Timken Reports Fourth Quarter and Fiscal 2003 Results

The Timken Company (USA) reported fourth quarter and fiscal year 2003 financial results, reflecting their February 2003 acquisition of Torrington from Ingersoll-Rand. Sales for the year, including Torrington, were up 49% to USD $3.8 billion. Excluding Torrington, sales of Timken products rose 8% for the year, 5% representing organic growth and 3% the effects of foreign currency translation. Torrington-related sales were $1.03 billion in 2003, down from $1.2 billion reported for Torrington's 2002 sales when it was a division of Ingersoll-Rand. Torrington's 2001 sales had been $1.08 billion. Net income in fiscal 2003 was $36.5 million, down slightly from $38.7 million earned in 2002. Even though combined operating income started out $20 million higher, factors such as a $17 million increase in interest expense combined to drive down net from 2002's level. Combined fourth quarter sales were $1.02 billion, up from $645 million in 2002. Excluding Torrington, Timken sales grew by 10% over fourth quarter 2002, 6% of which was organic growth and 4% related to currency translation. Fourth quarter combined net income was $22.5 million, down significantly from $36.5 million earned in fourth quarter 2002. Overall, President and CEO Jim Griffith said, "2003 was a pivotal year for The Timken Company. Our $840 million strategic acquisition of Torrington was accretive to earnings and added $1 billion in new sales. We leveraged our balance sheet higher to purchase Torrington with debt peaking at more than $1 billion during the year, but we have since reduced this level by nearly $300 million. While we were disappointed in our 2003 earnings performance, the year ended with signs of improvement." Recognizing that most of the challenges and opportunities in 2004 are internal, Mr. Griffith said, "The improvements in our performance will be driven by Timken, not the markets." Looking to 2004, Timken's earnings release stated, "We expect improved performance in 2004 across all three segments. North American industrial markets are expected to grow slowly from low 2003 levels, while strong growth is expected in emerging markets. North American automotive production is expected to be up slightly. Medium and heavy truck should strengthen further, and better Automotive Group profitability is expected with continued manufacturing improvements. Steel profitability is expected to be challenged by continued high raw material and energy costs and lower inter-segment sales." NOTE: Timken's reporting results by division are not comparable to previous divisional results due to changes in reporting methodology during 2003 and changes in how emerging market sales are recorded. Automotive Group Fourth quarter sales were $374.6 million, including Torrington. In Timken-only products, sales improved dramatically, up 12% over fourth quarter 2002. For the year 2003, combined Automotive Group sales were $1.4 billion, up more than 86% over 2002. Excluding Torrington, Timken product sales were up 9%, aided by favorable exchange rates and new product launches for the Ford F150 and Nissan Pathfinder. After a difficult year which saw significant restructuring activities, restructuring charges, and 770 people cut from the Automotive Group, Mr. Griffith said the Automotive rationalization has, "turned the corner." In addition, he said, Timken saw stronger demand in the light and medium truck markets while automotive and heavy truck demand continues up strongly into first quarter 2004. On top of the other changes, Torrington operations experienced an 8% margin swing in Automotive. Going forward, Timken said needle manufacturing will have a major impact, driven by the company's operation in Olomouk. Olomouk is a new facility in the Czech Republic which produces price-sensitive automotive size bearings. In addition, the plant in Suzhou will be coming online in 2004, but for now is driving startup costs. Industrial Group Combined fourth quarter 2003 sales were $418 million, up 69% from 2002. Excluding Torrington, sales were $270.3 million. For the year, combined Industrial Group sales hit $1.5 billion, up 54% over 2002. Excluding Torrington, sales improved slightly due to foreign currency effects. While Industrial sales continue at 20% below 1997 levels, the company said Industrial has, "turned the corner." Although Timken executives have not directly accused Ingersoll-Rand of "channel stuffing" (overselling product to customers in order to pad short-term results and misrepresent true demand) Torrington bearings into its industrial distributors, bloated Torrington inventory at distributors continues to be a major problem. After almost a year of selling down