The Statement of Income
Sales by Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Mobile Industries
|
$
|
348.0
|
|
$
|
396.7
|
|
$
|
(48.7
|
)
|
(12.3
|
)%
|
Process Industries
|
307.2
|
|
309.8
|
|
(2.6
|
)
|
(0.8
|
)%
|
Aerospace
|
76.3
|
|
84.0
|
|
(7.7
|
)
|
(9.2
|
)%
|
Steel
|
330.0
|
|
352.0
|
|
(22.0
|
)
|
(6.3
|
)%
|
Total Company
|
$
|
1,061.5
|
|
$
|
1,142.5
|
|
$
|
(81.0
|
)
|
(7.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Mobile Industries
|
$
|
1,137.5
|
|
$
|
1,314.0
|
|
$
|
(176.5
|
)
|
(13.4
|
)%
|
Process Industries
|
907.8
|
|
1,000.5
|
|
(92.7
|
)
|
(9.3
|
)%
|
Aerospace
|
240.8
|
|
262.5
|
|
(21.7
|
)
|
(8.3
|
)%
|
Steel
|
991.8
|
|
1,329.7
|
|
(337.9
|
)
|
(25.4
|
)%
|
Total Company
|
$
|
3,277.9
|
|
$
|
3,906.7
|
|
$
|
(628.8
|
)
|
(16.1
|
)%
|
Net sales for the
third
quarter of
2013
decreased
approximately
$81 million
, or
7.1%
, compared to the
third
quarter of
2012
, primarily due to lower volume of approximately $105 million, partially offset by the impact of acquisitions of approximately $20 million and higher pricing of $5 million. The decrease in volume was due to lower demand across most of the Company's end market sectors.
Net sales for the first
nine
months of
2013
decreased approximately
$629 million
, or
16.1%
, compared to the first
nine
months of
2012
, primarily due to lower volume of approximately $565 million and lower raw material surcharges of approximately $125 million, partially offset by the impact of acquisitions of approximately $50 million and foreign currency exchange of approximately $10 million. The decrease in volume was due to lower demand across most of the Company's end market sectors.
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Gross profit
|
$
|
251.7
|
|
$
|
298.9
|
|
$
|
(47.2
|
)
|
(15.8)%
|
|
Gross profit % to net sales
|
23.7
|
%
|
26.2
|
%
|
|
(250) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Gross profit
|
$
|
828.3
|
|
$
|
1,087.8
|
|
$
|
(259.5
|
)
|
(23.9)%
|
|
Gross profit % to net sales
|
25.3
|
%
|
27.8
|
%
|
|
(250) bps
|
|
Gross profit
decreased
in the
third
quarter of
2013
compared to the
third
quarter of
2012
primarily due to the impact of lower volume of approximately $40 million, unfavorable sales mix of approximately $15 million and higher manufacturing costs of approximately $10 million. These factors were partially offset by lower raw material costs (net of surcharges) of approximately $20 million.
Gross profit decreased in the first
nine
months of
2013
compared to the first
nine
months of
2012
primarily due to the impact of lower volume of approximately $250 million, unfavorable sales mix of approximately $45 million and higher manufacturing costs of approximately $40 million. These factors were partially offset by lower raw material costs (net of surcharges) of approximately $45 million, lower logistics costs of approximately $15 million, and higher pricing of approximately $15 million.
Selling, General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Selling, general and administrative expenses
|
$
|
159.0
|
|
$
|
152.7
|
|
$
|
6.3
|
|
4.1%
|
Selling, general and administrative expenses % to net sales
|
15.0
|
%
|
13.4
|
%
|
—
|
|
160 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Selling, general and administrative expenses
|
$
|
472.2
|
|
$
|
480.4
|
|
$
|
(8.2
|
)
|
(1.7)%
|
|
Selling, general and administrative expenses % to net sales
|
14.4
|
%
|
12.3
|
%
|
—
|
|
210 bps
|
|
The
increase
in selling, general and administrative expenses in the
third
quarter of
2013
compared to the
third
quarter of
2012
was primarily due to higher professional expenses of approximately $5 million related to the evaluation of the shareholder proposal to separate the Company's steel business, as well as the impact of new acquisitions of approximately $5 million, partially offset by lower expense of approximately $5 million related to incentive compensation plans.
The
decrease
in selling, general and administrative expenses in the first
nine
months of
2013
, compared to the first
nine
months of
2012
was primarily due to lower expense related to incentive compensation plans of approximately $20 million. These decreases were partially offset by the impact of acquisitions of approximately $10 million and higher professional expenses of approximately $5 million related to the evaluation of the shareholder proposal to separate the Company's steel business.
Impairment and Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
2013
|
2012
|
$ Change
|
Impairment charges
|
$
|
—
|
|
$
|
6.4
|
|
$
|
(6.4
|
)
|
Severance and related benefit costs
|
3.2
|
|
1.3
|
|
1.9
|
|
Exit costs
|
0.5
|
|
4.2
|
|
(3.7
|
)
|
Total
|
$
|
3.7
|
|
$
|
11.9
|
|
$
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2013
|
2012
|
$ Change
|
Impairment charges
|
$
|
—
|
|
$
|
6.4
|
|
$
|
(6.4
|
)
|
Severance and related benefit costs
|
10.2
|
|
17.9
|
|
(7.7
|
)
|
Exit costs
|
1.4
|
|
4.5
|
|
(3.1
|
)
|
Total
|
$
|
11.6
|
|
$
|
28.8
|
|
$
|
(17.2
|
)
|
Impairment and restructuring charges of
$3.7 million
and
$11.6 million
in the third quarter and first nine months of
2013
, respectively, were primarily due to the recognition of severance and related benefits, including $1.5 million and $6.7 million of pension settlement charges, respectively, related to the closure of the manufacturing facility in St. Thomas and the reorganization of one of the Company's U.S. plants. Impairment and restructuring charges of
$11.9 million
in the third quarter of 2012 were primarily due to the recognition of impairment charges related to the announced closure of the Company's manufacturing facility in St. Thomas and the recognition of environmental remediation costs at the former manufacturing facility in Sao Paulo. Impairment and restructuring charges of
$28.8 million
in the first nine months of 2012 were primarily due to the recognition of severance and related benefits, including $10.7 million of pension curtailment, as well as impairment charges, related to the announced closure of the manufacturing facility in St. Thomas and the recognition of environmental remediation costs at the former manufacturing facility in Sao Paulo.
