3Q 2017 Earnings Investor Presentation

Transcription

1 3Q 2017 Earnings Investor Presentation OCTOBER 25, 2017 Delivering Next-Level Performance

2 Agenda Introduction - Jason Hershiser Manager, Investor Relations Overview and Business Update - Rich Kyle President & CEO Financial Review - Phil Fracassa Executive Vice President & CFO Q&A Session 2

3 Forward-Looking Statements Safe Harbor & 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 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, including the information under the headings, Continuing to Advance Our Strategy, 2017 Outlook Update, 3Q 2017 Financial Comparison Net Income & Diluted EPS, Mobile Industries, Process Industries, and Cash Flow, Balance Sheet & Capital Allocation 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 finalization of the company's financial statements for the third quarter of 2017; 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; weakness in global or regional economic conditions and capital markets; 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 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, and capital investments; and retention of U.S. Continued Dumping and Subsidy Offset Act (CDSOA) distributions. 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, 2016, 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. 3

4 Overview and Business Update Rich Kyle President and Chief Executive Officer 4

5 3Q 2017: Strong Results, Growth in Multiple End-Market Sectors Sales of $771 million in 3Q-17, up over 17% from prior year - Sales up 9% organically Adjusted EBIT margin of 11.7%, up 140 bps from prior year Adjusted EPS of $0.71, up 34% from prior-year period Strong execution in the quarter Continued progress on integrating recently acquired businesses - Completed financing arrangements for Groeneveld Returned $35 million in capital to shareholders during the quarter - Repurchase of 312,000 shares and payment of 381 st consecutive quarterly dividend See appendix for reconciliations of adjusted EBIT margin and adjusted EPS to their most directly comparable GAAP equivalents. 5

6 Continuing to Advance Our Strategy 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 Optimize processes and SG&A efficiency NEXT-LEVEL 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 6

7 Driving Value Through Acquisitions Since 2010, Timken has spent more than $1B on 15 acquisitions, adding TTM revenue of ~$680M over that period Spherical housed unit bearings and elastomeric couplings Industrial gear drives and repair services Electric motor repair and related services Lubrication systems Electric motor repair and related services Industrial and commercial belts Industrial couplings and universal joints Engineered torsional couplings Chains, augers Electric motor repair and related services Split roller housed unit bearings Polymer housed unit bearings and stainless steel ball bearings Industrial clutches and brakes Engineered bearings Mechanical power transmission products and services Industrial gears and repair services Lubrication systems * Announced agreement to acquire ABC Bearings Ltd.; expected to close in early 2018 Since 2010: Spent >$1B on 15 acquisitions, adding TTM revenue of ~$680M over that period 7

8 2017 Outlook Update JULY GUIDANCE CURRENT OUTLOOK CURRENT OUTLOOK: FULL YEAR 2017 VS Net Sales $2.95B to $2.98B ~$2.99B Net sales up approximately 12% GAAP EPS $2.60 to $2.70 $2.78 to $2.83 Adjusted EPS $2.50 to $2.60 $2.58 to $2.63 Net Cash from Operations ~$325M ~$280M Free Cash Flow ~$210M ~$180M +7% Organic +4.5% Acquisitions Components (at mid-point) Adjusted EPS up 22% at the mid-point Free Cash Flow ~0.9x adjusted net income CapEx of % of sales +0.5% Currency EPS outlook does not include the impact of any potential mark-to-market pension remeasurement adjustments. See appendix for reconciliations of 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. 8

9 Financial Review Phil Fracassa Executive Vice President and Chief Financial Officer 9

10 3Q 2017 Financial Overview NET SALES ($M) EBIT* ($M) EARNINGS PER SHARE* $771 REPORTED (GAAP) $85 ADJUSTED $90 REPORTED (GAAP) $0.68 ADJUSTED $0.71 $657 $68 $0.53 $57 $ % 11.7% 3Q-16 3Q-17 3Q-16 GAAP3Q-17 3Q-16 Adjusted 3Q-17 3Q-16 GAAP3Q-17 3Q-16 Adjusted 3Q-17 Sales up over 17% from 3Q-16 Reflects strong organic growth, recent acquisitions and favorable currency Adjusted EBIT margin at 11.7%, up 140 bps from 3Q-16 Adjusted EPS of $0.71 per share, up 34% from 3Q-16 *2016 results include impact of change to mark-to-market accounting for pensions. See appendix for reconciliations of EBIT, adjusted EBIT, adjusted EBIT margin and adjusted EPS to their most directly comparable GAAP equivalents. 10

