NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions, except per share data)
Note 1 - Basis of Presentation
The accompanying Consolidated Financial Statements (unaudited) for The Timken Company (the "Company") have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by the accounting principles generally accepted in the United States ("U.S. GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and accompanying Notes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
Note 2 - Recent Accounting Pronouncements
New Accounting Guidance Adopted:
In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments." ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. This new accounting guidance does not eliminate the requirement for the measurement period to be completed within one year. On January 1, 2016, the Company adopted the provisions of ASU 2015-16. The impact of the adoption of ASU 2015-16 was immaterial to the Company's results of operations and financial condition as there was only a minor measurement-period adjustment during the first six months of 2016.
In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." ASU 2015-07 eliminates the requirement to categorize within the fair value hierarchy investments for which fair values are estimated using the net asset value ("NAV") practical expedient provided in ASC 820, "Fair Value Measurement." Instead, entities will be required to disclose the fair values of such investments so that financial statement users can reconcile amounts reported in the fair value hierarchy table and the amounts reported on the balance sheet. On January 1, 2016, the Company adopted the provisions of ASU 2015-07. The adoption of ASU 2015-07 did not have any impact on the Company's results of operations or financial condition as the new guidance addresses disclosure only. See
Note 17 - Fair Value
for the new disclosures.
In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Prior to the issuance of this new accounting guidance, there was no explicit guidance about a customer's accounting for fees paid in a cloud computing arrangement. On January 1, 2016, the Company adopted the provisions of ASU 2015-05 on a prospective basis. The adoption of ASU 2015-05 did not have any impact on the Company's results of operations or financial condition.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction to the carrying value of debt. Prior to the issuance of this new accounting guidance, debt issuance costs were required to be presented in the balance sheet as a deferred charge (i.e., an asset), and only a debt discount was recorded as a direct deduction to the carrying value of debt. ASU 2015-03 requires that the new accounting guidance be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance.
On January 1, 2016, the Company adopted the provisions of ASU 2015-03. The following financial statement line items at
December 31, 2015
were affected by the adoption of ASU 2015-03.
|
|
|
|
|
|
|
|
|
|
|
|
As Originally Reported
|
New Presentation
|
Effect of Change
|
Assets:
|
|
|
|
Other non-current assets
|
$
|
50.3
|
|
$
|
49.1
|
|
$
|
1.2
|
|
|
|
|
|
Liabilities:
|
|
|
|
Long-term debt
|
$
|
580.6
|
|
$
|
579.4
|
|
$
|
1.2
|
|
New Accounting Guidance Issued and Not Yet Adopted:
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance will replace the current incurred loss approach with an expected loss model. The new expected credit loss impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt instruments, net investments in leases, loan commitments and standby letters of credit. Upon initial recognition of the exposure, the expected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. ASU 2016-13 does not prescribe a specific method to make the estimate so its application will require significant judgment. ASU 2016-13 is effective in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the effect that ASU 2016-13 will have on the Company's results of operations and financial condition.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies various aspects of the accounting for stock-based payments. The simplifications include: (a) recording all tax effects associated with stock-based compensation through the income statement, as opposed to recording certain amounts in other paid-in capital, which eliminates the complications of tracking a “windfall pool,” but will increase the volatility of income tax expense; (b) allowing entities to withhold shares to satisfy the employer’s statutory tax withholding requirement up to the highest marginal tax rate applicable to employees rather than the employer’s minimum statutory rate, without requiring liability classification for the award; (c) modifying the requirement to estimate the number of awards that will ultimately vest by providing an accounting policy election to either estimate the number of forfeitures or recognize forfeitures as they occur; and (d) changing certain presentation requirements in the statement of cash flows, including removing the requirement to present excess tax benefits as an inflow from financing activities and an outflow from operating activities, and requiring the cash paid to taxing authorities arising from withheld shares to be classified as a financing activity.
ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The Company is currently evaluating the effect that ASU 2016-09 will have on the Company's results of operations and financial condition.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 was issued to increase transparency and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. ASU 2016-02 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the effect that ASU 2016-02 will have on the Company's results of operations and financial condition.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. On July 9, 2015, the FASB decided to delay the effective date of this new accounting guidance by one year, which will result in it being effective for annual periods beginning after December 15, 2017. The Company is currently evaluating the effect that ASU 2014-09 will have on the Company's results of operations and financial condition.
Note 3 - Acquisitions
On September 1, 2015, the Company completed the acquisition of the membership interests of Carlstar Belt LLC ("Timken Belts") for
$213.7 million
, including cash acquired of approximately
$0.1 million
. The Company incurred approximately
$1.0 million
of legal and professional fees to acquire Timken Belts. Timken Belts is a leading North American manufacturer of belts used in industrial, commercial and consumer applications, and sold under multiple brand names, including Carlisle®, Ultimax® and Panther®, among others. The product portfolio includes more than 20,000 parts that utilize wrap molded, raw edge, v-ribbed and synchronous belt designs. Based in Springfield, Missouri, Timken Belts had annual sales of approximately
$140 million
for the twelve months ending June 30, 2015, and employs approximately
750
employees. The results of the operations of Timken Belts are reported in both the Mobile Industries and Process Industries segments based on customers served.
In June 2016, the Company paid a net purchase price adjustment of
$0.7 million
for Timken Belts, resulting in an adjustment to goodwill. The following table presents the purchase price allocation for the Timken Belts acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
Initial Purchase Price Allocation
|
Adjustment
|
Final
Purchase Price Allocation
|
Assets:
|
|
|
|
Accounts receivable, net
|
$
|
13.3
|
|
|
$
|
13.3
|
|
Inventories, net
|
48.5
|
|
|
48.5
|
|
Other current assets
|
1.1
|
|
|
1.1
|
|
Property, plant and equipment, net
|
37.9
|
|
|
37.9
|
|
Goodwill
|
70.8
|
|
0.7
|
|
71.5
|
|
Other intangible assets
|
63.9
|
|
|
63.9
|
|
Total assets acquired
|
$
|
235.5
|
|
$
|
0.7
|
|
$
|
236.2
|
|
Liabilities:
|
|
|
|
Accounts payable, trade
|
$
|
10.2
|
|
|
$
|
10.2
|
|
Salaries, wages and benefits
|
1.1
|
|
|
1.1
|
|
Other current liabilities
|
1.3
|
|
|
1.3
|
|
Accrued pension cost
|
2.3
|
|
|
2.3
|
|
Accrued postretirement benefits cost
|
1.1
|
|
|
1.1
|
|
Other non-current liabilities
|
5.9
|
|
|
5.9
|
|
Total liabilities assumed
|
$
|
21.9
|
|
$
|
—
|
|
$
|
21.9
|
|
Net assets acquired
|
$
|
213.6
|
|
$
|
0.7
|
|
$
|
214.3
|
|
The following table summarizes the final purchase price allocation for identifiable intangible assets acquired in 2015:
|
|
|
|
|
|
|
Final Purchase
Price Allocation
|
|
|
Weighted -
Average Life
|
Trade name
|
$
|
1.7
|
|
11 years
|
Technology
|
17.1
|
|
20 years
|
All customer relationships
|
43.9
|
|
20 years
|
Capitalized software
|
1.2
|
|
3 years
|
Total intangible assets
|
$
|
63.9
|
|
|
Refer to
Note 20 - Subsequent Events
for information regarding the acquisition of Lovejoy, Inc. ("Lovejoy").
