The Timken Company (NYSE: TKR) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included where disclosed. Timken designs and manufactures engineered bearings, power-transmission products and related services, reporting through Mobile Industries and Process Industries.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $3,789.9 million | $3,580.8 million | +5.8% |
| Gross profit / margin | $1,141.8 million / 30.1% | $1,040.1 million / 29.0% | Margin +110 bps |
| Operating income | $516.4 million | $454.5 million | +13.6% |
| Net income attributable to Timken | $362.1 million | $302.8 million | +19.6% |
| Diluted EPS | $4.71 | $3.86 | +22.0% |
| Cash from operations | $550.1 million | $332.5 million | +$217.6 million |
| Capital expenditures | $140.6 million | $112.6 million | +$28.0 million |
| Total debt / cash | $1,730.1 million / $209.5 million | $1,681.6 million / $132.5 million | Net debt $1,520.6 million, down from $1,549.1 million |
Operating cash flow improved primarily because working-capital items provided $55.3 million in 2019 versus using $163.3 million in 2018. Cash used in investing was $364.9 million; cash used in financing was $100.7 million. The filing does not present free cash flow as a reported measure.
Current assets were $1,874.6 million and current liabilities were $736.6 million at year-end. The reported current ratio was approximately 2.5. Cash includes substantial overseas holdings: $207.2 million of the $209.5 million cash balance was outside the United States.
Segments and changes versus prior year
- Mobile Industries: Sales of $1,893.9 million, down 0.5%; EBITDA of $284.9 million, up 4.7%; EBITDA margin 15.0%, versus 14.3%. Excluding acquisitions, divestitures and currency, sales fell 2.5%, reflecting weaker off-highway and heavy-truck shipments, partly offset by aerospace, rail and pricing.
- Process Industries: Sales of $1,896.0 million, up 13.1%; EBITDA of $466.6 million, up 15.0%; EBITDA margin 24.6%, versus 24.2%. Comparable sales excluding acquisitions and currency rose 3.5%, driven by renewable energy and pricing.
- Consolidated sales growth reflected $270 million from acquisitions and $11 million higher organic revenue, partly offset by $72 million of unfavorable currency effects. Gross profit benefited from acquisitions, favorable price/mix and lower material and logistics costs, but was partly offset by lower volume, currency and property losses.
- Acquisitions included Diamond Chain, completed April 1, and BEKA Lubrication, completed November 1. The combined businesses contributed 2% of 2019 sales; their purchase-price allocations remained preliminary at year-end.
Quarterly and unusual items
Fourth-quarter 2019 net sales were $896.2 million, compared with $910.1 million in fourth-quarter 2018. Net income attributable to Timken was $113.5 million, versus $60.0 million; diluted EPS was $1.48, versus $0.77. Fourth-quarter 2019 earnings included a $44.5 million release of foreign tax valuation allowances and net actuarial gains of $21.1 million. Accordingly, the quarterly earnings comparison includes significant tax and pension effects.
For the full year, the effective tax rate declined to 20.7% from 25.1%, principally reflecting valuation-allowance releases and changes to deferred taxes. Non-service pension and postretirement income was $10.2 million, compared with expense of $6.2 million in 2018. The company recorded $6.8 million of impairment and restructuring charges, including a $1.8 million goodwill impairment in Aerospace Drive Systems. Flood and fire damage caused $8 million of property losses and related expenses. Timken paid approximately $1.8 million to settle a Brazilian antitrust matter.
Outlook, liquidity and risks
- 2020 outlook: Revenue expected to range from down 2% to up 2% versus 2019. Earnings expected to decline, primarily due to lower volume, higher manufacturing costs and higher income tax expense, partly offset by acquisitions, favorable price/mix and lower material and logistics costs.
- Management forecast 2020 operating cash flow of approximately $585 million and capital expenditures of approximately $160 million. Segment sales outlook: Mobile Industries roughly flat to down 4%; Process Industries flat to up 4%.
- At year-end, the $650 million revolving credit facility had $132.7 million drawn and $517.3 million available. The separate $100 million receivables facility was fully drawn. Debt covenants were met; leverage ratio was 2.40x against a 3.5x maximum and interest coverage was 10.53x against a 3.5x minimum. A €48.5 million term loan was due in September 2020.
- Key risks include cyclical industrial demand, pricing competition, customer or distributor destocking, steel and energy costs, tariffs and trade disputes, foreign exchange, acquisition integration, debt and refinancing, pension assumptions, environmental liabilities, product quality claims, cybersecurity and international regulatory exposure. Environmental accruals were $5.2 million; management did not expect pending matters to materially affect results, though outcomes remain uncertain.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after the $44.5 million tax valuation-allowance release and pension remeasurement effects?
- Whether 2020 volume declines, manufacturing costs and higher taxes offset acquisition contributions and favorable pricing.
- Acquisition integration, final purchase-price allocations, and returns on Diamond Chain and BEKA.
- Debt refinancing and repayment requirements, overseas cash availability, and continued covenant headroom.
- Working-capital cash-flow improvement, capital spending, and the assumptions behind management’s $585 million 2020 operating-cash forecast.
- Exposure to pension and postretirement actuarial changes, environmental matters, and the evolving risks listed in the filing.