The Timken Company (TKR) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Augusta, and I will be your conference operator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to the Timken Second Quarter Earnings Release Conference Call. [Operator Instructions] Mr. Steve Tschiegg, you may begin your conference.

Thank you. And welcome to our second quarter 2012 earnings conference call. I'm Steve Tschiegg, Director of Capital Markets and Investor Relations. Thanks for joining us today, and should you have further questions after our call, please feel free to contact me at (330) 471-7446. Before we begin our call this morning, I wanted to point out that we posted to the company's website presentation materials to supplement our review of the quarterly results as part of this earnings teleconference call. This material is also available via Download feature from our earnings call webcast link. 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 Process Industries; Sal Miraglia, President of Steel. 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, www.timken.com. Reconciliations between non-GAAP financial information and its GAAP equivalent are included as part of the press release. This call is copyrighted by the Timken Company. Any use, recording or transmission of any portion without the express written consent of the company is prohibited. With that, I'll turn the call over to Jim.

Thanks, Steve, and good morning, everyone. As you saw in our release, Timken reported a very solid second quarter. We posted revenues of $1.3 billion, in line with the second quarter of last year as the impact of our acquisitions offset the weakness in some market segments. Our profitability remains strong, continuing to demonstrate the improved earnings power of the new Timken Company. Having said that, many companies are reporting a slowing of the global economy, and in the second quarter, we began to feel the impact. North America remains our strongest market. We continue to see growing demand in the railroad, energy and mining sectors and in the aftermarket. But we saw a tempering of that growth toward the end of the second quarter and anticipate further slowing in the last half of the year. Our customers are managing the situation very well, taking conservative positions with their inventory levels. This is translating into a general slowness for Timken rather than a dramatic reduction. In Asia, demand has slowed significantly for us with year-over-year sales down 14% in the second quarter. The impact on Timken is greater than for the economy as a whole, given our exposure to infrastructure markets and especially wind. We now anticipate the second half will not rebound as we have previously expected. Turning to Europe. Our revenues dropped by 8% in the second quarter, a distinct change from the first quarter of the year. This is another market where we've now scaled back our expectations for recovery in the second half of the year. As a direct result of lower market expectations, we reduced our estimate of earnings for the balance of the year. I would like to point out that our current outlook, which we shared in today's earnings release, will result in 2012 annual earnings, beating a record for the company. We continue to take actions to grow the company and to strengthen its performance. From a growth perspective, our recent strategic acquisitions of Philadelphia Gear and Drives added 5% to the top line during the second quarter, helping counter lower demand in other areas. From a performance viewpoint, we announced plans to close our Canadian bearing plant in St. Thomas, Ontario, and consolidate those operations into existing U.S. facilities. St. Thomas has been operating at low levels of capacity utilization, and consolidating its production in other plants improves our overall competitiveness. Our investment program in the Steel business is proceeding on schedule. The intermediate finishing line designed to automate our steel tubing production starts operating at the end of 2012. This will be followed by our new forge press, which comes online early in 2013, a ladle refiner in late 2013, and the Faircrest caster in early 2014. When complete, the Steel business will have 20% better labor productivity, 10% better energy efficiency, and 15% more capacity in our most attractive segments. Looking ahead, prudence is our mainstay. As we see the economy changing, we are operationally prepared, confident in our ability to stay our strategic course and weather the winds of change with a buoyancy that reflects the new and transformed Timken Company. This is because we've diversified our company, expanding in new geographies, products and services, where we create value for our customers. For example, we are now making and repairing gearboxes, as well as providing a line of premium roller chain and other mechanical power transmission solutions. We are leaner, and our cost structure is more variable. Our ability to tightly control our supply chain and manage costs is better aligned to respond to market variability. We've combined all this with a fundamental change in our ability to execute. We are relentless in this area, which will serve us well in facing the current global market. Glenn will now review our financial performance and outlook.

