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 that the Company 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 acquired the assets of Philadelphia Gear in
July 2011
. Philadelphia Gear recognizes a portion of its revenues on the percentage-of-completion method measured on the cost-to-cost basis. In
2013
and
2012
, the Company recognized approximately
$45 million
and
$60 million
, respectively, in net sales under the percentage-of-completion method.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
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 was 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. The majority of domestic inventories are valued by the LIFO method and the balance of the Company’s inventories is 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, 2013
and
2012
with a fair value and cost basis of
$13.9 million
and
$17.3 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
ten years
for computer software and
three
to
20 years
for machinery and equipment.
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
. 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 first, after the annual forecasting process is completed. 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.
Effective
October 1, 2011
, the Company adopted the provisions of Accounting Standards Update (ASU) 2011-08, “Intangibles–Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” which allows companies to assess qualitative factors to determine if goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test. Effective
October 1, 2012
, the Company adopted the provisions of ASU 2012-02, “Intangibles–Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment,” which allows companies to assess qualitative factors to determine if indefinite-lived intangibles might be impaired and whether it is necessary to perform the two-step impairment test.
Product Warranties:
The Company provides limited warranties on certain of its products. The Company accrues liabilities for warranties based upon specific claims and a review of 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. Should the Company become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. 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 Accounting Standards Codification (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 such 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 Translation:
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 translation adjustments are reflected as a separate component of accumulated other comprehensive loss. 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. The Company realized foreign currency exchange losses of
$9.2 million
,
$6.9 million
and
$1.4 million
in
2013
,
2012
and
2011
, respectively.
Pension and Other Postretirement Benefits:
The Company recognizes 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 postretirement benefit plans on the Consolidated Balance Sheets, with a corresponding adjustment to accumulated other comprehensive loss, net of tax. The adjustment to accumulated other comprehensive loss represents the current year net unrecognized actuarial gains and losses and unrecognized prior service costs. These amounts will be recognized in future periods as net periodic benefit cost.
Note 1 – Significant Accounting Policies (continued)
Stock-Based Compensation:
The Company recognizes stock-based compensation expense based on the grant date fair value of the stock-based awards over their required vesting period. 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.
Earnings Per Share:
Unvested restricted shares 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 be 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 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.
Recent Accounting Pronouncements:
In February 2013, the Financial Accounting Standards Board (FASB) issued ASU No. 2013-02, Comprehensive Income (Topic 220): "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," effective for annual and interim reporting periods beginning after December 15, 2012. The new accounting rules require all U.S. public companies to report the effect of items reclassified out of accumulated other comprehensive income on the respective line items of net income, net of tax, either on the face of the financial statements where net income is presented or in a tabular format in the notes to the financial statements. Effective January 1, 2013, the Company adopted ASU No. 2013-02. The new accounting rules expand the disclosure of other comprehensive income and had no impact on the Company's results of operations and financial condition. See Note 4 - Accumulated Other Comprehensive Income (Loss) for additional information on the new disclosure.
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. The new accounting rules are effective for annual and interim reporting periods beginning after December 15, 2013. The Company is currently evaluating the impact of adopting ASU 2013-11, if any, on the Company's results of operations and 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 reported in the financial statements and accompanying notes. These estimates and assumptions are reviewed and updated regularly to reflect recent experience.
Reclassifications:
Certain amounts reported in the
2012
Consolidated Financial Statements have been reclassified to correct an immaterial error. The Company reclassified
$15.1 million
from other current assets to restricted cash. In addition, the Company reclassified approximately
$12 million
from current deferred tax assets to non-current deferred tax assets.
Note 2 - Acquisitions and Divestitures
Acquisitions:
On
May 13, 2013
, the Company completed the acquisition of Standard Machine, which provides new gearboxes, gearbox service and repair, open gearing, large gear fabrication, machining and field technical services to end users in Canada and the western United States, for approximately
$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 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 Process Industries segment.
On
April 11, 2013
, the Company completed the acquisition of substantially all of the assets of Smith Services, an electric motor repair specialist, for approximately
$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 acquisition 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 approximately
$14.5 million
, including cash acquired of approximately
$0.3 million
, that was subject to a post-closing indebtedness adjustment. Based in Plymouth, United Kingdom, 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 approximately
$20 million
in cash. Based in Denver, Colorado, Wazee employs over
100
people. The results of operations of Wazee have been included in the Company's Consolidated Statements of Income since January 1, 2013 and are reported in the Process Industries segment. In addition to the Wazee acquisition, the Company purchased the remaining interest in its joint venture in Curitiba, Brazil.
On
October 3, 2011
, the Company completed the acquisition of Drives, a leading manufacturer of highly engineered drive-chains, roller-chains and conveyor augers for agricultural and industrial markets, for approximately
$93 million
in cash. Based in Fulton, Illinois, Drives employs approximately
430
people. The results of operations of Drives 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 and Process Industries segments.
On
July 1, 2011
, the Company completed the acquisition of substantially all of the assets of Philadelphia Gear, a leading provider of high-performance gear drives and components with a strong focus on value-added aftermarket capabilities in the industrial and military marine sectors, for approximately
$199 million
in cash. Based in King of Prussia, Pennsylvania, Philadelphia Gear employs approximately
220
people. The results of operations of Philadelphia Gear 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 Process Industries segment.
Note 2 – Acquisitions and Divestitures (continued)
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
2013
,
2012
or
2011
. The purchase price allocations, net of cash acquired, and any subsequent purchase price adjustments for acquisitions in
2013
,
2012
and
2011
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
2011
|
Assets:
|
|
|
|
Accounts receivable, net
|
$
|
10.6
|
|
$
|
4.7
|
|
$
|
25.6
|
|
Inventories, net
|
12.7
|
|
2.3
|
|
23.6
|
|
Deferred charges and prepaid expenses
|
0.3
|
|
0.1
|
|
0.9
|
|
Other current assets
|
0.1
|
|
0.2
|
|
0.1
|
|
Property, plant and equipment, net
|
19.5
|
|
3.0
|
|
32.1
|
|
Goodwill
|
18.1
|
|
7.1
|
|
83.3
|
|
Other intangible assets
|
13.0
|
|
7.7
|
|
146.9
|
|
Other non-current assets
|
—
|
|
—
|
|
0.6
|
|
Total assets acquired
|
$
|
74.3
|
|
$
|
25.1
|
|
$
|
313.1
|
|
Liabilities:
|
|
|
|
Accounts payable, trade
|
$
|
3.3
|
|
$
|
2.3
|
|
$
|
10.7
|
|
Salaries, wages and benefits
|
1.4
|
|
0.3
|
|
5.1
|
|
Other current liabilities
|
0.9
|
|
1.8
|
|
5.2
|
|
Other non-current liabilities
|
4.5
|
|
—
|
|
—
|
|
Total liabilities assumed
|
$
|
10.1
|
|
$
|
4.4
|
|
$
|
21.0
|
|
Net assets acquired
|
$
|
64.2
|
|
$
|
20.7
|
|
$
|
292.1
|
|
The following table summarizes the purchase price allocation for identifiable intangible assets acquired in
2013
:
|
|
|
|
|
|
|
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
|
|
|
The following table summarizes the final purchase price allocation for identifiable intangible assets acquired in 2012:
|
|
|
|
|
|
|
|
|
|
|
Initial Purchase
Price Allocation
|
Adjusted Purchase
Price Allocation
|
|
|
Weighted-
Average Life
|
|
Weighted-
Average Life
|
Trade name
|
1.2
|
|
8 years
|
0.8
|
|
6 years
|
Know how
|
3.5
|
|
20 years
|
3.4
|
|
20 years
|
All customer relationships
|
2.5
|
|
10 years
|
3.5
|
|
9 years
|
Non-compete agreements
|
0.5
|
|
5 years
|
—
|
|
|
Total intangible assets
|
$
|
7.7
|
|
|
$
|
7.7
|
|
|
Divestitures:
On December 31, 2012, the Company completed the sale of its interest in AGC to Machinery Tec Masters Corporation. The Company received
$2.2 million
in cash proceeds for AGC. The Company recognized a pretax loss on divestiture of
$2.0 million
, and the loss is reflected in other (expense) income, net in the Consolidated Statement of Income.
Note 3 - 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:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
2011
|
Numerator:
|
|
|
|
Net Income Attributable to The Timken Company
|
$
|
262.7
|
|
$
|
495.5
|
|
$
|
454.3
|
|
Less: undistributed earnings allocated to nonvested stock
|
(0.3
|
)
|
(1.5
|
)
|
(1.6
|
)
|
Net income available to common shareholders for basic earnings
per share and diluted earnings per share
|
$
|
262.4
|
|
$
|
494.0
|
|
$
|
452.7
|
|
Denominator:
|
|
|
|
Weighted-average number of shares outstanding – basic
|
94,989,561
|
|
96,671,613
|
|
97,451,064
|
|
Effect of dilutive securities:
|
|
|
|
Stock options and awards - based on the treasury
stock method
|
834,167
|
|
930,868
|
|
1,204,449
|
|
Weighted-average number of shares outstanding, assuming
dilution of stock options and awards
|
95,823,728
|
|
97,602,481
|
|
98,655,513
|
|
Basic earnings per share
|
$
|
2.76
|
|
$
|
5.11
|
|
$
|
4.65
|
|
Diluted earnings per share
|
$
|
2.74
|
|
$
|
5.07
|
|
$
|
4.59
|
|
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
382,525
,
879,413
and
436,850
during
2013
,
2012
and
2011
, respectively.
