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| TKR > SEC Filings for TKR > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
On July 29, 2009, the Company announced it had signed an agreement to sell the
assets of its Needle Roller Bearings (NRB) operations to JTEKT Corporation. Upon
closing of the transaction, which is expected to occur by the end of 2009
subject to customary regulatory approvals and the satisfaction or waiver of
other closing conditions, the Company will receive approximately $330 million in
cash proceeds for these operations (including certain receivables to be retained
by the Company), subject to working capital adjustments. The NRB operations
manufacture highly engineered needle roller bearings, including an extensive
range of radial and thrust needle roller bearings, as well as bearing assemblies
and loose needles, for automotive and industrial applications. The NRB
operations have facilities in the United States, Canada, Europe and China. The
NRB operations had 2008 sales of approximately $620 million and were previously
included in the Company's Mobile Industries, Process Industries and Aerospace
and Defense reportable segments. The Mobile Industries segment accounted for
approximately 80 percent of the 2008 sales of the NRB operations. The results of
operations were reclassified as Discontinued Operations during the third quarter
of 2009 as the NRB operations met all the criteria for discontinued operations,
including assets held for sale. Previous results for 2009 and 2008 have been
reclassified to conform to the presentation under Discontinued Operations. The
Company incurred a pretax impairment loss of approximately $33.7 million during
the third quarter of 2009 as the projected proceeds from the sale of NRB
operations were lower than net book value of the net assets expected to be
transferred as a result of sale of the NRB operations to JTEKT Corporation.
Refer to Note 18 - Divestitures in the Notes to Consolidated Financial
Statements for additional discussion.
Financial Overview
Overview:
3Q 2009 3Q 2008 $ Change % Change
(Dollars in millions, except earnings
per share)
Net sales $ 763.6 $ 1,336.4 $ (572.8 ) (42.9 )%
(Loss) income from continuing operations (18.9 ) 125.0 (143.9 ) (115.1 )%
(Loss) income from discontinued
operations (30.8 ) 6.5 (37.3 ) (573.8 )%
Income attributable to noncontrolling
interest 0.4 1.1 (0.7 ) (63.6 )%
Net (loss) income attributable to The
Timken Company (50.1 ) 130.4 (180.5 ) (138.4 )%
Diluted (loss) earnings per share:
Continuing operations $ (0.20 ) $ 1.28 $ (1.48 ) (115.6 )%
Discontinued operations (0.32 ) 0.07 (0.39 ) (557.1 )%
Diluted (loss) earnings per share $ (0.52 ) $ 1.35 $ (1.87 ) (138.7 )%
Average number of shares - diluted 96,176,091 96,103,130 - 0.1 %
YTD 2009 YTD 2008 $ Change % Change
(Dollars in millions, except earnings
per share)
Net sales $ 2,367.0 $ 3,942.8 $ (1,575.8 ) (40.0 )%
(Loss) income from continuing operations (58.8 ) 280.7 (339.5 ) (120.9 )%
(Loss) income from discontinued
operations (59.9 ) 26.1 (86.0 ) NM
(Loss) income attributable to
noncontrolling interest (4.9 ) 3.0 (7.9 ) (263.3 )%
Net (loss) income attributable to The
Timken Company (113.8 ) 303.8 (417.6 ) (137.5 )%
Diluted (loss) earnings per share:
Continuing operations $ (0.56 ) $ 2.87 $ (3.43 ) (119.5 )%
Discontinued operations (0.62 ) 0.27 (0.89 ) (329.6 )%
Diluted (loss) earnings per share $ (1.18 ) $ 3.14 $ (4.32 ) (137.6 )%
Average number of shares - diluted 96,111,847 95,968,659 - 0.1 %
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Net sales for the third quarter of 2009 were approximately $0.76 billion,
compared to $1.34 billion in the third quarter of 2008, a decrease of 42.9%. Net
sales for the first nine months of 2009 were approximately $2.37 billion,
compared to $3.94 billion in the first nine months of 2008, a decrease of 40.0%.
Sales were lower across all business segments for the third quarter of 2009.
Sales for the first nine months of 2009 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 surcharges in the Steel segment,
partially offset by the impact of favorable pricing.
The Company's third quarter and first nine months results reflect the
deterioration of most market sectors as a result of the current global economic
downturn. The impact of lower volume and higher restructuring charges, as a
result of actions taken to align the Company's businesses with current demand,
was partially offset by lower raw material costs and lower selling and
administrative costs. Additionally, the Company's results from continuing
operations for the first nine months of 2008 reflected a pretax gain of
$20.2 million on the sale of the Company's former seamless steel tube
manufacturing facility located in Desford, England.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Outlook
The Company's outlook for 2009 reflects a deteriorating global economic climate
that is expected to last through the remainder of the year, impacting most of
the Company's market sectors. Lower sales, compared to 2008, are expected in all
business segments except for the Aerospace and Defense segment. A significant
portion of the decrease in Steel segment sales is expected to be due to lower
surcharges to recover raw material and energy costs, which were at historically
high levels during the middle of 2008, but declined dramatically towards the end
of 2008. The Company's results will continue to reflect lower margins as a
result of the lower volume and surcharges, partially offset by improved pricing,
lower raw material costs and lower selling, administrative and general expenses.
