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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, 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
___ ___
Common shares outstanding at October 31, 2003, 89,062,697.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Sep 30 Dec 31
2003 2002
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents........................... $38,043 $82,050
Accounts receivable, less allowances,
(2003-$18,922; 2002-$14,386)........................ 618,866 361,316
Deferred income taxes............................... 35,194 36,003
Inventories (Note 4) ............................... 740,958 488,923
---------- ----------
Total Current Assets...................... 1,433,061 968,292
Property, plant and equipment....................... 3,435,727 2,945,076
Less allowances for depreciation................... 1,809,442 1,718,832
---------- ----------
1,626,285 1,226,244
Goodwill (Note 10).................................. 206,831 129,943
Intangible pension asset............................ 128,385 129,042
Intangible assets (Note 10)......................... 98,436 5,217
Deferred income taxes............................... 169,310 169,051
Other assets........................................ 199,749 120,567
---------- ----------
Total Assets.................................. $3,862,057 $2,748,356
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and other liabilities.............. $472,175 $296,543
Short-term debt and commercial paper................ 240,971 111,134
Accrued expenses.................................... 402,559 226,393
---------- ----------
Total Current Liabilities................. 1,115,705 634,070
Noncurrent Liabilities
Long-term debt (Note 5) ............................ 698,464 350,085
Accrued pension cost................................ 559,031 723,188
Accrued postretirement benefits cost................ 497,334 411,304
Other noncurrent liabilities........................ 30,060 20,623
---------- ----------
Total Noncurrent Liabilities.............. 1,784,889 1,505,200
Shareholders' Equity (Note 7)
Common stock........................................ 632,628 310,317
Earnings invested in the business................... 747,931 764,446
Accumulated other comprehensive loss................ (419,096) (465,677)
---------- ----------
Total Shareholders' Equity................ 961,463 609,086
Total Liabilities and Shareholders' Equity.... $3,862,057 $2,748,356
========== ==========
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) Nine Months Ended Three Months Ended
Sep 30 Sep 30 Sep 30 Sep 30
2003 2002 2003 2002
---------- ---------- ---------- ----------
(Thousands of dollars, except per share data)
Net sales................................................... $2,766,272 $1,905,177 $938,012 $628,591
Cost of products sold....................................... 2,330,327 1,550,972 790,402 517,329
---------- ---------- ---------- ----------
Gross Profit............................................. 435,945 354,205 147,610 111,262
Selling, administrative and general expenses................ 368,922 266,379 128,454 87,382
Impairment and restructuring charges (Note 8)............... 2,736 24,986 1,883 7,703
---------- ---------- ---------- ----------
Operating Income......................................... 64,287 62,840 17,273 16,177
Interest expense............................................ (35,644) (23,996) (12,369) (8,072)
Interest income............................................. 848 991 430 294
Other expense............................................... (6,183) (12,490) (7,459) (3,415)
---------- ---------- ---------- ----------
Income Before Income Taxes and Cumulative
Effect of Change in Accounting Principle............... 23,308 27,345 (2,125) 4,984
Provision for income taxes (Note 6)......................... 9,323 12,360 (850) 3,147
---------- ---------- ---------- ----------
Income Before Cumulative Effect of Change in Accounting
Principle.............................................. $ 13,985 $ 14,985 $ (1,275) $ 1,837
Cumulative effect of change in accounting principle (net of
income tax benefit of $7,786)............................. - 12,702 - -
---------- ---------- ---------- ----------
Net Income ................................................. $ 13,985 $ 2,283 $ (1,275) $ 1,837
========== ========== ========== ==========
Earnings Per Share:
Income before cumulative effect of change in
accounting principle..................................... $ 0.17 $ 0.25 $(0.01) $ 0.03
Cumulative effect of change in accounting principle $ - $(0.21) $ - $ -
Earnings Per Share*........................................ $ 0.17 $ 0.04 $(0.01) $ 0.03
Earnings Per Share - assuming dilution:
Income before cumulative effect of change in
accounting principle..................................... $ 0.17 $ 0.25 $(0.01) $ 0.03
Cumulative effect of change in accounting principle $ - $(0.21) $ - $ -
Earnings Per Share - assuming dilution**................... $ 0.17 $ 0.04 $(0.01) $ 0.03
Dividends Per Share........................................ $ 0.39 $ 0.39 $ 0.13 $ 0.13
========== ========== ========== ==========
* Average shares outstanding............................... 81,109,433 60,459,277 85,568,394 61,091,924
** Average shares outstanding - assuming dilution........... 81,285,394 60,998,543 (A)85,568,394 61,430,256
(A) The addition of 119,016 shares would result in antidilution.
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Cash Provided (Used) Sep 30 Sep 30
2003 2002
-------- --------
OPERATING ACTIVITIES (Thousands of dollars)
Net income ............................................... $ 13,985 $ 2,283
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Cumulative effect of accounting change................... - 12,702
Depreciation and amortization............................ 146,012 110,956
Gain on disposals of property, plant and equipment....... (648) (8,855)
Provision for deferred income taxes...................... 2,634 23,557
Stock issued in lieu of cash to employee benefit plans... 2,301 4,628
Non-cash impact of changes in impairment and
restructuring charges - net............................. - (13,368)
Changes in operating assets and liabilities:
Accounts receivable..................................... (57,524) (64,254)
Inventories............................................. (13,036) (35,222)
Other assets............................................ (6,068) (6,766)
Accounts payable and accrued expenses................... (76,383) 46,094
Foreign currency translation............................ (11,793) 8,446
-------- -------
Net Cash (Used) Provided by Operating Activities....... (520) 80,201
INVESTING ACTIVITIES
Capital expenditures..................................... (80,802) (54,140)
Proceeds from disposals of property, plant and equipment. 13,578 9,504
Other ................................................... (878) 19,642
Proceeds from disposals of equity investments............ 146,335 -
Acquisitions............................................. (723,905)* (6,751)
-------- -------
Net Cash Used by Investing Activities.................. (645,672) (31,745)
FINANCING ACTIVITIES
Cash dividends paid to shareholders...................... (30,500) (23,481)
Issuance of common stock for acquisition................. 180,010* -
Accounts receivable securitization financing borrowings.. 125,000 -
Accounts receivable securitization financing payments.... (2,000) -
Payments on long-term debt............................... (152,381) (36,872)
Proceeds from issuance of long-term debt................. 424,957 -
Short-term debt activity - net........................... 54,421 14,462
-------- --------
Net Cash Provided (Used) by Financing Activities....... 599,507 (45,891)
Effect of exchange rate changes on cash................... 2,678 855
(Decrease) Increase in Cash and Cash Equivalents.......... (44,007) 3,420
Cash and Cash Equivalents at Beginning of Period.......... 82,050 33,392
-------- --------
Cash and Cash Equivalents at End of Period................ $ 38,043 $ 36,812
======== ========
* 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:
Nine months ended Three months ended
Sep 30 Sep 30
2003 2002 2003 2002
-------- -------- -------- --------
(Thousands of dollars)
Net income (loss), as reported $ 13,985 $ 2,283 $ (1,275) $ 1,837
Add: Stock-based employee
compensation expense, net
of related taxes 1,243 779 379 535
Deduct: Total stock-based
employee compensation
expense determined under
fair value based methods
for all awards, net of
related tax effects (4,732) (4,594) (1,934) (2,033)
-------- -------- -------- --------
Pro forma net income (loss) $ 10,496 $ (1,532) $ (2,830) $ 339
======== ======== ======== ========
Earnings (loss) per share:
Basic and diluted -
as reported $ 0.17 $ 0.04 $(0.01) $ 0.03
Basic and diluted -
pro forma $ 0.13 $(0.03) $(0.03) $0.01
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 $23.2 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 company continues to evaluate possible plant
rationalizations for sites that it acquired in the Torrington acquisition.
