THE TIMKEN COMPANY Overview
Introduction:
The Timken Company designs and manages a growing portfolio of engineered bearings and power transmission products. With more than a century of innovation and increasing knowledge, the Company continuously improves the reliability and efficiency of global machinery and equipment to move the world forward. The Company's growing product and services portfolio features many strong industrial brands, such as Timken®, Philadelphia Gear®, Drives®, Cone Drive®, Rollon®, Lovejoy®, Diamond®, BEKA® and Groeneveld®. Timken employs more than 17,000 people globally in 42 countries. The Company operates under two reportable segments: (1)Mobile Industries and (2)Process Industries . The following further describes these business segments: •Mobile Industries serves OEM customers that manufacture off-highway equipment for the agricultural, mining and construction markets; on-highway vehicles including passenger cars, light trucks, and medium- and heavy-duty trucks; rail cars and locomotives; outdoor power equipment; rotorcraft and fixed-wing aircraft; and other mobile equipment. Beyond service parts sold to OEMs, aftermarket sales and services to individual end users, equipment owners, operators and maintenance shops are handled directly or through the Company's extensive network of authorized automotive and heavy-truck distributors. •Process Industries serves OEM and end-user customers in industries that place heavy demands on the fixed operating equipment they make or use in heavy and other general industrial sectors. This includes metals, cement and aggregate production; power generation and renewable energy sources; oil and gas extraction and refining; pulp and paper and food processing; automation and robotics; and health and critical motion control equipment. Other applications include marine equipment, gear drives, cranes, hoists and conveyors. This segment also supports aftermarket sales and service needs through its global network of authorized industrial distributors and through the provision of services directly to end users.
Timken creates value by understanding customer needs and applying its know-how to serve a broad range of customers in attractive markets and industries across the globe. The Company's business strengths include its product technology, end-market diversity, geographic reach and aftermarket mix. Timken collaborates with OEMs to improve equipment efficiency with its engineered products and captures subsequent equipment replacement cycles by selling largely through independent channels in the aftermarket. Timken focuses its international efforts and footprint in regions of the world where strong macroeconomic factors such as urbanization, infrastructure development and sustainability create demand for its products and services.
The Company's strategy has three primary elements:
Profitable Growth. The Company intends to expand into new and existing markets
by leveraging its collective knowledge of metallurgy, friction management and
power transmission to create value for Timken customers. Using
a highly collaborative technical selling approach, the Company places particular
emphasis on creating unique solutions for challenging and/or demanding
applications. The Company intends to grow in attractive market sectors around
the world, emphasizing those spaces that are highly fragmented, demand high
service and value the reliability and efficiency offered by Timken products. The
Company also targets applications that offer significant aftermarket demand,
thereby providing product and services revenue throughout the equipment's
lifetime.
Operating With Excellence. Timken operates with a relentless drive for
exceptional results and a passion for superior
execution. The Company embraces a continuous improvement culture that is charged
with increasing efficiency, lowering costs, eliminating waste, encouraging
organizational agility and building greater brand equity to fuel growth. This
requires the Company's ongoing commitment to attract, retain and develop the
best talent across the world.
Capital Deployment to Drive Shareholder Value. The Company is intently focused
on providing the highest returns
for shareholders through its capital allocation framework, which includes: (1)
investing in the core business through capital expenditures, research and
development and other organic growth initiatives; (2) pursuing strategic
acquisitions to broaden its portfolio and capabilities across diverse markets,
with a focus on bearings, adjacent power transmission products and related
services; (3) returning capital to shareholders through dividends and share
repurchases; and (4) maintaining a strong balance sheet and sufficient
liquidity. As part of this framework, the Company may also restructure,
reposition or divest underperforming product lines or assets.
