1. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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).
Common shares outstanding at March 31, 2004, 89,402,739.
PART I. FINANCIAL INFORMATION 2. THE TIMKEN COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
Mar 31 Dec 31 2004 2003 ASSETS ---------- ---------- Current Assets (Thousands of dollars) Cash and cash equivalents........................... $35,015 $28,626 Accounts receivable, less allowances, (2004-$22,957; 2003-$23,957)........................ 691,167 602,262 Deferred income taxes............................... 50,033 50,271 Inventories......................................... 718,183 695,946 ---------- ---------- Total Current Assets...................... 1,494,398 1,377,105
Property, plant and equipment....................... 3,514,925 3,501,551 Less allowances for depreciation................... 1,931,696 1,892,957 ---------- ---------- 1,583,229 1,608,594
Goodwill............................................ 202,853 173,099 Other intangible assets............................. 195,443 197,993 Deferred income taxes............................... 149,282 148,802 Other assets........................................ 200,429 184,196 ---------- ---------- Total Assets.................................. $3,825,634 $3,689,789 ========== ==========
LIABILITIES Current Liabilities Accounts payable and other liabilities.............. $511,902 $425,157 Short-term debt and current portion of long-term debt 188,123 121,194 Accrued expenses.................................... 509,436 508,205 ---------- ---------- Total Current Liabilities................. 1,209,461 1,054,556
Noncurrent Liabilities Long-term debt...................................... 624,141 613,446 Accrued pension cost................................ 368,622 424,414 Accrued postretirement benefits cost................ 482,028 476,966 Other noncurrent liabilities........................ 34,346 30,780 ---------- ---------- Total Noncurrent Liabilities.............. 1,509,137 1,545,606
Shareholders' Equity Common stock........................................ 693,110 689,160 Earnings invested in the business................... 775,705 758,849 Accumulated other comprehensive loss................ (361,779) (358,382) ---------- ---------- Total Shareholders' Equity................ 1,107,036 1,089,627
Total Liabilities and Shareholders' Equity.... $3,825,634 $3,689,789 ========== ==========
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Mar 31 Mar 31 2004 2003 ---------- ---------- (Thousands of dollars, except per share data) Net sales................................................... $1,098,785 $ 838,007 Cost of products sold....................................... 896 262 700,245 ---------- ---------- Gross Profit............................................. 202 523 137,762
Selling, administrative and general expenses................ 142,703 112,767 Impairment and restructuring charges ....................... 730 - ---------- ---------- Operating Income......................................... 59,090 24,995
Interest expense............................................ (11,391) (10,161) Interest income............................................. 246 210 Other expense (income)...................................... (2,025) 3,854 ---------- ---------- Income Before Income Taxes .............................. 45,920 18,898 Provision for income taxes.................................. 17,450 7,559 ---------- ----------
Net Income ................................................. $ 28,470 $ 11,339 ========== ==========
Earnings Per Share*........................................ $ 0.32 $ 0.15
Earnings Per Share - assuming dilution**................... $ 0.32 $ 0.15
Dividends Per Share........................................ $ 0.13 $ 0.13 ========== ==========
* Average shares outstanding............................... 89,265,382 74,444,132 ** Average shares outstanding - assuming dilution........... 90,137,140 74,613,170
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended Cash Provided (Used) Mar 31 Mar 31 2004 2003 -------- -------- OPERATING ACTIVITIES (Thousands of dollars) Net income ............................................... $ 28,470 $ 11,339 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization............................ 53,928 41,265 Loss (gain) on disposals of property, plant and equipment 1,807 (5,734) Provision (credit) for deferred income taxes............. 1,118 (2,100) Stock issued in lieu of cash to employee benefit plans... 1,188 715 Changes in operating assets and liabilities: Accounts receivable..................................... (87,328) (54,614) Inventories............................................. (15,767) (22,463) Other assets............................................ (5,287) (10,201) Accounts payable and accrued expenses................... (3,283) 53,973 Foreign currency translation loss (gain)................ 1,476 (1,859) -------- -------- Net Cash (Used) Provided by Operating Activities....... (23,678) 10,321
INVESTING ACTIVITIES Capital expenditures..................................... (24,449) (22,998) Proceeds from disposals of property, plant and equipment. 700 9,895 Other ................................................... (2,799) (2,064) Acquisitions............................................. (1,549) (718,952)* -------- -------- Net Cash Used by Investing Activities.................. (28,097) (734,119)
FINANCING ACTIVITIES Cash dividends paid to shareholders...................... (11,614) (8,252) Issuance of common stock for acquisition................. - 180,220* Accounts receivable securitization financing borrowings.. 68,000 125,000 Accounts receivable securitization financing payments.... (30,000) - Payments on long-term debt............................... (37,150) (124) Proceeds from issuance of long-term debt................. 48,570 424,553 Short-term debt activity - net........................... 18,329 (36,939) -------- -------- Net Cash Provided by Financing Activities.............. 56,135 684,458
Effect of exchange rate changes on cash................... 2,029 577
Increase (Decrease) in Cash and Cash Equivalents.......... 6,389 (38,763) Cash and Cash Equivalents at Beginning of Period.......... 28,626 82,050 -------- -------- Cash and Cash Equivalents at End of Period................ $ 35,015 $ 43,287 ======== ========
* Excluding $140 million of common stock (9,395,973 shares) issued to Ingersoll-Rand Company, in conjunction with the acquisition.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 5.
