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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 June 30, 2004
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 June 30, 2004, 90,051,157.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Jun 30 Dec 31
2004 2003
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents........................... $67,469 $28,626
Accounts receivable, less allowances,
(2004-$23,361; 2003-$23,957)........................ 687,709 602,262
Deferred income taxes............................... 48,448 50,271
Inventories......................................... 719,404 695,946
---------- ----------
Total Current Assets...................... 1,523,030 1,377,105
Property, plant and equipment....................... 3,530,129 3,501,551
Less allowances for depreciation................... 1,968,848 1,892,957
---------- ----------
1,561,281 1,608,594
Goodwill............................................ 202,933 173,099
Other intangible assets............................. 195,443 197,993
Deferred income taxes............................... 149,224 148,802
Other assets........................................ 214,015 184,196
---------- ----------
Total Assets.................................. $3,845,926 $3,689,789
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and other liabilities.............. $504,218 $425,157
Short-term debt and current portion of long-term debt 237,933 121,194
Accrued expenses.................................... 429,489 508,205
---------- ----------
Total Current Liabilities................. 1,171,640 1,054,556
Noncurrent Liabilities
Long-term debt...................................... 613,628 613,446
Accrued pension cost................................ 415,717 424,414
Accrued postretirement benefits cost................ 487,066 476,966
Other noncurrent liabilities........................ 39,076 30,780
---------- ----------
Total Noncurrent Liabilities.............. 1,555,487 1,545,606
Shareholders' Equity
Common stock........................................ 699,492 689,160
Earnings invested in the business................... 789,371 758,849
Accumulated other comprehensive loss................ (370,064) (358,382)
---------- ----------
Total Shareholders' Equity................ 1,118,799 1,089,627
Total Liabilities and Shareholders' Equity.... $3,845,926 $3,689,789
========== ==========
See accompanying Notes to the Consolidated Condensed Financial Statements.
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) Six Months Ended Three Months Ended
Jun 30 Jun 30 Jun 30 Jun 30
2004 2003 2004 2003
---------- ---------- ---------- ----------
(Thousands of dollars, except share and per share data)
Net sales................................................... $2,229,072 $1,828,260 $1,130,287 $990,253
Cost of products sold....................................... 1,820,962 1,532,429 924,700 832,184
---------- ---------- ---------- ----------
Gross Profit............................................. 408,110 295,831 205,587 158,069
Selling, administrative and general expenses................ 290,094 247,964 147,391 135,197
Impairment and restructuring charges ....................... 1,059 853 329 853
---------- ---------- ---------- ----------
Operating Income......................................... 116,957 47,014 57,867 22,019
Interest expense............................................ (23,310) (23,275) (11,919) (13,114)
Interest income............................................. 458 418 212 208
Other (expense) income...................................... (7,313) 1,276 (5,288) (2,578)
---------- ---------- ---------- ----------
Income Before Income Taxes .............................. 86,792 25,433 40,872 6,535
Provision for income taxes.................................. 32,981 10,173 15,531 2,614
---------- ---------- ---------- ----------
Net Income ................................................. $ 53,811 $ 15,260 $ 25,341 $ 3,921
========== ========== ========== ==========
Earnings Per Share*........................................ $ 0.60 $ 0.19 $ 0.28 $ 0.05
Earnings Per Share - assuming dilution**................... $ 0.60 $ 0.19 $ 0.28 $ 0.05
Dividends Per Share........................................ $ 0.26 $ 0.26 $ 0.13 $ 0.13
========== ========== ========== ==========
* Average shares outstanding............................... 89,492,987 79,198,167 89,698,030 85,520,667
** Average shares outstanding - assuming dilution........... 90,356,032 79,402,600 90,552,362 85,760,495
See accompanying Notes to the Consolidated Condensed Financial Statements.
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
Cash Provided (Used) Jun 30 Jun 30
2004 2003
-------- --------
OPERATING ACTIVITIES (Thousands of dollars)
Net income ............................................... $ 53,811 $ 15,260
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................ 105,337 88,952
Loss (gain) on disposals of property, plant and equipment 1,463 (1,954)
Provision for deferred income taxes...................... 3,193 3,892
Stock issued in lieu of cash to employee benefit plans... 7,569 2,280
Changes in operating assets and liabilities:
Accounts receivable..................................... (103,672) (39,164)
Inventories............................................. (19,848) (18,749)
Other assets............................................ (5,499) (4,163)
Accounts payable and accrued expenses................... (34,731) 1,414
Foreign currency translation loss (gain)................ 3,309 (9,723)
-------- --------
Net Cash Provided by Operating Activities.............. 10,932 38,045
INVESTING ACTIVITIES
Capital expenditures..................................... (55,696) (51,707)
Proceeds from disposals of property, plant and equipment. 2,016 12,078
Other ................................................... (1,927) (1,054)
Acquisitions............................................. (7,824) (718,952)*
-------- --------
Net Cash Used by Investing Activities.................. (63,431) (759,635)
FINANCING ACTIVITIES
Cash dividends paid to shareholders...................... (23,289) (19,376)
Issuance of common stock for acquisition................. - 180,010*
Accounts receivable securitization financing borrowings.. 133,000 125,000
Accounts receivable securitization financing payments.... (30,000) -
Payments on long-term debt............................... (102,591) (49,222)
Proceeds from issuance of long-term debt................. 107,210 424,957
Short-term debt activity - net........................... 4,569 28,540
-------- --------
Net Cash Provided by Financing Activities.............. 88,899 689,909
Effect of exchange rate changes on cash................... 2,443 2,076
Increase (Decrease) in Cash and Cash Equivalents.......... 38,843 (29,605)
Cash and Cash Equivalents at Beginning of Period.......... 28,626 82,050
-------- --------
Cash and Cash Equivalents at End of Period................ $ 67,469 $ 52,445
======== ========
* Excluding $140 million of common stock (9,395,973 shares) issued to
Ingersoll-Rand Company, in conjunction with the acquisition.
See accompanying Notes to the Consolidated Condensed Financial Statements.
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, 2003.
Note 2 -- Stock-Based Compensation
The company utilizes the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
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 company'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 and earnings per share as if the company had applied
the fair value recognition provisions of SFAS No. 123 is as follows:
Six months ended Three months ended
June 30 June 30
2004 2003 2004 2003
-------- -------- -------- --------
(Thousands of dollars)
Net income, as reported $ 53,811 $ 15,260 $ 25,341 $ 3,921
Add: Stock-based employee
compensation expense, net
of related taxes 681 864 491 413
Deduct: Total stock-based
employee compensation
expense determined under
fair value based methods
for all awards, net of
related tax effects (3,027) (2,798) (2,025) (1,581)
-------- -------- -------- --------
Pro forma net income $ 51,465 $ 13,326 $ 23,807 $ 2,753
======== ======== ======== ========
Earnings per share:
Basic and diluted -
as reported $ 0.60 $ 0.19 $ 0.28 $ 0.05
Basic and diluted -
pro forma $ 0.57 $ 0.17 $ 0.26 $ 0.03
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 6.
Continued
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 for approximately $840 million, plus $26.0 million of acquisition
costs.
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
senior credit facility.
The allocation of the purchase price has been performed based on the assignment
of fair values to assets acquired and liabilities assumed. Fair values are
based primarily on appraisals performed by an independent appraisal firm. The
final purchase price for the acquisition of Torrington is subject to adjustment
upward or downward based on the differences for both net working capital and
net debt as of December 31, 2001 and February 15, 2003, both calculated in a
manner as set forth in The Stock and Asset Purchase Agreement. These adjust-
ments have not been finalized as of June 30, 2004.
The following unaudited pro forma financial information presents the combined
results of operations of the company and Torrington as if the acquisition had
occurred at the beginning of the period presented. Unaudited pro forma
earnings include higher than normal cost of products sold resulting from the
one-time write-up of acquired inventories required by the purchase accounting
rules. 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 period presented or that may be obtained in the future:
Six Months Ended
Jun 30
2003
----------
(Amounts in thousands, except per share data)
Net sales $1,979,503
Net income $ 8,408
Earnings per share:
Basic $ 0.11
Diluted $ 0.11
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7.
