1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number 1-1169
December 31, 1998
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)
Registrants telephone number, including area code (330)438-3000
___________________
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
______________________________ _______________________
Common Stock without par value New York Stock Exchange
Rights to Purchase Common Stock without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
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
___ ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X].
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The aggregate market value of the voting stock held by all shareholders
other than shareholders identified under item 12 of this Form 10-K as of
February 19, 1999, was $946,108,777 (representing 50,968,823 shares).
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of February 19, 1999.
Common Stock without par value--61,876,547 shares (representing a market
value of $1,148,583,404).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
December 31, 1998, are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual meeting of shareholders to
be held on April 20, 1999, are incorporated by reference into parts III
and IV.
Exhibit Index may be found on Pages 19 through 22.
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PART I
______
Item 1. Description of Business
________________________________
General
_______
As used herein the term "Timken" or the "company" refers to The Timken
Company and its subsidiaries unless the context otherwise requires.
Timken, an outgrowth of a business originally founded in 1899, was
incorporated under the laws of Ohio in 1904.
Products
________
Timken's products are divided into two industry segments. The first
includes anti-friction bearings; the second industry segment is steel.
Anti-friction bearings constitute Timken's principal industry product.
Basically, the tapered roller bearing made by Timken is its principal
product in the anti-friction industry segment. It consists of four
components: (1) the cone or inner race, (2) the cup or outer race, (3)
the tapered rollers which roll between the cup and cone, and (4) the
cage which serves as a retainer and maintains proper spacing between
the rollers. These four components are manufactured or purchased and
are sold in a wide variety of configurations and sizes. Sensing
devices are added to the basic tapered roller bearing and sold to sport
utility vehicle and light truck markets.
Matching bearings to service requirements of customers' applications
requires engineering, and oftentimes sophisticated analytical
techniques. The design of every tapered roller bearing made by Timken
permits distribution of unit pressures over the full length of the
roller. This fact, coupled with its tapered design, high precision
tolerance and proprietary internal geometry and premium quality
material, provides a bearing with high load carrying capacity,
excellent friction-reducing qualities and long life.
Timken also produces super precision ball and roller bearings for use in
aerospace, medical / dental, computer disk drives and other markets having
high precision applications. These bearings are mostly produced at
Timken Aerospace & Super Precision Bearings, a subsidiary of the company.
They utilize ball and straight rolling elements and are in the super
precision end of the general ball and straight roller bearing product
range in the bearing industry. A majority of Timken Aerospace & Super
Precision Bearings' products are special custom-designed bearings and
spindle assemblies. They often involve specialized materials and coatings
for use in applications that subject the bearings to extreme operating
conditions of speed and temperature.
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Products (cont.)
________________
Other bearing products manufactured by Timken include cylindrical,
spherical, straight and ball bearings for industrial markets. These
bearings feature non-tapered rolling elements. In addition, Timken
produces custom-designed products called SpexxTM performance
Bearings. The product line includes both tapered and cylindrical
roller bearings and provides cost-effective solutions for selective
applications. In October 1998, the company introduced the new Timken
IsoClassTM brand of tapered roller bearings. This gives Timken access
to 95% of the market for ISO tapered roller bearings which are about one
half of today's total tapered roller bearing market.
In addition to bearing products, Timken is also expanding its presence
in providing bearing reconditioning services for industrial and railroad
markets as evidenced by the acquisition of Bearing Repair Specialists in
South Bend, Indiana, in May, 1998. Additional evidence of this commitment
was the second quarter 1998 announcement to build a railroad bearing
reconditioning facility in Benoni, South Africa, where the company has
operated a bearing manufacturing plant since 1951.
Steel products include steels of low and intermediate alloy, vacuum-
processed alloys, tool steel and some carbon grades. These are
available in a wide range of solid and tubular sections with a variety
of finishes.
The company also produces custom-made steel products including precision
steel components for automotive and industrial customers. The development
of the precision steel components business has provided the company with
the opportunity to further expand its market for tubing and capture more
higher-value steel sales. This also enables the company's traditional
tubing customers in the automotive and bearing industries to take
advantage of higher-performing components that cost less than those they
now use. This activity is a growing portion of the Steel business.
Sales and Distribution
______________________
Timken's products in the bearing industry segment are sold principally
by its own sales organization. A major portion of the shipments are
made directly from Timken's plants and the balance from warehouses
located in a number of cities in the United States, Canada, England,
France, Germany, Mexico, Singapore, Argentina and Australia. These
warehouse inventories are augmented by authorized distributor and
jobber inventories throughout the world which provide local availability
when service is required.
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Sales and Distribution (cont.)
______________________________
The company operates an Export Service Center in Atlanta, Georgia, which
specializes in the export of tapered roller bearings for the replacement
markets in the Caribbean, Central and South America and other regions.
Timken's tapered roller bearings and other bearing types are used in
general industry and in a wide variety of products including passenger
cars, trucks, railroad cars and locomotives, machine tools, rolling
mills and farm and construction equipment. Timken Aerospace & Super
Precision Bearings' products, which are at the super precision end of
the general ball and straight roller bearing segment, are used in
aircraft, missile guidance systems, computer peripherals, and medical /
dental instruments.
A significant portion of Timken's steel production is consumed in its
bearing operations. In addition, sales are made to other anti-friction
bearing companies and to the aircraft, automotive and truck,
construction, forging, oil and gas drilling and tooling industries. In
addition, sales are made to steel service centers. Timken's steel
products are sold principally by its own sales organization. Most
orders are custom made to satisfy specific customer applications and are
shipped directly to customers from Timken's steel manufacturing plants.
Timken has a number of customers in the automotive industry including
both manufacturers and suppliers. However, Timken feels that because of
the size of that industry, the diverse bearing applications, and the
fact that its business is spread among a number of customers, both
foreign and domestic, in original equipment manufacturing and
aftermarket distribution, its relationship with the automotive industry
is well diversified.
Timken has entered into individually negotiated contracts with some of
its customers in both the bearing and steel segments. These contracts
may extend for one or more years and, if a price is fixed for any period
extending beyond current shipments, customarily include a commitment by
the customer to purchase a designated percentage of its requirements
from Timken. Contracts extending beyond one year that are not subject
to price adjustment provisions do not represent a material portion of
Timken's sales. Timken does not believe that there is any significant
loss of earnings risk associated with any given contract.
Industry Segments
_________________
The company has two reportable segments: Bearings and Steel. Segment
information in Note 11 of the Notes to Consolidated Financial
Statements and Information by Industry and Geographic Area on pages 32
and 33 of the Annual Report to Shareholders for the year ended
December 31, 1998, are incorporated herein by reference. Export sales
from the U.S. and Canada are not separately stated since such sales
amount to less than 10% of revenue. The company's Bearings business has
historically participated in the worldwide bearing markets while
Steel has concentrated on U.S. markets.
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Industry Segments (cont.)
_________________________
Timken's non-U.S. operations are subject to normal international
business risks not generally applicable to domestic business. These
risks include currency fluctuation, changes in tariff restrictions, and
restrictive regulations by foreign governments including price and
exchange controls.
Competition
___________
Both the anti-friction bearing business and the steel business are
extremely competitive. The principal competitive factors involved, both
in the United States and in foreign markets, include price, product
quality, service, delivery, order lead times and technological
innovation.
Timken manufactures an anti-friction bearing known as the tapered roller
bearing. The tapered principle of bearings made by Timken permits ready
absorption of both radial and axial loads in combination. For this
reason, they are particularly well adapted to reducing friction where
shafts, gears or wheels are used. Timken also produces super precision
ball and straight roller bearings at its Timken Aerospace & Super
Precision Bearings subsidiary. With recent acquisitions, the company has
selectively expanded its product line to include other bearing types.
However, since the invention of the tapered roller bearing by its founder,
Timken has maintained primary focus in its product and process technology
on the tapered roller bearing segment. This has been important to its
ability to remain one of the leaders in the world's bearing industry.
This contrasts with the majority of Timken's major competitors who focus
more heavily on other bearing types such as ball, straight roller,
spherical roller and needle for the general industrial and automotive
markets and are, therefore, less specialized in the tapered roller bearing
segment. Timken competes with domestic manufacturers and many foreign
manufacturers of anti-friction bearings.
The anti-friction bearing business is intensely competitive in every
country in which Timken competes. With the collapse of the former
Soviet Union and the modernization of existing capacity in many
countries, there remain substantial downward pricing pressures in the
United States and other countries even during periods of significant
demand in the United States and other markets. Moreover, international
price discrimination by certain of Timken's foreign competitors and the
continued absorption of antidumping duties by companies related to the
foreign producers in the United States create additional pricing
pressures in the United States. Imports of tapered roller bearings into
the United States in 1998 were $260 million or approximately 18 percent
of the domestic tapered roller bearing market. In addition, Timken
estimates the tapered roller bearings contained as components of foreign
automobiles and heavy equipment produced outside the United States and
imported into this country, to be approximately $210 million in 1998.
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Competition (cont.)
______________________________
To address the problem of injurious dumping by various foreign
competitors, the company has pursued its legal rights in the United
States and in other parts of the world for many years. In the United
States, antidumping orders are outstanding from cases brought by the
company in the early 1970s and in 1986. The antidumping finding issued
in 1976 pertains to tapered roller bearings from Japan that have an
outside diameter of 4 inches or less but excluding unfinished components
or parts. The finding does not apply to one major Japanese producer.
In August 1986, the company filed an antidumping petition on behalf of
the U.S. tapered roller bearing industry with both the U.S.
International Trade Commission and the U.S. Department of Commerce
alleging that imports of tapered roller bearings (including unfinished
parts and components from six countries (China, Romania, Yugoslavia,
Italy, Hungary and Japan) to the extent not covered by the 1976
finding) were being sold at less than fair value in the United States
and were causing material injury to the domestic industry. The U.S.
Department of Commerce found that product from each of the countries was
being sold in the United States at less than fair value or "dumped," and
the U.S. International Trade Commission found such imports were causing
injury to the domestic industry. The Commerce Department's notice also
identified the amount by which selling prices of the foreign producers
were less than fair value. This amount is expressed as a weighted
average percentage for each company investigated and is often referred
to as the "final margin" for a particular time period. The final
margins for Japanese producers as originally calculated in 1986-87 were
approximately 36 percent for the major producers. Final margins for
producers in other countries varied but were above 100% for one foreign
producer. If requested by foreign producers, importers or domestic
producers, the dumping margins (if any) will be examined for a more
recent time period.
Substantial dumping margins have been found for most or all of the major
producers in Japan for most years since the antidumping orders issued.
On November 17, 1998, the U.S. Department of Commerce issued final
margins for companies investigated for the 1996-97 time period, finding
dumping margins that ranged from 7.62% to 19.78%.
Significant dumping margins continue to be found for certain producers
from other countries covered by orders. For some countries covered by
the orders, imports have declined or ceased. Some foreign producers and
exporters / resellers have ceased dumping. The orders were revoked for
Yugoslavia in 1995 and for Italy in 1996 as well as for selected
individual producers in the other orders over time. Importers
are required to post a cash deposit with the U.S. Customs Service equal
to the final margin from the most recent period that has been published
for a particular foreign producer from a country where an order remains
outstanding. If no dumping is found or the amount of dumping is less
than the cash deposit, the importer receives a refund with interest. If
the dumping found in the review is greater than the amount posted as a
cash deposit, the difference must be paid to the U.S. Customs Service
with interest.
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Competition (cont.)
______________________________
Timken has remained deeply concerned about the persistence of unfair
trade practices in its major markets and has participated in the
administrative review process in the United States and elsewhere to
assure that conditions of fair trade are restored if possible. The
company has pursued and continues to pursue legislative changes to
neutralize the price depressing effect of duty absorption that has
continued in the United States for more than 20 years in some cases.
The existence of the orders reduces the commercial harm that would
otherwise be experienced by the company from the continued dumping
practices of certain foreign competitors. In accord with the
international treaty obligations of the United States, each existing
antidumping duty finding or order, including those covering tapered
roller bearings, will be subject to review by U.S. government agencies
to determine whether dumping and injury to the domestic industry are
likely to continue or recur if it is revoked. These reviews will
commence for the finding and orders covering tapered roller bearings in
April 1999. The company intends to participate actively in the proceed-
ings which may conclude in as little as five months but more likely will
conclude sometime between March and September 2000. If the U.S.
government determines that dumping and injury are likely to continue or
recur, the antidumping duting finding and orders will continue in place.
If a negative determination is made on either issue for any of the four
countries covered, the finding or order will be revoked. By statute,
the earliest that an order or finding could be revoked is as of January
1, 2000.
Timken manufactures carbon and alloy seamless tubing, carbon and alloy
steel solid bars, tool steels and other custom-made specialty steel
products. Specialty steels are characterized by special chemistry,
tightly controlled melting and precise processing.
Maintaining high standards of product quality and reliability while
keeping production costs competitive is essential to Timken's ability to
compete in the specialty steel industry with domestic and foreign steel
manufacturers.
Backlog
_______
The backlog of orders of Timken's domestic and overseas operations is
estimated to have been $1.22 billion at December 31, 1998, and
$1.37 billion at December 31, 1997. Actual shipments are dependent upon
ever-changing production schedules of the customer. Accordingly, Timken
does not believe that its backlog data and comparisons thereof as of
different dates are reliable indicators of future sales or shipments.
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Raw Materials
_____________
The principal raw materials used by Timken in its North American plants
to manufacture bearings are its own steel tubing and bars and purchased
strip steel. Outside North America the company purchases raw materials
from local sources with whom it has worked closely to assure steel
quality according to its demanding specifications. In December 1998,
the company acquired Desford Steel Tubes Ltd., a steel tube manufacturer
in Leicester, England. Now called Timken Desford Steel, the operation
will be a major source of raw materials for many Timken plants in Europe.
The principal raw materials used by Timken in steel manufacturing are
scrap metal, nickel, and other alloys. Timken believes that the
availability of raw materials and alloys are adequate for its needs,
and, in general, it is not dependent on any single source of supply.
Research
________
Timken's major research center, located in Stark County, Ohio near its
largest manufacturing plant, is engaged in research on bearings, steels,
manufacturing methods and related matters. Research facilities are also
located at the Timken Aerospace & Super Precision Bearings New Hampshire
plants, the Duston, England plant, the Latrobe, Pennsylvania plant and
the facility in Bangelore, India. Expenditures for research, development
and testing amounted to approximately $48,000,000 in 1998, $43,000,000 in
1997, and $41,000,000 in 1996. The company's research program is
committed to the development of new and improved bearing and steel
products, as well as more efficient manufacturing processes and techniques
and the expansion of application of existing products.
Environmental Matters
_____________________
The company continues to protect the environment and comply with
environmental protection laws. The company has invested in pollution
control equipment and updated plant operational practices. In 1998,
the company received the Governor's Award for waste reduction from the
state of North Carolina. This makes the third such state award the
company has received for pollution prevention in the past two years.
The company believes it has established adequate reserves to cover
its environmental expenses and has a well-established environmental
compliance audit program, which includes a proactive approach to
bringing its domestic and international units to higher standards of
environmental performance. This program measures performance against
local laws as well as to standards that have been established for all
units worldwide.
It is difficult to assess the possible effect of compliance with future
requirements that differ from existing ones. As previously reported,
the company is unsure of the future financial impact to the company that
could result from the United States Environmental Protection Agency's
(EPA's) final rules to tighten the National Ambient Air Quality Standards
for fine particulate and ozone.
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Environmental Matters (cont.)
_____________________________
The company and certain of its U.S. subsidiaries have been designated as
potentially responsible parties (PRP's) by the United States EPA for
site investigation and remediation at certain sites under the
Comprehensive Environmental Response, Compensation and Liability Act
(Superfund). The claims for remediation have been asserted against
numerous other entities, which are believed to be financially solvent
and are expected to fulfill their proportionate share of the obligation.
