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, 2002
Commission File No. 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, and (2) has been subject to such filing requirements for the past 90 days.
YES X NO ___ ___
Common shares outstanding at March 31, 2002, 59,968,725.
PART I. FINANCIAL INFORMATION 2. THE TIMKEN COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
Mar 31 Dec 31 2002 2001 ASSETS ---------- ---------- Current Assets (Thousands of dollars) Cash and cash equivalents........................... $17,050 $33,392 Accounts receivable, less allowances, (2002-$14,848; 2001-$14,976)........................ 356,718 307,759 Refundable income taxes............................. 15,092 15,103 Deferred income taxes............................... 43,148 42,895 Inventories (Note 2) ............................... 446,366 429,231 ---------- ---------- Total Current Assets...................... 878,374 828,380
Property, plant and equipment....................... 2,963,958 2,971,793 Less allowances for depreciation................... 1,682,919 1,666,448 ---------- ---------- 1,281,039 1,305,345
Costs in excess of net assets of acquired business (Note 8)........................................... 148,431 150,041 Intangible pension asset............................ 136,118 136,118 Intangible assets (Note 8).......................... 5,075 5,058 Deferred income taxes............................... 16,704 27,164 Other assets........................................ 89,531 80,978 ---------- ---------- Total Assets.................................. $2,555,272 $2,533,084 ========== ==========
LIABILITIES Current Liabilities Accounts payable and other liabilities.............. $265,156 $258,001 Short-term debt and commercial paper................ 153,824 128,864 Accrued expenses.................................... 253,387 254,291 ---------- ---------- Total Current Liabilities................. 672,367 641,156
Noncurrent Liabilities Long-term debt (Note 3) ............................ 367,279 368,151 Accrued pension cost................................ 304,423 317,297 Accrued postretirement benefits cost................ 410,269 406,568 Other noncurrent liabilities........................ 17,631 18,177 ---------- ---------- Total Noncurrent Liabilities.............. 1,099,602 1,110,193
Shareholders' Equity (Note 4) Common stock........................................ 249,894 248,863 Earnings invested in the business................... 758,809 757,410 Accumulated other comprehensive income (loss)....... (225,400) (224,538) ---------- ---------- Total Shareholders' Equity................ 783,303 781,735
Total Liabilities and Shareholders' Equity.... $2,555,272 $2,533,084 ========== ==========
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Mar 31 Mar 31 2002 2001 ---------- ---------- (Thousands of dollars, except per share data) Net sales.......................................... $ 615,757 $ 661,516 Cost of products sold.............................. 497,115 543,502 ---------- ---------- Gross Profit.................................... 118,642 118,014
Selling, administrative and general expenses....... 85,992 96,538 Impairment and restructuring charges (Note 5)...... 3,057 7,907 ---------- ---------- Operating Income................................ 29,593 13,569
Interest expense................................... (8,035) (8,894) Interest income.................................... 380 489 Other expense...................................... (7,468) (1,210) ---------- ---------- Income Before Income Taxes...................... 14,470 3,954 Provision for income taxes (Note 6)................ 5,282 1,732 ---------- ---------- Net Income...................................... $ 9,188 $ 2,222 ========== ==========
Earnings Per Share * ........................... $0.15 $0.04 Earnings Per Share - assuming dilution **...... $0.15 $0.04
Dividends Per Share............................. $0.13 $0.18 ========== ==========
* Average shares outstanding...................... 59,914,680 59,981,237 ** Average shares outstanding - assuming dilution.. 60,395,183 60,122,806
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 2002 2001 -------- -------- OPERATING ACTIVITIES (Thousands of dollars) Net Income............................................. $ 9,188 $ 2,222 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 36,762 37,898 Provision (credit) for deferred income taxes.......... 29,435 (2,725) Stock issued in lieu of cash to employee benefit plans ............................................... 1,031 106 Change in impairment and restructuring charges - net.. (6,671) 4,225 Changes in operating assets and liabilities: Accounts receivable.................................. (49,862) (54,854) Inventories.......................................... (17,128) (7,491) Other assets......................................... (7,526) (11,221) Accounts payable and accrued expenses................ (11,510) 9,659 Foreign currency translation......................... (465) 2,876 ------- ------- Net Cash Used by Operating Activities............... (16,746) (19,305)
INVESTING ACTIVITIES Purchases of property, plant and equipment - net...... (10,439) (14,848) Acquisitions.......................................... (6,751) (1,170) ------- ------- Net Cash Used by Investing Activities............... (17,190) (16,018)
FINANCING ACTIVITIES Cash dividends paid to shareholders................... (7,789) (10,798) Purchase of treasury shares - net..................... - 505 Payments on long-term debt............................ (1,727) (884) Proceeds from issuance of long-term debt.............. - 18 Short-term debt activity - net........................ 27,498 55,701 ------- ------- Net Cash Provided by Financing Activities........... 17,982 44,542
Effect of exchange rate changes on cash................ (388) (1,274)
(Decrease) increase in Cash and Cash Equivalents....... (16,342) 7,945 Cash and Cash Equivalents at Beginning of Period....... 33,392 10,927 ------- ------- Cash and Cash Equivalents at End of Period............. $17,050 $18,872 ======= =======
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, 2001. Certain amounts have been reclassified to conform with current year presentation.
3/31/02 12/31/01 Note 2 -- Inventories -------- --------- (Thousands of dollars) Finished products $183,457 $180,533 Work-in-process and raw materials 226,066 212,040 Manufacturing supplies 36,843 36,658 -------- -------- $446,366 $429,231 ======== ======== An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on manage- ment's estimates of expected year-end inventory levels and costs. Because these are subject to many forces beyond management's control, interim results are subject to the final year-end LIFO inventory valuation.
