Notes to Consolidated Financial Statements
(Thousands of dollars, except share data)
15 Income Taxes
The provision (credit) for income taxes consisted of the following:
|
| |
2003 |
2002 |
2001 |
|
| |
Current |
Deferred |
Current |
Deferred |
Current |
Deferred |
|
| United States: |
|
|
|
|
|
|
| Federal |
$ - |
$ 48 |
$ 5,220 |
$ 17,808 |
$ (18,523) |
$ 22,620 |
| State and local |
1,020 |
1,271 |
3,936 |
(1,682) |
2,332 |
(628) |
| Foreign |
18,895 |
3,087 |
7,661 |
1,124 |
7,961 |
1,021 |
|
| |
$ 19,915 |
$ 4,406 |
$ 16,817 |
$ 17,250 |
$ (8,230) |
$ 23,013 |
|
The company made income tax payments of approximately $13,830 in 2003, received income tax refunds of approximately $27,000 in 2002 and made income tax payments of approximately $7,210 in 2001. 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, 2003 and 2002 were as follows:
|
|
2003 |
2002 |
|
| Deferred tax assets: |
|
|
| Accrued postretirement benefits cost |
$ 192,860 |
$ 169,113 |
| Accrued pension cost |
145,451 |
192,983 |
| Benefit accruals |
22,908 |
18,262 |
| Tax loss and credit carryforwards |
136,086 |
63,877 |
| Other–net |
21,049 |
1,818 |
| Valuation allowance |
(31,581) |
(22,491) |
|
| |
486,773 |
423,562 |
| Deferred tax liability–depreciation |
(287,700) |
(218,508) |
|
| Net deferred tax asset |
$ 199,073 |
$ 205,054 |
|
The company has U.S. net operating loss carryforwards with benefits totaling $97,900. These losses will start to expire in 2021. In addition, the company has loss carryforward benefits in various foreign jurisdictions of $16,400 without expiration dates and state and local loss carryforward benefits of $5,800, which will begin to expire in 2014. The company has provided a full valuation allowance against the foreign loss carryforward benefits and a $2,100 valuation allowance against the state and local loss carryforward benefits.
The company has a research tax credit carryforward of $3,400, an AMT credit carryforward of $2,900 and state income tax credits of $9,700. The research tax credits will expire annually between 2019 and 2023 and the AMT credits do not have any expiration date. The state income tax credits will expire at various intervals beginning in 2004 and are fully reserved by the company. For financial statement reporting purposes, income (loss) before income taxes, based on geographic location of the operation to which such earnings are attributable, is provided below. The Timken Company has elected to treat certain foreign entities as branches for US income tax purposes; therefore, pretax income by location is not directly related to pretax income as reported to the respective taxing jurisdictions.
|
| |
Income (loss)
before income taxes |
|
| |
2003 |
2002 |
2001 |
|
| United States |
$53,560 |
$ 191,105 |
$ 26,862 |
| Non-United States |
$7,242 |
$ (105,587) |
$ (53,745) |
|
| Income (loss) before taxes |
$ 60,802 |
$ 85,518 |
$ (26,883) |
|
Following is the reconciliation between the provision for income taxes and the amount computed by applying U.S. federal income tax rate of 35% to income before taxes:
|
| |
2003 |
2002 |
2001 |
|
| Income tax (credit) at the statutory federal rate |
$ 21,281 |
$ 29,931 |
$ (9,409) |
| Adjustments: |
|
|
|
| State and local income taxes, net of federal tax benefit |
1,489 |
1,465 |
1,107 |
| Tax on foreign remittances |
1,277 |
1,105 |
476 |
| Losses without current tax benefits |
8,866 |
3,598 |
20,854 |
| Extraterritorial Income Benefit |
(8,626) |
(980) |
(924) |
| Other items |
34 |
(1,052) |
2,679 |
|
| Provision for income taxes |
$ 24,321 |
$ 34,067 |
$ 14,783 |
|
| Effective income tax rate |
40% |
40% |
N/A |
|
In 2003, the company incurred losses without current tax benefits principally related to operations in Germany. In 2002 and 2001, the company incurred losses without current tax benefits in Brazil and China. In addition, the company had losses without current benefit in 2001 related to the shut down of operations in the United Kingdom.
In connection with various investment arrangements, the Company has a “holiday” from income taxes in the Czech Republic and China. These agreements are new to the Company in 2003 and expire in 2010 and 2007, respectively. In total, the agreements reduced income tax expenses by $2,200 or $0.03 per diluted share for the year ended 2003.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
The Timken Company
We have audited the consolidated balance sheets of The Timken Company and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 8 to the consolidated financial statements, "Goodwill and Other Intangible Assets," the company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002.
Canton, Ohio
February 5, 2004
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