Timken Announces First Quarter Results
CANTON, Ohio, April 28 -- The Timken Company today announced first quarter results that include six weeks of ownership of The Torrington Company, which Timken acquired on February 18, 2003.
For the quarter ended March 31, the company reported sales of $838 million, up 36% from $616 million in the year-ago period. The acquisition, strong automotive demand, and the positive impact of currency exchange rates contributed to the sales increase.
Net income for the quarter was $11.3 million or $0.15 per diluted share, which included net expense for special items of $0.04 per diluted share. Those special items are pretax implementation charges of $9.1 million for the Torrington acquisition, which were partially offset by a $5.4 million pretax gain on the sale of land. Excluding these items, adjusted net income was $14.0 million or $0.19 per diluted share.
In first quarter 2002, there was a net loss of $3.5 million or ($0.06) per diluted share. This includes a $12.7 million after tax charge for goodwill impairment for FAS 142. This also included special items of $8.1 million of pretax restructuring and reorganization expenses related to our manufacturing strategy initiative. Excluding these items, the adjusted net income for 2002's first quarter, was $14.0 million or $0.23 per diluted share. The special charges for 2003 are entirely related to the Torrington acquisition and do not include any costs related to Timken's manufacturing strategy initiative.
The company's results were impacted by increases in operating expenses that were cited earlier this year -- soaring scrap and energy costs and higher pension and benefits expenses, as well as continuing sluggish industrial markets and inefficiencies related to the manufacturing restructuring in the Automotive Group.
Excluding the effects of the Torrington acquisition, Timken's sales were up 12% and adjusted earnings per share were $0.19. This is in line with the guidance of $0.17 to $0.21 per share provided by the company earlier this year.
"The integration of Torrington into Timken is proceeding as planned," said James W. Griffith, president and CEO. "With our sales forces consolidated, we soon expect to win our first major order that combines Timken and Torrington technology. We remain on track to achieve our expectations of having the Torrington acquisition be accretive to our full-year earnings by at least 10 percent. We continue to rationalize manufacturing operations to construct a global network of focused factories, with emphasis on increasing production in lower-cost locations. At the same time, we continue to push for more productivity increases in all of our facilities."
Timken's integration plan is on target to achieve its expectations of annualized pretax savings of $20 million by the end of 2003, increasing to $80 million by the end of 2005. Even before the acquisition closed, integration teams and their responsibilities were defined, and work is now well under way. In just the first 60 days following the acquisition:
* The combined management team is in place.
* Sales forces have been consolidated.
* The Darlington, England industrial bearing plant has begun the
eight to 12-month process of closing.
* Two distribution centers in England have been consolidated.
* In a series of meetings, the company brought together suppliers of
Timken and Torrington to begin the process of achieving savings from
the combined $1.6 billion of annual purchases.
In connection with the $840 million purchase of Torrington, Timken increased equity by $320 million with 22 million shares issued to finance the acquisition. Timken shares outstanding now total 85.5 million. The company financed the remaining $520 million with debt. At the end of the first quarter, Timken had total assets of $3.9 billion, an increase of $1.2 billion from the end of 2002. This increase was due primarily to the Torrington acquisition and included approximately $190 million of goodwill, based on preliminary estimates.
While integrating Torrington, Timken reorganized its Automotive and Industrial Groups. The company's automotive aftermarket business is part of the Industrial Group, which is now managing the combined distribution operations. The company's sales to emerging markets -- principally in central and eastern Europe and Asia -- previously were reported as part of the Industrial Group. Now, emerging market sales to automotive original equipment manufacturers are included in the Automotive Group. The segment results that follow reflect the reorganization for this and prior periods and exclude special charges.
Automotive Group Results
For the first quarter, Automotive Group sales were $298.1 million, up 63% from $183.4 million in the year ago period. EBIT (earnings before interest and taxes) was $8.9 million compared with $7.5 million a year earlier. Excluding Torrington, sales were $211.2 million and EBIT was $3.3 million.
Automotive Group results continue to be negatively impacted by inefficiencies related to the manufacturing restructuring by both Timken and Torrington. Pricing pressures and higher pension and benefit expenses also affected results for the quarter. Contributing favorably to Automotive Group results were the Torrington acquisition, new product introductions and currency exchange rates.