Note 3 -- Long-term Debt 3/31/02 12/31/01 (Thousands of dollars) -------- --------- State of Ohio Pollution Control Revenue Refunding Bonds, maturing on July 1, 2003. The variable interest rate is tied to the bank's tax exempt weekly interest rate. The rate at March 31, 2002 is 1.55%. $17,000 $17,000 State of Ohio Water Development Revenue Refunding Bond, maturing on May 1, 2007. The variable interest rate is tied to the bank's tax exempt weekly interest rate. The rate at March 31, 2002 is 1.50%. 8,000 8,000 State of Ohio Air Quality and Water Development Revenue Refunding Bonds, maturing on November 1, 2025. The variable interest rate is tied to the bank's tax exempt weekly interest rate. The rate at March 31, 2002 is 1.40%. 21,700 21,700 State of Ohio Water Development Authority Solid Waste Revenue Bonds, maturing on July 1, 2032. The variable interest rate is tied to the bank's tax exempt weekly interest rate. The rate at March 31, 2002 is 1.55%. 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%. 327,000 327,000 Other 11,059 12,885 -------- -------- 408,759 410,585 Less: Current Maturities 41,480 42,434 -------- -------- $367,279 $368,151 ======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) Continued 6.
Note 4 -- Shareholders' Equity 3/31/02 12/31/01 -------- -------- 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) 2002 - 63,082,626 shares 2001 - 63,082,626 shares Stated Capital 53,064 53,064 Other paid-in capital 255,172 256,423 Less cost of Common Stock in treasury 2002 - 3,113,901 shares 2001 - 3,226,544 shares 58,342 60,624 -------- -------- $249,894 $248,863 ======== ========
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, 2001 $53,064 $256,423 $757,410 ($224,538) ($60,624) $ 781,735
Net Income 9,188 9,188 Foreign currency translation adjustment (2,389) (2,389) Change in fair value of derivative financial instruments 2,299 2,299 Reclassification adjustments - contract settlements (772) (772) ---------- Total comprehensive income 8,326
Dividends - $0.13 per share (7,789) (7,789) Issuance of 112,644 shares from treasury related to stock option and employee benefit plans (1,251) 2,282 1,031 ------- -------- -------- ---------- --------- ---------- Balance March 31, 2002 $53,064 $255,172 $758,809 ($225,400) ($58,342) $783,303 ======= ======== ======== ========== ========= ==========
The total comprehensive loss for the three months ended March 31, 2001 was $10,220,000.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7. Continued
Note 5 -- Impairment and Restructuring Charges
In April 2001, the company announced a strategic global refocusing of its manu- facturing operations to establish a foundation for accelerating the company's growth initiatives. This second phase of the company's transformation includes creating focused factories for each product line or component, replacing specific manufacturing processes with state-of-the-art processes through the company's global supply chain, rationalize production to the lowest total cost plants in the company's global manufacturing system and implementing lean manu- facturing process redesign. The company also announced its intention to close bearing plants in Columbus, Ohio and Duston, England, and to sell a tooling plant in Ashland, Ohio. To implement these actions, the company is expecting to take approximately $100 - $110 million in severance, impairment and implementation charges from 2001 through the end of 2002.
As a result of the market weakness experienced in 2001, the company accelerated this strategic refocusing of its manufacturing operations. The Columbus bearing plant ceased manufacturing operations in November 2001 while the Duston plant is expected to cease manufacturing operations in September 2002. The company announced additional cost-saving actions in August 2001. The company took steps to further reduce capital spending, delay or scale back certain projects and reduce salaried employment.
The company targeted an annualized pretax rate of savings of approximately $100 million by the end of 2004 as a result of this program. As of March 31, 2002, the company achieved estimated annual savings of $35 million.
The following chart details the breakdown by segment of the $3.0 million in restructuring and impairment charges incurred during the first quarter ended March 31, 2002 (in millions of dollars):
Auto Industrial Steel Total Restructuring: ------- ---------- ------- ------- Separation costs $ 0.4 $ 0.4 $ 0.2 $ 1.0 Exit costs 0.5 - - 0.5 ------- ---------- ------- ------- $ 0.9 $ 0.4 $ 0.2 $ 1.5
Impaired assets: Property, plant and equipment $ 1.0 $ 0.5 $ - $ 1.5 ------- ---------- ------- ------- $ 1.9 $ 0.9 $ 0.2 $ 3.0 ======= ========== ======= =======
The first quarter of 2002 automotive impaired assets charge related to the Duston plant closure and the impaired assets charge for industrial related to the Columbus plant closure. The majority of the automotive and industrial restructuring costs also related to the Duston and Columbus plant closures, respectively. Implementation charges for the quarter ended March 31, 2002 totaled $5.1 million classified as cost of products sold ($2.3 million) and selling, administrative and general expenses ($2.8 million).
