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, 1999.
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, 1999, 61,930,145.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Sept. 30 Dec. 31
1999 1998
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents........................... $18,379 $320
Accounts receivable, less allowances,
(1999-$10,168; 1998-$7,949)......................... 358,873 350,483
Deferred income taxes............................... 39,276 42,288
Inventories (Note 2) ............................... 422,908 457,246
---------- ----------
Total Current Assets...................... 839,436 850,337
Property, Plant and Equipment....................... 2,885,457 2,789,131
Less allowances for depreciation................... 1,512,378 1,439,592
---------- ----------
1,373,079 1,349,539
Costs in excess of net assets of acquired business,
less amortization, (1999-$33,266; 1998-$28,936)..... 154,059 150,140
Deferred income taxes............................... 13,641 20,409
Other assets........................................ 79,072 79,606
---------- ----------
Total Assets.................................. $2,459,287 $2,450,031
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and other liabilities.............. $210,609 $221,823
Short-term debt and commercial paper................ 178,730 144,312
Accrued expenses.................................... 117,744 124,288
---------- ----------
Total Current Liabilities................. 507,083 490,423
Noncurrent Liabilities
Long-term debt (Note 3) ............................ 327,645 325,086
Accrued pension cost................................ 138,273 149,366
Accrued postretirement benefits cost................ 393,977 390,804
Other noncurrent liabilities........................ 36,165 38,271
---------- ----------
Total Noncurrent Liabilities.............. 896,060 903,527
Shareholders' Equity (Note 4)
Common stock........................................ 290,114 287,003
Earnings invested in the business................... 826,649 818,794
Accumulated other comprehensive income.............. (60,619) (49,716)
---------- ----------
Total Shareholders' Equity................ 1,056,144 1,056,081
Total Liabilities and Shareholders' Equity.... $2,459,287 $2,450,031
========== ==========
<TABLE>
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
1999 1998 1999 1998
---------- ---------- -------- --------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Net sales................................................... $1,863,172 $2,025,976 $601,703 $616,848
Cost of product sold........................................ 1,500,671 1,566,895 485,362 496,875
---------- ---------- -------- --------
Gross Profit............................................. 362,501 459,081 116,341 119,973
Selling, administrative and general expenses................ 266,271 263,345 89,160 85,304
---------- ---------- -------- --------
Operating Income......................................... 96,230 195,736 27,181 34,669
Interest expense............................................ (20,378) (19,109) (6,853) (6,639)
Interest income............................................. 1,752 2,460 604 1,531
Other income (expense)...................................... (8,469) (12,860) (2,306) (4,304)
---------- ---------- -------- --------
Income Before Income Taxes............................... 69,135 166,227 18,626 25,257
Provision for income taxes (Note 5)......................... 27,850 64,829 6,184 11,684
---------- ---------- -------- --------
Net Income............................................... $41,285 $101,398 $12,442 $13,573
========== ========== ======== ========
Earnings Per Share * .................................... $0.67 $1.63 $0.20 $0.22
Earnings Per Share - assuming dilution **............... $0.66 $1.61 $0.20 $0.22
Dividends Per Share...................................... $0.54 $0.54 $0.18 $0.18
========== ========== ======== ========
* Per average shares outstanding........................... 61,897,876 62,353,218 61,929,197 62,303,033
** Per average shares outstanding - assuming dilution....... 62,121,455 63,036,445 62,122,909 62,536,641
</TABLE>
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
1999 1998
------- -------
OPERATING ACTIVITIES (Thousands of dollars)
Net Income............................................. $41,285 101,398
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 111,311 104,068
Credit for deferred income taxes...................... 7,293 10,106
Stock issued in lieu of cash to employee benefit plans 3,450 46,592
Changes in operating assets and liabilities:
Accounts receivable.................................. (6,583) 583
Inventories.......................................... 30,820 (65,975)
Other assets......................................... 2,086 (3,946)
Accounts payable and accrued expenses................ (28,604) (8,755)
Foreign currency translation......................... 3,961 1,477
------- -------
Net Cash Provided by Operating Activities........... 165,019 185,548
INVESTING ACTIVITIES
Purchases of property, plant and equipment - net......(123,137) (181,352)
Acquisitions.......................................... (27,939) 0
------- -------
Net Cash Used by Investing Activities...............(151,076) (181,352)
FINANCING ACTIVITIES
Cash dividends paid to shareholders................... (33,430) (33,640)
Purchase of Treasury Shares........................... (339) (75,398)
Payments on long-term debt............................ (639) (23,257)
Proceeds from issuance of long-term debt.............. 4,049 139,583
Short-term debt activity - net........................ 34,400 (2,161)
------- -------
Net Cash Provided by Financing Activities........... 4,041 5,127
Effect of exchange rate changes on cash................ 75 (241)
Increase in Cash and Cash Equivalents.................. 18,059 9,082
Cash and Cash Equivalents at Beginning of Period....... 320 9,824
------- -------
Cash and Cash Equivalents at End of Period............. $18,379 $18,906
======= =======
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, 1998.
