Timken Reports Third-Quarter 2021 Results

The Timken Company

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in millions, except share data) (Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020

2021

2020

$

1,037.3

$

894.6

$

3,125.6

$

2,621.5

Cost of products sold

769.4

630.9

2,256.2

1,848.6

 Gross Profit

267.9

263.7

869.4

772.9

Selling, general & administrative expenses

140.7

132.7

434.2

398.1

Impairment and restructuring charges

2.9

12.0

8.2

18.7

 Operating Income

124.3

119.0

427.0

356.1

Non-service pension and other postretirement income

0.5

15.3

5.9

13.4

Other income (expense), net

1.5

(1.0)

0.3

1.1

Interest expense, net

(14.3)

(15.4)

(43.3)

(49.3)

 Income Before Income Taxes

112.0

117.9

389.9

321.3

Provision for income taxes

20.4

26.6

75.1

84.2

 Net Income

91.6

91.3

314.8

237.1

 Less: Net income attributable to noncontrolling interest

3.5

2.5

8.6

5.7

Net Income Attributable to The Timken Company

$

88.1

$

88.8

$

306.2

$

231.4

Net Income per Common Share Attributable to The Timken Company Common Shareholders

    Basic Earnings per share

$

1.16

$

1.18

$

4.03

$

3.07

    Diluted Earnings per share

$

1.14

$

1.16

$

3.97

$

3.04

Average Shares Outstanding

76,068,582

75,223,462

75,980,355

75,288,567

Average Shares Outstanding - assuming dilution

77,023,973

76,286,136

77,157,614

76,131,920

BUSINESS SEGMENTS

(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

(Dollars in millions)

2021

2020

2021

2020

Mobile Industries

Net sales

$

487.3

$

428.6

$

1,486.0

$

1,237.9

Earnings before interest, taxes, depreciation and amortization (EBITDA) ⁽¹⁾

$

53.2

$

64.0

$

200.1

$

177.9

EBITDA Margin ⁽¹⁾

10.9

%

14.9

%

13.5

%

14.4

%

Process Industries

Net sales

$

550.0

$

466.0

$

1,639.6

$

1,383.6

Earnings before interest, taxes, depreciation and amortization (EBITDA) ⁽¹⁾

$

129.7

$

109.2

$

401.9

$

343.0

EBITDA Margin ⁽¹⁾

23.6

%

23.4

%

24.5

%

24.8

%

Unallocated corporate expense

$

$

(10.6)

$

(34.9)

$

(28.2)

Corporate pension and other postretirement benefit related (expense) income ⁽²⁾

(3.9)

11.9

(8.3)

3.1

Acquisition-related gain ⁽³⁾

0.3

—

0.9

—

Consolidated

Net sales

$

1,037.3

$

894.6

$

3,125.6

$

2,621.5

Earnings before interest, taxes, depreciation and amortization (EBITDA) ⁽¹⁾

$

167.6

$

174.5

$

559.7

$

495.8

EBITDA Margin ⁽¹⁾

16.2

%

19.5

%

17.9

%

18.9

%

⁽¹⁾ EBITDA is a non-GAAP measure defined as operating income plus other income (expense) and excluding depreciation and amortization. EBITDA Margin is a non-GAAP measure defined as EBITDA as a percentage of net sales. EBITDA and EBITDA Margin are important financial measures used in the management of the business, including decisions concerning the allocation of resources and assessment of performance.  Management believes that reporting EBITDA and EBITDA Margin is useful to investors as these measures are representative of the core operations of the segments and Company, respectively.

⁽²⁾ Corporate pension and other postretirement benefit related (expense) income primarily represents actuarial (losses) and gains that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience. The Company recognizes actuarial (losses) and gains in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement. Refer to the Retirement Benefit Plans and Other Postretirement Benefit Plans footnotes within the Company's annual reports on Form 10-K and quarterly reports on Form 10-Q for additional discussion.