Interest Expense and Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Interest (expense)
|
$
|
(4.9
|
)
|
$
|
(7.3
|
)
|
$
|
2.4
|
|
(32.9
|
)%
|
Interest income
|
$
|
0.5
|
|
$
|
0.6
|
|
$
|
(0.1
|
)
|
(16.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Interest (expense)
|
$
|
(17.5
|
)
|
$
|
(24.0
|
)
|
$
|
6.5
|
|
(27.1
|
)%
|
Interest income
|
$
|
1.5
|
|
$
|
2.0
|
|
$
|
(0.5
|
)
|
(25.0
|
)%
|
Interest expense for the
third
quarter and first nine months of
2013
decreased
compared to the
third
quarter and first nine months of
2012
primarily due to higher capitalized interest and lower average debt. Interest income for the
third
quarter and first nine months of
2013
decreased
compared to the
third
quarter and first nine months of
2012
primarily due to lower interest rates and lower cash balances.
Other (Expense) Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
CDSOA receipts, net of expense
|
$
|
(0.1
|
)
|
$
|
(0.9
|
)
|
$
|
0.8
|
|
NM
|
|
Other (expense) income, net
|
$
|
0.4
|
|
$
|
1.4
|
|
$
|
(1.0
|
)
|
(71.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
CDSOA receipts, net of expense
|
$
|
(0.5
|
)
|
$
|
108.6
|
|
$
|
(109.1
|
)
|
NM
|
|
Other (expense) income, net
|
$
|
(0.4
|
)
|
$
|
(3.7
|
)
|
$
|
3.3
|
|
(89.2
|
)%
|
CDSOA receipts are reported net of applicable expenses. The CDSOA provides for distribution of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. Refer to Note 16 - Continued Dumping and Subsidy Offset Act (CDSOA) for additional information.
Other income, net decreased in the third quarter of
2013
compared to the third quarter of
2012
primarily due to foreign currency exchange losses recognized in the third quarter of 2013 compared to foreign currency exchange gains in the third quarter of 2012, partially offset by lower charitable donations. Other expense, net decreased in the first nine months of 2013 compared the first nine months of 2012 primarily due to lower losses from the disposal of fixed assets and lower charitable donations.
Income Tax Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Income tax expense
|
$
|
32.4
|
|
$
|
47.0
|
|
$
|
(14.6
|
)
|
(31.1
|
)%
|
Effective tax rate
|
38.2
|
%
|
36.7
|
%
|
—
|
|
150
|
bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Income tax expense
|
$
|
117.3
|
|
$
|
241.0
|
|
$
|
(123.7
|
)
|
(51.3
|
)%
|
Effective tax rate
|
35.8
|
%
|
36.4
|
%
|
—
|
|
(60
|
) bps
|
The increase in the effective tax rate in the
third
quarter of
2013
compared to the
third
quarter of
2012
was primarily due to higher losses at certain foreign subsidiaries where no tax benefit could be recorded, certain non-deductible U.S. expenses primarily due to the Company's separation costs, and lower discrete tax benefits realized. These factors were partially offset by higher benefits from the foreign tax credit and the U.S. research tax credit, higher U.S. manufacturing deduction and lower realized U.S. state and local taxes.
The decrease in the effective tax rate in the first
nine
months of
2013
compared to the first
nine
months of
2012
was primarily due to
higher benefits from the foreign tax credit and U.S. research tax credit, higher discrete tax benefits and lower U.S. state and local taxes realized. These factors were partially offset by higher losses at certain foreign subsidiaries where no tax benefit could be recorded, certain non-deductible U.S. expenses primarily due to the Company's separation costs, and a lower realized benefit from the U.S. manufacturing deduction.
Business Segments
The primary measurement used by management to measure the financial performance of each segment is EBIT. Refer to
Note 11 - Segment Information
in the Notes to the Consolidated Financial Statements for the reconciliation of EBIT by segment to consolidated income before income taxes.
The presentation of segment results below includes a reconciliation of the changes in net sales for each segment reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of acquisitions made in 2013 and 2012 and currency exchange rates. The effects of acquisitions and currency exchange rates on net sales are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period. During the fourth quarter of 2012, the Company completed the acquisition of substantially all of the assets of Wazee Companies, LLC (Wazee). During the first quarter of
2013
, the Company completed the acquisition of Interlube. Results for Interlube are reported in the Mobile Industries segment. During the
second
quarter of
2013
, the Company completed the acquisition of Standard Machine, as well as substantially all of the assets of Smith Services. Results for Standard Machine, Smith Services and Wazee are reported in the Process Industries segment.
Mobile Industries Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
348.1
|
|
$
|
396.9
|
|
$
|
(48.8
|
)
|
(12.3)%
|
|
EBIT
|
$
|
29.1
|
|
$
|
37.9
|
|
$
|
(8.8
|
)
|
(23.2)%
|
|
EBIT margin
|
8.4
|
%
|
9.5
|
%
|
—
|
|
(110
|
) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
348.1
|
|
$
|
396.9
|
|
$
|
(48.8
|
)
|
(12.3
|
)%
|
Less: Acquisitions
|
3.5
|
|
—
|
|
3.5
|
|
NM
|
|
Currency
|
(3.0
|
)
|
—
|
|
(3.0
|
)
|
NM
|
|
Net sales, excluding the impact of acquisitions and
currency
|
$
|
347.6
|
|
$
|
396.9
|
|
$
|
(49.3
|
)
|
(12.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
1,138.3
|
|
$
|
1,314.4
|
|
$
|
(176.1
|
)
|
(13.4)%
|
|
EBIT
|
$
|
132.7
|
|
$
|
173.4
|
|
$
|
(40.7
|
)
|
(23.5)%
|
|
EBIT margin
|
11.7
|
%
|
13.2
|
%
|
—
|
|
(150
|
) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
1,138.3
|
|
$
|
1,314.4
|
|
$
|
(176.1
|
)
|
(13.4
|
)%
|
Less: Acquisitions
|
8.5
|
|
—
|
|
8.5
|
|
NM
|
|
Currency
|
(7.9
|
)
|
—
|
|
(7.9
|
)
|
NM
|
|
Net sales, excluding the impact of acquisitions and
currency
|
$
|
1,137.7
|
|
$
|
1,314.4
|
|
$
|
(176.7
|
)
|
(13.4
|
)%
|
The Mobile Industries segment's net sales, excluding the effects of acquisitions and currency-rate changes,
decreased
12.4%
in the
third
quarter of
2013
compared to the
third
quarter of
2012
. The decrease was primarily due to lower volume of approximately $50 million. The lower volume was seen across most market sectors led by a 22% decrease in off-highway, an 18% decrease in light vehicle and a 19% decrease in heavy truck, partially offset by a 16% increase in automotive aftermarket. The lower volume in off-highway was primarily in mining and agriculture sectors. The decrease in the light vehicle and heavy truck market sectors was primarily due to exited business related to the Company's market strategy. EBIT decreased in the
third
quarter of
2013
compared to the
third
quarter of
2012
primarily due to the impact of lower volume of approximately $20 million, partially offset by lower plant closure costs of approximately $5 million and lower raw material costs of approximately $5 million.