9/30/99 12/31/98
Note 2 -- Inventories -------- ---------
(Thousands of dollars)
Finished products $165,055 $183,950
Work-in-process and raw materials 213,963 229,397
Manufacturing supplies 43,890 43,899
-------- --------
$422,908 $457,246
======== ========
Note 3 -- Long-term Debt 9/30/99 12/31/98
-------- ---------
(Thousands of dollars)
State of Ohio Pollution Control Revenue Refunding Bonds,
maturing on July 1, 2003. The variable interest
rate is tied to the bank's tax exempt weekly interest
rate. The rate at September 30, 1999 is 3.80%. $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, 1999 is 3.80%. 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, 1999 is 3.80%. 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, 1999 is 3.85%. 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 7.76%. 267,000 267,000
Other 13,554 5,105
-------- --------
351,254 342,805
Less: Current Maturities 23,609 17,719
-------- --------
$327,645 $325,086
======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 6.
Note 4 -- Shareholders' Equity 9/30/99 12/31/98
-------- --------
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)
1999 - 63,082,626 shares
1998 - 63,082,626 shares
Stated Capital 53,064 53,064
Other paid-in capital 262,352 261,156
Less cost of Common Stock in treasury
1999 - 1,152,480 shares
1998 - 1,234,462 shares 25,302 27,217
-------- --------
$290,114 $287,003
======== ========
<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, 1998 $53,064 $261,156 $818,794 ($49,716) ($27,217) $1,056,081
Net Income 41,285 41,285
Foreign currency translation adjustment (10,903) (10,903)
----------
Total comprehensive income 30,382
Dividends - $.54 per share (33,430) (33,430)
Stock Options, employee benefit and dividend
reinvestment plans: 1,196 1,915 3,111
Treasury - (issued)/acquired (81,982) shares
------- -------- -------- ---------- -------- ----------
Balance September 30, 1999 $53,064 $262,352 $826,649 ($60,619) ($25,302) $1,056,144
======= ======== ======== ========== ======== ==========
The total comprehensive income for the three months ended September 30, 1999 and 1998 was $19,202,000 and
$15,786,000, respectively. Total comprehensive income for the nine months ended September 30, 1998 was $94,648,000.
</TABLE>
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7.
Continued
Note 5 -- Income Tax Provision Nine Months Ended Three Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1999 1998 1999 1998
-------- -------- -------- --------
U.S. (Thousands of dollars)
Federal $20,633 $50,320 $3,178 $8,790
State & Local 2,476 5,239 1,055 69
Foreign 4,741 9,270 1,951 2,825
------- ------- ------- -------
$27,850 $64,829 $ 6,184 $11,684
======= ======= ======= =======
Taxes provided exceed the U.S. statutory rate primarily due to state and
local taxes and losses without current tax benefits. These unfavorable
permanent differences had a greater percentage impact on the company's
effective tax rate due to lower earnings.
