Timken Co (TKR) 2002 Q3 法說會逐字稿

Good morning, this is Shalita (ph) and I will be your conference facilitator today. At this time I would like to welcome everyone to the discussion of Torrington acquisition and third quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Mertes you may begin your conference.

Thank you and good morning to you all. I am Dick Mertes, manager of investor relations. With me today is Jim Griffith, President and CEO; Tim Timken, Chairman of our Board; Glenn Eisenberg, Executive VP Finance and Administration. Today we're going to quickly review our third quarter financial performance, and then move onto review the powerful and exciting acquisition of Torrington that was announced late yesterday. We'll have adequate time to address your questions on both topics.

Before we go any further, I will cover the safe harbor language. Certain statements made in this teleconference, including statements regarding company's forecasts, beliefs and expectations that are not historical in nature, are forward-looking statements within the meaning of the act. The company cautions that actual results may differ materially from those projected or implied in forward-looking statements due to a variety of important factors, including the anti trust clearance, financing and other closing risks associated with the acquisition of Torrington, the uncertainties in both time and amount, if any, of actual benefits realized through economies of scale, elimination of duplicated costs, operating efficiencies and enhanced productivity through the integration of Torrington with Timken operations. Risks associated with diversion of management's attention from routine operations during the integration process, risks associated with the greater level of debt associated with the combined companies, the impact on operations of general economic conditions, the cyclicality of the company's business, customer demand and the company's ability to achieve the benefits of its ongoing restructuring and debt reduction programs.

These and additional factors are described in greater detail in the company's 2001 annual report, our 10K's for the year ending December 31 2001, and the 10Q's for the periods ending March 31 and June 30, 2002. The company undertakes no obligation to update or revise any forward-looking statements. With that I'd like to turn the conference over to Jim.

Thanks Dick, and good morning everyone. Before I start my comments I should inform you that last evening we filed an 8K report, containing a presentation that we will be referring to in this discussion this morning. You can find it posted on our Website, www.timken.com, and actually I will begin on page three of that presentation if in fact you have it.

My comments on our financial results will exclude the impact of restructuring, reorganization and the cumulative effect of accounting changes relating to the goodwill impairment laws. We took a $13 million after tax write down of goodwill relative to the company's Latrobe specialty steel business. The third quarter financial performance of the Timken Company continued the strong performance achieved in the first two quarters of the year. One has to go back to the year 2000 for sales, and 1999 for EBIT to find third quarter performance level better than this year's performance. For our bearing business we had record third quarter sales.

Sales for the quarter of $629 million were up almost 9% over last year. As with the first two quarters of this year, the sales strength is primarily driven by the North American automotive market. Automotive bearing sales for the quarter were up 17% over last year. Steel was up 11% and industrial bearings up slightly, just over 1%. EBIT for the quarter of $25 million was up $19 million over last year. Gross profit improved over last year while business cost was essentially flat, as improved volumes and the continued impact of our manufacturing strategy and cost containment initiatives leveraged our operating results.

We are on course to achieve the $80 million annual rate of savings targeted by year-end. EBIT margins were up 300 basis points, to 4% as gross profit margins improved 180 basis points to 18%, and SG&A improved 130 basis points to 13.5%. Earnings per share for the quarter were 17 cents, 3 cents over the consensus analysts' estimate. On a year to date basis, we had earnings per share of 68 cents, well over last year's 20 cents. Operating cash flow for the quarter was $61 million, versus $4 million last year. The change was driven by improved profitability, lower restructuring charges, and the pension fund contributions which were made in stock versus cash, partially offset by slightly higher inventory levels.

Net debt ended the quarter of $445 million or 35.2% of capital, which is almost $120 million under last year. I think I'll pause my comments on the third quarter at that point, and shift this over to talk about the acquisition. If you have any questions about the specific businesses, or about the market, I'll be happy to take those during the Q&A. With that I'd like to turn the mic over to Tim Timken, to talk about our exciting announcement.

Good morning. Well certainly today is a major day in the history of our 103-year-old Timken Company. For many years, extensively in the last two to three years, we have been building our company resources and talent to be able to undertake such a major acquisition as we announced yesterday. The day and the opportunity have arrived. Our platform for profitable growth and increased returns will now be greatly expanded. In difficult times companies often lose sight of the opportunities that exist in the future. We plan to capture those opportunities, and I think that's good for our associates at the Timken Company, and for our shareholders.

