10-Q


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, 2015
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 Mount Pleasant Street NW
 North Canton, Ohio
 
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, 2015
 
 
Common Shares, without par value
  
82,993,555 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,
 
2015
 
2014
 
2015
 
2014
(Dollars in millions, except per share data)
 
 
 
 
 
 
 
Net sales
$
707.4

 
$
788.0

 
$
2,157.9

 
$
2,314.0

Cost of products sold
512.0

 
562.5

 
1,554.9

 
1,636.8

Gross Profit
195.4

 
225.5

 
603.0

 
677.2

Selling, general and administrative expenses
120.7

 
132.2

 
375.3

 
410.8

Impairment and restructuring charges
4.4

 
99.4

 
12.0

 
108.0

Pension settlement charges
3.6

 
—

 
223.2

 
0.7

Operating Income (Loss)
66.7

 
(6.1
)
 
(7.5
)
 
157.7

Interest expense
(8.6
)
 
(9.1
)
 
(25.0
)
 
(20.4
)
Interest income
0.6

 
1.0

 
2.0

 
3.1

Gain on sale of real estate
—

 
—

 
—

 
22.6

Other income (expense), net
(0.8
)
 
1.8

 
(1.1
)
 
(1.9
)
Income (Loss) From Continuing Operations Before Income Taxes
57.9

 
(12.4
)
 
(31.6
)
 
161.1

Provision (benefit) for income taxes
(6.6
)
 
(2.2
)
 
1.0

 
53.4

Income (Loss) From Continuing Operations
64.5

 
(10.2
)
 
(32.6
)
 
107.7

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

 
(11.0
)
 
—

 
18.7

Net Income (Loss)
64.5

 
(21.2
)
 
(32.6
)
 
126.4

Less: Net income attributable to noncontrolling interest
1.1

 
0.7

 
2.5

 
2.1

Net Income (Loss) attributable to The Timken Company
$
63.4

 
$
(21.9
)
 
$
(35.1
)
 
$
124.3

 
 
 
 
 
 
 
 
Amounts attributable to The Timken Company's Common Shareholders
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
63.4

 
$
(10.9
)
 
$
(35.1
)
 
$
105.6

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

 
(11.0
)
 
—

 
18.7

Net income (loss) attributable to The Timken Company
$
63.4

 
$
(21.9
)
 
$
(35.1
)
 
$
124.3

 
 
 
 
 
 
 
 
Net Income (Loss) per Common Share attributable to The
  Timken Company's Common Shareholders
 
 
 
 
 
 
 
Earnings (loss) per share - Continuing Operations
$
0.76

 
$
(0.12
)
 
$
(0.41
)
 
$
1.16

Earnings (loss) per share - Discontinued Operations
—

 
(0.12
)
 
—

 
0.21

Basic earnings (loss) per share
$
0.76

 
$
(0.24
)
 
$
(0.41
)
 
$
1.37

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share - Continuing Operations
$
0.75

 
$
(0.12
)
 
$
(0.41
)
 
$
1.15

Diluted earnings (loss) per share - Discontinued Operations
—

 
(0.12
)
 
—

 
0.20

Diluted earnings (loss) per share
$
0.75

 
$
(0.24
)
 
$
(0.41
)
 
$
1.35

 
 
 
 
 
 
 
 
Dividends per share
$
0.26

 
$
0.25

 
$
0.77

 
$
0.75

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,
 
2015
 
2014
 
2015
 
2014
(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss)
$
64.5

 
$
(21.2
)
 
$
(32.6
)
 
$
126.4

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(30.9
)
 
(25.9
)
 
(52.1
)
 
(17.6
)
Pension and postretirement liability adjustment
13.0

 
15.4

 
120.5

 
1.9

Change in fair value of derivative financial instruments
1.2

 
(0.7
)
 
0.9

 
(0.9
)
Other comprehensive income (loss), net of tax
(16.7
)
 
(11.2
)
 
69.3

 
(16.6
)
Comprehensive Income (Loss), net of tax
47.8

 
(32.4
)
 
36.7

 
109.8

Less: comprehensive income attributable to noncontrolling interest
—

 
0.2

 
0.9

 
2.0

Comprehensive Income (Loss) attributable to The Timken Company
$
47.8

 
$
(32.6
)
 
$
35.8

 
$
107.8

See accompanying Notes to the Consolidated Financial Statements.

3


Consolidated Balance Sheets
 
(Unaudited)
 
 
 
September 30,
2015
 
December 31,
2014
(Dollars in millions)
 
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
155.0

 
$
278.8

Restricted cash
14.8

 
15.3

Accounts receivable, less allowances (2015 – $17.2 million; 2014 – $13.7 million)
469.8

 
475.7

Inventories, net
595.4

 
585.5

Deferred income taxes
48.0

 
49.9

Deferred charges and prepaid expenses
25.1

 
25.2

Other current assets
70.8

 
51.5

Total Current Assets
1,378.9

 
1,481.9

 
 
 
 
Property, Plant and Equipment, net
783.1

 
780.5

 
 
 
 
Other Assets
 
 
 
Goodwill
327.1

 
259.5

Non-current pension assets
114.1

 
176.2

Other intangible assets
277.8

 
239.8

Deferred income taxes
18.3

 
11.2

Other non-current assets
47.3

 
52.3

Total Other Assets
784.6

 
739.0

Total Assets
$
2,946.6

 
$
3,001.4

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Short-term debt
$
83.6

 
$
7.4

Current portion of long-term debt
15.1

 
0.6

Accounts payable, trade
176.0

 
143.9

Salaries, wages and benefits
110.0

 
146.7

Income taxes payable
75.0

 
80.2

Other current liabilities
145.9

 
155.0

Total Current Liabilities
605.6

 
533.8

 
 
 
 
Non-Current Liabilities
 
 
 
Long-term debt
625.9

 
522.1

Accrued pension cost
158.8

 
165.9

Accrued postretirement benefits cost
130.1

 
141.8

Deferred income taxes
3.8

 
4.1

Other non-current liabilities
70.8

 
44.6

Total Non-Current Liabilities
989.4

 
878.5

 
 
 
 
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) (2015 – 98,375,135 shares; 2014 – 98,375,135 shares)
 
 
 
Stated capital
53.1

 
53.1

Other paid-in capital
901.0

 
899.4

Earnings invested in the business
1,514.6

 
1,615.4

Accumulated other comprehensive loss
(411.6
)
 
(482.5
)
Treasury shares at cost (2015 – 15,381,580 shares; 2014 – 9,783,375 shares)
(722.8
)
 
(509.2
)
Total Shareholders’ Equity
1,334.3

 
1,576.2

Noncontrolling Interest
17.3

 
12.9

Total Equity
1,351.6

 
1,589.1

Total Liabilities and Shareholders’ Equity
$
2,946.6

 
$
3,001.4

See accompanying Notes to the Consolidated Financial Statements.

