Business context and reporting period
The Timken Company is a global industrial manufacturer operating through Mobile Industries, Process Industries, Aerospace and Steel. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods unless stated otherwise. Dollar amounts are in millions, except per-share data.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $1,061.5 | $1,142.5 | $3,277.9 | $3,906.7 |
| Gross profit | $251.7 | $298.9 | $828.3 | $1,087.8 |
| Gross margin | 23.7% | 26.2% | 25.3% | 27.8% |
| Operating income | $89.0 | $134.3 | $344.5 | $578.6 |
| Net income attributable to Timken | $52.2 | $80.9 | $210.1 | $420.2 |
| Diluted EPS | $0.54 | $0.83 | $2.18 | $4.28 |
| Impairment and restructuring charges | $3.7 | $11.9 | $11.6 | $28.8 |
Quarterly sales fell 7.1%, and nine-month sales fell 16.1%. Management attributed the declines mainly to lower volume across segments; lower raw-material surcharges also weighed on nine-month sales. Lower volume, unfavorable mix and higher manufacturing costs reduced gross profit. Lower raw-material costs and higher pricing partly offset those pressures. Nine-month 2012 results included $108.6 million of net CDSOA receipts before tax, or $69.0 million after tax ($0.70 per diluted share), making the year-over-year earnings comparison less representative of underlying operations.
Q3 segment results: Mobile Industries sales were $348.0 million and EBIT was $29.1 million; Process Industries, $307.2 million and $50.8 million; Aerospace, $76.3 million and $4.9 million; Steel, $330.0 million and $29.2 million. EBIT declined in each segment versus Q3 2012. Steel EBIT fell 41.2%, with lower volume and surcharges, unfavorable mix and higher manufacturing costs among the reported factors; Mobile EBIT fell 23.2%.
Cash flow, balance sheet and liquidity
For the first nine months of 2013, operating cash flow was $251.8 million, versus $366.5 million in 2012. Investing cash outflow was $266.6 million, including $210.4 million of capital expenditures and $64.5 million for acquisitions; financing cash outflow was $145.8 million. Cash declined $168.3 million from year-end 2012 to $418.1 million.
At September 30, 2013, total debt was $476.6 million and net debt was $58.5 million, compared with net cash of $107.4 million at December 31, 2012. The $250 million senior unsecured notes due September 2014 were classified as current. Timken reported no borrowings under its $500 million senior credit facility or $200 million receivables securitization facility; stated availability was $491.4 million and $180.2 million, respectively. The company reported compliance with debt covenants. Shareholders’ equity was $2,367.1 million. The quarterly dividend was $0.23 per share.
Outlook, management commentary and material matters
- Management expected full-year 2013 sales to decline approximately 13% from 2012, primarily because of lower volume across segments and lower raw-material surcharges; earnings were also expected to decline.
- 2013 operating cash flow was forecast at approximately $415 million. Pension and postretirement contributions were expected to be approximately $115 million, and capital expenditures approximately $320 million.
- On September 5, 2013, the board approved pursuing a spin-off of Steel into a separate publicly traded company, targeted for completion within 12 months. Completion is subject to approvals and other conditions, including a tax opinion; estimated one-time transaction costs were approximately $125 million.
- The St. Thomas, Ontario plant closure was completed March 31, 2013. Cumulative pretax costs were approximately $40.9 million by September 30; total expected costs were $55–$65 million, including $20–$25 million of expected cash costs.
- Management identified demand and economic conditions, input costs, execution of acquisitions and capital projects, currency movements, pension obligations, potential CDSOA clawback, and the timing, tax treatment and cost of the Steel separation as risks to forward-looking expectations. It considered CDSOA clawback remote. Sao Paulo environmental remediation liability was estimated at $3.2–$7.2 million; $3.2 million was accrued, and estimates could change.
- Management stated ordinary-course legal matters were not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the Steel spin-off proceeds, its final terms and tax treatment, and whether actual separation costs are consistent with the approximately $125 million estimate.
- Whether demand, pricing, product mix and raw-material surcharges support the 2013 sales and earnings outlook, particularly in Steel and Mobile Industries.
- Whether operating cash flow, working capital, capital spending and pension contributions track management’s forecasts.
- How the September 2014 $250 million debt maturity is refinanced or repaid, and whether liquidity and covenant headroom remain adequate.
- Whether restructuring and environmental costs, including Sao Paulo remediation, remain within disclosed estimates, and whether any CDSOA distribution is challenged or subject to recovery.