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For Canton (Ohio)-based Timken, these are the times that try manufacturers' souls. A global leader in the production of bearings, steel, and other automotive assemblies, Timken just reported a third-quarter loss of $3.0 million on revenues of $577 million. Sales were down 9%, vs. third quarter 2000, when the company posted a $7.7 million profit. The company reduced its third-quarter dividend by a nickel a share, and closed two plants, one in Ohio and the other in England. But it's still expanding operations around the world, as it restructures for future growth.
How did the events of September 11 affect business? And when will the recession clouds clear? BusinessWeek contributing correspondent Raluca Topliceanu recently caught up with James Griffith, Timken's president and chief operating officer, to talk about the company's future strategy. Following are edited excerpts from their conversation:
Q: How would you describe the status of the U.S. manufacturing sector at the moment?
A: For Timken, September 11 was not as significant as the fact that our sector has been in recession for well over a year. We serve industrial markets, and they generally serve markets like mining, steel manufacturing, and so on. You can see by the number of steel companies that are bankrupt in America today [how rough it is]. We had hoped to see something of a turnaround in the fourth quarter of this year. Obviously, September 11 stole that. To put it in very personal terms, Timken has reduced its employment by almost 2,000 people in the last 18 months, and that is a direct relationship to the recession that we're in.
Q: Why, then, are you expanding some operations abroad?
A: We are expanding those places that are the most competitive, and we are closing those that are not competitive. So we are expanding into Romania and Poland, where we have competitive plants. But we are also expanding our plant in Ashboro, N.C., and we are also expanding our plant in Brazil. We faced the recession a year ago. We stepped back and said, we've got to put our production in our most competitive plants and close our least competitive plants.
Q: How much money are you going to invest in these growing plants?
A: We would probably invest somewhere on the order of $60 million worldwide to achieve a cost savings of $100 million annually. That was the announcement that we made last April.
Q: What's the state of international trade in manufactured goods? Have manufacturing exports or imports suffered?
A: The value of the dollar is a very significant factor for us. The U.S. dollar is overvalued against other major world currencies by something on the order of 30%. Again, it's not September 11 that's so much the issue. It is that over the past three years, the U.S. dollar has risen to uncompetitive levels. That is a big piece of what's driving the manufacturing recession.
Q: Why did you reduce your dividend from 18 cents a share to 13 cents a share?
A: Timken pays a great deal of attention to maintaining a strong balance sheet. We want to have the ability to invest when we need to invest and the ability to borrow when we need to borrow. I would say that the events of September 11 convinced us that it will take longer for the economy to climb out of this recession.
We thought the economy would climb out of the recession in the fourth quarter and then recover in the first quarter. Now, we believe [a recovery] won't come until sometime in the second quarter or early in the third quarter of 2002. So we are sitting and looking at a recession scenario, where earnings will be down for some period of time. That causes us to say we should conserve our cash. The reduction in dividends saves us about $12 million a year.
Q: Timken recently bought a new facility in France?
A: Timken is a strong company making moves to remain strong in the 21st century. The case of the acquisition of Bamarec in France underlines the expansion of the business unit we call precision steel components, which takes tubing that we produce in our steel business and turns it into finished parts for our customers. In the United States over the last eight years, that business has grown from zero to $160 million in sales. We have picked up a couple of orders from European auto makers, and we think the opportunity is there to take that value proposition into Europe. We needed a base from which to do it. In fact, we've already had a contract with General Motors [in] Strasbourg. We will be shifting production from the United States to this facility in France.
Q: What about next year?
A: In my 25 years in business, this is the most difficult market [in which] to make that forecast. We believe the automotive sector in the United States will be down slightly, and also in Europe -- down slightly but not dramatically. That's the way we are planning the business. For us, we are actually anticipating a better year next year because we have a number of new pieces of business. We have increased penetration, particularly in North America.
In our industrial market, we have very positive results outside the United States. Beyond that, in the general investment market, I think that next year will be flat, at best. We think that the first two quarters will be extremely slow. Then we are expecting to come back. In aerospace, I won't presume to make a prediction at this point. There is just too much uncertainty in the market to understand what's going on in the aerospace sector.
Edited by Douglas Harbrecht
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