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Timken Encouraged by Rebound in Steel Bookings
04/25/2014 - The Timken Co. reported stronger demand in its Steel and Process Industries segments, helping drive sales higher in the first quarter of the year.
The Timken Co. reported first-quarter 2014 sales of US$1.1 billion, up 1% from the prior-year quarter. Stronger demand in the company's Steel and Process Industries segments, higher raw material surcharges and the benefit of acquisitions drove the increase, which was offset largely by lower shipments in the Mobile Industries segment and the impact of currency.
For the first quarter, the company generated net income of US$83.5 million, or US$0.90 per diluted share, compared with US$75.1 million, or US$0.77 per diluted share, during the same period a year ago.
Adjusted net income was US$82.2 million, or US$0.88 per diluted share, which compares with adjusted net income ofUS$77.2 million, or US$0.80 per diluted share, a year ago (reference Table 1). Strong manufacturing performance and higher raw material surcharges drove the increase, which more than offset the impact of higher material costs and higher selling and administrative expenses.
Table 1: Adjusted Net Income and Diluted Earnings Per Share (EPS)
"Our results reflect a solid start to the year," said James W. Griffith, Timken president and chief executive officer. "We are encouraged by the rebound in our steel bookings, which historically have been a positive early indicator for the rest of the business.
"With the benefit of recent investments, manufacturing execution and our more robust portfolio of products and services, we are well-positioned to capitalize on the opportunities developing in our target markets," Griffith added. "We remain on pace to achieve our performance objectives for 2014."
As of March 31, 2014, total debt was US$479.3 million, or 15.5% of capital. Including US$263.4 million of cash on hand, net debt was US$215.9 million, or 7.6% of capital, compared with net debt of US$76.2 million, or 2.8% of capital as of 31 December 2013. Share repurchases in the quarter largely drove the increase in net debt.
Among recent developments, The Timken Company:
In the first quarter, Mobile Industries' sales of US$344.7 million decreased 13% compared to last year's first-quarter sales of US$397.1 million. The decrease was driven primarily by US$45 million in lower volume due to program exits in the light vehicle sector, which concluded at the end of 2013. In addition, improved demand from the rail and automotive aftermarket sectors and acquisitions was more than offset by lower demand in the mining and heavy truck market sectors and the impact of currency.
EBIT for the segment was US$56.1 million for the first quarter, or 16.3% of sales, compared to US$51.2 million, or 12.9% of sales, for the same period a year ago.
When adjusted to eliminate the gain on the sale of land in Brazil and charges related to cost-reduction initiatives and plant rationalizations, EBIT was US$36.7 million, or 10.6% of sales for the first quarter, compared to adjusted EBIT of US$55.8 million, or 14.1% of sales, for the same period a year ago. The decrease was driven primarily by lower light vehicle volume.
Process Industries Segment Results
Process Industries' first-quarter sales were US$310.2 million, up 9% from US$285.2 million for the same period a year ago. The increase reflects higher industrial original equipment demand, primarily in the wind energy market sector, and the benefit of acquisitions.
Process Industries' first-quarter EBIT was US$51.8 million, or 16.7% of sales, compared to US$42.6 million, or 14.9% of sales, for the same period a year ago.
When adjusted to eliminate charges related to cost-reduction initiatives and plant rationalizations, EBIT wasUS$52.9 million, or 17.1% of sales, compared to adjusted EBIT of US$42.7 million, or 15.0% of sales, for the same period a year ago. The increase reflects improved demand and lower manufacturing and material costs, partially offset by higher selling and administrative expenses and the impact of currency.
Aerospace Segment Results
Aerospace posted first-quarter sales of US$82.7 million, essentially unchanged from US$82.5 million for the same period last year. Improved demand from the defense rotorcraft market sector largely offset a decline from the general aviation and commercial market sectors compared to a year ago.
First-quarter EBIT was US$6.5 million, or 7.9% of sales, compared to US$8.6 million, or 10.4% of sales, for the same period a year ago. When adjusted to eliminate charges related to cost-reduction initiatives and plant rationalizations in the current quarter, EBIT was US$7.0 million, or 8.5% of sales. The decline in EBIT reflects unfavorable mix, partially offset by lower manufacturing costs.