The Torrington acquisition significantly strengthened Timken's Automotive Group. Torrington's sophisticated needle bearing technology complements Timken's leading tapered roller bearing technology. The combination provides many opportunities for innovation, particularly in power trains.
Industrial Group Results
For the first quarter, Industrial Group sales were $305.0 million, up 31% from $233.2 million last year. EBIT was $17.8 million compared to $11.1 million in 2002's first quarter. Excluding Torrington, sales were $243.0 million and EBIT was $17.3 million.
Industrial Group results were favorably impacted by improved performance in the distribution business, favorable currency exchange rates and benefits of the company's manufacturing strategy initiative. Partially offsetting these benefits were continued weakness in the industrial markets and increased costs for energy, pension and benefits.
The Torrington acquisition significantly broadens the group's product line and is already leading to increased sales opportunities. The group also has begun the rationalization of distribution and manufacturing facilities, which is key to achieving the necessary synergies.
Steel Group Results
For the first quarter, Steel Group sales were $275.8 million, up 16% from $238.4 million a year ago. EBIT was $6.5 million, down from $12.1 million in the year-ago period. This includes intersegment sales of approximately $40 million for both periods. All market segments, except aerospace, were stronger than the weak first quarter a year ago. Performance benefited from modest price increases on certain product lines and from significantly improved labor productivity. More than offsetting those accomplishments were significant increases in the costs of raw materials and energy and higher costs for pensions and benefits. Surcharges and price increases will partially cover the increases in raw material and energy costs and will begin to have a positive impact in the second quarter.
Outlook
The Timken Company expects net income per diluted share for the full year to be between $1.20 to $1.40, excluding special items. For the second quarter, the company expects net income per diluted share to be between $0.20 to $0.28, excluding special items. This guidance assumes continued strength in automotive markets and some improvement in industrial markets. It also assumes some reduction in scrap and energy costs.
The Timken Company (www.timken.com) is a leading international manufacturer of highly engineered bearings, alloy and specialty steels and components, and a provider of related products and services. Timken employs 28,000 people in operations in 29 countries. In 2002, the combined Timken and Torrington companies had sales of approximately $3.8 billion. The company will conduct a teleconference on April 29 at 10 a.m. Eastern Time on its first quarter results. Dial in 706-634-0975 (reference Timken) or link to www.timken.com for the Web cast. Replay will be available by calling 706-645-9291 at 1 p.m. Eastern Time, April 29 through May 9 at 11:59 p.m. Access Code is 9561735.
CONSOLIDATED STATEMENT OF OPERATIONS
(Thousands of U.S. dollars,
except share data)
AS REPORTED ADJUSTED (1)
1Q 03 1Q 02 1Q 03 1Q 02
Net sales $838,007 $615,757 $838,007 $615,757
Cost of products sold 704,053 494,816 704,053 494,816
Reorganization expenses -
cost of products sold 3,688 2,299 -- --
Gross Profit $130,266 $118,642 $133,954 $120,941
Selling, administrative
& general expenses
(SG&A) 99,896 83,248 99,896 83,248
Reorganization/
Implementation expenses -
SG&A 5,375 2,744 -- --
Impairment and restructuring -- 3,057 -- --
Operating Income $24,995 $29,593 $34,058 $37,693
Gain on sale of land 5,447 -- -- --
Other expense (1,593) (7,468) (1,593) (7,468)
Earnings Before Interest
and Taxes (EBIT) (2) $28,849 $22,125 $32,465 $30,225
Interest expense (10,161) (8,035) (10,161) (8,035)
Interest income 210 380 210 380
Income Before Income
Taxes and Cumulative
Effect of Change in
Accounting Principle $18,898 $14,470 $22,514 $22,570
Provision for income taxes 7,559 5,282 8,555 8,582
Income Before Cumulative
Effect of Change in
Accounting Principle $11,339 $9,188 $13,959 $13,988
Cumulative effect of
change in accounting
principle (net of income
tax benefit of $7,786) -- (12,702) -- --
Net Income (Loss) $11,339 ($3,514) $13,959 $13,988
Earnings Per Share:
Income before
accounting change $0.15 $0.15 $0.19 $0.23
