TKR 10-Q 9.30.2014


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number: 1-1169
 
THE TIMKEN COMPANY
(Exact name of registrant as specified in its charter)
 
 
OHIO
 
34-0577130
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
4500 Mt. Pleasant St., NW,
 North Canton, OH
 
44720-5450
(Address of principal executive offices)
 
(Zip Code)
234.262.3000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
o
 
 
 
 
 
 
Non-accelerated filer
 
o
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
 Yes  o    No   ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
  
Outstanding at September 30, 2014
 
 
Common Shares, without par value
  
88,686,674 shares
 



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
THE TIMKEN COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
2013
 
2014
2013
(Dollars in millions, except per share data)
 
 
 
 
 
Net sales
$
788.0

$
731.4

 
$
2,314.0

$
2,285.9

Cost of products sold
562.5

529.4

 
1,636.8

1,625.4

Gross Profit
225.5

202.0

 
677.2

660.5

Selling, general and administrative expenses
132.2

139.4

 
410.8

412.6

Impairment and restructuring charges
99.4

3.7

 
108.7

11.6

Operating Income (Loss)
(6.1
)
58.9

 
157.7

236.3

Interest expense
(9.1
)
(5.0
)
 
(20.4
)
(17.5
)
Interest income
1.0

0.4

 
3.1

1.4

Gain on sale of real estate
—

—

 
22.6

—

Other income (expense), net
1.8

0.4

 
(1.9
)
(0.5
)
Income (Loss) From Continuing Operations Before Income Taxes
(12.4
)
54.7

 
161.1

219.7

Provision (benefit) for income taxes
(2.2
)
19.9

 
53.4

78.0

Income (Loss) From Continuing Operations
(10.2
)
34.8

 
107.7

141.7

Income (loss) from discontinued operations, net of income taxes
(11.0
)
17.7

 
18.7

68.6

Net Income (Loss)
(21.2
)
52.5

 
126.4

210.3

Less: Net income attributable to noncontrolling interest
0.7

0.3

 
2.1

0.2

Net Income (loss) attributable to The Timken Company
$
(21.9
)
$
52.2

 
$
124.3

$
210.1

 
 
 
 
 
 
Amounts attributable to The Timken Company's Common Shareholders
 
 
 
 
 
Income (loss) from continuing operations
$
(10.9
)
$
34.5

 
$
105.6

$
141.5

Income (loss) from discontinued operations, net of income taxes
(11.0
)
17.7

 
18.7

68.6

Net Income (loss) attributable to The Timken Company
$
(21.9
)
$
52.2

 
$
124.3

$
210.1

 
 
 
 
 
 
Net Income (loss) per Common Share attributable to The
  Timken Company Common Shareholders
 
 
 
 
 
Earnings (loss) per share - Continuing Operations
$
(0.12
)
$
0.36

 
$
1.16

$
1.48

Earnings (loss) per share - Discontinued Operations
$
(0.12
)
$
0.19

 
$
0.21

$
0.72

Basic earnings (loss) per share
$
(0.24
)
$
0.55

 
$
1.37

$
2.20

 
 
 
 
 
 
Diluted earnings (loss) per share - Continuing Operations
$
(0.12
)
$
0.36

 
$
1.15

$
1.47

Diluted earnings (loss) per share - Discontinued Operations
$
(0.12
)
$
0.18

 
$
0.20

$
0.71

Diluted earnings (loss) per share
$
(0.24
)
$
0.54

 
$
1.35

$
2.18

 
 
 
 
 
 
Dividends per share
$
0.25

$
0.23

 
$
0.75

$
0.69

See accompanying Notes to the Consolidated Financial Statements.


2


Consolidated Statements of Comprehensive Income
(Unaudited) 
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2014
2013
2014
2013
(Dollars in millions)
 
 
 
 
 
 
 
 
 
Net Income (Loss)
$
(21.2
)
$
52.5

$
126.4

$
210.3

Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustments
(25.9
)
15.2

(17.6
)
(19.3
)
Pension and postretirement liability adjustment
15.4

14.3

1.9

71.1

Change in fair value of derivative financial instruments
(0.7
)
(1.2
)
(0.9
)
—

Other comprehensive (loss) income
(11.2
)
28.3

(16.6
)
51.8

Comprehensive Income (Loss)
(32.4
)
80.8

109.8

262.1

Less: comprehensive income (loss) attributable to noncontrolling interest
0.2

(3.2
)
2.0

(7.6
)
Comprehensive Income (Loss) attributable to The Timken Company
$
(32.6
)
$
84.0

$
107.8

$
269.7

See accompanying Notes to the Consolidated Financial Statements.

3


Consolidated Balance Sheets
 
(Unaudited)
 
 
September 30,
2014
December 31,
2013
(Dollars in millions)
 
 
ASSETS
 
 
Current Assets
 
 
Cash and cash equivalents
$
238.2

$
384.6

Restricted cash
15.3

15.1

Accounts receivable, less allowances (2014 – $12.5 million; 2013 – $10.1 million)
488.7

444.0

Inventories, net
618.3

582.6

Deferred income taxes
51.9

56.2

Deferred charges and prepaid expenses
20.6

26.8

Other current assets
66.7

61.7

Current assets, discontinued operations
—

366.5

Total Current Assets
1,499.7

1,937.5

Property, Plant and Equipment, net
833.4

855.8

Other Assets
 
 
Goodwill
260.6

346.1

Non-current pension assets
259.7

223.5

Other intangible assets
188.4

207.4

Deferred income taxes
7.4

8.3

Other non-current assets
57.5

50.1

Non-current assets, discontinued operations
—

849.2

Total Other Assets
773.6

1,684.6

Total Assets
$
3,106.7

$
4,477.9

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
Current Liabilities
 
 
Short-term debt
$
8.7

$
18.6

Accounts payable, trade
185.3

139.9

Salaries, wages and benefits
156.4

131.1

Income taxes payable
67.1

106.7

Deferred income taxes
7.3

7.6

Other current liabilities
136.6

173.2

Current portion of long-term debt
0.7

250.7

Current liabilities, discontinued operations
—

152.3

Total Current Liabilities
562.1

980.1

Non-Current Liabilities
 
 
Long-term debt
522.0

176.4

Accrued pension cost
133.6

159.0

Accrued postretirement benefits cost
123.9

138.3

Deferred income taxes
77.6

82.9

Other non-current liabilities
43.6

55.9

Non-current liabilities, discontinued operations
—

236.7

Total Non-Current Liabilities
900.7

849.2

Shareholders’ Equity
 
 
Class I and II Serial Preferred Stock, without par value:
 
