Timken Reports Strong Third-Quarter 2017 Results; Raises Full-Year Outlook

Conference Call:

Wednesday, October 25, 2017

11 a.m. Eastern Time

Live Dial-In: 888-389-5988 or 719-457-2654

(Call in 10 minutes prior to be included.)

Conference ID: Timken's 3Q Earnings Call

Conference Call Replay:

Replay Dial-In available through November 8, 2017:

888-203-1112 or 719-457-0820

Replay Passcode: 2507783

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
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Net sales

$

771.4

$

657.4

$

2,225.8

$

2,015.0

Cost of products sold

554.4

487.7

1,626.5

1,477.7

Gross Profit

217.0

169.7

599.3

537.3

Selling, general & administrative expenses

134.0

107.3

377.4

332.6

Impairment and restructuring charges

1.3

5.3

3.8

18.7

81.7

57.1

218.1

186.0

Continued Dumping and Subsidy Offset Act income (expense), net ⁽¹⁾

—

(0.2)

—

53.6

Other income (expense), net

2.9

(0.1)

9.1

(1.8)

Earnings Before Interest and Taxes (EBIT) ⁽²⁾

84.6

56.8

227.2

237.8

Interest expense, net

(9.4)

(7.6)

(24.5)

(24.0)

Income Before Income Taxes

75.2

49.2

202.7

213.8

Provision for income taxes

21.1

15.2

28.5

65.8

Net Income

54.1

34.0

174.2

148.0

Less: Net income attributable to noncontrolling interest

0.6

0.4

—

0.3

Net Income Attributable to The Timken Company

$

53.5

$

33.6

$

174.2

$

147.7

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

    Basic Earnings per share

$

0.69

$

0.43

$

2.24

$

1.87

    Diluted Earnings per share

$

0.68

$

0.43

$

2.21

$

1.86

Average Shares Outstanding

77,694,974

77,935,783

77,766,828

78,808,179

Average Shares Outstanding - assuming dilution

78,804,296

78,617,476

78,889,930

79,471,756

⁽¹⁾ U.S. Continued Dumping and Subsidy Offset Act ("CDSOA") income (expense), net, represents the amount of funds received by the Company from monies collected by U.S. Customs and Border
Protection ("U.S. Customs") on entries of merchandise subject to anti-dumping orders that entered the U.S. prior to October 1, 2007.

⁽²⁾ 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
September 30,

Nine Months Ended
September 30,

(Dollars in millions)

2017

2016

2017

2016

Mobile Industries

Net sales

$

422.8

$

353.1

$

1,214.2

$

1,104.1

Earnings before interest and taxes (EBIT) ⁽¹⁾

$

34.9

$

25.9

$

100.1

$

95.3

EBIT Margin ⁽¹⁾

8.3

%

7.3

%

8.2

%

8.6

%

Process Industries

Net sales

$

348.6

$

304.3

$

1,011.6

$

910.9

Earnings before interest and taxes (EBIT) ⁽¹⁾

$

61.7

$

42.0

$

164.9

$

123.7

EBIT Margin ⁽¹⁾

17.7

%

13.8

%

16.3

%

13.6

%

Corporate expense

$

(12.0)

$

(10.9)

$

(37.8)

$

(34.8)

CDSOA income (expense), net ⁽²⁾

—

(0.2)

—

53.6

Consolidated

Net sales

$

771.4

$

657.4

$

2,225.8

$

2,015.0

Earnings before interest and taxes (EBIT) ⁽¹⁾

$

84.6

$

56.8

$

227.2

$

237.8

EBIT Margin ⁽¹⁾

11.0

%

8.6

%

10.2

%

11.8

%

⁽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 Company's core operations of the segments and Company, respectively.