Thanks, Jim. Sales for the second quarter were $1.3 billion, an increase of $14 million or 1% over 2011, as favorable pricing and mix were mostly offset by lower demand. The benefit of acquisitions, which accounted for 5% growth, was offset by the negative impact of currency and lower material surcharges. From a geographic perspective, sales in North America were up 7% versus the prior year, primarily driven by acquisitions, while Asia was down 8% and Europe was down 14%. Gross profit of $377 million was up $27 million from a year ago. The improvement was driven by pricing, mix, acquisitions and lower material costs, which were partially offset by weaker demand, lower surcharges and currency. Gross margin of 28.1% for the quarter was up 170 basis points over a year ago. For the quarter, SG&A was $163 million, up $9 million from last year, primarily reflecting acquisitions. SG&A was 12.1% of sales, an increase of 50 basis points over last year. Impairment and restructuring charges in the quarter totaled $17 million, up from $6 million in the same period a year ago. The increase was due to the announced closure of the bearing production plant in St. Thomas, Ontario, Canada. Other income for the quarter totaled $106 million, up from $1 million in the same period a year ago, primarily due to the $110 million received from the Continued Dumping and Subsidy Offset Act, or CDO. EBIT for the quarter came in at $303 million, or 22.6% of sales, compared to $192 million, or 14.4% of sales, last year. Excluding the benefit of CDO receipts and the charges incurred for the bearing plant closure, EBIT was $212 million, or 15.7% of sales. Net interest expense of $7.4 million for the quarter was down slightly from last year, primarily due to lower financing costs. The tax rate for the quarter was 38% compared to 33.5% last year and our prior estimate of 34%. Charges related to the bearing plant closure increased the rate by roughly 2 percentage points due to the company's net operating loss position in Canada. The remaining increase was primarily due to the lower percentage of the company's earnings coming from lower tax rate foreign jurisdictions. For 2012, we expect to stay at the year-to-date rate of roughly 36.5% and then return to a 34% tax rate in 2013. As a result, net income for the quarter was $184 million, or $1.86 per diluted share. This includes the benefit of CDO receipts of $0.70 per share and the charge related to the St. Thomas plant closure of $0.18 per share. Now I'll review our business segment performance. Mobile Industries sales for the quarter were $448 million, down 4% from a year ago. The benefit of acquisitions and improved rail demand was more than offset by currency and lower volume in other mobile markets, including the impact of exited business. The Mobile segment had EBIT of $49 million, or 10.9% of sales, compared to $71 million, or 15.3% of sales, last year. The decline in EBIT was primarily due to a $17 million charge related to the St. Thomas plant closure. Weaker demand and currency also negatively impacted results, but were partially offset by acquisitions. Excluding the impact of the St. Thomas charge, margins for the quarter were 14.8%. Mobile Industries sales for 2012 are expected to be flat to down 5%. The benefit of the Drives acquisition and demand in the off-highway and rail sectors is expected to be offset by lower demand in light vehicle and heavy truck sectors, as well as the negative impact of currency. Process Industries sales for the second quarter were $338 million, up 10% from a year ago, driven by acquisitions and pricing. Partially offsetting this was the negative impact of currency and lower volume driven by reduced demand outside North America, including wind energy. For the quarter, Process Industries EBIT was $71 million, or 21.1% of sales, up from $69 million, or 22.3% of sales, last year. EBIT benefited from higher pricing and acquisitions partially offset by lower volume and currency. Process Industries sales for 2012 are expected to be up 7% to 12% for the year due to acquisitions and industrial distribution demand. Aerospace and Defense sales for the second quarter were $87 million, up 4% from a year ago. Higher demands led by defense and motion control sectors contributed to most of the increase. EBIT for the quarter was $8 million, or 9.1% of sales, up from $3 million or 3% of sales a year ago. The improved profitability was due to higher volume, while the prior year included a $3 million inventory write-down. For 2012, we anticipate Aerospace and Defense sales to be up 10% to 15%, primarily driven by stronger defense and civil aerospace markets. Steel sales of $500 million for the quarter were down slightly from last year. Increased pricing and favorable mix were more than offset by lower industrial and mobile and highway demand, as well as surcharges, which were down approximately $30 million due to lower raw material costs. EBIT for the quarter was $89 million or 17.8% of sales compared to $71 million or 14.1% of sales last year. The increase resulted from improved pricing and lower material costs, which were partially offset by lower volume and surcharges. Steel segment sales for 2012 are expected to be flat to down 5%. Weakening end market demand and lower surcharges are expected to be partially offset by pricing and mix. Looking at our balance sheet, we ended the quarter with cash of $510 million and net cash of $16 million compared to net debt of $47 million at the end of last year. The company ended the quarter with liquidity of $1.4 billion with no significant debt maturities until 2014. Operating cash flow for the quarter was $275 million, reflecting the company's strong earnings and lower working capital requirements. During the quarter, the company received CDO disbursements of $110 million, which were used to fund discretionary pension contributions. Free cash flow for the quarter was $183 million after capital expenditures of $69 million and dividends of $22 million. The company also repurchased 500,000 of its shares during the quarter for $26 million, bringing shares repurchased so far this year to 1 million at a cost of $52 million. The company now has 9 million shares remaining under its board-authorized share repurchase program, and expects to continue to be in the market repurchasing additional shares this year. Turning to our outlook. We have lowered our full year estimates given the expectation of further global weakening in many of our end markets for the remainder of 2012. Sales for 2012 are now projected to be up slightly versus last year, as the benefit of pricing and acquisitions are mostly offset by lower volume, surcharges and the impact of currency. Earnings per diluted share for 2012 are expected to be $5 to $5.30. Included in this estimate is the benefit of CDO receipts of approximately $0.70 per share and the costs associated with the St. Thomas plant closure of approximately $0.30 per share. The company expects cash from operating activities to be $545 million. This includes discretionary pension and VEBA trust contributions totaling $220 million and the benefit of CDO receipts totaling approximately $70 million, both net of tax. The company's free cash flow estimate of $140 million remains unchanged from our prior outlook, as the impact of lower earnings is expected to be offset by improved working capital and lower capital expenditures, which are now expected to be $315 million, while dividends are unchanged at roughly $90 million. Excluding discretionary pension and VEBA trust contributions and CDO receipts, free cash flow for the year is expected to remain at $290 million. This ends our formal remarks. And now we'll be happy to answer any questions. Operator?

