10-K 1 tkr10k123114.htm 10-K TKR 10K 12.31.14


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 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
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
4500 Mt. Pleasant St., N.W., North Canton, Ohio
 
44720-5450
(Address of principal executive offices)
 
(Zip Code)
234.262.3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, without par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
    Yes  x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  o    No  x
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  x    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  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
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
x
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  x
As of June 30, 2014, the aggregate market value of the registrant’s common shares held by non-affiliates of the registrant was $5,811,740,662 based on the closing sale price as reported on the New York Stock Exchange.
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 January 31, 2015
Common Shares, without par value
 
88,214,403 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
 
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held on or about May 7, 2015 (Proxy Statement)
 
Part III




THE TIMKEN COMPANY
INDEX TO FORM 10-K REPORT
 
 
 
PAGE
I.
 
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 4A.
II.
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
III.
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
IV.
 
 
 
Item 15.
 
 
 
 
 
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges
 
 
Exhibit 21
Subsidiaries of the Registrant
 
 
Exhibit 23
Consent of Independent Registered Public Accounting Firm
 
 
Exhibit 24
Power of Attorney
 
 
Exhibit 31.1
Principal Executive Officer’s Certifications
 
 
Exhibit 31.2
Principal Financial Officer’s Certifications
 
 
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
Exhibit 101
Extensible Business Reporting Language (XBRL)
 




PART I.

Item 1. Business

General:
As used herein, the term “Timken” or the “Company” refers to The Timken Company and its subsidiaries unless the context otherwise requires. Timken engineers, manufactures and markets bearings, transmissions, gearboxes, chain and related products and offers a spectrum of power system rebuild and repair services around the world. The Company’s growing product and services portfolio features many strong industrial brands, such as Timken, Fafnir, Philadelphia Gear, Drives and Interlube.

The Company was founded in 1899 by Henry Timken, who received two patents on the design of a tapered roller bearing. Timken later became, and continues to be, the world's largest manufacturer of tapered roller bearings, leveraging its expertise to develop a full portfolio of industry-leading products and services. Timken built its reputation as a global leader by applying its knowledge of metallurgy, friction management and mechanical power transmission to increase the reliability and efficiency of its customers' equipment across a diverse range of industries. Today, the Company's global footprint consists of 61 manufacturing facilities/service centers, 12 technology and engineering centers and 23 distribution centers and warehouses, supported by a team comprised of approximately 16,000 employees. Timken operates in 28 countries and territories around the globe.

For nearly 100 years, the Company also made and marketed steel within its steel business. However, on June 30, 2014, the Company announced that it had 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. The steel business has been reclassified to discontinued operations for all periods presented.

Industry Segments and Geographical Financial Information:
Information required by this Item is incorporated herein by reference to Note 15 - Segment Information in the Notes to the Consolidated Financial Statements.

Major Customers:
The Company sells products and services to a diverse customer base globally, including customers in the following market sectors: industrial equipment, construction, agriculture, rail, aerospace and defense, automotive, heavy truck and energy. No single customer accounts for 5% or more of total net sales.

Products:
Timken manufactures and manages global supply chains for multiple product lines including anti-friction bearings and mechanical power transmission products designed to operate in demanding environments. The Company leverages its technical knowledge, research expertise, and production and engineering capabilities across all of its products and end markets to deliver high-performance products and services to its customers. Differentiation in these product lines is achieved by either: (1) product type or (2) the targeted applications utilizing the product.


1


Bearings:
The Timken® bearing portfolio features a broad range of anti-friction bearing products, including tapered, spherical and cylindrical roller bearings; thrust and ball bearings; and housed units. Timken is a leading authority on tapered roller bearings, and leverages its position by applying engineering know-how and technology across its entire bearing portfolio.

Selection and development of bearings for customer applications and demand for high reliability require sophisticated engineering and analytical techniques. Deep knowledge of friction management combined with high precision tolerances, proprietary internal geometries and quality materials provide Timken bearings with high load-carrying capacity, excellent friction-reducing qualities and long service lives. The uses for bearings are diverse and can be found in transportation applications that include passenger cars and trucks, heavy trucks, helicopters, airplanes and trains. Ranging in size from precision bearings the size of a pencil eraser to those roughly three meters in diameter, Timken components are also used in a wide variety of industrial applications: paper and steel mills, mining, oil and gas extraction and production, machine tools, gear drives, health and positioning control, wind turbines and food processing.

Tapered Roller Bearings. Timken tapered roller bearings can increase power density and can include customized geometries, engineered surfaces and specialized sealing solutions. The Company’s tapered roller bearing line comes in thousands of combinations in single-, double- and four-row configurations. Tapered roller designs permit ready absorption of both radial and axial load combinations, which makes them particularly well-adapted to reducing friction where shafts, gears or wheels are used.

Spherical and Cylindrical Roller Bearings. Timken also produces spherical and cylindrical roller bearings that are used in large gear drives, rolling mills and other industrial and infrastructure development applications. These products are sold worldwide to original equipment manufacturers and industrial distributors serving major end-market sectors, including construction and mining, natural resources, defense, pulp and paper production, rolling mills and general industrial goods.

Ball Bearings. Timken radial, angular and precision ball bearings are used by customers in a variety of market sectors, including aerospace, agriculture, construction, health, machine tool and general industries. Radial ball bearings are designed to tolerate relatively high-speed operation under a range of load conditions. Bearings consist of an inner and outer ring with a cage containing a complement of precision balls. Angular contact ball bearings are designed for a combination of radial and axial loading. Precision ball bearings are manufactured to tight tolerances and come in miniature and instrument, thin section and ball screw support designs.

Housed Units. Timken markets among the broadest range of bearing housed units in the industry. These products deliver durable, heavy-duty components designed to protect spherical, tapered and ball bearings in debris-filled, contaminated or high-moisture environments. Common housed unit applications include material handling and processing equipment.

Mechanical Power Transmission:
Chains. Timken manufactures precision Drives® roller chain, pintle chain, agricultural conveyor chain, engineering class chain and oil field roller chain. These highly engineered products are used in a wide range of mobile and industrial machinery applications, including agriculture, oil and gas, aggregate and mining, primary metals, forest products and other heavy industries. These products are also utilized in the food and beverage and packaged goods sectors, which often require high-end, specialty products, including stainless-steel and corrosion-resistant roller chain.

Lubrication Systems. The Company offers 27 formulations of grease, leveraging its knowledge of tribology and anti-friction bearings to enable smooth equipment operation. Interlube® automated lubrication delivery systems dispense precise amounts of Timken grease, saving users from having to manually apply lubrication. These multifaceted delivery systems are used by the commercial vehicle, construction, mining, and heavy and general industries.


2


Aerospace Products. The Company's portfolio of parts, systems and services for the aerospace market sector includes products used in helicopters and fixed-wing aircraft for the military and commercial aviation industries. Timken designs, manufactures and tests a wide variety of power transmission and drive train components, including bearings, transmissions, turbine engine components, gears and rotor-head assemblies and housings. In addition to original equipment, Timken provides a wide range of aftermarket products, including replacement parts for gas turbine engines, transmissions and fuel controls, gearboxes and accessory systems in helicopters and fixed-wing aircraft. Other parts include airfoils (such as blades, vanes, rotors and diffusers), nozzles and other precision flight-critical components.

Industrial Gearboxes. The Company’s Philadelphia Gear® line of low- and high-speed gear drive designs are used in large-scale industrial applications. These gear drive configurations are custom-made to meet user specifications, offering a wide-array of size, footprint and gear arrangements. Low-speed drives are commonly used in crushing and pulverizing equipment, cooling towers, conveyors and pumps. High-speed drives are typically used by power generation, oil and gas, marine and pipeline industries.

Other Products. The Company also offers a full line of seals, couplings, augers and other mechanical power transmission components. Timken industrial sealing solutions come in a variety of types and material options that are used in manufacturing, food processing, mining, power generation, chemical processing, primary metals, pulp and paper, and oil and gas industry applications. Timken couplings, another mechanical power transmission component, are commonly found in gear drives, motors and pump applications. The Company also designs and manufactures Drives helicoid and sectional augers for agricultural applications, like conveying, digging and combines.

Services:
Power Systems. Timken services components in the industrial customer's drive train, including switch gears, electric motors and generators, gearboxes, bearings, couplings and central panels. The Company’s Philadelphia Gear services for gear drive applications include onsite technical services; inspection, repair and upgrade capabilities; and manufacturing of parts to OEM specifications. In addition, the Company’s Wazee, Smith Services, Schulz, Standard Machine and H&N brands provide customers with services that include motor and generator rewind and repair and uptower wind turbine maintenance and repair. Timken power systems commonly serves customers in the power, wind energy, hydro and fossil fuel, water management, paper, mining and general manufacturing sectors.

Bearing Repair. Timken bearing repair services return worn bearings to like-new specifications, which increases bearing service life and can often restore bearings in less time than required to manufacture new. Bearing remanufacturing is available for any bearing type or brand - including competitor products - and is well-suited to heavy industrial applications such as paper, metals, mining, power generation and cement; railroad locomotives, passenger cars and freight cars; and aerospace engines and gearboxes.

Services accounted for approximately 7% of the Company’s net sales for the year ended December 31, 2014.

Sales and Distribution:
Timken products are sold principally by its own internal sales organizations. A portion of each segment's sales are made through authorized distributors.

Customer collaboration is central to the Company's sales strategy. Therefore, Timken goes where its customers need them, with sales engineers primarily working in close proximity to customers rather than at production sites. In some cases, Timken may co-locate with a customer at their facility to ensure optimized collaboration. The Company's sales force constantly updates the team's training and knowledge regarding all friction management products and market sector trends, and Timken employees assist customers during development and implementation phases and provide ongoing service and support.

The Company has a joint venture in North America focused on joint logistics and e-business services. This joint venture, CoLinx, LLC, includes five equity members: Timken, SKF Group, the Schaeffler Group, Rockwell Automation and Gates Corporation. The e-business service focuses on information and business services for authorized distributors in the Process Industries segment.

Timken has entered into individually negotiated contracts with some of its customers. These contracts may extend for one or more years and, if a price is fixed for any period extending beyond current shipments, customarily include a commitment by the customer to purchase a designated percentage of its requirements from Timken. Timken does not believe that there is any significant loss of earnings risk associated with any given contract.


3


Competition:
The anti-friction bearing business is highly competitive in every country where Timken sells products. Timken competes primarily based on total value, including price, quality, timeliness of delivery, product design and the ability to provide engineering support and service on a global basis. The Company competes with domestic manufacturers and many foreign manufacturers of anti-friction bearings, including SKF Group, the Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd.

Joint Ventures:
Investments in affiliated companies accounted for under the equity method were approximately $1.8 million and $1.6 million, respectively, at December 31, 2014 and 2013. The amount at December 31, 2014 was reported in other non-current assets on the Consolidated Balance Sheets.

Backlog:
The following table provides the backlog of orders of the Company's domestic and overseas operations at December 31, 2014 and 2013:
  
December 31,
(Dollars in millions)
2014
2013
Segment:
 
 
Mobile Industries
$
719.2

$
945.1

Process Industries
569.9

370.8

Total Company
$
1,289.1

$
1,315.9


Approximately 90% of the Company’s backlog at December 31, 2014 is scheduled for delivery in the succeeding twelve months. Actual shipments depend upon customers' ever-changing production schedules. Accordingly, Timken does not believe that its backlog data and comparisons thereof, as of different dates, reliably indicate future sales or shipments.

Raw Materials:
The principal raw material used by the Company to make anti-friction bearings is special bar quality (SBQ) steel. SBQ steel is produced around the world by various suppliers. SBQ steel is purchased in bar, tube and wire forms. The primary inputs to SBQ steel include scrap metal, iron ore, alloys, energy and labor. The availability and price of SBQ steel are subject to changes in supply and demand, commodity prices for ferrous scrap, ore, alloy, electricity, natural gas, transportation fuel, and labor costs. The Company manages price variability of commodities by using surcharge mechanisms on some of its contracts with its customers that provides for partial recovery of these cost increases in the price of bearing products.
Any significant increase in the cost of steel could materially affect the Company’s earnings. Disruptions in the supply of SBQ steel could temporarily impair the Company’s ability to manufacture bearings for its customers, or require the Company to pay higher prices in order to obtain SBQ, which could affect the Company’s revenues and profitability. The availability of bearing quality tubing is relatively limited, and the Company is taking steps to diversify its processes to limit its exposure to this particular form of SBQ steel. Overall, the Company believes that the number of suppliers of SBQ steel is adequate to support the needs of global bearing production, and, in general, the Company is not dependent on any single source of supply.
Research:
Timken operates a network of technology and engineering centers to support its global customers with sites in North America, Europe and Asia. This network develops and delivers innovative friction management and mechanical power transmission solutions and technical services. Timken's largest technical center is located in North Canton, Ohio, near Timken's world headquarters. Other sites in the United States include Mesa, Arizona; Manchester, Connecticut; Fulton, Illinois; Keene and Lebanon, New Hampshire; and King of Prussia, Pennsylvania. Within Europe, the Company has technology facilities in Plymouth, England; Colmar, France; and Ploiesti, Romania. In Asia, Timken operates technology and engineering facilities in Bangalore, India and Shanghai, China.

Expenditures for research and development amounted to approximately $38.8 million, $39.3 million and $45.7 million in 2014, 2013 and 2012, respectively. Of these amounts, approximately $0.3 million, $0.4 million and $0.8 million were funded by others in 2014, 2013 and 2012, respectively.


4


Environmental Matters:
The Company continues its efforts to protect the environment and comply with environmental protection laws. Additionally, it has invested in pollution control equipment and updated plant operational practices. The Company is committed to implementing a documented environmental management system worldwide and to becoming certified under the ISO 14001 standard where appropriate to meet or exceed customer requirements. As of the end of 2014, 16 of the Company’s plants had obtained ISO 14001 certification.

The Company believes it has established appropriate reserves to cover its environmental expenses and has a well-established environmental compliance audit program for its domestic and international units. This program measures performance against applicable laws, as well as against internal standards that have been established for all units worldwide. It is difficult to assess the possible effect of compliance with future requirements that differ from existing ones.

The Company and certain of its U.S. subsidiaries previously have been and could in the future be identified as potentially responsible parties for investigation and remediation at off-site disposal or recycling facilities under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as the Superfund, or state laws similar to CERCLA. In general, such claims for investigation and remediation have also been asserted against numerous other entities.

Management believes any ultimate liability with respect to pending actions will not materially affect the Company’s operations, cash flows or consolidated financial position. The Company is also conducting environmental investigation and/or remediation activities at a number of current or former operating sites. The costs of such investigation and remediation activities, in the aggregate, are not expected to be material to the operations or financial position of the Company.

New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements may require Timken to incur costs or become the basis for new or increased liabilities that could have a materially adverse effect on the Company's business, financial condition or results of operations.

