1.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM 10Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
___ ___ Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
___ ___ Common shares outstanding at June 30, 2005, 91,527,721.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Jun 30 Dec 31
2005 2004
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents........................... $66,980 $50,967
Accounts receivable, less allowances,
(2005-$25,734; 2004-$24,952)........................ 808,276 717,425
Deferred income taxes............................... 91,022 90,066
Inventories......................................... 963,862 874,833
---------- ----------
Total Current Assets...................... 1,930,140 1,733,291Property, plant and equipment....................... 3,573,879 3,622,656
Less allowances for depreciation................... 2,051,273 2,039,231
---------- ----------
1,522,606 1,583,425Goodwill............................................ 188,005 189,299
Other intangible assets............................. 174,788 178,986
Deferred income taxes............................... 85,284 76,835
Other assets........................................ 185,120 152,235
---------- ----------
Total Assets.................................. $4,085,943 $3,914,071
========== ==========LIABILITIES
Current Liabilities
Accounts payable and other liabilities.............. $518,388 $504,585
Short-term debt and current portion of long-term debt 232,487 158,690
Accrued expenses.................................... 437,659 353,623
---------- ----------
Total Current Liabilities................. 1,188,534 1,016,898Noncurrent Liabilities
Long-term debt...................................... 609,627 620,634
Accrued pension cost................................ 404,881 468,644
Accrued postretirement benefits cost................ 494,978 490,366
Other noncurrent liabilities........................ 45,760 47,681
---------- ----------
Total Noncurrent Liabilities.............. 1,555,246 1,627,325Shareholders' Equity
Common stock........................................ 728,410 711,596
Earnings invested in the business................... 945,893 847,738
Accumulated other comprehensive loss................ (332,140) (289,486)
---------- ----------
Total Shareholders' Equity................ 1,342,163 1,269,848
---------- ---------- Total Liabilities and Shareholders' Equity.... $4,085,943 $3,914,071
========== ==========See accompanying Notes to the Consolidated Condensed Financial Statements.
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) Six Months Ended Three Months Ended
Jun 30 Jun 30 Jun 30 Jun 30
2005 2004 2005 2004
---------- ---------- ---------- ----------
(Thousands of dollars, except share and per share data)
Net sales................................................... $2,629,218 $2,229,072 $1,324,678 $1,130,287
Cost of products sold....................................... 2,080,556 1,820,962 1,047,866 924,700
---------- ---------- ---------- ----------
Gross Profit............................................. 548,662 408,110 276,812 205,587Selling, administrative and general expenses................ 325,781 290,094 161,742 147,391
Impairment and restructuring charges ....................... (44) 1,059 (44) 329
---------- ---------- ---------- ----------
Operating Income......................................... 222,925 116,957 115,114 57,867Interest expense............................................ (26,534) (23,310) (13,860) (11,919)
Interest income............................................. 1,345 458 773 212
Other expense............................................... (5,173) (7,313) (413) (5,288)
---------- ---------- ---------- ----------
Income Before Income Taxes .............................. 192,563 86,792 101,614 40,872
Provision for income taxes.................................. 66,994 32,981 34,280 15,531
---------- ---------- ---------- ----------Net Income ................................................. $ 125,569 $ 53,811 $ 67,334 $ 25,341
========== ========== ========== ========== Earnings Per Share*........................................ $ 1.38 $ 0.60 $ 0.74 $ 0.28
Earnings Per Share - assuming dilution**................... $ 1.37 $ 0.60 $ 0.73 $ 0.28
Dividends Per Share........................................ $ 0.30 $ 0.26 $ 0.15 $ 0.13
========== ========== ========== ==========* Average shares outstanding............................... 90,981,208 89,492,987 91,189,208 89,698,030
** Average shares outstanding - assuming dilution........... 91,828,505 90,356,032 91,817,375 90,552,362
See accompanying Notes to the Consolidated Condensed Financial Statements.
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
Cash Provided (Used) Jun 30 Jun 30
2005 2004
-------- --------
OPERATING ACTIVITIES (Thousands of dollars)
Net income ............................................... $125,569 $ 53,811
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization............................ 107,699 105,337
Loss on disposals of assets.............................. 1,559 1,463
Provision for deferred income taxes...................... (8,978) 3,193
Amortization of restricted share awards.................. 3,009 1,099
Changes in operating assets and liabilities:
Accounts receivable..................................... (123,722) (103,672)
Inventories............................................. (124,594) (19,848)
Other assets............................................ (28,619) (12,034)
Accounts payable and accrued expenses................... 76,816 (34,731)
Foreign currency translation loss....................... 7,435 3,309
-------- --------
Net Cash Provided (Used) by Operating Activities....... 36,174 (2,073)INVESTING ACTIVITIES
Capital expenditures..................................... (83,226) (55,696)
Proceeds from sale of non-strategic assets............... 10,881 -
Proceeds from disposals of assets........................ 2,652 2,016
Other ................................................... 1,258 (1,927)
Acquisitions............................................. (6,556) (7,824)
-------- --------
Net Cash Used by Investing Activities.................. (74,991) (63,431)FINANCING ACTIVITIES
Cash dividends paid to shareholders...................... (27,414) (23,289)
Proceeds from the exercise of stock options.............. 12,580 10,202
Accounts receivable securitization financing borrowings.. 145,000 133,000
Accounts receivable securitization financing payments.... (45,000) (30,000)
Payments on senior revolving credit facility............. (241,200) (102,200)
Proceeds from senior revolving credit facility........... 231,200 107,200
Other long-term debt activity - net...................... (985) 2,422
Short-term debt activity - net........................... (13,083) 4,569
-------- --------
Net Cash Provided by Financing Activities.............. 61,098 101,904Effect of exchange rate changes on cash................... (6,268) 2,443
Increase in Cash and Cash Equivalents..................... 16,013 38,843
Cash and Cash Equivalents at Beginning of Period.......... 50,967 28,626
-------- --------
Cash and Cash Equivalents at End of Period................ $ 66,980 $ 67,469
======== ========See accompanying Notes to the Consolidated Condensed Financial Statements.
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, 2004.
Reclassifications: Certain amounts reported in the 2004 financial statements
have been reclassified to conform to the 2005 presentation.
Note 2 -- Stock-Based Compensation
The company utilizes the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
The company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its stock options to key associates and directors. Under APB
Opinion No. 25, if the exercise price of the company's stock options equals
the market price of the underlying common stock on the date of grant, no
compensation expense is required.
The effect on net income and earnings per share as if the company had applied
the fair value recognition provisions of SFAS No. 123 is as follows:
Six months ended Three months ended
June 30 June 30
2005 2004 2005 2004
-------- -------- -------- --------
(Thousands of dollars)
Net income, as reported $125,569 $ 53,811 $ 67,334 $ 25,341Add: Stock-based employee
compensation expense, net
of related taxes 1,962 681 1,133 491
Deduct: Total stock-based
employee compensation
expense determined under
fair value based methods
for all awards, net of
related tax effects (4,001) (3,027) (2,393) (2,025)
-------- -------- -------- --------
Pro forma net income $123,530 $ 51,465 $ 66,074 $ 23,807
======== ======== ======== ========
Earnings per share:
Basic - as reported $ 1.38 $ 0.60 $ 0.74 $ 0.28
Diluted - as reported $ 1.37 $ 0.60 $ 0.73 $ 0.28
Basic - pro forma $ 1.36 $ 0.57 $ 0.73 $ 0.26
Diluted - pro forma $ 1.35 $ 0.57 $ 0.72 $ 0.26
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 6.
Continued
Note 3 -- Inventories Jun 30 Dec 31
2005 2004
-------- ---------
(Thousands of dollars)
Finished products $428,101 $392,668
Work-in-process and raw materials 473,798 423,808
Manufacturing supplies 61,963 58,357
-------- --------
$963,862 $874,833
======== ========
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on manage-
ment's estimates of expected year-end inventory levels and costs. Because
these are subject to many forces beyond management's control, interim results
are subject to the final year-end LIFO inventory valuation.Note 4 -- Financing Arrangements Jun 30 Dec 31
2005 2004
Short-term debt: -------- --------
(Thousands of dollars)
Variable-rate lines of credit for certain of the company's
European subsidiaries with various banks with interest
rates ranging from 2.17% to 5.75% at June 30, 2005 $ 82,450 $109,260
Variable-rate Accounts Receivable Securitization financing
agreement with an interest rate of 3.57% at June 30,
2005 100,000 -
Variable-rate Ohio Water Development Authority revenue
bonds for PEL (2.37% at June 30, 2005) 23,000 23,000
Fixed-rate mortgage for PEL with an interest rate of 9.00% 11,561 11,561
Other 14,710 13,596
-------- --------
$231,721 $157,417
======== ========Refer to Note 10 - Equity Investments for a discussion of PEL's debts, which are
included above.
