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" or "Timken") 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, 2019.
Note 2 - Significant Accounting Policies
The Company's significant accounting policies are detailed in "Note 1 - Significant Accounting Policies" of the Annual Report on Form 10-K for the year ended December 31, 2019.
Recent Accounting Pronouncements:
New Accounting Guidance Adopted:
In June 2016, the Financial Accounting Standards Board ("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 will replace 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 is 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 Note 12 - Equity for the cumulative effect of initially applying ASU 2016-13.
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 is currently assessing the impact of this standard on its results of operations and financial conditions.
Note 3 - Acquisitions
During 2019, the Company completed two acquisitions. On November 1, 2019, the Company completed the acquisition of BEKA Lubrication ("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 Company ("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 United States and China. These acquisitions will be collectively referred to hereafter as the "2019 Acquisitions."
The following table presents the purchase price allocation at fair value, net of cash acquired, for the 2019 Acquisitions as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Initial Purchase
Price Allocation
|
Adjustments
|
Purchase
Price Allocation
|
Assets:
|
|
|
|
Accounts receivable, net
|
$
|
26.3
|
|
$
|
(0.1
|
)
|
$
|
26.2
|
|
Inventories, net
|
62.9
|
|
0.1
|
|
63.0
|
|
Other current assets
|
4.9
|
|
0.2
|
|
5.1
|
|
Property, plant and equipment, net
|
57.4
|
|
—
|
|
57.4
|
|
Operating lease assets
|
4.7
|
|
—
|
|
4.7
|
|
Goodwill
|
44.2
|
|
6.3
|
|
50.5
|
|
Other intangible assets
|
84.4
|
|
—
|
|
84.4
|
|
Other non-current assets
|
0.7
|
|
—
|
|
0.7
|
|
Total assets acquired
|
$
|
285.5
|
|
$
|
6.5
|
|
$
|
292.0
|
|
Liabilities:
|
|
|
|
Accounts payable, trade
|
$
|
10.8
|
|
$
|
(0.2
|
)
|
$
|
10.6
|
|
Salaries, wages and benefits
|
6.8
|
|
—
|
|
6.8
|
|
Income taxes payable
|
2.1
|
|
—
|
|
2.1
|
|
Other current liabilities
|
6.7
|
|
0.7
|
|
7.4
|
|
Short-term debt
|
0.8
|
|
—
|
|
0.8
|
|
Long-term debt
|
17.2
|
|
—
|
|
17.2
|
|
Accrued pension benefits
|
0.5
|
|
—
|
|
0.5
|
|
Accrued postretirement benefits
|
0.1
|
|
—
|
|
0.1
|
|
Long-term operating lease liabilities
|
4.1
|
|
—
|
|
4.1
|
|
Deferred income taxes
|
5.1
|
|
(0.7
|
)
|
4.4
|
|
Other non-current liabilities
|
1.1
|
|
—
|
|
1.1
|
|
Total liabilities assumed
|
$
|
55.3
|
|
$
|
(0.2
|
)
|
$
|
55.1
|
|
Noncontrolling interest acquired
|
1.8
|
|
—
|
|
1.8
|
|
Net assets acquired
|
$
|
228.4
|
|
$
|
6.7
|
|
$
|
235.1
|
|
In March 2020, the Company accrued $6.6 million for a working capital adjustment to the purchase price for BEKA in accordance with the purchase agreement, which was paid during the second quarter of 2020 in the amount of $6.7 million. This adjustment, as well as other measurement period adjustments recorded in 2020, resulted in a $6.3 million increase to goodwill.
In determining the fair value of the amounts above, the Company utilized various forms of the income, cost and market approaches depending on the asset or liability being valued. The estimation of fair value required significant judgment related to future net cash flows, discount rates, competitive trends, market comparisons and other factors. Inputs were generally determined by taking into account independent appraisals and historical data, supplemented by current and anticipated market conditions.
Note 3 - Acquisitions (continued)
The above purchase price allocation, including the residual amount allocated to goodwill, is based on preliminary information and is subject to change as additional information concerning final asset and liability valuations is obtained. The purchase price allocation for BEKA is preliminary as a result of the continued evaluation of working capital accounts and contingent liabilities, as well as the finalization of the Company's review pertaining to a limited set of valuation calculations and inputs. The primary areas of the BEKA purchase price allocation that have not been finalized relate to the fair value of inventory, net property, plant, and equipment and other intangible assets, and the related impacts on deferred income taxes and goodwill. During the applicable measurement period, 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.
Note 4 - Revenue
The following table presents details deemed most relevant to the users of the financial statements about total revenue for the three and six months ended June 30, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Three Months Ended
|
|
June 30, 2020
|
June 30, 2019
|
|
Mobile
|
Process
|
Total
|
Mobile
|
Process
|
Total
|
United States
|
$
|
186.6
|
|
$
|
173.7
|
|
$
|
360.3
|
|
$
|
258.6
|
|
$
|
226.9
|
|
$
|
485.5
|
|
Americas excluding United States
|
26.8
|
|
29.3
|
|
56.1
|
|
57.2
|
|
40.8
|
|
98.0
|
|
Europe / Middle East / Africa
|
78.8
|
|
112.9
|
|
191.7
|
|
101.2
|
|
129.1
|
|
230.3
|
|
Asia-Pacific
|
50.4
|
|
145.0
|
|
195.4
|
|
76.7
|
|
109.5
|
|
186.2
|
|
Net sales
|
$
|
342.6
|
|
$
|
460.9
|
|
$
|
803.5
|
|
$
|
493.7
|
|
$
|
506.3
|
|
$
|
1,000.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
Six Months Ended
|
|
June 30, 2020
|
June 30, 2019
|
|
Mobile
|
Process
|
Total
|
Mobile
|
Process
|
Total
|
United States
|
$
|
424.8
|
|
$
|
366.3
|
|
$
|
791.1
|
|
$
|
532.3
|
|
$
|
436.6
|
|
$
|
968.9
|
|
Americas excluding United States
|
75.6
|
|
64.3
|
|
139.9
|
|
105.7
|
|
84.4
|
|
190.1
|
|
Europe / Middle East / Africa
|
187.5
|
|
228.5
|
|
416.0
|
|
202.9
|
|
254.1
|
|
457.0
|
|
Asia-Pacific
|
121.4
|
|
258.5
|
|
379.9
|
|
152.8
|
|
210.9
|
|
363.7
|
|
Net sales
|
$
|
809.3
|
|
$
|
917.6
|
|
$
|
1,726.9
|
|
$
|
993.7
|
|
$
|
986.0
|
|
$
|
1,979.7
|
|
When reviewing revenue by sales channel, the Company separates net sales to original equipment manufacturers from sales to distributors and end users. The following table presents the percent of revenue by sales channel for the six months ended June 30, 2020 and 2019, respectively:
|
|
|
|
|
Six Months Ended
|
Six Months Ended
|
Revenue by sales channel
|
June 30, 2020
|
June 30, 2019
|
Original equipment manufacturers
|
59%
|
57%
|
Distribution/end users
|
41%
|
43%
|
In addition to disaggregating revenue by segment and geography and by sales channel as shown above, the Company believes information about the timing of transfer of goods or services, type of customer and distinguishing service revenue from product sales is also relevant. During the six months ended June 30, 2020 and June 30, 2019, approximately 13% and 11%, 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 5% of total net sales represented service revenue during the six months ended June 30, 2020 and June 30, 2019, respectively. Finally, the United States ("U.S.") government or its contractors represented approximately 9% and 8% of total net sales during the six months ended June 30, 2020 and June 30, 2019, respectively.
