Timken Slashing Automotive Bearing Group

The Timken Company (USA; NYSE: TKR) announced today it will take more aggressive action in response to continued production cuts across the North American auto industry, hurting its already troubled Automotive Group. Beginning immediately, Automotive will slash approximately 700 workers, or about 5% of its workforce. The cuts will be complete by the end of the fourth quarter, which ends December 31; the company clarified that there are no severance-related costs tied to the layoffs; all of the cuts are operational and volume-driven. Timken also said periodic plant shutdowns are now likely, although no further details about that aspect of the program were given. The continued problems plaguing Automotive stand in contrast to Industrial, which continues to ride the wave of worldwide industrial and rail market strength. Timken's Steel operations will also be impacted, but executives said the steel business is far better positioned to shift production away from automotive-related production to other markets and businesses. While Steel once had a 30% sales exposure to North American automotive, today that figure is down to less than 20%. In fact, management indicated steel is still on track for another record year. But it is Timken's exposure to the deeply troubled North American auto industry causing headaches today. While all Big Three sales are hurting, pickup trucks and SUV's are down particularly sharply. Today's announcement is based on Timken seeing not only the expected automotive volume declines, but also "dramatic" up-front production cuts. Currently, 67% of the Automotive bearing group's sales are to the Big Three North American automakers; to date, their volume is down by as much as 50%. Troubles at GM and Ford have been widely known and forecast by Timken and automotive suppliers, Timken said it was surprised by the unexpected announcement of a sharp North American sales decline by DaimlerChrysler; vehicle output for DaimlerChrysler will be cut by at least 14%. Heavy-duty trucks, another traditionally strong market for Timken, is also hurting. Jacqueline Dedo, head of Automotive, indicated Timken has been expecting and planning for at least 26% cutbacks in North American heavy-duty truck production. The need for a structural shift in bearing production toward higher value industrial items is particularly clear in heavy-duty, where she said demand is not expected to return in 2007. While Timken is experiencing direct cutbacks by OEMs, the domino effect by Tier 2 suppliers and other levels of OEM-related sales are exacerbating the slide. The company warned third quarter earnings, for the period ended September 30, 2006, will not meet former predictions of $0.70 to $0.75 per share, but instead will come in around $0.50 to $0.55 per share. For the year, earnings projections are cut more sharply, to a range of $2.60 to $2.75 per share, from earlier estimates of $3.00 to $3.15 per share. 2005 diluted EPS was $2.81 per share. President and CEO, Jim Griffith, said: "The widening decline in North American auto industry production has had a significant impact on our performance. This structural auto industry shift reinforces our resolve to diversify our corporate portfolio and customer mix." Mr Griffith went on: "In addition to our previously announced restructuring, we are taking new steps to offset the impact of the further decline in sales, including a workforce reduction of approximately 700 positions, or about five percent of our Automotive Group employment. Moreover, we continue to advance our strategy to expand in global industrial markets, which is contributing to the strong overall performance of the company in 2006." Ms. Dedo said Automotive group's ongoing restructuring is on track; two plants and 700 jobs will be incremental to that program. Mr. Griffith added the past year's efforts in Automotive have been focused on reducing fixed costs, while the new focus will be on reducing variable costs and production in line with up-front OEM forecasts. Many believe it will be difficult for Timken to directly tease Automotive out of many facilities. In its global manufacturing initiative, bearing production is awarded to Timken plants worldwide based on competitiveness, not necessarily on the basis of a particular item's primary market as industrial-related or automotive-related. Mr. Griffith said that although the up-front cuts were 700 jobs, the company is looking at restructuring, different product use, or different market use, for each impacted facility. On the industrial side, for Timken to grow market share significantly, it will need to focus on its strengths and follow the example set by market leader SKF. In particular, SKF has a commanding lead in profitable value-added products and services, such as condition monitoring and lubrication systems. Industrial is currently running a strong growth cycle, with record sales in 2006 and record margins expected to continue contributing to Timken's bottom line. Mr. Griffith said industrial bearing capacity is being added, but to what extent the automotive capacity can and will be converted to industrial is unclear. The general push, he said, will be to accelerate the move already in progress to reduce dependence on OEM automotive-related bearing sales, and to the Big Three in particular. Instead, capacity will shift to meeting industrial market demand and easing capacity-constrained industrial production sources. As that happens, Timken expects to see both sales and margins improve. Timken executives said there will be more concrete information about the automotive group and its related initiatives in the upcoming third quarter earnings release and call.