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, 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 September 30, 1997, 62,980,440.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Sept. 30 Dec. 31
1997 1996
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents......................... $31,836 $5,342
Accounts receivable, less allowances,
(1997-$7,811; 1996-$7,062)........................ 349,252 313,932
Deferred income taxes............................. 51,307 54,852
Inventories (Note 2) ............................. 439,919 419,507
------- -------
Total Current Assets.................... 872,314 793,633
Property, Plant and Equipment..................... 2,592,180 2,483,200
Less allowances for depreciation................. 1,445,714 1,388,871
--------- ---------
1,146,466 1,094,329
Costs in excess of net assets of acquired business,
less amortization, (1997-$22,144; 1996-$18,670)... 126,502 125,018
Deferred income taxes............................. 21,600 3,803
Other assets...................................... 57,353 54,555
--------- ---------
Total Assets................................ $2,224,235 $2,071,338
========= =========
LIABILITIES
Current Liabilities
Accounts payable and other liabilities............ $237,001 $237,020
Short-term debt and commercial paper.............. 172,758 136,830
Accrued expenses.................................. 155,043 154,098
------- -------
Total Current Liabilities............... 564,802 527,948
Noncurrent Liabilities
Long-term debt (Note 3) .......................... 166,627 165,835
Accrued pension cost.............................. 87,933 56,568
Accrued postretirement benefits cost.............. 400,994 398,759
------- -------
655,554 621,162
Shareholders' Equity (Note 4)
Common stock...................................... 322,027 315,966
Earnings invested in the business................. 711,815 619,061
Cumulative foreign currency translation adjustment (29,963) (12,799)
--------- -------
Total Shareholders' Equity.............. 1,003,879 922,228
--------- ---------
Total Liabilities and Shareholders' Equity.. $2,224,235 $2,071,338
========= =========
PART I. FINANCIAL INFORMATION 3.
Continued
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1997 1996 1997 1996
--------- --------- -------- --------
(Thousands of dollars, except per share data)
Net sales........................$1,946,487 $1,778,924 $629,900 $581,417
Cost of product sold............. 1,483,038 1,359,670 487,182 443,767
--------- --------- ------- -------
Gross Profit.................. 463,449 419,254 142,718 137,650
Selling, administrative and general
expenses........................ 243,158 234,460 81,184 77,326
------- ------- ------ ------
Operating Income.............. 220,291 184,794 61,534 60,324
Interest expense................. (16,295) (12,406) (5,242) (4,672)
Other - net...................... (9,053) (8,606) (2,342) (3,545)
------ ------ ------ ------
Other Income (Expense)........ (25,348) (21,012) (7,584) (8,217)
Income Before Income Taxes.... 194,943 163,782 53,950 52,107
Provision for Income Taxes (Note 5) 71,147 63,875 16,160 20,322
------- ------ ------ ------
Net Income.................... $123,796 $99,907 $37,790 $31,785
======= ====== ====== ======
Net Income Per Share * ....... $1.97 $1.59 $0.60 $0.51
======= ====== ====== ======
Dividends Per Share........... $0.495 $0.450 $0.165 $0.15
======= ====== ====== ======
* Per average shares outstanding 62,727,242 62,841,106 62,977,635 62,848,820
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Cash Provided (Used) Sept. 30 Sept. 30
1997 1996
-------- --------
OPERATING ACTIVITIES (Thousands of dollars)
Net Income............................................. $123,796 $99,907
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 100,208 93,892
(Credit) Provision for deferred income taxes.......... (14,901) 13,433
Stock issued in lieu of cash to employee benefit plans 14,167 3,300
Changes in operating assets and liabilities:
Accounts receivable.................................. (41,068) (29,192)
Inventories and other assets......................... (25,489) (39,713)
Accounts payable and accrued expenses................ 39,104 (85,910)
Foreign currency translation......................... (597) (481)
------- ------
Net Cash Provided by Operating Activities 195,220 55,236
INVESTING ACTIVITIES
Purchases of property, plant and equipment - net (129,910) (100,841)
Purchase of subsidiaries.............................. (41,812) (75,634)
------- -------
Net Cash Used by Investing Activities (171,722) (176,475)
FINANCING ACTIVITIES
Cash dividends paid to shareholders................... (28,307) (22,485)
Purchase of Treasury Shares........................... (10,839) (12,426)
Payments on long-term debt............................ (29,971) (196)
Proceeds from issuance of long-term debt.............. 24,000 20,000
Short-term debt activity - net........................ 48,810 144,471
------ -------
Net Cash Provided by Financing Activities 3,693 129,364
Effect of exchange rate changes on cash................ (697) (78)
Increase in Cash and Cash Equivalents.................. 26,494 8,047
Cash and Cash Equivalents at Beginning of Period....... 5,342 7,262
------ ------
Cash and Cash Equivalents at End of Period............. $31,836 $15,309
====== ======
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 5.