Borrowings under the Accounts Receivable Securitization financing agreement
(Asset Securitization), which provides for borrowings up to $125 million subject
to certain borrowing base limitations, are secured by certain trade receivables.
Under the terms of the Asset Securitization, the company sells, on an ongoing
basis, certain domestic trade receivables to Timken Receivables Corporation, a
wholly owned consolidated subsidiary, that in turn uses the trade receivables to
secure the borrowings, which are funded through a vehicle that issues commercial
paper in the short-term market. As of June 30, 2005, there was $100.0 million
outstanding under this facility, which reduced the availability to
$25.0 million. This balance is reflected on the company's consolidated
condensed balance sheet as of June 30, 2005 in short-term debt. The yield on
the commercial paper, which is the commercial paper rate plus program fees, is
considered a financing cost and is included in interest expense on the
consolidated statements of income.
The lines of credit of the company's European subsidiaries provide for
borrowings up to $128.6 million. At June 30, 2005, the company had
outstanding borrowings of $82.5 million, which reduced the availability
under these facilities to $46.1 million.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7.
Continued
Note 4 -- Financing Arrangements (continued)
Jun 30 Dec 31
2005 2004
Long-term debt: -------- ---------
(Thousands of dollars)
Fixed-rate Medium-Term Notes, Series A, due at various
dates through May 2028, with interest rates ranging
from 6.20% to 7.76% $286,734 $286,832
Fixed-rate Unsecured Notes, maturing on February 15,
2010 with a fixed interest rate of 5.75% 249,350 249,258
Variable-rate State of Ohio Water Development Authority
Solid Waste Revenue Bonds, maturing on July 1, 2032
(2.40% at June 30, 2005) 24,000 24,000
Variable-rate State of Ohio Air Quality and Water
Development Revenue Refunding Bonds, maturing on
November 1, 2025 (2.22% at June 30, 2005) 21,700 21,700
Variable-rate State of Ohio Pollution Control Revenue
Refunding Bonds, maturing on June 1, 2033
(2.22% at June 30, 2005) 17,000 17,000
Variable-rate State of Ohio Water Development Revenue
Refunding Bonds, maturing on May 1, 2007
(2.35% at June 30, 2005) 8,000 8,000
Variable-rate revolving credit facility, maturing on
June 30, 2010. This agreement was amended and
restated on June 30, 2005. - 10,000
Other 3,609 5,117
-------- --------
610,393 621,907
Less: Current Maturities 766 1,273
-------- --------
$609,627 $620,634
======== ========On June 30, 2005, the company entered into a $500 million Amended and Restated
Credit Agreement (Credit Agreement) that replaced the company's previous credit
agreement dated as of December 31, 2002. The Credit Agreement matures on
June 30, 2010 and provides for a $500 million revolving credit facility. Under
this credit facility, the company has two financial covenants: a consolidated
leverage ratio and a consolidated interest coverage ratio. At June 30, 2005,
the company was in compliance with the covenants under this credit facility and
its other debt agreements.
At June 30, 2005, the company had no borrowings and letters of credit totaling
$77.1 million outstanding under the $500 million revolving credit facility,
which reduced the availability under that facility to $422.9 million.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 8.
Note 5 -- Income Tax Provision
Six Months Ended Three Months Ended
Jun 30 Jun 30 Jun 30 Jun 30
2005 2004 2005 2004
-------- -------- -------- --------
U.S. (Thousands of dollars)
Federal $ 56,428 $ 20,507 $ 28,490 $ 9,445
State & Local 5,044 1,576 2,436 355
Foreign 5,522 10,898 3,354 5,731
-------- -------- -------- -------
$ 66,994 $ 32,981 $ 34,280 $ 15,531
======== ======== ======== ========The effective tax rates were 33.7% and 38.0% for the three months ended
June 30, 2005 and 2004, respectively, and 34.8% and 38.0% for the six months
ended June 30, 2005 and 2004, respectively.
For the six months ended June 30, 2005, the effective tax rate was less than the
U.S. statutory tax rate due primarily to beneficial foreign tax rates, tax
holidays and other U.S. tax benefits. These benefits were partially offset by
losses at certain foreign operations that were not available to reduce overall
tax expense, taxes paid to state and local jurisdictions, tax on foreign
remittances and other permanent differences.
For the six months ended June 30, 2004, the effective tax rate exceeded the U.S.
statutory tax rate as a result of losses at certain foreign operations that were
not available to reduce overall tax expense, taxes paid to state and local
jurisdictions, tax on foreign remittances and other permanent differences.
These unfavorable items were partially offset by beneficial foreign tax rates,
tax holidays and other U.S. tax benefits.
The effective tax rate for the six months ended 2005 decreased from the same
period in 2004 due primarily to certain tax planning strategies that resulted in
lower foreign tax rates and higher earnings generated in low tax-rate foreign
jurisdictions, partially offset by settlement of prior years' liabilities.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004
(the "Act"). The Act creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent dividends
received deduction for certain dividends from controlled foreign corporations.
The deduction is subject to a number of limitations and the Internal Revenue
Service (IRS) issued guidance related to the domestic reinvestment plans on
January 13, 2005 and May 10, 2005. However, uncertainty remains on other
provisions of the Act. Based on our current analysis, the company
anticipates that the range of possible amounts that it will repatriate to be
between $8 million and $130 million. An estimated tax liability of
$11 million would be incurred on the repatriation of $130 million. As of
June 30, 2005, the company has provided for income tax of $2.8 million on
$8 million of dividends from its controlled foreign corporations.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 9.
Jun 30 Dec 31
Note 6 -- Shareholders' Equity 2005 2004
-------- --------
Class I and Class II serial preferred stock (Thousands of dollars)
without par value:
Authorized -- 10,000,000 shares each class
Issued - none $ - $ -
Common Stock without par value:
Authorized -- 200,000,000 shares
Issued (including shares in treasury)
2005 - 91,548,524 shares
2004 - 90,511,833 shares
Stated Capital 53,064 53,064
Other paid-in capital 675,875 658,730
Less cost of Common Stock in treasury
2005 - 20,803 shares
2004 - 7,501 shares (529) (198)
-------- --------
$728,410 $711,596
======== ========
An analysis of the change in capital and earnings invested in the business is as follows:
Common Stock Earnings Accumulated
Other Invested Other
Stated Paid-In in the Comprehensive Treasury
Capital Capital Business Loss Stock Total
------- -------- -------- ---------- -------- ----------
(Thousands of dollars)
Balance December 31, 2004 $53,064 $658,730 $847,738 ($289,486) ($198) $1,269,848Net Income 125,569 125,569
Foreign currency translation adjustment (48,669) (48,669)
Minimum pension liability adjustment 2,680 2,680
Change in fair value of derivative financial
instruments, net of reclassifications
(net of income tax of $1,954) 3,335 3,335
---------
Total comprehensive income 82,915Dividends - $0.30 per share (27,414) (27,414)
Tax benefit from exercise of stock options 2,735 2,735
Issuance of 1,036,691 shares from authorized
and surrender of 13,302 shares to treasury
related to stock option plans 14,410 (331) 14,079
------- -------- -------- ---------- -------- ----------
Balance June 30, 2005 $53,064 $675,875 $945,893 ($332,140) ($529) $1,342,163
======= ======== ======== ========== ======== ==========The total comprehensive income for the three months ended June 30, 2005 and 2004 was $43,535 and $17,056
respectively. Total comprehensive income for the six months ended June 30, 2004 was $42,129.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 10.
Continued
Note 7 -- Impairment and Restructuring Charges
Impairment and restructuring charges by segment are as follows:
Auto Industrial Steel Total
------ ------------ ------- ------
(Thousands of dollars)For the three and six months ended June 30, 2005:
Severance expense and related benefits $ (44) $ - $ - $ (44)
------ ------------ ------- ------
Total $ (44) $ - $ - $ (44)
====== ============ ======= ======For the six months ended June 30, 2004:
Severance expense and related benefits $ 89 $ 809 $13 $ 911
Exit costs - 137 11 148
------ ------------ ------- ------
Total $ 89 $ 946 $24 $1,059
====== ============ ======= ======For the three months ended June 30, 2004:
Severance expense and related benefits $ 31 $ 138 $12 $ 181
Exit costs - 137 11 148
------ ------------ ------- ------
Total $ 31 $ 275 $23 $ 329
====== ============ ======= ======For both the three and six months ended June 30, 2004, restructuring charges
related primarily to severance and related benefit costs for associates who
exited the company as a result of the integration of Torrington.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 11.