⁽³⁾ The acquisition-related gain represents measurement period adjustments to the bargain purchase price gain on the acquisition of the assets of Aurora Bearing Company ("Aurora") that closed on November 30, 2020.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

(Unaudited)

September 30,
2021

December 31,
2020

ASSETS

Cash and cash equivalents

$

261.8

$

320.3

Restricted cash

0.8

0.8

Accounts receivable, net

700.2

581.1

Unbilled receivables

85.7

110.9

Inventories, net

974.1

841.3

Other current assets

172.8

145.9

Total Current Assets

2,195.4

2,000.3

Property, plant and equipment, net

1,035.3

1,035.6

Operating lease assets

109.8

118.2

Goodwill and other intangible assets

1,714.4

1,789.0

Non-current pension assets

4.0

2.0

Other assets

86.7

96.5

Total Assets

$

5,145.6

$

5,041.6

LIABILITIES

Accounts payable

$

406.2

$

351.4

Short-term debt, including current portion of long-term debt

39.0

130.7

Short-term operating lease liabilities

25.7

27.2

Income taxes

25.6

16.1

Accrued expenses

349.5

322.6

Total Current Liabilities

846.0

848.0

Long-term debt

1,417.0

1,433.9

Accrued pension benefits

162.2

163.0

Accrued postretirement benefits

50.6

41.3

Long-term operating lease liabilities

68.5

75.5

Other non-current liabilities

224.9

254.7

Total Liabilities

2,769.2

2,816.4

EQUITY

The Timken Company shareholders' equity

2,296.9

2,152.9

Noncontrolling interest

79.5

72.3

Total Equity

2,376.4

2,225.2

Total Liabilities and Equity

$

5,145.6

$

5,041.6

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

(Dollars in millions)

2021

2020

2021

2020

Cash Provided by (Used in)

OPERATING ACTIVITIES

Net Income

$

91.6

$

91.3

$

314.8

$

237.1

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

41.3

41.2

126.5

125.2

Stock-based compensation expense

3.1

7.8

15.6

19.2

Pension and other postretirement benefit expense (income)

2.4

(12.1)

2.9

(3.9)

Pension and other postretirement benefit contributions and payments

(3.2)

(4.3)

(18.2)

(12.9)

Changes in operating assets and liabilities:

  Accounts receivable

(1.7)

(19.2)

(127.5)

(27.6)

  Unbilled receivables

14.7

(14.9)

25.1

(11.9)

  Inventories

(62.8)

6.6

(144.2)

47.9

  Accounts payable

19.3

31.7

60.5

2.8

  Accrued expenses

19.4

44.1

50.2

49.4

  Income taxes

0.7

(18.1)

(6.7)

5.7

  Other, net

(19.0)

(0.5)

(14.4)

26.2

Net Cash Provided by Operating Activities

$

105.8

$

153.6

$

284.6

$

457.2

INVESTING ACTIVITIES

Capital expenditures

$

(43.1)

$

(29.2)

$

(103.6)

$

(85.7)

Acquisitions, net of cash received

(7.3)

—

(7.2)

(6.7)

Investments in short-term marketable securities, net

8.4

(8.8)

(5.4)

(10.4)

Other, net

—

1.3

0.3

1.4

Net Cash Used in Investing Activities

$

(42.0)

$

(36.7)

$

(115.9)

$

(101.4)

FINANCING ACTIVITIES

Cash dividends paid to shareholders

$

(22.8)

$

(21.1)

$

(69.5)

$

(65.0)

Purchase of treasury shares

(30.3)

—

(56.6)

(42.3)

Proceeds from exercise of stock options

—

10.7

25.4

18.2

Payments related to tax withholding for stock-based compensation

—

(1.6)

(23.5)

(12.0)

Net payments from credit facilities

(46.9)

(187.5)

(88.3)

(76.0)

Net payments on long-term debt

(3.0)

(11.1)

(9.4)

(63.2)

Other, net

(0.5)

(15.8)

(0.5)

(17.4)

Net Cash Used in Financing Activities

$

(103.5)

$

(226.4)

$

(222.4)

$

(257.7)

Effect of exchange rate changes on cash

(4.0)

7.4

(4.8)

(0.3)

(Decrease) Increase in Cash, Cash Equivalents and Restricted Cash

$

(43.7)

$

(102.1)

$

(58.5)

$

97.8

Cash, Cash Equivalents and Restricted Cash at Beginning of Period

306.3

416.1

321.1

216.2

Cash, Cash Equivalents and Restricted Cash at End of Period

$

262.6

$

314.0

$

262.6

$

314.0

Reconciliations of Adjusted Net Income to GAAP Net Income and Adjusted Earnings Per Share to GAAP Earnings Per Share:

(Unaudited)

The following reconciliation is provided as additional relevant information about the Company's performance deemed useful to investors.  Management believes that the non-GAAP measures of adjusted net income and adjusted diluted earnings per share are important financial measures used in the management of the business, including decisions concerning the allocation of resources and assessment of performance. Management believes that reporting adjusted net income and adjusted diluted earnings per share is useful to investors as these measures are representative of the Company's core operations.

