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, 2018
.
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, 2018. In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)", which was adopted by the Company on January 1, 2019. In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which was adopted by the Company on January 1, 2019. Updates to the Company's accounting policies as a result of adopting ASU 2016-02 and ASU 2017-12 are discussed below.
Recent Accounting Pronouncements:
New Accounting Guidance Adopted:
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. The Company adopted the new leasing standard on January 1, 2019 using the cumulative-effect adjustment transition method. The Company also elected several practical expedients to not asses the following as part of adoption: (1) whether any expired or existing contracts contain leases; (2) the lease classification between finance and operating leases for any expired or existing leases; and (3) the recognition of initial direct costs for existing leases. The Company also elected to not recognize leases with a term of 12 months or less on the Consolidated Balance Sheets. The adoption of the lease standard had no impact to the Company's consolidated results of operations or the captions on the consolidated statements of cash flows. The cumulative effect of the changes made to the balance sheet as of January 1, 2019 for the adoption of the new lease standard was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
Effect of Accounting Change
|
Balance at
January 1, 2019
|
Operating lease assets
|
$
|
—
|
|
$
|
114.1
|
|
$
|
114.1
|
|
Other intangible assets
|
733.2
|
|
0.7
|
|
733.9
|
|
Other non-current assets
(1)
|
37.0
|
|
(15.3
|
)
|
21.7
|
|
Total Assets
|
4,445.2
|
|
99.5
|
|
4,544.7
|
|
|
|
|
|
Short-term operating lease liability
|
—
|
|
29.8
|
|
29.8
|
|
Long-term operating lease liability
|
—
|
|
69.7
|
|
69.7
|
|
Total Liabilities
|
$
|
2,802.5
|
|
$
|
99.5
|
|
$
|
2,902.0
|
|
(1)
Due to the adoption of the new leasing standard, the Company recognized operating lease assets and corresponding operating lease liabilities on the Consolidated Balance Sheet. In conjunction with the adoption of the new leasing standard, the Company reclassified
$15.3 million
of lease assets related to purchase accounting adjustments from the ABC Bearings Limited ("ABC Bearings") acquisition from Other assets to Operating lease assets. These assets do not have material corresponding lease liabilities.
The Company determines if any arrangement is a lease at the inception of a contract. For leases where the Company is the lessee, it recognizes lease assets and related lease liabilities at the lease commencement date based on the present value of lease payments over the lease term. Most of the Company’s leases do not provide an implicit interest rate. As a result, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease assets also consist of amounts for favorable or unfavorable lease terms related to acquisitions. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. A lease asset and lease liability are not recorded for leases with an initial term of less than 12 months or less and the lease expenses related to these leases is recognized as incurred over the lease term.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which impacts both designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 amends and clarifies the requirements to qualify for hedge accounting, removes the requirement to recognize changes in fair value from certain hedges in current earnings, and specifies the presentation of changes in fair value in the income statement for all hedging instruments. ASU 2017-12 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2017-12 effective January 1, 2019, and the impact of adoption was not material to the Company's results of operations and financial condition.
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 for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is continuing to advance its analysis and evaluating the effect that the adoption of ASU 2016-13 will have on the Company's results of operations and financial condition.
Note 3 - Acquisitions
On
April 1, 2019
, the Company completed the acquisition of The 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, located in Indianapolis, Indiana, operates primarily in the United States and China and had sales of approximately
$60 million
for the twelve months ended March 31, 2019. The purchase price for this acquisition was
$84.9 million
, excluding
$1.8 million
for cash acquired. During the six months ended June 30, 2019, the Company incurred acquisition-related costs of
$1.3 million
to complete this acquisition. Based on markets and customers served, the results for Diamond Chain are reported in the Process Industries segment. The following table presents the purchase price allocation at fair value, net of cash acquired, for the Diamond Chain acquisition:
|
|
|
|
|
|
Initial Purchase
Price Allocation
|
Assets:
|
|
Accounts receivable, net
|
$
|
6.7
|
|
Inventories, net
|
24.1
|
|
Other current assets
|
2.4
|
|
Property, plant and equipment, net
|
19.4
|
|
Operating lease assets
|
2.1
|
|
Goodwill
|
17.7
|
|
Other intangible assets
|
26.7
|
|
Other non-current assets
|
0.5
|
|
Total assets acquired
|
$
|
99.6
|
|
Liabilities:
|
|
Accounts payable, trade
|
$
|
5.6
|
|
Other current liabilities
|
4.1
|
|
Long-term operating lease liabilities
|
2.1
|
|
Other non-current liabilities
|
1.1
|
|
Total liabilities assumed
|
$
|
12.9
|
|
Noncontrolling interest acquired
|
1.8
|
|
Net assets and noncontrolling interest acquired
|
$
|
84.9
|
|
The following table summarizes the preliminary purchase price allocation for identifiable intangible assets acquired in
2019
:
|
|
|
|
|
|
|
Preliminary Purchase
Price Allocation
|
|
|
Weighted -
Average Life
|
Trade names (indefinite life)
|
$
|
12.3
|
|
Indefinite
|
Technology and know-how
|
5.2
|
|
14 years
|
Customer relationships
|
9.2
|
|
16 years
|
Total intangible assets
|
$
|
26.7
|
|
|
During 2018, the Company completed three acquisitions. On
September 18, 2018
, the Company completed the acquisition of Rollon S.p.A. ("Rollon"), a leader in engineered linear motion products, specializing in the design and manufacture of linear guides, telescopic rails and linear actuators used in a wide range of industries such as passenger rail, aerospace, packaging and logistics, medical and automation.