Management believes any ultimate liability with respect to all pending
actions will not materially affect the company's operations, cash flows
or consolidated financial position.
The Timken Aerospace & Super Precision Bearings subsidiary has two
environmental projects at its manufacturing locations in New Hampshire.
The company has provided for the costs of these projects, which to date
have been $3.7 million. A portion of these costs is being recovered from
a former owner of the property. Future operating and maintenance costs
are expected to be $1.5 million.
The company continued work in 1998 on environmental projects at its
locations in Canton and Columbus, Ohio. Costs for these two projects
are estimated to be about $2.1 million. Remediation system upgrades
became operational in August 1998 at the Columbus, Ohio plant.
Patents, Trademarks and Licenses
________________________________
Timken owns a number of United States and foreign patents, trademarks
and licenses relating to certain of its products. While Timken regards
these as items of importance, it does not deem its business as a whole,
or either industry segment, to be materially dependent upon any one
item or group of items.
Employment
__________
At December 31, 1998, Timken had 21,046 associates. Thirty-seven percent
of Timken's U.S. associates are covered under collective bargaining
agreements. None of Timken's U.S. associates are covered under
collective bargaining agreements that expire within one year.
Executive Officers of the Registrant
____________________________________
The officers are elected by the Board of Directors normally for a term
of one year and until the election of their successors. All officers
have been employed by Timken or by a subsidiary of the company during
the past five-year period. The Executive Officers of the company as of
February 19, 1999, are as follows:
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Current Position and Previous
Name Age Positions During Last Five Years
___________________ ___ ____________________________________________
W. R. Timken, Jr. 60 1993 Chairman - Board of Directors;
1997 Chairman, President and Chief
Executive Officer; Director;
Officer since 1968.
R. L. Leibensperger 60 1993 Vice President - Technology;
1995 Executive Vice President and President
- Bearings;
1997 Executive Vice President, Chief
Operating Officer and President
- Bearings; Officer since 1986.
B. J. Bowling 57 1993 Executive Vice President - Latrobe Steel
Company;
1995 President - Latrobe Steel Company;
1996 Executive Vice President and President
- Steel;
1997 Executive Vice President, Chief
Operating Officer and President
- Steel; Officer since 1996.
L. R. Brown 63 1993 Vice President and General Counsel;
Secretary;
1998 Senior Vice President and General
Counsel; Secretary; Officer
since 1990.
J. T. Elasser 46 1993 Deputy Managing Director - Bearings -
Europe, Africa and West Asia;
1995 Managing Director - Bearings - Europe,
Africa and West Asia;
1996 Vice President - Bearings - Europe,
Africa and West Asia;
1998 Group Vice President - Bearings -
Rail, Europe, Africa and West Asia;
Officer since 1996.
J. W. Griffith 45 1993 Director - Manufacturing - Bearings -
North and South America;
1993 Vice President - Manufacturing -
Bearings - North America;
1996 Vice President - Bearings - North
American Automotive, Rail, Asia
Pacific and Latin America;
1998 Group Vice President - Bearings -
North American Automotive, Asia
Pacific and Latin America; Officer
since 1996.
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12
Current Position and Previous
Name Age Positions During Last Five Years
___________________ ___ ____________________________________________
Karl P. Kimmerling 41 1993 General Manager - Primary Operations
and Engineering - Latrobe Steel
Company;
1995 President - Canadian Timken Ltd.;
1996 Vice President - Manufacturing -
Steel;
1998 Group Vice President - Alloy Steel;
Officer since 1998.
G. E. Little 55 1993 Vice President - Finance; Treasurer;
1998 Senior Vice President - Finance;
Treasurer; Officer since 1990.
S. J. Miraglia, Jr. 48 1993 Vice President - Manufacturing - Steel;
1994 Director - Manufacturing - Europe,
Africa and West Asia;
1996 Vice President - Bearings - North
American Industrial and Super
Precision;
1998 Group Vice President - Bearings -
North American Industrial and Super
Precision; Officer since 1996.
S. A. Perry 53 1993 Vice President - Human Resources and
Logistics;
1998 Senior Vice President - Human
Resources, Purchasing and
Communications; Officer since 1993.
Hans J. Sack 44 1993 General Manager - Parts Business -
Steel;
1994 Vice President - Manufacturing -
Steel;
1996 President - Latrobe Steel Company;
1998 Group Vice President - Specialty Steel
and President - Latrobe Steel
Company; Officer since 1998.
J. J. Schubach 62 1993 Vice President - Strategic Management;
1996 Vice President - Strategic Management
and Continuous Improvement;
1998 Senior Vice President - Strategic
Management and Continuous
Improvement; Officer since 1984.
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13
Current Position and Previous
Name Age Positions During Last Five Years
___________________ ___ ____________________________________________
T. W. Strouble 60 1993 Vice President - Sales and Marketing -
Bearings - North and South America;
1995 Vice President - Technology;
1998 Senior Vice President - Technology
Officer since 1995.
W. J. Timken 56 1993 Vice President; Director; Officer
since 1992.
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Item 2. Properties
___________________
Timken has bearing and steel manufacturing facilities at several
locations in the United States. Timken also has bearing manufacturing
facilities in several countries outside the United States. The
aggregate floor area of these facilities worldwide is approximately
14,096,000 square feet, all of which, except for approximately 385,000
square feet, is owned in fee. The buildings occupied by Timken are
principally of brick, steel, reinforced concrete and concrete block
construction, all of which are suitably equipped and in satisfactory
operating condition.
Timken's bearing manufacturing facilities in the United States are
located in Ashland, Bucyrus, Canton, Columbus and New Philadelphia,
Ohio; Altavista and Richmond, Virginia; Asheboro and Lincolnton, North
Carolina; Carlyle, Illinois; South Bend, Indiana; Gaffney, South
Carolina; Keene and Lebanon, New Hampshire; Knoxville, Tennessee;
Lenexa, Kansas; North Little Rock, Arkansas; Ogden, Utah and Orange,
California. These facilities, including the research facility in
Canton, Ohio, and warehouses at plant locations, have an aggregate
floor area of approximately 4,702,000 square feet.
Timken's bearing manufacturing plants outside the United States are
located in Ballarat, Australia; Benoni, South Africa; Cogozzo, Italy;
Colmar, France; Duston, Northampton and Wolverhampton, England; Medemblik,
The Netherlands; Ploesti, Romania; Sao Paulo, Brazil; Singapore;
Sosnowiec, Poland; St. Thomas, Canada and Yantai, China. The
facilities, including warehouses at plant locations, have an aggregate
floor area of approximately 3,541,000 square feet.
Timken's steel manufacturing facilities in the United States are located
in Canton, Eaton, Wauseon and Wooster, Ohio; Columbus, North Carolina;
Franklin and Latrobe, Pennsylvania and Winchester, Kentucky. These
facilities have an aggregate floor area of approximately 5,020,000
square feet.
Timken's steel manufacturing facility outside the United States is
located in Leicester, England. This facility has an aggregate floor
area of approximately 590,000 square feet. Timken also has a tool
steel finishing and distribution facility in Sheffield, England. This
facility has an aggregate floor area of approximately 244,000 square feet.
In addition to the manufacturing and distribution facilities discussed
above, Timken owns warehouses and steel distribution facilities in the
United States, Canada, England, France, Scotland, Singapore, Germany,
Mexico, Argentina and Australia, and leases several relatively small
warehouse facilities in cities throughout the world.
During the first half of 1998, Timken's Bearings and Steel businesses
continued to experience high plant utilization as a result of increased
sales in most industries and geographic areas. However, plant utilization
decreased during the last half of the year as a result of general world
economic difficulties which decreased demand in the oil country and
general industrial markets.
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15
Properties (cont.)
__________________
Timken's manufacturing facilities expanded during 1998 as a result
of its two most recent acquisitions. In May, the company acquired
Bearing Repair Specialists, an industrial bearing repair business in
South Bend, Indiana, that reconditions or modifies a wide variety of
bearing types for industrial customers in the United States and Canada.
The facility includes floor space of approximately 40,000 square feet
and employs some 19 associates.
In December, the company acquired Desford Steel Tubes Ltd. of Leicester,
England, a manufacturer of seamless mechanical tubing of consistent
quality necessary for bearing, automotive, off-highway and defense
applications. The facility includes floor space of approximately 590,000
square feet and employs some 571 associates.
In the second quarter, Timken made the announcement to build a railroad
bearing reconditioning facility in Benoni, South Africa, where the company
has operated a bearing manufacturing plant since 1951. Also in the second
quarter, growing demand for the advanced bearings produced at the Altavista
Bearing Plant in Virginia for the light truck and sport utility vehicle
markets prompted the plant's third expansion since it was built in 1991.
During the third quarter, Timken dedicated its $55 million rolling mill
investment at the Harrison Steel Plant in Canton, Ohio. The 119,000
square foot facility houses a new rolling mill and bar processing
equipment.
In September 1998, the company announced that Australian Timken would be
closing its bearing manufacturing operation in Ballarat. The plant closure
is now expected to be completed early in the second quarter of 1999.
As of December 31, 1998, the company was a forty percent shareholder in
Tata Timken Limited, a joint venture with The Tata Iron and Steel Company
Limited (TISCO) of India. The joint venture consists of a manufacturing
facility in Jamshedpur, India, completed in March of 1992, and six sales
offices, also located in India. In February 1999, the company agreed to
increase its stake in Tata Timken Limited to 80 percent by acquiring the
40 percent stake held by TISCO. The transaction was approved by the Indian
government and completed in March.
Item 3. Legal Proceedings
__________________________
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
____________________________________________________________
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 1998.
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16
PART II
_______
Item 5. Market for the Registrant's Common Equity and Related Stock
____________________________________________________________________
Holder Matters
______________
The company's common stock is traded on the New York Stock Exchange
(TKR). The estimated number of record holders of the company's common
stock at December 31, 1998, was 8,939. The estimated number of
shareholders at December 31, 1998, was 45,942.
High and low stock prices and dividends for the last two years are
presented in the Quarterly Financial Data schedule on Page 1 of the
Annual Report to Shareholders for the year ended December 31, 1998, and
is incorporated herein by reference.
During 1998, the non-United States fiduciary of an employee stock purchase
and savings plan established and administered in accordance with the laws
of France purchased 22,625 shares of the company's common stock on the
New York Stock Exchange on behalf of persons not resident in the United
States who are employed by subsidiaries of the company. The purchases were
made in connection with sales to employees made in reliance on Regulation S
under the Securities Act of 1933 and were made for an aggregate
consideration of $522,836.
Item 6. Selected Financial Data
________________________________
The Summary of Operations and Other Comparative Data on Pages 34-35
of the Annual Report to Shareholders for the year ended December 31,
1998, is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
________________________________________________________________________
Results of Operation
____________________
Management's Discussion and Analysis of Financial Condition and Results
of Operations on Pages 17-24 of the Annual Report to Shareholders for
the year ended December 31, 1998, is incorporated herein by reference.
In February 1999, the company agreed to increase its stake in Tata Timken
Limited to 80 percent by acquiring the 40 percent stake held by The Tata
Iron and Steel Company of India. The transaction was approved by the
Indian government and completed in March.
<PAGE>
17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
____________________________________________________________________
Information appearing under the caption "Management's Discussion and
Analysis of Other Information" appearing on page 23 of the Annual
Report to Shareholders for the year ended December 31, 1998, is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
____________________________________________________
The Quarterly Financial Data schedule included on Page 1, the
Consolidated Financial Statements of the registrant and its subsidiaries
on Pages 18-24, the Notes to Consolidated Financial Statements on Pages
25-33, and the Report of Independent Auditors on Page 33 of the Annual
Report to Shareholders for the year ended December 31, 1998, are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants
______________________________________________________
on Accounting and Financial Disclosure
______________________________________
Not applicable.
<PAGE>
18
PART III
________
Item 10. Directors and Executive Officers of the Registrant
____________________________________________________________
Required information is set forth under the caption "Election of
Directors" on Pages 4-7 of the proxy statement issued in connection with
the annual meeting of shareholders to be held April 20, 1999, and is
incorporated herein by reference. Information regarding the executive
officers of the registrant is included in Part I hereof.
Item 11. Executive Compensation
________________________________
Required information is set forth under the caption "Executive
Compensation" on Pages 10-20 of the proxy statement issued in connection
with the annual meeting of shareholders to be held April 20, 1999, and
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
________________________________________________________________________
Required information regarding Security Ownership of Certain Beneficial
Owners and Management, including institutional investors owning more
than 5% of the company's Common Stock, is set forth under the caption
"Beneficial Ownership of Common Stock" on Pages 8-9 of the proxy
statement issued in connection with the annual meeting of shareholders
to be held April 20, 1999, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
________________________________________________________
Required information is set forth under the caption "Election of
Directors" on Pages 4-7 of the proxy statement issued in connection with
the annual meeting of shareholders to be held April 20, 1999, and is
incorporated herein by reference.
<PAGE>
19
PART IV
_______
Item 14. Exhibits, Financial Statement Schedules, and Report on
Form 8-K.
_________________________________________________________________________
(a)(1) and (2) - The response to this portion of Item 14 is submitted
as a separate section of this report.
(3) Listing of Exhibits
Exhibit
_______
(3)(i) Amended Articles of Incorporation of The Timken Company
(Effective April 16, 1996) were filed with Form S-8
dated April 16, 1996 and are incorporated herein by
reference.
(3)(ii) Amended Regulations of The Timken Company effective
April 21, 1987, were filed with Form 10-K for the
period ended December 31, 1992, and are incorporated
herein by reference.
(4) Credit Agreement dated as of July 10, 1998 among The
Timken Company, as Borrower, Various Financial
Institutions, as Banks, and Keybank National
Association, as Agent was filed with Form 10-Q for the
period ended June 30, 1998, and is incorporated herein
by reference.
(4.1) Indenture dated as of April 24, 1998, between The Timken
Company and The Bank of New York, which was filed with
Timken's Form S-3 registration statement which became
effective April 24, 1998, and is incorporated herein by
reference.
(4.2) Indenture dated as of July 1, 1990, between Timken and
Ameritrust Company of New York, which was filed with
Timken's Form S-3 registration statement dated July 12,
1990, and is incorporated herein by reference.
(4.3) First Supplemental Indenture, dated as of July 24,
1996, by and between The Timken Company and Mellon
Bank, N.A. was filed with Form 10-Q for the period
ended September 30, 1996, and is incorporated herein by
reference.
(4.4) The company is also a party to agreements with respect
to other long-term debt in total amount less than 10%
of the registrant's consolidated total assets. The
registrant agrees to furnish a copy of such agreements
upon request.
<PAGE>
20
Listing of Exhibits (cont.)
___________________________
Management Contracts and Compensation Plans
___________________________________________
(10) The Management Performance Plan of The Timken Company
for Officers and Certain Management Personnel was filed
with Form 10-K for the period ended December 31, 1997,
and is incorporated herein by reference.
(10.1) The form of Deferred Compensation Agreement entered
into with Joseph F. Toot, Jr., W. R. Timken, Jr., R. L.
Leibensperger and B. J. Bowling was filed with Form
10-Q for the period ended September 30, 1995, and is
incorporated herein by reference.
(10.2) The Timken Company 1996 Deferred Compensation Plan for
officers and other key employees, was filed with Form
10-Q for the period ended September 30, 1995, and is
incorporated herein by reference.
(10.3) The Timken Company Long-Term Incentive Plan for
officers and other key employees as amended and
restated as of December 20, 1995, and approved by
shareholders April 16, 1996, was filed as Appendix A to
Proxy Statement dated March 6, 1996, and is
incorporated herein by reference.
(10.4) The 1985 Incentive Plan of The Timken Company for
Officers and other key employees as amended through
December 17, 1997 was filed with Form 10-K for the
period ended December 31, 1997, and is incorporated
herein by reference.
