1.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 1996.
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 September 30, 1996, 31,257,822.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Sep. 30 Dec. 31
1996 1995
------ ------
ASSETS (Thousands of Dollars)
Current Assets
Cash and cash equivalents......................... $15,309 $7,262
Accounts receivable, less allowances,
(1996-$7,670; 1995-$6,632)........................ 323,342 284,924
Deferred income taxes............................. 54,179 50,183
Inventories (Note 2) ............................. 427,482 367,889
------ ------
Total Current Assets.................... 820,312 710,258
Property, Plant and Equipment..................... 2,442,432 2,337,450
Less allowances for depreciation................. 1,374,215 1,298,068
------ ------
1,068,217 1,039,382
Costs in excess of net assets of acquired business,
less amortization, (1996-$17,626; 1995-$14,985)... 128,054 102,854
Deferred income taxes............................. 14,203 31,176
Other assets...................................... 50,428 42,255
------ ------
Total Assets................................ $2,081,214 $1,925,925
====== ======
LIABILITIES
Current Liabilities
Accounts payable and other liabilities............ $221,659 $229,096
Short-term debt and commercial paper.............. 232,955 60,078
Accrued expenses.................................. 177,140 173,189
------ ------
Total Current Liabilities............... 631,754 462,363
Noncurrent Liabilities
Long-term debt (Note 3) .......................... 140,930 151,154
Accrued pension cost.............................. 27,265 97,524
Accrued postretirement benefits cost.............. 394,825 393,706
------ ------
563,020 642,384
Shareholders' Equity (Note 4)
Common stock...................................... 314,144 317,455
Earnings invested in the business................. 589,409 517,802
Cumulative foreign currency translation adjustment (17,113) (14,079)
------ ------
Total Shareholders' Equity.............. 886,440 821,178
Total Liabilities and Shareholders' Equity.. $2,081,214 $1,925,925
========== ==========
PART I. FINANCIAL INFORMATION 3.
Continued
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
Sep. 30 Sep. 30 Sep. 30 Sep. 30
1996 1995 1996 1995
------ ------ ------ ------
(Thousands of dollars, except per share data)
Net sales....................................... $1,778,924 $1,674,159 $581,417 $519,463
Cost of product sold............................ 1,359,670 1,286,640 443,767 403,912
------ ------ ------ ------
Gross Profit................................. 419,254 387,519 137,650 115,551
Selling, administrative and general expenses.... 234,460 225,974 77,326 77,552
------ ------ ------ ------
Operating Income............................. 184,794 161,545 60,324 37,999
Interest expense................................ (12,406) (15,162) (4,672) (4,781)
Other - net..................................... (8,606) (9,575) (3,545) (2,427)
------ ------ ------ ------
Other Income (Expense)....................... (21,012) (24,737) (8,217) (7,208)
Income Before Income Taxes................... 163,782 136,808 52,107 30,791
Provision for Income Taxes (Note 5)............. 63,875 52,261 20,322 11,763
------ ------ ------ ------
Net Income................................... $99,907 $84,547 $31,785 $19,028
======== ======== ======== ========
Net Income Per Share * ...................... $3.18 $2.71 $1.01 $0.61
======== ======== ======== ========
Dividends Per Share.......................... $0.90 $0.81 $0.30 $0.27
======== ======== ======== ========
* Per average shares outstanding................ 31,420,553 31,159,689 31,424,410 31,244,711
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Cash Provided (Used) Sep. 30 Sep. 30
1996 1995
------ ------
OPERATING ACTIVITIES (Thousands of dollars)
Net Income.............................................. $99,907 $84,547
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 93,892 92,756
Provision (credit) for deferred income taxes........... 13,433 5,790
Stock issued in lieu of cash to employee benefit plans. 3,300 4,383
Changes in operating assets and liabilities:
Accounts receivable................................... (29,192) (32,058)
Inventories and other assets.......................... (39,713) (72,561)
Accounts payable and accrued expenses................. (85,910) 22,469
Foreign currency translation.......................... (481) (22)
------ ------
Net Cash Provided (Used) by Operating Activities..... 55,236 105,304
INVESTING ACTIVITIES
Purchases of property, plant and equipment - net....... (100,841) (89,313)
Purchase of subsidiaries............................... (75,634) 0
------ ------
Net Cash Provided (Used) by Investing Activities..... (176,475) (89,313)
FINANCING ACTIVITIES
Cash dividends paid to shareholders.................... (22,485) (21,493)
Purchase of Treasury Shares............................ (12,426) 0
Payments on long-term debt............................. (196) 269
Proceeds from issuance of long-term debt............... 20,000 0
Short-term debt activity - net......................... 144,471 2,755
------ ------
Net Cash Provided (Used) by Financing Activities..... 129,364 (18,469)
Effect of exchange rate changes on cash................. (78) (137)
Increase or (Decrease) in Cash and Cash Equivalents..... 8,047 (2,615)
Cash and Cash Equivalents at Beginning of Period........ 7,262 12,121
------ ------
Cash and Cash Equivalents at End of Period.............. $15,309 $9,506
====== ======
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 5.
