1.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM 10Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended June 30, 2001
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 June 30, 2001, 60,032,127.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
June 30 Dec. 31
2001 2000
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents........................... $15,652 $10,927
Accounts receivable, less allowances,
(2001-$12,875; 2000-$11,259)........................ 388,780 354,972
Deferred income taxes............................... 42,656 43,094
Inventories (Note 2) ............................... 466,471 489,549
---------- ----------
Total Current Assets...................... 913,559 898,542Property, Plant and Equipment....................... 2,948,214 2,974,379
Less allowances for depreciation................... 1,629,474 1,610,607
---------- ----------
1,318,740 1,363,772Costs in excess of net assets of acquired business,
less amortization, (2001-$44,306; 2000-$41,228)..... 149,487 151,487
Intangible Pension Asset............................ 88,405 88,405
Other assets........................................ 85,978 61,899
---------- ----------
Total Assets.................................. $2,556,169 $2,564,105
========== ==========LIABILITIES
Current Liabilities
Accounts payable and other liabilities.............. $249,725 $239,182
Short-term debt and commercial paper................ 218,490 209,423
Accrued expenses.................................... 152,108 138,847
---------- ----------
Total Current Liabilities................. 620,323 587,452Noncurrent Liabilities
Long-term debt (Note 3) ............................ 325,455 305,181
Accrued pension cost................................ 212,941 237,952
Accrued postretirement benefits cost................ 410,714 394,097
Deferred income taxes............................... 9,636 11,742
Other noncurrent liabilities........................ 17,276 22,999
---------- ----------
Total Noncurrent Liabilities.............. 976,022 971,971Shareholders' Equity (Note 4)
Common stock........................................ 251,383 250,353
Earnings invested in the business................... 805,288 839,242
Accumulated other comprehensive income (loss)....... (96,847) (84,913)
---------- ----------
Total Shareholders' Equity................ 959,824 1,004,682 Total Liabilities and Shareholders' Equity.... $2,556,169 $2,564,105
========== ==========
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended Three Months Ended
June 30 June 30 June 30 June 30
2001 2000 2001 2000
---------- ---------- -------- --------
(Thousands of dollars, except per share data)
Net sales................................................... $1,295,905 $1,379,054 $634,389 $693,263
Cost of products sold....................................... 1,066,808 1,091,613 523,306 550,787
---------- ---------- -------- --------
Gross Profit............................................. 229,097 287,441 111,083 142,476Selling, administrative and general expenses................ 189,827 185,260 93,289 91,115
Impairment and restructuring charges (Note 5)............... 24,766 18,081 16,859 3,322
---------- ---------- -------- --------
Operating Income......................................... 14,504 84,100 935 48,039Interest expense............................................ (17,381) (14,693) (8,487) (7,471)
Interest income............................................. 1,097 1,109 608 560
Other expense............................................... (2,895) (6,240) (1,685) (3,585)
---------- ---------- -------- --------
(Loss) Income Before Income Taxes........................ (4,675) 64,276 (8,629) 37,543
Provision for income taxes (Note 6)......................... 7,677 26,996 5,945 16,303
---------- ---------- -------- --------
Net (Loss) Income........................................ $ (12,352) $ 37,280 $(14,574) $ 21,240
========== ========== ======== ======== Earnings Per Share * .................................... $(0.21) $0.61 $(0.24) $0.35
Earnings Per Share - assuming dilution **............... $(0.21) $0.61 $(0.24) $0.35
Dividends Per Share...................................... $0.36 $0.36 $0.18 $0.18
========== ========== ======== ========* Average shares outstanding............................... 59,999,194 60,969,469 60,015,025 60,837,740
** Average shares outstanding - assuming dilution........... 60,200,827 61,171,114 60,276,721 61,103,848
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
Cash Provided (Used) June 30 June 30
2001 2000
------- -------
OPERATING ACTIVITIES (Thousands of dollars)
Net (Loss) Income......................................$(12,352) $37,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 76,221 75,894
(Credit) provision for deferred income taxes.......... (937) 15,312
Stock issued in lieu of cash to employee benefit plans (277) 60
Non-cash portion of impairment and restructuring
charges.............................................. 20,761 16,445
Changes in operating assets and liabilities:
Accounts receivable.................................. (40,004) (71,932)
Inventories.......................................... 14,065 (45,032)
Other assets......................................... (24,259) (10,549)
Accounts payable and accrued expenses................ (6,756) 30,064
Foreign currency translation......................... 3,724 (738)
------- -------
Net Cash Provided by Operating Activities........... 30,186 46,804INVESTING ACTIVITIES
Purchases of property, plant and equipment - net...... (39,973 (57,055)
Acquisitions.......................................... (1,170) -
------- -------
Net Cash Used by Investing Activities............... (41,143) (57,055)FINANCING ACTIVITIES
Cash dividends paid to shareholders................... (21,602) (21,957)
Issuance (purchase) of treasury shares................ 1,307 (10,977)
Payments on long-term debt............................ (992) (1,453)
Proceeds from issuance of long-term debt.............. 18 2,061
Short-term debt activity - net........................ 38,058 41,585
------- -------
Net Cash Provided (Used) by Financing Activities.... 16,789 9,259Effect of exchange rate changes on cash................ (1,107) (464)
(Decrease) increase in Cash and Cash Equivalents....... 4,725 (1,456)
Cash and Cash Equivalents at Beginning of Period....... 10,927 7,906
------- -------
Cash and Cash Equivalents at End of Period............. $15,652 $ 6,450
======= =======
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, 2000.