[Operator Instructions] Our first question will come from Holden Lewis of BB&T. Holden Lewis - BB&T Capital Markets, Research Division: I wanted to ask you about something in the operating profit calculation. To get to your operating profit number of $215 million which is $1.34, if I add up your 4 segments, it gives me a segment income of about $217 million. If I strip out your corporate of $23 million and your eliminations, I get sort of a residual of about a $22 million gain. There's usually a residual but not usually one anywhere near that size. It looks like you kind of boosted the operating profit a little bit more than it usually does. Any insight as to what that sort of other residual profit is?

Yes, the only thing I'd have to go and look through to make sure I picked up all your pieces, but I believe it's the CDO benefits that we had. When you look at the segmented results, which you're talking about, it would include the charges associated with St. Thomas, primarily in the Mobile group. When you look at the other income, which is where the other discrete item is, which is the CDO of $110 million, that would show up in other income, and would not be in the unallocated corporate cost that would be on that sheet. So my guess is the difference that we're talking about is that amount. Holden Lewis - BB&T Capital Markets, Research Division: Okay. Because I mean to get to your $1.34, which would exclude the CDSOA, I mean that's the $215 million in operating income, right?

That's correct. Holden Lewis - BB&T Capital Markets, Research Division: Okay. So if I take the $215 million, and then I subtract out the -- basically if you add up your 4 segments, it gives you about $217 million. You take out the corporate of $23 million and the eliminations, which is nothing. I mean that's -- to get to $215 million, that takes out that CDSOA, and $20 million would be too small a number anyway, right?

Again, I mean, we can take this offline. The only thing that I can think about, again, are the difference. If you worked, call it, the $0.52, which is the benefit of the CDO, which is $0.70 and the St. Thomas charge of $0.18 gets you that $0.52, which to your point nets to that $1.34. Again, it could where we're off is on the tax rate or other, but my guess is it's the St. Thomas number given that the magnitude we're talking about is in that range. Holden Lewis - BB&T Capital Markets, Research Division: Okay, well, we can address it offline. And could you also give a little bit of insight as to -- you don't give this [indiscernible] to the k, but I mean what was sort of the split between, for corporate wide purposes, the organic volume growth, the price mix, sort of the acquisition contribution, the ForEx drag?

You're saying for the period for the second quarter? Holden Lewis - BB&T Capital Markets, Research Division: Yes, do you happen to have those breakouts?

Yes, effectively, when we say we're up 1%, we talked about the benefit of acquisitions. We said it was around 5%, and that was offset by currency and surcharges. Currency negatively impacted us around 3% and surcharges around 2%. So those kind of, if you will, washed out each other. And then we would say the benefit of price and mix, which would have been up around 5%, was offset by volume down around 4%.

[Operator Instructions] We'll go next to David Raso of ISI Group.

Two questions, one bigger picture and one just on Mobile. It seems like the outlook, the revenue is the key thing that you people were surprised it's down so much in the second half year-over-year from the first half growth. And a lot of it seems to be related a bit to really the international businesses being down even more than what you would have thought. But a lot of that international weakness isn't necessarily that new, I mean, especially the Asian piece. So I'm just trying to understand how much of a recovery did you have baked into the second half for Asia and Europe? And I guess, what happened during the quarter where it became, not to be rude about it, but kind of novel about it, the international wasn't strong. Because it seems that the biggest delta here is the area that was maybe a little more understood was going to be weak. I think North America is more the weakening aspect of folks outlooks in last, say, month or 2. So just kind of going from your comments over the last few months at different conferences and so forth to this release, I'm just trying to understand what changed during the quarter. And then secondarily, I want to focus on the Mobile sales guidance in particular, which I think which is particularly interesting.

Let me at least take the first cut of it, David, and then ask the others to provide a little more color. But when we look at what's changed from the second half outlook versus the first half, we're looking at, call it, around, using rounded numbers -- and matter of fact, even use it relative to the expectations that we had set 3 months ago. Our volume, or I should say, our sales, plus or minus, are now looking to be down around $400 million-ish. The good news is we continue to leverage that well. So when we look at the earnings outlook change, we're leveraging those sales at around 25% on the downturn. Having said that, around half of it is due to volume. The other half is due to lower surcharges, so we're expecting to see, on average, lower material cost environment than what we had in the first half, as well as from a currency standpoint. So you backed out surcharges, you backed out currency, really that explains -- we only have half of the decline, first half, second half. And from the standpoint of international, we clearly are looking and had, in Jim's comments, spoken earlier that we did expect the rebound in Asia, China, in particular. Because we saw that in the first 2 quarters of this year, we did see year-over-year declines in Asia, but we expected that to pickup. Right now, we're not seeing it, so our expectation is that it won't rebound. But, Chris, maybe you want to provide some color on Asia.

Yes, David. Well, a couple of things. And I'll speak for the total corporation on these comments. As you know, we've been cautioning on Asia for 9 months now. However, we did expect to see the strengthening as the year progressed. That, obviously, has not happened. In the second quarter our total Asia sales were down 9%. We've got significant weakness in wind energy, particularly in China. The heavy industries are also very weak, which would be for us, steel, cement, anything tied into the commodity and the construction kind of stuff. That's, obviously, not news to any of you. You're seeing similar results from other companies. So that is offset a little bit by some strength in rail. But generally speaking, if you look at Asia as a region, we have more weakness than we would have expected. Now moving forward on that, we do believe we're stabilizing at these levels, so we do not expect to see a significant drop from where we're at. That said, we see no evidence of any significant recovery in our market space in either India or China. And for that matter, they drive, obviously, most of the region. So there's the color on it.