Note 1 -- Basis of Presentation
The accompanying consolidated condensed financial statements (unaudited) 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, 1995.
9/30/96 12/31/95
Note 2 -- Inventories ------ ------
(Thousands of dollars)
Finished products $138,558 $130,894
Work-in-process and raw materials 247,979 195,126
Manufacturing supplies 40,945 41,869
------ ------
$427,482 $367,889
====== ======
Note 3 -- Long-term Debt 9/30/96 12/31/95
------ ------
(Thousands of dollars)
7-1/2% State of Ohio Pollution Control
Revenue Refunding Bonds, maturing on
January 1, 2002 $17,000 $17,000
State of Ohio Water Development Revenue
Refunding Bond, maturing on May 1, 2007.
The variable interest rate is tied to the
bank's tax exempt weekly interest rate.
The rate at September 30, 1996 is 3.85%. 8,000 8,000
State of Ohio Air Quality and Water Development
Revenue Refunding Bonds, maturing on
June 1, 2001. The variable interest rate
is tied to the bank's tax exempt weekly
interest rate. The rate at September 30, 1996
is 3.85% 21,700 21,700
Fixed Rate Medium-term Notes, Series A, due at
various dates through July, 2026 with
interest rates ranging from 7.20% to 9.25% 123,000 103,000
Other 1,625 1,768
------ ------
171,325 151,468
Less: Current Maturities 30,395 314
------ ------
$140,930 $151,154
====== ======
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 6.
Continued
Note 4 -- Shareholders' Equity 09/30/96 12/31/95
------ ------
Class I and Class II serial preferred stock (Thousands of dollars)
without par value:
Authorized -- 10,000,000 shares each class
Issued - none $0 $0
Common Stock without par value:
Authorized -- 200,000,000 shares
Issued (including shares in treasury)
1996 - 31,525,227 shares
1995 - 31,354,307 shares
Stated Capital 53,064 53,064
Other paid-in capital 271,526 264,567
Less cost of Common Stock in treasury
1996 - 267,405 shares
1995 - 4444 shares 10,446 176
------ ------
$314,144 $317,455
====== ======
An analysis of the change in capital and earnings invested in the business is as follows:
Common Stock
-------------------- Earnings Foreign
Other Invested Currency
Stated Paid-In in the Translation Treasury
Capital Capital Business Adjustment Stock Total
------ ------ ------ ------ ------ ------
(Thousands of dollars)
Balance December 31, 1995 $53,064 $264,567 $517,802 ($14,079) ($176) $821,178
Net Income 99,907 99,907
Dividends paid - $.90 per share (28,300) (28,300)
Employee benefit and dividend reinvestment plans: 6,959 (10,270) (3,311)
Treasury - issued/acquired 262,961 shares
Common Stock - issued 170,920 shares
Foreign currency translation adjustment (3,034) (3,034)
------ ------ ------ ------ ------ ------
Balance September 30, 1996 $53,064 $271,526 $589,409 ($17,113)($10,446) $886,440
====== ====== ====== ====== ====== ======
PART I. NOTES TO FINANCIAL STATEMENTS 7.
(Unaudited) Continued
Note 5 -- Income Tax Provision Nine Months Ended Three Months Ended
Sep. 30 Sep. 30 Sep. 30 Sep. 30
1996 1995 1996 1995
------ ------ ------ ------
U.S. (Thousands of dollars)
Federal $48,834 $35,684 $15,010 $7,359
State & Local 7,577 6,604 2,055 1,911
Foreign 7,464 9,973 3,257 2,493
------ ------ ------ ------
$63,875 $52,261 $20,322 $11,763
====== ====== ====== ======
Taxes provided exceed the U.S. statutory rate primarily
due to state and local taxes.