In March 2003, the company announced the planned closing of its plant in
Darlington, England within eight to twelve months. In July 2003, the company
announced that it will close its plant in Rockford, Illinois within three to
five months. In October 2003, the company announced that it reached an agreement
in principle with Roller Bearing Company of America, Inc. for the sale of the
company's airframe business, which includes certain assets at its Standard Plant
in Torrington, Connecticut.
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 $0.05 for the nine months ended September 30, 2003 and 2002,
respectively, based on the preliminary asset valuation. 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:
Nine months ended
Sep 30
2003 2002
---------- ----------
(Amounts in thousands, except per share data)
Net sales $2,917,515 $2,809,258
Income before cumulative
effect of change in
accounting principle 7,133 34,148
Net income $ 7,133 $ 21,446
Earnings per share:
Basic and diluted:
Income before cumulative
effect of change in
accounting principle $ 0.09 $ 0.41
Cumulative effect of
change in accounting
principle - (0.15)
---------- ----------
Earnings per share -
basic and diluted $ 0.09 $ 0.26
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7.
Continued
Note 4 -- Inventories Sep 30 Dec 31
2003 2002
-------- ---------
(Thousands of dollars)
Finished products $344,466 $210,945
Work-in-process and raw materials 354,739 243,485
Manufacturing supplies 41,753 34,493
-------- --------
$740,958 $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.
Sep 30 Dec 31
2003 2002
Note 5 -- Long-term Debt -------- --------
(Thousands of dollars)
State of Ohio Pollution Control Revenue Refunding Bonds,
maturing on June 1, 2033. The variable interest
rate is tied to the bank's tax exempt weekly interest
rate. The rate at September 30, 2003 is 1.10%. $ 17,000 $ -
State of Ohio Pollution Control Revenue Refunding Bonds,
matured on July 1, 2003. The variable interest rate
is tied to the bank's tax exempt weekly interest rate. - 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, 2003 is 1.10%. 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
September 30, 2003 is 1.10%. 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 September 30, 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
September 30, 2003 is 1.12%. 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%. 292,000 292,000
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 8.
Continued
Note 5 -- Long-term Debt and Other Financing Arrangements (continued)
Sep 30 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 September 30, 2003 is 2.62%. 80,000 -
Unsecured notes, maturing on February 15, 2010,
with a fixed interest rate of 5.75%. 250,000 -
Fixed rate credit facility with Citic Industrial
Bank, due at various dates through June 2004,
with interest rates ranging from 4.54% to 5.84%. 8,373 5,455
Other 8,632 5,711
-------- --------
709,705 373,866
Less: Current Maturities 11,241 23,781
-------- --------
$698,464 $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 September 30, 2003, there was $123 million outstanding under
this facility. This balance is reflected on the company's consolidated
condensed balance sheet as of September 30, 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
1.55% at September 30, 2003.
Under the $500 million senior credit facility, the company has three financial
covenants: consolidated net worth; leverage ratio; and fixed charge coverage
ratio. At September 30, 2003, the company was in compliance with the covenants
under its senior credit facility and its other debt agreements.
Note 6 -- Income Tax Provision Nine Months Ended Three Months Ended
Sep 30 Sep 30 Sep 30 Sep 30
2003 2002 2003 2002
-------- -------- -------- --------
U.S. (Thousands of dollars)
Federal $(5,684) $ 6,877 $(5,757) $ 1,001
State & Local 1,291 1,688 963 551
Foreign 13,716 3,795 3,944 1,595
------- ------- ------- -------
$ 9,323 $12,360 $ (850) $ 3,147
======= ======= ======= =======
Taxes provided exceeded the U.S. statutory rate primarily due to unutilized
losses at certain foreign operations and taxes paid to state and local
jurisdictions.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 9.
Sep 30 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 - 85,576,114 shares
2002 - 63,451,916 shares
Stated Capital 53,064 53,064
Other paid-in capital 579,610 257,992
Less cost of Common Stock in treasury
2003 - 2,593 shares
2002 - 40,074 shares (46) (739)
-------- --------
$632,628 $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 13,985 13,985
Foreign currency translation adjustment 45,285 45,285
Change in fair value of derivative financial
instruments, net of reclassifications
(net of income tax of $262) 1,296 1,296
----------
Total comprehensive income 60,566
Dividends - $0.39 per share (30,500) (30,500)
Issuance of 37,481 shares from treasury
and 78,225 shares from authorized related
to stock option plans 1,608 693 2,301
Issuance of 22,045,973 shares from authorized
to finance the Torrington acquisition 320,010 320,010
------- -------- -------- ---------- -------- ----------
Balance September 30, 2003 $53,064 $579,610 $747,931 ($419,096) ($46) $961,463
======= ======== ======== ========== ======== ==========
The total comprehensive income (loss) for the three months ended September 30, 2003 and 2002 was $1,640,000 and
($17,759,000) respectively. Total comprehensive (loss) for the nine months ended September 30, 2002 was ($46,000).
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 10.
Continued
Note 8 -- Integration, Impairment and Restructuring Charges
The company has incurred restructuring and integration charges in 2003 as a
result of integrating Torrington and addressing redundant processes and
evaluating the cost structure of the combined operations. Although costs
associated with the closing of certain former Torrington plants are included in
the purchase price accounting, restructuring and integration costs associated
with Timken associates and plants are recognized in the income statement as
described below. The majority of these costs are being recognized in accordance
with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," as they relate to plans implemented in 2003.