Patents, Trademarks and Licenses:
Timken owns numerous U.S. and foreign patents, trademarks and licenses relating to certain products. While Timken regards these as important, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items.

Employment:
At December 31, 2014, Timken had approximately 16,000 employees. Approximately 3% of Timken’s U.S. employees are covered under collective bargaining agreements.

Available Information:
The Company uses its Investor Relations website at www.timken.com/investors, as a channel for routine distribution of important information, including news releases, analyst presentations and financial information. The Company posts filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the SEC), including its annual, quarterly and current reports on Forms 10-K, 10-Q and 8-K; its proxy statements; and any amendments to those reports or statements. All such postings and filings are available on the Company’s website free of charge. In addition, this website allows investors and other interested persons to sign up to automatically receive e-mail alerts when the Company posts news releases and financial information on the Company’s website. The SEC also maintains a web site, www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Annual Report unless expressly noted.



5


Item 1A. Risk Factors

The following are certain risk factors that could affect our business, financial condition and results of operations. The risks that are highlighted below are not the only ones that we face. These risk factors should be considered in connection with evaluating forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results and financial condition to differ materially from those projected in forward-looking statements. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected.

Risk Relating to our Business

The bearing industry is highly competitive, and this competition results in significant pricing pressure for our products that could affect our revenues and profitability.

The global bearing industry is highly competitive. We compete with domestic manufacturers and many foreign manufacturers of anti-friction bearings, including SKF Group, the Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd. The bearing industry is also capital intensive and profitability is dependent on factors such as labor compensation and productivity and inventory management, which are subject to risks that we may not be able to control. Due to the competitiveness within the bearing industry, we may not be able to increase prices for our products to cover increases in our costs. In many cases we face pressure from our customers to reduce prices, which could adversely affect our revenues and profitability. In addition, our customers may choose to purchase products from one of our competitors rather than pay the prices we seek for our products, which could adversely affect our revenues and profitability.


Our business is capital intensive, and if there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend operations with respect to those industries, which could result in our recording asset impairment charges or taking other measures that may adversely affect our results of operations and profitability.

Our business operations are capital intensive, and we devote a significant amount of capital to certain industries. If there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend our operations with respect to those industries, including laying-off employees, recording asset impairment charges and other measures, which may adversely affect our results of operations and profitability.


Weakness in global economic conditions or in any of the industries or geographic regions in which we or our customers operate, as well as the cyclical nature of our customers' businesses generally or sustained uncertainty in financial markets, could adversely impact our revenues and profitability by reducing demand and margins.

Our results of operations may be materially affected by the conditions in the global economy generally and in global capital markets. There has been extreme volatility in the capital markets and in the end markets and geographic regions in which we and our customers operate, which has negatively affected our revenues. Our revenues may also be negatively affected by changes in customer demand, additional changes in the product mix and negative pricing pressure in the industries in which we operate. Margins in those industries are highly sensitive to demand cycles, and our customers in those industries historically have tended to delay large capital projects, including expensive maintenance and upgrades, during economic downturns. As a result, our revenues and earnings are impacted by overall levels of industrial production.


6


Our results of operations may be materially affected by the conditions in the global financial markets or in any of the geographic regions in which we operate. If an end user cannot obtain financing to purchase our products, either directly or indirectly contained in machinery or equipment, demand for our products will be reduced, which could have a material adverse effect on our financial condition and earnings.

If a customer becomes insolvent or files for bankruptcy, our ability to recover accounts receivable from that customer would be adversely affected and any payment we received during the preference period prior to a bankruptcy filing may be potentially recoverable by the bankruptcy estate. Furthermore, if certain of our customers liquidate in bankruptcy, we may incur impairment charges relating to obsolete inventory and machinery and equipment. In addition, financial instability of certain companies in the supply chain could disrupt production in any particular industry. A disruption of production in any of the industries where we participate could have a material adverse effect on our financial condition and earnings.


Any change in raw material prices or the availability or cost of raw materials could adversely affect our results of operations and profit margins.
 
We require substantial amounts of raw materials, including steel, to operate our business.  Our supply of raw materials could be interrupted for a variety of reasons, including availability and pricing.  Prices for raw materials necessary for production have fluctuated significantly in the past and could do so in the future.  We generally attempt to manage these fluctuations by passing along increased raw material prices to our customers in the form of price increases; however, we may be unable to increase the price of our products due to pricing pressure, contract terms or other factors.  Additionally, certain of our long term customer contracts contain raw material surcharge mechanisms, which are generally tied to a market index or indexes.  The index or indexes may be ineffective in mitigating our exposure to changes in raw material costs, which could adversely impact our revenue and profit margins. 

Moreover, future disruptions in the supply of our raw materials could impair our ability to manufacture our products for our customers or require us to pay higher prices in order to obtain these raw materials from other sources. Any significant increase in the prices for such raw materials could adversely affect our results of operations and profit margins.


Warranty, recall, quality or product liability claims could materially adversely affect our earnings.

In our business, we are exposed to warranty and product liability claims. In addition, we may be required to participate in the recall of a product. If we fail to meet customer specifications for their products, we may be subject to product quality costs and claims. A successful warranty or product liability claim against us, or a requirement that we participate in a product recall, could have a material adverse effect on our earnings.


We may incur further impairment and restructuring charges that could materially affect our profitability.

We have taken $187.7 million in impairment and restructuring charges during the last five years. Changes in business or economic conditions, or our business strategy, may result in additional restructuring programs and may require us to take additional charges in the future, which could have a material adverse effect on our earnings.



7


Environmental laws and regulations impose substantial costs and limitations on our operations and environmental compliance may be more costly than we expect.

We are subject to the risk of substantial environmental liability and limitations on our operations due to environmental laws and regulations. We are subject to extensive federal, state, local and foreign environmental, health and safety laws and regulations concerning matters such as air emissions, wastewater discharges, solid and hazardous waste handling and disposal and the investigation and remediation of contamination. The risks of substantial costs and liabilities related to compliance with these laws and regulations are an inherent part of our business, and future conditions may develop, arise or be discovered that create substantial environmental compliance or remediation liabilities and costs.

Compliance with environmental, health and safety legislation and regulatory requirements may prove to be more limiting and costly than we anticipate. To date, we have committed significant expenditures in our efforts to achieve and maintain compliance with these requirements at our facilities, and we expect that we will continue to make significant expenditures related to such compliance in the future. From time to time, we may be subject to legal proceedings brought by private parties or governmental authorities with respect to environmental matters, including matters involving alleged noncompliance with or liability under environmental, health and safety laws, property damage or personal injury. New laws and regulations, including those which may relate to emissions of greenhouse gases, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition or results of operations.


The Company may be subject to risks relating to its information technology systems.

The Company relies on information technology systems to process, transmit and store electronic information and manage and operate its business. A breach in security could expose the Company and its customers and suppliers to risks of misuse of confidential information, manipulation and destruction of data, production downtimes and operations disruptions, which in turn could adversely affect the Company's reputation, competitive position, business or results of operations.


The global nature of our business exposes us to foreign currency fluctuations that may affect our asset values, results of operations and competitiveness.

We are exposed to the risks of currency exchange rate fluctuations because a significant portion of our net sales, costs, assets and liabilities, are denominated in currencies other than the U.S. dollar. These risks include a reduction in our asset values, net sales, operating income and competitiveness.

For those countries outside the United States where we have significant sales, devaluation in the local currency would reduce the value of our local inventory as presented in our Consolidated Financial Statements. In addition, a stronger U.S. dollar would result in reduced revenue, operating profit and shareholders' equity due to the impact of foreign exchange translation on our Consolidated Financial Statements. Fluctuations in foreign currency exchange rates may make our products more expensive for others to purchase or increase our operating costs, affecting our competitiveness and our profitability.

Changes in exchange rates between the U.S. dollar and other currencies and volatile economic, political and market conditions in emerging market countries have in the past adversely affected our financial performance and may in the future adversely affect the value of our assets located outside the United States, our gross profit and our results of operations.



8


Global political instability and other risks of international operations may adversely affect our operating costs, revenues and the price of our products.

Our international operations expose us to risks not present in a purely domestic business, including primarily:
changes in tariff regulations, which may make our products more costly to export or import;
difficulties establishing and maintaining relationships with local original equipment manufacturers (OEMs), distributors and dealers;
import and export licensing requirements;
compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and environmental or other regulatory requirements, which could increase our operating and other expenses and limit our operations;
disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the Foreign Corrupt Practices Act (FCPA);
difficulty in staffing and managing geographically diverse operations; and
tax exposures related to cross-border intercompany transfer pricing and other tax risks unique to international operations.

These and other risks may also increase the relative price of our products compared to those manufactured in other countries, reducing the demand for our products in the markets in which we operate, which could have a material adverse effect on our revenues and earnings.


The funded status of our defined benefit and other postretirement plans has caused and may in the future cause a significant reduction in our shareholders' equity.
 
We recorded a decrease in shareholders' equity related to pension and postretirement benefit liabilities in 2014 primarily due to a decrease in discount rates and changes in mortality assumptions, and in the future, we may be required to record charges related to pension and other postretirement liabilities as a result of asset returns, discount rate changes or other actuarial adjustments. These charges may be significant and would cause a reduction in our shareholders' equity.


The funded status of our pension plans may require additional contributions, which may divert funds from other uses.

The funded status of our pension plans may require us to make additional contributions to such plans. We made cash contributions of approximately $21 million, $121 million and $326 million in 2014, 2013 and 2012, respectively, to our defined benefit pension plans and currently expect to make cash contributions of approximately $15 million in 2015 to such plans. However, we cannot predict whether changing economic conditions, the future performance of assets in the plans or other factors will lead us or require us to make contributions in excess of our current expectations, diverting funds we would otherwise apply to other uses.


Our defined benefit plans' assets and liabilities are substantial and expenses and contributions related to those plans are affected by factors outside our control, including the performance of plan assets, interest rates, actuarial data and experience, and changes in laws and regulations.

Our defined benefit pension plans had assets with an estimated value of approximately $1.8 billion and liabilities with an estimated value of approximately $1.7 billion, both as of December 31, 2014. Our future expense and funding obligations for the defined benefit pension plans depend upon a number of factors, including the level of benefits provided for by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine the discount rate to calculate the amount of liabilities, actuarial data and experience and any changes in government laws and regulations. In addition, if the various investments held by our pension trusts do not perform as expected or the liabilities increase as a result of discount rates and other actuarial changes, our pension expense and required contributions would increase and, as a result, could materially adversely affect our business. Due to the value of our defined benefit plan assets and liabilities, even a minor decrease in interest rates, to the extent not offset by contributions or asset returns, could increase our obligations under such plans. We may be legally required to make contributions to the pension plans in the future in excess of our current expectations, and those contributions could be material.

9


 
Work stoppages or similar difficulties could significantly disrupt our operations, reduce our revenues and materially affect our earnings.

A work stoppage at one or more of our facilities could have a material adverse effect on our business, financial condition and results of operations. Also, if one or more of our customers were to experience a work stoppage, that customer would likely halt or limit purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations.


We are subject to a wide variety of domestic and foreign laws and regulations that could adversely affect our results of operations, cash flow or financial condition.

We are subject to a wide variety of domestic and foreign laws and regulations, and legal compliance risks, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trading laws, and laws governing improper business practices. We are affected by new laws and regulations, and changes to existing laws and regulations, including interpretations by courts and regulators.

In addition, we could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws as well as export controls and economic sanction laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal controls and procedures will always protect us from the improper acts committed by our employees or agents. If we are found to be liable for FCPA, export control or sanction violations, we could suffer from criminal or civil penalties or other sanctions, including loss of export privileges or authorization needed to conduct aspects of our international business, which could have a material adverse effect on our business.

Compliance with the laws and regulations described above or with other applicable foreign, federal, state, and local laws and regulations currently in effect or that may be adopted in the future could materially adversely affect our competitive position, operating results, financial condition and liquidity.


If we are unable to attract and retain key personnel our business could be materially adversely affected.

Our business substantially depends on the continued service of key members of our management. The loss of the services of a significant number of members of our management could have a material adverse effect on our business. Our future success will also depend on our ability to attract and retain highly skilled personnel, such as engineering, finance, marketing and senior management professionals. Competition for these employees is intense, and we could experience difficulty from time to time in hiring and retaining the personnel necessary to support our business. If we do not succeed in retaining our current employees and attracting new high quality employees, our business could be materially adversely affected.


We may not realize the improved operating results that we anticipate from past and future acquisitions and we may experience difficulties in integrating acquired businesses.

We seek to grow, in part, through strategic acquisitions and joint ventures, which are intended to complement or expand our businesses, and expect to continue to do so in the future. These acquisitions involve challenges and risks. In the event that we do not successfully integrate these acquisitions into our existing operations so as to realize the expected return on our investment, our results of operations, cash flow or financial condition could be adversely affected.







10


Our operating results depend in part on continued successful research, development and marketing of new and/or improved products and services, and there can be no assurance that we will continue to successfully introduce new products and services.

The success of new and improved products and services depends on their initial and continued acceptance by our customers. Our businesses are affected, to varying degrees, by technological change and corresponding shifts in customer demand, which could result in unpredictable product transitions or shortened life cycles. We may experience difficulties or delays in the research, development, production, or marketing of new products and services which may prevent us from recouping or realizing a return on the investments required to bring new products and services to market. The end result could be a negative impact on our operating results.


Risks Relating to the Spinoff of TimkenSteel

We may not realize the potential benefits from the Spinoff.

We may not realize the potential financial, operational, managerial or other benefits that we expect from the recently completed Spinoff, or may not realize the potential benefits in a timely fashion. Additionally, the Company’s operational and financial profile has changed as a result of the Spinoff. As a result, the Company’s diversification of revenue sources has decreased, and it is possible that the Company’s results of operations, cash flows, working capital and financing requirements may be subject to increased volatility. If we do not realize the potential benefits of the Spinoff, it could have a material adverse effect on our financial condition.


Potential indemnification liabilities to TimkenSteel pursuant to the separation and distribution agreement could materially and adversely affect our business, financial condition, results of operations and cash flows.

In connection with the Spinoff, we entered into a separation and distribution agreement, an employee matters agreement and a tax sharing agreement, all with TimkenSteel, which provide for, among other things, the principal corporate transactions required to effect the spinoff, certain conditions to the Spinoff and provisions governing the relationship between the Company and TimkenSteel with respect to and resulting from the Spinoff. Among other things, the separation and distribution agreement provides for indemnification obligations designed to make us financially responsible for substantially all liabilities that may exist relating to our continuing business operations, whether incurred prior to or after the spinoff, as well as those obligations of TimkenSteel assumed by us pursuant to the separation and distribution agreement. If we are required to indemnify TimkenSteel under the circumstances set forth in the separation and distribution agreement, we could be subject to substantial liabilities.

