The Timken Company (USA; NYSE: TKR) reported financial results for fourth quarter and full fiscal year 2007.

Note that because Timken went through a major reorganization in mid year, there are no directly comparable divisional results between 2006 and 2007. Timken has restated 2006 financials in the form of 2007's reorganization, to better aid comparisons. Those are the divisional comparisons we will present.

article: Timken restructures
Sales in fourth quarter were $1.34 billion, from $1.23 billion in 2006.

For the year, sales reached $5.23 billion, up 5% from 2006's $4.97 billion

Timken credited the sales increase to, "strong sales in industrial markets and the favorable impact of currency," which were partially offset by the cost of selling off the automotive steering operations and the European steel tube manufacturing operations.

article: Timken divests automotive steering unit
With COGS holding relatively steady from fourth quarter 2006 to fourth quarter 2007, the sales increase turned into a large profit gain; gross in fourth quarter 2006 was $209 million, while gross in 2007 was $259 million.

For the full year 2007, direct COGS and COGS related to the reorganization were up, providing gross profit of $1.05 billion in 2007 against $1.01 billion in 2006.

Fourth quarter operating income in 2006 showed a $52 million loss due to $88 million in divestiture and restructuring costs; with only $7 million in related restructuring costs, 2007 operating income reversed to $71.3 million.

For the year, operating income in 2007 hit $317.6 million, up from 2006's divestiture cost impacted level of $218.6 million.

Net income for 2007's fourth quarter reached $48.3 million, from cost-impacted $35.3 million in 2006.

For the full year 2007, net income was $220.0 million, down slightly from $222.5 million in 2006.

However, 2006 was helped not only by income from now-discontinued operations but also more than $94 million in "other" income, primarily from the Continued Dumping and Subsidy Offset Act payouts. That same category of "other" income in 2007 came to only a little over $13 million.

Full Year Results By Segment (adjusted for the reorganization and discontinued operations)

Industrial Group sales in 2007 reached a record $2.3 billion, up 11% from $2.1 billion in 2006.

Timken said the increase was due primarily to favorable pricing, currency effects, and stronger demand. Sales increases came from several markets, including oil and gas, mining, metals, rail, and aerospace. Asian market growth initiatives also paid off, particularly in China where sales were up 30% from 2006.

Automotive Group sales for 2007 were $1.52 billion, down 3% from $1.57 billion in 2006.

Discounting the divested steering gear business, Automotive's sales were actually up 3% from 2006. Sales were up in international markets, but offset by a continued slump in Class 8 truck sales in North America.

Steel Group sales in 2007 were $1.56 billion, from $1.47 billion in 2006.


Timken's inventory situation soured somewhat in 2007; the company finished 2007 with $1.088 billion in inventory (4.7 turns), against $952 million (5.22 turns) at the end of 2006.

Similarly, accounts receivable rose to $748 million (52 days) at the end of 2007, from $690 million (50 days) at the end of 2006.

Capex in 2007 was $314 million, against D&A of $218 million; in 2006, capex was $296 million, against D&A of $197 million. Continued increases in capital expenditures, specifically in excess of depreciation and amortization, is generally seen a a positive indicator of management's faith in the business.


President and CEO, Jim Griffith, said: "Our financial results for 2007 reflect the strength of industrial markets and the progress we made on initiatives to shift our portfolio to markets where we can create greater shareholder value. We expect to see continued strong demand for our products and are committed to achieving improved financial performance through a combination of better execution and portfolio management."

Timken highlighted several key points about its recent change in direction, particularly progress made in shifting energy toward key growth markets, such as Asia, aerospace, distribution, wind energy, and heavy industry:

•  Capacity expansion in China, India, Romania and the U.S. to meet growing demand for large-bore and aerospace bearings

•  Acquisition of Purdy Corp., expanding presence in aircraft gearbox manufacturing and repair

•  Establishing joint venture in China to produce ultra-large-bore bearings for the wind energy market in China

•  Closing steel tube manufacturing operations in Desford, England

•  Moving ahead with bearing production restructuring; closing the plant in Clinton, South Carolina

•  Commissioning a new induction heat-treat line, focused on steel products for the energy and industrial sectors, and began a $60 million expansion for specialty small bar steel •  Realigning operations under to major business groups: Bearings and Power Transmission, and Steel Group

•  Completed the first major U.S. implementation of Project O.N.E., designed to improve the company's business processes and systems

Looking forward to 2008, steel, industrial, wind power, and aerospace are expected to continue strong, while automotive is pursuing pricing, portfolio management and continued restructuring. And additional capacity for high-demand products will be coming online to serve key markets.