The Mobile Industries segment's net sales, excluding the effects of acquisitions and currency-rate changes, decreased
13.4%
in the first nine months of
2013
compared to the first nine months of
2012
as a result of lower volume of approximately $180 million. The lower volume was driven by a 21% decrease in off-highway, primarily in mining and agriculture sectors. In addition, heavy truck declined 19% and light vehicle declined 14% primarily due to exited business. EBIT was lower in the first nine months of
2013
compared to the first nine months of
2012
primarily due to the impact of lower volume of approximately $65 million and higher manufacturing costs of approximately $15 million. These decreases were partially offset by lower plant closure costs of approximately $15 million, lower raw material costs of approximately $10 million, lower selling, general and administrative expenses of approximately $10 million and lower logistics costs of approximately $5 million.
Full-year sales for the Mobile Industries segment are expected to decrease 11% to 13% in
2013
compared to
2012
. The expected decrease is primarily due to lower volume across most market sectors, led by a decrease in off-highway volume of approximately 21%, a decrease in heavy truck volume of approximately 19% and a decrease in light-vehicle volume of approximately 15%. EBIT for the Mobile Industries segment is expected to decline in
2013
compared to
2012
as a result of lower volume, exited business and higher manufacturing costs, partially offset by lower raw material costs, plant closure costs and selling, general and administrative expenses.
Process Industries Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
308.3
|
|
$
|
311.1
|
|
$
|
(2.8
|
)
|
(0.9)%
|
EBIT
|
$
|
50.8
|
|
$
|
60.1
|
|
$
|
(9.3
|
)
|
(15.5)%
|
EBIT margin
|
16.5
|
%
|
19.3
|
%
|
—
|
|
(280
|
) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
308.3
|
|
$
|
311.1
|
|
$
|
(2.8
|
)
|
(0.9)%
|
Less: Acquisitions
|
18.5
|
|
—
|
|
18.5
|
|
NM
|
Currency
|
0.8
|
|
—
|
|
0.8
|
|
NM
|
Net sales, excluding the impact of acquisitions and
currency
|
$
|
289.0
|
|
$
|
311.1
|
|
$
|
(22.1
|
)
|
(7.1)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
910.9
|
|
$
|
1,004.4
|
|
$
|
(93.5
|
)
|
(9.3)%
|
EBIT
|
$
|
148.0
|
|
$
|
213.7
|
|
$
|
(65.7
|
)
|
(30.7)%
|
EBIT margin
|
16.2
|
%
|
21.3
|
%
|
|
(510
|
) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
910.9
|
|
$
|
1,004.4
|
|
$
|
(93.5
|
)
|
(9.3)%
|
Less: Acquisitions
|
40.3
|
|
—
|
|
40.3
|
|
NM
|
Currency
|
0.7
|
|
—
|
|
0.7
|
|
NM
|
Net sales, excluding the impact of acquisitions and
currency
|
$
|
869.9
|
|
$
|
1,004.4
|
|
$
|
(134.5
|
)
|
(13.4)%
|
The Process Industries segment's net sales, excluding the effects of acquisitions and currency-rate changes,
decreased
7.1%
in the
third
quarter of
2013
compared to the same period in
2012
. The decrease was primarily due to lower volume of approximately $25 million, partially offset by higher pricing of approximately $5 million. The lower volume was seen across most market sectors, driven by a decrease in industrial distribution of approximately 4%, a decrease in metals of approximately 34% and a decrease in gear drives of approximately 16%, partially offset by an increase in services of approximately 39%. EBIT was lower in the
third
quarter of
2013
compared to the
third
quarter of
2012
primarily due to the impact of lower volume of approximately $15 million, partially offset by higher pricing and lower selling, general and administrative expenses of approximately $5 million. EBIT margin decreased in the
third
quarter of
2013
compared to the
third
quarter of
2012
primarily due to lower volume in industrial distribution and purchase accounting costs unfavorably impacting acquisitions.
The Process Industries segment's net sales, excluding the effects of acquisitions and currency-rate changes, decreased
13.4%
in the first
nine
months of
2013
compared to the same period in
2012
. The decrease was primarily due to lower volume of $150 million, partially offset by higher pricing of approximately $15 million. The lower volume was seen across most market sectors, driven by a decrease in industrial distribution of approximately 12%, a decrease in metals of approximately 32% and a decrease in wind energy of approximately 23%. EBIT was lower in the first
nine
months of
2013
compared to the first
nine
months of
2012
primarily due to the impact of lower volume of approximately $75 million and higher manufacturing costs of approximately $10 million, partially offset by higher pricing of approximately $15 million and lower selling, general and administrative expenses of approximately $10 million.
Full-year sales for the Process Industries segment are expected to decrease 7% to 9% in
2013
compared to
2012
, driven by lower industrial distribution volume of approximately 11% and wind volume of approximately 14%, partially offset by acquisitions and higher pricing. EBIT for the Process Industries segment is expected to be lower in
2013
compared to
2012
primarily due to the impact of lower volume, partially offset by higher pricing.
Aerospace Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
76.3
|
|
$
|
84.0
|
|
$
|
(7.7
|
)
|
(9.2)%
|
|
EBIT
|
$
|
4.9
|
|
$
|
7.7
|
|
$
|
(2.8
|
)
|
(36.4)%
|
|
EBIT margin
|
6.4
|
%
|
9.2
|
%
|
—
|
|
(280
|
) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
76.3
|
|
$
|
84.0
|
|
$
|
(7.7
|
)
|
(9.2
|
)%
|
Less: Currency
|
0.2
|
|
—
|
|
0.2
|
|
NM
|
|
Net sales, excluding the impact of currency
|
$
|
76.1
|
|
$
|
84.0
|
|
$
|
(7.9
|
)
|
(9.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
240.8
|
|
$
|
262.5
|
|
$
|
(21.7
|
)
|
(8.3
|
)%
|
EBIT
|
$
|
21.4
|
|
$
|
26.3
|
|
$
|
(4.9
|
)
|
(18.6
|
)%
|
EBIT margin
|
8.9
|
%
|
10.0
|
%
|
|
(110
|
) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
240.8
|
|
$
|
262.5
|
|
$
|
(21.7
|
)
|
(8.3
|
)%
|
Less: Currency
|
0.3
|
|
—
|
|
0.3
|
|
NM
|
|
Net sales, excluding the impact of currency
|
$
|
240.5
|
|
$
|
262.5
|
|
$
|
(22.0
|
)
|
(8.4
|
)%
|
The Aerospace segment's net sales, excluding the impact of currency-rate changes,
decreased
9.4%
in the
third
quarter of
2013
compared to the
third
quarter of
2012
. The decrease was primarily due to lower volume of approximately $10 million. The lower volume was seen across most market sectors, led by a decrease in defense of approximately 15%, commercial aviation of approximately 14% and critical motion of approximately 9%, partially offset by an increase in general aviation of approximately 20%. EBIT for the
third
quarter of
2013
was down compared to the
third
quarter of
2012
primarily due to the impact of lower volume of approximately $5 million.