(10.5) The form of Severance Agreement entered into with all
Executive Officers of the company was filed with
Form 10-K for the period ended December 31, 1996, and
is incorporated herein by reference. Each differs only
as to name and date executed.
(10.6) The form of Death Benefit Agreement entered into with
all Executive Officers of the company was filed with
Form 10-K for the period ended December 31, 1993, and
is incorporated herein by reference. Each differs only
as to name and date executed.
(10.7) The form of Indemnification Agreements entered into
with all Directors who are not Executive Officers of
the company was filed with Form 10-K for the period
ended December 31, 1990, and is incorporated herein by
reference. Each differs only as to name and date
executed.
<PAGE>
21
Listing of Exhibits (cont.)
___________________________
(10.8) The form of Indemnification Agreements entered into
with all Executive Officers of the company who are not
Directors of the company was filed with Form 10-K for
the period ended December 31, 1990, and is incorporated
herein by reference. Each differs only as to name and
date executed.
(10.9) The form of Indemnification Agreements entered into
with all Executive Officers of the company who are also
Directors of the company was filed with Form 10-K for
the period ended December 31, 1990, and is incorporated
herein by reference. Each differs only as to name and
date executed.
(10.10) The form of Employee Excess Benefits Agreement entered
into with all active Executive Officers, certain
retired Executive Officers, and certain other key
employees of the company was filed with Form 10-K for
the period ended December 31, 1991, and is incorporated
herein by reference. Each differs only as to name and
date executed, except Mr. Brown who will be given
additional service.
(10.11) The Amended and Restated Supplemental Pension Plan of
The Timken Company as adopted March 16, 1998 was filed
with Form 10-K for the period ended December 31, 1997,
and is incorporated herein by reference.
(10.12) Amendment to the Amended and Restated Supplemental Pension
Plan of the Timken Company executed on December 29, 1998.
(10.13) The form of The Timken Company Nonqualified Stock
Option Agreement for nontransferable options as adopted
on April 21, 1998 was filed with Form 10-Q for the
period ended March 31, 1998, and is incorporated
herein by reference.
(10.14) The form of The Timken Company Nonqualified Stock
Option Agreement for transferable options as adopted on
April 21, 1998 was filed with Form 10-Q for the period
ended March 31, 1998, and is incorporated herein by
reference.
(10.15) The form of The Timken Company Nonqualified Stock Option
Agreement for transferable options as adopted on
November 18, 1998.
(10.16) The Timken Company Deferral of Stock Option Gains Plan
effective as of April 21, 1998 was filed with Form 10-Q
for the period ended March 31, 1998, and is incorporated
herein by reference.
<PAGE>
22
Listing of Exhibits (cont.)
___________________________
(10.17) The Consulting Agreement entered into with Joseph F.
Toot, Jr. was filed with Form 10-K for the period ended
December 31, 1997, and is incorporated herein by
reference.
(10.18) The form of The Timken Company Performance Share
Agreement entered into with W. R. Timken, Jr.,
R. L. Leibensperger and B. J. Bowling was filed with
Form 10-K for the period ended December 31, 1997, and is
incorporated herein by reference.
(12) Ratio of Earnings to Fixed Charges
(13) Annual Report to Shareholders for the year ended
December 31, 1998, (only to the extent expressly
incorporated herein by reference).
(21) A list of subsidiaries of the registrant.
(23) Consent of Independent Auditors.
(24) Power of Attorney
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None
(c) and (d) The exhibits are contained in a separate section of this
report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE TIMKEN COMPANY
By /s/ W. R. Timken, Jr. By /s/ G. E. Little
________________________________ ________________________________
W. R. Timken, Jr. G. E. Little
Director and Chairman; President Senior Vice President - Finance
and Chief Executive Officer Principal Financial and
Accounting Officer)
Date March 30, 1999 Date March 30, 1999
________________________________ _______________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By /s/ Martin D. Walker* By /s/ John M. Timken, Jr.*
______________________________ _______________________________
Martin D. Walker Director John M. Timken, Jr. Director
Date March 30, 1999 Date March 30, 1999
By /s/ Stanley C. Gault* By /s/ W. J. Timken*
______________________________ _______________________________
Stanley C. Gault Director W. J. Timken Director
Date March 30, 1999 Date March 30, 1999
By /s/ J. Clayburn La Force, Jr.* By /s/ Joseph F. Toot, Jr.*
______________________________ _______________________________
J. Clayburn La Force, Jr., Director Joseph F. Toot, Jr. Director
Date March 30, 1999 Date March 30, 1999
By /s/ Robert W. Mahoney* By /s/ Charles H. West*
______________________________ _______________________________
Robert W. Mahoney Director Charles H. West Director
Date March 30, 1999 Date March 30, 1999
By /s/ Jay A. Precourt* By /s/ Alton W. Whitehouse*
______________________________ _______________________________
Jay A. Precourt Director Alton W. Whitehouse, Director
Date March 30, 1999 Date March 30, 1999
*By /s/ G. E. Little
___________________________________
G. E. Little, attorney-in-fact
by authority of Power of Attorney
filed as Exhibit 24 hereto
EXHIBIT 10.12
AMENDMENT
TO THE AMENDED AND RESTATED SUPPLEMENTAL PENSION PLAN
OF
THE TIMKEN COMPANY
The Timken Company, an Ohio corporation, and its wholly-owned
subsidiaries, Latrobe Steel Company, a Pennsylvania corporation, and MPB
Corporation, A Delaware corporation, hereby amend the Supplemental
Pension Plan of The Timken Company (the "Supplemental Plan"), effective
January 1, 1999.
1. Amend the opening paragraph of the Plan to read:
The Timken Company, 1835 Dueber Avenue, S.W., Canton, Ohio
44706, EIN 34-0577130, and its wholly-owned subsidiaries,
Latrobe Steel Company, and MPB Corporation (collectively the
"Company") hereby amend and restate the Supplemental Pension
Plan of The Timken Company (the "Supplemental Plan")
originally effective May 14, 1979, for the following purpose
and in accordance with the provisions set forth below. This
amended and restated Plan is effective November 1, 1997.
Effective January 1, 1999, The Timken Corporation, a wholly-
owned subsidiary of The Timken Company shall also be
considered to be part of any reference to the Company in the
Supplemental Plan.
In witness whereof, the Company has executed this amendment of
the Supplemental Plan at Canton, Ohio, this 29th day of December, 1998.
THE TIMKEN COMPANY
By: ________________________
Stephen A. Perry
Senior Vice President
Human Resources, Purchasing &
Communications
EXHIBIT 10.15
THE TIMKEN COMPANY
Nonqualified Stock Option Agreement
WHEREAS, <<NAME>> (the "Optionee") is an employee of The Timken
Company (the "Company");
WHEREAS, the execution of a stock option agreement in the form
hereof has been authorized by a resolution of the Compensation Committee
(the "Committee") of the Board of Directors (the "Board") of the Company
that was duly adopted on November 18, 1998 (the "Date of Grant"), and is
incorporated herein by this reference; and
WHEREAS, the option granted hereby is intended to be a
nonqualified stock option and shall not be treated as an "incentive
stock option" within the meaning of that term under Section 422 of the
Internal Revenue Code of 1986;
NOW, THEREFORE, pursuant to the Company's Long-Term Incentive
Plan (as Amended and Restated as of December 20, 1995) (the "Plan") and
subject to the terms and conditions thereof and the terms and conditions
hereinafter set forth, the Company hereby grants to the Optionee a
nonqualified stock option (the "Option") to purchase <<SHARES>> shares
of the Company's common stock without par value (the "Common Shares")
at the exercise price of nineteen and seven-sixteenths dollars ($19.4375)
per Common Share (the "Exercise Price").
1. Vesting of Option.
(a) Unless terminated as hereinafter provided, the Option
shall be exercisable to the extent of one hundred percent (100%) of the
Common Shares covered by the Option after the Optionee shall have been
in the continuous employ of the Company or a subsidiary for eighteen
(18) months from the Date of Grant. For the purposes of this agreement:
"subsidiary" shall mean a corporation, partnership, joint venture,
unincorporated association or other entity in which the Company has
a direct or indirect ownership or other equity interest; the continuous
employment of the Optionee with the Company or a subsidiary shall not
be deemed to have been interrupted, and the Optionee shall not be deemed
to have ceased to be an employee of the Company or a subsidiary, by
reason of the transfer of his employment among the Company and its
subsidiaries.
(b) Notwithstanding the provisions of Section 1(a)
hereof, the Option shall become immediately exercisable in full upon
any change in control of the Company that shall occur while the
Optionee is an employee of the Company or a subsidiary. For the
purposes of this agreement, the term "change in control" shall mean
the occurrence of any of the following events:
(i) all or substantially all of the assets of
the Company are sold or transferred to another corporation or entity,
<PAGE>
or the Company is merged, consolidated or reorganized into or with
another corporation or entity, with the result that upon conclusion of
the transaction less than fifty-one percent (51%) of the outstanding
securities entitled to vote generally in the election of directors or
other capital interests of the acquiring corporation or entity is owned,
directly or indirectly, by the shareholders of the Company generally
prior to the transaction; or
(ii) there is a report filed on Schedule 13D or
Schedule 14D-1 (or any successor schedule, form or report thereto),
as promulgated pursuant to the Securities Exchange Act of 1934
(the "Exchange Act"), disclosing that any person (as the term "person"
is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act)
has become the beneficial owner (as the term "beneficial owner" is
defined under Rule 13d-3 or any successor rule or regulation thereto
under the Exchange Act) of securities representing thirty percent (30%)
or more of the combined voting power of the then-outstanding voting
securities of the Company; or
(iii) the Company shall file a report or proxy
statement with the Securities and Exchange Commission (the "SEC")
pursuant to the Exchange Act disclosing in response to Item 1 of Form
8-K thereunder or Item 5(f) of Schedule 14A thereunder (or any
successor schedule, form, report or item thereto) that a change in
control of the Company has or may have occurred, or will or may occur
in the future, pursuant to any then-existing contract or transaction;
or
(iv) the individuals who constituted the Board at
the beginning of any period of two consecutive calendar years cease
for any reason to constitute at least a majority thereof unless the
nomination for election by the Company's shareholders of each new
member of the Board was approved by a vote of at least two-thirds of
the members of the Board still in office who were members of the Board
at the beginning of any such period.
In the event that any person described in Section 1(b)(ii) hereof
files an amendment to any report referred to in Section 1(b)(ii) hereof
that shows the beneficial ownership described in Section 1(b)(ii) hereof
to have decreased to less than thirty percent (30%), or in the event that
any anticipated change in control referred to in Section 1(b)(iii)
hereof does not occur following the filing with the SEC of any report
or proxy statement described in Section 1(b)(iii) hereof because any
contract or transaction referred to in Section 1(b)(iii) hereof is
canceled or abandoned, the Committee may nullify the effect of Section
1(b)(ii) or 1(b)(iii) hereof, as the case may be, and reinstate the
provisions of Section 1(a) hereby by giving notice thereof to the
Optionee; provided, however, that any such action by the Committee
shall not prejudice any exercise of the Option that may have occurred
prior to the nullification and reinstatement. The provisions of Section
1(b)(ii) hereof shall again become automatically effective following
any such nullification of the provisions thereof and reinstatement of
the provisions of Section 1(a) hereof in the event that any person
described in Section 1(b)(ii) hereof files a further amendment to any
report referred to in Section 1(b)(ii) hereof that shows the beneficial
<PAGE>
ownership described in Section 1(b)(ii) hereto to have again increased
to thirty percent (30%) or more.
(c) Notwithstanding the provisions of Section 1(a) hereof,
the Option shall become immediately exercisable in full if the Optionee
should die or become permanently disabled (within the meaning of the
Company's long-term disability plan) while in the employ of the Company
or any subsidiary.
(d) To the extent that the Option shall have become
exercisable in accordance with the terms of this agreement, it may be
exercised in whole or part from time to time thereafter.
2. Termination of Option. The Option shall terminate
automatically and without further notice on the earliest of the
following dates:
(a) thirty (30) days after the date upon which the
Optionee ceases to be an employee of the Company or a subsidiary,
unless the cessation of his employment (i) is a result of his death,
disability or retirement with the Company's consent or (ii) follows
a change in control;
(b) five (5) years after the date upon which the Optionee
ceases to be an employee of the Company or subsidiary (i) as a result of
his disability, (ii) as a result of his retirement with the Company's
consent, unless he is also a director of the Company who continues to
serve as such following his retirement with the Company's consent, or
(iii) following a change in control, unless the cessation of his
employment following a change in control is a result of his death;
(c) one (1) year after the date upon which the Optionee
ceases to be a director of the Company, but not less than five (5)
years after the date upon which he ceases to be an employee of the
Company or a subsidiary, if (i) the cessation of his employment is a
result of his retirement with the Company's consent and (ii) he
continues to serve as a director of the Company following the cessation
of his employment;
(d) one (1) year after the date of the Optionee's death
regardless of whether he ceases to be an employee of the Company or a
subsidiary prior to his death (i) as a result of his disability or
retirement with the Company's consent or (ii) following a change in
control; or
(e) ten (10) years after the Date of Grant.
For purposes of this agreement: "retirement with the Company's
consent" shall mean the retirement of the Optionee prior to age 62, if
the Board or the Committee determines that his retirement is for the
convenience of the Company or a subsidiary, or the retirement of the
Optionee at or after age 62 under a retirement plan of the Company or
a subsidiary; "disability" shall mean that the Optionee has qualified
<PAGE>
for disability benefits under the Company's Long-Term Disability
Program or any successor disability plan or program of the Company.
In the event that the Optionee shall intentionally commit an act
that the Committee determines to be materially adverse to the interests
of the Company or a subsidiary, the Option shall terminate at the time
of that determination notwithstanding any other provision of this
agreement.
3. Payment of Exercise Price. The Exercise Price shall be
payable (a) in cash in the form of currency or check or other cash
equivalent acceptable to the Company, (b) by transfer to the Company
of nonforfeitable, unrestricted Common Shares that have been owned by
the Optionee for at least six months prior to the date of exercise or
(c) by any combination of the methods of payment described in Sections
3(a) and 3(b) hereof. Nonforfeitable, unrestricted Common Shares that
are transferred by the Optionee in payment of all or any part of the
Exercise Price shall be valued on the basis of their fair market value
as determined by the Committee from time to time. Subject to the terms
and conditions of Section 4 hereof, and subject to any deferral election
the Optionee may have made pursuant to any plan or program of the
Company, the Company shall cause certificates for any shares purchased
hereunder to be delivered to the Optionee upon payment of the Exercise
Price in full.
4. Compliance with Law. The Company shall make reasonable
efforts to comply with all applicable federal and state securities
laws; provided, however, notwithstanding any other provision of this
agreement, the Option shall not be exercisable if the exercise thereof
would result in a violation of any such law.
5. Transferability and Exercisability.
(a) Except as provided in Section 5(b) below, neither
the Option nor any interest therein shall be transferable by the
Optionee except by will or the laws of descent and distribution, and
the Option shall be exercisable during the lifetime of the Optionee
only by him or, in the event of his legal incapacity to do so, by his
guardian or legal representative acting on behalf of the Optionee in
a fiduciary capacity under state law and court supervision.
(b) Notwithstanding Section 5(a) above, the Option, or
any interest therein, may be transferable by the Optionee, without
payment of consideration therefor, to any one or more members of the
immediate family of Optionee (as defined in Rule 16a-1(e) under the
Exchange Act), or to one or more trusts established solely for the
benefit of such members of the immediate family or to partnerships in
which the only partners are such members of the immediate family of
the Optionee; provided, however, that such transfer will not be
effective until notice of such transfer is delivered to the Company;
and provided, further, however, that any such transferee is subject
to the same terms and conditions hereunder as the Optionee.
