Timken Co (TKR) 2011 Q4 法說會逐字稿

Good morning. My name is Caroleena, and I will be your conference operator today. At this time, I would like to welcome everyone to Timken's fourth quarter earnings release 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 2011 conference call. I'm Steve Tschiegg, Director of Capital Markets and Investor Relations. Thank you for joining us today. Should you have further questions after our call, please feel free to contact me at 330-471-7446. With me today are Jim Griffith, President and CEO; Glen Eisenberg, Executive Vice President of Finance, Administration and CFO; Rich Kyle, President of our Mobile and Aerospace and Defense businesses; Chris Coughlin, President of our Process Industries; and Sal Miraglia, President of our Steel Group. We have remarks this morning from Jim and Glen, and then we'll all be available for Q&A. At that time, I ask that you please limit your questions to one question and one follow-up at a time, to allow an opportunity for all to participate.

Before we begin, I'd like to remind you that during our conversation today, you may hear forward-looking statements related to future financial results, plans and 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 the 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, and the use, recording or transmission of any portion without the express written consent of the Company is prohibited. With that, I'll turn that I'll turn the call over to Jim.

Thanks, Steve. 2011 was a stand-out year for Timken. We achieved record sales of $5.2 billion, up 28% for the year. We grew earnings by a substantially higher amount, up 70%, to a record $4.59 a share. These results reflect the degree to which we've elevated our performance. We re-invigorated growth and drove more to the bottom line, leveraging greater profitability from an improved operating model and lower cost structure. We also had a strong year of cash generation, somewhat camouflaged by the need to put working capital in place to support our tremendous growth, and large discretionary contributions to our pension and benefits plans -- part of a long-term program targeted at reducing their impact on the Company's performance.

It should be clear, that there is more to our improvement, than the economic rebound. The real story is the development of a more efficient, global business model, and a mega shift in our market portfolio, which provides the foundation for profitable growth. Over the past decade, we have broadened our sales and product offering to expand in diverse industrial markets.

Today we serve a better mix of industries including energy, mining, agriculture, infrastructure development, metals, aerospace, and transport. They are attractive to us for several reasons. First, they present especially demanding requirements that play to Timken's inherent strengths, bringing technical know-how, application engineering, precision manufacturing, and services to improve our customers' performance, and create mutual value. Moreover, they offer a lifetime of aftermarket business, with prospects that suggest sustainable long-term growth.

The story behind our 2011 results is that we accelerated sales in energy, mining and related markets. The strength of these industries and our keener focus on them drove growth in our Steel, Mobile and Process Industry segments. More than anywhere else in the Company, energy was the headline of our Steel segment growth. Sales volume from the oil and gas sector rose 80% for the year, while the business also gained ground in serving industrial demand.

To capitalize on this demand, you may recall that we are exploring a major investment in our Faircrest Steel plant. Since our current labor agreement will expire in September 2013, we opened early negotiations with the United Steel Workers to ensure a stable work environment through the proposed expansion. On January 6, members of the Union failed to ratify the agreement we reached with their leadership. However, just yesterday, Company and Union negotiators agreed to continue discussions on the labor agreement. They are meeting today to discuss the vote and related issues.

If we turn for a minute to organic growth, sales from new-products played a significant role in our Process Industry segment, which achieved it's first $1 billion year in 2011. This business has been increasing penetration with new bearing varieties, in growing and attractive industrial distribution channels. Off-highway equipment, mining and rail industries top the growth of our Mobile segment, which also saw incremental improvement in heavy truck and aftermarket sectors.

Our 2011 acquisitions also contributed to our profitable growth. Both Philadelphia Gear and Drives bring Timken new capabilities, beyond our core bearing and steel lines. Acquisitions like these exemplify our continuing efforts to diversify our portfolio within the mechanical power transmission space, and achieve new growth by expanding these capabilities around the world. We are approaching 2012 with confidence, grounded in sound strategy and delivered performance.

While we are seeing the impact of economic turmoil in Europe, and the effects of credit tightening in Asia, overall, the markets remain strong. We are buoyed which the long-term growth prospects that our markets present. We are bolstered by a strong balance sheet, providing ample capacity for growth. We are committed to our operating model, guiding responsive execution through whatever economic turns lie ahead. We are confident in the heightened earning power of the Company, and we are driven to perform, with 21,000 dedicated Timken people world-wide serving our customers' communities and shareholders with distinction. Now I'll ask Glen to share more details about our 2011 performance.

Thanks, Jim. Sales for the fourth quarter were $1.3 billion an increase of $194 million, or 18% over 2010. The increase was due to strong volume across the Company's broad markets, with the exception of our Aerospace and Defense business. The top line also benefited from higher pricing, material surcharges and acquisitions. Excluding acquisitions, sales were up 12%.

From a geographic perspective, we posted the strongest gains in North America, while most other regions were relatively flat. Gross profit of $343 million was up $77 million from a year ago. The improvement was driven by higher volume and acquisitions, while surcharges and price more than offset the impact of higher material costs. The gross margin of 27.1% for the quarter was up 230 basis points over a year ago.