4


Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
September 30,
 
2015
 
2014
(Dollars in millions)
 
 
 
CASH PROVIDED (USED)
 
 
 
Operating Activities
 
 
 
Net (loss) income attributable to The Timken Company
$
(35.1
)
 
$
124.3

Net income from discontinued operations
—

 
(18.7
)
Net income attributable to noncontrolling interest
2.5

 
2.1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
97.8

 
103.4

Impairment charges
3.3

 
98.8

Loss (gain) on sale of assets
2.1

 
(20.9
)
Deferred income tax provision
(81.1
)
 
(16.6
)
Stock-based compensation expense
14.1

 
18.5

Excess tax benefits related to stock-based compensation
(1.5
)
 
(6.4
)
Pension and other postretirement expense
251.5

 
22.5

Pension contributions and other postretirement benefit payments
(23.5
)
 
(47.6
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(1.9
)
 
(52.6
)
Inventories
7.1

 
(52.1
)
Accounts payable, trade
27.0

 
47.3

Other accrued expenses
(56.0
)
 
(7.4
)
Income taxes
23.5

 
(31.0
)
Other, net
16.5

 
9.2

Net Cash Provided by Operating Activities - Continuing Operations
246.3

 
172.8

Net Cash Provided by Operating Activities - Discontinued Operations
—

 
22.6

Net Cash Provided by Operating Activities
246.3

 
195.4

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(65.1
)
 
(87.1
)
Acquisitions, net of cash received
(213.6
)
 
(12.0
)
Proceeds from disposal of property, plant and equipment
11.0

 
15.1

Investments in short-term marketable securities, net
(0.6
)
 
3.9

Other
(0.5
)
 
—

Net Cash Used by Investing Activities - Continuing Operations
(268.8
)
 
(80.1
)
Net Cash Used by Investing Activities - Discontinued Operations
—

 
(77.0
)
Net Cash Used by Investing Activities
(268.8
)
 
(157.1
)
 
 
 
 
Financing Activities
 
 
 
Cash dividends paid to shareholders
(65.7
)
 
(68.2
)
Purchase of treasury shares
(227.9
)
 
(266.5
)
Proceeds from exercise of stock options
4.0

 
16.7

Excess tax benefits related to stock-based compensation
1.5

 
6.4

Proceeds from issuance of long-term debt
225.7

 
346.2

Deferred financing costs
(2.0
)
 
—

Accounts receivable securitization financing borrowings
116.0

 
90.0

Accounts receivable securitization financing payments
(38.0
)
 
(90.0
)
Payments on long-term debt
(106.1
)
 
(250.6
)
Short-term debt activity, net
(1.6
)
 
(9.5
)
Decrease in restricted cash
0.2

 
—

Cash transferred to TimkenSteel Corporation
—

 
(46.5
)
Other
3.7

 
(3.1
)
Net Cash Used by Financing Activities - Continuing Operations
(90.2
)
 
(275.1
)
Net Cash Provided by Financing Activities - Discontinued Operations
—

 
100.0

Net Cash Used by Financing Activities
(90.2
)
 
(175.1
)
Effect of exchange rate changes on cash
(11.1
)
 
(9.6
)
Decrease In Cash and Cash Equivalents
(123.8
)
 
(146.4
)
Cash and cash equivalents at beginning of year
278.8

 
384.6

Cash and Cash Equivalents at End of Period
$
155.0

 
$
238.2

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, 2014.


Note 2 - Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, "Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction in the carrying value of debt. Prior to the issuance of this new accounting guidance, debt issuance costs were required to be presented in the balance sheet as a deferred charge (i.e., an asset), and only a debt discount was recorded as a direct deduction to the carrying value of debt. This new accounting guidance is effective for annual periods beginning after December 15, 2015. The impact of adopting ASU 2015-03 is not expected to have a material impact on the Company's results of operations or financial condition.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. On July 9, 2015, the FASB decided to delay the effective date of this new accounting guidance by one year, which will result in it being effective for annual periods beginning after December 15, 2017. The Company is currently evaluating the impact of adopting ASU 2014-09 on the Company's results of operations or financial condition.

In April 2014, the FASB issued 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 adoption of this accounting guidance did not have any impact on the Company's results of operations or financial condition.



6


Note 3 - Discontinued Operations

On June 30, 2014, the Company completed the tax-free spinoff of its steel business (the Spinoff) into a separate 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.

In connection with the Spinoff, the Company and TimkenSteel entered into certain transitional relationships, including a commercial supply agreement for TimkenSteel to supply the Company with certain steel products and other relationships described in the section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 titled "Risks Relating to the Spinoff of TimkenSteel."

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.
 