6. Adjustments. The Committee shall make any adjustments in
the Exercise Price and the number or kind of shares of stock or other
securities covered by the Option that the Committee may determine to
<PAGE>
be equitably required to prevent any dilution or expansion of the
Optionee's rights under this agreement that otherwise would result
from any (a) stock dividend, stock split, combination of shares,
recapitalization or other change in the capital structure of the
Company, (b) merger, consolidation, separation, reorganization or
partial or complete liquidation involving the Company or (c) other
transaction or event having any effect similar to any of those referred
to in Section 8(a) or 8(b) hereof. Furthermore, in the event that any
transaction or event described or referred to in the immediately
preceding sentence shall occur, the Committee may provide in
substitution of any or all of the Optionee's rights under this
agreement such alternative consideration as the Committee may
determine in good faith to be equitable under the circumstances.
7. Withholding Taxes. If the Company shall be required to
withhold any federal, state, local or foreign tax in connection with
any exercise of the Option, the Optionee shall pay the tax or make
provisions that are satisfactory to the Company for the payment thereof.
The Optionee may elect to satisfy all or any part of any such
withholding obligation by surrendering to the Company a portion of
the Common Shares that are issuable to the Optionee upon the exercise
of the Option. If such election is made, the shares so surrendered
by the Optionee shall be credited against any such withholding
obligation at their fair market value (as determined by the Committee
from time to time) on the date of such surrender.
8. Right to Terminate Employment. No provision of this
agreement shall limit in any way whatsoever any right that the Company
or a subsidiary may otherwise have to terminate the employment of the
Optionee at any time.
9. Relation to Other Benefits. Any economic or other benefit
to the Optionee under this agreement or the Plan shall not be taken
into account in determining any benefits to which the Optionee may be
entitled under any profit-sharing, retirement or other benefit or
compensation plan maintained by the Company or a subsidiary and shall
not affect the amount of any life insurance coverage available to any
beneficiary under any life insurance plan covering employees of the
Company or a subsidiary.
10. Amendments. Any amendment to the Plan shall be deemed to
be an amendment to this agreement to the extent that the amendment is
applicable hereto; provided, however, that no amendment shall adversely
affect the rights of the Optionee with respect to the Option without
the Optionee's consent.
11. Severability. In the event that one or more of the
provisions of this agreement shall be invalidated for any reason by a
<PAGE>
court of competent jurisdiction, any provision so invalidated shall be
deemed to be separable from the other provisions hereof, and the
remaining provisions hereof shall continue to be valid and fully
enforceable.
12. Governing Law. This agreement is made under, and shall be
construed in accordance with, the laws of the State of Ohio.
This agreement is executed by the Company on this 18th day of
November, 1998.
THE TIMKEN COMPANY
By: ________________________________
Stephen A. Perry
Senior Vice President
Human Resources, Purchasing &
Communications
<PAGE>
The undersigned Optionee hereby acknowledges receipt of an executed
original of this agreement and accepts the Option granted hereunder and
the right to receive Deferred Dividend Shares with respect to the Common
Shares covered thereby, subject to the terms and conditions of the Plan
and the terms and conditions hereinabove set forth.
_____________________________________
Optionee
Date: ______________________________
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31,
1998 1997 1996
-------- -------- --------
(Thousands of Dollars)
Income before income taxes,
extraordinary item and cumulative
effect of accounting changes $185,350 $266,592 $225,259
Amortization of capitalized interest 2,437 2,213 1,999
Interest expense 26,502 21,432 17,899
Interest portion of rental expense 3,260 3,267 2,627
Earnings $217,549 $293,504 $247,784
======== ======== ========
Interest $31,265 $23,608 $19,700
Interest portion of rental expense 3,260 3,267 2,627
-------- -------- --------
Fixed Charges $34,525 $26,875 $22,327
======== ======== ========
Ratio of Earnings to Fixed Charges 6.30 10.92 11.10
======== ======== ========
EXHIBIT 13
FINANCIAL SUMMARY
1998 1997
(Thousands of dollars, except
per share data)
Net sales $ 2,679,841 $ 2,617,562
Income before income taxes 185,350 266,592
Provision for income taxes 70,813 95,173
Net income $ 114,537 $ 171,419
Earnings per share $ 1.84 $ 2.73
Earnings per share - assuming dilution $ 1.82 $ 2.69
Dividends paid per share $ 0.72 $ 0.66
In 1998, The Timken Company achieved record sales and the third
highest earnings total in company history. Difficult market conditions
and concerted actions to lower inventories, decrease employment costs
and trim excess capacity combined to lower earnings.
Weaker markets and unusual negative occurrences caused both the
Bearings and Steel businesses to suffer lower-than-expected results.
QUARTERLY FINANCIAL DATA
<TABLE>
Dividends
Net Gross Net Earnings per Share(1) per Stock Prices
1998 Sales Profit Income Basic Diluted Share High Low
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $ 707,381 $ 174,366 $ 49,136 $ .79 $ .78 $ .18 $ 35 5/8 $ 30 7/8
Second Quarter 701,747 164,742 38,689 .62 .61 .18 41 15/16 30 1/4
Third Quarter 616,848 119,973 13,573 .22 .22 .18 31 1/2 15 1/16
Fourth Quarter 653,865 122,574 13,139 .21 .21 .18 20 1/4 13 5/8
$2,679,841 $ 581,655 $114,537 $ 1.84 $ 1.82 $ .72
1997
First Quarter $ 640,584 $ 151,429 $ 41,066 $ .66 $ .64 $ .165 $ 27 5/8 $ 22 5/8
Second Quarter 676,003 165,580 44,940 .72 .70 .165 36 3/4 25 7/8
Third Quarter 629,900 140,602 37,790 .60 .59 .165 41 1/2 34
Fourth Quarter 671,075 154,577 47,623 .76 .74 .165 40 1/2 31 1/16
$2,617,562 $ 612,188 $171,419 $ 2.73 $ 2.69 $ .660
</TABLE>
(1)Annual earnings per share do not equal the sum of the individual
quarters due to differences in the average number of shares outstanding
during the respective periods.
1
<PAGE>
MD&A SUMMARY TIMKEN
Despite a combination of difficult global market conditions and
unusual negative occurrences, The Timken Company achieved its sixth
straight year of increased sales. Earnings totaled $114.5 million -
the third highest earnings in company history - but were down from a
record $171.4 million in 1997. For the year, sales edged up 2.4% to
$2.68 billion. In the second half of the year, the company faced a
lengthy customer strike, significant plant startup costs and lower
manufacturing levels. The company recorded $21.4 million of
additional expenses for structural changes aimed at improving future
profitability.
In Bearings, North American markets for light and heavy trucks
and for railroad remained strong. However, U.S. markets for certain
industrial products weakened over the year and demand in Asia stayed
at a low ebb. Steel was unable to completely offset the negative
impact of weaker markets and other unusual negative occurrences.
The company completed two acquisitions and announced targeted
capital investments in plants where increased demand for certain
products required additional capacity. In the first quarter, the
company announced tentative plans to build a new steel tube mill
that would include state-of-the-art piercing and finishing
operations. Given current global macroeconomic conditions, the
company has postponed the tube mill. In March, the new Advanced
Package Bearings plant in Duston, England, began operation to
provide complex bearings for the growing medium- and heavy-truck and
trailer markets, as well as other industrial applications such as
high-speed printing presses.
The second quarter was a high-growth period for both Bearings
and Steel. The company acquired the assets of Bearing Repair
Specialists in South Bend, Indiana, in May. Now named Industrial
Bearing Services, it signifies the company's commitment to further
growth in bearing reconditioning services. Additional evidence of
this commitment was the second quarter announcement to build a
railroad bearing reconditioning facility in Benoni, South Africa,
where the company has operated a bearing manufacturing plant since
1951.
Growing demand for the advanced bearings produced at the
Altavista Bearing Plant in Virginia for the light truck and sport
utility vehicle markets prompted the plant's third expansion since
it was built in 1991.
In the third quarter, Alloy Steel dedicated its $55 million
rolling mill investment at the Harrison Steel Plant in Canton, Ohio.
Its computer-controlled processes are expected to provide quick
payback as they reduce cycle times and inventory, improve product
consistency and increase productivity.
Also in the third quarter, the company took decisive actions to
lessen the impact of sudden changes in the economic climate. Two
manufacturing facilities announced their intent to shift focus to
align operations with the changing market. Australian Timken is
closing its bearing manufacturing operations and is refocusing
resources to sales, service and distribution. Likewise, Timken
South Africa will shift its manufacturing efforts away from
automotive bearings toward the railroad market.
In October, the company introduced the new Timken IsoClassTM
brand of metric tapered roller bearings. This gives Timken access
to 95% of the market for ISO tapered roller bearings which are about
one half of today's total tapered roller bearing market.
The company also took steps to integrate its acquisitions into
the Timken organization with a new corporate naming system. For
example, MPB Corporation is now Timken Aerospace & Super Precision
Bearings, and Latrobe Steel Company is now Timken Latrobe Steel.
The fourth quarter brought the company's second acquisition for
the year. Desford Steel Tubes Ltd., a steel tube manufacturer in
Leicester, England, was acquired in December. Now called Timken
Desford Steel, the operation is expected to generate significant
sales without requiring major additional capital investment and
offers an excellent base from which to grow the steel business in
Europe.
FORWARD-LOOKING STATEMENTS
The statements set forth in this annual report that are not
historical in nature are forward-looking statements. This is
particularly true of the statements made in the Corporate Profile on
pages 6 and 7. 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
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 ongoing continuous
improvement and rationalization programs; its ability, along
with that of customers, suppliers and governments 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.
17
<PAGE>
Consolidated Statement of Income
Year Ended December 31
1998 1997 1996
(Thousands of dollars, except per
share data)
Net sales $2,679,841 $2,617,562 $2,394,757
Cost of products sold 2,098,186 2,005,374 1,828,394
Gross Profit 581,655 612,188 566,363
Selling, administrative and general
expenses 356,672 332,419 319,458
Operating Income 224,983 279,769 246,905
Interest expense (26,502) (21,432) (17,899)
Other income (expense) (13,131) 8,255 (3,747)
Income Before Income Taxes 185,350 266,592 225,259
Provision for income taxes 70,813 95,173 86,322
Net Income $ 114,537 $ 171,419 $ 138,937
Earnings Per Share $ 1.84 $ 2.73 $ 2.21
Earnings Per Share-assuming
dilution $ 1.82 $ 2.69 $ 2.19
See accompanying Notes to Consolidated Financial Statements on pages 25
through 33.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME
1998 compared to 1997
Net sales for 1998 were a record $2.680 billion, an increase of
2.4% above the $2.618 billion reported for 1997. Sales in North
American automotive and rail markets remained strong throughout the
year. Also contributing to the increase were sales gains in Europe
along with sales by the company's most recent acquisitions. Sales
softened in the U.S. industrial, agricultural, mining and oil well
drilling markets during the year as a result of the spreading global
economic decline. Asia Pacific markets, which represent less than
5% of the company's total direct sales, also weakened significantly
due to the severe economic problems there.
Gross profit was $581.7 million (21.7% of net sales), down 5%
from 1997's gross profit of $612.2 million (23.4% of net sales).
Unusual occurrences in 1998 in the company's steel operations,
unexpected near-term order reductions, and lower manufacturing
levels aimed at controlling inventory levels reduced the year's
gross profit. In response to this decline in demand, the company
reduced its workforce by more than 400 associates in its
manufacturing operations during the last half of the year. Current
year gross profit also reflects expense of $15.4 million related to
initiatives and structural changes in its bearing and steel
businesses aimed at reducing costs and improving profitability in
1999. Approximately half of this expense relates to workforce
reductions planned for early 1999 and the remainder relates to
impaired equipment. In 1998, expense for performance-based pay
programs was lower by $7.1 million as a result of the company's
lower performance levels.
Consistent with the drop in gross profit, operating income
decreased to $225 million in 1998 compared to $279.8 million in
1997. Selling, administrative and general expenses were
$356.7 million (13.3% of net sales) in 1998 compared to
$332.4 million (12.7% of net sales) in 1997. Administrative
expenses were higher in 1998 to support the company's strong growth
plans and to cover expenses incurred at newly acquired subsidiaries
that were not in the prior year. In addition, the company recorded
$6 million of expense in the fourth quarter, $4 million of which
related primarily to severance costs for administrative salaried
positions that will be eliminated by December 31, 1999, as a result
of cost-reduction initiatives and structural changes. The company
also wrote off $2 million of costs associated with abandoned
potential business investment opportunities. In 1998,
administrative performance-based pay was $14.3 million lower due to
the company's lower profitability.
Other expense increased in 1998 compared to 1997 and includes
$7.4 million of expense for the disposal of certain fixed assets
related to a company-initiated internal fixed asset review conducted
approximately every five years. Other income in 1997 included a
gain on the sale of property in the United Kingdom.
Taxes represent 38.2% of income before taxes. The provision
for income taxes for 1997 included a credit relating to claims for
prior years' research and development credits of $4 million, or $.06
per share. The effective income tax rate for 1997 exclusive of this
item was 37.2%.
The company is moving quickly to implement a range of
aggressive actions in Bearings and Steel to improve profitability
and competitiveness and to produce ongoing returns for its
shareholders. As noted above, the company recorded $21.4 million of
expense in the fourth quarter of 1998 related to these actions,
which will result in eliminating approximately 265 salaried and 250
operative positions by the end of 1999. The company expects savings
will offset the expense within about 18 months.
In September, the company announced that Australian Timken
would be closing its bearing manufacturing operation in Ballarat.
The plant closure is expected to be completed by the end of the
first quarter of 1999 and accounts for 170 of the job reductions
noted above. 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. In December 1998, the company completed the closure of
manufacturing lines for automotive product at its South African
plant that will now focus primarily on railroad products. Closure
of the automotive lines made 26 positions redundant. In October,
Timken announced its
18
<PAGE>
TIMKEN
intent to rationalize certain operations between its bearing plants
in the United Kingdom and France. In Brazil, the company is taking
action to reduce its raw material and machining costs. The company
anticipates that the majority of the equipment disposals resulting
from the closure of the aforementioned operations will be scrapped.
Subsequently, the company's annual depreciation expense will be
reduced by $0.4 million. In addition to the above manufacturing-
related initiatives, the company increased administrative efficiency
through new software systems and focused continuous improvement
efforts.
In Bearings, net sales increased by 4.6% from $1.719 billion in
1997 to $1.798 billion in 1998. Sales to North American locomotive
and freight car markets remained strong during the year, reflecting
an increase of more than 22% over 1997's sales. North American
automotive sales increased by more than 9% due primarily to higher
light truck and sport utility vehicle demand. The General Motors
strike reduced bearing automotive sales in 1998 by more than
$10 million. Sales in North American industrial markets in 1998,
both original equipment and aftermarket, were slightly higher than
1997. However, the strength seen in the first half of the year was
offset by declining markets in the last half as original equipment
customers in agriculture, mining, oil drilling and heavy
construction cut back on their schedules due to the economic decline
in Asia and other parts of the world. In the aftermarket,
distributors' high inventory levels and reduced manufacturing
activity by their customers also hurt sales in the last half of the
year. Sales in Europe were higher in 1998 boosted by a 16% increase
in automotive sales; however, markets there showed signs of slowing
in the fourth quarter. The strength of the British pound slowed
exports from the United Kingdom. Markets in Latin America started
the year strong but began to weaken in mid-year due to the influence
of economic difficulties in Brazil and Asia. Asia Pacific sales
were down by more than 22% in 1998 compared to 1997. Asia Pacific
markets continued to weaken during the year; however, there are
signs that the bottom of Asia's deep recession may have been reached
as sales in those markets have shown modest increases in recent
months. Sales from companies acquired since the beginning of 1997
added approximately $18.5 million to the year's increase.
