Timken Reports Strong First-Quarter 2018 Results; Raises Full-Year Outlook

Conference Call:

Tuesday, May 1, 2018

11 a.m. Eastern Time

Live Dial-In: 800-239-9838 or 323-794-2551

(Call in 10 minutes prior to be included.)

Conference ID: Timken's 1Q Earnings Call

Conference Call Replay:

Replay Dial-In available through May 15, 2018:

888-203-1112 or 719-457-0820

Replay Passcode: 9332277

Live Webcast:

http://investors.timken.com

The Timken Company

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in millions, except per share data)

Three Months Ended
March 31,

2018

2017

Net sales

$

883.1

$

703.8

Cost of products sold

618.2

521.6

Gross Profit

264.9

182.2

Selling, general & administrative expenses

148.6

117.6

Impairment and restructuring charges

0.2

1.7

116.1

62.9

Other income (expense), net

2.3

(2.0)

Earnings Before Interest and Taxes (EBIT) ⁽¹⁾

118.4

60.9

Interest expense, net

(9.6)

(7.3)

Income Before Income Taxes

108.8

53.6

Provision for income taxes

28.3

15.5

Net Income

80.5

38.1

Less: Net income (loss) attributable to noncontrolling interest

0.3

(0.1)

$

80.2

$

38.2

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

    Basic Earnings per share

$

1.03

$

0.49

    Diluted Earnings per share

$

1.02

$

0.48

Average Shares Outstanding

77,734,153

77,731,793

Average Shares Outstanding - assuming dilution

79,013,185

78,893,954

⁽¹⁾ EBIT is a non-GAAP measure defined as operating income plus other income (expense). EBIT is an important financial measure used in the management of the business, including decisions concerning the allocation of resources and assessment of performance. Management believes that reporting EBIT is useful to investors as this measure is representative of the Company's core operations.

BUSINESS SEGMENTS

(Unaudited)

Three Months Ended
March 31,

(Dollars in millions)

2018

2017

Mobile Industries

Net sales

$

488.5

$

383.0

Earnings before interest and taxes (EBIT) ⁽¹⁾

$

51.1

$

32.6

EBIT Margin ⁽¹⁾

10.5

%

8.5

%

Process Industries

Net sales

$

394.6

$

320.8

Earnings before interest and taxes (EBIT) ⁽¹⁾

$

81.6

$

44.1

EBIT Margin ⁽¹⁾

20.7

%

13.7

%

Corporate expense

$

(14.3)

$

(15.8)

Consolidated

Net sales

$

883.1

$

703.8

Earnings before interest and taxes (EBIT) ⁽¹⁾

$

118.4

$

60.9

EBIT Margin ⁽¹⁾

13.4

%

8.7

%

⁽¹⁾ EBIT is a non-GAAP measure defined as operating income plus other income (expense). EBIT Margin is a non-GAAP measure defined as EBIT as a percentage of net sales. EBIT and EBIT 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 EBIT and EBIT Margin is useful to investors as these measures are representative of the core operations of the segments and Company, respectively.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

(Unaudited)

March 31,
2018

December 31,
2017

ASSETS

Cash, cash equivalents and restricted cash

$

120.3

$

125.4

Accounts receivable, net

535.1

524.9

Contract assets

111.4

—

Inventories, net

776.8

738.9

Other current assets

102.2

110.9

  Total Current Assets

1,645.8

1,500.1

Property, plant and equipment, net

865.4

864.2

Goodwill and other intangible assets

930.5

932.4

Non-current pension assets

23.9

19.7

Other assets

83.9

86.0

Total Assets

$

3,549.5

$

3,402.4

LIABILITIES

Accounts payable

$

266.6

$

265.2

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

169.8

108.1

Income taxes

12.2

9.8

Accrued expenses

253.7

288.6

  Total Current Liabilities

702.3

671.7

Long-term debt

896.5

854.2

Accrued pension cost

168.5

167.3

Accrued postretirement benefits cost

122.5

122.6

Other non-current liabilities

116.9

111.7

  Total Liabilities

2,006.7

1,927.5

EQUITY

The Timken Company shareholders' equity

1,510.9

1,442.7

Noncontrolling Interest

31.9

32.2

  Total Equity

1,542.8

1,474.9

Total Liabilities and Equity

$

3,549.5

$

3,402.4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended
March 31,

(Dollars in millions)

2018

2017

Cash Provided by (Used in)

OPERATING ACTIVITIES

Net income attributable to The Timken Company

$

80.2

$

38.2

Net income (loss) attributable to noncontrolling interest

0.3

(0.1)

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

  Depreciation and amortization

35.8

32.9

  Pension and other postretirement expense

2.0

7.2

  Pension and other postretirement benefit contributions

(6.1)

(6.1)

  Changes in operating assets and liabilities:

  Accounts receivable

(72.1)

(50.3)

  Contract assets

(11.5)

—

  Inventories

(53.8)

(6.5)

  Accounts payable

(2.3)

48.6

  Accrued expenses

(38.7)

(28.4)

  Income taxes

13.4

8.2

8.5

3.0

Net Cash (Used in) Provided by Operating Activities

$

(44.3)

$

46.7

INVESTING ACTIVITIES

Capital expenditures

$

(17.8)

$

(19.3)