Note 1 -- Basis of Presentation
The accompanying consolidated condensed financial statements (unaudited) for The Timken Company (the company) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes included in the company's annual report on Form 10-K for the year ended December 31, 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:
Three months ended Mar 31 2004 2003 -------- -------- (Thousands of dollars) Net income, as reported $ 28,470 $11,339
Add: Stock-based employee compensation expense, net of related taxes 190 451 Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects (1,002) (1,217) -------- -------- Pro forma net income $ 27,658 $10,573 ======== ======== Earnings per share: Basic and diluted - as reported $ 0.32 $ 0.15 Basic and diluted - pro forma $ 0.31 $ 0.14
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 incurred in connection with the acquisition.
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 March 31, 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:
Three months ended Mar 31 2003 ---------- (Amounts in thousands, except per share data) Net sales $989,250
Net income $ 4,487
Earnings per share: Basic $ 0.06 Diluted $ 0.06
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 (4,854) (629) (485) (5,968) --------- ------- ----------- ------- Balance at March 31, 2004 $ 123 $19,210 $1,412 $20,745 ========= ======= =========== =======
Note 4 -- Inventories Mar 31 Dec 31 2004 2003 -------- --------- (Thousands of dollars) Finished products $327,933 $330,455 Work-in-process and raw materials 343,982 323,439 Manufacturing supplies 46,268 42,052 -------- -------- $718,183 $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.
Mar 31 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 (1.04% at March 31, 2004) $ 17,000 $17,000 Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on May 1, 2007 (1.05% at March 31, 2004) 8,000 8,000 Variable-rate State of Ohio Air Quality and Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (1.04% at March 31, 2004) 21,700 21,700
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 8. Continued
Note 5 -- Long-term Debt and Other Financing Arrangements (continued) Mar 31 Dec 31 2004 2003 -------- --------- (Thousands of dollars) Variable-rate State of Ohio Water Development Authority Solid Waste Revenue Bonds, maturing on July 1, 2032 (1.05% at March 31, 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%. 287,272 287,000 Variable-rate Senior credit facility, maturing on December 31, 2007. The interest rate is LIBOR plus 1.5% (4.75% at March 31, 2004) 11,700 - Fixed-rate Unsecured Notes, maturing on February 15, 2010 with a fixed interest rate of 5.75%. 250,597 250,000 Other 10,672 12,471 -------- -------- 630,941 620,171 Less: Current Maturities 6,800 6,725 -------- -------- $624,141 $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 March 31, 2004, there was $38 million outstanding under this facility. This balance is reflected on the company's consolidated condensed balance sheet as of March 31, 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 1.12% at March 31, 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 March 31, 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 Three Months Ended Mar 31 Mar 31 2004 2003 --------- -------- U.S. (Thousands of dollars) Federal $11,062 $ 4,004 State & Local 1,221 627 Foreign 5,167 2,928 --------- -------- $17,450 $ 7,559 ========= ========
The effective tax rates were 38% and 40% for the quarters ended March 31, 2004 and 2003, respectively. The effective tax rate for both 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 and taxes paid to state and local jurisdictions.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) Continued 10. Mar 31 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 - 89,402,964 shares 2003 - 89,076,114 shares Stated Capital 53,064 53,064 Other paid-in capital 640,051 636,272 Less cost of Common Stock in treasury 2004 - 225 shares 2003 - 10,601 shares (5) (176) -------- -------- $693,110 $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 28,470 28,470 Foreign currency translation adjustment (4,633) (4,633) Change in fair value of derivative financial instruments, net of reclassifications (net of income tax of $211) 1,236 1,236 ---------- Total comprehensive income 25,073
Dividends - $0.13 per share (11,614) (11,614) Issuance of 10,376 shares from treasury and 326,850 shares from authorized related to stock option plans 3,779 171 3,950
------- -------- -------- ---------- -------- ---------- Balance March 31, 2004 $53,064 $640,051 $775,705 ($361,779) ($5) $1,107,036 ======= ======== ======== ========== ======== ==========
