Timken Company Announces Record Second Quarter Results; Raises Outlook
CANTON, Ohio, July 28 -- The Timken Company today reported a 17 percent increase in sales and more than doubling of earnings per share for the second quarter of 2005, compared to a year ago.
"We are pleased to report both record sales and second-quarter earnings per share. As these results demonstrate, we have leveraged the strength of the industrial markets we serve, while improving competitiveness," said James W. Griffith, president and CEO.
Timken reported second-quarter sales of $1.3 billion, compared to $1.1 billion last year, and net income of $67.3 million or $0.73 per diluted share, up from $25.3 million or $0.28 per diluted share a year ago. Excluding special items, earnings per diluted share were $0.77, compared to $0.33 per diluted share last year. Special items in the second quarter of 2005 totaled $3.7 million of pretax expense, including expenses for manufacturing rationalization, integration and reorganization, partially offset by a gain on the sale of a non-strategic business.
"While we are seeing strong industrial markets, automotive markets continue to be challenging. We have benefited from actions to improve our position, including price increases to recoup high raw material costs. However, these efforts have not been enough to offset significant changes occurring in the automotive industry. As a result, we are taking more aggressive actions. Over the next quarter, we will announce detailed plans to globally restructure our Automotive Group to reduce fixed costs, with targeted annual savings of approximately $40 million," Mr. Griffith said.
For the first half of 2005, sales were $2.6 billion, an increase of 18 percent from the prior year. Earnings per diluted share for the first six months were $1.37 in 2005, versus $0.60 in 2004. Excluding special items, earnings per diluted share in the first half of 2005 were $1.42, versus $0.64 in 2004. Special items in the first half of 2005 totaled $4.8 million of pretax expense, compared to $6.9 million a year ago.
Excluding special items, the company's effective tax rate for the first half of 2005 was 34.1 percent, down from 36.0 percent in the first quarter, due to higher earnings in low tax-rate jurisdictions. The company expects to maintain its rate from the first half.
Total debt at June 30, 2005 was $842.1 million, or 38.6 percent of capital. Debt was higher than the 2004 year-end level of $779.3 million due to seasonality and higher working capital requirements to support growth. The company expects its leverage to be lower at the end of this year compared to last year.
Industrial Group Results
For the second quarter, Industrial Group sales were $498.2 million, up 14 percent from $437.7 million last year. Sales growth was strongest in distribution, rail, mining and agriculture. In addition to strong market demand, results reflect the benefit of the company's focus on profitable growth through new products and market expansion. During the quarter, the Industrial Group introduced a new line of Timken(R) industrial oil seals and expanded its maintenance tool line into the U.S. and Canada.
Earnings before interest and taxes (EBIT) increased to $63.6 million, up 29 percent from last year's $49.3 million. EBIT margin improved to 12.8 percent from 11.3 percent a year ago. Driving margin improvement was increased volume, favorable mix that reflected higher distribution sales and improved pricing.
For the first half of 2005, Industrial Group sales were $967.0 million, up 14 percent from a year ago, while EBIT for the first half of 2005 increased to $110.6 million - or 11.4 percent of sales - compared to 10.0 percent in the first half of 2004.
Automotive Group Results
Automotive Group sales were $425.9 million, up 5 percent from $404.2 million in the second quarter of last year. Increased sales into medium and heavy truck markets were partially offset by decreases in light vehicle markets. The Automotive Group reported a loss before interest and taxes of $1.2 million, compared with EBIT of $6.6 million the prior year. Despite improved pricing, the decline in earnings was due principally to reduced unit volume from light vehicle customers and the impact of high raw material costs.
Over the next quarter, the Automotive Group will announce detailed plans to restructure operations, which will reduce fixed costs. Restructuring actions are expected to require approximately two years to complete. These actions are targeted to deliver annual savings of approximately $40 million, with expected net workforce reductions of 400 to 500 positions and restructuring costs of $80 to $90 million.
For the first half of 2005, Automotive Group sales were $846.2 million, up 3 percent from the first half of last year. The Group recorded a loss of $6.3 million for the first half, compared to EBIT of $24.9 million in the first half of 2004.
Steel Group Results
For the second quarter, Steel Group sales were $445.3 million, up 35 percent from $330.4 million last year. The sales growth in the alloy and specialty steel businesses reflected strong demand from industrial customers as well as price increases and surcharges to recover high raw material and energy costs.
