The Timken Company (NYSE: TKR) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing is an annual report; fourth-quarter figures are also summarized below. Timken designs and manufactures engineered bearings and industrial motion products and provides related services. It operates through Engineered Bearings and Industrial Motion, serving diverse industrial and transportation markets worldwide.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Net sales | $4,769.0 million | $4,496.7 million |
| Operating income / margin | $657.1 million / 13.8% | $606.9 million / 13.5% |
| Net income attributable to Timken | $394.1 million | $407.4 million |
| Diluted EPS | $5.47 | $5.48 |
| Adjusted EPS | $7.05 | $6.46 |
| Adjusted EBITDA / margin | $939.7 million / 19.7% | $855.9 million / 19.0% |
| Operating cash flow | $545.2 million | $463.8 million |
| Capital expenditures / free cash flow | $187.8 million / $357.4 million | $178.4 million / $285.4 million |
At year-end, total debt was $2,395.9 million and cash was $418.9 million, leaving net debt of $1,977.0 million; net debt to adjusted EBITDA was 2.1x. Net debt to capital was 42.2%. Timken reported $513.4 million available under committed credit lines, and was in compliance with debt covenants. The current portion of debt rose to $605.6 million from $49.0 million in 2022. The company reported $2,702.4 million of total equity and $6,541.7 million of total assets.
Fourth-quarter 2023 sales were $1,091.2 million versus $1,082.0 million in fourth-quarter 2022. Operating income was $119.2 million versus $127.0 million; net income attributable to Timken was $58.7 million versus $97.2 million. Fourth-quarter 2023 results included net actuarial losses of $22.3 million.
Material changes versus 2022
- Sales increased 6.1%, primarily from acquisitions and higher organic pricing, partly offset by lower organic volume and unfavorable foreign exchange. Acquisitions net of divestitures added $246 million to sales; organic sales increased $50 million, while currency reduced sales by $23 million.
- Operating income rose 8.3%, and operating margin improved 30 basis points. Lower material and logistics costs and favorable price/mix helped, while SG&A, amortization and restructuring costs increased.
- Net income attributable to Timken fell 3.3%, and diluted EPS was nearly flat. Lower volume, higher operating costs, unfavorable currency, pension remeasurement charges and higher interest expense weighed on earnings.
- Interest expense increased 48.4% to $110.7 million, primarily because of higher average debt and interest rates. The effective tax rate declined to 23.1% from 24.3%.
- Operating cash flow increased by $81.4 million, reflecting improved working capital, partly offset by $132.7 million of year-over-year adverse cash-tax effects. Free cash flow increased to $357.4 million.
- Segment results differed: Engineered Bearings sales rose 5.3%, but were nearly flat excluding acquisitions, divestitures and currency; Industrial Motion sales rose 7.6%, or 3.3% on that adjusted basis. Segment EBITDA margins were 20.3% and 17.3%, respectively.
Outlook, management commentary and risks
Management expects 2024 full-year revenue to decline 2.5%–4.5% versus 2023, as weaker expected organic revenue more than offsets 2023 acquisitions. Earnings are expected to decline, mainly due to lower sales volume, partly offset by lower anticipated pension remeasurement and impairment charges and acquisition benefits. Management expects higher operating cash flow, driven by improved working capital and lower cash taxes, and capital expenditures similar to 2023, at about 4% of sales.
Timken completed six acquisitions in 2023, with $638.8 million of cash paid net of acquired cash, and invested in new manufacturing facilities expected to begin operating in 2025. It repurchased 3.2 million shares and deployed more than $1.1 billion across capital expenditures, acquisitions, dividends and repurchases. The company also sold shares of Timken India Limited, receiving $284.8 million in cash proceeds; its ownership declined from 67.8% to 57.7%.
- Debt and refinancing: $350 million of 3.875% notes mature in September 2024, and a variable-rate term loan of $220.8 million matures in August 2024. Management said it intends to refinance the notes and repay or replace the term loan before maturity. Variable-rate debt exposes the company to higher interest costs.
- Unusual items: Timken recorded a $28.3 million goodwill impairment related to its Belts and Chain reporting unit and $45.5 million of impairment and restructuring charges overall. It also recorded $20.6 million of corporate pension and postretirement remeasurement charges in its adjusted-results reconciliation. The Russian joint venture was deconsolidated and its remaining $4.7 million investment written off.
- Contingencies: Environmental accruals were $4.7 million, including the Lovejoy matter at the Ellsworth Industrial Park site; the company says its allocated share of costs could be significant, and actual costs may exceed accruals. Management says pending matters are not expected to materially affect consolidated results or financial position. Product warranty accruals were $15.2 million; claims involving automotive and wind-energy bearings could materially affect results in a particular period.
- Other principal risks: Cyclical demand and customer destocking, price competition, raw-material and logistics costs, acquisition integration, foreign exchange, geopolitical and trade disruptions, cybersecurity, environmental and regulatory requirements, pension assumptions, and product-liability claims.
Important facts for investors to verify
- Whether 2024 demand, sales and earnings track management’s expected declines, and whether working-capital improvements support higher operating cash flow.
- How Timken refinances or repays the 2024 maturities, and the effect of interest rates on interest expense and leverage.
- Whether recent acquisitions deliver expected growth and synergies; several 2023 purchase-price allocations were preliminary at year-end.
- Whether volume, pricing and cost trends sustain segment margins, particularly amid weaker demand in some Engineered Bearings markets.
- Potential changes in environmental, warranty and pension exposures, including the Lovejoy site and automotive and wind-energy claims.
- That 2023 adjusted EPS and adjusted EBITDA exclude specified items; compare these non-GAAP measures with reported GAAP earnings and cash flow.
- The auditor issued unqualified opinions on the financial statements and internal controls. Internal-control assessment excluded the six 2023 acquisitions, which represented 13% of total assets, 25% of net assets and 3% of 2023 revenue.