Investments in short-term marketable securities, net

3.7

(6.8)

Other, net

0.1

(0.8)

Net Cash Used in Investing Activities

$

(14.0)

$

(26.9)

FINANCING ACTIVITIES

Cash dividends paid to shareholders

$

(21.1)

$

(20.3)

Purchase of treasury shares

(22.7)

(8.1)

Proceeds from exercise of stock options

8.4

16.6

Shares surrendered for taxes

(4.4)

(8.2)

Net proceeds (payments) from credit facilities

93.6

(22.6)

Net payments from long-term debt

(0.4)

(0.3)

Other, net

(1.1)

—

Net Cash Provided by (Used in) Financing Activities

$

52.3

$

(42.9)

Effect of exchange rate changes on cash

0.9

3.9

Decrease in Cash, Cash Equivalents and Restricted Cash

$

(5.1)

$

(19.2)

Cash, Cash Equivalents and Restricted Cash at Beginning of Period

125.4

151.6

Cash, Cash Equivalents and Restricted Cash at End of Period

$

120.3

$

132.4

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
March 31,

2018

EPS

2017

EPS

Net Income Attributable to The Timken Company

$

80.2

$

1.02

$

38.2

$

0.48

Adjustments: ⁽¹⁾

  Impairment, restructuring and reorganization charges ⁽²⁾

$

0.7

$

4.6

  Acquisition related charges

—

0.1

  Pension related charges ⁽³⁾

0.2

4.4

  Tax indemnification

0.3

—

  Provision for income taxes ⁽⁴⁾

(1.4)

(3.6)

      Total Adjustments:

(0.2)

(0.01)

5.5

0.07

Adjusted Net Income from The Timken Company

$

80.0

$

1.01

$

43.7

$

0.55

⁽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⁾ Pension related charges during the first quarter of 2017 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.

⁽⁴⁾ 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.

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.

(Dollars in millions)

Three Months Ended
March 31,

Percentage to
Net Sales

2017

Percentage to

Net Sales

Net Income

$

80.5

9.1

%

$

38.1

5.4

%

Provision for income taxes

28.3

3.2

%

15.5

2.2

%

Interest expense

10.0

1.1

%

7.9

1.1

%

Interest income

(0.4)

—

%

(0.6)

—

%

Consolidated EBIT

$

118.4

13.4

%

$

60.9

8.7

%

Adjustments:

  Impairment, restructuring and reorganization charges ⁽¹⁾

$

0.7

0.1

%

$

4.6

0.6

%

  Acquisition related charges

—

—

%

0.1

—

%

  Pension related charges ⁽²⁾

0.2

—

%

4.4

0.6

%

  Tax indemnification

0.3

—

%

—

—

%

     Total Adjustments

1.2

0.1

%

9.1

1.2

%

Adjusted EBIT

$

119.6

13.5

%

$

70.0

9.9

%

⁽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 makes adjustments as needed that result in restructuring charges.  However, management believes these actions are not representative of the Company's core operations. 

⁽²⁾ Pension related charges during the first quarter of 2017 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.

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
March 31, 2018

Percentage to Net Sales

Three Months
Ended
March 31, 2017

Percentage to Net Sales

Earnings before interest and taxes (EBIT)

$

51.1

10.5

%

$

32.6

8.5

%

  Impairment, restructuring and reorganization charges ⁽¹⁾

0.7

0.1

%

4.0

1.1

%

Adjusted EBIT

$

51.8

10.6

%

$

36.6

9.6

%

Process Industries

(Dollars in millions)

Three Months
Ended
March 31, 2018

Percentage to Net Sales

Three Months
Ended
March 31, 2017

Percentage to Net Sales

Earnings before interest and taxes (EBIT)

$

81.6

20.7

%

$

44.1

13.7

%

  Acquisition related charges

—

—

%

0.1

0.1

%

Adjusted EBIT

$

81.6

20.7

%

$

44.2

13.8

%

⁽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. 

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)

March 31,
2018

December 31,
2017

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

$

169.8

$

108.1

Long-term debt

896.5

854.2

  Total Debt

$

1,066.3

$

962.3

Less: Cash, cash equivalents and restricted cash

(120.3)

(125.4)

Net Debt

$

946.0

$

836.9

Total Equity

$

1,542.8

$

1,474.9

Ratio of Total Debt to Capital

40.9

%

39.5

%

Ratio of Net Debt to Capital

38.0

%

36.2

%

Reconciliation of Free Cash Flow to GAAP Net Cash (Used in) 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
March 31,

2018

2017

Net cash (used in) provided by operating activities

$

(44.3)

$

46.7

Less: capital expenditures

(17.8)

(19.3)

Free cash flow

$

(62.1)

$

27.4

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
Earnings
Per Share

High End
Earnings
Per Share

Forecasted full year GAAP diluted earnings per share

$

3.80

$

3.90

Forecasted Adjustments:

  Restructuring and other special items, net ⁽¹⁾

0.10

0.10

Total Adjustments:

$

0.10

$

0.10

Forecasted full year adjusted diluted earnings per share

$

3.90

$

4.00

⁽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.

(Dollars in Millions)

Free Cash Flow Outlook

Net cash provided by operating activities

$

370.0

Less: capital expenditures

(120.0)

Free cash flow

$

250.0