The total comprehensive income for the three months ended March 31, 2003 was $19,573,000.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 11. Continued
Note 8 -- Impairment and Restructuring Charges
Impairment and restructuring charges are comprised of the following:
Three months ended Mar 31 2004 2003 ---------- ---------- (Thousands of dollars)
Severance expense and related benefit costs $730 $ - ---------- ---------- Total $730 $ - ========== ==========
In the first quarter of 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)
Severance expense and related benefits $58 $671 $1 $730 ------ ------------ ------- ------ Total $58 $671 $1 $730 ====== ============ ======= ======
A reconciliation of the beginning and ending balances for accrued severance and exit costs that are being accounted for in accordance with FASB Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," or Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," is as follows:
(Thousands of dollars) Balance at December 31, 2003 $4,461 Add: provisions 730 Less: payments (870) -------- Balance at March 31, 2004 $4,321 ========
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.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 12. 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) Three Months Ended Mar 31 Mar 31 2004 2003 Automotive Group --------- --------- Net sales to external customers $ 415,602 $ 298,129 Depreciation and amortization 20,490 12,701 EBIT, as adjusted 18,323 8,868
Industrial Group Net sales to external customers $ 410,269 $ 304,963 Intersegment sales 289 192 Depreciation and amortization 18,007 12,140 EBIT, as adjusted 35,766 17,810
Steel Group Net sales to external customers $ 272,914 $ 234,915 Intersegment sales 36,417 40,864 Depreciation and amortization 15,431 16,424 EBIT, as adjusted 2,724 6,530
Reconciliation to Income Before Income Taxes
Total EBIT, as adjusted, for reportable segments $ 56,813 $ 33,208 Impairment and restructuring charges (730) - Integration/Reorganization expenses (5,364) (9,063) Gain on sale of land - 5,447 CDSOA receipts, net of expenses 7,743 - Adoption of FIN 46 for investment in PEL (948) - Interest expense (11,391) (10,161) Interest income 246 210 Intersegment adjustments (449) (743) --------- --------- Income before income taxes $ 45,920 $ 18,898 ========= =========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 13. Continued
Note 10 - Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the three months ended March 31, 2004 are as follows:
(Thousands of Dollars) Balance Balance 12/31/03 Acquisition Other 3/31/04 --------- ----------- ------- --------- Goodwill: Automotive $ 45,614 $ 19,470 $ 2,066 $ 67,150 Industrial 127,485 8,497 (279) 135,703 Steel - - - - --------- ---------- -------- --------- $ 173,099 $ 27,967 $ 1,787 $ 202,853 ========= ========== ======== =========
The following table displays intangible assets as of March 31,2004 and December 31, 2003:
(Thousands of Dollars) As of March 31,2004 ---------------------------------- Gross Net Carrying Accumulated Carrying Amount Amortization Amount -------- ------------ -------- Intangible assets subject to amortization:
Automotive $ 68,001 $ (7,170) $ 60,831 Industrial 30,848 (4,162) 26,686 Steel 429 (82) 347 -------- ----------- -------- $ 99,278 $ (11,414) $ 87,864 ======== =========== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 14. Continued
Note 10 - Goodwill and Other Intangible Assets (continued)
Intangible assets not subject to amortization:
Goodwill $202,853 $ - $202,853 Intangible pension asset 106,509 106,509 Other 1,070 - 1,070 -------- ----------- -------- $310,432 $ - $310,432 ======== =========== ======== Total Intangible Assets $409,710 $ (11,414) $398,296 ======== =========== ========
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) 15. Continued
Amortization expense for intangible assets was approximately $2.1 million for the three months ended March 31, 2004, and is estimated to be approximately $8.4 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 $32.2 million and $34.0 million at March 31, 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 has 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.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 16. 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 ------------------- -------------------- Three Months Ended Three Months Ended Mar 31 Mar 31 Mar 31 Mar 31 2004 2003 2004 2003 --------- --------- -------- -------- (Thousands of dollars) Service cost $ 10,689 $ 11,845 $ 1,843 $ 1,691 Interest cost 36,177 34,623 12,522 12,874 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 $ 22,521 $ 17,361 $16,435 ========= ========= ======== ========
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 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.
