Timken(US:TKR)2023-11-01 19:39PART I. FINANCIAL INFORMATION This section provides the company's unaudited consolidated financial statements, including income, comprehensive income, balance sheets, and cash flows, along with detailed notes for the periods ended September 30, 2023 Financial Statements This section presents the unaudited Consolidated Statements of Income, Comprehensive Income, Balance Sheets, and Cash Flows for the three and nine months ended September 30, 2023, compared to the same periods in 2022, including detailed notes Acquisitions and Divestitures During the first nine months of 2023, the company completed four acquisitions for $466.9 million, primarily expanding its Industrial Motion segment, and recorded an impairment charge for a planned divestiture - Completed four acquisitions in the first nine months of 2023: Rosa Sistemi S.p.A., Des-Case, Nadella, and American Roller Bearing Company (ARB)16 2023 Acquisitions Overview | Acquisition | Segment | Purchase Price (net) | Key Products | | :--- | :--- | :--- | :--- | | Rosa Sistemi S.p.A. | Industrial Motion | Part of $466.9M total | Linear motion components | | Des-Case | Industrial Motion | Part of $466.9M total | Specialty filtration products | | Nadella | Industrial Motion | Part of $466.9M total | Linear guides, actuators | | ARB | Engineered Bearings | Part of $466.9M total | Industrial bearings | - Agreed to sell Jiangsu TWB Bearings Co., Ltd. (TWB) and recorded a $1.0 million impairment charge in Q3 2023 as the carrying value exceeded the estimated sales price26 Segment Information The company operates under two reportable segments, Engineered Bearings and Industrial Motion, which collectively increased total segment EBITDA to $738.1 million for the nine months ended September 30, 2023 Segment Performance (Nine Months Ended Sep 30, 2023 vs 2022) | Segment (in millions) | Net Sales 2023 | Net Sales 2022 | EBITDA 2023 | EBITDA 2022 | | :--- | :--- | :--- | :--- | :--- | | Engineered Bearings | $2,533.5 | $2,350.4 | $538.7 | $486.2 | | Industrial Motion | $1,144.3 | $1,064.3 | $199.4 | $162.4 | | Total Segments | $3,677.8 | $3,414.7 | $738.1 | $648.6 | Financing Arrangements As of September 30, 2023, total debt stood at $2.2 billion, up from $1.96 billion at year-end 2022, with strong liquidity maintained through $720.9 million available under committed credit lines - On August 16, 2023, the Company entered into a new €200 million variable-rate term loan maturing in August 202449 Debt Composition (as of Sep 30, 2023) | Debt Category (in millions) | Amount | | :--- | :--- | | Short-term debt, including current portion | $598.4 | | Long-term debt | $1,601.6 | | Total Debt | $2,200.0 | - At September 30, 2023, the company had $698.9 million available under its Senior Credit Facility and $22.0 million under its Accounts Receivable Facility145147 Impairment and Restructuring Charges For the nine months ended September 30, 2023, the company recorded $40.3 million in impairment and restructuring charges, including a $28.3 million goodwill impairment loss in the Industrial Motion segment Impairment & Restructuring Charges (Nine Months Ended Sep 30, 2023) | Segment (in millions) | Impairment Charges | Severance & Benefits | Exit Costs | Total | | :--- | :--- | :--- | :--- | :--- | | Engineered Bearings | $4.9 | $3.8 | $0.6 | $9.3 | | Industrial Motion | $28.3 | $2.5 | $0.2 | $31.0 | | Total | $33.2 | $6.3 | $0.8 | $40.3 | - A pretax goodwill impairment loss of $28.3 million was recorded in Q1 2023 for the Belts and Chain reporting unit within the Industrial Motion segment following a change in reporting segments4672 - Charges related to the closure of the Gaffney, South Carolina bearing plant totaled $3.1 million for severance and related benefits in the first nine months of 202368 Consolidated Statements of Income Highlights (Q3 & YTD 2023 vs 2022) | Metric (in millions) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,142.7 | $1,136.4 | $3,677.8 | $3,414.7 | | Operating Income | $149.6 | $131.7 | $537.9 | $479.9 | | Net Income Attributable to The Timken Company | $87.9 | $87.0 | $335.4 | $310.2 | | Diluted EPS | $1.23 | $1.18 | $4.63 | $4.16 | Consolidated Balance Sheet Highlights (as of Sep 30, 2023 vs Dec 31, 2022) | Metric (in millions) | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $2,606.9 | $2,504.0 | | Total Assets | $6,244.7 | $5,772.4 | | Total Current Liabilities | $1,503.9 | $1,012.4 | | Total Liabilities | $3,647.6 | $3,419.5 | | Total Shareholders' Equity | $2,477.8 | $2,268.3 | Consolidated Statements of Cash Flows Highlights (YTD 2023 vs 2022) | Metric (in millions) | YTD Sep 30, 2023 | YTD Sep 30, 2022 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $416.9 | $222.3 | | Net Cash Used in Investing Activities | ($599.1) | ($242.0) | | Net Cash Provided by Financing Activities | $235.6 | $88.5 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, strategic initiatives, and financial condition, highlighting Q3 2023 sales growth of 0.6% to $1.14 billion and a full-year 2023 revenue outlook of 5-5.5% growth Company Overview and Strategy Timken designs and manufactures engineered bearings and industrial motion products, focusing on profitable growth, operational excellence, and disciplined capital deployment - The company operates under two reportable segments: Engineered Bearings (tapered, spherical, cylindrical roller bearings, etc.) and Industrial Motion (drives, lubrication systems, linear motion, chains, belts, etc.)108110 - The company's three-part