1. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 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 ___ ___
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 September 30, 2002, 63,315,670.
PART I. FINANCIAL INFORMATION 2. THE TIMKEN COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
Sept. 30 Dec. 31 2002 2001 ASSETS ---------- ---------- Current Assets (Thousands of dollars) Cash and cash equivalents........................... $36,812 $33,392 Accounts receivable, less allowances, (2002-$16,250; 2001-$14,715)........................ 376,416 307,759 Refundable income taxes............................. - 15,103 Deferred income taxes............................... 42,790 42,895 Inventories (Note 2) ............................... 464,394 429,231 ---------- ---------- Total Current Assets...................... 920,412 828,380
Property, Plant and Equipment....................... 2,951,614 2,971,793 Less allowances for depreciation................... 1,714,207 1,666,448 ---------- ---------- 1,237,407 1,305,345
Goodwill (Note 8)................................... 129,526 150,041 Deferred income taxes............................... 23,207 27,164 Intangible pension asset............................ 136,382 136,118 Other assets........................................ 95,109 86,036 ---------- ---------- Total Assets.................................. $2,542,043 $2,533,084 ========== ==========
LIABILITIES Current Liabilities Accounts payable and other liabilities.............. $263,303 $258,001 Short-term debt and commercial paper................ 131,432 128,864 Accrued expenses.................................... 272,242 254,291 ---------- ---------- Total Current Liabilities................. 666,977 641,156
Noncurrent Liabilities Long-term debt (Note 3) ............................ 350,515 368,151 Accrued pension cost................................ 270,179 317,297 Accrued postretirement benefits cost................ 413,319 406,568 Other noncurrent liabilities........................ 21,980 18,177 ---------- ---------- Total Noncurrent Liabilities.............. 1,055,993 1,110,193
Shareholders' Equity (Note 4) Common stock........................................ 309,728 248,863 Earnings invested in the business................... 736,212 757,410 Accumulated other comprehensive loss................ (226,867) (224,538) ---------- ---------- Total Shareholders' Equity................ 819,073 781,735
Total Liabilities and Shareholders' Equity.... $2,542,043 $2,533,084 ========== ==========
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Nine Months Ended Three Months Ended Sept. 30 Sept. 30 Sept. 30 Sept. 30 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (Thousands of dollars, except per share data) Net sales................................................... $1,905,177 $1,873,603 $628,591 $577,698 Cost of products sold....................................... 1,550,972 1,553,555 517,329 486,747 ---------- ---------- ---------- ---------- Gross Profit............................................. 354,205 320,048 111,262 90,951
Selling, administrative and general expenses................ 266,379 276,655 87,382 86,828 Impairment and restructuring charges ....................... 24,986 49,405 7,703 24,639 ---------- ---------- ---------- ---------- Operating Income (Loss).................................. 62,840 (6,012) 16,177 (20,516)
Interest expense............................................ (23,996) (25,813) (8,072) (8,432) Interest income............................................. 991 1,670 294 573 Other expense............................................... (12,490) (5,371) (3,415) (2,476) Income (Loss) Before Income Taxes and Cumulative Effect ---------- ---------- ---------- ---------- of Accounting Changes.................................. 27,345 (35,526) 4,984 (30,851)
Provision (benefit) for income taxes (Note 6)............... 12,360 7,358 3,147 (319) Income (Loss) Before Cumulative Effect of Change in ---------- ---------- ---------- ---------- Accounting Principle................................... 14,985 (42,884) 1,837 (30,532)
Cumulative effect of change in accounting principle (net of income tax benefit of $7,786)............................. (12,702) - (12,702) -
Net Income (Loss)........................................... $2,283 $(42,884) $(10,865) $(30,532) ========== ========== ========== ==========
Earnings Per Share: Income (loss) before cumulative effect of change in accounting principle................................... $ 0.25 $(0.71) $ 0.03 $(0.51) Cumulative effect of change in accounting principle...... $(0.21) $ - $(0.21) $ - Earnings Per Share*...................................... $ 0.04 $(0.71) $(0.18) $(0.51)
Earnings Per Share - assuming dilution: Income (loss) before cumulative effect of change in accounting principle................................... $ 0.25 $(0.71) $ 0.03 $(0.51) Cumulative effect of change in accounting principle...... $(0.21) $ - $(0.21) $ - Earnings Per Share - assuming dilution**................. $ 0.04 $(0.71) $(0.18) $(0.51)
Dividends Per Share...................................... $ 0.39 $ 0.54 $ 0.13 $ 0.18 ========== ========== ========== ==========
* Average shares outstanding............................... 60,459,277 59,979,699 61,091,924 59,958,690 ** Average shares outstanding - assuming dilution........... 60,998,543 60,156,778 61,430,256 60,086,662
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended Cash Provided (Used) Sept. 30 Sept. 30 2002 2001 -------- -------- OPERATING ACTIVITIES (Thousands of dollars) Net Income (Loss)......................................$ 2,283 $(42,884) Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting change................ 12,702 - Depreciation and amortization......................... 110,956 114,015 Provision (credit) for deferred income taxes.......... 23,557 (7,196) Stock issued in lieu of cash to employee benefit plans 4,628 1,319 Non-cash portion of impairment and restructuring charges.............................................. (13,368) 40,344 Changes in operating assets and liabilities: Accounts receivable.................................. (64,254) (20,809) Inventories.......................................... (35,222) 22,003 Other assets......................................... (6,766) (26,297) Accounts payable and accrued expenses................ 46,094 (49,773) Foreign currency translation......................... 8,446 4,801 -------- -------- Net Cash Provided by Operating Activities........... 89,056 35,523
INVESTING ACTIVITIES Purchases of property, plant and equipment - net...... (33,849) (61,832) Acquisitions.......................................... (6,751) (1,170) -------- -------- Net Cash Used by Investing Activities............... (40,600) (63,002)
FINANCING ACTIVITIES Cash dividends paid to shareholders................... (23,481) (32,388) Purchase of treasury shares........................... - (2,795) Payments on long-term debt............................ (36,872) (1,487) Proceeds from issuance of long-term debt.............. - 76,110 Short-term debt activity - net........................ 14,462 4,828 -------- -------- Net Cash (Used) Provided by Financing Activities.... (45,891) 44,268
Effect of exchange rate changes on cash................ 855 (1,801)
Increase in Cash and Cash Equivalents.................. 3,420 14,988 Cash and Cash Equivalents at Beginning of Period....... 33,392 10,927 -------- -------- Cash and Cash Equivalents at End of Period.............$ 36,812 $ 25,915 ======== ========
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. 9/30/02 12/31/01 Note 2 -- Inventories -------- --------- (Thousands of dollars) Finished products $188,254 $180,533 Work-in-process and raw materials 241,708 212,040 Manufacturing supplies 34,432 36,658 -------- -------- $464,394 $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. 9/30/02 12/31/01 -------- --------- Note 3 -- Long-term Debt (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 September 30, 2002 is 1.70%. $ 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 September 30, 2002 is 1.70%. 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 September 30, 2002 is 1.70%. 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 September 30, 2002 is 1.75%. 24,000 24,000 Fixed Rate Medium-Term Notes, Series A, due at various dates through May, 2028 with interest rates ranging from 6.20% to 7.76%. 292,000 327,000 Other 11,359 12,885 -------- -------- 374,059 410,585 Less: Current Maturities 23,544 42,434 -------- -------- $350,515 $368,151 ======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) Continued 6.
