost or market and, as such, the new guidance reduces the complexity in the measurement. On January 1, 2017, the Company adopted the provisions of ASU 2015-11 on a prospective basis. The adoption of ASU 2015-11 did not have a material impact on the Company's results of operations or financial condition. For our disclosures related to inventories, refer to Note 7 - Inventories.
Note 1 – Significant Accounting Policies (continued)
New Accounting Guidance Issued and Not Yet Adopted:
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which impacts both designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 amends and clarifies the requirements to qualify for hedge accounting, removes the requirement to recognize changes in fair value from certain hedges in current earnings, and specifies the presentation of changes in fair value in the income statement for all hedging instruments. ASU 2017-12 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including in any interim period for which financial statements have not yet been issued, but the effect of adoption is required to be reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the effect that the adoption of ASU 2017-12 will have on the Company's results of operations and financial condition.
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 provides clarity on which changes to the terms or conditions of share-based payment awards require entities to apply the modification accounting provisions required in Topic 718. ASU 2017-09 is effective for public companies for annual reporting periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company does not expect that the adoption of ASU 2017-09 will have a material impact on the Company's results of operations and financial condition, as the Company does not anticipate future modifications of share-based payment awards.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 impacts where the components of net benefit cost are presented within an entity’s income statement. Service cost will be included in other employee compensation costs within operating income and is the only component that may be capitalized when applicable. The other components of net periodic benefit cost will be presented separately outside of operating income. ASU 2017-07 is effective for public companies for annual reporting periods beginning after December 15, 2017 and interim periods within that reporting period. Accordingly, the Company plans to adopt ASU 2017-07 during the first quarter of 2018. The Company's assessment has indicated that the adoption of ASU 2017-07 will result in the reclassification of certain amounts from cost of products sold and SG&A expenses to other income (expense), net in the Consolidated Statement of Income. The amounts impacted include all components of net benefit cost, except for the service cost component, for the Company's defined benefit pension plans and other postretirement benefit plans. The amounts impacted may be material to individual line items on the Consolidated Statement of Income, but will have no impact on the Company's net income. The Company will finalize its analysis on the effect that the adoption of ASU 2017-07 will have on the Company's results of operations during the first quarter of 2018.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Prior to the issuance of the new accounting guidance, entities first assessed qualitative factors to determine whether a two-step goodwill impairment test was necessary. When entities bypassed or failed the qualitative analysis, they were required to apply a two-step goodwill impairment test. Step 1 compared a reporting unit’s fair value to its carrying amount to determine if there is a potential impairment. If the carrying amount of a reporting unit exceeds its fair value, Step 2 was required to be completed. Step 2 involved determining the implied fair value of goodwill and comparing it to the carrying amount of that goodwill to measure the impairment loss, if any. ASU 2017-04 eliminates Step 2 of the current goodwill impairment test. ASU 2017-04 will require that a goodwill impairment loss be measured at the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for public companies for years beginning after December 15, 2019, with early adoption permitted, and must be applied prospectively. While the effect of adopting ASU 2017-04 will not be known until the period of adoption, the Company currently does not expect it to materially impact the Company's results of operations and financial condition.
Note 1 – Significant Accounting Policies (continued)
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance will replace the current incurred loss approach with an expected loss model. The new expected credit loss impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt instruments, net investments in leases, loan commitments and standby letters of credit. Upon initial recognition of the exposure, the expected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. ASU 2016-13 does not prescribe a specific method to make the estimate, so its application will require significant judgment. ASU 2016-13 is effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of ASU 2016-13 will have on the Company's results of operations and financial condition.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 was issued to increase transparency and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. ASU 2016-02 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the effect that the adoption of ASU 2016-02 will have on the Company's results of operations and financial condition.
In May 2014, the Financial Accounting Standards Board (FASB)FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 (the "New Standard”) introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. This new accounting guidance isOn July 9, 2015, the FASB decided to delay the effective date of the New Standard by one year, which will result in it being effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period.2017.
The Company has completed the assessment phase of the project, which has identified certain differences from the application of the New Standard. The Company is currently evaluatingdesigning and implementing procedures and related internal controls to address the impactdifferences identified, including the expanded disclosure requirements resulting from the New Standard, and will adopt the requirements of the New Standard in the first quarter of 2018. The Company has determined it will use the modified retrospective method of adoption, such that the cumulative effect of applying the New Standard will be recognized at the date of initial application accompanied by additional disclosures comparing the current period results presented under the New Standard to the previous accounting method.
Note 1 – Significant Accounting Policies (continued)
The cumulative-effect adjustment of adopting ASU 2014-09 onthe New Standard is not expected to be material to the Company's results of operations orand financial condition.
In April 2014,condition; however, we will expand certain disclosures as required. The anticipated impact principally relates to the FASB issued ASU 2014-08, "Presentationacceleration of Financial Statements (Topic 205)revenue recognition for certain revenue streams previously accounted for using a point-in-time model that will now utilize an over-time model due to the continuous transfer of control to customers. Additionally, there are other minor policy changes related to the timing and Property, Plantmeasurement of recognizing revenue and Equipment (Topic 360)." ASU 2014-08 amendscosts to better align our policies with the requirements for reporting discontinuedNew Standard that are not expected to result in material changes. The Company's belief that the impact to its results of operations and requires additional disclosures about discontinued operations.financial condition is not material is based on an evaluation of its contracts under the New Standard, which only supports the recognition of revenue over time under the cost-to-cost method for a limited number of contracts, primarily in the services, defense, and aerospace market sectors. Revenue on the majority of the Company's contracts will continue to be recognized as of a point in time because the criteria in the New Standard for over time recognition have not been met. Additionally, the Company does not expect material changes to its consolidated balance sheet. The anticipated impact to the consolidated balance sheet primarily relates to reclassifications among financial statement accounts to align with the New Standard and the addition of contract asset and contract liability accounts representing costs in excess of billings for in-process contracts and deferred revenue, respectively, for revenue that is recognized over-time as previously described. The Company's contract balances will be reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.
Note 2 - Change in Accounting Principle
Effective January 1, 2017, the Company voluntarily changed its accounting principles for recognizing actuarial gains and losses and expected returns on plan assets for its defined benefit pension and other postretirement benefit plans, with retrospective application to prior periods. Prior to 2017, the Company amortized, as a component of pension and other postretirement expense, unrecognized actuarial gains and losses (included within accumulated other comprehensive income (loss)) over the average remaining service period of active plan participants expected to receive benefits under the plan, or average remaining life expectancy of inactive plan participants when all or almost all of individual plan participants were inactive. The Company also historically calculated the market-related value of plan assets based on a five-year market adjustment. Under the new guidance, only disposals representingprinciples, actuarial gains and losses will be immediately recognized through net periodic benefit cost in the Statement of Income, upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a strategic shiftremeasurement. In addition, the Company has changed its accounting policy for measuring the market-related value of plan assets from a calculated amount (based on a five-year smoothing of asset returns) to fair value. The Company believes these changes are preferable as they result in operations or that have a major effectan accelerated recognition of actuarial gains and losses and changes in fair value of plan assets in its Consolidated Statement of Income, which provides greater transparency and better aligns with fair value principles by fully reflecting the impact of interest rate and economic changes on the Company's operationspension and financialother postretirement benefit liabilities and assets in the Company's operating results should be presented as discontinued operations. ASU 2014-08 also requires expanded disclosures about discontinued operationsin the year in which the gains and losses are incurred. As of January 1, 2015, the cumulative effect of the change in accounting principles resulted in a decrease of $487 million in earnings invested in the business and a corresponding increase of $492 million in accumulated other comprehensive loss that will providewas partially offset by the net impact of the direct effects of these changes on inventory and deferred taxes of $5 million.
The following tables reflect the changes to financial statement users with more information aboutline items as a result of the assets, liabilities, income, and expenses of discontinued operations. This newchange in accounting guidance is effective for annual periods beginning after December 15, 2014. The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company's results of operations or financial condition.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists at the reporting date. This accounting guidance is effectiveprinciples for the Company for annual and interim reporting periods beginning after December 15, 2013. The adoption of this accounting guidance did not have a material impact on the Company's results of operations or financial condition.
Use of Estimates:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reportedpresented in the accompanying unaudited consolidated financial statements and accompanying notes. These estimates and assumptions are reviewed and updated regularly to reflect recent experience.statements:
Consolidated Statements of Income for the Years Ended December 31:
|
| | | | | | | | | |
| | 2017 |
| | Previous Accounting Method | As Reported | Effect of Accounting Change |
| Cost of products sold | $ | 2,199.0 |
| $ | 2,193.4 |
| $ | (5.6 | ) |
| Gross profit | 804.8 |
| 810.4 |
| 5.6 |
|
| Selling, general and administrative expenses | 518.0 |
| 521.4 |
| 3.4 |
|
| Pension settlement expenses | 17.3 |
| — |
| (17.3 | ) |
| Operating income | 265.2 |
| 284.7 |
| 19.5 |
|
| Income before income taxes | 240.4 |
| 259.9 |
| 19.5 |
|
| Provision for income taxes | 51.1 |
| 57.6 |
| 6.5 |
|
| Net income | 189.3 |
| 202.3 |
| 13.0 |
|
| Net income attributable to The Timken Company | $ | 190.4 |
| $ | 203.4 |
| $ | 13.0 |
|
| Basic earnings per share | $ | 2.45 |
| $ | 2.62 |
| $ | 0.17 |
|
| Diluted earnings per share | $ | 2.41 |
| $ | 2.58 |
| $ | 0.17 |
|
Note 1 - Significant2 – Change in Accounting PoliciesPrinciple (continued)
Reclassifications:
Certain amounts reported in
Consolidated Statements of Income for the 2013 Consolidated Financial Statements for amounts related to the Company's former steel business have been reclassified to discontinued operations to reflect the Spinoff. In addition, certain amounts reported in the 2013 Consolidated Financial Statements for segment results have been reclassified to conform to the new segment presentation.
Note 2 - Spinoff Transaction
On June 30, 2014, the Company completed the separation of its steel business through the Spinoff, creating a new independent publicly traded company, TimkenSteel. The Company's Board of Directors declared a distribution of all outstanding common shares of TimkenSteel through a dividend. At the close of business on June 30, 2014, the Company's shareholders received one common share of TimkenSteel for every two common shares of the Company they held as of the close of business on June 23, 2014.
In connection with the Spinoff, the Company and TimkenSteel entered into certain transitional relationships, including a commercial supply agreement for TimkenSteel to supply the Company with certain steel products and other relationships described in the section of this Annual Report on Form 10-K titled "Risks Relating to the Spinoff of TimkenSteel."
The operating results, net of tax, included one-time transaction costs of approximately $57 million and $13 million for 2014 and 2013, respectively, in connection with the separation of the two companies. These costs consisted of consulting and professional fees associated with preparing for and executing the Spinoff, as well as lease cancellation fees. In addition to the one time transaction costs, the Company incurred approximately $15 million of capital expenditures related to the Spinoff.
The following table presents the results of operations for TimkenSteel that have been reclassified to discontinued operations for all periods presented:Years Ended December 31:
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | 2013 | 2012 |
| Net Sales | $ | 786.2 |
| $ | 1,305.8 |
| $ | 1,627.5 |
|
| Cost of goods sold | 642.0 |
| 1,082.2 |
| 1,289.2 |
|
| Gross profit | 144.2 |
| 223.6 |
| 338.3 |
|
| Selling, administrative and general expenses | 46.4 |
| 80.5 |
| 89.4 |
|
| Separation costs | 57.1 |
| 13.0 |
| — |
|
| Interest expense, net | 0.8 |
| — |
| — |
|
| Other (income) expense, net | (0.1 | ) | 3.0 |
| 0.7 |
|
| Income before income taxes | 40.0 |
| 127.1 |
| 248.2 |
|
| Income tax expense | 16.0 |
| 39.6 |
| 83.8 |
|
| Income from discontinued operations | $ | 24.0 |
| $ | 87.5 |
| $ | 164.4 |
|
|
| | | | | | | | | |
| | 2016 |
| | As Previously Reported | Revised | Effect of Accounting Change |
| Cost of products sold | $ | 1,975.0 |
| $ | 2,001.3 |
| $ | 26.3 |
|
| Gross profit | 694.8 |
| 668.5 |
| (26.3 | ) |
| Selling, general and administrative expenses | 450.0 |
| 470.7 |
| 20.7 |
|
| Pension settlement expenses | 28.1 |
| 1.6 |
| (26.5 | ) |
| Operating income | 195.0 |
| 174.5 |
| (20.5 | ) |
| Income before income taxes | 222.1 |
| 201.6 |
| (20.5 | ) |
| Provision for income taxes | 69.2 |
| 60.5 |
| (8.7 | ) |
| Net income | 152.9 |
| 141.1 |
| (11.8 | ) |
| Net income attributable to The Timken Company | $ | 152.6 |
| $ | 140.8 |
| $ | (11.8 | ) |
| Basic earnings per share | $ | 1.94 |
| $ | 1.79 |
| $ | (0.15 | ) |
| Diluted earnings per share | $ | 1.92 |
| $ | 1.78 |
| $ | (0.14 | ) |
|
| | | | | | | | | |
| | 2015 |
| | As Previously Reported | Revised | Effect of Accounting Change |
| Cost of products sold | $ | 2,078.4 |
| $ | 2,052.8 |
| $ | (25.6 | ) |
| Gross profit | 793.9 |
| 819.5 |
| 25.6 |
|
| Selling, general and administrative expenses | 494.3 |
| 457.7 |
| (36.6 | ) |
| Pension settlement expenses | 465.0 |
| 119.9 |
| (345.1 | ) |
| Operating income (loss) | (151.4 | ) | 255.9 |
| 407.3 |
|
| Income (loss) before income taxes | (189.6 | ) | 217.7 |
| 407.3 |
|
| Provision (benefit) for income taxes | (121.6 | ) | 26.3 |
| 147.9 |
|
| Net income (loss) | (68.0 | ) | 191.4 |
| 259.4 |
|
| Net income (loss) attributable to The Timken Company | $ | (70.8 | ) | $ | 188.6 |
| $ | 259.4 |
|
| Basic earnings (loss) per share | $ | (0.84 | ) | $ | 2.23 |
| $ | 3.07 |
|
| Diluted earnings (loss) per share | $ | (0.84 | ) | $ | 2.21 |
| $ | 3.05 |
|
Consolidated Statements of Comprehensive Income for the Years Ended December 31:
|
| | | | | | | | | |
| | 2017 |
| | Previous Accounting Method | As Reported | Effect of Accounting Change |
| Net Income | $ | 189.3 |
| $ | 202.3 |
| $ | 13.0 |
|
| Pension and postretirement liability adjustment | 11.2 |
| (1.8 | ) | (13.0 | ) |
| Other comprehensive income, net of tax | $ | 55.0 |
| $ | 42.0 |
| $ | (13.0 | ) |
Note 2 - Spinoff Transaction– Change in Accounting Principle (continued)
The following table presents
Consolidated Statements of Comprehensive Income for the carrying value of assets and liabilities immediately preceding the Spinoff on June 30, 2014.Years Ended December 31:
|
| | | |
| | 2014 |
| ASSETS | |
| Cash and cash equivalents | $ | 46.5 |
|
| Accounts receivable, net | 178.9 |
|
| Inventories, net | 238.2 |
|
| Deferred income taxes | 20.2 |
|
| Other current assets | 4.0 |
|
| Property, plant, and equipment, net | 751.6 |
|
| Goodwill | 12.6 |
|
| Non-current pension assets | 83.5 |
|
| Other intangible assets | 11.2 |
|
| Other non-current assets | 2.6 |
|
| Total assets, discontinued operations | $ | 1,349.3 |
|
| LIABILITIES | |
| Accounts payable, trade | $ | 132.8 |
|
| Salaries, wages and benefits | 52.0 |
|
| Income taxes payable | 0.1 |
|
| Other current liabilities | 15.9 |
|
| Long-term debt | 130.2 |
|
| Accrued pension cost | 24.5 |
|
| Accrued postretirement benefits cost | 68.3 |
|
| Deferred income taxes | 91.7 |
|
| Other non-current liabilities | 10.7 |
|
| Total liabilities, discontinued operations | $ | 526.2 |
|
|
| | | | | | | | | |
| | 2016 |
| | As Previously Reported | Revised | Effect of Accounting Change |
| Net Income | $ | 152.9 |
| $ | 141.1 |
| $ | (11.8 | ) |
| Foreign currency translation adjustments | (32.8 | ) | (22.8 | ) | 10.0 |
|
| Pension and postretirement liability adjustment | (0.6 | ) | 1.1 |
| 1.7 |
|
| Other comprehensive income, net of tax | (33.3 | ) | (21.6 | ) | 11.7 |
|
| Comprehensive Income, net of tax | 119.6 |
| 119.5 |
| (0.1 | ) |
| Comprehensive income attributable to The Timken Company | $ | 117.6 |
| $ | 117.5 |
| $ | (0.1 | ) |
|
| | | | | | | | | |
| | 2015 |
| | As Previously Reported | Revised | Effect of Accounting Change |
| Net Income | $ | (68.0 | ) | $ | 191.4 |
| $ | 259.4 |
|
| Foreign currency translation adjustments | (73.5 | ) | (64.8 | ) | 8.7 |
|
| Pension and postretirement liability adjustment | 265.9 |
| (2.4 | ) | (268.3 | ) |
| Other comprehensive income, net of tax | 193.5 |
| (66.1 | ) | (259.6 | ) |
| Comprehensive Income, net of tax | 125.5 |
| 125.3 |
| (0.2 | ) |
| Less: comprehensive income attributable to noncontrolling interest | 0.8 |
| 0.7 |
| (0.1 | ) |
| Comprehensive income attributable to The Timken Company | $ | 124.7 |
| $ | 124.6 |
| $ | (0.1 | ) |
Consolidated Balance Sheets for the Years Ended December 31:
|
| | | | | | | | | |
| | 2017 |
| | Previous Accounting Method | As Reported | Effect of Accounting Change |
| Inventories, net | $ | 731.0 |
| $ | 738.9 |
| $ | 7.9 |
|
| Total current assets | 1,492.2 |
| 1,500.1 |
| 7.9 |
|
| Deferred income taxes | 64.0 |
| 61.0 |
| (3.0 | ) |
| Total other assets | 1,041.1 |
| 1,038.1 |
| (3.0 | ) |
| Total assets | 3,397.5 |
| 3,402.4 |
| 4.9 |
|
| Earnings invested in the business | 1,634.7 |
| 1,408.4 |
| (226.3 | ) |
| Accumulated other comprehensive loss | (269.4 | ) | (38.3 | ) | 231.1 |
|
| Total shareholders' equity | 1,437.9 |
| 1,442.7 |
| 4.8 |
|
| Noncontrolling interest | 32.1 |
| 32.2 |
| 0.1 |
|
| Total equity | 1,470.0 |
| 1,474.9 |
| 4.9 |
|
| Total liabilities and shareholders' equity | $ | 3,397.5 |
| $ | 3,402.4 |
| $ | 4.9 |
|
Note 2 - Spinoff Transaction– Change in Accounting Principle (continued)
The following table presents the carrying value of assets and liabilities
Consolidated Balance Sheets for the steel business atYears Ended December 31, 2013.31:
|
| | | |
| | 2013 |
| ASSETS | |
| Cash and cash equivalents | $ | — |
|
| Accounts receivable, net | 122.7 |
|
| Inventories, net | 227.3 |
|
| Deferred income taxes | 13.6 |
|
| Other current assets | 2.9 |
|
| Property, plant, and equipment, net | 702.2 |
|
| Goodwill | 12.6 |
|
| Non-current pension assets | 119.1 |
|
| Other intangible assets | 11.7 |
|
| Other non-current assets | 3.6 |
|
| Total assets, discontinued operations | $ | 1,215.7 |
|
| LIABILITIES | |
| Accounts payable, trade | $ | 82.6 |
|
| Salaries, wages and benefits | 52.0 |
|
| Income taxes payable | 0.4 |
|
| Other current liabilities | 17.3 |
|
| Long-term debt | 30.2 |
|
| Accrued pension cost | 20.0 |
|
| Accrued postretirement benefits cost | 95.7 |
|
| Deferred income taxes | 84.1 |
|
| Other non-current liabilities | 6.7 |
|
| Total liabilities, discontinued operations | $ | 389.0 |
|
|
| | | | | | | | | |
| | 2016 |
| | As Previously Reported | Revised | Effect of Accounting Change |
| Inventories, net | $ | 545.8 |
| $ | 553.7 |
| $ | 7.9 |
|
| Total current assets | 1,204.0 |
| 1,211.9 |
| 7.9 |
|
| Deferred income taxes | 54.4 |
| 51.4 |
| (3.0 | ) |
| Total other assets | 749.9 |
| 746.9 |
| (3.0 | ) |
| Total assets | 2,758.3 |
| 2,763.2 |
| 4.9 |
|
| Earnings invested in the business | 1,528.6 |
| 1,289.3 |
| (239.3 | ) |
| Accumulated other comprehensive loss | (322.0 | ) | (77.9 | ) | 244.1 |
|
| Total shareholders' equity | 1,274.9 |
| 1,279.7 |
| 4.8 |
|
| Noncontrolling interest | 31.1 |
| 31.2 |
| 0.1 |
|
| Total equity | 1,306.0 |
| 1,310.9 |
| 4.9 |
|
| Total liabilities and shareholders' equity | $ | 2,758.3 |
| $ | 2,763.2 |
| $ | 4.9 |
|
Consolidated Statements of Cash Flows for the Years Ended December 31:
|
| | | | | | | | | |
| | 2017 |
| | Previous Accounting Method | As Reported | Effect of Accounting Change |
| Net income attributable to The Timken Company | $ | 190.4 |
| $ | 203.4 |
| $ | 13.0 |
|
| Deferred income tax benefit | (6.9 | ) | (0.4 | ) | 6.5 |
|
| Pension and other postretirement expense | $ | 48.4 |
| $ | 28.9 |
| $ | (19.5 | ) |
|
| | | | | | | | | |
| | 2016 |
| | As Previously Reported | Revised | Effect of Accounting Change |
| Net income attributable to The Timken Company | $ | 152.6 |
| $ | 140.8 |
| $ | (11.8 | ) |
| Deferred income tax benefit | (6.3 | ) | (15.0 | ) | (8.7 | ) |
| Pension and other postretirement expense | $ | 63.5 |
| $ | 84.0 |
| $ | 20.5 |
|
|
| | | | | | | | | |
| | 2015 |
| | As Previously Reported | Revised | Effect of Accounting Change |
| Net income attributable to The Timken Company | $ | (70.8 | ) | $ | 188.6 |
| $ | 259.4 |
|
| Deferred income tax benefit | (170.1 | ) | (22.2 | ) | 147.9 |
|
| Pension and other postretirement expense | 502.9 |
| 95.3 |
| (407.6 | ) |
| Inventories | $ | 52.8 |
| $ | 53.1 |
| $ | 0.3 |
|
Note 2 – Change in Accounting Principle (continued)
Consolidated Statements of Shareholders' Equity for the Years Ended December 31:
|
| | | | | | | | | |
| | 2017 |
| | Previous Accounting Method | As Reported | Effect of Accounting Change |
| Net income | $ | 189.3 |
| $ | 202.3 |
| $ | 13.0 |
|
| Pension and postretirement liability adjustments | $ | 11.2 |
| $ | (1.8 | ) | $ | (13.0 | ) |
|
| | | | | | | | | |
| | 2016 |
| | As Previously Reported | Revised | Effect of Accounting Change |
| Net income | $ | 152.9 |
| $ | 141.1 |
| $ | (11.8 | ) |
| Foreign currency translation adjustment | (32.8 | ) | (22.8 | ) | 10.0 |
|
| Pension and postretirement liability adjustments | $ | (0.6 | ) | $ | 1.1 |
| $ | 1.7 |
|
|
| | | | | | | | | |
| | 2015 |
| | As Previously Reported | Revised | Effect of Accounting Change |
| Net income (loss) | $ | (68.0 | ) | $ | 191.4 |
| $ | 259.4 |
|
| Foreign currency translation adjustment | (73.5 | ) | (64.8 | ) | 8.7 |
|
| Pension and postretirement liability adjustments | $ | 265.9 |
| $ | (2.4 | ) | $ | (268.3 | ) |
Note 3 - Acquisitions and Divestitures
Acquisitions:
The Company completed three acquisitions in 2017. On November 30, 2014,July 3, 2017, the Company completed the acquisition of Groeneveld, a leading provider of automatic lubrication solutions used in on- and off-highway applications. On May 5, 2017, the Company completed the acquisition of the assets of Revolvo,PT Tech, a specialty bearing company based in Dudley, U.K., for $9.7 million. Revolvo makesmanufacturer of engineered clutches, brakes, hydraulic power take-off units and markets ball and roller bearings for industrial applications in process and heavy industries. Revolvo's split roller bearing housed units are widelyother torque management devices used by mining, power generation, food and beverage, pulp and paper, metals, cement, marine and waste-water end users. Revolvo had full-year 2014 sales of approximately $9 million. The Company reported the results for Revolvo in the Process Industries segment.
mining, aggregate, wood recycling and metals industries. On April 28, 2014,3, 2017, the Company completed the acquisition of assets from Schulz for $12.0 million in cash. Schulz provides electric motor and generator repairs, motor rewinds, custom controls and panels, systems integration, pump services, machine rebuilds, hydro services and diagnostics forTorsion Control Products, a broad rangemanufacturer of commercial and industrial applications. Schulz serves customers nationwideengineered torsional couplings used in the commercial nuclear power market sector, as well as regionallyconstruction, agriculture and mining industries. Aggregate sales for these companies for the most recent 12 months prior to their respective acquisitions totaled approximately $146.2 million. The total purchase price for these acquisitions was $346.2 million, net of $35.4 million of cash received. In 2017, the Company incurred acquisition-related fees of $3.7 million to complete these acquisitions. Based on markets and customers served, substantially all of the results for Groeneveld, PT Tech and Torsion Control Products are reported in the hydro and fossil fuel market sectors, water management, paper and general manufacturing sectors inMobile Industries segment.
During 2016, the New England and Mid-Atlantic regions. Based in New Haven, Connecticut, Schulz employs 125 associates and had 2013 sales of approximately $18 million. The Company reported the results for Schulz in the Process Industries segment.
completed two acquisitions. On May 13, 2013,October 31, 2016, the Company completed the acquisition of Standard Machine, which provides new gearboxes, gearbox serviceEDT, a manufacturer of polymer housed units and repair, open gearing, large gear fabrication, machining and field technical services to end users in Canada and the western United States, for $37.0 million in cash, including cash acquired of approximately $0.1 million that was subject to a post-closing indebtedness adjustment. Based in Saskatoon, Saskatchewan, Canada, Standard Machine employs 125 people and serves a wide variety of industrial sectors including mining, oil and gas, and pulp and paper. The results of operations of Standard Machine were includedstainless steel ball bearings used primarily in the Company's Consolidated Statements of Income for the period subsequent to the effective date of the acquisitionfood and are reported in the Process Industries segment.
beverage industry. On April 11, 2013,July 8, 2016, the Company completed the acquisition of substantiallyLovejoy, a manufacturer of premium industrial couplings and universal joints. Aggregate sales for these companies for the most recent 12 months prior to their respective acquisitions totaled approximately $61 million. The total purchase price for these acquisitions was $74.7 million in cash, net of $1.9 million of cash received, and $2.2 million in assumed debt. In 2017, the Company paid a net purchase price adjustment of $0.6 million in connection with the EDT acquisition. Also, the Company incurred approximately $1.7 million of acquisition-related fees to acquire EDT and Lovejoy. Substantially all of the assets of Smith Services, an electric motor repair specialist,results for $13.2 million. Based in Princeton, West Virginia, Smith Services employs approximately 140 people. The results of operations of Smith Services were included in the Company's Consolidated Statements of Income for the period subsequent to the effective date of the acquisitionEDT and are reported in the Process Industries segment.
On March 11, 2013, the Company completed the acquisition of Interlube, which makes and markets automated lubrication delivery systems and related components to end market sectors including commercial vehicles, construction, mining, and heavy and general industries, for $14.5 million, including cash acquired of approximately $0.3 million, that was subject to a post-closing indebtedness adjustment. Based in Plymouth, U.K., Interlube employs about 90 people. The results of operations of Interlube were included in the Company's Consolidated Statements of Income for the period subsequent to the effective date of the acquisition and are reported in the Mobile Industries segment.
On December 31, 2012, the Company completed the acquisition of the assets of Wazee, a leading regional provider of motor, generator, wind turbine and industrial crane services to diverse end-markets including oil and gas, wind, agriculture, material handling and construction, for $20.1 million in cash. Based in Denver, Colorado, Wazee employs over 100 people. The results of operations of Wazee were included in the Company's Consolidated Statements of Income for the period subsequent to the effective date of the acquisition andLovejoy are reported in the Process Industries segment. In additionThe Company assumed certain contingent liabilities, including a potential environmental liability, as part of the Lovejoy transaction. Refer to Note 11 - Contingencies for additional information on Lovejoy's contingent liabilities.
