Timken Announces Second Quarter Results
Integration of Torrington on track
CANTON, Ohio, July 23 -- The Timken Company today announced second quarter and first half results, including The Torrington Company for the full quarter. Timken acquired Torrington on February 18, 2003.
For the quarter ended June 30, the company reported sales of $990.3 million, up 50% from $660.8 million in the year-ago period. Most of the increase was due to the acquisition of Torrington. Excluding Torrington, sales were up 5% with about half of this growth attributable to currency translation.
Net income for the quarter was $3.9 million or $0.05 per diluted share, which included net expense for special items of $0.13 per diluted share. Those special items include integration expenses, costs related to a plant closure and repayment of a small portion of antidumping receipts received under the U.S. Continued Dumping and Subsidy Offset Act.
Excluding these items, adjusted net income was $15.1 million or $0.18 per diluted share. Excluding the effects of the Torrington acquisition and the special items, Timken's adjusted second-quarter earnings per diluted share would have been $0.21. The company continues to expect the acquisition to be accretive to earnings this year.
For the second quarter of 2002, the company reported earnings of $0.07 per diluted share. Excluding restructuring and reorganization charges, the company reported earnings of $0.28 per diluted share in the second quarter of 2002.
Results in the second quarter were negatively impacted by high energy and raw material costs, higher costs associated with the implementation of the manufacturing strategy and rationalization programs in our automotive group, lower volume in industrial markets due to high levels of distributor inventories for Torrington products, and higher pension and benefits costs.
The company ended the second quarter with a debt-to-capital ratio of 51%, unchanged from the end of the first quarter. In July the company's cash position was favorably affected by the sale of its interest in NTC, a joint venture with Japan-based NSK Ltd. Timken received approximately $146 million in cash, which it has used to pay down debt.
"While we continue to maintain our focus on integration and on a strong balance sheet, our operating performance in our base business was lower than last year. We are taking corrective actions to address those problems and expect to achieve higher levels of performance later in the year," said James W. Griffith, president and CEO. "Our integration of Torrington remains on track. We have achieved $5 million in pretax savings to date and expect to hit our target for achieving annualized pretax savings of $20 million by the end of 2003."
Since the acquisition of Torrington, the company has:
* Combined management organizations and consolidated sales forces.
* Started rationalizing operations of the Darlington, England industrial
bearing plant -- moving production to another facility in Ploiesti,
Romania.
* Launched global supply chain initiatives, resulting in purchasing
savings.
* Consolidated two distribution centers in England.
* Announced the closing of three U.S. regional service centers to
leverage on-line order and distribution capabilities of CoLinx --
an e-business joint venture.
* Announced the closing of the Rockford, Illinois industrial bearing
plant.
* Created an alliance with NSK to serve selected Japanese automotive
customers globally with engineering solutions on needle bearings,
following the sale of Timken's interest in NTC.
For the first half, sales were $1.8 billion, compared with $1.3 billion in 2002. Earnings per fully diluted share for the first six months were $0.19 in 2003 versus $0.01 in 2002. Excluding special items, first-half earnings per diluted share were $0.37 in 2003 versus $0.51 in 2002.
Excluding the effects of the Torrington acquisition, first-half sales were $1.4 billion, up 9% over the first six months of 2002, while adjusted earnings were $0.40 per diluted share.
The segment results that follow exclude special charges for all periods. They also reflect for all periods a reorganization of the Automotive and Industrial Groups that occurred in the first quarter of 2003. Automotive distribution operations are now reported as part of the Industrial Group. Additionally, company sales to emerging markets - principally in central and eastern Europe and Asia - previously were reported as part of the Industrial Group. Emerging market sales to automotive original equipment manufacturers are now included in the Automotive Group.
Automotive Group Results
For the second quarter, Automotive Group sales were $376.5 million, up 92% from $196.1 million during the year-ago period. EBIT (earnings before interest and taxes) was $7.0 million, compared to breakeven a year earlier. Excluding Torrington, sales were $205.0 million, which were slightly up from last year excluding currency translation, and the group reported a loss of $1.1 million before interest and taxes.
