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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 March 31, 2003
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-1169
THE TIMKEN COMPANY
(Exact name of registrant as specified in its charter)
Ohio 34-0577130
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
___ ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
___ ___
As of March 31, 2003, the Registrant had 85,472,026 shares of common stock
outstanding.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Mar 31 Dec 31
2003 2002
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents........................... $43,287 $82,050
Accounts receivable, less allowances,
(2003-$18,248; 2002-$14,386)........................ 603,352 361,316
Deferred income taxes............................... 35,351 36,003
Inventories (Note 4) ............................... 738,127 488,923
---------- ----------
Total Current Assets...................... 1,420,117 968,292
Property, plant and equipment....................... 3,291,497 2,945,076
Less allowances for depreciation................... 1,734,396 1,718,832
---------- ----------
1,557,101 1,226,244
Goodwill............................................ 320,868 129,943
Intangible pension asset............................ 128,368 129,042
Intangible assets (Note 10)......................... 20,589 5,217
Deferred income taxes............................... 170,273 169,051
Other assets........................................ 260,571 120,567
---------- ----------
Total Assets.................................. $3,877,887 $2,748,356
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and other liabilities.............. $389,336 $296,543
Short-term debt and commercial paper................ 218,632 111,134
Accrued expenses.................................... 278,983 226,393
---------- ----------
Total Current Liabilities................. 886,951 634,070
Noncurrent Liabilities
Long-term debt (Note 5) ............................ 778,066 350,085
Accrued pension cost................................ 753,834 723,188
Accrued postretirement benefits cost................ 493,302 411,304
Other noncurrent liabilities........................ 24,392 20,623
---------- ----------
Total Noncurrent Liabilities.............. 2,049,594 1,505,200
Shareholders' Equity (Note 7)
Common stock........................................ 631,252 310,317
Earnings invested in the business................... 767,533 764,446
Accumulated other comprehensive loss................ (457,443) (465,677)
---------- ----------
Total Shareholders' Equity................ 941,342 609,086
Total Liabilities and Shareholders' Equity.... $3,877,887 $2,748,356
========== ==========
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
Mar 31 Mar 31
2003 2002
---------- ----------
(Thousands of dollars, except per share data)
Net sales.......................................... $ 838,007 $ 615,757
Cost of products sold.............................. 707,741 497,115
---------- ----------
Gross Profit...................................... 130,266 118,642
Selling, administrative and general expenses....... 105,271 85,992
Impairment and restructuring charges (Note 8)...... - 3,057
---------- ----------
Operating Income.................................. 24,995 29,593
Interest expense................................... (10,161) (8,035)
Interest income.................................... 210 380
Other income (expense)............................. 3,854 (7,468)
---------- ----------
Income Before Income Taxes and Cumulative
Effect of Change in Accounting Principle......... 18,898 14,470
Provision for income taxes (Note 6)................ 7,559 5,282
---------- ----------
Income Before Cumulative Effect of Change in
Accounting Principle............................. $ 11,339 $ 9,188
Cumulative effect of change in accounting principle
(net of income tax benefit of $7,786)............ - 12,702
---------- ----------
Net Income (Loss).................................. $ 11,339 $ (3,514)
========== ==========
Earnings Per Share:
Income before cumulative effect of change in
accounting principle............................ $ 0.15 $ 0.15
Cumulative effect of change in accounting principle $ - $(0.21)
Earnings Per Share*............................... $ 0.15 $(0.06)
Earnings Per Share - assuming dilution:
Income before cumulative effect of change in
accounting principle............................ $ 0.15 $ 0.15
Cumulative effect of change in accounting principle $ - $(0.21)
Earnings Per Share - assuming dilution**.......... $ 0.15 $(0.06)
Dividends Per Share............................... $ 0.13 $ 0.13
========== ==========
* Average shares outstanding...................... 74,444,132 59,914,680
** Average shares outstanding - assuming dilution.. 74,613,170 60,395,183
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Cash Provided (Used) Mar 31 Mar 31
2003 2002
-------- --------
OPERATING ACTIVITIES (Thousands of dollars)
Net income (loss)...................................... $11,339 ($3,514)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Cumulative effect of accounting change................ - 12,702
Depreciation and amortization......................... 41,265 36,762
Gain on disposals of property, plant and equipment.... (5,734) (2,875)
(Credit) provision for deferred income taxes.......... (2,100) 9,272
Stock issued in lieu of cash to employee benefit
plans................................................ 715 1,031
Non-cash impact of impairment and restructuring
charges.............................................. - (6,671)
Changes in operating assets and liabilities:
Accounts receivable.................................. (54,614) (49,862)
Inventories.......................................... (22,463) (17,128)
Other assets......................................... (10,201) 2,637
Accounts payable and accrued expenses................ 53,973 (1,510)
Foreign currency translation......................... (1,859) (465)
-------- -------
Net Cash Provided (Used) by Operating Activities.... 10,321 (19,621)
INVESTING ACTIVITIES
Capital expenditures.................................. (22,998) (16,504)
Proceeds from disposals of property, plant and
equipment............................................ 9,895 1,441
Other ................................................ (2,064) 7,499
Acquisitions.......................................... (718,952)* (6,751)
-------- -------
Net Cash Used by Investing Activities............... (734,119) (14,315)
FINANCING ACTIVITIES
Cash dividends paid to shareholders.................... (8,252) (7,789)
Issuance of common stock for acquisition............... 180,220* -
Accounts receivable securitization financing........... 125,000 -
Payments on long-term debt............................. (124) (1,727)
Proceeds from issuance of long-term debt............... 424,553 -
Short-term debt activity - net......................... (36,939) 27,498
-------- --------
Net Cash Provided by Financing Activities............ 684,458 17,982
Effect of exchange rate changes on cash................ 577 (388)
Decrease in Cash and Cash Equivalents.................. (38,763) (16,342)
Cash and Cash Equivalents at Beginning of Period....... 82,050 33,392
-------- --------
Cash and Cash Equivalents at End of Period............. $43,287 $17,050
======== ========
* Excluding $140 million of common stock (9,395,973 shares) issued to
Ingersoll-Rand Company, in conjunction with the acquisition.
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, 2002.
