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Timken Reports 2nd Quarter Results
07/31/2009 - Timken reports a loss of $64.5 million on sales of $828.9 million for the second quarter, and a net loss of $63.6 million on sales of $1.79 billion for the first six months of 2009.
The Timken Co. reported a loss of $64.5 million on sales of $828.9 million for the second quarter, and a net loss of $63.6 million on sales of $1.79 billion for the first six months of 2009.
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Timken’s Steel Group
Sales for the Steel Group, including inter-group sales, were $134.8 million in the second quarter, a 74% decrease from $518.9 million in sales for last year’s second quarter. The company said the decline was driven by lower demand across all market sectors, with the greatest decline coming from the energy, service-center and automotive sectors. Sales were also affected by an approximately $180 million decline in raw-material surcharges from the second quarter last year.
The Steel Group incurred an EBIT loss of $32.9 million, which compares with EBIT of $80.3 million for the same period a year ago. The decline primarily resulted from lower demand and underutilization of manufacturing capacity of roughly $125 million, partially offset by cost-reduction actions. Lower surcharges (about $180 million) were offset by approximately $150 million in favorable material costs and a change in LIFO of approximately $30 million.
For the first six months, Steel Group sales were $383.4 million, down 59% from the first half of last year. EBIT was a loss of $40.2 million (10.5% of sales) compared with EBIT of $133.7 million (14.2% of sales) in last year’s first half.
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Special items, net of tax, amounted to $43.9 million of expense, compared with charges totaling $3.5 million in the same period last year. Special items in 2009 include a $31.7 million pretax, noncash impairment charge primarily related to ongoing consolidation of the Canton bearing operations, as well as severance costs. The 2008 special items included manufacturing rationalization, impairment and restructuring charges.
Sales of $828.9 million reflect a 46% decrease from sales of $1.536 billion in the year-ago second quarter. The company said the decline in sales was due to weaker demand across most of the company’s end markets as well as lower steel surcharges and currency, which were partially offset by improved pricing.
“The combination of a slow economy and inventory reduction throughout the supply chains we serve continues to curb demand for our products. We’re now seeing evidence that our customers’ inventory destocking activities may go longer and deeper than we expected,” said James W. Griffith, Timken President and CEO. “We have decreased manufacturing output in response to lower demand and are on track in our efforts to right-size the company. We’ve also had success in product pricing, reducing inventory levels and cutting spending across the company, leading to strong cash generation for the quarter. We have positioned the company well, and are confident that we will see stronger structural profitability as markets stabilize.”
Other News this Quarter—In the second quarter, the company completed a number of actions as part of its previously announced plans to realign the organization and reduce overhead, staffing levels and administrative costs. The company remains on track to deliver the annualized savings of approximately $80 million associated with these actions, and is taking additional steps to respond to weaker market conditions.
In addition to cash and cash equivalents of $277.1 million at June 30, 2009, the company had approximately $830 million available under various credit lines. On July 10, the company entered into a three-year, $500-million unsecured Senior Credit Facility to replace the company’s previous credit facility, which was set to expire on June 30, 2010.
Total debt was $592.5 million as of June 30, 2009 (27.0% of capital). Net debt at June 30, 2009, was $315.5 million (16.5% of capital) compared with $490.5 million (22.8% of capital) as of Dec. 31, 2008. During the quarter the company generated $220.3 million of cash flow from operating activities, driven primarily by inventory reductions.
The company also just announced an agreement to sell the assets of its Needle Roller Bearings business to JTEKT Corporation. “This transaction is a major step forward in our strategy to transform Timken’s portfolio to focus on industrial sectors with strong aftermarkets,” said Griffith.
Timken will receive cash proceeds of approximately $330 million upon completion, subject to adjustments for working capital. The transaction is expected to close by the end of the year, subject to the satisfaction of certain closing conditions. The business’ current book value is approximately $385 million. The results of the Needle Roller Bearings business will be reclassified to discontinued operations beginning in the third quarter of 2009.
Six-Month Results—The company incurred a loss of $0.66 per share, compared with earnings of $1.80 per diluted share last year. Special items, net of tax, totaled $50.2 million of expense, and were primarily related to impairment and severance charges. For the prior-year period, special items, net of tax, amounted to $2.1 million of income, including a gain on a real estate divestment associated with a prior plant closure, partially offset by charges related to restructuring, rationalization and impairment. Excluding special items, the loss was $0.14 per share in the first half of 2009, versus earnings of $1.78 per diluted share in the first half of 2008.
Sales were $1.79 billion, a 40% decrease from the same period in 2008.
Outlook (Including Needle Roller Bearings Business)—While the economic outlook continues to remain uncertain, the company said it expects the impact of the global recession to be greater than previously anticipated, due not only to the depth and breadth of decline across end-markets, but also the compounding factor of inventory destocking throughout the supply chain.
The company expects Mobile Industries sales to be down approximately 35 to 40% for the year, driven by lower North American light-vehicle production, and significant declines in heavy-truck builds in North America and Europe. Process The company expects Industries sales to be down by about 30 to 35% in 2009, with broad-based volume declines in most end markets, especially heavy industrial equipment. Sales in the Aerospace and Defense segment are expected to be up roughly 5% for 2009, driven by a strong defense sector, while recent softening in the civil sector is expected to have a minimal effect, given current order backlogs. Steel Group sales are expected to decline approximately 60 to 65% for the year due to lower demand and surcharges across all sectors.
As a result of the company’s global market outlook, it reduced its earnings estimate for 2009, now expecting earnings per share, excluding special items, to be a loss of $(0.40) to $(0.90). The company said it remains on track to deliver strong cash from operations in 2009, driven by effective working capital management and reduced spending.
Timken provides innovative friction management and power transmission products and services. The company reported sales of $5.7 billion in 2008.
