The Timken Company (TKR) Q3 2011 Earnings Report, Transcript and Summary

Good morning, my name is Trenise and I will be your conference operator today. At this time, I would like to welcome everyone to Timken's Earnings Release Conference Call. [Operator Instructions] Mr. Tschiegg, you may begin your conference.

Thank you, and welcome to our third quarter 2011 conference call. I'm Steve Tschiegg, Director of Capital Markets and Investors Relations. Thank you for joining us today. Should you have further questions after our call, feel 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 and 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 Glenn, and then all of us will be available for Q&A. [Operator Instructions] 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 on 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. Any use, recording or transmission of any portion without the expressed written consent of the company is prohibited. With that, I'll turn the call over to Jim.

Thanks, Steve, and good morning. By now you've seen that The Timken Company had another excellent quarter. In fact, today's earnings reports just 9 months into the year, we surpassed our prior annual earnings record. Just as importantly, we continue to see strong revenue growth with sales year-to-date up 31% over 2010. This performance demonstrates the new reality for Timken. We've shifted the company to focus on more attractive industrial markets on a global basis. These include energy, mining and agriculture, as well as the regional markets in Latin America and Asia, all of which are growing faster than the economy as a whole. We've structurally improved our ability to serve customers in those markets with better business processes, a broader product range and more cost-effective manufacturing. This combination continues to drive strong revenue growth and even stronger profit growth for The Timken Company. The only exception to our positive third quarter story is our Aerospace and Defense business, which continues to be challenged. While later cycle than our other segments, we have not seen the improvement on the Defense side we were expecting. We've taken actions to address some execution issues within the business and we took a $5 million reserve during the quarter for our quality concern. We expect to see improved performance in this segment going forward. Aerospace is not the only area where we look forward to stronger performance in 2012. Strong demand from the oil and gas sector is leading to an improved mix and better pricing in our Steel business. Our expanding product line and growing exposure to emerging markets will increase demand for products for both our Process and Mobile Industries businesses. And as demonstrated by our recent acquisitions, we are demonstrating our ability to expand our product and service offering well beyond historic bounds. Our success in growing the company led to a number of strategic moves in the past quarter. We invested almost $300 million in 2 acquisitions, Philly Gear last quarter and Drives this quarter. This complements our ongoing organic diversification program, which is responsible for much of our growth in global markets. We opened early negotiations with the United Steelworkers to pave the way for a $225 million expansion of our Faircrest Steel Plant. This would involve building a continuous caster that will give us an additional 25% of high-quality alloy steel capacity at that plant. This highly differentiated production would support our growth in the energy markets, including our export program. We launched 2 joint investments with local universities to expand our technical competencies with capital effective public-private partnerships. Our strategy is working, creating more value for customers and more earnings for our shareholders. As you can see, we continue to advance many opportunities to expand on that success. To reiterate points I made in the second quarter call about the global economy, we remain confident about the long-term strength of the industrial markets we served, focused in key areas such as energy, mining and infrastructure. Growth overall in Asia remains strong, led by China and India, with new momentum in the ASEAN region. This is reinforced by growth in Latin America and in Africa. That growth is driving focused demand on specific industries around the world and we're serving that demand as a more effective, more global company. This approach sustains good Timken jobs in the Americas, in Europe and in Asia. Now I'll turn the mic over to Glenn to give more details about the third quarter's performance.