In the first quarter of 2009, the Company announced that it planned to eliminate
approximately 400 sales and administrative salaried positions and implement
other cost savings initiatives that are targeted to save approximately
$80 million in annual selling and administrative expenses.
The Company expects to generate cash from operations for the full year of 2009
as a result of working capital reductions and lower income taxes, partially
offset by higher pension contributions. In addition, the Company expects to
reduce capital expenditures by approximately 50% in 2009, compared to 2008.
The Statement of Income
Sales by Segment:
3Q 2009 3Q 2008 $ Change Change
(Dollars in millions)
Mobile Industries $ 327.6 $ 426.5 $ (98.9 ) (23.2 )%
Process Industries 186.4 316.9 (130.5 ) (41.2 )%
Aerospace and Defense 100.2 104.7 (4.5 ) (4.3 )%
Steel 149.4 488.3 (338.9 ) (69.4 )%
Total Company $ 763.6 $ 1,336.4 $ (572.8 ) (42.9 )%
YTD 2009 YTD 2008 $ Change Change
(Dollars in millions)
Mobile Industries $ 920.4 $ 1,397.6 $ (477.2 ) (34.1 )%
Process Industries 616.9 895.6 (278.7 ) (31.1 )%
Aerospace and Defense 318.7 302.2 16.5 5.5 %
Steel 511.0 1,347.4 (836.4 ) (62.1 )%
Total Company $ 2,367.0 $ 3,942.8 $ (1,575.8 ) (40.0 )%
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Net sales for the third quarter of 2009 decreased $572.8 million, or 42.9%,
compared to the third quarter of 2008, primarily due to lower volume of
approximately $420 million across all business segments, lower surcharges in the
Steel segment of approximately $215 million and the effect of foreign currency
exchange rate changes of approximately $15 million, partially offset by improved
pricing and favorable sales mix of approximately $55 million.
Net sales for the first nine months of 2009 decreased $1.58 billion, or 40.0%,
compared to the first nine months of 2008, primarily due to lower volume of
approximately $1.2 billion across all business segments, except for the
Aerospace and Defense segment, lower surcharges in the Steel segment of
approximately $475 million and the effect of foreign currency exchange rate
changes of approximately $145 million. These decreases were partially offset by
improved pricing and favorable sales mix of approximately $180 million.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Gross Profit:
3Q 2009 3Q 2008 $ Change Change
(Dollars in millions)
Gross profit $ 129.6 $ 381.5 $ (251.9 ) (66.0 )%
Gross profit % to net sales 17.0 % 28.6 % - (1,160 ) bps
Rationalization expenses included in cost
of products sold $ 1.0 $ 0.3 $ 0.7 NM
YTD 2009 YTD 2008 $ Change Change
(Dollars in millions)
Gross profit $ 409.5 $ 974.0 $ (564.5 ) (58.0 )%
Gross profit % to net sales 17.3 % 24.7 % - (740 ) bps
Rationalization expenses included in cost
of products sold $ 3.6 $ 1.8 $ 1.8 100.0 %
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Gross profit decreased in the third quarter of 2009, compared to the third
quarter of 2008, due to the impact of lower sales volume across most market
sectors of approximately $190 million, lower surcharges in the Steel segment of
$215 million and higher manufacturing costs of approximately $50 million,
partially offset by lower raw material costs of approximately $195 million,
improved pricing and sales mix of approximately $20 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 decreased in the first nine months of 2009, compared to the first
nine months of 2008, due to the impact of lower sales volume across most market
sectors of approximately $445 million, lower surcharges in the Steel segment of
$475 million and higher manufacturing costs of approximately $250 million,
partially offset by lower raw material costs of approximately $400 million,
improved pricing and sales mix of approximately $145 million and lower logistics
costs of approximately $85 million.
In the third quarter and the first nine months of 2009, rationalization expenses
included in cost of products sold primarily related to the continued
rationalization of Process Industries' Canton, Ohio bearing manufacturing
facilities. In the third quarter and first nine months of 2008, rationalization
expenses included in cost of products sold primarily related to certain Mobile
Industries' domestic manufacturing facilities, the closure of the Company's
seamless steel tube manufacturing operations located in Desford, England and the
continued rationalization of Process Industries' Canton, Ohio bearing
manufacturing facilities. Rationalization expenses in the respective periods of
2009 and 2008 primarily consisted of accelerated depreciation and relocation of
equipment.