Note 4 - Accumulated Other Comprehensive Income (Loss)
The following tables present details about components of accumulated other comprehensive income (loss) for the years ended December 31, 2013 and December 31, 2012 respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments
|
Pension and postretirement
liability adjustments
|
Change in fair value of
marketable securities
|
Change in fair value of
derivative financial instruments
|
Total
|
Balance, December 31, 2011
|
$
|
38.5
|
|
$
|
(928.3
|
)
|
$
|
0.6
|
|
$
|
(0.3
|
)
|
$
|
(889.5
|
)
|
Other comprehensive income (loss) before
reclassifications, before income tax
|
10.5
|
|
(288.9
|
)
|
—
|
|
0.4
|
|
(278.0
|
)
|
Amounts reclassified from accumulated
other comprehensive income (loss), before
income tax
|
—
|
|
100.4
|
|
(1.2
|
)
|
(0.8
|
)
|
98.4
|
|
Income tax expense
|
—
|
|
55.3
|
|
0.4
|
|
—
|
|
55.7
|
|
Net current period other comprehensive
(loss) income, net of income taxes
|
10.5
|
|
(133.2
|
)
|
(0.8
|
)
|
(0.4
|
)
|
(123.9
|
)
|
Non-controlling interest
|
—
|
|
—
|
|
0.2
|
|
—
|
|
0.2
|
|
Net current period comprehensive (loss)
income, net of income taxes and
non-controlling interest
|
10.5
|
|
(133.2
|
)
|
(0.6
|
)
|
(0.4
|
)
|
(123.7
|
)
|
Balance at December 31, 2012
|
$
|
49.0
|
|
$
|
(1,061.5
|
)
|
$
|
—
|
|
$
|
(0.7
|
)
|
$
|
(1,013.2
|
)
|
Other comprehensive (loss) income before reclassifications and income taxes includes the effect of foreign currency. The reclassification of the pension and postretirement liability adjustment was included in costs of products sold and selling, general and administrative expenses on the Consolidated Statements of Income. The reclassification of the remaining components of accumulated other comprehensive (loss) income were included in other income (expense), net on the Consolidated Statements of Income.
Note 5 - Inventories
The components of inventories at
December 31, 2013
and
2012
were as follows:
|
|
|
|
|
|
|
|
|
2013
|
2012
|
Manufacturing supplies
|
$
|
59.7
|
|
$
|
64.3
|
|
Raw materials
|
94.5
|
|
110.7
|
|
Work in process
|
294.5
|
|
278.1
|
|
Finished products
|
381.5
|
|
430.4
|
|
Subtotal
|
$
|
830.2
|
|
$
|
883.5
|
|
Allowance for surplus and obsolete inventory
|
(20.3
|
)
|
(21.4
|
)
|
Total Inventories, net
|
$
|
809.9
|
|
$
|
862.1
|
|
Inventories valued on the LIFO cost method were
54%
and the remaining
46%
were valued by the FIFO method. If all inventories had been valued at FIFO, inventories would have been
$278.3 million
and
$280.6 million
greater at
December 31, 2013
and
2012
, respectively. The Company recognized a decrease in its LIFO reserve of
$2.3 million
during
2013
compared to a decrease in its LIFO reserve of
$7.1 million
during
2012
. The decrease in the LIFO reserve recognized during
2013
was due to lower costs and quantities of inventory on hand, as well as the mix of inventory.
Note 6 - Property, Plant and Equipment
The components of property, plant and equipment, net at
December 31, 2013
and
2012
were as follows:
|
|
|
|
|
|
|
|
|
2013
|
2012
|
Land and buildings
|
$
|
685.0
|
|
$
|
653.8
|
|
Machinery and equipment
|
3,393.1
|
|
3,138.3
|
|
Subtotal
|
$
|
4,078.1
|
|
$
|
3,792.1
|
|
Less allowances for depreciation
|
(2,520.0
|
)
|
(2,386.8
|
)
|
Property, Plant and Equipment, net
|
$
|
1,558.1
|
|
$
|
1,405.3
|
|
Total depreciation expense was
$175.9 million
,
$179.0 million
and
$178.5 million
in
2013
,
2012
and
2011
, respectively. At
December 31, 2013
and
2012
, property, plant and equipment, net included
$81.1 million
and
$84.9 million
, respectively, of capitalized software. Depreciation expense for capitalized software was
$25.1 million
,
$23.5 million
and
$21.7 million
in
2013
,
2012
and
2011
, respectively.
In November 2013, the Company finalized the sale of its former manufacturing facility in Sao Paulo. The Company expects to receive approximately
$34 million
over a twenty-four month period, of which
$5.9 million
was received as of December 31, 2013. 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 is recognizing the gain on the sale of this facility using the installment method. In the fourth quarter of 2013, the Company recognized a gain of
$5.4 million
and expects to recognize an additional gain of approximately
$25 million
in 2014 related to this transaction.
Note 7 - Goodwill and Other Intangible Assets
Goodwill:
The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually. The Company performs its annual impairment test as of October first after the annual forecasting process is completed. 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. Prior to 2012, the Company’s reporting units were the same as its reportable segments: Mobile Industries, Process Industries, Aerospace and Steel. During 2012, management began reviewing goodwill for impairment at a level below the segment level for the Process Industries and Aerospace segments. This change was necessitated by a change in management structure, as well as the level of review of financial information by management within the Aerospace segment, and the acquisition of the assets of Philadelphia Gear. Philadelphia Gear is part of the Process Industries segment and provides aftermarket gear box repair services and gear-drive systems for the industrial, energy and military marine market sectors. In 2013, the acquisitions of Wazee, Smith Services and Standard Machine were grouped with Philadelphia Gear to comprise the Process Services reporting unit. The Company still reviews goodwill for impairment at the segment level for the Mobile Industries and Steel segments.
During 2011, the Company adopted the provisions of ASU No. 2011-8, “Intangibles–Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” which allows companies to assess qualitative factors to determine if goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test. Based on a review of various qualitative factors, management concluded that the goodwill for the Mobile Industries and Process Industries Segment, excluding the Process Services reporting unit, was not impaired and that the two-step approach was not required to be performed for these reporting units. Based on a review of various qualitative factors, management concluded that the goodwill for the Steel segment, the Process Services reporting unit and the three reporting units within the Aerospace segment, would be tested under the two-step approach. The Company prepares its 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.
In
2013
,
2012
and
2011
,
no
goodwill impairment loss was recorded.
Changes in the carrying value of goodwill were as follows:
Year ended
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process
Industries
|
Aerospace
|
Steel
|
Total
|
Beginning Balance
|
$
|
17.7
|
|
$
|
146.4
|
|
$
|
162.2
|
|
$
|
12.6
|
|
$
|
338.9
|
|
Acquisitions
|
4.3
|
|
13.8
|
|
—
|
|
—
|
|
18.1
|
|
Other
|
0.3
|
|
1.2
|
|
0.2
|
|
—
|
|
1.7
|
|
Ending Balance
|
$
|
22.3
|
|
$
|
161.4
|
|
$
|
162.4
|
|
$
|
12.6
|
|
$
|
358.7
|
|
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
.
Note 2 - Acquisitions and Divestitures
for additional information on the acquisitions listed above.
Note 7 – Goodwill and Other Intangible Assets (continued)
Year ended
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process
Industries
|
Aerospace
|
Steel
|
Total
|
Beginning Balance
|
$
|
16.9
|
|
$
|
141.1
|
|
$
|
162.1
|
|
$
|
12.6
|
|
$
|
332.7
|
|
Acquisitions
|
0.8
|
|
6.3
|
|
—
|
|
—
|
|
7.1
|
|
Other
|
—
|
|
(1.0
|
)
|
0.1
|
|
—
|
|
(0.9
|
)
|
Ending Balance
|
$
|
17.7
|
|
$
|
146.4
|
|
$
|
162.2
|
|
$
|
12.6
|
|
$
|
338.9
|
|
Acquisitions in 2012 primarily relate to the purchase price allocation of
$6.1 million
for the Wazee acquisition completed on
December 31, 2012
. All of the goodwill acquired in
2012
is tax-deductible and will be amortized over
15 years
for tax purposes. “Other” primarily includes foreign currency translation adjustments for
2012
.
Intangibles Assets:
The following table displays intangible assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Intangible assets subject
to amortization:
|
|
|
|
|
|
|
Customer relationships
|
$
|
167.3
|
|
$
|
51.3
|
|
$
|
116.0
|
|
$
|
159.6
|
|
$
|
38.1
|
|
$
|
121.5
|
|
Know-how
|
31.4
|
|
4.4
|
|
27.0
|
|
26.1
|
|
2.8
|
|
23.3
|
|
Industrial license agreements
|
0.1
|
|
0.1
|
|
—
|
|
0.2
|
|
0.1
|
|
0.1
|
|
Land-use rights
|
8.9
|
|
4.5
|
|
4.4
|
|
8.6
|
|
4.1
|
|
4.5
|
|
Patents
|
2.3
|
|
1.8
|
|
0.5
|
|
2.5
|
|
1.8
|
|
0.7
|
|
Technology use
|
46.2
|
|
13.5
|
|
32.7
|
|
47.0
|
|
11.5
|
|
35.5
|
|
Trademarks
|
4.6
|
|
2.7
|
|
1.9
|
|
4.2
|
|
3.4
|
|
0.8
|
|
PMA licenses
|
8.8
|
|
4.0
|
|
4.8
|
|
8.8
|
|
3.6
|
|
5.2
|
|
Non-compete agreements
|
4.2
|
|
3.8
|
|
0.4
|
|
4.4
|
|
3.3
|
|
1.1
|
|
Unpatented technology
|
7.2
|
|
7.2
|
|
—
|
|
7.2
|
|
6.7
|
|
0.5
|
|
|
$
|
281.0
|
|
$
|
93.3
|
|
$
|
187.7
|
|
$
|
268.6
|
|
$
|
75.4
|
|
$
|
193.2
|
|
Intangible assets not
subject to amortization:
|
|
|
|
|
|
|
Tradename
|
$
|
17.2
|
|
$
|
—
|
|
$
|
17.2
|
|
$
|
17.3
|
|
$
|
—
|
|
$
|
17.3
|
|
FAA air agency
certificates
|
14.2
|
|
—
|
|
14.2
|
|
14.2
|
|
—
|
|
14.2
|
|
|
$
|
31.4
|
|
$
|
—
|
|
$
|
31.4
|
|
$
|
31.5
|
|
$
|
—
|
|
$
|
31.5
|
|
Total intangible assets
|
$
|
312.4
|
|
$
|
93.3
|
|
$
|
219.1
|
|
$
|
300.1
|
|
$
|
75.4
|
|
$
|
224.7
|
|
Intangible assets acquired in 2013 were
$5.9 million
for the Standard Machine acquisition,
$0.7 million
for the Smith Services acquisition and
$6.8 million
for the Interlube acquisition. Intangible assets subject to amortization acquired in 2013 were assigned useful lives of
two
to
20 years
and had a weighted-average amortization period of
18.4 years
. Intangible assets acquired in
2012
were
$7.7 million
for the Wazee acquisition. Intangible assets subject to amortization acquired in
2012
were assigned useful lives of
five
to
20 years
and had a weighted-average amortization period of
13.6
years.
