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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, 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 September 30, 2004, 90,271,676.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Sep 30 Dec 31
2004 2003
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents........................... $52,871 $28,626
Accounts receivable, less allowances,
(2004-$23,058; 2003-$23,957)........................ 710,218 602,262
Deferred income taxes............................... 48,421 50,271
Inventories......................................... 798,316 695,946
---------- ----------
Total Current Assets...................... 1,609,826 1,377,105
Property, plant and equipment....................... 3,569,909 3,501,551
Less allowances for depreciation................... 2,009,342 1,892,957
---------- ----------
1,560,567 1,608,594
Goodwill............................................ 207,195 173,099
Other intangible assets............................. 193,765 197,993
Deferred income taxes............................... 149,608 148,802
Other assets........................................ 198,732 184,196
---------- ----------
Total Assets.................................. $3,919,693 $3,689,789
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and other liabilities.............. $523,816 $425,157
Short-term debt and current portion of long-term debt 261,547 121,194
Accrued expenses.................................... 394,730 508,205
---------- ----------
Total Current Liabilities................. 1,180,093 1,054,556
Noncurrent Liabilities
Long-term debt...................................... 652,800 613,446
Accrued pension cost................................ 420,376 424,414
Accrued postretirement benefits cost................ 490,486 476,966
Other noncurrent liabilities........................ 30,412 30,780
---------- ----------
Total Noncurrent Liabilities.............. 1,594,074 1,545,606
Shareholders' Equity
Common stock........................................ 703,674 689,160
Earnings invested in the business................... 795,109 758,849
Accumulated other comprehensive loss................ (353,257) (358,382)
---------- ----------
Total Shareholders' Equity................ 1,145,526 1,089,627
---------- ----------
Total Liabilities and Shareholders' Equity.... $3,919,693 $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) Nine Months Ended Three Months Ended
Sep 30 Sep 30 Sep 30 Sep 30
2004 2003 2004 2003
---------- ---------- ---------- ----------
(Thousands of dollars, except share and per share data)
Net sales................................................... $3,325,796 $2,766,272 $1,096,724 $938,012
Cost of products sold....................................... 2,733,641 2,322,831 912,679 790,402
---------- ---------- ---------- ----------
Gross Profit............................................. 592,155 443,441 184,045 147,610
Selling, administrative and general expenses................ 425,100 376,418 135,006 128,454
Impairment and restructuring charges ....................... 3,998 2,736 2,939 1,883
---------- ---------- ---------- ----------
Operating Income......................................... 163,057 64,287 46,100 17,273
Interest expense............................................ (35,941) (35,644) (12,631) (12,369)
Interest income............................................. 766 848 308 430
Other (expense), net........................................ (12,924) (6,183) (5,611) (7,459)
---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes ....................... 114,958 23,308 28,166 (2,125)
Provision for income taxes.................................. 43,684 9,323 10,703 (850)
---------- ---------- ---------- ----------
Net Income (Loss)........................................... $ 71,274 $ 13,985 $ 17,463 $ (1,275)
========== ========== ========== ==========
Earnings Per Share*........................................ $ 0.79 $ 0.17 $ 0.19 $(0.01)
Earnings Per Share - assuming dilution**................... $ 0.79 $ 0.17 $ 0.19 $(0.01)
Dividends Per Share........................................ $ 0.39 $ 0.39 $ 0.13 $ 0.13
========== ========== ========== ==========
* Average shares outstanding............................... 89,706,620 81,109,433 90,166,612 85,568,394
** Average shares outstanding - assuming dilution........... 90,579,359 81,285,394 91,058,739 (A)85,568,394
(A) The addition of 119,016 shares would result in antidilution.
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)
Nine Months Ended
Cash Provided (Used) Sep 30 Sep 30
2004 2003
-------- --------
OPERATING ACTIVITIES (Thousands of dollars)
Net income ............................................... $ 71,274 $ 13,985
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................ 156,916 146,012
Loss (gain) on disposals of property, plant and equipment 2,296 (648)
Provision for deferred income taxes...................... 1,911 2,634
Stock issued in lieu of cash to employee benefit plans... 1,946 2,301
Changes in operating assets and liabilities:
Accounts receivable..................................... (121,331) (57,524)
Inventories............................................. (91,705) (13,036)
Other assets............................................ 15,269 (6,068)
Accounts payable and accrued expenses................... (50,048) (76,383)
Foreign currency translation loss (gain)................ 1,742 (11,793)
-------- --------
Net Cash Used by Operating Activities.................. (11,730) (520)
INVESTING ACTIVITIES
Capital expenditures..................................... (95,229) (80,802)
Proceeds from disposals of property, plant and equipment. 2,610 13,578
Other ................................................... (2,907) (878)
Proceeds from disposals of equity investments............ - 146,335
Acquisitions............................................. (10,233) (723,905)*
-------- --------
Net Cash Used by Investing Activities.................. (105,759) (645,672)
FINANCING ACTIVITIES
Cash dividends paid to shareholders...................... (35,014) (30,500)
Issuance of common stock for acquisition................. - 180,010*
Accounts receivable securitization financing borrowings.. 183,000 125,000
Accounts receivable securitization financing payments.... (73,000) (2,000)
Payments on long-term debt............................... (193,654) (152,381)
Proceeds from issuance of long-term debt................. 237,007 424,957
Short-term debt activity - net........................... 19,288 54,421
-------- --------
Net Cash Provided by Financing Activities.............. 137,627 599,507
Effect of exchange rate changes on cash................... 4,107 2,678
Increase (Decrease) in Cash and Cash Equivalents.......... 24,245 (44,007)
Cash and Cash Equivalents at Beginning of Period.......... 28,626 82,050
-------- --------
Cash and Cash Equivalents at End of Period................ $ 52,871 $ 38,043
======== ========
* 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:
Nine months ended Three months ended
Sep 30 Sep 30
2004 2003 2004 2003
-------- -------- -------- --------
(Thousands of dollars)
Net income (loss), as reported $ 71,274 $ 13,985 $ 17,463 $ (1,275)
Add: Stock-based employee
compensation expense, net
of related taxes 1,207 1,243 526 379
Deduct: Total stock-based
employee compensation
expense determined under
fair value based methods
for all awards, net of
related tax effects (5,055) (4,732) (2,028) (1,934)
-------- -------- -------- --------
Pro forma net income (loss) $ 67,426 $ 10,496 $ 15,961 $ (2,830)
======== ======== ======== ========
Earnings (loss) per share:
Basic and diluted -
as reported $ 0.79 $ 0.17 $ 0.19 $(0.01)
Basic - pro forma $ 0.75 $ 0.13 $ 0.18 $(0.03)
Diluted - pro forma $ 0.74 $ 0.13 $ 0.18 $(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 was 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
adjustments were finalized subsequent to September 30, 2004. In the fourth
quarter of 2004, the company will record these adjustments, which will not have
a material effect on its financial statements.
