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Philip Fracassa

Thank you, Rich. Welcome back, and good morning, everyone. For the financial review, I'm going to start on slide 11 of the materials with a summary of our first quarter results. Overall, first quarter revenue came in at $1.14 billion, down 4.2% from last year. Adjusted EBITDA margins were 18.2%, and adjusted EPS for the quarter was $1.40.
Turning to slide 12. Let's take a closer look at our first quarter sales performance. Organically, sales were down 3.1% from last year, with volumes lower, but pricing slightly higher. Looking at the rest of the revenue walk, the CGI acquisition contributed 1% of growth to the top line while foreign currency translation was about a 2-point headwind in the quarter. On the right, you can see organic growth by region. This excludes both currency and acquisitions. Let me provide a little color on each region.
In Asia Pacific, we were up 10% and led by growth in China with a significant improvement in renewable energy demand. India and the rest of the region were also up modestly compared to a year ago. In the Americas, our largest region, we were down about 4%. Most sectors were lower as we expected, with the auto truck and off-highway sectors seeing the largest declines. Industrial Services revenue was also down, while we posted solid growth in Marine during the quarter. And finally, we were down 11% in EMEA due to continued industrial softness in Western Europe. Most sectors were lower with the largest declines in general and heavy industrial automation and auto truck.
Turning to slide 13. Adjusted EBITDA was $208 million or 18.2% of sales in the first quarter compared to $246 million or 20.7% of sales last year. Looking at the change in adjusted EBITDA dollars, you can see that the decrease versus last year was driven mainly by the impact of lower sales volume, higher manufacturing costs and unfavorable mix in currency, partially offset by the benefit of acquisitions in our ongoing cost reduction actions. Let me comment a little further on these drivers.
With respect to price mix, pricing was up slightly in the quarter, while mix was unfavorable. Pricing was also up slightly from the fourth quarter. Note that year-to-date pricing does not include any tariff-related pricing that will start in the second quarter. Looking at material and logistics. Logistics costs were up versus last year, while material costs were down slightly.
On the manufacturing line, Overall, our performance was in line with our expectations, but let me take you through the various puts and takes. The negative $10 million reflects the continued year-over-year impact of inflation and ramp costs associated with our facility expansions in Mexico and India. In addition, we reduced inventory during the quarter, which drove an unfavorable cost absorption impact. Collectively, these items more than offset the positive impact of savings from cost reduction actions in the quarter.
Moving to the SG&A other line. Expenses were down from last year with cost reductions and other tactics more than offsetting the impact of wage inflation. Currency was negative $5 million, which corresponds to the negative sales impact and reflects the stronger US dollar as compared to the same period a year ago. And finally, our CGI acquisition continues to perform well, contributing $4 million of adjusted EBITDA in the quarter, which was accretive to company margins.
Moving to slide 14. We posted first quarter net income of $78 million or $1.11 per diluted share on a GAAP basis. The quarter includes $0.29 of net expense from special items which is comprised of acquisition amortization and other net charges. On an adjusted basis, we earned $1.40 per share, down from $1.77 last year, but largely in line with our expectations.
With respect to some below the line items, interest expense in the first quarter was $5 million lower than last year, reflecting the benefit of debt paydown from free cash flow. Our adjusted tax rate for the quarter was 27%, and in line with our expectations, and diluted shares were down slightly, reflecting net share buybacks over the past 12 months. And finally, noncontrolling interest, or NCI, was $6 million higher than last year. This was more than we anticipated and was driven by the impact of some tax-related benefits at Timken India.
Now let's move to our business segment results, starting with engineered bearings on slide 15. Engineered bearing sales were $761 million in the first quarter, down 5.2% from last year. Organically, sales were down 2.8%, driven by lower end market demand in Europe and the Americas, partially offset by higher sales in Asia. Among market sectors, heavy industries, auto truck and off-highway were lower versus last year, and rail was down slightly as well.
On the positive side, renewable energy was up significantly in the quarter, off last year's low level, while revenue in other sectors was relatively flat. And finally, currency was a headwind to segment revenue of more than 2% during the quarter. Engineered Bearings adjusted EBITDA was $159 million or 20.9% of sales in the first quarter compared to $181 million or 22.6% of sales last year. The decline in segment margins reflects the impact of lower volume and unfavorable mix in currency, partially offset by the benefit of our cost reduction actions.
Now let's turn to Industrial Motion on slide 16. Industrial Motion sales were $380 million in the first quarter, down around 2% from last year. Organically, sales declined 3.8% and as lower demand was partially offset by higher pricing. Most platforms posted lower revenue year-over-year. Lubrication Systems and Linear Motion were down on continued weakness in Western Europe. Belts and chain continues to be impacted by lower ag demand in North America. And Industrial Services saw less demand, but our backlog in that business remains relatively strong.
On the positive side, our Drive System platform was up significantly on higher military marine revenue in the quarter. While couplings, clutches and seals revenue was relatively flat. The CGI acquisition contributed over 3% to the top line, while currency was a headwind of around 1.5%. Industrial Motion adjusted EBITDA was $67 million, or 17.7% of sales in the first quarter compared to $82 million or 21.2% of sales last year, a tough comp.
