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1.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 2002
Commission File No. 1-1169
THE TIMKEN COMPANY
Exact name of registrant as specified in its charter
Ohio 34-0577130
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
1835 Dueber Avenue, S.W., Canton, Ohio 44706-2798
Address of principal executive offices Zip Code
(330) 438-3000
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year if changed
since last report.
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,
and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
___ ___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES X NO
___ ___
Common shares outstanding at September 30, 2002, 63,315,670.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Sept. 30 Dec. 31
2002 2001
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents........................... $36,812 $33,392
Accounts receivable, less allowances,
(2002-$16,250; 2001-$14,715)........................ 376,416 307,759
Refundable income taxes............................. - 15,103
Deferred income taxes............................... 42,790 42,895
Inventories (Note 2) ............................... 464,394 429,231
---------- ----------
Total Current Assets...................... 920,412 828,380
Property, Plant and Equipment....................... 2,951,614 2,971,793
Less allowances for depreciation................... 1,714,207 1,666,448
---------- ----------
1,237,407 1,305,345
Goodwill (Note 8)................................... 129,526 150,041
Deferred income taxes............................... 23,207 27,164
Intangible pension asset............................ 136,382 136,118
Other assets........................................ 95,109 86,036
---------- ----------
Total Assets.................................. $2,542,043 $2,533,084
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and other liabilities.............. $263,303 $258,001
Short-term debt and commercial paper................ 131,432 128,864
Accrued expenses.................................... 272,242 254,291
---------- ----------
Total Current Liabilities................. 666,977 641,156
Noncurrent Liabilities
Long-term debt (Note 3) ............................ 350,515 368,151
Accrued pension cost................................ 270,179 317,297
Accrued postretirement benefits cost................ 413,319 406,568
Other noncurrent liabilities........................ 21,980 18,177
---------- ----------
Total Noncurrent Liabilities.............. 1,055,993 1,110,193
Shareholders' Equity (Note 4)
Common stock........................................ 309,728 248,863
Earnings invested in the business................... 736,212 757,410
Accumulated other comprehensive loss................ (226,867) (224,538)
---------- ----------
Total Shareholders' Equity................ 819,073 781,735
Total Liabilities and Shareholders' Equity.... $2,542,043 $2,533,084
========== ==========
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Thousands of dollars, except per share data)
Net sales................................................... $1,905,177 $1,873,603 $628,591 $577,698
Cost of products sold....................................... 1,550,972 1,553,555 517,329 486,747
---------- ---------- ---------- ----------
Gross Profit............................................. 354,205 320,048 111,262 90,951
Selling, administrative and general expenses................ 266,379 276,655 87,382 86,828
Impairment and restructuring charges ....................... 24,986 49,405 7,703 24,639
---------- ---------- ---------- ----------
Operating Income (Loss).................................. 62,840 (6,012) 16,177 (20,516)
Interest expense............................................ (23,996) (25,813) (8,072) (8,432)
Interest income............................................. 991 1,670 294 573
Other expense............................................... (12,490) (5,371) (3,415) (2,476)
Income (Loss) Before Income Taxes and Cumulative Effect ---------- ---------- ---------- ----------
of Accounting Changes.................................. 27,345 (35,526) 4,984 (30,851)
Provision (benefit) for income taxes (Note 6)............... 12,360 7,358 3,147 (319)
Income (Loss) Before Cumulative Effect of Change in ---------- ---------- ---------- ----------
Accounting Principle................................... 14,985 (42,884) 1,837 (30,532)
Cumulative effect of change in accounting principle (net of
income tax benefit of $7,786)............................. (12,702) - (12,702) -
Net Income (Loss)........................................... $2,283 $(42,884) $(10,865) $(30,532)
========== ========== ========== ==========
Earnings Per Share:
Income (loss) before cumulative effect of change in
accounting principle................................... $ 0.25 $(0.71) $ 0.03 $(0.51)
Cumulative effect of change in accounting principle...... $(0.21) $ - $(0.21) $ -
Earnings Per Share*...................................... $ 0.04 $(0.71) $(0.18) $(0.51)
Earnings Per Share - assuming dilution:
Income (loss) before cumulative effect of change in
accounting principle................................... $ 0.25 $(0.71) $ 0.03 $(0.51)
Cumulative effect of change in accounting principle...... $(0.21) $ - $(0.21) $ -
Earnings Per Share - assuming dilution**................. $ 0.04 $(0.71) $(0.18) $(0.51)
Dividends Per Share...................................... $ 0.39 $ 0.54 $ 0.13 $ 0.18
========== ========== ========== ==========
* Average shares outstanding............................... 60,459,277 59,979,699 61,091,924 59,958,690
** Average shares outstanding - assuming dilution........... 60,998,543 60,156,778 61,430,256 60,086,662
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Cash Provided (Used) Sept. 30 Sept. 30
2002 2001
-------- --------
OPERATING ACTIVITIES (Thousands of dollars)
Net Income (Loss)......................................$ 2,283 $(42,884)
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change................ 12,702 -
Depreciation and amortization......................... 110,956 114,015
Provision (credit) for deferred income taxes.......... 23,557 (7,196)
Stock issued in lieu of cash to employee benefit plans 4,628 1,319
Non-cash portion of impairment and restructuring
charges.............................................. (13,368) 40,344
Changes in operating assets and liabilities:
Accounts receivable.................................. (64,254) (20,809)
Inventories.......................................... (35,222) 22,003
Other assets......................................... (6,766) (26,297)
Accounts payable and accrued expenses................ 46,094 (49,773)
Foreign currency translation......................... 8,446 4,801
-------- --------
Net Cash Provided by Operating Activities........... 89,056 35,523
INVESTING ACTIVITIES
Purchases of property, plant and equipment - net...... (33,849) (61,832)
Acquisitions.......................................... (6,751) (1,170)
-------- --------
Net Cash Used by Investing Activities............... (40,600) (63,002)
FINANCING ACTIVITIES
Cash dividends paid to shareholders................... (23,481) (32,388)
Purchase of treasury shares........................... - (2,795)
Payments on long-term debt............................ (36,872) (1,487)
Proceeds from issuance of long-term debt.............. - 76,110
Short-term debt activity - net........................ 14,462 4,828
-------- --------
Net Cash (Used) Provided by Financing Activities.... (45,891) 44,268
Effect of exchange rate changes on cash................ 855 (1,801)
Increase in Cash and Cash Equivalents.................. 3,420 14,988
Cash and Cash Equivalents at Beginning of Period....... 33,392 10,927
-------- --------
Cash and Cash Equivalents at End of Period.............$ 36,812 $ 25,915
======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 5.
Note 1 -- Basis of Presentation
The accompanying consolidated condensed financial statements (unaudited) for
the Timken Company (the "company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) and disclosures considered necessary
for a fair presentation have been included. For further information, refer to
the consolidated financial statements and footnotes included in the company's
Annual Report on Form 10-K for the year ended December 31, 2001. Certain
amounts have been reclassified to conform with current year presentation.
