Despite the friction of a tepid U.S. economic recovery, the Timken Co. recently has announced a series of investments and the possibility of additional investments in Stark County.
The Timken Co., has been on a 112-year-old mission to minimize friction in vehicles and machines with its steel and bearings parts.
Despite the friction of a tepid U.S. economic recovery, the company recently has announced a series of investments and the possibility of additional investments in Stark County.
After experiencing losses in 2009, the Timken Co. reports that sales in 2010 and the first half of this year have jumped by roughly a third, in part due to high growth in the mining and energy industries and surging sales in Asia.
Since last year, Timken announced it:
• Is considering a $225 million expansion of its Faircrest Steel plant, which would boost output as much as 25 percent.
• Is exploring whether to expand its technology center to house about 500 of its Bearings and Power Transmission employees.
• Purchased Philadelphia Gear, a manufacturer of gear drive repair products, for $200 million.
• Will contribute $5 million in cash and equipment for a new laboratory at the University of Akron that would allow faculty and students to do research on engineered surfaces and lubrication that could lead to new Timken products and provide a pool of students familiar with research that Timken could later hire.
• Is funding $6 million of the $11.8 million construction of a wind turbine research center it would share with Stark State College.
These announcements are on top of about $200 million in investments the company said it has made in Stark County since 2006, including building a new finishing line at the Gambrinus plant, expanding its steel lay-down yard at the Harrison Plant and the renovation of its Dueber headquarters.
“Obviously, it’s a pretty exciting time for Timken,” said Timken’s president and CEO James Griffith. “There hasn’t been a time that I can remember in most of a decade that we’ve had as many exciting and positive announcements.”
So what does this mean for the Stark County community?
• Assuming there’s not a repeat of the 2009 downturn or a cost-cutting restructuring, Timken workers have more job security.
• Timken, Stark County’s second-highest employer as of 2009, is less likely to move any of its operations out of the county, a relocation that would inflict a demoralizing blow to the local economy and tax collections.
• If Timken moves forward with upgrading the Faircrest plant in Perry Township and the Technology Center in Jackson Township, it would mean the creation of several temporary construction jobs and jobs to transport materials to and from Faircrest. The company estimates that the building of its new testing center for wind turbines will support about 50 construction jobs.
• It does not necessarily mean Timken will hire any more locally. The upgrades at the Faircrest plant, for example, would use a more efficient steelmaking method that would increase capacity without the need to add employees to the approximately 350 employees there.
Page 2 of 6 - “We’re going to continue to hire,” Griffith said. “But when you ask me about the jobs we hire, I can only think on a global basis. ... These investments are not intended to increase the number of people we employ in Stark County on a direct basis. They’ll increase our output. They’ll make us more efficient. They’ll increase our revenue, but (hiring more local people) that’s not what the story is.”
• Timken’s investments could lead to additional indirect economic benefits for the area economy. If Timken can increase steel capacity and meet growing demand, it could mean greater profits, higher dividend payments for local shareholders, raises and higher bonuses for some Timken employees and more contracts for local businesses that serve Timken, such as scrap suppliers. Much of that money could be spent into the local economy.
The investments, acquisitions and research collaborations are the latest in Timken’s long-term strategy to reinvent itself.
In 1999, when Griffith became president and CEO, the company primarily made bearings and steel for the domestic automotive industry, which made up half of the company’s sales.
During the next decade, that industry began to deteriorate. More competitors that could make basic bearings at a lower cost emerged. Timken was in danger of becoming a stagnant company mired in a race to the bottom on price.
Timken, eager to lessen its dependence on the automotive sector and to withdraw from an increasingly commoditized market, has transformed itself into a company that uses its technological expertise to make customized, high-quality steel and friction-management products that its rivals cannot easily duplicate.
During the last several years, the company, using its knowledge of engineered surfaces, coatings and lubrication along with several acquisitions, has expanded its business to include gears, drive chains and transmissions, which like bearings, involve minimizing friction.