(Dollars in millions, except share data)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

EPS

2020

EPS

2021

EPS

2020

EPS

Net Income Attributable to The Timken Company

$

88.1

$

1.14

$

88.8

$

1.16

$

306.2

$

3.97

$

231.4

$

3.04

Adjustments: ⁽¹⁾

  Impairment, restructuring and reorganization charges ⁽²⁾

$

5.9

$

13.3

$

13.3

$

24.9

  Corporate pension and other postretirement benefit related expense (income) ⁽³⁾

3.9

(11.9)

8.3

(3.1)

  Acquisition-related charges ⁽⁴⁾

1.5

(0.5)

2.1

3.7

  Property losses (recoveries) and related expenses ⁽⁵⁾

—

(1.7)

—

(3.8)

  Noncontrolling interest of above adjustments

—

—

0.2

—

  Provision for income taxes ⁽⁶⁾

(8.4)

(1.6)

(26.3)

(5.0)

      Total Adjustments:

2.9

0.04

(2.4)

(0.03)

(2.4)

(0.03)

16.7

0.21

Adjusted Net Income Attributable to The Timken Company

$

91.0

$

1.18

$

86.4

$

1.13

$

303.8

$

3.94

$

248.1

$

3.25

⁽¹⁾ Adjustments are pre-tax, with the net tax provision listed separately.

⁽²⁾ Impairment, restructuring and reorganization charges (including items recorded in cost of products sold) relate to: (i) plant closures; (ii) the rationalization of certain plants; (iii) severance related to cost reduction initiatives and (iv) related depreciation and amortization. The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges. However, management believes these actions are not representative of the Company's core operations.

⁽³⁾ Corporate pension and other postretirement benefit related expense (income) represents actuarial losses and (gains) that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience. The Company recognizes actuarial losses and (gains) in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement. Refer to the Retirement Benefit Plans and Other Postretirement Benefit Plans footnotes within the Company's annual reports on Form 10-K and quarterly reports on Form 10-Q for additional discussion.

⁽⁴⁾ Acquisition-related charges represent deal-related expenses associated with completed and certain unsuccessful transactions, as well as any resulting inventory step-up impact and measurement period adjustments to the bargain purchase gain on the acquisition of the assets of Aurora that closed on November 30, 2020.

⁽⁵⁾ Represents property loss and related expenses during the period presented (net of insurance recoveries received in 2020) resulting from property loss that occurred during the first quarter of 2019 at one of the Company's warehouses in Knoxville, Tennessee and during the third quarter of 2019 at one of the Company's warehouses in Yantai, China.

⁽⁶⁾ Provision for income taxes includes the net tax impact on pre-tax adjustments (listed above), the impact of discrete tax items recorded during the respective periods as well as other adjustments to reflect the use of one overall effective tax rate on adjusted pre-tax income in interim periods.

Reconciliation of EBITDA to GAAP Net Income, EBITDA Margin to Net Income as a Percentage of Sales, and EBITDA Margin, After Adjustments, to Net Income as a Percentage of Sales, and EBITDA, After Adjustments, to Net Income:

(Unaudited)

The following reconciliation is provided as additional relevant information about the Company's performance deemed useful to investors.  Management believes consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP measure that is useful to investors as it is representative of the Company's performance and that it is appropriate to compare GAAP net income to consolidated EBITDA. Management also believes that adjusted EBITDA, adjusted EBITDA margin and EBITDA margin are useful to investors as they are representative of the Company's core operations and are used in the management of the business, including decisions concerning the allocation of resources and assessment of performance.

(Dollars in millions)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

Percentage
to
Net Sales

2020

Percentage
to
Net Sales

2021

Percentage
to
Net Sales

2020

Percentage
to
Net Sales

Net Income

$

91.6

8.8

%

$

91.3

10.2

%

$

314.8

10.1

%

$

237.1

9.0

%

Provision for income taxes

20.4

26.6

75.1

84.2

Interest expense

14.8

16.3

45.0

52.3

Interest income

(0.5)

(0.9)

(1.7)

(3.0)

Depreciation and amortization

41.3

41.2

126.5

125.2

Consolidated EBITDA

$

167.6

16.2

%

$

174.5

19.5

%

$

559.7

17.9

%

$

495.8

18.9

%

Adjustments:

  Impairment, restructuring and reorganization charges ⁽¹⁾

$

5.6

$

13.1

$

12.5

$

22.1

  Corporate pension and other postretirement benefit related

     expense (income) ⁽²⁾

3.9

(11.9)

8.3

(3.1)

  Acquisition-related charges ⁽³⁾

1.5

(0.5)

2.1

3.7

  Property losses (recoveries) and related expenses ⁽⁴⁾

—

(1.7)

—

(3.8)

     Total Adjustments

11.0

1.0

%

(1.0)

(0.1)

%

22.9

0.7

%

18.9

0.7

%

Adjusted EBITDA

$

178.6

17.2

%

$

173.5

19.4

%

$

582.6

18.6

%

$

514.7

19.6

%

⁽¹⁾ Impairment, restructuring and reorganization charges (including items recorded in cost of products sold) relate to: (i) plant closures; (ii) the rationalization of certain plants; and (iii) severance related to cost reduction initiatives. The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges. However, management believes these actions are not representative of the Company's core operations. 

