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, 2017
.
Note 2 - Significant Accounting Policies
The Company's significant accounting policies are detailed in "Note 1 - Significant Accounting Policies" of the Annual Report on Form 10-K for the year ended December 31, 2017. In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)", which was adopted by the Company on January 1, 2018. Also, 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.” Significant changes to the Company's accounting policies as a result of adopting ASU 2014-09 (the “new revenue standard”) and ASU 2017-07 are discussed below:
Revenue:
A contract exists when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectibility of consideration is probable.
Revenue is recognized when performance obligations under the terms of a contract with a customer of the Company are satisfied. A majority of the Company's revenue is from short-term, fixed-price contracts and continues to be recognized as of a point in time when products are shipped from the Company's manufacturing facilities or at a later point in time when control of the products transfers to the customer. Revenue was previously recognized for services and certain sales of customer-specific product at the point in time when the shipping terms were satisfied. Under the new revenue standard, the Company now recognizes revenue over time as it satisfies the performance obligations because of the continuous transfer of control to the customer, supported as follows:
|
|
•
|
For certain service contracts, this continuous transfer of control to the customer occurs as the Company's service enhances assets that the customer owns and controls at all times and the Company is contractually entitled to payment for work performed to date plus a reasonable margin.
|
|
|
•
|
For United States ("U.S.") government contracts, the customer is allowed to unilaterally terminate the contract for convenience, and is required to pay the Company for costs incurred plus a reasonable margin and take control of any work in process.
|
|
|
•
|
For certain non-U.S. government contracts involving customer-specific products, the customer controls the work in process based on contractual termination clauses or restrictions of the Company's use of the product and the Company possesses a right to payment for work performed to date plus a reasonable margin.
|
As a result of control transferring over time for these products and services, revenue is recognized based on progress toward completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company has elected to use the cost-to-cost input measure of progress for these contracts because it best depicts the transfer of goods or services to the customer based on incurring costs on the contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
The pricing and payment terms for non-U.S. government contracts is based on the Company's standard terms and conditions or the specific negotiations with each customer. The Company's standard terms and conditions require payment 30 days from the invoice date, but the timing of payment for specific negotiated terms may vary. The Company also has both prime and subcontracts in support of the provision of goods and services to the U.S. government. Certain of these contracts are subject to the Federal Acquisition Regulation ("FAR") and are priced commercially based on a competitive market. Under the payment terms of those U.S. government fixed-price contracts, the customer pays the Company performance-based payments, which are interim payments of up to 80% of the contract price for costs incurred to date based on quantifiable measures of performance or on the achievement of specified events or milestones. Because the customer retains a portion of the contract price until completion of such contracts, certain of these U.S. government fixed-price contracts result in revenue recognized in excess of billings, which is presented within "Contract assets" on the Consolidated Balance Sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. As a practical expedient, the Company may not assess whether promised goods or services are performance obligations, if they are immaterial in the context of the contract with the customer, and combine these with other performance obligations. The Company has elected to recognize incremental costs incurred to obtain contracts, which primarily represent commissions paid to third-party sales agents where the amortization period would be less than one year, as "Selling, general and administrative ("SG&A") expenses" in the Consolidated Statement of Income as incurred. The Company has also elected not to adjust the promised amount of consideration for the effects of any significant financing component where the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Finally, the Company's policy is to exclude performance obligations resulting from contracts with a duration of one year or less from its disclosures related to remaining performance obligations.
The amount of consideration to which the Company expects to be entitled in exchange for the goods and services is not generally subject to significant variations. However, the Company does offer certain customers rebates, prompt payment discounts, end-user discounts, the right to return eligible products, and/or other forms of variable consideration. The Company estimates this variable consideration using the expected value amount, which is based on historical experience. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company adjusts the estimate of revenue at the earlier of when the amount of consideration the Company expects to receive changes or when the consideration becomes fixed. The Company recognizes the cost of freight and shipping when control of the products or services has transferred to the customer as an expense in "Cost of products sold" on the Consolidated Statement of Income, because those are costs incurred to fulfill the promise recognized, not a separate performance obligation. To the extent certain freight and shipping fees are charged to customers, the Company recognizes the amounts charged to customers as revenues and the related costs as an expense in "Cost of products sold" when control of the related products or services has transferred to the customer.
Contracts are occasionally modified to account for changes in contract specifications, requirements, and pricing. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Substantially all of the Company's contract modifications are for goods or services that are distinct from the existing contract. Therefore, the effect of a contract modification on the transaction price and the Company's measure of progress for the performance obligation to which it relates is generally recognized on a prospective basis.
Accounts Receivable, Less Allowances:
"Accounts receivable, less allowances" on the Consolidated Balance Sheet include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. 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.
Prior to the adoption of the new revenue standard, the Company recognized a portion of its revenues on the percentage-of-completion method measured on the cost-to-cost basis. As of December 31, 2017, revenue recognized in excess of billings of
$67.3 million
related to these revenues were included in "Accounts receivable, less allowances" on the Consolidated Balance Sheet. In accordance with the new revenue standard,
$74.8 million
of revenue recognized in excess of billings related to these revenues are included in "Contract assets" on the Consolidated Balance Sheet at
March 31, 2018
.