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 8. Continued
Note 5 -- Impairment and Restructuring Charges (continued)
Cumulative restructuring and impairment charges related to the second phase of restructuring by segment as of March 31, 2002 are as follows (in millions of dollars):
Auto Industrial Steel Total Restructuring: ------- ---------- ------- ------- Separation costs $ 26.3 $ 4.0 $ 1.5 $ 31.8 Exit costs 0.9 1.0 - 1.9 ------- ---------- ------- ------- $ 27.2 $ 5.0 $ 1.5 $ 33.7
Impaired assets: Property, plant and equipment $ 2.1 $ 0.9 $ - $ 3.0
Special Charges: SFAS 88/106 curtailment $ - $ 15.1 $ - $ 15.1
------- ---------- ------- ------- $ 29.3 $ 21.0 $ 1.5 $ 51.8 ======= ========== ======= =======
Cumulative implementation charges related to the second phase of restructuring as of March 31, 2002 totaled $13.1 million classified as cost of products sold ($6.4 million) and selling, administrative and general expenses ($6.7 million). As of March 31, 2002, the remaining severance accrual balance was $14.7 million. This was the result of $1.0 million in additional expense incurred during the first quarter, of which $0.4 million was paid and expensed when incurred. Total payments made during the first quarter of 2002 totaled $7.3 million.
Since the announcement in April 2001, 1,131 associates left the company as of March 31, 2002. Of that number, 855 people were from the Duston and Columbus plants, Canton bearing plants, Canadian Timken Ltd., and associates included in the worldwide salaried workforce for whom severance has been paid. The remaining 276 associates have retired or voluntarily left the company as of March 31, 2002 and their positions have been eliminated.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) Continued 9.
Note 6 -- Income Tax Provision Three Months Ended Mar 31 Mar 31 2002 2001 -------- -------- U.S. (Thousands of dollars) Federal $ 4,219 $ (805) State & Local 730 (112) Foreign 333 2,649 ------- ------- $ 5,282 $ 1,732 ======= ======= Although the effective tax rate as of March 31, 2002 continues to exceed the U.S. statutory tax rate due to state and local taxes and current foreign losses reserved for a lack of expected tax benefit, the tax rate has decreased from the first quarter of 2001. This decrease is primarily the result of current utilization of previously reserved foreign losses generated in prior years and a decrease in current year foreign losses for which a tax benefit reserve is required.
Note 7 -- Segment Information
(Thousands of Dollars) Three Months Ended March 31 March 31 2002 2001 Automotive Bearings -------- -------- Net sales to external customers $203,696 $194,257 Depreciation and amortization 8,574 8,936 Goodwill amortization - 23 Impairment and restructuring 1,932 82 Earnings (loss) before interest and taxes 11,213 (1,986)
Industrial Bearings Net sales to external customers $212,940 $241,994 Depreciation and amortization 11,261 10,987 Goodwill Amortization - 1,208 Impairment and restructuring 956 7,393 (Loss) earnings before interest and taxes (606) 4,774
Steel Net sales to external customers $199,121 $225,265 Intersegment sales 39,273 42,477 Depreciation and amortization 16,927 16,431 Goodwill Amortization - 313 Impairment and restructuring 169 432 Earnings before interest and taxes 11,950 9,282
Profit Before Taxes
Total EBIT for reportable segments 22,557 12,070 Interest expense (8,035) (8,894) Interest income 380 489 Intersegment adjustments 432 289 Income before income taxes 14,470 3,954
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 10. Continued
Note 8 - Change in Method of Accounting
Effective January 2002, the company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed at least annually for impairment. The application of the nonamortization provisions is expected to result in an increase in annual net income of $6.1 million, of which $1.5 million is related to the first quarter. Changes in the estimated useful lives of intangible assets will not result in a material change to net income. Intangible assets that are separable and have a definite life will continue to be amortized over the estimated useful lives.
As part of the adoption, the company evaluated the impairment of indefinite lived intangible assets and determined that none were impaired based on estimations in market value. Fair value of each of the company's five reporting units was determined by discounted cash flows and validated with various market-comparable approaches. It was determined that the fair value of the Industrial and Aerospace reporting units exceeded the book value. However, the book value exceeded the fair value for the Automotive, Consolidated Steel and Specialty Steel reporting units. Based on preliminary results, which are currently under review, the company estimates the transitional impairment loss to be between $25 - $30 million, the majority of which is primarily related to the Steel Business. Once the review has been completed, the related transitional impairment loss is expected to be recorded in the second quarter of 2002 as a non-cash charge and reflected as the cumulative effect of a change in accounting principle.
Prior to the adoption of SFAS No. 142, amortization expense was recorded for goodwill and other intangible assets. The following table reflects reported net income for the first quarter of 2001 adjusted for purposes of comparison:
(Thousands of Dollars) Three Months Ended March 31 March 31 2002 2001 -------- -------- Reported net income $ 9,188 $ 2,222 Plus: Goodwill and indefinite lived intangible asset amortization - 1,555 -------- -------- Adjusted net income $ 9,188 $ 3,777 ======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 11. Continued
Note 8 - Change in Method of Accounting (continued)
Three Months Ended March 31 March 31 2002 2001 -------- -------- Earnings per share (basic and diluted): Reported net income $ 0.15 $ 0.04 Plus: Goodwill and indefinite lived intangible asset amortization, net of tax 0.00 0.03 -------- -------- Adjusted net income $ 0.15 $ 0.07
The changes in the carrying amount of goodwill and indefinite lived intangible assets for the quarter ended March 31, 2002 are as follows:
(Thousands of Dollars) Balance Balance 12/31/01 Reclass Other 3/31/02 -------- ---------- -------- -------- Goodwill: Automotive $ 1,577 $ - $ (56) $ 1,521 Industrial 120,426 (1,219) (258) 118,949 Steel 28,038 - (77) 27,961 -------- ---------- --------- -------- $150,041 $ (1,219) $ (391) $148,431
The indefinite lived intangible assets are immaterial.