Continued
Note 7 -- Impairment and Restructuring Charges (continued)
The following is a rollforward of accrued severance and exit costs:
(Thousands of dollars)
Balance at December 31, 2004 $4,116
Less: reversal of accruals not used (44)
Less: payments (2,669)
--------
Balance at June 30, 2005 $1,403
========In May 2004, the company announced a plan to begin closing its three bearing
plants in Canton, Ohio. In June 2004, the company and the United Steelworkers
of America (union) began the effects bargaining process. In July 2004, the
company and the union agreed to enter into early formal negotiations over the
current labor contract that expires on September 25, 2005 and covers
approximately 2,700 associates at the company's bearing and steel plants in
Ohio. In June 2005, a proposed labor agreement between the company and the
union was rejected by the union membership. Because the company and the union
are still in discussions, it is not possible to accurately estimate the timing
and impact on employment or the magnitude of savings and charges for
restructuring, which could be material. Therefore, the company is unable to
determine the impact of these plant closings in accordance with SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities."
In July 2005, the company disclosed that it will announce detailed restructuring
plans for its Automotive Group in the third quarter of 2005. The company has
determined that restructuring actions are necessary to improve the Automotive
Group's performance. The company expects the plans, which are intended to
reduce fixed costs and improve effectiveness, to require approximately two years
for completion. These restructuring actions are targeted to deliver annual
savings of approximately $40 million, with expected net workforce reductions of
approximately 400 to 500 positions and restructuring costs of approximately
$80 million to $90 million. The company will account for these restructuring
costs in future quarters in accordance with the applicable accounting
pronouncements.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 12.
Continued
Note 8 -- Segment Information
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,
manufacturing rationalization/integration/reorganization costs, allocated
receipts received under the U.S. Continued Dumping and Subsidy Offset Act
(CDSOA) and gain on the sale of non-strategic assets).
(Thousands of Dollars) Six Months Ended Three Months Ended
Jun 30 Jun 30 Jun 30 Jun 30
2005 2004 2005 2004
Industrial Group -------- -------- -------- --------
Net sales to external customers $965,972 $847,685 $497,523 $437,416
Intersegment sales 1,026 567 628 278
Depreciation and amortization 36,143 35,464 18,080 17,457
EBIT, as adjusted 110,628 85,077 63,629 49,311Automotive Group
Net sales to external customers $846,214 $819,765 $425,949 $404,163
Depreciation and amortization 41,259 39,518 20,560 19,028
EBIT (loss), as adjusted (6,317) 24,930 (1,217) 6,607
Steel Group
Net sales to external customers $817,032 $561,622 $401,206 $288,708
Intersegment sales 95,736 78,103 44,131 41,686
Depreciation and amortization 30,297 30,355 14,959 14,924
EBIT, as adjusted 120,473 5,750 56,748 3,026
Reconciliation to Income Before Income Taxes:
Total EBIT, as adjusted, for
reportable segments $224,784 $115,757 $119,160 $ 58,944
Impairment and restructuring charges 44 (1,059) 44 (329)
Manufacturing rationalization/
integration/reorganization expenses (7,859) (12,622) (6,326) (7,258)
CDSOA receipts, net of expenses - 7,743 - -
Gain on sale of non-strategic assets 2,570 - 2,570 -
Adoption of FIN 46 - (949) - -
Other 425 - 39 -
Interest expense (26,534) (23,310) (13,860) (11,919)
Interest income 1,345 458 773 212
Intersegment adjustments (2,212) 774 (786) 1,222
------- ------- ------- -------
Income before income taxes $192,563 $ 86,792 $101,614 $ 40,872
======== ======== ======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 13.
Continued
Note 9 - Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended
June 30, 2005 are as follows:
(Thousands of Dollars) Balance Balance
12/31/04 Acquisition Other 6/30/05
--------- ----------- ------- ---------
Goodwill:
Industrial $ 187,621 $ 1,406 $ (2,517) $ 186,510
Automotive 1,678 - (183) 1,495
--------- ---------- -------- ---------
$ 189,299 $ 1,406 $ (2,700) $ 188,005
========= ========== ======== =========The following table displays intangible assets as of June 30, 2005 and
December 31, 2004:
(Thousands of Dollars) As of June 30, 2005
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Intangible assets subject to amortization:Industrial $ 38,522 $ (8,112) $ 30,410
Automotive 63,130 (13,362) 49,768
Steel 864 (174) 690
-------- ------------ --------
$102,516 $ (21,648) $ 80,868
======== =========== ========Intangible assets not subject to amortization:
Goodwill $188,005 $ - $188,005
Intangible pension asset 92,835 - 92,835
Other 1,085 - 1,085
-------- ----------- --------
$281,925 $ - $281,925
======== =========== ========
Total Intangible Assets $384,441 $ (21,648) $362,793
======== =========== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 14.
Continued
Note 9 - Goodwill and Other Intangible Assets (continued)
As of December 31, 2004
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Intangible assets subject to amortization:Industrial $ 38,781 $ (6,568) $ 32,213
Automotive 62,657 (10,358) 52,299
Steel 633 (126) 507
-------- ----------- --------
$102,071 $ (17,052) $ 85,019
======== =========== ========Intangible assets not subject to amortization:
Goodwill $189,299 $ - $189,299
Intangible pension asset 92,860 - 92,860
Other 1,107 - 1,107
-------- ----------- --------
$283,266 $ - $283,266
======== =========== ========
Total Intangible Assets $385,337 $ (17,052) $368,285
======== =========== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 15.
Continued
Note 9 - Goodwill and Other Intangible Assets (continued)
Amortization expense for intangible assets was approximately $2.4 million and
$4.6 million for the three and six months ended June 30, 2005, respectively,
and is estimated to be approximately $8.6 million annually for the next five
fiscal years.
Note 10 - Equity Investments
The balances related to investments accounted for under the equity method are
reported in other assets in the consolidated condensed balance sheets, which
were approximately $28.2 million and $29.8 million at June 30, 2005 and
December 31, 2004, respectively.
Equity investments are reviewed for impairment when circumstances (such as lower
than expected financial performance or change in strategic direction) indicate
that the net book value of the investment may not be recoverable. If an
impairment does exist, the equity investment is written down to its fair value
with a corresponding charge to the statement of operations.
During 2000, the company's Steel Group invested in a joint venture, PEL
Technologies (PEL), to commercialize a proprietary technology that converts iron
units into engineered iron oxides for use in pigments, coatings and abrasives.
The company concluded that PEL is a variable interest entity and that the
company is the primary beneficiary. In accordance with FASB Interpretation No.
46, "Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51," (FIN 46), the company consolidated PEL
effective March 31, 2004. The adoption of FIN 46 resulted in a charge,
representing the cumulative effect of change in accounting principle, of
$0.9 million, which is reported in other expense on the consolidated statement
of income. Also, the adoption of FIN 46 increased the consolidated condensed
balance sheet as follows: current assets by $1.7 million; property, plant and
equipment by $11.3 million; short-term debt by $11.6 million; accounts payable
and other liabilities by $0.6 million; and other non-current liabilities by
$1.7 million. All of PEL's assets are pledged as collateral for its obligations.
Except for PEL's indebtedness for which the company is a guarantor, PEL's
creditors have no recourse to the general credit of the company. The company is
the guarantor of certain debt for PEL. During 2003, the company recorded the
aggregate amount outstanding at that time on the debt underlying these
guarantees. The amount outstanding at June 30, 2005 of PEL's debt guaranteed
by the company is $23.0 million, which is reported as short-term debt on the
consolidated condensed balance sheet.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 16.
Continued
Note 11 - Retirement and Postretirement Benefit Plans
The following table sets forth the net periodic benefit cost for the company's
retirement and postretirement benefit plans. The amounts for the three and six
months ended June 30, 2005 are based on actuarial calculations prepared during
2005. Consistent with prior years, these calculations will be updated later in
the year. These updated calculations may result in different net periodic
benefit cost for 2005. The net periodic benefit cost recorded for the three and
six months ended June 30, 2005 is the company's best estimate of the amounts to
be recorded for the year ended December 31, 2005.