6/30/01 12/31/00
Note 2 -- Inventories -------- ---------
(Thousands of dollars)
Finished products $191,961 $201,228
Work-in-process and raw materials 235,318 247,806
Manufacturing supplies 39,191 40,515
-------- --------
$466,470 $489,549
======== ========
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 6/30/01 12/31/00
-------- ---------
(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 June 30, 2001 is 2.70%. $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 June 30, 2001 is 2.70%. 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
June 30, 2001 is 2.65%. 21,700 21,700
State of Ohio Water Development Authority Solid Waste
Revenue Bonds, maturing on July 2, 2032. The
variable interest rate is tied to the bank's tax
exempt weekly interest rate. The rate at
June 30, 2001 is 2.80%. 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%. 252,000 252,000
Other 8,458 9,455
-------- --------
331,158 332,155
Less: Current Maturities 5,703 26,974
-------- --------
$325,455 $305,181
======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 6.
Note 4 -- Shareholders' Equity 6/30/01 12/31/00
-------- --------
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)
2001 - 63,082,626 shares
2000 - 63,082,626 shares
Stated Capital 53,064 53,064
Other paid-in capital 256,596 256,873
Less cost of Common Stock in treasury
2001 - 3,050,499 shares
2000 - 3,117,469 shares 58,277 59,584
-------- --------
$251,383 $250,353
======== ========
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 Income Stock Total
------- -------- -------- ---------- -------- ----------
(Thousands of dollars)
Balance December 31, 2000 $53,064 $256,873 $839,242 ($84,913) ($59,584) $1,004,682Net Income (12,352) (12,352)
Foreign currency translation adjustment (11,515) (11,515)
Cumulative effect of change in method of
accounting (20) (20)
Change in fair value of derivative
financial instruments (399) (399)
----------
Total comprehensive income (loss) (24,286)Dividends - $.36 per share (21,602) (21,602)
Stock Options, employee benefit and dividend
reinvestment plans: (277) 1,307 1,030
Treasury - issued 66,970 shares
------- -------- -------- ---------- -------- ----------
Balance June 30, 2001 $53,064 $256,596 $805,288 ($96,847) ($58,277) $ 959,824
======= ======== ======== ========== ======== ==========The total comprehensive income (loss) for the three months ended June 30, 2001 and 2000 was $(14,066,000) and
$10,927,000, respectively. Total comprehensive income for the six months ended June 30, 2000 was $22,124,000.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7.
Continued
Note 5 -- Impairment and Restructuring Charges
The $55 million restructuring program announced in March 2000 concluded during
the first quarter of 2001, with total expenditures of $51.4 million recorded
for impairment, restructuring and reorganization charges. Of the $51.4 million
total expenditures recorded, $20.7 million were impairment charges, $15 million
were restructuring charges and the remaining $15.7 million were reorganization
charges classified as cost of products sold ($7.7 million) and selling, admini-
strative and general expenses ($8 million).
The restructuring charges of $15 million were primarily separation expenses
with associated payments of $11.9 million to date and the remaining
$3.1 million expected to be disbursed by the end of 2001. The company expects
an annualized savings rate of $29 million before taxes by year-end. Savings
realized in 2001 through the second quarter approximate $14 million. Seven
hundred twenty-three (723) associates will be terminated, with six hundred
thirty-nine (639) having exited through the second quarter of 2001 and the
remainder by the end of 2001.
