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, 1999
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
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 18, 2000, was $705,101,600 (representing 50,364,400 shares).
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of February 18, 2000.
Common Stock without par value--61,119,617 shares (representing a market
value of $855,674,638).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
December 31, 1999, 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 18, 2000, are incorporated by reference into parts III
and IV.
Exhibit Index may be found on Pages 20 through 23.
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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. The company produces the Timken IsoClassTM brand of tapered
roller bearings, which 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 provides bearing reconditioning
services for industrial and railroad markets, both globally and
domestically.
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 that provide local availability
when service is required.
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.
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Sales and Distribution (cont.)
______________________________
In January 2000, the company announced that distribution activities will
be moved from existing warehousing and shipping facilities in Germany,
England, France and Italy to a central warehouse in Strasbourg, France,
which will be operated by an external service provider. This initiative
is expected to reduce employment at the facilities by approximately 60
positions. These job reductions will be implemented through a combination
of voluntary departures and redundancies. The existing sales offices at
all locations will continue providing service to customers. In the U.K.,
a smaller warehouse facility will be established to serve local
requirements.
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 12 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, 1999, 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 1999 were $237 million or approximately 16 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 $205 million in 1999.
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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 March 6, 2000, the U.S. Department of Commerce issued final
margins for companies investigated for the 1997-98 time period, finding
dumping margins that ranged from 1.80% to 23.36%.
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.
The industry's antidumping duty orders covering imports of tapered
roller bearings from Japan, China, Hungary and Romania are currently in
the process of being reviewed by U.S. government agencies to determine
whether dumping and injury to the domestic industry are likely to
continue or recur if the orders were to be revoked. These reviews
commenced in April, 1999, and should conclude by the end of the second
quarter 2000. The company is actively participating in the proceedings.
If the U.S. government determines that dumping and injury are likely to
continue or recur, the antidumping duty finding and orders will continue
in place for another five years. If, however, a determination is made
that injury to the domestic industry is unlikely to continue or recur
with respect to any of the four countries covered, the finding or order
will be revoked with respect to that country. If, following the
revocation of such an order, injurious dumping does continue or recur,
contrary to the finding of the government, the improved conditions
of fair trade of tapered roller bearings in the U.S., which resulted from
existing orders, would 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.
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 $1.04 billion at December 31, 1999, and
$1.22 billion at December 31, 1998. 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 addition, Timken
Desford Steel, in Leicester, England is 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 facilities in Bangelore, India and Yokohama, Japan. Expenditures for
research, development and testing amounted to approximately $50,000,000
in 1999, $48,000,000 in 1998, and $43,000,000 in 1997. 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 1999, the
company reissued its environmental policy, revised in accordance with ISO
14001 environmental management system requirements, and committed to be-
coming ISO 14001 certified within the next several 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. This continues to be true in view of the
fact that the rules have now been remanded by the federal courts for
further consideration by the EPA.
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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 $3.8 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 $1.4 million.
The company has environmental projects at two of its manufacturing locations
in Ohio. A remediation system was installed at the Columbus plant in 1998
and at the oil house site in Canton in December 1999. The company has pro-
vided for the cost of these projects which to date have been $3.8 million.
A portion of the cost of the oil house project is being recovered from the
Ohio Petroleum Underground Storage Tank Release Compensation Board. Future
operating and maintenance costs are expected to be approximately $1.2
million.
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, 1999, Timken had 20,856 associates. Thirty-six 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 18, 2000, are as follows:
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Current Position and Previous
Name Age Positions During Last Five Years
___________________ ___ ____________________________________________
W. R. Timken, Jr. 61 1994 Chairman - Board of Directors;
1997 Chairman, President and Chief
Executive Officer; Director;
1999 Chairman and Chief Executive Officer;
Director; Officer since 1968.
J. W. Griffith 46 1994 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;
1999 President and Chief Operating Officer;
Officer since 1996.
R. L. Leibensperger 61 1994 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 58 1994 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.
M. C. Arnold 43 1994 General Manager - Asheboro Plant;
1996 Director - Manufacturing and Technology -
Europe, Africa and West Asia;
1997 Director - Bearing Business Process
Advancement;
1998 Vice President - Bearings - Business
Process Advancement;
2000 President - Industrial; Officer since
2000.
S. B. Bailey 40 1995 Director - Finance;
1999 Director - Finance and Treasurer;
Officer since 1999.
L. R. Brown 64 1994 Vice President and General Counsel;
Secretary;
1998 Senior Vice President and General
Counsel; Secretary;
1999 Senior Vice President and General
Counsel; Officer since 1990 (retires
March 31, 2000).
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Current Position and Previous
Name Age Positions During Last Five Years
___________________ ___ ____________________________________________
W. R. Burkhart 34 1994 Attorney
1996 Corporate Attorney
1997 Legal Counsel - Europe, Africa and West
Asia;
1998 Director of Affiliations and Acquisitions
2000 Senior Vice President and General Counsel
Officer since 2000 (Effective
April 1, 2000).
V. K. Dasari 33 1994 Manager - Cup Operations - Small
Industrial Bearing - Canton;
1995 Project Manager - Global Industrial
Segment Strategy;
1996 Director - Manufacturing and Technology -
Tata Timken Limited;
1998 Deputy Managing Director - Tata Timken
Limited;
1999 Managing Director - Tata Timken Limited;
2000 President - Rail; Officer since 2000.
D. J. Demerling 49 1994 General Manager - Bucyrus Operations;
1996 Stanford Sloan Fellow;
1997 President - MPB Corporation;
2000 President - Aerospace and Super Precision;
Officer since 2000.
J. T. Elasser 47 1994 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;
1999 Senior Vice President - Corporate
Development; Officer since 1996.
K. P. Kimmerling 42 1994 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;
1999 President - Automotive; Officer since
1998.
G. E. Little 56 1994 Vice President - Finance; Treasurer;
1998 Senior Vice President - Finance;
Treasurer;
1999 Senior Vice President - Finance; Officer
since 1990.
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Current Position and Previous
Name Age Positions During Last Five Years
___________________ ___ ____________________________________________
S. J. Miraglia, Jr. 49 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;
1999 Senior Vice President - Technology;
Officer since 1996.
S. A. Perry 54 1994 Vice President - Human Resources and
Logistics;
1998 Senior Vice President - Human
Resources, Purchasing and
Communications; Officer since 1993.
H. J. Sack 45 1994 Vice President - Manufacturing -
Steel;
1996 President - Latrobe Steel Company;
1998 Group Vice President - Specialty Steel
and President - Latrobe Steel
Company;
1999 Group Vice President - Specialty Steel
and President - Timken Latrobe Steel;
Officer since 1998.
M. J. Samolczyk 44 1994 President - Canadian Timken, Limited;
1995 General Manager - Sales and Marketing -
Bearings - North America - Mobile
Industrial;
1995 General Manager - Sales and Marketing -
Bearings - North America - Industrial;
1996 Vice President - Sales and Marketing -
Industrial - Original Equipment;
1998 Vice President and General Manager -
Precision Steel Components;
2000 President - Precision Steel Components;
Officer since 2000.
S. A. Scherff 45 1994 Director - Legal Services and Assistant
Secretary;
1999 Corporate Secretary; Officer since 1999.
J. J. Schubach 63 1994 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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14
Current Position and Previous
Name Age Positions During Last Five Years
___________________ ___ ____________________________________________
T. W. Strouble 61 1994 Vice President - Sales and Marketing -
Bearings - North and South America;
1995 Vice President - Technology;
1998 Senior Vice President - Technology
2000 Senior Vice President - E-Business;
Officer since 1995.
W. J. Timken 57 1994 Vice President; Director; Officer
since 1992.
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15
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
14,230,000 square feet, all of which, except for approximately 503,000
square feet, is owned in fee. The facilities that are not owned are
are leased by the company. 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, Virginia; Asheboro and Iron Station, North
Carolina; Carlyle, Illinois; South Bend, Indiana; Gaffney, South
Carolina; Keene and Lebanon, New Hampshire; Winchester, Kentucky;
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 4,929,000 square feet.
Timken's bearing manufacturing plants outside the United States are
located in Benoni, South Africa; Cogozzo, Italy; Colmar, France; Duston,
Northampton and Wolverhampton, England; Medemblik, The Netherlands;
Ploesti, Romania; Sao Paulo, Brazil; Singapore; Jamshedpur, India;
Sosnowiec, Poland; St. Thomas, Canada and Yantai, China. The
facilities, including warehouses at plant locations, have an aggregate
floor area of approximately 3,564,000 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. These facilities have an aggregate
floor area of approximately 5,023,000 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 124,000 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 1999, plant utilization in the Bearings business'
industrial plants continued at relatively low levels due to global
industrial market weakness. This situation was further impacted by
aggressive actions to reduce inventories. By midyear, with inventory
reduction complete, utilization levels improved slightly. Automotive plant
utilization was at capacity throughout the year fueled by continuing strong
automotive market demand.
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Properties (cont.)
__________________
During 1999, plant utilization in the Steel business continued at low levels
due to market weakness in the industrial, oil country and service center
markets. Utilizations improved slightly at year-end as these markets showed
some improvement. In the third quarter, the company completed the start-up
phase of its new rolling mill at the Harrison Steel Plant in Canton, Ohio.
In March 1999, the company increased its ownership of Timken India Limited
(formerly Tata Timken Limited) by acquiring the 40 percent stake held by
The Tata Iron and Steel Company Limited of India. The transaction was
approved by the Indian government and completed in March. Timken India
Limited consists of a manufacturing facility in Jamshedpur, India, which
includes floor space of approximately 121,000 square feet and six sales
offices, also located in India.
