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 intercompany accounts and transactions are eliminated upon consolidation.
Revenue Recognition:
The Company recognizes revenue when title passes to the customer. This occurs at the shipping point except for goods sold by certain foreign entities and certain exported goods, where title passes when the goods reach their destination. Selling prices are fixed based on purchase orders or contractual arrangements. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold in the Consolidated Statements of Income.
The Company recognizes a portion of its revenues on the percentage-of-completion method measured on the cost-to-cost basis. In
2016
,
2015
and
2014
, the Company recognized
$68 million
,
$66 million
and
$50 million
, respectively, in net sales under the percentage-of-completion method. As of
December 31, 2016
and
2015
,
$63.5 million
and
$62.5 million
of accounts receivable, net, respectively, related to these net sales.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Restricted Cash:
Cash of
$2.7 million
and
$0.2 million
at
December 31, 2016
and
2015
, respectively, was restricted. The increase was primarily due to cash restricted for bank guarantees of
$2.5 million
in
2016
.
Allowance for Doubtful Accounts:
The Company maintains an allowance for doubtful accounts, which represents an estimate of the losses expected from the accounts receivable portfolio, to reduce accounts receivable to their net realizable value. The allowance is based upon historical trends in collections and write-offs, management’s judgment of the probability of collecting accounts and management’s evaluation of business risk. The Company extends credit to customers satisfying pre-defined credit criteria. The Company believes it has limited concentration of credit risk due to the diversity of its customer base.
Inventories:
Inventories are valued at the lower of cost or market, with approximately
53%
valued by the FIFO method and the remaining
47%
valued by the LIFO method. The majority of the Company’s domestic inventories are valued by the LIFO method, and all of the Company’s international inventories are 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, 2016
and
2015
with a fair value and cost basis of
$11.7 million
and
$9.7 million
, respectively, which were included in other current assets on the Consolidated Balance Sheets.
Property, Plant and Equipment:
Property, plant and equipment, net is valued at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. The provision for depreciation is computed principally by the straight-line method based upon the estimated useful lives of the assets. The useful lives are approximately
30 years
for buildings,
three
to
ten years
for computer software and
three
to
20 years
for machinery and equipment.
Note 1 – Significant Accounting Policies (continued)
The impairment of long-lived assets is evaluated when events or changes in circumstances indicate that the carrying amount of the asset or related group of assets may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time to reduce the asset to the lower of its fair value or its net book value.
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 1, 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.
Product Warranties:
The Company provides limited warranties on certain of its products. The Company accrues liabilities for warranties generally based upon specific claims and in certain instances based on historical warranty claim experience in accordance with accounting rules relating to contingent liabilities. When the Company becomes 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 those assets will not be realized. Accruals for uncertain tax positions are provided for in accordance with ASC 740-10. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.
Foreign Currency:
Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the reporting period. Related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions are included in the Consolidated Statements of Income.
For the year ended
December 31, 2016
, the Company recorded a non-cash foreign currency translation adjustment of
$34.5 million
that decreased shareholders’ equity, compared with a non-cash foreign currency translation adjustment of
$71.5 million
that decreased shareholders’ equity for the year ended
December 31, 2015
. The foreign currency translation adjustments for the year ended
December 31, 2016
were negatively impacted by the strengthening of the U.S. dollar relative to most other currencies.
The Company recognized a foreign currency exchange loss resulting from transactions of $
5.6 million
, $
0.3 million
and $
9.9 million
for the years ended December 31,
2016
,
2015
and
2014
, 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. Net actuarial gains and losses for the Company's defined benefit pension plan in the United Kingdom are amortized over the remaining life expectancy of the participants in the plan.
Note 1 – Significant Accounting Policies (continued)
For all other plans, the Company generally amortizes actuarial gains and losses over the remaining service period of active participants. However, in accordance with its policy, the Company updates the census data for its U.S. defined benefit pension plans on an annual basis. The updated 2015 census data indicated that, as a result of the Spinoff, over
95%
of the participants in one of the U.S. plans were inactive. Therefore, the Company changed the amortization period over which actuarial gains and losses related to that plan will be amortized to be based on the remaining expected life of inactive participants in the plan. This change resulted in an amortization period of
15.5 years
, compared to
10.1 years
had the change not been made. The impact of the change resulted in lower pension expense of
$5.7 million
(
$3.6 million
after-tax, or
$0.04
per share) for the first eleven months of 2015. On November 30, 2015, the Company purchased a group annuity contract from Prudential covering substantially all of the inactive participants in this plan. Refer to
Note 14 - Retirement Benefit Plans
for additional information. Subsequent to this transaction, the vast majority of the participants remaining in this plan were active. Therefore, the Company changed the amortization period back to the remaining service period of active participants in December 2015. There were no changes to the amortization period in 2016 for any of the plans.
Stock-Based Compensation:
The Company recognizes stock-based compensation expense over the related vesting period of the awards based on the fair value on the grant date. Stock options are issued with an exercise price equal to the opening market price of Timken common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. The fair value of stock-based awards that will settle in Timken common shares, other than stock options, is based on the opening market price of Timken common shares on the grant date. The fair value of stock-based awards that will settle in cash are remeasured at each reporting period until settlement of the awards.
Earnings Per Share:
Only certain unvested restricted share grants provide for the payment of nonforfeitable dividends. The Company considers these awards as participating securities. Earnings per share are computed using the two-class method. Basic earnings per share are computed by dividing net income less undistributed earnings allocated to unvested restricted shares by the weighted-average number of common shares outstanding during the year. Diluted earnings per share are computed by dividing net income less undistributed earnings allocated to unvested restricted shares by the weighted-average number of common shares outstanding, adjusted for the dilutive impact of outstanding stock-based awards.
Derivative Instruments:
The Company recognizes all derivatives on the Consolidated Balance Sheets at fair value. Derivatives that are not designated as hedges are adjusted to fair value through earnings. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive loss until the hedged item is recognized in earnings. The Company’s holdings of forward foreign currency exchange contracts qualify as derivatives pursuant to the criteria established in derivative accounting guidance, and the Company has designated certain of those derivatives as hedges.
Recent Accounting Pronouncements:
New Accounting Guidance Adopted:
In September 2015, the FASB issued Accounting Standards Update ("ASU") 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments." ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. This new accounting guidance does not eliminate the requirement for the measurement period to be completed within one year. On January 1, 2016, the Company adopted the provisions of ASU 2015-16. The impact of the adoption of ASU 2015-16 was immaterial to the Company's results of operations and financial condition as there was only a minor measurement-period adjustment during 2016.
Note 1 – Significant Accounting Policies (continued)
In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." ASU 2015-07 eliminates the requirement to categorize within the fair value hierarchy investments for which fair values are estimated using the net asset value ("NAV") practical expedient provided in ASC 820, "Fair Value Measurement." Instead, entities will be required to disclose the fair values of such investments so that financial statement users can reconcile amounts reported in the fair value hierarchy table and the amounts reported on the balance sheet. On January 1, 2016, the Company adopted the provisions of ASU 2015-07. The adoption of ASU 2015-07 did not have any impact on the Company's results of operations or financial condition as the new guidance addresses disclosure only. See
Note 18 - Fair Value
for the new disclosures.
In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Prior to the issuance of this new accounting guidance, there was no explicit guidance about a customer's accounting for fees paid in a cloud computing arrangement. On January 1, 2016, the Company adopted the provisions of ASU 2015-05 on a prospective basis. The adoption of ASU 2015-05 did not have a material impact on the Company's results of operations or financial condition.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction to the carrying value of debt. Prior to the issuance of this new accounting guidance, debt issuance costs were required to be presented in the balance sheet as a deferred charge (i.e., an asset), and only a debt discount was recorded as a direct deduction to the carrying value of debt. ASU 2015-03 requires that the new accounting guidance be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance.
On January 1, 2016, the Company adopted the provisions of ASU 2015-03. The following financial statement line items at
December 31, 2015
were affected by the adoption of ASU 2015-03.
|
|
|
|
|
|
|
|
|
|
|
|
As Originally Reported
|
New Presentation
|
Effect of Change
|
Assets:
|
|
|
|
Other non-current assets
|
$
|
50.3
|
|
$
|
49.1
|
|
$
|
1.2
|
|
|
|
|
|
Liabilities:
|
|
|
|
Long-term debt
|
$
|
580.6
|
|
$
|
579.4
|
|
$
|
1.2
|
|
Note 1 – Significant Accounting Policies (continued)
New Accounting Guidance Issued and Not Yet Adopted:
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance will replace the current incurred loss approach with an expected loss model. The new expected credit loss impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt instruments, net investments in leases, loan commitments and standby letters of credit. Upon initial recognition of the exposure, the expected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. ASU 2016-13 does not prescribe a specific method to make the estimate so its application will require significant judgment. ASU 2016-13 is effective in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the effect that ASU 2016-13 will have on the Company's results of operations and financial condition.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies various aspects of the accounting for stock-based payments. The simplifications include:
|
|
a.
|
recording all tax effects associated with stock-based compensation through the income statement, as opposed to recording certain amounts in other paid-in capital, which eliminates the complications of tracking a “windfall pool,” but will increase the volatility of income tax expense;
|
|
|
b.
|
allowing entities to withhold shares to satisfy the employer’s statutory tax withholding requirement up to the highest marginal tax rate applicable to employees rather than the employer’s minimum statutory rate, without requiring liability classification for the award;
|
|
|
c.
|
modifying the requirement to estimate the number of awards that will ultimately vest by providing an accounting policy election to either estimate the number of forfeitures or recognize forfeitures as they occur; and
|
|
|
d.
|
changing certain presentation requirements in the statement of cash flows, including removing the requirement to present excess tax benefits as an inflow from financing activities and an outflow from operating activities, and requiring the cash paid to taxing authorities arising from withheld shares to be classified as a financing activity.
|
The Company is currently evaluating the effect that ASU 2016-09 will have on the Company's results of operations and financial condition, but does not expect the impact to be material.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 was issued to increase transparency and comparability among entities by recognizing leased assets and leased liabilities on the balance sheet and disclosing key information about lease arrangements. ASU 2016-02 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the effect that ASU 2016-02 will have on the Company's results of operations and financial condition.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. On July 9, 2015, the FASB decided to delay the effective date of this new accounting guidance by one year, which will result in it being effective for annual periods beginning after December 15, 2017. Although early adoption is permitted, the Company intends to adopt the new accounting standard effective January 1, 2018.
Note 1 – Significant Accounting Policies (continued)
The two permitted transition methods under the new standard are 1) the full retrospective method, in which case the standard would be applied to each prior reporting period presented, subject to allowable practical expedients, and the cumulative effect of applying the standard would be recognized at the earliest period shown, or 2) the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application accompanied by additional disclosures comparing the current period results presented under the new standard to the prior periods presented under the current, legacy revenue recognition standards. While the Company has not yet determined which adoption method it will use, the Company is currently anticipating using the modified retrospective method, but will base the final decision on the results of its assessment, once completed.
We are currently assessing the impact of the new standard on our business by reviewing our current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts. The assessment phase of the project has identified potential accounting differences that may arise from the application of the new standard and we are in the process of reviewing individual contracts and performing a deeper analysis of the impacts of the new standard. We made significant progress on our contract reviews during the fourth quarter of 2016 and expect to finalize our evaluation of these and other potential differences that may result from applying the new standard to our contracts with customers in 2017 and will provide updates on our progress in future filings.
Use of Estimates:
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Because actual results could differ from these estimates, the Company reviews and updated these estimates and assumptions regularly to reflect recent experience.
Reclassifications:
Certain amounts reported in the
2015
and
2014
consolidated financial statements and accompanying footnotes have been reclassified to conform to the current presentation.
Note 2 - Discontinued Operations
On June 30, 2014, the Company completed the separation of its steel business through the Spinoff. The Company's Board of Directors declared a distribution of all outstanding common shares of TimkenSteel through a dividend. At the close of business on June 30, 2014, the Company's shareholders received
one
common share of TimkenSteel for every
two
common shares of the Company they held as of the close of business on June 23, 2014.
At the time of the Spinoff, the Company and TimkenSteel entered into certain transitional relationships, including an 18-month commercial supply agreement for TimkenSteel to supply the Company with certain steel products and other relationships.
The operating results, net of tax, included a one-time transaction cost of approximately
$57.1 million
for
2014
in connection with the separation of the two companies. The cost primarily consisted of consulting and professional fees associated with preparing for and executing the Spinoff, as well as lease cancellation fees. In addition to the one time transaction costs, the Company incurred approximately
$15 million
of capital expenditures related to the Spinoff in 2014.
The following table presents the results of operations for TimkenSteel that have been reclassified to discontinued operations for all periods presented:
|
|
|
|
|
|
Year Ended December 31, 2014
|
Net sales
|
$
|
786.2
|
|
Cost of goods sold
|
642.0
|
|
Gross profit
|
144.2
|
|
Selling, administrative and general expenses
|
46.4
|
|
Separation costs
|
57.1
|
|
Interest expense, net
|
0.8
|
|
Other (income) expense, net
|
(0.1
|
)
|
Income before income taxes
|
40.0
|
|
Income tax expense
|
16.0
|
|
Income from discontinued operations
|
$
|
24.0
|
|
Note 3 - Acquisitions and Divestitures
Acquisitions:
During
2016
, the Company completed two acquisitions. On
October 31, 2016
, the Company completed the acquisition of EDT, a manufacturer of polymer housed units and stainless steel ball bearings used primarily in the food and beverage industry. On
July 8, 2016
, the Company completed the acquisition of Lovejoy, a manufacturer of premium industrial couplings and universal joints. Aggregate sales for these companies for the most recent twelve months prior to their respective acquisitions totaled approximately
$61 million
. The total purchase price for these two acquisitions was
$74.4 million
in cash and
$2.2 million
in assumed debt. The Company acquired cash of approximately
$2.5 million
, subject to post-closing working capital adjustments, as part of these acquisitions. The Company incurred approximately
$1.7 million
of legal and professional fees to acquire EDT and Lovejoy. Substantially all of the results for EDT and Lovejoy are reported in the Process Industries segment. The Company assumed certain contingent liabilities, including an environmental liability, as part of the Lovejoy transaction. Refer to
Note 11 - Contingencies
for additional information on Lovejoy's contingent liabilities.