Three Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2014
Net sales
$
—

 
$
786.2

Cost of goods sold
—

 
642.1

Gross profit
—

 
144.1

Selling, administrative and general expenses
—

 
46.3

Separation Costs
10.1

 
54.7

Interest expense, net
—

 
0.8

Other expense (income), net
—

 
(0.1
)
Income (loss) before income taxes
(10.1
)
 
42.4

Income tax expense
(0.9
)
 
(23.7
)
Income (loss) from discontinued operations
$
(11.0
)
 
$
18.7



7


Note 4 - Acquisitions

On September 1, 2015, the Company completed the acquisition of the membership interests of Carlstar Belt LLC (Carlstar Belts) for $213.7 million, including cash acquired of approximately $0.1 million. The Company incurred approximately $1 million of legal and professional fees to acquire Carlstar Belts. Carlstar Belts is a leading North American manufacturer of belts used in industrial, commercial and consumer applications, and sold under multiple brand names, including Carlisle®, Ultimax® and Panther®, among others. The acquisition of Carlstar Belts further diversifies the Company's portfolio beyond engineered bearings, bringing customers an expanded offering of mechanical power transmission products and services. The product portfolio includes more than 20,000 parts that utilize wrap molded, raw edge, v-ribbed and synchronous belt designs. Based in Springfield, Missouri, Carlstar Belts had annual sales of approximately $140 million for the twelve months ending June 30, 2015, and employs approximately 750 employees. The results of the operations of Carlstar Belts are reported in both the Mobile Industries and Process Industries segments based on customers served.
Pro forma results of operations have not been presented because the effects of the acquisition were not significant to the Company's income from continuing operations before income taxes or total assets in 2015. The following table presents the preliminary purchase price allocations for the acquisition in 2015: 

 
Initial Purchase Price Allocation
Assets:
 
Cash and cash equivalents
$
0.1

Accounts receivable, net
13.3

Inventories, net
48.5

Other current assets
1.1

Property, plant and equipment, net
37.9

Goodwill
69.7

Other intangible assets
63.9

Total assets acquired
$
234.5

Liabilities:
 
Accounts payable, trade
$
10.2

Salaries, wages and benefits
1.1

Other current liabilities
1.3

Non-Current Pension Liability
2.3

Non-Current Deferred Tax Liability
5.9

Total liabilities assumed
$
20.8

Net assets acquired
$
213.7


The following table summarizes the preliminary purchase price allocation for identifiable intangible assets acquired in 2015:
 
Initial Purchase
Price Allocation
 
 
Weighted -
Average Life
Trade name
$
1.7

11 years
Technology
17.1

20 years
All customer relationships
43.9

20 years
Capitalized Software
1.2

3 years
Total intangible assets
$
63.9

19 years


8


Note 5 - Inventories
The components of inventories were as follows:
 
September 30,
2015
December 31,
2014
Manufacturing supplies
$
25.7

$
25.0

Raw materials
63.5

51.3

Work in process
212.0

219.3

Finished products
318.2

302.7

Subtotal
619.4

598.3

Allowance for obsolete and surplus inventory
(24.0
)
(12.8
)
Total Inventories, net
$
595.4

$
585.5


Inventories are valued at the lower of cost or market, with approximately 53% valued by the first-in, first-out (FIFO) method and the remaining 47% valued by the last-in, first-out (LIFO) method. The majority of the Company's domestic inventories are valued by the LIFO method and all of the Company's international (outside the United States) inventories are valued by the FIFO method.

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

The LIFO reserves at September 30, 2015 and December 31, 2014 were $197.1 million and $199.7 million, respectively. The Company recognized a decrease in its LIFO reserve of $2.6 million during the first nine months of 2015, compared to a decrease in its LIFO reserve of $1.7 million during the first nine months of 2014.


Note 6 - Property, Plant and Equipment
The components of property, plant and equipment were as follows:
 
September 30,
2015
December 31,
2014
Land and buildings
$
429.7

$
428.8

Machinery and equipment
1,762.9

1,735.3

Subtotal
2,192.6

2,164.1

Accumulated depreciation
(1,409.5
)
(1,383.6
)
Property, Plant and Equipment, net
$
783.1

$
780.5


Depreciation expense for the nine months ended September 30, 2015 and 2014 was $70.8 million and $90.0 million, respectively.

During the fourth quarter of 2014, the Company transferred $45.7 million of capitalized software from property, plant and equipment to intangible assets. Depreciation expense on the transferred capitalized software for the nine months ended September 30, 2014 was $8.3 million.

Capitalized interest during the nine months ended September 30, 2015 and 2014 was zero and $7.3 million, respectively. Capitalized interest of $5.7 million for the nine months ended September 30, 2014 related to TimkenSteel.


9


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 $31 million over a twenty-four month period, of which $28.9 million was received as of September 30, 2015. 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 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.

Assets Held for Sale

During the third quarter of 2015, the Company explored strategic alternatives for its U.S. subsidiary, Timken Alcor Aerospace Technologies, Inc. (Alcor). Alcor is engaged in the design, engineering, sourcing, manufacture and sale of parts and components used in gas turbine engines and helicopter drivetrain applications and filing applications for and obtaining certificates reflecting a Parts Manufacturer Approval (PMA) issued by the United States Federal Aviation Administration (FAA) for such parts and components. The results of the operations of Alcor are reported in the Mobile Industries segment. At September 30, 2015, the assets and liabilities of Alcor were presented as assets held for sale and included in other current assets and other current liabilities, respectively on the Consolidated Balance Sheet.

The following table presents the assets and liabilities classified as assets held for sale at September 30, 2015. 
 
Assets Held
for Sale
Assets:
 
Accounts receivable, net
$
2.5

Inventories, net
6.7

Other current assets
0.1

Property, plant and equipment, net
2.0

Other intangible assets
3.6

Total assets
$
14.9

Liabilities:
 
Accounts payable, trade
$
0.7

Other current liabilities
0.8

Total liabilities
$
1.5

Net assets held for sale
$
13.4



10


Note 7 - Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2015 were as follows:
 
Mobile
Industries
Process
Industries
Total
Beginning balance
$
89.6

$
169.9

$
259.5

Acquisitions
7.1

62.6

69.7

Other
(0.5
)
(1.6
)
(2.1
)
Ending balance
$
96.2

$
230.9

$
327.1


Acquisitions in 2015 relate to the preliminary purchase price allocation for Carlstar Belts completed on September 1, 2015. $58.8 million of the goodwill acquired for Carlstar Belts is tax-deductible and will be recognized over 15 years for tax purposes. The remaining $10.9 million is non-deductible for tax purposes. “Other” primarily includes foreign currency translation adjustments.

