The Timken Company Reports Strong 2005 Results; Positive Outlook for 2006
CANTON, Ohio, Feb. 1, 2006 -- The Timken Company today announced record sales of $5.2 billion, up 15 percent from a year ago. Net income in 2005 increased sharply to a record $260.3 million, or $2.81 per diluted share, from $135.7 million, or $1.49 per diluted share, last year. Excluding the impact of special items, the company reported adjusted 2005 net income of $234.2 million or $2.53 per diluted share, compared to $122.3 million or $1.35 per diluted share in 2004. These special items include the benefits received under the Continued Dumping and Subsidy Offset Act [CDSOA], partially offset by charges related to restructuring and rationalization of operations.
"In 2005, demand across a broad range of industrial markets drove record sales. The combination of strong markets and our execution translated into significantly improved results," said James W. Griffith, president and CEO. "We have made considerable strides in our efforts to structurally improve Timken's profitability. We continued that process in 2005 by launching several key initiatives to position the company for continued success."
During 2005, the company:
- Leveraged demand and implemented surcharges and price increases to
recover high raw material costs;
- Improved the business mix and increased production capacity in targeted
areas, including significant investments in the U.S., China and
Romania;
- Launched a major growth initiative in Asia with the objective of
increasing market share, influencing major design centers and expanding
our network of sources of globally competitive friction management
products;
- Initiated Project ONE, a five-year program designed to improve business
processes and systems to deliver enhanced customer service and
financial performance. With an expected cost of $90 million, Project
ONE is targeted to achieve annual savings of approximately $75 million
upon project completion, as well as improved working capital
management;
- Began restructuring automotive operations to address challenging market
issues, with expected costs of $80 to $90 million and targeted annual
savings of approximately $40 million by the end of 2007;
- Reached a new four-year agreement with the United Steelworkers union,
covering employees in the Canton, Ohio bearing and steel plants. As a
result of the contract settlement, the company has refined its plans to
rationalize the Canton bearing operations, with expected costs of
approximately $35 to $40 million over the next four years and targeted
annual savings of approximately $25 million;
- Improved the business portfolio. The company expanded its presence in
the aerospace aftermarket through acquisitions and alliances, providing
a broader range of engine bearing repair and reconditioning, while also
completing the divestiture of several non-strategic product lines; and
- Strengthened the balance sheet, reducing debt while contributing $226
million to the company's U.S. pension plans.
Fourth quarter results
For the quarter ended December 31, 2005, sales were $1.3 billion, an increase of 8 percent from a year ago. Sales across all three business groups improved from the fourth quarter of 2004. Earnings per diluted share for the fourth quarter were $1.01, compared to $0.71 in the same period a year ago.
Excluding special items, the company's adjusted fourth quarter earnings per diluted share were $0.54, versus $0.44 a year ago. Special items in the fourth quarter included income from CDSOA, a gain on the sale of assets and restructuring and rationalization charges.
"While adjusted fourth quarter earnings per diluted share were up 23 percent over the same period last year, they were lower than anticipated due to higher manufacturing costs, a write-off of obsolete and slow-moving inventory and increased reserves for automotive industry credit exposure," said Mr. Griffith.
Industrial Group Results
Industrial Group 2005 sales increased 13 percent from the prior year to a record $1.9 billion. The increase was driven by higher volume and improved product mix. Many end markets were strong, especially mining, metals, rail, aerospace and oil and gas, which also drove strong distribution sales. The Industrial Group also benefited from growth in emerging markets, especially China.
Industrial Group 2005 earnings before interest and taxes (EBIT) increased to $199.9 million from $177.9 million in 2004, reflecting volume growth and price increases, partially offset by investments in Project ONE and Asia growth initiatives.
Industrial Group sales in the 2005 fourth quarter increased to $491.9 million, up 10 percent from the prior year with continued market strength. EBIT was $41.9 million, down from $47.6 million a year ago. The positive impact of improvements in volume and mix were more than offset by higher manufacturing costs associated with the ramping up of capacity to meet customer demand, investments in Project ONE and Asia growth initiatives, and a write-off of obsolete and slow-moving inventory.