For the quarter SG&A was $167 million, up $17 million from last year, primarily reflecting acquisitions, as well as increased discretionary spending. SG&A was 13.2% of sales, an improvement of 80 basis points over last year, as we continue to effectively leverage our cost structure. As a result, EBIT for the quarter came in at $167 million or 13.2% of sales, 310 basis points higher than last year. Net interest expense of $7.4 million for the quarter, was down $1 million from last year, primarily due to lower financing costs.

The tax rate for the quarter was 32.1%, compared to 13.3% last year. The lower tax rate in the fourth quarter of 2010 was primarily related to a one-time tax benefit from implementing a Voluntary Employee Benefits Arrangement, or VEBA, trust. In addition, the fourth quarter tax rate in 2011, came in slightly better than the 34% anticipated rate, due to a higher percentage of the Company's earnings coming from lower tax rate foreign jurisdictions. Going forward, we expect the tax rate to be 34%. As a result, income from continuing operations for the quarter was $109.1 million or $1.11 per share, compared to $0.87 per share last year.

Now, I'll review our business segment performance. Mobile Industry sales for the quarter were $420 million, up 8% from a year ago. The increase was driven by higher demand, led by off-highway and rail markets. In addition, the top line benefited from pricing and acquisitions. Excluding acquisitions, sales were up 5%. The Mobile segment had EBIT of $43 million or 10.3% of sales, compared to $42 million or 10.9% of sales last year. The favorable impact of stronger volume, was offset by higher raw material and administrative costs. The margin decline primarily resulted from purchase price accounting, related to the Drives acquisition. Mobile Industry sales for 2012 are expected to be flat for the year.

The Company expects improved demand from off-highway, rail and automotive aftermarket sectors, and the Drives acquisition. This growth is expected to be offset by lower light vehicle sales, resulting from the Company's strategy of focusing on markets which offer long-term attractive returns. For 2012, we expect the negative sales impact of this repositioning to be approximately $150 million.

Process Industry sales for the fourth quarter were $322 million, up 29% from a year ago, driven by acquisitions, stronger demand from industrial distribution, and new products. Excluding acquisitions, sales would have been up 9%. For the quarter, Process Industry's EBIT was $67 million or 20.8% of sales, up from $44 million or 17.7% of sales last year. EBIT benefited from higher volume and mix, as well as acquisitions. Process Industry sales for 2012 are expected to be up 8% to 13% for the year, driven by broad industrial market demand, growth in Asia, new-product sales, and the full-year benefit of acquisitions.

Aerospace and Defense sales for the fourth quarter were $80 million, down slightly from a year. Lower Defense related demand drove most of the decline. EBIT for the quarter was $4 million or 4.5% of sales, compared to a loss of $4 million a year ago. The loss last year resulted from $7 million of expense, related to increased inventory and warranty reserves. For 2012, we anticipate Aerospace and Defense sales to be up 10% to 15%, primarily driven by stronger defense and commercial aerospace markets.

Steel sales of $468 million for the quarter were up 23% over last year. The increase was primarily driven by stronger demand, led by the energy sector, as well as pricing. In addition, surcharges were up approximately $35 million for the quarter, due to higher raw material costs and overall demand. EBIT for the quarter was $72 million or 15.3% of sales, compared to $42 million or 11.1% of sales last year. The increase resulted from higher surcharges, pricing, and mix which were partially offset by higher material costs. Steel segment sales for 2012 are expected to be up 5% to 10%, driven by end market demand in the energy and mobile on-highway sectors and pricing.

Looking at our balance sheet, we ended the quarter with cash of $468 million, and net debt of $47 million. This compares to a net cash position of $363 million at the end of last year. The change in net debt position includes the Company's investment and acquisitions of $292 million, and discretionary pension, and VEBA trust contributions of $256 million, net of tax. The Company ended the year with liquidity of $1.3 billion, with no significant debt maturities until 2014.

Operating cash flow for the year of $212 million reflects the Company's strong earnings, partially offset by increased working capital to support the Company's growth, as well as discretionary pension and VEBA trust contributions. Free cash flow for the year was a use of cash of $70 million, after capital expenditures of $205 million, and dividends of $76 million. Excluding the discretionary pension and VEBA trust contributions, free cash flow for the year was $186 million. The Company ended 2011 with unfunded pension obligations of $491 million, or roughly 84% funded. The benefit of contributions were more than offset by the negative impact of a lower discount rate and lower asset returns.

Turning to our outlook for 2012, we expect continued improvement in the global economy and estimate sales for the full year to be up 5% to 8% over 2011. Generating earnings per diluted share of $4.90 to $5.20, an increase of 7% to 13%. The Company expects cash from operating activities to be $515 million, which includes discretionary pension and VEBA trust contributions totaling $150 million, net of tax. Free cash flow is expected to be $90 million, after capital expenditures of $345 million, and dividends of roughly $80 million. Excluding discretionary pension and VEBA trust contributions, free cash flow is expected to be $240 million.