The Aerospace segment's net sales, excluding the impact of currency-rate changes, decreased
8.4%
in the first
nine
months of
2013
compared to the first
nine
months of
2012
primarily due to lower volume of approximately $25 million, partially offset by higher pricing of $5 million. The lower volume was seen across most market sectors, led by a decrease in critical motion of approximately 23%, commercial aviation of approximately 10% and defense of approximately 10%, partially offset by an increase in general aviation of 8%. EBIT was lower in the first
nine
months of
2013
compared to the first
nine
months of
2012
primarily due to the impact of lower volume of approximately $10 million and higher manufacturing costs of approximately $5 million, partially offset by lower selling, general and administrative expenses of approximately $5 million and higher pricing of approximately $5 million.
Full-year sales for the Aerospace segment are expected to decrease by approximately 3% to 5% in
2013
compared to
2012
, due to lower volume across most market sectors, led by a decrease in critical motion of approximately 15% and a decrease in commercial aviation of approximately 4%. EBIT for the Aerospace segment is expected to decrease in
2013
compared to
2012
primarily due to the impact of lower volume and unfavorable mix, partially offset by higher pricing.
Steel Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
350.5
|
|
$
|
377.0
|
|
$
|
(26.5
|
)
|
(7.0)%
|
|
EBIT
|
$
|
29.2
|
|
$
|
49.7
|
|
$
|
(20.5
|
)
|
(41.2)%
|
|
EBIT margin
|
8.3
|
%
|
13.2
|
%
|
—
|
|
(490
|
) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
350.5
|
|
$
|
377.0
|
|
$
|
(26.5
|
)
|
(7.0
|
)%
|
Less: Currency
|
0.2
|
|
—
|
|
0.2
|
|
NM
|
|
Net sales, excluding the impact of currency
|
$
|
350.3
|
|
$
|
377.0
|
|
$
|
(26.7
|
)
|
(7.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
1,050.7
|
|
$
|
1,412.3
|
|
$
|
(361.6
|
)
|
(25.6
|
)%
|
EBIT
|
$
|
107.3
|
|
$
|
226.6
|
|
$
|
(119.3
|
)
|
(52.6
|
)%
|
EBIT margin
|
10.2
|
%
|
16.0
|
%
|
—
|
|
(580
|
) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Net sales, including intersegment sales
|
$
|
1,050.7
|
|
$
|
1,412.3
|
|
$
|
(361.6
|
)
|
(25.6
|
)%
|
Less: Currency
|
1.1
|
|
—
|
|
1.1
|
|
NM
|
|
Net sales, excluding the impact of currency
|
$
|
1,049.6
|
|
$
|
1,412.3
|
|
$
|
(362.7
|
)
|
(25.7
|
)%
|
The Steel segment's net sales for the third quarter of
2013
, excluding the effects of currency-rate changes, decreased
7.1%
compared to the third quarter of
2012
primarily due to lower volume of approximately $20 million and lower raw material surcharges of approximately $5 million. The lower volume was led by a 23% decrease in industrial shipments, partially offset by a 12% increase in mobile shipments. Surcharges decreased to $77 million in the third quarter of 2013 from $81 million in the third quarter of 2012. Surcharges are a pricing mechanism that the Company uses to recover scrap steel and certain alloy costs, which are derived from published monthly indices. The lower surcharges were a result of lower market prices for certain input raw materials such as scrap steel and alloys, as well as lower volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Scrap index per ton
|
$
|
409
|
|
$
|
380
|
|
$
|
29
|
|
7.6
|
%
|
Shipments (in tons)
|
232,646
|
|
242,904
|
|
(10,258
|
)
|
(4.2
|
)%
|
Average selling price per ton, including surcharges
|
$
|
1,507
|
|
$
|
1,552
|
|
$
|
(45
|
)
|
(2.9
|
)%
|
The Steel segment's EBIT decreased in the third quarter of
2013
compared to the third quarter of
2012
primarily due to higher manufacturing costs of approximately $15 million, unfavorable sales mix of approximately $10 million, lower raw material surcharges of approximately $5 million and the impact of lower volume of approximately $5 million. These declines were partially offset by lower raw material costs of approximately $15 million. The higher manu
facturing costs of $15 million included approximately $8 million of planned maintenance. Raw material costs per ton consumed in the manufacturing process on tons shipped, including scrap steel and
alloys decreased 9% in the third quarter of 2013 compared to the third quarter of 2012, to an average cost of $458 per ton. EBIT margin decreased in the
third
quarter of
2013
compared to the
third
quarter of
2012
primarily due to unfavorable sales mix.
The Steel segment's net sales for the first
nine
months of
2013
, excluding the effects of currency-rate changes, decreased
25.7%
compared to the first
nine
months of
2012
primarily due to lower volume of approximately $235 million and lower surcharges of approximately $125 million. The lower volume was primarily driven by a 36% decrease in industrial shipments and a 32% decrease in oil and gas shipments, partially offset by a 15% increase in mobile shipments. Surcharges decreased to $228 million in the first nine months of
2013
from $352 million in the first nine months of
2012
. The lower surcharges were a result of lower market prices for certain input raw materials, especially scrap steel, nickel and molybdenum, and lower volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Scrap index per ton
|
$
|
399
|
|
$
|
448
|
|
$
|
(49
|
)
|
(10.9
|
)%
|
Shipments (in tons)
|
703,961
|
|
862,252
|
|
(158,291
|
)
|
(18.4
|
)%
|
Average selling price per ton, including surcharges
|
$
|
1,493
|
|
$
|
1,638
|
|
$
|
(145
|
)
|
(8.9
|
)%
|
The Steel segment's EBIT decreased in the first
nine
months of
2013
compared to the first
nine
months of
2012
primarily due to lower raw material surcharges of approximately $125 million, the impact of lower volume of approximately $100 million, unfavorable sales mix of approximately $40 million and higher manufacturing costs of approximately $5 million. These declines were partially offset by lower raw material costs of approximately $150 million. The lower raw material costs were driven by lower volume and lower material costs per ton. Raw material costs per ton consumed in the manufacturing process on tons shipped, including scrap steel, alloys and energy, decreased 16% in the first nine months of
2013
over the comparable period in the prior year to an average cost of $462 per ton.