Our segment margin was impacted by lower volume, unfavorable mix and higher manufacturing costs, including the impact of higher capitalized variances last year and ramp costs related to our new belt capacity in Mexico. On the positive side, other costs were lower, driven by cost reduction actions and the CGI acquisition was accretive to margins in the quarter.
Moving to slide 17. We generated operating cash flow of $59 million and free cash flow of $23 million in the first quarter, both higher than last year as improved working capital performance and lower CapEx spending more than offset the impact of lower earnings.
From a capital allocation standpoint, we returned $48 million to shareholders during the quarter through the repurchase of 300,000 shares and the payment of our 411th consecutive quarterly dividend. And I want to point out that we have continued our repurchases in April, about 200,000 shares at attractive prices. And looking at the balance sheet, we ended the first quarter with net debt to adjusted EBITDA at 2.2 times, well within our targeted range for net leverage.
Now let's turn to the updated outlook for full year 2025 with a summary on slide 18. The tariff situation has complicated this. So let me take you through it piece by piece. On the revenue line, overall, you see an improvement in the outlook from down 2.5% at the midpoint in February to down just over 1% at the midpoint now. This improvement can be attributed entirely to currency as our current expectation is for a headwind of 1% for the full year based on March 31 exchange rates. This compares to our February expectation for a headwind of just over 2%. For acquisitions, we expect CGI to contribute just under 1% to our revenue for the year. This is unchanged from February.
Now moving to organic revenue. Our current outlook is to be down 1% at the midpoint. While this looks unchanged on its face, we made two changes here. First, we added some pricing to pass through the impact of tariffs over the course of the rest of the year. And second, we lowered our volume outlook by roughly an equal amount to reflect our expectation for slightly softer demand caused by trade-related economic uncertainty.
Year-to-date, our demand and order intake rates are generally in line with our prior expectations, and our backlog is up versus the end of 2024. However, given the uncertainty and limited visibility, we are taking a cautious view on market demand, but we are not assuming any sort of global recession at this point.
On the bottom line, we now expect adjusted earnings per share in the range of $5.10 to $5.60 per share, down $0.20 at the midpoint from our prior guide. You'll see a walk of the various puts and takes on a later slide, but the guide assumes a net unfavorable direct impact from tariffs of approximately $0.25 per share. I'll come back to this in a moment.
Our revised outlook implies that our full year consolidated adjusted EBITDA margin will be in the mid- to high 17% range. Note that this includes a net unfavorable direct impact from tariffs of $25 million. Our margin outlook would be close to unchanged versus our prior guide if you exclude the tariff impacts. And as Rich mentioned, we are affirming our full year cost savings target of $75 million which should more than offset continued inflation in labor and other input costs.
Moving to acquisitions and currency, we expect CGI to be accretive to margins, while currency is expected to be unfavorable, albeit less than before. And finally, we now anticipate net interest expense to be in the range of $95 million to $100 million for the year. While the outlook for the adjusted tax rate is unchanged at 27%. Moving to cash flow. We're looking for around $375 million of free cash flow at the midpoint, which is just under 130% conversion on GAAP net income. Versus last year, Free cash flow is expected to benefit from improved working capital performance, reduced CapEx spending and lower taxes, which had more than offset the impact of lower earnings.
Moving to slide 19. Here, we provide some additional detail on the direct impact on Timken from tariffs. As we covered in February, the company imports less than $400 million of goods into the US from all countries. This includes less than $80 million from China.
And keep in mind that Timken serves the US market primarily from our significant US manufacturing footprint, which we believe is an advantage for us in this environment. Based on the tariffs currently in place, we're estimating a gross unmitigated annualized cost impact of around $150 million. This reflects tariff rates in effect as of today.
Note that most of this number is being driven by the escalation that has occurred between the US and China, which has produced incremental tariffs of 145% and 125%, respectively. Our team is moving with urgency to mitigate this impact through pricing and other actions, and we expect to fully offset it on a run rate basis by the end of 2025. For the full year, we're assuming a net headwind of $25 million driven by timing, with most of this hitting in the second and third quarters.
On slide 20, we provide a bridge of the $0.20 per share change in our 2025 adjusted EPS outlook at the midpoint as compared to our prior guide. Here, you can see the $0.25 negative impact from tariffs that I mentioned earlier. We also saw a positive change for currency, which is offsetting a modest change related to organic sales volume. And finally, we're planning for lower interest expense, which is the favorable $0.05 per share that you see in the other bucket.
In summary, we're executing well in an unpredictable environment right now. Our team is focused on offsetting the impact of tariffs and delivering resilient performance in 2025. While we remain hopeful that the trade situation will be resolved in the near term, we are prepared and confident in our ability to overcome any challenges that lie ahead.
This concludes our formal remarks, and we'll now open the line for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Bryan Blair, Oppenheimer.