9/30/02 12/31/01
Note 2 -- Inventories -------- ---------
(Thousands of dollars)
Finished products $188,254 $180,533
Work-in-process and raw materials 241,708 212,040
Manufacturing supplies 34,432 36,658
-------- --------
$464,394 $429,231
======== ========
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on manage-
ment's estimates of expected year-end inventory levels and costs. Because
these are subject to many forces beyond management's control, interim results
are subject to the final year-end LIFO inventory valuation.
9/30/02 12/31/01
-------- ---------
Note 3 -- Long-term Debt (Thousands of dollars)
State of Ohio Pollution Control Revenue Refunding Bonds,
maturing on July 1, 2003. The variable interest
rate is tied to the bank's tax exempt weekly interest
rate. The rate at September 30, 2002 is 1.70%. $ 17,000 $ 17,000
State of Ohio Water Development Revenue Refunding
Bond, maturing on May 1, 2007. The variable interest
rate is tied to the bank's tax exempt weekly interest
rate. The rate at September 30, 2002 is 1.70%. 8,000 8,000
State of Ohio Air Quality and Water Development Revenue
Refunding Bonds, maturing on November 1, 2025. The
variable interest rate is tied to the bank's tax
exempt weekly interest rate. The rate at
September 30, 2002 is 1.70%. 21,700 21,700
State of Ohio Water Development Authority Solid Waste
Revenue Bonds, maturing on July 1, 2032. The
variable interest rate is tied to the bank's tax
exempt weekly interest rate. The rate at
September 30, 2002 is 1.75%. 24,000 24,000
Fixed Rate Medium-Term Notes, Series A, due at various
dates through May, 2028 with interest rates ranging
from 6.20% to 7.76%. 292,000 327,000
Other 11,359 12,885
-------- --------
374,059 410,585
Less: Current Maturities 23,544 42,434
-------- --------
$350,515 $368,151
======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 6.
Note 4 -- Shareholders' Equity 9/30/02 12/31/01
-------- --------
Class I and Class II serial preferred stock (Thousands of dollars)
without par value:
Authorized -- 10,000,000 shares each class
Issued - none $ - $ -
Common Stock without par value:
Authorized -- 200,000,000 shares
Issued (including shares in treasury)
2002 - 63,315,670 shares
2001 - 63,082,626 shares
Stated Capital 53,064 53,064
Other paid-in capital 256,664 256,423
Less cost of Common Stock in treasury
2001 - 3,226,544 shares - 60,624
-------- --------
$309,728 $248,863
======== ========
An analysis of the change in capital and earnings invested in the business is as follows:
Common Stock Earnings Accumulated
Other Invested Other
Stated Paid-In in the Comprehensive Treasury
Capital Capital Business Loss Stock Total
------- -------- -------- ---------- -------- ----------
(Thousands of dollars)
Balance December 31, 2001 $53,064 $256,423 $757,410 ($224,538) ($60,624) $ 781,735
Net Income 2,283 2,283
Foreign currency translation adjustment (2,721) (2,721)
Change in fair value of derivative
financial instruments (123) (123)
Reclassification adjustments - contract
settlements 515 515
----------
Total comprehensive loss (46)
Dividends - $.39 per share (23,481) (23,481)
Stock Options, employee benefit and dividend
reinvestment plans:
Treasury - issued 459,589 shares (2,234) 8,619 6,385
Treasury - acquired 0 shares
Pension Contribution
Treasury - issued 2,766,955 shares 52,005 52,005
Common Stock - issued 233,045 shares 2,475 2,475
------- -------- -------- ---------- -------- ----------
Balance September 30, 2002 $53,064 $256,664 $736,212 ($226,867) $ - $ 819,073
======= ======== ======== ========== ======== ==========
The total comprehensive loss for the three months ended September 30, 2002 and 2001 was $ 17,759,000 and
$31,832,000, respectively. Total comprehensive loss for the nine months ended September 30, 2001 was $56,118,000.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7.
Continued
Note 5 -- Impairment and Restructuring Charges
In April 2001, the company announced a strategic global refocusing of its
manufacturing operations to establish a foundation for accelerating the
company's growth initiatives. This second phase of the company's transformation
includes creating focused factories for each product line or component,
replacing specific manufacturing processes with state-of-the-art processes
through the company's global supply chain, rationalizing production to the
lowest total cost plants in the company's global manufacturing system and
implementing lean manufacturing process redesign. The company also announced
its intention to close bearing plants in Columbus, Ohio and Duston, England,
and to sell a tooling plant in Ashland,Ohio. The Columbus bearing plant ceased
manufacturing operations in November 2001 while the Duston plant ceased
manufacturing operations at the end of September 2002. Additionally, on June
30, 2002, the company sold its Ashland plant to Ashland Precision Tooling, LLC.
To implement these actions, the company is expecting to take approximately
$100 - $110 million in severance, impairment and implementation charges from
2001 through the end of 2002.
The company targeted an annualized pretax rate of savings of approximately
$100 million by the end of 2004 as a result of this program. Through September
30, 2002, the company achieved estimated annual savings of $70 million.
The following chart details the breakdown by segment of the $7.7 million in
restructuring and impairment charges incurred during the three months ended
September 30, 2002 (in millions of dollars):
Auto Industrial Steel Total
Restructuring: ------- ---------- ------- -------
Separation costs $ 0.3 $ 0.9 $ - $ 1.2
Exit costs 0.4 - - 0.4
------- ---------- ------- -------
$ 0.7 $ 0.9 $ - $ 1.6
Impaired assets:
Property, plant and equipment $ 1.1 $ 1.6 $ - $ 2.7
Special Charges:
SFAS No. 88/106 Curtailment $ 0.8 $ 2.0 $ 0.9 $ 3.7
Reversal of Separation Cost $ (0.1) $ (0.2) $ - $ (0.3)
------- ---------- ------- -------
$ 2.5 $ 4.3 $ 0.9 $ 7.7
======= ========== ======= =======
The third quarter 2002 Automotive Bearings Business impaired assets charge
related to the Duston plant closure. The Industrial Bearings Business impaired
assets charge related to the Columbus plant closure. The majority of the Auto-
motive and Industrial restructuring costs also related to the Duston and
Columbus plant closures, respectively. Third quarter 2002 charges also included
severance for Columbus associates and special curtailment expenses (pension and
postretirement benefits) related to associates involved in the sale of the
Ashland plant and the salaried workforce reduction. The reversals of
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 8.
Continued
Note 5 -- Impairment and Restructuring Charges (continued)
separation cost in the third quarter of 2002 related to associates who were
previously included in the severance accrual but for whom severance will not be
paid, as these associates subsequently retired or found other employment.
Implementation charges for the quarter ended September 30, 2002 totaled
$4.4 million. Of these charges, $2.1 million were classified as cost of
products sold and $2.3 million as selling, administrative and general expenses.
