1.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 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
___ ___ Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
YES NO X
___ ___
Common shares outstanding at September 30, 2005, 92,450,889.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Sept 30 Dec 31
2005 2004
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents........................... $63,105 $50,967
Accounts receivable, less allowances,
(2005-$35,317; 2004-$24,952)........................ 791,729 717,425
Deferred income taxes............................... 94,821 90,066
Inventories......................................... 1,004,939 874,833
---------- ----------
Total Current Assets...................... 1,954,594 1,733,291Property, plant and equipment....................... 3,594,680 3,622,656
Less allowances for depreciation................... 2,078,355 2,039,231
---------- ----------
1,516,325 1,583,425Goodwill............................................ 190,200 189,299
Other intangible assets............................. 173,791 178,986
Deferred income taxes............................... 87,176 76,835
Other assets........................................ 185,736 152,235
---------- ----------
Total Assets.................................. $4,107,822 $3,914,071
========== ==========LIABILITIES
Current Liabilities
Accounts payable and other liabilities.............. $514,255 $504,585
Short-term debt and current portion of long-term debt 269,441 158,690
Accrued expenses.................................... 503,247 353,623
---------- ----------
Total Current Liabilities................. 1,286,943 1,016,898Noncurrent Liabilities
Long-term debt...................................... 533,169 620,634
Accrued pension cost................................ 324,954 468,644
Accrued postretirement benefits cost................ 504,425 490,366
Other noncurrent liabilities........................ 54,401 47,681
---------- ----------
Total Noncurrent Liabilities.............. 1,416,949 1,627,325Shareholders' Equity
Common stock........................................ 749,898 711,596
Earnings invested in the business................... 971,900 847,738
Accumulated other comprehensive loss................ (317,868) (289,486)
---------- ----------
Total Shareholders' Equity................ 1,403,930 1,269,848
---------- ---------- Total Liabilities and Shareholders' Equity.... $4,107,822 $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) Nine Months Ended Three Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
2005 2004 2005 2004
---------- ---------- ---------- ----------
(Thousands of dollars, except share and per share data)
Net sales................................................... $3,887,351 $3,325,796 $1,258,133 $1,096,724
Cost of products sold....................................... 3,086,278 2,733,641 1,005,722 912,679
---------- ---------- ---------- ----------
Gross Profit............................................. 801,073 592,155 252,411 184,045Selling, administrative and general expenses................ 488,802 425,100 163,021 135,006
Impairment and restructuring charges ....................... 24,407 3,998 24,451 2,939
---------- ---------- ---------- ----------
Operating Income......................................... 287,864 163,057 64,939 46,100Interest expense............................................ (39,376) (35,941) (12,842) (12,631)
Interest income............................................. 2,219 766 874 308
Other expense............................................... (9,446) (12,924) (4,273) (5,611)
---------- ---------- ---------- ----------
Income Before Income Taxes .............................. 241,261 114,958 48,698 28,166
Provision for income taxes.................................. 75,861 43,684 8,867 10,703
---------- ---------- ---------- ----------Net Income ................................................. $ 165,400 $ 71,274 $ 39,831 $ 17,463
========== ========== ========== ========== Earnings Per Share*........................................ $ 1.81 $ 0.79 $ 0.43 $ 0.19
Earnings Per Share - assuming dilution**................... $ 1.79 $ 0.79 $ 0.43 $ 0.19
Dividends Per Share........................................ $ 0.45 $ 0.39 $ 0.15 $ 0.13
========== ========== ========== ==========* Average shares outstanding............................... 91,238,444 89,706,620 91,688,231 90,166,612
** Average shares outstanding - assuming dilution........... 92,181,013 90,579,359 92,821,344 91,058,739
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)
Nine Months Ended
Cash Provided (Used) Sept 30 Sept 30
2005 2004
-------- --------
OPERATING ACTIVITIES (Thousands of dollars)
Net income ............................................... $165,400 $ 71,274
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization............................ 160,765 156,916
Loss on disposals of assets.............................. 4,542 2,296
(Credit) provision for deferred income taxes............. (13,143) 1,911
Amortization of restricted share awards.................. 4,398 1,946
Changes in operating assets and liabilities:
Accounts receivable..................................... (110,262) (121,331)
Inventories............................................. (162,106) (91,705)
Other assets............................................ (28,671) 851
Accounts payable and accrued expenses................... 79,190 (50,048)
Foreign currency translation loss....................... 5,581 1,742
-------- --------
Net Cash Provided (Used) by Operating Activities....... 105,694 (26,148)INVESTING ACTIVITIES
Capital expenditures..................................... (128,605) (95,229)
Proceeds from sale of non-strategic assets............... 11,729 -
Proceeds from disposals of assets........................ 3,661 2,610
Other ................................................... 3,186 (2,907)
Acquisitions............................................. (6,629) (10,233)
-------- --------
Net Cash Used by Investing Activities.................. (116,658) (105,759)FINANCING ACTIVITIES
Cash dividends paid to shareholders...................... (41,238) (35,014)
Proceeds from the exercise of stock options.............. 30,740 13,744
Accounts receivable securitization financing borrowings.. 185,000 183,000
Accounts receivable securitization financing payments.... (106,500) (73,000)
Payments on senior revolving credit facility............. (256,700) (192,700)
Proceeds from senior revolving credit facility........... 246,700 234,700
Other long-term debt activity - net...................... (1,277) 2,027
Short-term debt activity - net........................... (28,824) 19,288
-------- --------
Net Cash Provided by Financing Activities.............. 27,901 152,045Effect of exchange rate changes on cash................... (4,799) 4,107
Increase in Cash and Cash Equivalents..................... 12,138 24,245
Cash and Cash Equivalents at Beginning of Period.......... 50,967 28,626
-------- --------
Cash and Cash Equivalents at End of Period................ $ 63,105 $ 52,871
======== ========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:
Nine months ended Three months ended
September 30 September 30
2005 2004 2005 2004
-------- -------- -------- --------
(Thousands of dollars)
Net income, as reported $165,400 $ 71,274 $ 39,831 $ 17,463Add: Stock-based employee
compensation expense, net
of related taxes 3,017 1,207 1,055 526
Deduct: Total stock-based
employee compensation
expense determined under
fair value based methods
for all awards, net of
related tax effects (6,356) (5,055) (2,355) (2,028)
-------- -------- -------- --------
Pro forma net income $162,061 $ 67,426 $ 38,531 $ 15,961
======== ======== ======== ========
Earnings per share:
Basic - as reported $ 1.81 $ 0.79 $ 0.43 $ 0.19
Diluted - as reported $ 1.79 $ 0.79 $ 0.43 $ 0.19
Basic - pro forma $ 1.78 $ 0.75 $ 0.42 $ 0.18
Diluted - pro forma $ 1.76 $ 0.74 $ 0.42 $ 0.18
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 6.
