NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Note 1 - Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts and operations of the Company in which a controlling interest is maintained. Investments in affiliated companies where the Company exercises significant influence, but does not control, and the activities of which it is not the primary beneficiary, are accounted for using the equity method. All intercompany accounts and transactions are eliminated upon consolidation.
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 collectability of consideration is probable.
Revenue is recognized when performance obligations under the terms of a contract with a customer of the Company are satisfied. Of the Company's revenue, approximately 85-90% 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. The Company recognizes approximately 10-15% of revenue over time for services and certain sales of customer-specific product 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 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 can 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 on 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 are based on the Company's standard terms and conditions or the result of specific negotiations with each customer. The Company's standard terms and conditions require payment 45-75 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 based on a competitive market prices. Under the payment terms of certain of those U.S. government fixed-price contracts, the customer pays the Company performance-based payments, which are interim payments of up to 90% of the 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 "Unbilled Receivables" 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.
Note 1 - Significant Accounting Policies (continued)
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 exclude an assessment of whether promised goods or services are performance obligations, if such promised goods and services are immaterial to the customer contract taken as a whole, and combine these with other performance obligations. 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 enforceable rights and obligations or changes existing ones. 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.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Restricted Cash:
Cash of $0.8 million and $6.7 million at December 31, 2020 and 2019, respectively, was restricted for contractually specified uses. The decrease was primarily due to the release of the Company's contractual cash hold-back for working capital adjustment as part of the BEKA acquisition.
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.
Note 1 - Significant Accounting Policies (continued)
Unbilled Receivables:
Unbilled receivables on the Consolidated Balance Sheet primarily include unbilled amounts typically resulting from sales under long-term contracts when the following conditions exist: (i) cost-to-cost method of revenue recognition is utilized; (ii) the revenue recognized exceeds the amount billed to the customer; and (iii) the right to payment is primarily subject only to the passage of time. The amounts recorded for unbilled receivables do not exceed their net realizable value.
Inventories:
Inventories are valued at the lower of cost or net realizable value, with approximately 61% valued by the FIFO method and the remaining 39% valued by the LIFO method. The majority of the Company’s domestic inventories are valued by the LIFO method, while all of the Company’s international inventories are valued by the FIFO method.
Investments:
Short-term investments are investments with maturities between three months and one year and are valued at amortized cost, which approximates fair value. The Company held short-term investments as of December 31, 2020 and 2019 with a fair value and cost basis of $37.6 million and $25.7 million, respectively, which were included in "Other current assets" on the Consolidated Balance Sheets.
Property, Plant and Equipment:
Property, plant and equipment, net on the Consolidated Balance Sheets is valued at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. The provision for depreciation is computed by the straight-line method based upon the estimated useful lives of the assets. The useful lives are approximately 30 years for buildings, 3 to 10 years for computer software and 3 to 20 years for machinery and equipment.
The impairment of long-lived assets is evaluated when events or changes in circumstances indicate that the carrying amount of the asset or related group of assets may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time to reduce the asset to the lower of its fair value or its net book value.
Leases:
The Company determines if any arrangement is a lease at the inception of a contract. For leases where the Company is the lessee, it recognizes lease assets and related lease liabilities at the lease commencement date based on the present value of lease payments over the lease term. Most of the Company’s leases do not provide an implicit interest rate. As a result, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease assets also consist of amounts for favorable or unfavorable lease terms related to acquisitions. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. A lease asset and lease liability are not recorded for leases with an initial term of less than 12 months or less and the lease expenses related to these leases is recognized as incurred over the lease term.
Goodwill and Other Intangible Assets:
Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from 1 to 20 years. Goodwill and indefinite-lived intangible assets not subject to amortization are tested for impairment at least annually. The Company performs its annual impairment test as of October 1st. Furthermore, goodwill and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable in accordance with accounting rules related to goodwill and other intangible assets.
Note 1 - Significant Accounting Policies (continued)
Purchase accounting and business combinations:
Assets acquired and the liabilities assumed as part of a business combination are recognized at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. The Company considers inputs to value the assets and liabilities by taking into account competitive trends, market comparisons, independent appraisals, and historical data, among other factors, as supplemented by current and anticipated market conditions. The valuation inputs in these analyses are based on market participant assumptions. The Company may refine these estimates and record adjustments to an asset or liability with the offset to goodwill during the measurement period, which may be up to one year from the acquisition date. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the Company’s Consolidated Statements of Income.
Product Warranties:
The Company provides limited warranties on certain of its products. The Company accrues liabilities for warranties generally based upon specific claims and in certain instances based on historical warranty claim experience in accordance with accounting rules relating to contingent liabilities. When the Company becomes aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. Adjustments are made quarterly to the accruals as claim data and historical experience change.
Income Taxes:
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. The Company recognizes valuation allowances against deferred tax assets by tax jurisdiction when it is more likely than not those assets will not be realized. Accruals for uncertain tax positions are provided for in accordance with ASC 740-10. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.
Foreign Currency:
Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the reporting period. Translation adjustments for assets and liabilities are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions are included in the Consolidated Statements of Income. Net of related derivative activity, the Company recognized a foreign currency exchange loss resulting from transactions of $10.0 million for the year ended December 31, 2020, and recognized a gain of $6.1 million and a gain of $3.6 million for the years ended December 31, 2019 and 2018, respectively.
Pension and Other Postretirement Benefits:
The Company recognizes actuarial gains and losses immediately through net periodic benefit cost upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement. 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.
Stock-Based Compensation:
The Company recognizes stock-based compensation expense over the related vesting period of the awards based on the fair value on the grant date. Stock options are issued with an exercise price equal to the opening market price of Timken common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. The fair value of stock-based awards that will settle in Timken common shares, other than stock options, is based on the opening market price of Timken common shares on the grant date. The fair value of stock-based awards that will settle in cash are remeasured at each reporting period until settlement of the awards. The Company recognizes forfeitures on stock-based awards as they occur. In addition, the Company’s share grants provide for the payment of dividends to employees and the Board of Directors upon vesting. These dividends are charged to retained earnings when paid.
Note 1 - Significant Accounting Policies (continued)
Earnings Per Share:
Certain unvested restricted share grants provide for the payment of nonforfeitable dividends. The Company considers these awards as participating securities. Earnings per share are computed using the two-class method. Basic earnings per share are computed by dividing net income less undistributed earnings allocated to unvested restricted shares by the weighted-average number of common shares outstanding during the year. Diluted earnings per share are computed by dividing net income less undistributed earnings allocated to unvested restricted shares by the weighted-average number of common shares outstanding, adjusted for the dilutive impact of outstanding stock-based awards.
Derivative Instruments:
The Company recognizes all derivatives on the Consolidated Balance Sheets at fair value. Derivatives that are not designated as hedges are adjusted to fair value through earnings. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive loss until the hedged item is recognized in earnings. The Company’s holdings of forward foreign currency exchange contracts qualify as derivatives pursuant to the criteria established in derivative accounting guidance, and the Company has designated certain of those derivatives as hedges.
Use of Estimates:
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Because actual results could differ from these estimates, the Company reviews and updates these estimates and assumptions regularly to reflect recent experience.
Recent Accounting Pronouncements:
New Accounting Guidance Adopted:
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," and was subsequently updated with ASU 2019-04 in April of 2019. These ASUs change 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 replaced the current incurred loss approach with an expected loss model. The new expected credit loss impairment model applies 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 requires significant judgment. ASU 2016-13 was effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 effective January 1, 2020, and the impact of adoption was not material to the Company's results of operations and financial condition. Refer to the Consolidated Statements of Shareholders’ Equity for the cumulative effect of initially applying ASU 2016-13.
Note 1 - Significant Accounting Policies (continued)
New Accounting Guidance Issued and Not Yet Adopted:
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This guidance is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022. The Company is currently assessing which of its various contracts will require an update for a new reference rate, and will determine the timing for implementation of this guidance at the completion of that analysis.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (ASC 740) – Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. This standard is effective for public companies in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company has assessed the adoption of ASU 2019-12, and determined that the standard is not expected to materially impact the Company’s results of operations and financial condition.
Note 2 - Acquisitions
The Company completed one acquisition in 2020. On November 30, 2020, the Company completed the acquisition of the assets of Aurora. With expected 2020 annual sales of approximately $30 million, Aurora serves a diverse range of industrial sectors, including aerospace and defense, racing, off-highway equipment and packing. Aurora is headquartered in Montgomery, Illinois. The total purchase price for this acquisition was $17.8 million, including $0.5 million of the purchase price that was held back for the settlement of net working capital, subject to a post-closing net working capital adjustment. Based on markets and customers served, results for Aurora are reported in both the Mobile Industries segment and the Process Industries segment.
During 2019 the Company completed two acquisitions. On November 1, 2019, the Company completed the acquisition of BEKA, a leading global supplier of automatic lubrication systems. BEKA serves a diverse range of industrial sectors, including wind, food and beverage, rail, on- and off-highway and other process industries. Headquartered in Pegnitz, Germany, BEKA has manufacturing and research and development facilities in Germany, and assembly facilities and sales offices around the world. On April 1, 2019, the Company completed the acquisition of Diamond Chain, a leading supplier of high-performance roller chains for industrial markets. Diamond Chain serves a diverse range of market sectors, including industrial distribution, material handling, food and beverage, agriculture, construction and other process industries. Diamond Chain operates primarily in the U.S. and China.
Note 2 - Acquisitions (continued)
The purchase price allocations at fair value, net of cash acquired, for 2020 and 2019 acquisitions as of December 31, 2020 and 2019 are presented below:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Assets:
|
|
|
Accounts receivable
|
$
|
2.7
|
|
$
|
26.1
|
|
Inventories
|
16.4
|
|
59.4
|
|
Other current assets
|
0.1
|
|
5.1
|
|
Property, plant and equipment
|
10.9
|
|
57.4
|
|
Operating lease assets
|
—
|
|
5.1
|
|
Goodwill
|
—
|
|
52.6
|
|
Other intangible assets
|
—
|
|
84.3
|
|
Other non-current assets
|
—
|
|
0.9
|
|
Total assets acquired
|
$
|
30.1
|
|
$
|
290.9
|
|
Liabilities:
|
|
|
Accounts payable, trade
|
$
|
0.8
|
|
$
|
10.6
|
|
Salaries, wages and benefits
|
—
|
|
6.8
|
|
Income taxes payable
|
—
|
|
2.1
|
|
Other current liabilities
|
0.9
|
|
7.1
|
|
Short-term debt
|
—
|
|
0.8
|
|
Long-term debt
|
—
|
|
17.2
|
|
Accrued pension cost
|
—
|
|
0.8
|
|
Accrued postretirement liability
|
—
|
|
0.1
|
|
Long-term operating lease liabilities
|
—
|
|
4.5
|
|
Deferred taxes
|
—
|
|
2.9
|
|
Other non-current liabilities
|
—
|
|
1.1
|
|
Total liabilities assumed
|
$
|
1.7
|
|
$
|
54.0
|
|
Noncontrolling interest acquired
|
—
|
|
1.8
|
|
Net assets acquired
|
$
|
28.4
|
|
$
|
235.1
|
|
Cash flow reconciling items:
|
|
|
Working capital adjustment related to 2018 acquisitions paid in 2019
|
$
|
—
|
|
$
|
2.9
|
|
Working capital adjustment for 2019 acquisitions paid (recognized) in 2020
|
6.7
|
|
(6.7)
|
|
Indemnification settlement received
|
—
|
|
(4.8)
|
|
Bargain purchase price gain
|
(11.1)
|
|
—
|
|
Cash paid for acquisitions, net of cash acquired
|
$
|
24.0
|
|
$
|
226.5
|
|
In April 2020, the Company paid $6.7 million for a working capital adjustment to the purchase price for BEKA in accordance with the purchase agreement. This adjustment, as well as other measurement period adjustments recorded in 2020, resulted in an $8.4 million increase to goodwill.
As a result of applying the accounting rules on business combinations, the Company recognized a bargain purchase gain of $11.1 million on the acquisition of Aurora. The Company believes it was able to negotiate a bargain purchase price for the business due to some historic operational performance challenges, as well as the seller’s desire to exit the business in an expedited manner in an exclusive process with the Company.
In January 2019, the Company paid a working capital adjustment of $2.9 million in connection with the Cone Drive acquisition, which was accrued and reflected in the purchase price in 2018. In May 2019, the Company received a $4.8 million payment from escrow related to an indemnification settlement for the Cone Drive acquisition, which is reflected as a purchase price adjustment. These adjustments, as well as other measurement period adjustments recorded in 2019, resulted in a $1.9 million increase to Goodwill.
Note 2 - Acquisitions (continued)
The amounts for 2020 in the table above represent the preliminary purchase price allocations for Aurora. These purchase price allocations are based on preliminary information and are subject to change as additional information concerning final asset and liability valuations is obtained. The purchase price allocation for Aurora is preliminary as a result of the proximity of the acquisition date to December 31, 2020, and as a result, no elements of the purchase price allocation have been finalized. During the measurement period for this acquisition, the Company will adjust assets and liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date. The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the acquisition date. As a result of recognizing the bargain purchase price gain, any change will be reflected as an adjustment to pretax income.