Continued
Note 3 -- Acquisition (continued)
The company has finalized its plans for integration activities and plant
rationalizations. In accordance with FASB EITF Issue No. 95-3, "Recognition
of Liabilities in Connection with a Purchase Business Combination," the company
recorded accruals for severance, exit and relocation costs in the purchase
price allocation. A reconciliation of the beginning and ending accrual
balances is as follows:
Severance Exit Relocation Total
--------- ------- ----------- -------
(Thousands of dollars)
Balance at December 31, 2003 $3,905 $ 2,325 $1,897 $ 8,127
Add: additional accruals 1,072 17,514 - 18,586
Less: payments (173) (14,107) (513) (14,793)
--------- ------- ----------- -------
Balance at June 30, 2004 $4,804 $ 5,732 $1,384 $11,920
========= ======= =========== =======
Note 4 -- Inventories Jun 30 Dec 31
2004 2003
-------- ---------
(Thousands of dollars)
Finished products $317,951 $330,455
Work-in-process and raw materials 357,796 323,439
Manufacturing supplies 43,657 42,052
-------- --------
$719,404 $695,946
======== ========
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.
Jun 30 Dec 31
2004 2003
Note 5 -- Long-term Debt and Other Financing Arrangements -------- --------
(Thousands of dollars)
Variable-rate State of Ohio Pollution Control Revenue
Refunding Bonds, maturing on June 1, 2033
(1.05% at June 30, 2004) $ 17,000 $17,000
Variable-rate State of Ohio Water Development Revenue
Refunding Bonds, maturing on May 1, 2007
(1.05% at June 30, 2004) 8,000 8,000
Variable-rate State of Ohio Air Quality and Water
Development Revenue Refunding Bonds, maturing on
November 1, 2025 (1.05% at June 30, 2004) 21,700 21,700
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 8.
Continued
Note 5 -- Long-term Debt and Other Financing Arrangements (continued)
Jun 30 Dec 31
2004 2003
-------- ---------
(Thousands of dollars)
Variable-rate State of Ohio Water Development Authority
Solid Waste Revenue Bonds, maturing on July 1, 2032
(1.07% at June 30, 2004) 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%. 286,664 287,000
Variable-rate Senior credit facility, maturing on
December 31, 2007. The interest rate is LIBOR plus
1.5% (4.75% at June 30, 2004) 5,000 -
Fixed-rate Unsecured Notes, maturing on February 15,
2010 with a fixed interest rate of 5.75%. 247,533 250,000
Other 10,323 12,471
-------- --------
620,220 620,171
Less: Current Maturities 6,592 6,725
-------- --------
$613,628 $613,446
======== ========
The Accounts Receivable Securitization financing agreement (Asset
Securitization), which provides for borrowings up to $125 million, is 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 June 30, 2004,
there was $103 million outstanding under this facility. This balance is
reflected on the company's consolidated condensed balance sheet as of
June 30, 2004 in short-term debt. 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
income. This rate was 1.02% at June 30, 2004.
Under the $500 million senior credit facility, the company has three financial
covenants: consolidated net worth; leverage ratio; and fixed charge coverage
ratio. At June 30, 2004, the company was in compliance with the covenants
under its senior credit facility and its other debt agreements.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 9.
Note 6 -- Income Tax Provision Six Months Ended Three Months Ended
Jun 30 Jun 30 Jun 30 Jun 30
2004 2003 2004 2003
-------- -------- -------- --------
U.S. (Thousands of dollars)
Federal $ 20,507 $ 73 $ 9,445 $ (3,931)
State & Local 1,576 328 355 (299)
Foreign 10,898 9,772 5,731 6,844
-------- -------- -------- -------
$ 32,981 $ 10,173 $ 15,531 $ 2,614
======== ======== ======== ========
The effective tax rates were 38% and 40% for the three months ended
June 30, 2004 and 2003, respectively, and 38% and 40% for the six months ended
June 30, 2004 and 2003, respectively. Taxes provided exceeded the U.S.
statutory rate primarily due to unutilized losses at certain foreign operations,
taxes paid to state and local jurisdictions, tax on foreign remittances, and
other permanent differences, partially offset by tax holidays and benefits
related to export incentives.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 10.
Jun30 Dec 31
Note 7 -- Shareholders' Equity 2004 2003
-------- --------
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)
2004 - 90,053,540 shares
2003 - 89,076,114 shares
Stated Capital 53,064 53,064
Other paid-in capital 646,487 636,272
Less cost of Common Stock in treasury
2004 - 2,383 shares
2003 - 10,601 shares (59) (176)
-------- --------
$699,492 $689,160
======== ========
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, 2003 $53,064 $636,272 $758,849 ($358,382) ($176) $1,089,627
Net Income 53,811 53,811
Foreign currency translation adjustment (13,424) (13,424)
Change in fair value of derivative financial
instruments, net of reclassifications
(net of income tax of $508) 1,742 1,742
----------
Total comprehensive income 42,129
Dividends - $0.26 per share (23,289) (23,289)
Issuance of 8,218 shares from treasury
and 977,426 shares from authorized related
to stock option plans 10,215 117 10,332
------- -------- -------- ---------- -------- ----------
Balance June 30, 2004 $53,064 $646,487 $789,371 ($370,064) ($59) $1,118,799
======= ======== ======== ========== ======== ==========
The total comprehensive income for the three months ended June 30, 2004 and 2003 was $17,056,000 and
$39,353,000 respectively. Total comprehensive income for the six months ended June 30, 2003 was $58,926,000.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 11.
Continued
Note 8 -- Impairment and Restructuring Charges
Impairment and restructuring charges are comprised of the following:
Six Months Ended Three Months Ended
Jun 30 Jun 30 Jun 30 Jun 30
2004 2003 2004 2003
---------- ---------- ---------- ----------
(Thousands of dollars)
Severance expense and related benefit costs $ 911 $853 $181 $853
Exit costs 148 - 148 -
---------- ---------- ---------- ----------
Total $1,059 $853 $329 $853
========== ========== ========== ==========
In both the three months and six months ended June 30, 2004, restructuring charges related
primarily to severance and related benefit costs for associates who exited the company as a result
of the integration of Torrington.
Impairment and restructuring charges by segment are as follows:
Auto Industrial Steel Total
------ ------------ ------- ------
(Thousands of dollars)
For the six months ended June 30, 2004:
Severance expense and related benefits $89 $809 $13 $ 911
Exit costs - 137 11 148
------ ------------ ------- ------
Total $89 $946 $24 $1,059
====== ============ ======= ======
For the three months ended June 30, 2004:
Severance expense and related benefits $31 $138 $12 $181
Exit costs - 137 11 148
------ ------------ ------- ------
Total $31 $275 $23 $329
====== ============ ======= ======
For the three and six months ended June 30, 2003:
Severance expense and related benefits $61 $792 $- $853
------ ------------ ------- ------
Total $61 $792 $- $853
====== ============ ======= ======
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 12.
Continued
Note 8 -- Impairment and Restructuring Charges (continued)
The following is a rollforward of accrued severance and exit costs:
(Thousands of dollars)
Balance at December 31, 2003 $4,461
Add: provisions 1,059
Less: payments (1,220)
--------
Balance at June 30, 2004 $4,300
========
The company continues to evaluate the competitiveness of its operations and
may from time to time determine to close those operations that are not
competitive. The company may incur charges associated with the closure of
such operations in future periods that may be material.
In May 2004, the company announced a plan to begin closing its three bearing
plants in Canton, Ohio. In June 2004, the company and the United Steelworkers
of America (union) began the effects bargaining process. In July 2004, the
company and the union agreed to enter into early formal negotiations over the
current labor contract, which expires in September 2005. Since the company and
the union have only recently begun discussions, final decisions have not been
made regarding the timing of the closure, the impact on employment, and the
magnitude of savings and charges for restructuring, which could be material.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 13.
