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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
timkenlogoa38.jpg
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______to_______ 
Commission file number: 1-1169

THE TIMKEN COMPANY
(Exact name of registrant as specified in its charter)
Ohio
 
34-0577130
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
4500 Mount Pleasant Street NW
 
 
North Canton
Ohio
 
44720-5450
(Address of principal executive offices)
 
(Zip Code)
234.262.3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Shares, without par value
 
TKR
 
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      No  
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      No  
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   
 Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes      No  
As of June 28, 2019, the aggregate market value of the registrant’s common shares held by non-affiliates of the registrant was $3,408,380,507 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, 2020

Common Shares, without par value
 
75,565,361 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 8, 2020 (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.



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 designs and manages a growing portfolio of engineered bearings and power transmission products and services. The Company’s growing portfolio features many strong brands, including Timken®, Philadelphia Gear®, Drives®, Cone Drive®, Rollon®, Lovejoy®, Diamond®, BEKA® and Groeneveld®.

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 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 125 manufacturing facilities/service centers, 21 technology and engineering centers, and 68 distribution centers and warehouses, supported by a team comprised of more than 18,000 employees. Timken operates in 42 countries around the globe.


Major Customers:
The Company sells products and services to a diverse customer base globally, including customers in the following market sectors: industrial distribution, automotive, aerospace, rail, renewable energy, agriculture/turf, on-highway aftermarket, mining, construction, heavy truck, metals, fossil fuels and marine. 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 engineered bearings and 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 within these product lines is generally based on application engineering, product performance, product quality or customer service.


Engineered Bearings:
The Timken® bearing portfolio features a broad range of engineered bearing products, including tapered, spherical and cylindrical roller bearings; thrust and specialty 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.

A bearing is a mechanical device that reduces friction between moving parts. The purpose of a bearing is to carry a load while allowing a machine shaft to rotate freely. The basic elements of the bearing generally include two rings, called races; a set of rolling elements that rotate around the bearing raceway; and a cage to separate and guide the rolling elements. Bearings come in a number of designs, featuring tapered, spherical, cylindrical or ball rolling elements. The various bearing designs accommodate radial and/or thrust loads differently, making certain bearing types better suited for specific applications.

Selection and development of bearings for customer applications and demand for high reliability require sophisticated engineering and analytical techniques. 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 premium passenger cars and trucks, heavy trucks, helicopters, airplanes and trains. Ranging in size from precision bearings the size of a pencil eraser to more than roughly three meters in diameter, Timken components are also used in a wide variety of industrial applications, including: paper and steel mills, mining, oil and gas extraction and production, agriculture, construction, machine tools, gear drives, health and positioning control, wind turbines and food and beverage processing.

1





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 gear drives, rolling mills and other industrial and infrastructure development applications. These products are sold worldwide to original equipment manufacturers ("OEMs") and industrial distributors serving major end-market sectors, including construction and mining, natural resources, wind energy, 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, the automotive aftermarket and general industries. Radial ball bearings are designed to tolerate relatively high-speed operation under a range of load conditions. These bearing types 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 housed bearing 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.


Power Transmission Products:
Linear Motion Products. The Company designs and manufactures a global portfolio of Rollon® engineered linear motion products, including linear guides, telescopic rails and linear actuators. These engineered products are highly customized to control movements with different variability and complexity based on the application. Rollon products serve a wide range of industries, including passenger rail, aerospace, packaging and logistics, medical and automation.


Gear Drives. The Company’s Philadelphia Gear® line of low- and high-speed gear drive designs are used in large-scale industrial applications such as crushing and pulverizing equipment, conveyors and pumps, power generation and military marine. These gear drive designs are custom made to meet user specifications, offering a wide-array of size, footprint and gear arrangements. Timken also offers Cone Drive® high-torque worm gears, harmonic solutions and precision slew drives. Cone Drive products can be found in a variety of industrial end-markets, including solar, oil and gas, aerial platforms, automation and food and beverage.


Lubrication Systems. The Company's Groeneveld® and BEKA® lubrication systems include a wide variety of automatic lubrication delivery devices, oil management systems and safety support systems designed to enhance vehicle and machine uptime in on- and off-highway applications. These systems complement the Company's Interlube® line of lubrication systems, which are used by the commercial vehicle, mining, and heavy and general industries. Timken also offers 27 formulations of grease, leveraging its knowledge of tribology and anti-friction bearings to enable smooth equipment operation.


Belts. The Company makes and markets a full line of Timken® and Carlisle® belts used in industrial, commercial and consumer applications. The portfolio features more than 20,000 parts designed for demanding applications, which are sold to original equipment and aftermarket customers. These belts are engineered for maximum performance and durability, with products available in wrap molded, raw edge, v-ribbed and synchronous belt designs. Common applications include agriculture, construction, industrial machinery, outdoor power equipment and powersports.


2



Chain. Timken manufactures precision Diamond® and 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. They are also used in the food and beverage and packaged goods sectors, which often require high-end, specialty products, including stainless-steel and corrosion-resistant roller chain.


Couplings. The Company offers a full range of industrial couplings within its power transmission products portfolio. The Lovejoy brand is widely known for its flexible coupling design and as the creator of the jaw-style coupling. Lovejoy® couplings are available in curved jaw, jaw in-shear, s-flex, gear-torsional and disc style configurations. These components are used in a wide range of industries such as steel, pulp and paper, power generation, food processing, mining and construction. The Company also offers an extensive line of torsional couplings offered under the Torsion Control Products brand.


Aerospace Drive Systems. The Company's portfolio of parts, systems and services for the aerospace market sector includes products used in helicopters for military and commercial use.  Timken designs, manufactures and tests a wide variety of power transmission and drive train components, including transmissions, gears and rotor-head assemblies and housings. In addition to original equipment, Timken provides aftermarket overhaul and repair services for transmissions, gearboxes and other components.


Industrial Clutches and Brakes. Timken offers a selection of engineered clutches, brakes, hydraulic power take-off units and other torque management devices marketed under the PT Tech brand. These products are custom engineered for OEMs and used in mining, aggregate, wood recycling and metals industries.


Other Products. The Company also offers a full line of seals, augers and other 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. 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 specifications. In addition, the Company’s Wazee, Smith Services, Schulz, Standard Machine and H&N service centers 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 often can 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 5% of the Company’s net sales for the year ended December 31, 2019.



3



Sales and Distribution:
Timken products are sold principally by its 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 our customers need us, with sales engineers primarily working in close proximity to customers rather than at production sites. The Company's sales force continuously 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, Schaeffler Group, ABB Group and Gates Industrial Corp. 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.


