1.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended March 31, 1997.
Commission File No. 1-1169
THE TIMKEN COMPANY
Exact name of registrant as specified in its charter
Ohio 34-0577130
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
1835 Dueber Avenue, S.W., Canton, Ohio 44706-2798
Address of principal executive offices Zip Code
(330) 438-3000
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
___ ___
Common shares outstanding at March 31, 1997, 31,242,707.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Mar. 31 Dec. 31
1997 1996
ASSETS ------ ------
Current Assets (Thousands of dollars)
Cash and cash equivalents......................... $10,974 $5,342
Accounts receivable, less allowances,
(1997-$7,318; 1996-$7,062)........................ 345,999 313,932
Deferred income taxes............................. 55,916 54,852
Inventories (Note 2) ............................. 425,182 419,507
------- -------
Total Current Assets.................... 838,071 793,633
Property, Plant and Equipment..................... 2,522,482 2,483,200
Less allowances for depreciation................. 1,400,936 1,388,871
--------- ---------
1,121,546 1,094,329
Costs in excess of net assets of acquired business,
less amortization, (1997-$19,733; 1996-$18,670)... 125,526 125,018
Deferred income taxes............................. 11,495 3,803
Other assets...................................... 60,938 54,555
-------- --------
Total Assets................................ $2,157,576 $2,071,338
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and other liabilities............ $235,087 $237,020
Short-term debt and commercial paper.............. 198,164 136,830
Accrued expenses.................................. 158,801 154,098
------- -------
Total Current Liabilities............... 592,052 527,948
Noncurrent Liabilities
Long-term debt (Note 3) .......................... 142,806 165,835
Accrued pension cost.............................. 78,570 56,568
Accrued postretirement benefits cost.............. 401,396 398,759
------- -------
622,772 621,162
Shareholders' Equity (Note 4)
Common stock...................................... 312,048 315,966
Earnings invested in the business................. 649,839 619,061
Cumulative foreign currency translation adjustment (19,135) (12,799)
-------- --------
Total Shareholders' Equity.............. 942,752 922,228
Total Liabilities and Shareholders' Equity.. $2,157,576 $2,071,338
========== ==========
PART I. FINANCIAL INFORMATION 3.
Continued
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Mar 31 Mar 31
1997 1996
------ ------
(Thousands of dollars, except per share data)
Net sales........................... $640,584 $595,954
Cost of product sold................ 487,372 456,739
------ ------
Gross Profit..................... 153,212 139,215
Selling, administrative and general 77,754 78,917
------ ------
Operating Income................. 75,458 60,298
Interest expense.................... (5,465) (3,675)
Other - net......................... (3,001) (2,780)
------ ------
Other Income (Expense)........... (8,466) (6,455)
Income Before Income Taxes....... 66,992 53,843
Provision for Income Taxes (Note 5). 25,926 20,245
------ ------
Net Income....................... $41,066 $33,598
====== ======
Net Income Per Share * .......... $1.32 $1.07
====== ======
Dividends Per Share.............. $0.33 $0.30
====== ======
* Per average shares outstanding.... 31,224,266 31,390,830
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Cash Provided (Used) Mar. 31 Mar. 31
1997 1996
------ ------
OPERATING ACTIVITIES (Thousands of dollars)
Net Income.............................................. $41,066 $33,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 33,205 30,891
Provision (credit) for deferred income taxes........... (6,194) (2,322)
Stock issued in lieu of cash to employee benefit plans. 4,095 2,298
Changes in operating assets and liabilities:
Accounts receivable................................... (35,269) (36,744)
Inventories and other assets.......................... (11,315) (28,929)
Accounts payable and accrued expenses................. 29,365 31,657
Foreign currency translation.......................... (233) (48)
------ ------
Net Cash Provided (Used) by Operating Activities..... 54,720 30,401
INVESTING ACTIVITIES
Purchases of property, plant and equipment - net....... (37,364) (32,598)
Purchase of subsidiaries............................... (34,747) 0
------ ------
Net Cash Provided (Used) by Investing Activities..... (72,111) (32,598)
FINANCING ACTIVITIES
Cash dividends paid to shareholders.................... (8,939) (7,227)
Purchase of Treasury Shares............................ (9,361) 0
Payments on long-term debt............................. 0 (34)
Proceeds from issuance of long-term debt...............