Griffith said Timken in 2000 made primarily alloy steel bars and tubes, about 2 to 12 inches in diameter. Today, Timken makes every type of bearing and steel tubes up to 60 inches in diameter. Griffith said Timken is the only manufacturer in the U.S. that can make high-end large tubes used in the oil industry. He cited Timken’s acquisition of Philadelphia Gear as part of building Timken’s line of gearbox products, which can be as large as a room.
Timken has increased sales in high-growth areas overseas such as Asia. Its sales outside the U.S. make up more than a third of sales, the company says. Timken has expanded its presence into other industries such as aerospace, mining, energy exploration and extraction. For example about 25 percent to 30 percent of Timken’s steel sales are to the energy sector. Timken also serves the construction, trucking, rail and industrial machinery markets.
Griffith said Timken’s growth in the energy and mining sectors has been driven by record prices for commodities such as oil and minerals as well as the emergence of modern hydraulic fracturing to extract natural gas from shale.
Page 3 of 6 - He cited Timken’s 2008 acquisition of the assets of Houston-based Boring Specialties, which puts holes at precise specifications in steel bars to be used in oil drilling and extraction.
Timken’s sales of its 20-meter diameter bearings for big wind energy turbines have grown from zero to $50 million in sales, said Griffith, who added the steel for the bearings comes from the Faircrest plant.
“We really began a decade ago with a radical transformation that the basis of which was focus the company on markets that are growing, markets where the ... technology that we have is valued by the customers,” Griffith said.
Thomas Moline, Timken’s vice president of steel manufacturing, says Timken can make more than 400 different grades of steel customized to 9,000 customer specifications.
“There’s no one else in North America who can do that with the reliability and consistency that we do,” Moline said.
Griffith said Timken has moved more aggressively into the aftermarket parts market, which he said is growing 20 percent to 30 percent a year, making use of Timken’s “unique distribution” network.
“If we were sitting here in 2011 with still 50 percent of our sales in the U.S. auto industry, you’d be hearing a whole different story,” he said. “Today, we sell more to the aerospace industry than we do to the automotive industry. Frankly, we sell more in China today than we do to the auto industry in North America. ... those are the markets that are exploding with growth.”
Griffith said sales in Asia have grown from $10 million in 2001 to $300 million this year or about 12 percent of sales, while sales in Europe have grown from 8 to 12 percent of sales. He said the Faircrest mill this year will ship $55 million worth of steel to China, where 4,500 Timken employees are based. Both the India and China markets are growing 20 percent to 25 percent a year, he said.
“What we sell in China today, half of it we import into China,” the CEO added.
Today, the company has about 20,000 employees in 30 countries, including 12,000 in the U.S. It has about 4,000 in Stark County, a decline from about 6,100 in 2000.
Griffith stressed that innovation today is a key driver of Timken’s growth, and that executives’ bonuses are based in part on how many new products the company can introduce.
“Thirty percent of what (the Timken) steel business sells didn’t exist five years ago,” Griffith said. “So this is a technology company that makes steel.”
“They need steel that will hold up when it’s 500 degrees, in an acid environment when they’re 30,000 feet down. Or they need steel that can be honed to very precise tolerances that make the mud drills go that make hydraulic fracturing work. And that’s where Timken plays.
Page 4 of 6 - “People get caught up in the fact we make bearings and steel, and it’s not the message. It’s a technology company sitting in Canton, Ohio, that creates value for customers and that’s the whole story,” Griffith said.
Stephen P. Johnson, Timken’s director of process technology, oversees much of the testing at Timken’s 240,000-square-foot technology center in Jackson Township. It is one of nine Timken centers around the world. The one in Jackson has about 440 employees, many of whom have Master’s degrees.
Johnson said that by 2007, Timken’s technology had advanced to the point it was overengineering some of its products. The company could make bearings for a car that would last a million miles. But carmakers weren’t interested in paying more when all they wanted was for the components to last 200,000 miles, which competitors were willing to sell at a lower cost and lower profit margins.
