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The eBearing News
September 23, 2003
Timken Cuts Earnings Outlook
And More Jobs
copyright © 2003 eBearing Inc.
The Timken Company (USA) cut its earnings outlook for the third time in 2003, citing a North American
automotive slowdown, lingering manufacturing inefficiencies, continued steel group cost issues and other
challenges stemming from the Torrington acquisition.
Announcing a new pro forma ("excluding special items") estimate for third quarter earnings, Timken slashed
its earlier estimate of $0.05 - $0.15 per share down to $0.00 - $0.05 per share. With charges, GAAP results
could easily show a loss for the quarter. For the year, Timken has revised its estimates downward yet again,
to $0.45 - $0.60 per share, down from previous guidance of $0.80 - $0.95, revised down from
initial projections that ran as high as $1.40 per share.
Declining sales to the North American automotive industry is primarily to blame for the quarter's problems,
said Jim Griffith, President and CEO, and that Timken has had difficulty managing the volume decline.
"Our automotive performance is disappointing, and we are taking additional
actions to address it. As the Big 3 automakers have moved to cut production levels, we have experienced
steeper volume declines in our automotive group than we had anticipated. North American passenger car
production has been particularly hard hit. This has exacerbated the performance challenges which our automotive
plants have experienced in recent months and will further delay the benefits of our restructuring efforts."
According to Mr. Griffith, GM production is down almost 20% from last year, and Ford's is down almost 40%.
In all, "Passenger car production is down 7% from our July estimate," he said, "That's the core of the
Torrington automotive market. That was not something that was predicted. In fact, it hit hard starting
in July of this year."
Timken has begun reorganizing the automotive operation to both address these operational issues, pursue
manufacturing improvements, and better leverage the Timken / Torrington market position.
In that reorganization, Karl Kimmerling, President of Automotive and a 24-year Timken veteran, has left
the company. Mr. Griffith, who has held that position, took over Mr. Kimmerling's responsibilities
until a replacement is named.
While automotive has suffered, the industrial bearing business -- which includes the non-automotive bearing
markets -- is expected to hold steady through the end of 2003.
Mr. Griffith said, "U.S. manufacturing continues to lag the rest of the economy, with this recovery the
slowest on record. While economists recently have noted some improvement in the manufacturing sector, we have
seen very little evidence of a turnaround in the markets we serve."
The steel group has also been squeezed by the decline in automotive demand, while also facing
higher raw materials costs. Some price increases have been announced to help offset the squeeze, and
spending is being tightened.
And more job cuts are coming. Overall, Timken will eliminate more than 900 employees during the second
half of 2003; 700 from the automotive group and 200 from elsewhere across the organization. 360 of the 700
automotive-related cuts were made in July and August, leaving 340 still to come. Timken
did not say where those remaining cuts will be made, except that the scope is international.
Put another way, Timken said of the 700 automotive positions being eliminated, 250 stem from the
restructuring begun back in 2001. The other 450 are due to current conditions.
The Torrington data center is closing, and Torrington's IT department
is being integrated with Timken's data processing operation in Canton. In all, about 75 people are
involved in those operations, and some are being offered the opportunity to relocate.
Last month, Timken revealed it is investigating the possibility of selling off Torrington's
Standard Plant, which basically includes Fafnir. The Standard Plant currently employs approximately
250 people.
• article: Timken considers sale of Torrington Standard Plant
Still, Mr. Griffith was upbeat about the Torrington acquisition. "We are getting the synergies," he said, "That part
of the plan is going well. The one place we are having problems ... is really in the base business performance
of Timken and Torrington." He added, "None of it is structural. None of it, I believe, is long-term in nature."
"We look forward to the time when we see its full potential in the bottom line of the Timken Company," said
Mr. Griffith.
Wall Street Reaction
Wall Street has not been so kind when faced with Timken's earnings surprises this year, however.
The prolonged, contentious, second-quarter earnings call was an example of what one analyst termed
"total exasperation" with Timken management, "being surprised by their own business." He told
eBearing, "Wall Street punishes bad earnings surprises far more than we reward good ones; we expect
management to come clean with investors early and often."
Following the latest announcement, both Standard & Poor's and Moody's Investor Service hinted they may
downgrade Timken's debt ratings.
Standard & Poor's Ratings Services placed Timken BBB- corporate credit and other ratings on CreditWatch
with, "negative implications." Credit Analyst Joel Levington said, "The CreditWatch placement follows
the company's announcement that it is lowering its earnings guidance for the second time in three months."
He cited fiscal year earnings projections dropping from $1.20-1.40 down to $0.80-0.90 and then to $0.45-0.60.
"As a result, it is unlikely that Timken will achieve S&P's prior expectation of EBIT to interest charge
in the 3.5x area for at least the next few quarters," said S&P, "For now, we view a potential downgrade
as most likely limited to one notch."
Moody's Investors Service announced it has placed Timken's unsecured debt ratings, currently at Baa3
and prime-3, "under review for possible downgrade."
Moody's cited three key issues: continuing cost pressure in the steel business, reduced Big 3 passenger car
production, and resolution of issues related to the Torrington acquisition, including weaker-than-expected
progress with its rationalization efforts, excessive inventories in the distribution channel, and
production issues at its Czech Republic plant.
The factors Moody's said it will consider as impacting financial performance included: progress toward debt
reduction targets, cost savings successes from the restructuring efforts, and focus on working capital
management initiatives to support cash flow.
Glenn Eisenberg, Timken's VP of Finance, showed Timken is aware of these issues by mentioning during
a conference call that, "While we're behind on our expectations in earnings, we are not behind on cash
generation. We're focused on cash balanced that are paying down our debt levels."
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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
trademarks of eBearing Inc.
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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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