In the second quarter of 1999, the company completed the closing of its
manufacturing operations in Australia, rationalizing the production of
certain automotive products to Timken plants in Canada and Brazil.
In January 2000, the company announced that distribution activities will
be moved from existing warehousing and shipping facilities in Germany,
England, France and Italy to a central warehouse in Strasbourg, France,
which will be operated by an external service provider. This
initiative is expected to reduce employment at the facilities by approx-
imately 60 positions. These job reductions will be implemented through
a combination of voluntary departures and redundancies. The existing
sales offices at all locations will continue providing service to
customers. In the U.K., a smaller warehouse facility will be established
to serve local requirements.
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, 1999.
<PAGE>
17
PART II
_______
Item 5. Market for Registrant's Common Equity and Related Stockholder
______________________________________________________________________
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, 1999, was 8,792. The estimated number of
shareholders at December 31, 1999, was 42,907.
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, 1999, and
are incorporated herein by reference.
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,
1999, is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
________________________________________________________________________
Results of Operations
_____________________
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, 1999, is incorporated herein by reference.
In March 2000, the company announced an acceleration of its global
restructuring to position the company for profitable growth, streamline
operations, reduce costs and improve European profitability. This re-
structuring is expected to save the company approximately $35 million
annually before taxes by the end of 2001. Implementation, employee
severance and non-cash impairment charges of $55 million before taxes are
expected over the next year.
The company's bearing manufacturing facility in Duston, England will be
refocused to specialize and fuel growth in advanced automotive bearings,
roller production and formed products reflecting currently strong automotive
demand. The restructuring is expected to reduce the Duston site workforce
of approximately 1100 to about 800.
The Western European restructuring will increase manufacturing at lower cost
facilities in Eastern Europe, which have been growing rapidly. Included in
the restructuring is the outsourcing and consolidation of Timken distri-
bution operations in Europe, which was announced in January. It also
includes actions to reduce production costs in the company's steel
operations in Europe and redefine the company's operations in Asia.
<PAGE>
18
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, 1999, 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, 1999, are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
____________________________________________________________________
and Financial Disclosure
________________________
Not applicable.
<PAGE>
19
PART III
________
Item 10. Directors and Executive Officers of the Registrant
____________________________________________________________
Required information is set forth under the caption "Election of
Directors" on Pages 4-8 of the proxy statement issued in connection with
the annual meeting of shareholders to be held April 18, 2000, 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 11-22 of the proxy statement issued in connection
with the annual meeting of shareholders to be held April 18, 2000, 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 9-10 of the proxy
statement issued in connection with the annual meeting of shareholders
to be held April 18, 2000, 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 4-8 of the proxy statement issued in connection with
the annual meeting of shareholders to be held April 18, 2000, and is
incorporated herein by reference.
<PAGE>
20
PART IV
_______
Item 14. Exhibits, Financial Statement Schedules, and Reports 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.
21
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 James W. Griffith, 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, amended and restated as
of April 20, 1999 was filed with Form 10-Q for the period
ended March 31, 1999, 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.
22
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
was filed with Form 10-K for the period ended December 31,
1998, and is incorporated herein by reference.
(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 was filed with Form 10-K for the period ended
December 31, 1998, and is incorporated herein by reference.
(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.
23
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.
(10.19) The Timken Company Senior Executive Management Performance
Plan effective January 1, 1999, and approved by
shareholders April 20, 1999 was filed as Appendix A to
Proxy Statement dated February 24, 1999, and is
incorporated herein by reference.
(10.20) The Timken Company Nonqualified Stock Option Agreement
entered into with James W. Griffith and adopted on
December 16, 1999.
(10.21) The Timken Company Promissory Note entered into with
James W. Griffith and dated December 17, 1999.
(12) Ratio of Earnings to Fixed Charges
(13) Annual Report to Shareholders for the year ended
December 31, 1999, (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 and Chief Senior Vice President - Finance
Executive Officer (Principal Financial and
Accounting Officer)
Date March 29, 2000 Date March 29, 2000
________________________________ _______________________________
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/ Stanley C. Gault* By /s/ John M. Timken, Jr.*
______________________________ _______________________________
Stanley C. Gault Director John M. Timken, Jr. Director
Date March 29, 2000 Date March 29, 2000
By /s/ J. Clayburn La Force, Jr.* By /s/ W. J. Timken*
______________________________ _______________________________
J. Clayburn La Force, Jr., Director W. J. Timken Director
Date March 29, 2000 Date March 29, 2000
By /s/ James W. Griffith* By /s/ Joseph F. Toot, Jr.*
______________________________ _______________________________
James W. Griffith, Director Joseph F. Toot, Jr. Director
Date March 29, 2000 Date March 29, 2000
By /s/ John A. Luke, Jr.* By /s/ Martin D. Walker*
______________________________ _______________________________
John A. Luke, Jr. Director Martin D. Walker Director
Date March 29, 2000 Date March 29, 2000
By /s/ Robert W. Mahoney* By /s/ Alton W. Whitehouse*
______________________________ _______________________________
Robert W. Mahoney Director Alton W. Whitehouse, Director
Date March 29, 2000 Date March 29, 2000
By /s/ Jay A. Precourt*
______________________________
Jay A. Precourt Director
Date March 29, 2000
By /s/ G. E. Little
___________________________________
G. E. Little, attorney-in-fact
By authority of Power of Attorney
filed as Exhibit 24 hereto
Date March 29, 2000
EXHIBIT 10.20
THE TIMKEN COMPANY
Nonqualified Stock Option Agreement
WHEREAS, James W. Griffith (the "Optionee") is an
employee of The Timken Company (the "Company");
WHEREAS, the grant of stock options evidenced hereby
was 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 5, 1999 (the "Date of
Grant"), and the execution of a stock option agreement in the
form hereof was authorized by a resolution of the Committee duly
adopted on December 16, 1999; and
WHEREAS, the option evidenced 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 60,000 shares of the Company's common stock
without par value (the "Common Shares") at the exercise price of
eighteen and three-eighths ($18.375) per Common Share (the
"Exercise Price").
1. Vesting of Option. (a) Provided the Optionee
remains in the continuous employ of the Company or a subsidiary
and unless terminated as hereinafter provided, the Option shall
be exercisable (i) to the extent of one-half of the Common Shares
covered by the Option if and when the closing price of a Common
Share equals or exceeds thirty-five dollars ($35.00) per share on
any trading day and (ii) to the extent of the remaining one-half
of the Common Shares covered by the Option if and when the
closing price of a Common Share equals or exceeds fifty-three
dollars
CL: 464213v2
($53.00) per share on any trading day. The closing price of a
Common Share shall be determined in accordance with The Wall
Street Journal, Midwest Edition. 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,
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 51 percent 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
CL: 464213v2
Exchange Act) of securities representing 30 percent 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 30 percent, 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) hereof 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)
CL: 464213v2
hereof files a further 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 again increased to 30 percent 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, or if the Optionee
should retire under a retirement plan of the Company or any
subsidiary (i) at or after age 62 or (ii) at an earlier age with
the consent of the Company.
(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 in 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 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 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 year after the date upon which the Optionee
ceases to be a director of the Company, but not less than five
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
CL: 464213v2
Company's consent and (ii) he continues to serve as a director of the
Company following the cessation of his employment;
(d) one 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 years after the Date of Grant.
For the 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 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
CL: 464213v2
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. To the extent that the Ohio Securities Act
shall be applicable to the Option, the Option shall not be
exercisable unless the Common Shares or other securities covered
by the Option are (a) exempt from registration thereunder,
(b) the subject of a transaction that is exempt from compliance
therewith, (c) registered by description or qualification
thereunder or (d) the subject of a transaction that shall have
been registered by description thereunder.
5. Transferability and Exercisability.
(a) Except as provided in Section 5(b) below, the
Option or any interest in thereof shall not 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 in thereof 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.
CL: 464213v2
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 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 an effect similar to any of those referred to in
Section 6(a) or 6(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
CL: 464213v2
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 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.
CL: 464213v2
This agreement is executed by the Company as of this
16th day of December, 1999.
THE TIMKEN COMPANY
By /s/ Stephen A. Perry
Stephen A. Perry
Senior Vice President
Human Resources, Purchasing & Communications
The undersigned Optionee hereby acknowledges receipt of
an executed original of this agreement and accepts the Option
granted hereunder, subject to the terms and conditions of the
Plan and the terms and conditions hereinabove set forth.
/s/ James W. Griffith
Optionee
Date: 12/16/99
CL: 464213v2
EXHIBIT 10.21
THE TIMKEN COMPANY
Promissory Note
$340,000 Dated: December 17, 1999
For value received, James W. Griffith, an individual whose
residence is located at 1671 Markley in N.Canton, OH (the
"Maker"), hereby promises to pay to The Timken Company (the
"Holder"), or assigns, on or before December 16, 2004 (the
"Maturity Date"), the principal sum of Three Hundred Forty
Thousand Dollars ($340,000), or such part thereof as then remains
unpaid, together with interest thereon at the rate of 6.20
percent per annum on the unpaid balance. Accrued interest shall
be payable not less frequently than annually. Principal and
interest shall be payable in lawful money of the United States of
America, in immediately available funds, at the principal office
of the Holder or at such other place as the Holder may designate
from time to time in writing to the Maker.
