The Timken Company (NYSE: TKR) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Timken designs and manufactures engineered bearings and power-transmission products. Its reportable segments are Mobile Industries and Process Industries.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,136.4m | $1,037.3m | $3,414.7m | $3,125.6m |
| Gross profit / margin | $322.8m / 28.4% | $267.9m / 25.8% | $992.0m / 29.1% | $869.4m / 27.8% |
| Operating income | $131.7m | $124.3m | $479.9m | $427.0m |
| Net income attributable to Timken | $87.0m | $88.1m | $310.2m | $306.2m |
| Diluted EPS | $1.18 | $1.14 | $4.16 | $3.97 |
| Interest expense | $19.3m | $14.8m | $51.9m | $45.0m |
| Effective tax rate | 22.8% | 18.2% | 25.5% | 19.3% |
Sales rose 9.6% in Q3 and 9.2% year to date, primarily from organic growth and pricing; foreign exchange partly offset growth. For Q3, gross profit benefited from favorable price/mix and volume, partly offset by higher material and logistics costs and weaker manufacturing performance. Net income attributable to Timken edged down in Q3 despite higher sales and operating income, reflecting higher costs, impairment and restructuring charges, and taxes. Lower diluted share counts helped lift diluted EPS.
- Segment results, Q3: Mobile Industries sales were $526.9m, up 8.1%; EBITDA was $20.0m versus $53.2m. Process Industries sales were $609.5m, up 10.8%; EBITDA was $165.3m versus $129.7m. Management cited pricing and volume gains in both segments, with higher costs weighing on Mobile Industries.
- Cash flow, nine months: Operating cash flow was $222.3m versus $284.6m. Capital expenditures were $122.5m, producing reported free cash flow of $99.8m versus $181.0m. Management attributed weaker operating cash flow mainly to $140.2m more cash used in working capital.
- Debt and liquidity: Total debt was $1,783.1m and cash and cash equivalents were $300.9m at September 30; net debt was $1,482.2m, versus $1,207.8m at year-end 2021. Net debt to capital was 40.5%, versus 33.7%. Timken reported $742.2m of available resources from committed credit lines and stated it was compliant with debt covenants. The 2023 term loan, with $314.8m outstanding, matures in September 2023.
- Other metrics: Nine-month adjusted EPS, a non-GAAP measure, was $4.80 versus $3.94; adjusted EBITDA was $669.9m versus $582.6m, with adjusted EBITDA margin of 19.6% versus 18.6%. These measures exclude specified items and should be considered alongside GAAP results.
Material changes and notable items
- Q3 impairment and restructuring charges were $31.3m versus $2.9m a year earlier. The largest item was a $29.3m impairment on the planned sale of Timken Aerospace Drive Systems (ADS). Timken signed a definitive sale agreement on October 7, 2022 and expected closing in Q4, subject to customary conditions.
- Nine-month charges also included a $9.0m impairment of property and equipment at the Russia rail joint venture and $4.1m of Russia-related inventory write-downs. Timken sold its Timken Russia subsidiary on September 1, recording a $2.1m loss. The company said it may incur further Russia-related impairments or write-offs; $10.6m of cash in Russia was not then repatriable.
- Timken acquired Spinea in May for $152.4m, net of cash acquired. It agreed in September to acquire GGB Bearing Technology for $305m, with a Q4 2022 closing expected and funding planned from cash and existing credit facilities.
- The stronger U.S. dollar drove substantial translation losses: nine-month foreign currency translation adjustments reduced equity by $267.7m. This contributed to comprehensive loss attributable to Timken of $46.1m for Q3, despite positive net income.
- Nine-month product warranty liabilities rose to $19.6m from $11.7m at year-end, primarily due to additional accruals for certain automotive and renewable-energy products. The filing notes that changes in claim assumptions could materially affect results.
Outlook, risks and contingencies
Management expected 2022 full-year revenue to increase approximately 9% from 2021, with earnings also expected to rise. The outlook cited demand, pricing, growth initiatives and volume as positives, offset by foreign exchange, material, logistics and other operating costs, higher interest costs, and a higher tax rate. Timken expected 2022 operating cash flow to exceed 2021 and capital expenditures to be about 4.0% of sales. These are forward-looking estimates, not guarantees.
Key disclosed risks include economic and end-market weakness, inflation and supply-chain or logistics disruption, customer demand and pricing changes, foreign exchange, rising financing costs and debt covenant compliance, integration of acquisitions, product warranty claims, and geopolitical developments and sanctions. Environmental matters include the Lovejoy-related Ellsworth Industrial Park site; environmental accruals were $5.0m. Management said ordinary-course legal matters were not expected to materially adversely affect consolidated financial position or results. The filing reported no material change in risk factors from the 2021 Form 10-K.
Important facts for investors to verify
- Whether pricing and volume continue to offset input, logistics, labor and manufacturing costs, particularly in Mobile Industries.
- Delivery against full-year revenue, earnings, operating cash flow and capital expenditure expectations.
- Cash conversion and working-capital trends, given the year-to-date decline in operating cash flow and free cash flow.
- Debt refinancing or repayment plans for the 2023 term loan, and liquidity and covenant headroom after the GGB acquisition.
- Closing and proceeds for the ADS and GGB transactions, and any subsequent acquisition accounting or impairment adjustments.
- Further financial exposure from Russia, product warranty claims, environmental matters and foreign-currency movements.