The Timken Company (NYSE: TKR) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Timken designs and manufactures engineered bearings and industrial motion products. Its reportable segments are Engineered Bearings and Industrial Motion.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,272.3 million | $1,153.7 million | $2,535.1 million | $2,278.3 million |
| Operating income / margin | $200.7 million / 15.8% | $175.9 million / 15.2% | $388.3 million / 15.3% | $348.2 million / 15.3% |
| Net income attributable to Timken | $125.2 million | $105.0 million | $247.5 million | $223.2 million |
| Diluted EPS | $1.73 | $1.42 | $3.39 | $2.98 |
| Adjusted diluted EPS (non-GAAP) | $2.01 | $1.78 | $4.11 | $3.49 |
| Adjusted EBITDA margin (non-GAAP) | 20.7% | 20.0% | 20.8% | 20.0% |
Q2 sales rose 10.3% year over year, reflecting acquisitions and organic growth, partly offset by unfavorable currency effects. Management attributed higher Q2 earnings primarily to favorable price/mix, lower material and logistics costs, and lower impairment and restructuring charges; higher manufacturing and SG&A costs and interest expense partly offset the gains. Gross margin, calculated from reported sales and cost of products sold, was approximately 31.9% versus 30.5% in Q2 2022.
Q2 segment results: Engineered Bearings sales were $857.2 million, up 7.4%, and EBITDA was $185.5 million, up 10.7%; Industrial Motion sales were $415.1 million, up 16.8%, and EBITDA was $80.9 million, up 24.3%. For the first half, segment EBITDA was $390.5 million for Engineered Bearings and $129.1 million for Industrial Motion; Industrial Motion’s first-half EBITDA margin declined to 16.6% from 18.0%.
Cash flow, debt and liquidity
- First-half operating cash flow was $222.6 million, versus $77.1 million in 2022; free cash flow was $131.3 million, versus $1.9 million. Improved working-capital cash use was a major driver, although income-tax payments used $119.4 million of cash.
- Capital expenditures were $91.3 million in the first half. Investing cash outflow was $412.0 million, including $324.6 million of acquisitions, net of cash acquired.
- At June 30, cash and cash equivalents were $344.3 million; total debt was $2,099.7 million and net debt was $1,755.4 million. Net debt to capital was 39.8%, compared with 40.9% at December 31, 2022; trailing-twelve-month net debt to adjusted EBITDA was 1.9 times.
- Timken reported $630 million available under committed credit lines and stated it was in compliance with debt covenants. Its leverage ratio was 1.85 versus a maximum of 3.5; interest coverage was 10.47 versus a minimum of 3.0. Interest expense rose 54.6% in Q2 year over year, reflecting higher debt and rates.
Material changes, outlook and notable items
- Management expects 2023 full-year revenue to increase approximately 8% versus 2022 and earnings to be higher. It expects higher operating cash flow, driven by earnings and working capital, and capital expenditure spending relatively in line with 2022 as a percentage of sales (4.0%). Earnings outlook factors include favorable price/mix and lower material and logistics costs, partly offset by manufacturing and SG&A costs, restructuring charges, foreign exchange and interest expense.
- Timken acquired ARB in January and Nadella in April 2023 for a combined net purchase price of $326.9 million. Purchase-price allocations remained preliminary at June 30. First-half acquisition cash outflow was $324.6 million.
- The June sale of 7.6 million Timken India Limited shares generated $229 million net proceeds and reduced Timken’s ownership from 67.8% to 57.7%. Timken also recorded a $4.8 million gain on the sale of its SE Setco joint-venture interest.
- A $28.3 million first-quarter goodwill impairment was recorded for the Belts and Chain reporting unit. The Gaffney, South Carolina plant closure is expected to affect approximately 225 employees and cost $10–$12 million pretax in total; $6.1 million of cumulative costs had been incurred by June 30.
- Product warranty liability increased to $27.1 million from $23.5 million at year-end, primarily due to additional accruals for certain automotive and renewable-energy products. Environmental accruals were $4.7 million; the Lovejoy Superfund matter could result in significant allocated costs, though the amount is not clearly quantified.
- Timken reported $7.1 million of net assets related to its Russian rail joint venture, including $6.9 million of cash classified as restricted because it could not then be repatriated. The company warned additional impairments or losses may occur.
Key investor verification points
- Track organic demand, pricing and volume by segment, especially the Industrial Motion margin trend and lower volume in belts and chain.
- Assess delivery of the approximately 8% full-year sales outlook, earnings growth and improved working-capital cash generation.
- Monitor acquisition integration, preliminary purchase accounting, realized returns and the goodwill impairment outlook.
- Review debt costs and refinancing needs, including the $444 million of debt maturities shown for 2024, and confirm continued covenant headroom.
- Follow warranty claims, environmental remediation exposure, restricted Russian assets and the cost and execution of announced plant closures.