The employee matters agreement generally provides that each of the Company and TimkenSteel has responsibility for its own employees and compensation plans, subject to certain exceptions as described in the agreement. The tax sharing agreement generally governs the Company’s and TimkenSteel’s respective rights, responsibilities and obligations after the Spinoff with respect to taxes for any tax period ending on or before the distribution date, as well as tax periods beginning before and ending after the distribution date. Generally, TimkenSteel will be liable for all pre-spinoff U.S. federal income taxes, foreign income taxes and non-income taxes attributable to TimkenSteel’s business, and all other taxes attributable to TimkenSteel, paid after the spinoff. In addition, the tax sharing agreement will address the allocation of liability for taxes that are incurred as a result of restructuring activities undertaken to effectuate the Spinoff. The tax sharing agreement will also provide that TimkenSteel is liable for taxes incurred by the Company that arise as a result of TimkenSteel’s taking or failing to take, as the case may be, certain actions that result in the Spinoff failing to meet the requirements of a tax-free distribution under Section 355 of the Code.


11


Pursuant to the separation and distribution agreement, the employee matters agreement and the tax sharing agreement, TimkenSteel will agree to indemnify us for certain liabilities related to its steel business operations. However, third parties could seek to hold us responsible for any of the liabilities that TimkenSteel has agreed to retain, and there can be no assurance that the indemnity from TimkenSteel will be sufficient to protect us against the full amount of such liabilities, or that TimkenSteel will be able to fully satisfy its indemnification obligations. In particular, if TimkenSteel is unable to pay any prior period taxes for which it is responsible, the Company could be required to pay the entire amount of such taxes. Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans as well as other contingent liabilities. Moreover, even if we ultimately succeed in recovering from TimkenSteel any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. If TimkenSteel is unable to satisfy its indemnification obligations, the underlying liabilities could have a material adverse effect on our business, financial condition, results of operations and cash flows.

If the Spinoff does not qualify as a tax-free transaction, the Company and its shareholders could be subject to substantial tax liabilities.

The Spinoff was conditioned on our receipt of an opinion from Covington & Burling LLP, special tax counsel to the Company, that the distribution of TimkenSteel common shares in the spinoff qualified as tax-free (except for cash received by shareholders in lieu of fractional shares) to the Company, TimkenSteel and the Company’s shareholders for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) and related provisions of the Code. The opinion relied on, among other things, various assumptions and representations as to factual matters made by the Company and TimkenSteel, which, if inaccurate or incomplete in any material respect, could jeopardize the conclusions reached by such counsel in its opinion. We are not aware of any facts or circumstances that would cause the assumptions or representations that were relied on in the opinion of counsel to be inaccurate or incomplete in any material respect. The opinion is not binding on the Internal Revenue Service, or IRS, or the courts, and there can be no assurance that the qualification of the Spinoff as a transaction under Sections 355 and 368(a) of the Code will not be challenged by the IRS or by others in court, or that any such challenge would not prevail. If the Spinoff is determined to be taxable for U.S. federal income tax purposes, the Company and its shareholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities, as each U.S. holder of the Company’s common shares that received TimkenSteel common shares in the Spinoff would generally be treated as having received a taxable distribution of property in an amount equal to the fair market value of the TimkenSteel common shares received.


Certain members of our Board of Directors and management may have actual or potential conflicts of interest because of their ownership of shares of TimkenSteel or their relationships with TimkenSteel following the spinoff.

Certain members of our Board of Directors and management own shares of TimkenSteel and/or options to purchase shares of TimkenSteel, which could create, or appear to create, potential conflicts of interest when our directors and executive officers are faced with decisions that could have different implications for us and TimkenSteel. Two of our directors, Ward J. Timken, Jr. and John P. Reilly, are also directors of TimkenSteel and, in the case of Mr. Timken, Chairman, President and Chief Executive Officer of TimkenSteel. This may create, or appear to create, potential conflicts of interest if these directors are faced with decisions that could have different implications for TimkenSteel then the decisions have for us.



Item 1B. Unresolved Staff Comments
None.


12


Item 2. Properties
Timken has manufacturing facilities at multiple locations in the United States and in a number of countries outside the United States. The aggregate floor area of these facilities worldwide is approximately 9,823,917 square feet, all of which, except for approximately 1,876,974 square feet, is owned in fee. The facilities not owned in fee are leased. The buildings occupied by Timken are principally made of brick, steel, reinforced concrete and concrete block construction. All buildings are in satisfactory operating condition to conduct business.

Timken’s Mobile Industries segment's manufacturing facilities and service centers in the United States are located in Bucyrus and New Philadelphia, Ohio; Mesa, Arizona; Los Alamitos, California; Manchester and New Haven, Connecticut; Carlyle, Illinois; Keene and Lebanon, New Hampshire; Iron Station, North Carolina; Gaffney and Honea Path, South Carolina; Pulaski and Knoxville, Tennessee; and Ogden, Utah. These facilities, including warehouses at plant locations and a technology center in North Canton, Ohio have an aggregate floor area of 3,809,836 square feet.

Timken’s Mobile Industries segment’s manufacturing plants and service centers outside the United States are located in Benoni, South Africa; Villa Carcina, Italy; Colmar, France; Cheltenham, Northampton, Plymouth, and Wolverhampton, England; Belo Horizonte, Curtiba, and Sorocaba, Brazil; Jamshedpur, India; Sosnowiec, Poland; St. Thomas, Canada; and Yantai, China. These facilities, including warehouses at plant locations, have an aggregate floor area of 2,536,359 square feet.

Timken's Process Industries segment's manufacturing plants and service centers in the United States are located in Canton and Niles, Ohio; Hueytown, Alabama; Sante Fe Springs, California; Broomfield and Denver, Colorado; New Castle, Delaware; Fulton and Mokena, Illinois; Mishawaka, Indiana; Lenexa, Kansas; Augusta and Portland, Maine; Randleman, and Rutherfordton, North Carolina; Union, South Carolina; Altavista, Virginia; Ferndale and Pasco, Washington; Princeton, West Virginia; and Casper and Rock Springs, Wyoming. These facilities, including warehouses at plant locations and a technology center in North Canton, Ohio have an aggregate floor area of 1,773,950 square feet.

Timken's Process Industries segment's manufacturing plants and service centers outside the United States are located in Chengdu, Xiangtan and Wuxi, China; Chennai and Durg, India; Dudley, England; Saskatoon and Prince George, Canada; and Ploiesti, Romania. These facilities, including warehouses at plant locations have an aggregate floor area of 1,703,772 square feet.

In addition to the manufacturing and distribution facilities discussed above, Timken owns or leases warehouses and distribution facilities in the United States, France, Mexico, Singapore, Argentina, Australia, and China.

The extent to which the Company uses its properties varies by property and from time to time.  The Company believes that its capacity levels are adequate for its present and anticipated future needs.  Most of the Company’s manufacturing facilities remain capable of handling additional volume increases.


Item 3. Legal Proceedings
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

In October 2014, the Brazilian government antitrust agency announced that it had opened an investigation of alleged antitrust violations in the bearing industry. The Company’s Brazilian subsidiary, Timken do Brasil Comercial Importadora Ltda, was included in the investigation. While the Company is unable to predict the ultimate length, scope or results
of the investigation, management believes that the outcome will not have a material effect on the Company’s consolidated financial position; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Based on current facts and circumstances, the low end of the range for potential penalties, if any, would be immaterial to the Company.


Item 4. Mine Safety Disclosures
Not applicable.


13


Item 4A. Executive Officers of the Registrant
The executive officers are elected by the Board of Directors normally for a term of one year and until the election of their successors. All executive officers have been employed by Timken or by a subsidiary of the Company during the past five-year period. The executive officers of the Company as of March 2, 2015 are as follows:

Name
 
Age    
 
Current Position and Previous Positions During Last Five Years
William R. Burkhart
 
49
 
2014 Executive Vice President, General Counsel and Secretary
 
 
 
 
2000 Senior Vice President and General Counsel
Christopher A. Coughlin
 
54
 
2014 Executive Vice President, Group President
 
 
 
 
2012 Group President
 
 
 
 
2011 President - Process Industries
 
 
 
 
2010 President - Process Industries & Supply Chain
Philip D. Fracassa
 
47
 
2014 Executive Vice President, Chief Financial Officer
 
 
 
 
2012 Senior Vice President - Planning and Development
 
 
 
 
2010 Senior Vice President and Controller - B&PT
Richard G. Kyle
 
49
 
2014 President and Chief Executive Officer; Director
 
 
 
 
2013 Chief Operating Officer - B&PT; Director
 
 
 
 
2012 Group President
 
 
 
 
2011 President - Mobile Industries & Aerospace
 
 
 
 
2009 President - Mobile Industries
J. Ted Mihaila
 
60
 
2006 Senior Vice President and Controller

14


PART II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common shares are traded on the New York Stock Exchange under the symbol “TKR.” The estimated number of record holders of the Company’s common shares at December 31, 2014 was 4,733. The estimated number of beneficial shareholders at December 31, 2014 was 31,616.
The following table provides information about the high and low sales prices for the Company’s common shares and dividends paid for each quarter for the last two fiscal years.
 
 
2014
 
2013
 
Stock prices
Dividends
 
Stock prices
Dividends
 
High
Low
per share
 
High
Low
per share
First quarter
$
61.37

$
52.51

$
0.25

 
$
58.50

$
47.67

$
0.23

Second quarter
$
69.51

$
57.69

$
0.25

 
$
59.44

$
50.22

$
0.23

Third quarter
$
49.96

$
42.34

$
0.25

 
$
64.35

$
55.00

$
0.23

Fourth quarter
$
44.30

$
37.62

$
0.25

 
$
61.57

$
50.22

$
0.23


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. On June 30, 2014, the last trading day before the Spinoff became effective, the closing price of our common shares, trading “regular way” (that is with an entitlement to common shares of TimkenSteel distributed in the Spinoff), was $67.84. On July 1, 2014, the first trading day after the Spinoff, the opening price of our common shares was $48.56 per share and the opening price of TimkenSteel common shares was $39.55 per share. These stock prices were as quoted on the New York Stock Exchange.

Issuer Purchases of Common Shares:
The following table provides information about purchases of its common shares by the Company during the quarter ended December 31, 2014.
 
Period
Total number
of shares purchased (1)
Average
price paid per share (2)
Total number of
shares purchased as
part of publicly
announced
plans or programs
Maximum number
of shares that may
yet be purchased
under the
plans or programs (3)
10/1/2014 - 10/31/2014
150

$
42.68

$

8,997,807

11/1/2014 - 11/30/2014
30

43.64


8,997,807

12/1/2014 - 12/31/2014
100,036

43.54

100,000

8,897,807

Total
100,216

$
43.54

100,000

8,897,807

 
(1)
Of the shares purchased in October, November and December, 150, 30 and 36, respectively, represent common shares of the Company that were owned and tendered by employees to exercise stock options, and to satisfy withholding obligations in connection with the exercise of stock options and vesting of restricted shares.
(2)
For shares tendered in connection with the vesting of restricted shares, the average price paid per share is an average calculated using the daily high and low of the Company’s common shares as quoted on the New York Stock Exchange at the time of vesting. For shares tendered in connection with the exercise of stock options, the price paid is the real-time trading share price at the time the options are exercised.
(3)
On February 10, 2012, the Board of Directors of the Company approved a share purchase plan pursuant to which the Company may purchase up to ten million of its common shares in the aggregate. On June 13, 2014, the Board of Directors of the Company authorized an additional ten million common shares for repurchase under this plan. This share purchase plan expires on December 31, 2015. The Company may purchase shares

15


Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (continued)

from time to time in open market purchases or privately negotiated transactions. The Company may make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans.

 

*Total return assumes reinvestment of dividends. Fiscal years ending December 31.


 
2010
2011
2012
2013
2014
Timken
$
204

$
169

$
213

$
249

$
275

S&P 500
115

117

136

180

205

S&P 400 Industrials
131

129

158

227

230

 
The line graph compares the cumulative total shareholder returns over five years for The Timken Company, the S&P 500 Stock Index and the S&P 400 Industrials Index. The graph assumes, in each case, an initial investment of $100 on January 1, 2010, in Timken common shares, S&P 500 Index and S&P 400 Industrials Index, based on market prices at the end of each fiscal year through and including December 31, 2014, and reinvestment of dividends (and taking into account the value of the TimkenSteel common shares distributed in the Spinoff).



16


Item 6. Selected Financial Data

Summary of Operations and Other Comparative Data:
(Dollars in millions, except per share and per employee data)
2014
2013
2012
2011
2010
Statements of Income
 
 
 
 
 
Net sales
$
3,076.2

$
3,035.4

$
3,359.5

$
3,333.6

$
2,798.6

Gross profit
898.0

868.4

1,028.0

1,018.0

803.9

Selling, general and administrative expenses
542.5

546.6

554.5

540.6

484.8

Impairment and restructuring charges
113.4

8.7

29.5

14.4

21.7

Operating income
208.4

305.9

444.0

463.0

297.4

Other income (expense), net
19.9

6.7

102.0

(0.4
)
4.2

Interest expense, net
24.3

22.5

28.2

31.2

34.5

Income from continuing operations
149.3

175.5

331.5

280.8

179.2

Income from discontinued operations, net of income taxes
24.0

87.5

164.4

175.8

97.8

Net income attributable to The Timken Company
$
170.8

$
262.7

$
495.5

$
454.3

$
274.8

Balance Sheets
 
 
 
 
 
Inventories, net
$
585.5

$
582.6

$
611.5

$
669.6

$
602.4

Property, plant and equipment, net
780.5

855.8

834.1

868.6

880.3

Total assets
3,001.4

4,477.9

4,244.2

4,327.4

4,180.4

Total debt:
 
 
 
 
 
Short-term debt
7.4

18.6

14.3

22.0

22.4

Current portion of long-term debt
0.6

250.7

9.6

5.8

9.5

Long-term debt
522.1

176.4

424.9

448.6

443.0

Total debt
$
530.1

$
445.7

$
448.8

$
476.4

$
474.9

Net debt (cash)
 
 
 
 
 
Total debt
530.1

445.7

448.8

476.4

474.9

Less: cash and cash equivalents and restricted cash
(294.1
)
(399.7
)
(601.5
)
(468.4
)
(877.1
)
 Net debt (cash): (1)
$
236.0

$
46.0

$
(152.7
)
$
8.0

$
(402.2
)
Total liabilities
1,412.3

1,829.3

1,997.6

2,284.9

2,238.6

Shareholders’ equity
$
1,589.1

$
2,648.6

$
2,246.6

$
2,042.5

$
1,940.7

Capital:
 
 
 
 
 
