Timken Reports Third-Quarter Results
- Strong industrial markets benefit company performance
- Actions underway to address volume declines in North American automotive market
CANTON, Ohio, Oct. 25 -- The Timken Company today reported sales of $1.27 billion in the third quarter, up slightly from the same period a year ago. Strong sales in industrial markets were largely offset by significant declines in automotive markets. The company achieved third-quarter net income of $46.5 million, or $0.49 per diluted share, up from $39.8 million, or $0.43 per diluted share, in last year's third quarter.
Excluding special items, earnings per diluted share were $0.57 compared to $0.58 for the same period in 2005. Special items in the third quarter included manufacturing restructuring and rationalization charges that totaled $7.1 million of pretax expense, compared to $28.3 million in the same period a year ago.
"Our industrial and steel businesses performed well in the third quarter with industrial markets continuing to drive strong demand for our products," said James W. Griffith, president and chief executive officer. "Dramatic volume reductions are posing significant challenges across the North American automotive market. We are taking actions to adapt to the decline in demand and will continue to pursue structural changes to bring our Automotive business to profitability."
For the first nine months of 2006, sales were $4.0 billion, an increase of 3 percent from the same period in the prior year, driven by strong industrial markets. Earnings per diluted share for the first nine months of 2006 increased to $1.99 from $1.79 in the same period a year ago.
Special items in the first nine months of 2006 totaled $32.9 million of pretax expense, compared to $33.1 million in the same period a year ago, and included manufacturing, restructuring and rationalization charges and the impact of asset dispositions. Excluding special items, earnings per diluted share in the first nine months of 2006 were $2.19, compared to $1.99 during the same period in 2005, due to continued strong industrial market demand.
Total debt was $752.8 million as of Sept. 30, 2006, or 30.7 percent of capital. Net debt at Sept. 30, 2006, was $698.7 million, or 29.2 percent of capital, compared to $655.6 million, or 30.5 percent of capital, as of Dec. 31, 2005. Year-to-date, the increase in net debt was primarily due to capital expenditures to support the company's growth initiatives, pension contributions and seasonal working capital requirements. The company anticipates ending the year with lower net debt and leverage, compared to Dec. 31, 2005.
Industrial Group Results
The Industrial Group had third-quarter sales of $501.8 million, up 7 percent from $468.2 million for the same period last year. The company continued to benefit from strong demand across its broad industrial segments, led by increases in the aerospace, industrial distribution and heavy industry segments.
The Industrial Group's earnings before interest and taxes (EBIT) in the third quarter were $48.2 million, compared to $47.4 million for the same period last year. EBIT performance reflected continued strong volume and pricing, which were offset primarily by higher manufacturing costs, including those for capacity additions and increased investments for growth initiatives. Timken continues to make investments in Asia and key global industrial markets, including construction of the company's fifth manufacturing facility in China, opening of a global aerospace facility in Arizona and introduction of a new line of large-bore seals.
For the first nine months of 2006, Industrial Group sales were $1.5 billion, up 7 percent over the same period a year ago. EBIT for the first nine months of 2006 was $157.6 million, compared to EBIT of $158.1 million over the prior-year period.
Automotive Group Results
The Automotive Group's third-quarter sales of $363.6 million were 11 percent below the same period a year ago. The decline in sales was the result of significant reductions in vehicle production by automakers headquartered in North America, which was partially offset by improved pricing.
The Automotive Group recorded a third-quarter loss of $26.3 million, compared to a loss of $6.0 million for the same period a year ago. EBIT during the quarter was negatively impacted by lower volume, leading to underutilization of manufacturing capacity. In response to the recent drop in demand, Timken announced in September 2006 the reduction of 700 positions from its Automotive Group. This action is expected to result in savings of approximately $35 million, which will be fully realized by the middle of 2007, at a cost of approximately $25 million. This program is in addition to the automotive restructuring plan announced in July 2005, which has targeted savings of approximately $40 million by the end of 2007. The company anticipates taking additional actions to structurally improve the performance of this business going forward.
For the first nine months of 2006, Automotive Group sales of $1.2 billion were 3 percent below the same period last year. The group recorded a loss of $31.4 million for the first nine months of 2006, compared to a loss of $12.4 million in the first nine months of 2005.
Steel Group Results
Steel Group third-quarter sales were $442.6 million, a 3 percent increase from $427.9 million in the same period a year ago. The sales were driven by increased pricing, surcharges and higher demand in the service center, aerospace and energy segments, and were negatively impacted by lower automotive demand.