Note 4 -- Shareholders' Equity 9/30/02 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 - 63,315,670 shares 2001 - 63,082,626 shares Stated Capital 53,064 53,064 Other paid-in capital 256,664 256,423 Less cost of Common Stock in treasury 2001 - 3,226,544 shares - 60,624 -------- -------- $309,728 $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 2,283 2,283 Foreign currency translation adjustment (2,721) (2,721) Change in fair value of derivative financial instruments (123) (123) Reclassification adjustments - contract settlements 515 515 ---------- Total comprehensive loss (46)
Dividends - $.39 per share (23,481) (23,481) Stock Options, employee benefit and dividend reinvestment plans: Treasury - issued 459,589 shares (2,234) 8,619 6,385 Treasury - acquired 0 shares Pension Contribution Treasury - issued 2,766,955 shares 52,005 52,005 Common Stock - issued 233,045 shares 2,475 2,475 ------- -------- -------- ---------- -------- ---------- Balance September 30, 2002 $53,064 $256,664 $736,212 ($226,867) $ - $ 819,073 ======= ======== ======== ========== ======== ==========
The total comprehensive loss for the three months ended September 30, 2002 and 2001 was $ 17,759,000 and $31,832,000, respectively. Total comprehensive loss for the nine months ended September 30, 2001 was $56,118,000.
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 manufacturing 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, 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. The Columbus bearing plant ceased manufacturing operations in November 2001 while the Duston plant ceased manufacturing operations at the end of September 2002. Additionally, on June 30, 2002, the company sold its Ashland plant to Ashland Precision Tooling, LLC. 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.
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 September 30, 2002, the company achieved estimated annual savings of $70 million.
The following chart details the breakdown by segment of the $7.7 million in restructuring and impairment charges incurred during the three months ended September 30, 2002 (in millions of dollars):
Auto Industrial Steel Total Restructuring: ------- ---------- ------- ------- Separation costs $ 0.3 $ 0.9 $ - $ 1.2 Exit costs 0.4 - - 0.4 ------- ---------- ------- ------- $ 0.7 $ 0.9 $ - $ 1.6
Impaired assets: Property, plant and equipment $ 1.1 $ 1.6 $ - $ 2.7
Special Charges: SFAS No. 88/106 Curtailment $ 0.8 $ 2.0 $ 0.9 $ 3.7
Reversal of Separation Cost $ (0.1) $ (0.2) $ - $ (0.3) ------- ---------- ------- ------- $ 2.5 $ 4.3 $ 0.9 $ 7.7 ======= ========== ======= =======
The third quarter 2002 Automotive Bearings Business impaired assets charge related to the Duston plant closure. The Industrial Bearings Business impaired assets charge related to the Columbus plant closure. The majority of the Auto- motive and Industrial restructuring costs also related to the Duston and Columbus plant closures, respectively. Third quarter 2002 charges also included severance for Columbus associates and special curtailment expenses (pension and postretirement benefits) related to associates involved in the sale of the Ashland plant and the salaried workforce reduction. The reversals of
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 8. Continued
Note 5 -- Impairment and Restructuring Charges (continued)
separation cost in the third quarter of 2002 related to associates who were previously included in the severance accrual but for whom severance will not be paid, as these associates subsequently retired or found other employment.
Implementation charges for the quarter ended September 30, 2002 totaled $4.4 million. Of these charges, $2.1 million were classified as cost of products sold and $2.3 million as selling, administrative and general expenses.
Cumulative restructuring and impairment charges related to the second phase of restructuring as of September 30, 2002 by segment, are as follows (in millions of dollars):
Auto Industrial Steel Total Restructuring: ------- ---------- ------- ------- Separation costs $ 26.9 $ 5.5 $ 1.5 $ 33.9 Exit costs 1.9 1.0 - 2.9 ------- ---------- ------- ------- $ 28.8 $ 6.5 $ 1.5 $ 36.8
Impaired assets: Property, plant and equipment $ 15.2 $ 2.5 $ - $ 17.7
Special Charges: SFAS No. 88/106 Curtailment $ 0.8 $ 18.8 $ 0.9 $ 20.5
Reversal of Separation Cost $ (0.5) $ (0.6) $ (0.2) $ (1.3) ------- ---------- ------- ------- $ 44.3 $ 27.2 $ 2.2 $ 73.7 ======= ========== ======= =======
Cumulative implementation charges related to the second phase of restructuring totaled $22.3 million as of September 30, 2002. Of these charges, $11.3 million were classified as cost of products sold and $11.0 million were classified as selling, administrative and general expenses. As of September 30, 2002, the remaining severance accrual balance was $6.8 million including $0.6 million in additional expense incurred during the third quarter, offset by the accrual reversal and foreign currency adjustments of $0.1 million. Total payments made during the third quarter of 2002 totaled $4.9 million.