Thanks, Jim. Sales for the third quarter were $1.3 billion, an increase of 25% over 2010. The increase was due to strong volume across the company's broad markets with the exception of our Defense business. The top line also benefited from higher surcharges, pricing and acquisitions, which included Philadelphia Gear which closed at the beginning of the quarter. Excluding acquisitions, sales were up 21%. From a geographic perspective, we posted the strongest gains in North America and Asia followed by Europe. Gross profit of $343 million was up $78 million from a year ago. The improvement was driven by higher volume and mix, while surcharges and price more than offset the impact of higher material costs. The gross margin of 26% for the quarter was up 100 basis points from a year ago. For the quarter, SG&A was $155 million, up $15 million from last year, primarily reflecting higher variable and incentive compensation and wages, as well as acquisitions. SG&A was 11.7% of sales, an improvement of 150 basis points over last year as we continue to effectively leverage our cost structure. As a result, EBIT for the quarter came in at $190 million or 14.4% of sales, 320 basis points better than last year. Net interest expense of $8 million for the quarter was down $1 million from last year, due to higher global returns on invested cash. The tax rate for the quarter was 38.5% compared to 34.8% a year ago. The higher rate reflects a change in French tax law in the third quarter that was retroactive to the beginning of this year. The impact was approximately $4 million, including the year-to-date catch-up. Additionally, the tax rate was adversely impacted by out-of-period discrete tax items, totaling approximately $2 million. Combined, these items accounted for around 3.3 percentage points of the tax rate. Going forward, we expect the tax rate to be back at roughly 34%. As a result, income from continuing operations for the quarter was $111 million or $1.12 per share compared to $0.73 per share last year. Included in the quarter were $0.06 of unusual items that negatively impacted our results, including the out-of-period tax factors that I mentioned earlier, as well as restructuring costs associated with our previously announced Brazil plant closure. In addition, as Jim noted, we incurred a warranty charge in our Aerospace and Defense business of approximately $0.03 per share. Now I'll review our business segment performance. Global industry sales for the quarter were $442 million, up 9% from a year ago. The increase was driven by higher demand led by off-highway, rail and heavy truck markets. In addition, the top line benefited from pricing and currency. The Mobile segment had EBIT of $65 million or 14.8% of sales, up from $57 million and 14.1% of sales last year. The increase was driven by stronger volume, while pricing mostly offsetting increased material costs. Mobile Industries' sales for 2011 are expected to be up 10% to 15% for the year. We continue to see improved demand, primarily in the off-highway, rail and heavy truck sectors. Process Industries sales for the third quarter were $329 million, up 40% from a year ago, reflecting stronger demand from industrial distribution, the Philadelphia Gear acquisition and growth in Asia. The company's expansions in the new product lines and pricing also contributed to the increase. Excluding acquisitions, sales would have been up 22%. For the quarter, Process Industries EBIT was $78 million or 23.6% of sales, up from $37 million and 15.7% of sales last year. EBIT benefited from higher volume, pricing and the Philadelphia Gear acquisition. Process Industries sales for 2011 are expected to be up 35% to 40% for the year, driven by industrial distribution demands, growth in Asia, acquisitions and continued growth in new products. Aerospace and Defense sales for the third quarter were $82 million, up slightly from a year ago. The increased commercial and general aviation demands was largely offset by lower demand in our Defense business. EBIT for the quarter was a loss of $2 million or 1.8% of sales compared to income of $3 million or 3.1% of sales a year ago. The benefit of stronger commercial and general aviation demand and lower operating costs was more than offset by a $5 million warranty charge taken during the quarter. We expect Aerospace and Defense sales to be down slightly for the year as stronger commercial and general aviation demand is expected to be more than offset by continued weakness in our Defense business. Steel sales of $502 million for the quarter were up 35% over last year. The increase was driven by stronger demand across all end markets led by the oil and gas and industrial sectors. In addition, surcharges were up approximately $45 million for the quarter, due to higher raw material prices and overall demand. EBIT for the quarter was $67 million or 13.4% of sales compared to $41 million or 11.1% of sales last year. The increase resulted from higher volume, mix, pricing and surcharges, which were partially offset by higher material costs, as well as higher manufacturing costs related to plant and maintenance shutdowns in the quarter. Steel segment sales for 2011 are expected to be up 40% to 45%, primarily driven by improved demand in the energy and industrial end markets, as well as surcharges and pricing. The segment is also benefiting from increased capacity to satisfy the strong demand. Looking at our balance sheet, we ended the quarter with cash of $407 million and net debt of $106 million. This compares to a net cash position of $363 million at the end of last year. Net debt to capital at the end of this quarter was roughly 5%. Free cash flow for the quarter was $30 million. Cash generated from earnings was partially offset by discretionary pension and VEBA trust contributions of $63 million, net of tax, and increased working capital of $39 million to support the company's higher sales. Free cash flow, excluding the discretionary pension and VEBA contributions, totaled $93 million for the quarter. The company also used cash during the quarter to fund the acquisition of Philadelphia Gear at approximately $200 million and repurchased an additional 500,000 shares at approximately $19 million. Turning to our outlook. We expect sales for the full year to be up 25% to 30% over 2010. Our earnings per diluted share for 2011 are now expected to be $4.45 to $4.55. This implies a fourth quarter estimate range of $0.97 to $1.07. While we continue to see good end-market demand, we expect sales and earnings for the fourth quarter to be down from the third quarter, due to seasonality. The decline in organic sales will be partially offset by the Drives acquisition. However, operating earnings from Drives are expected to be offset by purchase accounting adjustments in the quarter. In addition and included in our estimate range is a $10 million potential charge for exit costs associated with the previously announced Brazil facility closure. For the full year, the company expects cash from operating activities to be $210 million and free cash flow, a use of $65 million, after capital expenditures of $200 million and dividends of roughly $75 million. Excluding discretionary pension and VEBA trust contributions made in the first 9 months of 2011 totaling $256 million net of tax, free cash flow is expected to be $190 million. This ends our formal remarks and now we'll be happy to answer any questions. Operator?

