Baird 2018 Global Industrial Conference - Delivering Next-Level Performance - Investors | The Timken ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Baird 2018 Global
Industrial Conference
NOVEMBER 6, 2018
Delivering Next-Level Performance
Forward-Looking Statements Safe Harbor and Non-GAAP
Financial Information
Certain statements in this presentation (including statements regarding the company's forecasts, beliefs, estimates and expectations) that are not
historical in nature are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, the
statements related to Timken’s plans, outlook, future financial performance, targets, projected sales, cash flows, liquidity and expectations
regarding the future financial performance of the company are forward-looking.
The Company cautions that actual results may differ materially from those projected or implied in forward-looking statements due to a variety of
important factors, including: the company's ability to respond to changes in its end markets that could affect demand for the company's products;
unanticipated changes in business relationships with customers or their purchases from the company; changes in the financial health of the
company's customers, which may have an impact on the company's revenues, earnings and impairment charges; fluctuations in material and
energy costs; the impact of changes to the company’s accounting methods; recent world events that have increased the risk posed by international
trade disputes, tariffs and sanctions; weakness in global or regional economic conditions and capital markets; the company’s ability to satisfy its
obligations under its debt agreements and renew or refinance borrowings on favorable terms; fluctuations in currency valuations; changes in the
expected costs associated with product warranty claims; the ability to achieve satisfactory operating results in the integration of acquired
companies, including realizing any accretion within expected timeframes or at all; the impact on operations of general economic conditions;
fluctuations in customer demand; the impact on the company’s pension obligations and assets due to changes in interest rates, investment
performance and other tactics designed to reduce risk; the company’s ability to complete and achieve the benefits of announced plans, programs,
initiatives, acquisitions and capital investments; and the actual impact of the Tax Cuts and Jobs Act of 2017 on the full-year 2018 global effective
tax rate. Additional factors are discussed in the company's filings with the Securities and Exchange Commission, including the company's Annual
Report on Form 10-K for the year ended Dec. 31, 2017, quarterly reports on Form 10-Q and current reports on Form 8-K. Except as required by
the federal securities laws, the company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise.
This presentation includes certain non-GAAP financial measures as defined by the rules and regulations of the Securities and Exchange
Commission. Reconciliation of those measures to the most directly comparable GAAP equivalents are provided in the Appendix to this presentation.
2
Company Overview
3
Why Invest in Timken?
LTM SEPTEMBER 2018
Leading market, brand and technical position KEY METRICS
Focused, talented and committed management team SALES
Strong track record of results; exceeding targets $3.45 billion
Sound strategy to: EBIT MARGIN EPS
- Grow and improve market position
12.4% $3.46
- Deliver higher levels of financial performance
ADJUSTED EBIT MARGIN ADJUSTED EPS
Timken is a compelling investment
13.4% $3.86
4
See appendix for reconciliations of EBIT margin, adjusted EBIT margin and adjusted EPS to their most directly comparable GAAP equivalents.
We Deliver Premium Bearings and Power Transmission Products
and Services for the World’s Equipment and Vehicles
Timken engineered bearings feature a broad range of sizes, rolling
elements and proprietary designs that are vital to a wide array of
customer applications
Timken power transmission products range from belts and chain
to sealing technologies, improving the reliability of industrial
equipment and machinery
Timken industrial services provide bearing and power system
rebuild services that can return components or entire systems to
like-new specifications
5
21%
INDUSTRIAL/OTHER
14%
AUTOMOTIVE
Percentage of Sales for 2017
9%
HEAVY TRUCK
9%
AGRICULTURE/TURF
8%
RAIL
8%
ENERGY
7%
DEFENSE
6%
MINING
6%
CONSTRUCTION
5%
METALS
3%
CIVIL AEROSPACE
2%
Our Sales Are Diversified Across Several End-Market Sectors
CEMENT/AGGREGATE
6
2%
PULP/PAPER
Portfolio and Channel Position Reflects Progress in Diversifying
Product and Services Offerings
PORTFOLIO CHANNELS
26%
45%
55%
74%
Bearings Power Transmission/Services OEM Distribution/End-User
Percentage of Sales for 2017
7
We Have Strong Global Capabilities
33 97 2017 SALES BY GEOGRAPHY
countries
plants and
service centers
57%
83 North
America
17%
Asia
Pacific
sales offices
19%
41 7%
Latin
America
Europe,
Middle East,
>17K
Africa
logistics
centers
associates
8
Mobile Industries Segment:
A Balanced and Attractive Mix Across Mobile End-Market Sectors
MOBILE INDUSTRIES
LTM SEPTEMBER 2018 MARKET SECTOR MIX PRODUCT
KEY METRICS (SALES) PORTFOLIO
SALES
Engineered bearings, power
$1.87 billion
transmission products and
18%
24% related services
11%
EBIT MARGIN
10.1%
15%
32%
ADJUSTED EBIT MARGIN
Automotive Off-Highway
10.7% Rail
Heavy Truck
Aerospace
9
See appendix for reconciliations of EBIT margin and adjusted EBIT margin to their most directly comparable GAAP equivalents.