Bearings' earnings before interest and income taxes (EBIT) in
1998 decreased by 19.5% to $133.3 million from $165.5 million in
1997. Mix deterioration associated with growth in sales of lower
margin automotive and rail products detracted from 1998's profits.
Temporary plant shutdowns aimed at reducing inventory levels
contributed to about $6 million of higher manufacturing costs and
resulted in the layoff of about 300 associates. Lower bearing sales
in Asia Pacific markets also hurt EBIT for the year. In addition,
EBIT was reduced by approximately $19 million as a result of
expenses recorded in the fourth quarter related to the actions and
initiatives described above to improve global competitiveness and
reduce costs in coming years. As a result, approximately 190
salaried and 250 operative positions have been identified for
elimination by the end of 1999 due to structural changes. Bearings'
EBIT in 1998 also reflected lower expense of $11.8 million related
to the reduction in the amount previously reserved for performance-
based pay. In 1997, Bearings' EBIT included a gain on the sale
of property in the United Kingdom.
Steel's net sales totaled $882.1 million, down 1.8% from
$898.7 million in 1997. Demand remained strong in the bearing and
automotive segments throughout most of the year, with sales
increases of 18% and 6%, respectively. The General Motors strike,
which lingered into the early part of the third quarter, lowered
automotive sales by about $5 million. Industrial sales were down by
about 8% compared to 1997 levels as markets began to weaken in the
last half of the year. Steel also continued to experience weakness
in oil country and service center markets during the year, causing a
reduction in sales of about $32 million compared to 1997. Late in
August, service center distributors began to reduce excessive
inventories. Inventories remain high and the company anticipates
that correction of service center inventories will occur by mid-1999
when that business is expected to regain normal strength.
Steel's EBIT in 1998 was $73.8 million compared to
$121.2 million last year. In addition to the effect of lower sales
volume, the Steel business experienced spikes in electricity costs
during the summer months along with higher labor, maintenance and
tooling costs. EBIT was also lower due to a combination of unusual
events. In July, Steel 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. The General Motors
strike along with impaired asset and additional planned startup
costs related to the new Harrison Steel Plant rolling mill also
affected EBIT. Actions taken to curtail operations in the third and
fourth quarters in response to short-term inventory corrections by
customers reduced EBIT by about $12 million. Steel has proceeded to
lay off about 110 associates due to the volume decline. At year-
end, the company's steel plants were operating at about 70% of
1997's year-end levels. In addition, EBIT for 1998 was $2.3 million
lower as a result of expense recorded in the fourth quarter for
actions and cost reduction initiatives described above. It is
expected that these initiatives will result in eliminating about 75
salaried positions by the end of 1999. Higher expenses were offset
in part by lower raw material and natural gas costs. In addition,
EBIT was positively impacted by a $9.6 million reduction in the
amount previously reserved for performance-based pay and a payment
received in settlement of a price-fixing lawsuit filed against
electrode suppliers. Steel already has begun to realize cost
improvements from its new Harrison Steel Plant rolling mill
dedicated in August 1998. At full capacity, the company expects
Harrison's rolled bar production costs to be reduced by $30 per ton
in 1999.
1997 compared to 1996
Net sales increased in 1997 by 9.3% to $2.618 billion. Sales
were stronger in North American automotive, industrial and super
precision bearing markets, and in the specialty alloy steel and
steel components markets. Higher sales in Europe and Latin America
and sales by the company's recently acquired businesses contributed
to the year-to-year increase. Sales in Asia Pacific markets
weakened significantly toward year-end due to the severe economic
problems in that area. Gross profit for 1997 increased to
$612.2 million (23.4% of net sales), an 8.1% increase over 1996's
gross profit of $566.4 million (23.7% of net sales). Higher sales
volume and cost improvements related to the company's ongoing
continuous improvement initiatives contributed to this growth.
Costs associated with bringing products manufactured by new
acquisitions to Timken quality and technological standards, and
higher product costs, some associated with the exceptional levels of
customer demand, caused gross profit margins to decline slightly in
1997. Operating income increased to $279.8 million in 1997, up from
$246.9 million in 1996. The company was successful in reducing
further its selling, administrative, and general expenses as a
percent of sales, which were $332.4 million (12.7% of net sales) in
1997 compared to $319.5 million (13.3% of net sales) in 1996. In
addition to expenses required to support the increased level of
sales volume, the higher dollar figure resulted in part from the
continued phase-in of the company's pay-for-performance plan for
salaried associates, recent acquisitions and higher research
expenditures.
19
<PAGE>
Consolidated Balance Sheet
December 31
1998 1997
(Thousands of dollars)
ASSETS
Current Assets
Cash and cash equivalents $ 320 $ 9,824
Accounts receivable, less allowances:
1998-$7,949; 1997-$7,003 350,483 357,423
Deferred income taxes 42,288 42,071
Inventories:
Manufacturing supplies 43,899 36,448
Work in process and raw materials 229,397 264,784
Finished products 183,950 144,621
Total Inventories 457,246 445,853
Total Current Assets 850,337 855,171
Property, Plant and Equipment
Land and buildings 464,259 420,322
Machinery and equipment 2,324,872 2,257,464
2,789,131 2,677,786
Less allowances for depreciation 1,439,592 1,457,270
Property, Plant and Equipment-Net 1,349,539 1,220,516
Other Assets
Costs in excess of net assets of acquired
businesses, net of amortization,
1998-$28,936; 1997-$23,448 150,140 139,409
Deferred income taxes 20,409 26,605
Miscellaneous receivables and other assets 52,520 60,161
Deferred charges and prepaid expenses 27,086 24,688
Total Other Assets 250,155 250,863
Total Assets $2,450,031 $2,326,550
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE BALANCE SHEET
Maintaining strong credit ratings has been an important
objective for the company since public debt was first issued in
1975. The company has maintained an "A" rating on its long-term
debt by two rating agencies.
Total assets increased by $123.5 million from December 31,
1997. The increase resulted primarily from the company's December
1998 acquisition of Desford Steel Tubes, Ltd. in Leicester, England,
and additional investments in property, plant and equipment. The
company was successful in reducing inventories in both Bearings and
Steel as the number of days' supply in inventory decreased to 109
days at December 31, 1998, compared to 120 days at
September 30, 1998, and 112 days at the previous year-end. The
number of days' sales in receivables at December 31, 1998, was
basically unchanged from the year-end 1997 level. The company is
focused on improving cash flow by effectively managing working
capital usage, especially through more effective inventory
utilization.
The company uses the LIFO method of accounting for about 80% of
its inventories. Under this method, the cost of products sold
approximates current cost and, therefore, reduces distortion in
reporting income due to inflation. Depreciation charged to
operations is based on historical cost and is significantly less
than if it were based on replacement value.
Other assets remained basically unchanged from 1997. The
$10.7 million increase in "costs in excess of net assets
20
<PAGE>
TIMKEN
December 31
1998 1997
(Thousands of dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Commercial paper $ 29,873 $ 71,566
Short-term debt 96,720 61,399
Accounts payable and other liabilities 221,823 253,033
Salaries, wages and benefits 106,999 134,390
Income taxes 17,289 22,953
Current portion of long-term debt 17,719 23,620
Total Current Liabilities 490,423 566,961
Non-Current Liabilities
Long-term debt 325,086 202,846
Accrued pension cost 149,366 103,061
Accrued postretirement benefits cost 390,804 389,749
Other non-current liabilities 38,271 31,857
Total Non-Current Liabilities 903,527 727,513
Shareholders' Equity
Class I and II Serial Preferred Stock without
par value: Authorized-10,000,000 shares each
class, none issued -0- -0-
Common stock without par value:
Authorized-200,000,000 shares
Issued (including shares in treasury)
63,082,626 shares
Stated capital 53,064 53,064
Other paid-in capital 261,156 273,873
Earnings invested in the business 818,794 749,033
Accumulated other comprehensive income (49,716) (38,026)
Treasury shares at cost
(1998-1,234,462 shares; 1997-202,627 shares) (27,217) (5,868)
Total Shareholders' Equity 1,056,081 1,032,076
Total Liabilities and Shareholders' Equity $ 2,450,031 $ 2,326,550
See accompanying Notes to Consolidated Financial Statements on pages 25
through 33.
of acquired businesses" relates directly to recent business
acquisitions.
Accrued pension liabilities were higher at December 31, 1998,
as required company contributions into its pension funds were lower.
The 30.8% debt-to-total-capital ratio was higher than the 25.8%
at year-end 1997. Debt increased by $110 million, from
$359.4 million at year-end 1997 to $469.4 million at
December 31, 1998. The increase in debt was utilized primarily to
fund new acquisitions and to purchase shares under the 1996 and 1998
common stock purchase plans.
In 1998, the company issued $137 million of medium-term notes
with effective interest rates between 6.20% and 6.92%, maturing from
January 15, 2008, to May 8, 2028. The company completed its
$250 million debt registration filed in 1990 with the Securities and
Exchange Commission (SEC). Another shelf registration for
$300 million of debt securities was filed in the first quarter of
1998 and declared effective by the SEC in April.
21
<PAGE>
Consolidated Statement of Cash Flows
Year Ended December 31
1998 1997 1996
(Thousands of dollars)
CASH PROVIDED (USED)
Operating Activities
Net income $ 114,537 $ 171,419 $ 138,937
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 139,833 134,431 126,457
Deferred income tax provision (credit) 6,935 (1,564) 23,216
Common stock issued in lieu of cash to
benefit plans 46,396 20,452 4,862
Changes in operating assets and
liabilities:
Accounts receivable 13,037 (48,584) (18,348)
Inventories 2,478 (25,758) (24,916)
Other assets (5,046) (4,298) (482)
Accounts payable and accrued
expenses (27,223) 66,357 (63,100)
Foreign currency translation
(gain) loss 919 (472) (215)
Net Cash Provided by Operating
Activities 291,866 311,983 186,411
Investing Activities
Purchases of property, plant and
equipment-net (237,835) (233,392) (150,728)
Acquisitions (41,667) (78,739) (85,459)
Net Cash Used by Investing
Activities (279,502) (312,131) (236,187)
Financing Activities
Cash dividends paid to shareholders (44,776) (38,714) (30,244)
Purchases of treasury shares (80,462) (18,083) (13,786)
Proceeds from issuance of long-term
debt 139,666 60,453 45,000
Payments on long-term debt (23,333) (30,217) (288)
Short-term debt activity-net (12,918) 32,485 47,461
Net Cash Provided (Used) by
Financing Activities (21,823) 5,924 48,143
Effect of exchange rate changes on cash (45) (1,294) (287)
Increase (Decrease) In Cash and
Cash Equivalents (9,504) 4,482 (1,920)
Cash and cash equivalents at beginning
of year 9,824 5,342 7,262
Cash and Cash Equivalents at
End of Year $ 320 $ 9,824 $ 5,342
See accompanying Notes to Consolidated Financial Statements on pages 25
through 33.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF CASH FLOWS
1998 compared to 1997
Net cash provided by operating activities in 1998 was
$291.9 million, the second highest in company history, compared to
the record $312 million in 1997. The cash generated from income in
1998 was more than sufficient to cover working capital, pay
dividends, pay interest and fund purchases of property, plant and
equipment. Accounts receivable decreased slightly and generated
$13 million of cash. Inventories decreased by $2.5 million during
1998 compared to a $25.8 million increase in 1997. Cash decreased
as a result of a $27.2 million reduction in accounts payable and
accrued expenses that was related primarily to the lower level of
activity during the last half of the year.
"Purchases of property, plant and equipment-net" during the
twelve months ended December 31, 1998, was $237.8 million compared
to $233.4 million one year earlier. The company also invested
$41.7 million in new acquisitions compared to $78.7 million in 1997.
The company continues to invest in activities consistent with its
strategies to achieve industry leadership positions. Further
capital investments in technologies within plants throughout the
world and new acquisitions provide the opportunity to improve
competitiveness and meet the needs of the company's growing base of
customers. The company obtained funds during the year through the
issuance of debt as cash was needed to finance new acquisitions, and
to repurchase shares of the company's stock under the 1996 and 1998
common stock purchase plans. The company completed the purchase of
2 million shares authorized under the 1996 common stock purchase
plan and acquired 1.8 million of the 4 million shares authorized
under the 1998 plan. The company expects that cash generated from
operating activities during 1999 will be sufficient to cover working
capital, pay dividends, fund debt service requirements and fund
currently planned capital expenditures. Any further cash needs that
exceed cash generated from operations, such as those that may be
required for potential future acquisitions, could be met by short-
term borrowing and issuance of medium-term notes.
1997 compared to 1996
Net cash provided by operating activities was $312 million in
1997, compared to $186.4 million in 1996. The cash generated from
income in 1997 was more than sufficient to cover the additional cash
required for working capital. Accounts
22
<PAGE>
TIMKEN
receivable and inventories increased during 1997 by $48.6 million
and $25.8 million, respectively, primarily as a result of higher
sales and production activity. The $66.4 million cash provided by
higher accounts payable and accrued expenses also related primarily
to the higher activity level and recent acquisitions. In 1996,
the $63.1 million cash outflow resulted primarily from the
contribution of additional funds to the company's pension plans.
"Purchases of property, plant and equipment-net" was $233.4 million
compared to $150.7 million in 1996. The company also invested
$78.7 million in new acquisitions compared to $85.5 million in 1996.
Debt increased in 1997. Cash was needed to fund additional
investments in property, plant and equipment, finance acquisitions
and to buy back shares of the company's stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OTHER INFORMATION
Based on the Brazilian three-year cumulative inflation rate
being below 100% and the company's evaluation of the Brazilian
economy, the company began in January 1998 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.
At the present time, the company does not believe the devaluation of
the Brazilian real that occurred in January 1999 will have a
significant impact on the company's results of operations for the year.
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 Romanian subsidiary, acquired in December
1997, is considered to be operating in a highly inflationary economy;
therefore, foreign currency gains and losses resulting from
transactions and the translation of financial statements are included
in the results of operations.
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. Current project plans call for Timken to have all
of its critical non-IT manufacturing and personal end-user systems
year 2000 ready and implemented in the second quarter of 1999.
Testing on all systems will continue throughout 1999. Although the
company plans to meet these projected completion dates, 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 December 1998, the
company spent $9.3 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 is making concerted efforts to understand
the year 2000 status of its customers and third parties including,
without limitation, 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. These
efforts are to minimize any potential year 2000 compliance impact;
however, it is not possible to guarantee 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's business, financial condition or results of operations or
involve safety risk.
The company's earnings are affected by changes in short-term
interest rates related to three separate funding sources. These
sources are commercial paper issued in the United States, floating
rate tax-exempt U.S. municipal bonds with a weekly reset mode and
short-term bank borrowing at international subsidiaries. If the
market rates for short-term borrowings increased by 1% around the
globe, the impact would be an interest expense increase of
$1.7 million with the corresponding decrease of income before taxes
of the same amount. This amount was determined by considering the
impact of hypothetical interest rates on the company's borrowing
cost, year-end debt balances by category and an estimated impact on
the tax-exempt municipal bonds' interest rates.
The company's earnings are also affected by fluctuations in the
value of the U.S. dollar as compared to foreign currencies,
predominantly in European countries. The greatest risk relates to
product shipped between the company's European operations and the
United States. Foreign currency forward contracts and options are
used to hedge these intercompany transactions. In addition, hedges
are used to cover third party purchases of product and equipment. As
of December 31, 1998, there were $21.6 million of hedges in place. A
uniform weakening of the dollar of 10% against all currencies would
result in a shortfall of $1.6 million on these hedges. In addition to
the direct impact on the hedged amounts, changes in exchange rates also
affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive.
The company continues to protect the environment and comply
with environmental protection laws. The company has invested in
pollution control equipment and updated plant operational practices.