⁽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, 2007.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

(Unaudited)

September 30,
2017

December 31,
2016

ASSETS

Cash and cash equivalents

$

137.2

$

148.8

Restricted cash

3.3

2.7

Accounts receivable

542.2

438.0

Inventories, net

687.5

553.7

Other current assets

104.1

68.7

Total Current Assets

1,474.3

1,211.9

Property, plant and equipment, net

842.2

804.4

Goodwill and other intangible assets

939.2

628.5

Non-current pension assets

31.6

32.1

Other assets

76.3

86.3

Total Assets

$

3,363.6

$

2,763.2

LIABILITIES

Accounts payable

$

248.1

$

176.2

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

46.1

24.2

Income taxes

7.4

16.9

Accrued expenses

267.1

235.4

Total Current Liabilities

568.7

452.7

Long-term debt

959.8

635.0

Accrued pension cost

160.3

154.7

Accrued postretirement benefits cost

126.7

131.5

Other non-current liabilities

92.2

78.4

Total Liabilities

1,907.7

1,452.3

EQUITY

The Timken Company shareholders' equity

1,423.0

1,279.7

Noncontrolling Interest

32.9

31.2

Total Equity

1,455.9

1,310.9

Total Liabilities and Equity

$

3,363.6

$

2,763.2

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

(Dollars in millions)

2017

2016

2017

2016

Cash Provided by (Used in)

OPERATING ACTIVITIES

Net income attributable to The Timken Company

$

53.5

$

33.6

$

174.2

$

147.7

Net income attributable to noncontrolling interest

0.6

0.4

—

0.3

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

Depreciation and amortization

35.7

33.3

102.5

98.3

Impairment charges

—

1.2

—

3.8

CDSOA receivable

—

6.2

—

—

Pension and other postretirement expense

2.7

4.8

12.6

14.5

Pension and other postretirement benefit contributions and payments

(4.1)

(8.0)

(16.3)

(22.3)

Changes in operating assets and liabilities:

Accounts receivable

(15.6)

7.5

(61.6)

12.2

Inventories

(47.3)

(5.4)

(85.4)

(13.6)

Accounts payable

5.2

2.5

55.7

15.0

Accrued expenses

13.9

(8.6)

15.9

(17.5)

Income taxes

(3.1)

(1.7)

(52.1)

27.5

(13.1)

8.8

(2.6)

12.8

Net Cash Provided by Operating Activities

$

28.4

$

74.6

$

142.9

$

278.7

INVESTING ACTIVITIES

Capital expenditures

$

(22.6)

$

(34.0)

$

(62.5)

$

(84.4)

Acquisitions

(283.1)

(62.1)

(347.2)

(62.8)

Other, net

7.2

3.8

2.3

3.9

Net Cash Used in Investing Activities

$

(298.5)

$

(92.3)

$

(407.4)

$

(143.3)

FINANCING ACTIVITIES

Cash dividends paid to shareholders

$

(21.0)

$

(20.3)

$

(62.4)

$

(61.4)

Purchase of treasury shares

(14.0)

(15.1)

(41.0)

(83.3)

Proceeds from exercise of stock options

2.0

0.3

27.7

0.7

Shares surrendered for taxes

(1.4)

(0.1)

(10.8)

(1.6)

Net proceeds (payments) from credit facilities

(304.5)

43.4

27.6

19.0

Net proceeds (payments) from long-term debt

299.4

(15.1)

299.4

(15.1)

Other, net

(4.1)

(2.8)

(4.2)

2.0

Net Cash Provided by (Used in) Financing Activities

$

(43.6)

$

(9.7)

$

236.3

$

(139.7)

Effect of exchange rate changes on cash

5.8

0.4

16.6

3.7

Decrease in Cash and Cash Equivalents

$

(307.9)

$

(27.0)

$

(11.6)

$

(0.6)

Cash and Cash Equivalents at Beginning of Period

445.1

156.0

148.8

129.6

Cash and Cash Equivalents at End of Period

$

137.2

$

129.0

$

137.2

$

129.0

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,

Nine Months Ended
September 30,

2017

EPS

2016

EPS

2017

EPS

2016

EPS

Net Income Attributable to The Timken Company

$

53.5

$

0.68

$

33.6

$

0.43

$

174.2

$

2.21

$

147.7

$

1.86

Adjustments: ⁽¹⁾

  Impairment, restructuring and reorganization charges ⁽²⁾

$

2.6

$

7.3

$

10.5

$

21.4

  Acquisition related charges ⁽³⁾

4.4

2.5

6.9

3.3

  Gain on sale of real estate ⁽⁴⁾

(1.6)