Bryan Blair

The guidance update directionally contemplating higher price, lower volume, of course, makes sense. Are you willing to speak to the underlying assumptions there. What you're now baking in for volume and price, respectively, netting to the 1% organic sales decline. And then within that, are there meaningful differences by segment, either with regard to better or worse performance first, minus 1% or the split of volume and price?

Philip Fracassa

Yes, sure, Bryan. I'll take that. So relative to holding the minus 1, pricing got a little bit better, as we said, for tariffs. And I think of that as on the order of approaching 1.5%, probably not quite that big, but north of $60 million, if you will, and then an offsetting decline in volume. And if you think about that, that was really us trying to be a little cautious on the demand outlook.
And then relative to the segment, just given the first quarter performance, we did -- we are assuming a little bit more of that volume change, if you will, going to industrial motion versus bearings, again with Industrial Motion being a little more indexed to Europe. And then also services was down in the first quarter and we do expect that to be neutral for the year, but we did move that from up mid-single digits to neutral, and that also sits in industrial motion, and that was a piece of it as well.

Bryan Blair

Yes. All makes sense. And then maybe for a little more detail on renewable energy trends, particularly in China. Costs are easy there, but it seems like Q1 shook out pretty favorably. Was there any notable pull forward of shipments with all the goings on, how order rates look now? And what are you now contemplating for the full year in terms of renewable growth.

Philip Fracassa

Yes. Great question. I would say we were pleasantly surprised with the renewable energy demand in the first quarter. We were we were seeing order intake rates pick up as we move through the second half of last year. And again, the first quarter is sort of that low base, if you will. So we were up pretty significantly off that low base. But we think we are expecting that momentum to continue.
And coming into the year, we thought we'd be around flat in renewable energy. And now we're thinking we should be up mid-single digits with some momentum that we've saw in the first quarter, which we're looking to extend that as we move through the year.
So as we've said before, the outlook on wind remains positive. It should be a growth market for us long term. As we said before, it will probably be several years before we get back to where we were, but it's nice to see the improvement in Q1. And then we also strongly believe in the long-term potential for the aftermarket as that continues to grow in land.