 
Authorized – 10,000,000 shares each class, none issued
—

—

Common stock, without par value:
 
 
Authorized – 200,000,000 shares
 
 
Issued (including shares in treasury) (2014 – 98,375,135 shares; 2013 – 98,375,135 shares)
 
 
Stated capital
53.1

53.1

Other paid-in capital
895.6

896.4

Earnings invested in the business
1,594.8

2,586.4

Accumulated other comprehensive loss
(408.5
)
(626.1
)
Treasury shares at cost (2014 –9,688,461 shares; 2013 – 5,252,441 shares)
(505.1
)
(273.2
)
Total Shareholders’ Equity
1,629.9

2,636.6

Noncontrolling Interest
14.0

12.0

Total Equity
1,643.9

2,648.6

Total Liabilities and Shareholders’ Equity
$
3,106.7

$
4,477.9

See accompanying Notes to the Consolidated Financial Statements.

4


Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
September 30,
 
2014
2013
(Dollars in millions)
 
 
CASH PROVIDED (USED)
 
 
Operating Activities
 
 
Net income attributable to The Timken Company
$
124.3

$
210.1

Net income from discontinued operations
(18.7
)
(68.6
)
Net income attributable to noncontrolling interest
2.1

0.2

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
103.4

106.3

Impairment charges
98.8

—

(Gain) loss on sale of assets
(20.9
)
2.3

Deferred income tax provision
(16.6
)
(21.7
)
Stock-based compensation expense
18.5

10.4

Excess tax benefits related to stock-based compensation
(6.4
)
(10.4
)
Pension and other postretirement expense
22.5

42.1

Pension contributions and other postretirement benefit payments
(47.6
)
(80.3
)
Changes in operating assets and liabilities:
 
 
Accounts receivable
(52.6
)
(4.8
)
Inventories
(52.1
)
(1.3
)
Accounts payable, trade
47.3

1.9

Other accrued expenses
(7.4
)
(59.9
)
Income taxes
(31.0
)
26.4

Other, net
9.2

(16.1
)
Net Cash Provided by Operating Activities - Continuing Operations
172.8

136.6

Net Cash Provided by Operating Activities - Discontinued Operations
22.6

113.3

Net Cash Provided by Operating Activities
195.4

249.9

Investing Activities
 
 
Capital expenditures
(87.1
)
(91.6
)
Acquisitions, net of cash received
(12.0
)
(64.5
)
Proceeds from disposal of property, plant and equipment
15.1

1.1

Investments in short-term marketable securities, net
3.9

5.6

Other
—

1.5

Net Cash Used by Investing Activities - Continuing Operations
(80.1
)
(147.9
)
Net Cash Used by Investing Activities - Discontinued Operations
(77.0
)
(118.7
)
Net Cash Used by Investing Activities
(157.1
)
(266.6
)
Financing Activities
 
 
Cash dividends paid to shareholders
(68.2
)
(66.0
)
Purchase of treasury shares
(266.5
)
(107.3
)
Proceeds from exercise of stock options
16.7

12.9

Excess tax benefits related to stock-based compensation
6.4

10.4

Proceeds from issuance of long-term debt
346.2

—

Accounts receivable securitization financing borrowings
90.0

—

Accounts receivable securitization financing payments
(90.0
)
—

Payments on long-term debt
(250.6
)
(9.8
)
Short-term debt activity, net
(9.5
)
7.6

Proceeds from sale of shares in subsidiary
—

8.4

Cash transferred to TimkenSteel Corporation
(46.5
)
—

Other
(3.1
)
—

Net Cash Used by Financing Activities - Continuing Operations
(275.1
)
(143.8
)
Net Cash Provided by Financing Activities - Discontinued Operations
100.0

—

Net Cash Used by Financing Activities
(175.1
)
(143.8
)
Effect of exchange rate changes on cash
(9.6
)
(7.8
)
Decrease In Cash and Cash Equivalents
(146.4
)
(168.3
)
Cash and cash equivalents at beginning of year
384.6

586.4

Cash and Cash Equivalents at End of Period
$
238.2

$
418.1

See accompanying Notes to the Consolidated Financial Statements.

5


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 notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.


Note 2 - Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. This new accounting guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact of adopting ASU 2014-09 on the Company's results of operations or financial condition.

In April 2014, the FASB issued Accounting Standards Update (ASU) 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)." ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations. ASU 2014-08 also requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company's results of operations or financial condition.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This accounting guidance is effective for the Company for annual and interim reporting periods beginning after December 15, 2013. The adoption of this accounting guidance did not have a material impact on the Company's results of operations or financial condition.
 

6


Note 3 - Spinoff Transaction

On June 30, 2014, the Company completed the separation of its steel business from its bearings and power transmission business through a spinoff, creating a new independent publicly traded company, TimkenSteel Corporation (TimkenSteel). The Company's board of directors declared a distribution of all outstanding common shares of TimkenSteel through a dividend. At the close of business on June 30, 2014, the Company's shareholders received one common share of TimkenSteel for every two common shares of the Company they held as of the close of business on June 23, 2014.

The operating results, net of tax, included one-time transaction costs of $10.1 million and $54.7 million in connection with the separation of the two companies for the third quarter and first nine months of 2014, respectively. These costs primarily consisted of consulting and professional fees associated with preparing for and executing the spinoff, as well as lease cancellation fees.

The following table presents the results of operations for TimkenSteel that have been reclassified to discontinued operations for all periods presented.
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2014
2013
2014
2013
Net sales
$
—

$
330.0

$
786.2

$
992.0

Cost of goods sold
—

280.3

642.1

824.2

Gross profit
—

49.7

144.1

167.8

Selling, administrative and general expenses
—

19.5

46.3

59.5

Separation Costs
10.1

—

54.7

—

Interest expense, net
—

—

0.8

—

Other (expense) income, net
—

(0.1
)
0.1

(0.5
)
Income (loss) before income taxes
(10.1
)
30.1

42.4

107.8

Income tax expense
(0.9
)
(12.4
)
(23.7
)
(39.2
)
Income (loss) from discontinued operations
$
(11.0
)
$
17.7

$
18.7

$
68.6



7


The following table presents the carrying value of assets and liabilities immediately preceding the spinoff of TimkenSteel on June 30, 2014.
 
