Timken Co (TKR) 2009 Q4 法說會逐字稿

Good morning, my name is Michael, and I will be your conference operator today. At this time, I would like to welcome everyone to the Timken's fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Tschiegg, you may begin your conference.

Thank you, and welcome to our fourth quarter 2009 conference call. I'm Steve Tschiegg, Director Capital Markets and Investor Relations. Thank you for joining us today, and if after our call should you have further questions, please feel free to contact me at 330-471-7446. With me today are Jim Griffith, President and CEO; Glenn Eisenberg, Executive Vice President of Finance & Administration and CFO; Mike Arnold, Executive Vice President and President, Bearings and Power Transmission Group; and Sal Miraglia, President of our Steel Group. We have remarks this morning from Jim and Glenn, and then would all be available for Q&A. At this time, I would ask that you please limit your questions to one question and one followup at a time to allow an opportunity for everyone to participate.

Before we begin, I would like to remind you that during our conversation today you may hear forward-looking statements related to future financial results, plans, or business operations. Actual results may differ materially from those projected or implied due to a variety of factors. These factors are described in greater detail in today's press release and in our reports filed with with SEC, which are available on our website at www.timken.com. Reconciliations between GAAP and non-GAAP financial information are included as part of the press release. This call is copyrighted by the Timken Company. Any use, recording, or transmission of any portion without the express written consent of the company is prohibited. With that, I'll turn the call over to Jim.

Good morning. As you have seen from our earnings release today, Timken delivered results in the fourth quarter that exceeded our previous outlook. This morning, I would like to provide insight on what drove our performance for the fourth quarter and full year. Then we'll talk about the things we have done to position ourselves for stronger performance. Lastly, I'll share some observations on marketing conditions as we entered 2010.

Results for the fourth quarter came in ahead of our expectations. Sales were stronger than expected, reflecting increased demand from the automotive sector. We had anticipated customer shutdowns at year end. However, many customers continued to operate, resulting in higher shipments for both bearings and steel. This higher-than-expected demand, coupled with the impact of our cost-control efforts, resulted in favorable operating leverage for the quarter.

We continued our trend of achieving strong cash flow. We ended the year with a new free cash flow record of over $400 million, driven largely by improved working capital management. While better than expected, our results for 2009 were still disappointing. Sales were down 38%, and earnings on an adjusted basis were $0.53 a share. In contrast, a careful examination will show that our management team reacted well in a challenging environment. Our actions repositioned the Company to be profitable at much lower levels of sales. We are prepared to deliver much higher levels of performance as the market recovers.

We took a number of decisive actions throughout the year in response to the global economic slowdown. We realigned and rightsized the organization to improve efficiency and reduce costs. We significantly exceeded our targeted production in S&A costs. Operative and professional employment levels were reduced roughly 25% or 6,500 positions, rightsizing our Company for the current economic reality.

We continued the implementation of Project 1, our global project business redesign. The capabilities gained through this effort enabled us to achieve record productions of working capital while maintaining strong levels of customer service. Improved execution allowed us to maintain strong margins in our process industry segment, and actually improve them year on year in aerospace. Mobile industries saw improving profitability in the last two quarters at very low operating levels as improved pricing and reduced cost took hold. Our steel business, which operated the entire year at well under 50% capacity utilization, reduced its break-even point and continued to expand market penetration.

In addition to improvements in execution, we also had a good year strategically. We completed the sale of the needle roller bearing business at year end, a significant strategic step in the transformation of Timken's market exposure towards a more balanced portfolio of industrial and mobile equipment demand. We continued to expand in Asia. Our new wind energy bearing plant in China will begin shipments this year and we are broadening our product line in that region. In addition, our collaboration with Daido to offer premium engineered steel in Asia will enhance Timken's presence in that region.

The combination of cash and working capital, the proceeds from the needle bearing sale, and the refinancing of two significant credit facilities positions us with a strong balance sheet and ample liquidity. Once again, we are positioned to grow and we are prepared to respond quickly to opportunities, as the economy begins to improve.

In 2010, we are expecting moderate improvement in economic activity, consistent with most published forecasts. We have seen gradual improvement in demand in the fourth quarter, and are seeing increased bookings in the first quarter of 2010. However, this varies dramatically by market segment. Mobile equipment markets appear to be strengthening this quarter as improving sales in the light vehicle segment and restocking of the supply chain in construction and mining markets have increased demand for our products. We have seen this most dramatically in our Steel business. In the Bearing and Power Transmission Group, the strength we have seen is being offset by our strategic decision to exit parts of the portfolio with unacceptable levels of profitability. Our manufacturing capacity utilization remains around 50% in both businesses.

Contrary to what we're seeing in the mobile markets, energy markets and the demand for heavy capital equipment continue to be extremely week, as capital spendings remains at very low levels and customers work through excess inventories. We expect these markets to remain weak throughout 2010. The exception to this trend will be in wind energy, and in Asia, where government stimulus investments and Timken market initiatives will exit the slowdown. Industrial distributors continued to reduce their inventory levels throughout the end of 2009. It appears that our distributors are beginning to see their markets stabilize as we enter 2010. We do not expect to see our demand improve until well into the year. Aerospace markets for Timken have remained relatively strong throughout 2009, void by demand in military and helicopter markets. In the fourth quarter, this strength was overcome by declines in commercial and general aviation markets. We expect weakness in these sectors will result in demand for our products in 2010 at levels slightly lower than in 2009.

While the current economic environment makes forecasting unusually difficult, our view is that we will achieve moderate sales growth in 2010, led by a rebound in our steel business. Based on the actions we have taken to resize the Company, this should allow us to improve profitability well above 2009 levels, but still well below our record in 2008. A little over a year ago, I observed that I have never seen a management team so aligned and so capable of navigating through these turbulent times. Our associates are to be commended for responding so well during a very difficult period in Timken's history. As we look to 2010, we're ready to capitalize on any turnabout in our markets. Now I'll ask Glenn to walk you through the details of the quarterly results.