Third-quarter EBIT was $63.0 million, compared to $49.7 million for the same period last year. The strong results were due to price increases, surcharges, better sales mix and improved manufacturing productivity.
During the quarter, the Steel Group announced an investment in a new induction heat-treat line that will increase Timken's capacity and ability to provide differentiated products to more customers in important global energy markets. In addition, the group recently announced its intention to exit its European seamless steel tube manufacturing operation as part of its strategy to strengthen its business portfolio.
For the first nine months of 2006, Steel Group sales were $1.4 billion, a 3 percent increase over the first nine months of last year. EBIT for the first nine months of 2006 was $209.6 million compared to EBIT of $170.2 million in the first nine months of 2005.
Outlook
Based on third-quarter performance, Timken is estimating 2006 earnings per diluted share, excluding special items, of $2.65 to $2.75. In 2005, the company earned $2.53 per diluted share, excluding special items.
Conference Call Information
The company will host a conference call for investors and analysts today to discuss financial results.
Conference Call: Wednesday, Oct. 25, 2006
11:00 a.m. Eastern Daylight Time
All Callers: Live Dial-In: 800-344-0593 or 706-634-0975
(Call in 10 minutes prior to be included.)
Replay Dial-In through Nov. 1, 2006:
800-642-1687 or 706-645-9291
Conference ID: 5677550 (Valid for live call and
replay)
Live Webcast: www.timken.com/investors
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.
Certain statements in this news release (including statements regarding the company's forecasts, estimates and expectations) that are not historical in nature are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements related to expected savings and costs of the company's programs and initiatives and expectations regarding the company's financial performance, including the information under the heading "Outlook," are forward-looking. The company cautions that actual results may differ materially from those projected or implied in forward-looking statements due to a variety of important factors, including: the company's ability to respond to the changes in its end markets, especially the North American automotive industry; fluctuations in raw-material and energy costs and the operation of the company's surcharge mechanisms; changes in the financial health of the company's customers; and the impact on operations of general economic conditions, higher raw-material and energy costs, fluctuations in customer demand and the company's ability to achieve the benefits of its future and ongoing programs and initiatives, including, without limitation, the implementation of its Automotive Group restructuring program and initiatives and the rationalization of the company's Canton bearing operations. These and additional factors are described in greater detail in the company's Annual Report on Form 10-K for the year ended Dec. 31, 2005, page 65, and in the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. The company undertakes no obligation to update or revise any forward-looking statement.
Media Contact: Jeff Dafler, Manager - Global Media & Government Relations, Telephone: (330) 471-3514, Facsimile: (330) 471-4118, jeff.dafler@timken.com
Investor Contact: Steve Tschiegg, Manager - Investor Relations, Telephone: (330) 471-7446, Facsimile: (330) 471-2797, steve.tschiegg@timken.com
CONSOLIDATED STATEMENT OF INCOME AS REPORTED
(Thousands of U.S.
dollars, except share Nine Months Nine Months
data) (Unaudited) Q3 06 Q3 05 06 05
Net sales $1,272,922 $1,258,133 $4,008,027 $3,887,351
Cost of products sold 1,021,019 1,002,705 3,147,732 3,076,089
Manufacturing
rationalization/
reorganization expenses -
cost of products sold 3,419 3,017 11,400 10,189
Gross Profit $248,484 $252,411 $848,895 $801,073
Selling, administrative &
general expenses (SG&A) 162,955 162,231 511,778 487,325
Manufacturing
rationalization/
reorganization expenses -
SG&A 1,044 790 2,737 1,477
Impairment and restructuring 2,682 24,451 21,162 24,407
Operating Income $81,803 $64,939 $313,218 $287,864
Other (expense) income (2,018) (4,265) (11,367) (12,433)
Special items - other
(expense) income 76 (8) 2,430 2,987
Earnings Before Interest
and Taxes (EBIT)(2) $79,861 $60,666 $304,281 $278,418
Interest expense, net (10,850) (11,968) (34,149) (37,157)
Income Before Income
Taxes $69,011 $48,698 $270,132 $241,261
Provision for income taxes 22,465 8,867 82,955 75,861
Net Income $46,546 $39,831 $187,177 $165,400
Earnings Per Share $0.50 $0.43 $2.01 $1.81
Earnings Per Share -
assuming dilution $0.49 $0.43 $1.99 $1.79
Average Shares Outstanding 93,500,491 91,688,231 93,239,292 91,238,444
Average Shares Outstanding
- assuming dilution 94,376,937 92,821,344 94,238,413 92,181,013
CONSOLIDATED STATEMENT OF INCOME ADJUSTED (1)
(Thousands of U.S.