Note 2 -- Stock-Based Compensation
On December 31, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation," by providing alterna-
tive methods of transition to SFAS No. 123's fair value method of accounting
for stock-based compensation. SFAS No. 148 also amends the disclosure require-
ments of SFAS No. 123. The company has elected to follow Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its stock options to key associates
and directors. Under APB Opinion No. 25, whenever the market price of the com-
pany's stock options equals the market price of the underlying common stock on
the date of grant, no compensation expense is required.
The effect on net income (loss) and earnings per share as if the company had
applied the fair value recognition provisions of SFAS No. 123 is as follows for
the quarters ended March 31:
2003 2002
---------- -----------
(Thousands of dollars)
Net income (loss), as reported $11,339 $(3,514)
Add: Stock-based employee compen-
sation expense, net of related
taxes 451 54
Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax
effects (1,217) (927)
---------- -----------
Pro forma net income (loss) $10,573 $(4,387)
========== ===========
Earnings per share:
Basic and diluted - as reported $ 0.15 $(0.06)
Basic and diluted - pro forma $ 0.14 $(0.07)
Note 3 -- Acquisition
On February 18, 2003, the company acquired Ingersoll-Rand Company Limited's
(IR's) Engineered Solutions business, a leading worldwide producer of needle
roller, heavy-duty roller and ball bearings, and motion control components and
assemblies. IR's Engineered Solutions business is comprised of certain
operating assets and subsidiaries, including The Torrington Company. IR's
Engineered Solutions business, hereafter referred to as Torrington, had sales
of $1.2 billion in 2002.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 6.
Continued
Note 3 -- Acquisition (continued)
The company paid IR $700 million in cash, subject to post-closing purchase price
adjustments, and issued $140 million of its common stock (9,395,973 shares) to
Ingersoll-Rand Company, a subsidiary of IR. To finance the cash portion of the
transaction the company utilized, in addition to cash on hand: $180.0 million,
net of underwriting discounts and commissions, from a public offering of
12.65 million shares of common stock at $14.90 per common share; $246.9 million,
net of underwriting discounts and commissions, from a public offering of
$250.0 million of 5.75% senior unsecured notes due 2010; $125.0 million from
its Asset Securitization facility; and approximately $86 million from its new
senior credit facility. Costs related to the acquisition were $18.2 million
and are included in the purchase price.
The purchase price has been allocated to assets acquired and liabilities
assumed based on estimated fair market values at the date of acquisition. The
purchase price allocation is preliminary and further adjustments will be made
upon completion of the final valuation studies and integration initiatives
implemented by the company.
The table below reflects unaudited pro forma results of the company and
Torrington as if the acquisition had taken place at the beginning of the periods
presented, after giving effect to certain adjustments, including the amorti-
zation of intangible assets, interest expense on acquisition debt, depreciation
of fixed assets, employee benefits and income tax effects. Unaudited pro forma
earnings for each quarter presented include higher than normal cost of products
sold resulting from the one-time write-up of acquired inventories required by
the purchase accounting rules. This charge decreased earnings per share by
approximately $0.07 in each quarter presented. No effect has been given to
operating synergies in this presentation. These pro forma amounts do not
purport to be indicative of the results that would have been obtained if the
acquisition had occurred as of the beginning of the periods presented or that
may be obtained in the future:
(Amounts in thousands, except per share data) Three Months Ended March 31,
----------------------------
2003 2002
------------ ------------
Net sales $ 981,562 $ 904,799
(Loss) income before cumulative effect of change
in accounting principle (5,353) 11,055
Net loss $ (5,353) $ (1,647)
Earnings per share:
Basic and diluted:
Income before cumulative effect of change
in accounting principle $ (0.07) $ 0.14
Cumulative effect of change in accounting
principle - (0.16)
------------ ------------
Earnings per share - basic and diluted $ (0.07) $(0.02) ============ ============
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7.
Continued
Note 4 -- Inventories Mar 31 Dec 31
2003 2002
-------- ---------
(Thousands of dollars)
Finished products $343,681 $210,945
Work-in-process and raw materials 357,719 243,485
Manufacturing supplies 36,727 34,493
-------- --------
$738,127 $488,923
======== ========
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.
Note 5 -- Long-term Debt and Other Financing Arrangments Mar 31 Dec 31
2003 2002
-------- ---------
(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 March 31, 2003 is 1.20%. $ 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 March 31, 2003 is 1.20%. 8,000 8,000
State of Ohio Air Quality Bond, maturing on November 1,
2025. The variable interest rate is tied to the
bank's tax exempt weekly interest rate. The rate at
March 31, 2003 is 1.15%. 9,500 9,500
State of Ohio 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 March 31, 2003 is 1.10%. 12,200 12,200
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
March 31, 2003 is 1.20%. 24,000 24,000
Fixed Rate Medium-Term Notes, Series A, due at various
dates through May, 2028, with interest rates ranging
from 5.75% to 7.76%. 292,000 292,000
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 8.
Continued
Note 5 -- Long-term Debt and Other Financing Arrangments (continued)
Mar 31 Dec 31
2003 2002
-------- ---------
(Thousands of dollars)
Senior credit facility, maturing on December 31,
2007. The variable interest rate is LIBOR plus
1.5%. The rate at March 31, 2003 is 2.85%. 175,000 -
Unsecured notes, maturing on February 15, 2010,
with a fixed interest rate of 5.75%. 250,000 -
Other 15,885 11,166
-------- --------
803,858 373,866
Less: Current Maturities 25,792 23,781
-------- --------
$778,066 $350,085
======== ========
On December 19, 2002, the company entered into an Accounts Receivable
Securitization financing agreement (Asset Securitization), which provides for
borrowings up to $125 million, limited to certain borrowing base calculations,
and is secured by certain trade receivables. Under the terms of the Asset
Securitization, the company sells, on an ongoing basis, certain domestic trade
receivables to Timken Receivables Corporation, a wholly owned consolidated
subsidiary, that in turn uses the trade receivables to secure the borrowings,
which are funded through a vehicle that issues commercial paper in the short-
term market. As of March 31, 2003, there was $125 million outstanding on this
facility, and no payments have been made. This balance is reflected on the
company's consolidated condensed balance sheet as of March 31, 2003 in short-
term debt and commercial paper. The yield on the commercial paper, which is
the commercial paper rate plus program fees, is considered a financing cost,
and is included in interest expense on the consolidated statements of
operations. This rate was 1.76% at March 31, 2003.