In 1998, the company received the Governor's Award for waste
reduction from the state of North Carolina. This makes the third
such state award the company has received for pollution prevention
in the past two years. The company believes it has established
adequate reserves to cover its environmental expenses and has a well-
established environmental compliance audit program, which includes a
proactive approach to bringing its domestic and international units
to higher standards of environmental performance. This program
measures performance against local laws as well as to standards that
have been established for all units worldwide.
It is difficult to assess the possible effect of compliance with
future requirements that differ from existing ones. As previously
reported, the company is unsure of the future financial impact to
the company that could result from the United States Environmental
Protection Agency's (EPA's) final rules to tighten the National
Ambient Air Quality Standards for fine particulate and ozone.
23
<PAGE>
Consolidated Statement of Shareholders' Equity
<TABLE>
Common Stock Earnings Accumulated
Other Invested Other
Stated Paid-In in the Comprehensive Treasury
Total Capital Capital Business Income Stock
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Balance at January 1, 1996 $ 821,178 $53,064 $264,567 $517,802 $ (14,079) $ (176)
Net income 138,937 138,937
Foreign currency translation
adjustments (net of income
tax of $958) 1,280 1,280
Total comprehensive income 140,217
Dividends-$0.60 per share (37,678) (37,678)
Issuance of 341,788 shares(1) 6,273 6,273
Purchase of 724,600 shares
for treasury (13,786) (13,786)
Issuance of 329,976 shares
from treasury(1) 6,024 6,024
Balance at December 31, 1996 922,228 53,064 270,840 619,061 (12,799) (7,938)
Year Ended December 31, 1997
Net income 171,419 171,419
Foreign currency translation
adjustments (net of income
tax of $3,401) (22,516) (22,516)
Minimum pension liability
adjustment (net of income
tax of $1,589) (2,711) (2,711)
Total comprehensive income 146,192
Dividends-$0.66 per share (41,447) (41,447)
Issuance of 32,224 shares(1) 3,033 3,033
Purchase of 697,100 shares
for treasury (18,083) (18,083)
Issuance of 897,985 shares
from treasury(1) 20,153 20,153
Balance at December 31, 1997 1,032,076 53,064 273,873 749,033 (38,026) (5,868)
Year Ended December 31, 1998
Net income 114,537 114,537
Foreign currency translation
adjustments (net of income
tax of $1,315) (8,096) (8,096)
Minimum pension liability
adjustment (net of income
tax of $2,106) (3,594) (3,594)
Total comprehensive income 102,847
Dividends-$0.72 per share (44,776) (44,776)
Purchase of 3,012,900 shares
for treasury (80,462) (80,462)
Issuance of 1,981,065 shares
from treasury(1) 46,393 (12,717) 59,113
Balance at December 31, 1998 $1,056,081 $53,064 $261,156 $818,794 $ (49,716) $(27,217)
</TABLE>
(1)Share activity was in conjunction with stock options and various benefit and
dividend reinvestment plans. In 1998, the majority of shares issued from
treasury related to the exercise of stock options. See accompanying Notes to
Consolidated Financial Statements on pages 25 through 33.
Management's Discussion and Analysis of Other Information
(Continued)
The company and certain of its U.S. subsidiaries have been
designated as potentially responsible parties (PRP's) by the United
States EPA for site investigation and remediation at certain sites
under the Comprehensive Environmental Response, Compensation and
Liability Act (Superfund). The claims for remediation have been
asserted against numerous other entities, which are believed to be
financially solvent and are expected to fulfill their proportionate
share of the obligation. Management believes any ultimate liability
with respect to all pending actions will not materially affect the
company's operations, cash flows or consolidated financial position.
The Timken Aerospace & Super Precision Bearings subsidiary has
two environmental projects at its manufacturing locations in New
Hampshire. The company has provided for the costs of these
projects, which to date have been $3.7 million. A portion of these
costs is being recovered from a former owner of the property.
Future operating and maintenance costs are expected to be
$1.5 million.
The company continued work in 1998 on environmental projects at
its locations in Canton and Columbus, Ohio. Costs for these two
projects are estimated at about $2.1 million. Remediation system
upgrades became operational in August 1998 at the Columbus, Ohio,
plant.
24
<PAGE>
Notes to Consolidated Financial Statements TIMKEN
1. Significant Accounting Policies
Principles of Consolidation: The consolidated financial
statements include the accounts and operations of the
company and its subsidiaries. All significant intercompany
accounts and transactions are eliminated upon consolidation.
Cash Equivalents: The company considers all highly liquid
investments with a maturity of three months or less when
purchased to be cash equivalents.
Inventories: Inventories are valued at the lower of cost or
market, principally by the last-in, first-out (LIFO) method.
If all inventories had been valued at current costs,
inventories would have been $167,466,000 and $162,709,000
greater at December 31, 1998 and 1997, respectively.
Property, Plant and Equipment: Property, plant and
equipment is valued at cost less accumulated depreciation.
Provision for depreciation is computed principally by the
straight-line method based upon the estimated useful lives
of the assets. The useful lives are approximately 30 years
for buildings, 5 to 7 years for computer software and 3 to
20 years for machinery and equipment.
Costs in Excess of Net Assets of Acquired Businesses: Costs
in excess of net assets of acquired businesses (goodwill)
are amortized on the straight-line method over 25 years for
businesses acquired after 1991 and over 40 years for those
acquired before 1991. The carrying value of goodwill is
reviewed on a quarterly basis for recoverability based on
the undiscounted cash flows of the businesses acquired over
the remaining amortization period. Should the review
indicate that goodwill is not recoverable, the company's
carrying value of the goodwill would be reduced by the
estimated shortfall of the cash flows. In addition, the
company assesses long-lived assets for impairment under
Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of."
Under those rules, goodwill associated with assets acquired
in a purchase business combination is included in impairment
evaluations when events or circumstances exist that indicate
the carrying amount of those assets may not be recoverable.
No reduction of goodwill for impairment was necessary in
1998 or in previous years.
Income Taxes: Deferred income taxes are provided for the
temporary differences between the financial reporting basis
and tax basis of the company's assets and liabilities.
The company plans to continue to finance expansion of its
operations outside the United States by reinvesting
undistributed earnings of its non-U.S. subsidiaries. The
amount of undistributed earnings that is considered to be
indefinitely reinvested for this purpose was approximately
$68,000,000 at December 31, 1998. Accordingly, U.S. income
taxes have not been provided on such earnings. While the
amount of any U.S. income taxes on these reinvested earnings
- - if distributed in the future - is not presently
determinable, it is anticipated that they would be reduced
substantially by the utilization of tax credits or
deductions. Such distributions would be subject to
withholding taxes.
Use of Estimates: The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. These estimates and assumptions are
reviewed and updated regularly to reflect recent experience.
Foreign Currency Translation: Assets and liabilities of
subsidiaries, other than those located in highly
inflationary countries, 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 year. The 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 subsidiaries in
highly inflationary countries are included in results of
operations. The company recorded a foreign currency
exchange loss of $1,332,000 in 1998, gain of $731,000 in
1997 and loss of $1,358,000 in 1996.
Comprehensive Income: Accumulated other comprehensive
income at December 31, 1998, consists of $43,411,000
relating to foreign currency translation adjustments and
$6,305,000 relating to minimum pension liability adjustments
compared to $35,315,000 and $2,711,000, respectively, at
December 31, 1997. Accumulated other comprehensive income
in 1996 consisted entirely of foreign currency translation
adjustments.
Earnings Per Share: Earnings per share are computed by
dividing net income by the weighted-average number of common
shares outstanding during the year. Earnings per share -
assuming dilution are computed by dividing net income by the
weighted-average number of common shares outstanding
adjusted for the dilutive impact of potential common shares
for options.
Derivative Instruments: In June 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in the year
2000. Because of the company's minimal use of derivatives,
management anticipates that the adoption of the new
Statement will not have a significant effect on earnings or
the financial position of the company.
Reclassifications: Certain amounts reported in the 1997
financial statements have been reclassified to conform to
the 1998 presentation.
25
<PAGE>
Notes to Consolidated Financial Statements
2. Acquisitions
During 1998, the company made the following acquisitions:
* May 1998 - Bearing Repair Specialists, an industrial bearing repair
business in South Bend, Indiana, that reconditions or modifies a wide
variety of bearing types for industrial customers in the United States
and Canada.
* December 1998 - Desford Steel Tubes Ltd. of Leicester, England, a
manufacturer of seamless mechanical tubing of the consistent quality
necessary for bearing, automotive, off-highway and defense applications.
In 1997, the company completed the acquisition of Handpiece
Headquarters, Inc. and the aerospace bearing operations of
the Torrington Company Limited. These operate as subsidiaries
under Timken Aerospace & Super Precision Bearings. In
February 1997, the company purchased a third company, Gnutti
Carlo S.p.A., a manufacturer of medium-sized industrial
bearings. Also, the company acquired in December 1997 a 70%
interest in Rulmenti Grei S.A. to form Timken Romania,
which produces bearings used in industrial applications.
During 1996, the company completed the acquisitions of three
companies (Ohio Alloy Steels, Inc., Houghton & Richards,
Inc., and Sanderson Kayser Ltd.) that service, finish and
distribute tool steel and operate as subsidiaries of Timken
Latrobe Steel. In April 1996, the company purchased a
fourth company, FLT Prema Milmet S.A., a manufacturer of
automotive, agricultural and industrial machinery bearings.
Also, the company joined with Yantai Bearing Factory to form
the Yantai Timken Company Limited joint venture in March
1996. The company holds a 60% interest in the joint
venture, which provides tapered roller bearings to the
Chinese automotive and agricultural markets.
The total cost of these acquisitions amounted to $41,667,000
in 1998; $78,739,000 in 1997; and $85,459,000 in 1996. A
portion of the purchase price has been allocated to the
assets and liabilities acquired based on their fair values
at the dates of acquisition. The fair value of the assets
was $50,115,000 in 1998; $85,619,000 in 1997; and $68,709,000
in 1996; the fair value of liabilities assumed was
$13,026,000 in 1998; $20,075,000 in 1997; and $11,843,000 in
1996. The purchase allocation for Desford Steel Tubes is
preliminary, subject to obtaining asset appraisals. The
excess of the purchase price over the fair value of the net
assets acquired has been allocated to goodwill. The
finalization of the purchase price allocation for Timken
Romania in 1998 caused goodwill to increase by $11,020,000.
All of the acquisitions were accounted for as purchases.
The company's consolidated financial statements include the
results of operations of the acquired businesses for the
period subsequent to the effective date of these
acquisitions. Pro forma results of operations have not been
presented because the effect of these acquisitions was not
significant.
3. Earnings Per Share
The following table sets forth the reconciliation of the
numerator and the denominator of earnings per share and
earnings per share - assuming dilution for the years ended
December 31:
1998 1997 1996
(Thousands of dollars, except per
share data)
Numerator:
Net income for earnings per share and
earnings per share - assuming
dilution - income available to
common shareholders $ 114,537 $ 171,419 $ 138,937
Denominator:
Denominator for earnings per share -
weighted-average shares 62,244,097 62,786,387 62,776,132
Effect of dilutive securities:
Stock options and awards - based on
the treasury stock method 565,672 1,017,747 733,570
Denominator for earnings per share -
assuming dilution - adjusted
weighted-average shares 62,809,769 63,804,134 63,509,702
Earnings per share $ 1.84 $ 2.73 $ 2.21
Earnings per share - assuming dilution $ 1.82 $ 2.69 $ 2.19
In 1998, certain stock options and awards were excluded from
the computation of earnings per share-assuming dilution
since their inclusion would have an antidilutive effect.
26
<PAGE>
TIMKEN
4. Financing Arrangements
Long-term debt at December 31, 1998 and 1997 was as follows:
1998 1997
(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% $267,000 $153,000
Variable-rate State of Ohio Air Quality and Water
Development Revenue Refunding Bonds, maturing on
June 1, 2001 (4.15% at December 31, 1998) 21,700 21,700
7.50% State of Ohio Pollution Control Revenue Refunding
Bonds, maturing on January 1, 2002 17,000 17,000
Variable-rate State of Ohio Water Development Revenue
Refunding Bonds, maturing May 1, 2007 (4.15% at
December 31, 1998) 8,000 8,000
Variable-rate State of Ohio Water Development Authority
Solid Waste Revenue Bonds, maturing on July 2, 2032
(3.80% at December 31, 1998) 24,000 24,000
Other 5,105 2,766
342,805 226,466
Less current maturities 17,719 23,620
$325,086 $202,846
The aggregate maturities of long-term debt for the five
years subsequent to December 31, 1998, are as follows:
1999-$17,719,000; 2000-$872,000; 2001-$22,556,000;
2002-$52,201,000; and 2003-$179,000.
Interest paid in 1998, 1997 and 1996 approximated
$28,000,000, $24,000,000 and $18,500,000, respectively.
This differs from interest expense due to timing of payments
and interest capitalized of $4,800,000 in 1998; $2,200,000
in 1997; and $1,800,000 in 1996 as a part of major capital
additions. The weighted-average interest rate on commercial
paper borrowings during the year was 5.6% in 1998, 5.7% in
1997 and 5.5% in 1996. The weighted-average interest rate
on short-term debt during the year was 7.4% in 1998, 6.6% in
1997 and 6.3% in 1996.
At December 31, 1998, the company had available $270,000,000
through an unsecured $300,000,000 revolving or competitive
bid credit agreement with a group of banks. The agreement,
which expires in June 2003, bears interest based upon any
one of four rates at the company's option-adjusted prime,
Eurodollar, competitive bid Eurodollar or the competitive
bid absolute rate. Also, the company has a shelf
registration filed with the Securities and Exchange
Commission which, as of December 31, 1998, enables the
company to issue up to an additional $200,000,000 of long-
term debt securities in the public markets.
The company and its subsidiaries lease a variety of real
property and equipment. Rent expense under operating leases
amounted to $16,934,000, $16,689,000 and $14,580,000 in
1998, 1997 and 1996, respectively. At December 31, 1998,
future minimum lease payments for noncancelable operating
leases totaled $38,733,000 and are payable as follows:
1999-$11,898,000; 2000-$8,412,000; 2001-$5,593,000;
2002-$4,411,000; 2003-$3,855,000; and $4,564,000,
thereafter.
5. Financial Instruments
As a result of the company's worldwide operating activities,
it is exposed to changes in foreign currency exchange rates
which affect its results of operations and financial
condition. The company and certain subsidiaries enter into
forward exchange contracts to manage exposure to currency
rate fluctuations primarily related to the purchases of
inventory and equipment. The purpose of these foreign
currency hedging activities is to minimize the effect of
exchange rate fluctuations on business decisions and the
resulting uncertainty on future financial results. At
December 31, 1998 and 1997, the company had forward exchange
contracts, all having maturities of less than one year, in
amounts of $21,613,000 and $20,596,000, respectively, which
approximates their fair value. The forward exchange
contracts were primarily entered into by the company's
German, South African and Australian subsidiaries in order
to forward hedge U.S. dollar purchases. The realized and
unrealized gains and losses on these contracts are deferred
and included in inventory or property, plant and equipment
depending on the transaction. These deferred gains and
losses are recognized in earnings when the future sales
occur or through depreciation expense.
The carrying value of cash and cash equivalents, accounts
receivable, commercial paper, short-term borrowings and
accounts payable are a reasonable estimate of their fair
value due to the short-term nature of these instruments.
The fair value of the company's fixed rate debt, based on
discounted cash flow analysis, was $293,000,000 and
$177,000,000 at December 31, 1998 and 1997, respectively.
The carrying value of this debt was $284,000,000 and
$170,000,000.