Note 6 -- Segment Information
(Thousands of Dollars) Three Months Ended Nine Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
Bearings 1999 1998 1999 1998
-------- -------- -------- --------
Net sales to external customers $423,680 $415,109 $1,313,835 $1,347,681
Depreciation and amortization 20,661 20,113 61,664 59,798
Earnings before interest and taxes 24,782 24,860 68,101 114,872
Interest expense (5,549) (5,915) (16,052) (16,460)
Interest income 658 648 1,861 1,557
Steel
Net sales to external customers 178,023 201,738 549,337 678,294
Intersegment sales 54,141 49,038 157,784 162,358
Depreciation and amortization 16,998 14,952 49,647 44,270
Earnings before interest and taxes 2,766 4,581 21,045 70,024
Interest expense (2,349) (1,869) (6,917) (5,331)
Interest income 990 2,028 2,482 3,585
Profit Before Taxes
Total EBIT for reportable segments 27,548 29,441 89,146 184,896
Interest expense (6,853) (6,639) (20,378) (19,109)
Interest income 604 1,531 1,752 2,460
Intersegment adjustments (2,673) 924 (1,385) (2,020)
Income before income taxes 18,626 25,257 69,135 166,227
<PAGE>
8.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
The Timken Company reported net sales of $601.7 million for the
third quarter of 1999, down 2.5% from $616.8 million in 1998's
third quarter. Third quarter net income was $12.4 million, down
more than 8% from $13.6 million reported in the third quarter of
1998. Persistent global market weakness and continuing soft
demand for higher margin products affected third quarter sales
and earnings. The third quarter normally is the weakest of the
year, due to customer demand patterns.
North American automotive markets continued to show strength;
however, demand in most other markets remained depressed.
Steel's oil country and service center markets were particularly
weak as was the aerospace market for both Bearings and Steel.
Sales to industrial and rail markets were also down significantly
from last year's levels. Sales into Europe in the third quarter
were well below last year's levels; however, markets there are
showing some signs of improvement from the low levels of activity
of the first half of the year. Asia Pacific markets continued
the improvement that began earlier in the year. Third quarter
1999 sales include Timken Desford Steel and Timken India Limited,
acquired in December 1998 and March 1999, respectively. Sales in
1998's third quarter were about $15 million lower due to the
General Motors strike that lingered into the early part of last
year's quarter.
Gross profit was $116.3 million (19.3% of net sales) in the third
quarter of 1999, down $3.7 million compared to $120 million
(19.4% of net sales) in 1998's third quarter. Excluding the
effect of the unusual occurrences and income adjustments from the
third quarter 1998, the drop in gross profit would have been
about $15 million. The effect of lower sales volumes combined
with a less favorable product mix and lower production levels
contributed to the decline in profit.
Selling, administrative and general expenses were $89.2 million
(14.8% of net sales) in the third quarter of 1999 compared to
$85.3 million (13.8% of net sales) recorded in the year-ago
quarter. Considering that third quarter 1998 expenses were
reduced by about $7.5 million due to an adjustment in the amount
previously reserved for performance-based pay, 1999's third
quarter expenses would have been lower than 1998's expenses by
about $3.7 million. This is indicative of the company's
aggressive efforts to reduce administrative expenses despite its
continued efforts to pursue strategic growth initiatives. In
addition, 1999 expenses include normal administrative expenses
for Timken Desford Steel and Timken India Limited, acquisitions
completed during the past ten months.
In the fourth quarter 1998, the company recorded expense of
$21.4 million related to actions taken to reduce its
administrative and manufacturing costs. A portion of this
expense related to the elimination of 515 positions by
<PAGE>
9.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
December 31, 1999. To date, 439 positions have been eliminated,
with separation cash payments of approximately $7.7 million being
made to terminated associates. Current expectations are that 495
terminations will result from the cost reduction initiatives. In
total, the expenses recorded in the fourth quarter 1998 are
deemed sufficient to cover the remaining costs associated with
the improvement initiatives.
"Other income (expense)" reflects lower expense compared to the
1998's third quarter. Expense in the third quarter of 1998 was
higher due primarily to the disposal of certain fixed assets
resulting from a company-initiated internal fixed asset review
that is conducted approximately every five years.
