1.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 2000.
Commission File No. 1-1169
THE TIMKEN COMPANY
Exact name of registrant as specified in its charter
Ohio 34-0577130
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
1835 Dueber Avenue, S.W., Canton, Ohio 44706-2798
Address of principal executive offices Zip Code
(330) 438-3000
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
___ ___
Common shares outstanding at September 30, 2000, 60,018,284.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Sept. 30 Dec. 31
2000 1999
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents........................... $18,921 $ 7,906
Accounts receivable, less allowances,
(2000-$10,454; 1999-$9,497)......................... 380,111 339,326
Deferred income taxes............................... 35,421 39,706
Inventories (Note 2) ............................... 500,599 446,588
---------- ----------
Total Current Assets...................... 935,052 833,526
Property, Plant and Equipment....................... 2,919,847 2,912,733
Less allowances for depreciation................... 1,584,540 1,531,259
---------- ----------
1,335,307 1,381,474
Costs in excess of net assets of acquired business,
less amortization, (2000-$39,644; 1999-$34,879)..... 151,677 153,847
Other assets........................................ 67,088 72,471
---------- ----------
Total Assets.................................. $2,489,124 $2,441,318
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and other liabilities.............. $233,743 $236,602
Short-term debt and commercial paper................ 212,693 122,547
Accrued expenses.................................... 164,325 198,512
---------- ----------
Total Current Liabilities................. 610,761 557,661
Noncurrent Liabilities
Long-term debt (Note 3) ............................ 305,624 327,343
Accrued pension cost................................ 128,892 76,005
Accrued postretirement benefits cost................ 398,039 394,084
Deferred income taxes............................... 3,780 6,147
Other noncurrent liabilities........................ 29,258 34,097
---------- ----------
Total Noncurrent Liabilities.............. 865,593 837,676
Shareholders' Equity (Note 4)
Common stock........................................ 251,273 273,199
Earnings invested in the business................... 849,108 836,916
Accumulated other comprehensive income.............. (87,611) (64,134)
---------- ----------
Total Shareholders' Equity................ 1,012,770 1,045,981
Total Liabilities and Shareholders' Equity.... $2,489,124 $2,441,318
========== ==========
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
2000 1999 2000 1999
---------- ---------- -------- --------
(Thousands of dollars, except per share data)
Net sales................................................... $2,011,297 $1,863,172 $632,243 $601,703
Cost of products sold....................................... 1,614,311 1,500,671 522,698 485,362
---------- ---------- -------- --------
Gross Profit............................................. 396,986 362,501 109,545 116,341
Selling, administrative and general expenses................ 274,180 266,271 88,920 89,160
Impairment and restructuring (Note 5)....................... 21,534 - 3,453 -
---------- ---------- -------- --------
Operating Income......................................... 101,272 96,230 17,172 27,181
Interest expense............................................ (22,774) (20,378) (8,081) (6,853)
Interest income............................................. 2,844 1,752 1,735 604
Other income (expense)...................................... (7,628) (8,469) (1,388) (2,306)
---------- ---------- -------- --------
Income Before Income Taxes............................... 73,714 69,135 9,438 18,626
Provision for income taxes (Note 6)......................... 28,749 27,850 1,753 6,184
---------- ---------- -------- --------
Net Income............................................... $44,965 $41,285 $ 7,685 $12,442
========== ========== ======== ========
Earnings Per Share * .................................... $0.74 $0.67 $0.13 $0.20
Earnings Per Share - assuming dilution **............... $0.74 $0.66 $0.13 $0.20
Dividends Per Share...................................... $0.54 $0.54 $0.18 $0.18
========== ========== ======== ========
* Average shares outstanding............................... 60,733,288 61,897,876 60,283,189 61,929,197