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 will
create focused factories for each product line or component, replace 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 implement lean manufacturing
process redesign. The company intends to close bearing plants in Columbus,
Ohio and Duston, England, and to sell a tooling plant in Ashland, Ohio. As a
result of this plan, the company has targeted an annualized pretax savings of
approximately $100 million by the end of 2004. To implement these actions,
the company expects to take approximately $100 - $110 million in severance,
impairment and implementation charges over the next two years. The actual
charges incurred during the second quarter were $17.3 million. Of the
$17.3 million, $15.1 million were curtailment charges, $1.6 million were
related to severance, $0.2 million were exit costs and the remaining
$0.4 million were reorganization/implementation charges classified as cost of
products sold ($0.1 million) and selling, administrative and general expenses
($0.3 million). The $15.1 million in curtailment charges for pension and
postretirement medical benefits were related to the shutdown of the rail
bearing plant in Columbus, Ohio. The $1.6 million in severance costs and
$0.2 million in exit costs were related to the shutdown of the Columbus plant
as well as additional reductions in the selling and administrative workforce.
As of the end of the second quarter, cash expenditures of $0.02 million have
been made.
Since the announcement in April, 35 people at the Duston, England bearing
plant, Columbus, Ohio rail bearing plant, Canadian Timken Ltd., and in Canton
have exited the company as of June 30, 2001 for whom severance has been paid.
In addition, 52 people have retired or voluntarily left the company during the
second quarter. These positions have been eliminated.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 8.
Continued
Note 5 -- Impairment and Restructuring Charges (continued)
Key elements of the second phase of restructuring and impairment charges by
segment as of the end of the second quarter are as follows (in millions of
dollars):
Auto Industrial Steel Total
Restructuring: ------- ---------- ------- -------
Separation costs - operations $ - $ 0.3 $ - $ 0.3
Separation costs - administration 0.1 0.8 0.4 1.3
Exit costs 0.1 0.1 - 0.2
------- ---------- ------- -------
$ 0.2 $ 1.2 $ 0.4 $ 1.8Impaired assets:
Property, plant and equipment $ - $ - $ - $ -
Special Charges:
SFAS 88/106 curtailment - operations $ - $ 2.6 $ - $ 2.6
SFAS 88/106 curtailment -
administration - 12.5 - 12.5
------- ---------- ------- -------
$ - $ 15.1 $ - $ 15.1
------- ---------- ------- -------
$ 0.2 $ 16.3 $ 0.4 $ 16.9
======= ========== ======= =======Note 6 -- Income Tax Provision Six Months Ended Three Months Ended
June 30 June 30 June 30 June 30
2001 2000 2001 2000
-------- -------- -------- --------
U.S. (Thousands of dollars)
Federal $ 5,241 $18,841 $ 6,047 $11,910
State & Local (499) 965 (387) 460
Foreign 2,935 7,190 285 3,933
------- ------- ------- -------
$ 7,677 $26,996 $ 5,945 $16,303
======= ======= ======= =======Although consolidated income before taxes is a loss, the company is recording
consolidated tax provision due to the existence of income in some jurisdictions
on which taxes must be provided and losses in other jurisdictions which are not
able to be tax effected.
Note 7 -- Segment Information
(Thousands of Dollars) Six Months Ended Three Months Ended
June 30 June 30 June 30 June 30
Automotive Bearings 2001 2000 2001 2000
-------- -------- -------- --------
Net sales to external customers $389,243 $465,079 $194,986 $227,508
Depreciation and amortization 18,105 17,778 9,146 8,804
Impairment and restructuring charges 261 806 179 710
Earnings before interest and taxes (2,206) 27,914 (220) 11,434
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 9.
Continued
Note 7 -- Segment Information (continued)
(Thousands of Dollars) Six Months Ended Three Months Ended
June 30 June 30 June 30 June 30
Industrial Bearings 2001 2000 2001 2000
-------- -------- -------- --------
Net sales to external customers $463,911 $471,329 $221,917 $238,526
Depreciation and amortization 24,391 24,315 12,196 12,002
Impairment and restructuring charges 23,702 4,328 16,309 2,515
Earnings before interest amd taxes (1,764) 30,855 (6,538) 15,202Steel
Net sales to external customers $442,751 $442,646 $217,486 $227,229
Intersegment sales 79,477 106,914 37,000 51,332
Depreciation and amortization 33,725 33,801 16,981 16,867
Impairment and restructuring charges 803 12,947 371 97
Earnings before interest and taxes 15,611 19,526 6,329 16,735
Profit Before Taxes
Total EBIT for reportable segments 11,641 78,295 (429) 43,371
Interest expense (17,381) (14,693) (8,487) (7,471)
Interest income 1,097 1,109 608 560
Intersegment adjustments (32) (435) (321) 1,083
Income before income taxes (4,675) 64,276 (8,629) 37,543
Note 8 -- New Accounting Pronouncement
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill
and certain other intangible assets are no longer amortized but are reviewed
annually for impairment. If, based on the impairment reviews, the related
assets are found to be impaired, their carrying value is adjusted through a
charge to earnings. Intangible assets that are separable and have a definite
life will continue to be amortized over their useful lives. The company will
apply the new accounting rules for goodwill and other intangible assets
beginning in the first quarter of 2002. The company is currently evaluating
the implications of SFAS No. 142 and has not yet determined its effects on
the company's operations or financial position.