Pension Postretirement
------------------- --------------------
Six Months Ended Six Months Ended
Jun 30 Jun 30 Jun 30 Jun 30
2005 2004 2005 2004
--------- --------- -------- --------
(Thousands of dollars)
Service cost $ 21,268 $ 21,378 $ 2,740 $ 3,686
Interest cost 76,640 72,354 22,708 25,044
Expected return on
plan assets (77,059) (72,624) - -
Amortization of prior
service cost 6,964 7,824 (2,533) (2,584)
Recognized net
actuarial loss 24,317 15,288 8,138 8,576
Curtailment loss 202 - 752 -
Amortization of
transition asset (57) (54) - -
--------- --------- -------- -------- Net periodic benefit cost $ 52,275 $ 44,166 $ 31,805 $34,722
========= ========= ======== ======== Pension Postretirement
------------------- --------------------
Three Months Ended Three Months Ended
Jun 30 Jun 30 Jun 30 Jun 30
2005 2004 2005 2004
--------- --------- -------- --------
(Thousands of dollars)
Service cost $ 9,986 $ 10,689 $ 1,176 $ 1,843
Interest cost 37,030 36,177 10,104 12,522
Expected return on
plan assets (38,587) (36,312) - -
Amortization of prior
service cost 3,852 3,912 (1,249) (1,292)
Recognized net
actuarial loss 12,754 7,644 3,386 4,288
Curtailment loss 202 - 752 -
Amortization of
transition asset (29) (27) - -
--------- --------- -------- -------- Net periodic benefit cost $ 25,208 $ 22,083 $ 14,169 $17,361
========= ========= ======== ========
17.
Management's Discussion and Analysis of Financial Condition and Results of
OperationsOVERVIEW
- --------
Introduction:
The Timken Company is a leading global manufacturer of highly engineered
antifriction bearings and alloy steels and a provider of related products and
services. Timken operates under three segments: Industrial Group, Automotive
Group and Steel Group.
The Industrial and Automotive Groups design, manufacture and distribute a range
of bearings and related products and services. Industrial Group customers
include both original equipment manufacturers and distributors for agriculture,
construction, mining, energy, mill, machine tooling, aerospace, and rail
applications. The Industrial Group also includes aftermarket distribution
operations, including automotive applications, for products other than steel.
Automotive Group customers include original equipment manufacturers of passenger
cars, light trucks, and medium- to heavy-duty trucks and their suppliers.
Steel Group 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.
Financial Overview:
For the three months ended June 30, 2005, the Timken Company reported net sales
of approximately $1.3 billion, an increase of approximately 17 percent from the
second quarter of 2004. Sales were higher across all three business segments.
For the three months ended June 30, 2005, earnings per diluted share were $0.73,
compared to $0.28 per diluted share for the second quarter of 2004.
For the six months ended June 30, 2005, net sales were approximately
$2.6 billion, an increase of approximately 18 percent from the same period last
year. For the six months ended June 30, 2005, earnings per diluted share were
$1.37, compared to $0.60 for the same period last year.
The company benefited from continued strength in global industrial markets,
leading to improved performance in the Industrial and Steel Groups. The
Automotive Group's results reflected the relative weakness of the North American
automotive industry and high raw material costs.
Demand in the Industrial Group's end markets continued to be strong, with the
most significant growth in industrial distribution, rail, mining and
agriculture. In addition to strong market demand, results reflect the benefits
of the company's focus on profitable growth through new products and market
expansion. Profitability improved due to increased volume, favorable mix and
improved pricing.
The Automotive Group's net sales increased from last year due to higher sales
into medium and heavy truck markets, partially offset by decreases in light
vehicle markets. The Automotive Group's profitability was negatively impacted
by higher raw material costs and lower production volume of light vehicles,
partially offset by improved pricing.
The Steel Group benefited from strong performance in both its alloy steel and
specialty steel businesses. The increase in the Steel Group's net sales over
18.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)last year was due to higher volume, price increases and surcharges. The
strongest market sectors were aerospace, energy and general industrial. The
Steel Group's improved profitability reflects increased volume, price increases,
surcharges and continued high labor productivity.
THE STATEMENT OF INCOME
- ------------------------
Unless otherwise stated below, comments regarding the three months ended
June 30, 2005 apply also to the six months ended June 30, 2005 and comments
regarding the three months ended June 30, 2004 apply also to the six months
ended June 30, 2004.
Overview:
2Q 2005 2Q 2004 $ Change % Change
------- ------- -------- --------
(Dollars in millions, except earnings per share)
Net sales $1,324.7 $1,130.3 $194.4 17.2%
Net income $ 67.3 $ 25.3 $ 42.0 166.0%
Earnings per share - diluted $ 0.73 $ 0.28 $ 0.45 160.7%
Average number of shares
- diluted 91,817,375 90,552,362 - 1.4% YTD 2005 YTD 2004 $ Change % Change
-------- -------- -------- --------
(Dollars in millions, except earnings per share)
Net sales $2,629.2 $2,229.1 $400.1 17.9%
Net income $ 125.6 $ 53.8 $ 71.8 133.4%
Earnings per share - diluted $ 1.37 $ 0.60 $ 0.77 128.3%
Average number of shares
- diluted 91,828,505 90,356,032 - 1.6%Sales by Segment:
2Q 2005 2Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions and exclude intersegment sales)
Industrial Group $ 497.5 $ 437.4 $ 60.1 13.7%
Automotive Group 426.0 404.2 21.8 5.4%
Steel Group 401.2 288.7 112.5 39.0%
-------- -------- --------- -------
Total company $1,324.7 $1,130.3 $194.4 17.2%
======== ======== ========= ======= YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions and exclude intersegment sales)
Industrial Group $ 966.0 $ 847.7 $118.3 14.0%
Automotive Group 846.2 819.8 26.4 3.2%
Steel Group 817.0 561.6 255.4 45.4%
-------- -------- --------- -------
Total company $2,629.2 $2,229.1 $400.1 17.9%
======== ======== ========= =======The Industrial Group's net sales increased due to stronger demand in most end
markets, especially industrial distribution, rail, mining and agriculture. The
19.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Automotive Group's net sales increased due to higher sales of medium and heavy
trucks, partially offset by lower sales of light vehicles. The increase in the
Steel Group's net sales over last year was due to higher volume, price increases
and surcharges. The strongest market sectors for the Steel Group were
aerospace, energy and general industrial.
Gross Profit:
2Q 2005 2Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Gross profit $276.8 $205.6 $71.2 34.6%
Gross profit % to net sales 20.9% 18.2% - 2.7%
Manufacturing rationalization /
integration / reorganization
charges included in cost of
products sold $ 6.0 $ 1.0 $ 5.0 500.0% YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Gross profit $548.7 $408.1 $140.6 34.4%
Gross profit % to net sales 20.9% 18.3% - 2.6%
Manufacturing rationalization /
integration / reorganization
charges included in cost of
products sold $ 7.2 $ 2.4 $ 4.8 200.0%Gross profit benefited from higher sales volume, price increases, surcharges and
favorable sales mix. Gross profit was negatively impacted by higher raw
material costs, lower production volume for North American passenger cars and
higher costs in the Automotive Group to run certain facilities that serve the
heavy truck and industrial markets beyond their economic capacity. The company
recovered a significant portion of the raw material cost increases through price
increases and surcharges.
In 2005, manufacturing rationalization/integration/reorganization charges
related to the start of the rationalization of the company's Canton, Ohio
bearing facilities and integration/reorganization costs for certain facilities
acquired as part of the Torrington acquisition in February 2003. In 2004,
manufacturing rationalization/integration/reorganization charges related
primarily to expenses associated with the integration of Torrington.
Selling, Administrative and General Expenses:
2Q 2005 2Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Selling, administrative and
general expenses $161.7 $147.4 $14.3 9.7%
Selling, administrative and
general expenses % to net sales 12.2% 13.0% - (0.8)%
Manufacturing rationalization /
integration / reorganization
charges included in selling,
administrative and general expenses $ 0.3 $ 6.3 $(6.0) (95.2)%
20.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued) YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Selling, administrative and
general expenses $325.8 $290.1 $35.7 12.3%
Selling, administrative and
general expenses % to net sales 12.4% 13.0% - (0.6)%
Manufacturing rationalization /
integration / reorganization
charges included in selling,
administrative and general expenses $ 0.7 $ 10.2 $(9.5) (93.1)%The increase in selling, administrative and general expenses in 2005 compared
to 2004 was due primarily to higher accruals for performance-based
compensation and costs for growth initiatives, partially offset by lower
manufacturing rationalization/integration/reorganization charges. The decrease
between periods in the percentage of selling, administrative and general
expenses to net sales was primarily the result of the company's ability to
leverage expenses on higher sales.