Our acquisition of Ingersoll Rand's Torrington subsidiary combines two complementary businesses to form an industry leading global bearings company. With this acquisition we are combining over 100 years of bearing experience of the two companies, along with a commitment to remain a worldwide leader in the industry. Timken invented the tapered roller bearing, and today we are the leading global producer of tapered roller bearing products. Torrington pioneered needle roller bearings, and they are the leading global producer of those products. Combined, we will be the third largest bearing company in the world, with many complementary products.

We will be able to create more value for our customers through effective new product development, by leveraging our combined bearing and material science, we being a steel producer. We'll also use Timken's broad international distribution network to deliver Torrington products to the world under the strong Timken brand name, and increase our range of products to our aftermarket customers.

There is a strong strategic rationale for combining the two companies. Timken will increase its penetration of the global bearings market from 7% to 11%. Not only will we offer a broader range of complementary products, but our customer base will become larger, and more diverse, with more end use applications and significant cross selling opportunities. We also expect that this acquisition will improve our cash flow generation capabilities, and we'll use it to immediately reduce outstanding debt as it occurs. There should be many opportunities to grow the business, improve our cost position and create substantial synergies. In fact, we expect to capture about 20 million synergies in the year 2003, and we project that this rate will grow to 80 million annually by the end of 2005.

At this point let me return to my initial comment, this is a powerful move by a strong company. We are a competitive world leader with a strong balance sheet and cash flows, we have great talent, up to date management systems, and a performance ethic. I personally have been working for the Timken Company for 44 years, and the chairman for 27 years, and I have never been more excited than I am today.

Jim Griffith has some additional comments that will add further perspective to this subject.

OK, for those of you using the presentation, I'm now on what I think is the seventh page, one called "Torrington Overview". This acquisition is in fact a bold one in Timken's ongoing transformation. We've talked to you extensively over the last three years about the transformation as we've created global business units, as we have launched a number of relatively small but quite creative new business initiatives, and as we have aggressively cut costs, implementing our global manufacturing strategy to remove $120 million in costs by 2004.

This acquisition accelerates our transformation. Torrington offers a good, strategic fit with Timken. We know the industry very well, and the acquisition of Torrington is an integral part of our strategy to deliver greater value to our customers, and through that, to our shareholders. We are combining two companies with complementary product lines into an industry leading global bearings company. To give you some perspective, the Torrington Company is referred to by Ingersoll Rand as their engineering solutions segment. Torrington operates its business in two segments that are very familiar to us, in automotives and in industrial business.

But Timken and Torrington serve many different applications and different segments within those groupings. A little over 50% of Torrington's business is in the automotive bearings, with the remainder in industrial. Their OEM business focuses on higher margin niche products, and about 25% of their sales is in the industrial aftermarket. Again to the next page, which has two pie charts on it.

Torrington's global sales are divided geographically, with 73% of the sales in North America, 17% in Europe, and 10% in other regions. I have to say however, that this financial analysis understates their globality, because they have a number of joint ventures in other parts of the world, which are minority holdings for them, and therefore not consolidated. They serve many diverse end use markets, from automotive and consumer markets, to general industrial, construction, agricultural, natural resource, and other industries

As you look at the slide with the customers, you get a bit of a sense of their globality. Torrington serves a number of the same customers as Timken, but with different products, and in different applications. In terms of product mix, Torrington will increase the size of both our automotive and industrial businesses. On a pro forma basis, roughly 37% of our business will be in the automotive sector, 40% in the industrial sector, and 23% in steel. Timken will become one of the top 100 automotive suppliers worldwide, with significant opportunities to innovate, creating new automotive solutions for customers. Torrington adds sophisticated needle bearing solutions for automotive power train applications, which complements our existing portfolio of tapered roller bearings and precision steel components for wheel ends and drive lines.

For industrial customers, it will mean a broader range of industrial solutions and services involving tapered and needle roller bearings as well as cylindrical, spherical and ball bearings. While our geographic mix will stay roughly the same, we expect the acquisition to strengthen our footprint outside North America, creating critical mass in many emerging markets.