This Note may be prepaid at any time or from time to time,
in whole or in part, without any premium or penalty. The unpaid
principal amount of this Note shall be and become immediately due
and payable without notice or demand, at the option of the
Holder, upon the occurrence of any of the following events:
(a) the termination of the Maker's employment with the
Holder or any of its subsidiaries, with or without cause, for any
reason or for no reason, unless (i) he is terminated
involuntarily by the Holder or unless (ii) his employment
terminates under any circumstances after the occurrence of a
change in control of the Holder (as defined in the Severance
Agreement between the Maker and the Holder dated February 13,
1997, as such Agreement may be amended from time to time);
(b) the death or disability (within the meaning of the
Holder's long-term disability plan) of the Maker;
(c) the failure of the Maker to pay his debts as they
become due, the insolvency of the Maker, the filing by or against
the Maker of any petition under the United States Bankruptcy Code
(or the filing of any similar petition under the insolvency law
of any jurisdiction), or the making by the Maker of an assignment
or trust mortgage for the benefit of creditors or the appointment
of a receiver, custodian or similar agent with respect to, or the
taking by any such person of possession of, any property of the
Maker; or
(d) the issuance of any writ of attachment, by trustee
process or otherwise, or any restraining order or injunction not
removed, repealed or dismissed within thirty (30) days of
issuance, against or affecting the person or property of the
Maker or any liability or obligation of the Maker to the Holder.
Nothing in this Note restricts the Maker from selling or
otherwise disposing of any of his assets, including any "margin
stock" (as defined in Regulation U of the Board of Governors of
the Federal Reserve System), and this Note is not directly or
indirectly secured by any "margin stock". By its acceptance of
this Note, the Holder agrees that it has extended the credit
evidenced hereby in good faith without any reliance upon any
"margin stock" as collateral for the extension or maintenance of
the credit evidenced hereby.
In case any payment herein provided for shall not be
paid when due, the Maker further promises to pay all costs of
collection, including all reasonable attorneys' fees, to the
extent permitted by law.
No delay or omission on the part of the Holder in
exercising any right hereunder shall operate as a waiver of such
right or of any other right of the Holder, nor shall any delay,
omission or waiver on any one occasion be deemed a bar to or
waiver of the same or any other right on any future occasion.
The Maker hereby waives presentment, demand, notice of
prepayment, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or
enforcement of this Note. The undersigned hereby assents to any
indulgence and any extension of time for payment of any
indebtedness evidenced by this Note that is granted or permitted
by the Holder.
This Note shall be governed by and construed in
accordance with, the internal substantive laws of the State of
Ohio.
James W. Griffith
Witness
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31,
1999 1998 1997
-------- -------- --------
(Thousands of Dollars)
Income before income taxes,
extraordinary item and cumulative
effect of accounting changes $ 98,991 $185,350 $266,592
Amortization of capitalized interest 2,432 2,437 2,213
Interest expense 27,225 26,502 21,432
Interest portion of rental expense 3,401 3,260 3,267
Earnings $132,049 $217,549 $293,504
======== ======== ========
Interest $30,877 $31,265 $23,608
Interest portion of rental expense 3,401 3,260 3,267
-------- -------- --------
Fixed Charges $34,278 $34,525 $26,875
======== ======== ========
Ratio of Earnings to Fixed Charges 3.85 6.30 10.92
======== ======== ========
EXHIBIT 13
FINANCIAL SUMMARY
1999 1998
(Thousands of dollars, except per share data)
Net sales $2,495,034 $2,679,841
Income before income taxes 98,991 185,350
Provision for income taxes 36,367 70,813
Net income $ 62,624 $ 114,537
Earnings per share $1.01 $1.84
Earnings per share - assuming dilution $1.01 $1.82
Dividends paid per share $0.72 $0.72
The Timken Company maintained profitability in 1999 and
offset longer-than-expected weaknesses in many markets and
regions of the world. The company achieved its third
highest sales in company history and, for the third
consecutive year, succeeded in reducing the number of days'
supply in inventory.
Quarterly Financial Data
<TABLE>
Earnings
Net Gross Net Per Share(1) Dividends Stock Prices
1999 Sales Profit Income Basic Diluted Per Share High Low
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $ 625,370 $126,559 $16,579 $.27 $.27 $.18 $22 3/16 $16 1/8
Second Quarter 636,099 119,601 12,264 .20 .20 .18 25 13/16 15 15/16
Third Quarter 601,703 116,341 12,442 .20 .20 .18 19 11/16 15 3/4
Fourth Quarter 631,862 130,167 21,339 .35 .35 .18 20 9/16 15 5/8
$2,495,034 $492,668 $62,624 $1.01 $1.01 $.72
1998
(Thousands of dollars, except per share data)
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
</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
MD&A SUMMARY TIMKEN
Sales and earnings were down from a year ago, but The Timken
Company maintained profitability and offset longer-than-
expected weaknesses in many markets and regions of the world
through successful growth initiatives, ongoing
rationalizations, and a strong automotive market. In 1999,
sales were $2.495 billion compared to a record $2.68 billion
a year ago. Earnings were $62.6 million, down from 1998's
$114.5 million. In 1998, the company recorded $21.4 million
of pre-tax expenses for structural changes. In addition, in
1999 the company reduced debt by $19.5 million and
repurchased 800,000 shares of the company's stock under the
1998 common stock purchase plan.
In Bearings, automotive markets remained strong while global
industrial market weakness continued. Sales in Europe
remained weak while Asia Pacific markets showed continuing
signs of recovery. In Steel, improved productivity and
lower raw material costs were not sufficient to entirely
offset pricing pressure and weakened demand in industrial
and energy markets.
In 1999, the company continued integrating new acquisitions,
rationalized certain operations for improved efficiency and
customer service, and announced a reorganization of its
global operations, beginning with the election of a new
president.
In the first quarter, two actions increased the company's
presence in India. Timken Engineering and Research in
Bangalore was formed, and Timken bought out its Indian joint
venture partner, creating Timken India Limited. This
acquisition raised the total number of Timken associates at
year-end by about 550. The company's newest acquisition,
Timken Desford Steel, began the integration process in the
first quarter. By year-end it had completed the first phase
of an aggressive accelerated continuous improvement process.
In the second quarter, the company completed the closing of
its manufacturing operations in Australia, rationalizing the
production of certain automotive products to Timken plants
in Canada and Brazil.
In the third quarter, the company announced it would explore
strategic alternatives for its specialty steel subsidiary,
Timken Latrobe Steel. Having completed the initial stage of
the process, the company has determined it will retain
Timken Latrobe Steel as a separate business within The
Timken Company's Steel business. We will continue to seek
opportunities for its growth through internal initiatives
and possible cooperative partnerships.
A series of moves designed to accelerate the company's
profitable growth began with the election in the fourth
quarter of James W. Griffith as president and chief
operating officer and as a director. Mr. Griffith announced
that, in 2000, the new organization will revolve around six
dedicated business units serving global markets. Three new
officers were elected, effective January 1, 2000, to lead
three of the new business units. Donna J. Demerling was
named president - aerospace and super precision; Michael C.
Arnold was named president - industrial; and Mark J.
Samolczyk was named president - precision steel components.
Vinod K. Dasari was elected an officer, effective March 1,
and named president - rail. Bill J. Bowling and Karl P.
Kimmerling, already officers, are presidents of the alloy
steel and automotive businesses, respectively. The timing
of these changes capitalizes on the pending normal
retirements in 2000 of four key executives: Larry R. Brown,
senior vice president and general counsel; Robert L.
Leibensperger, executive vice president, chief operating
officer and president - bearings; John J. Schubach, senior
vice president - strategic management and continuous
improvement; and Thomas W. Strouble, senior vice president -
e-business (until recently, senior vice president -
technology).
Three others were elected officers as follows: Sallie
Ballantine Bailey, director - finance and treasurer; Scott
A. Scherff, corporate secretary; and William R. Burkhart,
senior vice president and general counsel. Ms. Bailey's and
Mr. Scherff's elections were effective in November 1999 and
Mr. Burkhart's is effective April 1.
Two other officers have moved to new positions: Jon T.
Elsasser is senior vice president - corporate development,
and Salvatore J. Miraglia, Jr. is senior vice president -
technology.
Also in the fourth quarter, the company reached an early
tentative agreement with the United Steelworkers of America,
which represents its workers in the Canton, Columbus and
Wooster facilities. Members ratified the new five-year
agreement in January 2000. The new contract will extend
through September 26, 2005, and is the third consecutive
early agreement reached by the company.
FORWARD-LOOKING STATEMENTS
The statements set forth in this annual report that are not
historical in nature are forward-looking. In particular,
the Corporate Profile on pages 6 and 7 and Management's
Discussion and Analysis on pages 17 through 24 contain
numerous 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) changes in customer demand on sales, product mix, and
prices. This includes the effects of customer strikes,
the impact of changes in industrial business cycles,
whether conditions of fair trade continue in the U.S.
market, and the possible revocation in the U.S. of the
anti-dumping duty orders on tapered roller bearings, on
which a decision is to be reached by the U.S. government
by the end of June 2000.
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.
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 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 (1) affect the company's ability or costs to raise
capital, (2) have an impact on the overall performance
of the company's pension fund investments and (3) cause
changes in the economy which affect customer demand.
17
Consolidated Statement of Income
Year Ended December 31
1999 1998 1997
(Thousands of dollars, except per
share data)
Net sales $2,495,034 $2,679,841 $2,617,562
Cost of products sold 2,002,366 2,098,186 2,005,374
Gross Profit 492,668 581,655 612,188
Selling, administrative and general
expenses 359,910 356,672 332,419
Operating Income 132,758 224,983 279,769
Interest expense (27,225) (26,502) (21,432)
Interest income 3,096 2,986 2,250
Other income (expense) (9,638) (16,117) 6,005
Income Before Income Taxes 98,991 185,350 266,592
Provision for income taxes 36,367 70,813 95,173
Net Income $ 62,624 $ 114,537 $ 171,419
Earnings Per Share $ 1.01 $ 1.84 $ 2.73
Earnings Per Share-Assuming
Dilution $ 1.01 $ 1.82 $ 2.69
See accompanying Notes to Consolidated Financial Statements
on pages 25 through 33.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME
1999 COMPARED TO 1998
Net sales for 1999 were $2.495 billion, 6.9% below the
record $2.680 billion in 1998. North American automotive
markets continued to show strength. However, industrial
sales, including original equipment and aftermarket, were
down significantly as were sales in rail and aerospace
markets. Steel's oil country and service center markets
remained weak. Asia Pacific markets continued to improve
throughout the year from 1998's extremely depressed levels.