Amortization expense for intangible assets was
$18.7 million
,
$19.0 million
and
$14.0 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively. Amortization expense for intangible assets is estimated to be approximately:
$18.5 million
in 2014;
$18.4 million
in 2015;
$18.0 million
in 2016;
$17.6 million
in 2017; and
$17.5 million
in 2018.
Note 8 - Financing Arrangements
Short-term debt for the years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
2013
|
2012
|
Variable-rate lines of credit for certain of the Company’s foreign subsidiaries with
various banks with interest rates ranging from 0.87% to 4.86% and 0.61% to
2.28% at December 31, 2013 and 2012, respectively
|
$
|
18.6
|
|
$
|
14.3
|
|
Short-term debt
|
$
|
18.6
|
|
$
|
14.3
|
|
The lines of credit for certain of the Company’s foreign subsidiaries provide for borrowings up to
$217.0 million
. Most of these lines of credit are uncommitted. At
December 31, 2013
, the Company’s foreign subsidiaries had borrowings outstanding of
$18.6 million
and guarantees of
$1.2 million
, which reduced the availability under these facilities to
$197.2 million
.
The weighted-average interest rate on short-term debt during the year was
3.2%
,
3.2%
and
4.1%
in
2013
,
2012
and
2011
, respectively. The weighted-average interest rate on short-term debt outstanding at
December 31, 2013
and
2012
was
4.6%
and
1.5%
, respectively.
On November 30, 2012, the Company entered into a
$200 million
Asset Securitization Agreement, which matures on
November 30, 2015
. Under the terms of the Asset Securitization Agreement, the Company sells, on an ongoing basis, certain domestic trade receivables to Timken Receivables Corporation, a wholly-owned consolidated subsidiary that in turn uses the trade receivables to secure borrowings which are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the Asset Securitization Agreement 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, 2013
and
2012
, there were
no
outstanding borrowings under the Asset Securitization Agreement. However, certain borrowing base limitations reduced the availability of the Asset Securitization Agreement to
$149.3 million
at
December 31, 2013
. The cost of this facility, which is the commercial paper rate plus program fees, is considered a financing cost and is included in interest expense in the Consolidated Statements of Income. The yield rate was
0.96%
,
1.06%
and
1.25%
, at
December 31, 2013
,
2012
and
2011
, respectively.
Long-term debt for the years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
2013
|
2012
|
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 15, 2014, with an
interest rate of 6.0%
|
249.9
|
|
249.9
|
|
Variable-rate State of Ohio Water Development Revenue Refunding Bonds,
maturing on November 1, 2025 (0.06% at December 31, 2013)
|
12.2
|
|
12.2
|
|
Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds,
maturing on November 1, 2025 (0.15% at December 31, 2013)
|
9.5
|
|
9.5
|
|
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing
on June 1, 2033 (0.15% at December 31, 2013)
|
8.5
|
|
8.5
|
|
Other
|
2.2
|
|
9.6
|
|
Total debt
|
$
|
457.3
|
|
$
|
464.7
|
|
Less current maturities
|
250.7
|
|
9.6
|
|
Long-term debt
|
$
|
206.6
|
|
$
|
455.1
|
|
The Company has a
$500 million
Senior Credit Facility, which matures on
May 11, 2016
. At
December 31, 2013
, the Company had
no
outstanding borrowings under the Senior Credit Facility, but had letters of credit outstanding totaling
$8.6 million
, which reduced the availability under 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, 2013
, the Company was in full compliance with the covenants under the Senior Credit Facility.
Note 8 – Financing Arrangements (continued)
In
2011
, the Company was notified that its variable-rate State of Ohio Pollution Control Revenue Refunding Bonds (the Bonds), maturing on
June 1, 2033
, had lost their tax-exempt status and would now be taxable to its bondholders. As part of the settlement with the IRS, the Company redeemed half of the balance during the third quarter of 2012 and agreed to redeem the remaining balance of
$8.5 million
on
December 31, 2022
. In addition, the IRS agreed to allow the Bonds to remain tax-exempt during the period they are outstanding.
The maturities of long-term debt for the five years subsequent to
December 31, 2013
are as follows:
2014
–
$250.7 million
;
2015
–
$0.7 million
;
2016
–
$15.7 million
;
2017
–
$5.0 million
; and
2018
–
zero
.
Interest paid was
$31.0 million
in
2013
,
$32.4 million
in
2012
and
$34.8 million
in
2011
. This differs from interest expense due to the timing of payments and interest capitalized of
$12.7 million
in
2013
,
$4.9 million
in
2012
and
$1.2 million
in
2011
.
The Company and its subsidiaries lease a variety of real property and equipment. Rent expense under operating leases amounted to
$44.4 million
,
$43.6 million
and
$44.5 million
in
2013
,
2012
and
2011
, respectively. At
December 31, 2013
, future minimum lease payments for noncancelable operating leases totaled
$125.7 million
and are payable as follows:
2014
–
$37.9 million
;
2015
–
$30.7 million
;
2016
–
$21.8 million
;
2017
–
$13.8 million
;
2018
-
$8.9 million
and
$12.6 million
thereafter.
Note 9 - Contingencies
The Company and certain of its subsidiaries have been identified as potentially responsible parties for investigation and remediation under the Comprehensive Environmental Response, Compensation and Liability Act (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.
The Company had an accrual of
$2.6 million
and
$7.5 million
for environmental matters that are probable and reasonably estimable as of
December 31, 2013
and
2012
, respectively. This accrual is 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
2013
accrual,
$1.2 million
is included in the rollforward of the restructuring accrual as of
December 31, 2013
, discussed further in Note 10 – 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.
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 reserves for
2013
and
2012
:
|
|
|
|
|
|
|
|
|
2013
|
2012
|
Beginning balance, January 1
|
$
|
4.3
|
|
$
|
11.7
|
|
Expense (Income)
|
4.8
|
|
(0.9
|
)
|
Payments
|
(4.8
|
)
|
(6.5
|
)
|
Ending balance, December 31
|
$
|
4.3
|
|
$
|
4.3
|
|
The product warranty accrual for
2013
and
2012
was included in other current liabilities on the Consolidated Balance Sheets.
Note 10 - Impairment and Restructuring Charges
Impairment and restructuring charges by segment were as follows:
Year ended
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Aerospace
|
Steel
|
Total
|
Impairment charges
|
$
|
—
|
|
$
|
0.1
|
|
$
|
—
|
|
$
|
0.6
|
|
$
|
0.7
|
|
Severance expense and related benefit costs
|
12.5
|
|
2.6
|
|
1.2
|
|
—
|
|
16.3
|
|
Exit costs
|
(1.5
|
)
|
0.9
|
|
—
|
|
—
|
|
(0.6
|
)
|
Total
|
$
|
11.0
|
|
$
|
3.6
|
|
$
|
1.2
|
|
$
|
0.6
|
|
$
|
16.4
|
|
Year ended
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Aerospace
|
Steel
|
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
|
|
Year ended
December 31, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Aerospace
|
Steel
|
Total
|
Impairment charges
|
$
|
0.2
|
|
$
|
0.3
|
|
$
|
—
|
|
$
|
—
|
|
$
|
0.5
|
|
Severance expense and related benefit costs
|
0.2
|
|
(0.1
|
)
|
—
|
|
|
|
0.1
|
|
Exit costs
|
13.0
|
|
0.3
|
|
0.5
|
|
—
|
|
13.8
|
|
Total
|
$
|
13.4
|
|
$
|
0.5
|
|
$
|
0.5
|
|
$
|
—
|
|
$
|
14.4
|
|
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:
In May 2012, the Company announced the closure of its manufacturing facility in St. Thomas, which was expected to be completed in approximately
one year
, 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, 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 pretax costs of approximately
$55 million
to
$65 million
in connection with this closure, of which approximately
$20 million
to
$25 million
is expected to be pretax cash costs.
The Company has incurred pretax costs related to this closure of approximately
$41.6 million
as of
December 31, 2013
, including rationalization costs recorded in cost of products sold. During
2013
, the Company recorded
$8.2 million
of severance and related benefits, including pension settlement charges of
$7.1 million
, related to this closure. During 2012, the Company recorded
$16.9 million
of severance and related benefits, including a curtailment of pension benefits of
$10.7 million
, and impairment charges of
$6.5 million
, related to this closure.
In
March 2007
, the Company announced the closure of its manufacturing facility in Sao Paulo. The Company completed the closure of this manufacturing facility on
March 31, 2010
. Mobile Industries has incurred cumulative pretax expenses of approximately
$54.9 million
as of
December 31, 2013
related to this closure. In
2013
,
2012
and
2011
, the Company recorded a favorable adjustment of
$2.0 million
, and exit costs of
$6.8 million
and
$12.5 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. Exit costs in 2011 also included workers' compensation claims for former employees. The Company accrues environmental remediation costs and workers’ compensation claims when they are probable and reasonably estimable.