No intangible assets were acquired in 2020. The following table summarizes the purchase price allocation at fair value for identifiable intangible assets acquired in 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
Weighted-
Average Life
|
Trade names (indefinite life)
|
|
|
$
|
28.2
|
|
Indefinite
|
|
|
|
|
|
Technology and know-how
|
|
|
22.4
|
|
17 years
|
Customer relationships
|
|
|
33.3
|
|
19 years
|
|
|
|
|
|
Capitalized software
|
|
|
0.5
|
|
2 years
|
Total intangible assets
|
|
|
$
|
84.4
|
|
|
The total acquired intangible asset amount for 2019 acquisitions does not fully align with the purchase price allocations shown previously due to measurement period adjustments reflected in the purchase price allocations.
Note 3 - Revenue
The following table presents details deemed most relevant to the users of the financial statements about total revenue for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Mobile
|
Process
|
Total
|
United States
|
$
|
853.8
|
|
$
|
699.6
|
|
$
|
1,553.4
|
|
Americas excluding United States
|
168.1
|
|
138.0
|
|
306.1
|
|
Europe / Middle East / Africa
|
389.9
|
|
457.0
|
|
846.9
|
|
China
|
102.2
|
|
421.0
|
|
523.2
|
|
Asia-Pacific excluding China
|
157.6
|
|
126.0
|
|
283.6
|
|
Net sales
|
$
|
1,671.6
|
|
$
|
1,841.6
|
|
$
|
3,513.2
|
|
|
|
|
|
|
December 31, 2019
|
|
Mobile
|
Process
|
Total
|
United States
|
$
|
1,007.1
|
|
$
|
821.0
|
|
$
|
1,828.1
|
|
Americas excluding United States
|
209.6
|
|
167.7
|
|
377.3
|
|
Europe / Middle East / Africa
|
390.8
|
|
489.2
|
|
880.0
|
|
China
|
92.1
|
|
268.5
|
|
360.6
|
|
Asia-Pacific excluding China
|
194.3
|
|
149.6
|
|
343.9
|
|
Net sales
|
$
|
1,893.9
|
|
$
|
1,896.0
|
|
$
|
3,789.9
|
|
|
|
|
|
|
December 31, 2018
|
|
Mobile
|
Process
|
Total
|
United States
|
$
|
1,028.8
|
|
$
|
769.5
|
|
$
|
1,798.3
|
|
Americas excluding United States
|
208.9
|
|
176.7
|
|
385.6
|
|
Europe / Middle East / Africa
|
382.5
|
|
380.2
|
|
762.7
|
|
China
|
95.4
|
|
218.4
|
|
313.8
|
|
Asia-Pacific excluding China
|
188.1
|
|
132.3
|
|
320.4
|
|
Net sales
|
$
|
1,903.7
|
|
$
|
1,677.1
|
|
$
|
3,580.8
|
|
When reviewing revenues by sales channel, the Company separates net sales to OEMs from sales to distributors and end users. The following table presents the percent of revenues by sales channel for the years ended December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
Revenue by sales channel
|
December 31, 2020
|
December 31, 2019
|
Original equipment manufacturers
|
60%
|
56%
|
Distribution/end users
|
40%
|
44%
|
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. During the years ended December 31, 2020 and December 31, 2019, approximately 11% and 12%, respectively, of total net sales were 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. Approximately 4% and 5% of total net sales represented service revenue in 2020 and 2019, respectively. Finally, the payment terms with the U.S. government or its contractors represented approximately 8% of total net sales for 2020 and 2019, respectively.
Note 3 - Revenue (continued)
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 $224.3 million at December 31, 2020.
Unbilled Receivables:
The following table contains a rollforward of unbilled receivables for the year ended December 31, 2020:
|
|
|
|
|
|
|
December 31,
2020
|
Beginning balance, January 1
|
$
|
129.2
|
|
Additional unbilled revenue recognized
|
393.6
|
|
Less: amounts billed to customers
|
(411.9)
|
|
|
|
Ending balance
|
$
|
110.9
|
|
There were no impairment losses recorded on unbilled receivables for the year ended December 31, 2020.
Note 4 - Segment Information
The Company operates under two reportable segments: (1) Mobile Industries and (2) Process Industries.
Description of types of products and services from which each reportable segment derives its revenues:
The Company's reportable segments are business units that target different industry sectors. While the segments often operate using a shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market segments.
Mobile Industries offers an extensive portfolio of bearings, seals, lubrication devices and systems, as well as power transmission components, engineered chain, augers, belts, couplings, clutches, brakes and related products and maintenance services, to OEMs and end users of: off-highway equipment for the agricultural, construction, mining, outdoor power equipment and powersports markets; on-highway vehicles including passenger cars, light trucks and medium- and heavy-duty trucks; rail cars and locomotives. Beyond service parts sold to OEMs, aftermarket sales and services to individual end users, equipment owners, operators and maintenance shops are handled directly or through the Company's extensive network of authorized automotive and heavy-truck distributors, and include hub units, specialty kits and more. Mobile Industries also provides power transmission systems and flight-critical components for civil and military aircraft, which include bearings, helicopter transmission systems, rotor-head assemblies, turbine engine components, gears and housings.
Process Industries supplies industrial bearings and assemblies, power transmission components such as gears and gearboxes, linear motion products, couplings, seals, lubricants, chains, belts and related products and services to OEMs and end users in industries that place heavy demands on operating equipment they make or use. This includes: metals, mining, cement and aggregate production; wind energy and solar; coal power generation and oil and gas; pulp and paper in applications including printing presses; packaging and automation; and cranes, hoists, drawbridges, gear drives, conveyors, health and critical motion control equipment, marine equipment and food processing equipment. This segment also supports aftermarket sales and service needs through its global network of authorized industrial distributors and through the provision of services directly to end users. In addition, the Company’s industrial services group offers end users a broad portfolio of maintenance support and capabilities that include repair and service for bearings and gearboxes as well as electric motor rewind, repair and services.
Note 4 - Segment Information (continued)
Measurement of segment profit or loss and segment assets:
The Company evaluates performance and allocates resources based on return on capital and profitable growth. The primary measurement used by management to measure the financial performance of each segment is EBITDA.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Factors used by management to identify the enterprise’s reportable segments:
Net sales by geographic area are reported by the destination of net sales, which is reflective of how the Company operates its segments. Long-lived assets by geographic area are reported by the location of the subsidiary.
Timken’s non-U.S. operations are subject to normal international business risks not generally applicable to a domestic business. These risks include currency fluctuation, changes in tariff restrictions, difficulties in establishing and maintaining relationships with local distributors and dealers, import and export licensing requirements, difficulties in staffing and managing geographically diverse operations and restrictive regulations by foreign governments, including price and exchange controls, compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and environmental regulatory requirements, and disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the FCPA.
Business Segment Information:
The following tables provide segment financial information and a reconciliation of segment results to consolidated results:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Net sales to external customers:
|
|
|
|
Mobile Industries
|
$
|
1,671.6
|
|
$
|
1,893.9
|
|
$
|
1,903.7
|
|
Process Industries
|
1,841.6
|
|
1,896.0
|
|
1,677.1
|
|
|
$
|
3,513.2
|
|
$
|
3,789.9
|
|
$
|
3,580.8
|
|
Segment EBITDA:
|
|
|
|
Mobile Industries
|
$
|
232.5
|
|
$
|
284.9
|
|
$
|
272.2
|
|
Process Industries
|
442.9
|
|
466.6
|
|
405.7
|
|
Total EBITDA, for reportable segments
|
$
|
675.4
|
|
$
|
751.5
|
|
$
|
677.9
|
|
Corporate EBITDA
|
(40.7)
|
|
(55.4)
|
|
(61.4)
|
|
Corporate pension and other postretirement benefit related
(expense) income (1)
|
(18.5)
|
|
4.1
|
|
(12.8)
|
|
Acquisition-related gain (2)
|
11.1
|
|
—
|
|
—
|
|
Depreciation and amortization
|
(167.1)
|
|
(160.6)
|
|
(146.0)
|
|
Interest expense, net
|
(63.9)
|
|
(67.2)
|
|
(49.6)
|
|
Income before income taxes
|
$
|
396.3
|
|
$
|
472.4
|
|
$
|
408.1
|
|
(1) Corporate pension and other postretirement benefit related (expense) income represents curtailments, professional fees associated with pension de-risking and actuarial (losses) and gains that resulted from the remeasurement of pension and other postretirement plan assets and obligations as a result of changes in assumptions.
(2) The acquisition-related gain represents a bargain purchase price gain on the acquisition of Aurora, acquired on November 30, 2020. See Note 2 - Acquisitions for additional information.
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Assets employed at year-end:
|
|
|
Mobile Industries
|
$
|
2,082.2
|
|
$
|
2,109.9
|
|
Process Industries
|
2,482.6
|
|
2,366.7
|
|
Corporate (2)
|
476.8
|
|
383.3
|
|
|
$
|
5,041.6
|
|
$
|
4,859.9
|
|
(2) Corporate assets include corporate buildings and cash and cash equivalents.
Note 4 - Segment Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Capital expenditures:
|
|
|
|
Mobile Industries
|
$
|
70.5
|
|
$
|
74.2
|
|
$
|
48.3
|
|
Process Industries
|
50.1
|
|
65.3
|
|
63.3
|
|
Corporate
|
1.0
|
|
1.1
|
|
1.0
|
|
|
$
|
121.6
|
|
$
|
140.6
|
|
$
|
112.6
|
|
Depreciation and amortization:
|
|
|
|
Mobile Industries
|
$
|
79.7
|
|
$
|
73.6
|
|
$
|
73.5
|
|
Process Industries
|
86.6
|
|
86.2
|
|
71.9
|
|
Corporate
|
0.8
|
|
0.8
|
|
0.6
|
|
|
$
|
167.1
|
|
$
|
160.6
|
|
$
|
146.0
|
|
Geographic Financial Information:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Property, Plant and Equipment, net:
|
|
|
United States
|
$
|
401.8
|
|
$
|
391.7
|
|
China
|
196.4
|
|
183.4
|
|
India
|
140.0
|
|
132.6
|
|
Romania
|
118.0
|
|
105.3
|
|
Rest of world
|
179.4
|
|
176.2
|
|
|
$
|
1,035.6
|
|
$
|
989.2
|
|
Refer to Note 3 - Revenue for further information pertaining to geographic net sales information.
Note 5 - Income Taxes
Income before income taxes, based on geographic location of the operations to which such earnings are attributable, is provided below. As the Company has elected to treat certain foreign subsidiaries as branches for U.S. income tax purposes, pretax income attributable to the United States shown below may differ from the pretax income reported in the Company’s annual U.S. federal income tax return.
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
United States
|
$
|
144.1
|
|
$
|
190.7
|
|
$
|
202.0
|
|
Non-United States
|
252.2
|
|
281.7
|
|
206.1
|
|
Income before income taxes
|
$
|
396.3
|
|
$
|
472.4
|
|
$
|
408.1
|
|
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Current:
|
|
|
|
Federal
|
$
|
40.3
|
|
$
|
20.8
|
|
$
|
46.1
|
|
State and local
|
7.9
|
|
4.8
|
|
9.9
|
|
Foreign
|
78.9
|
|
81.0
|
|
68.0
|
|
|
$
|
127.1
|
|
$
|
106.6
|
|
$
|
124.0
|
|
Deferred:
|
|
|
|
Federal
|
$
|
(19.5)
|
|
$
|
39.8
|
|
$
|
(19.9)
|
|
State and local
|
(1.3)
|
|
6.5
|
|
(0.7)
|
|
Foreign
|
(2.4)
|
|
(55.2)
|
|
(0.8)
|
|
|
$
|
(23.2)
|
|
$
|
(8.9)
|
|
$
|
(21.4)
|
|
United States and foreign tax provision on income
|
$
|
103.9
|
|
$
|
97.7
|
|
$
|
102.6
|
|
The Company made net income tax payments of $119.3 million, $118.6 million and $121.3 million in 2020, 2019 and 2018, respectively.