The company's provision for income taxes in the third quarter is
lower as a percent of income before income taxes due primarily to
projected higher utilization of foreign tax credits.
Bearings
Bearings' net sales of $423.7 million in the third quarter
of 1999 were higher by 2.1% compared to the $415.1 million
recorded in the year-earlier period. Sales in 1998's third
quarter were lower by about $11 million as a result of the
General Motors strike.
North American light and heavy truck markets continued their
strong production levels in the third quarter of 1999
contributing to an overall increase of 32.7% in automotive sales
compared to the year-ago quarter. Improving sales in Asia
Pacific markets also contributed to the increase. North American
industrial bearing sales, including original equipment and
aftermarket, were down by 11.3% due primarily to lower
construction, mining, and farm equipment production. Aerospace
sales, which represent approximately 5% of the company's bearing
sales, declined by 11.3%. Railroad sales also declined by 26.1%.
Demand in Latin America and Europe remains soft; however European
markets are showing signs of improvement particularly in
automotive markets. Third quarter sales in Europe were off by
8.8% compared to a year ago and sales in Latin American countries
were down 11.3%. The Bearings business continues to evaluate
opportunities to rationalize operations in Europe and elsewhere
in the world to offset lower demand levels and to continue
improving operating efficiency.
Bearings' earnings before interest and income taxes (EBIT)
for the third quarter 1999 were $24.8 million compared to
$24.9 million in the year-earlier period. Excluding a third
quarter 1998 income adjustment of $8.2 million related to the
reduction in the amount previously reserved in 1998 for
performance-based pay, Bearings' EBIT in 1999's third quarter
would have reflected an $8.1 million increase. The effect of
higher automotive sales and production volumes more than offset
<PAGE>
10.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
costs associated with lower sales and production volumes in
Europe. Bearings' selling and administrative expenses were
higher in 1999's third quarter due in part to the addition of
Timken India Limited, in which the company acquired a majority
interest in March 1999. In 1998's third quarter, EBIT was
affected by lower automotive sales volume precipitated by the
General Motors strike and by temporary plant shutdowns aimed at
controlling inventory levels.
Steel
Steel's net sales, including intersegment sales, were
$232.2 million in the third quarter of 1999, down 7.4% from
the $250.8 million recorded a year earlier. Sales in 1998's
third quarter were down by about $4 million as a result of the
General Motors strike. All markets except automotive remained
weak. Oil country, service center and aerospace markets were
markedly depressed. Sales into oil country markets declined by
about 65% compared to the year-ago quarter. Similarly, service
center sales were down by more than 40%. Recently, order
bookings have begun to show signs of limited strengthening in the
service center and oil markets. In general, service center
distributor inventories have been brought back into balance;
however, based on the current level of active rig counts, the
company estimates that customers in oil markets have about three
to six months of excess inventory on hand. Aerospace sales
declined by more than 50% compared to 1998's third quarter and
industrial sales were off by about 35%. Sales to external
bearing customers also dropped by about 25%. In automotive
markets, third quarter sales of precision steel components and
alloy steel were higher by about 24% and 20%, respectively,
compared to a year ago. The company believes that demand for
steel products in the last quarter of 1999 will remain relatively
flat compared to August / September levels. Steel sales in the
third quarter of 1999 include sales from Timken Desford Steel
acquired in the fourth quarter of 1998.
Steel's EBIT was $2.8 million in the third quarter of 1999, down
$1.8 million compared to $4.6 million in 1998's third quarter.
EBIT in 1998's third quarter was reduced by a net amount of
approximately $11.5 million related to expenses resulting from
unusual occurrences and income adjustments. The primary factors
that lowered EBIT in 1999's third quarter were lower sales volume
and higher manufacturing costs associated with inefficiencies
from lower production volumes. During the third quarter, the
company's steel plants operated at about 75% of capacity. Steel
EBIT was also affected by a less favorable shift to lower margin
automotive sales and some price erosion compared to last year's
third quarter. Higher costs were offset in part by lower
purchased scrap prices. Selling and administrative expenses in
1999's third quarter would have been basically unchanged from the
prior year's quarter except for the addition of Timken Desford
Steel.
