Timken Continues to Generate Strong Operating Margins Across All Segments
07/25/2013 - As it reported its second quarter earnings results, the Timken Company adjusted its full-year outlook to reflect a slower economic recovery now expected in the second half of 2013.
Timken reported sales of US$1.1 billion for the second quarter of 2013, a decrease of 16% from the prior year. The decline primarily reflects lower off-highway, industrial distribution, and oil and gas demand as well as the impact of the company's market strategy in the light-vehicle sector, partially offset by the benefit of acquisitions. In addition, sales reflect a US$49 million decline in raw material surcharges from the prior-year quarter.
Timken generated net income in the second quarter of US$82.8 million. This compared with US$183.6 million during the same period a year ago, which included income of US$69 million from Continued Dumping and Subsidy Offset Act (CDSOA) receipts. The decrease in second-quarter earnings also reflects lower demand as well as unfavorable sales mix. The decrease was partially offset by lower raw material costs (net of surcharges) and selling and administrative expenses as well as lower costs related to previously announced plant closures.
"We continue to perform very well, maintaining double-digit operating margins despite weak demand lingering in many global markets," said James W. Griffith, Timken president and chief executive officer. "Although our outlook for the year now reflects a more modest market recovery in the second half, we continue to expect strong financial performance for the remainder of the year."
Among recent developments, the company:
• Expanded its industrial services capabilities through the acquisition of the Standard Machine business, which provides new gearboxes, gearbox service and repair, and field technical services in Canada and the western United States;
• Started up a second ladle refining station at the Faircrest Steel Plant, the third major system to come on line this year in the Steel business. Part of a plan that includes installing a new vertical continuous caster, the investments are designed to bring greater operating efficiencies and new market opportunities to the company;
• Returned US$104 million in capital to shareholders in the quarter through the repurchase of 1.4 million shares and dividends; and
• Announced that the Timken Board of Directors formed a Strategy Committee to evaluate a potential separation of the company's Steel business from its other businesses and to review the company's corporate governance and capital allocation strategy.
Six Months' Results
Timken posted sales of US$2.2 billion in the first half of 2013, down 20% from the same period in 2012. The decrease reflects lower off-highway, industrial distribution and oil and gas demand as well as the impact of the company's market strategy in the light-vehicle sector, partially offset by acquisitions. In addition, a US$121 million decline in raw material surcharges from the prior-year period negatively impacted first-half revenues.
In the first half of 2013, the company generated net income of US$157.9 million. That compares with US$339.3 million in the same period last year, which included CDSOA receipts of US$69 million. The decrease in earnings during the first half of 2013 was driven by lower demand, sales mix and higher manufacturing costs, partially offset by improved pricing and lower selling and administrative expenses as well as lower costs related to previously announced plant closures.
As of 30 June 2013, total debt was US$462.5 million, or 16.6% of capital. The company had cash of US$396.8 million, resulting in US$65.7 million of net debt, compared with a net cash position of US$107.4 million as of 31 December 2012.
In the first half of 2013, the company generated US$139.5 million in cash from operating activities. Excluding discretionary pension contributions of US$66.3 million, net of tax, free cash flow (operating cash after capital expenditures and dividends) was US$16.7 million. In addition, the company repurchased 1.4 million shares totaling US$82 million and made three acquisitions totaling US$67 million. The company ended the quarter with US$1.3 billion of liquidity.
Mobile Industries Segment Results
In the second quarter, Mobile Industries' sales of US$393.1 million decreased 12% compared with last year's second-quarter sales of US$448.4 million. The US$55 million decrease included US$30 million related to the company's market strategy primarily in the light-vehicle sector. The remaining decrease was driven by lower volume in most markets led by lower off-highway and rail demand, partially offset by the Interlube Systems acquisition.
EBIT for the segment was US$52.4 million for the second quarter, or 13.3% of sales, up 7% from US$48.8 million, or 10.9% of sales, in the same period a year ago. The increase was driven primarily by lower manufacturing costs, reduced selling and administrative expense and reduced plant closure costs, partially offset by lower volume.
For the first half of 2013, Mobile Industries' sales were US$790.2 million, a decrease of 14% from the same period a year ago. First-half 2013 EBIT was US$103.6 million, or 13.1% of sales, down from US$135.5 million, or 14.8% of sales, in the prior-year period. The decrease in EBIT was driven primarily by lower volume and the impact of exited business, partially offset by lower selling and administrative expense and lower plant closure costs.