Note 4 - Inventories
The components of inventories were as follows:
|
|
|
|
|
|
|
|
|
June 30,
2016
|
December 31,
2015
|
Manufacturing supplies
|
$
|
29.6
|
|
$
|
24.7
|
|
Raw materials
|
55.6
|
|
58.8
|
|
Work in process
|
186.3
|
|
181.9
|
|
Finished products
|
306.9
|
|
296.2
|
|
Subtotal
|
578.4
|
|
561.6
|
|
Allowance for obsolete and surplus inventory
|
(23.0
|
)
|
(18.4
|
)
|
Total Inventories, net
|
$
|
555.4
|
|
$
|
543.2
|
|
Inventories are valued at the lower of cost or market, with approximately
54%
valued by the first-in, first-out ("FIFO") method and the remaining
46%
valued by the last-in, first-out ("LIFO") method. The majority of the Company's domestic inventories are valued by the LIFO method and all of the Company's international (outside the United States) inventories are valued by the FIFO method.
An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation.
The LIFO reserves at
June 30, 2016
, and
December 31, 2015
, were
$178.7 million
and
$188.1 million
, respectively. The Company recognized a decrease in its LIFO reserve of
$9.4 million
during the first
six
months of
2016
, compared with an increase in its LIFO reserve of
$0.3 million
during the first
six
months of
2015
.
Note 5 - Property, Plant and Equipment
The components of property, plant and equipment were as follows:
|
|
|
|
|
|
|
|
|
June 30,
2016
|
December 31,
2015
|
Land and buildings
|
$
|
426.1
|
|
$
|
430.3
|
|
Machinery and equipment
|
1,766.1
|
|
1,741.4
|
|
Subtotal
|
2,192.2
|
|
2,171.7
|
|
Accumulated depreciation
|
(1,419.7
|
)
|
(1,393.9
|
)
|
Property, plant and equipment, net
|
$
|
772.5
|
|
$
|
777.8
|
|
Total depreciation expense for the
six
months ended
June 30, 2016
and
2015
was
$46.9 million
and
$47.4 million
, respectively.
Note 6 - Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the
six
months ended
June 30, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Total
|
Beginning balance
|
$
|
97.0
|
|
$
|
230.3
|
|
$
|
327.3
|
|
Acquisitions
|
0.1
|
|
0.6
|
|
0.7
|
|
Foreign currency translation adjustments
|
(0.2
|
)
|
0.9
|
|
0.7
|
|
Ending balance
|
$
|
96.9
|
|
$
|
231.8
|
|
$
|
328.7
|
|
In June 2016, the Company paid a net purchase price adjustment of
$0.7 million
for Timken Belts, resulting in an adjustment to goodwill.
The following table displays intangible assets as of
June 30, 2016
, and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
As of December 31, 2015
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Intangible assets
subject to amortization:
|
|
|
|
|
|
|
Customer relationships
|
$
|
198.4
|
|
$
|
76.9
|
|
$
|
121.5
|
|
$
|
198.9
|
|
$
|
70.0
|
|
$
|
128.9
|
|
Know-how
|
31.8
|
|
7.5
|
|
24.3
|
|
31.9
|
|
6.7
|
|
25.2
|
|
Industrial license
agreements
|
0.1
|
|
0.1
|
|
—
|
|
0.1
|
|
0.1
|
|
—
|
|
Land-use rights
|
8.1
|
|
4.7
|
|
3.4
|
|
8.3
|
|
4.7
|
|
3.6
|
|
Patents
|
2.1
|
|
2.1
|
|
—
|
|
2.1
|
|
2.1
|
|
—
|
|
Technology use
|
53.7
|
|
15.5
|
|
38.2
|
|
53.6
|
|
14.0
|
|
39.6
|
|
Trademarks
|
6.3
|
|
3.5
|
|
2.8
|
|
6.5
|
|
3.3
|
|
3.2
|
|
Non-compete
agreements
|
0.7
|
|
0.6
|
|
0.1
|
|
2.7
|
|
2.5
|
|
0.2
|
|
Software
|
248.9
|
|
205.7
|
|
43.2
|
|
243.8
|
|
197.6
|
|
46.2
|
|
|
$
|
550.1
|
|
$
|
316.6
|
|
$
|
233.5
|
|
$
|
547.9
|
|
$
|
301.0
|
|
$
|
246.9
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
Tradenames
|
$
|
15.8
|
|
|
|
$
|
15.8
|
|
$
|
15.7
|
|
|
|
$
|
15.7
|
|
FAA air agency
certificates
|
8.7
|
|
|
|
8.7
|
|
8.7
|
|
|
|
8.7
|
|
|
$
|
24.5
|
|
|
|
$
|
24.5
|
|
$
|
24.4
|
|
|
|
$
|
24.4
|
|
Total intangible assets
|
$
|
574.6
|
|
$
|
316.6
|
|
$
|
258.0
|
|
$
|
572.3
|
|
$
|
301.0
|
|
$
|
271.3
|
|
Amortization expense for intangible assets was
$18.1 million
and
$18.2 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. Amortization expense for intangible assets is estimated to be
$35.8 million
in
2016
;
$31.5 million
in
2017
;
$26.9 million
in
2018
;
$22.7 million
in
2019
; and
$18.6 million
in
2020
.
Note 7 - Financing Arrangements
Short-term debt at
June 30, 2016
, and
December 31, 2015
, was as follows:
|
|
|
|
|
|
|
|
|
June 30,
2016
|
December 31,
2015
|
Variable-rate Accounts Receivable Facility with interest rate of 1.05% at
December 31, 2015
|
$
|
—
|
|
$
|
49.0
|
|
Borrowings under variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.29% to 0.50% at June 30, 2016 and 0.31% to 0.44% at December 31, 2015, respectively.
|
13.4
|
|
13.0
|
|
Short-term debt
|
$
|
13.4
|
|
$
|
62.0
|
|
The lines of credit for certain of the Company’s foreign subsidiaries provide for short-term borrowings up to
$221.4 million
. Most of these lines of credit are uncommitted. At
June 30, 2016
, the Company’s foreign subsidiaries had borrowings outstanding of
$13.4 million
and bank guarantees of
$1.4 million
, which reduced the availability under these facilities to
$206.6 million
.
