The Timken Company Reports Record Second Quarter 2006 Results
CANTON, Ohio, July 26 -- The Timken Company today reported record sales of $1.39 billion in the second quarter, up 5 percent from the same period a year ago. Second quarter net income increased 11 percent to $74.7 million, or $0.79 per diluted share, up from $67.3 million, or $0.73 per diluted share, in the second quarter a year ago.
Excluding special items, earnings per diluted share increased 17 percent to a record $0.90 from $0.77 in last year's second quarter. Special items in the second quarter included manufacturing restructuring and rationalization charges and the impact of asset dispositions that totaled $21.0 million of pretax expense, compared to $3.7 million in the same period a year ago.
"This quarter's results reflect good progress towards fundamentally improving financial performance," said James W. Griffith, president and chief executive officer. "Strong industrial markets and record Steel Group results contributed to our record second quarter. Our financial performance is underpinned by our strategic progress as we continue to improve the level of innovation and execution across the company."
During the quarter, the company strengthened its balance sheet through strong cash generation. Total debt at June 30, 2006 was $704.0 million, or 29.8 percent of capital. Net debt at June 30, 2006 was $665.2 million, or 28.6 percent of capital, compared to $737.2 million, or 31.9 percent of capital, at March 31, 2006. Cash generated from earnings and working capital more than offset higher pension contributions and capital expenditures. The company expects to generate strong free cash flow for the remainder of the year.
For the first half of 2006, sales were $2.7 billion, an increase of 4 percent from the same period in the prior year, driven by strong industrial markets. Earnings per diluted share for the first six months of 2006 increased 9 percent to $1.49. This includes the benefit of lower pension and retiree medical expense of approximately $0.05 per diluted share. Special items in the first half of 2006 totaled $25.8 million of pretax expense, compared to $4.8 million in the same period a year ago. Excluding special items, earnings per diluted share in the first half of 2006 were $1.61, versus $1.42 in the first half of 2005, due to strong industrial market demand and a record performance by the Steel Group.
Industrial Group Results
The Industrial Group had second quarter sales of $529.1 million, up 6 percent from $498.2 million for the same period last year. The company continued to enjoy strong demand across its broad industrial segments, led by increases in the aerospace, industrial distribution, off-highway and rail segments.
The Industrial Group's earnings before interest and taxes (EBIT) in the second quarter were $63.5 million, compared to $63.6 million for the same period last year. EBIT performance reflected better volume and pricing, which were offset primarily by higher manufacturing costs, including those for capacity additions, increased investments for growth initiatives and the impact of foreign currency.
For the first half of 2006, Industrial Group sales were $1.03 billion, up 7 percent from the same period a year ago. EBIT for first half of 2006 was $109.4 million -- or 10.6 percent of sales -- compared to EBIT of $110.6 million -- or 11.4 percent of sales -- in the first half of 2005. While EBIT margins in the first half were lower than the same period a year ago, the company expects Industrial Group margins for the full year to improve over last year's levels due to better pricing, higher volume and improving manufacturing costs.
Automotive Group Results
The Automotive Group's second quarter sales of $426.7 million were comparable to the same period a year ago. The favorable effect of improved pricing was offset by lower demand from North American original equipment manufacturers and the exiting of low-margin business.
The Automotive Group recorded a second quarter loss of $2.0 million, compared to a loss of $1.2 million for the same period a year ago. Despite improved pricing and mix, EBIT was negatively impacted by higher manufacturing costs due to lower volume and higher energy costs.
For the first half of 2006, Automotive Group sales of $847.7 million were comparable to last year's first six months. The Group recorded a loss of $5.1 million for the first half of 2006, compared to a loss of $6.3 million in the first half of 2005. Results for the first half of 2006 included a $3.5 million increase in the company's accounts receivable reserve for automotive industry credit exposure.