Switching to the slide that has a picture of our transformation pyramid. We've reduced costs and had driven productivity in excess of 8% in the last two years, that being spread equally in all three of our major businesses. This is the primary thing that has increased our profitability over that time. We intend to continue that through the integration of the two companies, as we continue to improve our base business performance. We expect to realize significant synergies, as we combine the two companies. We'll accomplish this by removing redundancies, leveraging a much broader manufacturing footprint, and leveraging our global distribution network with a broader product line.

In the longer term, we will achieve growth through innovation. A significant portion of Torrington's automotive sales comes from custom engineered products. In addition, the industrial business will establish a broader product line, and new applications involving needle roller bearings. Together we have a strong foundation for innovation.

Finally, Torrington has a good team of technical and management associates, which we will garner and add to the strength of our organization. Let me turn the mic to Glenn to walk through the financial overview.

Thank you Jim. I believe the financial slides that start with key transaction terms are slide number 12. First let me cover some of those issues. For the $840 million purchase price, we'll be paying Ingersoll Rand $700 million in cash, and issuing to them $140 million worth of Timken shares. We have bank commitments for $875 million from Bank of America, Key Bank, Merrill Lynch and Morgan Stanley. This includes a $500 million revolving credit facility, and a $375 million one-year term loan facility. The latter will be taken out with a public bond offering.

In addition, we'll issue 11 million shares to the public prior to closing. In order to maintain our investment grade ranking, we've made the transaction contingent upon issuing these shares. At our current price we would be raising over $300 million in equity when combined with the $140 million issued to IR. IR would receive approximately 8.5 million shares, or around 10% of Timken stock at today's price. They've agreed not to sell these shares for six months after the close of the transaction. We will raise our equity after we receive regulatory approval of anti-trust and securities and we would expect to close the transaction during the first quarter of next year.

On the next slide with the financial overview, you'll see that at the purchase price of $840 million this would represent a multiple of approximately five times Torrington's last 12 months pro forma EBITDA of around $147 million. We believe this is a very attractive valuation, especially given the complementary fit that the company has with Timken.

Given our proposed capital structure we expect to remain investment grade, with a focus on future free cash flow that we would use to pay down debt and to further strengthen our balance sheet. Looking at the multiple again on the sheet you'll see 5.7 times. I don't know if I made that number clear.

Given the complementary fit with Timken, we also expect to achieve significant synergies that I'll talk about in a moment, especially including the first year out. This will contribute greater than 10% accretion to EPS in 2003 and improve our capabilities for generating cash flow. It's important to note that based upon the price we paid and the envisioned capital structure, this transaction is accretive on a stand-alone basis, even without any synergies.

The next slide goes through the synergies that we believe we will receive. As I mentioned, it will be very significant when we are able to combine two very complementary companies. We estimate the first year synergies to be approximately $20 million, and this will grow to around $80 million by the end of 2005, or after three years. We have spent a lot of time during our due diligence process, developing a detailed integration plan that will drive the synergy capture.

Now, we cannot go into the very specifics about the synergies until the transaction is closed, however, other than (ph) to say that we expect significant savings to be achieved through leveraging our purchasing, facility rationalization, eliminating duplication of costs and leveraging distribution channels.

The next chart shows our estimated pro forma numbers, for both Timken and Torrington, over the last 12 months that would have ended in September. As you can see, combined the new Timken company would have pro forma sales of approximately $3.7 billion, generating around $380 million of EBITDA, or margins in excess of 10%. You'll see that Torrington actually mixes Timken's margin up with their focus on higher margin niches and stronger after market sales.

Over the past year, Timken's and Torrington's capital expenditures as a percentage of sales has been a little bit over 3%, which is down a little bit from historical averages, given the current economic environment that we're in.

And finally, on our last slide, in summary, this combination of Timken and Torrington is both a very powerful transaction, a very powerful company coming out from a strategic as well as a financial perspective. In addition to being the leader in tapered and needle roller bearings, Timken also will have an expanded position in additional bearing types, such as cylindrical, spherical and ball bearings. Timken will be a leading bearings producer for industrial, automotive, rail and aerospace sectors. We will have an expanded platform to take advantage of our steel competencies.

