NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions, except per share data)
Note 1 - Basis of Presentation
The accompanying Consolidated Financial Statements (unaudited) for The Timken Company (the "Company") have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by the accounting principles generally accepted in the United States ("U.S. GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and accompanying Notes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
. Certain amounts recorded in 2016 consolidated financial statements and accompanying footnotes have been reclassified to conform to the current presentation.
Note 2 - Change in Accounting Principles
Effective January 1, 2017, the Company voluntarily changed its accounting principles for recognizing actuarial gains and losses and expected returns on plan assets for its defined benefit pension and other postretirement benefit plans, with retrospective application to prior periods. Prior to 2017, the Company amortized, as a component of pension and other postretirement expense, unrecognized actuarial gains and losses (included within accumulated other comprehensive income (loss)) over the average remaining service period of active plan participants expected to receive benefits under the plan, or average remaining life expectancy of inactive plan participants when all or almost all of individual plan participants were inactive. The Company also historically calculated the market-related value of plan assets based on a five-year market adjustment. Under the new principles, actuarial gains and losses will be immediately recognized through net periodic benefit cost in the Statement of Income, upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement. In addition, the Company has changed its accounting policy for measuring the market-related value of plan assets from a calculated amount (based on a five-year smoothing of asset returns) to fair value. The Company believes these changes are preferable as they result in an accelerated recognition of actuarial gains and losses and changes in fair value of plan assets in its Consolidated Statement of Income, which provides greater transparency and better aligns with fair value principles by fully reflecting the impact of interest rate and economic changes on the Company's pension and other postretirement benefit liabilities and assets in the Company's operating results in the year in which the gains and losses are incurred. As of January 1, 2017, the cumulative effect of the change in accounting principles resulted in a decrease of
$239 million
in earnings invested in the business and a corresponding increase of
$244 million
in accumulated other comprehensive loss that was partially offset by the net impact of the direct effects of these changes on inventory and deferred taxes of
$5 million
.
The following tables reflect the changes to financial statement line items as a result of the change in accounting principles for the periods presented in the accompanying unaudited consolidated financial statements:
Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30, 2017
|
|
September 30, 2016
|
|
Previous Accounting Method
|
As Reported
|
Effect of Accounting Change
|
|
As Previously Reported
|
Revised
|
Effect of Accounting Change
|
Cost of products sold
|
$
|
556.7
|
|
$
|
554.4
|
|
$
|
(2.3
|
)
|
|
$
|
489.9
|
|
$
|
487.7
|
|
$
|
(2.2
|
)
|
Gross profit
|
214.7
|
|
217.0
|
|
2.3
|
|
|
167.5
|
|
169.7
|
|
2.2
|
|
Selling, general and administrative expense
|
136.8
|
|
134.0
|
|
(2.8
|
)
|
|
109.5
|
|
107.2
|
|
(2.3
|
)
|
Pension settlement expenses
|
3.9
|
|
—
|
|
(3.9
|
)
|
|
10.3
|
|
0.1
|
|
(10.2
|
)
|
Operating income
|
72.7
|
|
81.7
|
|
9.0
|
|
|
42.4
|
|
57.1
|
|
14.7
|
|
Income before income taxes
|
66.2
|
|
75.2
|
|
9.0
|
|
|
34.5
|
|
49.2
|
|
14.7
|
|
Provision for income taxes
|
18.0
|
|
21.1
|
|
3.1
|
|
|
13.5
|
|
15.2
|
|
1.7
|
|
Net income
|
48.2
|
|
54.1
|
|
5.9
|
|
|
21.0
|
|
34.0
|
|
13.0
|
|
Net income attributable to The Timken Company
|
$
|
47.6
|
|
$
|
53.5
|
|
$
|
5.9
|
|
|
$
|
20.6
|
|
$
|
33.6
|
|
$
|
13.0
|
|
Basic earnings per share
|
$
|
0.61
|
|
$
|
0.69
|
|
$
|
0.08
|
|
|
$
|
0.26
|
|
$
|
0.43
|
|
$
|
0.17
|
|
Diluted earnings per share
|
$
|
0.60
|
|
$
|
0.68
|
|
$
|
0.08
|
|
|
$
|
0.26
|
|
$
|
0.43
|
|
$
|
0.17
|
|
Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 30, 2016
|
|
Previous Accounting Method
|
As Reported
|
Effect of Accounting Change
|
|
As Previously Reported
|
Revised
|
Effect of Accounting Change
|
Cost of products sold
|
$
|
1,630.9
|
|
$
|
1,626.5
|
|
$
|
(4.4
|
)
|
|
$
|
1,484.3
|
|
$
|
1,477.7
|
|
$
|
(6.6
|
)
|
Gross profit
|
594.9
|
|
599.3
|
|
4.4
|
|
|
530.7
|
|
537.3
|
|
6.6
|
|
Selling, general and administrative expense
|
383.8
|
|
377.4
|
|
(6.4
|
)
|
|
338.0
|
|
331.3
|
|
(6.7
|
)
|
Pension settlement expenses
|
15.7
|
|
—
|
|
(15.7
|
)
|
|
11.9
|
|
1.3
|
|
(10.6
|
)
|
Operating income
|
191.6
|
|
218.1
|
|
26.5
|
|
|
162.1
|
|
186.0
|
|
23.9
|
|
Income before income taxes
|
176.2
|
|
202.7
|
|
26.5
|
|
|
189.9
|
|
213.8
|
|
23.9
|
|
Provision for income taxes
|
19.3
|
|
28.5
|
|
9.2
|
|
|
61.1
|
|
65.8
|
|
4.7
|
|
Net income
|
156.9
|
|
174.2
|
|
17.3
|
|
|
128.8
|
|
148.0
|
|
19.2
|
|
Net income attributable to The Timken Company
|
$
|
156.9
|
|
$
|
174.2
|
|
$
|
17.3
|
|
|
$
|
128.5
|
|
$
|
147.7
|
|
$
|
19.2
|
|
Basic earnings per share
|
$
|
2.02
|
|
$
|
2.24
|
|
$
|
0.22
|
|
|
$
|
1.63
|
|
$
|
1.87
|
|
$
|
0.24
|
|
Diluted earnings per share
|
$
|
1.99
|
|
$
|
2.21
|
|
$
|
0.22
|
|
|
$
|
1.62
|
|
$
|
1.86
|
|
$
|
0.24
|
|
Consolidated Statements of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30, 2017
|
|
September 30, 2016
|
|
Previous Accounting Method
|
As Reported
|
Effect of Accounting Change
|
|
As Previously Reported
|
Revised
|
Effect of Accounting Change
|
Net Income
|
$
|
48.2
|
|
$
|
54.1
|
|
$
|
5.9
|
|
|
$
|
21.0
|
|
$
|
34.0
|
|
$
|
13.0
|
|
Foreign currency translation adjustments
|
10.9
|
|
10.9
|
|
—
|
|
|
2.2
|
|
3.7
|
|
1.5
|
|
Pension and postretirement liability adjustment
|
6.0
|
|
0.1
|
|
(5.9
|
)
|
|
15.0
|
|
0.4
|
|
(14.6
|
)
|
Other comprehensive income, net of tax
|
14.9
|
|
9.0
|
|
(5.9
|
)
|
|
17.2
|
|
4.1
|
|
(13.1
|
)
|
Comprehensive Income, net of tax
|
63.1
|
|
63.1
|
|
—
|
|
|
38.2
|
|
38.1
|
|
(0.1
|
)
|
Less: comprehensive income attributable to noncontrolling interest
|
0.5
|
|
0.5
|
|
—
|
|
|
0.9
|
|
1.0
|
|
0.1
|
|
Comprehensive income attributable to
The Timken Company
|
$
|
62.6
|
|
$
|
62.6
|
|
$
|
—
|
|
|
$
|
37.3
|
|
$
|
37.1
|
|
$
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 30, 2016
|
|
Previous Accounting Method
|
As Reported
|
Effect of Accounting Change
|
|
As Previously Reported
|
Revised
|
Effect of Accounting Change
|
Net Income
|
$
|
156.9
|
|
$
|
174.2
|
|
$
|
17.3
|
|
|
$
|
128.8
|
|
$
|
148.0
|
|
$
|
19.2
|
|
Foreign currency translation adjustments
|
42.8
|
|
42.8
|
|
—
|
|
|
(1.4
|
)
|
5.2
|
|
6.6
|
|
