The Timken Company (NYSE: TKR) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods unless noted. Timken designs and manufactures engineered bearings and industrial motion products and reports two segments: Engineered Bearings and Industrial Motion. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,142.7m | $1,136.4m | $3,677.8m | $3,414.7m |
| Operating income | $149.6m | $131.7m | $537.9m | $479.9m |
| Operating margin | 13.1% | 11.6% | 14.6% | 14.1% |
| Net income attributable to Timken | $87.9m | $87.0m | $335.4m | $310.2m |
| Diluted EPS | $1.23 | $1.18 | $4.63 | $4.16 |
| Adjusted diluted EPS (non-GAAP) | $1.55 | $1.63 | $5.67 | $5.12 |
Cash flow: Nine-month operating cash flow was $416.9m, compared with $222.3m; free cash flow, a non-GAAP measure, was $282.0m versus $99.8m. Capital expenditures were $134.9m. Investing cash outflow was $599.1m, including $464.7m for acquisitions.
Debt and liquidity: At September 30, total debt was $2,200.0m and cash and cash equivalents were $367.9m, resulting in net debt of $1,832.1m. Net debt was $1,631.6m at year-end 2022. Net debt to capital was 41.4%, versus 40.9%. Timken reported $720.9m available under committed credit lines and was in compliance with debt covenants. Its trailing-twelve-month net-debt-to-adjusted-EBITDA ratio was 2.0.
Changes and segment results
- Q3 sales rose 0.6%; management attributed growth to acquisitions and pricing, partly offset by lower volume. Organic sales, excluding acquisitions, divestitures and currency, declined in both segments: 7.8% in Engineered Bearings and 2.2% in Industrial Motion.
- Q3 operating income increased 13.6%, with operating margin up 150 basis points. Lower impairment and restructuring charges and improved price/mix helped; higher SG&A, amortization, interest and taxes were offsets. GAAP diluted EPS increased, while adjusted EPS declined year over year.
- For the first nine months, sales increased 7.7%, operating income rose 12.1%, and diluted EPS increased 11.3%. Acquisition contribution and pricing were important drivers; currency and lower volume partly offset sales growth.
- Q3 Engineered Bearings sales were $775.6m and EBITDA was $148.2m, down from $150.4m. Industrial Motion sales were $367.1m and EBITDA was $70.3m, versus $34.9m; the comparison benefited substantially from lower charges after the 2022 ADS divestiture impairment.
Outlook, significant items and risks
- Management expected full-year 2023 revenue to increase 5%–5.5% from 2022, driven almost entirely by acquisitions net of divestitures. It expected net earnings to be relatively flat, as pricing and acquisitions were expected to be offset by lower volume, higher operating costs, unfavorable currency and higher interest expense.
- Management expected higher 2023 operating cash flow than in 2022, primarily from improved working capital, and capital expenditures higher in dollars but around 4.0% of sales.
- Four 2023 acquisitions—Rosa, Des-Case, Nadella and ARB—had a combined net purchase price of $466.9m. Purchase accounting remained preliminary for some acquired businesses. A proposed iMECH acquisition was announced in October, subject to closing conditions.
- Unusual charges included a $28.3m goodwill impairment in Q1, a $3.9m impairment relating to the Russia rail joint venture, and a $1.0m write-down of TWB, which was sold in October. The Gaffney plant closure was expected to cost $12m–$14m pretax; $10.2m of cumulative costs had been incurred by September 30.
- Risk exposures include economic and customer-demand changes, inflation and labor costs, acquisition integration, higher borrowing costs, foreign exchange, and legal, environmental and warranty matters. The Lovejoy Superfund matter could involve a significant allocated share, but the filing does not quantify that potential exposure; total environmental accruals were $4.7m. Timken also warned that further losses related to Russia may occur; $6.5m of Russia-related cash was restricted.
Investor verification points
- Assess whether acquisition-led growth can offset organic volume weakness, particularly in Engineered Bearings.
- Compare the earnings outlook with the decline in Q3 adjusted EPS and the effects of higher interest expense, costs and taxes.
- Track net debt, near-term maturities—including $438.7m scheduled for 2024—and refinancing or interest-rate exposure.
- Review preliminary acquisition valuations and integration performance, along with the eventual iMECH closing and funding.
- Monitor restructuring and impairment costs, Russia-related exposures, and the Lovejoy environmental contingency.