Contract Assets:
"Contract assets" on the Consolidated Balance Sheet primarily include unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized, the revenue recognized exceeds the amount billed to the customer and the right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value.
Pension and Other Postretirement Benefits:
With the adoption of ASU 2017-07 on January 1, 2018, service cost is 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 are presented separately outside of operating income. Also, actuarial gains and losses are excluded from segment results, while all other components of net periodic benefit cost will continue to be included within segment results.
Recent Accounting Pronouncements:
New Accounting Guidance Adopted:
Revenue recognition
The new revenue standard introduces a 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. The new revenue standard 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. For further information about the Company's revenues from contracts with customers, refer to
Note 10 - Revenue
.
On January 1, 2018, the Company adopted the new revenue standard and all of the related amendments using the modified retrospective method and applied those provisions to all open contracts. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The cumulative effect of changes made to the balance sheet as of January 1, 2018 for the adoption of the new revenue standard was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
Effect of Accounting Change
|
Balance at
January 1, 2018
|
ASSETS
|
|
|
|
Accounts receivable, less allowances
|
$
|
524.9
|
|
$
|
(67.3
|
)
|
$
|
457.6
|
|
Contract assets
|
—
|
|
100.5
|
|
100.5
|
|
Inventories, net
|
738.9
|
|
(22.9
|
)
|
716.0
|
|
Other current assets
|
81.2
|
|
3.0
|
|
84.2
|
|
Deferred income taxes
|
61.0
|
|
(2.6
|
)
|
58.4
|
|
LIABILITIES
|
|
|
|
Other current liabilities
|
160.7
|
|
3.0
|
|
163.7
|
|
EQUITY
|
|
|
|
Earnings invested in the business
|
1,408.4
|
|
7.7
|
|
1,416.1
|
|
The tables below reflect changes to financial statement line items as a result of adopting the new revenue standard. The adoption of the new revenue standard did not have an impact on "Net cash used in operating activities" on the Consolidated Statement of Cash Flows for the
three
months ended
March 31, 2018
.
Consolidated Statement of Income for the
three
months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Previous Accounting Method
|
Effect of Accounting Change
|
As Reported
|
Net sales
|
$
|
879.1
|
|
$
|
4.0
|
|
$
|
883.1
|
|
Cost of products sold
|
616.5
|
|
1.7
|
|
618.2
|
|
Selling, general, and administrative expenses
|
148.0
|
|
0.6
|
|
148.6
|
|
Income before income taxes
|
107.1
|
|
1.7
|
|
108.8
|
|
Provision for income taxes
|
27.9
|
|
0.4
|
|
28.3
|
|
Net income
|
79.2
|
|
1.3
|
|
80.5
|
|
Net income attributable to The Timken Company
|
$
|
78.9
|
|
$
|
1.3
|
|
$
|
80.2
|
|
Basic earnings per share
|
$
|
1.01
|
|
$
|
0.02
|
|
$
|
1.03
|
|
Diluted earnings per share
|
$
|
1.00
|
|
$
|
0.02
|
|
$
|
1.02
|
|
Consolidated Balance Sheet as of
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Previous Accounting Method
|
Effect of Accounting Change
|
As Reported
|
ASSETS
|
|
|
|
Accounts receivable, less allowances
|
$
|
609.9
|
|
$
|
(74.8
|
)
|
$
|
535.1
|
|
Contract assets
|
—
|
|
111.4
|
|
111.4
|
|
Inventories, net
|
801.4
|
|
(24.6
|
)
|
776.8
|
|
Other current assets
|
69.9
|
|
3.1
|
|
73.0
|
|
Deferred income taxes
|
61.0
|
|
(3.0
|
)
|
58.0
|
|
LIABILITIES
|
|
|
|
Other current liabilities
|
153.8
|
|
3.1
|
|
156.9
|
|
EQUITY
|
|
|
|
Earnings invested in the business
|
1,466.9
|
|
9.0
|
|
1,475.9
|
|
Pension and other postretirement benefits
As mentioned above, 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” in March 2017. The Company adopted ASU 2017-07 on January 1, 2018 on a retrospective basis, which resulted in the reclassification of certain amounts from "Cost of products sold" and "Selling, general and administrative expenses" to "Other income (expense)" in the Consolidated Statement of Income. As a result, prior period amounts impacted have been revised accordingly.
The following table reflects the changes to financial statement line items for the
three
months ended
March 31, 2017
resulting from the adoption of ASU 2017-07:
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
Effect of Accounting Change
|
As Adjusted
|
Cost of products sold
|
$
|
523.3
|
|
$
|
(1.7
|
)
|
$
|
521.6
|
|
Selling, general, and administrative expenses
|
119.6
|
|
(2.0
|
)
|
117.6
|
|
Other income (expense), net
|
1.7
|
|
(3.7
|
)
|
(2.0
|
)
|
Other new accounting guidance adopted
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 requires that a statement of cash flows explain the change in the total of cash, cash equivalents, and restricted cash during the period. On January 1, 2018, the Company adopted the provisions of ASU 2016-18 on a retrospective basis, which resulted in the addition of restricted cash balances and movements in the Company’s Statement of Cash Flows for all periods presented. As a result, for the
three
months ended
March 31, 2018
and
2017
, restricted cash balances of $
3.9 million
and $
2.9 million
, respectively, were included in the Company's ending balance on the Statement of Cash Flows.
