1.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 1998.
Commission File No. 1-1169
THE TIMKEN COMPANY
Exact name of registrant as specified in its charter
Ohio 34-0577130
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
1835 Dueber Avenue, S.W., Canton, Ohio 44706-2798
Address of principal executive offices Zip Code
(330) 438-3000
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
___ ___
Common shares outstanding at September 30, 1998, 62,112,808.
<PAGE>
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Sep. 30 Dec. 31
1998 1997
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents......................... $18,906 $9,824
Accounts receivable, less allowances,
(1998-$8,222; 1997-$7,003)........................ 357,527 357,423
Deferred income taxes............................. 43,990 42,071
Inventories (Note 2) ............................. 510,629 445,853
---------- ----------
Total Current Assets.................... 931,052 855,171
Property, Plant and Equipment..................... 2,726,977 2,677,786
Less allowances for depreciation................. 1,426,225 1,457,270
---------- ----------
1,300,752 1,220,516
Costs in excess of net assets of acquired business,
less amortization, (1998-$27,436; 1997-$23,448)... 145,938 139,409
Deferred income taxes............................. 10,917 26,605
Other assets...................................... 78,040 84,849
---------- ----------
Total Assets................................ $2,466,699 $2,326,550
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and other liabilities............ $224,374 $253,033
Short-term debt and commercial paper.............. 138,668 156,585
Accrued expenses.................................. 136,210 157,343
---------- ----------
Total Current Liabilities............... 499,252 566,961
Noncurrent Liabilities
Long-term debt (Note 3) .......................... 340,179 202,846
Accrued pension cost.............................. 126,051 103,061
Accrued postretirement benefits cost.............. 391,031 389,749
Other noncurrent liabilities...................... 45,908 31,857
---------- ----------
Total Noncurrent Liabilities............ 903,169 727,513
Shareholders' Equity (Note 4)
Common stock...................................... 292,263 321,069
Earnings invested in the business................. 816,791 749,033
Accumulated other comprehensive income............ (44,776) (38,026)
---------- ----------
Total Shareholders' Equity.............. 1,064,278 1,032,076
Total Liabilities and Shareholders' Equity.. $2,466,699 $2,326,550
========== ==========
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
Sep. 30 Sep. 30 Sep. 30 Sep. 30
1998 1997 1998 1997
--------- --------- ------- -------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Net sales............................................. $2,025,976 $1,946,487 $616,848 $629,900
Cost of product sold.................................. 1,566,895 1,488,876 496,875 489,298
--------- --------- ------- -------
Gross Profit....................................... 459,081 457,611 119,973 140,602
Selling, administrative and general expenses.......... 263,345 245,083 85,304 81,838
--------- --------- ------- -------
Operating Income................................... 195,736 212,528 34,669 58,764
Interest expense...................................... (19,109) (16,295) (6,639) (5,242)
Other income (expense)................................ (10,400) (1,290) (2,773) 428
--------- --------- ------- -------
Income Before Income Taxes......................... 166,227 194,943 25,257 53,950
Provision for Income Taxes (Note 5)................... 64,829 71,147 11,684 16,160
--------- --------- ------- -------
Net Income......................................... $101,398 $123,796 $13,573 $37,790
========= ========= ======= =======
Earnings Per Share * .............................. $1.63 $1.97 $0.22 $0.60
Earnings Per Share - assuming dilution **......... $1.61 $1.93 $0.22 $0.59
Dividends Per Share................................ $0.540 $0.495 $0.180 $0.165
* Per average shares outstanding..................... 62,353,218 62,727,242 62,303,033 62,977,635
** Per average shares outstanding - assuming dilution. 63,036,445 64,073,870 62,536,641 64,582,843
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Cash Provided (Used) Sep. 30 Sep. 30
1998 1997
------- -------
OPERATING ACTIVITIES (Thousands of dollars)
Net Income............................................. $101,398 $123,796
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 104,068 100,208
Provision (credit) for deferred income taxes.......... 10,106 (14,901)
Stock issued in lieu of cash to employee benefit plans 46,592 14,167
Changes in operating assets and liabilities:
Accounts receivable.................................. 583 (41,068)
Inventories and other assets......................... (69,921) (25,489)
Accounts payable and accrued expenses................ (8,755) 39,104
Foreign currency translation......................... 1,477 (597)
------- -------
Net Cash Provided by Operating Activities 185,548 195,220
INVESTING ACTIVITIES
Purchases of property, plant and equipment - net...... (181,352) (129,910)
Purchase of subsidiaries.............................. 0 (41,812)
------- -------
Net Cash Used by Investing Activities............... (181,352) (171,722)
FINANCING ACTIVITIES
Cash dividends paid to shareholders................... (33,640) (28,307)
Purchase of Treasury Shares........................... (75,398) (10,839)
Payments on long-term debt............................ (23,257) (29,971)
Proceeds from issuance of long-term debt.............. 139,583 24,000
Short-term debt activity - net........................ (2,161) 48,810
------- -------
Net Cash Provided by Financing Activities........... 5,127 3,693
Effect of exchange rate changes on cash................ (241) (697)
Increase in Cash and Cash Equivalents.................. 9,082 26,494
Cash and Cash Equivalents at Beginning of Period....... 9,824 5,342
------- -------
Cash and Cash Equivalents at End of Period............. $18,906 $31,836
======= =======
<PAGE>
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, 1997.