Continued
Note 9 -- Segment Information
The primary measurement used by management to measure the financial performance
of each Group is adjusted EBIT (earnings before interest and taxes, excluding
the effect of amounts related to certain items that management considers not
representative of ongoing operations such as impairment and restructuring,
integration costs, one-time gains or losses on sales of assets, allocated
receipts received or payments made under the Continued Dumping and Subsidy
Offset Act (CDSOA), and other items similar in nature).
(Thousands of Dollars) Six Months Ended Three Months Ended
Jun 30 Jun 30 Jun 30 Jun 30
2004 2003 2004 2003
Automotive Group -------- -------- -------- --------
Net sales to external customers $819,765 $674,654 $404,163 $376,525
Depreciation and amortization 39,518 30,104 19,028 17,403
EBIT, as adjusted 24,930 15,857 6,607 6,989
Industrial Group
Net sales to external customers $847,685 $694,543 $437,416 $389,580
Intersegment sales 567 346 278 154
Depreciation and amortization 35,464 26,067 17,457 13,927
EBIT, as adjusted 85,077 48,388 49,311 30,578
Steel Group
Net sales to external customers $561,622 $459,063 $288,708 $224,148
Intersegment sales 78,103 73,556 41,686 32,692
Depreciation and amortization 30,355 32,781 14,924 16,357
EBIT, as adjusted 5,750 3,783 3,026 (2,747)
Reconciliation to Income Before Income Taxes
Total EBIT, as adjusted, for reportable
segments $115,757 $ 68,028 $ 58,944 $ 34,820
Impairment and restructuring charges (1,059) (853) (329) (853)
Integration/Reorganization expenses (12,622) (23,831) (7,258) (14,768)
Gain (loss) on sale of assets - 3,107 - (2,340)
CDSOA repayment - (2,808) - (2,808)
CDSOA receipts, net of expenses 7,743 - - -
Acquisition-related unrealized
currency exchange gains - 1,930 - 1,930
Prior restructuring accrual reversal - 942 - 942
Adoption of FIN 46 (949) - - -
Interest expense (23,310) (23,275) (11,919) (13,114)
Interest income 458 418 212 208
Intersegment adjustments 774 1,775 1,222 2,518
------- ------- ------- -------
Income before income taxes $ 86,792 $ 25,433 $ 40,872 $ 6,535
======== ======== ======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 14.
Continued
Note 10 - Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended
June 30, 2004 are as follows:
(Thousands of Dollars) Balance Balance
12/31/03 Acquisition Other 6/30/04
--------- ----------- ------- ---------
Goodwill:
Automotive $ 45,614 $ 19,269 $ 1,151 $ 66,034
Industrial 127,485 10,496 (1,082) 136,899
Steel - - - -
--------- ---------- -------- ---------
$ 173,099 $ 29,765 $ 69 $ 202,933
========= ========== ======== =========
The following table displays intangible assets as of June 30,2004 and
December 31, 2003:
(Thousands of Dollars) As of June 30,2004
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Intangible assets subject to amortization:
Automotive $ 61,847 $ (7,391) $ 54,456
Industrial 37,934 (4,870) 33,064
Steel 443 (92) 351
-------- ------------ --------
$100,224 $ (12,353) $ 87,871
======== =========== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 15.
Continued
Note 10 - Goodwill and Other Intangible Assets (continued)
Intangible assets not subject to amortization:
Goodwill $202,933 $ - $202,933
Intangible pension asset 106,498 - 106,498
Other 1,074 - 1,074
-------- ----------- --------
$310,505 $ - $310,505
======== =========== ========
Total Intangible Assets $410,729 $ (12,353) $398,376
======== =========== ========
As of December 31, 2003
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Intangible assets subject to amortization:
Automotive $ 68,425 $ (5,664) $ 62,761
Industrial 30,879 (3,577) 27,302
Steel 450 (112) 338
-------- ----------- --------
$ 99,754 $ (9,353) $ 90,401
======== =========== ========
Intangible assets not subject to amortization:
Goodwill $173,099 $ - $173,099
Intangible pension asset 106,518 106,518
Other 1,074 - 1,074
-------- ----------- --------
$280,691 $ - $280,691
======== =========== ========
Total Intangible Assets $380,445 $ (9,353) $371,092
======== =========== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 16.
Continued
Note 10 - Goodwill and Other Intangible Assets (continued)
Amortization expense for intangible assets was approximately $2.1 million and
$4.2 million for the three and six months ended June 30, 2004, respectively,
and is estimated to be approximately $8.5 million annually for the next five
fiscal years.
Note 11 - Equity Investments
The balances related to investments accounted for under the equity method are
reported in other assets in the consolidated condensed balance sheets, which
were approximately $30.7 million and $34.0 million at June 30, 2004 and
December 31, 2003, respectively.
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.
During 2000, the company's Steel Group invested in a joint venture, PEL, to
commercialize a proprietary technology that converts iron units into engineered
iron oxides for use in pigments, coatings and abrasives. In the fourth quarter
of 2003, the company concluded its investment in PEL was impaired due to the
following indicators of impairment: history of negative cash flow and losses;
2004 operating plan with continued losses and negative cash flow; and the
continued required support from the company or another party. In the fourth
quarter of 2003, the company recorded a non-cash impairment loss of
$45.7 million.
The company concluded that PEL is a variable interest entity and that the
company is the primary beneficiary. In accordance with FASB Interpretation No.
46, "Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51," (FIN 46), the company consolidated PEL
effective March 31, 2004. The adoption of FIN 46 resulted in a charge,
representing the cumulative effect of change in accounting principle, of
$0.9 million, which is reported in other expense on the consolidated statement
of income. Also, the adoption of FIN 46 increased the consolidated condensed
balance sheet as follows: current assets by $1.7 million; property, plant and
equipment by $11.3 million; short-term debt by $11.5 million; accounts payable
and other liabilities by $0.7 million; and other non-current liabilities by
$1.7 million. All of PEL's assets are collateral for its obligations. Except
for PEL's indebtedness for which the company is a guarantor, PEL's creditors
have no recourse to the general credit of the company. The company is the
guarantor of $27.0 million in debt for PEL. During 2003, the company recorded
the aggregate amount outstanding at December 31, 2003 on the debt underlying
these guarantees of $26.5 million, which is reported as short-term debt on the
consolidated condensed balance sheet. Subsequent to June 30, 2004, the company
paid approximately $3.5 million pursuant to the guarantee of PEL debt, which
reduces the total guaranteed to approximately $23 million.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 17.
Continued
Note 12 - Retirement and Postretirement Benefit Plans
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The revised statement requires the
disclosure of the components of the net periodic benefit cost recognized during
interim periods. The following table sets forth the net periodic benefit cost
for the company's retirement and postretirement benefit plans.
Pension Postretirement
------------------- --------------------
Six Months Ended Six Months Ended
Jun 30 Jun 30 Jun 30 Jun 30
2004 2003 2004 2003
--------- --------- -------- --------
(Thousands of dollars)
Service cost $ 21,378 $ 23,690 $ 3,686 $ 3,382
Interest cost 72,354 68,622 25,044 24,730
Expected return on
plan assets (72,624) (66,738) - -
Amortization of prior
service cost 7,824 9,254 (2,584) (2,850)
Recognized net
actuarial loss 15,288 9,598 8,576 7,498
Curtailment loss (gain) - 280 - (908)
Amortization of
transition asset (54) (288) - -
--------- --------- -------- --------
Net periodic benefit cost $ 44,166 $ 44,418 $ 34,722 $31,852
========= ========= ======== ========
Three Months Ended Three Months Ended
Jun 30 Jun 30 Jun 30 Jun 30
2004 2003 2004 2003
--------- --------- -------- --------
(Thousands of dollars)
Service cost $ 10,689 $ 11,845 $ 1,843 $ 1,691
Interest cost 36,177 33,999 12,522 11,856
Expected return on
plan assets (36,312) (33,369) - -
Amortization of prior
service cost 3,912 4,627 (1,292) (1,425)
Recognized net
actuarial loss 7,644 4,799 4,288 3,749
Curtailment loss (gain) - 140 - (454)
Amortization of
transition asset (27) (144) - -
--------- --------- -------- --------
Net periodic benefit cost $ 22,083 $ 21,897 $ 17,361 $15,417
========= ========= ======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 18.