Short-term debt activity - net......................... 41,742 3,000
------ ------
Net Cash Provided (Used) by Financing Activities..... 23,442 (4,261)
Effect of exchange rate changes on cash................. (419) 60
Increase or (Decrease) in Cash and Cash Equivalents..... 5,632 (6,398)
Cash and Cash Equivalents at Beginning of Period........ 5,342 7,262
------ ------
Cash and Cash Equivalents at End of Period.............. $10,974 $864
====== ======
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, 1996.
3/31/97 12/31/96
Note 2 -- Inventories ------ ------
(Thousands of dollars)
Finished products $138,366 $137,666
Work-in-process and raw materials 246,448 241,691
Manufacturing supplies 40,368 40,150
------ ------
$425,182 $419,507
====== ======
Note 3 -- Long-term Debt 3/31/97 12/31/96
------ ------
(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 March 31, 1997 is 3.45%. 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 March 31, 1997
is 3.45% 21,700 21,700
Fixed Rate Medium-Term Notes, Series A, due at
various dates through October, 2026 with
interest rates ranging from 6.78% to 9.25% 148,000 148,000
Other 1,531 1,531
------ ------
196,231 196,231
Less: Current Maturities 53,425 30,396
------ ------
$142,806 $165,835
====== ======
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 6.
Continued
Note 4 -- Shareholders' Equity 03/31/97 12/31/96
------ ------
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 -- 100,000,000 shares
Issued (including shares in treasury)
1997 - 31,525,169 shares
1996 - 31,525,201 shares
Stated Capital 53,064 53,064
Other paid-in capital 271,449 270,840
Less cost of Common Stock in treasury
1997 - 282,462 shares
1996 - 201,756 shares 12,465 7,938
------ ------
$312,048 $315,966
====== ======
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, 1996 $53,064 $270,840 $619,061 ($12,799) ($7,938) $922,228
Net Income 41,066 41,066
Dividends paid - $.33 per share (10,288) (10,288)
Employee benefit and dividend reinvestment plans: 609 (4,527) (3,918)
Treasury -(issued)/acquired 80,706 shares
Common Stock - issued/(acquired) (32) shares
Foreign currency translation adjustment (6,336) (6,336)
------ ------ ------ ------ ------ ------
Balance March 31, 1997 $53,064 $271,449 $649,839 ($19,135)($12,465) $942,752
====== ====== ====== ====== ====== ======
PART I. NOTES TO FINANCIAL STATEMENTS 7.
(Unaudited) Continued
Note 5 -- Income Tax Provision Three Months Ended
Mar. 31 Mar. 31
1997 1996
------ ------
U.S. (Thousands of dollars)
Federal $19,449 $15,359
State & Local 3,223 2,770
Foreign 3,254 2,116
------ ------
$25,926 $20,245
====== ======
Taxes provided exceed the U.S. statutory rate primarily
due to losses without current tax benefits and state
and local taxes.
Note 6 -- Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," which is required to be adopted on December 31, 1997. At
that time, the company will be required to change the method currently
used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating basic earnings per share,
the dilutive effect of stock options will be excluded. The company
has determined that under SFAS No. 128 the "basic" earnings per share
will be the same as the previously calculated "primary" earnings per
share because common stock equivalents had previously been excluded
due to the lack of materially. The calculation of "diluted" earnings
per share under SFAS No. 128 will not materially differ from the
previously calculated "fully-diluted" earnings per share as reflected
in Exhibit 11 to this Form 10-Q.
Note 7 -- Subsequent Event
On April 15, 1997, the company's Board of Directors approved a
two-for-one stock split effected in the form of a stock dividend.
As a result of this action, shareholders will receive, on or about
May 30, 1997, a stock dividend of one share of the company's common
stock for each full share of common stock outstanding to holders of
record on May 16, 1997. Pro forma earnings per share, giving
retroactive effect to the two-for-one split, are $0.66 for the three
months ended March 31, 1997, and $0.54 for the three months ended
March 31, 1996. Share and per share information contained
elsewhere in this filing have not been adjusted to reflect the
impact of the common stock split.
8.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The Timken Company's financial performance in the first quarter of
1997 continues to provide strong returns for shareholders as again
the company achieved record quarterly sales and earnings.
Net sales for the first quarter were $640.6 million, up 7.5% from
1996's first quarter record level of $596 million. Contributing to
the quarter-to-quarter growth were sales by businesses acquired
during the past 12 months, stronger North American automotive and
super-precision bearing sales and higher steel automotive bar and
parts sales. During the first quarter, the company also achieved
growth in new products and markets.
Gross profit for the quarter was $153.2 million (23.9% of net sales)
compared to $139.2 million (23.4% of net sales) in the same period a
year ago. The company's continuous improvement activities continued
to help lower manufacturing costs in existing operations. The
increase in sales also contributed to the first quarter improvement
in earnings.