For the fourth quarter, the Company incurred a loss of $0.21 per share. Excluding special items, earnings were $0.40 per share, including $0.09 from discontinued operations. Earnings for the quarter exceeded the upper end of our previous estimate by approximately $0.40 per share. This was primarily due to strong demand within the light vehicle market sector, higher LIFO income, and the resolution of a pricing dispute. Special items totaled $59 million of after-tax expense. Included is a non-cash charge of approximately $56 million for an asset impairment in mobile industries due in part to the Company's strategic decision to fix or exit unprofitable product lines. The rest of my comments will cover continuing operations and exclude the impact of special items.

Sales for the fourth quarter were $775 million, a decrease of 29% from 2008. The decline was principally due to lower volume across most of the Company's end markets and the impact of lower steel surcharges, partially offset by improved pricing and currency. Gross profit of $178 million was essentially unchanged from a year ago. Margins increased to 23% from 16.3% last year. Results were favorably impacted by pricing, cost-reduction initiatives, lower material costs, and LIFO income due to lower inventory levels and lower material costs. Offsetting these benefits were lower volume, manufacturing underutilization, and reduced surcharges.

For the quarter, SG&A was $113 million, down $27 million from last year. Margins increased 190 basis points to 14.6% on lower sales. For the full year, the Company's SG&A was $185 million lower than 2008, including achieving its $80 million structural savings target. EBIT for the quarter came in at $63 million or 8.1% of sales, up 520 basis points from last year. Net interest expense for the quarter was $14 million, up $4 million from last year. This expense reflects higher average debt and fees associated with the Company's refinancing. The higher average debt level resulted from the Company's public's bond offering in September totaling $250 million. These proceeds were used to pay down existing debt in December. As a result, year-end debt balances were lower than 2008.

The tax rate for the quarter was 39.1% compared to 33.5% last year, and higher than our 33.5% previous estimate. The higher rate is primarily due to a lower overall percentage of the Company's earnings in lower tax rate foreign jurisdictions. Going forward, we expect a tax rate of roughly 33%. As a result, income from continuing operations for the quarter was $29.8 million or $0.31 per share, compared to $0.15 per share last year.

Now I'll review our business segment performance. Mobile industry sales for the quarter were $325 million, down 13% from a year ago. The decline was driven by lower demand in the off-highway, rail, and heavy truck market sector. This was partially offset by improved pricing and currency. For the quarter, mobile industry's EBIT was $31 million or 9.6% of sales, compared to a loss of $8 million last year. The improvement was driven by cost-reduction initiatives, pricing, lower material costs, and LIFO income, which more than offset the impact of lower demand. During the quarter, the Company also resolved a pricing dispute and certain non-income tax audits, which contributed a benefit of approximately $15 million. Mobile industry sales for 2010 are expected to be up slightly. Increased demand in the light vehicle sector is expected to be mostly offset by lost business, resulting from the Company's fix or exit strategy. The Company also expected improved end markets in heavy truck and off-highway, while rail is expected to be down.

Process industry sales for the quarter were $190 million, down 29% from a year ago. The decline was driven by lower original equipment demand, especially in the power transmission sector, and lower industrial distribution sales. Partially offsetting this lower demand was improved pricing and currency. For the quarter, process industry's EBIT was $24 million, down from $38 million a year ago. Margins were 12.6% of sales, compared to 14.1% last year. Earnings were impacted by lower volume, partially offset by cost reduction initiatives, pricing, lower material costs, and LIFO. Process industry sales for 2010 are expected to be up modestly as sales from new products and wind energy demand are expected to be largely offset by declines in heavy industrial equipment.

Aerospace and Defense sales for the quarter were $99 million, down 10% from a year ago. The decrease was driven by lower demand across the commercial and general aviation aerospace markets, partially offset by favorable pricing and currency. EBIT for the quarter was $17 million, essentially unchanged from a year ago. Margins increased to 16.7% of sales, up 80 basis points over last year. Earnings benefited from cost-reduction initiatives, LIFO income, and pricing, which were offset by lower volume. Aerospace and defense sales for 2010 are expected to be down slightly. This is primarily due to a drop in commercial and general aviation aerospace demand, while defense markets are expected to be flat.

Steel Group sales for the quarter were $174 million, down 53% from a year ago. The change was driven by lower ship tons of approximately 40%. The greatest declines were in the industrial and energy sectors, partially offset by stronger demand in the light vehicle sector. In addition, surcharges were down approximately $80 million for the quarter due to lower raw material and energy prices and overall demand. EBIT for the quarter was $3 million or 1.5% of sales compared to a loss of $3 million last year. The improvement resulted from lower material costs, LIFO income, and cost-reduction initiatives, partially offset by lower demand and underutilization of manufacturing capacity. The Company expects Steel Group sales for 2010 to be up between 25% and 35%. The increase reflects an improvement in end-market demand, primarily in the mobile and highway and industrial market sectors, and higher surcharges.

Looking at our balance sheet, we ended 2009 with cash in excess of debt of $243 million. This compares to net debt of $490 million at the end of 2008. This $733 million improvement resulted from record free cash flow and the sale of the needle roller bearings business. For the quarter, free cash flow was $111 million. Operating activities generated $152 million in cash, primarily reflecting the Company's actions to reduce inventory. Partially offsetting this were capital expenditures of $33 million and dividends of $9 million, both of which were reduced from last year's level. Including cash and credit facilities, the Company had approximately $1.6 billion of liquidity at the end of 2009 with no significant debt maturities until 2014.