Note 4 - Revenue (continued)
Remaining Performance Obligations:
Remaining performance obligations represent the transaction price of orders meeting the definition of a contract 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 $244 million at June 30, 2020.
Unbilled Receivables:
The following table contains a rollforward of unbilled receivables for the six months ended June 30, 2020:
|
|
|
|
|
|
June 30, 2020
|
Beginning balance, January 1
|
$
|
129.2
|
|
Additional unbilled revenue recognized
|
218.6
|
|
Less: amounts billed to customers
|
(221.6
|
)
|
Ending balance
|
$
|
126.2
|
|
There were no impairment losses recorded on unbilled receivables for the six months ended June 30, 2020.
Note 5 - Segment Information
The primary measurement used by management to measure the financial performance of each segment is earnings before interest, taxes, depreciation and amortization ("EBITDA").
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net sales:
|
|
|
|
|
|
|
|
Mobile Industries
|
$
|
342.6
|
|
|
$
|
493.7
|
|
|
$
|
809.3
|
|
|
$
|
993.7
|
|
Process Industries
|
460.9
|
|
|
506.3
|
|
|
917.6
|
|
|
986.0
|
|
Net sales
|
$
|
803.5
|
|
|
$
|
1,000.0
|
|
|
$
|
1,726.9
|
|
|
$
|
1,979.7
|
|
Segment EBITDA:
|
|
|
|
|
|
|
|
Mobile Industries
|
$
|
38.8
|
|
|
$
|
78.0
|
|
|
$
|
113.9
|
|
|
$
|
157.3
|
|
Process Industries
|
126.3
|
|
|
125.7
|
|
|
233.8
|
|
|
253.3
|
|
Total EBITDA, for reportable segments
|
$
|
165.1
|
|
|
$
|
203.7
|
|
|
$
|
347.7
|
|
|
$
|
410.6
|
|
Corporate EBITDA
|
(6.5
|
)
|
|
(15.3
|
)
|
|
(17.6
|
)
|
|
(29.4
|
)
|
Corporate pension and other postretirement benefit
related charges (1)
|
(8.8
|
)
|
|
—
|
|
|
(8.8
|
)
|
|
—
|
|
Depreciation and amortization
|
(41.7
|
)
|
|
(41.7
|
)
|
|
(84.0
|
)
|
|
(81.2
|
)
|
Interest expense
|
(18.9
|
)
|
|
(19.3
|
)
|
|
(36.0
|
)
|
|
(37.3
|
)
|
Interest income
|
0.6
|
|
|
1.1
|
|
|
2.1
|
|
|
2.4
|
|
Income before income taxes
|
$
|
89.8
|
|
|
$
|
128.5
|
|
|
$
|
203.4
|
|
|
$
|
265.1
|
|
(1) Corporate pension and other postretirement benefit related charges represent 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.
Note 6 - Income Taxes
The Company's provision for income taxes in interim periods is computed by applying the estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items are recorded during the period(s) in which they occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2020
|
2019
|
|
2020
|
|
2019
|
Provision for income taxes
|
$
|
28.0
|
|
$
|
33.6
|
|
|
$
|
57.6
|
|
|
$
|
74.9
|
|
Effective tax rate
|
31.2
|
%
|
26.1
|
%
|
|
28.3
|
%
|
|
28.3
|
%
|
Income tax expense for the three and six months ended June 30, 2020 was calculated using forecasted multi-jurisdictional annual effective tax rates to determine a blended annual effective tax rate. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the projected mix of earnings in international jurisdictions with relatively higher tax rates and unfavorable U.S. permanent differences.
The effective tax rate of 31.2% for the three months ended June 30, 2020 was higher than the three months ended June 30, 2019 primarily due to higher discrete tax expense in the current year compared to discrete tax benefits in the prior year.
The effective tax rate of 28.3% for the six months ended June 30, 2020 was consistent with the six months ended June 30, 2019. Income taxes decreased due to additional accruals recorded discretely for uncertain tax positions in the prior year related to the U.S. Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform"). This was offset by the projected increase in the mix of the earnings in international jurisdictions with relatively higher tax rates.
During the second quarter of 2020, the European Court of Justice issued a ruling applicable to an unrelated taxpayer that concerns the scope of countries subject to exemption on withholding tax on dividends. The Company assessed the ruling and concluded that no accrual for uncertain tax positions was required for withholding taxes on certain prior year intercompany dividends made in Europe.