Cumulative restructuring and impairment charges related to the second phase of
restructuring as of September 30, 2002 by segment, are as follows (in millions
of dollars):
Auto Industrial Steel Total
Restructuring: ------- ---------- ------- -------
Separation costs $ 26.9 $ 5.5 $ 1.5 $ 33.9
Exit costs 1.9 1.0 - 2.9
------- ---------- ------- -------
$ 28.8 $ 6.5 $ 1.5 $ 36.8
Impaired assets:
Property, plant and equipment $ 15.2 $ 2.5 $ - $ 17.7
Special Charges:
SFAS No. 88/106 Curtailment $ 0.8 $ 18.8 $ 0.9 $ 20.5
Reversal of Separation Cost $ (0.5) $ (0.6) $ (0.2) $ (1.3)
------- ---------- ------- -------
$ 44.3 $ 27.2 $ 2.2 $ 73.7
======= ========== ======= =======
Cumulative implementation charges related to the second phase of restructuring
totaled $22.3 million as of September 30, 2002. Of these charges, $11.3 million
were classified as cost of products sold and $11.0 million were classified as
selling, administrative and general expenses. As of September 30, 2002, the
remaining severance accrual balance was $6.8 million including $0.6 million in
additional expense incurred during the third quarter, offset by the accrual
reversal and foreign currency adjustments of $0.1 million. Total payments made
during the third quarter of 2002 totaled $4.9 million.
From the announcement of the restructuring initiatives in April 2001 to
September 30, 2002, 1,682 associates left the company as a result of the
restructuring and salaried workforce reduction. Of that number, 1,214 people
were from the Duston and Columbus plants, Canton bearing plants, Canadian
Timken Ltd., and associates included in the worldwide salaried workforce for
whom severance has been paid. In addition, 78 associates left the company as a
consequence of the sale of the Ashland plant. The remaining 390 associates
have retired or voluntarily left the company as of September 30, 2002, and
their positions have been eliminated.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 9.
Continued
Note 6 -- Income Tax Provision Nine Months Ended Three Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
2002 2001 2002 2001
-------- -------- -------- --------
U.S. (Thousands of dollars)
Federal $ 6,877 $ 3,292 $ 1,001 $(1,949)
State & Local 1,688 (395) 551 104
Foreign 3,795 4,461 1,595 1,526
------- ------- ------- -------
$12,360 $ 7,358 $ 3,147 $( 319)
======= ======= ======= =======
Taxes provided exceed the U.S. statutory rate primarily due to foreign losses
without current tax benefits.
Note 7 -- Segment Information
(Thousands of Dollars) Nine Months Ended Three Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
Automotive Bearings 2002 2001 2002 2001
-------- -------- -------- --------
Net sales to external customers $630,009 $565,761 $207,136 $176,518
Depreciation and amortization 25,817 27,112 8,624 9,053
Goodwill Amortization - 69 - 23
Impairment and restructuring charges 17,011 23,858 2,550 23,597
Loss before interest and taxes (3,644) (34,557) (3,081) (32,351)
Industrial Bearings
Net sales to external customers $658,230 $678,041 $217,232 $214,130
Depreciation and amortization 34,451 32,606 11,669 10,627
Goodwill Amortization - 3,613 - 1,201
Impairment and restructuring charges 7,226 24,343 4,330 641
Earnings before interest amd taxes 23,857 4,422 11,953 6,186
Steel
Net sales to external customers $616,938 $629,801 $204,223 $187,050
Intersegment sales 123,655 114,484 42,623 35,007
Depreciation and amortization 50,606 49,683 16,725 16,579
Goodwill Amortization - 932 - 311
Impairment and restructuring charges 749 1,205 823 402
Earnings before interest and taxes 31,530 16,522 4,769 911
Profit Before Taxes
Total EBIT for reportable segments 51,743 (13,613) 13,641 (25,254)
Interest expense (23,996) (25,813) (8,072) (8,432)
Interest income 991 1,670 294 573
Intersegment adjustments (1,393) 2,230 (879) 2,262
Income (loss) before income taxes 27,345 (35,526) 4,984 (30,851)
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 10.
Continued
Note 8 - Change in Method of Accounting
Effective January 2002, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." In
accordance with SFAS No. 142, goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed at least annually for impairment.
The application of the nonamortization provisions is expected to result in an
increase in annual net income of $6.1 million (pre-tax), of which $1.5 million
(pre-tax) is related to the third quarter. Changes in the estimated useful
lives of intangible assets will not result in a material change to net income.
Intangible assets that are separable and have a definite life will continue to
be amortized over the estimated useful lives.
In accordance with the adoption of SFAS No. 142, the company evaluated the
impairment of indefinite lived intangible assets and determined that none were
impaired based on estimations in market value. Fair value of each of the
company's five reporting units was determined by discounted cash flows and
validated with various market-comparable approaches. Based on the results of
this review, the company recorded a transitional impairment loss of
$12.7 million, net of an income tax benefit of $7.8 million, which relates to
the Specialty Steel Business. The transitional impairment loss was recorded in
the third quarter as a non-cash charge and reflected as the cumulative effect
of a change in accounting principle.
Prior to the adoption of SFAS No. 142, amortization expense was recorded for
goodwill and other intangible assets. The following table reflects reported
net income for the third quarter and first nine months of 2002 adjusted for
purposes of comparison:
(Thousands of Dollars) Nine Months Ended Three Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
2002 2001 2002 2001
-------- -------- -------- --------
Reported net income (loss) $ 2,283 $(42,884) $(10,865) $(30,532)
Plus: Goodwill and indefinite
lived intangible asset
amortization, net of tax - 3,156 - 726
-------- -------- -------- --------
Adjusted net income (loss) $ 2,283 $(39,728) $(10,865) $(29,806)
======== ======== ======== ========
Earnings per share (basic and diluted):
Reported net income (loss) $ 0.04 $ (0.71) $ (0.18) $ (0.51)
Plus: Goodwill and indefinite
lived intangible asset
amortization, net of tax - 0.05 - 0.01
-------- -------- -------- --------
Adjusted net income (loss) $ 0.04 $ (0.66) $ (0.18) $ (0.50)
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 11.
Continued
Note 8 - Change in Method of Accounting (continued)
The changes in the carrying amount of goodwill and indefinite lived intangible
assets for the quarter ended September 30, 2002 are as follows:
(Thousands of Dollars)
Balance Balance
12/31/01 Impairment Other 9/30/02
--------- ---------- ---------- ----------
Goodwill:
Automotive $ 1,577 $ - $ (71) $ 1,506
Industrial 120,426 - (805) 119,621
Steel 28,038 (20,488) 849 8,399
--------- ---------- ---------- ----------
$ 150,041 $ (20,488) $ 1,192 $ 129,526
The indefinite lived intangible assets are immaterial.
Total intangible assets at September 30 were $134.7 million, of which
unamortizable assets were $130.6 million, consisting primarily of goodwill
and industrial license agreements, with the remaining primarily being
amortizable industrial land use rights.
Note 9 - Subsequent Event
On October 16, 2002, the company announced that it had reached an agreement
with Ingersoll-Rand Company Limited to acquire its Engineered Solutions
business, including certain operating assets and its subsidiary, The Torrington
Company, a leading worldwide producer of needle roller, heavy duty roller and
ball bearings and motion control components and assemblies, for cash and stock
valued at approximately $840 million. Under the terms of the agreement,
Ingersoll-Rand will receive approximately $700 million in cash and $140 million
worth of the company's common stock. The transaction, which is subject to
antitrust clearance, successful completion of debt and equity financing, and
customary closing conditions, is expected to close during the first quarter of
2003.