In 2005, the manufacturing rationalization/integration/reorganization charges
related to the start of the rationalization of the company's Canton, Ohio
bearing facilities. In 2004, the manufacturing rationalization/integration/
reorganization charges related primarily to expenses associated with the
integration of Torrington, primarily for information technology and
purchasing initiatives.
Impairment and Restructuring Charges:
2Q 2005 2Q 2004 $ Change
------- ------- ---------
(Dollars in millions)
Severance and related benefit costs $(0.1) $0.2 $(0.3)
Exit costs - 0.1 (0.1)
------- ------- ---------
Total $(0.1) $0.3 $(0.4)
======= ======= ========= YTD 2005 YTD 2004 $ Change
-------- -------- ---------
(Dollars in millions)
Severance and related benefit costs $(0.1) $1.0 $(1.1)
Exit costs - 0.1 (0.1)
-------- -------- ---------
Total $(0.1) $1.1 $(1.2)
======== ======== =========In 2004, restructuring charges related primarily to severance and related
benefit costs for associates who exited the company as a result of the
integration of Torrington.
In May 2004, the company announced a plan to begin closing its three bearing
plants in Canton, Ohio. In June 2004, the company and the United Steelworkers
of America (union) began the effects bargaining process. In July 2004, the
company and the union agreed to enter into early formal negotiations over the
21.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
current labor contract that expires on September 25, 2005 and covers
approximately 2,700 associates at the company's bearing and steel plants in
Ohio. In June 2005, a proposed labor agreement between the company and the
union was rejected by the union membership. Because the company and the union
are still in discussions, it is not possible to accurately estimate the timing
and impact on employment or the magnitude of savings and charges for
restructuring, which could be material. Therefore, the company is unable to
determine the impact of these plant closings in accordance with SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities."
In July 2005, the company disclosed that it will announce detailed restructuring
plans for its Automotive Group in the third quarter of 2005. The company has
determined that restructuring actions are necessary to improve the Automotive
Group's performance. The company expects the plans, which are intended to
reduce fixed costs and improve effectiveness, to require approximately two years
for completion. These restructuring actions are targeted to deliver annual
savings of approximately $40 million, with expected net workforce reductions of
approximately 400 to 500 positions and restructuring costs of approximately
$80 million to $90 million. The company will account for these restructuring
costs in future quarters in accordance with the applicable accounting
pronouncements.
Interest Expense and Income:
2Q 2005 2Q 2004 $ Change
------- ------- ---------
(Dollars in millions)
Interest expense $13.8 $11.9 $1.9
Interest income $ 0.7 $ 0.2 $0.5 YTD 2005 YTD 2004 $ Change
-------- -------- ---------
(Dollars in millions)
Interest expense $26.5 $23.3 $3.2
Interest income $ 1.3 $ 0.4 $0.9Interest expense for 2005 increased compared to last year due to higher
effective interest rates and higher average debt outstanding.
Other Income and Expense:
2Q 2005 2Q 2004 $ Change
-------- --------- ---------
(Dollars in millions)
Other expense $(0.4) $(5.3) $ 4.9 YTD 2005 YTD 2004 $ Change
-------- --------- ---------
(Dollars in millions)
CDSOA receipts, net of expenses $ - $ 7.7 $ (7.7)
Other expense (5.2) (15.0) 9.8
-------- ------- ---------
Total $ (5.2) $(7.3) $ 2.1
======== ======= =========
22.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
For the three months ended June 30, 2005, other expense included a gain on the
sale of non-strategic assets, losses from equity investments, donations,
minority interests, losses on the disposal of assets and foreign currency
exchange gains. For the three months ended June 30, 2004, other expense
included losses from equity investments, foreign currency exchange losses,
donations, minority interests and losses on the disposal of assets. The
decrease in other expense for the three months ended June 30, 2005, compared to
the same period of 2004 was due primarily to a gain on the sale of non-strategic
assets in 2005, lower losses from equity investments in 2005 and foreign
currency gains in 2005, compared to a foreign currency losses in 2004.
For the six months ended June 30, 2005, other expense included a gain on the
sale of non-strategic assets, losses from equity investments, donations, losses
on the disposal of assets, minority interests and foreign currency exchange
losses. For the six months ended June 30, 2004, other expense included losses
from equity investments, foreign currency exchange losses, losses on the
disposal of assets, donations and minority interests. Other expense for the six
months ended June 30, 2004 also included the adoption of Financial Accounting
Standards Board (FASB) Interpretation No. 46, "Consolidation of Variable
Interest Entities, an interpretation of Accounting Research Bulletin No. 51"
(FIN 46). The decrease in other expense for the six months ended June 30, 2005,
compared to the same period of 2004 was due primarily to lower losses from
equity investments in 2005, a gain on the sale of non-strategic assets in 2005,
lower foreign currency exchange losses in 2005, lower losses on the disposals of
assets in 2005 and the adoption of FIN 46 in 2004, partially offset by higher
donations in 2005.
U.S. Continued Dumping and Subsidy Offset Act (CDSOA) receipts are reported net
of applicable expenses. CDSOA provides for distribution of monies collected by
U.S. Customs from antidumping cases to qualifying domestic producers where the
domestic producers have continued to invest in their technology, equipment and
people. The $7.7 million received in the first quarter of 2004 related to
Torrington's bearing business. Pursuant to the terms of the agreement under
which the company purchased Torrington, Timken delivered to the seller of the
Torrington business 80% of the CDSOA payments received in 2004 for Torrington's
bearing business. Timken is under no further obligation to transfer any CDSOA
payments to the seller of the Torrington business. The company cannot predict
whether it will receive any additional payments under CDSOA in 2005 or, if so,
in what amount. If the company does receive any additional CDSOA payments,
they will most likely be received in the fourth quarter. In September 2002, the
World Trade Organization (WTO) ruled that such payments are inconsistent with
international trade rules. The U.S. Trade Representative appealed this ruling,
but the WTO upheld the ruling on January 16, 2003. CDSOA continues to be in
effect in the United States at this time.
Income Tax Expense:
2Q 2005 2Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Income tax expense $34.3 $15.5 $18.8 121.3%
Effective tax rate 33.7% 38.0% - (4.3)%
23.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued) YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Income tax expense $67.0 $33.0 $34.0 103.0%
Effective tax rate 34.8% 38.0% - (3.2)%In 2005, the effective tax rate was less than the U.S. statutory tax rate due
primarily to beneficial foreign tax rates, tax holidays and other U.S. tax
benefits. These benefits were partially offset by losses at certain foreign
operations that were not available to reduce overall tax expense, taxes paid to
state and local jurisdictions, tax on foreign remittances and other permanent
differences.
In 2004, the effective tax rate exceeded the U.S. statutory tax rate as a result
of losses at certain foreign operations that were not available to reduce
overall tax expense, taxes paid to state and local jurisdictions, tax on foreign
remittances and other permanent differences. These unfavorable items were
partially offset by beneficial foreign tax rates, tax holidays and other U.S.
tax benefits.
The effective tax rate for 2005 decreased from 2004 due primarily to certain tax
planning strategies that resulted in lower foreign tax rates and higher earnings
generated in low tax-rate foreign jurisdictions, partially offset by settlement
of prior years' liabilities.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004
(the "Act"). The Act creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent dividends
received deduction for certain dividends from controlled foreign corporations.
The deduction is subject to a number of limitations and the Internal Revenue
Service (IRS) issued guidance related to the domestic reinvestment plans on
January 13, 2005 and May 10, 2005. However, uncertainty remains on other
provisions of the Act. Based on our current analysis, the company anticipates
that the range of possible amounts that it will repatriate to be between
$8 million and $130 million. An estimated tax liability of $11 million would be
incurred on the repatriation of $130 million. As of June 30, 2005, the company
has provided for income tax of $2.8 million on $8 million of dividends from its
controlled foreign corporations.
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,
manufacturing rationalization/integration/reorganization costs, allocated
receipts received under the CDSOA and gain on the sale of non-strategic assets).
Refer to Note 8 - Segment Information in the notes to the consolidated condensed
financial statements for the reconciliation of adjusted EBIT by Group to
consolidated income before income taxes.
24.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)Industrial Group:
2Q 2005 2Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $498.2 $437.7 $60.5 13.8%
Adjusted EBIT $ 63.6 $ 49.3 $14.3 29.0%
Adjusted EBIT margin 12.8% 11.3% - 1.5% YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $967.0 $848.3 $118.7 14.0%
Adjusted EBIT $110.6 $ 85.1 $ 25.5 30.0%
Adjusted EBIT margin 11.4% 10.0% - 1.4%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, including automotive applications, for products other than steel.