dollars, except share Nine Months Nine Months
data) (Unaudited) Q3 06 Q3 05 06 05
Net sales $1,272,922 $1,258,133 $4,008,027 $3,887,351
Cost of products sold 1,021,019 1,002,705 3,147,732 3,076,089
Manufacturing
rationalization/
reorganization expenses -
cost of products sold - - - -
Gross Profit $251,903 $255,428 $860,295 $811,262
Selling, administrative &
general expenses (SG&A) 162,955 162,231 511,778 487,325
Manufacturing
rationalization/
reorganization expenses -
SG&A - - - -
Impairment and restructuring - - - -
Operating Income $88,948 $93,197 $348,517 $323,937
Other (expense) income (2,018) (4,265) (11,367) (12,433)
Special items - other
(expense) income - - - -
Earnings Before Interest
and Taxes (EBIT)(2) $86,930 $88,932 $337,150 $311,504
Interest expense, net (10,850) (11,968) (34,149) (37,157)
Income Before Income
Taxes $76,080 $76,964 $303,001 $274,347
Provision for income taxes 21,849 23,501 96,960 90,809
Net Income $54,231 $53,463 $206,041 $183,538
Earnings Per Share $0.58 $0.58 $2.21 $2.01
Earnings Per Share -
assuming dilution $0.57 $0.58 $2.19 $1.99
Average Shares Outstanding 93,500,491 91,688,231 93,239,292 91,238,444
Average Shares Outstanding
- assuming dilution 94,376,937 92,821,344 94,238,413 92,181,013
(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) Nine Months Nine Months
(Unaudited) Q3 06 Q3 05 06 05
Industrial Group
Net sales to external
customers $501,347 $467,774 $1,533,397 $1,433,746
Intersegment sales 469 435 1,366 1,461
Total net sales $501,816 $468,209 $1,534,763 $1,435,207
Adjusted earnings before
interest and taxes
(EBIT) * (2) $48,180 $47,444 $157,557 $158,072
Adjusted EBIT Margin (2) 9.6% 10.1% 10.3% 11.0%
Automotive Group
Net sales to external
customers $363,586 $407,959 $1,211,284 $1,254,173
Adjusted (loss) earnings
before interest and taxes
(EBIT) * (2) ($26,276) ($6,040) ($31,377) ($12,357)
Adjusted EBIT (Loss)
Margin (2) -7.2% -1.5% -2.6% -1.0%
Steel Group
Net sales to external
customers $407,989 $382,400 $1,263,346 $1,199,432
Intersegment sales 34,584 45,512 116,556 141,248
Total net sales $442,573 $427,912 $1,379,902 $1,340,680
Adjusted earnings before
interest and taxes
(EBIT) * (2) $63,010 $49,698 $209,580 $170,171
Adjusted EBIT Margin (2) 14.2% 11.6% 15.2% 12.7%
*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) Sept 30, Jun 30, Dec 31,
(Unaudited) 2006 2006 2005
Short-term debt $204,166 $150,983 $159,279
Long-term debt 548,611 553,016 561,747
Total Debt 752,777 703,999 721,026
Less: cash and cash equivalents (54,069) (38,752) (65,417)
Net Debt $698,708 $665,247 $655,609
Shareholders' equity 1,697,303 1,661,302 1,497,067
Ratio of Total Debt to Capital 30.7% 29.8% 32.5%
Ratio of Net Debt to Capital
(Leverage) 29.2% 28.6% 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.
