Timken Company Earnings Per Share Double on Record First Quarter Sales and Net Income
CANTON, Ohio, April 19 -- The Timken Company today reported record sales of $1.3 billion in the first quarter of 2005, up 19 percent from a year ago, driven by strong industrial demand. Timken had record net income of $58.2 million, or $0.63 per diluted share, compared to $28.5 million, or $0.32 per diluted share, in the first quarter a year ago. Excluding special items, earnings per diluted share were $0.64, compared to $0.31 last year. Special items in the first quarter of 2005 totaled $1.1 million of pretax expense, compared to $0.7 million of pretax income a year ago. The company's tax rate for the quarter was 36 percent, compared to 38 percent in the same period a year ago, reflecting the benefit of tax planning strategies. The company expects the tax rate going forward to remain at 36 percent.
"We continued to see broad strength in industrial markets, leading the Industrial and Steel Groups to deliver solid earnings this quarter. The performance in these areas more than offset the results of the Automotive Group, which reflected the relative weakness of the North American automotive industry," said James W. Griffith, president and CEO. "Over the past few years, we have taken actions to improve competitiveness in preparation for the upturn in global markets, and we are now benefiting from these actions. Overall, we are pleased with our first-quarter results and are continuing to focus on improving margins and performance."
Total debt at March 31, 2005 was $837.5 million, 39.1 percent of capital. Debt was higher than the 2004 year-end level of $779.3 million due to higher working capital requirements, resulting from increased sales volume and seasonality. During the quarter, Standard & Poors Ratings Services and Moody's Investors Service improved their outlook on Timken debt from negative to stable and also reaffirmed their ratings of BBB- and Ba1, respectively. The company expects its leverage to be lower at the end of this year, compared to last year.
Industrial Group Results
For the first quarter, the Industrial Group achieved record sales of $468.8 million, up 14 percent from $410.6 million last year. End market demand continued to be robust with the strongest growth in rail, mining, construction, agriculture and heavy industrial applications. The group is continuing to focus on customer service and expanding market opportunities. During the first quarter, for example, Timken expanded its industrial product line through a licensing and supply agreement with Federal-Mogul Corporation to sell National(R) industrial seal products in the U.S. and Canada under the Timken brand.
The Industrial Group's continued strong performance was reflected in earnings before interest and taxes (EBIT) of $47.0 million, up 31 percent from $35.8 million last year. Higher volume, price increases and improved productivity drove the EBIT increase, which was partially offset by increased costs for growth initiatives.
Automotive Group Results
Automotive Group sales were $420.3 million, up 1 percent from $415.6 million in the first quarter of last year. Continued strong demand in the heavy truck market was nearly offset by a production decline in North American light vehicles. Sales also benefited from new platforms launched in 2004, such as the Nissan Titan and Pathfinder Armada and Ford F-150.
The Automotive Group recorded an EBIT loss of $5.1 million in the first quarter of 2005, compared to EBIT of $18.3 million last year. The loss was due primarily to higher raw material costs, which could not be completely offset due to contractual commitments with certain customers. However, the company is making progress in recovery of raw material cost increases. The Automotive Group's results were also negatively impacted by lower volume in passenger car applications.
Steel Group Results
The Steel Group benefited from strong performance in both its alloy steel and specialty steel businesses. The group posted record sales of $467.4 million, up 51 percent from $309.3 million in the first quarter of last year. The increase was due to three factors: higher volume, with the strongest demand from aerospace, energy and general industrial customers; surcharges; and price increases. EBIT was a record $63.7 million, compared to $2.7 million last year. The group's improved profitability reflects increased volume, price increases and its success in recovering higher raw material costs through surcharges. In addition, high operating levels and labor productivity contributed to improved profitability.
Outlook
The company expects continued strong results in 2005 with estimated earnings per diluted share, excluding special items, of $0.55 to $0.60 for the second quarter and $2.05 to $2.20 for the full year. Continued strength of global industrial markets is expected to contribute to strong Industrial and Steel Group performance. North American light vehicle production is expected to be down slightly, while medium and heavy truck production is expected to remain strong. The Automotive Group should see improved profitability over last year as a result of productivity gains, price increases and surcharges.