Sales in Europe were well below 1998's levels; however,
markets there showed some signs of improvement during the
last half of the year. Sales from Timken Desford Steel and
Timken India Limited, acquired in December 1998 and March
1999, respectively, added about $54 million to 1999's sales.
Gross profit was $492.7 million (19.7% of net sales), down
15.3% from 1998's $581.7 million (21.7% of net sales).
Contributing to the decline in profits were lower sales
volumes (particularly of industrial and aftermarket
products), a less favorable product mix, weakening prices,
and lower production levels resulting in higher unabsorbed
fixed costs. These factors, along with substantial
inventory reductions and exchange rate changes, contributed
to weaker performance in the company's European operations.
Gross profit in 1998 included approximately $15 million of
expense related to unusual occurrences and $15.4 million
related to structural changes and cost-reduction
initiatives.
Operating income decreased to $132.8 million in 1999
compared to $225 million in 1998. Selling, administrative
and general expenses were $359.9 million (14.4% of net
sales) in 1999, up slightly from the $356.7 million (13.3%
of net sales) in 1998. Excluding the $6 million of expense
recorded in 1998 related to severance costs and abandoned
potential business opportunities, the year-to-year change in
expenses would have reflected an increase of 2.6%. Normal
administrative expenses for Timken Desford Steel and Timken
India Limited, acquisitions completed during the past year,
account for most of the year-to-year increase.
"Other expense" decreased in 1999. In 1998, the company
recorded $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.
Taxes represented 36.7% of income before taxes compared to
38.2% in 1998. The company's effective tax rate in 1999 was
lower due primarily to greater utilization of foreign and
state tax credits.
In the fourth quarter of 1998, the company recorded expenses
of $21.4 million ($19.1 million for Bearings and
$2.3 million for Steel) related to cost-cutting initiatives
in its administrative and manufacturing areas. Of this
amount, $15.4 million was included in cost of sales and
$6 million was selling, general and administrative expense.
At December 31, 1998, the company had remaining reserves of
$16.2 million, which were essentially exhausted by year-end
1999. The reserves included costs related to the planned
elimination of 515 positions. To date, the company has
eliminated 476 positions and made cash payments of
approximately $10.0 million to the terminated associates.
Current expectations are that a total of 490 positions will
be eliminated. Additional cash payments of approximately
$0.5 million will be made to those associates terminated in
the first quarter of 2000.
During 1999, the company successfully closed its
manufacturing operations in Australia, closed its automotive
lines in South Africa and reduced its raw material and
operational costs at its Brazilian facility. In addition,
the company continued to rationalize certain operations
between its bearing plants in the United Kingdom and France.
Bearings' net sales in 1999 were $1.760 billion, down 2.1%
from $1.798 billion in 1998. North American automotive
sales increased by about 18% over last year resulting
primarily from continued demand for sport utility vehicles
and strong production levels in light and heavy truck
markets. Bearings also experienced similar sales increases
in automotive markets around the world. Demand in most
other bearing markets was down in 1999 compared to 1998.
Sales in North American industrial markets, including
original equipment and aftermarket,
18
TIMKEN
declined by 17% compared to 1998's levels, due primarily to
lower demand from customers in energy, construction, mining
and farm equipment industries. Aerospace and super
precision sales were off by more than 7% in 1999 compared to
the previous year. North American railroad sales also
declined by 13%.
Demand in Europe and Latin America remained soft during the
year. European sales were down year-to-year; however,
Western European markets began to show some strength toward
year-end, particularly in automotive markets. The financial
crisis in Latin America impacted markets there. Asia
Pacific sales continued to show improvement throughout the
year, increasing by 16% over 1998's depressed levels.
Bearings' 1999 sales include Timken India Limited sales for
the last nine months of the year, since the company became a
majority owner in the joint venture in March 1999. Looking
at 2000, the company believes that global automotive markets
should remain strong throughout the year with some softening
of North American light vehicle and heavy truck demand. The
company also expects continued improvement in global
industrial markets as the year progresses. Meanwhile,
industry over-capacity and dumping continue to exert
downward pressures on pricing.
Bearings' earnings before interest and income taxes (EBIT)
in 1999 decreased to $80.5 million, down by 39.6% from
$133.3 million in 1998. Considering the $19.1 million
reduction in 1998's EBIT that resulted from initiatives
identified to improve global competitiveness and reduce
costs, Bearings' EBIT would have suffered a 47.2% structural
decline. Lower demand for industrial products, combined
with efforts to significantly reduce inventory levels during
the year, hurt manufacturing performance as industrial
bearing plants operated well below capacity during much of
the year. Profits generated from higher sales of automotive
product were not great enough to offset the effect of the
global decline in industrial business. Bearings' EBIT was
also affected by weak performance in its European
operations. Selling, administrative and general expenses
were higher in 1999, due in part to the addition of Timken
India Limited and higher expenses required to support growth
initiatives.
In January 2000, the company announced it was transferring
its distribution activities from its existing facilities in
Europe to a central warehouse operated by an external
service provider in Strasbourg, France. This will improve
significantly the company's ability to serve customers in
Europe and will result in the elimination of approximately
60 positions. The company is in the process of evaluating
other opportunities to rationalize bearing operations in
Europe and elsewhere in the world to offset lower demand
levels, reduce fixed costs and improve operating efficiency.
Steel's net sales, including intersegment sales, were
$947 million in 1999, down 12.6% from $1.083 billion in
1998. Sales of precision steel components included in the
above were $150.4 million in 1999 compared to $131.5 million
in 1998. Alloy Steel sales for 1999 included the entire
year's sales from Timken Desford Steel acquired in
December 1998. Sales to external customers were down by
about 17%. In automotive markets, precision steel component
sales were up by 14% with alloy steel sales remaining flat
compared to 1998. Sales in all other markets remained weak
during 1999. Oil country and service center markets were
markedly weaker with sales declining by 72% and 50%,
respectively. Order bookings in service center and oil
country markets began to show signs of limited strengthening
in the latter half of 1999. In general, service center
distributor inventories were brought back into balance
during the year; however, based on the current level of
active rig counts, the company estimates that customers in
oil markets still have about 3 months of excess inventory.
Aerospace sales declined by about 43% compared to 1998 and
industrial sales were off by 29%. Sales to external bearing
customers also dropped by 21%. The company expects demand
for steel products to show modest growth during the year
2000 with continued strength in automotive markets and
strengthening industrial, service center and oil markets.
Steel's EBIT in 1999 was $44 million, down 40.4% from
$73.8 million in the previous year. In 1998, Steel's EBIT
was reduced by approximately $15 million resulting from a
combination of unusual events. In addition, 1998's EBIT was
reduced by $2.3 million as a result of expenses related to
initiatives aimed at reducing costs in coming years.
Adjusting 1998's EBIT for these unusual items, 1999's EBIT
would have been down 51.7%. Lower sales in higher margin
markets, price erosion and higher manufacturing costs
associated with lower production volumes were the primary
causes for the drop in profits.
Although production volumes increased during the fourth
quarter of 1999, the company's steel plants operated at
about 80% of capacity during much of the year. The Steel
business took numerous actions to reduce manufacturing and
administrative costs during the year; however, the benefits
were not sufficient to offset the effect of lower sales and
production volumes. Staff reductions were made in
administrative areas; in plants, the work force was aligned
to match the lower volumes. Steel also achieved significant
gains in operating efficiency, as associates set new output
records with about 230 fewer associates. Raw material costs
also were significantly lower in 1999. Steel's selling,
general and administrative expenses were higher for the year
due in part to severance costs related to additional
administrative staff reductions. Expenses would have been
lower in 1999 except for the addition of Timken Desford
Steel acquired in December 1998.
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
gains were achieved in North American automotive and rail
markets and in Europe. The company's acquisitions made in
1997 and early 1998 also contributed to 1998's increase.
Sales in the U.S. industrial and Asia Pacific markets
weakened during the year as a result of the global economic
decline. 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
by about $15 million. 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 1998. Gross profit was lower in 1998 by
$15.4 million due to expenses for structural changes
initiated by its bearing and steel businesses to reduce
costs and improve profitability in 1999. Approximately half
of this expense related to workforce reductions planned for
early 1999 and the remainder related 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. Operating income also declined in 1998.
Selling, administrative and general expenses were higher in
1998 to support the company's strong growth plans and to
cover expenses incurred at newly acquired subsidiaries. In
addition, the company recorded $6 million of expense in the
fourth quarter, $4 million of which related primarily to
severance costs for the elimination of administrative
salaried positions. 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.