In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows for certain tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”) to be reclassified from accumulated other comprehensive income (or loss) to retained earnings. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Also, ASU 2018-02 may be applied in the period of adoption or retrospectively to each period in which the effect of the change in the statutory income tax rate in the U.S. Tax Reform is recognized. On January 1, 2018, the Company early adopted the provisions of ASU 2018-02, with the related impact applied in the period of adoption. In doing so, the Company elected to reclassify
$0.7 million
of related income tax effects from accumulated other comprehensive loss to retained earnings in the first quarter of 2018.
New Accounting Guidance Issued and Not Yet Adopted:
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which impacts both designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 amends and clarifies the requirements to qualify for hedge accounting, removes the requirement to recognize changes in fair value from certain hedges in current earnings, and specifies the presentation of changes in fair value in the income statement for all hedging instruments. ASU 2017-12 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including in any interim period for which financial statements have not yet been issued, but the effect of adoption is required to be reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the effect that the adoption of ASU 2017-12 will have on the Company's results of operations and financial condition.
In 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 this 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 exceeded 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, and instead will require that a goodwill impairment loss be measured at the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for public companies for years beginning after December 15, 2019, with early adoption permitted, and must be applied prospectively. While the actual effect of adopting ASU 2017-04 will not be known until the period of adoption, the Company currently does not expect it to materially impact the Company's results of operations and financial condition.
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 expects to recognize a right-to-use asset and a lease liability for its operating lease commitments on the Consolidated Balance Sheet and is assessing the impact this new standard will have on its consolidated financial condition and results of operations. The Company has created an implementation team to identify all leases involved, determine which, if any, practical expedients to utilize, and perform all data gathering required to comply. Additionally, the Company is implementing an enterprise-wide lease management system to assist in the related accounting and is evaluating additional changes to the related processes and internal controls to ensure requirements are met for reporting and disclosure purposes.
Note 3 - Inventories
The components of inventories at
March 31, 2018
and
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
March 31,
2018
|
December 31,
2017
|
Manufacturing supplies
|
$
|
30.2
|
|
$
|
29.0
|
|
Raw materials
|
95.5
|
|
90.4
|
|
Work in process
|
254.6
|
|
245.2
|
|
Finished products
|
430.3
|
|
404.3
|
|
Subtotal
|
810.6
|
|
768.9
|
|
Allowance for obsolete and surplus inventory
|
(33.8
|
)
|
(30.0
|
)
|
Total Inventories, net
|
$
|
776.8
|
|
$
|
738.9
|
|
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 inventories are valued by the FIFO method.
The LIFO reserves at
March 31, 2018
and
December 31, 2017
were
$167.2 million
and
$167.6 million
, respectively. 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.
Note 4 - Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the
three
months ended
March 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Total
|
Beginning balance
|
$
|
254.3
|
|
$
|
257.5
|
|
$
|
511.8
|
|
Foreign currency translation adjustments
|
3.9
|
|
0.2
|
|
4.1
|
|
Ending balance
|
$
|
258.2
|
|
$
|
257.7
|
|
$
|
515.9
|
|
The following table displays intangible assets as of
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
Balance at December 31, 2017
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Intangible assets
subject to amortization:
|
|
|
|
|
|
|
Customer relationships
|
$
|
327.2
|
|
$
|
108.6
|
|
$
|
218.6
|
|
$
|
324.6
|
|
$
|
103.0
|
|
$
|
221.6
|
|
Technology and know-how
|
129.3
|
|
35.4
|
|
93.9
|
|
128.7
|
|
33.8
|
|
94.9
|
|
Trade names
|
8.5
|
|
4.4
|
|
4.1
|
|
8.6
|
|
4.3
|
|
4.3
|
|
Capitalized software
|
262.1
|
|
229.8
|
|
32.3
|
|
261.5
|
|
226.5
|
|
35.0
|
|
Other
|
10.6
|
|
6.4
|
|
4.2
|
|
10.3
|
|
6.2
|
|
4.1
|
|
|
$
|
737.7
|
|
$
|
384.6
|
|
$
|
353.1
|
|
$
|
733.7
|
|
$
|
373.8
|
|
$
|
359.9
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
Trade names
|
$
|
52.8
|
|
|
$
|
52.8
|
|
$
|
52.0
|
|
|
$
|
52.0
|
|
FAA air agency certificates
|
8.7
|
|
|
8.7
|
|
8.7
|
|
|
8.7
|
|
|
$
|
61.5
|
|
|
|
$
|
61.5
|
|
$
|
60.7
|
|
|
|
$
|
60.7
|
|
Total intangible assets
|
$
|
799.2
|
|
$
|
384.6
|
|
$
|
414.6
|
|
$
|
794.4
|
|
$
|
373.8
|
|
$
|
420.6
|
|
Amortization expense for intangible assets was
$10.8 million
and
$9.0 million
for the
three
months ended
March 31, 2018
and
2017
, respectively. Amortization expense for intangible assets is estimated to be
$41.5 million
in
2018
;
$36.1 million
in
2019
;
$31.5 million
in
2020
;
$27.5 million
in
2021
; and
$23.3 million
in
2022
.