From the announcement of the restructuring initiatives in April 2001 to September 30, 2002, 1,682 associates left the company as a result of the restructuring and salaried workforce reduction. Of that number, 1,214 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. In addition, 78 associates left the company as a consequence of the sale of the Ashland plant. The remaining 390 associates have retired or voluntarily left the company as of September 30, 2002, and their positions have been eliminated.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 9. Continued
Note 6 -- Income Tax Provision Nine Months Ended Three Months Ended Sept. 30 Sept. 30 Sept. 30 Sept. 30 2002 2001 2002 2001 -------- -------- -------- -------- U.S. (Thousands of dollars) Federal $ 6,877 $ 3,292 $ 1,001 $(1,949) State & Local 1,688 (395) 551 104 Foreign 3,795 4,461 1,595 1,526 ------- ------- ------- ------- $12,360 $ 7,358 $ 3,147 $( 319) ======= ======= ======= =======
Taxes provided exceed the U.S. statutory rate primarily due to foreign losses without current tax benefits.
Note 7 -- Segment Information
(Thousands of Dollars) Nine Months Ended Three Months Ended Sept. 30 Sept. 30 Sept. 30 Sept. 30 Automotive Bearings 2002 2001 2002 2001 -------- -------- -------- -------- Net sales to external customers $630,009 $565,761 $207,136 $176,518 Depreciation and amortization 25,817 27,112 8,624 9,053 Goodwill Amortization - 69 - 23 Impairment and restructuring charges 17,011 23,858 2,550 23,597 Loss before interest and taxes (3,644) (34,557) (3,081) (32,351)
Industrial Bearings
Net sales to external customers $658,230 $678,041 $217,232 $214,130 Depreciation and amortization 34,451 32,606 11,669 10,627 Goodwill Amortization - 3,613 - 1,201 Impairment and restructuring charges 7,226 24,343 4,330 641 Earnings before interest amd taxes 23,857 4,422 11,953 6,186
Steel
Net sales to external customers $616,938 $629,801 $204,223 $187,050 Intersegment sales 123,655 114,484 42,623 35,007 Depreciation and amortization 50,606 49,683 16,725 16,579 Goodwill Amortization - 932 - 311 Impairment and restructuring charges 749 1,205 823 402 Earnings before interest and taxes 31,530 16,522 4,769 911
Profit Before Taxes
Total EBIT for reportable segments 51,743 (13,613) 13,641 (25,254) Interest expense (23,996) (25,813) (8,072) (8,432) Interest income 991 1,670 294 573 Intersegment adjustments (1,393) 2,230 (879) 2,262 Income (loss) before income taxes 27,345 (35,526) 4,984 (30,851)
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 (pre-tax), of which $1.5 million (pre-tax) is related to the third 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.
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 of each of the company's five reporting units was determined by discounted cash flows and validated with various market-comparable approaches. Based on the results of this review, the company recorded a transitional impairment loss of $12.7 million, net of an income tax benefit of $7.8 million, which relates to the Specialty Steel Business. The transitional impairment loss was recorded in the third quarter 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 third quarter and first nine months of 2002 adjusted for purposes of comparison:
(Thousands of Dollars) Nine Months Ended Three Months Ended Sept. 30 Sept. 30 Sept. 30 Sept. 30 2002 2001 2002 2001 -------- -------- -------- -------- Reported net income (loss) $ 2,283 $(42,884) $(10,865) $(30,532) Plus: Goodwill and indefinite lived intangible asset amortization, net of tax - 3,156 - 726 -------- -------- -------- -------- Adjusted net income (loss) $ 2,283 $(39,728) $(10,865) $(29,806) ======== ======== ======== ========
Earnings per share (basic and diluted): Reported net income (loss) $ 0.04 $ (0.71) $ (0.18) $ (0.51) Plus: Goodwill and indefinite lived intangible asset amortization, net of tax - 0.05 - 0.01 -------- -------- -------- -------- Adjusted net income (loss) $ 0.04 $ (0.66) $ (0.18) $ (0.50)
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 11. Continued
Note 8 - Change in Method of Accounting (continued)
The changes in the carrying amount of goodwill and indefinite lived intangible assets for the quarter ended September 30, 2002 are as follows:
(Thousands of Dollars) Balance Balance 12/31/01 Impairment Other 9/30/02 --------- ---------- ---------- ---------- Goodwill: Automotive $ 1,577 $ - $ (71) $ 1,506 Industrial 120,426 - (805) 119,621 Steel 28,038 (20,488) 849 8,399 --------- ---------- ---------- ---------- $ 150,041 $ (20,488) $ 1,192 $ 129,526
The indefinite lived intangible assets are immaterial.
Total intangible assets at September 30 were $134.7 million, of which unamortizable assets were $130.6 million, consisting primarily of goodwill and industrial license agreements, with the remaining primarily being amortizable industrial land use rights.
Note 9 - Subsequent Event
On October 16, 2002, the company announced that it had reached an agreement with Ingersoll-Rand Company Limited to acquire its Engineered Solutions business, including certain operating assets and its subsidiary, The Torrington Company, a leading worldwide producer of needle roller, heavy duty roller and ball bearings and motion control components and assemblies, for cash and stock valued at approximately $840 million. Under the terms of the agreement, Ingersoll-Rand will receive approximately $700 million in cash and $140 million worth of the company's common stock. The transaction, which is subject to antitrust clearance, successful completion of debt and equity financing, and customary closing conditions, is expected to close during the first quarter of 2003.
12. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations - ---------------------
The Timken Company reported net sales of $628.6 million and $1.905 billion for the third quarter and first nine months of 2002, respectively, an increase of 8.8% from $577.7 million in the same quarter and 1.7% from $1.874 billion for the same period a year ago. The company reported a net loss of $10.9 million and net income of $2.3 million for the third quarter and first nine months of 2002, respectively, compared to a net loss of $30.5 million and $42.9 million in the third quarter and first nine months of 2001, respectively. In the third quarter and first nine months of 2002, the company incurred total pretax restructuring and implementation charges of $12.1 million and $39.3 million, respectively. These charges included $7.7 million and $25.0 million in the third quarter and first nine months of 2002, respectively, related to impair- ment and restructuring charges and $4.4 million and $14.3 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 and the first nine months of 2002, respectively. In addition, the company recorded $12.7 million (net of tax benefit) in the third quarter of 2002 as a cumulative effect of change in accounting principle related to the impairment of goodwill. The third quarter and first nine months of 2001 included pretax charges of $27.2 million and $57.0 million, respectively. Of this, $24.6 million represented impairment and restructuring charges and $2.6 million represented implementation charges in the third quarter of 2001; $49.4 million represented impairment and restructuring charges and $7.6 million represented implementa- tion charges for the first nine months of 2001. In addition, net income for the third quarter of 2002 was favorably impacted by the discontinuation of goodwill amortization, which was $1.5 million (pre-tax) and $4.6 million (pre- tax) in the third quarter and first nine months of 2001.
Consistent with the first half of 2002, the company's third quarter and first nine months results benefited from continued strength in the automotive industry for both Automotive Bearings and Steel. North American light truck production continued to be strong in the third quarter and first nine months of 2002. North American heavy truck demand also remained strong resulting from the anticipated environmental regulation change to occur in the fourth quarter. However, industrial markets around the world continued to show few signs of recovery. Rail demand remains weak and global aerospace demand remains weak versus levels from a year ago. Nevertheless, the company improved its earnings performance in the third quarter and first nine months of 2002, which reflects cost reductions achieved through its ongoing restructuring of manu- facturing operations and lower administrative spending levels.
Gross profit was $111.3 million (17.7% of net sales) and $354.2 million (18.6% of net sales) in the third quarter and first nine months of 2002, respectively, compared to $91.0 million (15.7% of net sales) and $320.0 million (17.1% of net sales) in the same periods a year ago. Gross profit performance improved due to higher sales volume, cost containment and savings generated from the company's manufacturing strategy initiatives. In addition, the third quarter and first nine months 2002 gross profit was favorably impacted by the discontinuation of goodwill amortization, which was $1.5 million (pre-tax) and $4.6 million (pre-tax) in the third quarter and first nine months of 2001.
Selling, administrative and general expenses were $87.4 million (13.9% of net sales) and $266.4 million (14.0% of net sales) in the third quarter and first nine months of 2002, respectively, compared to $86.8 million (15.0% of net 13. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
sales) and $276.7 million (14.8% of net sales) recorded in the third quarter and first nine months of 2001. Although there was an increase in implementa- tion charges of $1.0 million and $4.5 million in the third quarter and first nine months of 2002, respectively, compared to the same periods a year ago, as well as increased performance-based pay reserves, these increases were offset by savings related to the salaried workforce reduction and continuing focused control on discretionary spending.
The company continued, in the third quarter of 2002, the second phase of the strategic global refocusing of its manufacturing operations it announced in April 2001 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, 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 in 2001 its intention to close bearing plants in Columbus, Ohio and Duston, England, and to sell a tooling plant in Ashland, Ohio. The Columbus bearing plant ceased manu- facturing operations in November 2001 while the Duston plant ceased manu- facturing operations at the end of September 2002. Additionally, on June 30, 2002, the company sold its Ashland plant to Ashland Precision Tooling, LLC.
The following chart details the breakdown by segment of the $7.7 million and $24.9 million in restructuring and impairment charges incurred during the three months and nine months ended September 30, 2002 (in millions of dollars):
Three months ended September 30,2002: Auto Industrial Steel Total Restructuring: ------- ---------- ------- ------- Separation costs $ 0.3 $ 0.9 $ - $ 1.2 Exit costs 0.4 - - 0.4 ------- ---------- ------- ------- $ 0.7 $ 0.9 $ - $ 1.6 Impaired assets: Property, plant and equipment $ 1.1 $ 1.6 $ - $ 2.7
Special charges: SFAS No. 88/106 curtailment $ 0.8 $ 2.0 $ 0.9 $ 3.7
Reversal of separation cost $ (0.1) $ (0.2) $ - $ (0.3) ------- ---------- ------- ------- $ 2.5 $ 4.3 $ 0.9 $ 7.7 ======= ========== ======= ======= 14. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Nine months ended September 30,2002: Auto Industrial Steel Total Restructuring: ------- ---------- ------- ------- Separation costs $ 1.0 $ 1.9 $ 0.2 $ 3.1 Exit costs 1.5 - - 1.5 ------- ---------- ------- ------- $ 2.5 $ 1.9 $ 0.2 $ 4.6 Impaired assets: Property, plant and equipment $ 14.1 $ 2.1 $ - $ 16.2
Special charges: SFAS No. 88/106 curtailment $ 0.8 $ 3.7 $ 0.9 $ 5.4
Reversal of separation cost $ (0.5) $ (0.6) $ (0.2) $ (1.3) ------- ---------- ------- ------- $ 16.9 $ 7.1 $ 0.9 $ 24.9 ======= ========== ======= =======
The third quarter and first nine months 2002 Automotive Bearings Business impaired assets charge related to the Duston plant closure. The Industrial Bearings Business impaired assets charge related to the Columbus plant closure. The majority of the Automotive and Industrial restructuring costs in all of 2002 related to the Duston and Columbus plant closures, respectively. Third quarter and first nine months 2002 charges also included severance for Columbus associates and special curtailment expenses (pension and postretirement bene- fits) related to associates involved in the sale of the Ashland plant and the salaried workforce reduction. The reversals of separation cost in the third quarter and first nine months of 2002 related to associates who were previously included in the severance accrual but for whom severance will not be paid, as these associates subsequently retired or found other employment.