Note 1 -- Basis of Presentation
The accompanying consolidated condensed financial statements
(unaudited) for the Timken Company (the "company") have been prepared
in accordance with the instructions to Form 10-Q and do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) and disclosures considered necessary for a fair
presentation have been included. For further information, refer to
the consolidated financial statements and footnotes included in the
company's annual report on Form 10-K for the year ended December 31,
1996.
9/30/97 12/31/96
Note 2 -- Inventories --------- ---------
(Thousands of dollars)
Finished products $132,047 $137,666
Work-in-process and raw materials 270,383 241,691
Manufacturing supplies 37,489 40,150
------- -------
$439,919 $419,507
======= =======
Note 3 -- Long-term Debt 9/30/97 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 September 30, 1997 is 4.15%. 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, 1997
is 4.15%. 21,700 21,700
State of Ohio Water Development Authority Solid Waste
Revenue Bonds, maturing on July 2, 2032.
The variable interest rate is tied to the bank's
tax exempt weekly interest rate. The rate at
September 30, 1997 is 4.10%. 24,000 0
Fixed Rate Medium-Term Notes, Series A, due at
various dates through October, 2026 with
interest rates ranging from 6.78% to 9.10%. 118,000 148,000
Other 1,559 1,531
------- -------
190,259 196,231
Less: Current Maturities 23,632 30,396
------- -------
$166,627 $165,835
======= =======
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 6.
Continued
Note 4 -- Shareholders' Equity 9/30/97 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 -- 200,000,000 shares
Issued (including shares in treasury)
1997 - 63,050,303 shares
1996 - 63,050,402 shares
Stated Capital 53,064 53,064
Other paid-in capital 270,893 270,840
Less cost of Common Stock in treasury
1997 - 69,863 shares
1996 - 403,512 shares 1,930 7,938
------- -------
$322,027 $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 123,796 123,796
Dividends paid - $.495 per share (31,042) (31,042)
Employee benefit and dividend reinvestment plans: 53 6,008 6,061
Treasury -(issued)/acquired (333,648) shares
Common Stock - issued/(acquired) (99) shares
Foreign currency translation adjustment (17,164) (17,164)
------ ------- ------- ------- ------ ---------
Balance September 30, 1997 $53,064 $270,893 $711,815 ($29,963) ($1,930) $1,003,879
====== ======= ======= ======= ====== =========
PART I. NOTES TO FINANCIAL STATEMENTS 7.
(Unaudited) Continued
Note 5 -- Income Tax Provision Nine Months Ended Three Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1997 1996 1997 1996
-------- -------- -------- --------
U.S. (Thousands of dollars)
Federal $51,064 $48,834 $10,371 $15,010
State & Local 9,312 7,577 1,888 2,055
Foreign 10,771 7,464 3,901 3,257
------ ------ ------ ------
$71,147 $63,875 $16,160 $20,322
====== ====== ====== ======
The provision for income taxes for the third quarter of 1997 includes a
credit relating to claims for prior years' research and development
credits of $4 million, or $.06 per share. The effective income tax rates for
the quarter and nine months ended September 30, 1997, exclusive of this item
were 37.4% and 38.6%, respectively.
Note 6 -- Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) 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 materiality. 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.
8.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The Timken Company reported record sales and earnings for both the
quarter and nine months ended September 30, 1997. During the
quarter, the company continued to pursue its growth strategies
through plant expansions, an acquisition and increased market
penetration. Demand for the company's products remained strong
during the quarter. Plant utilization throughout the company was
high with the majority of its facilities running at full levels.
The company believes that customer demand through the end of the
year should enable it to finish 1997 strongly.
Net sales for the third quarter were $629.9 million, an increase of
8.3% above 1996's third quarter record level of $581.4 million.
Demand for the company's products was particularly strong in the
aerospace, automotive and industrial markets.
Gross profit for 1997's third quarter was $142.7 million (22.7% of
net sales) compared to $137.7 million (23.7% of net sales) in the
same period a year ago. Benefits related to the company's on-going
continuous improvement initiatives and the higher sales volume
contributed to higher profits. This improvement was offset,
however, by costs related to the company's efforts to meet stronger
customer demand, which resulted in additional hiring and training
costs and the shift of some products to less efficient processes.
Third quarter 1997 gross profit was also adversely affected by an
inventory write-down related to the annual taking of physical
inventory. This compares to an inventory write-up in the year-
earlier period.
Selling, administrative, and general expenses were $81.2 million
(12.9% of net sales) in the third quarter of 1997 compared to $77.3
million (13.3% of net sales) in 1996. The company has been
successful in reducing its selling, administrative, and general
expenses as a percent of sales despite higher investment in
corporate research and higher expenses related to the integration of
the company's more recent acquisitions.