On
September 1, 2018
,
the Company completed the acquisition of Apiary Investments Holdings Limited ("Cone Drive"), a leader in precision drives used in diverse markets including solar, automation, aerial platforms, and food and beverage. On
August 30, 2018
, the Company's majority-owned subsidiary, Timken India Limited ("Timken India"), completed the acquisition of ABC Bearings. Timken India issued its shares as consideration for the acquisition of ABC Bearings. ABC Bearings is a manufacturer of tapered, cylindrical and spherical roller bearings and slewing rings in India. Hereafter, the ABC Bearings, Cone Drive, and Rollon acquisitions will be referred to collectively as the "2018 Acquisitions".
In January 2019, the Company paid a working capital adjustment of
$2.9 million
in connection with the Cone Drive acquisition, which was accrued and reflected in the purchase price in 2018. In May 2019, the Company received a
$4.8 million
payment from escrow related to an indemnification settlement for the Cone Drive acquisition, which is reflected as a purchase price adjustment. This adjustment, as well as other measurement period adjustments recorded in 2019, resulted in a
$5.0 million
decrease to goodwill. The following table presents the purchase price allocation at fair value, net of cash acquired, for the 2018 Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
Initial Purchase
Price Allocation
|
Adjustments
|
Preliminary Purchase
Price Allocation
|
Assets:
|
|
|
|
Accounts receivable, net
|
$
|
42.5
|
|
|
|
$
|
42.5
|
|
Inventories, net
|
61.6
|
|
(0.1
|
)
|
61.5
|
|
Other current assets
|
8.5
|
|
1.0
|
|
9.5
|
|
Property, plant and equipment, net
|
71.7
|
|
(6.3
|
)
|
65.4
|
|
Goodwill
|
468.2
|
|
(5.0
|
)
|
463.2
|
|
Other intangible assets
|
372.6
|
|
2.7
|
|
375.3
|
|
Other non-current assets
|
20.2
|
|
(3.7
|
)
|
16.5
|
|
Total assets acquired
|
$
|
1,045.3
|
|
$
|
(11.4
|
)
|
$
|
1,033.9
|
|
Liabilities:
|
|
|
|
Accounts payable, trade
|
$
|
35.2
|
|
|
|
$
|
35.2
|
|
Salaries, wages and benefits
|
9.1
|
|
|
|
9.1
|
|
Income taxes payable
|
2.5
|
|
0.4
|
|
2.9
|
|
Other current liabilities
|
8.2
|
|
0.2
|
|
8.4
|
|
Short-term debt
|
2.5
|
|
(0.6
|
)
|
1.9
|
|
Long-term debt
|
3.0
|
|
(2.9
|
)
|
0.1
|
|
Accrued pension cost
|
5.7
|
|
|
|
5.7
|
|
Accrued postretirement benefits cost
|
11.7
|
|
|
|
11.7
|
|
Deferred income taxes
|
116.2
|
|
(3.7
|
)
|
112.5
|
|
Other non-current liabilities
|
16.9
|
|
|
|
16.9
|
|
Total liabilities assumed
|
$
|
211.0
|
|
$
|
(6.6
|
)
|
$
|
204.4
|
|
Net assets acquired
|
$
|
834.3
|
|
$
|
(4.8
|
)
|
$
|
829.5
|
|
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.
The above purchase price allocations for Diamond Chain and the 2018 Acquisitions, including the residual amount allocated to goodwill, are based on preliminary information and is subject to change as additional information concerning final asset and liability valuations is obtained. The Diamond Chain purchase price allocation is preliminary as a result of the proximity of the acquisition date to June 30, 2019. The primary areas of the preliminary purchase price allocation for the 2018 Acquisitions that have not been finalized relate to the fair value of net property, plant, and equipment and other intangible assets, and the related impacts on deferred income taxes and goodwill. During the applicable measurement periods, we 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 - Inventories
The components of inventories at
June 30, 2019
and
December 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
June 30,
2019
|
December 31,
2018
|
Manufacturing supplies
|
$
|
33.5
|
|
$
|
32.4
|
|
Raw materials
|
107.3
|
|
102.4
|
|
Work in process
|
294.9
|
|
287.7
|
|
Finished products
|
451.6
|
|
452.7
|
|
Subtotal
|
887.3
|
|
875.2
|
|
Allowance for obsolete and surplus inventory
|
(43.5
|
)
|
(39.5
|
)
|
Total Inventories, net
|
$
|
843.8
|
|
$
|
835.7
|
|
Inventories are valued at net realizable value, with approximately
57%
valued on the first-in, first-out ("FIFO") method and the remaining
43%
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 of the Company's international inventories are valued on the FIFO method.
The LIFO reserve at
June 30, 2019
and
December 31, 2018
was
$174.4 million
and
$173.9 million
, respectively. An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation.
Note 5 - Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the
six
months ended
June 30, 2019
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Industries
|
Process
Industries
|
Total
|
Beginning balance
|
$
|
349.7
|
|
$
|
610.8
|
|
$
|
960.5
|
|
Acquisitions
|
(1.1
|
)
|
13.8
|
|
12.7
|
|
Foreign currency translation adjustments and other changes
|
(1.4
|
)
|
(2.4
|
)
|
(3.8
|
)
|
Ending balance
|
$
|
347.2
|
|
$
|
622.2
|
|
$
|
969.4
|
|
The
$12.7 million
addition of goodwill from acquisitions includes
$17.7 million
of goodwill recognized in the Process Industries segment for the Diamond Chain acquisition, partially offset by certain measurement period adjustments recorded in 2019 related to the 2018 Acquisitions.
