The Timken Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Timken designs and manufactures engineered bearings, power-transmission products and related services, and reports Mobile Industries and Process Industries segments.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $3,580.8 million | $3,003.8 million |
| Gross profit / margin | $1,040.1 million / 29.0% | $812.1 million / 27.0% |
| Operating income / margin | $454.5 million / 12.7% | $299.5 million / 10.0% |
| Net income attributable to Timken | $302.8 million | $203.4 million |
| Diluted earnings per share | $3.86 | $2.58 |
| Cash from operating activities | $332.5 million | $236.8 million |
| Capital expenditures | $112.6 million | $104.7 million |
| Total debt | $1,681.6 million | $962.3 million |
Net sales grew 19.2%, including $396 million of organic growth and $177 million from acquisitions. Management cited broad-based demand, higher pricing, acquisition benefits and improved manufacturing performance. Higher material and logistics costs, including tariffs, partly offset gains. Net income attributable to Timken increased 48.9%. Operating cash flow less capital expenditures was $219.9 million in 2018, versus $132.1 million in 2017.
Fourth quarter: Sales were $910.1 million versus $778.0 million in Q4 2017; net income was $60.8 million versus $28.1 million, and diluted EPS was $0.77 versus $0.37. Q4 2018 net income included $19.7 million of net actuarial losses, partly offset by $10.2 million of pension curtailment gains.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $132.5 million and net debt was $1,548.5 million, compared with $836.9 million in 2017. Net debt to capital rose to 48.5% from 36.2%. The debt increase primarily funded the Rollon and Cone Drive acquisitions, including $400 million of 2028 notes and a $350 million term loan. Timken reported compliance with its debt covenants; its Senior Credit Facility leverage ratio was 2.45:1 against a maximum of 3.5:1, and interest coverage was 13.74:1 against a 3.5:1 minimum. The company reported $456.1 million available under its Senior Credit Facility and $25 million under its receivables facility; most foreign credit lines are uncommitted.
Operating cash flow was reduced by $163.3 million of working-capital use, including increases in receivables and inventory. The company paid $85.7 million in dividends and repurchased $98.5 million of shares in 2018.
Material changes and unusual items
- Timken acquired ABC Bearings, Cone Drive and Rollon in 2018; the acquisitions added preliminary goodwill of $465 million and intangible assets of $372.6 million. The company sold the non-core ICT business for $14 million in proceeds.
- Process Industries sales rose 23.0% and EBIT rose 50.2%; Mobile Industries sales rose 16.1% and EBIT rose 42.9%.
- Adoption of the new revenue standard increased reported 2018 sales by $14.1 million and net income by $3.1 million. Prior-year figures were not restated. Year-end unbilled receivables were $116.6 million.
- The 2018 effective tax rate was 25.1%, versus 22.2% in 2017. The filing says final U.S. tax-reform regulations were expected to result in additional tax expense in Q1 2019, but does not quantify it.
- Foreign currency translation reduced equity by $60.5 million in 2018. Pension and postretirement remeasurement effects were also significant.
Outlook and risks
For 2019, management forecast sales growth of approximately 8%–10% and higher earnings, citing demand, pricing and acquisitions, with offsets from currency, material and logistics costs (including tariffs), SG&A, taxes and interest. Expected operating cash flow was approximately $450 million and capital expenditures approximately $150 million. Segment sales outlook was growth of 4%–6% for Mobile Industries and 13%–15% for Process Industries. These are forward-looking estimates, not guarantees.
Key risks include industrial and end-market cyclicality, pricing pressure, steel and other input costs, tariffs and trade-policy changes, foreign exchange, acquisition integration and debt service, pension assumptions, environmental compliance, product warranty or liability claims, cybersecurity, and international regulatory and political risks. Timken disclosed a Brazilian antitrust investigation and environmental matters; environmental accruals were $5.5 million. It was evaluating customer claims involving bearings sold into wind energy and said the outcome could affect results in a particular period.
Important facts for investors to verify
- Whether the acquired businesses deliver the expected growth and earnings contribution, and whether preliminary purchase-price allocations change.
- Progress on debt reduction, cash conversion and working-capital needs after the acquisition-related increase in leverage.
- Whether 2019 sales, earnings and operating-cash-flow guidance is achieved, particularly amid tariff, cost and currency pressures.
- The eventual cost or resolution of the wind-energy warranty claims, Brazilian antitrust investigation, environmental matters and tax-reform regulations.
- Acquisition-related controls were excluded from the 2018 internal-control assessment: the acquired businesses represented 24% of total assets and 51% of net assets. Management and the auditor reported effective controls for the assessed scope; the acquired businesses were to be included in the 2019 assessment.