Note 10 – Impairment and Restructuring Charges (continued)
In addition to the above charges, the Company 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 organization to improve efficiency and reduce costs. During
2013
, the Company recognized
$5.9 million
of severance and related benefit costs to eliminate approximately
180
positions. Of the
$5.9 million
charge for
2013
,
$1.2 million
related to the Aerospace segment,
$2.5 million
related to the Process Industries segment and
$2.2 million
related to the Mobile Industries segment
Consolidated Restructuring Accrual:
The following is a rollforward of the consolidated restructuring accrual for the years ended December 31:
|
|
|
|
|
|
|
|
|
2013
|
2012
|
Beginning balance, January 1
|
$
|
17.6
|
|
$
|
21.8
|
|
Expense
|
8.7
|
|
12.2
|
|
Payments
|
(15.5
|
)
|
(16.4
|
)
|
Ending balance, December 31
|
$
|
10.8
|
|
$
|
17.6
|
|
The restructuring accrual at
December 31, 2013
and
2012
was included in other current liabilities on the Consolidated Balance Sheets. The restructuring accrual at
December 31, 2012
excluded costs related to the curtailment of pension benefit plans of
$10.7 million
. At
December 31, 2013
, the restructuring accrual included
$1.2 million
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 11 - Separation Costs
Separation costs for the year ended December 31 were as follows:
|
|
|
|
|
|
2013
|
Severance expense and related benefit costs
|
$
|
5.6
|
|
Professional fees
|
7.3
|
|
Exit costs
|
0.1
|
|
Total
|
$
|
13.0
|
|
On September 5, 2013, the Company announced that its Board of Directors had approved a plan to pursue a separation of its steel business from the rest of the Company through a spinoff, creating a new independent, publicly traded steel company, TimkenSteel Corporation. The transaction is expected to be tax-free to shareholders and should be completed in mid-year 2014, subject to customary regulatory approvals, the receipt of a legal opinion regarding the tax-free nature of the transaction, the execution of intercompany agreements between the Company and the new steel company, final approval of the Company's Board of Directors and other customary matters. One-time transaction costs in connection with the separation of the two companies are expected to be approximately
$105 million
. The majority of these costs include consulting and professional fees associated with preparing for the spinoff. In addition, these costs include a cost reduction initiative to eliminate corporate positions to mitigate the incremental enterprise costs with operating two separate companies. The expected cost of this cost reduction initiative is expected to be approximately
$15 million
.
In the fourth quarter of 2013, the Company recorded
$5.6 million
of severance and related benefit costs related to the cost reduction initiative. The Company also recorded
$7.3 million
of professional fees related to the planned spinoff of the steel business.
Note 11 - Separation Costs (continued)
The following is a rollforward of the consolidated separation accrual for the year ended December 31:
|
|
|
|
|
|
2013
|
Beginning balance, January 1
|
$
|
—
|
|
Expense
|
13.0
|
|
Payments
|
(7.3
|
)
|
Ending balance, December 31
|
$
|
5.7
|
|
The separation accrual at
December 31, 2013
was included in other current liabilities on the Consolidated Balance Sheets. At December 31, 2013, accrued separation costs included
$3.8 million
related to severance and related benefit costs and
$1.9 million
related to professional fees. The professional fees are recorded when incurred.
Note 12 - Stock Compensation Plans
Under the Company’s long-term incentive plan, the Company’s common shares have been made available to 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
-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. Restricted 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.
During
2013
,
2012
and
2011
, the Company recognized stock-based compensation expense of
$12.1 million
(
$7.6 million
after tax or
$0.08
per diluted share),
$10.8 million
(
$6.8 million
after tax or
$0.07
per diluted share) and
$9.4 million
(
$5.9 million
after tax or
$0.06
per diluted share), respectively, for stock option awards.
The fair value of stock option awards granted during
2013
,
2012
and
2011
was estimated at the date of grant using a Black-Scholes option-pricing method with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
2011
|
Weighted-average fair value per option
|
$
|
21.17
|
|
$
|
20.16
|
|
$
|
19.93
|
|
Risk-free interest rate
|
1.09
|
%
|
1.15
|
%
|
2.76
|
%
|
Dividend yield
|
2.29
|
%
|
1.94
|
%
|
2.00
|
%
|
Expected stock volatility
|
50.66
|
%
|
50.00
|
%
|
48.10
|
%
|
Expected life - years
|
6
|
|
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 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%
.
A summary of option activity for the year ended
December 31, 2013
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
Weighted-average
Exercise Price
|
Weighted-average
Remaining
Contractual Term
|
Aggregate Intrinsic Value
(millions)
|
Outstanding - beginning of year
|
3,717,340
|
|
$
|
33.59
|
|
|
|
Granted
|
614,480
|
|
56.27
|
|
|
|
Exercised
|
(928,803
|
)
|
23.09
|
|
|
|
Canceled or expired
|
(18,330
|
)
|
49.86
|
|
|
|
Outstanding - end of year
|
3,384,687
|
|
$
|
40.50
|
|
7 years
|
$
|
49.5
|
|
Options expected to vest
|
2,740,589
|
|
$
|
36.93
|
|
6 years
|
$
|
49.0
|
|
Options exercisable
|
1,711,482
|
|
$
|
32.94
|
|
5 years
|
$
|
37.9
|
|
The total intrinsic value of options exercised during the years ended
December 31, 2013
,
2012
and
2011
was
$25.2 million
,
$28.2 million
and
$26.0 million
, respectively. Net cash proceeds from the exercise of stock options were
$13.1 million
,
$13.8 million
and
$16.6 million
, respectively. Income tax benefits were
$8.9 million
,
$8.1 million
and
$7.2 million
for the years ended
December 31, 2013
,
2012
and 2011, respectively.
In
2013
, the Company issued
260,740
strategic performance shares and
121,080
strategic shares to officers and key employees. Strategic performance shares are performance-based restricted stock units that vest based on achievement of specified performance objectives and cliff-vest after
three
years. Strategic performance shares settle in either cash or shares, with
243,580
shares expected to settle in cash and
17,160
expected to settle in shares. Strategic shares are timed-based restricted stock units and generally vest in
25%
increments annually beginning on the first anniversary of the date of grant. Strategic shares also settle in either cash or shares, with
65,400
strategic shares expected to settle in cash and
55,680
strategic shares expected to settle in common shares. For shares that are expected to settle in cash, the Company accrued
$6.2 million
in
2013
, which was included in other non-current liabilities on the Consolidated Balance Sheets.
A summary of restricted share activity, including restricted shares, deferred shares, strategic performance shares that will settle in common shares and strategic shares that will settle in common shares, for the year ended
December 31, 2013
is as follows:
|
|
|
|
|
|
|
|
Number of Shares
|
Weighted-average
Grant Date Fair Value
|
Outstanding - beginning of year
|
524,064
|
|
$
|
36.23
|
|
Granted
|
111,640
|
|
55.95
|
|
Vested
|
(221,542
|
)
|
32.16
|
|
Canceled or expired
|
(17,110
|
)
|
47.24
|
|
Outstanding - end of year
|
397,052
|
|
$
|
43.57
|
|
As of
December 31, 2013
, a total of
397,052
restricted shares have been awarded that have not yet vested. The Company distributed
221,542
,
249,569
and
302,924
shares in
2013
,
2012
and
2011
, respectively, due to the vesting of these awards. The shares awarded in
2013
,
2012
and 2011 totaled
111,640
,
161,905
and
246,890
, respectively. The Company recognized compensation expense of
$6.5 million
,
$7.2 million
and
$7.5 million
, for the years ended
December 31, 2013
,
2012
and
2011
, respectively, relating to restricted shares.
As of
December 31, 2013
, the Company had unrecognized compensation expense of
$28.1 million
related to stock option awards and restricted shares. The unrecognized compensation expense is expected to be recognized over a total weighted-average period of
two years
. The number of shares available for future grants for all plans at December 31, 2013 was
7,562,958
.
The Company offers to certain employees a performance unit component under its long-term incentive plan in which awards are earned based on Company performance measured by two metrics over a
three
-year performance period. The Compensation Committee of the Board of Directors can elect to make payments that become due in the form of cash or the Company’s common shares. A total of
34,756
performance units were granted in
2011
. Performance units granted, if fully earned, would represent
156,183
of the Company’s common shares at December 31, 2012. Since the inception of the plan,
160,668
performance units were canceled. Each performance unit has a cash value of
$100
.
Note 13 - 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 are generally noncontributory. Pension benefits earned are generally based on years of service and compensation during active employment. The cash contributions for the Company’s defined benefit pension plans were
$120.7 million
and
$325.8 million
in
2013
and
2012
, 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:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
2011
|
Components of net periodic benefit cost:
|
|
|
|
Service cost
|
$
|
38.5
|
|
$
|
34.7
|
|
$
|
32.2
|
|
Interest cost
|
134.7
|
|
151.1
|
|
158.6
|
|
Expected return on plan assets
|
(232.0
|
)
|
(221.1
|
)
|
(214.9
|
)
|
Amortization of prior service cost
|
4.5
|
|
9.3
|
|
9.4
|
|
Amortization of net actuarial loss
|
116.8
|
|
83.3
|
|
56.0
|
|
Pension curtailments and settlements
|
7.2
|
|
11.6
|
|
—
|
|
Net periodic benefit cost
|
$
|
69.7
|
|
$
|
68.9
|
|
$
|
41.3
|
|
|
|
|
|
|
|
|
|
Assumptions
|
2013
|
2012
|
2011
|
U.S. Plans:
|
|
|
|
Discount rate
|
4.00
|
%
|
5.00
|
%
|
5.75
|
%
|
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
|
8.00
|
%
|
8.25
|
%
|
8.50
|
%
|
International Plans:
|
|
|
|
Discount rate
|
2.75% to 9.0%
|
|
4.75% to 9.50%
|
|
4.75% to 9.00%
|
|
Future compensation assumption
|
2.30% to 8.00%
|
|
2.5% to 8.00%
|
|
2.50% to 8.84%
|
|
Expected long-term return on plan assets
|
3.25% to 8.50%
|
|
3.25% to 9.00%
|
|
3.50% to 9.00%
|
|
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
2013
, the Company applied a discount rate of
4.00%
to its U.S. defined benefit pension plans. For expense purposes in
2014
, the Company will apply a discount rate of
5.02%
to its U.S. defined benefit pension plans. A
0.25
percentage point decrease in the discount rate would increase pension expense by approximately
$5.3 million
for
2014
.
For expense purposes in
2013
, the Company applied an expected rate of return of
8.00%
for the Company’s U.S. pension plan assets. For expense purposes in
2014
, the Company will apply an expected rate of return on plan assets of
7.25%
. A
0.25
percentage point reduction in the expected rate of return would increase pension expense by approximately
$6.6 million
for
2014
.