⁽²⁾ Corporate pension and other postretirement benefit related expense (income) represents actuarial losses and (gains) that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience. The Company recognizes actuarial losses and (gains) in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement. Refer to the Retirement Benefit Plans and Other Postretirement Benefit Plans footnotes within the Company's annual reports on Form 10-K and quarterly reports on Form 10-Q for additional discussion.

⁽³⁾ Acquisition-related charges represent deal-related expenses associated with completed and certain unsuccessful transactions, as well as any resulting inventory step-up impact and measurement period adjustments to the bargain purchase gain on the acquisition of the assets of Aurora that closed on November 30, 2020.

⁽⁴⁾ Represents property loss and related expenses during the period presented (net of insurance recoveries received in 2020) resulting from property loss that occurred during the first quarter of 2019 at one of the Company's warehouses in Knoxville, Tennessee and during the third quarter of 2019 at one of the Company's warehouses in Yantai, China.

Reconciliation of segment EBITDA Margin, After Adjustments, to segment EBITDA as a Percentage of Sales and segment EBITDA, After Adjustments, to segment EBITDA:

(Unaudited)

The following reconciliation is provided as additional relevant information about the Company's Mobile Industries and Process Industries segment performance deemed useful to investors. Management believes that non-GAAP measures of adjusted EBITDA and adjusted EBITDA margin for the segments are useful to investors as they are representative of each segment's core operations and are used in the management of the business, including decisions concerning the allocation of resources and assessment of performance.

Mobile Industries

Three Months Ended
September 30,

Nine Months Ended
September 30,

(Dollars in millions)

2021

Percentage to Net Sales

2020

Percentage to Net Sales

2021

Percentage to Net Sales

2020

Percentage to Net Sales

Earnings before interest, taxes, depreciation and amortization
(EBITDA)

$

53.2

10.9

%

$

64.0

14.9

%

$

200.1

13.5

%

$

177.9

14.4

%

  Impairment, restructuring and reorganization charges ⁽¹⁾

4.8

6.6

6.3

10.2

  Acquisition-related charges ⁽²⁾

0.2

(0.5)

0.6

2.1

  Property losses (recoveries) and related expenses ⁽³⁾

—

(1.7)

—

(3.8)

Adjusted EBITDA

$

58.2

11.9

%

$

68.4

16.0

%

$

207.0

13.9

%

$

186.4

15.1

%

Process Industries

Three Months Ended
September 30,

Nine Months Ended
September 30,

(Dollars in millions)

2021

Percentage to Net Sales

2020

Percentage to Net Sales

2021

Percentage to Net Sales

2020

Percentage to Net Sales

Earnings before interest, taxes, depreciation and amortization
(EBITDA)

$

129.7

23.6

%

$

109.2

23.4

%

$

401.9

24.5

%

$

343.0

24.8

%

  Impairment, restructuring and reorganization charges ⁽¹⁾

0.8

6.2

6.2

11.5

  Acquisition-related charges ⁽²⁾

0.2

(0.2)

0.5

1.0

Adjusted EBITDA

$

130.7

23.8

%

$

115.2

24.7

%

$

408.6

24.9

%

$

355.5

25.7

%

⁽¹⁾ Impairment, restructuring and reorganization charges (including items recorded in cost of products sold) relate to: (i) plant closures; (ii) the rationalization of certain plants; and (iii) severance related to cost reduction initiatives. The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges. However, management believes these actions are not representative of the Company's core operations. 

⁽²⁾ The acquisition-related charges represent the inventory step-up impact.

⁽³⁾ Represents property loss and related expenses during the period presented (net of insurance recoveries received in 2020) resulting from property loss that occurred during the first quarter of 2019 at one of the Company's warehouses in Knoxville, Tennessee and during the third quarter of 2019 at one of the Company's warehouses in Yantai, China.

