Business Context and Reporting Period
Company: The Timken Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: A global manufacturer of anti-friction bearings, alloy steels, and aerospace power transmission systems. Operations are divided into four reportable segments: Mobile Industries, Process Industries, Aerospace and Defense, and Steel.
Key Event: On July 29, 2009, the Company signed an agreement to sell its Needle Roller Bearings (NRB) operations to JTEKT Corporation. Results for NRB are now classified as Discontinued Operations.
Key Financial Metrics
| Metric (in millions) | Q3 2009 | Q3 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Sales | $763.6 | $1,336.4 | $2,367.0 | $3,942.8 |
| Gross Profit | $129.6 | $381.5 | $409.5 | $974.0 |
| Gross Margin % | 17.0% | 28.6% | 17.3% | 24.7% |
| Operating Income (Loss) | $2.7 | $202.7 | $(33.2) | $449.0 |
| Net Income (Loss) Attributable to Timken | $(50.1) | $130.4 | $(113.8) | $303.8 |
| Diluted EPS (Continuing Ops) | $(0.20) | $1.28 | $(0.56) | $2.87 |
| Diluted EPS (Total) | $(0.52) | $1.35 | $(1.18) | $3.14 |
| Cash and Cash Equivalents | $382.9 | $133.4 | $382.9 | $115.1 |
| Total Debt | $801.0 | $623.9 | $801.0 | $623.9 |
| Net Debt | $169.9 | $490.5 | $169.9 | $490.5 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 42.9% in Q3 2009 and 40.0% YTD 2009 compared to the prior year. This was driven by lower volume across all segments, significantly lower surcharges in the Steel segment due to falling raw material costs, and unfavorable foreign currency impacts.
- Profitability Collapse: The Company reported a net loss of $50.1 million for Q3 2009, compared to net income of $130.4 million in Q3 2008. YTD 2009 net loss was $113.8 million versus $303.8 million income in 2008.
- Restructuring and Impairment: Impairment and restructuring charges totaled $19.6 million in Q3 2009 and $84.1 million YTD 2009, compared to $2.4 million and $7.4 million in the respective 2008 periods. Major charges included severance for workforce reductions and asset impairments in the Process Industries and Mobile Industries segments.
- Discontinued Operations: The NRB operations generated a loss of $30.8 million in Q3 2009 (including a $33.7 million impairment loss) compared to income of $6.5 million in Q3 2008.
- Working Capital: Cash provided by operating activities increased to $424.3 million YTD 2009 from $308.9 million in 2008, primarily due to significant reductions in inventory ($311.5 million cash provided) and accounts receivable ($128.4 million cash provided).
Guidance, Outlook, and Risks
- Outlook: Management expects the global economic downturn to persist through the remainder of 2009. Sales are expected to decrease in all segments except Aerospace and Defense. The Steel segment expects a 50% to 60% sales decrease for the remainder of the year.
- Cost Reduction: The Company plans to eliminate approximately 400 sales and administrative positions and expects to achieve $80 million in annual selling and administrative cost savings. Capital expenditures are expected to be reduced by approximately 50% in 2009 compared to 2008.
- Liquidity: The Company maintains a strong liquidity position with $382.9 million in cash and cash equivalents and $464.5 million available under its new $500 million Senior Credit Facility. Net debt to capital ratio improved to 9.6% from 22.8% at year-end 2008.
- Risks: Key risks include continued weakness in global economic conditions, customer bankruptcies (particularly in the automotive sector), inability to maintain debt covenant compliance, and potential for further impairment charges.
- Divestiture: The sale of NRB operations is expected to close by the end of 2009, with expected proceeds of approximately $330 million.
Investor Verification Checklist
- NRB Sale Closing: Verify the final closing date and working capital adjustments for the $330 million sale of the Needle Roller Bearings operations to JTEKT Corporation.
- Steel Segment Surcharges: Monitor the correlation between scrap steel prices and the Steel segment's surcharge revenue, which significantly impacts margins.
- Restructuring Execution: Track the realization of the targeted $80 million in annual selling and administrative cost savings and the timeline for facility closures (e.g., Canton, Ohio; Sao Paulo, Brazil).
- Debt Covenants: Confirm continued compliance with the new Senior Credit Facility covenants, specifically the consolidated leverage ratio (currently 1.94:1.0) and interest coverage ratio (currently 7.56:1.0).
- LIFO Impact: Review the final year-end LIFO inventory valuation for the Steel segment, which is expected to generate $25 million to $30 million in LIFO income for 2009.