Finally, on February 14, the Company will host it's annual Analyst Day meeting in New York, where we will review our long-term outlook. Additional details regarding this event will be announced early next month, including the webcast information. This ends our formal remarks, and we'll now answer any questions that you have. Operator?

Thank you.

(Operator Instructions).

And we have a question from the line of Stephen Volkmann with Jefferies & Company. Please go ahead.

Hi, good morning.

Good morning.

I think what stands out to me, as I think about your guidance, is just the Mobile number. And I just wanted to make sure I had a couple things right. And then maybe you can help me through it.

But I think what you're implying is that acquisitions should add about $150 million in 2012, and that you think there's a $150 million headwind for some businesses that you're kind of exiting. Do I have that right?

Yes, on a consolidated basis, that's correct, not just, obviously, the impact for Mobile The acquisitions that will benefit, that we've done last year, that we'll get the full-year benefit, will come in both our Process and our Mobile groups, where the exited business if you will, that would take away from that, is, obviously, just in the Mobile group.

Got it. Okay. And can you ballpark for me what acquisitions should add to Mobile in 2012?

Steve, that would be about $50 million.

50. Okay. So you have a net headwind of about $100 million in Mobile from that. How should I think about the margin profile of the businesses that you're not going forward with? Would that -- can I assume that you're exiting lower margin, or is that not the right way to think of it?

That would not be the right way to think of it. As a result of the pricing actions that we took several years ago, that business would have been in line with the rest of the portfolio. So, we expect margins for the Mobile business, for the year, to be comparable to the last couple of years, in the low teens.

Okay. Great. So I guess, the thing I'm struggling with is sort of the flat outlook. And I guess, you have -- what is it -- it's probably going to be a 6% or 7% -- I'm trying to do it in my head -- headwind from the businesses that you're losing. And yet what we're hearing from our other companies, is that all the other Mobile markets are going to be up double digits. So, coming up with a flattish overall -- is that just a kind of conservative view of the world, or is this based on an order book kind of look, or how should I think of that?

Let me -- Steve, let me take on the lost business piece first. And then I'll talk about the markets. Going back to the 2008, 2009 time frame, as you know, we repriced our portfolio. We made strategic decisions that we knew would lead to the exit of portions of our automotive portfolio, and to a lesser degree, our heavy truck portfolio.

As we entered 2011, we provided guidance that we would exit approximately $100 million, as a result of those strategic decisions. And that guidance proved to be relatively accurate. And as a result of that, our light vehicle business shrank about 5% in 2011. And that was despite, relatively strong North American automotive markets, as you're aware of.

Right.

Our other Mobile markets were strong enough, and our penetration in those markets was strong enough that we offset that 5% shrinkage in light vehicles, which was our largest segment, to achieve a net 13% growth for the Mobile business. As we enter 2012, we plan to exit $150 million, up from the 100, again, mostly light vehicle.

Of that, about two-thirds of that is one customer, one platform, that ended in the fourth quarter of last year. We've known that was coming. We've prepped for it, and we've taken the actions around that, so that's no surprise.

The vast majority of the other third, has also either taken place towards the end of the fourth quarter, or will take place in the first quarter. And so, we expect that the first quarter results will be reflective of the exit, and the go-forward run rate for the business. We expect growth in the other segments, plus the acquisition, to largely offset that, but just moderately, not to the degree that we did in 2011.

The projected result of that is, again, relatively flat year-over-year performance, but a shift to more attractive, and more sustainable markets that we are confident that we can grow in, going forward. And going forward after Q1, we do not expect exited business to be material, from a sequential standpoint through the rest of 2012 and entering 2013.

Okay. Great. That's super helpful. How will that impact margin then, in the first quarter to some extent as well, then?

No, no. Again, we've taken the actions through the course of last year, and the decline we saw in margins in the fourth quarter for Mobile, were not a reflection of exited business. It was a reflection of the typical seasonality, as well as the Brazil charges that we took as well.

Okay. Great. I'll give somebody else a chance. Thanks.

Thank you. And our next question is from the line of David Raso with ISI Group. Please go ahead.

Good morning. Really just one straightforward question. You're guiding your CapEx to be up 68% in '012, but a revenue growth that's -- we haven't talked at all about pricing, currency, to get the real volume number, even stripping out the acquisitions.

But obviously, not much volume, especially given -- I suspect you're getting decent pricing, especially on steel. How do we square up that revenue guidance, with a Company deciding to raise their CapEx 68% in '012?

Let me take the first cut, and obviously, we can spread it around the room on any in particular things. But clearly, we see a lot of attractive growth opportunities, and we're running into certain areas where we're capacity constrained, and see markets that are pretty attractive that we want to continue to pursue.

There's obviously going to be a lag, obviously for the capital investments, that would be geared towards certain kinds of capacity additions, so it's a lag effect. When we're together later on, I guess next month and talking more about our longer term outlooks, you'll start to see the benefits of those investments coming in, and showing up in stronger top line growth.

