TIMKEN COMPANY — Q1 2014 Form 10-Q
Business context and reporting period. The Timken Company reported the three months ended March 31, 2014, comparing results with the first quarter of 2013. It operated four segments: Mobile Industries, Process Industries, Aerospace and Steel. The filing anticipated a tax-free spin-off of the Steel business as TimkenSteel Corporation by June 30, 2014, subject to specified approvals and other conditions.
Financial performance
Amounts are in millions of dollars, except per-share data.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $1,104.5 | $1,089.9 | +1.3% |
| Gross profit / margin | $291.0 / 26.3% | $274.5 / 25.2% | Margin +110 bps |
| Operating income | $113.6 | $119.7 | -$6.1 |
| Net income attributable to Timken | $83.5 | $75.1 | +$8.4 |
| Diluted EPS | $0.90 | $0.77 | +$0.13 |
| Cash from operating activities | $40.2 | -$37.8 | +$78.0 |
| Capital expenditures | $53.8 | $63.4 | -$9.6 |
Gross margin improved mainly on lower manufacturing and net material costs, partly offset by unfavorable mix, higher LIFO expense and logistics costs. Net income rose despite lower operating income, aided by a $22.6 real-estate gain on the former São Paulo site. The effective tax rate was 36.1%, versus 34.1%. Dividends were $0.25 per share, versus $0.23.
Segment results
| Segment | Sales | Sales change | EBIT | EBIT change |
|---|---|---|---|---|
| Mobile Industries | $344.5 | -13.2% | $56.1 | +$4.9 |
| Process Industries | $309.8 | +9.1% | $51.8 | +$9.2 |
| Aerospace | $82.7 | +0.2% | $6.5 | -$2.1 |
| Steel | $367.5 | +12.6% | $54.4 | +$18.6 |
Mobile sales fell with lower volume, notably in light vehicles following planned program exits. Process benefited from industrial and wind-energy demand and acquisitions. Steel gains reflected higher volume, surcharges and improved manufacturing performance, partly offset by higher input costs and LIFO expense. Aerospace EBIT declined mainly due to sales mix.
Liquidity, debt and cash flow
Cash and cash equivalents were $248.3 at March 31, down from $384.6 at year-end; restricted cash was $15.1. Total debt was $479.3, resulting in net debt of $215.9, compared with $475.9 total debt and $76.2 net debt at December 31. The increase in net debt primarily reflected $117.7 of share repurchases. Net debt to capital rose to 7.6% from 2.8%.
Operating cash flow improved year over year, in part because pension and postretirement contributions/payments declined to $22.9 from $117.1. Working capital remained a use of cash. Financing activities used $130.9, including the share repurchases and $23.1 in dividends. The company reported $250.7 of current maturities of long-term debt, principally notes due September 2014, and said it expected to refinance them. It had no borrowings under its $500 credit facility or $200 receivables securitization facility; availability was $491.4 and $190.7, respectively. It was in compliance with debt covenants.
Outlook, management commentary and notable items
- Management forecast 2014 sales growth of approximately 7% and higher earnings than in 2013, with stronger demand and cost-reduction initiatives as key drivers.
- Management expected approximately $500 of 2014 operating cash flow, $300 of capital expenditures and $20 of pension and postretirement contributions. These are forecasts, not reported results.
- Segment outlook: Mobile sales down 3%–8%, with EBIT expected roughly flat; Process sales up 7%–12% and EBIT expected higher; Aerospace sales up 5%–10% and EBIT expected higher; Steel sales up 15%–20% and EBIT expected higher. Steel forecasts depend in part on demand, surcharges and raw-material costs.
- The planned Steel spin-off was expected to involve approximately $95 of one-time costs ($75 expense and $20 capital). Approximately $30 of costs had been incurred through March 31, including about $5 capitalized. Q1 income-statement separation costs were $11.5.
- The company expected a $10.6 increase in its 2014 LIFO reserve; a 1% increase in costs would raise the estimated 2014 LIFO expense by $5.6.
- Management cited risks including economic and end-market demand changes, raw-material and energy costs, foreign exchange, execution of cost initiatives and acquisitions, and the timing, cost and tax-free status of the spin-off. Approximately $167.4 of cash was held outside the United States; repatriation may entail taxes or restrictions. Management said ordinary-course legal matters were not expected to materially affect results.
Investor facts to verify
- Whether the Steel spin-off closed on schedule, met its conditions and remained tax-free, and whether total separation costs and savings matched expectations.
- How the September 2014 note maturity was refinanced and whether post-spin liquidity and facility availability remained adequate.
- Whether operating cash flow, working-capital needs, pension contributions and capital spending tracked management’s 2014 forecasts.
- Whether Mobile Industries’ planned program exits and demand weakness, and Steel’s demand, surcharge and input-cost assumptions, developed as expected.
- How the São Paulo gain and other nonrecurring items affected reported earnings relative to underlying operating performance.