Interest expense was $.6 million higher in the third quarter of 1997
compared to the year-ago period. This increase resulted from the
higher average level of debt outstanding during the quarter and
slightly higher interest rates. During the third quarter, Standard &
Poor's rating agency increased The Timken Company's corporate credit
and senior unsecured rating to "A" and its commercial paper program
9.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
rating to "A-1". The company's strong capital structure and prudent
fiscal management resulted in this upgrade. This change will reduce
modestly the interest rate which the company pays to borrow money it
needs to operate, which thus lowers the cost of capital for The
Timken Company.
The provision for income taxes for the third quarter of 1997 includes
a credit relating to claims for prior years' research and development
credits of $4 million, or $.06 per share. The effective income tax
rates for the quarter and nine months ended September 30, 1997,
exclusive of this item were 37.4% and 38.6% respectively.
Bearing Business net sales were $408.8 million in the third quarter
of 1997, an increase of $26.2 million compared to $382.6 million in
the year-earlier period. The Bearing Business achieved higher sales
in the light truck, heavy truck, and industrial equipment markets.
Sales were also stronger in Mexico and sales volumes improved in the
company's European operations compared to the year-earlier quarter.
In addition, sales from the Business's recently acquired bearing
operations of Gnutti Carlo, S.p.A. and Handpiece Headquarters, Inc.
contributed to the sales performance.
During the third quarter, the Bearing Business introduced a
comprehensive line of bearings, seals and related components to be
sold through retail outlet stores. The new line, marketed as Timken
tapered roller bearings and Timken Automotive Service Parts, features
premium products for servicing U.S. and internationally manufactured
automobiles and light trucks. These products can be found at more
than 1,400 AutoZone stores across the U.S.
Also during the third quarter, the Bearing Business launched a full
line of heavy-and light-duty differential and transmission rebuild
kits and components. This new line, aimed at the automotive and heavy-
duty truck markets, is being marketed under the new DT Components
brand and allows customers to tailor their purchases from individual
rebuild components to complete rebuild kits. DT Components are
available through Timken sales representatives and authorized bearing
distributors.
Bearing Business operating income totaled $27.2 million in the third
quarter of 1997 compared to $37.9 million reported in 1996's third
quarter. Although the higher sales volume had a positive impact on
10.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
third quarter results, operating income was lower primarily due to an
inventory write-down compared to a year-earlier write-up. In
addition, costs associated with meeting additional hiring and
training needs, integrating newly acquired operations, and addressing
stronger customer demand also had an adverse effect on earnings.
On November 6, 1997, the company announced plans to invest $15
million in new machining technology for its Bucyrus (Ohio) bearing
plant over the next two to three years. The Bucyrus plant's
machinery transforms large pieces of tubing into cups and cones for
bearings. The new machining technology will increase the yield of
material to parts resulting in less scrap and rework and increased
productivity. This investment will ensure that the Bucyrus plant
maintains its position in the intensely competitive worldwide
automotive tapered roller bearing market.
Because of strong market successes with a range of products, the
company's Bearing Business will be investing $51 million over the
next five years to expand and modernize its Gaffney (South Carolina)
Bearing Plant. The improvement program will increase plant capacity
by more than 25 percent in some areas. Over half the investment will
be made in the coming 12 months. This follows last quarter's
announcement that the company would be investing $20 million in its
Asheboro (North Carolina) Plant to meet demand for industrial
bearings.
In July, the company announced its acquisition of the aerospace
bearing operations of The Torrington Company Limited, located in
Wolverhampton, England. By expanding the scope of products and
services for the European aerospace market, this transaction also
expands the company's leadership position in providing super-
precision bearing products for the aerospace industry worldwide.
Steel Business sales were $221.1 million in the third quarter of 1997
compared to $198.8 million recorded a year earlier. The sales
increase resulted from strong demand in all markets for both alloy
steel products and steel components. During the third quarter the
business performed at record levels and was able to meet strong
customer demand by continuing to produce both steel tubes and bars at
higher than expected levels with existing equipment. Sales from OH&R
Special Steels Company and Sanderson Special Steels Ltd., recently
acquired subsidiaries of Latrobe Steel Company, also contributed to
higher third quarter sales.
11.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Steel Business operating income in the third quarter of 1997 rose by
$11.9 million to $34.3 million compared to $22.4 million in the year-
earlier period. This increase resulted primarily from the business'
continuous improvement initiatives which resulted in lower
manufacturing costs and new levels of output. The price of recycled
scrap metal in the third quarter of 1997 was also lower than the year-
ago period.
