SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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Date of Report (Date of earliest event reported): | July 30, 2015 |
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THE TIMKEN COMPANY |
(Exact Name of Registrant as Specified in its Charter) |
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Ohio |
(State or Other Jurisdiction of Incorporation) |
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1-1169 | | 34-0577130 |
(Commission File Number) | | (I.R.S. Employer Identification No.) |
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4500 Mt. Pleasant St., N.W., North Canton, Ohio 44720-5450
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(Address of Principal Executive Offices) (Zip Code) |
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(234) 262-3000 |
(Registrant's Telephone Number, Including Area Code) |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions.
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02 Results of Operations and Financial Condition
The Timken Company issued a press release on July 30, 2015 announcing results for the second quarter of 2015. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and incorporated herein by this reference.
Also on July 30, 2015, the Timken Company will host a conference call and has posted conference call materials on its website, www.timken.com. A copy of the conference call materials is attached as Exhibit 99.2 to this Current Report on Form 8-K and incorporated herein by this reference.
This information shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be incorporated by reference into a filing under the Securities Act of 1933, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
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Exhibit No. | | Description |
99.1 | | Press Release of The Timken Company dated July 30, 2015. |
99.2 | | Conference Call Materials dated July 30, 2015. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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| | | THE TIMKEN COMPANY |
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| | By: | /s/ William R. Burkhart |
| | | William R. Burkhart |
| | | Executive Vice President, General Counsel and Secretary |
Date: | | July 30, 2015 | |
EXHIBIT INDEX
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Exhibit No. | | Description |
99.1 | | Press Release of The Timken Company dated July 30, 2015. |
99.2 | | Conference Call Materials dated July 30, 2015. |
Timken Reports Second-Quarter Results,
Updates Outlook
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• | Adjusted earnings of $0.57 per diluted share (EPS) |
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• | Repurchased 2 million shares during the quarter |
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• | Strong free cash flow in the quarter |
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• | Reducing outlook; expects adjusted EPS in the range of $2.10 to $2.20 |
NORTH CANTON, Ohio: July 30, 2015 - The Timken Company (NYSE: TKR; www.timken.com), a global leader in bearings, today reported sales of $728 million for the second quarter of 2015, down 8 percent from a year ago. Excluding currency impact of 5 percent, sales were down approximately 3 percent, primarily due to market-related declines in Mobile Industries that were partially offset by organic growth in Process Industries.
Net income from continuing operations was $36.7 million or $0.43 per diluted share for the quarter, versus $56.5 million or $0.61 per diluted share a year ago. Adjusted net income from continuing operations (reference Table) was $49.1 million or $0.57 per diluted share. This compares with $59.4 million or $0.65 per diluted share for the same period in 2014. The change in adjusted net income reflects the impact of negative currency and unfavorable volume. This was partially offset by lower material and logistics costs; reduced selling, general and administrative (SG&A) expenses; and a more favorable tax rate. Earnings per share benefited from the company’s share buyback program, with 2 million shares repurchased in the second quarter.
Free cash flow (net cash from operations minus capital expenditures) for the quarter was $64.7 million, or 132 percent of adjusted net income. The strong performance was driven in part by lower working capital.
“The quarter came in near our expectations with demand up slightly compared with the first quarter,” Timken President and CEO Richard G. Kyle reported. “Given the volume levels and the impact of currency, we managed costs and cash flow well in the quarter and continued to return capital to shareholders by raising our quarterly dividend and executing our share buyback plan.
“During the quarter, demand remained weak in many of our markets. As a result, we are reducing our outlook for the balance of the year, now expecting our top line to be slightly off from the first half,” Kyle said. “We are working to accelerate the impact of our cost-reduction initiatives, and expect to generate second-half earnings comparable to the first half. We’re committed to drive shareholder value and remain focused on executing our strategy and growing our business.”
Adjusted Net Income and Diluted Earnings Per Share (EPS) from Continuing Operations
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| | | | |
| 2015 - 2Q | 2014 - 2Q |
| ($ in Mils.) | EPS | ($ in Mils.) | EPS |
Net Income from Continuing Operations | $ 36.7 | $0.43 | $ 56.5 | $ 0.61 |
Adjustments: | | | | |
Pension settlement charges | $ 4.4 | $0.05 | $ -- | $ -- |
Impairment and restructuring charges | 1.7 | 0.02 | 6.2 | 0.07 |
Provision (Benefit) for income taxes | 6.3 | 0.07 | (3.3) | (0.03) |
Total adjustments | 12.4 | 0.14 | 2.9 | 0.04 |
Net Income, after adjustments | $ 49.1 | $ 0.57 | $ 59.4 | $ 0.65 |
In the quarter, the company:
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• | Launched the Timken® UC-series ball bearing housed unit product line, an extension of the company’s housed unit bearing portfolio; |
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• | Started shipping products to support new business platforms in Mobile Industries; |
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• | Increased the company’s quarterly dividend 4 percent to $0.26 per share; |
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• | Returned $102.5 million in capital to shareholders through the repurchase of 2 million shares and payment of dividends in the quarter; and |
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• | Entered into a new five-year $500 million senior credit facility. |
Second-Quarter Segment Results
Mobile Industries reported second-quarter sales of $388.6 million, down approximately 13 percent from the same period a year ago, with about 5 percent attributable to currency. The remainder was largely due to declines in aerospace, agriculture and automotive, partially offset by continued growth in the rail sector.
Earnings before interest and taxes (EBIT) for the second quarter were $36 million or 9.3 percent of sales, compared with prior-year EBIT of $42.3 million or 9.5 percent of sales. Adjusted EBIT was $37 million or 9.5 percent of sales, compared with $46.7 million or 10.4 percent of sales in the second quarter last year. The decline in earnings was driven by lower volume and currency, partially offset by lower manufacturing, material and logistics costs and SG&A expenses.
Process Industries sales of $339.4 million for the second quarter were down 1 percent from the prior year. Excluding currency impact of about 5 percent, sales were up almost 4 percent, driven by organic growth in the wind energy and military marine sectors, higher industrial services revenue and the benefit of acquisitions. This growth was partially offset by lower industrial distribution demand driven by weakness in metals, mining and oil and gas.
EBIT for the quarter was $56.7 million or 16.7 percent of sales, compared with prior-year EBIT of $64.8 million or 18.9 percent of sales. Adjusted EBIT was $57.5 million or 16.9 percent of sales, compared with $66.6 million or 19.5 percent of sales in the second quarter last year. The decrease in earnings was driven by unfavorable mix, manufacturing utilization and currency, which more than offset the benefit of higher sales volume and lower logistics costs.
