THE TIMKEN COMPANY OVERVIEW
Introduction:
The Timken Company designs and manufactures a growing portfolio of engineered bearings and power transmission products. With more than a century of knowledge and innovation, the Company continuously improves the reliability and efficiency of global machinery and equipment to move the world forward. Timken posted$3.8 billion in sales in 2019 and employs more than 18,000 people globally, operating in 42 countries. The Company operates under two reportable segments: (1)Mobile Industries and (2)Process Industries . The following further describes these business segments: •Mobile Industries serves OEM customers that manufacture off-highway equipment for the agricultural, mining and construction markets; on-highway vehicles including passenger cars, light trucks, and medium- and heavy-duty trucks; rail cars and locomotives; outdoor power equipment; rotorcraft and fixed-wing aircraft; and other mobile equipment. Beyond service parts sold to OEMs, aftermarket sales and services to individual end users, equipment owners, operators and maintenance shops are handled directly or through the Company's extensive network of authorized distributors. •Process Industries serves OEM and end-user customers in industries that place heavy demands on the fixed operating equipment they make or use in heavy and other general industrial sectors. This includes metals, cement and aggregate production; power generation and renewable energy sources; oil and gas extraction and refining; pulp and paper and food processing; automation and robotics; and health and critical motion control equipment. Other applications include marine equipment, gear drives, cranes, hoists and conveyors. This segment also supports aftermarket sales and service needs through its global network of authorized industrial distributors and through the provision of services directly to end users.
Timken creates value by understanding customer needs and applying its know-how to serve a broad range of customers in attractive markets and industries across the globe. The Company's business strengths include its product technology, end-market diversity, geographic reach and aftermarket mix. Timken collaborates with OEMs to improve equipment efficiency with its engineered products and captures subsequent equipment replacement cycles by selling largely through independent channels in the aftermarket. Timken focuses its international efforts and footprint in regions of the world where strong macroeconomic factors such as urbanization, infrastructure development and sustainability create demand for its products and services.
The Company's strategy has three primary elements:
Profitable Growth. The Company intends to expand into new and existing markets by leveraging its collective knowledge of metallurgy, friction management and power transmission to create value for Timken customers. Using a highly collaborative technical selling approach, the Company places particular emphasis on creating unique solutions for challenging and/or demanding applications. The Company intends to grow in attractive market sectors around the world, emphasizing those spaces that are highly fragmented, demand high service and value the reliability and efficiency offered by Timken products. The Company also targets applications that offer significant aftermarket demand, thereby providing product and services revenue throughout the equipment's lifetime.
Operational Excellence. Timken operates with a relentless drive for exceptional results and a passion for superior execution. The Company embraces a continuous improvement culture that is charged with increasing efficiency, lowering costs, eliminating waste, encouraging organizational agility and building greater brand equity to fuel growth. This requires the Company's ongoing commitment to attract, retain and develop the best talent across the world.
Capital Deployment to Drive Shareholder Value. The Company is intently focused on providing the highest returns for shareholders through its capital allocation framework, which includes: (1) investing in the core business through capital expenditures, research and development and other organic growth initiatives; (2) pursuing strategic acquisitions to broaden its portfolio and capabilities across diverse markets, with a focus on bearings, adjacent power transmission products and related services; (3) returning capital to shareholders through dividends and share repurchases; and (4) maintaining a strong balance sheet and sufficient liquidity. As part of this framework, the Company may also restructure, reposition or divest underperforming product lines or assets.
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The following items highlight certain of the Company's more significant strategic accomplishments in 2019:
• OnNovember 1, 2019 , the Company completed the acquisition of BEKA Lubrication ("BEKA"), a leading global supplier of automatic lubrications systems serving a diverse range of industrial sectors including wind, food and beverage, rail, on- and off-highway and other process industries. BEKA, located in Pegnitz,Germany , employs approximately 900 people, and had annual sales at the time of the acquisition of approximately$135 million . The acquisition was funded with cash on hand and through borrowings under existing credit facilities. • OnApril 1, 2019 , the Company acquiredDiamond Chain Company ("Diamond Chain"), a leading supplier of high-performance roller chains for industrial markets. Diamond Chain serves a diverse range of sectors, including industrial distribution, material handling, food and beverage, agriculture, construction and other process industries. At the time of the acquisition, Diamond had annual sales of approximately$60 million . Diamond Chain has manufacturing operations in theU.S. andChina and employs approximately 370 people. The acquisition was funded with cash on hand and through borrowings under existing credit facilities. 20
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RESULTS OF OPERATIONS
2019 vs. 2018
Overview:
2019 2018 $ Change % Change
Net sales $ 3,789.9 $ 3,580.8 $ 209.1 5.8 %
Net income 374.7 305.5 69.2 22.7 %
Net income attributable to
noncontrolling interest 12.6 2.7 9.9 366.7 %
Net income attributable to The Timken
Company $ 362.1 $ 302.8 $ 59.3 19.6 %
Diluted earnings per share $ 4.71 $ 3.86 $ 0.85 22.0 %
Average number of diluted shares 76,896,565 78,337,481 - (1.8 %)
The increase in net sales was primarily driven by the benefit of acquisitions,
the impact of higher pricing and higher demand in the
Outlook:
The Company expects 2020 full-year revenue to be in the range of down 2% to up 2% compared with 2019 primarily due to the benefit of acquisitions made in 2019, offset by expected organic declines and the impact of currency. The Company's earnings are expected to be down in 2020 compared with 2019, primarily due to the impact of lower volume, higher manufacturing costs and higher income tax expense, partially offset by lower material and logistics costs, favorable price/mix and the impact of acquisitions.