The company expects improved Automotive Group performance in the second half of 2006 through better pricing and the continued favorable shift in business mix. The Automotive Group restructuring program also remains on track to achieve its targeted savings.
Steel Group Results
Steel Group second quarter sales were a record $469.1 million, a 5 percent increase from $445.3 million in the same period a year ago. The record sales were driven by increased pricing, surcharges and higher demand in the service center, aerospace, bearing and energy segments, which were partially offset by lower automotive demand.
Second quarter EBIT was a record $75.4 million, up 33 percent from $56.7 million for the same period last year. The record results were due to price increases, surcharges, better sales mix and improved manufacturing productivity.
For the first six months of 2006, Steel Group sales were $937.3 million, up 3 percent over the first half of last year. EBIT for the first half of 2006 was a record $146.6 million -- or 15.6 percent of sales -- compared to EBIT of $120.5 million -- or 13.2 percent of sales -- in the first half of 2005.
The company anticipates Steel Group profitability to be down in the second half of 2006, compared to the first six months of the year due to seasonality, but expects to exceed last year's record performance for the full year due to continued strong markets and manufacturing performance.
Outlook
The company recently raised its 2006 estimated earnings to $3.00 to $3.15 per diluted share, excluding special items, from $2.80 to $2.95. This revised earnings estimate compares to 2005 earnings per diluted share of $2.53, excluding special items. Earnings per diluted share are estimated to be $0.70 to $0.75 for the third quarter of 2006, excluding special items. As the company continues to implement its business strategies, margin improvement is expected in the Automotive and Industrial Groups, and Steel Group margin performance should exceed last year's record levels.
About The Timken Company
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) (Unaudited) Q2 06 Q2 05 YTD 06 YTD 05 Net sales $1,388,025 $1,324,678 $2,735,105 $2,629,218 Cost of products sold 1,070,054 1,041,818 2,126,713 2,073,384 Manufacturing rationalization/ reorganization expenses - cost of products sold 4,946 6,048 7,981 7,172 Gross Profit $313,025 $276,812 $600,411 $548,662 Selling, administrative & general expenses (SG&A) 174,948 161,464 348,823 325,094 Manufacturing rationalization/ reorganization expenses - SG&A 1,316 278 1,693 687 Impairment and restructuring 17,440 (44) 18,480 (44) Operating Income $119,321 $115,114 $231,415 $222,925 Other expense (4,578) (3,022) (9,349) (8,168) Special items - other (expense) income 2,662 2,609 2,354 2,995 Earnings Before Interest and Taxes (EBIT) (2) $117,405 $114,701 $224,420 $217,752 Interest expense, net (11,697) (13,087) (23,299) (25,189) Income Before Income Taxes $105,708 $101,614 $201,121 $192,563 Provision for income taxes 31,017 34,280 60,490 66,994 Net Income $74,691 $67,334 $140,631 $125,569 Earnings Per Share $0.80 $0.74 $1.51 $1.38 Earnings Per Share- assuming dilution $0.79 $0.73 $1.49 $1.37 Average Shares Outstanding 93,261,154 91,189,208 93,117,090 90,981,208 Average Shares Outstanding -assuming