The Timken Company — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Timken manufactures bearings, power-transmission products and engineered steel through Mobile Industries, Process Industries, Aerospace and Steel. All amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $1,126.5 | $1,343.2 | $2,216.4 | $2,764.2 |
| Gross profit | $302.1 | $377.3 | $576.6 | $788.9 |
| Gross margin | 26.8% | 28.1% | 26.0% | 28.5% |
| Operating income | $135.8 | $197.6 | $255.5 | $444.3 |
| Net income attributable to Timken | $82.8 | $183.6 | $157.9 | $339.3 |
| Diluted EPS | $0.86 | $1.86 | $1.63 | $3.44 |
Sales fell 16.1% in Q2 and 19.8% in the first half. Management attributed the declines mainly to lower volume and raw-material surcharges, partly offset by acquisitions and pricing. Gross margin declined 130 basis points in Q2 and 250 basis points in the first half. Q2 earnings comparisons are significantly affected by $109.5 million of CDSOA receipts recorded in Q2 2012; management said those receipts contributed $0.70 per diluted share after tax. Lower volume and unfavorable mix also weighed on 2013 earnings.
Q2 segment EBIT: Mobile Industries $52.4 (up from $48.8); Process Industries $54.6 (down from $71.3); Aerospace $7.9 (unchanged); Steel $42.3 (down from $88.9). Steel was the largest source of weakness, with lower volume, surcharges and unfavorable mix. First-half segment EBIT declined in all segments versus 2012.
Cash flow, balance sheet and liquidity
- First-half operating cash flow: $139.5, versus $236.4 in 2012. Lower earnings were partly offset by reduced pension and postretirement payments and less cash used for working capital.
- First-half investing cash flow: $(203.6), including $145.2 of capital expenditures and $67.3 of acquisitions. Financing cash flow was $(115.1), including $81.8 of share repurchases and $44.2 of dividends.
- Cash: $396.8 at June 30, down from $586.4 at December 31, 2012. Total debt was $462.5; net debt was $65.7, versus net cash of $107.4 at year-end.
- Liquidity access: No borrowings under the $500 million revolving credit facility; $491.4 remained available after letters of credit. No borrowings under the receivables facility; $188.4 was available, subject to borrowing-base limits. Timken reported compliance with debt covenants.
- Capital and pensions: First-half pension and postretirement contributions/payments were $127.8. The balance sheet reported accrued pension cost of $245.9 and postretirement benefits cost of $360.6.
Outlook, management commentary and notable items
- Management forecast 2013 sales down approximately 10% from 2012, reflecting lower volume across segments except Aerospace and lower raw-material surcharges. It expected full-year earnings to decline, principally because of lower CDSOA receipts and volume.
- Management expected 2013 operating cash flow of approximately $475 million, pension and postretirement contributions of approximately $115 million, and capital expenditures of approximately $360 million, versus $300 million in 2012.
- Segment outlook: Mobile sales down 7%–12%; Process down 2%–7%; Aerospace up 3%–8%; Steel down 15%–20%. Management expected Process sales to improve in the second half and Aerospace EBIT to increase slightly; Steel and Mobile EBIT were expected to decline.
- The Board formed a Strategy Committee to evaluate a potential separation of the Steel business and review corporate governance and capital allocation; results were expected by the end of Q3 2013.
- Timken completed three acquisitions in 2013—Interlube, Smith Services and Standard Machine—for approximately $67.8 million in aggregate purchase consideration, net of cash acquired as reported in the cash-flow statement. Their results were assigned to Mobile or Process Industries.
- The St. Thomas, Ontario facility closure was completed March 31, 2013. Estimated total pretax costs were $55–$65 million; $38.9 million had been incurred through June 30. Environmental remediation estimates for the Sao Paulo site ranged from $3.9 million to $7.7 million, and the filing noted estimates could change.
- Timken cautioned that CDSOA distributions could be subject to clawback because related litigation remains; management considered the likelihood remote. The filing also cited demand, economic, raw-material, currency, pension, acquisition-integration, litigation and other risks. Management reported effective disclosure controls and no material change in internal controls.
Most important facts for investors to verify
- Whether weak volume and Steel-sector demand continue, and whether the company achieves its segment and full-year sales outlook.
- Underlying earnings excluding the unusual 2012 CDSOA receipt, and the effects of volume, product mix, surcharges and input-cost movements on margins.
- Delivery of the $475 million operating-cash-flow outlook alongside planned $360 million capital spending, acquisitions and pension contributions.
- Progress and expected costs of major capital projects, including the steel caster and the North Canton facility, and any changes to the Steel-separation review.
- Any developments in CDSOA litigation or environmental remediation estimates that could affect cash, earnings or liabilities.