In summary, our outlook for 2010 reflects modest improvement in the global economy. The Company expects sales to be up approximately 5% to 10% over 2009. We expect to leverage the sales growth well as a result of improved operating performance and cost-reduction initiatives, partially offset by LIFO expense and the restoration of our variable compensation plans. For 2009, we expect our earnings per diluted share excluding special items to be between $0.85 and $1.15, up from $0.53 per share in 2009. The Company expects to generate positive free cash flow in 2010. This will be after investing approximately $135 million in capital programs and $135 million in pension contributions, of which $100 million is discretionary. The Company ended 2009 with unfunded pension obligations of $690 million, an improvement of $133 million from last year, driven by strong asset returns of approximately 23%.

This ends our formal remarks, and we'll now be happy to answer any questions. Operator?

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Eli Lustgarten with Longbow Securities.

Good morning, everyone.

Good morning.

Good morning, Eli.

Quick question on -- you gave us the $30 million of LIFO in Steel. What was the LIFO in the other three sections as referred to, in Mobile Process and Aerospace?

Eli, for the fourth quarter, the change year-over-year in profitability in Steel, you are right, was around $30 million. As you look through the bearing business, Mobile, the change was around $20 million, Process around $10 million, and Aero was essentially flat.

So the profits came from the LIFO swing, is what it looks like.

Yes, in part. So $60 million overall for the whole company.

And can you give us some idea -- you took a big impairment charge. Is that all in light vehicles or can you give us -- what are you exiting? What is the impairment charge for? What are you trying to accomplish strategically for 2010?

Eli, as we reviewed obviously as we could do annually, especially within the mobile group, our fix or exit strategy is obviously having an impact on business that we're going to be going forward. So we evaluate and value the parts of our business that are supporting a market that we're fixing or exiting. So therefore, as a result of potentially exiting the business, we're revaluing the assets that will support it. The bulk of it was again a non-cash charge, approximately $80 million, would have been targeted if you will to that light vehicle demand, but more broadly just the automotive markets that we're serving.

A quick followon -- can you talk about the profitability of each sector as you look at 2010? What kind of margins can we expect in Mobile, and can we hold the margins in process in the mid double digits in Aerospace, in the mid-to higher double digits?

Eli, this is Mike, so let me just walk you through those segments a little bit, and give you a little feel for what is happening. On the mobile side, our volume will be slightly up -- that will be single-digit moves. That will be a little bit less than some of the markets that we serve, only because of some of the business that we still anticipate that we'll lose, although in some cases we haven't, but that's been a little of the repricing in the market, et cetera. So we'll see still some growth on the top line. From a margin standpoint, we'll see improvement year on year. We'll continue the path that we have as we try to normalize and look at those margins out through the quarter of 2009. So we'll see some improvement in margins on the mobile side. Year on year, as we go into the year, basically a lot of that will be fix of the automotive sector, and then some downside with regards to some lost revenue. And some of that lost revenue will be product that we repriced in the marketplace and actually gained from in 2009 from a profitability stand point.

On the Aerospace side, Aerospace is late to the cycle move. It's reacted about as we anticipated, with the second half softening. We saw that -- Glenn said our sales were down 10% quarter on quarter versus last year. So as we go into 2010, we're still seeing the civil side being weak. We see the defense side relatively flat, but certainly some continued pressure on the area in civil that has to do with not only the OE side but also some of our MRO business, our overhaul business. So we'll see revenues slightly down in 2010 as we go through that period. We still anticipate that we'll keep margins someplace in the mid-teens, so it will still be a very attractive business on some lower revenue.

And then on the Process side, Process side is the one that as you know has been the most depressed with regards to 2009. Basically every industry was down, geographies, et cetera. And it's a mixed bag going into 2010. What we're beginning to see -- and I think Jim made a comment in his opening remarks, that at least distribution now seems to be flattening. That happened through the fourth quarter. We don't know yet as to exactly what they are going to buy as we go into 2010, but we anticipate at least it's flattening out. They have a lot of inventories back in shape where they want to be. So we've taken the brunt of that in 2009. So that will be flat to slightly up, and that slightly up will come in the latter half of the year, if it does come, and we'll watch the general market.

In addition, in that market is where we're actually -- most of the growth offsetting some of the reduction in the capital equipment sales. Most of the growth is going to come from Asia and wind. Wind in particular, and that's a combination of Asia and wind. Those are tied to new investments, and as you know, we'll be opening up a new wind energy facility China that is for large [core] product all dedicated to process industry. So we'll have some associated ramp-up cost, start-up cost there, and a lot of new product introductions into the market that basically are products that we have not been producing in the past, and we'll be entering the market. So there I see there's going to be a little bit of pressure on the margins, but still we'll be in that low to mid-teens in margins for the year.

All right. Thank you. I'll get in line.

Your next question comes from the line of Andrew Obin with Bank of America, Merrill Lynch.

Yes, hi. Good morning.

Good morning.

Just a couple of questions. When you -- in terms of your guidance, what are we assuming for LIFO impact in 2010? In particular, Q1?

Andrew, I guess, one, obviously we make some assumptions with LIFO, but for the most part it would normally be fairly nominal, plus or minus a fairly small amount, given the stable environment hopefully -- or that we expect to be entering into. I think the bigger impact will be the year-over-year change, because we had built up LIFO income this year as we saw a dramatic decline in our inventory levels and lower material costs. At least as we would look out for next year, inventory levels plus or minus are going to be fairly stable. Material costs may be up a little bit, so you can expect maybe some LIFO expense, but it will be a bigger issue on not what is the absolute earnings of our earnings as opposed to what's the change in the earnings, because we will have that headwind of losing the income that we realized in 2009.

And could you quantify -- just as we think about revenue, the change in mix, could you quantify low margin contract exit in mobile industry that you talked about? Or it is related to sales discontinued -- or am I right about this is just exiting the contract?