David, this is Jim. Just to put a little bit in perspective, our capital program alternates between long cycle and short cycle investments. You will recall when we were putting our capacity in China four, five years ago, we made some investments that took several years to get in place, and then paid off. And then the last two or three years, we've been just filling those out on an incremental basis.

Well, we're back to where in 2012, we're launching a couple of fairly long cycle investments, the one that I mentioned in my comments, the caster is an example that, that's still in the capital forecast at this point. And it's a two-year investment cycle before we see the benefits of it.

Well, I mean, it's just -- at the end of the day, I guess the idea of the volume alone, to be investing that way, you must have at least some thoughts around a macro environment that's not that troubled near term at a minimum. I know some of these are long-term investments, but the decision to be that confident, and make some of those longer term investments, sounds like a Company a little more comfortable with the macro backdrop, than -- if you pull out the acquisitions, you're saying that your Mobile business -- pull out the acquisitions and the lost contracts, your Mobile business has only grown 5% to 6%. Right?

Your Process Industries ex Philly, you're talking 2%, 2.5% growth. So, it just sounds like a very weak unit growth assumption for a Company that confident in a macro backdrop, to be spending that kind of CapEx. (Multiple Speakers).

So, maybe, help me at least a little bit, get more granular on the revenue guidance. What do you have for currency in these businesses with this guidance? I mean again, the Process Industries business, and for that matter Mobile -- it's not all the US, right, especially Process?

How can we think through, if Philly's adding say, roughly 100 of revenue to Process, your revenue guidance is implying low single digit revenue growth, ex acquisitions. Can you take us through this a little bit more in detail? I appreciate it.

Hi, David, a little bit. First, again, we'll deal with some rounded numbers. But -- the acquisitions of both Philly end drives that would affect Process year-over-year growth are going to be in the $80 million-ish kind of ballpark.

Okay.

Currency within our Process group as we model it, again, obviously fluctuates day-to-day, but is constraining the top line we think in '12 by a couple of percentage points.

Okay.

We have north of 50% of the sales that come out of Process are outside of the US markets, and given the stronger dollar, that's going to have a constraint. For the whole Company it's more like a 1 point to 1.5 point. But for Process, you'd see a bigger negative impact from that.

But again, as Jim said, we see opportunities to growth in markets, not every market, but in selected markets of oil and gas, mining and so forth, that we feel long-term are very attractive to us. And as we talked about -- obviously you're talking with Mobile and Process opportunities.

Within our Steel group, we talked about the opportunity as Jim said, the Caster is focused on the oil and gas market in particular, mining and so forth. And so, we are bullish relative to certain markets on a global basis. And again, looking at the global markets, and looking at the global outlook from a macro standpoint, you're still looking at 3%, 4%, 5%, kind of global GDP kind of growth over the next several years.

But we've gone through, as Jim said this before, through cycles, and we're making selective investments. Of the 300, and, call it, $45 million of capital investments, around $80 million-ish of that is maintenance. So clearly, the bulk of the investment are where we feel, we can redeploy our capital into attractive growth opportunities longer term.

And would you mind commenting on the profitability you're looking for in Process in '012. I thought the margins were pretty healthy in the fourth quarter. It might give us some insight into how you're thinking about -- it looks like ex currency, ex acquisitions, you're looking for Process to be up 6. Maybe some sensitivity to what geography is up or down, in the sense of where you're going to guide the margins toward? What kind of margin are you thinking for Process for '012.

David, this is Chris. A couple things, and let me go back just to acquisition, just to get your math straight. The acquisition growth that we're looking at next year in Process is only 5%. You were quoting a much higher number.

And part of that has got to do with the timing of some major contracts and -- that hit during this year, et cetera, and I won't get into that here. But that's basically -- there is more volume there, than you were using in your math.

All right. So it's 7.5, then?

Yes, okay. And where that number comes from, we do have some uncertainty with regards to Asia in particular, with regards to how 2012 is going to play out in that market space, particularly China.

So, we can debate whether that's conservative or not, but there are -- there is some uncertainty in both of our European and Asian markets. And, I think as you know, 60% of Process sales are outside the United States. So that is primarily, I guess, the explanation on the volume side.

On the margin side, the fourth quarter margin was generally pretty good from our perspective. I do remember we have the seasonal operating issues, which we operate at lower levels in the fourth quarter, and that puts some pressure on the cost.

Moving forward, we expect to see continued good margin performance in the 20s, and that will fluctuate based on a couple different things. There's some inflationary cost pressure. Obviously, we try to get that back with pricing, but there are definite timing issues with regards to costs coming in, and when pricing is actually realized. So, that's one issue.

The mix is also a very important issue that we've talked about a number of times in the past. We had a very strong distribution mix in 2011. However, the original equipment business is very important to the long-term health of our aftermarkets. So, we are constantly trying to aggressively grow that OE business as well, even though it is lower margin than our distribution business.