EBIT was $56.7 million compared to $3.0 million last year. Increased volume, price increases, surcharges and continued high labor productivity drove the strong EBIT performance. During the quarter, the company also benefited from its investment in the new continuous rolling mill at its specialty steel operation in Latrobe, Pennsylvania.
Last year's second quarter EBIT was reduced by nearly $8 million due to an unplanned shutdown of the Faircrest steel plant.
For the first half, Steel Group sales were $912.8 million, up 43 percent over the first half of last year. EBIT for the first half was a record $120.5 million - or 13.2 percent of sales - compared to 0.9 percent of sales in the first half of 2004. Steel Group's second half results are expected to be lower than the record first half due to seasonality and lower raw material surcharges.
Outlook
As a result of the company's strong second-quarter performance and improved outlook for the year, the company is estimating third-quarter earnings per diluted share, excluding special items, of $0.50 to $0.55 and increasing its full-year estimates to $2.40 to $2.55 from $2.05 to $2.20. The improved outlook reflects continued strong industrial markets, benefiting the Industrial and Steel Groups, which should more than offset continued challenges within automotive markets.
Conference Call Information
The company will host a conference call for investors and analysts today to discuss financial results.
Conference Call: Thursday, July 28, 2005
11:00 a.m. Eastern Daylight Time
All Callers Live Dial-In: 706-634-0975
(Call in 10 minutes prior to be included)
Replay Dial-In through August 4, 2005: 706-645-9291
Conference ID: 3420202
Live Web cast: http://www.timken.com/
The Timken Company 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
(Thousands of U.S.
dollars, except share Six Months Six Months
data) 2Q 05 2Q 04 05 04
Net sales $1,324,678 $1,130,287 $2,629,218 $2,229,072
Cost of products sold 1,041,818 923,700 2,073,384 1,818,586
Manufacturing
rationalization/
Integration/Reorganization
expenses - cost of
products sold 6,048 1,000 7,172 2,376
Gross Profit $276,812 $205,587 $548,662 $408,110
Selling, administrative &
general expenses (SG&A) 161,464 141,133 325,094 279,848
Manufacturing
rationalization/
Integration/
Reorganization
expenses - SG&A 278 6,258 687 10,246
Impairment and
restructuring (44) 329 (44) 1,059
Operating Income $115,114 $57,867 $222,925 $116,957
Other expense (3,022) (5,288) (8,168) (14,107)
Special items - other
income 2,609 - 2,995 6,794
Earnings Before
Interest and Taxes
(EBIT) (2) $114,701 $52,579 $217,752 $109,644
Interest expense, net (13,087) (11,707) (25,189) (22,852)
Income Before Income
Taxes $101,614 $40,872 $192,563 $86,792
Provision for income taxes 34,280 15,531 66,994 32,981
Net Income $67,334 $25,341 $125,569 $53,811
Earnings Per Share $0.74 $0.28 $1.38 $0.60
Earnings Per Share-
assuming dilution $0.73 $0.28 $1.37 $0.60
Average Shares Outstanding 91,189,208 89,698,030 90,981,208 89,492,987
Average Shares
Outstanding-assuming
dilution 91,817,375 90,552,362 91,828,505 90,356,032
CONSOLIDATED STATEMENT OF INCOME
ADJUSTED (1)
(Thousands of U.S.