[Operator Instructions] Our first question is from Stephen Volkmann of Jefferies. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: So I hate to focus on the one thing you're not doing well because the rest is obviously going well. But on the Aerospace business, I guess, we're talking about taking some actions there to address what's going on. I'm wondering if you can sort of dig in a little bit on that and then give us a sense of what that impact -- what we should be thinking about margin-wise going forward.

Stephen, this is Rich. I'm not sure if the first question was related to the warranty or not. But putting that aside coming into the year, our guidance was that we expected to get off to a slow start and have that steadily improve through the course of the year, both on revenue, EBIT and EBIT margins, ending the fourth quarter around double digits. And clearly, through 3 quarters now, we have not seen the top line improvement that we had expected. And in the third quarter, essentially what we saw is high single-digit improvement in commercial and general aviation, offset by high single-digit decline in Defense, which essentially wipes each other out. And then we've been hovering in this low single-digit EBIT margins through the third quarter. We do not, at this point, see a significant improvement in the fourth quarter in revenue as we expect to have another year-over-year decline in Defense to offset by the other segments. As we look out to 2012, not looking to provide any specific guidance in 2012 on percentages or targets, we'll do that after the end of the fourth quarter. But certainly, as we look into 2012, we would expect top line growth, EBIT growth, as well as EBIT margins getting back to improved levels in terms of the guidance we provided earlier. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Okay, great. That's helpful. And then maybe switching quickly to Process. Those margins continue to be very high. Higher than what I was looking for. And I guess, I thought we had sort of discussed how those could potentially start to come down here, but clearly they haven't. So should we think about this as sustainable or is there something special going on here?

Stephen, this is Chris. It's going to be pretty much the same story that I've given you in the previous quarters. What happened in the third quarter though, is the distribution mix remained very, very strong. We anticipated that mix to become more OE-oriented once again as new applications came on. What happened though, quite frankly, is the distribution growth was stronger than we expected. So that's the third quarter story. Moving forward, we do expect to maintain very good margins in the segment. That said, we do expect some downward pressure on this relative to the 23.6% that you're looking at this quarter. And what's going to drive that is we are still growing in certain applications which are very good business for us, very important to our long-term aftermarket but operate at lower margins than our core distribution business. But that said, we expect to have very good margins in the segment, achieve very good growth rates. But as some of that growth comes online, there will certainly be some downward pressure on those margins that we're still in the 20s, but along those lines. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Great. That's really helpful. And then, Glenn, can you just give us the EBIT impact from Philly Gear and I'll pass it on.