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Overview:
Three Months Ended
June 30,
2020 2019 $ Change % Change
Net sales $ 803.5 $ 1,000.0 $ (196.5 ) (19.7 )%
Net income 61.8 94.9 (33.1 ) (34.9 )%
Net income attributable to
noncontrolling interest (0.1 ) 2.4 (2.5 ) (104.2 )%
Net income attributable to The Timken
Company $ 61.9 $ 92.5 $ (30.6 ) (33.1 )%
Diluted earnings per share $ 0.82 $ 1.20 $ (0.38 ) (31.7 )%
Average number of shares - diluted 75,698,289 77,208,432 - (2.0 )%
Six Months Ended
June 30,
2020 2019 $ Change % Change
Net sales $ 1,726.9 $ 1,979.7 $ (252.8 ) (12.8 )%
Net income 145.8 190.2 (44.4 ) (23.3 )%
Net income attributable to
noncontrolling interest 3.2 5.8 (2.6 ) (44.8 )%
Net income attributable to The Timken
Company $ 142.6 $ 184.4 $ (41.8 ) (22.7 )%
Diluted earnings per share $ 1.88 $ 2.39 $ (0.51 ) (21.3 )%
Average number of shares - diluted 76,032,049 77,098,982 - (1.4 )%
The decrease in net sales for the three months ended
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Outlook:
In
Throughout the COVID-19 pandemic, Timken has continued to operate and fill
customer orders, and has adjusted production as required by local government
directives and to reflect changes in global demand. During the first quarter,
the Company's operations in
During the second quarter, the Company took steps to reduce costs by
implementing temporary salary reductions, work furloughs and other actions.
Recently, Timken began expanding and accelerating certain structural cost
reduction initiatives to align its costs with near-term demand expectations and
to improve profitability of the Company longer-term. Timken expects these
structural cost reduction actions, combined with other cost reduction
initiatives, will generate approximately
Given the continued uncertainty surrounding the COVID-19 pandemic, the Company is not providing detailed sales and earnings guidance at this time. Timken expects revenue to remain lower over the remainder of the year as compared to 2019. The Company expects operating margins to be lower in the second half of 2020 versus the first half of 2020, due to the timing of realization with respect to cost reduction initiatives, normal seasonality, higher restructuring charges and other items.
The Statement of Income
Sales:
Three Months Ended
June 30,
2020 2019 $ Change % Change
Six Months Ended
June 30,
2020 2019 $ Change % Change
Net sales decreased for the three months ended
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Gross Profit:
Three Months Ended
June 30,
2020 2019 $ Change Change
Gross profit $ 230.3 $ 305.7 $ (75.4 ) (24.7 %)
Gross profit % to net sales 28.7 % 30.6 % (190 ) bps
Six Months Ended
June 30,
2020 2019 $ Change Change
Gross profit $ 509.2 $ 608.3 $ (99.1 ) (16.3 %)
Gross profit % to net sales 29.5 % 30.7 % (120 ) bps
Gross profit decreased for the three months ended
Selling, General and Administrative Expenses:
Three Months Ended
June 30,
2020 2019 $ Change Change
Selling, general and administrative
expenses $ 111.8 $ 158.7 $ (46.9 ) (29.6 %)
Selling, general and administrative
expenses % to net sales 13.9 % 15.9 % (200 ) bps
Six Months Ended
June 30,
2020 2019 $ Change Change
Selling, general and administrative
expenses $ 265.4 $ 311.4 $ (46.0 ) (14.8 %)
Selling, general and administrative
expenses % to net sales 15.4 % 15.7 % (30 ) bps
SG&A expenses decreased in the three months ended
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Impairment and Restructuring:
Three Months Ended
June 30,
2020 2019 $ Change % Change
Impairment charges $ - $ 0.7 $ (0.7 ) (100.0 )%
Severance and related benefit costs 3.2 0.8 2.4 300.0 %
Exit costs (0.1 ) 0.4 (0.5 ) (125.0 )%
Total $ 3.1 $ 1.9 $ 1.2 63.2 %
Six Months Ended
June 30,
2020 2019 $ Change % Change
Impairment charges $ 0.1 $ 0.7 $ (0.6 ) (85.7 )%
Severance and related benefit costs 5.9 0.8 5.1 NM
Exit costs 0.7 0.4 0.3 75.0 %
Total $ 6.7 $ 1.9 $ 4.8 NM
Impairment and restructuring charges of
Impairment and restructuring charges of
The Company expects to generate approximately
Refer to Note 13 - Impairment and Restructuring Charges in the Notes to the Consolidated Financial Statements for additional information.