Note 9 -- Subsequent Event
In August 2001, the company announced additional cost-saving actions. The
company intends to further reduce capital spending, delay or scale back certain
projects and reduce salaried employment. The reductions will affect about 300
salaried associates and will be concentrated in North America and Western
Europe. The majority of the affected associates are expected to depart the
company by the end of December.
10.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
- ---------------------
The Timken Company reported net sales of $634.4 million for the second quarter
of 2001, a decrease of 8.5% from $693.3 million in the second quarter of 2000.
The company reported a loss of $14.6 million for the second quarter of 2001
compared to net income of $21.2 million in the same quarter a year ago. In
the second quarter of 2001, the company incurred total pretax charges of
$17.3 million related to the company's restructuring and reorganization. These
charges included $16.8 million related to impairment and restructuring charges
and $0.5 million related to reorganization expenses, which were reflected in
the company's cost of products sold and selling, administrative and general
expenses for the quarter. The second quarter of 2000 included pretax charges
of $4.8 million. Of this, $3.3 million represented impairment and
restructuring charges and $1.5 million represented reorganization charges.
Continuing weakness in global automotive and industrial demand and the U.S.
manufacturing recession caused the decreased sales and profits for the second
quarter. The effect of the strong dollar on key global markets continues to
be negative. Second quarter 2001 results were hurt by the continued decline
in automotive demand and weak North American markets. While vehicle production
in North America did improve in the second quarter of this year, production
rates are down significantly from last year's levels, and are projected to
soften over the remainder of the year. In the second quarter of 2000, North
American automotive demand remained strong and international markets,
especially the industrial sectors, showed improvement.
Gross profit was $111.1 million (17.5% of net sales) in the second quarter of
2001, compared to $142.5 million (20.5% of net sales) in the second quarter of
2000. The lower sales volume, fueled by weakened automotive and industrial
product demand, unfavorable product mix, higher natural gas costs and reduced
operating levels to control inventory reduced profitability in the second
quarter of 2001 compared with the same period a year ago. Gross profit in the
second quarter of 2001 was favorably impacted by $2.1 million attributed to a
reduction in the amounts accrued during the first quarter for pension and
postretirement benefits.
Selling, administrative and general expenses were $93.3 million (14.7% of net
sales) in the second quarter of 2001, compared to $91.1 million (13.1% of net
sales) recorded in the second quarter of 2000. The increase was primarily
due to higher costs to support the company's growth initiatives. Selling,
administrative and general expenses were favorably impacted by $0.4 million
related to the reduction in amounts accrued during the first quarter for
pension and postretirement benefits.
The $55 million restructuring program announced in March 2000 concluded during
the first quarter of 2001, with total expenditures of $51.4 million recorded
for impairment, restructuring and reorganization charges. Of the $51.4 million
total expenditures recorded during the period of March 2000 through March 2001,
$20.7 million related to non-cash asset impairment and abandoned acquisition
expenses. Restructuring severance expenses accounted for approximately
$15 million, and reorganization expenses were $15.7 million.
11.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)The restructuring charges of $15 million were primarily separation expenses
with associated payments of $11.9 million to date and the remaining
$3.1 million expected to be disbursed by the end of 2001. The company expects
an annualized savings rate of $29 million before taxes before year-end. As a
result of the restructuring program, the workforce has been reduced by 723
positions, with 639 having exited through the end of the second quarter of
2001. Reorganization expenses of $15.7 million represent relocation expenses,
write-off of obsolete inventory and professional fees.