The following table displays intangible assets subject to amortization, and not subject to amortization as of March 31, 2002 and December 31, 2001:
(Thousands of Dollars) As of March 31, 2002 Gross Net Carrying Accumulated Carrying Amount Amortization Amount -------- ------------ -------- Amortized intangible assets: Industrial trademarks $ 541 $ 294 $ 247 Industrial land use rights 4,484 777 3,707 Industrial know-how transfer 416 343 73 -------- ----------- -------- $ 5,441 $ 1,414 $ 4,027 ======== =========== ========
Unamortized intangible assets: Goodwill $148,431 $ - $148,431 Automotive land use rights 104 - 104 Industrial license agreements 944 - 944 -------- ----------- -------- $149,479 $ - $149,479 ======== =========== ======== Total Intangible Assets $154,920 $ 1,414 $153,506 ======== =========== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 12. Continued
As of December 31, 2001 Gross Net Carrying Accumulated Carrying Amount Amortization Amount -------- ------------ -------- Amortized intangible assets: Industrial trademarks $ 532 $ 289 $ 243 Industrial land use rights 4,484 798 3,686 Industrial know-how transfer 417 341 76 -------- ----------- -------- $ 5,433 $ 1,428 $ 4,005 ======== =========== ========
Unamortized intangible assets: Goodwill $197,329 $ 47,288 $150,041 Automotive land use rights 108 - 108 Industrial license agreements 1,042 97 945 -------- ----------- -------- $198,479 $ 47,385 $151,094 ======== =========== ======== Total Intangible Assets $203,912 $ 48,813 $155,099 ======== =========== ========
Amortization expense for intangible assets was approximately $72,000 for the three months ended March 31, 2002, and is estimated to be approximately $342,000 annually for the next five fiscal years. 13.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations - ---------------------
The Timken Company reported net sales of $615.8 million for the first quarter of 2002, a decrease of 6.9% from $661.5 million in the first quarter of 2001. The company reported net income of $9.2 million for the first quarter of 2002, compared to net income of $2.2 million in the same quarter a year ago. In the first quarter of 2002, the company incurred total pretax restructuring and implementation charges of $8.1 million. These charges included $3.0 million related to impairment and restructuring charges and $5.1 million related to implementation expenses, which were reflected in the company's cost of products sold and selling, administrative and general expenses for the quarter. The first quarter of 2001 included pretax charges of $12.5 million. Of this, $7.9 million represented impairment and restructuring charges and $4.6 million represented implementation charges. In addition, net income for the first quarter of 2002 was favorably impacted by the non-amortization of goodwill, which was $1.5 million in first quarter of 2001.
Despite lower sales, the company's first quarter 2002 earnings increased compared to a year ago. U.S. automotive sales, especially in the light truck and SUV segment, continued at a robust level and contributed to the company's higher earnings in the first quarter of 2002. Sales increased 7% from the depressed levels experienced in the fourth quarter of 2001. Industrial markets around the world, while stabilizing, have shown few signs of recovery. The Steel business benefited from the strong shipments made to automotive customers during the first quarter of 2002, while shipments to customers in other industries were lower compared to first quarter of 2001. The company's higher performance in the first quarter of 2002 also reflected cost reductions achieved through its ongoing restructuring of manufacturing operations and lower administrative spending levels.
Gross profit was $118.6 million (19.2% of net sales) in the first quarter of 2002, compared to $118.0 million (17.8% of net sales) in the first quarter of 2001. Although sales volume in the first quarter of 2002 was lower compared to the same period a year ago, gross profit performance increased as a result of the company's manufacturing strategy initiatives and cost containment. In addition, the first quarter 2002 gross profit was favorably impacted by the non-amortization of goodwill, which was $1.5 million in first quarter of 2001.
Selling, administrative and general expenses were $86.0 million (14.0% of net sales) in the first quarter of 2002, compared to $96.5 million (14.6% of net sales) recorded in the same quarter a year ago. The decrease in expense resulted from savings related to the salaried workforce reduction, reduced expense incurred for performance-based pay and continuing focused control on discretionary spending.
In April 2001, the company announced a strategic global refocusing of its manu- facturing operations to establish a foundation for accelerating the company's growth initiatives. This second phase of the company's transformation includes creating focused factories for each product line or component, replacing specific manufacturing processes with state-of-the-art processes through the
14.
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
company's global supply chain, rationalizing production to the lowest total cost plants in the company's global manufacturing system and implementing lean manufacturing process redesign. The company also announced its intention to close bearing plants in Columbus, Ohio and Duston, England, and to sell a tooling plant in Ashland, Ohio. To implement these actions, the company is expecting to take approximately $100 - $110 million in severance, impairment and implementation charges from 2001 through the end of 2002.
As a result of the market weakness experienced in 2001, the company accelerated this strategic refocusing of its manufacturing operations. The Columbus bearing plant ceased manufacturing operations in November 2001 while the Duston plant is expected to cease manufacturing operations by September 2002. The company announced additional cost-saving actions in August 2001. The company took steps to further reduce capital spending, delay or scale back certain projects and reduce salaried employment.
The company targeted an annualized pretax rate of savings of approximately $100 million by the end of 2004 as a result of this program. Through March 31, 2002, the company achieved estimated annual savings of $35 million.
Auto Industrial Steel Total Restructuring: ------- ---------- ------ ------- Separation costs $ 0.4 $ 0.4 $ 0.2 $ 1.0 Exit costs 0.5 - - 0.5 ------- ---------- ------ ------- $ 0.9 $ 0.4 $ 0.2 $ 1.5
Impaired assets: Property, plant and equipment $ 1.0 $ 0.5 $ - $ 1.5 ------- ---------- ------ ------- $ 1.9 $ 0.9 $ 0.2 $ 3.0 ======= ========== ====== =======
The first quarter of 2002 Automotive Bearings Business impaired assets charge related to the Duston plant closure and the impaired assets charge for the Industrial Bearings Business related to the Columbus plant closure. The majority of the Automotive and Industrial restructuring costs also related to the Duston and Columbus plant closures, respectively. Implementation charges for the quarter ended March 31, 2002 totaled $5.1 million, classified as cost of products sold of $2.3 million and selling, administrative and general expenses of $2.8 million.