Under the $500 million senior credit facility, the company has three financial
covenants: consolidated net worth; leverage ratio; and fixed charge coverage
ratio. These financial covenants will become effective for the second quarter
ending on June 30, 2003. At March 31, 2003, the company was in compliance with
the covenants under its senior credit facility and its other debt agreements.
Note 6 -- Income Tax Provision
Three Months Ended
Mar 31 Mar 31
2003 2002
-------- --------
U.S. (Thousands of dollars)
Federal $ 4,004 $ 4,219
State & Local 627 730
Foreign 2,928 333
------- -------
$ 7,559 $ 5,282
======= =======
Taxes provided exceeded the U.S. statutory rate primarily due to losses at
certain foreign operations in which the realization of the tax benefit of
these losses is more than likely not to occur and taxes paid to state and
local jurisdictions.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 9.
Mar 31 Dec 31
Note 7 -- Shareholders' Equity 2003 2002
-------- --------
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)
2003 - 85,497,889 shares
2002 - 63,451,916 shares
Stated Capital 53,064 53,064
Other paid-in capital 578,659 257,992
Less cost of Common Stock in treasury
2003 - 25,863 shares
2002 - 40,074 shares (471) (739)
-------- --------
$631,252 $310,317
======== ========
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, 2002 $53,064 $257,992 $764,446 ($465,677) ($739) $ 609,086
Net Income 11,339 11,339
Foreign currency translation adjustment 9,102 9,102
Change in fair value of derivative financial
instruments, net of reclassifications 868 868
----------
Total comprehensive income 19,573
Dividends - $0.13 per share (8,252) (8,252)
Issuance of 14,211 shares from treasury
related to stock option and employee
benefit plans 447 268 715
Issuance of 22,045,973 shares from authorized
to finance the Torrington acquisition 320,220 320,220
------- -------- -------- ---------- --------- ----------
Balance March 31, 2003 $53,064 $578,659 $767,533 ($457,443) ($471) $941,342
======= ======== ======== ========== ========= ==========
The total comprehensive income for the three months ended March 31, 2002 was $8,326,000.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 10.
Continued
Note 8 -- Impairment and Restructuring Charges
In April 2001, the company announced a strategic global refocusing of its manu-
facturing operations (MSI) to establish a foundation for accelerating the
company's growth initiatives. This second phase of the company's transformation
included 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 closed its
bearing plants in Columbus, Ohio and Duston, England, sold the tooling plant
in Ashland, Ohio, and reduced employment by 1,824 associates by the end of
2002. To implement the MSI initiatives during 2001 and 2002, the company
incurred $107.4 million in cumulative impairment, restructuring and reorgani-
zation charges related to MSI and salaried workforce reduction programs.
The company targeted an annualized pretax rate of savings of approximately
$100 million by the end of 2004 as a result of these programs. As of March 31,
2002, the company achieved an estimated annualized pretax savings rate of
$35 million. All charges associated with MSI and salaried workforce reduction
programs were recognized at the end of 2002, and the company achieved an
estimated annualized pretax savings rate of $80 million. No impairment,
restructuring and/or reorganization charges related to the MSI and salaried
workforce reduction programs were incurred during the first quarter of 2003.
As of March 31, 2003, the majority of the remaining accrual balance was paid,
and no reversal of the severance accrual was recorded.
The following chart details the breakdown by segment of the $3.0 million in
restructuring and impairment charges incurred during the quarter ended
March 31, 2002 (in millions of dollars):
Auto Industrial Steel Total
Restructuring: ------- ---------- ------- -------
Separation costs $ 0.4 $ 0.4 $ 0.2 $ 1.0
Exit costs 0.5 - - 0.5
------- ---------- ------- -------
$ 0.9 $ 0.4 $ 0.2 $ 1.5
Impaired assets:
Property, plant and equipment $ 1.0 $ 0.5 $ - $ 1.5
------- ---------- ------- -------
$ 1.9 $ 0.9 $ 0.2 $ 3.0
======= ========== ======= =======
The first quarter of 2002 automotive impaired assets charge related to the
Duston plant closure and the impaired assets charge for industrial related to
the Columbus plant closure. The majority of the automotive and industrial
restructuring costs also related to the Duston and Columbus plant closures,
respectively. Reorganization charges for the quarter ended March 31, 2002
totaled $5.1 million, classified as cost of products sold ($2.3 million) and
selling, administrative and general expenses ($2.8 million).
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 11.
Continued
Note 9 -- Segment Information
With the acquisition of Torrington, the company reorganized two of its
reportable segments - the Automotive and Industrial Groups. Timken's automotive
aftermarket business is now part of the Industrial Group, which is managing the
combined distribution operations. The company's sales to emerging markets,
principally in central and eastern Europe and Asia, previously were reported as
part of the Industrial Group. In the first quarter of 2003, emerging market
sales to automotive original equipment manufacturers are now included in the
Automotive Group. The primary measurement used by management to measure the
financial performance of each Group is adjusted EBIT (earnings before interest
and taxes) excluding special items such as restructuring, reorganization and
integration costs, one-time gains or losses on sales of assets and allocated
payments received under the Continued Dumping and Subsidy Offset Act (CDSOA).
The segment results that follow for both 2003 and 2002 reflect the reporting
reorganization described above.
(Thousands of Dollars) Three Months Ended
Mar 31 Mar 31
2003 2002
Automotive Group -------- --------
Net sales to external customers $298,129 $183,398
Depreciation and amortization 12,701 8,574
EBIT, as adjusted 8,868 7,459
Industrial Group
Net sales to external customers $304,963 $233,238
Depreciation and amortization 12,140 11,261
EBIT, as adjusted 17,810 11,080
Steel Group
Net sales to external customers $234,915 $199,121
Intersegment sales 40,864 39,273
Depreciation and amortization 16,424 16,927
EBIT, as adjusted 6,530 12,119
Profit Before Taxes
Total EBIT, as adjusted, for reportable segments 33,208 30,658
Impairment and restructuring charges - (3,057)
Reorganization expenses - (5,044)
Integration expenses (9,063) -
Gain on sale of land 5,447 -
Interest expense (10,161) (8,035)
Interest income 210 380
Intersegment adjustments (743) (432)
-------- --------
Income before income taxes $ 18,898 $ 14,470
======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 12.