Certain amounts for 1997 have been reclassified to conform with the 1998
presentation.
9/30/98 12/31/97
Note 2 -- Inventories ------- --------
(Thousands of dollars)
Finished products $175,057 $144,621
Work-in-process and raw materials 295,157 264,784
Manufacturing supplies 40,415 36,448
------- -------
$510,629 $445,853
======= =======
Note 3 -- Long-term Debt 9/30/98 12/31/97
------- --------
(Thousands of dollars)
7-1/2% State of Ohio Pollution Control
Revenue Refunding Bonds, maturing on
January 1, 2002. $17,000 $17,000
State of Ohio Water Development Revenue
Refunding Bond, maturing on May 1, 2007.
The variable interest rate is tied to the
bank's tax exempt weekly interest rate.
The rate at September 30, 1998 is 3.65%. 8,000 8,000
State of Ohio Air Quality and Water Development
Revenue Refunding Bonds, maturing on
June 1, 2001. The variable interest rate
is tied to the bank's tax exempt weekly interest
rate. The rate at September 30, 1998 is 3.65%. 21,700 21,700
State of Ohio Water Development Authority Solid Waste
Revenue Bonds, maturing on July 2, 2032. The
variable interest rate is tied to the bank's
tax exempt weekly interest rate. The rate at
September 30, 1998 is 3.65%. 24,000 24,000
Fixed Rate Medium-Term Notes, Series A, due at
various dates through May, 2028 with
interest rates ranging from 6.20% to 9.10%. 267,000 153,000
Other 5,098 2,766
------- -------
342,798 226,466
Less: Current Maturities 2,619 23,620
------- -------
$340,179 $202,846
======= =======
<PAGE>
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 6.
Continued
Note 4 -- Shareholders' Equity 9/30/98 12/31/97
------- --------
Class I and Class II serial preferred stock (Thousands of dollars)
without par value:
Authorized -- 10,000,000 shares each class
Issued - none $0 $0
Common Stock without par value:
Authorized -- 200,000,000 shares
Issued (including shares in treasury)
1998 - 63,082,626 shares
1997 - 63,082,626 shares
Stated Capital 53,064 53,064
Other paid-in capital 262,178 273,873
Less cost of Common Stock in treasury
1998 - 969,817 shares
1997 - 202,627 shares 22,979 5,868
-------- --------
$292,263 $321,069
======== ========
<TABLE>
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 Income Stock Total
------- -------- -------- ---------- --------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 $53,064 $273,873 $749,033 ($38,026) ($5,868) $1,032,076
Net Income 101,398 101,398
Foreign currency translation adjustment (6,750) (6,750)
------
Total comprehensive income 94,648
Dividends - $.54 per share (33,640) (33,640)
Stock Options, employee benefit and dividend
reinvestment plans: (11,695) (17,111) (28,806)
Treasury -(issued)/acquired (224,865) shares
------- -------- -------- ---------- --------- ----------
Balance September 30, 1998 $53,064 $262,178 $816,791 ($44,776) ($22,979) $1,064,278
======= ======== ======== ========== ========= ==========
</TABLE>
<PAGE>
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7.