On September 1, 2015, the Company completed the acquisition of Timken Belts, a leading North American manufacturer of belts used in industrial, commercial and consumer applications, and sold under multiple brand names, including Carlisle®, Ultimax® and Panther®, among others. The acquisition portfolio includes more than 20,000 parts that utilize wrap molded, raw edge, v-ribbed and synchronous belt designs. Aggregate sales for Timken Belts for the most recent 12 months prior to the Wazee acquisition were approximately $140 million. The total purchase price for Timken Belts was $213.7 million, including cash acquired of approximately $0.1 million. In June 2016, the Company purchasedpaid a net purchase price adjustment of $0.7 million, resulting in an adjustment to goodwill. Also, the remaining interestCompany incurred approximately $1.0 million of acquisition-related fees to acquire Timken Belts. The results of operations for Timken Belts are reported in its joint venture in Curitiba, Brazil.both the Mobile Industries and Process Industries segments based on customers served.
Pro forma results of these operations have not been presented because the effects of the acquisitions were not significant to the Company’s income from operations or total assets in 2014, 2013 or 2012, respectively.any of the years presented.
Note 3 – Acquisitions and Divestitures (continued)
The purchase price allocations, net of cash acquired, and any subsequent purchase price adjustments for acquisitions in 20142017, 20132016 and 20122015 are presented below:
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Assets: | | | |
| Accounts receivable | $ | 27.6 |
| $ | 8.4 |
| $ | 13.3 |
|
| Inventories | 29.4 |
| 17.8 |
| 48.5 |
|
| Other current assets | 3.3 |
| 5.3 |
| 1.1 |
|
| Property, plant and equipment | 31.5 |
| 16.5 |
| 37.9 |
|
| Goodwill | 149.7 |
| 30.6 |
| 70.8 |
|
| Other intangible assets | 173.6 |
| 27.9 |
| 63.9 |
|
| Other non-current assets | 1.8 |
| 0.1 |
| — |
|
| Total assets acquired | $ | 416.9 |
| $ | 106.6 |
| $ | 235.5 |
|
| Liabilities: | | | |
| Accounts payable, trade | $ | 9.5 |
| $ | 8.1 |
| $ | 10.2 |
|
| Salaries, wages and benefits | 5.8 |
| 1.3 |
| 1.1 |
|
| Other current liabilities | 8.6 |
| 4.4 |
| 1.3 |
|
| Short-term debt | 0.1 |
| — |
| — |
|
| Long-term debt | 2.9 |
| 2.2 |
| — |
|
| Accrued pension cost | — |
| — |
| 2.3 |
|
| Accrued postretirement liability | — |
| — |
| 1.1 |
|
| Deferred taxes | 42.2 |
| 10.4 |
| 5.9 |
|
| Other non-current liabilities | 1.0 |
| 7.6 |
| — |
|
| Total liabilities assumed | $ | 70.1 |
| $ | 34.0 |
| $ | 21.9 |
|
| Net assets acquired | $ | 346.8 |
| $ | 72.6 |
| $ | 213.6 |
|
|
| | | | | | | | | |
| | 2014 | 2013 | 2012 |
| Assets: | | | |
| Accounts receivable, net | $ | 5.0 |
| $ | 10.6 |
| $ | 4.7 |
|
| Inventories, net | 5.5 |
| 12.7 |
| 2.3 |
|
| Other current assets | 0.2 |
| 0.4 |
| 0.3 |
|
| Property, plant and equipment, net | 2.9 |
| 19.5 |
| 3.0 |
|
| Goodwill | 3.3 |
| 18.1 |
| 7.1 |
|
| Other intangible assets | 8.3 |
| 13.0 |
| 7.7 |
|
| Total assets acquired | $ | 25.2 |
| $ | 74.3 |
| $ | 25.1 |
|
| Liabilities: | | | |
| Accounts payable, trade | $ | 2.3 |
| $ | 3.3 |
| $ | 2.3 |
|
| Salaries, wages and benefits | — |
| 1.4 |
| 0.3 |
|
| Other current liabilities | 0.7 |
| 0.9 |
| 1.8 |
|
| Other non-current liabilities | 0.5 |
| 4.5 |
| — |
|
| Total liabilities assumed | $ | 3.5 |
| $ | 10.1 |
| $ | 4.4 |
|
| Net assets acquired | $ | 21.7 |
| $ | 64.2 |
| $ | 20.7 |
|
The amounts for 20142017 in the table above represent the preliminary purchase price allocationallocations for current year acquisitions.Groeneveld, PT Tech and Torsion Control Products. The preliminary purchase accounting for the Groeneveld acquisition is incomplete as it relates to the final determination of fair value for the contingent liabilities assumed in the acquisition and other potential post-closing indemnification adjustments.
The following table summarizes the preliminary purchase price allocation for identifiable intangible assets acquired in 2014:2017:
|
| | | | |
| | | Weighted- Average Life |
| Trade names (indefinite life) | 31.1 |
| Indefinite |
| Trade names (finite life) | 2.2 |
| 13 years |
| Technology and know-how | 29.8 |
| 16 years |
| Customer relationships | 108.9 |
| 17 years |
| Other | 0.2 |
| 5 years |
| Capitalized software | 1.4 |
| 3 years |
| Total intangible assets | $ | 173.6 |
| |
Note 3 – Acquisitions and Divestitures (continued)
|
| | | | |
| | Purchase Price Allocation |
| | | Weighted- Average Life |
| Trade name | $ | 1.0 |
| 6 years |
| Technology / Know-how | 4.1 |
| 17 years |
| All customer relationships | 3.0 |
| 16 years |
| Non-compete agreements | 0.2 |
| 5 years |
| Total intangible assets | $ | 8.3 |
| |
The following table summarizes the final purchase price allocation for identifiable intangible assets acquired in 2013:2016:
|
| | | | |
| | | Weighted- Average Life |
| Trade names (indefinite life) | $ | 3.7 |
| Indefinite |
| Trade names (finite life) | 0.2 |
| 5 years |
| Technology and know-how | 10.1 |
| 19 years |
| Customer relationships | 13.5 |
| 20 years |
| Other | 0.3 |
| 4 years |
| Capitalized software | 0.1 |
| 4 years |
| Total intangible assets | $ | 27.9 |
| |
|
| | | | |
| | Purchase Price Allocation |
| | | Weighted- Average Life |
| Trade name | $ | 1.1 |
| 13 years |
| Technology / Know-how | 5.2 |
| 18 years |
| All customer relationships | 6.4 |
| 20 years |
| Non-compete agreements | 0.3 |
| 4 years |
| Total intangible assets | $ | 13.0 |
| |
On July 5, 2017, the Company announced that the Company's majority-owned subsidiary, Timken India, entered into a definitive agreement to acquire ABC Bearings. Timken India is a public limited company listed on the National Stock Exchange of India Limited and BSE Limited. ABC Bearings is a manufacturer of tapered, cylindrical and spherical roller bearings and slewing rings in India, and also is listed on the BSE Limited. The transaction is structured as a merger of ABC Bearings into Timken India, whereby shareholders of ABC Bearings will receive shares of Timken India as consideration. The transaction is subject to receipt of various approvals in India, which are expected to be completed in the first half of 2018. ABC Bearings, located in Mumbai, India, operates primarily out of manufacturing facilities in Bharuch, Gujarat and Dehradun, Uttarakhand and had annual sales of approximately $29 million for the 12 months ended March 31, 2017.
Divestitures:
On December 31, 2012,October 21, 2015, the Company completed the sale of its interestAlcor. Alcor, located in Advanced Green Components, LLC (AGC) to Machinery Tec Masters Corporation.Mesa, Arizona, had sales of $20.6 million for the 12 months ending September 30, 2015. The results of the operations of Alcor were reported in the Mobile Industries segment. The Company received $2.2recorded proceeds of $43.4 million in cash proceeds for AGC. The Companyand recognized a pretax lossgain on divestiturethe sale of $2.0Alcor of $29.0 million andduring the lossfourth quarter of 2015. The gain was reflected in other (expense) income, netgain on divestiture in the Consolidated Statement of Income.
On April 30, 2015, the Company completed the sale of a service center in Niles, Ohio. The company received $2.8 million in cash proceeds for the service center. The Company recognized a loss of $0.3 million from the sale reflected in gain on divestiture in the Consolidated Statement of Income.
Note 4 - Investment in Joint Venture
On March 6, 2014, Timken Lux Holdings II S.á r.l, a subsidiary of the Company, entered into a joint venture agreement with Holme Services Limited ("joint venture partner"). During 2015, the Company and its joint venture partner established TUBC Limited, a Cyprus entity, for the purpose of producing bearings to serve the rail market sector in Russia. The Company and its joint venture partner have a 51% controlling interest and 49% controlling interest, respectively, in TUBC Limited. During 2015, the Company and its joint venture partner amended and restated the joint venture agreement and contributed $6.9 million and $6.6 million, respectively, to TUBC Limited. During 2016, the Company and its joint venture partner contributed $9.7 million and $9.3 million, respectively, to TUBC Limited. No additional contributions were made during 2017.
Note 45 - Earnings Per Share
The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share and diluted earnings per share for the years ended December 31:31, 2017, 2016 and 2015:
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Numerator: | | | |
| Net income attributable to The Timken Company | $ | 203.4 |
| $ | 140.8 |
| $ | 188.6 |
|
| Less: undistributed earnings allocated to nonvested stock | — |
| — |
| — |
|
| Net income available to common shareholders for basic earnings per share and diluted earnings per share | $ | 203.4 |
| $ | 140.8 |
| $ | 188.6 |
|
| Denominator: | | | |
| Weighted-average number of shares outstanding – basic | 77,736,398 |
| 78,516,029 |
| 84,631,778 |
|
| Effect of dilutive securities: | | | |
Stock options and awards - based on the treasury stock method | 1,174,751 |
| 718,295 |
| 714,468 |
|
Weighted-average number of shares outstanding, assuming
dilution of stock options and awards | 78,911,149 |
| 79,234,324 |
| 85,346,246 |
|
| Basic earnings per share | $ | 2.62 |
| $ | 1.79 |
| $ | 2.23 |
|
| Diluted earnings per share | $ | 2.58 |
| $ | 1.78 |
| $ | 2.21 |
|
|
| | | | | | | | | |
| | 2014 | 2013 | 2012 |
| Numerator: | | | |
| Net income from continuing operations attributable to The Timken Company | $ | 146.8 |
| $ | 175.2 |
| $ | 331.1 |
|
| Less: undistributed earnings allocated to nonvested stock | — |
| (0.2 | ) | (1.5 | ) |
| Net income from continuing operations available to common shareholders for basic earnings per share and diluted earnings per share | $ | 146.8 |
| $ | 175.0 |
| $ | 329.6 |
|
| Denominator: | | | |
| Weighted-average number of shares outstanding – basic | 90,367,345 |
| 94,989,561 |
| 96,671,613 |
|
| Effect of dilutive securities: | | | |
Stock options and awards - based on the treasury stock method | 856,983 |
| 834,167 |
| 930,868 |
|
Weighted-average number of shares outstanding, assuming
dilution of stock options and awards | 91,224,328 |
| 95,823,728 |
| 97,602,481 |
|
| Basic earnings per share from continuing operations | $ | 1.62 |
| $ | 1.84 |
| $ | 3.41 |
|
| Diluted earnings per share from continuing operations | $ | 1.61 |
| $ | 1.82 |
| $ | 3.38 |
|
The exercise prices for certain stock options that the Company has awarded exceed the average market price of the Company’s common shares. Such stock options are antidilutive and were not included in the computation of diluted earnings per share. The antidilutive stock options outstanding were 523,252, 382,525512,657, 2,826,733 and 879,4131,986,907 during 20142017, 20132016 and 20122015, respectively.
Note 56 - Accumulated Other Comprehensive Income (Loss)
The following tables present details about components of accumulated other comprehensive income (loss) for the years ended December 31, 20142017 and December 31, 2013,2016, respectively:
|
| | | | | | | | | | | | |
| | Foreign currency translation adjustments | Pension and postretirement liability adjustments | Change in fair value of derivative financial instruments | Total |
| Balance at December 31, 2013 | $ | 37.5 |
| $ | (663.2 | ) | $ | (0.4 | ) | $ | (626.1 | ) |
Other comprehensive (loss) income before reclassifications, before income tax | (41.8 | ) | (166.0 | ) | 0.7 |
| (207.1 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), before income tax | — |
| 99.0 |
| (0.8 | ) | 98.2 |
|
| Income tax expense (benefit) | — |
| 23.9 |
| (0.3 | ) | 23.6 |
|
| Net current period other comprehensive (loss), net of income taxes | (41.8 | ) | (43.1 | ) | (0.4 | ) | (85.3 | ) |
| Non-controlling interest | 0.5 |
| — |
| — |
| 0.5 |
|
| Distribution of TimkenSteel | 3.1 |
| 225.3 |
| — |
| 228.4 |
|
| Net current period comprehensive (loss) income, net of income taxes and non-controlling interest | (38.2 | ) | 182.2 |
| (0.4 | ) | 143.6 |
|
| Balance at December 31, 2014 | $ | (0.7 | ) | $ | (481.0 | ) | $ | (0.8 | ) | $ | (482.5 | ) |
|
| | | | | | | | | | | | |
| | Foreign currency translation adjustments | Pension and postretirement liability adjustments | Change in fair value of derivative financial instruments | Total |
| Balance at December 31, 2016 | $ | (79.8 | ) | $ | 1.5 |
| $ | 0.4 |
| $ | (77.9 | ) |
Other comprehensive income (loss) before reclassifications, before income tax | 47.1 |
| (4.0 | ) | (7.1 | ) | 36.0 |
|
Amounts reclassified from accumulated other comprehensive income (loss), before income tax | — |
| 1.1 |
| 1.8 |
| 2.9 |
|
| Income tax benefit (expense) | — |
| 1.1 |
| 2.0 |
| 3.1 |
|
| Net current period other comprehensive income (loss), net of income taxes | 47.1 |
| (1.8 | ) | (3.3 | ) | 42.0 |
|
| Non-controlling interest | (2.4 | ) | — |
| — |
| (2.4 | ) |
| Net current period comprehensive income (loss), net of income taxes and non-controlling interest | 44.7 |
| (1.8 | ) | (3.3 | ) | 39.6 |
|
| Balance at December 31, 2017 | $ | (35.1 | ) | $ | (0.3 | ) | $ | (2.9 | ) | $ | (38.3 | ) |
|
| | | | | | | | | | | | |
| | Foreign currency translation adjustments | Pension and postretirement liability adjustments | Change in fair value of derivative financial instruments | Total |
| Balance at December 31, 2015 | $ | (55.3 | ) | $ | 0.4 |
| $ | 0.3 |
| $ | (54.6 | ) |
Other comprehensive (loss) income before reclassifications, before income tax | (22.8 | ) | 11.4 |
| (0.2 | ) | (11.6 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), before income tax | — |
| 2.8 |
| 0.3 |
| 3.1 |
|
| Income tax expense | — |
| (13.1 | ) | — |
| (13.1 | ) |
| Net current period other comprehensive (loss) income, net of income taxes | (22.8 | ) | 1.1 |
| 0.1 |
| (21.6 | ) |
| Non-controlling interest | (1.7 | ) | — |
| — |
| (1.7 | ) |
| Net current period comprehensive (loss) income, net of income taxes and non-controlling interest | (24.5 | ) | 1.1 |
| 0.1 |
| (23.3 | ) |
| Balance at December 31, 2016 | $ | (79.8 | ) | $ | 1.5 |
| $ | 0.4 |
| $ | (77.9 | ) |
|
| | | | | | | | | | | | |
| | Foreign currency translation adjustments | Pension and postretirement liability adjustments | Change in fair value of derivative financial instruments | Total |
| Balance at December 31, 2012 | $ | 49.0 |
| $ | (1,061.5 | ) | $ | (0.7 | ) | $ | (1,013.2 | ) |
Other comprehensive (loss) income before reclassifications, before income tax | (19.0 | ) | 494.2 |
| 0.7 |
| 475.9 |
|
Amounts reclassified from accumulated other comprehensive income (loss), before income tax | — |
| 130.6 |
| (0.4 | ) | 130.2 |
|
| Income tax benefit | — |
| (226.5 | ) | — |
| (226.5 | ) |
| Net current period other comprehensive (loss) income, net of income taxes | (19.0 | ) | 398.3 |
| 0.3 |
| 379.6 |
|
| Non-controlling interest | 7.5 |
| — |
| — |
| 7.5 |
|
| Net current period comprehensive (loss) income, net of income taxes and non-controlling interest | (11.5 | ) | 398.3 |
| 0.3 |
| 387.1 |
|
| Balance at December 31, 2013 | $ | 37.5 |
| $ | (663.2 | ) | $ | (0.4 | ) | $ | (626.1 | ) |
Other comprehensive income (loss) income before reclassifications beforeand income taxtaxes includes the effect of foreign currency.
The before-tax reclassification of the pension and postretirement liability adjustmentadjustments was due to the amortization of prior service costs and was included in costs of products sold and selling, general and administrativeSG&A expenses onin the Consolidated Statements of Income. TheFor further information about the reclassification of the change in fair value of derivativederivatives financial instruments, was included in other income (expense), net on the Consolidated Statements of Income.refer to Note 19 - Derivative Instruments and Hedging Activities.
Note 67 - Inventories
The components of inventories at December 31, 20142017 and 20132016 were as follows:
|
| | | | | | |
| | 2017 | 2016 |
| Manufacturing supplies | $ | 29.0 |
| $ | 28.2 |
|
| Raw materials | 90.4 |
| 54.9 |
|
| Work in process | 245.2 |
| 182.9 |
|
| Finished products | 404.3 |
| 308.8 |
|
| Subtotal | $ | 768.9 |
| $ | 574.8 |
|
| Allowance for surplus and obsolete inventory | (30.0 | ) | (21.1 | ) |
| Total Inventories, net | $ | 738.9 |
| $ | 553.7 |
|
|
| | | | | | |
| | 2014 | 2013 |
| Manufacturing supplies | $ | 25.0 |
| $ | 26.8 |
|
| Raw materials | 51.3 |
| 62.3 |
|
| Work in process | 219.3 |
| 199.2 |
|
| Finished products | 302.7 |
| 312.7 |
|
| Subtotal | $ | 598.3 |
| $ | 601.0 |
|
| Allowance for surplus and obsolete inventory | (12.8 | ) | (18.4 | ) |
| Total Inventories, net | $ | 585.5 |
| $ | 582.6 |
|
Inventories at December 31, 2017 valued on the FIFO cost method were 52%55% and the remaining 48%45% were valued by the LIFO method. If all inventories had been valued at FIFO, inventories would have been $199.7$167.6 million and $199.3$179.5 million greater at December 31, 20142017 and 20132016, respectively. The Company recognized a decrease in its LIFO reserve of $11.9 million during 2017, compared to an increase in its LIFO reserve of $0.4$4.7 million during 2014, compared to a2016. The decrease in itsthe LIFO reserve in 2017 was due to lower unit costs primarily driven by favorable efficiency variances that more than offset higher material and labor costs. The impacts of $3.8 million during 2013.LIFO liquidations in 2016 were immaterial.
During the third quarter of 2014, the Company recorded an inventory valuation adjustment of $18.7 million related to its former Aerospace segment. The Company recorded this adjustment during the third quarter of 2014 as a result of the announcement of a plan to exit the engine overhaul business, as well as other product lines, and lower than expected future sales. The Company disposed of the related inventory during the fourth quarter of 2014.
Note 78 - Property, Plant and Equipment
The components of property, plant and equipment, net at December 31, 20142017 and 20132016 were as follows:
|
| | | | | | |
| | 2017 | 2016 |
| Land and buildings | $ | 483.0 |
| $ | 425.4 |
|
| Machinery and equipment | 1,922.6 |
| 1,807.6 |
|
| Subtotal | $ | 2,405.6 |
| $ | 2,233.0 |
|
| Less: accumulated depreciation | (1,541.4 | ) | (1,428.6 | ) |
| Property, Plant and Equipment, net | $ | 864.2 |
| $ | 804.4 |
|
|
| | | | | | |
| | 2014 | 2013 |
| Land and buildings | $ | 428.8 |
| $ | 382.3 |
|
| Machinery and equipment | 1,735.3 |
| 2,013.0 |
|
| Subtotal | $ | 2,164.1 |
| $ | 2,395.3 |
|
| Less allowances for depreciation | (1,383.6 | ) | (1,539.5 | ) |
| Property, Plant and Equipment, net | $ | 780.5 |
| $ | 855.8 |
|
Total depreciation expense was $115.5$97.7 million, $124.7$95.5 million and $131.8$94.6 million in 2014, 20132017, 2016 and 2012, respectively. At December 31, 2013, property, plant and equipment, net included $63.3 million of capitalized software. Depreciation expense for capitalized software was $13.7 million, $23.1 million and $21.5 million in 2014, 2013 and 2012,2015, respectively.
During the middle of 2014, the Company transferred approximately $45 million of capitalized software from property, plant and equipment to intangible assets. The Company did not reclassify prior year amounts to conform to the current year presentation because management of the Company determined the amount was immaterial to the 2013 Consolidated Balance Sheet.
In November 2013, the Company finalized the sale of its former manufacturing facility in Sao Paulo. The Company expects to receive approximately $33 million over a twenty-four month period, of which $20.6 million was received as of December 31, 2014. The total costs of this transaction, including the net book value of the real estate and broker's commissions, were approximately $3 million. The Company began recognizing the gain on the sale of this site using the installment method. In the fourth quarter of 2013,2015, the Company recognizedwrote-off $9.7 million that remained in CIP after the related assets were placed into service. This item was identified during an examination of aged balances in the CIP account and 91% of the amount related to fiscal years prior to 2013. Net income attributable to The Timken Company in 2015 included a gaincharge of $5.4$9.7 million ($5.46.1 million, after tax). Inor $0.07 per share, after-tax) due to the firstcorrection of this error. Management of the Company concluded that the correction of this error in the fourth quarter of 2014,2015 and the Company changedpresence of this error in prior periods was immaterial to the full accrual method of recognizing the gain after it had received 25% of the total sales value. As a result, the Company recognized the remaining gain of $22.6 million ($19.5 million after tax) related to this transaction during the first quarter of 2014. During 2014, the Company also recorded interest income of $2.1 million on deferred payments related to this transaction.all periods presented.
Note 7 – Property, Plant and Equipment (continued)
During the third quarter of 2014, the Company classified assets of the aerospace engine overhaul business, located in Mesa, Arizona, as assets held for sale. In connection with this classification, the Company recorded an impairment charge of $1.2 million. In November 2014, the Company sold the assets of the aerospace engine overhaul business for $7.4 million and recorded an immaterial loss.
Note 89 - Goodwill and Other Intangible Assets
Goodwill:
The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually. The Company performsannually, performing its annual impairment test as of October 1 after the annual forecasting process is completed.1st. Furthermore, goodwill and indefinite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
The Company reviews goodwill for impairment at the reporting unit level. The Mobile Industries segment has four reporting units and the Process Industries segment has two reporting units.
Changes in the carrying value of goodwill were as follows:
Year ended December 31, 2014:2017:
|
| | | | | | | | | |
| | Mobile Industries | Process Industries | Total |
| Beginning Balance | $ | 97.2 |
| $ | 260.3 |
| $ | 357.5 |
|
| Acquisitions | 150.8 |
| (1.1 | ) | 149.7 |
|
| Other | 6.3 |
| (1.7 | ) | 4.6 |
|
| Ending Balance | $ | 254.3 |
| $ | 257.5 |
| $ | 511.8 |
|
|
| | | | | | | | | |
| | Mobile Industries | Process Industries | Total |
| Beginning Balance | $ | 176.7 |
| $ | 169.4 |
| $ | 346.1 |
|
| Acquisitions | — |
| 3.3 |
| 3.3 |
|
| Impairment | (86.3 | ) | — |
| (86.3 | ) |
| Other | (0.8 | ) | (2.8 | ) | (3.6 | ) |
| Ending Balance | $ | 89.6 |
| $ | 169.9 |
| $ | 259.5 |
|
The change relatedGroeneveld, PT Tech and Torsion Control Products acquisitions added a total of $150.8 million of goodwill to the Mobile Industries segment. The $14.1 million of goodwill acquired through the PT Tech and Torsion Control Products acquisitions reflectsis expected to be tax deductible over 15 years. The $136.7 million of goodwill acquired through the resultsGroeneveld acquisition is not expected to be tax deductible. The Company paid a net purchase price adjustment of a preliminary$0.6 million in January 2017 in connection with the acquisition of EDT, which resulted in an increase to goodwill. The Company also adjusted its purchase price allocation for the Lovejoy acquisition of Schulz completed on April 28, 2014 and Revolvo on November 30, 2014. The goodwill acquired from Schulz of $2.9in 2017, which resulted in a $1.7 million is tax-deductible and will be amortized over 15 years. The goodwill acquired from Revolvo of $0.4 million is tax-deductible and is estimatedreduction to be amortized over approximately 15 years. “Other”goodwill.
"Other" primarily includedincludes foreign currency translation adjustments for 2014.adjustments. Refer to Note 3 - Acquisitions and Divestituresfor additional information on the acquisitions listed above.
DuringYear ended December 31, 2016:
|
| | | | | | | | | |
| | Mobile Industries | Process Industries | Total |
| Beginning Balance | $ | 97.0 |
| $ | 230.3 |
| $ | 327.3 |
|
| Acquisitions | 0.7 |
| 29.9 |
| 30.6 |
|
| Other | (0.5 | ) | 0.1 |
| (0.4 | ) |
| Ending Balance | $ | 97.2 |
| $ | 260.3 |
| $ | 357.5 |
|
The increase in goodwill was due to the third quarteracquisition of 2014,Lovejoy in July 2016 and EDT in October 2016. None of this goodwill is deductible for tax purposes. The goodwill resulting from the Company reviewed goodwill for impairment for two of its reporting units withinEDT and Lovejoy acquisitions was allocated to the Company's former Aerospace segment (now included in the MobileProcess Industries segment) as a result of declining sales forecasts and financial performance within the segment. The Company utilizes both an income approach and a market approach in testing goodwill for impairment. The Company utilized updated forecasts for the income approach as part of the goodwill impairment review. As a result of the lower earnings and cash flow forecasts, the Company determined that the Aerospace Transmissions and the Aerospace Aftermarket reporting units could not support the carrying value of their goodwill. As a result, the Company recorded a pretax impairment loss of $86.3 million during the third quarter of 2014, which was reported in impairment and restructuring charges in the Consolidated Statement of Income.
In 2013 and 2012, noNo goodwill impairment losses were recorded.recorded in 2017 or 2016.
Note 89 – Goodwill and Other Intangible Assets (continued)
Year ended December 31, 2013:
|
| | | | | | | | | |
| | Mobile Industries | Process Industries | Total |
| Beginning Balance | $ | 171.9 |
| $ | 154.4 |
| $ | 326.3 |
|
| Acquisitions | 4.3 |
| 13.8 |
| 18.1 |
|
| Other | 0.5 |
| 1.2 |
| 1.7 |
|
| Ending Balance | $ | 176.7 |
| $ | 169.4 |
| $ | 346.1 |
|
Acquisitions in 2013 primarily relate to the purchase price allocation for Interlube completed on March 11, 2013, Smith Services completed on April 11, 2013 and Standard Machine completed on May 13, 2013. “Other” includes foreign currency translation adjustments for 2013. The goodwill acquired from Smith Services of $1.7 million is tax-deductible and will be amortized over 15 years.