Long-term debt at
June 30, 2016
, and
December 31, 2015
, was as follows:
|
|
|
|
|
|
|
|
|
June 30,
2016
|
December 31,
2015
|
Fixed-rate Medium-Term Notes, Series A, mature at various dates through
May 2028, with interest rates ranging from 6.74% to 7.76%
|
$
|
174.5
|
|
$
|
174.4
|
|
Fixed-rate Senior Unsecured Notes, maturing on September 1, 2024, with an
interest rate of 3.875%
|
345.3
|
|
344.8
|
|
Variable-rate Senior Credit Facility with an interest rate of 1.57% at June 30, 2016 and 1.45% at December 31, 2015, respectively.
|
38.4
|
|
75.2
|
|
Variable-rate Accounts Receivable Facility with interest rate of 1.29% at June 30, 2016
|
61.0
|
|
—
|
|
Other
|
—
|
|
0.1
|
|
|
$
|
619.2
|
|
$
|
594.5
|
|
Less current maturities
|
15.0
|
|
15.1
|
|
Long-term debt
|
$
|
604.2
|
|
$
|
579.4
|
|
The Company has a
$500 million
Amended and Restated Credit Agreement ("Senior Credit Facility"), which matures on
June 19, 2020
. At
June 30, 2016
, the Company had
$38.4 million
of outstanding borrowings under the Senior Credit Facility, which reduced the availability under this facility to
$461.6 million
. Under the Senior Credit Facility, the Company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At
June 30, 2016
, the Company was in full compliance with both of these covenants under the Senior Credit Facility.
The Company has a
$100 million
Amended and Restated Asset Securitization Agreement ("Accounts Receivable Facility") that matures on
November 30, 2018
. Under the terms of the Accounts Receivable Facility, the Company sells, on an ongoing basis, certain domestic trade receivables to Timken Receivables Corporation, a wholly-owned consolidated subsidiary, which in turn uses the trade receivables to secure borrowings, which are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the Accounts Receivable Facility are limited by certain borrowing base limitations. These limitations reduced the availability of the Accounts Receivable Facility to
$74.4 million
at
June 30, 2016
. As of
June 30, 2016
, there were outstanding borrowings of
$61.0 million
under the Accounts Receivable Facility, which reduced the availability under this facility to
$13.4 million
. The cost of this facility, which is the prevailing commercial paper rate plus program fees, is considered a financing cost and is included in interest expense in the Consolidated Statements of Income. The outstanding balance under the Accounts Receivable Facility was classified as long-term debt as of
June 30, 2016
, to align with the term of the agreement and reflect the Company's expectations relative to the minimum borrowing base. The outstanding balance under the Accounts Receivable Facility was classified as short-term debt as of
December 31, 2015
.
Note 8 - Contingencies
Product Warranties:
The Company is currently evaluating claims raised by certain customers with respect to the performance of bearings sold into the Wind energy sector. The Company recorded expense related to these claims for the three and six months ended
June 30, 2016
, of
$1.9 million
and
$3.4 million
, respectively, to provide accruals related to these claims. Management believes that the outcome of these claims will not have a material effect on the Company’s consolidated financial position; however, the effect of any such outcome may be material to the results of operations of any particular period in which costs in excess of amounts provided, if any, are recognized.
Note 9 - Equity
The changes in the equity components for the
six
months ended
June 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Timken Company Shareholders
|
|
|
Total
|
Stated
Capital
|
Other
Paid-In
Capital
|
Earnings
Invested
in the
Business
|
Accumulated
Other
Comprehensive
(Loss)
|
Treasury
Stock
|
Non-
controlling
Interest
|
Balance at December 31, 2015
|
$
|
1,344.6
|
|
$
|
53.1
|
|
$
|
905.1
|
|
$
|
1,457.6
|
|
$
|
(287.0
|
)
|
$
|
(804.3
|
)
|
$
|
20.1
|
|
Net income (loss)
|
107.8
|
|
|
|
107.9
|
|
|
|
(0.1
|
)
|
Foreign currency translation adjustment
|
(3.6
|
)
|
|
|
|
(4.9
|
)
|
|
1.3
|
|
Pension and postretirement liability
adjustment (net of the income tax
benefit of $3.4 million)
|
12.0
|
|
|
|
|
12.0
|
|
|
|
Change in fair value of derivative
financial instruments, net of
reclassifications
|
(1.6
|
)
|
|
|
|
(1.6
|
)
|
|
|
Investment in joint venture by
noncontrolling interest party
|
4.8
|
|
|
|
|
|
|
4.8
|
|
Dividends declared to noncontrolling
interest
|
(0.3
|
)
|
|
|
|
|
|
(0.3
|
)
|
Dividends – $0.52 per share
|
(41.1
|
)
|
|
|
(41.1
|
)
|
|
|
|
Excess tax shortfall from stock
compensation
|
(0.8
|
)
|
|
(0.8
|
)
|
|
|
|
|
Stock-based compensation expense
|
6.7
|
|
|
6.7
|
|
|
|
|
|
Stock purchased at fair market value
|
(68.2
|
)
|
|
|
|
|
(68.2
|
)
|
|
Stock option exercise activity
|
0.4
|
|
|
(0.6
|
)
|
|
|
1.0
|
|
|
Restricted shares (issued) surrendered
|
—
|
|
|
(8.6
|
)
|
|
|
8.6
|
|
|
Shares surrendered for taxes
|
(1.5
|
)
|
|
|
|
|
(1.5
|
)
|
|
Balance at June 30, 2016
|
$
|
1,359.2
|
|
$
|
53.1
|
|
$
|
901.8
|
|
$
|
1,524.4
|
|
$
|
(281.5
|
)
|
$
|
(864.4
|
)
|
$
|
25.8
|
|
On March 6, 2014, Timken Lux Holdings II S.A.R.L, a subsidiary of the Company, entered into a joint venture agreement with Holme Service Limited ("joint venture partner"). During 2015, the Company and its joint venture partner established TUBC Limited, a Cyprus entity, for the purpose of producing bearings to serve the rail market sector in Russia. During 2015, the Company and its joint venture partner amended and restated the joint venture agreement and contributed
$6.9 million
and
$6.6 million
, respectively, to TUBC Limited. During the first
six
months of 2016, the Company and its joint venture partner contributed
$5.0 million
and
$4.8 million
, respectively, to TUBC Limited. The Company and its joint venture partner have a
51%
controlling interest and
49%
controlling interest, respectively, in TUBC Limited.