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, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
2013
|
2012
|
Change in benefit obligation:
|
|
|
Benefit obligation at beginning of year
|
$
|
3,496.3
|
|
$
|
3,124.6
|
|
Service cost
|
38.5
|
|
34.7
|
|
Interest cost
|
134.7
|
|
151.1
|
|
Amendments
|
—
|
|
(0.3
|
)
|
Actuarial (gains) losses
|
(274.4
|
)
|
394.1
|
|
Employee contributions
|
0.2
|
|
0.2
|
|
International plan exchange rate change
|
5.3
|
|
18.2
|
|
Curtailment loss
|
—
|
|
9.5
|
|
Benefits paid
|
(267.1
|
)
|
(235.8
|
)
|
Benefit obligation at end of year
|
$
|
3,133.5
|
|
$
|
3,496.3
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
Fair value of plan assets at beginning of year
|
$
|
3,098.4
|
|
$
|
2,631.9
|
|
Actual return on plan assets
|
334.0
|
|
361.7
|
|
Employee contributions
|
0.2
|
|
0.2
|
|
Company contributions / payments
|
120.7
|
|
325.8
|
|
International plan exchange rate change
|
4.4
|
|
14.6
|
|
Benefits paid
|
(267.1
|
)
|
(235.8
|
)
|
Fair value of plan assets at end of year
|
3,290.6
|
|
3,098.4
|
|
Funded status at end of year
|
$
|
157.1
|
|
$
|
(397.9
|
)
|
|
|
|
|
|
|
|
|
Amounts recognized on the Consolidated Balance Sheets:
|
|
|
Non-current assets
|
$
|
342.6
|
|
$
|
0.3
|
|
Current liabilities
|
(6.5
|
)
|
(6.8
|
)
|
Non-current liabilities
|
(179.0
|
)
|
(391.4
|
)
|
|
$
|
157.1
|
|
$
|
(397.9
|
)
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
Net actuarial loss
|
$
|
989.1
|
|
$
|
1,489.4
|
|
Net prior service cost
|
19.0
|
|
23.5
|
|
Accumulated other comprehensive loss
|
$
|
1,008.1
|
|
$
|
1,512.9
|
|
|
|
|
|
|
|
|
|
Changes in plan assets and benefit obligations recognized in accumulated other comprehensive loss (AOCL):
|
2013
|
2012
|
AOCI at beginning of year
|
$
|
1,512.9
|
|
$
|
1,348.2
|
|
Net actuarial (gain) loss
|
(376.3
|
)
|
263.1
|
|
Prior service cost
|
—
|
|
(0.3
|
)
|
Recognized net actuarial loss
|
(116.8
|
)
|
(83.3
|
)
|
Recognized prior service cost
|
(4.5
|
)
|
(9.3
|
)
|
Loss recognized due to curtailment
|
(7.2
|
)
|
(11.6
|
)
|
Foreign currency impact
|
—
|
|
6.1
|
|
Total recognized in accumulated other comprehensive loss at December 31
|
$
|
1,008.1
|
|
$
|
1,512.9
|
|
Note 13 - Retirement Benefit Plans (continued)
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
|
2013
|
2012
|
U.S. Plans:
|
|
|
Discount rate
|
5.02
|
%
|
4.00
|
%
|
Future compensation assumption
|
2.00% to 3.00%
|
|
2.00% to 3.00%
|
|
International Plans:
|
|
|
Discount rate
|
3.25% to 9.75%
|
|
2.75% to 9.5%
|
|
Future compensation assumption
|
2.30% to 8.00%
|
|
2.3% to 8.0%
|
|
Defined benefit pension plans in the United States represent
84%
of the benefit obligation and
87%
of the fair value of plan assets as of
December 31, 2013
.
Certain of the Company’s defined benefit pension plans were overfunded as of
December 31, 2013
. As a result,
$342.6 million
and
$0.2 million
at
December 31, 2013
and
2012
, respectively, are included in non-current pension assets on the Consolidated Balance Sheets. The current portion of accrued pension cost, which is included in salaries, wages and benefits on the Consolidated Balance Sheets, was
$6.5 million
and
$6.7 million
at
December 31, 2013
and
2012
, respectively. In
2013
, 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, 2013
exceeded the market value of plan assets for several of the Company’s pension plans. For these plans, the projected benefit obligation was
$600.6 million
, the accumulated benefit obligation was
$585.8 million
and the fair value of plan assets was
$415.6 million
at
December 31, 2013
.
The total pension accumulated benefit obligation for all plans was
$3.0 billion
and
$3.4 billion
at
December 31, 2013
and
2012
, respectively.
Due to significant increases in global capital markets in
2013
, investment performance increased the value of the Company’s pension assets by
10.8%
.
As of
December 31, 2013
and
2012
, the Company’s defined benefit pension plans did not directly hold any of the Company’s common shares.
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
$71.0 million
and
$3.9 million
, respectively.
Plan Assets:
The Company’s target allocation for pension plan assets, as well as the actual pension plan asset allocations as of
December 31, 2013
and
2012
, was as follows:
|
|
|
|
|
|
|
|
Current Target
Allocation
|
Percentage of Pension Plan
Assets at December 31,
|
Asset Category
|
|
|
|
2013
|
2012
|
Equity securities
|
35%
|
to
|
52%
|
43%
|
47%
|
Debt securities
|
35%
|
to
|
50%
|
45%
|
40%
|
Other
|
9%
|
to
|
19%
|
12%
|
13%
|
Total
|
|
|
|
100%
|
100%
|
Note 13 - Retirement Benefit Plans (continued)
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.
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.
|
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, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
364.0
|
|
$
|
3.3
|
|
$
|
360.7
|
|
$
|
—
|
|
Government and agency securities
|
188.4
|
|
175.0
|
|
13.4
|
|
—
|
|
Corporate bonds - investment grade
|
301.1
|
|
—
|
|
301.1
|
|
—
|
|
Corporate bonds - non-investment grade
|
110.1
|
|
—
|
|
110.1
|
|
—
|
|
Equity securities - U.S. companies
|
300.6
|
|
299.2
|
|
1.4
|
|
—
|
|
Equity securities - international companies
|
311.5
|
|
311.5
|
|
—
|
|
—
|
|
Asset backed securities
|
38.2
|
|
—
|
|
38.2
|
|
—
|
|
Common collective funds - domestic equities
|
195.6
|
|
—
|
|
195.6
|
|
—
|
|
Common collective funds - international equities
|
387.5
|
|
—
|
|
387.5
|
|
—
|
|
Common collective funds - fixed income
|
625.4
|
|
—
|
|
625.4
|
|
—
|
|
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
|
155.9
|
|
155.9
|
|
—
|
|
—
|
|
Other assets
|
0.7
|
|
—
|
|
0.7
|
|
—
|
|
Total Assets
|
$
|
3,290.6
|
|
$
|
944.9
|
|
$
|
2,245.8
|
|
$
|
99.9
|
|
Note 13 - Retirement Benefit Plans (continued)
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
|
|
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, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
80.0
|
|
$
|
3.1
|
|
$
|
76.9
|
|
$
|
—
|
|
Government and agency securities
|
226.2
|
|
193.9
|
|
32.3
|
|
—
|
|
Corporate bonds - investment grade
|
263.7
|
|
—
|
|
263.7
|
|
—
|
|
Corporate bonds - non-investment grade
|
103.9
|
|
—
|
|
103.9
|
|
—
|
|
Equity securities - U.S. companies
|
347.6
|
|
347.2
|
|
0.4
|
|
—
|
|
Equity securities - international companies
|
273.6
|
|
273.6
|
|
—
|
|
—
|
|
Asset backed securities
|
55.4
|
|
—
|
|
55.4
|
|
—
|
|
Common collective funds - domestic equities
|
350.1
|
|
—
|
|
350.1
|
|
—
|
|
Common collective funds - international equities
|
365.3
|
|
—
|
|
365.3
|
|
—
|
|
Common collective funds - fixed income
|
620.1
|
|
—
|
|
620.1
|
|
—
|
|
Common collective funds - other
|
39.7
|
|
—
|
|
39.7
|
|
—
|
|
Limited partnerships
|
79.9
|
|
—
|
|
—
|
|
79.9
|
|
Real estate partnerships
|
128.6
|
|
—
|
|
112.3
|
|
16.3
|
|
Mutual funds - real estate
|
163.6
|
|
163.6
|
|
—
|
|
—
|
|
Other assets
|
0.7
|
|
—
|
|
0.7
|
|
—
|
|
Total Assets
|
$
|
3,098.4
|
|
$
|
981.4
|
|
$
|
2,020.8
|
|
$
|
96.2
|
|
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, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
Limited Partnerships
|
Real Estate
|
Total
|
Beginning balance, January 1
|
$
|
83.6
|
|
$
|
6.6
|
|
$
|
90.2
|
|
Purchases
|
7.1
|
|
11.3
|
|
18.4
|
|
Sales
|
(8.5
|
)
|
(1.5
|
)
|
(10.0
|
)
|
Realized losses
|
(3.4
|
)
|
—
|
|
(3.4
|
)
|
Unrealized gains (losses)
|
1.1
|
|
(0.1
|
)
|
1.0
|
|
Ending balance, December 31
|
$
|
79.9
|
|
$
|
16.3
|
|
$
|
96.2
|
|
Note 13 - Retirement Benefit Plans (continued)
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 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.
Cash Flows:
|
|
|
|
|
Employer Contributions to Defined Benefit Plans
|
|
2012
|
$
|
325.8
|
|
2013
|
120.7
|
|
2014 (planned)
|
20.0
|
|
Future benefit payments are expected to be as follows:
|
|
|
|
|
Benefit Payments
|
|
2014
|
$
|
233.4
|
|
2015
|
253.9
|
|
2016
|
223.7
|
|
2017
|
224.0
|
|
2018
|
231.9
|
|
2019-2023
|
1,094.4
|
|
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 contributed Timken common shares to certain of these plans based on formulas established in the respective plan agreements. At
December 31, 2013
, the plans held
5,701,671
of the Company’s common shares with a fair value of
$314.0 million
. Company contributions to the plans, including performance sharing, were
$28.5 million
in
2013
,
$24.9 million
in
2012
and
$26.4 million
in
2011
. The Company paid dividends totaling
$5.5 million
in
2013
,
$6.3 million
in
2012
and
$5.7 million
in
2011
to plans holding the Company’s common shares.