Full-year sales for the Steel segment are expected to decrease 20% to 22% for
2013
compared to
2012
, primarily due to lower volume and lower surcharges. The Company expects lower volume to be driven by a decrease in industrial shipments of approximately 31% and oil and gas shipments of approximately 26%, partially offset by an increase in mobile shipments of approximately 13%
.
EBIT for the Steel segment is expected to decrease in
2013
compared to
2012
, driven by lower surcharges, lower volume and unfavorable sales mix, partially offset by lower raw material costs. Scrap, alloy and energy costs are expected to decrease, compared to 2012.
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Corporate expenses
|
$
|
24.3
|
|
$
|
20.1
|
|
$
|
4.2
|
|
20.9%
|
|
Corporate expenses % to net sales
|
2.3
|
%
|
1.8
|
%
|
—
|
|
50
|
bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
2012
|
$ Change
|
% Change
|
Corporate expenses
|
$
|
67.0
|
|
$
|
63.8
|
|
$
|
3.2
|
|
5.0
|
%
|
Corporate expenses % to net sales
|
2.0
|
%
|
1.6
|
%
|
—
|
|
40
|
bps
|
The
increase
in corporate expenses in the
third
quarter of
2013
and first nine months of 2013 compared to the same periods in the prior year was primarily due to higher professional expenses of approximately $5 million related to the evaluation of the shareholder proposal to separate the Company's steel business.
The Balance Sheet
The following discussion is a comparison of the Consolidated Balance Sheets at
September 30, 2013
and
December 31, 2012
.
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
December 31,
2012
|
$ Change
|
% Change
|
Cash and cash equivalents
|
$
|
418.1
|
|
$
|
586.4
|
|
$
|
(168.3
|
)
|
(28.7
|
)%
|
Accounts receivable, net
|
593.7
|
|
546.7
|
|
47.0
|
|
8.6
|
%
|
Inventories, net
|
856.1
|
|
862.1
|
|
(6.0
|
)
|
(0.7
|
)%
|
Deferred income taxes
|
80.1
|
|
98.6
|
|
(18.5
|
)
|
(18.8
|
)%
|
Deferred charges and prepaid expenses
|
32.9
|
|
12.6
|
|
20.3
|
|
161.1
|
%
|
Other current assets
|
69.1
|
|
67.7
|
|
1.4
|
|
2.1
|
%
|
Total current assets
|
$
|
2,050.0
|
|
$
|
2,174.1
|
|
$
|
(124.1
|
)
|
(5.7
|
)%
|
Refer to the Consolidated Statement of Cash Flows for a discussion of the
decrease
in cash and cash equivalents. Accounts receivable increased as a result of the timing of sales in the
third
quarter of
2013
compared to the fourth quarter of
2012
, with higher sales during the month of September 2013 compared to the month of December 2012. Inventories decreased primarily due to higher inventory reserves, partially offset by acquisitions. Deferred income taxes decreased while deferred charges and prepaid expenses increased due to a reclassification of income taxes related to intercompany transactions.
Property, Plant and Equipment, Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
December 31,
2012
|
$ Change
|
% Change
|
Property, plant and equipment
|
$
|
3,983.3
|
|
$
|
3,792.1
|
|
$
|
191.2
|
|
5.0
|
%
|
Accumulated depreciation
|
(2,485.0
|
)
|
(2,386.8
|
)
|
(98.2
|
)
|
4.1
|
%
|
Property, plant and equipment, net
|
$
|
1,498.3
|
|
$
|
1,405.3
|
|
$
|
93.0
|
|
6.6
|
%
|
The
increase
in property, plant and equipment in the first
nine
months of
2013
was primarily due to current-year capital expenditures exceeding depreciation expense, as well as current-year acquisitions. See "Other Matters - Capital Expenditures" for more information.
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
December 31,
2012
|
$ Change
|
% Change
|
Goodwill
|
$
|
359.7
|
|
$
|
338.9
|
|
$
|
20.8
|
|
6.1
|
%
|
Other intangible assets
|
222.0
|
|
224.7
|
|
(2.7
|
)
|
(1.2
|
)%
|
Deferred income taxes
|
25.6
|
|
62.5
|
|
(36.9
|
)
|
(59.0
|
)%
|
Other non-current assets
|
37.3
|
|
39.2
|
|
(1.9
|
)
|
(4.8
|
)%
|
Total other assets
|
$
|
644.6
|
|
$
|
665.3
|
|
$
|
(20.7
|
)
|
(3.1
|
)%
|
The
increase
in goodwill was primarily due to acquisitions in 2013. The
decrease
in other intangible assets was primarily due to amortization in 2013, partially offset by acquisitions. The decrease in deferred income taxes was due to the recognition of certain items of tax deduction, primarily related to accelerated tax depreciation, which are recognized in different periods for tax and financial reporting purposes.
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
December 31,
2012
|
$ Change
|
% Change
|
Short-term debt
|
$
|
21.1
|
|
$
|
14.3
|
|
$
|
6.8
|
|
47.6
|
%
|
Accounts payable
|
252.5
|
|
216.2
|
|
36.3
|
|
16.8
|
%
|
Salaries, wages and benefits
|
184.1
|
|
213.9
|
|
(29.8
|
)
|
(13.9
|
)%
|
Income taxes payable
|
109.4
|
|
33.5
|
|
75.9
|
|
226.6
|
%
|
Deferred income taxes
|
7.3
|
|
2.9
|
|
4.4
|
|
151.7
|
%
|
Other current liabilities
|
153.9
|
|
177.5
|
|
(23.6
|
)
|
(13.3
|
)%
|
Current portion of long-term debt
|
250.1
|
|
9.6
|
|
240.5
|
|
NM
|
|
Total current liabilities
|
$
|
978.4
|
|
$
|
667.9
|
|
$
|
310.5
|
|
46.5
|
%
|
The increase in short-term debt during the first
nine
months of
2013
was primarily to provide liquidity for non-U.S. inter-company dividends. The
decrease
in accrued salaries, wages and benefits was the result of the payout of the 2012 performance-based compensation, partially offset by accruals in 2013 for performance-based compensation. The
increase
in income taxes payable in the first
nine
months of
2013
was primarily due to the provision for current-year income taxes and a reclassification of uncertain tax positions from other non-current liabilities to income taxes payable, partially offset by tax payments in 2013. The decrease in other current liabilities during the first
nine
months of
2013
was primarily due to lower restructuring accruals. The increase in the current portion of long-term debt was primarily due to the reclassification of the Company’s $250 million fixed-rate senior unsecured notes, which mature in September 2014, from non-current liabilities to current liabilities.