On
September 1, 2015
, the Company completed the acquisition of Timken Belts, a leading North American manufacturer of belts used in industrial, commercial and consumer applications, and sold under multiple brand names, including Carlisle®, Ultimax® and Panther®, among others. The acquisition portfolio includes more than 20,000 parts that utilize wrap molded, raw edge, v-ribbed and synchronous belt designs. Aggregate sales for Timken Belts for the most recent twelve months prior to the acquisition was approximately
$140 million
. The total purchase price for Timken Belts was
$213.7 million
in cash, including cash acquired of approximately
$0.1 million
. In
June 2016
, the Company paid a net purchase price adjustment of
$0.7 million
, resulting in an adjustment to goodwill. The Company incurred approximately
$1.0 million
of legal and professional fees to acquire Timken Belts. The results of the operations of Timken Belts are reported in both the Mobile Industries and Process Industries segments based on customers served.
During
2014
, the Company completed two acquisitions. On
November 30, 2014
, the Company completed the acquisition of Revolvo, a specialty bearing company that makes and markets ball and roller bearings for industrial applications in process and heavy industries. On
April 28, 2014
, the Company completed the acquisition of Schulz, a provider of electric motor and generator repairs, motor rewinds, custom controls and panels, systems integration, pump services, machine rebuilds, hydro services and diagnostics for a broad range of commercial and industrial applications. Aggregate sales for these companies for the most recent twelve months prior to their respective acquisitions totaled approximately
$26 million
. The total purchase price for these two acquisitions was
$21.7 million
in cash. The results for Revolvo and Schulz are reported in the Process Industries segment.
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 any of the years presented.
Note 3 – Acquisitions and Divestitures (continued)
The purchase price allocations, net of cash acquired, and any subsequent purchase price adjustments for acquisitions in
2016
,
2015
and
2014
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
Assets:
|
|
|
|
Accounts receivable
|
$
|
8.4
|
|
$
|
13.3
|
|
$
|
4.5
|
|
Inventories
|
17.8
|
|
48.5
|
|
5.4
|
|
Other current assets
|
5.3
|
|
1.1
|
|
0.3
|
|
Property, plant and equipment
|
16.5
|
|
37.9
|
|
2.8
|
|
Goodwill
|
30.6
|
|
70.8
|
|
4.7
|
|
Other intangible assets
|
27.9
|
|
63.9
|
|
7.5
|
|
Other non-current assets
|
0.1
|
|
—
|
|
—
|
|
Total assets acquired
|
$
|
106.6
|
|
$
|
235.5
|
|
$
|
25.2
|
|
Liabilities:
|
|
|
|
Accounts payable, trade
|
$
|
8.1
|
|
$
|
10.2
|
|
$
|
2.3
|
|
Salaries, wages and benefits
|
1.3
|
|
1.1
|
|
—
|
|
Other current liabilities
|
4.4
|
|
1.3
|
|
1.0
|
|
Long-term debt
|
2.2
|
|
—
|
|
—
|
|
Accrued pension cost
|
—
|
|
2.3
|
|
—
|
|
Accrued postretirement liability
|
—
|
|
1.1
|
|
—
|
|
Deferred taxes
|
10.4
|
|
5.9
|
|
—
|
|
Other non-current liabilities
|
7.6
|
|
—
|
|
0.5
|
|
Total liabilities assumed
|
$
|
34.0
|
|
$
|
21.9
|
|
$
|
3.8
|
|
Net assets acquired
|
$
|
72.6
|
|
$
|
213.6
|
|
$
|
21.4
|
|
The amounts for
2016
in the table above represent the preliminary purchase price allocations for Lovejoy and EDT. The preliminary purchase accounting for 2016 acquisitions is incomplete as it is subject to working capital adjustments for the EDT acquisition and the final determination of the fair value of the contingent liabilities assumed in the Lovejoy acquisition.
The following table summarizes the preliminary purchase price allocation for identifiable intangible assets acquired in
2016
:
|
|
|
|
|
|
|
Purchase
Price Allocation
|
|
|
Weighted-
Average Life
|
Trade name (not subject to amortization)
|
$
|
3.7
|
|
Indefinite
|
Trade name
|
0.2
|
|
5 years
|
Technology / Know-how
|
10.1
|
|
19 years
|
All customer relationships
|
13.5
|
|
20 years
|
Non-competition agreements
|
0.2
|
|
5 years
|
Favorable leases
|
0.1
|
|
2 years
|
Capitalized software
|
0.1
|
|
4 years
|
Total intangible assets
|
$
|
27.9
|
|
|
Note 3 – Acquisitions and Divestitures (continued)
The following table summarizes the final purchase price allocation for identifiable intangible assets acquired in
2015
:
|
|
|
|
|
|
|
Purchase
Price Allocation
|
|
|
Weighted-
Average Life
|
Trade name
|
$
|
1.7
|
|
11 years
|
Technology / Know-how
|
17.1
|
|
20 years
|
All customer relationships
|
43.9
|
|
20 years
|
Non-compete agreements
|
1.2
|
|
3 years
|
Total intangible assets
|
$
|
63.9
|
|
|
Divestitures:
On
October 21, 2015
, the Company completed the sale of Alcor. Alcor, located in Mesa, Arizona, had sales of
$20.6 million
for the twelve months ending September 30, 2015. The results of the operations of Alcor were reported in the Mobile Industries segment. The Company recorded proceeds of
$43.4 million
and recognized a gain on the sale of Alcor of
$29.0 million
during the fourth quarter of 2015. The gain was reflected in gain on divestitures in the Consolidated Statement of Income.
On April 30, 2015, the Company completed the sale of a service center in Niles, Ohio. The company received
$2.8 million
in cash proceeds for the service center. The Company recognized a loss of
$0.3 million
from the sale reflected in gain on divestitures in the Consolidated Statement of Income.
During the third quarter of
2014
, the Company classified assets of the aerospace engine overhaul business, located in Mesa, Arizona, as assets held for sale. In connection with this classification, the Company recorded an impairment charge of
$1.2 million
. In November 2014, the Company sold the assets of the aerospace engine overhaul business for
$7.4 million
and recorded an immaterial loss.
Note 4 - Investment in Joint Venture
On March 6, 2014, Timken Lux Holdings II S.A.R.L, a subsidiary of the Company, entered into a joint venture agreement with Holme Services Limited ("joint venture partner"). During 2015, the Company and its joint venture partner established TUBC Limited, a Cyprus entity, for the purpose of producing bearings to serve the rail market sector in Russia. The Company and its joint venture partner have a
51%
controlling interest and
49%
controlling interest, respectively, in TUBC Limited. During
2015
, the Company and its joint venture partner amended and restated the joint venture agreement and contributed
$6.9 million
and
$6.6 million
, respectively, to TUBC Limited. During
2016
, the Company and its joint venture partner contributed
$9.7 million
and
$9.3 million
, respectively, to TUBC Limited.
Note 5 - 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:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
Numerator:
|
|
|
|
Net income (loss) from continuing operations attributable to The Timken Company
|
$
|
152.6
|
|
$
|
(70.8
|
)
|
$
|
146.8
|
|
Less: undistributed earnings allocated to nonvested stock
|
—
|
|
—
|
|
—
|
|
Net income (loss) from continuing operations available to common shareholders for basic earnings per share and diluted earnings per
share
|
$
|
152.6
|
|
$
|
(70.8
|
)
|
$
|
146.8
|
|
Denominator:
|
|
|
|
Weighted-average number of shares outstanding – basic
|
78,516,029
|
|
84,631,778
|
|
90,367,345
|
|
Effect of dilutive securities:
|
|
|
|
Stock options and awards - based on the treasury
stock method
|
718,295
|
|
—
|
|
856,983
|
|
Weighted-average number of shares outstanding, assuming
dilution of stock options and awards
|
79,234,324
|
|
84,631,778
|
|
91,224,328
|
|
Basic earnings (loss) per share from continuing operations
|
$
|
1.94
|
|
$
|
(0.84
|
)
|
$
|
1.62
|
|
Diluted earnings (loss) per share from continuing operations
|
$
|
1.92
|
|
$
|
(0.84
|
)
|
$
|
1.61
|
|
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. During 2015, the Company incurred a net loss and therefore treated all stock options and restricted stock units as antidilutive. The antidilutive stock options outstanding were
2,826,733
,
1,986,907
and
523,252
during
2016
,
2015
and
2014
, respectively.
Note 6 - Accumulated Other Comprehensive Income (Loss)
The following tables present details about components of accumulated other comprehensive income (loss) for the years ended
December 31, 2016
and
December 31, 2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments
|
Pension and postretirement
liability adjustments
|
Change in fair value of
derivative financial instruments
|
Total
|
Balance at December 31, 2015
|
$
|
(72.2
|
)
|
$
|
(215.1
|
)
|
$
|
0.3
|
|
$
|
(287.0
|
)
|
Other comprehensive (loss) income before
reclassifications, before income tax
|
(32.8
|
)
|
(43.2
|
)
|
(0.2
|
)
|
(76.2
|
)
|
Amounts reclassified from accumulated other
comprehensive income (loss), before income tax
|
—
|
|
47.2
|
|
0.3
|
|
47.5
|
|
Income tax (benefit)
|
—
|
|
(4.6
|
)
|
—
|
|
(4.6
|
)
|
Net current period other comprehensive (loss) income, net of income taxes
|
(32.8
|
)
|
(0.6
|
)
|
0.1
|
|
(33.3
|
)
|
Non-controlling interest
|
(1.7
|
)
|
—
|
|
—
|
|
(1.7
|
)
|
Net current period comprehensive (loss) income, net of income taxes and non-controlling interest
|
(34.5
|
)
|
(0.6
|
)
|
0.1
|
|
(35.0
|
)
|
Balance at December 31, 2016
|
$
|
(106.7
|
)
|
$
|
(215.7
|
)
|
$
|
0.4
|
|
$
|
(322.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments
|
Pension and postretirement
liability adjustments
|
Change in fair value of
derivative financial instruments
|
Total
|
Balance at December 31, 2014
|
$
|
(0.7
|
)
|
$
|
(481.0
|
)
|
$
|
(0.8
|
)
|
$
|
(482.5
|
)
|
Other comprehensive (loss) income before
reclassifications, before income tax
|
(73.5
|
)
|
(80.6
|
)
|
3.0
|
|
(151.1
|
)
|
Amounts reclassified from accumulated other
comprehensive income (loss), before income tax
|
—
|
|
501.9
|
|
(1.2
|
)
|
500.7
|
|
Income tax (benefit) expense
|
—
|
|
(155.4
|
)
|
(0.7
|
)
|
(156.1
|
)
|
Net current period other comprehensive (loss) income, net of income taxes
|
(73.5
|
)
|
265.9
|
|
1.1
|
|
193.5
|
|
Non-controlling interest
|
2.0
|
|
—
|
|
—
|
|
2.0
|
|
Net current period comprehensive (loss) income, net of income taxes and non-controlling interest
|
(71.5
|
)
|
265.9
|
|
1.1
|
|
195.5
|
|
Balance at December 31, 2015
|
$
|
(72.2
|
)
|
$
|
(215.1
|
)
|
$
|
0.3
|
|
$
|
(287.0
|
)
|
Other comprehensive (loss) income before reclassifications and income taxes includes the effect of foreign currency.
Of the
$47.2 million
before-tax reclassification of pension and postretirement liability adjustments,
$26.6 million
was included in pension settlement charges in the Consolidated Statement of Income for the year ended
December 31, 2016
. The remaining before-tax reclassification of pension and postretirement liability adjustments of
$20.6 million
in
2016
was due to the amortization of actuarial losses and prior service costs and was included in costs of products sold and selling, general and administrative expenses in the Consolidated Statements of Income. The reclassification of the remaining components of accumulated other comprehensive income (loss) was included in other expense, net in the Consolidated Statements of Income.
Of the
$501.9 million
before-tax reclassification of pension and postretirement liability adjustments,
$461.8 million
was included in pension settlement charges in the Consolidated Statement of Income for the year ended
December 31, 2015
. The remaining before-tax reclassification of pension and postretirement liability adjustments of
$40.1 million
in
2015
was due to the amortization of actuarial losses and prior service costs and was included in costs of products sold and selling, general and administrative expenses in the Consolidated Statements of Income. The reclassification of the remaining components of accumulated other comprehensive income (loss) was included in other expense, net in the Consolidated Statements of Income.
Note 7 - Inventories
The components of inventories at
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Manufacturing supplies
|
$
|
28.2
|
|
$
|
24.7
|
|
Raw materials
|
54.4
|
|
58.8
|
|
Work in process
|
180.2
|
|
181.9
|
|
Finished products
|
304.1
|
|
296.2
|
|
Subtotal
|
$
|
566.9
|
|
$
|
561.6
|
|
Allowance for surplus and obsolete inventory
|
(21.1
|
)
|
(18.4
|
)
|
Total Inventories, net
|
$
|
545.8
|
|
$
|
543.2
|
|
Inventories at
December 31, 2016
valued on the FIFO cost method were
53%
and the remaining
47%
were valued by the LIFO method. If all inventories had been valued at FIFO, inventories would have been
$183.9 million
and
$188.1 million
greater at
December 31, 2016
and
2015
, respectively. The Company recognized a decrease in its LIFO reserve of
$4.2 million
during
2016
, compared to a decrease in its LIFO reserve of
$11.6 million
during
2015
. Included in these inventory amounts, the Company realized income of
$1.7 million
and
$1.7 million
as a result of LIFO inventory liquidations during
2016
and
2015
, respectively.
Note 8 - Property, Plant and Equipment
The components of property, plant and equipment, net at
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Land and buildings
|
$
|
425.4
|
|
$
|
430.3
|
|
Machinery and equipment
|
1,807.6
|
|
1,741.4
|
|
Subtotal
|
$
|
2,233.0
|
|
$
|
2,171.7
|
|
Less allowances for depreciation
|
(1,428.6
|
)
|
(1,393.9
|
)
|
Property, Plant and Equipment, net
|
$
|
804.4
|
|
$
|
777.8
|
|
Total depreciation expense was
$95.5 million
,
$94.6 million
and
$115.5 million
in
2016
,
2015
and
2014
, respectively.
During the fourth quarter of 2015, the Company wrote-off
$9.7 million
that remained in CIP after the related assets were placed into service. This item was identified during an examination of aged balances in the CIP account and
91%
of the amount related to fiscal years prior to 2013. Net loss attributable to The Timken Company in 2015 included a charge of
$9.7 million
(
$6.1 million
, or
$0.07
per share, after-tax) due to the correction of this error. Management of the Company concluded that the correction of this error in the fourth quarter of 2015 and the presence of this error in prior periods was immaterial to all periods presented.
During the first quarter of 2014, the Company recognized a gain of
$22.6 million
related to the sale of its former manufacturing facility in Sao Paulo.