19
Consolidated Balance Sheet
December 31
1999 1998
(Thousands of dollars)
ASSETS
Current Assets
Cash and cash equivalents $ 7,906 $ 320
Accounts receivable, less allowances:
1999-$9,497; 1998-$7,949 339,326 350,483
Deferred income taxes 39,706 42,288
Inventories:
Manufacturing supplies 38,655 43,899
Work in process and raw materials 235,251 229,397
Finished products 172,682 183,950
Total Inventories 446,588 457,246
Total Current Assets 833,526 850,337
Property, Plant and Equipment
Land and buildings 483,810 464,259
Machinery and equipment 2,428,923 2,324,872
2,912,733 2,789,131
Less allowances for depreciation 1,531,259 1,439,592
Property, Plant and Equipment-Net 1,381,474 1,349,539
Other Assets
Costs in excess of net assets of acquired
businesses, net of amortization: 1999-
$34,879; 1998-$28,936 153,847 150,140
Deferred income taxes -0- 20,409
Miscellaneous receivables and other assets 43,668 52,520
Deferred charges and prepaid expenses 28,803 27,086
Total Other Assets 226,318 250,155
Total Assets $2,441,318 $2,450,031
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE BALANCE SHEET
Maintaining a strong balance sheet and strong credit ratings
have been important objectives for the company. During
1999, the company maintained an "A" rating on its long-term
debt by two rating agencies.
Total assets decreased by $8.7 million from December 31,
1998, due to the company's efforts to control working
capital and a planned reduction in capital spending. The
consolidation of Timken India Limited (formerly Tata Timken
Limited) assets into the company's balance sheet added
approximately $46 million to the company's assets. Prior to
the March 1999 increase in ownership to 80%, the company's
investment in Timken India Limited was accounted for using
the equity method.
For the third consecutive year, the company succeeded in
reducing the number of days' supply in inventory to 108
days at December 31, 1999, compared to 109 days and 112 days
at December 31, 1998 and December 31, 1997, respectively.
Bearing inventory (including Timken India Limited) decreased
by about 10 days during 1999 as Bearings took aggressive
action to reduce manufacturing schedules while continuing to
meet customer demand. Steel's inventory (including Timken
Desford Steel) increased by about 12 days due in part to the
higher level of business activity in the fourth quarter.
The number of days' sales in receivables at
December 31, 1999, was basically unchanged from the year-end
1998 level.
The company uses the LIFO method of accounting for about 75%
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.
20
<PAGE>
TIMKEN
December 31
1999 1998
(Thousands of dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Commercial paper $ 35,937 $ 29,873
Short-term debt 81,296 96,720
Accounts payable and other liabilities 236,602 221,823
Salaries, wages and benefits 192,885 106,999
Income taxes 5,627 17,289
Current portion of long-term debt 5,314 17,719
Total Current Liabilities 557,661 490,423
Non-Current Liabilities
Long-term debt 327,343 325,086
Accrued pension cost 76,005 149,366
Accrued postretirement benefits cost 394,084 390,804
Deferred income taxes 6,147 -0-
Other non-current liabilities 34,097 38,271
Total Non-Current Liabilities 837,676 903,527
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 258,287 261,156
Earnings invested in the business 836,916 818,794
Accumulated other comprehensive income (64,134) (49,716)
Treasury shares at cost (1999-1,886,537 shares;
1998-1,234,462 shares) (38,152) (27,217)
Total Shareholders' Equity 1,045,981 1,056,081
Total Liabilities and Shareholders' Equity $2,441,318 $2,450,031
See accompanying Notes to Consolidated Financial Statements
on pages 25 through 33.
"Other assets" declined by $23.8 million in 1999 due
primarily to a reduction in deferred income taxes. This
resulted principally from the company's election to make
cash contributions to its pension plans in 1999 and future
plans to make additional contributions to its pension plans
in 2000.
Accounts payable and other liabilities increased by
$14.8 million in 1999 due in part to the consolidation of
Timken India Limited and increased activity at Timken
Desford Steel since its acquisition in December 1998. The
$85.9 million increase in salaries, wages and benefits
resulted primarily from a reclassification of the company's
accrued pension cost liability to short-term due to the
company's anticipated 2000 cash contributions to its pension
plans.
The 30.1% debt-to-total-capital ratio was slightly lower
than the 30.8% at year-end 1998. Debt decreased by
$19.5 million during the year, from $469.4 million at year-
end 1998 to $449.9 million at December 31, 1999. The
company took aggressive actions in Bearings to improve cash
provided by operating activities primarily through the
reduction of inventory levels. In addition, capital
spending was curtailed to conserve cash. Debt at year-end
1999 included $6.6 million on the books of Timken India
Limited, acquired in March 1999.
21
Consolidated Statement of Cash Flows
Year Ended December 31
1999 1998 1997
(Thousands of dollars)
CASH PROVIDED (USED)
Operating Activities
Net income $ 62,624 $114,537 $171,419
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 149,949 139,833 134,431
Deferred income tax provision (credit)
20,760 6,935 (1,564)
Common stock issued in lieu of cash to
benefit plans 467 46,396 20,452
Changes in operating assets and
liabilities:
Accounts receivable 12,390 13,037 (48,584)
Inventories 6,551 2,478 (25,758)
Other assets 13,307 (5,046) (4,298)
Accounts payable and accrued
expenses 13,291 (27,223) 66,357
Foreign currency translation
(gain) loss (1,921) 919 (472)
Net Cash Provided by Operating
Activities 277,418 291,866 311,983
Investing Activities
Purchases of property, plant and
equipment-net (164,872) (237,835) (233,392)
Acquisitions (29,240) (41,667) (78,739)
Net Cash Used by Investing
Activities (194,112) (279,502) (312,131)
Financing Activities
Cash dividends paid to shareholders (44,502) (44,776) (38,714)
Purchases of treasury shares (14,271) (80,462) (18,083)
Proceeds from issuance of long-term
debt 4,076 139,666 60,453
Payments on long-term debt (20,867) (23,333) (30,217)
Short-term debt activity-net (411) (12,918) 32,485
Net Cash (Used) Provided by
Financing Activities (75,975) (21,823) 5,924
Effect of exchange rate changes on cash 255 (45) (1,294)
Increase (Decrease) In Cash and Cash
Equivalents 7,586 (9,504) 4,482
Cash and cash equivalents at beginning
of year 320 9,824 5,342
Cash and Cash Equivalents at End of
Year $ 7,906 $ 320 $ 9,824
See accompanying Notes to Consolidated Financial Statements
on pages 25 through 33.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENTS OF
CASH FLOWS
Net cash provided by operating activities in 1999 was
$277.4 million, the third highest in company history. This
compares to $291.9 million in 1998 and the record of
$312 million in 1997. Cash generated from income in 1999
was more than sufficient to cover working capital, pay
dividends, pay interest and fund purchases of property,
plant and equipment. The increase in the provision for
deferred income taxes resulted primarily from the company's
election to make additional cash contributions to its
pension plans in 1999 and 2000. "Common stock issued in
lieu of cash to benefit plans" was lower by about
$46 million resulting primarily from the company's decision
to fund employee benefit plans with shares of common stock
purchased on the open market versus using treasury shares.
The company was successful in effectively managing working
capital during 1999. "Accounts receivable" was lower and
generated $12.4 million of cash. A decrease in inventories
provided $6.6 million of cash during 1999 compared to
$2.5 million in 1998. Cash also was provided by a
$13.3 million increase in accounts payable and accrued
expenses, which resulted primarily from higher accounts
payable to suppliers, offset in part by lower income taxes
payable.
"Purchases of property, plant and equipment-net" during the
twelve months ended December 31, 1999, was $164.9 million,
30.7% below the $237.8 million spent in 1998. Growth
initiatives continued, however, as the company supported
capital projects consistent with its strategies to maintain
industry leadership. The company also invested
approximately $29 million to increase its ownership from 40%
to 80% in Timken India Limited. In 1998, the company
invested $41.7 million in new acquisitions. Further capital
investments in technologies within plants throughout the
world provide the opportunity to improve the company's
competitiveness and meet the needs of its growing base of
customers.
The company also used funds during the year to repay debt
and to repurchase shares of the company's stock under the
1998 common stock purchase plan. During 1999, the
22
TIMKEN
company acquired about 800,000 shares to be held in treasury
as authorized under the 1998 plan. As of year-end 1999,
2.6 million shares of the 4 million shares authorized were
purchased pursuant to the plan. The authorization to
purchase shares under the 1998 plan expires December 31,
2001. The company expects that cash generated from
operating activities during 2000 will be sufficient to cover
working capital, pay dividends, fund debt service
requirements and fund currently planned capital
expenditures. Any further cash needs, such as those that
may be required for potential future acquisitions or cash
contributions to the company's pension plans, could be met
by short-term borrowing and issuance of medium-term notes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OTHER INFORMATION
The industry's antidumping duty orders covering imports of
tapered roller bearings from Japan, China, Hungary and
Romania are currently in the process of being reviewed by
U.S. government agencies to determine whether dumping and
injury to the domestic industry are likely to continue or
recur if the orders were to be revoked. These reviews
commenced in April 1999, and should conclude by the end of
the second quarter 2000. The company is actively
participating in the proceedings. If the U.S. government
determines that dumping and injury are likely to continue or
recur, the antidumping duty finding and orders will continue
in place for another five years. If, however, a
determination is made that injury to the domestic industry
is unlikely to continue or recur with respect to any of the
four countries covered, the finding or order will be revoked
with respect to that country. If, following the revocation
of such an order, injurious dumping does continue or recur,
contrary to the finding of the government, the improved
conditions of fair trade of tapered roller bearings in the
U.S., which resulted from the existing orders, would
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.
In readying systems for 2000 compliance, the company used a
defined methodology that included inventory and assessment,
remediation, test, integration, implementation and
contingency plan components. Begun in 1996, this program
encompassed Timken worldwide business systems and
operations, manufacturing and distribution systems,
technical architecture, end-user computing and the company's
supplier and customer base.
This effort led to the successful startup of global business
systems and production operations during and immediately
after the January 1st weekend. To date, no environmental,
systems or operational problems have resulted that impact
the company's ability to conduct business or its financial
position. The company has not experienced any significant
year-2000-related compliance problems with its customers,
suppliers, business partners or governments. A program that
will continue through March 31, 2000, has been implemented
to monitor and control year 2000 turnover at all corporate
facilities.