Net debt (cash)
236.0

46.0

(152.7
)
8.0

(402.2
)
Shareholders’ equity
1,589.1

2,648.6

2,246.6

2,042.5

1,940.7

Net debt (cash) + shareholders’ equity (capital)
$
1,825.1

$
2,694.6

$
2,093.9

$
2,050.5

$
1,538.5

Other Comparative Data
 
 
 
 
 
Income from continuing operations / Net sales
4.9
%
5.8
%
9.9
 %
8.4
%
6.4
 %
Net income attributable to The Timken Company / Net sales
5.6
%
8.7
%
14.7
 %
13.6
%
9.8
 %
 Return on equity (2)
9.4
%
6.6
%
14.8
 %
13.7
%
9.2
 %
 Net sales per employee (3)
$
188.2

$
181.6

$
192.0

$
189.9

$
169.3

Capital expenditures
126.8

133.6

118.3

105.5

72.1

Depreciation and amortization
137.0

142.4

149.6

146.7

143.7

Capital expenditures / Net sales
4.1
%
4.4
%
3.5
 %
3.2
%
2.6
 %
Dividends per share
$
1.00

$
0.92

$
0.92

$
0.78

$
0.53

 Basic earnings per share - continuing operations (4)
$
1.62

$
1.84

$
3.41

$
2.84

$
1.84

 Diluted earnings per share - continuing operations (4)
$
1.61

$
1.82

$
3.38

$
2.81

$
1.82

 Basic earnings per share (5)
$
1.89

$
2.76

$
5.11

$
4.65

$
2.83

 Diluted earnings per share (5)
$
1.87

$
2.74

$
5.07

$
4.59

$
2.81

Net debt (cash) to capital (1)
12.9
%
1.7
%
(7.3
)%
0.4
%
(26.1
)%
Number of employees at year-end (6)
16,345

16,717

17,500

17,558

16,534

Number of shareholders (7)
44,217

52,218

50,783

44,238

39,118


(1)
The Company presents net debt (cash) because it believes net debt (cash) is more representative of the Company’s financial position than total debt due to the amount of cash and cash equivalents.
(2)
Return on equity is defined as income from continuing operations divided by ending shareholders’ equity.
(3)
Based on average number of employees employed during the year.
(4)
Based on average number of shares outstanding during the year.
(5)
Based on average number of shares outstanding during the year and includes discontinued operations for all periods presented.
(6)
Adjusted to exclude employees from the former Steel segment (which was spunoff in June 2014) for all periods.
(7)
Includes an estimated count of shareholders having common shares held for their accounts by banks, brokers and trustees for benefit plans.


17


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in millions, except per share data)

OVERVIEW

Introduction:

The Timken Company engineers, manufactures and markets bearings, transmissions, gearboxes, chain and related products and offers a spectrum of power system rebuild and repair services around the world. The Company’s growing product and services portfolio features many strong industrial brands, such as Timken, Fafnir, Philadelphia Gear, Drives and Interlube. Timken today applies its deep knowledge of metallurgy, tribology and power transmission across the broad spectrum of bearings and related systems to improve the reliability and efficiency of machinery and equipment all around the world. Known for its quality products and collaborative technical sales model, Timken focuses on providing value to diverse markets worldwide through both original equipment manufacturers (OEMs) and aftermarket channels. With approximately 16,000 people operating in 28 countries, Timken makes the world more productive and keeps industry in motion. Beginning in the fourth quarter of 2014, the Company began operating under two segments: (1) Mobile Industries and (2) Process Industries. Refer to Note 15 - Segment Information for additional information on the resegmentation of the Company's business segments. The following further describes these business segments:

Mobile Industries offers an extensive portfolio of bearings, seals, lubrication devices and systems, as well as power transmission components, engineered chain, augers and related products and maintenance services, to OEMs of: off-highway equipment for the agricultural, construction and mining markets; on-highway vehicles including passenger cars, light trucks, and medium- and heavy-duty trucks; and rail cars, locomotives, rotor craft and fixed-wing aircraft. Beyond service parts sold to OEMs, aftermarket sales to individual end users, equipment owners, operators and maintenance shops are handled through the Company's extensive network of authorized automotive and heavy-truck distributors, and include hub units, specialty kits and more. Mobile Industries also provides power transmission systems and flight-critical components for civil and military aircraft, which include bearings, helicopter transmission systems, rotor-head assemblies, turbine engine components, gears and housings.

Process Industries supplies industrial bearings and assemblies, power transmission components such as gears and gearboxes, couplings, seals, lubricants, chains and related products and services to OEMs and end users in industries that place heavy demands on operating equipment they make or use. This includes; metals, mining, cement and aggregate production; coal and wind power generation; oil and gas; pulp and paper in applications including printing presses; and cranes, hoists, drawbridges, wind energy turbines, gear drives, drilling equipment, coal conveyors, health and critical motion control equipment, marine equipment and food processing equipment. This segment also supports aftermarket sales and service needs through its global network of authorized industrial distributors. In addition, the Company’s industrial services group offers end users a broad portfolio of maintenance support and capabilities that include repair and service for bearings and gearboxes as well as electric motor rewind, repair and services.

For nearly 100 years, the Company also made and marketed steel within its steel business. However, on June 30, 2014, the Company announced that it had completed the Spinoff into a separate independent publicly traded company, 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 steel business has been reclassified to discontinued operations for all periods presented.


18


Currently, the Company focuses its strategy on creating value that leads to growth and sustained levels of profitability. The Company works to create value by:

Expanding in new and existing markets by applying the Timken team’s knowledge of metallurgy, friction management and mechanical power transmission to create value for our customers. Using a highly collaborative technical selling model, the Company places particular emphasis on creating unique solutions for challenging and/or demanding applications. The Company intends to grow in attractive market sectors, emphasizing those spaces that are highly fragmented, demand high service and value the reliability and efficiency offered by the Company's products. The Company also targets those applications that offer significant aftermarket demand, thereby providing product and services revenue throughout the equipment’s lifetime.

Performing with excellence, driving for exceptional results with a passion for superior execution, the Company embraces a continuous improvement culture that is charged with lowering costs, eliminating waste, increasing efficiency, encouraging organizational agility and building greater brand equity. As part of this effort, the Company may also reposition underperforming product lines and segments and divest non-strategic assets.

The following items highlight certain of the Company's more significant strategic accomplishments in 2014:

On November 30, 2014, the Company completed the acquisition of the assets of Revolvo Ltd. (Revolvo), a specialty bearing company based in Dudley, United Kingdom (U.K.). Revolvo makes and markets ball and roller bearings for industrial applications in process and heavy industries. Revolvo's split roller bearing housed units are widely used by mining, power generation, food and beverage, pulp and paper, metals, cements, marine and waste-water end users. Revolvo had full-year 2014 sales of approximately $9 million.

On September 8, 2014, the Company announced plans to eliminate its Aerospace segment leadership positions and integrate substantially all aerospace business activities into Mobile Industries under the direction of its Group President. The Company also announced plans to close its aerospace engine overhaul business, located in Mesa, Arizona. The Company subsequently sold the aerospace engine overhaul assets in November 2014. In addition, the Company announced plans to evaluate strategic alternatives for its aerospace MRO parts business, also located in Mesa, and close its aerospace bearing facility located in Wolverhampton, U.K., which is expected to close in early 2016. The Company began reporting the aerospace business results primarily within the Mobile Industries segment starting with the fourth quarter of 2014.

In June 2014, the Company announced that it was committing $60 million to the DeltaX initiative, a multi-year investment to improve the Company's concept-to-commercialization efforts. DeltaX will integrate technology and tools designated to enable the Company to be more agile and competitive. The Company will replace its traditional functional infrastructure with a more product-focused infrastructure, supported by new customer-facing systems. DeltaX is intended to help the Company to execute on its strategy to grow, delivering to the market place much faster and more efficently those products that customers value. As part of the $60 million DeltaX initiative, the XSell project will leverage the SAP infrastructure deployed throughout our global operations. It will provide the global sales team with new customer relationship management capabilities, as well as more consistent, mobility-enabled sales processes and business tools.

On June 13, 2014, the Company's Board of Directors authorized the Company to purchase an additional 10 million of its common shares. The total number of shares that remained authorized for repurchase was 8.9 million shares at December 31, 2014.

On April 28, 2014, the Company completed the acquisition of assets from Schulz Group (Schulz). Based in New Haven, Connecticut, 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 had full-year 2013 sales of approximately $18 million and employed 125 associates.







19


RESULTS OF OPERATIONS
2014 compared to 2013

Overview: 
 
2014
2013
$ Change
% Change
Net sales
$
3,076.2

$
3,035.4

$
40.8

1.3
 %
Income from continuing operations
149.3

175.5

(26.2
)
(14.9
)%
Income from discontinued operations
24.0

87.5

(63.5
)
(72.6
)%
Income attributable to noncontrolling interest
2.5

0.3

2.2

NM

Net income attributable to The Timken Company
$
170.8

$
262.7

$
(91.9
)
(35.0
)%
Diluted earnings per share:
 
 
 


Continuing operations
$
1.61

$
1.82

$
(0.21
)
(11.5
)%
Discontinued operations
0.26

0.92

(0.66
)
(71.7
)%
Diluted earnings per share
$
1.87

$
2.74

$
(0.87
)
(31.8
)%
Average number of shares—diluted
91,224,328

95,823,728


(4.8
)%

On January 29, 2015, the Company furnished a Current Report on Form 8-K to the Securities and Exchange Commission that included an earnings release issued that same day reporting results for the fourth quarter and full year of 2014, which was furnished as Exhibit 99.1 thereto (the Earning Release). For the twelve months ended December 31, 2014, the Earnings Release reported: (a) income from continuing operations of $147.0 million, or $1.58 per diluted share; (b) income from discontinued operations of $21.7 million, or $0.24 per diluted share; (c) net income of $168.7 million; and (d) net income attributable to The Timken Company of $166.2 million. Between the issuance of the Earnings Release and the filing of this Annual Report on Form 10-K, the Company adjusted an entry in its provision for income taxes for the three and twelve months ended December 31, 2014, reducing the provision for income taxes and increasing net income by $4.6 million, or $0.05 per diluted share.

The Company reported net sales for 2014 of approximately $3.1 billion, compared to approximately $3.0 billion in 2013, a 1.3% increase. The increase in sales was primarily due to higher volume in the Process Industries segment, partially offset by decreased volume in the Mobile Industries segment. The lower volume in the Mobile Industries segment was primarily driven by planned program exits that concluded in 2013. In 2014, diluted earnings per share from continuing operations was $1.61, compared to $1.82 in 2013. The Company's net income from continuing operations in 2014, compared to 2013, was lower due to higher impairment and restructuring charges, the impact of planned program exits that concluded at the end of 2013, and pension settlement charges, partially offset by the impact of higher volume, lower manufacturing cost and the gain on the sale of real estate in Sao Paulo, Brazil (Sao Paulo). Income from continuing operations also benefited from a lower effective tax rate. Impairment and restructuring charges primarily related to goodwill impairment for two of the Company's aerospace reporting units within the Mobile Industries segment. Discontinued operations related to Company's former steel business that was spun off on June 30, 2014. Income from discontinued operations was lower in 2014 compared to 2013 as a result of separation costs incurred as a result of the Spinoff.


20


Outlook:
The Company expects sales to increase approximately 1% in 2015 compared to 2014, primarily driven by higher demand in the light vehicle, wind energy, marine and industrial aftermarket sectors, offset in large part by the impact of currency-rate changes. The Company's earnings are expected to be lower in 2015 compared to 2014, primarily due to non-cash charges related to the settlement of certain U.S. pension obligations, partially offset by lower impairment and restructuring charges and the impact of higher demand. On January 22, 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) to pay future pension benefits for approximately 5,000 U.S. Timken retirees. The Company has transferred approximately $600 million of the Company's pension obligations and approximately $635 million of the pension assets to Prudential. The Company expects to incur pension settlement charges of approximately $220 million during the first quarter of 2015 in connection with this group annuity purchase.

The Company expects to generate cash from continuing operations of approximately $345 million in 2015, an increase of approximately $65 million, or 23%, compared to 2014, as the Company anticipates higher income from continuing operations, excluding non-cash impairment and pension settlement charges. Pension contributions are expected to be approximately $15 million in 2015, compared to $21.1 million in 2014. The Company expects capital expenditures of approximately 4% of sales in 2015, compared to 4.2% of sales in 2014.



21


THE STATEMENTS OF INCOME

Sales by Segment:
 
2014
2013
$ Change
% Change    
Mobile Industries
$
1,685.4

$
1,775.8

$
(90.4
)
(5.1
)%
Process Industries
1,390.8

1,259.6

131.2

10.4
 %
Total Company
$
3,076.2

$
3,035.4

$
40.8

1.3
 %

Net sales for 2014 increased $40.8 million, or 1.3%, compared to 2013, primarily due to higher volume of approximately $150 million, driven by increases in the Process Industries' wind energy and industrial aftermarket sectors and the Mobile Industries' rail market sector, as well as the benefit of acquisitions of $25 million. These factors were partially offset by planned program exits in the Mobile Industries segment that concluded in 2013 of approximately $110 million and the impact of foreign currency of approximately $30 million.

Gross Profit:
 
2014
2013
$ Change
Change
Gross profit
$
898.0

$
868.4

$
29.6

3.4
%
Gross profit % to net sales
29.2
%
28.6
%

60
 bps
Rationalization expenses included in cost of products sold
$
3.6

$
5.9

$
(2.3
)
(39.0
%)

Gross profit increased in 2014 compared to 2013, primarily due to lower manufacturing costs of approximately $30 million and the impact of higher sales volume and mix, including the impact of planned program exits, of approximately $10 million. These factors were partially offset by inventory valuation adjustments of approximately $20 million.

Selling, General and Administrative Expenses:
 
2014
2013
$ Change
Change
Selling, general and administrative expenses
$
542.5

$
546.6

$
(4.1
)
(0.8)%

Selling, general and administrative expenses % to net
 sales
17.6
%
18.0
%

(40
) bps

The decrease in selling, general and administrative expenses of $4.1 million in 2014 compared to 2013 was primarily due to the benefit of cost reduction initiatives of approximately $25 million, partially offset by higher expense related to incentive compensation plans of approximately $15 million and the impact of acquisitions of approximately $5 million.


22



Impairment and Restructuring Charges:
 
2014
2013
$ Change
Impairment charges
$
98.9

$
0.1

$
98.8

Severance and related benefit costs
10.7

9.2

1.5

Exit costs
3.8

(0.6
)
4.4

Total
$
113.4

$
8.7

$
104.7


Impairment and restructuring charges of $113.4 million in 2014 were primarily due to goodwill and other intangible impairment charges of $96.2 million for two of the Company's aerospace reporting units within the Mobile Industries segment that were recorded in 2014. Impairment and restructuring charges for 2013 were primarily due to severance and related benefit costs of approximately $6 million due to cost-reduction initiatives relating to reductions in headcount in the bearings and power transmission business and the recognition of severance and related benefits of approximately $3 million related to the closure of the manufacturing facility in St. Thomas, Ontario, Canada (St. Thomas). Refer to Note 11 - Impairment and Restructuring Charges in the Notes to the Consolidated Financial Statements for additional discussion.
 