The Company expects to generate operating cash of approximately
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THE STATEMENTS OF INCOME
Sales:
2019 2018 $ Change % Change
Net sales
Net sales increased in 2019 compared with 2018, primarily due to the benefit of
acquisitions of
Gross Profit:
2019 2018 $ Change Change
Gross profit $ 1,141.8 $ 1,040.1 $ 101.7 9.8 %
Gross profit % to net sales 30.1 % 29.0 % - 110 bps
Gross profit increased in 2019 compared with 2018, primarily due to the benefit
of acquisitions of
Selling, General and Administrative Expenses:
2019 2018 $ Change Change
Selling, general and administrative
expenses $ 618.6 $ 580.7 $ 37.9 6.5%
Selling, general and administrative
expenses % to net sales 16.3 % 16.2 % - 10 bps
The increase in selling, general and administrative ("SG&A") expenses in 2019
compared with 2018 was primarily due to SG&A expense from acquisitions of
Interest Expense and Income:
2019 2018 $ Change % Change
Interest expense
Interest expense increased in 2019 compared to 2018 primarily due to higher average outstanding debt during the year, which was primarily used to fund acquisitions. Refer to Note 11 - Financing Arrangements in the Notes to the Consolidated Financial Statements for further discussion.
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Other Income (Expense):
2019 2018 $ Change % Change
Non-service pension and other postretirement
income (expense) $ 10.2 $ (6.2 ) $ 16.4 (264.5 %)
Other income, net 13.0 9.4 3.6 38.3 %
The increase in non-service pension and other postretirement income (expense)
for 2019 compared with 2018 was primarily due to the recognition of net
actuarial gains ("Mark-to-Market Charges") of
Income Tax Expense:
2019 2018 $ Change Change
Income tax expense
The effective tax rate for 2019 was 20.7%, which was slightly favorable compared
to the
The effective tax rate for 2018 was 25.1%, which was unfavorable compared to the
The change in the effective rate for 2019 compared with 2018 was a decrease of
4.4%. The decrease was primarily due to the release of certain valuation
allowances and the remeasurement of deferred tax balances to reflect the reduced
Refer to Note 5 - Income Taxes in the Notes to the Consolidated Financial Statements for more information on the computation of the income tax expense in interim periods.
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BUSINESS SEGMENTS
The presentation of segment results below includes a reconciliation of the
changes in net sales for each segment reported in accordance with
The following items highlight the Company's acquisitions completed in 2019 and
2018 by segment based on the customers and underlying markets served:
• The Company acquired BEKA during the fourth quarter of 2019. The majority
of the results for BEKA are reported in the Mobile Industries segment.
• The Company acquired Diamond Chain during the second quarter of 2019. The
majority of the results for Diamond Chain are reported in the Process
Industries segment.
• The Company acquired ABC Bearings Limited ("ABC Bearings"), Apiary
Investments Holding Limited ("Cone Drive "), and Rollon S.p.A. ("Rollon")
during the third quarter of 2018. Substantially all of the results for ABC
Bearings are reported in the Mobile Industries segment. Results for Cone
Drive and Rollon are reported in the Mobile Industries and Process
Industries segments based on customers and underlying market sectors
served.
• The Company divested Groeneveld Information Technology Holding B.V. (the
"ICT Business") on September 19, 2018 . The Company acquired the ICT
Business in July 2017 as part of the Groeneveld Group ("Groeneveld")
acquisition. The ICT Business is separate from the Groeneveld lubrication
solutions business and was considered non-core to the operations. Results
for the ICT Business were reported in the Mobile Industries segment.
