Timken Posts Record Sales of $1.1 Billion in Second Quarter
Earnings Up Sharply Over Last Year's Second Quarter
CANTON, Ohio, July 22 -- The Timken Company today reported record sales of $1.1 billion for the second quarter of 2004, up 14 percent from the prior year. Sales increases in all three of the company's business groups drove strong earnings performance in the quarter.
"It was another record sales quarter for The Timken Company," said James W. Griffith, president and CEO. "Industrial markets strengthened noticeably in the second quarter, buoying sales across all parts of the company. Our results reflect both this increased demand and improved execution."
Timken reported earnings of $0.28 per diluted share, up from $0.05 a year ago. Excluding costs associated primarily with the integration of the Torrington acquisition, adjusted earnings per diluted share were $0.33, or 83 percent higher than last year. This was above previous company estimates of $0.27 to $0.32 per diluted share, excluding special items. The company had $7.6 million of pretax expense in the second quarter of 2004, compared to $17.9 million of pretax expense a year ago, primarily related to the Torrington integration.
Both reported and adjusted earnings per diluted share for the second quarter of 2004 included a negative effect of $0.05 per share, resulting from the approximately $7.7 million pretax impact of clean-up costs and estimated business interruption losses due to an unplanned shutdown of the Faircrest steel plant.
For the first half, sales were $2.2 billion, an increase of 22 percent from the prior year. Adjusted on a pro forma basis with Torrington included for the full six months of 2003, sales were up 13 percent. Timken completed its $840 million strategic acquisition of The Torrington Company on February 18, 2003. Earnings per diluted share for the first six months were $0.60 in 2004, versus $0.19 in 2003.
Excluding special items, earnings per diluted share in the first half of 2004 were $0.64, versus $0.37 in 2003. Special items in 2004 included $14.6 million of pretax expense, primarily related to the Torrington integration. This was partially offset by $7.7 million of pretax income received under the Continued Dumping and Subsidy Offset Act.
For the first half of 2004, the company achieved pretax integration savings of $35 million, primarily through purchasing synergies and workforce reductions. The company is on track to achieve its target of $80 million of pretax integration cost savings in 2005.
Total debt at June 30, 2004 was $852 million. After deducting cash and cash equivalents, net debt was $784 million, or 41.2 percent of capital. Net debt was higher than the 2003 year-end level of $706 million due to cash contributions to pension plans and seasonal working capital requirements. The company expects the ratio of net debt to capital at the end of this year to be lower than last year's level of 39.3 percent.
Automotive Group Results
For the second quarter, Automotive Group sales were $404 million, up 7 percent from $377 million in the second quarter of last year. Strong demand and increased penetration in the light truck and medium/heavy truck sectors in both North America and Europe accounted for most of the growth. North American light truck production in the second quarter was up approximately 5 percent, while medium/heavy truck production was up approximately 27 percent. Partially offsetting this increase was a 6 percent decrease in North American passenger car production.
Earnings before interest and taxes (EBIT) for the second quarter were $6.6 million -- down from $7.0 million the prior year. Despite higher production levels and improved operating efficiency, Automotive Group EBIT margin of 1.6 percent was negatively impacted by higher material costs. The company expects to continue to aggressively pursue recovering these costs through surcharges and price increases.
For the first half of 2004, Automotive Group sales were up 22 percent from the first half of last year. Including pro forma results for Torrington, sales were up 8 percent. EBIT for the first half was $24.9 million -- or 3.0 percent of sales compared to 2.4 percent in the first half of 2003.
Industrial Group Results
For the second quarter, Industrial Group sales were $438 million, up 12 percent from $390 million last year. Sales to most market sectors grew 10 percent or more over last year's levels, with sales to construction and agriculture customers reflecting the strongest gains. Sales in all geographic regions also improved.
EBIT was $49.3 million, compared to $30.6 million last year, while the EBIT margin improved to 11.3 percent from 7.8 percent a year ago. Increased volumes, lower operating costs and improved pricing all contributed to the EBIT improvement.
For the first half of 2004, Industrial Group sales were up 22 percent from a year ago. Including pro forma results for Torrington, sales were up 12 percent. EBIT for the first half of 2004 was $85.1 million -- or 10.0 percent of sales compared to 7.0 percent in the first half of 2003.