Continued
Note 3 -- Inventories Sep 30 Dec 31
2005 2004
---------- ---------
(Thousands of dollars)
Finished products $ 450,628 $392,668
Work-in-process and raw materials 483,159 423,808
Manufacturing supplies 71,152 58,357
-------- --------
$1,004,939 $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 Sep 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 2.59% to 5.50% at September 30,
2005 $ 76,519 $109,260
Variable-rate Accounts Receivable Securitization financing
agreement with an interest rate of 4.05% at September
30, 2005 78,500 -
Variable-rate Ohio Water Development Authority revenue
bonds for PEL (2.82% at September 30, 2005) 23,000 23,000
Fixed-rate mortgage for PEL with an interest rate of 9.00% 11,491 11,561
Other 4,433 13,596
-------- --------
$193,943 $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 September 30, 2005, there was $78.5 million
outstanding under this facility, which reduced the availability to
$46.5 million. This balance is reflected on the company's consolidated
condensed balance sheet as of September 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 $132.4 million. At September 30, 2005, the company had
outstanding borrowings of $76.5 million, which reduced the availability
under these facilities to $55.9 million.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7.
Continued
Note 4 -- Financing Arrangements (continued)
Sep 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% $211,554 $211,832
Fixed-rate Medium-Term Notes, Series A, maturing on
August 21, 2006 with an interest rate of 6.75% 75,000 75,000
Fixed-rate Unsecured Notes, maturing on February 15,
2010 with a fixed interest rate of 5.75% 248,106 249,258
Variable-rate State of Ohio Water Development Authority
Solid Waste Revenue Bonds, maturing on July 1, 2032
(2.83% at September 30, 2005) 24,000 24,000
Variable-rate State of Ohio Air Quality and Water
Development Revenue Refunding Bonds, maturing on
November 1, 2025 (2.85% at September 30, 2005) 21,700 21,700
Variable-rate State of Ohio Pollution Control Revenue
Refunding Bonds, maturing on June 1, 2033
(2.85% at September 30, 2005) 17,000 17,000
Variable-rate State of Ohio Water Development Revenue
Refunding Bonds, maturing on May 1, 2007
(2.78% at September 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 3,307 5,117
-------- --------
608,667 621,907
Less: Current Maturities 75,498 1,273
-------- --------
$533,169 $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 September 30, 2005,
the company was in compliance with the covenants under this credit facility and
its other debt agreements.
At September 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
Nine Months Ended Three Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
2005 2004 2005 2004
-------- -------- -------- --------
U.S. (Thousands of dollars)
Federal $ 58,532 $ 20,722 $ 2,104 $ 3,656
State & Local 6,175 3,020 1,131 651
Foreign 11,154 19,942 5,632 6,396
-------- -------- -------- -------
$ 75,861 $ 43,684 $ 8,867 $ 10,703
======== ======== ======== ========For the quarter ended September 30, 2005, the effective tax rate was 18.2%. The
decrease in the effective tax rate in the quarter was due primarily to the
recognition of additional U.S. tax benefits on export sales for the years
2003 through 2005, and the elimination of a valuation allowance on certain foreign
deferred tax assets because of improved profitability in the affected jurisdiction.
For the first nine months of 2005, the effective tax rate of 31.4% was less than
the U.S. statutory tax rate due primarily to beneficial foreign tax rates, tax
holidays and other U.S. tax benefits, including export tax incentives. These
benefits were offset partially by losses at certain foreign operations that were not
available to reduce overall tax expense, taxes paid to U.S. state and local
jurisdictions and tax on foreign remittances.
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 U.S. state and local jurisdictions and tax on foreign
remittances. These unfavorable items were offset partially by beneficial foreign tax
rates, tax holidays and other U.S. tax benefits.
The effective tax rate for the first nine months of 2005 decreased from the same
period in 2004 due primarily to increased benefits from export tax incentives in the
U.S., improved performance in certain foreign subsidiaries that reduced the amount of
foreign losses without tax benefit and increased income in jurisdictions with lower
foreign tax rates.
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 foreign subsidiaries. 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. As of
September 30, 2005, the company estimates that it may repatriate approximately up
to an additional $120 million, which could result in an estimated tax liability
of $8 million.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 9.
Sept 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 - 92,550,638 shares
2004 - 90,511,833 shares
Stated Capital 53,064 53,064
Other paid-in capital 699,644 658,730
Less cost of Common Stock in treasury
2005 - 99,749 shares
2004 - 7,501 shares (2,810) (198)
-------- --------
$749,898 $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 165,400 165,400
Foreign currency translation adjustment (34,671) (34,671)
Minimum pension liability adjustment 3,338 3,338
Change in fair value of derivative financial
instruments, net of reclassifications
(net of income tax of $1,729) 2,951 2,951
---------
Total comprehensive income 137,018Dividends - $0.45 per share (41,238) (41,238)
Tax benefit from exercise of stock options 4,352 4,352
Issuance of 2,038,805 shares from authorized
and surrender of 92,248 shares to treasury
related to stock option plans 36,562 (2,612) 33,950
------- -------- -------- ---------- -------- ----------
Balance September 30, 2005 $53,064 $699,644 $971,900 ($317,868) ($2,810) $1,403,930
======= ======== ======== ========== ======== ==========The total comprehensive income for the three months ended September 30, 2005 and 2004 was $54,103
and $34,270, respectively. Total comprehensive income for the nine months ended September 30, 2004 was $76,399.