IntangiblesIntangible Assets:
The following table displays intangible assets as of December 31:31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | |
| 2017 | 2016 |
| | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
Intangible assets subject
to amortization: | | | | | | |
| Customer relationships | $ | 324.6 |
| $ | 103.0 |
| $ | 221.6 |
| $ | 211.4 |
| $ | 84.4 |
| $ | 127.0 |
|
| Technology and know-how | 128.7 |
| 33.8 |
| 94.9 |
| 95.2 |
| 25.4 |
| 69.8 |
|
| Trade names | 8.6 |
| 4.3 |
| 4.3 |
| 6.5 |
| 3.8 |
| 2.7 |
|
| Capitalized Software | 261.5 |
| 226.5 |
| 35.0 |
| 251.7 |
| 211.8 |
| 39.9 |
|
| Other | 10.3 |
| 6.2 |
| 4.1 |
| 11.0 |
| 7.5 |
| 3.5 |
|
| | $ | 733.7 |
| $ | 373.8 |
| $ | 359.9 |
| $ | 575.8 |
| $ | 332.9 |
| $ | 242.9 |
|
Intangible assets not
subject to amortization: | | | | | | |
| Trade names | $ | 52.0 |
|
|
| $ | 52.0 |
| $ | 19.4 |
|
|
| $ | 19.4 |
|
| FAA air agency certificates | 8.7 |
|
|
| 8.7 |
| 8.7 |
|
|
| 8.7 |
|
| | $ | 60.7 |
|
| $ | 60.7 |
| $ | 28.1 |
|
| $ | 28.1 |
|
| Total intangible assets | $ | 794.4 |
| $ | 373.8 |
| $ | 420.6 |
| $ | 603.9 |
| $ | 332.9 |
| $ | 271.0 |
|
|
| | | | | | | | | | | | | | | | | | |
| 2014 | 2013 |
| | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
Intangible assets subject to amortization: | | | | | | |
| Customer relationships | $ | 160.1 |
| $ | 59.0 |
| $ | 101.1 |
| $ | 160.4 |
| $ | 49.3 |
| $ | 111.1 |
|
| Know-how | 33.4 |
| 5.1 |
| 28.3 |
| 31.4 |
| 4.4 |
| 27.0 |
|
| Industrial license agreements | 0.1 |
| 0.1 |
| — |
| 0.1 |
| 0.1 |
| — |
|
| Land-use rights | 8.7 |
| 4.7 |
| 4.0 |
| 8.9 |
| 4.5 |
| 4.4 |
|
| Patents | 2.3 |
| 2.0 |
| 0.3 |
| 2.3 |
| 1.8 |
| 0.5 |
|
| Technology use | 37.0 |
| 11.9 |
| 25.1 |
| 44.4 |
| 17.2 |
| 27.2 |
|
| Trademarks | 5.4 |
| 3.0 |
| 2.4 |
| 4.6 |
| 2.7 |
| 1.9 |
|
| PMA licenses | 5.3 |
| 4.5 |
| 0.8 |
| 8.8 |
| 4.0 |
| 4.8 |
|
| Non-compete agreements | 3.5 |
| 3.2 |
| 0.3 |
| 3.2 |
| 2.8 |
| 0.4 |
|
| Software | 235.0 |
| 182.0 |
| 53.0 |
| — |
| — |
| — |
|
| | $ | 490.8 |
| $ | 275.5 |
| $ | 215.3 |
| $ | 264.1 |
| $ | 86.8 |
| $ | 177.3 |
|
Intangible assets not subject to amortization: | | | | | | |
| Tradename | $ | 15.8 |
| $ | — |
| $ | 15.8 |
| 15.9 |
| $ | — |
| $ | 15.9 |
|
FAA air agency certificates | 8.7 |
| — |
| 8.7 |
| 14.2 |
| — |
| 14.2 |
|
| | $ | 24.5 |
| $ | — |
| $ | 24.5 |
| $ | 30.1 |
| $ | — |
| $ | 30.1 |
|
| Total intangible assets | $ | 515.3 |
| $ | 275.5 |
| $ | 239.8 |
| $ | 294.2 |
| $ | 86.8 |
| $ | 207.4 |
|
During the middle of 2014, the Company transferred approximately $45 million of capitalized software from property, plant and equipment to intangible assets. The Company did not reclassify prior year amounts to conform to the current year presentation because management of the Company determined the amount was immaterial to the 2013 Consolidated Balance Sheet.
In addition to recording an impairment loss related to goodwill, the Company recorded an impairment loss of $9.9 million related to intangible assets within the former Aerospace segment during the third quarter of 2014.
Note 8 – Goodwill and Other Intangible Assets (continued)
Intangible assets acquired in 20142017 totaled $173.6 million from the Groeneveld, PT Tech, and Torsion Control Products acquisitions. Intangible assets subject to amortization were $4.9assigned useful lives of two to 20 years and had a weighted- average amortization period of 16.8 years. Intangible assets acquired in 2016 totaled $27.9 million forfrom the Schulz acquisitionacquisitions of Lovejoy and $3.4 million for the Revolvo acquisition.EDT. Intangible assets subject to amortization acquired in 2014 were assigned useful lives of five to 20 years and had a weighted-average amortization period of 15.0 years. Intangible assets acquired in 2013 were $6.1 million for the Standard Machine acquisition, $0.7 million for the Smith Services acquisition and $6.2 million for the Interlube acquisition. Intangible assets subject to amortization acquired in 20132016 were assigned useful lives of two to 20 years and had a weighted-average amortization period of 18.419.1 years.
Amortization expense for intangible assets was $21.5$40.0 million,, $17.7 $36.2 million and $17.8$36.2 million for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively. Amortization expense for intangible assets is estimated to be approximately: $17.5$41.4 million in 2015; $17.4 million in 2016; $17.3 million in 2017; $17.0 million in 2018; $35.5 million in 2019; $30.9 million in 2020; $27.2 million in 2021; and $15.0$23.1 million in 2019.2022.
Note 910 - Financing Arrangements
Short-term debt for the years endedas of December 31, 2017 and 2016 was as follows:
|
| | | | | | |
| | 2017 | 2016 |
| Variable-rate Accounts Receivable Facility with an interest rate of 2.15% at December 31, 2017 | $ | 62.9 |
| $ | — |
|
| Borrowings under variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.32% to 2.22% at December 31, 2017 and 0.50% at December 31, 2016 | 42.5 |
| 19.2 |
|
| Short-term debt | $ | 105.4 |
| $ | 19.2 |
|
|
| | | | | | |
| | 2014 | 2013 |
Variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.51% to 5.13% and 0.87% to 4.86% at December 31, 2014 and 2013, respectively | $ | 7.4 |
| $ | 18.6 |
|
| Short-term debt | $ | 7.4 |
| $ | 18.6 |
|
The lines of credit for certain of the Company’s foreign subsidiaries provide for borrowings up to $234.0 million. Most of these lines of credit are uncommitted. At December 31, 2014, the Company’s foreign subsidiaries had borrowings outstanding of $7.4Company has a $100 million and guarantees of $5.8 million, which reduced the availability under these facilities to $220.8 million.
The weighted-average interest rate on short-term debt during the year was 3.1%, 3.2% and 3.2% in 2014, 2013 and2012, respectively. The weighted-average interest rate on short-term debt outstanding at December 31, 2014 and 2013 was 1.39% and 4.6%, respectively.
On April 30, 2014, the Company amended its Asset Securitization Agreement, reducing its aggregate borrowing availability from $200 million to $100 million. This agreementAccounts Receivable Facility that matures on November 30, 2015.2018. The Company is exploring opportunities to refinance the facility prior to its maturity. Under the terms of the Asset Securitization Agreement,Accounts Receivable Facility, the Company sells, on an ongoing basis, certain domestic trade receivables to Timken Receivables Corporation, a wholly-ownedwholly owned consolidated subsidiary that, in turn, uses the trade receivables to secure borrowings whichthat are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the Asset Securitization AgreementAccounts Receivable Facility are limited to certain borrowing base calculations. Any amounts outstanding under this Asset Securitization Agreement would be reported in short-term debt on the Company’s Consolidated Balance Sheets. As of December 31, 2014 and 2013, there were no outstanding borrowings under the Asset Securitization Agreement. However, certain borrowing baselimitations. These limitations reduced the availability of the Asset Securitization AgreementAccounts Receivable Facility to $72.7$82.3 million at December 31, 2014.2017. As of December 31, 2017, there were outstanding borrowings of $62.9 million under the Accounts Receivable Facility, which reduced the availability under this facility to $19.4 million. The cost of this facility, which is the prevailing commercial paper rate plus program fees, is considered a financing cost and is included in interest expense in the Consolidated Statements of Income. The outstanding balance under the Accounts Receivable Facility was classified as short term or long term in accordance with the terms of the agreement. In 2016, the classification of the outstanding balance reflected the Company's expectations relative to the minimum borrowing base. The yield rate was 0.20%2.15%, 0.96%1.65% and 1.06%1.05%, at December 31, 20142017, 2016 and 2015, respectively.
The lines of credit for certain of the Company’s foreign subsidiaries provide for short-term borrowings up to $288.9 million in the aggregate. Most of these lines of credit are uncommitted. At December 31, 2017, the Company’s foreign subsidiaries had borrowings outstanding of $42.5 million and guarantees of $0.2 million, which reduced the aggregate availability under these facilities to $246.2 million. The weighted-average interest rate on these lines of credit during the year were 0.7%, 20130.7% and 20121.1% in 2017, 2016 and2015, respectively. The weighted-average interest rate on lines of credit outstanding at December 31, 2017 and 2016 was 0.41% and 0.50%, respectively. The decrease in the weighted-average interest rate was primarily due to increased borrowings in the United States at a lower rate.
66| Long-term debt as of December 31, 2017 and 2016 was as follows: |
| | | | | | |
| | 2017 | 2016 |
| Fixed-rate Medium-Term Notes, Series A, maturing at various dates through May 2028, with interest rates ranging from 6.74% to 7.76% | $ | 154.5 |
| $ | 159.5 |
|
| Fixed-rate Senior Unsecured Notes, maturing on September 1, 2024, with an interest rate of 3.875% | 346.9 |
| 345.9 |
|
| Variable-rate Senior Credit Facility with a weighted-average interest rate of 1.83% at December 31, 2017 and 1.50% at December 31, 2016 | 52.0 |
| 83.8 |
|
| Variable-rate Accounts Receivable Facility with an interest rate of 1.65% at December 31, 2016 | — |
| 48.9 |
|
| Fixed-rate Euro Senior Unsecured Notes, maturing on September 7, 2027, with an interest rate of 2.02% | 179.3 |
| — |
|
| Variable-rate Euro Term Loan with an interest rate of 1.13% at December 30, 2017 | 119.7 |
| — |
|
| Other | 4.5 |
| 1.9 |
|
| Total debt | $ | 856.9 |
| $ | 640.0 |
|
| Less current maturities | 2.7 |
| 5.0 |
|
| Long-term debt | $ | 854.2 |
| $ | 635.0 |
|
Note 910 – Financing Arrangements (continued)
Long-term debt for the years ended December 31 was as follows:
|
| | | | | | |
| | 2014 | 2013 |
Fixed-rate Medium-Term Notes, Series A, mature at various dates through
May 2028, with interest rates ranging from 6.74% to 7.76% | $ | 175.0 |
| $ | 175.0 |
|
| Fixed-rate Senior Unsecured Notes, maturing on September 1, 2024, with an interest rate of 3.875% | 346.4 |
| — |
|
| Fixed-rate Senior Unsecured Notes, maturing on September 15, 2014, with an interest rate of 6.0% | — |
| 249.9 |
|
| Other | 1.3 |
| 2.2 |
|
| Total debt | $ | 522.7 |
| $ | 427.1 |
|
| Less current maturities | 0.6 |
| 250.7 |
|
| Long-term debt | $ | 522.1 |
| $ | 176.4 |
|
The Company has a $500$500 million Senior Credit Facility, which matures on May 11, 2016.June 19, 2020. At December 31, 2014,2017, the Company had no$52.0 million of outstanding borrowings under the Senior Credit Facility. UnderFacility, which reduced the availability under this facility to $448.0 million. The Senior Credit Facility the Company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At December 31, 2014,2017, the Company was in full compliance with the covenants under the Senior Credit Facility.both of these covenants.
On August 20, 2014,September 7, 2017, the Company issued the 2024 Notes. The2027 Notes in the aggregate principle amount of €150 million of fixed-rate 2.02% senior unsecured notes. On September 18, 2017, the Company usedentered into the net proceeds2020 Term Loan that provided €100 million. Proceeds from the issuance of the 20242027 Notes and 2020 Term Loan were used to repay amounts drawn from the Company's 2014 NotesSenior Credit Facility to fund the Groeneveld acquisition, which closed on July 3, 2017. Refer to Note 3 - Acquisitions and Divestitures for general corporate purposes.additional information. These debt instruments have two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. These covenants are similar to those in the Senior Credit Facility. At December 31, 2017, the Company was in full compliance with both of these covenants.
The maturities of long-term debt for the five years subsequent to December 31, 20142017 are as follows:2015 – $0.6 million; 2016 – $15.7 million; 2017 – $5.0 million; 2018 – zero and 2019 - zero
|
| | | |
| Year | |
| 2018 | $ | 2.7 |
|
| 2019 | — |
|
| 2020 | 171.7 |
|
| 2021 | 1.7 |
|
| 2022 | — |
|
| Thereafter | 680.8 |
|
Interest paid was $34.4$31.5 million in 2014, $31.02017, $30.1 million in 20132016 and $32.4$32.1 million in 2012.2015. This differs from interest expense due to the timing of payments and interest capitalized of $1.6$0.7 million in 2014, $12.72017, $1.1 million in 20132016 and $4.9 millionzero in 2012.2015.
The Company and its subsidiaries lease a variety of real property and equipment. Rent expense under operating leases amounted to $33.0$35.2 million, $35.6$30.0 million and $35.1$33.5 million in 2014, 20132017, 2016 and 2012,2015, respectively. At December 31, 2014, future
Future minimum lease payments for noncancelable operating leases totaled $96.2 million andat December 31, 2017 are payable as follows: 2015
|
| | | |
| Year | |
| 2018 | $ | 33.5 |
|
| 2019 | 25.9 |
|
| 2020 | 20.7 |
|
| 2021 | 12.1 |
|
| 2022 | 6.8 |
|
| Thereafter | 6.4 |
|
Note 11 - $28.5 million; 2016 - $21.5 million; 2017 - $16.4 million; 2018 - $11.2 million; 2019 - $8.3 million and $10.3 million thereafter.
Note 10 - Contingencies
The Company and certain of its subsidiaries have been identified as potentially responsible parties for investigation and remediation under the Superfund or similar state laws with respect to certain sites. Claims for investigation and remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation.
On December 28, 2004, the United States Environmental Protection Agency (“USEPA”) sent Lovejoy a Special Notice Letter that identified Lovejoy as a potentially responsible party, together with at least 14 other companies, at the Ellsworth Industrial Park Site, Downers Grove, DuPage County, Illinois (the “Site”). Lovejoy’s Downers Grove property is situated within the Ellsworth Industrial Complex. The USEPA and the Illinois Environmental Protection Agency (“IEPA”) allege there have been one or more releases or threatened releases of hazardous substances, allegedly including, but not limited to, a release or threatened release on or from Lovejoy's property, at the Site. The relief sought by the USEPA and IEPA includes further investigation and potential remediation of the Site and reimbursement of response costs. Lovejoy’s allocated share of past and future costs related to the Site, including for investigation and/or remediation, could be significant. All previously pending property damage and personal injury lawsuits against Lovejoy related to the Site have been settled or dismissed. In connection with the acquisition of Lovejoy discussed in Note 3 - Acquisitions and Divestitures, the Company recorded an accrual for potential environmental remediation.
TheIncluding the Lovejoy matter discussed above, the Company had an accrualtotal accruals of $1.5$5.0 million and $2.1$5.6 million for various known environmental matters that are probable and reasonably estimable as of December 31, 20142017 and 2013,2016, respectively. This accrual isThese accruals were recorded based upon the best estimate of costs to be incurred in light of the progress made in determining the magnitude of remediation costs, the timing and extent of remedial actions required by governmental authorities and the amount of the Company’s liability in proportion to other responsible parties. Of the 2014 accrual,2017 and 2016 accruals, $0.4 million and $0.6 million, isrespectively, was included in the rollforward of the restructuring accrual as of December 31, 2014,2017, discussed further in Note 11 –12 - Impairment and Restructuring Charges.
In addition, the Company is subject to various lawsuits, claims and proceedings, which arise in the ordinary course of its business. The Company accrues costs associated with legal and non-income tax matters when they become probable and reasonably estimable. Accruals are established based on the estimated undiscounted cash flows to settle the obligations and are not reduced by any potential recoveries from insurance or other indemnification claims. Management believes that any ultimate liability with respect to these actions, in excess of amounts provided, will not materially affect the Company’s Consolidated Financial Statements.
In October 2014, the Brazilian government antitrust agency announced that it had opened an investigation of alleged antitrust violations in the bearing industry. The Company’s Brazilian subsidiary, Timken do Brasil Comercial Importadora Ltda, was included in the investigation. While the Company is unable to predict the ultimate length, scope or results of the investigation, management believes that the outcome will not have a material effect on the Company’s consolidated financial position; however,position. However, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Based on current facts and circumstances, the low end of the range for potential penalties, if any, would be immaterial to the Company.
Note 10 – Contingencies (continued)
Product Warranties:
In addition to the contingencies above, the Company provides limited warranties on certain of its products. The following is a rollforward of the warranty reservesliability for 20142017 and 2013:2016:
|
| | | | | | |
| | 2017 | 2016 |
| Beginning balance, January 1 | $ | 6.9 |
| $ | 5.4 |
|
| Expense | 2.7 |
| 2.4 |
|
| Payments | (3.8 | ) | (0.9 | ) |
| Ending balance, December 31 | $ | 5.8 |
| $ | 6.9 |
|
|
| | | | | | |
| | 2014 | 2013 |
| Beginning balance, January 1 | $ | 4.2 |
| $ | 4.3 |
|
| Expense (Income) | (1.4 | ) | 4.7 |
|
| Payments | (1.1 | ) | (4.8 | ) |
| Ending balance, December 31 | $ | 1.7 |
| $ | 4.2 |
|
The product warranty accrualliability for 20142017 and 20132016 was included in other current liabilities on the Consolidated Balance Sheets.
The Company currently is evaluating claims raised by certain customers with respect to the performance of bearings sold into the wind energy sector. Accruals related to this matter are included in the table above. Management believes that the outcome of these claims will not have a material effect on the Company’s consolidated financial position; however, the effect of any such outcome may be material to the results of operations of any particular period in which costs in excess of amounts provided, if any, are recognized.
Note 1112 - Impairment and Restructuring Charges
Impairment and restructuring charges by segment were as follows:
Year ended December 31, 2014:2017:
| | | | Mobile Industries | Process Industries | Corporate | Total | Mobile Industries | Process Industries | Corporate | Total |
| Impairment charges | $ | 98.2 |
| $ | 0.3 |
| $ | 0.4 |
| $ | 98.9 |
| $ | — |
| $ | 0.1 |
| $ | — |
| $ | 0.1 |
|
| Severance expense and related benefit costs | 9.3 |
| 1.4 |
| — |
| 10.7 |
| 3.3 |
| 0.1 |
| 0.1 |
| 3.5 |
|
| Exit costs | 2.0 |
| 1.8 |
| — |
| 3.8 |
| 0.2 |
| — |
| 0.5 |
| 0.7 |
|
| Total | $ | 109.5 |
| $ | 3.5 |
| $ | 0.4 |
| $ | 113.4 |
| $ | 3.5 |
| $ | 0.2 |
| $ | 0.6 |
| $ | 4.3 |
|
Year ended December 31, 2013:2016:
| | | | Mobile Industries | Process Industries | Corporate | Total | Mobile Industries | Process Industries | Corporate | Total |
| Impairment charges | $ | — |
| $ | 0.1 |
| $ | — |
| $ | 0.1 |
| $ | 3.9 |
| $ | — |
| $ | — |
| $ | 3.9 |
|
| Severance expense and related benefit costs | 6.6 |
| 2.6 |
| — |
| 9.2 |
| 9.3 |
| 6.0 |
| — |
| 15.3 |
|
| Exit costs | (1.5 | ) | 0.9 |
| — |
| (0.6 | ) | 1.8 |
| 0.7 |
| — |
| 2.5 |
|
| Total | $ | 5.1 |
| $ | 3.6 |
| $ | — |
| $ | 8.7 |
| $ | 15.0 |
| $ | 6.7 |
| $ | — |
| $ | 21.7 |
|
Year ended December 31, 2012:2015:
|
| | | | | | | | | | | | |
| | Mobile Industries | Process Industries | Corporate | Total |
| Impairment charges | $ | 0.1 |
| $ | 3.2 |
| $ | — |
| $ | 3.3 |
|
| Severance expense and related benefit costs | 4.5 |
| 2.6 |
| 0.6 |
| 7.7 |
|
| Exit costs | 0.8 |
| 2.9 |
| — |
| 3.7 |
|
| Total | $ | 5.4 |
| $ | 8.7 |
| $ | 0.6 |
| $ | 14.7 |
|
|
| | | | | | | | | | | | |
| | Mobile Industries | Process Industries | Corporate | Total |
| Impairment charges | 6.5 |
| $ | 0.1 |
| $ | — |
| $ | 6.6 |
|
| Severance expense and related benefit costs | 16.8 |
| 1.6 |
| — |
| 18.4 |
|
| Exit costs | 4.2 |
| 0.3 |
| — |
| 4.5 |
|
| Total | $ | 27.5 |
| $ | 2.0 |
| $ | — |
| $ | 29.5 |
|
Note 11 – Impairment and Restructuring Charges (continued)
The following discussion explains the major impairment and restructuring charges recorded for the periods presented; however, it is not intended to reflect a comprehensive discussion of all amounts in the tables above.
Mobile Industries:
On September 8, 2014, the Company announced plans to restructure its Aerospace segment. In connection with the restructuring, the Company: 1) eliminated leadership positions and integrated substantially all aerospace activities into Mobile Industries under the direction of its Group President; 2) sold the assets of its aerospace engine overhaul business, located in Mesa, Arizona, prior to the end of the year; 3) evaluated strategic alternatives for its aerospace MRO parts business, also located in Mesa; and 4) plans to close its aerospace bearing facility located in Wolverhampton, U.K. by early29, 2016, rationalizing the capacity into existing facilities. In conjunction with this announcement, the Company reviewed goodwill for impairment for its three reporting units within the Aerospace segment as a result of declining sales forecasts and financial performance within the segment. As a result of that review, the Company recorded a pretax goodwill impairment charge of $86.3 million during the third quarter of 2014 related to its Aerospace Transmissions and Aerospace Aftermarket reporting units. In addition, the Company recorded an intangible asset impairment charge of $9.9 million, an impairment charge of $1.2 million for its engine overhaul business, which it classified as assets held for sale, and severance and related benefits of $0.3 million. During the fourth quarter of 2014, the Company recorded severance and related benefits of $3.7 million related to the planned closure of Wolverhampton. See Note 17 - Fair Value for additional information on the impairment charges for the Aerospace segment.
In May 2012, the Company announced the closure of its manufacturing facility in St. Thomas,the Pulaski bearing plant, which was expected to be completed inclosed during the fourth quarter of 2017 and affected approximately one year,120 employees. During 2017 and was intended to consolidate bearing production from this plant with existing U.S. operations to better align the Company's manufacturing footprint and customer base. In connection with this closure,2016, the Company also moved customer service for the Canadian market to its offices in Toronto. The Company completed the closure of this manufacturing facility on March 31, 2013. The closure of the St. Thomas manufacturing facility displaced 190 employees. The Company expects to incur pretaxrecognized severance and related benefit costs of approximately $55$1.3 million and $2.5 million, respectively, related to $60 million in connection with this closure, of which approximately $20 million to $25 million is expected to be pretax cash costs.closure. The Company has incurred pretax costs related to this closure of approximately $41.7$9.8 million as of December 31, 2014,2017, including rationalization costs recorded in cost of products sold.
In August 2016, the Company completed the consultation process to cease manufacturing operations in Benoni affecting approximately 85 employees. During 2013,2016, the Company recorded $1.1impairment charges of $0.5 million ofand severance and related benefitsbenefit costs of $1.1 million related to this closure. During 2012, theThe Company recorded $16.9 million of severancewill continue to recondition bearings and related benefits, including a curtailment of pension benefits of $10.7 million, and impairment charges of $6.5 million, related to this closure.assemble rail bearings in Benoni.
InOn March 2007,17, 2016, the Company announced the closure of its manufacturing facility in Sao Paulo.the Altavista bearing plant. The Company completed the closure of this manufacturing facility on March 31, 2010. Mobile Industries2017. During 2016, the Company recorded impairment charges of $3.1 million and severance and related benefit costs of $1.9 million related to this closure. The Company has incurred cumulative pretax expensescosts related to this closure of approximately $55.2$11.5 million as of December 31, 2014 related to this closure. In 2013 and 2012, the Company2017, including rationalization costs recorded a favorable adjustmentin cost of $2.0 million and exit costs of $6.8 million, respectively, associated with the closure of this facility. The favorable adjustment for 2013 and exit costs for 2012 primarily related to environmental remediation costs.products sold.
In addition to the above charges, during 2015, the Company incurredrecorded severance and related benefit costs of $1.2 million related to the rationalization of its facility in Colmar, France.
Note 12 – Impairment and Restructuring Charges (continued)
Process Industries
During 2015, the Company recorded impairment charges of $3.0 million related to a repair business in Niles, Ohio. See Note 18 - Fair Value for additional information on the impairment charges for the repair business. In addition, the Company recorded $2.9 million of exit costs related to the Company's termination of its relationship with one of its third-party sales representatives in Colombia.
Workforce Reductions:
In 2017, the Company recognized $1.8 million of severance and related benefit costs relatedbenefits to the rationalization of one of its facilities in Europe in 2014. The Company also recorded a favorable adjustment of $2.7 million during 2012 for environmental exit costs at the site of its former plant in Columbus, Ohio. The favorable adjustment was a result of the sale of the real estate at the site of this former plant during the first quarter of 2012. The buyer assumed responsibility for the environmental remediation as a result of the sale. The buyer was able to obtain funding from the State of Ohio to remediate the site.
Workforce Reductions:
In 2013, the Company began the realignment of its organizationeliminate approximately 60 positions to improve efficiency and reduce costs. The amounts recognized in 2017 primarily relate to the Mobile Industries segment. During 2014,2016, the Company recognized $5.9$9.4 million of severance and related benefit costsbenefits to eliminate approximately 180 positions.175 positions to improve efficiency and reduce costs. Of the $5.9$9.4 million charge for 2014,2016, $3.8 million related to the Mobile Industries segment and $5.6 million related to the Process Industries segment. During 2015, the Company recognized $6.5 million of severance and related benefits to eliminate approximately 100 positions to improve efficiency and reduce costs. Of the $6.5 million charge for 2015, $3.4 million related to the Mobile Industries segment, and $2.5 million related to the Process Industries segment.segment and $0.6 million related to Corporate positions.
Note 11 – Impairment and Restructuring Charges (continued)
Consolidated Restructuring Accrual:
The following is a rollforward of the consolidated restructuring accrual for the years ended December 31:31, 2017 and 2016: |
| | | | | | |
| | 2017 | 2016 |
| Beginning balance, January 1 | $ | 10.1 |
| $ | 11.3 |
|
| Expense | 4.2 |
| 17.8 |
|
| Payments | (10.4 | ) | (19.0 | ) |
| Ending balance, December 31 | $ | 3.9 |
| $ | 10.1 |
|
|
| | | | | | |
| | 2014 | 2013 |
| Beginning balance, January 1 | $ | 10.8 |
| $ | 17.6 |
|
| Expense | 14.5 |
| 8.7 |
|
| Payments | (15.8 | ) | (15.5 | ) |
| Ending balance, December 31 | $ | 9.5 |
| $ | 10.8 |
|
The restructuring accrual at December 31, 20142017 and 2013 was2016 is included in other current liabilities on the Consolidated Balance Sheets. At December 31, 2014 and 2013, the restructuring accrual included $0.6 million and $1.2 million, respectively, of environmental remediation costs. The Company adjusts environmental remediation accruals based on the best available estimate of costs to be incurred, the timing and extent of remedial actions required by governmental authorities and the amount of the Company’s liability in proportion to other responsible parties.
Note 1213 - Stock Compensation Plans
Under the Company’sits long-term incentive plan, the Company’s common shares have been made available for grant, at the discretion of the Compensation Committee of the Board of Directors, to officers and key employees in the form of stock option awards. Stock option awards typically have a ten-yearten-year term and generally vest in 25% increments annually beginning on the first anniversary of the date of grant. In addition to stock option awards, the Company has granted restricted shares, under the long-term incentive plan. Restricteddeferred shares, typically vest in 25% increments annually beginning on the first year anniversary of the date of grant and are expensed over the vesting period.
Upon the Spinoff, outstanding long-term incentive awards were treated in a manner similar to that experienced by the Company's shareholders with respect to their common shares of the Company. As a result, common shares of the Company, as well as outstanding stock options, restricted stock units, restricted share, deferred share and performance share awards, were bifurcated such that common shares and the equity awards were split into shares or equity awards of both the Company and TimkenSteel. Individuals kept existing common shares of the Company and received one common share of TimkenSteel for every two common shares of the Company that they owned immediately prior to the Spinoff. Any unvested or vested but unexercised equity-based incentives held immediately prior to the Spinoff were treated in a similar manner.
Pre- and post-Spinoff stock option awards were intended to provide comparable value. The adjustment for each award was based on the average of the high and low stock prices on both June 30 and July 1, 2014. The strike price of each stock award was adjusted so that each participant's aggregate value was generally preserved.
In addition to the bifurcation of then-currently held stock, stock options,performance-based restricted stock units and time-based restricted stock the 2012 to 2014 strategic performance share award was scored upon the Spinoff based on results at that timeunits under its long-term incentive plan.
During 2017, 2016 and the award will be paid in March 2015. The award will be paid in cash.
The 2013 to 2015, strategic performance share measurement cycle also ended June 30, 2014, half way through the originally intended performance cycle. Performance for the first 18 months of the 2013-2015 performance cycle was scored as of June 30, 2014 and the earned amount, which was based on one-half of the original target number of strategic performance shares, will be paid in early 2016. The award will be paid in cash. In August 2014, a replacement grant covering the performance period from July 1, 2014 through December 31, 2015 was issued.
During 2014, 2013 and 2012, the Company recognized stock-based compensation expense of $13.7$5.2 million ($8.5 ($3.2 million after tax or $0.09$0.04 per diluted share), $12.1$5.9 million ($7.6 ($3.7 million after tax or $0.08$0.05 per diluted share) and $10.8$6.6 million ($6.8 ($4.1 million after tax or $0.07$0.05 per diluted share), respectively, for stock option awards.