Steel Group Results
For the second quarter, Steel Group sales were a record $330 million, up 29 percent from $257 million last year, reflecting strong demand from both automotive and industrial customers. Double-digit increases occurred in nearly all market sectors. Approximately half of the top-line growth resulted from surcharges and price increases to offset rising raw material costs.
EBIT was $3.0 million, compared to a loss of $2.7 million last year, while EBIT margin improved to 0.9 percent from a negative 1.1 percent a year ago. Productivity and volume increases contributed positively to results.
The second quarter results were negatively affected by the shutdown of the Faircrest steel plant for approximately 10 days for a clean up of low-level radioactive material that was detected in scrap material. There was no exposure to the environment, employees or products.
Excluding the approximately $7.7 million impact of the Faircrest plant shutdown, margins would have been 3.2 percent. The company expects to recover all the costs associated with the Faircrest plant shutdown, except for $4 million of insurance deductibles.
For the first half, Steel Group sales were up 20 percent over the first half of last year. EBIT for the first half was $5.8 million - or 0.9 percent of sales compared to 0.7 percent of sales in the first half of 2003. Excluding the impact of Faircrest, EBIT margin would have been 2.1 percent.
Outlook
The company expects improved performance in 2004 relative to last year across all three of its business groups, driven by the sustained recovery anticipated in global markets. The company is increasing its earnings estimates for the year. The company expects earnings per diluted share, excluding special items, to be $0.25 to $0.30 for the third quarter of 2004 and $1.15 to $1.25 for the year.
The Timken Company ; (http://www.timken.com/) is a leading global manufacturer of highly engineered bearings and alloy steels and a provider of related products and services with operations in 27 countries. A Fortune 500 company, Timken recorded 2003 sales of $3.8 billion and employed approximately 26,000 at year-end.
Investor Contact: Kevin R. Beck, Manager - Investor Relations, (330) 471-718
CONSOLIDATED STATEMENT OF INCOME AS REPORTED
(Thousands of U.S.
dollars, except share Six Months Six Months
data) 2Q 04 2Q 03 04 03
Net sales $1,130,287 $990,253 $2,229,072 $1,828,260
Cost of products sold (2) 923,700 825,573 1,818,586 1,522,130
Integration/Reorganization
expenses - cost of
products sold 1,000 6,611 2,376 10,299
Gross Profit $205,587 $158,069 $408,110 $295,831
Selling, administrative &
general expenses (SG&A) (2) 141,133 127,040 279,848 234,432
Integration/Reorganization
expenses - SG&A 6,258 8,157 10,246 13,532
Impairment and
restructuring 329 853 1,059 853
Operating Income $57,867 $22,019 $116,957 $47,014
Other expense (5,288) (302) (14,107) (1,895)
Special items - other
(expense) income -- (2,276) 6,794 3,171
Earnings Before
Interest and Taxes
(EBIT) (3) $52,579 $19,441 $109,644 $48,290
Interest expense, net (11,707) (12,906) (22,852) (22,857)
Income Before Income
Taxes $40,872 $6,535 $86,792 $25,433
Provision for income taxes 15,531 2,614 32,981 10,173
Net Income $25,341 $3,921 $53,811 $15,260
Earnings Per Share $0.28 $0.05 $0.60 $0.19
Earnings Per Share -
assuming dilution $0.28 $0.05 $0.60 $0.19
Average Shares Outstanding 89,698,030 85,520,667 89,492,987 79,198,167
Average Shares
Outstanding-assuming
dilution 90,552,362 85,760,495 90,356,032 79,402,600
(1) "Adjusted" statements exclude the impact of impairment and
restructuring, integration/reorganization and special charges for all
periods shown.
(2) First half of 2003 results include a reclassification of $7,496 from
cost of products sold to selling, administrative and general expenses
for Torrington engineering and research and development expenses to be
consistent with Timken's cost classification methodology.