So, as that mix fluctuates, you will see some movement in those margins, as well. All that said, we expect to see margins healthy again, moving forward. And we'll see some bouncing around a little bit, a point or two here or there, on the basis of cost, pricing and mix.

I appreciate it. Thank you very much.

Thank you. And our next question is from the line of Eli Lustgarten with Longbow Securities. Please go ahead.

Good morning, everyone.

Good morning.

Well, we've gone through two, so could we talk about the profitability of Aerospace and Steel? Before I go on? (Laughter). In 2012?

I'll start with Aerospace, Eli, this is Rich. We expect, as we said double-digit growth, and we expect very strong leverage off that growth, not to the extent that we get back to our peak margins in the high teens. But that we, by the middle to second half of the year, approach double digits. The reason we're able to get that leverage is essentially some improved mix, the volume, obviously, helping. And then the result of cost improvement actions that we took through the course of 2011, and then some better execution, as well.

Eli, this is Sal. Again, if we look at 2011, we had a record year for our performance. We're expecting 2012 to be comparable. Similar volumes, but with improvements in mix and pricing.

So we think we're going to be operating in at least the same territory, as you've seen us in the low to mid-teen EBIT margin range, but with very -- with pretty healthy market demand in those market segments that we've been talking about in --. Actually for us, Mobile is still looking healthy, Mobile on-highway for us. But, particularly in our industrial and oil and gas segments, strength is very nice.

Now can I get one clarification? You talked about the $150 million volume drop in Mobile from the contract exited, and you said about the impact from the first quarter. Are we going to see most of the $150 million decline hit in the first quarter, or is it spread out over the year? I mean, the implication was that the first quarter was the worst by far.

It is, it is almost exclusively a hit in the first quarter. You will see very little impact after the first quarter.

So, the first quarter volume, whatever it -- it takes $150 million out, and the rest of it -- is that the correct way to look at it?

Yes.

Just to be clear, Eli, what he's saying is, on a run rate, it hits almost 100% in the first quarter, but the 150 is an annual number.

Okay.

Is that the way you understood it?

I just want to make sure -- that's the implication. So, you take 150, and if it's a year number, then it's about $40 million lower in the first quarter and --.

That's correct.

Yes. Roughly $40 million each quarter, if you look at it year-over-year.

Okay. That wasn't quite -- that's why I asked the question. And what we see in the Process industry, across people who are supplying the industry, is a wide expectation for double-digit growth in some markets. It's probably the thing that's going to carry Emerson's Process business and the whole company, and Honeywell, and across the board.

Is double -- you're implying a sort of a growth rate, almost half that in your guidance. If things work out, I understand the Europe and Asian problem, but is a double-digit growth reasonable in the Process market? We're talking ex the acquisitions add, based on current bookings, if the fears don't work out. Because we are seeing a much stronger Process market, than you're sort of indicating.

Yes, there are -- anything's possible. And clearly, if markets run with us, we could see good growth. The issue that we would see right now, Eli, is in Asia, and particularly China, we're looking at relatively flattish kinds of first quarter numbers.

Okay.

The growth rate has clearly stopped, quite frankly, so we're looking at relatively flat revenue numbers early in the year. Now, we are cautiously optimistic that we're at a bottom, at least in terms of growth rate, and that growth will resume in the later part of the year. But depending on how that plays out, and everybody can have their own assumptions on that, those are the issues we're looking at, when we are looking at our guidance on the revenue rate.

Obviously, if those prove to be too pessimistic, that will be good for us, because we're right in the middle of those markets. And as you know, one other point, Wind, in particular in China is challenged. And it is part of our portfolio in that market space.

And so, we do have a couple market sectors, which in total are not of huge consequence, in terms of the performance of the group. But when you start getting into a point here, or a point there of growth rates, those market segments can have an impact, as well.

And one final question. I know the Mobile business, with debate of how strong it will be, all the numbers. Are you seeing any change in order pattern from your -- the construction equipment, farm or truck or rail or some of the heavier companies, as you look into 2012 order book in the Mobile business?

So, is business still strong? Has it flattened out on a quarter-to-quarter basis? Can we get some idea of what's going on in the marketplace?

From a Mobile perspective, we are still growing year-over-year, and sequentially. The rail market is strong. The off-highway market is strong, led by mining. Construction's okay as well, but mining is the real driver there.

Heavy truck has been flattening out, and that depends on -- I'd say globally, our mix is flattening out. Some softness in Europe, still some strength in North America. But overall, our first quarter order book is pretty solid.

All right. Thank you very much.

Thank you. And our next question is from the line of Samuel Eisner with William Blair & Company. Please go ahead.

Good morning, everybody.

Good morning.

You mentioned before when you were talking about your CapEx guidance, that you were capacity constrained. Could you talk about where you're seeing those constraints? I presume that they're in Steel, but maybe if you could talk through that a little bit further.

Sam. This is Jim. If you look across the Company, and go back to my opening comments, the strength in the oil and gas industry and the strength in the mining industries are driving our Capital program, and that is across the Company. Certainly, we're capacity constrained.