Richard Kyle

The only thing I would add is we've worked our way through what was the over-inventory situation in that channel, and which was affecting the comps last year.

Operator

Angel Castillo, Morgan Stanley.

Stefan Diaz

This is actually Stefan Diaz sitting in for Angel. Maybe to start, I know organic sales were down for the quarter. But do you have any sense that your customers pulled forward demand trying to get ahead of tariffs at all?

Philip Fracassa

Yes. I would say nothing that we could point to that would be material from a tariff standpoint. Obviously, we sell a lot of different products to our customers, particularly distributors and those products mainly get produced in the US, and there's a small minority of imports. So I would say overall, when you think of lead times and then the fact just the breadth of the of the mix that we sell to our various customers. I'd say nothing notable that we can point to and say, yes, that was a buy ahead of tariffs, if you will.

Richard Kyle

Yes. And I would add that as I said in my comments, April revenue in line with expectations and May backlog is in line. So we're not seeing any significant move up or down in the demand level in aggregate.

Stefan Diaz

Great. That's helpful. And then maybe can you give more details on the actions you're planning on taking in your auto OE business that you mentioned in the prepared remarks? Like, for example, you're planning on implementing a similar strategy for when you left the light vehicle industry in North America? And maybe does your planned actions include trucks? Or is it more limited to light vehicles?

Richard Kyle

Yes. It's focused on light vehicles, and it's focused on OEM. So it's not affecting our -- we're not targeting aftermarket. And to the point you raised of what we did before to go back in history, on this in -- between the 2008 to 2013 time frame, we exited over $1 billion of automotive and at that time, truck revenue as well in the OEM space. We sold some of that off. We exited some platforms, restructured portfolio and the manufacturing footprint that supported it and saw a significant uplift in company margins as a result of that.
From that time, I would say, to COVID, the margins, as we've said over the years were below company average. They were more in line with our old mobile business margins. But the business did not require much capital, generated good cash flow and was acceptable margins. And it wasn't the growth engine of the company, but we continue to stay in it and, again, with minimal investment.
I would say, since COVID and coming out of COVID with inflation, we've been chasing the margin suffered as everything did during COVID. But unlike other parts of our business where we were recovered, we've been chasing the margin since that time. It has not been acceptable.
And we're really now targeting what I would say is more than half of the -- of our automotive OEM business. Not all of it. We still have some very strong technology niches there that are attractive and we get good returns on. It's too early to say what that will -- how that will play out in regards to that, but we expect that by 2027, we will likely be a smaller player in that market. And as a result, we would expect a material uplift in corporate margins from it in 2026 and then more in 2027.

Philip Fracassa

Yes. The only thing I would add, as Rich said, we're targeting more than half of that auto OE business and from -- we have a pie chart in our investor deck, and that would show you that auto OE was around 8% of company sales last year. So that would give you kind of an order of magnitude of what we're looking at. And as Rich said, with the actions we're taking probably not a '25 impact, but certainly, should be accretive to margins in '26 and beyond.

Operator

Kyle Menges, Citigroup.

Kyle Menges

So you're taking pricing understandably, probably mostly in industrial distribution, I would gather to offset some tariff impacts. Do you have some sense of the pricing that you're passing through just relative to competitors? And then also just looking at your supply chain in the US what sense do you have at least in your core businesses, just how you're positioned relative to competitors from a just tariff impact that you might be seeing relative to your peers?

Richard Kyle

Yes. I would say that we are seeing competitors raise prices. And certainly, the fastest impact is typically in distribution, but we are raising prices with -- through OEM channels as well. And I would say, in general, bearing prices are going up globally and -- but certainly more so in the US.
I would say our footprint, we think, is at worst, neutral and at best advantaged and there's probably longer term, some opportunities for us with our heavier concentration of US footprint. But short term, we're -- until there is more stability in the tariff situation, our short-term objective is largely to hold share past the cost increases through and get some settling on where the tariffs land, and then we'll look at -- is there opportunity for us to capture some share and/or reposition some of our footprint.