CONSOLIDATED STATEMENT OF INCOME ADJUSTED (1)
(Thousands of U.S.
dollars, except share Six Months Six Months
data) 2Q 04 2Q 03 04 03
Net sales $1,130,287 $990,253 $2,229,072 $1,828,260
Cost of products sold (2) 923,700 825,573 1,818,586 1,522,130
Integration/Reorganization
expenses - cost of
products sold -- -- -- --
Gross Profit $206,587 $164,680 $410,486 $306,130
Selling, administrative &
general expenses (SG&A) (2) 141,133 127,040 279,848 234,432
Integration/Reorganization
expenses - SG&A -- -- -- --
Impairment and
restructuring -- -- -- --
Operating Income $65,454 $37,640 $130,638 $71,698
Other expense (5,288) (302) (14,107) (1,895)
Special items - other
(expense) income -- -- -- --
Earnings Before
Interest and Taxes
(EBIT) (3) $60,166 $37,338 $116,531 $69,803
Interest expense, net (11,707) (12,906) (22,852) (22,857)
Income Before Income
Taxes $48,459 $24,432 $93,679 $46,946
Provision for income taxes 18,414 9,284 35,598 17,839
Net Income $30,045 $15,148 $58,081 $29,107
Earnings Per Share $0.33 $0.18 $0.65 $0.37
Earnings Per Share-
assuming dilution $0.33 $0.18 $0.64 $0.37
Average Shares Outstanding 89,698,030 85,520,667 89,492,987 79,198,167
Average Shares
Outstanding-assuming
dilution 90,552,362 85,760,495 90,356,032 79,402,600
(1) "Adjusted" statements exclude the impact of impairment and
restructuring, integration/reorganization and special charges for all
periods shown.
(2) First half of 2003 results include a reclassification of $7,496 from
cost of products sold to selling, administrative and general expenses
for Torrington engineering and research and development expenses to be
consistent with Timken's cost classification methodology.
BUSINESS SEGMENTS
Six Months Six Months
(Thousands of U.S. dollars) 2Q 04 2Q 03 04 03
Automotive Group
Net sales to external
customers $404,163 $376,525 $819,765 $674,654
Impairment and restructuring -- -- -- --
Integration/Re organization
expenses -- -- -- --
Adjusted earnings before
interest and taxes
(EBIT) * (3) $6,607 $6,989 $24,930 $15,857
Adjusted EBIT Margin (3) 1.6% 1.9% 3.0% 2.4%
Industrial Group
Net sales to external
customers $437,416 $389,580 $847,685 $694,543
Intersegment sales 278 154 567 346
Total net sales $437,694 $389,734 $848,252 $694,889
Impairment and restructuring -- -- -- --
Integration/Re organization
expenses -- -- -- --
Adjusted earnings before
interest and taxes
(EBIT) * (3) $49,311 $30,578 $85,077 $48,388
Adjusted EBIT Margin (3) 11.3% 7.8% 10.0% 7.0%
Steel Group
Net sales to external
customers $288,708 $224,148 $561,622 $459,063
Intersegment sales 41,686 32,692 78,103 73,556
Total net sales $330,394 $256,840 $639,725 $532,619
Impairment and restructuring -- -- -- --
Integration/Special expenses -- -- -- --
Adjusted earnings
before interest and taxes
(EBIT) * (3) $3,026 ($2,747) $5,750 $3,783
Adjusted EBIT Margin (3) 0.9% -1.1% 0.9% 0.7%
* Automotive Group, Industrial Group and Steel Group EBIT do not equal
Consolidated EBIT due to intersegment adjustments which are eliminated
upon consolidation.
(3) EBIT is defined as operating income 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.
Reconciliation of Total Debt to Net Debt and the Ratio of Net Debt to
Capital:
(Thousands of U.S. Dollars) Jun 30, 2004 Dec 31, 2003
Short-term debt $237,933 $121,194
Long-term debt 613,628 613,446
Total Debt 851,561 734,640
Less: cash and cash equivalents (67,469) (28,626)
Net Debt $784,092 $706,014
Net debt $784,092 $706,014
Shareholders' equity 1,118,799 1,089,627
Net debt + shareholders' equity
(Capital) $1,902,891 $1,795,641
Ratio of Net Debt to Capital 41.2% 39.3%
This reconciliation is provided as additional relevant information about
the Timken's financial position. Management believes Net Debt is more
representative of the Timken's financial position, due to a temporary
increase in cash and cash equivalents.