Note 7 - 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, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable to The Timken Company
|
$
|
61.9
|
|
|
$
|
92.5
|
|
|
$
|
142.6
|
|
|
$
|
184.4
|
|
Less: undistributed earnings allocated to nonvested
stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income available to common shareholders for basic
and diluted earnings per share
|
$
|
61.9
|
|
|
$
|
92.5
|
|
|
$
|
142.6
|
|
|
$
|
184.4
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding - basic
|
75,078,207
|
|
|
76,085,358
|
|
|
75,298,356
|
|
|
76,024,301
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options and awards - based on the treasury stock method
|
620,082
|
|
|
1,123,074
|
|
|
733,693
|
|
|
1,074,681
|
|
Weighted average number of shares outstanding
assuming dilution of stock options and awards
|
75,698,289
|
|
|
77,208,432
|
|
|
76,032,049
|
|
|
77,098,982
|
|
Basic earnings per share
|
$
|
0.82
|
|
|
$
|
1.22
|
|
|
$
|
1.89
|
|
|
$
|
2.43
|
|
Diluted earnings per share
|
$
|
0.82
|
|
|
$
|
1.20
|
|
|
$
|
1.88
|
|
|
$
|
2.39
|
|
The exercise prices for certain stock options that the Company has awarded exceeded the average market price of the Company’s common shares during each period presented. 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, 2020 and 2019 were 1,338,686 and 1,428,699, respectively. The antidilutive stock options outstanding during the six months ended June 30, 2020 and 2019 were 1,353,254 and 1,309,878, respectively.
Note 8 - Inventories
The components of inventories at June 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Manufacturing supplies
|
$
|
34.5
|
|
|
$
|
34.2
|
|
Raw materials
|
99.5
|
|
|
100.0
|
|
Work in process
|
310.4
|
|
|
308.9
|
|
Finished products
|
385.9
|
|
|
439.0
|
|
Subtotal
|
830.3
|
|
|
882.1
|
|
Allowance for obsolete and surplus inventory
|
(46.3
|
)
|
|
(40.1
|
)
|
Total Inventories, net
|
$
|
784.0
|
|
|
$
|
842.0
|
|
Inventories are valued at net realizable value, with approximately 59% valued on the first-in, first-out ("FIFO") method and the remaining 41% valued on the last-in, first-out ("LIFO") method. The majority of the Company's domestic inventories are valued on the LIFO method, and all the Company's international inventories are valued on the FIFO method.
The LIFO reserve at June 30, 2020 and December 31, 2019 was $162.5 million and $164.6 million, respectively. An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation. The prior year balances have been revised to align to the current year classification of the LIFO reserve and the allowance for obsolete and surplus inventory.
Note 9 - Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Total
|
Beginning balance
|
$
|
361.3
|
|
$
|
632.4
|
|
$
|
993.7
|
|
Acquisitions
|
4.2
|
|
2.1
|
|
6.3
|
|
Foreign currency translation adjustments and other changes
|
(2.3
|
)
|
(1.2
|
)
|
(3.5
|
)
|
Ending balance
|
$
|
363.2
|
|
$
|
633.3
|
|
$
|
996.5
|
|
The addition of $6.3 million of goodwill from acquisitions represents measurement period adjustments recorded in 2020 for the 2019 Acquisitions.
The following table displays intangible assets as of June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2020
|
Balance at December 31, 2019
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Intangible assets
subject to amortization:
|
|
|
|
|
|
|
Customer relationships
|
$
|
509.0
|
|
$
|
(143.4
|
)
|
$
|
365.6
|
|
$
|
510.9
|
|
$
|
(128.8
|
)
|
$
|
382.1
|
|
Technology and know-how
|
264.2
|
|
(62.1
|
)
|
202.1
|
|
265.1
|
|
(54.7
|
)
|
210.4
|
|
Trade names
|
12.5
|
|
(6.4
|
)
|
6.1
|
|
12.7
|
|
(6.1
|
)
|
6.6
|
|
Capitalized software
|
273.2
|
|
(250.2
|
)
|
23.0
|
|
270.3
|
|
(245.8
|
)
|
24.5
|
|
Other
|
13.6
|
|
(9.4
|
)
|
4.2
|
|
13.8
|
|
(9.1
|
)
|
4.7
|
|
|
$
|
1,072.5
|
|
$
|
(471.5
|
)
|
$
|
601.0
|
|
$
|
1,072.8
|
|
$
|
(444.5
|
)
|
$
|
628.3
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
Trade names
|
$
|
121.7
|
|
|
$
|
121.7
|
|
$
|
121.5
|
|
|
$
|
121.5
|
|
FAA air agency certificates
|
8.7
|
|
|
8.7
|
|
8.7
|
|
|
8.7
|
|
|
$
|
130.4
|
|
|
|
$
|
130.4
|
|
$
|
130.2
|
|
|
|
$
|
130.2
|
|
Total intangible assets
|
$
|
1,202.9
|
|
$
|
(471.5
|
)
|
$
|
731.4
|
|
$
|
1,203.0
|
|
$
|
(444.5
|
)
|
$
|
758.5
|
|
Amortization expense for intangible assets was $28.1 million and $29.3 million for the six months ended June 30, 2020 and 2019, respectively. Amortization expense for intangible assets is projected to be $54.7 million in 2020; $51.6 million in 2021; $46.7 million in 2022; $43.8 million in 2023; and $42.1 million in 2024.
Note 10 - Financing Arrangements
Short-term debt at June 30, 2020 and December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
June 30,
2020
|
December 31,
2019
|
Variable-rate Accounts Receivable Facility with an interest rate of 2.77% at December 31, 2019
|
$
|
—
|
|
$
|
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 2.80% at June 30, 2020 and 0.27% to 1.75% at December 31, 2019
|
42.9
|
|
15.5
|
|
Short-term debt
|
$
|
42.9
|
|
$
|
17.3
|
|
The Company has a $100 million Amended and Restated Asset Securitization Agreement (the "Accounts Receivable Facility"), which matures on November 30, 2021. Under the terms of the Accounts Receivable Facility, the Company sells, on an ongoing basis, certain domestic trade receivables to Timken Receivables Corporation, a wholly-owned consolidated subsidiary that, in turn, uses the trade receivables to secure borrowings that are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the Accounts Receivable Facility may be limited by certain borrowing base limitations. As of June 30, 2020, there were no outstanding borrowings under the Accounts Receivable Facility. However, certain borrowing base limitations reduced the availability under the Accounts Receivable Facility to $86.9 million at June 30, 2020. 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 Company also maintains uncommitted lines of credit at certain foreign subsidiaries, which provide for short-term borrowings up to $267.7 million in the aggregate. At June 30, 2020, the Company’s foreign subsidiaries had borrowings outstanding of $42.9 million and bank guarantees of $0.5 million, which reduced the aggregate availability under these facilities to $224.4 million.
