Timken Posts Record Second-Quarter Earnings

The Timken Company has reported sales of $1.3bn in the second quarter of 2011, an increase of 31% over the same period a year ago. The increase primarily reflects growing demand in the company’s broad industrial markets, as well as favorable effects from pricing, material surcharges and currency.

The company’s second-quarter income from continuing operations increased 49% to $121.5m, or $1.22 per diluted share, net of non-controlling interest, compared with $81.4m, or $0.84 per diluted share a year ago. Improved demand, mix, surcharges and pricing more than offset higher raw material and logistics costs, as well as increased selling and administrative costs.

“Timken’s strategy is working. We’re benefitting from an enhanced portfolio, executing well and have positioned the company to capitalize on attractive global markets,” said James W. Griffith, Timken president and chief executive officer. “We are on pace to achieve record sales and earnings for the full year.”

Among recent developments, the company:

  • Completed on 1 July its $200m acquisition of Philadelphia Gear, a leading provider of aftermarket services for gear-drive systems in a variety of industrial and military marine applications
  • Announced plans to establish a Wind Energy Research and Development Center for advanced bearing systems in large wind turbines
  • Entered into an amended $500m unsecured senior credit facility that matures in May 2016
  • Increased the quarterly dividend by 11% to 20 cents per share

Six-month results

Timken posted sales of $2.6bn in the first half of 2011, up 34% from the same period in 2010. Stronger demand across the company’s industrial sectors drove the increase, along with favorable pricing, surcharges and currency effects.

The company’s earnings from continuing operations increased 113% to $234.2m, or $2.36 per diluted share, net of non-controlling interest. That compares with $109.7m, or $1.13 per diluted share, earned in the same period last year. The first-half of 2011 earnings benefited from increased demand, higher surcharges and a combination of favorable pricing and mix, which more than offset higher raw material and logistics costs, as well as selling and administrative costs.

Total debt as of 30 June 2011 was $520.9m, or 19.1% of capital. The company had cash of $637.6m, or $116.7m in excess of total debt at the end of the second quarter, compared with a net cash position of $363.4m at the end of 2010.

The company used $162.9m in cash from operating activities in the first half of 2011, as strong earnings were more than offset by higher working capital requirements to support demand and discretionary pension and VEBA trust contributions. Excluding these discretionary contributions of $192.8m net of tax, free cash flow (operating cash after capital expenditures and dividends) was a use of $66.8m. The company continues to maintain a strong balance sheet and ended the quarter with $1.5bn of available liquidity.

Mobile Industries segment results

Mobile Industries’ sales in the second quarter of 2011 rose 16% to $465.2m, compared with last year’s second-quarter sales of $400.4m. Higher demand in the off-highway, heavy truck and rail sectors drove most of the increase, as well as favorable currency exchange.

The Mobile segment generated EBIT of $66.8m in the second quarter of 2011, down 3% compared with the prior year’s record EBIT of $68.6m. Offsetting the current period’s stronger volume were higher material and logistics costs and a charge of approximately $5m related to the previously announced closure of a facility in Brazil.

For the first half of 2011, Mobile Industries’ sales rose 18% to $908.2m from the same period a year ago. First-half 2011 EBIT was $134.8m, or 14.8% of sales, compared with $108.2m, or 14.1% of sales, the prior year.

Process Industries segment results

Process Industries’ second-quarter sales rose 46% to $308.3m, compared with $211.6m for the same period a year ago. The sales increase was driven by higher demand from industrial distribution, growth in Asia, increased sales of new products and a modest improvement in demand from the capital equipment sector. Pricing, mix and currency also contributed to the improvement.

Process Industries’ second-quarter EBIT was $70.3m, up 148% from $28.3m a year ago. Higher volume, favorable pricing and mix contributed to the increase, more than offsetting higher material costs.

For the first half of 2011, Process Industries sales were $593.3m, up 42% from the same period a year ago. First-half 2011 EBIT was $137m, or 23.1% of sales, up from the prior year’s EBIT of $52.4m, or 12.5% of sales.

Aerospace and Defense segment results

Aerospace and Defense had second-quarter sales of $83.5m, up 1% from $82.7m for the same period last year, as increased commercial demand was offset by lower demand for the company’s defense-related products.

Second-quarter EBIT was $3.3m, down 46% from $6.1m a year ago. The decline reflects a write-down of approximately $3m in aftermarket inventory.

For the first half of 2011, Aerospace and Defense sales were $162.6m, down 7% from the same period a year ago. The decrease primarily reflects lower demand in the segment’s defense-related business. First-half 2011 EBIT was $5.5m, or 3.4% of sales, compared with EBIT of $18m, or 10.3% of sales, in the first half of 2010. The decline was driven by lower demand, unfavorable manufacturing utilization and the second-quarter inventory write-down.

Steel segment results

Sales for the Steel segment, including inter-segment sales, were $505.1m in the second quarter, an increase of 49% from $338.1m for the same period last year. Stronger demand, particularly in the oil and gas and industrial market sectors, and surcharges contributed to the improvement. Raw-material surcharges increased approximately $50m from the second quarter last year.

Second-quarter EBIT was $72.1m, up 68% from $43m for the same period a year ago. The benefits from improved volume, mix, surcharges and pricing were partially offset by higher material costs.

For the first six months of 2011, Steel segment sales were $986.6m, up 62% from the first half of last year. Stronger demand, particularly in the oil and gas and industrial market sectors, and surcharges contributed to the improvement. Raw-material surcharges increased approximately $125m from the same period a year ago. EBIT for the first half of 2011 was $132.1m, or 13.4% of sales, compared with $62.9m, or 10.3% of sales, for the same period a year ago.

Outlook

Timken now expects a full-year sales increase of 25% to 30% in 2011 over 2010. The revised outlook reflects the company’s second-quarter performance and stronger-than-expected demand in its Steel and Process Industries segments, as well as the benefit expected from the Philadelphia Gear acquisition for the remainder of the year. For each of its business segments in 2011, Timken expects:

  • Mobile Industries sales up 10% to 15%, with higher demand in the off-highway, rail and heavy-truck sectors
  • Process Industries sales up 30% to 35%, with increased demand from global industrial distribution, higher new-product sales, growth in Asia and the Philadelphia Gear acquisition
  • Aerospace and Defense sales to be up slightly on modest improvement in the commercial aerospace and health and positioning control sectors, partially offset by lower demand for the company’s defense-related products
  • Steel sales up 40% to 45%, driven by demand across all sectors, as well as capacity increases and surcharges

The company is raising its 2011 full-year earnings estimate to a range of $4.30 to $4.50 per diluted share from its prior estimate of $3.80 to $4.10 per diluted share. The increase reflects the company’s record first-half results and improved outlook. The company expects cash from operating activities to be approximately $275m, and a free cash flow use of approximately $10m after capital expenditures of roughly $210m and dividends of approximately $75m. Excluding discretionary pension and VEBA trust contributions of $193m, net of tax, made in the first half of 2011, free cash flow is expected to be approximately $180m.

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