Process Industries Segment:
Industry-Leading Portfolio Serving OEMs and Aftermarket
PROCESS INDUSTRIES
LTM SEPTEMBER 2018 MARKET SECTOR MIX PRODUCT
KEY METRICS (SALES) PORTFOLIO
SALES
Engineered bearings, power
$1.58 billion
9% transmission products and
related services
19%
EBIT MARGIN 56%
19.6%
16%
ADJUSTED EBIT MARGIN Distribution
19.8%
Gears & Services
Heavy/General Industrial
Wind
10
See appendix for reconciliations of EBIT margin and adjusted EBIT margin to their most directly comparable GAAP equivalents.Proven Strategy to Drive Next-Level Performance
OUTGROW OUR MARKETS
Be the technical leader in solving customers’ friction and power
transmission challenges
Expand both our product portfolio and geographic presence
Deliver best-in-class customer service experience using a differentiated
technical sales model
OPERATE WITH EXCELLENCE
Drive enterprise-wide Lean and continuous improvement efforts
Build a more cost-effective global manufacturing footprint
Deliver efficiencies across our supply chains
NEXT-LEVEL
Optimize processes and SG&A efficiency
PERFORMANCE
DEPLOY CAPITAL TO DRIVE SHAREHOLDER VALUE
Invest in organic growth and productivity initiatives
Pay an attractive dividend that grows over time with earnings
Broaden portfolio and reach through value-accretive M&A
Return capital through share repurchases
11Our Actions Are Driven by the Timken Business Model
Markets Supported by
Strong Macros
FOR ATTRACTIVE OPPORTUNITIES
Challenging Technology
Applications & Innovation
TIMKEN COMPETITIVE
DISCIPLINED FILTER
DIFFERENTIATORS
Aftermarket Business
& Rebuild Capabilities
VALUE
Fragmentation CREATION Operational
Excellence
High Service Talent
Requirements
Expand Reach with
Adjacent Products and Services
12Growth-Creating Megatrends Will Fuel Opportunities Going
Forward
URBANIZATION INFRASTRUCTURE DEVELOPMENT POPULATION GROWTH
ENERGY SUSTAINABILITY & EFFICIENCY
13Timken’s Strategy Will Drive Outgrowth
Timken’s strategy is to be the supplier of choice for solving our
customers’ friction management and power transmission challenges.