11 3Q 2017 Financial Highlights - Sales ($M) $44 $9 $771 3Q-17 VS. 3Q-16 SALES BY GEOGRAPHY (EXCLUDING CURRENCY IMPACT) $61 $657 Includes: EDT Torsion Control Products PT Tech Groeneveld +9% North America +35% EMEA +28% Asia- Pacific 3Q-16 Organic Acquisitions Currency 3Q-17 +4% Latin America Sales of $771.4 million, up 17.3% from a year ago - Sales up 9.2% organically, up 6.8% from acquisitions, up 1.3% from currency Organic revenue growth reflects higher demand across most end-market sectors led by industrial distribution and off-highway - All geographies up in the quarter from a year ago, led by Europe and Asia Certain data contained in the graph above has been rounded for presentation purposes. 11

12 3Q 2017 Financial Comparison - Adjusted EBIT ($M) Adjusted EBIT of $90 million or 11.7% of sales compares with $67.8 million or 10.3% of sales in the same period a year ago - Increase in adjusted EBIT driven by the impact of higher volume, favorable manufacturing performance, and the benefit of acquisitions and currency, partially offset by higher material/logistics and SG&A costs $23 $(2) $(9) $14 $(15) $6 $5 $90 $ % 10.3% 3Q-16 Volume Price/Mix Material/ Logistics Manufacturing SG&A/ Other Acquisitions Currency 3Q-17 Certain data contained in the graph above has been rounded for presentation purposes. See appendix for reconciliations of adjusted EBIT and adjusted EBIT margin to their most directly comparable GAAP equivalents. 12

13 3Q 2017 Financial Comparison - Net Income & Diluted EPS 3Q-16 3Q-17 $M EPS $M EPS Net Income / EPS Adjustments Adjusted Net Income / Adjusted EPS Average diluted shares outstanding: GAAP tax rate: Quarter Quarter $33.6 $0.43 $53.5 $ $42.1 $0.53 $55.9 $ million 78.8 million 30.9% 28.1% Adjusted tax rate: Quarter 29.5% 30.0% Adjusted EPS of $0.71 versus $0.53 in the same period last year, an increase of 34% GAAP tax rate of 28.1% in 3Q-17 Adjusted tax rate of 30.0% in 3Q-17 and YTD-17 - Expect to maintain adjusted tax rate of ~30% in 4Q-17 See appendix for reconciliations of adjusted net income and adjusted EPS to their most directly comparable GAAP equivalents. 13

14 Mobile Industries NET SALES ($M) EBIT ($M) CURRENT OUTLOOK: FULL YEAR 2017 VS $423 REPORTED (GAAP) $35 ADJUSTED $32 $38 Net sales up approximately 13% $353 $26 3Q-16 3Q-17 $383.2 $ Q-16 GAAP3Q-17 3Q-16 Adjusted 3Q-17 Sales of $422.8 million, up 19.7% from the same period last year - Organically, sales up 6.5% driven by increased demand in the off-highway and heavy truck sectors, partially offset by lower automotive demand - Sales up 12% from acquisitions, up 1.2% from currency 9.2% 8.9% +6% Organic +6.5% Acquisitions Components (at mid-point) % Currency Organic growth led by improved demand in the off-highway and heavy truck sectors, partially offset by softer demand in the rail sector Adjusted EBIT of $37.6 million, or 8.9% of sales - Adjusted EBIT reflects the impact of higher volume, favorable manufacturing performance, and the benefit of acquisitions and currency, partially offset by unfavorable price/mix and higher material/logistics and SG&A costs - Adjusted EBIT margins up slightly sequentially See appendix for reconciliations of adjusted EBIT and adjusted EBIT margin to their most directly comparable GAAP equivalents. 14

15 Process Industries NET SALES ($M) EBIT ($M) CURRENT OUTLOOK: FULL YEAR 2017 VS $349 REPORTED (GAAP) ADJUSTED $62 $62 Net sales up approximately 11% $42 $46 $304 3Q-16 3Q-17 $ % 17.7% 3Q-16 GAAP3Q-17 3Q-16 Adjusted 3Q-17 +8% Organic +2.5% Acquisitions Components (at mid-point) % Currency Sales of $348.6 million, up 14.6% from the same period last year - Organically, sales up 12.4% driven by increased demand in the industrial distribution and heavy industries sectors, and increased shipments in wind energy Organic growth reflects increased demand across most end-market sectors, led by industrial distribution - Sales up 0.7% from acquisitions, up 1.5% from currency Adjusted EBIT of $61.7 million, or 17.7% of sales - Increase in adjusted EBIT driven primarily by higher volume and favorable manufacturing performance, partially offset by higher material/logistics and SG&A costs See appendix for reconciliations of adjusted EBIT and adjusted EBIT margin to their most directly comparable GAAP equivalents. 15