Total costs associated with the company's year 2000
conversion efforts were approximately $13 million. The
Timken Company's year 2000 efforts have had minimal impact
on its other information technology programs.
In 1999, the company increased its discount rate for U.S.-
based pension and postretirement benefit plans from 7.0% to
8.25% to reflect the increase in year-end interest rates.
However, the favorable impact that this change has on
pension and postretirement expense calculations will be more
than offset by plan improvements. The combined expense for
U.S.-based pension and postretirement benefits is expected
to increase by about $21 million in 2000.
Changes in short-term interest rates related to three
separate funding sources affect company earnings. 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 $1.6 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.
Fluctuations in the value of the U.S. dollar as compared to
foreign currencies, predominantly in European countries,
also affect company earnings. 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 intracompany
transactions. In addition, hedges are used to cover third-
party purchases of product and equipment. As of
December 31, 1999, there were $27.4 million of hedges in
place. A uniform 10% weakening of the dollar against all
currencies would have resulted in a shortfall of
$0.7 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's subsidiary in Romania is considered to operate
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. In 1999, the company recorded
unrealized exchange losses of $9.1 million related to the
translation of Timken Romania's financial statements. The
devaluation of the Brazilian real that occurred in
January 1999 did not have a significant impact on the
company's results of operations for the year.
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 1999, the company reissued its
environmental policy, revised in accordance with ISO 14001
environmental management system requirements, and committed
to becoming ISO 14001 certified within the next several
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. This continues to
be true in view of the fact that the rules have now been
remanded by the federal courts for further consideration by
the EPA.
The company and certain of its U.S. subsidiaries have been
designated as potentially responsible parties (PRP's) by the
23
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, 1997
Balance at January 1, 1996 $ 922,228 $53,064 $270,840 $619,061 $(12,799) $ (7,938)
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) 46,396 (12,717) 59,113
Balance at December 31, 1998 $1,056,081 $53,064 $261,156 $818,794 $(49,716) $ (27,217)
Year Ended December 31, 1999
Net income 62,624 62,624
Foreign currency translation
adjustments (net of income tax
of $2,829) (13,952) (13,952)
Minimum pension liability
adjustment (net of income tax
of $274) (466) (466)
Total comprehensive income 48,206
Dividends-$0.72 per share (44,502) (44,502)
Purchase of 804,500 shares for
treasury (14,271) (14,271)
Issuance of 152,425 shares
from treasury(1) 467 (2,869) 3,336
Balance at December 31, 1999 $1,045,981 $53,064 $258,287 $836,916 $(64,134) $ (38,152)
</TABLE>
(1)Share activity was in conjunction with employee benefit and stock option
plans. See accompanying Notes to Consolidated Financial Statements on
pages 25 through 33.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OTHER INFORMATION (CONTINUED)
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 $3.8 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 $1.4 million.
The company has environmental projects at two of its manufacturing locations
in Ohio. A remediation system was installed at the Columbus plant in 1998
and at the oil house site in Canton in December 1999. The company has
provided for the cost of these projects which to date have been $3.8 million.
A portion of the cost of the oil house project is being recovered from the
Ohio Petroleum Underground Storage Tank Release Compensation Board. Future
operating and maintenance costs are expected to be approximately $1.2 million.
24
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.
Revenue Recognition: The company recognizes revenue when
products are shipped or services rendered.
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, with 75% valued by the last-in, first-out (LIFO)
method. If all inventories had been valued at current
costs, inventories would have been $142,806,000 and
$167,466,000 greater at December 31, 1999 and 1998,
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 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 and for 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 1999 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
$46,000,000 at December 31, 1999. 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 $9,856,000 in 1999, a loss of $1,332,000 in
1998 and a gain of $731,000 in 1997.
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," as amended, which is required to be adopted by
the company effective January 1, 2001. 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 1998
financial statements have been reclassified to conform to
the 1999 presentation.
25
Notes to Consolidated Financial Statements
2. Acquisitions
In March 1999, the company increased its ownership of Timken
India Limited (formerly Tata Timken Limited) from 40% to
80%. Prior to the additional investment, the company
accounted for Timken India using the equity method. As a
result of the transaction, the Timken India financial
position and operating results are consolidated into the
company's financial statements.
In December 1998, the company purchased Desford Steel Tubes
Ltd. of Leicester, England, to form Timken Desford Steel, a
manufacturer of seamless mechanical tubing for bearing,
automotive, off-highway and defense applications. During
1998, the company completed the acquisition of Bearing
Repair Specialists, an industrial bearing repair business
that reconditions or modifies a wide variety of bearing
types for industrial customers in the United States and
Canada.
In 1997, the company completed the acquisition of Handpiece
Headquarters, Inc. and the aerospace bearing operations of
the Torrington Company Limited that 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 a 70% interest in
Rulmenti Grei S.A. to form Timken Romania in December 1997,
which produces bearings used in industrial applications.
The total cost of these acquisitions amounted to $29,240,000
in 1999; $41,667,000 in 1998; and $78,739,000 in 1997. 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 $30,425,000 in 1999; $50,115,000 in 1998; and
$85,619,000 in 1997; the fair value of liabilities assumed
was $9,790,000 in 1999; $13,026,000 in 1998; and $20,075,000
in 1997. The purchase allocation for Timken India 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. 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:
1999 1998 1997
(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 $ 62,624 $ 114,537 $ 171,419
Denominator:
Denominator for earnings per share -
weighted-average shares 61,795,162 62,244,097 62,786,387
Effect of dilutive securities:
Stock options and awards - based on
the treasury stock method 230,651 565,672 1,017,747
Denominator for earnings per share -
assuming dilution - adjusted
weighted-average shares 62,025,813 62,809,769 63,804,134
Earnings per share $ 1.01 $ 1.84 $ 2.73
Earnings per share - assuming
dilution $ 1.01 $ 1.82 $ 2.69
4. Comprehensive Income
Accumulated comprehensive income consists of the following:
1999 1998 1997
(Thousands of dollars)
Foreign currency translation adjustment $(57,363) $(43,411) $(35,315)
Minimum pension liability adjustment (6,771) (6,305) (2,711)
$(64,134) $(49,716) $(38,026)
26
TIMKEN
5. Financing Arrangements
Long-term debt at December 31, 1999 and 1998 was as follows:
1999 1998
(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% $252,000 $267,000
Variable-rate State of Ohio Air Quality and Water
Development Revenue Refunding Bonds, maturing on
June 1, 2001 (5.65% at December 31, 1999) 21,700 21,700
Variable-rate State of Ohio Pollution Control Revenue
Refunding Bonds, maturing on July 1, 2003 (5.35% at
December 31, 1999) 17,000 17,000
Variable-rate State of Ohio Water Development Revenue
Refunding Bonds, maturing May 1, 2007 (5.65% at
December 31, 1999) 8,000 8,000
Variable-rate State of Ohio Water Development Authority
Solid Waste Revenue Bonds, maturing on July 2, 2032
(5.75% at December 31, 1999) 24,000 24,000
Other 9,957 5,105
332,657 342,805
Less current maturities 5,314 17,719
$327,343 $325,086
The aggregate maturities of long-term debt for the five
years subsequent to December 31, 1999, are as follows:
2000-$5,314,000; 2001-$23,650,000; 2002-$36,266,000;
2003-$17,663,000; and 2004-$5,421,000.
Interest paid in 1999, 1998 and 1997 approximated
$32,000,000; $28,000,000 and $24,000,000, respectively.
This differs from interest expense due to timing of payments
and interest capitalized of $3,700,000 in 1999; $4,800,000
in 1998; and $2,200,000 in 1997 as a part of major capital
additions. The weighted-average interest rate on commercial
paper borrowings during the year was 5.2% in 1999, 5.6% in
1998 and 5.7% in 1997. The weighted-average interest rate
on short-term debt during the year was 6.3% in 1999, 7.4% in
1998 and 6.6% in 1997.
At December 31, 1999, the company had available $264,000,000
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, 1999, 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 $17,724,000, $16,934,000 and $16,689,000 in
1999, 1998 and 1997, respectively. At December 31, 1999,
future minimum lease payments for noncancelable operating
leases totaled $41,741,000 and are payable as follows:
2000-$12,056,000; 2001-$8,190,000; 2002-$6,338,000;
2003-$5,163,000; 2004-$4,141,000; and $5,853,000,
thereafter.
6. 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, 1999 and 1998, the company had forward exchange
contracts, all having maturities of less than one year, in
amounts of $27,393,000 and $21,613,000, respectively, which
approximates their fair value. The forward exchange
contracts were primarily entered into by the company's
German subsidiary and exchanged Deutsche marks for U.S.
dollars and British pounds. 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 $241,000,000 and
$293,000,000 at December 31, 1999 and 1998, respectively.
The carrying value of this debt was $264,000,000 and
$284,000,000.