This is Mike, again. As you know, we sold the needle roller bearing business, and that was one of the moves, but in addition to that, we also have had in the past certainly contracts that were not attractive for us in all of our product lines we serve, in particular the automotive sector. But we look at everything across the business. So we'll continue to exit those businesses that in fact we can't make profitable, and that process will continue on. So as we go throughout 2010, there will be less determination of it, Andrew, if I can put it in that context, meaning most of the contracts have been renegotiated now. We're basically done in that sector, and at this point, our communications with our customers were pretty clear as to any intent that they might have to no longer utilize us as supply on those. And it's very much in line with regards to where we started the whole process.

Just as we think about how to model the segment for next year versus your end markets, how much of a revenue drag should this be? 1 percentage point of revenue, 2? If you could help me with that, ex the divestiture.

I would put it in the context of single digits in revenue.

Okay.

Percentagewise.

But it is material to the point where it is single digits?

The other thing I would add to what Mike is, is again, we expect within mobile to see good markets other than potentially business that we're going to lose based on our fixed or exit strategy. But part of that strategy is also continuing to generate good pricing that we have to make sure that the business is going to be profitable.

Just to follow up, and when you exit these unprofitable contracts, what happens to capacity? Can you -- you can utilize this capacity on other -- with other customers, right?

Yes, Andrew what we have talked about in the past is converting as much of the capacity as we could to more profitable markets. So that is a constant mode of operation for all of our manufacturing facilities as we do that, and that has been relatively successful. I will tell you, though, since we have been on this move aggressively since the middle of -- or the beginning of 2008, you can go back and actually look at the 2009 results. And if you just take a look at 2009 versus 2008, we actually were down over $500 million in revenue, and actually the margins didn't get hurt.

Oh, we're very happy with that. Congratulations. Thanks a lot.

Okay.

Your next question comes from the line of Mark Parr, with KeyBanc Capital Markets.

Thanks a lot. Good morning.

Good morning, Mark.

A couple of follow-on questions. And again, I apologize for getting back to LIFO, but if you looked at kind of -- Glenn, if you looked at kind of where you thought the LIFO was going to come out for the year at the end of the third quarter, and then where the audit finally ended up, is there any delta you can tell us? Probably a little better than expected? But any color there?

I think that -- as we went in to the fourth quarter, if you will, we continued to drive a lot of cash by working on our working capital. What surprised us, and frankly surprised us pleasantly, as we went through the whole year was the effectiveness that we were able to drive it out. So where the LIFO came in in the fourth quarter better than we expected was the fact that we generated a lot more cash coming out of the inventory levels. But as we talked about the surprise to us between -- that played less of an issue to us than the fact that we saw automotive markets continue to stay at third quarter levels, where our expectations were that they were going to decline. But clearly LIFO did provide some additional income, more than what we expected.

All right. That's helpful. And again, I don't want to put words in your mouth, but given your outlook for 2010 that includes, really, no help from LIFO, is there -- are there any quarters that you -- should we expect to see profitability in all four quarters in 2010?

Well, the first thing, within -- again, the LIFO, it's going to be -- probably a small expense if you will for the full year as we go forward. But, again, not a big number. So again, it's the change year-over-year that's going to have the implication. One thing that we have strived to do, as you'll recall from last year versus this year, was that rather than provide quarterly estimates, we have moved to an annual one, specifically to address the issue of just the uncertainty or having to put out three months ahead of us. So I know you are looking more from directionally in profitability, but what we would say is that -- we ended the year strong. The expectation is that we will see overall improved markets as we go into next year. We clearly are seeing top line growth leveraged well to get good earnings growth. We're really not going to go ahead and try to break that down for you by quarter.

Okay. All right. Well, but I had to try. Maybe along those lines, Jim, I was wondering if you might be able to give us some sense of how the year's -- what kind of start you have gotten off to? What sort of feedback are you getting from the field? Look, with January in your pocket, any shifts in momentum -- within the context of just the near term environment here. First quarter is typically a pretty weak quarter, but any color you can give us on what is happening now I think would be very helpful.

Mark, I went over that at a high level in my comments, but it is so different from market segment to market segment, I think it's probably to let Mike and Sal each respond to that and give you the color on the segments. Mike, you want to go first?

Yes, I'll give you insight into what we're seeing early on. Nothing that I would say is unexpected as we came out of the fourth quarter. So we're still seeing some relative strength in the mobile markets. We're seeing some order upticks in some of the areas like mining, where -- there are some customers that are beginning to put some inventory back in place. They're anticipating end-market demand. We're seeing some of that in our own order book. China is off and running. I know -- we read in the press with regards to they are doing, interest rates, maybe slowing growth, et cetera, but that looks pretty strong for 2010.

That's a tough problem to have when you have too much growth, isn't it?

Yes, I wish it was across all of our markets. Wishful thinking We have got what we have got. We're seeing weakness in Aerospace that continues on from second half of last year, but again, in line with what we have been looking at for the full year, so we'll watch that very closely. And then Process Industries,it's a pretty big dichotomy within the business, because you have the big capital equipment -- the steel industry is an example -- just shutdown on the OE perspective, and yet we're anticipating at least that the distribution side in some of our other power transition areas are seeing slight uptick that we can anticipate towards the end of the year. But playing out about as we thought. No big surprise on the downside. On the upside, I would tell you that at least in our growth markets like Asia, we're still pretty excited. I just came back from two weeks in Asia, for example, and spent a lot of time with our distribution partners, and there is a lot positive things going on there. So we're still pretty excited there.

Thank you very much for that.

You bet.

I had one question, if I could on the pension side. Could you give us some guidance on what the P&L impact is going to look like for 2010 versus 2009?

P&L should be fairly comparable. We have been between our pension and post-retirement -- call it rounded, around $100 million of expense. It is going to go up slightly just because of the losses that we had in 2008, but it's still a good proxy.

Okay. Terrific. Thanks again for everything.

Thanks, Mark.

Your next question comes from the line of David Raso with ISI.