With sales combined, of $3.7 billion, we will have 11% market position globally in the bearings industry, which will enable us to compete more effectively on a global scale. And again, with the price that we're able to pay for Torrington, and with the synergies that we envision receiving, we expect this to be a highly accretive transaction, and create significant shareholder value.

With those comments, Tim, Jim and I would be happy to answer any of your questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one, on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Our first question comes from Holden Lewis, from BBNT.

Good morning, guys. I wanted to ask you, now, can you give a sense of, you know, how much of the savings you're expecting? I guess, it's certainly listed at $20 million. But as we go forward, towards the $80 million, how much of those are expected to be really kind of hard savings that could be, you know, gotten regardless of what takes place in the economy? And, how much of it tends to be more, you know, productivity based, where there might be some assumption in terms of volume recovery, over which you can get that productivity? I mean, if the market doesn't recover, there's some risk. Can you give some guidance there, please?

How does 100% solid sound? There is no assumption in the synergy number of a volume impact for that. I mean, that's the same approach that we've taken in our manufacturing strategy initiative, Holden. Most of it comes from the fact that, these are two companies with complementary product lines, but basically in the same business. So, we have overlapping sales forces, overlapping distribution. We will leverage the best of both manufacturing capabilities and then we will drive Lean Six Sigma through their factories and our factories as we capture the best of both companies.

So, in my mind that $80 million number is all hard cost savings, the same kind of stuff we've delivered through our manufacturing strategy initiative.

OK. And can you give us a sense of what the impact on steel is? Was Torrington a significant buyer, so maybe some of that volume now is internal? Or is there any impact on steel from this acquisition?

One of the, I guess, complementary in the other term comments about Torrington is that they were a very loyal steel customer. And, in fact, the majority of the steel that they consume was already purchased from the Timken Company. There will be a positive impact, but it was not the reason for the deal.

OK, but I mean, are the revenues, I mean, those were external sales. Those now become internal, correct?

Yes, but it's not material compared with the sales of the steel business.

It's not? OK. All right, thank you.

Thank you. Your next question comes from Bob Schenosky, from CIBC World Markets.

Congratulations, guys. I have two quick questions, Jim. The first, are there any liabilities relative to the employees that you'll be taking on from Torrington, as well?

I'm going to let Glenn answer that, if I can. The answer is no, but I'll let him give you the broad answer.

Bob, and the first thing I'll say is that we will be filing, or they will be filing the documents of the agreement today. So, there should be, hopefully, via the Edgar, or the Internet access to the entire document. As Jim said, we have at least, if it's regarding the pensions for the U.S. Pension plans, we will not be assuming any of the liabilities associated with the legacy costs for that in the U.S. We will assume the international plans, which are much smaller.

OK. Any issues with those international plans, at this point, in terms of funding status?

No.

OK. And then, if I could, just two follow on things. Jim, from a global standpoint, where's the one thing that stands out for you from this acquisition, where you may have been lacking from a competitive standpoint, you know, when you think about the two big players?

You know better than to ask me to pick one thing.

Well, OK, let's get three.

We will become the number three bearings producer, bearings manufacturer in Europe, which is a much stronger position than the niche that we had there. Second, they have a 40-year old joint venture with NSK in Japan, which has sales of about $150 million. It's not consolidated because they are just barely a minority holder in it, so that gives us a foothold, toehold, whatever you want to call it, in the Japanese market.

And then, in the emerging markets, India, China, it just strengthens the foothold that we already have. When we finish this in our new plant in Xiujuo (ph) China, we'll have four manufacturing sites in China. We'll have two manufacturing sites in India, and that's important, given the future of those markets, both as markets and as manufacturing locations.

Right, and then if I could, one final question. You know, the last acquisition, if I remember correctly back in the early '90s, MPB, that you did obviously had some issues there. What would you say are the biggest integration challenges with this acquisition?

Let me first contrast the two. In hindsight, we bought MPB at the height of the market and the only real issue we had with MPB is that the aerospace market collapsed in the early part of the '90s. As we look at the integration here, if integrations can be straightforward, this is a straightforward integration. We're bearing people; they're bearing people. We're highly ethical; they're highly ethical. We have a strong brand; they have a strong brand. This is the kind of acquisition that should be happening in the market today.

