Timken Company — Q1 2012 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2012, Timken reported results across Mobile Industries, Process Industries, Aerospace and Defense, and Steel. Comparisons are with Q1 2011 unless noted. The unaudited statements include normal recurring adjustments.
Financial performance
- Net sales were $1.421 billion, up 13.3%. Management attributed the increase primarily to approximately $75 million from pricing and mix, $60 million from acquisitions, and $30 million from volume.
- Gross profit increased 23.5% to $411.6 million; gross margin rose to 29.0% from 26.6%. Higher pricing, favorable mix, acquisitions, and volume outweighed approximately $15 million of higher raw-material costs.
- Operating income was $246.7 million, compared with $181.9 million. Net income attributable to Timken was $155.7 million, up 38.2%; diluted EPS was $1.58, versus $1.13. The effective tax rate was 34.3%, versus 33.5%.
- Segment sales and EBIT: Mobile Industries $469.1 million and $86.7 million; Process Industries $354.1 million and $82.3 million; Aerospace and Defense $91.3 million and $10.7 million; Steel $506.5 million and $88.0 million. Segment EBIT improved in all four segments.
- Operating cash flow was negative $38.7 million, compared with negative $197.6 million. The improvement reflected lower pension and postretirement payments, reduced working-capital cash use, and higher earnings. Capital expenditures were $46.0 million, versus $20.1 million.
- Cash and cash equivalents were $355.3 million at March 31, down from $464.8 million at year-end. Total debt was $504.6 million; net debt was $145.7 million, versus $46.7 million at December 31. Net debt to capital increased to 6.2% from 2.2%.
- Current assets were $2.317 billion and current liabilities $816.5 million. The company reported $482.8 million available under its $500 million senior credit facility and full availability under its $150 million receivables securitization facility. It reported compliance with debt covenants.
Material changes and management commentary
- Sales increased in every segment. Process Industries had the strongest reported sales growth; Steel had the largest sales base and improved EBIT substantially. Steel shipments fell about 3%, while average selling price rose to $1,678 per ton from $1,459.
- Philadelphia Gear and Drives acquisitions contributed to year-over-year sales and earnings. The company continued refining their purchase-price allocations.
- Timken expects 2012 sales to rise approximately 7%–10% versus 2011 and operating performance to improve, partly offset by higher raw-material costs and slightly higher SG&A.
- Management forecast approximately $565 million of operating cash flow, $335 million of capital expenditures, and $375 million of pension and postretirement contributions for 2012. Pension contributions were expected to include approximately $275 million to defined-benefit plans and $100 million to a VEBA trust.
- Segment outlook: Mobile Industries sales flat to up 5%, with EBIT up slightly; Process Industries sales up 10%–15%, with EBIT expected higher; Aerospace and Defense sales up 10%–15%, with EBIT expected to increase significantly; Steel sales up 5%–10%, with EBIT expected higher. Segment expectations reflect differing volume, pricing, mix, and cost assumptions.
Risks, contingencies, and unusual items
- In April 2012, after quarter-end, Timken received $112.8 million in CDSOA distributions relating to 2006–2010. The company cautioned that ongoing litigation could result in a clawback; the receipt was not part of March 31 cash.
- Environmental remediation accruals included $12.4 million, of which $11.0 million related to the former Sao Paulo facility. The estimated total liability for that site ranged from $11.0 million to $17.2 million and could change. A favorable $2.8 million adjustment for the former Columbus site followed a property sale and transfer of remediation responsibility.
- The February 2012 labor agreement ratification resulted in approximately $5.6 million of expense. The company also recorded $8.8 million of LIFO reserve increase in Q1 and expected approximately $28.6 million of LIFO expense for 2012, reflecting anticipated higher costs and quantities.
- Management cited risks including economic and customer-demand changes, competition, raw-material and energy costs, acquisitions and integration, labor relations, pension funding and investment returns, litigation, foreign exchange, and potential CDSOA clawback. Approximately $240 million, or 67.6% of cash, was held outside the U.S. and could face restrictions or taxes on repatriation.
- Management said ordinary-course legal matters were not expected to materially adversely affect financial position or results. No material changes to previously disclosed risk factors or market-risk exposures were reported.
Important facts for investors to verify
- Whether sales and margin gains persist after separating pricing, acquisitions, mix, volume, and raw-material effects.
- Whether the company meets its 2012 sales, operating cash flow, capital expenditure, and pension contribution expectations.
- The ultimate status of CDSOA distributions and any potential repayment exposure.
- Steel demand, scrap and alloy costs, LIFO expense, and the effectiveness of surcharge recovery.
- Actual pension funding needs and the effect of investment returns and discount rates on expense and funded status.
- Progress and final costs for Sao Paulo environmental remediation, as well as the planned Faircrest investment and other major capital projects.