The following table is the reconciliation between the provision for income taxes and the amount computed by applying the U.S. federal income tax rate of 21% to income before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Income tax at the U.S. federal statutory rate
|
$
|
83.2
|
|
$
|
99.2
|
|
$
|
85.7
|
|
Adjustments:
|
|
|
|
State and local income taxes, net of federal tax benefit
|
4.8
|
|
7.4
|
|
6.8
|
|
Tax on foreign remittances and U.S. tax on foreign income
|
22.5
|
|
26.4
|
|
21.1
|
|
Tax expense related to undistributed earnings of foreign subsidiaries
|
0.1
|
|
6.0
|
|
—
|
|
Foreign losses without current tax benefits
|
2.5
|
|
3.2
|
|
3.7
|
|
Foreign earnings taxed at different rates including tax holidays
|
11.1
|
|
12.6
|
|
11.1
|
|
|
|
|
|
U.S. foreign tax credit
|
(13.8)
|
|
(18.3)
|
|
(21.2)
|
|
Accruals and settlements related to tax audits
|
3.4
|
|
11.1
|
|
(3.8)
|
|
Valuation allowance changes
|
(0.7)
|
|
(44.5)
|
|
—
|
|
Deferred taxes related to branch operations
|
—
|
|
5.3
|
|
—
|
|
U.S. Tax Reform
|
—
|
|
—
|
|
(10.6)
|
|
Other tax rate change
|
0.8
|
|
(5.0)
|
|
(2.4)
|
|
Other items, net
|
(10.0)
|
|
(5.7)
|
|
12.2
|
|
Provision for income taxes
|
$
|
103.9
|
|
$
|
97.7
|
|
$
|
102.6
|
|
Effective income tax rate
|
26.2
|
%
|
20.7
|
%
|
25.1
|
%
|
Note 5 - Income Taxes (continued)
The Company released $44.5 million of foreign valuation allowances for the year ended December 31, 2019, $40.7 million of which relates to the valuation allowance that was recorded against German indefinite-lived loss carryforwards and pension deferred tax assets. Once established, the valuation allowance is released when, based on the weight of all available evidence, management concludes that related deferred tax assets are more likely than not to be realized. As a result of the execution of a tax planning strategy in the fourth quarter of 2019, management reached this conclusion and accordingly released the valuation allowance. Because the local German entity is treated as a branch under U.S. tax law, the valuation allowance release was partially offset by income tax expense of $5.3 million related to a U.S. deferred tax liability.
U.S. Tax Reform reduced the U.S. federal statutory rate from 35% to 21% beginning in 2018. U.S. Tax Reform also required companies to pay a one-time net charge related to the taxation of unremitted foreign earnings and to remeasure its U.S. deferred tax balances to the lower corporate income tax rate for the 2017 tax year. Additionally, U.S. Tax Reform created taxes on certain foreign sourced earnings known as the global intangible low-taxed income (“GILTI”) tax beginning with tax year 2018. The Company has elected to account for GILTI as a period cost in the year the tax is incurred. The accounting for the tax effects of U.S. Tax Reform was completed as of December 31, 2018 under Staff Accounting Bulletin No. 118.
For the year ended December 31, 2018, the Company recorded $8.2 million of tax benefit for changes to the provisional estimate for the remeasurement of net U.S. deferred tax balances as a result of adjustments to finalize purchase accounting for prior-year acquisitions, the remeasurement of anticipatory tax credits for foreign branches and changes to U.S. deferred tax assets included in the 2017 U.S. federal income tax return. Over the same period, the Company recorded $2.4 million of tax benefit for changes in the provisional estimate of the 2017 one-time net charge related to the taxation of unremitted foreign earnings as a result of additional federal and state regulatory guidance issued and the filing of the Company's 2017 U.S. federal income tax return.
There are no changes to the Company’s assertion about its permanent reinvestment in undistributed foreign earnings. The Company recorded $0.1 million and $6.0 million of income tax expense related to foreign withholding taxes on planned one-time distribution for the years ended December 31, 2020 and 2019, respectively. No additional deferred taxes have been recorded for any other outside basis differences as these amounts continue to be indefinitely reinvested in foreign operations. The amounts of undistributed foreign earnings were $810.3 million and $785.3 million at December 31, 2020 and December 31, 2019, respectively. It is not practicable to calculate the additional taxes that might be payable on such unremitted earnings due to the variety of circumstances and tax laws applicable at the time of distribution.
The effect of temporary differences giving rise to deferred tax assets and liabilities at December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Deferred tax assets:
|
|
|
Accrued postretirement benefits cost
|
$
|
15.4
|
|
$
|
0.1
|
|
Accrued pension cost
|
57.4
|
|
55.1
|
|
Other employee benefit accruals
|
11.0
|
|
10.9
|
|
Tax loss and credit carryforwards
|
90.2
|
|
86.0
|
|
Other, net
|
46.7
|
|
46.9
|
|
Valuation allowances
|
(36.7)
|
|
(33.7)
|
|
|
$
|
184.0
|
|
$
|
165.3
|
|
Deferred tax liabilities - principally depreciation and amortization
|
(255.7)
|
|
(261.6)
|
|
Net deferred tax (liabilities) assets
|
$
|
(71.7)
|
|
$
|
(96.3)
|
|
Note 5 - Income Taxes (continued)
The Company has U.S. federal and state tax credit and loss carryforwards with tax benefits totaling $6.7 million, portions of which will expire in 2021 and continue until 2040. In addition, the Company has loss carryforwards in various non-U.S. jurisdictions with tax benefits totaling $83.5 million, portions of which will expire in 2021 while others will be carried forward indefinitely. The Company has provided valuation allowances of $35.9 million against certain of these carryforwards and $0.8 million against other deferred tax assets. A majority of the non-U.S. loss carryforwards represent local country net operating losses for branches of the Company or entities treated as branches of the Company under U.S. tax law for which deferred taxes have been recorded.
As of December 31, 2020, the Company had $45.6 million of total gross unrecognized tax benefits, $39.2 million of which would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized. As of December 31, 2020, the Company believes it is reasonably possible that the amount of unrecognized tax positions could decrease by approximately $8.4 million during the next 12 months. The potential decrease would be primarily driven by settlements with tax authorities and the expiration of various applicable statutes of limitation. As of December 31, 2020, the Company had accrued $8.6 million of interest and penalties related to uncertain tax positions. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.
As of December 31, 2019, the Company had $38.9 million of total gross unrecognized tax benefits, $36.1 million of which would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized. As of December 31, 2019, the Company had accrued $5.0 million of interest and penalties related to uncertain tax positions. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.
As of December 31, 2018, the Company had $26.0 million of total gross unrecognized tax benefits, all of which would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized. As of December 31, 2018, the Company had accrued $2.5 million of interest and penalties related to uncertain tax positions. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.
The following table reconciles the Company’s total gross unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Beginning balance, January 1
|
$
|
38.9
|
|
$
|
26.0
|
|
$
|
14.0
|
|
Tax positions related to the current year:
|
|
|
|
Additions
|
2.2
|
|
3.6
|
|
0.4
|
|
Tax positions related to prior years:
|
|
|
|
Additions
|
8.7
|
|
11.7
|
|
17.8
|
|
Reductions
|
(1.0)
|
|
(1.1)
|
|
(2.9)
|
|
Settlements with tax authorities
|
(0.3)
|
|
(1.2)
|
|
(2.2)
|
|
Lapses in statutes of limitation
|
(2.9)
|
|
(0.1)
|
|
(1.1)
|
|
Ending balance, December 31
|
$
|
45.6
|
|
$
|
38.9
|
|
$
|
26.0
|
|
During 2020, gross unrecognized tax benefits increased primarily for additional accruals for uncertain tax positions related to non-U.S. transfer pricing along with prior year tax matters in multiple jurisdictions related to previous acquisitions and non-deductible expenses. These increases were partially offset by releases of accrual for lapses in statutes of limitations.
Note 5 - Income Taxes (continued)
During 2019, gross unrecognized tax benefits increased primarily for additional accruals for uncertain tax positions related to U.S. Tax Reform along with prior year tax matters in multiple jurisdictions related to acquisitions. These increases were partially offset by settlements with the tax authorities for prior year tax matters related to the Company’s foreign operations.
During 2018, gross unrecognized tax benefits increased primarily for prior year tax matters in multiple jurisdictions related to acquisitions. These increases were partially offset by settlements with the tax authorities for prior year tax matters related to the Company’s international operations.
As of December 31, 2020 the Company is subject to examination by the IRS for tax years 2017 to the present. The Company also is subject to tax examination in various U.S. state and local tax jurisdictions for tax years 2013 to the present, as well as various foreign tax jurisdictions, including Mexico, China, Poland, France, Germany and India for tax years as early as 1999 to the present. The Company’s unrecognized tax benefits were presented on the Consolidated Balance Sheets as a component of other non-current liabilities and as a reduction to deferred income taxes.
Note 6 - Earnings Per Share
The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share and diluted earnings per share for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Numerator:
|
|
|
|
Net income attributable to The Timken Company
|
$
|
284.5
|
|
$
|
362.1
|
|
$
|
302.8
|
|
Less: undistributed earnings allocated to nonvested stock
|
—
|
|
—
|
|
—
|
|
Net income available to common shareholders for basic and diluted earnings per share
|
$
|
284.5
|
|
$
|
362.1
|
|
$
|
302.8
|
|
Denominator:
|
|
|
|
Weighted average number of shares outstanding - basic
|
75,354,280
|
|
75,758,123
|
|
77,119,602
|
|
Effect of dilutive securities:
|
|
|
|
Stock options and awards - based on the treasury stock method
|
1,047,086
|
|
1,138,442
|
|
1,217,879
|
|
Weighted average number of shares outstanding, assuming dilution of stock options and awards
|
76,401,366
|
|
76,896,565
|
|
78,337,481
|
|
Basic earnings per share
|
$
|
3.78
|
|
$
|
4.78
|
|
$
|
3.93
|
|
Diluted earnings per share
|
$
|
3.72
|
|
$
|
4.71
|
|
$
|
3.86
|
|
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 were 676,627, 1,016,435 and 1,139,146 during 2020, 2019 and 2018, respectively.
Note 7 - Inventories
The components of inventories at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Manufacturing supplies
|
$
|
34.8
|
|
$
|
34.2
|
|
Raw materials
|
99.5
|
|
100.0
|
|
Work in process
|
320.3
|
|
308.9
|
|
Finished products
|
441.2
|
|
439.0
|
|
Subtotal
|
$
|
895.8
|
|
$
|
882.1
|
|
Allowance for surplus and obsolete inventory
|
(54.5)
|
|
(40.1)
|
|
Total Inventories, net
|
$
|
841.3
|
|
$
|
842.0
|
|
Inventories at December 31, 2020 valued on the FIFO cost method were 61% and the remaining 39% were valued by the LIFO method. If all inventories had been valued at FIFO, inventories would have been $172.1 million and $168.9 million greater at December 31, 2020 and 2019, respectively. The Company recognized an increase in its LIFO reserve of $3.2 million during 2020, compared to a decrease in its LIFO reserve of $5.0 million during 2019. Inventory and the allowance for surplus and obsolete inventory increased from 2019 primarily as a result of recent acquisitions.
Note 8 - Property, Plant and Equipment
The components of property, plant and equipment, net at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Land and buildings
|
$
|
535.3
|
|
$
|
510.9
|
|
Machinery and equipment
|
2,206.2
|
|
2,093.3
|
|
Subtotal
|
$
|
2,741.5
|
|
$
|
2,604.2
|
|
Less: accumulated depreciation
|
(1,705.9)
|
|
(1,615.0)
|
|
Property, Plant and Equipment, net
|
$
|
1,035.6
|
|
$
|
989.2
|
|
Total depreciation expense was $110.9 million, $103.3 million and $99.2 million in 2020, 2019 and 2018, respectively.
Note 9 - Goodwill and Other Intangible Assets
Goodwill:
The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually, performing its annual impairment test as of October 1st. Furthermore, goodwill and indefinite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
The Company reviews goodwill for impairment at the reporting unit level. The Mobile Industries segment has four reporting units and the Process Industries segment has two reporting units. Changes in the carrying value of goodwill were as follows:
Year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process
Industries
|
Total
|
Beginning Balance
|
$
|
361.3
|
|
$
|
632.4
|
|
$
|
993.7
|
|
Acquisitions
|
5.6
|
|
2.8
|
|
8.4
|
|
Foreign currency translation adjustments
|
17.7
|
|
27.8
|
|
45.5
|
|
Ending Balance
|
$
|
384.6
|
|
$
|
663.0
|
|
$
|
1,047.6
|
|
The $8.4 million addition from acquisitions was the result of measurement period adjustments related to the 2019 acquisitions of BEKA and Diamond Chain bringing total goodwill to $52.6 million for these acquisitions. Approximately $19.0 million of this amount is tax deductible. Refer to Note 2 - Acquisitions for further information.
Year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process
Industries
|
Total
|
Beginning Balance
|
$
|
349.7
|
|
$
|
610.8
|
|
$
|
960.5
|
|
Acquisitions
|
18.2
|
|
27.9
|
|
46.1
|
|
Foreign currency translation adjustments and other changes
|
(6.6)
|
|
(6.3)
|
|
(12.9)
|
|
Ending Balance
|
$
|
361.3
|
|
$
|
632.4
|
|
$
|
993.7
|
|
In 2019, the $46.1 million addition resulted from the acquisitions of BEKA and Diamond Chain and the measurement period adjustments of $1.9 million recorded in 2019 for 2018 acquisitions.
No material goodwill impairment losses were recorded in 2020, 2019 or 2018.