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Mobile Industries Segment:
2019 2018 $ Change Change
Net sales $ 1,893.9 $ 1,903.7 $ (9.8 ) (0.5 %)
EBITDA $ 284.9 $ 272.2 $ 12.7 4.7 %
EBITDA margin 15.0 % 14.3 % - 70 bps
2019 2018 $ Change % Change
Net sales $ 1,893.9 $ 1,903.7 $ (9.8 ) (0.5 %)
Less: Acquisitions 82.5 - 82.5 NM
Divestitures (8.5 ) - (8.5 ) NM
Currency (36.0 ) - (36.0 ) NM
Net sales, excluding the impact of
acquisitions, divestitures and
currency $ 1,855.9 $ 1,903.7 $ (47.8 ) (2.5 %)
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Process Industries Segment:
2019 2018 $ Change Change
Net sales $ 1,896.0 $ 1,677.1 $ 218.9 13.1 %
EBITDA $ 466.6 $ 405.7 $ 60.9 15.0 %
EBITDA margin 24.6 % 24.2 % - 40 bps
2019 2018 $ Change % Change
Net sales $ 1,896.0 $ 1,677.1 $ 218.9 13.1 %
Less: Acquisitions 196.4 - 196.4 NM
Currency (36.5 ) - (36.5 ) NM
Net sales, excluding the impact of
acquisitions and currency $ 1,736.1 $ 1,677.1 $ 59.0 3.5 %
Corporate:
2019 2018 $ Change Change
Corporate expenses $ 56.2 $ 62.0 $ (5.8 ) (9.4 %)
Corporate expenses % to net sales 1.5 % 1.7 % - (20 ) bps
Corporate expenses decreased in 2019 compared with 2018 primarily due to higher transaction costs related to acquisitions in 2018.
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RESULTS OF OPERATIONS:
2018 vs. 2017
Overview:
2018 2017 $ Change % Change
Net sales $ 3,580.8 $ 3,003.8 $ 577.0 19.2 %
Net income 305.5 202.3 103.2 51.0 %
Income (loss) attributable to
noncontrolling interest 2.7 (1.1 ) 3.8 (345.5 %)
Net income attributable to The Timken
Company $ 302.8 $ 203.4 $ 99.4 48.9 %
Diluted earnings per share $ 3.86 $ 2.58 $ 1.28 49.6 %
Average number of diluted shares 78,337,481 78,911,149 - (0.7 %)
The increase in net sales was primarily due to organic revenue growth driven by higher end-market demand, the benefit of acquisitions and the impact of higher pricing. The increase in net income in 2018 compared with 2017 was primarily due to improved performance across the business, driven by the impact of higher volume, favorable price/mix, the net benefit of acquisitions and improved manufacturing performance, as well as lower Mark-to-Market Charges due to the remeasurement of pension and other postretirement assets and obligations, restructuring charges, and interest expense. These factors were partially offset by the impact of higher SG&A expenses, higher income tax expenses and higher material and logistics costs (including tariffs).
THE STATEMENTS OF INCOME
Sales:
2018 2017 $ Change % Change
Net sales
Net sales increased in 2018 compared with 2017 primarily due to higher organic
revenue of
Gross Profit:
2018 2017 $ Change Change
Gross profit $ 1,040.1 $ 812.1 $ 228.0 28.1 %
Gross profit % to net sales 29.0 % 27.0 % - 200 bps
Gross profit increased in 2018 compared with 2017 primarily due to the impact of
higher volume of
Selling, General and Administrative Expenses:
2018 2017 $ Change Change
Selling, general and administrative
expenses $ 580.7 $ 508.3 $ 72.4 14.2 %
Selling, general and administrative
expenses % to net sales 16.2 % 16.9 % - (70 ) bps
The increased in SG&A expenses in 2018 compared with 2017 was primarily due to
the impact of acquisitions of
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Interest Expense and Income:
2018 2017 $ Change % Change
Interest expense
Interest expense increased in 2018 compared to 2017 primarily due to an increase in outstanding debt to fund the acquisitions of Groeneveld, Rollon andCone Drive . Other Income (Expense): 2018 2017 $ Change % Change Non-service pension and other postretirement expense (6.2 ) (15.0 ) 8.8 (58.7 %) Other income (expense), net$ 9.4 $ 9.6 $ (0.2 ) (2.1 )%
The decrease in non-service pension and other postretirement expense for 2018
compared to 2017 was primarily due to lower Mark-to-Market Charges of
Income Tax Expense:
2018 2017 $ Change Change
Income tax expense
The effective tax rate for 2018 was 25.1%, which was unfavorable compared to the
The effective tax rate for 2017 was 22%, which was favorable compared to the
These favorable impacts were partially offset by provisional amounts for the
one-time net charge related to the taxation of unremitted foreign earnings and
the remeasurement of
The change in the effective rate for 2018 compared with 2017 was an increase of
2.9%. The increase was primarily due to the net reversal of accruals for prior
year uncertain tax positions in 2017. The effective tax rate also increased due
to earnings in certain foreign jurisdictions where the effective rate was higher
than 21%, unfavorable
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Table of Contents BUSINESS SEGMENTS
The presentation of segment results below includes a reconciliation of the
changes in net sales for each segment reported in accordance with
The following items highlight the Company's acquisitions and divestitures completed in 2018 and 2017: • The Company acquired ABC Bearings,Cone Drive and Rollon during the third quarter of 2018. Substantially all of the results for ABC Bearings are reported in theMobile Industries segment. Results forCone Drive and Rollon are reported in theMobile Industries andProcess Industries segments based on customers and underlying market sectors served. • The Company acquired Groeneveld during the third quarter of 2017. Substantially all of the results for Groeneveld are reported in theMobile Industries segment. • The Company acquiredTorsion Control Products, Inc. ("Torsion Control Products") andPT Tech, Inc. ("PT Tech") during the second quarter of 2017. Results for Torsion Control Products and PT Tech are reported in theMobile Industries andProcess Industries segments based on customers and underlying market sectors served.