** Average shares outstanding - assuming dilution........... 60,914,242 62,121,455 60,422,761 62,122,909
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Cash Provided (Used) Sept. 30 Sept. 30
2000 1999
-------- --------
OPERATING ACTIVITIES (Thousands of dollars)
Net Income............................................. $44,965 $41,285
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 113,566 111,311
Provision for deferred income taxes................... 4,504 7,293
Stock issued in lieu of cash to employee
benefit plans, net................................... (769) 3,450
Non-cash portion of impairment and restructuring
charges.............................................. 17,010 -
Changes in operating assets and liabilities:
Accounts receivable.................................. (50,421) (6,583)
Inventories.......................................... (66,607) 30,820
Other assets......................................... (2,476) 2,086
Accounts payable and accrued expenses................ 19,899 (28,604)
Foreign currency translation......................... (1,420) 3,961
------- -------
Net Cash Provided by Operating Activities........... 78,251 165,019
INVESTING ACTIVITIES
Purchases of property, plant and equipment - net...... (92,392) (123,137)
Acquisitions.......................................... - (27,939)
------- -------
Net Cash Used by Investing Activities............... (92,392) (151,076)
FINANCING ACTIVITIES
Cash dividends paid to shareholders................... (32,773) (33,430)
Purchase of treasury shares........................... (21,157) (339)
Payments on long-term debt............................ (2,987) (639)
Proceeds from issuance of long-term debt.............. 3,478 4,049
Short-term debt activity - net........................ 79,659 34,400
------- -------
Net Cash Provided by Financing Activities........... 26,220 4,041
Effect of exchange rate changes on cash................ (1,064) 75
Increase in Cash and Cash Equivalents.................. 11,015 18,059
Cash and Cash Equivalents at Beginning of Period....... 7,906 320
------- -------
Cash and Cash Equivalents at End of Period............. $18,921 $18,379
======= =======
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 5.
Note 1 -- Basis of Presentation
The accompanying consolidated condensed financial statements (unaudited) for
the Timken Company (the "company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) and disclosures considered necessary
for a fair presentation have been included. For further information, refer to
the consolidated financial statements and footnotes included in the company's
annual report on Form 10-K for the year ended December 31, 1999.
9/30/00 12/31/99
Note 2 -- Inventories -------- ---------
(Thousands of dollars)
Finished products $186,644 $172,682
Work-in-process and raw materials 274,235 235,251
Manufacturing supplies 39,720 38,655
-------- --------
$500,599 $446,588
======== ========
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on manage-
ment's estimates of expected year-end inventory levels and costs. Because
these are subject to many forces beyond management's control, interim results
are subject to the final year-end LIFO inventory valuation.
Note 3 -- Long-term Debt 9/30/00 12/31/99
-------- ---------
(Thousands of dollars)
State of Ohio Pollution Control Revenue Refunding Bonds,
maturing on July 1, 2003. The variable interest
rate is tied to the bank's tax exempt weekly interest
rate. The rate at Sept. 30, 2000 is 5.55%. $17,000 $17,000
State of Ohio Water Development Revenue Refunding
Bond, maturing on May 1, 2007. The variable interest
rate is tied to the bank's tax exempt weekly interest
rate. The rate at Sept. 30, 2000 is 5.65%. 8,000 8,000
State of Ohio Air Quality and Water Development Revenue
Refunding Bonds, maturing on June 1, 2001. The
variable interest rate is tied to the bank's tax
exempt weekly interest rate. The rate at
Sept. 30, 2000 is 5.65%. 21,700 21,700
State of Ohio Water Development Authority Solid Waste
Revenue Bonds, maturing on July 2, 2032. The
variable interest rate is tied to the bank's tax
exempt weekly interest rate. The rate at
Sept. 30, 2000 is 5.75%. 24,000 24,000
Fixed Rate Medium-Term Notes, Series A, due at various
dates through May, 2028 with interest rates ranging
from 6.20% to 7.76%. 252,000 252,000
Other 10,136 9,957
-------- --------
332,836 332,657
Less: Current Maturities 27,212 5,314
-------- --------
$305,624 $327,343
======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 6.