2015 Outlook
For 2015, the company expects year-over-year revenue to be down approximately 7 to 8 percent, which includes 5 percent from currency declines. The segment outlook for full-year 2015 has also been adjusted with:
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• | Mobile Industries’ sales expected to be down 8 to 9 percent. Without the impact of currency, sales are expected to be down 3 to 4 percent reflecting lower shipments in aerospace and agriculture, partially offset by organic growth in rail. |
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• | Process Industries’ sales expected to be down 6 to 7 percent. Excluding currency, sales are expected to be down 1 to 2 percent, as growth in wind energy and military marine and the benefit of acquisitions are more than offset by weaker demand in industrial aftermarket and heavy industries. |
Timken expects 2015 earnings per diluted share to range from $0.30 to $0.40, which includes $1.80 of non-cash pension settlement charges and $0.20 per share of impairment and other restructuring charges, partially offset by $0.20 of income associated with discrete tax accrual adjustments.
Excluding these items, the company expects 2015 adjusted earnings per diluted share to range from $2.10 to $2.20.
Conference Call Information
Timken will host a conference call today at 11:00 a.m. Eastern Time to review its financial results. Presentation materials will be available online in advance of the call for interested investors and securities analysts.
Conference Call: Thursday, July 30, 2015
11:00 a.m. Eastern Time
Live Dial-In: 800-289-0498 or 913-312-0839
(Call in 10 minutes prior to be included.)
Conference ID: Timken Earnings Call
Live Webcast: www.timken.com/investors
Conference Call Replay: Replay Dial-In available through August 13, 2015:
888-203-1112 or 719-457-0820
Replay Passcode: 2686912
About The Timken Company
The Timken Company (NYSE: TKR; www.timken.com) engineers, manufactures and markets bearings, transmissions, gearboxes, chain and related products, and offers a spectrum of powertrain rebuild and repair services. The leading authority on tapered roller bearings, Timken today applies its deep knowledge of metallurgy, tribology and mechanical power transmission across a variety of bearings and related systems to improve reliability and efficiency of machinery and equipment all around the world. The company's growing product and services portfolio features many strong industrial brands including Timken®, Fafnir®, Philadelphia Gear®, Drives® and Interlube™. Known for its quality products and collaborative technical sales model, Timken posted $3.1 billion in sales in 2014. With 14,000 employees operating from 28 countries, Timken makes the world more productive and keeps industry in motion.
Certain statements in this release (including statements regarding the company's forecasts, 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 expectations regarding the company's future financial performance, including information under the heading "Outlook," 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 second quarter of 2015; the company's ability to respond to the 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 raw material and energy costs; the impact of the company's last-in, first-out accounting; weakness in global or regional economic conditions and financial 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; 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; and the company’s ability to complete and achieve the benefits of announced plans, programs, initiatives, and capital investments. 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, 2014, 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.
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Media Contact: Gloria Irwin | Investor Contact: Shelly Chadwick |
Communications Manager | Vice President - Treasury & Investor Relations |
Telephone: (234) 262-3514 | Telephone: (234) 262-3223 |
mediarelations@timken.com | shelly.chadwick@timken.com |
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The Timken Company | | | | | |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | | | | | |
(Unaudited) | | | | | |
(Dollars in millions, except per share data) | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | 2014 | | 2015 | 2014 |
Net sales | $ | 728.0 |
| $ | 789.2 |
| | $ | 1,450.5 |
| $ | 1,526.0 |
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Cost of products sold | 522.9 |
| 555.6 |
| | 1,042.9 |
| 1,074.3 |
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Gross Profit | 205.1 |
| 233.6 |
| | 407.6 |
| 451.7 |
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Selling, general & administrative expenses (SG&A) | 126.1 |
| 136.8 |
| | 254.6 |
| 278.6 |
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Impairment and restructuring charges | 1.4 |
| 5.4 |
| | 7.6 |
| 8.6 |
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Pension settlement charges | 4.4 |
| — |
| | 219.6 |
| 0.7 |
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Operating Income (Loss) | 73.2 |
| 91.4 |
| | (74.2 | ) | 163.8 |
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Other income (expense), net | 1.1 |
| (1.5 | ) | | (0.3 | ) | 18.9 |
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Earnings (Loss) Before Interest and Taxes (EBIT)(1) | 74.3 |
| 89.9 |
| | (74.5 | ) | 182.7 |
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Interest expense, net | (7.7 | ) | (4.7 | ) | | (15.0 | ) | (9.2 | ) |
Income (Loss) From Continuing Operations Before Income Taxes | 66.6 |
| 85.2 |
| | (89.5 | ) | 173.5 |
|
Provision for income taxes | 28.9 |
| 27.6 |
| | 7.6 |
| 55.6 |
|
Income (Loss) From Continuing Operations | 37.7 |
| 57.6 |
| | (97.1 | ) | 117.9 |
|
Income from Discontinued Operations, net of income taxes(2) | — |
| 6.2 |
| | — |
| 29.7 |
|
Net Income (Loss) | 37.7 |
| 63.8 |
| | (97.1 | ) | 147.6 |