Note 10 - Accumulated Other Comprehensive Income (Loss)
The following tables present details about components of accumulated other comprehensive income (loss) for the
three
and
six
months ended
June 30, 2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at March 31, 2016
|
$
|
(58.5
|
)
|
$
|
(211.4
|
)
|
$
|
(2.0
|
)
|
$
|
(271.9
|
)
|
Other comprehensive (loss) income before
reclassifications and income tax
|
(18.4
|
)
|
4.7
|
|
0.9
|
|
(12.8
|
)
|
Amounts reclassified from accumulated other
comprehensive income, before income tax
|
—
|
|
5.5
|
|
0.2
|
|
5.7
|
|
Income tax (benefit) expense
|
—
|
|
(1.9
|
)
|
(0.4
|
)
|
(2.3
|
)
|
Net current period other comprehensive
(loss) income, net of income taxes
|
(18.4
|
)
|
8.3
|
|
0.7
|
|
(9.4
|
)
|
Noncontrolling interest
|
(0.2
|
)
|
—
|
|
—
|
|
(0.2
|
)
|
Net current period comprehensive (loss) income, net
of income taxes and noncontrolling interest
|
(18.6
|
)
|
8.3
|
|
0.7
|
|
(9.6
|
)
|
Balance at June 30, 2016
|
$
|
(77.1
|
)
|
$
|
(203.1
|
)
|
$
|
(1.3
|
)
|
$
|
(281.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at December 31, 2015
|
$
|
(72.2
|
)
|
$
|
(215.1
|
)
|
$
|
0.3
|
|
$
|
(287.0
|
)
|
Other comprehensive (loss) income before
reclassifications and income tax
|
(3.6
|
)
|
4.8
|
|
(2.0
|
)
|
(0.8
|
)
|
Amounts reclassified from accumulated other
comprehensive income, before income tax
|
—
|
|
10.6
|
|
(0.6
|
)
|
10.0
|
|
Income tax (benefit) expense
|
—
|
|
(3.4
|
)
|
1.0
|
|
(2.4
|
)
|
Net current period other comprehensive
income (loss), net of income taxes
|
(3.6
|
)
|
12.0
|
|
(1.6
|
)
|
6.8
|
|
Noncontrolling interest
|
(1.3
|
)
|
—
|
|
—
|
|
(1.3
|
)
|
Net current period comprehensive income (loss), net
of income taxes and noncontrolling interest
|
(4.9
|
)
|
12.0
|
|
(1.6
|
)
|
5.5
|
|
Balance at June 30, 2016
|
$
|
(77.1
|
)
|
$
|
(203.1
|
)
|
$
|
(1.3
|
)
|
$
|
(281.5
|
)
|
$0.4 million
of the
$10.6 million
before-tax reclassification of pension and postretirement liability adjustments was included in pension settlement charges in the Consolidated Statement of Income for the
six
months ended
June 30, 2016
. The remaining before-tax reclassification of pension and postretirement liability adjustments of
$10.2 million
was due to the amortization of actuarial losses and prior service costs and was included in costs of products sold and selling, general and administrative expenses in the Consolidated Statements of Income. The reclassification of the remaining components of accumulated other comprehensive income (loss) was included in other income (expense), net in the Consolidated Statements of Income.
The following tables present details about components of accumulated other comprehensive income (loss) for the
three
and
six
months ended
June 30, 2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at March 31, 2015
|
$
|
(28.5
|
)
|
$
|
(375.9
|
)
|
$
|
(0.8
|
)
|
$
|
(405.2
|
)
|
Other comprehensive (loss) income before
reclassifications and income tax
|
6.6
|
|
(6.4
|
)
|
(0.6
|
)
|
(0.4
|
)
|
Amounts reclassified from accumulated other
comprehensive income, before income tax
|
—
|
|
12.4
|
|
0.1
|
|
12.5
|
|
Income tax (benefit) expense
|
—
|
|
(3.6
|
)
|
0.2
|
|
(3.4
|
)
|
Net current period other comprehensive
income (loss), net of income taxes
|
6.6
|
|
2.4
|
|
(0.3
|
)
|
8.7
|
|
Non-controlling interest
|
0.5
|
|
—
|
|
—
|
|
0.5
|
|
Net current period comprehensive income (loss), net
of income taxes and noncontrolling interest
|
7.1
|
|
2.4
|
|
(0.3
|
)
|
9.2
|
|
Balance at June 30, 2015
|
$
|
(21.4
|
)
|
$
|
(373.5
|
)
|
$
|
(1.1
|
)
|
$
|
(396.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at December 31, 2014
|
$
|
(0.7
|
)
|
$
|
(481.0
|
)
|
$
|
(0.8
|
)
|
$
|
(482.5
|
)
|
Other comprehensive (loss) income before
reclassifications and income tax
|
(21.2
|
)
|
(66.5
|
)
|
—
|
|
(87.7
|
)
|
Amounts reclassified from accumulated other
comprehensive income, before income tax
|
—
|
|
237.9
|
|
(0.5
|
)
|
237.4
|
|
Income tax (benefit) expense
|
—
|
|
(63.9
|
)
|
0.2
|
|
(63.7
|
)
|
Net current period other comprehensive
income (loss), net of income taxes
|
(21.2
|
)
|
107.5
|
|
(0.3
|
)
|
86.0
|
|
Non-controlling interest
|
0.5
|
|
—
|
|
—
|
|
0.5
|
|
Net current period comprehensive income (loss), net
of income taxes and noncontrolling interest
|
(20.7
|
)
|
107.5
|
|
(0.3
|
)
|
86.5
|
|
Balance at June 30, 2015
|
$
|
(21.4
|
)
|
$
|
(373.5
|
)
|
$
|
(1.1
|
)
|
$
|
(396.0
|
)
|
Other comprehensive income (loss) before reclassifications and income taxes includes the effect of foreign currency.
$217.5 million
of the
$237.9 million
before-tax reclassification of pension and postretirement liability adjustments was included in pension settlement charges in the Consolidated Statement of Income for the
six
months ended
June 30, 2015
. The remaining before-tax reclassification of pension and postretirement liability adjustments of
$20.4 million
was due to the amortization of actuarial losses and prior service costs and was included in costs of products sold and selling, general and administrative expenses in the Consolidated Statements of Income. The reclassification of the remaining components of accumulated other comprehensive income (loss) was included in other income (expense), net in the Consolidated Statements of Income.
Note 11 - Earnings Per Share
The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share and diluted earnings per share for the
three
and six months ended
June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2016
|
2015
|
2016
|
2015
|
Numerator:
|
|
|
|
|
Net income (loss) attributable to The Timken Company
|
$
|
44.9
|
|
$
|
36.7
|
|
$
|
107.9
|
|
$
|
(98.5
|
)
|
Less: undistributed earnings allocated to nonvested stock
|
—
|
|
—
|
|
—
|
|
—
|
|
Net income (loss) available to common shareholders for basic earnings per share and diluted earnings per share
|
$
|
44.9
|
|
$
|
36.7
|
|
$
|
107.9
|
|
$
|
(98.5
|
)
|
Denominator:
|
|
|
|
|
Weighted average number of shares outstanding, basic
|
78,671,509
|
|
85,326,526
|
|
79,225,703
|
|
86,514,517
|
|
Effect of dilutive securities:
|
|
|
|
|
Stock options and awards based on the treasury stock method
|
641,265
|
|
830,249
|
|
654,519
|
|
—
|
|
Weighted average number of shares outstanding, assuming dilution
of stock options and awards
|
79,312,774
|
|
86,156,775
|
|
79,880,222
|
|
86,514,517
|
|
Basic earnings (loss) per share
|
$
|
0.57
|
|
$
|
0.43
|
|
$
|
1.36
|
|
$
|
(1.14
|
)
|
Diluted earnings (loss) per share
|
$
|
0.57
|
|
$
|
0.43
|
|
$
|
1.35
|
|
$
|
(1.14
|
)
|
The exercise prices for certain stock options that the Company has awarded exceed the average market price of the Company’s common shares. Such stock options are antidilutive and were not included in the computation of diluted earnings per share. The antidilutive stock options outstanding during the
three
months ended
June 30, 2016
and
2015
were
3,440,775
and
1,618,201
, respectively. During the
six
months ended
June 30, 2016
, the antidilutive stock options outstanding were
3,266,844
. During the six months ended
June 30, 2015
, the Company incurred a net loss and therefore treated all stock options and restricted stock units as antidilutive.
