The Timken Company ( NYSE: TKR) has issued financial results for second quarter 2008, ended June 30, 2008.

Sales posted a new record of $1.54 billion, up more than 14% over 2007's $1.35 billion.

The company credited strong industrial market demand worldwide, more than offsetting the impact of a weakened North American automotive market. Second quarter sales also benefited from additional industrial bearing production now online, some price increases, steel surcharges, and foreign currency exchange rate effects.

Net income reached $88.9 million, from $55.3 million in second quarter 2007.

Income largely reflects the stronger sales and ability to pass on cost increases and lower expenses for restructuring efforts, although Timken still dealt with historically higher raw material costs.

In second quarter, Timken continued to focus on increasing production capacity, primarily for large industrial precision bearings, via capacity expansions at several plants around the world.

In late 2007, Timken reorganized and now reports in five segments. 2007 results have been adjusted to reflect the new organization :

Bearings and Power Transmission Group
Mobile Industries
Sales in second quarter were $628.2 million, down 1% from 2007's $632.5 million.

Mobile Industries includes bearings, power transmission components and other products and services (other than steel) to Tier 1 and Tier 2 OEMs in automotive, light trucks, medium- to heavy-duty trucks, rail cars, locomotives, agricultural, construction and mining equipment. It also includes the automotive aftermarket.

Timken said sales dipped primarily due to lower demand from the North American automakers, and lower sales to American Axle and Manufacturing due to a strike there. Those dips were partially offset by higher sales to heavy truck and off-highway markets, and by some strategic price increases.

On the cost side, Mobile Industries had higher raw materials costs, higher LIFO valuation charges, and costs related to dealing with the strike at AAM. Those pressures were partially offset by a more favorable pricing and product mix in the quarter.

In the second half of 2008, Timken said Mobile Industries sales will probably continue to decline as the North American auto industry does -- even though it expects to see sales continue to increase to heavy-truck, off-highway and the automotive aftermarket. However, pricing, portfolio management and restructuring impacts should help the division maintain its margins for the rest of the year.


Process Industries
This segment includes global sales of bearings, power transmission components and other products and services (other than steel) to the power transmission, energy and heavy industrial markets. This unit is also distributes all non-automotive aftermarket bearings.

Sales were $327.5 million, up 23% from 2007's $265.7 million.

Without foreign currency exchange effects, net sales would still have been up more than 18% in the quarter. Factors contributing to higher sales this quarter were organic volume growth -- specifically from heavy industry and power transmission markets -- aided by some strategic price increases.

Timken said Process Industries should continue to benefit from strong heavy industry and energy markets, as well as from distribution. Results will also be helped by additional production now coming online for capacity-constrained bearings.


Aerospace and Defense
This segment includes sales of bearings, helicopter transmission systems, rotor head assemblies, turbine engine components, gears, and other precision flight-critical components. Markets are entirely commercial and military aviation. The unit offers aftermarket services, such as certified overhaul and repair of engines, transmissions and fuel controls, along with aerospace bearing repair and reconditioning. Beyond aerospace and defense, the segment handles bearing sales for healthcare devices and positioning control applications.

Sales in the quarter were $105.7 million, up 42% from 2007's $74.4 million.

Organic sales growth did not factor into much of this sector's impressive 42% gain. Excluding acquisitions and foreign currency exchange effects, sales were up just 12.4% in the quarter -- and Timken said the majority of that gain was due to price increases.

This unit has received investments to add capacity at aerospace product plants in North America and China.

Looking ahead, Timken said demand should remain strong, and margins should hold steady as the Purdy acquisition and additional capacity come on stream.


Steel Group
Steel
Steel sales worldwide were $474.1 million, up 26% from $376.6 million in 2007.


A balance sheet review shows some notable changes.

Receivables rose to $909.4 million at the end of the quarter, up from $748.5 million at the beginning of the year.

Inventory growth is outpacing sales growth. Since January 1, inventory value is up 15%, or $160 million, from $1.088 billion to $1.248 billion at the end of second quarter.

Short term debt more than doubled in the first half of the year, hitting $278 million from $108 million on January 1, up $170 million. In comparison, the various long-term liabilities declined by $30 million in the same period.

Capex continues to outpace D&A, a general indication that management is committed to strengthening the business for long term growth. Capex in the quarter was $127 million vs. D&A of $117 million.

Cash flow in the quarter took a giant leap from second quarter 2007, hitting $110.1 million from a negative $7.6 million last year. However, Timken achieved that cash flow boost by securitizing receivables to the tune of $210 million, paying $45 million in financing.

Project O.N.E., begun in 2005, is designed to improve overall business processes and systems. So far, Timken has spent approximately $185 million out of the project's $220 million budget, capitalizing $108 million of that. Project O.N.E. installation is complete across most domestic U.S. and European operations.

Looking forward, Timken said continued strength in industrial markets should continue to drive organic sales increases. And while global industrial markets are expected to remain strong, any performance improvements will be hindered by raw material cost increases, as well as spending on strategic investments in Asia and Project O.N.E. Capacity expansion in Asia is designed to allow market share growth, influence major design centers, and expand Timken's sourcing options for lower cost bearings.