Impairment and restructuring charges for the three months ended September 30,
2003 totaled $1.9 million and represented severance of $1.2 million for former
Timken associates in the Automotive Group, Industrial Group and corporate centers
and $0.7 million for SFAS No. 88 and 106 curtailments for associates in corporate
centers. For the nine months ended September 30, 2003, impairment and
restructuring charges totaled $2.7 million and represented severance of
$2.0 million for former Timken associates in the Automotive Group, Industrial
Group and corporate centers and $0.7 million for SFAS No. 88 and 106 curtailments
for associates in corporate centers. As of September 30, 2003, the majority of
the remaining accrual balance was paid. The company continues to evaluate its
cost structure and may take further rationalization actions in the future.
In the third quarter of 2003, the company incurred total pretax integration and
reorganization charges of $5.1 million, of which $4.8 million related to the
acquisition of Torrington and $0.3 million was the result of the Duston, England
plant closure. Of this amount, $0.2 million was reported in the company's cost
of products sold and $4.9 million was reported in selling, administrative and
general expenses. Reorganization charges for the third quarter of 2002 totaled
$4.4 million classified as cost of products sold ($2.1 million) and
selling, administrative and general expenses ($2.3 million).
For the nine months ended September 30, 2003, the company incurred total pretax
integration and reorganization charges of $28.9 million, of which $25.8 million
related to the acquisition of Torrington and $3.1 million was the result of the
Duston, England plant closure. Of this amount, $10.5 million was reported in the
company's cost of products sold and $18.4 million was reported in selling, admin-
istrative and general expenses. Reorganization charges for the nine months ended
September 30, 2002 totaled $14.3 million, classified as cost of products sold
($7.1 million) and selling, administrative and general expense ($7.2 million).
In April 2001, the company announced a strategic global refocusing of its
manufacturing operations, which Timken refers to as its manufacturing strategy
initiative (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 its 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 reorganization charges related to MSI and salaried workforce
reduction programs.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 11.
Continued
Note 8 -- Integration, Impairment and Restructuring Charges (continued)
For the three months ended September 30, 2002, the company incurred impairment
and restructuring charges of $7.7 million, which were comprised of $3.7 million
for SFAS No. 88 and 106 curtailments resulting from the sale of the Ashland, Ohio
plant and the salaried workforce reduction, ($0.3) million for the reversal of
severance cost related to associates who were previously included in the
severance accrual but for whom severance was not paid as these associates
subsequently retired or found other employment, and the following costs for the
Duston, England and Columbus, Ohio plant closures: $1.2 million for separation
costs, $0.4 million for exit costs and $2.7 million for asset impairment charges.
For the nine months ended September 30, 2002, the company incurred impairment and
restructuring charges of $25.0 million, which were comprised of $5.4 million for
SFAS No. 88 and 106 curtailments resulting from the sale of the Ashland, Ohio
plant and the salaried workforce reduction, ($1.3) million for the reversal of
severance cost related to associates who were previously included in the
severance accrual but for whom severance was not paid as these associates
subsequently retired or found other employment, and the following costs for the
Duston, England and Columbus, Ohio plant closures: $3.2 million for separation
costs, $1.5 million for exit costs and $16.2 million for asset impairment charges.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 12.
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. 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 management to measure the
financial performance of each Group is adjusted EBIT (earnings before interest
and taxes excluding special items such as impairment and restructuring,
reorganization and integration costs, one-time gains or losses on sales of
assets, allocated payments received under the Continued Dumping and Subsidy
Offset Act (CDSOA), acquisition-related currency exchange gains, and other items
similar in nature). The segment results that follow for both 2003 and 2002
reflect the reporting reorganization described above.
(Thousands of Dollars) Nine Months Ended Three Months Ended
Sep 30 Sep 30 Sep 30 Sep 30
2003 2002 2003 2002
Automotive Group ---------- -------- -------- --------
Net sales to external customers $1,021,458 $564,122 $346,804 $184,671
Depreciation and amortization 53,768 25,817 23,664 8,624
EBIT (loss), as adjusted 7,398 3,416 (8,459) (4,078)
Industrial Group
Net sales to external customers $1,080,951 $724,117 $386,407 $239,697
Intersegment sales 481 - 136 -
Depreciation and amortization 43,243 34,451 17,176 11,669
EBIT, as adjusted 83,489 55,341 35,100 24,271
Steel Group
Net sales to external customers $ 663,863 $616,938 $204,801 $204,223
Intersegment sales 105,371 123,655 31,815 42,623
Depreciation and amortization 49,001 50,606 16,220 16,725
EBIT (loss), as adjusted (1,826) 32,279 (5,609) 5,592
Profit Before Taxes
Total EBIT, as adjusted, for reportable
segments 89,061 91,036 21,032 25,785
Impairment and restructuring charges (2,736) (24,986) (1,883) (7,703)
Integration/Reorganization expenses (28,925) (14,306) (5,094) (4,441)
Gain (loss) on sale of assets 3,107 - - -
CDSOA repayment (2,808) - - -
Acquisition-related unrealized
currency exchange gains 1,930 - - -
Prior restructuring accrual reversal (32) - (974) -
Interest expense (35,644) (23,996) (12,369) (8,072)
Interest income 848 991 430 294
Intersegment adjustments (1,493) (1,394) (3,267) (879)
---------- -------- -------- -------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle $ 23,308 $ 27,345 $ (2,125) $ 4,984
========== ======== ======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 13.
Continued
Note 10 - Goodwill and Intangible Assets
The changes in the carrying amount of goodwill and indefinite lived intangible
assets for the nine months ended September 30, 2003 are as follows:
(Thousands of Dollars) Balance Balance
12/31/02 Acquisition Other 9/30/03
--------- ----------- ------- ---------
Goodwill:
Automotive $ 1,633 $ 59,460 $ 3,186 $ 64,279
Industrial 119,440 11,909 1,702 133,051
Steel 8,870 - 631 9,501
--------- ---------- -------- ---------
$ 129,943 $ 71,369 $ 5,519 $ 206,831
========= ========== ======== =========
The following table displays intangible assets as of September 30, 2003 and
December 31, 2002:
(Thousands of Dollars) As of September 30, 2003
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Amortized intangible assets:
Automotive customer relationships $ 27,107 $ (2,338) $ 24,769
Automotive unpatented technology 10,800 (671) 10,129
Automotive technology use 10,789 (613) 10,176
Automotive patents 17,800 (1,154) 16,646
Automotive engineering drawings 3,000 (437) 2,563
Automotive trademarks 2,146 (389) 1,757
Industrial customer relationships $ 15,360 $ (455) $ 14,905
Industrial unpatented technology 7,200 (447) 6,753
Industrial patents 450 (39) 411
Industrial land use rights 4,483 (1,032) 3,451
Industrial engineering drawings 2,000 (291) 1,709
Industrial trademarks 1,476 (284) 1,192
Industrial know-how transfer 417 (358) 59
Steel trademarks $ 432 $ (101) $ 331
-------- ----------- --------
$103,460 $ (8,609) $ 94,851
======== =========== ========
Unamortized intangible assets:
Goodwill $206,831 $ - $206,831
Automotive trade names $ 1,970 $ - $ 1,970
Automotive land use rights 109 - 109
Automotive technology use 480 - 480
Automotive patents 71 71
Industrial license agreements 955 - 955
-------- ----------- --------
$210,416 $ - $210,416
======== =========== ========
Total Intangible Assets $313,876 $ (8,609) $305,267
======== =========== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 14.
