The Timken Company (NYSE: TKR) today reported sales of $1.43 billion during the first quarter of 2008, an increase of 12 percent over the same period a year ago. The increase was driven by strong sales in global industrial markets, as the company benefited from its capacity-expansion initiatives, as well as the favorable impact of pricing, surcharges and currency.
First-quarter income from continuing operations was $84.5 million, or $0.88 per diluted share, compared to $74.3 million, or $0.78 per diluted share, in the first quarter of 2007. Excluding special items, income from continuing operations increased 26 percent to $78.9 million or $0.82 per diluted share for the first quarter of 2008, compared to $62.5 million or $0.66 per diluted share in the prior-year period. Strong first-quarter earnings benefited from favorable pricing, volume, mix and currency, which were partially offset by higher LIFO charges related to increased material costs. Special items, net of tax, in the first quarter of 2008 totaled $5.6 million of income compared to $11.8 million of income in the same period last year and included a gain on a real estate divestment associated with a prior plant closure, partially offset by charges related to restructuring, rationalization and impairment.
“We achieved record first-quarter earnings as execution of our strategic initiatives and a more efficient operating model allowed us to take better advantage of continued strong global demand for our industrial products,” said James W. Griffith, Timken’s president and chief executive officer. “We continue to have a positive outlook for 2008 performance as we bring more capacity online in attractive markets and advance our pricing and execution initiatives.”
During the quarter, the company:
Implemented the next wave of Project O.N.E., Timken’s business process improvement and global systems initiative, covering most of the company’s remaining U.S. and European operations;
Completed construction of a new industrial bearing manufacturing plant in Chennai, India, and a new aerospace and precision products facility in Chengdu, China, which are part of Timken’s strategy of driving growth in key global industrial markets; and
Acquired the assets of Boring Specialties Inc. (BSI), which provides steel components for the oil and gas industry, further expanding Timken’s ability to serve the growing market for high-performance energy products.
Total debt was $873.3 million as of March 31, 2008, or 29.7 percent of capital. Net debt at March 31, 2008, was $805.1 million, or 28.0 percent of capital, compared to $693.0 million, or 26.1 percent, as of Dec. 31, 2007. The increase in net debt was due to seasonal working capital requirements and strong demand. In addition, net debt increased due to acquisitions, net of divestments, during the quarter. The company expects to end 2008 with lower net debt and leverage, providing additional financial capacity to pursue strategic investments.
First-quarter financial reporting reflects changes to the company’s management structure to improve execution and accelerate profitable growth. The company operates under two major business groups, the Steel Group and the Bearings and Power Transmission Group, which includes three reporting segments – Mobile Industries, Process Industries, and Aerospace and Defense. The following group and segment results exclude special items and unallocated corporate expenses.
Bearings and Power Transmission Group Results
The Bearings and Power Transmission Group had first-quarter sales of $1.05 billion, up 13 percent from $0.93 billion for the same period last year, primarily resulting from organic growth in the Process Industries and Aerospace and Defense segments, and the favorable impact of acquisitions and currency. Earnings before interest and taxes (EBIT) for the first quarter were $93.7 million, up 72 percent from $54.5 million in the first quarter of 2007, benefiting from improvements across all three reporting segments.
Mobile Industries Segment Results
Timken’s Mobile Industries business provides products and services for the automotive, mining, agriculture, construction and rail industries. These products and services include bearings and bearing assemblies used in a range of powertrain applications, seals, lubricants, sensor systems and repair services.
In the first quarter, Mobile Industries sales were $635.3 million, an increase of 4 percent from $609.5 million for the same period a year ago. Higher sales were driven by stronger demand in the off-highway and heavy-truck market sectors, pricing and the impact of currency. These favorable factors were partially offset by lower demand from the North American light-vehicle market sector, which included the effects of a strike in the automotive industry.