12.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
- ---------------------
The Timken Company reported net sales of $628.6 million and $1.905 billion for
the third quarter and first nine months of 2002, respectively, an increase of
8.8% from $577.7 million in the same quarter and 1.7% from $1.874 billion for
the same period a year ago. The company reported a net loss of $10.9 million
and net income of $2.3 million for the third quarter and first nine months of
2002, respectively, compared to a net loss of $30.5 million and $42.9 million
in the third quarter and first nine months of 2001, respectively. In the third
quarter and first nine months of 2002, the company incurred total pretax
restructuring and implementation charges of $12.1 million and $39.3 million,
respectively. These charges included $7.7 million and $25.0 million in the
third quarter and first nine months of 2002, respectively, related to impair-
ment and restructuring charges and $4.4 million and $14.3 million related to
implementation expenses, which were reflected in the company's cost of products
sold and selling, administrative and general expenses for the quarter and the
first nine months of 2002, respectively. In addition, the company recorded
$12.7 million (net of tax benefit) in the third quarter of 2002 as a cumulative
effect of change in accounting principle related to the impairment of goodwill.
The third quarter and first nine months of 2001 included pretax charges of
$27.2 million and $57.0 million, respectively. Of this, $24.6 million
represented impairment and restructuring charges and $2.6 million represented
implementation charges in the third quarter of 2001; $49.4 million represented
impairment and restructuring charges and $7.6 million represented implementa-
tion charges for the first nine months of 2001. In addition, net income for
the third quarter of 2002 was favorably impacted by the discontinuation of
goodwill amortization, which was $1.5 million (pre-tax) and $4.6 million (pre-
tax) in the third quarter and first nine months of 2001.
Consistent with the first half of 2002, the company's third quarter and first
nine months results benefited from continued strength in the automotive
industry for both Automotive Bearings and Steel. North American light truck
production continued to be strong in the third quarter and first nine months of
2002. North American heavy truck demand also remained strong resulting from
the anticipated environmental regulation change to occur in the fourth quarter.
However, industrial markets around the world continued to show few signs of
recovery. Rail demand remains weak and global aerospace demand remains weak
versus levels from a year ago. Nevertheless, the company improved its
earnings performance in the third quarter and first nine months of 2002, which
reflects cost reductions achieved through its ongoing restructuring of manu-
facturing operations and lower administrative spending levels.
Gross profit was $111.3 million (17.7% of net sales) and $354.2 million (18.6%
of net sales) in the third quarter and first nine months of 2002,
respectively, compared to $91.0 million (15.7% of net sales) and $320.0 million
(17.1% of net sales) in the same periods a year ago. Gross profit performance
improved due to higher sales volume, cost containment and savings generated
from the company's manufacturing strategy initiatives. In addition, the third
quarter and first nine months 2002 gross profit was favorably impacted by the
discontinuation of goodwill amortization, which was $1.5 million (pre-tax) and
$4.6 million (pre-tax) in the third quarter and first nine months of 2001.
Selling, administrative and general expenses were $87.4 million (13.9% of net
sales) and $266.4 million (14.0% of net sales) in the third quarter and first
nine months of 2002, respectively, compared to $86.8 million (15.0% of net
13.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
sales) and $276.7 million (14.8% of net sales) recorded in the third quarter
and first nine months of 2001. Although there was an increase in implementa-
tion charges of $1.0 million and $4.5 million in the third quarter and first
nine months of 2002, respectively, compared to the same periods a year ago, as
well as increased performance-based pay reserves, these increases were offset
by savings related to the salaried workforce reduction and continuing focused
control on discretionary spending.
The company continued, in the third quarter of 2002, the second phase of the
strategic global refocusing of its manufacturing operations it announced in
April 2001 to establish a foundation for accelerating the company's growth
initiatives. This second phase of the company's transformation includes
creating focused factories for each product line or component, replacing
specific manufacturing processes with state-of-the-art processes through the
company's global supply chain, rationalizing production to the lowest total
cost plants in the company's global manufacturing system and implementing lean
manufacturing process redesign. The company also announced in 2001 its
intention to close bearing plants in Columbus, Ohio and Duston, England, and to
sell a tooling plant in Ashland, Ohio. The Columbus bearing plant ceased manu-
facturing operations in November 2001 while the Duston plant ceased manu-
facturing operations at the end of September 2002. Additionally, on June 30,
2002, the company sold its Ashland plant to Ashland Precision Tooling, LLC.
The company targeted an annualized pretax rate of savings of approximately
$100 million by the end of 2004 as a result of this program. Through September
30, 2002, the company achieved estimated annual savings of $70 million.
The following chart details the breakdown by segment of the $7.7 million and
$24.9 million in restructuring and impairment charges incurred during the three
months and nine months ended September 30, 2002 (in millions of dollars):
Three months ended September 30,2002:
Auto Industrial Steel Total
Restructuring: ------- ---------- ------- -------
Separation costs $ 0.3 $ 0.9 $ - $ 1.2
Exit costs 0.4 - - 0.4
------- ---------- ------- -------
$ 0.7 $ 0.9 $ - $ 1.6
Impaired assets:
Property, plant and equipment $ 1.1 $ 1.6 $ - $ 2.7
Special charges:
SFAS No. 88/106 curtailment $ 0.8 $ 2.0 $ 0.9 $ 3.7
Reversal of separation cost $ (0.1) $ (0.2) $ - $ (0.3)
------- ---------- ------- -------
$ 2.5 $ 4.3 $ 0.9 $ 7.7
======= ========== ======= =======
14.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Nine months ended September 30,2002:
Auto Industrial Steel Total
Restructuring: ------- ---------- ------- -------
Separation costs $ 1.0 $ 1.9 $ 0.2 $ 3.1
Exit costs 1.5 - - 1.5
------- ---------- ------- -------
$ 2.5 $ 1.9 $ 0.2 $ 4.6
Impaired assets:
Property, plant and equipment $ 14.1 $ 2.1 $ - $ 16.2
Special charges:
SFAS No. 88/106 curtailment $ 0.8 $ 3.7 $ 0.9 $ 5.4
Reversal of separation cost $ (0.5) $ (0.6) $ (0.2) $ (1.3)
------- ---------- ------- -------
$ 16.9 $ 7.1 $ 0.9 $ 24.9
======= ========== ======= =======
The third quarter and first nine months 2002 Automotive Bearings Business
impaired assets charge related to the Duston plant closure. The Industrial
Bearings Business impaired assets charge related to the Columbus plant closure.
The majority of the Automotive and Industrial restructuring costs in all of
2002 related to the Duston and Columbus plant closures, respectively. Third
quarter and first nine months 2002 charges also included severance for Columbus
associates and special curtailment expenses (pension and postretirement bene-
fits) related to associates involved in the sale of the Ashland plant and the
salaried workforce reduction. The reversals of separation cost in the third
quarter and first nine months of 2002 related to associates who were previously
included in the severance accrual but for whom severance will not be paid, as
these associates subsequently retired or found other employment.
Implementation charges for the quarter and nine months ended September 30, 2002
totaled $4.4 million and $14.3 million, respectively. Of these charges,
$2.1 million and $7.1 million, respectively, were classified as cost of
products sold and $2.3 million and $7.2 million, respectively, were classified
as selling, administrative and general expenses.