Implementation charges for the quarter and nine months ended September 30, 2002 totaled $4.4 million and $14.3 million, respectively. Of these charges, $2.1 million and $7.1 million, respectively, were classified as cost of products sold and $2.3 million and $7.2 million, respectively, were classified as selling, administrative and general expenses.
15. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Cumulative restructuring and impairment charges related to the second phase of restructuring as of September 30, 2002 by segment, are as follows (in millions of dollars): Auto Industrial Steel Total Restructuring: ------- ---------- ------- ------- Separation costs $ 26.9 $ 5.5 $ 1.5 $ 33.9 Exit costs 1.9 1.0 - 2.9 ------- ---------- ------- ------- $ 28.8 $ 6.5 $ 1.5 $ 36.8 Impaired assets: Property, plant and equipment $ 15.2 $ 2.5 $ - $ 17.7
Special charges: SFAS 88/106 curtailment $ 0.8 $ 18.8 $ 0.9 $ 20.5
Reversal of separation cost $ (0.5) $ (0.6) $ (0.2) $ (1.3) ------- ---------- ------- ------- $ 44.3 $ 27.2 $ 2.2 $ 73.7 ======= ========== ======= =======
Cumulative implementation charges related to the second phase of restructuring totaled $22.3 million as of September 30, 2002. Of these charges, $11.3 million were classified as cost of products sold and $11.0 million were classified as selling, administrative and general expenses. As of September 30, 2002, the remaining severance accrual balance was $6.8 million, including $0.6 million in additional expense incurred during the third quarter 2002, offset by total accrual reversal and foreign currency adjustments of $0.1 million. Total payments made during the third quarter of 2002 totaled $4.9 million.
From the announcement of the restructuring initiatives in April 2001 to September 30, 2002, 1,682 associates left the company as a result of the restructuring and salaried workforce reduction. Of that number, 1,214 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. In addition, 78 associates left the company as a result of the sale of the Ashland plant. The remaining 390 associates retired or voluntarily left the company as of September 30, 2002, and their positions have been eliminated.
Other expense recorded in the third quarter of 2002 increased 38% and more than doubled from the same periods a year ago due primarily to increased foreign currency losses and the lack of realized gains from land sales.
The income tax rate exceeds the U.S. statutory rate primarily due to state and local taxes and current foreign net operating losses for which no current tax benefit is being realized.
On October 16, 2002, the company announced that it had reached an agreement with Ingersoll-Rand Company Limited to acquire its Engineered Solutions business, including certain operating assets and its subsidiary, The Torrington Company, a leading worldwide producer of needle roller, heavy duty roller and ball bearings and motion control components and assemblies, for cash and stock valued at approximately $840 million. Under the terms of the agreement, Ingersoll-Rand will receive approximately $700 million in cash and $140 million 16. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
worth of the company's common stock. The transaction is subject to antitrust clearance, successful completion of debt and equity financing, and customary closing conditions.
Automotive Bearings
The Automotive Bearings Business includes products for passenger cars, light and heavy trucks and trailers. Global Automotive Bearings' sales for the third quarter and first nine months of 2002 increased 17.3% to $207.1 million, from $176.5 million in the third quarter of 2001, and 11.3% to $630.0 million, from $565.8 million in the first nine months of 2001. Widespread incentive programs on light vehicles and changing environmental regulations on heavy trucks drove North American demand in the third quarter and first nine months of 2002. North American light truck production is up approximately 11% year-to-date compared to the same period a year ago. Medium and heavy truck production globally continues to be weak. In North America, medium and heavy truck production is down 10% year-to-date from 2001. The company expects demand for heavy trucks in North America to decline significantly in the fourth quarter of 2002. Latin American automotive markets continue to be negatively impacted by the current economic and political situations in that region.
Excluding $5.2 million and $24.4 million in restructuring and implementation charges for the third quarters of 2002 and 2001, and $24.7 million and $25.1 million in restructuring and implementation charges for the first nine months of 2002 and 2001, respectively, and before interest and taxes, Automotive Bearings' had earnings of $2.1 million, compared to a loss of $7.9 million in 2001's third quarter, and earnings of $21.0 million, compared to a loss of $9.4 million in 2001's first nine months. Including these charges, Automotive Bearings' had a loss before interest and taxes of $3.1 million, compared with a loss before interest and taxes of $32.3 million in the third quarter of 2001, and a loss before interest and taxes of $3.6 million, compared with a loss before interest and taxes of $34.6 million, in the first nine months of 2001. The increase in EBIT, excluding restructuring and implementation charges, resulted from increased sales volume compared to the same period a year ago, increased savings enhanced by the manufacturing strategy and salaried cost reduction initiatives and aggressive business cost control. These increases more than offset the adverse impact of operating inefficiencies resulting from capacity constraints caused by equipment rationalization related to the manufacturing strategy initiative, foreign currency losses and costs incurred to meet higher-than-expected customer demand.
Automotive Bearings' selling, administrative and general expenses in the third quarter and first nine months of 2002 were comparable to the same periods a year ago. The business has been focusing on controlling discretionary spending and realizing savings from the salaried cost reduction initiatives, which offset the increased implementation charges and performance-based pay reserves as a result of stronger EBIT performance in the third quarter and first nine months of 2002.
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 for the third quarter and first 17. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
nine months of 2002 were $217.2 million and $658.2 million, an increase of 1.4% over the third quarter 2001 net sales of $214.1 million, and a decrease of 2.9% over the first nine months of 2001 net sales of $678.0 million. Although general industrial demand strengthened modestly in the third quarter and first nine months of 2002 compared to the same periods a year ago, this strength was offset by weaker demand from aerospace and rail customers. Rail demand is expected to remain depressed, and aerospace demand shows no near-term signs of improvement as customers reduce build rates. Industrial markets are showing limited signs of recovery, and any recovery in 2003 is expected to be modest.