The Industrial Group's net sales increased due to stronger demand in most end
markets, especially industrial distribution, rail, mining and agriculture. In
addition to strong market demand, results reflect the benefit of the company's
focus on profitable growth through new products and market expansion.
Profitability improved due to increased volume, favorable mix and improved
pricing. The Industrial Group continues to focus on improving capacity
utilization, product availability and customer service in response to strong
industrial demand. For the remainder of 2005, the company expects the
Industrial Group to benefit from continued strength in global industrial
markets.
Automotive Group:
2Q 2005 2Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $425.9 $404.2 $ 21.7 5.4%
Adjusted EBIT (loss) $ (1.2) $ 6.6 $ (7.8) -
Adjusted EBIT (loss) margin (0.3)% 1.6% - (1.9)% YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $846.2 $819.8 $ 26.4 3.2%
Adjusted EBIT (loss) $ (6.3) $ 24.9 $(31.2) -
Adjusted EBIT (loss) margin (0.7)% 3.0% - (3.7)%The Automotive Group includes sales of bearings and other products and services
(other than steel) to automotive original equipment manufacturers and their
suppliers. The Automotive Group's net sales increased due to higher sales of
medium and heavy trucks, partially offset by lower sales of light vehicles.
25.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The Automotive Group's profitability was negatively impacted by higher raw
material costs and lower production volume of light vehicles, partially offset
by improved pricing. Additionally, the Automotive Group incurred higher costs
to run certain facilities that serve the heavy truck and industrial markets
beyond their economic capacity. The Automotive Group continues to make progress
in its ability to recover higher raw material costs through price increases.
The company expects the Automotive Group's profitability in the second half of
2005 to improve from the first half of 2005. However, the company expects the
Automotive Group's profitability in 2005 to be lower than 2004.
Steel Group:
2Q 2005 2Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $445.3 $330.4 $114.9 34.8%
Adjusted EBIT $ 56.7 $ 3.0 $ 53.7 1,790.0%
Adjusted EBIT margin 12.7% 0.9% - 11.8% YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $912.8 $639.7 $273.1 42.7%
Adjusted EBIT $120.5 $ 5.8 $114.7 1,977.6%
Adjusted EBIT margin 13.2% 0.9% - 12.3%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 over last year was due to higher
volume, price increases and surcharges. The strongest market sectors for the
Steel Group were aerospace, energy and general industrial. The Steel Group's
improved profitability reflects increased volume, price increases, surcharges
and productivity. During the second quarter of 2005, the Steel Group also
benefited from the new continuous rolling mill at its specialty steel operation
in Latrobe, Pennsylvania. The Steel Group's profitability in the second quarter
of 2004 was negatively impacted by $7.7 million for the unplanned shutdown of
the Faircrest steel plant. During 2005, the Steel Group's results benefited
from scrap surcharges in excess of costs. The company does not expect this
trend to continue. For the remainder of 2005, the company expects the Steel
Group to benefit from continued strength in global industrial markets. The
company expects profitability for the Steel Group in the second half of 2005 to
be lower than the first half of 2005 due to seasonality and lower raw material
surcharges.
THE BALANCE SHEET
- -----------------
Total assets as shown on the consolidated condensed balance sheet at June 30,
2005 increased by $171.9 million from December 31, 2004. This increase was due
primarily to increased working capital required to support higher sales.
26.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)Current Assets:
06/30/05 12/31/04 $ Change % Change
-------- -------- -------- --------
(Dollars in millions)
Cash and cash equivalents $ 67.0 $ 51.0 $ 16.0 31.4%
Accounts receivable, net 808.2 717.4 90.8 12.7%
Deferred income taxes 91.0 90.1 0.9 1.0%
Inventories 963.9 874.8 89.1 10.2%
-------- -------- -------- --------
Total current assets $1,930.1 $1,733.3 $196.8 11.4%
======== ======== ======== ========The increase in cash and cash equivalents was partially due to accumulated cash
at certain debt-free foreign subsidiaries. The increase in accounts receivable
was due primarily to sales being higher in the second quarter of 2005, compared
to the fourth quarter of 2004, partially offset by the impact of foreign
currency translation. The increase in inventories was due primarily to higher
volume and increased raw material costs, partially offset by the impact of
foreign currency translation.
Property, Plant and Equipment - Net:
06/30/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Property, plant and equipment
- cost $3,573.9 $3,622.6 $(48.7) (1.3)%
Less: allowances for depreciation (2,051.3) (2,039.2) (12.1) (0.6)%
-------- -------- -------- ---------
Property, plant and equipment
- net $1,522.6 $1,583.4 $(60.8) (3.8)%
======== ======== ======== =========The decrease in property, plant and equipment - net was due primarily to
depreciation expense in excess of capital expenditures and the impact of foreign
currency translation.
Other Assets:
06/30/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Goodwill $188.0 $189.3 $(1.3) (0.7)%
Other intangible assets 174.8 179.0 (4.2) (2.3)%
Deferred income taxes 85.3 76.8 8.5 11.1%
Other assets 185.1 152.3 32.8 21.5%
-------- -------- -------- ---------
Total other assets $633.2 $597.4 $35.8 6.0%
======== ======== ======== =========The increase in other assets was due primarily to an increase in the fair value
of forward foreign exchange contracts, increase in miscellaneous receivables and
the timing of payment of prepaid expenses.
27.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)Current Liabilities:
06/30/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Short-term debt $ 232.5 $ 158.7 $ 73.8 46.5%
Accounts payable and other
liabilities 518.4 504.6 13.8 2.7%
Accrued expenses 437.6 353.6 84.0 23.8%
-------- -------- -------- ---------
Total current liabilities $1,188.5 $1,016.9 $ 171.6 16.9%
======== ======== ======== =========The increase in short-term debt was due primarily to additional borrowings,
mainly under the company's asset securitization facility, as a result of
seasonal working capital requirements and cash contributions to its U.S.-based
pension plans. The increase in accounts payable and other liabilities was due
primarily to an increase in trade accounts payable resulting from increased
volume. The increase in accrued expenses was due primarily to a
reclassification from the long-term portion of accrued pension cost to the
current portion based upon the company's estimate of contributions to its
pension plans in the next twelve months and an increase in income taxes payable
due to current year income tax expense.
Non-Current Liabilities:
06/30/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Long-term debt $ 609.6 $ 620.6 $(11.0) (1.8)%
Accrued pension cost 404.9 468.6 (63.7) (13.6)%
Accrued postretirement benefits
cost 495.0 490.4 4.6 0.9%
Other non-current liabilities 45.8 47.7 (1.9) (4.0)%
-------- -------- -------- ---------
Total non-current liabilities $1,555.3 $1,627.3 $(72.0) (4.4)%
======== ======== ======== =========The decrease in long-term debt related primarily to payments on borrowings under
the company's senior credit facility. The decrease in accrued pension cost was
due primarily to contributions to the company's U.S.-based pension plans during
the six months ended June 30, 2005 and the reclassification to the current
portion of accrued pension cost, partially offset by current year accruals for
pension expense.
Shareholders' Equity:
06/30/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Common stock $ 728.4 $ 711.6 $16.8 2.4%
Earnings invested in the business 945.9 847.7 98.2 11.6%
Accumulated other comprehensive
loss (332.1) (289.5) (42.6) (14.7)%
-------- -------- -------- ---------
Total shareholders' equity $1,342.2 $1,269.8 $72.4 5.7%
======== ======== ======== =========
28.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The increase in common stock was due primarily to stock option exercises by
employees and the related income tax benefits. Earnings invested in the
business were increased by net income and reduced by dividends declared. The
increase in accumulated other comprehensive loss was due primarily to foreign
currency translation and the strengthening of the U.S. dollar relative to other
currencies. For discussion regarding the impact of foreign currency
translation, refer to "Foreign Currency" in the Other Information section below.