15.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Cumulative restructuring and impairment charges related to the second phase of
restructuring as of September 30, 2002 by segment, are as follows (in millions
of dollars):
Auto Industrial Steel Total
Restructuring: ------- ---------- ------- -------
Separation costs $ 26.9 $ 5.5 $ 1.5 $ 33.9
Exit costs 1.9 1.0 - 2.9
------- ---------- ------- -------
$ 28.8 $ 6.5 $ 1.5 $ 36.8
Impaired assets:
Property, plant and equipment $ 15.2 $ 2.5 $ - $ 17.7
Special charges:
SFAS 88/106 curtailment $ 0.8 $ 18.8 $ 0.9 $ 20.5
Reversal of separation cost $ (0.5) $ (0.6) $ (0.2) $ (1.3)
------- ---------- ------- -------
$ 44.3 $ 27.2 $ 2.2 $ 73.7
======= ========== ======= =======
Cumulative implementation charges related to the second phase of restructuring
totaled $22.3 million as of September 30, 2002. Of these charges,
$11.3 million were classified as cost of products sold and $11.0 million were
classified as selling, administrative and general expenses. As of
September 30, 2002, the remaining severance accrual balance was $6.8 million,
including $0.6 million in additional expense incurred during the third quarter
2002, offset by total accrual reversal and foreign currency adjustments of
$0.1 million. Total payments made during the third quarter of 2002 totaled
$4.9 million.
From the announcement of the restructuring initiatives in April 2001 to
September 30, 2002, 1,682 associates left the company as a result of the
restructuring and salaried workforce reduction. Of that number, 1,214 people
were from the Duston and Columbus plants, Canton bearing plants, Canadian
Timken Ltd., and associates included in the worldwide salaried workforce for
whom severance has been paid. In addition, 78 associates left the company as
a result of the sale of the Ashland plant. The remaining 390 associates
retired or voluntarily left the company as of September 30, 2002, and their
positions have been eliminated.
Other expense recorded in the third quarter of 2002 increased 38% and more than
doubled from the same periods a year ago due primarily to increased foreign
currency losses and the lack of realized gains from land sales.
The income tax rate exceeds the U.S. statutory rate primarily due to state and
local taxes and current foreign net operating losses for which no current tax
benefit is being realized.
On October 16, 2002, the company announced that it had reached an agreement
with Ingersoll-Rand Company Limited to acquire its Engineered Solutions
business, including certain operating assets and its subsidiary, The Torrington
Company, a leading worldwide producer of needle roller, heavy duty roller and
ball bearings and motion control components and assemblies, for cash and stock
valued at approximately $840 million. Under the terms of the agreement,
Ingersoll-Rand will receive approximately $700 million in cash and $140 million
16.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
worth of the company's common stock. The transaction is subject to antitrust
clearance, successful completion of debt and equity financing, and customary
closing conditions.
Automotive Bearings
The Automotive Bearings Business includes products for passenger cars, light
and heavy trucks and trailers. Global Automotive Bearings' sales for the third
quarter and first nine months of 2002 increased 17.3% to $207.1 million, from
$176.5 million in the third quarter of 2001, and 11.3% to $630.0 million, from
$565.8 million in the first nine months of 2001. Widespread incentive programs
on light vehicles and changing environmental regulations on heavy trucks drove
North American demand in the third quarter and first nine months of 2002.
North American light truck production is up approximately 11% year-to-date
compared to the same period a year ago. Medium and heavy truck production
globally continues to be weak. In North America, medium and heavy truck
production is down 10% year-to-date from 2001. The company expects demand for
heavy trucks in North America to decline significantly in the fourth quarter of
2002. Latin American automotive markets continue to be negatively impacted by
the current economic and political situations in that region.
Excluding $5.2 million and $24.4 million in restructuring and implementation
charges for the third quarters of 2002 and 2001, and $24.7 million and
$25.1 million in restructuring and implementation charges for the first nine
months of 2002 and 2001, respectively, and before interest and taxes,
Automotive Bearings' had earnings of $2.1 million, compared to a loss of
$7.9 million in 2001's third quarter, and earnings of $21.0 million, compared
to a loss of $9.4 million in 2001's first nine months. Including these charges,
Automotive Bearings' had a loss before interest and taxes of $3.1 million,
compared with a loss before interest and taxes of $32.3 million in the third
quarter of 2001, and a loss before interest and taxes of $3.6 million, compared
with a loss before interest and taxes of $34.6 million, in the first nine
months of 2001. The increase in EBIT, excluding restructuring and
implementation charges, resulted from increased sales volume compared to the
same period a year ago, increased savings enhanced by the manufacturing
strategy and salaried cost reduction initiatives and aggressive business cost
control. These increases more than offset the adverse impact of operating
inefficiencies resulting from capacity constraints caused by equipment
rationalization related to the manufacturing strategy initiative, foreign
currency losses and costs incurred to meet higher-than-expected customer
demand.
Automotive Bearings' selling, administrative and general expenses in the third
quarter and first nine months of 2002 were comparable to the same periods a
year ago. The business has been focusing on controlling discretionary spending
and realizing savings from the salaried cost reduction initiatives, which
offset the increased implementation charges and performance-based pay reserves
as a result of stronger EBIT performance in the third quarter and first nine
months of 2002.
Industrial Bearings
The Industrial Bearings Business includes industrial, rail, aerospace and super
precision products as well as emerging markets in China, India and Central and
Eastern Europe. Industrial Bearings' net sales for the third quarter and first
17.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
nine months of 2002 were $217.2 million and $658.2 million, an increase of
1.4% over the third quarter 2001 net sales of $214.1 million, and a decrease
of 2.9% over the first nine months of 2001 net sales of $678.0 million.
Although general industrial demand strengthened modestly in the third quarter
and first nine months of 2002 compared to the same periods a year ago, this
strength was offset by weaker demand from aerospace and rail customers.
Rail demand is expected to remain depressed, and aerospace demand shows no
near-term signs of improvement as customers reduce build rates. Industrial
markets are showing limited signs of recovery, and any recovery in 2003 is
expected to be modest.
Excluding $6.2 million and $2.4 million in restructuring and implementation
charges for the third quarters of 2002 and 2001, respectively, and
$13.9 million and $29.6 million in restructuring and implementation charges for
the first nine months of 2002 and 2001, respectively, and goodwill amortization
of $1.2 million and $3.6 million for the third quarter and first nine months of
2001, respectively, Industrial Bearings' EBIT was $18.1 million, up from
$9.8 million in third quarter of 2001, and $37.7 million, compared to
$37.6 million in the first nine months of 2001. Including these charges,
Industrial Bearings' EBIT was $11.9 million for the third quarter of 2002, com-
pared to $6.2 million in the third quarter of 2001, and $23.8 million for the
first nine months of 2002, compared to $4.4 million in the first nine months of
2001. The improvement in EBIT performance, despite relatively flat volumes, was
driven by improved product mix, efficiency improvements from the manufacturing
strategy and salaried cost reduction initiatives, as well as aggressive
business cost control. Also, the third quarter and first nine months 2002 EBIT
was favorably impacted by the discontinuation of goodwill amortization. This
improvement was dampened by the weakened demand in Aerospace and Super
Precision, which resulted in additional costs associated with surplus capacity,
reduced work schedules and redundancy costs as operations were ramped down.