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Other Income (Expense):
Three Months Ended
June 30,
2020 2019 $ Change % Change
Non-service pension and other
postretirement
(expense) income $ (5.3 ) $ 0.2 $ (5.5 ) NM
Other (expense) income, net (2.0 ) 1.4 (3.4 ) NM
Total other income (expense), net
Six Months Ended
June 30,
2020 2019 $ Change % Change
Non-service pension and other postretirement
(expense) income$ (1.9 ) $ 0.3 $ (2.2 ) NM Other income, net 2.1 4.7 (2.6 ) (55.3 )% Total other income (expense), net$ 0.2 $ 5.0 $ (4.8 ) (96.0 )%
Non-service pension and other postretirement expense increased in the three and
six months ended
Other (expense) income, net decreased in the three months ended
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Income Tax Expense:
Three Months Ended
June 30,
2020 2019 $ Change % Change
Provision for income taxes $ 28.0 $ 33.6 $ (5.6 ) (16.7 )%
Effective tax rate 31.2 % 26.1 % 510 bps
Six Months Ended
June 30,
2020 2019 $ Change % Change
Provision for income taxes $ 57.6 $ 74.9 $ (17.3 ) (23.1 )%
Effective tax rate 28.3 % 28.3 % -
Income tax expense decreased $5.6 million for the three months ended June 30,
2020 compared with the three months ended June 30, 2019 primarily due to lower
pre-tax earnings. The effective tax rate for the three months ended June 30,
2020 was 31.2% as compared to 26.1% for the three months ended June 30, 2019 ,
primarily due to higher discrete tax expense in the current year compared to
discrete tax benefits in the prior year.
Income tax expense decreased $17.3 million for the six months ended June 30,
2020 compared with the six months ended June 30, 2019 primarily due to lower
pre-tax earnings. Income tax expense also decreased due to additional accruals
recorded discretely for uncertain tax positions in the prior year related to
U.S. Tax Reform. These impacts were partially offset by the projected increase
in the mix of earnings in the international jurisdictions with relatively higher
tax rates.
Refer to Note 6 - Income Taxes for more information on the computation of the
income tax expense in interim periods.
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), enacted by
the U.S. on March 27, 2020 , did not have a material impact on the Company's
provision for income taxes for the six months ended June 30, 2020 . The Company
is continuing to analyze the ongoing impact of the CARES Act.
Business Segments
The Company's reportable segments are business units that serve different industry sectors. While the segments operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. Beginning in the fourth quarter of 2019, the main operating income metric used by management to measure the financial performance of each segment was EBITDA. The Company made this change because recent acquisitions have resulted in an increased amount of purchase accounting amortization expense that affects comparability of results across periods and versus other companies. The primary measurement used by management to measure the financial performance of each segment prior to the fourth quarter of 2019 was earnings before interest and taxes ("EBIT"). Segment results have been revised for all periods presented to be consistent with the new measure of segment performance. Refer to Note 5 - Segment Information in the Notes to the Consolidated Financial Statements for the reconciliation of EBITDA by segment to consolidated income before income taxes.
The presentation of segment results below includes a reconciliation of the
changes in net sales for each segment reported in accordance with
The following items highlight the Company's acquisitions completed in 2019 by
segment based on the customers and underlying markets served:
• The Company acquired BEKA during the fourth quarter of 2019. The majority
of the results for BEKA are reported in the Mobile Industries segment.
• The Company acquired Diamond Chain during the second quarter of 2019. The
majority of the results for Diamond Chain are reported in the Process
Industries segment.