2014
ASSETS
 
Cash and cash equivalents
$
46.5

Accounts receivable, net
178.9

Inventories, net
238.2

Deferred income taxes
13.6

Deferred charges and prepaid expenses
0.4

Other current assets
3.4

Property, plant, and equipment, net
750.4

Goodwill
12.6

Non-current pension assets
77.1

Other intangible assets
11.2

Other non-current assets
2.6

            Total assets, discontinued operations
$
1,334.9

LIABILITIES
 
Accounts payable, trade
$
132.8

Salaries, wages and benefits
52.0

Income taxes payable
0.1

Other current liabilities
15.9

Long-term debt
130.2

Accrued pension cost
24.5

Accrued postretirement benefits cost
71.0

Deferred income taxes
84.1

Other non-current liabilities
10.7

            Total liabilities, discontinued operations
$
521.3


The balance sheet above reflects $3.0 million in cash transferred to TimkenSteel during the third quarter of 2014. As of September 30, 2014, there were no assets or liabilities remaining from the TimkenSteel operations.

8


Note 4 - Acquisitions

On April 28, 2014, the Company completed the acquisition of assets from: (a) Maine Industrial Repair Services, Inc.; (b) Schulz Electric Company; (c) S.E.C. Electrical; and (d) Stultz Electric Motor & Controls, collectively d/b/a Schulz Group (Schulz), for $12.0 million in cash. Schulz provides electric motor and generator repairs, motor rewinds, custom controls and panels, systems integration, pump services, machine rebuilds, hydro services and diagnostics for a broad range of commercial and industrial applications. Schulz serves customers nationwide in the commercial nuclear power market sector, as well as regionally in the hydro and fossil fuel market sectors, water management, paper and general manufacturing sectors in the New England and Mid-Atlantic regions. Based in New Haven, Connecticut, Schulz employs 125 associates and had 2013 sales of approximately $18.0 million. The Company reported the results for Schulz in the Process Industries segment.

Pro forma results of operations have not been presented because the effects of the acquisitions were not significant to the Company's income from continuing operations before income taxes or total assets in 2014. The following table presents the preliminary purchase price allocations for acquisition in 2014: 
 
Initial Purchase Price Allocation
Assets:
 
Accounts receivable, net
$
2.9

Inventories, net
2.2

Other current assets
0.2

Property, plant and equipment – net
1.7

Goodwill
2.9

Other intangible assets
4.9

Total assets acquired
$
14.8

Liabilities:
 
Accounts payable, trade
$
1.8

Other current liabilities
0.5

Long-term debt
0.5

Total liabilities assumed
$
2.8

Net assets acquired
$
12.0


The following table summarizes the preliminary purchase price allocation for identifiable intangible assets acquired in 2014:
 
Initial Purchase
Price Allocation
 
 
Weighted -
Average Life
Tradename
$
0.7

5 years
Know-how
2.3

20 years
All customer relationships
1.7

16 years
Non-compete agreements
0.2

5 years
Total intangible assets allocated
$
4.9

 



9


Note 5 - Inventories

The components of inventories were as follows:
 
September 30,
2014
December 31,
2013
Manufacturing supplies
$
25.7

$
26.8

Raw materials
57.0

62.3

Work in process
227.4

199.2

Finished products
332.9

312.7

Subtotal
643.0

601.0

Allowance for obsolete and surplus inventory
(24.7
)
(18.4
)
Total Inventories, net
$
618.3

$
582.6


Inventories are valued at the lower of cost or market, with approximately 30% valued by the last-in, first-out (LIFO) method and the remaining 70% valued by the first-in, first-out (FIFO) method. The majority of the Company's domestic inventories are valued by the LIFO method and all of the Company's international (outside the United States) inventories are valued by the FIFO method.

An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation.

The LIFO reserves at September 30, 2014 and December 31, 2013 were $197.6 million and $199.3 million, respectively. The Company recognized a decrease in its LIFO reserve of $1.7 million during the first nine months of 2014, compared to an increase in its LIFO reserve of $3.1 million during the first nine months of 2013.

Based on current expectations of inventory levels and costs, the Company expects to recognize a decrease of approximately $2.1 million in its LIFO reserve for the year ended December 31, 2014. The decrease in the LIFO reserve for 2014 reflects lower anticipated costs. A 1.0% increase in costs would increase the current LIFO expense estimate for 2014 by $3.5 million. An increase in inventory quantities would have no effect on the current LIFO expense estimate for 2014.

During the third quarter of 2014, the Company recorded an inventory valuation adjustment of $18.7 million related to its Aerospace segment. The Company recorded this adjustment during the third quarter of 2014 as a result of the announcement to exit the engine overhaul business, as well as other product lines, and lower than expected future sales. The Company expects to dispose of the related inventory during the fourth quarter of 2014.

10


Note 6 - Property, Plant and Equipment

The components of property, plant and equipment were as follows:
 
September 30,
2014
December 31,
2013
Land and buildings
$
435.5

$
418.8

Machinery and equipment
1,955.7

1,976.5

Subtotal
2,391.2

2,395.3

Accumulated depreciation
(1,557.8
)
(1,539.5
)
Property, Plant and Equipment, net
$
833.4

$
855.8


Depreciation expense for the nine months ended September 30, 2014 and 2013 was $90.0 million and $93.4 million, respectively. At September 30, 2014 and December 31, 2013, machinery and equipment included $48.6 million and $63.3 million, respectively, of capitalized software. Depreciation expense on capitalized software for the nine months ended September 30, 2014 and 2013 was approximately $8.3 million and $17.6 million, respectively. Capitalized interest during the nine months ended September 30, 2014 and 2013 was $1.6 million and $1.2 million, respectively.

In November 2013, the Company finalized the sale of its former manufacturing site in Sao Paulo, Brazil (Sao Paulo). The Company expects to receive approximately $34 million over a twenty-four month period, of which $17.2 million was received as of September 30, 2014. The total cost of this transaction, including the net book value of the real estate and broker's commissions, was approximately $3 million. The Company began recognizing the gain on the sale of this site using the installment method. In the fourth quarter of 2013, the Company recognized a gain of $5.4 million ($5.4 million after tax). In the first quarter of 2014, the Company changed to the full accrual method of recognizing the gain after it had received 25% of the total sales value. As a result, the Company recognized the remaining gain of $22.6 million ($19.5 million after tax) related to this transaction during the first quarter of 2014. During the first nine months of 2014, the Company also recorded interest income of $1.8 million on deferred payments related to this transaction.