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Less: Net Income Attributable to Noncontrolling Interest | 1.0 |
| 1.1 |
| | 1.4 |
| 1.4 |
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Net Income (Loss) Attributable to The Timken Company | $ | 36.7 |
| $ | 62.7 |
| | $ | (98.5 | ) | $ | 146.2 |
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Net Income (Loss) per Common Share Attributable to The Timken Company Common Shareholders | | | | | |
Basic Earnings (Loss) per share - Continuing Operations | $ | 0.43 |
| $ | 0.62 |
| | $ | (1.14 | ) | $ | 1.27 |
|
Basic Earnings per share - Discontinued Operations | — |
| 0.07 |
| | — |
| 0.33 |
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Basic Earnings (Loss) Per Share | $ | 0.43 |
| $ | 0.69 |
| | $ | (1.14 | ) | $ | 1.60 |
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Diluted Earnings (Loss) per share - Continuing Operations | $ | 0.43 |
| $ | 0.61 |
| | $ | (1.14 | ) | $ | 1.26 |
|
Diluted Earnings per share - Discontinued Operations | — |
| 0.07 |
| | — |
| 0.32 |
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Diluted Earnings (Loss) Per Share | $ | 0.43 |
| $ | 0.68 |
| | $ | (1.14 | ) | $ | 1.58 |
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Average Shares Outstanding | 85,326,526 |
| 90,859,587 |
| | 86,514,517 |
| 91,558,614 |
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Average Shares Outstanding - assuming dilution | 86,156,775 |
| 91,726,593 |
| | 86,514,517 |
| 92,395,891 |
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(1) EBIT is 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 performance. |
(2) Discontinued Operations related to the spinoff of the steel business on June 30, 2014 and includes both operating results and separation costs. |
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BUSINESS SEGMENTS | | | | | |
(Unaudited) | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
(Dollars in millions) | 2015 | 2014 | | 2015 | 2014 |
| | | | | |
Mobile Industries | | | | | |
Net sales to external customers | $ | 388.6 |
| $ | 447.2 |
| | $ | 781.6 |
| $ | 868.9 |
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Earnings before interest and taxes (EBIT) (1) | $ | 36.0 |
| $ | 42.3 |
| | $ | 71.4 |
| $ | 106.6 |
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EBIT Margin (1) | 9.3 | % | 9.5 | % | | 9.1 | % | 12.3 | % |
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Process Industries | | | | | |
Net sales to external customers | $ | 339.4 |
| $ | 342.0 |
| | $ | 668.9 |
| $ | 657.1 |
|
Earnings before interest and taxes (EBIT) (1) | $ | 56.7 |
| $ | 64.8 |
| | $ | 101.9 |
| $ | 113.0 |
|
EBIT Margin (1) | 16.7 | % | 18.9 | % | | 15.2 | % | 17.2 | % |
| | | | | |
Unallocated corporate expense | $ | (14.0 | ) | $ | (17.2 | ) | | $ | (28.2 | ) | $ | (36.9 | ) |
Unallocated pension settlement charges (2) | $ | (4.4 | ) | $ | — |
| | $ | (219.6 | ) | $ | — |
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Consolidated | | | | | |
Net sales to external customers | $ | 728.0 |
| $ | 789.2 |
| | $ | 1,450.5 |
| $ | 1,526.0 |
|
Earnings (Loss) before interest and taxes (EBIT) (1) | $ | 74.3 |
| $ | 89.9 |
| | $ | (74.5 | ) | $ | 182.7 |
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EBIT Margin (1) | 10.2 | % | 11.4 | % | | (5.1 | )% | 12.0 | % |
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(1) EBIT is defined as operating income plus other income (expense). EBIT Margin is 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 performance. |
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(2) Unallocated pension settlement charges primarily related to the purchase of a group annuity contract from Prudential Insurance Company of America (Prudential) on January 23, 2015, that requires Prudential to pay and administer future pension benefits for approximately 5,000 U.S. Timken retirees, as well as lump sum distributions to new retirees during the first six months of 2015.
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CONDENSED CONSOLIDATED BALANCE SHEETS | | |
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(Dollars in millions) | (Unaudited) June 30, 2015 | | December 31,
2014 |
ASSETS | | | |
Cash and cash equivalents | $ | 236.8 |
| | $ | 278.8 |
|
Restricted cash | 19.1 |
| | 15.3 |
|
Accounts receivable | 487.5 |
| | 475.7 |
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Inventories, net | 574.2 |
| | 585.5 |
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Other current assets | 118.4 |
| | 126.6 |
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Total Current Assets | 1,436.0 |
| | 1,481.9 |
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Property, Plant and Equipment, net | 759.1 |
| | 780.5 |
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Goodwill | 257.7 |
| | 259.5 |
|
Non-current pension assets | 112.2 |
| | 176.2 |
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Other assets | 322.6 |
| | 303.3 |
|
Total Assets | $ | 2,887.6 |
| | $ | 3,001.4 |
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LIABILITIES | | | |
Accounts payable | $ | 170.1 |
| | $ | 143.9 |
|
Short-term debt, including current portion of long-term debt | 82.2 |
| | 8.0 |
|
Income taxes | 91.4 |
| | 80.2 |
|
Accrued expenses | 250.3 |
| | 301.7 |
|
Total Current Liabilities | 594.0 |
| | 533.8 |
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Long-term debt | 555.6 |
| | 522.1 |
|
Accrued pension cost | 157.6 |
| | 165.9 |
|
Accrued postretirement benefits cost | 133.7 |
| | 141.8 |
|
Other non-current liabilities | 75.6 |
| | 48.7 |
|
Total Liabilities | 1,516.5 |
| | 1,412.3 |
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EQUITY | | | |
The Timken Company shareholders' equity | 1,353.7 |
| | 1,576.2 |
|
Noncontrolling Interest | 17.4 |
| | 12.9 |
|
Total Equity | 1,371.1 |
| | 1,589.1 |
|
Total Liabilities and Equity | $ | 2,887.6 |
| | $ | 3,001.4 |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | |
(Unaudited) | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
(Dollars in millions) | 2015 | 2014 | 2015 | 2014 |
Cash Provided (Used) | | | | |
OPERATING ACTIVITIES | | | | |
Net income (loss) attributable to The Timken Company | $ | 36.7 |
| $ | 62.7 |
| $ | (98.5 | ) | $ | 146.2 |
|
Net income from discontinued operations | — |
| (6.2 | ) | — |
| (29.7 | ) |
Net income attributable to noncontrolling interest | 1.0 |
| 1.1 |
| 1.4 |
| 1.4 |
|
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | | | | |
Depreciation and amortization | 32.1 |
| 34.2 |
| 65.6 |
| 69.3 |
|
Impairment charges | 0.6 |
| 0.8 |
| 3.3 |
| 0.8 |
|
Loss (gain) on sale of assets | 1.4 |
| 0.8 |
| 1.7 |
| (22.2 | ) |
Pension and other postretirement expense | 12.9 |
| 5.4 |
| 238.0 |
| 14.9 |
|
Pension and other postretirement benefit contributions and payments | (10.0 | ) | (23.4 | ) | (16.9 | ) | (41.0 | ) |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | 6.9 |
| (15.5 | ) | (22.7 | ) | (39.3 | ) |
Inventories | 10.0 |
| (19.9 | ) | (2.8 | ) | (39.8 | ) |
Accounts payable | 1.0 |
| 18.8 |
| 28.9 |
| 36.9 |
|
Accrued expenses | 8.8 |
| 55.5 |
| (54.7 | ) | 3.5 |
|
Income taxes | (14.8 | ) | (47.3 | ) | (44.5 | ) | (36.2 | ) |
Other, net | 1.9 |
| 16.8 |
| 6.7 |
| 17.7 |
|
Net Cash Provided by Operating Activities - Continuing Operations | $ | 88.5 |
| $ | 83.8 |
| $ | 105.5 |
| $ | 82.5 |
|
Net Cash (Used) Provided by Operating Activities - Discontinued Operations | — |
| (7.9 | ) | — |
| 33.6 |
|
Net Cash Provided by Operating Activities | $ | 88.5 |
| $ | 75.9 |
| $ | 105.5 |
| $ | 116.1 |
|
INVESTING ACTIVITIES | | | | |
Capital expenditures | $ | (23.8 | ) | $ | (29.4 | ) | $ | (43.5 | ) | $ | (48.5 | ) |
Acquisitions | — |
| (12.0 | ) | — |
| (12.0 | ) |
Other | 4.5 |
| 9.0 |
| 10.2 |
| 17.8 |
|
Net Cash Used by Investing Activities - Continuing Operations | $ | (19.3 | ) | $ | (32.4 | ) | $ | (33.3 | ) | $ | (42.7 | ) |
Net Cash Used by Investing Activities - Discontinued Operations | — |
| (42.3 | ) | — |
| (77.0 | ) |
Net Cash Used by Investing Activities | $ | (19.3 | ) | $ | (74.7 | ) | $ | (33.3 | ) | $ | (119.7 | ) |
FINANCING ACTIVITIES | | | | |
Cash dividends paid to shareholders | $ | (22.1 | ) | $ | (22.6 | ) | $ | (44.0 | ) | $ | (45.7 | ) |
Purchase of treasury shares | (80.4 | ) | (33.6 | ) | (177.2 | ) | (151.3 | ) |
Net proceeds from credit facilities | 114.1 |
| 41.3 |
| 110.5 |
| 45.4 |
|
Net payments from long-term debt | — |
| — |
| (1.1 | ) | (0.2 | ) |
Distribution of TimkenSteel | — |
| (43.5 | ) | — |
| (43.5 | ) |
Other | 0.9 |
| 2.7 |
| 3.5 |
| 8.7 |
|
Net Cash Provided (Used) by Financing Activities - Continuing Operations | $ | 12.5 |
| $ | (55.7 | ) | $ | (108.3 | ) | $ | (186.6 | ) |
Net Cash Provided by Financing Activities - Discontinued Operations | — |
| 100.0 |
| — |
| 100.0 |
|
Net Cash Provided (Used) by Financing Activities | $ | 12.5 |
| $ | 44.3 |
| $ | (108.3 | ) | $ | (86.6 | ) |
Effect of exchange rate changes on cash | 0.7 |
| 1.0 |
| (5.9 | ) | 0.4 |
|
Increase (Decrease) in Cash and Cash Equivalents | $ | 82.4 |
| $ | 46.5 |
| $ | (42.0 | ) | $ | (89.8 | ) |
Cash and cash equivalents at beginning of period | 154.4 |
| 248.3 |
| 278.8 |
| 384.6 |
|
Cash and Cash Equivalents at End of Period | $ | 236.8 |
| $ | 294.8 |
| $ | 236.8 |
| $ | 294.8 |
|
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Reconciliations of Adjusted Net Income from Continuing Operations to GAAP Income (Loss) from Continuing Operations and Adjusted Earnings Per Share to GAAP Earnings (Loss) Per Share: |
(Unaudited) |
These reconciliations are provided as additional relevant information about the Company's performance. Management believes that adjusted net income from continuing operations and diluted earnings (loss) per share, adjusted to remove: (a) pension settlement charges; (b) impairment and restructuring charges; (c) gain on sale of real estate in Brazil; and (d) provision (benefit) for income taxes are representative of the Company's performance and therefore useful to investors. |
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(Dollars in millions, except share data) | | Three Months Ended
June 30, | Six Months Ended June 30, |
| | 2015 | | EPS | 2014 | | EPS | 2015 | | EPS | 2014 | | EPS |
Income (Loss) from Continuing Operations | | $ | 37.7 |
| | | $ | 57.6 |
| | | $ | (97.1 | ) | | | $ | 117.9 |
| | |
Less: Net Income Attributable to Noncontrolling Interest | | 1.0 |
| | | 1.1 |
| | | 1.4 |
| | | 1.4 |
| | |
Net Income (Loss) from Continuing Operations attributable to The Timken Company | | $ | 36.7 |
| | $ | 0.43 |
| $ | 56.5 |
| | $ | 0.61 |
| $ | (98.5 | ) | | $ | (1.14 | ) | $ | 116.5 |
| | $ | 1.26 |
|
| | | | | | | | | | | | | |
Adjustments: | | | | | | | | | | | | | |
Pension settlement charges (1) | | $ | 4.4 |
| | $ | 0.05 |
| $ | — |
| | $ | — |
| $ | 219.6 |
| | $ | 2.52 |
| $ | 0.7 |
| | $ | 0.01 |
|
Impairment and restructuring charges (2) | | 1.7 |
| | 0.02 |
| 6.2 |
| | 0.07 |
| 8.3 |
| | 0.10 |
| 10.5 |
| | 0.11 |
|
Gain on sale of real estate in Brazil (3) | | — |
| | — |
| — |
| | — |
| — |
| | — |
| (22.6 | ) | | (0.24 | ) |
Provision (benefit) for income taxes (4) | | 6.3 |
| | 0.07 |
| (3.3 | ) | | (0.03 | ) | (36.0 | ) | | (0.41 | ) | 0.7 |
| | 0.01 |
|
Total Adjustments: | | 12.4 |
| | 0.14 |
| 2.9 |
| | 0.04 |
| 191.9 |
| | 2.21 |
| (10.7 | ) | | (0.11 | ) |
Adjusted Net Income from Continuing Operations | | $ | 49.1 |
| | $ | 0.57 |
| $ | 59.4 |
| | $ | 0.65 |
| $ | 93.4 |
| | $ | 1.07 |
| $ | 105.8 |
| | $ | 1.15 |
|
| | | | | | | | | | | | | |
(1) Pension settlement charges primarily related to the purchase of a group annuity contract from Prudential on January 23, 2015, that requires Prudential to pay and administer future pension benefits for approximately 5,000 U.S. Timken retirees, as well as lump sum distributions to new retirees during the first six months of 2015.