Pension and postretirement liability adjustment
|
17.5
|
|
0.2
|
|
(17.3
|
)
|
|
27.0
|
|
1.2
|
|
(25.8
|
)
|
Other comprehensive income, net of tax
|
56.1
|
|
38.8
|
|
(17.3
|
)
|
|
24.0
|
|
4.8
|
|
(19.2
|
)
|
Comprehensive Income, net of tax
|
213.0
|
|
213.0
|
|
—
|
|
|
152.8
|
|
152.8
|
|
—
|
|
Less: comprehensive income attributable to noncontrolling interest
|
1.9
|
|
1.9
|
|
—
|
|
|
2.1
|
|
2.2
|
|
0.1
|
|
Comprehensive income attributable to
The Timken Company
|
$
|
211.1
|
|
$
|
211.1
|
|
$
|
—
|
|
|
$
|
150.7
|
|
$
|
150.6
|
|
$
|
(0.1
|
)
|
Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
December 31, 2016
|
|
Previous Accounting Method
|
As Reported
|
Effect of Accounting Change
|
As Previously Reported
|
Revised
|
Effect of Accounting Change
|
Inventories, net
|
$
|
679.6
|
|
$
|
687.5
|
|
$
|
7.9
|
|
$
|
545.8
|
|
$
|
553.7
|
|
$
|
7.9
|
|
Total current assets
|
1,466.4
|
|
1,474.3
|
|
7.9
|
|
1,204.0
|
|
1,211.9
|
|
7.9
|
|
Deferred income taxes
|
50.9
|
|
47.9
|
|
(3.0
|
)
|
54.4
|
|
51.4
|
|
(3.0
|
)
|
Total other assets
|
1,050.1
|
|
1,047.1
|
|
(3.0
|
)
|
749.9
|
|
746.9
|
|
(3.0
|
)
|
Total assets
|
3,358.7
|
|
3,363.6
|
|
4.9
|
|
2,758.3
|
|
2,763.2
|
|
4.9
|
|
Earnings invested in the business
|
1,622.2
|
|
1,400.2
|
|
(222.0
|
)
|
1,528.6
|
|
1,289.3
|
|
(239.3
|
)
|
Accumulated other comprehensive loss
|
(267.8
|
)
|
(41.0
|
)
|
226.8
|
|
(322.0
|
)
|
(77.9
|
)
|
244.1
|
|
Total shareholders' equity
|
1,418.2
|
|
1,423.0
|
|
4.8
|
|
1,274.9
|
|
1,279.7
|
|
4.8
|
|
Noncontrolling interest
|
32.8
|
|
32.9
|
|
0.1
|
|
31.1
|
|
31.2
|
|
0.1
|
|
Total equity
|
1,451.0
|
|
1,455.9
|
|
4.9
|
|
1,306.0
|
|
1,310.9
|
|
4.9
|
|
Total liabilities and shareholders' equity
|
$
|
3,358.7
|
|
$
|
3,363.6
|
|
$
|
4.9
|
|
$
|
2,758.3
|
|
$
|
2,763.2
|
|
$
|
4.9
|
|
Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 30, 2016
|
|
Previous Accounting Method
|
As Reported
|
Effect of Accounting Change
|
|
As Previously Reported
|
Revised
|
Effect of Accounting Change
|
Net income attributable to The Timken Company
|
$
|
156.9
|
|
$
|
174.2
|
|
$
|
17.3
|
|
|
$
|
128.5
|
|
$
|
147.7
|
|
$
|
19.2
|
|
Deferred income tax (benefit) provision
|
(1.7
|
)
|
7.5
|
|
9.2
|
|
|
(0.1
|
)
|
4.6
|
|
4.7
|
|
Pension and other postretirement expense
|
39.1
|
|
12.6
|
|
(26.5
|
)
|
|
38.4
|
|
14.5
|
|
(23.9
|
)
|
Note 3 - Recent Accounting Pronouncements
New Accounting Guidance Adopted:
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies various aspects of the accounting for stock-based payments. The simplifications include:
|
|
a.
|
recording all tax effects associated with stock-based compensation through the income statement, as opposed to recording certain amounts in other paid-in capital, which eliminates the requirements to calculate a “windfall pool”;
|
|
|
b.
|
allowing entities to withhold shares to satisfy the employer’s statutory tax withholding requirement up to the highest marginal tax rate applicable to employees rather than the employer’s minimum statutory rate, without requiring liability classification for the award;
|
|
|
c.
|
modifying the requirement to estimate the number of awards that will ultimately vest by providing an accounting policy election to either estimate the number of forfeitures or recognize forfeitures as they occur;
|
|
|
d.
|
changing certain presentation requirements in the statement of cash flows, including removing the requirement to present excess tax benefits as an inflow from financing activities and an outflow from operating activities and requiring the cash paid to taxing authorities arising from withheld shares to be classified as a financing activity; and
|
|
|
e.
|
amending the assumed proceeds from applying the treasury stock method when computing earnings per share to exclude the amount of excess tax benefits that would be recognized in additional paid-in capital.
|
On January 1, 2017, the Company adopted the provisions of ASU 2016-09. The presentation of the Consolidated Statement of Cash Flows for shares surrendered by employees to meet the minimum statutory withholding requirement was applied retrospectively. As a result of the adoption of ASU 2016-09,
$1.6 million
was reclassified from the other accrued expenses line in the operating activities section of the Consolidated Statement of Cash Flows to the shares surrendered for taxes line in the financing activities section for the first
nine
months of
2016
.
In addition, the adoption of ASU 2016-09 resulted in the Company making an accounting policy election to change how it will recognize the number of stock awards that will ultimately vest. In the past, the Company applied a forfeiture rate to shares granted. With the adoption of ASU 2016-09, the Company will recognize forfeitures as they occur. This change resulted in the Company making a cumulative effect change to retained earnings of
$0.9 million
. For additional information, refer to
Note 10 - Equity
for the disclosure of the cumulative effect change. In addition, the Company began recording the tax effects associated with stock-based compensation through the income statement on a prospective basis, which resulted in a tax benefit of
$1.9 million
for the first nine months of 2017. Finally, the Company adjusted dilutive shares to remove the excess tax benefits from the calculation of earnings per share on a prospective basis. The revised calculation is more dilutive, but it did not change earnings per share for prior years.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value, which is defined as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. Under existing guidance, net realizable value is one of several acceptable measures of market value that could be used to measure inventory at the lower of cost or market and, as such, the new guidance reduces the complexity in the measurement. On January 1, 2017, the Company adopted the provisions of ASU 2015-11 on a prospective basis. The adoption of ASU 2015-11 did not have a material impact on the Company's results of operations or financial condition. For our disclosures related to inventories, refer to
Note 5 - Inventories
.
New Accounting Guidance Issued and Not Yet Adopted:
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which impacts both designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 amends and clarifies the requirements to qualify for hedge accounting, removes the requirement to recognize changes in fair value from certain hedges in current earnings, and specifies the presentation of changes in fair value in the income statement for all hedging instruments. ASU 2017-02 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including in any interim period for which financial statements have not yet been issued, but the effect of adoption is required to be reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the effect that the adoption of ASU 2017-12 will have on the Company's results of operations and financial condition.