Competition:
The anti-friction bearing and power transmission businesses are highly competitive in every country where Timken sells products. Timken primarily competes 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, Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd., and with manufacturers of power transmission products, including Rexnord Corporation, Altra Industrial Motion Corporation and Regal Beloit Corporation.


Joint Ventures:
Investments in affiliated companies accounted for under the equity method were $2.5 million and $2.3 million, respectively, at December 31, 2019 and 2018. The investment balance at December 31, 2019 was reported in other non-current assets on the Consolidated Balance Sheets.


Backlog:
The following table provides the backlog of orders for the Company's domestic and overseas operations at December 31, 2019 and 2018:
 
December 31,
(Dollars in millions)
2019
2018
Segment:
 
 
Mobile Industries
$
952.9

$
955.0

Process Industries
782.5

699.3

Total Company
$
1,735.4

$
1,654.3

Approximately 91% of the Company’s backlog at December 31, 2019 is scheduled for delivery in the succeeding 12 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.



4



Raw Materials:
The principal raw materials used by the Company to make engineered bearings are special bar quality ("SBQ") steel and steel components. SBQ steel and steel components are produced around the world by various suppliers. SBQ steel is purchased in bar, tube and wire forms, while steel components are commonly purchased as forgings, semi-finished or finished components. 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.
The availability of bearing-quality tubing is relatively limited, and the Company has taken steps 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 power transmission solutions and technical services. Timken's largest technical center is located at the Company's world headquarters in North Canton, Ohio. Other smaller sites in the United States ("U.S.") include Los Alamitos, California; Manchester, Connecticut; Downer's Grove and Fulton, Illinois; Rochester Hills and Traverse City, Michigan; Springfield, Missouri; Keene and Lebanon, New Hampshire; and King of Prussia, Pennsylvania. Within Europe, the Company has technology facilities in Plymouth, England; Colmar, France; Pegnitz and Werdohl, Germany; Valmadrera, Italy; Gorinchem, Netherlands; and Ploiesti, Romania. In Asia, Timken operates technology and engineering facilities in Bangalore, India and Shanghai, China.


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. All of the Company's plants are expected to have an effective environmental management system which follows the ISO 14001 principles and management performs internal audits against this standard. Where appropriate to meet or exceed customer requirements, we are certified under the formal ISO 14001 certification process. As of the end of 2019, 20 of the Company’s plants had obtained ISO 14001 certification, including the majority of the Company's bearing manufacturing plants.

The Company establishes appropriate levels of 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 requirements.
 
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 also have been asserted against numerous other entities.

Management believes any ultimate liability with respect to pending actions will not materially affect the Company’s annual results of operations, cash flows or consolidated financial position. The Company also is conducting environmental investigation and/or remediation activities at certain 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.

5



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, 2019, Timken had more than 18,000 employees worldwide. Approximately 8.6% of Timken’s U.S. employees are covered under collective bargaining agreements.


Available Information:
The Company uses its Investor Relations website at http://investors.timken.com, 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 website, 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.


6



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 described 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 bearings 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, Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd., and an increasing number of emerging market competitors. Due to competitiveness within the bearing industry, we may not be able to increase prices for our products to cover increases in our costs or to achieve desired profitability. 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, restructuring 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. Our 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. 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, reducing production, recording asset impairment charges and other measures, which may adversely affect our results of operations and profitability. We have taken approximately $52 million in impairment and restructuring charges in the aggregate 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.


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.

There has been significant 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 also may be negatively affected by changes in customer demand, 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.


7



Our results of operations may be materially affected by conditions in global financial markets or in any of the geographic regions in which we, our customers or our suppliers 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.

Global financial markets have experienced volatility in recent years, including volatility in securities prices and diminished liquidity and credit availability. Our access to the financial markets cannot be assured and is dependent on, among other things, market conditions and company performance. Accordingly, we may be forced to delay raising capital, issue shorter tenors than we prefer or pay unattractive interest rates, which could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility.

If a customer becomes insolvent or files for bankruptcy, our ability to recover accounts receivable from that customer would be affected adversely and any payment we received during the preference period prior to a bankruptcy filing potentially may be 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. If any of our suppliers are unable or unwilling to provide the products or services that we require or materially increase their costs, our ability to offer and deliver our products on a timely and profitable basis could be impaired. We cannot assure you that any or all of our relationships will not be terminated or that such relationships will continue as presently in effect. Furthermore, if any of our suppliers were to become subject to bankruptcy, receivership or similar proceedings, we may be unable to arrange for alternate or replacement relationships on favorable terms, which could harm our sales and operating results.


Changes in customer preferences and inventory reductions by customers or distributors could adversely affect the Company's business.

The Company has previously experienced distributor inventory corrections reflecting de-stocking of the supply chain associated with softer demand in certain markets. The Company's results in a period may be adversely impacted by similar customer inventory adjustments in the future, as well as changes in customer buying preferences.


Our level of debt and financial covenants or a failure to maintain our credit ratings could limit our ability to invest in our business.

Due to our current level of debt, we may have less cash flow available for our business operations, capital expenditures, and strategic transactions and our ability to service our debt obligations or to obtain future financing could be negatively impacted by general adverse economic and industry conditions and interest rate trends. In addition, a failure to maintain our credit ratings could adversely affect our cost of borrowing, liquidity and access to capital markets.


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 or surcharges; however, we may be unable to increase the price of our products due to pricing pressure, contract terms or other factors, 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.



8



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

Warranty, recall, quality or product liability claims could materially adversely affect our earnings and brand reputation. 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, as well as adverse brand reputational impacts.  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 and brand reputation.

 
Environmental health and safety laws and regulations impose substantial costs and limitations on our operations and 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 arising from environmental, health and safety laws, property damage or personal injury. Actual or alleged violations of environmental, health and safety laws or environmental permit requirements could result in restrictions or prohibitions on operations and substantial civil or criminal fines, as well as, under some environmental, health, and safety laws, the assessment of strict liability and/or joint and several liability. New laws and regulations, including those that 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, including the risk of security breaches.

The Company relies on information technology systems to manage and operate its business and to process, transmit and store sensitive and confidential data, including its intellectual property and other proprietary business information and that of its customers and suppliers. Despite security measures taken by the Company, the Company’s information technology systems (both on-premises and third-party managed) may be vulnerable to attacks by hackers or breached due to employee error, supplier error, malfeasance or other disruptions. Any such breach in security could expose the Company and its employees, customers and suppliers to risks of misuse of confidential information, manipulation and destruction of data, production downtimes, litigation and operational disruptions, which in turn could adversely affect the Company's reputation, competitive position, business or results of operations.