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 nine months ended Sept 30, 2005:
Severance expense and related benefits $21,607 $ - $ - $21,607
Exit costs 2,800 - - 2,800
------ ------------ ------- ------
Total $24,407 $ - $ - $24,407
======= ============ ======= ======For the three months ended Sept 30, 2005:
Severance expense and related benefits $21,651 $ - $ - $21,651
Exit costs 2,800 - - 2,800
------- ------------ ------- -------
Total $24,451 $ - $ - $24,451
======= ============ ======= =======For the nine months ended Sept 30, 2004:
Severance expense and related benefits $1,554 $2,139 $13 $3,706
Exit costs 40 241 11 292
------ ------------ ------- ------
Total $1,594 $2,380 $24 $3,998
====== ============ ======= ======For the three months ended Sept 30, 2004:
Severance expense and related benefits $1,465 $1,330 $ - $2,795
Exit costs 40 104 - 144
------ ------------ ------- ------
Total $1,505 $1,434 $ - $2,939
====== ============ ======= ======
For both the three and nine months ended Sep 30, 2005, restructuring charges
related primarily to severance and related benefit costs for associates and
exit costs as result of the company's automotive restructuring.
For both the three and nine months ended Sep 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 (3,108)
Add: provisions 24,451
--------
Balance at September 30, 2005 $25,415
========During the third quarter of 2005, the company announced a global
restructuring within its automotive segment to reduce fixed costs.
This restructuring is expected to take approximately two years to
complete. As a part of this announcement, the company will close its
plant in Clinton, South Carolina, with production being phased out during
the next two years. In addition, the company is restructuring its
automotive powertrain engineering resources, which includes creating a new
worldwide powertrain engineering center of expertise at Clemson University's
International Center for Automotive Research (ICAR) in Greenville, South
Carolina. These announced restructuring efforts, along with other
future actions are targeted to deliver annual pretax savings of
approximately $40 million, with expected net workforce reductions of
approximately 400 to 500 positions and pretax restructuring costs of
$80 to $90 million. During the third quarter, the company recorded
approximately $21.6 million of severance and related benefit costs and
$2.8 million of exit costs. This included $7.8 million related to curtailment
of pension and postretirement benefit plans.
In May 2004, the company announced a plan to begin closing its three bearing
plants in Canton, Ohio within its industrial segment. 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 labor contract that expired
on September 25, 2005 and covered approximately 2,700 associates at the
company's steel and bearing plants in the Canton, Ohio area. On
September 15, 2005, the company reached a new four-year agreement with the
union, which went into effect on September 26, 2005 when the prior contract
expired. As a result of the contract settlement, the company has refined
its plans to rationalize the Canton bearing operations. This initiative
is expected to deliver annual pretax savings of approximately
$25 million through streamlining operations and workforce reductions, with
costs of approximately $35 to $40 million over the next four years. As of
September 30, 2005 the company had not recorded any restructuring charges
related to the Canton bearing plants.
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 (loss) on the sale of non-strategic assets).
(Thousands of Dollars) Nine Months Ended Three Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
2005 2004 2005 2004
Industrial Group --------- --------- -------- --------
Net sales to external customers $1,433,746 $1,261,274 $467,774 $ 413,589
Intersegment sales 1,461 983 435 416
Depreciation and amortization 54,006 52,852 17,863 17,388
EBIT, as adjusted 158,072 130,277 47,444 45,200Automotive Group
Net sales to external customers $1,254,173 $1,190,641 $407,959 $370,876
Depreciation and amortization 62,415 58,619 21,156 19,101
EBIT (loss), as adjusted (12,357) 17,782 (6,040) (7,148)
Steel Group
Net sales to external customers $1,199,432 $873,881 $382,400 $312,259
Intersegment sales 141,248 121,147 45,512 43,044
Depreciation and amortization 44,344 45,445 14,047 15,090
EBIT, as adjusted 170,171 22,510 49,698 16,760
Reconciliation to Income Before Income Taxes:
Total EBIT, as adjusted, for
reportable segments $315,886 $170,569 $ 91,102 $ 54,812
Impairment and restructuring charges (24,407) (3,998) (24,451) (2,939)
Manufacturing rationalization/
integration/reorganization expenses(11,666) (20,119) (3,807) (7,497)
CDSOA receipts, net of expenses - 7,743 - -
Gain (loss) on sale of non-strategic
assets 2,535 - (35) -
Adoption of FIN 46 - (948) - -
Other 452 (719) 27 (719)
Interest expense (39,376) (35,941) (12,842) (12,631)
Interest income 2,219 766 874 308
Intersegment adjustments (4,382) (2,395) (2,170) (3,168)
------- ------- ------- -------
Income before income taxes $241,261 $114,958 $ 48,698 $ 28,166
======== ======== ======== ========
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 nine months ended
September 30, 2005 are as follows:
(Thousands of Dollars) Balance Balance
12/31/04 Acquisition Other 9/30/05
--------- ----------- ------- ---------
Goodwill:
Industrial $ 187,621 $ 1,479 $ (450) $ 188,650
Automotive 1,678 - (128) 1,550
--------- ---------- -------- ---------
$ 189,299 $ 1,479 $ (578) $ 190,200
========= ========== ======== =========The following table displays intangible assets as of September 30, 2005 and
December 31, 2004:
(Thousands of Dollars) As of September 30, 2005
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Intangible assets subject to amortization:Industrial $ 39,516 $ (8,988) $ 30,527
Automotive 63,552 (14,954) 48,599
Steel 885 (204) 681
-------- ------------ --------
$103,953 $ (24,146) $ 79,807
======== =========== ========Intangible assets not subject to amortization:
Goodwill $190,200 $ - $190,200
Intangible pension asset 92,895 - 92,895
Other 1,089 - 1,089
-------- ----------- --------
$284,184 $ - $284,184
======== =========== ========
Total Intangible Assets $388,137 $ (24,146) $363,991
======== =========== ========
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 $2.5 million and
$7.1 million for the three and nine months ended September 30, 2005, respectively,
and is estimated to be approximately $8.5 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 $26.7 million and $29.8 million at September 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 income.
