Timken Delivers Strong 2012 Results; Provides Outlook for 2013
01/24/2013 - The Timken Co. reported overall strong results for the 2012 year but noted lower shipments in its steel segment, primarily in the industrial and oil and gas market sectors, which were offset by improved pricing.
The Timken Company reported sales of US$5.0 billion for 2012, a decrease of 4% from the prior year. The decline reflects lower demand from the light vehicle, heavy truck, industrial machinery, and oil and gas sectors in the second half of the year. Lower surcharges and the impact of currency also contributed to the decrease in sales. The company benefited from improved pricing, the favorable impact of its Philadelphia Gear and Drives acquisitions, and strength in the company's rail and aerospace and defense end markets.
In 2012, the company generated net income of $495.5 million compared with $454.3 million a year prior. The increase in earnings reflects favorable pricing, lower material costs, LIFO income and acquisitions, partially offset by weaker sales volume, mix, material surcharges and manufacturing costs. The 2012 results also included two significant items, net of tax: the benefit of Continued Dumping and Subsidy Offset Act (CDSOA) receipts in the amount of $68 million and charges related to the announced closure of a bearing plant in Canada, totaling $28.1 million.
"Over the course of the year, we responded quickly and effectively to slowing demand across our end markets and maintained our focus on driving value for our customers and shareholders," said James W. Griffith, Timken president and CEO. "Our strategy of continuing to evolve in key markets and further diversifying our product portfolio with new products and additional repair services enabled us to achieve double-digit operating margins in all four segments, even in the face of lower volumes. Our diversification strategy was reinforced by the positive impact that the Drives and Philadelphia Gear acquisitions are having on our performance.
"The fundamental changes we've made to improve the structural performance in our business led to strong operating results and free cash flow generation," said Griffith, "as well as a strengthened balance sheet. Our strategic plan continues to serve us well in the face of uncertainty in the global economy."
During 2012, Timken:
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Expanded its reach in emerging markets and broadened its product portfolio, extending the Timken® spherical bearing line and developing new crankshaft steels as well as incorporating Drives® chain and Philadelphia Gear® repair services into its offerings;
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Completed the acquisition of the assets of Wazee Companies, LLC, expanding Timken services into critical motor and generator services and uptower wind maintenance and repair;
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Broke ground on a $225 million expansion at its Faircrest Steel Plant in Canton, Ohio, which will provide large bar production capabilities unique in America as well as improve efficiency and increase capacity in a core area of its Timken® engineered steel product portfolio;
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Invested in a new intermediate tube finishing line and new in-line forge press to improve productivity and increase capacity in its steel operations. These two investments, which come on line in the first quarter, reinforce the company's position of offering the broadest special bar quality (SBQ) steel capabilities in North America;
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Continued to align its manufacturing footprint with market needs, announcing the closure of its St. Thomas, Ontario, bearing plant and the consolidation of those operations into existing U.S. facilities, and realigning its Tyger River plant in Union, S.C., to focus exclusively on large bore bearing products; and
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Appointed Christopher A. Coughlin and Richard G. Kyle as group presidents, in connection with the retirement of Salvatore J. Miraglia. Coughlin leads the Mobile and Process Industries segments and Kyle oversees the Aerospace and Steel segments.
Fourth-Quarter Results
Timken posted sales of $1.1 billion in the fourth quarter of 2012, down 15% from the same period in 2011. The sales decrease primarily reflects lower demand in the company's light vehicle, heavy truck, mining and energy-related end market sectors, as well as lower surcharges. This decrease was partially offset by favorable pricing. From a geographic perspective, the decline also reflects lower demand in North America and Europe, partially offset by growth in Asia.
For the fourth quarter, the company generated net income of $75.3 million. That compares with $109.1 millio earned in the same period last year. The decrease in earnings was primarily the result of lower volume, mix, lower material surcharges and higher manufacturing costs, partially offset by favorable pricing, lower material costs, LIFO income and a lower tax rate.
Steel Segment Results
Sales for Steel, including inter-segment sales, were $1.7 billion in 2012, down 12% from $2 billion last year. The results reflect reduced shipments to the industrial and oil and gas market sectors and lower raw-material surcharges of approximately $165 million, partially offset by favorable pricing.
Steel segment EBIT for the year was $251.8 million, or 14.6% of sales, compared to $267.4 million, or 13.7% of sales, in the prior year. EBIT was impacted by lower volume, mix, surcharges and higher manufacturing costs, partially offset by pricing, LIFO income and lower material costs.