Continued
Note 5 -- Income Tax Provision Nine Months Ended Three Months Ended
Sep. 30 Sep. 30 Sep. 30 Sep. 30
1998 1997 1998 1997
------- ------- ------- -------
U.S. (Thousands of dollars)
Federal $50,320 $51,064 $8,790 $10,371
State & Local 5,239 9,312 69 1,888
Foreign 9,270 10,771 2,825 3,901
------- ------- ------- -------
$64,829 $71,147 $11,684 $16,160
======= ======= ======= =======
Taxes provided exceed the U.S. statutory rate primarily due to state and
local taxes and losses without current tax benefits.
Note 6 -- Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in
years beginning after June 15, 1999. Because of the company's minimal
use of derivatives, management does not expect the adoption of SFAS No. 133
to have a significant effect on earnings or the financial position of the
company.
Note 7 -- Computer Software Development Costs
Effective in the first quarter 1998, the company adopted the American
Institute of Certified Public Accountants Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP offers new guidance concerning
the capitalization and/or expensing of costs associated with developing
or obtaining internal use software. The adoption of this SOP did not have
a material effect on the company's financial position, results of
operations or cash flows.
<PAGE>
8.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
The Timken Company reported net sales of $616.8 million for the
third quarter of 1998, down 2.1% from $629.9 million in 1997's
third quarter. Sales were lower in the current year's quarter as
a result of the spreading global economic decline that softened
the industrial, agricultural, mining and oil well drilling
markets. Net sales for the first nine months of 1998 were a
record $2.026 billion, an increase of 4.1% above the $1.946
billion reported for the same period in 1997.
Gross profit was $120 million (19.4% of net sales) in the third
quarter of 1998, compared to $140.6 million (22.3% of net sales)
in 1997's third quarter. Unexpected near-term order reductions
combined with lower manufacturing levels aimed at controlling
inventory levels contributed to the lower third quarter profit.
In addition, unusual occurrences that spanned the end of the
second quarter and the beginning of the third negatively impacted
third quarter results. As previously disclosed, the company's
Harrison Steel Plant rolling mill startup, the General Motors'
strike, temporary electric power outages and a transformer
malfunction in the company's steel operations lowered third
quarter gross profit by about $15 million. Gross profit in the
third quarter of 1998 included income of $4.2 million related to
a reduction in the amount previously reserved for performance-
based pay resulting from the company's lower levels of
performance.
Selling, administrative, and general expenses were $85.3 million
(13.8% of net sales) in the third quarter of 1998 compared to
$81.8 million (13% of net sales) in 1997. Expenses were higher
in 1998's third quarter as a result of expenses incurred by
subsidiaries acquired since the third quarter of 1997 and due to
structural changes required to support the company's strong
growth plans for the future. Selling, administrative, and
general expenses were decreased by approximately $7.5 million in
the third quarter also due to a reduction in the amount
previously reserved for performance-based pay.
Interest expense was $1.4 million higher in the third quarter of
1998 compared to the year-ago period. This increase resulted
from the higher average level of debt outstanding during the
quarter.
Other expense increased in the third quarter of 1998 compared to
1997. The increase relates primarily to the disposal of certain
fixed assets related to the company-initiated internal fixed
asset review begun in the second quarter. As previously
disclosed, the review is conducted approximately every five years
and was completed in the third quarter.
