The Timken Company (NYSE: TKR) — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. Timken designs and manufactures bearings, power-transmission products, aerospace components and engineered steel, across Mobile Industries, Process Industries, Aerospace and Steel.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $4,341.2 million | $4,987.0 million |
| Gross profit / margin | $1,092.0 million / 25.2% | $1,366.3 million / 27.4% |
| Operating income / margin | $436.0 million / 10.0% | $692.9 million / 13.9% |
| Net income attributable to Timken | $262.7 million | $495.5 million |
| Diluted EPS | $2.74 | $5.07 |
| Cash from operations | $430.0 million | $624.1 million |
| Capital expenditures | $325.8 million | $297.2 million |
| Total debt | $475.9 million | $479.0 million |
| Cash and restricted cash | $399.7 million | $601.5 million |
| Net debt (cash) | $76.2 million | Net cash $122.5 million |
Fourth-quarter 2013 sales were $1,063.3 million, compared with $1,080.3 million in Q4 2012. Net income attributable to Timken was $52.6 million versus $75.3 million; diluted EPS was $0.55 versus $0.78.
Material changes versus FY2012
- Sales fell 12.9%, primarily on lower volume across all segments and lower surcharges. Lower volume accounted for about $625 million of the sales decline; acquisitions and favorable pricing partly offset it.
- Gross margin declined 220 basis points. Lower volume, unfavorable mix and higher manufacturing costs outweighed savings from lower raw-material costs, acquisitions and pricing.
- Net income declined 47.0%. Results also reflect the absence of FY2012’s $108.0 million net CDSOA receipt, which contributed approximately $0.69 per diluted share after tax. FY2013 included $13.0 million of steel-spinoff separation costs.
- Segment EBIT declined in every segment: Mobile Industries $164.7 million, Process Industries $201.9 million, Aerospace $26.6 million and Steel $140.2 million. Steel EBIT fell 44.3%, reflecting lower volume, surcharges and unfavorable mix.
- Operating cash flow decreased by $194.1 million. Cash fell to $384.6 million; cash and restricted cash were below total debt by $76.2 million at year-end.
- Capital spending increased, including investment in Steel projects. Timken repurchased 3.4 million shares for $189.2 million during 2013.
Outlook, significant items and risks
- Management expected FY2014 sales to rise about 6%, with higher earnings and double-digit operating margins in all four segments. Forecast operating cash flow was about $560 million; capital expenditures about $310 million; pension contributions about $20 million.
- Segment outlook varied: Mobile Industries sales were expected to decline 3%–8%, Process Industries to grow 7%–12%, Aerospace to grow about 5%–10%, and Steel to grow 12%–17%. Steel was expected to benefit from higher volume and surcharges, though raw-material costs and LIFO expense were expected to rise.
- The planned tax-free spin-off of the Steel business, TimkenSteel Corporation, was targeted for mid-2014, subject to approvals and other conditions. Expected one-time separation costs were about $105 million; $13.0 million had been recorded by year-end. Completion, tax treatment and anticipated benefits were not assured.
- A $250 million fixed-rate note matured in September 2014; management planned to refinance it. Timken reported no borrowings under its $500 million senior credit facility and stated it complied with its covenants.
- Approximately 71% of cash and cash equivalents was held outside the United States. The company began a plan to repatriate about $365 million, with approximately $26 million in tax expense; $123 million was repatriated in January 2014.
- Key exposures include cyclical industrial demand, competitive pricing and steel overcapacity, raw-material and energy costs, currency movements, plant disruptions, product claims, environmental liabilities, and pension assumptions and funding. Environmental and ordinary-course legal matters were not expected by management to materially affect consolidated results; environmental accruals were $2.6 million at year-end.
- Other notable items: the sale of the former São Paulo facility generated a $5.4 million gain in 2013, with about $25 million of additional gain expected in 2014; the potential for clawback of CDSOA distributions remained, though management considered it remote. The independent auditor gave an unqualified opinion on the financial statements and internal controls.
Investor verification priorities
- Verify the FY2014 sales, margin, cash-flow and segment forecasts against subsequent reported results, especially Steel demand, surcharges and cost assumptions.
- Check the Steel spin-off’s completion, final costs, tax treatment, intercompany arrangements and effects on each company’s capital structure.
- Confirm refinancing of the September 2014 notes and monitor cash availability, international repatriation and credit-facility covenant headroom.
- Assess the sustainability of lower pension contributions and the sensitivity of pension and postretirement obligations to discount rates and asset returns.
- Review whether operating cash generation supports planned capital investment, dividends and share repurchases amid weaker 2013 earnings.