The following table displays intangible assets as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
Balance at December 31, 2018
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Intangible assets
subject to amortization:
|
|
|
|
|
|
|
Customer relationships
|
$
|
490.9
|
|
$
|
114.3
|
|
$
|
376.6
|
|
$
|
481.5
|
|
$
|
99.8
|
|
$
|
381.7
|
|
Technology and know-how
|
250.1
|
|
47.6
|
|
202.5
|
|
245.0
|
|
40.4
|
|
204.6
|
|
Trade names
|
12.0
|
|
5.3
|
|
6.7
|
|
11.3
|
|
4.8
|
|
6.5
|
|
Capitalized software
|
268.4
|
|
241.4
|
|
27.0
|
|
266.4
|
|
236.5
|
|
29.9
|
|
Other
|
40.8
|
|
37.2
|
|
3.6
|
|
40.8
|
|
35.2
|
|
5.6
|
|
|
$
|
1,062.2
|
|
$
|
445.8
|
|
$
|
616.4
|
|
$
|
1,045.0
|
|
$
|
416.7
|
|
$
|
628.3
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
Trade names
|
$
|
106.4
|
|
|
$
|
106.4
|
|
$
|
96.2
|
|
|
$
|
96.2
|
|
FAA air agency certificates
|
8.7
|
|
|
8.7
|
|
8.7
|
|
|
8.7
|
|
|
$
|
115.1
|
|
|
|
$
|
115.1
|
|
$
|
104.9
|
|
|
|
$
|
104.9
|
|
Total intangible assets
|
$
|
1,177.3
|
|
$
|
445.8
|
|
$
|
731.5
|
|
$
|
1,149.9
|
|
$
|
416.7
|
|
$
|
733.2
|
|
Amortization expense for intangible assets was
$29.3 million
and
$21.2 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. Amortization expense for intangible assets is projected to be
$56.8 million
in
2019
;
$52.2 million
in
2020
;
$48.2 million
in
2021
;
$43.7 million
in
2022
; and
$40.7 million
in
2023
.
Note 6 - Leasing
The Company enters into operating and finance leases for manufacturing facilities, warehouses, sales offices, information technology equipment, plant equipment, vehicles and certain other equipment.
Lease expense for the
three and six
months ended
June 30, 2019
was as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
June 30, 2019
|
June 30, 2019
|
Operating lease expense
|
$
|
8.3
|
|
$
|
18.7
|
|
Amortization of right-of-use assets on finance leases
|
0.2
|
|
0.6
|
|
Total lease expense
|
$
|
8.5
|
|
$
|
19.3
|
|
The following tables present the impact of leasing on the Consolidated Balance Sheet.
|
|
|
|
|
Operating Leases
|
June 30, 2019
|
Lease assets:
|
|
Operating lease assets
|
$
|
117.3
|
|
Lease liabilities:
|
|
Short-term operating lease liabilities
|
$
|
29.5
|
|
Long-term operating lease liabilities
|
73.0
|
|
Total operating lease liabilities
|
$
|
102.5
|
|
|
|
|
|
|
Finance Leases
|
June 30, 2019
|
Lease assets:
|
|
Property, plant and equipment, net
|
$
|
3.6
|
|
Lease liabilities:
|
|
Current portion of long-term debt
|
$
|
0.4
|
|
Long-term debt
|
2.5
|
|
Total finance lease liabilities
|
$
|
2.9
|
|
Future minimum lease payments under non-cancellable leases at
June 30, 2019
were as follows:
|
|
|
|
|
|
|
|
|
Operating Leases
|
Finance Leases
|
Year Ending December 31,
|
|
|
2019
|
$
|
17.6
|
|
$
|
0.4
|
|
2020
|
29.4
|
|
0.9
|
|
2021
|
19.4
|
|
0.8
|
|
2022
|
13.7
|
|
0.7
|
|
2023
|
10.1
|
|
0.2
|
|
Thereafter
|
24.1
|
|
—
|
|
Total future minimum lease payments
|
114.3
|
|
3.0
|
|
Less: imputed interest
|
(11.8
|
)
|
(0.1
|
)
|
Total
|
$
|
102.5
|
|
$
|
2.9
|
|
The following tables present other information related to leases:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
June 30, 2019
|
June 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
$
|
8.8
|
|
$
|
17.7
|
|
Financing cash flows from finance leases
|
0.1
|
|
1.1
|
|
Lease assets added in the period:
|
|
|
Operating leases
|
$
|
23.7
|
|
$
|
39.4
|
|
Finance leases
|
0.2
|
|
0.8
|
|
|
|
|
|
|
June 30, 2019
|
Weighted-average remaining lease term:
|
|
Operating leases
|
5.3 years
|
|
Finance leases
|
3.6 years
|
|
Weighted-average discount rate:
|
|
Operating leases
|
4.10
|
%
|
Finance leases
|
2.58
|
%
|
Note 7 - Financing Arrangements
Short-term debt at
June 30, 2019
and
December 31, 2018
was as follows:
|
|
|
|
|
|
|
|
|
June 30,
2019
|
December 31,
2018
|
Borrowings under variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.34% to 3.50% at June 30, 2019 and 0.29% to 1.00% at December 31, 2018
|
$
|
37.3
|
|
$
|
33.6
|
|
Short-term debt
|
$
|
37.3
|
|
$
|
33.6
|
|
The lines of credit for certain of the Company’s foreign subsidiaries provide for short-term borrowings up to
$272.6 million
in the aggregate. Most of these lines of credit are uncommitted. At
June 30, 2019
, the Company’s foreign subsidiaries had borrowings outstanding of
$37.3 million
and bank guarantees of
$0.4 million
, which reduced the aggregate availability under these facilities to
$234.9 million
.