Steel Segment Results
Sales for Steel, including inter-segment sales, were US$390.1 million in the first quarter, 13% higher than theUS$346.1 million posted in the first quarter last year. The results reflect improved shipments to the oil and gas and industrial market sectors along with increased raw-material surcharges of approximately US$15 million.
First-quarter EBIT was US$54.4 million, or 13.9% of sales, up from US$35.8 million, or 10.3% of sales, for the same period a year ago. The increase in EBIT was driven by higher volume, favorable mix, surcharges and improved manufacturing performance, partially offset by higher material costs and the impact of LIFO.
Outlook
The company's outlook reflects its current business structure with all four operating segments in place for the full 12 months of 2014. Timken now expects 2014 sales to be up approximately 7% compared to 2013, driven by higher demand in industrial, off-highway, energy, defense and rail end-market sectors.
For the full year 2014, The Timken Company expects:
The company expects to generate cash from operations of approximately US$500 million in 2014. Free cash flow is projected to be US$110 million after making capital expenditures of US$300 million and paying US$90 million in dividends.
For the first quarter, the company generated net income of US$83.5 million, or US$0.90 per diluted share, compared with US$75.1 million, or US$0.77 per diluted share, during the same period a year ago.
Adjusted net income was US$82.2 million, or US$0.88 per diluted share, which compares with adjusted net income ofUS$77.2 million, or US$0.80 per diluted share, a year ago (reference Table 1). Strong manufacturing performance and higher raw material surcharges drove the increase, which more than offset the impact of higher material costs and higher selling and administrative expenses.
Table 1: Adjusted Net Income and Diluted Earnings Per Share (EPS)
| 2014 – 1Q | 2013 – 1Q | |||
| (US$ in Mils.) | EPS | (US$ in Mils.) | EPS | |
| Net Income attributable to The Timken Company | US$ 83.5 | US$ 0.90 | US$ 75.1 | US$ 0.77 |
| Adjustments: | ||||
| Gain on sale of land in Brazil | (22.6) | - - | ||
| Spinoff-related costs | 11.5 | - - | ||
| Charges for cost-reduction initiatives and plant rationalizations | 5.0 | 4.7 | ||
| Provision for income taxes | 4.8 | (2.6) | ||
| Total adjustments | (1.3) | (0.02) | 2.1 | 0.03 |
| Net Income, after adjustments | US$ 82.2 | US$ 0.88 | US$ 77.2 | US$ 0.80 |
"Our results reflect a solid start to the year," said James W. Griffith, Timken president and chief executive officer. "We are encouraged by the rebound in our steel bookings, which historically have been a positive early indicator for the rest of the business.
"With the benefit of recent investments, manufacturing execution and our more robust portfolio of products and services, we are well-positioned to capitalize on the opportunities developing in our target markets," Griffith added. "We remain on pace to achieve our performance objectives for 2014."
As of March 31, 2014, total debt was US$479.3 million, or 15.5% of capital. Including US$263.4 million of cash on hand, net debt was US$215.9 million, or 7.6% of capital, compared with net debt of US$76.2 million, or 2.8% of capital as of 31 December 2013. Share repurchases in the quarter largely drove the increase in net debt.
Among recent developments, The Timken Company:
- Returned a total of US$141 million in capital to shareholders through dividends and the repurchase of approximately 2 million common shares. In February, the company increased its dividend by 9% to25 cents per share;
- Was awarded US$55 million in new business from the U.S. Department of Defense for additional main reduction gear propulsion ship sets for the Arleigh Burke DDG 51 class ships;
- Filed TimkenSteel Corporation's initial Form 10 Registration Statement for the planned separation from Timken in a tax-free spinoff, which is expected to be completed 30 June 2014;
- Announced two strategic joint ventures to pursue growth opportunities in emerging markets, including an agreement with United Wagon Company (UWC) to manufacture rail bearings and an agreement with European Bearing Corporation (EPK) to design and manufacture bearings aimed at serving industrial markets; and
- Earned recognition for the fourth time as one of the World's Most Ethical Companies by Ethisphere, an international organization focused on the advancement of best practices in corporate governance, risk, sustainability, compliance and ethics.
