EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 2004
FINANCIAL summary
2004 | 2003 | |
(Thousands of dollars, except per share data) | ||
Net sales Impairment and restructuring charges Income before income taxes Provision for income taxes Net income Earnings per share Earnings per share – assuming dilution Dividends per share | $ 4,513,671 13,434 199,779 64,123 $ 135,656 $ 1.51 $ 1.49 $ .52 | $ 3,788,097 19,154 60,802 24,321 $ 36,481 $ .44 $ .44 $ .52 |
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TIMKEN |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
IntroductionThe Timken Company is a leading global manufacturer of highly The Automotive and Industrial Groups design, manufacture On February 18, 2003, Timken acquired The Torrington Company Financial Overview For 2004, The Timken Company reported net sales of approximately The company achieved record sales and strong earnings growth, | 2004, with savings from purchasing synergies, workforce consolidation The company expects the improvement in industrial demand to In 2004, the Automotive Group’s net sales increased from 2003 In 2004, the Industrial Group’s net sales increased from 2003 In 2004, the Steel Group’s net sales increased from 2003 due to |
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TIMKEN |
The Statement of Income
2004 compared to 2003Overview:
2004 | 2003 | $ Change | % Change | |
(Dollars in millions, except earnings per share) | ||||
Net sales Net income Earnings per share – diluted Average number of shares – diluted | $ 4,513.7 $ 135.7 $ 1.49 90,759,571 | $ 3,788.1 $ 36.5 $ 0.44 83,159,321 | $ 725.6 $ 99.2 $ 1.05 – | 19.2% 271.8% 238.6% 9.1% |
Sales by Segment:
2004 | 2003 | $ Change | % Change | |
(Dollars in millions, and exclude intersegment sales) | ||||
Automotive Group Industrial Group Steel Group | $ 1,582.2 1,709.8 1,221.7 | $ 1,396.1 1,498.8 893.2 | $ 186.1 211.0 328.5 | 13.3% 14.1% 36.8% |
Total Company | $ 4,513.7 | $ 3,788.1 | $ 725.6 | 19.2% |
The Automotive Group’s net sales benefited from increased light | Automotive and Industrial Groups, a portion of the net sales |
Gross Profit :
2004 | 2003 | $ Change | % Change | |
(Dollars in Millions) | ||||
Gross profit Gross profit % to net sales Integration and special charges included in cost of products sold | $ 838.6 18.6% $ 4.5 | $ 639.1 16.9% $ 3.4 | $ 199.5 – $ 1.1 | 31.2% 1.7% 32.4% |
Gross profit for 2003 included a reclassification of $7.5 million from | In 2004, integration charges related to the continued integration of |
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TIMKEN |
Selling, Administrative and General Expenses:
2004 | 2003 | $ Change | % Change | |
(Dollars in Millions) | ||||
Selling, administrative and general expenses Selling, administrative and general expenses % to net sales Integration charges included in selling, administrative and general expenses | $ 587.9 | $ 521.7 13.8% $ 30.5 | $ 66.2 – $ (8.0) | 12.7% (0.8)% (26.2)% |
Selling, administrative and general expenses for 2003 included a | leverage expenses on higher sales, continued focus on controlling The integration charges for 2004 related to the continued integra– |
Impairment and Restructuring Charges:
2004 | 2003 | $ Change | |
(Dollars in millions) | |||
Impairment charges Severance and related benefit costs Exit costs | $ 8.5 | $ 12.5 2.9 3.7 | $ (4.0) 1.3 (3.0) |
Total | $ 13.4 | $ 19.1 | $ (5.7) |
In 2004, the impairment charges related primarily to the write– In 2003, impairment charges represented the write–off of the | The company continues to evaluate the competitiveness of its In May 2004, the company announced a plan to begin closing its |
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TIMKEN |
Interest Expense and Income:
2004 | 2003 | $ Change | |
(Dollars in millions) | |||
Interest expense Interest income | $ 50.8 | $ 48.4 $ 1.1 | $ 2.4 $ 0.3 |
Other Income and Expense:
2004 | 2003 | $ Change | |
(Dollars in millions) | |||
CDSOA receipts, net of expenses | $ 44.4 | $ 65.6 | $ (21.2) |
Impairment charge – equity investment Gain on divestitures of non–strategic assets Loss on dissolution of subsidiary Other | $ – $ 16.4 $ (16.2) $ (32.6) | $ (45.7) $ 2.0 $ – $ (12.0) | $ 45.7 $ 14.4 $ (16.2) $ (20.6) |
Other expense – net | $ (32.4) | $ (55.7) | $ 23.3 |
U.S. Continued Dumping and Subsidy Offset Act (CDSOA) receipts During 2004, the company sold certain non–strategic assets, which | operations in 2002, for a gain of $22.5 million; and the company’s In 2004, the company began the process of liquidating one of its For 2004, “other expense, net” included losses on the disposal of During 2000, the company’s Steel Group invested in a joint venture, |
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Income Tax Expense:
2004 | 2003 | $ Change | % Change | |
(Dollars in millions) | ||||
Income tax expense Effective tax rate | $ 64.1 | $ 24.3 40.0% | $ 39.8 – | 163.8 % (7.9)% |
Income tax expense for 2004 was positively impacted by tax benefits relating to settlement of prior years’ liabilities, the changes in the tax status of certain foreign subsidiaries, earnings of certain subsidiaries being taxed at a rate less than 35%, benefits of tax holidays in China and the Czech Republic, tax benefits from extra–territorial income exclusion, and the aggregate impact of certain items of income that were not subject to income tax. These benefits were partially offset by the establishment of a valuation allowance against certain deferred tax assets associated with loss carryforwards attributable to a subsidiary, which is in the process of liquidation; state and local income taxes; and taxes incurred on foreign remittances. Management does not anticipate that the extent of the tax benefits relating to settlement of prior years’ liabilities, the tax benefit from changes in tax status of foreign subsidiaries, and the tax charges associated with the establishment of the valuation allowance attributable to the subsidiary that is being liquidated will recur in the near future. The effective tax rate for 2003 exceeded the U.S. statutory tax rate as a result of state and local income taxes, withholding taxes on foreign remittances, losses incurred in foreign jurisdictions that were not | available to reduce overall tax expense, and the aggregate effect On October 22, 2004, the President signed the American Jobs |
Business Segments:
The primary measurement used by management to measure the financial performance of each Group is adjusted EBIT (earnings before interest and taxes, excluding the effect of amounts related to certain items that management considers not representative of ongoing operations such as impairment and restructuring, integra– tion costs, one–time gains or losses on sales of assets, allocated | receipts received or payments made under the CDSOA, loss on the |
Automotive Group:
2004 | 2003 | $ Change | % Change | |
(Dollars in millions) | ||||
Net sales, including intersegment sales Adjusted EBIT Adjusted EBIT margin | $ 1,582.2 | $ 1,396.1 $ 15.7 1.1% | $ 186.1 $ 0.2 – | 13.3 % 1.3 % (0.1)% |
The Automotive Group includes sales of bearings and other products and services (other than steel) to automotive original equipment manufacturers. The Automotive Group’s net sales in 2004 benefited from increased light vehicle penetration from new products, strong medium and heavy truck production and favorable foreign currency translation. Sales for light vehicle applications increased, despite lower vehicle production in North America. Medium and heavy truck demand continued to be strong primarily due to a 37% increase in North American vehicle production. | A portion of the net sales increase was attributable to the acquisition |
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Industrial Group:
2004 | 2003 | $ Change | % Change | |
(Dollars in millions) | ||||
Net sales, including intersegment sales Adjusted EBIT Adjusted EBIT margin | $ 1,711.2 | $ 1,499.7 $ 128.0 8.5% | $ 211.5 $ 49.9 – | 14.1% 39.0% 1.9% |
Sales by the Industrial Group include global sales of bearings and other products and services (other than steel) to a diverse customer base, including: industrial equipment; construction and agriculture; rail; and aerospace and defense customers. The Industrial Group also includes aftermarket distribution operations for products other than steel. The Industrial Group’s net sales in 2004 increased due to higher demand, increased prices and favorable foreign cur– rency translation. Many end markets recorded substantial growth, especially construction, agriculture, rail, and general industrial equipment. A portion of the net sales increase was attributable to | the acquisition of Torrington. Sales to distributors increased slightly |
Steel Group:
2004 | 2003 | $ Change | % Change | |
(Dollars in millions) | ||||
Net sales, including intersegment sales Adjusted EBIT (loss) Adjusted EBIT (loss) margin | $ 1,383.6 | $ 1,026.5 $ (6.0) (0.6)% | $ 357.1 $ 60.8 – | 34.8% – – |
The Steel Group’s products include steels of intermediate alloy, low alloy and carbon grades in both solid and tubular sections, as well as custom–made steel products, for both industrial and automotive applications, including bearings. The increase in the Steel Group’s net sales in 2004 resulted primarily from surcharges and price increases, which were driven by higher raw material costs, as well as increased volume. Demand increased across all steel customer segments, led by strong industrial market growth. The strongest customer segments for the Steel Group were oil production, aerospace and general industrial customers. The Steel Group’s profitability improved significantly in 2004 due to volume, raw material surcharges and price increases. Raw material costs, especially scrap steel prices, increased over 2003. The company | recovered these cost increases primarily through surcharges. The During the second quarter of 2004, the company’s Faircrest steel |
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2003 compared to 2002
2003 | 2002 | $ Change | % Change | |
(Dollars in millions, except earnings per share) | ||||
Net sales Income before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle, net of tax Net income Earnings per share before cumulative effect of change in accounting principle – diluted Cumulative effect of change in accounting principle, net of tax Earnings per share – diluted Average number of shares – diluted | $ 3,788.1 | $ 2,550.1 $ 51.4 $ (12.7) $ 38.7 $ 0.83 $ (0.21) $ 0.62 61,635,339 | $ 1,238.0 $ (14.9) $ 12.7 $ (2.2) $ (0.39) $ 0.21 $ (0.18) – | 48.6 % (29.1)% – (5.9)% (47.0)% – (29.0)% 34.9 % |
Assets.” The goodwill impairment charge related to the company’s Specialty Steel business.