17. 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 all 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 March 31, 2004, The Timken Company reported record sales of approximately $1.1 billion, an increase of approximately 31 percent from the first quarter of 2003, driven by the acquisition of Torrington on February 18, 2003. Sales were higher across all three business segments. For the three months ended March 31, 2004, earnings per diluted share were $0.32, compared to $0.15 per diluted share for the first quarter of 2003.
Strong demand in North American light truck and medium/heavy truck sectors and successful new platforms at Nissan and Ford launched in late 2003 benefited the Automotive Group's net sales. Automotive Group profitability was positively impacted by stronger volume and manufacturing improvements. In 2004, the company anticipates a slight improvement, compared to last year, in North American light vehicle production and continued strengthening in medium/heavy truck production. The company expects the Automotive Group's profitability to continue to be better in 2004, compared to 2003.
Nearly all of the market segments served by the Industrial Group reported sales increases over 2003 levels. In addition to the increased sales volume, profit for the Industrial Group benefited from integration and other cost reduction initiatives. The company expects a continued growing demand in global industrial markets in 2004. However, the company anticipates that distributors will continue to reduce their inventory levels of Torrington branded products during the remainder of 2004.
18. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The increase in the Steel Group's net sales over last year was driven by both increased demand and surcharges implemented to partially offset rising raw material costs, including scrap steel and alloys. First quarter of 2004 bar shipments were at record levels and March 2004 saw a record high melt tonnage in the company's alloy steel operations. Even though the Steel Group's profitability for the first quarter of 2004 was below the same period of 2003, it was the first profitable quarter since the second quarter of 2003. In 2004, the company expects raw material and energy costs to continue to be high, compared to 2003.
THE STATEMENT OF OPERATIONS - ----------------------------
Overview:
1Q 2004 1Q 2003 $ Change % Change ------- ------- -------- -------- (Dollars in millions, except earnings per share) Net sales $1,098.8 $838.0 $260.8 31.1% Net income $ 28.5 $ 11.3 $ 17.2 152.2% Earnings per share - diluted $ 0.32 $ 0.15 $ 0.17 113.3% Average number of shares - diluted 90,137,140 74,613,170 - 20.8%
Sales by Segment: 1Q 2004 1Q 2003 $ Change % Change ------- ------- --------- -------- (Dollars in millions and exclude intersegment sales) Automotive Group $ 415.6 $298.1 $117.5 39.4% Industrial Group 410.3 305.0 105.3 34.5% Steel Group 272.9 234.9 38.0 16.2% -------- ------- --------- ------- Total company $1,098.8 $838.0 $260.8 31.1% ======== ======= ========= =======
The increases in net sales for both the Automotive and the Industrial Groups were primarily the result of the Torrington acquisition. The Automotive Group's net sales further benefited from strong demand in North American light truck and medium/heavy truck sectors and new product introductions, partially offset by a decrease in passenger car production. In addition to the effect of the Torrington acquisition, the Industrial Group's net sales increased due to stronger demand in most industrial market segments. The increase in the Steel Group's net sales resulted primarily from increased demand and surcharges implemented to offset rising raw material costs.
19. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Gross Profit: 1Q 2004 1Q 2003 $ Change % Change ------- ------- --------- -------- (Dollars in millions) Gross profit $202.5 $137.8 $64.7 47.0% Gross profit % to net sales 18.4% 16.4% - 2.0% Integration charges included in cost of products sold $ 1.4 $ 3.7 $(2.3) (62.2)%
First quarter 2003 gross profit 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 cost classification methodology. Gross profit for the Automotive Group in the first quarter of 2004 was higher than the same period in 2003 due to: the additional sales volume resulting from the Torrington acquisition, market demand and new product introductions; reduced manufacturing costs, primarily as a result of workforce reductions in excess of 750 positions during the second half of 2003 and manufacturing savings from continuous improvement programs; and integration cost savings. In addition to the increased sales volume from the Torrington acquisition, gross profit for the Industrial Group benefited from integration and other cost reduction initiatives. Steel Group gross profit was negatively impacted by extremely high costs for scrap steel, energy and alloys, which more than offset increased sales, raw material surcharges passed on to customers, higher capacity utilization and improved productivity.
In 2004, integration charges included in cost of products sold related primarily to charges associated with the continued integration of Torrington. In 2003, the integration charges were due primarily to the one-time write-up of inventories acquired in the Torrington acquisition, which is required by purchase accounting rules.