Data privacy and security concerns, as well as evolving government regulation, could adversely affect our results of operations and profitability.

We collect, store, access and otherwise process certain confidential or sensitive data, including proprietary business information, personal data or other information that is subject to privacy and security laws, regulations and/or customer-imposed controls. We operate in a global environment in which the data privacy regulatory and legal framework is evolving quickly. Moreover, the data privacy laws of the specific jurisdictions in which we operate may vary and potentially conflict. As such, we cannot predict the cost of compliance with future data privacy laws, regulations and standards, future interpretations of current laws, regulations and standards, or the potential effects on our business.

9


Government enforcement actions can be costly and interrupt the regular operation of our business, and a violation of data privacy laws or a security breach involving personal data can result in fines, reputational damage and civil lawsuits, any of which may adversely affect our results of operations and profitability.

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, a strengthening in the U.S. dollar or 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 or a weaker local currency 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.


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 international treaties or trade unions (e.g., the UK's probable withdrawal from the European Union, commonly referred to as "Brexit"), which may make our products or our customers' products more costly to export or import;
changes in tariff regulations, which may make our products more costly to export or import;
difficulties establishing and maintaining relationships with local 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 also may 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.



10



Changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences, could adversely impact our revenue and profit margins.
The U.S. government has indicated an intent to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements. It has also imposed tariffs on certain foreign goods, including steel and other raw materials as well as certain products made from such materials. Changes in U.S. trade policy have resulted in, and could further result in, U.S. trading partners adopting responsive trade policies that make it more difficult or costly for us to export our products to those countries. These measures have resulted in increased costs for goods imported into the U.S. If we are unable to increase the price of our products or otherwise mitigate these increased costs, it could adversely impact our revenue and profit margins.


Expenses and contributions related to our defined benefit 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, all of which could impact our funded status.

Our future expense and funding obligations for 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 with specific country economic performance risks set aside in trust 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 rate changes and other actuarial changes, our pension expense and required contributions would increase and, as a result, could materially adversely affect our business or require us to record charges that could be significant and would cause a reduction in our shareholders' equity. We may be required legally to make contributions to the pension plans in the future in excess of our current expectations, and those contributions could be material.


Future actions involving our defined benefit and other postretirement plans, such as annuity purchases, lump-sum payouts, and/or plan terminations could cause us to incur significant pension and postretirement settlement and curtailment charges, and require cash contributions.
 
We have purchased annuities and offered lump-sum payouts to defined benefit plan and other postretirement plan participants and retirees in the past. If we were to take similar actions in the future, we could incur significant pension settlement and curtailment charges related to the reduction in pension and postretirement obligations from annuity purchases, lump-sum payouts of benefits to plan participants, and/or plan terminations. Pursuing these types of actions could require us to make additional contributions to the defined benefit plans to maintain a legally required funded status.


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, whether caused by fire, flooding, pandemics, other natural disaster or otherwise, could have a material adverse effect on our business, financial condition and results of operations. In addition, some of our employees are represented by labor unions or works councils under collective bargaining agreements with varying durations and terms. Although we have experienced no material strikes or work stoppages recently, no assurances can be made that we will not experience these and other types of conflicts with labor unions, works councils, and other similar groups in the future.

A work stoppage at one of our suppliers could also materially and adversely affect our operations if an alternative source of supply were not readily available. In addition, if one or more of our customers were to experience a work stoppage, that customer likely would halt or limit purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations.



11



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 trade laws, and laws governing improper business practices. We are affected by both new laws and regulations, and changes to existing laws and regulations which may continue to evolve through interpretations by courts and regulators. Furthermore, the laws and regulations to which we are subject may differ from jurisdiction to jurisdiction, further increasing the cost of compliance, and the risk of noncompliance.

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. government officials for the purpose of obtaining or retaining business. Recently, there has been a substantial increase in the global enforcement of anti-corruption 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. Our policies mandate compliance with these laws, but 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.

Also, our sales to public-sector customers are subject to complex regulations. Noncompliance with government procurement regulations or other applicable laws or regulations could result in civil, criminal and administrative liability, termination of government contracts or other public-sector customer contracts, and suspension, debarment or ineligibility from doing business with governmental entities or other customers in the public sector.

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 and other key employees. The loss of the services of a significant number of members of our management or other key employees could have a material adverse effect on our business. Our future success also will depend on our ability to attract and retain highly skilled personnel, such as engineering, finance, marketing and senior management professionals, as well as skilled labor. Competition for these types of 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, joint ventures and other alliances, 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.



12



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, especially as it relates to market and technological changes driven by electrification, environmental requirements, the continued rising importance of e-commerce and increased digitalization. We may experience difficulties or delays in the research, development, production, or marketing of new products and services that 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 have a negative impact on our operating results.


If our internal controls are found to be ineffective, our financial results or our stock price may be adversely affected.

Our most recent evaluation resulted in our conclusion that, as of December 31, 2019, our internal control over financial reporting was effective. We believe that we currently have adequate internal control procedures in place for future periods, including processes related to newly acquired businesses; however, increased risk of internal control breakdowns generally exists in a business environment that is decentralized. In addition, if our internal control over financial reporting is found to be ineffective, investors may lose confidence in the reliability of our financial statements, which may adversely affect our stock price.


Changes in accounting guidance could have an adverse effect on our results of operations, as reported in our financial statements.
 
Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), which is periodically revised and/or expanded.  Accordingly, from time to time we are required to adopt new or revised accounting guidance and related interpretations issued by recognized authoritative bodies, including the Financial Accounting Standards Board ("FASB") and the SEC.  The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in this Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q.  It is possible that future accounting guidance we are required to adopt, or future changes in accounting principles, could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have an adverse effect on our results of operations, as reported in our consolidated financial statements.


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 Corporation ("TimkenSteel") following the spinoff of TimkenSteel into an independent publicly traded company on June 30, 2014 (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.


Item 1B. Unresolved Staff Comments
None.


13


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 12.4 million square feet, all of which, except for approximately 3.3 million 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. The Company believes 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 Los Alamitos, California; Manchester, Connecticut; Carlyle, Illinois; Lenexa, Kansas; Keene and Lebanon, New Hampshire; Iron Station, North Carolina; Bucyrus, Canton, New Philadelphia and Sharon Center, Ohio; Gaffney and Honea Path, South Carolina; Knoxville, Tennessee; and Ogden, Utah. These facilities, including warehouses at plant locations and a technology center and wind center in North Canton, Ohio, have an aggregate floor area of approximately 3.1 million square feet.