Pension Settlement Charges:
 
2014
2013
$ Change
Pension Settlement Charges
$
33.7

$
7.2

$
26.5


Pension settlement charges recorded in 2014 were primarily the result of the settlement of approximately $110 million of the Company's pension obligations related to its defined benefit pension plan in the United States as a result of the lump sum distributions to new retirees and certain deferred vested plan participants in 2014. Pension settlement charges in 2013 primarily related to the settlement of pension obligations for the Company's Canadian defined pension plans as a result of the closure of the Company's manufacturing facility in St. Thomas.

Interest Income (Expense):
 
2014
2013
$ Change
% Change
Interest (expense)
$
(28.7
)
$
(24.4
)
$
(4.3
)
17.6
%
Interest income
4.4

1.9

2.5

131.6
%

Interest expense for 2014 increased compared to 2013 primarily due to higher average debt and lower capitalized interest. Interest income increased for 2014 compared to 2013 primarily due to interest income recognized on the deferred payments related to the sale of the Company's former manufacturing site in Sao Paulo.


Other Income (Expense):
 
2014
2013
$ Change
% Change
Gain on sale of real estate
$
22.6

$
5.4

$
17.2

318.5
%
Other income (expense), net
(2.7
)
1.3

(4.0
)
307.7
%
Total
$
19.9

$
6.7

$
13.2

197.0
%

During 2014, the Company recognized a gain of $22.6 million, compared to $5.4 million in 2013, related to the sale of its former manufacturing site in Sao Paulo. Refer to Note 7 - Property, Plant and Equipment for additional information on the gain.

The Company reported other expense, net in 2014 compared to other income, net in 2013 primarily due to higher charitable donations in 2014. The Company also incurred higher foreign currency exchange losses in 2014 compared to 2013.


23


Income Tax Expense:
 
2014
2013
$ Change
Change
Income tax expense
$
54.7

$
114.6

$
(59.9
)
(52.3)%

Effective tax rate
26.8
%
39.5
%

(1,270
) bps

The effective tax rate on pretax income for 2014 was favorable relative to the U.S. federal statutory rate primarily due to U.S. foreign tax credits, earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, the U.S. manufacturing deduction, the U.S. research tax credit and certain discrete tax benefits. These factors were partially offset by U.S. taxation of foreign income, losses at certain foreign subsidiaries where no tax benefit could be recorded, non-deductible intangible asset impairment charges recorded in the Mobile Industries segment and U.S. state and local taxes.

The effective tax rate on pretax income for 2013 was unfavorable relative to the U.S. federal statutory rate primarily due to U.S. taxation of foreign income including cash repatriation, losses at certain foreign subsidiaries where no tax benefit could be recorded and U.S. state and local taxes. These factors were partially offset by earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, U.S. foreign tax credits, the U.S. manufacturing deduction and certain discrete U.S. tax benefits.

The change in the effective tax rate in 2014 compared to 2013 was primarily due to lower U.S. taxation of foreign income, lower losses at certain foreign subsidiaries where no tax benefit could be recorded and lower U.S. state and local taxes, partially offset by lower U.S. foreign tax credits, lower U.S. manufacturing deduction, non-deductible intangible asset impairment charges recorded in the Mobile Industries segment and the net effect of other discrete items.

Discontinued Operations:

 
2014
2013
$ Change
Change
Net Sales
$
786.2

$
1,305.8

$
(519.6
)
(39.8)%

Income before income taxes
40.0

127.1

(87.1
)
(68.5)%

Income taxes
16.0

39.6

(23.6
)
(59.6)%

Operating results, net of tax
$
24.0

$
87.5

$
(110.7
)
(72.6)%


On June 30, 2014, the Company completed the Spinoff. The operating results, net of tax, included one-time transaction costs in connection with the separation of the two companies of $57.1 million and $13.0 million during 2014 and 2013, respectively. These costs included consulting and professional fees associated with preparing for and executing the Spinoff, as well as lease cancellation fees. For further discussion, please refer to Note 2 - Spinoff Transaction in the Notes to the Consolidated Financial Statements.


24


BUSINESS SEGMENTS

The primary measurement used by management to measure the financial performance of each segment is earnings before interest and taxes (EBIT). Refer to Note 15 - Segment Information in the Notes to the Consolidated Financial Statements for the reconciliation of EBIT by segment to consolidated income before income taxes. Effective October 1, 2014, the Company began operating under new reportable segments. The Company's two reportable segments are: Mobile Industries and Process Industries. Results of the Company's former Aerospace segment are now primarily included in the Mobile Industries segment. In addition, the Company made adjustments to the allocation of certain selling, general and administrative expenses and certain foreign currency exchange gains or losses for all prior periods presented to better reflect the Company’s operating model and new cost structure following the Spinoff and the elimination of the former Aerospace segment.

The presentation of segment results below includes a reconciliation of the changes in net sales for each segment reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of acquisitions made in 2014 and 2013 and changes in foreign currency exchange rates. The effects of acquisitions and currency exchange rates on net sales are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period. During the first quarter of 2013, the Company completed the acquisition of Interlube Systems Ltd. (Interlube). Results for Interlube are reported in the Mobile Industries segment. During the second quarter of 2013, the Company completed the acquisition of Hamilton Gear Ltd., d/b/a Standard Machine (Standard Machine), as well as substantially all of the assets of Smith Services, Inc. (Smith Services). During the second quarter of 2014, the Company acquired the assets of Schulz. During the fourth quarter of 2014, the Company acquired the assets of Revolvo. Results for Standard Machine, Smith Services, Schulz and Revolvo are reported in the Process Industries segment.


Mobile Industries Segment:
 
2014
2013
$ Change
Change
Net sales
$
1,685.4

$
1,775.8

$
(90.4
)
(5.1)%

EBIT
$
65.6

$
193.7

$
(128.1
)
(66.1)%

EBIT margin
3.9
%
10.9
%

(700) bps

 
 
 
 
 
 
 
 
 
 
  
2014
2013
$ Change
% Change
Net sales
$
1,685.4

$
1,775.8

$
(90.4
)
(5.1)%

Less: Acquisitions
3.6


3.6

NM

         Currency
(17.1
)

(17.1
)
NM

Net sales, excluding the impact of acquisitions and currency
$
1,698.9

$
1,775.8

$
(76.9
)
(4.3)%


The Mobile Industries segment’s net sales, excluding the impact of acquisitions and currency-rate changes, decreased 4.3% in 2014 compared to 2013, primarily due to lower volume of approximately $80 million. The lower volume was primarily driven by a reduction in sales to the light vehicle sector due to planned program exits that concluded in 2013 of approximately $110 million. In addition, heavy truck volume declined approximately $15 million, aerospace aftermarket volume declined approximately $5 million and aerospace original equipment volume declined approximately $5 million. These factors were partially offset by higher volume in the rail market sector of approximately $65 million. EBIT decreased in 2014 compared to 2013, primarily due to the impact of the aerospace business impairment and restructuring charges of approximately $125 million and the impact of lower sales volume and mix, including planned program exits of approximately $35 million. These factors were partially offset by the sale of real estate in Sao Paulo of approximately $25 million.

Sales for the Mobile Industries segment are expected to be flat to down approximately 2% in 2015 compared to 2014, reflecting organic growth primarily from the light vehicle market sector, offset by the impact of currency rate changes and a decline in the agriculture market sector. EBIT for the Mobile Industries segment is expected to increase in 2015 compared to 2014 as a result of lower impairment and restructuring charges and lower material costs, offset by the sale of real estate in Sao Paulo.



25


Process Industries Segment:
 
2014
2013
$ Change
Change
Net sales
$
1,390.8

$
1,259.6

$
131.2

10.4%

EBIT
$
267.1

$
189.3

$
77.8

41.1%

EBIT margin
19.2
%
15.0
%

420
 bps
 
 
 
 
 
 
 
 
 
 
  
2014
2013
$ Change
% Change
Net sales
$
1,390.8

$
1,259.6

$
131.2

10.4%

Less: Acquisitions
16.0


16.0

NM

         Currency
(13.3
)

(13.3
)
NM

Net sales, excluding the impact of acquisitions and currency
$
1,388.1

$
1,259.6

$
128.5

10.2%


The Process Industries segment’s net sales, excluding the impact of acquisitions and currency-rate changes, increased 10.2% for 2014 compared to 2013, primarily due to an increase in volume of approximately $120 million and favorable pricing of approximately $5 million. The higher volume was primarily due to higher demand in the wind energy market sector of approximately $75 million and higher demand from the industrial aftermarket of approximately $35 million. EBIT in 2014 increased compared to 2013 primarily due to the impact of higher volume of approximately $60 million and lower material and manufacturing costs of approximately $35 million, partially offset by unfavorable sales mix of approximately $15 million and higher selling, general and administrative expenses of approximately $10 million.

Sales for the Process Industries segment are expected to increase approximately 2% to 4% in 2015 compared to 2014, driven by organic growth in the industrial aftermarket, targeted original equipment sectors, including wind energy and military marine, and the benefit of acquisitions, partially offset by the impact of currency rate changes. EBIT for the Process Industries segment is expected to increase in 2015 compared to 2014 due to increased volume.

Corporate:
 
2014
2013
$ Change
Change
Corporate expenses
$
71.4

$
70.4

$
1.0

1.4 %

Corporate expenses % to net sales
2.3
%
2.3
%



Corporate expenses increased in 2014 compared to 2013 primarily due to higher expense related to incentive compensation plans and foreign currency exchange losses, which were partially offset by cost reduction initiatives.

26


RESULTS OF OPERATIONS:
2013 compared to 2012

Overview:
 
2013
2012
$ Change
% Change
Net sales
$
3,035.4

$
3,359.5

$
(324.1
)
(9.6
)%
Income from continuing operations
175.5

331.5

(156.0
)
(47.1
)%
Income from discontinued operations
87.5

164.4

(76.9
)
(46.8
)%
Income attributable to noncontrolling interest
0.3

0.4

(0.1
)
(25.0
)%
Net income attributable to The Timken Company
$
262.7

$
495.5

$
(232.8
)
(47.0
)%
Diluted earnings per share:
 
 
 
 
Continuing operations
$
1.82

$
3.38

$
(1.56
)
(46.2
)%
Discontinued operations
0.92

1.69

(0.77
)
(45.6
)%
Diluted earnings per share
$
2.74

$
5.07

$
(2.33
)
(46.0
)%
Average number of shares - diluted
95,823,728

97,602,481


(1.8
)%

The Company reported net sales for 2013 of approximately $3.0 billion, compared to approximately $3.4 billion in 2012, a 9.6% decrease. The sales decrease reflected lower volume across most market sectors, and the effect of currency rate changes, partially offset by favorable pricing and the impact of acquisitions. The Company's net income from continuing operations for 2013, compared to 2012, was lower due to the impact of lower volume, unfavorable sales mix and higher manufacturing costs, partially offset by lower selling, general and administrative expenses, favorable pricing and lower restructuring charges. In addition, net income from continuing operations for 2013 was lower due to the U.S. Continued Dumping and Subsidy Offset Act (CDSOA) receipts, net of expense, of $108.0 million ($68.0 million after tax, or approximately $0.69 per diluted share), received in 2012.

THE STATEMENTS OF INCOME

Sales by Segment:
 
2013
2012
$ Change
% Change
Mobile Industries
$
1,775.8

$
1,987.4

$
(211.6
)
(10.6
)%
Process Industries
1,259.6

1,372.1

(112.5
)
(8.2
)%
Total Company
$
3,035.4

$
3,359.5

$
(324.1
)
(9.6
)%

Net sales for 2013 decreased $324.1 million, or 9.6%, compared to 2012, primarily due to lower volume of approximately $315 million across most market sectors. In addition, the decrease in sales reflected planned program exits that concluded at the end of 2013 of approximately $90 million and the effect of currency rate changes of approximately $10 million, partially offset by the impact of prior-year acquisitions of $70 million and favorable pricing of $30 million.

Gross Profit:
 
2013
2012
$ Change
Change
Gross profit
$
868.4

$
1,028.0

$
(159.6
)
(15.5) %

Gross profit % to net sales
28.6
%
30.6
%

(200
) bps
Rationalization expenses included in cost of products sold
$
5.9

$
8.3

$
(2.4
)
(28.9) %


Gross profit decreased in 2013 compared to 2012, primarily due to the impact of lower sales volume of approximately $130 million, higher manufacturing costs of approximately $40 million and the impact of planned program exits that concluded at the end of 2013 of approximately $35 million, partially offset by favorable pricing of approximately $30 million and the impact from prior-year acquisitions of approximately $15 million.



27


Selling, General and Administrative Expenses:
 
2013
2012
$ Change
Change
Selling, general and administrative expenses
$
546.6

$
554.5

$
(7.9
)
(1.4) %

Selling, general and administrative expenses % to net sales
18.0
%
16.5
%

150
 bps

The decrease in selling, general and administrative expenses of $7.9 million in 2013 compared to 2012 was primarily due to lower expenses related to incentive compensation plans of approximately $30 million, partially offset by the full year impact of acquisitions of approximately $15 million.

Impairment and Restructuring Charges:
 
2013
2012
$ Change
Impairment charges
$
0.1

$
6.6

$
(6.5
)
Severance and related benefit costs
9.2

18.4

(9.2
)
Exit costs
(0.6
)
4.5

(5.1
)
Total
$
8.7

$
29.5

$
(20.8
)

Impairment and restructuring charges of $8.7 million in 2013 were primarily due to severance and related benefit costs of approximately $6 million due to cost-reduction initiatives relating to reductions in headcount in the bearings and power transmission business. In addition, impairment and restructuring charges for 2013 included to the recognition of severance and related benefits of approximately $3 million related to the closure of the manufacturing facility in St. Thomas. Impairment and restructuring charges of $29.5 million in 2012 were primarily due to the recognition of severance and related benefits, including approximately $10.7 million of pension curtailment charges, as well as impairment charges related to the closure of the manufacturing facility in St. Thomas and the recognition of environmental remediation costs at the former manufacturing facility in Sao Paulo. Refer to Note 11 - Impairment and Restructuring Charges in the Notes to the Consolidated Financial Statements for additional discussion.

Interest Income and (Expense):
 
2013
2012
$ Change
% Change
Interest (expense)
$
(24.4
)
$
(31.1
)
$
6.7

(21.5
)%
Interest income
$
1.9

$
2.9

$
(1.0
)
(34.5
)%

Interest expense for 2013 decreased compared to 2012 primarily due to lower average debt and higher capitalized interest. Interest income decreased for 2013 compared to 2012 primarily due to lower invested cash balances.