Long-term debt at
June 30, 2019
and
December 31, 2018
was as follows:
|
|
|
|
|
|
|
|
|
June 30,
2019
|
December 31,
2018
|
Variable-rate Senior Credit Facility with an average interest rate on U.S. Dollar of 3.57% and Euro of 1.09% at June 30, 2019 and 3.40% and 1.10%, respectively, at December 31, 2018
|
$
|
54.6
|
|
$
|
43.9
|
|
Variable-rate Euro Term Loan
(1)
, maturing on September 18, 2020, with an interest rate of 1.13% at June 30, 2019 and December 31, 2018
|
81.8
|
|
107.1
|
|
Variable-rate Accounts Receivable Facility, with an interest rate of 3.32% at June 30, 2019 and 3.22% at December 31, 2018
|
100.0
|
|
75.0
|
|
Variable-rate Term Loan
(1)
, maturing on September 11, 2023, with an interest rate of 3.65% at June 30, 2019 and 3.77% at December 31, 2018
|
342.8
|
|
347.1
|
|
Fixed-rate Senior Unsecured Notes
(1)
, maturing on September 1, 2024, with an interest rate of 3.875%
|
348.1
|
|
347.7
|
|
Fixed-rate Euro Senior Unsecured Notes
(1)
, maturing on September 7, 2027, with an interest rate of 2.02%
|
170.1
|
|
171.4
|
|
Fixed-rate Senior Unsecured Notes
(1)
, maturing on December 15, 2028, with an interest rate of 4.50%
|
395.9
|
|
395.8
|
|
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
|
|
Other
|
3.7
|
|
5.4
|
|
|
1,651.6
|
|
1,648.0
|
|
Less: Current maturities
|
9.0
|
|
9.4
|
|
Long-term debt
|
$
|
1,642.6
|
|
$
|
1,638.6
|
|
(1)
Net of discounts and fees
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; however, availability under the Accounts Receivable Facility was not reduced by any such borrowing base limitations at
June 30, 2019
. As of
June 30, 2019
, there were outstanding borrowings of
$100.0 million
under the Accounts Receivable Facility, which reduced the availability under this facility to
zero
. 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.
On
June 25, 2019
, the Company entered into a Fourth Amended and Restated Credit Agreement ("Senior Credit Facility"). The Senior Credit Facility amends and restates the Company's previous credit agreement, dated as of June 19, 2015. The Senior Credit Facility is a
$650.0 million
unsecured revolving credit facility, which matures on
June 25, 2024
. At
June 30, 2019
, the Company had
$54.6 million
of outstanding borrowings under the Senior Credit Facility, which reduced the availability under this facility to
$595.4 million
. The Senior Credit Facility has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio.
On
September 6, 2018
, the Company issued
$400 million
aggregate principal amount of fixed-rate
4.50%
senior unsecured notes that mature on
December 15, 2028
(the "2028 Notes"). 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 2028 Notes and the 2023 Term Loan were used to fund the acquisitions of Cone Drive and Rollon, which closed on
September 1, 2018
and
September 18, 2018
, respectively. On
July 12, 2019
, the Company amended and restated the 2023 Term Loan. The Amendment modifies the original agreement to, among other things, align covenants and other terms with the Company’s Senior Credit Facility.
On
September 7, 2017
, the Company issued
€150 million
aggregate principal amount of fixed-rate
2.02%
senior unsecured notes that mature on
September 7, 2027
(the "2027 Notes"). On
September 18, 2017
, the Company entered into a
€100 million
variable-rate term loan that matures on
September 18, 2020
(the "2020 Term Loan"). During the second quarter, the Company repaid
€17.0 million
under the 2020 Term Loan bringing the total paid to-date to
€28.0 million
, which reduced the principal balance to
€72.0 million
as of
June 30, 2019
.
At
June 30, 2019
, the Company was in full compliance with all applicable covenants on its outstanding debt.
Note 8 - 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 have been settled or dismissed.
The Company had total environmental accruals of
$5.4 million
and $
5.5 million
for various known environmental matters that are probable and reasonably estimable at
June 30, 2019
and
December 31, 2018
, respectively, which includes the Lovejoy matter discussed above. These accruals were recorded based upon the best estimate of costs to be incurred in light of the progress made in determining the magnitude of remediation costs, the timing and extent of remedial actions required by governmental authorities and the amount of the Company’s liability in proportion to other responsible parties.
In October 2014, the Brazilian government antitrust agency, Administrative Council for Economic Defense, or CADE, announced that it had opened an investigation of alleged antitrust violations in the bearing industry. The Company’s Brazilian subsidiary, Timken do Brasil Comercial Importadora Ltda. ("Timken do Brasil"), was included in the investigation. In
May 2019
, the investigation division of CADE issued a report on the alleged antitrust violations and recommended that Timken do Brasil, among others, be found to have violated certain provisions of the Brazil Competition Law. The case has now moved to the tribunal level of CADE. The Company is continuing to advance its interests in this case. Based on management's evaluation of the findings contained in the CADE investigation report, the Company recorded expense in the
three
months ended
June 30, 2019
to establish a liability that represents management’s best estimate of the probable loss. While no assurance can be given as to the ultimate outcome of this case, the Company does not believe that the final resolution will have a material effect on the Company's consolidated financial position or liquidity, however, the effect of any such future 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.
The Company is a defendant in a 2017 lawsuit filed in the U.S. by a former employee asserting workplace-related negligence by Company medical personnel. The Company’s defense is ongoing and, while the incurrence of a liability is not considered probable at this point, management believes the low end of the range of the reasonably possible outcomes would be immaterial to the Company.
In addition, the Company is subject to various other lawsuits, claims and proceedings, which arise in the ordinary course of its business. The Company accrues costs associated with legal and non-income tax matters when they become probable and reasonably estimable. Accruals are established based on the estimated undiscounted cash flows to settle the obligations and are not reduced by any potential recoveries from insurance or other indemnification claims. Management believes that any ultimate liability with respect to these actions, in excess of amounts provided, will not materially affect the Company’s Consolidated Financial Statements.