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:
Nine Months Ended
Sep 30
2003
----------
(Amounts in thousands, except per share data)
Net sales $2,917,515
Net income $ 7,133
Earnings per share:
Basic $ 0.09
Diluted $ 0.09
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 (2,023) (13,363) (1,179) (16,565)
--------- ------- ----------- -------
Balance at Sep 30, 2004 $2,954 $ 6,476 $ 718 $10,148
========= ======= =========== =======
Note 4 -- Inventories Sep 30 Dec 31
2004 2003
-------- ---------
(Thousands of dollars)
Finished products $344,737 $330,455
Work-in-process and raw materials 406,762 323,439
Manufacturing supplies 46,817 42,052
-------- --------
$798,316 $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.
Sep 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
(1.70% at September 30, 2004) $ 17,000 $17,000
Variable-rate State of Ohio Water Development Revenue
Refunding Bonds, maturing on May 1, 2007
(1.70% at September 30, 2004) 8,000 8,000
Variable-rate State of Ohio Air Quality and Water
Development Revenue Refunding Bonds, maturing on
November 1, 2025 (1.70% at September 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)
Sep 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
(1.72% at September 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%. 286,908 287,000
Variable-rate Senior credit facility, maturing on
December 31, 2007. The interest rate is LIBOR plus
1.5% (4.50% at September 30, 2004) 42,000 -
Fixed-rate Unsecured Notes, maturing on February 15,
2010 with a fixed interest rate of 5.75%. 249,418 250,000
Other 10,026 12,471
-------- --------
659,052 620,171
Less: Current Maturities 6,252 6,725
-------- --------
$652,800 $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 September 30,
2004, there was $110 million outstanding under this facility. This balance is
reflected on the company's consolidated condensed balance sheet as of
September 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 2.21% at September 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 September 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 Nine Months Ended Three Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
2004 2003 2004 2003
-------- -------- -------- --------
U.S. (Thousands of dollars)
Federal $ 20,722 $( 5,684) $ 3,656 $ (5,757)
State & Local 3,020 1,291 651 963
Foreign 19,942 13,716 6,396 3,944
-------- -------- -------- -------
$ 43,684 $ 9,323 $ 10,703 $ ( 850)
======== ======== ======== ========
The effective tax rates were 38% and 40% for the three months ended
September 30, 2004 and 2003, respectively, and 38% and 40% for the nine months
ended September 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 extraterritorial income.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 10.
Sep 30 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 - 90,273,877 shares
2003 - 89,076,114 shares
Stated Capital 53,064 53,064
Other paid-in capital 650,662 636,272
Less cost of Common Stock in treasury
2004 - 2,201 shares
2003 - 10,601 shares (52) (176)
-------- --------
$703,674 $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 71,274 71,274
Foreign currency translation adjustment 3,542 3,542
Change in fair value of derivative financial
instruments, net of reclassifications
(net of income tax of $414) 1,583 1,583
---------
Total comprehensive income 76,399
Dividends - $0.39 per share (35,014) (35,014)
Issuance of 8,400 shares from treasury
and 1,197,763 shares from authorized related
to stock option plans 14,390 124 14,514
------- -------- -------- ---------- -------- ----------
Balance September 30, 2004 $53,064 $650,662 $795,109 ($353,257) ($52) $1,145,526
======= ======== ======== ========== ======== ==========
The total comprehensive income for the three months ended September 30, 2004 and 2003 was $34,270,000 and
$1,640,000 respectively. Total comprehensive income for the nine months ended September 30, 2003 was $60,566,000.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 11.