Note 9 - 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 1 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. The Mobile Industries segment has
three
reporting units and the Process Industries segment has
two
reporting units.
Changes in the carrying value of goodwill were as follows:
Year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process
Industries
|
Total
|
Beginning Balance
|
$
|
97.0
|
|
$
|
230.3
|
|
$
|
327.3
|
|
Acquisitions
|
0.7
|
|
29.9
|
|
30.6
|
|
Other
|
(0.5
|
)
|
0.1
|
|
(0.4
|
)
|
Ending Balance
|
$
|
97.2
|
|
$
|
260.3
|
|
$
|
357.5
|
|
The increase in goodwill was due to the acquisition of Lovejoy in July 2016 and EDT in October 2016. None of this goodwill is deductible for tax purposes.
Year ended
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process
Industries
|
Total
|
Beginning Balance
|
$
|
89.6
|
|
$
|
169.9
|
|
$
|
259.5
|
|
Acquisitions
|
8.2
|
|
62.6
|
|
70.8
|
|
Other
|
(0.8
|
)
|
(2.2
|
)
|
(3.0
|
)
|
Ending Balance
|
$
|
97.0
|
|
$
|
230.3
|
|
$
|
327.3
|
|
Acquisitions in 2015 related to the purchase of Timken Belts completed on September 1, 2015.
$59.7 million
of the goodwill acquired for Timken Belts is tax-deductible and will be recognized over
15 years
for tax purposes. The remaining
$11.1 million
is non-deductible for tax purposes.
“Other” primarily includes foreign currency translation adjustments. Refer to
Note 3 - Acquisitions and Divestitures
for additional information on the acquisitions listed above.
In
2016
and
2015
, no goodwill impairment losses were recorded.
During the third quarter of 2014, the Company reviewed goodwill for impairment for two of its reporting units within the Company's former Aerospace segment (now included in the Mobile Industries segment) as a result of declining sales forecasts and financial performance within the segment. The Company utilizes both an income approach and a market approach in testing goodwill for impairment. The Company utilized updated forecasts for the income approach as part of the goodwill impairment review. As a result of the lower earnings and cash flow forecasts, the Company determined that the Aerospace Transmissions and the Aerospace Aftermarket reporting units could not support the carrying value of their goodwill. As a result, the Company recorded a pretax impairment loss of
$86.3 million
during the third quarter of 2014, which was reported in impairment and restructuring charges in the Consolidated Statement of Income.
Note 9 – Goodwill and Other Intangible Assets (continued)
Intangible Assets:
The following table displays intangible assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Intangible assets subject
to amortization:
|
|
|
|
|
|
|
Customer relationships
|
$
|
211.4
|
|
$
|
84.4
|
|
$
|
127.0
|
|
$
|
198.9
|
|
$
|
70.0
|
|
$
|
128.9
|
|
Know-how
|
40.3
|
|
8.5
|
|
31.8
|
|
31.9
|
|
6.7
|
|
25.2
|
|
Industrial license agreements
|
0.1
|
|
0.1
|
|
—
|
|
0.1
|
|
0.1
|
|
—
|
|
Land-use rights
|
7.8
|
|
4.6
|
|
3.2
|
|
8.3
|
|
4.7
|
|
3.6
|
|
Patents
|
2.1
|
|
2.1
|
|
—
|
|
2.1
|
|
2.1
|
|
—
|
|
Technology use
|
54.9
|
|
16.9
|
|
38.0
|
|
53.6
|
|
14.0
|
|
39.6
|
|
Trademarks
|
6.5
|
|
3.8
|
|
2.7
|
|
6.5
|
|
3.3
|
|
3.2
|
|
Non-compete agreements
|
0.9
|
|
0.7
|
|
0.2
|
|
2.7
|
|
2.5
|
|
0.2
|
|
Leases
|
0.1
|
|
—
|
|
0.1
|
|
—
|
|
—
|
|
—
|
|
Software
|
251.7
|
|
211.8
|
|
39.9
|
|
243.8
|
|
197.6
|
|
46.2
|
|
|
$
|
575.8
|
|
$
|
332.9
|
|
$
|
242.9
|
|
$
|
547.9
|
|
$
|
301.0
|
|
$
|
246.9
|
|
Intangible assets not
subject to amortization:
|
|
|
|
|
|
|
Tradename
|
$
|
19.4
|
|
$
|
—
|
|
$
|
19.4
|
|
$
|
15.7
|
|
$
|
—
|
|
$
|
15.7
|
|
FAA air agency
certificates
|
8.7
|
|
—
|
|
8.7
|
|
8.7
|
|
—
|
|
8.7
|
|
|
$
|
28.1
|
|
|
$
|
28.1
|
|
$
|
24.4
|
|
|
$
|
24.4
|
|
Total intangible assets
|
$
|
603.9
|
|
$
|
332.9
|
|
$
|
271.0
|
|
$
|
572.3
|
|
$
|
301.0
|
|
$
|
271.3
|
|
Intangible assets acquired in 2016 totaled
$27.9 million
from the acquisitions of Lovejoy and EDT. Intangible assets subject to amortization acquired in 2016 were assigned useful lives of
two
to
20
years and had a weighted-average amortization period of
19.1 years
.
Amortization expense for intangible assets was
$36.2 million
, $
36.2 million
and $
21.5 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Amortization expense for intangible assets is estimated to be approximately: $
33.0 million
in 2017; $
28.4 million
in 2018; $
24.0 million
in 2019; $
19.6 million
in 2020; and $
16.1 million
in 2021.
Note 10 - Financing Arrangements
Short-term debt for the years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Variable-rate Accounts Receivable Facility with an interest rate of
1.05%
at December 31, 2015.
|
$
|
—
|
|
$
|
49.0
|
|
Borrowings under variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates of 0.50% at December 31, 2016 and 0.31% to 0.44% at December 31, 2015, respectively.
|
19.2
|
|
13.0
|
|
Short-term debt
|
$
|
19.2
|
|
$
|
62.0
|
|
The Company has a
$100 million
Accounts Receivable Facility that matures on
November 30, 2018
. Under the terms of the Accounts Receivable Facility, 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 Accounts Receivable Facility are limited to certain borrowing base calculations. Certain borrowing base limitations reduced the availability of the Accounts Receivable Facility to
$67.2 million
at
December 31, 2016
. As of
December 31, 2016
, there were outstanding borrowings of
$48.9 million
under the Accounts Receivable Facility included in long-term debt, which reduced the availability under this facility to
$18.3 million
. As of December 31, 2015, there were
$49.0 million
outstanding borrowings under the Accounts Receivable Facility included in short-term debt. 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
1.65%
,
1.05%
and
0.20%
, at
December 31, 2016
,
2015
and
2014
, respectively.
The lines of credit for certain of the Company’s foreign subsidiaries provide for borrowings up to $
202.7 million
. Most of these lines of credit are uncommitted. At
December 31, 2016
, the Company’s foreign subsidiaries had borrowings outstanding of
$19.2 million
and guarantees of
$1.9 million
, which reduced the availability under these facilities to
$181.6 million
.
The weighted-average interest rate on short-term debt during the year was
0.7%
,
1.1%
and
3.1%
in
2016
,
2015
and
2014
, respectively. The weighted-average interest rate on short-term debt outstanding at
December 31, 2016
and
2015
was
0.50%
and
0.90%
, respectively. The decrease in the weighted-average interest rate was primarily due to increased borrowings in the U.S. at a lower rate.
Long-term debt for the years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Fixed-rate Medium-Term Notes, Series A, maturing at various dates through
May 2028, with interest rates ranging from 6.74% to 7.76%
|
$
|
159.5
|
|
$
|
174.4
|
|
Fixed-rate Senior Unsecured Notes, maturing on September 1, 2024, with an
interest rate of 3.875%
|
345.9
|
|
344.8
|
|
Variable-rate Senior Credit Facility with a weighted-average interest rate
of 1.50% at December 31, 2016 and 1.45% at December 31, 2015, respectively.
|
83.8
|
|
75.2
|
|
Variable-rate Accounts Receivable Facility with an interest rate of
1.65%
at
December 31, 2016
|
48.9
|
|
—
|
|
Other
|
1.9
|
|
0.1
|
|
Total debt
|
$
|
640.0
|
|
$
|
594.5
|
|
Less current maturities
|
5.0
|
|
15.1
|
|
Long-term debt
|
$
|
635.0
|
|
$
|
579.4
|
|
The Company has a
$500 million
Senior Credit Facility, which matures on
June 19, 2020
. At
December 31, 2016
, the Company had $
83.8 million
of outstanding borrowings under the Senior Credit Facility, which reduced the availability under this facility to
$416.2 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, 2016
, the Company was in full compliance with the covenants under the Senior Credit Facility.
Note 10 – Financing Arrangements (continued)
On August 20, 2014, the Company issued the 2024 Notes. The Company used the net proceeds from the issuance of the 2024 Notes to repay the Company's 2014 Notes and for general corporate purposes.
The maturities of long-term debt for the five years subsequent to
December 31, 2016
are as follows:
|
|
|
|
|
Year
|
|
2017
|
$
|
5.0
|
|
2018
|
48.9
|
|
2019
|
—
|
|
2020
|
83.8
|
|
2021
|
1.9
|
|
Thereafter
|
500.4
|
|
Interest paid was
$30.1 million
in
2016
,
$32.1 million
in
2015
and
$34.4 million
in
2014
. This differs from interest expense due to the timing of payments and interest capitalized of
$1.1 million
in
2016
,
zero
in
2015
and
$1.6 million
in
2014
.
The Company and its subsidiaries lease a variety of real property and equipment. Rent expense under operating leases amounted to
$30.0 million
,
$33.5 million
and
$33.0 million
in
2016
,
2015
and
2014
, respectively.
Future minimum lease payments for noncancelable operating leases totaled the following at
December 31, 2016
:
|
|
|
|
|
Year
|
|
2017
|
$
|
26.2
|
|
2018
|
21.0
|
|
2019
|
16.8
|
|
2020
|
13.5
|
|
2021
|
8.8
|
|
Thereafter
|
5.5
|
|
Note 11 - Contingencies
The Company and certain of its subsidiaries have been identified as potentially responsible parties for investigation and remediation under the Superfund or similar state laws with respect to certain sites. Claims for investigation and remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation.
On December 28, 2004, the United States Environmental Protection Agency (“USEPA”) sent Lovejoy a Special Notice Letter that identified Lovejoy as a potentially responsible party, together with at least fourteen other companies, at the Ellsworth Industrial Park Site, Downers Grove, DuPage County, Illinois (the “Site”). Lovejoy’s Downers Grove property is situated within the Ellsworth Industrial Complex. The USEPA and the Illinois Environmental Protection Agency (“IEPA”) allege there have been one or more releases or threatened releases of hazardous substances, allegedly including, but not limited to, a release or threatened release on or from Lovejoy's property, at the Site. The relief sought by the USEPA and IEPA includes further investigation and potential remediation of the Site and reimbursement of response costs. Lovejoy’s allocated share of past and future costs related to the Site, including for investigation and/or remediation, could be significant. All previously pending property damage and personal injury lawsuits against Lovejoy related to the Site have been settled or dismissed. In connection with the acquisition of Lovejoy discussed in
Note 3 - Acquisitions and Divestitures
, the Company recorded an accrual for potential environmental remediation.
The Company had total accruals of
$5.6 million
and $
1.2 million
for various known environmental matters that are probable and reasonably estimable as of
December 31, 2016
and
2015
, respectively. These accruals were recorded based upon the best estimate of costs to be incurred in light of the progress made in determining the magnitude of remediation costs, the timing and extent of remedial actions required by governmental authorities and the amount of the Company’s liability in proportion to other responsible parties. Of the
2016
and
2015
accruals,
$0.6 million
and $
0.3 million
, respectively, was included in the rollforward of the restructuring accrual as of
December 31, 2016
, discussed further in
Note 12 - Impairment and Restructuring Charges
.
In addition, the Company is subject to various lawsuits, claims and proceedings, which arise in the ordinary course of its business. The Company accrues costs associated with legal and non-income tax matters when they become probable and reasonably estimable. Accruals are established based on the estimated undiscounted cash flows to settle the obligations and are not reduced by any potential recoveries from insurance or other indemnification claims. Management believes that any ultimate liability with respect to these actions, in excess of amounts provided, will not materially affect the Company’s Consolidated Financial Statements.
In October 2014, the Brazilian government antitrust agency announced that it had opened an investigation of alleged antitrust violations in the bearing industry. The Company’s Brazilian subsidiary, Timken do Brasil Comercial Importadora Ltda, was included in the investigation. While the Company is unable to predict the ultimate length, scope or results of the investigation, management believes that the outcome will not have a material effect on the Company’s consolidated financial position; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Based on current facts and circumstances, the low end of the range for potential penalties, if any, would be immaterial to the Company.
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 liability for
2016
and
2015
:
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Beginning balance, January 1
|
$
|
5.4
|
|
$
|
3.7
|
|
Expense
|
2.4
|
|
6.1
|
|
Payments
|
(0.9
|
)
|
(4.4
|
)
|
Ending balance, December 31
|
$
|
6.9
|
|
$
|
5.4
|
|
The product warranty liability for
2016
and
2015
was included in other current liabilities on the Consolidated Balance Sheets.
The Company is currently evaluating claims raised by certain customers with respect to the performance of bearings sold into the wind energy sector. Accruals related to this matter are included in the table above. Management believes that the outcome of these claims will not have a material effect on the Company’s consolidated financial position; however, the effect of any such outcome may be material to the results of operations of any particular period in which costs in excess of amounts provided, if any, are recognized.
Note 12 - Impairment and Restructuring Charges
Impairment and restructuring charges by segment were as follows:
Year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Corporate
|
Total
|
Impairment charges
|
$
|
3.9
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3.9
|
|
Severance expense and related benefit costs
|
9.3
|
|
6.0
|
|
—
|
|
15.3
|
|
Exit costs
|
1.8
|
|
0.7
|
|
—
|
|
2.5
|
|
Total
|
$
|
15.0
|
|
$
|
6.7
|
|
$
|
—
|
|
$
|
21.7
|
|
Year ended
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Corporate
|
Total
|
Impairment charges
|
$
|
0.1
|
|
$
|
3.2
|
|
$
|
—
|
|
$
|
3.3
|
|
Severance expense and related benefit costs
|
4.5
|
|
2.6
|
|
0.6
|
|
7.7
|
|
Exit costs
|
0.8
|
|
2.9
|
|
—
|
|
3.7
|
|
Total
|
$
|
5.4
|
|
$
|
8.7
|
|
$
|
0.6
|
|
$
|
14.7
|
|
Year ended
December 31, 2014
:`
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Corporate
|
Total
|
Impairment charges
|
$
|
98.2
|
|
$
|
0.3
|
|
$
|
0.4
|
|
$
|
98.9
|
|
Severance expense and related benefit costs
|
9.3
|
|
1.4
|
|
—
|
|
10.7
|
|
Exit costs
|
2.0
|
|
1.8
|
|
—
|
|
3.8
|
|
Total
|
$
|
109.5
|
|
$
|
3.5
|
|
$
|
0.4
|
|
$
|
113.4
|
|
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:
On September 29, 2016, the Company announced the closure of the Pulaski bearing plant, which is expected to close in approximately one year from the announcement date and to affect approximately
120
employees. During
2016
, the Company recorded severance and related benefit costs of
$2.5 million
related to this closure.