Note 12 - Segment Information
The primary measurement used by management to measure the financial performance of each segment is EBIT (earnings before interest and taxes).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2016
|
2015
|
2016
|
2015
|
Net sales:
|
|
|
|
|
Mobile Industries
|
$
|
367.8
|
|
$
|
388.6
|
|
$
|
751.0
|
|
$
|
781.6
|
|
Process Industries
|
305.8
|
|
339.4
|
|
606.6
|
|
668.9
|
|
|
$
|
673.6
|
|
$
|
728.0
|
|
$
|
1,357.6
|
|
$
|
1,450.5
|
|
|
|
|
|
|
Segment EBIT:
|
|
|
|
|
Mobile Industries
|
$
|
35.3
|
|
$
|
36.0
|
|
$
|
65.5
|
|
$
|
71.4
|
|
Process Industries
|
46.7
|
|
56.7
|
|
79.3
|
|
101.9
|
|
Total EBIT, for reportable segments
|
$
|
82.0
|
|
$
|
92.7
|
|
$
|
144.8
|
|
$
|
173.3
|
|
Unallocated corporate expenses
|
(14.5
|
)
|
(14.0
|
)
|
(25.2
|
)
|
(28.2
|
)
|
Unallocated pension settlement charges
|
(0.4
|
)
|
(4.4
|
)
|
(1.6
|
)
|
(219.6
|
)
|
Continued Dumping & Subsidy Offset Act income, net of
expenses
|
6.1
|
|
—
|
|
53.8
|
|
—
|
|
Interest expense
|
(8.7
|
)
|
(8.4
|
)
|
(17.1
|
)
|
(16.4
|
)
|
Interest income
|
0.4
|
|
0.7
|
|
0.7
|
|
1.4
|
|
Income (loss) before income taxes
|
$
|
64.9
|
|
$
|
66.6
|
|
$
|
155.4
|
|
$
|
(89.5
|
)
|
Note 13 - Impairment and Restructuring Charges
Impairment and restructuring charges by segment are comprised of the following:
For the
three
months ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process Industries
|
Total
|
Severance and related benefit costs
|
$
|
0.7
|
|
$
|
0.9
|
|
$
|
1.6
|
|
Exit costs
|
1.1
|
|
0.2
|
|
1.3
|
|
Total
|
$
|
1.8
|
|
$
|
1.1
|
|
$
|
2.9
|
|
For the
three
months ended
June 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process Industries
|
Total
|
Impairment charges
|
$
|
—
|
|
$
|
0.6
|
|
$
|
0.6
|
|
Severance and related benefit costs
|
0.6
|
|
—
|
|
0.6
|
|
Exit costs
|
0.2
|
|
—
|
|
0.2
|
|
Total
|
$
|
0.8
|
|
$
|
0.6
|
|
$
|
1.4
|
|
For the
six
months ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process Industries
|
Total
|
Impairment charges
|
$
|
2.6
|
|
$
|
—
|
|
$
|
2.6
|
|
Severance and related benefit costs
|
4.8
|
|
4.5
|
|
9.3
|
|
Exit costs
|
1.3
|
|
0.2
|
|
1.5
|
|
Total
|
$
|
8.7
|
|
$
|
4.7
|
|
$
|
13.4
|
|
For the
six
months ended
June 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process Industries
|
Total
|
Impairment charges
|
$
|
0.1
|
|
$
|
3.2
|
|
$
|
3.3
|
|
Severance and related benefit costs
|
0.7
|
|
—
|
|
0.7
|
|
Exit costs
|
0.6
|
|
3.0
|
|
3.6
|
|
Total
|
$
|
1.4
|
|
$
|
6.2
|
|
$
|
7.6
|
|
The following discussion explains the impairment and restructuring charges recorded for the periods presented; however, it is not intended to reflect a comprehensive discussion of all amounts in the tables above.
Mobile Industries
On March 17, 2016, the Company announced the closure of its bearing plant in Altavista, Virginia ("Altavista"). The plant is expected to close in approximately one year from the announcement date, with production transferring to the Company's bearing plant near Lincolnton, North Carolina. During the first
six
months of
2016
, the Company recorded impairment charges of
$2.4 million
and severance and related benefit costs of
$1.5 million
related to this closure.
On September 8, 2014, the Company announced the closure of its bearing facility in Wolverhampton, United Kingdom, rationalizing the capacity into existing facilities. This facility closed during the second quarter of 2016 and the Company recorded exit costs of
$0.7 million
related to this closure.
In addition, the Company incurred
$0.7 million
of severance and related benefit costs related to the rationalization of one of its facilities in Europe during the first
six
months of
2015
.
Process Industries
During the first
six
months of
2015
, the Company recorded impairment charges of
$3.0 million
related to the Company's repair business in Niles, Ohio. See
Note 17 - Fair Value
for additional information on the impairment charges for the repair business. In addition, the Company recorded
$3.0 million
of exit costs related to the Company's termination of its relationship with one of its third-party sales representatives in Colombia.
Workforce Reductions:
During the second quarter and first
six
months of
2016
, the Company recognized
$1.2 million
and
$7.5 million
, respectively, of severance and related benefit costs to eliminate approximately
100
positions, in the aggregate. Of the
$1.2 million
charge in the aggregate for the second quarter of 2016,
$0.3 million
related to the Mobile Industries segment and
$0.9 million
related to the Process Industries segment. Of the
$7.5 million
charge for the first
six
months of
2016
,
$3.0 million
related to the Mobile Industries segment and
$4.5 million
related to the Process Industries segment.
The following is a rollforward of the consolidated restructuring accrual for the
six
months ended
June 30, 2016
, and the twelve months ended
December 31, 2015
:
|
|
|
|
|
|
|
|
|
June 30,
2016
|
December 31,
2015
|
Beginning balance, January 1
|
$
|
11.3
|
|
$
|
9.5
|
|
Expense
|
10.8
|
|
11.4
|
|
Payments
|
(13.6
|
)
|
(9.6
|
)
|
Ending balance
|
$
|
8.5
|
|
$
|
11.3
|
|
The restructuring accruals at
June 30, 2016
, and
December 31, 2015
, were included in other current liabilities on the Consolidated Balance Sheets.