Selling, Administrative and General Expenses:
3Q 2009 3Q 2008 $ Change Change
(Dollars in millions)
Selling, administrative and general expenses $ 107.2 $ 176.5 $ (69.3 ) (39.3 )%
Selling, administrative and general expenses
% to net sales 14.0 % 13.2 % - 80 bps
Rationalization expenses included in selling,
administrative and general expenses $ 0.5 $ (0.4 ) $ 0.9 NM
YTD 2009 YTD 2008 $ Change Change
(Dollars in millions)
Selling, administrative and general expenses $ 358.7 $ 517.6 $ (158.9 ) (30.7 )%
Selling, administrative and general expenses
% to net sales 15.2 % 13.1 % - 210 bps
Rationalization expenses included in selling,
administrative and general expenses $ 1.6 $ 1.7 $ (0.1 ) (5.9 )%
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The decrease in selling, administrative and general expenses in the third quarter of 2009, compared to the third quarter of 2008, was primarily due to restructuring initiatives and lower discretionary spending on items such as travel and professional fees of approximately $45 million and lower performance-based compensation of approximately $20 million. The decrease in selling, administrative and general expenses in the first nine months of 2009, compared to the first nine months of 2008, was primarily due to restructuring initiatives and lower discretionary spending on items such as travel and professional fees of approximately $100 million, lower performance-based compensation of approximately $40 million and lower bad debt expense of approximately $15 million.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
In the third quarter and first nine months of 2009, the rationalization expenses
included in selling, administrative and general expenses primarily related to
exit costs for associates exiting the Company. In the third quarter and first
nine months of 2008, the rationalization expenses included in selling,
administrative and general expenses primarily related to the rationalization of
the Process Industries' Canton, Ohio bearing facilities and costs associated
with vacating the Torrington, Connecticut office complex.
Impairment and Restructuring Charges:
3Q 2009 3Q 2008 $ Change
(Dollars in millions)
Impairment charges $ - $ - $ -
Severance and related benefit costs 18.8 0.5 18.3
Exit costs 0.8 1.9 (1.1 )
Total $ 19.6 $ 2.4 $ 17.2
YTD 2009 YTD 2008 $ Change
(Dollars in millions)
Impairment charges $ 34.8 $ 0.1 $ 34.7
Severance and related benefit costs 46.3 3.7 42.6
Exit costs 3.0 3.7 (0.7 )
Total $ 84.1 $ 7.5 $ 76.6
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The following discussion explains the major impairment and restructuring charges
recorded for the periods presented; however, it is not intended to reflect a
comprehensive discussion of all amounts in the tables above. See Note 12 -
Impairment and Restructuring for further details by segment.
Selling and Administrative Cost Reductions
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 first nine months of 2009,
the Company recorded $10.6 million of severance and related benefit costs
related to this initiative to eliminate approximately 270 associates. Of the
$10.6 million charge for the first nine months of 2009, $4.5 million related to
the Mobile Industries segment, $1.9 million related to the Process Industries
segment, $0.6 million related to the Aerospace and Defense segment, $1.5 million
related to the Steel segment and $2.1 million related to Corporate.
Manufacturing Workforce Reductions
During the third quarter and first nine months of 2009, the Company recorded
$13.6 million and $28.8 million, respectively, in severance and related benefit
costs, including a curtailment of pension benefits of $1.6 million for the first
nine months of 2009, to eliminate approximately 3,000 associates to properly
align its business as a result of the current downturn in the economy and
expected market demand. Of the $13.6 million charge, $10.3 million related to
the Mobile Industries segment, $2.3 million related to the Process Industries
segment and $1.0 million related to the Aerospace and Defense segment. Of the
$28.8 million charge, $20.6 million related to the Mobile Industries segment,
$4.8 million related to the Process Industries segment, $1.7 million related to
the Aerospace and Defense segment and $1.7 million related to the Steel segment.
Bearings and Power Transmission Reorganization
In August 2007, the Company announced the realignment of its management
structure. During the first quarter of 2008, the Company began to operate under
two major business groups: the Steel Group and the Bearings and Power
Transmission Group. The Bearings and Power Transmission Group includes three
reportable segments: Mobile Industries, Process Industries and Aerospace and
Defense. The Company realized pretax savings of approximately $18 million in
2008 as a result of these changes. During the first nine months of 2008, the
Company recorded $1.9 million of severance and related benefit costs related to
this initiative. The majority of the severance charge related to the Mobile
segment.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Torrington Campus
On July 20, 2009, the Company sold the remaining portion of its Torrington,
Connecticut office complex. In anticipation of the loss that the Company
expected to record upon completion of the sale of the office complex, the
Company recorded an impairment charge of $6.4 million during the second quarter
of 2009. During the third quarter of 2009, the Company recorded an additional
loss of approximately $0.7 million in Other (expense) income, net on the sale of
the remaining portion of this office complex.
Mobile Industries
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 $22.0 million
as of September 30, 2009 related to this closure. During the third quarter and
first nine months of 2009, the Company recorded $1.3 million and $2.5 million,
respectively, of severance and related benefit costs and exit costs of
$0.7 million and $1.5 million, respectively, associated with the planned closure
. . .
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