Note 4 -- Shareholders' Equity 9/30/00 12/31/99
-------- --------
Class I and Class II serial preferred stock (Thousands of dollars)
without par value:
Authorized -- 10,000,000 shares each class
Issued - none $ - $ -
Common Stock without par value:
Authorized -- 200,000,000 shares
Issued (including shares in treasury)
2000 - 63,082,626 shares
1999 - 63,082,626 shares
Stated Capital 53,064 53,064
Other paid-in capital 257,518 258,287
Less cost of Common Stock in treasury
2000 - 3,064,341 shares
1999 - 1,886,537 shares 59,309 38,152
-------- --------
$251,273 $273,199
======== ========
An analysis of the change in capital and earnings invested in the business is as follows:
Common Stock Earnings Accumulated
Other Invested Other
Stated Paid-In in the Comprehensive Treasury
Capital Capital Business Income Stock Total
------- -------- -------- ---------- -------- ----------
(Thousands of dollars)
Balance December 31, 1999 $53,064 $258,287 $836,916 ($64,134) ($38,152) $1,045,981
Net Income 44,965 44,965
Foreign currency translation adjustment (23,477) (23,477)
----------
Total comprehensive income 21,488
Dividends - $.54 per share (32,773) (32,773)
Stock Options, employee benefit and dividend
reinvestment plans: (769) (21,157) (21,926)
Treasury - acquired 1,177,804 shares, net
------- -------- -------- ---------- -------- ----------
Balance September 30, 2000 $53,064 $257,518 $849,108 ($87,611) ($59,309) $1,012,770
======= ======== ======== ========== ======== ==========
The total comprehensive (loss) income for the three months ended September 30, 2000 and 1999 was $(636,000) and
$19,202,000, respectively. Total comprehensive income for the nine months ended September 30, 1999 was $30,382,000.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7.
Continued
Note 5 -- Impairment and Restructuring Charges
In March 2000, the company announced an acceleration of its global
restructuring to position itself for profitable growth, streamline
operations, reduce costs and improve European profitability. This
restructuring is expected to save the company approximately $35 million
annually before taxes by the end of 2001. Employee severance, exit costs,
non-cash impairment and reorganization charges of an estimated $55 million
before taxes are expected to be recorded by the end of 2001. Of this amount,
approximately $35 million is anticipated as impairment and restructuring
charges, and the remaining $20 million will be classified as either cost of
products sold or selling, administrative and general expense.
Of the charges recorded through September 2000, $21.5 million were
impairment and restructuring charges related to the global restructuring
acceleration. In addition, reorganization expenses of $6.1 million were
recorded with $5.3 million related to bearing operations and $0.8 million
related to steel operations.
Impairment charges of $13.7 million reflected costs associated with the
consolidation of operations as well as abandoned acquisition, affiliation
and divestiture efforts. The restructuring charges of $7.8 million primarily
related to the severance costs associated with the on-going termination of 394
positions in Europe, Asia, and the U.S. Of the 394 positions to be terminated,
272 have exited as of September 30, 2000. The remaining positions are expected
to exit through the end of the first quarter of 2001. Payments charged against
the restructuring liability through the end of the third quarter were
$4.5 million, resulting in an accrual balance of $3.3 million.
Key elements of the restructuring and impairment charges by industry through
September are as follows (in thousands of dollars):
Bearing Steel Total
Restructuring: -------- --------- ---------
Separation costs - operations $ 4,501 $ - $ 4,501
Separation costs - administration 2,782 513 3,295
Exit costs 22 1 23
-------- --------- ---------
$ 7,305 $ 514 $ 7,819
Impaired assets:
Property, plant and equipment 764 8,735 9,499
Abandoned acquisitions 214 4,002 4,216
-------- --------- ---------
$ 978 $ 12,737 $ 13,715
-------- --------- ---------
$ 8,283 $ 13,251 $ 21,534
======== ========= =========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 8.