Sales by Segment:
2003 | 2002 | $ Change | % Change | |
(Dollars in millions, and exclude intersegment sales) | ||||
Automotive Group Industrial Group Steel Group | $ 1,396.1 | $ 752.8 971.5 825.8 | $ 643.3 527.3 67.4 | 85.5% 54.3% 8.2% |
Total company | $ 3,788.1 | $ 2,550.1 | $ 1,238.0 | 48.6% |
The increases in net sales in 2003 for both the Automotive and the Industrial Groups were primarily the result of the Torrington acquisition. The Automotive Group’s net sales further benefited from the launch of new product platforms, the increasing demand in the medium and heavy truck segments, and favorable foreign currency translation. In addition to the effect of the Torrington acquisition, | the Industrial Group’s net sales increased in 2003 due to favorable |
Gross Profit:
2003 | 2002 | $ Change | % Change | |
(Dollars in millions) | ||||
Gross profit Gross profit % to net sales Reorganization and integration charges included in cost of products sold | $ 639.1 | $ 469.6 18.4% $ 8.5 | $ 169.5 – $ (5.1) | 36.1% (1.5)% (60.0)% |
Gross profit increased in 2003, primarily due to the incremental sales volume from the Torrington acquisition. Gross profit for the Automotive Group benefited in 2003 from the additional sales volume, resulting from the Torrington acquisition; however, it was negatively impacted by additional costs associated with the restruc–turing of its manufacturing plants. During the last six months of 2003, the Automotive Group reduced employment by more than 750 associates. This action, along with others, improved the Automotive Group’s productivity in the fourth quarter of 2003. In addition to the increased sales volume from the Torrington acquisi– tion, gross profit for the Industrial Group benefited in 2003 from improved performance in Europe that was largely due to favorable foreign currency exchange, exiting of low–margin businesses and | manufacturing cost reductions. Steel Group gross profit in 2003 In 2003, reorganization and integration charges included in cost of |
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TIMKEN |
Selling, Administrative and General Expenses:
2003 | 2002 | $ Change | % Change | |
(Dollars in millions) | ||||
Selling, administrative and general expenses Selling, administrative and general expenses % to net sales Reorganization and integration charges included in selling, administrative and general expenses | $ 521.7 | $ 358.9 14.1% $ 9.9 | $ 162.8 – $ 20.6 | 45.4 % (0.3)% 208.0 % |
Selling, administrative and general expenses in 2003 increased primarily due to the Torrington acquisition, costs incurred in the integration of Torrington and currency exchange rates. Even though the amount of selling, administrative and general expenses in 2003 increased from 2002 as a result of higher net sales, selling, administrative and general expenses as a percentage of net sales decreased to 13.8% in 2003 from 14.1% in 2002. | In 2003, reorganization and integration charges included in selling, |
Impairment and Restructuring Charges:
2003 | 2002 | $ Change | |
(Dollars in millions) | |||
Impairment charges Severance and related benefit costs Exit costs | $ 12.5 | $ 17.9 10.2 4.0 | $ (5.4) (7.3) (0.3) |
Total | $ 19.1 | $ 32.1 | $ (13.0) |
In 2003, impairment charges represented the write–off of the remaining goodwill for the Steel Group in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” of $10.2 million and impairment charges for the Columbus, Ohio plant of $2.3 million. The severance and related benefit costs of $2.9 million related to associates who exited the company as a result of the integration of Torrington and other actions taken by the company to reduce costs. The exit costs were comprised of $3.0 million for the Columbus, Ohio plant and $0.7 million for the | Duston, England plant. The Duston and Columbus plants were |
Interest Expense and Income:
2003 | 2002 | $ Change | |
(Dollars in millions) | |||
Interest expense Interest income | $ 48.4 | $ 31.5 $ 1.7 | $ 16.9 $ (0.6) |
was not significant in either year.
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Other Income and Expense:
2003 | 2002 | $ Change | |
(Dollars in millions) | |||
CDSOA receipts, net of expenses Impairment charge – equity investment Other expense, net | $ 65.6 | $ 50.2 $ – $ (13.4) | $ 15.4 $ (45.7) $ 3.4 |
CDSOA receipts are reported net of applicable expenses. In addi– During 2000, the company’s Steel Group invested in PEL to | investment in PEL was impaired due to the following indicators In 2003, “other expense, net” included losses from other equity |
Income Tax Expense:
The effective tax rate was 40.0% for the years ended December | reduce overall tax expense, additional taxes on foreign income, and |
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Business Segments:
Automotive Group:2003 | 2002 | $ Change | % Change | |
(Dollars in millions) | ||||
Net sales, including intersegment sales Adjusted EBIT Adjusted EBIT margin | $ 1,396.1 | $ 752.8 $ 11.1 1.5% | $ 643.3 $ 4.6 – | 85.5 % 41.4 % (0.4)% |
The Automotive Group includes sales of bearings and other products | 2003 reflected higher costs due to issues in the execution of the |
Industrial Group:
2003 | 2002 | $ Change | % Change | |
(Dollars in millions) | ||||
Net sales, including intersegment sales Adjusted EBIT Adjusted EBIT margin | $ 1,499.7 | $ 971.5 $ 73.0 7.5% | $ 528.2 $ 55.0 – | 54.4% 75.2% 1.0% |
Sales by the Industrial Group include global sales of bearings and | the markets served by the Industrial Group remained relatively flat |
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Steel Group:
2003 | 2002 | $ Change | % Change | |
(Dollars in millions) | ||||
Net sales, including intersegment sales Adjusted EBIT (loss) Adjusted EBIT (loss) margin | $ 1,026.5 | $ 981.3 $ 32.5 3.3% | $ 45.2 $ (38.5) – | 4.6% – – |
The increase in the Steel Group’s net sales was primarily the result | impacted by extremely high costs for scrap steel, natural gas and |
The Balance Sheet
Total assets as shown on the Consolidated Balance Sheet at December 31, 2004 increased by $248.7 million from December 31, 2003.
This increase was due primarily to increased working capital required to support higher sales.