Note 14 - Retirement Benefit Plans
The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans. The amounts for the
three and six
months ended
June 30, 2016
, are based on calculations prepared by the Company's actuaries during the
second
quarter of
2016
and represent the Company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ending
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
Total
|
|
Three Months Ended
June 30,
|
Three Months Ended
June 30,
|
Three Months Ended
June 30,
|
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
3.3
|
|
$
|
3.8
|
|
$
|
0.3
|
|
$
|
0.7
|
|
$
|
3.6
|
|
$
|
4.5
|
|
Interest cost
|
6.6
|
|
11.3
|
|
2.8
|
|
3.1
|
|
9.4
|
|
14.4
|
|
Expected return on plan assets
|
(7.4
|
)
|
(15.6
|
)
|
(2.7
|
)
|
(4.1
|
)
|
(10.1
|
)
|
(19.7
|
)
|
Amortization of prior service cost
|
0.4
|
|
0.5
|
|
—
|
|
—
|
|
0.4
|
|
0.5
|
|
Amortization of net actuarial loss
|
3.6
|
|
6.7
|
|
0.8
|
|
1.3
|
|
4.4
|
|
8.0
|
|
Pension settlements and curtailments
|
—
|
|
2.8
|
|
0.4
|
|
1.1
|
|
0.4
|
|
3.9
|
|
Net periodic benefit cost
|
$
|
6.5
|
|
$
|
9.5
|
|
$
|
1.6
|
|
$
|
2.1
|
|
$
|
8.1
|
|
$
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
Total
|
|
Six Months Ended
June 30,
|
Six Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
6.6
|
|
$
|
7.6
|
|
$
|
0.7
|
|
$
|
1.4
|
|
$
|
7.3
|
|
$
|
9.0
|
|
Interest cost
|
13.3
|
|
24.2
|
|
5.6
|
|
6.2
|
|
18.9
|
|
30.4
|
|
Expected return on plan assets
|
(14.9
|
)
|
(33.4
|
)
|
(5.4
|
)
|
(8.4
|
)
|
(20.3
|
)
|
(41.8
|
)
|
Amortization of prior service cost
|
0.8
|
|
1.4
|
|
—
|
|
—
|
|
0.8
|
|
1.4
|
|
Amortization of net actuarial loss
|
7.3
|
|
16.3
|
|
1.6
|
|
2.7
|
|
8.9
|
|
19.0
|
|
Pension settlements and curtailments
|
—
|
|
216.4
|
|
0.4
|
|
1.1
|
|
0.4
|
|
217.5
|
|
Net periodic benefit cost
|
$
|
13.1
|
|
$
|
232.5
|
|
$
|
2.9
|
|
$
|
3.0
|
|
$
|
16.0
|
|
$
|
235.5
|
|
On November 30, 2015, The Timken Company Pension Plan purchased a group annuity contract from Prudential Insurance Company of America ("Prudential") to pay and administer future pension benefits for approximately
3,400
United Sates ("U.S.") Timken retirees. Pension settlement charges of
$1.6 million
incurred for the
six
months ended
June 30, 2016
, were primarily due to professional fees associated with the implementation of this group annuity contract.
On
January 23, 2015
, the Timken-Latrobe-MPB-Torrington Retirement Plan purchased a group annuity contract from Prudential to pay and administer future pension benefits for approximately
5,000
U.S. Timken retirees. The Company transferred approximately
$575 million
of the Company's pension obligations and
$635 million
of pension assets to Prudential in this transaction. In addition to the purchase of the group annuity contract, the Company made lump-sum distributions to new retirees of
$19 million
in 2015. The Company also entered into an agreement pursuant to which one of the Company's Canadian defined benefit pension plans purchased a group annuity contract from Canada Life. The group annuity contract requires Canada Life to pay and administer future pension benefits for approximately 40 Canadian retirees. As a result of the group annuity contract, lump-sum distributions, and pension settlement and curtailment charges related to the Company's Canadian pension plans, the Company incurred total pension settlement charges of
$219.6 million
, including professional fees of
$2.1 million
, for the
six
months ended
June 30, 2015
.
Note 15 - Other Postretirement Benefit Plans
The following table sets forth the net periodic benefit cost for the Company’s other postretirement benefit plans. The amounts for the
three and six
months ended
June 30, 2016
, are based on calculations prepared by the Company's actuaries during the
second
quarter of
2016
and represent the Company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ending
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2016
|
2015
|
2016
|
2015
|
Components of net periodic benefit cost:
|
|
|
|
|
Service cost
|
$
|
0.1
|
|
$
|
0.1
|
|
$
|
0.2
|
|
$
|
0.2
|
|
Interest cost
|
2.8
|
|
2.7
|
|
5.5
|
|
5.4
|
|
Expected return on plan assets
|
(1.7
|
)
|
(1.7
|
)
|
(3.3
|
)
|
(3.5
|
)
|
Amortization of prior service cost
|
0.3
|
|
0.2
|
|
0.5
|
|
0.4
|
|
Net periodic benefit cost
|
$
|
1.5
|
|
$
|
1.3
|
|
$
|
2.9
|
|
$
|
2.5
|
|
Note 16 - Income Taxes
The Company's provision for income taxes in interim periods is computed by applying the estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items, including interest on prior year tax liabilities, are recorded during the period(s) in which they occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2016
|
2015
|
2016
|
2015
|
Provision for income taxes
|
$
|
20.0
|
|
$
|
28.9
|
|
$
|
47.6
|
|
$
|
7.6
|
|
Effective tax rate
|
30.8
|
%
|
43.4
|
%
|
30.6
|
%
|
(8.5
|
)%
|
The effective tax rate in the
second
quarter of
2016
was calculated as the difference between the income taxes computed for the six months, as described below, and the year-to-date income taxes recorded as of March 31, 2016. This computation resulted in an effective tax rate of
30.8%
for the second quarter of 2016, including discrete items.
The effective tax rate in the first six months of 2016 was computed based on an expected annual effective tax rate of
30.2%
, excluding discrete items. Discrete tax items are recorded in the period in which they occur. The effective tax rate of
30.6%
in the first six months of 2016 was lower than the U.S. federal statutory rate of
35%
primarily due to tax benefits related to foreign tax credits, earnings in certain foreign jurisdictions where the effective tax rate is less than
35%
and other U.S. tax benefits, such as the Research and Experimentation credit and the U.S. manufacturing deduction. These factors were partially offset by U.S. taxation of foreign earnings, losses at certain foreign subsidiaries where no tax benefit could be recorded, U.S. state and local taxes and the impact of certain discrete tax items during the period.
The effective tax rate in the second quarter of 2015 was calculated as the difference between the income taxes computed for the six months, as described below, and the year-to-date income taxes recorded as of March 31, 2015. This computation resulted in an effective tax rate of
43.4%
for the second quarter of 2015, including discrete items.