Long-term debt at June 30, 2020 and December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
June 30,
2020
|
December 31,
2019
|
Variable-rate Senior Credit Facility with an average interest rate on U.S. Dollar of 2.23% and Euro of 1.04% at June 30, 2020 and 2.85% and Euro of 1.00% at December 31, 2019
|
$
|
317.8
|
|
$
|
132.7
|
|
Variable-rate Euro Term Loan(1), maturing on September 18, 2020, with an interest rate of 1.375% at June 30, 2020 and 1.13% at December 31, 2019
|
7.8
|
|
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 2.11% at June 30, 2020 and 2.92% at December 31, 2019
|
333.8
|
|
338.5
|
|
Fixed-rate Senior Unsecured Notes(1), maturing on September 1, 2024, with an interest rate of 3.875%
|
348.8
|
|
348.5
|
|
Fixed-rate Euro Senior Unsecured Notes(1), maturing on September 7, 2027, with an interest rate of 2.02%
|
168.1
|
|
167.7
|
|
Fixed-rate Senior Unsecured Notes(1), maturing on December 15, 2028, with an interest rate of 4.50%
|
396.3
|
|
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%
|
154.6
|
|
154.6
|
|
Fixed-rate Bank Loan, maturing on June 30, 2033, with an interest rate of 2.15%
|
18.0
|
|
18.0
|
|
Other
|
3.3
|
|
4.1
|
|
|
1,748.5
|
|
1,712.8
|
|
Less: Current maturities
|
18.4
|
|
64.7
|
|
Long-term debt
|
$
|
1,730.1
|
|
$
|
1,648.1
|
|
(1) Net of discounts and fees
Note 10 - Financing Arrangements (continued)
On June 25, 2019, the Company entered into a Fourth Amended and Restated Credit Agreement ("Senior Credit Facility"). The Senior Credit Facility is a $650.0 million unsecured revolving credit facility, which matures on June 25, 2024. At June 30, 2020, the Company had $317.8 million of outstanding borrowings under the Senior Credit Facility, which reduced the availability to $332.2 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 a $350 million variable-rate term loan that matures on September 11, 2023 (the "2023 Term Loan"). Proceeds from the 2023 Term Loan were used to fund the acquisitions of Apiary Investments Holding Limited ("Cone Drive") and Rollon S.p.A. ("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 a €100 million variable-rate term loan that matures on September 18, 2020 (the "2020 Term Loan"). The Company has paid to-date a total of €93.0 million under the 2020 Term Loan, including a payment of €41.5 million in the second quarter of 2020, which reduced the principal balance to €7.0 million as of June 30, 2020. At June 30, 2020, the 2020 Term Loan was classified as current portion of long-term debt. The Company expects to service interest and repay the remaining principal balance with cash held or generated outside the U.S.
At June 30, 2020, the Company was in full compliance with all applicable covenants on its outstanding debt.
In the ordinary course of business, the Company utilizes standby letters of credit issued by financial institutions to guarantee certain obligations, most of which relate to insurance contracts. At June 30, 2020, outstanding letters of credit totaled $38.5 million, most with expiration dates within 12 months.
Note 11 - Contingencies
The Company and certain of its subsidiaries have been identified as potentially responsible parties for investigation and remediation under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as the Superfund, or similar state laws with respect to certain sites. Claims for investigation and remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation.
On December 28, 2004, the United States Environmental Protection Agency (“USEPA”) sent Lovejoy, Inc. ("Lovejoy") a Special Notice Letter that identified Lovejoy as a potentially responsible party, together with at least 14 other companies, at the Ellsworth Industrial Park Site, Downers Grove, DuPage County, Illinois (the “Site”). 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 were settled or dismissed prior to our acquisition of Lovejoy.
The Company had total environmental accruals of $5.2 million for various known environmental matters that are probable and reasonably estimable at June 30, 2020 and December 31, 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.
The Company is a defendant in a 2017 lawsuit filed in the U.S. by a former employee asserting workplace-related negligence by the Company's medical personnel. No specific amount of damages has been asserted by the plaintiff at this time. While the Company’s defense is ongoing, management’s low end of the range of probable outcomes is immaterial to the Company.