Continued
Note 6 -- Income Tax Provision Nine Months Ended Three Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
2000 1999 2000 1999
-------- -------- -------- --------
U.S. (Thousands of dollars)
Federal $15,622 $20,633 $(3,219) $ 3,178
State & Local 1,211 2,476 246 1,055
Foreign 11,916 4,741 4,726 1,951
------- ------- ------- -------
$28,749 $27,850 $ 1,753 $ 6,184
======= ======= ======= =======
Taxes provided for the nine months ended September 30, 2000 and 1999, exceed
the U.S. statutory rate primarily due to state and local taxes and losses
without current tax benefits. These unfavorable permanent differences had a
greater percentage impact on the company's effective tax rate due to lower
earnings.
The effective tax rate for the three months ended September 30, 2000 is lower
compared to the same period a year ago as a result of federal income tax
settlements.
Note 7 -- Segment Information
(Thousands of Dollars) Nine Months Ended Three Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
Bearings 2000 1999 2000 1999
---------- ---------- -------- --------
Net sales to external customers $1,350,903 $1,313,835 $414,495 $423,680
Depreciation and amortization 62,974 61,664 20,881 20,661
Earnings before interest and taxes 66,073 68,101 7,304 24,782
Interest expense (18,386) (16,052) (6,317) (5,549)
Interest income 2,592 1,861 1,381 658
Steel
Net sales to external customers 660,394 549,337 217,748 178,023
Intersegment sales 157,531 157,784 50,617 54,141
Depreciation and amortization 50,592 49,647 16,791 16,998
Earnings before interest and taxes 27,528 21,045 8,002 2,766
Interest expense (8,625) (6,917) (3,046) (2,349)
Interest income 4,489 2,482 1,635 990
Profit Before Taxes
Total EBIT for reportable segments 93,601 89,146 15,306 27,548
Interest expense (22,774) (20,378) (8,081) (6,853)
Interest income 2,844 1,752 1,735 604
Intersegment adjustments 43 (1,385) 478 (2,673)
Income before income taxes 73,714 69,135 9,438 18,626
9.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
---------------------
The Timken Company reported net sales of $632.2 million for the third
quarter of 2000, an increase of 5.1% from $601.7 million in 1999's third
quarter. Net income decreased by 38% to $7.7 million compared to
$12.4 million in the third quarter of 1999. In the third quarter of
2000, the company incurred total pretax charges of $6 million related to
the company's restructuring and reorganization. These charges included
$3.5 million related to impairment and restructuring charges and
$2.5 million related to reorganization expenses, which were reflected in
the company's cost of products sold and selling, administrative and
general expenses for the quarter.
Although sales volume did increase in the current quarter compared to the
third quarter of 1999, sales have decreased in comparison to the first
two quarters of 2000. Typically, the third quarter is the weakest of the
year as a result of customer demand patterns. However, several economic
factors have further negatively impacted the current quarter's sales.
The continued devaluation of the Euro and other currencies against the
U.S. dollar and British pound has enabled European producers, especially
steel manufacturers, to export into North America with lower prices,
which has put pressure on pricing and operating margins. The Euro's
devaluation has also substantially eroded margins on products
manufactured in the U.S. and the United Kingdom and sold throughout the
rest of Europe. There has also been declining demand in key sectors,
including North American rail and heavy truck, as well as inventory
balancing in the North American light truck and SUV market. Additionally,
industrial markets, which began recovering in the fourth quarter of 1999,
have been level for the last five months.
Gross profit was $109.5 million (17.3% of net sales) in the third quarter
of 2000, compared to $116.3 million (19.3% of net sales) in 1999's third
quarter. The impact of the Euro devaluation, the weakened automotive
demand and the effect of operational issues more than offset the favorable
impact of the U.S. physical inventory adjustment of $6.1 million and the
world-wide adjustment of approximately $1.7 million in amounts previously
reserved for performance-based pay.
Selling, administrative and general expenses were $88.9 million (14.1% of
net sales) in the third quarter of 2000, compared to $89.2 million (14.8%
of net sales) recorded in the third quarter of 1999. Although expenses
decreased by approximately $4.1 million due to the reduction in the
amount previously reserved for performance-based pay, this was offset by
$1.5 million in reorganization expenses related to the company's
10.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (cont.)
realignment of businesses into global units as well as additional expense
related primarily to spending on growth initiatives.