No, I agree. Any issues that you see with the employment in terms of redundancies?

No more than any that you know, when you're going after $80 million in synergies, you undoubtedly will impact some people's jobs.

Right, no I'm thinking more any hurdles with unions?

No, at this point we don't see anything that would inhibit our ability to move forward from that point of view. If there is an area which has a risk, they have a fairly strong presence in France, and that's a difficult environment. You'll actually see in the announcement or in the contract if you look at it, there's some funny language around French unions. We actually have a requirement to consult with the French works council before we can announce the acquisition in France. It's clear between the two of us that acquisition will take place, but it's just indicative of the nature of the French labor situation.

Right, like trying to ask them to work five days instead of four.

Yes, but again Bob we've been in France since before World War II, we've had our European headquarters there for a long time, so it's not a new challenge.

Right, absolutely. OK, thanks, and congratulations again.

Thank you.

Thank you. Your next question comes from Gabe Marshank from Cigma.

Hi gentlemen, a couple of quick questions for you. First, can you give us a sense of the amount of leverage that you will have pro forma for the acquisition? It looks to me like you're taking on about 10 points of leverage, going from about 37 to about 47% net to cap. Does that seem reasonable?

Yes that seems reasonable, and again it will be a function of the shares that we raise close to the closing on the transaction.

Right, and the rating agencies given you an indication that they're comfortable that that remains investment grade?

Well I saw this morning S&P came out with their indications and they've quoted obviously subject to the transaction being completed, but that we would most likely remain investment grade, although probably at the BBB- (ph) level. I think as we've modeled the transaction, as we've formulated the capital structure that we wanted to have, it was extremely important to us to maintain an investment grade balance sheet, and we believe we will with this transaction.

Great. Second question on the pension. You obviously have mad some contribution of shares. How much year-to-date have you contributed to the pension, and what is your minimum funding requirement this year under ARISA, and can you speculate on the outlook for next year.

We've put into the pension plan a little bit over $100 million of contribution. As you pointed out, we funded part of that this year, with 3 million of our shares, which would have represented around $55 million of that contribution. So from a cash standpoint, it was around $60 million. We continue to effectively provide more than the minimums required for our pension funds and will continue to do so.

And should that minimum requirement go up next year, given the weak performance of the equity market?

Well again, normally the requirements for next year will be a function of prior times, so we're pretty confident in what the numbers will be. But clearly as you go beyond that timeframe, it is a function of the returns that we get on the assets that we have for our pensions. Again, this transaction for the U.S. plan won't increase that, because we're not assuming their plans, but we continue to again over fund our existing plans. We've modeled that, and we can do that with the free cash flow of the company.

Just to clarify, you over fund relative to ARISA requirements, but what is the under funding currently on the, the difference between PBO and the fair value of your planned assets past the end of the third quarter?

Again I think in the, in our annual report you'll see that funding status is around, I think it's 65% give or take funded on that basis, 65-70%. We can get you more current, but that still fluctuates.

OK, last question. You significantly reduced your reliance on steel, but at the same time you're expanding your exposure to auto and industrial with this transaction. Can you just give me a sense of your comfort level if we were to sustain a significant downturn in the auto markets, and especially if North American production were to drop to sort of the 15 million level or 15.5. What would that mean in terms of your ability to A) cut costs; or B) just in terms of the top line of stability that you see?

Gabe, the first comment I would make is the automotive business of the Timken Company has been changing radically over the last five to eight years, and bringing the Torrington automotive business into it changes it even more radically. Unlike the perceptions people have of the automotive business, this is a custom engineered products business, and therefore carries very attractive margins from our point of view. What all that means is that we are not as susceptible to an automotive downturn as historical cycles would indicate. Clearly we've modeled scenarios that talk about the type of numbers that you're talking about, and are very comfortable in our ability to maintain our balance sheet in that kind of a scenario.

OK, thank you very much.

Thank you. Your next question comes from Steve Bookman from Morgan Stanley.

Hi, good morning. Just a couple of follow-ups, there was a point on one of the slides about positive cash flow impact. I'm just wondering if this is one of those stories where perhaps there was some excess working capital, from your perspective, tied up in Torrington, which potentially could be reduced or maybe capital spending. Can you just flush that out a little?