In August 2016, the Company completed the consultation process to close the Benoni manufacturing operations affecting approximately
85
employees. During
2016
, the Company recorded impairment charges of
$0.5 million
and severance and related benefit costs of
$1.1 million
related to this closure. Benoni will continue to recondition bearings and assemble rail bearings.
On March 17, 2016, the Company announced the closure of the Altavista bearing plant. The plant is expected to close approximately one year from the announcement date, with production transferring to the Company's bearing plant near Lincolnton, North Carolina. During
2016
, the Company recorded impairment charges of
$3.1 million
and severance and related benefit costs of
$1.9 million
related to this closure.
Note 12 – Impairment and Restructuring Charges (continued)
On September 8, 2014, the Company announced plans to restructure its former Aerospace segment. In connection with the restructuring, the Company: (1) eliminated leadership positions and integrated substantially all aerospace activities into Mobile Industries under the direction of Christopher A. Coughlin, Executive Vice President and Group President; (2) sold the assets of its aerospace engine overhaul business, located in Mesa, Arizona, during the fourth quarter of 2014; (3) evaluated strategic alternatives for its aerospace MRO parts business, also located in Mesa; and (4) announced plans to close its aerospace bearing facility located in Wolverhampton, U.K. by early 2016, rationalizing the capacity into existing facilities. In conjunction with this announcement, the Company reviewed goodwill for impairment for its three reporting units within the Aerospace segment as a result of declining sales forecasts and financial performance within the segment. As a result of that review, the Company recorded a pretax goodwill impairment charge of
$86.3 million
during the third quarter of 2014 related to its Aerospace Transmissions and Aerospace Aftermarket reporting units. In addition, the Company recorded an intangible asset impairment charge of
$9.9 million
, an impairment charge of
$1.2 million
for its engine overhaul business, which it classified as assets held for sale and severance and related benefits of
$0.3 million
. During the fourth quarter of 2014, the Company recorded severance and related benefits of
$3.7 million
related to the planned closure of Wolverhampton. In 2016, the Company recorded exit costs of
$0.9 million
related to the closure of Wolverhampton. See
Note 18 - Fair Value
for additional information on the impairment charges for the former Aerospace segment.
In addition to the above charges, during 2015 and 2014, the Company recorded severance and related benefit costs of
$1.2 million
and
$2.9 million
related to the rationalization of its facility in Colmar, France.
Process Industries
During
2015
, the Company recorded impairment charges of
$3.0 million
related to a repair business in Niles, Ohio. See
Note 18 - Fair Value
for additional information on the impairment charges for the repair business. In addition, the Company recorded
$2.9 million
of exit costs related to the Company's termination of its relationship with one of its third-party sales representatives in Colombia.
Workforce Reductions:
In
2016
, the Company recognized
$9.4 million
of severance and related benefits to eliminate approximately
175
positions to improve efficiency and reduce costs. Of the
$9.4 million
charge for
2016
,
$3.8 million
related to the Mobile Industries segment and
$5.6 million
related to the Process Industries segment. During
2015
, the Company recognized
$6.5 million
of severance and related benefit costs to eliminate approximately
100
positions. Of the
$6.5 million
charge for
2015
,
$3.4 million
related to the Mobile Industries segment,
$2.5 million
related to the Process Industries segment and
$0.6 million
related to Corporate positions.
Consolidated Restructuring Accrual:
The following is a rollforward of the consolidated restructuring accrual for the years ended December 31:
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Beginning balance, January 1
|
$
|
11.3
|
|
$
|
9.5
|
|
Expense
|
17.8
|
|
11.4
|
|
Payments
|
(19.0
|
)
|
(9.6
|
)
|
Ending balance, December 31
|
$
|
10.1
|
|
$
|
11.3
|
|
The restructuring accrual at
December 31, 2016
and
2015
is included in other current liabilities on the Consolidated Balance Sheets.
Note 13 - Stock Compensation Plans
Under the Company’s long-term incentive plan, the Company’s common shares have been made available for grant, at the discretion of the Compensation Committee of the Board of Directors, to officers and key employees in the form of stock option awards. Stock option awards typically have a
ten-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, deferred shares, performance-based restricted stock units and time-vested restricted stock units under the long-term incentive plan.
During
2016
,
2015
and
2014
, the Company recognized stock-based compensation expense of
$5.9 million
(
$3.7 million
after tax or
$0.05
per diluted share),
$6.6 million
(
$4.1 million
after tax or
$0.05
per diluted share) and
$13.7 million
(
$8.5 million
after tax or
$0.09
per diluted share), respectively, for stock option awards.
The fair value of stock option awards granted during
2016
,
2015
and
2014
was estimated at the date of grant using a Black-Scholes option-pricing method with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
Weighted-average fair value per option (Pre-Spinoff for 2014)
|
$
|
6.49
|
|
$
|
11.67
|
|
$
|
23.09
|
|
Risk-free interest rate
|
1.22
|
%
|
1.58
|
%
|
1.64
|
%
|
Dividend yield
|
3.04
|
%
|
2.29
|
%
|
1.75
|
%
|
Expected stock volatility
|
34.12
|
%
|
36.53
|
%
|
50.96
|
%
|
Expected life - years
|
5
|
|
5
|
|
5
|
|
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
2.3%
.
A summary of stock option award activity for the year ended
December 31, 2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
Weighted-average
Exercise Price
|
Weighted-average
Remaining
Contractual Term
|
Aggregate Intrinsic Value
(millions)
|
Outstanding - beginning of year
|
3,279,868
|
|
$
|
35.60
|
|
|
|
Granted - new awards
|
733,580
|
|
27.75
|
|
|
|
Exercised
|
(152,720
|
)
|
26.89
|
|
|
|
Canceled or expired
|
(77,231
|
)
|
36.55
|
|
|
|
Outstanding - end of year
|
3,783,497
|
|
$
|
34.41
|
|
6 years
|
$
|
22.2
|
|
Options expected to vest
|
3,751,006
|
|
$
|
34.41
|
|
6 years
|
$
|
22.0
|
|
Options exercisable
|
2,370,847
|
|
$
|
34.38
|
|
5 years
|
$
|
13.6
|
|
The total intrinsic value of stock option awards exercised during the years ended
December 31, 2016
,
2015
and
2014
was
$1.7 million
,
$5.6 million
and
$21.5 million
, respectively. Net cash proceeds from the exercise of stock option awards were
$4.3 million
,
$4.1 million
and
$16.8 million
, respectively. Income taxes were a shortfall of
$0.3 million
for the year ended
December 31, 2016
. Income tax benefits were
$1.3 million
and
$5.9 million
for the years ended
December 31, 2015
and
2014
, respectively.
In
2016
, the Company issued
368,815
performance-based restricted stock units and
265,930
time-based restricted stock units to officers and key employees. The performance-based restricted stock units are calculated and awarded based on the achievement of specified performance objectives and vest
three years
from the date of grant. The performance-based restricted stock units settle in either cash or shares, with
10,880
shares expected to settle in cash and
357,935
expected to settle in common shares. Time-vesting restricted stock units vest in
25%
increments annually beginning on the first anniversary of the grant or vest
five years
from the date of grant. Time-based restricted stock units also settle in either cash or shares, with
10,700
time-based restricted stock units expected to settle in cash and
255,230
time-based restricted stock units expected to settle in common shares. For time-based restricted stock units that are expected to settle in cash, the Company had
$1.2 million
and
$6.1 million
, accrued in salaries, wages and benefits as of
December 31, 2016
and
2015
, respectively, on the Consolidated Balance Sheets.
Note 13 - Stock Compensation Plans (continued)
A summary of stock award activity, including restricted shares, deferred shares, performance-based restricted stock units and time-based restricted stock units that will settle in common shares, for the year ended
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
Number of Shares
|
Weighted-average
Grant Date Fair Value
|
Outstanding - beginning of year
|
1,014,770
|
|
$
|
40.69
|
|
Granted - new awards
|
613,165
|
|
28.21
|
|
Vested
|
(188,383
|
)
|
41.48
|
|
Canceled or expired
|
(90,377
|
)
|
39.92
|
|
Outstanding - end of year
|
1,349,175
|
|
$
|
34.96
|
|
As of
December 31, 2016
, a total of
1,349,175
stock awards have been awarded that have not yet vested. The Company distributed
188,383
,
103,953
and
171,135
shares in
2016
,
2015
and
2014
, respectively, due to the vesting of stock awards. The shares awarded in
2016
,
2015
and
2014
totaled
613,165
,
485,975
and
520,912
, respectively. The Company recognized compensation expense of
$8.2 million
,
$11.8 million
and
$10.1 million
, for the years ended
December 31, 2016
,
2015
and
2014
, respectively, relating to restricted share activity.
As of
December 31, 2016
, the Company had unrecognized compensation expense of
$24.1 million
related to stock options and stock awards. 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, 2016
was
6,238,995
.
Note 14 - 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
$15.0 million
,
$10.8 million
and
$21.1 million
in
2016
,
2015
and
2014
, respectively.
The following tables summarize the net periodic benefit cost information and the related assumptions used to measure the net periodic benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
|
2016
|
2015
|
2014
|
2016
|
2015
|
2014
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
13.1
|
|
$
|
15.4
|
|
$
|
21.5
|
|
$
|
1.4
|
|
$
|
2.2
|
|
$
|
2.4
|
|
Interest cost
|
26.6
|
|
45.6
|
|
98.3
|
|
10.5
|
|
12.3
|
|
17.7
|
|
Expected return on plan assets
|
(29.8
|
)
|
(62.6
|
)
|
(152.0
|
)
|
(10.3
|
)
|
(16.7
|
)
|
(23.7
|
)
|
Amortization of prior service cost
|
1.7
|
|
2.8
|
|
3.5
|
|
0.1
|
|
0.1
|
|
0.1
|
|
Amortization of net actuarial loss
|
14.5
|
|
31.1
|
|
55.6
|
|
3.4
|
|
5.2
|
|
5.3
|
|
Curtailment
|
—
|
|
—
|
|
—
|
|
(0.1
|
)
|
0.6
|
|
—
|
|
Settlement
|
15.8
|
|
456.4
|
|
32.7
|
|
10.8
|
|
4.8
|
|
0.8
|
|
Special termination benefits
|
—
|
|
—
|
|
—
|
|
—
|
|
0.6
|
|
—
|
|
Less: Discontinued operations
|
—
|
|
—
|
|
(8.0
|
)
|
—
|
|
—
|
|
0.4
|
|
Net periodic benefit cost
|
$
|
41.9
|
|
$
|
488.7
|
|
$
|
51.6
|
|
$
|
15.8
|
|
$
|
9.1
|
|
$
|
3.0
|
|
|
|
|
|
|
|
|
Assumptions
|
2016
|
2015
|
2014
|
U.S. Plans:
|
|
|
|
Discount rate
|
4.50% to 4.70%
|
3.98% to 4.64%
|
|
4.68% / 5.02%
|
|
Future compensation assumption
|
2.50% to 3.00%
|
2.00% to 3.00%
|
|
2.00% to 3.00%
|
|
Expected long-term return on plan assets
|
5.75% to 6.75%
|
6.00
|
%
|
7.25
|
%
|
International Plans:
|
|
|
|
Discount rate
|
2.00% to 8.50%
|
1.50% to 8.75%
|
|
3.25% to 9.75%
|
|
Future compensation assumption
|
2.20% to 8.00%
|
2.20% to 8.00%
|
|
2.30% to 8.00%
|
|
Expected long-term return on plan assets
|
0.82% to 9.25%
|
2.25% to 9.25%
|
|
3.00% to 8.50%
|
|
In
2016
, the Company incurred pension settlement charges of
$28.1 million
, including professional fees of
$1.5 million
, primarily to settle approximately
$70 million
of the Company's pension obligations. On September 8, 2016, the Retirement Plan for the Hourly-Rated Employees of Timken Canada LP (the "Canadian Plan") purchased a group annuity contract from Canada Life to pay and administer future pension benefits for
135
Canadian Timken retirees. The Plan was associated with former employees of the St. Thomas, Ontario manufacturing facility, which closed on March 31, 2013. The Company transferred approximately
$15 million
of the Company's pension obligations and
$15 million
of pension assets to Canada Life in this transaction. In addition to the purchase of the group annuity contract, the Company made lump-sum distributions of approximately
$55 million
to new retirees and deferred vested participants in two of the Company's U.S. defined benefit pension plans and the Canadian Plan.
Note 14 - Retirement Benefit Plans (continued)
In 2015, the Company entered into two agreements pursuant to which two of the Company's U.S. defined benefit pension plans purchased group annuity contracts from Prudential. The two group annuity contracts require Prudential to pay and administer future pension benefits for approximately
8,400
U.S. Timken retirees in the aggregate. The Company transferred a total of approximately
$1.1 billion
of its pension obligations and a total of approximately
$1.2 billion
of pension assets to Prudential in these transactions. In addition to the purchase of the group annuity contracts, the Company made lump-sum distributions of
$37.2 million
to new retirees in the U.S. The Company also entered into an agreement pursuant to which one of the Company's Canadian defined benefit pension plans purchased a group annuity contract from Canada Life. The group annuity contract requires Canada Life to pay and administer future pension benefits for approximately
40
Canadian retirees. As a result of the group annuity contracts, lump-sum distributions, as well as pension settlement and curtailment charges related to the Company's Canadian pension plans, the Company incurred total pension settlement and curtailment charges of
$465.0 million
, including professional fees of
$2.6 million
, in 2015.
In 2014, the Company incurred pension settlement charges of
$33.7 million
, including professional fees, primarily to settle approximately
$110 million
of the Company's pension obligations related to one of its defined benefit pension plans in the U.S. as a result of the lump sum distributions for 2014 retirements and certain deferred vested plan participants.
