TIMKEN COMPANY — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Timken manufactures bearings, power-transmission products and related services, reported in Mobile Industries and Process Industries. Comparisons are affected by the June 2014 spin-off of TimkenSteel, whose results are presented as discontinued operations.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $707.4 million | $788.0 million | $2,157.9 million | $2,314.0 million |
| Gross profit | $195.4 million | $225.5 million | $603.0 million | $677.2 million |
| Gross margin | 27.6% | 28.6% | 27.9% | 29.3% |
| Operating income (loss) | $66.7 million | ($6.1) million | ($7.5) million | $157.7 million |
| Net income (loss) attributable to Timken | $63.4 million | ($21.9) million | ($35.1) million | $124.3 million |
| Diluted EPS | $0.75 | ($0.24) | ($0.41) | $1.35 |
Q3 diluted EPS from continuing operations was $0.75, versus a loss of $0.12 per share in the prior-year quarter. Nine-month diluted EPS from continuing operations was a loss of $0.41, versus earnings of $1.15. Nine-month 2015 results included $223.2 million of pension settlement charges, principally associated with transferring pension obligations to an insurer.
- Cash flow: Continuing-operations operating cash flow was $246.3 million for the first nine months, compared with $172.8 million in 2014. Capital expenditures were $65.1 million; acquisition spending was $213.6 million. Cash and cash equivalents were $155.0 million at September 30, down from $278.8 million at year-end 2014.
- Debt and liquidity: Total debt was $724.6 million; cash, cash equivalents and restricted cash totaled $169.8 million, leaving net debt of $554.8 million. Net debt to capital increased to 29.1% from 12.9% at year-end. The $500 million credit facility had $379.2 million available; the company reported compliance with its debt covenants.
- Shareholder returns: Timken paid $0.77 per share in dividends during the first nine months and spent $227.9 million to repurchase shares.
Material changes and management commentary
- Q3 sales fell 10.2% year over year; management attributed the decline mainly to lower volume ($53 million) and foreign exchange ($44 million), partly offset by acquisitions ($12 million). For nine months, sales declined 6.7%, mainly from currency effects and lower Mobile Industries volume.
- Q3 gross margin decreased 100 basis points. Lower volume, mix and pricing and currency effects outweighed lower material costs and manufacturing savings; reduced factory utilization also pressured results.
- Process Industries Q3 sales declined 13.9% and segment EBIT fell to $43.1 million from $74.4 million, reflecting lower demand, adverse price/mix and currency. Mobile Industries Q3 EBIT was $43.0 million versus a loss of $63.4 million, principally because the 2014 quarter included substantial impairment and inventory valuation charges.
- Timken acquired Carlstar Belts on September 1 for $213.7 million. The business had approximately $140 million in sales for the 12 months ended June 30, 2015; its results are allocated across both segments.
- Alcor was classified as held for sale at quarter-end and sold on October 21, 2015. Management expected to record a pretax gain of approximately $29 million, subject to working-capital adjustments.
Outlook, risks and unusual items
- Management forecast 2015 full-year sales down approximately 8% versus 2014. Currency was expected to account for about two-thirds of the decrease; excluding currency, sales were expected to decline 2%–3%, net of acquisition growth. Earnings from continuing operations were expected to be lower, principally due to pension settlements, volume and mix, and currency.
- Management expected approximately $300 million of 2015 operating cash flow from continuing operations, pension contributions of approximately $15 million and capital expenditures of about 3.5% of sales.
- The pension annuity transaction transferred approximately $575 million of pension obligations and $635 million of pension assets to Prudential. The company expected 2015 pension expense of approximately $273 million, largely reflecting settlement charges.
- The $100 million accounts-receivable facility matured November 30, 2015; $78 million was drawn and no capacity remained at quarter-end. Management expected to extend it. Approximately $138 million, or 89%, of cash and cash equivalents was held outside the U.S.; repatriation could incur taxes or be restricted.
- Management cited exposure to industrial demand, pricing and competition, manufacturing costs and capacity utilization, foreign exchange, acquisition integration, pension assumptions and financial-market conditions. It expected quarterly tax-rate volatility. Management reported no material changes to previously disclosed risk factors and no material adverse effect expected from ordinary-course legal matters.
Most important facts for investors to verify
- Whether the sales and margin outlook was achieved, particularly given continued weakness in industrial end markets and currency exposure.
- Whether the accounts-receivable facility was renewed on acceptable terms and whether liquidity and covenant headroom remained adequate.
- The final pension settlement, funded-status and expense impacts, including the assumptions underlying future pension costs and contributions.
- Final Carlstar purchase accounting and operating contribution, and the actual Alcor sale gain after working-capital adjustments.
- Cash generation and capital allocation after substantial 2015 share repurchases, dividends and acquisition spending.