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 provides clarity on which changes to the terms or conditions of share-based payment awards require entities to apply the modification accounting provisions required in Topic 718. ASU 2017-09 is effective for public companies for annual reporting periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company does not expect that the adoption of ASU 2017-09 will have a material impact on the Company's results of operations and financial condition, as the Company does not anticipate future modifications of share-based payment awards.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 impacts where the components of net benefit cost are presented within an entity’s income statement. Service cost will be included in other employee compensation costs within operating income and is the only component that may be capitalized when applicable. The other components of net periodic benefit cost will be presented separately outside of operating income. ASU 2017-07 is effective for public companies for annual reporting periods beginning after December 15, 2017 and interim periods within that reporting period. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. Our initial assessment has indicated that the adoption of ASU 2017-07 will result in the reclassification of certain amounts out of "Cost of products sold" and "Selling, general and administrative ("SG&A") expenses" into "Other expense, net" in the Consolidated Statement of Income. Also, the adoption of this standard will result in the reclassification of certain amounts from "Cost of products sold" and "SG&A expenses" for the Mobile Industries and Process Industries segments into Corporate "Other expense, net". The amounts impacted may be material. The Company is currently performing further analysis on the effect that the adoption of ASU 2017-07 will have on the Company's results of operations.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Prior to the issuance of the new accounting guidance, entities first assessed qualitative factors to determine whether a two-step goodwill impairment test was necessary. When entities bypassed or failed the qualitative analysis, they were required to apply a two-step goodwill impairment test. Step 1 compared a reporting unit’s fair value to its carrying amount to determine if there is a potential impairment. If the carrying amount of a reporting unit exceeds its fair value, Step 2 was required to be completed. Step 2 involved determining the implied fair value of goodwill and comparing it to the carrying amount of that goodwill to measure the impairment loss, if any. ASU 2017-04 eliminates Step 2 of the current goodwill impairment test. ASU 2017-04 will require that a goodwill impairment loss be measured at the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for public companies for years beginning after December 15, 2019, with early adoption permitted, and must be applied prospectively. The Company is currently evaluating the effect that the adoption of ASU 2017-04 will have on the Company's results of operations and financial condition.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance will replace the current incurred loss approach with an expected loss model. The new expected credit loss impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt instruments, net investments in leases, loan commitments and standby letters of credit. Upon initial recognition of the exposure, the expected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. ASU 2016-13 does not prescribe a specific method to make the estimate, so its application will require significant judgment. ASU 2016-13 is effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of ASU 2016-13 will have on the Company's results of operations and financial condition.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 was issued to increase transparency and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. ASU 2016-02 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the effect that the adoption of ASU 2016-02 will have on the Company's results of operations and financial condition.
In May 2014, the 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 public companies 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.
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 and (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 revenue recognition standards. The Company plans to use the modified retrospective method.
The Company has substantially completed the assessment phase of the project, which has identified potential differences from the application of the new standard. Upon adoption, the Company expects that certain revenue streams currently accounted for using a point-in-time model will utilize an over-time model due to the continuous transfer of control to customers. The Company is currently designing and implementing procedures and related internal controls to address the potential differences identified, including the expanded disclosure requirements resulting from the new standard, and performing a deeper analysis of those potential differences to quantify the impacts of applying the new standard. The Company expects to finalize its evaluation of these potential differences that may result from applying the new standard to the Company's contracts with customers in 2017 and will provide updates on its progress in future filings.
Note 4 - Acquisitions
During the first nine months of 2017, the Company completed three acquisitions. On
July 3, 2017
, the Company completed the acquisition of Groeneveld Group ("Groeneveld"), a leading provider of automatic lubrication solutions used in on- and off-highway applications. On
May 5, 2017
, the Company completed the acquisition of the assets of PT Tech, Inc. ("PT Tech"), a manufacturer of engineered clutches, brakes, hydraulic power take-off units and other torque management devices used in mining, aggregate, wood recycling and metals industries. On
April 3, 2017
, the Company completed the acquisition of Torsion Control Products, Inc. ("Torsion Control Products"), a manufacturer of engineered torsional couplings used in the construction, agriculture and mining industries. Aggregate sales for these companies for the most recent twelve months prior to their respective acquisitions totaled approximately
$146.2 million
. The total purchase price for these acquisitions was
$346.6 million
, net of
$35.0 million
cash received. The Company incurred acquisition-related costs of
$3.6 million
to complete these acquisitions. The 2017 acquisitions are subject to post-closing purchase price allocation adjustments.
Based on markets and customers served, substantially all of the
results for Groeneveld, PT Tech and Torsion Control Products are reported in the Mobile Industries segment.
The following table presents the initial purchase price allocation for acquisitions in 2017:
|
|
|
|
|
|
Initial Purchase Price Allocation
|
Assets:
|
|
Accounts receivable, net
|
$
|
27.6
|
|
Inventories, net
|
29.1
|
|
Other current assets
|
4.7
|
|
Property, plant and equipment, net
|
31.6
|
|
Goodwill
|
147.6
|
|
Other intangible assets
|
175.3
|
|
Other non-current assets
|
1.9
|
|
Total assets acquired
|
$
|
417.8
|
|
Liabilities:
|
|
Accounts payable, trade
|
$
|
9.5
|
|
Salaries, wages and benefits
|
5.8
|
|
Other current liabilities
|
8.2
|
|
Short-term debt
|
1.0
|
|
Long-term debt
|
2.0
|
|
Deferred income taxes
|
42.4
|
|
Other non-current liabilities
|
2.3
|
|
Total liabilities assumed
|
$
|
71.2
|
|
Net assets acquired
|
$
|
346.6
|
|
The following table summarizes the initial purchase price allocation for identifiable intangible assets acquired in 2017:
|
|
|
|
|
|
|
Initial Purchase
Price Allocation
|
|
|
Weighted -
Average Life
|
Trade names (indefinite life)
|
$
|
33.4
|
|
Indefinite
|
Trade names (finite life)
|
2.2
|
|
13 years
|
Technology and know-how
|
29.9
|
|
16 years
|
Customer relationships
|
108.2
|
|
17 years
|
Other
|
0.2
|
|
5 years
|
Capitalized software
|
1.4
|
|
3 years
|
Total intangible assets
|
$
|
175.3
|
|
|
On
July 5, 2017
, the Company announced that the Company's majority-owned subsidiary, Timken India Ltd. ("Timken India"), entered into a definitive agreement to acquire ABC Bearings Limited ("ABC Bearings"). Timken India is a public limited company listed on the National Stock Exchange of India Limited and BSE Limited. ABC Bearings is a manufacturer of tapered, cylindrical and spherical roller bearings and slewing rings in India.
The transaction is structured as a merger of ABC Bearings into Timken India, whereby shareholders of ABC Bearings will receive shares of Timken India as consideration.
The transaction is subject to receipt of various approvals in India, which are expected to
be completed in the first half of 2018
. ABC Bearings, located in Mumbai, India, operates primarily out of manufacturing facilities in Bharuch, Gujarat and Dehradun, Uttarakhand and had annual sales of approximately
$29 million
for the twelve months ended March 31, 2017.
During
2016
, the Company completed two acquisitions. On
October 31, 2016
, the Company completed the acquisition of EDT Corp. ("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 Inc. ("Lovejoy"), a manufacturer of premium industrial couplings and universal joints.
