Timken(TKR) - 2021 Q4 - Annual Report

Part I Business The Timken Company designs and manufactures engineered bearings and power transmission products globally, serving diverse industrial sectors - The Timken Company specializes in engineered bearings and power transmission products, operating globally in 42 countries with over 18,000 employees[12][13] - The company serves diverse sectors including industrial distribution, automotive, and renewable energy, with no single customer exceeding 5% of net sales[14] - The product portfolio includes Engineered Bearings (tapered, spherical, cylindrical, ball, housed, plain) and various Power Transmission Products (linear motion, industrial drives, lubrication systems, belts, chain, couplings)[16][24] - Services, such as power systems maintenance and bearing repair, constituted approximately 4% of net sales for the year ended December 31, 2021[35] Company Backlog (as of December 31) | (Dollars in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Mobile Industries | $1,354.9 | $1,012.6 | | Process Industries | $1,095.0 | $1,016.2 | | Total Company | $2,449.9 | $2,028.8 | Employee Health & Safety Performance | Metric | 2021 | 2020 | 2020 Industry Average* | | :--- | :--- | :--- | :--- | | Recordable Rate | 1.20 | 0.92 | - - - | | Lost Time Accident Rate | 0.38 | 0.32 | - - - | *U.S. metal manufacturers (NAICS code 332) with at least 1,000 employees. Risk Factors The company faces significant risks from intense competition, raw material price volatility, global operations, and regulatory compliance - The company operates in highly competitive industries, facing significant pricing pressure that could adversely affect revenues and profitability[63] - The capital-intensive business is vulnerable to industry downturns, potentially leading to asset impairment and restructuring charges, totaling approximately $46 million over the last five years[64] - Fluctuations in raw material prices, especially steel, pose a significant risk, potentially impacting profit margins if cost increases cannot be fully passed on[66] - The COVID-19 pandemic has negatively impacted operations through demand volatility, supply chain disruptions, and inflation, potentially continuing to affect financial results[68] - Global operations expose the company to risks from foreign currency fluctuations, trade policy changes, and compliance with various foreign laws and regulations, including the FCPA[75][81][82] - The company is subject to extensive environmental, health, and safety laws, with substantial compliance costs, and new regulations could further increase operational expenses[90][91][97] Properties The company operates 75 manufacturing plants and various offices globally, with most plants owned and adequate capacity - As of December 31, 2021, the Company operates 75 manufacturing plants and facilities in the U.S. and 41 other countries[109] - The company owns most manufacturing plants, while sales offices and distribution centers are primarily leased, with management deeming capacity adequate for future needs[109][110] Legal Proceedings The company is involved in various ordinary course legal actions, with no material adverse financial impact expected - The company is involved in various legal actions, with management believing ultimate outcomes will not materially affect its financial position[111] Information about our Executive Officers Executive officers are elected annually by the Board of Directors, with all current officers having served the company for at least five years Executive Officers as of February 15, 2022 | Name | Age | Current Position | | :--- | :--- | :--- | | Christopher A. Coughlin | 61 | Executive Vice President, Group President | | Philip D. Fracassa | 53 | Executive Vice President and Chief Financial Officer | | Richard G. Kyle | 56 | President and Chief Executive Officer | | Hans Landin | 49 | Group Vice President | | Hansal N. Patel | 41 | Vice President, General Counsel and Secretary | | Andreas Roellgen | 54 | Vice President - Europe, Asia and Africa | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common shares trade on the NYSE, with a new share repurchase plan approved and Q4 2021 repurchases - The company's common shares trade on the NYSE under "TKR", with an estimated 3,171 record holders and over 80,000 beneficial shareholders as of December 31, 2021[114] Issuer Purchases of Common Shares (Q4 2021) | Period | Total Shares Purchased | Average Price Paid | Shares Purchased Under Plan | | :--- | :--- | :--- | :--- | | Oct 2021 | — | $— | — | | Nov 2021 | 402,262 | $73.99 | 400,000 | | Dec 2021 | 101,959 | $68.49 | 100,000 | | Total | 504,221 | $72.88 | 500,000 | - A new share repurchase plan, approved on February 12, 2021, authorizes the purchase of up to ten million common shares until February 28, 2026[117] Selected Financial Data This section provides a five-year