The Timken Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Timken manufactures bearings, power-transmission products and specialty steel through Mobile Industries, Process Industries, Aerospace and Defense, and Steel.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,142.5 million | $1,321.8 million | $3,906.7 million | $3,905.5 million |
| Gross profit / margin | $298.9 million / 26.2% | $343.3 million / 26.0% | $1,087.8 million / 27.8% | $1,027.1 million / 26.3% |
| Operating income | $134.3 million | $187.0 million | $578.6 million | $559.5 million |
| Net income attributable to Timken | $80.9 million | $111.0 million | $420.2 million | $345.2 million |
| Diluted EPS | $0.83 | $1.12 | $4.28 | $3.48 |
Q3 operating margin was approximately 11.8%, versus 14.1% a year earlier; nine-month operating margin was approximately 14.8%, versus 14.3%. Q3 sales fell 13.6% and Timken-attributable net income fell 27.1%. Nine-month sales were essentially flat, while net income rose 21.7%; the increase included a significant one-time CDSOA recovery described below.
For the nine months, operating cash flow was $366.5 million, compared with cash use of $67.4 million in 2011. Investing activities used $165.0 million, including $187.3 million of capital expenditures; financing activities used $181.8 million. Cash increased $20.7 million to $485.5 million.
At September 30, total debt was $488.9 million and net debt was $3.4 million, compared with $515.1 million and $46.7 million, respectively, at year-end 2011. Net debt to capital was 0.1%. Current assets were $2,233.7 million and current liabilities $797.9 million. The $500 million senior credit facility had $491.4 million available, and Timken reported compliance with its debt covenants.
Material changes and segment trends
- Q3 sales declined across all segments except Aerospace and Defense. Lower volume, lower material surcharges and currency effects drove the decline; higher pricing and prior-year acquisitions partly offset it.
- Steel had the largest Q3 sales decline: 24.8%, with shipments down 24%. Mobile Industries sales fell 10.1% and Process Industries sales fell 5.4%. Aerospace and Defense sales increased 2.7%.
- Q3 segment EBIT fell in Mobile Industries to $37.9 million from $69.5 million and in Process Industries to $60.1 million from $75.6 million. Steel EBIT declined to $49.7 million from $66.2 million. Aerospace and Defense improved to $7.7 million from a $1.7 million loss.
- Nine-month segment EBIT increased in Process Industries, Aerospace and Defense, and Steel, but declined in Mobile Industries. Overall nine-month earnings also benefited from CDSOA receipts.
- Timken repurchased 2.5 million shares for $112.3 million during the first nine months and paid $66.8 million in dividends. The quarterly dividend was $0.23 per share, up from $0.20.
Outlook, risks and unusual items
- Management forecast 2012 sales down 3%–5% from 2011 and earnings comparable with 2011, with lower volume and surcharges and restructuring costs offset by CDSOA receipts, pricing and lower raw-material costs.
- Management expected approximately $535 million of 2012 operating cash flow, pension and postretirement contributions of approximately $375 million, and capital expenditures of approximately $300 million.
- Timken received $112.8 million of CDSOA distributions in April; $108.6 million was recognized net of expenses for the nine-month period. Management considered clawback unlikely, but litigation remained and the distributions could be subject to recovery.
- The planned St. Thomas, Ontario plant closure is expected to displace approximately 190 employees. Timken estimated total pretax closure costs of $55–$65 million, including $20–$25 million in cash costs; approximately $26.1 million had been incurred by September 30. Q3 included a $6.4 million equipment impairment.
- Other exposures include Sao Paulo environmental remediation (estimated liability range $5.8–$9.7 million), pension and postretirement assumptions and funding needs, foreign-currency and demand changes, and uncertain tax positions. Gross unrecognized tax benefits were $111.2 million; the company anticipated a $43–$44 million decrease over the next 12 months, primarily from settlements.
- The $150 million receivables securitization agreement matured November 10, 2012; there were no borrowings at September 30, and the company was reviewing replacement options. Management said it believed liquidity was sufficient through the term of the senior credit facility, which matures in 2016.
Important facts for investors to verify
- Whether the receivables securitization facility was renewed or replaced after its November 2012 maturity.
- Actual full-year sales, earnings and cash flow versus management’s 2012 outlook, particularly given weaker Steel and Mobile Industries demand.
- Remaining costs and execution risks for the St. Thomas closure, and changes in Sao Paulo remediation estimates.
- Whether CDSOA distributions were retained and how any further legal developments affected the possibility of clawback.
- Actual pension contributions, expense and funding status, alongside planned capital spending and share repurchases.