In January 2017, the Company paid a net purchase price adjustment of
$0.6 million
in connection with the EDT acquisition, resulting in an adjustment to goodwill. During the second quarter of 2017, the Company re-evaluated the fair value of certain contingent liabilities assumed in the Lovejoy acquisition, resulting in adjustments to other current assets, goodwill, other current liabilities and other non-current liabilities. The following table presents the final purchase price allocation for both the Lovejoy and the EDT acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
Initial Purchase Price Allocation
|
Adjustment
|
Final Purchase Price Allocation
|
Assets:
|
|
|
|
Accounts receivable, net
|
$
|
8.4
|
|
|
$
|
8.4
|
|
Inventories, net
|
17.8
|
|
|
17.8
|
|
Other current assets
|
5.3
|
|
(0.2
|
)
|
5.1
|
|
Property, plant and equipment, net
|
16.5
|
|
|
16.5
|
|
Goodwill
|
29.9
|
|
(1.1
|
)
|
28.8
|
|
Other intangible assets
|
27.9
|
|
|
27.9
|
|
Other non-current assets
|
0.1
|
|
|
0.1
|
|
Total assets acquired
|
$
|
105.9
|
|
$
|
(1.3
|
)
|
$
|
104.6
|
|
Liabilities:
|
|
|
|
Accounts payable, trade
|
$
|
8.1
|
|
|
$
|
8.1
|
|
Salaries, wages and benefits
|
1.3
|
|
|
1.3
|
|
Other current liabilities
|
4.4
|
|
(0.6
|
)
|
3.8
|
|
Long-term debt
|
2.2
|
|
|
2.2
|
|
Deferred taxes
|
10.4
|
|
|
10.4
|
|
Other non-current liabilities
|
7.6
|
|
(1.3
|
)
|
6.3
|
|
Total liabilities assumed
|
$
|
34.0
|
|
$
|
(1.9
|
)
|
$
|
32.1
|
|
Net assets acquired
|
$
|
71.9
|
|
$
|
0.6
|
|
$
|
72.5
|
|
Note 5 - Inventories
The components of inventories at
September 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
September 30,
2017
|
December 31,
2016
|
Manufacturing supplies
|
$
|
29.5
|
|
$
|
28.2
|
|
Raw materials
|
85.7
|
|
54.9
|
|
Work in process
|
238.4
|
|
182.9
|
|
Finished products
|
367.4
|
|
308.8
|
|
Subtotal
|
$
|
721.0
|
|
$
|
574.8
|
|
Allowance for obsolete and surplus inventory
|
(33.5
|
)
|
(21.1
|
)
|
Total Inventories, net
|
$
|
687.5
|
|
$
|
553.7
|
|
Inventories are valued at the lower of cost or market, with approximately
55%
valued by the first-in, first-out ("FIFO") method and the remaining
45%
valued by the last-in, first-out ("LIFO") method. The majority of the Company's domestic inventories are valued by the LIFO method and all of the Company's international (outside the United States) inventories are valued by the FIFO method.
An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation.
The LIFO reserves at
September 30, 2017
and
December 31, 2016
were
$167.4 million
and
$179.5 million
, respectively. The Company recognized a decrease in its LIFO reserve of
$12.1 million
during the first
nine
months of
2017
, compared with a decrease in its LIFO reserve of
$0.2 million
during the first
nine
months of
2016
.
Note 6 - Property, Plant and Equipment
The components of property, plant and equipment at
September 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
September 30,
2017
|
December 31,
2016
|
Land and buildings
|
$
|
478.2
|
|
$
|
425.4
|
|
Machinery and equipment
|
1,882.4
|
|
1,807.6
|
|
Subtotal
|
$
|
2,360.6
|
|
$
|
2,233.0
|
|
Accumulated depreciation
|
(1,518.4
|
)
|
(1,428.6
|
)
|
Property, plant and equipment, net
|
$
|
842.2
|
|
$
|
804.4
|
|
Total depreciation expense for the
nine
months ended
September 30, 2017
and
2016
was
$73.3 million
and
$71.1 million
, respectively.
Note 7 - Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the
nine
months ended
September 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Total
|
Beginning balance
|
$
|
97.2
|
|
$
|
260.3
|
|
$
|
357.5
|
|
Acquisitions
|
147.6
|
|
(1.1
|
)
|
146.5
|
|
Foreign currency translation adjustments
|
4.0
|
|
2.3
|
|
6.3
|
|
Ending balance
|
$
|
248.8
|
|
$
|
261.5
|
|
$
|
510.3
|
|
The Groeneveld, PT Tech and Torsion Control Products acquisitions added a total of
$147.6 million
of goodwill to the Mobile Industries segment. The goodwill acquired from PT Tech and Torsion Control Products is expected to be tax-deductible over
15 years
. The goodwill acquired from Groeneveld is not expected to be tax-deductible. The Company paid a net purchase price adjustment of
$0.6 million
in January 2017 in connection with the acquisition of EDT, which resulted in an increase to goodwill. The Company also adjusted its purchase price allocation for the Lovejoy acquisition in 2017, which resulted in a
$1.7 million
reduction to goodwill. The goodwill resulting from the EDT and Lovejoy acquisitions was allocated to the Process Industries segment.
The following table displays intangible assets as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
As of December 31, 2016
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Intangible assets
subject to amortization:
|
|
|
|
|
|
|
Customer relationships
|
$
|
322.4
|
|
$
|
97.6
|
|
$
|
224.8
|
|
$
|
211.4
|
|
$
|
84.4
|
|
$
|
127.0
|
|
Technology and know-how
|
126.4
|
|
29.9
|
|
96.5
|
|
95.2
|
|
25.4
|
|
69.8
|
|
Trade names
|
8.6
|
|
4.2
|
|
4.4
|
|
6.5
|
|
3.8
|
|
2.7
|
|
Capitalized software
|
260.0
|
|
223.4
|
|
36.6
|
|
251.7
|
|
211.8
|
|
39.9
|
|
Other
|
12.2
|
|
8.1
|
|
4.1
|
|
11.0
|
|
7.5
|
|
3.5
|
|
|
$
|
729.6
|
|
$
|
363.2
|
|
$
|
366.4
|
|
$
|
575.8
|
|
$
|
332.9
|
|
$
|
242.9
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
Trade names
|
$
|
53.8
|
|
|
$
|
53.8
|
|
$
|
19.4
|
|
|
$
|
19.4
|
|
FAA air agency certificates
|
8.7
|
|
|
8.7
|
|
8.7
|
|
|
8.7
|
|
|
$
|
62.5
|
|
|
|
$
|
62.5
|
|
$
|
28.1
|
|
|
|
$
|
28.1
|
|
Total intangible assets
|
$
|
792.1
|
|
$
|
363.2
|
|
$
|
428.9
|
|
$
|
603.9
|
|
$
|
332.9
|
|
$
|
271.0
|
|
Amortization expense for intangible assets was
$29.2 million
and
$27.2 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. Amortization expense for intangible assets is estimated to be
$40.5 million
in
2017
;
$39.8 million
in
2018
;
$36.0 million
in
2019
;
$29.9 million
in
2020
; and
$27.3 million
in
2021
.
Note 8 - Financing Arrangements
Short-term debt at
September 30, 2017
and
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
September 30,
2017
|
December 31,
2016
|
Variable-rate Accounts Receivable Facility with an interest rate of 2.07% at September 30, 2017
|
$
|
5.6
|
|
$
|
—
|
|
Borrowings under variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.32% to 1.75% at September 30, 2017 and 0.50% at December 31, 2016, respectively
|
35.5
|
|
19.2
|
|
Short-term debt
|
$
|
41.1
|
|
$
|
19.2
|
|
The Company has a
$100 million
Amended and Restated Asset Securitization Agreement ("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, which, in turn, uses the trade receivables to secure borrowings that are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the Accounts Receivable Facility are limited by certain borrowing base limitations. These limitations reduced the availability of the Accounts Receivable Facility to
$80.3 million
at
September 30, 2017
. As of
September 30, 2017
, there were outstanding borrowings of
$74.8 million
under the Accounts Receivable Facility, which reduced the availability under this facility to
$5.5 million
. The cost of this facility, which is the prevailing commercial paper rate plus program fees, is considered a financing cost and is included in interest expense in the Consolidated Statement of Income. The outstanding balance under the Accounts Receivable Facility was classified as short term or long term in accordance with the terms of the agreement and reflects the Company's expectations relative to the minimum borrowing base.
The lines of credit for certain of the Company’s foreign subsidiaries provide for short-term borrowings up to
$250.0 million
in the aggregate. Most of these lines of credit are uncommitted. At
September 30, 2017
, the Company’s foreign subsidiaries had borrowings outstanding of
$35.5 million
and bank guarantees of
$2.0 million
, which reduced the aggregate availability under these facilities to
$212.5 million
.