dollars, except share Six Months Six Months
data) 2Q 05 2Q 04 05 04
Net sales $1,324,678 $1,130,287 $2,629,218 $2,229,072
Cost of products sold 1,041,818 923,700 2,073,384 1,818,586
Manufacturing
rationalization/
Integration/
Reorganization
expenses - cost of
products sold - - - -
Gross Profit $282,860 $206,587 $555,834 $410,486
Selling, administrative &
general expenses (SG&A) 161,464 141,133 325,094 279,848
Manufacturing
rationalization/
Integration/
Reorganization
expenses - SG&A - - - -
Impairment and
restructuring - - - -
Operating Income $121,396 $65,454 $230,740 $130,638
Other expense (3,022) (5,288) (8,168) (14,107)
Special items - other
income - - - -
Earnings Before
Interest and Taxes
(EBIT) (2) $118,374 $60,166 $222,572 $116,531
Interest expense, net (13,087) (11,707) (25,189) (22,852)
Income Before Income
Taxes $105,287 $48,459 $197,383 $93,679
Provision for income taxes 34,153 18,414 67,308 35,598
Net Income $71,134 $30,045 $130,075 $58,081
Earnings Per Share $0.78 $0.33 $1.43 $0.65
Earnings Per Share-
assuming dilution $0.77 $0.33 $1.42 $0.64
Average Shares Outstanding 91,189,208 89,698,030 90,981,208 89,492,987
Average Shares
Outstanding-assuming
dilution 91,817,375 90,552,362 91,828,505 90,356,032
(1) "Adjusted" statements exclude the impact of impairment and
restructuring, manufacturing rationalization/integration/reorganization
and special charges and credits for all periods shown
BUSINESS SEGMENTS
Six Months Six Months
(Thousands of U.S. dollars) 2Q 05 2Q 04 05 04
Industrial Group
Net sales to
external
customers $497,523 $437,416 $965,972 $847,685
Intersegment
sales 628 278 1,026 567
Total net sales $498,151 $437,694 $966,998 $848,252
Adjusted earnings
before interest
and taxes (EBIT)
* (2) $63,629 $49,311 $110,628 $85,077
Adjusted EBIT
Margin (2) 12.8% 11.3% 11.4% 10.0%
Automotive Group
Net sales to
external
customers $425,949 $404,163 $846,214 $819,765
Adjusted (loss)
earnings before
interest and
taxes (EBIT) *
(2) ($1,217) $6,607 ($6,317) $24,930
Adjusted EBIT
(Loss) Margin
(2) -0.3% 1.6% -0.7% 3.0%
Steel Group
Net sales to
external
customers $401,206 $288,708 $817,032 $561,622
Intersegment
sales 44,131 41,686 95,736 78,103
Total net sales $445,337 $330,394 $912,768 $639,725
Adjusted earnings
before interest
and taxes (EBIT)
* (2) $56,748 $3,026 $120,473 $5,750
Adjusted EBIT
Margin (2) 12.7% 0.9% 13.2% 0.9%
*Industrial Group, Automotive Group and Steel Group EBIT do not equal
Consolidated EBIT due to intersegment adjustments which are eliminated
upon consolidation.
(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) June 30, 2005 Dec 31, 2004
Short-term debt $232,487 $158,690
Long-term debt 609,627 620,634
Total Debt 842,114 779,324
Less: cash and cash equivalents (66,980) (50,967)
Net Debt $775,134 $728,357
Net debt $775,134 $728,357
Shareholders' equity 1,342,163 1,269,848
Net debt + shareholders' equity
(Capital) $2,117,297 $1,998,205
Ratio of Net Debt to Capital 36.6% 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,
Continued Dumping and Subsidy Offset Act (CDSOA) receipts, and gain on the
sale of non-strategic assets.
(Thousands of U.S. dollars, except 2Q 05 2Q 04
share data) $ EPS $ EPS
Net income $67,334 $0.73 $25,341 $0.28
Pre-tax special items:
Manufacturing
rationalization/integration/
reorganization expenses
- cost of products sold 6,048 0.07 1,000 0.01
Manufacturing
rationalization/integration/
reorganization expenses
- SG&A 278 0.00 6,258 0.07
Impairment and restructuring (44) (0.00) 329 0.00
Special items - other (income)
expense:
Gain on sale of non-strategic
assets (2,570) (0.03) - -
CDSOA receipts, net of expenses - - - -
Adoption of FIN 46 for investment
in PEL - - - -
Other (39) (0.00) - -
Tax effect of special items 127 0.00 (2,883) (0.03)
Adjusted net income $71,134 $0.77 $30,045 $0.33
(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 third quarter
exclude special items. Examples of such special items include impairment
and restructuring, manufacturing rationalization/integration/
reorganization expenses, gain on the sale of non-strategic assets, 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.