We will do this by:
• Strengthening our global leadership in tapered roller bearings, and
enhancing our offering of other highly-engineered bearings
• Delivering a diverse portfolio of power transmission products that
complement our bearing offering and enhance the value we
provide to customers and end users across the globe
• Delivering a best-in-class customer service experience utilizing a
differentiated technical sales and service model
14Delivering Outgrowth and Changing Market Sector Mix
Wind Energy Solar Energy Spherical Automated Asia
Increasing Cone Drive Roller Bearings Lubrication
Automated Variety of
penetration acquisition serving Bearing product Systems
Lubrication penetration
in wind energy renewable energy breadth expansion Improving
Systems equipment initiatives
markets reliability
Improving through
automation
equipment
reliability through
automation
15Operational Excellence is a Core Competency
TRANSFORMING OUR BEARING FOOTPRINT
Regional manufacturing hubs in Americas,
Asia and Europe
2007 2017
Expand capacity in low-cost geographies to
support growth 10%
29%
Improve efficiency in high-cost locations 26% 42%
Drive Lean principles across the organization 64%
29%
Continually look to streamline and leverage
SG&A costs
Americas
Part of our culture EMEA
Asia-Pacific
16Focus on Broader Power Transmission and Motion Space Opens
Up Significant Opportunity for Value Creation
Timken M&A Strategy:
Consolidate attractive targets within the
global bearing space
- Focus on “bolt-ons” to enhance industry-
leading product offering or extend reach
Expand into attractive adjacencies that fit the
~$10B ~$70B Power Transmission Timken Business Model
TRB* and Motion Space
$3B Bearings - Focus on high-quality businesses across the
industrial power transmission and motion
space
- Look to enhance our organic growth and
profitability over the long term
*TRB = Tapered roller bearings 17
Note: Bearing market is based on the 2016 Freedonia report.Power Transmission Products and Services – Strong Adjacency
to Bearings
Target products are critical components in the industrial drivetrain
- Close proximity to bearing positions
- Require same engineering expertise – friction, motion and materials
- Often served through same aftermarket channels
Excellent fit with Timken Business Model BRAKE
BEARINGS
ELECTRIC MOTOR SERVICES GEARBOX
SPLIT HOUSED
BEARINGS BEARINGS UNIT BEARING
COUPLING CLUTCH COUPLING
DRIVEN EQUIPMENT
PUMPS/COMPRESSORS
FANS
CONVEYORS
GENERATORS
MILLS
HOUSED UNIT CHAIN
BEARING
BEARINGS
LUBRICATION BELTS
SYSTEMS
18Building Our Power Transmission Platforms with
Bearings at the Core
LUBRICATION GEARS & COUPLINGS,
BEARINGS LINEAR MOTION BELTS & CHAIN
SYSTEMS GEAR DRIVES CLUTCHES & BRAKES
Strengthening Our Position in Attractive Markets Around the World
19Financial Review and
Capital Allocation
203Q 2018: Delivering Next-Level Financial Performance
NET SALES ($M) EBIT* ($M) EARNINGS PER SHARE*
REPORTED (GAAP) ADJUSTED REPORTED (GAAP) ADJUSTED
$881 $127 $1.06
$109 $0.91
$771 $90
$85 $0.71
$0.68
14.4%
11.7%
3Q-17 3Q-18 3Q-17GAAP3Q-18 3Q-17 3Q-18
Adjusted 3Q-17GAAP3Q-18 3Q-17 3Q-18
Adjusted
Sales up 14.2% from 3Q-17
– Reflects strong organic growth across both Process and Mobile Industries and the benefit of
acquisitions, partially offset by unfavorable currency
Adjusted EBIT margin at 14.4%, up 270 bps from 3Q-17
– Held strong margins from 2Q-18 despite seasonally lower volume and tariffs
Record 3rd quarter adj. EPS of $1.06 per diluted share, up 49% from 3Q-17
21
See appendix for reconciliations of EBIT, adjusted EBIT, adjusted EBIT margin and adjusted EPS to their most directly comparable GAAP equivalents.Cash Flow, Balance Sheet & Capital Allocation
BALANCE SHEET (AS OF: 9/30/18)
($M) Capital Structure
3Q-17 3Q-18 Cash $155.0
Debt 1,730.1
Net Cash from Operations $28.4 $137.1
Net Debt 1,575.1
Capital Expenditures (22.6) (23.2) Equity 1,640.4
Net Capital $3,215.5
Free Cash Flow $5.8 $113.9
Leverage
• Strong free cash flow in the quarter driven primarily by: Net Debt/Capital 49%
- Higher earnings in the current period Net Debt/Adjusted EBITDA TTM 2.6x
- Improved working capital performance versus the year-ago period PF Net Debt/Adj. EBITDA TTM(1) 2.4x
3Q-18 Update:
CAPITAL EXPENDITURES CapEx of $23M in the quarter; expect full year CapEx of ~$115M
DIVIDEND Paid 385th consecutive quarterly dividend in September ($22M)
ACQUISITIONS Completed the acquisitions of Cone Drive, Rollon Group and ABC Bearings
SHARE REPURCHASES Repurchased ~300K shares ($13M) in the third quarter; ~1.4 million shares repurchased YTD
See appendix for reconciliations of net debt, net debt/capital, adjusted EBITDA and pro forma adjusted EBITDA to their most directly comparable
22
GAAP equivalents.