For expense purposes in
2016
, the Company applied a weighted-average discount rate of
4.69%
to its US defined benefit pension plans. For expense purposes in 2017, the Company will apply a weighted-average discount rate of
4.34%
to its U.S. defined benefit pension plans.
For expense purposes in
2016
, the Company applied a weighted-average expected rate of return of
5.78%
for the Company’s U.S. pension plan assets. For expense purposes in
2017
, the Company will apply a weighted-average expected rate of return on plan assets of
5.78%
.
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, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
|
2016
|
2015
|
2016
|
2015
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
589.9
|
|
$
|
1,703.9
|
|
$
|
338.1
|
|
$
|
415.7
|
|
Service cost
|
13.1
|
|
15.4
|
|
1.4
|
|
2.2
|
|
Interest cost
|
26.6
|
|
45.6
|
|
10.5
|
|
12.3
|
|
Actuarial losses (gains)
|
45.3
|
|
68.8
|
|
53.4
|
|
(31.6
|
)
|
International plan exchange rate change
|
—
|
|
—
|
|
(45.0
|
)
|
(29.5
|
)
|
Curtailment
|
—
|
|
—
|
|
(0.1
|
)
|
0.5
|
|
Benefits paid
|
(62.5
|
)
|
(100.9
|
)
|
(44.1
|
)
|
(17.6
|
)
|
Special termination benefits
|
—
|
|
—
|
|
—
|
|
0.6
|
|
Settlements
|
—
|
|
(1,162.8
|
)
|
—
|
|
(14.5
|
)
|
Acquisitions
|
—
|
|
19.9
|
|
—
|
|
—
|
|
Benefit obligation at end of year
|
$
|
612.4
|
|
$
|
589.9
|
|
$
|
314.2
|
|
$
|
338.1
|
|
Note 14 - Retirement Benefit Plans (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
|
2016
|
2015
|
2016
|
2015
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
553.7
|
|
$
|
1,772.4
|
|
$
|
304.6
|
|
$
|
349.4
|
|
Actual return on plan assets
|
33.8
|
|
23.0
|
|
43.2
|
|
4.5
|
|
Company contributions / payments
|
4.6
|
|
4.4
|
|
10.4
|
|
6.4
|
|
International plan exchange rate change
|
—
|
|
—
|
|
(45.4
|
)
|
(23.6
|
)
|
Acquisitions
|
—
|
|
17.6
|
|
—
|
|
—
|
|
Settlements
|
—
|
|
(1,162.8
|
)
|
—
|
|
(14.5
|
)
|
Benefits paid
|
(62.5
|
)
|
(100.9
|
)
|
(44.1
|
)
|
(17.6
|
)
|
Fair value of plan assets at end of year
|
529.6
|
|
553.7
|
|
268.7
|
|
304.6
|
|
Funded status at end of year
|
$
|
(82.8
|
)
|
$
|
(36.2
|
)
|
$
|
(45.5
|
)
|
$
|
(33.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized on the Consolidated Balance Sheets:
|
|
|
|
|
Non-current assets
|
$
|
26.4
|
|
$
|
69.0
|
|
$
|
5.7
|
|
$
|
17.3
|
|
Current liabilities
|
(4.3
|
)
|
(4.2
|
)
|
(1.4
|
)
|
(4.9
|
)
|
Non-current liabilities
|
(104.9
|
)
|
(101.0
|
)
|
(49.8
|
)
|
(45.9
|
)
|
|
$
|
(82.8
|
)
|
$
|
(36.2
|
)
|
$
|
(45.5
|
)
|
$
|
(33.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
|
|
Net actuarial loss
|
$
|
198.3
|
|
$
|
187.4
|
|
$
|
87.9
|
|
$
|
93.3
|
|
Net prior service cost
|
7.4
|
|
9.1
|
|
0.5
|
|
0.5
|
|
Accumulated other comprehensive loss
|
$
|
205.7
|
|
$
|
196.5
|
|
$
|
88.4
|
|
$
|
93.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets and benefit obligations recognized in accumulated other comprehensive loss (AOCL):
|
|
|
|
|
AOCL at beginning of year
|
$
|
196.5
|
|
$
|
578.4
|
|
$
|
93.8
|
|
$
|
133.0
|
|
Net actuarial loss (gain)
|
41.2
|
|
108.4
|
|
20.4
|
|
(18.9
|
)
|
Recognized net actuarial loss
|
(14.5
|
)
|
(31.1
|
)
|
(3.4
|
)
|
(5.2
|
)
|
Recognized prior service cost
|
(1.7
|
)
|
(2.8
|
)
|
(0.1
|
)
|
(0.1
|
)
|
Loss recognized due to curtailment
|
—
|
|
—
|
|
0.1
|
|
(0.6
|
)
|
Loss recognized due to settlement
|
(15.8
|
)
|
(456.4
|
)
|
(10.8
|
)
|
(4.8
|
)
|
Foreign currency impact
|
—
|
|
—
|
|
(11.6
|
)
|
(9.6
|
)
|
Total recognized in accumulated other comprehensive loss at December 31
|
$
|
205.7
|
|
$
|
196.5
|
|
$
|
88.4
|
|
$
|
93.8
|
|
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
|
2016
|
2015
|
U.S. Plans:
|
|
|
Discount rate
|
4.34% to 4.50%
|
4.50% to 4.70%
|
Future compensation assumption
|
2.00% to 3.00%
|
2.00% to 3.00%
|
International Plans:
|
|
|
Discount rate
|
1.25% to 9.00%
|
1.50% to 8.75%
|
Future compensation assumption
|
2.00% to 8.00%
|
2.20% to 8.00%
|
Note 14 - Retirement Benefit Plans (continued)
Defined benefit pension plans in the United States represent
66%
of the benefit obligation and
66%
of the fair value of plan assets as of
December 31, 2016
.
Certain of the Company’s defined benefit pension plans were overfunded as of
December 31, 2016
. As a result,
$32.1 million
and
$86.3 million
at
December 31, 2016
and
2015
, respectively, are included in non-current pension assets on the Consolidated Balance Sheets. The current portion of accrued pension cost, which was included in salaries, wages and benefits on the Consolidated Balance Sheets, was
$5.7 million
and
$9.1 million
at
December 31, 2016
and
2015
, respectively. In
2016
, 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, 2016
exceeded the market value of plan assets for several of the Company’s pension plans. For these plans, the projected benefit obligation was
$194.2 million
, the accumulated benefit obligation was
$182.5 million
and the fair value of plan assets was
$34.7 million
at
December 31, 2016
.
The total pension accumulated benefit obligation for all plans was
$888.0 million
and
$890.3 million
at
December 31, 2016
and
2015
, respectively.
Investment performance increased the value of the Company’s pension assets by
8.5%
in 2016.
As of
December 31, 2016
and
2015
, the Company’s defined benefit pension plans did not directly hold any of the Company’s common shares.
Under current accounting policies, 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
$19.2 million
and
$1.4 million
, respectively. Refer to
Change in Accounting Principle
in the
Other Disclosures
section for additional information on potential changes to these policies.
Plan Assets:
The Company’s target allocation for pension plan assets, as well as the actual pension plan asset allocations as of
December 31, 2016
and
2015
, was as follows:
|
|
|
|
|
|
|
|
Current Target
Allocation
|
Percentage of Pension Plan
Assets at December 31,
|
Asset Category
|
|
|
|
2016
|
2015
|
Equity securities
|
6%
|
to
|
12%
|
12%
|
15%
|
Debt securities
|
70%
|
to
|
90%
|
78%
|
63%
|
Other
|
7%
|
to
|
15%
|
10%
|
22%
|
Total
|
|
|
|
100%
|
100%
|
The Company recognizes its overall responsibility to ensure that the assets of its various defined benefit pension plans are managed effectively and prudently and in compliance with its policy guidelines and all applicable laws. Preservation of capital is important; however, the Company also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the pension funds. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
Note 14 - Retirement Benefit Plans (continued)
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB provides accounting rules that classify the inputs used to measure fair value into the following hierarchy:
|
|
Level 1 -
|
Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2 -
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
|
|
|
Level 3 -
|
Unobservable inputs for the asset or liability.
|
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, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
International Pension Plans
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
34.3
|
|
$
|
—
|
|
$
|
—
|
|
$
|
34.3
|
|
$
|
0.8
|
|
$
|
—
|
|
$
|
—
|
|
$
|
0.8
|
|
Government and agency securities
|
44.0
|
|
2.6
|
|
—
|
|
46.6
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Corporate bonds - investment grade
|
—
|
|
65.7
|
|
—
|
|
65.7
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Equity securities - U.S. companies
|
10.5
|
|
—
|
|
—
|
|
10.5
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Equity securities - international companies
|
6.2
|
|
—
|
|
—
|
|
6.2
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Mutual funds
|
41.5
|
|
—
|
|
—
|
|
41.5
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
$
|
136.5
|
|
$
|
68.3
|
|
$
|
—
|
|
$
|
204.8
|
|
$
|
0.8
|
|
$
|
—
|
|
$
|
—
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
Investments measured at net asset value:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
—
|
|
|
|
|
$
|
3.4
|
|
Corporate bonds - investment grade
|
|
|
|
—
|
|
|
|
|
2.7
|
|
Equity securities - international companies
|
|
|
|
—
|
|
|
|
|
1.5
|
|
Common collective funds - domestic equities
|
|
|
|
14.0
|
|
|
|
|
—
|
|
Common collective funds - international equities
|
|
|
|
14.1
|
|
|
|
|
33.4
|
|
Common collective funds - fixed income
|
|
|
|
217.1
|
|
|
|
|
74.6
|
|
Limited partnerships
|
|
|
|
39.6
|
|
|
|
|
—
|
|
Real estate partnerships
|
|
|
|
22.1
|
|
|
|
|
—
|
|
Other assets
|
|
|
|
—
|
|
|
|
|
152.3
|
|
Risk parity
|
|
|
|
17.9
|
|
|
|
|
—
|
|
Total Assets
|
|
|
|
$
|
529.6
|
|
|
|
|
$
|
268.7
|
|
Note 14 - Retirement Benefit Plans (continued)
The following table presents the fair value hierarchy for those investments of the Company’s pension assets measured at fair value on a recurring basis as of
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
International Pension Plans
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
23.9
|
|
$
|
—
|
|
$
|
—
|
|
$
|
23.9
|
|
$
|
12.8
|
|
$
|
—
|
|
$
|
—
|
|
$
|
12.8
|
|
Government and agency securities
|
33.0
|
|
2.2
|
|
—
|
|
35.2
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Corporate bonds - investment grade
|
—
|
|
56.0
|
|
—
|
|
56.0
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Equity securities - U.S. companies
|
9.7
|
|
—
|
|
—
|
|
9.7
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Equity securities - international companies
|
6.1
|
|
—
|
|
—
|
|
6.1
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
$
|
72.7
|
|
$
|
58.2
|
|
$
|
—
|
|
$
|
130.9
|
|
$
|
12.8
|
|
$
|
—
|
|
$
|
—
|
|
$
|
12.8
|
|
|
|
|
|
|
|
|
|
|
Investments measured at net asset value:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
41.8
|
|
|
|
|
$
|
18.2
|
|
Corporate bonds - investment grade
|
|
|
|
—
|
|
|
|
|
3.0
|
|
Equity securities - U.S. companies
|
|
|
|
0.1
|
|
|
|
|
—
|
|
Equity securities - international companies
|
|
|
|
—
|
|
|
|
|
0.9
|
|
Common collective funds - domestic equities
|
|
|
|
13.0
|
|
|
|
|
—
|
|
Common collective funds - international equities
|
|
|
|
14.2
|
|
|
|
|
81.4
|
|
Common collective funds - fixed income
|
|
|
|
173.6
|
|
|
|
|
85.0
|
|
Limited partnerships
|
|
|
|
52.8
|
|
|
|
|
—
|
|
Real estate partnerships
|
|
|
|
99.7
|
|
|
|
|
—
|
|
Other assets
|
|
|
|
—
|
|
|
|
|
103.3
|
|
Risk parity
|
|
|
|
27.6
|
|
|
|
|
—
|
|
Total Assets
|
|
|
|
$
|
553.7
|
|
|
|
|
$
|
304.6
|
|
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. Other real estate investments are valued based on the ownership interest in the net asset value of the investment, which is used as a practical expedient to fair value per the underlying investment fund, which is based on appraised values and current transaction prices. Risk parity investments include funds that invest in diversified global asset classes (equities, bonds, inflation-linked bonds, and commodities) with leverage to balance risk and achieve consistent returns with lower volatility. Risk parity investments are valued based on the closing prices of the underlying securities in the active markets in which they are traded.
Note 14 - Retirement Benefit Plans (continued)
Cash Flows:
|
|
|
|
|
Employer Contributions to Defined Benefit Plans
|
|
2015
|
$
|
10.8
|
|
2016
|
14.8
|
|
2017 (planned)
|
10.0
|
|
Future benefit payments, including lump sum distributions, are expected to be as follows:
|
|
|
|
|
Benefit Payments
|
|
2017
|
$
|
58.0
|
|
2018
|
62.9
|
|
2019
|
78.8
|
|
2020
|
58.2
|
|
2021
|
69.5
|
|
2022-2026
|
290.9
|
|
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. In the past, the Company has contributed its common shares to certain of these plans based on formulas established in the respective plan agreements. In 2016, the Company contributed its common shares to certain of these plans based on the elections of the participants in these plans. At
December 31, 2016
, the plans held
2,790,811
of the Company’s common shares with a fair value of
$110.8 million
. Company contributions to the plans were
$20.2 million
in
2016
,
$22.4 million
in
2015
and
$26.1 million
in
2014
. The Company paid dividends totaling
$3.7 million
in
2016
,
$4.2 million
in
2015
and
$4.7 million
in
2014
to plans holding the Company’s common shares.
Note 15 - 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
:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
Components of net periodic benefit cost:
|
|
|
|
Service cost
|
$
|
0.3
|
|
$
|
0.4
|
|
$
|
1.3
|
|
Interest cost
|
11.0
|
|
10.9
|
|
16.7
|
|
Expected return on plan assets
|
(6.6
|
)
|
(7.1
|
)
|
(8.5
|
)
|
Amortization of prior service credit
|
1.0
|
|
0.8
|
|
1.0
|
|
Amortization of net actuarial loss
|
—
|
|
0.1
|
|
—
|
|
Curtailment
|
0.1
|
|
—
|
|
—
|
|
Less: discontinued operations
|
—
|
|
—
|
|
(3.1
|
)
|
Net periodic benefit cost
|
$
|
5.8
|
|
$
|
5.1
|
|
$
|
7.4
|
|
|
|
|
|
|
|
|
|
Assumptions:
|
2016
|
2015
|
2014
|
Discount rate
|
4.39
|
%
|
3.95
|
%
|
4.33% / 4.59%
|
|
Rate of return
|
6.00
|
%
|
6.25
|
%
|
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
2016
, the Company applied a discount rate of
4.39%
to its postretirement benefit plans. For expense purposes in 2017, the Company will apply a discount rate of
3.97%
to its postretirement benefit plans.