Mobile Industries Segment:
2018 2017 $ Change Change
Net sales $ 1,903.7 $ 1,640.0 $ 263.7 16.1 %
EBITDA $ 272.2 $ 209.9 $ 62.3 29.7 %
EBITDA margin 14.3 % 12.8 % - 150 bps
2018 2017 $ Change % Change
Net sales $ 1,903.7 $ 1,640.0 $ 263.7 16.1
Less: Acquisitions 98.6 - 98.6 NM
Currency (2.3 ) - (2.3 ) NM
Net sales, excluding the impact of
acquisitions and currency $ 1,807.4 $ 1,640.0 $ 167.4 10.2
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Process Industries Segment:
2018 2017 $ Change Change
Net sales $ 1,677.1 $ 1,363.8 $ 313.3 23.0 %
EBITDA $ 405.7 $ 288.6 $ 117.1 40.6 %
EBITDA margin 24.2 % 21.2 % - 300 bps
2018 2017 $ Change % Change
Net sales $ 1,677.1 $ 1,363.8 $ 313.3 23.0 %
Less: Acquisitions 78.7 - 78.7 NM
Currency 6.0 - 6.0 NM
Net sales, excluding the impact of
acquisitions and currency $ 1,592.4 $ 1,363.8 $ 228.6 16.8 %
Corporate:
2018 2017 $ Change Change
Corporate expenses $ 62.0 $ 49.1 $ 12.9 26.3 %
Corporate expenses % to net sales 1.7 % 1.6 % - 10 bps
Corporate expense increased in 2018 compared with 2017 primarily due to the
impact of acquisition-related costs of
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Table of Contents THE BALANCE SHEETS
The following discussion is a comparison of the Consolidated Balance Sheets at
Current Assets:
December 31,
2019 2018 $ Change % Change
Cash and cash equivalents $ 209.5 $ 132.5 $ 77.0 58.1 %
Restricted cash 6.7 0.6 6.1 NM
Accounts receivable, net 545.1 546.6 (1.5 ) (0.3 %)
Unbilled receivables 129.2 $ 116.6 12.6 10.8 %
Inventories, net 842.0 835.7 6.3 0.8 %Deferred charges and prepaid expenses 36.7 28.2 8.5 30.1 % Other current assets
105.4 77.0 28.4 36.9 %
Total current assets $ 1,874.6 $ 1,737.2 $ 137.4 7.9 %
Refer to the "Cash Flows" section for discussion on the change in cash and cash
equivalents. Unbilled receivables increased primarily due to higher marine
production and related revenue recognized over time in
Property, Plant and Equipment, Net:
December 31,
2019 2018 $ Change % Change
Property, plant and equipment, net
The increase in property, plant and equipment, net in 2019 was primarily due to
capital expenditures of
Operating Lease Assets
December 31, December 31,
2019 2018 $ Change % Change
Operating lease assets $ 114.1 $ - $ 114.1 NM
The increase in operating lease assets in 2019 was primarily due to the adoption
of the new lease accounting standard. The increase also includes the
reclassification of
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Other Assets:
December 31,
2019 2018 $ Change % Change
Goodwill $ 993.7 $ 960.5 $ 33.2 3.5 %
Other intangible assets 758.5 733.2 25.3 3.5 %
Non-current pension assets 3.4 6.2 (2.8 ) (45.2 %)
Non-current other postretirement
benefit assets 36.6 - 36.6 NM
Deferred income taxes 71.8 59.0 12.8 21.7 %
Other non-current assets 18.0 37.0 (19.0 ) (51.4 %)
Total other assets $ 1,882.0 $ 1,795.9 $ 86.1 4.8 %
The increase in goodwill in 2019 was primarily due to acquisitions in 2019. The
increase in other intangible assets was primarily due to the impact of
acquisitions of
Current Liabilities:
December 31,
2019 2018 $ Change % Change
Short-term debt $ 17.3 $ 33.6 $ (16.3 ) (48.5 %)
Current portion of long-term debt 64.7 9.4 55.3 NM
Accounts payable 301.7 273.2 28.5 10.4 %
Salaries, wages and benefits 134.5 174.9 (40.4 ) (23.1 %)
Income taxes payable 17.8 23.5 (5.7 ) (24.3 %)
Other current liabilities 172.3 171.0 1.3 0.8 %
Total current liabilities $ 708.3 $ 685.6 $ 22.7 3.3 %
The decrease in short-term debt was primarily due to the decrease in borrowings
under the variable-rate lines of credit for the Company's foreign subsidiaries.