The following table displays intangible assets as of September 30, 2015 and December 31, 2014:
 
As of September 30, 2015
As of December 31, 2014
 
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Intangible assets
subject to amortization:
 
 
 
 
 
 
Customer relationships
$
198.8

$
66.4

$
132.4

$
160.1

$
59.0

$
101.1

Know-how
32.7

6.3

26.4

33.4

5.1

28.3

Industrial license
 agreements
0.1

0.1

—

0.1

0.1

—

Land-use rights
8.5

4.8

3.7

8.7

4.7

4.0

Patents
2.1

2.0

0.1

2.3

2.0

0.3

Technology
53.7

13.3

40.4

37.0

11.9

25.1

Tradenames
6.5

3.1

3.4

5.4

3.0

2.4

PMA licenses
—

—

—

5.3

4.5

0.8

Non-compete
 agreements
2.7

2.5

0.2

3.5

3.2

0.3

Software
240.7

193.9

46.8

235.0

182.0

53.0

 
$
545.8

$
292.4

$
253.4

$
490.8

$
275.5

$
215.3

Intangible assets not subject to amortization:
 
 
 
 
 
 
Tradenames
$
15.7

$
—

$
15.7

$
15.8

$
—

$
15.8

FAA air agency
 certificates
8.7

—

8.7

8.7

—

8.7

 
$
24.4

$
—

$
24.4

$
24.5

$
—

$
24.5

Total intangible assets
$
570.2

$
292.4

$
277.8

$
515.3

$
275.5

$
239.8


Intangible assets at September 30, 2015 exclude $3.6 million of intangible assets classified as assets held for sale. See Note 6 - Property, Plant and Equipment for additional information on assets held for sale.

Amortization expense for intangible assets was $27.0 million and $13.4 million for the nine months ended September 30, 2015 and 2014, respectively. Amortization expense for intangible assets is estimated to be $34.4 million in 2015; $30.3 million in 2016; $26.1 million in 2017; $20.8 million in 2018; and $15.8 million in 2019.


11


Note 8 - Financing Arrangements
Short-term debt at September 30, 2015 and December 31, 2014 was as follows:
 
September 30,
2015
December 31,
2014
Variable-rate Asset Securitization Agreement with interest rate of 0.98% at September 30, 2015
$
78.0

$
—

Borrowings under variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.40% to 9.50% at September 30, 2015 and interest rates ranging from 0.51% to 5.13% at December 31, 2014
5.6

7.4

Short-term debt
$
83.6

$
7.4


The lines of credit for certain of the Company’s foreign subsidiaries provide for short-term borrowings up to $222.9 million. Most of these lines of credit are uncommitted. At September 30, 2015, the Company’s foreign subsidiaries had borrowings outstanding of $5.6 million and guarantees of $5.1 million, which reduced the availability under these facilities to $212.2 million.

The Company has a $100 million Amended and Restated Asset Securitization Agreement (Accounts Receivable Facility), which matures on November 30, 2015. Under the terms of the Accounts Receivable Facility, the Company sells, on an ongoing basis, certain accounts receivable to Timken Receivables Corporation, a wholly-owned consolidated subsidiary, that in turn uses the accounts receivable to secure borrowings, which are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the Accounts Receivable Facility are limited by certain borrowing base calculations. Amounts outstanding under the Accounts Receivable Facility are reported in short-term debt in the Company’s Consolidated Balance Sheet. As of September 30, 2015, the Company had $78.0 million in outstanding borrowings under the Accounts Receivable Facility, which are secured by certain accounts receivable in accordance with the terms of the Accounts Receivable Facility. These borrowings reduced the availability of the Accounts Receivable Facility to zero at September 30, 2015. 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, 2015 and December 31, 2014 was as follows:
 
September 30,
2015
December 31,
2014
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 1, 2024, with an
interest rate of 3.875%
345.1

346.4

Variable-rate Senior Credit Facility with an interest rate of 1.48% at September 30, 2015
120.8

—

Other
0.1

1.3

 
$
641.0

$
522.7

Less current maturities
15.1

0.6

Long-term debt
$
625.9

$
522.1


On June 19, 2015, the Company entered into a $500 million Third Amended and Restated Credit Agreement (Senior Credit Facility). The Senior Credit Facility amended and restated the previous senior credit facility, which was due to expire on May 11, 2016. The Senior Credit Facility now matures on June 19, 2020. At September 30, 2015, the Company had outstanding borrowings of $120.8 million under the Senior Credit Facility, which reduced the availability to $379.2 million at September 30, 2015. The Company incurred $2.0 million of deferred financing costs in connection with the Senior Credit Facility that will be amortized over life of the 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, 2015, the Company was in full compliance with both of these covenants.

On August 20, 2014, the Company issued $350 million of fixed-rate 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.


12


Note 9 - Equity

The changes in the equity components for the nine months ended September 30, 2015 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, 2014
$
1,589.1

$
53.1

$
899.4

$
1,615.4

$
(482.5
)
$
(509.2
)
$
12.9

Net (loss) income
(32.6
)
 
 
(35.1
)
 
 
2.5

Foreign currency translation adjustment
(52.1
)
 
 
 
(50.5
)
 
(1.6
)
Pension and postretirement liability
adjustment (net of the income tax
benefit of $68.5 million)
120.5

 
 
 
120.5

 
 
Change in fair value of derivative financial instruments, net of reclassifications
0.9

 
 
 
0.9

 
 
Dissolution of joint venture
(0.2
)
 
 
 
 
 
(0.2
)
Investment in joint venture by noncontrolling interest party
3.7

 
 
 
 
 
3.7

Dividends – $0.77 per share
(65.7
)
 
 
(65.7
)
 
 
 
Excess tax benefit from stock compensation
1.5

 
1.5

 
 
 
 
Stock-based compensation expense
14.1

 
14.1

 
 
 
 
Stock purchased at fair market value
(227.9
)
 
 
 
 
(227.9
)
 
Stock option exercise activity
4.0

 
(7.4
)
 