The company is taking numerous actions covering a wide span of
<PAGE>
9.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
initiatives in its bearing and steel businesses to improve
profitability in 1999. One such initiative is the
rationalization of operations. As announced in September, the
bearing manufacturing operation in Ballarat, Australia, is being
closed. This will enable Australian Timken to focus on sales,
marketing and remanufacturing and will result in the reduction of
180 jobs. The distribution warehouse in Ballarat, as well as
remanufacturing operations and sales offices located in five
cities around the country, will continue to operate as integral
parts of the company. The company also announced in September
the closing of manufacturing lines for automotive product at its
plant in South Africa. This will allow Timken South Africa to re-
focus on railroad product, which positions it to become a
supplier for the entire African continent and export products
throughout the world. Closure of the automotive manufacturing
lines will make 26 positions redundant, although a fewer number
of associates is expected to be affected as the plant's
refocusing efforts come to completion. Warehouses operated by
Timken Latrobe Steel - Europe Limited (formerly Sanderson Special
Steels Limited) in Glasgow and London were closed in June and
August respectively. In addition, in October Timken announced
its intent to concentrate its European roller operations at its
Duston bearing plant in the United Kingdom and to focus its
European turning operations for parts machined from tubing at its
bearing plant in Colmar, France. Colmar will also become the
European center for small Unipac bearing production. Other
facilities identified for rationalization include operations in
the United States and South America. A second initiative is
increasing organizational effectiveness through ongoing
continuous improvement efforts. One example is increased
efficiencies resulting from the installation of new software
systems, and another is the supply chain cost reduction program
launched in 1997. The company expects these cost-reduction
initiatives to result in approximately $18-$23 million of
additional pre-tax expense in the fourth quarter.
Bearing Business
Bearing Business net sales were $415.1 million in the third
quarter of 1998, up 1.5% over the $408.8 million recorded in the
year-earlier period. Sales to locomotive and freight car markets
remained strong in the third quarter of 1998, reflecting an
increase of more than $7 million over 1997's third quarter.
Although heavy- and light-truck markets in North America showed
continued strength, overall automotive sales declined by more
than $11 million in the third quarter due primarily to the
General Motors strike. Sales to North American industrial
markets, both original equipment and aftermarket, were down by
about $3 million in the quarter as original equipment customers
in agriculture, mining, oil drilling, and heavy construction cut
back on their schedules. In the aftermarket, high distributor
inventory levels and reduced manufacturing activity by their
customers also hurt third quarter sales.
<PAGE>
10.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Sales in Europe continued at acceptable levels during the
quarter, particularly in the automotive market. Sales from
companies acquired within the past year added approximately $3.7
million to third quarter sales. The strength of the British
pound slowed exports from there, and markets in Latin America are
beginning to weaken. Asia Pacific weakness continued to
deteriorate and is being felt in other parts of the world. Asia
Pacific sales were down almost $6 million from the year-earlier
period.
Bearing Business operating income for the third quarter increased
by 6.3% to $26.9 million from $25.3 million in the year-earlier
period. Contributing to the increase was an income adjustment of
$8.2 million related to the reduction in the amount previously
reserved for performance-based pay. In addition, operating
income in 1998's third quarter was higher than 1997's comparable
period by about $5 million due to a more favorable inventory
adjustment resulting from the company's annual physical
inventory. Mix deterioration associated with weakness in the
aftermarket and higher margin export and industrial markets
detracted from third quarter 1998 profits. Temporary plant
shutdowns aimed at reducing the increasing inventory levels
resulted in higher manufacturing costs and lower bearing sales in
Asia Pacific markets hurt operating income in the third quarter.
In response to the softening demand for industrial bearings, the
Bearing Business announced in late September that production
capacity at the company's Canton and Gambrinus bearing plants
would be reduced resulting in the lay off of approximately 150
associates by the end of October. The duration of the layoffs is
dependent upon economic conditions.
Steel Business
Steel Business net sales were $201.8 million in the third quarter
of 1998, down 8.7% from the $221.1 million recorded a year
earlier. Demand remains strong in the automotive and industrial
segments; however, the General Motors' strike which lingered into
the early part of the third quarter reduced third quarter
automotive sales by about $4 million. The Steel Business
continued to experience weakness in oil country and service
center markets causing a reduction in sales of about $14 million
compared to the year-ago quarter. Late in August, service center
distributors began to reduce excessive inventories. The company
anticipates that correction of service sector inventories will
occur by year-end and service center business will regain normal
strength early in 1999.
Steel Business operating income in the third quarter of 1998 was
$7.7 million compared to $33.5 million in last year's
corresponding period. In addition to lower sales volumes,
approximately $15 million of the decrease resulted from a
combination of unusual events. In July, the Steel Business
<PAGE>
11.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
experienced a transformer malfunction that halted melting
operations at its Faircrest plant for seventeen days. As a
result, the company's melting capacity was reduced by about 10%
in the quarter. The impact of the equipment failure was
minimized by moving up maintenance shutdowns scheduled later in
the year and by aggressively reducing in-process inventory.