Product Warranties:
In addition to the contingencies above, the Company provides limited warranties on certain of its products. The product warranty liability included in "Other current liabilities" on the Consolidated Balance Sheets was $10.4 million and $7.5 million at June 30, 2020 and December 31, 2019, respectively. The increase in the liability since year end 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 and expected trends 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 12 - Equity
The following tables present the changes in the components of equity for the three and six months ended June 30, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2020
|
$
|
1,900.3
|
|
$
|
53.1
|
|
$
|
920.1
|
|
$
|
1,964.8
|
|
$
|
(118.9
|
)
|
$
|
(1,001.7
|
)
|
$
|
82.9
|
|
Net income (loss)
|
61.8
|
|
|
|
61.9
|
|
|
|
(0.1
|
)
|
Foreign currency translation adjustment
|
24.5
|
|
|
|
|
23.3
|
|
|
1.2
|
|
Pension and other postretirement liability
adjustments (net of income tax benefit
of $0.5 million)
|
(1.5
|
)
|
|
|
|
(1.5
|
)
|
|
|
Unrealized gain on marketable securities
|
0.5
|
|
|
|
|
0.5
|
|
|
|
Change in fair value of derivative financial
instruments, net of reclassifications
|
(2.6
|
)
|
|
|
|
(2.6
|
)
|
|
|
Dividends – $0.28 per share
|
(21.0
|
)
|
|
|
(21.0
|
)
|
|
|
|
Stock-based compensation expense
|
5.8
|
|
|
5.8
|
|
|
|
|
|
Restricted share activity
|
—
|
|
|
(1.5
|
)
|
|
|
1.5
|
|
|
Payments related to tax withholding for
stock-based compensation
|
(0.2
|
)
|
|
|
|
|
(0.2
|
)
|
|
Balance at June 30, 2020
|
$
|
1,967.6
|
|
$
|
53.1
|
|
$
|
924.4
|
|
$
|
2,005.7
|
|
$
|
(99.2
|
)
|
$
|
(1,000.4
|
)
|
$
|
84.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019
|
$
|
1,954.8
|
|
$
|
53.1
|
|
$
|
937.6
|
|
$
|
1,907.4
|
|
$
|
(50.1
|
)
|
$
|
(979.8
|
)
|
$
|
86.6
|
|
Cumulative effect of ASU 2016-13
(net of income tax benefit of $0.2 million)
|
(0.4
|
)
|
|
|
(0.4
|
)
|
|
|
|
Net income
|
145.8
|
|
|
|
142.6
|
|
|
|
3.2
|
|
Foreign currency translation adjustment
|
(54.3
|
)
|
|
|
|
(48.0
|
)
|
|
(6.3
|
)
|
Pension and other postretirement liability
adjustments (net of income tax benefit
of $1.0 million)
|
(2.8
|
)
|
|
|
|
(2.8
|
)
|
|
|
Unrealized gain on marketable
securities
|
0.1
|
|
|
|
|
0.1
|
|
|
|
Change in fair value of derivative financial
instruments, net of reclassifications
|
1.6
|
|
|
|
|
1.6
|
|
|
|
Change in ownership of noncontrolling
interest
|
0.5
|
|
|
|
|
|
|
0.5
|
|
Dividends – $0.56 per share
|
(43.9
|
)
|
|
|
(43.9
|
)
|
|
|
|
Stock-based compensation expense
|
11.4
|
|
|
11.4
|
|
|
|
|
|
Stock purchased at fair market value
|
(42.3
|
)
|
|
|
|
|
(42.3
|
)
|
|
Stock option exercise activity
|
7.5
|
|
|
(0.9
|
)
|
|
|
8.4
|
|
|
Restricted share activity
|
—
|
|
|
(23.7
|
)
|
|
|
23.7
|
|
|
Payments related to tax withholding for
stock-based compensation
|
(10.4
|
)
|
|
|
|
|
(10.4
|
)
|
|
Balance at June 30, 2020
|
$
|
1,967.6
|
|
$
|
53.1
|
|
$
|
924.4
|
|
$
|
2,005.7
|
|
$
|
(99.2
|
)
|
$
|
(1,000.4
|
)
|
$
|
84.0
|
|
Note 12 - Equity (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2019
|
$
|
1,705.9
|
|
$
|
53.1
|
|
$
|
938.2
|
|
$
|
1,700.8
|
|
$
|
(101.1
|
)
|
$
|
(952.5
|
)
|
$
|
67.4
|
|
Net income
|
94.9
|
|
|
|
92.5
|
|
|
|
|
2.4
|
|
Foreign currency translation adjustment
|
5.1
|
|
|
|
|
4.4
|
|
|
0.7
|
|
Change in fair value of derivative financial
instruments, net of reclassifications
|
(0.8
|
)
|
|
|
|
(0.8
|
)
|
|
|
Noncontrolling interest acquired
|
1.8
|
|
|
|
|
|
|
|
|
1.8
|
|
Dividends – $0.28 per share
|
(21.3
|
)
|
|
|
(21.3
|
)
|
|
|
|
Stock-based compensation expense
|
7.1
|
|
|
7.1
|
|
|
|
|
|
Stock purchased at fair market value
|
(15.3
|
)
|
|
|
|
|
(15.3
|
)
|
|
Stock option exercise activity
|
7.9
|
|
|
(2.8
|
)
|
|
|
10.7
|
|
|
Restricted share activity
|
—
|
|
|
(1.2
|
)
|
|
|
1.2
|
|
|
Payments related to tax withholding for
stock-based compensation
|
(1.7
|
)
|
|
|
|
|
|
(1.7
|
)
|
|
Balance at June 30, 2019
|
$
|
1,783.6
|
|
$
|
53.1
|
|
$
|
941.3
|
|
$
|
1,772.0
|
|
$
|
(97.5
|
)
|
$
|
(957.6
|
)
|
$
|
72.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018
|
$
|
1,642.7
|
|
$
|
53.1
|
|
$
|
951.9
|
|
$
|
1,630.2
|
|
$
|
(95.3
|
)
|
$
|
(960.3
|
)
|
$
|
63.1
|
|
Net income
|
190.2
|
|
|
|
184.4
|
|
|
|
5.8
|
|
Foreign currency translation adjustment
|
0.9
|
|
|
|
|
(0.7
|
)
|
|
1.6
|
|
Pension and postretirement liability
adjustments
|
(0.1
|
)
|
|
|
|
(0.1
|
)
|
|
|
Change in fair value of derivative financial
instruments, net of reclassifications
|
(1.4
|
)
|
|
|
|
(1.4
|
)
|
|
|
Noncontrolling interest acquired
|
1.8
|
|
|
|
|
|
|
1.8
|
|
Dividends – $0.56 per share
|
(42.6
|
)
|
|
|
(42.6
|
)
|
|
|
|
Stock-based compensation
|
14.9
|
|
|
14.9
|
|
|
|
|
|
Stock purchased at fair market value
|
(23.6
|
)
|
|
|
|
|
(23.6
|
)
|
|
Stock option exercise activity
|
8.9
|
|
|
(3.4
|
)
|
|
|
12.3
|
|
|
Restricted share activity
|
—
|
|
|
(22.1
|
)
|
|
|
22.1
|
|
|
Payments related to tax withholding for
stock-based compensation
|
(8.1
|
)
|
|
|
|
|
(8.1
|
)
|
|
Balance at June 30, 2019
|
$
|
1,783.6
|
|
$
|
53.1
|
|
$
|
941.3
|
|
$
|
1,772.0
|
|
$
|
(97.5
|
)
|
$
|
(957.6
|
)
|
$
|
72.3
|
|
Note 13 - Impairment and Restructuring Charges
Impairment and restructuring charges by segment are comprised of the following:
For the three months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process Industries
|
Corporate
|
Total
|
Severance and related benefit costs
|
$
|
1.5
|
|
$
|
1.7
|
|
$
|
—
|
|
$
|
3.2
|
|
Exit costs
|
(0.3
|
)
|
0.2
|
|
—
|
|
(0.1
|
)
|
Total
|
$
|
1.2
|
|
$
|
1.9
|
|
$
|
—
|
|
$
|
3.1
|
|
For the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Industries
|
Process Industries
|
Corporate
|
Total
|
Impairment charges
|
$
|
—
|
|
$
|
0.1
|
|
$
|
—
|
|
$
|
0.1
|
|
Severance and related benefit costs
|
1.6
|
|
4.2
|
|
0.1
|
|
5.9
|
|
Exit costs
|
0.3
|
|
0.4
|
|
—
|
|
0.7
|
|
Total
|
$
|
1.9
|
|
$
|
4.7
|
|
$
|
0.1
|
|
$
|
6.7
|
|
The following discussion explains the impairment and restructuring charges recorded for the periods presented; however, it is not intended to reflect a comprehensive discussion of all amounts in the tables above.