Acquisitions:
The amounts in the tables above include the impact of the final purchase price allocations for the Torsion Control Products, Inc. ("Torsion Control Products") and PT Tech, Inc. ("PT Tech") acquisitions and the impact of the preliminary purchase price allocation for the Groeneveld Group ("Groeneveld") acquisition. The purchase accounting for the Groeneveld acquisition is incomplete as it relates to the final determination of fair value for the contingent liabilities assumed in the acquisition, fixed asset valuation adjustments and other potential post-closing indemnification adjustments.
Note 5 - Financing Arrangements
Short-term debt at
March 31, 2018
and
December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
March 31,
2018
|
December 31,
2017
|
Variable-rate Accounts Receivable Facility with an interest rate of 2.47% at March 31, 2018 and 2.15% at December 31, 2017
|
$
|
98.9
|
|
$
|
62.9
|
|
Borrowings under variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.32% to 10.00% at March 31, 2018 and 0.32% to 2.22% at December 31, 2017
|
68.2
|
|
42.5
|
|
Short-term debt
|
$
|
167.1
|
|
$
|
105.4
|
|
The Company has a
$100 million
Amended and Restated Asset Securitization Agreement ("Accounts Receivable Facility") that matures on
November 30, 2018
. The Company is exploring opportunities to refinance the facility prior to its maturity. 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 that are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the Accounts Receivable Facility may be limited to certain borrowing base limitations, however the Accounts Receivable Facility was not reduced by any such borrowing base limitations at
March 31, 2018
. As of
March 31, 2018
, there were outstanding borrowings of
$98.9 million
under the Accounts Receivable Facility, which reduced the availability under this facility to
$1.1 million
. The cost of this facility, which is the prevailing commercial paper rate plus facility fees, is considered a financing cost and is included in "Interest expense" in the Consolidated Statements of Income. The outstanding balance under the Accounts Receivable Facility was classified as short term because the agreement matures in less than one year.
The lines of credit for certain of the Company’s foreign subsidiaries provide for short-term borrowings up to
$310.8 million
in the aggregate. Most of these lines of credit are uncommitted. At
March 31, 2018
, the Company’s foreign subsidiaries had borrowings outstanding of
$68.2 million
and bank guarantees of
$0.1 million
, which reduced the aggregate availability under these facilities to
$242.5 million
.
Long-term debt at
March 31, 2018
and
December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
March 31,
2018
|
December 31,
2017
|
Fixed-rate Medium-Term Notes, Series A, maturing at various dates through May 2028, with interest rates ranging from 6.74% to 7.76%
|
$
|
154.5
|
|
$
|
154.5
|
|
Fixed-rate Senior Unsecured Notes, maturing on September 1, 2024, with an interest rate of 3.875%
|
347.1
|
|
346.9
|
|
Variable-rate Senior Credit Facility with a weighted-average interest rate of 1.65% at March 31, 2018 and 1.83% at December 31, 2017
|
86.3
|
|
52.0
|
|
Fixed-rate Euro Senior Unsecured Notes, maturing on September 7, 2027, with an interest rate of 2.02%
|
184.2
|
|
179.3
|
|
Variable-rate Euro Term Loan with an interest rate of 1.13% at March 31, 2018 and December 31, 2017
|
123.0
|
|
119.7
|
|
Other
|
4.1
|
|
4.5
|
|
|
899.2
|
|
856.9
|
|
Less: Current maturities
|
2.7
|
|
2.7
|
|
Long-term debt
|
$
|
896.5
|
|
$
|
854.2
|
|
The Company has a
$500 million
Amended and Restated Credit Agreement ("Senior Credit Facility"), which matures on
June 19, 2020
. At
March 31, 2018
, the Company had
$86.3 million
of outstanding borrowings under the Senior Credit Facility, which reduced the availability under this facility to
$413.7 million
. The Senior Credit Facility has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At
March 31, 2018
, 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
(the "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"). Proceeds from the 2027 Notes and 2020 Term Loan were used to repay amounts drawn from the Senior Credit Facility to fund the acquisition of Groeneveld, which closed on
July 3, 2017
. These debt instruments have two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. These covenants are similar to those in the Senior Credit Facility. At
March 31, 2018
, the Company was in full compliance with both of these covenants.
Note 6 - Contingencies
The Company and certain of its subsidiaries have been identified as potentially responsible parties for investigation and remediation under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as 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, Inc. ("Lovejoy") a Special Notice Letter that identified Lovejoy as a potentially responsible party, together with at least 14 other companies, at the Ellsworth Industrial Park Site, Downers Grove, DuPage County, Illinois (the “Site”). Lovejoy’s Downers Grove property is situated within the Ellsworth Industrial Complex. The USEPA and the Illinois Environmental Protection Agency (“IEPA”) allege there have been one or more releases or threatened releases of hazardous substances, allegedly including, but not limited to, a release or threatened release on or from Lovejoy's property, at the Site. The relief sought by the USEPA and IEPA includes further investigation and potential remediation of the Site and reimbursement of response costs. Lovejoy’s allocated share of past and future costs related to the Site, including for investigation and/or remediation, could be significant. All previously pending property damage and personal injury lawsuits against Lovejoy related to the Site have been settled or dismissed.