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 September 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.
Note 11 - Subsequent Events
On October 6, 2005, the company acquired Bearing Inspection, Inc., which
provides bearing inspection and reconditioning services to the aerospace
industry for approximately $40 million. The financial results of the
acquisition, which the company expects to be accretive, will be included in the
company's 2005 consolidated results from the date of acquisition. Pro Forma
results of operations will not be presented because the effect of the
acquisition is not expected to be material.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 16.
Continued
Note 12 - 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 nine
months ended September 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 nine months ended September 30, 2005 is the company's best estimate of
each period's proportionate share of the amounts to be recorded for the year
ended December 31, 2005.
Pension Postretirement
------------------- --------------------
Nine Months Ended Nine Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
2005 2004 2005 2004
--------- --------- -------- --------
(Thousands of dollars)
Service cost $ 31,901 $ 29,402 $ 4,125 $ 4,313
Interest cost 114,960 109,171 34,385 36,959
Expected return on
plan assets (115,587) (109,324) - -
Amortization of prior
service cost 10,445 11,338 (3,335) (3,512)
Recognized net
actuarial loss 36,474 24,876 12,206 13,221
Curtailment loss 900 - 7,840 -
Amortization of
transition asset (86) (81) - -
--------- --------- -------- -------- Net periodic benefit cost $ 79,007 $ 65,382 $ 55,221 $50,981
========= ========= ======== ======== Pension Postretirement
------------------- --------------------
Three Months Ended Three Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
2005 2004 2005 2004
--------- --------- -------- --------
(Thousands of dollars)
Service cost $ 10,633 $ 8,024 $ 1,385 $ 627
Interest cost 38,320 36,817 11,677 11,915
Expected return on
plan assets (38,528) (36,700) - -
Amortization of prior
service cost 3,481 3,514 (802) (928)
Recognized net
actuarial loss 12,157 9,588 4,068 4,645
Curtailment loss 698 - 7,088 -
Amortization of
transition asset (29) (27) - -
--------- --------- -------- -------- Net periodic benefit cost $ 26,732 $ 21,216 $ 23,416 $16,259
========= ========= ======== ========
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 September 30, 2005, the Timken Company reported net
sales of approximately $1.3 billion, an increase of approximately 15 percent
from the third quarter of 2004. Sales were higher across all three business
segments. For the three months ended September 30, 2005, earnings per diluted
share were $0.43, compared to $0.19 per diluted share for the third quarter of
2004.
For the nine months ended September 30, 2005, net sales were approximately
$3.9 billion, an increase of approximately 17 percent from the same period last
year. For the nine months ended September 30, 2005, earnings per diluted share
were $1.79, compared to $0.79 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 Auto-
motive Group's results were negatively impacted by the impact of currency,
the impact of a Chapter 11 bankruptcy filing by Delphi Corporation and high raw
material costs.
Demand in the Industrial Group's segments continued to be strong with the
largest increases in industrial distribution and rail. Profitability improved
due to increased volume, improved pricing and favorable mix.
The Automotive Group's net sales increased from the same period last year due
to improved pricing and increased demand for heavy truck products. While the
Automotive Group's profitability was positively impacted by improved volume and
pricing, it was more than offset by the impact of currency, the impact of
Delphi's Chapter 11 filing and high raw material costs.
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 reflected strong demand from industrial customers as well as price
increases and surcharges. The strongest market sectors were industrial, aero-
space and energy. The Steel Group's improved profitability reflects increased
volume, price increases, surcharges to recover high raw material costs,
improved mix and continued high labor productivity.
THE STATEMENT OF INCOME
- ------------------------
Unless otherwise stated below, comments regarding the three months ended
September 30, 2005 apply also to the nine months ended September 30, 2005 and
comments regarding the three months ended September 30, 2004 apply also to the
nine months ended September 30, 2004.
Overview:
3Q 2005 3Q 2004 $ Change % Change
------- ------- -------- --------
(Dollars in millions, except earnings per share)
Net sales $1,258.1 $1,096.7 $161.4 14.7%
Net income $ 39.8 $ 17.5 $ 22.3 127.4%
Earnings per share - diluted $ 0.43 $ 0.19 $ 0.24 126.3%
Average number of shares
- diluted 92,821,344 91,058,739 - 1.9% YTD 2005 YTD 2004 $ Change % Change
-------- -------- -------- --------
(Dollars in millions, except earnings per share)
Net sales $3,887.4 $3,325.8 $561.6 16.9%
Net income $ 165.4 $ 71.3 $ 94.1 132.0%
Earnings per share - diluted $ 1.79 $ 0.79 $ 1.00 126.6%
Average number of shares
- diluted 92,181,013 90,579,359 - 1.8%Sales by Segment:
3Q 2005 3Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions and exclude intersegment sales)
Industrial Group $ 467.8 $ 413.6 $ 54.2 13.1%
Automotive Group 407.9 370.9 37.0 10.0%
Steel Group 382.4 312.2 70.2 22.5%
-------- -------- --------- -------
Total company $1,258.1 $1,096.7 $161.4 14.7%
======== ======== ========= ======= YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions and exclude intersegment sales)
Industrial Group $1,433.8 $1,261.3 $172.5 13.7%
Automotive Group 1,254.2 1,190.6 63.6 5.3%
Steel Group 1,199.4 873.9 325.5 37.2%
-------- -------- --------- -------
Total company $3,887.4 $3,325.8 $561.6 16.9%
======== ======== ========= =======The Industrial Group's net sales increased due to stronger demand in most end
markets, especially industrial distribution and rail. The Automotive Group's net
19.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
sales increased from the same period last year due to improved pricing and
increased demand for heavy truck products. The increase in the Steel Group's
net sales over last year was primarily due to price increases, surcharges to
recover high raw material costs and volume. The strongest market sectors for
the Steel Group were industrial, aerospace and energy.