|
| | | | | | | | | | | | | |
(2) Impairment and restructuring charges, including rationalization costs recorded in cost of products sold, related to plant closures, the rationalization of certain plants and severance related to cost reduction initiatives. |
| | | | | | | | | | | | | |
(3) Gain on the sale of real estate related to the sale of the former manufacturing facility in Sao Paulo, Brazil. |
| | | | | | | | | | | | | |
(4) Provision (benefit) for income taxes includes the tax impact on pre-tax special items, 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 (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. Management believes consolidated earnings (loss) before interest and taxes (EBIT) 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 EBIT and EBIT margin, after adjustments, are representative of the Company's core operations and therefore useful to investors. |
| | | | | | | | |
(Dollars in millions, except share data) | Three Months Ended
June 30, | Six Months Ended June 30, |
| 2015 | Percentage to Net Sales | 2014 | Percentage to Net Sales | 2015 | Percentage to Net Sales | 2014 | Percentage to Net Sales |
Net Income (Loss) | $ | 37.7 |
| 5.2 | % | $ | 63.8 |
| 8.1 | % | $ | (97.1 | ) | (6.7 | )% | $ | 147.6 |
| 9.7 | % |
| | | | | | | | |
Income From Discontinued Operations, net of income taxes | — |
| — | % | (6.2 | ) | (0.8 | )% | — |
| — | % | (29.7 | ) | (1.9 | )% |
Provision for income taxes | 28.9 |
| 4.0 | % | 27.6 |
| 3.5 | % | 7.6 |
| 0.5 | % | 55.6 |
| 3.7 | % |
Interest expense | 8.4 |
| 1.2 | % | 5.8 |
| 0.7 | % | 16.4 |
| 1.1 | % | 11.3 |
| 0.7 | % |
Interest income | (0.7 | ) | (0.1 | )% | (1.1 | ) | (0.1 | )% | (1.4 | ) | (0.1 | )% | (2.1 | ) | (0.1 | )% |
Consolidated earnings (loss) before interest and taxes (EBIT) | $ | 74.3 |
| 10.2 | % | $ | 89.9 |
| 11.4 | % | $ | (74.5 | ) | (5.1 | )% | $ | 182.7 |
| 12.1 | % |
| | | | | | | | |
Adjustments: | | | | | | | | |
Pension settlement charges (1) | $ | 4.4 |
| 0.6 | % | $ | — |
| — | % | $ | 219.6 |
| 15.1 | % | $ | 0.7 |
| 0.1 | % |
Impairment and restructuring charges(2) | 1.7 |
| 0.2 | % | 6.2 |
| 0.8 | % | 8.3 |
| 0.6 | % | 10.5 |
| 0.6 | % |
Gain on sale of real estate in Brazil (3) | — |
| — | % | — |
| — | % | — |
| — | % | (22.6 | ) | (1.5 | )% |
Total Adjustments | 6.1 |
| 0.8 | % | 6.2 |
| 0.8 | % | 227.9 |
| 15.7 | % | (11.4 | ) | (0.8 | )% |
Consolidated earnings before interest and taxes (EBIT), after adjustments | $ | 80.4 |
| 11.0 | % | $ | 96.1 |
| 12.2 | % | $ | 153.4 |
| 10.6 | % | $ | 171.3 |
| 11.3 | % |
| | | | | | | | |
| | | | | | | | |
(1) Pension settlement charges primarily related to the purchase of a group annuity contract from Prudential on January 23, 2015, that requires Prudential to pay and administer future pension benefits for approximately 5,000 U.S. Timken retirees, as well as lump sum distributions to new retirees during the first six months of 2015.
|
| | | | | | | | |
(2) Impairment and restructuring charges, including rationalization costs recorded in cost of products sold, related to plant closures, the rationalization of certain plants, and severance related to cost reduction initiatives. |
| | | | | | | | |
(3) Gain on the sale of real estate related to the sale of the former manufacturing facility in Sao Paulo, Brazil. | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
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. Management believes that segment EBIT and EBIT margin, after adjustments, are representative of the segment's core operations and therefore useful to investors. |
| | | | | | | | | |
Mobile Industries | | | | | | | | | |
(Dollars in millions) | Three Months Ended June 30, 2015 | Percentage to Net Sales | Three Months Ended June 30, 2014 | Percentage to Net Sales | | Six Months Ended June 30, 2015 | Percentage to Net Sales | Six Months Ended June 30, 2014 | Percentage to Net Sales |
Earnings before interest and taxes (EBIT) | $ | 36.0 |
| 9.3 | % | $ | 42.3 |
| 9.5 | % | | $ | 71.4 |
| 9.1 | % | $ | 106.6 |
| 12.3 | % |
| | | | | | | | | |
Pension settlement charges (1) | — |
| — | % | — |
| — | % | | — |
| — | % | 0.7 |
| 0.1 | % |
Impairment and restructuring charges (2) | 1.0 |
| 0.3 | % | 4.4 |
| 1.0 | % | | 2.0 |
| 0.3 | % | 7.3 |
| 0.8 | % |
Gain on sale of real estate in Brazil (3) | — |
| — | % | — |
| — | % | | — |
| — | % | (22.6 | ) | (2.6 | )% |
Earnings before interest and taxes (EBIT), after adjustments | $ | 37.0 |
| 9.5 | % | $ | 46.7 |
| 10.4 | % | | $ | 73.4 |
| 9.4 | % | $ | 92.0 |
| 10.6 | % |
| | | | | | | | | |
Process Industries | | | | | | | | | |
(Dollars in millions) | Three Months Ended June 30, 2015 | Percentage to Net Sales | Three Months Ended June 30, 2014 | Percentage to Net Sales | | Six Months Ended June 30, 2015 | Percentage to Net Sales | Six Months Ended June 30, 2014 | Percentage to Net Sales |
Earnings before interest and taxes (EBIT) | $ | 56.7 |
| 16.7 | % | $ | 64.8 |
| 18.9 | % | | $ | 101.9 |
| 15.2 | % | $ | 113.0 |
| 17.2 | % |
| | | | | | | | | |
Impairment and restructuring charges(2) | 0.8 |
| 0.2 | % | 1.8 |
| 0.5 | % | | 6.4 |
| 1.0 | % | 2.9 |
| 0.4 | % |
Earnings before interest and taxes (EBIT), after adjustments | $ | 57.5 |
| 16.9 | % | $ | 66.6 |
| 19.5 | % | | $ | 108.3 |
| 16.2 | % | $ | 115.9 |
| 17.6 | % |
| | | | | | | | | |
| | | | | | | | | |
(1) Pension settlement charges related to the settlement of certain pension obligations in Canada.