The Company had total environmental accruals of
$5.1 million
and $
5.0 million
for various known environmental matters that are probable and reasonably estimable as of
March 31, 2018
and
December 31, 2017
, respectively, which includes the Lovejoy matter discussed above. 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.
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 table is a rollforward of the warranty liability for the
three
months ended
March 31, 2018
and the twelve months ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
March 31,
2018
|
December 31,
2017
|
Beginning balance, January 1
|
$
|
5.8
|
|
$
|
6.9
|
|
Additions
|
0.5
|
|
2.7
|
|
Payments
|
(0.4
|
)
|
(3.8
|
)
|
Ending balance
|
$
|
5.9
|
|
$
|
5.8
|
|
The product warranty liability at
March 31, 2018
and
December 31, 2017
was included in "Other current liabilities" on the Consolidated Balance Sheets.
The Company currently is evaluating claims raised by certain customers with respect to the performance of bearings sold into the wind energy sector. Accruals related to this matter are included in the table above. Management believes that the outcome of these claims will not have a material effect on the Company’s consolidated financial position; however, the effect of any such outcome may be material to the results of operations of any particular period in which costs in excess of amounts provided, if any, are recognized.
Note 7 - Equity
The changes in the components of equity for the
three
months ended
March 31, 2018
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, 2017
|
$
|
1,474.9
|
|
$
|
53.1
|
|
$
|
903.8
|
|
$
|
1,408.4
|
|
$
|
(38.3
|
)
|
$
|
(884.3
|
)
|
$
|
32.2
|
|
Cumulative effect of the new revenue standard (net of income tax benefit of $2.6 million)
|
7.7
|
|
|
|
7.7
|
|
|
|
|
Cumulative effect of ASU 2018-02
|
—
|
|
|
|
0.7
|
|
(0.7
|
)
|
|
|
Net income
|
80.5
|
|
|
|
80.2
|
|
|
|
0.3
|
|
Foreign currency translation adjustment
|
8.4
|
|
|
|
|
9.0
|
|
|
(0.6
|
)
|
Change in fair value of derivative financial
instruments, net of reclassifications
|
0.8
|
|
|
|
|
0.8
|
|
|
|
Dividends
– $0.27 per shar
e
|
(21.1
|
)
|
|
|
(21.1
|
)
|
|
|
|
Stock-based compensation
|
10.3
|
|
|
10.3
|
|
|
|
|
|
Stock purchased at fair market value
|
(22.7
|
)
|
|
|
|
|
(22.7
|
)
|
|
Stock option exercise activity
|
8.4
|
|
|
(1.4
|
)
|
|
|
9.8
|
|
|
Restricted share activity
|
—
|
|
|
(11.2
|
)
|
|
|
11.2
|
|
|
Shares surrendered for taxes
|
(4.4
|
)
|
|
|
|
|
(4.4
|
)
|
|
Balance at March 31, 2018
|
$
|
1,542.8
|
|
$
|
53.1
|
|
$
|
901.5
|
|
$
|
1,475.9
|
|
$
|
(29.2
|
)
|
$
|
(890.4
|
)
|
$
|
31.9
|
|
Note 8 - Accumulated Other Comprehensive Income (Loss)
The following tables present details about components of accumulated other comprehensive loss for the
three
months ended
March 31, 2018
and
2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at December 31, 2017
|
$
|
(35.1
|
)
|
$
|
(0.3
|
)
|
$
|
(2.9
|
)
|
$
|
(38.3
|
)
|
Cumulative effect of ASU 2018-02
|
—
|
|
(0.1
|
)
|
(0.6
|
)
|
(0.7
|
)
|
Balance at January 1, 2018
|
(35.1
|
)
|
(0.4
|
)
|
(3.5
|
)
|
(39.0
|
)
|
Other comprehensive income (loss) before
reclassifications and income tax
|
8.4
|
|
—
|
|
(0.4
|
)
|
8.0
|
|
Amounts reclassified from accumulated other
comprehensive income, before income tax
|
—
|
|
—
|
|
1.4
|
|
1.4
|
|
Income tax benefit
|
—
|
|
—
|
|
(0.2
|
)
|
(0.2
|
)
|
Net current period other comprehensive
income, net of income taxes
|
8.4
|
|
—
|
|
0.8
|
|
9.2
|
|
Noncontrolling interest
|
0.6
|
|
—
|
|
—
|
|
0.6
|
|
Net current period comprehensive income (loss),
net of income taxes, noncontrolling interest and
cumulative effect of accounting change
|
9.0
|
|
(0.1
|
)
|
0.2
|
|
9.1
|
|
Balance at March 31, 2018
|
$
|
(26.1
|
)
|
$
|
(0.4
|
)
|
$
|
(2.7
|
)
|
$
|
(29.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
20.4
|
|
—
|
|
(1.1
|
)
|
19.3
|
|
Amounts reclassified from accumulated other
comprehensive income (loss), before income tax
|
—
|
|
0.1
|
|
(0.2
|
)
|
(0.1
|
)
|
Income tax expense
|
—
|
|
—
|
|
0.5
|
|
0.5
|
|
Net current period other comprehensive
income (loss), net of income taxes
|
20.4
|
|
0.1
|
|
(0.8
|
)
|
19.7
|
|
Noncontrolling interest
|
(2.6
|
)
|
—
|
|
—
|
|
(2.6
|
)
|
Net current period comprehensive income (loss),
net of income taxes and noncontrolling interest
|
17.8
|
|
0.1
|
|
(0.8
|
)
|
17.1
|
|
Balance at March 31, 2017
|
$
|
(62.0
|
)
|
$
|
1.6
|
|
$
|
(0.4
|
)
|
$
|
(60.8
|
)
|
Other comprehensive income (loss) before reclassifications and income taxes includes the effect of foreign currency.