Selling, Administrative and General Expenses:
1Q 2004 1Q 2003 $ Change % Change ------- ------- --------- -------- (Dollars in millions) Selling, administrative and general expenses $142.7 $112.8 $29.9 26.5% Selling, administrative and general expenses % to net sales 13.0% 13.5% - (0.5)% Integration charges included in selling, administrative and general expenses $ 4.0 $ 5.4 $(1.4) (25.9)%
First quarter 2003 results 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 cost classification methodology. Selling, administrative and general expenses in 2004 increased primarily due to the Torrington acquisition. The decrease between periods in the percentage of selling, administrative and general expenses to net sales was primarily the result of the company's continued focus on controlling spending, lower integration charges and savings resulting from the integration of Torrington. The integration charges for both the first quarter of 2004 and 2003 related to charges associated with the integration of Torrington.
20. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Impairment and Restructuring Charges:
1Q 2004 1Q 2003 $ Change ------- ------- --------- (Dollars in millions) Severance and related benefit costs $0.7 $ 0 $0.7 ------- ------- --------- Total $0.7 $ 0 $0.7 ======= ======= =========
In 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.
Interest Expense and Income:
1Q 2004 1Q 2003 $ Change ------- ------- --------- (Dollars in millions) Interest expense $11.4 $10.2 $1.2 Interest income $ 0.2 $ 0.2 $ 0
The increase in interest expense was due to the additional debt incurred as a result of the Torrington acquisition on February 18, 2003 that was outstanding for the entire first quarter of 2004. Interest income was not significant in either period.
Other Income and Expense: 1Q 2004 1Q 2003 $ Change ------- ------- --------- (Dollars in millions) CDSOA receipts, net of expenses $ 7.7 $ 0 $ 7.7 Other (expense) income, net (9.7) 3.9 (13.6) ------- ------- --------- Total $ (2.0) $ 3.9 $ (5.9) ======= ======= =========
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 in 2004 related to Torrington's bearing businesses other than its tapered roller bearing business. Pursuant to the terms of the agreement under which the company purchased Torrington, Timken delivered to the seller of Torrington 80% of the CDSOA payments received in 2004; 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 violate international trade rules. The U.S. Trade Representatives appealed this ruling; however, the WTO upheld the ruling on January 16, 2003.
21. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
In 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). In 2003, other income, net included a one-time gain of $5.4 million related to the sale of property in the United Kingdom, losses from equity investments and foreign currency exchange gains.
Income Tax Expense:
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:
1Q 2004 1Q 2003 $ Change % Change ------- ------- --------- -------- (Dollars in millions) Net sales, including intersegment sales $415.6 $298.1 $117.5 39.4% Adjusted EBIT $ 18.3 $ 8.9 $ 9.4 105.6% Adjusted EBIT margin 4.4% 3.0% - 1.4%
The Automotive Group includes sales of bearings and other products and services (other than steel) to automotive original equipment manufacturers. The increase in sales between years was primarily the result of the acquisition of Torrington. Also, the Automotive Group's net sales increased as a result of strong demand in North American light truck and medium/heavy truck sectors and new product introductions, partially offset by a decrease in passenger car production. The Automotive Group's results in 2004 were positively impacted by: the additional sales volume resulting from the Torrington acquisition, market demand and new product introductions; reduced manufacturing costs, primarily as a result of the elimination of more than 750 positions during the second half of 2003 and manufacturing savings from continuous improvement programs in the first quarter of 2004; integration cost savings, especially in purchasing; and lower costs incurred in the material conversion process, which involves moving from internally-produced tubing to forgings that are produced externally. In 2004, the company anticipates a slight improvement in North
22. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
American light vehicle production and continued strengthening in medium/heavy truck production, compared to last year. The company expects the Automotive Group's profitability to continue to be better in 2004, compared to 2003.
Industrial Group: 1Q 2004 1Q 2003 $ Change % Change ------- ------- --------- --------
(Dollars in millions) Net sales, including intersegment sales $410.6 $305.2 $105.4 34.5% Adjusted EBIT $ 35.8 $ 17.8 $ 18.0 101.1% Adjusted EBIT margin 8.7% 5.8% - 2.9%
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; off-highway; rail; and aerospace and defense customers. The Industrial Group also includes aftermarket distribution operations for products other than steel. The first quarter 2004 sales increase from the prior period was primarily due to the acquisition of Torrington. In addition to the effect of the Torrington acquisition, the Industrial Group's net sales increased as a result of stronger demand in most industrial market segments, especially off-highway, rail and heavy industry, and favorable foreign currency exchange rates. In addition to the increased sales volume from the Torrington acquisition, gross profit for the Industrial Group increased due to integration savings and other cost reduction initiatives. The company expects continued strengthening of demand in global industrial markets in 2004. However, the company anticipates that distributors will continue to reduce their inventory levels of Torrington branded products during the remainder of 2004.