Note 7 - Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2014 were as follows:
 
Mobile
Industries
Process
Industries
Aerospace
Total
Beginning balance
$
22.3

$
161.4

$
162.4

$
346.1

Acquisitions
—

2.9

—

2.9

Impairment
—

—

$
(86.3
)
$
(86.3
)
Other
(0.1
)
(1.6
)
(0.4
)
(2.1
)
Ending balance
$
22.2

$
162.7

$
75.7

$
260.6


ASC 350, "Intangibles - Goodwill and Other," requires that goodwill and indefinite-lived intangible assets be tested at least annually for impairment. The Company performs its annual impairment test during the fourth quarter after the annual forecasting process is completed. Furthermore, goodwill and indefinite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable. In reviewing goodwill for impairment, potential impairment is identified by comparing the fair value of each reporting unit using an income approach (a discounted cash flow model) and a market approach, with its carrying value.

During the third quarter of 2014, the Company reviewed goodwill for impairment for its three reporting units within the Aerospace segment as a result of declining sales forecasts and financial performance within the segment. The Company utilizes both an income approach and a market approach in testing goodwill for impairment. The Company utilized updated forecasts for the income approach as part of the goodwill impairment review. As a result of the lower earnings and cash flow forecasts, the Company determined that the Drive Systems and the Aerospace Aftermarket reporting units could not support the carrying value of their goodwill. As a result, the Company recorded a pretax impairment loss of $86.3 million during the third quarter of 2014, which was reported in impairment and restructuring charges in the Consolidated Statement of Income.


11


The change related to acquisitions reflects the preliminary purchase price allocation for the acquisition of Schulz completed on April 28, 2014. The goodwill acquired from Schulz of $2.9 million is tax-deductible and will be amortized over 15 years. “Other” primarily includes foreign currency translation adjustments. See Note 4 - Acquisitions for additional information on the acquisition listed above.

The following table displays intangible assets as of September 30, 2014 and December 31, 2013:
 
As of September 30, 2014
As of December 31, 2013
 
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Intangible assets
subject to amortization:
 
 
 
 
 
 
Customer relationships
$
159.2

$
56.6

$
102.6

$
160.4

$
49.3

$
111.1

Know-how
32.3

4.8

27.5

31.4

4.4

27.0

Industrial license
 agreements
0.1

0.1

—

0.1

0.1

—

Land-use rights
8.8

4.7

4.1

8.9

4.5

4.4

Patents
2.3

2.0

0.3

2.3

1.8

0.5

Technology
37.1

11.3

25.8

44.4

17.2

27.2

Tradenames
5.1

2.8

2.3

4.6

2.7

1.9

PMA licenses
8.8

8.0

0.8

8.8

4.0

4.8

Non-compete
 agreements
3.5

3.0

0.5

3.2

2.8

0.4

 
$
257.2

$
93.3

$
163.9

$
264.1

$
86.8

$
177.3

Intangible assets not subject to amortization:
 
 
 
 
 
 
Tradenames
$
15.8

$
—

$
15.8

$
15.9

$
—

$
15.9

FAA air agency
 certificates
8.7

—

8.7

14.2

—

14.2

 
$
24.5

$
—

$
24.5

$
30.1

$
—

$
30.1

Total intangible assets
$
281.7

$
93.3

$
188.4

$
294.2

$
86.8

$
207.4


In addition to recording an impairment loss related to goodwill, the Company recorded an impairment loss of $9.9 million related to intangible assets within the Aerospace segment during the third quarter of 2014.

Amortization expense for intangible assets was $13.4 million and $12.9 million for the nine months ended September 30, 2014 and September 30, 2013, respectively. Amortization expense for intangible assets is estimated to be $17.8 million in 2014; $18.3 million in 2015; $18.1 million in 2016; $17.4 million in 2017; and $17.4 million in 2018.


12


Note 8 - Financing Arrangements

Short-term debt at September 30, 2014 and December 31, 2013 was as follows:
 
September 30,
2014
December 31,
2013
Variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.65% to 6.16% at September 30, 2014 and interest rates ranging from 0.87% to 4.86% at December 31, 2013.
$
8.7

$
18.6

Short-term debt
$
8.7

$
18.6


The lines of credit for certain of the Company’s foreign subsidiaries provide for short-term borrowings up to $238.9 million. Most of these lines of credit are uncommitted. At September 30, 2014, the Company’s foreign subsidiaries had borrowings outstanding of $8.7 million and guarantees of $4.9 million, which reduced the availability under these facilities to $225.3 million.

On April 30, 2014, the Company reduced its aggregate borrowing available under its Amended and Restated Asset Securitization Agreement (Asset Securitization Agreement) from $200 million to $100 million. This agreement matures on November 30, 2015. Under the terms of the Asset Securitization Agreement, 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, which are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the agreement are limited by certain borrowing base calculations. Any amounts outstanding under this Asset Securitization Agreement would be reported in short-term debt in the Company’s Consolidated Balance Sheet. As of September 30, 2014, the Company had no outstanding borrowings under the Asset Securitization Agreement, and as a result of certain borrowing base limitations, its availability under the Asset Securitization Agreement was $87.1 million at September 30, 2014. The cost of this facility, which is the commercial paper rate plus program fees, is considered a financing cost and is included in interest expense in the Consolidated Statements of Income.

Long-term debt at September 30, 2014 and December 31, 2013 was as follows:
 
September 30,
2014
December 31,
2013
Fixed-rate Medium-Term Notes, Series A, mature at various dates through
May 2028, with interest rates ranging from 6.74% to 7.76%
$
175.0

$
175.0

Fixed-rate Senior Unsecured Notes, maturing on September 15, 2014, with an
interest rate of 6.0%
—

249.9

Fixed-rate Senior Unsecured Notes, maturing on September 1, 2024, with an
interest rate of 3.875%
346.2

—

Other
1.5

2.2

 
$
522.7

$
427.1

Less current maturities
0.7

250.7

Long-term debt
$
522.0

$
176.4


The Company has a $500 million Amended and Restated Credit Agreement (Senior Credit Facility), which matures on May 11, 2016. At September 30, 2014, the Company had no outstanding borrowings under the Senior Credit Facility. Under the Senior Credit Facility, the Company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At September 30, 2014, the Company was in full compliance with both of these covenants under the Senior Credit Facility.

On August 20, 2014, the Company issued $350 million of fixed-rated 3.875%Senior Unsecured Notes that mature on September 1, 2024 (2024 Notes). The Company used the net proceeds from the issuance of the 2024 Notes to repay the Company's fixed-rate 6.00% Senior Unsecured Notes that matured on September 15, 2014 and for general corporate purposes.