Industrial Bearings' selling, administrative and general expenses in the third
quarter and first nine months of 2002 were comparable to the same period a year
ago. The business has been focusing on controlling discretionary spending and
realizing savings from the salaried cost reduction initiatives, which offset
the higher implementation charges and performance-based pay reserves as a
result of stronger EBIT performance in the third quarter and first nine months
of 2002.
Steel
Steel's net sales, including intersegment sales, of $246.8 million in third
quarter of 2002 and $740.6 million in the first nine months of 2002 improved
11.1% and declined 0.5%, respectively, compared to net sales of $222.1 million
and $744.3 million, in the same periods a year ago. Sales to automotive and
general industrial customers increased 23% and 31%, respectively, in the third
quarter of 2002 compared to third quarter of 2001 and increased 21% and 14%,
respectively, in the first nine months of 2002 compared to the first nine
months of 2001. However, sales to other customers continue to be sluggish.
Sales to the bearing industry, other than automotive suppliers, were weak,
and aerospace sales decreased 12% and 3%, compared to the same periods a year
ago. Additionally, sales to oil country and steel service center customers
decreased nearly 18% and 38%, respectively, compared to the same periods
a year ago.
18.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The company expects some negative seasonal impact on sales to automotive
customers in the fourth quarter. Fourth quarter sales to general industrial
customers and to steel service centers are expected to be higher than 2001.
Aerospace sales are expected to drop as customers cut the production of
passenger planes.
Excluding restructuring and implementation charges of $0.8 million and
$0.8 million for the third quarter and first nine months of 2002, Steel's
EBIT was $5.6 million and $32.3 million, respectively. This compares
with EBIT of $1.6 million and $19.6 million in the third quarter and first nine
months of 2001, excluding restructuring and implementation charges of
$0.4 million and $2.2 million, respectively, and goodwill amortization of
$0.3 million and $0.9 million, respectively. Including restructuring and
reorganization charges and goodwill amortization, Steel's EBIT was
$4.8 million and $31.5 million for the third quarter and the first nine
months of 2002, compared to $0.9 million and $16.5 million in the same
periods a year ago. The increase in EBIT was the result of continuing
cost-control actions. The Steel Business has reduced operating costs through
a combination of price reductions, product substitution and lower consumption.
Although scrap and alloy costs continued to increase in the third quarter and
the first nine months of 2002 compared to the same periods a year ago,
electricity and natural gas costs were lower than in the third quarter and
first nine months of 2001 and contributed to the improved EBIT performance.
Additionally, third quarter and first nine months 2002 labor productivity
increased compared to third quarter and first nine months 2001 due to
efficiency improvements and increased production levels. The company expects
scrap and alloy costs to be higher in the fourth quarter compared to 2001
levels.
Steel's selling, administrative and general expenses in the second quarter of
2002 were slightly higher compared to the same period a year ago, primarily due
to the increase in performance-based pay reserves as a result of stronger EBIT
performance in 2002 compared to the third quarter of 2001.
Financial Condition
- -------------------
Total assets as shown on the Consolidated Condensed Balance Sheets increased by
approximately $9 million from December 31, 2001. Inventory balances at the end
of the third quarter of 2002 increased approximately 8% compared to year-end
2001 levels. The company's number of days' supply in inventory as of September
30, 2002 was 110 days compared to 105 days as of December 31, 2001. Total
Bearings' number of days' supply in inventory was comparable with the prior
year period while Steel's inventory increased eleven days. The increase in
Steel's inventories in the third quarter of 2002 was a result of the increase
in operating levels to meet increased automotive customer demand. The Steel
number of days' supply in inventory as of December 31, 2001 was extremely low
as the result of the depressed customer demand in the fourth quarter of 2001.
Accounts receivable have increased by $68.6 million since December 31, 2001.
The increase is due primarily to the increase in sales levels. The number of
days' sales in receivables at September 30, 2002 was comparable to December 31,
2001, which was 51 days.
As shown on the Consolidated Condensed Statement of Cash Flows, the increase
in inventories used $35.2 million of cash during the first nine months of 2002.
Other assets used $6.8 million in cash during the first nine months of 2002.
19.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
This was primarily due to the funding of the e-business joint ventures and
other affiliations, which was offset by the collection of the receivable
related to the Ashland plant fixed assets sale as well as other receivables
collected during the third quarter. Accounts payable and accrued expenses
provided $46.1 million of cash in the first nine months of 2002, primarily due
to an increase in amounts payable to suppliers and an increase in the amounts
reserved for performance-based pay due to the company's better performance in
the first nine months of 2002. This increase in accounts payable and accrued
expenses was offset by the restructuring accrual payments made during the first
nine months of 2002. Purchases of property, plant and equipment, net used
$33.8 million of cash in the first nine months of 2002, well below the
$61.8 million spent during the same period in 2001.
The 37.0% debt-to-total-capital ratio at September 30, 2002 is lower than the
38.9% ratio at year-end 2001. Debt decreased by $15.1 million during the first
nine months of 2002, to $481.9 million at September 30, 2002. Excluding the
acquisition of Torrington, the company currently expects that any cash require-
ments in excess of cash generated from operating activities will be satisfied
by short-term borrowing and/or the issuance of medium-term notes. The company
continues to focus on working capital management and discretionary spending.
The company's contractual debt obligations and contractual commitments out-
standing as of September 30, 2002 are as follows (in millions):
Payments Due by Period
Total Less than 1 1-3 years 4-5 After 5
year years years
------- ----------- --------- ------- -------
Long-term Debt $374.1 $23.5 $9.6 $103.1 $237.9
Commercial Paper $26.6 $26.6 - - -
Other Lines of
Credit $81.2 $81.2 - - -
Operating Leases $57.1 $13.3 $21.9 $5.7 $16.2
The company's capital lease obligations are immaterial. At September 30, 2002,
the company had available $273.4 million through an unsecured $300.0 million
revolving credit agreement with a group of banks. The company is the guarantor
of a $23.5 million letter of credit for Pel Technologies, LLC. Excluding
letters of credit and guarantees supporting current outstanding debt, the
company also has approximately $31.5 million in various letters of credit and
guarantees.
The company expects the $700 million cash component of the pending acquisition
of Torrington will be financed through a new senior credit facility
underwritten by Bank of America, Key Bank, Merrill Lynch & Co. and Morgan
Stanley, proceeds from a public offering of senior notes and a public offering
of 11 million Timken shares.
On October 17, 2002, Standard & Poor's Rating Services publicly announced that
it placed its ratings of the company on CreditWatch with negative implications.
Additionally, Moody's Investors Service announced that it had placed the
company's debt ratings under review for possible downgrade. These announce-
ments were in response to the company's announcement that it had reached an
agreement with Ingersoll-Rand to purchase Torrington. The company expects to
maintain an investment grade rating.
20.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Total shareholders' equity has increased by approximately $37.3 million since
December 31, 2001. The increase in equity was primarily the result of a
favorable adjustment to the company's treasury shares of $60.8 million
resulting from the stock contribution to the pension plan and other stock
transactions, net income of $2.3 million, a non-cash foreign currency trans-
lation adjustment of $2.7 million, a non-cash adjustment of $0.4 million
related to outstanding and settled derivative instruments and the payment of
$23.5 million in dividends. Although the Brazilian Real and Argentine Peso
continued to be devalued during the first nine months of 2002, the adverse
impact on the foreign currency translation adjustment was more than offset
by the strength of currencies against the US dollar in many of the countries
in which the company operates.