For expense purposes in
2016
, the Company applied an expected rate of return of
6.00%
to the VEBA trust assets. For expense purposes in 2017, the Company will apply an expected rate of return of
6.00%
to the VEBA trust assets.
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 postretirement benefit plans as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Change in benefit obligation:
|
|
|
Benefit obligation at beginning of year
|
$
|
262.7
|
|
$
|
284.6
|
|
Service cost
|
0.3
|
|
0.4
|
|
Interest cost
|
11.0
|
|
10.9
|
|
Amendments
|
(11.4
|
)
|
—
|
|
Actuarial (gains) losses
|
4.3
|
|
(7.7
|
)
|
International plan exchange rate change
|
—
|
|
(0.3
|
)
|
Benefits paid
|
(25.5
|
)
|
(26.3
|
)
|
Acquisition
|
—
|
|
1.1
|
|
Benefit obligation at end of year
|
$
|
241.4
|
|
$
|
262.7
|
|
Note 15 - Postretirement Benefit Plans (continued)
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Change in plan assets:
|
|
|
Fair value of plan assets at beginning of year
|
$
|
112.1
|
|
$
|
120.7
|
|
Company contributions / payments
|
9.7
|
|
19.0
|
|
Return on plan assets
|
6.1
|
|
(1.3
|
)
|
Benefits paid
|
(25.5
|
)
|
(26.3
|
)
|
Fair value of plan assets at end of year
|
102.4
|
|
112.1
|
|
Funded status at end of year
|
$
|
(139.0
|
)
|
$
|
(150.6
|
)
|
|
|
|
|
|
|
|
|
Amounts recognized on the Consolidated Balance Sheets:
|
|
|
Current liabilities
|
$
|
(7.5
|
)
|
$
|
(14.5
|
)
|
Non-current liabilities
|
(131.5
|
)
|
(136.1
|
)
|
|
$
|
(139.0
|
)
|
$
|
(150.6
|
)
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
Net actuarial loss
|
$
|
23.9
|
|
$
|
19.2
|
|
Net prior service cost
|
(10.3
|
)
|
2.1
|
|
Accumulated other comprehensive loss
|
$
|
13.6
|
|
$
|
21.3
|
|
|
|
|
|
|
|
|
|
Changes in plan assets and benefit obligations recognized in AOCL:
|
|
|
AOCL at beginning of year
|
$
|
21.3
|
|
$
|
21.5
|
|
Net actuarial loss
|
4.8
|
|
0.7
|
|
Prior service cost
|
(11.4
|
)
|
—
|
|
Recognized net actuarial loss
|
—
|
|
(0.1
|
)
|
Recognized prior service credit
|
(1.0
|
)
|
(0.8
|
)
|
Loss recognized due to curtailment
|
(0.1
|
)
|
—
|
|
Total recognized in accumulated other comprehensive loss at December 31
|
$
|
13.6
|
|
$
|
21.3
|
|
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.
The following table summarizes assumptions used to measure the benefit obligation for the postretirement benefit plans at
December 31
:
|
|
|
|
|
|
Assumptions:
|
2016
|
2015
|
Discount rate
|
3.97
|
%
|
4.39
|
%
|
In
2016
, the Company amended the postretirement benefit plan for nonbargaining employees to no longer offer Company subsidized postretirement medical benefits to those employees that retire after December 31, 2016. This amendment reduced the accumulated benefit obligation by
$11.4 million
in
2016
. This amount will be amortized over the remaining service period of the employees affected by this amendment.
The current portion of accrued postretirement benefit cost, which was included in salaries, wages and benefits on the Consolidated Balance Sheets, was
$7.5 million
and
$14.5 million
at
December 31, 2016
and
2015
, respectively. In
2016
, the current portion of accrued postretirement benefit cost related to unfunded plans and represented the actuarial present value of expected payments related to the plans to be made over the
next 12 months
.
The estimated 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 is a credit of
$1.1 million
. The Company does not expect to recognize any amortization of the net actuarial loss over the next fiscal year.
Note 15 - Postretirement Benefit Plans (continued)
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
6.50%
for
2017
, declining gradually to
5.0%
in
2023
and thereafter; and
6.50%
for
2017
, declining gradually to
5.0%
in
2023
and thereafter for prescription drug benefits; and
8.50%
for
2017
, declining gradually to
5.0%
in
2031
and thereafter for HMO benefits. Most of the Company's postretirement plans include caps that limit the amount of the benefit provided by the Company to participants each year, which lessens the impact of health care inflation costs to the Company.
The assumed health care cost trend rate may have a significant effect on the amounts reported. A one percentage point increase in the assumed health care cost trend rate would have increased the
2016
total service and interest cost components by
$0.2 million
and would have increased the postretirement benefit obligation by
$6.0 million
. A one percentage point decrease would provide corresponding reductions of
$0.2 million
and
$5.3 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 Topic 715, “Compensation – Retirement Benefits,” all measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the financial statements or accompanying notes reflect the effects of the Medicare Act on the plan for the entire fiscal year. The
2016
expected subsidy was
$1.7 million
, of which
$1.0 million
was received prior to
December 31, 2016
.
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, 2016
and
2015
, was as follows:
|
|
|
|
|
|
|
|
Current Target
Allocation
|
Percentage of VEBA Assets
at December 31,
|
Asset Category
|
|
|
|
2016
|
2015
|
Equity securities
|
34%
|
to
|
46%
|
30%
|
42%
|
Debt securities
|
54%
|
to
|
66%
|
70%
|
58%
|
Total
|
|
|
|
100%
|
100%
|
During 2016, the Pension Investment Committee made the decision to temporarily adjust the asset allocation outside of the target allocation percentages in order to better align investments with the timing of anticipated cash flows from the VEBA. The target allocation is currently under review and will be revised as needed in 2017.
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.
The following table presents those investments of the Company’s VEBA trust assets measured at net asset value on a recurring basis as of
December 31, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Assets:
|
|
|
Cash and cash equivalents
|
$
|
2.1
|
|
$
|
3.0
|
|
Common collective fund - U.S. equities
|
18.5
|
|
28.2
|
|
Common collective fund - international equities
|
12.3
|
|
18.3
|
|
Common collective fund - fixed income
|
69.5
|
|
62.6
|
|
Total Assets
|
$
|
102.4
|
|
$
|
112.1
|
|
Note 15 - Postretirement Benefit Plans (continued)
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:
The Company did not make any employer contributions to the VEBA Trust in
2016
and
2015
. Employer contributions to the VEBA trust were
$20.0 million
in
2014
. The Company does not expect to make any employer contributions in 2017.
Future benefit payments are expected to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
Expected
Medicare
Subsidies
|
Net Including
Medicare
Subsidies
|
2017
|
$
|
27.7
|
|
$
|
1.7
|
|
$
|
26.0
|
|
2018
|
26.3
|
|
1.8
|
|
24.5
|
|
2019
|
24.7
|
|
1.8
|
|
22.9
|
|
2020
|
23.2
|
|
1.9
|
|
21.3
|
|
2021
|
21.8
|
|
1.9
|
|
19.9
|
|
2022-2026
|
91.4
|
|
8.6
|
|
82.8
|
|
Note 16 - Segment Information
The Company operates under
two
reportable segments: (1) Mobile Industries and (2) Process Industries.
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. While the segments often operate using a shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market segments.
Mobile Industries offers an extensive portfolio of bearings, seals, lubrication devices and systems, as well as power transmission components, engineered chain, augers, belts and related products and maintenance services, to OEMs and end users of: off-highway equipment for the agricultural, construction, mining, outdoor power equipment and powersports markets; on-highway vehicles including passenger cars, light trucks and medium- and heavy-duty trucks; rail cars and locomotives. Beyond service parts sold to OEMs, aftermarket sales to individual end users, equipment owners, operators and maintenance shops are handled through the Company's extensive network of authorized automotive and heavy-truck distributors, and include hub units, specialty kits and more. Mobile Industries also provides power transmission systems and flight-critical components for civil and military aircraft, which include bearings, helicopter transmission systems, rotor-head assemblies, turbine engine components, gears and housings.
Process Industries supplies industrial bearings and assemblies, power transmission components such as gears and gearboxes, couplings, seals, lubricants, chains, belts and related products and services to OEMs and end users in industries that place heavy demands on operating equipment they make or use. This includes; metals, mining, cement and aggregate production; coal and wind power generation; oil and gas; pulp and paper in applications including printing presses; and cranes, hoists, drawbridges, wind energy turbines, gear drives, drilling equipment, coal conveyors, health and critical motion control equipment, marine equipment and food processing equipment. This segment also supports aftermarket sales and service needs through its global network of authorized industrial distributors. In addition, the Company’s industrial services group offers end users a broad portfolio of maintenance support and capabilities that include repair and service for bearings and gearboxes as well as electric motor rewind, repair and services.
Measurement of segment profit or loss and segment assets:
The Company evaluates performance and allocates resources based on return on capital and profitable growth. The primary measurement used by management to measure the financial performance of each segment is EBIT.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Factors used by management to identify the enterprise’s reportable segments:
Net sales by geographic area are reported by the destination of net sales, which is reflective of how the Company operates its segments. Long-lived assets by geographic area are reported by the location of the subsidiary.
Timken’s non-U.S. operations are subject to normal international business risks not generally applicable to a domestic business. These risks include currency fluctuation, changes in tariff restrictions, difficulties in establishing and maintaining relationships with local distributors and dealers, import and export licensing requirements, difficulties in staffing and managing geographically diverse operations and restrictive regulations by foreign governments, including price and exchange controls, compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and environmental regulatory requirements, and disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the FCPA.
Note 16 - Segment Information (continued)
Geographic Financial Information:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
Net sales:
|
|
|
|
United States
|
$
|
1,478.6
|
|
$
|
1,566.1
|
|
$
|
1,623.6
|
|
Americas excluding United States
|
308.2
|
|
339.7
|
|
378.1
|
|
Europe / Middle East / Africa
|
461.3
|
|
496.7
|
|
559.8
|
|
Asia-Pacific
|
421.7
|
|
469.8
|
|
514.7
|
|
|
$
|
2,669.8
|
|
$
|
2,872.3
|
|
$
|
3,076.2
|
|
Property, Plant and Equipment, net:
|
|
|
|
United States
|
$
|
418.0
|
|
$
|
446.7
|
|
$
|
443.5
|
|
Americas excluding United States
|
14.9
|
|
10.6
|
|
13.9
|
|
Europe / Middle East / Africa
|
141.1
|
|
92.5
|
|
96.2
|
|
Asia-Pacific
|
230.4
|
|
228.0
|
|
226.9
|
|
|
$
|
804.4
|
|
$
|
777.8
|
|
$
|
780.5
|
|
Business Segment Information:
The following tables provide segment financial information and a reconciliation of segment results to consolidated results:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
Net sales to external customers:
|
|
|
|
Mobile Industries
|
$
|
1,446.4
|
|
$
|
1,558.3
|
|
$
|
1,685.4
|
|
Process Industries
|
1,223.4
|
|
1,314.0
|
|
1,390.8
|
|
|
$
|
2,669.8
|
|
$
|
2,872.3
|
|
$
|
3,076.2
|
|
Segment EBIT:
|
|
|
|
Mobile Industries
|
$
|
108.8
|
|
$
|
173.3
|
|
$
|
65.6
|
|
Process Industries
|
163.2
|
|
190.2
|
|
267.1
|
|
Total EBIT, for reportable segments
|
$
|
272.0
|
|
$
|
363.5
|
|
$
|
332.7
|
|
Corporate expenses
|
(49.8
|
)
|
(57.4
|
)
|
(71.4
|
)
|
CDSOA income, net
|
59.6
|
|
—
|
|
—
|
|
Pension settlement charges
|
(28.1
|
)
|
(465.0
|
)
|
(33.0
|
)
|
Interest expense
|
(33.5
|
)
|
(33.4
|
)
|
(28.7
|
)
|
Interest income
|
1.9
|
|
2.7
|
|
4.4
|
|
Income (loss) from continuing operations before income taxes
|
$
|
222.1
|
|
$
|
(189.6
|
)
|
$
|
204.0
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Assets employed at year-end:
|
|
|
Mobile Industries
|
$
|
1,159.5
|
|
$
|
1,240.1
|
|
Process Industries
|
1,320.5
|
|
1,226.9
|
|
Corporate
|
278.3
|
|
317.1
|
|
|
$
|
2,758.3
|
|
$
|
2,784.1
|
|
Note 16 - Segment Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
Capital expenditures:
|
|
|
|
Mobile Industries
|
$
|
88.4
|
|
$
|
47.5
|
|
$
|
55.7
|
|
Process Industries
|
48.4
|
|
57.5
|
|
70.1
|
|
Corporate
|
0.7
|
|
0.6
|
|
1.0
|
|
|
$
|
137.5
|
|
$
|
105.6
|
|
$
|
126.8
|
|
Depreciation and amortization:
|
|
|
|
Mobile Industries
|
$
|
64.9
|
|
$
|
61.4
|
|
$
|
65.7
|
|
Process Industries
|
65.6
|
|
68.1
|
|
68.8
|
|
Corporate
|
1.2
|
|
1.3
|
|
2.5
|
|
|
$
|
131.7
|
|
$
|
130.8
|
|
$
|
137.0
|
|
Corporate assets include corporate buildings and cash and cash equivalents.
Note 17 - Income Taxes
Income before income taxes, based on geographic location of the operations to which such earnings are attributable, is provided below. As the Company has elected to treat certain foreign subsidiaries as branches for U.S. income tax purposes, pretax income attributable to the United States shown below may differ from the pretax income reported in the Company’s annual U.S. Federal income tax return.