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 adjusted net income and
adjusted earnings per share are more representative of the company's
performance, and therefore useful to investors. Management also 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/reorganization costs, one-time gains/losses on sales of
assets, Continued Dumping and Subsidy Offset Act (CDSOA) receipts and
payments.
2Q 04 2Q 03
(Thousands of U.S. dollars, except
share data) $ EPS $ EPS
Net income $25,341 $0.28 $3,921 $0.05
Pre-tax special items:
Integration expense - cost of
products sold 1,000 0.01 6,611 0.08
Integration expenses - SG&A 6,258 0.07 8,157 0.09
Impairment and restructuring 329 0.00 853 0.01
Special items - other (income)
expense:
CDSOA repayment -- -- 2,808 0.03
CDSOA receipts, net of expenses -- -- -- --
Adoption of FIN 46 for investment
in PEL -- -- -- --
Loss (Gain) on sale of assets -- -- 2,340 0.03
Acquisition-related unrealized
currency exchange gains -- -- (1,930) (0.02)
Prior restructuring accrual
reversal -- -- (942) (0.01)
Tax effect of special items (2,883) (0.03) (6,670) (0.08)
Adjusted net income $30,045 $0.33 $15,148 $0.18
Six Months
04 03
(Thousands of U.S. dollars, except
share data) $ EPS $ EPS
Net income $53,811 $0.60 $15,260 $0.19
Pre-tax special items:
Integration expense - cost of
products sold 2,376 0.03 10,299 0.13
Integration expenses - SG&A 10,246 0.11 13,532 0.17
Impairment and restructuring 1,059 0.01 853 0.01
Special items - other (income)
expense: --
CDSOA repayment -- -- 2,808 0.04
CDSOA receipts, net of expenses (7,743)(4) (0.09) -- --
Adoption of FIN 46 for investment
in PEL 949 (5) 0.01 -- --
Loss (Gain) on sale of assets -- -- (3,107) (0.04)
Acquisition-related unrealized
currency exchange gains -- -- (1,930) (0.02)
Prior restructuring accrual
reversal -- -- (942) (0.01)
Tax effect of special items (2,617) (0.03) (7,666) (0.10)
Adjusted net income $58,081 $0.64 $29,107 $0.37
(4) CDSOA receipts are reported net of applicable expenses.
(5) In the first quarter of 2004, Timken adopted Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51" (FIN 46). Timken concluded that
its investment in a joint venture, PEL, was subject to the provisions
of FIN 46 and that Timken was the primary beneficiary of PEL.
Accordingly, Timken consolidated PEL, effective March 31, 2004, which
resulted in a charge to earnings related to the cumulative effect of
change in accounting principle.
Calculation of Timken Company Six Months 03 Pro forma Net Sales
(Thousands of U.S. Dollars)
Six Months 04 Six Months 03
Timken Timken Timken
Company, Company, Impact of Company,
As As Torrington Pro
Reported Reported Acquisition(6) forma
Automotive Group
Net sales to external
customers $819,765 $674,654 $87,721 $762,375
Industrial Group
Net sales to external
customers $847,685 $694,543 $63,522 $758,065
Intersegment sales 567 346 -- 346
Total net sales $848,252 $694,889 $63,522 $758,411
Steel Group
Net sales to external
customers $561,622 $459,063 -- $459,063
Intersegment sales 78,103 73,556 -- 73,556
Total net sales $639,725 $532,619 -- $532,619
Consolidated
Net sales to external
customers $2,229,072 $1,828,260 $151,243 $1,979,503
(6) Impact of Torrington Acquisition represents Torrington sales for 2003
prior to the acquisition. Timken sales to Torrington prior to the
acquisition have been excluded. This is consistent with the
methodology used to calculate pro forma financial results in 2003.
Allocation of net sales within the business groups was calculated
using the ratio of first quarter 2003 net sales subsequent to the
acquisition. Management believes this comparison is helpful for
investors to evaluate six months 04 sales compared to six months 03
sales, as if Timken had acquired Torrington on January 1, 2003.