Continued
Note 10 - Goodwill and 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 $3.7 million for the
three months ended September 30, 2003, and is estimated to be approximately
$8.7 million annually for the next five fiscal years.
Preliminary goodwill for Torrington is approximately $71.8 million at September
30, 2003. The September 30, 2003 balances for the other intangible assets
include a write-up of approximately $89.0 million based on the preliminary
valuation of the identified intangible assets acquired in the Torrington
acquisition.
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. 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 $28.2 million
and $25.1 million at September 30, 2003 and December 31, 2002, respectively.
In July 2003, the company sold to NSK Ltd. its interest in a needle bearing
manufacturing venture in Japan that had been operated by NSK and Torrington for
$146 million before taxes, which approximated the carrying value at the time of
sale. Since the company adjusted the carrying value of the investment through
the purchase price allocation for Torrington, no gain was recognized on the
statement of income.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 15.
Continued
Note 11 - Equity Investments (continued)
The company is a guarantor of $27.5 million in debt for PEL Technologies, LLC
(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 January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" (the Interpretation). The Interpretation requires the consolidation of
variable interest entities in which an enterprise is the primary beneficiary.
The primary beneficiary absorbs a majority of the entity's expected losses,
receives a majority of the entity's expected residual returns, or both, as a
result of ownership, contractual or other financial interest in the entity.
Currently, entities are generally consolidated by an enterprise that has a
controlling financial interest through ownership of a majority voting interest
in the entity. In October 2003, the FASB deferred the implementation date of the
Interpretation until the end of the first annual period ending after December 15,
2003 for interests held by public entities in variable interest entities that
were created before February 1, 2003.
During 2000 the company formed a joint venture, PEL, that has developed a
a proprietary technology that converts iron units into engineered iron oxides
for use in pigments, coatings and abrasives. The company is currently evaluating
the effects of the Interpretation on the accounting for its ownership interest in
PEL. Based on its preliminary analysis, the company has concluded that PEL is a
variable interest entity. The company will perform an analysis to determine the
primary beneficiary when it implements the Interpretation during the fourth
quarter of 2003.
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. The company's investment
in PEL totals $18.5 million at September 30, 2003 and is reported in other assets
on the consolidated condensed balance sheet. Through September 30, 2003, the
company recorded its proportional share (20.5%) of PEL's operating results using
the equity method since the company does not own a majority voting interest in
PEL. As of September 30, 2003, PEL's assets totaled $31.9 million. PEL's
current and long-term debt obligations, exclusive of its indebtedness to an
affiliate and to Timken, totaled $38.1 million as of September 30, 2003. As of
September 30, 2003, the company estimates that its maximum exposure to loss as a
result of its involvement with PEL ranges between $15 million and $25 million,
net of income taxes.
16.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
- ---------------------
The results for both the third quarter 2003 and nine months ended September 30,
2003 were significantly impacted by the acquisition of Torrington, which was
acquired on February 18, 2003.
Timken reported net sales of $938.0 million for the third quarter of 2003, an
increase of 49.2% from $628.6 million in the third quarter of 2002. Net sales
for the nine months ended September 30, 2003 were $2.8 billion, an increase of
45.2% from $1.9 billion for the same period a year ago. The company reported a
loss before cumulative effect of change in accounting principle of $1.3 million
or $0.01 per diluted share for the third quarter of 2003, compared to income of
$1.8 million or $0.03 per diluted share in the third quarter of 2002. Income
before cumulative effect of change in accounting principle for the nine months
ended September 30, 2003 was $14.0 million or $0.17 per diluted share, compared
to $15.0 million or $0.25 per diluted share for the same period in the prior
year. The company reported a net loss of $1.3 million or $0.01 per diluted share
for the third quarter of 2003, compared to net income of $1.8 million or $0.03
per diluted share in the third quarter of 2002. Net income for the nine months
ended September 30, 2003 was $14.0 million or $0.17 per diluted share, compared
to net income of $2.3 million or $0.04 per diluted share for the same period in
the prior year. Results for the nine months ended September 30, 2002 were
negatively impacted by the $12.7 million or $0.21 per diluted share aftertax
cumulative effect of change in accounting principle related to the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets."
The Automotive Group's results benefited from increased sales of tapered roller
bearing products that were fueled by new product introductions, despite declines
in light, medium and heavy truck production. However, the Automotive Group's
results were negatively impacted primarily by weakening passenger car production
resulting from the Big 3 auto makers' actions to reduce inventories. The
Automotive Group's results were also negatively impacted by new process start-up
costs associated with a manufacturing joint venture formed to produce rings used
in the manufacture of bearings. The Industrial Group benefited from improved
performance in Europe and in the rail business, continued growth in the
automotive distribution business, exiting of low-margin business, and
manufacturing cost reductions. However, continuing weakness in North American
industrial markets and high levels of distributor inventories for Torrington
industrial products negatively impacted the Industrial Group's results. The
Steel Group's results were negatively impacted by lower sales, high raw material
and natural gas costs, changes in product mix, and lower capacity utilization.
Operating income for the third quarter of 2003 included $1.9 million for
impairment and restructuring charges and $5.1 million for integration and
reorganization charges. In the third quarter of 2002, operating income included
impairment and restructuring charges of $7.7 million and reorganization charges
of $4.4 million. Operating income for the nine months ended September 30, 2003
included $2.7 million for impairment and restructuring charges and $28.9 million
for integration and reorganization charges. For the nine months ended
September 30, 2002, operating income included impairment and restructuring
charges of $25.0 million and reorganization charges of $14.3 million.
Net sales for the third quarter of 2003 of $938.0 million increased by
$309.4 million or 49.2% compared to $628.6 million in the third quarter of 2002.
For the nine months ended September 30, 2003, net sales of $2.8 billion increased
17.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
by $861.1 million or 45.2% compared to $1.9 billion in the same period of the
prior year. The increases for both the three and nine months ended September 30,
2003 were primarily the result of the Torrington acquisition. New product
introductions in the Automotive Group and favorable impact of currency exchange
and growth in certain markets in the Industrial Group also contributed to the
sales increases. Continuing weakness in North American industrial markets,
weakening passenger car production, high levels of distributor inventories for
Torrington industrial products, and decreased customer demand for steel partially
offset these increases.
Gross profit was $147.6 million (15.7% of net sales) in the third quarter of 2003
compared to $111.3 million (17.7% of net sales) in the third quarter of 2002.