Long-term debt at
September 30, 2017
and
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
September 30,
2017
|
December 31,
2016
|
Fixed-rate Medium-Term Notes, Series A, maturing at various dates through May 2028, with interest rates ranging from 6.74% to 7.76%
|
$
|
159.5
|
|
$
|
159.5
|
|
Fixed-rate Senior Unsecured Notes, maturing on September 1, 2024, with an interest rate of 3.875%
|
346.6
|
|
345.9
|
|
Variable-rate Senior Credit Facility with a weighted-average interest rate of 1.59% at September 30, 2017 and 1.50% at December 31, 2016
|
91.2
|
|
83.8
|
|
Variable-rate Accounts Receivable Facility with an interest rate of 2.07% at September 30, 2017 and 1.65% at December 31, 2016
|
69.2
|
|
48.9
|
|
Fixed-rate Euro Senior Unsecured Notes, maturing on September 7, 2027, with an interest rate of 2.02%
|
176.5
|
|
—
|
|
Variable-rate Euro Term Loan with an interest rate of 1.13% at September 30, 2017
|
117.8
|
|
—
|
|
Other
|
4.0
|
|
1.9
|
|
|
$
|
964.8
|
|
$
|
640.0
|
|
Less: Current maturities
|
5.0
|
|
5.0
|
|
Long-term debt
|
$
|
959.8
|
|
$
|
635.0
|
|
The Company has a
$500 million
Amended and Restated Credit Agreement ("Senior Credit Facility"), which matures on
June 19, 2020
. At
September 30, 2017
, the Company had
$91.2 million
of outstanding borrowings under the Senior Credit Facility, which reduced the availability under this facility to
$408.8 million
. The Senior Credit Facility has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At
September 30, 2017
, the Company was in full compliance with both of these covenants.
On
September 7, 2017
, the Company issued
€150 million
of fixed-rate
2.02%
senior unsecured notes that mature on
September 7, 2027
("2027 Notes"). On
September 18, 2017
, the Company entered into a
€100 million
variable-rate term loan that matures on
September 18, 2020
("2020 Term Loan"). The increased borrowings were primarily to refinance the acquisition of Groeneveld that closed on
July 3, 2017
. Refer to
Note 4 - Acquisitions
for additional information. These debt instruments have two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. These covenants are the same as those in the Senior Credit Facility. At
September 30, 2017
, the Company was in full compliance with both of these covenants.
Note 9 - Contingencies
Product Warranties:
The Company provides limited warranties on certain of its products. The following is a rollforward of the warranty liability for the
nine
months ended
September 30, 2017
and the twelve months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
September 30,
2017
|
December 31,
2016
|
Beginning balance, January 1
|
$
|
6.9
|
|
$
|
5.4
|
|
Additions
|
2.6
|
|
2.4
|
|
Payments
|
(2.1
|
)
|
(0.9
|
)
|
Ending balance
|
$
|
7.4
|
|
$
|
6.9
|
|
The product warranty liability at
September 30, 2017
and
December 31, 2016
was included in other current liabilities on the Consolidated Balance Sheets.
Currently, the Company is evaluating claims raised by certain customers with respect to the performance of bearings sold into the wind energy sector. Accruals related to this matter are included in the table above. Management believes that the outcome of these claims will not have a material effect on the Company’s consolidated financial position; however, the effect of any such outcome may be material to the results of operations of any particular period in which costs in excess of amounts provided, if any, are recognized.
Note 10 - Equity
The changes in the equity components for the
nine
months ended
September 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Timken Company Shareholders
|
|
|
Total
|
Stated
Capital
|
Other
Paid-In
Capital
|
Earnings
Invested
in the
Business
|
Accumulated
Other
Comprehensive
(Loss)
|
Treasury
Stock
|
Non-
controlling
Interest
|
Balance at December 31, 2016
|
$
|
1,310.9
|
|
$
|
53.1
|
|
$
|
906.9
|
|
$
|
1,289.3
|
|
$
|
(77.9
|
)
|
$
|
(891.7
|
)
|
$
|
31.2
|
|
Cumulative effect of ASU 2016-09
|
0.5
|
|
|
1.4
|
|
(0.9
|
)
|
|
|
|
Net income
|
174.2
|
|
|
|
174.2
|
|
|
|
—
|
|
Foreign currency translation adjustment
|
42.8
|
|
|
|
|
40.9
|
|
|
1.9
|
|
Pension and postretirement liability
adjustments (net of $0.1 income
tax benefit)
|
0.2
|
|
|
|
|
0.2
|
|
|
|
Change in fair value of derivative financial
instruments, net of reclassifications
|
(4.2
|
)
|
|
|
|
(4.2
|
)
|
|
|
Dividends paid to noncontrolling
interest
|
(0.2
|
)
|
|
|
|
|
|
(0.2
|
)
|
Dividends
– $0.80 per shar
e
|
(62.4
|
)
|
|
|
(62.4
|
)
|
|
|
|
Stock-based compensation expense
|
18.2
|
|
|
18.2
|
|
|
|
|
|
Stock purchased at fair market value
|
(41.0
|
)
|
|
|
|
|
(41.0
|
)
|
|
Stock option exercise activity
|
27.7
|
|
|
(9.7
|
)
|
|
|
37.4
|
|
|
Restricted share activity
|
—
|
|
|
(18.6
|
)
|
|
|
18.6
|
|
|
Shares surrendered for taxes
|
(10.8
|
)
|
|
|
|
|
(10.8
|
)
|
|
Balance at September 30, 2017
|
$
|
1,455.9
|
|
$
|
53.1
|
|
$
|
898.2
|
|
$
|
1,400.2
|
|
$
|
(41.0
|
)
|
$
|
(887.5
|
)
|
$
|
32.9
|
|
Note 11 - Accumulated Other Comprehensive Income (Loss)
The following tables present details about components of accumulated other comprehensive loss for the
three
and
nine
months ended
September 30, 2017
and
2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at June 30, 2017
|
$
|
(49.9
|
)
|
$
|
1.6
|
|
$
|
(1.8
|
)
|
$
|
(50.1
|
)
|
Other comprehensive income (loss) before
reclassifications and income tax
|
10.9
|
|
—
|
|
(4.0
|
)
|
6.9
|
|
Amounts reclassified from accumulated other
comprehensive income, before income tax
|
—
|
|
0.1
|
|
0.9
|
|
1.0
|
|
Income tax expense
|
—
|
|
—
|
|
1.1
|
|
1.1
|
|
Net current period other comprehensive
income (loss), net of income taxes
|
10.9
|
|
0.1
|
|
(2.0
|
)
|
9.0
|
|
Noncontrolling interest
|
0.1
|
|
—
|
|
—
|
|
0.1
|
|
Net current period comprehensive income (loss),
net of income taxes and noncontrolling interest
|
11.0
|
|
0.1
|
|
(2.0
|
)
|
9.1
|
|
Balance at September 30, 2017
|
$
|
(38.9
|
)
|
$
|
1.7
|
|
$
|
(3.8
|
)
|
$
|
(41.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at December 31, 2016
|
$
|
(79.8
|
)
|
$
|
1.5
|
|
$
|
0.4
|
|
$
|
(77.9
|
)
|
Other comprehensive income (loss) before
reclassifications and income tax
|
42.8
|
|
—
|
|
(7.1
|
)
|
35.7
|
|
Amounts reclassified from accumulated other
comprehensive income, before income tax
|
—
|
|
0.3
|
|
0.4
|
|
0.7
|
|
Income tax expense (benefit)
|
—
|
|
(0.1
|
)
|
2.5
|
|
2.4
|
|
Net current period other comprehensive
income (loss), net of income taxes
|
42.8
|
|
0.2
|
|
(4.2
|
)
|
38.8
|
|
Noncontrolling interest
|
(1.9
|
)
|
—
|
|
—
|
|
(1.9
|
)
|
Net current period comprehensive income (loss),
net of income taxes and noncontrolling interest
|
40.9
|
|
0.2
|
|
(4.2
|
)
|
36.9
|
|
Balance at September 30, 2017
|
$
|
(38.9
|
)
|
$
|
1.7
|
|
$
|
(3.8
|
)
|
$
|
(41.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at June 30, 2016
|
$
|
(55.1
|
)
|
$
|
1.2
|
|
$
|
(1.3
|
)
|
$
|
(55.2
|
)
|
Other comprehensive income (loss) before
reclassifications and income tax
|
3.7
|
|
—
|
|
(0.5
|
)
|
3.2
|
|
Amounts reclassified from accumulated other
comprehensive income, before income tax
|
—
|
|
0.7
|
|
0.5
|
|
1.2
|
|
Income tax benefit
|
—
|
|
(0.3
|
)
|
—
|
|
(0.3
|
)
|
Net current period other comprehensive
income, net of income taxes
|
3.7
|
|
0.4
|
|
—
|
|
4.1
|
|
Noncontrolling interest
|
(0.6
|
)
|
—
|
|
—
|
|
(0.6
|
)
|
Net current period comprehensive income,
net of income taxes and noncontrolling interest
|
3.1
|
|
0.4
|
|
—
|
|
3.5
|
|
Balance at September 30, 2016
|
$
|
(52.0
|
)
|
$
|
1.6
|
|
$
|
(1.3
|
)
|
$
|
(51.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at December 31, 2015
|
$
|
(55.3
|
)
|
$
|
0.4
|
|
$
|
0.3
|
|
$
|
(54.6
|
)
|
Other comprehensive income (loss) before
reclassifications and income tax
|
5.2
|
|
—
|
|
(2.5
|
)
|
2.7
|
|
Amounts reclassified from accumulated other
comprehensive income (loss), before income tax
|
—
|
|
2.0
|
|
(0.1
|
)
|
1.9
|
|
Income tax (benefit) expense
|
—
|
|
(0.8
|
)
|
1.0
|
|
0.2
|
|
Net current period other comprehensive
income (loss), net of income taxes
|
5.2
|
|
1.2
|
|
(1.6
|
)
|
4.8
|
|
Noncontrolling interest
|
(1.9
|
)
|
—
|
|
—
|
|
(1.9
|
)
|
Net current period comprehensive income (loss),
net of income taxes and noncontrolling interest
|
3.3
|
|
1.2
|
|
(1.6
|
)
|
2.9
|
|
Balance at September 30, 2016
|
$
|
(52.0
|
)
|
$
|
1.6
|
|
$
|
(1.3
|
)
|
$
|
(51.7
|
)
|
Other comprehensive income (loss) before reclassifications and income taxes includes the effect of foreign currency.