The effective tax rate in the first six months of 2015 was computed based on an expected annual effective tax rate of negative
4.9%
, excluding discrete items. At that time, the Company expected tax benefits on expected pretax income with an estimated effective tax rate of negative
8.5%
, including discrete items. This rate reflected an expected full year loss in the U.S. primarily driven by pension settlement charges, and earnings in foreign jurisdictions, which was expected to produce a net tax benefit on pretax income. The expected effective tax rate of negative
8.5%
was lower than the U.S. federal statutory rate of
35%
primarily due to lower U.S. earnings due to pension settlement charges, earnings in certain foreign jurisdictions where the effective tax rate is less than
35%
, tax benefits related to foreign tax credits, U.S. state and local taxes, non-deductible U.S. expenses and the U.S. manufacturing deduction. These factors were partially offset by U.S. taxation of foreign earnings, losses at certain foreign subsidiaries where no tax benefit could be recorded and certain discrete tax expenses.
Note 17 - Fair Value
Fair value is defined as the price that would be expected to be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB provides accounting rules that classify the inputs used to measure fair value into the following hierarchy:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 – Unobservable inputs for the asset or liability.
The following tables present the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of
June 30, 2016
, and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
120.8
|
|
$
|
120.8
|
|
$
|
—
|
|
$
|
—
|
|
Cash and cash equivalents measured at net asset value
|
35.1
|
|
|
|
|
|
|
|
Restricted cash
|
0.2
|
|
0.2
|
|
—
|
|
—
|
|
Short-term investments
|
8.7
|
|
—
|
|
8.7
|
|
—
|
|
Short-term investments measured at net asset value
|
0.5
|
|
|
|
|
|
|
|
Foreign currency hedges
|
4.3
|
|
—
|
|
4.3
|
|
—
|
|
Total Assets
|
$
|
169.6
|
|
$
|
121.0
|
|
$
|
13.0
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
3.4
|
|
$
|
—
|
|
$
|
3.4
|
|
$
|
—
|
|
Total Liabilities
|
$
|
3.4
|
|
$
|
—
|
|
$
|
3.4
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
110.2
|
|
$
|
110.2
|
|
$
|
—
|
|
$
|
—
|
|
Cash and cash equivalents measured net asset value
|
19.4
|
|
|
|
|
|
|
|
Restricted cash
|
0.2
|
|
0.2
|
|
—
|
|
—
|
|
Short-term investments
|
8.9
|
|
—
|
|
8.9
|
|
—
|
|
Short-term investments measured at net asset value
|
0.8
|
|
|
|
|
|
|
|
Foreign currency hedges
|
8.2
|
|
—
|
|
8.2
|
|
—
|
|
Total Assets
|
$
|
147.7
|
|
$
|
110.4
|
|
$
|
17.1
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
0.4
|
|
$
|
—
|
|
$
|
0.4
|
|
$
|
—
|
|
Total Liabilities
|
$
|
0.4
|
|
$
|
—
|
|
$
|
0.4
|
|
$
|
—
|
|
Cash and cash equivalents are highly liquid investments with maturities of
three months or less
when purchased and are generally valued at the redemption value. Short-term investments are investments with maturities between
four months and one year
and are generally valued at amortized cost. A portion of the cash and cash equivalents and short-term investment are valued based on net asset value. The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts.
The Company does not believe it has significant concentrations of risk associated with the counterparties to its financial instruments.
The following table presents those assets measured at fair value on a nonrecurring basis for the
six
months ended
June 30, 2016
, using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
Fair Value Adjustment
|
Fair Value
|
Long-lived assets held for sale:
|
|
|
|
Land
|
$
|
0.2
|
|
$
|
(0.2
|
)
|
$
|
—
|
|
Total long-lived assets held for sale
|
$
|
0.2
|
|
$
|
(0.2
|
)
|
$
|
—
|
|
|
|
|
|
Long-lived assets held and used:
|
|
|
|
Altavista bearing plant
|
$
|
5.7
|
|
$
|
(2.4
|
)
|
$
|
3.3
|
|
Total long-lived assets held and used
|
$
|
5.7
|
|
$
|
(2.4
|
)
|
$
|
3.3
|
|
Assets held for sale of
$0.2 million
were written down to their fair value of
zero
during the first quarter of 2016, resulting in an impairment charge. The fair value of these assets was based on the price that the Company expects to receive when it disposes of these assets.
On March 17, 2016, the Company announced the closure of its Altavista bearing plant. The plant is expected to close in approximately one year from the announcement date, with production transferring to the Company's bearing plant near Lincolnton, North Carolina. The Altavista bearing plant, with a carrying value of
$5.7 million
, was written down to its fair value of
$3.3 million
during the first quarter of 2016, resulting in an impairment of
$2.4 million
. The fair value for the plant was based on the price that the Company expects to receive from the sale of this facility.
The following table presents those assets measured at fair value on a nonrecurring basis for the
six
months ended
June 30, 2015
, using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
Fair Value Adjustment
|
Fair Value
|
Long-lived assets held for sale:
|
|
|
|
Repair business
|
$
|
5.8
|
|
$
|
(3.0
|
)
|
$
|
2.8
|
|
Total long-lived assets held for sale
|
$
|
5.8
|
|
$
|
(3.0
|
)
|
$
|
2.8
|
|
|
|
|
|
Long-lived assets held and used:
|
|
|
|
Fixed assets
|
$
|
0.8
|
|
$
|
(0.3
|
)
|
$
|
0.5
|
|
Total long-lived assets held and used
|
$
|
0.8
|
|
$
|
(0.3
|
)
|
$
|
0.5
|
|
Assets held for sale of
$5.8 million
associated with the Company's repair business in Niles, Ohio were written down to their fair value of
$2.8 million
during the first
six
months of
2015
, resulting in an impairment charge of
$3.0 million
. The fair value of these assets was based on the price that the Company expected to receive from the sale of these assets. This business was subsequently sold during the second quarter of 2015 for an immaterial loss.
Various items of property, plant and equipment, with a carrying value of
$0.8 million
, were written down to their fair value of
$0.5 million
during the first
six
months of
2015
, resulting in an impairment charge of
$0.3 million
. The fair value for these assets was based on the price that would be received in a current transaction to sell the assets on a standalone basis, considering the age and physical attributes of these items, as these assets had been idled.
Financial Instruments:
The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash, short-term investments, accounts receivable net, accounts payable, trade, short-term borrowings and long-term debt. Due to their short-term nature, the carrying value of cash and cash equivalents, restricted cash, short-term investments, accounts receivable net, accounts payable, trade and short-term borrowings are a reasonable estimate of their fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was
$558.1 million
and
$521.5 million
at
June 30, 2016
, and
December 31, 2015
, respectively. The carrying value of this debt was
$519.8 million
and
$519.2 million
at
June 30, 2016
, and
December 31, 2015
, respectively. The fair value of long-term fixed-debt was measured using Level 2 inputs.