Gross profit in the third quarter of 2003 was negatively impacted by high natural
gas and raw material costs, changes in product mix and lower capacity utilization
affecting the Steel Group, and the continuation of the excess costs associated
with the restructuring of the company's manufacturing plants in the Automotive
Group. Integration and reorganization charges included in gross profit totaled
$0.2 million and $2.1 million for the third quarter of 2003 and 2002,
respectively. Gross profit was $435.9 million (15.8% of net sales) for the nine
months ended September 30, 2003, compared to $354.2 million (18.6% of net sales)
for the same period in the prior year. For the nine months ended September 30,
2003, gross profit included integration charges of $6.9 million related to the
Torrington acquisition, of which $6.3 million related to the one-time write-up of
Torrington inventory, and $3.6 million in reorganization costs primarily related
to the Duston, England site closure. Reorganization charges included in gross
profit for the nine months ended September 30, 2002 were $7.1 million.
Selling, administrative and general expenses were $128.5 million (13.7% of net
sales) in the third quarter of 2003 compared to $87.4 million (13.9% of net
sales) in the third quarter of 2002. Although the amount of selling,
administrative and general expenses increased in the third quarter of 2003
compared to the same period a year ago, the expenses as a percentage of net sales
decreased slightly. The increase in the total amount of selling,
administrative and general expenses resulted from the addition of Torrington's
financial results, costs incurred in the integration of Torrington, and the
impact of currency exchange rates. This increase was partially offset by a
decrease in selling, administrative and general expenses related to Timken's
business cost reductions achieved through the manufacturing strategy initiative
(MSI) and salaried workforce reduction initiatives. Selling, administrative
and general expenses in the third quarter of 2003 included $4.9 million of
integration expenses related to the Torrington acquisition. The third quarter of
2002 selling, administrative and general expenses included reorganization charges
of $2.4 million related to the salaried workforce reduction. Selling,
administrative and general expenses were $368.9 million (13.3% of net sales) for
the nine months ended September 30, 2003, compared to $266.4 million (14.0% of
net sales) recorded in the same period a year ago. Selling, administrative and
general expenses for the nine months ended September 30, 2003 included
$18.4 million of integration expenses related to the Torrington acquisition.
The nine months ended September 30, 2002 selling, administrative and general
expenses included reorganization charges of $7.2 million.
Impairment and restructuring charges for the third quarter of 2003 totaled
$1.9 million and represented severance of $1.2 million for former Timken
associates in the Automotive and Industrial Groups and corporate centers and
$0.7 million in pension and postretirement curtailment expense for associates in
corporate centers. Third quarter of 2002 impairment and restructuring charges of
$7.7 million were comprised of $3.7 million for curtailment expense for pension
and postretirement benefits resulting from the sale of the Ashland, Ohio plant
and the salaried workforce reduction; ($0.3) million for the reversal of
18.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
severance expense related to associates who were previously included in the
severance accrual but for whom severance was not paid as these associates
subsequently retired or found other employment; and the following costs for the
Duston, England and Columbus, Ohio plant closures: $1.2 million for severance
expense, $0.4 million for exit costs and $2.7 million for asset impairment
expense. For the nine months ended September 30, 2003, impairment and
restructuring charges totaled $2.7 million and represented severance of
$2.0 million for former Timken associates in the Automotive and Industrial Groups
and corporate centers and $0.7 million in pension and postretirement curtailment
expense for associates in corporate centers. For the nine months ended
September 30, 2002, impairment and restructuring charges of $25.0 million were
comprised of $5.4 million for curtailment expense for pension and postretirement
benefits resulting from the sale of the Ashland, Ohio plant and the salaried
workforce reduction; ($1.3) million for the reversal of severance expense related
to associates who were previously included in the severance accrual but for whom
severance was not paid; and the following costs for the Duston, England and
Columbus, Ohio plant closures: $3.2 million for severance expense, $1.5 million
for exit costs and $16.2 million for asset impairment expense.
Third quarter of 2003 interest expense of $12.4 million increased by $4.3 million
from $8.1 million in the third quarter of 2002. For the nine months ended
September 30, 2003, interest expense of $35.6 million increased by $11.6 million
from $24.0 million in the same period of the prior year. The increases for both
periods were primarily due to the additional debt incurred as a result of the
Torrington acquisition.
Third quarter of 2003 other expense of $7.5 million increased by $4.1 million
from $3.4 million in the third quarter of 2002. The increase was primarily due
to higher loss from equity investments, which included new process start-up costs
associated with a manufacturing joint venture that was formed to produce rings
used in the manufacture of bearings. Both the third quarter of 2003 and 2002
other expense includes losses from equity investments, currency exchange
differences and losses on the disposal of assets. For the nine months ended
September 30, 2003, other expense was $6.2 million and included losses from
equity investments, a one-time repayment, due to a miscalculation by the U.S.
Treasury Department, of a portion of 2002 antidumping receipts received under
the U.S. Continued Dumping and Subsidy Offset Act (CDSOA), losses on the disposal
of assets, partially offset by acquisition-related currency exchange gains and a
one-time gain of $5.4 million related to the sale of property in the United
Kingdom. For the nine months ended September 30, 2002, other expense totaled
$12.5 million and included currency exchange losses, losses on the disposal of
assets and losses from equity investments.
The effective tax rates were 40.0% and 45.2% for the nine months ended September
30, 2003 and 2002, respectively. The effective tax rates for both the three
months and nine months ended September 30, 2003 and 2002, respectively, exceeded
the U.S. statutory tax rate primarily due to unutilized losses at certain foreign
operations 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 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. 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 management to measure the financial
performance of each Group is adjusted EBIT (earnings before interest and taxes
19.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
excluding special items such as impairment and restructuring, reorganization and
integration costs, one-time gains or losses on sales of assets, allocated
receipts received or payments made under the CDSOA, acquisition-related currency
exchange gains, and other items similar in nature). The segment results that
follow for both 2003 and 2002 reflect the reporting reorganization described
above. Refer to Note 9 - Segment Information in this Form 10-Q for the
reconciliation of adjusted EBIT by Group to consolidated income before income
taxes and cumulative effect of change in accounting principle.
Automotive Group
The Automotive Group includes sales of bearings and other products and services
(other than steel) to automotive original equipment manufacturers. The
Automotive Group net sales for the third quarter of 2003 increased 87.8% to
$346.8 million from $184.7 million in the third quarter of 2002. The majority
of the increase between periods resulted from the acquisition of Torrington.
The Automotive Group's results benefited from increased sales of tapered roller
bearing products that were fueled by new product introductions, despite declines
in light, medium and heavy truck production. The Automotive Group was negatively
affected by weakening passenger car production. Net sales for the nine months
ended September 30, 2003 increased 81.1% to $1.0 billion from $564.1 million from
the same period in the prior year. For the remainder of 2003, the company
expects North American passenger car and light truck production to improve
compared to the third quarter of 2003.
