The Timken Company (TKR) — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Timken designs and sells engineered bearings and power-transmission products through Mobile Industries and Process Industries.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $914.0 million | $881.3 million | $2,893.7 million | $2,670.7 million |
| Gross profit | $277.5 million | $253.3 million | $885.8 million | $785.6 million |
| Operating income | $127.9 million | $108.7 million | $422.9 million | $350.1 million |
| Net income attributable to Timken | $64.2 million | $71.6 million | $248.6 million | $242.8 million |
| Diluted EPS | $0.84 | $0.91 | $3.23 | $3.09 |
- Q3 gross margin rose to 30.4% from 28.7%; nine-month gross margin was 30.6% versus 29.4%.
- Q3 sales grew 3.7%, but Timken-attributable income fell 10.3%. Nine-month sales increased 8.3% and attributable income rose 2.4%.
- Nine-month operating cash flow was $354.8 million, compared with $195.0 million. Capital expenditures were $82.9 million; operating cash flow less capital expenditures was $271.9 million.
- At September 30, total debt was $1,650.1 million, cash and cash equivalents were $181.4 million, and net debt was $1,468.2 million. Net debt to capital improved to 44.7% from 48.5% at year-end 2018.
- Liquidity included $580.7 million available under the $650 million revolving credit facility; the $100 million accounts-receivable facility was fully drawn. The company reported compliance with debt covenants.
Changes and segment results
- Q3 sales growth primarily reflected $70 million from acquisitions, partly offset by $26 million lower organic sales and $12 million of unfavorable currency effects. Nine-month growth reflected $239 million from acquisitions and $46 million higher organic sales, partly offset by $65 million of currency effects.
- Mobile Industries Q3 sales declined 2.0%; excluding acquisitions, divestitures and currency, sales fell 4.8%. Segment EBIT increased 2.8% to $52.0 million. Management cited weakness in off-highway and heavy-truck demand.
- Process Industries Q3 sales rose 10.0%, largely due to acquisitions; on an organic, currency-adjusted basis, sales declined 0.9%. EBIT increased 16.9% to $95.6 million. For the first nine months, organic, currency-adjusted sales grew 5.5%.
- Higher Q3 interest expense ($18.2 million versus $12.5 million) and a higher effective tax rate (34.7% versus 25.7%) weighed on earnings. Management also cited lower volume and higher pension and postretirement actuarial losses.
Outlook, risks and unusual items
- Management expected full-year 2019 sales to increase approximately 5%–6% versus 2018 and earnings to be higher. It forecast operating cash flow of approximately $525 million and capital expenditures of approximately $150 million. The outlook excluded pension and postretirement mark-to-market charges after September 30.
- Expected segment sales: Mobile Industries approximately flat to down 1%; Process Industries up approximately 12%–13%. Management cited acquisitions, price/mix and selected market growth, offset by foreign exchange and softer demand in some end markets.
- Diamond Chain was acquired April 1 for $84.6 million, excluding acquired cash. Its preliminary purchase-price allocation remained subject to change. Timken announced an agreement to acquire BEKA for approximately $165 million, subject to customary closing conditions and then expected to close in Q4.
- Changes to certain retiree medical benefits, effective January 1, 2020, reduced the postretirement obligation by $103.5 million and resulted in a $9.9 million actuarial loss. A former executive’s deferred-compensation payout triggered a pension remeasurement and a $7.0 million actuarial loss.
- Contingencies include a Brazilian antitrust proceeding, environmental matters with $5.3 million accrued, and customer claims concerning wind-energy bearings. Management said the ultimate outcomes were uncertain; excess costs in a particular period could be material.
- Key disclosed risks include economic and industrial-demand weakness, tariffs and trade disputes, currency movements, input costs, acquisition integration, litigation and product warranty claims, and debt-market conditions. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether weaker Mobile Industries demand and broader industrial conditions persist, and how they affect organic sales and margins.
- Progress against 2019 sales, earnings and cash-flow expectations, including the effect of currency, taxes, interest costs and any pension or postretirement remeasurement charges.
- Diamond Chain integration and final purchase accounting, and the closing, financing and subsequent performance of the proposed BEKA acquisition.
- Debt maturity and refinancing needs, facility availability, covenant headroom, and the location and accessibility of cash; $172.2 million of cash was held outside the United States.
- Developments in the Brazilian antitrust case, environmental remediation, and wind-bearing warranty claims, including any changes to accrued liabilities.