<PAGE>
11.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
In September 1999, the United States Department of Energy awarded
a $3.3 million grant to The Timken Company for the research and
development of controlled thermo-mechanical processing (CTMP)
technology to optimize the manufacture and performance of
seamless tube and pipe. The process will greatly improve quality
and significantly reduce product variability. The total cost of
the project is estimated at $4.7 million. Earlier in the year,
Timken was awarded a $1.4 million grant by The Department of
Energy for a $2.4 million project to begin the development of a
laser gauging system for dimensional control that enhances the
manufacturing process of seamless mechanical tubing.
Financial Condition
- -------------------
Total assets as shown on the Consolidated Condensed Balance
Sheets increased by $9.3 million from December 31, 1998.
Assets increased by approximately $50 million resulting from
the consolidation of Timken India Limited (formerly Tata Timken
Limited) assets into the company's balance sheet. Prior to the
March 1999 increase in ownership to 80%, the company's investment
in Timken India Limited was accounted for using the equity
method. Inventory balances at the end of the third quarter were
substantially lower than year-end 1998 levels. The number of
days' supply in inventory decreased by 4 days to 105 days at
September 30, 1999, compared to 109 days at December 31, 1998.
Bearings' inventory (including Timken India Limited) decreased by
about 8 days. Steel's inventory (including Timken Desford Steel)
increased by about 3 days.
As shown on the Consolidated Condensed Statement of Cash Flows,
the change in inventories provided $30.8 million of cash during
the first nine months of 1999. Accounts receivable increased by
$6.6 million since year-end. The number of days' sales in
receivables at September 30, 1999, increased by less than 2 days
compared to December 31,1998. Cash was used as a result of a
$28.6 million decrease in accounts payable and accrued expenses
due primarily to lower amounts owed to suppliers,lower income
taxes payable and additional cash contributions to the company's
pension funds. Purchases of property, plant and equipment used
$123.1 million of cash in the first nine months of 1999, about
32% below the $181.4 million spent during the same period in
1998. The company's capital expenditures for 1999 are expected
to remain at least 30% below 1998's spending as the company
continues to limit capital spending as a means to conserve cash
in response to the business environment. Growth initiatives were
continued as the company invested approximately $28 million in
March to acquire the additional 40% ownership in Timken India
Limited. Company investments continue to support activities
consistent with strategies it is pursuing to achieve industry
leadership. 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.
<PAGE>
12.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
The 32.4% debt-to-total-capital ratio at September 30,1999, was
higher than the 30.8% at year-end 1998. Debt increased by
$37 million during the first nine months of 1999 to 506.4 million
at September 30, 1999, due primarily to the timing of cash
contributions to the company's pension plans. Also, contributing
to the increase is $9.8 million of debt assumed with the March
1999 acquisition of Timken India Limited. The company continues
to take aggressive efforts to manage cash by controlling
inventory and limiting capital expenditures. Any future cash
needs that exceed cash generated from operations will be met by
short-term borrowing and issuance of medium-term notes. Total
shareholders' equity of $1.056 billion was unchanged from year-
end 1998. The $41.3 million increase in equity resulting from
the first nine months' net income was offset by a $10.9 million
foreign currency translation adjustment and the payment of
$33.4 million in dividends.
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 monitors
all Timken year 2000 project efforts worldwide. Critical
business computer information technology (IT) systems were year
2000 ready as of January 1999. Critical non-IT manufacturing and
business support personal end-user systems year 2000 readiness
was achieved in the second quarter of 1999. Systems testing and
testing with our customers and suppliers will continue throughout
1999 to ensure the continued compliance of our critical systems.
Although the company has met its completion dates and believes
its systems are year 2000 compliant, it can provide no assurances
that all of its year 2000 efforts will be successful.