I don't think we've commented on the earnings as much as just the sales excluding the acquisitions. But suffice it to say that at least Philly Gear was accretive and we said from a margin standpoint, fairly comfortable to what the process margins are, so you can kind of back into it.

Our next question is from David Raso with ISI Group.

You've given the margins in process versus the rest of the company. Obviously, pretty critical for next year, can process outgrow the other 2 divisions and leaving Aerospace to the side [ph] for a second when it comes the earnings drivers? When you look at Process next year, just as we sit here today, look at the backlog, it's obviously one of the more diversified geographically businesses that you have. The 30% or so of Process that's Asia, can you help us understand a little bit what you're seeing right now, especially the wind business, I would assume, is a little bit challenged. The contract that you have with Goldwind next year that steps up pretty sizably, is that still in place? I'm just trying to think through the growth profile for Process next year because again, that outgrowing the other businesses is an area where maybe that total company margins can continue to improve.

David, let me just start for a second then obviously have Chris address it. But just for obviously, as we talked about 2012 outlook from our standpoint, we're obviously going to speak about our outlook this year and obviously the performance of the company. As Rich said, we'll really get into obviously all the details when we report out our year results and our new expectations for each of the segments and in January for 2012. Having said that, specific to your question, obviously, with just relating to some macro issues glad to share it with you what our views are and obviously, just overall, we expect just most of the end markets that we're serving to be favorable from year-over-year. And obviously, we would expect to leverage that so we're clearly looking for improved performance, but let Chris deal specifically about just the macro level of issues regarding just the wind industry over in China.

Yes. Let me split your question in 2 parts, David. Let me start with just Asia. Third quarter, another solid quarter, maintaining our existing growth rates versus history generally, once again, solid. Moving forward, obviously, China has slowed a little bit. We are still seeing decent growth rates. At this point for 2012, I don't know. I think you need to use your own assumption on what you believe is going to be in that market space. We expect to achieve good solid growth, whether it will be our historical growth rate is going to depend on those markets and whether the market remains relatively robust. But generally speaking, still a very good story. Specifically on wind, let me address this because obviously, this has come out with some other earnings releases. And let me start with -- first of all, we've had steady growth through 2011 in our wind business. One thing that's very important to remember is we've really only been in this business 5, 6 years. We are only on the new platforms, which are the multi-megawatt platforms. We are not on the existing base of wind applications if you go back over what was built over the last 10, 15 years. So that's a very important point because our business continues to grow as these new platforms come online relative to that base. Now that said, we clearly have seen the slowdown in China that others have referenced. China, in particular, has issues going on. I won't get into them here. You've heard them already via other people. But of course, we are seeing that. All that said, we still expect to see double-digit growth in our wind business in 2012 as we look on the new applications that are coming on. And so in summary, although we see the issues in China like others, they're really not all that significant to us in total.

Okay, great. And on Europe in process, how would you characterize the levels of uncertainties high enough? Nobody's going to be exact in their thoughts right now in '12 for Europe. But is there anything you'd like to share a little bit on what you're seeing in the current backlog in order trends?

Yes, just one comment. Europe is clearly the most challenged area at least for uncertainty is what how I would word that. There clearly have been a lot of things going on there, as you're well aware. We do see some slowing there. But once again, we're really talking slowing of growth rate. Nothing overly concerning or significant at this point in time relative to the total.

And lastly, something that we picked up in the channel, on the pricing and process was relatively encouraging. Can you describe a little bit how you're thinking about price right now at the distributor level in particular, or at least maybe Process as a whole, and how that might dovetail into thoughts on pricing for '12?

Well, clearly, in distribution, it is our aim to put through yearly price increases in all of our regions around the world. Those happen at different times during the year. We follow actually a set schedule. The actual amounts we don't obviously publish until we actually publish them, so I don't want to comment on the actual amounts. In 2012, though, we'll be looking to follow our similar pattern and we'll make the decisions on what those price increases will be depending on how the year plays out and how the markets are responding to certain issues that we have.