Automotive Group Results
Automotive Group 2005 sales increased 5 percent to a record $1.7 billion. Sales grew due to favorable pricing actions and growth in medium and heavy truck markets. The Automotive Group had a loss in 2005 of $19.9 million, compared to EBIT of $15.9 million in 2004. Increased volume and pricing were more than offset by higher manufacturing costs associated with ramping up plants serving industrial customers and from reduced unit volume from light vehicle customers. Automotive results were also impacted by investments in Project ONE and an increase in accounts receivable reserves. In the third quarter, the company announced a restructuring plan as part of its effort to improve Automotive Group performance and address challenges in the automotive markets.
In the fourth quarter, the Automotive Group had sales of $406.9 million, a 4 percent increase from a year ago. The Automotive Group had a loss of $7.5 million in the fourth quarter of 2005, compared to a loss of $1.9 million for the same period a year ago. Despite higher pricing, fourth quarter results were negatively impacted by higher manufacturing costs, investments in Project ONE and an increase in accounts receivable reserves.
Steel Group Results
Steel Group 2005 sales, including inter-segment sales, were a record $1.8 billion, up 27 percent from 2004. The sales growth reflected record shipments, driven by strong industrial markets, as well as surcharges and price increases to offset higher raw material and energy costs. For 2005, EBIT increased to $219.8 million from $54.8 million in 2004, driven by higher volume, raw material surcharges and price increases. High capacity utilization and record productivity also improved the results.
Steel Group sales in the fourth quarter, including inter-segment sales, were $419.7 million, an 8 percent increase from the prior year. Fourth- quarter EBIT was $49.6 million, compared to $32.2 million a year ago. Both sales and EBIT reflected the strong business performance experienced throughout the year.
Outlook
The company expects continued financial improvement in 2006. Global industrial markets are expected to remain strong, while improvements in Timken's operating performance will be partially constrained by investments in Project ONE and Asia growth initiatives as well as the expensing of stock options. Earnings per diluted share for 2006, excluding special items, are estimated at $2.65 to $2.80 for the full year and $0.55 to $0.60 for the first quarter.
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. With operations in 27 countries, sales of $5.2 billion in 2005 and 27,000 employees, Timken is Where You Turn(TM) for better performance.
CONSOLIDATED STATEMENT OF INCOME AS REPORTED
(Thousands of U.S. dollars,
except share data) 4Q 05 4Q 04 Year 05 Year 04
Net sales $1,281,083 $1,187,875 $5,168,434 $4,513,671
Cost of products sold 1,019,120 940,317 4,095,209 3,670,584
Manufacturing
rationalization/Integration/
Reorganization expenses -
cost of products sold 4,315 1,128 14,504 4,502
Gross Profit $257,648 $246,430 $1,058,721 $838,585
Selling, administrative &
general expenses (SG&A) 171,501 157,045 658,826 565,400
Manufacturing
rationalization/Integration/
Reorganization expenses -
SG&A 1,289 5,778 2,766 22,523
Impairment and
restructuring 1,686 9,436 26,093 13,434
Operating Income $83,172 $74,171 $371,036 $237,228
Other expense (5,331) (11,964) (17,764) (30,964)
Special items - other
income 82,435 36,876 85,422 42,952
Earnings Before
Interest and Taxes
(EBIT) (2) $160,276 $99,083 $438,694 $249,216
Interest expense, net (10,991) (14,262) (48,148) (49,437)
Income Before Income
Taxes $149,285 $84,821 $390,546 $199,779
Provision for income taxes 54,404 20,439 130,265 64,123
Net Income $94,881 $64,382 $260,281 $135,656
Earnings Per Share $1.03 $0.71 $2.84 $1.51
Earnings Per Share-
assuming dilution $1.01 $0.71 $2.81 $1.49
Average Shares Outstanding 92,426,648 90,397,233 91,533,242 89,875,650
Average Shares
Outstanding-assuming
dilution 93,616,089 91,314,698 92,537,529 90,759,571
(1) "Adjusted" statements exclude the impact of impairment and
restructuring, manufacturing rationalization/integration/reorganization
and special charges and credits for all periods shown.