27
Notes to Consolidated Financial Statements
7. 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, 1999, the plans
had 10,073,214 shares of Timken Company common stock with a
fair value of $205,871,000. Company contributions to the
plans, including performance sharing, amounted to
$14,891,000 in 1999; $16,380,000 in 1998; and $16,245,000 in
1997. The company paid dividends totaling $6,838,000 in
1999; $5,519,000 in 1998; and $4,366,000 in 1997, 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, 1999 and 1998:
Defined Benefit Postretirement Plans
Pension Plans
1999 1998 1999 1998
(Thousands of dollars)
Change in benefit obligation
Benefit obligation at
beginning of year $1,496,111 $1,296,866 $ 463,385 $ 414,570
Service cost 35,876 32,441 4,857 4,562
Interest cost 103,232 95,520 33,525 30,188
Amendments 27,514 20,140 -0- 1,772
Actuarial (gains) losses (135,485) 135,029 (833) 41,786
Associate contributions 1,371 1,517 -0- -0-
Acquisition 12,155 -0- -0- -0-
International plan exchange
rate change (3,997) 84 (109) 127
Benefits paid (85,048) (85,486) (34,518) (29,620)
Benefit obligation at end of
year $1,451,729 $1,496,111 $ 466,307 $ 463,385
Change in plan assets (1)
Fair value of plan assets at
beginning of year $1,314,158 $1,207,847
Actual return on plan assets 171,566 178,288
Associate contributions 1,371 1,517
Company contributions 46,673 11,751
Acquisition 12,155 -0-
International plan exchange
rate change (3,422) 241
Benefits paid (85,048) (85,486)
Fair value of plan assets at
end of year $1,457,453 $1,314,158
Funded status
Projected benefit obligation
(in excess of) or less
than plan assets $ 5,724 $ (181,953) $(466,307) $(463,385)
Unrecognized net actuarial
(gain) loss (261,711) (54,013) 78,708 83,791
Unrecognized net asset at
transition dates, net of
amortization (6,253) (9,244) -0- -0-
Unrecognized prior service
cost (benefit) 115,066 104,433 (35,370) (40,080)
Accrued benefit cost $ (147,174) $ (140,777) $(422,969) $(419,674)
Amounts recognized in the
consolidated balance sheet
Accrued benefit liability $ (158,754) $ (151,777) $(422,969) $(419,674)
Intangible asset 840 1,000 -0- -0-
Minimum pension liability
included in accumulated
other comprehensive income 10,740 10,000 -0- -0-
Net amount recognized $ (147,174) $ (140,777) $(422,969) $(419,674)
(1)Plan assets are primarily invested in listed stocks and
bonds and cash equivalents.
28
TIMKEN
Amounts applicable to the company's pension plans with
accumulated benefit obligations in excess of plan assets are
as follows:
1999 1998
(Thousands of dollars)
Projected benefit obligation $32,488 $710,880
Accumulated benefit obligation 29,739 652,095
Fair value of plan assets -0- 567,753
The following table summarizes the assumptions used by the
consulting actuary and the related benefit cost information:
Pension Benefits Postretirement Benefits
1999 1998 1997 1999 1998 1997
Assumptions
Discount rate 8.25% 7.0% 7.25% 8.25% 7.0% 7.25%
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 $ 35,876 $32,441 $26,144 $ 4,857 $ 4,562 $ 4,116
Interest cost 103,232 95,520 88,683 33,525 30,188 28,691
Expected return on
plan assets (102,148) (95,083) (91,384) -0- -0- -0-
Amortization of
prior service cost 16,412 16,033 13,019 (4,474) (4,489) (4,547)
Recognized net
actuarial loss 1,724 1,646 764 3,796 544 -0-
Amortization of
transition asset (1,951) (2,143) (2,283) -0- -0- -0-
Net periodic
benefit cost $ 53,145 $48,414 $34,943 $37,704 $30,805 $28,260
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 7.5% declining gradually to
6% in 2002 and thereafter for pre-age 65 benefits, and 6%
for post-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 1999 total service and interest cost components
by $1,907,000 and would increase the postretirement benefit
obligation by $25,409,000. A one percentage point decrease
would provide corresponding reductions of $1,831,000 and
$24,183,000, respectively.
8. Research and Development
Expenditures committed to research and development amounted
to approximately $50,000,000 in 1999; $48,000,000 in 1998;
and $43,000,000 in 1997. Such expenditures may fluctuate
from year to year depending on special projects and needs.
9. 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
Notes to Consolidated Financial Statements
10. 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 $5,056,000
in 1999; $3,787,000 in 1998; and $2,901,000 in 1997.
Following is the pro forma information and the related assumptions under
the Black-Scholes method:
1999 1998 1997
(Thousands of dollars except per share data)
Pro forma net income $57,568 $110,750 $168,518
Earnings per share $ 0.93 $ 1.78 $ 2.68
Earnings per share - assuming dilution $ 0.93 $ 1.76 $ 2.64
Assumptions:
Risk-free interest rate 5.33% 5.74% 6.90%
Dividend yield 2.79% 2.78% 3.13%
Expected stock volatility 0.444 0.271 0.235
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>
1999 1998 1997
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 3,526,301 $23.73 3,180,136 $20.15 3,091,994 $17.80
Granted 1,186,100 19.45 861,900 33.35 762,200 26.44
Exercised (186,774) 16.72 (510,635) 17.71 (653,608) 16.41
Canceled or expired (9,951) 22.13 (5,100) 21.47 (20,450) 18.77
Outstanding - end of
year 4,515,676 $22.90 3,526,301 $23.73 3,180,136 $20.15
Options exercisable 2,171,996 1,710,031 1,617,355
</TABLE>
The company sponsors a performance target option plan that is contingent
upon the company's common shares reaching specified fair market values.
Under the plan, no awards were issued nor was compensation expense recognized
during 1997, 1998 or 1999.
Exercise prices for options outstanding as of December 31, 1999, 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 1999, 1998 and 1997 were $8.11, $10.19 and $7.58,
respectively. At December 31, 1999, a total of 263,829 restricted stock
rights, restricted shares or deferred shares have been awarded under the above
plans and are not vested. The company distributed 87,206, 78,831 and 71,188
common shares in 1999, 1998 and 1997, respectively, as a result of awards of
restricted stock rights, restricted shares and deferred shares.
The number of shares available for future grants for all plans, including
stock options, is 308,783, 1,654,222 and 2,396,441 at year-end 1999, 1998 and
1997, respectively.
30
TIMKEN
11. Income Taxes
The provision (credit) for income taxes consisted of the following:
1999 1998 1997
Current Deferred Current Deferred Current Deferred
(Thousands of dollars)
United States:
Federal $ 9,988 $20,884 $50,056 $ 5,173 $76,866 $(4,627)
State and local (552) 2,835 6,212 (1,384) 10,248 (294)
Foreign 6,171 (2,959) 7,610 3,146 9,623 3,357
$15,607 $20,760 $63,878 $ 6,935 $96,737 $(1,564)
The company made income tax payments of approximately
$14,760,000 in 1999; $62,190,000 in 1998; and $93,486,000 in
1997. 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, 1999 and 1998 was
as follows:
1999 1998
(Thousands of dollars)
Deferred tax assets:
Accrued postretirement benefits cost $156,777 $156,371
Accrued pension cost 27,949 47,185
Benefit accruals 24,051 19,634
Foreign tax loss carryforwards 15,041 14,367
Other-net 17,160 25,375
Valuation allowance (15,041) (14,367)
225,937 248,565
Deferred tax liability-depreciation (192,378) (185,868)
Net deferred tax asset $ 33,559 $ 62,697
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:
1999 1998 1997
(Thousands of dollars)
Income tax at the statutory federal rate $34,647 $64,873 $93,307
Adjustments:
State and local income taxes, net of federal
tax benefit 1,484 3,138 6,470
Tax on foreign remittances 1,216 -0- -0-
Non-deductible unrealized exchange losses 1,548 -0- -0-
Foreign tax credits (2,205) -0- -0-
Losses without current tax benefits -0- 2,307 -0-
Research tax credit claims for prior years -0- -0- (4,000)
Other items (323) 495 (604)
Provision for income taxes $36,367 $70,813 $95,173
Effective income tax rate 37% 38% 36%
31
Notes to Consolidated Financial Statements
12. Segment Information
DESCRIPTION OF TYPES OF PRODUCTS AND SERVICES FROM WHICH
EACH REPORTABLE SEGMENT DERIVES ITS REVENUES
The company has two reportable segments: Bearings and
Steel. 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 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 are 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 creates
intercompany profit on intersegment sales or transfers.
FACTORS USED BY MANAGEMENT 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
(Thousands of dollars)
1999
Net sales $1,922,092 $364,380 $208,562 $2,495,034
Income before income taxes 112,556 (28,936) 15,371 98,991
Non-current assets 1,303,980 240,020 63,792 1,607,792
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
32
TIMKEN
Segment Financial Information 1999 1998 1997
(Thousands of dollars)
Bearings
Net sales to external customers $1,759,871 $1,797,745 $1,718,876
Depreciation and amortization 83,255 80,175 76,625
Earnings before interest and taxes 80,548 133,318 165,520
Interest expense (21,817) (22,425) (16,880)
Interest income 3,018 2,086 1,270
Capital expenditures 116,569 145,613 122,350
Assets employed at year-end 1,476,545 1,514,780 1,455,086
Steel
Net sales to external customers $ 735,163 $ 882,096 $ 898,686
Intersegment sales 211,870 200,911 204,295
Depreciation and amortization 66,694 59,658 57,806
Earnings before interest and taxes 44,039 73,825 121,203
Interest expense (9,347) (7,714) (6,802)
Interest income 4,017 4,537 2,200
Capital expenditures 56,653 113,008 107,582
Assets employed at year-end 964,773 935,251 871,464
Total
Net sales to external customers $2,495,034 $2,679,841 $2,617,562
Depreciation and amortization 149,949 139,833 134,431
Earnings before interest and taxes 124,587 207,143 286,723
Interest expense (31,164) (30,139) (23,682)
Interest income 7,035 6,623 3,470
Capital expenditures 173,222 258,621 229,932
Assets employed at year-end 2,441,318 2,450,031 2,326,550
Income Before Income Taxes
Total EBIT for reportable segments $ 124,587 $ 207,143 $ 286,723
Interest expense (27,225) (26,502) (21,432)
Interest income 3,096 2,986 1,258
Intersegment adjustments (1,467) 1,723 43
Income before income taxes $ 98,991 $ 185,350 $ 266,592
Segment interest expense and income include intersegment
amounts. Both intersegment interest expense and income of
$3,939,000, $3,637,000 and $2,250,000 incurred in 1999, 1998
and 1997, respectively, were deducted from combined segment
amounts to reconcile consolidated amounts.
