Timken Company (NYSE: TKR) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Timken designs and manufactures engineered bearings, power-transmission products and related services. Its two reportable segments are Mobile Industries and Process Industries; no customer represented 5% or more of sales.
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $4,132.9 million | $3,513.2 million | +17.6% |
| Gross profit / margin | $1,102.5 million / 26.7% | $1,009.9 million / 28.7% | Profit +9.2%; margin down 200 bps |
| Operating income | $513.1 million | $454.9 million | +12.8% |
| Net income attributable to Timken | $369.1 million | $284.5 million | +29.7% |
| Diluted EPS | $4.79 | $3.72 | +28.8% |
| Cash from operations | $387.3 million | $577.6 million | Down $190.3 million |
| Capital expenditures / free cash flow | $148.3 million / $239.0 million | $121.6 million / $456.0 million | FCF down $217.0 million |
| Total debt / cash / net debt | $1,464.9 million / $257.1 million / $1,207.8 million | $1,564.6 million / $320.3 million / $1,244.3 million | Net debt down $36.5 million |
Revenue growth reflected $513 million of higher organic sales, $78 million from foreign exchange and $29 million from acquisitions. Higher volume and utilization, positive pricing and mix, and favorable currency effects supported results. Higher material and logistics costs partly offset these benefits: those costs reduced gross-profit growth by $171 million. Adjusted EBITDA was $718.0 million, with a 17.4% margin versus 18.8% in 2020; adjusted EPS was $4.72 versus $4.10. These are non-GAAP measures.
Operating cash flow fell chiefly because working capital used $133.5 million of cash versus providing $102.9 million in 2020. Inventory used $215.8 million of cash, reflecting stronger demand and longer supply-chain lead times. Net debt to adjusted EBITDA improved to 1.7x from 1.9x; net debt to capital was 33.7% versus 35.9%.
Segment results
- Mobile Industries: Sales of $1,965.7 million, up 17.6%; organic sales excluding acquisitions and currency rose 15.3%. EBITDA increased 3.3% to $240.1 million, while margin fell to 12.2% from 13.9%. Growth in off-highway, automotive and heavy truck was partly offset by lower aerospace revenue and higher costs.
- Process Industries: Sales of $2,167.2 million, up 17.7%; organic sales excluding acquisitions and currency rose 14.0%. EBITDA increased 14.3% to $506.3 million, while margin declined to 23.4% from 24.0%. Distribution, renewable energy and general industrial demand contributed to growth.
Fourth quarter: Net sales were $1,007.3 million versus $891.7 million in Q4 2020. Net income attributable to Timken was $62.9 million versus $53.1 million; diluted EPS was $0.82 versus $0.69. Q4 gross profit was $233.1 million, down from $237.0 million a year earlier.
Liquidity, debt and capital allocation
At year-end, Timken reported $257.1 million of cash and $733 million of available resources from committed credit facilities, including availability under its revolving credit and receivables facilities. The $650 million revolving facility had $9 million drawn; the receivables facility had no borrowings. The company reported compliance with its debt covenants: consolidated leverage was 2.05x against a 3.5x maximum, and interest coverage was 12.10x against a 3.0x minimum. Approximately $240.5 million of cash was held outside the U.S.; repatriation may involve taxes or governmental restrictions.
Cash dividends paid were $92.2 million, and share repurchases were $93.0 million. The company reported a $1.19 annual dividend per share for 2021 and declared a $0.30 quarterly dividend in February 2022.
Outlook, risks and unusual items
- 2022 outlook: Management expected full-year revenue to rise approximately 10% from 2021, earnings to increase, and operating cash flow to exceed 2021 levels. It expected capital expenditures of approximately 4% of sales. The outlook assumed COVID-19 conditions would continue to improve, while supply-chain disruption and inflationary pressure would largely persist.
- Cost and operating pressures: The filing cites inflation in materials, freight, energy and labor, supply-chain constraints, staffing challenges, and the risk that pricing actions or surcharges may not recover cost increases promptly or fully. COVID-19 could continue to affect demand, labor availability and operations.
- Restructuring and acquisitions: 2021 impairment and restructuring charges were $8.9 million, down from $21.2 million. Planned closures of the Villa Carcina, Italy bearing plant and Indianapolis, Indiana chain plant involve further costs and execution risks. Timken acquired industrial automation provider iMS for $7.7 million in 2021, with up to $3.0 million of contingent consideration. 2021 also included a $0.9 million acquisition-related gain tied to the Aurora purchase; 2020 included an $11.1 million bargain-purchase gain.
- Tax and pension items: The 2021 effective tax rate was 20.0%, compared with 26.2% in 2020, benefiting in part from releases of uncertain-tax-position accruals and a $7.8 million foreign deferred-tax valuation allowance. Pension and postretirement accounting also affected results; the auditor identified pension benefit obligations as a critical audit matter. The reported pension obligation exceeded plan assets by $156.9 million.
- Contingencies and other risks: Environmental accruals were $6.0 million, including a Superfund-site matter for which the company says its allocated costs could be significant. Product warranty liabilities were $11.7 million. Management did not expect pending legal matters to materially affect consolidated results, but outcomes remain uncertain. Other disclosed risks include competition and pricing, currency movements, climate and environmental regulation, cybersecurity, product claims, and pension funding needs.
The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective at December 31, 2021.
Most important facts for investors to verify
- Whether 2022 revenue and earnings growth materialized and pricing kept pace with persistent input-cost inflation.
- Whether inventory and receivables convert to cash, given the sharp 2021 operating-cash-flow and free-cash-flow decline.
- Segment margin trends, especially Mobile Industries’ lower EBITDA margin despite strong sales growth.
- Progress, final costs and expected savings from the two plant closures, and integration and returns from iMS and other acquisitions.
- Debt maturities, covenant headroom, liquidity availability and any constraints on accessing overseas cash.
- Changes in pension funding status, environmental exposure, warranty claims and valuation-allowance or uncertain-tax-position benefits.