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Mobile Industries Segment:
Three Months Ended
June 30,
2020 2019 $ Change Change
Net sales $ 342.6 $ 493.7 $ (151.1 ) (30.6 %)
EBITDA $ 38.8 $ 78.0 $ (39.2 ) (50.3 %)
EBITDA margin 11.3 % 15.8 % (450 ) bps
Three Months Ended
June 30,
2020 2019 $ Change % Change
Net sales $ 342.6 $ 493.7 $ (151.1 ) (30.6 %)
Less: Acquisitions 21.3 - 21.3 NM
Currency (14.0 ) - (14.0 ) NM
Net sales, excluding the impact of
acquisitions and currency $ 335.3 $ 493.7 $ (158.4 ) (32.1 %)
Six Months Ended
June 30,
2020 2019 $ Change Change
Net sales
(170 ) bps
Six Months Ended
June 30,
2020 2019 $ Change % Change
Net sales $ 809.3 $ 993.7 $ (184.4 ) (18.6 %)
Less: Acquisitions 47.7 - 47.7 NM
Currency (21.5 ) - (21.5 ) NM
Net sales, excluding the impact of
acquisitions and currency $ 783.1 $ 993.7 $ (210.6 ) (21.2 %)
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Process Industries Segment:
Three Months Ended
June 30,
2020 2019 $ Change Change
Net sales $ 460.9 $ 506.3 $ (45.4 ) (9.0 %)
EBITDA $ 126.3 $ 125.7 $ 0.6 0.5 %
EBITDA margin 27.4 % 24.8 % 260 bps
Three Months Ended
June 30,
2020 2019 $ Change % Change
Net sales $ 460.9 $ 506.3 $ (45.4 ) (9.0 %)
Less: Acquisitions 9.6 - 9.6 NM
Currency (12.5 ) - (12.5 ) NM
Net sales, excluding the impact of
acquisitions and currency $ 463.8 $ 506.3 $ (42.5 ) (8.4 )%
Six Months Ended
June 30,
2020 2019 $ Change Change
Net sales
(20) bps
Six Months Ended
June 30,
2020 2019 $ Change % Change
Net sales $ 917.6 $ 986.0 $ (68.4 ) (6.9 %)
Less: Acquisitions 30.9 - 30.9 NM
Currency (20.9 ) - (20.9 ) NM
Net sales, excluding the impact of
acquisitions and currency $ 907.6 $ 986.0 $ (78.4 ) (8.0 )%
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Corporate:
Three Months Ended
June 30,
2020 2019 $ Change Change
Corporate EBITDA $ (6.5 ) $ (15.3 ) $ 8.8 (57.5%)
Corporate EBTIDA % to net sales (0.8 )% (1.5 )% 70 bps
Six Months Ended
June 30,
2020 2019 $ Change Change
Corporate EBITDA $ (17.6 ) $ (29.4 ) $ 11.8 (40.1%)
Corporate EBTIDA % to net sales (1.0 )% (1.5 )% 50 bps
Corporate EBITDA increased in the three months ended
Corporate EBITDA increased in the six months ended
The Balance Sheet
The following discussion is a comparison of the Consolidated Balance Sheets at
Current Assets:
June 30, December 31,
2020 2019 $ Change % Change
Cash and cash equivalents $ 415.6 $ 209.5 $ 206.1 98.4 %
Restricted cash 0.5 6.7 (6.2 ) (92.5 )%
Accounts receivable, net 541.6 545.1 (3.5 ) (0.6 )%
Unbilled receivables 126.2 129.2 (3.0 ) (2.3 )%
Inventories, net 784.0 842.0 (58.0 ) (6.9 )%
Deferred charges and prepaid expenses 33.4 36.7 (3.3 ) (9.0 )%
Other current assets 105.6 105.4 0.2 0.2 %
Total current assets $ 2,006.9 $ 1,874.6 $ 132.3 7.1 %
Refer to the "Cash Flows" section for discussion on the change in Cash and cash
equivalents. Inventories, net decreased primarily due to a decrease in finished
goods inventory of
Property, Plant and Equipment, Net:
June 30, December 31,
2020 2019 $ Change % Change
Property, plant and equipment, net
The decrease in net property, plant and equipment for the six months of 2020 was
primarily due to depreciation in 2020 of
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Other Assets:
June 30, December 31,
2020 2019 $ Change % Change