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,
1999 and 1998, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. 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 auditing
standards generally accepted in the United States. 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, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Canton, Ohio
February 3, 2000
33
SUMMARY OF OPERATIONS AND OTHER COMPARATIVE DATA
(Thousands of dollars, except per share data)
1999 1998 1997 1996
Statements of Income
Net sales:
Bearings $1,759,871 $1,797,745 $1,718,876 $1,598,040
Steel 735,163 882,096 898,686 796,717
Total net sales 2,495,034 2,679,841 2,617,562 2,394,757
Cost of products sold 2,002,366 2,098,186 2,005,374 1,828,394
Selling, administrative and
general expenses 359,910 356,672 332,419 319,458
Impairment and
restructuring charges -0- -0- -0- -0-
Operating income (loss) 132,758 224,983 279,769 246,905
Earnings before interest
and taxes (EBIT) 123,120 208,866 286,766 242,304
Interest expense 27,225 26,502 21,432 17,899
Income (loss) before income
taxes 98,991 185,350 266,592 225,259
Provisions for income taxes
(credit) 36,367 70,813 95,173 86,322
Income (loss) before
cumulative effect of
accounting changes 62,624 114,537 171,419 138,937
Net income (loss) $ 62,624 $ 114,537 $ 171,419 $ 138,937
Balance Sheets
Inventory $ 446,588 $ 457,246 $ 445,853 $ 419,507
Current assets 833,526 850,337 855,171 793,633
Working capital 275,865 359,914 275,607 265,685
Property, plant and
equipment (less
depreciation) 1,381,474 1,349,539 1,220,516 1,094,329
Total assets 2,441,318 2,450,031 2,326,550 2,071,338
Total debt 449,890 469,398 359,431 302,665
Total liabilities 1,395,337 1,393,950 1,294,474 1,149,110
Shareholders' equity $1,045,981 $1,056,081 $1,032,076 $ 922,228
Other Comparative Data
Net income (loss)/Total
assets 2.6% 4.7% 7.4% 6.7%
Net income (loss)/Net sales 2.5% 4.3% 6.5% 5.8%
EBIT/Beginning invested
capital (1) 5.6% 10.5% 16.1% 15.1%
Inventory days (FIFO) 108.4 109.4 111.5 117.5
Net sales per
associate (2) $ 119.1 $ 127.5 $ 130.5 $ 132.4
Capital expenditures $ 173,222 $ 258,621 $ 229,932 $ 155,925
Depreciation and
amortization $ 149,949 $ 139,833 $ 134,431 $ 126,457
Capital expenditures/
Depreciation 120.3% 192.5% 177.3% 127.0%
Dividends per share $ 0.72 $ 0.72 $ 0.66 $ 0.60
Earnings per share (3) $ 1.01 $ 1.84 $ 2.73 $ 2.21
Earnings per share -
assuming dilution (3) $ 1.01 $ 1.82 $ 2.69 $ 2.19
Debt to total capital 30.1% 30.8% 25.8% 24.7%
Number of associates at
year-end 20,856 21,046 20,994 19,130
Number of shareholders (4) 42,907 45,942 46,394 31,813
(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
1995 1994 1993 1992 1991 1990(5)
$1,524,728 $1,312,323 $1,153,987 $1,169,035 $1,128,972 $1,173,056
705,776 618,028 554,774 473,275 518,453 527,955
2,230,504 1,930,351 1,708,761 1,642,310 1,647,425 1,701,011
1,723,463 1,514,098 1,369,711 1,300,744 1,315,290 1,287,534
304,046 283,727 276,928 299,305 300,274 287,971
-0- -0- 48,000 -0- 41,000 -0-
202,995 132,526 14,122 42,261 (9,139) 125,506
197,957 134,674 7,843 40,606 (16,724) 119,199
19,813 24,872 29,619 28,660 26,673 26,339
180,174 111,323 (20,919) 13,431 (41,950) 98,816
67,824 42,859 (3,250) 8,979 (6,263) 43,574
112,350 68,464 (17,669) 4,452 (35,687) 55,242
$ 112,350 $ 68,464 $ (271,932) $ 4,452 $ (35,687) $ 55,242
$ 367,889 $ 332,304 $ 299,783 $ 310,947 $ 320,076 $ 379,543
710,258 657,180 586,384 556,017 562,496 657,865
247,895 178,556 153,971 165,553 148,950 238,486
1,039,382 1,030,451 1,024,664 1,049,004 1,058,872 1,025,565
1,925,925 1,858,734 1,789,719 1,738,450 1,759,139 1,814,909
211,232 279,519 276,476 320,515 273,104 266,392
1,104,747 1,125,843 1,104,407 753,387 740,168 740,208
$ 821,178 $ 732,891 $ 685,312 $ 985,063 $1,018,971 $1,074,701
5.8% 3.7% (15.2)% 0.3% (2.0)% 3.0%
5.0% 3.5% (15.9)% 0.3% (2.2)% 3.2%
12.6% 9.0% 0.5% 2.5% (1.0)% 7.9%
112.2 118.0 122.5 137.8 139.9 162.8
$ 134.2 $ 119.9 $ 104.5 $ 95.3 $ 90.0 $ 94.2
$ 131,188 $ 119,656 $ 92,940 $ 139,096 $ 144,678 $ 120,090
$ 123,409 $ 119,255 $ 118,403 $ 114,433 $ 109,252 $ 101,260
109.1% 102.6% 80.2% 124.4% 135.6% 120.4%
$ 0.555 $ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.49
$ 1.80 $ 1.11 $ (0.29) $ 0.07 $ (0.60) $ 0.92
$ 1.78 $ 1.10 $ (0.29) $ 0.07 $ (0.60) $ 0.92
20.5% 27.6% 28.7% 24.5% 21.1% 19.9%
17,034 16,202 15,985 16,729 17,740 18,860
26,792 49,968 28,767 31,395 26,048 25,090
(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
APPENDIX TO EXHIBIT 13
On page 1 of the printed document, three bar charts were
shown which contain the following information:
(1) Net Sales ($ Millions)
1995 2,231
1996 2,395
1997 2,618
1998 2,680
1999 2,495
(2) Total Annual Return to Shareholders
1995 11.7%
1996 23.1%
1997 53.4%
1998 -43.5%
1999 12.4%
(3) Inventory Days
1990 162.8
1993 122.5
1996 117.5
1999 108.4
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 71%
Steel 29%
(2) The Timken Company Net Sales by Geographic Area
United States 77%
Europe 15%
Other 8%
(3) Steel Net Sales - Total
Customers 78%
Intersegment 22%
On page 34 of the printed document, two bar charts were
shown that contain the following information:
(1) Total Net Sales to Customers (Billions of dollars)
Bearings Steel
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
1999 1.760 0.735
(2) Return on Net Sales*
Operating
Income (Loss) Income(Loss)
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%
1999 5.3% 2.5%
*Before cumulative effect of accounting changes
On page 35 of the printed document, two bar charts were
shown that contain the following information:
(1) Earnings* and Dividends per Share
Earnings Dividends
Per Share Per Share
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
1999 1.01 0.720
*Assuming dilution and before cumulative effect of
accounting changes
(2) EBIT/Beginning Invested Capital
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%
1999 5.6%
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 India Limited India 80%
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 92%
The Timken Corporation Ohio 100%
The Timken Service & Sales Co. Ohio 100%
Timken Servicios Administrativos
S.A. de C.V. Mexico 100%
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 Singapore Pte. Ltd. Singapore 100%
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 3,
2000, 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, 1999, 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
333-62481 The Company Savings Plan for the Employees August 28, 1998
of Timken France - 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
ERNST & YOUNG LLP
Canton, Ohio
March 28, 2000
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, 1999 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 4th day of February, 2000.
/s/ Stanley C. Gault /s/ John M. Timken, Jr.
____________________________ _____________________________
Stanley C. Gault, Director John M. Timken, Jr., Director
/s/ J. Clayburn LaForce, Jr. /s/ Ward J. Timken
____________________________ _____________________________
J. Clayburn LaForce, Jr., Ward J. Timken, Director and
Director Vice President
/s/ James W. Griffith /s/ W. R. Timken, Jr.
____________________________ _____________________________
James W. Griffith, Director W. R. Timken, Jr., Director
and President and Chief and Chairman and Chief
Operating Officer Executive Officer
/s/ Gene E. Little /s/ Joseph F. Toot, Jr.
____________________________ _____________________________
Gene E. Little, Senior Vice Joseph F. Toot, Jr., Director
President - Finance
(Principal Financial
Accounting Officer
/s/ John A. Luke, Jr. /s/ Martin D. Walker
____________________________ _____________________________
John A. Luke, Jr., Director Martin D. Walker, Director
/s/ Robert W. Mahoney /s/ Charles H. West
____________________________ _____________________________
Robert W. Mahoney, Director Charles H. West, Director
/s/ Jay A. Precourt /s/ A. W. Whitehouse
____________________________ _____________________________
Jay A. Precourt, 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>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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<CURRENT-ASSETS> 833,526
<PP&E> 2,912,733
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<TOTAL-ASSETS> 2,441,318
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0
0
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<INCOME-TAX> 36,367
<INCOME-CONTINUING> 62,624
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