The company expects that the total costs associated with its year
2000 conversion efforts will not have a material effect on its
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. As of September 1999,
the company spent approximately $13.3 million in support of these
efforts. Its 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 customers, suppliers and governments to become year 2000
compliant. The company has made, and will continue to make,
concerted efforts to understand the year 2000 status of its
customers and third parties including, without limitation,
<PAGE>
13.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
electric utilities, water utilities, communications carriers,
transportation providers, governmental entities, vendors and
other general service suppliers. The company has implemented a
structured plan to communicate and evaluate year 2000 compliance
of its customers and suppliers. This plan includes surveys,
audits, meetings and other applicable methods. The company has
evaluated its critical suppliers and has developed appropriate
contingency plans. These efforts are to minimize any potential
year 2000 compliance impact; however, it is not possible to
guarantee compliance. The company has developed financial and
operating contingency plans for facilities worldwide as of June
1999. These plans will continue to be refined, tested and
reviewed during the remainder of 1999.
The company is also in the process of identifying fourth quarter
1999 and first quarter 2000 operating support strategies, which
include staffing requirements, communication procedures,
installation requirements, and event management activities, to
minimize the impact of potential disruptions. 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's business, financial
condition or results of operations or involve safety risk.
The industry's antidumping duty orders covering imports of
tapered roller bearings from Japan, China, Hungary and Romania
are currently in the process of being reviewed by U.S. government
agencies to determine whether dumping and injury to the domestic
industry are likely to continue or recur if the orders were to be
revoked. These reviews commenced in April 1999, and should
conclude by the end of the second quarter in 2000. The company
is actively participating in the proceedings. If the U.S.
government determines that dumping and injury are likely to
continue or recur, the antidumping duty finding and orders will
continue in place for another five years. If, however, a
determination is made that dumping and injury to the domestic
industry is unlikely to continue with respect to any of the four
countries covered, the finding or order will be revoked with
respect to that country. If following the revocation of such an
order, and contrary to the finding of the government, injurious
dumping does in fact continue or recur, the improved conditions
of fair trade of tapered roller bearings in the U.S., which exist
because of the orders, could deteriorate. If injurious dumping
does occur, contrary to the finding of the government, such
dumping could have a material adverse effect on the company's
business, financial condition or results of operations.
In September 1999, the company announced that it is exploring
strategic alternatives for its specialty steel subsidiary,
Latrobe Steel Company, including strategic alliances,
acquisitions and divestiture. The Latrobe Steel Company was
acquired by Timken in 1975. Latrobe's combined manufacturing and
distribution operations represent about 20 percent of Timken's
steel business.
<PAGE>
14.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Assets and liabilities of subsidiaries, other than Timken Romania
which is considered to operate in a highly inflationary economy,
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 income. Foreign currency gains
and losses resulting from transactions and the translation of
financial statements of Timken Romania are included in the
results of operations.
Foreign currency exchange losses included in the company's
operating results for the first nine months ended September 30,
1999, amounted to $8.8 million compared to $0.7 million in the
year-ago period. In addition, the company recorded a foreign
currency translation adjustment of $10.9 million that reduced
other comprehensive income compared to a reduction of $6.8
million in the first nine months of 1998. Losses resulted
primarily from the January 1999 devaluation of the Brazilian Real
as well as weakening currencies in certain other European
countries in which the company operates.
In early October 1999, the company purchased 240,600 shares of
its common stock to be held in treasury as authorized under the
company's 1998 common stock purchase plan. To-date, 2.1 million
shares of the 4 million shares authorized have been purchased
pursuant to the plan. The authorization to purchase shares under
the 1998 plan expires December 31, 2001.
On November 5, 1999, the board of directors declared a quarterly
cash dividend of 18 cents per share payable December 6, 1999, to
shareholders of record at the close of business on November 19,
1999. This is the 310th consecutive dividend paid on the common
stock of the company.
Also on November 5, 1999, the board of directors elected James W.
Griffith president and chief operating officer of the company.
