The Timken Company: 2015 Form 10-K Summary
Business context and reporting period
Timken engineers and manufactures bearings and mechanical power-transmission products and provides repair and rebuild services. It reports two segments: Mobile Industries and Process Industries. This Form 10-K covers the fiscal year ended December 31, 2015; fourth-quarter figures are also summarized below.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $2,872.3 million | $3,076.2 million |
| Gross profit / margin | $793.9 million / 27.6% | $898.0 million / 29.2% |
| Operating income (loss) | $(151.4) million | $208.4 million |
| Net income (loss) attributable to Timken | $(70.8) million | $170.8 million |
| Diluted EPS | $(0.84) | $1.87 |
| Operating cash flow, continuing operations | $374.8 million | $281.5 million |
| Capital expenditures | $105.6 million | $126.8 million |
Fourth-quarter 2015 sales were $714.4 million and net loss attributable to Timken was $35.7 million, or $0.44 per diluted share. The quarter included $241.8 million of pension settlement charges and a $29.0 million gain on the Alcor sale.
Total debt was $657.7 million, cash and restricted cash were $129.8 million, and net debt was $527.9 million at year-end, versus $236.0 million net debt in 2014. Net debt to capital increased to 28.2% from 12.9%. The company reported $424.8 million available under its $500 million senior credit facility and was in covenant compliance. Approximately $123 million of cash was held outside the United States.
Segment results: Mobile Industries sales were $1,558.3 million and EBIT was $173.3 million, with an 11.1% margin. Process Industries sales were $1,314.0 million and EBIT was $190.2 million, with a 14.5% margin.
Material changes versus the prior year
- Sales fell 6.6%; management attributed the decrease mainly to $152 million of unfavorable foreign exchange and $90 million of lower organic sales, partly offset by $39 million from acquisitions.
- Gross margin declined 160 basis points. Lower volume, unfavorable price/mix and currency effects outweighed lower costs and other offsets.
- The $465.0 million pension settlement and curtailment charge drove the operating loss. Timken transferred about $1.1 billion of pension obligations and $1.2 billion of plan assets to insurers through annuity contracts; the transactions required no company cash contribution.
- Continuing-operations cash flow rose by $93.3 million, principally reflecting a favorable $89.7 million year-over-year change in working-capital cash effects. Cash declined by $149.2 million overall, including cash used for acquisitions and $309.7 million of share repurchases.
- Timken acquired the Carlstar Belts business for approximately $213.7 million and sold Alcor, recognizing a $29.0 million gain. Year-end order backlog was $943.2 million, down from $1,289.1 million.
Outlook, commentary, and risks
For 2016, management expected sales to decline 4%–5%, reflecting softer demand across most markets and foreign-exchange effects, partly offset by acquisitions. It expected higher earnings from continuing operations, mainly because of the absence of material 2015 pension settlement charges, lower raw-material costs and lower SG&A, partly offset by lower volume and price/mix, restructuring charges and currency effects. Forecast operating cash flow was approximately $300 million; capital expenditures were expected to be about 4.5% of sales, and pension contributions about $15 million.
Key risks include cyclical industrial demand, pricing pressure, steel and other input costs and supply, foreign-exchange movements, pension assumptions and funding, environmental and product-liability exposure, and execution/integration of acquisitions. The filing also describes a Brazilian antitrust investigation; management said the outcome was not expected to materially affect consolidated financial position, though costs could be material to an individual period. Timken disclosed potential indemnification and tax risks related to the 2014 TimkenSteel spinoff. Environmental reserves were $1.2 million; management considered pending legal and environmental matters not expected to materially affect consolidated results or position.
The company reported an unqualified audit opinion and effective internal control over financial reporting. The assessment excluded the acquired Belts business, representing 8% of year-end assets and 1% of 2015 sales; inclusion was planned for the 2016 assessment. The filing also disclosed a $9.7 million write-off of aged construction-in-progress balances, which management deemed immaterial to prior periods.
Important facts for investors to verify
- Whether the 2016 sales and earnings outlook was achieved, especially given broad end-market weakness and price/mix pressure.
- How much of the 2015 loss reflects pension settlement accounting versus ongoing operating performance, and the expected durability of pension-cost reductions.
- Progress on debt, cash balances and capital allocation after substantial 2015 buybacks and the Belts acquisition.
- Segment demand, margins and backlog conversion; the filing cautions backlog is not a reliable indicator of future shipments.
- Integration returns from the Belts acquisition, and any developments in the Brazilian investigation or TimkenSteel-related indemnification and tax exposures.
- The reported 2015 balance-sheet presentation differs from the February 2016 earnings release after reclassifications and an equity correction; verify the audited figures in this 10-K.