The Automotive Group had adjusted EBIT (loss) of ($8.5) million in the third
quarter of 2003, compared to ($4.1) million in the third quarter of 2002. The
Automotive Group's third quarter of 2003 adjusted EBIT (loss) was favorably
impacted by the Torrington acquisition and new platform launches for light
trucks, but this was more than offset by the new process start-up costs
associated with a manufacturing joint venture formed to produce rings used in
the manufacture of bearings and the continuation of excess costs associated with
the restructuring of the company's manufacturing plants. For the nine months
ended September 30, 2003, adjusted EBIT was $7.4 million compared to $3.4 million
in the same period of the prior year. This increase was due primarily to the
Torrington acquisition, strength in light truck production in the first half of
2003 and new product launches.
In the third quarter of 2003, the Automotive Group's selling, administrative and
general expenses were $21.1 million higher compared to the third quarter of 2002,
and as a percentage of net sales, the selling, administrative and general
expenses increased by 0.5%, compared to the third quarter of 2002. This was
primarily the result of the additional selling, administrative and general
expenses incurred as a result of the acquisition of Torrington and the impact of
currency exchange rates. For the nine months ended September 30, 2003, the
Automotive Group's selling, administrative and general expenses were
$44.7 million higher compared to the same period a year ago primarily due to the
acquisition of Torrington, although as a percentage of net sales, the selling,
administrative and general expenses decreased by 1.2%, compared to the first nine
months of 2002.
Industrial Group
The Industrial Group has global sales of bearings and other products and services
(other than steel) to a diverse customer base. These include: industrial
equipment, off-highway, rail, 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, including
intersegment sales, for the third quarter of 2003 were $386.5 million, an
20.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
increase of 61.3% over the third quarter of 2002 net sales of $239.7 million. The
majority of this increase resulted from the acquisition of Torrington. The
Industrial Group results were favorably impacted by the effect of currency
exchange rates and growth in the automotive distribution, defense and rail
markets, partially offset by continued weakness in North American industrial
markets and high levels of distributor inventories for Torrington industrial
products. The company expects the high levels of distributor inventories for
Torrington industrial products to continue to negatively impact net sales through
2004. Net sales, including intersegment sales, for the nine months ended
September 30, 2003 increased 49.3% to $1.1 billion from $724.1 million from the
same period in the prior year. For the remainder of 2003, the company expects
that general industrial demand will remain flat.
For the third quarter of 2003, Industrial Group adjusted EBIT was $35.1 million,
up from $24.3 million in the third quarter of 2002. The increase in adjusted
EBIT is the result of growth in the automotive distribution business, improved
performance in the rail business and in Europe, the exiting of low-margin
business, and manufacturing cost reductions, partially offset by continued
weakness in the North American industrial markets and high levels of distributor
inventories for Torrington industrial products. For the nine months ended
September 30, 2003, adjusted EBIT was $83.5 million compared to $55.3 million in
the same period of the prior year.
In the third quarter of 2003, the Industrial Group's selling, administrative and
general expenses were $19.7 million higher compared to the third quarter of 2002,
although as a percentage of net sales, the selling, administrative and general
expenses decreased by 1.6%. The increase in the total amount of selling,
administrative and general expenses was primarily the result of the acquisition
of Torrington and the impact of currency exchange rates. For the nine months
ended September 30, 2003, the Industrial Group's selling, administrative and
general expenses were $52.8 million higher compared to the same period a year
ago primarily due to the acquisition of Torrington, although as a percentage of
net sales, the selling, administrative and general expenses decreased by 0.8%.
Steel Group
The Steel Group's net sales, including intersegment sales, for the third quarter
of 2003 decreased 4.1% to $236.6 million from $246.8 million in the third quarter
of 2002. This sales decrease was primarily the result of lower intersegment
sales. Sales to automotive customers increased slightly from last year. Sales
to the bearing industry continued to be weak. Sales to general industrial
customers increased in the third quarter of 2003 compared to the same period a
year ago as the Steel Group gained market share from its competition as the
industry continued to restructure. Third quarter 2003 oil country sales increased
from the same period a year ago. Shipments to steel service centers and tool
steel customers in the third quarter of 2003 decreased from the third quarter of
2002 and continued to be weak as a result of low overall industrial production.
The aerospace sector continued to be weak as a majority of the Steel Group
demand relates to commercial airline applications. Net sales, including
intersegment sales, for the nine months ended September 30, 2003 increased 3.9%
to $769.2 million from $740.6 million from the same period in the prior year.
For intersegment sales, the impact of the previously announced bearing
manufacturing strategy initiative has affected the Steel Group, as expected.
21.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The Steel Group's intersegment sales to the Automotive Group have been negatively
impacted by the Automotive Group converting a portion of its bearing production
from tubing based processes to hot forming processes, which use solid bar.
Adjusted EBIT (loss) for the Steel Group was ($5.6) million in the third quarter
of 2003, compared to $5.6 million in the third quarter of 2002. The Steel
Group's results were negatively impacted by high natural gas and raw material
costs, a decline in margins due to a change in product mix, lower sales, and
lower capacity utilization. Plant operations were curtailed intermittently to
control labor costs and inventory levels in response to lower sales. Steps were
also taken to recover a portion of high raw material and energy costs through
surcharges and price increases. For the nine months ended September 30, 2003,
adjusted EBIT (loss) was ($1.8) million compared to $32.3 million in the same
period of the prior year. For the remainder of 2003, the company expects raw
material and energy costs to be high relative to the first nine months of 2003
and the fourth quarter of 2002.
Selling, administrative and general expenses for the Steel Group in the third
quarter of 2003 were $2.3 million lower than the third quarter of 2002, and as a
percentage of net sales, the selling, administrative and general expenses
decreased by 0.6%. This decrease was primarily due to the Steel Group's
continued focus on controlling business cost spending. For the nine months ended
September 30, 2003, the Steel Group's selling, administrative and general
expenses were $6.3 million lower compared to the same period in the prior year,
and as a percentage of net sales, the selling, administrative and general
expenses decreased by 1.1%.
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 on February 18,
2003 for $840 million, before expenses and certain post-closing adjustments.
Accounts receivable have increased by $257.6 million since December 31, 2002.
The increase was due primarily to the acquisition of Torrington and the impact of
currency exchange rate changes. Inventory balances at the end of the third
quarter 2003 increased by $252.0 million since December 31, 2002. Although the
Steel Group inventory balance decreased as a result of managing production in
accordance with demand, this was more than offset by the increase in the
Automotive and Industrial Groups' inventory balances as of September 30, 2003.
The increase in these inventories was primarily due to the Torrington acquisition
and the impact of currency exchange rate changes.