summary of key financial and operational data from 2017 to 2021 Five-Year Summary of Operations (2017-2021) | (Dollars in millions, except per share data) | 2021 | 2020 | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $4,132.9 | $3,513.2 | $3,789.9 | $3,580.8 | $3,003.8 | | Gross profit | $1,102.5 | $1,009.9 | $1,141.8 | $1,040.1 | $812.1 | | Operating income | $513.1 | $454.9 | $516.4 | $454.5 | $299.5 | | Net income attributable to The Timken Company | $369.1 | $284.5 | $362.1 | $302.8 | $203.4 | | Diluted earnings per share | $4.79 | $3.72 | $4.71 | $3.86 | $2.58 | | Net cash provided from operating activities | $387.3 | $577.6 | $550.1 | $332.5 | $236.8 | | Dividends per share | $1.19 | $1.13 | $1.12 | $1.11 | $1.07 | Five-Year Non-GAAP Financial Information (2017-2021) | (Dollars in millions, except per share data) | 2021 | 2020 | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | :--- | :--- | | Adjusted earnings per share | $4.72 | $4.10 | $4.60 | $4.18 | $2.63 | | Adjusted EBITDA | $718.0 | $658.9 | $726.3 | $646.5 | $464.8 | | Adjusted EBITDA Margin (% of net sales) | 17.4% | 18.8% | 19.2% | 18.1% | 15.5% | | Free cash flow | $239.0 | $456.0 | $409.5 | $219.9 | $132.1 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes 2021 financial performance, including sales, net income, segment results, cash flow, and liquidity Results of Operations (2021 vs. 2020) In 2021, net sales increased by 17.6% to $4.13 billion, with net income growing 29.7% to $369.1 million, driven by organic growth and a lower tax rate Financial Performance Overview (2021 vs. 2020) | Metric | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $4,132.9 M | $3,513.2 M | $619.7 M | 17.6% | | Net income | $381.5 M | $292.4 M | $89.1 M | 30.5% | | Net income attributable to The Timken Company | $369.1 M | $284.5 M | $84.6 M | 29.7% | | Diluted earnings per share | $4.79 | $3.72 | $1.07 | 28.8% | - Net sales growth was driven by $513 million in organic revenue, $78 million from favorable currency exchange, and $29 million from acquisitions[135] - Gross profit increased due to higher volume ($196 million) and favorable manufacturing performance ($20 million), partially offset by $171 million in higher material and logistics costs[136] - The effective tax rate decreased to 20.0% in 2021 from 26.2% in 2020, primarily due to the release of uncertain tax position accruals and favorable U.S. permanent differences[143][145] Business Segments Both Mobile and Process Industries segments reported strong sales growth in 2021, driven by organic expansion, despite margin pressure from increased costs Mobile Industries Segment Performance (2021 vs. 2020) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,965.7 M | $1,671.6 M | 17.6% | | EBITDA | $240.1 M | $232.5 M | 3.3% | | EBITDA Margin | 12.2% | 13.9% | (170) bps | - Mobile Industries' organic sales increased 15.3%, driven by growth in off-highway, automotive, and heavy truck sectors, partially offset by lower aerospace revenue[151] Process Industries Segment Performance (2021 vs. 2020) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,167.2 M | $1,841.6 M | 17.7% | | EBITDA | $506.3 M | $442.9 M | 14.3% | | EBITDA Margin | 23.4% | 24.0% | (60) bps | - Process Industries' organic sales increased 14.0%, driven by growth in distribution, renewable energy, and general industrial sectors[153] Cash Flows In 2021, net cash from operating activities decreased to $387.3 million, primarily due to increased working capital and inventory investment Consolidated Cash Flow Summary (2021 vs. 2020) | (Dollars in millions) | 2021 | 2020 | $ Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $387.3 | $577.6 | ($190.3) | | Net cash used in investing activities | ($173.8) | ($153.5) | ($20.3) | | Net cash used in financing activities | ($269.3) | ($331.1) | $61.8 | - The decrease in operating cash flow was mainly due to a $236.4 million increase in cash used for working capital, partially offset by higher net income[157] - Cash used for inventories increased by $243.2 million year-over-year, driven by higher demand and longer supply chain lead times[158] Liquidity and Capital Resources As of December 31, 2021, Timken maintained strong liquidity with $257.1 million cash and $733 million available credit, reducing debt and improving its net debt to capital ratio to 33.7% Net Debt and Capital Ratio (as of December 31) | (Dollars in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total debt | $1,464.9 | $1,564.6 | | Less: Cash and cash equivalents | $257.1 | $320.3 | | Net debt | $1,207.8 | $1,244.3 | | Total equity | $2,377.7 | $2,225.2 | | Capital (net debt + total equity) | $3,585.5 | $3,469.5 | | Ratio of net debt to capital | 33.7% | 35.9% | - The company maintained strong liquidity with $257.1 million in cash and $733 million in available committed credit lines at year-end 2021[164] - As of December 31, 