The fair value of stock option awards granted during 2014, 20132017, 2016 and 20122015 was estimated at the date of grant using a Black-Scholes option-pricing method with the following assumptions:
70 |
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Weighted-average fair value per option | $ | 10.60 |
| $ | 6.49 |
| $ | 11.67 |
|
| Risk-free interest rate | 1.96 | % | 1.22 | % | 1.58 | % |
| Dividend yield | 2.96 | % | 3.04 | % | 2.29 | % |
| Expected stock volatility | 32.25 | % | 34.12 | % | 36.53 | % |
| Expected life - years | 5 |
| 5 |
| 5 |
|
Note 12 - Stock Compensation Plans (continued)
|
| | | | | | | | | |
| | 2014 | 2013 | 2012 |
| Weighted-average fair value per option (pre-Spinoff) | $ | 23.09 |
| $ | 21.17 |
| $ | 20.16 |
|
| Risk-free interest rate | 1.64 | % | 1.09 | % | 1.15 | % |
| Dividend yield | 1.75 | % | 2.29 | % | 1.94 | % |
| Expected stock volatility | 50.96 | % | 50.66 | % | 50.00 | % |
| Expected life - years | 5 |
| 6 |
| 6 |
|
Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and the expected lives of the options. The dividend yield was calculated based upon the last dividend prior to the grant compared to the trailing 12 months' daily stock price on the dividend date.prices. The risk-free interest rate was based upon yields of U.S. zero coupon issues with a term equal to the expected life of the option being valued. Forfeitures were estimated at 4%.
Note 13 - Stock Compensation Plans (continued)
A summary of stock option award activity for the year ended December 31, 20142017 is presented below:
|
| | | | | | | | | |
| | Number of Shares | Weighted-average
Exercise Price | Weighted-average
Remaining
Contractual Term | Aggregate Intrinsic Value (millions) |
| Outstanding - beginning of year | 3,783,497 |
| $ | 34.41 |
| | |
| Granted - new awards | 484,186 |
| 45.43 |
| | |
| Exercised | (1,053,189 | ) | 32.62 |
| | |
| Canceled or expired | (63,373 | ) | 36.94 |
| | |
| Outstanding - end of year | 3,151,121 |
| $ | 36.65 |
| 6 years | $ | 39.4 |
|
| Options expected to vest | 3,151,121 |
| $ | 36.65 |
| 6 years | $ | 39.4 |
|
| Options exercisable | 1,859,277 |
| $ | 36.05 |
| 5 years | $ | 24.4 |
|
|
| | | | | | | | | |
| | Number of Shares | Weighted-average
Exercise Price | Weighted-average
Remaining
Contractual Term | Aggregate Intrinsic Value (millions) |
| Outstanding - beginning of year | 3,384,687 |
| $ | 40.50 |
| | |
| Granted - new awards | 602,905 |
| 56.87 |
| | |
| Exercised | (764,001 | ) | 21.74 |
| (a) | |
| Canceled or expired | (55,228 | ) | 48.16 |
| | |
| Outstanding - end of year | 3,168,363 |
| $ | 33.57 |
| 7 years | $ | 28.9 |
|
| Options expected to vest | 3,117,761 |
| $ | 33.45 |
| 7 years | $ | 28.8 |
|
| Options exercisable | 1,734,601 |
| $ | 28.49 |
| 5 years | $ | 24.6 |
|
(a) Reflects the weighted average price at time of exercise with respect to pre- or post-Spinoff prices.
The total intrinsic value of optionsstock option awards exercised during the years ended December 31, 2014, 20132017, 2016 and 20122015 was $21.5$14.7 million,, $25.2 $1.7 million and $28.2$5.6 million,, respectively. Net cash proceeds from the exercise of stock optionsoption awards were $16.8$32.9 million,, $13.1 $4.3 million and $13.8$4.1 million,, respectively. On January 1, 2017, the Company adopted the provisions of ASU 2016-09. As a result, the Company began recording the tax effects associated with stock-based compensation through the income statement on a prospective basis. Prior to 2017, the Company recorded the tax effects associated with stock-based compensation in paid-in capital. Income tax benefits were $5.9$1.9 million, $8.9 and $1.3 million and $8.1 million for the years ended December 31, 2014, 20132017 and 2012,2015, respectively. Income taxes were a shortfall of $0.3 million for the year ended December 31, 2016.
In 2014,2017, the Company issued 102,070 strategic performance shares226,640 performance-based restricted stock units and 431,785 time-vesting191,256 time-based restricted stock units to officers and key employees. These strategic performance shares areThe performance-based restricted stock units that vestare calculated and awarded based on the achievement of specified performance objectives and cliff-vest after 1.5 years. Strategic performance sharesvest three years from the date of grant. The performance-based restricted stock units settle in either cash or shares, with 1,4806,260 shares expected to settle in cash and 100,590220,380 expected to settle in common shares. Time-vestingTime-based restricted stock units vest on one of three schedules:in 25% increments annually beginning on the first anniversary of the grant, cliff-vest after 3grant. Deferred shares cliff vest five years or cliff-vest after 5 years. Time-vestingfrom the date of grant. Time-based restricted stock units also settle in either cash or shares, with 11,729 time-vesting4,200 time-based restricted stock units expected to settle in cash and 420,056 time-vesting187,056 time-based restricted stock units expected to settle in common shares. For time-vestingtime-based restricted stock units that are expected to settle in cash, the Company has $15.3had $0.7 million and $1.2 million accrued in salaries, wages and benefits as of December 31, 2014, accrued2017 and 2016, respectively, on the Consolidated Balance Sheets. This is included in other non-current liabilities and salaries, wages and benefits for $5.3 million and $10.0 million, respectively.
A summary of restricted sharestock award activity, including restricted shares, deferred shares, strategic performance sharesperformance-based restricted stock units and strategic sharestime-based restricted stock units that will settle in common shares for the year ended December 31, 20142017 is as follows:
|
| | | | | |
| | Number of Shares | Weighted-average
Grant Date Fair Value |
| Outstanding - beginning of year | 1,349,175 |
| $ | 34.96 |
|
| Granted - new awards | 407,436 |
| 45.48 |
|
| Vested | (445,036 | ) | 37.18 |
|
| Canceled or expired | (66,301 | ) | 35.96 |
|
| Outstanding - end of year | 1,245,274 |
| $ | 37.56 |
|
|
| | | | | |
| | Number of Shares | Weighted-average
Grant Date Fair Value |
| Outstanding - beginning of year | 397,052 |
| $ | 43.57 |
|
| Granted - new awards | 520,646 |
| 43.38 |
|
| Vested | (171,135 | ) | 56.97 |
|
| Canceled or expired | (59,533 | ) | 51.13 |
|
| Outstanding - end of year | 687,030 |
| $ | 35.21 |
|
Note 12 - Stock Compensation Plans (continued)
As of December 31, 2014,2017, a total of 687,030 restricted shares1,245,274 stock awards have been awarded that have not yet vested. The Company distributed 171,135, 221,542445,036, 188,383 and 249,569103,953 shares in 2014, 20132017, 2016 and 2012,2015, respectively, due to the vesting of stock awards; the grant date fair value of these awards. Thevested shares was $16.5 million, $7.8 million, and $3.8 million, respectively. Shares awarded in 2014, 20132017, 2016 and 20122015 totaled 520,912, 111,640407,436, 613,165 and 161,905,485,975, respectively. The Company recognized compensation expense of $10.1$19.5 million,, $6.5 $8.2 million and $7.2$11.8 million, for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively, relating to restricted shares.stock award activity.
As of December 31, 2014,2017, the Company had unrecognized compensation expense of $27.4$29.4 million related to stock option awardsoptions and restricted shares.stock awards. The unrecognized compensation expense is expected to be recognized over a total weighted-average period of two years.years. The number of shares available for future grants for all plans at December 31, 20142017 was 3,537,197.4,920,863.
Note 1314 - Retirement Benefit Plans
The Company and its subsidiaries sponsor a number of defined benefit pension plans, which cover eligible employees, including certain employees in foreign countries. These plans generally are generally noncontributory. Pension benefits earned generally are generally based on years of service and compensation during active employment. The cash contributions for the Company’s defined benefit pension plans were $21.1$11.5 million, $120.7$15.0 million and $325.8$10.8 million in 20142017, 20132016 and 2012,2015, respectively.
The following tables summarize the net periodic benefit cost information and the related assumptions used to measure the net periodic benefit cost for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | |
| | U.S. Plans | International Plans |
| | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 |
| Components of net periodic benefit cost: | | | | | | |
| Service cost | $ | 12.2 |
| $ | 13.1 |
| $ | 15.4 |
| $ | 1.6 |
| $ | 1.4 |
| $ | 2.2 |
|
| Interest cost | 24.6 |
| 26.6 |
| 45.6 |
| 7.5 |
| 10.5 |
| 12.3 |
|
| Expected return on plan assets | (28.0 | ) | (30.1 | ) | (66.9 | ) | (11.1 | ) | (10.7 | ) | (18.2 | ) |
| Amortization of prior service cost | 1.4 |
| 1.7 |
| 2.8 |
| — |
| 0.1 |
| 0.1 |
|
Recognition of net actuarial
losses (gains) | 23.1 |
| 41.5 |
| (3.4 | ) | 0.1 |
| 19.4 |
| (17.7 | ) |
| Curtailment | (1.1 | ) | — |
| — |
| — |
| (0.1 | ) | 0.6 |
|
| Settlement | — |
| — |
| 116.1 |
| — |
| — |
| — |
|
| Special termination benefits | — |
| — |
| — |
| — |
| — |
| 0.6 |
|
| Net periodic benefit cost | $ | 32.2 |
| $ | 52.8 |
| $ | 109.6 |
| $ | (1.9 | ) | $ | 20.6 |
| $ | (20.1 | ) |
|
| | | | | | | | | | | | | | | | | | |
| | U.S. Plans | International Plans |
| | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 |
| Components of net periodic benefit cost: | | | | | | |
| Service cost | $ | 21.5 |
| $ | 35.7 |
| $ | 31.4 |
| $ | 2.4 |
| $ | 2.8 |
| $ | 3.3 |
|
| Interest cost | 98.3 |
| 116.2 |
| 131.3 |
| 17.7 |
| 18.5 |
| 19.8 |
|
| Expected return on plan assets | (152.0 | ) | (207.6 | ) | (197.8 | ) | (23.7 | ) | (24.4 | ) | (23.3 | ) |
| Amortization of prior service cost | 3.5 |
| 4.5 |
| 9.0 |
| 0.1 |
| — |
| 0.3 |
|
| Amortization of net actuarial loss | 55.6 |
| 109.2 |
| 76.9 |
| 5.3 |
| 7.6 |
| 6.4 |
|
| Pension curtailments and settlements | 32.7 |
| — |
| — |
| 0.8 |
| 7.2 |
| 11.6 |
|
| Less: discontinued operations | (8.0 | ) | (24.2 | ) | (19.4 | ) | 0.4 |
| 0.4 |
| 0.4 |
|
| Net periodic benefit cost | $ | 51.6 |
| $ | 33.8 |
| $ | 31.4 |
| $ | 3.0 |
| $ | 12.1 |
| $ | 18.5 |
|
|
| | | | |
| Assumptions | 2017 | 2016 | 2015 |
| U.S. Plans: | | | |
| Discount rate | 4.34% to 4.50% | 4.50% to 4.70% | 3.98% to 4.64% |
|
| Future compensation assumption | 2.50% to 3.00% | 2.50% to 3.00% | 2.00% to 3.00% |
|
| Expected long-term return on plan assets | 5.75% to 6.50% | 5.75% to 6.75% | 6.00 | % |
| International Plans: | | | |
| Discount rate | 1.25% to 9.00% | 2.00% to 8.50% | 1.50% to 8.75% |
|
| Future compensation assumption | 2.00% to 8.00% | 2.20% to 8.00% | 2.20% to 8.00% |
|
| Expected long-term return on plan assets | 0.75% to 9.25% | 0.82% to 9.25% | 2.25% to 9.25% |
|
|
| | | | | | |
| Assumptions | 2014 | 2013 | 2012 |
| U.S. Plans: | | | |
| Discount rate | 4.68% / 5.02% |
| 4.00 | % | 5.00 | % |
| Future compensation assumption | 2.00% to 3.00% |
| 2.00% to 3.00% |
| 2.00% to 3.00% |
|
| Expected long-term return on plan assets | 7.25 | % | 8.00 | % | 8.25 | % |
| International Plans: | | | |
| Discount rate | 3.25% to 9.75% |
| 2.75% to 9.00% |
| 4.75% to 9.50% |
|
| Future compensation assumption | 2.30% to 8.00% |
| 2.30% to 8.00% |
| 2.50% to 8.00% |
|
| Expected long-term return on plan assets | 3.00% to 8.50% |
| 3.25% to 8.50% |
| 3.25% to 9.00% |
|
The Company recognized actuarial losses of $23.2 million during 2017 primarily due to the impact of a net reduction in the discount rate assumption is based on current ratesused to measure its defined benefit pension obligations of high-quality long-term corporate bonds over$52.9 million and the same period that benefit payments will be required to be made. Theimpact of experience losses and other changes in valuation assumptions of $8.7 million, partially offset by higher than expected rate of returnreturns on plan assets assumption is based onof $38.4 million. The impact of the weighted-average expected return on the various asset classesnet reduction in the plans’ portfolio. discount rate used to measure the Company's defined benefit obligation was primarily driven by a 54 basis point reduction in the discount rate used to measure its U.S. defined benefit plan obligations.
The asset class return is developed using historical asset return performanceCompany recognized actuarial losses of $60.9 million during 2016 primarily due to the impact of a net reduction in the discount rate used to measure its defined benefit pension obligations of $86.9 million and the impact of experience losses and other changes in valuation assumptions of $10.2 million, partially offset by higher than expected returns on plan assets of $36.2 million. The impact of the net reduction in the discount rate used to measure the Company's defined benefit obligation was primarily driven by a 125 basis point reduction in the discount rate used to measure its defined benefit plan obligations in the United Kingdom and a 36 basis point reduction in the discount rate used to measure its defined benefit plan obligations in the United States.
Note 14 - Retirement Benefit Plans (continued)
The Company recognized actuarial gains of $21.1 million during 2015 primarily due to the impact of a net increase in the discount rate used to measure its defined benefit pension obligations of $56.1 million and the impact of experience gains and other changes in valuation assumptions of $22.6 million, partially offset by lower than expected returns on plan assets of $57.6 million. The impact of the net increase in the discount rate used to measure the Company's defined benefit obligation was primarily driven by a 50 basis point increase in the discount rate used to measure its U.S. defined benefit plan obligations.
In 2015, the Company entered into two agreements pursuant to which two of the Company's U.S. defined benefit pension plans purchased group annuity contracts from Prudential. The two group annuity contracts require Prudential to pay and administer future pension benefits for approximately 8,400 U.S. Timken retirees in the aggregate. The Company transferred a total of approximately $1.1 billion of its pension obligations and a total of approximately $1.2 billion of pension assets to Prudential in these transactions. The Company also entered into an agreement pursuant to which one of the Company's Canadian defined benefit pension plans purchased a group annuity contract from Canada Life. The group annuity contract requires Canada Life to pay and administer future pension benefits for approximately 40 Canadian retirees. As a result of the group annuity contracts, as well as current market conditions such as inflation, interest ratespension settlement and equity market performance.curtailment charges related to the Company's Canadian pension plans, the Company incurred total pension settlement and curtailment charges of $119.9 million, including professional fees of $2.6 million, in 2015.
For expense purposes in 2014,2017, the Company applied a weighted-average discount rate of 5.02% for the first four months of 2014, and a discount rate of 4.68% for the last eight months of 20144.34% to its U.S. defined benefit pension plans as a result of a remeasurement of the U.S. defined benefit pension plans due to the spinoff of the plans related to TimkenSteel.plans. For expense purposes in 2015,2018, the Company will apply a weighted-average discount rate of 4.20%3.80% to its U.S. defined benefit pension plans.
For expense purposes in 2014,2017, the Company applied ana weighted-average expected rate of return of 7.25%5.92% for the Company’s U.S. pension plan assets. For expense purposes in 2015,2018, the Company will apply ana weighted-average expected rate of return on plan assets of 6.00%5.78%. The reduction in expected rate of return on plan assets is due to the Company's move to a higher level of debt securities offset by a lower level of equity securities to maintain its overfunded status on U.S. pension plans.
Note 13 - Retirement Benefit Plans (continued)
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, 20142017 and 20132016:
|
| | | | | | | | | | | | |
| | U.S. Plans | International Plans |
| | 2017 | 2016 | 2017 | 2016 |
| Change in benefit obligation: | | | | |
| Benefit obligation at beginning of year | $ | 612.4 |
| $ | 589.9 |
| $ | 314.2 |
| $ | 338.1 |
|
| Service cost | 12.2 |
| 13.1 |
| 1.6 |
| 1.4 |
|
| Interest cost | 24.6 |
| 26.6 |
| 7.5 |
| 10.5 |
|
| Plan amendments | 2.8 |
| — |
| — |
| — |
|
| Actuarial losses | 60.5 |
| 45.3 |
| 0.9 |
| 53.4 |
|
| International plan exchange rate change | — |
| — |
| 32.2 |
| (45.0 | ) |
| Curtailment | (1.8 | ) | — |
| — |
| (0.1 | ) |
| Benefits paid | (67.7 | ) | (62.5 | ) | (21.2 | ) | (44.1 | ) |
| Benefit obligation at end of year | $ | 643.0 |
| $ | 612.4 |
| $ | 335.2 |
| $ | 314.2 |
|
|
| | | | | | | | | | | | |
| | U.S. Plans | International Plans |
| | 2014 | 2013 | 2014 | 2013 |
| Change in benefit obligation: | | | | |
| Benefit obligation at beginning of year | $ | 2,642.4 |
| $ | 2,996.5 |
| $ | 491.1 |
| $ | 499.8 |
|
| Service cost | 21.5 |
| 35.7 |
| 2.4 |
| 2.8 |
|
| Interest cost | 98.3 |
| 116.2 |
| 17.7 |
| 18.5 |
|
| Amendments | — |
| — |
| 0.3 |
| — |
|
| Actuarial losses (gains) | 239.6 |
| (274.0 | ) | 38.7 |
| (0.4 | ) |
| Employee contributions | — |
| — |
| 0.3 |
| 0.2 |
|
| International plan exchange rate change | — |
| — |
| (29.5 | ) | 5.3 |
|
| Benefits paid | (234.6 | ) | (232.0 | ) | (23.5 | ) | (35.1 | ) |
| Spinoff of TimkenSteel | (1,063.3 | ) | — |
| (81.8 | ) | — |
|
| Benefit obligation at end of year | $ | 1,703.9 |
| $ | 2,642.4 |
| $ | 415.7 |
| $ | 491.1 |
|
|
| | | | | | | | | | | | |
| Change in plan assets: | | | | |
| Fair value of plan assets at beginning of year | $ | 529.6 |
| $ | 553.7 |
| $ | 268.7 |
| $ | 304.6 |
|
| Actual return on plan assets | 65.5 |
| 33.8 |
| 12.0 |
| 43.2 |
|
| Company contributions / payments | 4.5 |
| 4.6 |
| 7.0 |
| 10.4 |
|
| International plan exchange rate change | — |
| — |
| 25.9 |
| (45.4 | ) |
| Benefits paid | (67.7 | ) | (62.5 | ) | (21.2 | ) | (44.1 | ) |
| Fair value of plan assets at end of year | 531.9 |
| 529.6 |
| 292.4 |
| 268.7 |
|
| Funded status at end of year | $ | (111.1 | ) | $ | (82.8 | ) | $ | (42.8 | ) | $ | (45.5 | ) |
|
| | | | | | | | | | | | |
| Change in plan assets: | | | | |
| Fair value of plan assets at beginning of year | $ | 2,870.0 |
| $ | 2,698.4 |
| $ | 420.6 |
| $ | 400.0 |
|
| Actual return on plan assets | 250.5 |
| 293.8 |
| 42.2 |
| 40.2 |
|
| Employee contributions | — |
| — |
| 0.3 |
| 0.2 |
|
| Company contributions / payments | 4.5 |
| 109.8 |
| 16.6 |
| 10.9 |
|
| International plan exchange rate change | — |
| — |
| (21.2 | ) | 4.4 |
|
| Benefits paid | (234.6 | ) | (232.0 | ) | (23.5 | ) | (35.1 | ) |
| Spinoff of TimkenSteel | (1,118.0 | ) | — |
| (85.6 | ) | — |
|
| Fair value of plan assets at end of year | 1,772.4 |
| 2,870.0 |
| 349.4 |
| 420.6 |
|
| Funded status at end of year | $ | 68.5 |
| $ | 227.6 |
| $ | (66.3 | ) | $ | (70.5 | ) |
|
| | | | | | | | | | | | |
| Amounts recognized on the Consolidated Balance Sheets: | | | | |
| Non-current assets | $ | 176.2 |
| $ | 342.3 |
| $ | — |
| $ | 0.3 |
|
| Current liabilities | (4.1 | ) | (4.8 | ) | (4.0 | ) | (1.7 | ) |
| Non-current liabilities | (103.6 | ) | (109.9 | ) | (62.3 | ) | (69.1 | ) |
| | $ | 68.5 |
| $ | 227.6 |
| $ | (66.3 | ) | $ | (70.5 | ) |
|
| | | | | | | | | | | | |
| Amounts recognized in accumulated other comprehensive loss: | | | | |
| Net actuarial loss | $ | 566.5 |
| $ | 846.9 |
| $ | 132.3 |
| $ | 142.2 |
|
| Net prior service cost | 11.9 |
| 18.5 |
| 0.7 |
| 0.5 |
|
| Accumulated other comprehensive loss | $ | 578.4 |
| $ | 865.4 |
| $ | 133.0 |
| $ | 142.7 |
|
Note 1314 - Retirement Benefit Plans (continued)
|
| | | | | | | | | | | | |
| | U.S. Plans | International Plans |
| | 2017 | 2016 | 2017 | 2016 |
| Amounts recognized on the Consolidated Balance Sheets: | | | | |
| Non-current assets | $ | 6.7 |
| $ | 26.4 |
| $ | 13.0 |
| $ | 5.7 |
|
| Current liabilities | (4.8 | ) | (4.3 | ) | (1.5 | ) | (1.4 | ) |
| Non-current liabilities | (113.0 | ) | (104.9 | ) | (54.3 | ) | (49.8 | ) |
| | $ | (111.1 | ) | $ | (82.8 | ) | $ | (42.8 | ) | $ | (45.5 | ) |
|
| | | | | | | | | | | | |
| Changes in plan assets and benefit obligations recognized in accumulated other comprehensive loss (AOCL): | 2014 | 2013 | 2014 | 2013 |
| AOCL at beginning of year | $ | 865.4 |
| $ | 1,339.2 |
| $ | 142.7 |
| $ | 173.7 |
|
| Net actuarial loss (gain) | 141.0 |
| (360.1 | ) | 20.2 |
| (16.2 | ) |
| Prior service cost | — |
| — |
| 0.3 |
| — |
|
| Recognized net actuarial loss | (55.6 | ) | (109.2 | ) | (5.3 | ) | (7.6 | ) |
| Recognized prior service cost | (3.5 | ) | (4.5 | ) | (0.1 | ) | — |
|
| Loss recognized due to curtailment | (32.7 | ) | — |
| (0.8 | ) | (7.2 | ) |
| Foreign currency impact | — |
| — |
| (9.8 | ) | — |
|
| TimkenSteel Spinoff | (336.2 | ) | — |
| (14.2 | ) | — |
|
| Total recognized in accumulated other comprehensive loss at December 31 | $ | 578.4 |
| $ | 865.4 |
| $ | 133.0 |
| $ | 142.7 |
|
|
| | | | | | | | | | | | |
| Amounts recognized in accumulated other comprehensive loss: | | | | |
| Net prior service cost | $ | 8.1 |
| $ | 7.4 |
| $ | 0.5 |
| $ | 0.5 |
|
| Accumulated other comprehensive loss | $ | 8.1 |
| $ | 7.4 |
| $ | 0.5 |
| $ | 0.5 |
|
Amounts recognized on the Consolidated Balance Sheet for 2013 include amounts related to the Company's former steel business. |
| | | | | | | | | | | | |
| Changes in prior service cost recognized in accumulated other comprehensive loss: | | | | |
| Accumulated other comprehensive loss at beginning of year | $ | 7.4 |
| $ | 9.1 |
| $ | 0.5 |
| $ | 0.5 |
|
| Prior service cost | 2.8 |
| — |
| — |
| — |
|
| Recognized prior service cost | (1.4 | ) | (1.7 | ) | — |
| (0.1 | ) |
| (Loss) gain recognized due to curtailment | (0.7 | ) | — |
| — |
| 0.1 |
|
| Total recognized in accumulated other comprehensive loss at December 31 | $ | 8.1 |
| $ | 7.4 |
| $ | 0.5 |
| $ | 0.5 |
|
The presentation in the above tables for amounts recognized in accumulated other comprehensive loss on the Consolidated Balance Sheets is before the effect of income taxes.
The following table summarizes assumptions used to measure the benefit obligation for the defined benefit pension plans at December 31:
|
| | | |
| Assumptions | 2017 | 2016 |
| U.S. Plans: | | |
| Discount rate | 3.75% to 3.80% |
| 4.34% to 4.50% |
| Future compensation assumption | 2.50 | % | 2.00% to 3.00% |
| International Plans: | | |
| Discount rate | 1.25% to 9.00% |
| 1.25% to 9.00% |
| Future compensation assumption | 2.00% to 8.00% |
| 2.00% to 8.00% |
|
| | | | |
| Assumptions | 2014 | 2013 |
| U.S. Plans: | | |
| Discount rate | 4.20 | % | 5.02 | % |
| Future compensation assumption | 2.00% to 3.00% |
| 2.00% to 3.00% |
|
| International Plans: | | |
| Discount rate | 1.50% to 8.75% |
| 3.25% to 9.75% |
|
| Future compensation assumption | 2.20% to 8.00% |
| 2.30% to 8.00% |
|
The Company adopted the new RP-2014 mortality tables for pension obligations for the Company's U.S. defined benefit pension plans. Company-specific experience was applied to these mortality tables. This change in assumption increased pension obligations by $59.0 million for 2014.
Defined benefit pension plans in the United States represent 80%66% of the benefit obligation and 84%65% of the fair value of plan assets as of December 31, 20142017.
Certain of the Company’s defined benefit pension plans were overfunded as of December 31, 2014.2017. As a result, $176.2$19.7 million and $342.6$32.1 million at December 31, 20142017 and 2013,2016, respectively, are included in non-current pension assets on the Consolidated Balance Sheets. The current portion of accrued pension cost, which iswas included in salaries, wages and benefits on the Consolidated Balance Sheets, was $8.1$6.4 million and $6.5$5.7 million at December 31, 20142017 and 2013,2016, respectively. In 2014,2017, the current portion of accrued pension cost relates to unfunded plans and represents the actuarial present value of expected payments related to the plans to be made over the next 12 months.
The accumulated benefit obligation at December 31, 20142017 exceeded the market value of plan assets for several of the Company’s pension plans. For these plans, the projected benefit obligation was $226.3$208.8 million,, the accumulated benefit obligation was $213.8$196.1 million and the fair value of plan assets was $56.4$35.6 million at December 31, 2014.2017.
Note 14 - Retirement Benefit Plans (continued)
The total pension accumulated benefit obligation for all plans was $2.1 billion$941.5 million and $3.0 billion$888.0 million at December 31, 20142017 and 2013,2016, respectively.
Investment performance increased the value of the Company’s pension assets by 11.2%.10.6% in 2017.
As of December 31, 20142017 and 2013,2016, the Company’s defined benefit pension plans did not directly hold any of the Company’s common shares.
Note 13 - Retirement Benefit Plans (continued)
The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $53.3 million and $2.9 million, respectively.is $1.7 million.
The Company recorded $33.7 million of pension settlement charges, including professional fees, in 2014. These pension settlement charges primarily related to the settlement of approximately $110 million of the Company's pension obligations related to its defined benefit pension plan in the U.S. as a result of the lump sum distributions for 2014 retirements and certain deferred vested plan participants.