The increase in the current portion of long-term debt was primarily due to the
2020 Term Loan (as defined below) being reclassified to the current portion of
long-term debt as it matures on
The increase in accounts payable was primarily due to efforts by the Company to extend supplier payment terms in 2019, as well as the impact of acquisitions. The decrease in accrued salaries, wages and benefits was primarily due to timing as the payments for 2018 performance-based compensation exceeded accruals for 2019 performance-based compensation expense. In addition, the current pension liability decreased due to the payout of deferred compensation to a former executive of the Company. Refer to Note 14 - Retirement Benefit Plans to the Notes to the Consolidated Financial Statements for additional information.
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Non-Current Liabilities:
December 31,
2019 2018 $ Change % Change
Long-term debt $ 1,648.1 $ 1,638.6 $ 9.5 0.6 %
Accrued pension benefits 165.1 161.3 3.8 2.4 %
Accrued postretirement benefits 31.8 108.7 (76.9 ) (70.7 %)
Long-term operating lease liabilities 71.3 - 71.3 NM
Deferred income taxes 168.2 138.0 30.2 21.9 %
Other non-current liabilities 84.0 70.3 13.7 19.5 %
Total non-current liabilities $ 2,168.5 $ 2,116.9 $ 51.6 2.4 %
The decrease in accrued postretirement benefits was primarily due to changes to
the medical plan offerings for certain of the Company's postretirement benefit
plans, effective
The increase in long-term operating lease liabilities was primarily due to the adoption of the new lease accounting standard. Refer to Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements for further discussion. The increase in the deferred income taxes was primarily due to the decrease in accrued postretirement benefits discussed above and additional deferred tax liabilities from recent acquisitions. Refer to Note 5 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion.
Shareholders' Equity:
December 31,
2019 2018 $ Change % Change
Common stock $ 990.7 $ 1,005.0 $ (14.3 ) (1.4 %)
Earnings invested in the business 1,907.4 1,630.2 277.2 17.0 %
Accumulated other comprehensive loss (50.1 ) (95.3 ) 45.2 (47.4 %)
Treasury shares (979.8 ) (960.3 ) (19.5 ) (2.0 %)
Noncontrolling interest 86.6 63.1 23.5 37.2 %
Total equity $ 1,954.8 $ 1,642.7 $ 312.1 19.0 %
Earnings invested in the business in 2019 increased primarily by net income
attributable to the Company of
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CASH FLOWS
2019 2018 $ Change
Net cash provided by operating activities
(364.9 ) (865.2 ) 500.3
Net cash (used) provided by financing activities (100.7 ) 553.1 (653.8 ) Effect of exchange rate changes on cash
(1.4 ) (12.7 ) 11.3
Increase (decrease) in cash and cash equivalents
Operating Activities:
The increase in net cash provided by operating activities in 2019 compared with
2018 was primarily due a favorable impact of working capital items of
The following chart displays the impact of working capital items on cash during 2019 and 2018, respectively:
2019 2018 $ Change
Cash (used) provided:
Accounts receivable $ 24.1 $ (66.4 ) $ 90.5
Unbilled receivables (12.6 ) (21.8 ) 9.2
Inventories 50.7 (87.1 ) 137.8
Trade accounts payable 19.9 (20.2 ) 40.1
Other accrued expenses (26.8 ) 32.2 (59.0 )
Cash used in working capital items
The following table displays the impact of income taxes on cash during 2019 and 2018, respectively:
2019 2018 $ Change
Accrued income tax expense
(2.2 ) (0.8 ) (1.4 )
Change in income taxes
Investing Activities:
The decrease in net cash used in investing activities in 2019 compared with 2018
was primarily due to a
Financing Activities:
The decrease in net cash used by financing activities in 2019 compared with 2018
was primarily due to a decrease in net borrowings of
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LIQUIDITY AND CAPITAL RESOURCES
Reconciliation of total debt to net debt and the ratio of net debt to capital:
Net Debt:
December 31,
2019 2018
Short-term debt $ 17.3 $ 33.6 Current portion of long-term debt 64.7 9.4 Long-term debt
1,648.1 1,638.6
Total debt $ 1,730.1 $ 1,681.6
Less: Cash and cash equivalents 209.5 132.5
Net debt $ 1,520.6 $ 1,549.1
Ratio of Net Debt to Capital:
December 31,
2019 2018
Net debt $ 1,520.6 $ 1,549.1
Total equity 1,954.8 1,642.7
Capital (net debt + total equity)
43.8 % 48.5 %
The Company presents net debt because it believes net debt is more representative of the Company's financial position than total debt due to the amount of cash and cash equivalents held by the Company and the ability to utilize such cash and cash equivalents to reduce debt if needed.