27
<PAGE>
Notes to Consolidated Financial Statements
6. Retirement and Postretirement Benefit Plans
The company sponsors defined contribution retirement and
savings plans covering substantially all associates in the
United States and certain salaried associates at non-U.S.
locations. The company contributes Timken Company common
stock to certain plans based on formulas established in the
respective plan agreements. At December 31, 1998, the plans
had net assets of $504,661,000, including 8,984,392 shares
of Timken Company common stock. Company contributions to
the plans, including performance sharing, amounted to
$16,380,000 in 1998; $16,245,000 in 1997; and $14,761,000 in
1996. The company paid dividends totaling $5,519,000 in
1998; $4,366,000 in 1997; and $3,963,000 in 1996 to plan
participants holding common shares.
The company and its subsidiaries sponsor several unfunded
postretirement plans that provide health care and life
insurance benefits for eligible retirees and dependents.
Depending on retirement date and associate classification,
certain health care plans contain contributions and cost-
sharing features such as deductibles and coinsurance. The
remaining health care plans and the life insurance plans are
noncontributory.
The company and its subsidiaries sponsor a number of defined
benefit pension plans, which cover many of their associates
except those at certain locations who are covered by
government plans.
The following tables set forth the change in benefit
obligation, change in plan assets, funded status and amounts
recognized in the consolidated balance sheet of the defined
benefit pension and postretirement benefits as of
December 31, 1998 and 1997:
Defined Benefit
Pension Plans Postretirement Plans
1998 1997 1998 1997
(Thousands of dollars)
Change in benefit obligation
Benefit obligation at
beginning of year $1,296,866 $1,145,852 $ 414,570 $ 397,957
Service cost 32,441 26,144 4,562 4,116
Interest cost 95,520 88,683 30,188 28,691
Amendments 20,140 42,468 1,772 -0-
Actuarial losses 135,029 72,922 41,786 11,224
Associate contributions 1,517 1,251 -0- -0-
International plan exchange
rate change 84 (1,966) 127 120
Benefits paid (85,486) (78,488) (29,620) (27,538)
Benefit obligation at end
of year $1,496,111 $1,296,866 $ 463,385 $ 414,570
Change in plan assets (1)
Fair value of plan assets
at beginning of year $1,207,847 $1,099,576
Actual return on plan assets 178,288 178,580
Associate contributions 1,517 1,251
Company contributions 11,751 8,388
International plan exchange
rate change 241 (1,460)
Benefits paid (85,486) (78,488)
Fair value of plan assets at
end of year $1,314,158 $1,207,847
Funded status
Projected benefit obligation
in excess of plan assets $ (181,953) $ (89,019) $(463,385) $(414,570)
Unrecognized net actuarial
(gain) loss (54,013) (116,631) 83,791 41,460
Unrecognized net asset at
transition dates, net of
amortization (9,244) (12,545) -0- -0-
Unrecognized prior service
cost (benefit) 104,433 111,695 (40,080) (45,506)
Accrued benefit cost $ (140,777) $(106,500) $(419,674) $(418,616)
Amounts recognized in the
consolidated balance sheet
Accrued benefit liability $(151,777) $(111,900) $(419,674) $(418,616)
Intangible asset 1,000 1,100 -0- -0-
Minimum pension liability
included in accumulated
other comprehensive income 10,000 4,300 -0- -0-
Net amount recognized $(140,777) $(106,500) $(419,674) $(418,616)
(1) Plans' assets are primarily invested in listed stocks and bonds and
cash equivalents.
28
<PAGE>
TIMKEN
Amounts applicable to the company's pension plans with
accumulated benefit obligations in excess of plan assets are
as follows:
1998 1997
(Thousands of dollars)
Projected benefit obligation $710,880 $616,862
Accumulated benefit obligation 652,095 568,536
Fair value of plan assets 567,753 522,030
The following table summarizes the assumptions used by the
consulting actuary and the related benefit cost information:
Pension Benefits Postretirement Benefits
1998 1997 1996 1998 1997 1996
Assumptions
Discount rate 7.0% 7.25% 7.5% 7.0% 7.25% 7.5%
Future compensation
assumption 3% to 4% 3% to 4% 3% to 4%
Expected long-term
return on plan
assets 9.25% 9.25% 9.25%
Components of net
periodic benefit cost
(Thousands of dollars)
Service cost $32,441 $26,144 $27,319 $ 4,562 $ 4,116 $ 4,332
Interest cost 95,520 88,683 84,195 30,188 28,691 28,299
Expected return on
plan assets (95,083) (91,384) (81,445) -0- -0- -0-
Amortization of prior
service cost 16,033 13,019 10,693 (4,489) (4,547) (4,610)
Recognized net
actuarial loss 1,646 764 2,804 544 -0- -0-
Amortization of
transition asset (2,143) (2,283) (2,256) -0- -0- -0-
Net periodic benefit
cost $48,414 $34,943 $41,310 $30,805 $28,260 $28,021
For measurement purposes, the company assumed an annual rate
of increase in the per capita cost of health care benefits
(health care cost trend rate) of 8% declining gradually to
5% in 2004 and thereafter for pre-age 65 benefits, and 6%
declining gradually to 5% in 2000 and thereafter for
post-age 65 benefits.
The assumed health care cost trend rate has a significant
effect on the amounts reported. A one-percentage-point
increase in the assumed health care cost trend rate would
increase the 1998 total service and interest cost components
by $2,409,000 and would increase the postretirement benefit
obligation by $31,371,000. A one-percentage-point decrease
would provide corresponding reductions of $2,418,000 and
$31,010,000, respectively.
7. Research and Development
Expenditures committed to research and development amounted
to approximately $48,000,000 in 1998; $43,000,000 in 1997;
and $41,000,000 in 1996. Such expenditures may fluctuate
from year to year depending on special projects and needs.
8. Contingencies
The company and certain of its U.S. subsidiaries have been
designated as potentially responsible parties (PRPs) by the
United States Environmental Protection Agency for site
investigation and remediation under the Comprehensive
Environmental Response, Compensation and Liability Act
(Superfund) with respect to certain sites. The claims for
remediation have been asserted against numerous other
entities which are believed to be financially solvent and
are expected to fulfill their proportionate share of the
obligation. In addition, the company is subject to various
lawsuits, claims and proceedings which arise in the ordinary
course of its business. The company accrues costs
associated with environmental and legal matters when they
become probable and reasonably estimable. Environmental
costs include compensation and related benefit costs
associated with associates expected to devote significant
amounts of time to the remediation effort and post-
monitoring costs. Accruals are established based on the
estimated undiscounted cash flows to settle the obligations
and are not reduced by any potential recoveries from
insurance or other indemnification claims. Management
believes that any ultimate liability with respect to these
actions, in excess of amounts provided, will not materially
affect the company's operations, cash flows or consolidated
financial position.
29
<PAGE>
Notes to Consolidated Financial Statements
9. Stock Compensation Plans
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, because 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 recognized.
Under the company's stock option plans, shares of common
stock have been made available to grant, at the discretion of
the Compensation Committee of the Board of Directors, to
officers and key associates in the form of stock options,
stock appreciation rights, restricted shares and deferred
shares. In addition, shares can be awarded to directors not
employed by the company. The options have a ten-year term
and vest in 25% increments annually beginning twelve months
after the date of grant.
Pro forma information regarding net income and earnings per
share is required by Financial Accounting Standard (FAS) No.
123, and has been determined as if the company had accounted
for its associate stock options under the fair value method
of FAS No. 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option
pricing model. For purposes of pro forma disclosures, the
estimated fair value of the options granted under the plan
is amortized to expense over the options' vesting periods.
The pro forma information indicates a decrease in net income
of $3,787,000 in 1998; $2,901,000 in 1997; and $1,131,000 in
1996. Under FAS No. 123, the first year to recognize pro
forma stock-based compensation expense was 1995. Based on
the estimated life of the grants, 1997 was the first year to
demonstrate the full effect on pro forma net income of
amortizing compensation expense related to stock options.
Following is the pro forma information and the related
assumptions under the Black-Scholes method:
1998 1997 1996
(Thousands of dollars except per share data)
Pro forma net income $110,750 $168,518 $137,806
Earnings per share $1.78 $2.68 $2.20
Earnings per share - assuming dilution $1.76 $2.64 $2.17
Assumptions:
Risk-free interest rate 5.74% 6.90% 6.52%
Dividend yield 2.78% 3.13% 3.33%
Expected stock volatility 0.271 0.235 0.219
Expected life - years 8 8 8
A summary of activity related to stock options for the
above plans is as follows for the years ended December 31:
<TABLE>
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding
beginning of year 3,180,136 $20.15 3,091,994 $17.80 2,913,416 $16.52
Granted 861,900 33.35 762,200 26.44 654,000 22.06
Exercised (510,635) 17.71 (653,608) 16.41 (437,872) 15.56
Canceled or expired (5,100) 21.47 (20,450) 18.77 (37,550) 18.12
Outstanding - end
of year 3,526,301 $23.73 3,180,136 $20.15 3,091,994 $17.80
Options execisable 1,710,031 1,617,355 1,782,044
Reserved for future
use 1,654,222 2,396,441 3,125,658
Exercise prices for options outstanding as of December 31,
1998, range from $12.88 to $33.75 and the weighted-
average remaining contractual life of these options is 7
years. The estimated weighted-average fair values of
stock options granted during 1998, 1997 and 1996 were
$10.19, $7.58 and $5.79, respectively. At December 31,
1998, a total of 218,573 restricted stock rights,
restricted shares or deferred shares have been awarded
under the above plans and are not vested. The company
distributed 78,831, 71,188 and 41,006 common shares in
1998, 1997 and 1996, respectively, as a result of awards
of restricted stock rights, restricted shares and
deferred shares.
30
<PAGE>
TIMKEN
10. Income Taxes
The provision (credit) for income taxes consisted of the following:
1998 1997 1996
Current Deferred Current Deferred Current Deferred
(Thousands of
dollars)
United States:
Federal $50,056 $ 5,173 $76,866 $(4,627) $47,120 $20,596
State and local 6,212 (1,384) 10,248 (294) 6,271 2,573
Foreign 7,610 3,146 9,623 3,357 9,715 47
$63,878 $ 6,935 $96,737 $(1,564) $63,106 $23,216
The company made income tax payments of approximately
$62,190,000 in 1998; $93,486,000 in 1997; and $54,100,000
in 1996. Taxes paid differ from current taxes provided,
primarily due to the timing of payments.
The effect of temporary differences giving rise to
deferred tax assets and liabilities at December 31, 1998
and 1997 was as follows:
1998 1997
(Thousands of dollars)
Deferred tax assets:
Accrued postretirement benefits cost $ 156,371 $155,888
Accrued pension cost 47,185 39,271
Benefit accruals 19,634 21,126
Foreign tax loss carryforwards 14,367 12,702
Other-net 25,375 19,932
Valuation allowance (14,367) (12,702)
248,565 236,217
Deferred tax liability-depreciation (185,868) (167,541)
Net deferred tax asset $ 62,697 $ 68,676
Following is the reconciliation between the provision for
income taxes and the amount computed by applying the
statutory U.S. federal income tax rate of 35% to income
before income taxes:
1998 1997 1996
(Thousands of dollars)
Income tax at the statutory federal rate $64,873 $93,307 $78,841
Adjustments:
State and local income taxes, net of
federal tax benefit 3,138 6,470 5,749
Losses without current tax benefits 2,307 -0- -0-
Research tax credit claims for prior years -0- (4,000) -0-
Tax on foreign remittances -0- -0- 944
Other items 495 (604) 788
Provision for income taxes $70,813 $95,173 $86,322
Effective income tax rate 38% 36% 38%
31
<PAGE>
Notes to Consolidated Financial Statements
11. Segment Information
Effective January 1, 1998, the company adopted FASB
Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131
establishes standards for the way public business
enterprises report information about operating segments
in annual financial statements and requires that those
enterprises report selected information about operating
segments in interim financial reports. Statement 131
also establishes standards for related disclosures about
products and services, geographic areas, and major
customers. The adoption of Statement 131 did not affect
results of operations or financial position, but did
affect the disclosure of segment information.
Description of Types of Products and Services From Which
Each Reportable Segment Derives its Revenues
The company has two reportable segments: bearing and
steel products. The company's Bearings business sells
directly to customers in the automotive, railroad,
aerospace, industrial and service replacement markets.
The company's tapered roller bearings are used in a wide
variety of products including passenger cars, trucks,
railroad cars and locomotives, aircraft wheels, machine
tools, rolling mills and farm and construction equipment.
Super precision bearings are used in aircraft, missile
guidance systems, computer peripherals and medical
instruments. Other bearing products manufactured by the
company include cylindrical, spherical, straight and ball
bearings for industrial markets.
Steel products include steels of low and intermediate alloy,
vacuum-processed alloys, tool steel and some carbon
grades. These are available in a wide range of solid and
tubular sections with a variety of finishes. The company
also manufactures custom-made steel products including
precision steel components. A significant portion of the
company's steel is consumed in its bearing operations.
In addition, sales are made to other anti-friction
bearing companies and to aircraft, automotive, forging,
tooling, oil and gas drilling industries and steel
service centers. Tool steels increasingly are being sold
through the company's distribution facilities.
Measurement of Segment Profit or Loss and Segment Assets
The company evaluates performance and allocates resources
based on return on capital and profitable growth.
Specifically, the company measures segment profit or loss
based on earnings before interest and income taxes
(EBIT). The accounting policies of the reportable
segments are the same as those described in the summary
of significant accounting policies. Intersegment sales
and transfers are recorded at values based on market
prices, which create intercompany profit on intersegment
sales or transfers.
Factors Management Used to Identify the Enterprise's
Reportable Segments
The company's reportable segments are business units that
offer different products. Each reportable segment is
managed separately because each manufactures and
distributes distinct products with different production
processes.