12/31/04 | 12/31/03 | $ Change | % Change | |
(Dollars in millions) | ||||
Cash and cash equivalents Accounts receivable, net Deferred income taxes Inventories | $ 51.0 | $ 28.6 602.3 50.3 695.9 | $ 22.4 115.1 39.8 178.9 | 78.3% 19.1% 79.1% 25.7% |
Total current assets | $ 1,733.3 | $ 1,377.1 | $ 356.2 | 25.9% |
The increase in cash and cash equivalents in 2004 was partially due | fourth quarter of 2003. The increase in deferred income taxes |
Property, Plant and Equipment – Net:
12/31/04 | 12/31/03 | $ Change | % Change | |
(Dollars in millions) | ||||
Property, plant and equipment – cost Less: allowances for depreciation | $ 3,622.2 | $ 3,503.8 (1,893.0) | $ 118.4 (146.2) | 3.4 % (7.7)% |
Property, plant and equipment – net | $ 1,583.0 | $ 1,610.8 | $ (27.8) | (1.7)% |
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Other Assets:
12/31/04 | 12/31/03 | $ Change | % Change | |
(Dollars in millions) | ||||
Goodwill Other intangible assets Intangible pension assets Miscellaneous receivables and other assets Deferred income taxes Deferred charges and prepaid expenses | $ 189.3 | $ 173.1 91.5 106.5 130.1 148.8 51.8 | $ 16.2 (5.5) (13.6) 8.4 (72.0) (13.0) | 9.4 % (6.0)% (12.8)% 6.5 % (48.4)% (25.1)% |
Total other assets | $ 622.3 | $ 701.8 | $ (79.5) | (11.3)% |
The increase in goodwill in 2004 was due primarily to the finaliza– | acquisitions, which increased goodwill by $3.7 million. The |
Current Liabilities:
12/31/04 | 12/31/03 | $ Change | % Change | |
(Dollars in millions) | ||||
Short–term debt Accounts payable and other liabilities Salaries, wages and benefits Income taxes Current portion of long–term debt | $ 157.4 | $ 114.5 425.2 376.6 78.5 6.7 | $ 42.9 95.0 (33.2) (59.5) (5.4) | 37.5 % 22.3 % (8.8)% (75.8)% (80.6)% |
Total current liabilities | $ 1,041.3 | $ 1,001.5 | $ 39.8 | 4.0% |
The increase in short–term debt in 2004 was due primarily to addi– | portion of accrued pension cost, based upon the company’s |
Non–Current Liabilities:
12/31/04 | 12/31/03 | $ Change | % Change | |
(Dollars in millions) | ||||
Long–term debt Accrued pension cost Accrued postretirement benefits cost Other non–current liabilities | $ 620.6 | $ 613.4 477.5 477.0 30.8 | $ 7.2 (8.9) 13.4 16.9 | 1.2 % (1.9)% 2.8 % 54.9 % |
Total non–current liabilities | $ 1,627.3 | $ 1,598.7 | $ 28.6 | 1.8% |
The decrease in accrued pension cost in 2004 was due primarily to plan contributions, partially offset by current year accruals for pen– | Refer to Note 13 – Retirement and Postretirement Benefit Plans |
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Shareholders’ Equity:
12/31/04 | 12/31/03 | $ Change | % Change | |
(Dollars in millions) | ||||
Common stock Earnings invested in the business Accumulated other comprehensive loss Treasury shares | $ 711.8 | $ 689.3 758.9 (358.4) (0.2) | $ 22.5 88.8 68.9 – | 3.3% 11.7% 19.2% – |
Total shareholders’ equity | $ 1,269.8 | $ 1,089.6 | $ 180.2 | 16.5% |
Earnings invested in the business were increased in 2004 by net | cumulative foreign currency translation adjustment loss, resulting |
Cash Flows
2004 | 2003 | $ Change | |
(Dollars in millions) | |||
Net cash provided by operating activities Net cash (used) by investing activities Net cash (used) provided by financing activities Effect of exchange rate changes on cash Increase (decrease) in cash and cash equivalents | $ 139.1 | $ 204.9 $ (665.0) $ 401.9 $ 4.8 $ (53.4) | $ (65.8) $ 556.4 $ (422.3) $ 7.4 |
Net cash provided by operating activities was negatively impacted | charges, deferred income tax provision, and common stock issued The decrease in net cash used by investing activities was the result In 2004, net cash used by financing activities related primarily to |
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Liquidity and Capital Resources
Total debt was $779.3 million at December 31, 2004, compared to | facility. At December 31, 2004, the company had outstanding |
Reconciliation of Total Debt to Net Debt and the Ratio of Net Debt to Capital:
Net debt:
12/31/04 | 12/31/03 | |
(Dollars in millions) | ||
Short–term debt Current portion of long–term debt Long–term debt | $ 157.4 | $ 114.5 6.7 613.4 |
Total debt Less: cash and cash equivalents | 779.3 (50.9) | 734.6 (28.6) |
Net debt | $ 728.4 | $ 706.0 |
Ratio of net debt to capital:
12/31/04 | 12/31/03 | |
(Dollars in millions) | ||
Net debt Shareholders’ equity | $ 728.4 | $ 706.0 1,089.6 |
Net debt + shareholders’ equity (capital) | $ 1,998.2 | $ 1,795.6 |
Ratio of net debt to capital | 36.5% | 39.3% |
The company presents net debt because it believes net debt is Under its $500 million senior credit facility, the company has three | In January 2004, Standard & Poor’s Rating Services reaffirmed its |
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The company’s contractual debt obligations and contractual commitments outstanding as of December 31, 2004 are as follows:
Payments due by Period
Contractual Obligations | Total | Less than 1 Year | 1–3 Years | 3–5 Years | More than 5 Years |
(Dollars in millions) | |||||
Long–term debt Short–term debt Operating leases Supply agreement | $ 621.9 | $ 1.3 157.4 19.3 5.2 | $ 101.2 – 33.9 2.3 | $ 27.3 – 23.3 – | $ 492.1 – 33.2 – |
Total | $896.5 | $ 183.2 | $ 137.4 | $ 50.6 | $ 525.3 |
The company expects to make cash contributions of $135.0 million During 2004, the company did not purchase any shares of its | stock purchase plan. This plan authorizes the company to buy in The company does not have any off–balance sheet arrangements |
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Other Information
Recent Accounting Pronouncements:
In November 2004, the Financial Accounting Standards Board In December 2004, the FASB issued SFAS No. 123R, “Share–Based SFAS No. 123R permits public companies to adopt its requirements | the year of adoption. The company plans to adopt SFAS No. 123R As permitted by SFAS 123, the company currently accounts for Critical Accounting Policies and Estimates: Revenue recognition: |
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point, except for certain exported goods, for which it occurs when Goodwill: Restructuring costs: Benefit plans: | measurement of liabilities related to these plans is based For expense purposes in 2004, the company applied a discount rate During 2003, the company made revisions, which became effective For measurement purposes for postretirement benefits, the company |
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trend rate would have increased the 2004 total service and interest The U.S. Medicare Prescription Drug Improvement and Income taxes: | differences resulting from the treatment of items for tax and Other Matters: |
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$80 million to hedge a portion of its fixed–rate debt. Under the Fluctuations in the value of the U.S. Dollar compared to foreign The company continues its efforts to protect the environment | environmental expenses and has a well–established environmental The company and certain of its U.S. subsidiaries have been On February 1, 2005, the company’s board of directors declared a |
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Consolidated Statement of Income
