Timken(TKR) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited Consolidated Financial Statements and accompanying notes for the periods ended September 30, 2021 and 2020 Consolidated Statements of Income Net sales and net income significantly increased for the nine-month period, while third-quarter net income remained relatively flat Consolidated Statements of Income (Nine Months Ended Sep 30) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net sales | $3,125.6M | $2,621.5M | | Gross Profit | $869.4M | $772.9M | | Operating Income | $427.0M | $356.1M | | Net Income Attributable to The Timken Company | $306.2M | $231.4M | | Diluted earnings per share | $3.97 | $3.04 | Consolidated Statements of Income (Three Months Ended Sep 30) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net sales | $1,037.3M | $894.6M | | Gross Profit | $267.9M | $263.7M | | Operating Income | $124.3M | $119.0M | | Net Income Attributable to The Timken Company | $88.1M | $88.8M | | Diluted earnings per share | $1.14 | $1.16 | Consolidated Balance Sheets Total assets and equity increased due to higher business activity and retained earnings, reflecting a stronger financial position Key Balance Sheet Items | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $2,195.4M | $2,000.3M | | Total Assets | $5,145.6M | $5,041.6M | | Total Current Liabilities | $846.0M | $848.0M | | Long-term debt | $1,417.0M | $1,433.9M | | Total Equity | $2,376.4M | $2,225.2M | Consolidated Statements of Cash Flows Operating cash flow decreased due to increased working capital, while investing and financing activities continued to utilize cash Cash Flow Summary (Nine Months Ended Sep 30) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $284.6M | $457.2M | | Net Cash Used in Investing Activities | ($115.9M) | ($101.4M) | | Net Cash Used in Financing Activities | ($222.4M) | ($257.7M) | | (Decrease) Increase in Cash | ($58.5M) | $97.8M | | Cash at End of Period | $262.6M | $314.0M | Note 3 - Acquisitions The company completed the acquisition of Intelligent Machine Solutions and recognized a bargain purchase gain from a prior acquisition - On August 20, 2021, the Company acquired the assets of Intelligent Machine Solutions (iMS) for a purchase price of $7.4 million, with an additional $3.0 million in contingent performance-based consideration[19] - A bargain purchase gain of $0.9 million was recognized during the first nine months of 2021 related to the acquisition of Aurora, which closed in November 2020[24] Note 4 - Revenue Total net sales increased, with both segments contributing significantly, and OEMs remaining a primary revenue source Net Sales by Segment (Nine Months Ended Sep 30, 2021) | Segment | Net Sales (2021) | Net Sales (2020) | | :--- | :--- | :--- | | Mobile Industries | $1,486.0M | $1,237.9M | | Process Industries | $1,639.6M | $1,383.6M | | Total | $3,125.6M | $2,621.5M | - Sales to original equipment manufacturers (OEMs) constituted 61% of revenue for the first nine months of 2021, compared to 60% in the same period of 2020[25] - The aggregate amount of transaction price allocated to remaining performance obligations for contracts with a duration of more than one year was approximately $417.8 million at September 30, 2021[26] Note 5 - Segment Information Both Process and Mobile Industries segments reported increased EBITDA, contributing to higher total segment performance Segment EBITDA (Nine Months Ended Sep 30) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | Mobile Industries | $200.1M | $177.9M | | Process Industries | $401.9M | $343.0M | | Total Segment EBITDA | $602.0M | $520.9M | Note 13 - Impairment and Restructuring Charges Impairment and restructuring charges decreased, primarily related to plant closures and asset impairments Impairment and Restructuring Charges (Nine Months Ended Sep 30) | Charge Type | 2021 | 2020 | | :--- | :--- | :--- | | Impairment charges | $4.5M | $0.1M | | Severance and related benefit costs | $3.1M | $17.8M | | Exit costs | $0.6M | $0.8M | | Total | $8.2M | $18.7M | - Key restructuring activities in 2021 include the announced closure of the bearing manufacturing facility in Villa Carcina, Italy, and the ongoing closure of the chain manufacturing facility in Indianapolis, Indiana[56][58] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's strong financial performance, driven by sales and net income growth, while acknowledging persistent supply chain and inflationary pressures Overview Net sales and net income significantly increased, driven by organic growth and acquisitions, despite ongoing supply chain and inflationary challenges Financial Highlights (Nine Months Ended Sep 30) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $3,125.6M | $2,621.5M | 19.2% | | Net income | $314.8M | $237.1M | 32.8% | | Diluted EPS | $3.97 | $3.04 | 30.6% | - The company's outlook assumes COVID-19 conditions will continue to improve, but that supply chain disruptions and inflationary pressures will persist into 2022[95] The Statement of Income Net sales increased significantly, though gross margin declined due to higher costs, while the effective tax rate decreased - For the nine months ended Sep 30, 2021, net sales increased by $504.1 million, comprising $400 million from higher organic revenue, $81 million from favorable currency exchange, and $24 million from acquisitions[99] - Gross profit for the nine-month period was negatively impacted by $110 million in higher materials and logistics costs and $10 million in unfavorable price/mix[101] - The effective tax rate for the nine months ended Sep 30, 2021, was 19.3%, down from 26.2% in the prior year, primarily due to the release of accruals for uncertain tax positions and favorable U.S. permanent book-tax differences[109][110] Business Segments Both Mobile and Process Industries segments achieved strong sales growth, though EBITDA margins were impacted by rising costs Mobile Industries Segment Performance (Nine Months Ended Sep 30) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $1,486.0M | $1,237.9M | 20.0% | | EBITDA | $200.1M | $177.9M | 12.5% | | EBITDA margin | 13.5% | 14.4% | (90) bps | Process Industries Segment Performance (Nine Months Ended Sep 30) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $1,639.6M | $1,383.6M | 18.5% | | EBITDA | $401.9M | $343.0M | 17.2% | | EBITDA margin | 24.5% | 24.8% | (30) bps | Cash Flow Operating cash flow decreased primarily due to increased working capital needs to support higher sales levels - The decrease in operating cash flow was primarily driven by a $196.5 million use of cash for working capital in the first nine months of 2021, compared to a $60.6 million source of cash in the same period of 2020[122][123] Liquidity and Capital Resources The company maintained strong liquidity, reduced total debt, and improved its net debt to capital ratio, remaining in compliance with covenants Net Debt Reconciliation | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total debt | $1,456.0M | $1,564.6M | | Less: Cash and cash equivalents | $261.8M | $320.3M | | Net debt | $1,194.2M | $1,244.3M | - The ratio of net debt to capital improved to 33.4% at September 30, 2021, from 35.9% at December 31, 2020[127] - As of September 30, 2021, the company had $640.8 million of availability under its $650.0 million Senior Credit Facility[129] Item 3. Quantitative and Qualitative Disclosures about Market Risk 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, 2020 - There have been no material changes in reported market risk since the discussion included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020[157] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2021 - Based on an evaluation as of the end of the period, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective[158] - There were no changes in the Company's internal control over financial reporting during the fiscal quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls[158] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal actions arising in the ordinary course of business - The Company is involved in various claims and legal actions in the ordinary course of business, which are not expected to have a material adverse effect on its financial position[160] Item 1A. Risk Factors This section confirms that 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, 2020 - There have been no material changes to the risk factors included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020[161] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased common shares under a new plan approved in February 2021, authorizing up to ten million shares Issuer Purchases of Common Shares (Q3 2021) | Period | Total Shares Purchased | Average Price Paid | Shares Purchased as Part of Plan | Remaining Shares Authorized | | :--- | :--- | :--- | :--- | :--- | | Jul 2021 | 10 | $80.37 | — | 9,950,000 | | Aug 2021 | 360,059 | $75.94 | 360,000 | 9,590,000 | | Sep 2021 | 40,000 | $74.77 | 40,000 | 9,550,000 | | Total | 400,069 | $75.82 | 400,000 | | - On February 12, 2021, the Board of Directors approved a new share purchase plan, effective March 1, 2021, authorizing the purchase of up to ten million common shares, expiring on February 28, 2026[165] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 - Exhibits filed include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, and financial statements in Inline XBRL format[169]