The Timken Company — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Timken designs and sells engineered bearings and power-transmission products through Mobile Industries and Process Industries. Comparisons below are year over year unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1,062.9 million | $803.5 million | $2,088.3 million | $1,726.9 million |
| Gross profit / margin | $302.3 million / 28.4% | $230.3 million / 28.7% | $601.5 million / 28.8% | $509.2 million / 29.5% |
| Operating income | $152.0 million | $115.4 million | $302.7 million | $237.1 million |
| Net income attributable to Timken | $104.8 million | $61.9 million | $218.1 million | $142.6 million |
| Diluted EPS | $1.36 | $0.82 | $2.82 | $1.88 |
| Adjusted EBITDA margin | 18.8% | 20.4% | 19.3% | 19.8% |
Q2 sales rose 32.3%, and diluted EPS rose 65.9%. Management attributed growth mainly to higher organic demand, favorable foreign exchange and the Aurora acquisition. For the first half, sales increased 20.9% and diluted EPS increased 50.0%. Higher volumes and manufacturing performance supported earnings, while higher material and logistics costs, unfavorable mix and higher SG&A weighed on results. Gross margin declined 30 basis points in Q2 and 70 basis points for the first half.
Segments: Q2 Mobile Industries sales increased 44.2% to $494.2 million and EBITDA rose 73.5% to $67.3 million; EBITDA margin expanded to 13.6% from 11.3%. Process Industries sales increased 23.4% to $568.7 million and EBITDA rose 11.8% to $141.2 million; margin contracted to 24.8% from 27.4%. First-half segment EBITDA was $146.9 million for Mobile and $272.2 million for Process.
Cash flow, debt and liquidity
- First-half operating cash flow was $178.8 million, down from $303.6 million; free cash flow was $118.3 million versus $247.1 million. Working capital used $124.8 million, principally reflecting higher receivables and inventory.
- Cash and cash equivalents were $305.5 million at June 30, 2021; $267.4 million was held outside the U.S. Total debt was $1,511.4 million and net debt was $1,205.9 million. Net debt to capital was 33.7%, compared with 35.9% at year-end 2020; net debt to adjusted EBITDA was 1.7x versus 1.9x.
- The $650 million revolving credit facility had $640.6 million available. Foreign subsidiary lines had approximately $209.6 million available. The $100 million receivables facility had no borrowings and matures November 30, 2021; Timken said it intended to renew or replace it.
- Timken reported compliance with debt covenants. The leverage-ratio calculation under the credit facility and term loan was scheduled to revert from a net-debt basis to a total-debt basis in Q3 2021.
Outlook, commentary and notable items
- For full-year 2021, management expected revenue to increase approximately 19% versus 2020 and earnings to rise significantly. The outlook assumes improving COVID-19 conditions and reflects expected volume growth, foreign exchange, acquisitions and positive pricing, partly offset by materials and logistics costs, SG&A and mix.
- Management forecast operating cash flow of $450 million to $475 million and capital expenditures of approximately $150 million for 2021. It expected working capital to use cash, making forecast cash flow lower than 2020 despite higher earnings.
- Timken reported some COVID-related supply-chain disruptions and staffing issues, while stating it had served customers amid robust demand. Risks include demand and economic changes, supply-chain and logistics disruption, input costs, competition, currency movements, pension exposure, and debt refinancing or covenant compliance.
- After quarter-end, Timken announced the planned closure of its Villa Carcina, Italy facility by year-end 2021, affecting about 110 employees and expected to cost $7 million to $10 million. It also continued the planned Indianapolis chain-plant closure, expected by the end of Q4 2021, affecting about 240 employees; expected costs are $10 million to $12 million, with about $8.5 million incurred cumulatively by June 30.
- Environmental accruals totaled $5.2 million, including the Lovejoy site matter; the company noted its allocated future costs could be significant. Product-warranty liability was $10.9 million. A $11.7 million bargain-purchase gain from the 2020 Aurora acquisition was recognized, with a $0.6 million measurement-period adjustment in the first quarter of 2021.
Most important facts for investors to verify
- Whether demand, pricing and planned volume growth support the approximately 19% full-year revenue outlook, and whether margin pressure from costs and mix persists.
- Whether working-capital investment—especially receivables and inventory—allows operating cash flow to reach the $450 million to $475 million forecast.
- Renewal or replacement of the receivables facility before its November 2021 maturity, and covenant headroom after the leverage test reverts to a total-debt basis.
- Actual restructuring costs, timing and savings from the Italy and Indianapolis closures, and any further impairment charges.
- Potential exposure from environmental and warranty matters, and the impact of overseas cash access, foreign exchange and ongoing COVID-related supply constraints.