Hi, good morning. My question relates to the balance sheet, and I didn't hear any commentary about potential divestitures still further in the disclosure that you have. Can you elaborate on how you are thinking about that business? Are we solely looking at exiting unprofitable contracts, or are things still potential not just fix -- or don't fix and still get the goodwill writedowns? Are we still looking to actively shrink the auto exposure and dovetail the use of the balance sheet? What is your answer, please?

David, this is Mike. We're constantly looking to reduce our exposure to any of the businesses or markets that we can't make reasonable returns. So that continues to go without saying, and that goes for all of our businesses. So now let me just address a little bit on the Mobile side. The NRB obviously was a piece that -- albeit it wasn't 100% mobile, it was about 75% to 80% mobile business. So along with that went some business out of other markets. What we now get into the rest of the mobile business, and in particular the automotive business, the assets that we have in place also serve many other industries. So we have to be very, very careful with regards to further divestments as to how that would impact our ability to provide products into many of the very profitable markets. We continue on the fix or exit. That will continue on both from a cost-reduction standpoint, the rules of engagement with our customers, our pricing, et cetera, and we won't stop there. Any further divestments, obviously, we're always looking at what that might look like. It's not off of the table, but it's not something that is as easy to do as the needle roller bearings.

Balance sheet usage?

The balance sheet usage, can you be a little bit more specific?

I'm sorry, your net cash. Wondering how you are thinking about using the balance sheet? I assume you're not going to stay net cash for long.

Right. Obviously it's nice -- I think someone mentioned it earlier on another issue, it's a nice problem to have. We do end the year with $755 million in cash, call it around $330 million ish we have talked about, the proceeds from the divestiture of NRB. It clearly was our intention or is our intention to redeploy that capital into acquisition opportunities. So it wasn't to shrink it to raise the cash. So we're actively looking for ways to do strategic complementary acquisitions, especially in areas that we have targeted for growth in our industrial markets. We have also talked about obviously organic needs. We have talked about pensions. We still have a very sizable unfunded pension obligations. We ended around $690 million unfunded at the end of this last year. Obviously we also have an authorized share repurchase program, albeit we had not been in the marketplace for a while, but that is obviously one of the potential uses as well. But clearly we're looking to redeploy it, find areas to continue to grow, and provide more profitability to the Company.

Okay. Thank you.

Your next question comes from the line of Steve Volkmann with Jefferies.

Hi, good morning. Most of it has been answered, but, Glenn, how much of the steel increase -- I think you said 25% to 30% in 2010 -- how much of that is surcharge related?

Let me -- I'll have Sal provide a little color on the top line growth.

Actually, Steve, that's in pure volume, not surcharge at all. We're not trying to predict what the actual strap prices will do as we go through time, and therefore, how we'll react to that with pass-throughs with our surcharges. That's volume. What we don't really know is how much of that will be -- will signal actual return of demand, and how much of it will be restocking the pipeline as we move into the future. We see a healthy breath of fresh air for our first quarter, but we don't see much further than about April, and April is looking okay. Not much higher nor much lower than the other months of the first quarter, but still much better than last year.

Okay. Great. That's helpful. And then I guess just -- were there some temporary cost savings that were done in 2009 that we should think about maybe rolling off in 2010, whether it be -- we have heard from some other companies about incentive comp accrual and travel and training and those types of things. Would there be some uptick those temporary cost cuts, or should we not think in those terms?

No, similar to what you are hearing in other areas. What we did this year, obviously is one, constrain our expenses as the much as possible. We have a variable compensation plan that works relative to returns and so forth, so that was down. And based upon the profitability and returns of the Company, obviously that will come back in next year. When you look at what we have talked about, reductions in costs, we talked about structural costs as well as discretionary spending. Those structural costs that we've done is we realigned the organization are costs that are staying south even even with the uptick in the marketplace. The discretionary bucket that we squeezed hard by not traveling as much and doing other things, depending on the market environment we're in, we would expect to see some of those costs come back into the Company, but obviously we're going to be fairly cautious until we see what unfolds.

Any way to just bracket what that could be in dollar terms or is it too early for that?

It's a too early. It's clearly -- we wanted to at least get the point across as we gave our outlook for next year of profitability that it would be constrained in part by our variable pay mechanism by some discretionary expenses coming back, by not having that LIFO income or things that were headwinds, but clearly the profitability is still obviously attractive, and some of those costs are driven off of improved end markets. So as markets improve, those costs will come back. If they don't, those costs will stay out.

Okay. Great. And just the final one, you talked a little bit about wind and China. Can you just tell us how big those businesses are these days? Dollar terms of sales?

In terms of Asia in particular, I think we have always -- oh, we never really give a direct figure with respect to what we do in Asia, but it is in the neighborhood of -- let's call it $0.5 billion, and -- so it's sizable for us, and China is the biggest piece of that, and the biggest piece of our growth in China, year on year, 2009 to 2010 will be in the wind energy segment. So that gives you a little bit of trail as to how those work.

Okay. Great. Thanks.

You bet.

Your next question comes from the line of Holden Lewis, with BB&T.

Thank you, good morning.

Good morning.

Can you -- referring to the prior question, can you talk about the structural and discretionary costs that came out? What were those in 2009 exactly? How do you break those two up in terms of the total cost save, if you will? And then on the structural side, how much of those savings were realized in 2009, and how much more do you have incrementally to realize in 2010? Because obviously you proceeded through the year making improvements as you went. I assume there is still incremental benefit to be had in 2010 from those structure changes as well.

Holden, that's right. I'll give you a broad stroke to at least give you the flavor for it. As we said, that S&A was improved by around $185 million year-over-year, and there were three buckets that were roughly of comparable size, plus or minus, but it was the variable pay incentive compensation, it was the structural cost, and it was the discretionary spending. So you can see one-third of that would be -- structural would be less than the $80 million target that we said that we exceeded, and that's because our target was to essentially be at the run rate. So we'll get the full benefit of that $80 million. We have achieved it, so we'll probably have the full-year benefit of those structural savings in 2010, more than what we realized in 2009. But the flip side is the incentive compensation, and some of the discretionary expenses coming back.

