The Timken Company (NYSE: TKR) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Timken designs and manufactures engineered bearings and power-transmission products. Its reportable segments are Mobile Industries and Process Industries.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1,153.7 million | $1,062.9 million | $2,278.3 million | $2,088.3 million |
| Gross profit / margin | $341.8 million / 29.6% | $302.3 million / 28.4% | $669.2 million / 29.4% | $601.5 million / 28.8% |
| Operating income | $175.9 million | $152.0 million | $348.2 million | $302.7 million |
| Net income attributable to Timken | $105.0 million | $104.8 million | $223.2 million | $218.1 million |
| Diluted EPS | $1.42 | $1.36 | $2.98 | $2.82 |
| Adjusted diluted EPS (non-GAAP) | $1.67 | $1.37 | $3.28 | $2.75 |
Q2 sales grew 8.5%; management attributed the increase chiefly to $122 million of organic growth, including higher demand and pricing, partly offset by $35 million of unfavorable currency effects. For the first half, sales grew 9.1%, with $235 million of organic growth partly offset by $50 million of currency effects. Q2 gross margin rose 120 basis points, as favorable price/mix and volume more than offset higher material and logistics costs and weaker manufacturing performance.
- Segments: Q2 Mobile Industries sales rose 10.0% to $543.6 million; EBITDA increased 2.7% to $69.1 million and margin fell to 12.7% from 13.6%. Process Industries sales rose 7.3% to $610.1 million; EBITDA increased 15.8% to $163.5 million and margin expanded to 26.8% from 24.8%. Reported sales include currency impacts and, for Process, Spinea acquisition contribution.
- Cash flow: First-half operating cash flow was $77.1 million, down from $178.8 million. Free cash flow, a non-GAAP measure, was $1.9 million versus $118.3 million. Management cited a $143.0 million increase in cash used by working-capital items, particularly receivables, inventories and trade payables. Capital expenditures were $75.2 million.
- Liquidity and debt: June 30 cash and equivalents were $305.3 million; total debt was $1,815.9 million and net debt $1,510.6 million, versus $1,464.9 million and $1,207.8 million, respectively, at year-end 2021. Net debt to capital increased to 39.8% from 33.7%; net debt to adjusted EBITDA was 2.0x versus 1.7x at year-end. The company reported $741.7 million available from committed credit lines and compliance with debt covenants.
Material changes and notable items
- Despite higher sales, Q2 net income attributable to Timken was nearly flat year over year. Favorable price/mix and volume were offset in part by inflation-related costs, higher pension remeasurement losses, impairment and restructuring charges, increased interest expense and a higher tax rate. The Q2 effective tax rate was 29.4%, compared with 21.5%.
- Timken acquired Spinea, a Slovakian maker of precision cycloidal gears and actuators, on May 31 for $152.3 million net of cash acquired. Spinea’s estimated 2022 full-year sales were approximately $40 million; its purchase-price allocation remained preliminary.
- First-half cash used in investing was $198.7 million, primarily reflecting the Spinea acquisition and capital spending. Financing provided $177.4 million, including debt issuance; the company also repurchased $144.3 million of shares and paid $46.4 million in dividends.
Outlook, risks and contingencies
Management expected 2022 full-year revenue to increase approximately 7% versus 2021, with earnings also expected to rise. It cited demand across most end markets, positive pricing and growth initiatives, while noting higher materials, logistics and other operating costs, interest costs and taxes. The company expected 2022 operating cash flow to exceed 2021 levels and capital expenditures of 4.0%–4.5% of sales.
- Management cautioned that business conditions remained challenging, including supply-chain disruption, inflation and staffing constraints, Russia’s invasion of Ukraine and COVID-related lockdowns in China.
- Timken suspended its Russian operations and recorded $8.8 million of property impairment and $4.3 million of inventory write-downs in the first half. It reported $17.5 million of net assets related to Russia at June 30, including $17.8 million of cash that it was unable to repatriate, and said further impairments or write-offs could occur.
- Product-warranty liabilities increased to $17.2 million from $11.7 million at year-end, primarily from additional accruals for products sold into automotive and renewable-energy sectors. Changes in assumptions or claims trends could materially affect results in a period.
- Environmental accruals were $5.5 million. The filing describes potential investigation and remediation costs at the Ellsworth Industrial Park site; Lovejoy’s allocated share could be significant, though management said the ultimate disposition of legal matters was not expected to materially adversely affect consolidated financial position or results.
- Other disclosed exposures include foreign-exchange and interest-rate movements, pension assumptions and returns, customer demand, input costs, competition, acquisition integration, and debt refinancing and covenant risks. Currency translation reduced equity by $134.2 million in the first half.
Investor verification points
- Assess whether pricing can continue to offset materials, logistics, labor and other operating-cost inflation, especially given weaker first-half Mobile Industries EBITDA.
- Track working-capital conversion and operating cash flow against management’s full-year expectation; first-half free cash flow was close to break-even.
- Review debt growth, the 2023 term-loan maturity, interest costs and covenant headroom as the company funds acquisitions, investment and shareholder returns.
- Monitor Russia-related asset recoverability, sanctions and the status of cash that cannot be repatriated.
- Follow warranty accruals, restructuring execution and the final Spinea purchase-price allocation and contribution.