Year Ended December 31 | |||
2004 | 2003 | 2002 | |
(Thousands of dollars, except per share data) | |||
Net sales Cost of products sold | $ 4,513,671 3,675,086 | $ 3,788,097 3,148,979 | $ 2,550,075 2,080,498 |
Gross Profit | 838,585 | 639,118 | 469,577 |
Selling, administrative and general expenses Impairment and restructuring charges | 587,923 13,434 | 521,717 19,154 | 358,866 32,143 |
Operating Income | 237,228 | 98,247 | 78,568 |
Interest expense Interest income Receipt of Continued Dumping & Subsidy Offset Act (CDSOA) payment Other expense – net | (50,834) 1,397 44,429 (32,441) | (48,401) 1,123 65,559 (55,726) | (31,540) 1,676 50,202 (13,388) |
Income Before Income Taxes and Cumulative Effect of Change in Accounting Principle | 199,779 | 60,802 | 85,518 |
Provision for income taxes | 64,123 | 24,321 | 34,067 |
Income Before Cumulative Effect of Change in Accounting Principle | $ 135,656 | $ 36,481 | $ 51,451 |
Cumulative effect of change in accounting principle (net of income tax benefit of $7,786) | – | – | (12,702) |
Net Income | $ 135,656 | $ 36,481 | $ 38,749 |
Earnings Per Share: | $ 1.51 – | $ 0.44 – | $ 0.84 (0.21) |
Earnings Per Share | $ 1.51 | $ 0.44 | $ 0.63 |
Earnings Per Share–Assuming Dilution: Income before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle | $ 1.49 – | $ 0.44 – | $ 0.83 (0.21) |
Earnings Per Share–Assuming Dilution | $ 1.49 | $ 0.44 | $ 0.62 |
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TIMKEN |
Consolidated Balance Sheet
December 31 | ||
2004 | 2003 | |
(Thousands of dollars) | ||
ASSETS Current Assets |
|
|
Total Inventories | 874,833 | 695,946 |
Total Current Assets | 1,733,291 | 1,377,105 |
Property, Plant and Equipment Land and buildings Machinery and equipment | 648,646 2,973,542 | 601,108 2,902,697 |
Less allowances for depreciation | 3,622,188 2,039,231 | 3,503,805 1,892,957 |
Property, Plant and Equipment–Net | 1,582,957 | 1,610,848 |
Other Assets Goodwill Other intangible assets Miscellaneous receivables and other assets Deferred income taxes Deferred charges and prepaid expenses | 189,299 178,844 138,466 76,834 38,809 | 173,099 197,993 130,081 148,802 51,861 |
Total Other Assets | 622,252 | 701,836 |
Total Assets | $ 3,938,500 | $ 3,689,789 |
LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities |
|
|
Total Current Liabilities | 1,041,327 | 1,001,468 |
Non–Current Liabilities Long–term debt Accrued pension cost Accrued postretirement benefits cost Other non–current liabilities | 620,634 468,644 490,366 47,681 | 613,446 477,502 476,966 30,780 |
Total Non–Current Liabilities | 1,627,325 | 1,598,694 |
Shareholders’ Equity Class I and II Serial Preferred Stock without par value: Authorized–10,000,000 shares each class, none issued Common stock without par value: Authorized–200,000,000 shares Issued (including shares in treasury) (2004 – 90,511,833 shares; 2003 – 89,076,114 shares) Stated capital Other paid–in capital Earnings invested in the business Accumulated other comprehensive loss Treasury shares at cost (2004 – 7,501 shares; 2003 – 10,601 shares) | – 53,064 658,730 847,738 (289,486) (198) | – 53,064 636,272 758,849 (358,382) (176) |
Total Shareholders’ Equity | 1,269,848 | 1,089,627 |
Total Liabilities and Shareholders’ Equity | $ 3,938,500 | $ 3,689,789 |
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Consolidated Statement of Cash Flows
Year Ended December 31 | |||
2004 | 2003 | 2002 | |
(Thousands of dollars) | |||
CASH PROVIDED (USED) Operating Activities |
|
|
|
Net Cash Provided by Operating Activities | 139,067 | 204,888 | 206,103 |
Investing Activities Purchases of property, plant and equipment–net Proceeds from disposals of property, plant and equipment Proceeds from disposals of non–strategic assets Acquisitions | (155,180) 5,268 50,690 (9,359) | (118,530) 26,377 152,279 (725,120) | (85,277) 12,616 – (6,751) |
Net Cash Used by Investing Activities | (108,581) | (664,994) | (79,412) |
Financing Activities Cash dividends paid to shareholders Accounts receivable securitization financing borrowings Accounts receivable securitization financing payments Proceeds from issuance of common stock Common stock issued to finance acquisition Proceeds from issuance of long–term debt Payments on long–term debt Short–term debt activity–net | (46,767) 198,000 (198,000) – – 339,547 (334,040) 20,860 | (42,078) 127,000 (127,000) 54,985 180,010(1) 629,800 (379,790) (41,082) | (31,713) – – – – – (37,296) (11,498) |
Net Cash (Used) Provided by Financing Activities Effect of exchange rate changes on cash | (20,400) 12,255 | 401,845 4,837 | (80,507) 2,474 |
Increase (Decrease) In Cash and Cash Equivalents Cash and cash equivalents at beginning of year | 22,341 28,626 | (53,424) 82,050 | 48,658 33,392 |
Cash and Cash Equivalents at End of Year | $ 50,967 | $ 28,626 | $ 82,050 |
(1) Excluding $140 million of common stock (9,395,973 shares) issued to the seller of the Torrington business, in conjunction with the acquisition.
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TIMKEN |
Consolidated Statement of Shareholders’ Equity
Common Stock | ||||||
Total | Stated Capital | Other Paid–In Capital | Earnings Invested in the Business | Accumulated Other Comprehensive Loss | Treasury Stock | |
(Thousands of dollars, except share data) | ||||||
Year Ended December 31, 2002 |
|
| $ 256,423 | $ 757,410 38,749 | $ (224,538) 14,050 (254,318) (871) |
|
Total comprehensive loss Dividends – $0.52 per share Issuance of 3,186,470 shares from treasury(1) Issuance of 369,290 shares from authorized(1) | (202,390) (31,713) 57,747 3,707 | (2,138) 3,707 | (31,713) | 59,885 | ||
Balance at December 31, 2002 | $ 609,086 | $ 53,064 | $ 257,992 | $ 764,446 | $ (465,677) | $ (739) |
Year Ended December 31, 2003 Net income Foreign currency translation adjustments (net of income tax of $1,638) Minimum pension liability adjustment (net of income tax of $19,164) Change in fair value of derivative financial instruments net of reclassifications | 36,481 75,062 31,813 420 | 36,481 | 75,062 31,813 420 | |||
Total comprehensive income Dividends – $0.52 per share Tax benefit from exercise of stock options Issuance of 29,473 shares from treasury(1) Issuance of 25,624,198 shares from authorized(1)(2) | 143,776 (42,078) 1,104 301 377,438 | 1,104 (262) 377,438 | (42,078) | 563 | ||
Balance at December 31, 2003 | $1,089,627 | $ 53,064 | $ 636,272 | $ 758,849 | $ (358,382) | $ (176) |
Year Ended December 31, 2004 Net income Foreign currency translation adjustments (net of income tax of $18,766) Minimum pension liability adjustment (net of income tax of $18,391) Change in fair value of derivative financial instruments (net of reclassifications) | 135,656 105,736 (36,468) (372) | 135,656 | 105,736 (36,468) (372) | |||
Total comprehensive income | 204,552 (46,767) 3,068 (1,067) 20,435 | 3,068 (1,045) 20,435 | (46,767) | (22) | ||
Balance at December 31, 2004 | $1,269,848 | $ 53,064 | $ 658,730 | $ 847,738 | $ (289,486) | $ (198) |
(2) Share activity includes the issuance of 22,045,973 shares in connection with the Torrington acquisition and an additional public equity offering of 3,500,000 shares in October 2003.