8.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
During the third quarter of 1996, The Timken Company continued its
trend of improved financial performance, resulting in record sales
and earnings for the quarter and nine months ended September 30.
Net sales for the third quarter were $581.4 million, up 11.9% from
1995's third quarter record level of $519.5 million. This increase
resulted in part from sales gains in the U.S. automotive market,
which were bolstered by higher demand for steel tubing and parts and
an increase in sales of higher value Sensor-pac bearings. In
addition, the company achieved higher sales in Mexico, Australia and
Argentina as well as in its miniature precision bearing and U.S.
specialty alloy steel markets. The company increased sales during
the first nine months of 1996 despite weakness in certain markets,
including heavy trucks, freight cars and locomotives in the U.S. and
trucks and construction and agricultural equipment in Europe. Sales
in 1996 were also higher than the year-earlier period because of
acquisitions the company completed during 1996.
Gross profit for the quarter was $137.7 million (23.7% of net sales)
compared to $115.6 million (22.2% of net sales) in the same period a
year ago. The company's efforts to accelerate continuous
improvement in its manufacturing plants had a positive impact on
manufacturing performance and contributed to the growth in gross
profit. Higher natural gas costs were more than offset by lower
steel raw material costs and lower labor costs resulting from less
overtime and a reduction of the company's contingency workforce.
Selling, administrative, and general expenses were $77.3 million
(13.3% of net sales) in the third quarter of 1996 compared to $77.6
million (14.9% of net sales) in 1995. The company's on-going
efforts to streamline its administrative functions helped to offset
higher expense due to the company's new pay-for-performance plan for
salaried associates that was implemented in the fourth quarter of
1995. The company also incurred higher expense in the third quarter
and first nine months of 1996 related to its recent acquisitions and
the development of improved scheduling and product and process
costing systems.
Bearing Business net sales were $382.6 million in the third quarter
of 1996 compared to $351.5 million in the year-earlier period.
During the fist nine months, the Bearing Business achieved higher
9.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
sales despite weakness in the heavy truck, and locomotive markets in
the U.S. and softening of the truck and construction and agricultural
equipment markets in Europe. Strengthened business in Mexico,
Argentina, and Australia and higher-value "smart" bearings equipped
with sensors and used in anti-lock braking systems buoyed sales. In
addition, the bearing business achieved growth in its U.S.
aftermarket sales and in its computer disk drive and aerospace
markets. Sales from the business' recently acquired bearing company,
Timken Polska Sp.z o.o. and its Chinese joint venture, Yantai Timken
Company, Ltd., also contributed to higher Bearing Business sales in
the third quarter of 1996.
Bearing Business operating income was $37.9 million in 1996's third
quarter, up from the $33.4 million reported in the third quarter of
1995. Cost reductions in manufacturing attributable to the company's
efforts to accelerate continuous improvement contributed to growth in
operating income, although still more slowly than planned. The
bearing business reduced overtime and its contingency workforce as it
focused more on production schedules and manufacturing output in
order to more effectively manage inventories. Improved performance
by the company's European and Miniature Precision Bearing operations
also contributed to the year-to-year improvement in operating income.
In addition, the third quarter 1996 was positively affected by a
write-up related to annual taking of physical inventory. The 1996
write-up was considerably less than one recorded in the year-ago
period.
Steel Business sales of $198.8 million in the third quarter of 1996
were 18.3% higher than the $168 million recorded a year earlier. The
business achieved an increase in specialty steel sales at the
company's Latrobe Steel Company subsidiary in addition to higher
demand for large bars, steel parts, and automotive tubing. Sales
from Ohio Alloy Steels, Inc. and Houghton and Richards, Inc., newly
acquired subsidiaries of Latrobe Steel Company, also contributed to
higher third quarter sales.
Steel Business operating income in the third quarter of 1996 was
$22.4 million, up from the $4.6 million in the year-earlier period.