The before-tax reclassification of pension and postretirement liability adjustments was due to the amortization of prior service costs and was included in costs of products sold and SG&A expenses in the Consolidated Statement of Income. The reclassification of the remaining components of accumulated other comprehensive loss was included in "Other income (expense), net" in the Consolidated Statement of Income.
Note 12 - 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
three and nine
months ended
September 30, 2017
and
2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2017
|
2016
|
2017
|
2016
|
Numerator:
|
|
|
|
|
Net income attributable to The Timken Company
|
$
|
53.5
|
|
$
|
33.6
|
|
$
|
174.2
|
|
$
|
147.7
|
|
Less: undistributed earnings allocated to nonvested stock
|
—
|
|
—
|
|
—
|
|
—
|
|
Net income available to common shareholders for basic earnings per share and diluted earnings per share
|
$
|
53.5
|
|
$
|
33.6
|
|
$
|
174.2
|
|
$
|
147.7
|
|
Denominator:
|
|
|
|
|
Weighted average number of shares outstanding, basic
|
77,694,974
|
|
77,935,783
|
|
77,766,828
|
|
78,808,179
|
|
Effect of dilutive securities:
|
|
|
|
|
Stock options and awards based on the treasury stock method
|
1,109,322
|
|
681,693
|
|
1,123,102
|
|
663,577
|
|
Weighted average number of shares outstanding, assuming dilution
of stock options and awards
|
78,804,296
|
|
78,617,476
|
|
78,889,930
|
|
79,471,756
|
|
Basic earnings per share
|
$
|
0.69
|
|
$
|
0.43
|
|
$
|
2.24
|
|
$
|
1.87
|
|
Diluted earnings per share
|
$
|
0.68
|
|
$
|
0.43
|
|
$
|
2.21
|
|
$
|
1.86
|
|
The exercise prices for certain stock options that the Company has awarded exceed the average market price of the Company’s common shares. Such stock options are antidilutive and were not included in the computation of diluted earnings per share. The antidilutive stock options outstanding during the
three
months ended
September 30, 2017
and
2016
were
473,694
and
2,706,711
, respectively. During the
nine
months ended
September 30, 2017
and
2016
, the antidilutive stock options outstanding were
529,020
and
3,080,133
, respectively.
Note 13 - Segment Information
The primary measurement used by management to measure the financial performance of each segment is earnings before interest and taxes ("EBIT").
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2017
|
2016
|
2017
|
2016
|
Net sales:
|
|
|
|
|
Mobile Industries
|
$
|
422.8
|
|
$
|
353.1
|
|
$
|
1,214.2
|
|
$
|
1,104.1
|
|
Process Industries
|
348.6
|
|
304.3
|
|
1,011.6
|
|
910.9
|
|
|
$
|
771.4
|
|
$
|
657.4
|
|
$
|
2,225.8
|
|
$
|
2,015.0
|
|
|
|
|
|
|
Segment EBIT:
|
|
|
|
|
Mobile Industries
|
$
|
34.9
|
|
$
|
25.9
|
|
$
|
100.1
|
|
$
|
95.3
|
|
Process Industries
|
61.7
|
|
42.0
|
|
164.9
|
|
123.7
|
|
Total EBIT, for reportable segments
|
$
|
96.6
|
|
$
|
67.9
|
|
$
|
265.0
|
|
$
|
219.0
|
|
Corporate expenses
|
(12.0
|
)
|
(10.9
|
)
|
(37.8
|
)
|
(34.8
|
)
|
Continued Dumping & Subsidy Offset Act income
(expense), net
|
—
|
|
(0.2
|
)
|
—
|
|
53.6
|
|
Interest expense
|
(10.1
|
)
|
(8.0
|
)
|
(26.5
|
)
|
(25.1
|
)
|
Interest income
|
0.7
|
|
0.4
|
|
2.0
|
|
1.1
|
|
Income before income taxes
|
$
|
75.2
|
|
$
|
49.2
|
|
$
|
202.7
|
|
$
|
213.8
|
|
Note 14 - Impairment and Restructuring Charges
Impairment and restructuring charges by segment are comprised of the following:
For the
three
months ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process Industries
|
Corporate
|
Total
|
Severance and related benefit costs
|
$
|
1.3
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1.3
|
|
Total
|
$
|
1.3
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1.3
|
|
For the
three
months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process Industries
|
Corporate
|
Total
|
Impairment charges
|
$
|
1.2
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1.2
|
|
Severance and related benefit costs
|
2.9
|
|
0.4
|
|
—
|
|
3.3
|
|
Exit costs
|
0.3
|
|
0.5
|
|
—
|
|
0.8
|
|
Total
|
$
|
4.4
|
|
$
|
0.9
|
|
$
|
—
|
|
$
|
5.3
|
|
For the
nine
months ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process Industries
|
Corporate
|
Total
|
Severance and related benefit costs
|
$
|
3.1
|
|
$
|
0.1
|
|
$
|
—
|
|
$
|
3.2
|
|
Exit costs
|
0.1
|
|
—
|
|
0.5
|
|
0.6
|
|
Total
|
$
|
3.2
|
|
$
|
0.1
|
|
$
|
0.5
|
|
$
|
3.8
|
|
For the
nine
months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process Industries
|
Corporate
|
Total
|
Impairment charges
|
$
|
3.8
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3.8
|
|
Severance and related benefit costs
|
7.7
|
|
4.9
|
|
—
|
|
12.6
|
|
Exit costs
|
1.6
|
|
0.7
|
|
—
|
|
2.3
|
|
Total
|
$
|
13.1
|
|
$
|
5.6
|
|
$
|
—
|
|
$
|
18.7
|
|
The following discussion explains the 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.
On September 29, 2016, the Company announced the closure of its bearing plant in Pulaski, Tennessee ("Pulaski"), which is expected to close during the fourth quarter of
2017
and to affect approximately
120
employees. During the three and
nine
months ended
September 30, 2017
, the Company recognized severance and related benefit costs of
$0.2 million
and
$1.3 million
, respectively, related to this closure. During the three months ended
September 30, 2016
, the Company recorded severance and related benefit costs of
$1.7 million
related to this closure. The Company has incurred pretax costs related to this closure of
$8.1 million
as of
September 30, 2017
, including rationalization costs recorded in cost of products sold.