Third Quarter
06 05
(Thousands of U.S. dollars, except
share data) (Unaudited) $ EPS $ EPS
assuming assuming
dilution dilution
Net income $46,546 $0.49 $39,831 $0.43
Pre-tax special items:
Manufacturing
rationalization/reorganization
expenses - cost of products sold 3,419 0.04 3,017 0.03
Manufacturing
rationalization/reorganization
expenses - SG&A 1,044 0.01 790 0.01
Impairment and restructuring 2,682 0.03 24,451 0.26
Special items - other expense (income) (76) - 8 -
Provision for income taxes 616 - (14,634) (0.15)
Adjusted net income $54,231 $0.57 $53,463 $0.58
Nine Months
06 05
(Thousands of U.S. dollars, except
share data) (Unaudited) $ EPS $ EPS
assuming assuming
dilution dilution
Net income $187,177 $1.99 $165,400 $1.79
Pre-tax special items:
Manufacturing
rationalization/reorganization
expenses - cost of products sold 11,400 0.12 10,189 0.11
Manufacturing
rationalization/reorganization
expenses - SG&A 2,737 0.03 1,477 0.02
Impairment and restructuring 21,162 0.22 24,407 0.26
Special items - other expense (income) (2,430) (0.03) (2,987) (0.03)
Provision for income taxes (14,005) (0.14) (14,948) (0.16)
Adjusted net income $206,041 $2.19 $183,538 $1.99
Reconciliation of Outlook Information.
Expected earnings per diluted share for the full year exclude special
items. Examples of such special items include impairment and
restructuring, manufacturing rationalization/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 Sept 30 Dec 31
(Thousands of U.S. dollars)(Unaudited) 2006 2005
ASSETS
Cash & cash equivalents $54,069 $65,417
Accounts receivable, net 734,631 711,783
Inventories, net 1,077,792 998,368
Deferred income taxes 92,369 104,978
Other current assets 104,646 102,763
Total Current Assets $2,063,507 $1,983,309
Property, plant & equipment 1,606,782 1,547,044
Goodwill 216,961 204,129
Other assets 256,804 259,252
Total Assets $4,144,054 $3,993,734
LIABILITIES
Accounts payable & other liabilities $506,866 $501,423
Short-term debt 204,166 159,279
Income Taxes 60,633 35,360
Accrued expenses 313,075 375,264
Total Current Liabilities $1,084,740 $1,071,326
Long-term debt 548,611 561,747
Accrued pension cost 209,052 246,692
Accrued postretirement benefits cost 519,792 513,771
Other non-current liabilities 84,556 103,131
Total Liabilities $2,446,751 $2,496,667
SHAREHOLDERS' EQUITY 1,697,303 1,497,067
Total Liabilities and
Shareholders' Equity $4,144,054 $3,993,734
CONDENSED CONSOLIDATED STATEMENT OF For the three For the nine
CASH FLOWS months ended months ended
Sept 30 Sept 30 Sept 30 Sept 30
(Thousands of U.S. dollars)
(Unaudited) 2006 2005 2006 2005
Cash Provided (Used)
OPERATING ACTIVITIES
Net Income $46,546 $39,831 $187,177 $165,400
Adjustments to reconcile net income
to net cash provided (used)
by operating activities:
Depreciation and amortization 49,640 53,066 151,226 160,765
Other 6,302 207 (1,548) (4,203)
Changes in operating assets and
liabilities:
Accounts receivable 54,808 13,460 (14,082) (110,262)
Inventories (29,495) (37,512) (57,837) (162,106)
Other assets (9,945) (52) (8,732) (28,671)
Accounts payable and accrued
expenses (45,434) 2,374 (73,963) 79,190
Foreign currency translation
loss (gain) 1,116 (1,854) (9,891) 5,581
Net Cash Provided by Operating
Activities 73,538 69,520 172,350 105,694
INVESTING ACTIVITIES
Capital expenditures (74,490) (45,379) (179,419) (128,605)
Other 4,896 2,937 6,158 6,847
Divestments - 848 (2,723) 11,729
Acquisitions (4,299) (73) (4,299) (6,629)
Net Cash Used by Investing
Activities (73,893) (41,667) (180,283) (116,658)
FINANCING ACTIVITIES
Cash dividends paid to
shareholders (15,049) (13,824) (43,170) (41,238)
Net proceeds from common share
activity 3,967 18,160 22,066 30,740
Net borrowings (payments) on
credit facilities 26,848 (37,533) 15,122 38,399
Net Cash Provided (Used) by
Financing Activities 15,766 (33,197) (5,982) 27,901
Effect of exchange rate changes on
cash (94) 1,469 2,567 (4,799)
Increase (Decrease) in Cash and Cash
Equivalents 15,317 (3,875) (11,348) 12,138
Cash and Cash Equivalents at
Beginning of Period $38,752 $66,980 $65,417 $50,967
Cash and Cash Equivalents at End of
Period $54,069 $63,105 $54,069 $63,105