The Timken Company — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; filed May 2, 2011. Timken manufactures bearings, power-transmission products, aerospace components and specialty steel through four operating segments.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $1,254.1 million | $913.7 million | +37.3% |
| Gross profit / margin | $333.3 million / 26.6% | $222.7 million / 24.4% | Margin +220 bps |
| Operating income | $181.9 million | $84.2 million | +116.1% |
| Net income attributable to Timken | $112.7 million | $28.6 million | +294.1% |
| Diluted EPS | $1.13 | $0.29 | +$0.84 |
| Net cash used by operating activities | $197.6 million | $13.9 million | Cash use increased |
Sales growth reflected approximately $210 million of higher volume, $75 million of higher surcharges and $55 million from pricing and sales mix. Gross margin improved despite approximately $100 million of higher raw-material and logistics costs. Q1 2011 net margin was approximately 9.0%, versus approximately 3.1% a year earlier.
Segments
- Mobile Industries: Sales $442.9 million, up 20.5%; EBIT $68.0 million, up 71.7%.
- Process Industries: Sales $284.1 million, up 38.0%; EBIT $66.7 million, up 176.8%.
- Aerospace and Defense: Sales $79.1 million, down 14.1%; EBIT $2.2 million, down 81.5%, reflecting weaker defense demand and lower volume.
- Steel: Sales $448.0 million, up 80.5%; EBIT $60.0 million, up 201.5%. Shipments rose about 51%; higher surcharges and volume benefited results, partly offset by higher input costs.
Liquidity, debt and balance sheet
At March 31, 2011, cash and cash equivalents were $637.6 million, down from $877.1 million at year-end. Total debt was $522.4 million, leaving net cash of $115.2 million; the company reported a negative net-debt-to-capital ratio of 5.9%. It had no borrowings under its $500 million senior credit facility, with $482.8 million available after letters of credit, and no borrowings under its $150 million receivables securitization facility. The company was in compliance with debt covenants.
Operating cash use was driven by working-capital investment, including $149.6 million used by receivables and $80.4 million by inventory, plus $166.0 million of pension contributions and other postretirement payments. Capital expenditures were $20.1 million. Current debt-facility availability and liquidity do not eliminate the risk of cash-flow pressure if working capital or pension needs rise.
Outlook, commentary and notable items
- Management forecast 2011 sales growth of approximately 20%–25% and operating cash generation of approximately $390 million. Planned 2011 capital expenditures were approximately $220 million, pension contributions approximately $170 million, and dividends approximately $70 million.
- Segment sales outlook: Mobile Industries +10%–15%; Process Industries +20%–25%; Aerospace and Defense approximately +5%–10%; Steel +35%–40%. Management expected higher annual EBIT in each segment, while citing raw-material costs and continuing weakness in defense and some aviation markets.
- The 2010 comparison includes a $21.6 million tax charge related to U.S. health-care legislation. The effective tax rate was 33.5% in Q1 2011 versus 61.5% in Q1 2010, substantially affected by that prior-year charge.
- Q1 2011 included a $1.8 million impairment loss on an equity investment and $1.1 million of restructuring charges. The restructuring accrual was $21.0 million at quarter-end; some environmental remediation costs remain estimates and actual costs could differ.
- Management cited risks including economic and customer-demand changes, competition, raw-material and energy costs, the effectiveness of surcharges, currency movements, pension investment performance, litigation and warranty claims. It reported no material changes to previously disclosed risk factors, no material changes in market-risk disclosures, and effective disclosure controls.
Important facts for investors to verify
- Whether strong sales translate into operating cash generation as receivables and inventories build.
- Whether steel surcharges and pricing keep pace with rising scrap, alloy, energy and logistics costs.
- Progress toward the 2011 cash-flow, sales, capital-spending and pension-contribution outlook.
- Whether Aerospace and Defense demand and segment profitability recover as management expects.
- Developments in environmental remediation, restructuring obligations, pension funding and the July 2012 senior-credit-facility maturity.