|
| | | | | | | | | |
(2) Impairment and restructuring charges, including rationalization costs recorded in cost of products sold, related to plant closures, the rationalization of certain plants, and severance related to cost reduction initiatives. |
| | | | | | | | | |
(3) Gain on the sale of real estate related to the sale of the former manufacturing facility in Sao Paulo, Brazil. |
|
| | | | | | | | | | | | |
Reconciliation of Total Debt to Net Debt and the Ratio of Net Debt to Capital: |
(Unaudited) |
This reconciliation is provided as additional relevant information about the Company's financial position. Capital, used for the ratio of total debt to capital, is defined as total debt plus total shareholders' equity. Capital, used for the ratio of net debt to capital, is defined as total debt less cash, cash equivalents and restricted cash plus total shareholders' equity. Management believes Net Debt is an important measure of the Company's financial position, due to the amount of cash and cash equivalents. |
| | |
(Dollars in millions) | | |
| | | June 30,
2015 | December 31,
2014 |
Short-term debt, including current portion of long-term debt | | | $ | 82.2 |
| $ | 8.0 |
|
Long-term debt | | | 555.6 |
| 522.1 |
|
Total Debt | | | $ | 637.8 |
| $ | 530.1 |
|
Less: Cash, cash equivalents and restricted cash | | | (255.9 | ) | (294.1 | ) |
Net Debt | | | $ | 381.9 |
| $ | 236.0 |
|
| | | | |
Total equity | | | $ | 1,371.1 |
| $ | 1,589.1 |
|
| | | | |
Ratio of Total Debt to Capital | | | 31.7 | % | 25.0 | % |
Ratio of Net Debt to Capital | | | 21.8 | % | 12.9 | % |
| | | | |
| | | | |
Reconciliation of Free Cash Flow to GAAP Net Cash Provided by Operating Activities: |
(Unaudited) |
Management believes that free cash flow 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
June 30, | Six Months Ended
June 30, |
| 2015 | 2014 | 2015 | 2014 |
Net cash provided by operating activities from continuing operations | $ | 88.5 |
| $ | 83.8 |
| $ | 105.5 |
| $ | 82.5 |
|
Less: capital expenditures | (23.8 | ) | (29.4 | ) | (43.5 | ) | (48.5 | ) |
Free cash flow | $ | 64.7 |
| $ | 54.4 |
| $ | 62.0 |
| $ | 34.0 |
|
2Q 2015 Earnings Investor Presentation July 30, 2015
EARNINGS CALL DETAIL Timken 2Q 2015 Earnings Conference Call Conference Call: Thursday, July 30, 2015 11:00 a.m. Eastern Time Live Dial-In: 800-289-0498 or 913-312-0839 (Call in 10 minutes prior to be included.) Conference ID: Timken Earnings Call Conference Call Replay: Replay Dial-In available through August 13, 2015 888-203-1112 or 719-457-0820 Replay Passcode: 2686912 Live Webcast: www.timken.com/investors 2
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, including the information under the headings, “2015 Outlook Update”, “Our Focus”, “2Q 2015 Net Income and Diluted EPS”, “2015 Full-Year Outlook” and “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 second quarter of 2015; the company’s ability to respond to the 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 raw-material and energy costs; the impact of the company’s last-in, first-out accounting; weakness in global or regional economic conditions and financial markets; fluctuations in currency valuations; changes in the expected costs associated with product warranty claims; the ability to integrate acquired companies to achieve satisfactory operating results; the impact on operations of general economic conditions; fluctuations in customer demand; the impact on the company’s pension obligations due to the changes in interest rates, investment performance and other tactics designed to reduce risk and the company’s ability to complete and achieve the benefits of its announced plans, programs, initiatives and capital investments. 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, 2014, 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
AGENDA ● Introduction Shelly Chadwick – Vice President, Treasury & Investor Relations ● Overview & Business Update Rich Kyle – President & CEO ● Financial Review Phil Fracassa – Executive Vice President & CFO ● Question/Answer Session 4
2Q 2015 HIGHLIGHTS ● Sales of $728 million decreased 8% from prior year, down 3% excluding currency of 5% ‒ Process Industries sales down 1%; up 4% excluding currency of 5% ‒ Mobile Industries sales down 13%; down 8% excluding currency of 5% ● Net income per share from continuing operations of $0.43 versus $0.61 in same quarter last year ‒ 2Q-15 adjusted EPS of $0.57, compared with $0.65 last year ‒ Adjusted EBIT margin of 11.0%, compared with 12.2% last year ● Capital Allocation ‒ Returned ~$102 million to shareholders in the quarter through the purchase of 2.0 million shares and dividends ‒ Increased quarterly dividend by 4% in May ‒ Ended the quarter at ~22% net debt-to-capital Note: See Appendix for reconciliation of adjusted EPS, adjusted EBIT margins and Net Debt to Capital to their most directly comparable GAAP equivalents. 5
2015 OUTLOOK UPDATE Sales $2.95 Bil. $2.85 Bil. Markets / Penetration +1% -2 to -3% •Down markets with modest outgrowth Currency -5% -5% Total -4% -7 to -8% Earnings (EPS) $2.30- $2.40 $2.10- $2.20 Currency Impact ~$(0.35) ~$(0.35) EBIT Margin ~11.5% ~11% 6 April Outlook July Outlook Change Reflects
OUR FOCUS 7 ● Remain flexible to respond to the market environment ● Drive margin enhancement/competitiveness initiatives - Operational excellence - Mix - SG&A efficiency ● Continue to build our pipeline of outgrowth initiatives ● Capital Allocation
Launched new product line designed to help improve efficiencies through: • Increased equipment uptime and reduced maintenance cost • Robust sealing designed for the most demanding environments • Wide range of ready-to- mount units TIMKEN UC-SERIES BALL BEARING HOUSED UNITS 8
Financial Review
● Sales of $728 million, down 8% from a year ago ‒ Excluding currency impact of 5%, sales declined 3% ‒ Decline driven by weakness across most end markets partially offset by growth in wind, industrial services, military marine and rail 2Q 2015 FINANCIAL HIGHLIGHTS – SALES 2Q ’15 2Q ’14 $728.0 $789.2 $ B/(W) Sales % B/(W) $(61.2) (7.8)% ($ Millions) 2Q 2014 Currency Volume Acquisitions 2Q 2015 $(24) $2 $789 $728 $(39) 10 2Q-2015 Excluding vs. impact Region 2Q-2014 of currency NA -6% -5% EMEA -11% 7% APAC -10% -7% LatAm -9% 4% Geographic Sales Comparison