15.
Auto Industrial Steel Total Restructuring: ------- ---------- ------ ------- Separation costs $ 26.3 $ 4.0 $ 1.5 $ 31.8 Exit costs 0.9 1.0 - 1.9 ------- ---------- ------ ------- $ 27.2 $ 5.0 $ 1.5 $ 33.7
Special Charges: SFAS 88/106 curtailment $ - $ 15.1 $ - $ 15.1 ------- ---------- ------ ------- $ 29.3 $ 21.0 $ 1.5 $ 51.8 ======= ========== ====== =======
Cumulative implementation charges related to the second phase of restructuring as of March 31, 2002 totaled $13.1 million, classified as cost of products sold of $6.4 million and selling, administrative and general expenses of $6.7 million. As of March 31, 2002, the remaining severance accrual balance was $14.7 million including $1.0 million in additional expense incurred during the first quarter, of which $0.4 million was paid and expensed when incurred. Total payments made during the first quarter of 2002 totaled $7.3 million.
Since the announcement in April 2001, 1,131 associates left the company as of March 31, 2002. Of that number, 855 people were from the Duston and Columbus plants, Canton bearing plants, Canadian Timken Ltd., and associates included in the worldwide salaried workforce for whom severance has been paid. The remaining 276 associates retired or voluntarily left the company as of March 31, 2002 and their positions have been eliminated.
Other expense reflected higher expense in the first quarter of 2002 compared to the same period a year ago, primarily due to one-time charges related to legal expenses and loss on sale of fixed assets. In addition, the first quarter of 2001 reflected a one-time gain on disposal of land of $1.7 million.
Although the effective tax rate as of March 31, 2002 continues to exceed the U.S. statutory tax rate due to state and local taxes and certain foreign losses reserved for a lack of expected tax benefit, the tax rate has decreased from the first quarter of 2001. This decrease is primarily the result of current utilization of previously reserved foreign losses generated in prior years and a decrease in current year foreign losses for which a tax benefit reserve is required. The tax provision for the three months ended March 31, 2002 was not impacted by the Job Creation and Worker Assistance Act of 2002.
16.
Automotive Bearings
The Automotive Bearings Business includes products for passenger cars, light and heavy trucks and trailers. Global Automotive Bearings' sales for the first quarter of 2002 increased 4.8% to $203.7 million, from $194.3 million in the first quarter of 2001. This increase reflected continued strength in vehicle production in North America and new automotive platforms launched using Timken products. North American passenger car production is up slightly from 2001, while production in Europe is weaker. North American light truck production is up 8% from 2001. Although it is projected that light truck production could increase 3% for the year, this projection could be impacted by gasoline prices driven by the current situations in the Middle East and South America. Medium and heavy truck production globally continues to be weak. In North America, production is down 20% versus 2001. For 2002, North American production is expected to increase 12% over 2001 levels, which is approximately 35% below 2000. In the near-term, North American demand for heavy trucks is being favorably impacted by the October 1, 2002 emissions change. Latin American automotive markets are being negatively impacted by the current economic and political situations in that region.
Excluding $4.1 million and $0.4 million in restructuring and implementation charges and goodwill amortization for the first quarters of 2002 and 2001, respectively, and before interest and taxes, Automotive Bearings' had earnings of $15.3 million, compared to a loss of $1.6 million in 2001's first quarter. Adjusted for these charges, Automotive Bearings' had EBIT of $11.2 million, compared with a loss before interest and taxes of $2.0 million in the first quarter of 2001. The increase in EBIT resulted from increased sales volume compared to the same period a year ago, increased plant utilization and efficiencies enhanced by the manufacturing strategy and salaried cost reduction initiatives and aggressive business cost control.
Automotive Bearings' selling, administrative and general expenses in the first quarter of 2002 were approximately 13% lower compared to the same period a year ago. This was the result of savings realized from the salaried cost reduction initiatives, focused business cost spending and reduction in expense incurred for performance-based pay.
Industrial Bearings
The Industrial Bearings Business includes industrial, rail, aerospace and super precision products as well as emerging markets in China, India and Central and Eastern Europe. Industrial Bearings' net sales were $212.9 million, a decrease of 12% below the first quarter 2001 net sales of $242.0 million. North American and European industrial markets are weaker than a year ago, and orders for industrial bearings have not risen appreciably from very low levels in the fourth quarter of 2001. Sales to North American rail customers continue to decrease significantly. Rail car build has decreased from 31,000 cars in 2001 to a forecasted 15,000 in 2002. First quarter 2001 rail car build was 8,400 compared to only 2,600 for first quarter of 2002. Rail markets are expected to
17.
remain depressed. The company anticipates that industrial markets will start to improve in the second half of 2002. While aerospace activity has stabilized since the events of September 11, the aerospace customer demand remains depressed as anticipated, and is approximately 25% lower compared to the same quarter a year ago. While there has been some select improvement noticed in the commercial business, the military business has not demonstrated the demand previously anticipated. In general, aerospace customers have been slow to in- crease deliveries both in the U.S. and Europe. Revenues for the first quarter of 2002 reflect the lower passenger traffic and the reduced aircraft build rates.