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
$6.4 million
and
$7.1 million
at
June 30, 2019
and
December 31, 2018
, respectively. The Company continues to evaluate claims raised by certain customers with respect to the performance of bearings sold into the wind energy sector. 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 following tables present the changes in the components of equity for the
three and six
months ended
June 30, 2019
and
2018
, 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, 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 expense
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018
|
$
|
1,542.8
|
|
$
|
53.1
|
|
$
|
901.5
|
|
$
|
1,475.9
|
|
$
|
(29.2
|
)
|
$
|
(890.4
|
)
|
$
|
31.9
|
|
Net income
|
91.9
|
|
|
|
91.0
|
|
|
|
0.9
|
|
Foreign currency translation adjustment
|
(46.6
|
)
|
|
|
|
(44.3
|
)
|
|
(2.3
|
)
|
Change in fair value of derivative financial
instruments, net of reclassifications
|
3.6
|
|
|
|
|
3.6
|
|
|
|
Dividends – $0.28 per share
|
(21.6
|
)
|
|
|
(21.6
|
)
|
|
|
|
Stock-based compensation expense
|
7.5
|
|
|
7.5
|
|
|
|
|
|
Stock purchased at fair market value
|
(26.9
|
)
|
|
|
|
|
(26.9
|
)
|
|
Stock option exercise activity
|
2.2
|
|
|
(1.7
|
)
|
|
|
3.9
|
|
|
Restricted share activity
|
—
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
Payments related to tax withholding for
stock-based compensation
|
(0.6
|
)
|
|
|
|
|
|
(0.6
|
)
|
|
Balance at June 30, 2018
|
$
|
1,552.3
|
|
$
|
53.1
|
|
$
|
907.2
|
|
$
|
1,545.3
|
|
$
|
(69.9
|
)
|
$
|
(913.9
|
)
|
$
|
30.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Timken Company Shareholders
|
|
|
Total
|
Stated
Capital
|
Other
Paid-In
Capital
|
Earnings
Invested
in the
Business
|
Accumulated
Other
Comprehensive
(Loss)
|
Treasury
Stock
|
Non
controlling
Interest
|
Balance at December 31, 2017
|
$
|
1,474.9
|
|
$
|
53.1
|
|
$
|
903.8
|
|
$
|
1,408.4
|
|
$
|
(38.3
|
)
|
$
|
(884.3
|
)
|
$
|
32.2
|
|
Cumulative effect of adopting ASU 2014-09
(net of income tax benefit of $2.6 million)
(1)
|
7.7
|
|
|
|
7.7
|
|
|
|
|
Cumulative effect of adopting ASU 2018-02
|
—
|
|
|
|
0.7
|
|
(0.7
|
)
|
|
|
Net income
|
172.4
|
|
|
|
171.2
|
|
|
|
1.2
|
|
Foreign currency translation adjustment
|
(38.2
|
)
|
|
|
|
(35.3
|
)
|
|
(2.9
|
)
|
Change in fair value of derivative financial
instruments, net of reclassifications
|
4.4
|
|
|
|
|
4.4
|
|
|
|
Dividends
– $0.55 per shar
e
|
(42.7
|
)
|
|
|
(42.7
|
)
|
|
|
|
Stock-based compensation expense
|
17.8
|
|
|
17.8
|
|
|
|
|
|
Stock purchased at fair market value
|
(49.6
|
)
|
|
|
|
|
(49.6
|
)
|
|
Stock option exercise activity
|
10.6
|
|
|
(3.1
|
)
|
|
|
13.7
|
|
|
Restricted share activity
|
—
|
|
|
(11.3
|
)
|
|
|
11.3
|
|
|
Payments related to tax withholding for
stock-based compensation
|
(5.0
|
)
|
|
|
|
|
|
(5.0
|
)
|
|
Balance at June 30, 2018
|
$
|
1,552.3
|
|
$
|
53.1
|
|
$
|
907.2
|
|
$
|
1,545.3
|
|
$
|
(69.9
|
)
|
$
|
(913.9
|
)
|
$
|
30.5
|
|
(1)
On January 1, 2018, the Company recognized the cumulative effect of adopting the revenue recognition guidance in ASU 2014-09 and related amendments as an adjustment to the opening balance of earnings invested in the business for the year ended December 31, 2018. Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for further information.
Note 10 - Accumulated Other Comprehensive Income (Loss)
The following tables present details about components of accumulated other comprehensive loss for the
three and six
months ended
June 30, 2019
and
2018
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
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 expense
|
—
|
|
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 postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at December 31, 2018
|
$
|
(95.6
|
)
|
$
|
—
|
|
$
|
0.3
|
|
$
|
(95.3
|
)
|
Other comprehensive income before
reclassifications and income tax
|
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 expense
|
—
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at March 31, 2018
|
$
|
(26.1
|
)
|
$
|
(0.4
|
)
|
$
|
(2.7
|
)
|
$
|
(29.2
|
)
|
Other comprehensive (loss) income before
reclassifications and income taxes
|
(46.6
|
)
|
—
|
|
4.4
|
|
(42.2
|
)
|
Amounts reclassified from accumulated other
comprehensive income (loss) before income taxes
|
—
|
|
—
|
|
0.4
|
|
0.4
|
|
Income tax benefit
|
—
|
|
—
|
|
(1.2
|
)
|
(1.2
|
)
|
Net current period other comprehensive
(loss) income, net of income taxes
|
(46.6
|
)
|
—
|
|
3.6
|
|
(43.0
|
)
|
Noncontrolling interest
|
2.3
|
|
—
|
|
—
|
|
2.3
|
|
Net current period comprehensive (loss) income,
net of income taxes and noncontrolling interest
|
(44.3
|
)
|
—
|
|
3.6
|
|
(40.7
|
)
|
Balance at June 30, 2018
|
$
|
(70.4
|
)
|
$
|
(0.4
|
)
|
$
|
0.9
|
|
$
|
(69.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
Pension and postretirement liability adjustments
|
Change in fair value of derivative financial instruments
|
Total
|
Balance at December 31, 2017
|
$
|
(35.1
|
)
|
$
|
(0.3
|
)
|
$
|
(2.9
|
)
|
$
|
(38.3
|
)
|
Cumulative effect of ASU 2018-02
|
—
|
|
(0.1
|
)
|
(0.6
|
)
|
(0.7
|
)
|
Balance at January 1, 2018
|
(35.1
|
)
|
(0.4
|
)
|
(3.5
|
)
|
(39.0
|
)
|
Other comprehensive (loss) income before
reclassifications and income taxes
|
(38.2
|
)
|
—
|
|
4.0
|
|
(34.2
|
)
|
Amounts reclassified from accumulated other
comprehensive income (loss) before income taxes
|
—
|
|
—
|
|
1.8
|
|
1.8
|
|
Income tax benefit
|
—
|
|
—
|
|
(1.4
|
)
|
(1.4
|
)
|
Net current period other comprehensive
(loss) income, net of income taxes
|
(38.2
|
)
|
—
|
|
4.4
|
|
(33.8
|
)
|
Noncontrolling interest
|
2.9
|
|
—
|
|
—
|
|
2.9
|
|
Net current period comprehensive (loss) income,
net of income taxes and noncontrolling interest
|
(35.3
|
)
|
(0.1
|
)
|
3.8
|
|
(31.6
|
)
|
Balance at June 30, 2018
|
$
|
(70.4
|
)
|
$
|
(0.4
|
)
|
$
|
0.9
|
|
$
|
(69.9
|
)
|
Other comprehensive income (loss) before reclassifications and income taxes includes the effect of foreign currency.