Note 14 - 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:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
2011
|
Components of net periodic benefit cost:
|
|
|
|
Service cost
|
$
|
2.9
|
|
$
|
2.5
|
|
$
|
2.5
|
|
Interest cost
|
21.7
|
|
28.4
|
|
32.9
|
|
Expected return on plan assets
|
(11.1
|
)
|
(10.6
|
)
|
(4.4
|
)
|
Amortization of prior service credit
|
(0.2
|
)
|
(0.2
|
)
|
(0.3
|
)
|
Amortization of net actuarial loss
|
2.3
|
|
2.5
|
|
2.9
|
|
Net periodic benefit cost
|
$
|
15.6
|
|
$
|
22.6
|
|
$
|
33.6
|
|
|
|
|
|
|
|
|
|
Assumptions:
|
2013
|
2012
|
2011
|
Discount rate
|
3.80
|
%
|
4.85
|
%
|
5.50
|
%
|
Rate of return
|
5.00
|
%
|
5.00
|
%
|
5.00
|
%
|
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
2013
, the Company applied a discount rate of
3.80%
to its postretirement benefit plans. For expense purposes in
2014
, the Company will apply a discount rate of
4.59%
to its postretirement benefit plans. A
0.25
percentage point reduction in the discount rate would increase postretirement benefit expense by approximately
$0.5 million
for
2014
.
In
December 2010
, the Company established a VEBA trust for The Timken Company Bargaining Unit Welfare Benefit Plan. For expense purposes in
2013
, the Company applied an expected rate of return of
5.00%
to the VEBA trust assets. For expense purposes in
2014
, the Company will apply an expected rate of return on plan assets of
5.00%
. A
0.25
percentage point reduction in the expected rate of return would increase postretirement benefit expense by approximately
$0.6 million
for
2014
.
Note 14 - 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 defined benefit postretirement benefit plans as of
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
2013
|
2012
|
Change in benefit obligation:
|
|
|
Benefit obligation at beginning of year
|
$
|
639.2
|
|
$
|
628.6
|
|
Service cost
|
2.9
|
|
2.5
|
|
Interest cost
|
21.7
|
|
28.4
|
|
Amendments
|
—
|
|
0.9
|
|
Actuarial (gains) losses
|
(101.9
|
)
|
24.5
|
|
Benefits paid
|
(46.3
|
)
|
(45.7
|
)
|
Benefit obligation at end of year
|
$
|
515.6
|
|
$
|
639.2
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
Fair value of plan assets at beginning of year
|
$
|
221.9
|
|
$
|
170.9
|
|
Actual return on plan assets
|
27.2
|
|
9.8
|
|
Company contributions / payments
|
37.3
|
|
86.9
|
|
Benefits paid
|
(46.3
|
)
|
(45.7
|
)
|
Fair value of plan assets at end of year
|
240.1
|
|
221.9
|
|
Funded status at end of year
|
$
|
(275.5
|
)
|
$
|
(417.3
|
)
|
|
|
|
|
|
|
|
|
Amounts recognized on the Consolidated Balance Sheets:
|
|
|
Current liabilities
|
$
|
(41.6
|
)
|
$
|
(45.5
|
)
|
Non-current liabilities
|
(233.9
|
)
|
(371.8
|
)
|
|
$
|
(275.5
|
)
|
$
|
(417.3
|
)
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
Net actuarial loss
|
$
|
5.5
|
|
$
|
125.7
|
|
Net prior service cost
|
7.8
|
|
7.6
|
|
Accumulated other comprehensive loss
|
$
|
13.3
|
|
$
|
133.3
|
|
|
|
|
|
|
|
|
|
Changes in plan assets and benefit obligations recognized in AOCL:
|
|
|
AOCI at beginning of year
|
$
|
133.3
|
|
$
|
109.5
|
|
Net actuarial (gain) loss
|
(117.9
|
)
|
25.2
|
|
Prior service cost
|
—
|
|
0.9
|
|
Recognized net actuarial loss
|
(2.3
|
)
|
(2.5
|
)
|
Recognized prior service credit
|
0.2
|
|
0.2
|
|
Total recognized in accumulated other comprehensive loss at December 31
|
$
|
13.3
|
|
$
|
133.3
|
|
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.
Note 14 - Postretirement Benefit Plans (continued)
The following table summarizes assumptions used to measure the benefit obligation for the postretirement benefit plans at December 31:
|
|
|
|
|
|
Assumptions:
|
2013
|
2012
|
Discount rate
|
4.59
|
%
|
3.80
|
%
|
Rate of return
|
5.00
|
%
|
5.00
|
%
|
The current portion of accrued postretirement benefit cost, which is included in salaries, wages and benefits on the Consolidated Balance Sheets, was
$41.6 million
and
$45.5 million
at
December 31, 2013
and
2012
, respectively. In
2013
, the current portion of accrued postretirement benefit cost related 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 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
expense and
$1.4 million
of expense, respectively.
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
7.25%
for
2014
, declining gradually to
5.0%
in
2023
and thereafter; and
7.25%
for
2014
, declining gradually to
5.0%
in
2023
and thereafter for prescription drug benefits; and
9.25%
for
2014
, declining gradually to
5.0%
in
2031
and thereafter for HMO benefits.
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
2013
total service and interest cost components by
$0.5 million
and would have increased the postretirement benefit obligation by
$10.4 million
. A one percentage point decrease would provide corresponding reductions of
$0.4 million
and
$9.5 million
, respectively.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the 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 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
2013
expected subsidy was
$3.1 million
, of which
$1.4 million
was received prior to
December 31, 2013
.
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, 2013
and
2012
, was as follows:
|
|
|
|
|
|
|
|
Current Target
Allocation
|
Percentage of VEBA Assets
at December 31,
|
Asset Category
|
|
|
|
2013
|
2012
|
Equity securities
|
45%
|
to
|
55%
|
55%
|
49%
|
Debt securities
|
45%
|
to
|
55%
|
45%
|
51%
|
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 14 - Postretirement Benefit Plans (continued)
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 funds - fixed income
|
104.8
|
|
—
|
|
104.8
|
|
—
|
|
Total Assets
|
$
|
240.1
|
|
$
|
—
|
|
$
|
240.1
|
|
$
|
—
|
|
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, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
2.1
|
|
$
|
—
|
|
$
|
2.1
|
|
$
|
—
|
|
Common Collective fund - U.S. equities
|
65.6
|
|
—
|
|
65.6
|
|
—
|
|
Common Collective fund - international equities
|
43.4
|
|
—
|
|
43.4
|
|
—
|
|
Common collective funds - fixed income
|
110.8
|
|
—
|
|
110.8
|
|
—
|
|
Total Assets
|
$
|
221.9
|
|
$
|
—
|
|
$
|
221.9
|
|
$
|
—
|
|
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 Contributions to Postretirement Benefit Plans:
|
|
|
|
|
2012
|
$
|
50.0
|
|
2013
|
—
|
|
2014 (planned)
|
—
|
|
Future benefit payments are expected to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
Expected
Medicare
Subsidies
|
Net Including
Medicare
Subsidies
|
2014
|
$
|
53.6
|
|
$
|
2.7
|
|
$
|
50.9
|
|
2015
|
52.0
|
|
2.9
|
|
49.1
|
|
2016
|
50.5
|
|
3.1
|
|
47.4
|
|
2017
|
49.0
|
|
3.2
|
|
45.8
|
|
2018
|
47.6
|
|
3.2
|
|
44.4
|
|
2019-2023
|
206.6
|
|
15.7
|
|
190.9
|
|
Note 15 - Segment Information
The Company operates under
four
reporting segments: (1) Mobile Industries; (2) Process Industries; (3) Aerospace; and (4) Steel.
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. Each reportable segment is managed separately to address specific customer needs in these diverse market segments.
The Mobile Industries segment includes global sales of bearings, mechanical power transmission components, drive-chains, roller-chains, augers and related products and services (other than steel) to a diverse customer base, including original equipment manufacturers and their suppliers of passenger cars, light trucks, medium to heavy-duty trucks, rail cars, locomotives, agricultural, construction and mining equipment. The Mobile Industries segment also includes aftermarket distribution operations for automotive and heavy truck applications.
The Process Industries segment includes global sales of bearings, mechanical power transmission components, industrial chains, augers and related products and services (other than steel) to a diverse customer base including original equipment manufacturers in the power transmission, energy and heavy industry market sectors. The Process Industries segment also includes aftermarket distribution operations for products other than steel and automotive applications.
The Aerospace segment includes sales of bearings, helicopter transmission systems, rotor head assemblies, turbine engine components, gears and other precision flight-critical components for commercial and military aviation applications. The Aerospace segment also provides aftermarket services, including repair and overhaul of engines, transmissions and fuel controls as well as aerospace bearing repair and component reconditioning. The Aerospace segment also includes sales of precision bearings and related products for health and critical motion control applications.
The Steel segment manufactures alloy steel as well as carbon and micro-alloy steel. Included in its portfolio are SBQ bars and seamless mechanical tubing. In addition, this segment supplies machining and thermal treatment services, as well as manages raw material recycling programs. This segment's metallurgical expertise and unique operational capabilities drive customized, high-value solutions for the mobile, industrial and energy sectors. Less than
10%
of the Company's steel is directly consumed in its bearing operations. In addition, the Company sells steel to other anti-friction bearing companies and to aircraft, forging, construction, industrial equipment, mining, tooling, oil and gas drilling and automotive industries and steel service centers.
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. Intersegment sales and transfers are recorded at values based on market prices, which creates intercompany profit on intersegment sales or transfers that is eliminated in consolidation.
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, Process Industries and Aerospace segments have historically participated in the global bearing industry, while the Steel segment has concentrated primarily on U.S. customers.
Timken’s non-U.S. operations are subject to normal international business risks not generally applicable to 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.