Calculation of the Estimated Impact of the Faircrest Steel Plant Shutdown
on the Steel Group EBIT Margin
(Thousands of U.S. Dollars) 2Q 04 Six Months 04
Clean-up and business interruption costs $6,812 $6,812
Estimate of reduced EBIT from $3.9
million of lower sales 900 900
Impact on EBIT from the Faircrest
plant shutdown 7,712 7,712
Steel Group EBIT 3,026 5,750
EBIT excluding impact of Faircrest
plant shutdown $10,738 $13,462
Steel Group total net sales $330,394 $639,725
Lower sales due to Faircrest plant shutdown 3,900 3,900
Total net sales excluding impact of
Faircrest plant shutdown $334,294 $643,625
EBIT margin excluding impact of
Faircrest plant shutdown 3.2% 2.1%
This reconciliation is provided as additional relevant information
concerning the impact of the Faircrest plant shutdown. Management
believes excluding the impact of the Faircrest plant shutdown is more
representative of the Company's performance and, therefore, useful to
investors.
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 additional payments under the CDSOA
in 2004 and if so, in what amount. If we do receive any additional CDSOA
payments, they will most likely be received in the fourth quarter.
CONSOLIDATED BALANCE SHEET June 30 Dec 31
(Thousands of U.S. dollars) 2004 2003
ASSETS
Cash & cash equivalents $67,469 $28,626
Accounts receivable 687,709 602,262
Deferred income taxes 48,448 50,271
Inventories 719,404 695,946
Total Current Assets $1,523,030 $1,377,105
Property, plant & equipment 1,561,281 1,608,594
Goodwill 202,933 173,099
Other assets 558,682 530,991
Total Assets $3,845,926 $3,689,789
LIABILITIES
Accounts payable & other liabilities $504,218 $425,157
Short-term debt 237,933 121,194
Accrued expenses 429,489 508,205
Total Current Liabilities $1,171,640 $1,054,556
Long-term debt 613,628 613,446
Accrued pension cost 415,717 424,414
Accrued postretirement benefits cost 487,066 476,966
Other non-current liabilities 39,076 30,780
Total Liabilities $2,727,127 $2,600,162
SHAREHOLDERS' EQUITY 1,118,799 1,089,627
Total Liabilities and
Shareholders' Equity $3,845,926 $3,689,789
CONDENSED CONSOLIDATED STATEMENT For the three For the six
OF CASH FLOWS months ended months ended
June 30 June 30 June 30 June 30
(Thousands of U.S. dollars) 2004 2003 2004 2003
Cash Provided (Used)
OPERATING ACTIVITIES
Net Income $25,341 $3,921 $53,811 $15,260
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 51,409 47,687 105,337 88,952
Other 8,112 11,337 12,225 4,218
Changes in operating assets and
liabilities:
Accounts receivable (16,344) 15,450 (103,672) (39,164)
Inventories (4,081) 3,714 (19,848) (18,749)
Other assets (212) 6,038 (5,499) (4,163)
Accounts payable and accrued
expenses (31,448) (52,559) (34,731) 1,414
Foreign currency translation 1,833 (7,864) 3,309 (9,723)
Net Cash Provided by
Operating Activities $34,610 $27,724 $10,932 $38,045
INVESTING ACTIVITIES
Capital expenditures ($30,713) ($28,709) ($55,696) ($51,707)
Other 1,654 3,193 89 11,024
Acquisitions (6,275) -- (7,824) (718,952)
Net Cash Used by Investing
Activities ($35,334) ($25,516) ($63,431) ($759,635)
FINANCING ACTIVITIES
Cash dividends paid to
shareholders ($11,675) ($11,124) ($23,289) ($19,376)
Issuance of common stock for
acquisition -- (210) -- 180,010
Net borrowings on credit
facilities 44,439 16,785 112,188 529,275
Net Cash Provided by
Financing Activities $32,764 $5,451 $88,899 $689,909
Effect of exchange rate changes
on cash $414 $1,499 $2,443 $2,076
Increase (decrease) in Cash and
Cash Equivalents 32,454 9,158 38,843 (29,605)
Cash and Cash Equivalents at
Beginning of Period $35,015 $43,287 $28,626 $82,050
Cash and Cash Equivalents at End
of Period $67,469 $52,445 $67,469 $52,445