CANTON, Ohio — The Timken Co. has reported sales of $828.9 million for the second quarter of 2009, a decrease of 46 percent over the same period a year ago. The decline in sales was due to weaker demand across most of the company’s end-markets, lower steel surcharges and currency, which were partially offset by improved pricing. 
For the quarter, the company incurred a loss of $64.5 million, or 67 cents per share, compared with income of $88.9 million, or 92 cents per diluted share, a year ago. Excluding special items, the second-quarter loss was $20.6 million, or 21 cents per share, compared with the prior-year’s income of $92.4 million or 96 cents per diluted share. The results reflect lower sales volume and manufacturing utilization, which were partially offset by favorable pricing and cost-reduction initiatives.
Special items, net of tax, in the second quarter of 2009 amounted to $43.9 million of expense, compared with charges totaling $3.5 million in the same period last year. Special items in 2009 include a pre-tax, non-cash impairment charge of $31.7 million, primarily related to the ongoing consolidation of the Canton, Ohio, bearing operations, as well as severance costs related to the company’s cost-reduction initiatives. The 2008 special items included manufacturing rationalization, impairment and restructuring charges.
“The combination of a slow economy and inventory reduction throughout the supply chains we serve continues to curb demand for our products. We’re now seeing evidence that our customers’ inventory de-stocking activities may go longer and deeper than we expected,” said James Griffith, Timken president and chief executive officer. “We have decreased manufacturing output in response to lower demand and are on track in our efforts to right-size the company. We’ve also had success in product pricing, reducing inventory levels and cutting spending across the company, leading to strong cash generation for the quarter. We have positioned the company well, and are confident that we will see stronger structural profitability as markets stabilize.”
Earlier this year, the company announced a series of actions to realign the organization and reduce overhead, staffing levels and administrative costs, the majority of which were completed in the second quarter. The company said it remains on track to deliver the annualized savings of approximately $80 million associated with these actions, and is taking additional steps to respond to weaker market conditions.
The company continues to maintain a strong balance sheet with ample liquidity. In addition to cash and cash equivalents of $277.1 million at June 30, the company had approximately $830 million available under various credit lines. On July 10, the company entered into a three-year, $500-million unsecured senior credit facility to replace the company’s previous credit facility, which was set to expire on June 30, 2010.
Total debt was $592.5 million as of June 30, or 27 percent of capital. Net debt at June 30, was $315.5 million, or 16.5 percent of capital, compared with $490.5 million, or 22.8 percent, as of Dec. 31, 2008. During the quarter the company generated cash flow from operating activities of $220.3 million, driven primarily by inventory reductions.
Agreement to Sell Needle Roller Bearings Business
Yesterday, the company announced it signed an agreement to sell the assets of its Needle Roller Bearings business to JTEKT Corp., a Toyota affiliate. “This transaction is a major step forward in our strategy to transform Timken’s portfolio to focus on industrial sectors with strong aftermarkets,” said Griffith.
In 2008, the Needle Roller Bearings business had approximately $620 million in sales, comprising around 11 percent of the company’s overall revenues. In the first half of 2009, sales were about $185 million. The business employs roughly 3,400 people and manufactures highly engineered needle roller bearings, primarily serving the automotive original equipment market sector.
Timken will receive cash proceeds of approximately $330 million upon completion, subject to adjustments for working capital. The transaction is expected to close by the end of the year, subject to the satisfaction of certain closing conditions. The business’ current book value is approximately $385 million. The results of the Needle Roller Bearings business will be reclassified to discontinued operations beginning in the third quarter of 2009.
Outlook
While the economic outlook continues to remain uncertain, the company expects the impact of the global recession to be greater than previously anticipated, due not only to the depth and breadth of decline across end-markets, but also the compounding factor of inventory de-stocking throughout the supply chain. Mobile Industries sales are expected to be down approximately 35 to 40 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 30 to 35 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 roughly 5 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. Steel Group sales are expected to decline approximately 60 to 65 percent for the year due to lower demand and surcharges across all sectors.
As a result of the company’s global market outlook, it reduced its earnings estimate for 2009, now expecting earnings per share, excluding special items, to be a loss of 40 cents to 90 cents. The company remains on track to deliver strong cash from operations in 2009, driven by effective working capital management and reduced spending.