Note 15 - Segment Information (continued)
Geographic Financial Information:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
2011
|
Net sales:
|
|
|
|
United States
|
$
|
2,887.7
|
|
$
|
3,420.3
|
|
$
|
3,494.6
|
|
Canada & Mexico
|
258.9
|
|
275.1
|
|
268.4
|
|
South America
|
141.8
|
|
153.5
|
|
186.0
|
|
Europe / Middle East / Africa
|
574.0
|
|
594.2
|
|
652.3
|
|
Asia-Pacific
|
478.8
|
|
543.9
|
|
568.9
|
|
|
$
|
4,341.2
|
|
$
|
4,987.0
|
|
$
|
5,170.2
|
|
Long-lived assets:
|
|
|
|
United States
|
$
|
1,199.4
|
|
$
|
1,055.7
|
|
$
|
963.1
|
|
Canada & Mexico
|
12.6
|
|
6.1
|
|
16.3
|
|
South America
|
2.1
|
|
4.4
|
|
6.2
|
|
Europe / Middle East / Africa
|
105.5
|
|
101.6
|
|
102.0
|
|
Asia-Pacific
|
238.5
|
|
237.5
|
|
221.3
|
|
|
$
|
1,558.1
|
|
$
|
1,405.3
|
|
$
|
1,308.9
|
|
Business Segment Information:
The following tables provide segment financial information and a reconciliation of segment results to consolidated results:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
2011
|
Net sales to external customers:
|
|
|
|
Mobile Industries
|
$
|
1,474.3
|
|
$
|
1,675.0
|
|
$
|
1,768.9
|
|
Process Industries
|
1,231.7
|
|
1,337.6
|
|
1,240.5
|
|
Aerospace
|
329.5
|
|
346.9
|
|
324.1
|
|
Steel
|
1,305.7
|
|
1,627.5
|
|
1,836.7
|
|
|
$
|
4,341.2
|
|
$
|
4,987.0
|
|
$
|
5,170.2
|
|
Intersegment sales:
|
|
|
|
Mobile Industries
|
$
|
1.1
|
|
$
|
0.5
|
|
$
|
0.5
|
|
Process Industries
|
3.9
|
|
5.7
|
|
4.1
|
|
Steel
|
75.1
|
|
101.2
|
|
119.8
|
|
|
$
|
80.1
|
|
$
|
107.4
|
|
$
|
124.4
|
|
Segment EBIT:
|
|
|
|
Mobile Industries
|
$
|
164.7
|
|
$
|
208.1
|
|
$
|
261.8
|
|
Process Industries
|
201.9
|
|
274.9
|
|
274.2
|
|
Aerospace
|
26.6
|
|
36.3
|
|
5.1
|
|
Steel
|
140.2
|
|
251.8
|
|
267.4
|
|
Total EBIT, for reportable segments
|
$
|
533.4
|
|
$
|
771.1
|
|
$
|
808.5
|
|
Unallocated corporate expenses
|
(82.5
|
)
|
(84.4
|
)
|
(80.8
|
)
|
CDSOA receipts, net of expense
|
—
|
|
108.0
|
|
—
|
|
Separation costs
|
(13.0
|
)
|
—
|
|
—
|
|
Interest expense
|
(24.4
|
)
|
(31.1
|
)
|
(36.8
|
)
|
Interest income
|
1.9
|
|
2.9
|
|
5.6
|
|
Intersegment adjustments
|
1.7
|
|
(0.5
|
)
|
0.3
|
|
Income before income taxes
|
$
|
417.1
|
|
$
|
766.0
|
|
$
|
696.8
|
|
Note 15 - Segment Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
2011
|
Assets employed at year-end:
|
|
|
|
Mobile Industries
|
$
|
1,051.4
|
|
$
|
1,052.9
|
|
$
|
1,233.7
|
|
Process Industries
|
1,096.7
|
|
1,056.2
|
|
979.3
|
|
Aerospace
|
555.8
|
|
480.6
|
|
526.6
|
|
Steel
|
1,198.9
|
|
921.4
|
|
954.2
|
|
Corporate
|
575.1
|
|
733.1
|
|
633.6
|
|
|
$
|
4,477.9
|
|
$
|
4,244.2
|
|
$
|
4,327.4
|
|
Capital expenditures:
|
|
|
|
Mobile Industries
|
$
|
40.3
|
|
$
|
32.1
|
|
$
|
39.5
|
|
Process Industries
|
80.1
|
|
72.4
|
|
54.4
|
|
Aerospace
|
7.8
|
|
14.0
|
|
10.6
|
|
Steel
|
192.6
|
|
175.5
|
|
99.8
|
|
Corporate
|
5.0
|
|
3.2
|
|
1.0
|
|
|
$
|
325.8
|
|
$
|
297.2
|
|
$
|
205.3
|
|
Depreciation and amortization:
|
|
|
|
Mobile Industries
|
$
|
50.2
|
|
$
|
60.8
|
|
$
|
70.2
|
|
Process Industries
|
67.4
|
|
62.2
|
|
51.8
|
|
Aerospace
|
20.5
|
|
23.1
|
|
23.2
|
|
Steel
|
53.8
|
|
49.7
|
|
45.8
|
|
Corporate
|
2.7
|
|
2.2
|
|
1.5
|
|
|
$
|
194.6
|
|
$
|
198.0
|
|
$
|
192.5
|
|
Corporate assets include corporate buildings and cash and cash equivalents.
Note 16 - 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. Federal income tax return.
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
2011
|
United States
|
$
|
314.5
|
|
$
|
680.8
|
|
$
|
527.6
|
|
Non-United States
|
102.6
|
|
85.2
|
|
169.2
|
|
Income before income taxes
|
$
|
417.1
|
|
$
|
766.0
|
|
$
|
696.8
|
|
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
2011
|
Current:
|
|
|
|
Federal
|
$
|
99.9
|
|
$
|
103.5
|
|
$
|
53.8
|
|
State and local
|
14.4
|
|
7.2
|
|
6.8
|
|
Foreign
|
39.3
|
|
36.3
|
|
55.1
|
|
|
$
|
153.6
|
|
$
|
147.0
|
|
$
|
115.7
|
|
Deferred:
|
|
|
|
Federal
|
$
|
(3.4
|
)
|
$
|
105.2
|
|
$
|
117.7
|
|
State and local
|
2.9
|
|
18.1
|
|
11.7
|
|
Foreign
|
1.0
|
|
(0.2
|
)
|
(4.9
|
)
|
|
$
|
0.5
|
|
$
|
123.1
|
|
$
|
124.5
|
|
United States and foreign tax expense on income
|
$
|
154.1
|
|
$
|
270.1
|
|
$
|
240.2
|
|
The Company made net income tax payments of
$111.2 million
,
$121.0 million
and
$101.9
million in
2013
,
2012
and 2011, respectively.
The following table is the reconciliation between the provision for income taxes and the amount computed by applying the U.S. Federal income tax rate of
35%
to income before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
2012
|
2011
|
Income tax at the U.S. federal statutory rate
|
$
|
146.0
|
|
$
|
268.1
|
|
$
|
243.9
|
|
Adjustments:
|
|
|
|
State and local income taxes, net of federal tax benefit
|
10.9
|
|
15.6
|
|
11.2
|
|
Tax on foreign remittances and U.S. tax on foreign income
|
41.0
|
|
9.5
|
|
15.3
|
|
Tax expense related to undistributed earnings of foreign subsidiaries
|
8.7
|
|
—
|
|
—
|
|
Foreign losses without current tax benefits
|
9.5
|
|
16.1
|
|
7.7
|
|
Foreign earnings taxed at different rates including tax holidays
|
(4.4
|
)
|
(18.1
|
)
|
(26.4
|
)
|
U.S. domestic manufacturing deduction
|
(11.3
|
)
|
(7.5
|
)
|
(6.6
|
)
|
U.S. foreign tax credit
|
(25.9
|
)
|
(13.7
|
)
|
—
|
|
U.S. research tax credit
|
(3.8
|
)
|
(0.4
|
)
|
(1.5
|
)
|
Accruals and settlements related to tax audits
|
(16.9
|
)
|
4.3
|
|
1.2
|
|
Other items, net
|
0.3
|
|
(3.8
|
)
|
(4.6
|
)
|
Provision for income taxes
|
$
|
154.1
|
|
$
|
270.1
|
|
$
|
240.2
|
|
Effective income tax rate
|
36.9
|
%
|
35.3
|
%
|
34.5
|
%
|
Note 16 - Income Taxes (continued)
In the fourth quarter of 2013, the Company implemented a strategy to repatriate approximately
$365 million
of cash, incurring tax expense of approximately
$26 million
. The Company repatriated
$123 million
of cash in January 2014, with the remaining portion expected to be repatriated in future periods. In connection with various investment arrangements, the Company has been granted a “holiday” from income taxes for
one
affiliate in Asia for 2013 and 2012 and
two
affiliates in Asia for 2011. These agreements began to expire at the end of
2010
, with full
expiration in 2018
. In total, the agreements reduced income tax expense by
$0.7 million
in 2013,
$1.0 million
in
2012
and
$1.0 million
in
2011
. These savings resulted in an increase to earnings per diluted share of
$0.01
in 2013,
$0.01
in
2012
and
$0.01
in
2011
.
Income tax expense includes U.S. and international income taxes. The Company had undistributed earnings related to its international subsidiaries of
$577.9 million
and
$544.0 million
at
December 31, 2013
and
2012
, respectively. A deferred tax liability of
$8.7 million
has been accrued at December 31, 2013 for earnings of
$136.1 million
(relating to the
$365 million
cash repatriation strategy) that are available to be repatriated to the U.S. No provisions for U.S. income taxes have been made with respect to earnings of
$441.8 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
$23.3 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, 2013
and
2012
was as follows:
|
|
|
|
|
|
|
|
|
2013
|
2012
|
Deferred tax assets:
|
|
|
Accrued postretirement benefits cost
|
$
|
130.1
|
|
$
|
185.0
|
|
Accrued pension cost
|
—
|
|
137.1
|
|
Inventory
|
4.0
|
|
15.4
|
|
Other employee benefit accruals
|
20.3
|
|
26.6
|
|
Tax loss and credit carryforwards
|
166.7
|
|
145.1
|
|
Other, net
|
52.6
|
|
59.9
|
|
Valuation allowances
|
(195.9
|
)
|
(183.9
|
)
|
|
$
|
177.8
|
|
$
|
385.2
|
|
Pension assets
|
(33.4
|
)
|
—
|
|
Deferred tax liabilities - principally depreciation and amortization
|
(239.0
|
)
|
(231.9
|
)
|
Net deferred tax (liabilities) assets
|
$
|
(94.6
|
)
|
$
|
153.3
|
|
The Company has a U.S. foreign tax credit carryforward of
$19.9 million
that will begin to expire in 2018, and U.S. state and local credit carryforwards of
$2.1 million
, portions of which will expire in 2014. The Company also has U.S. state and local loss carryforwards with tax benefits totaling
$1.0 million
, portions of which will expire at the end of 2014. In addition, the Company has loss carryforwards in various non-U.S. jurisdictions with tax benefits totaling
$143.4 million
having various expiration dates, as well as tax credit carryforwards of
$0.2 million
. The Company has provided valuation allowances of
$162.2 million
against certain of these carryforwards. The 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. 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
$33.7 million
against other deferred tax assets.
