Timken reports second quarter results

The Timken Company reports sales of $789 million for the second quarter of 2014. Sales exclude revenue attributable to the steel business, which was spun off as TimkenSteel Corporation at the end of June. Second-quarter sales were comparable to the previous year's second quarter and reflect stronger demand in Process Industries, offset by lower shipments in Mobile Industries.

In the second quarter, Timken generated consolidated net income of $62.7 million, or $0.68 per diluted share. Net income from continuing operations totaled $56.5 million, or $0.61 per diluted share, compared with net income from continuing operations of $55.3 million, or $0.57 per diluted share, during the same period a year ago. (Earnings from discontinued operations of $0.07 per diluted share reflect steel business results of $0.31 per diluted share, partially offset by one-time separation costs of $0.24 per diluted share.)

Adjusted net income from continuing operations was $59.4 million, or $0.65 per diluted share in the second quarter, and compares to adjusted net income from continuing operations of $61.2 million, or $0.63 per diluted share, during the same period a year ago. Despite strong manufacturing performance and lower selling and administrative expenses, adjusted net income was down slightly due to unfavorable mix, an inventory valuation adjustment and an accrual for value-added tax during the quarter. However, earnings per share increased due to the impact of share repurchases.

"The second quarter was in line with our expectations," says Richard G. Kyle, Timken President and Chief Executive Officer. "We delivered sequential revenue growth of 7% and adjusted margins improved by 200 basis points. The sequential increase reflects our strategic efforts to gain penetration in a slow-growth market environment and our margin improvement initiatives.

"During the quarter, we completed the spinoff of TimkenSteel on time and under budget and we're now fully focused on executing our strategy for the bearings and power transmission business," Kyle says. "We're winning new OE and aftermarket business in both our Mobile and Process Industries segments. We expect a stronger second half based on modest market growth combined with penetration gains and continued cost improvement." 

During the quarter, the company:

• Completed the spinoff of TimkenSteel Corporation in a tax-free distribution of TMST common shares to Timken shareholders;
• Returned $56 million in capital to shareholders through the repurchase of 0.6 million shares and payment of dividends;
• Received board authorization to repurchase an additional 10 million common shares, bringing the total number of shares authorized for repurchase to 11.5 million shares as of June 30;
• Won new business on a large OEM platform within Mobile Industries. Combined with other penetration gains in 2014, the segment has already secured more than $100 million on an annualized basis, which will begin impacting revenue in 2015 and be fully realized in 2016;
• Acquired the assets of Schulz Group, based in New Haven, Conn., expanding  capabilities within the Process Industries segment with additional electric motor and generator repairs and motor rewind; and
• Launched DeltaX, a multi-year initiative to improve the company's concept-to-commercialization efforts, redesigning and expanding its engineering, product management and business systems talent, technology and tools.

Other second-quarter business results, reflecting continuing operations, worth noting:

Mobile Industries sales decreased 5% compared to the same period a year ago; sales were up 2% excluding the impact of program exits that concluded in 2013. Earnings before interest and taxes (EBIT) for the second quarter were $39.7 million. Adjusted EBIT was $43.7 million, and the segment attained a double-digit adjusted margin of 11.8% of sales, despite the negative impact of a value-added tax accrual during the quarter. Revenue, adjusted EBIT and margin all improved sequentially.

Process Industries sales increased 6% compared to last year's second quarter. EBIT for the quarter was $67.9 million, which compares to $55 million during the same period a year ago. Adjusted EBIT was $69.7 million, or 20.7% of sales, on improved volume and manufacturing performance. This compares to $55.1 million, or 17.3% of sales, for the same period a year ago. Adjusted margins improved both year-on-year and sequentially by more than 300 basis points.

Aerospace sales were essentially flat compared to last year's second-quarter sales. EBIT for the quarter was $2.8 million, which compares to $7.8 million during the same period a year ago. Adjusted EBIT was $3.2 million, or 3.9% of sales, including an unfavorable inventory valuation adjustment of $3.8 million. This compares to adjusted EBIT of $7.9 million, or 9.6% of sales, for the same period a year ago. The company continues to focus on achieving an appropriate level of performance in Aerospace. An analysis is underway, and the results are expected to be communicated in the third quarter as plans are developed and approved. 

Outlook (Continuing Operations)
The company continues to expect 2014 sales to be up approximately 3% compared to 2013.

• Mobile Industries' sales are expected to be down 2 to 4%, anticipating that revenue reductions of approximately $110 million in the light vehicle sector will be partially offset by organic growth in the rail sector.
• Process Industries' sales are estimated to be up 10 to 12 percent as a result of improved penetration in targeted original equipment sectors, stable to modestly improving end markets, and acquisitions.   
• Although the company anticipates increased shipments in the defense rotorcraft market sector, lower demand across the civil markets sectors and other defense platforms are expected to keep Aerospace sales relatively flat.

Timken projects 2014 annual earnings per diluted share to range from $2.20 to $2.40, which includes approximately $0.25 per diluted share of non-cash pension settlement charges related to ongoing and planned lump-sum programs, and $0.15 per share of costs associated with previously announced cost-reduction initiatives and plant rationalizations, partially offset by a $0.20 per share gain on the sale of land in Brazil. Excluding these items, adjusted earnings per diluted share would range from $2.40 to $2.60.

The company expects to generate cash from operations of approximately $370 million in 2014. Free cash flow is projected to be $250 million after making capital expenditures of $120 million.