Note 9 - Goodwill and Other Intangible Assets (continued)
Intangible Assets:
The following table displays intangible assets as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Intangible assets subject
to amortization:
|
|
|
|
|
|
|
Customer relationships
|
$
|
532.2
|
|
$
|
(161.9)
|
|
$
|
370.3
|
|
$
|
510.9
|
|
$
|
(128.8)
|
|
$
|
382.1
|
|
Technology and know-how
|
277.2
|
|
(72.0)
|
|
205.2
|
|
265.1
|
|
(54.7)
|
|
210.4
|
|
Trade names
|
14.2
|
|
(8.8)
|
|
5.4
|
|
12.7
|
|
(6.1)
|
|
6.6
|
|
Capitalized Software
|
276.4
|
|
(254.6)
|
|
21.8
|
|
270.3
|
|
(245.8)
|
|
24.5
|
|
Other
|
4.7
|
|
(3.7)
|
|
1.0
|
|
13.8
|
|
(9.1)
|
|
4.7
|
|
|
$
|
1,104.7
|
|
$
|
(501.0)
|
|
$
|
603.7
|
|
$
|
1,072.8
|
|
$
|
(444.5)
|
|
$
|
628.3
|
|
Intangible assets not
subject to amortization:
|
|
|
|
|
|
|
Trade names
|
$
|
129.0
|
|
|
$
|
129.0
|
|
$
|
121.5
|
|
|
$
|
121.5
|
|
FAA air agency certificates
|
8.7
|
|
|
8.7
|
|
8.7
|
|
|
8.7
|
|
|
$
|
137.7
|
|
|
$
|
137.7
|
|
$
|
130.2
|
|
|
$
|
130.2
|
|
Total intangible assets
|
$
|
1,242.4
|
|
$
|
(501.0)
|
|
$
|
741.4
|
|
$
|
1,203.0
|
|
$
|
(444.5)
|
|
$
|
758.5
|
|
There were no intangible assets acquired in 2020. Intangible assets acquired in 2019 totaled $84.4 million from the BEKA and Diamond Chain acquisitions. Intangible assets subject to amortization acquired in 2019 were assigned useful lives of two to 20 years and had a weighted-average amortization period of 18.1 years.
Amortization expense for intangible assets was $56.2 million, $57.3 million and $46.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization expense for intangible assets is estimated to be approximately $54.2 million in 2021, $49.4 million in 2022, $46.2 million in 2023, $44.3 million in 2024 and $43.2 million in 2025.
Note 10 - Leasing
The Company enters into operating and finance leases for manufacturing facilities, warehouses, sales offices, information technology equipment, plant equipment, vehicles and certain other equipment.
Lease expense for the years ended December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
December 31, 2019
|
Operating lease expense
|
$
|
36.0
|
|
$
|
36.6
|
|
Amortization of right-of-use assets on finance leases
|
1.5
|
|
1.2
|
|
Total lease expense
|
$
|
37.5
|
|
$
|
37.8
|
|
The following tables present the impact of leasing on the Consolidated Balance Sheet.
|
|
|
|
|
|
|
|
|
Operating Leases
|
December 31, 2020
|
December 31, 2019
|
Lease assets:
|
|
|
Operating lease assets
|
$
|
118.2
|
|
$
|
114.1
|
|
Lease liabilities:
|
|
|
Short-term operating lease liabilities
|
$
|
27.2
|
|
$
|
28.3
|
|
Long-term operating lease liabilities
|
75.5
|
|
71.3
|
|
Total operating lease liabilities
|
$
|
102.7
|
|
$
|
99.6
|
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
December 31, 2020
|
December 31, 2019
|
Lease assets:
|
|
|
Property, plant and equipment, net
|
$
|
5.3
|
|
$
|
5.0
|
|
Lease liabilities:
|
|
|
Current portion of long-term debt
|
$
|
0.8
|
|
$
|
0.5
|
|
Long-term debt
|
2.9
|
|
2.9
|
|
Total finance lease liabilities
|
$
|
3.7
|
|
$
|
3.4
|
|
Future minimum lease payments under non-cancellable leases at December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
Finance Leases
|
Year Ending December 31,
|
|
|
2021
|
$
|
30.2
|
|
$
|
1.5
|
|
2022
|
23.5
|
|
1.3
|
|
2023
|
16.0
|
|
0.6
|
|
2024
|
10.5
|
|
0.3
|
|
2025
|
8.6
|
|
0.1
|
|
Thereafter
|
24.7
|
|
—
|
|
Total future minimum lease payments
|
$
|
113.5
|
|
$
|
3.8
|
|
Less: imputed interest
|
(10.8)
|
|
(0.1)
|
|
Total
|
$
|
102.7
|
|
$
|
3.7
|
|
Note 10 - Leasing (continued)
The following tables present other information related to leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
$
|
35.7
|
|
$
|
35.6
|
|
Financing cash flows from finance leases
|
1.2
|
|
1.6
|
|
Lease assets added in the period:
|
|
|
Operating leases
|
$
|
39.9
|
|
$
|
58.6
|
|
Finance leases
|
0.9
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
December 31, 2019
|
Weighted-average remaining lease term:
|
|
|
Operating leases
|
5.1 years
|
5.3 years
|
Finance leases
|
2.9 years
|
3.3 years
|
Weighted-average discount rate:
|
|
|
Operating leases
|
3.69
|
%
|
3.87
|
%
|
Finance leases
|
2.55
|
%
|
2.55
|
%
|
Note 11 - Financing Arrangements
Short-term debt as of December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Variable-rate Accounts Receivable Facility with an interest rate of 0.96% at December 31, 2020 and of 2.77% at December 31, 2019
|
$
|
58.0
|
|
$
|
1.8
|
|
Borrowings under lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.24% to 1.75% at December 31, 2020 and 0.27% to 1.75% at December 31, 2019
|
61.8
|
|
15.5
|
|
Short-term debt
|
$
|
119.8
|
|
$
|
17.3
|
|
The Company has a $100.0 million Accounts Receivable Facility, which matures November 30, 2021. The Company currently intends to renew or replace the Accounts Receivable Facility prior it 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 are limited to certain borrowing base limitations. These limitations reduced the availability of the Accounts Receivable Facility to $83.9 million at December 31, 2020. As of December 31, 2020, there were outstanding borrowings of $58.0 million under the Accounts Receivable Facility, which reduced the availability under this facility to $25.9 million. All of the outstanding borrowings under the Accounts Receivable Facility were classified as short-term due to its upcoming maturity in November of 2021. 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 interest rate was 1.0%, 2.8% and 3.2% at December 31, 2020, 2019 and 2018, respectively.
The lines of credit for certain of the Company’s foreign subsidiaries provide for short-term borrowings up to $277.4 million in the aggregate. Most of these lines of credit are uncommitted. At December 31, 2020, the Company’s foreign subsidiaries had borrowings outstanding of $61.8 million and guarantees of $0.7 million, which reduced the aggregate availability under these facilities to $214.9 million. The weighted-average interest rate on these lines of credit during the year were 0.6%, 0.5% and 0.6% in 2020, 2019 and 2018, respectively. The increase in the weighted-average interest rate was primarily due to an increase in borrowings in Europe with higher rates. The weighted-average interest rate on lines of credit outstanding at December 31, 2020 and 2019 was 0.8% and 1.0%, respectively.
Note 11 - Financing Arrangements (continued)
Long-term debt as of December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Variable-rate Senior Credit Facility with an average interest rate on U.S. Dollar of 2.01% and Euro of 1.48% at December 31, 2020 and 2.85% and 1.00%, respectively, at December 31, 2019
|
$
|
9.7
|
|
$
|
132.7
|
|
Variable-rate Euro Term Loan(1), matured on September 18, 2020, with an interest rate of 1.13% at December 31, 2019.
|
—
|
|
54.4
|
|
Variable-rate Accounts Receivable Facility, with an interest rate of 2.77% at December 31, 2019.
|
—
|
|
98.2
|
|
Variable-rate Term Loan(1), maturing on September 11, 2023, with an interest rate of 1.63% at December 31, 2020 and of 2.92% at December 31, 2019.
|
329.6
|
|
338.5
|
|
Fixed-rate Senior Unsecured Notes(1), maturing on September 1, 2024, with an interest rate of 3.875%
|
349.0
|
|
348.5
|
|
Fixed-rate Euro Senior Unsecured Notes(1), maturing on September 7, 2027, with an interest rate of 2.02%
|
182.9
|
|
167.7
|
|
Fixed-rate Senior Unsecured Notes(1), maturing on December 15, 2028, with an interest rate of 4.50%
|
396.5
|
|
396.1
|
|
Fixed-rate Medium-Term Notes, Series A(1), maturing at various dates through May 2028, with interest rates ranging from 6.74% to 7.76%
|
154.7
|
|
154.6
|
|
Fixed-rate Bank Loan, maturing on June 30, 2033, with an interest rate of 2.15%
|
18.8
|
|
18.0
|
|
Other
|
3.6
|
|
4.1
|
|
Total debt
|
$
|
1,444.8
|
|
$
|
1,712.8
|
|
Less current maturities
|
10.9
|
|
64.7
|
|
Long-term debt
|
$
|
1,433.9
|
|
$
|
1,648.1
|
|
(1) Net of discount and fees
The Company entered into the Senior Credit Facility on June 25, 2019. The Senior Credit Facility amends and restates the Company's previous credit agreement, dated as of June 19, 2015. The Senior Credit Facility is a $650.0 million unsecured revolving credit facility, which matures on June 25, 2024. At December 31, 2020, the Company had $9.7 million of outstanding borrowings under the Senior Credit Facility, which reduced the availability under this facility to $640.3 million. The Senior Credit Facility has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. On May 27, 2020, the Senior Credit Facility was amended to, among other things, effectively increase the limit with respect to the consolidated leverage ratio. As amended, the consolidated leverage ratio is calculated using a net debt construct, netting unrestricted cash in excess of $25 million, instead of total debt. This change to the consolidated leverage ratio calculation is effective through June 30, 2021, after which the calculation of the consolidated leverage ratio under the Senior Credit Facility will revert back to using a total debt construct.
On November 1, 2019, the Company assumed certain fixed-rate debt of €16 million associated with the BEKA acquisition that matures on June 30, 2033.
On September 11, 2018, the Company entered into the $350 million 2023 Term Loan. Proceeds from the 2023 Term Loan were used to fund the acquisitions of Cone Drive and Rollon, which closed on September 1, 2018 and September 18, 2018, respectively. On July 12, 2019, the Company amended the 2023 Term Loan agreement to, among other things, align covenants and other terms with the Senior Credit Facility. On May 27, 2020, the 2023 Term Loan agreement was further amended to align the calculation of the consolidated leverage ratio and other terms with the Senior Credit Facility.
On September 18, 2017, the Company entered into the 2020 Term Loan, that matured on September 18, 2020. Upon the final payment during the third quarter of 2020, the Company fully repaid the 2020 Term Loan.
At December 31, 2020, the Company was in full compliance with all applicable covenants on its outstanding debt.
Note 11 - Financing Arrangements (continued)
The maturities of long-term debt (including $3.7 million of finance leases) for the five years subsequent to December 31, 2020 are as follows:
|
|
|
|
|
|
Year
|
|
2021
|
$
|
10.9
|
|
2022
|
10.2
|
|
2023
|
10.2
|
|
2024
|
304.5
|
|
2025
|
360.0
|
|
Thereafter
|
749.0
|
|
Interest paid was $65.2 million in 2020, $67.4 million in 2019 and $42.5 million in 2018. This differs from interest expense due to the timing of payments, the amortization of deferred financing fees and interest capitalized of $1.5 million in 2020, $1.1 million in 2019 and $0.4 million in 2018.
Note 12 - Contingencies
The Company and certain of its subsidiaries have been identified as potentially responsible parties for investigation and remediation under the 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 in Downers Grove, DuPage County, Illinois (the “Site”). The Company acquired Lovejoy in 2016. 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 $5.3 million and $5.2 million for various known environmental matters that are probable and reasonably estimable as of December 31, 2020 and 2019, 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.
Product Warranties:
In addition to the contingencies above, the Company provides limited warranties on certain products. The product warranty liability included in other current liabilities on the Consolidated Balance Sheets for 2020 and 2019 was $9.4 million and $7.5 million, respectively. The increase in the liability during 2020 primarily relates to accruals that are based on the best estimate of costs for future claims based on products sold that are still under warranty. The estimate of these accruals is based on historical claims, expected trends and course of dealing experience that continue to mature. Any significant change to these assumptions may be material to the results of operations in any particular period in which that change occurs.
Note 13 - Stock Compensation
Under its long-term incentive plan, the Company’s common shares have been made available for grant, at the discretion of the Compensation Committee of the Board of Directors, to officers and key employees in the form of stock option awards. Stock option awards typically have a ten-year term and generally vest in 25% increments annually beginning on the first anniversary of the date of grant.
During 2020, 2019 and 2018, the Company recognized stock-based compensation expense of $3.6 million ($2.7 million after tax or $0.04 per diluted share), $4.9 million ($3.7 million after tax or $0.05 per diluted share) and $4.8 million ($3.7 million after tax or $0.05 per diluted share), respectively, for stock option awards.
Beginning in 2020, the Company discontinued the use of nonqualified stock options. As such, there were no stock option awards granted in 2020. The fair value of stock option awards granted in 2019 and 2018 was estimated at the date of grant using a Black-Scholes option-pricing method with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Weighted-average fair value per option
|
|
$
|
9.58
|
|
$
|
10.29
|
|
Risk-free interest rate
|
|
2.46
|
%
|
2.62
|
%
|
Dividend yield
|
|
2.52
|
%
|
2.30
|
%
|
Expected stock volatility
|
|
28.29
|
%
|
27.78
|
%
|
Expected life - years
|
|
5
|
5
|
Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and the expected lives of the options. The dividend yield was calculated based upon the last dividend prior to the grant compared to the trailing 12 months' daily stock prices. The risk-free interest rate was based upon yields of U.S. zero coupon issues with a term equal to the expected life of the option being valued.