Continued
Note 12 - Retirement and Postretirement Benefit Plans (continued)
In January 2004, the FASB issued FASB Staff Position (FSP) 106-1, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" (the Act). The FASB is in the
process of amending the FSP by issuing proposed FSP 106-b. The FSP is
effective for the first interim or annual period beginning after June 15, 2004.
The FSP provides guidance on the accounting for the effects of the Act for
employers that sponsor "qualified" postretirement health care plans that provide
prescription drug benefits. The company is currently evaluating the effects of
the Act on its existing postretirement health care plans and has not determined
the amount of any subsidy that may be available from the Act. In addition, the
company has elected under the provisions of the FSP to defer the recognition of
any potential subsidy from the Act. When the amended FSP is issued, previously
reported information may be required to change.
Note 13 - Contingencies
On May 4, 2004, cesium 137, a low level radioactive material commonly used in
industrial gauging, was detected in a dust evacuation system at the company's
Faircrest steel plant. This material entered the plant from scrap steel
provided by one of its suppliers. There was no exposure to employees or the
environment. The plant was closed for approximately 10 days for the clean up.
The company estimates that its Steel Group's profitability for the three months
ended June 30, 2004 was negatively impacted by approximately $7.7 million as a
result of this incident. This estimate includes $9.0 million of clean-up and
estimated business interruption costs as well as reduced EBIT from lower sales,
net of a $1.3 million reimbursement received from the insurer. The company is
in discussions with third parties to handle the disposal of the contaminated
material. At this time, the company cannot reasonably estimate the disposal
costs, which could be significant. Consequently, the company has not accrued
for these disposal costs in its result of operations for the three months ended
June 30, 2004. The company expects to recover nearly all of the clean-up,
business interruption and disposal costs in excess of $4 million of insurance
deductibles. The $4 million of insurance deductibles has been reflected in cost
of products sold in the consolidated statement of income for the three months
ended June 30, 2004.
19.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
- --------
Introduction:
The Timken Company is a leading global manufacturer of highly engineered
antifriction bearings and alloy steels and a provider of related products and
services. Timken operates under three segments: Automotive Group, Industrial
Group and Steel Group.
The Automotive and Industrial Groups design, manufacture and distribute a range
of bearings and related products and services. Automotive Group customers
include original equipment manufacturers of passenger cars and trucks, ranging
from light- and medium-duty to heavy-duty trucks and their suppliers.
Industrial Group customers include both original equipment manufacturers and
distributors for agriculture, construction, mining, energy, mill, machine
tooling, aerospace, and rail applications. Steel Group products include
different alloys in both solid and tubular sections, as well as custom-made
steel products, for both automotive and industrial applications, including
bearings.
On February 18, 2003, Timken acquired The Torrington Company (Torrington),
also a leading bearing manufacturer, for approximately $840 million. The
strategic acquisition strengthened Timken's market position among global bearing
manufacturers while expanding Timken's product line with complementary products
and services and offering significant cost savings opportunities for the
combined organization.
Financial Overview:
For the three months ended June 30, 2004, The Timken Company reported sales of
approximately $1.1 billion, an increase of approximately 14 percent from the
second quarter of 2003. Sales were higher across all three business segments.
For the three months ended June 30, 2004, earnings per diluted share were $0.28,
compared to $0.05 per diluted share for the second quarter of 2003.
For the six months ended June 30, 2004, net sales were approximately
$2.2 billion, an increase of approximately 22 percent from the same period last
year, partially driven by the acquisition of Torrington on February 18, 2003.
For the six months ended June 30, 2004, earnings per diluted share were $0.60,
compared to $0.19 per diluted share for the six months ended June 30, 2003.
Strong demand and increased penetration in the light truck and medium/heavy
truck sectors in both North American and Europe benefited the Automotive Group's
net sales. Automotive Group profitability was negatively impacted by higher raw
material costs, but benefited from higher production levels and continuous
improvement programs.
Most of the market segments served by the Industrial Group reported double-digit
sales increases over 2003 levels. Also, sales in all geographic regions
improved. In addition to the increased sales volume, profit for the Industrial
Group benefited from lower operating costs and improved pricing.
The increase in the Steel Group's net sales over last year was driven by
increased demand, as well as surcharges and price increases implemented to
20.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
partially offset rising raw material costs. Productivity and volume increases
more than offset the negative impact that the Faircrest plant shutdown had on
the Steel Group's profitability.
On May 4, 2004, cesium 137, a low level radioactive material commonly used in
industrial gauging, was detected in a dust evacuation system at Timken's
Faircrest steel plant. This material entered the plant from scrap steel
provided by one of its suppliers. There was no exposure to employees or the
environment. The plant was closed for approximately 10 days for the clean-up.
Timken estimates that its Steel Group's profitability for the three months ended
June 30, 2004 was negatively impacted by approximately $7.7 million pre-tax
as a result of this incident.
THE STATEMENT OF OPERATIONS
- ----------------------------
Unless otherwise stated below, comments regarding the three months ended
June 30, 2004 apply to the six months ended June 30, 2004 and comments regarding
the three months ended June 30, 2003 apply to the six months ended
June 30, 2003.
Overview:
2Q 2004 2Q 2003 $ Change % Change
------- ------- -------- --------
(Dollars in millions, except earnings per share)
Net sales $1,130.3 $990.3 $140.0 14.1%
Net income $ 25.3 $ 3.9 $ 21.4 548.7%
Earnings per share - diluted $ 0.28 $ 0.05 $ 0.23 460.0%
Average number of shares
- diluted 90,552,362 85,760,495 - 5.6%
YTD 2004 YTD 2003 $ Change % Change
-------- --------- -------- --------
(Dollars in millions, except earnings per share)
Net sales $2,229.1 $1,828.3 $400.8 21.9%
Net income $ 53.8 $ 15.3 $ 38.5 251.6%
Earnings per share - diluted $ 0.60 $ 0.19 $ 0.41 215.8%
Average number of shares
- diluted 90,356,032 79,402,600 - 13.8%
Sales by Segment:
2Q 2004 2Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions and exclude intersegment sales)
Automotive Group $ 404.2 $376.5 $ 27.7 7.4%
Industrial Group 437.4 389.6 47.8 12.3%
Steel Group 288.7 224.2 64.5 28.8%
-------- ------- --------- -------
Total company $1,130.3 $990.3 $140.0 14.1%
======== ======= ========= =======
21.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
YTD 2004 YTD 2003 $ Change % Change
-------- ---------- --------- --------
(Dollars in millions and exclude intersegment sales)
Automotive Group $ 819.8 $ 674.7 $145.1 21.5%
Industrial Group 847.7 694.5 153.2 22.1%
Steel Group 561.6 459.1 102.5 22.3%
-------- --------- --------- -------
Total company $2,229.1 $1,828.3 $400.8 21.9%
======== ========= ========= =======
The Automotive Group's net sales benefited from strong demand in the North
American and European light truck and medium/heavy truck sectors and new product
introductions, partially offset by a decrease in passenger car production. The
Industrial Group's net sales increased due to stronger demand in most industrial
market segments, especially construction and agriculture customers. The
increase in the Steel Group's net sales resulted primarily from increased demand
as well as surcharges and price increases implemented to offset rising raw
material costs. For both the Automotive and Industrial Groups, a portion of the
net sales increase for the six months ended June 30, 2004, compared to the same
period last year, was attributable to the acquisition of Torrington on
February 18, 2003.