Gross Profit:
3Q 2005 3Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Gross profit $252.4 $184.0 $68.4 37.2%
Gross profit % to net sales 20.1% 16.8% - 3.3%
Manufacturing rationalization /
integration / reorganization
charges included in cost of
products sold $ 3.0 $ 1.0 $ 2.0 200.0% YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Gross profit $801.1 $592.2 $208.9 35.3%
Gross profit % to net sales 20.6% 17.8% - 2.8%
Manufacturing rationalization /
integration / reorganization
charges included in cost of
products sold $ 10.2 $ 3.4 $ 6.8 200.0%Gross profit benefited from price increases and surcharges, favorable sales
volume and mix. However, gross profit continued to be negatively impacted by
higher raw material costs, although the company recovered a significant portion
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, manu-
facturing rationalization/integration/reorganization charges related primarily
to expenses associated with the integration of Torrington.
Selling, Administrative and General Expenses:
3Q 2005 3Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Selling, administrative and
general expenses $163.0 $135.0 $28.0 20.7%
Selling, administrative and
general expenses % to net sales 13.0% 12.3% - 0.7%
Manufacturing rationalization /
integration / reorganization
charges included in selling,
administrative and general expenses $ 0.8 $ 6.5 $(5.7) (87.7)%
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 $488.8 $425.1 $ 63.7 15.0%
Selling, administrative and
general expenses % to net sales 12.6% 12.8% - (0.2)%
Manufacturing rationalization /
integration / reorganization
charges included in selling,
administrative and general expenses $ 1.5 $ 16.7 $(15.2) (91.0)%The increase in selling, administrative and general expenses in 2005, compared
to last year was due primarily to higher accruals for performance-based compen-
sation and costs for growth initiatives, partially offset by lower manufacturing
rationalization/integration/reorganization charges. The decrease between year-
to-date 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
primarily related to 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:
3Q 2005 3Q 2004 $ Change
------- ------- --------
(Dollars in millions)
Severance and related benefit costs $21.7 $ 2.8 $18.9
Exit costs 2.8 0.1 2.7
------- ------- --------
Total $24.5 $ 2.9 $21.6
======= ======= ======== YTD 2005 YTD 2004 $ Change
-------- -------- --------
(Dollars in millions)
Severance and related benefit costs $21.6 $ 3.7 $17.9
Exit costs 2.8 0.3 2.5
-------- -------- --------
Total $24.4 $ 4.0 $20.4
======== ======== ========During the third quarter of 2005, the company announced a global restructuring
within its automotive segment to reduce fixed costs. This restructuring is
expected to take approximately two years to complete. As a part of this
announcement, the company will close its plant in Clinton, South Carolina,
with production being phased out during the next two years. In addition, the
company is restructuring its automotive powertrain engineering resources, which
includes creating a new worldwide powertrain engineering center of expertise at
Clemson University's International Center for Automotive Research (ICAR) in
Greenville, South Carolina. These announced restructuring efforts, along with
other future actions are targeted to deliver annual pretax savings of
21.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
approximately $40 million, with expected net workforce reductions of
approximately 400 to 500 positions and pretax restructuring costs of
$80 to $90 million. During the third quarter, the company recorded
approximately $21.7 million of severance and related benefit costs and
$2.8 million of exit costs related to the announcement. This included
$7.8 million related to curtailment of pension and postretirement benefit
plans.
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 within its industrial segment. 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 labor contract that expired on
September 25, 2005 and covered approximately 2,700 associates at the company's
steel and bearing plants in the Canton, Ohio area. On September 15, 2005, the
company reached a new four-year agreement with the union, which went into effect
September 26, 2005 when the prior contract expired. As a result of the contract
settlement, the company has refined its plans to rationalize the Canton bearing
operations. This initiative is expected to deliver annual pretax savings of
approximately $25 million through streamlining operations and workforce
reductions, with costs of approximately $35 to $40 million over the next four
years. As of September 30, 2005 the company had not recorded any restructuring
charges related to the Canton bearing plants.
Interest Expense and Income:
3Q 2005 3Q 2004 $ Change
------- ------- ---------
(Dollars in millions)
Interest expense $12.8 $12.6 $0.2
Interest income $ 0.9 $ 0.3 $0.6 YTD 2005 YTD 2004 $ Change
-------- -------- ---------
(Dollars in millions)
Interest expense $39.4 $35.9 $3.5
Interest income $ 2.2 $ 0.8 $1.4Interest expense for 2005 increased compared to last year due to higher
effective interest rates and higher average debt outstanding.
Other Income and Expense:
3Q 2005 3Q 2004 $ Change
-------- --------- ---------
(Dollars in millions)
Other expense $(4.3) $(5.6) $ 1.3 YTD 2005 YTD 2004 $ Change
-------- --------- ---------
(Dollars in millions)
CDSOA receipts, net of expenses $ - $ 7.7 $ (7.7)
Other expense (9.4) (20.6) 11.2
-------- ------- ---------
Total $ (9.4) $(12.9) $ 3.5
======== ======= =========
22.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
For the three months ended September 30, 2005, other expense included losses on
the disposal of assets, losses from equity investments, donations, minority
interests, and foreign currency exchange gains. For the three months ended
September 30, 2004, other expense included losses on the disposal of assets and
foreign currency exchange gains. The decrease in other expense for the three
months ended September 30, 2005, compared to the same period of 2004, was due
primarily to a gain on the sale of non-strategic assets in 2005 and foreign
currency gains in 2005 offset by increased losses from equity investments.