Goodwill $ 996.5 $ 993.7 $ 2.8 0.3 %
Other intangible assets 731.4 758.5 (27.1 ) (3.6 )%
Operating lease assets 110.3 114.1 (3.8 ) (3.3 )%
Non-current pension assets 7.9 3.4 4.5 132.4 %
Non-current other postretirement
benefit assets - 36.6 (36.6 ) (100.0 )%
Deferred income taxes 69.7 71.8 (2.1 ) (2.9 )%
Other non-current assets 16.2 18.0 (1.8 ) (10.0 )%
Total other assets $ 1,932.0 $ 1,996.1 $ (64.1 ) (3.2 )%
The decrease in other intangible assets was primarily due to current-year
amortization of
At
Current Liabilities:
June 30, December 31,
2020 2019 $ Change % Change
Short-term debt $ 42.9 $ 17.3 $ 25.6 148.0 %
Current portion of long-term debt 18.4 64.7 (46.3 ) (71.6 )%
Short-term operating lease liabilities 27.5 28.3 (0.8 ) (2.8 )%
Accounts payable 267.3 301.7 (34.4 ) (11.4 )%
Salaries, wages and benefits 106.0 134.5 (28.5 ) (21.2 )%
Income taxes payable 31.2 17.8 13.4 75.3 %
Other current liabilities 171.5 172.3 (0.8 ) (0.5 )%
Total current liabilities $ 664.8 $ 736.6 $ (71.8 ) (9.7 )%
The increase in short-term debt was primarily due to the increase in borrowings
under variable-rate lines of credit for the Company's foreign subsidiaries. The
Company increased its borrowings in order to increase its cash position and
enhance the Company's financial flexibility due to the uncertainty in the global
markets resulting from the ongoing COVID-19 pandemic. The decrease in the
current portion of long-term debt was primarily due to the payment of
The decrease in accounts payable was primarily due to a decrease in purchasing
activity as a result of lower sales volume. The decrease in accrued salaries,
wages and benefits was primarily due to the 2019 performance-based compensation
exceeding accruals for 2020 performance-based compensation, partially offset by
increases in payroll tax accruals due to deferral of payments until 2021 and
2022 as allowed under the
The increase in income taxes payable was primarily due to the current year income tax expense, as well as the deferral of second quarter income tax payments, partially offset by cash payments.
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Non-Current Liabilities:
June 30, December 31,
2020 2019 $ Change % Change
Long-term debt $ 1,730.1 $ 1,648.1 $ 82.0 5.0 %
Accrued pension benefits 173.3 165.1 8.2 5.0 %
Accrued postretirement benefits 44.9 31.8 13.1 41.2 %
Long-term operating lease liabilities 70.2 71.3 (1.1 ) (1.5 )%
Deferred income taxes 158.1 168.2 (10.1 ) (6.0 )%
Other non-current liabilities 92.0 84.0 8.0 9.5 %
Total non-current liabilities
The increase in long-term debt was primarily due to an increase in borrowings of
The increase in accrued postretirement benefits was primarily due to the
creation of the new VEBA trust. In
Shareholders' Equity:
June 30, December 31,
2020 2019 $ Change % Change
Common shares $ 977.5 $ 990.7 $ (13.2 ) (1.3 )%
Earnings invested in the business 2,005.7 1,907.4 98.3 5.2 %
Accumulated other comprehensive loss (99.2 ) (50.1 ) (49.1 ) 98.0 %
Treasury shares (1,000.4 ) (979.8 ) (20.6 ) 2.1 %
Noncontrolling interest 84.0 86.6 (2.6 ) (3.0 )%
Total shareholders' equity $ 1,967.6 $ 1,954.8 $ 12.8 0.7 %
Earnings invested in the business in the six months of 2020 increased by net
income attributable to the Company of
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