Our next question is from Andrew Obin of Bank of America Merrill Lynch.

Just talking about the steel, I apologize if I missed it, but how will you guys add capacity in 2012? What's the timing of capacity additions?

Andrew, this is Sal Miraglia. I think that Glenn was referring to capacity additions that we have made by moving to a full operating mode on some of the assets we already have in place. We are essentially operating at our capacity level right now. We have 2 approved projects in place moving forward that will improve that to some extent but not until 2013. And then, Jim made reference to a major project for which we are currently engaged with the variety of parties to create the kind of receptive environment that would allow us to be -- to move forward with a positive decision on a major addition to our Faircrest plant. But that would not -- should that go forward, that would not occur until 2014.

So Q3 is effectively your full capacity and will have no capacity additions until 2013?

That's correct.

And just historically, you've guys concluded your negotiations. By now, you should have concluded your negotiations on steel. Can you share with us what percent of capacity you've sold for next year and just what's the general sense, I assume given how tight capacity is, negotiations have been fairly positive. But could you give us more color as to how much of capacity we've locked in into next year? And directionally, what kind of pricing were you getting?

Let me just make sure that I understand your points. I thought I heard you say that we have finished our labor negotiations.

No, no, no, steel. I'm talking about steel, talking to your steel customers, sorry about that.

I just want to make sure that, that was the point in case you have made that, but that is not yet finished. We are about 85% through our annual negotiations with customers. We started relatively early this year. We are on allocation and will remain on allocation across all of our product lines. We are getting no solid indications for many customers about their view of any weakening in demand. But with do believe we're at the end of inventory restocking cycle from what occurred in 2009 and has been rebuilding since then. And we are taking appropriate pricing actions. We've taken them this year and we'll take them again. As Chris said, we don't really comment on it until those are public and we publish those when they are public.

So how much of your capacity will be available for the spot market next year?

About 10% of what we produce is sold on the spot market.

Our next question is from Eli Lustgarten of Longbow Securities.

Can we just go over what all the charges were, some of them were sort of buried in this terrific third quarter. I think you talk about taxes only $6 million, but the difference between the 34% and the 38.5% tax rate is $8 million. I think you have the $5 million warranty-ing, I think to some Brazilian charges. Can you break out what limited to quarter that you sort specifically because some numbers don't add up?

Sure, Eli. The big one's the ones that we highlighted on the tax line first are what we would call the unusual or out-a-period ones in particular, and that was around $0.05 a share impact on the quarter. Our tax rate would have been slightly higher even excluding that, then kind of our 34% rate, but that fluctuates plus or minus within a percentage point usually. So we just wanted to highlight the 2, call it, unusual items. One again, the change in the French tax law that went into effect in the third quarter and was retroactive for the full year, so obviously, you had 3 quarters worth of that higher tax rate in the one quarter. And then in addition, in the third quarter, each year, when we file our tax returns for the prior year, we true-up reserves. And in this case, there was a negative impact of a couple of million dollars, but it could be a couple million positive or negative in any year. But it's a third quarter issue that relates to periods other than the third quarter. The restructuring, frankly, in Brazil for the third quarter was fairly nominal but it was around $0.01, it's called $1.5 million, about $0.01 a share. And then the warranty reserve, the $5 million that was built up or reserve for in Aerospace would be around $0.03. So add those all together, you're probably looking at around $0.09, $0.06 of what we would've historically called kind of out-of-period and, therefore, not in our adjusted numbers. But $0.09 clearly of impact that we wouldn't have expected to have occurred in the third quarter.

And just a clarification, the $10 million charge for closing the Brazilian charges a pretax number?

It's $1 million. It's $0.01 a share so -- I'm sorry, in the fourth quarter, it would be...

4Q.

That's correct, that would be a pretax. What we've done is we've established, if you will, a range of costs, and I’ll use rounded numbers, call it $10 million to $20 million. We've reserved up to today $10 million of that. So there's still potentially another $10 million that is in the range that we've provided, but there's no guarantee that we'll incur any of that or -- but that's kind of the range at least that we're looking at.