-----------------CASH FLOWS
- -----------
YTD 2005 YTD 2004 $ Change
-------- --------- ---------
(Dollars in millions)
Net cash provided (used) by
operating activities $ 36.2 $ (2.1) $ 38.3
Net cash used by investing
activities (75.0) (63.4) (11.6)
Net cash provided by
financing activities 61.1 101.9 (40.8)
Effect of exchange rate
changes on cash (6.3) 2.4 (8.7)
-------- --------- ---------
Increase in cash and
cash equivalents $ 16.0 $ 38.8 -
======== ======== =========The increase in net cash provided by operating activities of $38.3 million was
primarily the result of higher net income, adjusted for non-cash items of
$103.3 million in the six months ended June 30, 2005, compared to $111.1 million
in the same period of 2004. The non-cash items include depreciation and
amortization expense, gain or loss on disposals of assets, deferred income tax
provision and amortization of restricted share awards. For the six months ended
June 30, 2005, net cash provided by operating activities was negatively impacted
by working capital requirements for increased sales volume, compared to the six
months ended June 30, 2004. Accounts receivable was a use of cash of
$123.7 million for the six months ended June 30, 2005, compared to a use of cash
of $103.7 million in the same period of 2004. For the six months ended June 30,
2005, inventory was a use of cash of $124.6 million, compared to a use of cash
of $19.8 million in the same period of 2004. Excluding cash contributions to
the company's pension plans, accounts payable and accrued expenses was a source
of cash of $150.0 million in the six months ended June 30, 2005, compared to a
source of cash of $89.3 million in the same period of 2004. The company made
cash contributions to its U.S.-based pension plans in the six months ended
June 30, 2005 of $73.2 million, compared to $124.0 million in the same period of
2004.
The increase in net cash used by investing activities was due primarily to
higher capital expenditures in the six months ended June 30, 2005, compared to
the same period of 2004, partially offset by the net cash proceeds from the sale
of the Industrial Group's Linear Motion Systems business.
The decrease in cash provided by financing activities was due primarily to lower
net borrowings under credit facilities in the six months ended June 30, 2005,
compared to the same period of 2004.
29.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total debt was $842.1 million at June 30, 2005, compared to $779.3 million at
December 31, 2004. Net debt was $775.1 million at June 30, 2005, compared to
$728.4 million at December 31, 2004. The net debt to capital ratio was 36.6% at
June 30, 2005, compared to 36.5% at December 31, 2004. The company expects that
any cash requirements in excess of cash generated from operating activities will
be met by the availability under the accounts receivable securitization facility
and the revolving credit facility. The company believes it has sufficient
liquidity to meet its obligations.
Reconciliation of Total Debt to Net Debt and the Ratio of Net Debt to Capital:*
Net debt:
6/30/05 12/31/04
-------- ---------
(Dollars in millions)
Short-term debt $232.5 $158.7
Long-term debt 609.6 620.6
-------- ---------
Total debt 842.1 779.3
Less: cash and cash equivalents (67.0) (50.9)
-------- ---------
Net debt $775.1 $728.4
======== ========= Ratio of net debt to capital:
6/30/05 12/31/04
-------- ---------
(Dollars in millions)
Net debt $ 775.1 $ 728.4
Shareholders' equity 1,342.2 1,269.8
-------- ---------
Net debt + shareholders'
equity (capital) $ 2,117.3 $ 1,998.2
======== =========Ratio of net debt to capital 36.6% 36.5%
======== =========* The company presents net debt because it believes net debt is more
representative of the company's indicative financial position due to a
temporary increase in cash and cash equivalents. This information is
provided as additional information concerning the company's financial
position.
On June 30, 2005, the company entered into a $500 million Amended and Restated
Credit Agreement (Credit Agreement) that replaced the company's previous credit
agreement dated as of December 31, 2002. The Credit Agreement matures on
June 30, 2010 and provides for a $500 million revolving credit facility. Under
this credit facility, the company has two financial covenants: a consolidated
leverage ratio and a consolidated interest coverage ratio. At June 30, 2005,
the company was in compliance with the covenants under this credit facility and
its other debt agreements.
30.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)At June 30, 2005, the company had no borrowings and letters of credit totaling
$77.1 million outstanding under the $500 million revolving credit facility,
which reduced the availability under that facility to $422.9 million. Also,
at June 30, 2005, the company had outstanding borrowings of $100.0 million
under the $125 million accounts receivable securitization facility, which
reduced the availability under that facility to $25.0 million.
During the six months ended June 30, 2005, Standard & Poor's Rating Services and
Moody's Investors Services improved their outlook on Timken debt from "negative"
to "stable" and also reaffirmed their ratings of BBB- and Ba1, respectively.
The company's contractual debt obligations and contractual commitments
outstanding as of June 30, 2005 are as follows:
Payments Due by Period (in millions)
Total Less than 1-3 3-5 More than
1 Year Years Years 5 Years
------ --------- ------- ------ ----------
Contractual Obligations:
Long-term debt $610.4 $ 0.8 $122.0 $250.4 $237.2
Short-term debt 231.7 231.7 - - -
Operating Leases 100.1 18.8 30.9 17.2 33.2
Supply Agreement 4.6 4.6 - - -
------ --------- ------- ------ ----------
Total $946.8 $255.9 $152.9 $267.6 $270.4
====== ========= ======= ====== ==========The company expects to make cash contributions of $135.0 million to its global
defined benefit plans in 2005. Also, the company expects its postretirement
benefit payments will total $59.7 million in 2005. Refer to Note 13 to the
company's consolidated financial statements in the company's Annual Report on
Form 10-K for the year ended December 31, 2004 for additional information
regarding the company's benefit plans. In connection with the sale of the
company's Ashland tooling plant in 2002, the company entered into a
$25.9 million four-year supply agreement pursuant to which the company purchases
tooling, which expires on June 30, 2006. This supply agreement is reflected in
the table above. As of June 30, 2005, the weighted average maturity date and
interest rate of the company's total debt were 8.3 years and 5.28%,
respectively.
During the first six months of 2005, the company did not purchase any shares of
its common stock as authorized under the company's 2000 common stock purchase
plan. This plan authorizes the company to buy in the open market or in
privately negotiated transactions up to four million shares of common stock,
which are to be held as treasury shares and used for specified purposes. The
company may exercise this authorization until December 31, 2006. The company
does not expect to be active in repurchasing its shares under this plan in the
near-term.
The company does not have any off-balance sheet arrangements with unconsolidated
entities or other persons.
31.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)OTHER INFORMATION
- ------------------
Foreign Currency:
Assets and liabilities of subsidiaries are translated at the rate of exchange in
effect on the balance sheet date; income and expenses are translated at the
average rates of exchange prevailing during the quarter. Related translation
adjustments are reflected as a separate component of accumulated other
comprehensive loss. Foreign currency gains and losses resulting from
transactions are included in the consolidated results of operations.
Foreign currency exchange gains included in the company's operating results for
the three months ended June 30, 2005 totaled $3.7 million, compared to losses of
$1.7 million during the three months ended June 30, 2004. Foreign currency
exchange gains included in the company's operating results for the six months
ended June 30, 2005 totaled $4.7 million, compared to losses of $2.2 million
during the six months ended June 30, 2004. For the three months ended June 30,
2005, the company recorded a negative non-cash foreign currency translation
adjustment of $27.1 million that decreased shareholders' equity, compared to a
negative non-cash foreign currency translation adjustment of $9.2 million that
decreased shareholders' equity in the three months ended June 30, 2004. For the
six months ended June 30, 2005, the company recorded a negative non-cash foreign
currency translation adjustment of $48.7 million that decreased shareholders'
equity, compared to a negative non-cash foreign currency translation adjustment
of $12.9 million that decreased shareholders' equity in the six months ended
June 30, 2004. The six months ended June 30, 2005 were negatively impacted by
the effect of currency exchange rates, primarily the weakening of the Euro,
Polish Zloty, Romanian Leu and South African Rand relative to the U.S. Dollar,
compared to December 31, 2004.
Recent Accounting Pronouncements:
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB 43, Chapter 4." SFAS No. 151 requires certain inventory costs to be
recognized as current period expenses. SFAS No. 151 also provides guidance for
the allocation of fixed production costs. This standard is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Accordingly, the company will adopt this standard in 2006. The company has
determined that SFAS No. 151 will not have a material impact on its results of
operations, cash flows or financial position.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS
No. 123R is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation," which supersedes Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95,
"Statement of Cash Flows." Generally, the approach to accounting for share-
based payments in SFAS No. 123R is similar to the approach described in SFAS
No. 123. However, SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the consolidated
statement of income based on their fair values. Pro forma disclosure is no
longer an alternative. In April 2005, the Securities and Exchange Commission
deferred the effective date of SFAS No. 123R until the beginning of the first
fiscal year beginning after June 15, 2005. Early adoption is permitted. The
company expects to adopt the provisions of SFAS No. 123R effective January 1,
2006.