Selling, administrative, and general expenses were $77.8 million
(12.1% of net sales) in the first quarter of 1997 compared to $78.9
million (13.2% of net sales) in 1996. These results reflect the
company's continuing emphasis on controlling administrative costs.
Bearing Business net sales were $422.9 million in the first quarter
of 1997 compared to $407.5 million in the year-earlier period. Sales
from the business' recently acquired bearing companies, Timken Polska
Sp.z o.o. and Gnutti Cuscinetti, S.r.l, and its Chinese joint
venture, Yantai Timken Company, Ltd., contributed to the increase.
In addition, the Bearing Business achieved higher North American
automotive and aftermarket sales and increased volumes in its super-
precision business in this year's first quarter. Sales in Europe were
lower due to weaker aftermarket and automotive market segments.
Bearing Business operating income rose to $45.1 million in 1997's
first quarter compared to $40.4 million reported in the first quarter
of 1996. Cost reductions in manufacturing attributable to the
company's continuous improvement efforts had a positive impact on the
first quarter's operating profit. Improved sales of higher-value
automotive package bearings along with increased demand for super-
precision bearings manufactured by the company's MPB Corporation
subsidiary also contributed to the growth in earnings.
9.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
During the first quarter, the Bearing Business completed its
acquisition of the tapered roller bearing business of Gnutti Carlo
S.p.A., a European manufacturer located near Brescia, Italy. Now
called Gnutti Cuscinetti, S.r.l, the operation will function as a
Timken Italia subsidiary. This acquisition strengthens the company's
European presence and promotes continuing synergies among the
company's other plants in Europe. Also during the first quarter, the
company's Rail Bearing Service subsidiary launched its first
international remanufacturing operation for railroad bearings in
Nothampton, Great Britain. The new facility will operate under the
name "Rail Bearing Service - Unit of British Timken" and will be
dedicated to the growing railway markets within Europe.
Steel Business sales were $217.7 million in the first quarter of 1997
compared to $188.5 million recorded a year earlier. The sales
increase resulted from strong demand for small bars in the automotive
industry and from the company's ability to capitalize on the rebound
in the oil country market. During the first quarter, the company was
also successful in capturing additional industrial market segment
business and adding value through its Steel Parts Business. Sales
from Ohio Alloy Steels, Inc., Houghton and Richards, Inc., and
Sanderson Specialty Steels Ltd., newly acquired subsidiaries of
Latrobe Steel Company, also contributed to higher first quarter
sales.
Steel Business operating income in the first quarter of 1997 was
$30.4 million, up from the $19.9 million in the year-earlier period.
This increase resulted from a number of factors, including a decrease
in the price of scrap metal and mild winter weather, which
contributed to lower maintenance and sustained record levels of
throughput. The Steel Business also benefited from continuous
improvement initiatives which helped to lower manufacturing costs.
In April 1997, the company's Steel Business officially broke ground
for its new rolling mill at its Harrison Steel Plant located in
Canton, Ohio. This $55 million 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.
Interest expense was higher in the first quarter of 1997 compared to
the year-ago period due to a higher average level of debt outstanding
during the quarter.
10.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Financial Condition
Total assets increased by $86.2 million from December 31, 1996. The
increase resulted in part from higher accounts receivable and
inventories. The $35.3 million increase in accounts receivable, as
reflected in the Consolidated Condensed Statements of Cash Flows,
relates primarily to the increase in sales; however, the number of
days' sales in receivables at March 31, 1997, was slightly higher
than the year-end 1996 level. Inventories and other assets increased
by $11.3 million compared to year-end 1996. The increase in
inventories relates to the higher level of activity. The company
expects to continue to reduce its days' supply in inventory by year-
end 1997.
Debt of $341 million at the end of the first quarter of 1997
exceeded the $302.7 million at year-end 1996. Cash was required
primarily to fund the company's investing activities. Any future cash
needs that exceed cash generated from operations will be met by added
short-term borrowing and issuance of medium-term notes.
The 26.6% debt to total capital ratio was higher than the 24.7% at
year-end 1996. Debt increased by $38.3 million during the first
three months of 1997; total shareholders' equity increased by $20.5
million.
Purchases of property, plant and equipment - net during the three
months ended March 31, 1997, were $37.4 million compared to $32.6
million one year earlier. The company also invested $34.7 million in
the purchase of subsidiaries. The company continues to invest in
activities consistent with the strategies it is pursuing to 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.