A summary of stock option award activity for the year ended December 31, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
Weighted-average Exercise Price
|
Weighted-average Remaining Contractual Term
|
Aggregate Intrinsic Value (millions)
|
Outstanding - beginning of year
|
2,913,272
|
|
$
|
40.10
|
|
|
|
|
|
|
|
|
Exercised
|
(956,258)
|
|
39.07
|
|
|
|
Canceled of expired
|
(52,265)
|
|
43.27
|
|
|
|
Outstanding - end of year
|
1,904,749
|
|
$
|
40.53
|
|
7 years
|
$
|
70.1
|
|
Options expected to vest
|
1,904,749
|
|
40.53
|
|
7 years
|
70.1
|
|
Options exercisable
|
1,259,075
|
|
38.94
|
|
6 years
|
48.4
|
|
The total intrinsic value of stock option awards exercised during the years ended December 31, 2020, 2019 and 2018 was $20.7 million, $13.4 million and $6.7 million, respectively. Net cash proceeds from the exercise of stock option awards were $37.4 million, $27.5 million and $12.8 million, respectively.
In addition to stock option awards, the Company has granted performance-based restricted stock units, time-based restricted stock units and deferred shares under its long-term incentive plan. A summary of those awards granted in 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to be Settled in Equity
|
Expected to be Settled in Cash
|
Total Awards Granted
|
Performance-based restricted stock units
|
442,371
|
|
11,251
|
|
453,622
|
|
Time-based restricted stock units
|
204,550
|
|
4,480
|
|
209,030
|
|
Deferred shares
|
5,000
|
|
—
|
|
5,000
|
|
Note 13 - Stock Compensation (continued)
Performance-based restricted stock units are calculated and awarded based on the achievement of specified performance objectives and cliff vest three years from the date of grant. Time-based restricted stock units generally vest in 25% increments annually beginning on the first anniversary of the grant. Deferred shares generally cliff vest five years from the date of grant. For time-based restricted stock units that are expected to settle in cash, the Company had $1.0 million and $1.1 million accrued in salaries, wages and benefits as of December 31, 2020 and 2019, respectively, on the Consolidated Balance Sheets.
A summary of stock award activity, including performance-based restricted stock units, time-based restricted stock units and deferred shares that will settle in common shares for the year ended December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
Weighted-average
Grant Date Fair Value
|
Outstanding - beginning of year
|
1,106,386
|
|
$
|
43.13
|
|
Granted - new awards
|
651,921
|
|
50.05
|
|
Vested
|
(557,590)
|
|
43.76
|
|
Canceled or expired
|
(75,245)
|
|
47.97
|
|
Outstanding - end of year
|
1,125,472
|
|
$
|
46.50
|
|
As of December 31, 2020, a total of 1,125,472 stock awards have been awarded that have not yet vested. The Company distributed shares totaling 557,590 in 2020, 539,396 in 2019 and 290,287 in 2018 due to the vesting of stock awards. The grant date fair value of these vested shares was $24.4 million, $17.3 million and $11.8 million, respectively. The Company recognized compensation expense of $19.6 million, $22.3 million and $27.5 million for the years ended December 31, 2020, 2019 and 2018, respectively, relating to performance-based restricted stock units, time-based restricted stock units, deferred shares and restricted shares.
As of December 31, 2020, the Company had unrecognized compensation expense of $22.5 million related to stock options and stock awards, which is expected to be recognized over a total weighted-average period of two years. There were 7.8 million shares available for future grants for all plans at December 31, 2020.
Note 14 - Impairment and Restructuring Charges
Impairment and restructuring charges by segment were as follows:
Year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Unallocated Corporate
|
Total
|
Impairment charges
|
$
|
0.2
|
|
$
|
0.2
|
|
$
|
—
|
|
$
|
0.4
|
|
Severance expense and related benefit costs
|
8.2
|
|
11.0
|
|
0.4
|
|
19.6
|
|
Exit costs
|
0.6
|
|
0.6
|
|
—
|
|
1.2
|
|
Total
|
$
|
9.0
|
|
$
|
11.8
|
|
$
|
0.4
|
|
$
|
21.2
|
|
Year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Unallocated Corporate
|
Total
|
Impairment charges
|
$
|
1.8
|
|
$
|
0.8
|
|
$
|
—
|
|
$
|
2.6
|
|
Severance expense and related benefit costs
|
1.6
|
|
0.9
|
|
0.5
|
|
3.0
|
|
Exit costs
|
0.2
|
|
1.0
|
|
—
|
|
1.2
|
|
Total
|
$
|
3.6
|
|
$
|
2.7
|
|
$
|
0.5
|
|
$
|
6.8
|
|
Year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Unallocated Corporate
|
Total
|
Impairment charges
|
$
|
—
|
|
$
|
1.3
|
|
$
|
—
|
|
$
|
1.3
|
|
Severance expense and related benefit costs
|
1.1
|
|
0.3
|
|
1.6
|
|
3.0
|
|
Exit costs
|
0.3
|
|
0.3
|
|
—
|
|
0.6
|
|
Total
|
$
|
1.4
|
|
$
|
1.9
|
|
$
|
1.6
|
|
$
|
4.9
|
|
The following discussion explains the major impairment and restructuring charges recorded for the periods presented; however, it is not intended to reflect a comprehensive discussion of all amounts in the tables above.
COVID-19 Pandemic Cost Reduction Initiatives:
During 2020, the Company recorded $12.0 million in severance and related benefit costs to eliminate approximately 200 salaried positions to align current employment levels with customer demand. Of the $12.0 million charge, $5.8 million related to the Mobile Industries segment, $5.8 million related to the Process Industries segment and $0.4 million related to Unallocated Corporate.
Mobile Industries:
On October 16, 2019, the Company announced the reorganization of its bearing plant in Gaffney, South Carolina. The Company transferred its high-volume bearing production and roller production to other Timken manufacturing facilities in the U.S. The transfer of these operations was substantially completed by the end of the third quarter of 2020 and is expected to affect approximately 150 employees. The Company expected to incur approximately $8 million to $10 million of pretax costs in total related to this reorganization. During 2020 and 2019, the Company recognized severance and related benefits of $0.3 million and $1.3 million, respectively, and exit costs of $0.4 million and $0.1 million, respectively, related to this reorganization. The Company has incurred cumulative pretax costs related to this reorganization of $7.5 million as of December 31, 2020, including rationalization costs recorded in cost of products sold.
Note 14 - Impairment and Restructuring Charges (continued)
Process Industries:
On February 4, 2020, the Company announced the closure of its chain plant in Indianapolis, Indiana. This plant was part of the Diamond Chain acquisition completed on April 1, 2019. The Company will be transferring the manufacturing of its Diamond Chain product line to its chain facility in Fulton, Illinois. The chain plant is expected to close by the end of the fourth quarter of 2021 and is expected to affect approximately 240 employees. The Company expects to hire approximately 130 full-time positions in Fulton, Illinois and expects to incur approximately $10 million to $12 million of expenses related to this closure. During 2020, the Company recorded severance and related benefit costs of $3.1 million related to this closure. The Company has incurred cumulative pretax costs related to this closure of $6.0 million as of December 31, 2020, including rationalization costs recorded in cost of products sold.
On September 3, 2020, the Company announced the reorganization of its bearing plant in Canton, Ohio. The Company will be transferring production for certain product lines to other Timken locations in order to streamline resources and better align capacity with demand. The transfer of these operations is expected to occur by early 2021 and is expected to affect approximately 40 employees. The Company expects to incur approximately $2.0 million to $2.5 million of pretax costs related to this reorganization. During 2020, the Company recognized severance and related benefits of $1.1 million related to this reorganization. The Company has incurred cumulative pretax costs related to this reorganization of $1.2 million as of December 31, 2020, including rationalization costs recorded in cost of products sold.
Consolidated Restructuring Accrual:
The following is a rollforward of the consolidated restructuring accrual for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Beginning balance, January 1
|
$
|
2.7
|
|
$
|
2.7
|
|
Expense
|
20.8
|
|
4.2
|
|
Payments
|
(15.5)
|
|
(4.2)
|
|
Ending balance, December 31
|
$
|
8.0
|
|
$
|
2.7
|
|
The restructuring accrual at December 31, 2020 and 2019 is included in other current liabilities on the Consolidated Balance Sheets.
Note 15 - Retirement Benefit Plans
The Company and its subsidiaries sponsor a number of defined benefit pension plans, which cover eligible employees, including certain employees in foreign countries. These plans generally are noncontributory. Pension benefits earned generally are based on years of service and compensation during active employment. The cash contributions and payments for the Company’s defined benefit pension plans were $17.9 million, $35.4 million and $11.3 million in 2020, 2019 and 2018, respectively. The 2019 contributions and payments include a $24 million payout of deferred compensation to a former executive officer of the Company.
The following tables summarize the net periodic benefit cost information and the related assumptions used to measure the net periodic benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
|
2020
|
2019
|
2018
|
2020
|
2019
|
2018
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
10.7
|
|
$
|
10.7
|
|
$
|
12.6
|
|
$
|
1.8
|
|
$
|
1.5
|
|
$
|
1.7
|
|
Interest cost
|
21.0
|
|
23.5
|
|
24.0
|
|
5.5
|
|
7.3
|
|
7.2
|
|
Expected return on plan assets
|
(25.3)
|
|
(25.8)
|
|
(29.3)
|
|
(8.7)
|
|
(10.2)
|
|
(11.6)
|
|
Amortization of prior service cost
|
1.6
|
|
1.6
|
|
1.7
|
|
0.2
|
|
0.2
|
|
0.1
|
|
Recognition of net actuarial (gains)
losses
|
(3.9)
|
|
(3.5)
|
|
30.0
|
|
20.1
|
|
17.4
|
|
8.8
|
|
Curtailment losses (gains)
|
0.9
|
|
—
|
|
(10.2)
|
|
—
|
|
—
|
|
—
|
|
Net periodic benefit cost
|
$
|
5.0
|
|
$
|
6.5
|
|
$
|
28.8
|
|
$
|
18.9
|
|
$
|
16.2
|
|
$
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
|
2020
|
2019
|
2018
|
U.S. Plans:
|
|
|
|
Discount rate
|
3.04% to 3.55%
|
3.67% to 4.43%
|
3.75% to 3.94%
|
Future compensation assumption
|
2.50
|
%
|
2.50
|
%
|
2.50
|
%
|
Expected long-term return on plan assets
|
4.50% to 6.25%
|
5.35% to 6.25%
|
5.75% to 6.50%
|
International Plans:
|
|
|
|
Discount rate
|
0.75% to 9.00%
|
1.50% to 11.00%
|
1.25% to 9.00%
|
Future compensation assumption
|
2.00% to 8.20%
|
2.00% to 8.23%
|
2.00% to 8.00%
|
Expected long-term return on plan assets
|
1.75% to 9.00%
|
2.50% to 9.00%
|
2.50% to 9.00%
|
The following table summarizes assumptions used to measure the benefit obligation for the defined benefit pension plans at December 31:
|
|
|
|
|
|
|
|
|
Assumptions
|
2020
|
2019
|
U.S. Plans:
|
|
|
Discount rate
|
2.71% to 2.91%
|
3.04% to 3.55%
|
Future compensation assumption
|
2.50
|
%
|
2.50
|
%
|
International Plans:
|
|
|
Discount rate
|
0.25% to 7.75%
|
0.75
|
%
|
Future compensation assumption
|
1.90% to 8.18%
|
2.00% to 8.20%
|
Note 15 - Retirement Benefit Plans (continued)
The Company recognized actuarial losses of $16.2 million during 2020 primarily due to the impact of a net reduction in the discount rate used to measure its defined benefit pension obligations of $88.0 million and the impact of experience losses of $16.9 million, partially offset by higher than expected returns on plan assets of $84.3 million and other changes in valuation assumptions of $4.4 million. The impact of the net reduction in the discount rate used to measure the Company's defined benefit pension obligations was primarily driven by 66 basis point reduction in the weighted-average discount rate used to measure its U.S. plan obligations, which decreased from 3.50% in 2019 to 2.84% in 2020.
The Company recognized actuarial losses of $13.9 million during 2019 primarily due to the impact of a net reduction in the discount rate used to measure its defined benefit pension obligations of $100.9 million and the impact of experience losses and other changes in valuation assumptions of $3.1 million, partially offset by higher than expected returns on plan assets of $90.1 million. The impact of the net reduction in the discount rate used to measure the Company's defined benefit pension obligations was primarily driven by a 86 basis point reduction in the weighted-average discount rate used to measure its U.S. plan obligations, which decreased from 4.36% in 2018 to 3.50% in 2019.