Can we talk a little about -- you've talked about Process and Defense, we talk about operating margins in both Mobile and in Steel and sustainability of the current levels from where we are, particularly with Steel at basically add capacity for a while. The only improvement next year is probably -- is some price. Can we hold the 13.4% margin or something to that effect? And you've been outperforming in Mobile now for about 4 or 5 quarters. This never had gone down. Are we looking at the new stable level for the next – not only in the fourth quarter but into next year?

Let me just make a general comment and then ask the others to come in. Because when you talk about the fourth quarter relative to how we did for the prior 3 quarters, you definitely have seasonality come into play. And in the case of Mobile, again, we talked about we do expect to have down volumes and therefore, obviously, it's going to have an impact on their margins. In the case of steel, interestingly enough, while we still expect to have some down volumes with seasonality, we did take maintenance shutdowns in the third quarter that actually negatively impacted their margins that we won't have in the fourth other than normal holiday. So net-net, we'll actually leverage better because we won't have that cost. But, Sal, any additional color or Rich?

Well, I think yes. This is Sal, Eli. I think Glenn's got it about right. I mean, the fact is some of the third quarter maintenance costs may actually spill into the fourth quarter and put a little pressure on it. And add to that, the holiday periods where people don't really receive much even given where we returned and that would put a little bit negative pressure. But to your overall point, we believe strongly that we have moved our EBIT margin structurally to a better level. It'll waiver a bit around this '12 perhaps 12% to 14% range. But given what the demand is for -- in our particular segment of the Steel industry, which as you know is very niche-y and very special, given that demand and given the value of it, we think structurally, we'll be performing better than the low, low single-digit or low double-digit levels that we were talking about earlier, high single or little low double digits.

The only comment I would add, Eli, is the clarification, when Glenn said we expect Mobile volume to be down, that's down sequentially, which is our typical seasonality. If you look year-over-year, our markets rail, off-highway, mining, all are still continuing to improve and we would expect them to be up year-over-year. At this point, if you look at the last year, third to fourth quarter change, we could expect something similar going into this year for the seasonality perspective.

Can I take say one [ph]? Was the impact of currency in the quarter top line and bottom line?

Fairly negligible. I think that currency impacted sales 1% out of the 25%, and we don't comment on it from an earnings standpoint, but it would be even less than that.

[Operator Instructions] Our next question is from Sam Eisner of William Blair. Samuel H. Eisner - William Blair & Company L.L.C., Research Division: Just had some questions regarding the margins in Process, I know we touched on them, but were there any charges embedded in there for any of the acquisitions that have been made, specifically Philly Gear or Drives?

Really not an impact for them. The Drives acquisition, which will move into the fourth quarter, will obviously have purchase accounting issues. But the Philadelphia Gear and QM, other acquisitions in process, are really operating at that, call it, their normal performance levels. Samuel H. Eisner - William Blair & Company L.L.C., Research Division: Okay. And then you mentioned that you had a little bit better mix regarding, I guess, the industrial distribution business. What was that as a total percentage of the Process business? I know, I guess, historically, it's been about 65% of the total segment.

Yes, we're pushing 70 this kind of quarter, once again, which is a very, very strong mix. And as we grow more and more in the areas we're pushing on, we would expect that mix to return more to historical kind of numbers and maybe even go a little bit lower. Once again, very good business for us, still very good profit levels but as we grow in more and more of this business, our -- the margins will be lower than some of that legacy distribution business. Samuel H. Eisner - William Blair & Company L.L.C., Research Division: Understood, understood. And then, I guess, on the overall incremental margins of the company, you guys basically had 25% incrementals and acceleration versus the second quarter. I mean, how are you guys thinking about incrementals maybe ahead into next year? Is this a sustainable level or should we see further, I guess, declines in incrementals going forward?