Continued
Note 8 -- Impairment and Restructuring Charges
Impairment and restructuring charges are comprised of the following:
Nine Months Ended Three Months Ended
Sep 30 Sep 30 Sep 30 Sep 30
2004 2003 2004 2003
---------- ---------- ---------- ----------
(Thousands of dollars)
Severance expense and related benefit costs $3,706 $2,736 $2,795 $1,883
Exit costs 292 - 144 -
---------- ---------- ---------- ----------
Total $3,998 $2,736 $2,939 $1,883
========== ========== ========== ==========
In both the three months and nine months ended September 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 nine months ended Sep 30, 2004:
Severance expense and related benefits $1,554 $2,139 $13 $3,706
Exit costs 40 241 11 292
------ ------------ ------- ------
Total $1,594 $2,380 $24 $3,998
====== ============ ======= ======
For the three months ended Sep 30, 2004:
Severance expense and related benefits $1,465 $1,330 $ - $2,795
Exit costs 40 104 - 144
------ ------------ ------- ------
Total $1,505 $1,434 $ - $2,939
====== ============ ======= ======
For the nine months ended Sep 30, 2003:
Severance expense and related benefits $573 $2,057 $106 $2,736
------ ------------ ------- ------
Total $573 $2,057 $106 $2,736
====== ============ ======= ======
For the three months ended Sep 30, 2003:
Severance expense and related benefits $512 $1,265 $106 $1,883
------ ------------ ------- ------
Total $512 $1,265 $106 $1,883
====== ============ ======= ======
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 3,998
Less: payments (4,116)
--------
Balance at September 30, 2004 $4,343
========
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) Nine Months Ended Three Months Ended
Sep 30 Sep 30 Sep 30 Sep 30
2004 2003 2004 2003
Automotive Group -------- -------- -------- --------
Net sales to external customers $1,190,641 $1,021,458 $370,876 $346,804
Depreciation and amortization 58,619 53,768 19,101 23,664
EBIT (loss), as adjusted 17,782 7,398 (7,148) (8,459)
Industrial Group
Net sales to external customers $1,261,274 $1,080,951 $413,589 $386,407
Intersegment sales 983 481 416 136
Depreciation and amortization 52,852 43,243 17,388 17,176
EBIT, as adjusted 130,277 83,489 45,200 35,100
Steel Group
Net sales to external customers $873,881 $663,863 $312,259 $204,801
Intersegment sales 121,147 105,371 43,044 31,815
Depreciation and amortization 45,445 49,001 15,090 16,220
EBIT (loss), as adjusted 22,510 (1,826) 16,760 (5,609)
Reconciliation to Income (Loss) Before Income Taxes
Total EBIT, as adjusted, for
reportable segments $170,569 $ 89,061 $ 54,812 $ 21,032
Impairment and restructuring charges (3,998) (2,736) (2,939) (1,883)
Integration/Reorganization expenses (20,119) (28,925) (7,497) (5,094)
Gain on sale of assets - 3,107 - -
CDSOA repayment - ( 2,808) - -
CDSOA receipts, net of expenses 7,743 - - -
Acquisition-related unrealized
currency exchange gains - 1,930 - -
Prior restructuring accrual reversal - (32) - (974)
Adoption of FIN 46 (948) - - -
Other (719) - (719) -
Interest expense (35,941) (35,644) (12,631) (12,369)
Interest income 766 848 308 430
Intersegment adjustments (2,395) (1,493) (3,168) (3,267)
------- ------- ------- -------
Income (loss) before income taxes $114,958 $ 23,308 $ 28,166 $ (2,125)
======== ======== ======== ========
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 nine months ended
September 30, 2004 are as follows:
(Thousands of Dollars) Balance Balance
12/31/03 Acquisition Other 9/30/04
--------- ----------- ------- ---------
Goodwill:
Automotive $ 45,614 $ 18,744 $ 3,899 $ 68,257
Industrial 127,485 12,258 (805) 138,938
Steel - - - -
--------- ---------- -------- ---------
$ 173,099 $ 31,002 $ 3,094 $ 207,195
========= ========== ======== =========
The following table displays intangible assets as of September 30,2004 and
December 31, 2003:
(Thousands of Dollars) As of September 30,2004
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Intangible assets subject to amortization:
Automotive $ 62,239 $ (8,878) $ 53,361
Industrial 38,113 (5,681) 32,432
Steel 468 (103) 365
-------- ------------ --------
$100,820 $ (14,662) $ 86,158
======== =========== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 15.
Continued
Note 10 - Goodwill and Other Intangible Assets (continued)
Intangible assets not subject to amortization:
Goodwill $207,195 $ - $207,195
Intangible pension asset 106,526 - 106,526
Other 1,081 - 1,081
-------- ----------- --------
$314,802 $ - $314,802
======== =========== ========
Total Intangible Assets $415,622 $ (14,662) $400,960
======== =========== ========
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 $2.3 million and
$6.5 million for the three and nine months ended September 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 $29.8 million and $34.0 million at September 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
Technologies (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 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. During the third quarter of 2004, the company paid
$3.5 million pursuant to the guarantee of PEL debt, which reduced the total
guaranteed to $23 million, which is reported as short-term debt on the
consolidated condensed balance sheet.
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
------------------- --------------------
Nine Months Ended Nine Months Ended
Sep 30 Sep 30 Sep 30 Sep 30
2004 2003 2004 2003
--------- --------- -------- --------
(Thousands of dollars)
Service cost $ 29,402 $ 35,536 $ 4,313 $ 5,074
Interest cost 109,171 102,932 36,959 37,094
Expected return on
plan assets (109,324) (100,106) - -
Amortization of prior
service cost 11,338 13,880 (3,512) (4,275)
Recognized net
actuarial loss 24,876 14,398 13,221 11,248
Curtailment loss (gain) - 420 - (1,362)
Amortization of
transition asset (81) (431) - -
--------- --------- -------- --------
Net periodic benefit cost $ 65,382 $ 66,629 $ 50,981 $47,779
========= ========= ======== ========
Three Months Ended Three Months Ended
Sep 30 Sep 30 Sep 30 Sep 30
2004 2003 2004 2003
--------- --------- -------- --------
(Thousands of dollars)
Service cost $ 8,024 $ 11,846 $ 627 $ 1,692
Interest cost 36,817 34,310 11,915 12,364
Expected return on
plan assets (36,700) (33,368) - -
Amortization of prior
service cost 3,514 4,626 (928) (1,425)
Recognized net
actuarial loss 9,588 4,800 4,645 3,750
Curtailment loss (gain) - 140 - (454)
Amortization of
transition asset (27) (143) - -
--------- --------- -------- --------
Net periodic benefit cost $21,216 $ 22,211 $16,259 $15,927
========= ========= ======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 18.