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TIMKEN |
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
1 Significant Accounting PoliciesPrinciples of Consolidation: The consolidated financial Revenue Recognition: The company recognizes revenue when Cash Equivalents: The company considers all highly liquid invest–ments with a maturity of three months or less when purchased to Inventories: Inventories are valued at the lower of cost or market, Property, Plant and Equipment: Property, plant and equipment Impairment of long–lived assets is recognized when events or Goodwill: The company tests goodwill and indefinite–lived intangible Income Taxes: Deferred income taxes are provided for the Foreign Currency Translation: Assets and liabilities of | balance sheet date; income and expenses are translated at the Stock–Based Compensation: On December 31, 2002, the The effect on net income and earnings per share as if the company |
2004 | 2003 | 2002 | |
Net income,as reported Add: Stock–based employee compensation expense, net of related taxes Deduct: Stock–based employee compensation expense determined under fair value based methods for all awards,net of related taxes | $ 135,656 1,884 (6,751) | $ 36,481 1,488 (7,305) | $ 38,749 1,170 (6,786) |
Pro forma net income | $ 130,789 | $ 30,664 | $ 33,133 |
Earnings per share: Basic – as reported Basic – pro forma Diluted – as reported Diluted – pro forma | $1.51 $1.46 $1.49 $1.44 | $0.44 $0.37 $0.44 $0.37 | $0.63 $0.54 $0.62 $0.54 |
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TIMKEN |
Earnings Per Share: Earnings per share are computed by dividing Derivative Instruments: The company accounts for its derivative Recent Accounting Pronouncements In November 2004, the In December 2004, the FASB issued SFAS No. 123R, “Share–Based | SFAS No. 123R permits public companies to adopt its As permitted by SFAS 123, the company currently accounts for Use of Estimates: The preparation of financial statements in Reclassifications: Certain amounts reported in the 2003 and 2002 |
43
TIMKEN |
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
2 AcquisitionsOn February 18, 2003, the company acquired Ingersoll–Rand The company paid IR $700,000 in cash, subject to post–closing The final purchase price for the acquisition of Torrington was | adjustments did not have a material effect on the company’s The allocation of the purchase price has been performed based on |
company recorded accruals for severance, exit and relocation costs in the purchase price allocation. A reconciliation of the beginning and
ending accrual balances is as follows:
Severance | Exit | Relocation | Total | |
Balance at December 31, 2002 Add: additional accruals Less: payments | $ – 8,536 (4,631) | $ – 2,530 (205) | $ – 5,259 (3,362) | $ – 16,325 (8,198) |
Balance at December 31, 2003 Add: additional accruals Less: payments | 3,905 287 (1,871) | 2,325 6,560 (8,885) | 1,897 (570) (1,327) | 8,127 6,277 (12,083) |
Balance at December 31, 2004 | $ 2,321 | $ – | $ – | $ 2,321 |
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TIMKEN |
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
Accounts receivable Inventory Other current assets Property, plant & equipment In–process research and development Intangible assets subject to amortization – (12–year weighted average useful life) Goodwill Equity investment in needle bearing joint venture Other non–current assets, including deferred taxes | $ 177,227 210,194 4,418 429,014 1,800 91,642 56,909 146,335 36,451 |
Total Assets Acquired | $ 1,153,990 |
Accounts payable and other current liabilities Non–current liabilities, including accrued postretirement benefits cost | $ 192,689 96,212 |
Total Liabilities Assumed | $ 288,901 |
Net Assets Acquired | $ 865,089 |
There is no tax basis goodwill associated with the Torrington The $1,800 related to in–process research and development was | In July 2003, the company sold to NSK Ltd. its interest in a needle The following unaudited pro forma financial information presents |
Unaudited Year Ended December 31 |
2003 | 2002 | |
Net sales Income before cumulative effect of change in accounting principle Net income Earnings per share – assuming dilution: Income before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle | $3,939,340 29,629 29,629 $ 0.36 $ – | $3,756,652 104,993 92,291 $ 1.25 $ (0.15) |
Earnings per share – assuming dilution | $ 0.36 | $ 1.10 |
Other Acquisitions in 2004 and 2002
During 2004 and 2002, the company finalized several acquisitions. | over the fair value of the net assets acquired was allocated to |
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TIMKEN |
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
3 Earnings Per Share
The following table sets forth the reconciliation of the numerator and the denominator of earnings per share and earnings per share –
assuming dilution for the years ended December 31:
2004 | 2003 | 2002 | |
Numerator: Net income for earnings per share and earnings per share – assuming dilution – income available to common shareholders Denominator: Denominator for earnings per share – weighted–average shares Effect of dilutive securities: Stock options and awards – based on the treasury stock method | $ 135,656 89,875,650 883,921 | $ 36,481 82,945,174 214,147 | $ 38,749 61,128,005 507,334 |
Denominator for earnings per share – assuming dilution – adjusted weighted–average shares | 90,759,571 | 83,159,321 | 61,635,339 |
Earnings per share | $ 1.51 | $ 0.44 | $ 0.63 |
Earnings per share – assuming dilution | $ 1.49 | $ 0.44 | $ 0.62 |
The exercise prices for certain of the stock options that the company Under the performance unit component of the company’s long– | Directors can elect to make payments that become due in the |
4 Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following:2004 | 2003 | 2002 | |
Foreign currency translation adjustment Minimum pension liability adjustment Fair value of open foreign currency cash flow hedges | $ 100,278 (387,750) (2,014) | $ (5,458) (351,282) (1,642) | $ (80,520) (383,095) (2,062) |
$ (289,486) | $ (358,382) | $ (465,677) | |
In 2004, the company began the process of liquidating one of its | currency translation losses to the consolidated statement of income, During 2004, the company sold the real estate of this facility in |
5 Financing Arrangements
Short–term debt at December 31, 2004 and 2003 was as follows:2004 | 2003 | |
Variable–rate lines of credit for certain of the company’s European subsidiaries with |
| $ 78,196 23,000 – 13,273 |
Short–term debt | $ 157,417 | $ 114,469 |
of PEL’s debts, which are included above.
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TIMKEN |
Long–term debt at December 31, 2004 and 2003 was as follows:
2004 | 2003 | |
Fixed–rate Medium–Term Notes, Series A, due at various dates through |
| $ 287,000 21,700 17,000 8,000 24,000 250,000 12,471 |
Less current maturities | 621,907 1,273 | 620,171 6,725 |
Long–term debt | $ 620,634 | $ 613,446 |
The maturities of long–term debt for the five years subse– Interest paid was approximately $52,000 in 2004, $43,000 in 2003 In connection with the Torrington acquisition, the company entered Under the $500 million senior credit facility, the company has three | On December 19, 2002, the company entered into an Accounts The lines of credit for certain of the company’s European The company and its subsidiaries lease a variety of real property |
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TIMKEN |
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
6 Impairment and Restructuring Charges
Impairment and restructuring charges are comprised of the following:2004 | 2003 | 2002 | |
(Dollars in millions) | |||
Impairment charges | $ 8.5 | $ 12.5 2.9 3.7 | $ 17.9 10.2 4.0 |
Total | $ 13.4 | $ 19.1 | $ 32.1 |
In 2004, the impairment charge related primarily to the write In 2003, impairment charges represented the write–off of the | of $2.3 million. The severance and related benefit costs of In 2002, the impairment charges and exit costs were related to |
Impairment and restructuring charges by segment are as follows:
Year ended December 31, 2004:Auto | Industrial | Steel | Total | |
(Dollars in millions) | ||||
Impairment charges | $ – | $ – 2.5 0.7 | $ 8.5 – – | $ 8.5 4.2 0.7 |
Total | $1.7 | $ 3.2 | $ 8.5 | $ 13.4 |
Year ended December 31, 2003:
Auto | Industrial | Steel | Total | |
(Dollars in millions) | ||||
Impairment charges | $ – | $ 2.3 2.2 3.0 | $ 10.2 0.2 – | $ 12.5 2.9 3.7 |
Total | $1.2 | $ 7.5 | $ 10.4 | $ 19.1 |
Year ended December 31, 2002:
Auto | Industrial | Steel | Total | |
(Dollars in millions) | ||||
Impairment charges | $ 14.2 | $ 3.7 5.5 0.1 | $ – 3.8 – | $ 17.9 10.2 4.0 |
Total | $19.0 | $ 9.3 | $ 3.8 | $ 32.1 |
As of December 31, 2004, the remaining accrual balance for | The activity for 2003 included expense accrued of $6.1 million, |
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TIMKEN |
7 Contingencies
The company and certain of its U.S. subsidiaries have been The company is also the guarantor of debt for PEL Technologies | of credit was provided by the company to secure payment on Ohio In connection with the Ashland plant sale, the company entered |