 
11.4

 
Restricted shares (issued) surrendered
0.2

 
(6.6
)
 
 
6.8

 
Shares surrendered for taxes
(3.9
)
 
 
 
 
(3.9
)
 
Balance at September 30, 2015
$
1,351.6

$
53.1

$
901.0

$
1,514.6

$
(411.6
)
$
(722.8
)
$
17.3


On March 6, 2014, Timken Lux Holdings II S.A.R.L, a subsidiary of the Company, entered into a joint venture agreement with Holme Service Limited (joint venture partner). During the first quarter of 2015, the Company and its joint venture partner established TUBC Limited, a Cyprus entity, for the purpose of producing bearings to serve the rail market sector in Russia. During the second quarter of 2015, the Company and its joint venture partner amended and restated the joint venture agreement and contributed $3.8 million and $3.7 million, respectively, to TUBC Limited. The Company and its joint venture partner will have a 51% controlling interest and 49% controlling interest, respectively, in TUBC Limited. The Company expects to contribute a total of $16 million in 2015 and 2016 during phase one of the joint venture agreement.

13


Note 10 - Accumulated Other Comprehensive Income (Loss)

The following tables present details about components of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2015, respectively:

 
Foreign currency translation adjustments
Pension and postretirement liability adjustments
Change in fair value of derivative financial instruments
Total
Balance at June 30, 2015
$
(21.4
)
$
(373.5
)
$
(1.1
)
$
(396.0
)
Other comprehensive (loss) income before
  reclassifications, before income tax
(30.9
)
4.2

2.1

(24.6
)
Amounts reclassified from accumulated other comprehensive income, before income tax
—

13.4

(0.2
)
13.2

Income tax (benefit) expense
—

(4.6
)
(0.7
)
(5.3
)
Net current period other comprehensive
  (loss) income, net of income taxes
(30.9
)
13.0

1.2

(16.7
)
Non-controlling interest
1.1

—

—

1.1

Net current period comprehensive (loss)
  income, net of income taxes and
  non-controlling interest
(29.8
)
13.0

1.2

(15.6
)
Balance at September 30, 2015
$
(51.2
)
$
(360.5
)
$
0.1

$
(411.6
)


 
Foreign currency translation adjustments
Pension and postretirement liability adjustments
Change in fair value of derivative financial instruments
Total
Balance at December 31, 2014
$
(0.7
)
$
(481.0
)
$
(0.8
)
$
(482.5
)
Other comprehensive (loss) income before reclassifications, before income tax
(52.1
)
(62.3
)
2.1

(112.3
)
Amounts reclassified from accumulated other comprehensive income, before income tax
—

251.3

(0.7
)
250.6

Income tax (benefit) expense
—

(68.5
)
(0.5
)
(69.0
)
Net current period other comprehensive (loss) income, net of income taxes
(52.1
)
120.5

0.9

69.3

Non-controlling interest
1.6

—

—

1.6

Net current period comprehensive (loss) income, net of income taxes and non-controlling interest
(50.5
)
120.5

0.9

70.9

Balance at September 30, 2015
$
(51.2
)
$
(360.5
)
$
0.1

$
(411.6
)














14


The following tables present details about components of accumulated other comprehensive loss for the three and the 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) expense
—

(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
As of 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) expense
—

(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.

$221.0 million of the before-tax reclassification of pension and postretirement liability adjustments was included in pension settlement charges in the Consolidated Statement of Income for the first nine months of 2015. The remaining before-tax reclassification of pension and postretirement liability adjustments was due to the amortization of actuarial losses and prior service costs and was included in costs of products sold and selling, general and administrative expenses in the Consolidated Statements of Income. The reclassification of the remaining components of accumulated other comprehensive income (loss) was included in other income (expense), net in the Consolidated Statements of Income.


15


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, 2015 and 2014:
  
Three Months Ended
September 30,
Nine Months Ended
September 30,
  
2015
2014
2015
2014
Numerator:
 
 
 
 
Net income (loss) from continuing operations attributable to The Timken Company
$
63.4

$
(10.9
)
$
(35.1
)
$
105.6

Less: undistributed earnings allocated to nonvested stock


—

—

—

Net income (loss) from continuing operations available to common shareholders for basic earnings per share and diluted earnings per share
$
63.4

$
(10.9
)
$
(35.1
)
$
105.6

Denominator:
 
 
 
 
Weighted average number of shares outstanding, basic
83,671,931

89,683,436

85,578,800

90,889,871

Effect of dilutive securities:
 
 
 
 
Stock options and awards based on the treasury
   stock method
473,820

—

—

820,157

   Weighted average number of shares outstanding, 
       assuming dilution of stock options and awards
84,145,751

89,683,436

85,578,800

91,710,028

Basic earnings (loss) per share from continuing operations
$
0.76

$
(0.12
)
$
(0.41
)
$
1.16

Diluted earnings (loss) per share from continuing operations
$
0.75

$
(0.12
)
$
(0.41
)
$
1.15


The exercise prices for certain stock options that the Company has awarded exceed the average market price of the Company’s common shares during the relevant periods. Such stock options are antidilutive and were not included in the computation of diluted earnings per share. The antidilutive stock options outstanding during the three months ended September 30, 2015 were 2,761,824. During the three months ended September 31, 2014, all stock options were antidilutive as the Company experienced a loss from continuing operations. During the nine months ended September 31, 2015, all stock options were antidilutive as the Company experienced a loss from continuing operations. The antidilutive stock options outstanding during the nine months ended September 30, 2014 were 697,670.