The Company recognized actuarial losses of $38.8 million during 2018 primarily due to lower than expected returns on plan assets of $83.4 million driven by negative returns on fixed income investments, which were offset by the increase in discount rates used to measure its defined benefit pension obligations of $62.4 million. The impact of experience losses and other changes in valuation assumptions resulted in losses of approximately $17.8 million. The discount rate used to measure the U.S. plan obligations increased by 56 basis points from 3.80% during 2017 compared to 4.36% in 2018.
During the fourth quarter of 2018, the Company's Board of Directors approved the freezing of the benefits for two of the Company's U.S. defined benefit pension plans, effective December 31, 2022. In conjunction with this action, the Company recognized a curtailment gain of $10.2 million in 2018.
For expense purposes in 2020, the Company applied a weighted-average discount rate of 3.5% to its U.S. defined benefit pension plans. For expense purposes in 2021, the Company will apply a weighted-average discount rate of 2.84% to its U.S. defined benefit pension plans.
For expense purposes in 2020, the Company applied a weighted-average expected rate of return of 5.22% for the Company’s U.S. pension plan assets. For expense purposes in 2021, the Company will apply a weighted-average expected rate of return on plan assets of 4.69%.
Note 15 - Retirement Benefit Plans (continued)
The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets for the defined benefit pension plans as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
|
2020
|
2019
|
2020
|
2019
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
634.7
|
|
$
|
586.6
|
|
$
|
328.8
|
|
$
|
300.3
|
|
Service cost
|
10.7
|
|
10.7
|
|
1.8
|
|
1.5
|
|
Interest cost
|
21.0
|
|
23.5
|
|
5.5
|
|
7.3
|
|
Plan amendments
|
0.1
|
|
—
|
|
—
|
|
—
|
|
Actuarial losses
|
56.6
|
|
74.9
|
|
43.9
|
|
29.1
|
|
International plan exchange rate change
|
—
|
|
—
|
|
14.1
|
|
7.6
|
|
Curtailments
|
0.3
|
|
—
|
|
—
|
|
—
|
|
Benefits paid
|
(60.3)
|
|
(61.0)
|
|
(14.4)
|
|
(17.4)
|
|
Acquisitions
|
—
|
|
—
|
|
—
|
|
0.4
|
|
|
|
|
|
|
Benefit obligation at end of year
|
$
|
663.1
|
|
$
|
634.7
|
|
$
|
379.7
|
|
$
|
328.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
|
2020
|
2019
|
2020
|
2019
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
520.2
|
|
$
|
448.3
|
|
$
|
274.7
|
|
$
|
254.6
|
|
Actual return on plan assets
|
85.8
|
|
104.2
|
|
32.5
|
|
21.9
|
|
Company contributions / payments
|
7.6
|
|
28.7
|
|
10.3
|
|
6.7
|
|
International plan exchange rate change
|
—
|
|
—
|
|
9.7
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
(60.3)
|
|
(61.0)
|
|
(14.4)
|
|
(17.4)
|
|
Fair value of plan assets at end of year
|
553.3
|
|
520.2
|
|
312.8
|
|
274.7
|
|
Funded status at end of year
|
$
|
(109.8)
|
|
$
|
(114.5)
|
|
$
|
(66.9)
|
|
$
|
(54.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized on the Consolidated Balance Sheets:
|
|
|
|
|
Non-current assets
|
$
|
1.8
|
|
$
|
—
|
|
$
|
0.2
|
|
$
|
3.4
|
|
Current liabilities
|
(14.2)
|
|
(5.4)
|
|
(1.5)
|
|
(1.5)
|
|
Non-current liabilities
|
(97.4)
|
|
(109.1)
|
|
(65.6)
|
|
(56.0)
|
|
|
$
|
(109.8)
|
|
$
|
(114.5)
|
|
$
|
(66.9)
|
|
$
|
(54.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Net prior service cost
|
$
|
2.7
|
|
$
|
4.8
|
|
$
|
3.9
|
|
$
|
3.9
|
|
Accumulated other comprehensive loss
|
$
|
2.7
|
|
$
|
4.8
|
|
$
|
3.9
|
|
$
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in prior service cost recognized in accumulated other comprehensive loss:
|
|
|
|
|
Accumulated other comprehensive loss at beginning of year
|
$
|
4.8
|
|
$
|
6.4
|
|
$
|
3.9
|
|
$
|
4.0
|
|
|
|
|
|
|
Prior service cost
|
0.1
|
|
—
|
|
—
|
|
—
|
|
Recognized prior service cost
|
(1.6)
|
|
(1.6)
|
|
(0.2)
|
|
(0.2)
|
|
Loss recognized due to curtailment
|
(0.6)
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
Foreign currency impact
|
—
|
|
—
|
|
0.2
|
|
0.1
|
|
Total recognized in accumulated other comprehensive loss
at December 31
|
$
|
2.7
|
|
$
|
4.8
|
|
$
|
3.9
|
|
$
|
3.9
|
|
Note 15 - Retirement Benefit Plans (continued)
The presentation in the above tables for amounts recognized in accumulated other comprehensive loss on the Consolidated Balance Sheets is before the effect of income taxes.
Defined benefit pension plans in the U.S. represent 64% of the benefit obligation and 64% of the fair value of plan assets as of December 31, 2020.
Certain of the Company’s defined benefit pension plans were overfunded as of December 31, 2020. As a result, $2.0 million and $3.4 million at December 31, 2020 and 2019, respectively, are included in non-current pension assets on the Consolidated Balance Sheets. The current portion of accrued pension benefits, which was included in salaries, wages and benefits on the Consolidated Balance Sheets, was $15.7 million and $6.9 million at December 31, 2020 and 2019, respectively. The increase in the current portion of accrued pension benefits relates to the expected 2021 deferred compensation payment to a former executive officer of the Company. In 2020, the current portion of accrued pension benefits relates to unfunded plans and represents the actuarial present value of expected payments related to the plans to be made over the next 12 months.
The accumulated benefit obligation at December 31, 2020 exceeded the market value of plan assets for several of the Company’s pension plans. For these plans, the projected benefit obligation was $521.2 million, the accumulated benefit obligation was $515.9 million and the fair value of plan assets was $343.4 million at December 31, 2020.
The total accumulated benefit obligation for all plans was $1,026.3 million and $942.0 million at December 31, 2020 and 2019, respectively.
Investment performance increased the value of the Company’s pension assets by 16.5% in 2020.
As of December 31, 2020, 2019 and 2018, the Company’s defined benefit pension plans did not directly hold any of the Company’s common shares.
Plan Assets:
The Company’s target allocation for pension plan assets, as well as the actual pension plan asset allocations as of December 31, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Target
Allocation
|
Percentage of Pension Plan
Assets at December 31,
|
Asset Category
|
|
|
|
2020
|
2019
|
Equity securities
|
18%
|
to
|
24%
|
22%
|
21%
|
Fixed income securities
|
70%
|
to
|
82%
|
75%
|
74%
|
Other investments
|
2%
|
to
|
4%
|
3%
|
5%
|
Total
|
|
|
|
100%
|
100%
|
The Company recognizes its overall responsibility to ensure that the assets of its various defined benefit pension plans are managed effectively and prudently and in compliance with its policy guidelines and all applicable laws. Preservation of capital is important; however, the Company also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the pension funds. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes, and are reviewed regularly by management. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
Note 15 - Retirement Benefit Plans (continued)
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB provides accounting rules that classify the inputs used to measure fair value into the following hierarchy:
Level 1 -Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 -Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 -Unobservable inputs for the asset or liability.
The following table presents the fair value hierarchy for those investments of the Company’s pension assets measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
December 31, 2019
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
37.1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
37.1
|
|
$
|
17.1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
17.1
|
|
Government and agency securities
|
45.1
|
|
3.0
|
|
—
|
|
48.1
|
|
35.8
|
|
3.0
|
|
—
|
|
38.8
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds - investment grade
|
—
|
|
99.5
|
|
—
|
|
99.5
|
|
—
|
|
79.5
|
|
—
|
|
79.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities - U.S. companies
|
—
|
|
—
|
|
—
|
|
—
|
|
0.1
|
|
—
|
|
—
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common collective funds - fixed income
|
44.5
|
|
—
|
|
—
|
|
44.5
|
|
42.0
|
|
—
|
|
—
|
|
42.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - fixed income
|
55.4
|
|
—
|
|
—
|
|
55.4
|
|
66.9
|
|
—
|
|
—
|
|
66.9
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - international equity
|
60.4
|
|
—
|
|
—
|
|
60.4
|
|
36.0
|
|
—
|
|
—
|
|
36.0
|
|
Mutual funds - domestic equity
|
—
|
|
—
|
|
—
|
|
—
|
|
3.2
|
|
—
|
|
—
|
|
3.2
|
|
Mutual funds - other assets
|
—
|
|
—
|
|
—
|
|
—
|
|
1.4
|
|
—
|
|
—
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
$
|
242.5
|
|
$
|
102.5
|
|
$
|
—
|
|
$
|
345.0
|
|
$
|
202.5
|
|
$
|
82.5
|
|
$
|
—
|
|
$
|
285.0
|
|
|
|
|
|
|
|
|
|
|
Investments measured at net asset value:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
—
|
|
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Equity securities - international companies
|
|
|
|
0.3
|
|
|
|
|
1.0
|
|
Common collective funds - domestic equities
|
|
|
|
63.2
|
|
|
|
|
76.3
|
|
Common collective funds - international equities
|
|
|
|
42.6
|
|
|
|
|
31.9
|
|
Common collective funds - fixed income
|
|
|
|
203.8
|
|
|
|
|
202.5
|
|
Common collective funds - diversified growth
|
|
|
|
20.1
|
|
|
|
|
17.9
|
|
Limited partnerships
|
|
|
|
13.2
|
|
|
|
|
18.7
|
|
Real estate partnerships
|
|
|
|
7.7
|
|
|
|
|
11.2
|
|
Other liability-driven investments
|
|
|
|
144.4
|
|
|
|
|
128.2
|
|
Other assets
|
|
|
|
25.8
|
|
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
$
|
866.1
|
|
|
|
|
$
|
794.9
|
|
International investments measured at net asset value totaled $265.0 million as of December 31, 2020 and $231.8 million as of December 31, 2019, respectively.
Note 15 - Retirement Benefit Plans (continued)
Cash and cash equivalents are valued at redemption value. Government and agency securities are valued at the closing price reported in the active market in which the individual securities are traded. Certain corporate bonds are valued at the closing price reported in the active market in which the bond is traded. Equity securities (both common and preferred stock) are valued at the closing price reported in the active market in which the individual security is traded. Common collective funds are valued based on a net asset value per share. Mutual funds classified as Level 1 assets include investments in fixed income and international equities. These investments are comprised of securities listed on exchange, market, or automated quotation systems, for which active, quoted prices are available. Mutual funds are valued based on a net asset value per share for shares held at year end, as determined by the closing price reported on the active market on which the individual securities are traded, or a pricing vendor or the fund family if an active market is not available. Asset-backed securities are valued based on quoted prices for similar assets in active markets. When such prices are unavailable, the plan trustee determines a valuation from the market maker dealing in the particular security.
Limited partnerships include investments in funds that invest primarily in private equity, venture capital and distressed debt. Limited partnerships are valued based on the ownership interest in the net asset value of the investment, which is used as a practical expedient to fair value, per the underlying investment fund, which is based upon the general partner's own assumptions about the assumptions a market participant would use in pricing the assets and liabilities of the partnership. Real estate investments include funds that invest in companies that primarily invest in commercial and residential properties, commercial mortgage-backed securities, debt and equity securities of real estate operating companies, and real estate investment trusts. Other real estate investments are valued based on the ownership interest in the net asset value of the investment, which is used as a practical expedient to fair value per the underlying investment fund, which is based on appraised values and current transaction prices.
Other liability-driven investments mainly include investments in index-linked open-end swap funds. These funds invest in cash held deposits that reflect the index-linked deferred annuity with payment terms of specific years linked to UK inflation measures. The underlying assets in this investment are valued daily.
Common collective funds - diversified growth investments are pooled funds that invest in a multiple underlying asset classes, such as equities, fixed income, commodities, alternative investments, and cash in an effort to achieve returns on investment through capital appreciation and income. The underlying assets in this investment are valued daily.
Cash Flows:
|
|
|
|
|
|
Employer Contributions to Defined Benefit Plans
|
|
2019
|
$
|
35.4
|
|
2020
|
17.9
|
|
2021 (estimated)
|
16.0
|
|
Estimated future benefit payments, including estimated lump sum distributions, are expected to be as follows:
|
|
|
|
|
|
Benefit Payments
|
|
2021
|
$
|
98
|
|
2022
|
74
|
|
2023
|
72
|
|
2024
|
64
|
|
2025
|
62
|
|
2026-2030
|
270
|
|
Note 15 - Retirement Benefit Plans (continued)
Employee Savings Plans:
The Company sponsors defined contribution retirement and savings plans covering substantially all employees in the United States and employees at certain non-U.S. locations. The Company made contributions to its defined contribution plans of $27.1 million, $27.9 million and $23.7 million in 2020, 2019 and 2018, respectively. Effective January 1, 2019, the primary U.S. Company sponsored defined contribution plan no longer allows contributions to be made to the Company stock fund to align with industry trends to remove investments in company stock as an option in a company sponsored defined contribution plan. All participants in this plan are required to transfer remaining funds in the Company stock fund to other fund options by December 31, 2022. At December 31, 2020, the plans held 1,095,124 of the Company’s common shares with a fair value of $84.7 million. The Company paid dividends totaling $1.5 million, $2.3 million and $2.9 million in 2020, 2019 and 2018, respectively, to plans to be disbursed to participant accounts holding the Company’s common shares.