Coronavirus ("COVID-19") Pandemic Cost Reduction Initiatives:
During the three months ended June 30, 2020, the Company recorded $2.0 million in severance and related benefit costs to eliminate approximately 20 salaried positions. Of the $2.0 million charge, $0.6 million related to the Mobile Industries segment and $1.4 million related to the Process Industries segment. The Company announced additional job eliminations during July 2020, as the Company continues to align current employment levels with customer demand. The Company expects to incur charges related to these initiatives of $8 million to $10 million during the remainder of 2020. In addition, the Company expects to incur additional charges related to other cost reduction initiatives to be implemented over the remainder of the year.
Mobile Industries:
On October 16, 2019, the Company announced the reorganization of its bearing plant in Gaffney, South Carolina. The Company will be transferring its high-volume bearing production and roller production to other Timken manufacturing facilities in the U.S. The transfer of these operations is expected to occur by the end of the third quarter of 2020 and is expected to affect approximately 150 employees. The Company expects to incur approximately $8 million to $10 million of pretax costs related to this reorganization. During the six months ended June 30, 2020, the Company recognized severance and related benefits of $0.3 million and exit costs of $0.3 million related to this reorganization. The Company has incurred pretax costs related to this reorganization of $6.6 million as of June 30, 2020, including rationalization costs recorded in cost of products sold.
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 related to this closure. During the three and six months ended June 30, 2020, the Company recorded severance and related benefit costs of $0.3 million and $2.2 million, respectively, related to this closure. The Company has incurred pretax costs related to this closure of $3.0 million as of June 30, 2020, including rationalization costs recorded in cost of products sold.
Note 13 - Impairment and Restructuring Charges (continued)
Consolidated Restructuring Accrual:
The following is a rollforward of the consolidated restructuring accrual for the six months ended June 30, 2020:
|
|
|
|
|
|
June 30,
2020
|
Beginning balance, January 1
|
$
|
2.7
|
|
Expense
|
6.6
|
|
Payments
|
(2.9
|
)
|
Ending balance
|
$
|
6.4
|
|
The restructuring accrual at June 30, 2020 was 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, 2020 are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of that period’s proportionate share of the amounts to be recorded for the year ending December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
Total
|
|
Three Months Ended
June 30,
|
Three Months Ended
June 30,
|
Three Months Ended
June 30,
|
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
Components of net periodic
benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
2.7
|
|
$
|
2.6
|
|
$
|
0.4
|
|
$
|
0.4
|
|
$
|
3.1
|
|
$
|
3.0
|
|
Interest cost
|
5.3
|
|
6.0
|
|
1.3
|
|
1.8
|
|
6.6
|
|
7.8
|
|
Expected return on plan assets
|
(6.4
|
)
|
(6.4
|
)
|
(2.1
|
)
|
(2.6
|
)
|
(8.5
|
)
|
(9.0
|
)
|
Amortization of prior service cost
|
0.4
|
|
0.4
|
|
0.1
|
|
0.1
|
|
0.5
|
|
0.5
|
|
Recognition of net actuarial losses
|
8.8
|
|
—
|
|
—
|
|
—
|
|
8.8
|
|
—
|
|
Net periodic benefit cost (credit)
|
$
|
10.8
|
|
$
|
2.6
|
|
$
|
(0.3
|
)
|
$
|
(0.3
|
)
|
$
|
10.5
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
Total
|
|
Six Months Ended
June 30,
|
Six Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
Components of net periodic
benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
5.4
|
|
$
|
5.2
|
|
$
|
0.8
|
|
$
|
0.8
|
|
$
|
6.2
|
|
$
|
6.0
|
|
Interest cost
|
10.5
|
|
12.0
|
|
2.8
|
|
3.7
|
|
13.3
|
|
15.7
|
|
Expected return on plan assets
|
(12.7
|
)
|
(12.8
|
)
|
(4.3
|
)
|
(5.2
|
)
|
(17.0
|
)
|
(18.0
|
)
|
Amortization of prior service cost
|
0.8
|
|
0.8
|
|
0.1
|
|
0.1
|
|
0.9
|
|
0.9
|
|
Recognition of net actuarial losses
|
8.8
|
|
—
|
|
—
|
|
—
|
|
8.8
|
|
—
|
|
Net periodic benefit cost (credit)
|
$
|
12.8
|
|
$
|
5.2
|
|
$
|
(0.6
|
)
|
$
|
(0.6
|
)
|
$
|
12.2
|
|
$
|
4.6
|
|
The Company currently expects to make lump sum payments to new retirees in 2020 in excess of annual interest and service costs for one of the Company's U.S. defined benefit pension plans. This expectation triggered a remeasurement of assets and obligations for this plan at June 30, 2020. As a result of this remeasurement, the Company recognized actuarial losses of $8.8 million during the three months ended June 30, 2020.