In August 2016, the Company completed the consultation process to close the manufacturing operations in Benoni, South Africa ("Benoni") affecting
85
employees. Benoni will continue to recondition bearings and assemble rail bearings. During the three months ended
September 30, 2016
, the Company recorded impairment charges of
$0.5 million
and severance and related benefit costs of
$0.8 million
related to this closure.
On
March 17, 2016
, the Company announced the closure of its bearing plant in Altavista, Virginia ("Altavista"). The Company completed the closure of this manufacturing facility on
March 31, 2017
. During the three months ended
September 30, 2016
, the Company recorded impairment charges of
$0.7 million
and severance and related benefit costs of
$0.2 million
related to this closure. During the
nine
months ended
September 30, 2016
, the Company recorded impairment charges of
$3.1 million
and severance and related benefit costs of
$1.7 million
in connection with this closure. The Company has incurred pretax costs related to this closure of
$11.5 million
as of
September 30, 2017
, including rationalization costs recorded in cost of products sold.
During the three months and
nine
months ended
September 30, 2017
, the Company recognized
$0.7 million
and
$1.5 million
, respectively, of severance and related benefit costs to eliminate approximately
50
positions in the aggregate. The amounts recognized for the three months and
nine
months ended
September 30, 2017
primarily related to the Mobile Industries segment. During the
nine
months ended
September 30, 2016
, the Company recognized
$7.7 million
of severance and related benefit costs to eliminate approximately
175
positions. Of the
$7.7 million
charge for the first
nine
months of
2016
,
$2.9 million
related to the Mobile Industries segment and
$4.8 million
related to the Process Industries segment.
Consolidated Restructuring Accrual:
The following is a rollforward of the consolidated restructuring accrual for the
nine
months ended
September 30, 2017
and the twelve months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
September 30,
2017
|
December 31,
2016
|
Beginning balance, January 1
|
$
|
10.1
|
|
$
|
11.3
|
|
Expense
|
3.8
|
|
17.8
|
|
Payments
|
(9.2
|
)
|
(19.0
|
)
|
Ending balance
|
$
|
4.7
|
|
$
|
10.1
|
|
The restructuring accruals at
September 30, 2017
and
December 31, 2016
were included in other current liabilities on the Consolidated Balance Sheets.
Note 15 - Retirement Benefit Plans
The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans. The amounts for the
three and nine
months ended
September 30, 2017
are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ending
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
Total
|
|
Three Months Ended
September 30,
|
Three Months Ended
September 30,
|
Three Months Ended
September 30,
|
|
2017
|
2016
|
2017
|
2016
|
2017
|
2016
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
3.1
|
|
$
|
3.3
|
|
$
|
0.4
|
|
$
|
0.4
|
|
$
|
3.5
|
|
$
|
3.7
|
|
Interest cost
|
6.2
|
|
6.6
|
|
1.9
|
|
2.6
|
|
8.1
|
|
9.2
|
|
Expected return on plan assets
|
(7.0
|
)
|
(7.4
|
)
|
(2.9
|
)
|
(2.6
|
)
|
(9.9
|
)
|
(10.0
|
)
|
Amortization of prior service cost
|
0.3
|
|
0.4
|
|
0.1
|
|
0.1
|
|
0.4
|
|
0.5
|
|
Net periodic benefit cost
|
$
|
2.6
|
|
$
|
2.9
|
|
$
|
(0.5
|
)
|
$
|
0.5
|
|
$
|
2.1
|
|
$
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
Total
|
|
Nine Months Ended
September 30,
|
Nine Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2017
|
2016
|
2017
|
2016
|
2017
|
2016
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
9.2
|
|
$
|
9.9
|
|
$
|
1.2
|
|
$
|
1.1
|
|
$
|
10.4
|
|
$
|
11.0
|
|
Interest cost
|
18.5
|
|
20.0
|
|
5.6
|
|
8.2
|
|
24.1
|
|
28.2
|
|
Expected return on plan assets
|
(21.0
|
)
|
(22.3
|
)
|
(8.3
|
)
|
(8.0
|
)
|
(29.3
|
)
|
(30.3
|
)
|
Amortization of prior service cost
|
1.0
|
|
1.2
|
|
0.1
|
|
0.1
|
|
1.1
|
|
1.3
|
|
Recognition of actuarial loss
|
4.4
|
|
—
|
|
—
|
|
—
|
|
4.4
|
|
—
|
|
Net periodic benefit cost
|
$
|
12.1
|
|
$
|
8.8
|
|
$
|
(1.4
|
)
|
$
|
1.4
|
|
$
|
10.7
|
|
$
|
10.2
|
|
During the first
three
months of
2017
, the Company recognized actuarial losses of
$4.4 million
as a result of the remeasurement of plan assets and obligations for one of the Company’s United States ("U.S.") defined benefit pension plans. The remeasurement was due to lump sum payments exceeding service and interest costs for this plan.
Note 16 - Other Postretirement Benefit Plans
The following table sets forth the net periodic benefit cost for the Company’s other postretirement benefit plans. The amounts for the
three and nine
months ended
September 30, 2017
are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ending
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2017
|
2016
|
2017
|
2016
|
Components of net periodic benefit cost:
|
|
|
|
|
Service cost
|
$
|
—
|
|
$
|
0.1
|
|
$
|
0.1
|
|
$
|
0.3
|
|
Interest cost
|
2.3
|
|
2.7
|
|
6.8
|
|
8.2
|
|
Expected return on plan assets
|
(1.4
|
)
|
(1.6
|
)
|
(4.2
|
)
|
(4.9
|
)
|
Amortization of prior service cost
|
(0.3
|
)
|
0.2
|
|
(0.8
|
)
|
0.7
|
|
Net periodic benefit cost
|
$
|
0.6
|
|
$
|
1.4
|
|
$
|
1.9
|
|
$
|
4.3
|
|
Note 17 - Income Taxes
The Company's provision for income taxes in interim periods is computed by applying the estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items are recorded during the period(s) in which they occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2017
|
2016
|
2017
|
2016
|
Provision for income taxes
|
$
|
21.1
|
|
$
|
15.2
|
|
$
|
28.5
|
|
$
|
65.8
|
|
Effective tax rate
|
28.1
|
%
|
30.9
|
%
|
14.1
|
%
|
30.8
|
%
|
The income tax expense for the
third
quarter and first
nine
months of
2017
was calculated using the forecasted multi-jurisdictional annual effective tax rates to determine a blended annual effective tax rate. The effective tax rate differs from the U.S. federal statutory rate of
35%
primarily due to the projected mix of earnings in international jurisdictions with relatively lower tax rates and tax benefits related to foreign tax credits, which are partially offset by losses in jurisdictions with no tax benefit due to valuation allowances.
Income tax expense increased for the
third
quarter of
2017
compared to the
third
quarter of
2016
primarily due to the significant increase in pre-tax earnings, primarily in non-U.S. jurisdictions. The expense was partially offset by favorable U.S. tax deductions, tax credits and favorable discrete tax amounts.
Income tax expense for the
nine
months ended
September 30, 2017
is lower than the
nine
months ended
September 30, 2016
primarily due to the net reversal of accruals for prior year uncertain tax positions recorded discretely and favorable U.S. tax deductions and tax credits.
