The Timken Company — Q3 2011 Form 10-Q
Business context and reporting period. Timken designs, manufactures, sells and services bearings, power-transmission systems and specialty steel. This filing covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless stated otherwise. Reporting segments are Mobile Industries, Process Industries, Aerospace and Defense, and Steel.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,321.8 million | $1,059.7 million | $3,905.5 million | $2,984.8 million |
| Gross profit / margin | $343.3 million / 26.0% | $265.1 million / 25.0% | $1,027.1 million / 26.3% | $756.1 million / 25.3% |
| Operating income / margin | $187.0 million / 14.1% | $121.9 million / 11.5% | $559.5 million / 14.3% | $332.7 million / 11.1% |
| Net income attributable to Timken | $111.0 million | $70.3 million | $345.2 million | $184.5 million |
| Diluted EPS | $1.12 | $0.72 | $3.48 | $1.89 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $(67.4) million | $313.4 million |
For the first nine months, capital expenditures were $106.0 million, acquisitions used $198.9 million, and cash dividends paid were $56.6 million. Cash and cash equivalents were $402.9 million at September 30, versus $877.1 million at year-end 2010. Total debt was $512.1 million; reported net debt was $105.6 million, including the deduction of $3.6 million of restricted cash. Total equity was $2,224.7 million. The current ratio was approximately 2.7, based on reported current assets and liabilities.
Changes versus prior periods
- Q3 sales rose 24.7%; nine-month sales rose 30.8%. Management attributed growth to stronger demand in most segments, higher surcharges and pricing, acquisitions, and currency effects. Excluding acquisitions and currency, segment disclosures show continued underlying growth in Mobile, Process and Steel.
- Profitability improved: Q3 diluted EPS increased to $1.12 from $0.72, and nine-month diluted EPS to $3.48 from $1.89. Higher volume, pricing and surcharges more than offset higher input costs overall.
- Process Industries and Steel were major growth drivers. Aerospace and Defense weakened: nine-month sales fell 4.5%, and EBIT declined to $4.0 million from $20.5 million. Q3 segment EBIT was a loss of $1.5 million.
- Operating cash flow turned negative, principally reflecting $445.2 million of pension and postretirement contributions and payments, plus cash absorbed by receivables and inventories. Cash declined by $474.2 million from year-end.
- Philadelphia Gear was acquired for $200 million on July 1. Drives LLC was acquired for $92 million in October, after quarter-end. The May refinancing extended the $500 million senior credit facility’s maturity to May 2016.
Outlook, commentary and risks
- Management forecast full-year 2011 sales 25%–30% above 2010, operating improvement, and approximately $210 million of operating cash flow. It expected about $200 million of capital expenditures and approximately $75 million of dividends for 2011.
- Expected 2011 pension and postretirement funding was approximately $420 million in total, including about $295 million in pension contributions and a $125 million VEBA contribution. The filing reports $286.7 million of pension contributions and $125 million to the VEBA through September.
- Segment outlook: Mobile sales expected to rise 10%–15%; Process sales 35%–40%; Steel sales 40%–45%. Aerospace and Defense sales and EBIT were expected to decline slightly and decrease, respectively. Raw-material costs, especially scrap steel and alloys, remained an offset and could rise in the near term.
- Steel results were affected by planned maintenance timing and higher LIFO expense. Management estimated approximately $32 million of 2011 LIFO expense; a 1% increase in costs would add $5.7 million to that estimate.
- Aerospace and Defense recorded approximately $5 million of Q3 warranty expense for an aftermarket product; its warranty accrual was $13.1 million at September 30. Brazil environmental remediation and related restructuring accruals included an estimated $9.2 million to $19.4 million liability for the Sao Paulo site; the estimate could change.
- Timken reported compliance with debt covenants and said it believed liquidity was sufficient through the senior facility term. Its $500 million facility had $482.8 million available after letters of credit; the receivables facility had no borrowings. Key risks include economic and customer-demand changes, competition and pricing, raw-material and energy costs, acquisitions and integration, warranty, environmental and tax matters, and pension funding and asset returns.
- The Q3 effective tax rate was 38.5%, versus 34.8% a year earlier, reflecting discrete prior-year tax items, state and local taxes and French tax-law changes, partly offset by other tax benefits. Nine-month 2010 results included a $21.6 million healthcare-law deferred-tax charge.
Most important facts for investors to verify
- Whether forecast sales, earnings improvement and approximately $210 million of operating cash flow were achieved, given the nine-month operating cash outflow and working-capital needs.
- Acquisition performance and integration, including Philadelphia Gear and the post-quarter-end Drives acquisition.
- Demand and margin trends in Aerospace and Defense, and the effect of the reported warranty charge.
- Steel surcharge recovery, raw-material costs, LIFO expense and maintenance timing.
- Actual pension and postretirement funding, liquidity, and any changes to environmental, warranty or tax contingencies.