Timken’s Mobile Industries segment’s manufacturing plants and service centers outside the United States are located in Belo Horizonte and Rio Clara, Brazil; Yantai, China; Cheltenham, Northampton and Plymouth, England; Colmar, France; Cruessen, Pegnitz and Wannberg, Germany; Bharuch and Jamshedpur, India; Karmiel, Israel; Arcore, Cassago, Brianza, Valmadrea and Villa Carcina, Italy; Sosnowiec, Poland; Tikhvin, Russia; and Gauteng, South Africa. These facilities, including warehouses at plant locations, have an aggregate floor area of approximately 3.1 million square feet.

Timken's Process Industries segment's manufacturing plants and service centers in the United States are located in Hueytown, Alabama; Sante Fe Springs, California; Broomfield and Denver, Colorado; New Haven, Connecticut; New Castle, Delaware; Downers Grove, Fulton and Mokena, Illinois; Indianapolis and Mishawaka, Indiana; Fort Scott, Kansas; Portland, Maine; Springfield, Massachusetts; Ludington, Rochester Hills, South Haven and Traverse City, Michigan; Springfield, Missouri; Hackettstown, New Jersey; Randleman and Rutherfordton, North Carolina; Union, South Carolina; Ferndale and Pasco, Washington; and Princeton, West Virginia. These facilities, including warehouses at plant locations and a wind center in North Canton, Ohio, have an aggregate floor area of approximately 3.5 million square feet.     

Timken's Process Industries segment's manufacturing plants and service centers outside the United States are located in Mississauga, Prince George and Sasakatoon, Canada; Chengdu, Jiangsu, Wuxi and Xiangtan, China; Dudley, England; Dusseldorf and Werdohl, Germany; Chennai, India; Arcore and Vimercate, Italy; and Ploiesti and Prahova, Romania. These facilities, including warehouses at plant locations, have an aggregate floor area of approximately 2.7 million square feet.

In addition to the manufacturing and distribution facilities discussed above, Timken owns or leases warehouses and distribution facilities in Argentina, Australia, Austria, Belgium, Brazil, Canada, China, England, France, Germany, India, Japan, Mexico, Netherlands, New Zealand, Poland, South Africa, Singapore, Spain and the United States.

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 annual results of operations.
In October 2014, the Brazilian government antitrust agency, Administrative Council for Economic Defense ("CADE"), announced that it had opened an investigation of alleged antitrust violations in the bearing industry. The Company’s Brazilian subsidiary, Timken do Brasil Comercial Importadora Ltda. ("Timken do Brasil"), was included in the investigation. During the fourth quarter of 2019, the Company paid approximately $1.8 million to settle the matter with CADE.


14




Item 4. Mine Safety Disclosures
Not applicable.

Item 4A. Information about our Executive Officers
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 February 14, 2020 are as follows:
Name
 
Age
 
Current Position and Previous Positions During Last Five Years
Christopher A. Coughlin
 
59
 
2014 Executive Vice President, Group President
Philip D. Fracassa
 
51
 
2014 Executive Vice President and Chief Financial Officer
Richard G. Kyle
 
54
 
2014 President and Chief Executive Officer
Hans Landin
 
47
 
2018 Group Vice President
 
 
 
 
2017 Vice President - Mechanical Power Transmission
 
 
 
 
2014 Vice President - Power Transmission and Engineering Systems
Ronald J. Myers
 
61
 
2017 Executive Vice President - Human Resources
 
 
 
 
2015 Vice President of Human Resources
 
 
 
 
2014 Vice President - Organizational Advancement
Hansal N. Patel
 
39
 
2019 Vice President, General Counsel and Secretary
 
 
 
 
2019 Vice President - Legal and Corporate Secretary
 
 
 
 
2018 Director - Legal and Corporate Secretary
 
 
 
 
2016 Managing Attorney - M&A, Securities and Assistant Corporate Secretary
 
 
 
 
2014 Senior Corporate Attorney, Securities and Finance
Andreas Roellgen
 
52
 
2016 Vice President - Europe, Asia and Africa
 
 
 
 
2014 Vice President - Process Industries and Managing Director, Europe


15




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, 2019 was 3,635. The estimated number of beneficial shareholders at December 31, 2019 exceeds 40,000.


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, 2019.
 
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)
10/1/2019 - 10/31/2019
154,253

$
42.75

153,668

5,357,042

11/1/2019 - 11/30/2019
26,432

52.81


5,357,042

12/1/2019 - 12/31/2019
1,301

55.21


5,357,042

Total
181,986

$
44.30

153,668


 
(1)
Of the shares purchased in October, November and December, 585, 26,432 and 1,301, 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 6, 2017, the Company's Board of Directors approved a share repurchase plan pursuant to which the Company may purchase up to ten million of its common shares, in the aggregate. This share purchase plan expires on February 28, 2021. Under this plan the Company purchased shares from time to time in open market purchases or privately negotiated transactions and was able to make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans.


16


 chart-4ca7ea13daec5cfcb38.jpg
*Total return assumes reinvestment of dividends. Fiscal years ending December 31.


 
2015
2016
2017
2018
2019
Timken
$
69

$
99

$
125

$
97

$
151

S&P 500
101

114

138

132

174

S&P 400 Industrials
97

125

154

131

175

 
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, 2015, 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, 2019, and reinvestment of dividends.


17


Item 6. Selected Financial Data
Summary of Operations and Other Comparative Data:
(Dollars in millions, except per share, shareholder and per employee data)
2019
2018
2017
2016
2015
Statements of Income
 
 
 
 
 
Net sales
$
3,789.9

$
3,580.8

$
3,003.8

$
2,669.8

$
2,872.3

Gross profit
1,141.8

1,040.1

812.1

706.3

803.8

Operating income
516.4

454.5

299.5

244.4

333.2

Net income
374.7

305.5

202.3

141.1

191.4

Net income attributable to The Timken Company
$
362.1

$
302.8

$
203.4

$
140.8

$
188.6

Balance Sheets
 
 
 
 
 
Total assets
$
4,859.9

$
4,445.2

$
3,402.4

$
2,763.2

$
2,789.0

Total debt
1,730.1

1,681.6

962.3

659.2

656.5

Total liabilities
2,905.1

2,802.5

1,927.5

1,452.3

1,439.4

Total equity
$
1,954.8

$
1,642.7

$
1,474.9

$
1,310.9

$
1,349.6

Other Comparative Data
 
 
 
 
 