Note 18 - Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange rate risk, commodity price risk and interest rate risk. Forward exchange contracts on various foreign currencies are entered into in order to manage the foreign currency exchange rate risk associated with certain of the Company’s commitments denominated in foreign currencies. Forward contracts on various commodities are entered into to manage the price risk associated with forecasted purchases of natural gas used in the Company’s manufacturing process. Interest rate swaps are used to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings.
The Company designates certain foreign currency forward contracts as cash flow hedges of forecasted revenues and certain interest rate hedges as fair value hedges of fixed-rate borrowings.
The Company does not purchase nor hold any derivative financial instruments for trading purposes. As of
June 30, 2016
, and
December 31, 2015
, the Company had
$269.2 million
and
$235.7 million
, respectively, of outstanding foreign currency forward contracts at notional value. Refer to
Note 17 - Fair Value
for the fair value disclosure of derivative financial instruments.
Cash Flow Hedging Strategy:
For certain derivative instruments that are designated as and qualify as cash flow hedges (
i.e
., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (
i.e
., the ineffective portion), or hedge components excluded from the assessment of effectiveness, are recognized in the Consolidated Statement of Income during the current period.
To protect against a reduction in the value of forecasted foreign currency cash flows resulting from export sales over the next year, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its forecasted intra-group revenue or expense denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against foreign currencies, the decline in the present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.
The maximum length of time over which the Company hedges its exposure to the variability in future cash flows for forecasted transactions is generally 18 months or less.
Fair Value Hedging Strategy:
For derivative instruments that are designated and qualify as fair value hedges (
i.e
., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the same line item associated with the hedged item (
i.e
., in “interest expense” when the hedged item is fixed-rate debt).
Purpose for Derivative Instruments not Designated as Hedging Instruments:
For derivative instruments that are not designated as hedging instruments, the instruments are typically forward contracts. In general, the practice is to reduce volatility by selectively hedging transaction exposures including intercompany loans, accounts payable and accounts receivable. Intercompany loans between entities with different functional currencies are typically hedged with a forward contract at the inception of the loan with a maturity date at the maturity of the loan. The revaluation of these contracts, as well as the underlying balance sheet items, is recorded directly to the income statement so the adjustment generally offsets the revaluation of the underlying balance sheet items to protect cash payments and reduce income statement volatility.
The following table presents the fair value and location of all assets and liabilities associated with the Company's hedging instruments within the Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
Liability Derivatives
|
Derivatives designated as hedging instruments
|
Balance Sheet Location
|
Fair Value at 6/30/16
|
Fair Value at 12/31/15
|
Fair Value at 6/30/16
|
Fair Value at 12/31/15
|
Foreign currency forward contracts
|
Other non-current assets/liabilities
|
$
|
0.5
|
|
$
|
2.2
|
|
$
|
1.2
|
|
$
|
0.2
|
|
Total derivatives designated as hedging instruments
|
0.5
|
|
2.2
|
|
1.2
|
|
0.2
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
Foreign currency forward contracts
|
Other non-current assets/liabilities
|
3.8
|
|
6.0
|
|
2.2
|
|
0.2
|
|
|
|
|
|
|
|
Total Derivatives
|
|
$
|
4.3
|
|
$
|
8.2
|
|
$
|
3.4
|
|
$
|
0.4
|
|
The following tables present the impact of derivative instruments and their location within the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) recognized in
Other Comprehensive Income ("OCI") on derivative instruments
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
Derivatives in cash flow hedging relationships
|
2016
|
2015
|
2016
|
2015
|
Foreign currency forward contracts
|
$
|
0.9
|
|
$
|
(0.6
|
)
|
$
|
(2.0
|
)
|
$
|
—
|
|
Total
|
$
|
0.9
|
|
$
|
(0.6
|
)
|
$
|
(2.0
|
)
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from Accumulated Other Comprehensive Income ("AOCI") into income (effective portion)
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
Derivatives in cash flow hedging relationships
|
2016
|
2015
|
2016
|
2015
|
Foreign currency forward contracts
|
$
|
(0.1
|
)
|
$
|
—
|
|
$
|
0.8
|
|
$
|
0.6
|
|
Interest rate swaps
|
(0.1
|
)
|
(0.1
|
)
|
(0.2
|
)
|
(0.1
|
)
|
Total
|
$
|
(0.2
|
)
|
$
|
(0.1
|
)
|
$
|
0.6
|
|
$
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) recognized in
income on derivative instruments
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
Derivatives not designated as hedging instruments
|
Location of gain or (loss) recognized in income on derivative
|
2016
|
2015
|
2016
|
2015
|
Foreign currency forward contracts
|
Other (expense) income, net
|
$
|
0.3
|
|
$
|
(6.7
|
)
|
$
|
(4.3
|
)
|
$
|
6.6
|
|
Total
|
|
$
|
0.3
|
|
$
|
(6.7
|
)
|
$
|
(4.3
|
)
|
$
|
6.6
|
|
Note 19 - Continued Dumping and Subsidy Offset Act (CDSOA)
The U.S. Continued Dumping and Subsidy Offset Act ("CDSOA") provides for distribution of monies collected by U.S. Customs and Border Protection ("U.S. Customs") on entries of merchandise subject to antidumping orders that entered the U.S. prior to October 1, 2007, to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. During the second quarter and first
six
months of 2016, the Company recognized pretax CDSOA income, net of related expenses, of
$6.1 million
and
$53.8 million
, respectively.
In September 2002, the World Trade Organization ruled that CDSOA payments are not consistent with international trade rules. In February 2006, U.S. legislation was enacted that ended CDSOA distributions for imports covered by antidumping duty orders entering the United States after September 30, 2007. Instead, any such antidumping duties collected would remain with the U.S. Treasury.
CDSOA has been the subject of significant litigation since 2002, and U.S. Customs has withheld CDSOA distributions in recent years while litigation was ongoing. In recent months, much of the CDSOA litigation that involves antidumping orders where Timken is a qualifying domestic producer has concluded.
As a result, the Company was notified by letters dated March 25, 2016 and June 24, 2016 that funds were being distributed to the Company. On April 1, 2016, and July 1, 2016, the Company received CDSOA distributions of
$48.1 million
and
$6.3 million
, respectively, in the aggregate, representing funds that would have been distributed to Timken at the end of calendar years 2011 through 2015.
At June 30, 2016, the Company recorded a sundry receivable for CDSOA distributions received in July. This sundry receivable was included in other current assets on the Consolidated Balance Sheet.
While some of the challenges to CDSOA have been resolved, others are still in litigation. Since there continue to be legal challenges to CDSOA, U.S. Customs has advised all affected domestic producers that it is possible that CDSOA distributions could be subject to clawback. Management of the Company believes that the likelihood of any clawback is remote.
Note 20 - Subsequent Events
On July 8, 2016, the Company acquired Lovejoy, a manufacturer of premium industrial couplings and universal joints, for
$63.5 million
in cash and assumed debt of
$2.5 million
. Based in Downers Grove, Illinois, with additional locations in the U.S., Canada and Germany, Lovejoy had sales of approximately
$56 million
for the twelve months ended March 31, 2016.