EBIT was $26.6 million, up 27 percent from $20.9 million in the first quarter of 2007, driven by improved pricing, as well as the favorable impact of mix, currency and restructuring, partially offset by the effects of a strike in the automotive industry.
The company expects full-year results to improve for the Mobile Industries segment compared to the prior year, as it realizes the benefits of its pricing, portfolio-management and restructuring initiatives, which are expected to more than offset higher raw-material costs.
Process Industries Segment Results
Process Industries serves customers in power transmission, energy and heavy industry, including the metals, aggregate, cement, and pulp and paper sectors, with original equipment and aftermarket solutions. Timken’s Process Industries products are found in gear drives and a broad range of industrial machines.
Process Industries had first-quarter sales of $312.6 million, up 25 percent from $249.2 million for the same period a year ago. The increase resulted from strong demand across broad industrial market sectors, new capacity coming online and advanced customer purchases ahead of Project O.N.E. implementation. In addition, the company benefited from strong pricing and currency.
First-quarter EBIT was $59.9 million, up 121 percent from $27.1 million in the prior-year period. EBIT performance benefited from strong volume, increased capacity for large-bore products, pricing and currency. Partially offsetting these benefits were higher raw-material, manufacturing and logistics costs.
Timken expects to see continued top-line growth in the Process Industries segment in 2008 compared to 2007, particularly in market sectors where the company has focused its growth initiatives, including energy, heavy industry and distribution, as well as in Asia. The company continues to expect strong results in Process Industries for the full year compared to 2007, although lower than first-quarter levels primarily due to high raw-material costs.
Aerospace and Defense Segment Results
Timken’s Aerospace and Defense business serves the civil aviation, defense, health and machine-tool sectors with original equipment and aftermarket solutions. The company’s aerospace products are found in engines, gearboxes and helicopter transmissions.
Aerospace and Defense had first-quarter sales of $102.1 million, up 39 percent from $73.7 million for the same period last year. The increase was driven primarily by the Purdy acquisition, completed in the fourth quarter of last year, as well as strong demand and favorable pricing. Excluding the Purdy acquisition, organic Aerospace and Defense sales rose approximately 10 percent.
First-quarter EBIT was $7.2 million, up 10 percent from $6.5 million in the prior-year period. Performance benefited from the Purdy acquisition and pricing, partially offset by investments in capacity expansions, including the aerospace and precision products plant in Chengdu, China, and higher manufacturing and logistics costs associated with managing strong demand through constrained facilities.
Timken expects aerospace demand to remain strong and performance to benefit from the integration of the Purdy acquisition, improved manufacturing performance and pricing, driving margin improvement for 2008 compared to 2007.
Steel Group Results
Sales for the Steel Group, including inter-group sales, were $425.0 million, an increase of 9 percent from $390.3 million for the same period last year. Excluding the net impact of the BSI acquisition and divestment of the group’s steel tube manufacturing operations in England in 2007, sales increased 16 percent. The increase was driven by raw-material surcharges and higher demand in the energy sector, partially offset by lower demand in automotive-related sectors.
First-quarter EBIT was $53.4 million, down 19 percent from $65.5 million in the prior-year period. The company benefited from higher volume, favorable mix and surcharges, which were more than offset by the negative impact of higher LIFO expense, as well as significantly higher raw-material costs and inflation in manufacturing costs.
The company expects Steel Group performance in 2008 to be comparable to 2007, as strong demand and the favorable impact of the BSI acquisition are anticipated to be offset by LIFO expense, driven by significant inflation in the cost of raw-materials and consumables.
Outlook
The company expects earnings per diluted share for 2008, excluding special items, to be $2.75 to $2.95 for the year and $0.73 to $0.83 for the second quarter, compared to $2.40 and $0.73, respectively, for the same periods in 2007. Global industrial demand is expected to remain strong in 2008 as additional capacity comes online in key growth markets. Timken will continue to pursue pricing, portfolio management and better execution to improve operating results, which are expected to contribute to anticipated record performance for the company in 2008.
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