Pursuant to the acceleration of the company's global restructuring and
reorganization announced in March 2000, $27.6 million of the estimated
$55 million pre-tax charge was recorded through September 30, 2000. The
pretax charge included $21.5 million in impairment and restructuring
charges, $12.7 million of which related to the impairment of domestic
steel assets, with the balance primarily being bearing severance expense.
Also included was $6.1 million in reorganization expense, primarily
selling, administrative and general expenses related to the realignment
of the bearing business into global units. The consolidation of the
company's European distribution operations has experienced start-up
problems that will delay the full realization of associated benefits
until 2002. The remainder of the impairment and restructuring charges
are anticipated to be recorded over the next two quarters, with full
impact of savings from these programs expected to be realized by the
end of 2001.
The restructuring is utilizing initiatives to improve competitiveness,
promote profitable worldwide growth and transform the company into global
business units. These initiatives include rationalization of plants and
businesses to reduce asset intensity as well as streamlining the
management structure. Of the 600 positions to be eliminated worldwide,
394 have been identified, primarily in Asia, Europe, and the U.S., with
272 actual terminations to date. Payments charged against the $7.8 million
restructuring liability through the end of the third quarter of 2000
were $4.5 million, resulting in a balance of $3.3 million.
Globally the company has achieved actual pre-tax savings of $2.7 million
representing an annual rate of approximately $8 million. The European
restructuring program, which includes the refocusing of the Duston,
England bearing plant and the transfer of manufacturing from Western Europe
to Romania, Poland and the United States, produced labor cost savings of
$0.7 million through the third quarter of 2000. Also included in the
savings was management streamlining of $0.8 million and operational savings
from the small bar mill of approximately $0.8 million.
Other income (expense) reflected lower expense in the third quarter of
2000 due primarily to lower transactional foreign currency exchange
losses recorded in the third quarter of 2000 compared to the same period
a year ago. The majority of the decrease related to the revaluation of
Timken do Brasil transactions relative to the Brazilian Real as well as
the decreased hyperinflationary impact based on the revaluation of Timken
Romania accounts.
11.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (cont.)
Provision for income taxes for the third quarter of 2000 were lower than
the provision for the third quarter of 1999 due to the settlement of
federal income tax issues which significantly reduced the effective tax rate.
Bearings
Bearings' net sales were $414.5 million in the third quarter of 2000,
down 2.2% compared to $423.7 million recorded in the year-earlier period.
The net sales were negatively impacted during the current quarter by a
variety of factors. Comparing the third quarter 1999 currency exchange
rates to weakened third quarter 2000 exchange rates, Bearings' net sales
would have been higher by approximately $11.9 million using third quarter
1999 exchange rates. In addition, North American automotive sales
decreased 10% compared to the third quarter of 1999. Compared to the
same quarter a year ago, current quarter production of passenger cars
was down just over 1%, while light and heavy trucks were down over 8%.
Also, the canceling of two weeks of Ford Ranger production and one week
of Ford Explorer production impacted sales by an estimated $1.1 million.
North American rail industry shipments decreased 11% compared to the same
period a year ago. Current third quarter sales to the Asia Pacific region
were 12% below the third quarter of 1999. While North American industrial
markets were stronger than in the third quarter of 1999, the recovery in
these markets has stalled during recent months. Latin America continued
to show strong demand in the current third quarter.
Excluding $5.5 million in restructuring and reorganization charges, Bearings'
earnings before interest and income taxes (EBIT) was $12.8 million, a
decrease of 48.4% from 1999's third quarter. Including these charges,
Bearings' EBIT for the third quarter was $7.3 million, compared to
$24.8 million in the third quarter of 1999. The decline in EBIT was a
result of lower North American automotive sales and the negative impact
of the weak Euro on margins. Other contributing factors were operating
problems due to the outsourcing of the company's bearing distribution
center in Europe as well as productivity issues associated with the
significant number of retirements at the Canton bearing plant, which
occurred at the end of the second quarter this year. The negative impact
of these contributing factors more than offset the effect of the U.S.
physical inventory adjustment recorded in the third quarter of 2000. The
company is still in the process of resolving the European distribution
center problems, which will continue to impact industrial aftermarket results
in Europe in the fourth quarter.