Gross Profit:
2Q 2004 2Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Gross profit $205.6 $158.1 $47.5 30.0%
Gross profit % to net sales 18.2% 16.0% - 2.2%
Integration charges included in
cost of products sold $ 1.0 $ 6.6 $(5.6) (84.9)%
YTD 2004 YTD 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Gross profit $408.1 $295.8 $112.3 38.0%
Gross profit % to net sales 18.3% 16.2% - 2.1%
Integration charges included in
cost of products sold $ 2.4 $ 10.3 $(7.9) (76.7)%
Gross profit for the six months ended June 30, 2003 included a reclassification
of $7.5 million from cost of products sold to selling, administrative and
general expenses for Torrington engineering and research and development
expenses to be consistent with the company's 2004 cost classification
methodology. Gross profit for the Automotive Group in 2004 was higher than 2003
due to higher production levels and reduced manufacturing costs, partially
offset by higher raw material costs. Gross profit for the Industrial Group in
2004 was higher than 2003 primarily as a result of increased volume, lower
operating costs and the recovery of high material costs through price increases
and surcharges. Gross profit for the Steel Group in 2004 was higher than 2003
due to the positive impacts from volume increases and productivity improvements,
which were partially offset by the negative impact from the Faircrest plant
shutdown. A portion of the high raw material costs was recovered through
surcharges and price increases.
22.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
In 2004, integration charges included in cost of products sold related primarily
to charges associated with the continued integration of Torrington. In 2003,
integration charges included charges related to the one-time write-up of
Torrington inventory, which was required by purchase accounting rules; costs
related to the closure of the company's plant in Duston, England; and
integration charges related to the acquisition of Torrington.
Selling, Administrative and General Expenses:
2Q 2004 2Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Selling, administrative and
general expenses $147.4 $135.2 $12.2 9.0%
Selling, administrative and
general expenses % to net sales 13.0% 13.7% - (0.7)%
Integration charges included in
selling, administrative and
general expenses $ 6.3 $ 8.2 $(1.9) (23.2)%
YTD 2004 YTD 2003 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Selling, administrative and
general expenses $290.1 $248.0 $42.1 17.0%
Selling, administrative and
general expenses % to net sales 13.0% 13.6% - (0.6)%
Integration charges included in
selling, administrative and
general expenses $ 10.2 $ 13.5 $(3.3) (24.4)%
The increase in selling, administrative and general expenses for the three
months ended June 30, 2004 compared to the same period last year was due
primarily to higher sales in 2004. Selling, administrative and general expenses
for the six months ended June 30, 2003 included a reclassification of
$7.5 million from cost of products sold to selling, administrative and general
expenses for Torrington engineering and research and development expenses to be
consistent with the company's 2004 cost classification methodology. The
decrease between periods in the percentage of selling, administrative and
general expenses to net sales was primarily the result of the company's ability
to leverage expenses on higher sales, continued focus on controlling spending,
lower integration charges, and savings resulting from the integration of
Torrington. Selling, administrative and general expenses for the six months
ended June 30, 2004 increased compared to the same period last year primarily
due to the Torrington acquisition.
The integration charges for both 2004 and 2003 related to charges associated
with the integration of Torrington.
23.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Impairment and Restructuring Charges:
2Q 2004 2Q 2003 $ Change
------- ------- ---------
(Dollars in millions)
Severance and related benefit costs $0.2 $0.9 $(0.7)
Exit costs 0.1 - 0.1
------- ------- ---------
Total $0.3 $0.9 $(0.6)
======= ======= =========
YTD 2004 YTD 2003 $ Change
-------- -------- ---------
(Dollars in millions)
Severance and related benefit costs $1.0 $0.9 $0.1
Exit costs 0.1 - 0.1
------- ------- ---------
Total $1.1 $0.9 $0.2
======= ======= =========
In both 2004 and 2003, restructuring charges related primarily to severance and
related benefit costs for associates who exited the company as a result of the
integration of Torrington.
In May 2004, the company announced a plan to begin closing its three bearing
plants in Canton, Ohio. In June 2004, the company and the United Steelworkers
of America (union) began the effects bargaining process. In July 2004, the
company and the union agreed to enter into early formal negotiations over the
current labor contract, which expires in September 2005. Since the company and
the union have only recently begun discussions, final decisions have not been
made regarding the timing of the closure, the impact on employment, and the
magnitude of savings and charges for restructuring, which could be material.
Interest Expense and Income:
2Q 2004 2Q 2003 $ Change
------- ------- ---------
(Dollars in millions)
Interest expense $11.9 $13.1 $(1.2)
Interest income $ 0.2 $ 0.2 $ -
YTD 2004 YTD 2003 $ Change
-------- -------- ---------
(Dollars in millions)
Interest expense $23.3 $23.3 $ -
Interest income $ 0.4 $ 0.4 $ -
Interest expense for the three months ended June 30, 2004 decreased compared to
the same period last year due to lower average debt outstanding in the second
quarter of 2004, compared to the second quarter of 2003.
24.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Other Income and Expense:
2Q 2004 2Q 2003 $ Change
------- ------- ---------
(Dollars in millions)
Other (expense) income, net $(5.3) $ 0.2 $(5.5)
CDSOA repayment - (2.8) 2.8
------- ------- ---------
Total $(5.3) $(2.6) $(2.7)
======= ======= =========
YTD 2004 YTD 2003 $ Change
-------- -------- ---------
(Dollars in millions)
CDSOA receipts, net of expenses
and (repayments) $ 7.7 $(2.8) $10.5
Other (expense) income, net (15.0) 4.1 (19.1)
------- ------- ---------
Total $ (7.3) $ 1.3 $ (8.6)
======= ======= =========
For the three months ended June 30, 2004, other expense, net included losses
from equity investments, foreign currency exchange losses and losses on the
disposal of assets. For the three months ended June 30, 2003, other income, net
included foreign currency exchange gains, losses on the disposal of assets and
losses from equity investments. For both the three and six months ended
June 30, 2003, the U.S. Continued Dumping and Subsidy Offset Act (CDSOA)
repayment of $2.8 million was the result of a miscalculation by the U.S.
Treasury Department of funds received in 2002. For the six months ended
June 30, 2004, other expense, net included losses from equity investments,
foreign currency exchange losses, losses on the disposal of assets, and the
adoption of FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51" (FIN 46).
For the six months ended June 30, 2003, other income, net included a one-time
gain of $5.4 million related to the sale of property in the United Kingdom,
foreign currency exchange gains, losses from equity investments, and losses on
the disposal of assets.
CDSOA receipts are reported net of applicable expenses. CDSOA provides for
distribution of monies collected by U.S. Customs from antidumping cases to
qualifying domestic producers where the domestic producers have continued to
invest in their technology, equipment and people. The amounts received in 2004
related to Torrington's needle bearing and ball bearing business. Pursuant to
the terms of the agreement under which the company purchased Torrington, Timken
delivered 80% of the CDSOA payments received in 2004 to the seller of
Torrington; the company retained $7.7 million of the 2004 payment. The company
cannot predict whether it will receive any additional payments under CDSOA in
2004 or, if so, in what amount. In September 2002, the World Trade Organization
(WTO) ruled that such payments are inconsistent with international trade rules.
The U.S. Trade Representative appealed this ruling, but the WTO upheld the
ruling on January 16, 2003. CDSOA continues to be in effect in the United
States at this time.
25.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Income Tax Expense:
The effective tax rates were 38% and 40% for both the quarters and six months
ended June 30, 2004 and 2003, respectively. The effective tax rate for all
periods exceeded the U.S. statutory tax rate as a result of losses at certain
foreign operations that were not available to reduce overall tax expense, taxes
paid to state and local jurisdictions, tax on foreign remittances and other
permanent differences, partially offset by tax holidays and benefits related to
export incentives.
