Timken Reports Record 2008 Results
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CANTON, Ohio--The Timken Company today reported sales of $5.7 billion for 2008, an increase of 8 percent from a year ago. During the year, the company benefited from strong demand in global industrial markets, surcharges, pricing and currency, as well as acquisitions serving the aerospace and energy market sectors. Lower automotive demand partially offset these benefits.
The company achieved income from continuing operations of $267.7 million, or $2.78 per diluted share, up from $219.4 million, or $2.29 per diluted share, in 2007. The 2008 results included a goodwill impairment charge in the company’s Mobile Industries segment of $42.2 million, or $0.44 per diluted share. Excluding all special items, income from continuing operations increased 36 percent to $313.4 million or $3.26 per diluted share in 2008, compared with $229.9 million or $2.40 per diluted share in the prior year. Full-year earnings benefited from pricing, surcharges and acquisitions. These benefits were partially offset by higher raw-material costs and related LIFO charges, as well as manufacturing and logistics costs versus a year ago.
“Our strategy to reposition the company for more diversified, profitable growth in industrial markets contributed to the year’s record results,” said James W. Griffith, Timken president and chief executive officer. “We believe the steps we’ve taken to grow and optimize our business for long-term value creation also position the company to better manage through the current downturn.”
Timken made progress in these key areas of its strategy:
- Transformation: Timken implemented its realignment of the Bearings and Power Transmission Group, leveraging synergies within its businesses to improve performance. The company also reduced employment by approximately 2,500 positions in the past 15 months, streamlining operations as part of its realignment and in response to lower demand;
- Differentiation: Timken’s Steel business strengthened its competitive position with the expansion of its thermal treatment capabilities to serve the energy and industrial sectors and a small-bar mill that extends its offering in highly specialized small-diameter sizes for power transmission applications;
- Expansion in aerospace: Timken integrated the Purdy business acquired in late 2007, along with the 2008 acquisition of EXTEX. These additions strengthened the company’s presence in aerospace products and aftermarket services, while Timken’s new precision products facility in China will serve the commercial aerospace industry’s growth there;
- Expansion in energy: Supporting its expansion in the energy sector, the company acquired Boring Specialties (BSI), focused on the oil and gas industry, and increased its strategic capabilities to serve demand in wind energy with a joint venture in China. In North America, the company reallocated existing capacity to serve demand in wind energy;
- Growth in Asia: The company continued to broaden its reach in Asia, including expanded production in China and India, and a widening global distribution network that is extending Timken’s brand in the region; and
- Execution: Timken completed another phase of its Project O.N.E. global system initiative to optimize transactions and customer service, which now has approximately 75 percent of the Bearings and Power Transmission Group’s global sales flowing through the system.
Fourth-Quarter Results
For the quarter ended Dec. 31, 2008, sales were $1.2 billion, a decrease of 10 percent from a year ago. The benefits of pricing, surcharges and acquisitions were more than offset by weaker demand across most of the company’s end markets and the impact of currency.
Income from continuing operations was a loss of $0.38 per diluted share in the fourth quarter of 2008, compared with income of $0.50 per diluted share in the same period a year ago. The 2008 results included an after-tax goodwill impairment charge in the company’s Mobile Industries segment of $42.2 million, or $0.44 per diluted share. Excluding special items, income from continuing operations was $0.07 per diluted share in the fourth quarter of 2008, compared with $0.51 a year ago. Benefits from pricing, surcharges and selling, administrative and general (SG&A) expense reductions were more than offset by the effects of lower demand, higher raw-material costs and related LIFO charges compared with a year ago. The company’s fourth-quarter results were negatively affected by the timing of raw-material cost recovery, which benefited the third quarter of 2008.
Fourth-quarter earnings were below the company’s prior estimate of $0.16 to $0.26, primarily due to the impact of LIFO expense. The company expected to have LIFO income during the quarter, but with lower demand, incurred a net LIFO expense of $26.9 million. The company expects LIFO income in 2009.
Total debt was $624 million as of Dec. 31, 2008, or 27.8 percent of capital. Net debt at Dec. 31, 2008, was $508 million, or 23.8 percent of capital, compared with $693 million, or 26.1 percent, as of Dec. 31, 2007. The decrease in net debt reflects strong operating cash flow. Shareholders’ equity at Dec. 31, 2008, was $1.6 billion, a decrease of $338 million due primarily to an after-tax charge of $415 million to other comprehensive income to reflect valuation adjustments for pension and other post-retirement benefit obligations, primarily resulting from negative pension-plan asset returns in 2008.
The company continues to maintain a strong balance sheet and ample liquidity. In addition to cash and cash equivalents of $116 million at Dec. 31, 2008, the company had $573 million available under committed credit facilities. In the third quarter, Moody’s Investor Service increased Timken’s corporate credit rating to “Baa3” (investment-grade), reflecting the company’s improved financial condition. This is consistent with the company’s investment-grade rating from Standard & Poor’s Ratings Services (“BBB-”).
Bearings and Power Transmission Group Results
Full-year sales in 2008 for the Bearings and Power Transmission Group were $4.0 billion, up 4 percent compared with the prior year. Earnings before interest and taxes (EBIT) for 2008 were $313.7 million, an increase of 46 percent over 2007.
Sales in the fourth quarter of 2008 were $865.1 million, down 13 percent from the fourth quarter of 2007. EBIT in the fourth quarter was $31.2 million, down 37 percent from the prior-year period.