But the incentive compensation obviously comes back only provided the volumes -- provided the metrics are there, but discretionary comes back regardless. You think discretionary -- and you think the negative on the discretionary and the positive on the structural will roughly cancel each other out?

We would view the discretionary very much again depending on the business environment. So the extent that the demand there, we'll obviously let the discretionary expenses come back in. To the extent that it's not, it's as variable as the variable pay. We control it and it won't be spent unless the markets are there to spend it.

Okay. And then can you comment a little bit -- we saw that revenues were up, but inventories were down again. Can you comment on production, I guess both in the bearings business as well as the steel business. I assume given the behavior of inventories that your production in bearings was still very low, even perhaps -- I mean, have you seen any step-up in your production rates on the bearings side of the business, or is that still on the [cusp]? And then if you can make the same commentary around steel?

This is Mike. Again, by segment -- we'll have to do it by segment. I would tell you in general, and we said last year, we were operating throughout the year at someplace between 35%and 45%, again, by segment. I will tell you that we're probably up maybe 5 percentage points on that as we look at 2010 as a predictor. However, when we do look at that, that's by revenue. We still have the intent of weaning additional inventory out of our working capital for the year, again, given the volume expectations from the market. So in general, slightly up on capacity utilization. It's not significant. And it's still at a very low level, which would be under 50%.

Okay. And that's in the bearings as well as the steel businesses?

That's in the bearings. I'll let Sal answer.

On the steel side, in all of 2009, our raw steel production was lower than our shipment levels as we drained inventory, and we were in a comparable level that Mike was describing at about 35% raw steel production, on average about 40% on shipment levels. Our first quarter is a lot better than that. We're running at about 60% of raw steel production. So we're seeing this restocking and return of some dimension of that consumption -- whether it's inventory or demand, we're not sure -- that is far healthier than what we saw last year. And our production and shipments are much more in harmony versus last year, where we were not producing nearly as much as we were shipping.

So that 60% in Q1, was that also a level you were at in Q4? Or Q4 was another low utilization level?

Q4 was a little lower than that, to be honest with you, Holden, but we had a funny set of circumstances last year. You recall we were coming into a labor negotiation. We produced a products that were inventories to protect what might be an uncontrolled work stoppage. We did that in the second and third quarters. So we inflated our production levels there, and then consumed that in the fourth quarter. So our production was distorted throughout the course of the year, as opposed to being synchronized with actual demand in shipments. So notwithstanding that little blip, we were still lower last year, and are a little better this year than what we had seen last year.

Okay. So -- the step-up in production in steel obviously is a very good thing where profits are concerned going forward for the fourth quarter. And then on bearings, it sounds like you may want to whittle your inventories down a little bit more, but are you beginning to step that production level back up so we'll begin to see some good absorption on that business that we hadn't gotten in 2009?

Well, again, as I said, at least from a volume perspective, we have got two things going on. We are anticipating by segment certain areas that will be up, certain areas that will be down. We're going to continue to take inventories out, and it is not as a result of the market levels. This is as a result of better capabilities and systems by which we are running our business that we can take working capital out. So there's more efficiency in what we're doing. And that's really the drive to continue to take that inventory out in 2010. But we're still not going to be operating at significantly greater capacity utilization than we were in 2009. The good news with that, though, is if you look again at the margins on our businesses across the board in 2009 at those very, very low levels, you can probably understand the upside if we do get volume.

Okay. All right. Thank you.

Your next question comes from the line of Samuel Eisner with Sterne Agee.

Hi, everyone.

Good morning.

Good morning.

Just had a couple of quick questions regarding cash. I know you guys said you were going to wanting to be put that back to work. Is there any goal posts you could potentially put around as far as acquisitions, or any guidance as to specifically you are looking for, what markets? I know you mentioned process was going to be one of your big areas, but any other color you can provide could be great.

This is Mike. We continue on the bearings side of the business to look for acquisitions that fit strategically what we're trying to do, certainly in the Process Industries and Aerospace areas. Many of our acquisitions have been in the transformation of our Aerospace business. If you look at that business over the last five years, you'll see the transformation in the mix of that business, and the performance of that business. So our acquisitions have worked very well. Same in our growth. Although we spent more time on organic growth on the process industry side as we built out new capacity to serve markets like Asia, wind energy, et cetera. So that's been a little bit less inorganic, and more organic, where Aerospace has been more of the inorganic play.

Sam, this is Jim, just an easy way to look at it, the way I usually answer that question, is if you want to understand where we're going to focus from an acquisition point of view, look at the acquisitions we have done over the last three or four years. Those are the areas where we have concluded we know how to make money, and that's where we're driving the business. And it is Aerospace, heavy equipment, and those spaces that have significant end customer after-market service kinds of opportunities.

All right. And then I guess, Mike, back on the mobile side, I think maybe Eli was trying to get at this point before. But as you look at that business, obviously you had two big factors going on that allowed you to get basically 9.6% margins. You had some I guess spillover from, I guess government stimulus, as well as the restructuring of the business that maybe [held off] some operating leverage. Do you know how we should think about that business going forward? I guess what is like the true operating profitability in that segment?

Well, we're not going to stop until we get to double-digit margins on this business. So we have got a long way to go. I think you're seeing significant progress both strategically, but also performancewise. And as I said earlier, we dropped about $530 million in revenue, and basically didn't hurt the margins. The Cash for Clunkers, as you were talking about, the government incentives, that pumped up our light vehicle sales by 28% in the fourth quarter versus fourth quarter 2008. So did it have an impact? You bet it did.