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, 2019
and
2018
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2019
|
2018
|
2019
|
2018
|
Numerator:
|
|
|
|
|
Net income attributable to The Timken Company
|
$
|
92.5
|
|
$
|
91.0
|
|
$
|
184.4
|
|
$
|
171.2
|
|
Less: undistributed earnings allocated to nonvested
stock
|
—
|
|
—
|
|
—
|
|
—
|
|
Net income available to common shareholders for basic
and diluted earnings per share
|
$
|
92.5
|
|
$
|
91.0
|
|
$
|
184.4
|
|
$
|
171.2
|
|
Denominator:
|
|
|
|
|
Weighted average number of shares outstanding - basic
|
76,085,358
|
|
77,360,159
|
|
76,024,301
|
|
77,544,365
|
|
Effect of dilutive securities:
|
|
|
|
|
Stock options and awards - based on the treasury stock
method
|
1,123,074
|
|
1,136,139
|
|
1,074,681
|
|
1,207,586
|
|
Weighted average number of shares outstanding
assuming dilution of stock options and awards
|
77,208,432
|
|
78,496,298
|
|
77,098,982
|
|
78,751,951
|
|
Basic earnings per share
|
$
|
1.22
|
|
$
|
1.18
|
|
$
|
2.43
|
|
$
|
2.21
|
|
Diluted earnings per share
|
$
|
1.20
|
|
$
|
1.16
|
|
$
|
2.39
|
|
$
|
2.17
|
|
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, 2019
and
2018
were
1,428,699
and
933,465
, respectively. The antidilutive stock options outstanding during the
six
months ended
June 30, 2019
and
2018
were
1,309,878
and
816,684
, respectively.
Note 12 - 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, 2019
and
2018
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Three Months Ended
|
|
June 30, 2019
|
June 30, 2018
|
|
Mobile
|
Process
|
Total
|
Mobile
|
Process
|
Total
|
United States
|
$
|
258.6
|
|
$
|
226.9
|
|
$
|
485.5
|
|
$
|
261.7
|
|
$
|
190.0
|
|
$
|
451.7
|
|
Americas excluding United States
|
57.2
|
|
40.8
|
|
98.0
|
|
53.5
|
|
42.4
|
|
95.9
|
|
Europe / Middle East / Africa
|
101.2
|
|
129.1
|
|
230.3
|
|
100.3
|
|
92.4
|
|
192.7
|
|
Asia-Pacific
|
76.7
|
|
109.5
|
|
186.2
|
|
73.6
|
|
92.4
|
|
166.0
|
|
Net sales
|
$
|
493.7
|
|
$
|
506.3
|
|
$
|
1,000.0
|
|
$
|
489.1
|
|
$
|
417.2
|
|
$
|
906.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
Six Months Ended
|
|
June 30, 2019
|
June 30, 2018
|
|
Mobile
|
Process
|
Total
|
Mobile
|
Process
|
Total
|
United States
|
$
|
532.3
|
|
$
|
436.6
|
|
$
|
968.9
|
|
$
|
519.1
|
|
$
|
368.6
|
|
$
|
887.7
|
|
Americas excluding United States
|
105.7
|
|
84.4
|
|
190.1
|
|
108.7
|
|
89.1
|
|
197.8
|
|
Europe / Middle East / Africa
|
202.9
|
|
254.1
|
|
457.0
|
|
203.2
|
|
180.4
|
|
383.6
|
|
Asia-Pacific
|
152.8
|
|
210.9
|
|
363.7
|
|
146.6
|
|
173.7
|
|
320.3
|
|
Net sales
|
$
|
993.7
|
|
$
|
986.0
|
|
$
|
1,979.7
|
|
$
|
977.6
|
|
$
|
811.8
|
|
$
|
1,789.4
|
|
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, 2019
and
2018
, respectively:
|
|
|
|
|
Six Months Ended
|
Six Months Ended
|
Revenue by sales channel
|
June 30, 2019
|
June 30, 2018
|
Original equipment manufacturers
|
57%
|
57%
|
Distribution/end users
|
43%
|
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, 2019
and
June 30, 2018
, approximately
11%
and
9%
, 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. The payment terms with the U.S. government or its contractors, which represented approximately
8%
and
7%
of total net sales during the
six
months ended
June 30, 2019
and
June 30, 2018
, respectively, differ from those of non-government customers. Finally, approximately
5%
of total net sales represented service revenue during the
six
months ended
June 30, 2019
and
June 30, 2018
, respectively.