The Timken Company ( www.timken.com ) keeps the world turning, with innovative ways to make customers' products run smoother, faster and more efficiently. Timken's highly engineered bearings, alloy steels and related products and services turn up everywhere -- on land, on the seas and in space. With operations in 27 countries, sales of $4.5 billion in 2004 and 26,000 employees, Timken is Where You Turn(TM) for better performance.
CONSOLIDATED STATEMENT
OF INCOME AS REPORTED ADJUSTED (1)
(Thousands of U.S. dollars,
except share data) 1Q 05 1Q 04 1Q 05 1Q 04
Net sales $1,304,540 $1,098,785 $1,304,540 $1,098,785
Cost of products sold 1,031,566 894,886 1,031,566 894,886
Manufacturing
rationalization/Integration/
Reorganization expenses -
cost of products sold 1,124 1,376 - -
Gross Profit $271,850 $202,523 $272,974 $203,899
Selling, administrative &
general expenses (SG&A) 163,630 138,715 163,630 138,715
Manufacturing
rationalization/Integration/
Reorganization expenses -
SG&A 409 3,988 - -
Impairment and restructuring - 730 - -
Operating Income $107,811 $59,090 $109,344 $65,184
Other expense (5,146) (8,820) (5,146) (8,820)
Special items - other income 386 6,795 - -
Earnings Before
Interest and Taxes
(EBIT) (2) $103,051 $57,065 $104,198 $56,364
Interest expense, net (12,102) (11,145) (12,102) (11,145)
Income Before Income
Taxes $90,949 $45,920 $92,096 $45,219
Provision for income taxes 32,714 17,450 33,155 17,183
Net Income $58,235 $28,470 $58,941 $28,036
Earnings Per Share $0.64 $0.32 $0.65 $0.31
Earnings Per Share-
assuming dilution $0.63 $0.32 $0.64 $0.31
Average Shares Outstanding 90,804,936 89,265,382 90,804,936 89,265,382
Average Shares
Outstanding-assuming
dilution 91,871,363 90,137,140 91,871,363 90,137,140
(1) "Adjusted" statements exclude the impact of impairment and
restructuring, manufacturing rationalization / integration /
reorganization and special charges and credits for all periods shown.
(2) 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.
BUSINESS SEGMENTS ADJUSTED (1)
(Thousands of U.S. dollars) 1Q 05 1Q 04
Industrial Group
Net sales to external customers $468,449 $410,269
Intersegment sales 398 289
Total net sales $468,847 $410,558
Adjusted earnings before interest and
taxes (EBIT) * (2) $46,999 $35,766
Adjusted EBIT Margin (2) 10.0% 8.7%
Automotive Group
Net sales to external customers $420,265 $415,602
Adjusted earnings (loss) before
interest and taxes (EBIT) * (2) ($5,100) $18,323
Adjusted EBIT (Loss) Margin (2) -1.2% 4.4%
Steel Group
Net sales to external customers $415,826 $272,914
Intersegment sales 51,605 36,417
Total net sales $467,431 $309,331
Adjusted earnings before interest and
taxes (EBIT) * (2) $63,725 $2,724
Adjusted EBIT Margin (2) 13.6% 0.9%
*Industrial Group, Automotive Group and Steel Group 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, manufacturing rationalization / integration /
reorganization and special charges and credits for all periods shown.
(2) 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) Mar 31, 2005 Dec 31, 2004
Short-term debt $226,556 $158,690
Long-term debt 610,957 620,634
Total Debt 837,513 779,324
Less: cash and cash equivalents (51,768) (50,967)
Net Debt $785,745 $728,357
Net debt $785,745 $728,357
Shareholders' equity 1,306,523 1,269,848
Net debt + shareholders' equity (Capital) $2,092,268 $1,998,205
Ratio of Net Debt to Capital 37.6% 36.5%
This reconciliation is provided as additional relevant information about
Timken's financial position. Management believes Net Debt is more
representative of Timken's indicative 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
manufacturing rationalization/integration/reorganization costs, and
Continued Dumping and Subsidy Offset Act (CDSOA) receipts and payments.