Continued
Note 12 - Retirement and Postretirement Benefit Plans (continued)
The U.S. Medicare Prescription Drug Improvement and Modernization Act of 2003
(the Act) was signed into law on December 8, 2003. The Act provides for
prescription drug benefits under Medicare Part D and contains a subsidy to plan
sponsors who provide "actuarially equivalent" prescription plans. The company
believes that it offers "actuarially equivalent" prescription plans. In
May 2004, the Financial Accounting Standards Board issued FASB Staff Position
No. FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" (FSP 106-2). FSP
106-2 is effective for the first interim or annual period beginning after
June 15, 2004. Prior to the third quarter of 2004, the company elected deferral
under FSP 106-2. During the three months ended September 30, 2004, the company
adopted retroactively FSP 106-2. The effect of the Act has been measured as of
December 31, 2003 and is now reflected in the company's unaudited condensed
consolidated financial statements and accompanying notes. The effect of the Act
is a reduction to the accumulated postretirement benefit obligation of
$30.7 million. Also, the effect of the Act will decrease the net periodic
postretirement benefit cost by $4.1 million in 2004, comprised of $2.2 million
of amortization of unrecognized net actuarial loss and $1.9 million in reduced
interest costs. During the three months ended September 30, 2004, the company
recorded a reduction to the net periodic postretirement benefit cost of
$3.1 million.
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.
During the third quarter of 2004, the company incurred clean-up costs of
$2.5 million, which were more than offset by a reimbursement of $3.0 million
received from the company's insurer. The company estimates that its Steel
Group's profitability for the nine months ended September 30, 2004 was
negatively impacted by approximately $7.2 million as a result of this incident.
This estimate includes $11.5 million of clean-up and estimated business
interruption costs as well as reduced EBIT from lower sales, net of
reimbursements of $4.3 million received to date from the company's insurer.
The company expects to recover nearly all of the clean-up, business interruption
and disposal costs in excess of $4 million of insurance deductibles.
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, including
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 September 30, 2004, The Timken Company reported net
sales of approximately $1.1 billion, an increase of approximately 17 percent
from the third quarter of 2003. Sales were higher across all three business
segments. For the three months ended September 30, 2004, earnings per diluted
share were $0.19, compared to a loss of $0.01 per diluted share for the third
quarter of 2003.
For the nine months ended September 30, 2004, net sales were approximately
$3.3 billion, an increase of approximately 20 percent from the same period last
year, partially driven by the acquisition of Torrington. For the nine months
ended September 30, 2004, earnings per diluted share were $0.79, compared to
$0.17 per diluted share for the nine months ended September 30, 2003.
The company benefited from operational improvements made over the past year and
synergies from the Torrington acquisition. The company has been challenged by
the rapid upturn in market demand and unprecedented high raw material costs, but
is actively addressing these issues to improve customer service and leverage the
increased volume.
The Automotive Group's net sales increased from the third quarter of last year
due to increased market penetration and new product launches, despite a one
percent reduction in North American light vehicle production and a flat European
market. Medium- and heavy-duty truck demand continued to be strong, driven by a
38 percent increase in North American vehicle production. The Automotive
Group's profitability benefited from higher sales and continued productivity
improvements, but was negatively impacted by higher raw material costs.
20.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The Industrial Group reported a strong sales increase across most market
sectors, with the strongest growth in construction, agriculture, rail, and
mechanical power transmission. In addition to the increased sales volume,
profit for the Industrial Group benefited from lower operating costs and
improved pricing and surcharges.
The increase in the Steel Group's net sales over last year was driven by price
increases and surcharges, which were implemented to recover high costs for
scrap, alloys and energy, as well as increased demand. The strongest market
sectors were aerospace, oil production and industrial. The company recovered a
significant portion of the raw material cost increases through surcharges and
price increases. The Steel Group's profitability further benefited from volume
increases and productivity improvements.
THE STATEMENT OF OPERATIONS
- ----------------------------
Unless otherwise stated below, comments regarding the three months ended
September 30, 2004 apply also to the nine months ended September 30, 2004 and
comments regarding the three months ended September 30, 2003 apply also to the
nine months ended September 30, 2003.
