The Timken Company — Q1 2022 Form 10-Q
Business context and period: Timken designs and manufactures engineered bearings and power-transmission products. It reports Mobile Industries and Process Industries segments. This unaudited quarterly report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net sales | $1,124.6 million | $1,025.4 million; up 9.7% |
| Gross profit / margin | $327.4 million / 29.1% | $299.2 million / 29.2% |
| Operating income | $172.3 million | $150.7 million |
| Net income attributable to Timken | $118.2 million; diluted EPS $1.56 | $113.3 million; diluted EPS $1.47 |
| Operating cash flow / free cash flow | $(1.2) million / $(35.5) million | $31.7 million / $2.3 million |
| Cash and cash equivalents | $424.5 million | $257.1 million at December 31, 2021 |
| Total debt / net debt | $1,788.2 million / $1,363.7 million | $1,464.9 million / $1,207.8 million at December 31, 2021 |
Adjusted EBITDA, a non-GAAP measure, was $225.1 million, with a 20.0% margin, versus $203.7 million and 19.9%. Net debt to adjusted EBITDA for the trailing twelve months was 1.8, compared with 1.7 at year-end 2021.
Cash used in operations reflected $184.1 million of working-capital outflows, principally receivables and inventory. Timken reported $741.2 million of available resources under committed credit lines. Its net-debt-to-capital ratio was 36.7%, up from 33.7% at December 31, 2021. The company said it was in compliance with debt covenants.
Material changes and management commentary
- Sales rose 9.7%, reflecting $113 million of organic growth, including positive pricing, partly offset by a $15 million unfavorable currency impact. Demand increased in both segments.
- Gross profit increased $28.2 million: favorable price/mix and higher volume were each partly offset by higher material and logistics costs. Gross margin edged down 10 basis points.
- Mobile Industries sales increased 7.1%, but EBITDA fell 5.7% to $75.1 million and its margin declined to 13.9%, mainly because of higher costs. Process Industries sales increased 12.2% and EBITDA increased 18.8% to $155.6 million; margin rose to 26.6%.
- Debt increased during the quarter. Timken issued $350 million of 4.125% senior notes due 2032, using proceeds to repay facility borrowings and for general corporate purposes. It also repurchased $100 million of shares and paid $23.5 million in dividends.
- The effective tax rate rose to 23.9% from 17.9%, primarily because the prior-year period included a discrete tax benefit from settling U.S. federal tax years 2017 and 2018.
Outlook, risks and notable items
- Management expected full-year 2022 revenue to increase approximately 8% from 2021 and earnings to increase, with higher volume and favorable price/mix partly offset by costs, interest expense and taxes. It expected 2022 operating cash flow to exceed 2021 and capital expenditures of 4.0%–4.5% of sales.
- Management warned that supply-chain disruption, inflation and staffing constraints could persist or worsen, including due to Russia’s invasion of Ukraine and COVID-19 lockdowns in China.
- Russia-related allowances and inventory write-downs totaled $4.6 million in Q1. Timken reported $21.9 million of net assets and cumulative translation adjustments related to its Russian operations, including $12.9 million of cash, and said further impairments or write-offs were possible.
- Environmental accruals were $6.4 million, including the Lovejoy-related Ellsworth Industrial Park matter; the company noted its allocated costs could be significant. Product warranty liabilities were $13.0 million. Management did not expect ordinary-course legal matters to have a material adverse effect.
- Restructuring charges were $1.0 million in Q1, primarily related to the planned Villa Carcina, Italy plant closure. Timken expected the closure to be completed by June 2022 and estimated total related expenses of $9 million–$11 million.
- After quarter-end, on April 29, 2022, Timken agreed to acquire Spinea, a Slovakian manufacturer of cycloidal gears and actuators, for a transaction expected to close in Q2, subject to customary conditions. Spinea was expected to have 2022 sales of about $40 million; the acquisition was to be funded with cash and existing credit facilities.
Important facts for investors to verify
- Whether pricing and volume continue to offset inflation, logistics, staffing and other operating costs, especially in Mobile Industries.
- Whether working-capital needs ease and operating cash flow meets management’s full-year expectation.
- Debt and liquidity after the 2032 note issuance, planned capital spending, share repurchases and any acquisition funding.
- Potential further financial effects of Russia-related developments, China lockdowns, and the Lovejoy environmental matter.
- Progress and final costs of the Villa Carcina closure, and closing, funding and performance of the proposed Spinea acquisition.