Note 16 - Other Postretirement Benefit Plans
The Company and its subsidiaries sponsor several funded and unfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and dependents. Depending on retirement date and employee classification, certain health care plans contain contribution and cost-sharing features such as deductibles, coinsurance and limitations on employer-provided subsidies. The remaining health care and life insurance plans are noncontributory.
The following tables summarize the net periodic benefit cost information and the related assumptions used to measure the net periodic benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Components of net periodic benefit (credit) cost:
|
|
|
|
Service cost
|
$
|
0.2
|
|
$
|
0.2
|
|
$
|
0.2
|
|
Interest cost
|
2.1
|
|
5.9
|
|
7.6
|
|
Expected return on plan assets
|
(0.4)
|
|
(3.2)
|
|
(3.7)
|
|
Amortization of prior service credit
|
(9.8)
|
|
(5.4)
|
|
(1.7)
|
|
Recognition of net actuarial losses (gains)
|
1.4
|
|
(18.0)
|
|
(16.7)
|
|
Net periodic benefit (credit) cost
|
$
|
(6.5)
|
|
$
|
(20.5)
|
|
$
|
(14.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions:
|
2020
|
2019
|
2018
|
Discount rate
|
3.43
|
%
|
3.48% to 4.30%
|
3.57
|
%
|
Rate of return
|
3.00
|
%
|
4.85
|
%
|
4.50
|
%
|
The following table summarizes assumptions used to measure the benefit obligation for the other postretirement benefit plans at December 31:
|
|
|
|
|
|
|
|
|
Assumptions:
|
2020
|
2019
|
Discount rate
|
2.62
|
%
|
3.43
|
%
|
The Company recognized actuarial losses of $1.4 million during 2020 primarily due to the impact of an 81 basis point decrease in the discount rate used to measure the Company's defined benefit postretirement obligations, which decreased from 3.43% in 2019 to 2.62% in 2020. The decrease in the discount rate resulted in a $3.9 million loss. This actuarial loss was partially offset by actuarial gains of $2.0 million due to the impact of a reduction in the rate for Medicare Advantage plans, $0.4 million due to higher than expected returns on plans assets and $0.1 million due to changes in other actuarial assumptions.
The Company recognized actuarial gains of $18.0 million during 2019 primarily due to the impact of a reduction in the rates for Medicare Advantage plans of $22.7 million. The change in the contractual rates for Medicare Advantage plans was due to a law change that repealed the tax on health care insurers after 2020. In addition to the change in rates on Medicare Advantage plans, the Company recognized actuarial gains of $3.6 million due to higher than expected returns on plan assets and $5.2 million due to changes in other actuarial assumptions. These actuarial gains were partially offset by an 87 basis point decrease in the discount rate used to measure the Company's defined benefit postretirement obligations, which decreased from 4.30% to 3.43%. The decrease in the discount rate resulted in a $13.5 million loss.
During July 2019, the Company announced changes to the medical plan offerings for certain of its postretirement benefit plans, effective January 1, 2020, which will impact the benefits provided to certain retirees. This plan amendment resulted in a $92.8 million reduction in its postretirement benefit obligations and a corresponding pretax adjustment to accumulated other comprehensive loss. Starting with the three months ended September 30, 2019, the pretax adjustment of $92.8 million will be amortized from accumulated other comprehensive loss into net periodic benefit cost (as a benefit) until 2031.
Note 16 - Other Postretirement Benefit Plans (continued)
The Company recognized actuarial gains of $16.7 million during 2018 primarily due to the impact of a 73 basis point increase in the discount rate used to measure the Company's defined benefit postretirement obligations, which increased from 3.57% in 2017 to 4.30% in 2018, and due to a number of participants opting out of coverage from the plans in response to a financial incentive program offered to eligible participants of the Company's retiree health and life insurance plans. The Company recognized actuarial gains of $10.6 million as a result of the increase in the discount rate and $10.4 million as a result of the impact of the opt-out program. These actuarial gains were partially offset by lower than expected returns on plan assets of $4.0 million and by the impact of experience losses and other changes in valuation assumptions of $0.3 million.
The discount rate assumption is based on current rates of high-quality long-term corporate bonds over the same period that benefit payments will be required to be made. The expected rate of return on plan assets assumption is based on the weighted-average expected return on the various asset classes in the plans’ portfolio. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.
For expense purposes in 2020, the Company applied a discount rate of 3.43% to its other postretirement benefit plans. For expense purposes in 2021, the Company will apply a discount rate of 2.62% to its other postretirement benefit plans.
For expense purposes in 2020, the Company applied an expected rate of return of 3.00% to the VEBA trust assets.
The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets of the other postretirement benefit plans as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Change in benefit obligation:
|
|
|
Benefit obligation at beginning of year
|
$
|
63.4
|
|
$
|
186.9
|
|
Service cost
|
0.2
|
|
0.2
|
|
Interest cost
|
2.1
|
|
5.9
|
|
Plan amendments
|
(3.1)
|
|
(92.8)
|
|
Actuarial losses (gains)
|
1.8
|
|
(14.4)
|
|
International plan exchange rate change
|
—
|
|
0.2
|
|
Benefits paid
|
(6.8)
|
|
(22.7)
|
|
|
|
|
Acquisitions
|
—
|
|
0.1
|
|
Benefit obligation at end of year
|
$
|
57.6
|
|
$
|
63.4
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
Fair value of plan assets at beginning of year
|
$
|
64.4
|
|
$
|
72.3
|
|
Company contributions / payments
|
2.7
|
|
8.0
|
|
Transfer to VEBA trust for certain active employees' medical benefits
|
(50.0)
|
|
—
|
|
Return on plan assets
|
0.8
|
|
6.8
|
|
Benefits paid
|
(6.8)
|
|
(22.7)
|
|
Fair value of plan assets at end of year
|
11.1
|
|
64.4
|
|
Funded status at end of year
|
$
|
(46.5)
|
|
$
|
1.0
|
|
Note 16 - Other Postretirement Benefit Plans (continued)
|
|
|
|
|
|
|
|
|
Amounts recognized on the Consolidated Balance Sheets:
|
2020
|
2019
|
Non-current assets
|
$
|
—
|
|
$
|
36.6
|
|
Current liabilities
|
(5.2)
|
|
(3.8)
|
|
Non-current liabilities
|
(41.3)
|
|
(31.8)
|
|
|
$
|
(46.5)
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income:
|
|
|
|
|
|
Net prior service credit
|
$
|
(91.5)
|
|
$
|
(98.2)
|
|
Accumulated other comprehensive income
|
$
|
(91.5)
|
|
$
|
(98.2)
|
|
|
|
|
|
|
|
|
|
|
Changes to prior service credit recognized in accumulated other comprehensive (income) loss:
|
|
|
Accumulated other comprehensive income at beginning of year
|
$
|
(98.2)
|
|
$
|
(10.8)
|
|
|
|
|
Prior service credit
|
(3.1)
|
|
(92.8)
|
|
|
|
|
Recognized prior service credit
|
9.8
|
|
5.4
|
|
|
|
|
|
|
|
Total recognized in accumulated other comprehensive income at December 31
|
$
|
(91.5)
|
|
$
|
(98.2)
|
|
The presentation in the above tables for amounts recognized in accumulated other comprehensive (income) loss on the Consolidated Balance Sheets is before the effect of income taxes.
The current portion of accrued postretirement benefits, which was included in salaries, wages and benefits on the Consolidated Balance Sheets, was $5.2 million and $3.8 million at December 31, 2020 and 2019, respectively. In 2021, the current portion of accrued postretirement benefits related to unfunded plans and represented the actuarial present value of expected payments related to the plans to be made over the next 12 months.
For measurement purposes, the Company assumed a weighted-average annual rate of increase in the per capita cost (health care cost trend rate) for medical benefits of 5.5% for 2021, declining gradually to 5.0% in 2023 and thereafter for medical and prescription drug benefits. For Medicare Advantage benefits, actual contract rates have been set for 2021 and 2022, and are assumed to increase by 7.25% for 2022, declining gradually to 5.0% in 2031 and thereafter.
The assumed health care cost trend rate may have a significant effect on the amounts reported. A one percentage point increase in the assumed health care cost trend rate would have increased the 2020 total service and interest cost components by $0.1 million and would have increased the postretirement benefit obligation by $1.8 million. A one percentage point decrease would provide corresponding reductions of $0.1 million and $1.6 million, respectively.
Plan Assets:
The Company’s target allocation for the VEBA trust assets, as well as the actual VEBA trust asset allocation as of December 31, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Target
Allocation
|
Percentage of VEBA Assets
at December 31,
|
Asset Category
|
|
|
|
2020
|
2019
|
Equity securities
|
|
—
|
|
—%
|
18%
|
Fixed income securities
|
100%
|
100%
|
82%
|
Total
|
|
|
|
100%
|
100%
|
Note 16 - Other Postretirement Benefit Plans (continued)
Preservation of capital is important; however, the Company also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the postretirement funds. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
The following table presents those investments of the Company’s VEBA trust assets as of December 31, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
Assets:
|
NAV
|
Level 1
|
Level 2
|
Level 3
|
Cash and cash equivalents
|
$
|
0.5
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Mutual fund - fixed income
|
—
|
|
10.6
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
$
|
0.5
|
|
$
|
10.6
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
Assets:
|
NAV
|
Level 1
|
Level 2
|
Level 3
|
Cash and cash equivalents
|
$
|
9.4
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
Common collective fund - U.S. equities
|
7.4
|
|
—
|
|
—
|
|
—
|
|
Common collective fund - international equities
|
4.2
|
|
—
|
|
—
|
|
—
|
|
Common collective fund - fixed income
|
43.4
|
|
—
|
|
—
|
|
—
|
|
Total Assets
|
$
|
64.4
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Cash and cash equivalents are valued at redemption value. Common collective funds are valued based on a net asset value per share, which is used as a practical expedient to fair value. When such prices are unavailable, the plan trustee determines a valuation from the market maker dealing in the particular security. Mutual funds are valued at the closing priced reported in the active market in which the individual funds are traded.
In January 2020, the Company established a second VEBA trust for certain active employees’ medical benefits. The Company transferred $50 million from the existing VEBA trust to fund the second VEBA trust. The $50 million that was transferred was primarily classified as other current assets based on the portfolio of the assets in the trust. The Company utilized all of the assets of the trust in 2020 for the payment of certain active employees’ medical benefits. In January 2021, the Company transferred the remaining $11.1 million in the existing VEBA trust to the second VEBA trust.
Cash Flows:
The Company did not make any employer contributions to the VEBA in 2020 and 2019. The Company does not expect to make any employer contributions in 2021.
Estimated future benefit payments to be funded by the Company are expected to be as follows:
|
|
|
|
|
|
|
|
|
Future Benefit Payments
|
|
|
2021
|
$
|
5
|
|
|
|
2022
|
5
|
|
|
|
2023
|
5
|
|
|
|
2024
|
4
|
|
|
|
2025
|
4
|
|
|
|
2026-2030
|
18
|
|
|
|
Note 17 - Accumulated Other Comprehensive Income (Loss)
The following tables present details about components of accumulated other comprehensive (loss) income for the years ended December 31, 2020 and December 31, 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments
|
Pension and postretirement
liability adjustments
|
|
Change in fair value of
derivative financial instruments
|
Total
|
Balance at December 31, 2019
|
$
|
(115.3)
|
|
$
|
66.9
|
|
|
$
|
(1.7)
|
|
$
|
(50.1)
|
|
Other comprehensive income (loss) before reclassifications and income taxes
|
92.7
|
|
2.8
|
|
|
(1.2)
|
|
94.3
|
|
Amounts reclassified from accumulated other comprehensive (loss) income, before income tax
|
—
|
|
(7.4)
|
|
|
(2.3)
|
|
(9.7)
|
|
Income tax benefit
|
—
|
|
1.1
|
|
|
1.1
|
|
2.2
|
|
Net current period other comprehensive income (loss), net of income taxes
|
92.7
|
|
(3.5)
|
|
|
(2.4)
|
|
86.8
|
|
Noncontrolling interest
|
4.6
|
|
—
|
|
|
—
|
|
4.6
|
|
Net current period comprehensive income (loss), net of income taxes and noncontrolling interest
|
97.3
|
|
(3.5)
|
|
|
(2.4)
|
|
91.4
|
|
Balance at December 31, 2020
|
$
|
(18.0)
|
|
$
|
63.4
|
|
|
$
|
(4.1)
|
|
$
|
41.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments
|
Pension and postretirement
liability adjustments
|
|
Change in fair value of
derivative financial instruments
|
Total
|
Balance at December 31, 2018
|
$
|
(95.6)
|
|
$
|
—
|
|
|
$
|
0.3
|
|
$
|
(95.3)
|
|
Other comprehensive income (loss) before reclassifications and income taxes
|
(19.9)
|
|
92.7
|
|
|
1.2
|
|
74.0
|
|
Amounts reclassified from accumulated other comprehensive (loss) income, before income tax
|
—
|
|
(3.6)
|
|
|
(3.8)
|
|
(7.4)
|
|
Income tax (expense) benefit
|
—
|
|
(22.2)
|
|
|
0.6
|
|
(21.6)
|
|
Net current period other comprehensive income (loss), net of income taxes
|
(19.9)
|
|
66.9
|
|
|
(2.0)
|
|
45.0
|
|
Noncontrolling interest
|
0.2
|
|
—
|
|
|
—
|
|
0.2
|
|
Net current period comprehensive income (loss), net of income taxes and noncontrolling interest
|
(19.7)
|
|
66.9
|
|
|
(2.0)
|
|
45.2
|
|
Balance at December 31, 2019
|
$
|
(115.3)
|
|
$
|
66.9
|
|
|
$
|
(1.7)
|
|
$
|
(50.1)
|
|
Other comprehensive income (loss) before reclassifications and income taxes includes the effect of foreign currency.