Non-Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
December 31,
2012
|
$ Change
|
% Change
|
Long-term debt
|
$
|
205.4
|
|
$
|
455.1
|
|
$
|
(249.7
|
)
|
(54.9
|
)%
|
Accrued pension cost
|
230.7
|
|
391.4
|
|
(160.7
|
)
|
(41.1
|
)%
|
Accrued postretirement benefits cost
|
354.9
|
|
371.8
|
|
(16.9
|
)
|
(4.5
|
)%
|
Deferred income taxes
|
10.8
|
|
4.9
|
|
5.9
|
|
120.4
|
%
|
Other non-current liabilities
|
45.6
|
|
107.0
|
|
(61.4
|
)
|
(57.4
|
)%
|
Total non-current liabilities
|
$
|
847.4
|
|
$
|
1,330.2
|
|
$
|
(482.8
|
)
|
(36.3
|
)%
|
The decrease in long-term debt was primarily due to the reclassification of the Company’s $250 million fixed-rate senior unsecured notes, which mature in September 2014, to current liabilities. The
decrease
in accrued pension cost during the first
nine
months of
2013
was primarily due to the Company's contributions of
$114.0 million
to its global defined benefit pension plans, as well as the expected return on pension assets exceeding service and interest cost. The decrease in other non-current liabilities was primarily due to a $60 million decrease in uncertain tax positions, which were reclassified to income taxes payable, as a result of the expected closure of tax audits for years 2006 through 2009 and the closure of the tax audits for 2010 through 2011.
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
December 31,
2012
|
$ Change
|
% Change
|
Common stock
|
$
|
944.7
|
|
$
|
944.5
|
|
$
|
0.2
|
|
—
|
%
|
Earnings invested in the business
|
2,555.3
|
|
2,411.2
|
|
144.1
|
|
6.0
|
%
|
Accumulated other comprehensive loss
|
(953.6
|
)
|
(1,013.2
|
)
|
59.6
|
|
(5.9
|
)%
|
Treasury shares
|
(193.1
|
)
|
(110.3
|
)
|
(82.8
|
)
|
75.1
|
%
|
Noncontrolling interest
|
13.8
|
|
14.4
|
|
(0.6
|
)
|
(4.2
|
)%
|
Total shareholders’ equity
|
$
|
2,367.1
|
|
$
|
2,246.6
|
|
$
|
120.5
|
|
5.4
|
%
|
Earnings
invested
in the business
increased
in the first
nine
months of
2013
by net income attributable to the Company of
$210.1 million
, partially offset by dividends declared of
$66.0 million
. The
decrease
in accumulated other comprehensive loss was primarily due to a
$71.1 million
after-tax adjustment as a result of amortization of actuarial losses and prior-year service costs for defined benefit pension and postretirement plans, partially offset by an $11.5 million decrease in foreign currency translation. The foreign currency translation adjustments were due to the strengthening of the U.S. dollar relative to other currencies, such as the Australian Dollar, the Indian Rupee, the Brazilian Real, the Argentine Peso and the Canadian Dollar. See "Other Matters - Foreign Currency" for further discussion regarding the impact of foreign currency translation. The
increase
in treasury shares was primarily due to the Company's purchase of 1.9 million of its common shares for an aggregate of $107.4 million, partially offset by shares issued for stock compensation plans, during the first
nine
months of
2013
.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2013
|
2012
|
$ Change
|
Net cash provided by operating activities
|
$
|
251.8
|
|
$
|
366.5
|
|
$
|
(114.7
|
)
|
Net cash used by investing activities
|
(266.6
|
)
|
(165.0
|
)
|
(101.6
|
)
|
Net cash used by financing activities
|
(145.8
|
)
|
(181.8
|
)
|
36.0
|
|
Effect of exchange rate changes on cash
|
(7.7
|
)
|
1.0
|
|
(8.7
|
)
|
(Decrease) increase in cash and cash equivalents
|
$
|
(168.3
|
)
|
$
|
20.7
|
|
$
|
(189.0
|
)
|
Operating activities
provided
net cash of
$251.8 million
in the first
nine
months of
2013
, after providing net cash of
$366.5 million
in the first
nine
months of
2012
. The change in cash from operating activities was primarily due to a decrease in net income and an increase in cash used for working capital items, such as accounts receivable, inventory, and accounts payable. These decreases in cash were partially offset by lower pension contributions and other postretirement benefit payments. Net income attributable to The Timken Company
decreased
$210.1 million
in the first
nine
months of
2013
compared to the first
nine
months of
2012
. Pension contributions and other postretirement benefit payments were
$140.4 million
in the first
nine
months of
2013
, compared to
$399.8 million
in the first
nine
months of
2012
. Cash taxes were $80.0 million in the first
nine
months of
2013
, compared to $96.4 million in the first
nine
months of
2012
.
The following chart displays the impact of working capital items on cash during the first
nine
months of
2013
and
2012
, respectively:
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2013
|
2012
|
Cash Provided (Used):
|
|
|
Accounts receivable
|
$
|
(40.3
|
)
|
$
|
13.8
|
|
Inventories
|
12.8
|
|
35.2
|
|
Trade accounts payable
|
30.3
|
|
(17.0
|
)
|
Other accrued expenses
|
(64.8
|
)
|
(74.5
|
)
|
Net cash
used
by investing activities of
$266.6 million
in the first
nine
months of
2013
increased
from the same period in
2012
primarily due to a
$23.1 million
increase
in capital expenditures and a
$64.3 million
increase
in acquisitions, as well as an
$11.6 million
reduction in cash provided by investments in short-term marketable securities. Short-term marketable securities provided cash of
$5.6 million
in the first
nine
months of
2013
after providing cash of
$17.2 million
in the first
nine
months of
2012
. The Company expects to increase capital expenditures to approximately
$320 million
in
2013
compared to
$300 million
in
2012
. See "Other Matters - Capital Expenditures" for further discussion of the Company's multi-year capital expenditure projects.
