The Timken Company — Q3 2010 Form 10-Q
Business context and reporting period. Timken manufactures bearings, power-transmission products, alloy steel and aerospace components. This unaudited filing covers the quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,059.7 | $763.6 | $2,984.8 | $2,367.0 |
| Gross profit / margin | $265.1 / 25.0% | $129.5 / 17.0% | $756.1 / 25.3% | $409.5 / 17.3% |
| Operating income (loss) | $121.9 | $2.6 | $332.7 | $(33.3) |
| Income (loss) from continuing operations | $72.2 | $(19.0) | $182.9 | $(58.8) |
| Net income (loss) attributable to Timken | $70.3 | $(50.2) | $184.5 | $(113.8) |
| Diluted EPS | $0.72 | $(0.52) | $1.89 | $(1.17) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $313.4 | $424.2 |
Q3 operating margin was approximately 11.5%, versus 0.3% a year earlier; nine-month operating margin was approximately 11.1%, versus a 1.4% loss margin. Q3 and nine-month impairment and restructuring charges were $2.9 and $9.4, compared with $19.6 and $84.1 in 2009.
Material changes and segment trends
- Sales rose 38.8% in Q3 and 26.1% year to date. Management attributed growth mainly to higher volume in Steel and Mobile Industries, industrial distribution demand, and higher surcharges.
- Q3 segment sales and adjusted EBIT: Mobile Industries $404.1 and $60.6; Process Industries $233.7 and $37.2; Aerospace and Defense $81.0 and $3.8; Steel $340.9 and $41.3. Steel sales rose 128.2% and adjusted EBIT recovered from a loss to profit; Aerospace and Defense sales fell 19.2% and adjusted EBIT declined.
- Gross margin expanded by 8.0 percentage points in both comparison periods. Higher volume, surcharges, improved utilization and restructuring benefits were partly offset by higher material costs, LIFO expense and incentive compensation.
- SG&A increased 30.8% in Q3 and 15.4% year to date, largely reflecting incentive compensation; SG&A as a share of sales declined to 13.2% in Q3 from 14.1%.
- Nine-month operating cash flow fell $110.8 to $313.4 despite the earnings recovery. Higher pension and postretirement payments, and cash absorbed by receivables and inventory, were key factors.
Balance sheet, liquidity and capital
At September 30, 2010, cash and cash equivalents were $899.8, total debt $493.0, and net cash $406.8, compared with net cash of $242.8 at December 31, 2009. Current assets were $2,368.8 and current liabilities $715.5. Total equity was $1,794.0. Cash increased $144.3 during the first nine months.
Timken had no borrowings under its $500 million senior credit facility, with $482.8 available after letters of credit, and was in compliance with its covenants. The $100 million receivables securitization facility had no borrowings and was due to mature November 15, 2010; management expected to replace it. Long-term debt was $479.4. Nine-month capital expenditures were $61.2; dividends paid were $33.8; and the company repurchased $29.2 of shares.
Outlook, commentary and risks
- Management forecast 2010 sales growth of approximately 25%–30% over 2009, operating cash flow above $400, and capital expenditures of approximately $110. Expected pension contributions were approximately $135 for 2010, including substantial discretionary U.S. contributions.
- Segment outlook: Mobile Industries sales expected to grow 20%–25%; Process Industries 5%–10%; Steel 80%–90%. Aerospace and Defense sales and adjusted EBIT were expected to decline.
- Management cited an improving global economy, stronger demand, higher surcharges and cost initiatives, while noting offsets from incentive compensation, raw-material costs and softer industrial and aerospace markets. Scrap, alloy and energy prices, demand, foreign exchange, execution of restructuring and pension asset returns remain significant uncertainties.
- Reported results include a $21.6 charge for the deferred-tax effect of U.S. health-care legislation in the first quarter. The nine-month discontinued-operations gain of $3.4 mainly reflected a working-capital adjustment from the 2009 sale of Needle Roller Bearings. Timken acquired QM Bearings and Power Transmission for $16.9 in September 2010.
- Gross unrecognized tax benefits were approximately $62.5 at September 30. Management said ordinary-course legal matters were not expected to materially adversely affect consolidated results or financial position. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the projected 2010 sales, operating cash flow, capital spending and pension contribution outcomes were achieved.
- Whether demand and margins—particularly in Steel and Aerospace and Defense—developed as management expected, and how raw-material costs and LIFO affected results.
- Whether the receivables securitization facility was renewed at maturity and whether liquidity and covenant headroom remained strong.
- How pension funding, asset returns and benefit obligations affected cash requirements and earnings.
- The final tax, purchase-price allocation and discontinued-operation adjustments, and the timing and cost of remaining restructuring and environmental obligations.