Overview:
3Q 2004 3Q 2003 $ Change % Change
------- ------- -------- --------
(Dollars in millions, except earnings per share)
Net sales $1,096.7 $938.0 $158.7 16.9%
Net income (loss) $ 17.5 $ (1.3) $ 18.8 N/A
Earnings per share - diluted $ 0.19 $(0.01) $ 0.20 N/A
Average number of shares
- diluted 91,058,739 85,568,394 - 6.4%
YTD 2004 YTD 2003 $ Change % Change
-------- --------- -------- --------
(Dollars in millions, except earnings per share)
Net sales $3,325.8 $2,766.3 $559.5 20.2%
Net income $ 71.3 $ 14.0 $ 57.3 409.3%
Earnings per share - diluted $ 0.79 $ 0.17 $ 0.62 364.7%
Average number of shares
- diluted 90,579,359 81,285,394 - 11.4%
Sales by Segment:
3Q 2004 3Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions and exclude intersegment sales)
Automotive Group $ 370.9 $346.8 $ 24.1 6.9%
Industrial Group 413.6 386.4 27.2 7.0%
Steel Group 312.2 204.8 107.4 52.4%
-------- ------- --------- -------
Total company $1,096.7 $938.0 $158.7 16.9%
======== ======= ========= =======
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 $1,190.6 $1,021.5 $169.1 16.6%
Industrial Group 1,261.3 1,080.9 180.4 16.7%
Steel Group 873.9 663.9 210.0 31.6%
-------- --------- --------- -------
Total company $3,325.8 $2,766.3 $559.5 20.2%
======== ========= ========= =======
The Automotive Group's net sales benefited from increased market penetration in
the North American and European light truck sectors, new product introductions
and increased demand in the medium and heavy truck sectors. The Industrial
Group's net sales increased due to stronger demand in most industrial market
segments, especially construction, agriculture, rail, and mechanical power
transmission. The increase in the Steel Group's net sales resulted primarily
from price increases and surcharges, which were implemented to recover high
costs for scrap, alloys and energy, as well as increased demand. The strongest
Steel Group market sectors were aerospace, oil production and industrial. For
both the Automotive and Industrial Groups, a portion of the net sales increase
for the nine months ended September 30, 2004, compared to the same period last
year, was attributable to the acquisition of Torrington on February 18, 2003.
Gross Profit:
3Q 2004 3Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Gross profit $184.0 $147.6 $36.4 24.7%
Gross profit % to net sales 16.8% 15.7% - 1.1%
Integration charges included in
cost of products sold $ 1.0 $ 0.2 $0.8 400.0%
YTD 2004 YTD 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Gross profit $592.2 $443.4 $148.8 33.6%
Gross profit % to net sales 17.8% 16.0% - 1.8%
Integration charges included in
cost of products sold $ 3.4 $ 10.5 $(7.1) (67.6)%
Gross profit for the nine months ended September 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 benefited from higher sales and
improved manufacturing performance leveraging higher volumes. Gross profit was
negatively impacted by higher raw material costs, although the company recovered
a significant portion of these increases through price increases and surcharges.
In 2004, integration charges included in cost of products sold related 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 other
integration charges related to the acquisition of Torrington.
22.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Selling, Administrative and General Expenses:
3Q 2004 3Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Selling, administrative and
general expenses $135.0 $128.5 $ 6.5 5.1%
Selling, administrative and
general expenses % to net sales 12.3% 13.7% - (1.4)%
Integration charges included in
selling, administrative and
general expenses $ 6.5 $ 4.9 $ 1.6 32.7%
YTD 2004 YTD 2003 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Selling, administrative and
general expenses $425.1 $376.4 $48.7 12.9%
Selling, administrative and
general expenses % to net sales 12.8% 13.6% - (0.8)%
Integration charges included in
selling, administrative and
general expenses $ 16.7 $ 18.4 $(1.7) (9.2)%
The increase in selling, administrative and general expenses for the three
months ended September 30, 2004 compared to the same period last year was due
primarily to higher sales in the third quarter of 2004. Selling, administrative
and general expenses for the nine months ended September 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, and savings resulting from the integration of
Torrington. Selling, administrative and general expenses for the nine months
ended September 30, 2004 increased compared to the same period last year
primarily due to higher sales and higher accruals for performance-based
compensation.
The integration charges for both 2004 and 2003 related to charges associated
with the integration of Torrington, primarily for information technology and
purchasing initiatives.
23.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Impairment and Restructuring Charges:
3Q 2004 3Q 2003 $ Change
------- ------- ---------
(Dollars in millions)
Severance and related benefit costs $2.8 $1.9 $0.9
Exit costs 0.1 - 0.1
------- ------- ---------
Total $2.9 $1.9 $1.0
======= ======= =========
YTD 2004 YTD 2003 $ Change
-------- -------- ---------
(Dollars in millions)
Severance and related benefit costs $3.7 $2.7 $1.0
Exit costs 0.3 - 0.3
------- ------- ---------
Total $4.0 $2.7 $1.3
======= ======= =========
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.
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.
Interest Expense and Income:
3Q 2004 3Q 2003 $ Change
------- ------- ---------
(Dollars in millions)
Interest expense $12.6 $12.4 $0.2
Interest income $ 0.4 $ 0.4 $ -
YTD 2004 YTD 2003 $ Change
-------- -------- ---------
(Dollars in millions)
Interest expense $35.9 $35.6 $0.3
Interest income $ 0.8 $ 0.8 $ -
Interest expense for both the three and nine months ended September 30, 2004
increased compared to the same periods last year due to higher effective
interest rates, partially offset by lower average debt outstanding.
24.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Other Income and Expense:
3Q 2004 3Q 2003 $ Change
------- ------- ---------
(Dollars in millions)
Other (expense), net $(5.6) $(7.5) $1.9
YTD 2004 YTD 2003 $ Change
-------- -------- ---------
(Dollars in millions)
CDSOA receipts, net of expenses
and (repayments) $ 7.7 $(2.8) $10.5
Other (expense), net (20.6) (3.4) (17.2)
------- ------- ---------
Total $(12.9) $(6.2) $ (6.7)
======= ======= =========
For the three months ended September 30, 2004, other expense, net included
losses on the disposal of assets and foreign currency exchange gains. For the
three months ended September 30, 2003, other expense, net included losses from
equity investments, foreign currency exchange losses and losses on the disposal
of assets. For the nine months ended September 30, 2004, other expense, net
included losses from equity investments, losses on the disposal of assets,
foreign currency exchange losses, 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 nine months ended
September 30, 2003, other expense, net included losses from equity investments,
losses on the disposal of assets, a one-time gain related to the sale of
property in the United Kingdom, and foreign currency exchange gains.