the inventory overhang, Timken said, "We did not make the progress we expected to make in pulling the inventory out of the system." Mr. Griffith declined to specify the inventory overhang remaining, noting it is proprietary distributor information. Timken said lower Torrington industrial bearing sales will carry over into 2004 as distributors continue to sell down that inventory. Fourth quarter, they noted, was an anomaly as Torrington historically has a cyclical jump in fourth quarter sales, and, "is not an indicator for 2004." On a positive note, Mr. Griffith noted Timken is, "beginning to see signs of a turnaround in segments of the O.E. industrial markets." In North America, rail, aerospace, agricultural and construction market demand should all be up in 2004, with other markets flat to moderately up. Steel Group Fourth quarter 2003 sales to external customers were $229.3 million, up from $208.8 million in 2002. For the year, sales improved to $1.03 billion, from $826 million in 2002 and $814 million in 2001. Sales to outside automotive and industrial customers improved, but internal sales declined. Timken is changing over much of its bearing production, particularly high-volume and price-sensitive items, from tubing to forged slugs. To date, the company said external steel sales to other bearing manufacturers (up 9% in fourth quarter 2003) are not offsetting the drop in internal sales. Steel is running at 75%-85% capacity. Steel was recently able to implement and is still pursuing raw materials surcharges, but record high costs for raw materials -- January scrap steel at $228 per ton, for example, -- and natural gas had the Group reporting its first loss in 12 years. In addition to the operating loss, Steel took a massive $46 million hit to write off its investment in PEL Technologies LLC, a 2000 joint venture with Phoenix Environmental Ltd. PEL was set up to commercialize engineered/synthetic iron oxides such as magnetite and magnesium, manganese and nickel ferrites, from byproducts such as mill scale. For PEL, Timken guaranteed $27.5 million in debt: a $23.5 million letter of credit and $4 million bank loan. Several steel industry observers have cited Timken's PEL writeoff as further evidence it is unwinding Steel in preparation for a serious effort to divest the entire operation by 2005 or 2006. Other Developments • Beginning in 2004, Timken will no longer separate "traditional Timken" from "Torrington" bearing sales in its public financial operating reports. Executives said the two companies are so integrated now that separating the two serves no purpose. • Payments from the Continued Dumping and Subsidy Offset Act (CDSOA) netted $68.4 million in 2003, while Timken had to repay $2.8 million, "due to a miscalculation by the U.S. Treasury Department of funds received in 2002." • The reorganization expense tied to COGS was $4 million as applied to closing the tapered bearing plant in Duston, England. The equipment from there is going to the new NSK-Timken joint venture facility in Suzhou, China scheduled to come online later in 2004. • Timken received $146 million from NSK, buying out Timken's 49% stake in NSK-Torrington Co. Ltd., a joint venture needle bearing factory in Japan. Timken inherited the venture when it bought Torrington. One NSK executive told eBearing the number, "must be a happy surprise," to Timken. • Advanced Green Components (AGC), a 62%-owned joint venture with Sanyo Special Steel Company Ltd., and Showa Seiko Ltd., is experiencing higher than expected startup costs and ramp-up is happening slower than expected. The plant produces hot-forged, cold-forged and machined rings as the first step toward making a bearing. This impacts Timken's changeover to producing bearings from forged slugs rather than machining 52100 steel tube. • Accounts Receivable at the end of 2003 stood at $602.3 million, approximately 57 days of sales, up sharply from $361.3 million, or approximately 51 days of sales, at the end of 2002. Timken did not indicate what portion of that increase is due to overhang from Torrington sales under Ingersoll-Rand. • Accounts Payable at the end of 2003 was $425.2 million, growing less than the pace of sales. At the end of 2003, days payable stood at 40 days, down from $296.5 million at the end of 2002, or 41.8 days, indicating Timken is probably paying its bills sooner, despite the Torrington acquisition and costs. • Inventory at the end of 2003 was $696 million, or 5.5 turns, improved from $296.5 million, or 5.2 turns, at the end of 2002. During the earnings call, Timken executives said inventory on hand is at good levels and that 2004 first quarter and second quarter production plans are in balance with forecast demand.