Again, we'll speak more to that as we go through our 2012 outlook. But it’s just a general premise, we try to drive the incremental margins relative to gross margins for the company and leverage the S&A. And effectively, that gives in the 25% plus or minus kind of number. Samuel H. Eisner - William Blair & Company L.L.C., Research Division: Okay, great. And then lastly, in terms total revenue, Aerospace is about 6% of the total company through the, I guess, through the first 3 quarters here. You've talked in the past about your fixed related [ph] strategy as it relates to Mobile. Is there anything within Aerospace that you might be looking to monetize?

No, at this point, it's a fix. And we're confident we'll be able to fix the business.

Our next question is from Bryan Carlson of Atlantic Investments.

I have a couple of specific things and then a high-level question. First, Glenn, you talked about the purchase accounting adjustment that is included in the guidance in Q4. What's the magnitude of that?

I’d say, call it a couple of million dollars. It's effectively writing after we've written up the inventory what the acquisition that we did, that we're now planning to selling that through, and effectively, that will offset the earnings that would have been driven.

Right. And then there was a warranty charge for a quality-related issue. Can you talk to us about what that was specifically? And is that enough to more than cover any sort of quality remediation?

We had a specific issue in the third quarter related to 1 watt of aerospace gear sets. We are and we have been and continue to work with the FAA to resolve the issue with issues matter of public records, there's more details through the FAA. It's an isolated incident. And we believe the $5 million charge will cover the warranty cost going forward.

Okay. And then at a high level, Steel's operating extremely well. You're very tight. It sounds like all of your competitors are very tight through at least halfway through next year. But everybody is also talking about adding capacity. Is it your expectation that the kind of as long as energy markets remain robust, that any additional capacity gets soaked up? I mean, it seems like to some degree, you're kind of reducing -- or maybe you're reducing the number of customers that you have by putting them on allocation and mixing to the better quality customers. I just worry that at some point, we're mixing to lower quality customers and expanding that customer base again. Can you just talk about that dynamic?

Yes, Brian, let me talk a little bit about it in general. First of all, I appreciate that the capacity in the industry has been altered by one of the participants having taken a fairly large piece of capacity. A lot of what you're hearing in terms of additions are really compensating for that as the demand in the market slowly moves back up to the levels that it's seen before. It just happened to have moved up very quickly in a short period of time and in our interpretation because of the growth for all practical purposes. Jim made the comment about what parts of the markets that we're serving that are strong. You all know what happened in terms of the return of -- to relatively modest, but at least healthier levels in the automotive market space. So that's a part of it. But the real drivers are things that are building infrastructure around the world, mining and construction outside of the U.S. and the relentless thirst for energy, which is driving a very, very strong exploration and production activity. And the products in the markets that we serve are very valuable in those kind of marketplaces and that's what we see. So if you believe that the kind of global infrastructure pursuit that we've seen in China, with India right behind it, in all practical purposes will continue, then frankly, the kinds of capacity discussions that we are participating in and we've heard are pretty welcome.

And then lastly, you guys recently conducted a survey, I think, of observers of the company, buy and sell side people. And I think that you were trying to understand how they perceived Timken and how they think about Timken evaluation. As I look at Timken, it seems like your valuation relative to any steel player, you're lower, or any bearings player, globally, NSK, SPS you're lower. I'm just wondering what, if you can share with us at all, what perhaps you learned from that survey, and if there's anything to be done about what appears to be a perception gap.

Bryan, well, one, appreciate you participating in that survey, so we periodically do obviously the surveys just to gauge perception on the company over time. We're still actually finishing compiling the information to get the benefit of it. But I think it's fair to say similar issues to where we've been before, just the potential cyclicality of the business based upon historical performance with the concerns as far as what’s the economy going to do going forward, issues relating to the legacy liabilities in the cash use for pensions and OPEBs. So -- I mean, those issues. But we're obviously getting it compiled for us that will have a lot more specifics to speak to that. But obviously, from our standpoint, what we're looking at is continuing to drive the performance of the company and letting that speak for itself. Because as we do, we would expect to see the discount that we trade at relative to other diversified industrials continue to narrow and provide more upside for our shareholders.