Net income / net sales
9.9
%
8.5
%
6.7
%
5.3
%
6.7
%
Net income attributable to The Timken Company / net sales
9.6
%
8.5
%
6.8
%
5.3
%
6.6
%
Return on equity (1)
19.2
%
18.6
%
13.7
%
10.8
%
14.2
%
Net sales per employee (2)
$
208.8

$
220.5

$
206.3

$
185.3

$
197.5

Capital expenditures
140.6

112.6

104.7

137.5

105.6

Capital expenditures / net sales
3.7
%
3.1
%
3.5
%
5.2
%
3.7
%
Depreciation and amortization
160.6

146.0

137.7

131.7

130.8

Basic earnings per share (3)
4.78

3.93

2.62

1.79

2.23

Diluted earnings per share (4)
4.71

3.86

2.58

1.78

2.21

Dividends per share
$
1.12

$
1.11

$
1.07

$
1.04

$
1.03

Weighted average number of shares outstanding - basic
75,758,123

77,119,602

77,736,398

78,516,029

84,631,778

Weighted average number of shares outstanding - diluted
76,896,565

78,337,481

78,911,149

79,234,324

85,346,246

Number of employees at year-end
18,829

17,477

15,006

14,111

14,709


(1)
Return on equity is defined as net income divided by ending total equity.
(2)
Dollars in thousands, based on average number of employees employed during the year.
(3)
Based on weighted average number of shares outstanding during the year.
(4)
Based on weighted average number of shares outstanding during the year, assuming dilution of stock options and awards.

18


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 designs and manufactures a growing portfolio of engineered bearings and power transmission products. With more than a century of knowledge and innovation, the Company continuously improves the reliability and efficiency of global machinery and equipment to move the world forward. Timken posted $3.8 billion in sales in 2019 and employs more than 18,000 people globally, operating in 42 countries. The Company operates under two reportable segments: (1) Mobile Industries and (2) Process Industries. The following further describes these business segments:
Mobile Industries serves OEM customers that manufacture off-highway equipment for the agricultural, mining and construction markets; on-highway vehicles including passenger cars, light trucks, and medium- and heavy-duty trucks; rail cars and locomotives; outdoor power equipment; rotorcraft and fixed-wing aircraft; and other mobile equipment. Beyond service parts sold to OEMs, aftermarket sales and services to individual end users, equipment owners, operators and maintenance shops are handled directly or through the Company's extensive network of authorized distributors.
Process Industries serves OEM and end-user customers in industries that place heavy demands on the fixed operating equipment they make or use in heavy and other general industrial sectors. This includes metals, cement and aggregate production; power generation and renewable energy sources; oil and gas extraction and refining; pulp and paper and food processing; automation and robotics; and health and critical motion control equipment. Other applications include marine equipment, gear drives, cranes, hoists and conveyors. This segment also supports aftermarket sales and service needs through its global network of authorized industrial distributors and through the provision of services directly to end users.

Timken creates value by understanding customer needs and applying its know-how to serve a broad range of customers in attractive markets and industries across the globe. The Company’s business strengths include its product technology, end-market diversity, geographic reach and aftermarket mix. Timken collaborates with OEMs to improve equipment efficiency with its engineered products and captures subsequent equipment replacement cycles by selling largely through independent channels in the aftermarket. Timken focuses its international efforts and footprint in regions of the world where strong macroeconomic factors such as urbanization, infrastructure development and sustainability create demand for its products and services.

The Company's strategy has three primary elements:

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

Operational Excellence. Timken operates with a relentless drive for exceptional results and a passion for superior execution. The Company embraces a continuous improvement culture that is charged with increasing efficiency, lowering costs, eliminating waste, encouraging organizational agility and building greater brand equity to fuel growth. This requires the Company’s ongoing commitment to attract, retain and develop the best talent across the world.

Capital Deployment to Drive Shareholder Value. The Company is intently focused on providing the highest returns for shareholders through its capital allocation framework, which includes: (1) investing in the core business through capital expenditures, research and development and other organic growth initiatives; (2) pursuing strategic acquisitions to broaden its portfolio and capabilities across diverse markets, with a focus on bearings, adjacent power transmission products and related services; (3) returning capital to shareholders through dividends and share repurchases; and (4) maintaining a strong balance sheet and sufficient liquidity. As part of this framework, the Company may also restructure, reposition or divest underperforming product lines or assets.


19



The following items highlight certain of the Company's more significant strategic accomplishments in 2019:

On November 1, 2019, the Company completed the acquisition of BEKA Lubrication ("BEKA"), a leading global supplier of automatic lubrications systems serving a diverse range of industrial sectors including wind, food and beverage, rail, on- and off-highway and other process industries. BEKA, located in Pegnitz, Germany, employs approximately 900 people, and had annual sales at the time of the acquisition of approximately $135 million. The acquisition was funded with cash on hand and through borrowings under existing credit facilities.

On April 1, 2019, the Company acquired Diamond Chain Company ("Diamond Chain"), a leading supplier of high-performance roller chains for industrial markets. Diamond Chain serves a diverse range of sectors, including industrial distribution, material handling, food and beverage, agriculture, construction and other process industries. At the time of the acquisition, Diamond had annual sales of approximately $60 million. Diamond Chain has manufacturing operations in the U.S. and China and employs approximately 370 people. The acquisition was funded with cash on hand and through borrowings under existing credit facilities.








20


RESULTS OF OPERATIONS
2019 vs. 2018

Overview: 
 
2019
2018
$ Change
% Change
Net sales
$
3,789.9

$
3,580.8

$
209.1

5.8
%
Net income
374.7

305.5

69.2

22.7
%
Net income attributable to noncontrolling interest
12.6

2.7

9.9

366.7
%
Net income attributable to The Timken Company
$
362.1

$
302.8

$
59.3

19.6
%
Diluted earnings per share
$
4.71

$
3.86

$
0.85

22.0
%
Average number of diluted shares
76,896,565

78,337,481


(1.8
%)
The increase in net sales was primarily driven by the benefit of acquisitions, the impact of higher pricing and higher demand in the Process Industries segment, partially offset by the unfavorable impact of foreign currency exchange rate changes and lower shipments in the Mobile Industries segment. The increase in net income in 2019 compared with 2018 was primarily due to the net benefit of acquisitions, favorable price/mix and the impact of a lower tax rate driven by net discrete benefits, partially offset by the impact of lower volume, unfavorable currency and higher interest expense. Results for 2019 also benefited from pension and other postretirement plan remeasurement income compared to expense in 2018.