Continued
Note 10 - Intangible Assets
The changes in the carrying amount of goodwill and indefinite lived intangible
assets for the quarter ended March 31, 2003 are as follows:
(Thousands of Dollars) Balance Balance
12/31/02 Acquisition Other 3/31/03
--------- ----------- ------- ---------
Goodwill:
Automotive $ 1,633 $ 169,279 $ (108) $ 170,804
Industrial 119,440 21,342 311 141,093
Steel 8,870 - 101 8,971
--------- ---------- -------- ---------
$ 129,943 $ 190,621 $ 304 $ 320,868
========= ========== ======== =========
The indefinite lived intangible assets are immaterial.
The following table displays intangible assets as of March 31, 2003 and
December 31, 2002:
(Thousands of Dollars) As of March 31, 2003
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Amortized intangible assets:
Automotive trademarks $ 312 $ (105) $ 207
Automotive technology use 10,100 (115) 9,985
Automotive customer relationships 3,770 (1,146) 2,624
Industrial trademarks $ 266 $ (90) $ 176
Industrial land use rights 3,685 (149) 3,536
Industrial know-how transfer 462 (358) 104
Steel trademarks 236 (79) 157
-------- ----------- --------
$ 18,831 $ (2,042) $ 16,789
======== =========== ========
Unamortized intangible assets:
Goodwill $320,868 $ - $320,868
Automotive land use rights $ 105 - $ 105
Automotive technology use 2,240 - 2,240
Industrial license agreements $ 952 - 952
Industrial technology use 503 - 503
-------- ----------- --------
$324,668 $ - $324,668
======== =========== ========
Total Intangible Assets $343,499 $ (2,042) $341,457
======== =========== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 13.
Continued
Note 10 - Intangible Assets (continued)
As of December 31, 2002
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Amortized intangible assets:
Industrial trademarks $ 712 $ 213 $ 499
Industrial land use rights 4,484 905 3,579
Industrial know-how transfer 417 341 76
-------- ----------- --------
$ 5,613 $ 1,459 $ 4,154
======== =========== ========
Unamortized intangible assets:
Goodwill $129,943 $ - $129,943
Automotive land use rights 112 - 112
Industrial license agreements 951 - 951
-------- ----------- --------
$131,006 $ - $131,006
======== =========== ========
Total Intangible Assets $136,619 $ 1,459 $135,160
======== =========== ========
Amortization expense for intangible assets was approximately $234,000 for the
three months ended March 31, 2003, and is estimated to be approximately
$1,844,000 annually for the next five fiscal years.
Note 11 - Equity Investments
The company, prior to the Torrington acquisition, owned equity interests in
certain joint ventures. As part of the Torrington acquisition, several
additional equity interests were acquired. Certain of these equity interests
include: Advanced Green Components, LLC, a supplier of forged and machined
rings for bearing manufacture; Timken-NSK Bearings (Suzhou) Co. Ltd., a
joint venture which positions the company to provide tapered roller bearings
from a facility under construction in China; International Components Supply,
Limitada, a joint venture which produces forged and turned steel rings in
Brazil; Bardella Timken Industrial Services, a joint venture which expands
the technical services the company provides to rolling mill customers in Brazil;
Torrington Wuxi Bearings Company, a manufacturing joint venture in China; S.E.
SETCO Service Company, a joint venture which repairs and rebuilds machine tool
spindles; NRB Bearings Limited, a manufacturing and marketing joint venture in
India; and PEL Technologies, LLC, a joint venture in the United States that has
developed a proprietary technology which converts iron units into engineered
iron oxides for use in pigments, coatings and abrasives. The balances related
to investments accounted for under the equity method are reflected in other
assets in the consolidated condensed balance sheets, which were approximately
$131.6 million and $25.1 million at March 31, 2003 and December 31, 2002,
respectively.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 14.
Continued
Note 11 - Equity Investments (continued)
The company is a guarantor of $27.5 million in debt for Pel. A $23.5 million
letter of credit was guaranteed by the company to secure payment on Ohio Water
Development Authority revenue bonds held by Pel, as well as a guarantee for a
$4 million bank loan. In case of default by Pel on either obligation, the
company has agreed to pay existing balances due as of the date of default. The
letter of credit expires on July 22, 2006. The bank loan obligation expires
on the earlier of March 27, 2012 or on the date that Pel maintains a certain
debt coverage ratio for a specified period.
Equity investments are reviewed for impairment when circumstances (such as lower
than expected financial performance or change in strategic direction) indicate
that the net book value of the investment may not be recoverable. If an
impairment does exist, the equity investment is written down to its fair value
with a corresponding charge to the statement of operations.
Note 12 - Recent Accounting Pronouncements
In June 2002, the FASB issued 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 No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. Under EITF Issue No. 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. SFAS No. 146
is effective for exit and disposal activities that are initiated after
December 31, 2002. SFAS No. 146 has no effect on charges recorded for exit
activities begun prior to this date. The company does not expect the adoption
of this statement to have a material effect on its financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (the Interpretation). The Interpretation's disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The Interpretation requires certain
guarantees to be recorded at fair value. The guarantor's previous accounting
for guarantees issued prior to the date of initial application should not be
revised or restated.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." In general, a variable interest entity is a
corporation, partnership, trust or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. Interpretation 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 15.
Continued
Note 12 - Recent Accounting Pronouncements (continued)
requirements apply to pre-existing entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements
apply in all financial statements issued after January 31, 2003, regardless of
when the variable interest entity was established. Implementation of Interpre-
tation 46 may require the company to consolidate certain equity investments.
The company is currently evaluating the impact of Interpretation 46 on the
financial statements of the company.
16.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
- ---------------------
First quarter 2003 results were significantly impacted by the acquisition of
Torrington, which was acquired on February 18, 2003. In addition to the effects
of the acquisition, strong automotive demand and the positive impact of currency
exchange rates caused net sales to be higher in the first quarter 2003 compared
to the same period a year ago. Industrial markets, however, continued to be
sluggish during the first quarter of 2003.
The Timken Company reported net sales of $838.0 million for the first quarter
of 2003, an increase of 36.1% from $615.8 million in the first quarter of 2002.
