TIMKEN CO — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Timken manufactures bearings, power-transmission products and related services, and reports Mobile Industries and Process Industries segments.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $657.4 million | $707.4 million | $2,015.0 million | $2,157.9 million |
| Gross profit | $167.5 million | $195.4 million | $530.7 million | $603.0 million |
| Gross margin | 25.5% | 27.6% | 26.3% | 27.9% |
| Operating income (loss) | $42.4 million | $66.7 million | $162.1 million | $(7.8) million |
| Net income (loss) attributable to Timken | $20.6 million | $63.4 million | $128.5 million | $(35.1) million |
| Diluted EPS | $0.26 | $0.75 | $1.62 | $(0.41) |
Third-quarter sales fell 7.1%; management attributed the decline chiefly to weaker end-market demand and foreign exchange. Lower organic volume and unfavorable price/mix reduced profitability, partly offset by lower material and operating costs and lower SG&A. Nine-month results also benefited from a $53.6 million net CDSOA recovery; the prior-year comparison included $223.2 million of pension settlement charges.
Segments: Q3 Mobile Industries sales were $353.1 million, down 10.9%, and EBIT was $24.1 million versus $43.0 million. Process Industries sales were $304.3 million, down 2.2%, and EBIT was $40.7 million versus $43.1 million. Reported segment sales include acquisition, divestiture and currency effects.
Cash flow and investment: Nine-month operating cash flow was $277.1 million, up from $246.3 million. Investing cash outflow was $143.3 million, including $84.4 million of capital expenditures and $62.8 million for acquisitions. Financing cash outflow was $138.1 million, including $61.4 million in dividends and $83.3 million of treasury-share purchases. Cash and cash equivalents were $129.0 million at September 30.
Debt and liquidity: Total debt was $663.9 million and net debt was $532.2 million; net debt-to-capital was 28.0%. The $500 million senior credit facility had $423.8 million available. The accounts-receivable facility had only $3.6 million available under borrowing-base limits. Timken reported compliance with debt covenants; leverage and interest-coverage ratios were 1.6x and 12.8x, respectively. About $128.2 million of cash was held outside the United States, and repatriation may involve taxes or restrictions.
Material changes, outlook and risks
- Management expected full-year 2016 sales to decline approximately 7%–8% from 2015. Earnings were expected to rise year over year chiefly because of lower pension settlement charges and CDSOA income; excluding those items, earnings were expected to decline with lower volume and unfavorable price/mix.
- Management forecast approximately $375 million of 2016 operating cash flow and capital expenditures of about 5.0% of sales.
- Q3 pension settlement charges were $10.3 million; nine-month charges were $11.9 million, compared with $223.2 million in the first nine months of 2015. The 2016 charges related mainly to a Canadian annuity purchase and lump-sum distributions.
- Timken received $48.1 million and $6.3 million of CDSOA distributions in April and July. Some litigation remains, and distributions could be subject to clawback, although management considered that outcome remote.
- Wind-sector bearing warranty claims generated $4.8 million of expense in the first nine months. Management did not expect a material effect on consolidated financial position, but additional costs could materially affect an individual period.
- Lovejoy was acquired in July for $63.5 million in cash plus $2.2 million of assumed debt. Lovejoy is subject to an environmental site matter; Timken recorded an immaterial remediation accrual, while its potential allocated share of future costs could be significant.
- Plant closures and restructuring continued, including Pulaski, Altavista and Benoni; the Pulaski and Altavista closures were expected to take about a year. The filing also identifies demand, pricing, foreign exchange, integration, pension, warranty, environmental and CDSOA-retention risks.
Investor verification priorities
- Track underlying demand, price/mix and segment margins, separating organic performance from acquisitions, divestitures and currency effects.
- Assess earnings and cash generation excluding the CDSOA recovery and pension settlement charges; verify the assumptions behind full-year guidance.
- Monitor remaining CDSOA litigation and any risk of repayment or clawback.
- Review wind-bearing warranty claims and the Lovejoy environmental exposure for changes in estimated costs.
- Check progress and costs of announced plant closures, restructuring and Lovejoy integration, alongside borrowing-base availability and covenant headroom.