Philip Fracassa

Yes. And maybe, Kyle, maybe if I could just maybe add a little bit more color because I do agree with what Rich said, we do believe our US footprint should help us in an environment like this, and we think it will.
The impact that we've talked about in the slides, $150 million gross annualized impact, I mean, let me -- if I could break that down a little bit. I mean, first, when you talk about rates in China, we're assuming rates in effect as of today, and that includes the China-related rates of 145% and 125%, respectively. So big numbers from China that we would hope those rates would certainly come down at some point.
And China is probably north of 80% of the impact for us and obviously, given those rates really driving the numbers. So if -- even if just the China de-escalates a bit and get, say, cut in half, that impact goes down significantly. And I think our net $25 million impact largely goes away, not 0, but largely goes away. That would be one. Number two, Rich talked about the lag we've talked about the time lag for pricing before that with distribution, it can take a couple of months, typically less than a quarter. We're working to get the pricing in.
OEMs can be a little bit longer because it's kind of one by one, customer by customer in many cases, and that's ongoing. Last time in 2018, it was probably two, three quarters before we got it in. And so the pricing that we put in is kind of what we expect for the rest of the year, working on other mitigation tactics as well, supply chain and et cetera, those also take time, but we do think we'll get to on a run rate basis, offset it on a dollar basis by the end of the year at those rates and then look to recapture the margin in '26.
And the last point I want to make, too, is around inventory accounting. It's a minor point, but it's a big impact most of our US business is on LIFO inventory accounting under LIFO, the tariff costs hit you right away. Compare that to FIFO, where they would kind of work their way through the inventory and typically hit you as the inventory turns, which can be a few months down the road. And that's kind of exacerbating that timing impact. So bottom line, it's a fluid situation. We've assumed the current rates, which I think most people would say is probably a worst-case scenario for China, and we're pricing for it. And we'll keep monitoring as we go.

Kyle Menges

Helpful. That LIFO accounting, definitely not helping in the current environment. But yes, I guess just the follow-up of that, you said you plan to fully offset that $150 million, just can you give us some sense on how much pricing surcharges versus sourcing supply chain initiatives should be of that $150 million?

Philip Fracassa

Yes. I mean it will predominantly be pricing in surcharges. And as we talked about, both distribution and OEMs. I think the supply chain mitigation tactics are a little more limited and obviously, some are lower-hanging fruit than others. And obviously, we're working on the lower-hanging fruit stuff right away. But I would say the vast majority would be pricing and surcharges, and that would be by the end of the year. And then that net '25 impact would mainly be affecting the second and third quarters and then dropping significantly in the fourth quarter.

Operator

Mike Shlisky, D.A. Davidson.

Michael Shlisky

Just to follow up on that last answer there. I'm not sure if I had this correct. So if there's a $0.25 headwind this year on tariffs, but you catch up by the end of the year, again, if everything stays the exact same as far as tariffs are concerned, would you then say that for 2025, we should be modeling zero impact. I just want to make sure I have that exact -- I have what you're trying to get clear for after 2025.

Philip Fracassa

No, I think that's right, Mike. So all else equal, by the end of the year, we will be offset on a dollar basis. So the net impact would be zero in '26. And obviously, we'd have the headwind of '25 that wouldn't repeat. So that would be a year-over-year benefit, if you will. But we should be fully offset by the end of the year on a go forward basis.

Michael Shlisky

And then as a follow-up, I wanted to -- and I wanted to maybe take a step back from my other question here. Rich, you and the Board, I'm sure discussed in detail the kinds of things that the recently departed CEO was looking at or doing or changing at Timken, what his plans were. I guess I'm curious, was there a fully developed plan internally as to what he wanted to do when he left? And are you looking to or will your successor be just implementing all those plants at this point? Or do you and the Board going to have a fully clean slate for the next CEO who may or may not do what Tarek was hoping to do.