While the steel industry historically has exhibited a seasonal
pattern in the third quarter, strategic long-term initiatives in the
Timken Steel Business have reduced this to a less dramatic level.
These initiatives include expanding distribution services,
implementing new operating practices, and building the range of
products and services available through the Steel Parts Business.
A new plant in Winchester, Kentucky, serving the needs of both the
Timken Bearing Business and external bearing customers, ramped up
production during the quarter.
Financial Condition
Total assets increased by $152.9 million from December 31, 1996.
The increase resulted in part from higher accounts receivable and
inventories. The $41.1 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, 1997, was basically unchanged
from the year-end 1996 level. Inventories and other assets
increased by $25.5 million compared to year-end 1996. The increase
in inventories relates to the higher level of activity as days of
inventory decreased slightly from year-end 1996. The company
continues to recognize the importance of cash flow by improving
working capital usage, especially focusing on lowering inventory
levels.
The increase in long-term deferred income taxes relates primarily
to the increase in non-deductible accrued pension costs.
Debt of $339.4 million at the end of the third quarter of 1997
exceeded the $302.7 million at year-end 1996. During the nine
months ended September 30, 1997, cash was required primarily to
fund the company's investing activities. The company expects debt
to decline by year-end 1997. Any future cash needs that exceed
cash generated from operations will be met by short-term borrowing
and issuance of medium-term notes.
12.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
The 25.3% debt to total capital ratio was slightly higher than the
24.7% at year-end 1996. Debt increased by $36.7 million during the
first nine months of 1997; total shareholders' equity increased by
$81.7 million.
Purchases of property, plant and equipment - net during the nine
months ended September 30, 1997, were $129.9 million compared to
$100.8 million one year earlier. The company also invested $41.8
million in the purchase of subsidiaries. The company continues to
invest in activities consistent with the strategies it is pursuing to
achieve industry leadership positions. Further capital investments
in technologies in the company's plants throughout the world and
new acquisitions provide Timken with the opportunity to improve
the company's competitiveness and meet the needs of its growing
base of customers.
The Timken company has approached its efforts to be year 2000
compliant using a defined methodology that includes assessment,
strategy definition, development, test, integration and
implementation components. Additionally, the company's corporate
information systems department has instituted a corporate level
reporting and tracking process that encompasses all Timken year
2000 project efforts world-wide. Through the use of this
methodology over the past two years, the company is well into its
year 2000 conversion effort. Based on current project plans,
Timken is striving to have all of its critical systems year 2000
compliant by the last quarter of 1998. The costs associated with
this project will not have a material effect on the company's
financial position, results of operation or cash flows.
On November 7, 1997, the Board of Directors declared a quarterly
cash dividend of 16.5 cents per share payable December 8, 1997,
to shareholders of record at the close of business on
November 21, 1997.
Other Information
On November 7, 1997, the company announced that Joseph F. Toot, Jr.,
president and chief executive office, will retire at the end of
December. Mr. Toot, 62, has served as president of the company
since 1979 and as president and CEO since 1992. He will continue to
serve as a member of the board of directors and as chairman of the
board's executive committee. In that capacity, he will carry out
certain projects on behalf of the company. Following Mr. Toot's
retirement, W. R. Timken, Jr., 58, chairman - board of directors,
13.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
will continue as chairman and also serve as president and CEO.
Joining him in leading the company will be Bill J. Bowling, 56,
and Robert L. Leibensperger, 59. Each will take on additional
responsibility as chief operating officer. Mr. Bowling will be
executive vice president, COO and president - steel, and Mr.
Leibensperger will be executive vice president, COO and president
- - bearings.
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
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 benefits from its on-going continuous
improvement programs, its ability to integrate acquisitions
into company operations, the ability of recently acquired
companies to achieve satisfactory operating results and the
company's ability to maintain appropriate relations with unions
that represent company associates in certain locations in order to
avoid disruptions of business.
14.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
f) unanticipated litigation, claims or assessments. This
includes, but is not limited to, claims or problems related
to product warranty and environmental issues.
g) changes in worldwide financial markets to the extent they
affect the company's ability to raise capital, have an
impact on the overall performance of the company's pension
fund investments and cause changes in the economy which
affect customer demand.
15.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
4 Sixth Amendment Agreement dated
August 31, 1997, to the amended and
restated credit agreement as amended
February 23, 1993, May 31, 1994,
November 15, 1994, August 15, 1995, and
August 31, 1996, between Timken and certain
banks.
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, 1997 BY /s/ Joseph F. Toot, Jr.
________________________ _______________________________
Joseph F. Toot, Jr.,
Director; President and
Chief Executive Officer
Date November 13, 1997 BY /s/ G. E. Little
________________________ _______________________________
G. E. Little
Vice President - Finance