Melting operations were also shut down for six hours in July due
to an electricity supply interruption precipitated by unusually
hot summer weather. Third quarter operating results were also
affected by the General Motors strike and additional planned
start-up and impaired asset costs related to the new Harrison
Steel Plant rolling mill. Operating income in the third quarter
of 1998 was about $5 million lower than that in the year-earlier
period due to an inventory write-down related to the annual
physical inventory compared to a year-earlier write-up. Higher
expenses were offset in part by income of $3.5 million related to
the reduction in the amount previously reserved for performance-
based pay in the Steel Business.
The Steel Business has taken action to curtail operations where
necessary to bring production levels more in line with market
opportunities while reducing costs. In mid-September, the Steel
Business moved to reduce staffing levels in its Northeastern Ohio
plants. Approximately 30 associates were retrogressed into
positions previously performed by contracted services and 40
company associates were laid off October 1st. The company's
steel plants are currently operating at about 90% of the levels
experienced six months earlier. In addition, the Steel Business
has already begun to realize cost improvements from its new
Harrison Steel Plant rolling mill. Operations ceased at one of
the existing mills that was replaced by the new equipment
resulting in the redundancy of two crews. The business is in the
process of taking the first crew off the second mill and plans to
shut it down by year-end. At full capacity the company expects
potential cost reduction on Harrison rolled bar product of $30
per ton in 1999.
On April 22, 1998, the company announced it was considering the
construction of a new $110 million steel tube mill that would
expand its tubing product line. The facility would include state-
of-the-art piercing, rolling and finishing operations designed to
complement existing piercing mills by expanding the wall
thickness and size offerings. In light of the current economic
climate, the company has postponed its decision on the tube mill
and is taking a more aggressive approach to ensure that a
decision to move ahead with the project would earn the cost of
capital. The location of the facility has not been determined.
Any plans would be contingent upon the success of discussions
with suppliers, customers, union, governments and development
authorities at the locations being considered. Cost
competitiveness, stability, and site and equipment packages are
key factors being considered. The company has met several times
with representatives of the local, district and international
<PAGE>
12.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
offices of the United Steelworkers of America, AFL-CIO, to
develop a labor agreement to place the Canton area in the running
as a potential site. The discussions with union representatives
have not been achieving the results needed and no further
discussions are scheduled at this time. The company is willing
to continue discussions if there is an opportunity for progress
on the issues of stability and competitiveness.
On October 16, 1998, the company announced it had entered into
discussions with the Hay Hall Group Ltd., which could result in
the acquisition of Desford Tubes Ltd., a steel tubing
manufacturer in Leicester, England. The facility is similar to
the company's existing operations, producing seamless mechanical
tubing of the consistent quality necessary for bearing,
automotive, off-highway and defense applications. The operation
would generate significant sales without requiring major capital
investment and would offer an excellent base on which to grow the
steel business in Europe. Desford opened in 1942 and had sales
of $80 million in 1997.
Financial Condition
- -------------------
Total assets have increased by $140.1 million from December 31,
1997. The increase resulted in part from higher inventories and
increased investment in property, plant and equipment. The $69.9
million increase in inventories, as reflected in the Consolidated
Condensed Statements of Cash Flows, was the result of unexpected
near-term order reductions which surpassed the company's efforts
to reduce inventories by curtailing operations. The number of
days' supply in inventory has increased by about 8 days over the
112 days' inventory at December 31, 1997. Both the Bearing
Business and Steel Business inventories increased at September
30, 1998, compared with year-end 1997 levels. The company
continues to focus on lowering inventory levels and expects a 10%
reduction by year end. The number of days' sales in receivables
at September 30, 1998, was basically unchanged from the year-end
1997 level.
"Purchases of property, plant and equipment - net" during the
nine months ended September 30, 1998, were $181.4 million
compared to $129.9 million one year earlier. The company
continues to invest in activities consistent with the strategies
it is pursuing to achieve industry leadership positions. Further
capital investments in technologies within the company's plants
throughout the world and new acquisitions provide Timken with the
opportunity to improve the company's competitiveness and meet the
needs of its growing base of customers.