And, Glenn, just so I heard you properly, the revenues came down roughly $400 million from before. You're saying $200 million surcharge. The $200 million at the volume, I'm sorry, I think you didn't split it between, kind of, true volume and currency, or did I miss that?

Yes. No, we said a little more than half of that would have been volume. So just giving you a magnitude there from just the end market demand, call it, from our standpoint again, midpoint to midpoint of our guidance change is roughly around $250 million-ish of that decline. So the other, call it, $150 million is a combination of surcharges, which is the bulk of it and the impact of currency.

Okay. I mean, the margins are holding up well. Obviously, the surcharge being half of it explains you should lose less on the surcharge, so to speak. So that kind of defends why the margins held up well in this quarter and could continue because, again, half of the revenue loss is surcharge. But trying to think of what does this mean for the rest of the year going to '13, the way you're looking at your end markets, the level of accuracy of the second half guidance, you're also baking in any inventory reduction in this process, producing below retail, or is this kind of more in line or -- I mean, people are just trying to figure out is, is there some conservatism in this revenue guidance that looks a little more harsh than, say, other companies first half, second half?

Okay, this is Jim. And again, let me respond at the corporate level. Your question upon inventory reduction for us, the place that we are seeing, probably the biggest change from that perspective is from the Steel business, and is particularly in the energy market. Sal talked last time about the fact that in 2011, when markets were tight, our customers built inventory and brought some inventory in from overseas to supplement. With gas prices mitigating, or oil prices mitigating in the second quarter and natural gas prices are already low, we're seeing a different level of conservatism in that patch, in the oil patch particularly around inventory. And that's a big piece of the second half revenue decline. Now having said that in terms of turning around from a potential upside, we are not seeing a significant reduction in actual drilling activity. And that's where we look at it when we say our customers are being prudent in this sense and taking inventory down as opposed to we see a dramatic reduction in the end markets.

But how about your own inventory from now to year end, the way you're looking at retail, end demand versus what you're posting as your sales guidance? What probably happens to your inventory sequentially between now and year end?

David, this is Chris. We will take some of our inventory down is the fact of the matter. And that is, we'll be relatively in line with the revenue and the growth that we have. I would not term that to be a major issue for us. It's just the proper management relative to the supply chain and relative to the volume levels we're running at. But that said, we're not looking at a huge inventory drop for the balance of the year, although it will be down.

Yes. Back to my comments on execution, a very big difference in the Timken Company in 2012 is we're sitting with our inventories across the enterprise in very good shape. And so it's just managing it prudently to keep them in proportion to our sales revenue.

So to my last question then on Mobile. The back half guidance, you're basically implying sales to be down 6.5% or so for the second half of the year. I'm curious, the walking away from losing, how do you want to call it, auto sales, the $45 million in the second quarter, light and heavy truck, does that continue in the next 2 quarters? Are you basically saying down 6.5% with absorbing or walked away from $45 million per quarter? Or in a way was this captured more in the first half? I'm just trying to understand how you think about it in your reporting.

Well, the guidance was $150 million for the full year. Don't recall exactly what the first quarter number was, but it's slightly heavier weighted to the first half with the $45 million -- and maybe it was $40 million in the -- 40-ish in the first quarter. But still a significant headwind to overcome to get that in the second quarter was roughly 10% of revenue. And then we also, in the second quarter, Glenn hit on currency. We had about a 5% year-over-year headwind on currency, which we expect to continue for the majority of the year as well. So you put those 2 together, and it's certainly more than the 6%. So we're netting out growth from a volume perspective in the markets in general.

That's helpful. So if just for comps, if you add back the auto loss business, you're basically saying up 3%, 4% Mobile in the back half. You will have one more quarter of drive, so it's more like saying flat third quarter, call fourth quarter up 4%, and the currency drag can be probably bigger in the third quarter than fourth quarter. But end of the day, you're talking about single-digit growth, flattish growth in kind of a core basis. When I go to the individual markets, basically I'm just trying to get a feel how conservative you feel that number is or is it spot on. Because when you look at the ag, construction, mining, we can have our own thoughts about if 2013 is down or not. I mean, it's not the discussion here. I'm talking about the next quarter or 2, I'm not exactly hearing notable production cuts there. You're hearing it in truck. Obviously, rail is still doing pretty well. So I guess, obviously, what it comes back down to is Mobile is 60% or so U.S. It's got to be just a notable change in how you're looking at the back half on international, I would think, on top of a little U.S. truck. It just seems the international has got to be where the major change was in the back half of Mobile, I suspect. Or maybe you're hearing more from your construction, ag, even auto customers, than maybe we're hearing them articulate this earnings season about their back half production.

Well, firstly, I said, when we went from a guidance standpoint to flat to up slightly to flat to down slightly. So it wasn't...

So what it's implying is there's growth in the back half end of the day? The back half growth is pretty much insignificant. So I'll let you finish. I'm just trying to -- what changed in the back half versus the prior guidance?