16


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,
 
2015
2014
2015
2014
Net sales to external customers:
 
 
 
 
Mobile Industries
$
396.4

$
427.0

$
1,178.0

$
1,295.9

Process Industries
311.0

361.0

979.9

1,018.1

 
$
707.4

$
788.0

$
2,157.9

$
2,314.0

 
 
 
 
 
Segment EBIT:
 
 
 
 
Mobile Industries
$
43.0

$
(63.4
)
$
114.4

$
43.2

Process Industries
43.1

74.4

145.0

187.4

Total EBIT, for reportable segments
$
86.1

$
11.0

$
259.4

$
230.6

Unallocated corporate expenses
(16.6
)
(15.3
)
(44.8
)
(52.2
)
Unallocated pension settlement charges
(3.6
)
—

(223.2
)
—

Interest expense
(8.6
)
(9.1
)
(25.0
)
(20.4
)
Interest income
0.6

1.0

2.0

3.1

Income (loss) from continuing operations before income taxes
$
57.9

$
(12.4
)
$
(31.6
)
$
161.1



17


Note 13 - Impairment and Restructuring Charges
Impairment and restructuring charges by segment are comprised of the following:
 
For the three months ended September 30, 2015:
 
Mobile Industries
Process Industries
Corporate
Total
Severance and related benefit costs
$
2.0

$
1.7

$
0.6

$
4.3

Exit costs
0.1

—

—

0.1

Total
$
2.1

$
1.7

$
0.6

$
4.4


For the three months ended September 30, 2014:
 
Mobile Industries
Process Industries
Corporate
Total
Impairment charges
$
97.4

$
0.2

$
0.4

$
98.0

Severance and related benefit costs
1.0

0.3

—

1.3

Exit costs
—

0.1

—

0.1

Total
$
98.4

$
0.6

$
0.4

$
99.4


For the nine months ended September 30, 2015:
 
Mobile Industries
Process Industries
Corporate
Total
Impairment charges
$
0.1

$
3.2

$
—

$
3.3

Severance and related benefit costs
2.7

1.7

0.6

5.0

Exit costs
0.7

3.0

—

3.7

Total
$
3.5

$
7.9

$
0.6

$
12.0


For the nine months ended September 30, 2014:
 
Mobile Industries
Process Industries
Corporate
Total
Impairment charges
$
98.2

$
0.2

$
0.4

$
98.8

Severance and related benefit costs
4.7

1.7

—

6.4

Exit costs
1.4

1.4

—

2.8

Total
$
104.3

$
3.3

$
0.4

$
108.0


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.


18


Mobile Industries

On September 8, 2014, the Company announced plans to: eliminate leadership positions under its former Aerospace segment 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 2014; 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 former 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. These charges are included in the Mobile Industries segment.

In addition, the Company incurred $1.2 million and $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 2015 and 2014, respectively.


Process Industries

During the first nine months of 2015, the Company recorded $3.0 million of exit costs related to the Company's termination of its relationship with one of its third-party sales representatives in Colombia.

In addition, the Company recorded impairment charges of $3.0 million related to one of the Company's repair businesses in the United States. See Note 17 - Fair Value for additional information on the impairment charges for the repair business.


Workforce Reductions:

During the third quarter of 2015, the Company recognized $4.0 million of severance and related benefit costs to eliminate approximately 65 positions. Of the $4.0 million charge for the third quarter of 2015, $1.8 million related to the Mobile Industries segment, $1.6 million related to the Process Industries segment and $0.6 million related to Corporate positions. 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, $1.6 million related to the Mobile Industries segment and $1.2 million related to the Process Industries segment.

The following is a rollforward of the consolidated restructuring accrual for the nine months ended September 30, 2015 and the twelve months ended December 31, 2014:
 
September 30,
2015
December 31,
2014
Beginning balance, January 1
$
9.5

$
10.8

Expense
8.7

14.5

Payments
(4.4
)
(15.8
)
Ending balance
$
13.8

$
9.5


The restructuring accrual at September 30, 2015 and December 31, 2014 was included in other current liabilities on the Consolidated Balance Sheets.


19


Note 14 - Retirement Benefit Plans
The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans. The amounts for the three months and nine months ended September 30, 2015 are based on calculations prepared by the Company's actuaries during the second quarter of 2015. The net periodic benefit cost recorded for the three months and nine months ended September 30, 2015 is the Company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ending December 31, 2015.

 
U.S. Plans
International Plans
Total
 
Three Months Ended
September 30,
Three Months Ended
September 30,
Three Months Ended
September 30,
 
2015
2014
2015
2014
2015
2014
Components of net periodic benefit cost:
 
 
 
 
 
 
Service cost
$
3.9

$
3.6

$
0.4

$
0.6

$
4.3

$
4.2

Interest cost
11.4

18.1

3.2

4.2

14.6

22.3

Expected return on plan assets
(15.8
)
(28.7
)
(4.2
)
(5.4
)
(20.0
)
(34.1
)
Amortization of prior service cost
0.7

0.8

0.1

—

0.8

0.8

Amortization of net actuarial loss
7.8

11.3

1.2

1.3

9.0

12.6

Pension settlements and curtailments
3.5

—

—

—

3.5

—

Net periodic benefit cost
$
11.5

$
5.1

$
0.7

$
0.7

$
12.2

$
5.8


 
U.S. Plans
International Plans
Total
 
Nine Months Ended
September 30,
Nine Months Ended
September 30,
Nine Months Ended
September 30,
 
2015
2014
2015
2014
2015
2014
Components of net periodic benefit cost:
 
 
 
 
 
 
Service cost
$
11.5

$
17.9

$
1.8

$
1.8

$
13.3

$
19.7

Interest cost
35.6

80.1

9.4

14.2

45.0

94.3

Expected return on plan assets
(49.2
)
(123.1
)
(12.6
)
(18.5
)
(61.8
)
(141.6
)
Amortization of prior service cost
2.1

2.7

0.1

—

2.2

2.7

Amortization of net actuarial loss
24.1

44.3

3.9

4.4

28.0

48.7

Pension settlements and curtailments
219.9

—

1.1

0.7

221.0

0.7

Less: discontinued operations
—

(8.0
)
—

0.4

—

(7.6
)
Net periodic benefit cost
$
244.0

$
13.9

$
3.7

$
3.0

$
247.7

$
16.9


On January 23, 2015, the Company entered into an agreement pursuant to which the Timken-Latrobe-MPB-Torrington Retirement Plan (the Plan) purchased a group annuity contract from Prudential Insurance Company of America (Prudential) that requires Prudential to pay and administer future pension benefits for approximately 5,000 U.S. Timken retirees. The Company transferred approximately $575 million of the Company's pension obligations and approximately $635 million of pension assets to Prudential in this transaction. In addition to the purchase of the group annuity contract, the Company made lump sum distributions of $29.5 million to new retirees. The Company also incurred pension settlement and curtailment charges related to one of its Canadian defined benefit pension plans. As a result of the purchase of the group annuity contract and the lump sum distributions, as well as pension settlement and curtailment charges related to one of its Canadian defined benefit pension plans, the Company incurred pension settlement and curtailment charges of $223.2 million, including professional fees of $2.2 million, for the nine months ended September 30, 2015.
 