Plan Assets:
The Company’s target allocation for pension plan assets, as well as the actual pension plan asset allocations as of December 31, 20142017 and 20132016, was as follows:
|
| | | | | |
| | Current Target Allocation | Percentage of Pension Plan Assets at December 31, |
| Asset Category | | | | 2017 | 2016 |
| Equity securities | 10% | to | 16% | 14% | 12% |
| Fixed income securities | 70% | to | 90% | 80% | 78% |
| Other investments | 4% | to | 10% | 6% | 10% |
| Total | | | | 100% | 100% |
|
| | | | | |
| | Current Target Allocation | Percentage of Pension Plan Assets at December 31, |
| Asset Category | | | | 2014 | 2013 |
| Equity securities | 10% | to | 18% | 10% | 43% |
| Debt securities | 70% | to | 78% | 77% | 45% |
| Other | 9% | to | 15% | 13% | 12% |
| Total | | | | 100% | 100% |
The Company 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, the Company 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 portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
Note 14 - Retirement Benefit Plans (continued)
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 FASB provides accounting rules that classify the inputs used to measure fair value 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. |
Note 13 - Retirement Benefit Plans (continued)
The following table presents the fair value hierarchy for those investments of the Company’s pension assets measured at fair value on a recurring basis as of December 31, 20142017:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Plans | International Pension Plans |
| | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total |
| Assets: | | | | | | | | |
| Cash and cash equivalents | $ | 27.2 |
| $ | — |
| $ | — |
| $ | 27.2 |
| $ | 4.8 |
| $ | — |
| $ | — |
| $ | 4.8 |
|
| Government and agency securities | 15.5 |
| 3.4 |
| — |
| 18.9 |
| — |
| — |
| — |
| — |
|
| Corporate bonds - investment grade | — |
| 105.1 |
| — |
| 105.1 |
| — |
| — |
| — |
| — |
|
| Mutual funds - fixed income | 44.9 |
| — |
| — |
| 44.9 |
| — |
| — |
| — |
| — |
|
| Mutual funds - international equity | 17.5 |
| — |
| — |
| 17.5 |
| — |
| — |
| — |
| — |
|
| | $ | 105.1 |
| $ | 108.5 |
| $ | — |
| $ | 213.6 |
| $ | 4.8 |
| $ | — |
| $ | — |
| $ | 4.8 |
|
| | | | | | | | | |
| Investments measured at net asset value: | | | | | | | | |
| Cash and cash equivalents | | | | $ | 0.2 |
| | | | $ | 0.1 |
|
| Corporate bonds - investment grade | | | | — |
| | | | 5.3 |
|
| Equity securities - international companies | | | | — |
| | | | 1.0 |
|
| Common collective funds - domestic equities | | | | 37.0 |
| | | | — |
|
| Common collective funds - international equities | | | | 11.5 |
| | | | 25.3 |
|
| Common collective funds - fixed income | | | | 220.9 |
| | | | 86.2 |
|
| Limited partnerships | | | | 31.8 |
| | | | — |
|
| Real estate partnerships | | | | 16.9 |
| | | | — |
|
| Other assets | | | | — |
| | | | 169.7 |
|
| Total Assets |
| | | $ | 531.9 |
| | | | $ | 292.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Plans | International Pension Plans |
| | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 |
| Assets: | | | | | | | | |
| Cash and cash equivalents | $ | 55.3 |
| $ | 0.8 |
| $ | 54.5 |
| $ | — |
| $ | 25.5 |
| $ | — |
| $ | 25.5 |
| $ | — |
|
| Government and agency securities | 505.9 |
| 496.4 |
| 9.5 |
| — |
| — |
| — |
| — |
| — |
|
| Corporate bonds - investment grade | 473.7 |
| — |
| 473.7 |
| — |
| 2.7 |
| — |
| 2.7 |
| — |
|
| Equity securities - U.S. companies | 22.7 |
| 22.7 |
| — |
| — |
| 30.2 |
| 30.2 |
| — |
| — |
|
| Equity securities - international companies | 16.3 |
| 16.3 |
| — |
| — |
| 26.6 |
| 25.7 |
| 0.9 |
| — |
|
| Asset backed securities | — |
| — |
| — |
| — |
| 3.4 |
| — |
| 3.4 |
| — |
|
| Common collective funds - domestic equities | 22.6 |
| — |
| 22.6 |
| — |
| 2.1 |
| — |
| 2.1 |
| — |
|
| Common collective funds - international equities | 27.4 |
| — |
| 27.4 |
| — |
| 60.6 |
| — |
| 60.6 |
| — |
|
| Common collective funds - fixed income | 379.5 |
| — |
| 379.5 |
| — |
| 108.9 |
| — |
| 108.9 |
| — |
|
| Common collective funds - other | — |
| — |
| — |
| — |
| 89.4 |
| — |
| 89.4 |
| — |
|
| Limited partnerships | 66.1 |
| — |
| — |
| 66.1 |
| — |
| — |
| — |
| — |
|
| Real estate partnerships | 112.6 |
| — |
| 84.8 |
| 27.8 |
| — |
| — |
| — |
| — |
|
| Risk parity | 90.3 |
| — |
| 90.3 |
| — |
| — |
| — |
| — |
| — |
|
| Total Assets | $ | 1,772.4 |
| $ | 536.2 |
| $ | 1,142.3 |
| $ | 93.9 |
| $ | 349.4 |
| $ | 55.9 |
| $ | 293.5 |
| $ | — |
|
The table below sets forth a summary of changes in the fair value of the level 3 assets by fund for the year ended December 31, 2014:
|
| | | | | | | | | |
| | Limited Partnerships | Real Estate | Total |
| Beginning balance, January 1 | $ | 78.8 |
| $ | 21.1 |
| $ | 99.9 |
|
| Purchases | 2.1 |
| 10.5 |
| 12.6 |
|
| Sales | (16.8 | ) | (5.6 | ) | (22.4 | ) |
| Realized losses | (11.0 | ) | (4.1 | ) | (15.1 | ) |
| Unrealized gains | 13.0 |
| 5.9 |
| 18.9 |
|
| Ending balance, December 31 | $ | 66.1 |
| $ | 27.8 |
| $ | 93.9 |
|
Note 1314 - Retirement Benefit Plans (continued)
The following table presents the fair value hierarchy for those investments of the Company’s pension assets measured at fair value on a recurring basis as of December 31, 20132016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Plans | International Pension Plans |
| | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total |
| Assets: | | | | | | | | |
| Cash and cash equivalents | $ | 34.3 |
| $ | — |
| $ | — |
| $ | 34.3 |
| $ | 0.8 |
| $ | — |
| $ | — |
| $ | 0.8 |
|
| Government and agency securities | 44.0 |
| 2.6 |
| — |
| 46.6 |
| — |
| — |
| — |
| — |
|
| Corporate bonds - investment grade | — |
| 65.7 |
| — |
| 65.7 |
| — |
| — |
| — |
| — |
|
| Equity securities - U.S. companies | 10.5 |
| — |
| — |
| 10.5 |
| — |
| — |
| — |
| — |
|
| Equity securities - international companies | 6.2 |
| — |
| — |
| 6.2 |
| — |
| — |
| — |
| — |
|
| Mutual funds | 41.5 |
| — |
| — |
| 41.5 |
| — |
| — |
| — |
| — |
|
| | $ | 136.5 |
| $ | 68.3 |
| $ | — |
| $ | 204.8 |
| $ | 0.8 |
| $ | — |
| $ | — |
| $ | 0.8 |
|
| | | | | | | | | |
| Investments measured at net asset value: | | | | | | | | |
| Cash and cash equivalents | | | | $ | — |
| | | | $ | 3.4 |
|
| Corporate bonds - investment grade | | | | — |
| | | | 2.7 |
|
| Equity securities - international companies | | | | — |
| | | | 1.5 |
|
| Common collective funds - domestic equities | | | | 14.0 |
| | | | — |
|
| Common collective funds - international equities | | | | 14.1 |
| | | | 33.4 |
|
| Common collective funds - fixed income | | | | 217.1 |
| | | | 74.6 |
|
| Limited partnerships | | | | 39.6 |
| | | | — |
|
| Real estate partnerships | | | | 22.1 |
| | | | — |
|
| Other assets | | | | — |
| | | | 152.3 |
|
| Risk parity | | | | 17.9 |
| | | | — |
|
| Total Assets | | | | $ | 529.6 |
| | | | $ | 268.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Plans | International Pension Plans |
| | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 |
| Assets: | | | | | | | | |
| Cash and cash equivalents | $ | 345.8 |
| $ | 3.3 |
| $ | 342.5 |
| $ | — |
| $ | 18.1 |
| $ | — |
| $ | 18.1 |
| $ | — |
|
| Government and agency securities | 188.4 |
| 175 |
| 13.4 |
| — |
| — |
| — |
| — |
| — |
|
| Corporate bonds - investment grade | 300.6 |
| — |
| 300.6 |
| — |
| 0.5 |
| — |
| 0.5 |
| — |
|
| Corporate bonds - non-investment grade | 110.1 |
| — |
| 110.1 |
| — |
| — |
| — |
| — |
| — |
|
| Equity securities - U.S. companies | 274.6 |
| 273.2 |
| 1.4 |
| — |
| 26.0 |
| 26.0 |
| — |
| — |
|
| Equity securities - international companies | 230.8 |
| 230.8 |
| — |
| — |
| 80.7 |
| 80.7 |
| — |
| — |
|
| Asset backed securities | 34.8 |
| — |
| 34.8 |
| — |
| 3.3 |
| — |
| 3.3 |
| — |
|
| Common collective funds - domestic equities | 180.9 |
| — |
| 180.9 |
| — |
| 14.8 |
| — |
| 14.8 |
| — |
|
| Common collective funds - international equities | 315.5 |
| — |
| 315.5 |
| — |
| 72.0 |
| — |
| 72.0 |
| — |
|
| Common collective funds - fixed income | 507.5 |
| — |
| 507.5 |
| — |
| 118.0 |
| — |
| 118.0 |
| — |
|
| Common collective funds - other | — |
| — |
| — |
| — |
| 87.2 |
| — |
| 87.2 |
| — |
|
| Limited partnerships | 78.8 |
| — |
| — |
| 78.8 |
| — |
| — |
| — |
| — |
|
| Real estate partnerships | 145.6 |
| — |
| 124.5 |
| 21.1 |
| — |
| — |
| — |
| — |
|
| Mutual funds - real estate | 156.6 |
| 155.9 |
| 0.7 |
| — |
| — |
| — |
| — |
| — |
|
| Total Assets | $ | 2,870.0 |
| $ | 838.2 |
| $ | 1,931.9 |
| $ | 99.9 |
| $ | 420.6 |
| $ | 106.7 |
| $ | 313.9 |
| $ | — |
|
The table below sets forth a summary of changes in the fair value of the level 3 assets by fund for the year ended December 31, 2013:
|
| | | | | | | | | |
| | Limited Partnerships | Real Estate | Total |
| Beginning balance, January 1 | $ | 79.9 |
| $ | 16.3 |
| $ | 96.2 |
|
| Purchases | 5.3 |
| 3.5 |
| 8.8 |
|
| Sales | (11.5 | ) | (0.6 | ) | (12.1 | ) |
| Realized losses | (6.2 | ) | (0.1 | ) | (6.3 | ) |
| Unrealized gains | 11.3 |
| 2.0 |
| 13.3 |
|
| Ending balance, December 31 | $ | 78.8 |
| $ | 21.1 |
| $ | 99.9 |
|
Cash and cash equivalents are valued at redemption value. Government and agency securities are valued at the closing price reported in the active market in which the individual securities are traded. Certain corporate bonds are valued at the closing price reported in the active market in which the bond is traded. Equity securities (both common and preferred stock) are valued at the closing price reported in the active market in which the individual security is traded. Common collective funds are valued based on a net asset value per share. Asset-backed securities are valued based on quoted prices for similar assets in active markets. When such prices are unavailable, the plan trustee determines a valuation from the market maker dealing in the particular security.
Limited partnerships include investments in funds that invest primarily in private equity, venture capital and distressed debt. Limited partnerships are valued based on the ownership interest in the net asset value of the investment, which is used as a practical expedient to fair value, per the underlying investment fund, which is based upon the general partner's own assumptions about the assumptions a market participant would use in pricing the assets and liabilities of the partnership. Real estate investments include funds that invest in companies that primarily invest in commercial
Note 13 - Retirement Benefit Plans (continued)
and residential properties, commercial mortgage-backed securities, debt and equity securities of real estate operating companies, and real estate investment trusts. Mutual funds – real estate are valued based on the closing price reported in the active market in which the individual security is traded. Other real estate investments are valued based on the ownership interest in the net asset value of the investment, which is used as a practical expedient to fair value per the underlying investment fund, which is based on appraised values and current transaction prices. Risk parity investments include funds that invest in diversified global asset classes (equities, bonds, inflation-linked bonds, and commodities) with leverage to balance risk and achieve consistent returns with lower volatility. Risk parity investments are valued based on the closing prices of the underlying securities in the active markets in which they are traded.
Note 14 - Retirement Benefit Plans (continued)
Cash Flows:
|
| | | |
| Employer Contributions to Defined Benefit Plans | |
| 2016 | $ | 15.0 |
|
| 2017 | 11.5 |
|
| 2018 (planned) | 10.4 |
|
|
| | | |
| Employer Contributions to Defined Benefit Plans | |
| 2013 | $ | 120.7 |
|
| 2014 | 21.1 |
|
| 2015 (planned) | 15.0 |
|
Future benefit payments, including lump sum distributions, are expected to be as follows:
|
| | | |
| Benefit Payments | |
| 2018 | $ | 67.4 |
|
| 2019 | 94.0 |
|
| 2020 | 64.6 |
|
| 2021 | 72.2 |
|
| 2022 | 65.2 |
|
| 2023-2027 | 300.4 |
|
|
| | | |
| Benefit Payments | |
| 2015 | $ | 178.9 |
|
| 2016 | 154.2 |
|
| 2017 | 147.1 |
|
| 2018 | 145.9 |
|
| 2019 | 169.4 |
|
| 2020-2024 | 716.8 |
|
Employee Savings Plans:
The Company sponsors defined contribution retirement and savings plans covering substantially all employees in the United States and employees at certain non-U.S. locations. The Company has contributedmade contributions to its common shares todefined contribution plans of $21.8 million in 2017, $20.2 million in 2016 and $22.4 million in 2015. Participants in certain of these plans based on formulas establishedmay elect to hold a portion of their investments in the respective plan agreements.Company's common shares. At December 31, 2014,2017, the plans held 3,984,3632,665,260 of the Company’s common shares with a fair value of $170.1 million. Company contributions to the plans, including performance sharing, were $26.1 million in 2014, $28.5 million in 2013 and $24.9 million in 2012.$131.0 million. The Company paid dividends totaling $4.7$3.0 million in 2014, $5.52017, $3.7 million in 20132016 and $6.3$4.2 million in 20122015 to plans to be disbursed to participant accounts holding the Company’s common shares. The Spinoff also resulted in a dividend of $81.9 million of TimkenSteel common shares in 2014 to plans holding the Company's common shares.
Note 1415 - Other Postretirement Benefit Plans
The Company and its subsidiaries sponsor several funded and unfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and dependents. Depending on retirement date and employee classification, certain health care plans contain contribution and cost-sharing features such as deductibles, coinsurance and limitations on employer-provided subsidies. The remaining health care and life insurance plans are noncontributory.
The following tables summarize the net periodic benefit cost information and the related assumptions used to measure the net periodic benefit cost for the years ended December 31:
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Components of net periodic benefit cost: | | | |
| Service cost | $ | 0.1 |
| $ | 0.3 |
| $ | 0.4 |
|
| Interest cost | 9.1 |
| 11.0 |
| 10.9 |
|
| Expected return on plan assets | (5.6 | ) | (6.3 | ) | (7.3 | ) |
| Amortization of prior service (credit) cost | (1.0 | ) | 1.0 |
| 0.8 |
|
| Recognition of net actuarial (gains) losses | (4.0 | ) | 4.5 |
| 1.0 |
|
| Curtailment | — |
| 0.1 |
| — |
|
| Net periodic benefit cost | $ | (1.4 | ) | $ | 10.6 |
| $ | 5.8 |
|
|
| | | | | | | | | |
| | 2014 | 2013 | 2012 |
| Components of net periodic benefit cost: | | | |
| Service cost | $ | 1.3 |
| $ | 2.9 |
| $ | 2.5 |
|
| Interest cost | 16.7 |
| 21.7 |
| 28.4 |
|
| Expected return on plan assets | (8.5 | ) | (11.1 | ) | (10.6 | ) |
| Amortization of prior service credit | 1.0 |
| (0.2 | ) | (0.2 | ) |
| Amortization of net actuarial loss | — |
| 2.3 |
| 2.5 |
|
| Less: discontinued operations | (3.1 | ) | (6.4 | ) | (9.0 | ) |
| Net periodic benefit cost | $ | 7.4 |
| $ | 9.2 |
| $ | 13.6 |
|
|
| | | | | | |
| Assumptions: | 2017 | 2016 | 2015 |
| Discount rate | 3.97 | % | 4.39 | % | 3.95 | % |
| Rate of return | 6.00 | % | 6.00 | % | 6.25 | % |
|
| | | | | | |
| Assumptions: | 2014 | 2013 | 2012 |
| Discount rate | 4.33% / 4.59% |
| 3.80 | % | 4.85 | % |
| Rate of return | 5.00 | % | 5.00 | % | 5.00 | % |
The Company recognized actuarial losses of $4.5 million during 2016 primarily due to the impact of a 42 basis point reduction in the discount rate used to measure its defined benefit postretirement obligations of $8.2 million and lower than expected returns on plan assets of $0.2 million, partially offset by the impact of experience gains and other changes in valuation assumptions of $3.9 million.
The Company recognized actuarial losses of $1.0 million during 2015 primarily due to lower than expected returns on plan assets of $8.6 million and the impact of experience losses and other changes in valuation assumptions of $1.7 million, partially offset by the impact of a 44 basis point increase in the discount rate used to measure its defined benefit postretirement obligations of $9.3 million.
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’ portfolio. 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 expense purposes in 20142017, the Company applied a discount rate of 4.59% for the first four months of 2014, and a discount rate of 4.33% for the last eight months of 20143.97% to its other postretirement benefit plans. For expense purposes in 2015,2018, the Company will apply a discount rate of 3.95%3.57% to its other postretirement benefit plans.
For expense purposes in 2014,2017, the Company applied an expected rate of return of 5.00%6.00% to the VEBA trust assets. For expense purposes in 2015,2018, the Company will apply an expected rate of return of 6.25%4.50% to the VEBA trust assets.
.
Note 1415 - Other Postretirement Benefit Plans (continued)
The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets of the other postretirement benefit plans as of December 31, 20142017 and 20132016:
|
| | | | | | |
| 2017 | 2016 |
| Change in benefit obligation: | | |
| Benefit obligation at beginning of year | $ | 241.4 |
| $ | 262.7 |
|
| Service cost | 0.1 |
| 0.3 |
|
| Interest cost | 9.1 |
| 11.0 |
|
| Plan amendments | 1.2 |
| (11.4 | ) |
| Actuarial (gains) losses | (0.3 | ) | 4.3 |
|
| Benefits paid | (31.7 | ) | (25.5 | ) |
| Benefit obligation at end of year | $ | 219.8 |
| $ | 241.4 |
|
|
| | | | | | |
| 2014 | 2013 |
| Change in benefit obligation: | | |
| Benefit obligation at beginning of year | $ | 515.6 |
| $ | 639.2 |
|
| Service cost | 1.3 |
| 2.9 |
|
| Interest cost | 16.7 |
| 21.7 |
|
| Actuarial losses (gains) | 18.0 |
| (101.9 | ) |
| International plan exchange rate change | (0.1 | ) | — |
|
| Benefits paid | (37.1 | ) | (46.3 | ) |
| Spinoff of TimkenSteel | (229.8 | ) | — |
|
| Benefit obligation at end of year | $ | 284.6 |
| $ | 515.6 |
|
|
| | | | | | |
| Change in plan assets: | | |
| Fair value of plan assets at beginning of year | $ | 102.4 |
| $ | 112.1 |
|
| Company contributions / payments | 12.4 |
| 9.7 |
|
| Return on plan assets | 9.3 |
| 6.1 |
|
| Benefits paid | (31.7 | ) | (25.5 | ) |
| Fair value of plan assets at end of year | 92.4 |
| 102.4 |
|
| Funded status at end of year | $ | (127.4 | ) | $ | (139.0 | ) |
|
| | | | | | |
| Change in plan assets: | | |
| Fair value of plan assets at beginning of year | $ | 240.1 |
| $ | 221.9 |
|
| Company contributions / payments | 49.4 |
| 37.3 |
|
| Return on plan assets | 12.2 |
| 27.2 |
|
| Benefits paid | (37.1 | ) | (46.3 | ) |
| Spinoff of TimkenSteel | (143.9 | ) | — |
|
| Fair value of plan assets at end of year | 120.7 |
| 240.1 |
|
| Funded status at end of year | $ | (163.9 | ) | $ | (275.5 | ) |
| | | Amounts recognized on the Consolidated Balance Sheets: | | |
| Current liabilities | $ | (22.1 | ) | $ | (41.6 | ) | $ | (4.8 | ) | $ | (7.5 | ) |
| Non-current liabilities | (141.8 | ) | (233.9 | ) | (122.6 | ) | (131.5 | ) |
| | $ | (163.9 | ) | $ | (275.5 | ) | $ | (127.4 | ) | $ | (139.0 | ) |
|
| | | | | | |
| Amounts recognized in accumulated other comprehensive loss: | | |
| Net actuarial loss | $ | 18.5 |
| $ | 5.5 |
|
| Net prior service cost | 3.0 |
| 7.8 |
|
| Accumulated other comprehensive loss | $ | 21.5 |
| $ | 13.3 |
|
|
| | | | | | |
| Amounts recognized in accumulated other comprehensive income: | | |
| Net prior service cost | $ | (8.1 | ) | $ | (10.3 | ) |
| Accumulated other comprehensive income | $ | (8.1 | ) | $ | (10.3 | ) |
|
| | | | | | |
| Changes to prior service cost recognized in accumulated other comprehensive (income) loss: | | |
| Accumulated other comprehensive income (loss) at beginning of year | $ | (10.3 | ) | $ | 2.2 |
|
| Prior service cost (credit) | 1.2 |
| (11.4 | ) |
| Recognized prior service credit (cost) | 1.0 |
| (1.0 | ) |
| Loss recognized due to curtailment | — |
| (0.1 | ) |
| Total recognized in accumulated other comprehensive income at December 31 | $ | (8.1 | ) | $ | (10.3 | ) |
|
| | | | | | |
| Changes in plan assets and benefit obligations recognized in AOCL: | | |
| AOCL at beginning of year | $ | 13.3 |
| $ | 133.3 |
|
| Net actuarial loss (gain) | 14.3 |
| (117.9 | ) |
| Recognized net actuarial loss | — |
| (2.3 | ) |
| Recognized prior service credit | (1.0 | ) | 0.2 |
|
| Spinoff of TimkenSteel | (5.1 | ) | — |
|
| Total recognized in accumulated other comprehensive loss at December 31 | $ | 21.5 |
| $ | 13.3 |
|
Amounts recognized on the Consolidated Balance Sheet for 2013 include amounts related to the Company's former steel business.
The presentation in the above tables for amounts recognized in accumulated other comprehensive (income) loss on the Consolidated Balance Sheets is before the effect of income taxes.
Note 14 - Postretirement Benefit Plans (continued)
The following table summarizes assumptions used to measure the benefit obligation for the other postretirement benefit plans at December 31:
|
| | | | |
| Assumptions: | 2017 | 2016 |
| Discount rate | 3.57 | % | 3.97 | % |
Note 15 - Other Postretirement Benefit Plans (continued)
|
| | | | |
| Assumptions: | 2014 | 2013 |
| Discount rate | 3.95 | % | 4.59 | % |
In 2016, the Company amended one of its other postretirement benefit plans to no longer offer Company-subsidized postretirement medical benefits to certain eligible employees that retire after December 31, 2016. This amendment reduced the accumulated benefit obligation by $11.4 million in 2016. This amount will be amortized over the remaining service period of the employees affected by this amendment.
The current portion of accrued postretirement benefit cost, which iswas included in salaries, wages and benefits on the Consolidated Balance Sheets, was $22.1$4.8 million and $41.6$7.5 million at December 31, 20142017 and 20132016, respectively. In 20142017, the current portion of accrued postretirement benefit cost related to unfunded plans and represented the actuarial present value of expected payments related to the plans to be made over the next 12 months.months.
The estimated net actuarial loss and prior service cost for the postretirement plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are zero and $0.8 millionis a credit of expense, respectively.$1.7 million.
For measurement purposes, the Company assumed a weighted-average annual rate of increase in the per capita cost (health care cost trend rate) for medical benefits of 7.0%6.25% for 2015,2018, declining gradually to 5.0% in 2023 and thereafter; and 7.0%6.25% for 2015,2018, declining gradually to 5.0% in 2023 and thereafter for prescription drug benefits; and 9.0%8.25% for 2015,2018, declining gradually to 5.0% in 2031 and thereafter for HMO benefits. Most of the Company's postretirement plans include caps that limit the amount of the benefit provided by the Company to participants each year, which lessens the impact of health care inflation costs to the Company.
The assumed health care cost trend rate may have a significant effect on the amounts reported. A one percentage point increase in the assumed health care cost trend rate would have increased the 20142017 total service and interest cost components by $0.4$0.2 million and would have increased the postretirement benefit obligation by $7.6 million.$4.4 million. A one percentage point decrease would provide corresponding reductions of $0.3$0.2 million and $6.7$3.9 million,, respectively.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Act)"Medicare Act") provides for prescription drug benefits under Medicare Part D and contains a subsidy to plan sponsors who provide “actuarially equivalent” prescription plans. The Company’s actuary determined that the prescription drug benefit provided by the Company’s postretirement plan is considered to be actuarially equivalent to the benefit provided under the Medicare Act. In accordance with ASC Topic 715, “Compensation – Retirement Benefits,” all measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the financial statements or accompanying notes reflect the effects of the Medicare Act on the plan for the entire fiscal year. The 20142017 expected subsidy was $2.7$1.7 million, of which $0.6$0.9 million was received prior to December 31, 2014.2017.
Plan Assets:
The Company’s target allocation for the VEBA trust assets, as well as the actual VEBA trust asset allocation as of December 31, 20142017 and 20132016, was as follows:
|
| | | | | |
| | Current Target Allocation | Percentage of VEBA Assets at December 31, |
| Asset Category | | | | 2017 | 2016 |
| Equity securities | 14% | to | 20% | 17% | 30% |
| Fixed income securities | 80% | to | 86% | 83% | 70% |
| Total | | | | 100% | 100% |
|
| | | | | |
| | Current Target Allocation | Percentage of VEBA Assets at December 31, |
| Asset Category | | | | 2014 | 2013 |
| Equity securities | 45% | to | 55% | 51% | 55% |
| Debt securities | 45% | to | 55% | 49% | 45% |
| Total | | | | 100% | 100% |
The Company recognizes its overall responsibility to ensure that the assets of its postretirement benefit plan are managed effectively and prudently and in compliance with its policy guidelines and all applicable laws.
Preservation of capital is important; however, the Company 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 postretirement 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 portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
Note 1415 - Other Postretirement Benefit Plans (continued)
The following table presents the fair value hierarchy for those investments of the Company’s VEBA trust assets measured at fairnet asset value on a recurring basis as of December 31, 2014:2017 and 2016, respectively:
| | | | Total | Level 1 | Level 2 | Level 3 | 2017 | 2016 |
| Assets: | | |
| Cash and cash equivalents | $ | 7.9 |
| $ | — |
| $ | 7.9 |
| $ | — |
| $ | 13.0 |
| $ | 2.1 |
|
| Common Collective fund - U.S. equities | 39.9 |
| — |
| 39.9 |
| — |
| |
| Common Collective fund - international equities | 22.1 |
| — |
| 22.1 |
| — |
| |
| Common Collective fund - fixed income | 50.8 |
| — |
| 50.8 |
| — |
| |
| Common collective fund - U.S. equities | | 9.5 |
| 18.5 |
|
| Common collective fund - international equities | | 6.7 |
| 12.3 |
|
| Common collective fund - fixed income | | 63.2 |
| 69.5 |
|
| Total Assets | $ | 120.7 |
| $ | — |
| $ | 120.7 |
| $ | — |
| $ | 92.4 |
| $ | 102.4 |
|
The following table presents the fair value hierarchy for those investments of the Company’s VEBA trust assets measured at fair value on a recurring basis as of December 31, 2013:
|
| | | | | | | | | | | | |
| | Total | Level 1 | Level 2 | Level 3 |
| Assets: | | | | |
| Cash and cash equivalents | $ | 2.9 |
| $ | — |
| $ | 2.9 |
| $ | — |
|
| Common Collective fund - U.S. equities | 82.7 |
| — |
| 82.7 |
| — |
|
| Common Collective fund - international equities | 49.7 |
| — |
| 49.7 |
| — |
|
| Common Collective fund - fixed income | 104.8 |
| — |
| 104.8 |
| — |
|
| Total Assets | $ | 240.1 |
| $ | — |
| $ | 240.1 |
| $ | — |
|
Cash and cash equivalents are valued at redemption value. Common collective funds are valued based on a net asset value per share, which is used as a practical expedient to fair value. When such prices are unavailable, the plan trustee determines a valuation from the market maker dealing in the particular security.
