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Timken Company\'s activities are divided into two principal segments. The first is anti-friction bearings and the other is steel. Timken is a leading international manufacturer of highly engineered bearings alloy and specialty steels and components as well as related products and services. The company also produces custom-made steel products including precision steel components for automotive and industrial customers. The Timken Company has a market cap of $2 billion; its shares were traded at around $20.7 with a P/E ratio of 15.5 and P/S ratio of 0.4. The dividend yield of The Timken Company stocks is 1.8%. The Timken Company had an annual average earning growth of 2% over the past 10 years. Highlight of Business Operations:Net sales for the second quarter of 2009 were approximately $0.83 billion, compared to $1.54 billion in the second quarter of 2008, a decrease of 46.0%. Net sales for the first six months of 2009 were approximately $1.79 billion, compared to $2.97 billion in the first six months of 2008, a decrease of 39.8%. Sales were lower across all business segments except for the Aerospace and Defense segment. The decrease in sales was primarily driven by lower volume and lower steel surcharges, partially offset by the impact of favorable pricing. For the second quarter of 2009, losses were $0.67 per share, compared to earnings of $0.92 per diluted share for the second quarter of 2008. For the first six months of 2009, losses were $0.66 per share, compared to earnings of $1.80 per diluted share for the first six months of 2008.
Gross profit margin decreased in the second quarter of 2009, compared to the second quarter of 2008, due to the impact of lower sales volume across most market sectors of approximately $215 million, lower steel surcharges of $175 million and higher manufacturing costs of approximately $120 million, partially offset by lower raw material costs of approximately $150 million, improved pricing and sales mix of approximately $70 million and lower logistics costs of approximately $30 million. The higher manufacturing costs were primarily driven by the Mobile Industries and Steel segments as a result of the underutilization of plant capacity. The lower raw material costs are primarily due to lower scrap steel costs as scrap steel and other raw material costs have fallen in 2009 from historically high levels in 2008.
Gross profit margin decreased in the first six months of 2009, compared to the first six months of 2008, due to the impact of lower sales volume across most market sectors of approximately $330 million, lower steel surcharges of $255 million and higher manufacturing costs of approximately $220 million, partially offset by lower raw material costs of approximately $200 million, improved pricing and sales mix of approximately $140 million and lower logistics costs of approximately $55 million.
In March 2009, the Company announced the realignment of its organization to improve efficiency and reduce costs as a result of the economic downturn. The Company had targeted pretax savings of approximately $30 million to $40 million in annual selling and administrative costs. In April 2009, in light of the Company’s revised forecast indicating significantly reduced sales and earnings for the year, the Company expanded the target to approximately $80 million. The implementation of these savings began in the first quarter of 2009 and is expected to be substantially completed by the end of the fourth quarter of 2009, with full-year savings expected to be achieved in 2010. As the Company streamlines its operating structure, it expects to cut up to 400 sales and administrative associate positions in 2009, incurring severance costs of approximately $15 million to $20 million. During the second quarter and first six months of 2009, the Company recorded $9.0 million and $11.3 million, respectively, of severance and related benefit costs related to this initiative to eliminate approximately 270 associates. Of the $9.0 million charge for the second quarter of 2009, $4.6 million related to the Mobile Industries segment, $1.8 million related to the Process Industries segment, $0.8 million related to the Aerospace and Defense segment, $1.1 million related to the Steel segment and $0.7 million related to Corporate. Of the $11.3 million charge for the first six months of 2009, $5.1 million related to the Mobile Industries segment, $2.0 million related to the Process Industries segment, $0.8 million related to the Aerospace and Defense segment, $1.5 million related to the Steel segment and $1.9 million related to Corporate.
During the second quarter and first six months of 2009, the Company recorded $11.8 million and $19.2 million, respectively, in severance and related benefit costs, including a curtailment of pension benefits of $1.6 million for the first six months of 2009, to eliminate approximately 1,900 associates to properly align its business as a result of the current downturn in the economy and expected market demand. Of the $11.8 million charge, $7.6 million related to the Mobile Industries segment, $1.8 million related to the Process Industries segment, $0.7 million related to the Aerospace and Defense segment and $1.7 million related to the Steel segment. Of the $19.2 million charge, $14.2 million related to the Mobile Industries segment, $2.6 million related to the Process Industries segment, $0.7 million related to the Aerospace and Defense segment and $1.7 million related to the Steel segment.
In March 2007, the Company announced the planned closure of its manufacturing facility in Sao Paulo, Brazil. The closure of this manufacturing facility was subsequently delayed to serve higher customer demand. However, with the current downturn in the economy, the Company believes it will close this facility before the end of 2010. This closure is targeted to deliver annual pretax savings of approximately $5 million, with expected pretax costs of approximately $25 million to $30 million, which includes restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses. Due to the delay in the closure of this manufacturing facility, the Company expects to realize the $5 million of annual pretax savings before the end of 2010, once this facility closes. Mobile Industries has incurred cumulative pretax costs of approximately $20.0 million as of June 30, 2009 related to this closure. During the second quarter and first six months of 2009, the Company recorded $0.6 million and $1.2 million, respectively, of severance and related benefit costs and exit cost of $0.8 million associated with the planned closure of the Company’s Sao Paulo, Brazil manufacturing facility. During the first six months of 2008, the Company recorded $1.0 million of severance and related benefit costs associated with the planned closure of the Company’s Sao Paulo, Brazil manufacturing facility.
Read the The complete ReportTKR is in the portfolios of John Keeley of Keeley Fund Management, NWQ Managers of NWQ Investment Management Co, John Hussman of Hussman Economtrics Advisors, Inc., Richard Aster Jr of Meridian Fund.
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