Income (loss) from continuing operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
United States
|
$
|
117.8
|
|
$
|
(307.7
|
)
|
$
|
39.5
|
|
Non-United States
|
104.3
|
|
118.1
|
|
164.5
|
|
Income (loss) from continuing operations before income taxes
|
$
|
222.1
|
|
$
|
(189.6
|
)
|
$
|
204.0
|
|
The provision (benefit) for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
Current:
|
|
|
|
Federal
|
$
|
44.1
|
|
$
|
26.8
|
|
$
|
61.1
|
|
State and local
|
0.1
|
|
5.4
|
|
2.8
|
|
Foreign
|
31.3
|
|
16.3
|
|
44.1
|
|
|
$
|
75.5
|
|
$
|
48.5
|
|
$
|
108.0
|
|
Deferred:
|
|
|
|
Federal
|
$
|
(15.1
|
)
|
$
|
(146.1
|
)
|
$
|
(46.9
|
)
|
State and local
|
(0.1
|
)
|
(13.1
|
)
|
(4.4
|
)
|
Foreign
|
8.9
|
|
(10.9
|
)
|
(2.0
|
)
|
|
$
|
(6.3
|
)
|
$
|
(170.1
|
)
|
$
|
(53.3
|
)
|
United States and foreign tax provision (benefit) on income (loss)
|
$
|
69.2
|
|
$
|
(121.6
|
)
|
$
|
54.7
|
|
The Company made net income tax payments of
$49.7 million
,
$83.3 million
and
$111.6 million
in
2016
,
2015
and
2014
, respectively.
The following table is the reconciliation between the provision (benefit) for income taxes and the amount computed by applying the U.S. Federal income tax rate of
35%
to income before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
Income tax at the U.S. federal statutory rate
|
$
|
77.7
|
|
$
|
(66.4
|
)
|
$
|
71.4
|
|
Adjustments:
|
|
|
|
State and local income taxes, net of federal tax benefit
|
2.4
|
|
(4.9
|
)
|
(0.3
|
)
|
Tax on foreign remittances and U.S. tax on foreign income
|
8.3
|
|
13.8
|
|
19.6
|
|
Tax expense related to undistributed earnings of foreign subsidiaries
|
—
|
|
—
|
|
(8.7
|
)
|
Foreign losses without current tax benefits
|
6.4
|
|
5.3
|
|
4.3
|
|
Foreign earnings taxed at different rates including tax holidays
|
(3.5
|
)
|
(11.0
|
)
|
(15.7
|
)
|
U.S. domestic manufacturing deduction
|
(5.0
|
)
|
(4.5
|
)
|
(6.6
|
)
|
U.S. foreign tax credit
|
(8.0
|
)
|
(22.4
|
)
|
(15.1
|
)
|
U.S. research tax credit
|
(0.6
|
)
|
(1.1
|
)
|
(1.0
|
)
|
Accruals and settlements related to tax audits
|
(8.1
|
)
|
(5.9
|
)
|
12.8
|
|
Valuation allowance changes, net
|
0.2
|
|
(34.7
|
)
|
—
|
|
Deferred taxes related to branch operations
|
(1.3
|
)
|
11.6
|
|
—
|
|
Other items, net
|
0.7
|
|
(1.4
|
)
|
(6.0
|
)
|
Provision (benefit) for income taxes
|
$
|
69.2
|
|
$
|
(121.6
|
)
|
$
|
54.7
|
|
Effective income tax rate
|
31.2
|
%
|
64.1
|
%
|
26.8
|
%
|
Note 17 - Income Taxes (continued)
In connection with various investment arrangements, the Company has been granted a “holiday” from income taxes for one affiliate in Asia for
2016
,
2015
and
2014
. These agreements began to expire at the end of 2010, with full expiration in 2018. In total, the agreements reduced income tax expense by
$0.5 million
in
2016
,
$1.3 million
in
2015
and
$1.3 million
in
2014
. These savings resulted in an increase to earnings per diluted share of approximately
$0.01
in
2016
, approximately
$0.01
in
2015
and approximately
$0.01
in
2014
.
Income tax expense includes U.S. and international income taxes. No income tax provision has been made on undistributed foreign earnings of
$561.7 million
and
$547.6 million
at
December 31, 2016
and
December 31, 2015
, respectively, as it is our intention to indefinitely reinvest the undistributed foreign earnings. It is not practicable to calculate the taxes that might be payable on such earnings indefinitely reinvested outside the U.S.
The effect of temporary differences giving rise to deferred tax assets and liabilities at
December 31, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Deferred tax assets:
|
|
|
Accrued postretirement benefits cost
|
$
|
56.8
|
|
$
|
72.3
|
|
Accrued pension cost
|
63.3
|
|
36.3
|
|
Other employee benefit accruals
|
11.5
|
|
10.9
|
|
Tax loss and credit carryforwards
|
84.7
|
|
100.3
|
|
Other, net
|
43.8
|
|
40.0
|
|
Valuation allowances
|
(85.5
|
)
|
(83.7
|
)
|
|
$
|
174.6
|
|
$
|
176.1
|
|
Deferred tax liabilities - principally depreciation and amortization
|
(124.1
|
)
|
(113.8
|
)
|
Net deferred tax assets
|
$
|
50.5
|
|
$
|
62.3
|
|
The Company has a U.S. foreign tax credit carryforward of
$1.1 million
that will expire in 2023, and U.S. state and local credit carryforwards of
$0.9 million
, portions of which will expire in 2017. The Company also has U.S. state and local loss carryforwards with tax benefits totaling
$1.1 million
, portions of which will expire at the end of 2017. In addition, the Company has loss carryforwards in various non-U.S. jurisdictions with tax benefits totaling
$81.6 million
having various expiration dates, as well as tax credit carryforwards of
$0.1 million
. The Company has provided valuation allowances of
$62.4 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
$23.1 million
against other deferred tax assets.
As of December 31, 2016, the Company had
$39.2 million
of total gross unrecognized tax benefits. Included in this amount was
$35.9 million
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, 2016, the Company believes it is reasonably possible that the amount of unrecognized tax positions could decrease by approximately
$25 million
during the
next 12 months
. The potential decrease would be primarily driven by settlements with tax authorities and the expiration of various statutes of limitation. As of December 31, 2016, the Company had accrued
$8.5 million
of interest and penalties related to uncertain tax positions. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.
As of December 31, 2015, the Company had
$50.4 million
of total gross unrecognized tax benefits. Included in this amount was
$38.0 million
of unrecognized tax benefits that would favorably impact the Company’s effective income tax rate in any future periods if such benefits were recognized. As of December 31, 2015, the Company had accrued
$12.2 million
of interest and penalties related to uncertain tax positions. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.
As of December 31, 2014, the Company had
$57.5 million
of total gross unrecognized tax benefits. Included in this amount was
$47.3 million
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, 2014, the Company had accrued
$16.5 million
of interest and penalties related to uncertain tax positions.
Note 17 - Income Taxes (continued)
The following table reconciles the Company’s total gross unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
2014
|
Beginning balance, January 1
|
$
|
50.4
|
|
$
|
57.5
|
|
$
|
49.5
|
|
Tax positions related to the current year:
|
|
|
|
Additions
|
—
|
|
6.5
|
|
0.7
|
|
Tax positions related to prior years:
|
|
|
|
Additions
|
5.7
|
|
5.0
|
|
14.7
|
|
Reductions
|
(7.8
|
)
|
(4.0
|
)
|
(3.5
|
)
|
Settlements with tax authorities
|
(9.1
|
)
|
(14.6
|
)
|
(3.0
|
)
|
Lapses in statutes of limitation
|
—
|
|
—
|
|
(0.9
|
)
|
Ending balance, December 31
|
$
|
39.2
|
|
$
|
50.4
|
|
$
|
57.5
|
|
During 2016, gross unrecognized tax benefits decreased primarily due to settlements with tax authorities related to various prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’s international operations. The decrease was also related to expiration of statute of limitations in multiple jurisdictions. These decreases were partially offset by accruals 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 2015, gross unrecognized tax benefits decreased primarily due to settlements with tax authorities related to various prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’s international operations. These decreases were partially offset by accruals related to 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 2014, 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.
As of December 31, 2016, the Company is subject to examination by the IRS for tax years 2006 to 2009 and 2012 to the present. The Company was 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 Mexico, Poland and India for tax years 2002 to the present. The Company’s unrecognized tax benefits were presented on the Consolidated Balance Sheets as a component of other non-current liabilities.
In the third quarter of 2016, the Company reclassified
$18.6 million
of tax payments in India from other non-current assets to income taxes payable in order to apply these payments to the underlying liabilities to which they relate. This item was identified during a routine review of the balances in these accounts. Management of the Company concluded that this change from gross to net presentation of these items in the third quarter of 2016 and the presence of the gross presentation in prior periods was immaterial to all periods presented.
Note 18 - Fair Value
The following tables present the fair value hierarchy for those assets and liabilities on the Consolidated Balance Sheets measured at fair value on a recurring basis as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
129.6
|
|
$
|
125.0
|
|
$
|
4.6
|
|
$
|
—
|
|
Cash and cash equivalents measured at net
asset value
|
19.2
|
|
—
|
|
—
|
|
—
|
|
Restricted cash
|
2.7
|
|
2.7
|
|
—
|
|
—
|
|
Short-term investments
|
9.4
|
|
—
|
|
9.4
|
|
—
|
|
Short-term investments measured at net asset value
|
2.3
|
|
—
|
|
—
|
|
—
|
|
Foreign currency hedges
|
9.9
|
|
—
|
|
9.9
|
|
—
|
|
Total Assets
|
$
|
173.1
|
|
$
|
127.7
|
|
$
|
23.9
|
|
$
|
—
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
2.1
|
|
$
|
—
|
|
$
|
2.1
|
|
$
|
—
|
|
Total Liabilities
|
$
|
2.1
|
|
$
|
—
|
|
$
|
2.1
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
110.2
|
|
$
|
110.2
|
|
$
|
—
|
|
$
|
—
|
|
Cash and cash equivalents measured at net
asset value
|
19.4
|
|
—
|
|
—
|
|
—
|
|
Restricted cash
|
0.2
|
|
0.2
|
|
—
|
|
—
|
|
Short-term investments
|
8.9
|
|
—
|
|
8.9
|
|
—
|
|
Short-term investments measured at net asset value
|
0.8
|
|
—
|
|
—
|
|
—
|
|
Foreign currency hedges
|
8.2
|
|
—
|
|
8.2
|
|
—
|
|
Total Assets
|
$
|
147.7
|
|
$
|
110.4
|
|
$
|
17.1
|
|
$
|
—
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
0.4
|
|
$
|
—
|
|
$
|
0.4
|
|
$
|
—
|
|
Total Liabilities
|
$
|
0.4
|
|
$
|
—
|
|
$
|
0.4
|
|
$
|
—
|
|
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.
Note 18 - Fair Value (continued)
2016
The following table presents those assets measured at fair value on a nonrecurring basis for the year ended
December 31, 2016
, using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
Fair Value Adjustment
|
Fair Value
|
Long-lived assets held for sale:
|
|
|
|
Land
|
$
|
0.3
|
|
$
|
(0.3
|
)
|
$
|
—
|
|
Total long-lived assets held for sale
|
$
|
0.3
|
|
$
|
(0.3
|
)
|
$
|
—
|
|
|
|
|
|
Long-lived assets held and used:
|
|
|
|
Altavista bearing plant
|
$
|
5.6
|
|
$
|
(3.1
|
)
|
$
|
2.5
|
|
Equipment at Benoni bearing plant
|
0.5
|
|
(0.5
|
)
|
—
|
|
Total long-lived assets held and used
|
$
|
6.1
|
|
$
|
(3.6
|
)
|
$
|
2.5
|
|
Assets held for sale of
$0.3 million
were written down to their fair value of
zero
during the first quarter of
2016
, resulting in an impairment charge. The fair value of these assets was based on the price that the Company expects to receive when it disposes of these assets.
On March 17, 2016, the Company announced the closure of its Altavista bearing plant. The plant is expected to close in approximately one year from the announcement date, with production transferring to the Company's bearing plant near Lincolnton, North Carolina. The Altavista bearing plant, with a carrying value of
$5.6 million
, was written down to its fair value of
$2.5 million
during 2016, resulting in an impairment charge of
$3.1 million
.
In August 2016, the Company completed the consultation process to close the manufacturing operations in Benoni. The Benoni facility will continue to recondition bearings and assemble rail bearings. Equipment at this facility, with a carrying value of
$0.5 million
, was written down to its fair value of
zero
during the third quarter of 2016, resulting in an impairment of
$0.5 million
. The fair value for the equipment was based on the price that the Company expects to receive from the sale of the equipment.
2015
The following table presents those assets measured at fair value on a nonrecurring basis for the year ended
December 31, 2015
using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
Fair Value Adjustment
|
Fair Value
|
Long-lived assets held for sale:
|
|
|
|
Repair business
|
$
|
5.8
|
|
$
|
(3.0
|
)
|
$
|
2.8
|
|
Total long-lived assets held for sale
|
$
|
5.8
|
|
$
|
(3.0
|
)
|
$
|
2.8
|
|
|
|
|
|
Long-lived assets held and used:
|
|
|
|
Fixed assets
|
$
|
0.8
|
|
$
|
(0.3
|
)
|
$
|
0.5
|
|
Total long-lived assets held and used
|
$
|
0.8
|
|
$
|
(0.3
|
)
|
$
|
0.5
|
|
Assets held for sale of
$5.8 million
associated with the Company's service center in Niles, Ohio were written down to their fair value of
$2.8 million
during the first quarter of 2015, resulting in an impairment charge of
$3.0 million
. The fair value of these assets was based on the price that the Company expected to receive from the sale of these assets.
Various items of property, plant and equipment, with a carrying value of
$0.8 million
, were written down to their fair value of
$0.5 million
, resulting in an impairment charge of
$0.3 million
. The fair value for these assets was based on the price that would be received in a current transaction to sell the assets on a standalone basis, considering the age and physical attributes of these items, as these assets had been idled.
Note 18 - Fair Value (continued)
2014
The following table presents those assets measured at fair value on a nonrecurring basis for the year ended
December 31, 2014
using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
Fair Value Adjustment
|
Fair Value
|
Long-lived assets held for sale:
|
|
|
|
Aerospace overhaul business
|
$
|
8.0
|
|
$
|
(1.2
|
)
|
$
|
6.8
|
|
Total long-lived assets held for sale
|
$
|
8.0
|
|
$
|
(1.2
|
)
|
$
|
6.8
|
|
|
|
|
|
Long-lived assets held and used:
|
|
|
|
Goodwill
|
$
|
92.5
|
|
$
|
(86.3
|
)
|
$
|
6.2
|
|
Indefinite-lived intangible assets
|
14.2
|
|
(5.5
|
)
|
8.7
|
|
Amortizable intangible assets
|
4.4
|
|
(4.4
|
)
|
—
|
|
Fixed assets
|
1.5
|
|
(1.5
|
)
|
—
|
|
Total long-lived assets held and used
|
$
|
112.6
|
|
$
|
(97.7
|
)
|
$
|
14.9
|
|
During 2014, assets held for sale of
$8.0 million
and assets held and used of
$112.6 million
were written down to their fair value of
$6.8 million
and
$14.9 million
, respectively, and impairment charges of
$1.2 million
and
$97.7 million
, respectively, were included in earnings. The fair value of these assets was based on the price that the Company expected to receive to sell these assets.