The Steel Business achieved an increase in profits primarily as a
result of the higher sales and continuous improvement efforts in its
manufacturing processes. Third quarter results were also affected by
lower scrap prices and higher natural gas costs. Operating income in
10.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
1995's third quarter was adversely affected by a physical inventory
adjustment.
More favorable interest rates in the third quarter of 1996 resulted
in lower interest expense compared to the year-ago period despite
higher average outstanding debt.
Financial Condition
Total assets increased by $155.3 million from December 31, 1995,
primarily as a result of the company's acquisitions that were
completed during the first nine months of 1996. In addition, the
increase in assets resulted in part from higher accounts receivable
and inventories. The $29.2 million increase in accounts receivable,
as reflected in the Consolidated Condensed Statements of Cash Flows,
relates primarily to the increase in sales. The number of days'
sales in receivables at September 30, 1996, was lower than the year-
end 1995 level. Inventories and other assets increased by $39.7
million compared to year-end 1995. The increase in inventories
relates primarily to the higher level of activity; however, the
number of days' supply in inventory at the end of the third quarter
was higher than the previous year-end level. The company expects to
reduce its days' supply in inventory by year-end.
The $85.9 million decrease in accounts payable and accrued expenses
relates primarily to additional funds the company contributed to its
pension plans during the third quarter. Debt of $373.9 million at
the end of the third quarter of 1996 exceeded the $211.2 million at
year-end 1995. In addition to funding the pension plans, cash was
required for the purchase of property, plant and equipment, to cover
the increase in working capital and to finance the company's various
growth initiatives. Any future increase in cash needs will be met
by added short-term borrowing and issuance of medium-term notes.
The 29.7% debt to total capital ratio was higher than the 20.5% at
year-end 1995 due to the higher debt level described above.
Purchases of property, plant and equipment - net during the nine
months ended September 30, 1996, were $100.8 million compared to
$89.3 million one year earlier. The company also invested $75.6
million in the purchase of subsidiaries. The company continues to
invest in activities consistent with the strategies it is pursuing to
11.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
achieve an industry leadership position. Further capital investments
in technologies in the company's plants throughout the world and new
acquisitions provide Timken with the opportunity to accelerate growth
and strengthen its positions in new and existing markets.
The company is continuing in its effort to accelerate continuous
improvement in its manufacturing plants worldwide. The Steel
Business is on track to achieve the results expected from this effort
announced in 1993. The Bearing Business is achieving savings but
is somewhat behind the planned savings schedule. Separation costs
associated with layoffs resulting from the implementation of cost
saving initiatives are being charged to accounting reserves that
were established in 1993.
During the third quarter, the company completed its acquisition of
the tool steel service center of Houghton & Richards, Inc.
(H & R), headquartered in Marlborough, Massachusetts. H & R will
operate as a subsidiary of Latrobe Steel Company, a Timken Company
subsidiary since 1975. This acquisition will expand the scope of
Latrobe's products and services to tool steel customers and will
enhance its tool steel distribution network.
On September 9, 1996, the company's Steel Business announced plans to
invest $55 million in a rolling mill and bar processing equipment at
its Harrison Steel Plant located in Canton, Ohio. This investment is
part of the company's growth strategy and will move the company
closer to achieving a cost and quality leadership position in the
manufacture of continuous-cast, small- and intermediate-sized, steel
bars. It is anticipated that the new rolling mill will be
operational by mid-1998.
On September 10, 1996, the company announced that it had entered into
negotiations to acquire the tool steel finishing and distribution
businesses of Sanderson Kayser Ltd., a United Kingdom steelmaker,
from its British parent GEI International PLC. The Sanderson Kayser
businesses will become part of Latrobe Steel Company, a Timken
Company subsidiary known for its leadership in specialty steel
manufacturing and, increasingly, in tool steel distribution.
On September 16, 1996, the company announced a planned $5 million
investment in its New Philadelphia Precision Tapered Bearing Business
to expand the facility and increase the plant's production capacity
by 50 percent. The 10,000-square-foot expansion, which is expected
12.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
to be completed in the second quarter of 1997, will provide space for
a manufacturing cell to produce specialized printing press bearings
and other precision products. The plan also calls for new equipment
to improve production of precision bearings for machine tool
customers.