Just let me talk first a little bit about the -- finish out the second quarter year-on-year comparables. So if you look on year-over-year second quarter, the acquisition was about plus 5%, currency minus 5%, light vehicle and heavy truck exits about minus 10%, which leaves you to get to the minus 4%, 5%, 6% on the market side. And we're talking about the segments, year-over-year, all segments -- all markets are up, taking out from a pure volume standpoint, with the exception of heavy truck, which for us was down pretty significantly in the second quarter. You compare that sequentially, though, to the first quarter, all of our markets were down sequentially from the second quarter from the first quarter. And as we look into the third quarter, we don't see the order book and the demand signals from our customers to support a reversal of that. So that's essentially why the guidance flipped from, again, up a few percent to down a few percent. So I wouldn't certainly characterize it as any sort of free fall, but the second quarter was lighter than what we expected. And as we finish the quarter, we expect the third quarter to be softer than what we expected 3 months as we look back as well.

Okay. But based on the Mobile lower outlook, it's pretty broad. I mean it's not a particular end market per se. I mean, it's a continued sequential decline the next quarter or 2. Is that what the order book is telling you?

Yes. And as you said, I mean some of those markets are good. I mean rail is still growing year-over-year. But even there, we see some softening of the sequential growth rates. So still growing but at a softer rate than what it was.

Our next question comes from Gary Farber of CL King. Gary Farber - CL King & Associates, Inc.: I was just wondering when you look at -- well, I guess 2 questions. one is just on the competitor side. Can you talk about, either in individual business segments or geographies, what the competitive environment is for your product? And then just sort of looking at your major geographies that you have in your presentation, I mean, what's -- it's not a huge range of guidance, but what's the difference between the high end and the low end as far as your assumptions in your major geographies?

Okay. Let's start with competitors. Let's stick with North America, let's start there. North American market remains pretty good. We see pretty good demand in North America. And all of the global competition, I would say, is heavily focused on North America because the global -- the rest of the international bearing markets are, obviously, having issues. In Asia, I would say the competition is most intense there. The markets there, particularly and now for us, remember this is industrial, we're not in the automotive markets in Asia at all. So in the industrial markets, the slowdown there has been significant. And a lot of the competition has new capacity, as well as The Timken Company has capacity. So I would characterize the Asia market to be the most intense and competitive from that perspective. Europe. Europe is just sort of trudging along from our perspective. We're not, once again, a big player in European automotive. So that's not a huge issue for us. But it's just sort of going along. And I would not call the competition intense in Europe at this point in time. I think everybody is just working their way through the issues there would be my characterization of it. Gary Farber - CL King & Associates, Inc.: And what's in North America if more companies or competitors are sort of focused on that market? Is that sort of baked into your guidance to the back half of the year that the level of intensity could increase?

I don't know specifically. I mean, I think we're obviously very strong in North America, and we are the big player in the North American market. So that's a very good thing for us. We expect to have a pretty good year in North America. My only point was, obviously, the competition, whose home markets are weaker, obviously, are competing here. So we don't see any huge competitive problem from that perspective in the North American market. So that would be the comment I'd have on it. Gary Farber - CL King & Associates, Inc.: Right. And then just on the range of your -- even though it's a sort of a tight range, range of guidance. What's the assumption at the low end versus the high end for those 3 major geographies?

Again, the bandwidth is not that great when you think about sales are going to be up slightly. Obviously, that's going to be a big driver. The expectation that there's -- that Asia will be, plus or minus, how much it's going to grow, it's tough to gauge because again, we've been fairly -- don't have a big bandwidth around the top line. So the bottom line is really how well will we leverage it. So it obviously depends as much on the mix of business we have, the material issues that we're grappling with. The capacity obviously is a big issue. I think it's less plus or minus on the geographies as much as just overall demand. Gary Farber - CL King & Associates, Inc.: And in North America, I mean, what's the assumption on the low end of your guidance for the outlook?

Again, I'd make the same comment. Right now, North America continues to be the strongest market that we're participating in. It's obviously our largest exposure to the market. But what we see is it's continued steady state, if you will, from the current environment. But the bandwidth, we don't think, is that great. Again, at the top line, we've had a fairly narrow view of what our top line will be. So it's just execution and how well we leverage that. And again, we expect to continue to leverage the downside very well by managing our cost structure and continuing to be aggressive in our execution.

[Operator Instructions] We'll go next to Samuel Eisner of William Blair. Samuel H. Eisner - William Blair & Company L.L.C., Research Division: Just had a couple of questions regarding utilization rates. I know that you mentioned that Asia, obviously you're seeing increased competition based on that last question. So can you maybe talk about what you're utilization rates are in China at the moment? Maybe obviously, with rail -- with wind continuing to be extremely weak?

Yes. Well, a couple of things. One, it's important to note that we operate a global manufacturing stream. So my point on that is you really can't look at a given country and deduce anything specifically around utilization rates. But we're in the 70%, 75% range of utilization. To be clear, we really like to be in the 80% kind of range. So we're not far off of the optimal range we want to be at. We do not operate at high levels. Our business model is a high service kind of business model. So we do not try to operate at 100% of our utilization. So us, all in all, we are managing that okay. Obviously, you're seeing the St. Thomas announcement. That's an issue. But we're not severely stressed, I would say, from our manufacturing infrastructure at this point in time. It's just we're sort of leveling off is the term I would use. Samuel H. Eisner - William Blair & Company L.L.C., Research Division: And that -- I guess, versus your 80% where you like to operate, that 70%, 75%, is that primarily because of new investments that have come online or because of the material down take on the existing capacity that you already have in the market?