Property, plant and equipment increased $400.0 million to $1.6 billion at
September 30, 2003 due primarily to the Torrington acquisition. Goodwill
increased $76.9 million to $206.8 million at September 30, 2003 primarily as a
result of the preliminary purchase price allocation for the Torrington
acquisition. Intangible assets, excluding goodwill and intangible pension asset,
increased $93.2 million to $98.4 million at September 30, 2003 primarily as a
result of intangible assets acquired in the Torrington acquisition.
Other assets increased by $79.2 million to $199.7 million as of September 30,
2003 due principally to other assets acquired in the acquisition of Torrington.
Prior to the Torrington acquisition, the company owned equity interests in
certain joint ventures. As part of the Torrington acquisition, several
additional equity interests were acquired. Equity investments are reviewed for
impairment when circumstances (such as lower than expected financial performance
22.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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. In July 2003, the company sold to NSK Ltd. its interest
in NTC, a needle bearing manufacturing joint venture in Japan that had been
operated by NSK and Torrington, for $146.3 million, before taxes. Since the
company adjusted the carrying value of this investment net of taxes through the
purchase price allocation, no gain was recognized on the statement of income.
Accounts payable and other liabilities increased $175.6 million to $472.2 million
at September 30, 2003 as a result of payables assumed in the acquisition of
Torrington, as well as timing of payments to suppliers. Accrued expenses
increased $176.2 million to $402.6 million at September 30, 2003, primarily as a
result of amounts assumed in the acquisition of Torrington and the
reclassification of the current portion of accrued pension cost from non-current
liabilities.
Non-current accrued pension cost decreased by $164.2 million to $559.0 million at
September 30, 2003. The decrease is primarily the result of pension
contributions totaling $168.9 million. Postretirement benefits cost increased by
$86.0 million to $497.3 million at September 30, 2003 primarily due to the
additional liability incurred for plans related to active employees as a result
of the Torrington acquisition.
As shown on the Consolidated Condensed Statement of Cash Flows, the increase in
inventories used $13.0 million of cash during the first nine months of 2003.
The increase in accounts receivable used $57.5 million of cash during the first
nine months of 2003. Also, the impact of foreign currency translation was a use
of $11.8 million of cash during the first nine months of 2003. Accounts payable
and accrued expenses used $76.4 million of cash during the first nine months of
2003, primarily the result of a higher level of pension contributions in the
first nine months of 2003 compared to the same period in the prior year.
Capital expenditures used $80.8 million of cash in the first nine months of 2003
compared to $54.1 million in the first nine months of 2002. Although the company
will continue to focus on further efficiency and productivity, it expects that
capital expenditures for 2003 will be higher than 2002 due to the acquisition of
Torrington and new product development. In July 2003, the company sold its
interest in NTC for $146.3 million before taxes.
The 49.4% debt-to-total-capital ratio at September 30, 2003 was higher than the
43.1% at December 31, 2002. Total debt increased by $478.2 million during the
first nine months of 2003 to $939.4 million at September 30, 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 securitization facility put in place at the end of 2002 and drawn down in
full in connection with the Torrington acquisition, which is 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 decrease in debt was the result of the
sale of the NTC joint venture for $146.3 million, partially offset by pension
contributions and capital expenditures. The company expects that any cash
requirements in excess of cash generated from operating activities will be met by
the remaining availability under the senior credit facility.
23.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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 became effective for the second quarter ending
on June 30, 2003. At September 30, 2003, the company was in compliance with the
covenants under its senior credit facility and its other debt agreements.
In September 2003, Standard & Poor's Ratings Services said that it placed its
BBB- corporate credit and its other ratings on the company on CreditWatch with
negative implications. In October 2003, Moody's Investors Services lowered its
rating of the company's debt from Baa3 to Ba1. The ratings are on the company's
senior unsecured debt and senior implied and senior unsecured issuer ratings.
Timken expects that the impact of the lowered ratings by Moody's on the company's
earnings will be minimal, with only a slight increase in the cost of the
company's revolving credit facility. The company has no significant long-term
debt payments coming due in the next three years and believes it has sufficient
liquidity to meet its obligations.
The company's contractual debt obligations and contractual commitments
outstanding as of September 30, 2003 are as follows (in millions):
Payments Due by Period
Total Less than 1-3 4-5 More than
1 Year Years Years 5 Years
------- ---------- --------- ------- --------
Long-term Debt $618.4 - $84.3 $46.1 $488.0
Senior Credit Facility $80.0 - - $80.0 -
Asset Securitization $123.0 $123.0 - - -
Other Lines of Credit $118.0 $118.0 - - -
Operating Leases $62.0 $9.3 $16.7 $11.8 $24.2
Supply Agreement $15.7 $6.8 $8.9 - -
The company's capital lease obligations are immaterial. At September 30, 2003,
the company had available $355.9 million through a $500 million five-year senior
credit facility with a syndicate of financial institutions. 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, (PEL) an equity investment of the company, and
an operating lease of a subsidiary's warehouse facility, which had future rental
commitments of $16.1 million at September 30, 2003. In connection with the sale
of the company's Ashland tooling plant in 2002, the company entered into a
$25.9 million four-year supply agreement, which expires on June 30, 2006,
pursuant to which the company purchases tooling from Ashland.
Total shareholders' equity increased by approximately $352.4 million since
December 31, 2002, primarily as a result of the issuance of 22 million common
shares valued at approximately $320 million to finance the Torrington
acquisition. Other significant factors affecting shareholders' equity were net
income of $14.0 million, a favorable non-cash foreign currency translation
adjustment of $45.3 million, partially offset by payment of dividends of
$30.5 million. For the nine months ended September 30, 2003, shareholders'
equity was positively impacted by the effect of currency exchange rates,
primarily due to the strength of the Euro.
During the first nine months of 2003, the company did not purchase any shares of
its common stock as authorized under the company's 2000 common stock purchase
24.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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.
In October 2003, the company announced the public offering of 12,895,973 shares
of its common stock at a public offering price of $15.85 per share. The shares
offered included 9,395,973 shares held by Ingersoll-Rand Company, a selling
stockholder, plus 3,500,000 shares issued and sold by the company. The company
has used the approximately $55.0 million in proceeds, net of underwriting
discounts and commissions, it received from the offering to reduce debt. The
company did not receive any of the proceeds from the sale of common stock by
the selling stockholder. Ingersoll-Rand received the 9,395,973 shares earlier
this year in connection with the company's acquisition of The Torrington
Company from Ingersoll-Rand.
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 of
subsidiaries in highly inflationary countries are included in the consolidated
results of operations.