(1) Adjusted EBITDA is pro forma to include estimated trailing twelve month EBITDA for Cone Drive, Rollon and ABC Bearings acquisitions.Exceeding Targets…With Room to Go
(Targets from May 2017 Investor Day)
STRATEGY TO DRIVE MEANINGFUL IMPROVEMENT IN FINANCIAL PERFORMANCE
REVENUE GROWTH OPERATING MARGINS FCF AND ROIC CAPITAL DEPLOYMENT
Organic: Market growth 11-13% adj. EBIT margin FCF conversion >100% Deploy cash and balance
plus 100 bps “outgrowth” Mobile Ind.: 10-12% ROIC average 12+% sheet with capital allocation
Inorganic: 200+ bps framework
Process Ind.: 16-19%
growth from acquisitions Net debt to capital: 30-45%
Drive above-market top-line growth and meaningful margin expansion
Target top-end of EBIT margin range (13%)
Generate strong cash flow and ROIC
Continue to deploy balance sheet to create value
23Tariffs and Estimated Impact on Timken
Timken serves the U.S. market primarily with its U.S. footprint and serves the China market primarily
with its China footprint
Total 3Q-18 impact from tariffs was ~$3M of additional expense
Estimated run-rate moving forward is $6-7M per quarter (pre-mitigation)
We continue to pursue tactics to reduce the impact of tariffs – including sourcing, supply chain and
other initiatives; expect these actions to mitigate over one-third of the impact
With the impact of targeted pricing, would expect to fully mitigate tariff impact in 2019
Tariffs Expected to be a Manageable Headwind
242018 Outlook Update
PRIOR 2018 CURRENT 2018
CURRENT OUTLOOK:
OUTLOOK OUTLOOK
FULL YEAR 2018 VS. 2017
(JULY 31, 2018) (OCTOBER 30, 2018)
Net Sales ~$3.6B ~$3.6B Net sales estimated to be up ~19.5%
GAAP EPS $3.90 to $4.00 $3.98 to $4.03
~+14% ~+5.5% ~flat
Organic Acquisitions Currency
Adjusted EPS $4.10 to $4.20 $4.18 to $4.23
----- Components (at mid-point) -----
Net Cash from Outlook includes Cone Drive, Rollon and ABC
~$370M ~$375M
Operations Bearings acquisitions
Adjusted EPS up 60% at the mid-point
Free Cash Flow ~$250M ~$260M
- Adj. EBIT margins up ~300 bps; price-cost positive
Free Cash Flow ~80% of adjusted net income
- CapEx of ~$115M
EPS outlook does not include the impact of any potential mark-to-market pension remeasurement adjustments. See appendix for reconciliations of 25
adjusted EPS and free cash flow to their most directly comparable GAAP equivalents. Free cash flow is defined as net cash provided by operating
activities minus capital expenditures.Disciplined Capital Allocation Strategy Enhances
Shareholder Value
INVEST IN CORE BUSINESS
Organic Growth, Margin Improvement, R&D
CapEx Target: ~4% of Sales
DIVIDEND
Pay Attractive Dividend
Target: 25-40% Payout Ratio Over Cycle
INORGANIC GROWTH SHARE REPURCHASE
Target Accretive Transactions Return Capital to Shareholders
to Drive Portfolio Expansion Through Stock Buybacks
LEVERAGE TARGET: 30-45% NET DEBT TO CAPITAL
26Investing in Core Business Remains Top Priority for Growth
BREAKDOWN OF TARGET CAPEX
Investing in core business remains top priority for
capital allocation
- Generally produces the highest risk-adjusted returns
Maintenance,
Repair &
Includes investments in CapEx, R&D, etc. Operations
CapEx – targeted at ~4% of sales annually over
the cycle
- Includes normal maintenance (~1% of sales)
Growth/
- Bulk of spend (~3% of sales) allocated to organic Excellence
growth and productivity/margin improvement
initiatives
o New capacity/capabilities in lower-cost countries GROWTH:
Add new capabilities/capacity
o Investments in productivity/automation in OPERATIONAL EXCELLENCE:
higher-cost countries Improve productivity and margins
27Rich History of Attractive and Growing Dividend
ANNUAL DIVIDEND PAYOUT
Goal: Pay an attractive dividend that grows over time
with earnings $1.11
$1.04 $1.07
$1.00 $1.03
- Target 25-40% payout (adj. EPS) $0.92 $0.92
$0.78
In 2018:
$0.53
- Increased quarterly dividend 4% to 28 cents per share $0.45
in May 2018
o Reflects the company’s financial strength and our
confidence in our strategy and future growth
prospects 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E (1)
- Declared 385th consecutive quarterly dividend in
August 2018
DIVIDEND YIELD (AS OF: 10/30/18)
o One of the longest active streaks on NYSE
The Timken Company 2.9%
2018 expected to be 5th consecutive year of annual
Peer Median(2) 1.4%
dividend increases(1)
S&P 500 2.1%
Commitment to dividend will continue
S&P Mid-Cap 400 Industrials 1.4%
28
(1) Subject to Board approval on a quarterly basis.