Steel Group: 1Q 2004 1Q 2003 $ Change % Change ------- ------- --------- -------- (Dollars in millions) Net sales, including intersegment sales $309.3 $275.8 $33.5 12.2% Adjusted EBIT $ 2.7 $ 6.5 $(3.8) (58.5)% Adjusted EBIT margin 0.9% 2.4% - (1.5)%
The increase in the Steel Group's net sales was due primarily to increased demand from automotive and industrial customers and surcharges implemented to offset rising raw material costs, partially offset by lower intersegment sales. Steel Group gross profit was negatively impacted by extremely high costs for scrap steel, energy and alloys, which more than offset increased sales, raw material surcharges passed on to customers, higher capacity utilization and improved productivity. In 2004, the company expects raw material and energy costs to continue to be high.
23. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
THE BALANCE SHEET - -----------------
Total assets as shown on the Consolidated Condensed Balance Sheet at March 31, 2004 increased by $135.8 million from December 31, 2003. This increase was due primarily to increased working capital required to support higher sales.
Current Assets:
03/31/04 12/31/03 $ Change % Change -------- -------- -------- -------- (Dollars in millions) Cash and cash equivalents $ 35.0 $ 28.6 $ 6.4 22.4% Accounts receivable, net 691.2 602.3 88.9 14.8% Deferred income taxes 50.0 50.3 (0.3) (0.6)% Inventories 718.2 695.9 22.3 3.2% -------- -------- -------- -------- Total current assets $1,494.4 $1,377.1 $117.3 8.5% ======== ======== ======== ========
Refer to the Consolidated Condensed Statement of Cash Flows for an explanation of the increase in cash and cash equivalents. The increase in accounts receivable was due primarily to the timing of sales with higher sales in the first quarter of 2004, compared to the fourth quarter of 2003. The increase in inventories was due primarily to higher Steel Group inventories.
Property, Plant and Equipment - Net:
03/31/04 12/31/03 $ Change % Change -------- -------- -------- --------- (Dollars in millions) Property, plant and equipment - cost $3,514.9 $3,501.6 $ 13.3 0.4% Less: allowances for depreciation (1,931.7) (1,893.0) (38.7) (2.0)% -------- -------- -------- --------- Property, plant and equipment - net $1,583.2 $1,608.6 $(25.4) (1.6)% ======== ======== ======== =========
The decrease in property, plant and equipment - net was due primarily to depreciation expense in excess of capital expenditures.
Other Assets: 03/31/04 12/31/03 $ Change % Change -------- -------- -------- --------- (Dollars in millions) Goodwill $202.9 $173.1 $29.8 17.2% Other intangible assets 195.4 198.0 (2.6) (1.3)% Deferred income taxes 149.3 148.8 0.5 0.3% Other assets 200.4 184.2 16.2 8.8% -------- -------- -------- --------- Total other assets $748.0 $704.1 $43.9 6.2% ======== ======== ======== =========
24. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The increase in goodwill was due primarily to updates 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 $74.9 million at March 31, 2004, compared to $47.0 million at December 31, 2003.
Current Liabilities: 03/31/04 12/31/03 $ Change % Change -------- -------- -------- --------- (Dollars in millions) Short-term debt $ 188.1 $ 121.2 $ 66.9 55.2% Accounts payable and other liabilities 511.9 425.2 86.7 20.4% Accrued expenses 509.5 508.2 1.3 0.3% -------- -------- -------- --------- Total current liabilities $1,209.5 $1,054.6 $ 154.9 14.7% ======== ======== ======== =========
The increase in short-term debt was due primarily to additional borrowings, primarily under the company's asset securitization facility, and 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 and additional accrued expenses recorded as part of the Torrington purchase price allocation to reflect the finalization of plant rationalization plans and integration activities.