CONSOLIDATED STATEMENT OF INCOME ADJUSTED (1)
(Thousands of U.S. dollars,
except share data) 4Q 05 4Q 04 Year 05 Year 04
Net sales $1,281,083 $1,187,875 $5,168,434 $4,513,671
Cost of products sold 1,019,120 940,317 4,095,209 3,670,584
Manufacturing
rationalization/Integration/
Reorganization expenses -
cost of products sold - - - -
Gross Profit $261,963 $247,558 $1,073,225 $843,087
Selling, administrative &
general expenses (SG&A) 171,501 157,045 658,826 565,400
Manufacturing
rationalization/Integration/
Reorganization expenses -
SG&A - - - -
Impairment and
restructuring - - - -
Operating Income $90,462 $90,513 $414,399 $277,687
Other expense (5,331) (11,964) (17,764) (30,964)
Special items - other
income - - - -
Earnings Before
Interest and Taxes
(EBIT) (2) $85,131 $78,549 $396,635 $246,723
Interest expense, net (10,991) (14,262) (48,148) (49,437)
Income Before Income
Taxes $74,140 $64,287 $348,487 $197,286
Provision for income taxes 23,495 24,429 114,304 74,969
Net Income $50,645 $39,858 $234,183 $122,317
Earnings Per Share $0.55 $0.44 $2.56 $1.36
Earnings Per Share-
assuming dilution $0.54 $0.44 $2.53 $1.35
Average Shares Outstanding 92,426,648 90,397,233 91,533,242 89,875,650
Average Shares
Outstanding-assuming
dilution 93,616,089 91,314,698 92,537,529 90,759,571
(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
(Thousands of U.S. dollars) 4Q 05 4Q 04 Year 05 Year 04
Industrial Group
Net sales to external
customers $491,465 $448,496 $1,925,211 $1,709,770
Intersegment sales 386 454 1,847 1,437
Total net sales $491,851 $448,950 $1,927,058 $1,711,207
Adjusted earnings before
interest and taxes (EBIT)* (2) $41,864 $47,636 $199,936 $177,913
Adjusted EBIT Margin (2) 8.5% 10.6% 10.4% 10.4%
Automotive Group
Net sales to external
customers $406,875 $391,585 $1,661,048 $1,582,226
Adjusted (loss) earnings
before interest and
taxes (EBIT)* (2) ($7,529) ($1,863) ($19,886) $15,919
Adjusted EBIT
(Loss) Margin (2) -1.9% -0.5% -1.2% 1.0%
Steel Group
Net sales to external
customers $382,743 $347,794 $1,582,175 $1,221,675
Intersegment sales 36,909 40,794 178,157 161,941
Total net sales $419,652 $388,588 $1,760,332 $1,383,616
Adjusted earnings
before interest and
taxes (EBIT)* (2) $49,609 $32,246 $219,780 $54,756
Adjusted EBIT
Margin (2) 11.8% 8.3% 12.5% 4.0%
* 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) Dec 31, 2005 Dec 31, 2004
Short-term debt $159,279 $158,690
Long-term debt 561,747 620,634
Total Debt 721,026 779,324
Less: cash and cash equivalents (65,417) (50,967)
Net Debt $655,609 $728,357
Shareholders' equity 1,497,067 1,269,848
Ratio of Total Debt to Capital 32.5% 38.0%
Ratio of Net Debt to Capital
(Leverage) 30.5% 36.5%
This reconciliation is provided as additional relevant information about
Timken's financial position. Capital is defined as debt plus
shareholder's equity. 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.
