CANTON, Ohio — The Timken Co. today reported sales of $960.4 million during the first quarter of 2009, a decrease of 33 percent over the same period a year ago. Significant volume declines due to weaker demand across most of the company’s end-markets and the impact of lower surcharges and currency more than offset benefits from pricing and mix.
First quarter net income was $0.9 million, or 1 cent per diluted share, compared with $84.5 million, or 88 cents per diluted share, in the first quarter of 2008. Excluding special items, net income was $7.1 million or 7 cents per diluted share for the first quarter of 2009, compared with $78.9 million or 82 cents per diluted share in the prior-year period. Lower first-quarter earnings reflect decreased demand across most of the company’s market sectors and the timing impact of the company’s material surcharge recovery mechanism. Partially offsetting these items were favorable pricing, mix, and lower selling, general and administrative costs.
Special items, net of tax, in the first quarter of 2009 totaled $6.2 million of expense compared with $5.6 million of income in the same period last year. Special items in 2009 were primarily related to severance and impairment charges, while 2008 included a gain on a sale of assets.
“It’s now clear that the impact of the recession on the demand for our products will be deeper and longer lasting than we anticipated. In the short-term, we are managing the company with a heightened emphasis on cash flow,” said James Griffith, Timken president and chief executive officer. “At the same time, we are taking actions to structure the company for profitability, even at current levels of demand, including efforts to strengthen our portfolio while improving the competitiveness of our manufacturing base.”
The company has doubled its targeted reduction in selling and administrative costs to approximately $80 million annually. This will be achieved through reductions in professional staff, overhead costs and discretionary expenditures. In addition, compensation costs are expected to be down approximately $60 million in 2009 associated with the company’s performance-based incentive plans.
The company also is implementing further reductions in its manufacturing workforce targeted to better align capacity with demand. By the end of this year, the total reduction in operative and professional employment is expected to exceed 7,000 positions, or more than 25 percent of the workforce since the beginning of 2008. During 2009, the company expects to record special charges of approximately $70 million primarily associated with these actions.
The company continues to maintain a strong balance sheet with ample liquidity. In addition to cash and cash equivalents of $112 million at March 31, the company had approximately $900 million available under various credit facilities.
Total debt was $630.3 million as of March 31, or 28.1 percent of capital. Net debt at March 31, was $518.3 million, or 24.3 percent of capital, compared with $507.5 million, or 23.4 percent, as of Dec. 31, 2008. During the quarter the company generated cash flow from operating activities of $37.4 million, driven by inventory reductions. The company expects to end 2009 with lower net debt and leverage than last year, providing additional financial flexibility.
The company now expects the impact of the global recession to continue through the rest of the year with sales in most of its market sectors being down significantly from last year. Steel Group sales are expected to decline approximately 55 to 65 percent for the year due to lower surcharges and demand across all sectors. Mobile Industries sales are expected to be down approximately 30 to 35 percent for the year, driven by lower North American light-vehicle production, and significant declines in heavy-truck builds in North America and Europe. Process Industries sales are expected to be down by about 25 to 30 percent in 2009, with broad-based volume declines in most end-markets, especially heavy industrial equipment. Sales in the Aerospace and Defense segment are expected to be up approximately 5 to 10 percent for 2009, driven by a strong defense sector, while recent softening in the civil sector is expected to have a minimal effect given current order backlogs.
As a result of the company’s global market outlook, it now expects earnings per diluted share for 2009, excluding special items, to be (15 cents) to 15 cents. Despite the lower earnings outlook, the company expects to generate strong cash from operations in 2009, driven by lower working capital. In addition, the company will significantly reduce capital spending from 2008 levels, and will continue to take the actions required to manage in the current environment while maintaining its strong liquidity and balance sheet.