The Timken Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Amounts are in millions of dollars, except per-share data.
Business context and results
Timken designs and manufactures engineered bearings and industrial motion products. It reported under two segments: Engineered Bearings and Industrial Motion. The company reported strong organic sales growth, with acquisitions also contributing to revenue.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,262.8 | $1,124.6 | +12.3% |
| Operating income | $187.6 | $172.3 | +8.9% |
| Operating margin | 14.9% | 15.3% | -0.4 percentage points |
| Net income attributable to Timken | $122.3 | $118.2 | +3.5% |
| Diluted EPS | $1.67 | $1.56 | +7.1% |
| Adjusted diluted EPS (non-GAAP) | $2.09 | $1.72 | +21.5% |
| Operating cash flow | $78.6 | $(1.2) | Improved $79.8 |
| Free cash flow (non-GAAP) | $36.9 | $(35.5) | Improved $72.4 |
Segments and material changes
- Engineered Bearings: Sales of $900.7 million, up 16.6%; segment EBITDA of $205.0 million, up 21.8%, with margin increasing to 22.8% from 21.8%. Excluding acquisitions, divestitures and currency, sales grew 5.0%.
- Industrial Motion: Sales of $362.1 million, up 2.8%; segment EBITDA fell 22.8% to $48.2 million and margin declined to 13.3% from 17.7%. Comparable sales excluding acquisitions, divestitures and currency grew 7.1%.
- Consolidated sales growth included $123 million of organic growth and $45 million from acquisitions net of divestitures, partly offset by a $30 million unfavorable currency effect. Management cited higher demand and positive pricing in both segments.
- Operating income rose, but operating margin declined as higher manufacturing and SG&A costs, impairment and restructuring charges, and amortization offset sales and price/mix benefits. Cost of products sold also benefited from lower material and logistics costs.
Cash, debt and liquidity
Cash and cash equivalents were $330.5 million at quarter-end, versus $331.6 million at year-end 2022. Total debt was $2,027.4 million and net debt was $1,696.9 million; net debt to capital was 41.1%, compared with 40.9% at year-end. Cash from operations improved primarily because working-capital cash use was lower than a year earlier, though working capital still used $109.5 million during the quarter.
Timken reported $686.4 million available under its $750 million committed revolving credit facility. Its $100 million accounts receivable facility was fully drawn, with no availability. Foreign subsidiary credit lines had $195 million of aggregate availability. The company said it was in compliance with debt covenants; it reported a 1.84-to-1 consolidated leverage ratio against a 3.5-to-1 maximum and interest coverage of 11.33-to-1 against a 3.0-to-1 minimum. Most cash, $327.9 million, was held outside the United States and may face tax or governmental restrictions on repatriation.
Outlook, risks and unusual items
- Management expected full-year 2023 revenue to increase 8%–11% versus 2022, driven by organic growth and acquisitions net of divestitures. It expected earnings to rise, citing price/mix, volume and lower material and logistics costs, partly offset by higher operating costs, restructuring and impairment charges, unfavorable currency and higher interest expense.
- Management expected higher operating cash flow in 2023, supported by earnings and improved working capital. Capital spending was expected to be higher in dollars, but approximately in line with 2022 as a percentage of sales (4.0%).
- A $28.3 million goodwill impairment was recorded in Industrial Motion after revised forecasts indicated the Belts & Chain reporting unit could not support its goodwill carrying value. Total impairment and restructuring charges were $28.9 million, versus $1.0 million in Q1 2022.
- The Gaffney, South Carolina bearing plant closure was expected to affect about 225 employees and incur total pretax costs of approximately $10–$12 million. The Indianapolis chain plant closure was expected to affect about 240 employees; cumulative costs were $14.4 million, with total expected costs of $12–$15 million.
- Timken disclosed ongoing evaluation of customer claims involving bearings sold into the wind energy sector. Management did not expect a material effect on consolidated financial position, but said costs above recorded provisions could materially affect a particular period. Product warranty liabilities were $25.4 million, up from $23.5 million at year-end.
- Environmental accruals were $4.7 million, including the Lovejoy-related Superfund matter; the company noted its allocated share of site costs could be significant. Russia-related uncertainty remained, including $7.9 million of restricted cash in the Rail JV and potential future impairments or write-offs.
- Other notable items included the January acquisition of American Roller Bearing Company for $32 million, the February sale of the SE Setco joint venture, and the April 4 acquisition of Nadella, which occurred after quarter-end. The ARB purchase-price allocation remained preliminary.
Key facts for investors to verify
- Whether revenue and earnings guidance is achieved, including the assumptions for demand, pricing, acquisitions, costs and foreign exchange.
- Whether Industrial Motion’s EBITDA and margin stabilize, and whether manufacturing and SG&A cost pressures persist.
- The final goodwill and acquisition valuations, restructuring costs, and any further impairment charges.
- Developments in wind-energy warranty claims, environmental matters and Russia-related assets or restrictions.
- Working-capital conversion, cash generation, capital spending and debt levels, particularly given higher interest expense and overseas cash restrictions.
- Non-GAAP adjusted EPS and EBITDA alongside GAAP results; the company’s adjustments include impairment, restructuring, acquisition-related and other specified items.