Excluding $3.8 million and $11.8 million in restructuring and implementation charges and goodwill amortization for the first quarters of 2002 and 2001, respectively, Industrial Bearings' EBIT was $3.2 million, down from $16.6 million in first quarter of 2001. Including these charges, Industrial Bearings' EBIT for the first quarter was a loss of $0.6 million, compared to $4.8 million in the first quarter of 2001. The decline in EBIT reflected lower sales to North American industrial, rail and super precision customers. Although the business noted increased plant utilization, efficiencies enhanced by the manufacturing strategy and salaried cost reduction initiatives as well as aggressive business cost control, the benefits were exceeded by the reduced volume impact.
Industrial Bearings' selling, administrative and general expenses in the first quarter of 2002 were 12% lower compared to the same period a year ago. This was the result of savings realized from the salaried cost reduction initiatives, focused business cost spending and reduction in expense incurred for performance-based pay.
Steel
Steel's net sales, including intersegment sales, decreased 11% to $238.4 million from $267.7 million a year ago. Although sales in the first quarter of 2002 were lower compared to the same period a year ago, a 10% increase was noted from the fourth quarter's depressed sales levels. Automotive sales in the first quarter of 2002 increased 17% compared to first quarter of 2001. However, sales to other customers continue to be sluggish. Sales to the bearing industry, other than automotive suppliers, were weak and sales to industrial customers decreased 4% compared to the same period a year ago. While aerospace sales increased 27% compared to first quarter of 2001, sales to oil country and steel service center customers decreased over 50%.
In general, steel demand across most business sectors is expected to remain weak through the second quarter of 2002. While the automotive segment is expected to remain strong through the second quarter of 2002, there is uncertainty regarding the continuation of strong automotive demand in the second half of the year. Although aerospace sales were higher than the first quarter of 2001, the company expects sales will drop as customers cut production of passenger planes.
Excluding Steel's portion of the restructuring and implementation charges of $0.2 million, Steel's EBIT for the first quarter of 2002 was $12.2 million. 18.
This compares with EBIT of $11.0 million in the first quarter of 2001, excluding restructuring and implementation charges and goodwill amortization of $1.7 million. Including these charges, Steel EBIT was $12.0 million, compared to $9.3 million a year ago. Increase in EBIT was the result of continuing cost-control actions. The business has reduced purchasing costs through a combination of price reductions, substitute products and reduced consumption. Compared to the first quarter of 2001, the cost for scrap, alloy and energy decreased and contributed to the improved EBIT performance for the first three months of 2002. Although plant capacity utilization improved from the very low levels noted in the fourth quarter of 2001, the capacity utilization for the first quarter of 2002 was slightly lower compared to the same period a year ago. The Steel business announced price increases on selected bar products during the first quarter of 2002.
Steel's selling, administrative and general expenses in the first quarter of 2002 decreased by approximately $1.3 million compared to the same period a year ago. The majority of the decrease related to a reduction of expense in first quarter 2002 related to performance-based pay and controlled business cost spending.
Financial Condition - ------------------- Total assets as shown on the Consolidated Condensed Balance Sheets increased by approximately $22 million from December 31, 2001. Inventory balances at the end of the first quarter of 2002 increased approximately 4% compared to year- end 2001 levels. The company's number of days' supply in inventory as of March 31, 2002 was 111 days compared to 105 days as of December 31, 2001. Total Bearings' number of days' supply in inventory increased five days while Steel's inventory increased seven days. The increase in Bearings' inventories was primarily impacted by the higher automotive sales volume anticipated early in the second quarter and the acquired inventory of an industrial equipment facility located in Niles, Ohio. This acquisition was completed in March 2002. The increase in Steel's inventories was a result of the increase in operating levels to meet increased demand in second quarter of 2002. Accounts receivable have increased by $49.0 million since December 31, 2001. The increase is due primarily to the timing of customer payments and increase in sales levels compared to the fourth quarter of 2001. The number of days' sales in receivables at March 31, 2002 was comparable to December 31, 2001, which was 51 days. Although the accounts receivable balance increased from December 31, 2001, the first quarter 2002's customer sales average increased significantly from the fourth quarter 2001's depressed sales levels.
As shown on the Consolidated Condensed Statement of Cash Flows, the increase in inventories used $17.1 million of cash during the first three months of 2002. The increase in other assets used $7.5 million in cash during the first quarter of 2002, primarily resulting from the company funding the e-business joint ventures and other affiliations. Accounts payable and accrued expenses used $11.5 million of cash in the first three months of 2002, primarily as a result of significant pension contributions made during the quarter, which were offset by the adjustment for non-cash transactions related to accrued pensions and restructuring. Purchases of property, plant and equipment, net used $10.4 million of cash in the first three months of 2002, below the $14.8 million spent during the same period in 2001. 19.
The 39.9% debt-to-total-capital ratio at March 31, 2002 was higher than the 38.9% at year-end 2001. Debt increased by $24.1 million during the first three months, to $521.1 million at March 31, 2002. The increase in total debt was used primarily to fund increases in working capital and to fund the manu- facturing strategy initiatives. The company expects that any cash requirements in excess of cash generated from operating activities will be met by short-term borrowing and issuance of medium-term notes. The company continues to focus on working capital management and discretionary spending.