Bearings' selling and administrative expenses in the third quarter of 2000
were comparable to the same year-ago period. Although third quarter 2000
business costs were adversely impacted by reorganization expenses and spending
on growth initiatives, this effect was offset by the decrease in the amount
previously reserved for performance-based pay.
12.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (cont.)
Steel
Steel's net sales, including intersegment sales, were $268.4 million in the
third quarter of 2000, an increase of 15.6% from the $232.2 million recorded
a year earlier. Continued strength in oil markets and increased penetration
in automotive markets by the precision steel components business caused sales
to increase in the third quarter of 2000 compared to the same period a year
ago. However, sales would have been even higher in the current quarter
were it not for the decrease in heavy truck and light vehicle production.
Shipments to service center customers have also slowed primarily due to a
reduction in their inventory levels. In addition, Steel's net sales were
negatively impacted by approximately $0.8 million, attributable to currency
rate fluctuations between the third quarters of 2000 and 1999. Continued
devaluation of the Euro and other currencies against the U.S. dollar and
British pound has enabled European and other overseas producers to export
into North America with lower prices, putting pressure on pricing and
operating margins. Although price increases had been announced in the
first two quarters of 2000, these increases affected only a small percentage
of the total business and were not enough to offset these pricing pressures.
Excluding Steel's portion of the restructuring and reorganization charges
of $0.5 million, Steel's EBIT for the third quarter of 2000 increased to
$8.5 million, more than double the EBIT in the third quarter of 1999.
Including these charges, Steel's EBIT was $8 million in the third quarter
of 2000 compared to $2.8 million in the same period a year-ago. Third
quarter 2000 included some impairment and restructuring charges related
primarily to asset impairment and administrative severance costs. Due to
pressure from imports, Steel has had to lower prices to maintain penetration
in certain markets, resulting in lower margins.
Steel's selling and administrative expenses in the third quarter of 2000
compared to the same period a year ago were relatively flat. Reorganization
expenses recorded during the third quarter of 2000 were offset by the
decrease in the amounts previously reserved for performance-based pay.
Financial Condition
-------------------
Total assets as shown on the Consolidated Condensed Balance Sheets increased
by approximately $48 million from December 31, 1999. Inventory balances at
the end of the third quarter were higher compared to year-end 1999 levels.
The number of days' supply in inventory increased by four days to 112 days
at September 30, 2000, compared to 108 days at December 31, 1999. Bearings'
inventory increased by seven days. The increase in inventories was primarily
a result of reduced shipments during the third quarter and recording of the
U.S. physical inventory adjustment. Steel's inventories decreased about
13.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (cont.)
three days due to concerted efforts to bring inventories more in line with
demand.
As shown on the Consolidated Condensed Statement of Cash Flows, the increase
in inventories required $66.6 million of cash during the first nine months
of 2000. Accounts receivable have increased by $50.4 million since
December 31, 1999, reflecting the higher level of sales in the third quarter
of 2000 and timing of receipts. The number of days' sales in receivables as
of September 30, 2000, increased approximately two days compared to
December 31, 1999. Cash was provided as a result of a $19.9 million increase
in accounts payable and accrued expenses due primarily to higher accruals
for pension liabilities related to the labor union agreement ratified in the
first quarter of 2000. Additionally, the amounts reserved for performance-
based pay at September 30, 2000 were higher than the amounts accrued as of
December 31, 1999 due to the company's better performance in the first half
of 2000. Purchases of property, plant and equipment used $92.4 million of
cash in the first nine months of 2000, below the $123.1 million spent during
the same period in 1999. The company expects the level of capital spending
for 2000 to be comparable to 1999.