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 trans-
formation will create focused factories for each product line or component,
replace 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 implement
lean manufacturing process redesign, using various tools to continue improving
quality and productivity. The company intends to close bearing plants in
Columbus, Ohio, and Duston, England, and to sell a tooling plant in Ashland,
Ohio. The Columbus plant employs about 219 associates, Duston 950 and Ashland
115. As of the end of the second quarter, the company's intent is to continue
operating the Columbus and Duston plants for periods ranging from 3 to 17
months. These changes will affect production processes and employment as the
company reduces positions by about 1,500 during the next two years.
As a result of this plan, the company has targeted an annualized pretax rate
of savings of approximately $100 million by the end of 2004. To implement
these actions, the company expects to take approximately $100-$110 million
in severance, impairment and implementation charges over the next two years.
The restructuring, reorganization and implementation charges recorded in the
second quarter were $17.3 million. Of the $17.3 million, $15.1 million were
curtailment charges, $1.6 million related to severance, $0.2 million were exit
costs, and the remaining $0.4 million were reorganization and implementation
charges classified as cost of goods sold ($0.1 million) and selling, admini-
strative, and general expenses ($0.3 million). The $15.1 million curtailment
charges related to special shutdown expenses (pension and postretirement bene-
fits) related to the rail bearing manufacturing plant in Columbus, Ohio. The
$1.6 million of severance costs related to the shutdown of the rail bearing
manufacturing plant in Columbus, Ohio and additional reductions in the selling
and administrative workforce. There have been payments of $0.02 million as of
June 30, 2001.
Since the announcement in April, 35 people at the Duston, England bearing
plant, Columbus, Ohio rail bearing plant, Canadian Timken Ltd., and in Canton
have exited the company as of June 30, 2001 for whom severance has been paid.
In addition, 52 people have retired or voluntarily left the company during
the second quarter. These positions have been eliminated.
In light of the market weakness in the second quarter, the company has stepped
up the strategic refocusing of its manufacturing operations. This should
accelerate the previously announced closings of its bearing manufacturing
facilities in Columbus, Ohio and Duston, England. Also, additional cost-saving
12.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)actions were announced by the company in August. The company intends to
further reduce capital spending, delay or scale back certain projects and
reduce salaried employment. The reductions will affect about 300 salaried
associates and will be concentrated in North America and Western Europe. The
majority of the affected associates are expected to depart the company by the
end of December.
Other expense reflected lower expense in the second quarter of 2001 primarily
due to a non-recurring gain on sale of land at the company's facility in Haan,
Germany.
The effective tax rate for the second quarter of 2001 was higher than the second
quarter of 2000, as a result of the company generating taxable income in some
countries and incurring losses in other countries which were unable to provide
any offsetting tax benefit.
Automotive Bearings
The Automotive Bearings Business includes products for passenger cars, light
and heavy trucks and trailers. The continuing decline in global automotive
markets that began in the second half of 2000 negatively impacted sales of
automotive bearings in the second quarter of 2001. Global Automotive Bearings'
sales for the second quarter of 2001 fell 14.3% to $195.0 million from
$227.5 million in the second quarter of 2000. North American automotive
bearings sales were down about 14%, reflective of the second quarter 2001
production rates which are down substantially from last year's levels and are
projected to soften over the remainder of the year. In the light truck
segment, first half vehicle production is down 20% compared to the first
half of 2000. In the first half of 2001, medium and heavy truck production
is down 39% and truck trailer production is down 49% compared to 2000 levels.
In Europe, automotive bearing sales decreased about 19%, with car production
rates projected to be down 3% and truck production down 8% compared to last
year. A few of the company's customers have delayed automotive program
launches for the second half of 2001. Furthermore, the global light vehicle
industry continues to be sluggish with improvement not anticipated for the
remainder of the year.
Excluding $0.3 million and $1.7 million in restructuring and reorganization
charges for the second quarters of 2001 and 2000, respectively, Automotive
Bearings' earnings before interest and taxes (EBIT) were $0.1 million compared
to $13.1 million in 2000's second quarter. Including these charges, Automotive
Bearings' EBIT for the second quarter was a loss of $0.2 million, compared to
income of $11.4 million in the second quarter of 2000. The decline in EBIT was
a result of lower sales volume than a year ago, higher natural gas costs and
plant shutdowns to adjust inventory levels. Automotive Bearings' EBIT was
favorably impacted by $0.5 million attributed to a reduction in the amounts
accrued during the first quarter for pension and postretirement benefits. Of
the total $0.5 million, $0.2 million favorably impacted selling, administrative
and general expenses.