On September 8, 2014, the Company announced plans to restructure its former Aerospace segment. In connection with the restructuring, the Company: (1) eliminated leadership positions and integrated substantially all aerospace activities into the Mobile Industries segment under the direction of its Group President; (2) sold the assets of its aerospace engine overhaul business, located in Mesa, Arizona, during the fourth quarter of 2014; (3) evaluated strategic alternatives for its aerospace MRO parts business, also located in Mesa; and (4) announced plans to close its aerospace bearing facility located in Wolverhampton, U.K. by early 2016, rationalizing the capacity into existing facilities.
In conjunction with the above Aerospace announcement, the Company reviewed goodwill for impairment for its Aerospace Transmissions and Aerospace Aftermarket reporting units. Step one of the goodwill impairment test failed for both of these reporting units. Therefore, the Company conducted step two of the goodwill impairment test. The carrying value of goodwill for the Aerospace Transmissions reporting unit was
$56.9 million
, and the carrying value of the Aerospace Aftermarket reporting unit was
$35.6 million
. The implied fair value of goodwill for the Aerospace Transmissions reporting unit was
$1.7 million
, and the implied fair value of the Aerospace Aftermarket reporting unit was
$4.5 million
. As a result of the carrying value of goodwill for these two reporting units exceeding fair value, the Company recorded a pretax impairment charge of
$86.3 million
during the third quarter of 2014.
Indefinite-lived intangible assets that were classified as assets held and used associated with the Company's Aerospace Aftermarket reporting unit with a carrying value of
$14.2 million
were written down to their fair value of
$8.7 million
resulting in an impairment charge of
$5.5 million
. In conjunction with the above Aerospace announcement, the Company also reviewed indefinite-lived intangible assets within the Aerospace segment for impairment. The fair value for these intangible assets was based on a relief from royalty method.
Intangible assets that were classified as assets held and used associated with the Company's Aerospace Aftermarket reporting unit with a carrying value of
$4.4 million
were written down to their fair value of
zero
resulting in an impairment charge of
$4.4 million
. The fair value for these intangible assets was based on the price that would be received in a current transaction to sell the assets on a standalone basis.
Various items of property, plant and equipment, with a carrying value of
$1.5 million
, were written down to their fair value of
zero
, resulting in an impairment charge of
$1.5 million
. The fair value for these assets was based on the price that would be received in a current transaction to sell the assets on a standalone basis, considering the age and physical attributes of these items, as these assets had been idled.
Note 18 - Fair Value (continued)
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
$532.2 million
and
$521.5 million
at
December 31, 2016
and
2015
, respectively. The carrying value of this debt was
$507.3 million
and
$520.4 million
at
December 31, 2016
and
2015
, respectively.
Note 19 - 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 and interest rate risk. Forward 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. From time to time, interest rate swaps are used 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 Company does not purchase nor hold any derivative financial instruments for trading purposes. As of
December 31, 2016
and
2015
, the Company had
$282.8 million
and
$235.7 million
, respectively, of outstanding foreign currency forward contracts at notional value.
Refer to
Note 18 - Fair Value
for the fair value disclosure of derivative financial instruments.
Cash Flow Hedging Strategy:
For certain derivative instruments that are designated as and qualify as cash flow hedges (
i.e
., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (
i.e
., the ineffective portion), or hedge components excluded from the assessment of effectiveness, are recognized in the Consolidated Statement of Income during the current period.
To protect against a reduction in the value of forecasted foreign currency cash flows resulting from export sales over the next year, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its forecasted cash flows denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against foreign currencies, the decline in the present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.
The maximum length of time over which the Company hedges it exposure to the variability in future cash flows for forecasted transactions is generally eighteen months or less.
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 - Derivative Instruments and Hedging Activities (continued)
Purpose for Derivative Instruments not designated as Hedging Instruments:
For derivative instruments that are not designated as hedging instruments, the instruments are typically forward contracts. In general, the practice is to reduce volatility by selectively hedging transaction exposures including intercompany loans, accounts payable and accounts receivable. Intercompany loans between entities with different functional currencies are typically hedged with a forward contract at the inception of loan with a maturity date at the maturity of the loan. The revaluation of these contracts, as well as the revaluation of the underlying balance sheet items, is recorded directly to the income statement so the adjustment generally offsets the revaluation of the underlying balance sheet items to protect cash payments and reduce income statement volatility.
The following table presents the fair value of the Company's hedging instruments. Those balances are presented in the other non-current assets/liabilities accounts within the Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
Liability Derivatives
|
Derivatives designated as hedging instruments
|
December 31, 2016
|
December 31, 2015
|
December 31, 2016
|
December 31, 2015
|
Foreign currency forward contracts
|
$
|
2.3
|
|
$
|
2.2
|
|
$
|
0.5
|
|
$
|
0.2
|
|
Total derivatives designated as hedging instruments
|
2.3
|
|
2.2
|
|
0.5
|
|
0.2
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
Foreign currency forward contracts
|
7.6
|
|
6.0
|
|
1.6
|
|
0.2
|
|
|
|
|
|
|
Total Derivatives
|
$
|
9.9
|
|
$
|
8.2
|
|
$
|
2.1
|
|
$
|
0.4
|
|
The following tables present the impact of derivative instruments and their location within the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) recognized in
Other Comprehensive Income (loss)("OCI") on derivative instruments
|
|
Year Ended December 31,
|
Derivatives in cash flow hedging relationships
|
2016
|
2015
|
2014
|
Foreign currency forward contracts
|
$
|
(0.2
|
)
|
$
|
3.0
|
|
$
|
1.3
|
|
Interest rate swaps
|
—
|
|
—
|
|
(2.1
|
)
|
Total
|
$
|
(0.2
|
)
|
$
|
3.0
|
|
$
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from Accumulated Other Comprehensive (loss) Income ("AOCI") into income (effective portion)
|
|
Year Ended December 31,
|
Derivatives in cash flow hedging relationships
|
2016
|
2015
|
2014
|
Foreign currency forward contracts
|
$
|
—
|
|
$
|
1.5
|
|
$
|
0.2
|
|
Interest rate swaps
|
(0.3
|
)
|
(0.3
|
)
|
(0.1
|
)
|
Total
|
$
|
(0.3
|
)
|
$
|
1.2
|
|
$
|
0.1
|
|
Note 19 - Derivative Instruments and Hedging Activities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) recognized in
income on derivative instruments
|
|
|
Year Ended December 31,
|
Derivatives not designated as hedging instruments
|
Location of gain or (loss) recognized in income on derivative
|
2016
|
2015
|
2014
|
Foreign currency forward contracts
|
Other (expense) income, net
|
$
|
0.1
|
|
$
|
(5.7
|
)
|
$
|
19.1
|
|
Total
|
|
$
|
0.1
|
|
$
|
(5.7
|
)
|
$
|
19.1
|
|
Note 20 - 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
$31.8 million
,
$32.6 million
and $
38.8 million
in
2016
,
2015
and
2014
, respectively. Of the
2014
amount,
$0.3 million
was funded by others. None of the
2016
and
2015
amounts were funded by others. Expenditures may fluctuate from year-to-year depending on special projects and needs.
Note 21 - Continued Dumping and Subsidy Offset Act
CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection on entries of merchandise subject to antidumping orders that entered the U.S. prior to October 1, 2007, to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. During the
twelve
months ended December 31 2016, the Company recognized pretax CDSOA income, net of related expenses of
$59.6 million
.
In September 2002, the World Trade Organization ruled that CDSOA payments are not consistent with international trade rules. In February 2006, U.S. legislation was enacted that ended CDSOA distributions for 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.
CDSOA has been the subject of significant litigation since 2002, and U.S. Customs has withheld CDSOA distributions in recent years while litigation was ongoing. In recent months, much of the CDSOA litigation that involves antidumping orders where Timken is a qualifying domestic producer has concluded.
During 2016, the Company received CDSOA distributions of
$60.6 million
, representing funds that would have been distributed to the Company at the end of calendar years 2011 through 2016.
While some of the challenges to CDSOA have been resolved, others are still in litigation. Since there continue to be legal challenges to CDSOA, U.S. Customs has advised all affected domestic producers that it is possible that CDSOA distributions could be subject to clawback. Management of the Company believes that the likelihood of any clawback is remote.
Note 22 - Quarterly Financial Data
(Unaudited
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
1st
|
2nd
|
3rd
|
4th
|
Total
|
Net sales
|
$
|
684.0
|
|
$
|
673.6
|
|
$
|
657.4
|
|
$
|
654.8
|
|
$
|
2,669.8
|
|
Gross profit
|
180.9
|
|
182.3
|
|
167.5
|
|
164.1
|
|
694.8
|
|
Impairment and restructuring charges
(1)
|
10.5
|
|
2.9
|
|
5.3
|
|
3.0
|
|
21.7
|
|
Pension settlement charges
(2)
|
1.2
|
|
0.4
|
|
10.3
|
|
16.2
|
|
28.1
|
|
Net income
(3)
|
62.9
|
|
44.9
|
|
21.0
|
|
24.1
|
|
152.9
|
|
Net (loss) income attributable to noncontrolling interests
|
(0.1
|
)
|
—
|
|
0.4
|
|
—
|
|
0.3
|
|
Net income attributable to The Timken Company
|
63.0
|
|
44.9
|
|
20.6
|
|
24.1
|
|
152.6
|
|
Net income per share - Basic:
|
$
|
0.79
|
|
$
|
0.57
|
|
$
|
0.26
|
|
$
|
0.31
|
|
$
|
1.94
|
|
Net income per share - Diluted:
|
$
|
0.78
|
|
$
|
0.57
|
|
$
|
0.26
|
|
$
|
0.31
|
|
$
|
1.92
|
|
Dividends per share
|
$
|
0.26
|
|
$
|
0.26
|
|
$
|
0.26
|
|
$
|
0.26
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
2015
|
|
1st
|
2nd
|
3rd
|
4th
|
Total
|
Net sales
|
$
|
722.5
|
|
$
|
728.0
|
|
$
|
707.4
|
|
$
|
714.4
|
|
$
|
2,872.3
|
|
Gross profit
|
202.5
|
|
205.1
|
|
195.4
|
|
190.9
|
|
793.9
|
|
Impairment and restructuring charges
(4)
|
6.2
|
|
1.4
|
|
4.4
|
|
2.7
|
|
14.7
|
|
Gain (loss) on divestiture
(5)
|
—
|
|
0.3
|
|
—
|
|
(29.0
|
)
|
(28.7
|
)
|
Pension settlement charges
(6)
|
215.2
|
|
4.4
|
|
3.6
|
|
241.8
|
|
465.0
|
|
Net (loss) income
(7)
|
(134.8
|
)
|
37.7
|
|
64.5
|
|
(35.4
|
)
|
(68.0
|
)
|
Net income attributable to noncontrolling interests
|
0.4
|
|
1.0
|
|
1.1
|
|
0.3
|
|
2.8
|
|
Net (loss) income attributable to The Timken Company
|
(135.2
|
)
|
36.7
|
|
63.4
|
|
(35.7
|
)
|
(70.8
|
)
|
Net (loss) income per share - Basic:
|
$
|
(1.54
|
)
|
$
|
0.43
|
|
$
|
0.76
|
|
$
|
(0.44
|
)
|
$
|
(0.84
|
)
|
Net (loss) income per share - Diluted:
|
$
|
(1.54
|
)
|
$
|
0.43
|
|
$
|
0.75
|
|
$
|
(0.44
|
)
|
$
|
(0.84
|
)
|
Dividends per share
|
$
|
0.25
|
|
$
|
0.26
|
|
$
|
0.26
|
|
$
|
0.26
|
|
$
|
1.03
|
|
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 first quarter of 2016 included severance and related benefit costs of
$7.7 million
, impairment charges of
$2.6 million
and exit costs of
$0.2 million
. Impairment and restructuring charges for the third quarter of 2016 included severance and related benefit costs of
$3.3 million
, impairment charges of
$1.2 million
and exit costs of
$0.8 million
.
|
|
|
(2)
|
Pension settlement charges in
2016
were primarily related to
$19 million
of lump–sum distributions to new retirees and deferred vested participants that triggered remeasurements, as well as
$7 million
related to the purchase of a group annuity contract from Canada Life for one of the Company's Canadian defined benefit pension plans, which was executed in September
2016
. These actions resulted in a decrease in the Company's pension obligations of approximately
$70 million
.
|
|
|
(3)
|
Net income included CDSOA income, net of
$47.7 million
for the first quarter of 2016,
$6.1 million
for the second quarter of 2016 and
$6.0 million
for the fourth quarter of 2016.
|
|
|
(4)
|
Impairment and restructuring charges for the first quarter of 2015 included exit costs of
$3.1 million
, impairment charges of
$2.7 million
and severance and related benefit costs of
$0.4 million
. Impairment and restructuring charges for the third quarter of 2015 included severance and related benefits of
$4.3 million
and exit costs of
$0.1 million
.
|
|
|
(5)
|
Gain (loss) on divestitures in the fourth quarter of 2015 included a gain of
$29.0 million
on the sale of Alcor located in Mesa, Arizona.
|
Note 22 - Quarterly Financial Data (continued)
|
|
(6)
|
Pension settlement charges in the first and fourth quarters of 2015 related to two agreements pursuant to which two of the Company's U.S. defined benefit pension plans purchased group annuity contracts from Prudential, which require Prudential to pay and administer future benefits for a total of approximately
8,400
U.S. Timken retirees in the aggregate, as well as lump sum distributions to new retirees during 2015. Pension settlement charges of
$215.2 million
were recorded during the first quarter of 2015 and pension settlement charges of
$241.8 million
were recorded during the fourth quarter of 2015.
|
|
|
(7)
|
The net loss attributable to the Company for the fourth quarter of 2015 included a charge of
$9.7 million
(
$6.1 million
, or
$0.07
per share, after-tax) due to the correction of an error. Refer to
Note 8 - Property, Plant and Equipment
for additional information.
|
Note 22 - Quarterly Financial Data (continued)