We're on allocation on the Steel side, and that explains a little bit of the growth numbers for 2012. There are investment plans to address the oil and gas capacity, as well as the mining capacity, on both the bearing business and the Steel business.

Okay.

On the bearing side, we're generally not capacity constrained. There could be some very small product areas that would be tight, but we have -- if the markets are stronger, we have room to capitalize on that.

I guess, just to add on to that, could you maybe talk about utilization rates within, I guess, the three separate bearing businesses?

Yes. Overall, capacity as Jim talked about, within Steel, we're probably running around, call it 85%-ish which is effectively full for us. On the Mobile side, I can give you kind of rounded number, around 70%. Process, around 75%. And on Aero, around 60%.

So as Rich said, from a segment standpoint, but we have additional capacity -- there are still certain markets within those segments that could be more constrained than others, such as the rail segment if you will within, the Mobile market.

No, that's definitely helpful. Thanks. Regarding pension, obviously, you're now about 84% funded. I think at last year, or at the beginning of last year you were about 90%. Can you maybe talk about where the deltas are in your guidance? And maybe how much on a year-over-year basis you would increase your ongoing pension expense, and how that flows through into your guidance assumptions?

We've always said, at least for the most part, plus or minus $100 million of expense for pension and OPEB is a reasonable number. It does fluctuate every year, but the magnitude is normally not that great, because of averaging and so forth.

But as you know, we've contributed a fair amount into the plans this year, only to see the contributions we made be offset because of having a lower discount rate, as well as asset returns.

In fact, our asset returns came in at around 4.5% this year versus an 8.5% expectation if you will. And the discount rate dropped fairly dramatically at the end of the year. And we're discounting it around 5%, which was 75 basis points lower.

So again, the funding status remains at 84%. We were at 86% at the same period a year ago. We actually had that percentage improved, as we went through the year. But again, on the year-end valuations, back to around 84%. And we've talked in our guidance of cash flows for next year, we'll put in around $150 million net of tax, so call it $250 million-ish pre-tax into those plans, in both the pension and the OPEB, our post retiree medical.

On that front, we did see an improvement in the post retiree medical by around $135 million. Again, this is a discretionary plan that we're not required to fund. And at the end of 2011, we were around 27% funded in that plan, as well So that gives us a flexibility going forward, on cash flows, as well. But we always say, rates can't go any lower, and they do.

But our strategy is to continue to fund, and these are discretionary. So, we'll evaluate where we are on the balance sheet, relative to other opportunities to invest. But clearly, we've also talked about at least on the pension side, going through and trying to address the liability now as much as the asset side, by looking at potentially going out with lump sum payments, annuitizations and so forth, so that we can lessen that liability that we have.

Great, and that was a lot of color. And then just lastly, obviously, you've been -- you highlighted your $1.3 billion of liquidity, and your strong cash position. I mean, could you maybe talk about priorities for cash, and maybe acquisitions as well? Are you still targeting, expanding further into Process and Aerospace, or is there something else that you would be, maybe looking at from an acquisition standpoint?

I think with -- again, the exception -- take acquisitions maybe last. But clearly the $345 million we're talking about on CapEx is a large amount for us, more than our normal amount, so clearly, what you heard from Jim and the others, we see a lot of good growth opportunities from that respect. We talked about the, 100 and, call it, a 150 net of tax into the pension, and the post retiree will be a form of that investment.

Obviously, we have a dividend and a share repurchase program that we'll continue to be active in. And then on the acquisition front, we continue to look for strategic acquisitions across the Businesses. There were two that we did this past year, and we continue to expect that we will use some of our liquidity to continue to pursue our strategic growth in acquisitions in a lot of different areas. But obviously, what you've seen is kind of growth outside our traditional product offerings, more into a broader expansion into the power transmission, mechanical power transmission space.

Great. Thank you very much.

Thank you. And our next question is from the line of Steve Barger with KeyBanc Capital Markets. Please go ahead.

Good morning.

Good morning.

For the Steel segment, thinking about the 5% to 10% revenue forecast, can you break that out for me, between volume and price?

Actually, Steve, it's all mix and price. We will be about flat on volume for 2012, operating close to a capacity level, not actually there, depending on what product mix might come through, we may be able to get a little more out. But for the -- predominantly, we're talking about mix and price that affects that, yes.

And so, in terms of margin, I mean, if you're getting all that on -- if a lot of that is coming from price, you should have a really solid incremental margin in that segment; right?

Yes, we kind of signaled a little earlier, that we would expect to maintain that low to mid-teen EBIT margin level, up from where we were a year, year and-a-half ago, which was just about 10% or thereabouts.

Okay. And can you tell us what maintenance costs in the quarter were for Steel?

For the fourth quarter, we were probably around $35 million, $30 million to $35 million maintenance for the quarter. We did a lot of work in that particular period of time, because of the holiday period.