The 33.8% debt-to-total-capital ratio at September 30, 2000, was higher than
the 30.1% at year-end 1999. Debt increased by $68.4 million during the first
nine months of 2000 to $518.3 million at September 30, 2000. Although the
average debt level during the third quarter of 2000 was slightly higher than
December 31, 1999, the short-term interest rate has increased approximately
1.5%, which accounts for the higher interest expense in the third quarter of
2000. In addition to capital expenditures, cash was used to fund working
capital, pay dividends to shareholders, and buy back shares of common stock
as authorized under the company's 1998 common stock purchase plan. Short-term
borrowing and issuance of medium-term notes should meet future cash needs
that exceed cash generated from operations. Total shareholders' equity has
decreased by approximately $33.2 million since December 31, 1999. The
increase of approximately $45 million in equity from net income was offset
by the $23.5 million foreign currency translation adjustment as well as the
payment of $32.8 million in dividends and the net increase of $21.9 million
in treasury stock. The majority of the increase in the foreign currency
translation adjustment was a result of the fluctuation in exchange rates
for currencies such as the British pound, Euro and Australian and Canadian
dollars.
Other Information
-----------------
In the second quarter of 2000, the U.S. International Trade Commission
(ITC) voted to revoke the industry's antidumping orders on imports of
14.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (cont.)
tapered roller bearings from Japan, Romania and Hungary. The ITC
determined that revocation of the antidumping duty orders on tapered roller
bearings from those countries was not likely to lead to continuation or
recurrence of material injury to the domestic industry within a reasonably
foreseeable time. The ITC upheld the antidumping duty order against China.
The company has filed an appeal of the ITC's decision regarding Japan. If
following the revocation of the orders and contrary to the ITC's finding,
injurious dumping from these countries continues or recurs, the improved
conditions of trade of tapered roller bearings in the U.S., which resulted
from the orders, could deteriorate. If injurious dumping does occur, such
dumping could have a material adverse effect on the company's business,
financial condition or results of operations. The company would explore
alternatives to remedy this material adverse effect as the law provides for
expedited investigations in cases where an order was revoked as a result of
this review.
The ITC separately extended the antidumping duty orders on ball bearings
from Germany, France, Japan and several other countries. These extended
orders should continue to provide the company's aerospace business with
fair competition for these products in the U.S.
Assets and liabilities of subsidiaries, other than Timken Romania, which is
considered to operate in a highly inflationary economy, are translated at
the rate of exchange in effect on the balance sheet date; income and
expenses are translated at the average rates of exchange prevailing during
the quarter. Related translation adjustments are reflected as a separate
component of accumulated other comprehensive income. Foreign currency gains
and losses resulting from transactions and the translation of financial
statements are included in the results of operations.
Foreign currency exchange losses included in the company's operating results
for the first nine months of 2000 totaled $2.9 million compared to
$8.8 million in the same year-ago period. Although the third quarter 2000
exchange losses increased significantly in comparison to the first half of
2000 as a result of continued weakening currencies, it was not as large as
the higher losses recorded in 1999. The most significant translation losses
in 1999 related to the January 1999 devaluation of the Brazilian Real as
well as the translation losses recorded by the company's operations in France
and the United Kingdom. Also, for the first nine months of 2000, the company
recorded a foreign currency translation adjustment of $23.5 million that
reduced shareholders' equity compared to a foreign currency translation
adjustment of $10.9 million in the first nine months of 1999. Continued
weakening of currencies in many of the countries in which the company operates
caused the higher impact of negative foreign currency adjustments in the
first nine months of 2000.
15.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (cont.)
In September 2000, the company entered into a joint venture with Tranergy
Corporation to bring advanced technology to the rail industry. The new
joint venture, Friction Management Services, LLC, has introduced an
intelligent, top-of-rail lubrication system. This system manages friction
to improve productivity and is cleaner and environmentally safer than
other types of rail lubrication.
In October 2000, the company announced it signed a letter of intent to sell
the tool and die steel operations of Timken Latrobe Steel - Europe in
Sheffield, England, to a group of private investors. The company will refocus
its high-speed steel business in the United Kingdom as part of the operations
of Timken Desford Steel. Timken Latrobe Steel - Europe currently employs 84
people in Sheffield, and it has initiated consultations with employees
regarding the transfer of the tool and die steel operations. It is anticipated
that the sale of the tool and die steel operations in Sheffield will be
completed by the end of 2000.
