Business Context and Reporting Period
Company: The Timken Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: A global manufacturer of anti-friction bearings, power transmission components, and alloy steels. Operations are divided into four segments: Mobile Industries, Process Industries, Aerospace and Defense, and Steel.
Key Financial Metrics
| Metric (in millions) | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Sales | $828.9 | $1,535.5 | $1,789.3 | $2,970.2 |
| Gross Profit | $118.8 | $343.7 | $271.0 | $655.3 |
| Gross Margin % | 14.3% | 22.4% | 15.1% | 22.1% |
| Operating (Loss) Income | $(78.4) | $145.3 | $(80.0) | $276.1 |
| Net (Loss) Income (Attributable to Timken) | $(64.5) | $88.9 | $(63.6) | $173.4 |
| Diluted EPS | $(0.67) | $0.92 | $(0.66) | $1.80 |
| Cash and Cash Equivalents | $277.1 | $133.4 | $277.1 | $93.4 |
| Total Debt | $592.6 | $623.9 | $592.6 | $623.9 |
| Net Debt | $315.5 | $490.5 | $315.5 | $490.5 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 46.0% in Q2 2009 and 39.8% YTD 2009 compared to the prior year. This was driven by a significant drop in volume (approx. $560M in Q2), lower steel surcharges (approx. $175M in Q2), and unfavorable foreign currency impacts.
- Profitability Collapse: The company reported a net loss of $64.5 million in Q2 2009, a reversal from a net income of $88.9 million in Q2 2008. Operating loss was $78.4 million.
- Restructuring and Impairment: Impairment and restructuring charges totaled $54.9 million in Q2 2009 (vs. $1.8 million in Q2 2008) and $69.7 million YTD 2009. Major charges included $31.7 million in impairment charges and $21.7 million in severance costs.
- Segment Performance:
- Mobile Industries: Sales down 41.8%; Adjusted EBIT loss of $36.4 million.
- Steel: Sales down 72.8%; Adjusted EBIT loss of $32.9 million, driven by lower surcharges and volume.
- Process Industries: Sales down 32.5%; Adjusted EBIT of $37.6 million.
- Aerospace and Defense: The only segment with sales growth (up 7.1%); Adjusted EBIT increased to $19.5 million.
- Working Capital: Cash provided by operating activities increased significantly to $253.4 million YTD 2009 (vs. $90.7 million YTD 2008), primarily due to reductions in inventory ($228M cash provided) and accounts receivable ($148M cash provided).
Guidance, Outlook, and Risks
- Outlook: Management expects a deteriorating global economic climate to persist through 2009. Sales are expected to decrease in all segments except Aerospace and Defense. The Steel segment expects a 60-70% sales decrease for the remainder of 2009.
- Cost Reduction: The company plans to eliminate approximately 400 sales/administrative positions and 1,900 manufacturing positions to align with demand, targeting $80 million in annual selling and administrative savings.
- Capital Expenditures: Expected to decrease by approximately 50% in 2009 compared to 2008.
- Divestiture: On July 29, 2009, the company signed an agreement to sell its Needle Roller Bearings (NRB) operations to JTEKT Corporation for approx. $330 million. The company expects to incur a loss on sale of $20 million to $60 million, to be recognized in Q3 2009.
- Liquidity: The company maintains a strong liquidity position with $536.2 million in committed credit facilities available. It entered a new $500 million Senior Credit Facility in July 2009.
- Risks: Key risks include continued global economic weakness, customer bankruptcies (specifically in the automotive sector), inability to refinance $250 million in notes maturing in Feb 2010, and potential work stoppages at Canton, Ohio facilities.
Investor Verification Checklist
- NRB Divestiture Closing: Verify the closing of the Needle Roller Bearings sale to JTEKT and the final loss on sale amount.
- Debt Refinancing: Monitor the refinancing of the $250 million fixed-rate unsecured notes maturing in February 2010 amidst tight credit markets.
- Restructuring Execution: Track the progress of the $80 million cost-saving initiative and the associated workforce reductions.
- LIFO Impact: Verify the year-end LIFO inventory valuation for the Steel segment, which is expected to generate approx. $32 million in LIFO income for 2009.
- Covenant Compliance: Confirm continued compliance with the new Senior Credit Facility covenants (leverage, interest coverage, tangible net worth) effective Q3 2009.