The company reported net income of $11.3 million for the first quarter of 2003
compared to a net loss of $3.5 million in the same quarter a year ago. Results
in the first quarter of 2002 were impacted by the $12.7 million aftertax
cumulative effect of change in accounting principle related to the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets." In the first quarter of
2003, the company incurred total pretax acquisition integration charges of
$9.1 million. Of this amount, $3.7 million was reflected in the company's cost
of products sold and $5.4 million was reflected in selling, administrative and
general expenses for the quarter. These integration charges are entirely
related to the acquisition of Torrington and did not include any amounts related
to Timken's manufacturing strategy initiative (MSI). Operating income for the
first quarter of 2002 included pretax charges of $8.1 million related to MSI.
Of this, $3.0 million represented impairment and restructuring charges and
$5.1 million represented reorganization charges.
Gross profit was $130.3 million (15.5% of net sales) in the first quarter of
2003, compared to $118.6 million (19.2% of net sales) in the first quarter of
2002. Although sales volume in the first quarter of 2003 was higher compared to
the same period a year ago, gross profit performance was adversely impacted by
the higher scrap, energy, pension and benefit costs. Also, performance
continued to be impacted by inefficiencies caused by capacity constraints
related to the rationalization of manufacturing operations while meeting strong
automotive demand. First quarter 2003 gross profit was negatively impacted by
additional expense of $3.5 million in cost of products sold resulting from the
one-time write-up of acquired inventories required by purchase accounting rules.
Selling, administrative and general expenses were $105.3 million (12.6% of net
sales) in the first quarter of 2003, compared to $86.0 million (14.0% of net
sales) recorded in the same quarter a year ago. Although the amount of selling,
administrative and general expenses increased in the first quarter of 2003,
compared to the same period a year ago, the expenses as a percentage of net
sales decreased. First quarter 2003 net sales were 36.1% higher than the first
quarter of 2002. However, selling, administrative and general expenses for the
first quarter of 2003 increased only 22.4%, compared to the same period a year
ago. The increase in the total dollar amount of selling, administrative and
general expenses resulted from the addition of six weeks of Torrington's
financial results as well as costs incurred in connection with the acquisition
and integration of Torrington. This increase was partially offset by a decrease
in selling, administrative and general expenses related to Timken's business
cost reductions achieved through MSI and salaried workforce reduction
initiatives. Selling, administrative and general expenses in the first quarter
of 2003 included $5.4 million of integration expenses, compared to $2.8 million
17.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
of reorganization expenses in the first quarter of 2002.
First quarter 2002 operating income was impacted by MSI, which was announced in
April 2001. Restructuring charges of $3.0 million consisted of $1.5 million
in impaired assets charges and $1.5 million in severance and exit costs. The
$1.5 million in impaired assets charges was comprised of a $1.0 million charge
to Automotive related to the Duston, England plant closure and $0.5 million
charge to Industrial related to the Columbus, Ohio plant closure. The majority
of the severance and exit costs of $1.5 million also related to the Duston and
Columbus plant closures. Reorganization charges for the quarter ended
March 31, 2002 totaled $5.1 million, of which $2.3 million was classified as
cost of products sold and $2.8 million was classified as selling, administrative
and general expenses. All charges associated with MSI and salaried workforce
reduction initiatives were recognized at the end of 2002, and the company
achieved an estimated annualized pretax savings rate of $80 million from the MSI
program as of December 31, 2002.
The increase in other income (expense) in the first quarter of 2003 compared to
the same period a year ago was due primarily to a one-time gain of $5.4 million
related to the sale of property in the United Kingdom.
The effective tax rate for the quarters ended March 31, 2003 and 2002,
respectively, exceeded the U.S. statutory tax rate primarily due to losses at
certain foreign operations in which the realization of the tax benefit of these
losses is more than likely not to occur and taxes paid to state and local
jurisdictions.
With the acquisition of Torrington, the company reorganized two of its
reportable segments - the Automotive and Industrial Groups. Timken's auto-
motive aftermarket business is now part of the Industrial Group, which is
managing the combined distribution operations. The company's sales to emerging
markets, principally in central and eastern Europe and Asia, previously were
reported as part of the Industrial Group. Beginning in the first quarter of
2003, emerging market sales to automotive original equipment manufacturers are
now included in the Automotive Group. The primary measurement used by manage-
ment to measure the financial performance of each Group is adjusted EBIT
(earnings before interest and taxes) excluding special items such as
restructuring, reorganization and integration costs, one-time gains or losses
on sales of assets and allocated payments received under the Continued Dumping
and Subsidy Offset Act (CDSOA). The segment results that follow for both 2003
and 2002 reflect the reporting reorganization described above.
Due to the integration of Torrington and Timken activities, it will become
increasingly difficult in future reporting periods to separate Torrington's
contribution to the consolidated results.
Automotive Group
The Automotive Group includes sales of bearings and products and services other
than steel to automotive original equipment manufacturers. Global Automotive
Group sales for the first quarter of 2003 increased 62.6% to $298.1 million from
$183.4 million in the first quarter of 2002. While the Torrington acquisition
accounts for the majority of the sales increase, North American automotive
demand remained strong during the first quarter of 2003. In the passenger car
18.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
and light truck segments, expanded incentives have supported relatively robust
vehicle sales levels. European automotive markets have softened, however, as
overall economic activity there remains stagnant. The company expects continued
strength in the North American automotive market and some modest improvements in
Europe for 2003.
The Automotive Group had adjusted EBIT of $8.9 million compared to $7.5 million
in 2002's first quarter. This increase was due to the Torrington acquisition
and new product introductions. However, the Automotive Group's results were
negatively affected by pricing pressures, higher pension and benefit expenses
and the continued impact of inefficiencies related to MSI.
In the first quarter of 2003, the Automotive Group's selling, administrative and
general expenses were approximately 14% higher compared to the same period a
year ago. This was primarily the result of the additional selling, admini-
strative and general expenses incurred in connection with the acquisition of
Torrington, as well as Torrington's selling, administrative and general expenses
for the six-week period since the acquisition. In addition, the first quarter
of 2003 also reflects higher expenses associated with the impact of currency
exchange rates and new product development.
