The Timken Company (USA; NYSE: TKR) announced financial results for third quarter 2007, ended September 30, 2007.

Sales for the quarter were USD $1.26 billion, up 6% from 2006's $1.19 billion.

COGS dipped slightly in the quarter, to 79.6% of sales from 80.1% of sales in 2006. Adding in reorganization-related COGS, however, 2007's improvement over 2006 shrinks to 80.1% of sales vs. 2006's 80.4% of sales.

SG&A held steady from 2006, at 13.4% of sales.

Adding other reorganization and impairment related expenses, operating income for 2007 third quarter was $68.5 million, or 5.4% of sales, from 2006's $69.0 million, or 5.8% of sales.

Net income in the quarter fell to $41.2 million, or 3.2% of sales, from 2006's $46.5 million, or 3.9% of sales.

Timken is in the midst of a fresh restructuring effort, involving not only divisional realignments, but also realigns manufacturing resources to market demand rather than production performance, as the last restructuring had done.

The new organization structure creates, "focused organizations, with responsibility for both customer-facing front ends and manufacturing supply chains, to improve our ability to better respond to changes in demand." It has been designed, "specifically to separate and highlight those areas where we are focusing for growth, including aerospace, process or heavy industries, distribution, and in Asia."

The other bearing operations have been lumped into a loosely related group, Mobile Industries.

The realignment's ultimate goal is to "bring focus to and to accelerate the impact of these programs to improve operational effectiveness."

article: Timken restructures
President and CEO, Jim Griffith, said: "While Timken's third quarter performance exceeded what we achieved last year, our results still fell short of what we had expected to deliver. As we move forward with our strategic initiatives, we have intensified our efforts to drive better execution across the company during a period of strong demand in multiple market sectors."

In the subsequent earnings call, Mr. Griffith said, "This performance is unacceptable."

Timken's results were all the more disappointing in light of competitors' third quarter performance. SKF, for example, turned in 13% net income rise on a 13% net increase in sales -- displaying across-the-board market strength which included automotive.

More positively, Timken said it is experiencing "unprecedented levels of demand," the downside of which has been incurring a raft of sharply higher short-term expenses in order to meet customer needs.

The spiking demand has caused those expenses to rise in areas such as training, logistics, line changeovers, and other related costs. Cost overruns were most severe in the needle and small roller bearing manufacturing operations.

Output focus has been disrupted to meet demand, too. Approximately 40% of "automotive" bearing plant production has been sent to the "industrial" segment. The current restructuring is designed to better address that situation by looking at the product line as a portfolio -- that is, selling a portfolio of bearings into the market as a whole, not just seeing them as individual automotive or industrial division items.

Other factors playing into the profit equation were rises in the costs of purchased items and raw materials, but without the ability to raise prices to compensate. Transportation and logistics costs are also up.

Those higher levels of expenses are expected to remain through fourth quarter, although they now include a massive $200 million investment to add capacity for heavy industrial bearings.

With a "significant" backlog of profitable items, Mr. Griffith said Timken expects the capacity additions to contribute strong profitability.

Other growth programs are also coming online; the new plant in Wuxi, China is ramping up, and a plant in Chennai, India is forecast to be online in early 2008. The plants also add much-needed geographically targeted capacity, serving the booming market in Asia -- where sales were up 37% from the same period in 2006.

Reversing course, the Sao Paulo, Brazil plant closing is now delayed, "until further notice" -- to capitalize on "hot" local markets. Several months ago, for example, GM predicted 2007 would be a record year for its Brazilian operations, and other bearing manufacturers are making larger investments there.

Third quarter capex of $69 million, or 5.5% of sales, far exceeded the $59 million claimed by depreciation & amortization. When capex exceeds depreciation, it is generally a sign that a company is making long-term investments in itself and expects to capitalize on strong long-term growth market opportunities.

Timken's automotive group, meanwhile, continued to be a problem area. Sales dropped 1% from 2006, impacted by the expected continuing weakness in Class 8 trucks, and by the divestiture of its steering gear business.

In addition, closing the Clinton automotive bearing plant, which is now almost complete, caused unforeseen problems. The plants receiving Clinton's production -- primarily Walhalla and Gaffney -- experienced unexpectedly steep learning curves, with the attendant disruptions and cost increases.

The transition problems came as a surprise to many, since Clinton's fate had been determined and in process for almost two years.

• 2005 article: Timken closing Clinton automotive bearing plant

Results by group (the restructuring will dramatically alter reporting as of next quarter):

Industrial -- sales in the quarter were $557 million, up 11% from 2006's $502 million.

Industrial had continued strong, with most sales gains attributed to general industrial and aerospace markets. Unlike Automotive, Industrial had some ability to raise prices, helped by demand profiles and international currency effects. Cost pressures grew from higher raw materials costs, manufacturing and logistics costs. The higher costs are expected to linger, as Industrial's market sales continue to bump against production capacity constraints.

Worldwide, manufacturers have seen very strong continuing demand for aerospace and large industrial bearings, and Timken is no different. These are also generally more profitable bearings at this point, and where capex is targeting increased capacity.

Automotive -- sales in the quarter were $361 million, down 1% from $364 million in 2006. Internally, the group turned in another loss-making quarter.

Sales to the North American light vehicle and European markets were up slightly, but offset by the expected and continued weakness in heavy-duty trucks, and the sale of Timken's steering business.

Timken said it had hoped Automotive would be profitable soon, but now can no longer say it will be profitable in 2008. Factors keeping the future potential down are long-term issues such as pricing, the overall cost structure, and the end market's long-term mix change.

Overall, Automotive is on a "fix or exit" track; the company said it will be deciding which markets to play in, and where the incremental opportunities exist to allow a return to profitability.

Steel -- sales in the quarter were $381 million, up 7% from 2006's $356 million.

Steel, and the U.S. steel industry in general, has been an outstanding place to be. Higher demand across the board has meant not only higher production volumes but also translates into an ability to pass on price increases and surcharges. Despite "wild volatility" in some scrap components, and taking a LIFO accrual for scrap value, Timken said Steel's sales and profits are well on track to set new records in 2007.



Looking ahead, Timken said cost pressures should continue but that the end market for large industrial bearings continues strong and should produce ever-stronger results as capacity ramps up and demand-driven short-term cost hits recede. Automotive will refocus on finding incremental gains which could accrue to produce future profitability. And Steel will continue on track to record results.