13


Note 9 - Equity

The changes in the equity components for the nine months ended September 30, 2014 were as follows:
 
 
The Timken Company Shareholders
 
  
Total
Stated
Capital
Other
Paid-In
Capital
Earnings
Invested
in the
Business
Accumulated
Other
Comprehensive
(Loss)
Treasury
Stock
Non-
controlling
Interest
Balance at December 31, 2013
$
2,648.6

$
53.1

$
896.4

$
2,586.4

$
(626.1
)
$
(273.2
)
$
12.0

Net income
126.4



124.3



2.1

Foreign currency translation
 adjustment
(17.6
)



(17.5
)

(0.1
)
Pension and postretirement liability
adjustment (net of the income tax
benefit of $17.6 million)
1.9




1.9



Change in fair value of derivative
 financial instruments
(0.9
)



(0.9
)


Dividends – $0.75 per share
(68.2
)


(68.2
)



Distribution of TimkenSteel
(813.6
)
 
 
(1,047.7
)
234.1

 
 
Excess tax benefit from stock
 compensation
6.4


6.4





Stock-based compensation expense
20.6


20.6





Stock purchased at cost
(266.5
)




(266.5
)

Stock option exercise activity
16.6


(23.7
)


40.3


Restricted shares surrendered (issued)
0.9


(4.1
)


5.0


Shares surrendered for taxes
(10.7
)





(10.7
)

Balance at September 30, 2014
$
1,643.9

$
53.1

$
895.6

$
1,594.8

$
(408.5
)
$
(505.1
)
$
14.0




14


Note 10 - Accumulated Other Comprehensive Income (Loss)

The following table presents details about components of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2014, respectively:

 
Foreign currency translation adjustments
Pension and postretirement liability adjustments
Change in fair value of derivative financial instruments
Total
Balance at June 30, 2014
$
48.5

$
(445.7
)
$
(0.6
)
$
(397.8
)
Other comprehensive (loss) income before
  reclassifications, before income tax
(25.9
)
6.1

(0.1
)
(19.9
)
Amounts reclassified from accumulated other
  comprehensive income, before income tax
—

13.5

0.1

13.6

Income tax (benefit)
—

(4.2
)
(0.7
)
(4.9
)
Net current period other comprehensive (loss) income,
  net of income taxes
(25.9
)
15.4

(0.7
)
(11.2
)
Non-controlling interest
0.5

—

—

0.5

Net current period comprehensive (loss) income, net of
  income taxes and non-controlling interest
(25.4
)
15.4

(0.7
)
(10.7
)
Balance at September 30, 2014
$
23.1

$
(430.3
)
$
(1.3
)
$
(408.5
)


 
Foreign currency
translation adjustments
Pension and postretirement
liability adjustments
Change in fair value of
derivative financial instruments
Total
Balance at December 31, 2013
$
37.5

$
(663.2
)
$
(0.4
)
$
(626.1
)
Other comprehensive (loss) income before
  reclassifications, before income tax
(17.6
)
(33.4
)
(1.0
)
(52.0
)
Amounts reclassified from accumulated other
  comprehensive income, before income tax
—

52.9

0.7

53.6

Income tax (benefit)
—

(17.6
)
(0.6
)
(18.2
)
Net current period other comprehensive (loss) income,
  net of income taxes
(17.6
)
1.9

(0.9
)
(16.6
)
Non-controlling interest
0.1

—

—

0.1

Distribution of TimkenSteel
3.1

231.0

—

234.1

Net current period comprehensive (loss) income, net of
  income taxes and non-controlling interest
(14.4
)
232.9

(0.9
)
217.6

Balance at September 30, 2014
$
23.1

$
(430.3
)
$
(1.3
)
$
(408.5
)

Other comprehensive (loss) income before reclassifications and income taxes includes the effect of foreign currency. The reclassification of the pension and postretirement liability adjustment was included in costs of products sold and selling, general and administrative expenses in the Consolidated Statements of Income. The reclassification of the remaining components of accumulated other comprehensive (loss) income were included in other income (expense), net in the Consolidated Statements of Income.


15


The following table presents details about components of accumulated other comprehensive loss for the three and nine months ended September 30, 2013:

 
Foreign currency translation adjustments
Pension and postretirement liability adjustments
Change in fair value of derivative financial instruments
Total
Balance at June 30, 2013
$
18.8

$
(1,004.7
)
$
0.5

$
(985.4
)
Other comprehensive (loss) income before
  reclassifications, before income tax
15.2

(7.3
)
(1.7
)
6.2

Amounts reclassified from accumulated
  other comprehensive income, before
  income tax
—

32.3

(0.2
)
32.1

Income tax (benefit) expense
—

(10.7
)
0.7

(10.0
)
Net current period other comprehensive
  (loss) income, net of income taxes
15.2

14.3

(1.2
)
28.3

Non-controlling interest
3.5



3.5

Net current period comprehensive (loss)
  income, net of income taxes and
  non-controlling interest
18.7

14.3

(1.2
)
31.8

Balance at September 30, 2013
$
37.5

$
(990.4
)
$
(0.7
)
$
(953.6
)


 
Foreign currency
translation adjustments
Pension and postretirement
liability adjustments
Change in fair value of
derivative financial instruments
Total
Balance at December 31, 2012
$
49.0

$
(1,061.5
)
$
(0.7
)
$
(1,013.2
)
Other comprehensive (loss) income before
  reclassifications, before income tax
(19.3
)
4.6

0.2

(14.5
)
Amounts reclassified from accumulated
  other comprehensive income, before
  income tax
—

99.2

(0.4
)
98.8

Income tax (benefit) expense
—

(32.7
)
0.2

(32.5
)
Net current period other comprehensive
  (loss) income, net of income taxes
(19.3
)
71.1

—

51.8

Non-controlling interest
7.8

—

—

7.8

Net current period comprehensive (loss)
  income, net of income taxes and
  non-controlling interest
(11.5
)
71.1

—

59.6

Balance at September 30, 2013
$
37.5

$
(990.4
)
$
(0.7
)
$
(953.6
)

Other comprehensive (loss) income before reclassifications and income taxes includes the effect of foreign currency. The reclassification of the pension and postretirement liability adjustment was included in costs of products sold and selling, general and administrative expenses on the Consolidated Statements of Income. The reclassification of the remaining components of accumulated other comprehensive (loss) income were included in other income (expense), net on the Consolidated Statements of Income.