—

(3.6)

—

  Pension related charges ⁽⁵⁾

—

0.1

4.4

1.3

  CDSOA (income) expense, net ⁽⁶⁾

—

0.2

—

(53.6)

  Health care plan modification costs ⁽⁷⁾

—

—

(0.7)

—

  (Gain) loss on dissolution of subsidiary

—

0.9

—

(0.5)

  Tax indemnification ⁽⁸⁾ 

—

—

(1.0)

—

  (Benefit) provision for income taxes ⁽⁹⁾

(3.0)

(2.5)

(37.1)

9.2

      Total Adjustments:

2.4

0.03

8.5

0.10

(20.6)

(0.26)

(18.9)

(0.24)

Adjusted Net Income from The Timken Company

$

55.9

$

0.71

$

42.1

$

0.53

$

153.6

$

1.95

$

128.8

$

1.62

⁽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 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 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, 2007.

⁽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⁾ The tax indemnification in 2017 represents a receivable from TimkenSteel related to the settlement of certain tax liabilities and pursuant to the Tax Sharing Agreement between the Company and TimkenSteel dated June 30, 2014.  This amount was recorded in other income.                                      

⁽⁹⁾ (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

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)

Three Months Ended
September 30,

Nine Months Ended
September 30,

Percentage
to
Net Sales

2016

Percentage
to

Net Sales

2017

Percentage
to
Net Sales

2016

Percentage
to
Net Sales

Net Income

$

54.1

7.0

%

$

34.0

5.2

%

$

174.2

7.8

%

$

148.0

7.3

%

Provision for income taxes

21.1

2.7

%

15.2

2.3

%

28.5

1.3

%

65.8

3.3

%

Interest expense

10.1

1.3

%

8.0

1.2

%

26.5

1.2

%

25.1

1.3

%

Interest income

(0.7)

—

%

(0.4)

(0.1)

%

(2.0)

(0.1)

%

(1.1)

(0.1)

%

Consolidated EBIT

$

84.6

11.0

%

$

56.8

8.6

%

$

227.2

10.2

%

$

237.8

11.8

%

Adjustments:

  Impairment, restructuring and reorganization charges ⁽¹⁾

$

2.6

0.3

%

$

7.3

1.2

%

$

10.5

0.4

%

$

21.4

1.1

%

  CDSOA (income) expense, net ⁽²⁾

—

—

%

0.2

—

%

—

—

%

(53.6)

(2.7)

%

  Health care plan modification costs ⁽³⁾

—

—

%

—

—

%

(0.7)

—

%

—

—

%

  Acquisition related charges ⁽⁴⁾

4.4

0.6

%

2.5

0.4

%

6.9

0.3

%

3.3

0.1

%

  Gain on sale of real estate ⁽⁵⁾

(1.6)

(0.2)

%

—

—

%

(3.6)

(0.2)

%

—

—

%

  Pension related charges ⁽⁶⁾

—

—

%

0.1

—

%

4.4

0.2

%

1.3

0.1

%

  Tax indemnification ⁽⁷⁾ 

—

—

%

—

—

%

(1.0)

—

%

—

—

%

  (Gain) loss on dissolution of subsidiary

—

—

%

0.9

0.1

%

—

—

%

(0.5)

—

%

     Total Adjustments

5.4

0.7

%

11.0

1.7

%

16.5

0.7

%

(28.1)

(1.4)

%

Adjusted EBIT

$

90.0

11.7

%

$

67.8

10.3

%

$

243.7

10.9

%

$

209.7

10.4

%

⁽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⁾ 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, 2007.

⁽³⁾ 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.
 

⁽⁴⁾ Acquisition related charges in 2017 relate to the acquisition of Groeneveld, Torsion Control Products, PT Tech and EDT, including one-time transaction costs.

⁽⁵⁾ 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.

⁽⁶⁾ 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.