On October 14, 1996, the company announced plans to invest $30
million in new technology to expand its steel parts manufacturing
capabilities and increase product lines. The new investments include
a $15 million profile ring mill to be built in Columbus, N.C., to
manufacture profiled rings, and a $15 million hot-forming facility to
be built at a site yet to be finalized. These initiatives are an
extension of the Steel Business' core competencies and will solidly
position the company as a prime supplier of rings to the bearing
industry. The ring mill, which will be added to the company's Tryon
Peak Plant, will produce a variety of shaped rings from Timken steel
for the bearing industry. The hot-forming facility will produce
forged bearing components from Timken steel bars.
On October 18, 1996, the company announced that it was in
negotiations to acquire the tapered roller bearing business of
Gnutti Carlo S.p.A., a leading European manufacturer of tapered
roller bearings located near Brescia in northern Italy. This
acquisition will give the company a stronger position in Europe and
enable it to offer a broader range of products to its customers.
On November 1, 1996, the Board of Directors declared a quarterly
cash dividend of $.30 per share payable December 2, 1996, to
shareholders of record at the close of business on November 15,
1996.
The company's basic labor agreement with the United Steelworkers of
America (AFL-CIO), representing production and maintenance workers
at the company's Canton, Wooster, and Columbus, Ohio plants, expires
on September 22, 1997. The collective bargaining agreement provides
for early negotiations in 1996. The two parties have been meeting
but have not reached an early agreement at this time.
Some of 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 statements made by
or on behalf of the company due to a variety of important
factors, such as:
13.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
a) changes in world economic conditions. This includes, but is
not limited to, the potential instability of governments and
legal systems in countries in which the company conducts
business, and significant changes in currency valuations.
b) changes in customer demand on sales and product mix. This
includes the effect of customer strikes and the impact of
changes in industrial business cycles.
c) competitive factors, including changes in market penetration
and the introduction of new products by existing and new
competitors.
d) changes in operating costs. This includes the effect of
changes in the company's manufacturing processes; changes in
costs associated with varying levels of operations; changes
resulting from inventory management 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 total planned benefits of its
continuous improvement programs and the ability of recently
acquired companies to meet initially projected operating
results.
f) unanticipated litigation, claims or assessments. This
includes, but is not limited to, claims or problems related
to product warranty and environmental issues.
14.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The company is currently involved in negotiations with the
Ohio Attorney General's office regarding alleged
violations of the company's NPDES water discharge permits
at its Canton, Ohio location. The company believes it has
substantial defenses to the violations alleged by the
Attorney General, and that the matter will ultimately be
settled for an amount that will not be material to its
financial condition or results of operations.
In August 1994, the company's Latrobe Steel Company
subsidiary was served with a complaint filed by seven
former employees. Each of the employees had been
terminated from employment in late 1993 as part of the
company's administrative streamlining efforts. The
plaintiffs' original claims of wrongful termination in
violation of public policy, breach of contract and
promissory estoppel were dismissed. Plaintiffs' remaining
claims include discrimination on account of age and/or
disability status. The relief requested includes
reinstatement, back pay, front pay, liquidated damages,
attorneys' fees and compensatory and punitive damages
under the Americans With Disabilities Act and Pennsylvania
law.
The company has denied all of the plaintiff's allegations
and believes that it has valid defenses to the plaintiffs'
claims. Discovery in this matter has been completed. The
claims of five plaintiffs have been consolidated by the
court for one trial and the claims of the remaining two
plaintiffs have been consolidated for another trial. The
trials are expected to begin in mid-November 1996. At
this time, the company believes that the ultimate
resolution of this matter will not be material to its
financial condition or results of operations.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
15.
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
4 Fifth Amendment Agreement dated
August 31, 1996, to the amended and
restated credit agreement as amended
February 23, 1993, May 31, 1994, November
15, 1994, and August 15, 1995, between
Timken and certain banks.
4.1 First Supplemental Indenture, dated as of
July 24, 1996 by and between The Timken
Company and Mellon Bank, N.A.
11 Computation of Per Share Earnings
27 Article 5
16.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Timken Company
_______________________________
Date November 13, 1996 BY /s/ Joseph F. Toot, Jr.
________________________ _______________________________
Joseph F. Toot, Jr.,
Director; President and
Chief Executive Officer
Date November 13, 1996 BY /s/ G. E. Little
________________________ _______________________________
G. E. Little
Vice President - Finance