Cash Flows:
Employer ContributionsThe Company did not make any employer contributions to the VEBA Trust:Trust in 2017 and 2016. The Company does not expect to make any employer contributions in 2018.
|
| | | |
| 2013 | $ | — |
|
| 2014 | 20.0 |
|
| 2015 (planned) | — |
|
Future benefit payments are expected to be as follows:
|
| | | | | | | | | |
| | Gross | Expected Medicare Subsidies | Net Including Medicare Subsidies |
| 2018 | $ | 24.9 |
| $ | 1.2 |
| $ | 23.7 |
|
| 2019 | 23.4 |
| 1.2 |
| 22.2 |
|
| 2020 | 22.0 |
| 1.3 |
| 20.7 |
|
| 2021 | 20.8 |
| 1.3 |
| 19.5 |
|
| 2022 | 19.6 |
| 1.3 |
| 18.3 |
|
| 2023-2027 | 80.9 |
| 6.3 |
| 74.6 |
|
|
| | | | | | | | | |
| | Gross | Expected Medicare Subsidies | Net Including Medicare Subsidies |
| 2015 | $ | 29.8 |
| $ | 1.8 |
| $ | 28.0 |
|
| 2016 | 28.4 |
| 1.9 |
| 26.5 |
|
| 2017 | 27.2 |
| 2.0 |
| 25.2 |
|
| 2018 | 26.3 |
| 2.0 |
| 24.3 |
|
| 2019 | 25.1 |
| 2.0 |
| 23.1 |
|
| 2020 - 2024 | 107.1 |
| 9.6 |
| 97.5 |
|
Note 1516 - Segment Information
Beginning in the fourth quarter of 2014, theThe Company began operatingoperates under two reportable segments: (1) Mobile Industries and (2) Process Industries. Prior to the fourth quarter of 2014 and after the Spinoff, the Company operated under three reportable segments: (1) Mobile Industries; (2) Process Industries; and (3) Aerospace. Results for the Company's former Aerospace segment are now primarily included in the Mobile Industries segment. Segment results for 2014, 2013 and 2012 have been reclassified to conform with the new presentation of segments. In addition, the Company also made adjustments to the allocation of certain selling, general and administrative expenses and certain foreign currency exchange gains or losses for all prior periods presented to better reflect the Company’s operating model and new cost structure following the Spinoff and the elimination of the former Aerospace segment.
Description of types of products and services from which each reportable segment derives its revenues:
The Company's reportable segments are business units that target different industry sectors. EachWhile the segments often operate using a shared infrastructure, each reportable segment is managed separately to address specific customer needs in these diverse market segments.
Mobile Industries offers an extensive portfolio of bearings, seals, lubrication devices and systems, as well as power transmission components, engineered chain, augers, belts, couplings, clutches, brakes and related products and maintenance services, to OEMs and end users of: off-highway equipment for the agricultural, construction, mining, outdoor power equipment and miningpowersports markets; on-highway vehicles including passenger cars, light trucks and medium- and heavy-duty trucks; and rail cars and locomotives. Beyond service parts sold to OEMs, aftermarket sales and services to individual end users, equipment owners, operators and maintenance shops are handled directly or through the Company's extensive network of authorized automotive and heavy-truck distributors, and include hub units, specialty kits and more. Mobile Industries also provides power transmission systems and flight-critical components for civil and military aircraft, which include bearings, helicopter transmission systems, rotor-head assemblies, turbine engine components, gears and housings, with a focus on the entire lifecycle of aircraft. Timken products are integrated into gas turbine engines and gearboxes, helicopter transmission systems, rotor systems, landing gear, instrumentation and guidance systems, for example. In addition to original equipment parts and systems, this segment also provides aftermarket products and services, including complete engine overhaul, aerospace bearing repair, component reconditioning and replacement parts.housings.
Process Industries supplies industrial bearings and assemblies, power transmission components such as gears and gearboxes, couplings, seals, lubricants, chains, belts and related products and services to OEMs and end users in industries that place heavy demands on operating equipment they make or use. This includes; metals, mining, cement and aggregate production; coal and wind power generation; oil and gas; pulp and paper in applications including printing presses; and cranes, hoists, drawbridges, wind energy turbines, gear drives, drilling equipment, coal conveyors, health and critical motion control equipment, marine equipment and food processing equipment. This segment also supports aftermarket sales and service needs through its global network of authorized industrial distributors.distributors and through the provision of services directly to end users. In addition, the Company’s industrial services group offers end users a broad portfolio of maintenance support and capabilities that include repair and service for bearings and gearboxes as well as electric motor rewind, repair and services. Additionally, this segment manufactures precision bearings, complex assemblies and sensors for manufacturers of health and critical motion control equipment.
Measurement of segment profit or loss and segment assets:
The Company evaluates performance and allocates resources based on return on capital and profitable growth. The primary measurement used by management to measure the financial performance of each segment is EBIT.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Factors used by management to identify the enterprise’s reportable segments:
Net sales by geographic area are reported by the destination of net sales, which is reflective of how the Company operates its segments. Long-lived assets by geographic area are reported by the location of the subsidiary.
Export sales from the United States and Canada are less than 10% of the Company's revenue. The Company’s Mobile Industries and Process Industries segments have historically participated in the global bearing industry.
Note 15 - Segment Information (continued)
Timken’s non-U.S. operations are subject to normal international business risks not generally applicable to a domestic business. These risks include currency fluctuation, changes in tariff restrictions, difficulties in establishing and maintaining relationships with local distributors and dealers, import and export licensing requirements, difficulties in staffing and managing geographically diverse operations and restrictive regulations by foreign governments, including price and exchange controls.controls, compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and environmental regulatory requirements, and disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the FCPA.
Geographic Financial Information:
|
| | | | | | | | | |
| | 2014 | 2013 | 2012 |
| Net sales: | | | |
| United States | $ | 1,623.6 |
| $ | 1,663.0 |
| $ | 1,885.4 |
|
| Canada & Mexico | 233.1 |
| 206.5 |
| 217.5 |
|
| South America | 145.0 |
| 142.9 |
| 152.2 |
|
| Europe / Middle East / Africa | 658.8 |
| 658.4 |
| 704.6 |
|
| Asia-Pacific | 415.7 |
| 364.6 |
| 399.8 |
|
| | $ | 3,076.2 |
| $ | 3,035.4 |
| $ | 3,359.5 |
|
| Long-lived assets: | | | |
| United States | $ | 443.5 |
| $ | 497.1 |
| $ | 484.5 |
|
| Canada & Mexico | 12.5 |
| 12.6 |
| 6.1 |
|
| South America | 1.4 |
| 2.1 |
| 4.5 |
|
| Europe / Middle East / Africa | 96.2 |
| 105.5 |
| 101.6 |
|
| Asia-Pacific | 226.9 |
| 238.5 |
| 237.4 |
|
| | $ | 780.5 |
| $ | 855.8 |
| $ | 834.1 |
|
Note 1516 - Segment Information (continued)
Business Segment Information:
The following tables provide segment financial information and a reconciliation of segment results to consolidated results:
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Net sales to external customers: | | | |
| Mobile Industries | $ | 1,640.0 |
| $ | 1,446.4 |
| $ | 1,558.3 |
|
| Process Industries | 1,363.8 |
| 1,223.4 |
| 1,314.0 |
|
| | $ | 3,003.8 |
| $ | 2,669.8 |
| $ | 2,872.3 |
|
| Segment EBIT: | | | |
| Mobile Industries | $ | 132.1 |
| $ | 87.1 |
| $ | 205.5 |
|
| Process Industries | 220.5 |
| 149.5 |
| 207.6 |
|
| Total EBIT, for reportable segments | $ | 352.6 |
| $ | 236.6 |
| $ | 413.1 |
|
| Corporate expenses | (58.5 | ) | (61.4 | ) | (44.8 | ) |
| CDSOA income, net | — |
| 59.6 |
| — |
|
| Pension settlement charges | — |
| (1.6 | ) | (119.9 | ) |
| Interest expense | (37.1 | ) | (33.5 | ) | (33.4 | ) |
| Interest income | 2.9 |
| 1.9 |
| 2.7 |
|
| Income before income taxes | $ | 259.9 |
| $ | 201.6 |
| $ | 217.7 |
|
|
| | | | | | | | | |
| | 2014 | 2013 | 2012 |
| Net sales to external customers: | | | |
| Mobile Industries | $ | 1,685.4 |
| $ | 1,775.8 |
| $ | 1,987.4 |
|
| Process Industries | 1,390.8 |
| 1,259.6 |
| 1,372.1 |
|
| | $ | 3,076.2 |
| $ | 3,035.4 |
| $ | 3,359.5 |
|
| Segment EBIT: | | | |
| Mobile Industries | $ | 65.6 |
| $ | 193.7 |
| $ | 245.2 |
|
| Process Industries | 267.1 |
| 189.3 |
| 261.8 |
|
| Total EBIT, for reportable segments | $ | 332.7 |
| $ | 383.0 |
| $ | 507.0 |
|
| Unallocated corporate expenses | (71.4 | ) | (70.4 | ) | (69.0 | ) |
| CDSOA receipts, net of expense | — |
| — |
| 108.0 |
|
| Pension settlement charges | (33.0 | ) | — |
| — |
|
| Interest expense | (28.7 | ) | (24.4 | ) | (31.1 | ) |
| Interest income | 4.4 |
| 1.9 |
| 2.9 |
|
| Income from continuing operations before income taxes | $ | 204.0 |
| $ | 290.1 |
| $ | 517.8 |
|
| | | | 2014 | 2013 | 2012 | 2017 | 2016 |
| Assets employed at year-end: | | |
| Mobile Industries | $ | 1,373.8 |
| $ | 1,579.3 |
| $ | 1,466.2 |
| $ | 1,775.7 |
| $ | 1,162.7 |
|
| Process Industries | 1,209.6 |
| 1,157.4 |
| 1,072.5 |
| 1,383.1 |
| 1,322.2 |
|
Corporate | 418.0 |
| 484.3 |
| 715.3 |
| 243.6 |
| 278.3 |
|
| Discontinued Operations | $ | — |
| 1,256.9 |
| 990.7 |
| |
| | $ | 3,001.4 |
| $ | 4,477.9 |
| $ | 4,244.7 |
| $ | 3,402.4 |
| $ | 2,763.2 |
|
| Capital expenditures: | | |
| Mobile Industries | $ | 55.7 |
| $ | 48.2 |
| $ | 44.2 |
| |
| Process Industries | 70.1 |
| 80.3 |
| 70.6 |
| |
| Corporate | 1.0 |
| 5.1 |
| 3.5 |
| |
| | $ | 126.8 |
| $ | 133.6 |
| $ | 118.3 |
| |
| Depreciation and amortization: | | |
| Mobile Industries | $ | 65.7 |
| $ | 71.4 |
| $ | 84.1 |
| |
| Process Industries | 68.8 |
| 67.9 |
| 63.2 |
| |
| Corporate | 2.5 |
| 3.1 |
| 2.3 |
| |
| | $ | 137.0 |
| $ | 142.4 |
| $ | 149.6 |
| |
(1) Corporate assets include corporate buildings and cash and cash equivalents.
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Capital expenditures: | | | |
| Mobile Industries | $ | 57.3 |
| $ | 88.4 |
| $ | 47.5 |
|
| Process Industries | 46.2 |
| 48.4 |
| 57.5 |
|
| Corporate | 1.2 |
| 0.7 |
| 0.6 |
|
| | $ | 104.7 |
| $ | 137.5 |
| $ | 105.6 |
|
| Depreciation and amortization: | | | |
| Mobile Industries | $ | 70.0 |
| $ | 64.9 |
| $ | 61.4 |
|
| Process Industries | 66.6 |
| 65.6 |
| 68.1 |
|
| Corporate | 1.1 |
| 1.2 |
| 1.3 |
|
| | $ | 137.7 |
| $ | 131.7 |
| $ | 130.8 |
|
Note 16 - Segment Information (continued)
Geographic Financial Information:
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Net sales: | | | |
| United States | $ | 1,603.0 |
| $ | 1,478.6 |
| $ | 1,566.1 |
|
| Americas excluding United States | 333.2 |
| 308.2 |
| 339.7 |
|
| Europe / Middle East / Africa | 570.3 |
| 461.3 |
| 496.7 |
|
| Asia-Pacific | 497.3 |
| 421.7 |
| 469.8 |
|
| | $ | 3,003.8 |
| $ | 2,669.8 |
| $ | 2,872.3 |
|
| Property, Plant and Equipment, net: | | | |
| United States | $ | 392.1 |
| $ | 418.0 |
| $ | 446.7 |
|
| Americas excluding United States | 14.7 |
| 14.9 |
| 10.6 |
|
| Europe / Middle East / Africa | 203.4 |
| 141.1 |
| 92.5 |
|
| Asia-Pacific | 254.0 |
| 230.4 |
| 228.0 |
|
| | $ | 864.2 |
| $ | 804.4 |
| $ | 777.8 |
|
Note 17 - Income Taxes
Income before income taxes, based on geographic location of the operations to which such earnings are attributable, is provided below. As the Company has elected to treat certain foreign subsidiaries as branches for U.S. income tax purposes, pretax income attributable to the United States shown below may differ from the pretax income reported in the Company’s annual U.S. Federalfederal income tax return.
Income before income taxes:
|
| | | | | | | | | |
| 2017 | 2016 | 2015 |
| United States | $ | 107.4 |
| $ | 102.3 |
| $ | 70.5 |
|
| Non-United States | 152.5 |
| 99.3 |
| 147.2 |
|
| Income before income taxes | $ | 259.9 |
| $ | 201.6 |
| $ | 217.7 |
|
|
| | | | | | | | | |
| 2014 | 2013 | 2012 |
| United States | $ | 39.5 |
| $ | 189.4 |
| $ | 438.7 |
|
| Non-United States | 164.5 |
| 100.7 |
| 79.1 |
|
| Income from continuing operations before income taxes | $ | 204.0 |
| $ | 290.1 |
| $ | 517.8 |
|
The provision for income taxes consisted of the following:
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Current: | | | |
| Federal | $ | 9.1 |
| $ | 44.1 |
| $ | 26.8 |
|
| State and local | 4.6 |
| 0.1 |
| 5.4 |
|
| Foreign | 44.3 |
| 31.3 |
| 16.3 |
|
| | $ | 58.0 |
| $ | 75.5 |
| $ | 48.5 |
|
| Deferred: | | | |
| Federal | $ | 13.6 |
| $ | (20.5 | ) | $ | (13.7 | ) |
| State and local | (4.6 | ) | 0.1 |
| (3.9 | ) |
| Foreign | (9.4 | ) | 5.4 |
| (4.6 | ) |
| | $ | (0.4 | ) | $ | (15.0 | ) | $ | (22.2 | ) |
| United States and foreign tax provision on income | $ | 57.6 |
| $ | 60.5 |
| $ | 26.3 |
|
|
| | | | | | | | | |
| | 2014 | 2013 | 2012 |
| Current: | | | |
| Federal | $ | 61.1 |
| $ | 96.8 |
| $ | 58.9 |
|
| State and local | 2.8 |
| 11.5 |
| 2.1 |
|
| Foreign | 44.1 |
| 39.3 |
| 33.7 |
|
| | $ | 108.0 |
| $ | 147.6 |
| $ | 94.7 |
|
| Deferred: | | | |
| Federal | $ | (46.9 | ) | $ | (35.7 | ) | $ | 73.9 |
|
| State and local | (4.4 | ) | 1.8 |
| 17.6 |
|
| Foreign | (2.0 | ) | 0.9 |
| 0.1 |
|
| | $ | (53.3 | ) | $ | (33.0 | ) | $ | 91.6 |
|
| United States and foreign tax expense on income | $ | 54.7 |
| $ | 114.6 |
| $ | 186.3 |
|
The Company made net income tax payments of $111.6$89.9 million, $98.9$49.7 million and $93.0$83.3 million in 2014, 20132017, 2016 and 2012,2015, respectively.
Note 17 - Income Taxes (continued)
The following table is the reconciliation between the provision for income taxes and the amount computed by applying the U.S. Federalfederal income tax rate of 35% to income before taxes:
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Income tax at the U.S. federal statutory rate | $ | 91.0 |
| $ | 70.6 |
| $ | 76.2 |
|
| Adjustments: | | | |
| State and local income taxes, net of federal tax benefit | 3.1 |
| 2.6 |
| 4.3 |
|
| Tax on foreign remittances and U.S. tax on foreign income | 93.0 |
| 8.3 |
| 13.8 |
|
| Foreign losses without current tax benefits | 8.9 |
| 6.4 |
| 5.3 |
|
| Foreign earnings taxed at different rates including tax holidays | (18.0 | ) | (5.2 | ) | (14.9 | ) |
| U.S. domestic manufacturing deduction | (3.9 | ) | (5.0 | ) | (4.5 | ) |
| U.S. foreign tax credit | (104.2 | ) | (8.0 | ) | (22.4 | ) |
| U.S. research tax credit | (1.5 | ) | (0.6 | ) | (1.1 | ) |
| Accruals and settlements related to tax audits | (34.4 | ) | (8.1 | ) | (5.9 | ) |
| Valuation allowance changes | (12.6 | ) | 0.2 |
| (34.7 | ) |
| Deferred taxes related to branch operations | — |
| (1.3 | ) | 11.6 |
|
| U.S. Tax Reform | 35.3 |
| — |
| — |
|
| Other items, net | 0.9 |
| 0.6 |
| (1.4 | ) |
| Provision for income taxes | $ | 57.6 |
| $ | 60.5 |
| $ | 26.3 |
|
| Effective income tax rate | 22.2 | % | 30.0 | % | 12.1 | % |
|
| | | | | | | | | |
| | 2014 | 2013 | 2012 |
| Income tax at the U.S. federal statutory rate | $ | 71.4 |
| $ | 101.5 |
| $ | 181.2 |
|
| Adjustments: | | | |
| State and local income taxes, net of federal tax benefit | (0.3 | ) | 8.4 |
| 12.1 |
|
| Tax on foreign remittances and U.S. tax on foreign income | 19.6 |
| 41.0 |
| 9.6 |
|
| Tax expense related to undistributed earnings of foreign subsidiaries | (8.7 | ) | 8.7 |
| — |
|
| Foreign losses without current tax benefits | 4.3 |
| 9.5 |
| 16.2 |
|
| Foreign earnings taxed at different rates including tax holidays | (15.7 | ) | (3.9 | ) | (19.0 | ) |
| U.S. domestic manufacturing deduction | (6.6 | ) | (8.8 | ) | (1.0 | ) |
| U.S. foreign tax credit | (15.1 | ) | (25.9 | ) | (13.7 | ) |
| U.S. research tax credit | (1.0 | ) | (3.2 | ) | 0.1 |
|
| Accruals and settlements related to tax audits | 12.8 |
| (10.8 | ) | 4.1 |
|
| Other items, net | (6.0 | ) | (1.9 | ) | (3.3 | ) |
| Provision for income taxes | $ | 54.7 |
| $ | 114.6 |
| $ | 186.3 |
|
| Effective income tax rate | 26.8 | % | 39.5 | % | 36.0 | % |
Provisional estimates of $25.2 million for the one-time net charge related to the taxation of unremitted foreign earnings and $10.1 million related to the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate were recognized as components of income tax expense in the current period. The Company’s provisional estimates may be affected as the Company obtains a more thorough understanding of the tax law and as additional analysis of U.S. Tax Reform is completed. A provisional estimate could not be made for the GILTI provisions, as the Company has not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred. Additional information is necessary to prepare a more detailed analysis of the Company’s deferred tax assets and liabilities and historical foreign earnings, as well as potential correlative adjustments. Any subsequent adjustments to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
No additional income tax provision has been made on any remaining undistributed foreign earnings not subject to the one-time net charge related to the taxation of unremitted foreign earnings or any additional outside basis difference as these amounts continue to be indefinitely reinvested in foreign operations. The Company is still evaluating whether to change its indefinite reinvestment assertion in light of U.S. Tax Reform and considers this conclusion to be incomplete.If the Company subsequently changes its assertion, it will account for the change in the quarter of 2018 when the analysis is complete.The amounts of undistributed foreign earnings were $479.6 million and $561.7 million at December 31, 2017 and December 31, 2016, respectively. It is not practicable to calculate the taxes that might be payable on such earnings indefinitely reinvested outside the United States.
Note 1617 - Income Taxes (continued)
In connection with various investment arrangements, the Company has been granted a “holiday” from income taxes for one affiliate in Asia for 2014, 2013 and 2012. These agreements began to expire at the end of 2010, with full expiration in 2018. In total, the agreements reduced income tax expense by $1.3 million in 2014, $0.7 million in 2013 and $1.0 million in 2012. These savings resulted in an increase to earnings per diluted share of approximately $0.01 in 2014, approximately $0.01 in 2013 and approximately $0.01 in 2012.
Income tax expense includes U.S. and international income taxes. The Company had undistributed earnings related to its international subsidiaries of $567.7 million and $577.9 million at December 31, 2014 and 2013, respectively. The Company has determined that U.S. earnings are sufficient to cover U.S. cash needs for operations and foreign earnings will be reinvested outside the U.S. to support global business growth initiatives. Accordingly, no provisions for U.S. income taxes have been made with respect to earnings of $486.7 million that are planned to be reinvested indefinitely outside the United States. The amount of U.S. income taxes that may be applicable to such earnings is $10.0 million if such earnings were repatriated, net of foreign tax credits.
The effect of temporary differences giving rise to deferred tax assets and liabilities at December 31, 20142017 and 20132016 was as follows:
|
| | | | | | |
| | 2017 | 2016 |
| Deferred tax assets: | | |
| Accrued postretirement benefits cost | $ | 35.7 |
| $ | 56.8 |
|
| Accrued pension cost | 53.4 |
| 63.3 |
|
| Other employee benefit accruals | 6.4 |
| 11.5 |
|
| Tax loss and credit carryforwards | 92.6 |
| 84.7 |
|
| Other, net | 29.0 |
| 43.8 |
|
| Valuation allowances | (79.4 | ) | (85.5 | ) |
| | $ | 137.7 |
| $ | 174.6 |
|
| Deferred tax liabilities - principally depreciation and amortization | (120.7 | ) | (127.0 | ) |
| Net deferred tax assets | $ | 17.0 |
| $ | 47.6 |
|
|
| | | | | | |
| | 2014 | 2013 |
| Deferred tax assets: | | |
| Accrued postretirement benefits cost | $ | 91.4 |
| $ | 88.0 |
|
| Accrued pension cost | 16.3 |
| 9.6 |
|
| Inventory | 0.7 |
| 12.0 |
|
| Other employee benefit accruals | 16.9 |
| 14.9 |
|
| Tax loss and credit carryforwards | 117.9 |
| 153.1 |
|
| Other, net | 60.0 |
| 44.6 |
|
| Valuation allowances | (145.4 | ) | (177.0 | ) |
| | $ | 157.8 |
| $ | 145.2 |
|
| Deferred tax liabilities - principally depreciation and amortization | (101.0 | ) | (140.9 | ) |
| Net deferred tax (liabilities) assets | $ | 56.8 |
| $ | 4.3 |
|
The Company has a U.S. foreignfederal and state tax credit carryforward of $8.7 million that will begin to expire in 2023, and U.S. state and local credit carryforwards of $1.5 million, portions of which will expire in 2015. The Company also has U.S. state and local loss carryforwards with tax benefits totaling $0.5$2.5 million, portions of which will expire at the end of 2015.begin expiring in 2018 and continue until 2035. In addition, the Company has loss carryforwards in various non-U.S. jurisdictions with tax benefits totaling $107.3$90.1 million, having various expiration dates, as well as tax credit carryforwardsportions of $0.1 million.which will begin expiring in 2018 while others will be carried forward indefinitely. The Company has provided valuation allowances of $112.8$64.8 million against certain of these carryforwards. TheA majority of the non-U.S. loss carryforwards represent local country net operating losses for branches of the Company or entities treated as branches of the Company under U.S. tax law. Tax benefits have been recorded for these losses in the United States. TheSubstantially all of the related local country net operating loss carryforwards are offset fully by valuation allowances. In addition to loss and credit carryforwards, the Company has provided valuation allowances of $32.6$14.6 million against other deferred tax assets.
As of December 31, 2014,2017, the Company had $57.5$14.0 million of total gross unrecognized tax benefits. Included in this amount was $47.3 millionbenefits, all of unrecognized tax benefits thatwhich would favorably impact the Company’s effective income tax rate in any future periodsperiod if such benefits were recognized. As of December 31, 2014,2017, the Company anticipates a decrease in itsbelieves it is reasonably possible that the amount of unrecognized tax positions ofcould decrease by approximately $40.0 million to $45.0$3.9 million during the next 12 months. The anticipatedpotential decrease iswould be primarily due todriven by settlements with tax authorities and the expiration of various applicable statutes of limitation. As of December 31, 2014,2017, the Company had accrued $16.5$3.0 million of interest and penalties related to uncertain tax positions. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.
As of December 31, 2013,2016, the Company had $49.5$39.2 million of total gross unrecognized tax benefits. Included in this amount was $35.8$35.9 million of unrecognized tax benefits that would impact favorably the Company’s effective income tax rate in any future period if such benefits were recognized. As of December 31, 2016, the Company had accrued $8.5 million of interest and penalties related to uncertain tax positions.
As of December 31, 2015, the Company had $50.4 million of total gross unrecognized tax benefits. Included in this amount was $38.0 million of unrecognized tax benefits that would favorably impact the Company’s effective income tax rate in any future periodsperiod if such benefits were recognized. As of December 31, 2013,2015, the Company had accrued $9.8$12.2 million of interest and penalties related to uncertain tax positions.
Note 1617 - Income Taxes (continued)
The following table reconciles the Company’s total gross unrecognized tax benefits for the years ended December 31, 20142017, 2016 and 2013:2015:
|
| | | | | | | | | |
| | 2017 | 2016 | 2015 |
| Beginning balance, January 1 | $ | 39.2 |
| $ | 50.4 |
| $ | 57.5 |
|
| Tax positions related to the current year: | | | |
| Additions | 2.7 |
| — |
| 6.5 |
|
| Tax positions related to prior years: | | | |
| Additions | 6.9 |
| 5.7 |
| 5.0 |
|
| Reductions | (5.2 | ) | (7.8 | ) | (4.0 | ) |
| Settlements with tax authorities | — |
| (9.1 | ) | (14.6 | ) |
| Lapses in statutes of limitation | (29.6 | ) | — |
| — |
|
| Ending balance, December 31 | $ | 14.0 |
| $ | 39.2 |
| $ | 50.4 |
|
|
| | | | | | |
| | 2014 | 2013 |
| Beginning balance, January 1 | $ | 49.5 |
| $ | 112.6 |
|
| Tax positions related to the current year: | | |
| Additions | 0.7 |
| 9.3 |
|
| Tax positions related to prior years: | | |
| Additions | 14.7 |
| 6.9 |
|
| Reductions | (3.5 | ) | (1.4 | ) |
| Settlements with tax authorities | (3.0 | ) | (77.9 | ) |
| Lapses in statutes of limitation | (0.9 | ) | — |
|
| Ending balance, December 31 | $ | 57.5 |
| $ | 49.5 |
|
During 2014,2017, gross unrecognized tax benefits increaseddecreased primarily due to net additionsexpiration of applicable statutes of limitations in multiple jurisdictions. These decreases were partially offset by accruals related to variousboth current year and prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’sCompany’s international operations. These increases were partially offset by reductions related to prior year tax matters, including settlement of tax matters with government authorities and taxes related to the Company’s international operations.
During 2013,2016, gross unrecognized tax benefits decreased primarily due to net reductionssettlements with tax authorities related to various current year and prior year tax matters, including settlement of tax matters with government authoritiescertain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’s international operations. The decrease also was related to reductions in unrecognized tax benefits for changes in judgment regarding prior year tax matters in multiple jurisdictions. These decreases were partially offset by additionsaccruals related to prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’sCompany’s international operations.
During 2015, gross unrecognized tax benefits decreased primarily due to settlements with tax authorities related to various prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’s international operations. These decreases were partially offset by accruals related to both current and prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’s international operations.
As of December 31, 2014,2017, the Company is subject to examination by the IRSInternal Revenue Service ("IRS") for tax years 20122014 to the present. The Company is also was subject to tax examination in various U.S. state and local tax jurisdictions for tax years 20062007 to the present, as well as various foreign tax jurisdictions, including Canada, France, Germany, ItalyMexico, China, Poland and India for tax years as early as 2002 to the present. The current portion of the Company’s unrecognized tax benefits waswere presented on the Consolidated Balance Sheets within income taxes payable, and the non-current portion was presented as a component of other non-current liabilities.