During the third quarter of 2002, the company did not purchase any shares of
its common stock under the company's 2000 common stock purchase plan. This
plan authorizes the company to buy in the open market or in privately
negotiated transactions up to 4 million shares of common stock, which are to
be held as treasury shares and used for specified purposes. The company may
exercise this authorization until December 31, 2006. The company does not ex-
pect to be active in repurchasing shares under this plan in the near-term.
Critical Accounting Policies
- ----------------------------
The company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Item 7 of the company's Annual Report on
Form 10-K for the year ended December 31, 2001 includes a summary of critical
accounting policies, assumptions and estimates that management believes are
significant to the company's reported results of operations and financial
condition. Additional accounting policies are described in the "Significant
Accounting Policies" note to the consolidated financial statements included
in the company's Annual Report on Form 10-K.
Pensions
- --------
The company sponsors a number of defined benefit pension plans which cover most
U.S. and certain foreign associates. Most other foreign associates are covered
by government plans. The company also sponsors several unfunded postretirement
plans that provide health care and life insurance benefits for eligible
retirees and dependents. The measurement of liabilities related to these plans
is based on management's assumptions related to future events, including return
on pension plan assets, rate of compensation increases and health care cost
trend rates. The discount rate is determined using a model that matches
corporate bond securities against projected pension and postretirement
disbursements. Actual pension plan asset performance will either reduce or
increase unamortized pension losses at the end of 2002, which ultimately
affects net income in subsequent years.
21.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Generally accepted accounting principles for defined benefit plans require the
creation of a minimum pension liability when a defined employee benefit plan
does not have sufficient assets available to cover the accumulated benefit
obligation. To the extent a plan has unrecognized prior service costs, an
intangible pension asset is recorded. The remaining difference is then charged
to other comprehensive income, which is a component of shareholders' equity.
Based on current asset performance and interest rate levels, the company
anticipates that it will be required to reduce shareholders' equity as of
December 31, 2002. The amount of the reduction to shareholders' equity is
dependent on the actual performance of the company's pension fund assets and
interest rates and will not be determined until the first quarter of 2003.
Other Information
- -----------------
Assets and liabilities of subsidiaries, other than Timken Romania, which is
considered to operate in a highly inflationary economy, are translated at the
rate of exchange in effect on the balance sheet date; income and expenses are
translated at the average rates of exchange prevailing during the quarter.
Related translation adjustments are reflected as a separate component of
accumulated other comprehensive loss. Foreign currency gains and losses
resulting from transactions and the translation of financial statements are
included in the results of operations.
Foreign currency exchange losses included in the company's operating results
for the third quarter and first nine months of 2002 totaled $4.0 million and
$5.3 million, respectively, compared to income of $0.1 million and expense of
$5.6 million in the same year-ago periods. The higher expense in 2002 is
primarily attributable to certain foreign subsidiaries having payables
denominated in currencies other than their own functional currency.
Regarding the balance sheet as of September 30, 2002, the company has a non-
cash foreign currency translation adjustment of $2.7 million, which decreased
shareholders' equity, compared to a non-cash foreign currency translation
adjustment of $13.3 million that decreased equity in the first nine months of
2001. Although the Brazilian Real and Argentine Peso continued to be devalued
during the first nine months of 2002, the adverse impact was more than offset
by the strength of currencies against the US dollar in many of the countries
in which the company operates. The opposite was true during the first nine
months of 2001 when the company was negatively impacted by continued weakening
of currencies.
On November 1, 2002, the board of directors declared a quarterly cash dividend
of $.13 per share, payable on December 2, 2002 to shareholders of record as of
November 15, 2002. This is the 322nd consecutive dividend paid on the common
stock of the company.
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
22.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Change in Method of Accounting
- ------------------------------
No. 146 is effective for exit and disposal activities that are initiated after
December 31, 2002. It is currently the company's policy to recognize
restructuring costs as announced in April 2001 in accordance with EITF Issue
No. 94-3.
Effective January 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with SFAS No. 142, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed at least
annually for impairment. The application of the nonamortization provisions is
expected to result in an increase in annual net income of $6.1 million
(pre-tax), of which $1.5 million (pre-tax) is related to the third quarter of
2002. Changes in the estimated useful lives of intangible assets will not
result in a material increase to net income. Intangible assets that are
separable and have a definite life will continue to be amortized over the
estimated useful lives of such assets.
In accordance with the adoption of SFAS No. 142, the company evaluated the
impairment of indefinite lived intangible assets and determined that none were
impaired based on estimations in market value. Fair value for each of the
company's five reporting units was determined by discounted cash flows and
validated with various market-comparable approaches. Based on the results of
this review, the company recorded a transitional impairment loss of
$12.7 million, net of an income tax benefit of $7.8 million, which relates to
the Specialty Steel Business. This transitional impairment loss was recorded
in the third quarter as a non-cash charge and reflected as the cumulative
effect of a change in accounting principle.
Refer to Note 8 on page 10 of "Notes to Financial Statements (Unaudited)" for
further discussion of this change in method of accounting.
Certain statements set forth in this document (including the company's fore-
casts, beliefs and expectations) that are not historical in nature are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The company cautions readers that actual
results may differ materially from those projected or implied in forward-
looking statements made by or on behalf of the company due to a variety of
important factors, such as:
a) Risks associated with the consummation of the acquisition of Torrington,
including our ability to obtain antitrust clearance and financing for the
acquisition and other closing risks; the uncertainties in both timing and
amount, if any, of actual benefits that may be realized as a result of the
integration of the Torrington business with the company's operations;
risks associated with diversion of management's attention from routine
operations during the integration process; and risks associated with the
higher level of debt associated with the acquisition.
b) Changes in world economic conditions, including additional adverse effects
from terrorism or hostilities. This includes, but is not limited to,
political risks associated with the potential instability of governments
and legal systems in countries in which the company or its customers
conduct business and significant changes in currency valuations.
23.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
c) The effects of changes in customer demand on sales, product mix, and
prices. This includes the effects of customer strikes, the impact of
changes in industrial business cycles and whether conditions of fair trade
continue in the U.S. market.
d) Competitive factors, including changes in market penetration, increasing
price competition by existing or new foreign and domestic competitors, the
introduction of new products by existing and new competitors, and new
technology that may impact the way the company's products are sold or
distributed.
e) Changes in operating costs. This includes the effect of changes in the
company's manufacturing processes; changes in costs associated with
varying levels of operations; changes resulting from inventory management
and cost reduction initiatives and different levels of customer demands;
the effects of unplanned work stoppages; changes in the cost of labor and
benefits; and the cost and availability of raw materials and energy.
f) The success of the company's operating plans, including its ability to
achieve the benefits from its global restructuring, manufacturing trans-
formation, and administrative cost reduction initiatives as well as its
ongoing continuous improvement and rationalization programs; its ability
to maintain appropriate relations with unions that represent company
associates in certain locations in order to avoid disruptions of business.
g) Unanticipated litigation, claims or assessments. This includes, but is
not limited to, claims or problems related to intellectual property,
product liability or warranty and environmental issues.
h) Changes in worldwide financial markets, including interest rates, to the
extent they affect the company's ability to raise capital or increase the
company's cost of funds, have an impact on the overall performance of the
company's pension fund investments and/or cause changes in the economy
which affect customer demand.