The Company has a
On
The interest rate under the Senior Credit Facility is variable with a spread
based on the Company's credit rating. The average rate on outstanding
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Other sources of liquidity include short-term lines of credit for certain of the
Company's foreign subsidiaries, which provide for borrowings up to approximately
On
On
At
The Company expects that any cash requirements in excess of cash on hand and cash generated from operating activities will be met by the committed funds available under its Accounts Receivable Facility and Senior Credit Facility. Management believes it has sufficient liquidity to meet its obligations through the term of the Senior Credit Facility.
At
The Company expects to generate operating cash of approximately
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Table of Contents CONTRACTUAL OBLIGATIONS
The Company's contractual debt obligations and contractual commitments
outstanding as of
Payments due by period:
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
Interest payments $ 380.6 $ 61.8 $ 117.9 $ 94.0 $ 106.9
Long-term debt, including
current portion 1,712.8 64.7 120.8 797.3 730.0
Short-term debt 17.3 17.3 - - -
Purchase commitments 50.5 44.6 4.9 1.0 -
Operating leases 110.4 31.7 39.1 19.6 20.0
Retirement benefits 165.8 14.4 38.7 27.2 85.5
Total $ 2,437.4 $ 234.5 $ 321.4 $ 939.1 $ 942.4 The interest payments beyond five years primarily relate to long-term fixed-rate notes. Refer to Note 11 - Financing Arrangements in the Notes to the Consolidated Financial Statements for additional information. Purchase commitments are defined as an agreement to purchase goods or services that are enforceable and legally binding on the Company. Included in purchase commitments above are certain obligations related to take-or-pay contracts, capital commitments, service agreements and utilities. Many of these commitments relate to take-or-pay contracts in which the Company guarantees payment to ensure availability of products or services. These purchase commitments do not represent the entire anticipated purchases in the future, but represent only those items that the Company is contractually obligated to purchase. The majority of the products and services purchased by the Company are purchased as needed, with no commitment.
In order to maintain minimum funding requirements, the Company is required to
make contributions to the trusts established for its defined benefit pension
plans and other postretirement benefit plans. The table above shows the expected
future minimum cash contributions to the trusts for the funded plans as well as
estimated future benefit payments to participants for the unfunded plans. Those
minimum funding requirements and estimated benefit payments can vary
significantly. The amounts in the table above are based on actuarial estimates
using current assumptions for, among other things, discount rates, expected
return on assets and health care cost trend rates. During 2019, the Company made
cash contributions and payments of approximately
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
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New Accounting Guidance Issued and Not Yet Adopted
Information required for this Item is incorporated by reference to Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in
Revenue recognition: A contract exists when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Revenue is recognized when performance obligations under the terms of a contract with a customer of the Company are satisfied. Refer to Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements for further discussion around the Company's revenue policy.
Inventory:
Inventories are valued at the lower of cost or market, with approximately 59%
valued by the first-in, first-out ("FIFO") method and the remaining 41% valued
by the last-in, first-out ("LIFO") method. The majority of the Company's
domestic inventories are valued by the LIFO method, while all of the Company's
international inventories are valued by the FIFO method. 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 are based on management's estimates of expected year-end inventory
levels and costs. Because these 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 Company recognized a decrease
in its LIFO reserve of
The Company reviews goodwill for impairment at the reporting unit level.
Accounting guidance permits an entity to first assess qualitative factors to
determine whether additional indefinite-lived intangible asset impairment
testing, including goodwill, is required. The Company chose to utilize this
qualitative assessment in the annual indefinite-lived asset impairment testing,
including the goodwill of the
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The Company chose to perform a quantitative goodwill impairment analysis in the
annual goodwill impairment testing of the Aerospace Drive Systems reporting unit
having a goodwill balance of
As of
Income taxes: Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, valuation allowances against deferred tax assets, and accruals for uncertain tax positions.
The Company, which is subject to income taxes in the
In the ordinary course of the Company's business, there are many transactions
and calculations where the ultimate income tax determination is uncertain. The
Company is regularly under audit by tax authorities. Accruals for uncertain tax
positions are provided for in accordance with the requirements of ASC Topic 740.