The company's contractual debt obligations and contractual commitments out- standing as of March 31, 2002 are as follows (in millions):
Payments Due by Period ------------------------------------------------ Total Less than 1-3 4-5 After 5 1 year years years years ------- --------- ------- ------- ------- Long-term Debt $ 408.8 $ 41.5 $ 26.1 $ 103.5 $ 237.7 Commercial Paper $ 28.0 $ 28.0 - - - Other Lines of Credit $ 84.3 $ 84.3 - - - Operating Leases $ 57.1 $ 13.3 $ 21.9 $ 5.7 $ 16.2
The company's capital lease obligations are immaterial. At March 31, 2002, the company had available $272.0 million through an unsecured $300.0 million revolving credit agreement with a group of banks. The company is the guarantor of a $12.3 million letter of credit for Pel Technologies, LLC.
Total shareholders' equity has increased by approximately $1.6 million since December 31, 2001. The increase in equity was primarily the result of net income of $9.2 million and favorable impact of $1.5 million related to net change in derivative financial instruments, less a non-cash foreign currency translation adjustment of $2.4 million, a $1.0 million adjustment related to the issuance of the company's treasury shares and the payment of $7.8 million in dividends. The majority of the increase in the foreign currency translation adjustment resulted from the fluctuation in exchange rates for currencies such as the Euro and the Argentine peso.
During the first quarter of 2002, the company did not purchase any shares of its common stock 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 4 million shares of common stock, which are to be held as treasury shares and used for specified purposes. The company may exer- cise this authorization until December 31, 2006. The company does not expect to be active in repurchasing shares under this plan in the near-term.
Other Information - ---------------------- In the second quarter of 2000, the U.S. International Trade Commission (ITC) voted to revoke the industry's antidumping orders on imports of tapered roller bearings from Japan, Romania and Hungary. The ITC determined that revocation
20.
of the antidumping duty orders on tapered roller bearings from those countries was not likely to lead to continuation or recurrence of material injury to the domestic industry within a reasonably foreseeable time. The ITC upheld the antidumping duty order against China. The company has filed an appeal of the ITC's decision regarding Japan, which is still pending.
On March 5, 2002, President Bush announced that the U.S. would impose tariffs on hot and cold-finished bar imports. The remedy for these product categories is three years of tariffs at 30%, 24% and 18%. Hot-rolled bars are a major product line for the company's Steel business, which also manufactures some cold-finished bar products. Steel made in Mexico, Canada and developing nations are generally exempt from the tariffs announced. No relief was granted with respect to tool steels, which is a major product line for the Timken Latrobe Steel subsidiary in Latrobe, Pennsylvania.
Assets and liabilities of subsidiaries, other than Timken Romania, which is considered to operate in a highly inflationary economy, are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the quarter. Related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions and the translation of financial statements are included in the results of operations.
Foreign currency exchange losses included in the company's operating results for the first quarter of 2002 totaled $0.6 million, compared to $3.7 million in the same year-ago period. The decrease in translation losses is related to the fluctuation in exchange rates for the Euro and Brazilian Real, which had significant devaluation during the first quarter of 2001. Also, for the first three months of 2002, the company recorded a non-cash foreign currency trans- lation adjustment of $2.4 million that reduced shareholders' equity, compared to a non-cash foreign currency translation adjustment of $3.7 million that decreased equity in the first three months of 2001. Although the first quarter of 2002 was impacted by the fluctuation in the Euro and the Argentine Peso, the adverse impact was not as significant as the adjustment in the first quarter of 2001 caused by continued weakening of currencies in many of the countries in which the company operates.
On April 8, 2002, it was announced that the company and NSK Ltd. have agreed to form a joint venture that will build a plant near Shanghai, China to manu- facture certain tapered roller bearing product lines. Construction of the plant is to begin later in 2002, and production is scheduled to start early in 2004. Ownership of this joint venture, Timken-NSK Bearings (Suzhou) Co. Ltd., will be divided evenly between the company and NSK.
At the company's annual meeting of shareholders held on April 16, 2002, Ward J. Timken, Jr., was elected to the board of directors for a three-year term expiring at the 2005 annual meeting. Mr. Timken serves as corporate vice president - office of the chairman at the company.
21.
On April 16, 2002, the board of directors declared a quarterly cash dividend of $0.13 per share payable June 3, 2002 to shareholders of record as of May 17, 2002. This is the 320th consecutive dividend in over 80 years paid on the common stock of the company.
Change in Method of Accounting: Effective January 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." In accord- ance with SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed at least annually for impairment. The appli- cation of the nonamortization provisions is expected to result in an increase in annual net income of $6.1 million, of which $1.5 million is related to the first quarter. Changes in the estimated useful lives of intangible assets will not result in a material increase to net income. Intangible assets that are separable and have a definite life will continue to be amortized over the estimated useful lives.
In accordance with the adoption of SFAS No. 142, the company evaluated the impairment of indefinite lived intangible assets and determined that none were impaired based on estimations in market value. Fair value for each of the company's five reporting units was determined by discounted cash flows and validated with various market-comparable approaches. It was determined that the fair value of the Industrial and Aerospace reporting units exceeded the book value. The book value exceeded the fair value for the Automotive, Consolidated Steel and Specialty Steel reporting units. Based on preliminary results, which are currently under review, the company estimates the transitional impairment loss to be between $25 - $30 million, the majority of which is primarily related to the Steel Business. Once the review has been completed, the related transitional impairment loss is expected to be recorded in the second quarter as a non-cash charge and reflected as the cumulative effect of a change in accounting principle.
Refer to Note 8 on page 10 of "Notes to Financial Statements (Unaudited)" for further discussion of this change in method of accounting.
Certain statements set forth in this document (including the company's fore- casts, 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) changes in world economic conditions, including additional adverse effects from terrorism or hostilities. This includes 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.