32.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)SFAS No. 123R permits public companies to adopt its requirements using either
the "modified prospective" method or "modified retrospective" method. Under the
"modified prospective" method, compensation cost is recognized, beginning with
the effective date (a) based on the requirements of SFAS No. 123R for all share-
based payments granted after the effective date and (b) based on the
requirements of SFAS No. 123 for all awards granted to employees prior to the
effective date of SFAS No. 123R that remain unvested on the effective date. The
"modified retrospective" method includes the requirements of the "modified
prospective" method, but also permits entities to restate based on the amounts
previously recognized under SFAS No. 123 for purposes of pro forma disclosures
either all periods presented or prior interim periods of the year of adoption.
The company plans to adopt SFAS No. 123R using the "modified prospective"
method.
As permitted by SFAS 123, the company currently accounts for share-based
payments to employees using APB Opinion No. 25's intrinsic value method and,
as such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS No. 123R's fair value method will have an
impact on the company's results of operations, although it will have no impact
on the company's overall financial position. The impact of adoption of SFAS
No. 123R cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had the company adopted
SFAS No. 123R in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net income and earnings per share in Note 1 to the company's consolidated
financial statements in the company's Annual Report on Form 10-K for the year
ended December 31, 2004. SFAS No. 123R also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current accounting guidance. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after adoption. While
the company cannot estimate what those amounts will be in the future (because
they depend on, among other things, when employees exercise stock options), the
amount of operating cash flows recognized in prior periods for such excess tax
deductions were $3.1 million, $1.1 million and $0 in 2004, 2003 and 2002,
respectively.
Critical Accounting Policies and Estimates:
The company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. The company reviews its critical accounting policies
throughout the year. The company has concluded that there have been no changes
to its critical accounting policies or estimates, as described in its Annual
Report on Form 10-K for the year ended December 31, 2004, during the six months
ended June 30, 2005.
Other:
On August 5, 2005, the company's board of directors declared a quarterly cash
dividend of $0.15 per share, payable on September 2, 2005 to shareholders of
record as of August 19, 2005. This will be the 333rd consecutive dividend paid
on the common stock of the company.
33.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)The company continues to evaluate the competitiveness of its operations and may
from time to time determine to close those operations that are not competitive.
The company may incur charges associated with the closure of such operations in
future periods that may be material.
In May 2004, the company announced a plan to begin closing its three bearings
plants in Canton, Ohio. In June 2004, the company and the United Steelworkers of
America (union) began the effects bargaining process. In July 2004, the company
and the union agreed to enter into early formal negotiations over the current
labor contract, which expires in September 2005. In June 2005, a proposed
labor agreement between the company and the union was rejected by the union
membership. As of the date of this report, the company and the union are
continuing to negotiate. If the company and the union are unable to reach early
agreement, the company may experience negative effects, including the possible
loss of future business due to uncertainty concerning the company's labor
situation.
Certain statements set forth in this document (including the company's
forecasts, beliefs and expectations) that are not historical in nature are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. 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, including additional adverse effects
from terrorism or hostilities. This includes, but is not limited to,
political risks associated with the potential instability of governments and
legal systems in countries in which the company or its customers conduct
business and significant changes in currency valuations.b) the effects of fluctuations in customer demand on sales, product mix and
prices in the industries in which the company operates. This includes the
ability of the company to respond to the rapid changes in the industrial
market, the effects of customer strikes, the impact of changes in
industrial and automotive business cycles and whether conditions of fair
trade continue in the U.S. market.c) the effects of adverse changes in the financial health of customers,
including the ability of the company to limit its exposure to customers
experiencing financial difficulty.d) competitive factors, including changes in market penetration, increasing
price competition by existing or new foreign and domestic competitors, the
introduction of new products by existing and new competitors and new
technology that may impact the way the company's products are sold or
distributed.
34.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)e) 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; higher cost and availability of raw materials and
energy; the company's ability to mitigate the impact of higher material
costs through surcharges and/or price increases; changes resulting from
inventory management and cost reduction initiatives and different levels of
customer demands; the effects of unplanned work stoppages; and changes in
the cost of labor and benefits.f) the success of the company's operating plans, including its ability to
achieve the benefits from its manufacturing and administrative cost
reduction initiatives as well as its ongoing continuous improvement and
rationalization programs; and the ability of acquired companies to achieve
satisfactory operating results.g) the company's ability to maintain appropriate relations and successfully
negotiate with unions that represent company associates in certain locations
in order to avoid disruptions of business.h) the success of the company's plans concerning the transfer of bearing
production from Canton, including the possibility that the transfer of
production will not achieve the desired results, the possibility of
disruption in the supply of bearings during the process, and the outcome
of the company's discussions with the union that represents company
associates at the affected facilities.i) the success of the company's plans concerning the restructuring of its
Automotive Group.j) unanticipated litigation, claims or assessments. This includes, but is not
limited to, claims or problems related to intellectual property, product
liability or warranty and environmental issues.k) changes in worldwide financial markets, including interest rates, to the
extent they affect the company's ability to raise capital or increase the
company's cost of funds, have an impact on the overall performance of the
company's pension fund investments and/or cause changes in the economy
which affect customer demand.Additional risks relating to the company's business, the industries in which the
company operates or the company's common stock may be described from time to
time in the company's filings with the SEC. All of these risk factors are
difficult to predict, are subject to material uncertainties that may affect
actual results and may be beyond the company's control.
Except as required by the federal securities laws, the company undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
35.
Item 3. Quantitative and Qualitative Disclosures about Market Risk Refer to information appearing under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" on pages 17-34 of this Form 10-Q. Furthermore, a
discussion of market risk exposures is included in Part II,
Item 7A, "Quantitative and Qualitative Disclosure about Market
Risk," of the Company's Annual Report on Form 10-K for the year ended
December 31, 2004. There have been no material changes in reported
market risk since the inclusion of this discussion in the Company's
Annual Report on Form 10-K referenced above.Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act rule 13a-15(e).
Based upon that evaluation, the principal executive officer and
principal financial officer concluded that the Company's disclosure
controls and procedures were effective as of the end of the period
covered by this report. There have been no significant changes in
the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting during the
Company's most recent fiscal quarter.
36.
Part II. OTHER INFORMATIONItem 1. Legal Proceedings
The company is normally involved in various claims and legal actions
arising in the ordinary course of its business. In the opinion of
management, the ultimate disposition of these matters will not have a
material adverse effect on the company's consolidated financial
position or results of operations. The company is currently in discussions with the State of Ohio
concerning a violation of Ohio air pollution control laws which was
discovered by the company and voluntarily disclosed to the State of
Ohio approximately eight years ago. Although no final settlement has
been reached, the company believes that the final settlement will not
be material to the company or have a material adverse effect on the
company's consolidated financial position or results of operations.Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer
Purchases of Equity Securities (c) Issuer Purchases of Common Stock
The following table provides information about purchases by the company
during the quarter ended June 30, 2005 of its common stock. Total Number Maximum
of Shares Number of
Purchased as Shares that
Part of May Yet Be
Publicly Purchased
Total Number Average Announced Under the
of Shares Price Paid Plans or Plans or
Period Purchased (1) per Share (2) Programs Programs
------ ------------- ------------- ------------ -----------
4/1/05-
4/30/05 32,349 $26.37 - -
5/1/05-
5/31/05 359 $25.08 - -
6/1/05-
6/30/05 - - - -
------------- ------------- ------------ -----------
Total 32,708 $26.35 - -
============= ============= ============ =========== (1) The company repurchases shares of its common stock that are owned
and tendered by employees to satisfy tax withholding obligations
on the vesting of restricted shares.
(2) The average price paid per share is calculated using the daily high
and low of the company's common stock as quoted on the New York
Stock Exchange at the time the employee tenders the shares.
37.
Item 4. Submission of Matters to a Vote of Security Holders
See Part II, Item 4 of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2005.Item 6. Exhibits
11 Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of James W. Griffith, President and Chief
Executive Officer of The Timken Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Glenn A. Eisenberg, Executive Vice
President-Finance and Administration (principal financial
officer) of The Timken Company, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. 32 Certifications of James W. Griffith, President and Chief
Executive Officer, and Glenn A. Eisenberg, Executive Vice
President-Finance and Administration (principal financial
officer) of The Timken Company, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
38. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
The Timken Company
_______________________________
Date August 8, 2005 BY /s/ James W. Griffith
________________________ ______________________________
James W. Griffith
President and Chief Executive Officer,
and Director
Date August 8, 2005 BY /s/ Glenn A. Eisenberg
________________________ _______________________________
Glenn A. Eisenberg
Executive Vice President - Finance and
Administration (Principal Financial Officer)