Excluding $6.2 million and $2.4 million in restructuring and implementation charges for the third quarters of 2002 and 2001, respectively, and $13.9 million and $29.6 million in restructuring and implementation charges for the first nine months of 2002 and 2001, respectively, and goodwill amortization of $1.2 million and $3.6 million for the third quarter and first nine months of 2001, respectively, Industrial Bearings' EBIT was $18.1 million, up from $9.8 million in third quarter of 2001, and $37.7 million, compared to $37.6 million in the first nine months of 2001. Including these charges, Industrial Bearings' EBIT was $11.9 million for the third quarter of 2002, com- pared to $6.2 million in the third quarter of 2001, and $23.8 million for the first nine months of 2002, compared to $4.4 million in the first nine months of 2001. The improvement in EBIT performance, despite relatively flat volumes, was driven by improved product mix, efficiency improvements from the manufacturing strategy and salaried cost reduction initiatives, as well as aggressive business cost control. Also, the third quarter and first nine months 2002 EBIT was favorably impacted by the discontinuation of goodwill amortization. This improvement was dampened by the weakened demand in Aerospace and Super Precision, which resulted in additional costs associated with surplus capacity, reduced work schedules and redundancy costs as operations were ramped down.
Industrial Bearings' selling, administrative and general expenses in the third quarter and first nine months of 2002 were comparable to the same period a year ago. The business has been focusing on controlling discretionary spending and realizing savings from the salaried cost reduction initiatives, which offset the higher implementation charges and performance-based pay reserves as a result of stronger EBIT performance in the third quarter and first nine months of 2002.
Steel's net sales, including intersegment sales, of $246.8 million in third quarter of 2002 and $740.6 million in the first nine months of 2002 improved 11.1% and declined 0.5%, respectively, compared to net sales of $222.1 million and $744.3 million, in the same periods a year ago. Sales to automotive and general industrial customers increased 23% and 31%, respectively, in the third quarter of 2002 compared to third quarter of 2001 and increased 21% and 14%, respectively, in the first nine months of 2002 compared to the first nine months of 2001. However, sales to other customers continue to be sluggish. Sales to the bearing industry, other than automotive suppliers, were weak, and aerospace sales decreased 12% and 3%, compared to the same periods a year ago. Additionally, sales to oil country and steel service center customers decreased nearly 18% and 38%, respectively, compared to the same periods a year ago. 18. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The company expects some negative seasonal impact on sales to automotive customers in the fourth quarter. Fourth quarter sales to general industrial customers and to steel service centers are expected to be higher than 2001. Aerospace sales are expected to drop as customers cut the production of passenger planes.
Excluding restructuring and implementation charges of $0.8 million and $0.8 million for the third quarter and first nine months of 2002, Steel's EBIT was $5.6 million and $32.3 million, respectively. This compares with EBIT of $1.6 million and $19.6 million in the third quarter and first nine months of 2001, excluding restructuring and implementation charges of $0.4 million and $2.2 million, respectively, and goodwill amortization of $0.3 million and $0.9 million, respectively. Including restructuring and reorganization charges and goodwill amortization, Steel's EBIT was $4.8 million and $31.5 million for the third quarter and the first nine months of 2002, compared to $0.9 million and $16.5 million in the same periods a year ago. The increase in EBIT was the result of continuing cost-control actions. The Steel Business has reduced operating costs through a combination of price reductions, product substitution and lower consumption. Although scrap and alloy costs continued to increase in the third quarter and the first nine months of 2002 compared to the same periods a year ago, electricity and natural gas costs were lower than in the third quarter and first nine months of 2001 and contributed to the improved EBIT performance. Additionally, third quarter and first nine months 2002 labor productivity increased compared to third quarter and first nine months 2001 due to efficiency improvements and increased production levels. The company expects scrap and alloy costs to be higher in the fourth quarter compared to 2001 levels.
Steel's selling, administrative and general expenses in the second quarter of 2002 were slightly higher compared to the same period a year ago, primarily due to the increase in performance-based pay reserves as a result of stronger EBIT performance in 2002 compared to the third quarter of 2001.
Financial Condition - ------------------- Total assets as shown on the Consolidated Condensed Balance Sheets increased by approximately $9 million from December 31, 2001. Inventory balances at the end of the third quarter of 2002 increased approximately 8% compared to year-end 2001 levels. The company's number of days' supply in inventory as of September 30, 2002 was 110 days compared to 105 days as of December 31, 2001. Total Bearings' number of days' supply in inventory was comparable with the prior year period while Steel's inventory increased eleven days. The increase in Steel's inventories in the third quarter of 2002 was a result of the increase in operating levels to meet increased automotive customer demand. The Steel number of days' supply in inventory as of December 31, 2001 was extremely low as the result of the depressed customer demand in the fourth quarter of 2001. Accounts receivable have increased by $68.6 million since December 31, 2001. The increase is due primarily to the increase in sales levels. The number of days' sales in receivables at September 30, 2002 was comparable to December 31, 2001, which was 51 days.
As shown on the Consolidated Condensed Statement of Cash Flows, the increase in inventories used $35.2 million of cash during the first nine months of 2002. Other assets used $6.8 million in cash during the first nine months of 2002. 19. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
This was primarily due to the funding of the e-business joint ventures and other affiliations, which was offset by the collection of the receivable related to the Ashland plant fixed assets sale as well as other receivables collected during the third quarter. Accounts payable and accrued expenses provided $46.1 million of cash in the first nine months of 2002, primarily due to an increase in amounts payable to suppliers and an increase in the amounts reserved for performance-based pay due to the company's better performance in the first nine months of 2002. This increase in accounts payable and accrued expenses was offset by the restructuring accrual payments made during the first nine months of 2002. Purchases of property, plant and equipment, net used $33.8 million of cash in the first nine months of 2002, well below the $61.8 million spent during the same period in 2001.
