The Timken Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Timken designs and manufactures engineered bearings and power-transmission products. Its reportable segments are Mobile Industries and Process Industries.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,037.3 million | $894.6 million | $3,125.6 million | $2,621.5 million |
| Gross profit / margin | $267.9 million / 25.8% | $263.7 million / 29.5% | $869.4 million / 27.8% | $772.9 million / 29.5% |
| Operating income | $124.3 million | $119.0 million | $427.0 million | $356.1 million |
| Net income attributable to Timken | $88.1 million | $88.8 million | $306.2 million | $231.4 million |
| Diluted EPS | $1.14 | $1.16 | $3.97 | $3.04 |
| Adjusted EBITDA margin | 17.2% | 19.4% | 18.6% | 19.6% |
Q3 sales grew 16.0%; management attributed the increase primarily to higher organic volume, with contributions from currency and acquisitions. Net income attributable to Timken was slightly lower year over year as higher materials, logistics and other operating costs, and pension remeasurement losses, offset much of the benefit from volume, pricing, lower restructuring charges and a lower tax rate. Nine-month sales rose 19.2% and attributable net income increased 32.3%.
Q3 segment results: Mobile Industries sales increased 13.7% to $487.3 million, while EBITDA declined 16.9% to $53.2 million and margin fell to 10.9% from 14.9%. Process Industries sales rose 18.0% to $550.0 million; EBITDA increased 18.8% to $129.7 million and margin was 23.6%, versus 23.4%. Management cited demand growth across both segments, but elevated costs weighed on Mobile results.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $284.6 million, down from $457.2 million. Capital spending was $103.6 million, resulting in free cash flow of $181.0 million versus $371.5 million.
- Working capital used $135.9 million of cash, compared with providing $60.6 million in the prior-year period; inventory and receivables were major uses. Cash and cash equivalents were $261.8 million at September 30, down from $320.3 million at year-end 2020.
- Total debt was $1,456.0 million and net debt was $1,194.2 million, compared with $1,564.6 million and $1,244.3 million, respectively, at year-end. Net debt to capital was 33.4%, down from 35.9%; trailing-twelve-month net debt to adjusted EBITDA was 1.6 times, down from 1.9 times.
- The company reported $640.8 million available under its $650 million revolving credit facility and no borrowings under its $100 million accounts receivable facility. The receivables facility was due to mature November 30, 2021; management intended to renew or replace it before maturity. Timken reported compliance with debt covenants.
- Cash dividends paid to shareholders were $69.5 million and treasury-share purchases were $56.6 million during the first nine months.
Outlook, risks and notable items
- Timken did not provide detailed sales or earnings guidance, citing uncertainty from COVID-19 and supply-chain disruptions. It expected full-year 2021 revenue and earnings to increase versus 2020, while expecting operating cash flow to be below 2020’s $577.6 million because of working-capital needs. Planned 2021 capital expenditures were approximately $150 million, versus $122 million in 2020.
- Management said industrial markets had strengthened but supply-chain disruption, inflation and staffing issues were increasing costs; it expected these pressures to persist into 2022. The outlook assumed continued improvement in pandemic conditions.
- In August 2021, Timken acquired Intelligent Machine Solutions for $7.4 million at closing, with up to $3.0 million of contingent performance-based consideration. The preliminary purchase-price allocation was not finalized at quarter-end.
- Restructuring includes closure of the Villa Carcina, Italy facility, expected to affect about 110 employees and incur approximately $9 million to $11 million in expenses, with completion expected by June 2022. The Indianapolis chain facility closure was expected by the end of Q4 2021. Additional impairment charges included $3.3 million for engineering-related assets written down to zero.
- Environmental matters include the Lovejoy-related Ellsworth Industrial Park site investigation and potential remediation; total environmental accruals were $5.2 million. Management said the ultimate disposition of ordinary-course legal matters was not expected to materially adversely affect consolidated financial position or results. Product warranty liabilities were $11.5 million, up from $9.4 million at year-end.
- Q3 pension remeasurement losses were $3.9 million, versus pension-related gains in the prior-year quarter; the nine-month 2021 loss was $8.3 million. The lower 2021 effective tax rate—18.2% for Q3 and 19.3% for nine months—was partly attributable to releases of uncertain-tax-position accruals and favorable tax items.
- Foreign-currency translation reduced equity by $53.3 million during the first nine months. The filing also identifies risks from demand changes, input and labor costs, supply-chain disruption, currency movements, pandemics, competition, acquisitions, pension obligations and debt refinancing.
Most important facts for investors to verify
- Whether pricing and productivity can offset continued materials, logistics, inflation and staffing costs, particularly in Mobile Industries.
- Whether inventory and receivables normalize sufficiently to support cash generation and the full-year cash-flow outlook.
- Progress on renewing or replacing the accounts receivable facility and continued compliance with leverage and interest-coverage covenants.
- Actual restructuring costs, timing and savings from the Villa Carcina and Indianapolis closures, and final acquisition accounting for iMS.
- Developments in the Lovejoy environmental matter, warranty claims and pension remeasurement assumptions.