dilution 94,313,670 91,817,375 94,177,549 91,828,505 ADJUSTED (1) (Thousands of U.S. dollars, except share data) (Unaudited) Q2 06 Q2 05 YTD 06 YTD 05 Net sales $1,388,025 $1,324,678 $2,735,105 $2,629,218 Cost of products sold 1,070,054 1,041,818 2,126,713 2,073,384 Manufacturing rationalization/ reorganization expenses - cost of products sold - - - - Gross Profit $317,971 $282,860 $608,392 $555,834 Selling, administrative & general expenses (SG&A) 174,948 161,464 348,823 325,094 Manufacturing rationalization/ reorganization expenses - SG&A - - - - Impairment and restructuring - - - - Operating Income $143,023 $121,396 $259,569 $230,740 Other expense (4,578) (3,022) (9,349) (8,168) Special items - other (expense) income - - - - Earnings Before Interest and Taxes (EBIT) (2) $138,445 $118,374 $250,220 $222,572 Interest expense, net (11,697) (13,087) (23,299) (25,189) Income Before Income Taxes $126,748 $105,287 $226,921 $197,383 Provision for income taxes 41,953 34,153 75,111 67,308 Net Income $84,795 $71,134 $151,810 $130,075 Earnings Per Share $0.91 $0.78 $1.63 $1.43 Earnings Per Share- assuming dilution $0.90 $0.77 $1.61 $1.42 Average Shares Outstanding 93,261,154 91,189,208 93,117,090 90,981,208 Average Shares Outstanding-assuming dilution 94,313,670 91,817,375 94,177,549 91,828,505 (1) "Adjusted" statements exclude the impact of impairment and restructuring, manufacturing rationalization/reorganization and special charges and credits for all periods shown. Management believes that the adjusted statements are more representative of the company's performance and therefore useful to investors. BUSINESS SEGMENTS (Thousands of U.S. dollars) (Unaudited) Q2 06 Q2 05 YTD 06 YTD 05 Industrial Group Net sales to external customers $528,606 $497,523 $1,032,050 $965,972 Intersegment sales 462 628 897 1,026 Total net sales $529,068 $498,151 $1,032,947 $966,998 Adjusted earnings before interest and taxes (EBIT)*(2) $63,492 $63,629 $109,377 $110,628 Adjusted EBIT Margin (2) 12.0% 12.8% 10.6% 11.4% Automotive Group Net sales to external customers $426,714 $425,949 $847,698 $846,214 Adjusted (loss) earnings before interest and taxes (EBIT)*(2) ($1,960) ($1,217) ($5,101) ($6,317) Adjusted EBIT (Loss) Margin(2) -0.5% -0.3% -0.6% -0.7% Steel Group Net sales to external customers $432,705 $401,206 $855,357 $817,032 Intersegment sales 36,442 44,131 81,972 95,736 Total net sales $469,147 $445,337 $937,329 $912,768 Adjusted earnings before interest and taxes (EBIT)*(2) $75,434 $56,748 $146,570 $120,473 Adjusted EBIT Margin (2) 16.1% 12.7% 15.6% 13.2% * 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, Mar 31, Dec 31, (Unaudited) 2006 2006 2005 Short-term debt $150,983 $208,237 $159,279 Long-term debt 553,016 560,286 561,747 Total Debt 703,999 768,523 721,026 Less: cash and cash equivalents (38,752) (31,285) (65,417) Net Debt $665,247 $737,238 $655,609 Shareholders' equity 1,661,302 1,572,222 1,497,067 Ratio of Total Debt to Capital 29.8% 32.8% 32.5% Ratio of Net Debt to Capital (Leverage) 28.6% 31.9% 30.5%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 the amount of 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/ reorganization costs, Continued Dumping and Subsidy Offset Act (CDSOA) receipts, and gain on the sale of non-strategic assets.