The Automotive Group benefited from continued strength in light truck production and new platform launches. It was negatively affected by weakening passenger car production, increases in pension and benefits expenses and inefficiencies related to the implementation of manufacturing strategy initiatives. Problems in implementing the Timken manufacturing strategy and postponement by Torrington of a rationalization program during the acquisition process delayed the benefits expected from these initiatives.
For the first half, Automotive Group sales were $674.7 million, compared to $379.5 million in 2002's first six months. EBIT for the first half was $15.9 million, compared with $7.5 million in 2002. Excluding effects of the Torrington acquisition, first half sales in 2003 were $416.1 million, and EBIT was $2.2 million.
Industrial Group Results
For the second quarter, Industrial Group sales were $389.7 million, up 55% from $251.2 million during the year-ago period. EBIT was $30.6 million, compared to $20.0 million a year earlier. Excluding Torrington, sales were $267.4 million, which were slightly up from last year excluding currency translation, and EBIT was $30.3 million.
Industrial Group results were favorably impacted by growth in the automotive distribution business, improved pricing and the exiting of low-margin business. Working against these positives were persistent weakness in industrial markets, increased costs for pensions and benefits and high levels of distributor inventories for Torrington industrial products. Improvement in distribution sales is expected in the second half as these inventories are lowered.
For the first half, Industrial Group sales were $694.9 million, compared to $484.4 million in 2002's first six months. EBIT for the first half was $48.4 million, compared with $31.1 million in 2002. Excluding Torrington, first half sales in 2003 were $510.6 million and EBIT was $47.5 million.
Steel Group Results
For the second quarter, Steel Group sales were $256.8 million, about even with 2002's second period. The group recorded a loss of $2.7 million before interest and taxes, compared with EBIT of $14.6 million a year earlier.
The group's results were hurt by high raw material and energy costs. The company also saw margins decline due to a change in product mix.
Plant operations were curtailed intermittently to avoid extremely high energy costs, and the group reduced inventories to generate cash. Steps were also taken to recover a portion of high raw material costs through surcharges and price increases. The company does not expect these actions to fully offset these higher costs for the remainder of the year as market prices for steel continue to be under pressure.
For the first half, Steel Group sales were $532.6 million compared to $493.7 million in 2002's first six months. EBIT was $3.8 million compared with $26.7 million in 2002.
Outlook
The company's outlook has changed from the first quarter when it assumed continued strength in automotive markets, some improvement in industrial markets and some reduction in scrap and energy costs. An assumption was made that positive economic recovery would occur in the last six months of the year. For the remainder of the year, the company now expects some softening in North American production of automotive light vehicles, particularly passenger cars, versus the second half of last year. The company also assumes industrial markets will remain flat and energy and raw material costs will be higher. As a result of these issues as well as the higher costs associated with the manufacturing strategy and rationalization initiatives, the company is lowering the earnings estimate for the full year to between $0.80 and $0.95 per diluted share, excluding special items. The company expects third quarter earnings per diluted share to be between $0.10 and $0.15, excluding special items.
"We continue to be excited about the acquisition of Torrington and the long-term prospects of the new Timken Company," said Mr. Griffith. "Integrating Torrington while completing a major manufacturing restructuring has challenged our organization and we have not performed up to our expectations for the first half of 2003. We remain confident in the positive impact that both activities will have on the company. We are focused on moving rapidly with the integration of Torrington and achieving our targeted synergies. While we are behind on earnings, we are on track on integration. We are ahead on debt reduction and expect that to be reflected on our year-end balance sheet."
On Thursday, July 24, The Timken Company will host a conference call for investors and securities analysts to discuss the financial results.