Outlook:

The Company expects 2020 full-year revenue to be in the range of down 2% to up 2% compared with 2019 primarily due to the benefit of acquisitions made in 2019, offset by expected organic declines and the impact of currency. The Company's earnings are expected to be down in 2020 compared with 2019, primarily due to the impact of lower volume, higher manufacturing costs and higher income tax expense, partially offset by lower material and logistics costs, favorable price/mix and the impact of acquisitions.

The Company expects to generate operating cash of approximately $585 million in 2020, an increase from 2019 of approximately $35 million, or 6%, as the Company anticipates lower pension and medical benefit plan payments, partially offset by less cash generation from working capital and higher capital expenditures. The Company expects capital expenditures to be approximately $160 million in 2020, compared with $141 million in 2019.

21


THE STATEMENTS OF INCOME

Sales:
 
2019
2018
$ Change
% Change
Net sales
$
3,789.9

$
3,580.8

$
209.1

5.8
%
Net sales increased in 2019 compared with 2018, primarily due to the benefit of acquisitions of $270 million and higher organic revenue of $11 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $72 million. The increase in organic revenue was driven primarily by improved demand in the Process Industries segment and the impact of positive pricing, partially offset by lower shipments in the Mobile Industries segment.


Gross Profit:
 
2019
2018
$ Change
Change
Gross profit
$
1,141.8

$
1,040.1

$
101.7

9.8
%
Gross profit % to net sales
30.1
%
29.0
%

110
 bps
Gross profit increased in 2019 compared with 2018, primarily due to the benefit of acquisitions of $86 million, favorable price/mix of $51 million and lower material and logistics costs (including tariffs) of $5 million. These factors were partially offset by the impact of lower volume of $19 million, the unfavorable impact of foreign currency exchange rate changes of $15 million and property losses of $8 million.


Selling, General and Administrative Expenses:
 
2019
2018
$ Change
Change
Selling, general and administrative expenses
$
618.6

$
580.7

$
37.9

6.5%
Selling, general and administrative expenses % to net sales
16.3
%
16.2
%

10 bps
The increase in selling, general and administrative ("SG&A") expenses in 2019 compared with 2018 was primarily due to SG&A expense from acquisitions of $45 million, partially offset by the favorable impact from changes in foreign currency exchange rates of $10 million.


Interest Expense and Income:
 
2019
2018
$ Change
% Change
Interest expense
$
(72.1
)
$
(51.7
)
$
(20.4
)
39.5
%
Interest income
4.9

2.1

2.8

133.3
%
Interest expense increased in 2019 compared to 2018 primarily due to higher average outstanding debt during the year, which was primarily used to fund acquisitions. Refer to Note 11 - Financing Arrangements in the Notes to the Consolidated Financial Statements for further discussion.


22



Other Income (Expense):
 
2019
2018
$ Change
% Change
Non-service pension and other postretirement income (expense)
$
10.2

$
(6.2
)
$
16.4

(264.5
%)
Other income, net
13.0

9.4

3.6

38.3
%

The increase in non-service pension and other postretirement income (expense) for 2019 compared with 2018 was primarily due to the recognition of net actuarial gains ("Mark-to-Market Charges") of $4.2 million in 2019 compared to actuarial losses of $22.1 million in 2018. The Mark-to-Market Charges were the result of higher than expected returns on plan assets and the impact of a reduction in contractual rates for Medicare Advantage plans, driven by a law change that repealed the tax on Health Care Insurers after 2020, partially offset by lower discount rates to measure the benefit obligations for pension and other postretirement plans. Actuarial losses in 2018 were partially offset by the benefit of curtailment gains of $10.2 million for two of the U.S. pension plans. Refer to Note 14 - Retirement Benefit Plans and Note 15 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for more information.


Income Tax Expense:
 
2019
2018
$ Change
Change
Income tax expense
$
97.7

$
102.6

$
(4.9
)
(4.8
%)
Effective tax rate
20.7
%
25.1
%

(440
) bps

The effective tax rate for 2019 was 20.7%, which was slightly favorable compared to the U.S. federal statutory rate of 21%, primarily due to the release of foreign valuation allowance against certain foreign deferred tax assets and the remeasurement of deferred tax balances to reflect the reduced India statutory tax rate. These impacts were partially offset by earnings in foreign jurisdictions where the effective tax rate was higher than 21%, additional discrete accruals for uncertain tax positions, U.S. state and local income taxes and withholding taxes recorded on planned dividend distributions.

The effective tax rate for 2018 was 25.1%, which was unfavorable compared to the U.S. federal statutory rate of 21%, primarily due to earnings in certain foreign jurisdictions where the effective tax rate was higher than 21%, unfavorable U.S. permanent differences and U.S. state and local income taxes. These impacts were partially offset by reductions to the one-time net charge related to the taxation of unremitted foreign earnings and the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate enacted under the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”).

The change in the effective rate for 2019 compared with 2018 was a decrease of 4.4%. The decrease was primarily due to the release of certain valuation allowances and the remeasurement of deferred tax balances to reflect the reduced India statutory tax rate. These impacts were partially offset by additional discrete accruals for uncertain tax positions and withholding taxes recorded on planned dividend distributions.

Refer to Note 5 - Income Taxes in the Notes to the Consolidated Financial Statements for more information on the computation of the income tax expense in interim periods.


23


BUSINESS SEGMENTS
The Company's reportable segments are business units that serve different industry sectors. While the segments often operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. Beginning in the fourth quarter of 2019, the main operating income metric used by management to measure the financial performance of each segment was earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Company made this change because recent acquisitions have resulted in an increased amount of purchase accounting amortization expense that affects comparability of results across periods and versus other companies. The primary measurement used by management to measure the financial performance of each segment prior to the fourth quarter of 2019 was earnings before interest and taxes ("EBIT"). Segment results have been revised for all periods presented to be consistent with new measure of segment performance. Refer to Note 4 - Segment Information in the Notes to the Consolidated Financial Statements for the reconciliation of EBITDA 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 divestitures completed in 2019 and 2018 and foreign currency exchange rate changes. The effects of acquisitions, divestitures and foreign currency exchange rate changes 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.