Note 18 - Fair Value
The following tables present the fair value hierarchy for those assets and liabilities on the Consolidated Balance Sheets measured at fair value on a recurring basis as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
320.3
|
|
$
|
318.6
|
|
$
|
1.7
|
|
$
|
—
|
|
|
|
|
|
|
Restricted cash
|
0.8
|
|
0.8
|
|
—
|
|
—
|
|
Short-term investments
|
37.6
|
|
—
|
|
37.6
|
|
—
|
|
|
|
|
|
|
Foreign currency hedges
|
1.1
|
|
—
|
|
1.1
|
|
—
|
|
Total Assets
|
$
|
359.8
|
|
$
|
319.4
|
|
$
|
40.4
|
|
$
|
—
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
8.1
|
|
$
|
—
|
|
$
|
8.1
|
|
$
|
—
|
|
Total Liabilities
|
$
|
8.1
|
|
$
|
—
|
|
$
|
8.1
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
160.7
|
|
$
|
158.2
|
|
$
|
2.5
|
|
$
|
—
|
|
Cash and cash equivalents measured at net
asset value
|
48.8
|
|
|
|
|
Restricted cash
|
6.7
|
|
6.7
|
|
—
|
|
—
|
|
Short-term investments
|
25.7
|
|
—
|
|
25.7
|
|
—
|
|
Short-term investments measured at net asset value
|
0.1
|
|
|
|
|
Foreign currency hedges
|
7.6
|
|
—
|
|
7.6
|
|
—
|
|
Total Assets
|
$
|
249.6
|
|
$
|
164.9
|
|
$
|
35.8
|
|
$
|
—
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
1.4
|
|
$
|
—
|
|
$
|
1.4
|
|
$
|
—
|
|
Total Liabilities
|
$
|
1.4
|
|
$
|
—
|
|
$
|
1.4
|
|
$
|
—
|
|
Cash and cash equivalents are highly liquid investments with maturities of three months or less when purchased and are valued at redemption value. Short-term investments are investments with maturities between four months and one year, and 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.
Additionally, the Company remeasures certain assets to fair value, using Level 3 measurements, as a result of the occurrence of triggering events such as purchase accounting for acquisitions. See Note 2 - Acquisitions for further discussion.
The Company does not believe it has significant concentrations of risk associated with the counterparts to its financial instruments.
No material assets were measured at fair value on a nonrecurring basis during the years ended December 31, 2020 and 2019.
Note 18 - Fair Value (continued)
Financial Instruments:
The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, net 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 $1,220.7 million and $1,185.8 million at December 31, 2020 and 2019, respectively. The carrying value of this debt was $1,103.2 million and $1,086.5 million at December 31, 2020 and 2019, respectively. The fair value of long-term fixed-rate debt was measured using Level 2 inputs.
Note 19 - Derivative Instruments
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.
On September 8, 2020, the Company entered into a $100 million floating-to-fixed rate swap on the 2023 Term Loan,
which hedges the change in the 1-month LIBOR rate October 30, 2020 through September 11, 2023 to a fixed rate. The Company’s risk management objective is to hedge the risk of changes in the monthly interest expense attributable to changes in the benchmark interest rate.
On September 15, 2020, the Company designated €54.5 million of its €150.0 million fixed-rate senior unsecured notes, maturing on September 07, 2027 (the "2027 Notes") as a hedge against its net investment in one of its European affiliates. The objective of the hedge transaction is to protect the net investment in the foreign operations against changes in the exchange rate between the U.S. dollar and the Euro. The net impact for the twelve months ended December 31, 2020 was to record a loss of $2.0 million to accumulated comprehensive loss with a corresponding offset to other (expense) income, which partially offsets the impact of the foreign currency adjustment on the 2027 Notes.
The Company does not purchase or hold any derivative financial instruments for trading purposes. As of December 31, 2020 and 2019, the Company had $173.2 million and $295.7 million, respectively, of outstanding foreign currency forward contracts at notional value. Refer to Note 18 - Fair Value for the fair value disclosure of derivative financial instruments.
Cash Flow Hedging Strategy:
For certain derivative instruments that are designated 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.
Note 19 - Derivative Instruments (continued)
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. As of December 31, 2020 and 2019, the Company had $86.9 million and $87.9 million, respectively, of outstanding foreign currency forward contracts at notional value that were classified as cash flow hedges.
The maximum length of time over which the Company hedges it exposure to the variability in future cash flows for forecast transactions is generally eighteen months or less.
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 loan with a maturity date at the maturity of the loan. The revaluation of these contracts, as well as the revaluation of the underlying balance sheet items, is recorded directly to the income statement so the adjustment generally offsets the revaluation of the underlying balance sheet items to protect cash payments and reduce income statement volatility.
As of December 31, 2020 and 2019, the Company had $86.2 million and $207.8 million, respectively, of outstanding foreign currency forward contracts at notional value that were not designated as hedging instruments. The following table presents the impact of derivative instruments not designated as hedging instruments for the years ended December 31, 2020, 2019 and 2018, and the related location within the Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss)
recognized in income
|
|
|
Year Ended December 31,
|
Derivatives not designated as hedging instruments
|
Location of gain or (loss) recognized in income
|
2020
|
2019
|
2018
|
Foreign currency forward contracts
|
Other income (expense), net
|
$
|
(3.7)
|
|
$
|
5.9
|
|
$
|
5.1
|
|
Note 20 - Research and Development
The Company leverages its technical knowledge, research expertise, and production and engineering capabilities across all of its products and end markets to deliver high-performance products and services to its customers. Costs included in "Research and Development Expense" primarily relate to new product innovation. Costs included in "Engineering Expense" primarily relate to the technological enhancement of existing products and services as we align with our customers evolving needs. Expenditures may fluctuate from year-to-year depending on special projects and needs.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Expenditures as a percentage of sales
|
2020
|
2019
|
2018
|
Research and Development Expense
|
1.2
|
%
|
1.1
|
%
|
1.0
|
%
|
Engineering Expense
|
1.0
|
%
|
1.3
|
%
|
1.3
|
%
|
Total
|
2.2
|
%
|
2.4
|
%
|
2.3
|
%
|
Note 21 - Quarterly Financial Data
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
1st
|
2nd
|
3rd
|
4th
|
Total
|
Net sales
|
$
|
923.4
|
|
$
|
803.5
|
|
$
|
894.6
|
|
$
|
891.7
|
|
$
|
3,513.2
|
|
Gross profit
|
278.9
|
|
230.3
|
|
263.7
|
|
237.0
|
|
1,009.9
|
|
Selling, general and administrative expenses
|
153.6
|
|
111.8
|
|
132.7
|
|
135.7
|
|
533.8
|
|
Impairment and restructuring charges
|
3.6
|
|
3.1
|
|
12.0
|
|
2.5
|
|
21.2
|
|
|
|
|
|
|
|
Net income (1)
|
84.0
|
|
61.8
|
|
91.3
|
|
55.3
|
|
292.4
|
|
Net income attributable to noncontrolling interests
|
3.3
|
|
(0.1)
|
|
2.5
|
|
2.2
|
|
7.9
|
|
Net income attributable to The Timken Company
|
80.7
|
|
61.9
|
|
88.8
|
|
53.1
|
|
284.5
|
|
Net income per share - Basic:
|
$
|
1.07
|
|
$
|
0.82
|
|
$
|
1.18
|
|
$
|
0.70
|
|
$
|
3.78
|
|
Net income per share - Diluted:
|
$
|
1.06
|
|
$
|
0.82
|
|
$
|
1.16
|
|
$
|
0.69
|
|
$
|
3.72
|
|
Dividends per share
|
$
|
0.28
|
|
$
|
0.28
|
|
$
|
0.28
|
|
$
|
0.29
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
2019
|
|
1st
|
2nd
|
3rd
|
4th
|
Total
|
Net sales
|
$
|
979.7
|
|
$
|
1,000.0
|
|
$
|
914.0
|
|
$
|
896.2
|
|
$
|
3,789.9
|
|
Gross profit
|
302.6
|
|
305.7
|
|
277.5
|
|
256.0
|
|
1,141.8
|
|
Selling, general and administrative expenses
|
152.7
|
|
158.7
|
|
148.0
|
|
159.2
|
|
618.6
|
|
Impairment and restructuring charges
|
—
|
|
1.9
|
|
1.6
|
|
3.3
|
|
6.8
|
|
|
|
|
|
|
|
Net income (2)
|
95.3
|
|
94.9
|
|
66.7
|
|
117.8
|
|
374.7
|
|
Net income attributable to noncontrolling interests
|
3.4
|
|
2.4
|
|
2.5
|
|
4.3
|
|
12.6
|
|
Net income attributable to The Timken Company
|
91.9
|
|
92.5
|
|
64.2
|
|
113.5
|
|
362.1
|
|
Net income per share - Basic:
|
$
|
1.21
|
|
$
|
1.22
|
|
$
|
0.85
|
|
$
|
1.51
|
|
$
|
4.78
|
|
Net income per share - Diluted:
|
$
|
1.19
|
|
$
|
1.20
|
|
$
|
0.84
|
|
$
|
1.48
|
|
$
|
4.71
|
|
Dividends per share
|
$
|
0.28
|
|
$
|
0.28
|
|
$
|
0.28
|
|
$
|
0.28
|
|
$
|
1.12
|
|
Earnings per share are computed independently for each of the quarters presented; therefore, the sum of the quarterly earnings per share may not equal the total computed for the year.
(1)Net income for the second quarter of 2020 included net actuarial losses of $8.8 million. Net income for the third quarter of 2020 included net actuarial gains of $11.9 million and impairment and restructuring charges of $12.0 million. Net income for the fourth quarter of 2020 included net actuarial losses of $21.6 million.
(2)Net income for the third quarter of 2019 included net actuarial losses of $16.9 million, Net income for the fourth quarter of 2019 included the reversal of tax valuation allowances of $44.5 million and net actuarial gains of $21.1 million.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of The Timken Company and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Timken Company and subsidiaries (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
|
|
|
|
|
|
|
Pension and other postretirement benefit obligations
|
Description of the Matter
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At December 31, 2020, the Company’s aggregate defined benefit pension and other postretirement benefit obligation was $1,100.4 million and exceeded the fair value of defined benefit pension and other postretirement plan assets of $877.2 million, resulting in an unfunded defined benefit pension and other postretirement benefit obligation of $223.2 million. As explained in Note 1, Significant Accounting Policies, Note 15, Retirement Benefit Plans, and Note 16, Other Postretirement Benefit Plans, to the consolidated financial statements, the Company recognizes actuarial gains and losses immediately through net periodic benefit cost upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement, through updating the estimates used to measure the defined benefit pension and other postretirement benefit obligation and plan assets to reflect the actual return on plan assets and updated actuarial assumptions.
Auditing the pension and other postretirement benefit obligations is complex and required the involvement of specialists due to the highly judgmental nature of certain of the actuarial assumptions (e.g., discount rate) used in the measurement process. These assumptions had a significant effect on the projected benefit obligation and net periodic benefit costs recognized.
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How We Addressed the Matter in Our Audit
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We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the measurement of pension and other postretirement obligations. For example, we tested controls over management’s review of the defined benefit pension and other postretirement benefit obligation calculations, the relevant data inputs and the significant actuarial assumptions used in the calculations.
To test the defined benefit pension and other postretirement benefit obligation, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above, and the underlying data used by the Company. We compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension and other postretirement benefit obligation from prior year due to the change in service cost, interest cost, plan amendments, actuarial losses (gains), benefits paid and other activities. In addition, we involved an actuarial specialist to assist with our procedures. For example, we evaluated management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the defined benefit pension and other postretirement benefit obligation. In certain instances, as part of this assessment, we compared the projected cash flows to prior year and compared the current year benefits paid to the prior year projected cash flows. We also tested the completeness and accuracy of the underlying data, including the participant data used in the determination of the projected benefit obligation.
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1910.
Cleveland, Ohio
February 16, 2021