16 Cash Flow, Balance Sheet & Capital Allocation ($M) Net Cash from Operations Capital Expenditures Free Cash Flow 3Q-16 3Q-17 YTD-16 YTD-17 $74.6 (34.0) $40.6 $28.4 (22.6) $5.8 $278.7 (84.4) $194.3 $142.9 (62.5) $80.4 Lower free cash flow reflects increased working capital to support higher sales levels and higher cash taxes, partially offset by higher earnings and lower CapEx. YTD-16 free cash flow includes CDSOA receipts of $54M pre-tax. BALANCE SHEET (AS OF: 9/30/17) Capital Structure Cash $141 Debt 1,006 Net Debt 865 Equity 1,456 Net Capital $2,321 Leverage Total Debt/Capital 41% Net Debt/Capital 37% CAPITAL EXPENDITURES DIVIDEND ACQUISITIONS SHARE REPURCHASES 3Q-17 Update CapEx of 2.9% of sales ($23M); expect full year CapEx of % of sales Paid 381 st consecutive quarterly dividend ($21M) Completed acquisition of Groeneveld Group ($283M); secured financing arrangements with attractive Euro-denominated debt Repurchased 312,000 shares (~$14M) in 3Q-17; 910,000 shares (~$41M) YTD See appendix for reconciliations of net debt and net debt/capital to their most directly comparable GAAP equivalents. 16

17 2017 Outlook Update JULY GUIDANCE CURRENT OUTLOOK CURRENT OUTLOOK: FULL YEAR 2017 VS Net Sales $2.95B to $2.98B ~$2.99B Net sales up approximately 12% GAAP EPS $2.60 to $2.70 $2.78 to $2.83 Adjusted EPS $2.50 to $2.60 $2.58 to $2.63 Net Cash from Operations ~$325M ~$280M Free Cash Flow ~$210M ~$180M +7% Organic +4.5% Acquisitions Components (at mid-point) Adjusted EPS up 22% at the mid-point Free Cash Flow ~0.9x adjusted net income CapEx of % of sales +0.5% Currency EPS outlook does not include the impact of any potential mark-to-market pension remeasurement adjustments. See appendix for reconciliations of 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. 17

18 Appendix 18

19 GAAP Reconciliation: Net Income & EPS Reconciliations of Adjusted Net Income to GAAP Net Income (Loss) and Adjusted Earnings Per Share to GAAP Earnings (Loss) 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, 2017 EPS 2016 EPS Net Income Attributable to The Timken Company $ 53.5 $ 0.68 $ 33.6 $ 0.43 Adjustments: (1) Impairment, restructuring and reorganization charges (2) $ 2.6 $ 7.3 Acquisition related charges (3) Gain on sale of real estate (4) (1.6) Pension related charges (5) 0.1 CDSOA (income) expense, net (6) 0.2 Health care plan modification costs (7) (Gain) loss on dissolution of subsidiary 0.9 (Benefit) provision for income taxes (8) (3.0) (2.5) Total Adjustments: Adjusted Net Income from The Timken Company $ 55.9 $ 0.71 $ 42.1 $ 0.53 (1) Adjustments are pre-tax, with net tax provision (benefit) 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 reassesses 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 2017 relate to the acquisition of Groeneveld Group ("Groeneveld"), Torsion Control Products, Inc. ("Torsion Control Products"), PT Tech, Inc. ("PT Tech") and EDT Corp. ("EDT"), including one-time transaction costs. (4) 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, Virgina during the second and third quarter of 2017, respectively. (5) In 2017, pension related 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. In 2016, pension related charges represented professional fees associated with the implementation of a group annuity contract. (6) CDSOA (income) expense, net, represents the amount of funds received by the Company from monies collected by U.S. Customs on entries of merchandise subject to anti-dumping orders that entered the U.S. prior to October 1, (7) Health care plan modification costs represent one-time charges associated with a redesign in medical insurance options available for active associates. In connection with the redesign, the Company elected to pay certain unused reimbursement account balances to associates impacted by the change in available options. (8) (Benefit) provision for income taxes includes the impact of discrete tax items recorded during the respective periods, including the net benefit of prior year tax matters during the second quarter of 2017, as well as the net tax impact on pre-tax adjustments, to reflect the use of one overall effective tax rate on adjusted pre-tax income in interim periods. 19