Industrial Group
The Industrial Group has global sales of bearings and products and services
other than steel to a diverse customer base. These include: industrial equip-
ment, off-highway, rail and aerospace and defense customers. The Industrial
Group also includes the financial results for Timken's distribution operations
for products other than steel. The Industrial Group's net sales were
$305.0 million, an increase of 30.8% over the first quarter 2002 net sales of
$233.2 million. The acquisition of Torrington was the primary contributor to
the sales increase, which was also favorably impacted by currency exchange
rates. Overall in the first quarter of 2003, industrial demand continued to be
flat with limited signs of near-term improvement. Although rail markets
continue to be depressed, there has been some improvement in demand over 2002
levels. Demand by aerospace customers, led by defense, has shown improvement
in the first quarter of 2003, while commercial demand remains weak. Also,
demand in the distribution sector of the Industrial Group has improved from
2002 levels. This improvement takes into account inventory balancing as
inventories are brought more in line with demand. For the remainder of 2003,
the company expects some modest improvement in industrial markets.
For the first quarter of 2003, Industrial Group adjusted EBIT was $17.8 million,
up from $11.1 million in first quarter of 2002. The increase in adjusted EBIT
reflected improved performance in the distribution business, favorable currency
exchange rates and the benefits of MSI. Partially offsetting these benefits
were continued weakness in industrial demand and increased costs for energy,
pension and benefits.
In the first quarter of 2003, the Industrial Group's selling, administrative
and general expenses were 27% higher than in the same period a year ago. This
was primarily the result of additional selling, administrative and general
expenses incurred in connection with the acquisition of Torrington, as well as
Torrington's selling, administrative and general expenses for the six-week
19.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
period since the acquisition, and the impact of currency exchange rates.
Steel Group
The Steel Group's net sales, including intersegment sales, increased 15.7% to
$275.8 million from $238.4 million a year ago. All of the Steel Group's market
segments, except aerospace, were stronger than the weak first quarter of 2002.
Sales to automotive and general industrial customers in the first quarter of
2003 increased 8.9% and 45.7%, respectively, compared to the same period a year
ago. Sales to bearing customers increased 9.5% in the first quarter of 2003,
compared to the first quarter of 2002. First quarter 2003 oil country sales
more than doubled from the same period a year ago, although these sales
represent a small percentage of Steel Group sales. Shipments to steel service
centers and tool steel customers were better than the first quarter of 2002,
but continue to be weak as a result of the low overall industrial production.
The aerospace sector continues to be weak as a majority of the Steel Group
demand relates to commercial airline applications. The company expects auto-
motive steel demand to remain strong for the rest of the year and sales to
industrial customers to improve modestly.
Adjusted EBIT for the Steel Group was $6.5 million in the first quarter of 2003,
a decrease from $12.1 million in the same period a year ago. While overall
demand was stronger in the first quarter of 2003, the Steel Group experienced
significant increases in the costs of raw materials and energy and higher costs
for pension and benefits. Going forward, surcharges and price increases are
expected to partially cover the increases in raw material and energy costs.
However, since the surcharges and announced price increases lag behind cost
increases, pressure on Steel Group margins is expected to continue in 2003.
The company expects 2003 raw material and energy costs to continue to be high
compared to 2002, but expects some reduction from first quarter 2003 levels in
the second half of the year.
Selling, administrative and general expenses for the Steel Group in the first
quarter of 2003 were comparable to the first quarter of 2002.
Financial Condition and Cash Flows
- ----------------------------------
Total assets as shown on the Consolidated Condensed Balance Sheets increased
by approximately $1.1 billion from December 31, 2002. The majority of this
increase related to the acquisition of Torrington, which was purchased for
$840 million, plus expenses, subject to certain post-closing adjustments.
Inventory balances at the end of the first quarter 2003 increased approximately
51% compared to year-end 2002 levels. Although the Steel Group inventory
balance decreased as a result of managing production in accordance with demand
and the change in the sales mix between bars and tubing, this was more than
offset by the increase in the Automotive and Industrial Groups' inventory
balances in the first quarter of 2003. The increase in these inventories was
primarily due to the Torrington acquisition and the impact of currency exchange
rate changes. The March 31, 2003 inventory balance includes a write-up of
$14 million to reflect the fair value of the acquired Torrington inventory. In
addition, Automotive Group inventory levels increased as a result of the
20.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
anticipated changes in customer demand and capacity constraints arising from
the manufacturing rationalization. Accounts receivable have increased by
$242.0 million since December 31, 2002. The increase is due primarily to the
acquisition of Torrington, which accounted for approximately $194 million of
the increase. In addition, the higher sales levels in the first quarter of
2003 as well as the impact of currency contributed to the increased accounts
receivable level.
Intangible assets increased $15.4 million from $5.2 million at December 31,
2002, primarily as a result of intangible assets acquired in the Torrington
acquisition. Other assets increased by $140.0 million to $260.6 million as of
March 31, 2003 due principally to other assets acquired in the acquisition of
Torrington. These amounts are based on the preliminary purchase price
allocation that will be finalized during 2003 as asset valuations are completed.
The company, prior to the Torrington acquisition, owned equity interests in
certain joint ventures. As part of the Torrington acquisition, several
additional equity interests were acquired. Certain of these equity interests
include: Advanced Green Components, LLC, a supplier of forged and machined
rings for bearing manufacture; Timken-NSK Bearings (Suzhou) Co. Ltd., a
joint venture which positions the company to provide tapered roller bearings
from a facility under construction in China; International Components Supply,
Limitada, a joint venture which produces forged and turned steel rings in
Brazil; Bardella Timken Industrial Services, a joint venture which expands
the technical services the company provides to rolling mill customers in Brazil;
Torrington Wuxi Bearings Company, a manufacturing joint venture in China; S.E.
SETCO Service Company, a joint venture which repairs and rebuilds machine tool
spindles; NRB Bearings Limited, a manufacturing and marketing joint venture in
India; and PEL Technologies, LLC, a joint venture in the United States that has
developed a proprietary technology which converts iron units into engineered
iron oxides for use in pigments, coatings and abrasives. The balances related
to investments accounted for under the equity method are reflected in other
assets in the consolidated condensed balance sheets, which were approximately
$131.6 million and $25.1 million at March 31, 2003 and December 31, 2002,
respectively. Equity investments are reviewed for impairment when circum-
stances (such as lower than expected financial performance or change in
strategic direction) indicate that the net book value of the investment may not
be recoverable. If an impairment does exist, the equity investment is written
down to its fair value with a corresponding charge to the statement of
operations.
Accounts payable and other liabilities increased $92.8 million from
$296.5 million at December 31, 2002 as a direct result of payables assumed in
the acquisition of Torrington, as well as timing of payments to suppliers.