The following items highlight the Company's acquisitions completed in 2019 and 2018 by segment based on the customers and underlying markets served:
The Company acquired BEKA during the fourth quarter of 2019. The majority of the results for BEKA are reported in the Mobile Industries segment.
The Company acquired Diamond Chain during the second quarter of 2019. The majority of the results for Diamond Chain are reported in the Process Industries segment.
The Company acquired ABC Bearings Limited ("ABC Bearings"), Apiary Investments Holding Limited ("Cone Drive"), and Rollon S.p.A. ("Rollon") during the third quarter of 2018. Substantially all of the results for ABC Bearings are reported in the Mobile Industries segment. Results for Cone Drive and Rollon are reported in the Mobile Industries and Process Industries segments based on customers and underlying market sectors served.
The Company divested Groeneveld Information Technology Holding B.V. (the "ICT Business") on September 19, 2018. The Company acquired the ICT Business in July 2017 as part of the Groeneveld Group ("Groeneveld") acquisition. The ICT Business is separate from the Groeneveld lubrication solutions business and was considered non-core to the operations. Results for the ICT Business were reported in the Mobile Industries segment.

24


Mobile Industries Segment:
 
2019
2018
$ Change
Change
Net sales
$
1,893.9

$
1,903.7

$
(9.8
)
(0.5
%)
EBITDA
$
284.9

$
272.2

$
12.7

4.7
%
EBITDA margin
15.0
%
14.3
%

70
 bps
 
 
 
 
 
  
2019
2018
$ Change
% Change
Net sales
$
1,893.9

$
1,903.7

$
(9.8
)
(0.5
%)
Less: Acquisitions
82.5


82.5

NM

Divestitures
(8.5
)

(8.5
)
NM

         Currency
(36.0
)

(36.0
)
NM

Net sales, excluding the impact of acquisitions, divestitures and currency
$
1,855.9

$
1,903.7

$
(47.8
)
(2.5
%)
The Mobile Industries segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, decreased $47.8 million or 2.5% in 2019 compared with 2018, reflecting lower shipments in the off highway and heavy truck sectors, partially offset by growth in the aerospace and rail sectors, as well as higher pricing. EBITDA increased in 2019 by $12.7 million or 4.7% compared with 2018, primarily due to favorable price/mix, lower material and logistics costs, the net benefit of acquisitions, and lower SG&A expenses. These factors were partially offset by the impact of lower volume and related manufacturing utilization, as well as property losses and related expenses from flood damage at a Company facility in Tennessee and fire damage at a facility in China.
Full-year sales for the Mobile Industries segment are expected to be roughly flat to down 4% in 2020 compared with 2019. This reflects a decrease of organic revenue in the off-highway, heavy truck and automotive sectors, partially offset by the impact of acquisitions. EBITDA for the Mobile Industries segment is expected to decrease in 2020 compared with 2019 primarily due to lower shipments and higher manufacturing costs, partially offset by favorable price/mix, lower material and logistics costs and the impact of acquisitions.

25


Process Industries Segment:
 
2019
2018
$ Change
Change
Net sales
$
1,896.0

$
1,677.1

$
218.9

13.1
%
EBITDA
$
466.6

$
405.7

$
60.9

15.0
%
EBITDA margin
24.6
%
24.2
%

40
 bps
 
 
 
 
 
  
2019
2018
$ Change
% Change
Net sales
$
1,896.0

$
1,677.1

$
218.9

13.1
%
Less: Acquisitions
196.4


196.4

NM

         Currency
(36.5
)

(36.5
)
NM

Net sales, excluding the impact of acquisitions and currency
$
1,736.1

$
1,677.1

$
59.0

3.5
%
The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $59.0 million or 3.5% in 2019 compared with 2018. The increase was primarily driven by growth in the renewable energy sector, as well as positive pricing. EBITDA increased $60.9 million or 15.0% in 2019 compared with 2018 primarily due to the net benefit of acquisitions, favorable price/mix and the impact of higher volume, partially offset by higher SG&A expenses.
Full-year sales for the Process Industries segment are expected to be flat to up 4% in 2020 compared with 2019. This reflects expected growth in the renewable energy and industrial services sectors, as well as the benefit of acquisitions, partially offset by a decline in revenue in the industrial distribution sector. EBITDA for the Process Industries segment is expected to increase in 2020 compared with 2019 primarily due to favorable price/mix, lower material costs and the impact of acquisitions, partially offset by higher manufacturing costs and SG&A expenses.


Corporate:
 
2019
2018
$ Change
Change
Corporate expenses
$
56.2

$
62.0

$
(5.8
)
(9.4
%)
Corporate expenses % to net sales
1.5
%
1.7
%

(20
) bps
Corporate expenses decreased in 2019 compared with 2018 primarily due to higher transaction costs related to acquisitions in 2018.


26


RESULTS OF OPERATIONS:
2018 vs. 2017

Overview:
 
2018
2017
$ Change
% Change
Net sales
$
3,580.8

$
3,003.8

$
577.0

19.2
%
Net income
305.5

202.3

103.2

51.0
%
Income (loss) attributable to noncontrolling interest
2.7

(1.1
)
3.8

(345.5
%)
Net income attributable to The Timken Company
$
302.8

$
203.4

$
99.4

48.9
%
Diluted earnings per share
$
3.86

$
2.58

$
1.28

49.6
%
Average number of diluted shares
78,337,481

78,911,149


(0.7
%)
The increase in net sales was primarily due to organic revenue growth driven by higher end-market demand, the benefit of acquisitions and the impact of higher pricing. The increase in net income in 2018 compared with 2017 was primarily due to improved performance across the business, driven by the impact of higher volume, favorable price/mix, the net benefit of acquisitions and improved manufacturing performance, as well as lower Mark-to-Market Charges due to the remeasurement of pension and other postretirement assets and obligations, restructuring charges, and interest expense. These factors were partially offset by the impact of higher SG&A expenses, higher income tax expenses and higher material and logistics costs (including tariffs).

THE STATEMENTS OF INCOME

Sales:
 
2018
2017
$ Change
% Change
Net sales
$
3,580.8

$
3,003.8

$
577.0

19.2
%
Net sales increased in 2018 compared with 2017 primarily due to higher organic revenue of $396 million and the benefit of acquisitions of $177 million. The increase in organic revenue was driven by higher demand across all of the Company's end-market sectors, as well as the impact of higher pricing.


Gross Profit:
 
2018
2017
$ Change
Change
Gross profit
$
1,040.1

$
812.1

$
228.0

28.1
%
Gross profit % to net sales
29.0
%
27.0
%

200
 bps
Gross profit increased in 2018 compared with 2017 primarily due to the impact of higher volume of $133 million, the favorable price/mix of $66 million, the benefit of acquisitions of $54 million, improved manufacturing performance of $12 million and lower restructuring costs of $6 million. These factors were partially offset by higher material and logistics costs of $44 million (including tariffs).