Are you any closer to being a point where you could do something with the pension? Annuitize the pension, something like that?

Yes. It is things we're looking at. Both annuitization, lump sums and so forth to work on lessening the liability that we have. As you know, we've contributed a lot of cash into our plants to get the plans more fully funded. But we still have that big liability. We're just sitting on lots of assets. And so we are looking at both the annuitization, as well as lump sums as vehicles to potentially bring down that liability.

Our next question is from Holden Lewis of BB&T Capital Markets. Holden Lewis - BB&T Capital Markets, Research Division: With regards to the pricing component of your Steel business, can you just kind of refresh us? I think that you've had like 6 or 7, 4 percentage type price increases in sort of through the first half of this year. And obviously, you're going into your negotiations to try to see what you're going to do at price next year. Could you just refresh us kind of how much price you've had and did that also point to kind of like double-digit potential increase in price next year? I'm just trying to get a sense of what that order of magnitude might look like.

Well, let's look at history first, Holden. Yes, we had announced and participated in, for what would be our spot price market, anywhere from $80 to $120 a ton depending on product line of the degree of value-added, et cetera, that we had, and that occurred throughout this past year that we made those announcements. I think, all I can say about the future is that we remain tight in capacity. We are, as I mentioned earlier, fully located across all our product lines. Meaning, we're only serving existing customers to the extent that they have required our service before, and we will take appropriate price actions. Holden Lewis - BB&T Capital Markets, Research Division: But obviously, in negotiations, you'll be trying to sort of capture some or all of that $80 to $120 on the 80% to 90% of your business that you can't capture on now, right? And depending how much you get, that pretty much should go straight to the bottom line, is that right?

Well, we've mentioned in the past that our prior announcements of price are a good indicator of what we would be trying to achieve. So -- I mean, you can make whatever assumptions you want to make on that, but the market is very strong right now.

And especially, Holden, when you look to the mechanism of surcharges that the Steel group has to be able to deal with those fluctuating material costs and true pricing that we get is really demand-based and therefore, should fall to the bottom line. Holden Lewis - BB&T Capital Markets, Research Division: Yes. And you also made announcement, I think, your last one about how you're increasing the minimum lot size. Can you talk about what impact that has had or will have from a margin standpoint?

Basically, it gives us better utilization of our assets quite frankly, Holden. It'll be a contributor from the point of view of eliminating certain numbers of set-ups and give us more operating and production time. So it's more of a maximization of capacity and a better coverage of fixed costs. Holden Lewis - BB&T Capital Markets, Research Division: Okay. And I mean, both of those things, the pricing flow-through, as well as that, that sort of [ph] profit, I mean, all of that should point to in 2012 even though you're capacity constrained, I mean, those are elements that should allow margins conceivably to expand, right? Are there any negative offsets that would keep margin kind of in the 2011 range? Or is it reasonable to assume margins would expand given some of those elements?

The only real concern we have is the same one that everyone else is looking at. We don't believe it will materialize but we don't know how to predict that future, and that is will we see any kind of softening because of all of the concerns about the nature of the economy. Right now, we have no indication that will happen. And so as a consequence, we would think very similarly the way you're thinking. That we should be able to hold these kind of margins, perhaps improve it slightly and look to see exactly what the demand environment is like in next year. Holden Lewis - BB&T Capital Markets, Research Division: Okay. And the last thing, you don't site automotive in your Mobile segment as one of the strong businesses. It has been in the past. Are you seeing something different there, or is it just comping?

For me, it's really the loss business that we took earlier in the year. So sequentially, the business has been strong. But as you look year-over-year, due to some loss business, our light vehicle business is essentially flat.

[Operator Instructions] There are no remaining questions at this time. I would now like to turn the conference back over to Jim Griffith for any final comments or remarks.

All right. Again, thank you for your interest. We remain committed to bringing Timken to new levels of performance as a leading industrial company. Thank you.

Thank you for participating in today's Timken's Third Quarter Earnings Release Conference Call. You may now disconnect.