strategy consists of: 1) Profitable Growth, 2) Operational Excellence, and 3) Capital Deployment to Drive Shareholder Value111112113 Results of Operations For Q3 2023, net sales increased 0.6% year-over-year, driven by acquisitions and pricing, while operating income rose 13.6% to $149.6 million Q3 2023 vs Q3 2022 Operating Results (in millions) | Metric | Q3 2023 | Q3 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,142.7 | $1,136.4 | $6.3 | 0.6% | | Operating Income | $149.6 | $131.7 | $17.9 | 13.6% | | Operating Margin | 13.1% | 11.6% | +150 bps | | - The increase in nine-month sales was driven by acquisitions (net of divestitures) of $191 million and higher organic sales of $107 million (favorable pricing, lower volume)119 - Net interest expense increased for both the three and nine-month periods due to increased debt levels from acquisitions and higher average interest rates122 Business Segments Performance In Q3 2023, Engineered Bearings sales decreased 0.5% while Industrial Motion sales grew 2.9%, with both segments showing overall growth for the nine-month period due to acquisitions and pricing Engineered Bearings Segment Results (Q3 2023 vs Q3 2022) | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $775.6M | $779.7M | -0.5% | | EBITDA | $148.2M | $150.4M | -1.5% | | EBITDA Margin | 19.1% | 19.3% | -20 bps | Industrial Motion Segment Results (Q3 2023 vs Q3 2022) | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $367.1M | $356.7M | +2.9% | | EBITDA | $70.3M | $34.9M | +101.4% | | EBITDA Margin | 19.2% | 9.8% | +940 bps | Liquidity and Capital Resources The company maintained strong liquidity with $367.9 million in cash and $720.9 million available credit, while net debt increased to $1.83 billion primarily to fund acquisitions Net Debt to Capital Ratio | Metric (in millions) | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Net Debt | $1,832.1 | $1,631.6 | | Total Equity | $2,597.1 | $2,352.9 | | Ratio of Net Debt to Capital | 41.4% | 40.9% | - Net cash provided by operating activities increased by $194.6 million year-over-year for the first nine months, primarily due to a $231.2 million favorable impact from working capital changes137138139 - Net cash used in investing activities increased by $357.1 million, mainly due to a $312.3 million increase in cash used for acquisitions137140 - Full-year 2023 revenue is expected to be up 5% to 5.5% compared to 2022, driven almost entirely by the benefit of acquisitions (net of divestitures)117 - Strategic accomplishments in the first nine months of 2023 include four acquisitions (Rosa, Des-Case, Nadella, ARB), a 6% dividend increase, and the repurchase of 2.7 million common shares114 - Operating cash flow is expected to be higher in 2023 compared to 2022, driven by improved working capital performance118 Quantitative and Qualitative Disclosures about Market Risk This section states that there have been no material changes in the company's reported market risk since the disclosures made in its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes in reported market risk since the company's Annual Report on Form 10-K for the year ended December 31, 2022177 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting during the quarter, excluding recent acquisitions - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023179 - The assessment of internal control over financial reporting for the year will exclude the recently acquired businesses of Rosa, Des-Case, Nadella, and ARB, which in aggregate represented 10% of total assets180181 PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security purchases, other information, and a list of exhibits filed with the Form 10-Q Legal Proceedings The company is involved in various claims and legal actions in the ordinary course of business, which management believes will not have a material adverse effect on its financial position or results of operations - The company states that ongoing legal proceedings are not expected to have a material adverse effect on its consolidated financial position or results of operations182 Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - No material changes have occurred to the risk factors detailed in the Annual Report on Form 10-K for the year ended December 31, 2022183 Issuer Purchases of Equity Securities During the third quarter of 2023, the company repurchased a total of 792,317 common shares at an average price of $81.63 per share, with approximately 3.1 million shares remaining available under the current authorization Share Repurchases (Quarter Ended Sep 30, 2023) | Period | Total Shares Purchased | Average Price Paid | Shares Purchased Under Plan | | :--- | :--- | :--- | :--- | | July 2023 | 216,032 | $91.80 | 215,000 | | August 2023 | 446,116 | $78.74 | 430,000 | | September 2023 | 130,169 | $74.66 | 130,000 | | Total Q3 | 792,317 | $81.63 | 775,000 | - As of September 30, 2023, 3,088,990 shares may yet be purchased under the company's share purchase plan, which expires on February 28, 2026186187 Other Information During the third quarter of 2023, no director or officer of the company adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended September 30, 2023187 Exhibits This section lists the exhibits filed with the Form 10-Q, which include certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, and the financial statements formatted in Inline XBRL - Exhibits filed include: - CEO and CFO certifications (Sarbanes-Oxley Act Sections 302 & 906) - Financial statements in Inline XBRL format189