Non-Current Liabilities: 03/31/04 12/31/03 $ Change % Change -------- -------- -------- --------- (Dollars in millions) Long-term debt $ 624.1 $ 613.4 $ 10.7 1.7% Accrued pension cost 368.6 424.4 (55.8) (13.1)% Accrued postretirement benefits cost 482.0 477.0 5.0 1.0% Other non-current liabilities 34.4 30.8 3.6 11.7% -------- -------- -------- --------- Total non-current liabilities $1,509.1 $1,545.6 $(36.5) (2.4)% ======== ======== ======== =========
The decrease in accrued pension cost was due primarily to contributions to the company's U.S.-based pension plans of $62.5 million.
Shareholders' Equity: 03/31/04 12/31/03 $ Change % Change -------- -------- -------- --------- (Dollars in millions) Common stock $ 693.1 $ 689.2 $ 3.9 0.6% Earnings invested in the business 775.7 758.8 16.9 2.2% Accumulated other comprehensive loss (361.8) (358.4) (3.4) (0.9)% -------- -------- -------- --------- Total shareholders' equity $1,107.0 $1,089.6 $17.4 1.6% ======== ======== ======== =========
25. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Earnings invested in the business were increased by net income of $28.5 million, partially offset by dividends declared of $11.6 million.
CASH FLOWS - ----------- 1Q 2004 1Q 2003 $ Change -------- ------- --------- (Dollars in millions) Net cash (used) provided by operating activities $(23.7) $ 10.3 $ (34.0) Net cash used by investing activities (28.1) (734.1) 706.0 Net cash provided by financing activities 56.2 684.4 (628.2) Effect of exchange rate changes on cash 2.0 0.6 1.4 -------- ------- --------- Increase (decrease) in cash and cash equivalents $ 6.4 $ (38.8) - ======== ======= =========
The change in net cash (used) provided by operating activities was a use of cash of $34.0 million. This decrease was primarily the result of higher cash contributions to the company's U.S.-based pension plans in 2004 of $62.5 million, compared to $15.0 million in 2003. Net cash used by operating activities was also negatively impacted by cash used from changes in operating assets and liabilities of $47.7 million in 2004, compared to $20.2 million in 2003, which is primarily the result of increased sales volume and a $28.6 million tax payment made in the first quarter of 2004 related to the sale of the company's interest in the NTC joint venture in 2003. The cash flow impact of the increased U.S.-based pension plan contributions and the changes in operating assets and liabilities was partially offset by higher net income adjusted for non-cash items equaling $86.5 million in 2004 as compared to $45.5 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 $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 $67.7 million in 2004. In 2004, the company expects its pension contributions and capital expenditures to be similar to 2003 levels.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
The total-debt-to-total-capital ratio was 42.3% at March 31, 2004, compared to 40.3% at December 31, 2003. Total debt was $812.3 million at March 31, 2004, compared to $734.6 million at December 31, 2003. The company expects that any
26. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 March 31, 2004, the company had outstanding letters of credit totaling $68.1 million and borrowings of $11.7 million under the $500 million senior credit facility, which reduced the availability under that facility to $420.2 million. Also, at March 31, 2004, the company had outstanding borrowings of $38.0 million under the $125 million accounts receivable securitization facility, which reduced the availability under that facility to $87.0 million. The company believes it has sufficient liquidity to meet its short-term and long-term obligations.
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. These financial covenants became effective for the quarter ending on June 30, 2003. At March 31, 2004, the company was in compliance with the covenants under its senior credit facility and its other debt agreements.
In September 2003, Standard & Poor's Ratings Services placed the company's BBB- corporate credit and its other ratings on the company on CreditWatch with negative implications. In January 2004, Standard & Poor's Rating Services reaffirmed its BBB- rating and removed the company from CreditWatch. 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 the company's senior credit facility.
The company's contractual debt obligations and contractual commitments outstanding as of March 31, 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 $630.9 $ 6.8 $ 98.0 $37.5 $488.6 Short-term debt $181.3 $181.3 0 0 0 Operating Leases $ 77.1 $ 15.5 $ 23.2 $14.5 $ 23.9 Supply Agreement $ 12.1 $ 6.0 $ 6.1 0 0 ------ --------- ------- ------ ---------- Total $901.4 $209.6 $127.3 $52.0 $512.5 ====== ========= ======= ====== ==========
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. Additionally, the company guarantees an operating lease of a subsidiary's warehouse facility, which had future rental commitments of $15.6 million at March 31, 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, which expires on June 30, 2006, pursuant to which the company purchases tooling.
27. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
During the first three 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 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 translated at the average rates of exchange prevailing during the quarter.
Related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions and the translation of financial statements of subsidiaries in highly inflationary countries are included in the consolidated results of operations.