We're going to still see that quarter on quarter improvement through the first half of the year. Now that just tells you two things, early 2009 was way down, and our early 2010 is still going to remain strong at any levels that they have continued to produce at. Plus, that Cash For Clunkers drove a lot of this keeping the plants -- automotive plants open in the fourth quarter, which drove a lot of the revenues. So I would tell you that the margins aren't where they -- on a structural basis for 2010, the margins aren't where they were in fourth quarter, yet. That's where we're driving towards, but I think you have got to think in terms of lower level to mid-level single digits at best as we go through this transformation.

So I just see a lot of good things going on with regards to our strategy, the implementation of that, the divestitures that we have made, the moves in the market, the margins are showing it. We have a lot of work to do yet still, but I think the path we have taken is a good one, and we'll continue to implement it.

And basically, just lastly on price, you have mentioned in the release that there is some pricing dispute that added a gain in the quarter. I guess what are you just seeing across the board across Bearings and Power Transition and also on Steel in terms of pricing?

Well, two things. I think any time you come through a year like 2009, there's enormous downward pressure on pricing in in all of our markets. As we have all made comments today and over the various quarters, we have been very successful in regards to maintaining and/or improving our pricing across most of our markets, and that's an indication of the value that we actually bring to many of the markets with our products, services, and knowledge. So I will tell you that there is going to continue to be onward pressure as long as this global recession continues. I will tell you that our pricing, though, is in pretty good shape across the world. We have got great mechanisms to judge that value and implement those pricings across all of our markets, customer base, and product lines. So a lot of downward pressure, but we have been very successful.

Sam, I would echo the fact that we have managed to maintain base pricing within Steel. Even with the weaknesses we have seen, we expected there would be a lot more downward pressure. We saw the pressure, but we managed to hold it. But appreciate also that at the transaction level throughout all of 2009, customers saw radical reductions in their actual transaction prices because of the falling raw material costs and therefore the narrowing of the surcharging mechanisms, and here more recently as pressures come back on, the raw material side, they have seen those go back up again. So they have seen an increasing transaction price consequent to the raw material situation as it is. But nothing that has dramatically taken it to where it was in 2008 -- much milder, although significant from where they saw prices fall at the transaction level in 2009.

Okay. And lastly on the dispute that happened in the quarter?

That -- Sam, was just a -- as you would have in normal course of business in the environment, we did have a dispute with a customer, and we accrued for -- obviously we accrued for where the dispute was with the expect that we were due additional pricing, and it did get resolved, and therefore, we reversed that accrual. So we made the comment that one, that's not that common. Two, because it occurred in the quarter, that reflected higher earnings than it would normally be, we wanted to highlight it. But not a big issue.

All right. Thank you very much.

Your next question comes from the line of Edward Marshall with Sidoti & Company.

Good morning, I -- thanks for taking my call. I just wanted to follow-up on the questions that were just asked on the balance sheet, the cash balances. Do you have a waiting as to where that cash is held? It is held domestically? Is it held in foreign accounts, and will that limit or enhance potential acquisitions, based on where those dollars are held?

No, the cash is principally in the US since we have available use of it. It's there to serve, again, for strategic acquisition purposes or other general corporate purposes, so we're not constrained frankly from where it is.

Okay. And then on the assumed improved utilization for 2010 in the Steel segment, can you talk about the tailwind that you may see from the impact on the margin as you walk in to 2010? I think you did it for the bearing segment. I don't think we have talked much about it from the steel side.

Ed, if you recall, or if you have listened to the sessions that we had last year, we were significantly below break-even for the whole year, for all practical purposes. We have managed to come above that as it stands right now. We are in the low single-digit range because we're hovering very close to that break-even level. So at this stage in time, it's -- as I said, a breath of fresh air, compared to the 2009 level. It's -- we're nowhere near what we would consider a normal operating level, and we're watching to see just what may develop as the economy improves. Anything you can do to cast some light on that, we would be really interested in, by the way.

Thank you guys very much.

Thank you.

Your next question comes from the line of Marty Pollock with NWQ Investment Management.

A couple of questions. On the interest expense -- or net interest expense, as you go forward into 2010, I mean, give us a sense what that guidance implies for that number -- in your guidance low in to the high end?

Well, again, that's -- we expect to have lower debt balances, call it, for -- on average for 2010 versus 2010 given the reduction in cash. We paid down debt. So we expect, again, with interest rates call it relatively flat. Our net interest expense will be down, albeit we have mostly fixed-rate debt anyway, but obviously we have a cash position as well, so -- we ended the year with around $513 million in debt, our borrowing costs, and obviously we have fees associated with our refinancing. You can use a 6% to 6.5% borrowing cost to get you to where interest expense will be.

Now the cash side -- what are you able to earn on that?

Not nearly what we pay on our debt, I can tell you that. Obviously returns in cash are very low. We manage it very short term and very conservatively, so we're not using the cash for yield until we redeploy it.

If I may, on the mobile side, maybe we can just describe a little bit -- within the segment, clearly you sold a chunk of your needle bearing automotive business piece. What remains relative to what you are looking at this year in terms of ability to still get significant improvement in pricing on the contracts existing? Should we assume that we're still in that work-out mode where margins are still very compressed here as contracts -- some contracts are just not up for negotiation yet? Or are we, in fact doing much better here?

Marty, I would tell you that we are just about through all of the redoing of contracts, and what I would tell you is the old automotive business. So as we talked about that for a long period of time, we're basically through that at this period. When you throw all Mobile in, you now throw in a lot of other customers in markets where we traditionally have gone through annual contracts and price negotiations, et cetera. It's the ones where we were in multi-year long-term platform-based contracts that we could not budge, when in fact we were losing significant amounts of dollars on those platforms. So we are through those basically from a fixed perspective, and now we look at the base of the business that we have, the capacity that we have in place, and we make the decisions with regards to any restructuring that we might continue to go through, or as we talked about with regards to divestitures that we already made. So now we're getting both operational, and now we start to enter into new products, and differentiating products, better margin projects as we move forward in all of these markets, and driving a lot of our after-market growth. So it's the typical model we go through and have in all of our businesses, Marty. We just needed to put the automotive sector into that same model and drive it hard.