Johnson said the company avoids markets where the only differentiator is price. For example, Timken does not want to make bearings that other companies can make that merely turn a drum in a tumble dryer.
“Timken’s strategy is not to be a commodity player for the most part,” Johnson said.
He said Timken is more interested in developing parts such as more profitable bearings for an advanced application like a fighter jet that can withstand intense acceleration and high altitudes.
Because the company prides itself on its ability to customize products to thousands of specifications set by the customer, Timken’s sales representatives have engineering degrees, so they can discuss in detail what the product needs to do for the customer.
“Our sales engineers aren’t going out with a catalog saying, ‘buy this,’” Johnson said.
SETBACK AND REBOUND
In 2009, after years of rising sales as Timken implemented its strategy, the company hit an economic tsunami. Demand for its products plummeted, leading to a 38 percent plunge in sales, losses of millions of dollars and the layoffs of hundreds of local workers. The price of a share of Timken stock fell to as low as about $10.
But Timken has quickly recovered since then.
Its 2010 sales rose 29 percent to $4.1 billion, as Timken recalled nearly all of its laid-off workers. Its profits for continuing operations surged to $267.7 million, after experiencing a loss of about $61 million in 2009. Griffith expects record revenue of $5 billion in 2011.
“When you’re hitting record profitability in a tepid economy, it says you’ve done something different,” Griffith said.
Timken’s stock hit a 52-week high of nearly $58 a share earlier this year but has since retreated to about $32 a share amid market fears of another recession.
Page 5 of 6 - Griffith believes investors haven’t yet bought that Timken has an extraordinary growth story.
“People think we’re a steel and automotive company,” he said. “The reason they see us as that (worth about $30 to $35 a share) is 2009, when the economy went bad, we lost money. And so now, they’re looking at us and saying the economy’s bad, you’re going to lose money again. So the stock price has dropped.
“We’ve positioned the company that it will continue to grow and continue to earn and continue to be profitable in the economy as we see it. ... we believe the markets we’re serving will continue to grow. ... And we’ve got this company facing toward those markets.”
Griffith said investors “don’t understand we have an order book for Faircrest that goes out into 2012, and we’re wrestling with which customers are we going to be able to serve next year, not, is there going to be enough business to be able to keep us running next year.”
Two analysts that cover the company and its stock agreed that Timken’s been making the right strategic moves.
“The company is investing in its businesses. They’ve gone through a tremendous transformation and have enhanced and restored the company’s profitability,” said Eli Lustgarten, a senior research analyst with Independence-based Longbow Research. “The strategy of Timken is to do proprietary products at value. ... they’ve radically improved the profitability of the company by stepping away from low margin products.”
Lustgarten called the company’s decision to spend millions of dollars to upgrade its steel plants “all moves to improve efficiency and enhance productivity and expand capacity.”
Theodore O’Neill, an alternative energy analyst for Wunderlich Securities in New York, believes investors have underrated Timken’s stock.
“The stock went through a near death experience,” O’Neill said. “People just gave up on the stock. ... investors weren’t sure if the strategy (to focus less on automotive) was going to work. ... there’s still work to be done in convincing everyone it’s a different company.”
O’Neill, who says he owns no Timken stock, projected in late July that the stock will rise to $65 a share. He says demand in the energy industry is surging for Timken’s specialty steel that’s used in making drill pipes that have to withstand extreme conditions.
Sales of Timken’s process industry, which makes bearings and other parts for manufacturing equipment, climbed 46 percent, because of Timken’s growing market share in Asia for parts used in mining equipment, said O’Neill.
Because bearings in intense mining applications have to be replaced constantly, the aftermarket sales just adds to the company’s bottom line, O’Neill said. Meanwhile, the automotive sector has become a less profitable business because of low demand for aftermarket car bearings.
Page 6 of 6 - “No one’s replacing bearings on their Ford Taurus,” O’Neill said.