Second Quarter
(Thousands of U.S. dollars, except 06 05
share data) (Unaudited) EPS EPS
assuming assuming
$ dilution $ dilution
Net income $74,691 $0.79 $67,334 $0.73
Pre-tax special items:
Manufacturing rationalization/
reorganization expenses - cost of
products sold 4,946 0.05 6,048 0.07
Manufacturing rationalization/
reorganization expenses - SG&A 1,316 0.01 278 -
Impairment and restructuring 17,440 0.18 (44) -
Special items - other expense (income) (2,662) (0.03) (2,609) (0.03)
Provision for income taxes (10,936) ($0.10) 127 $0.00
Adjusted net income $84,795 $0.90 $71,134 $0.77
Six Months
Thousands of U.S. dollars, except 06 05
share data) (Unaudited) EPS EPS
assuming assuming
$ dilution $ dilution
Net income $140,631 $1.49 $125,569 $1.37
Pre-tax special items:
Manufacturing rationalization/
reorganization expenses
- cost of products sold 7,981 0.08 7,172 0.08
Manufacturing rationalization/
reorganization expenses - SG&A 1,693 0.02 687 0.01
Impairment and restructuring 18,480 0.20 (44) -
Special items - other expense (income) (2,354) (0.02) (2,995) (0.03)
Provision for income taxes (14,621) ($0.16) (314) ($0.01)
Adjusted net income $151,810 $1.61 $130,075 $1.42
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 or loss 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 June 30 Dec 31
(Thousands of U.S. dollars) (Unaudited) 2006 2005
ASSETS
Cash & cash equivalents $38,752 $65,417
Accounts receivable, net 790,171 711,783
Inventories, net 1,046,956 998,368
Deferred income taxes 92,235 104,978
Other current assets 102,822 102,763
Total Current Assets $2,070,936 $1,983,309
Property, plant & equipment 1,549,643 1,547,044
Goodwill 207,943 204,129
Other assets 267,416 259,252
Total Assets $4,095,938 $3,993,734
LIABILITIES
Accounts payable & other liabilities $515,055 $501,423
Short-term debt 150,983 159,279
Income Taxes 89,446 35,360
Accrued expenses 310,545 375,264
Total Current Liabilities $1,066,029 $1,071,326
Long-term debt 553,016 561,747
Accrued pension cost 219,887 246,692
Accrued postretirement benefits cost 518,544 513,771
Other non-current liabilities 77,160 103,131
Total Liabilities $2,434,636 $2,496,667
SHAREHOLDERS' EQUITY 1,661,302 1,497,067
Total Liabilities and
Shareholders' Equity $4,095,938 $3,993,734
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the three For the six
months ended months ended
Jun 30 Jun 30 Jun 30 Jun 30
(Thousands of U.S. dollars) 2006 2005 2006 2005
(Unaudited)
Cash Provided (Used)
OPERATING ACTIVITIES
Net Income $74,691 $67,334 $140,631 $125,569
Adjustments to reconcile net income
to net cash provided (used)
by operating activities:
Depreciation and amortization 49,985 53,599 101,586 107,699
Other (11,482) (4,137) (7,850) (4,410)
Changes in operating assets and
liabilities:
Accounts receivable 1,426 (41,480) (68,890) (123,722)
Inventories 9,513 (48,823) (28,342) (124,594)
Other assets 899 (16,749) 1,213 (28,619)
Accounts payable and accrued
expenses 15,362 41,918 (28,529) 76,816
Foreign currency translation
(gain) loss (4,906) 4,231 (11,007) 7,435
Net Cash Provided (Used) by
Operating Activities 135,488 55,893 98,812 36,174
INVESTING ACTIVITIES
Capital expenditures (63,856) (50,863) (104,929) (83,226)
Other 949 3,622 1,262 3,910
Divestments (3,598) 10,881 (2,723) 10,881
Acquisitions - - - (6,556)
Net Cash Used by Investing
Activities (66,505) (36,360) (106,390) (74,991)
FINANCING ACTIVITIES
Cash dividends paid to
shareholders (14,095) (13,728) (28,121) (27,414)
Net proceeds from common share
activity 11,967 2,505 18,099 12,580
Net (payments) borrowings on
credit facilities (60,901) 10,470 (11,726) 75,932
Net Cash (Used) Provided by
Financing Activities (63,029) (753) (21,748) 61,098
Effect of exchange rate changes on
cash 1,513 (3,568) 2,661 (6,268)
Increase (Decrease) in Cash and Cash
Equivalents 7,467 15,212 (26,665) 16,013
Cash and Cash Equivalents at
Beginning of Period $31,285 $51,768 $65,417 $50,967
Cash and Cash Equivalents at End of
Period $38,752 $66,980 $38,752 $66,980