Geographic Financial United Other
Information States Europe Countries Consolidated
1998
Net sales $2,118,529 $373,877 $ 187,435 $ 2,679,841
Income before income taxes 172,388 10,757 2,205 185,350
Non-current assets 1,319,043 254,056 26,595 1,599,694
1997
Net sales $2,077,822 $339,630 $ 200,110 $ 2,617,562
Income before income taxes 229,612 15,916 21,064 266,592
Non-current assets 1,208,851 223,801 38,727 1,471,379
1996
Net sales $1,885,347 $315,474 $ 193,936 $ 2,394,757
Income before income taxes 192,250 14,428 18,581 225,259
Non-current assets 1,099,901 142,181 35,623 1,277,705
32
<PAGE>
TIMKEN
Segment Financial Information 1998 1997 1996
(Thousands of dollars)
Bearings
Net sales to external customers $1,797,745 $1,718,876 $1,598,040
Depreciation and amortization 80,175 76,625 72,396
Interest expense (22,425) (16,880) (14,862)
Interest income 2,086 1,270 883
Earnings before interest and taxes 133,318 165,520 147,641
Assets employed at year-end 1,514,780 1,455,086 1,287,509
Capital expenditures 145,613 122,350 106,616
Steel
Net sales to external customers $ 882,096 $ 898,686 $ 796,717
Intersegment sales 200,911 204,295 185,677
Depreciation and amortization 59,658 57,806 54,061
Interest expense (7,714) (6,802) (5,538)
Interest income 4,537 2,200 2,472
Earnings before interest and taxes 73,825 121,203 92,257
Assets employed at year-end 935,251 871,464 783,829
Capital expenditures 113,008 107,582 49,309
Total
Net sales to external customers $2,679,841 $2,617,562 $2,394,757
Depreciation and amortization 139,833 134,431 126,457
Interest expense (30,139) (23,682) (20,400)
Interest income 6,623 3,470 3,355
Earnings before interest and taxes 207,143 286,723 239,898
Assets employed at year-end 2,450,031 2,326,550 2,071,338
Capital expenditures 258,621 229,932 155,925
Profit Before Taxes
Total EBIT for reportable segments $ 207,143 $ 286,723 $ 239,898
Interest expense (26,502) (21,432) (17,899)
Interest income 2,986 1,258 854
Intersegment adjustments 1,723 43 2,406
Income before income taxes $ 185,350 $ 266,592 $ 225,259
Report of Independent Auditors
To the Board of Directors and Shareholders of The Timken Company
We have audited the accompanying consolidated balance
sheets of The Timken Company and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows
for each of the three years in the period ended
December 31, 1998. These financial statements are the
responsibility of the company's management. Our
responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
consolidated financial position of The Timken Company and
subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Canton, Ohio
February 4, 1999
33
<PAGE>
SUMMARY OF OPERATIONS AND OTHER COMPARATIVE DATA
(Thousands of dollars, except per share data)
1998 1997 1996 1995
Statements of Income
Net sales:
Bearings $1,797,745 $1,718,876 $1,598,040 $1,524,728
Steel 882,096 898,686 796,717 705,776
Total net sales 2,679,841 2,617,562 2,394,757 2,230,504
Cost of products sold 2,098,186 2,005,374 1,828,394 1,723,463
Selling, administrative
and general expenses 356,672 332,419 319,458 304,046
Impairment and
restructuring charges -0- -0- -0- -0-
Operating income (loss) 224,983 279,769 246,905 202,995
Earnings before interest
and taxes (EBIT) 208,866 286,766 242,304 197,957
Interest expense 26,502 21,432 17,899 19,813
Income (loss) before
income taxes 185,350 266,592 225,259 180,174
Provisions for income
taxes (credit) 70,813 95,173 86,322 67,824
Income (loss) before
cumulative effect of
accounting changes 114,537 171,419 138,937 112,350
Net income (loss) $ 114,537 $ 171,419 $ 138,937 $ 112,350
Balance Sheets
Inventory $ 457,246 $ 445,853 $ 419,507 $ 367,889
Current assets 850,337 855,171 793,633 710,258
Working capital 359,914 275,607 265,685 247,895
Property, plant and
equipment (less
depreciation) 1,349,539 1,220,516 1,094,329 1,039,382
Total assets 2,450,031 2,326,550 2,071,338 1,925,925
Total debt 469,398 359,431 302,665 211,232
Total liabilities 1,393,950 1,294,474 1,149,110 1,104,747
Shareholders' equity $1,056,081 $1,032,076 $ 922,228 $ 821,178
Other Comparative Data
Net income (loss)/
Total assets 4.7% 7.4% 6.7% 5.8%
Net income (loss)/
Net sales 4.3% 6.5% 5.8% 5.0%
EBIT/Beginning invested
capital (1) 10.5% 16.1% 15.1% 12.6%
Inventory days (FIFO) 109.4 111.5 117.5 112.2
Net sales per
associate(2) $ 127.5 $ 130.5 $ 132.4 $ 134.2
Capital expenditures $ 258,621 $ 229,932 $ 155,925 $ 131,188
Depreciation and
amortization $ 139,833 $ 134,431 $ 126,457 $ 123,409
Capital expenditures/
Depreciation 192.5% 177.3% 127.0% 109.1%
Dividends per share $ 0.72 $ 0.66 $ 0.60 $ 0.555
Earnings per share(3) $ 1.84 $ 2.73 $ 2.21 $ 1.80
Earnings per share -
assuming dilution(3) $ 1.82 $ 2.69 $ 2.19 $ 1.78
Debt to total capital 30.8% 25.8% 24.7% 20.5%
Number of associates at
year-end 21,046 20,994 19,130 17,034
Number of
shareholders(4) 45,942 46,394 31,813 26,792
(1) EBIT/Beginning invested capital, a type of return on asset ratio, is used
internally to measure the company's performance. In broad terms, invested
capital is total assets minus non-interest-bearing current liabilities.
(2) Based on the average number of associates employed during the year.
(3) Based on the average number of shares outstanding during the year and
excludes the cumulative effect of accounting changes in 1993, which related
to the adoption of FAS No. 106, 109 and 112.
34
<PAGE>
TIMKEN
1994 1993 1992 1991 1990(5) 1989
$1,312,323 $1,153,987 $1,169,035 $1,128,972 $1,173,056 $1,042,122
618,028 554,774 473,275 518,453 527,955 490,840
1,930,351 1,708,761 1,642,310 1,647,425 1,701,011 1,532,962
1,514,098 1,369,711 1,300,744 1,315,290 1,287,534 1,158,941
283,727 276,928 299,305 300,274 287,971 252,024
-0- 48,000 -0- 41,000 -0- -0-
132,526 14,122 42,261 (9,139) 125,506 121,997
134,674 7,843 40,606 (16,724) 119,199 108,001
24,872 29,619 28,660 26,673 26,339 17,217
111,323 (20,919) 13,431 (41,950) 98,816 96,493
42,859 (3,250) 8,979 (6,263) 43,574 41,148
68,464 (17,669) 4,452 (35,687) 55,242 55,345
$ 68,464 $ (271,932) $ 4,452 $ (35,687) $ 55,242 $ 55,345
$ 332,304 $ 299,783 $ 310,947 $ 320,076 $ 379,543 $ 344,135
657,180 586,384 556,017 562,496 657,865 608,224
178,556 153,971 165,553 148,950 238,486 359,773
1,030,451 1,024,664 1,049,004 1,058,872 1,025,565 932,828
1,858,734 1,789,719 1,738,450 1,759,139 1,814,909 1,565,961
279,519 276,476 320,515 273,104 266,392 80,647
1,125,843 1,104,407 753,387 740,168 740,208 501,157
$ 732,891 $ 685,312 $ 985,063 $1,018,971 $1,074,701 $1,064,804
3.7% (15.2)% 0.3% (2.0)% 3.0% 3.5%
3.5% (15.9)% 0.3% (2.2)% 3.2% 3.6%
9.0% 0.5% 2.5% (1.0)% 7.9% 7.2%
118.0 122.5 137.8 139.9 162.8 167.2
$ 119.9 $ 104.5 $ 95.3 $ 90.0 $ 94.2 $ 86.9
$ 119,656 $ 92,940 $ 139,096 $ 144,678 $ 120,090 $ 91,536
$ 119,255 $ 118,403 $ 114,433 $ 109,252 $ 101,260 $ 91,070
102.6% 80.2% 124.4% 135.6% 120.4% 100.5%
$ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.49 $ 0.46
$ 1.11 $ (0.29) $ 0.07 $ (0.60) $ 0.92 $ 0.94
$ 1.10 $ (0.29) $ 0.07 $ (0.60) $ 0.92 $ 0.93
27.6% 28.7% 24.5% 21.1% 19.9% 7.0%
16,202 15,985 16,729 17,740 18,860 17,248
49,968 28,767 31,395 26,048 25,090 22,445
(4) Includes an estimated count of shareholders having common stock held for
their accounts by banks, brokers and trustees for benefit plans.
(5) Includes Timken Aerospace & Super Precision Bearings for seven months.
35
<PAGE>
APPENDIX TO EXHIBIT 13
On page 1 of the printed document, three bar charts were
shown that contain the following information:
(1) Net Sales ($ Millions)
1994 1,930
1995 2,230
1996 2,395
1997 2,618
1998 2,680
(2) Total Annual Return To Shareholders
1994 7.8%
1995 11.7%
1996 23.1%
1997 53.4%
1998 -43.5%
(3) Productivity (Net Sales / Total Compensation)
Index: 1994 = 100
1994 100%
1995 105%
1996 112%
1997 117%
1998 115%
On page 32 of the printed document, three pie charts were
shown that contain the following information:
(1) The Timken Company Net Sales to Customers
Bearings 67%
Steel 33%
(2) The Timken Company Net Sales by Geographic
Area
United States 79%
Europe 14%
Other 7%
(3) Steel Net Sales - Total
Customers 81%
Intersegment 19%
On page 34 of the printed document, two bar charts were
shown that contain the following information:
(1) Total Net Sales (Billions of dollars)
Bearings Steel
1989 1.042 0.491
1990 1.173 0.528
1991 1.129 0.518
1992 1.169 0.473
1993 1.154 0.555
1994 1.312 0.618
1995 1.525 0.706
1996 1.598 0.797
1997 1.719 0.899
1998 1.798 0.882
(2) Return on Net Sales (before cumulative effect of
accounting changes):
Operating
Income (Loss) Income(Loss)
1989 8.0% 3.6%
1990 7.4% 3.2%
1991 -.6% -2.2%
1992 2.6% .3%
1993 .8% -1.0%
1994 6.9% 3.5%
1995 9.1% 5.0%
1996 10.3% 5.8%
1997 10.7% 6.5%
1998 8.4% 4.3%
On page 35 of the printed document, two bar charts were
shown that contain the following information:
(1) Earnings* and Dividends per Share (*Assuming dilution
and before cumulative effect of accounting changes):
Earnings Dividends
1989 0.93 0.460
1990 0.92 0.490
1991 -0.60 0.500
1992 0.07 0.500
1993 -0.29 0.500
1994 1.10 0.500
1995 1.78 0.555
1996 2.19 0.600
1997 2.69 0.660
1998 1.82 0.720
(2) EBIT/Beginning Invested Capital
1989 7.2%
1990 7.9%
1991 -1.0%
1992 2.5%
1993 0.5%
1994 9.0%
1995 12.6%
1996 15.1%
1997 16.1%
1998 10.5%
</TABLE>
Exhibit 21. Subsidiaries of the Registrant
___________________________________________
The Timken Company has no parent company.
The active subsidiaries of the Company (all of which are included
in the consolidated financial statements of the Company and its
subsidiaries) are as follows:
Percentage of
voting securities
State or sovereign owned directly
power under laws or indirectly
Name of which organized by Company
__________________________________________________________________
Timken Aerospace & Super
Precision Bearings Delaware 100%
Timken Aerospace & Super
Precision Bearings-Europa B.V. Netherlands 100%
Timken Aerospace & Super
Precision Bearings-
Singapore Pte. Ltd. Singapore 100%
Timken Aerospace & Super
Precision Bearings-UK, Ltd. England 100%
Australian Timken Proprietary,
Limited Victoria, Australia 100%
Timken do Brasil
Comercio e Industria, Ltda. Sao Paulo, Brazil 100%
British Timken Limited England 100%
Canadian Timken, Limited Ontario, Canada 100%
Timken Communications Company Ohio 100%
Timken Desford Steel Limited England 100%
EDC, Inc. Ohio 100%
Timken Engineering and Research -
India Private Limited India 100%
Timken Espana, S.L. Spain 100%
Timken Europa GmbH Germany 100%
Timken Europe B.V. Netherlands 100%
Timken Finance Europe B.V. Netherlands 100%
Handpiece Headquarters Corp. Delaware 100%
Timken Italia, S.R.L. Italy 100%
Timken Latrobe Steel Pennsylvania 100%
Timken Latrobe Steel
Distribution Delaware 100%
Timken Latrobe Steel-Europe Ltd. England 100%
Timken de Mexico S.A. de C.V. Mexico 100%
MPB Export Corporation Delaware 100%
Nihon Timken K.K. Japan 100%
Timken Polska Sp.z.o.o. Poland 100%
Rail Bearing Service Corporation Virginia 100%
Timken Romania S.A. Romania 70%
The Timken Corporation Ohio 100%
The Timken Service & Sales Co. Ohio 100%
Timken Servicios Administrativos
S.A. de C.V. Mexico 100%
Timken Singapore Pte. Ltd. Singapore 100%
<PAGE>
Exhibit 21. Subsidiaries of the Registrant (cont).
_______________________________________________
Percentage of
voting securities
State or sovereign owned directly
power under laws or indirectly
Name of which organized by Company
__________________________________________________________________
Timken South Africa (Pty.) Ltd. South Africa 100%
Timken De Venezuela C.A. Venezuela 100%
Yantai Timken Company Limited China 60%
The Company also has a number of inactive subsidiaries which were
incorporated for name-holding purposes and a foreign sales
corporation subsidiary.
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference of our report dated February 4,
1999, with respect to the consolidated financial statements and schedule of
The Timken Company included in this Annual Report (Form 10-K) for the year
ended December 31, 1998, in the following Registration Statements and in
the related Prospectuses:
Registration Filing
Number Description of Registration Statement Date
2-97340 1985 Incentive Plan of The Timken Company - November 19, 1990
Post-effective Amendment No. 1 to Form S-8
333-02553 The Timken Company Long-Term Incentive April 16, 1996
Plan - Form S-8
333-17503 The Timken Company Dividend Reinvestment December 9, 1996
Plan - Form S-3
333-41155 OH&R Investment Plan - Form S-8 November 26, 1997
333-43847 The Timken Company International Stock January 7, 1998
Ownership Plan - Form S-8
333-45753 Rail Bearing Service Employee Savings February 6, 1998
Plan - Form S-8
333-45891 $300,000,000 Medium-Term Notes, Series April 23, 1998
A - Amendment No. 4 to Form S-3
333-62501 The Salaried Associates Retirement Savings August 31, 1998
Plan of Canadian Timken, Limited - Form S-8
333-62481 The Company Savings Plan for the Employees August 28, 1998
of Timken France - Form S-8
333-62483 The Timken Company - Latrobe Steel Company August 28, 1998
Savings and Investment Pension Plan - Form S-8
333-66911 Voluntary Investment Program for Hourly November 6, 1998
Employees of Latrobe Steel Company - Form S-8
333-66921 The Hourly Pension Investment Plan - Form S-8 November 6, 1998
333-66905 Voluntary Investment Pension Plan for Hourly November 6, 1998
Employees of The Timken Company - Form S-8
333-66907 The MPB Employees' Savings Plan - Form S-8 November 6, 1998
333-69129 The Timken Company - Latrobe Steel Company December 17,1998
Savings and Investment Pension Plan -
Form S-8
Canton, Ohio ERNST & YOUNG LLP
March 29, 1999
POWER OF ATTORNEY
Each of the undersigned Directors and/or Officers of The Timken
Company, an Ohio corporation (the "Company"), hereby constitutes and
appoints W. R. Timken, Jr., Gene E. Little and Larry R. Brown, and
each of them, his true and lawful attorney-in-fact, with full power
of substitution and resubstitution, for him and in his name, place
and stead, to sign on his behalf as a Director and/or Officer of the
Company, an Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, on Form 10-K for the
fiscal year ended December 31, 1998 and to sign any and all amendments
to such Annual Report, and to file the same, with all exhibits thereto,
and any other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact full power
and authority to do and perform any and all other acts and deeds
whatsoever that may be necessary or required in connection with the
foregoing, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-
in-fact may lawfully do or cause to be done by virtue thereof.
EXECUTED this 5th day of February, 1999.
/s/ Stanley C. Gault /s/ Ward J. Timken
____________________________ _____________________________
Stanley C. Gault, Director Ward J. Timken, Director
And Vice President
/s/ J. Clayburn LaForce, Jr. /s/ W. R. Timken, Jr.
____________________________ _____________________________
J. Clayburn LaForce, Jr., W. R. Timken, Jr.,
Director Director and Chairman,
President and Chief Executive Officer
/s/ Gene E. Little
____________________________
Gene E. Little, Senior Vice /s/ Joseph F. Toot, Jr.
President - Finance (Principal _____________________________
Finance Accounting Officer) Joseph F. Toot, Jr., Director
/s/ Robert W. Mahoney /s/ M. D. Walker
____________________________ _____________________________
Robert W. Mahoney, Director Martin D. Walker, Director
/s/ Jay A. Precourt /s/ Charles H. West, Director
____________________________ _____________________________
J. A. Precourt, Director Charles H. West, Director
/s/ John M. Timken, Jr. /s/ A. W. Whitehouse
____________________________ _____________________________
John M. Timken, Jr., Director Alton W. Whitehouse, Director
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 320
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<PP&E> 2,789,131
<DEPRECIATION> 1,439,592
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0
0
<COMMON> 287,003
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<CGS> 2,098,186
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<INCOME-TAX> 70,813
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</TABLE>