Fourth Quarter
05 04
(Thousands of U.S. dollars,
except share data) $ EPS $ EPS
Net income $94,881 $1.01 $64,382 $0.71
Pre-tax special items:
Manufacturing
rationalization/integration/
reorganization expenses - cost of
products sold 4,315 0.05 1,128 0.01
Manufacturing
rationalization/integration/
reorganization expenses - SG&A 1,289 0.01 5,778 0.06
Impairment and restructuring 1,686 0.02 9,436 0.10
Special items - other (income)
expense:
Gain on sale of non-strategic
assets/dissolution of British Timken (6,012) (0.06) (190) -
CDSOA receipts, net of expenses (77,069) (0.82) (36,686) (0.40)
Adoption of FIN 46 for investment in
PEL - - - -
Other 646 0.01 - -
Tax effect of special items 30,909 $0.32 (3,990) (0.04)
Adjusted net income $50,645 $0.54 $39,858 $0.44
Year
05 04
(Thousands of U.S. dollars,
except share data) $ EPS $ EPS
Net income $260,281 $2.81 $135,656 $1.49
Pre-tax special items:
Manufacturing
rationalization/integration/
reorganization expenses -
cost of products sold 14,504 0.16 4,502 0.05
Manufacturing
rationalization/integration/
reorganization expenses - SG&A 2,766 0.03 22,523 0.25
Impairment and restructuring 26,093 0.28 13,434 0.15
Special items - other (income)
expense:
Gain on sale of non-strategic
assets/dissolution of British Timken (8,547) (0.09) (190) -
CDSOA receipts, net of expenses (77,069) (0.83) (44,429) (0.49)
Adoption of FIN 46 for investment in
PEL - - 948(3) 0.01
Other 194 - 719 0.01
Tax effect of special items 15,961 $0.17 (10,846) (0.12)
Adjusted net income $234,183 $2.53 $122,317 $1.35
(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 first quarter and the full
year 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 2006 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 Dec 31 Dec 31
(Thousands of U.S. dollars) 2005 2004
ASSETS
Cash & cash equivalents $65,417 $50,967
Accounts receivable 711,783 717,425
Deferred income taxes 107,632 114,657
Inventories 998,368 874,833
Total Current Assets $1,883,200 $1,757,882
Property, plant & equipment 1,547,044 1,583,425
Goodwill 204,129 189,299
Other assets 359,056 415,056
Total Assets $3,993,429 $3,945,662
LIABILITIES
Accounts payable & other liabilities $500,939 $504,585
Short-term debt 159,279 158,690
Accrued expenses 411,298 370,101
Total Current Liabilities $1,071,516 $1,033,376
Long-term debt 561,747 620,634
Accrued pension cost 246,692 468,644
Accrued postretirement benefits cost 513,771 490,366
Other non-current liabilities 102,636 62,794
Total Liabilities $2,496,362 $2,675,814
SHAREHOLDERS' EQUITY 1,497,067 1,269,848
Total Liabilities and
Shareholders' Equity $3,993,429 $3,945,662
CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS For the three months For the year
ended ended
Dec 31 Dec 31 Dec 31 Dec 31
(Thousands of U.S. dollars) 2005 2004 2005 2004
Cash Provided (Used)
OPERATING ACTIVITIES
Net Income $94,881 $64,382 $260,281 $135,656
Adjustments to reconcile net
income to net cash provided
(used) by operating
activities:
Depreciation and amortization 57,294 52,515 218,059 209,431
Other 97,507 74,944 93,304 81,097
Changes in operating
assets and liabilities:
Accounts receivable 80,836 7,067 (29,426) (114,264)
Inventories 1,819 (38,702) (160,287) (130,407)
Other assets 7,571 8,693 (21,099) 9,544
Accounts payable and
accrued expenses (126,477) (23,170) (47,288) (73,218)
Foreign currency
translation (gain) loss (424) 948 5,157 2,690
Net Cash Provided (Used)
by Operating
Activities $213,007 $146,677 $318,701 $120,529
INVESTING ACTIVITIES
Capital expenditures ($97,002) ($59,951) ($225,607) ($155,180)
Other 3,116 5,565 9,963 5,268
Proceeds from disposals
of non-strategic assets 10,109 50,690 21,838 50,690
Acquisitions (42,367) 874 (48,996) (9,359)
Net Cash Used by
Investing Activities ($126,144) ($2,822) ($242,802) ($108,581)
FINANCING ACTIVITIES
Cash dividends
paid to shareholders ($13,911) ($11,753) ($55,149) ($46,767)
Proceeds from exercise
of stock options 9,053 3,884 39,793 17,628
Net (payments) borrowings
on credit facilities (79,337) (146,038) (40,938) 27,277
Net Cash (Used)
Provided by Financing
Activities ($84,195) ($153,907) ($56,294) ($1,862)
Effect of exchange
rate changes on cash ($356) $8,148 ($5,155) $12,255
Increase (Decrease) in Cash
and Cash Equivalents 2,312 (1,904) 14,450 22,341
Cash and Cash Equivalents
at Beginning of Period $63,105 $52,871 $50,967 $28,626
Cash and Cash Equivalents
at End of Period $65,417 $50,967 $65,417 $50,967
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