Selling, General and Administrative Expenses:
 
2018
2017
$ Change
Change
Selling, general and administrative expenses
$
580.7

$
508.3

$
72.4

14.2
%
Selling, general and administrative expenses % to net sales
16.2
%
16.9
%

(70
) bps
The increased in SG&A expenses in 2018 compared with 2017 was primarily due to the impact of acquisitions of $39 million, higher compensation expense and other spending increases to support the higher sales levels.

27



Interest Expense and Income:
 
2018
2017
$ Change
% Change
Interest expense
$
(51.7
)
$
(37.1
)
$
(14.6
)
39.4
%
Interest income
$
2.1

$
2.9

$
(0.8
)
(27.6
%)
Interest expense increased in 2018 compared to 2017 primarily due to an increase in outstanding debt to fund the acquisitions of Groeneveld, Rollon and Cone Drive.


Other Income (Expense):
 
2018
2017
$ Change
% Change
Non-service pension and other postretirement expense
(6.2
)
(15.0
)
8.8

(58.7
%)
Other income (expense), net
$
9.4

$
9.6

$
(0.2
)
(2.1
)%

The decrease in non-service pension and other postretirement expense for 2018 compared to 2017 was primarily due to lower Mark-to-Market Charges of $8.8 million. The Mark-to-Market Charges resulted from the remeasurement of pension and postretirement plan obligations and assets due to changes in actuarial assumptions, partially offset by the benefit of curtailments for two of the U.S. pension plans.


Income Tax Expense:
 
2018
2017
$ Change
Change
Income tax expense
$
102.6

$
57.6

$
45.0

78.1
%
Effective tax rate
25.1
%
22.2
%

290
 bps
The effective tax rate for 2018 was 25.1%, which was unfavorable compared to the U.S. federal statutory rate of 21% primarily due to earnings in certain foreign jurisdictions where the effective rate was higher than 21%, unfavorable U.S. permanent differences and U.S. state and local income tax expenses. These impacts were partially offset by reductions to the one-time net charge related to the taxation of unremitted foreign earnings and the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate enacted under U.S. Tax Reform.

The effective tax rate for 2017 was 22%, which was favorable compared to the U.S. federal statutory rate of 35% primarily due to earnings in certain foreign jurisdictions where the effective tax rate was less than 35%, U.S. foreign tax credits realized on earnings distributed to the United States, and favorable U.S. permanent deductions and tax credits. The effective tax rate was also favorably impacted by the net reversal of accruals for prior year uncertain tax positions, a valuation allowance release and other discrete items.

These favorable impacts were partially offset by provisional amounts for the one-time net charge related to the taxation of unremitted foreign earnings and the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate enacted under U.S. Tax Reform. U.S. Tax Reform included a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. U.S. Tax Reform also requires companies to pay a one-time net charge related to the taxation of unremitted foreign earnings, created new taxes on certain foreign sourced earnings and allowed for immediate expensing of certain depreciable assets after September 27, 2017.

The change in the effective rate for 2018 compared with 2017 was an increase of 2.9%. The increase was primarily due to the net reversal of accruals for prior year uncertain tax positions in 2017. The effective tax rate also increased due to earnings in certain foreign jurisdictions where the effective rate was higher than 21%, unfavorable U.S. permanent differences and the release of valuations allowances in 2017. These impacts were partially offset by reductions to the one-time net charge related to the taxation of unremitted foreign earnings and the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate.

28


BUSINESS SEGMENTS

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 completed in 2018 and 2017 and foreign currency exchange rate changes. The effects of acquisitions and foreign currency exchange rate changes 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.

The following items highlight the Company's acquisitions and divestitures completed in 2018 and 2017:
The Company acquired ABC Bearings, Cone Drive and Rollon during the third quarter of 2018. Substantially all of the results for ABC Bearings are reported in the Mobile Industries segment. Results for Cone Drive and Rollon are reported in the Mobile Industries and Process Industries segments based on customers and underlying market sectors served.
The Company acquired Groeneveld during the third quarter of 2017. Substantially all of the results for Groeneveld are reported in the Mobile Industries segment.
The Company acquired Torsion Control Products, Inc. ("Torsion Control Products") and PT Tech, Inc. ("PT Tech") during the second quarter of 2017. Results for Torsion Control Products and PT Tech are reported in the Mobile Industries and Process Industries segments based on customers and underlying market sectors served.


Mobile Industries Segment:
 
2018
2017
$ Change
Change
Net sales
$
1,903.7

$
1,640.0

$
263.7

16.1
%
EBITDA
$
272.2

$
209.9

$
62.3

29.7
%
EBITDA margin
14.3
%
12.8
%

150
 bps
  
2018
2017
$ Change
% Change
Net sales
$
1,903.7

$
1,640.0

$
263.7

16.1
Less: Acquisitions
98.6


98.6

NM
         Currency
(2.3
)

(2.3
)
NM
Net sales, excluding the impact of acquisitions and currency
$
1,807.4

$
1,640.0

$
167.4

10.2
The Mobile Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased in 2018 compared with 2017, reflecting organic growth across all market sectors, as well as higher pricing. EBITDA increased in 2018 compared with 2017 primarily due to higher volume of $53 million, the benefit of acquisitions of $15 million, favorable price/mix of $11 million, lower restructuring charges of $9 million and improved manufacturing performance of $5 million. These factors were offset partially by higher material and logistics costs of $24 million (including tariffs) and higher SG&A expenses of $8 million.















29


Process Industries Segment:
 
2018
2017
$ Change
Change
Net sales
$
1,677.1

$
1,363.8

$
313.3

23.0
%
EBITDA
$
405.7

$
288.6

$
117.1

40.6
%
EBITDA margin
24.2
%
21.2
%

300
 bps
 
 
 
 
 
  
2018
2017
$ Change
% Change
Net sales
$
1,677.1

$
1,363.8

$
313.3

23.0
%
Less: Acquisitions
78.7


78.7

NM

 Currency
6.0


6.0

NM

Net sales, excluding the impact of acquisitions and currency
$
1,592.4

$
1,363.8

$
228.6

16.8
%
The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased in 2018 compared with 2017 reflecting increased demand across all market sectors, as well as higher pricing. EBITDA increased in 2018 compared with 2017 primarily due to the impact of higher volume of $84 million, favorable price/mix of $51 million, improved manufacturing performance of $6 million and the benefit of acquisitions of $12 million (excluding inventory step-up expense of $8 million). These factors were partially offset by higher material and logistics costs of $20 million (including tariffs) and higher SG&A expenses of $16 million.


Corporate:
 
2018
2017
$ Change
Change
Corporate expenses
$
62.0

$
49.1

$