The 37.0% debt-to-total-capital ratio at September 30, 2002 is lower than the 38.9% ratio at year-end 2001. Debt decreased by $15.1 million during the first nine months of 2002, to $481.9 million at September 30, 2002. Excluding the acquisition of Torrington, the company currently expects that any cash require- ments in excess of cash generated from operating activities will be satisfied by short-term borrowing and/or the 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 September 30, 2002 are as follows (in millions):
Payments Due by Period Total Less than 1 1-3 years 4-5 After 5 year years years ------- ----------- --------- ------- ------- Long-term Debt $374.1 $23.5 $9.6 $103.1 $237.9 Commercial Paper $26.6 $26.6 - - - Other Lines of Credit $81.2 $81.2 - - - Operating Leases $57.1 $13.3 $21.9 $5.7 $16.2
The company's capital lease obligations are immaterial. At September 30, 2002, the company had available $273.4 million through an unsecured $300.0 million revolving credit agreement with a group of banks. The company is the guarantor of a $23.5 million letter of credit for Pel Technologies, LLC. Excluding letters of credit and guarantees supporting current outstanding debt, the company also has approximately $31.5 million in various letters of credit and guarantees.
The company expects the $700 million cash component of the pending acquisition of Torrington will be financed through a new senior credit facility underwritten by Bank of America, Key Bank, Merrill Lynch & Co. and Morgan Stanley, proceeds from a public offering of senior notes and a public offering of 11 million Timken shares.
On October 17, 2002, Standard & Poor's Rating Services publicly announced that it placed its ratings of the company on CreditWatch with negative implications. Additionally, Moody's Investors Service announced that it had placed the company's debt ratings under review for possible downgrade. These announce- ments were in response to the company's announcement that it had reached an agreement with Ingersoll-Rand to purchase Torrington. The company expects to maintain an investment grade rating. 20. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Total shareholders' equity has increased by approximately $37.3 million since December 31, 2001. The increase in equity was primarily the result of a favorable adjustment to the company's treasury shares of $60.8 million resulting from the stock contribution to the pension plan and other stock transactions, net income of $2.3 million, a non-cash foreign currency trans- lation adjustment of $2.7 million, a non-cash adjustment of $0.4 million related to outstanding and settled derivative instruments and the payment of $23.5 million in dividends. Although the Brazilian Real and Argentine Peso continued to be devalued during the first nine months of 2002, the adverse impact on the foreign currency translation adjustment was more than offset by the strength of currencies against the US dollar in many of the countries in which the company operates.
During the third 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 exercise this authorization until December 31, 2006. The company does not ex- pect to be active in repurchasing shares under this plan in the near-term.
Critical Accounting Policies - ----------------------------
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. "Management's Discussion and Analysis of Financial Condition and Results of Operations," Item 7 of the company's Annual Report on Form 10-K for the year ended December 31, 2001 includes a summary of critical accounting policies, assumptions and estimates that management believes are significant to the company's reported results of operations and financial condition. Additional accounting policies are described in the "Significant Accounting Policies" note to the consolidated financial statements included in the company's Annual Report on Form 10-K.
Pensions - --------
The company sponsors a number of defined benefit pension plans which cover most U.S. and certain foreign associates. Most other foreign associates are covered by government plans. The company also sponsors several unfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and dependents. The measurement of liabilities related to these plans is based on management's assumptions related to future events, including return on pension plan assets, rate of compensation increases and health care cost trend rates. The discount rate is determined using a model that matches corporate bond securities against projected pension and postretirement disbursements. Actual pension plan asset performance will either reduce or increase unamortized pension losses at the end of 2002, which ultimately affects net income in subsequent years. 21. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Generally accepted accounting principles for defined benefit plans require the creation of a minimum pension liability when a defined employee benefit plan does not have sufficient assets available to cover the accumulated benefit obligation. To the extent a plan has unrecognized prior service costs, an intangible pension asset is recorded. The remaining difference is then charged to other comprehensive income, which is a component of shareholders' equity. Based on current asset performance and interest rate levels, the company anticipates that it will be required to reduce shareholders' equity as of December 31, 2002. The amount of the reduction to shareholders' equity is dependent on the actual performance of the company's pension fund assets and interest rates and will not be determined until the first quarter of 2003.
Other Information - -----------------
Assets and liabilities of subsidiaries, other than Timken Romania, which is considered to operate in a highly inflationary economy, are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the quarter. Related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions and the translation of financial statements are included in the results of operations.
Foreign currency exchange losses included in the company's operating results for the third quarter and first nine months of 2002 totaled $4.0 million and $5.3 million, respectively, compared to income of $0.1 million and expense of $5.6 million in the same year-ago periods. The higher expense in 2002 is primarily attributable to certain foreign subsidiaries having payables denominated in currencies other than their own functional currency.
Regarding the balance sheet as of September 30, 2002, the company has a non- cash foreign currency translation adjustment of $2.7 million, which decreased shareholders' equity, compared to a non-cash foreign currency translation adjustment of $13.3 million that decreased equity in the first nine months of 2001. Although the Brazilian Real and Argentine Peso continued to be devalued during the first nine months of 2002, the adverse impact was more than offset by the strength of currencies against the US dollar in many of the countries in which the company operates. The opposite was true during the first nine months of 2001 when the company was negatively impacted by continued weakening of currencies.
On November 1, 2002, the board of directors declared a quarterly cash dividend of $.13 per share, payable on December 2, 2002 to shareholders of record as of November 15, 2002. This is the 322nd consecutive dividend paid on the common stock of the company.
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) 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)." SFAS 22. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Change in Method of Accounting - ------------------------------
No. 146 is effective for exit and disposal activities that are initiated after December 31, 2002. It is currently the company's policy to recognize restructuring costs as announced in April 2001 in accordance with EITF Issue No. 94-3.
Effective January 2002, the Company adopted 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 (pre-tax), of which $1.5 million (pre-tax) is related to the third quarter of 2002. 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 of such assets.
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. Based on the results of this review, the company recorded a transitional impairment loss of $12.7 million, net of an income tax benefit of $7.8 million, which relates to the Specialty Steel Business. This transitional impairment loss was recorded in the third 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) Risks associated with the consummation of the acquisition of Torrington, including our ability to obtain antitrust clearance and financing for the acquisition and other closing risks; the uncertainties in both timing and amount, if any, of actual benefits that may be realized as a result of the integration of the Torrington business with the company's operations; risks associated with diversion of management's attention from routine operations during the integration process; and risks associated with the higher level of debt associated with the acquisition.