(2) Peers represent composite of 18-company group consisting primarily of S&P 400 Mid-Cap Industrials.Returning Capital Through Share Repurchases
BASIC SHARES OUTSTANDING (MILLIONS)
Share repurchase an important component of capital
allocation strategy 90.7
Since June 30, 2014:
- Repurchased 16.6M shares for $637M (avg. ~$38/share)
o Basic shares outstanding reduced by ~15% since 76.9
June 30, 2014
6/30/14 9/30/18
Current share repurchase authorization:
- 10 million shares authorized for repurchase through
February 2021
- ~7.7 million shares remaining as of 9/30/18
29M&A: What We Look To Achieve
Existing
Portfolio
Industrial
Bearings
Adjacent
Products
Stronger. Together.
DELIVER FINANCIAL VALUE STRENGTHEN THE COMPANY’S STRATEGIC POSITION
Discipline & Returns Customer Cost Mix Talent
Maintain financial discipline & Reach Scale, Growth, Leverage existing
deliver returns Customers, operational technology, & add new
ROIC – earn the cost of capital channels, excellence & margins, diversity
by Year 3 markets & business & cyclicality
EPS – accretive in Year 1 geography capabilities
Improve mix – margins & growth
30Timken Is Positioned to Deliver Next-Level Performance
We will:
Win with customers – innovate, differentiate, deliver value
Outgrow improving end markets through the differentiators
of the Timken Business Model
Invest in the business to drive competitive advantage
Generate strong cash flow and create value through
capital allocation – core business, dividend, M&A and buyback
Deliver next-level financial performance – revenue,
margins, EPS and ROIC
31Why Invest in Timken?
Leading market, brand and technical position
Focused, talented and committed management team TOTAL SHAREHOLDER RETURNS – 10 YEAR
Strong track record of results; exceeding targets 18% 15.9%
15%
Sound strategy to: 12%
9%
- Grow and improve market position 6%
3%
- Deliver higher levels of financial performance
0%
Timken is a compelling investment TKR Peer Median S&P 500 S&P Mid-Cap 400
Total Shareholder Returns as of 10/31/18. All periods include reinvestment of dividends. Peers represent composite of 18-company group 32
consisting primarily of S&P 400 Mid-Cap Industrials. The 10-Year period takes into account the value of the TimkenSteel Corporation common
shares distributed in the spinoff completed on June 30, 2014.Appendix:
Additional Slides
332017 INCENTIVE
Incentive COMPENSATION
Compensation Plans PLAN
ANNUAL (STIP) LONG-TERM (LTIP)
Short-Term Operational 3-Year Strategic Long-Term Shareholder
OBJECTIVE
Business Priorities Business Priorities Value Creation
~275 Leadership ~100 Senior Leadership
PARTICIPANTS ~11,800 Associates Globally ~275 Leadership Associates
Associates Associates
4-Year 4-Year Vesting with
TIME HORIZON 1 Year 3 Years
Vesting a 10-Year Term
EBIT Cumulative EPS
(1) Share Price
METRICS Working Capital as a % of Sales ROIC Share Price
and Dividend
EBIT Margin Share Price and Dividend
Equity – Time-Based
Equity – Performance-Based Equity – Non-Qualified
AWARD Cash Restricted
Restricted Stock Units Stock Options
Stock Units
Compensation Aligned to Shareholder Value Creation
(1) Represents metrics applicable to participants in the corporate STIP plan. Metrics for individual business unit STIPs can vary.
