The Timken Company (NYSE: TKR) — 2020 Form 10-K
Business context and reporting period. Timken designs and manufactures engineered bearings, power-transmission products and related services. It reports Mobile Industries and Process Industries segments. This annual filing covers the fiscal year ended December 31, 2020; quarterly figures below are unaudited. COVID-19 reduced demand and disrupted operations, particularly in the second quarter, while production improved in the second half.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $3,513.2 million | $3,789.9 million | Down 7.3% |
| Gross profit / margin | $1,009.9 million / 28.7% | $1,141.8 million / 30.1% | Down 11.6%; margin down 140 bps |
| Operating income | $454.9 million | $516.4 million | Down 11.9% |
| Net income attributable to Timken | $284.5 million | $362.1 million | Down 21.4% |
| Diluted EPS | $3.72 | $4.71 | Down 21.0% |
| Cash from operating activities | $577.6 million | $550.1 million | Up $27.5 million |
| Capital expenditures | $121.6 million | $140.6 million | Down $19.0 million |
Lower organic volume and unfavorable currency effects drove the sales decline; acquisitions and positive pricing partly offset them. Lower volume, currency and manufacturing performance weighed on gross profit. SG&A fell 13.7% to $533.8 million, reflecting cost actions and lower spending. Restructuring and impairment charges rose to $21.2 million from $6.8 million. The effective tax rate increased to 26.2% from 20.7%.
Fourth quarter: Sales were $891.7 million versus $896.2 million in Q4 2019. Net income attributable to Timken was $53.1 million and diluted EPS was $0.69, compared with $113.5 million and $1.48. The comparison was affected by unusual prior-year items: Q4 2019 included a $44.5 million release of tax valuation allowances and actuarial gains; Q4 2020 included $21.6 million of net actuarial losses.
Segments: Mobile Industries sales fell 11.7% to $1,671.6 million and EBITDA fell 18.4% to $232.5 million; EBITDA margin was 13.9%. Process Industries sales fell 2.9% to $1,841.6 million and EBITDA fell 5.1% to $442.9 million; EBITDA margin was 24.0%. Renewable-energy sales grew more than 50% and accounted for 12% of company sales, becoming the largest individual end-market sector.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $320.3 million, total debt was $1,564.6 million and net debt was $1,244.3 million, down from $1,520.6 million in 2019. Net debt to capital declined to 35.9% from 43.8%. The company reported $640.3 million available under its $650 million revolving credit facility and was in compliance with debt covenants. Separately, $58.0 million was outstanding under the accounts-receivable facility, which matures in November 2021; Timken said it intended to renew or replace it. About $287.4 million of cash was held outside the U.S., where repatriation may be subject to taxes or restrictions.
Cash from operations increased despite lower earnings, helped by working-capital cash generation. Timken paid $87.0 million in shareholder dividends and repurchased 1.1 million shares for $49.3 million during 2020. The board approved a new authorization for up to 10 million shares, effective March 1, 2021. The quarterly dividend was raised to $0.29 per share for Q4 2020.
Outlook, material developments and risks
- Management expected 2021 revenue to rise approximately 12% and earnings approximately 20% versus 2020, assuming global COVID-19 conditions improve as the year progresses. Higher volume, currency and acquisitions were expected to support growth; higher material costs and operating expenses were expected to partly offset it.
- Management forecast approximately $450 million of 2021 operating cash flow, about 22% below 2020, principally because working capital was expected to use cash rather than provide it. Planned 2021 capital expenditures were approximately $150 million.
- Timken completed its acquisition of Aurora Bearing assets in November 2020 for a purchase price of $17.8 million. Aurora had approximately $30 million in 2020 sales. The preliminary purchase accounting included an $11.1 million bargain-purchase gain and remained subject to final valuation adjustments.
- Restructuring included the planned Indianapolis chain-plant closure, bearing-facility reorganizations and workforce reductions. The Indianapolis closure was expected by the end of 2021 and to affect approximately 240 employees; management estimated $10–$12 million in related expenses.
- Principal risks include uncertain pandemic effects, cyclical and uneven end-market demand, competitive pricing, steel and other input costs, currency movements, tariffs and global trade conditions, acquisition integration, pension assumptions, and environmental, legal and cybersecurity exposures.
- At the Lovejoy-related Ellsworth Industrial Park environmental site, the company stated its allocated share of investigation and remediation costs could be significant. Environmental accruals for known matters totaled $5.3 million; management said pending matters were not expected to materially affect consolidated results or financial position.
Most important facts for investors to verify
- Whether the 2021 revenue and earnings outlook was achieved, including the assumptions about pandemic recovery, organic demand, pricing and acquisitions.
- Whether working-capital changes and operating cash flow developed as forecast, and how much cash remained accessible outside the U.S.
- Renewal or replacement terms for the accounts-receivable facility before its November 2021 maturity, and ongoing covenant headroom.
- Progress, total costs and expected savings from the Indianapolis closure and other restructuring actions.
- Final Aurora purchase accounting and subsequent operating contribution, as well as impairment sensitivity for goodwill and indefinite-lived assets.
- Developments in environmental remediation, uncertain tax positions and pension obligations, which depend on estimates and may change.