CONSOLIDATED STATEMENT OF INCOME AS REPORTED
(Thousands of U.S.
dollars, except share data) Six Months Six Months
2Q 03 2Q 02 03 02
Net sales $990,253 $660,829 $1,828,260 $1,276,586
Cost of products sold 825,573 533,746 1,529,626 1,028,562
Integration/Reorganization
expenses - cost of
products sold 6,611 2,782 10,299 5,081
Gross Profit $158,069 $124,301 $288,335 $242,943
Selling, administrative &
general expenses (SG&A) 127,040 90,965 226,936 174,213
Integration/Reorganization
expenses - SG&A 8,157 2,040 13,532 4,784
Impairment and
restructuring 853 14,226 853 17,283
Operating Income $22,019 $17,070 $47,014 $46,663
Other expense (302) (1,607) (1,895) (9,075)
Special charges - other
income (expense) (2,276) - 3,171 -
Earnings Before
Interest and Taxes
(EBIT) $19,441 $15,463 $48,290 $37,588
Interest expense (13,114) (7,889) (23,275) (15,924)
Interest income 208 317 418 697
Income Before Income
Taxes and Cumulative
Effect of Change in
Accounting
Principle $6,535 $7,891 $25,433 $22,361
Provision for income taxes 2,614 3,931 10,173 9,213
Income Before
Cumulative Effect of
Change in
Accounting Principle $3,921 $3,960 $15,260 $13,148
Cumulative effect of
change in accounting
principle (net of
income tax benefit
of $ 7,786) - - - 12,702
Net Income $3,921 $3,960 $15,260 $446
Earnings Per Share:
Income before
accounting change $0.05 $0.07 $0.19 $0.22
Cumulative effect of
accounting change - - - ($0.21)
Earnings Per Share $0.05 $0.07 $0.19 $0.01
Earnings Per Share-
assuming dilution:
Income before
accounting change $0.05 $0.07 $0.19 $0.22
Cumulative effect of
accounting change - - - ($0.21)
Earnings Per Share-
assuming dilution $0.05 $0.07 $0.19 $0.01
Average Shares Outstanding 85,520,667 60,239,065 79,198,167 60,092,322
Average Shares
Outstanding-assuming
dilution 85,760,495 61,038,029 79,402,600 60,732,056
CONSOLIDATED STATEMENT OF INCOME ADJUSTED (1)
(Thousands of U.S.
dollars, except share Six Months Six Months
data) 2Q 03 2Q 02 03 02
Net sales $990,253 $660,829 $1,828,260 $1,276,586
Cost of products sold 825,573 533,746 1,529,626 1,028,562
Integration/Reorganization
expenses - cost of
products sold - - - -
Gross Profit $164,680 $127,083 $298,634 $248,024
Selling, administrative &
general expenses (SG&A) 127,040 90,965 226,936 174,213
Integration/Reorganization
expenses - SG&A - - - -
Impairment and
restructuring - - - -
Operating Income $37,640 $36,118 $71,698 $73,811
Other expense (302) (1,607) (1,895) (9,075)
Special charges - other
income (expense) - - - -
Earnings Before
Interest and Taxes
(EBIT) $37,338 $34,511 $69,803 $64,736
Interest expense (13,114) (7,889) (23,275) (15,924)
Interest income 208 317 418 697
Income Before Income
Taxes and Cumulative
Effect of Change in
Accounting
Principle $24,432 $26,939 $46,946 $49,509
Provision for income taxes 9,284 10,116 17,839 18,763
Income Before
Cumulative Effect of
Change in
Accounting Principle $15,148 $16,823 $29,107 $30,746
Cumulative effect of
change in accounting
principle (net of
income tax benefit
of $ 7,786) - - - -
Net Income $15,148 $16,823 $29,107 $30,746
Earnings Per Share:
Income before
accounting change $0.18 $0.28 $0.37 $0.51
Cumulative effect of
accounting change - - - -
Earnings Per Share $0.18 $0.28 $0.37 $0.51
Earnings Per Share-
assuming dilution:
Income before
accounting change $0.18 $0.28 $0.37 $0.51
Cumulative effect of
accounting change - - - -
Earnings Per Share-
assuming dilution $0.18 $0.28 $0.37 $0.51
Average Shares Outstanding 85,520,667 60,239,065 79,198,167 60,092,322
Average Shares
Outstanding-assuming
dilution 85,760,495 61,038,029 79,402,600 60,732,056
BUSINESS SEGMENTS
(Thousands of U.S. Six Months Six Months
dollars) 2Q 03 2Q 02 03 02
Automotive Group (3)
Net sales to external
customers $376,525 $196,053 $674,654 $379,451
Impairment and
restructuring - - - -
Integration/Reorganization
expenses - - - -
Earnings before interest