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, 2020 are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of that period’s proportionate share of the amounts to be recorded for the year ending December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Components of net periodic benefit (credit) cost:
|
|
|
|
|
|
|
|
Service cost
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Interest cost
|
0.5
|
|
|
1.9
|
|
|
1.0
|
|
|
3.8
|
|
Expected return on plan assets
|
(0.1
|
)
|
|
(0.8
|
)
|
|
(0.2
|
)
|
|
(1.6
|
)
|
Amortization of prior service credit
|
(2.5
|
)
|
|
(0.6
|
)
|
|
(4.9
|
)
|
|
(1.1
|
)
|
Net periodic benefit (credit) cost
|
$
|
(2.0
|
)
|
|
$
|
0.6
|
|
|
$
|
(4.0
|
)
|
|
$
|
1.2
|
|
In January 2020, the Company established a second Voluntary Employee Beneficiary Association ("VEBA") trust for certain active employees’ medical benefits. The Company transferred $50 million from an existing VEBA trust to fund this new VEBA trust. The $50 million that was transferred will primarily be classified as other current assets based on the portfolio of the assets in the trust. The Company expects to fully utilize the assets of the trust in 2020 for the payment of certain active employees’ medical benefits. As of June 30, 2020, the Company had utilized $25 million of the new VEBA trust.
In 2019, the Company announced changes to the medical plan offerings of certain of its postretirement benefit plans, effective January 1, 2020, which will impact the benefits provided to certain retirees. The plan amendment triggered a remeasurement, which resulted in a $92.8 million reduction in the postretirement benefit obligation and a corresponding amount of income recorded to accumulated other comprehensive loss. Beginning in third quarter of 2019, the Company began amortizing the pretax adjustment of $92.8 million from accumulated other comprehensive loss into net periodic benefit cost (as a benefit) over the next twelve years.
Note 16 - 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, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and other postretirement liability adjustments
|
Unrealized gain (loss) on marketable securities
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at March 31, 2020
|
$
|
(186.6
|
)
|
$
|
65.6
|
|
$
|
(0.4
|
)
|
$
|
2.5
|
|
$
|
(118.9
|
)
|
Other comprehensive income (loss) before
reclassifications and income taxes
|
24.5
|
|
—
|
|
0.7
|
|
(2.2
|
)
|
23.0
|
|
Amounts reclassified from accumulated other
comprehensive (loss) income before income
taxes
|
—
|
|
(2.0
|
)
|
—
|
|
(1.3
|
)
|
(3.3
|
)
|
Income tax benefit (expense)
|
—
|
|
0.5
|
|
(0.2
|
)
|
0.9
|
|
1.2
|
|
Net current period other comprehensive
income (loss), net of income taxes
|
24.5
|
|
(1.5
|
)
|
0.5
|
|
(2.6
|
)
|
20.9
|
|
Noncontrolling interest
|
(1.2
|
)
|
—
|
|
—
|
|
—
|
|
(1.2
|
)
|
Net current period comprehensive income (loss),
net of income taxes and noncontrolling
interest
|
23.3
|
|
(1.5
|
)
|
0.5
|
|
(2.6
|
)
|
19.7
|
|
Balance at June 30, 2020
|
$
|
(163.3
|
)
|
$
|
64.1
|
|
$
|
0.1
|
|
$
|
(0.1
|
)
|
$
|
(99.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and other postretirement liability adjustments
|
Unrealized gain (loss) on marketable securities
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at December 31, 2019
|
$
|
(115.3
|
)
|
$
|
66.9
|
|
$
|
—
|
|
$
|
(1.7
|
)
|
$
|
(50.1
|
)
|
Other comprehensive (loss) income before
reclassifications and income taxes
|
(54.3
|
)
|
0.2
|
|
0.2
|
|
4.2
|
|
(49.7
|
)
|
Amounts reclassified from accumulated other
comprehensive (loss) income before income
taxes
|
—
|
|
(4.0
|
)
|
—
|
|
(1.9
|
)
|
(5.9
|
)
|
Income tax benefit (expense)
|
—
|
|
1.0
|
|
(0.1
|
)
|
(0.7
|
)
|
0.2
|
|
Net current period other comprehensive
(loss) income, net of income taxes
|
(54.3
|
)
|
(2.8
|
)
|
0.1
|
|
1.6
|
|
(55.4
|
)
|
Noncontrolling interest
|
6.3
|
|
—
|
|
—
|
|
—
|
|
6.3
|
|
Net current period comprehensive (loss) income,
net of income taxes and noncontrolling
interest
|
(48.0
|
)
|
(2.8
|
)
|
0.1
|
|
1.6
|
|
(49.1
|
)
|
Balance at June 30, 2020
|
$
|
(163.3
|
)
|
$
|
64.1
|
|
$
|
0.1
|
|
$
|
(0.1
|
)
|
$
|
(99.2
|
)
|
Note 16 - Accumulated Other Comprehensive Income (Loss) (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and other postretirement liability adjustments
|
Unrealized gain (loss) on marketable securities
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at March 31, 2019
|
$
|
(100.7
|
)
|
$
|
(0.1
|
)
|
$
|
—
|
|
$
|
(0.3
|
)
|
$
|
(101.1
|
)
|
Other comprehensive income (loss) before
reclassifications and income taxes
|
5.1
|
|
—
|
|
—
|
|
(0.2
|
)
|
4.9
|
|
Amounts reclassified from accumulated other
comprehensive (loss) income before income
taxes
|
—
|
|
(0.1
|
)
|
—
|
|
(0.7
|
)
|
(0.8
|
)
|
Income tax benefit
|
—
|
|
0.1
|
|
—
|
|
0.1
|
|
0.2
|
|
Net current period other comprehensive
income (loss), net of income taxes
|
5.1
|
|
—
|
|
—
|
|
(0.8
|
)
|
4.3
|
|
Noncontrolling interest
|
(0.7
|
)
|
—
|
|
—
|
|
—
|
|
(0.7
|
)
|
Net current period comprehensive income (loss),
net of income taxes and noncontrolling
interest
|
4.4
|
|
—
|
|
—
|
|
(0.8
|
)
|
3.6
|
|
Balance at June 30, 2019
|
$
|
(96.3
|
)
|
$
|
(0.1
|
)
|
$
|
—
|
|
$
|
(1.1
|
)
|
$
|
(97.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and other postretirement liability adjustments
|
Unrealized gain (loss) on marketable securities
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at December 31, 2018
|
$
|
(95.6
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
0.3
|
|
$
|
(95.3
|
)
|
Other comprehensive income before
reclassifications and income taxes
|
0.9
|
|
—
|
|
—
|
|
0.2
|
|
1.1
|
|
Amounts reclassified from accumulated other
comprehensive (loss) income before income
taxes
|
—
|
|
(0.2
|
)
|
—
|
|
(1.9
|
)
|
(2.1
|
)
|
Income tax benefit
|
—
|
|
0.1
|
|
—
|
|
0.3
|
|
0.4
|
|
Net current period other comprehensive
(loss) income, net of income taxes
|
0.9
|
|
(0.1
|
)
|
—
|
|
(1.4
|
)
|
(0.6
|
)
|
Noncontrolling interest
|
(1.6
|
)
|
—
|
|
—
|
|
—
|
|
(1.6
|
)
|
Net current period comprehensive loss,
net of income taxes and noncontrolling
interest
|
(0.7
|
)
|
(0.1
|
)
|
—
|
|
(1.4
|
)
|
(2.2
|
)
|
Balance at June 30, 2019
|
$
|
(96.3
|
)
|
$
|
(0.1
|
)
|
$
|
—
|
|
$
|
(1.1
|
)
|
$
|
(97.5
|
)
|
Other comprehensive income (loss) before reclassifications and income taxes includes the effect of foreign currency.