And what's the -- how should I think about a run rate for that kind of in 2012 on a quarterly basis?

Similar to what we've had before, about $20 million to $30 million a quarter.

Okay. And switching gears for a second to Process, the release mentioned that the segment benefited from a really strong mix of distribution. Can you tell me the margin differential between distribution and OE, and how I should think about what that mix is on a percentage basis going forward?

That varies considerably, and I don't think we're going to provide that kind of data. That said, our distribution mix, primarily meaning aftermarket, is running 65 on norm, been running a little closer to 70 in 2011. But there is clearly, a distinctly a margin differential between the two.

And the reason I -- I'd be greatly generalizing, because the OE side of that business, and even the distribution side, the mix can fluctuate, or the margin can fluctuate quite a bit, depending on the product line, and other details around which specific segment we're talking about.

Generally speaking, though, is it hundreds of basis points?

Yes.

Oh, all right. Thanks. I'll get back in line.

Thank you. And our next question is from the line of Tom Mullarkey with Morningstar. Please go ahead.

Hi, good job on 2011. All right, can you hear me?

We can.

Okay. My first question, since a lot of them have already been answered, deals with last February at your Investor Day, you spoke about the opportunities in Asia. And then you talked about the market softening a little bit. I was wondering if you could get into maybe, specifically in China and India, what you saw in 2011? And if any of your forward-looking thoughts have changed around the wind, aerospace, power transmission and rail sectors in that region?

Yes, I'll start. This is Chris. The first nine months in Asia were pretty much the way they've been. We were clipping off 30% growth rates kind of number, so the first nine months of the year were very, very good. In the fourth quarter, as a result of significant tightening from the government in the mid of 2011, basically the growth disappeared, for argument's sake. We could debate the numbers.

So the governments are reining in inflation. This is also happening in India, as well. So what has happened is, the growth rate has sort of disappeared. And I used that term, because it's not like the market's collapsed or anything. It's just that the 20%, 30% kind of growth rate's not there, and we will not see that in the first quarter.

Now, the government has begun loosening credit again. And I think as I pointed out in previous call, this is my third experience with this. In the previous two experiences, six, nine months after the government has done that, we see the market return to growth.

So we're cautiously optimistic, that we will see the resumption of growth in the China market in the balance of the year, as we move deeper into this year. We have not seen as big a problem in the greater ASEAN area, meaning Indonesia and countries like that. So, we've got some pretty decent growth there. So, that's really the geographic look at it.

In terms of the markets, most of the markets in China continue to do very, very well. I would put Wind off on the side. It's a little bit of a special case. It's a market that's definitely struggling, and you'll hear that from a number of people, I'm sure. But rail, mining, infrastructure, metals, these markets are still pretty robust within the region.

Fantastic. Thanks. And I guess my next question is, looking at your Philadelphia Gear acquisition, it's been under your belt now for about six months. Is the integration going as planned? And I think the business is primarily North American, have you been able to roll it out, the solutions into any international markets?

Yes, two things. One, it's going extremely well. And I think you can see that, just by looking at the margins in the Process Industries, we brought that segment in.

So you can see for yourself, that it's performing very, very well, in terms of the profitability and everything we expected. We are in the process of taking that platform globally. And so there's a lot of work going on India, China and throughout the greater world to globalize the platform, which is our primary synergy, per your point, that they are very strong in North America already.

Great. Thanks. I'll get back in queue.

Thank you. And our next question is from the line of Gary Farber with CL King.

Yes, good morning. Just a couple of questions. Can you talk about -- you just talked about at the beginning of the call, the trends in North America, Europe, the turmoil, Asia, the credit situation. Can you discuss the competitive environment you're seeing, how are competitors responding in those different geographies? Do you think there's opportunities for market share?

Let me take that question, and talk about it sort of at the corporate level. And then, if you want to dive into particular markets you can. The focus of Timken, to go back to my original comments, the focus of Timken is to focus on specific markets where we have unique capabilities in the marketplace. And our goal in those is to focus on markets that are growing, and to grow disproportionately in those markets, which therefore in your terms, means we will gain share in those.

I think you -- but you have to step back. You can't define that as either bearings or SBQ steel markets. You have to define them specifically in markets, like oil and gas on the steel side, mining, infrastructure, railroad, et cetera, on the bearings side. And certainly, the industrial aftermarket on the bearing side.

And just from a Mobile perspective, add a little more color -- not seeing anything unusual from a competitive landscape globally, as a result of European economic issues or other issues. Looking back in our rail, off-highway and our aftermarket businesses within Mobile, we certainly held our own or gained penetration through the course of 2011.

Automotive, I've already talked about that, we strategically lost share there. And in heavy truck probably held our own. There's always pricing pressure, but in general, pricing went up. We were a little behind covering material within Mobile, but would expect to cover that in 2012.

Great. Okay. And then just one last one, just there's been a fair amount of movement in raw material costs over the last quarter or so. Can you discuss if that's having impact on your business at all?