Process Industries Segment Results
Process Industries' second-quarter sales were US$317.4 million, down 6% from US$337.7 million for the same period a year ago. The decrease reflects lower demand in both the industrial distribution and original equipment market sectors, partially offset by pricing and the favorable impact of the previously announced industrial services acquisitions.
Process Industries' second-quarter EBIT was US$54.6 million, or 17.2% of sales, a 23% decrease compared with US$71.3 million, or 21.1% of sales, for the same period a year ago. The decrease reflects lower volume partially offset by pricing, lower selling and administrative expenses, and the benefit of acquisitions.
For the first half of 2013, Process Industries' sales were US$602.6 million, a decrease of 13% compared with the same period a year ago. First-half 2013 EBIT was US$97.2 million, or 16.1% of sales, a decrease compared with US$153.6 million, or 22.2% of sales, in the prior-year period.
Aerospace Segment Results
Aerospace posted second-quarter sales of US$82.0 million, down 6% from US$87.2 million for the same period last year. The decrease reflects lower volume primarily in the motion control sector, partially offset by pricing.
Second-quarter EBIT was US$7.9 million, or 9.6% of sales, compared with US$7.9 million, or 9.1% of sales, for the same period a year ago. EBIT benefitted from favorable selling and administrative expense, offset by lower volume.
For the first half of 2013, Aerospace sales were US$164.5 million, 8% lower than the same period a year ago. First half 2013 EBIT was US$16.5 million, or 10% of sales, compared with US$18.6 million, or 10.4% of sales, in the prior-year period. The decline in EBIT was driven primarily by lower volume and higher manufacturing costs, partially offset by pricing and lower selling and administrative expense.
Steel Segment Results
Sales for Steel, including inter-segment sales, were US$354.1 million in the second quarter, a decrease of 29% from US$499.8 million for the same period last year. The results reflect reduced shipments to the industrial and oil and gas market sectors, partially offset by improved sales to the mobile on-highway sector. Raw-material surcharges decreased US$49 million from the second quarter last year.
Second-quarter EBIT was US$42.3 million, or 11.9% of sales, down 52% from US$88.9 million, or 17.8% of sales, for the same period a year ago. The decline in EBIT was primarily due to lower volume and unfavorable sales mix.
For the first half of 2013, Steel sales were US$700.2 million, a 32% decrease compared with the same period a year ago. First-half 2013 EBIT was US$78.1 million, or 11.2% of sales, down from US$176.9 million, or 17.1% of sales, in the prior-year period.
Outlook
The company revised its outlook for the full year based on a slower-than-expected economic recovery in the second half of 2013.
The Timken Company now expects 2013 sales to be 10% lower year-over-year with:
• Mobile Industries sales down 7 to 12% for the year due to the impact of lower customer demand and the company's market strategy;
• Process Industries sales to be down 2 to 7%, due to weaker industrial markets, partially offset by the benefit of acquisitions;
• Aerospace sales up 3 to 8%, due to increased demand in civil and defense markets; and
• Steel sales down 15 to 20%, driven by lower industrial and oil and gas end-market demand and surcharges.
Timken projects 2013 annual earnings per diluted share to range from US$3.30 to US$3.60, which includes approximately US$0.15 per share for previously announced plant closure costs.
The company expects to generate cash from operations of approximately US$475 million in 2013. Free cash flow is projected to be US$25 million after making capital expenditures of about US$360 million and paying about US$90 million in dividends. The company does not anticipate making further discretionary pension contributions this year beyond the US$66 million, net of tax, made in the first quarter, as it expects its pension plans to be essentially fully funded by year end given the recent increase in interest rates. Excluding discretionary pension contributions, the company forecasts free cash flow of approximately US$90 million in 2013.
The Timken Company, a global industrial technology leader, applies its deep knowledge of materials, friction management and power transmission to improve the reliability and efficiency of industrial machinery and equipment all around the world. The company engineers, manufactures and markets mechanical components and high-performance steel. Timken® bearings, engineered steel bars and tubes—as well as transmissions, gearboxes, chain, related products and services—support diversified markets worldwide. With sales of US$5.0 billion in 2012 and approximately 20,000 people operating from 30 countries, Timken makes the world more productive and keeps industry in motion.