49
TIMKEN |
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
8 Goodwill and Other Intangible AssetsSFAS No. 142 requires that goodwill and indefinite–lived intangible In 2003, due to trends in the steel industry, the guideline company | company’s Steel reporting unit. Accordingly, the company had In fiscal 2002, upon adoption of SFAS No. 142, the company |
Changes in the carrying value of goodwill are as follows:
Year ended December 31, 2004
Beginning Balance | Impairment | Acquisitions | Other | Ending Balance | |
Goodwill: | $ 1,264 171,835 |
| $ – 13,774 | $ 414 2,012 | $ 1,678 187,621 |
Totals | $ 173,099 | $ – | $ 13,774 | $ 2,426 | $189,299 |
Year ended December 31, 2003
Beginning Balance | Impairment | Acquisitions | Other | Ending Balance | |
Goodwill: | $ 1,633 119,440 8,870 |
| $ – 46,951 – | $ (369) 5,444 1,367 | $ 1,264 171,835 – |
Totals | $ 129,943 | $ (10,237) | $ 46,951 | $ 6,442 | $173,099 |
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TIMKEN |
The following table displays other intangible assets as of December 31:
2004 | 2003 | |||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |
Intangible assets subject to amortization: Industrial: |
|
|
|
|
|
|
$ 101,929 | $ 17,052 | $ 84,877 | $ 99,754 | $ 9,353 | $ 90,401 | |
Intangible assets not subject to amortization: Goodwill Intangible pension asset Automotive land use rights Industrial license agreements | $ 189,299 92,860 144 963 | – – – – | $ 189,299 92,860 144 963 | $173,099 106,518 115 959 | $ – – – – | $173,099 106,518 115 959 |
$ 283,266 | – | $ 283,266 | $280,691 | – | $280,691 | |
Total intangible assets | $ 385,195 | $ 17,052 | $ 368,143 | $380,445 | $ 9,353 | $371,092 |
Amortization expense for intangible assets was approximately | amortization acquired in the Torrington acquisition have useful lives |
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TIMKEN |
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
9 Stock Compensation PlansUnder the company’s stock option plans, shares of common stock | earnings per share is required by SFAS No. 123, and has been |
Following are the related assumptions under the Black–Scholes method:
2004 | 2003 | 2002 | |
Assumptions: |
|
|
|
A summary of activity related to stock options for the above plans is as follows for the years ended December 31:
2004 | 2003 | 2002 | ||||
Options | Weighted– Average Exercise Price | Options | Weighted– Average Exercise Price | Options | Weighted– Average Exercise Price | |
Outstanding – beginning of year | 8,334,920 | $20.68 | 7,310,026 | $21.21 | 6,825,412 | $20.22 |
Outstanding – end of year | 7,388,910 | 21.50 | 8,334,920 | 20.68 | 7,310,026 | 21.21 |
Options exercisable | 5,081,063 | $21.95 | 5,771,810 | $21.53 | 4,397,590 | $22.39 |
The company sponsors a performance target option plan that is Exercise prices for options outstanding as of December 31, 2004, | distributed 73,025, 125,967 and 100,947 common shares in 2004, The company offers a performance unit component under its The number of shares available for future grants for all plans at |
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TIMKEN |
10 Financial Instruments
As a result of the company’s worldwide operating activities, it | During 2004, the company entered into interest rate swaps with a The carrying value of cash and cash equivalents, accounts |
11 Research and Development
The company performs research and development under | 2004, 2003 and 2002, respectively. Of these amounts, $8,400, |
12 Equity Investments
The balances related to investments accounted for under the Equity investments are reviewed for impairment when circum– During 2000, the company’s Steel Group invested in a joint venture, | In the fourth quarter of 2003, the company recorded a non–cash The company concluded that PEL is a variable interest entity and |
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TIMKEN |
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
13 Retirement and Postretirement Benefit PlansThe company sponsors defined contribution retirement and The company and its subsidiaries sponsor several unfunded | The company and its subsidiaries sponsor a number of defined As part of the Torrington purchase agreement, the company During 2003, the company made revisions, which became effec– |
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TIMKEN |
The company uses a measurement date of December 31 to determine pension and other postretirement benefit measurements for the
pension plans and other postretirement benefit plans.
The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized in the
consolidated balance sheet of the defined benefit pension and postretirement benefits as of December 31, 2004 and 2003:
Defined Benefit Pension Plans | Postretirement Plans | |||
2004 | 2003 | 2004 | 2003 | |
Change in benefit obligation |
|
|
|
|
Benefit obligation at end of year | $ 2,586,146 | $2,337,722 | $ 820,595 | $ 802,218 |
Change in plan assets(1) Fair value of plan assets at beginning of year Actual return on plan assets Associate contributions Company contributions Acquisition International plan exchange rate change Benefits paid | $ 1,548,142 234,374 962 196,951 – 17,823 (157,386) | $1,198,351 287,597 821 173,990 7,009 22,349 (141,975) | ||
Fair value of plan assets at end of year | $ 1,840,866 | $1,548,142 | ||
Funded status Projected benefit obligation in excess of plan assets Unrecognized net actuarial loss Unrecognized net asset at transition dates, net of amortization Unrecognized prior service cost (benefit) | $ (745,280) 739,079 (598) 95,820 | $ (789,580) 657,781 (660) 109,421 | $ (820,595) 303,244 – (33,016) | $ (802,218) 307,003 – (37,701) |
Prepaid (accrued) benefit cost | $ 89,021 | $ (23,038) | $ (550,367) | $ (532,916) |
Amounts recognized in the consolidated balance sheet Accrued benefit liability Intangible asset Minimum pension liability included in accumulated other comprehensive loss | $ (603,644) 92,860 599,805 | $ (674,502) 106,518 544,946 | $ (550,367) – – | $ (532,916) – – |
Net amount recognized | $ 89,021 | $ (23,038) | $ (550,367) | $ (532,916) |
The current portion of accrued pension cost, which is included in | benefit cost, which is included in salaries, wages and benefits on |
55
TIMKEN |
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
13 Retirement and Postretirement Benefit Plans (continued)2004 solid investment performance, which primarily reflected The accumulated benefit obligations at December 31, 2004 In 2004, as a result of increases in the company’s defined benefit | For 2005 expense, the company’s discount rate has been reduced On September 10, 2002, the company issued 3,000,000 shares of |
The following table summarizes the assumptions used by the consulting actuary and the related benefit cost information:
Pension Benefits | Postretirement Benefits | |||||
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |
Assumptions Components of net periodic benefit cost |
|
|
|
|
|
|
Net periodic benefit cost | $ 84,899 | $ 88,838 | $ 59,543 | $ 67,503 | $ 56,665 | $ 58,152 |
For measurement purposes, the company assumed a weighted– | The assumed health care cost trend rate may have a significant |
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TIMKEN |
On December 8, 2003, the Medicare Prescription Drug, | the financial statements or accompanying notes reflect the effects of For the year 2004, the effect on the accumulated postretirement |
Plan Assets:
The company’s pension asset allocation at December 31, 2004 and 2003, and target allocation are as follows:
Current Target Allocation | Percentage of Pension Plan Assets at December 31 | ||
Asset Category | 2005 | 2004 | 2003 |
Equity securities | 60% to 70% | 68% | 70% |
Total | 100% | 100% | 100% |
The company recognizes its overall responsibility to ensure that | character of the pension funds. Asset allocation is established in a |
Cash Flows:
Employer Contributions to Defined Benefit Plans | |
2003 2004 2005 (expected) | $ 173,990 $ 196,951 $ 135,000 |
Future benefit payments are expected to be as follows:
Benefit Payments | Pension Benefits | Postretirement Benefits | ||
Gross | Expected Medicare Subsidies | Net Including Medicare Subsidies | ||
2005 | $ 154,034 | $ 59,732 $ 63,181 $ 65,620 $ 67,696 $ 69,595 $ 349,879 | $ – | $ 59,732 |
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TIMKEN |
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
14 Segment Information
Description of types of products and services from which eachreportable segment derives its revenues
The company’s reportable segments are business units that Beginning in the first quarter of 2003, the company reorganized two The Automotive Group includes sales of bearings and other Steel Group includes sales of intermediate alloy, vacuum | steel products, including precision steel components. A significant Measurement of segment profit or loss and segment assets Factors used by management to identify the enterprise’s |
Geographic Financial Information | United States | Europe | Other Countries | Consolidated |