Let me take the first stab at that, Gary. This is Sal. As we've described earlier, we have had operatives since 2004, a surcharging mechanism for scrap alloy. At one time, energy, but energy's looking pretty good right now.

So it's not so operative for us, nor as problematic. In fact, it's a positive. So other than slight variations month to month, we essentially have passed the volatility and cost escalations of raw materials down the supply chain. So we're pretty immune from that in Steel right now.

Just as a general comment too, for the Company, as Sal said within the Steel group, the mechanism of surcharges, recovering our material costs has been very effective. And as we go into 2012, we really have true pricing power, given the constrained markets.

Within the bearing and power transmission side again, we have the ability to pass on those for the most part through price increases. So, as a net income of higher material costs on the Company, between the pricing and the surcharges, we would expect as we did this year, to meet or exceed through pricing beyond the cost of those materials.

Okay. Thank you.

Thank you. And our next question is from the line of Holden Lewis with BB&T. Please go ahead.

Thank you. Good morning.

Good morning.

So, where Steel is concerned, certainly, understand that you're capacity constrained, so the volumes aren't going to go up that much. But to the extent that price is a big source of growth, and in fact drives double-digit growth, shouldn't that drop to a greater degree, right to the bottom line? And so if you achieved sort of a 15% margin in Q4 in Steel, why wouldn't we assume that with a big pricing piece coming through, that you wouldn't build on that 15%?

You're thinking about it perfectly correctly, Holden. But just remember, that we also moved pricing in 2011. So there's one on top of the other that we're seeing for the two years. And in addition, where we have the opportunity again, because we're practically at our capacity right now, we are shifting when possible, to more profitable product lines when that opportunity makes itself available. So, I mean, I can't argue with your logic. We agree with that.

Holden, just a little bit of color, though. If you follow your logic, you'd say 10%, 15% price increase, means those dollars fall right to the bottom line. There are some cost headwinds in Steel, some particular inputs, that we're seeing very aggressive inflation, carbon-based kinds of things, and that offsets it. So, it tempers the profitability impact of that pricing to some degree.

But that's caught by surcharges, right?

No, not -- that's raw materials. But if you look at things such as refractory and electrodes, where there are similar global capacity constraints, there's opportunity there for those suppliers to push their prices, and they are.

Okay. Got it. And then, you made reference to the margins in Q4 being adversely impacted by accounting adjustments. Can you give some sense -- and that obviously has hit the Mobile and the Process, can you give some sense of how much that margin impact was? Because that should be relatively temporary, and be gone through most of 2012, right?

Yes, I guess the only things that I can think of that would, have negative impact our performance that were unusual would be, I guess, two. One, some purchase price accounting issues with regard to Drives. But again, not a significant issue, probably in the $1 million to $2 million issue. And then the Brazil, if you will, the restructuring, as we closed our facility and are looking to exit, that we have some costs, just going through -- they're primarily environmental -- and that's probably the tune of around, call it, $6 million. So overall, you're looking at -- those would be the only two that I would identify as, call it, unusual, accounting related.

Okay. All right. And then lastly, if I'm kind of doing this math correctly in your Mobile business, I think automotive is roughly 40% of Mobile, and you (inaudible) update the number. If that's right, then your automotive business in Mobile is about $700 million. And if you're losing 150 of that, that's like I mean, a 20% reduction in your overall Automotive Business. And I guess I'm kind of curious, I mean, is that going to necessitate more fixed cost restructuring, because that's a meaningful decline in the overall size of that operation?

Your numbers are close to right. It is about a 20% reduction in the size of that Business. But no, we have taken the fixed cost reductions at this point over the last couple of years. And we made some variable cost reductions in the fourth quarter of last year, and are comfortable with where we're at from a cost perspective heading into the year.

Okay. And then given that, is the $14.5 million in restructuring charges that you incurred in 2011, are we sort of -- I know you embed them now, rather than strip them out. Are we going to see like numbers in 2012, or are we kind of done with that $14.5 million, that $0.10?

No, we would see a similar type of number in 2012, in terms of repositioning our portfolio, and investing in our competitiveness of our manufacturing operation. So, a relatively small number in comparison to our revenue.

Holden, just again, put that in a little perspective, and I think we said this to you before. When we can go in, and project changes like we have with the pricing program we went through in 2008 and 2009, we can handle those adjustments with relatively small restructuring charges.

And the change in accounting method that we made, what, two years ago, this year, was intended to signal that the big restructuring is behind us. But I think just any business like ours, that's operating on a global basis, and -- will continue to have small restructuring charges to the kind of tune of $10 million or $20 million a year on an ongoing basis.

Got it. Okay. Great. Thank you.

Thank you. That is all the time we have for questions today. At this time, I'd like to return the conference over to Jim Griffith for any final remarks. Sir?

Well again, thank you for your interest, and thank you for the robust questions. Obviously, we're excited, 2011 was the best year in our history, and the more exciting part is as we look at 2012, we believe we have the capability to take the Company up to a new level of performance. Thanks again, for your interest.

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