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. 23. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
c) 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.
d) Competitive factors, including changes in market penetration, increasing price competition by existing or new foreign and domestic competitors, the introduction of new products by existing and new competitors, and new technology that may impact the way the company's products are sold or distributed.
e) Changes in operating costs. This includes the effect of changes in the company's manufacturing processes; changes in costs associated with varying levels of operations; changes resulting from inventory management and cost reduction initiatives and different levels of customer demands; the effects of unplanned work stoppages; changes in the cost of labor and benefits; and the cost and availability of raw materials and energy.
f) The success of the company's operating plans, including its ability to achieve the benefits from its global restructuring, manufacturing trans- formation, and administrative cost reduction initiatives as well as its ongoing continuous improvement and rationalization programs; its ability to maintain appropriate relations with unions that represent company associates in certain locations in order to avoid disruptions of business.
g) Unanticipated litigation, claims or assessments. This includes, but is not limited to, claims or problems related to intellectual property, product liability or warranty and environmental issues.
h) Changes in worldwide financial markets, including interest rates, to the extent they affect the company's ability to raise capital or increase the company's cost of funds, have an impact on the overall performance of the company's pension fund investments and/or cause changes in the economy which affect customer demand.
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. 24.
Part I
Item 4. Controls and Procedures
(a). Evaluation of disclosure controls and procedures. Based on their evaluation, as of a date within 90 days prior to the date of the filing of this Form 10-Q, of the effectiveness of the company's disclosure controls and procedures (as defined in Rule 13a-14(c) and 15(d)-14(c) of the Securities Exchange Act of 1934, as amended), the principal executive officer and principal financial officer of the company have each concluded that such disclosure controls and procedures are effective.
(b). Changes in internal controls. Subsequent to the date of their evaluation, there have not been any significant changes in the company's internal controls or in other factors that could significantly affect these controls, including any corrective action with regard to significant deficiencies and material weaknesses.
25.
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 em- ployment discrimination. The plaintiffs sought compensatory and punitive damages of approximately $95 million. During the third quarter of 2001, this case was dismissed, without prejudice, 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. The new lawsuit does not specify the amount of damages the plaintiffs are seeking. In April 2002, the plaintiffs voluntarily dismissed a number of counts contained in the complaint. In August 2002, one of the two remaining plaintiffs was voluntarily dismissed from the suit. In November 2002, the trial court judge granted the company's motion for summary judgment, and the case was dismissed.
Item 2. Changes in Securities and Use of Proceeds
On September 10, 2002, the company issued 3,000,000 shares of its common stock to The Timken Company Collective Investment Trust for Retirement Trusts (the "Trust") as a contribution to three company sponsored pension plans. The fair market value of the 3,000,000 shares of common stock contributed to the Trust was approximately $54,480,000. The issuance of the shares of common stock to the Trust was exempt from registration under the Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act as a trans- action by an issuer not involving a public offering.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
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 (a) Exhibits (continued) 26.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed on November 13, 2002 by the President and Chief Executive Officer and the Executive Vice President - Finance and Administration
99.2 Consulting Agreement entered into with e-Solutions.biz, LLC (Thomas W. Strouble, Owner and principal)
(b) Reports on Form 8-K:
On October 18, 2002, the company filed a Form 8-K regarding Other Events, which contained clarification of certain state- ments made during a teleconference held by the company on October 17, 2002. No financial statements were filed.
On October 17, 2002, the company filed a Form 8-K regarding Other Events, which contained an announcement that the company entered into a Stock and Asset Purchase Agreement with Ingersoll-Rand Company Limited ("IR") to acquire IR's Torrington business. This agreement was filed as an exhibit to this Form 8-K. No financial statements were filed.
On October 17, 2002, the company filed a Form 8-K regarding Regulation FD Disclosure, which contained presentation materials to be used in the teleconference, which was conducted on October 17. No financial statements were filed.
On October 17, 2002, the company filed a Form 8-K regarding Other Events, which contained a press release, dated October 16, 2002 titled "The Timken Company Announces Third Quarter Results: Sales and Earnings Both Up." A consolidated statement of income, consolidated statement of cash flows and balance sheet as of September 30, 2002 were included in the filing.
On October 16, 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 October 16, 2002, the company filed a Form 8-K regarding Other Events, which contained a press release dated October 16, 2002 titled "The Timken Company to Acquire Torrington For $840 Million in Cash and Stock." No financial statements were filed.
On September 23, 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 August 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.
27.
(b) Reports on Form 8-K (continued):
On August 7, 2002, the company filed a Form 8-K regarding Other Events and Regulation FD Disclosure, which contained Statements under Oath of its President and Chief Executive Offce and its Executive Vice President - Finance and Administration regarding facts and circumstances relating to Exchange Act Filings. No financial statements were filed.
On July 19, 2002, the company filed a Form 8-K regarding Other Events, which contained a press release, dated July 18,2002 titled "The Timken Company Announces Second Quarter Results." A consolidated statement of income, consolidated statement of cash oflows and balance sheet as of June 30, 2002 were included in the filing.
On July 17, 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.
28.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Timken Company _______________________________________
Date November 13, 2002 BY /s/ James W. Griffith ________________________ _______________________________________ James W. Griffith, Chief Executive Officer, President and Director
November 13, 2002 BY /s/ Glenn A. Eisenberg ________________________ _______________________________________ Glenn A. Eisenberg Executive Vice President - Finance and Administration
CERTIFICATIONS 29.
I, James W. Griffith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Timken Company;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effective- ness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all signficant deficiencies in the design or operation of internal con- trols which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal con- trols or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 BY /s/ James W. Griffith ______________________________________ James W. Griffith, Chief Executive Officer, President and Director
I, Glenn A. Eisenberg, certify that: 30.
Date: November 13, 2002 BY /s/ Glenn A. Eisenberg ______________________________________ Glenn A. Eisenberg Executive Vice President - Finance and Administration