and taxes (EBIT) * (2) $6,989 $35 $15,857 $7,494
EBIT Margin 1.9% 0.0% 2.4% 2.0%
Industrial Group (3)
Net sales to external
customers $389,580 $251,182 $694,543 $484,420
Intersegment sales 154 - 346 -
Total net sales $389,734 $251,182 $694,889 $484,420
Impairment and
restructuring - - - -
Integration/Reorganization
expenses - - - -
Earnings before interest
and taxes (EBIT) * (2) $30,578 $19,990 $48,388 $31,070
EBIT Margin 7.8% 8.0% 7.0% 6.4%
Steel Group
Net sales to external
customers $224,148 $213,594 $459,063 $412,715
Intersegment sales 32,692 41,759 73,556 81,032
Total net sales $256,840 $255,353 $532,619 $493,747
Impairment and
restructuring - - - -
Integration/Reorganization
expenses - - - -
Earnings before interest
and taxes (EBIT) * (2) ($2,747) $14,568 $3,783 $26,687
EBIT Margin -1.1% 5.7% 0.7% 5.4%
*Automotive Bearings, Industrial Bearings and Steel EBIT do not equal
Consolidated EBIT due to intersegment adjustments which are eliminated
upon consolidation.
(1) "Adjusted" statements exclude the impact of impairment and
restructuring and integration/reorganization charges for all quarters
shown, special charges 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, including decisions concerning the
allocation of resources and assessment of performance.
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 impairment and restructuring and
integration/reorganzation costs, one-time gains/losses on sales of assets,
Continued Dumping and Subsidy Offset Act (CDSOA) receipts and
payments and cumulative effect of change in accounting principle.
2Q 03 2Q 02
(Thousands of U.S. dollars, except
share data) $ EPS $ EPS
Net income $3,921 $0.05 $3,960 $0.07
-
Integration expense - inventory
write-up - cost of products sold 3,209 (1) 0.04 - -
Reorganization expense - cost of
products sold 3,402 (2) 0.04 2,782 0.05
Integration/Reorganization expenses
- SG&A 8,157 0.09 2,040 0.03
Impairment and restructuring 853 0.01 14,226 0.23
Special charges - other income
(expense)
Loss (Gain) on sale of assets 2,340 0.03 - -
CDSOA repayment 2,808 0.03 - -
Acquisition-related unrealized
currency exchange gains (1,930) (0.02) - -
Prior restructuring accrual
reversal (942) (0.01) - -
Tax effect of special items (6,670) (0.08) (6,185) (0.10)
Cumulative effect of change in
accounting principle - - - -
Adjusted net income $15,148 $0.18 $16,823 $0.28
Impact of Torrington acquisition
(3) (1,897) $0.03
Adjusted net income, excluding
Torrington acquisition $13,251 $0.21
Average shares outstanding,
assuming dilution 85,760,495
Impact of Torrington acquisition
(3) (22,097,534)
Adjusted average shares outstanding
- assuming dilution 63,662,961
Six Months 03 Six Months 02
(Thousands of U.S. dollars, except
share data) $ EPS $ EPS
Net income $15,260 $0.19 $446 $0.01
Integration expense - inventory
write-up - cost of products sold 6,897 (1) 0.09 - -
Reorganization expense - cost of
products sold 3,402 (2) 0.04 5,081 0.08
Integration/Reorganization expenses
- SG&A 13,532 0.17 4,784 0.08
Impairment and restructuring 853 0.01 17,283 0.28
Special charges - other income
(expense)
Loss (Gain) on sale of assets (3,107) (0.04) - -
CDSOA repayment 2,808 0.03 - -
Acquisition-related unrealized
currency exchange gains (1,930) (0.02) - -
Prior restructuring accrual
reversal (942) (0.01) - -
Tax effect of special items (7,666) (0.09) (9,550) (0.15)
Cumulative effect of change in
accounting principle - - 12,702 0.21
Adjusted net income $29,107 $0.37 $30,746 $0.51
Impact of Torrington acquisition
(3) (3,657) $0.03
Adjusted net income, excluding
Torrington acquisition $25,450 $0.40
Average shares outstanding,
assuming dilution 79,402,600
Impact of Torrington acquisition
(3) (15,775,740)
Adjusted average shares outstanding
- assuming dilution 63,626,860
(1) Represents a one-time inventory write-up related to purchase price
accounting.