I think that the first comment will be that we're picking up a very well run company. They do a very good job on working capital management and capex expenditures. So I think it's really the combination between the two and the synergies that we'll get between the two, which will provide the incremental cash flow versus just our operating their business on a stand alone business basis better than they did. But clearly we expect this to be cash positive with the combination of the two, as we combine and restructure or provide the synergies of integrating the two companies so that we can leverage better working capital, leverage the capex spending that we make.

OK, fair enough, thanks. Sort of building off of Gabe's question, can you give us a sense at the Torrington businesses, of the automotive margins that they're getting, maybe if you don't want to give us numbers, maybe with respect to your auto margins, are they better or worse? Then I guess sort of the same question about the industrial businesses.

Steve, the way to look at their business is if you look at the new product part, you've seen the sensor pack and the integrated wheel end products that we've got going to the North American light truck market. Their auto business looks like that, and clearly the change that's happened in our auto business over the last three or four years has been because of that shift toward much more highly engineered product. That means if you look at it on an overall basis, their overall automotive business carries higher margins than ours. On their industrial business they are almost in the same situation we are. A large aftermarket component, so that there are good structural margins in that, but with the level of the industrial market right now, they are depressed.

OK, fair enough. And I guess that does it for me, thanks.

Thanks Steve.

Thank you, your next question comes from Mark Parr, from McDonald Investments.

Hi, good morning gentlemen.

Good morning.

Congratulations on making a very bold move in what up to at least last week has been kind of a difficult market environment. I had one question, just kind of a point of clarification. At least my sense was that Timken's existing internal cost reduction plan I believe exceeded $80 million, and I just wonder if with this acquisition of Torrington that kind of the last year of this plan may be molded into the Torrington situation or should we still expect an additional $40 million of cost savings on top of the $80 million you're expecting from the Timken situation at the end of this year?

I'm tempted, and I will use the words that come to mind, damned right you should expect an additional $40 million. We said it in our news release, and there is actually, if you look at Ingersoll Rand's restructuring, there's actually restructuring going on within Torrington as well from a charge they took last year. The challenge to us, the key to the success is continuing to drive that restructuring, that cost reduction at a more aggressive pace than they've achieved, and maintaining that pace of cost reduction within the Timken Company.

I guess looking at '03, '04 and '05, we should be looking for about an additional $40 million of cost reduction out of Timken as well as $80 million of synergies related to the acquisition. Is that fair?

That's the rate we're on, we clearly would hope to actually exceed that, but that will drive up our margin over time, yes.

OK, terrific. Again congratulations and look forward to monitoring your progress here as the economy recovers over the next 18-24 months.

Thanks Mark.

Thank you. Your next question comes from Steve Haggerty from Merrill Lynch.

Good morning everyone.

Good morning.

Two quick questions. One, on the bearing business in general. SKF came out yesterday with good results and a fairly optimistic outlook. You had good results in your quarter. Is there anything particularly driving the bearing business right now against what has been a fairly bleak industrial background overall, that's allowing bearings to seem to outperform other industrial sectors?

The answer, when you look at those two companies specifically, is that those two companies, the markets that we serve went down early in the cycle, and those two companies took aggressive actions, very aggressive actions, to take their fixed costs down and to allow us to operate at the level that the market's at, and do it profitably. I would tell you I don't believe that is a bearing industry phenomenon; I think that is associated with the specific actions those two companies have taken. If you happen to notice the release of NSK out of Japan, they've actually gone the other direction in this market. So I do think it is specific to SKF and Timken.

OK, and one follow up question. It may be premature, but what has been the reaction among some of your customers, either in automotive or industrial, to this announced merger? I don't know whether you consulted with them or not, but I think it was mentioned earlier that this was a merger, or an acquisition I should say, that was needed in the industry. Have you gotten any feedback from any of your key customers on this?

Obviously we announced after the close of the market yesterday, and we're just now starting to make contact with them. So I think it would be presumptuous for us to give you an indicative response. We certainly are anticipating a positive response from them, because the purpose of this is to bring more value to those customers.

OK, thank you.

Thank you. Your next question comes from Jed Bonham from Catinous (ph) Capital.

Hi guys, congratulations.

Thank you.