Mobile Industries Segment Results
Sales for the Mobile Industries segment were $2.3 billion in 2008, down 7 percent compared with the prior year. Sales declined as a result of lower demand primarily from the North American light-vehicle market sector. Stronger demand in the off-highway, automotive aftermarket, heavy-truck and rail market sectors, pricing and the effect of currency partially offset the decline in light-vehicle demand.
Mobile Industries’ 2008 EBIT was $16.5 million, a decrease of 67 percent from 2007. Results benefited from pricing, currency and mix, which were more than offset by lower demand, underutilization of manufacturing capacity, higher logistics and material costs and related LIFO charges. In addition, the company increased its accounts-receivable reserves for automotive customers. During the year, the company reduced total employment levels and temporarily idled factories beyond normal seasonal shutdowns in response to weakness in demand.
In the fourth quarter, Mobile Industries’ sales were $461.8 million, a decrease of 23 percent from the same period a year ago. Stronger demand in the off-highway market sector and pricing were more than offset by lower demand from North American and European light-vehicle and heavy-truck market sectors, as well as unfavorable currency.
The Mobile Industries segment had a loss of $31.5 million in the fourth quarter of 2008, compared with a loss of $5.2 million for the same period a year ago. Results reflected lower volume, higher material costs and related LIFO charges, which were partially offset by pricing, mix and lower SG&A expense.
Process Industries Segment Results
Sales for the Process Industries segment were $1.3 billion in 2008, up 18 percent from the prior year. The increase was driven by strong demand across broad industrial market sectors, new capacity, pricing and currency. Process Industries also benefited from its Asian growth initiative, for which sales now represent approximately 19 percent of the segment.
EBIT for the year increased to $246.8 million, up 73 percent over 2007, driven by strong volume, increased capacity for large-bore products, pricing and currency. Partially offsetting these benefits were higher raw-material and related LIFO charges, as well as higher manufacturing and logistics costs.
Sales in the fourth quarter of 2008 were $290.1 million, a decrease of 5 percent from the fourth quarter of 2007, driven by lower volume and the unfavorable impact of currency. EBIT in the fourth quarter was $44.1 million, up 0.4 percent from the prior year, as improved pricing and lower SG&A expenses were offset by lower volume, higher material costs and related LIFO charges.
Aerospace and Defense Segment Results
Sales for the Aerospace and Defense segment were $431.1 million in 2008, up 38 percent from the prior year. The increase was driven primarily by the Purdy and EXTEX acquisitions, completed in October 2007 and November 2008 respectively, as well as strong demand and favorable pricing. Acquisitions accounted for approximately 60 percent of the sales increase from the prior year.
EBIT for the year increased to $50.4 million, up 132 percent over 2007. Performance benefited from acquisitions, pricing, volume and improved manufacturing productivity, partially offset by investments in capacity expansions, including the aerospace and precision products plant in China.
Sales in the fourth quarter of 2008 were $113.3 million, an increase of 19 percent from the fourth quarter of 2007. The increase was driven primarily by acquisitions and pricing. Acquisitions accounted for approximately 40 percent of the sales increase in the quarter. EBIT in the fourth quarter was $18.6 million, up 75 percent from the prior year, benefiting from acquisitions, pricing and volume.
Steel Group Results
Sales for the Steel Group, including inter-segment sales, reached $1.9 billion in 2008, up 19 percent from 2007. The increase was driven by surcharges and favorable mix resulting from higher demand across all market sectors, except automotive. The benefit of the group’s BSI acquisition completed in the first quarter of 2008 was offset by the divestiture of the Desford steel tube manufacturing operations in 2007.
EBIT for the year increased to $264.0 million, up 14 percent over 2007, driven by strong volumes in key market segments and higher surcharges, which were partially offset by higher raw-material costs and related LIFO charges, as well as higher manufacturing costs.
Sales in the fourth quarter, including inter-segment sales, were $371.5 million, a decrease of 2 percent from the prior-year period. The decline was driven by lower volumes, primarily in the automotive market sector, partially offset by favorable mix, the benefit of the BSI acquisition and higher surcharges.
The Steel Group had a loss of $3.5 million in the fourth quarter of 2008, compared with EBIT of $47.5 million for the same period a year ago. The decline primarily resulted from lower manufacturing volumes and higher raw-material costs in the quarter. During the quarter, the company had negative material-cost recovery primarily due to timing, as the company benefited from surcharges in excess of its material costs in the third quarter of 2008.
Outlook
Timken’s outlook reflects a deteriorating global economic climate in 2009. Although the implications of this decline are difficult to predict, the company anticipates weakness in most of its end markets throughout the year. The company expects earnings per diluted share for 2009, excluding special items, to be $1.30 to $1.60 for the year, compared with $3.26 in 2008.
“We are proactively managing the company for this time of extreme economic uncertainty. We have decreased operating levels to better match production with demand, including a combination of permanent and temporary furloughs. We have also reduced capital investments and lowered SG&A spending in response to immediate challenges,” said Griffith. “We are monitoring market conditions and will take additional actions as appropriate to optimize the performance of our company.”
Conference Call Information
The company will host a conference call for investors and analysts today to discuss financial results.
| Conference Call: | Thursday, Jan. 29, 2009 | |
| 11:00 a.m. Eastern Time | ||
| Live Dial-In: | 800-344-0593 or 706-634-0975 | |
| (Call in 10 minutes prior to be included.) | ||
| Conference ID: 68487254 | ||
| Replay Dial-In through Feb. 6, 2009: | ||
| 800-642-1687 or 706-645-9291 | ||
| Live Webcast: | ||
