Timken Reports Third Quarter Results; Updates Outlook
Timken generated third-quarter net income of US$52.2 million, or US$0.54 per diluted share. Compared with net income of US$80.9 million or US$0.83 per diluted share during the same period a year ago, third-quarter earnings primarily reflect lower volume and manufacturing utilization as well as unfavorable sales mix. The decrease was partially offset by lower raw material and plant closure costs as well as favorable pricing.
"On a macro basis, economic growth across the world has been much slower than we and our customers envisioned, and our third-quarter results were below our expectations," said James W. Griffith, Timken president and chief executive officer. "As a result, we've implemented and are continuing to take additional actions to allow us to enhance margins despite the lower demand levels. These include leveraging our strategic investments as well as implementing tactics to rationalize capacity levels and taking further actions to reduce costs, with a focus on SG&A."
Among recent developments, the company:
Nine Months' Results
Announced that its board of directors has approved a plan to pursue a separation of the company's steel business from its bearings and power transmission business through a tax-free spinoff, creating a new independent publicly traded steel company in 2014;
Expanded its product portfolio, launching new Timken® SNT plummer blocks and seals; introducing new Timken® encoders that utilize the latest magnetic encoder technology; and designing two new high-performance Timken® alloy steels to meet the specific needs of the oil and gas industry;
Further aligned its operations with market needs, which includes capacity rationalizations, supply chain improvements and workforce reductions; and
Returned US$47 million in capital to shareholders through dividends and repurchases of company shares in the quarter, bringing the total capital returned through September 2013 to approximately US$175 million. The company has approximately 5.6 million shares remaining under its board-approved share repurchase program.
Timken posted sales of US$3.3 billion in the first nine months of 2013, down 16% from the same period in 2012. The change reflects lower demand across most of the company's broad end markets. In addition, a US$124 million decline in raw material surcharges from the prior-year period negatively impacted revenues. The decrease was partially offset by the benefit of acquisitions.
In the first nine months of 2013, the company generated net income of US$210.1 million, or US$2.18 per diluted share. That compares with US$420.2 million, or US$4.28 per diluted share, in the same period last year, which included CDSOA receipts of US$68 million, or US$0.70 per share. Lower volume and manufacturing utilization, as well as sales mix, drove earnings during the first nine months of 2013. The decrease was partially offset by lower raw material costs, lower selling and administrative expenses, favorable pricing and lower costs related to previously announced plant closures.
As of 30 September 2013, total debt was US$476.6 million, or 16.8% of capital. The company had cash of US$418.1 million, resulting in US$58.5 million of net debt, compared with a net cash position of US$107.4 million at the end of 2012.
In the first nine months of 2013, the company generated US$251.8 million in cash from operating activities. Excluding discretionary pension contributions of US$66.0 million, net of tax, free cash flow (operating cash after capital expenditures and dividends) was US$42.0 million. In addition, the company repurchased 1.9 million shares for an aggregate of US$107 million and made three acquisitions totaling US$65 million.
Steel Segment Results
Sales for Steel, including inter-segment sales, were US$350.5 million in the third quarter, a decrease of 7% from US$377 million for the same period last year. The results reflect reduced shipments to industrial sectors, partially offset by improved sales to the mobile on-highway sector. Raw-material surcharges decreased US$4 million from the third quarter last year.
Third-quarter EBIT was US$29.2 million, or 8.3% of sales, down 41% from US$49.7 million, or 13.2% of sales, for the same period a year ago. The decline in EBIT was primarily due to unfavorable sales mix, lower volume and higher manufacturing costs including approximately US$8 million incurred for scheduled maintenance. The decrease was partially offset by lower raw material costs.
For the first nine months of 2013, Steel sales were US$1.1 billion, a 26% decrease compared with the same period a year ago. EBIT for the first nine months of 2013 was US$107.3 million, or 10.2% of sales, down 53% from US$226.6 million, or 16% of sales, in the prior-year period.