20 GAAP Reconciliation: Consolidated EBIT & EBIT Margin Reconciliation of EBIT to GAAP Net Income (Loss), and EBIT Margin, After Adjustments, to Net Income (Loss) as a Percentage of Sales and EBIT, After Adjustments, to Net Income (Loss): (Unaudited) The following reconciliation is provided as additional relevant information about the Company's performance deemed useful to investors. Management believes consolidated earnings (loss) 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 (loss) 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. (Dollars in millions) 2017 Three Months Ended September 30, Percentage to Net Sales 2016 Percentage to Net Sales Net Income $ % $ % Provision for income taxes % % Interest expense % % Interest income (0.7) % (0.4) (0.1)% Consolidated EBIT $ % $ % Adjustments: Impairment, restructuring and reorganization charges (1) $ % $ % CDSOA (income) expense, net (2) % 0.2 % Acquisition related charges (3) % % Gain on sale of real estate (4) Pension related charges (5) (1.6) (0.2)% % % 0.1 % (Gain) loss on dissolution of subsidiary % % Total Adjustments % % Adjusted EBIT $ % $ % (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) CDSOA (income) expense, net, represents the amount of funds received by the Company from monies collected by U.S. Customs on entries of merchandise subject to anti-dumping orders that entered the U.S. prior to October 1, (3) Acquisition related charges in 2017 relate to the acquisition of Groeneveld, Torsion Control Products, PT Tech and EDT, including one-time transaction costs. (4) 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, Virgina during the second and third quarter of 2017, respectively. (5) In 2017, pension related 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. In 2016, pension related charges represented professional fees associated with the implementation of a group annuity contract. 20

21 GAAP Reconciliation: Net Debt & 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, 2017 December 31, 2016 Short-term debt, including current portion of long-term debt $ 46.1 $ 24.2 Long-term debt Total Debt $ 1,005.9 $ Less: Cash, cash equivalents and restricted cash (140.5) (151.5) Net Debt $ $ Total equity $ 1,455.9 $ 1,310.9 Ratio of Total Debt to Capital 40.9% 33.5% Ratio of Net Debt to Capital 37.3% 27.9% 21

22 GAAP Reconciliation: Segment EBIT & 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 (Dollars in millions) Three Months Ended September 30, 2017 Percentage to Net Sales Three Months Ended September 30, 2016 Percentage to Net Sales Earnings before interest and taxes (EBIT) $ % $ % Impairment, restructuring and reorganization charges (1) % % Gain on sale of real estate (2) Health care plan modification costs (3) (1.6) (0.4)% % % % Acquisition related charges (4) % % Adjusted EBIT $ % $ % Process Industries (Dollars in millions) Three Months Ended September 30, 2017 Percentage to Net Sales Three Months Ended September 30, 2016 Percentage to Net Sales Earnings before interest and taxes (EBIT) $ % $ % Impairment, restructuring and reorganization charges (1) % % Loss on dissolution/divestment of subsidiary (2) % % Acquisition related charges (3) % % Adjusted EBIT $ % $ % (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) 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, Virgina during the second and third quarter of 2017, respectively. (3) Acquisition related charges in 2017 relate to the acquisition of Groeneveld, Torsion Control Products, PT Tech and EDT, including one-time transaction costs. 22

23 GAAP Reconciliation: Adjusted EPS & Free Cash Flow Outlook Reconciliation of Adjusted Earnings per Share to GAAP Earnings per Share for Full Year 2017 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. Forecasted full year GAAP diluted earnings per share $ 2.78 $ 2.83 Forecasted Adjustments: Impairment, restructuring and reorganization charges (1) Pension related charges (2) Acquisition related charges (3) (Benefit) provision for income taxes (4) (0.40) (0.40) Total Adjustments: $ (0.20) $ (0.20) Forecasted full year adjusted diluted earnings per share $ 2.58 $ 2.63 (1) Impairment, restructuring and reorganization charges relate to severance and other cost reduction initiatives, net of tax. (2) Pension related 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. The full year 2017 outlook does not account for the annual remeasurement because the amount will not be known until the fourth quarter. (3) Acquisition related charges in 2017, including one-time transaction costs. (4) (Benefit) provision for income taxes includes the impact of discrete tax items, including the net benefit of prior year tax matters during the second quarter of Low End Earnings Per Share High End Earnings Per Share Reconciliation of Free Cash Flow to GAAP Net Cash Provided by Operating Activities for Full Year 2017 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 $ Less: capital expenditures (100.0) Free cash flow $