Automotive Bearings' selling, administrative and general expenses in the second
quarter of 2001 were higher than the second quarter a year ago due primarily to
costs incurred to fund the company's growth initiatives, which were slightly
offset by the decrease in reorganization costs between quarters.
13.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)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 $221.9 million, a decrease
of 7.0% over the second quarter 2000 net sales of $238.5 million. Sales to
North American original equipment manufacturers remained weak in the second
quarter and poor demand in the industrial aftermarket diminished the segment's
profitability. Although sales for industrial products in Europe increased
about 6%, the demand was not enough to offset the 14% decrease in sales for
industrial products in North America. The North American railcar build rate
dropped sharply during the second quarter with sales down 27% compared to the
second quarter of 2000, also hurting profits. Aerospace and super precision
sales increased about 15% over the second quarter of 2000, but some weakness
has appeared in semiconductor markets. Increased demand for bearing products
in Central and Eastern Europe partially offset weak demand in China and India.
Sales of industrial products in Europe are expected to have moderate growth,
while North American industrial sales are expected to remain weak in 2001
relative to last year's levels. The aerospace and super precision business
is expected to continue showing modest growth in 2001. However, North American
rail sales are expected to remain weak during the second half of 2001.
Excluding $16.6 million and $2.9 million in restructuring and reorganization
charges for the second quarters of 2001 and 2000, respectively, Industrial
Bearings' EBIT was $10.1 million, down from $18.1 million in the second quarter
of 2000. Including these charges, Industrial Bearings' EBIT for the second
quarter was a loss of $6.5 million, compared to income of $15.2 million in the
second quarter of 2000. Lower sales volume, unfavorable product mix, higher
natural gas costs and lowered production levels to control inventory reduced
profitability in the second quarter of 2001 compared to the same period a year
ago. Improved EBIT performance in aerospace and super precision was not enough
to offset the decline in profitability experienced in the overall Industrial
Bearings' segment. Industrial Bearings' EBIT was favorably impacted by
$1.1 million attributed to a reduction in the amounts accrued during the first
quarter for pension and postretirement benefits. Of the total $1.1 million,
$0.1 million favorably impacted selling, administrative and general expenses.
Industrial Bearings' selling, administrative and general expenses in the second
quarter of 2001 were relatively flat compared to the same period a year ago.
Steel
Steel's net sales, including intersegment sales, decreased 8.6% to
$254.5 million from $278.6 million a year ago. Sales to most steel customers
were weak, except sales to aerospace and oil country customers. There were
steep declines in demand for automotive, bearing and tool steels. Imports
have lowered market prices in the U.S. and negatively affected the steel
business. In addition, the strong U.S. dollar has hurt steel business
competitiveness in global markets.
The company expects no significant changes in automotive steel sales during
the second half of 2001. Also, the aerospace steel business is expected to
show modest growth in the second half of 2001. Industrial sales and sales to
steel service centers are expected to be sluggish, reflecting weak North
14.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)American industrial demand. Sales of bars are expected to be fairly strong in
the second half of the year taking into account normal seasonal customer
demand. Oil country sales for the remainder of the year are expected to show
seasonal weakness as well.
Excluding Steel's portion of the restructuring and reorganization charges of
$0.4 million, Steel's EBIT for the second quarter of 2001 was $6.7 million.
This compares with EBIT of $16.9 million in the second quarter of 2000,
excluding restructuring and reorganization charges of $0.2 million. Including
restructuring and reorganization charges, Steel EBIT was $6.3 million compared
to $16.7 million a year ago. Due to pressure from imports, Steel has had to
lower prices to maintain penetration in certain segments, resulting in lower
margins. Additionally, responding to market conditions, Steel reduced
operating levels and inventories during the quarter. The reduced operating
levels required to decrease inventory negatively impacted EBIT. Also, higher
energy costs reduced second quarter 2001 EBIT. Although the reduced operating
levels caused natural gas consumption in the second quarter of 2001 to be
lower, the average unit cost for natural gas increased about 40% compared to
the same period a year ago. Steel EBIT was favorably impacted by $0.9 million
attributed to a reduction in the amounts accrued during the first quarter for
pension and postretirement benefits. Of the total $0.9 million, $0.1 million
favorably impacted selling, administrative and general expenses.
Steel's selling, administrative and general expenses were slightly higher in
the second quarter of 2001 compared to the same period a year ago. This was
primarily a result of increased marketing and engineering costs associated
with the joint venture between Axicon Technologies Inc. and Precision Steel
Components, which was announced in May.