U.S. Continued Dumping and Subsidy Offset Act (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 to date in 2004 related to Torrington's ball
bearing and needle 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. For the nine months ended September 30, 2003,
the CDSOA repayment of $2.8 million was the result of a miscalculation by the
U.S. Treasury Department of funds received in 2002. 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 three and nine months
ended September 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
extraterritorial income.
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:
3Q 2004 3Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $370.9 $346.8 $24.1 6.9%
Adjusted EBIT (loss) $ (7.1) $ (8.5) $ 1.4 16.5%
Adjusted EBIT (loss) margin (1.9)% (2.4)% - 0.5%
YTD 2004 YTD 2003 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $1,190.6 $1,021.5 $169.1 16.6%
Adjusted EBIT $ 17.8 $ 7.4 $ 10.4 140.5%
Adjusted EBIT margin 1.5% 0.7% - 0.8%
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 in light vehicle applications increased from last
year due to increased market penetration and new product launches, despite a one
percent reduction in North American light vehicle production and a flat European
market. Medium- and heavy-duty truck demand continued to be strong primarily
due to a 38 percent increase in North American vehicle production. A portion of
the net sales increase for the nine months ended September 30, 2004, compared to
the same period last year, was attributable to the acquisition of Torrington.
Profitability for the Automotive Group in 2004 was higher than 2003 primarily as
a result of higher sales and improved manufacturing performance, partially
offset by higher raw material costs. The Automotive Group recovered a portion
of the raw material cost increases through surcharges and pricing programs. The
Automotive Group expects to improve its ability to recover these higher raw
material costs in the future through surcharges and price increases.
26.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Industrial Group:
3Q 2004 3Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $414.0 $386.5 $27.5 7.1%
Adjusted EBIT $ 45.2 $ 35.1 $10.1 28.8%
Adjusted EBIT margin 10.9% 9.1% - 1.8%
YTD 2004 YTD 2003 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $1,262.3 $1,081.4 $180.9 16.7%
Adjusted EBIT $ 130.3 $ 83.5 $ 46.8 56.1%
Adjusted EBIT margin 10.3% 7.7% - 2.6%
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, agriculture, rail, and mechanical power transmission.
Distribution orders have risen more slowly in 2004 as distributors continue to
reduce their inventories of Torrington-branded products. The company expects
this inventory reduction, which is in line with its projections, to continue.
A portion of the net sales increase for the nine months ended September 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, improved cost structure and
improved pricing and surcharges. Supply chains are straining to keep up with
the rapid industrial upturn of 2004. The Industrial Group continues to focus on
adding capacity and improving sales mix to meet strong demand for industrial
products.
Steel Group:
3Q 2004 3Q 2003 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $355.3 $236.6 $118.7 50.2%
Adjusted EBIT (loss) $ 16.8 $ (5.6) $ 22.4 N/A
Adjusted EBIT (loss) margin 4.7% (2.4)% - 7.1%
YTD 2004 YTD 2003 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $995.0 $769.2 $225.8 29.4%
Adjusted EBIT (loss) $ 22.5 $ (1.8) $ 24.3 N/A
Adjusted EBIT (loss) margin 2.3% (0.2)% - 2.5%
27.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The Steel Group's 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 price increases and surcharges, which were
implemented to recover high costs for scrap, alloys and energy, as well as
increased demand. The strongest market sectors for the Steel Group were
aerospace, oil production and general industrial customers.
Raw material costs, especially scrap steel prices, increased significantly over
last year. The company recovered a significant portion of these cost increases
through surcharges and price increases. Increased volume and productivity
improvements further benefited earnings. The Steel Group operated at near
capacity during the third quarter of 2004.
The company expects production volume to remain at near capacity levels for the
remainder of 2004 and into 2005. The company expects the costs for scrap steel,
alloys and energy to remain high through 2005.
During the second quarter of 2004, the company's Faircrest steel facility was
shut down for 10 days to clean up contamination from a material commonly used
for industrial gauging. During the third quarter of 2004, the company incurred
clean-up costs of $2.5 million, which were more than offset by a reimbursement
of $3.0 million received from the company's insurer. The company estimates that
the Steel Group's profitability for the nine months ended September 30, 2004
was negatively impacted by approximately $7.2 million as a result of this
unplanned shutdown. This estimate includes $11.5 million of clean-up and
business interruption costs as well as reduced EBIT from lower sales, net of
reimbursements of $4.3 million received to date from the company's insurer.
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 BALANCE SHEET
- -----------------
Total assets as shown on the Consolidated Condensed Balance Sheet at
September 30, 2004 increased by $229.9 million from December 31, 2003. This
increase was due primarily to increased working capital required to support
higher sales.
Current Assets:
09/30/04 12/31/03 $ Change % Change
-------- -------- -------- --------
(Dollars in millions)
Cash and cash equivalents $ 52.9 $ 28.6 $ 24.3 85.0%
Accounts receivable, net 710.2 602.3 107.9 17.9%
Deferred income taxes 48.4 50.3 (1.9) (3.8)%
Inventories 798.3 695.9 102.4 14.7%
-------- -------- -------- --------
Total current assets $1,609.8 $1,377.1 $232.7 16.9%
======== ======== ======== ========
28.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The increase in cash and cash equivalents was partially due to accumulated cash
at certain debt-free foreign subsidiaries. Refer to the Consolidated Condensed
Statement of Cash Flows for further explanation. The increase in accounts
receivable was due primarily to sales being higher in the third quarter of 2004,
compared to the fourth quarter of 2003. The increase in inventories was due
primarily to higher Steel Group inventories and increased raw material costs.