Business Segments:
The primary measurement used by management to measure the financial performance
of each Group is adjusted EBIT (earnings before interest and taxes, excluding
the effect of amounts related to certain items that management considers not
representative of ongoing operations such as impairment and restructuring,
integration costs, one-time gains or losses on sales of assets, allocated
receipts received or payments made under the CDSOA and other items similar in
nature). Refer to Note 9 - Segment Information in the notes to the consolidated
condensed financial statements for the reconciliation of adjusted EBIT by Group
to consolidated income before income taxes.
Automotive Group:
2Q 2004 2Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $404.2 $376.5 $27.7 7.4%
Adjusted EBIT $ 6.6 $ 7.0 $(0.4) (5.7)%
Adjusted EBIT margin 1.6% 1.9% - (0.3)%
YTD 2004 YTD 2003 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $819.8 $674.7 $145.1 21.5%
Adjusted EBIT $ 24.9 $ 15.9 $ 9.0 56.6%
Adjusted EBIT margin 3.0% 2.4% - 0.6%
The Automotive Group includes sales of bearings and other products and services
(other than steel) to automotive original equipment manufacturers. The
Automotive Group's net sales benefited from strong demand in the North American
and European light truck and medium/heavy truck sectors and new product
introductions, partially offset by a decrease in passenger car production. A
portion of the net sales increase for the six months ended June 30, 2004,
compared to the same period last year, was attributable to the acquisition of
Torrington. The Automotive Group's results for the three months ended
June 30, 2004 were negatively impacted by high raw material costs. In 2004,
profitability for the Automotive Group was positively impacted by: higher
production levels; reduced manufacturing costs, primarily as a result of
workforce reductions during the second half of 2003; and manufacturing savings
from continuous improvement programs. In 2004, the company expects the
Automotive Group to benefit from increased market penetration in markets that
are expected to grow slightly. The company expects the Automotive Group's
profitability in 2004 to be higher than 2003.
26.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Industrial Group:
2Q 2004 2Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $437.7 $389.7 $48.0 12.3%
Adjusted EBIT $ 49.3 $ 30.6 $18.7 61.1%
Adjusted EBIT margin 11.3% 7.8% - 3.5%
YTD 2004 YTD 2003 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $848.3 $694.9 $153.4 22.1%
Adjusted EBIT $ 85.1 $ 48.4 $ 36.7 75.8%
Adjusted EBIT margin 10.0% 7.0% - 3.0%
Sales by the Industrial Group include global sales of bearings and other
products and services (other than steel) to a diverse customer base, including:
industrial equipment; construction and agriculture; rail; and aerospace and
defense customers. The Industrial Group also includes aftermarket distribution
operations for products other than steel. The Industrial Group's net sales
increased due to stronger demand in most industrial market segments, especially
construction and agriculture customers. Also, sales in all geographic regions
improved. A portion of the net sales increase for the six months ended
June 30, 2004, compared to the same period last year, was attributable to the
acquisition of Torrington. Profitability for the Industrial Group in 2004 was
higher than 2003 primarily as a result of increased volume, lower operating
costs and the recovery of high material costs through price increases and
surcharges. The company expects the Industrial Group to continue to benefit
from growing demand in global industrial markets in 2004 and for the Industrial
Group's profitability in 2004 to be higher than 2003.
Steel Group:
2Q 2004 2Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $330.4 $256.8 $73.6 28.7%
Adjusted EBIT $ 3.0 $ (2.7) $ 5.7 N/A
Adjusted EBIT margin 0.9% (1.1)% - 2.0%
YTD 2004 YTD 2003 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $639.7 $532.6 $107.1 20.1%
Adjusted EBIT $ 5.8 $ 3.8 $ 2.0 52.6%
Adjusted EBIT margin 0.9% 0.7% - 0.2%
27.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Steel Group products include different alloys in both solid and tubular
sections, as well as custom-made steel products, for both automotive and
industrial applications, including bearings. The increase in the Steel Group's
net sales resulted primarily from increased demand as well as surcharges and
price increases implemented to offset rising raw material costs. The positive
impacts from volume increases and productivity improvements were partially
offset by the negative impact from the Faircrest plant shutdown. A portion of
the high raw material costs was recovered through surcharges and price
increases. The company expects the Steel Group to continue to benefit from
growing demand in global industrial markets in 2004 and for the Steel Group's
profitability in 2004 to be higher than 2003. The company also expects costs
for scrap steel, alloys and energy to remain high for the remainder of 2004.
The company estimates that its Steel Group's profitability for the three months
ended June 30, 2004 was negatively impacted by approximately $7.7 million as a
result of the unplanned shutdown of its Faircrest plant. This estimate includes
$9.0 million of clean-up and estimated business interruption costs as well as
reduced EBIT from lower sales, net of a $1.3 million reimbursement received from
the company's insurer. The company is in discussions with third parties to
handle the disposal of the contaminated material. At this time, the company
cannot reasonably estimate the disposal costs, which could be significant.
Consequently, the company has not accrued for these disposal costs in its
results of operations for the three months ended June 30, 2004. The company
expects to recover nearly all of the clean-up, business interruption and
disposal costs in excess of $4 million of insurance deductibles. The $4 million
of insurance deductibles has been reflected in cost of products sold in the
consolidated statement of income for the three months ended June 30, 2004.
THE BALANCE SHEET
- -----------------
Total assets as shown on the Consolidated Condensed Balance Sheet at
June 30, 2004 increased by $156.1 million from December 31, 2003. This increase
was due primarily to increased working capital required to support higher sales.
Current Assets:
06/30/04 12/31/03 $ Change % Change
-------- -------- -------- --------
(Dollars in millions)
Cash and cash equivalents $ 67.5 $ 28.6 $ 38.9 136.0%
Accounts receivable, net 687.7 602.3 85.4 14.2%
Deferred income taxes 48.4 50.3 (1.9) (3.8)%
Inventories 719.4 695.9 23.5 3.4%
-------- -------- -------- --------
Total current assets $1,523.0 $1,377.1 $145.9 10.6%
======== ======== ======== ========
The increase in cash and cash equivalents was partially due to excess cash at
certain foreign subsidiaries that was not used to pay down debt at
June 30, 2004. Refer to the Consolidated Condensed Statement of Cash Flows for
further explanations. The increase in accounts receivable was due primarily to
the timing of sales being higher in the second quarter of 2004, compared to the
fourth quarter of 2003. The increase in inventories was due primarily to higher
Steel Group inventories, which is due in part to higher raw material costs.
28.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Property, Plant and Equipment - Net:
06/30/04 12/31/03 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Property, plant and equipment
- cost $3,530.1 $3,501.6 $ 28.5 0.8%
Less: allowances for depreciation (1,968.8) (1,893.0) (75.8) (4.0)%
-------- -------- -------- ---------
Property, plant and equipment
- net $1,561.3 $1,608.6 $(47.3) (2.9)%
======== ======== ======== =========
The decrease in property, plant and equipment - net was due primarily to
depreciation expense in excess of capital expenditures.
Other Assets:
06/30/04 12/31/03 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Goodwill $202.9 $173.1 $29.8 17.2%
Other intangible assets 195.5 198.0 (2.5) (1.3)%
Deferred income taxes 149.2 148.8 0.4 0.3%
Other assets 214.0 184.2 29.8 16.2%
-------- -------- -------- ---------
Total other assets $761.6 $704.1 $57.5 8.2%
======== ======== ======== =========
The increase in goodwill was due primarily to updates made in the first quarter
of 2004 to the preliminary purchase price allocation to reflect the finalization
of plant rationalization plans and integration activities for the Torrington
acquisition. Goodwill resulting from the Torrington acquisition was
$74.7 million at June 30, 2004, compared to $47.0 million at December 31, 2003.
The final purchase price for the acquisition of Torrington is subject to
adjustment upward or downward based on the differences for both net working
capital and net debt as of December 31, 2001 and February 15, 2003. These
adjustments have not been finalized as of June 30, 2004.