For the nine months ended September 30, 2005, other expense included losses on
the disposal of assets, losses from equity investments, donations, minority
interests and foreign currency exchange losses. For the nine months ended
September 30, 2004, other expense included losses from equity investments,
losses on the disposal of assets and foreign currency exchange losses. Other
expense for the nine months ended September 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 nine
months ended September 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. 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. Although CDSOA continues to
be in effect in the United States at this time, there is proposed legislation
that could impact the company's ability to receive CDSOA payments in 2005 and
beyond. The company cannot predict whether it will receive any payments under
CDSOA in 2005 or, if so, in what amount. If the company does receive payments
under CDSOA in 2005, they will likely be received in the fourth quarter.
Income Tax Expense:
3Q 2005 3Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Income tax expense $ 8.9 $10.7 $(1.8) (16.8)%
Effective tax rate 18.2% 38.0% - (19.8)% YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Income tax expense $75.9 $43.7 $32.2 73.7%
Effective tax rate 31.4% 38.0% - (6.6)%
23.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
For the quarter ended September 30, 2005, the effective tax rate was less than
the U.S. statutory tax rate due primarily to the recognition of additional U.S.
tax benefits on export sales for the years 2003 through 2005 and the elimination
of a valuation allowance on certain foreign deferred tax assets because of
improved profitability in the affected jurisdiction.
For the first nine months of 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, including export tax incentives. These
benefits were offset partially by losses at certain foreign operations that were
not available to reduce overall tax expense, taxes paid to U.S. state and local
jurisdictions and tax on foreign remittances.
For the first nine months of 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 U.S. state and local
jurisdictions and tax on foreign remittances. These unfavorable items were offset
partially by beneficial foreign tax rates, tax holidays and other U.S. tax
benefits.
The effective tax rate for the first nine months of 2005 decreased from the same
period in 2004 due primarily to increased benefits from export tax incentives in the
U.S., improved performance in certain foreign subsidiaries that reduced the amount of
foreign losses without tax benefit and increased income in jurisdictions with lower
foreign tax rates.
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 foreign subsidiaries. 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. As of September 30, 2005, the company estimates that it may repatriate up
to an additional $120 million, which could result in an estimated tax liability
of approximately $8 million.
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, manu-
facturing 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:
3Q 2005 3Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $468.2 $414.0 $54.2 13.1%
Adjusted EBIT $ 47.4 $ 45.2 $ 2.2 4.9%
Adjusted EBIT margin 10.1% 10.9% - (0.8)% YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $1,435.2 $1,262.3 $172.9 13.7%
Adjusted EBIT $ 158.1 $ 130.3 $ 27.8 21.3%
Adjusted EBIT margin 11.0% 10.3% - 0.7%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 end
markets, with the largest increases in industrial distribution and rail.
Profitability improved due to increased volume, improved pricing and favorable
mix. The Industrial Group continues to focus on improving capacity utilization,
product availability and customer service in response to strong industrial
demand. During the quarter, operations were expanded in Wuxi, China to serve
industrial customers with spherical bearings. The capacity at two large-bore
bearings operations located in Ploiesti, Romania and Asheboro, North
Carolina has been increased. The company expects the Industrial Group to
benefit from continued strength in global industrial markets.
Automotive Group:
3Q 2005 3Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $407.9 $370.9 $ 37.0 10.0%
Adjusted EBIT (loss) $ (6.0) $ (7.1) $ 1.1 -
Adjusted EBIT (loss) margin (1.5)% (1.9)% - 0.4% YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $1,254.2 $1,190.6 $ 63.6 5.3%
Adjusted EBIT (loss) $ (12.4) $ 17.8 $(30.2) -
Adjusted EBIT (loss) margin (1.0)% 1.5% - (2.5)%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 improved pricing
and increased demand for heavy truck products. While the Automotive Group's
profitability was positively impacted by improved volume and pricing, it was
25.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
more than offset by the impact of currency, Delphi's Chapter 11 filing and high
raw material costs. The Automotive Group continues to make progress in its
ability to recover higher raw material costs through price increases. During
the third quarter, the Automotive Group announced restructuring plans, including
closing of facilities, workforce reductions and combining and relocating
engineering resources. The restructuring initiative is targeted to deliver
annual savings of approximately $40 million, with restructuring costs of approx-
imately $80 to $90 million over two years. The Automotive Group's adjusted EBIT
will exclude these restructuring costs as it is not representative of ongoing
operations. The company expects to see improvement in the Automotive Group,
despite the challenging environment in the North American automotive industry.
Steel Group:
3Q 2005 3Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $427.9 $355.3 $ 72.6 20.4%
Adjusted EBIT $ 49.7 $ 16.8 $ 32.9 195.8%
Adjusted EBIT margin 11.6% 4.7% - 6.9% YTD 2005 YTD 2004 $ Change % Change
-------- -------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $1,340.7 $995.0 $345.7 34.7%
Adjusted EBIT $ 170.2 $ 22.5 $147.7 656.4%
Adjusted EBIT margin 12.7% 2.3% - 10.4%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 price
increases, surcharges to recover high raw material costs and volume. The
strongest market sectors for the Steel Group were industrial, aerospace and
energy. The Steel Group's improved profitability reflects price increases and
surcharges to recover high raw material costs, improved volume and mix, as well
as, continued high labor productivity. The Steel Group's profitability for the
nine months ended September 30, 2004 was negatively impacted by approximately
$7.2 million as a result of the unplanned shutdown of the Faircrest steel plant
that occurred in the second quarter. During the third quarter of 2004, the
company incurred clean-up costs of $2.5 million, which were more than offset by
a reimbursement of $3.0 million received from the company's insurer. During the
nine months ended September 30, 2005, the Steel Group's results benefited from
raw material surcharges in excess of costs. 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 fourth quarter to decline due to seasonality. Operating rates should return
to historically high levels in the first quarter of 2006 as the industrial
market continues to show broad-based strength.