Cumulative effect of
accounting change -- ($0.21) -- --
Earnings Per Share $0.15 ($0.06) $0.19 $0.23
Earnings Per Share-
assuming dilution:
Income before
accounting change $0.15 $0.15 $0.19 $0.23
Cumulative effect of
accounting change -- ($0.21) -- --
Earnings Per Share-
assuming dilution $0.15 ($0.06) $0.19 $0.23
Average Shares
Outstanding 74,444,132 59,914,680 74,444,132 59,914,680
Average Shares
Outstanding-
assuming dilution 74,613,170 60,395,183 74,613,170 60,395,183
BUSINESS SEGMENTS
(Thousands of U.S. dollars) 1Q 03 1Q 02
Automotive Group (3)
Net sales to external customers $298,129 $183,398
Earnings before interest and taxes (EBIT) * (2) $8,868 $7,459
EBIT Margin 3.0% 4.1%
Industrial Group (3)
Net sales to external customers $304,963 $233,238
Earnings before interest and taxes (EBIT) * (2) $17,810 $11,080
EBIT Margin 5.8% 4.8%
Steel Group
Net sales to external customers $234,915 $199,121
Intersegment sales 40,864 39,273
Total net sales $275,779 $238,394
Earnings before interest and taxes (EBIT) * (2) $6,530 $12,119
EBIT Margin 2.4% 5.1%
* Automotive, Industrial and Steel EBIT do not equal Consolidated EBIT
due to intersegment adjustments which are eliminated upon
consolidation.
(1) "Adjusted" statements exclude the impact of restructuring and
reorganization charges for all quarters shown, gain on sale of land
in 2003 and cumulative effect of change in accounting principle
recognized in 2002.
(2) EBIT is defined as operating income (loss) plus other income
(expense). EBIT Margin is EBIT as a percentage of net sales. EBIT
and EBIT margin on a segment basis exclude certain special items set
forth above. EBIT and EBIT Margin are important financial measures
used in the management of the business. Management believes that
reporting EBIT and EBIT Margin best reflect the performance of our
business segments, and EBIT disclosures are responsive to investors.
(3) Automotive Group and Industrial Group 2002 segmented results have
been adjusted for 2003 reclassification of Automotive Aftermarket
and Emerging Markets' results.
Reconciliation of GAAP net income and EPS - Basic and Diluted as
previously disclosed.
This reconciliation is provided as additional relevant information about
the company's performance. Management believes that it is appropriate to
compare GAAP net income to adjusted net income in light of special items
related to restructuring and reorganization/implementation costs, a
one-time gain on sale of land and cumulative effect of change in
accounting principle.
(Thousands of U.S. dollars,
except share data)
1Q 03 1Q 02
$ EPS $ EPS
Net income (loss) $11,339 $0.15 ($3,514) ($0.06)
Reorganization/
implementation
expenses - cost of
products sold 3,688 0.05 2,299 0.04
Reorganization/
implementation
expenses - SG&A 5,375 0.07 2,744 0.04
Impairment and
restructuring -- -- 3,057 0.05
Gain on sale of land (5,447) (0.07) -- --
Tax effect of special
items (996) (0.01) (3,300) (0.05)
Cumulative effect of
change in accounting
principle -- -- 12,702 0.21
Adjusted net income $13,959 $0.19 $13,988 $0.23
Impact of Torrington
acquisition (1) (1,760) $0.00
Adjusted net income,
excluding Torrington
acquisition $12,199 $0.19
Average shares
outstanding -
assuming dilution 74,613,170
Impact of Torrington
acquisition (1) (11,023,822)
Adjusted average shares
outstanding -
assuming dilution 63,589,348
(1) Impact of Torrington acquisition includes acquisition
earnings and financing.
Reconciliation of 1Q 03 Timken Company and Impact of Torrington
Acquisition for Business Segments
1Q 03 Adjusted (2)
Impact of
Timken Torrington Timken
Company Acquisition Standalone
Automotive Group
Net sales to external
customers $298,129 $86,974 $211,155
EBIT $8,868 $5,547 $3,321
EBIT Margin 3.0% 6.4% 1.6%
Industrial Group
Net sales to external
customers $304,963 $62,000 $242,963
EBIT $17,810 $543 $17,267
EBIT Margin 5.8% 0.9% 7.1%
Steel Group
Net sales to external
customers $234,915 -- $234,915
Intersegment sales 40,864 -- 40,864
Total net sales $275,779 -- $275,779
EBIT $6,530 -- $6,530
EBIT Margin 2.4% -- 2.4%
Consolidated
Net sales to external
customers $838,007 $148,974 $689,033
Total EBIT for reportable
segments $33,208 6,090 $27,118
Intersegment adjustments (743) -- (743)
Total EBIT $32,465 6,090 $26,375
EBIT Margin 3.9% 4.1% 3.8%
(2) "Adjusted" statements exclude the impact of restructuring and
reorganization/implementation charges for all quarters shown and
gain on sale of land in 2003.
