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The eBearing News
July 28, 2003
Timken Reports Second Quarter 2003 Results
copyright © 2003 eBearing Inc.
The Timken Company (USA) reported "disappointing" second quarter 2003 results, the result of
unfortunate surprises in the Torrington acquisition, general weakness in its markets, some
short-term operating inefficiencies, and unexpectedly energy and raw materials costs in the steel
business.
Timken went on to cut estimates for the year, citing no apparent overall upturn in their
combined markets despite some scattered improvements. The few market segments that do show promise
are being more than offset by those segments continuing to contract, particularly industrial.
President and CEO Jim Griffith said in the earnings conference call, "We don't see the turnaround
coming until sometime in mid-2004." Chairman W.R. "Tim" Timken said, "...the long-awaited
recovery in industrial markets will not take place in the next six months."
For the quarter, Timken reported sales of $990.3 million, up from $660.8 million a year ago, due
primarily to the Torrington acquisition.
Excluding the added Torrington sales and currency effects involved in international transactions,
the organic sales increase was only 2.5% over 2002.
Earnings for the quarter were $3.92 million (0.4% of sales), down from $3.96 million
(0.6% of sales) in 2002, reflecting what Mr. Griffith termed, "artificially
depressed" results traceable to Torrington acquisition expenses. Analysts had expected Timken to
earn approximately $20 million (2% of sales), which has led to a number of downgrades.
However, Mr. Timken, and others echoed, the company is still on track to achieve the projected $20
million annualized cost savings from the Torrington acquisition by the end
of the fiscal year. In particular, he said the company is moving rapidly to capture synergies
in leveraging its purchasing power.
Some of Timken's unexpected setbacks in the quarter came directly from Torrington,
even though as Mr. Timken said, "The integration is proceeding quickly, by any measure."
The strongest negative impact from Torrington came through its distribution chain. While Timken was
investigating the acquisition, Torrington's, parent Ingersoll-Rand had Torrington aggressively
price-cutting and cramming the distribution channels with needle bearings. Torrington distributors,
said Timken, took unusually large buys during this period.
Mr. Griffith said this excess inventory was identified by Timken as an issue during the due diligence
phase, so it was not a big surprise. What did surprise Timken and impact earnings this
quarter is that it has taken much longer than expected to burn off that inventory in this economic climate.
As a result of this slow inventory selloff, Torrington's sales thorough these "critical" industrial
aftermarket channels was far lower than projected for the quarter, accounting for 10% of the
earnings shortfall.
Timken management was, however, uncharacteristically candid about Torrington's operation by
Ingersoll-Rand in the final months between the end of due diligence, the signing of the purchase
agreement and early February 2003 when Timken officially took over Torrington.
Specifically, Ingersoll-Rand's, "...well-conceived cost savings programs were not undertaken by
Torrington last year leading up to the acquisition," said Mr. Griffith. I-R simply put all
spending on hold; "They went on and operated their business."
Asked why Timken was not aware Torrington's restructuring and investment activities had been stopped,
Mr. Griffith pointed out Timken had limited access to Torrington during that critical period.
He said, "we did not know that" about I-R until after Timken owned it. The impact of
I-R's failure to continue Torrington restructuring, "emerged over the period of the second quarter,"
he said. "Are we disappointed that they did it? Yes." But Mr. Griffith went on to emphasize that
most of the stalled restructuring projects were identified immediately and have already been done.
Even so, he said, I-R's failure to pursue those projects resulted in Timken shouldering higher
costs for their completion and lower productivity during their execution.
Another of Torrington's surprise negative impacts on earnings came from the new automotive plant in
the Czech Republic, a project which is not coming along smoothly. Mr. Griffith said "more challenging" operating
problems have surfaced than expected, and they will probably not be resolved until the first half of 2004.
Temporary inefficiencies affected earnings during the quarter. Timken's Manufacturing Strategy Initiative
(MSI) aligning products with their least-cost worldwide production facilities, resulted in some transient
operating inefficiencies which hurt earnings slightly.
Timken is also in the process of converting from tube to forged slugs for its high-volume bearings.
That program had setbacks in the quarter via delays in the Kentucky plant ramp-up and startup problems with
external forging suppliers.
Finally, the other major impact on Timken's earnings were due to, "unforeseen steel business cost issues,"
in significantly higher raw materials and energy costs. Steel's higher costs were compounded by weakness
in aerospace and general
industrial sectors. The company said it expects to see continued high raw material and inventory costs,
while scrap reverses, amid continued weak demand. The company said, "We do not see signs of a 2003
American industrial manufacturing recovery."
In all, Timken said half of the second quarter earnings shortfall was due to cost issues in the steel
business, and half due to situations in the bearing businesses. Approximately 80% of the shortfall on
the bearing side was due to automotive, and 20% industrial.
Winding up the earnings call, Mr. Griffith said all of the internal problems and situations which
contributed to the second quarter operating earnings shortfall were essentially temporary operating
issues and, "these are being corrected as we speak." He went on to point out that the Torrington acquisition
momentum is growing and the synergies are beginning to play out in terms of higher sales opportunities
that neither company could have achieved separately. For example, he cited the company's industrial sales
improvement, despite the flat market conditions.
For the coming quarters, Mr. Griffith said Torrington expects, "a gradual ramp up of shipments," as
distributor inventory is burned off. North American production of passenger cars and light trucks is
expected to soften, while industrial markets stay flat. As a result, Timken has lowered its earnings
guidance for the full year to between $0.80 and $0.95 per share, down from the initially projected $1.25.
Timken was hit by numerous downgrades for the surprise earnings miss. CIBC World Markets, BB&T Capital Markets
(strong buy to buy), Merrill Lynch (buy to neutral), and Wachovia (outperform to market perform) were
downgrades, and some were strongly worded. Merrill Lynch said, "We felt this was a critical quarter for
Timken to build investor confidence in its restructuring and integration plans." Wachovia expressed
concern about Timken management credibility, with two consecutive quarters coming well short of guidance
and noted it believed second half prospects were, "poor."
S&P did not downgrade the Timken but warned there is "limited room at the current ratings
and outlook."
When the earnings were released, Timken's stock fell 12% from approximately $17.50 to $15.40 before recovering
to a recent close near $16 on extremely high volume.
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- by Bruce A. Carr
from individual research,
tips and commercial sources.
Unauthorized reproduction is prohibited.
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eBearing.com ... for everything that moves™
Entire contents Copyright 1999-2008, eBearing Inc. All rights reserved.
eBearing.com and "... for everything that moves" are registered
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eBearing.com ... for everything that moves™
Entire contents Copyright © 1999-2008, eBearing Inc. All rights reserved.
eBearing.com and "... for everything that moves" are registered trademarks of eBearing Inc.
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