Note 9 - 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
months ended
March 31, 2018
and
2017
, respectively:
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
2017
|
Numerator:
|
|
|
Net income attributable to The Timken Company
|
$
|
80.2
|
|
$
|
38.2
|
|
Less: undistributed earnings allocated to nonvested stock
|
—
|
|
—
|
|
Net income available to common shareholders for
basic and diluted earnings per share
|
$
|
80.2
|
|
$
|
38.2
|
|
Denominator:
|
|
|
Weighted average number of shares outstanding - basic
|
77,734,153
|
|
77,731,793
|
|
Effect of dilutive securities:
|
|
|
Stock options and awards - based on the treasury stock method
|
1,279,032
|
|
1,162,161
|
|
Weighted average number of shares outstanding, assuming dilution
of stock options and awards
|
79,013,185
|
|
78,893,954
|
|
Basic earnings per share
|
$
|
1.03
|
|
$
|
0.49
|
|
Diluted earnings per share
|
$
|
1.02
|
|
$
|
0.48
|
|
The exercise prices for certain stock options that the Company has awarded exceeded the average market price of the Company’s common shares during the
three
months ended
March 31, 2018
. 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
March 31, 2018
and
2017
were
699,902
and
647,540
, respectively.
Note 10 - Revenue
The following table presents details deemed most relevant to the users of the financial statements about total revenue for the
three
months ended
March 31, 2018
and
2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Three Months Ended
|
|
March 31, 2018
|
March 31, 2017
|
|
Mobile
|
Process
|
Total
|
Mobile
(1)
|
Process
(1)
|
Total
(1)
|
United States
|
$
|
257.4
|
|
$
|
178.6
|
|
$
|
436.0
|
|
$
|
228.7
|
|
$
|
162.0
|
|
$
|
390.7
|
|
Americas excluding United States
|
55.2
|
|
46.7
|
|
101.9
|
|
43.3
|
|
34.9
|
|
78.2
|
|
Europe / Middle East / Africa
|
102.9
|
|
88.0
|
|
190.9
|
|
63.1
|
|
61.1
|
|
124.2
|
|
Asia-Pacific
|
73.0
|
|
81.3
|
|
154.3
|
|
47.9
|
|
62.8
|
|
110.7
|
|
Net sales
|
$
|
488.5
|
|
$
|
394.6
|
|
$
|
883.1
|
|
$
|
383.0
|
|
$
|
320.8
|
|
$
|
703.8
|
|
(1)
Prior period amounts have not been adjusted under the modified retrospective adoption method.
When reviewing revenues by sales channel, the Company separates net sales to original equipment manufacturers from sales to distributors and end users. The following table presents the percent of revenues by sales channel for the
three
months ended
March 31, 2018
:
|
|
|
|
Three Months Ended
|
Revenue by sales channel
|
March 31, 2018
|
Original equipment manufacturers
|
57%
|
Distribution/end users
|
43%
|
In addition to disaggregating revenue by segment and geography and by sales channel as shown above, the Company believes information about the timing of transfer of goods or services, type of customer and distinguishing service revenue from product sales is also relevant. Approximately
9%
of total net sales is recognized on an over-time basis because of the continuous transfer of control to the customer, with the remainder recognized as of a point in time. The payment terms with the U.S. government or its contractors, which represent approximately
6%
of total net sales, differ from those of non-government customers. Finally, approximately
5%
of total net sales represent service revenue.
Remaining Performance Obligations:
Remaining performance obligations represent the transaction price of orders meeting the definition of a contract in the new revenue standard for which work has not been performed and excludes unexercised contract options. Performance obligations having a duration of more than one year are concentrated in contracts for certain products and services provided to the U.S. government or its contractors. The aggregate amount of the transaction price allocated to remaining performance obligations for such contracts with a duration of more than one year was approximately
$175 million
at
March 31, 2018
.
Contract Assets:
The following table contains a rollforward of contract assets for the
three
months ended
March 31, 2018
:
|
|
|
|
|
|
March 31,
2018
|
Beginning balance, January 1
|
$
|
100.5
|
|
Additional revenue recognized in excess of billings
|
80.2
|
|
Less: amounts billed to customers
|
(69.3
|
)
|
Ending balance
|
$
|
111.4
|
|
There were no impairment losses recorded on contract assets for the
three
months ended
March 31, 2018
.