16


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 nine months ended September 30, 2014 and 2013:
  
Three Months Ended
September 30,
Nine Months Ended
September 30,
  
2014
2013
2014
2013
Numerator:
 
 
 
 
Net income (loss) from continuing operations attributable to The Timken Company
$
(10.9
)
$
34.5

$
105.6

$
141.5

Less: undistributed earnings allocated to nonvested stock
—

—

—

0.1

Net income (loss) from continuing operations available to common shareholders for basic earnings per share and diluted earnings per share
$
(10.9
)
$
34.5

$
105.6

$
141.4

Denominator:
 
 
 
 
Weighted average number of shares outstanding, basic
89,683,436

94,667,659

90,889,871

95,391,695

Effect of dilutive securities:
 
 
 
 
Stock options and awards based on the treasury
   stock method
—

740,410

820,157

856,516

   Weighted average number of shares outstanding, 
       assuming dilution of stock options and awards
89,683,436

95,408,069

91,710,028

96,248,211

Basic earnings (loss) per share from continuing operations
$
(0.12
)
$
0.36

$
1.16

$
1.48

Diluted earnings (loss) per share from continuing operations
$
(0.12
)
$
0.36

$
1.15

$
1.47


The exercise prices for certain stock options that the Company has awarded exceed the average market price of the Company’s common shares. Such stock options are antidilutive and were not included in the computation of diluted earnings per share. During the three months ended September 30, 2014, all stock options were antidilutive as the Company experienced a loss from continuing operations. There were no antidilutive stock options outstanding for the three months ending September 30, 2013. The antidilutive stock options outstanding during the nine months ended September 30, 2014 and 2013 were 697,670 and 306,767, respectively.


17


Note 12 - Segment Information

The primary measurement used by management to measure the financial performance of each segment is EBIT (earnings before interest and taxes).
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2014
2013
2014
2013
Net sales to external customers:
 
 
 
 
Mobile Industries
$
357.1

$
348.0

$
1,072.3

$
1,137.5

Process Industries
355.6

307.2

1,001.9

907.7

Aerospace
75.3

76.2

239.8

240.7

 
$
788.0

$
731.4

$
2,314.0

$
2,285.9

 
 
 
 
 
Segment EBIT:
 
 
 
 
Mobile Industries
$
47.0

$
27.8

$
144.5

$
132.1

Process Industries
77.4

51.1

196.0

149.6

Aerospace
(113.2
)
4.6

(104.9
)
21.0

Total EBIT, for reportable segments
$
11.2

$
83.5

$
235.6

$
302.7

Unallocated corporate expenses
(15.5
)
(24.2
)
(57.2
)
(66.9
)
Interest expense
(9.1
)
(5.0
)
(20.4
)
(17.5
)
Interest income
1.0

0.4

3.1

1.4

Income (loss) from continuing operations before income taxes
$
(12.4
)
$
54.7

$
161.1

$
219.7


 
September 30, 2014
December 31, 2013
Assets employed at period-end:
 
 
       Mobile Industries
$
1,122.9

$
1,051.4

       Process Industries
1,141.8

1,096.7

       Aerospace
392.3

555.8

       Corporate
449.7

558.3

  Discontinued Operations
—

1,215.7

Total Assets
$
3,106.7

$
4,477.9

Corporate assets include corporate buildings and cash and cash equivalents.

18


Note 13 - Impairment and Restructuring Charges

Impairment and restructuring charges by segment are comprised of the following:
 
For the three months ended September 30, 2014:
 
Mobile Industries
Process Industries
Aerospace
Corporate
Total
Impairment charges
$
—

$
0.2

$
97.4

$
0.4

$
98.0

Severance and related benefit costs
0.7

0.3

0.3

—

1.3

Exit costs
—

0.1

—

—

0.1

Total
$
0.7

$
0.6

$
97.7

$
0.4

$
99.4


For the nine months ended September 30, 2014:
 
Mobile Industries
Process Industries
Aerospace
Corporate
Total
Impairment charges
$
0.8

$
0.2

$
97.4

$
0.4

$
98.8

Severance and related benefit costs
5.0

1.7

0.4

—

7.1

Exit costs
1.4

1.4

—

—

2.8

Total
$
7.2

$
3.3

$
97.8

$
0.4

$
108.7


For the three months ended September 30, 2013:
 
Mobile Industries
Process Industries
Aerospace
Corporate
Total
Severance and related benefit costs
$
3.1

$
0.1

$
—

$
—

$
3.2

Exit costs
0.2

0.3

—

—

0.5

Total
$
3.3

$
0.4

$
—

$
—

$
3.7


For the nine months ended September 30, 2013:
 
Mobile Industries
Process Industries
Aerospace
Corporate
Total
Severance and related benefit costs
$
9.9

$
0.3

$
—

$
—

$
10.2

Exit costs
1.1

0.3

—

—

1.4

Total
$
11.0

$
0.6

$
—

$
—

$
11.6



The following discussion explains the impairment and restructuring charges recorded for the periods presented; however, it is not intended to reflect a comprehensive discussion of all amounts in the tables above.

Mobile Industries

In May 2012, the Company announced the closure of its manufacturing facility in St. Thomas, Ontario, Canada (St. Thomas), which was intended to consolidate bearing production from this plant with its existing U.S. operations to better align the Company's manufacturing footprint with customer demand. The Company also moved customer service for the Canadian market to its offices in Toronto. The Company completed the closure of this manufacturing facility on March 31, 2013. The closure of the St. Thomas manufacturing facility displaced 190 employees. The Company expects to incur pretax costs of approximately $55 million to $60 million in connection with this closure, of which approximately $20 million to $25 million is expected to be pretax cash costs.




19


The Company has incurred pretax costs related to this closure of approximately $42.4 million as of September 30, 2014, including rationalization costs recorded in cost of products sold. During the first nine months of 2014, the Company recorded $0.8 million of severance and related benefits, including pension settlement charges of $0.7 million, related to this closure. During the third quarter of 2013, the Company recorded $1.5 million of severance and related benefits related to pension settlement charges of $1.5 million. During the first nine months of 2013, the Company recorded $7.8 million of severance and related benefits, including pension settlement charges of $6.7 million, related to this closure.

In addition to the above charges, the Company incurred $2.3 million of severance and related benefit costs related to the rationalization of one of its facilities in Europe during the first nine months of 2014.

