The Timken Company — FY 2010 Form 10-K Summary
Business context and reporting period. Timken manufactures bearings and power-transmission products, aerospace components and alloy steel. This annual report covers the fiscal year ended December 31, 2010; quarterly figures below are unaudited. Its four reportable segments are Mobile Industries, Process Industries, Aerospace and Defense, and Steel.
Financial performance and position
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net sales | $4,055.5 million | $3,141.6 million |
| Gross profit / gross margin | $1,021.7 million / 25.2% | $582.7 million / 18.5% |
| Operating income (loss) | $436.2 million | $(54.1) million |
| Income (loss) from continuing operations | $269.5 million | $(66.0) million |
| Net income (loss) attributable to Timken | $274.8 million | $(134.0) million |
| Diluted EPS | $2.81 | $(1.39) |
| Cash from operating activities | $312.7 million | $587.7 million |
| Capital expenditures | $115.8 million | $114.1 million |
- Sales rose 29.1%, driven mainly by stronger volume and higher surcharges. Mobile Industries sales grew 25.3%, Process Industries 11.7%, and Steel 86.8%; Aerospace and Defense sales fell 19.0%.
- Segment adjusted EBIT was $223.5 million for Mobile Industries, $138.2 million for Process Industries, $21.2 million for Aerospace and Defense, and $146.3 million for Steel. Steel returned to profitability from a $57.9 million adjusted EBIT loss in 2009; Aerospace and Defense adjusted EBIT declined from $72.5 million.
- Cash and cash equivalents were $877.1 million, total debt was $513.7 million, and net cash was $363.4 million at year-end. The company reported a negative net-debt-to-capital ratio of 23.0%.
- Current assets were $2,399.2 million and current liabilities were $719.9 million. The $150 million receivables securitization facility was fully available; the $500 million senior credit facility had $482.8 million available after letters of credit.
- Operating cash flow declined by $275.0 million year over year. Higher pension and postretirement payments and working-capital investment—particularly in receivables and inventories—were major factors. Pension contributions were $230 million in 2010.
Material changes versus the prior comparable period
- The 2010 recovery reversed much of the 2009 downturn, when sales fell 37.7% and Timken recorded a net loss. However, 2010 sales remained below 2008’s $5,040.8 million.
- Gross margin improved 670 basis points. Higher volume, surcharges, manufacturing utilization and pricing were partly offset by approximately $275 million of higher raw-material costs and $90 million of related LIFO expense.
- Impairment and restructuring charges fell to $21.7 million from $164.1 million. SG&A increased 19.3%, primarily due to higher incentive compensation, but declined as a share of sales to 13.9% from 15.0%.
- Operating cash flow was lower despite the return to profitability, while cash increased by $121.6 million to $877.1 million. The company’s $303.6 million NRB divestiture proceeds had boosted investing cash flow in 2009; no comparable divestiture proceeds were received in 2010.
Outlook, commentary, risks and unusual items
- For 2011, management forecast sales growth of approximately 10% to 15%, operating cash flow of about $340 million, capital expenditures of $220 million, and pension contributions of about $120 million. It expected higher sales and EBIT in Process Industries, Aerospace and Defense, and Steel; Mobile Industries sales and EBIT were expected to increase slightly.
- Management expected steel demand and average selling prices to rise, while also anticipating higher scrap, alloy and energy costs. It noted that raw-material surcharge mechanisms may not fully track underlying costs.
- Pension and postretirement obligations remain significant: year-end defined-benefit pension assets were approximately $2.4 billion against obligations of approximately $2.8 billion; postretirement benefits were also underfunded. Funding requirements and expense are sensitive to investment returns, discount rates and actuarial assumptions.
- Other key risks include cyclical industrial demand, intense bearing and steel competition and pricing pressure, raw-material availability and costs, foreign-exchange movements, production interruptions, product-liability claims, environmental obligations, and labor disruptions. The filing reports $14.2 million accrued for environmental matters and says management did not expect ordinary-course legal matters to materially affect consolidated results.
- FY 2010 includes a $7.4 million after-tax gain related to final working-capital adjustments on the 2009 sale of Needle Roller Bearings (NRB). The 2009 comparison includes NRB operating losses and the loss on sale. FY 2010 tax expense also reflects a $21.6 million charge related to health-care legislation, partly offset by a $19.8 million benefit for VEBA contributions.
- The company reported no goodwill impairment in 2010, but disclosed that a 200-basis-point increase in the Aerospace and Defense discount rate would have caused that reporting unit to fail the first step of its impairment test. It also described prior-period adjustments that management considered immaterial to the affected financial statements.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the forecast 2011 sales and EBIT improvements materialized, particularly in steel and aerospace, and how much growth reflected volume versus surcharges.
- Whether raw-material inflation and LIFO effects outpaced surcharge recovery and pressured margins.
- Whether operating cash flow supported planned capital spending, dividends and pension contributions as working capital increased.
- How pension funding, discount-rate changes and postretirement obligations affected cash needs and shareholders’ equity.
- Whether environmental remediation, restructuring, tax matters or CDSOA litigation produced costs or receipts different from management’s estimates.