Note 11 - 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
March 31,
|
|
2018
|
2017
|
Net sales:
|
|
|
Mobile Industries
|
$
|
488.5
|
|
$
|
383.0
|
|
Process Industries
|
394.6
|
|
320.8
|
|
Net sales
|
$
|
883.1
|
|
$
|
703.8
|
|
Segment EBIT:
|
|
|
Mobile Industries
|
$
|
51.1
|
|
$
|
32.6
|
|
Process Industries
|
81.6
|
|
44.1
|
|
Total EBIT, for reportable segments
|
$
|
132.7
|
|
$
|
76.7
|
|
Corporate expenses
|
(14.3
|
)
|
(15.8
|
)
|
Interest expense
|
(10.0
|
)
|
(7.9
|
)
|
Interest income
|
0.4
|
|
0.6
|
|
Income before income taxes
|
$
|
108.8
|
|
$
|
53.6
|
|
Note 12 - 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
months ended
March 31, 2018
are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of the respective period’s proportionate share of the amounts to be recorded for the year ending
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
Total
|
|
Three Months Ended
March 31,
|
Three Months Ended
March 31,
|
Three Months Ended
March 31,
|
|
2018
|
2017
|
2018
|
2017
|
2018
|
2017
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
3.2
|
|
$
|
3.1
|
|
$
|
0.4
|
|
$
|
0.4
|
|
$
|
3.6
|
|
$
|
3.5
|
|
Interest cost
|
5.9
|
|
6.2
|
|
1.9
|
|
1.8
|
|
7.8
|
|
8.0
|
|
Expected return on plan assets
|
(7.3
|
)
|
(7.0
|
)
|
(3.0
|
)
|
(2.7
|
)
|
(10.3
|
)
|
(9.7
|
)
|
Amortization of prior service cost
|
0.4
|
|
0.3
|
|
—
|
|
—
|
|
0.4
|
|
0.3
|
|
Recognition of actuarial loss
|
—
|
|
4.4
|
|
—
|
|
—
|
|
—
|
|
4.4
|
|
Net periodic benefit cost
|
$
|
2.2
|
|
$
|
7.0
|
|
$
|
(0.7
|
)
|
$
|
(0.5
|
)
|
$
|
1.5
|
|
$
|
6.5
|
|
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 U.S. defined benefit pension plans. The remeasurement was due to lump sum payments exceeding service and interest costs for this plan.
Note 13 - 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
months ended
March 31, 2018
are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of the respective period’s proportionate share of the amounts to be recorded for the year ending
December 31, 2018
.
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
2017
|
Components of net periodic benefit cost:
|
|
|
Interest cost
|
$
|
1.8
|
|
$
|
2.3
|
|
Expected return on plan assets
|
(0.9
|
)
|
(1.4
|
)
|
Amortization of prior service credit
|
(0.4
|
)
|
(0.2
|
)
|
Net periodic benefit cost
|
$
|
0.5
|
|
$
|
0.7
|
|
Note 14 - 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
March 31,
|
|
2018
|
2017
|
Provision for income taxes
|
$
|
28.3
|
|
$
|
15.5
|
|
Effective tax rate
|
26.0
|
%
|
28.9
|
%
|
The income tax expense for the
three
months of
2018
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
21%
primarily due to the projected mix of earnings in international jurisdictions with relatively higher tax rates, losses in jurisdictions with no tax benefit due to valuation allowances and U.S. state and local income taxes.
The effective tax rate for the three months ended March 31, 2018 is
26.0%
. The reduction in the effective tax rate as compared with the prior year period primarily reflects the net benefits of U.S. Tax Reform, which reduced the U.S. statutory rate from
35%
to
21%
beginning in 2018 and made other changes to the U.S. federal income tax laws affecting both domestic and foreign income.
U.S. Tax Reform was enacted on December 22, 2017 and reduced the U.S. federal corporate rate from
35%
to
21%
. It requires companies to pay a one-time net charge related to the taxation of unremitted foreign earnings and creates new taxes, including a tax on certain foreign sourced earnings known as the global intangible low-taxed income (“GILTI”) tax. Also on December 22, 2017, SEC Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of U.S. Tax Reform. In accordance with SAB 118, the accounting for the tax effects of U.S. Tax Reform is not complete as of March 31, 2018; however, reasonable estimates have been made
.
Provisional estimates of
$25.2 million
for the one-time net charge related to the taxation of unremitted foreign earnings and
$10.1 million
related to the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate were recognized as components of income tax expense as of
December 31, 2017
. Reasonable estimates were also been made for the effects of other provisions of U.S. Tax Reform, but they do not have a material impact on the Company's consolidated financial statements. No changes have been made to these provisional estimates during the
three
months ended
March 31, 2018
. Additional information and analysis of U.S. Tax Reform is still needed to prepare a more detailed analysis of the Company’s deferred tax assets and liabilities, as well as historical foreign earnings and profits and potential correlative adjustments. Any subsequent adjustments to the Company's provisional estimates will be recorded to current tax expense in the quarter of
2018
when further analysis is complete. These changes could be material to income tax expense.
A provisional estimate for the GILTI provisions was not recognized as a component of income tax expense as of
December 31, 2017
as the Company had not completed its assessment or made an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to record it as a period cost if and when incurred. At
March 31, 2018
, given the complexity of the GILTI provisions, the Company is still evaluating the effects of the GILTI provisions and determining projections of future taxable income that is subject to the GILTI provisions. The Company has included GILTI related to current-year operations only in the forecasted annual effective tax rate and has not provided additional GILTI as a deferred amount.