Accrued expenses increased from $52.6 million to $279.0 million primarily as a
result of amounts assumed in the acquisition of Torrington.
Long-term accrued pension cost and postretirement benefits cost increased by
$30.6 million and $82.0 million, respectively, from $723.2 million and
$411.3 million at December 31, 2002, respectively, primarily due to the
additional liability incurred for plans related to active employees as a result
of the Torrington acquisition.
21.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
As shown on the Consolidated Condensed Statement of Cash Flows, the increase in
inventories used $22.5 million of cash during the first three months of 2003.
The increase in accounts receivable used $54.6 million of cash during the first
quarter of 2003. Also, $10.2 million of cash was used as a result of the
increase in other assets. The increase in other assets relates primarily to the
increase in sundry receivables for expenses related to Torrington that will be
reimbursed to Timken during the second quarter of 2003. Accounts payable and
accrued expenses generated $54.0 million of cash in the first three months of
2003, primarily as a result of increased payables resulting from Torrington
since the date of acquisition and the timing of payments to suppliers. In
addition, accrued expenses were affected by the timing of pension contributions
made in the first quarter of 2003, compared to the first quarter of 2002.
Capital expenditures used $23.0 million of cash in the first three months of
2003, compared to $16.5 million in the first quarter of 2002. The company
expects capital expenditures to continue to be higher in 2003 as a result of
the Torrington acquisition and new product development.
The 51.4% debt-to-total-capital ratio at March 31, 2003 was higher than the
43.1% at year-end 2002. Total debt increased by $535.5 million during the
first three months, to $996.7 million at March 31, 2003. The increase was
primarily due to the $520 million of debt incurred as a result of the Torrington
acquisition. The components of the debt resulting from the acquisition were:
$250 million of seven-year unsecured notes; $145 million drawn from the new
$500 million five-year senior credit facility; and a $125 million asset securi-
tization facility put in place at the end of 2002 and drawn down in full in
connection with the Torrington acquisition, which is now included in short-term
debt on the condensed consolidated balance sheet. Proceeds from the acquisition
financing were also used to repay outstanding commercial paper at the date of
the acquisition. The remaining increase in debt was used to fund working
capital and capital expenditures. The company expects that any cash require-
ments in excess of cash generated from operating activities will be met by the
remaining availability under the senior credit facility.
Under the $500 million senior credit facility, the company has three financial
covenants: consolidated net worth; leverage ratio; and fixed charge coverage
ratio. These financial covenants will become effective for the second quarter
ending on June 30, 2003. At March 31, 2003, the company was in compliance with
the covenants under its senior credit facility and its other debt agreements.
The company's contractual debt obligations and contractual commitments outstand-
ing as of March 31, 2003 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 $628.9 $25.8 $103.7 $8.3 $491.1
Senior Credit Facility $175.0 - - $175.0 -
Asset Securitization $125.0 $125.0 - - -
Other Lines of Credit $67.8 $67.8 - - -
Operating Leases $50.2 $12.2 $18.7 $5.4 $13.9
Supply Agreement $25.9 $8.5 $12.8 $4.6 -
22.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The company's capital lease obligations are immaterial. At March 31, 2003, the
company had available $284.3 million through a $500 million five-year senior
credit facility with a syndicate of financial institutions. The availability
under the senior credit facility was reduced by $40.7 million in outstanding
letters of credit. The company's previous senior credit facility of
$300 million, which would have expired in June of 2003, was terminated in
February of 2003 in connection with the Torrington acquisition. Proceeds from
the new senior credit facility were also used to repay commercial paper
outstanding as of the acquisition date. The company is also the guarantor of
$27.5 million in debt for Pel Technologies, LLC, an equity investment of the
company, and also guarantees the operating lease of a subsidiary's warehouse
facility. This obligation was $16.5 million at March 31, 2003. In connection
with the Ashland plant sale in 2002, the company entered into a $25.9 million
four-year supply agreement, which expires on June 30, 2006.
Total shareholders' equity increased by approximately $332 million since
December 31, 2002, primarily the result of the issuance of 22 million shares
valued at approximately $320 million to finance the Torrington acquisition.
Other significant factors affecting shareholders' equity were an increase in net
income of $11.3 million, a favorable non-cash foreign currency translation
adjustment of $9.1 million and the payment of $8.3 million in dividends. The
first quarter of 2003 shareholders' equity was positively impacted by the effect
of currency exchange rates, primarily due to the strength of the Euro.
During the first quarter of 2003, the company did not purchase any shares of its
common stock to be held in treasury as authorized 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 four 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 expect to be active in repurchasing shares under this plan
in the near-term.
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 consolidated results of operations.
Foreign currency exchange losses included in the company's operating results
for the first quarter of 2003 totaled $0.4 million, compared to $0.6 million
in the same year-ago period. Also, for the first three months of 2003, the
company recorded a positive non-cash foreign currency translation adjustment of
$9.1 million that increased shareholders' equity, compared to a negative non-
cash foreign currency translation adjustment of $2.4 million that reduced
shareholders' equity in the first three months of 2002. The first quarter of
2003 was positively impacted by the effect of currency exchange rates,
23.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
primarily the strength of the Euro.
On April 15, 2003, the board of directors declared a quarterly cash dividend
of $0.13 per share, payable June 3, 2003 to shareholders of record as of
May 16, 2003. This will be the 324th consecutive dividend paid on the common
stock of the company.
Recent Accounting Pronouncements
- --------------------------------
In June 2002, the FASB issued 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 No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recog-
nized at the date of an entity's commitment to an exit plan. SFAS No. 146 is
effective for exit and disposal activities that are initiated after
December 31, 2002. SFAS No. 146 has no effect on charges recorded for exit
activities begun prior to this date. The company does not expect the adoption
of this statement to have a material effect on its consolidated financial
position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (the Interpretation). The Interpretation's
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The initial recognition and
initial measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The Interpretation
requires certain guarantees to be recorded at fair value. The guarantor's
previous accounting for guarantees issued prior to the date of initial
application should not be revised or restated.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." In general, a variable interest entity is a
corporation, partnership, trust or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. Interpretation 46 requires a variable
interest entity to be consolidated by a company if that company is subject to
a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
The consolidation requirements of Interpretation 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to pre-existing entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements
apply in all financial statements issued after January 31, 2003, regardless of
when the variable interest entity was established. Implementation of Interpre-
tation 46 may require the company to consolidate certain equity investments.