On April 15, 1997, the Board of Directors announced a two-for-one
split of its common stock, to be effected in the form of a stock
dividend. The two-for-one stock split will take effect on or about
May 30, 1997, for shareholders of record on May 16, 1997. In effect,
shareholders will receive a stock dividend of one share for every
share held on May 16. Also, the board declared the company's 300th
consecutive quarterly cash dividend of $.33 per share payable
June 2, 1997, to shareholders of record at the close of business on
11.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
May 16, 1997. The dividend will be paid on shares prior to the
stock split.
On April 15, 1997, the company announced that it had amended and
extended its 1996 common stock purchase plan. As of April 15, when
the company's first quarter 1997 financial results were announced,
approximately 31 million shares were outstanding. The purchase plan
was initially adopted on June 14, 1996, and authorized the company,
from that date through December 31, 1998, to buy back in the open
market at prevailing market prices up to two million shares of
common stock, which were to be held as treasury shares and were to
be available for general corporate purposes. Under the amended
plan, the company may continue to purchase shares for an additional
12 months following the original expiration date, but may not
purchase more than the two million shares initially authorized.
Shares already acquired under the purchase plan, and those acquired
in the future, will be held in the company's treasury. They will be
used to satisfy the company's dividend reinvestment plan
requirements, to provide shares under non-qualified stock-incentive
plans for associates and directors of The Timken Company and its
subsidiaries, and to fund qualified benefit plans that the company
and its subsidiaries maintain for associates.
The company's basic labor agreement with the United Steelworkers of
America (AFL-CIO), representing 4,500 production and maintenance
workers at the company's Canton, Wooster, and Columbus, Ohio plants,
expires on September 22, 1997. The company has been negotiating
with the union leadership to reach an early agreement on a new
contract and, thus, be in a position to assure all customers an
uninterrupted supply of products. On April 17, 1997, the company
and the United Steelworkers reached tentative agreement for a new
3-year contract. The company and the union are continuing their
efforts to finalize the contract. No ratification vote has been
scheduled and it is not certain that the members of the
local unions will approve the proposed contract.
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:
a) changes in world economic conditions. This includes, but is
not limited to, the potential instability of governments and
12.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
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, its ability to integrate
acquisitions into company operations, the ability of
recently acquired companies to meet satisfactory operating
results and the company's ability to conclude timely
collective bargaining agreements without loss of customer
orders.
f) unanticipated litigation, claims or assessments. This
includes, but is not limited to, claims or problems related
to product warranty and environmental issues.
13.
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.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(1) The Board of Directors recommended the four
individuals set forth below be elected Directors in
Class III at the 1997 Annual Meeting of Shareholders of
The Timken Company held on April 15, 1997, to serve a
term of three years expiring at the Annual Meeting in
2000 (or until their respective successors are elected
and qualified). All four individuals had been
previously elected as Directors by the shareholders
and were re-elected at the 1997 meeting.
Affirmative Withheld
Stanley C. Gault 27,303,121 778,681
John M. Timken, Jr. 27,303,818 777,984
W. R. Timken, Jr. 27,306,504 775,298
Alton W. Whitehouse 27,304,354 777,448
(2) One proposal was submitted by shareholders. Proxies
were solicited regarding this proposal. The proposal was
presented at the meeting and a motion made for its adoption.
There was no second to the motion. The results of the
solicitation of the proxies in respect of this proposal
are set forth below.
14.
Shareholder Proposal recommended:
(a) The Board issue a policy publicly committing the
company to board inclusiveness, a program of
steps, and the timeline expected to move in that
direction.
(b) The company issue a report by September 1997
summarizing: a)efforts to encourage diversified
representation on our board; b) criteria for board
qualification; c) the process of selecting the
board candidates; d) the process of selecting the
board committee members including the nominating
committee.
Affirmative Negative
4,715,321 19,978,821
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
11 Computation of Per Share Earnings
27 Article 5
(b). Reports on Form 8-K
On April 15, 1997, the company filed a Form 8-K
regarding the Board of Directors action to authorize
a two-for-one split of its common stock, to be
effected in the form of a stock dividend. The stock
split will take effect on or about May 30, 1997, for
shareholders of record on May 16, 1997.
15.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Timken Company
_______________________________
Date May 14, 1997 BY /s/ Joseph F. Toot, Jr.
________________________ _______________________________
Joseph F. Toot, Jr.,
Director; President and
Chief Executive Officer
Date May 14, 1997 BY /s/ G. E. Little
________________________ _______________________________
G. E. Little
Vice President - Finance