The Timken Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Timken designs and manufactures engineered bearings and power-transmission products and reports Mobile Industries and Process Industries segments.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $1,025.4 million | $923.4 million | +11.0% |
| Gross profit / gross margin | $299.2 million / 29.2% | $278.9 million / 30.2% | Profit +7.3%; margin down 100 bps |
| Operating income | $150.7 million | $121.7 million | +23.8% |
| Net income attributable to Timken | $113.3 million | $80.7 million | +40.4% |
| Diluted EPS | $1.47 | $1.06 | +38.7% |
| Operating cash flow | $31.7 million | $56.2 million | Down $24.5 million |
| Free cash flow | $2.3 million | $24.4 million | Down $22.1 million |
Sales growth reflected $69 million of higher organic revenue, $25 million from favorable currency movements, and $8 million from the Aurora acquisition. Higher volume, manufacturing performance, and lower SG&A supported earnings; unfavorable price/mix and higher material and logistics costs weighed on gross margin. Q1 adjusted EPS was $1.38 versus $1.11, and adjusted EBITDA margin was 19.9% versus 19.2%; these are non-GAAP measures.
- Segments: Mobile Industries sales increased 8.1% to $504.5 million and EBITDA increased 6.0% to $79.6 million; EBITDA margin was 15.8% versus 16.1%. Process Industries sales increased 14.1% to $520.9 million and EBITDA increased 21.9% to $131.0 million; margin was 25.1% versus 23.5%. Organic sales growth, excluding acquisitions and currency, was 5.2% and 9.8%, respectively.
- Cash flow: Operating cash flow was lower mainly because working capital used $137.8 million, including a $138.9 million use from receivables and $33.3 million from inventory. Capital expenditures were $29.4 million. Cash, cash equivalents and restricted cash ended at $303.1 million, down $18.0 million during the quarter.
- Debt and liquidity: Total debt was $1,602.0 million and net debt was $1,299.7 million at quarter-end; net debt to capital was 36.6%, versus 35.9% at year-end 2020. Cash and cash equivalents were $302.3 million, of which $262.6 million was outside the U.S. The $650 million revolving credit facility had $640.7 million available. The $100 million receivables facility was fully drawn and matures November 30, 2021; management intends to renew or replace it. The company reported compliance with debt covenants.
Material changes, outlook and notable items
- Management forecast 2021 revenue growth of approximately 18% versus 2020 and said earnings were expected to increase significantly, without providing a specific earnings target. Forecasts assume improving COVID-19 conditions and reflect expected organic growth, currency and acquisitions.
- 2021 operating cash flow guidance was $475–$500 million, compared with $577.6 million in 2020, as management expected working capital to use cash. Capital expenditures were expected to be approximately $150 million.
- COVID-19-related supply-chain disruption and some staffing issues continued in Q1, though revenue was stronger than management had expected at the start of the year. Management cited demand strength in renewable energy and off-highway markets; it also noted unfavorable mix and higher material costs.
- The effective tax rate fell to 17.9% from 26.1%, primarily due to releases of uncertain-tax-position accruals following settlement of 2017 and 2018 U.S. federal tax years and favorable tax differences, including GILTI rules.
- Q1 impairment and restructuring charges totaled $4.0 million, including a $3.3 million impairment of engineering-related assets. The Indianapolis chain-plant closure was expected by year-end 2021, to affect about 240 employees, and to cost $10–$12 million in total; $7.3 million of cumulative pretax costs had been incurred by quarter-end.
- Aurora acquisition measurement adjustments generated a $0.6 million Q1 bargain-purchase gain. The total bargain-purchase gain recognized for the acquisition was $11.7 million.
- Environmental accruals were $5.3 million, including the Lovejoy matter at the Ellsworth Industrial Park site; the company said Lovejoy’s allocated costs could be significant. Product warranty liability was $10.2 million. Management stated ordinary-course legal matters were not expected to materially adversely affect consolidated financial position or results.
- Foreign-currency translation reduced shareholders’ equity by $44.0 million in Q1. The filing identifies currency, COVID-19, demand and supply disruptions, raw-material and labor costs, competition, acquisition integration, litigation, and debt refinancing/covenant compliance among risks to forward-looking results.
Important facts for investors to verify
- Whether the receivables facility was renewed or replaced before its November 2021 maturity, and how much liquidity remained available.
- Whether full-year revenue, earnings, operating cash flow and capital-spending expectations were achieved, particularly as working capital was forecast to consume cash.
- Whether supply-chain constraints, staffing, mix and material/logistics costs affected subsequent margins and segment performance.
- Progress and remaining costs for the Indianapolis closure, and any further impairment or restructuring charges.
- Developments in the Lovejoy environmental matter and warranty claims, including changes to accrual estimates.
- Non-GAAP adjusted results alongside GAAP earnings, including the effects of discrete tax items and acquisition-related gains.