2021, the company was in full compliance with debt covenants, with a consolidated leverage ratio of 2.05 to 1.0 and an interest coverage ratio of 12.10 to 1.0[165][170] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgment in inventory, goodwill, income tax, and pension liabilities - Approximately 41% of inventories are valued using the LIFO method, with the LIFO reserve increasing by $27.3 million in 2021[179] - Goodwill is tested for impairment at the reporting unit level; the Lubrication Systems unit's fair value exceeded its carrying value by more than 10% in the 2021 test[182][184][187] - Three indefinite-lived intangible assets, with a total carrying value of $67.1 million, had fair values exceeding carrying values by 10% or less, indicating sensitivity to future performance[189] - Pension and postretirement benefit liabilities are sensitive to discount rate changes; a 0.25% change would alter the U.S. projected pension benefit obligation by approximately $17.6 million[200][208] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, foreign currency, and commodity prices, managed through hedging and agreements - A one-percentage-point increase in global short-term borrowing rates would increase annual interest expense by approximately $3.7 million[239] - The company uses forward contracts to manage foreign currency risk, with $300.8 million in hedges as of December 31, 2021; a 10% U.S. dollar weakening would result in a $6.3 million charge[240] - Commodity price risk, mainly for steel and natural gas, is managed through supplier pricing agreements to establish purchase prices for certain inputs[241] Financial Statements and Supplementary Data This section presents The Timken Company's audited consolidated financial statements for 2019-2021, with an unqualified auditor's opinion Consolidated Statements of Income For 2021, net sales were $4.13 billion, gross profit $1.10 billion, operating income $513.1 million, and net income attributable to the company was $369.1 million Consolidated Statements of Income (Year Ended December 31) | (Dollars in millions, except per share data) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net sales | $4,132.9 | $3,513.2 | $3,789.9 | | Gross Profit | $1,102.5 | $1,009.9 | $1,141.8 | | Operating Income | $513.1 | $454.9 | $516.4 | | Net Income Attributable to The Timken Company | $369.1 | $284.5 | $362.1 | | Diluted earnings per share | $4.79 | $3.72 | $4.71 | Consolidated Balance Sheets As of December 31, 2021, total assets were $5.17 billion, total liabilities $2.79 billion, and total shareholders' equity $2.30 billion Consolidated Balance Sheets (as of December 31) | (Dollars in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total Current Assets | $2,213.5 | $2,000.3 | | Total Assets | $5,170.7 | $5,041.6 | | Total Current Liabilities | $896.6 | $848.0 | | Total Liabilities | $2,793.0 | $2,816.4 | | Total Shareholders' Equity | $2,294.9 | $2,152.9 | | Total Liabilities and Equity | $5,170.7 | $5,041.6 | Consolidated Statements of Cash Flows In 2021, net cash from operating activities was $387.3 million, decreasing from 2020 due to increased inventories Consolidated Statements of Cash Flows (Year Ended December 31) | (Dollars in millions) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $387.3 | $577.6 | $550.1 | | Net Cash Used in Investing Activities | ($173.8) | ($153.5) | ($364.9) | | Net Cash Used in Financing Activities | ($269.3) | ($331.1) | ($100.7) | | (Decrease) Increase In Cash | ($63.2) | $104.9 | $83.1 | Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2021, affirmed by the auditor - Management concluded the company's disclosure controls and procedures were effective as of December 31, 2021[428] - Based on the COSO framework, management believes the company's internal control over financial reporting was effective as of December 31, 2021[431] - Ernst & Young LLP provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[432][434] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Shareholder Matters Information for Items 10-14, including directors, executive officers, governance, compensation, and shareholder matters, is incorporated by reference from the proxy statement - Information for Items 10-14, including Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships, and Principal Accountant Fees, is incorporated by reference from the Proxy Statement[445][448][449][451][452] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, including governance documents and certifications - This section lists all exhibits filed with the Form 10-K, including governance documents, material contracts, compensation plans, and required certifications[454] - Schedule II - Valuation and Qualifying Accounts is provided, detailing changes in allowances for uncollectible accounts, obsolete inventory, and deferred tax asset valuation allowances for 2019-2021[453][474]