The Timken Company has reported sales of $788 million for the third quarter of 2014, an 8% increase from a year ago. The increase was primarily driven by organic growth in Process Industries.
As a result of non-cash charges taken in the third quarter and discontinued operations, Timken posted a consolidated net loss during the quarter of $14.8 million or $0.16 per share. The quarter includes a loss of $11.0 million or $0.12 per share from discontinued operations. Net income from continuing operations was a loss of $3.8 million or $0.04 per share. This compares with net income from continuing operations during the same period a year ago of $34.5 million or $0.36 per diluted share. The loss in the current quarter includes expense of $74.5 million net of tax or $0.83 per share, which relates to non-cash impairment and restructuring charges previously announced as part of the company's efforts to improve the performance of the aerospace business.
Adjusted net income from continuing operations in the third quarter was $69.9 million or $0.77 per diluted share. This compares with adjusted net income from continuing operations during the same period a year ago of $38.1 million or $0.40 per diluted share. Revenue growth, mix and strong manufacturing performance as well as lower selling, general and administrative expenses drove the earnings improvement. In addition, earnings per share benefited from the company's increased share repurchase activity.
"Timken performed well this quarter," says Richard G. Kyle, Timken President and Chief Executive Officer. "Our sales increased 8% year-on-year as we continue to gain share in targeted end markets, even in a relatively soft environment.
"We delivered strong operating margins, capitalizing on the increased demand and continuing our efforts to decrease costs across the enterprise. We also returned $138 million of capital to shareholders through dividends and the repurchase of 2.5 million shares in the quarter," Kyle says. "With our current traction in the marketplace and focus on execution, we continue to expect revenue to be up year-on-year in the fourth quarter and to achieve our full-year earnings targets."
In the third quarter, the company:
- Achieved notable new bearing business wins, including a new rail contract in Canada, a major wind energy contract for an installation in Europe and a multi-year commitment from a global cement manufacturer;
- Announced and started restructuring actions to improve the performance of its aerospace business;
- Returned $138 million in capital to shareholders through the payment of dividends and the repurchase of 2.5 million shares, bringing year-to-date repurchases to 5.1 million shares; and
- Completed a $350-million offering of 3.875% senior notes due 2024, part of which was used to repay $250 million 6% senior notes that matured in September.
Other third-quarter business results from continuing operations worth noting include:
- Mobile Industries sales increased 3% compared with the same period a year ago. Excluding the impact of planned program exits that concluded in 2013, sales were up 8%, driven largely by market growth and share gains in the rail sector. Earnings before interest and taxes (EBIT) for the third quarter were $47 million or 13.2% of sales on higher volume, strong operating performance and favorable mix. This compares to $27.8 million or 8.0% of sales for the same period a year ago.
- Process Industries sales increased 16% compared with last year's third quarter, driven by market growth and share gains in the wind energy sector and the industrial aftermarket. EBIT for the quarter was $77.4 million or 21.8% of sales on improved demand and strong manufacturing performance. This compares to $51.1 million or 16.6% of sales during the same period a year ago.
- Aerospace sales were essentially flat compared with third-quarter sales last year. EBIT for the quarter was a loss of $104.8 million, primarily reflecting the impact of goodwill impairment and inventory valuation charges of $109.5 million. Adjusted EBIT was $4.9 million or 6.5% of sales and compares to similar earnings for the same period a year ago. Beginning with the fourth quarter of 2014, Timken will no longer report Aerospace financial results separately but rather will incorporate aerospace business results primarily within the company's Mobile Industries segment.
The company expects fourth-quarter revenue to be up approximately 3% compared with last year.
For full-year 2014, the company expects revenue from continuing operations to increase approximately 2% compared to 2013. The outlook for full-year 2014 by segment:
- Mobile Industries' sales are expected to be down approximately 5%, reflecting lower revenue of approximately $110 million related to the final impact from planned program exits in the light vehicle sector, partially offset by organic growth primarily from the rail sector.
- Process Industries' sales are expected to be up approximately 11%, driven by organic growth in targeted original equipment sectors and the industrial aftermarket as well as the benefit of acquisitions.
- Aerospace sales are expected to be down approximately 5% due to lower defense shipments.
Timken projects 2014 earnings per diluted share from continuing operations to range from $1.45 to $1.55, which includes approximately:
- $0.85 per share of non-cash impairment and other charges related to the company's restructuring of its aerospace business,
- $0.25 per share of non-cash pension settlement charges related to lump-sum programs, and
- $0.10 per share of charges associated with previously announced cost-reduction initiatives and plant rationalizations;
- these items will be partially offset by a gain of $0.20 per share from the sale of land in Brazil.
Excluding these items, adjusted earnings per diluted share are expected to range from $2.45 to $2.55, consistent with prior estimates at the midpoint. Operating margins in the fourth quarter are expected to be up from prior year but will be lower than third quarter 2014 due to seasonality and actions to reduce inventory levels.
The company now expects to generate cash from operations of approximately $305 million in 2014. Free cash flow is projected to be $190 million after making capital expenditures of $115 million.