The Company records interest and penalties related to uncertain tax positions as
a component of income tax expense. In 2019, the Company recorded
Purchase accounting and business combinations: Assets acquired and liabilities assumed as part of a business combination are recognized at their acquisition date fair values. In determining these fair values, the Company utilized various forms of the income, cost and market approaches depending on the asset or liability being valued. The Company used a discounted cash flow model to measure the trade names, customer relationship, and technology and know-how-related intangible assets. The estimation of fair value required significant judgment related to future net cash flows based on assumptions related to revenue and EBITDA growth rates, discount rates, and royalty rates. Inputs were generally determined by taking into account competitive trends, market comparisons, independent appraisals, and historical data, among other factors, and were supplemented by current and anticipated market conditions.
Refer to Note 1 - Significant Accounting Policies for further discussion regarding the fair value process.
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Table of Contents Benefit Plans: The Company sponsors a number of defined benefit pension plans that cover eligible employees. The Company also sponsors several funded and unfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and their dependents. These plans are accounted for in accordance with ASC Topic 715-30, "Defined Benefit Plans - Pension," and ASC Topic 715-60, "Defined Benefit Plans - Other Postretirement." The measurement of liabilities related to these plans is based on management's assumptions related to future events, including discount rates and health care cost trend rates. Management regularly evaluates these assumptions and adjusts them as required and appropriate. Other plan assumptions also are reviewed on a regular basis to reflect recent experience and the Company's future expectations. Actual experience that differs from these assumptions may affect future liquidity, expense and the overall financial position of the Company. While the Company believes that current assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may affect materially the Company's pension and other postretirement employee benefit obligations and its future expense and cash flow. The discount rate is used to calculate the present value of expected future pension and postretirement cash flows as of the measurement date. The Company establishes the discount rate by constructing a notional portfolio of high-quality corporate bonds and matching the coupon payments and bond maturities to projected benefit payments under the Company's pension and postretirement welfare plans. The bonds included in the portfolio generally are non-callable. A lower discount rate will result in a higher benefit obligation; conversely, a higher discount rate will result in a lower benefit obligation. The discount rate also is used to calculate the annual interest cost, which is a component of net periodic benefit cost. The expected rate of return on plan assets is determined by analyzing the historical long-term performance of the Company's pension plan assets, as well as the mix of plan assets between equities, fixed-income securities and other investments, the expected long-term rate of return expected for those asset classes and long-term inflation rates. Short-term asset performance can differ significantly from the expected rate of return, especially in volatile markets. A lower-than-expected rate of return on pension plan assets will increase pension expense and future contributions.
The Company recognizes actuarial gains and losses immediately through net periodic benefit cost upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement.
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Defined Benefit Pension Plans:
The Company recognized net periodic benefit cost of
In 2020, the Company expects net periodic benefit cost of
The Company expects to contribute to its defined benefit pension plans or pay directly to participants of defined benefit plans approximately$11.8 million in 2020 compared with$35.4 million of contributions and payments in 2019. The decrease in 2020 planned employer contributions/payments is primarily due to the 2019 payout of deferred compensation to a former executive officer of the Company. For expense purposes in 2019, the Company applied a weighted-average discount rate of 4.36% to itsU.S. defined benefit pension plans. For expense purposes in 2020, the Company will apply a weighted-average discount rate of 3.50% to itsU.S. defined benefit pension plans. For expense purposes in 2019, the Company applied an expected weighted-average rate of return of 6.12% for the Company'sU.S. pension plan assets. For expense purposes in 2020, the Company will apply an expected weighted-average rate of return on plan assets of 5.22%.
The following table presents the sensitivity of the Company's
+ / - Change at
December 31, 2019 Change to
Change PBO 2019 Expense
Assumption:
Discount rate + 0.25% $ 20.2 $ 20.2
Overall return on plan assets + 0.25% N/A 1.1
In the table above, a 25 basis point decrease in the discount rate will increase
the PBO by
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Other Postretirement Benefit Plans:
The Company recognized net periodic benefit credit of
In 2020, the Company expects net periodic benefit credit of
In
For expense purposes in 2019, the Company applied a discount rate of 3.48% to 4.30% to its other postretirement benefit plans. For expense purposes in 2020, the Company will apply a discount rate of 3.43% to its other postretirement benefit plans. For expense purposes in 2019, the Company applied an expected rate of return of 4.85% to the VEBA trust assets. For expense purposes in 2020, the Company will apply an expected rate of return of 3.00% to the VEBA trust assets.