The 31.0% debt to total capital ratio at September 30, 1998, was
higher than the 25.8% at year-end 1997. Debt increased by
$119.4 million, from $359.4 million at year-end 1997 to
$478.8 million at the end of the third quarter. Total
<PAGE>
13.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
shareholders' equity increased by $32.2 million. The increase in
debt was required to meet the company's working capital needs,
its capital expansion and improvement needs, and to help fund its
purchase of shares under the 1996 and 1998 common stock purchase
plans. Any future cash needs that exceed cash generated from
operations will be met by short-term borrowing and issuance of
medium-term notes.
Other Information
- -----------------
The Timken Company has approached year 2000 compliance using a
defined methodology that includes inventory and assessment,
remediation, test, integration, implementation, and contingency
plan components. Begun in 1996, this program encompasses Timken
worldwide business systems and operations, manufacturing and
distribution systems, technical architecture, end-user computing,
and the company's supplier and customer base. Additionally, the
company's corporate information systems department has instituted
a corporate level reporting and tracking process that encompasses
all Timken year 2000 project efforts world-wide. Through the use
of this methodology over almost three years, the company is well
into its year 2000 conversion and test efforts. Current project
plans call for Timken to have all of its critical non-IT
manufacturing systems year 2000 compliant, tested, and
implemented by the second quarter of 1999. All critical business
computer IT systems are planned to be remediated and tested by
the end of 1998. In addition, Timken is closely monitoring
progress against project plans through the use of internal and
external assessments. Although the company plans to meet this
projected completion date, it can provide no assurances that all
of its year 2000 efforts will be successful.
The total costs associated with Timken's year 2000 conversion
efforts will not have a material effect on the company's
financial position, results of operations or cash flows. Between
1996 and 1999, overall costs of the year 2000 project, including
internal and external resources as well as hardware and software,
are expected to approximate $15 million. The company's year 2000
efforts have had minimal impact on its other information
technology programs. The company's financial results are also
dependent on the ability of its customers, suppliers and
governments to become year 2000 compliant. The company has
implemented a structured plan to communicate with its customers
and suppliers on this issue in an effort to minimize any
potential year 2000 compliance impact; however, it is not
possible to guarantee their compliance. The company is currently
in the process of developing financial and operating contingency
plans and will be finalizing such plans during the first half of
1999. Failure of the company, or any third party with whom the
company has a material relationship, to achieve year 2000
compliance could have a material adverse effect on the company.
<PAGE>
14.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Based on the Brazilian three-year cumulative inflation rate being
below 100% and the company's evaluation of the Brazilian economy,
in January 1998 the company began to consider Brazil a non-
hyperinflated economy. The initial adjustment of $6 million to
revalue Brazilian assets at current exchange rates was reflected
as a reduction of other comprehensive income in the first quarter
of 1998. Prospectively, exchange gains or losses on the
conversion of net assets also will be reflected in other
comprehensive income. Because of the trading relationship
between the company and its Mexican subsidiary, the functional
currency used for Mexico is the U.S. dollar. Accordingly, the
evaluation of the economy in Mexico as hyperinflated does not
impact the company's accounting for this subsidiary. The
company's recently acquired Romanian subsidiary is considered to
be operating in a highly inflationary economy and therefore
foreign currency gains and losses resulting from transactions and
the translation of financial statements are included in the
results of operations.
Effective in the first quarter 1998, the company adopted the
American Institute of Certified Public Accountants Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP
offers new guidance concerning the capitalization and/or
expensing of costs associated with developing or obtaining
internal use software. The adoption of this SOP did not have a
material effect on the company's financial position, results of
operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which is required to be adopted in years
beginning after June 15, 1999. Because of the company's minimal
use of derivatives, management does not expect the adoption of
the new Statement will have a significant effect on earnings or
the financial position of the company.
On November 6, 1998, the Board of Directors declared a quarterly
cash dividend of 18 cents per share payable December 7, 1998, to
shareholders of record at the close of business on November 20,
1998.