Financial Condition
- -------------------
Total assets as shown on the Consolidated Condensed Balance Sheets decreased
by approximately $8 million from December 31, 2000. Inventory balances at the
end of the second quarter were significantly lower compared to year-end 2000
levels. The number of days' supply in inventory decreased by two days to 106
days at June 30, 2001, compared to 108 days as of December 31, 2000. Bearings'
number of days' supply in inventory was flat while Steel's inventory decreased
four days. The decrease in Steel's inventories was the result of reduced
operating levels to bring inventory levels more in line with demand. Accounts
receivable have increased by $33.8 million since December 31, 2000. The
increase is due primarily to the temporary slowing of customer payments in
the second quarter. The number of days' sales in receivables at June 30,
2001 was comparable to December 31, 2000.
As shown on the Consolidated Condensed Statement of Cash Flows, the decrease
in inventories provided $14.1 million of cash during the first six months of
2001. Other assets used $24.3 million of cash in the first six months of
2001, primarily as a result of the company funding alliances and joint ven-
tures, such as the previously announced Brazilian joint venture with another
bearing manufacturer and e-business joint ventures in the United States and
Europe. Cash was used as a result of a $6.8 million decrease in accounts pay-
able and accrued expenses. Accounts payable and accrued liabilities increased
from December 31, 2000 as a result of recording higher accruals in 2001 for
postretirement benefits, severance and federal income and other taxes. The
15.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)cashflow effect of this increase in accruals was offset by the non-cash impact
of the severance and postretirement benefit reserves recorded in the second
quarter related to the closing of the Columbus rail bearing plant. These costs
associated with the closing of the rail bearing plant are included in the
restructuring announced in April 2001. Purchases of property, plant and equip-
ment, net used $40 million of cash in the first six months of 2001, below the
$57.1 million spent during the same period in 2000. The company expects 2001
capital spending for maintenance and replacement to be below 2000 levels even
taking into account the initiatives related to the strategic refocusing of the
company's manufacturing operations.
The 36.2% debt-to-total-capital ratio at June 30, 2001 was higher than the
33.9% at year-end 2000. Debt increased by $29.3 million during the first six
months to $543.9 million at June 30, 2001. The increase in debt was used
primarily to fund increases in working capital and to fund capital expenditures
related to the manufacturing strategy initiatives. The company expects that
any cash requirements in excess of cash generated from operating activities
(such as those which may be required for potential future acquisitions and
affiliations as well as cash contributions to the company's pension plans)
could be met by short-term borrowing and issuance of medium-term notes. During
the second quarter, debt decreased by $19.5 million from $563.4 million at
March 31, 2001. This was the result of the company monitoring working capital
and decreasing capital spending during the second quarter. The company
continues to value the importance of a strong credit profile.
On July 27, 2001, Moody's Investors Service (Moody's) publicly announced that
it had downgraded the company's long-term senior debt rating from A3 to Baa1
and revised its ratings outlook from stable to negative. Moody's affirmed the
company's short-term debt rating. In addition, on June 15, 2001, Standard &
Poor's Rating Services (S&P) publicly announced that it revised its outlook on
the company from stable to negative and affirmed all ratings on the company's
debt. S&P's rating of the company's long-term senior debt remains A-. The
company believes that Moody's downgrading of its long-term senior debt may
result in higher future borrowing costs and may negatively impact the prices
of its publicly traded notes.
Total shareholders' equity has decreased by approximately $44.9 million since
December 31, 2000. The decrease in equity was primarily the result of a net
loss of $12.3 million, a non-cash foreign currency translation adjustment of
$11.5 million and the payment of $21.6 million in dividends. The majority of
the increase in the foreign currency translation adjustment was a result of the
fluctuation in exchange rates for currencies such as the British Pound, Euro
and Brazilian Real. Effective January 1, 2001, the company adopted Statement
of Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The adoption of this standard did not have a significant
effect on the company's financial position or results of operations.
There was no activity during the first half of 2001 related to the company's
2000 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.
16.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)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
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. If following the revocation of the orders and
contrary to the ITC's finding, injurious dumping from these countries continues
or recurs, the improved conditions of trade of tapered roller bearings in the
U.S., which resulted from the orders, could deteriorate. If injurious dumping
does occur, such dumping could have a material adverse effect on the company's
business, financial condition or results of operations. The company would
explore alternatives to remedy this material adverse effect as the law provides
for expedited investigations in cases where an order was revoked as a result of
this review.
The ITC separately extended the antidumping duty orders on ball bearings from
Germany, France, Japan and several other countries. These extended orders
should continue to provide the company's aerospace business with fair
competition for these products in the U.S.