20


The Company generally amortizes actuarial gains and losses over the remaining service period of active participants. However, in accordance with its policy, the Company updates and reviews the census data for its U.S. defined benefit pension plans on an annual basis. This review, which was completed during the second quarter of 2015, indicated that over 95% of the participants in one of these plans are inactive. Therefore, the Company changed the amortization period over which actuarial gains and losses related to that plan will be amortized to be based on the remaining expected life of inactive participants in the plan. This change resulted in an amortization period of 15.5 years, compared to 10.1 years had the change not been made. The impact of the change resulted in lower pension expense of $3.1 million ($1.9 million after-tax, or $0.02 per share) for the first six months of 2015.


Note 15 - Postretirement Benefit Plans
The following table sets forth the net periodic benefit cost for the Company’s postretirement benefit plans. The amounts for the three months and nine months ended September 30, 2015 are based on calculations prepared by the Company's actuaries during the second quarter of 2015. The net periodic benefit cost recorded for the three months and nine months ended September 30, 2015 is the Company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ending December 31, 2015.

 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2015
2014
2015
2014
Components of net periodic benefit cost:
 
 
 
 
Service cost
$
0.1

$
0.2

$
0.3

$
1.2

Interest cost
2.7

2.9

8.1

13.8

Expected return on plan assets
(1.8
)
(1.4
)
(5.3
)
(7.1
)
Amortization of prior service cost (credit)
0.2

0.1

0.6

0.8

Amortization of net actuarial loss
0.1

—

0.1

—

Less: discontinued operations
—

—

—

(3.1
)
Net periodic benefit cost
$
1.3

$
1.8

$
3.8

$
5.6





21


Note 16 - Income Taxes

The Company's provision for income taxes in interim periods is computed by applying the estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items, including interest on prior year tax liabilities, are recorded during the period(s) in which they occur.
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2015
2014
2015
2014
Provision (benefit) for income taxes
$
(6.6
)
$
(2.2
)
$
1.0

$
53.4

Effective tax rate
(11.4
)%
17.7
%
(3.2
)%
33.1
%

In accordance with ASC Topic 740, "Income Taxes," the effective tax rate in the third quarter of 2015 was calculated as the difference between the income taxes computed for the nine months, as described below, and the year-to-date income taxes recorded as of June 30, 2015. This computation resulted in an effective tax rate of negative 11.4% for the third quarter of 2015, including discrete items. The effective tax rate of negative 11.4% was primarily due to the change in the Company's 2015 forecast and the variability caused by the large pension settlement charge recorded in the first quarter of 2015.

The effective tax rate in the third quarter of 2014 was calculated as the difference between the tax computed for the nine months, as described below, and the year-to-date tax recorded as of June 30, 2014. This computation resulted in an effective tax rate of 17.7% for the third quarter of 2014, including discrete items.

In accordance with ASC Topic 740, "Income Taxes", the effective tax rate in the first nine months of 2015 was computed based on an estimated overall annual effective tax rate, which produced a rate of negative 3.2%, including discrete items, for the first nine months of 2015 (expected tax benefits on expected pretax income). This rate reflects an estimated full year loss in the U.S. primarily driven by pension settlement charges and earnings in foreign jurisdictions, which is expected to produce a net tax benefit on pre-tax income. The effective tax rate of negative 3.2% was lower than the U.S. federal statutory rate of 35% primarily due to earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, tax benefits related to foreign tax credits, U.S. state and local tax benefits, non-taxable U.S. income and the U.S. manufacturing deduction. These factors were partially offset by U.S. taxation of foreign earnings, losses at certain foreign subsidiaries where no tax benefit could be recorded, non-deductible U.S. expenses and certain discrete tax expenses.

The effective tax rate in the first nine months of 2014 was computed based on an expected annual effective tax rate of 33.1%, including discrete items. The effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, tax benefits related to foreign tax credits, the U.S. manufacturing deduction, non-taxable U.S. income and certain discrete tax benefits. These factors were partially offset by U.S. taxation of foreign earnings, goodwill impairment, losses at certain foreign subsidiaries where no tax benefit could be recorded, U.S. state and local taxes and non-deductible U.S. expenses.

22


Note 17 - Fair Value
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.

The following tables present the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Cash and cash equivalents
$
155.0

$
120.3

$
34.7

$
—

Restricted cash
14.8

—

14.8

—

Short-term investments
8.7

—

8.7

—

Foreign currency hedges
5.5

—

5.5

—

Total Assets
$
184.0

$
120.3

$
63.7

$
—

Liabilities:
 
 
 
 
Foreign currency hedges
$
2.0

$
—

$
2.0

$
—

Total Liabilities
$
2.0

$
—

$
2.0

$
—

 
December 31, 2014
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Cash and cash equivalents
$
278.8

$
155.6

$
123.2

$
—

Restricted cash
15.3

—

15.3

—

Short-term investments
8.4

—

8.4

—

Foreign currency hedges
12.4

—

12.4

—

Total Assets
$
314.9

$
155.6

$
159.3

$
—

Liabilities:
 
 
 
 
Foreign currency hedges
$
0.3

$
—

$
0.3

$
—

Total Liabilities
$
0.3

$
—

$
0.3

$
—


Cash and cash equivalents are highly liquid investments with maturities of three months or less when purchased and are valued at the redemption value. Short-term investments are investments with maturities between four months and one year and are valued at the amortized cost. The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts.