The statements set forth in this document that are not historical
in nature are forward-looking statements. The company cautions
readers that actual results may differ materially from those
projected or implied in forward-looking statements made by or
on behalf of the company due to a variety of important factors,
such as:
a) changes in world economic conditions. This includes, but is
not limited to, the potential instability of governments and
legal systems in countries in which the company conducts
business, significant changes in currency valuations, the
implementation of the Euro, and the effects of year 2000
<PAGE>
15.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
compliance.
b) changes in customer demand on sales and product mix. This
includes the effect of customer strikes and the impact of
changes in industrial business cycles.
c) competitive factors, including changes in market penetration
and the introduction of new products by existing and new
competitors.
d) changes in operating costs. This includes the effect of
changes in the company's manufacturing processes; changes in
costs associated with varying levels of operations; changes
resulting from inventory management and cost reduction
initiatives and different levels of customer demands; the
effects of unplanned work stoppages; changes in the cost of
labor and benefits; and the cost and availability of raw
materials and energy.
e) the success of the company's operating plans, including its
ability to achieve the benefits from its on-going continuous
improvement programs, its ability, along with that of its
customers and suppliers, to update computer systems to be
year 2000 compliant; its ability to integrate acquisitions
into company operations, the ability of recently acquired
companies to achieve satisfactory operating results and the
company's ability to maintain appropriate relations with
unions that represent company associates in certain
locations in order to avoid disruptions of business.
f) unanticipated litigation, claims or assessments. This
includes, but is not limited to, claims or problems related
to product warranty and environmental issues.
g) changes in worldwide financial markets to the extent they
affect the company's ability or costs to raise capital,
have an impact on the overall performance of the company's
pension fund investments and cause changes in the economy
which affect customer demand.
<PAGE>
16.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
11 Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
<PAGE>
17.
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 12, 1998 BY /s/ W. R. Timken, Jr.
________________________ _______________________________
W. R. Timken, Jr.,
Director and Chairman;
President and Chief Executive
Officer
Date November 12, 1998 BY /s/ G. E. Little
________________________ _______________________________
G. E. Little
Senior Vice President - Finance
<TABLE>
Exhibit 11 - COMPUTATION OF PER SHARE EARNINGS
(Thousands of dollars, except per share data)
<CAPTION>
Nine Months Ended Sep. 30 Three Months Ended Sep. 30
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
BASIC
Average shares outstanding 62,353,218 62,727,242 62,303,033 62,977,635
Net income $101,398 $123,796 $13,573 $37,790
Per share amount $1.63 $1.97 $0.22 $0.60
DILUTED
Average shares outstanding 62,353,218 62,727,242 62,303,033 62,977,635
Effect of dilutive securities based on the
treasury stock method using the average
market price if higher than the exercise price 683,227 1,346,628 233,608 1,605,208
---------- ---------- ---------- -----------
63,036,445 64,073,870 62,536,641 64,582,843
Net income $101,398 $123,796 $13,573 $37,790
Per share amount $1.61 $1.93 $0.22 $0.59
</TABLE>
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended
Sep. 30 Sep. 30
1998 1997
-------- --------
(Thousands of Dollars)
Income before income taxes,
extraordinary item and cumulative
effect of accounting changes $25,257 $53,950
Amortization of capitalized interest 609 570
Interest expense 6,639 5,242
Interest portion of rental expense 609 657
Earnings $33,114 $60,419
======== ========
Interest $ 7,896 $ 5,930
Interest portion of rental expense 609 657
-------- --------
Fixed Charges $ 8,505 $ 6,587
======== ========
Ratio of Earnings to Fixed Charges 3.89 9.17
======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AND PROFIT & LOSS FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,906
<SECURITIES> 0
<RECEIVABLES> 365,749
<ALLOWANCES> 8,222
<INVENTORY> 510,629
<CURRENT-ASSETS> 931,052
<PP&E> 2,726,977
<DEPRECIATION> 1,426,225
<TOTAL-ASSETS> 2,466,699
<CURRENT-LIABILITIES> 499,252
<BONDS> 340,179
0
0
<COMMON> 292,263
<OTHER-SE> 772,015
<TOTAL-LIABILITY-AND-EQUITY> 2,466,699
<SALES> 2,025,976
<TOTAL-REVENUES> 2,025,976
<CGS> 1,566,895
<TOTAL-COSTS> 1,566,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,109
<INCOME-PRETAX> 166,227
<INCOME-TAX> 64,829
<INCOME-CONTINUING> 101,398
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101,398
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.61
</TABLE>