Note 1718 - Fair Value
The following tables present the fair value hierarchy for those assets and liabilities on the Consolidated Balance SheetSheets measured at fair value on a recurring basis as of December 31, 20142017 and 2013:2016:
| | | | December 31, 2014 | December 31, 2017 |
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 |
| Assets: | | |
| Cash and cash equivalents | $ | 278.8 |
| $ | 155.6 |
| $ | 123.2 |
| $ | — |
| $ | 108.5 |
| $ | 107.3 |
| $ | 1.2 |
| $ | — |
|
Cash and cash equivalents measured at net
asset value | | 13.1 |
|
|
|
|
|
|
|
| Restricted cash | 15.3 |
| — |
| 15.3 |
| — |
| 3.8 |
| 3.8 |
| — |
| — |
|
| Short-term investments | 8.4 |
| — |
| 8.4 |
| — |
| 16.2 |
| — |
| 16.2 |
| — |
|
| Short-term investments measured at net asset value | | 0.2 |
|
|
|
|
|
|
|
| Foreign currency hedges | 12.4 |
| — |
| 12.4 |
| — |
| 1.3 |
| — |
| 1.3 |
| — |
|
| Total Assets | $ | 314.9 |
| $ | 155.6 |
| $ | 159.3 |
| $ | — |
| $ | 143.1 |
| $ | 111.1 |
| $ | 18.7 |
| $ | — |
|
| | | |
| Liabilities: | | |
| Foreign currency hedges | $ | 0.3 |
| $ | — |
| $ | 0.3 |
| $ | — |
| $ | 7.1 |
| $ | — |
| $ | 7.1 |
| $ | — |
|
| Total Liabilities | $ | 0.3 |
| $ | — |
| $ | 0.3 |
| $ | — |
| $ | 7.1 |
| $ | — |
| $ | 7.1 |
| $ | — |
|
|
| | | | | | | | | | | | |
| | December 31, 2016 |
| Total | Level 1 | Level 2 | Level 3 |
| Assets: | | | | |
| Cash and cash equivalents | $ | 129.6 |
| $ | 125.0 |
| $ | 4.6 |
| $ | — |
|
Cash and cash equivalents measured at net
asset value | 19.2 |
|
|
|
|
|
|
|
| Restricted cash | 2.7 |
| 2.7 |
| — |
| — |
|
| Short-term investments | 9.4 |
| — |
| 9.4 |
| — |
|
| Short-term investments measured at net asset value | 2.3 |
|
|
|
|
|
|
|
| Foreign currency hedges | 9.9 |
| — |
| 9.9 |
| — |
|
| Total Assets | $ | 173.1 |
| $ | 127.7 |
| $ | 23.9 |
| $ | — |
|
| | | | | |
| Liabilities: | | | | |
| Foreign currency hedges | $ | 2.1 |
| $ | — |
| $ | 2.1 |
| $ | — |
|
| Total Liabilities | $ | 2.1 |
| $ | — |
| $ | 2.1 |
| $ | — |
|
|
| | | | | | | | | | | | |
| | December 31, 2013 |
| Total | Level 1 | Level 2 | Level 3 |
| Assets: | | | | |
| Cash and cash equivalents | $ | 384.6 |
| $ | 320.4 |
| $ | 64.2 |
| $ | — |
|
| Restricted cash | 15.1 |
| — |
| 15.1 |
| — |
|
| Short-term investments | 13.9 |
| — |
| 13.9 |
| — |
|
| Foreign currency hedges | 0.9 |
| — |
| 0.9 |
| — |
|
| Total Assets | $ | 414.5 |
| $ | 320.4 |
| $ | 94.1 |
| $ | — |
|
| Liabilities: | | | | |
| Foreign currency hedges | $ | 9.3 |
| $ | — |
| $ | 9.3 |
| $ | — |
|
| Total Liabilities | $ | 9.3 |
| $ | — |
| $ | 9.3 |
| $ | — |
|
Cash and cash equivalents are highly liquid investments with maturities of three months or less when purchased and are valued at redemption value. Short-term investments are investments with maturities between four months and one year and are valued at amortized cost, which approximates fair value. A portion of the cash and cash equivalents and short-term investments are valued based on net asset value. The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts.
The Company does not believe it has significant concentrations of risk associated with the counterparts to its financial instruments.
2017
No material assets were measured at fair value on a nonrecurring basis during the year ended December 31, 2017.
Note 1718 - Fair Value (continued)
2016
The following table presents those assets measured at fair value on a nonrecurring basis forduring the year ended December 31, 20142016, using Level 3 inputs:
|
| | | | | | | | | |
| | Carrying Value | Fair Value Adjustment | Fair Value |
| Long-lived assets held for sale: | | | |
| Land | $ | 0.2 |
| $ | (0.2 | ) | $ | — |
|
| Total long-lived assets held for sale | $ | 0.2 |
| $ | (0.2 | ) | $ | — |
|
| | | | |
| Long-lived assets held and used: | | | |
| Altavista bearing plant | $ | 5.6 |
| $ | (3.1 | ) | $ | 2.5 |
|
| Equipment at Benoni bearing plant | 0.5 |
| (0.5 | ) | — |
|
| Total long-lived assets held and used | $ | 6.1 |
| $ | (3.6 | ) | $ | 2.5 |
|
|
| | | | | | | | | |
| | Carrying Value | Fair Value Adjustment | Fair Value |
| Long - lived assets held for sale: | | | |
| Aerospace Overhaul business | $ | 8.0 |
| $ | (1.2 | ) | $ | 6.8 |
|
| Total long-lived assets held for sale | $ | 8.0 |
| $ | (1.2 | ) | $ | 6.8 |
|
| | | | |
| Long - lived assets held and used: | | | |
| Goodwill | $ | 92.5 |
| $ | (86.3 | ) | $ | 6.2 |
|
| Indefinite-lived intangible assets | 14.2 |
| (5.5 | ) | 8.7 |
|
| Amortizable Intangible assets | 4.4 |
| (4.4 | ) | — |
|
| Fixed assets | 1.5 |
| (1.5 | ) | — |
|
| Total long-lived assets held and used | $ | 112.6 |
| $ | (97.7 | ) | $ | 14.9 |
|
During 2014, assetsAssets held for sale of $8.0 million and assets held and used of $112.6$0.2 million were written down to their fair value of $6.8 million and $14.9 million, respectively, andzero during the first quarter of 2016, resulting in an impairment chargescharge. The fair value of $1.2 million and $97.7 million, respectively, were included in earnings.these assets was based on the price that the Company expected to receive upon disposal of these assets.
On September 8, 2014,March 17, 2016, the Company announced plans to restructure its Aerospace segment. In connection with the restructuring, the Company: 1) eliminated leadership positions and integrated substantially all aerospace activities into Mobile Industries under the directionclosure of its Group President; 2)Altavista bearing plant. The Company completed the closure of this manufacturing facility on March 31, 2017. The Altavista bearing plant, with a carrying value of $5.6 million, was written down to its fair value of $3.2 million during the first quarter of 2016, resulting in an impairment charge of $2.4 million. The fair value for the plant was based on the price that the Company expected to receive from the sale of this facility. During the third quarter of 2016, the Company reevaluated the fair value of this facility. The Altavista bearing plant was written down to its fair value of $2.5 million during the third quarter of 2016, resulting in an additional impairment charge of $0.7 million. During the second quarter of 2017, this facility was reclassified to assets held for sale and included in other current assets on the Consolidated Balance Sheet. On July 14, 2017, this facility was sold for a pretax gain of approximately $1.6 million, which was recorded in net other income (expense) in the assetsConsolidated Statement of Income.
In August 2016, the Company completed the consultation process to close the Benoni manufacturing operations. The Company will continue to recondition bearings and assemble rail bearings in Benoni. Equipment at this facility, with a carrying value of $0.5 million, was written down to its aerospace engine overhaul business, locatedfair value of zero during the third quarter of 2016, resulting in Mesa, Arizona, prioran impairment of $0.5 million. The fair value for the equipment was based on the price that the Company expected to receive from the endsale of the year; 3) evaluated strategic alternativesequipment. During the second quarter of 2017, the Benoni manufacturing facility was reclassified to assets held for its aerospace MRO parts business, also locatedsale and included in Mesa; and 4) plans to close its aerospace bearingother current assets on the Consolidated Balance Sheet. In June 2017, this facility locatedwas sold for a pretax gain of approximately $1.9 million, which was recorded in Wolverhampton, U.K. by early 2016, rationalizingnet other income (expense) in the capacity into existing facilities.Consolidated Statement of Income.
2015
The following table presents those assets measured at fair value on a nonrecurring basis during the year ended December 31, 2015, using Level 3 inputs:
|
| | | | | | | | | |
| | Carrying Value | Fair Value Adjustment | Fair Value |
| Long-lived assets held for sale: | | | |
| Repair business | $ | 5.8 |
| $ | (3.0 | ) | $ | 2.8 |
|
| Total long-lived assets held for sale | $ | 5.8 |
| $ | (3.0 | ) | $ | 2.8 |
|
| | | | |
| Long-lived assets held and used: | | | |
| Fixed assets | $ | 0.8 |
| $ | (0.3 | ) | $ | 0.5 |
|
| Total long-lived assets held and used | $ | 0.8 |
| $ | (0.3 | ) | $ | 0.5 |
|
Note 18 - Fair Value (continued)
Assets held for sale of $8.0$5.8 million associated with the Company's aerospace engine overhaul businessservice center in Niles, Ohio were written down to their fair value of $6.8$2.8 million during the first quarter of 2015, resulting in an impairment charge of $1.2$3.0 million. The fair value of these assets was based on the price that the Company expected to receive to sellfrom the sale of these assets.
In conjunction with the above Aerospace announcement, the Company reviewed goodwill for impairment for its Aerospace Transmissions and Aerospace Aftermarket reporting units. Step one of the goodwill impairment test failed for both of these reporting units. Therefore, the Company conducted step two of the goodwill impairment test. The carrying value of goodwill for the Aerospace Transmissions reporting unit was $56.9 million, and the carrying value of the Aerospace Aftermarket reporting unit was $35.6 million. The implied fair value of goodwill for the Aerospace Transmissions reporting unit was $1.7 million, and the implied fair value of the Aerospace Aftermarket reporting unit was $4.5 million. As a result of the carrying value of goodwill for these two reporting units exceeding fair value, the Company recorded a pretax impairment charge of $86.3 million during the third quarter of 2014.
Indefinite-lived intangible assets that were classified as assets held and used associated with the Company's Aerospace Aftermarket reporting unit with a carrying value of $14.2 million were written down to their fair value of $8.7 million resulting in an impairment charge of $5.5 million. In conjunction with the above Aerospace announcement, the Company also reviewed indefinite-lived intangible assets within the Aerospace segment for impairment. The fair value for these intangible assets was based on a relief from royalty method.
Intangible assets that were classified as assets held and used associated with the Company's Aerospace Aftermarket reporting unit with a carrying value of $4.4 million were written down to their fair value of zero resulting in an impairment charge of $4.4 million. The fair value for these intangible assets was based on the price that would be received in a current transaction to sell the assets on a standalone basis.
Various items of property, plant and equipment, with a carrying value of $1.5$0.8 million, were written down to their fair value of zero,$0.5 million, resulting in an impairment charge of $1.5$0.3 million. The fair value for these assets was based on the price that would be received in a current transaction to sell the assets on a standalone basis, considering the age and physical attributes of these items, as these assets had been idled.
Note 17 - Fair Value (continued)
During 2012, machinery and equipment associated with the manufacturing facility in St. Thomas with a carrying value of $10.4 million was written down to its fair value of $3.8 million, resulting in an impairment loss of $6.6 million. The fair value of these assets was based on the price that would be expected to be received in a current transaction to sell the assets on a standalone basis, considering the age and physical attributes of the equipment, compared to the cost of similar used equipment. The fair value of machinery and equipment was measured using Level 3 inputs.
Financial Instruments:
The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, net accounts receivable, net,trade accounts payable, trade, short-term borrowings and long-term debt. Due to their short-term nature, the carrying value of cash and cash equivalents, short-term investments, net accounts receivable, net,trade accounts payable, trade and short-term borrowings are a reasonable estimate of their fair value. Due to the nature of fair value calculations for variable-rate debt, the carrying value of the Company's long-term variable-rate debt is a reasonable estimate of its fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was $558.6$720.3 millionand $474.5$532.2 million at December 31, 20142017 and 2013,2016, respectively. The carrying value of this debt was $521.4$682.4 million and $441.6$507.3 million at December 31, 20142017 and 2013,2016, respectively. The fair value of long-term fixed-rate debt was measured using Level 2 inputs.
Note 1819 - Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange rate risk commodity price risk and interest rate risk. Forward contracts on various foreign currencies are entered into in order to manage the foreign currency exchange rate risk on forecasted revenue denominated in foreign currencies. Other forward exchange contracts on various foreign currencies are entered into in order to manage the foreign currency exchange rate risk associated with certain of the Company’sCompany's commitments denominated in foreign currencies. Forward contracts on various commodities are entered into in orderFrom time to manage the price risk associated with forecasted purchases of natural gas used in the Company’s manufacturing process. Interesttime, interest rate swaps are entered intoused to manage interest rate risk associated with the Company’s fixed, and floating-rate borrowings.
The Company designates certain foreign currency forward contracts as cash flow hedges of forecasted revenues and certain interest rate hedges as fair valuecash flow hedges of fixed-rate borrowings. The majority of the Company’s natural gas forward contracts are not subject to any hedge designation as they are considered within the normal purchases exemption.
The Company does not purchase or hold any derivative financial instruments for trading purposes. As of December 31, 20142017 and 2013,2016, the Company had approximately $194$386.9 million and $517$282.8 million, respectively, of outstanding foreign currency forward contracts at notional value. Refer to Note 17 –18 - Fair Value for the fair value disclosure of derivative financial instruments.
Cash Flow Hedging Strategy:
For certain derivative instruments that are designated as and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), or hedge components excluded from the assessment of effectiveness, are recognized in the Consolidated Statement of Income during the current period.
To protect against a reduction in the value of forecasted foreign currency cash flows resulting from export sales, over the next year, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its forecasted intra-group revenue or expensecash flows denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against foreign currencies, the decline in the present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.
The maximum length of time over which the Company hedges it exposure to the variability in future cash flows for forecast transactions is generally eighteen months or less.
Note 1819 - Derivative Instruments and Hedging Activities (continued)
Fair Value
Purpose for Derivative Instruments not designated as Hedging Strategy:Instruments:
For derivative instruments that are not designated as hedging instruments, the instruments are typically forward contracts. In general, the practice is to reduce volatility by selectively hedging transaction exposures including intercompany loans, accounts payable and qualifyaccounts receivable. Intercompany loans between entities with different functional currencies typically are hedged with a forward contract at the inception of loan with a maturity date at the maturity of the loan. The revaluation of these contracts, as fair value hedges (i.e., hedgingwell as the exposurerevaluation of the underlying balance sheet items, is recorded directly to changes inthe income statement so the adjustment generally offsets the revaluation of the underlying balance sheet items to protect cash payments and reduce income statement volatility.
The following table presents the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on theCompany's derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged riskinstruments at December 31, 2017 and 2016. Those balances are recognizedpresented within other non-current assets and liabilities in the same line item associated withConsolidated Balance Sheets.
|
| | | | | | | | | | | | |
| | Asset Derivatives | Liability Derivatives |
| Derivatives designated as hedging instruments | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 |
| Foreign currency forward contracts | $ | 0.5 |
| $ | 2.3 |
| $ | 2.1 |
| $ | 0.5 |
|
| | | | | |
| Derivatives not designated as hedging instruments | | | | |
| Foreign currency forward contracts | 0.8 |
| 7.6 |
| 5.0 |
| 1.6 |
|
| Total Derivatives | $ | 1.3 |
| $ | 9.9 |
| $ | 7.1 |
| $ | 2.1 |
|
The following tables present the hedged item (i.e., in “interest expense” whenimpact of derivative instruments for the hedged item is fixed-rate debt).years ended December 31, 2017, 2016 and 2015, respectively, and their location within the Consolidated Statements of Income:
|
| | | | | | | | | |
| | Amount of gain or (loss) recognized in
Other Comprehensive Income (Loss) (effective portion) |
| | Year Ended December 31, |
| Derivatives in cash flow hedging relationships | 2017 | 2016 | 2015 |
| Foreign currency forward contracts | $ | (4.7 | ) | $ | (0.2 | ) | $ | 3.0 |
|
| Interest rate swaps | (2.4 | ) | — |
| — |
|
| Total | $ | (7.1 | ) | $ | (0.2 | ) | $ | 3.0 |
|
|
| | | | | | | | | | |
| | | Amount of gain or (loss) reclassified from Accumulated Other Comprehensive Income (Loss) into income (effective portion) |
| | | Year Ended December 31, |
| Derivatives in cash flow hedging relationships | Location of gain or (loss) recognized in income | 2017 | 2016 | 2015 |
| Foreign currency forward contracts | Cost of products sold | $ | (1.4 | ) | $ | — |
| $ | 1.5 |
|
| Interest rate swaps | Interest expense | $ | (0.4 | ) | $ | (0.3 | ) | $ | (0.3 | ) |
| Total | | $ | (1.8 | ) | $ | (0.3 | ) | $ | 1.2 |
|
|
| | | | | | | | | | |
| | | Amount of gain or (loss) recognized in income on derivative instruments |
| | | Year Ended December 31, |
| Derivatives not designated as hedging instruments | Location of gain or (loss) recognized in income | 2017 | 2016 | 2015 |
| Foreign currency forward contracts | Other income (expense), net | $ | (10.2 | ) | $ | 0.1 |
| $ | (5.7 | ) |
Note 1920 - Research and Development
The Company performs research and development under Company-funded programs and under contracts with the federal government and others. Expenditures committed to research and development amounted to $38.8$35.3 million,, $39.3 $31.8 million and $45.7$32.6 million in 2014, 20132017, 2016 and 2012,2015, respectively. Of these amounts, $0.3 million, $0.4 million and $0.8 million, respectively, were funded by others. Expenditures may fluctuate from year-to-year depending on special projects and needs.
Note 2021 - Continued Dumping and Subsidy Offset Act (CDSOA)
CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection (U.S. Customs) fromon entries of merchandise subject to antidumping casesorders that entered the United States prior to October 1, 2007, to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. TheDuring the year ended December 31, 2016, the Company reportedrecognized pretax CDSOA expense of $2.3 million and $2.8 million, in 2014 and 2013, respectively, and income of $108.0$59.6 million, in 2012.net of related expenses.
In September 2002, the World Trade Organization (WTO) ruled that CDSOA payments are not consistent with international trade rules. In February 2006, U.S. legislation was enacted that ended CDSOA distributions for dumped imports covered by antidumping duty orders entering the United States after September 30, 2007. Instead, any such antidumping duties collected would remain with the U.S. Treasury. Several countries have objected that this
CDSOA has been the subject of significant litigation since 2002, and U.S. legislation is not consistent with WTO rulings, and were granted retaliation rights by the WTO, typically in the form of increased tariffs on some imported goods from the United States. The European Union and Japan have been retaliating in this fashion against the operation of U.S. law.
In 2006, the U.S. Court of International Trade (CIT) ruled, in two separate decisions, that the procedure for determining recipients eligible to receiveCustoms has withheld CDSOA distributions in recent years while litigation was unconstitutional.ongoing. In addition, several other court cases challenging various provisions of CDSOA were ongoing. As a result, from 2006 through 2010, U.S. Customs withheld a portion of the amounts that would otherwise have been distributed under CDSOA.
In February 2009, the U.S. Court of Appeals for the Federal Circuit reversed both of the 2006 decisions of the CIT. Later in December 2009, a plaintiff petitioned the U.S. Supreme Court to hear a further appeal, but the Supreme Court declined the petition, allowing the appellate court reversals to stand. At that time, several court cases challenging various provisionsrecent months, much of the CDSOA were still unresolved, so U.S. Customs accepted the CIT’s recommendation to continue to withhold CDSOA receipts related to 2006 through 2010 until January 2012.litigation that involves antidumping orders where Timken is a qualifying domestic producer has concluded.
U.S. Customs began distributing the withheld funds to affected domestic producers in early April 2012. In April 2012,During 2016, the Company received CDSOA distributions of $112.8$60.6 million, inrepresenting funds that would have been distributed to the aggregate for amounts originally withheld from 2006Company at the end of calendar years 2011 through 2010.2016.
While some of the challenges to CDSOA have been resolved, others are still in litigation. Since there continue to be legal challenges to CDSOA, U.S. Customs has advised all affected domestic producers that it is possible that CDSOA distributions could be subject to clawback. Management of the Company believes that the likelihood of any clawback is remote.
Note 21 - Subsequent Events
On January 22, 2015, the Company entered into an agreement pursuant to which the Plan purchased a group annuity contract from Prudential to pay future pension benefits for approximately 5,000 U.S. Timken retirees. The Company has transferred approximately $600 million of the Company's pension obligations and approximately $635 million of pension assets to Prudential. The Company expects to incur pension settlement charges of approximately $220 million during the first half of 2015 in connection with this group annuity purchase.
Note 22 - Quarterly Financial Data
(Unaudited)
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | 1st | 2nd | 3rd | 4th | Total |
| Net sales | $ | 703.8 |
| $ | 750.6 |
| $ | 771.4 |
| $ | 778.0 |
| $ | 3,003.8 |
|
Gross profit (1) | 180.5 |
| 201.8 |
| 217.0 |
| 211.1 |
| 810.4 |
|
Selling, general and administrative expenses (1) | 119.6 |
| 123.8 |
| 134.0 |
| 144.0 |
| 521.4 |
|
| Impairment and restructuring charges | 1.7 |
| 0.8 |
| 1.3 |
| 0.5 |
| 4.3 |
|
Net income (2) | 38.1 |
| 82.0 |
| 54.1 |
| 28.1 |
| 202.3 |
|
| Net (loss) income attributable to noncontrolling interests | (0.1 | ) | (0.5 | ) | 0.6 |
| (1.1 | ) | (1.1 | ) |
| Net income attributable to The Timken Company | 38.2 |
| 82.5 |
| 53.5 |
| 29.2 |
| 203.4 |
|
| Net income per share - Basic: | $ | 0.49 |
| $ | 1.06 |
| $ | 0.69 |
| $ | 0.38 |
| $ | 2.62 |
|
| Net income per share - Diluted: | $ | 0.48 |
| $ | 1.04 |
| $ | 0.68 |
| $ | 0.37 |
| $ | 2.58 |
|
| Dividends per share | $ | 0.26 |
| $ | 0.27 |
| $ | 0.27 |
| $ | 0.27 |
| $ | 1.07 |
|
| | | | | | |
| | 2016 |
| | 1st | 2nd | 3rd | 4th | Total |
| Net sales | $ | 684.0 |
| $ | 673.6 |
| $ | 657.4 |
| $ | 654.8 |
| $ | 2,669.8 |
|
Gross profit (3) | 183.1 |
| 184.5 |
| 169.7 |
| 131.2 |
| 668.5 |
|
Selling, general and administrative expenses (3) | 116.1 |
| 108.0 |
| 107.2 |
| 139.4 |
| 470.7 |
|
Impairment and restructuring charges (4) | 10.5 |
| 2.9 |
| 5.3 |
| 3.0 |
| 21.7 |
|
Net income (loss) (5) | 65.8 |
| 48.2 |
| 34.0 |
| (6.9 | ) | 141.1 |
|
| Net income (loss) attributable to noncontrolling interests | (0.1 | ) | — |
| 0.4 |
| — |
| 0.3 |
|
| Net income (loss) attributable to The Timken Company | 65.9 |
| 48.2 |
| 33.6 |
| (6.9 | ) | 140.8 |
|
| Net income (loss) per share - Basic: | $ | 0.83 |
| $ | 0.61 |
| $ | 0.43 |
| $ | (0.09 | ) | $ | 1.79 |
|
| Net income (loss) per share - Diluted: | $ | 0.82 |
| $ | 0.61 |
| $ | 0.43 |
| $ | (0.09 | ) | $ | 1.78 |
|
| Dividends per share | $ | 0.26 |
| $ | 0.26 |
| $ | 0.26 |
| $ | 0.26 |
| $ | 1.04 |
|
|
| | | | | | | | | | | | | | | |
| | 2014 |
| | 1st | 2nd | 3rd | 4th | Total |
| Net sales | $ | 736.8 |
| $ | 789.2 |
| $ | 788.0 |
| $ | 762.2 |
| $ | 3,076.2 |
|
Gross profit (1) | 218.1 |
| 233.6 |
| 225.5 |
| 220.8 |
| 898.0 |
|
Impairment and restructuring charges (2) | 3.2 |
| 5.4 |
| 99.4 |
| 5.4 |
| 113.4 |
|
Pension settlement charges (3) | 0.7 |
| — |
| — |
| 33.0 |
| 33.7 |
|
| Income (loss) from continuing operations | 60.3 |
| 57.6 |
| (10.2 | ) | 41.6 |
| 149.3 |
|
| Income (loss) from discontinued operations | 23.5 |
| 6.2 |
| (11.0 | ) | 5.3 |
| 24.0 |
|
Net income (loss) (4) | 83.8 |
| 63.8 |
| (21.2 | ) | 46.9 |
| 173.3 |
|
| Net income attributable to noncontrolling interests | 0.3 |
| 1.1 |
| 0.7 |
| 0.4 |
| 2.5 |
|
| Net income (loss) attributable to The Timken Company | 83.5 |
| 62.7 |
| (21.9 | ) | 46.5 |
| 170.8 |
|
| Net income (loss) per share - Basic: | | | | | |
| Income (loss) from continuing operations | 0.64 |
| 0.62 |
| (0.12 | ) | 0.46 |
| 1.62 |
|
| Income (loss) from discontinuing operations | 0.26 |
| 0.07 |
| (0.12 | ) | 0.06 |
| 0.27 |
|
| Total net income (loss) per share | 0.90 |
| 0.69 |
| (0.24 | ) | 0.52 |
| 1.89 |
|
| Net income (loss) per share - Diluted: | | | | | |
| Income (loss) from continuing operations | 0.64 |
| 0.61 |
| (0.12 | ) | 0.46 |
| 1.61 |
|
| Income (loss) from discontinued operations | 0.26 |
| 0.07 |
| (0.12 | ) | 0.06 |
| 0.26 |
|
| Total net income (loss) per share | 0.90 |
| 0.68 |
| (0.24 | ) | 0.52 |
| 1.87 |
|
| Dividends per share | 0.25 |
| 0.25 |
| 0.25 |
| 0.25 |
| 1.00 |
|
| | | | | | |
| | 2013 |
| | 1st | 2nd | 3rd | 4th | Total |
| Net sales | $ | 763.2 |
| $ | 791.3 |
| $ | 731.4 |
| $ | 749.5 |
| $ | 3,035.4 |
|
| Gross profit | 218.9 |
| 239.6 |
| 202.0 |
| 207.9 |
| 868.4 |
|
Impairment and restructuring charges (5) | 1.2 |
| 1.5 |
| 2.2 |
| 3.8 |
| 8.7 |
|
Pension settlement charges (6) | — |
| 5.2 |
| 1.5 |
| 0.5 |
| 7.2 |
|
| Income from continuing operations | 51.5 |
| 55.4 |
| 34.8 |
| 33.8 |
| 175.5 |
|
| Income from discontinued operations | 23.4 |
| 27.5 |
| 17.7 |
| 18.9 |
| 87.5 |
|
Net income (7) | 74.9 |
| 82.9 |
| 52.5 |
| 52.7 |
| 263.0 |
|
| Net income (loss) attributable to noncontrolling interests | (0.2 | ) | 0.1 |
| 0.3 |
| 0.1 |
| 0.3 |
|
| Net income attributable to The Timken Company | 75.1 |
| 82.8 |
| 52.2 |
| 52.6 |
| 262.7 |
|
| Net income per share - Basic: |
|
|
|
|
|
|
|
|
|
|
| Income from continuing operations | 0.54 |
| 0.58 |
| 0.36 |
| 0.36 |
| 1.84 |
|
| Income from discontinuing operations | 0.24 |
| 0.28 |
| 0.19 |
| 0.20 |
| 0.92 |
|
| Total net income per share | $ | 0.78 |
| $ | 0.86 |
| $ | 0.55 |
| $ | 0.56 |
| $ | 2.76 |
|
| Net income per share - Diluted: |
|
|
|
|
|
|
|
|
|
|
| Income from continuing operations | 0.53 |
| 0.57 |
| 0.36 |
| 0.35 |
| 1.82 |
|
| Income from discontinued operations | 0.24 |
| 0.29 |
| 0.18 |
| 0.20 |
| 0.92 |
|
| Total net income per share | $ | 0.77 |
| $ | 0.86 |
| $ | 0.54 |
| $ | 0.55 |
| $ | 2.74 |
|
| Dividends per share | $ | 0.23 |
| $ | 0.23 |
| $ | 0.23 |
| $ | 0.23 |
| $ | 0.92 |
|
Earnings per share are computed independently for each of the quarters presented; therefore, the sum of the quarterly earnings per share may not equal the total computed for the year.
TableThe amounts presented above for the fourth quarter of Contents2016 were revised to include adjustments relating to the change in accounting principle discussed in Note 2 - Change in Accounting Principles, including adjustments to reverse the amortization of actuarial gains and losses, the elimination of pension settlement charges and the recognition of actuarial gains and losses. These adjustments include a $32.9 million decrease in gross profit, a $27.4 million increase in SG&A expenses and a $31.0 million decrease in net income and net income attributable to The Timken Company, as well as a $0.40 per share decrease for both basic and diluted net income per share. During the fourth quarter of 2016, the Company incurred a net loss and therefore treated all stock options and restricted stock units as antidilutive.