The following table is a rollforward of the Company's gross unrecognized tax benefits for the
nine
months ended
September 30, 2017
:
|
|
|
|
|
|
September 30,
2017
|
Beginning balance, January 1
|
$
|
39.1
|
|
Tax positions related to the prior years:
|
|
Additions
|
5.6
|
|
Reductions
|
(1.3
|
)
|
Lapses in statutes of limitation
|
(28.6
|
)
|
Ending Balance
|
$
|
14.8
|
|
Note 18 - Fair Value
Fair value is defined as the price that would be expected to 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 tables present the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
125.4
|
|
$
|
120.5
|
|
$
|
4.9
|
|
$
|
—
|
|
Cash and cash equivalents measured at net asset value
|
11.8
|
|
—
|
|
—
|
|
—
|
|
Restricted cash
|
3.3
|
|
3.3
|
|
—
|
|
—
|
|
Short-term investments
|
16.5
|
|
—
|
|
16.5
|
|
—
|
|
Short-term investments measured at net asset value
|
0.2
|
|
—
|
|
—
|
|
—
|
|
Foreign currency hedges
|
1.6
|
|
—
|
|
1.6
|
|
—
|
|
Total Assets
|
$
|
158.8
|
|
$
|
123.8
|
|
$
|
23.0
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
3.9
|
|
$
|
—
|
|
$
|
3.9
|
|
$
|
—
|
|
Total Liabilities
|
$
|
3.9
|
|
$
|
—
|
|
$
|
3.9
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
|
|
$
|
—
|
|
Cash and cash equivalents are highly liquid investments with maturities of
three months or less
when purchased and are valued at the redemption value. Short-term investments are investments with maturities between
four months and one year
and generally are valued at amortized cost, which approximates fair value. A portion of the cash and cash equivalents and short-term investments are valued based on net asset value. The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts.
The Company does not believe it has significant concentrations of risk associated with the counterparties to its financial instruments.
2017
No assets were measured at fair value on a nonrecurring basis for the
nine
months ended
September 30, 2017
.
2016
The following table presents those assets measured at fair value on a nonrecurring basis for the
nine
months ended
September 30, 2016
using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
Fair Value Adjustment
|
Fair Value
|
Long-lived assets held for sale:
|
|
|
|
Land
|
$
|
0.2
|
|
$
|
(0.2
|
)
|
$
|
—
|
|
Total long-lived assets held for sale
|
$
|
0.2
|
|
$
|
(0.2
|
)
|
$
|
—
|
|
|
|
|
|
Long-lived assets held and used:
|
|
|
|
Altavista bearing plant
|
$
|
5.6
|
|
$
|
(3.1
|
)
|
$
|
2.5
|
|
Equipment at Benoni bearing plant
|
0.5
|
|
(0.5
|
)
|
—
|
|
Total long-lived assets held and used
|
$
|
6.1
|
|
$
|
(3.6
|
)
|
$
|
2.5
|
|
Assets held for sale of
$0.2 million
were written down to their fair value of
zero
during the first quarter of
2016
, resulting in an impairment charge of
$0.2 million
. The fair value of these assets was based on the price that the Company expected to receive when it disposed of these assets.
On March 17, 2016, the Company announced the closure of its Altavista bearing plant. The Company completed the closure of this manufacturing facility on March 31, 2017. The Altavista bearing plant, with a carrying value of
$5.6 million
, was written down to its fair value of
$3.2 million
during the first quarter of
2016
, resulting in an impairment charge of
$2.4 million
. The fair value for the plant was based on the price that the Company expected to receive from the sale of this facility. During the third quarter of
2016
, the Company reevaluated the fair value of this facility. The Altavista bearing plant was written down to its fair value of
$2.5 million
during the third quarter of
2016
, resulting in an additional impairment of
$0.7 million
. During the second quarter of
2017
, this facility was reclassified to assets held for sale and included in other current assets on the Consolidated Balance Sheet. On
July 14, 2017
, this facility was sold for a pretax gain of approximately
$1.6 million
.
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 charge of
$0.5 million
. The fair value for the equipment was based on the price that the Company expected to receive from the sale of the equipment.
Financial Instruments:
The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash, 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, restricted cash, short-term investments, accounts receivable net, accounts payable, trade and short-term borrowings are a reasonable estimate of their fair value. Due to the nature of fair value calculations for variable-rate debt, the carrying value of the Company's long-term variable rate debt is a reasonable estimate of its fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was
$723.9 million
and
$532.2 million
at
September 30, 2017
and
December 31, 2016
, respectively. The carrying value of this debt was
$684.3 million
and
$507.3 million
at
September 30, 2017
and
December 31, 2016
, respectively. The fair value of long-term fixed-rate debt was measured using Level 2 inputs.
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, commodity price risk and interest rate risk. Forward exchange contracts on various foreign currencies are entered into in order to manage the foreign currency exchange rate risk associated with certain of the Company’s commitments denominated in foreign currencies.
The Company designates certain foreign currency forward contracts as cash flow hedges of forecasted revenues and expenses and certain interest rate hedges as fair value hedges of fixed-rate borrowings.
The Company does not purchase or hold any derivative financial instruments for trading purposes. As of
September 30, 2017
and
December 31, 2016
, the Company had
$223.2 million
and
$282.8 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 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 revenue or expense denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against foreign currencies, the decline in the present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.
The length of time over which the Company hedges its exposure to the variability in future cash flows for forecasted transactions is generally 18 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).
Purpose for Derivative Instruments not Designated as Hedging Instruments:
For derivative instruments that are not designated as hedging instruments, the instruments typically are 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 typically are hedged with a forward contract at the inception of the loan with a maturity date at the maturity of the loan. The revaluation of these contracts, as well as 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 derivative instruments. Those balances are presented in the other non-current assets/liabilities accounts within the Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
Derivatives Liabilities
|
Derivatives designated as hedging instruments
|
Fair Value at 9/30/17
|
Fair Value at 12/31/16
|
Fair Value at 9/30/17
|
Fair Value at 12/31/16
|
Foreign currency forward contracts
|
$
|
0.3
|
|
$
|
2.3
|
|
$
|
2.9
|
|
$
|
0.5
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
Foreign currency forward contracts
|
1.3
|
|
7.6
|
|
1.0
|
|
1.6
|
|
Total Derivatives
|
$
|
1.6
|
|
$
|
9.9
|
|
$
|
3.9
|
|
$
|
2.1
|
|
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 on derivative instruments
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
Derivatives in cash flow hedging relationships
|
2017
|
2016
|
2017
|
2016
|
Foreign currency forward contracts
|
$
|
(1.6
|
)
|
$
|
(0.5
|
)
|
$
|
(4.7
|
)
|
$
|
(2.5
|
)
|
Interest rate swaps
|
(2.4
|
)
|
—
|
|
(2.4
|
)
|
—
|
|
Total
|
$
|
(4.0
|
)
|
$
|
(0.5
|
)
|
$
|
(7.1
|
)
|
$
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from Accumulated Other Comprehensive Loss into income (effective portion)
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
Derivatives in cash flow hedging relationships
|
2017
|
2016
|
2017
|
2016
|
Foreign currency forward contracts
|
$
|
(0.9
|
)
|
$
|
(0.4
|
)
|
$
|
(0.2
|
)
|
$
|
0.4
|
|
Interest rate swaps
|
—
|
|
(0.1
|
)
|
(0.2
|
)
|
(0.3
|
)
|
Total
|
$
|
(0.9
|
)
|
$
|
(0.5
|
)
|
$
|
(0.4
|
)
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) recognized in
income on derivative instruments
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
Derivatives not designated as hedging instruments
|
Location of gain or (loss) recognized in income on derivative
|
2017
|
2016
|
2017
|
2016
|
Foreign currency forward contracts
|
Other income (expense), net
|
$
|
2.7
|
|
$
|
(0.2
|
)
|
$
|
(5.6
|
)
|
$
|
(4.5
|
)
|
Note 20 - Continued Dumping and Subsidy Offset Act
The U.S. Continued Dumping and Subsidy Offset Act ("CDSOA") provides for distribution of monies collected by U.S. Customs and Border Protection ("U.S. Customs") 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 third quarter of
2016
, the Company recognized CDSOA expense of
$0.2 million
. During the first nine months of 2016, the Company recognized pretax CDSOA income, net of related expenses, of
$53.6 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 U.S. 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 for certain years while litigation was ongoing. However, much of the CDSOA litigation that involves antidumping orders where Timken is a qualifying domestic producer has concluded.
Subsequently, the Company was notified by letters dated March 25, 2016 and June 24, 2016 that funds were being distributed to the Company. On April 1, 2016 and July 1, 2016, the Company received CDSOA distributions of
$48.1 million
and
$6.3 million
, respectively, representing funds that would have been distributed to the Company at the end of calendar years 2011 through 2015.
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.