⁽⁷⁾ The tax indemnification in 2017 represents a receivable from TimkenSteel related to the settlement of certain tax liabilities and pursuant to the Tax Sharing Agreement between the Company and TimkenSteel dated June 30, 2014.  This amount was recorded in other income.       

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

Nine Months
Ended
September
30, 2017

Percentage
to Net
Sales

Nine Months
Ended
September
30, 2016

Percentage
to Net
Sales

Earnings before interest and taxes (EBIT)

$

34.9

8.3

%

$

25.9

7.3

%

$

100.1

8.2

%

$

95.3

8.6

%

  Impairment, restructuring and reorganization
  charges ⁽¹⁾

2.6

0.6

%

6.5

1.9

%

9.8

0.8

%

15.9

1.4

%

  Gain on dissolution of subsidiary

—

—

%

—

—

%

—

—

%

(1.4)

(0.1)

%

  Gain on sale of real estate ⁽²⁾

(1.6)

(0.4)

%

—

—

%

(3.6)

(0.2)

%

—

—

%

  Health care plan modification costs ⁽³⁾

—

—

%

—

—

%

(0.4)

—

%

—

—

%

  Acquisition related charges ⁽⁴⁾

1.7

0.4

%

—

—

%

2.4

0.2

%

—

—

%

  Pension related charges ⁽⁵⁾

—

—

%

—

—

%

1.8

0.1

%

—

—

%

Adjusted EBIT

$

37.6

8.9

%

$

32.4

9.2

%

$

110.1

9.1

%

$

109.8

9.9

%

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

Nine Months
Ended
September
30, 2017

Percentage
to Net
Sales

Nine Months
Ended
September
30, 2016

Percentage
to Net
Sales

Earnings before interest and taxes (EBIT)

$

61.7

17.7

%

$

42.0

13.8

%

$

164.9

16.3

%

$

123.7

13.6

%

  Impairment, restructuring and reorganization
  charges ⁽¹⁾

—

—

%

0.9

0.3

%

0.1

—

%

5.5

0.6

%

  Loss on dissolution/divestment of subsidiary ⁽²⁾

—

—

%

0.9

0.3

%

—

—

%

0.9

0.1

%

  Health care plan modification costs ⁽³⁾

—

—

%

—

—

%

(0.2)

—

%

—

—

%

  Acquisition related charges ⁽⁴⁾

—

—

%

1.7

0.6

%

0.2

—

%

1.7

0.2

%

  Pension related charges ⁽⁵⁾

—

—

%

—

—

%

1.1

0.1

%

—

—

%

Adjusted EBIT

$

61.7

17.7

%

$

45.5

15.0

%

$

166.1

16.4

%

$

131.8

14.5

%

⁽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⁾ 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.

⁽⁴⁾ Acquisition related charges in 2017 relate to the acquisition of Groeneveld, Torsion Control Products, PT Tech and EDT, including one-time transaction costs.

⁽⁵⁾ 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.

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

959.8

635.0

  Total Debt

$

1,005.9

$

659.2

Less: Cash, cash equivalents and restricted cash

(140.5)

(151.5)

Net Debt

$

865.4

$

507.7

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

%

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

(Unaudited)

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

(Dollars in millions)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Net cash provided by operating activities

$

28.4

$

74.6

$

142.9

$

278.7

Less: capital expenditures

(22.6)

(34.0)

(62.5)

(84.4)

Free cash flow

$

5.8

$

40.6

$

80.4

$

194.3

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.

Low End
Earnings
Per Share

High End
Earnings
Per Share

Forecasted full year GAAP diluted earnings per share

$

2.78

$

2.83

Forecasted Adjustments:

  Impairment, restructuring and reorganization charges ⁽¹⁾

0.10

0.10

  Pension related charges ⁽²⁾

0.05

0.05

  Acquisition related charges ⁽³⁾

0.05

0.05

  (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 2017.

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.

(Dollars in Millions)

Free Cash
Flow Outlook

Net cash provided by operating activities

$

280.0

Less: capital expenditures

(100.0)

Free cash flow

$

180.0