Mr. Griffith, 45, also was elected as a director. This is the
first step in a series of changes coming over the next several
months that will result in a new organizational structure
designed to position the company for accelerated profitable
growth. The timing of these changes also will take advantage of
the pending normal retirements of four key executives scheduled
during the year 2000. Those individuals are Larry R. Brown,
senior vice president and general counsel; Robert L.
Leibensperger, executive vice president, chief operating officer
and president - bearings; John J. Schubach, senior vice president
- - strategic management and continuous improvement; and Thomas W.
Strouble, senior vice president - technology.
Two new officers were elected to serve as secretary and treasurer
at the November 5, 1999, meeting of The Timken Company board of
directors. Scott A. Scherff was elected an officer and named
corporate secretary. Sallie Ballantine Bailey was elected an
officer and named director - finance and treasurer.
<PAGE>
15.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
The Timken Company has reached an understanding with the United
Steelworkers union on several key issues that will allow early
contract negotiations to begin November 16, 1999. Those issues
relate to the new tube mill, seniority and unrepresented
associates. No additional detail on the discussions will be
released until the agreement is complete. The current contract
expires September 25, 2000.
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 and the
effects of year 2000 compliance or lack thereof.
(b) changes in customer demand on sales, product mix, and
prices. This includes the effects of customer strikes, the
impact of changes in industrial business cycles, whether
conditions of fair trade continue in the U.S. market, and the
continued existence in the U.S. of the antidumping duty orders on
tapered roller bearings.
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
<PAGE>
16.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
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>
17.
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
The company did not file any reports on Form 8-K during the three
months ended September 30, 1999.
<PAGE>
18.
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, 1999 BY /s/ W. R. Timken, Jr.
________________________ _______________________________
W. R. Timken, Jr.,
Director and Chairman;
Chief Executive Officer
Date November 12, 1999 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 Sept. 30 Three Months Ended Sept. 30
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC
Average shares outstanding 61,897,876 62,353,218 61,929,197 62,303,033
Net income $41,285 $101,398 $12,442 $13,573
Per share amount $0.67 $1.63 $0.20 $0.22
===== ===== ===== =====
DILUTED
Average shares outstanding 61,897,876 62,353,218 61,929,197 62,303,033
Effect of dilutive securities based on the
treasury stock method using the average
market price if higher than the exercise price 223,579 683,227 193,712 233,608
---------- ---------- ---------- ----------
62,121,455 63,036,445 62,122,909 62,536,641
Net income $41,285 $101,398 $12,442 $13,573
Per share amount $0.66 $1.61 $0.20 $0.22
===== ===== ===== =====
</TABLE>
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended
Sept. 30 Sept. 30
1999 1998
-------- --------
(Thousands of Dollars)
Income before income taxes,
extraordinary item and cumulative
effect of accounting changes $18,626 $25,257
Amortization of capitalized interest 608 609
Interest expense 6,853 6,639
Interest portion of rental expense 555 609
-------- --------
Earnings $26,642 $33,114
======== ========
Interest $ 7,654 $ 7,896
Interest portion of rental expense 555 609
-------- --------
Fixed Charges $ 8,209 $ 8,505
======== ========
Ratio of Earnings to Fixed Charges 3.25 3.89
======== ========
<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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 18,379
<SECURITIES> 0
<RECEIVABLES> 369,041
<ALLOWANCES> 10,168
<INVENTORY> 422,908
<CURRENT-ASSETS> 839,436
<PP&E> 2,885,457
<DEPRECIATION> 1,512,378
<TOTAL-ASSETS> 2,459,287
<CURRENT-LIABILITIES> 507,083
<BONDS> 327,645
0
0
<COMMON> 290,114
<OTHER-SE> 766,030
<TOTAL-LIABILITY-AND-EQUITY> 2,459,287
<SALES> 1,863,172
<TOTAL-REVENUES> 1,863,172
<CGS> 1,500,671
<TOTAL-COSTS> 1,500,671
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,378
<INCOME-PRETAX> 69,135
<INCOME-TAX> 27,850
<INCOME-CONTINUING> 41,285
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,285
<EPS-BASIC> .67
<EPS-DILUTED> .66
</TABLE>