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, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
270.3
|
|
$
|
268.2
|
|
$
|
2.1
|
|
$
|
—
|
|
Cash and cash equivalents measured at net asset value
|
145.3
|
|
|
|
|
|
|
|
Restricted cash
|
0.5
|
|
0.5
|
|
—
|
|
—
|
|
Short-term investments
|
52.6
|
|
25.6
|
|
27.0
|
|
—
|
|
Foreign currency forward contracts
|
2.1
|
|
—
|
|
2.1
|
|
—
|
|
Total Assets
|
$
|
470.8
|
|
$
|
294.3
|
|
$
|
31.2
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
Foreign currency forward contracts
|
$
|
3.0
|
|
$
|
—
|
|
$
|
3.0
|
|
$
|
—
|
|
Total Liabilities
|
$
|
3.0
|
|
$
|
—
|
|
$
|
3.0
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 forward contracts
|
7.6
|
|
—
|
|
7.6
|
|
—
|
|
Total Assets
|
$
|
249.6
|
|
$
|
164.9
|
|
$
|
35.8
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
Foreign currency forward contracts
|
$
|
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 the redemption value. Short-term investments are investments with maturities between four months and one year, and include $27.0 million of held-to-maturity debt securities valued at amortized cost as well as available-for-sale equity securities having an amortized cost of $25.4 million and a fair value of $25.6 million. 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.
Note 17 - Fair Value (continued)
In addition, the Company remeasures certain assets at fair value, using Level 3 inputs, as a result of the occurrence of triggering events such as purchase accounting for acquisitions. See Note 3 - Acquisitions for further discussion.
No other material assets were measured at fair value on a nonrecurring basis during the six months ended June 30, 2020 and 2019, respectively.
Financial Instruments:
The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, trade accounts payable, short-term borrowings and long-term debt. Due to their short-term nature, the carrying value of cash and cash equivalents, short-term investments, accounts receivable, trade accounts payable and short-term borrowings are a reasonable estimate of their fair value. Due to the nature of fair value calculations for variable-rate debt, the carrying value of the Company's long-term variable-rate debt is a reasonable estimate of its fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was $1,173.3 million and $1,185.8 million at June 30, 2020 and December 31, 2019, respectively. The carrying value of this debt was $1,089.1 million and $1,086.5 million at June 30, 2020 and December 31, 2019, respectively. The fair value of long-term fixed-rate debt was measured using Level 2 inputs.
The Company does not believe it has significant concentrations of risk associated with the counterparties to its financial instruments.
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 and interest rate risk. Forward contracts on various foreign currencies are entered into in order to manage the foreign currency exchange rate risk associated with certain of the Company's commitments denominated in foreign currencies. From time to time, interest rate swaps are used to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings.
The Company designates certain foreign currency forward contracts as cash flow hedges of forecasted revenues and certain interest rate hedges as cash flow hedges of fixed-rate borrowings.
The Company does not purchase or hold any derivative financial instruments for trading purposes. As of June 30, 2020 and December 31, 2019, the Company had $139.9 million and $295.7 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 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 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.
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 June 30, 2020 and December 31, 2019, the Company had $79.3 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 its exposure to the variability in future cash flows for forecast transactions is generally eighteen months or less.
Note 18 - Derivative Instruments and Hedging Activities (continued)
Purpose for Derivative Instruments not designated as Hedging Instruments:
For derivative instruments that are not designated as hedging instruments, the instruments are typically forward contracts. In general, the practice is to reduce volatility by selectively hedging transaction exposures including intercompany loans, accounts payable and accounts receivable. Intercompany loans between entities with different functional currencies typically are hedged with a forward contract at the inception of the loan with a maturity date corresponding to the maturity of the loan. The revaluation of these contracts, as well as the revaluation of the underlying balance sheet items, is recorded directly to the income statement so the adjustment generally offsets the revaluation of the underlying balance sheet items to protect cash payments and reduce income statement volatility.
As of June 30, 2020 and December 31, 2019, the Company had $60.6 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 three and six months ended June 30, 2020 and 2019, respectively, and the related location within the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) recognized in income
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
Derivatives not designated as hedging instruments:
|
Location of gain or (loss) recognized in income
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Foreign currency forward contracts
|
Other income (expense), net
|
$
|
(3.7
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
1.8
|
|
|
$
|
2.7
|
|