Other Income (Expense):
 
2013
2012
$ Change
% Change
CDSOA receipts (expense), net
$
(2.8
)
$
108.0

$
(110.8
)
(102.6
)%
Gain on sale of real estate in Sao Paulo
5.4


5.4

NM

Other income (expense)
4.1

(6.0
)
10.1

(168.3
)%
Total
6.7

102.0

(95.3
)
(93.4
)%

In 2013, the Company reported expenses in connection with CDSOA of $2.8 million. The Company reported CDSOA receipts, net of expense, of $108.0 million in 2012. Refer to Note 20 - Continued Dumping and Subsidy Offset Act (CDSOA) in the Notes to the Consolidated Financial Statements for additional information

In November 2013, the Company finalized the sale of its former manufacturing facility in Sao Paulo, resulting in a $5.4 million gain. The Company is recognizing the gain on the sale of this facility on the installment method. The Company recognized an additional gain of approximately $25 million in 2014 related to this transaction.


28


Income Tax Expense:
 
2013
2012
$ Change
Change
Income tax expense
$
114.6

$
186.3

$
(71.7
)
(38.5) %

Effective tax rate
39.5
%
36.0
%

350
 bps

The effective tax rate on pretax income for 2013 was unfavorable relative to the U.S. federal statutory rate primarily due to U.S. taxation of foreign income including cash repatriation, losses at certain foreign subsidiaries where no tax benefit could be recorded, U.S. non-deductible items and U.S. state and local taxes. These factors were partially offset by discrete U.S. tax benefits, including certain settlements related to tax audits, U.S. foreign tax credits, earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, the U.S. manufacturing deduction and the U.S research tax credit.

The effective tax rate for 2012 was slightly favorable relative to the U.S. federal statutory rate primarily due to earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, U.S. Foreign tax credits, the U.S. manufacturing deduction and certain discrete U.S. tax benefits. These factors were partially offset by losses at certain foreign subsidiaries where no tax benefits could be recorded, U.S. state and local taxes and U.S. taxation of foreign income. The change in the effective tax rate in 2013 compared to 2012 was primarily due to U.S. taxation of foreign income, including U.S. taxation on cash repatriation, losses at certain foreign subsidiaries where no tax benefit could be recorded and higher U.S. state and local taxes, partially offset by U.S. foreign tax credits, higher U.S. manufacturing deduction and the net effect of other discrete items.


BUSINESS SEGMENTS

The primary measurement used by management to measure the financial performance of each segment is EBIT. Refer to Note 15 - Segment Information in the Notes to the Consolidated Financial Statements for the reconciliation of EBIT by segment to consolidated income before income taxes.

The presentation of segment results below includes a reconciliation of the changes in net sales for each segment reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of acquisitions and currency exchange rates. The effects of acquisitions and currency exchange rates on net sales are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period. During the fourth quarter of 2012, the Company completed the acquisition of substantially all of the assets of Wazee Companies, LLC (Wazee). The acquisition of the assets of Wazee, which was completed on December 31, 2012, had no impact on the 2012 operating results. During the first quarter of 2013, the Company completed the acquisition of Interlube. Results for Interlube are reported in the Mobile Industries segment. During the second quarter of 2013, the Company completed the acquisition of Standard Machine, as well as substantially all of the assets of Smith Services. Results for Standard Machine, Smith Services and Wazee are reported in the Process Industries segment.

Mobile Industries Segment:
 
2013
2012
$ Change
Change
Net sales
$
1,775.8

$
1,987.4

$
(211.6
)
(10.6
)%
EBIT
$
193.7

$
245.2

$
(51.5
)
(21.0
)%
EBIT margin
10.9
%
12.3
%

(140) bps
  
2013
2012
$ Change
% Change
Net sales
$
1,775.8

$
1,987.4

$
(211.6
)
(10.6
)%
Less: Acquisitions
27.0


27.0

NM

         Currency
(11.0
)

(11.0
)
NM

Net sales, excluding the impact of acquisitions and currency
$
1,759.8

$
1,987.4

$
(227.6
)
(11.5
)%


29


The Mobile Industries segment’s net sales, excluding the impact of acquisitions and currency-rate changes, decreased 11.5% in 2013 compared to 2012, primarily due to lower volume of approximately $220 million, partially offset by favorable pricing of $10 million. The lower volume was led by a decrease in off-highway volume of approximately $105 million, and a decrease in heavy truck volume of approximately $30 million, driven by exited business. EBIT decreased in 2013 compared to 2012, primarily due to the impact of lower volume of approximately $80 million and higher manufacturing costs of approximately $35 million, partially offset by lower restructuring charges of approximately $15 million, lower raw material costs of approximately $15 million, lower selling, general and administrative expenses of approximately $10 million, favorable sale mix of approximately $10 million, favorable pricing of $10 million and a gain on the sale of the Company's former manufacturing facility in Sao Paulo of approximately $5 million. Restructuring charges related to the closure of the manufacturing facility in St. Thomas were lower in 2013 compared to 2012.

Process Industries Segment:
 
2013
2012
$ Change
Change
Net sales
$
1,259.6

$
1,372.1

$
(112.5
)
(8.2) %

EBIT
$
189.3

$
261.8

$
(72.5
)
(27.7) %

EBIT margin
15.0
%
19.1
%

(410
) bps
 
 
 
 
 
  
2013
2012
$ Change
% Change
Net sales
$
1,259.6

$
1,372.1

$
(112.5
)
(8.2) %

Less: Acquisitions
58.8


58.8

NM

         Currency
0.7


0.7

NM

Net sales, excluding the impact of acquisitions and currency
$
1,200.1

$
1,372.1

$
(172.0
)
(12.5) %


The Process Industries segment’s net sales, excluding the effect of acquisitions and currency-rate changes, decreased 12.5% for 2013 compared to 2012, primarily due to lower volume of approximately $190 million, primarily offset by favorable pricing of $20 million. The lower volume was seen across all market sectors. EBIT decreased in 2013 compared to 2012 due to the impact of lower volume of approximately $80 million, the impact of higher manufacturing costs of approximately $20 million and unfavorable sales mix of approximately $15 million, partially offset by favorable pricing of approximately $20 million, lower selling, general and administrative expenses of approximately $10 million and lower material costs of approximately $10 million.

Corporate:
 
2013
2012
$ Change
Change
Corporate expenses
$
70.4

$
69.0

$
1.4

2.0%

Corporate expenses % to net sales
2.3
%
2.1
%

20
 bps

Corporate expenses decreased in 2013 compared to 2012, primarily due to lower expense related to incentive compensation plans.


30


THE BALANCE SHEETS

The following discussion is a comparison of the Consolidated Balance Sheets at December 31, 2014 and 2013.

Current Assets:
  
December 31,
  
  
  
2014
2013
$ Change
% Change
Cash and cash equivalents
$
278.8

$
384.6

$
(105.8
)
(27.5
)%
Restricted cash
15.3

15.1

0.2

1.3
 %
Accounts receivable, net
475.7

444.0

31.7

7.1
 %
Inventories, net
585.5

582.6

2.9

0.5
 %
Deferred income taxes
49.9

56.2

(6.3
)
(11.2
)%
Deferred charges and prepaid expenses
25.2

26.8

(1.6
)
(6.0
)%
Other current assets
51.5

61.7

(10.2
)
(16.5
)%
Current assets, discontinued operations

366.5

(366.5
)
(100.0
)%
Total current assets
$
1,481.9

$
1,937.5

$
(455.6
)
(23.5
)%

Cash and cash equivalents decreased primarily due to the Company's purchase of approximately 5.2 million of its common shares for an aggregate of $270.9 million during 2014. Accounts receivable, net increased as a result of higher sales in December 2014 compared to December 2013, partially offset by higher allowance for doubtful accounts of $3.6 million. Other current assets decreased primarily due to the liquidation of a portion of the Company's short-term investments of approximately $10 million. Current assets, discontinued operations at December 31, 2013 related to the Spinoff on June 30, 2014 and primarily included accounts receivable and inventory.

Property, Plant and Equipment, Net:
  
December 31,
  
  
  
2014
2013
$ Change
% Change
Property, plant and equipment
$
2,164.1

$
2,395.3

$
(231.2
)
(9.7
)%
Less: allowances for depreciation
(1,383.6
)
(1,539.5
)
155.9

10.1
 %
Property, plant and equipment, net
$
780.5

$
855.8

$
(75.3
)
(8.8
)%

The decrease in property, plant and equipment, net in 2014 was primarily due to the reclassification of approximately $45 million of capitalized software from property, plant and equipment to intangible assets in 2014, and the impact of currency-rate changes of approximately $20 million. See "Other Disclosures - Capital Expenditures" for more information.

Other Assets:
  
December 31,
  
  
  
2014
2013
$ Change
% Change
Goodwill
$
259.5

$
346.1

$
(86.6
)
(25.0
)%
Non-current pension assets
176.2

223.5

(47.3
)
(21.2
)%
Other intangible assets
239.8

207.4

32.4

15.6
 %
Other non-current assets
63.5

58.4

5.1

8.7
 %
Non-current assets, discontinued operations

849.2

(849.2
)
(100.0
)%
Total other assets
$
739.0

$
1,684.6

$
(945.6
)
(56.1
)%

The decrease in goodwill was primarily due to the impairment of two of the Company's aerospace reporting units in 2014. The decrease in non-current pension assets was primarily due to a decrease in the discount rate used to measure the Company's U.S. defined benefit pension plans, as well as the adoption of the new RP-2014 mortality tables. The increase in other intangible assets was primarily due to the reclassification of approximately $45 million of capitalized software from property, plant and equipment to other intangible assets, partially offset by current year amortization expense. Non-current assets, discontinued operations at December 31, 2013 related to the Spinoff and primarily included property, plant and equipment.


31



Current Liabilities:
  
December 31,
  
  
  
2014
2013
$ Change
% Change
Short-term debt
$
7.4

$
18.6

$
(11.2
)
(60.2
)%
Accounts payable
143.9

139.9

4.0

2.9
 %
Salaries, wages and benefits
146.7

131.1

15.6

11.9
 %
Income taxes payable
80.2

106.7

(26.5
)
(24.8
)%
Other current liabilities
155.0

180.8

(25.8
)
(14.3
)%
Current portion of long-term debt
0.6

250.7

(250.1
)
(99.8
)%
Current liabilities, discontinued operations

152.3

(152.3
)
(100.0
)%
Total current liabilities
$
533.8

$
980.1

$
(446.3
)
(45.5
)%

The decrease in short-term debt during 2014 was primarily due to lower borrowings under foreign lines of credit. Salaries, wages and benefits increased primarily due to the increase in accruals for incentive based compensation plans. The decrease in income taxes payable was primarily due to lower current year income tax expense compared to 2013, as well as higher taxes paid. The decrease in other current liabilities was primarily due to the recognition of deferred revenue related to the sale of the Company's former manufacturing site in Sao Paulo, as well as a reduction in accrued restructuring charges. The decrease in the current portion of long-term debt was primarily due to the Company’s $250 million aggregate principal amount of fixed-rate 6.0% senior unsecured notes (2014 Notes) being repaid at maturity in September 2014. Current liabilities, discontinued operations at December 31, 2013 related to the Spinoff and primarily included accounts payable and other accruals.

Non-Current Liabilities:
  
December 31,
  
  
  
2014
2013
$ Change
% Change
Long-term debt
$
522.1

$
176.4

$
345.7

196.0
 %
Accrued pension cost
165.9

159.0

6.9

4.3
 %
Accrued postretirement benefits cost
141.8

138.3

3.5

2.5
 %
Deferred income taxes
4.1

82.9

(78.8
)
(95.1
)%
Other non-current liabilities
44.6

55.9

(11.3
)
(20.2
)%
Non-current liabilities, discontinued operations

236.7

(236.7
)
(100.0
)%
Total non-current liabilities
$
878.5

$
849.2

$
29.3

3.5
 %

The increase in long-term debt during 2014 was primarily due to the issuance of $350 million aggregate principal amount of fixed-rate 3.875% senior unsecured notes that mature on September 1, 2024 (2024 Notes). The increase in accrued pension cost was primarily due to a decrease in the discount rate used to measure the projected benefit obligation, as well as the adoption of the new RP-2014 mortality tables. The increase in accrued postretirement benefits cost was primarily due to a decrease in the discount rate used to measure the accumulated benefit obligation. The decrease in deferred income taxes related primarily to the reduction of pre-paid pension assets, impairment of intangible assets and depreciation of fixed assets. Non-current liabilities, discontinued operations at December 31, 2013 related to the Spinoff and primarily included long-term debt, accrued pension cost and accrued postretirement benefits cost.
  

32



Shareholders’ Equity:
  
December 31,
  
  
  
2014
2013
$ Change
% Change
Common stock
$
952.5

$
949.5

$
3.0

0.3
 %
Earnings invested in the business
1,615.4

2,586.4

(971.0
)
(37.5
)%
Accumulated other comprehensive loss
(482.5
)
(626.1
)
143.6

(22.9
)%
Treasury shares
(509.2
)
(273.2
)
(236.0
)
(86.4
)%
Noncontrolling interest
12.9

12.0

0.9

7.5
 %
Total equity
$
1,589.1

$
2,648.6

$
(1,059.5
)
(40.0
)%

Earnings invested in the business decreased in 2014 primarily due to the Spinoff. The decrease in accumulated other comprehensive loss was primarily due to a $228.4 million after-tax adjustment related to the Spinoff, partially offset by a pension and postretirement liability adjustment of $43.1 million and a foreign currency translation adjustment of $41.3 million. The pension and postretirement liability adjustment was primarily due to a decrease in the discount rate used to measure the pension and postretirement plan obligations, as well as the adoption of the new RP-2014 mortality tables, partially offset by higher than expected returns on plan assets, amortization of net actuarial losses and pension settlement charges. The foreign currency translation adjustment was due to the strengthening of the U.S. dollar against most other currencies. The increase in treasury shares was primarily due to the Company's purchase during 2014 of 5.2 million of its common shares for an aggregate of $270.9 million, partially offset by shares issued pursuant to stock compensation plans.