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
$110 million
at
June 30, 2019
.
Unbilled Receivables:
The following table contains a rollforward of unbilled receivables for the
six
months ended
June 30, 2019
:
|
|
|
|
|
|
June 30, 2019
|
Beginning balance, January 1
|
$
|
116.6
|
|
Additional unbilled revenue recognized
|
219.2
|
|
Less: amounts billed to customers
|
(182.5
|
)
|
Ending balance
|
$
|
153.3
|
|
There were no impairment losses recorded on unbilled receivables for the
six
months ended
June 30, 2019
.
Note 13 - Segment Information
The primary measurement used by management to measure the financial performance of each segment is earnings before interest and taxes ("EBIT").
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2019
|
2018
|
2019
|
2018
|
Net sales:
|
|
|
|
|
Mobile Industries
|
$
|
493.7
|
|
$
|
489.1
|
|
$
|
993.7
|
|
$
|
977.6
|
|
Process Industries
|
506.3
|
|
417.2
|
|
986.0
|
|
811.8
|
|
Net sales
|
$
|
1,000.0
|
|
$
|
906.3
|
|
$
|
1,979.7
|
|
$
|
1,789.4
|
|
Segment EBIT:
|
|
|
|
|
Mobile Industries
|
$
|
59.1
|
|
$
|
54.5
|
|
$
|
120.5
|
|
$
|
105.6
|
|
Process Industries
|
103.0
|
|
90.6
|
|
209.2
|
|
172.2
|
|
Total EBIT, for reportable segments
|
$
|
162.1
|
|
$
|
145.1
|
|
$
|
329.7
|
|
$
|
277.8
|
|
Corporate expenses
|
(15.4
|
)
|
(15.2
|
)
|
(29.7
|
)
|
(29.3
|
)
|
Corporate pension-related charges
|
—
|
|
2.4
|
|
—
|
|
2.2
|
|
Interest expense
|
(19.3
|
)
|
(10.7
|
)
|
(37.3
|
)
|
(20.7
|
)
|
Interest income
|
1.1
|
|
0.5
|
|
2.4
|
|
0.9
|
|
Income before income taxes
|
$
|
128.5
|
|
$
|
122.1
|
|
$
|
265.1
|
|
$
|
230.9
|
|
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, 2019
are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of the respective period’s proportionate share of the amounts to be recorded for the year ending
December 31, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
Total
|
|
Three Months Ended
June 30,
|
Three Months Ended
June 30,
|
Three Months Ended
June 30,
|
|
2019
|
2018
|
2019
|
2018
|
2019
|
2018
|
Components of net periodic
benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
2.6
|
|
$
|
3.2
|
|
$
|
0.4
|
|
$
|
0.4
|
|
$
|
3.0
|
|
$
|
3.6
|
|
Interest cost
|
6.0
|
|
5.8
|
|
1.8
|
|
1.8
|
|
7.8
|
|
7.6
|
|
Expected return on plan assets
|
(6.4
|
)
|
(7.3
|
)
|
(2.6
|
)
|
(2.9
|
)
|
(9.0
|
)
|
(10.2
|
)
|
Amortization of prior service cost
|
0.4
|
|
0.4
|
|
0.1
|
|
—
|
|
0.5
|
|
0.4
|
|
Recognition of actuarial gains
|
—
|
|
(2.4
|
)
|
—
|
|
—
|
|
—
|
|
(2.4
|
)
|
Net periodic benefit cost
|
$
|
2.6
|
|
$
|
(0.3
|
)
|
$
|
(0.3
|
)
|
$
|
(0.7
|
)
|
$
|
2.3
|
|
$
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
Total
|
|
Six Months Ended
June 30,
|
Six Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2019
|
2018
|
2019
|
2018
|
2019
|
2018
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
5.2
|
|
$
|
6.4
|
|
$
|
0.8
|
|
$
|
0.8
|
|
$
|
6.0
|
|
$
|
7.2
|
|
Interest cost
|
12.0
|
|
11.7
|
|
3.7
|
|
3.7
|
|
15.7
|
|
15.4
|
|
Expected return on plan assets
|
(12.8
|
)
|
(14.6
|
)
|
(5.2
|
)
|
(5.9
|
)
|
(18.0
|
)
|
(20.5
|
)
|
Amortization of prior service cost
|
0.8
|
|
0.8
|
|
0.1
|
|
—
|
|
0.9
|
|
0.8
|
|
Recognition of actuarial gains
|
—
|
|
(2.4
|
)
|
—
|
|
—
|
|
—
|
|
(2.4
|
)
|
Net periodic benefit cost
|
$
|
5.2
|
|
$
|
1.9
|
|
$
|
(0.6
|
)
|
$
|
(1.4
|
)
|
$
|
4.6
|
|
$
|
0.5
|
|
The Company currently expects to make contributions and payments related to its global defined benefit pension plans totaling approximately
$34 million
in
2019
. Approximately
$24 million
of this total relates to the
2019
payout of deferred compensation in
July 2019
to a former executive officer of the Company, which will trigger a pension remeasurement during the third quarter of 2019.
During the
three and six
months ended
June 30, 2018
, the Company recognized actuarial gains of
$2.4 million
. The remeasurement was required during the period as a result of lump sum payments to new retirees exceeding service and interest costs for one of the Company's U.S. defined benefit plans.