2004 Net sales Non–current assets | $ 3,114,138 1,536,859 | $ 784,778 410,407 | $ 614,755 257,943 | $ 4,513,671 2,205,209 |
2003 |
| $ 648,412 365,969 |
|
|
2002 Net sales Non–current assets | $ 1,876,696 1,472,680 | $ 347,220 223,348 | $ 326,159 84,036 | $ 2,550,075 1,780,064 |
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TIMKEN |
Segment Financial Information | 2004 | 2003 | 2002 |
Automotive Group Net sales to external customers Depreciation and amortization EBIT as adjusted Capital expenditures Assets employed at year–end | $ 1,582,226 78,100 15,919 73,385 1,280,979 | $1,396,104 82,958 15,685 71,294 1,180,537 | $ 752,763 33,866 11,095 34,948 663,864 |
Industrial Group Net sales to external customers Intersegment sales Depreciation and amortization EBIT, as adjusted Capital expenditures Assets employed at year–end | $ 1,709,770 1,437 71,352 177,913 49,721 1,680,175 |
|
|
Steel Group Net sales to external customers Intersegment sales Depreciation and amortization EBIT (loss), as adjusted Capital expenditures Assets employed at year–end | $ 1,221,675 161,941 59,979 54,756 23,907 977,346 | $ 893,161 133,356 64,875 (6,043) 24,297 891,354 | $ 825,778 155,500 67,240 32,520 23,547 978,808 |
Total Net sales to external customers Depreciation and amortization EBIT, as adjusted Capital expenditures Assets employed at year–end | $ 4,513,671 209,431 248,588 147,013 3,938,500 | $3,788,097 208,851 137,673 129,315 3,689,789 | $2,550,075 146,535 116,655 90,673 2,748,356 |
Reconciliation to Income Before Income Taxes Total EBIT, as adjusted, for reportable segments Impairment and restructuring Integration/Reorganization expenses (Loss) gain on sale of assets CDSOA net receipts, net of expenses Acquisition–related unrealized currency exchange gains Impairment charge for investment in PEL Gain on sale of real estate Loss on dissolution of subsidiary Loss on sale of business Adoption of FIN 46 for investment in PEL Other Interest expense Interest income Intersegment adjustments | $ 248,588 (13,434) (27,025) (734) 44,429 – – 22,509 (16,186) (5,399) (948) (719) (50,834) 1,397 (1,865) | $ 137,673 (19,154) (33,913) 1,996 65,559 1,696 (45,730) – – – – – (48,401) 1,123 (47) | $ 116,655 (32,143) (18,445) – 50,202 – – – – – – – (31,540) 1,676 (887) |
Income before income taxes and cumulative effect of change in accounting principle | $ 199,779 | $ 60,802 | $ 85,518 |
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TIMKEN |
Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
15 Income TaxesFor financial statement reporting purposes, income before income | has elected to treat certain foreign entities as branches for US |
Income before income taxes | |||
2004 | 2003 | 2002 | |
United States Non– United States | $165,392 $ 34,387 | $ 53,560 $ 7,242 | $ 191,105 $(105,587) |
Income before income taxes | $199,779 | $ 60,802 | $ 85,518 |
The provision (credit) for income taxes consisted of the following:
2004 | 2003 | 2002 | ||||
Current | Deferred | Current | Deferred | Current | Deferred | |
United States: Federal State and local Foreign | $ (12,976) 4,078 10,982 | $ 53,646 1,063 7,330 | $ – 1,020 18,895 | $ 48 1,271 3,087 | $ 5,220 3,936 7,661 | $ 17,808 (1,682) 1,124 |
$ 2,084 | $ 62,039 | $ 19,915 | $ 4,406 | $ 16,817 | $ 17,250 | |
The company made income tax payments of approximately $49,758 and $13,830 in 2004 and 2003, respectively. During
2002, the company received income tax refunds of approximately $27,000. Taxes paid differ from current taxes provided,
primarily due to the timing of payments.
of 35% to income before income taxes:
2004 | 2003 | 2002 | |
Income tax at the statutory federal rate Adjustments: State and local income taxes, net of federal tax benefit Tax on foreign remittances Losses without current tax benefits Foreign Jurisdictions with different tax rates Deductible dividends paid to ESOP Extraterritorial Income Benefit Tax Holiday Settlements of prior year liabilities Change in tax status of certain entities Other items Provision for income taxes | $ 69,922 3,743 | $ 21,281 1,489 | $ 29,931 1,465 |
Effective income tax rate | 32.1% | 40% | 40% |
In connection with various investment arrangements, the Company | expire in 2010 and 2007, respectively. In total, the agreements |
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TIMKEN |
The effect of temporary differences giving rise to deferred tax assets and liabilities at December 31, 2004 and 2003 were as follows:
2004 | 2003 | |
Deferred tax assets: Accrued postretirement benefits cost Accrued pension cost Inventory Benefit accruals Tax loss and credit carryforwards Other–net Valuation allowance | $ 198,210 166,525 27,832 14,479 170,799 17,302 (129,328) |
|
Deferred tax liability – depreciation & amortization | 465,819 (298,918) | 492,653 (293,580) |
Net deferred tax asset | $ 166,901 | $199,073 |
The company has U.S. loss carryforwards with tax benefits totaling The company has a research tax credit carryforward of $3,400, an | Prior to the American Jobs Creation Act of 2004, the company On October 22, 2004, the President signed the American Jobs |
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TIMKEN |
Report of Management on Internal Control
Over Financial Reporting
The management of The Timken Company is responsible for estab– Timken management assessed the effectiveness of the company’s | Committee of Sponsoring Organizations of the Treadway Ernst & Young LLP, independent registered public accounting firm, | |
/s/ James W. Griffith President and | /s/ Glenn A. Eisenberg Executive Vice President – |
Management Certifications
James W. Griffith, President and Chief Executive Officer of Timken, | Section 302 of the Sarbanes–Oxley Act of 2002 requires Timken’s |
Report of Independent Registered Public
Accounting Firm
To the Board of Directors and Shareholders
The Timken Company
We have audited the accompanying consolidated balance sheets We conducted our audits in accordance with the standards of the | In our opinion, the financial statements referred to above present We also have audited, in accordance with the standards of the /s/ Ernst & Young LLP Cleveland, Ohio |
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TIMKEN |
Report of Independent Registered Public
Accounting Firm
To the Board of Directors and Shareholders
The Timken Company
We have audited management’s assessment, included in the We conducted our audit in accordance with the standards of the A company’s internal control over financial reporting is a process | are recorded as necessary to permit preparation of financial Because of its inherent limitations, internal control over financial In our opinion, management’s assessment that The Timken We also have audited, in accordance with the standards of the /s/ Ernst & Young LLP Cleveland, Ohio |
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TIMKEN |
Forward–Looking Statements
Certain statements set forth in this annual report (including a) risks associated with the acquisition of Torrington, b) changes in world economic conditions, including c) the effects of fluctuations in customer demand on sales, d) competitive factors, including changes in market e) changes in operating costs. This includes: the effect | and energy; the company’s ability to mitigate the impact f) the success of the company’s operating plans, including g) the success of the company’s plans concerning the h) unanticipated litigation, claims or assessments. This i) changes in worldwide financial markets, including interest Additional risks relating to the company’s business, the Except as required by the federal securities laws, the |
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TIMKEN |
Quarterly Financial Data
2004 | Net Sales | Gross Profit | Impairment & Restructuring | Net Income (Loss) | Earnings per Basic | Share(1) Diluted | Dividends per Share |
(Thousands of dollars, except per share data) | |||||||
Q1 Q2 Q3 Q4 | $ 1,098,785 1,130,287 1,096,724 1,187,875 | $ 202,523 205,587 184,045 246,430 | $ 730 329 2,939 9,436 | $ 28,470 25,341 17,463 64,382(2)(5) | $ .32 .28 .19 .71 | $ .32 .28 .19 .71 | $ .13 .13 .13 .13 |
$ 4,513,671 | $ 838,585 | $ 13,434 | $135,656 | $ 1.51 | $ 1.49 | $ .52 | |
2003 (Thousands of dollars, except per share data) | |||||||
Q1 Q2 Q3 Q4 | $ 838,007 990,253 938,012 1,021,825 | $ 137,762(3) 158,069 147,610 195,677 | $ – 853 1,883 16,418 | $ 11,339 3,921 (1,275) 22,496(2)(4) | $ .15 .05 (.01) .26 | $ .15 .05 (.01) .25 | $ .13 .13 .13 .13 |
$ 3,788,097 | $ 639,118(3) | $ 19,154 | $ 36,481 | $ .44 | $ .44 | $ .52 | |
(1)Annual earnings per share do not equal the sum of the individual quarters due to differences in the average number of shares outstanding during the respective periods.
(2)Includes receipt (net of expenses) of $44.4 million and $65.6 million in 2004 and 2003 resulting from the U.S. Continued Dumping and Subsidy Offset Act.
(3)Gross profit for 2003 includes a reclassification of $7.5 million from cost of products sold to selling administrative and general expenses for Torrington engineering and
research and development expenses to be consistent with the company’s 2004 cost classification methodology.