Richard Kyle

So I'd say a couple of things on the CEO transition. First, I'd say the team underneath the CEO was unchanged. I'd say of our top 100 managers, I think there's been one departure in the last 12 months, and that was due to retirement. So obviously, there's a lot of continuity there.
And then I would say during that time, there was not a strategy change or a proposed strategy change. It's anything I would say there was confirmation of the path that we were on. I think the new thinking that was brought in was more around would we go faster and bigger than any sort of pivot from the direction that we were going on. I think those were good thoughts and really the biggest piece of that. I mean, there were certainly some things in the details of how we can execute the company better and things like that, that in retaining some of that.
But on the big picture, it was around the portfolio as said we've really always done that portfolio work, but some of the thoughts were -- could we go bigger and faster on it. And as I said earlier, we are accelerating the automotive work now of what was identified. That was probably the -- well, it was the biggest piece, and other things would be smaller than that. So I think I would say it's been -- again, it's fairly consistent and nothing dramatic during the time and I wouldn't expect anything that the new person handled any immediate issues they have to grapple with.
I guess the last thing I'd say on the transition period, is we're really focused on maintaining margins and what we expect to be a soft industrial market looking to generate good strong cash flow and that cash flow, it tends -- is the primary driver of earnings growth beyond normal growth levels, the compounding of good capital allocation decisions. So a lot of focus on that over this interim period and then also continue to advance the company strategically on our path to achieve our financial targets. We're not standing still during the interim leadership period. Again, we've got a lot of tenured management. So our objective is to come out of this tariff period a bigger and a better version of ourselves.

Operator

Chris Dankert, Loop Capital Markets.

Chris Dankert

I guess first off, on the Fort Scott facility, is that fully closed? Are we running duplicative costs there? Are there any kind of ability to shift fashion fourth based on tariffs. Just any comments on kind of the manufacturing footprint here?

Richard Kyle

The facility is not fully closed, and it is a negative to first quarter Industrial Motion margins expecting a little bit of improvement there in the second quarter, but then a step change on that in the third quarter, and we are still marching down the path to have that facility closed fully in the third quarter.

Chris Dankert

So there is no change -- (multiple speakers)

Richard Kyle

To the point on tariffs -- yes, I would just say on the point on tariffs, and we have both US and Mexico footprint within our belts business, so we do have some ability to do some things on both sides of the border. But most of what we do in Mexico as the tariff situation today is USMCA?

Philip Fracassa

Yes, exactly. I think that's an important point, Chris. The belt is coming up from Mexico or USMCA compliance. So we're not getting hit at present on those. And I would say a portion of the bearings are compliant as well, but not 100%.

Chris Dankert

Understood. That's really helpful. And I think just following up, I really appreciate the color around tariffs and trying to get arms around it here. But when we think about just raw materials, SBQ pricing, steel pricing kind of outside of tariffs. I assume the expectation is when we start renegotiating in fourth quarter, those prices are going to go up materially. So is it fair to assume that higher pricing is here to stay into 2026 as well.

Richard Kyle

I think that's a fair assumption and where we buy steel in the US on spot prices, it is higher today than it was a year ago. As you said, a lot of it is under contract. But I would all say Timken did well with the bout of inflation that we had coming out of COVID, and inflation is not necessarily a negative for us, if anything, that could give us more pricing power.
The unique part about this as compared to other rounds of price -- the cost increases is the tariff element of it. But there's not enough amount of steel capacity or SBQ capacity in the US to serve the US market. So there is pricing -- there has been price increases in that space.

Operator

There are no remaining questions at this time. Sir, do you have any final comments or remarks?

Neil Frohnapple

Thanks, Emily, and thank you, everyone, for joining us today. If you have any further questions after today's call, please contact me. Thank you, and this concludes our call.

Operator

Thank you for participating in Timken's First Quarter Earnings Release Conference Call. You may now disconnect.