The 140 million of stock that is going to Ingersoll, are there adjustments that are made for movements in Timken stock? In other words, if your stock rises dramatically or falls dramatically, are there adjustments made to, in other words is there a collar in the stock ratio? Additionally, could you talk about the pro forma mix of auto bearings? The traditional mix has been skewed towards light truck, is that still the case? And what will be your mix with Ford, GM and Daimler-Chrysler, pro forma?

Jed, this is Glenn Eisenberg, let me cover the first one and have Jim Griffith cover the second. On the stock there is no collar, effectively we will be issuing to them $140 million worth of Timken stock at closing. The number of shares will be calculated based upon the share price that we raise our 11 million shares at. So the variable will be how many shares they'll receive. So currently, at the current share price, they would be receiving around 8.5 million shares.

On the mix within auto specifically, we talk about the two product lines being complimentary, in fact that has as lot to do with the application. Traditionally, Timken's product, tapered bearings, have been used extensively in wheel applications, in differential applications and in manual transmissions. Our steel products tend to be used more broadly, and particularly precision steel components, sells a fair amount to the automatic transmissions in North America. Torrington's products sell disproportionately in automotive transmissions and the engine. So what this allows us to do is to get down more into the passenger car market, and more broadly across the automotive industry.

Just a very quick follow up. Did you try to negotiate a collar on the stock that you're providing to Ingersoll? I mean if the market declines dramatically, the steel, at least on the Ingersoll stock portion, the amount of stock that you're issuing could be extremely dilutive to your stock. Did you try to negotiate a collar, at least on the downside?

What we have negotiated is an out, from the standpoint that we will raise our 11 million shares at a sufficient level in order to provide enough equity to come in to again maintain an investment grade balance sheet. So from that standpoint we're well protected. If there is a significant decrease in the share price at the time that we will be going forward, we would have the ability not to go forward with the transaction, because we wouldn't be raising the amount of equity that we would want in order to do the transaction.

Very quick follow up, are there any potential DOJ issues related to concentration in any geographies or end markets that might hold up the deal?

Clearly we will be required to file a Hart-Scott-Rodino filing on this and we expect it to be thoroughly reviewed. There is very little overlap between the products of the two companies, and therefore we expect the review to go cleanly, both in the United States and in the EU.

Great, thanks.

Thank you. At this time there is a follow up question or comment from Gabe Marshank from Cigma.

Yes, just two quick ones. One, Caterpillar yesterday announced that it was taking a pretty significant minimum pension liability; do you expect to do the same?

Yes.

OK, do you have a sense of what sort of hit to equity that could be?

We're looking at, I believe it's around, give or take call it $100 million that we would take in the fourth quarter relating to that.

OK, and just secondly, what will be the timing you suspect, just in general terms, of the secondary offering of stock?

Well again, it's after we receive all of our regulatory approvals, so we would say we've targeted, if you will, that the transaction would close in the first quarter of next year, and it would close right after we would go out with our equity filing or within the next few days after completing a successful equity offering.

Great, thanks very much.

Thank you. Again there is a follow up question from Bob Schenosky from CIBC World Markets.

Thanks; just a couple of follow ups here. One, on the back of Jed's question, if you were to pull out of the deal Glenn, is there a penalty? Financial penalty to Ingersoll?

No, there is not.

OK. And then just two other quick ones, as it relates to Torrington, were they limited, do you know, in terms of the construction markets, due to the Bob Cat relationship?

We don't have any information on that. That's pretty detailed market information and we just don't have any information on that.

OK thanks Jim. Then finally, if we can discuss fourth quarter briefly, we have the expectation several of the mobile customers may take some additional downtime, and questions on what type of seasonality impact we'll see in auto. Can you make some comments as it relates to your fourth quarter?

Well let me just step back and walk through the markets a little bit. We continue to see very strong demand in both North America and in the European auto markets. We see some strengthening in the heavy truck market in Europe, and all of that is positive. Frankly with the number of new products that we've got, and the strength of the market, we would welcome a little bit of a breather in the fourth quarter in terms of demand. On the industrial side, we're not seeing a lot of signs of strength in the North American market. We have seen some selected weakness in specific markets. We are seeing some signs of stronger markets outside the United States, particularly the countries that have big mining markets. We're seeing good aftermarket sales there, and we're seeing fairly good strength in Europe.