1Q 05 1Q 04
(Thousands of U.S. dollars, except
share data) $ EPS $ EPS
Net income $58,235 $0.63 $28,470 $0.32
Pre-tax special items:
Manufacturing rationalization -
cost of products sold 1,124 0.01 - -
Integration/reorganization expense
- cost of products sold - - 1,376 0.02
Manufacturing rationalization -
SG&A 409 0.00 - -
Integration/reorganization expenses
- SG&A - - 3,988 0.04
Impairment and restructuring - - 730 0.01
Special items - other (income) expense:
CDSOA receipts, net of expenses - - (7,743) (0.09)
Adoption of FIN 46 for investment
in PEL - - 948 (3) 0.01
Other (386) (0.00) - -
Tax effect of special items (441) (0.00) 267 0.00
Adjusted net income $58,941 $0.64 $28,036 $0.31
(3) 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.
Reconciliation of Outlook Information -
Expected earnings per diluted share for the full year and second quarter
exclude special items. Examples of such special items include impairment
and restructuring, manufacturing rationalization / 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 2005 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 Mar 31 Dec 31
(Thousands of U.S. dollars) 2005 2004
ASSETS
Cash & cash equivalents $51,768 $50,967
Accounts receivable 790,294 717,425
Deferred income taxes 86,652 90,066
Inventories 936,764 874,833
Total Current Assets $1,865,478 $1,733,291
Property, plant & equipment 1,547,875 1,582,957
Goodwill 190,442 189,299
Other assets 448,005 432,953
Total Assets $4,051,800 $3,938,500
LIABILITIES
Accounts payable & other liabilities $528,382 $520,259
Short-term debt 226,556 158,690
Accrued expenses 394,359 362,378
Total Current Liabilities $1,149,297 $1,041,327
Long-term debt 610,957 620,634
Accrued pension cost 438,794 468,644
Accrued postretirement benefits cost 496,640 490,366
Other non-current liabilities 49,589 47,681
Total Liabilities $2,745,277 $2,668,652
SHAREHOLDERS' EQUITY 1,306,523 1,269,848
Total Liabilities and
Shareholders' Equity $4,051,800 $3,938,500
CONDENSED CONSOLIDATED STATEMENT OF
CASH FLOWS For the three months ended
Mar 31 Mar 31
(Thousands of U.S. dollars) 2005 2004
Cash Provided (Used)
OPERATING ACTIVITIES
Net Income $58,235 $28,470
Adjustments to reconcile net income
to net cash used by operating activities:
Depreciation and amortization 54,100 53,928
Other (724) 4,113
Changes in operating assets and liabilities:
Accounts receivable (82,242) (87,328)
Inventories (75,771) (15,767)
Other assets 559 (5,287)
Accounts payable and accrued expenses 34,898 (3,283)
Foreign currency translation loss 3,204 1,476
Net Cash Used by Operating Activities ($7,741) ($23,678)
INVESTING ACTIVITIES
Capital expenditures ($32,363) ($24,449)
Other 288 (2,099)
Acquisitions (6,556) (1,549)
Net Cash Used by Investing Activities ($38,631) ($28,097)
FINANCING ACTIVITIES
Cash dividends paid to shareholders ($13,686) ($11,614)
Net borrowings on credit facilities 63,559 67,749
Net Cash Provided by Financing
Activities $49,873 $56,135
Effect of exchange rate changes on cash ($2,700) $2,029
Increase in Cash and Cash Equivalents 801 6,389
Cash and Cash Equivalents at
Beginning of Period $50,967 $28,626
Cash and Cash Equivalents at End of Period $51,768 $35,015