(4)Includes $45.7 million for write–off of investment in joint venture, PEL.
(5)Includes $17.1 million for the gain on sale of non–strategic assets and $16.2 million for the loss on dissolution of a subsidiary.
2004 Stock Prices | 2003 Stock Prices | |||||
High | Low | High | Low | |||
Q1 Q2 Q3 Q4 | $24.70 26.49 26.49 27.50 | $18.74 20.81 22.50 22.82 | Q1 Q2 Q3 Q4 | $20.46 18.50 19.25 20.32 | $14.88 15.59 14.55 15.31 |
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TIMKEN |
Summary of Operations and Other Comparative Data
2004 | 2003 | 2002 | 2001 | |
(Thousands of dollars, except per share data) | ||||
Statements of Income Net sales: Automotive Bearings Industrial Bearings Total Bearings Steel | $ 1,582,226 1,709,770 3,291,996 1,221,675 | $ 1,396,104 1,498,832 2,894,936 893,161 | $ 752,763 971,534 1,724,297 825,778 | $ 642,943 990,365 1,633,308 813,870 |
Total net sales | 4,513,671 | 3,788,097 | 2,550,075 | 2,447,178 |
Gross profit Selling, administrative and general expenses Impairment and restructuring charges Operating income (loss) Other income (expense) – net Earnings before interest and taxes (EBIT)(1) Interest expense Income (loss) before cumulative effect of accounting changes Net income (loss) Balance Sheets Inventory Working capital Property, plant and equipment – net Total assets Total debt: Commercial paper Short–term debt Current portion of long–term debt Long–term debt | 838,585 587,923 13,434 237,228 11,988 249,216 50,834 135,656 $ 135,656 $ 874,833 691,964 1,582,957 3,938,500 – 157,417 1,273 620,634 | 639,118(6) 521,717(6) 19,154 98,247 9,833 108,080 48,401 36,481 $ 36,481 $ 695,946 375,637 1,610,848 3,689,789 – 114,469 6,725 613,446 | 469,577 358,866 32,143 78,568 36,814 115,382 31,540 51,451 $ 38,749 $ 488,923 334,222 1,226,244 2,748,356 8,999 78,354 23,781 350,085 | 400,720 363,683 54,689 (17,652) 22,061 4,409 33,401 (41,666) $ (41,666) $ 429,231 187,224 1,305,345 2,533,084 1,962 84,468 42,434 368,151 |
Total debt Net debt: Total debt Less: cash and cash equivalents | 779,324 779,324 (50,967) | 734,640 734,640 (28,626) | 461,219 461,219 (82,050) | 497,015 497,015 (33,392) |
Net debt(5) Total liabilities Shareholders’ equity Capital: Net debt Shareholders’ equity | 728,357 2,668,652 $ 1,269,848 728,357 1,269,848 | 706,014 2,600,162 $ 1,089,627 706,014 1,089,627 | 379,169 2,139,270 $ 609,086 379,169 609,086 | 463,623 1,751,349 $ 781,735 463,623 781,735 |
Capital Other Comparative Data | 1,998,205
| 1,795,641
| 988,255
| 1,245,358
|
Beginning invested capital Net sales per associate (3) Capital expenditures Depreciation and amortization Capital expenditures / Net sales Dividends per share Earnings per share (4) Earnings per share – assuming dilution (4) Net debt to capital (5) Number of associates at year–end Number of shareholders (9) | 2,581,816 $ 173.6 $ 147,013 $ 209,431 3.3% $ 0.52 $ 1.51 $ 1.49 36.5% 25,931 42,484 | 1,938,316 $ 172.0 $ 129,315 $ 208,851 3.4% $ 0.52 $ 0.44 $ 0.44 39.3% 26,073 42,184 | 1,917,341 $ 139.0 $ 90,673 $ 146,535 3.6% $ 0.52 $ 0.63 $ 0.62 38.4% 17,963 44,057 | 2,132,055 $ 124.8 $ 102,347 $ 152,467 4.2% $ 0.67 $ (0.69) $ (0.69) 37.2% 18,735 39,919 |
(2) The company uses EBIT/Beginning invested capital as a type of ratio that indicates return on capital. EBIT is defined as operating income plus other income (expense) – net. Beginning
invested capital is calculated as total assets less the following balance sheet line items: cash and cash equivalents; the current and long–term portions of deferred income taxes; accounts
payable and other liabilities; salaries, wages and benefits; and income taxes.
(3) Based on the average number of associates employed during the year.
(4) Based on the average number of shares outstanding during the year and includes the cumulative effect of accounting change in 2002, which related to the adoption of SFAS No. 142.
(5) The company presents net debt because it believes net debt is more representative of the company’s indicative financial position due to temporary changes in cash and cash equivalents.
(6) Gross profit for 2003 included a reclassification of $7.5 million from cost of products sold to selling, administrative and general expenses for Torrington engineering and research and
development expenses to be consistent with the company’s 2004 cost classification methodology.
(7) It is impractical for Timken to reflect 2000 segment financial information related to the 2003 reorganization of its Automotive and Industrial Groups, as this structure was not in place
at the time.
(8) It is impracticable for the company to restate prior year segment financial information into Automotive Bearings and Industrial Bearings as this structure was not in place until 2000.
(9) Includes an estimated count of shareholders having common stock held for their accounts by banks, brokers and trustees for benefit plans.
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TIMKEN |
2000 | 1999 | 1998 | 1997 | 1996 | 1995 |
$ 839,838(7) 923,477(7) 1,763,315 879,693 | $ (8) (8) 1,759,871 735,163 | $ (8) (8) 1,797,745 882,096 | $ (8) (8) 1,718,876 898,686 | $ (8) (8) 1,598,040 796,717 | $ (8) (8) 1,524,728 705,776 |
2,643,008 | 2,495,034 | 2,679,841 | 2,617,562 | 2,394,757 | 2,230,504 |
|
|
|
|
|
|
514,604 514,604 (10,927) | 449,890 449,890 (7,906) | 469,398 469,398 (320) | 359,431 359,431 (9,824) | 302,665 302,665 (5,342) | 211,232 211,232 (7,262) |
503,677 1,559,423 $ 1,004,682 503,677 1,004,682 | 441,984 1,395,337 $ 1,045,981 441,984 1,045,981 | 469,078 1,393,950 $ 1,056,081 469,078 1,056,081 | 349,607 1,294,474 $ 1,032,076 349,607 1,032,076 | 297,323 1,149,110 $ 922,228 297,323 922,228 | 203,970 1,104,747 $ 821,178 203,970 821,178 |
1,508,359
| 1,487,965
| 1,525,159
| 1,381,683
| 1,219,551
| 1,025,148
|
2,031,182 $ 127.9 $ 162,717 $ 151,047 6.2% $ 0.72 $ 0.76 $ 0.76 33.4% 20,474 42,661 | 2,040,903 $ 119.1 $ 173,222 $ 149,949 6.9% $ 0.72 $ 1.01 $ 1.01 29.7% 20,856 42,907 | 1,837,674 $ 127.5 $ 258,621 $ 139,833 9.7% $ 0.72 $ 1.84 $ 1.82 30.8% 21,046 45,942 | 1,616,223 $ 130.5 $ 229,932 $ 134,431 8.8% $ 0.66 $ 2.73 $ 2.69 25.3% 20,994 46,394 | 1,435,019 $ 132.4 $ 155,925 $ 126,457 6.5% $ 0.60 $ 2.21 $ 2.19 24.4% 19,130 31,813 | 1,401,984 $ 134.2 $ 131,188 $ 123,409 5.9% $ 0.56 $ 1.80 $ 1.78 19.9% 17,034 26,792 |
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TIMKEN |
APPENDIX TO EXHIBIT 13
On page 1 of the printed document, three bar charts were shown which contain the following information:
(1) | Net Sales ($ Millions) | |
2000 2001 2002 2003 2004 | 2,643 2,447 2,550 3,788 4,514 |
(2) | Earnings (loss) per share – diluted | |
2000 2001 2002 2003 2004 | 0.76 (0.69) 0.62 0.44 1.49 |
(3) | Dividends per share | |
2000 2001 2002 2003 2004 | 0.72 0.67 0.52 0.52 0.52 |
TIMKEN |