Current Liabilities:
06/30/04 12/31/03 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Short-term debt $ 237.9 $ 121.2 $ 116.7 96.3%
Accounts payable and other
liabilities 504.2 425.2 79.0 18.6%
Accrued expenses 429.5 508.2 (78.7) (15.5)%
-------- -------- -------- ---------
Total current liabilities $1,171.6 $1,054.6 $ 117.0 11.1%
======== ======== ======== =========
The increase in short-term debt was due primarily to additional borrowings,
primarily under the company's asset securitization facility, as a result of
seasonal working capital requirements and cash contributions to its U.S.-based
29.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
pension plans as well as the adoption of FIN 46. Refer to Note 11 - Equity
Investments in the notes to the consolidated condensed financial statements for
additional discussion. The increase in accounts payable and other liabilities
was due primarily to an increase in trade accounts payable resulting from
increased volume as well as higher raw material costs and additional liabilities
recorded as part of the Torrington purchase price allocation to reflect the
finalization of plant rationalization plans and integration activities. The
decrease in accrued expenses was due primarily to a reclassification from the
current portion of accrued pension cost to the long-term portion based upon the
company's estimate of contributions to its pension plans in the next twelve
months. The company expects to make cash contributions of approximately
$175 million to its U.S.-based pension plans during 2004.
Non-Current Liabilities:
06/30/04 12/31/03 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Long-term debt $ 613.6 $ 613.4 $ 0.2 0.0%
Accrued pension cost 415.7 424.4 (8.7) (2.1)%
Accrued postretirement benefits
cost 487.1 477.0 10.1 2.1%
Other non-current liabilities 39.1 30.8 8.3 27.0%
-------- -------- -------- ---------
Total non-current liabilities $1,555.5 $1,545.6 $ 9.9 0.6%
======== ======== ======== =========
The decrease in accrued pension cost was due primarily to contributions to the
company's U.S.-based pension plans of $124.6 million during the six months ended
June 30, 2004, partially offset by a reclassification from the current portion
of accrued pension cost and current year accruals for pension expense.
Shareholders' Equity:
06/30/04 12/31/03 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Common stock $ 699.5 $ 689.2 $10.3 1.5%
Earnings invested in the business 789.4 758.8 30.6 4.0%
Accumulated other comprehensive
loss (370.1) (358.4) (11.7) (3.3)%
-------- -------- -------- ---------
Total shareholders' equity $1,118.8 $1,089.6 $29.2 2.7%
======== ======== ======== =========
Earnings invested in the business were increased by net income of $53.8 million,
partially offset by dividends declared of $23.3 million. For discussion
regarding the impact of foreign currency translation, refer to "Foreign
Currency" in the Other Information section below.
30.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
CASH FLOWS
- -----------
YTD 2004 YTD 2003 $ Change
-------- -------- ---------
(Dollars in millions)
Net cash provided by
operating activities $ 10.9 $ 38.0 $ (27.1)
Net cash used by investing
activities (63.4) (759.6) 696.2
Net cash provided by
financing activities 88.9 689.9 (601.0)
Effect of exchange rate
changes on cash 2.4 2.1 0.3
-------- -------- ---------
Increase (decrease) in
cash and cash equivalents $ 38.8 $ (29.6) -
======== ======== =========
The decrease in net cash provided by operating activities of $27.1 million was
primarily the result of higher cash contributions to the company's U.S.-based
pension plans in 2004 of $124.6 million, compared to $68.0 million in 2003.
Net cash provided by operating activities was also negatively impacted by cash
used from other changes in operating assets and liabilities of $35.9 million in
2004, compared to $2.4 million in 2003, which was primarily the result of
working capital requirements for increased sales volume and a $28.6 million tax
payment made in the first quarter of 2004 related to the sale to NSK Ltd. of the
company's interest in NTC, a needle bearing manufacturing joint venture in Japan
that had been operated by NSK and Torrington, for which the company received
cash proceeds of approximately $146 million during the third quarter of 2003.
These net cash outflows were partially offset by higher net income, adjusted for
non-cash items equaling $171.4 million in 2004, compared to $108.4 of similar
non-cash items in 2003. The non-cash items include depreciation and
amortization expense, gain or loss on disposals of property, plant and
equipment, deferred income tax provision, and common stock issued in lieu of
cash to employee benefit plans.
The decrease in net cash used by investing activities was the result of the cash
portion of the Torrington acquisition of $719.0 million in 2003, partially
offset by higher proceeds received in 2003 from sales of non-strategic assets in
the first quarter of 2003.
Net cash provided by financing activities decreased due primarily to the
additional debt incurred and common stock issued in connection with the
Torrington acquisition in 2003 of $700 million, partially offset by net
borrowings of $112.2 million in 2004. In 2004, the company expects its pension
contributions and capital expenditures to be similar to 2003 levels.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total debt was $851.5 million at June 30, 2004 compared to $734.6 million at
December 31, 2003. Net debt was $784.1 million at June 30, 2004, compared to
$706.0 million at December 31, 2003. The net debt to capital ratio was 41.2% at
June 30, 2004, compared to 39.3% at December 31, 2003. The company expects that
31.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
any cash requirements in excess of cash generated from operating activities will
be met by the availability under the accounts receivable securitization facility
and the senior credit facility. At June 30, 2004, the company had outstanding
letters of credit totaling $66.5 million and borrowings of $5.0 million under
the $500 million senior credit facility, which reduced the availability under
that facility to $428.5 million. Also, at June 30, 2004, the company had
outstanding borrowings of $103 million under the $125 million accounts
receivable securitization facility, which reduced the availability under that
facility to $22.0 million. The company believes it has sufficient liquidity to
meet its obligations through 2005.
Reconciliation of Total Debt to Net Debt and the Ratio of Net Debt to Capital:*
Net debt:
6/30/04 12/31/03
-------- ---------
(Dollars in millions)
Short-term debt $237.9 $121.2
Long-term debt 613.6 613.4
-------- ---------
Total debt 851.5 734.6
Less: cash and cash equivalents (67.4) (28.6)
-------- ---------
Net debt $784.1 $706.0
======== =========
Ratio of net debt to capital:
6/30/04 12/31/03
-------- ---------
(Dollars in millions)
Net debt $ 784.1 $ 706.0
Shareholders' equity 1,118.8 1,089.6
-------- ---------
Net debt + shareholders'
equity (capital) $ 1,902.9 $ 1,795.6
======== =========
Ratio of net debt to capital 41.2% 39.3%
======== =========
* Management of the company believes that Net Debt is more representative of
the company's financial position than Total Debt, due to a temporary increase
in cash and cash equivalents. This information is provided as additional
relevant information concerning the company's financial position.
Under its $500 million senior credit facility, the company has three financial
covenants: a consolidated net worth level; a leverage ratio; and a fixed charge
coverage ratio. At June 30, 2004, the company was in compliance with the
covenants under its senior credit facility and its other debt agreements.
In January 2004, Standard & Poor's Rating Services reaffirmed its BBB- corporate
credit rating on the company. In October 2003, Moody's Investors Services
lowered its rating of the company's debt from Baa3 to Ba1. The ratings apply to
the company's senior unsecured debt and senior implied and senior unsecured
32.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
issuer ratings. The impact of the lowered ratings by Moody's on the company's
earnings has been minimal, with only a slight increase in the cost of borrowings
under the company's senior credit facility.