(2) Costs associated with the British Timken plant closure.
(3) Impact of Torrington acquisition includes acquisition earnings,
financing and synergies.
Reconciliation of 2Q 03 Timken Company and Impact of Torrington
Acquisition for Business Segments
2Q 03 Adjusted (4)
Impact of
Timken Torrington Timken
Company Acquisition Standalone
Automotive Group
Net sales to external customers $376,525 $171,543 $204,982
EBIT $6,989 $8,135 ($1,146)
EBIT Margin 1.9% 4.7% -0.6%
Industrial Group
Net sales to external customers $389,580 $122,335 $267,245
Intersegment sales 154 - 154
Total net sales $389,734 $122,335 $267,399
EBIT $30,578 $298 $30,280
EBIT Margin 7.8% 0.2% 11.3%
Steel Group
Net sales to external customers $224,148 - $224,148
Intersegment sales 32,692 - 32,692
Total net sales $256,840 - $256,840
EBIT ($2,747) - ($2,747)
EBIT Margin -1.1% - -1.1%
Consolidated
Net sales to external customers $990,253 $293,878 $696,375
Total EBIT for reportable segments $34,820 8,433 $26,387
Intersegment adjustments 2,518 - 2,518
Total EBIT $37,338 $8,433 $28,905
EBIT Margin 3.8% 2.9% 4.2%
(4) "Adjusted" statements exclude the impact of impairment and
restructuring and integration/reorganization expenses for all quarters
shown and special items.
Reconciliation of 2Q 03 Timken Company and Impact of Torrington
Acquisition for Business Segments
Six Months 03 Adjusted (4)
Impact of
Timken Torrington Timken
Company Acquisition Standalone
Automotive Group
Net sales to external customers $674,654 $258,517 $416,137
EBIT $15,857 $13,682 $2,175
EBIT Margin 2.4% 5.3% 0.5%
Industrial Group
Net sales to external customers $694,543 $184,335 $510,208
Intersegment sales 346 - 346
Total net sales $694,889 $184,335 $510,554
EBIT $48,388 $841 $47,547
EBIT Margin 7.0% 0.5% 9.3%
Steel Group
Net sales to external customers $459,063 - $459,063
Intersegment sales 73,556 - 73,556
Total net sales $532,619 - $532,619
EBIT $3,783 - $3,783
EBIT Margin 0.7% - 0.7%
Consolidated
Net sales to external customers $1,828,260 $442,852 $1,385,408
Total EBIT for reportable segments $68,028 14,523 $53,505
Intersegment adjustments 1,775 - 1,775
Total EBIT $69,803 $14,523 $55,280
EBIT Margin 3.8% 3.3% 4.0%
(4) "Adjusted" statements exclude the impact of impairment and
restructuring and integration/reorganization expenses for all
quarters shown and special items.
