TIMKEN COMPANY — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Timken manufactures bearings, power-transmission products and engineered steel through Mobile Industries, Process Industries, Aerospace and Steel.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $1,089.9 million | $1,421.0 million | Down 23.3% |
| Gross profit / margin | $274.5 million / 25.2% | $411.6 million / 29.0% | Margin down 380 bps |
| Operating income | $119.7 million | $246.7 million | Down 51.5% |
| Net income attributable to Timken | $75.1 million | $155.7 million | Down 51.8% |
| Diluted EPS | $0.77 | $1.58 | Down $0.81 |
| Operating cash flow | $(35.9) million | $(38.7) million | Use narrowed $2.8 million |
SG&A declined 6.7% to $153.6 million, but rose as a share of sales to 14.1% from 11.6%. The effective tax rate was 34.1%, versus 34.3%. The quarterly dividend remained $0.23 per share.
Sales declined across all segments. Steel had the largest contraction, down 35.5% to $326.5 million; Mobile Industries fell 15.4% to $397.0 million; Process Industries fell 19.8% to $283.9 million; and Aerospace fell 9.6% to $82.5 million. Segment EBIT also decreased across all four segments.
Cash, debt and liquidity
Cash and cash equivalents were $457.9 million at March 31, down from $586.4 million at year-end. Total debt was $472.5 million, leaving net debt of $14.6 million, compared with net cash of $107.4 million at December 31. Net debt to capital was 0.6%.
Q1 investing cash use was $69.1 million, including $63.4 million of capital expenditures and $14.4 million for acquisitions. Financing cash use was $20.0 million, including $22.1 million of dividends. Cash declined $128.5 million during the quarter. Pension and postretirement contributions and benefit payments used $117.1 million of cash.
There were no borrowings under the $500 million senior credit facility or the $200 million receivables securitization facility; available capacity was $491.4 million and $190.6 million, respectively. Timken reported compliance with debt covenants and said it expected sufficient liquidity through the credit facility’s maturity.
Material changes and notable items
- Management attributed the sales decline principally to lower volume (approximately $260 million), lower raw-material surcharges (approximately $70 million) and unfavorable mix, partly offset by pricing and acquisitions. Lower volume, higher manufacturing costs and unfavorable mix reduced earnings; a favorable LIFO adjustment partly offset the gross-profit decline.
- Q1 2013 included $1.2 million of impairment and restructuring charges. The St. Thomas, Ontario facility closure is expected to cost $55 million–$65 million before tax, including $20 million–$25 million in cash costs. Approximately $32.7 million had been incurred by March 31; production transfer was expected by mid-2013.
- Timken acquired Interlube on March 11 for approximately $14.8 million. After quarter-end, it acquired Smith Services for $13.3 million. The Sao Paulo property buyer terminated the sale agreement on April 24; the company had expected approximately $30 million, including interest, subject to currency movements, and was evaluating its options.
- Q1 pension contributions were approximately $108 million, mostly discretionary. The company expected approximately $250 million of defined-benefit pension contributions and $50 million to a VEBA trust during 2013. It estimated 2013 pension expense at approximately $70 million.
- Foreign-currency translation reduced Q1 comprehensive income/equity by $16.1 million. The company reported no material change in market risks, risk factors or internal control over financial reporting; management considered disclosure controls effective. Ordinary-course legal matters were not expected to materially adversely affect financial position or results.
Outlook and risks
Management forecast 2013 sales down approximately 5% from 2012 and lower earnings, citing lower volume, surcharges and CDSOA receipts, partly offset by lower material costs. It expected operating cash flow of approximately $330 million, pension and postretirement contributions of approximately $300 million, and capital expenditures of approximately $360 million, compared with $626 million, $376 million and $300 million, respectively, in 2012.
Segment outlook varied: Mobile Industries sales were expected down 5%–10%; Process Industries sales and EBIT were expected approximately flat; Aerospace sales were expected up 7%–12%, with slightly higher EBIT; and Steel sales were expected down 7%–12%, with lower EBIT. Key uncertainties include demand and industrial cycles, pricing and mix, raw-material and energy costs, manufacturing utilization, foreign exchange, pension funding and investment returns, acquisitions, litigation/environmental matters, and CDSOA receipts. The company also noted that interim LIFO estimates may differ from year-end results.
Investor verification priorities
- Test whether the forecast decline in 2013 sales and earnings, especially in Steel and Mobile Industries, was borne out by subsequent results.
- Monitor cash generation against the $330 million outlook, working-capital needs, planned $360 million capital spending and substantial pension/health contributions.
- Verify the costs, timing and expected savings from the St. Thomas closure, and whether the Sao Paulo property sale was replaced or generated additional remediation costs.
- Assess whether expected Steel input-cost declines, LIFO assumptions, surcharges and segment volume/mix trends supported margins.
- Review integration and performance of Interlube and Smith Services, alongside continued covenant compliance and available liquidity.