34Appendix:
GAAP Reconciliations
35GAAP Reconciliation: Consolidated EBIT and EBIT Margin
Reconciliation of EBIT to GAAP Net Income, and EBIT Margin, After Adjustments, to Net Income as a Percentage of Sales and EBIT, 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 and taxes (EBIT) 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 EBIT. Management also believes that non-GAAP measures of adjusted EBIT and adjusted EBIT 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.
Three Months Ended Twelve Months Ended
(Dollars in millions) September 30, September 30,
Percentage to Percentage to Percentage to
2018 Net Sales 2017 Net Sales 2018 Net Sales
Net Income $ 72.3 8.2% $ 54.1 7.0% $ 272.8 7.9%
Provision for income taxes 25.0 2.8% 21.1 2.7% 112.6 3.3%
Interest expense 12.5 1.4% 10.1 1.3% 43.8 1.3%
Interest income (0.6) —% (0.7) —% (2.4) (0.1)%
Consolidated EBIT $ 109.2 12.4% $ 84.6 11.0% $ 426.8 12.4%
Adjustments:
Impairment, restructuring and reorganization charges (1) $ 3.1 0.3% $ 2.6 0.3% $ 7.1 0.2%
Acquisition-related charges (2) 8.8 1.0% 4.4 0.6% 11.1 0.3%
Gain on sale of real estate (3) — —% (1.6) (0.2)% — —%
Pension-related charges (4) 5.3 0.6% — —% 16.8 0.5%
Tax indemnification and related items 0.3 —% — —% 0.6 —%
Loss on divestiture (5) 0.6 0.1% — —% 0.6 —%
Total Adjustments 18.1 2.0% 5.4 0.7% 36.2 1.0%
Adjusted EBIT $ 127.3 14.4% $ 90.0 11.7% $ 463.0 13.4%
(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 makes adjustments as needed that result in restructuring charges. However, management believes these actions are not representative of the Company’s core operations.
(2)
Acquisition-related charges in 2018 relate to the ABC Bearings, Cone Drive and Rollon acquisitions. In 2017, acquisition-related charges relate to the Groeneveld, Torsion Control Products, PT Tech and EDT acquisitions, including transaction costs
and inventory step-up impact.
(3) The gain on the sale of real estate related to the sale of a manufacturing facility in South Africa and a manufacturing facility in Altavista, Virginia during the second and third quarter of 2017, respectively. This amount was recorded in other income.
(4)
Pension-related charges represent actuarial (gains) and losses that resulted from the remeasurement of pension plan assets and obligations as a result of changes in assumptions. The Company recognizes actuarial (gains) and losses through
earnings in connection with the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement.
(5) Loss on divestiture relates to the sale of the ICT Business, located in Gorinchem, Netherlands.
36GAAP Reconciliation: Net Income and EPS
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.
Three Months Ended Twelve Months Ended
(Dollars in millions, except share data) September 30, September 30,
2018 EPS 2017 EPS 2018 EPS
Net Income Attributable to The Timken Company $ 71.6 $ 0.91 $ 53.5 $ 0.68 $ 272.8 $ 3.46
Adjustments: (1)
Impairment, restructuring and reorganization charges (2) $ 3.1 $ 2.6 $ 7.1
Acquisition-related charges (3) 8.8 4.4 11.1
Gain on sale of real estate (4) — (1.6) —
Pension-related charges (5) 5.3 — 16.8
Loss on divestiture (6) 0.6 — 0.6
Tax indemnification and related items 0.3 — 0.6
Noncontrolling interest (7) (0.6) — (0.6)
Provision for income taxes (8) (6.2) (3.0) (3.6)
Total Adjustments: 11.3 0.15 2.4 0.03 32.0 0.40
Adjusted Net Income to The Timken Company $ 82.9 $ 1.06 $ 55.9 $ 0.71 $ 304.8 $ 3.86
(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; and (iii) severance related to cost reduction initiatives. The Company
re-assesses its operating footprint 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)
Acquisition-related charges in 2018 relate to the ABC Bearings Limited ("ABC Bearings"), Apiary Investments Holdings Limited ("Cone Drive") and Rollon S.p.A. ("Rollon") acquisitions. In 2017, acquisition-related charge related to the
Groeneveld Group ("Groeneveld"), Torsion Control Products, Inc. ("Torsion Control Products"), PT Tech, Inc. ("PT Tech") and EDT Corp. ("EDT") acquisitions, including transaction costs and inventory step-up impact.