Property, Plant and Equipment - Net:
09/30/04 12/31/03 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Property, plant and equipment
- cost $3,569.9 $3,501.6 $ 68.3 2.0%
Less: allowances for depreciation (2,009.3) (1,893.0) (116.3) (6.1)%
-------- -------- -------- ---------
Property, plant and equipment
- net $1,560.6 $1,608.6 $(48.0) (3.0)%
======== ======== ======== =========
The decrease in property, plant and equipment - net was due primarily to
depreciation expense in excess of capital expenditures.
Other Assets:
09/30/04 12/31/03 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Goodwill $207.2 $173.1 $34.1 19.7%
Other intangible assets 193.8 198.0 (4.2) (2.1)%
Deferred income taxes 149.6 148.8 0.8 0.5%
Other assets 198.7 184.2 14.5 7.9%
-------- -------- -------- ---------
Total other assets $749.3 $704.1 $45.2 6.4%
======== ======== ======== =========
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 $74.0
million at September 30, 2004, compared to $47.0 million at December 31, 2003.
The final purchase price for the acquisition of Torrington was subject to
adjustment upward or downward based on the differences for both net working
capital and net debt between December 31, 2001 and February 15, 2003. These
adjustments were finalized subsequent to September 30, 2004. In the fourth
quarter of 2004, the company will record these adjustments, which will not have
a material effect on its financial statements.
29.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Current Liabilities:
09/30/04 12/31/03 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Short-term debt $ 261.5 $ 121.2 $ 140.3 115.8%
Accounts payable and other
liabilities 523.8 425.2 98.6 23.2%
Accrued expenses 394.8 508.2 (113.4) (22.3)%
-------- -------- -------- ---------
Total current liabilities $1,180.1 $1,054.6 $ 125.5 11.9%
======== ======== ======== =========
The increase in short-term debt was due primarily to additional borrowings,
mainly under the company's asset securitization facility, as a result of
seasonal working capital requirements and cash contributions to its U.S.-based
pension plans. The company does not anticipate any additional cash
contributions to its U.S.-based pension plans during the fourth quarter of 2004.
The increase in accounts payable and other liabilities was due primarily to an
increase in trade accounts payable resulting from increased volume 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.
Non-Current Liabilities:
09/30/04 12/31/03 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Long-term debt $ 652.8 $ 613.4 $ 39.4 6.4%
Accrued pension cost 420.4 424.4 (4.0) (0.9)%
Accrued postretirement benefits
cost 490.5 477.0 13.5 2.8%
Other non-current liabilities 30.4 30.8 (0.4) (1.3)%
-------- -------- -------- ---------
Total non-current liabilities $1,594.1 $1,545.6 $ 48.5 3.1%
======== ======== ======== =========
The increase in long-term debt relates primarily to borrowings under the
company's senior credit facility as a result of seasonal working capital
requirements and cash contributions to its U.S.-based pension plans. The
decrease in accrued pension cost was due primarily to contributions to the
company's U.S.-based pension plans of $185.0 million during the nine months
ended September 30, 2004, partially offset by a reclassification from the current
portion of accrued pension cost and current year accruals for pension expense.
Shareholders' Equity:
09/30/04 12/31/03 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Common stock $ 703.7 $ 689.2 $14.5 2.1%
Earnings invested in the business 795.1 758.8 36.3 4.8%
Accumulated other comprehensive
loss (353.3) (358.4) 5.1 1.4%
-------- -------- -------- ---------
Total shareholders' equity $1,145.5 $1,089.6 $55.9 5.1%
======== ======== ======== =========
30.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Earnings invested in the business were increased by net income of $71.3 million,
partially offset by dividends declared of $35.0 million. For discussion
regarding the impact of foreign currency translation, refer to "Foreign
Currency" in the Other Information section below.
CASH FLOWS
- -----------
YTD 2004 YTD 2003 $ Change
-------- -------- ---------
(Dollars in millions)
Net cash used by
operating activities $(11.7) $ (0.5) $(11.2)
Net cash used by investing
activities (105.8) (645.7) 539.9
Net cash provided by
financing activities 137.6 599.5 (461.9)
Effect of exchange rate
changes on cash 4.1 2.7 1.4
-------- -------- ---------
Increase (decrease) in
cash and cash equivalents $ 24.2 $ (44.0) -
======== ======== =========
The increase in net cash used by operating activities of $11.2 million was
primarily the result of higher cash contributions to the company's U.S.-based
pension plans in 2004 of $185.0 million, compared to $168.9 million in 2003.
Net cash used by operating activities was also negatively impacted by cash used
from other changes in operating assets and liabilities of $61.0 million in 2004,
compared to cash provided of $4.1 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 $234.3 million in 2004,
compared to $164.3 million 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 $723.9 million in 2003, partially
offset by proceeds received of $146.3 million in 2003 from the sale of the
company's interest in NTC. Capital expenditures of $95.2 million in 2004
increased from $80.8 million in 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 $172.6 million in 2004.