Aerospace:

On September 8, 2014, the Company announced plans to: eliminate its Aerospace segment leadership positions and integrate aerospace activities under the direction of Christopher A. Coughlin, executive vice president and group president; close its aerospace engine overhaul business, located in Mesa, Arizona, by the end of the year; evaluate strategic alternatives for its aerospace MRO parts business, also located in Mesa; and close its aerospace bearing facility located in Wolverhampton, United Kingdom, rationalizing the capacity into existing facilities, with timing to be finalized at a later date. In conjunction with this announcement, the Company reviewed goodwill for impairment for its three reporting units within the Aerospace segment as a result of declining sales forecasts and financial performance within the segment. As a result of that review, the Company recorded a pretax goodwill impairment charge of $86.3 million during the third quarter of 2014 related to its Drive Systems and Aerospace Aftermarket reporting units. In addition, the Company recorded an intangible asset impairment charge of $9.9 million, an impairment charge of $1.2 million for its overhaul business, which it classified as assets held for sale and severance and related benefits of $0.3 million. See Note 17 - Fair Value for additional information on the impairment charges for the Aerospace segment.

Workforce Reductions:

During 2013, the Company began the realignment of its organization to improve efficiency and reduce costs. During the first nine months of 2014, the Company recognized $2.8 million of severance and related benefit costs to eliminate approximately 30 positions. Of the $2.8 million charge for the first nine months of 2014, $1.5 million related to the Mobile Industries segment, $1.2 million related to the Process Industries segment, and $0.1 million related to the Aerospace segment.

The following is a rollforward of the consolidated restructuring accrual for the nine months ended September 30, 2014 and the twelve months ended December 31, 2013:
 
September 30,
2014
December 31,
2013
Beginning balance, January 1
$
10.8

$
17.6

Expense
9.0

8.7

Payments
(12.7
)
(15.5
)
Ending balance
$
7.1

$
10.8


The restructuring accrual at September 30, 2014 and December 31, 2013 was included in other current liabilities on the Consolidated Balance Sheets. The restructuring accrual at September 30, 2014 excluded costs related to the settlement of pension benefit plans of $0.7 million.


20


Note 14 - Retirement Benefit Plans

The following tables set forth the net periodic benefit cost for the Company’s defined benefit pension plans. The amounts for the three months and nine months ended September 30, 2014 are based on calculations prepared by the Company's actuaries during the second quarter of 2014. The net periodic benefit cost recorded for the three months and nine months ended September 30, 2014 is the Company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ending December 31, 2014.

 
US Plans
International Plans
 
Total
 
Three Months Ended
September 30,
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
2014
2013
2014
2013
 
2014
2013
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
3.6

$
8.9

$
0.6

$
0.7

 
$
4.2

$
9.6

Interest cost
18.1

29.1

4.2

4.5

 
22.3

33.6

Expected return on plan assets
(28.7
)
(51.9
)
(5.4
)
(5.9
)
 
(34.1
)
(57.8
)
Amortization of prior service cost (credit)
0.8

1.1

—

—

 
0.8

1.1

Amortization of net actuarial loss
11.3

27.3

1.3

1.9

 
12.6

29.2

Pension curtailments and settlements
—

—

—

1.5

 
—

1.5

Less: discontinued operations
—

(6.1
)
—

0.1

 
—

(6.0
)
Net periodic benefit cost
$
5.1

$
8.4

$
0.7

$
2.8

 
$
5.8

$
11.2

 
US Plans
International Plans
 
Total
 
Nine Months Ended
September 30,
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
2013
2014
2013
 
2014
2013
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
17.9

$
26.7

$
1.8

$
2.2

 
$
19.7

$
28.9

Interest cost
80.1

87.2

14.2

13.7

 
94.3

100.9

Expected return on plan assets
(123.1
)
(155.7
)
(18.5
)
(18.3
)
 
(141.6
)
(174.0
)
Amortization of prior service cost (credit)
2.7

3.4

—

—

 
2.7

3.4

Amortization of net actuarial loss
44.3

81.9

4.4

5.6

 
48.7

87.5

Pension curtailments and settlements
—

—

0.7

6.7

 
0.7

6.7

Less: discontinued operations
(8.0
)
(18.2
)
0.4

0.3

 
(7.6
)
(17.9
)
Net periodic benefit cost
$
13.9

$
25.3

$
3.0

$
10.2

 
$
16.9

$
35.5


The following table summarizes the assumptions used to measure the net periodic cost for the defined benefit pension plans for the nine months of 2014:

Assumptions
 
U.S. Plans:
 
Discount rate
5.02
%
Future compensation assumption
3.00
%
Expected long-term return on plan assets
7.25
%
International Plans:
 
Discount rate
3.25% to 9.75%

Future compensation assumption
2.30% to 8.00%

Expected long-term return on plan assets
3.00% to 8.50%


21


The discount rate assumption is based on current rates of high-quality long-term corporate bonds over the same period that benefit payments will be required to be made. The expected rate of return on plan assets assumption is based on the weighted-average expected return on the various asset classes in the plans’ portfolio. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.
As a result of the spinoff of TimkenSteel, the Company remeasured its defined benefit pension plans in the U.S. and the United Kingdom prior to the spinoff. The discount rate used to measure net periodic benefit cost represents a blend between the discount rate used to measure the benefit obligation at December 31, 2013 and the discount rate used to remeasure the benefit obligation prior to the spinoff.

The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets for the defined benefit pension plans as of September 30, 2014:
 
US Plans
International Plans
 
Total
Change in benefit obligation:
 
 
 
 
Benefit obligation at beginning of year
$
2,642.4

$
491.1

 
$
3,133.5

Service cost
17.9

1.8

 
19.7

Interest cost
80.1

14.2

 
94.3

Actuarial losses
86.7

(12.3
)
 
74.4

Employee contributions
—

0.2

 
0.2

International plan exchange rate change
—

(10.8
)
 
(10.8
)
Benefits paid
(162.5
)
(16.8
)
 
(179.3
)
Spinoff of TimkenSteel
(1,063.3
)
(81.8
)
 
(1,145.1
)
Benefit obligation at end of period
$
1,601.3

$
385.6

 
$
1,986.9


 
US Plans
International Plans
 
Total
Change in plan assets:
 
 
 
 
Fair value of plan assets at beginning of year
$
2,870.0

$
420.6

 
$
3,290.6

Actual return on plan assets
163.2

19.2

 
182.4

Employee contributions
—

0.2

 
0.2

Company contributions / payments
3.4

14.3

 
17.7

International plan exchange rate change
—

(6.8
)
 