(4)The gain on the sale of real estate related to the sale of a manufacturing facility in South Africa and a manufacturing facil ity in Altavista, Virginia during the second and third quarter of 2017, respectively. This amount was recorded in other
income.
(5)Pension-related charges represent actuarial (gains) and losses that resulted from the remeasurement of pension plan assets and obligations as a result of changes in assumptions. The Company recognizes actuarial (gains) and losses
through earnings in connection with the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement.
(6) Loss on divestiture relates to the sale of the Groeneveld Information Technology Holding B.V. (the "ICT Business"), located in Gorinchem, Netherlands.
(7) Noncontrolling interest adjustments include acquisition related charges attributable to noncontrolling interest.
(8)
Provision for income taxes includes the net tax impact on pre-tax adjustments, the impact of discrete tax items recorded during the respective periods, as well as adjustments to reflect the use of one overall effective tax rate on adjusted pre-
tax income in interim periods.
37GAAP Reconciliation: Segment EBIT and EBIT Margin
Reconciliation of segment EBIT Margin, After Adjustments, to segment EBIT as a Percentage of Sales and segment EBIT, After Adjustments, to segment EBIT:
(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 EBIT and adjusted EBIT 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
Twelve Months
Ended Percentage to Net
(Dollars in millions) September 30, 2018 Sales
Earnings before interest and taxes (EBIT) $ 188.2 10.1%
Restructuring and reorganization charges (1) 4.4 0.2%
Loss on divestiture (2) 0.6 —%
Acquisition related charges (3) 2.4 0.1%
Pension related charges (4) 5.0 0.3%
Adjusted EBIT $ 200.6 10.7%
Process Industries
Twelve Months
Ended Percentage to Net
(Dollars in millions) September 30, 2018 Sales
Earnings before interest and taxes (EBIT) $ 309.6 19.6%
Restructuring and reorganization charges (1) 1.2 0.1%
Acquisition related charges (3) 1.4 0.1%
Pension related charges (4) 0.7 —%
Adjusted EBIT $ 312.9 19.8%
(1) 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 makes adjustments as needed that result in restructuring charges. However, management believes these actions are not representative of the
Company’s core operations.
(2) Loss on divestiture relates to the sale of the ICT Business, located in Gorinchem, Netherlands.
(3)
Acquisition-related charges in 2018 relate to the ABC Bearings, Cone Drive and Rollon acquisitions. In 2017, acquisition-related charges relate to the Groeneveld, Torsion Control Products, PT Tech and
EDT acquisitions, including transaction costs and inventory step-up impact.
(4) Pensionrelated charges represent actuarial losses that resulted from the remeasurement of pension plan assets and obligations as a result of changes in assumptions. The Company recognizes actuarial
(gains) and losses through earnings in connection with the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement.
38GAAP Reconciliation: Net Debt and Net Debt to Capital
Reconciliation of Total Debt to Net Debt and the Ratio of Net Debt to Capital to the Ratio of Total Debt to Capital:
(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 total debt to capital, is a non-GAAP measure defined as total debt plus total shareholders'
equity. Capital, used for the ratio of net debt to capital, is a non-GAAP measure defined as total debt less cash, cash equivalents and restricted cash plus total shareholders' equity. Management believes Net Debt and the Ratio of Net Debt to Capital are
important measures of the Company's financial position, due to the amount of cash and cash equivalents on hand.