No additional income tax provision has been made on any remaining undistributed foreign earnings not subject to the one-time net charge related to the taxation of unremitted foreign earnings or any additional outside basis difference as these amounts continue to be indefinitely reinvested in foreign operations. The Company is still evaluating whether to change its indefinite reinvestment assertion in light of U.S. Tax Reform and considers this conclusion to be incomplete. If the Company subsequently changes its assertion, it will account for the change in the quarter when the analysis is complete.
Note 15 - 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
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
104.5
|
|
$
|
103.3
|
|
$
|
1.2
|
|
$
|
—
|
|
Cash and cash equivalents measured at net asset value
|
11.9
|
|
|
|
|
|
|
|
Restricted cash
|
3.9
|
|
3.9
|
|
—
|
|
—
|
|
Short-term investments
|
13.3
|
|
—
|
|
13.3
|
|
—
|
|
Short-term investments measured at net asset value
|
0.2
|
|
|
|
|
|
|
Foreign currency hedges
|
2.5
|
|
—
|
|
2.5
|
|
—
|
|
Total Assets
|
$
|
136.3
|
|
$
|
107.2
|
|
$
|
17.0
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
11.7
|
|
$
|
—
|
|
$
|
11.7
|
|
$
|
—
|
|
Total Liabilities
|
$
|
11.7
|
|
$
|
—
|
|
$
|
11.7
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
108.5
|
|
$
|
107.3
|
|
$
|
1.2
|
|
$
|
—
|
|
Cash and cash equivalents measured at net asset value
|
13.1
|
|
|
|
|
|
|
|
Restricted cash
|
3.8
|
|
3.8
|
|
—
|
|
—
|
|
Short-term investments
|
16.2
|
|
—
|
|
16.2
|
|
—
|
|
Short-term investments measured at net asset value
|
0.2
|
|
|
|
|
|
|
Foreign currency hedges
|
1.3
|
|
—
|
|
1.3
|
|
—
|
|
Total Assets
|
$
|
143.1
|
|
$
|
111.1
|
|
$
|
18.7
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
7.1
|
|
$
|
—
|
|
$
|
7.1
|
|
$
|
—
|
|
Total Liabilities
|
$
|
7.1
|
|
$
|
—
|
|
$
|
7.1
|
|
$
|
—
|
|
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.
No material assets were measured at fair value on a nonrecurring basis during the
three
months ended
March 31, 2018
and
2017
, respectively.
Financial Instruments:
The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, trade accounts payable, 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, trade accounts payable 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
$704.5 million
and
$720.3 million
at
March 31, 2018
and
December 31, 2017
, respectively. The carrying value of this debt was
$687.2 million
and
$682.4 million
at
March 31, 2018
and
December 31, 2017
, respectively. The fair value of long-term fixed-rate debt was measured using Level 2 inputs.
Note 16 - 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 cash flow hedges of fixed-rate borrowings.
The Company does not purchase or hold any derivative financial instruments for trading purposes. As of
March 31, 2018
and
December 31, 2017
, the Company had
$412.2 million
and
$386.9 million
, respectively, of outstanding foreign currency forward contracts at notional value. Refer to
Note 15 - 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, 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 its exposure to the variability in future cash flows for forecast transactions is generally eighteen months or less.
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 typically are hedged with a forward contract at the inception of the loan with a maturity date corresponding to 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 derivative instruments at
March 31, 2018
and
December 31, 2017
. Those balances are presented within "Other non-current assets" and "Other non-current liabilities" in the Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
Liability Derivatives
|
Derivatives designated as hedging instruments:
|
March 31, 2018
|
December 31, 2017
|
March 31, 2018
|
December 31, 2017
|
Foreign currency forward contracts
|
$
|
0.9
|
|
$
|
0.5
|
|
$
|
1.5
|
|
$
|
2.1
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
Foreign currency forward contracts
|
1.6
|
|
0.8
|
|
10.2
|
|
5.0
|
|
Total Derivatives
|
$
|
2.5
|
|
$
|
1.3
|
|
$
|
11.7
|
|
$
|
7.1
|
|
The following tables present the impact of derivative instruments for the
three
months ended
March 31, 2018
and
2017
, respectively, and their location within the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
Amount of loss recognized in Other Comprehensive Loss
|
|
Three Months Ended
March 31,
|
Derivatives in cash flow hedging relationships:
|
2018
|
2017
|
Foreign currency forward contracts
|
$
|
(0.4
|
)
|
$
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from Accumulated Other Comprehensive Loss into income (effective portion)
|
|
|
Three Months Ended
March 31,
|
Derivatives in cash flow hedging relationships:
|
Location of gain or (loss) recognized in income
|
2018
|
2017
|
Foreign currency forward contracts
|
Cost of products sold
|
$
|
(1.2
|
)
|
$
|
0.3
|
|
Interest rate swaps
|
Interest expense
|
(0.2
|
)
|
(0.1
|
)
|
Total
|
|
$
|
(1.4
|
)
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of loss recognized in income
|
|
|
Three Months Ended
March 31,
|
Derivatives not designated as hedging instruments:
|
Location of loss recognized in income
|
2018
|
2017
|
Foreign currency forward contracts
|
Other income (expense), net
|
$
|
(4.4
|
)
|
$
|
(1.2
|
)
|