Foreign currency exchange gains (losses) included in the company's operating
results for the first nine months of 2003 totaled $1.8 million, of which
$1.9 million related to acquisition-related unrealized exchange gains, compared
to ($5.3) million during the first nine months of 2002. Also, for the first nine
months of 2003, the company recorded a positive non-cash foreign currency
translation adjustment of $45.3 million that increased shareholders' equity,
compared to a negative non-cash foreign currency translation adjustment of
$2.7 million that decreased shareholders' equity in the first nine months of
2002. The first nine months of 2003 was positively impacted by the effect of
currency exchange rates, primarily the strength of the Euro.
In October 2003, the company announced that it reached an agreement in principle
with Roller Bearing Company of America, Inc. for the sale of the company's
fixed-wing catalog business, which includes certain assets at its Standard Plant
in Torrington, Connecticut.
On November 7, 2003, the board of directors declared a quarterly cash dividend of
$0.13 per share, payable on December 2, 2003 to shareholders of record as of
November 21, 2003. This will be the 326th consecutive dividend paid on the
common stock of the company.
The company reviews its critical accounting policies throughout the year. The
company has concluded that there have been no changes to its critical accounting
policies during the nine months ended September 30, 2003.
25.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Recent Accounting Pronouncements
- --------------------------------
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" (the Interpretation). The Interpretation requires the consolidation of
variable interest entities in which an enterprise is the primary beneficiary.
The primary beneficiary absorbs a majority of the entity's expected losses,
receives a majority of the entity's expected residual returns, or both, as a
result of ownership, contractual or other financial interest in the entity.
Currently, entities are generally consolidated by an enterprise that has a
controlling financial interest through ownership of a majority voting interest
in the entity. In October 2003, the FASB deferred the implementation date of the
Interpretation until the end of the first annual period ending after December 15,
2003 for interests held by public entities in variable interest entities that
were created before February 1, 2003.
During 2000 the company formed a joint venture, PEL, that has developed a
proprietary technology that converts iron units into engineered iron oxides for
use in pigments, coatings and abrasives. The company is currently evaluating the
effects of the Interpretation on the accounting for its ownership interest in PEL.
Based on its preliminary analysis, the company has concluded that PEL is a
variable interest entity. The company will perform an analysis to determine the
primary beneficiary when it implements the Interpretation during the fourth
quarter of 2003.
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. The company's investment in PEL totals
$18.5 million at September 30, 2003 and is reported in other assets on the
consolidated condensed balance sheet. Through September 30, 2003, the company
recorded its proportional share (20.5%) of PEL's operating results using the
equity method since the company does not own a majority voting interest in PEL.
As of September 30, 2003, PEL's assets totaled $31.9 million. PEL's current and
long-term debt obligations, exclusive of its indebtedness to an affiliate and to
Timken, totaled $38.1 million as of September 30, 2003. As of September 30,
2003, the company estimates that its maximum exposure to loss as a result of its
involvement with PEL ranges between $15 million and $25 million, net of income
taxes.
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.
26.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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
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
transformation, 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.
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: on pages S-20 to S-28 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; on pages S-7 to S-16 in the Prospectus Supplement dated October 15,
2003 relating to an offering of the company's common shares; in the company's
Annual Report on Form 10-K for the year ended December 31, 2002; in the
company's Annual Report; or in the company's Quarterly Reports on Form 10-Q
for the quarters ended June 30, 2003 and March 31, 2003.
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.
27.
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 pages 16-26 of this Form 10-Q. Furthermore, a
discussion of market risk exposures is included in Part II,
Item 7A, "Quantitative and Qualitative Disclosure about Market
Risk," of the Company's 2002 Annual Report on Form 10-K. There
have been no material changes in reported market risk since the
inclusion of this discussion in the Company's 2002 Annual Report
on Form 10-K referenced above.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act rule 13a-15(e). Based
upon that evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls
and procedures were effective as of the end of the period covered by
this report. There have been no significant changes in the Company's
internal control over financial reporting that has materially affected,
or is reasonably likely to materially affect, the Company's internal
control over financial reporting during the Company's most recent
fiscal quarter.
28.
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
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
31.1 Certification of James W. Griffith, President and Chief
Executive Officer of The Timken Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Glenn A. Eisenberg, Executive Vice
President-Finance and Administration (principal financial
officer) of The Timken Company, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certifications of James W. Griffith, President and Chief
Executive Officer, and Glenn A. Eisenberg, Executive Vice
President-Finance and Administration (principal financial
officer) of The Timken Company, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On October 23, 2003, the company furnished a Form 8-K regarding
Results of Operations and Financial Condition, which contained a
press release announcing the company's third quarter of 2003
results.
29.
(b) Reports on Form 8-K (continued):
On October 17, 2003, the company filed a Form 8-K regarding Other
Events, which contained the underwriting agreement among the
company, Ingersoll-Rand Company and Morgan Stanley & Co.
Incorporated relating to (i) the public offering, issuance and
sale by the company of 3,500,000 shares of its common stock and
(ii) the public offering and resale by Ingersoll-Rand Company of
9,395,973 shares of the company's common stock.
On September 22, 2003, the company furnished a Form 8-K regarding
Regulation FD Disclosure, which contained the correction of a
typographical error in the press release that the company issued
on September 18, 2003.
On September 19, 2003, the company furnished a Form 8-K regarding
Regulation FD Disclosure, which contained a press release
announcing that the company lowered its earnings outlook for 2003
and changes in its Automotive Group.
On September 12, 2003, the company filed a Form 8-K regarding
Other Events and Regulation FD Disclosure, which contained
unaudited pro-forma financial information for the six months
ended June 30, 2003, and for the year ended December 31, 2002,
which related to the company's acquisition of Torrington.
On September 12, 2003, the company filed a Form 8-K regarding
Results of Operations and Financial Condition, which contained
the disclosures required under Regulation G since the company
on that date filed a registration statement that incorporated by
reference certain periodic filings that contained a "non-GAAP
financial measure".
On September 12, 2003, the company filed a Form 8-K regarding
Other Events and Regulation FD Disclosure, which contained
segment information for the years ended and as of December 31,
2002, 2001 and 2000, reflecting the reorganization of its
Automotive and Industrial Groups.
On July 24, 2003, the company furnished a Form 8-K regarding
Results of Operations and Financial Condition, which contained
a press release announcing the company's second quarter of 2003
results.
On July 3, 2003, the company filed a Form 8-K regarding Other
Events and Regulation FD Disclosure, which contained a press
release announcing that the company reached an agreement to
sell its interest in a needle bearing manufacturing venture in
Japan to NSK.
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 November 10, 2003 BY /s/ James W. Griffith
________________________ _______________________________
James W. Griffith
President and Chief Executive Officer,
and Director
Date November 10, 2003 BY /s/ Glenn A. Eisenberg
________________________ _______________________________
Glenn A. Eisenberg
Executive Vice President - Finance and
Administration (Principal Financial Officer)