2Q 2015 FINANCIAL HIGHLIGHTS – EBIT 2Q ’15 2Q ’14 $728.0 $789.2 $ B/(W) Sales % B/(W) $(61.2) (7.8)% 205.1 233.6 Gross Profit 126.1 136.8 SG&A 5.4 Impairment & restructuring $89.9 EBIT ($ Millions) % of sales 17.3% 17.3% % of sales 28.2% 29.6% (140) bps -- bps Note: See Appendix for reconciliation of EBIT and EBIT margin to their most directly comparable GAAP equivalents. (1.5) 10.7 1.4 $74.3 1.1 $(15.6) (28.5) 10.2% 11.4% EBIT Margins (120) bps 11 -- Pension settlement charges 4.4 Other income (expense), net
- Impairment & restructuring(1) - Pension settlement charges 2Q 2015 FINANCIAL HIGHLIGHTS – ADJ. EBIT Note: See Appendix for reconciliation of EBIT, adjusted EBIT, and EBIT and adjusted EBIT margin to their most directly comparable GAAP equivalents. (1) Includes rationalization costs recorded in cost of products sold Adjustments: $80.4 $96.1 EBIT after adjustments $(15.7) (16.3)% 11.0% 12.2% EBIT Margins (120) bps 1.7 4.4 -- 12 6.2 2Q ’15 2Q ’14 $728.0 $789.2 $ B/(W) Sales $(61.2) (7.8)% 205.1 233.6 Gross Profit 126.1 136.8 SG&A 5.4 Impairment & restructuring $89.9 EBIT ($ Millions) % of sales 17.3% 17.3% % of sales 28.2% 29.6% (140) bps -- bps 10.7 1.4 $74.3 1.1 $(15.6) (28.5) -- Pension settlement charges 4.4 Other income (expense), net % B/(W) (1.5)
2Q 2015 EARNINGS COMPARISON ● Adjusted EBIT of $80.4 million or 11.0% of sales compares with $96.1 million or 12.2% of sales in the same period a year ago ‒ Negative currency and lower volume, partially offset by favorable material and logistics costs, and lower SG&A expenses 2Q 2014 Currency Volume / Mix Materials / Logistics SG&A / Other 2Q 2015 Adjusted EBIT - ($ Millions) Note: 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. $96 $80 $(13) $(14) 13 $6 $5
2Q 2015 NET INCOME AND DILUTED EPS 2Q ’15 $36.7 $0.43 Net Income from Continuing Operations - Provision (benefit) for income taxes Net Income, after adjustments $49.1 $0.57 $ in Millions EPS 6.3 2Q ’14 $56.5 $0.61 $59.4 $0.65 $ in Millions EPS (3.3) Adjusted tax rate: Quarter 31% 34% - Impairment/restructuring & other 1.7 6.2 0.02 0.07 (0.03) ● Adjusted EPS of $0.57, versus $0.65 last year ● EPS benefited from share buyback program, including 2.0 million shares repurchased in the second quarter ● Adjusted tax rate of 31% in 2Q ’15; expect YTD adjusted tax rate of 31.5% to hold for remainder of 2015 ‒ GAAP tax rate volatile this year because of large pension charge in 1Q ‘15 0.07 - Pension settlement charges 4.4 -- 0.05 -- 14
MOBILE INDUSTRIES Heavy Truck Automotive Aerospace Rail ($ Millions) 2015 2014 Change Sales $388.6 $447.2 $(58.6) EBIT $36.0 $42.3 $(6.3) Margin 9.3% 9.5% (20) bps Adjusted(1): EBIT $37.0 $46.7 $(9.7) Margin 9.5% 10.4% (90) bps 2Q YOY Commentary 2Q Performance • Sales down 13%; excluding currency of over 5%, sales down almost 8% - Driven by lower aerospace, agriculture and automotive demand, partially offset by growth in rail • Decrease in adjusted EBIT driven by lower volume and currency, partially offset by favorable manufacturing, material and logistics costs, and lower SG&A expenses Off-Highway Currency -3 to -4% -5% 15 (1) See Appendix for reconciliations of adjusted EBIT and adjusted EBIT margin to their most directly comparable GAAP equivalents. 2Q vs. 1Q – 2015 Sales: Down 8 to 9% 2015 Full-Year Outlook $393 $389 $300 $325 $350 $375 $400 1Q-15 2Q-15 9.3% 9.5% 8.0% 9.0% 10.0% 1Q-15 2Q-15 Sales EBIT (Adjusted) +20 bps change 1% decrease
PROCESS INDUSTRIES ($ Millions) 2015 2014 Change Sales $339.4 $342.0 $(2.6) EBIT $56.7 $64.8 $(8.1) Margin 16.7% 18.9% (220) bps Adjusted(1): EBIT $57.5 $66.6 $(9.1) Margin 16.9% 19.5% (260) bps 2Q YOY Commentary 2Q Performance • Sales down 1%; excluding currency of almost 5%, sales up almost 4% - Driven by growth in wind energy, military marine, industrial services and acquisitions, partially offset by weaker industrial distribution demand • Decrease in adjusted EBIT driven by currency, unfavorable mix and manufacturing utilization, partially offset by higher sales volume and lower logistics costs Original Equipment Aftermarket 2015 Full-Year Outlook (1) See Appendix for reconciliations of adjusted EBIT and adjusted EBIT margin to their most directly comparable GAAP equivalents. Currency -1 to -2% -5% 16 2Q vs. 1Q – 2015 Sales: Down 6 to 7% $329 $339 $250 $275 $300 $325 $350 1Q-15 2Q-15 15.4% 16.9% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0% 1Q-15 2Q-15 Sales EBIT (Adjusted) +150 bps change 3% increase
2Q 2015 CASH FLOW OVERVIEW 2Q ’15 2Q ’14 $37.7 $57.6 Income from Continuing Operations $88.5 $83.8 Cash from operations (16.6) 17.9 Change in working capital (trade) (14.8) (47.3) Income taxes 32.1 (18.0) Depreciation & Amortization $64.7 $54.4 Free cash flow 2.9 Pension/OPEB expense, net of contributions / payments 34.2 (29.4) (23.8) Capital Expenditures 12.7 Other ($ Millions) 73.9 17 Strong trade working capital performance versus 2Q ’14, led by lower inventory
CAPITAL ALLOCATION Capital Structure Cash $256 Debt 638 Net Debt 382 Equity 1,371 Net Capital $1,753 Leverage Total Debt/Capital 32% Net Debt/Capital 22% ($ Millions) Balance Sheet (6/30/15) Target: 30 – 40% Net Debt Net Debt/ Capital $46 $236 $382 0% 10% 20% 30% 40% $0 $200 $400 $600 $800 2013 2014 2Q 2015 2015 2016 ($ Millions) Net Debt/Capital Note: See Appendix for reconciliation of Net Debt and Net Debt/Capital to their most directly comparable GAAP equivalents. 18 13% 2% 22% Capital Expenditures Dividend Share Repurchases Acquisitions Framework: • Increased the quarterly dividend by 4% to $0.26 per share in May; represents current yield of ~3% • Repurchased 2.0 million common shares in 2Q-15 for $80 million; remaining share repurchase authorization of 4.6 million shares (expires 12/31/15) Highlights:
2015 FULL-YEAR OUTLOOK ● Sales: down approximately 7 to 8% ‒ Negative currency of 5% ‒ Declines in aerospace, agriculture, industrial aftermarket and heavy industries, partially offset by growth in wind energy, rail and military marine ● GAAP EPS estimate: $0.30 to $0.40 per diluted share ● Adjusted EPS Estimate of $2.10 to $2.20 per diluted share excluding unusual items ‒ Adj. EBIT margin of ~11% (corp. level) Currency reducing margins by ~100bps ‒ Adj. tax rate of ~31.5% ● Free Cash Flow of ~$190 million ‒ Assumes CapEx of ~4% of sales ‒ Conversion > 100% (1) Adjusted net income divided by free cash flow. Adjusted net income excludes pension liability settlement charges, cost-reduction and plant rationalizations costs and discrete tax accrual adjustments identified above. Free cash flow is defined as net cash provided by operating activities (includes pension contributions) minus capital expenditures. 19 Sales (vs. 2014) Net Organic Currency Sales Mobile Industries (3) - (4)% (5)% Down 8 - 9% Process Industries (1) - (2)% (5)% Down 6 - 7% Timken (2) - (3)% (5)% Down 7 - 8% Earnings Per Share (EPS) - GAAP $0.30 - $0.40 Includes: - Pension settlement charges (non-cash) $(1.80) - Impairment and other restructuring charges $(0.20) - Discrete tax accrual adjustments (non-cash) $0.20 Adjusted EPS - excluding unusual items $2.10 - $2.20 Free Cash Flow (FCF) ~$190M FCF Conversion(1) >1.0x