In the first quarter, Mobile Industries' sales of US$344.7 million decreased 13% compared to last year's first-quarter sales of US$397.1 million. The decrease was driven primarily by US$45 million in lower volume due to program exits in the light vehicle sector, which concluded at the end of 2013. In addition, improved demand from the rail and automotive aftermarket sectors and acquisitions was more than offset by lower demand in the mining and heavy truck market sectors and the impact of currency.
EBIT for the segment was US$56.1 million for the first quarter, or 16.3% of sales, compared to US$51.2 million, or 12.9% of sales, for the same period a year ago.
When adjusted to eliminate the gain on the sale of land in Brazil and charges related to cost-reduction initiatives and plant rationalizations, EBIT was US$36.7 million, or 10.6% of sales for the first quarter, compared to adjusted EBIT of US$55.8 million, or 14.1% of sales, for the same period a year ago. The decrease was driven primarily by lower light vehicle volume.
Process Industries Segment Results
Process Industries' first-quarter sales were US$310.2 million, up 9% from US$285.2 million for the same period a year ago. The increase reflects higher industrial original equipment demand, primarily in the wind energy market sector, and the benefit of acquisitions.
Process Industries' first-quarter EBIT was US$51.8 million, or 16.7% of sales, compared to US$42.6 million, or 14.9% of sales, for the same period a year ago.
When adjusted to eliminate charges related to cost-reduction initiatives and plant rationalizations, EBIT wasUS$52.9 million, or 17.1% of sales, compared to adjusted EBIT of US$42.7 million, or 15.0% of sales, for the same period a year ago. The increase reflects improved demand and lower manufacturing and material costs, partially offset by higher selling and administrative expenses and the impact of currency.
Aerospace Segment Results
Aerospace posted first-quarter sales of US$82.7 million, essentially unchanged from US$82.5 million for the same period last year. Improved demand from the defense rotorcraft market sector largely offset a decline from the general aviation and commercial market sectors compared to a year ago.
First-quarter EBIT was US$6.5 million, or 7.9% of sales, compared to US$8.6 million, or 10.4% of sales, for the same period a year ago. When adjusted to eliminate charges related to cost-reduction initiatives and plant rationalizations in the current quarter, EBIT was US$7.0 million, or 8.5% of sales. The decline in EBIT reflects unfavorable mix, partially offset by lower manufacturing costs.
Steel Segment Results
Sales for Steel, including inter-segment sales, were US$390.1 million in the first quarter, 13% higher than theUS$346.1 million posted in the first quarter last year. The results reflect improved shipments to the oil and gas and industrial market sectors along with increased raw-material surcharges of approximately US$15 million.
First-quarter EBIT was US$54.4 million, or 13.9% of sales, up from US$35.8 million, or 10.3% of sales, for the same period a year ago. The increase in EBIT was driven by higher volume, favorable mix, surcharges and improved manufacturing performance, partially offset by higher material costs and the impact of LIFO.
Outlook
The company's outlook reflects its current business structure with all four operating segments in place for the full 12 months of 2014. Timken now expects 2014 sales to be up approximately 7% compared to 2013, driven by higher demand in industrial, off-highway, energy, defense and rail end-market sectors.
For the full year 2014, The Timken Company expects:
- Mobile Industries' sales to be down 3 to 8%, primarily driven by US$110 million in reduced revenue resulting from planned program exits in the light vehicle sector, which concluded at the end of 2013. Offsetting this decline is anticipated improvement in rail and off-highway demand;
- Process Industries' sales to be up 7 to 12%, driven by economic recovery across most industrial end markets, the impact of acquisitions and improved penetration in targeted original equipment sectors;
- Aerospace sales to be up 5 to 10%, due to increased demand across most end markets, led by defense; and
- Steel sales up 15 to 20%, driven by improved demand in the oil and gas and industrial end-market sectors.
The company expects to generate cash from operations of approximately US$500 million in 2014. Free cash flow is projected to be US$110 million after making capital expenditures of US$300 million and paying US$90 million in dividends.