Six Months
05 04
(Thousands of U.S. dollars, except
share data) $ EPS $ EPS
Net income $125,569 $1.37 $53,811 $0.60
Pre-tax special items:
Manufacturing
rationalization/integration/reorgani
zation expenses - cost of products
sold 7,172 0.07 2,376 0.03
Manufacturing
rationalization/integration/reorgani
zation expenses - SG&A 687 0.01 10,246 0.11
Impairment and restructuring (44) (0.00) 1,059 0.01
Special items - other (income)
expense:
Gain on sale of non-strategic
assets (2,570) (0.03) - -
CDSOA receipts, net of expenses - - (7,743) (0.09)
Adoption of FIN 46 for investment
in PEL - - 949 (3) 0.01
Other (425) (0.00) - -
Tax effect of special items (314) (0.00) (2,617) (0.03)
Adjusted net income $130,075 $1.42 $58,081 $0.64
(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 third quarter
exclude special items. Examples of such special items include impairment
and restructuring, manufacturing rationalization/integration/
reorganization expenses, gain on the sale of non-strategic assets, 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 June 30 Dec 31
(Thousands of U.S. dollars) 2005 2004
ASSETS
Cash & cash equivalents $66,980 $50,967
Accounts receivable 808,276 717,425
Deferred income taxes 91,022 90,066
Inventories 963,862 874,833
Total Current Assets $1,930,140 $1,733,291
Property, plant & equipment 1,522,606 1,583,425
Goodwill 188,005 189,299
Other assets 445,192 408,056
Total Assets $4,085,943 $3,914,071
LIABILITIES
Accounts payable & other liabilities $518,388 $504,585
Short-term debt 232,487 158,690
Accrued expenses 437,659 353,623
Total Current Liabilities $1,188,534 $1,016,898
Long-term debt 609,627 620,634
Accrued pension cost 404,881 468,644
Accrued postretirement benefits cost 494,978 490,366
Other non-current liabilities 45,760 47,681
Total Liabilities $2,743,780 $2,644,223
SHAREHOLDERS' EQUITY 1,342,163 1,269,848
Total Liabilities and
Shareholders' Equity $4,085,943 $3,914,071
CONDENSED CONSOLIDATED STATEMENT For the three months For the six months
OF CASH FLOWS ended ended
June 30 June 30 June 30 June 30
(Thousands of U.S. dollars) 2005 2004 2005 2004
Cash Provided (Used)
OPERATING ACTIVITIES
Net Income $67,334 $25,341 $125,569 $53,811
Adjustments to reconcile net
income to net cash used
by operating activities:
Depreciation and amortization 53,599 51,409 107,699 105,337
Other (4,137) 8,995 (4,410) 12,225
Changes in operating assets and
liabilities:
Accounts receivable (41,480) (16,344) (123,722) (103,672)
Inventories (48,117) (4,081) (124,594) (19,848)
Other assets (16,272) (10,696) (28,619) (18,504)
Accounts payable and accrued
expenses 41,203 (31,448) 76,816 (34,731)
Foreign currency translation
loss 4,231 1,833 7,435 3,309
Net Cash Provided (Used) by
Operating Activities $56,361 $25,009 $36,174 ($2,073)
INVESTING ACTIVITIES
Capital expenditures ($51,331) ($31,247) ($83,226) ($55,696)
Other 3,622 2,188 3,910 89
Proceeds from disposals of non-
strategic assets 10,881 - 10,881 -
Acquisitions - (6,275) (6,556) (7,824)
Net Cash Used by Investing
Activities ($36,828) ($35,334) ($74,991) ($63,431)
FINANCING ACTIVITIES
Cash dividends paid to
shareholders ($13,728) ($11,675) ($27,414) ($23,289)
Proceeds from exercise of stock
options 2,505 5,930 12,580 10,202
Net borrowings on credit
facilities 10,470 48,110 75,932 114,991
Net Cash (Used) Provided by
Financing Activities ($753) $42,365 $61,098 $101,904
Effect of exchange rate changes on
cash ($3,568) $414 ($6,268) $2,443
Increase in Cash and Cash
Equivalents 15,212 32,454 16,013 38,843
Cash and Cash Equivalents at
Beginning of Period $51,768 $35,015 $50,967 $28,626
Cash and Cash Equivalents at End
of Period $66,980 $67,469 $66,980 $67,469
NEWS MEDIA CONTACT:
Denise Bowler
Manager - Associate & Financial Communications
Mail Code: GNW-37
1835 Dueber Avenue, S.W.
P.O. Box 6932
Canton, OH 44706-0932 U.S.A.
Telephone: (330) 471-3485
Facsimile: (330) 471-4118
denise.bowler@timken.com
INVESTOR CONTACT:
Steve Tschiegg
Manager - Investor Relations
Mail Code: GNE-26
1835 Dueber Avenue, S.W.
P.O. Box 6928
Canton, OH 44706-0928 U.S.A.
Telephone: (330) 471-7446
Facsimile: (330) 471-2797
steve.tschiegg@timken.com