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 income (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 six months of 2001 totaled $5.7 million compared to $0.6 million
in the same year-ago period. The increase in translation losses is related to
continued weakening European currencies against a strong U.S. dollar and the
devaluation of the Brazilian Real in the first half of 2001. Also, for the
first six months of 2001, the company recorded a foreign currency translation
adjustment of $11.5 million that reduced shareholders' equity, compared to a
foreign currency translation adjustment of $15.1 million that decreased equity
in the first half of 2000. Continued weakening of currencies in many of the
countries in which the company operates caused the impact of negative foreign
currency adjustments in the first six months of 2001.
On August 3, 2001, the Board of Directors declared a quarterly cash dividend
of 18 cents per share payable September 4, 2001 to shareholders of record as
of August 17, 2001. This is the 317th consecutive dividend paid on the common
stock of the company.
17.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)After the close of trading on August 6, 2001, S&P removed the company from the
Standard & Poor's (S&P) 500 Index and added it to the S&P SmallCap 600 index,
in the GICS Industrial Machinery sub-industry group and the Machinery
(Diversified) industry group.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No.
142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and
certain other intangible assets are no longer amortized but are reviewed
annually for impairment. If, based on the impairment reviews, the related
assets are found to be impaired, their carrying value is adjusted through a
charge to earnings. Intangible assets that are separable and have a definite
life will continue to be amortized over their useful lives. The company will
apply the new accounting rules for goodwill and other intangible assets
beginning in the first quarter of 2002. The company is currently evaluating
the implications of SFAS No. 142 and has not yet determined its effects on the
company's operations or financial position.
On December 31, 1998, certain countries that are members of the European Union
irrevocably fixed the conversion rates between their national currencies and a
common currency, the "Euro." The participating countries' former national
currencies will continue to exist until January 1, 2002. The company has been
evaluating the business implications of conversion to the Euro, including the
need to adapt internal systems to accommodate the various Euro-denominated
transactions, the competitive implications of cross-border pricing and other
strategic issues. The company established an Euro project team to manage the
changes required to conduct business operations in compliance with Euro-related
regulations. As of the second quarter of 2001, the Euro conversion has not had
a material impact on the company's financial condition or results of operations
for subsidiaries converted thus far, nor does the company expect the conversion
to have a material effect on its financial condition or results of operations.
The statements set forth in this document that are not historical in nature are
forward-looking statements. The company cautions readers that actual results
may differ materially from those projected or implied in forward-looking state-
ments made by or on behalf of the company due to a variety of important factors,
such as:
a) changes in world economic conditions. This includes the potential
instability of governments and legal systems in countries in which the
company conducts business and significant changes in currency valuations.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, the intro-
duction of new products by existing and new competitors, and new
technology that may impact the way the company's products are sold or
distributed.
18.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)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; unexpected costs related to the company's
recently announced manufacturing transformation; 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, recently announced
manufacturing transformation, and administrative cost reduction as well
as its ongoing continuous improvement and rationalization programs;
unexpected costs related to the implementation of these programs; its
ability to integrate acquisitions into company operations; the ability of
recently 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 claims or
problems related to 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. 19.
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, Norther District of Ohio, Eastern Division on June 20, 2001.
The lawsuit alleges, among other things, sexual harassment and em-
ployment discrimination. The plaintiffs seek compensatory and puni-
tive damages of approximately $95 million. The company believes it has valid defenses to the plaintiffs' claims.
The case is currently in the early stages of discovery. The company
will vigorously defend this suit.Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
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
(b) Reports on Form 8-K:
On May 29, 2001, 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 June 26 and 28, 2001, the company filed a Form 8-K and 8K/A
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. 20.
(b) Reports on Form 8-K (continued):
On July 31, 2001, 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 1, 2001, the company filed a Form 8-K regarding Other
Events and Regulation FD Disclosure, which contained recent
developments with rating agencies, S&P indices, litigation and
press releases issued during the period from May 15, 2001
through August 1, 2001. Financial statements for the second
quarter ended June 30, 2001, included in the press release
dated July 18, 2001, were filed.
21. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Timken Company
_______________________________
Date August 13, 2001 BY /s/ W. R. Timken, Jr.
________________________ _______________________________
W. R. Timken, Jr.,
Director and Chairman;
Chief Executive Officer
Date August 13, 2001 BY /s/ G. E. Little
________________________ _______________________________
G. E. Little
Senior Vice President - Finance