33


CASH FLOWS
 
2014
2013
$ Change
Net cash provided by operating activities - continuing operations
$
281.5

$
292.8

$
(11.3
)
Net cash provided by operating activities - discontinued operations
25.5

137.2

(111.7
)
     Net cash provided by operating activities
307.0

430.0

(123.0
)
Net cash used by investing activities - continuing operations
(117.7
)
(184.1
)
66.4

Net cash used by investing activities - discontinued operations
(77.0
)
(191.9
)
114.9

     Net cash used by investing activities
(194.7
)
(376.0
)
181.3

Net cash used by financing activities - continuing operations
(302.2
)
(249.3
)
(52.9
)
Net cash provided by financing activities - discontinued operations
100.0


100.0

     Net cash used by financing activities
(202.2
)
(249.3
)
47.1

Effect of exchange rate changes on cash
(15.9
)
(6.5
)
(9.4
)
(Decrease) in cash and cash equivalents
$
(105.8
)
$
(201.8
)
$
96.0


Operating activities provided net cash of $307.0 million in 2014, compared to $430.0 million in 2013. The decrease in cash from operating activities was primarily due to lower cash provided by discontinued operations and higher cash used for income taxes and working capital items, partially offset by lower pension contributions and other postretirement benefit payments and an increase in income from continuing operations adjusted for impairment charges. Net cash provided by discontinued operations decreased to $25.5 million in 2014 from $137.2 million in 2013 primarily as a result of separation costs incurred to effect the Spinoff. Income taxes represented a use of cash of $15.3 million in 2014, after representing a source of cash of $67.5 million in 2013, as the Company incurred lower tax expense and paid higher taxes in 2014 compared to 2013. Net income from continuing operations decreased $30.7 million in 2014 compared to 2013, largely due to the impact from $98.9 million of impairment charges that were incurred in 2014. Pension and other postretirement benefit contributions and payments were $49.9 million in 2014, compared to $93.4 million in 2013.

The following chart displays the impact of working capital items on cash during 2014 and 2013:
 
 
2014
2013
Cash Provided (Used):
 
 
Accounts receivable
$
(48.3
)
$
(4.6
)
Inventories
(26.8
)
34.6

Trade accounts payable
8.0

0.9

Other accrued expenses
2.2

(39.6
)

Investing activities used cash of $194.7 million in 2014 compared to $376.0 million in 2013. The decrease was primarily due to a $114.9 million decrease in investing activities from discontinued operations, a $42.5 million decrease in cash used for acquisitions, a $6.8 million decrease in cash used for capital expenditures, as well as a $18.9 million increase in cash from the disposal of property, plant and equipment primarily due to the sale of real estate in Sao Paulo and South Africa.

Net cash used by financing activities was $202.2 million and $249.3 million in 2014 and 2013, respectively. The decreased cash used by financing activities was primarily due to net cash provided by discontinued operations and a decrease in net borrowings, partially offset by increased purchases of common shares in 2014 and cash transferred to TimkenSteel. The Company purchased 5.2 million of its common shares for an aggregate of $270.9 million in 2014 after purchasing 3.4 million of its common shares for an aggregate of $189.2 million in 2013. In addition, the Company transferred cash of $46.5 million to TimkenSteel in connection with the Spinoff. Net cash from discontinued operations provided $100 million in the first six months of 2014 as TimkenSteel borrowed $100 million under its line of credit prior to the Spinoff. Net borrowings provided cash of $85.7 million in 2014 after using cash of $3.2 million in 2013.


34


LIQUIDITY AND CAPITAL RESOURCES

Total debt was $530.1 million and $445.7 million at December 31, 2014 and 2013, respectively. Debt exceeded cash and cash equivalents by $236.0 million and $46.0 million at December 31, 2014 and 2013, respectively. The ratio of net debt to capital was 12.9% and 1.7% at December 31, 2014 and 2013, respectively.

Reconciliation of total debt to net debt and the ratio of net debt to capital:

Net Debt:
  
December 31,
  
2014
2013
Short-term debt
$
7.4

$
18.6

Current portion of long-term debt
0.6

250.7

Long-term debt
522.1

176.4

Total debt
$
530.1

$
445.7

Less: Cash and cash equivalents
278.8

384.6

 Restricted cash
15.3

15.1

Net debt
$
236.0

$
46.0


Ratio of Net Debt to Capital:
  
December 31,
  
2014
2013
Net debt
$
236.0

$
46.0

Total equity
1,589.1

2,648.6

Capital (net debt + total equity)
$
1,825.1

$
2,694.6

Ratio of net debt to capital
12.9
%
1.7
%

The Company presents net debt because it believes net debt is more representative of the Company’s financial position than total debt due to the amount of cash and cash equivalents.

At December 31, 2014, approximately $130.9 million, or 46.9%, of the Company's cash and cash equivalents resided in jurisdictions outside the United States. Repatriation of these funds to the United States could be subject to domestic and foreign taxes and some portion may be subject to governmental restrictions. Part of the Company's strategy is to grow in attractive market sectors, many of which are outside the United States. This strategy may include making investments in facilities and equipment and potential new acquisitions. The Company plans to fund these investments, as well as meet working capital requirements, with cash and cash equivalents and unused lines of credit within the geographic location of these investments when possible.

On April 30, 2014, the Company amended its three-year Asset Securitization Agreement, reducing its aggregate borrowing availability from $200 million to $100 million. The Asset Securitization Agreement matures on November 30, 2015, is subject to certain borrowing base limitations and is secured by certain domestic trade receivables of the Company. At December 31, 2014, the Company had no outstanding borrowings under the Asset Securitization Agreement; however, certain borrowing base limitations reduced the availability under the Asset Securitization Agreement to $72.7 million.


35


The Company has a $500 million Senior Credit Facility that matures on May 11, 2016. At December 31, 2014, the Company had no outstanding borrowings under the Senior Credit Facility but had letters of credit outstanding totaling $8.6 million, which reduced the availability under the Senior Credit Facility to $491.4 million. Under the Senior Credit Facility, the Company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At December 31, 2014, the Company was in full compliance with the covenants under the Senior Credit Facility. The maximum consolidated leverage ratio permitted under the Senior Credit Facility is 3.25 to 1.0. As of December 31, 2014, the Company’s consolidated leverage ratio was 1.03 to 1.0. The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility is 4.0 to 1.0. As of December 31, 2014, the Company’s consolidated interest coverage ratio was 16.32 to 1.0.

The interest rate under the Senior Credit Facility is based on the Company’s consolidated leverage ratio. In addition, the Company pays a facility fee based on the consolidated leverage ratio multiplied by the aggregate commitments of all of the lenders under the Senior Credit Facility.

Other sources of liquidity include short-term and long-term lines of credit for certain of the Company’s foreign subsidiaries, which provide for borrowings up to $234.0 million in the aggregate. The majority of these lines are uncommitted. At December 31, 2014, the Company had borrowings outstanding of $7.4 million and guarantees of $5.8 million, which reduced the availability under these facilities to $220.8 million.

The Company expects that any cash requirements in excess of cash on hand will be met by the committed funds available under its Asset Securitization Agreement and the Senior Credit Facility. Management believes it has sufficient liquidity to meet its obligations through at least the term of the Senior Credit Facility.

The Company expects to remain in compliance with its debt covenants. However, the Company may need to limit its borrowings under the Senior Credit Facility or other facilities in order to remain in compliance. As of December 31, 2014, the Company could have borrowed the full amounts available under the Senior Credit Facility and Asset Securitization Agreement, and would have still been in compliance with its debt covenants.

In August 2014, the Company issued $350 million of fixed-rate unsecured notes that mature in September 2024. The Company used a portion of the net proceeds from this issuance to repay the $250 million of fixed-rated unsecured notes that matured on September 15, 2014.

The Company expects to generate cash from continuing operations of approximately $345 million in 2015, an increase of approximately $65 million, or 23%, compared to 2014, as the Company anticipates higher income from continuing operations, excluding non-cash impairment and pension settlement charges. Pension contributions are expected to be approximately $15 million in 2015, compared to $21.1 million in 2014. The Company expects capital expenditures of approximately 4% of sales in 2015, compared to 4.2% of sales in 2014.



36


CONTRACTUAL OBLIGATIONS

The Company’s contractual debt obligations and contractual commitments outstanding as of December 31, 2014 were as follows:

Payments due by Period:
Contractual Obligations
Total
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
Interest payments
$
272.4

$
25.8

$
49.5

$
48.4

$
148.7

Long-term debt, including current portion
522.7

0.6

20.7


501.4

Short-term debt
7.4

7.4




Operating leases
96.3

28.6

37.9

19.5

10.3

Purchase commitments
44.8

16.0

7.3

21.5


Retirement benefits
1,736.9

206.9

353.0

362.7

814.3

Total
$
2,680.5

$
285.3

$
468.4

$
452.1

$
1,474.7


The interest payments beyond five years primarily relate to medium-term notes that mature over the next 16 years.
Purchase commitments are defined as an agreement to purchase goods or services that are enforceable and legally binding on the Company. Included in purchase commitments above are certain obligations related to take or pay contracts, capital commitments, service agreements and utilities. Many of these commitments relate to take or pay contracts, in which the Company guarantees payment to ensure availability of products or services. These purchase commitments do not represent the entire anticipated purchases in the future, but represent only those items for which the Company is contractually obligated. The majority of the products and services purchased by the Company are purchased as needed, with no commitment.

Retirement benefits represent pension and health care payments, including lump sum distributions, expected to be paid to retirees or their beneficiaries over the next ten years. These payments are largely covered by pension and postretirement benefit plan assets. The table above does not reflect the group annuity contract purchased on January 22, 2015, which transferred approximately $600 million of pension obligations to Prudential. Refer to Note 21 - Subsequent Events in the Notes to the Consolidated Financial Statements for additional information.

During 2014, the Company made cash contributions of approximately $21.1 million to its global defined benefit pension plans. The Company currently expects to make contributions to its global defined benefit pension plans totaling approximately $15 million in 2015. Returns for the Company’s global defined benefit pension plan assets in 2014 were 11.15%, above the expected rate of return of 7.25% due to broad increases in global equity markets. The higher returns positively impacted the funded status of the plans at the end of 2014 and are expected to result in lower pension expense in future years. Refer to Note 13 - Retirement Benefit Plans and Note 14 - Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for additional information.

The Company's 2012 common share purchase plan authorized the Company to buy, in the open market or in privately negotiated transactions, up to 10 million common shares, which are to be held as treasury shares and used for specified purposes. On June 13, 2014, the Company's Board of Directors authorized an additional 10 million common shares for repurchase under this plan. The authorization expires on December 31, 2015. During 2014, the Company purchased 5.2 million of its common shares for approximately $270.9 million in the aggregate under this plan. As of December 31, 2014, 8.9 million common shares remain authorized for purchase under this plan.

As disclosed in Note 10 – Contingencies and Note 16 – Income Taxes in the Notes to the Consolidated Financial Statements, the Company has exposure for certain legal and tax matters.
   
As of December 31, 2014, the Company had approximately $57.5 million of total gross unrecognized tax benefits. The Company anticipates a decrease in its unrecognized tax positions of $40 million to $45 million during the next 12 months. The anticipated decrease is primarily due to settlements with tax authorities. Future tax positions are not known at this time and therefore not included in the above summary of the Company’s fixed contractual obligations. Refer to Note 16 – Income Taxes in the Notes to the Consolidated Financial Statements for additional information.

The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.

37


RECENTLY ADOPTED ACCOUNTING PRONOUNCMENTS

Information required for this Item is incorporated by reference to Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The following paragraphs include a discussion of some critical areas that require a higher degree of judgment, estimates and complexity.

Revenue recognition:
The Company recognizes revenue when title passes to the customer. This occurs at the shipping point except for goods sold by certain foreign entities and certain exported goods, where title passes when the goods reach their destination. Selling prices are fixed based on purchase orders or contractual arrangements. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold in the Consolidated Statements of Income.

The Company recognizes a portion of its revenues on the percentage of completion method. In 2014 and 2013, the Company recognized approximately $50 million and $55 million, respectively, in net sales under the percentage-of-completion method.

Inventory:
Inventories are valued at the lower of cost or market, with approximately 48% valued by the last-in, first-out (LIFO) method and the remaining 52% 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 inventories are valued by the FIFO method. An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation. The Company recognized an increase in its LIFO reserve of $0.4 million during 2014 compared to a decrease in its LIFO reserve of $3.8 million during 2013.

Goodwill:
The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually. The Company performs its annual impairment test as of October first, after the annual forecasting process is completed. Furthermore, goodwill is reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Each interim period, management of the Company assesses whether or not an indicator of impairment is present that would necessitate that a goodwill impairment analysis be performed in an interim period other than during the fourth quarter.

The goodwill impairment analysis is a two-step process. Step one compares the carrying amount of the reporting unit to its estimated fair value. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, step two is performed, where the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value of goodwill exceeds the implied fair value of goodwill, impairment exists and must be recognized.

The Company reviews goodwill for impairment at the reporting unit level. The Mobile Industries segment has four reporting units and the Process Industries segment has two reporting units. The reporting units within the Mobile Industries segment are Mobile Industries, Aerospace Bearing, Aerospace Transmissions and Aerospace Aftermarket. The reporting units within the Process Industries segment are Process Industries and Industrial Services.

The Company prepares its goodwill impairment analysis by comparing the estimated fair value of each reporting unit, using an income approach (a discounted cash flow model), as well as a market approach, with its carrying value. The income approach and market approach are weighted in arriving at fair value based on the relative merits of the methods used and the quantity and quality of collected data to arrive at the indicated fair value.


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During the third quarter of 2014, the Company determined there was an indicator for impairment for two of its three Aerospace reporting units, specifically Aerospace Transmissions and Aerospace Aftermarket, within its former Aerospace segment (now included in the Mobile Industries segment) as a result of declining sales forecasts and financial performance within the reporting units. The Company utilized currently updated forecasts for the income approach as part of the goodwill impairment analysis. As a result of the lower earnings and cash flow forecasts, the Company determined that the goodwill associated with the Aerospace Transmissions and the Aerospace Aftermarket reporting units could not support the carrying value of their goodwill. As a result, the Company recorded a pretax impairment charge of $86.3 million during the third quarter of 2014, which was reported in impairment and restructuring charges in the Consolidated Statement of Income. Refer to Note 8 - Goodwill and Other Intangible Assets in the Notes to the Consolidated Financial Statements for additional information.

During the fourth quarter of 2014, the Company completed its annual goodwill impairment testing with no further impairment identified.

The income approach requires several assumptions including future sales growth, EBIT (earnings before interest and taxes) margins and capital expenditures. The Company’s reporting units each provide their forecast of results for the next three years. These forecasts are the basis for the information used in the discounted cash flow model. The discounted cash flow model also requires the use of a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the three years forecasted by the reporting units), as well as projections of future operating margins (for the period beyond the forecasted three years). During the fourth quarter of 2014, the Company used a discount rate for its reporting units of 10.5% to 13.0% and a terminal revenue growth rate of 3%.

The market approach requires several assumptions including sales and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples for comparable companies that operate in the same markets as the Company’s reporting units. During the fourth quarter of 2014, the Company used sales multiples of 0.75 to 1.80 for its reporting units. During the fourth quarter of 2014, the Company used EBITDA multiples of 6.0 to 9.0 for its reporting units.