Yes, combination thereof. We obviously are continuing to invest particularly in new products and things of that nature, So we clearly have capacity coming online. We, though, are, obviously, then managing some of our other capacity once again, as evidenced by the St. Thomas closure. So we continue to manage it, and that's where we sit on it. Samuel H. Eisner - William Blair & Company L.L.C., Research Division: And then, Sal, on the Steel business, I know that you guys mentioned last quarter that the declining or you were expecting a weakening of volumes and that would allow you to take some maintenance ahead of scheduled maintenance. I mean what are the current utilization rates? And how are you guys thinking about that, as well as volumes into the second half of the year?

Yes. Well, we operated -- yes, Sam, this is Sal. We operated our second quarter at about 70% utilization. So that's right in line with where we said we indicated that we'd probably perform second quarter about as we did in first, and it's almost identical and, frankly, with a little bit lower utilization rates. So we had a better product mix during that period as well. We do expect to see softening in the second half, not terrible, but definitely a bit lighter. We had talked about the conditions associated with inventory overshoots in terms of customer supply chains, which is coming to be recognized. We talked a little bit about the attracted imports that came in the fourth quarter of '11, first, a bit of second quarter of '12 because of the inability of the North American industry to supply last year. And right now we believe that, that will have to reconcile itself. And we expect to see that happening during the third quarter and probably take a bit of time during there. So not terrible, but definitely a bit softer, which is why the guidance we've given indicates that we'll probably going to be down a bit as opposed to where we were originally. Samuel H. Eisner - William Blair & Company L.L.C., Research Division: Understood. And then if I look back at your performance, and I'm not saying the environment is like this now, but if I look back at Steel's performance back in 2008, you had margins that were really increasing during the time of declining scrap steel environments, and then basically the volumes fell off and the margins fell off as well. So how are you guys thinking about that with volumes seemingly coming down? And even though surcharges are benefiting margins this quarter, would you expect that benefit to start to trail off towards the end of the year?

Well, I believe we'll see a bit of pressure on margins just because of the softness that we'll see regarding this inventory gain. We've got a little bit other headwinds, too, with the -- you've seen scrap prices fall quite considerably. They were down $115 in the last 2 months and $200 since February. And so we're going to have a little bit longer wait to recover our surcharges. And so that will put a little pressure on our third quarter. And frankly, there's another couple of unique things that occurred to us early in July. We had 2 unplanned plant outages, 1 week at our Harrison plant and 2 weeks at our Faircrest plant because of liquid metal leakages, one at a caster and one at an electric-arc furnace that we're recovering from right now. But that'll pressure probably our third quarter a little more than otherwise. But having said that, we still don't see things getting terrible. We just see a lot of caution among our customers right now. With the oil at $88 a barrel, there's a bit more conservatism in terms of our energy customers dealing with things. There's a little bit of confusion regarding the forecasts in the industry about where drill rig counts will go. There's one, Spears and Associates, that are predicting up and Raymond James down by double the amount they expect up. And so people are just a little nervous and being a bit conservative. And with the supply chains, with adequate inventories in them right now, they're just playing it very close as we are, by the way, playing it very close in terms of that. So we don't see it getting terrible. We just see it softening a bit until these inventories sop up. Samuel H. Eisner - William Blair & Company L.L.C., Research Division: That's a very thorough answer. And then just quickly on the bearing business maybe for both Mobile as well as in Process. In mean, what are the inventory levels looking like at your customers? I mean specifically within the industrial distribution market, how are your inventory levels looking there? And how does that affect -- I think, another analyst was asking about the this, affect production rates coming forward?

Yes, we have obviously very good visibility of that issue because we measure that very carefully with our distributor sales to the end users versus what we sell to them. It looks great. Unlike 2008, where you had massive inventory builds in the channels, we have no inventory build whatsoever of Timken product in the channels. And that's exactly what we want to see. We also have made changes in the way we commercially interact with our distributors to make sure they're not incented to build inventory either. So that issue looks really good for us, and we are very happy with where it is, and thus, it's no impact whatsoever of consequence in the industrial distribution arena.

That would echo similar for Mobile and Aerospace. We have no channel inventory problems. Inventory is in excellent condition from a standpoint of being at a proper level of turns. And we're able to respond to ups or downs quite quickly.

Our next question comes from Eli Lustgarten of Longbow Securities.

Let me have one clarification. I think, Glenn, during your presentation, you said the tax rate in the second half of the year will be 36.5% ongoing. Your first half on an operating basis is 34%, and the difference between 34% and 38% was in CDSOA and the charge in that. So is there something happening that -- is the earnings makes [indiscernible] U.S. that's causing the 36.5% tax rate in the second half of the year?

No, it's when we calculate the rate, we always do it on an annual basis. And then the second quarter trues it up. So roughly, there'll still be additional St. Thomas charges in the second half that, again, won't be deductible for us because of our NOL position. The assumption on a change in foreign earnings would not have changed from the first half assumption. And that's why ultimately, we say we get back to the 34% rate after we get through this year when those charges are done at a more normal environment.

So it's basically just the closing of the plant that's causing the high rates, nothing else?

As far as the comparison between the second half and the first, that's right.

Yes. Let me make sure I understand, you clearly indicate that the big problem in steel in the second half is this inventory liquidation. In the bearing side of the business, the lower volume, is that caused by weaker demand? Or is that your customer's sensing a change in environment, taking their inventories down even though it's not a matter of the inventories being high, but basically they're trimming their inventory levels at the OEM level? .

We're not seeing any dramatic inventory reductions, let's say, that customers are, I think Jimmy used the word playing it prudently and responding to what they've seen in some softening or maybe softening of growth projections in some cases. So don't see inventory being a major positive or negative factor in our outlook.

So basically it's a flow through of demands. The demand is flowing. You're just taking it down directly in the bearing business second half of the year?

Correct.

Okay. Now in the Mobile side, your adjusted margins was still mid-teens. How bad did margins yet, given this weakening outlook in the second half of the year? Can we hold them in double digits in the environment we're talking about?

Yes. We still have -- going a little, we have about $0.12 of restructuring in the forecast.

Yes, I meant the asset restructuring, obviously.

Yes, and outside that, our target is in the teens with the possible exception of the fourth quarter, but still would expect to hold double digits even then with normal seasonality.

Okay. And the Process business, I guess, has come off. Is that a change of environment also from the double-digit growth? And can profitability stay in the '20s given the low volume? .

Yes, Eli. The issues with process are clearly international. And specifically Asia, in particular, has given us some pain. Europe is a little bit of an issue for us. I mean, it's down mid-single digits in the distribution market. But it's trudging along. So the balance of the year, we, I mean, effectively expect the second quarter to carry forward for the third and fourth quarters is pretty much what we expect to see happen. We expect to see the margin hanging around the level where it's at now. The second quarter margin, price was effectively offset by currency and volume. And the 1% down year-over-year was primarily just some cost pressure from the S&A manufacturing at the slightly reduced volumes that we saw. So I mean, I think just look second quarter, you can pretty much see what we expect in the third and fourth.

Okay. I guess, the real fear that is shaping in the market, it could stop you getting hammered, is you're second half guidance is under $2 a share. It's in the $1.75 kind of range, I guess, versus $1.85 range from the first half or so. Is that the run rate that you expect a while until business improves or are the inventory -- I guess, steel has an inventory there. We can start thinking of '13 as a more normalized number somewhere in between what we're seeing in the second half of the year, and what we'll see for the full year? .

Eli, again, let's -- we'll put it in perspective. Clearly, when you go to the midpoint, you get to that call it $1.84 in the second half. And you probably expect that to be fairly similar between the third and the fourth quarter, albeit as Rich said, normally we'd get some seasonality in the fourth quarter. But just timing and because of that, [indiscernible] fairly comparable. But again, you said that, that's the current run rate, so we're doing the $0.90 plus a quarter for the next couple. And you annualize that. We're at the second best year we've ever had. So again, from our standpoint, the decline that we're seeing again is markets that are softer than we expected, albeit it's kind of interesting. If you look at this beginning of the year, they're not too far different than where we thought they would be at that time. And in fact, because the first quarter was so strong, we increased our expectations that the market would continue to grow. And in fact, it's kind of come back slightly below what our original expectation is. So the key part on our standpoint is that we continue to leverage it well. We've managed the cost very well. We're managing the business well. There are obviously market conditions we can't control. Some of the negative impact is currency translation, as well. But as we look out next year, obviously, we'll go through our plan. We'll provide our normal outlook in the normal course. But if we're saying things don't get worse, they just maintain, we're still operating at a fairly good level. And obviously we can even leverage it better if we knew it was going to be sustainable by taking certain other actions, but we continue to keep a good eye on our cost structure given the uncertainty that we're seeing out there.

And with the stock getting hammered as it is right now, would you -- is it fair to say that maybe you'll consider being much more aggressive in share repurchase than you've been historically? It's not the authorization you just haven't executed very much. But I mean your stock's trading down 18% at the moment, and I'm just wondering whether with such an unleveraged balance sheet would the company become more aggressive in repurchasing its shares?

No. It's a great question, Eli. Obviously, we've been in the market for the first half of this year greater than normally we've been in the first half repurchasing 1 million shares. We've averaged at around $52 a share. So if you liked it at $52, you should really like the benefit of buying it in the 30s. We did comment in the opening remarks that we do expect to be in the marketplace, continuing to repurchase shares. Again the board authorized a substantial program for us in February of this year increasing that with our expectation, given the strong balance sheet, given the strong cash flow of the company, that we can still keep to our balanced approach of funding the CapEx budget for growth opportunities, dealing with our pension and OPEB liabilities and obviously in the current interest rate environment, providing some headwinds, the increased dividend that we had earlier and acquisitions. So with the strong balance sheet, we expect to continue to pursue all those different areas. But obviously, in the 30s, the stock is even more attractive than, frankly, it was attractive in the 50s. So obviously, we'll report out as we go each quarter as far as how much we'll buyback, but it's a function of balancing all those different items.

We'll go next to Holden Lewis of BB&T. Holden Lewis - BB&T Capital Markets, Research Division: I wanted to go back to the commentary that you made around sort of the Steel business. I think you talked about -- the Steel held up very well in the quarter. But you talked about the -- maybe some inventory culling that's taking place there. I mean, are we expecting that even though the bearings are somewhat weaker this quarter and Steel held up quite well, are we expecting that a fair bit of the incremental weakness we're expecting in the second half is going to come from the Steel side of the business? I mean, the inventory culling, I guess, the unplanned shortages, utilization coming down a bit, I mean, the guidance that you provided for second half is so poor. Is that disproportionately coming from Steel now rather than the bearing side, which we kind of saw in Q2?

The comment, Holden, I guess, making, again Sal can provide some color. The change in outlook for Steel is the most dramatic of our other 4 operating segments, second half to first in part, given the strength that we saw in Steel in the first half. But I wouldn't know over -- to tell you the fact that given the current material environment we're in, when you see the top line coming down more significantly in Steel, it's because of the fact that we have that surcharge mechanism that insulates ourselves from exactly this issue of material costs rising and lowering that we can't control. So within Steel, probably a good half of the decline in our outlook for second half versus the first in our change is just a result of those surcharges coming down. The other half again being more market driven, which puts it at more in line with what's going on at least within the Mobile outlook for the business as well. So similar markets. Holden Lewis - BB&T Capital Markets, Research Division: But even at half that's volume, I mean if you're seeing inventories getting cold, and obviously there's a fair degree of operating leverage in that Steel business, so I mean if half of the issue is surcharge and the other half is volume, how much of that half that's volume is going to be a function of lower tonnage and things like that in the Steel business because of inventory and things like that?

Holden, this is Sal. I mean, that's exactly right. The half of the sales dollar decline that we're talking about is because scrap prices are $200 a ton lower, although we expect that, that will start to strengthen and increase even as early as August. We're seeing signs of that right now, so you may see that return. But this inventory reconciling that needs to go on, the combination of customers who have a bit more in their pipelines than they actually need given their uncertainty because of the nature of the economy right now and the imports that we've seen is going to result in a bit lower volume. But what we do believe is that what we've done in terms of improving our own efficiencies and rightsizing our pricing is that our volumes will hold pretty -- our margins will hold pretty reasonably, not as high as you've seen, but something in the low double digits. And I think you're going to find that, that's pretty reasonable when you consider the nature of the slowdown that we're seeing because of this conservatism regarding exactly when the demand will pick up again. Holden Lewis - BB&T Capital Markets, Research Division: Okay. And then are you planning on -- don't you usually do planned outages in Steel sort of in Q3? If you kind of had some unplanned outages, are you still looking at planned outages in Q3 as well?

Yes, we'll still have. There'll be 2 kinds of outages that we'll plan on, Holden. One is simply that which we will not run because the demand is not as strong as we expected. Then we also have some plans that were there because of the necessity to hook up some of the equipment that are in-line with the capital projects we have. In particular, the in-line forge press at the Faircrest steel plant will require about a week of downtime in order to make the connections that lie right within the spectrum of flow of product from our soaking pits into our rolling mills with the press in between. But that's about it. It would be the combination of those 2. Holden Lewis - BB&T Capital Markets, Research Division: Okay. And then just last thing on acquisition. Can you just remind us when did the acquisitions sort of anniversary into the Mobile and Process business? Then maybe give us since you're going to put that balance sheet to use, give us a sense of what the likelihood is that you can convert some of your pipeline today to something over the next 12 to 18 months?

I think the Philly Gear was in the third quarter of last year.

July, July of last year

And the Drives in the fourth quarter.

Drives was in October of this year. So we had Drives for 9 months. We had Philly Gear for just over a year.

And your question on the acquisitions, again, part of the reason of having the strong balance sheet we have is we continue to look at acquisitions to implement the strategic plan of the company, which again, is to continue to grow and diversify within that mechanical power transmission space that you've seen. The Philly Gear and the Drives acquisitions, illustratively, are where we're targeting. So we continue to believe there are good opportunities out there, and we'll be able to utilize some of our balance sheet for the acquisitions, as well as the share repurchases and the other in dealing with the pensions and so forth. But we continue to be very disciplined on our acquisitions. But obviously, we're seeing a fair amount of activity in the marketplace, which is good. The issue, obviously, is there are a lot of sellers right now and, particularly, could be because of the concern of where the economy is, and is this the right time to be selling. So we'll continue to be active and hopefully be able to execute and get good strategic acquisitions that continue to complement our business. And, Holden, just one last comment to -- so we -- well we can still circle back. I think we've figured out your difference in your question that you started with, which was the St. Thomas closures. When you look at the segment data, that is -- we're burning Mobile, if you will, by that charge in the segmented results. So when you add that up, then you compared it to the as adjusted, if you will, excluding that St. Thomas, so the delta is probably roughly that $17 million. But take a look at it, and then if it's not that number, give us a holler and then we'll walk you through it.

That is all the time that we have for questions. I'd like to turn the call to Jim Griffith for closing remarks.

In closing, I'm going to go back to my opening comments. Let me repeat. We had a very solid second quarter, and the company is running extremely well. And to reinforce, we are projecting record results for 2012. We've taken prudent action to deal with the global economy, and we look forward to reviewing the results with you at the end of the third quarter.

That does conclude today's conference. Thank you all for your participation.