(Dollars in millions)
September 30, December 31,
2018 2017
Short-term debt, including current portion of long-term debt $ 48.4 $ 108.1
Long-term debt 1,681.7 854.2
Total Debt $ 1,730.1 $ 962.3
Less: Cash, cash equivalents and restricted cash (155.0) (125.4)
Net Debt $ 1,575.1 $ 836.9
Total Equity $ 1,640.4 $ 1,474.9
Ratio of Total Debt to Capital 51.3% 39.5%
Ratio of Net Debt to Capital 49.0% 36.2%
39GAAP Reconciliation: Consolidated EBITDA
Reconciliation of EBIT, EBIT, After Adjustments, EBITDA, After Adjustments, and Pro Forma 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 and taxes (EBIT) 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 EBIT. Management believes that non-GAAP measures of adjusted EBIT and adjusted earnings before
interest, taxes, depreciation and amortization (EBITDA) 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. Management also believes that the non-GAAP measure of adjusted Pro Forma EBITDA is useful to investors as it is representative of the Company’s performance including a full year impact from acquired companies.
Twelve Months Ended
(Dollars in millions) September 30, 2018
Net Income $ 272.8
Provision for income taxes 112.6
Interest expense 43.8
Interest income (2.4)
Consolidated EBIT $ 426.8
Adjustments:
Impairment, restructuring and reorganization charges (1) $ 7.1
Acquisition-related charges (2) 11.1
Loss on divestiture (3) 0.6
Pension-related charges (4) 16.8
Tax indemnification and related items 0.6
Total Adjustments 36.2
Adjusted EBIT $ 463.0
Adjusted depreciation and amortization (5) 141.0
Adjusted EBITDA (6) $ 604.0
Pro Forma Estimated Adjusted EBITDA from acquisitions (7) 60.0
Pro Forma Adjusted EBITDA (8) $ $664.0
(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 makes adjustments as needed that result in restructuring charges. However, management believes these actions are not representative of the Company’s core operations.
(2)
Acquisition-related charges in 2018 relate to the ABC Bearings, Cone Drive and Rollon acquisitions. In 2017, acquisition charges relate to the Groeneveld, Torsion Control Products, PT Tech and EDT acquisitions, including transaction costs and
inventory step-up impact.
(3) Loss on divestiture relates to the sale of the ICT Business, located in Gorinchem, Netherlands.
(4)
Pension-related charges represent actuarial (gains) and losses that resulted from the remeasurement of pension plan assets and obligations as a result of changes in assumptions. The Company recognizes actuarial (gains) and losses through
earnings in connection with the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement.
(5) Adjusted deprecation and amortization removes the impact of deprecation recognized in reorganization charges.
(6) Twelve months trailing adjusted EBITDA reflects results from acquired companies from the acquisition date through September 30, 2018.
(7) Pro forma adjusted EBITDA from acquisitions reflects the estimated twelve months trailing EBITDA results from acquired companies through September 30, 2018, less EBITDA included above.
(8) Twelve months trailing pro forma adjusted EBITDA reflects estimated results from acquired companies for the last twelve months through September 30, 2018.
40GAAP Reconciliation: Adjusted EPS & Free Cash Flow Outlook
Reconciliation of Adjusted Earnings per Share to GAAP Earnings per Share for Full Year 2018 Outlook:
(Unaudited)
The following reconciliation is provided as additional relevant information about the Company's outlook deemed useful to investors. Forecasted full year adjusted diluted earnings per share is an important financial measure
that management believes is useful to investors as it is representative of the Company's expectation for the performance of its core business operations.
Low End High End
Earnings Earnings
Per Share Per Share
Forecasted full year GAAP diluted earnings per share $ 3.98 $ 4.03
Forecasted Adjustments:
Restructuring and other special items, net (1) 0.20 0.20
Total Adjustments: $ 0.20 $ 0.20
Forecasted full year adjusted diluted earnings per share $ 4.18 $ 4.23
(1) Restructuring and other special items, net do not include the impact of any potential mark-to-market pension and other postretirement remeasurement adjustment, because the amount will not be known until incurred.
Reconciliation of Free Cash Flow to GAAP Net Cash Provided by Operating Activities for Full Year 2018 Outlook:
(Unaudited)
Forecasted full year free cash flow is a non-GAAP measure that is useful to investors because it is representative of the Company's expectation of cash that will be generated from operating activities and available for the
execution of its business strategy.
Free Cash Flow
(Dollars in Millions) Outlook
Net cash provided by operating activities $ 375.0
Less: capital expenditures (115.0)
Free cash flow $ 260.0
41You can also read