As of December 31, 2014, the Company had $259.5 million of goodwill on its Consolidated Balance Sheet, of which $89.6 million was attributable to the Mobile Industries segment and $169.9 million was attributable to the Process Industries segment. See Note 8 - Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements for the carrying amount of goodwill by segment.

The fair value of the Aerospace Bearing and Industrial Services reporting units was $225.3 million and $356.7 million, respectively, compared to their carrying value of $205.9 million and $294.8 million, respectively. The fair value of the Mobile Industries and Process Industries reporting units exceeded its carrying value by a significant amount. As a result, the Company did not recognize any goodwill impairment charges during the fourth quarter of 2014.

A 30 basis point increase in the discount rate would have resulted in the Aerospace Bearing reporting units failing step one of the goodwill impairment analysis, which would have required the completion of step two of the goodwill impairment analysis to arrive at a potential goodwill impairment loss. A 300 basis point increase in the discount rate would have resulted in the Industrial Services reporting unit failing step one of the goodwill impairment analysis. The projected cash flows could have declined by 4.2% for the Aerospace Bearing reporting unit and the fair value would have still exceeded its carrying value. The projected cash flows could have declined by as much as 29.3% for the Industrial Services reporting unit and the fair value would have still exceeded its carrying value.

In 2014, the income approach for the Aerospace Bearing and Industrial Services reporting units was weighted by 70% and the market approach was weighted by 30% in arriving at fair value. The 70/30 weighting was selected to give consideration for the fact that the metrics for the last twelve months for the Aerospace Bearing and Industrial Services reporting units were not reflective of expected performance and the discounted-cash flow model provided a more normalized view of future operating conditions for the Aerospace Bearing and Industrial Services reporting units. Had the Company used a 50/50 weighting, the Company would still have passed step one of the goodwill impairment test for the Aerospace Bearing and Industrial Services reporting units for the year ended December 31, 2014.

Restructuring costs:
The Company’s policy is to recognize restructuring costs in accordance with Accounting Standards Codification (ASC) Topic 420, “Exit or Disposal Cost Obligations,” and ASC Topic 712, “Compensation and Non-retirement Post-Employment Benefits.” Detailed contemporaneous documentation is maintained and updated to ensure that accruals are properly supported. If management determines that there is a change in estimate, the accruals are adjusted to reflect this change.

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Income taxes:
The Company, which is subject to income taxes in the United States and numerous non-U.S. jurisdictions, accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The Company records valuation allowances against deferred tax assets by tax jurisdiction when it is more likely than not that such assets will not be realized. In determining the need for a valuation allowance, the historical and projected financial performance of the entity recording the net deferred tax asset is considered along with any other pertinent information. Deferred tax assets relate primarily to pension and postretirement benefit obligations in the United States, which the Company believes are more likely than not to result in future tax benefits.

In the ordinary course of the Company’s business, there are many transactions and calculations where the ultimate income tax determination is uncertain. The Company is regularly under audit by tax authorities. Accruals for uncertain tax positions are provided for in accordance with the requirements of ASC Topic 740. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, valuation allowances against deferred tax assets, and accruals for uncertain tax positions.

Benefit Plans:
The Company sponsors a number of defined benefit pension plans that cover eligible associates. The Company also sponsors several funded and unfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and their dependents. These plans are accounted for in accordance with ASC Topic 715-30, "Defined Benefit Plans – Pension," and ASC Topic 715-60, "Defined Benefit Plans – Other Postretirement."
  
The measurement of liabilities related to these plans is based on management's assumptions related to future events, including discount rates, rates of return on pension plan assets, rates of compensation increases and health care cost trend rates. Management regularly evaluates these assumptions and adjusts them as required and appropriate. Other plan assumptions are also reviewed on a regular basis to reflect recent experience and the Company's future expectations. Actual experience that differs from these assumptions may affect future liquidity, expense and the overall financial position of the Company. While the Company believes that current assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect the Company's pension and other postretirement employee benefit obligations and its future expense and cash flow.

The discount rate is used to calculate the present value of expected future pension and postretirement cash flows as of the measurement date. The Company establishes the discount rate by constructing a notional portfolio of high-quality corporate bonds and matching the coupon payments and bond maturities to projected benefit payments under the Company's pension and postretirement welfare plans. The bonds included in the portfolio are generally non-callable. A lower discount rate will result in a higher benefit obligation; conversely, a higher discount rate will result in a lower benefit obligation. The discount rate is also used to calculate the annual interest cost, which is a component of net periodic benefit cost.

The expected rate of return on plan assets is determined by analyzing the historical long-term performance of the Company's pension plan assets, as well as the mix of plan assets between equities, fixed income securities and other investments, the expected long-term rate of return expected for those asset classes and long-term inflation rates. Short-term asset performance can differ significantly from the expected rate of return, especially in volatile markets. A lower-than-expected rate of return on pension plan assets will increase pension expense and future contributions.


40


Defined Benefit Pension Plans:
The Company recognized net periodic benefit cost of $54.6 million in 2014 for defined benefit pension plans, excluding the steel business spunoff on June 30, 2014, compared to $45.9 million in 2013. The increase in net periodic cost was primarily due to higher pension settlement charges and lower expected rate of return, partially offset by lower amortization of net actuarial losses. The higher pension settlement charges of $33.5 million for 2014, compared to $7.2 million for 2013, was the result of lump sum distributions in 2014 for retirees and a special lump sum offering to certain deferred vested participants. Pension settlement charges in 2013 related to the closure of the Company's manufacturing facility in St. Thomas. The lower expected return from plan assets for 2014, compared to 2013, was due to the impact of a 75 basis point reduction in the expected rate of return on pension plan assets. The lower amortization of net actuarial losses was primarily due to a 100 basis point reduction in the discount rate used to measure the defined benefit pension obligation from 4.0% at December 31, 2012 to 5.02% at December 31, 2013. The discount rate used to remeasure the defined benefit pension obligation as a result of the spinoff of TimkenSteel at April 30, 2014 was 4.68% also resulted in lower amortization compared to 2013. Net actuarial losses are amortized over the average remaining service period of participants in the defined benefit pension plans.

In 2015, the Company expects net periodic benefit cost to increase to approximately $273 million for defined benefit pension plans. The expected increase is primarily due to higher pension settlement charges and a lower expected rate of return on plan assets, partially offset by lower amortization of net actuarial losses and lower interest cost. Pension settlement charges are expected to increase approximately $210 million. The Company entered into an agreement on January 22, 2015 pursuant to which the Plan purchased a group annuity contract from Prudential to transfer approximately $600 million of its pension obligations related to one of its U.S. defined benefit pension plans. This is expected to result in a pension settlement charge of approximately $220 million. The lower expected return from plan assets for 2015 is primarily due to a 125 basis point reduction in the expected return on pension assets for 2014. The decrease in the expected rate of return is due to the Company's move to a higher level of debt securities, offset by a lower level of equity securities to maintain its overfunded status on U.S. pension plans.

Interest cost is expected to decrease in 2015, compared to 2014, primarily due to a decrease in the Company's discount rate used for expense purposes from 5.02% for the first four months of 2014 and 4.68% for the last eight months of 2014 compared to 4.20% for 2015. Amortization of net actuarial losses is expected to decrease as a result of the impact of pension settlement charges that were recorded in 2014 and will be recorded in 2015, as well as favorable asset returns over the last several years, partially offset by a reduction in the discount rate to measure the pension obligation from 4.68% at April 30, 2014 (the measurement date for the spinoff of the defined benefit pension plans related to TimkenSteel) to 4.20% at December 31, 2014 and the adoption of the new RP-2014 mortality tables. The weighted-average amortization period for the Company's global defined pension plans is approximately 11 years.

The Company expects to contribute approximately $15 million to its defined benefit pension plans in 2015 compared to $21.1 million in 2014.


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The following table below presents a reconciliation of the cumulative net actuarial losses at December 31, 2009 and the cumulative net actuarial losses at December 31, 2014:
Net actuarial losses at December 31, 2009
 
 
$
1,072.3

 
 
 
 
Plus/minus actuarial (gains) and losses recognized:
 
 
 
Net actuarial gains recognized in 2010
 
$
(51.1
)
 
Net actuarial losses recognized in 2011
 
404.6

 
Net actuarial losses recognized in 2012
 
263.1

 
Net actuarial gains recognized in 2013
 
(376.3
)
 
Net actuarial losses recognized in 2014
 
161.2

 
 
 
 
401.5

Minus amortization of net actuarial losses:
 
 
 
Amortization of net actuarial losses in 2010
 
$
(51.9
)
 
Amortization of net actuarial losses in 2011
 
(56.0
)
 
Amortization of net actuarial losses in 2012
 
(83.3
)
 
Amortization of net actuarial losses in 2013
 
(116.8
)
 
Amortization of net actuarial losses in 2014
 
(60.9
)
 
 
 
 
(368.9
)
Curtailment loss recognized in 2012
 
 
(9.5
)
Settlement loss recognized in 2013
 
 
(7.2
)
Settlement loss recognized in 2014
 
 
(33.5
)
Spinoff of TimkenSteel
 
 
(347.4
)
Foreign currency impact
 
 
(8.5
)
Net actuarial losses at December 31, 2014
 
 
$
698.8


During the period between December 31, 2009 and December 31, 2014, the Company recognized net actuarial losses totaling $401.5 million for defined benefit pension plans. These actuarial losses primarily occurred in 2011, 2012 and 2014, offset by gains in 2010 and 2013. In 2011, the net actuarial loss of $404.6 million was primarily due to a 75 basis point reduction in the Company's discount rate used to measure its defined benefit pension obligation. The change in the discount rate accounted for $234.1 million of the net actuarial loss. The remaining portion of the net actuarial loss for 2011 was due to lower than expected asset returns of $100.4 million and other changes in actuarial assumptions of $70.1 million.

In 2012, the net actuarial loss of $263.1 million was primarily due to a 100 basis point reduction in the Company's discount rate used to measure its defined benefit pension obligation. The change in the discount rate accounted for approximately $370 million of the net actuarial loss. Net actuarial losses as a result of the discount rate were partially offset by higher than expected asset returns of approximately $140 million (a net asset gain of $361.7 million on actual assets in 2012, or positive 13.8% on pension plan assets of $3.1 billion, compared to an expected return of $221.1 million, or 8.25%, in 2012). The remaining portion of the net actuarial loss for 2012 was due to other changes in actuarial assumptions.

In 2014, the net actuarial loss of $161.2 million was primarily due to a 82 basis point reduction in the Company's discount rate used to measure its defined benefit pension obligation, as well as the impact of adopting the new RP-2014 mortality tables for pension obligations. The change in the discount rate accounted for approximately $226 million of the net actuarial loss, and the change due to the adoption of the new RP-2014 mortality tables accounted for approximately $59 million. Net actuarial losses as a result of the discount rate and the adoption of the new mortality tables were partially offset by higher than expected asset returns of approximately $117 million (a net asset gain of $292.7 million on actual assets in 2014, or positive 11.2% on pension plan assets of $2.1 billion, compared to an expected return of $175.7 million, or 7.25%, in 2014). The remaining portion of the net actuarial loss for 2014 was due to other changes in actuarial assumptions.








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In 2013, the net actuarial gain of $376.3 million was primarily due to a 102 basis point increase in the Company's discount rate used to measure its defined benefit pension obligation. The change in the discount rate accounted for approximately $320 million of the net actuarial gain. In addition to the change in the discount rate, higher than expected asset returns of approximately $100 million (a net asset gain of $334.0 million on actual assets in 2013, or positive 10.8% on pension plan assets of $3.3 billion, compared to an expected return of $232.0 million, or 8.0%, in 2013). The remaining portion of the net actuarial gain for 2013 was due to other changes in actuarial assumptions. The impact of these net actuarial losses for defined benefit pension plans, as well as net actuarial losses related to postretirement benefit plans and net prior service costs for defined benefit pension and postretirement plans, has increased total equity by $102.4 million after tax for the period between December 31, 2009 and December 31, 2014.

During this same time period, the Company contributed a total of $988.7 million to its global defined benefit pension plans, of which approximately $910.7 million was discretionary. As discussed above, the Company expects to contribute approximately $15 million to its global defined benefit pension plans in 2014. Despite the net actuarial losses recorded for the period between December 31, 2009 and December 31, 2014, only approximately $21 million of contributions was required in 2014. The contributions over the last five years, as well as favorable returns on pension assets, has contributed to the Company's U.S. defined benefit pension plans being overfunded and a lower requirement for the Company to contribute to its defined benefit pension plans. However, the effect of actuarial losses on future earnings and operating cash flow, as well as the impact from the lower interest rate to measure the Company's pension obligations is expected to be favorable in 2015, compared to 2014.

For expense purposes in 2014, the Company applied a discount rate of 5.02% for the first four months of 2014, and a discount rate of 4.68% for the last eight months of 2014 to its U.S. defined benefit pension plans as a result of a remeasurement of the U.S. defined benefit pension plans due to the spinoff of the plans related to TimkenSteel. For expense purposes for 2015, the Company has applied a discount rate of 4.20% for the defined benefit pension plans. For expense purposes in 2014, the Company applied an expected rate of return of 7.25% for the Company’s U.S. pension plan assets. For expense purposes in 2015, the Company will apply an expected rate of return on plan assets of 6.00%. The reduction in expected rate of return on plan assets is due to the Company's move to a higher level of debt securities offset by a lower level of equity securities to maintain its overfunded status on U.S. pension plans.

The following table presents the sensitivity of the Company's U.S. projected pension benefit obligation (PBO), total equity and 2015 expense to the indicated increase/decrease in key assumptions:
 
 
 
 
+ / - Change at December 31, 2015
 
 
Change
 
PBO
 
Equity
 
2014 Expense
Assumption:
 
 
 
 
 
 
 
 
Discount rate
 
+/- 0.25%
 
$
48.4

 
$
48.4

 
$
3.0

Actual return on plan assets
 
+/- 0.25%
 
 N/A

 
4.4

 
0.2

Expected return on assets
 
+/- 0.25%
 
 N/A

 
 N/A

 
4.1


In the table above, a 25 basis point decrease in the discount rate will increase the PBO by $48.4 million and decrease total equity by $48.4 million. The change in equity in the table above is reflected on a pre-tax basis. Defined benefit pension plans in the United States represent 80% of the Company's benefit obligation and 84% of the fair value of the Company's plan assets at December 31, 2014. The Company uses a combined U.S. federal and state statutory rate of approximately 37% to calculate the after tax impact on equity for U.S. plans.  The Company uses the local statutory tax rate in effect to calculate the after tax impact on equity for all remaining non-U.S. plans.  For some non-U.S. plans, a valuation allowance has been recorded against the tax benefits recorded in equity and, therefore, no tax benefits are recognized on an after tax basis.


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Postretirement Benefit Plans: