The Timken Company (NYSE: TKR) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed April 30, 2024. Timken designs and manufactures engineered bearings and industrial motion products and reports in Engineered Bearings and Industrial Motion segments. Financial figures below are in millions of dollars, except per-share data.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $1,190.3 | $1,262.8 | -5.7% |
| Operating income | $184.6 | $187.6 | -1.6% |
| Operating margin | 15.5% | 14.9% | +60 bps |
| Net income | $110.6 | $125.7 | -12.0% |
| Net income attributable to Timken | $103.5 | $122.3 | -15.4% |
| Diluted EPS | $1.46 | $1.67 | -12.6% |
| Adjusted diluted EPS | $1.77 | $2.09 | Lower |
| Operating cash flow | $49.3 | $78.6 | -$29.3 |
| Capital expenditures / free cash flow | $44.1 / $5.2 | $41.7 / $36.9 | FCF lower |
Adjusted EBITDA was $246.4 (20.7% margin), versus $265.5 (21.0%) a year earlier. Interest expense rose to $32.2 from $24.1. The effective tax rate was 27.9%, versus 25.3%.
Segments and material changes
- Engineered Bearings: Sales fell 10.9% to $802.5; excluding acquisitions, divestitures and currency, sales declined 10.3%. EBITDA declined 12.8% to $178.7, and margin decreased to 22.3% from 22.8%. Management cited weaker volumes across most markets, particularly renewable energy and off-highway, partly offset by pricing and rail.
- Industrial Motion: Reported sales rose 7.1% to $387.8, reflecting acquisitions; organic sales excluding currency and acquisitions declined 6.5%. EBITDA increased to $77.3 from $48.2, with margin of 19.9% versus 13.3%. The comparison benefited from the prior-year $28.3 goodwill impairment; adjusted EBITDA margin was 21.2% in both periods.
- Consolidated sales declined due to lower organic volume and unfavorable currency, partly offset by pricing and acquisitions. Management attributed lower earnings mainly to reduced volume, higher interest expense and amortization, partly offset by favorable price/mix, lower operating costs and material costs, and lower impairment charges.
- Foreign-currency translation reduced equity by $50.3 during the quarter. The dollar’s strengthening also contributed to unfavorable currency effects on sales.
Liquidity, debt and outlook
At March 31, 2024, cash and cash equivalents were $421.9; total debt was $2,399.8 and net debt was $1,977.9. Net debt to capital was 42.0%, and trailing-twelve-month net debt to adjusted EBITDA was 2.1x. The company reported $523.8 of availability under committed credit lines and compliance with debt covenants. Its leverage ratio was 2.20x against a maximum of 3.5x; interest coverage was 8.24x against a minimum of 3.0x.
Debt refinancing is a near-term consideration: a $215.8 variable-rate term loan matures in August 2024, and $350.0 of 3.875% notes mature in September 2024. Management said it intends to refinance both before maturity.
For full-year 2024, management expects revenue to decline 2%–4% from 2023, reflecting lower demand partly offset by acquisitions and slightly higher pricing. Net earnings are expected to decline, primarily due to lower sales volume and a higher tax rate. Management expects higher operating cash flow, driven mainly by improved working capital and lower cash taxes, and capital expenditures broadly in line with 2023 as a percentage of sales, approximately 4.0%.
Risks, contingencies and unusual items
- Environmental remediation accruals were $4.6, including the Lovejoy-related Ellsworth Industrial Park matter; actual costs could exceed accruals. Management notes potential future environmental compliance or remediation exposure related to PFAS.
- Product warranty liability was $16.3, primarily relating to automotive and renewable-energy products. Management believes certain customer claims will not materially affect consolidated financial position, but changes could materially affect results in an individual period.
- Restructuring continued: Q1 charges were $2.3. The Fort Scott, Kansas belts facility closure is expected by year-end 2024 and is expected to affect approximately 155 employees, with total pretax costs estimated at $10–$12. The Gaffney, South Carolina closure has incurred cumulative pretax costs of $12.7.
- Quarterly cash flow was affected by working-capital outflows, including $106.1 from accounts receivable. Management’s outlook depends on demand, pricing, acquisitions, working-capital execution and refinancing conditions.
- Other disclosed risks include economic and geopolitical conditions, customer demand and industrial cycles, competition, input and labor costs, acquisition integration, litigation and warranty claims, environmental regulation, interest rates, and the ability to refinance debt. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether full-year revenue guidance of a 2%–4% decline and expected lower net earnings remain achievable as demand develops.
- Progress and terms of refinancing the August and September 2024 maturities, and the effect of financing costs.
- Whether working-capital improvements support management’s higher operating-cash-flow expectation, given the Q1 receivables cash outflow and lower free cash flow.
- Underlying segment demand and margins, especially renewable energy and other Engineered Bearings markets, and Industrial Motion performance excluding acquisitions and prior-year impairment.
- Potential changes to environmental remediation estimates, warranty claims, restructuring costs, and preliminary acquisition purchase-price allocations.