Foreign currency exchange losses included in the company's operating results for the three months ended March 31, 2004 totaled $0.6 million, compared to $0.4 million during the three months ended March 31, 2003. For the three months ended March 31, 2004, the company recorded a negative non-cash foreign currency translation adjustment of $4.6 million that decreased shareholders' equity, compared to a positive non-cash foreign currency translation adjustment of $9.1 million that increased shareholders' equity in the three months ended March 31, 2003. The three months ended March 31, 2004 was 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 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.
28. 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 three months ended March 31, 2004.
Other:
On April 20, 2004, the company's board of directors declared a quarterly cash dividend of $0.13 per share, payable on June 2, 2004 to shareholders of record as of May 21, 2004. This will be the 328th 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 of unplanned work stoppages; changes in the cost of labor and benefits; and
29. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
the cost and availability of raw materials and energy.
f) the success of the company's operating plans, including its ability to achieve the benefits from its global restructuring, manufacturing transformation, and administrative cost reduction initiatives as well as its ongoing continuous improvement and rationalization programs; the 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) unanticipated litigation, claims or assessments. This includes, but is not limited to, claims or problems related to intellectual property, product liability or warranty and environmental issues.
h) changes in worldwide financial markets, including interest rates, to the extent they affect the company's ability to raise capital or increase the company's cost of funds, have an impact on the overall performance of the company's pension fund investments and/or cause changes in the economy which affect customer demand.
i) additional factors described in greater detail: on pages S-20 to S-28 in the company's Registration Statement and included Prospectus Supplement dated February 12, 2003 relating to the offering of the company's 5.75% notes due 2010; on pages S-7 to S-16 in the Prospectus Supplement dated October 15, 2003 relating to an offering of the company's common shares; in the company's Annual Report on Form 10-K for the year ended December 31, 2003; or in the company's Annual Report.
Additional risks relating to the company's business, the industries in which the company operates or the company's common stock may be described from time to time in the company's filings with the SEC. All of these risk factors are difficult to predict, are subject to material uncertainties that may affect actual results and may be beyond the company's control.
Except as required by the federal securities laws, the company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
30. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Reconciliation of Total Debt and the Ratio of Total Debt to Total Capital:
Total debt:
3/31/04 12/31/03 -------- --------- (Dollars in millions) Short-term debt $188.1 $121.2 Long-term debt 624.2 613.4 -------- --------- Total debt $812.3 $734.6 ======== =========
Ratio of total debt to total capital:
3/31/04 12/31/03 -------- --------- (Dollars in millions) Total debt $ 812.3 $ 734.6 Shareholders' equity 1,107.0 1,089.7 -------- --------- Total capital $ 1,919.3 $ 1,824.3 ======== =========
Ratio of total debt to total capital 42.3% 40.3% ======== =========
31. 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 17-30 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.
32. Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The company is normally involved in various claims and legal actions arising in the ordinary course of its business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
At the 2004 Annual Meeting of Shareholders of The Timken Company held on April 20, 2004, the shareholders of the company elected the five individuals set forth below as Directors in Class I to serve a term of three years expiring at the Annual Meeting in 2007 (or until their respective successors are elected and qualified).
Affirmative Withheld ------------- ---------- James W. Griffith 82,015,917 2,318,338 Jerry J. Jasinowski 82,898,248 1,436,007 John A. Luke, Jr. 83,020,579 1,313,676 Frank C. Sullivan 80,767,071 3,567,184 Ward J. Timken 79,754,354 4,579,901
Shareholders approved The Timken Company Long-Term Incentive Plan, as amended and restated as of February 6, 2004.
Affirmative Negative Abstain Broker Non-Votes ------------ ---------- --------- ------------------ 55,653,837 20,623,687 2,007,878 6,048,853
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of James W. Griffith, President and Chief Executive Officer of The Timken Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Glenn A. Eisenberg, Executive Vice President-Finance and Administration (principal financial officer) of The Timken Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
33.
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 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.
On March 31, 2004, the company furnished a Form 8-K regarding Regulation FD Disclosure, which contained a press release announcing that the company raised its earnings outlook for both the first quarter and full year of 2004.
On January 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 fourth quarter and full year of 2003 results.
34.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The Timken Company _______________________________
Date May 10, 2004 BY /s/ James W. Griffith ________________________ _______________________________ James W. Griffith President and Chief Executive Officer, and Director
Date May 10, 2004 BY /s/ Glenn A. Eisenberg ________________________ _______________________________ Glenn A. Eisenberg Executive Vice President - Finance and Administration (Principal Financial Officer)