THE BALANCE SHEET
- -----------------
Total assets as shown on the consolidated condensed balance sheet at
September 30, 2005 increased by $193.8 million from December 31, 2004. This
increase was due primarily to increased accounts receivable and inventory
to support higher sales.
26.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Current Assets:
09/30/05 12/31/04 $ Change % Change
-------- -------- -------- --------
(Dollars in millions)
Cash and cash equivalents $ 63.1 $ 51.0 $ 12.1 23.7%
Accounts receivable, net 791.7 717.4 74.3 10.4%
Deferred income taxes 94.8 90.1 4.7 5.2%
Inventories 1,005.0 874.8 130.2 14.9%
-------- -------- -------- --------
Total current assets $1,954.6 $1,733.3 $221.3 12.8%
======== ======== ======== ========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 third 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:
09/30/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Property, plant and equipment
- cost $3,594.7 $3,622.6 $(27.9) (0.8)%
Less: allowances for depreciation (2,078.4) (2,039.2) (39.2) (1.9)%
-------- -------- -------- ---------
Property, plant and equipment
- net $1,516.3 $1,583.4 $(67.1) (4.2)%
======== ======== ======== =========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:
09/30/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Goodwill $190.2 $189.3 $ 0.9 0.5%
Other intangible assets 173.8 179.0 (5.2) (2.9)%
Deferred income taxes 87.2 76.8 10.4 13.5%
Other assets 185.7 152.3 33.4 21.9%
-------- -------- -------- ---------
Total other assets $636.9 $597.4 $39.5 6.6%
======== ======== ======== =========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:
09/30/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Short-term debt and current
portion of long-term debt $ 269.4 $ 158.7 $ 110.7 69.8%
Accounts payable and other
liabilities 514.3 504.6 9.7 1.9%
Accrued expenses 503.2 353.6 149.6 42.3%
-------- -------- -------- ---------
Total current liabilities $1,286.9 $1,016.9 $ 270.0 26.6%
======== ======== ======== =========The increase in short-term debt and current portion of long-term debt was due
primarily to the reclassification of long-term debt to current, which will
mature within the next twelve months, and 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:
09/30/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Long-term debt $ 533.2 $ 620.6 $(87.4) (14.1)%
Accrued pension cost 325.0 468.6 (143.6) (30.6)%
Accrued postretirement benefits
cost 504.4 490.4 14.0 2.9%
Other non-current liabilities 54.4 47.7 6.7 14.0%
-------- -------- -------- ---------
Total non-current liabilities $1,417.0 $1,627.3 $(210.3) (12.9)%
======== ======== ======== =========The decrease in long-term debt related primarily to payments on the company's
senior credit facility and the reclassification from long-term to current for
debt maturing within the next twelve months. The decrease in accrued pension
cost was due primarily to contributions to the company's U.S.-based pension
plans during the nine months ended September 30, 2005 and the reclassification
to the current portion of accrued pension cost, partially offset by current year
accruals for pension expense.
Shareholders' Equity:
09/30/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Common stock $ 749.9 $ 711.6 $ 38.3 5.4%
Earnings invested in the business 971.9 847.7 124.2 14.7%
Accumulated other comprehensive
loss (317.9) (289.5) (28.4) (9.8)%
-------- -------- -------- ---------
Total shareholders' equity $1,403.9 $1,269.8 $134.1 10.6%
======== ======== ======== =========
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 trans-
lation, 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 $105.7 $ (26.1) $ 131.8
Net cash used by investing
activities (116.7) (105.8) (10.9)
Net cash provided by
financing activities 27.9 152.0 (124.1)
Effect of exchange rate
changes on cash (4.8) 4.1 (8.9)
-------- --------- ---------
Increase in cash and
cash equivalents $ 12.1 $ 24.2 -
======== ======== =========The increase in net cash provided by operating activities of $105.7 million was
primarily the result of higher net income of $165.4 million, adjusted for non-
cash items of $156.6 million in the nine months ended September 30, 2005,
compared to net income of $71.3 million, adjusted for non-cash items of
$163.1 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 nine months ended September 30, 2005, net cash provided by operating
activities was negatively impacted by accounts receivable and inventory for
increased sales volume, compared to the nine months ended September 30, 2004.
Accounts receivable was a use of cash of $110.3 million for the nine months
ended September 30, 2005, compared to a use of cash of $121.3 million in the
same period of 2004. For the nine months ended September 30, 2005, inventory
was a use of cash of $162.1 million, compared to a use of cash of $91.7 million
in the same period of 2004. Excluding cash contributions to the company's U.S.-
based pension plans, accounts payable and accrued expenses was a source of cash
of $204.2 million in the nine months ended September 30, 2005, compared to a
source of cash of $135.0 million in the same period of 2004. The company made
cash contributions to its U.S.-based pension plans in the nine months ended
September 30, 2005 of $125.0 million, compared to $185.0 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 nine months ended September 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 on credit facilities in the nine months ended September 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 $802.6 million at September 30, 2005, compared to $779.3 million
at December 31, 2004. Net debt was $739.5 million at September 30, 2005,
compared to $728.4 million at December 31, 2004. The net debt to capital ratio
was 34.5% at September 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 expects to continue to reduce its debt levels and leverage during the
fourth quarter of 2005. In addition, the company believes it has sufficient
liquidity to meet its obligations in the immediate future.
