TIMKEN COMPANY — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Dollar amounts are in millions except per-share data. Timken completed the spinoff of its steel business, TimkenSteel, on June 30, 2014; steel operations are presented as discontinued operations, affecting comparability with 2013.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $788.0 | $731.4 | $2,314.0 | $2,285.9 |
| Gross profit / margin | $225.5 / 28.6% | $202.0 / 27.6% | $677.2 / 29.3% | $660.5 / 28.9% |
| Operating income (loss) | $(6.1) | $58.9 | $157.7 | $236.3 |
| Continuing-operations income (loss) | $(10.2) | $34.8 | $107.7 | $141.7 |
| Net income (loss) attributable to Timken | $(21.9) | $52.2 | $124.3 | $210.1 |
| Diluted EPS | $(0.24) | $0.54 | $1.35 | $2.18 |
Q3 sales rose 7.7%, mainly on stronger Process Industries volume; nine-month sales increased 1.2%. Q3 gross margin improved 100 basis points, but operating results were reduced by $99.4 of impairment and restructuring charges, primarily Aerospace-related. Nine-month results also included a $22.6 pretax gain on the sale of the former Sao Paulo site. Discontinued operations recorded a Q3 loss of $11.0, including $10.1 of spinoff-related costs; nine-month discontinued-operations income was $18.7, after $54.7 of separation costs.
Segment performance: Q3 Mobile Industries sales were $357.1 and EBIT $47.0; Process Industries sales were $355.6 and EBIT $77.4; Aerospace sales were $75.3 and EBIT loss $113.2. Aerospace results included approximately $118 of goodwill, other intangible and inventory impairment charges. Process Industries growth reflected wind energy and industrial aftermarket demand; Mobile benefited from rail volume, partly offset by planned program exits.
Cash flow, debt and liquidity
- Nine-month net cash from operations was $195.4, including $172.8 from continuing operations; total operating cash flow was below the prior-year $249.9. Capital expenditures were $87.1.
- Cash and cash equivalents were $238.2 at September 30, versus $384.6 at year-end 2013. Total debt was $531.4; net debt was $277.9, compared with $46.0 at year-end. Net debt to capital rose to 14.5% from 1.7%.
- Timken issued $350 of 3.875% senior notes due 2024 and used part of the proceeds to repay $250 of notes that matured in September. No borrowings were outstanding under its $500 credit facility; the company reported compliance with debt covenants. It also had $87.1 available under its receivables securitization facility.
- The company repurchased approximately 5.1 million shares for $266.5 in the first nine months and paid $68.2 in dividends.
Outlook, commentary and risks
- Management expected 2014 full-year sales to rise approximately 2% from 2013, cash from continuing operations of approximately $305, capital expenditures of approximately $115, and pension contributions of approximately $20.
- Full-year continuing-operations earnings were expected to decline year over year, primarily because of Aerospace restructuring and impairment charges and expected pension settlement costs. Management expected approximately $35 of pension settlement costs in Q4.
- Expected 2014 segment sales: Mobile down about 5%, Process up about 11%, and Aerospace down about 5%. Aerospace was to cease being a separate reporting segment beginning in Q4, with its results primarily included in Mobile Industries.
- On September 8, the company announced plans to close its Mesa, Arizona engine-overhaul business by year-end, consider strategic alternatives for its Mesa MRO parts business, and close its Wolverhampton, UK aerospace bearing facility, with timing not finalized.
- Management cited risks including demand and economic conditions, competition, raw-material and operating costs, integration and execution of initiatives, litigation, currency and financing-market movements, and potential tax or indemnification consequences related to the TimkenSteel spinoff. Management stated it believed liquidity was sufficient through at least the credit facility’s maturity.
- The filing’s MD&A notes that the October 28 earnings release reported Q3 attributable net loss of $14.8 ($0.16 per share) and nine-month net income of $131.4 ($1.43 diluted EPS); the 10-Q reflects additional Aerospace impairment charges recorded before filing. The financial statements in this 10-Q report attributable Q3 net loss of $21.9 and nine-month income of $124.3.
Important facts for investors to verify
- Reconcile the earnings-release figures with the final 10-Q amounts and confirm the effect of the additional Aerospace impairment charges.
- Assess whether Aerospace closures, asset impairments, inventory write-downs and restructuring will create further costs or affect future sales and margins.
- Track execution of the 2014 sales, operating cash-flow, capital expenditure and pension-contribution outlook, including working-capital needs.
- Review leverage and liquidity after the share repurchases, debt refinancing and TimkenSteel spinoff, and monitor covenant headroom.
- Consider the nonrecurring Sao Paulo gain and the spinoff’s effect on period-to-period comparability when evaluating earnings trends.