The company's contractual debt obligations and contractual commitments
outstanding as of June 30, 2004 are as follows:
Payments Due by Period (in millions)
Total Less than 1-3 3-5 More than
1 Year Years Years 5 Years
------ --------- ------- ------ ----------
Contractual Obligations:
Long-term debt $620.2 $ 6.6 $105.9 $22.1 $485.6
Short-term debt 231.3 231.3 - - -
Operating Leases 73.1 15.2 21.5 14.0 22.4
Supply Agreement 10.3 5.7 4.6 - -
------ --------- ------- ------ ----------
Total $934.9 $258.8 $132.0 $36.1 $508.0
====== ========= ======= ====== ==========
The company's capital lease obligations are immaterial. The company is also the
guarantor of $27.0 million in debt for PEL. During 2003, the company recorded
the aggregate amount outstanding at December 31, 2003 on the debt underlying
these guarantees of $26.5 million, which is reported as short-term debt on the
consolidated condensed balance sheet, and included in the schedule of
contractual obligations above. Subsequent to June 30, 2004, the company paid
approximately $3.5 million pursuant to the guarantee of PEL debt, which reduces
the total guaranteed to approximately $23 million. Additionally, the company
guarantees an operating lease of a subsidiary's warehouse facility, which had
future rental commitments of $15.4 million at June 30, 2004. 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 pursuant to which the company
purchases tooling, which expires on June 30, 2006.
During the first six months of 2004, the company did not purchase any shares of
its common stock 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 its shares under this plan in the
near-term.
The company does not have any off-balance sheet arrangements with unconsolidated
entities or other persons.
OTHER INFORMATION
- ------------------
Foreign Currency:
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
33.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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. Recently, the American Institute of Certified Public
Accountants SEC Regulations Committee's International Practices Task Force
concluded that Romania should come off highly inflationary status no later than
October 1, 2004. The company is currently evaluating the impact of this
decision on the financial statements of the company.
Foreign currency exchange losses included in the company's operating results for
the three months ended June 30, 2004 totaled $0.6 million, compared to gains of
$3.3 million (of which $1.9 million relates to acquisition-related unrealized
exchange gains) during the three months ended June 30, 2003. Foreign currency
exchange losses included in the company's operating results for the six months
ended June 30, 2004 totaled $2.2 million, compared to gains of $4.9 million (of
which $1.9 million relates to acquisition-related unrealized exchange gains)
during the six months ended June 30, 2003. For the three months ended
June 30, 2004, the company recorded a negative non-cash foreign currency
translation adjustment of $8.7 million that decreased shareholders' equity,
compared to a positive non-cash foreign currency translation adjustment of
$37.3 million that increased shareholders' equity in the three months ended
June 30, 2003. For the six months ended June 30, 2004, the company recorded a
negative non-cash foreign currency translation adjustment of $11.1 million that
decreased shareholders' equity, compared to a positive non-cash foreign currency
translation adjustment of $45.6 million that increased shareholders' equity in
the six months ended June 30, 2003. Both the three and six months ended
June 30, 2004 were negatively impacted by the effect of currency exchange rates,
primarily the weakening of the Euro relative to the U.S. Dollar, compared to
December 31, 2003.
Recent Accounting Pronouncements:
In January 2004, the FASB issued FASB Staff Position (FSP) 106-1, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" (the Act). The FASB is in the
process of amending the FSP by issuing proposed FSP 106-b. The FSP is
effective for the first interim or annual period beginning after June 15, 2004.
The FSP provides guidance on the accounting for the effects of the Act for
employers that sponsor "qualified" postretirement health care plans that provide
prescription drug benefits. The company is currently evaluating the effects of
the Act on its existing postretirement health care plans and has not determined
the amount of any subsidy that may be available from the Act. In addition, the
company has elected under the provisions of the FSP to defer the recognition of
any potential subsidy from the Act. When the amended FSP is issued, previously
reported information may be required to change.
34.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Critical Accounting Policies and Estimates:
The company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. The company reviews its critical accounting policies
throughout the year. The company has concluded that there have been no changes
to its critical accounting policies or estimates, as described in its Annual
Report on Form 10-K for the year ended December 31, 2003, during the six months
ended June 30, 2004.
Other:
On August 6, 2004, the company's board of directors declared a quarterly cash
dividend of $0.13 per share, payable on September 8, 2004 to shareholders of
record as of August 20, 2004. This will be the 329th consecutive dividend paid
on the common stock 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.
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 fluctuations 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
35.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
of unplanned work stoppages; changes in the cost of labor and benefits; the
higher cost and availability of raw materials and energy; and the company's
ability to mitigate the impact of higher material costs through surcharges
and/or price increases.
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 effects of
impairment and restructuring charges associated with such programs; the
ability of acquired companies to achieve satisfactory operating results; and
the company's ability to maintain appropriate relations with unions that
represent company associates in certain locations in order to avoid
disruptions of business.
g) the success of the company's plans concerning the transfer of bearing
production from Canton, including the possibility that the transfer of
production will not achieve the desired results, the possibility of
disruption in the supply of bearings during the process, and the outcome
of the company's discussions with the union that represents company
associates at the affected facilities.
h) 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.
i) 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.
j) 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, 2003;
in the company's Annual Report; or in the company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004.
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.
36.
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 19-35 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 2003 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 2003 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.
37.
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.
The company is currently in discussions with the State of Ohio
concerning a violation of Ohio air pollution control laws which was
discovered by the company and voluntarily disclosed to the State of
Ohio approximately eight years ago. Although no final settlement has
been reached, the company believes that the final settlement will not
be material to the company or have a material adverse effect on the
company's consolidated financial position or results of operations.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(e) Issuer Purchases of Common Stock
The following table provides information about purchases by the company
during the quarter ended June 30, 2004 of its common stock.
Total Number Maximum
of Shares Number of
Purchased as Shares that
Part of May Yet Be
Publicly Purchased
Total Number Average Announced Under the
of Shares Price Paid Plans or Plans or
Period Purchased (1) per Share (2) Programs Programs
------ ------------- ------------- ------------ -----------
4/1/04-
4/30/04 7,674 $23.95 - -
5/1/04-
5/31/04 - - - -
6/1/04-
6/30/04 - - - -
------------- ------------- ------------ -----------
Total 7,674 $23.95 - -
============= ============= ============ ===========
(1) The company repurchases shares of its common stock that are owned
and tendered by employees to satisfy tax withholding obligations
on the vesting of restricted shares.
(2) The average price paid per share is calculated using the daily high
and low of the company's common stock as quoted on the New York
Stock Exchange at the time the employee tenders the shares.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
38.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amended form of Excess Benefits Agreement entered into
with certain executive officers and certain key
employees of the Company.
10.2 Amended form of Excess Benefits Agreement entered into
with the President & Chief Executive Officer; Senior Vice
President - Technology; and the Senior Vice President and
Chief Information Officer.
10.3 Amended form of Death Benefit Agreement entered into with
these executive officers and certain key employees of the
Company who held such positions as of October 1, 2003.
10.4 Amended form of The Timken Company Restricted Share
Agreement.
10.5 Amended form of The Timken Company Deferred Share
Agreement.
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 July 22, 2004, 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 2004
results.
On May 25, 2004, the company furnished a Form 8-K regarding
Regulation FD Disclosure, which contained a statement announcing
that the company's Faircrest steel plant resumed melting steel
on May 22, 2004.
On May 14, 2004, the company furnished a Form 8-K regarding
Regulation FD Disclosure, which contained a press release
announcing a plan to begin closing its Canton, Ohio bearing
manufacturing operations.
39.
(b) Reports on Form 8-K (continued):
On May 5, 2004, the company furnished a Form 8-K regarding
Regulation FD Disclosure, which contained a statement announcing
that the company detected a low level of radioactive material at
its Faircrest steel plant.
On April 22, 2004, the company furnished a Form 8-K regarding
Results of Operations and Financial Condition, which contained
a press release announcing the company's first quarter of 2004
results.
On April 20, 2004, the company furnished a Form 8-K regarding
Regulation FD Disclosure, which contained the presentation that
its President and CEO made at the Annual Meeting of Shareholders.
40.
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 August 6, 2004 BY /s/ James W. Griffith
________________________ ______________________________
James W. Griffith
President and Chief Executive Officer,
and Director
Date August 6, 2004 BY /s/ Glenn A. Eisenberg
________________________ _______________________________
Glenn A. Eisenberg
Executive Vice President - Finance and
Administration (Principal Financial Officer)