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, 2019
are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of the respective period’s proportionate share of the amounts to be recorded for the year ending
December 31, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2019
|
2018
|
2019
|
2018
|
Components of net periodic benefit cost:
|
|
|
|
|
Service cost
|
$
|
0.1
|
|
$
|
0.1
|
|
$
|
0.1
|
|
$
|
0.1
|
|
Interest cost
|
1.9
|
|
1.9
|
|
3.8
|
|
3.7
|
|
Expected return on plan assets
|
(0.8
|
)
|
(1.0
|
)
|
(1.6
|
)
|
(1.9
|
)
|
Amortization of prior service credit
|
(0.6
|
)
|
(0.4
|
)
|
(1.1
|
)
|
(0.8
|
)
|
Net periodic benefit cost
|
$
|
0.6
|
|
$
|
0.6
|
|
$
|
1.2
|
|
$
|
1.1
|
|
During July 2019, the Company announced changes to the medical plan offerings for certain of its postretirement benefit plans, effective January 1, 2020, which will impact the benefits provided to certain retirees. These plan amendments are expected to trigger a remeasurement during the third quarter of 2019.
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 are recorded during the period(s) in which they occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2019
|
2018
|
2019
|
2018
|
Provision for income taxes
|
$
|
33.6
|
|
$
|
30.2
|
|
$
|
74.9
|
|
$
|
58.5
|
|
Effective tax rate
|
26.1
|
%
|
24.7
|
%
|
28.3
|
%
|
25.3
|
%
|
The income tax expense for the
three and six
months ended
June 30, 2019
was calculated using the forecasted multi-jurisdictional annual effective tax rates to determine a blended annual effective tax rate. The effective tax rate differs from the U.S. federal statutory rate of
21%
primarily due to the projected mix of earnings in international jurisdictions with relatively higher tax rates and U.S. state and local income taxes. It was further impacted by additional discrete accruals recorded for uncertain tax positions related to the Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform").
The effective tax rate of
26.1%
for the
three
months ended
June 30, 2019
is higher than the
three
months ended
June 30, 2018
primarily due to higher discrete tax benefits recorded in the prior year period.
The effective tax rate of
28.3%
for the first
six
months of
2019
is higher than the first
six
months of
2018
primarily due to higher discrete tax expense in the current year for uncertain tax positions related to U.S. Tax Reform, as well as the impact of generating a greater percentage of earnings in international jurisdictions with relatively higher tax rates.
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, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
129.7
|
|
$
|
128.6
|
|
$
|
1.1
|
|
$
|
—
|
|
Cash and cash equivalents measured at net asset value
|
37.1
|
|
|
|
|
|
|
|
Restricted cash
|
0.6
|
|
0.6
|
|
—
|
|
—
|
|
Short-term investments
|
20.8
|
|
—
|
|
20.8
|
|
—
|
|
Short-term investments measured at net asset value
|
0.8
|
|
|
|
|
|
|
Foreign currency hedges
|
4.8
|
|
—
|
|
4.8
|
|
—
|
|
Total Assets
|
$
|
193.8
|
|
$
|
129.2
|
|
$
|
26.7
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
0.7
|
|
$
|
—
|
|
$
|
0.7
|
|
$
|
—
|
|
Total Liabilities
|
$
|
0.7
|
|
$
|
—
|
|
$
|
0.7
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
105.9
|
|
$
|
104.4
|
|
$
|
1.5
|
|
$
|
—
|
|
Cash and cash equivalents measured at net asset value
|
26.6
|
|
|
|
|
|
|
|
Restricted cash
|
0.6
|
|
0.6
|
|
—
|
|
—
|
|
Short-term investments
|
21.8
|
|
—
|
|
21.8
|
|
—
|
|
Foreign currency hedges
|
4.6
|
|
—
|
|
4.6
|
|
—
|
|
Total Assets
|
$
|
159.5
|
|
$
|
105.0
|
|
$
|
27.9
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
Foreign currency hedges
|
$
|
0.7
|
|
$
|
—
|
|
$
|
0.7
|
|
$
|
—
|
|
Total Liabilities
|
$
|
0.7
|
|
$
|
—
|
|
$
|
0.7
|
|
$
|
—
|
|
Cash and cash equivalents are highly liquid investments with maturities of
three months or less
when purchased and are valued at the redemption value. Short-term investments are investments with maturities between
four months and one year
and generally are valued at amortized cost, which approximates fair value. A portion of the cash and cash equivalents and short-term investments are valued based on net asset value. The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts.
Additionally, 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, 2019
and
2018
, 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
$1,141.1 million
and
$1,077.5 million
at
June 30, 2019
and
December 31, 2018
, respectively. The carrying value of this debt was
$1,069.5 million
and
$1,070.7 million
at
June 30, 2019
and
December 31, 2018
, 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, 2019
and
December 31, 2018
, the Company had
$222.8 million
and
$218.8 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.
The maximum length of time over which the Company hedges its exposure to the variability in future cash flows for forecast transactions is generally eighteen months or less.
Purpose for Derivative Instruments not designated as Hedging Instruments:
For derivative instruments that are not designated as hedging instruments, the instruments are typically forward contracts. In general, the practice is to reduce volatility by selectively hedging transaction exposures including intercompany loans, accounts payable and accounts receivable. Intercompany loans between entities with different functional currencies typically are hedged with a forward contract at the inception of the loan with a maturity date corresponding to the maturity of the loan. The revaluation of these contracts, as well as the revaluation of the underlying balance sheet items, is recorded directly to the income statement so the adjustment generally offsets the revaluation of the underlying balance sheet items to protect cash payments and reduce income statement volatility.
The following table presents the impact of derivative instruments not designated as hedging instruments for the three and six months ended
June 30, 2019
and
2018
, respectively, and their 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
|
2019
|
2018
|
2019
|
2018
|
Foreign currency forward contracts
|
Other income (expense), net
|
$
|
(0.3
|
)
|
$
|
11.0
|
|
$
|
2.7
|
|
$
|
6.7
|
|