Reconciliation of Total Debt to Net Debt, the Ratio of Net Debt to Capital, and the Ratio of Net Debt to Adjusted EBITDA:

(Unaudited)

These reconciliations are provided as additional relevant information about the Company's financial position deemed useful to investors. Capital, used for the ratio of net debt to capital, is a non-GAAP measure defined as total debt less cash and cash equivalents plus total shareholders' equity. Management believes Net Debt, the Ratio of Net Debt to Capital, Adjusted EBITDA (see below), and the Ratio of Net Debt to Adjusted EBITDA are important measures of the Company's financial position, due to the amount of cash and cash equivalents on hand. The Company presents net debt to adjusted EBITDA because it believes it is more representative of the Company's financial position as it is reflective of the ability to cover its net debt obligations with results from its core operations.

(Dollars in millions)

September 30,
2021

December 31,
2020

Short-term debt, including current portion of long-term debt

$

39.0

$

130.7

Long-term debt

1,417.0

1,433.9

  Total Debt

$

1,456.0

$

1,564.6

Less: Cash and cash equivalents

(261.8)

(320.3)

Net Debt

$

1,194.2

$

1,244.3

Total Equity

$

2,376.4

$

2,225.2

Ratio of Net Debt to Capital

33.4

%

35.9

%

Adjusted EBITDA for the Twelve Months Ended

$

726.8

$

658.9

Ratio of Net Debt to Adjusted EBITDA

1.6

1.9

Reconciliation of Free Cash Flow to GAAP Net Cash Provided by Operating Activities:

(Unaudited)

Management believes that free cash flow is a non-GAAP measure that is useful to investors because it is a meaningful indicator of cash generated from operating activities available for the execution of its business strategy.

(Dollars in millions)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020

2021

2020

Net cash provided by operating activities

$

105.8

$

153.6

$

284.6

$

457.2

Less: capital expenditures

(43.1)

(29.2)

(103.6)

(85.7)

Free cash flow

$

62.7

$

124.4

$

181.0

$

371.5

Reconciliation of EBITDA, After Adjustments, to GAAP Net Income:

(Unaudited)

The following reconciliation is provided as additional relevant information about the Company's performance deemed useful to investors. Management believes consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP measure that is useful to investors as it is representative of the Company's performance and that it is appropriate to compare GAAP net income to consolidated EBITDA. Management also believes that the non-GAAP measure of adjusted EBITDA is useful to investors as it is representative of the Company's core operations and is used in the management of the business, including decisions concerning the allocation of resources and assessment of performance.

(Dollars in millions)

Twelve Months Ended
September 30, 2021

Twelve Months Ended
December 31, 2020

Net Income

$

370.1

$

292.4

Provision for income taxes

94.8

103.9

Interest expense

60.3

67.6

Interest income

(2.4)

(3.7)

Depreciation and amortization

168.4

167.1

Consolidated EBITDA

$

691.2

$

627.3

Adjustments:

  Impairment, restructuring and reorganization charges ⁽¹⁾

$

16.3

$

25.9

  Corporate pension and other postretirement benefit related expense ⁽²⁾

29.9

18.5

  Acquisition-related charges ⁽³⁾

3.0

3.7

  Acquisition-related gain ⁽⁴⁾

(12.0)

(11.1)

 Gain on sale of real estate

(0.4)

(0.4)

  Property losses (recoveries) and related expenses ⁽⁵⁾

(1.7)

(5.5)

 Tax indemnification and related items

0.5

0.5

    Total Adjustments

35.6

31.6

Adjusted EBITDA

$

726.8

$

658.9

⁽¹⁾ Impairment, restructuring and reorganization charges (including items recorded in cost of products sold) relate to: (i) plant closures; (ii) the rationalization of certain plants and (iii) severance related to cost reduction initiatives. The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges.  However, management believes these actions are not representative of the Company's core operations.

⁽²⁾ Corporate pension and other postretirement benefit related expense represents actuarial losses and (gains) that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience. The Company recognizes actuarial losses and (gains) in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement.

⁽³⁾ Acquisition-related charges represent deal-related expenses associated with completed and certain unsuccessful transactions, as well as any resulting inventory step-up impact.

⁽⁴⁾ The acquisition-related gain represents a bargain purchase gain on the acquisition of the assets of Aurora that closed on November 30, 2020.

⁽⁵⁾ Represents property loss and related expenses during the periods presented (net of insurance recoveries received in 2020) resulting from property loss that occurred during the first quarter of 2019 at one of the Company's warehouses in Knoxville, Tennessee and during the third quarter of 2019 at one of the Company's warehouses in Yantai, China.