Reconciliation of Outlook Information
Expected net income per diluted share for the full year and the third
quarter exclude special items. Examples of such special items include
impairment and restructuring, integration/reorganization expenses and
payments under the 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 For the three months For the six months
FLOWS ended ended
June 30 June 30 June 30 June 30
(Thousands of U.S. dollars) 2003 2002 2003 2002
Cash Provided (Used)
OPERATING ACTIVITIES
Net Income $3,921 $3,960 $15,260 $446
Adjustments to reconcile net
income to net cash provided
by operating activities:
Cumulative effect of accounting
change - - - 12,702
Depreciation and amortization 47,687 37,093 88,952 73,855
Loss (Gain) on disposals of
property, plant and equipment 3,780 (1,064) (1,954) (3,939)
Provision for deferred income
taxes 5,992 14,761 3,892 24,033
Stock issued in lieu of cash to
employee benefit plans 1,565 4,385 2,280 5,416
Changes in impairment and
restructuring charges - net - (2,400) - (9,071)
Changes in operating assets and
liabilities:
Accounts receivable 15,450 (19,467) (39,164) (69,329)
Inventories 3,714 (6,337) (18,749) (23,465)
Other assets 6,038 (19,941) (4,163) (17,304)
Accounts payable and accrued
expenses (52,559) 28,753 1,414 27,243
Foreign currency translation (7,864) 4,197 (9,723) 3,732
Net Cash Provided by
Operating Activities $27,724 $43,940 $38,045 $24,319
INVESTING ACTIVITIES
Capital expenditures ($28,709) ($18,393) ($51,707) ($34,897)
Proceeds from disposals of
property, plant and equipment 2,183 4,285 12,078 5,726
Other 1,010 4,984 (1,054) 12,483
Acquisitions - - (718,952) (6,751)
Net Cash Used by Investing
Activities ($25,516) ($9,124) ($759,635) ($23,439)
FINANCING ACTIVITIES
Cash dividends paid to
shareholders ($11,124) ($7,851) (19,376) (15,640)
Issuance of common stock for
acquisition (210) - 180,010 -
Accounts receivable
securitization financing - - 125,000 -
Payments on long-term debt (49,098) - (49,222) (1,727)
Proceeds from issuance of long-
term debt 404 304 424,957 304
Short-term debt activity - net 65,479 (14,392) 28,540 13,106
Net Cash Provided (Used) by
Financing Activities $5,451 (21,939) $689,909 ($3,957)
Effect of exchange rate changes
on cash $1,499 1,167 2,076 779
Increase (decrease) in Cash and
Cash Equivalents 9,158 14,044 (29,605) (2,298)
Cash and Cash Equivalents at
Beginning of Period $43,287 $17,050 $82,050 $33,392
Cash and Cash Equivalents at End
of Period $52,445 $31,094 $52,445 $31,094
CONSOLIDATED BALANCE SHEET June 30 Dec 31
(Thousands of U.S. dollars) 2003 2002
ASSETS
Cash & cash equivalents $52,445 $82,050
Accounts receivable 610,690 361,316
Deferred income taxes 34,510 36,003
Inventories 744,352 488,923
Total Current Assets $1,441,997 $968,292
Property, plant & equipment 1,650,127 1,226,244
Goodwill 192,800 129,943
Other assets 716,579 423,877
Total Assets $4,001,503 $2,748,356
LIABILITIES
Accounts payable & other liabilities 512,012 $296,543
Short-term debt & commercial paper 272,884 111,134
Accrued expenses 281,372 226,393
Total Current Liabilities $1,066,268 $634,070
Long-term debt 744,523 350,085
Accrued pension cost 699,430 723,188
Accrued postretirement benefits cost 494,083 411,304
Other non-current liabilities 26,273 20,623
Total Liabilities $3,030,577 $2,139,270
SHAREHOLDERS' EQUITY 970,926 609,086
Total Liabilities and
Shareholders' Equity $4,001,503 $2,748,356
(0) (0)