Timken Company (NYSE: TKR) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Timken designs and sells engineered bearings and power-transmission products through Mobile Industries and Process Industries. Results include the 2019 acquisitions of BEKA and Diamond Chain.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $923.4 million | $979.7 million | (5.7%) |
| Gross profit / margin | $278.9 million / 30.2% | $302.6 million / 30.9% | Margin down 70 bps |
| Operating income | $121.7 million | $149.9 million | Down $28.2 million |
| Net income attributable to Timken | $80.7 million | $91.9 million | (12.2%) |
| Diluted EPS | $1.06 | $1.19 | (10.9%) |
| Cash from operating activities | $56.2 million | $52.3 million | Up $3.9 million |
Segment results: Mobile Industries sales were $466.7 million, down 6.7%, and EBITDA was $75.1 million, with a 16.1% margin versus 15.9%. Process Industries sales were $456.7 million, down 4.8%, and EBITDA was $107.5 million, with a 23.5% margin versus 26.6%. Capital expenditures were $31.8 million, compared with $16.2 million.
At March 31, cash and cash equivalents were $387.5 million and total debt was $1,958.9 million, resulting in net debt of $1,571.4 million and a net-debt-to-capital ratio of 45.3%, versus 43.8% at year-end. Total equity was $1,900.3 million. Cash, cash equivalents and restricted cash totaled $394.0 million. On April 3, Timken borrowed an additional $350 million under its revolving credit facility; management said cash and cash equivalents exceeded $700 million after that draw.
Material changes and drivers
- Sales fell $56.3 million: lower organic revenue of $88 million and unfavorable currency effects of $16 million were partly offset by $48 million from acquisitions.
- Lower volume and related manufacturing performance, along with unfavorable currency, weighed on earnings. Favorable price/mix and lower material and logistics costs provided offsets. Prior-year property losses and discrete tax expense were also favorable comparisons.
- Foreign-currency translation reduced equity by $71.3 million; total comprehensive income attributable to Timken was $11.9 million, versus $86.1 million a year earlier.
- Financing cash inflows included $200 million of long-term debt proceeds and increased short-term borrowing. Timken paid $22.9 million in dividends and spent $42.3 million on treasury shares.
Outlook, risks and unusual items
- Timken withdrew its February 2020 full-year outlook because of COVID-19 uncertainty. It expected full-year sales to decline significantly in Q2 versus the prior year, with markets and sales improving from Q2 levels over the remainder of the year. Management expected strong operating cash flow in 2020 and planned to restore guidance when reasonable; no full-year financial forecast was provided.
- COVID-19 had disrupted customer activity and production schedules; China operations, after an approximately two-week shutdown in February, had resumed near-normal operations. Management cited potential further effects on demand, operations, supply chains, margins, cash flow and liquidity. It said the impact’s duration and magnitude could not then be reasonably estimated.
- Timken recorded $3.6 million of impairment and restructuring charges. Planned actions include reorganizing the Gaffney, South Carolina bearing plant, affecting about 150 employees, and closing the Indianapolis chain plant by Q4 2021, affecting about 240 employees. Expected pretax costs were $8–$10 million and $10–$12 million, respectively.
- Debt covenants were in compliance at March 31 and after the April 3 draw. At March 31, the leverage ratio was 2.83 against a maximum of 3.5, and interest coverage was 10.25 against a minimum of 3.0. The April borrowing left the revolving facility almost fully drawn. Management said there were no significant long-term debt maturities before September 2023.
- Environmental accruals were $5.2 million, including the Lovejoy Superfund site, where the company’s allocated share of future costs could be significant. A post-quarter European court ruling was under review for possible implications for withholding-tax accruals; materiality had not been determined.
- Management said it was monitoring whether COVID-19’s effects might require an interim goodwill or indefinite-lived intangible impairment analysis. The filing reported no material market-risk changes and effective disclosure controls.
Important facts for investors to verify
- How COVID-19 affected Q2 and subsequent demand, segment margins, production, and the company’s ability to achieve its stated cash-flow expectations.
- Debt, liquidity, borrowing availability and covenant headroom after the $350 million April draw, including the impact of the nearly fully drawn revolving facility.
- Progress and total costs of the Gaffney and Indianapolis restructuring plans, and whether weaker demand triggers impairment testing.
- The outcome and potential financial effect of the European withholding-tax review and the Lovejoy environmental matter.
- Final purchase-price allocation for BEKA and Diamond Chain, which remained subject to adjustments.