As of
December 31, 2013
, the Company had
$49.5 million
of total gross unrecognized tax benefits. Included in this amount was
$35.8 million
, which represented the amount of unrecognized tax benefits that would favorably impact the Company’s effective income tax rate in any future periods if such benefits were recognized. As of
December 31, 2013
, the Company anticipates a decrease in its unrecognized tax positions of approximately
$30.0 million
to
$35.0 million
during the next 12 months. The anticipated decrease is primarily due to settlements with tax authorities and the expiration of various statutes of limitation. As of
December 31, 2013
, the Company had accrued
$9.8 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.
Note 16 - Income Taxes (continued)
As of
December 31, 2012
, the Company had
$112.6 million
of total gross unrecognized tax benefits. Included in this amount was
$47.5 million
, which represented the amount of unrecognized tax benefits that would favorably impact the Company’s effective income tax rate in any future periods if such benefits were recognized. As of
December 31, 2012
, the Company had accrued
$11.3 million
of interest and penalties related to uncertain tax positions.
The following table reconciles the Company’s total gross unrecognized tax benefits for the years ended
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
2013
|
2012
|
Beginning balance, January 1
|
$
|
112.6
|
|
$
|
87.2
|
|
Tax positions related to the current year:
|
|
|
Additions
|
9.3
|
|
20.6
|
|
Tax positions related to prior years:
|
|
|
Additions
|
6.9
|
|
7.0
|
|
Reductions
|
(1.4
|
)
|
(1.7
|
)
|
Settlements with tax authorities
|
(77.9
|
)
|
—
|
|
Lapses in statutes of limitation
|
—
|
|
(0.5
|
)
|
Ending balance, December 31
|
$
|
49.5
|
|
$
|
112.6
|
|
During
2013
, gross unrecognized tax benefits decreased primarily due to net reductions related to various current year and prior year tax matters, including settlement of tax matters with government authorities and taxes related to the Company
’
s international operations. These decreases were partially offset by additions related to 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.
During
2012
, gross unrecognized tax benefits increased primarily due to net additions related to various prior year tax matters, including U.S. state and local taxes, and taxes related to the Company’s international operations. These increases were partially offset by reductions related to prior year tax matters, including U.S. state and local taxes and taxes related to the Company’s international operations, settlement of tax matters with government authorities and lapses in statutes of limitation on various tax matters.
As of
December 31, 2013
, the Company is subject to examination by the IRS for tax years 2012 to the present. The Company is also subject to tax examination in various U.S. state and local tax jurisdictions for tax years
2006
to the present, as well as various foreign tax jurisdictions, including Germany, Italy and India for tax years
2002
to the present. The current portion of the Company’s unrecognized tax benefits was 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 17 - Fair Value
The following tables present the fair value hierarchy for those assets and liabilities on the Consolidated Balance Sheet measured at fair value on a recurring basis as of
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
586.4
|
|
$
|
303.9
|
|
$
|
282.5
|
|
$
|
—
|
|
Restricted Cash
|
15.1
|
|
—
|
|
15.1
|
|
—
|
|
Short-term investments
|
17.3
|
|
—
|
|
17.3
|
|
—
|
|
Foreign currency hedges
|
1.2
|
|
—
|
|
1.2
|
|
—
|
|
Total Assets
|
$
|
620.0
|
|
$
|
303.9
|
|
$
|
316.1
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
1.9
|
|
$
|
—
|
|
$
|
1.9
|
|
$
|
—
|
|
Total Liabilities
|
$
|
1.9
|
|
$
|
—
|
|
$
|
1.9
|
|
$
|
—
|
|
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. 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.
During
2012
, machinery and equipment primarily 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, accounts receivable, net, 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, accounts receivable, net, accounts payable, trade and short-term borrowings are a reasonable estimate of their fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was
$474.5 million
and
$481.3 million
at
December 31, 2013
and
2012
, respectively. The carrying value of this debt was
$441.6 million
and
$424.9 million
at
December 31, 2013
and
2012
, respectively.
Note 18 - 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’s commitments denominated in foreign currencies. Forward contracts on various commodities are entered into in order to manage the price risk associated with forecasted purchases of natural gas used in the Company’s manufacturing process. Interest rate swaps are entered into 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 value 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, 2013
and
2012
, the Company had
$516.7 million
and
$97.0 million
, respectively, of outstanding foreign currency forward contracts at notional value. Refer to Note 16 – 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 expense 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.
Fair Value Hedging Strategy:
For derivative instruments that are designated and qualify as fair value hedges (
i.e
., hedging the exposure to changes in 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 the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the same line item associated with the hedged item (
i.e
., in “interest expense” when the hedged item is fixed-rate debt).
Note 19 - 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
$46.1 million
,
$52.6 million
and
$49.6 million
in
2013
,
2012
and
2011
, respectively. Of these amounts,
$0.4 million
,
$0.8 million
, and
$0.3 million
respectively, were funded by others. Expenditures may fluctuate from year-to-year depending on special projects and needs.
Note 20 - Continued Dumping and Subsidy Offset Act (CDSOA)
CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection (U.S. Customs) from antidumping cases to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. The Company reported CDSOA expense of
$2.8 million
and income of
$108.0 million
in 2013 and 2012, respectively.
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 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 receive CDSOA distributions was unconstitutional. 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 provisions 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.
U.S. Customs began distributing the withheld funds to affected domestic producers in early April 2012. In April 2012, the Company received CDSOA distributions of
$112.8 million
in the aggregate for amounts originally withheld from 2006 through 2010.
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 clawback is remote.
Note 21 - Quarterly Financial Data
(Unaudited
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
1st
|
2nd
|
3rd
|
4th
|
Total
|
Net sales
|
$
|
1,089.9
|
|
$
|
1,126.5
|
|
$
|
1,061.5
|
|
$
|
1,063.3
|
|
$
|
4,341.2
|
|
Gross profit
|
274.5
|
|
302.1
|
|
251.7
|
|
263.7
|
|
1,092.0
|
|
Impairment and restructuring charges
(1)
|
1.2
|
|
6.7
|
|
3.7
|
|
4.8
|
|
16.4
|
|
Separation costs
(2)
|
—
|
|
—
|
|
—
|
|
13.0
|
|
13.0
|
|
Net income
(3)
|
75.0
|
|
82.8
|
|
52.5
|
|
52.7
|
|
263.0
|
|
Net income (loss) attributable to noncontrolling interests
|
(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:
|
|
|
|
|
|
Total net income per share
|
$
|
0.78
|
|
$
|
0.86
|
|
$
|
0.55
|
|
$
|
0.56
|
|
$
|
2.76
|
|
Net income per share - Diluted:
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
1st
|
2nd
|
3rd
|
4th
|
Total
|
Net sales
|
$
|
1,421.0
|
|
$
|
1,343.2
|
|
$
|
1,142.5
|
|
$
|
1,080.3
|
|
$
|
4,987.0
|
|
Gross profit
|
411.6
|
|
377.3
|
|
298.9
|
|
278.5
|
|
1,366.3
|
|
Impairment and restructuring charges
(4)
|
0.2
|
|
16.7
|
|
11.9
|
|
0.7
|
|
29.5
|
|
Net income
(5)
|
156.0
|
|
183.4
|
|
81.1
|
|
75.4
|
|
495.9
|
|
Net income (loss) attributable to noncontrolling interests
|
0.3
|
|
(0.2
|
)
|
0.2
|
|
0.1
|
|
0.4
|
|
Net income attributable to The Timken Company
|
155.7
|
|
183.6
|
|
80.9
|
|
75.3
|
|
495.5
|
|
Net income per share - Basic:
|
|
|
|
|
|
Total net income per share
|
$
|
1.59
|
|
$
|
1.88
|
|
$
|
0.84
|
|
$
|
0.79
|
|
$
|
5.11
|
|
Net income per share - Diluted:
|
|
|
|
|
|
Total net income per share
|
$
|
1.58
|
|
$
|
1.86
|
|
$
|
0.83
|
|
$
|
0.78
|
|
$
|
5.07
|
|
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.
|
|
(1)
|
Impairment and restructuring charges for the second quarter of 2013 included severance and related benefit costs of
$6.0 million
, including pension settlement costs of
$5.2 million
, and exit costs of
$0.7 million
. Impairment and restructuring charges for the third quarter of 2013 included severance and related benefit costs of
$3.2 million
, including pension settlement costs of
$1.5 million
, and exit costs of
$0.5 million
. Impairment and restructuring charges for the fourth quarter of 2013 included severance and related benefit costs of
$6.0 million
, including pension settlement costs of
$0.4 million
, impairment charges of
$0.7 million
and a favorable adjustment for exit costs of
$1.9 million
.
|
|
|
(2)
|
Separation costs of
$13.0 million
for the fourth quarter of 2013 related to the planned spinoff of the steel business.
|
|
|
(3)
|
Net income for the fourth quarter of 2013 included a gain of
$5.4 million
on the sale of real estate in Brazil.
|
|
|
(4)
|
Impairment and restructuring charges for the second quarter of 2012 included severance and related benefit costs of
$16.5 million
, including a curtailment of pension benefits of
$10.7 million
, and exit costs of
$0.2 million
. Impairment and restructuring charges for the third quarter of 2012 included impairment charges of
$6.4 million
, severance and related benefit costs of
$1.3 million
and exit costs of
$4.2 million
.
|
|
|
(5)
|
Net income for the second quarter of 2012 included CDSOA receipts of
$109.5 million
, net of expenses.
|