In the steel business we continue down the track that we have for the last few quarters, good strong automotive demand, a base of demand on the industrial markets, but no real strength, and we continue to see our customers shifting demand to us from weaker players in the steel industry.

OK thanks Jim, and then a final follow up on the steel side. How are contract negotiations going for next year, granted I know you can't be specific, but in general terms, is the bias flat, up, down?

Our efforts, what we've seen Bob, is we've seen an increase in scrap prices, and that is buoying that and the demand situation are buoying steel prices. So we would expect to see prices higher. In fact you've see a couple of announcements come out from us in terms of higher prices or price increases being announced in the marketplace.

Right, so it's something in the range of say 3-5% be reasonable for next year?

On the low end of that.

OK, great, thank you.

Thank you. There is a follow up question or comment from Holden Lewis from BBNT.

Thank you. Any issues with regard to the dock closures on the west coast? I noticed that a lot of people that said that they might be shutting down capacity prior to that sort of bailout was a lot of automotive companies. It was pretty short, but is that something which represents something of a risk, if after 80 days that kicks back in, and was there any material impact from the short closedown?

The direct answer is no actually. I was most impressed with our team, the products that we were importing were all diverted well in advance of the strike, and the automotive customers that were impacted did not have a significant impact on us.

OK, you'd be concerned if you did have a lengthy one after the 80-day period though? I assume there's no real way to sort of offset that risk.

I think the fundamental thing is that we are positioned, and in fact could benefit from such an effort. The challenge to us is competitive imports, both challenging our steel business and our bearing business. So we see it more as an opportunity than a threat.

Can you speak a little bit to the utilization of the steel business? Where was it? Was it up versus prior quarter or anything of that nature?

We have been running, I'll say reasonably consistently over the last couple of quarters. We're sort of in the 70-80% range. I mean obviously that's higher than last year, but about equal to where we were last quarter.

OK. And then last thing, you talked for the last couple of quarters about wanting to get the inventory down, it keeps creeping up. Is that, are we still looking to try to squeeze the inventory some, or is there some reason why that's being somewhat stronger?

Well it's a combination of two things. One is we were building inventories around the closure of our plant in England, and that closed as of the end of September. So we've taken that piece of capacity out now. So that will cause it to continue to come down. Beyond that it's balancing and trying to position inventories dealing with this extremely strong automotive market, and in some cases building ahead above that.

OK, thank you.

Thank you. At this time there are no further questions.

Thank you much for participating today. We have a closing remark, and then I have a statement to make and then we'll go enjoy the rest of our day.

This is Jim Griffith, if I can just summarize the discussion and the mood at the Timken Company. We've just reported our third quarter above market expectations. Obviously in not the most attractive market situations. That gives me great confidence that the steps we're taking internally to drive our performance are successful and delivering for our shareholders, and we are celebrating today a historic day in terms of the Timken Company, bringing the strengths of the Torrington Company into the strengths of the Timken Company in a bold, strategic move that makes us number three globally in the bearings industry. It makes us the leader in three key segments, the tapered segment, the alloy steel segment, and the needle bearing segment, and positions us very strongly in the global industrial aftermarket. It's an exciting time to be part of the Timken Company. Dick.

OK, thank you Jim. We'll conclude our teleconference with this remark. This presentation does not constitute an offer to sell or the solicitation of an offer to buy any securities and shall not constitute any offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under applicable security laws. Timken intends to file a registration statement with the SEC in connection with the proposed financing transactions. The registration statement will contain important information about Timken, the transactions and related matters.

Investors are urged to read the registration statement carefully when it is available. Investors will also be able to obtain free copies of these documents, through the Website maintained by the Commission, at www.SEC.gov. The securities, to be registered under such registration statements, may not be sold nor may offers to buy be accepted, prior to the time such registration statement becomes effective.

The last statement I have to make is that our next teleconference is tentatively scheduled for 10:00 o'clock on Wednesday, January 22, 2003. The call number will remain the same as the one you used today, which is 706 634 0975. Please refer to our website or to Streetevents.com for confirmation. And with that, we'll conclude this teleconference. And, have a great day.

Thank you. This concludes today's conference call. You may now disconnect.