Reconciliation of Outlook Information
Expected net income per diluted share for the full year and the second
quarter exclude special items. Examples of such special items include
restructuring, reorganization and implementation costs and payments under
the Continued Dumping and Subsidy Offset Act (CDSOA). It is not possible
at this time to identify the potential amount or significance of these
special items. We cannot predict whether we will receive any payments
under the CDSOA in 2003 and if so, in what amount. If we do receive any
CDSOA payments, they will be received in the fourth quarter.
CONSOLIDATED STATEMENT OF CASH FLOWS For the three months ended
Mar 31 Mar 31
(Thousands of U.S. dollars) 2003 2002
Cash Provided (Used)
OPERATING ACTIVITIES
Net Income (Loss) $11,339 ($3,514)
Adjustments to reconcile net income
to net cash provided
by operating activities:
Cumulative effect of accounting
change -- 12,702
Depreciation and amortization 41,265 36,762
Gain on disposals of property,
plant and equipment (5,734) (2,875)
(Credit) Provision for deferred
income taxes (2,100) 9,272
Stock issued in lieu of cash to
employee benefit plans 714 1,031
Non-cash impact of impairment and
restructuring charges -- (6,671)
Changes in operating assets and
liabilities:
Accounts receivable (54,614) (49,862)
Inventories (22,463) (17,128)
Other assets (10,200) 2,637
Accounts payable and accrued
expenses 53,973 (1,510)
Foreign currency translation (1,859) (465)
Net Cash Provided (Used) by
Operating Activities $10,321 ($19,621)
INVESTING ACTIVITIES
Capital expenditures ($22,998) ($16,504)
Proceeds from disposals of
property, plant and equipment 9,895 1,441
Other net changes in property,
plant and equipment (2,064) 7,499
Acquisitions (858,952) (6,751)
Net Cash Used by Investing
Activities ($874,119) ($14,315)
FINANCING ACTIVITIES
Cash dividends paid to shareholders ($8,252) ($7,789)
Issuance of common stock for
acquisition 320,220 --
Accounts receivable securitization
financing borrowings 125,000 --
Payments on long-term debt (124) (1,727)
Proceeds from issuance of long-term
debt 424,553 --
Short-term debt activity - net (36,939) 27,498
Net Cash Provided by Financing
Activities $824,458 $17,982
Effect of exchange rate changes on
cash 577 (388)
Decrease in Cash and Cash Equivalents ($38,763) ($16,342)
Cash and Cash Equivalents at
Beginning of Period 82,050 33,392
Cash and Cash Equivalents at End of
Period $43,287 $17,050
CONSOLIDATED BALANCE SHEET Mar 31 Dec 31
(Thousands of U.S. dollars) 2003 2002
ASSETS
Cash & cash equivalents $43,287 $82,050
Accounts receivable 603,352 361,316
Deferred income taxes 35,351 36,003
Inventories 738,127 488,923
Total Current Assets $1,420,117 $968,292
Property, plant & equipment 1,557,101 1,226,244
Goodwill 320,868 129,943
Other assets 579,801 423,877
Total Assets $3,877,887 $2,748,356
LIABILITIES
Accounts payable & other liabilities $389,336 $296,543
Short-term debt & commercial paper 218,632 111,134
Accrued expenses 278,983 226,393
Total Current Liabilities $886,951 $634,070
Long-term debt 778,066 350,085
Accrued pension cost 753,834 723,188
Accrued postretirement benefits 493,302 411,304
Other non-current liabilities 24,392 20,623
Total Liabilities $2,936,545 $2,139,270
SHAREHOLDERS' EQUITY 941,342 609,086
Total Liabilities and
Shareholders' Equity $3,877,887 $2,748,356