24.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The company is currently evaluating the impact of Interpretation 46 on the
financial statements of the company.
Certain statements set forth in this document (including the company's
forecasts, 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 acquisition of Torrington, including the
uncertainties in both timing and amount of actual benefits, if any, that may
be realized as a result of the integration of the Torrington business with
the company's operations and the timing and amount of the resources required
to achieve those benefits; 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.
c) the effects of changes in customer demand on sales, product mix and prices
in the industries in which the company operates. 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 tech-
nology 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; the ability of
acquired companies to achieve satisfactory operating results; and its
ability to maintain appropriate relations with unions that represent company
associates in certain locations in order to avoid disruptions of business.
25.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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.
i) additional factors described in greater detail in the company's Registration
Statement and included Prospectus Supplement dated February 12, 2003
relating to the offering of the company's 5.75% notes due 2010 in the
company's Annual Report on Form 10-K for the year ended December 31, 2002
and in the company's Annual Report.
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.
26.
Part I
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to information appearing under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" on Page 15-24 of this Form 10-Q.
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 or material
weaknesses.
27.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The company is normally involved in various claims and legal actions
arising in the ordinary course of its business. In the opinion of
management, the ultimate disposition of these matters will not have
a material adverse effect on the company's consolidated financial
position or results of operations.
Item 2. Changes in Securities
(a) On February 11, 2003, the company sold 12,650,000 shares of its
common stock in a registered public offering at an aggregate
offering price of $188,485,000, with an aggregate underwriting
discount of $8,475,500. Merrill Lynch & Co., J.P. Morgan
Securities Inc. and Morgan Stanley & Co. Incorporated acted as
representatives of the several underwriters.
(b) On February 12, 2003, the company sold $250,000,000, aggregate
principal amount, of its 5.75% Notes due 2010 in a registered
public offering at an aggregate offering price of $248,570,000,
with an aggregate underwriting discount of $1,625,000. Banc of
America Securities LLC, Merrill Lynch & Co., and Morgan Stanley
& Co. Incorporated acted as principal underwriters of this debt
offering.
(c) Between January 1, 2003 and March 31, 2003, the trustee of the
Timken Share Incentive Plan (the "Plan"), established and
administered in accordance with the laws of England and Wales,
purchased 1,917 shares of the company's common stock in the open
market on behalf of persons not resident in the United States
who are employed by subsidiaries of the company. The purchases
were made in reliance on the off-shore nature of the offering
for an aggregate consideration of $20,608.51.
Item 4. Submission of Matters to a Vote of Security Holders
The Board of Directors recommended at the 2003 Annual Meeting of
Shareholders of The Timken Company held on April 15, 2003 that the
five individuals set forth below be Directors in Class II to serve
a term of three years expiring at the Annual Meeting in 2006 (or
until their respective successors are elected and qualified).
Affirmative Withheld
Stanley C. Gault 56,608,674 1,058,826
Joseph W. Ralston 56,619,254 1,048,246
John M. Timken, Jr. 47,763,689 9,903,811
W.R. Timken, Jr. 49,489,975 8,177,525
Jacqueline F. Woods 55,334,425 2,333,075
Item 5. Other Information
Not applicable.
28.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 The Timken Company Director Deferred Compensation Plan
Election Agreement
11 Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
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 May 15, 2003 by the Chief Executive
Officer and President and the Executive Vice President -
Finance and Administration
(b) Reports on Form 8-K:
On April 30, 2003, the company filed a Form 8-K regarding
Results of Operations and Financial Condition, which contained
information regarding the company's reorganization of its
Automotive and Industrial Groups. No financial statements
were filed.
On April 28, 2003, the company filed a Form 8-K regarding
Results of Operations and Financial Condition, which contained
a press release announcing the company's first quarter results.
On March 11, 2003, the company filed a Form 8-K regarding Other
Events and Regulation FD disclosure, which contained a press
release announcing that the company will conduct a slide
presentation during the Salomon Smith Barney Industrial
Conference on March 11, 2003. No financial statements were
filed.
On February 18, 2003, the company filed a Form 8-K regarding
Acquisition or Disposition of Assets, which contained
information regarding the company's completion of the
acquisition of the Engineered Solutions Business of Ingersoll-
Rand Company Limited. Financial statements for the company and
the Engineered Solutions business of Ingersoll-Rand Company
Limited were incorporated by reference into this Form 8-K.
On February 13, 2003, the company filed a Form 8-K regarding
Other Events and Regulation FD disclosure, which contained a
press release announcing the offering of $250 million of 5.75%
notes due 2010. No financial statements were filed.
On February 12, 2003, the company filed a Form 8-K regarding
Other Events and Regulation FD disclosure, which contained a
press release announcing the pricing of the offering of 11
million shares of the company's common stock. No financial
statements were filed.
29.
Item 6. Exhibits and Reports on Form 8-K (continued)
(b) Reports on Form 8-K:
On February 7, 2003, the company filed a Form 8-K regarding
Other Events, which contained information regarding the
company's pending acquisition of the Engineered Solutions
business of Ingersoll-Rand Company Limited. Audited combined
financial statements of Ingersoll-Rand Engineered Solutions
Business for the years ended December 31, 2002, 2001 and 2000
were filed.
On January 29, 2003, the company filed a Form 8-K regarding
Other Events and Regulation FD disclosure, which contained a
press release announcing the company's first quarter and full
year 2003 outlook. No financial statements were filed.
On January 22, 2003, the company filed a Form 8-K regarding
Other Events and Regulation FD disclosure, which contained a
press release announcing the company's fourth quarter and 2002
results. No financial statements were filed.
30.
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 May 15, 2003 BY /s/ James W. Griffith
________________________ _______________________________________
James W. Griffith,
President and Chief Executive Officer
May 15, 2003 BY /s/ Glenn A. Eisenberg
________________________ _______________________________________
Glenn A. Eisenberg
Executive Vice President - Finance and
Administration, (Principal Financial
Officer)
CERTIFICATIONS 31.
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: May 15, 2003 BY /s/ James W. Griffith
______________________________________
James W. Griffith,
President and Chief Executive Officer
I, Glenn A. Eisenberg, certify that: 32.
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: May 15, 2003 BY /s/ Glenn A. Eisenberg
______________________________________
Glenn A. Eisenberg
Executive Vice President - Finance and
Administration