(6.8
)
Benefits paid
(162.5
)
(16.8
)
 
(179.3
)
Spinoff of TimkenSteel
(1,111.7
)
(85.7
)
 
(1,197.4
)
Fair value of plan assets at end of period
1,762.4

345.0

 
2,107.4

Funded status at end of period
$
161.1

$
(40.6
)
 
$
120.5

Amounts recognized on the Consolidated Balance Sheets:
 
 
 
 
Non-current assets
$
255.1

$
4.6

 
$
259.7

Current liabilities
(4.1
)
(1.5
)
 
(5.6
)
Non-current liabilities
(89.9
)
(43.7
)
 
(133.6
)
 
$
161.1

$
(40.6
)
 
$
120.5


22


 
US Plans
International Plans
 
Total
Amounts recognized in accumulated other comprehensive loss:
 
 
 
 
Net actuarial loss
$
509.8

$
106.9

 
$
616.7

Net prior service cost
12.7

0.5

 
13.2

Accumulated other comprehensive loss (AOCL)
$
522.5

$
107.4

 
$
629.9

Changes in plan assets and benefit obligations recognized in AOCL:
US Plans
International Plans
 
Total
AOCL at beginning of year
$
865.4

$
142.7

 
$
1,008.1

Net actuarial loss
46.6

(13.0
)
 
33.6

Recognized net actuarial loss
(44.3
)
(4.4
)
 
(48.7
)
Recognized prior service cost
(2.7
)
—

 
(2.7
)
Loss recognized due to settlement
—

(0.7
)
 
(0.7
)
Foreign currency impact
—

(3.0
)
 
(3.0
)
Spinoff of TimkenSteel
(342.5
)
(14.2
)
 
(356.7
)
Total recognized in accumulated other comprehensive loss at September 30, 2014
$
522.5

$
107.4

 
$
629.9

The presentation in the above tables for amounts recognized in accumulated other comprehensive loss on the Consolidated Balance Sheets is before the effect of income taxes.
The actual return on plan assets in the table on the prior page represents the expected rate of return on plans that were not remeasured in 2014 and actual returns on plans that were remeasured in 2014 up to the date of the remeasurement and expected rate of returns subsequent to the remeasurement.
The following table summarizes assumptions used to measure the benefit obligation for the defined benefit pension plans at September 30, 2014:
Assumptions
 
U.S. Plans:
 
Discount rate
4.68
%
Future compensation assumption
3.00
%
International Plans:
 
Discount rate
3.25% to 9.75%

Future compensation assumption
2.30% to 8.00%

The discount rate used to remeasure the benefit obligation represents the rate used at the latest period that the defined benefit pension plans were remeasured, which could be the rate at December 31, 2013 for plans that were not remeasured during 2014 or the date at which they were remeasured in 2014.
Defined benefit pension plans in the United States represent 81% of the benefit obligation and 84% of the fair value of plan assets as of September 30, 2014.
Certain of the Company’s defined benefit pension plans were overfunded as of September 30, 2014. As a result, $259.7 million at September 30, 2014 was included in non-current pension assets on the Consolidated Balance Sheets. The current portion of accrued pension cost, which is included in salaries, wages and benefits on the Consolidated Balance Sheets, was $5.6 million at September 30, 2014. In 2014, the current portion of accrued pension cost relates to unfunded plans and represents the actuarial present value of expected payments related to the plans to be made over the next 12 months.


23


The accumulated benefit obligation at September 30, 2014 exceeded the market value of plan assets for several of the Company’s pension plans. For these plans, the projected benefit obligation was $172.4 million, the accumulated benefit obligation was $161.3 million and the fair value of plan assets was $33.2 million at September 30, 2014.
The total pension accumulated benefit obligation for all plans was approximately $2.0 billion at September 30, 2014.

Defined Benefit Pension Plan Assets:
The Company’s target allocation for US pension plan assets, as well as the actual pension plan asset allocations as of September 30, 2014, was as follows: 
 
Current Target
Allocation
Percentage of Pension Plan
Assets at September 30,
Asset Category
 
 
 
2014
Equity securities
15%
to
25%
23%
Debt securities
55%
to
65%
59%
Other
8%
to
25%
18%
Total
 
 
 
100%
The Company recognizes its overall responsibility to ensure that the assets of its various defined benefit pension plans are managed effectively and prudently and in compliance with its policy guidelines and all applicable laws. Preservation of capital is important; however, the Company also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the pension funds. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB provides accounting rules that classify the inputs used to measure fair value into the following hierarchy:
Level 1 -
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 -
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 -
Unobservable inputs for the asset or liability.

24


The following table presents the fair value hierarchy for those investments of the Company’s pension assets measured at fair value on a recurring basis as of September 30, 2014:
 
US Pension Plans
International Pension Plans
 
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
225.6

$
35.8

189.8

$
—

$
24.6

$
—

24.6

$
—

Government and agency securities
420.3

412.6

7.7

—

—

—

—

—

Corporate bonds - investment grade
190.0

—

190.0

—

0.4

—

0.4

—

Equity securities - U.S. companies
68.8

68.8

—

—

13.9

13.9

—

—

Equity securities - international companies
43.3

43.3

—

—

44.5

44.5

—

—

Asset backed securities
0.4

—

0.4

—

3.4

—

3.4

—

Common collective funds - domestic equities
68.3

—

68.3

—

2.0

—

2.0

—

Common collective funds - international equities
110.5

—

110.5

—

81.6

—

81.6

—

Common collective funds - fixed income
311.1

—

311.1

—

103.7

—

103.7

—

Common collective funds - other
—

—

—

—

70.9

—

70.9

—

Limited partnerships
71.8

—

—

71.8

—

—

—

—

Real estate partnerships
111.2

—

81.0

30.2

—

—

—

—

Mutual funds
28.2

28.2

—

—

—

—

—

—

Mutual funds - real estate
23.8

23.8

—

—

—

—

—

—

Risk Parity
89.1

—

89.1

—

—

—

—

—

Total Assets
$
1,762.4

$
612.5

$
1,047.9

$
102.0

$
345.0

$
58.4

$
286.6

$
—


The table below sets forth a summary of changes in the fair value of the level 3 assets by fund for the period ended September 30, 2014:
 
Limited Partnerships
Real Estate
Total
Beginning balance, January 1
$
78.8

$
21.1

$
99.9