22.
b) the effects of changes in customer demand on sales, product mix, and prices. 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, in light of the ITC voting in second quarter 2000 to revoke the antidumping orders on imports of tapered roller bearings from Japan, Romania and Hungary.
c) 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.
d) changes in operating costs. This includes the effect of changes in the company's manufacturing processes; changes in costs associated with varying levels of operations; changes resulting from inventory management and cost reduction initiatives and different levels of customer demands; the effects of unplanned work stoppages; changes in the cost of labor and benefits; and the cost and availability of raw materials and energy.
e) the success of the company's operating plans, including its ability to achieve the benefits from its global restructuring, manufacturing trans- formation, and administrative cost reduction as well as its ongoing con- tinuous improvement and rationalization programs; its ability to integrate acquisitions into company operations; the ability of acquired companies to achieve satisfactory operating results; its ability to maintain appropriate relations with unions that represent company associates in certain locations in order to avoid disruptions of business and its ability to successfully implement its new organizational structure.
f) unanticipated litigation, claims or assessments. This includes, but is not limited to, claims or problems related to intellectual property, product warranty and environmental issues.
g) changes in worldwide financial markets, to the extent they affect the company's ability or costs to raise capital, 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.
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. 23.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 22, 2001, eight current or former employees of the company filed a lawsuit in the Court of Common Pleas, Stark County, Ohio against the company and fifteen current or former employees of the company. The lawsuit was removed to the United States District Court, Northern District of Ohio, Eastern Division on June 20, 2001. The lawsuit alleged, among other things, sexual harassment and employment discrimination. The plaintiffs sought compensatory and punitive damages of approximately $95 million.
During the third quarter of 2001, this case was dismissed, without pre- judice, pursuant to a sua sponte order of the presiding judge. In February 2002, the lawsuit was refiled in the Court of Common Pleas, Stark County, Ohio, by two of the original plaintiffs naming only the company as a defendant. The allegations contained in the complaint are similar to those made in the May 22, 2001 filing. In April 2002, the plaintiffs voluntarily dismissed a number of the counts contained in the new complaint. The new lawsuit does not specify the amount of damages the plaintiffs are seeking.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
(1) The Board of Directors recommended the four individuals set forth below be Directors in Class II at the 2002 Annual Meeting of Shareholders of The Timken Company held on April 16, 2002 to serve a term of three years expiring at the Annual Meeting in 2005 (or until their respective successors are elected and qualified). The first three individuals had been previously elected as Directors by the shareholders and were re-elected at the 2002 meeting.
Affirmative Withheld
Robert W. Mahoney 52,083,654 3,179,517 Jay A. Precourt 52,131,016 3,132,155 Joseph F. Toot, Jr. 51,171,187 4,091,984 Ward J. Timken, Jr. 42,498,111 12,765,060
(2) Shareholders approved The Timken Company Long-Term Incentive Plan, as amended and restated as of January 30, 2002.
Affirmative Negative Abstain 36,725,250 17,093,483 1,444,438
Item 5. Other Information
24.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
10 The Timken Company Long-Term Incentive Plan for directors, officers and other key employees as amended and restated as of January 30, 2002 and approved by shareholders on April 16, 2002, was filed as Appendix A to Proxy Statement dated February 20, 2002, and is incorporated herein by reference.
10.1 The form of The Timken Company 1996 Deferred Compensation Plan Election Agreement as adopted on April 16, 2002. Each differs only as to name and date executed.
10.2 The form of The Timken Company Nonqualified Stock Option Agreement for transferable options as adopted on April 16, 2002.
10.3 The form of The Timken Company Restricted Shares Agreement as adopted on April 16, 2002.
10.4 The form of The Timken Company Performance Unit Agreement as adopted on April 16, 2002.
11 Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K:
On April 16, 2002, the company filed a Form 8-K regarding Other Events, which contained a press release, dated April 16, 2002 titled "Earnings Up, Despite Sales Decline The Timken Announces First Quarter Results." A consolidated statement of income, consolidated statement of cash flows and balance sheet as of March 31, 2002 were included in the filing.
On April 15, 2002, the company filed a Form 8-K regarding Other Events and Regulation FD Disclosure, which contained estimated market data and industry trend information relating to a number of industry segments in which the company sells bearing and steel products. No financial statements were filed.
On April 8, 2002, the company filed a Form 8-K regarding Other Events, which contained a press release, dated April 8, 2002 titled "Timken and NSK form joint venture to build plant in China." No financial statements were filed.
On March 20, 2002, the company filed a Form 8-K regarding Other Events and Regulation FD Disclosure, which contained estimated market data and industry trend information relating to a number of industry segments in which the company sells bearing and steel products. No financial statements were filed.
25. (b) Reports on Form 8-K (continued):
On February 22, 2002, the company filed a Form 8-K regarding Other Events and Regulation FD Disclosure, which contained estimated market data and industry trend information relating to a number of industry segments in which the company sells bearing and steel products. No financial statements were filed.
On February 19, 2002, the company filed a Form 8-K regarding Other Events and Regulation FD Disclosure, which contained a recent development of rating agency activity related to the company's debt ratings. No financial statements were filed.
On January 22, 2002, the company filed a Form 8-K regarding Other Events and Regulation FD Disclosure, which contained estimated market data and industry trend information relating to a number of industry segments in which the company sells bearing and steel products. No financial statements were filed. 26.
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 14, 2002 BY /s/ W. R. Timken, Jr. ________________________ _______________________________ W. R. Timken, Jr., Director and Chairman; Chief Executive Officer
Date May 14, 2002 BY /s/ G. E. Little ________________________ _______________________________ G. E. Little Senior Vice President - Finance