Implicit in your guidance, can you talk about what the build rate is that you are working with? Clearly that number would suggest that the auto side would be feasibly double-digit on a 2009 base on what you still have left?

Well, we have used [SAR's] number of like [11.2], I think is the current forecast. So we have based it upon that, but remember especially now with the divestiture of needles, we are less exposed to the light vehicle, still exposed to light trucks, SUVs, and that sort of thing. So we pay a lot more attention to the actual growth rates year on year on those markets. So as we look at our package-bearing business, as an example, we'll be looking at the SUVs and pickups across the world and the utilization of those.

Maybe for Sal, just to the Steel side, we're seeing operating rates -- most Steel companies are beginning to inch in to the mid-60s, obviously they are coming off of very lows. But the number, at least on the car bit, Steel side, looks to be approaching maybe 70% maybe this year. I'm just wondering what do you think -- what would you be expecting operating rates to be? And what do you think -- can we expect to see a return towards double-digit margins in Steel? What does it take in terms of operating rate as one of those components to think about the margins returning back to somewhat historical levels?

Well, I'll tell you what I think it takes. I think it takes something on the order of 70% to 75% operating levels. We're not there yet. Appreciate that our particular product mix, while it includes automotive is -- has a much larger proportion of industrial and oil and gas in the energy arena. And the oil and gas in the energy arena didn't bottom out until -- and we're hoping it bottomed out in the fourth quarter of last year, and is not bouncing back with any extreme positive nature for us at this stage in time. But our mobile business is okay. It's strong, although we expect that that's going to kind of top out and then moderate a bit after we get past the first quarter. So the only visibility we have is first quarter and a little bit of April, and right now, they are as I described it -- a lot healthier than what we saw last year. April is coming in line, and beyond that, we don't know. We can't see very much beyond that, because that's about where our lead times are.

As far as 2010, coming from a fairly large loss, are we going to be maybe get in to -- as far as margins, at least later in the year, when these operating numbers get back closer to that number, 70% plus. Should we be expecting on a quarterly basis near the end of the year a number closer to what it has been historical?

Hard to say, Marty, because of the mix of products and the way each of the different markets would come back. From the point of view of what we have done to change the nature of the business, we think we'll be a lot better off as we move up that demand level, and up that utilization level, in a very healthy way. But we just don't have the visibility to know when these various markets are going to return, and how strong they will be at this stage in time.

Okay. Thank you.

Your next question is a follow-up from the line of Holden Lewis with BB&T.

Thanks again. When you think about the price-cost relationship going into 2010, obviously you said you were in good shape with regards to pricing, but raw material costs are going up as well. I would imagine that hurts the bearing business, but helps the steel business. When you think about price cost, are you thinking that what you are seeing in the raw mats arena is more of a positive on Steel than it is a negative on bearings or vice versa? Or do you not really look at those two businesses having a different kind of reaction?

Holden, let me take that one. I think, first of all, the raw material prices are -- as unpredictable as the economy at this point. Our approach from our pricing point of view is to insulate ourselves from that. On the steel side, we have contracts that pass through most of those raw material costs to our customers. We get a little bit of benefit sometimes, but it's not significant. On the bearing side, we have been working hard to create the same kind of structure on an OEM side, so as we look at the market, raw material costs are not one of the big five things on our concern list.

Okay. Thanks.

Your next question comes from the line of Andrew Obin with Bank of America Merrill Lynch.

Yes. Just a follow-up question on LIFO -- not to beat this horse to death, but what is the net impact of LIFO this year, just simple -- ? Because I know you had a lot of -- we had charges, then we had gains. I'm sure we also had charges and gains on the industrial business that we didn't talk. What is the net number for

For 2009 we would have had around $30 million of income as a Company. But that compares with around $50 million, if you will, of expense in the prior year, so it does fluctuate a little bit. So obviously the year-over-year improvement was a nice benefit to us, but overall --

And for 2010, LIFO, right now we're forecasting you're going to be fairly neutral, right?

We expect to have some expense, but fairly neutral is fair. So, again, we'll have the impact of losing the LIFO income that we had, and add to that some expense next year.

And just on back to Marty's question on the [past] utilization in the Steel business, just what kind of GDP numbers or just -- can you give us a macro indicator we should think of to get Steel back to this 75% capacity utilization, which would give you those double-digit margins?

Okay. Well, again, this is so dependant on different markets, Andrew that that's hard to say. My sense is that if the automotive market stays modestly positive as it is, that will be a big help, and a good platform. If we see any return of our industrial markets, including our distributors, which we have seen some demand coming from, that would be fine. Our big concern, though, is that there is just a refill of the inventory pipeline and that we see the actual demand for consumption of that weakened again after the first quarter, and there's a lot of words that are saying that. So we just don't know where it will head.

No, that's a very fair point, and just -- have you given a number what your guidance currently implies for the capacity utilization for Steel?

About half.

50%?

Yes.

Terrific. Thank you very much.

This is Steve Tschiegg. I see we're over our allotted hour for the call, and really appreciate all of the interest that we're hearing from you. Before we conclude today, I would like to turn it over to Jim for our closing comments.

If I could summarize briefly, our strategy to transform the Company is clearly on track, a strategy to transform for profitability and diversification. The questions about capacity utilization I think reinforce the fact that we're still dealing with a weak economy and operating well below capacity at this point. As the economy improves, Timken is well positioned to deliver higher levels of financial performance. Thank you for your interest in Timken.

Thank you for participating in today's Timken's fourth quarter earnings release conference call. You may now disconnect.