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WIKI ANALYSIS
Timken Company (NYSE:TKR) is the world's largest manufacturer of tapered roller bearings and alloy seamless mechanical steel tubing, though it also makes other bearings and steel alloys for industries ranging from defense to oilfield services to wind energy. Timken competes in the machine tools & accessories oligopoly with Stanley Works (SWK) and Kennametal (KMT), but is unique from these companies in that it can manufacture steel bars with one inch diameters and cylindrical roller bearings with diameters as large as 12 inches, making its product line useful to more industrial projects. The company earned $3.1 billion in revenue but incurred a $134 million loss in 2009.[1]
Timken has been pressured by slumps in the American housing and automotive markets, which have historically been TKR's biggest customers. In response, Timken has expanded internationally, especially in India and China, with annual sales in each country increasing 20% and 30%, respectively. Also, TKR has developed its aerospace and energy product lines to reduce dependence on automobile products, through acquisitions and new facilities. Aerospace and process industry sales have increased 38.6% and 25.4%, respectively. Rising steel and oil prices increase TKR total costs, but the company avoids decreasing margins because these commodities also increases demand for Timken Process Industries products. For example, rising steel prices causes greater demand for TKR's heavy bearings, which are used in rolling mills to make steel more efficiently.
Company Overview
Business Segments[2]
Bearings and Power Transmission Group
- Mobile Industries Segment (40% of sales) -- The Mobile Industries segment produces bearings and power transmission components for mobile units. Mobile Industries sells these products to auto and truck industry manufacturers and mining industry manufacturers.
- Process Industries Segment (26% of sales) -- The Process Industries segment produces bearings and power transmission components for industrial manufacturing. Power transmission involves generating electrical energy for mechanical operations. Process Industries sells these products to equipment manufacturers of energy and heavy industries machinery and equipment, especially for coal, oil, and wind energy industries as well as the steel industry. Timken's strategy for Process Industries is to achieve growth in targeted Asian sectors, including India and China.
- Aerospace and Defense Segment (13% of sales)-- The Aerospace and Defense segment produces bearings, helicopter transmission systems, turbine engine components, and gears for commercial and military aviation applications. The Aerospace and Defense segment also provides repair and overhaul of engines, transmissions and fuel controls, and aerospace bearing repair services. Timken's strategy for the Aerospace and Defense segment is to grow value by adding power transmission parts, assemblies and services and channel new end markets.
Steel Group (23% of sales)
The Steel Group manufactures more than 450 grades of carbon and alloy steel, which are produced in both solid and tubular sections with multiple lengths and finishes. The Steel segment also manufactures custom-made steel products for both industrial and automotive applications. Approximately 10% of TKR's steel production is used for its bearing production.
Timken leads the machine tools & accessories industry in total revenue. Despite increase costs due to rising commodities prices and the declining automotive and housing industries, Timken has been able to maintain sales and gross profit growth due to international expansion and improving the Process Industries and Aerospace & Defense groups.
Business Growth
FY 2009 (ended December 31, 2009)[1]
- Net sales decreased 28% to $3.1 billion. Sales were lower across all business segments except for Aerospace and Defense. Lower sales were driven by lower volume and lower surcharges in the Steel segment.
- The company incurred a net loss of $134 million compared to a gain of $268 million in the prior year.
Trends and Forces
TKR makes international acquisitions in booming industrial markets.
Timken, historically a producer for the U.S., has increased international production within the past few years in response to the U.S. economic recession. Timken's most effective international moves have been opening new facilities in Chennai, India and Chengdu, China.
TKR expands aerospace and energy product lines in response to declining automotive industry.
TKR's success depends on the health of the end markets it sells bearings, tools, and steel to. Timken combined its Automotive and Industrial Groups to form the Bearings and Power Transmission Group. TKR now operates in three segments within Bearings and Power Transmission: Process Industries, Mobile Industries, and Aerospace and Defense. TKR has made the following maneuvers to expand its aerospace and energy business:
Rising oil and steel prices increase Timken's product demand and total costs.
Timken manufactures bearings using its own steel tubing and bars, purchased strip steel and energy resources. TKR produces steel alloy using scrap metal, nickel and other alloys. Oil is the main source of energy for Timken manufacturing.[3]
- Rising steel and oil prices increase Timken product demand. Increasing steel and oil prices cause an demand increase for Timken products. Timken's Process industry products, including wind energy turbines , drilling equipment, and coal conveyors, are in high demand for energy exploration and processing. Also, increased steel prices increase demand for TKR's heavy bearings used in rolling mills to make steel more efficiently.
- Rising steel and oil prices increase Timken's total costs. -- Scrap metal is an ingredient in Timken's steel alloy production, so rising scrap metal costs increase Timken's cost of production. TKR also uses oil and gas in manufacturing. Prices for scrap metal and oil have increased since the early 2000s. Increased product demand has helped stabilize Timken's margins. Raw material surcharges and pricing strategies have also been done to stabilize Timken's margins.
Competition
Machine Tools & Accessories
- Timken Company (TKR)- World's largest manufacturer of tapered roller bearings and steel alloy.
- Kennametal (KMT) - Global producer of tools, machine accessories, and advanced materials and second largest metal cutting tools manufacturer in the world.
- Stanley Works (SWK)- World-renowned brand of consumer and industrial tools.
- Kaydon (KDN)- Leading manufacturer in specialty bearings, especially bearings used for wind energy.
- CompX International (CIX)- Manufactures security products and precision ball bearing slides.
- Hardinge (HDNG)- HDNG manufactures machine tools in Western Europe.
- Thermadyne Holding (THMD)- Producer of gas and electric arc cutting and welding products for the Americas.
- RBC Bearings (ROLL)- Bearing manufacturer makes 90% of sales in U.S., has second-highest return on equity in the past year.
- Flow International (FLOW)- Producer of high-pressure waterjet cutting tools had highest revenue growth of machine tools companies in the past quarter.
References
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