Additional risks relating to the company's business, the industries in which
the company operates or the company's common stock may be described from time
to time in the company's filings with the SEC. All of these risk factors are
difficult to predict, are subject to material uncertainties that may affect
actual results and may be beyond the company's control.
Except as required by the federal securities laws, the company undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
24.
Part I
Item 4. Controls and Procedures
(a). Evaluation of disclosure controls and procedures. Based on
their evaluation, as of a date within 90 days prior to the date
of the filing of this Form 10-Q, of the effectiveness of the
company's disclosure controls and procedures (as defined in Rule
13a-14(c) and 15(d)-14(c) of the Securities Exchange Act of
1934, as amended), the principal executive officer and principal
financial officer of the company have each concluded that such
disclosure controls and procedures are effective.
(b). Changes in internal controls. Subsequent to the date of their
evaluation, there have not been any significant changes in the
company's internal controls or in other factors that could
significantly affect these controls, including any corrective
action with regard to significant deficiencies and material
weaknesses.
25.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 22, 2001, eight current or former employees of the company
filed a lawsuit in the Court of Common Pleas, Stark County, Ohio
against the company and fifteen current or former employees of the
company. The lawsuit was removed to the United States District
Court, Northern District of Ohio, Eastern Division on June 20, 2001.
The lawsuit alleged, among other things, sexual harassment and em-
ployment discrimination. The plaintiffs sought compensatory and
punitive damages of approximately $95 million. During the third
quarter of 2001, this case was dismissed, without prejudice, pursuant
to a sua sponte order of the presiding judge.
In February 2002, the lawsuit was refiled in the Court of Common
Pleas, Stark County, Ohio, by two of the original plaintiffs naming
only the company as a defendant. The allegations contained in the
complaint are similar to those made in the May 22, 2001 filing. The
new lawsuit does not specify the amount of damages the plaintiffs are
seeking. In April 2002, the plaintiffs voluntarily dismissed a
number of counts contained in the complaint. In August 2002, one of
the two remaining plaintiffs was voluntarily dismissed from the suit.
In November 2002, the trial court judge granted the company's motion
for summary judgment, and the case was dismissed.
Item 2. Changes in Securities and Use of Proceeds
On September 10, 2002, the company issued 3,000,000 shares of its
common stock to The Timken Company Collective Investment Trust for
Retirement Trusts (the "Trust") as a contribution to three company
sponsored pension plans. The fair market value of the 3,000,000
shares of common stock contributed to the Trust was approximately
$54,480,000. The issuance of the shares of common stock to the Trust
was exempt from registration under the Securities Act of 1933, as
amended (the "Act"), pursuant to Section 4(2) of the Act as a trans-
action by an issuer not involving a public offering.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
(a) Exhibits (continued) 26.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 signed on November 13, 2002 by the President and
Chief Executive Officer and the Executive Vice President -
Finance and Administration
99.2 Consulting Agreement entered into with e-Solutions.biz,
LLC (Thomas W. Strouble, Owner and principal)
(b) Reports on Form 8-K:
On October 18, 2002, the company filed a Form 8-K regarding
Other Events, which contained clarification of certain state-
ments made during a teleconference held by the company on
October 17, 2002. No financial statements were filed.
On October 17, 2002, the company filed a Form 8-K regarding
Other Events, which contained an announcement that the company
entered into a Stock and Asset Purchase Agreement with
Ingersoll-Rand Company Limited ("IR") to acquire IR's
Torrington business. This agreement was filed as an exhibit to
this Form 8-K. No financial statements were filed.
On October 17, 2002, the company filed a Form 8-K regarding
Regulation FD Disclosure, which contained presentation materials
to be used in the teleconference, which was conducted on October
17. No financial statements were filed.
On October 17, 2002, the company filed a Form 8-K regarding
Other Events, which contained a press release, dated October 16,
2002 titled "The Timken Company Announces Third Quarter Results:
Sales and Earnings Both Up." A consolidated statement of
income, consolidated statement of cash flows and balance sheet
as of September 30, 2002 were included in the filing.
On October 16, 2002, the company filed a Form 8-K regarding Other
Events and Regulation FD Disclosure, which contained estimated
market data and industry trend information relating to a number
of industry segments in which the company sells bearing and
steel products. No financial statements were filed.
On October 16, 2002, the company filed a Form 8-K regarding
Other Events, which contained a press release dated October 16,
2002 titled "The Timken Company to Acquire Torrington For
$840 Million in Cash and Stock." No financial statements were
filed.
On September 23, 2002, the company filed a Form 8-K regarding
Other Events and Regulation FD Disclosure, which contained
estimated market data and industry trend information relating to
a number of industry segments in which the company sells bearing
and steel products. No financial statements were filed.
On August 15, 2002, the company filed a Form 8-K regarding Other
Events and Regulation FD Disclosure, which contained estimated
market data and industry trend information relating to a number
of industry segments in which the company sells bearing and
steel products. No financial statements were filed.
27.
(b) Reports on Form 8-K (continued):
On August 7, 2002, the company filed a Form 8-K regarding Other
Events and Regulation FD Disclosure, which contained Statements
under Oath of its President and Chief Executive Offce and its
Executive Vice President - Finance and Administration regarding
facts and circumstances relating to Exchange Act Filings. No
financial statements were filed.
On July 19, 2002, the company filed a Form 8-K regarding Other
Events, which contained a press release, dated July 18,2002
titled "The Timken Company Announces Second Quarter Results."
A consolidated statement of income, consolidated statement of
cash oflows and balance sheet as of June 30, 2002 were included
in the filing.
On July 17, 2002, the company filed a Form 8-K regarding Other
Events and Regulation FD Disclosure, which contained estimated
market data and industry trend information relating to a number
of industry segments in which the company sells bearing and
steel products. No financial statements were filed.
28.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Timken Company
_______________________________________
Date November 13, 2002 BY /s/ James W. Griffith
________________________ _______________________________________
James W. Griffith,
Chief Executive Officer,
President and Director
November 13, 2002 BY /s/ Glenn A. Eisenberg
________________________ _______________________________________
Glenn A. Eisenberg
Executive Vice President - Finance and
Administration
CERTIFICATIONS 29.
I, James W. Griffith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Timken Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effective-
ness of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all signficant deficiencies in the design or operation of internal con-
trols which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal con-
trols or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 BY /s/ James W. Griffith
______________________________________
James W. Griffith,
Chief Executive Officer,
President and Director
I, Glenn A. Eisenberg, certify that: 30.
1. I have reviewed this quarterly report on Form 10-Q of The Timken Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effective-
ness of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all signficant deficiencies in the design or operation of internal con-
trols which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal con-
trols or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
BY /s/ Glenn A. Eisenberg
______________________________________
Glenn A. Eisenberg
Executive Vice President - Finance and
Administration