Net cash
used
by financing activities was
$145.8 million
in the first
nine
months of
2013
compared to
$181.8 million
in the first
nine
months of
2012
. The decrease in cash used by financing activities was primarily due to a reduction in cash used for net borrowings of $20.7 million and a
$4.9 million
decrease
in the Company's repurchases of its common shares, partially offset by proceeds from the sale of shares in a subsidiary of $8.9 million. Cash used for net borrowings was $2.2 million in the first nine months of 2013 compared to cash used for net borrowings of $22.9 million in the first nine months of 2012. The Company purchased 1.9 million of its common shares for an aggregate of $107.4 million during the first nine months of 2013 after purchasing 2.5 million of its common shares for an aggregate of $112.3 million during the first nine months of 2012. In April 2013, the Company's subsidiary in India, Timken India Limited, issued new shares for approximately
$8.9 million
, net of transactions costs, which diluted the Company's controlling interest from
80%
to
75%
.
Liquidity and Capital Resources:
Total debt was
$476.6 million
and
$479.0 million
at
September 30, 2013
and
December 31, 2012
, respectively. At
September 30, 2013
, total debt of
$476.6 million
exceeded cash and cash equivalents of
$418.1 million
by
$58.5 million
. At
December 31, 2012
, cash and cash equivalents of
$586.4 million
exceeded total debt of
$479.0 million
by
$107.4 million
. The ratio of net debt to capital was
2.4%
at
September 30, 2013
. The ratio of net cash to capital was
5.0%
at
December 31, 2012
.
Reconciliation of total debt to net debt and the ratio of net debt (cash) to capital:
Net Debt:
|
|
|
|
|
|
|
|
|
September 30,
2013
|
December 31,
2012
|
Short-term debt
|
$
|
21.1
|
|
$
|
14.3
|
|
Current portion of long-term debt
|
250.1
|
|
9.6
|
|
Long-term debt
|
205.4
|
|
455.1
|
|
Total debt
|
$
|
476.6
|
|
$
|
479.0
|
|
Less: Cash and cash equivalents
|
418.1
|
|
586.4
|
|
Net debt (cash)
|
$
|
58.5
|
|
$
|
(107.4
|
)
|
Ratio of Net Debt to Capital:
|
|
|
|
|
|
|
|
|
September 30,
2013
|
December 31,
2012
|
Net debt (cash)
|
$
|
58.5
|
|
$
|
(107.4
|
)
|
Shareholders’ equity
|
2,367.1
|
|
2,246.6
|
|
Net debt plus shareholders’ equity (capital)
|
$
|
2,425.6
|
|
$
|
2,139.2
|
|
Ratio of net debt (cash) to capital
|
2.4
|
%
|
(5.0)%
|
|
The Company presents net debt (cash) because it believes net debt (cash) is more representative of the Company's financial position than total debt due to the amount of cash and cash equivalents.
At
September 30, 2013
, the Company had
no
outstanding borrowings under its three-year Asset Securitization Agreement, which provides for aggregate borrowings up to
$200 million
. The Asset Securitization Agreement is subject to certain borrowing base limitations, which reduced the availability to
$180.2 million
at
September 30, 2013
. The Asset Securitization Agreement is secured by certain domestic trade receivables of the Company.
At
September 30, 2013
, the Company had
no
outstanding borrowings under its Senior Credit Facility, which provides for aggregate borrowings up to $500 million, but had letters of credit outstanding totaling
$8.6 million
, reducing the availability under the Senior Credit Facility to
$491.4 million
. The Senior Credit Facility matures on
May 11, 2016
. Under the Senior Credit Facility, the Company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At
September 30, 2013
, the Company was in full compliance with the covenants under the Senior Credit Facility and its other debt agreements. The maximum consolidated leverage ratio permitted under the Senior Credit Facility is 3.25 to 1.0. As of
September 30, 2013
, the Company's consolidated leverage ratio was
0.71
to 1.0. The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility is 4.0 to 1.0. As of
September 30, 2013
, the Company's consolidated interest coverage ratio was
20.57
to 1.0.
The interest rate under the Senior Credit Facility is based on the Company's consolidated leverage ratio. In addition, the Company pays a facility fee based on the consolidated leverage ratio multiplied by the aggregate commitments of all of the lenders under this agreement.
Other sources of liquidity include short-term lines of credit for certain of the Company's foreign subsidiaries, which provide for borrowings up to
$226.6 million
. The majority of these lines are uncommitted. At
September 30, 2013
, the Company had borrowings outstanding of
$21.1 million
and guarantees of
$0.7 million
, which reduced the availability under these facilities to
$204.8 million
.
The Company has approximately $250 million of fixed-rate unsecured notes which mature in September of 2014. The Company will likely re-finance these unsecured notes prior to their maturity.
The Company expects that any cash requirements in excess of cash on hand and cash generated from operating activities will be met by the committed funds available under its Asset Securitization Agreement and the Senior Credit Facility. Management believes it has sufficient liquidity to meet its obligations through at least the term of the Senior Credit Facility.
At
September 30, 2013
, approximately $275 million, or 65.0%, of the Company's cash and cash equivalents resided in jurisdictions outside the United States. Repatriation of these funds to the United States could be subject to domestic and foreign taxes and an immaterial amount could be subject to governmental restrictions. Part of the Company's strategy is to grow in attractive market sectors, many of which are outside the United States. This strategy may include making investments in facilities and equipment and new acquisitions. The Company plans to fund these investments, as well as meet working capital requirements, with cash and cash equivalents and unused lines of credit within the geographic location of these investments when possible.
The Company expects to remain in compliance with its debt covenants. However, the Company may need to limit its borrowings under the Senior Credit Facility or other facilities in order to remain in compliance. As of
September 30, 2013
, the Company could have borrowed the full amounts available under the Senior Credit Facility and Asset Securitization Agreement, and would have still been in compliance with its debt covenants.
The Company expects cash from operations in
2013
to decrease to approximately
$415 million
from
$626 million
in
2012
as the Company anticipates lower net income and an increase in working capital requirements, partially offset by lower pension and postretirement contributions. The Company expects to make approximately
$115 million
in pension and postretirement contributions in
2013
, compared to approximately
$376 million
in
2012
. The Company also expects to increase capital expenditures to approximately
$320 million
in
2013
compared to
$300 million
in
2012
.
Financing Obligations and Other Commitments:
During the first
nine
months of
2013
, the Company made contributions of
$114.0 million
to its global defined benefit pension plans, of which
$105 million
was discretionary. The Company currently expects to make contributions to its global defined benefit pension plans in
2013
totaling approximately
$115 million
, of which
$105 million
is discretionary. Returns for the Company's global defined benefit pension plan assets in
2012
were above the expected rate-of-return assumption of 8.25 percent due to broad increases in global equity markets. These higher returns positively impacted the funded status of the plans at the end of
2012
and are expected to result in lower pension expense and required pension contributions in future years. However, the impact of these favorable returns was more than offset by a 100 basis point reduction in the Company's discount rate used to measure its defined benefit pension obligation at
December 31, 2012
. As a result, pension expense, including pension settlement charges, for
2013
is expected to be comparable to pension expense of $69 million in
2012
. Returns for the Company's U.S. defined benefit plan pension assets for the first
nine
months of
2013
were approximately 7.4%.