Reconciliation of Total Debt to Net Debt and the Ratio of Net Debt to Capital:*
Net debt:
09/30/05 12/31/04
-------- ---------
(Dollars in millions)
Short-term debt and current
portion of long-term debt $269.4 $158.7
Long-term debt 533.2 620.6
-------- ---------
Total debt 802.6 779.3
Less: cash and cash equivalents (63.1) (50.9)
-------- ---------
Net debt $739.5 $728.4
======== ========= Ratio of net debt to capital:
09/30/05 12/31/04
-------- ---------
(Dollars in millions)
Net debt $ 739.5 $ 728.4
Shareholders' equity 1,403.9 1,269.8
-------- ---------
Net debt + shareholders'
equity (capital) $ 2,143.4 $ 1,998.2
======== =========Ratio of net debt to capital (leverage) 34.5% 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
September 30, 2010 and is 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 September 30,
2005, the company was in compliance with the covenants under its revolving
credit facility and its other debt agreements.
30.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
At September 30, 2005, the company had outstanding letters of credit totaling
$77.1 million and no borrowings under the $500 million revolving credit
facility, which reduced the availability under that facility to $422.9 million.
Also, at September 30, 2005, the company had outstanding borrowings of
$78.5 million under the $125 million accounts receivable securitization
facility, which reduced the availability under that facility to $46.5 million.
The company's contractual debt obligations and contractual commitments
outstanding as of September 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 $608.7 $ 75.5 $ 46.8 $250.4 $236.0
Short-term debt 193.9 193.9 - - -
Operating Leases 95.2 18.6 29.4 14.0 33.2
Supply Agreement 3.5 3.5 - - -
------ --------- ------- ------ ----------
Total $901.3 $291.5 $ 76.2 $264.4 $269.2
====== ========= ======= ====== ==========The company expects to make cash contributions of $131.0 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. 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 September 30, 2006. As of September 30, 2005, the
weighted average maturity date and interest rate of the company's total debt
were 8.3 years and 5.42%, respectively.
During the first nine 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 trans-
actions are included in the consolidated results of operations.
Foreign currency exchange gains included in the company's operating results for
the three months ended September 30, 2005 totaled $1.5 million, compared to
gains of $0.5 million during the three months ended September 30, 2004. Foreign
currency exchange gains included in the company's operating results for the nine
months ended September 30, 2005 totaled $6.2 million, compared to losses of
$1.2 million during the nine months ended September 30, 2004. For the three
months ended September 30, 2005, the company recorded a positive non-cash
foreign currency translation adjustment of $14.0 million that increased share-
holders' equity, compared to a positive non-cash foreign currency translation
adjustment of $17.0 million that increased shareholders' equity in the three
months ended September 30, 2004. For the nine months ended September 30, 2005,
the company recorded a negative non-cash foreign currency translation adjustment
of $34.7 million that decreased shareholders' equity, compared to a positive
non-cash foreign currency translation adjustment of $3.5 million that increased
shareholders' equity in the nine months ended September 30, 2004. The nine
months ended September 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 September 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 September 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 require-
ments 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 literature. 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 nine months
ended September 30, 2005.
Subsequent Events:
On October 6, 2005, the company acquired Bearing Inspection, Inc., which
provides bearing inspection and reconditioning services to the aerospace
industry for approximately $40 million. The financial results of the
acquisition, which the company expects to be accretive, will be included in the
company's 2005 consolidated results from the date of acquisition. Pro Forma
results of operations will not be presented because the effect of the
acquisition is not expected to be material.
Other:
On November 8, 2005, the company's board of directors declared a quarterly cash
dividend of $0.15 per share, payable on December 2, 2005 to shareholders of
record as of November 18, 2005. This will be the 334th 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.
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. In particular, the statements related to
expected savings and costs of the company's initiatives and expectations
concerning the company's financial performance are forward looking. 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 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 rationalization of the
company's Canton bearing operations, including the possibility that the
rationalization or the transfer of production will not achieve the desired
results and the possibility of disruption in the supply of bearings during
the process.i) the success of the company's plans concerning the implementation of its
Automotive Group rationaliztion activities.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 (as defined by in 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. During the company's most recent
fiscal quarter there have been no changes in the company's
internal control over financial reporting that have materially affected,
or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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 and Use of Proceeds.
Issuer Purchases of Common Stock
The following table provides information about purchases by the company
during the quarter ended September 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
------ ------------- ------------- ------------ -----------
7/1/05-
7/31/05 - - - -
8/1/05-
8/31/05 74,640 $28.55 - -
9/1/05-
9/30/05 7,433 $29.69 - -
------------- ------------- ------------ -----------
Total 82,073 $28.65 - -
============= ============= ============ =========== (1) The company repurchases shares of its common stock that are
previously owned and tendered by employees to satisfy either the
exercise price for stock options or the tax withholding obligations
on the vesting of restricted shares or the exercise of stock options. (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 the day before the employee tenders the shares.
37.
Item 6. Exhibits
10 Amended and Restated Credit Agreement dated as of June 30,
2005 by and among: The Timken Company; Bank of America,
N.A. and KeyBank National Association as Co-Administrative
Agents; JP Morgan Chase Bank, N.A. and Wachovia Bank,
National Association as Syndication Agents; KeyBank
National Association as Paying Agent, L/C Issuer and Swing
Line Lender; and other Lenders party thereto was filed on
July 7, 2005 with Form 8-K (Commission File No. 1-1169),
and is incorporated herein by reference. 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 November 8, 2005 BY /s/ James W. Griffith
________________________ ______________________________
James W. Griffith
President and Chief Executive Officer,
and Director
Date November 8, 2005 BY /s/ Glenn A. Eisenberg
________________________ _______________________________
Glenn A. Eisenberg
Executive Vice President - Finance and
Administration (Principal Financial Officer)