Note 22 - Quarterly Financial Data (continued)
| |
| (1) | Gross profit and SG&A expenses included net actuarial losses of $2.2 million and $11.5 million, respectively, for the thirdfourth quarter of 2014 included an inventory valuation adjustment of $18.7 million related to the Company's Mobile Industries segment.2017. |
| |
| (2) | Net income for the second quarter of 2017 included a $34 million reversal of accruals for uncertain tax positions. Net income for the fourth quarter of 2017 included $35.3 million of income tax expense related to U.S. Tax Reform. |
| |
| (3) | Gross profit and SG&A expenses included net actuarial losses of $35.6 million and $29.8 million, respectively, for the fourth quarter of 2016. |
| |
| (4) | Impairment and restructuring charges for the secondfirst quarter of 20142016 included severance and related benefitsbenefit costs of $2.8$7.7 million, impairment charges of $2.6 million and exit costs of $1.8 million and impairment charges of $0.8$0.2 million. Impairment and restructuring charges for the third quarter of 20142016 included severance and related benefit costs of $3.3 million, impairment charges of $98.0 million, severance and related benefits of $1.3$1.2 million and exit costs of $0.1$0.8 million. The impairment charges primarily related to the impairment of goodwill and intangible assets for two of the Company's Aerospace reporting units. Impairment and restructuring charges for the fourth quarter of 2014 included severance and related benefits of $4.4 million and exits costs of $1.0 million. |
| |
(3) | Pension settlement charges for the fourth quarter of 2014 primarily related to the settlement of approximately $110 million of pension obligation for one of the Company's U.S. defined benefit pension plans.
|
| |
(4) | Net income for the first quarter of 2014 included a gain of $22.6 million on the sale of real estate in Sao Paulo.
|
| |
| (5) | ImpairmentNet income (loss) included net CDSOA income, net of $47.7 million for the first quarter of 2016, $6.1 million for the second quarter of 2016 and restructuring charges$6.0 million for the fourth quarter of 2013 included severance and related benefit costs of $5.6 million, impairment charges of $0.1 million and a favorable adjustment for exit costs of $1.9 million. |
| |
(6) | Pension settlement charges for the second quarter of 2013 related to the settlement of pension obligations for one of the Company's Canadian defined benefit pension plans. |
| |
(7) | Net income for the fourth quarter of 2013 included a gain of $5.4 million on the sale of real estate in Sao Paulo.
2016. |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors and Shareholders of The Timken Company and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Timken Company and subsidiaries (the Company) as of December 31, 20142017 and 2013,2016, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included2017, and the related notesand the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Timkenthe Company and subsidiaries at December 31, 20142017 and 2013,2016, and the consolidated results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2014,2017, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), The Timkenthe Company's internal control over financial reporting as of December 31, 2014,2017, 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 March 2, 2015February 15, 2018 expressed an unqualified opinion thereon.thereon.
Basis for Opinion
These consolidated 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.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has elected to change its method of accounting for actuarial gains and losses and plan assets for all of its pension and other postretirement benefit (OPEB) plans in 2017.
/s/Ernst & Young LLP
We have served as the Company’s auditor since 1910.
Cleveland, OhioOH
March 2, 2015February 15, 2018
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, the Company’s 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.
There have been no changes during the Company’s fourth quarter of 20142017 in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Management on Internal Control Over Financial Reporting
The management of The Timken Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Timken’s internal control system was 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.
Timken management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)("COSO"). Based on this assessment under COSO’s “Internal Control-Integrated Framework, (2013 framework),” management believes that, as of December 31, 2014,2017, Timken’s internal control over financial reporting is effective.
Ernst & Young LLP, independent registered public accounting firm, has issued an audit report on ourOn April 3, 2017, the Company completed the acquisition of the shares of Torsion Control Products. On May 5, 2017, the Company completed the acquisition of the assets of PT Tech. On July 3, 2017, the Company completed the acquisition of the shares of Groeneveld. As permitted by SEC guidance, the scope of Timken's evaluation of internal control over financing reporting as of December 31, 2017 did not include the internal control over financial reporting of Torsion Control Products, PT Tech and Groeneveld. The results of Torsion Control Products, PT Tech and Groeneveld are included in the Company's consolidated financial statements beginning April 3, 2017, May 5, 2017 and July 3, 2017, respectively. The combined total assets of Torsion Control Products, PT Tech and Groeneveld represented thirteen percent of the Company's total assets at December 31, 2017. The combined net sales of Torsion Control Products, PT Tech and Groeneveld represented three percent of the Company's consolidated net sales for 2017 and the combined net income of Torsion Control Products, PT Tech and Groeneveld represented five percent of the Company's net income for 2017. The Company will include Torsion Control Products, PT Tech and Groeneveld in the Company's internal control over financial reporting assessment as of Timken’sDecember 31, 2018.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014,2017 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is presented below.in this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
TheTo the Shareholders and the Board of Directors and Shareholders of The Timken Company and subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited The Timken Company and subsidiaries’ internal control over financial reporting as of December 31, 2014,2017, based on criteria established in Internal Control-IntegratedControl- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Timken Company and subsidiaries’subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
As indicated in the accompanying Report of Management on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of PT Tech, Inc., Torsion Control Products, Inc., and Groeneveld Group, which are included in the 2017 consolidated financial statements of the Company and constituted 13% and 25% of total and net assets, respectively, as of December 31, 2017 and 3% and 5% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of PT Tech, Inc., Torsion Control Products, Inc., and Groeneveld Group.
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 Timken Company and subsidiaries (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15(a) of the Company and our report dated February 15, 2018 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 Public Company Accounting Oversight Board (United States).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.
In our opinion, The Timken Company and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Timken Company and subsidiaries as of December 31, 2014 and 2013 and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014, and our report dated March 2, 2015 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Cleveland, OhioOH
March 2, 2015February 15, 2018
Item 9B. Other Information
Not applicable.
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Required information is set forth under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the proxy statement filed in connection with the annual meeting of shareholders to be held on or about May 7, 20158, 2018 (the "Proxy Statement"), 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 “Audit Committee” in the Proxy Statement, and is incorporated herein by reference.
The General Policies and Procedures of the Board of Directors of the Company and the charters of its Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are also available on the Company’s website at www.timken.com/investors/governanceabout/governance-documents and are available to any shareholder upon request to the General Counsel. 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, as well as its directors. The Company’s code of ethics, The Timken Company Standards of Business Ethics Policy, is available on its website at www.timken.com/investors/governance.about/governance-documents. The Company intends to disclose any amendment to, or waiver from, its code of ethics by posting such amendment or waiver, as applicable, on its website.
Item 11. Executive Compensation
Required information is set forth under the captions “Compensation Discussion and Analysis,” “2014“2017 Summary Compensation Table,” “2014“2017 Grants of Plan-Based Awards,” “Outstanding Equity Awards at 20142017 Year-End,” “2014“2017 Option Exercises and Stock Vested,” “Pension Benefits,” “2014“2017 Pension Benefits Table,” “2014“2017 Nonqualified Deferred Compensation,” “Potential Payments Upon Termination or Change-in-Control,” “Director Compensation,” “Compensation Committee,” and “Compensation Committee Report” in the Proxy Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Required information, including with respect to institutional investors owning more than 5% of the Company’s common shares, is set forth under the caption “Beneficial Ownership of Common Stock”Shares” in the Proxy Statement, and is incorporated herein by reference.
Required information is set forth under the caption “Equity Compensation Plan Information” in the Proxy Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Required information is set forth under the captioncaptions “Election of Directors”Directors,” "Nominees," "Independence Determinations" and "Related Party Transactions Approval Policy" in the Proxy Statement, and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Required information regarding fees paid to and services provided by the Company’s independent auditor during the years ended December 31, 20142017 and 20132016 and the pre-approval policies and procedures of the Audit Committee of the Company’s Board of Directors is set forth under the caption “Auditors”“Auditor” in the Proxy Statement, and is incorporated herein by reference.
PART IV.
Item 15. Exhibits and 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
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(2.1 | )
| | SeparationShare Purchase Agreement Dated June 27, 2017, between Mr. H.J. Groeneveld and Distribution Agreement between The Timken Company and TimkenSteel Corporation, dated as of June 30, 2014Europe B.V., was filed on July 3, 20142017 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(3.1 | )
| | Amended Articles of Incorporation of The Timken Company, (effective May 31, 2013) were filed on July 31, 2013 with Form 10-Q (Commission File No. 1-1169) and are incorporated herein by reference. |
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(3.2 | )
| | Amended Regulations of The Timken Company adopted on February 14, 2014,May 10, 2016, were filed on February 14, 2014July 28, 2016 with Form 8-K (Commission File No. 1-1169) and are incorporated herein by reference. |
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(4.1 | )
| | SecondThird Amended and Restated Credit Agreement, dated as of May 11, 2011,June 19, 2015, by and among: The Timken Company together with certain of its subsidiaries as Guarantors;Company; Bank of America, N.A. and KeyBank National Association as Co-Administrative Agents; KeyBank National Association as Paying Agent, L/C Issuer and Swing Line Lender; and the other Lenders party thereto, was filed on May 12, 2011June 23, 2015 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference.
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| (4.2 | ) | | First Amendment to Credit Agreement and Waiver, dated as of November 6, 2013, by and among: The Timken Company, together with certain of its subsidiaries as Guarantors; Bank of America, N.A. and KeyBank National Association as Co-Administrative Agents and the other Lenders party thereto, was filed on February 28, 2014 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(4.3 | ) | | Second Amendment to Credit Agreement, dated as of June 13, 2014, by and among: The Timken Company, together with certain of its subsidiaries as Guarantors; Bank of America, N.A. and KeyBank National Association as Co-Administrative Agents and the other Lenders party thereto, was filed on August 11, 2014 with Form 10-Q (Commission File No. 1-1169) and is incorporated herein by reference. |
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(4.4 | ) | | Indenture dated as of July 1, 1990, between The Timken Company and Ameritrust Company of New York, was filed with Form S-3 dated July 12, 1990 (Registration No. 333-35773) and is incorporated herein by reference.
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(4.5 | )
| | First Supplemental Indenture, dated as of July 24, 1996, by and between The Timken Company and Mellon Bank, N.A. was filed on November 13, 1996 with Form 10-Q (Commission File No. 1-1169) and is incorporated herein by reference. |
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(4.6 | )
| | Indenture, dated as of February 18, 2003, between The Timken Company and The Bank of New York, as Trustee, providing for Issuance of Notes in Series was filed on March 27, 2003 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(4.7 | )
| | Indenture, dated as of August 20, 2014, by and between The Timken Company and The Bank of New York Mellon Trust Company, N.A., was filed on August 20, 2014 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(4.84.6 | ) | | The Company is also a party to agreements with respect to other long-term debt in total amount less than 10% of the Registrant's consolidated total assets. The Registrant agrees to furnish a copy of such agreements upon request. |
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(4.9 | ) | | Amended and Restated Receivables Purchase Agreement, dated as of November 30, 2012, by and among: Timken Receivables Corporation; The Timken Corporation; the Purchasers from time to time parties thereto; SunTrust Bank and the Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch was filed on November 30, 2012 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(4.10 | ) | | Second Amended and Restated Receivables Sale Agreement, dated as of November 10, 2010, between The Timken Corporation and Timken Receivables Corporation was filed on November 10, 2010 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(4.11 | ) | | Receivables Sale Agreement, dated as of November 10, 2010, between MPB Corporation and Timken Receivables Corporation was filed on November 10, 2010 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(4.12 | ) | | Amendment No. 1 to Second Amended and Restated Receivables Sale Agreement dated as of November 30, 2012 between The Timken Corporation and Timken Receivables Corporation was filed on November 30, 2012 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(4.13 | ) | | Amendment No. 1 to Receivables Sale Agreement dated as of November 30, 2012 between MPB Corporation and Timken Receivables Corporation was filed on November 30, 2012 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(4.14 | ) | | Amendment No. 1 to Amended and Restated Receivables Sale Agreement dated as of April 30, 2014 between Timken Receivables Corporation, The Timken Corporation, the Purchasers from time to time parties thereto and the Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch was filed on May 1, 2014 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(4.15 | ) | | Amendment No. 2 to Second Amended and Restated Receivables Sale Agreement dated as of April 30, 2014 between Timken Receivables Corporation and The TImken Corporation was filed on May 1, 2014 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. |
| Management Contracts and Compensation Plans |
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(10.1 | ) | | The Timken Company 1996 Deferred Compensation Plan for officers and other key employees, amended and restated effective December 31, 2010, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.2 | ) | | The Timken Company Director Deferred Compensation Plan, amended and restated effective December 31, 2008, was filed on February 25, 2010 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.3 | ) | | Form of The Timken Company 1996 Deferred Compensation Plan Election Agreement, amended and restated as of January 1, 2008, was filed on February 25, 2010 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.4 | ) | | Form of The Timken Company Director Deferred Compensation Plan Election Agreement, amended and restated as of January 1, 2008, was filed on February 25, 2010 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.5 | ) | | The Timken Company Long-Term Incentive Plan for directors, officers and other key employees as amended and restated as of February 5, 2008 and approved by the shareholders on May 1, 2008 was filed on March 18, 2008 as Appendix A to the Registrant's Definitive Proxy Statement on Schedule 14A (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.6 | ) | | The Timken Company 2011 Long-Term Incentive Plan, as amended and restated as of February 13, 2015 for directors, officers and other key employees as approved by the shareholders on May 10, 20117, 2015 was filed on May 12, 2011March 27, 2015 with Form 8-KDefinitive Proxy Statement on Schedule 14A (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.7Management Contracts and Compensation Plans |
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| | Amended and Restated Supplemental Pension Plan of The Timken Company, amended and restated effective as of January 1, 2011, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.8 | ) | | The Timken Company Senior Executive Management Performance Plan, as amended and restated as of February 8, 201013, 2015 and approved by shareholders on May 11, 2010,7, 2015, was filed on May 12, 2010March 27, 2015 with Form 8-KDefinitive Proxy Statement on Schedule 14A (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.9 | ) | | Form of Amended and Restated Severance Agreement (for Executive Officers appointed prior to January 1, 2011)on or after November 12, 2015), as adopted on November 12, 2015, was filed on December 18, 2009February 24, 2016 with Form 8-K10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.10 | ) | | Form of Severance Agreement (for Executive Officers appointed on or after January 1, 2011 and other officers) as adopted on December 9, 2010 was filed on February 22, 2011 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.11 | ) | | Amendment No. 1 to the Amended and Restated Severance Agreement (for Executive Officers appointed prior to January 1, 2011) as adopted on December 9, 2010 was filed on February 22, 2011 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.12 | ) | | Form of Indemnification Agreement entered into with all Directors who are not Executive Officers of the Company was filed on July 31, 2013 with Form 10-Q (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.13 | ) | Form of Indemnification Agreement entered into with all Directors who are not Executive Officers of the Company was filed on July 31, 2013 with Form 10-Q (Commission File No. 1-1169) and is incorporated herein by reference. |
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| | Form of Indemnification Agreement entered into with all Executive Officers of the Company who are not Directors of the Company was filed on July 31, 2013 with Form 10-Q (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.14 | ) | | Form of IndemnificationAmended and Restated Employee Excess Benefits Agreement entered into with allcertain Executive Officers of the Company who are also Directorsand certain key employees of the Company, was filed on July 31, 2013February 26, 2009 with Form 10-Q10-K (Commission File No. 1-1169) and is incorporated herein by reference.reference |
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(10.15 | ) | | Form of Amended and Restated Employee Excess Benefits Agreement entered into with certain Executive Officers and certain key employees of the Company, was filed on February 26, 2009 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.16 | ) | | Form of Amended and Restated Employee Excess Benefits Agreement entered into with the Chief Executive Officer and the President of Steel, was filed on February 26, 2009 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.17 | ) | | Form of Employee Excess Benefits Agreement, entered into with all Executive Officers after January 1, 2011, was filed on August 4, 2011 with Form 10-Q (Commission File No. 1-1169) and is incorporated herein by reference. |
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(10.18 | ) | | Form of Amendment No. 1 to The Amended and Restated Employee Excess Benefit Agreement, entered into with certain Executive Officers and certain key employees of the Company, was filed on September 2, 2009 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. |
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Table of Contents
Management Contracts and Compensation Plans | | | | | (10.19 | ) | | Form of Amendment No. 1 to The Amended and Restated Employee Excess Benefits Agreement with all Executive Officers after January 1, 2011 and Form of Amendment No. 2 to the Amended and Restated Excess Benefits Agreement with certain Executive Officers and certain key employees of the Company, as adopted December 8, 2011, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.20 | ) | | Form of Amendment No. 1 to The Amended and Restated Employee Excess Benefits Agreement entered into with the Chief Executive Officer, and the President of Steel, as adopted December 8, 2011, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.21 | ) | | Form of Amendment No. 2 to The Amended and Restated Employee Excess Benefits Agreement entered into with the Chief Executive Officer, and the President of Steel, as adopted December 8, 2011, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.22 | ) | | Form of Nonqualified Stock Option Agreement for nontransferable options without dividend credit, as adopted on April 17, 2001, was filed on May 14, 2001 with Form 10-Q (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.23 | ) | | Form of Nonqualified Stock Option Agreement for transferable options for Officers, as adopted on January 31, 2005,August 12, 2015, was filed on February 4, 2005 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | (10.24 | ) | | Form of Nonqualified Stock Option Agreement for Non-Employee Directors, as adopted on January 31, 2005, was filed on March 15, 200524, 2016 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.25 | ) | | Form of Nonqualified Stock Option Agreement for Officers, as adopted on February 6, 2006, was filed on February 10, 2006 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.26 | ) | | Form of Nonqualified Stock Option Agreement for Officers, as adopted on November 6, 2008, was filed on February 26, 2009 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.27 | ) | | Form of Nonqualified Stock Option Agreement for Officers, as adopted on December 10, 2009, was filed on February 25, 2010 with Form 10-K (Commission File No. 1-1169), and is incorporated herein by reference. | | | | | (10.28 | ) | | Form of Nonqualified Stock Option Agreement for Non-Employee Directors, as adopted on December 8, 2011, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. |
| Management Contracts and Compensation Plans | | | | | | | | (10.29 | ) | | Form of Nonqualified Stock Option Agreement for transferable options for Officers, as adopted on December 8, 2011, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.30 | ) | | Form of Nonqualified Stock Option Agreement for non-transferable options for Non-Officer Employees, as adopted on December 8, 2011, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.31 | ) | | Form of Restricted Share Agreement for Non-Employee Directors, as adopted on January 31, 2005, was filed on March 15, 2005 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.32 | ) | | Form of Restricted Shares Agreement, as adopted on November 6, 2008, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.33 | ) | | Form of Restricted Share Agreement for Non-Employee Directors, as adopted on December 8, 2011, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.34 | ) | | Form of Performance UnitRestricted Share Agreement for Non-Employee Directors (ratable vesting over five years), as adopted on February 4, 2008,August 12, 2015, was filed on February 7, 200824, 2016 with Form 8-K10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.35 | ) | Form of Restricted Share Agreement for Non-Employee Directors (one year vesting), as adopted on February 12, 2015, is attached hereto as Exhibit 10.4. | | | | | | Form of Restricted Share Agreement for Non-Employee Directors (one year vesting), as adopted on February 12, 2015, was filed on February 24, 2016 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | | Form of Performance Shares Agreement was filed on February 11, 2010 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.36 | ) | | Form of Deferred Shares Agreement, as adopted on February 2, 2009, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.37 | ) | | Form of Deferred Shares Agreement entered into with employees after January 1, 2012, as adopted on December 8, 2011, was filed on February 17, 2012 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | |
Management Contracts | | Form of Deferred Shares Agreement (five year cliff vesting) entered into with employees after August 12, 2015, as adopted on August 12, 2015, was filed on February 24, 2016 with Form 10-K (Commission File No. 1-1169) and Compensation Plansis incorporated herein by reference. | | | | | (10.38 | ) | Form of Deferred Shares Agreement (three year cliff vesting) entered into with employees after November 12, 2015, as adopted on November 12, 2015, was filed on February 24, 2016 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | | Form of Performance-Based Restricted Stock Unit Agreement entered into with key employees was filed on May 2, 2012 with Form 10-Q (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.39 | ) | | Form of Time-Based Restricted Stock Unit Agreement entered into with key employees was filed on May 2, 2012 with Form 10-Q (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.40 | ) | | Form of Time-Based Restricted Stock Unit Agreement (Cliff Vesting) entered into with key employees was filed on February 28, 2014 with Form 10-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | (10.41 | ) | | Form of Associate Non-Compete Agreement entered into with key employees was filed on December 3, 2012 with Form 10-Q/A (Commission File No. 1-1169) and is incorporated herein by reference. |
| | | (10.42 | ) | | Employee Matters Agreement between The Timken Company and TimkenSteel Corporation, dated June 30, 2014 was filed on July 3, 2014 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | (10.43 | ) | | Tax Sharing Agreement by and between The Timken Company and TimkenSteel Corporation, dated June 30, 2014 was filed on July 3, 2014 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | (10.44 | ) | | Transition Services Agreement between The Timken Company and TimkenSteel Corporation, dated June 30, 2014 was filed on July 3, 2014 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | (10.45 | ) | | Trademark License Agreement between The Timken Company and TimkenSteel Corporation, dated June 30, 2014 was filed on July 3, 2014 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | (10.46 | ) | | Noncompetition Agreement between The Timken Company and TimkenSteel Corporation, dated June 30, 2014 was filed on July 3, 2014 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | (10.47 | ) | | Registration Rights Agreement between The Timken Company and TimkenSteel Corporation, dated August 20, 2014 was filed on August 20, 2014 with Form 8-K (Commission File No. 1-1169) and is incorporated herein by reference. | | | | | Listing of Exhibits (continued) | | | | | (12 | ) | | Computation of Ratio of Earnings to Fixed Charges. | | | | | (21 | ) | | A list of subsidiaries of the Registrant. | | | | | (23 | ) | | Consent of Independent Registered Public Accounting Firm. | | | | | (24 | ) | | Power of Attorney. | | | | | (31.1 | ) | | Principal Executive Officer's Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | (31.2 | ) | | Principal Financial Officer's Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | (32 | ) | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | (101 | ) | | Financial statements from the Annual Report on Form 10-K of The Timken Company for the year ended December 31, 2014,2017, formatted in XBRL: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income (iii) the Consolidated Balance Sheets, (iii)(iv) the Consolidated Statements of Cash Flows, (iv)(v) the Consolidated Statements of Shareholders' Equity and (v)(vi) the Notes to the Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE TIMKEN COMPANY | | | | | By: /s/ Richard G. Kyle | | By: /s/ Philip D. Fracassa | | Richard G. Kyle | | Philip D. Fracassa | | President, Chief Executive Officer and Director | | Executive Vice President and Chief Financial Officer | | (Principal Executive Officer) | | (Principal Financial Officer) | Date: March 2, 2015February 15, 2018 | | Date: March 2, 2015February 15, 2018 | | | | | | | | By: /s/ J. Ted MihailaShelly M. Chadwick | | | | J. Ted MihailaShelly M. Chadwick | | | | Senior Vice President - Finance and ControllerChief
Accounting Officer | | | | (Principal Accounting Officer) | | | | Date: March 2, 2015February 15, 2018 |
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. | | | | | By: /s/ Maria A. Crowe * | | By: /s/ John P. ReillyJoseph W. Ralston * | | Maria A. Crowe, Director | | John P. Reilly,Joseph W. Ralston, Director | Date: March 2, 2015February 15, 2018 | | Date: March 2, 2015February 15, 2018 | | | | | By: /s/ Elizabeth A. Harrell * | | By: /s/ Frank C. Sullivan * | | Elizabeth A. Harrell | | Frank C. Sullivan, Director | | Date: February 15, 2018 | | Date: February 15, 2018 | | | | | | By: /s/ Richard G. Kyle * | | By: /s/ Frank C. Sullivan John M. Timken, Jr.* | | Richard G. Kyle, Director | | Frank C. Sullivan,John M. Timken, Jr., Director | Date: March 2, 2015February 15, 2018 | | Date: March 2, 2015February 15, 2018 | | | | | | By: /s/ John A. Luke, Jr.* | | By: /s/ John M.Ward J. Timken, Jr.* | | John A. Luke, Jr., Director | | John M.Ward J. Timken, Jr., Director | Date: March 2, 2015February 15, 2018 | | Date: March 2, 2015February 15, 2018 | | | | | By: /s/ Christopher L. Mapes* | | By: /s/ Ward J. Timken, Jr.* | Christopher L. Mapes Director | | Ward J. Timken, Jr., Director | Date: March 2, 2015 | | Date: March 2, 2015 | | | | By: /s/ Ajita G. Rajendra** | | By: /s/ Jacqueline F. Woods * | Ajita G. Rajendra,Christopher L. Mapes, Director | | Jacqueline F. Woods, Director | Date: March 2, 2015February 15, 2018 | | Date: March 2, 2015February 15, 2018 | | | | | By: /s/ Joseph W. RalstonJames F. Palmer * | | * By: /s/ Philip D. Fracassa | Joseph W. Ralston,James F. Palmer, Director | | Philip D. Fracassa, attorney-in-fact | Date: March 2, 2015February 15, 2018 | | By authority of Power of Attorney | | | | filed as Exhibit 24 hereto | | By: /s/ Ajita G. Rajendra * | | Date: March 2, 2015February 15, 2018 | | Ajita G. Rajendra, Director | | | | Date: February 15, 2018 | | | | | |
Schedule II—Valuation and Qualifying Accounts The Timken Company and Subsidiaries | | | | | | | | | | | | Allowance for uncollectible accounts: | 2014 | 2013 | 2012 | | Balance at Beginning of Period | $ | 10.1 |
| $ | 11.0 |
| $ | 16.6 |
| | Additions: | | | | Charged to Costs and Expenses (1) | 2.7 |
| 2.4 |
| 8.5 |
| Charged to Other Accounts (2) | (0.5 | ) | — |
| (0.6 | ) | Deductions (3) | (1.4 | ) | 3.3 |
| 13.5 |
| | Balance at End of Period | $ | 13.7 |
| $ | 10.1 |
| $ | 11.0 |
| | | | | | | Allowance for surplus and obsolete inventory: | 2014 | 2013 | 2012 | | Balance at Beginning of Period | $ | 18.4 |
| $ | 19.0 |
| $ | 28.7 |
| | Additions: | | | | Charged to Costs and Expenses (4) | 28.0 |
| 10.5 |
| 9.3 |
| Charged to Other Accounts (2) | (5.7 | ) | 0.2 |
| 1.2 |
| Deductions (5) | 27.9 |
| 11.3 |
| 20.2 |
| | Balance at End of Period | $ | 12.8 |
| $ | 18.4 |
| $ | 19.0 |
| | | | | | | Valuation allowance on deferred tax assets: | 2014 | 2013 | 2012 | | Balance at Beginning of Period | $ | 177.0 |
| $ | 164.0 |
| $ | 162.4 |
| | Additions | | | | Charged to Costs and Expenses (6) | 14.4 |
| 32.1 |
| 13.8 |
| Charged to Other Accounts (7) | (10.0 | ) | (4.5 | ) | 8.8 |
| Deductions (8) | 36.0 |
| 14.6 |
| 21.0 |
| | Balance at End of Period | $ | 145.4 |
| $ | 177.0 |
| $ | 164.0 |
|
| | | | | | | | | | | | Allowance for uncollectible accounts: | 2017 | 2016 | 2015 | | Balance at beginning of period | $ | 20.2 |
| $ | 16.9 |
| $ | 13.7 |
| | Additions: | | | | Charged to costs and expenses (1) | 3.8 |
| 4.8 |
| 6.8 |
| Charged to other accounts (2) | 0.4 |
| 0.2 |
| 0.6 |
| Deductions (3) | 4.1 |
| 1.7 |
| 4.2 |
| | Balance at end of period | $ | 20.3 |
| $ | 20.2 |
| $ | 16.9 |
| | | | | | | Allowance for surplus and obsolete inventory: | 2017 | 2016 | 2015 | | Balance at beginning of period | $ | 21.1 |
| $ | 18.4 |
| $ | 12.8 |
| | Additions: | | | | Charged to costs and expenses (4) | 10.3 |
| 13.4 |
| 9.6 |
| Charged to other accounts (2) | 5.9 |
| 0.4 |
| 2.7 |
| Deductions (5) | 7.4 |
| 11.1 |
| 6.7 |
| | Balance at end of period | $ | 29.9 |
| $ | 21.1 |
| $ | 18.4 |
| | | | | | | Valuation allowance on deferred tax assets: | 2017 | 2016 | 2015 | | Balance at beginning of period | $ | 85.5 |
| $ | 83.7 |
| $ | 145.4 |
| | Additions | | | | Charged to costs and expenses (6) | 6.5 |
| 3.8 |
| 4.1 |
| Charged to other accounts (7) | — |
| — |
| (14.1 | ) | Deductions (8) | 12.6 |
| 2.0 |
| 51.7 |
| | Balance at end of period | $ | 79.4 |
| $ | 85.5 |
| $ | 83.7 |
|
| | | (1) | Provision for uncollectible accounts included in expenses. |
| | | (2) | Currency translation and change in reserves due to acquisitions, net of divestitures. |
| | | (3) | Actual accounts written off against the allowance—allowance, net of recoveries. |
| | | (4) | ProvisionsProvision for surplus and obsolete inventory included in expenses. Higher Obsolete and Surplus Inventory expenses in 2014 were a result of an inventory adjustment of $18.7 million in the third quarter that was recorded as a result of the announcement to exit the engine overhaul business, as well as other product lines, and lower than expected future sales. The Company sold or disposed of this excess inventory during the fourth quarter of 2014 |
| | | (5) | Inventory items written off against the allowance. |
| | | (6) | Increase in valuation allowance is recorded as a component of the provision for income taxes. |
| | | (7) | Includes valuation allowances recorded against other comprehensive income/loss or goodwill. |
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