During the third quarter of 2000, the company purchased 627,400 shares of
its common stock to be held in treasury as authorized under the company's
1998 common stock purchase plan. As of September 30, 3.9 million shares of
the 4 million shares authorized had been purchased pursuant to the plan.
As of November 3, 2000 the company had purchased the remaining outstanding
shares available under the 1998 plan.
In November 2000, the company announced board approval of a new 2000 common
stock purchase plan, which succeeds the 1998 plan. The 2000 stock purchase
plan authorizes the company to buy in the open market or in privately
negotiated transactions up to 4 million shares of common stock, which are
to be held as treasury shares and used for specified purposes. The company
may exercise this authorization until December 31, 2006.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivatives and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities.
It requires recognition of all derivatives as either assets or liabilities
on the balance sheet and measurement of those instruments at fair value.
SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of SFAS 133,"
is effective for fiscal years beginning after June 15, 2000. In June 2000,
the FASB issued SFAS No. 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities." This pronouncement amended portions of
SFAS No. 133 and will be applied prospectively as the cumulative effect of
an accounting change with SFAS No. 133 effective January 1, 2001. The
16.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (cont.)
company is in the process of completing its review to determine the impact
of the new standard on income and equity. Since the impact is dependent on
future market rates and future derivative actions prior to year-end, it
is not fully determinable at this time.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletion (SAB) No. 101, "Revenue Recognition." SAB No. 101
provides guidance on numerous revenue recognition issues and is required
to be adopted by the company in the fourth quarter of 2000. The company
continues to evaluate the implications of the SAB and has not yet
determined its effects, if any, on the company's operations or financial
position.
The statements set forth in this document that are not historical in nature
are forward-looking statements. The company cautions readers that actual
results may differ materially from those projected or implied in forward-
looking statements made by or on behalf of the company due to a variety
of important factors, such as:
a) changes in world economic conditions. This includes, but is not limited
to, the potential instability of governments and legal systems in
countries in which the company conducts business and significant changes
in currency valuations.
b) the effects of changes in customer demand on sales, product mix, and
prices. This includes the effects of customer strikes, the impact of
changes in industrial business cycles and whether conditions of fair
trade continue in the U.S. market, in light of the ITC voting in second
quarter 2000 to revoke the antidumping orders on imports of tapered
roller bearings from Japan, Romania and Hungary.
c) competitive factors, including changes in market penetration, the
introduction of new products by existing and new competitors, and new
technology that may impact the way the company's products are sold
or distributed.
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.
17.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (cont.)
e) the success of the company's operating plans, including its ability
to achieve the benefits from its global restructuring as well as its
ongoing continuous improvement and rationalization programs; its ability
to integrate acquisitions into company operations; the ability of
recently acquired companies to achieve satisfactory operating results;
its ability to maintain appropriate relations with unions that represent
company associates in certain locations in order to avoid disruptions
of business and its ability to successfully implement its new
organizational structure.
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/or
cause changes in the economy which affect customer demand.
18.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
10 Consulting agreement entered into with e-Solutions, LLC
(Thomas W. Strouble, Owner and principal)
11 Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b). Reports on Form 8-K
On November 3, 2000, the company filed a Form 8-K regarding
the approval by the Board of Directors of the company's 2000
Common Stock Purchase Plan (2000 Purchase Plan). The 2000
Purchase Plan will be in effect until December 31, 2006 and
authorizes the purchase of up to 4,000,000 shares of common
stock, without par value, on the open market or in privately
negotiated transactions. No financial statements were filed.
19.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Timken Company
_______________________________
Date November 13, 2000 BY /s/ W. R. Timken, Jr.
________________________ _______________________________
W. R. Timken, Jr.,
Director and Chairman;
Chief Executive Officer
Date November 13, 2000 BY /s/ G. E. Little
________________________ _______________________________
G. E. Little
Senior Vice President - Finance