The Company does not believe it has significant concentrations of risk associated with the counterparts to its financial instruments.






23


The following table presents those assets measured at fair value on a nonrecurring basis for the nine months ended September 30, 2015 using Level 3 inputs:
 
Carrying Value
Fair Value Adjustment
Fair Value
Long-lived assets held for sale:
 
 
 
Repair business
$
5.8

$
(3.0
)
$
2.8

Total long-lived assets held for sale
$
5.8

$
(3.0
)
$
2.8

 
 
 
 
Long-lived assets held and used:
 
 
 
Fixed assets
$
0.8

$
(0.3
)
$
0.5

Total long-lived assets held and used
$
0.8

$
(0.3
)
$
0.5


Assets held for sale of $5.8 million associated with the Company's service center in Niles, Ohio were written down to their fair value of $2.8 million during the first quarter of 2015, resulting in an impairment charge of $3.0 million. The fair value of these assets was based on the price that the Company expected to receive from the sale of these assets.

Various items of property, plant and equipment, with a carrying value of $0.8 million, were written down to their fair value of $0.5 million, resulting in an impairment charge of $0.3 million. The fair value for these assets was based on the price that would be received in a current transaction to sell the assets on a standalone basis, considering the age and physical attributes of these items, as these assets had been idled.


Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, net, accounts payable, trade, short-term borrowings and long-term debt. Due to their short-term nature, the carrying value of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, net, accounts payable, trade and short-term borrowings are a reasonable estimate of their fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was $538.8 million and $558.6 million at September 30, 2015 and December 31, 2014, respectively. The carrying value of this debt was $520.1 million and $521.4 million at September 30, 2015 and December 31, 2014, respectively. The fair value of long-term fixed-debt was measured using Level 2 inputs.


24


Note 18 - Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange rate risk, commodity price risk and interest rate risk. Forward exchange contracts on various foreign currencies are entered into in order to manage the foreign currency exchange rate risk associated with certain of the Company’s commitments denominated in foreign currencies. Forward contracts on various commodities are entered into in order to manage the price risk associated with forecasted purchases of natural gas used in the Company’s manufacturing process. Interest rate swaps are used to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings.

The Company designates certain foreign currency forward contracts as cash flow hedges of forecasted revenues and certain interest rate hedges as fair value hedges of fixed-rate borrowings. The majority of the Company’s natural gas forward contracts are not subject to any hedge designation as they are considered within the normal purchases exemption.

The Company does not purchase or hold any derivative financial instruments for trading purposes. As of September 30, 2015 and December 31, 2014, the Company had $263.4 million and $194.1 million, respectively, of outstanding foreign currency forward contracts at notional value. Refer to Note 17 – Fair Value for the fair value disclosure of derivative financial instruments.

Cash Flow Hedging Strategy:
For certain derivative instruments that are designated as and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), or hedge components excluded from the assessment of effectiveness, are recognized in the Consolidated Statement of Income during the current period.

To protect against a reduction in the value of forecasted foreign currency cash flows resulting from export sales over the next year, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its forecasted intra-group revenue or expense denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against foreign currencies, the decline in the present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.

Fair Value Hedging Strategy:
For derivative instruments that are designated and qualify as fair value hedges (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the same line item associated with the hedged item (i.e., in “interest expense” when the hedged item is fixed-rate debt).

Purpose for Derivative Instruments not Designated as Hedging Instruments:
For derivative instruments that are not designated as hedging instruments, the instruments are typically forward contracts.  In general, the practice is to reduce volatility by selectively hedging transaction exposures including intercompany loans, accounts payable and accounts receivable.   Intercompany loans between entities with different functional currencies are typically hedged with a forward contract at the inception of loan with a maturity date at the maturity of the loan.  The revaluation of these contracts, as well as the revaluation of the underlying balance sheet items, is recorded directly to the income statement so the adjustment generally offsets the revaluation of the underlying balance sheet items to protect cash payments and reduce income statement volatility.





25


The following table presents the fair value and location of all assets and liabilities associated with the Company's hedging instruments within the Consolidated Balance Sheets.
 
 
Asset Derivatives
Liability Derivatives
Derivatives designated as hedging instruments
Balance Sheet Location
Fair Value
 at 9/30/15
Fair Value
 at 12/31/14
Fair Value
 at 9/30/15
Fair Value
 at 12/31/14
Foreign currency forward contracts
Other non-current assets/liabilities
$
2.3

$
0.6

$
0.5

$
—

Total derivatives designated as hedging instruments
2.3

0.6

0.5

—

 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
Foreign currency forward contracts
Other non-current assets/liabilities
3.2

11.8

1.5

0.3

 
 
 
 
 
 
Total Derivatives
 
$
5.5

$
12.4

$
2.0

$
0.3


The following tables present the impact of derivative instruments and their location within the Consolidated Statements of Income:
 
Amount of gain or (loss) recognized in
 Other Comprehensive Income (OCI) on derivative instruments
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
Derivatives in cash flow hedging relationships
2015
2014
2015
2014
Foreign currency forward contracts
$
2.1

$
1.4

$
2.1

$
1.0

Interest rate swaps
—

(1.6
)
—

(2.1
)
Total
$
2.1

$
(0.2
)
$
2.1

$
(1.1
)
 
Amount of gain or (loss) reclassified from Accumulated Other Comprehensive Income (AOCI) into income (effective portion)
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
Derivatives in cash flow hedging relationships
2015
2014
2015
2014
Foreign currency forward contracts
$
0.3

$
(0.1
)
$
1.0

$
(0.6
)
Interest rate swaps
(0.1
)
—

(0.3
)
—

Total
$
0.2

$
(0.1
)
$
0.7

$
(0.6
)
 
 
Amount of gain or (loss) recognized in
 income on derivative instruments
 
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
Derivatives not designated as hedging instruments
Location of gain or (loss) recognized in income on derivative
2015
2014
2015
2014
Foreign currency forward contracts
Other (expense) income, net
$
(16.3
)
$
9.5

$
9.8

$
13.9

Total