During the first
nine
months of 2013, the Company purchased 1.9 million of its common shares for approximately $107.4 million in the aggregate under the Company's 2012 common share purchase plan. This plan authorizes the Company to buy, in the open market or in privately negotiated transactions, up to 10 million common shares, which are to be held as treasury shares and used for specified purposes. The authorization expires on December 31, 2015. As of
September 30, 2013
, the Company has purchased approximately 4.4 million common shares under this plan.
The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.
Critical Accounting Policies and Estimates:
The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The Company reviews its critical accounting policies throughout the year. The Company has concluded that there have been no changes to its critical accounting policies or estimates, as described in its Annual Report on Form 10-K for the year ended
December 31, 2012
, during the
nine
months ended
September 30, 2013
.
Other Matters
Capital Expenditures:
The Company has been making strategic investments in business and production processes. The Company is in the midst of several multi-year projects in the Steel segment, including a new vertical continuous caster, an intermediate steel tube finishing line and an in-line forge press to produce new large-diameter sound-center bars. Additionally, the Company is investing in the construction of a new building to bring together personnel from the Company's Bearing and Power Transmission headquarters and corporate headquarters together with personnel from the technology center in North Canton, Ohio.
The caster, which will provide large bar capabilities unique in America, is expected to cost approximately $200 million. As of
September 30, 2013
, the Company had incurred costs of $94 million related to this project. The caster is expected to begin production in the second quarter of 2014. The steel tube finishing line project is expected to cost approximately $50 million. As of
September 30, 2013
, the Company had incurred $46 million related to this project. The in-line forge press is expected to cost approximately $32 million. As of
September 30, 2013
, the Company had incurred $31 million related to this project. These investments reinforce the Company's position of offering the broadest special bar quality steel capabilities in North America.
The construction of the new building began in April 2012 to accommodate a combined team of approximately 1,000 employees, from research and development, engineering, customer service, sales and marketing and corporate functions. The Company foresees increased collaboration among employees at the new North Canton campus, thereby increasing the speed of innovation and levels of customer service when the project is expected to be mostly completed in early 2014. The total cost of the project is expected to be approximately $65 million. As of
September 30, 2013
, the Company had incurred $44 million related to this project.
Foreign Currency:
Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the quarter. Related translation adjustments are reflected as a separate component of accumulated other comprehensive income (loss). Foreign currency gains and losses resulting from transactions are included in the Consolidated Statement of Income.
Foreign currency exchange losses included in the Company's operating results for the
third
quarter of
2013
were $0.6 million, compared to a gain of $2.1 million during the
third
quarter of
2012
. Foreign currency exchange losses included in the Company's operating results for the first nine months of
2013
were $6.5 million, compared to a loss of $4.0 million during the first nine months of
2012
. For the
nine
months ended
September 30, 2013
, the Company recorded a negative non-cash foreign currency translation adjustment of $11.5 million that decreased shareholders' equity, compared to a positive non-cash foreign currency translation adjustment of $
0.5 million
that increased shareholders' equity for the
nine
months ended
September 30, 2012
. The foreign currency translation adjustments for the
nine
months ended
September 30, 2013
were negatively impacted by the strengthening of the U.S. dollar relative to other currencies, such as the Australian Dollar, the Indian Rupee, the Brazilian Real, the Argentine Peso and the Canadian Dollar.
Forward-Looking Statements
Certain statements set forth in this Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended
December 31, 2012
(including the Company's forecasts, beliefs 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, Management's Discussion and Analysis contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “outlook,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-Q. The Company cautions readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of the Company due to a variety of factors, such as:
|
|
•
|
deterioration in world economic conditions, or in economic conditions in any of the geographic regions in which the Company conducts business, including additional adverse effects from global economic slowdown, terrorism or hostilities. This includes: political risks associated with the potential instability of governments and legal systems in countries in which the Company or its customers conduct business, and changes in currency valuations;
|
|
|
•
|
the effects of fluctuations in customer demand on sales, product mix and prices in the industries in which the Company operates. This includes: the ability of the Company to respond to rapid changes in customer demand, the effects of customer bankruptcies or liquidations, the impact of changes in industrial business cycles, and whether conditions of fair trade continue in the U.S. markets;
|
|
|
•
|
competitive factors, including changes in market penetration, increasing price competition by existing or new foreign and domestic competitors, the introduction of new products by existing and new competitors, and new technology that may impact the way the Company's products are sold or distributed;
|
|
|
•
|
changes in operating costs. This includes: the effect of changes in the Company's manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; availability of raw materials and energy; the Company's ability to mitigate the impact of fluctuations in raw materials and energy costs and the operation of the Company's surcharge mechanism; changes in the expected costs associated with product warranty claims; changes resulting from inventory management and cost reduction initiatives and different levels of customer demands; the effects of unplanned work stoppages; and changes in the cost of labor and benefits;
|
|
|
•
|
the success of the Company's operating plans, announced programs, initiatives and capital investments; the ability to integrate acquired companies; the ability of acquired companies to achieve satisfactory operating results, including results being accretive to earnings; and the Company's ability to maintain appropriate relations with unions that represent Company associates in certain locations in order to avoid disruptions of business;
|
|
|
•
|
unanticipated litigation, claims or assessments. This includes: claims or problems related to intellectual property, product liability or warranty, environmental issues, and taxes;
|
|
|
•
|
changes in worldwide financial markets, including availability of financing and interest rates, which affect: the Company's cost of funds and/or ability to raise capital; the Company's pension obligations and investment performance; and/or customer demand and the ability of customers to obtain financing to purchase the Company's products or equipment that contain the Company's products;
|
|
|
•
|
retention of CDSOA distributions;
|
|
|
•
|
the taxable nature of the spin-off and the Company's ability to successfully complete the spin-off of its steel business within the expected time frame and at the expected cost; and
|
|
|
•
|
those items identified under Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the year ended
December 31, 2012
.
|
Additional risks relating to the Company's business, the industries in which the Company operates or the Company's common shares may be described from time to time in the Company's filings with the Securities and Exchange Commission. All of these risk factors are difficult to predict, are subject to material uncertainties that may affect actual results and may be beyond the Company's control.
Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered to be a complete list. Except as required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.