TIMKEN COMPANY — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The financial statements are unaudited. Timken manufactures bearings, alloy steel, power-transmission products and related services across Mobile Industries, Process Industries, Aerospace and Defense, and Steel.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $1,343.2 million | $1,329.6 million | $2,764.2 million | $2,583.7 million |
| Gross profit | $377.3 million | $350.5 million | $788.9 million | $683.8 million |
| Gross margin | 28.1% | 26.4% | 28.5% | 26.5% |
| Operating income | $197.6 million | $190.6 million | $444.3 million | $372.5 million |
| Net income attributable to Timken | $183.6 million | $121.5 million | $339.3 million | $234.2 million |
| Diluted EPS | $1.86 | $1.22 | $3.44 | $2.36 |
- Q2 sales rose 1.0%; first-half sales rose 7.0%. Management attributed growth mainly to acquisitions, higher pricing and favorable mix, offset by weaker volume, currency effects and lower surcharges.
- Operating income increased 3.7% in Q2 and 19.3% for the first half. First-half SG&A increased to $327.7 million from $304.0 million; restructuring charges were $16.9 million versus $7.3 million.
- Reported earnings include a $109.5 million pretax CDSOA receipt, net of expense, recognized in Q2. Management said this added $69.0 million after tax, or $0.70 per diluted share. Reported net income and EPS therefore include a substantial unusual item.
- For the first six months, operating cash flow was $236.4 million, versus cash used of $162.9 million in 2011. Investing activities used $93.3 million, including $115.3 million of capital expenditures; financing activities used $93.8 million. Cash increased $45.1 million to $509.9 million.
- At June 30, cash of $509.9 million exceeded total debt of $494.2 million by $15.7 million. Current assets were $2,365.5 million and current liabilities $827.7 million. The company reported no borrowings on its $500 million senior credit facility, with $482.8 million available after letters of credit; its receivables facility was also unused. It reported compliance with debt covenants.
Changes and segment performance
- Q2 gross margin improved 170 basis points; first-half gross margin improved 200 basis points. Management cited pricing and mix, acquisitions and, in Q2, lower raw-material costs as key benefits; lower volume, reduced surcharges and higher manufacturing costs were offsets.
- Q2 segment EBIT was mixed: Mobile Industries fell to $48.8 million from $71.4 million; Process Industries rose to $71.3 million from $68.7 million; Aerospace and Defense rose to $7.9 million from $2.5 million; Steel rose to $88.9 million from $71.3 million. Mobile was pressured by weaker demand and St. Thomas restructuring; Steel benefited from pricing and mix despite lower shipments.
- First-half segment sales growth was strongest in Process Industries (+16.8%) and Aerospace and Defense (+9.8%); Mobile Industries rose 1.0% and Steel 6.1%. Acquisitions contributed materially, particularly to Process Industries.
- Cash generation also reflects lower pension and postretirement payments: $225.9 million in the first half of 2012 versus $331.8 million a year earlier, as well as the CDSOA receipt and changes in working capital.
Outlook, risks and unusual items
- Management expected 2012 sales to be slightly above 2011, with strong margins supported by pricing and mix, partly offset by raw-material costs and somewhat higher SG&A. Segment outlook varied: Mobile sales flat to down 5%, Process sales up 7% to 12%, Aerospace and Defense sales up 10% to 15%, and Steel sales flat to down 5%.
- Management expected approximately $545 million of 2012 cash from operations, pension and postretirement contributions of approximately $375 million, and capital expenditures of approximately $315 million, compared with $205 million in 2011. The filing identifies the Faircrest steel plant investment as a primary driver of higher capital spending.
- The planned St. Thomas, Ontario plant closure is expected to displace about 190 employees and cost $55 million to $65 million pretax, including $20 million to $25 million of expected cash costs. Approximately $17.7 million of pretax costs had been incurred by June 30, including amounts recorded outside restructuring charges.
- CDSOA distributions remain subject to litigation and possible clawback. Timken received $112.8 million gross for amounts withheld from 2006–2010; the income statement reports $109.5 million net of expense.
- Pension expense and funding remain sensitive to asset returns and actuarial assumptions. The company expected 2012 pension expense of about $60 million and noted that 2011 asset returns were below assumptions. Other exposures include weaker global demand, raw-material and energy costs, currency movements, tax matters, acquisition integration and environmental remediation.
- The Sao Paulo environmental remediation estimate ranged from $5.6 million to $11.2 million. The company also disclosed $110.3 million of gross unrecognized tax benefits at June 30 and anticipated a $43 million to $44 million decrease in uncertain tax positions over the following 12 months, primarily from settlements.
Key investor verification points
- Separate recurring operating performance from the $109.5 million CDSOA benefit, and monitor the possibility of repayment or clawback.
- Track whether 2012 sales, cash-flow, capital-spending and segment guidance were achieved, especially given weaker demand and currency effects.
- Assess the cash and earnings consequences of the St. Thomas closure against the stated cost range, timing and employee impacts.
- Monitor pension contributions, funded status and expense assumptions, plus the planned $100 million VEBA contribution.
- Review developments in CDSOA litigation, tax examinations and uncertain tax positions, and environmental remediation obligations.