31.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total debt was $914.3 million at September 30, 2004 compared to $734.6 million
at December 31, 2003. Net debt was $861.5 million at September 30, 2004,
compared to $706.0 million at December 31, 2003. The net debt to capital ratio
was 42.9% at September 30, 2004, compared to 39.3% at December 31, 2003. The
company expects that 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
September 30, 2004, the company had outstanding letters of credit totaling
$71.0 million and borrowings of $42.0 million under the $500 million senior
credit facility, which reduced the availability under that facility to $387.0
million. Also, at September 30, 2004, the company had outstanding borrowings of
$110.0 million under the $125 million accounts receivable securitization
facility, which reduced the availability under that facility to $15.0 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:
9/30/04 12/31/03
-------- ---------
(Dollars in millions)
Short-term debt $261.5 $121.2
Long-term debt 652.8 613.4
-------- ---------
Total debt 914.3 734.6
Less: cash and cash equivalents (52.8) (28.6)
-------- ---------
Net debt $861.5 $706.0
======== =========
Ratio of net debt to capital:
9/30/04 12/31/03
-------- ---------
(Dollars in millions)
Net debt $ 861.5 $ 706.0
Shareholders' equity 1,145.5 1,089.6
-------- ---------
Net debt + shareholders'
equity (capital) $ 2,007.0 $ 1,795.6
======== =========
Ratio of net debt to capital 42.9% 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
information concerning the company's financial position.
32.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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 September 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
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 September 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 $659.0 $ 6.2 $106.1 $59.3 $487.4
Short-term debt 255.3 255.3 - - -
Operating Leases 69.3 15.0 19.9 13.5 20.9
Supply Agreement 8.9 5.4 3.5 - -
------ --------- ------- ------ ----------
Total $992.5 $281.9 $129.5 $72.8 $508.3
====== ========= ======= ====== ==========
The company's capital lease obligations are immaterial. The company is also the
guarantor of 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. During the third quarter of 2004, the company paid
$3.5 million pursuant to a guarantee of PEL debt, which reduced the total
guaranteed to $23.0 million, which is reported as short-term debt on the
consolidated condensed balance sheet, and included in the schedule of
contractual obligations above. Additionally, the company guarantees an
operating lease of a subsidiary's warehouse facility, which had future rental
commitments of $15.2 million at September 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 nine 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.
33.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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
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. In the fourth quarter of 2004, the company will no longer
account for Timken Romania as highly inflationary. The company has concluded
that Timken Romania coming off highly inflationary status will not have a
material impact on its consolidated financial statements.
Foreign currency exchange gains included in the company's operating results for
the three months ended September 30, 2004 totaled $0.5 million, compared to
losses of $0.5 million during the three months ended September 30, 2003.
Foreign currency exchange losses included in the company's operating results for
the nine months ended September 30, 2004 totaled $1.7 million, compared to
losses of $0.1 million (of which $1.9 million relates to acquisition-related
unrealized exchange gains) during the nine months ended September 30, 2003. For
the three months ended September 30, 2004, the company recorded a positive
non-cash foreign currency translation adjustment of $17.0 million that increased
shareholders' equity, compared to a positive non-cash foreign currency
translation adjustment of $3.2 million that increased shareholders' equity in
the three months ended September 30, 2003. For the nine months ended
September 30, 2004, the company recorded a positive non-cash foreign currency
translation adjustment of $3.5 million that increased shareholders' equity,
compared to a positive non-cash foreign currency translation adjustment of
$45.3 million that increased shareholders' equity in the nine months ended
September 30, 2003. Both the three and nine months ended September 30, 2004
were positively impacted by the effect of currency exchange rates, primarily the
movements of the Canadian Dollar and Euro relative to the U.S. Dollar, compared
to December 31, 2003.
Recent Accounting Pronouncements:
The U.S. Medicare Prescription Drug Improvement and Modernization Act of 2003
(the Act) was signed into law on December 8, 2003. The Act provides for
prescription drug benefits under Medicare Part D and contains a subsidy to plan
sponsors who provide "actuarially equivalent" prescription plans. The company
believes that it offers "actuarially equivalent" prescription plans. In
May 2004, the Financial Accounting Standards Board issued FASB Staff Position
No. FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" (FSP 106-2).
FSP 106-2 is effective for the first interim or annual period beginning after
June 15, 2004. Prior to the third quarter of 2004, the company elected deferral
34.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
under FSP 106-2. During the three months ended September 30, 2004, the company
adopted retroactively FSP 106-2. The effect of the Act has been measured as of
December 31, 2003 and is now reflected in the company's unaudited condensed
consolidated financial statements and accompanying notes. The effect of the Act
is a reduction to the accumulated postretirement benefit obligation of
$30.7 million. Also, the effect of the Act will decrease the net periodic
postretirement benefit cost by $4.1 million in 2004, comprised of $2.2 million
of amortization of unrecognized net actuarial loss and $1.9 million in reduced
interest costs. During the three months ended September 30, 2004, the company
recorded a reduction to the net periodic postretirement benefit cost of
$3.1 million.
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 nine months
ended September 30, 2004.
Other:
On November 5, 2004, the company's board of directors declared a quarterly cash
dividend of $0.13 per share, payable on December 7, 2004 to shareholders of
record as of November 19, 2004. This will be the 330th 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.
35.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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; the
company's ability to respond to the speed of the upturn in market demand;
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 Reports on
Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004.
36.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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.
37.
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 19-36 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.
38.
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. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
(c) Issuer Purchases of Common Stock
The following table provides information about purchases by the company
during the quarter ended September 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
------ ------------- ------------- ------------ -----------
7/1/04-
7/31/04 - - - -
8/1/04-
8/31/04 148 $23.56 - -
9/1/04-
9/30/04 1,210 $23.32 - -
------------- ------------- ------------ -----------
Total 1,358 $23.35 - -
============= ============= ============ ===========
(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.
39.
Item 6. 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.
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 November 8, 2004 BY /s/ James W. Griffith
________________________ ______________________________
James W. Griffith
President and Chief Executive Officer,
and Director
Date November 8, 2004 BY /s/ Glenn A. Eisenberg
________________________ _______________________________
Glenn A. Eisenberg
Executive Vice President - Finance and
Administration (Principal Financial Officer)