For the quarter, Steel segment sales were $316.4 million, down 32% from the same period last year. Raw material surcharges decreased approximately $70 million from the same period a year ago as a result of lower volume and material costs. Lower shipments, primarily in the industrial and oil and gas market sectors, were partially offset by improved pricing.
EBIT for the fourth quarter of 2012 was $25.2 million, or 8% of sales, compared with $70.6 million, or 15.1% of sales, for the same period a year ago. The decline in EBIT was driven by lower volume, mix, material surcharges and higher manufacturing costs, partially offset by pricing, lower material costs and LIFO income.
Mobile Industries Segment Results
Mobile Industries' 2012 sales were $1.7 billion, down 5% from $1.8 billion a year ago. The benefits of the Drives acquisition and the strength of rail markets were more than offset by lower light vehicle and heavy truck sales as well as currency.
Mobile Industries achieved EBIT of $208.1 million, or 12.4% of sales, for the year, down 21% from $261.8 million, or 14.8% of sales, earned in 2011. The decrease in EBIT was primarily driven by lower volume, higher manufacturing costs and charges of approximately $25.0 million related to previously announced plant closures, partially offset by favorable pricing.
In the fourth quarter, Mobile Industries' sales were $361.1 million, down 14% relative to the same period a year ago primarily due to lower light vehicle, heavy truck and off-highway market demand. EBIT in the quarter was $34.7 million, or 9.6% of sales, compared with $48.8 million, or 11.6% of sales, for the same period a year ago. The decline in EBIT was due to lower volume, partially offset by favorable pricing.
Process Industries Segment Results
Sales for the Process Industries segment were $1.3 billion in 2012, an increase of 8% from $1.2 billion a year ago. The increase was primarily driven by acquisitions. End-market demand was essentially flat while the benefit of pricing was mostly offset by currency.
Process Industries generated EBIT of $274.9 million, or 20.5% of sales, up slightly from the prior year's EBIT of $274.2 million, or 22% of sales. EBIT benefited from acquisitions and pricing, partially offset by manufacturing costs, mix and currency.
Process Industries' fourth-quarter sales were $338.9 million, up 5% from the same period a year ago. The increase reflects higher volume and favorable pricing. EBIT in the quarter was $61.2 million, or 18.1% of sales, down 5% from the prior year's fourth quarter EBIT of $64.6 million, or 20% of sales. The decrease in EBIT resulted from higher manufacturing and material costs, mix and currency, partially offset by increased volume, favorable pricing and lower selling and administrative costs.
Aerospace and Defense Segment Results
For the full year 2012, Aerospace and Defense recorded sales of $346.9 million, up 7% from $324.1 million in 2011. The increase reflects strong volume across most of the segment's end markets, led by defense.
Aerospace EBIT was $36.3 million, or 10.5% of sales, up from $5.1 million, or 1.6% of sales, for the same period a year ago. The increase in EBIT was led by volume, price and lower manufacturing and selling and administrative costs. In addition, last year's results were negatively impacted by approximately $6 million in warranty charges.
Aerospace and Defense sales for the fourth quarter were $84.4 million, up 6% from the same period a year ago. The increase reflects higher volume, led by the defense sector, as well as favorable pricing. EBIT for the fourth quarter was $10 million, or 11.8% of sales, compared with EBIT of $2.7 million, or 3.4% of sales, in the same period a year ago. The increase in EBIT was due to higher volume, pricing, lower manufacturing and selling and administrative costs.
Outlook
"We expect to deliver solid operating results in 2013 as we continue to take actions to reduce costs and drive efficiencies in response to the environment," said Griffith. "Our outlook for the year reflects our expectation that we will continue to see inventory reduction by our customers in the first half of the year, and anticipate an improving economy in the second half with customer demand matching consumption."
The company expects sales to be down around 5% compared to 2012, driven primarily by continued lower demand. Operating performance is expected to remain strong, with all four segments maintaining double-digit operating margins.
For the full year 2013, The Timken Company expects:
• Steel sales down 7 to 12%, driven by lower oil and gas as well as industrial end-market demand and surcharges.
• Mobile Industries' sales down 5 to 10% for the year due to the impact of lower customer demand driven by the company's market strategy;
• Process Industries' sales to be relatively flat, based on a second-half recovery in Asia and industrial distribution;
• Aerospace and Defense sales up 7 to 12%, due to increased demand in civil and defense as well as critical motion control end markets; and
The company expects to generate cash from operations of approximately $330 million in 2013. Free cash flow is projected to be a use of $120 million after making capital expenditures of about $360 million and paying about $90 million in dividends. Excluding discretionary pension and VEBA trust contributions of approximately $180 million, net of tax, the company forecasts free cash flow of approximately $60 million in 2013.