Mobile Industries Segment Results
In the third quarter, Mobile Industries' sales of US$348.1 million decreased 12% compared with last year's third-quarter sales of US$396.9 million. The US$49 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 non-automotive markets, led by mining, agriculture and heavy truck, partially offset by the Interlube Systems acquisition.
EBIT for the segment was US$29.1 million for the third quarter, or 8.4% of sales, down 23% from US$37.9 million, or 9.5% of sales for the same period a year ago. The decrease was driven primarily by lower volume, partially offset by lower plant closure and raw material costs.
For the nine months of 2013, Mobile Industries' sales were US$1.1 billion, a decrease of 13% relative to the same period a year ago. EBIT for the first nine months of 2013 was US$132.7 million, or 11.7% of sales, down 23% from US$173.4 million, or 13.2% of sales, in the prior-year period. The decrease in EBIT was driven primarily by lower volume and manufacturing utilization, partially offset by lower plant closure, raw material and selling and administrative expenses.
Process Industries Segment Results
Process Industries' third-quarter sales were US$308.3 million, down 1% from US$311.1 million for the same period a year ago. The change reflects lower demand in both the industrial original equipment and distribution market sectors, partially offset by the previously announced industrial services acquisitions as well as pricing.
Process Industries' third-quarter EBIT was US$50.8 million, or 16.5% of sales, a 15.5% decrease compared with US$60.1 million, or 19.3% of sales, for the same period a year ago. The decrease reflects lower volume partially offset by pricing and lower selling and administrative expenses.
For the first nine months of 2013, Process Industries' sales were US$910.9 million, a decrease of 9% compared with the same period a year ago. EBIT for the first nine months of 2013 was US$148 million, or 16.2% of sales, a decrease of 31% compared with US$213.7 million, or 21.3% of sales, in the prior-year period.
Aerospace Segment Results
Aerospace had third-quarter sales of US$76.3 million, down 9% from US$84 million for the same period last year. The decrease reflects weakness in commercial aviation and critical motion markets and a slower-than-expected ramp-up of shipping to defense customers, partially offset by strength in general aviation.
Third-quarter EBIT was US$4.9 million, or 6.4% of sales, a decrease of 36% compared with US$7.7 million, or 9.2% of sales, for the same period a year ago. The decrease reflects lower volume.
For the first nine months of 2013, Aerospace sales were US$240.8 million, 8% lower than the same period a year ago. EBIT for the first nine months was US$21.4 million, or 8.9% of sales, a decrease of 19% compared with US$26.3 million, or 10% 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 expenses.
The company revised its outlook for the full year based on a slower-than-expected economic recovery. The Timken Company expects 2013 sales to be approximately 13% lower year-over-year with:
Mobile Industries sales down 11 to 13% for the year due to the impact of lower customer demand and the company's market strategy;
Process Industries sales to be down 7 to 9%, due to broad-based weakness in industrial markets, partially offset by the benefit of acquisitions;
Aerospace sales down 3 to 5%, due to decreased demand in critical motion, civil aviation and defense; and
Steel sales down 20 to 22%, driven by lower industrial and oil and gas end-market demand and lower surcharges, partially offset by growth in mobile on-highway.
Timken projects 2013 annual earnings per diluted share to range from US$2.70 to US$2.90, which includes approximately US$0.13 per share for previously announced plant closure costs and US$0.07 associated with one-time implementation costs related to its planned separation of the steel business.
The company expects to generate cash from operations of approximately US$415 million in 2013. Free cash flow is projected to be US$5 million after making capital expenditures of about US$320 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$70 million in 2013. In addition, the company has repurchased US$107 million of its shares and expects to continue to repurchase shares under its current board-authorized program.
Excluding one-time implementation costs for the separation, the company expects sales and earnings in 2014 to improve as a result of cost reductions and the company's strategic initiatives as well as a gradual economic recovery.