TIMKEN COMPANY — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Timken manufactures bearings, power-transmission products and related services. The quarter reflects the company’s post-June 2014 spinoff of its steel business; 2014 comparisons include that business as discontinued operations.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $722.5 million | $736.8 million |
| Gross profit / margin | $202.5 million / 28.0% | $218.1 million / 29.6% |
| Operating income (loss) | $(147.4) million | $72.4 million |
| Continuing-operations net income (loss) | $(134.8) million | $60.3 million |
| Net income (loss) attributable to Timken | $(135.2) million | $83.5 million |
| Diluted EPS | $(1.54) | $0.90 |
| Operating cash flow, continuing operations | $17.0 million | $(1.3) million |
| Capital expenditures | $19.7 million | $19.1 million |
Revenue declined 1.9%. Management attributed the decrease primarily to approximately $35 million of unfavorable currency effects, partly offset by about $15 million of higher volume and $5 million from acquisitions. Gross margin fell 160 basis points, reflecting currency and unfavorable mix, partly offset by volume. SG&A declined 9.4% to $128.5 million, mainly from lower incentive compensation, currency effects and cost reductions.
Results included a $215.2 million pension settlement charge, largely non-cash, following a group annuity transaction covering approximately 5,000 U.S. retirees. Q1 2014 included a $22.6 million gain on the sale of Sao Paulo real estate and $23.5 million of income from the steel business, then reported as discontinued operations. These items make headline year-over-year earnings comparisons less representative of underlying operations.
Segments: Mobile Industries sales were $393.0 million, down 6.8%, and EBIT was $35.4 million versus $64.3 million; EBIT margin was 9.0% versus 15.2%. Process Industries sales were $329.5 million, up 4.6%, while EBIT declined to $45.2 million from $48.2 million; EBIT margin was 13.7% versus 15.3%. Excluding currency, Mobile sales declined 2.2%; excluding currency and acquisitions, Process sales increased 7.0%.
Financial position and liquidity
At March 31, cash and cash equivalents were $154.4 million, down from $278.8 million at year-end; total debt was $523.4 million. Net debt rose to $354.2 million from $236.0 million, and net debt to capital increased to 20.0% from 12.9%. Current assets were $1,363.8 million and current liabilities $519.4 million. Equity was $1,416.2 million, down from $1,589.1 million.
Cash decreased $124.4 million during the quarter. Financing used $120.8 million, including $96.8 million for share repurchases and $21.9 million in dividends. The company reported no borrowings under its $500 million Senior Credit Facility and was in compliance with its covenants; it also had $88.9 million available under its asset securitization facility. Management stated liquidity was sufficient through at least the credit facility’s May 2016 maturity. About $129 million, or 83.5% of cash and cash equivalents, was held outside the U.S.; repatriation could incur taxes or be restricted.
Outlook, risks and other matters
- For full-year 2015, management expected sales to decline approximately 4%, primarily due to currency, partly offset by about 1% higher demand. Continuing-operations earnings were expected to be lower than in 2014, mainly because of pension settlement costs and currency effects.
- Management forecast approximately $310 million of operating cash from continuing operations, pension contributions of about $15 million, and capital expenditures of approximately 4% of sales.
- Mobile Industries sales were forecast down 5%–6%; Process Industries sales down 2%–3%. Segment EBIT outlook was higher for Mobile and lower for Process versus 2014.
- Other Q1 items included $6.2 million of impairment and restructuring charges, including a $2.5 million impairment of a U.S. repair business and $3.0 million of exit costs related to a Colombian sales representative. The company also repurchased approximately 2.3 million shares for $96.8 million.
- Key stated risks include economic and customer-demand changes, foreign exchange, competition and pricing, raw-material and operating costs, acquisitions and execution, litigation and product claims, pension assumptions and investment performance, and risks relating to the TimkenSteel spinoff. Management reported no material changes to previously disclosed risk factors and no material change in market-risk disclosures.
Important facts for investors to verify
- How much of the reported loss and pension expense is attributable to the one-time settlement, and what pension costs or funding needs remain?
- Whether full-year sales, earnings and operating-cash-flow guidance remains achievable given currency movements, demand and segment mix.
- Whether cash generation and liquidity remain adequate as net debt increased and the asset securitization facility matures in November 2015.
- Whether Mobile Industries’ weaker sales and margins stabilize, and whether Process Industries can sustain volume growth despite lower EBIT margins.
- The effects of overseas cash repatriation, foreign-exchange exposure, and the company’s share-repurchase and dividend spending on liquidity.