The following table presents the sensitivity of the Company's accumulated other postretirement benefit obligation ("APBO") and 2019 expense to the indicated increase/decrease in key assumptions:
+ / - Change at
December 31, 2019 Change to
Change APBO 2019 Expense
Assumption:
Discount rate + 0.25% $ 1.3 $ 1.3
Overall return on plan assets + 0.25% N/A 0.2
In the table above, a 25 basis point decrease in the discount rate will increase
the APBO by
For measurement purposes, the Company assumed a weighted-average annual rate of
increase in the per capita cost (health care cost trend rate) for medical
benefits of 5.8% for 2020, declining gradually to 5.0% in 2023 and thereafter
for medical and prescription drug benefits. For Medicare Advantage benefits,
actual contract rates have been set for 2020 through 2022, and are assumed to
increase by 7.3% for 2023, declining gradually to 5.0% in 2031 and thereafter.
The assumed health care cost trend rate may have a significant effect on the
amounts reported. A one percentage point increase in the assumed health care
cost trend rate would have increased the 2019 total service and interest cost
components by
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Other loss reserves: The Company has a number of loss exposures that are incurred in the ordinary course of business such as environmental clean-up, product liability, product warranty, litigation and accounts receivable reserves. Establishing loss reserves for these matters requires management's judgment with regards to estimating risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances.
OTHER DISCLOSURES:
Foreign Currency: Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the reporting period. Related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions are included in the Consolidated Statements of Income.
Net of related derivative activity, the Company recognized a foreign currency
exchange gain resulting from transactions of
Trade Law Enforcement:
The
Quarterly Dividend:
On
Forward-Looking Statements Certain statements set forth in this Annual Report on Form 10-K and in the Company's 2019 Annual Report to Shareholders that are not historical in nature (including the Company's forecasts, beliefs and expectations) are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, Management's Discussion and Analysis contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "outlook," "intend," "may," "possible," "potential," "predict," "project" or other similar words, phrases or expressions. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. The Company cautions readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of the Company due to a variety of factors, such as:
(a) deterioration in world economic conditions, or in economic conditions in
any of the geographic regions in which the Company or its customers or
suppliers conduct business, including adverse effects from a global
economic slowdown, terrorism, pandemics or hostilities. This includes:
political risks associated with the potential instability of governments
and legal systems in countries in which the Company or its customers or
suppliers conduct business, changes in currency valuations and recent
world events that have increased the risks posed by international trade
disputes, tariffs and sanctions;
(b) the effects of fluctuations in customer demand on sales, product mix and
prices in the industries in which the Company operates. This includes:
the ability of the Company to respond to rapid changes in customer
demand, the effects of customer or supplier bankruptcies or
liquidations, the impact of changes in industrial business cycles, the
effects of distributor inventory corrections reflecting de-stocking of
the supply chain and whether conditions of fair trade continue in our
markets;
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(c) competitive factors, including changes in market penetration, increasing
price competition by existing or new foreign and domestic competitors,
the introduction of new products or services by existing and new
competitors, and new technology that may impact the way the Company's
products are produced, sold or distributed;
(d) changes in operating costs. This includes: the effect of changes in the
Company's manufacturing processes; changes in costs associated with
varying levels of operations and manufacturing capacity; availability
and cost of raw materials and energy; changes in the expected costs
associated with product warranty claims; changes resulting from
inventory management and cost reduction initiatives; the effects of
unplanned plant shutdowns or natural disasters; and changes in the cost
of labor and benefits;
(e) the success of the Company's operating plans, announced programs,
initiatives and capital investments; the ability to integrate acquired
companies; and the ability of acquired companies to achieve satisfactory
operating results, including results being accretive to earnings;
(f) the Company's ability to maintain appropriate relations with unions or
works councils that represent Company employees in certain locations in
order to avoid disruptions of business and to maintain the continued
service of our management and other key employees;
(g) unanticipated litigation, claims or assessments. This includes: claims,
investigations or problems related to intellectual property, product
liability or warranty, foreign export and trade laws, competition and
anti-bribery laws, environmental or health and safety issues, data
privacy and taxes;
(h) changes in worldwide financial and capital markets, including
availability of financing and interest rates on satisfactory terms,
which affect: the Company's cost of funds and/or ability to raise
capital; as well as customer demand and the ability of customers to
obtain financing to purchase the Company's products or equipment that
contain the Company's products;
(i) the Company's ability to satisfy its obligations under its debt
agreements and maintain favorable credit ratings, as well as its ability
to renew or refinance borrowings on favorable terms;
(j) the impact on the Company's pension obligations and assets due to
changes in interest rates, investment performance and other tactics
designed to reduce risk; and
(k) those items identified under Item 1A. Risk Factors on pages 6 through 11.
Additional risks relating to the Company's business, the industries in which the
Company operates or the Company's common shares may be described from time to
time in the Company's filings with the
Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered to be a complete list. Except as required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
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