Appendix
GAAP RECONCILIATION: CONSOLIDATED EBIT & EBIT MARGIN 21 (Unaudited) (Dollars in millions, except share data) 2015 Percentage to Net Sales 2014 Percentage to Net Sales Net Income (Loss) 37.7$ 5.2 % 63.8$ 8.1 % Income From Discontinued Operations, net of income taxes — —% (6.2) (0.8)% Provision for income taxes 28.9 4.0 % 27.6 3.5 % Interest expense 8.4 1.2 % 5.8 0.7 % Interest income (0.7) (0.1)% (1.1) (0.1)% Consolidated earnings (loss) before interest and taxes (EBIT) 74.3$ 10.2 % 89.9$ 11.4 % Adjustments: Pension settlement charges (1) 4.4$ 0.6 % -$ —% Impairment and restructuring charges (2) 1.7 0.2 % 6.2 0.8 % Total Adjustments 6.1 0.8 % 6.2 0.8 % Consolidated earnings before interest and taxes (EBIT), after adjustments 80.4$ 11.0 % 96.1$ 12.2 % (2) Impairment and restructuring charges, including rationalization costs recorded in cost of products sold, related to plant closures, the rationalization of certain plants, and severance related to cost reduction initiatives. 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): June 30, Three Months Ended The following reconciliation is provided as additional relevant information about the Company's performance. Management believes consolidated earnings (loss) before interest and taxes (EBIT) 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 EBIT and EBIT margin, after adjustments, are representative of the Company's core operations and therefore useful to investors. (1) Pension settlement charges primarily related to the purchase of a group annuity contract from Prudential on January 23, 2015, that requires Prudential to pay and administer future pension benefits for approximately 5,000 U.S. Timken retirees, as well as lump sum distributions to new retirees during the first six months of 2015.
GAAP RECONCILIATION: SEGMENT EBIT & EBIT MARGIN 22 Mobile Industries (Dollars in millions) Three Months Ended June 30, 2015 Percentage to Net Sales Three Months Ended June 30, 2014 Percentage to Net Sales Three Months Ended March 31, 2015 Percentage to Net Sales Earnings before interest and taxes (EBIT) 36.0$ 9.3% 42.3$ 9.5% 35.4$ 9.0% Impairment and restructuring charges (1) 1.0 0.3% 4.4 1.0% 1.0 0.3% Earnings before interest and taxes (EBIT), after adjustments 37.0$ 9.5% 46.7$ 10.4% 36.4$ 9.3% Process Industries (Dollars in millions) Three Months Ended June 30, 2015 Percentage to Net Sales Three Months Ended June 30, 2014 Percentage to Net Sales Three Months Ended March 31, 2015 Percentage to Net Sales Earnings before interest and taxes (EBIT) 56.7$ 16.7% 64.8$ 18.9% 45.2$ 13.7% Impairment and restructuring charges (1) 0.8 0.2% 1.8 0.5% 5.6 1.7% Earnings before interest and taxes (EBIT), after adjustments 57.5$ 16.9% 66.6$ 19.5% 50.8$ 15.4% Reconciliation of segment EBIT Margin, After Adjustments, to segment EBIT as a Percentage of Sales and segment EBIT, After Adjustments, to segment EBIT: The following reconciliation is provided as additional relevant information about the Company's Mobile Industries and Process Industries segment performance. Management believes that segment EBIT and EBIT margin, after adjustments, are representative of the segment's core operations and therefore useful to investors. (1) Impairment and restructuring charges, including rationalization costs recorded in cost of products sold, related to plant closures, the rationalization of certain plants, and severance related to cost reduction initiatives. (Unaudited)
GAAP RECONCILIATION: NET INCOME & EPS 23 (Unaudited) (Dollars in millions, except share data) 2015 EPS 2014 EPS Income (Loss) from Continuing Operations 37.7$ 57.6$ Less: Net Income Attributable to Noncontrolling Interest 1.0 1.1 Net Income (Loss) from Continuing Operations attributable to The Timken Company 36.7$ 0.43$ 56.5$ 0.61$ Adjustments: Pension settlement charges (1) 4.4$ 0.05$ -$ -$ Impairment and restructuring charges (2) 1.7 0.02 6.2 0.07 Provision (benefit) for income taxes (3) 6.3 0.07 (3.3) (0.03) Total Adjustments: 12.4 0.14 2.9 0.04 Adjusted Net Income from Continuing Operations 49.1$ 0.57$ 59.4$ 0.65$ Reconciliations of Adjusted Net Income from Continuing Operations to GAAP Income (Loss) from Continuing Operations and Adjusted Earnings Per Share to GAAP Earnings (Loss) Per Share: These reconciliations are provided as additional relevant information about the Company's performance. Management believes that adjusted net income from continuing operations and diluted earnings (loss) per share, adjusted to remove: (a) pension settlement charges; (b) impairment and restructuring charges; and (c) provision (benefit) for income taxes are representative of the Company's performance and therefore useful to investors. (1) Pension settlement charges primarily related to the purchase of a group annuity contract from Prudential on January 23, 2015, that requires Prudential to pay and administer future pension benefits for approximately 5,000 U.S. Timken retirees, as well as lump sum distributions to new retirees during the first six months of 2015. (3) Provision (benefit) for income taxes includes the tax impact on pre-tax special items, 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. (2) Impairment and restructuring charges, including rationalization costs recorded in cost of products sold, related to plant closures, the rationalization of certain plants and severance related to cost reduction initiatives. Three Months Ended June 30,
GAAP RECONCILIATION: NET DEBT 24 (Unaudited) (Dollars in millions) June 30, 2015 December 31, 2014 December 31, 2013 Short-term debt, including current portion of long-term debt 82.2$ 8.0$ 269.3$ Long-term debt 555.6 522.1 176.4 Total Debt 637.8$ 530.1$ 445.7$ Less: Cash, cash equivalents and restricted cash (255.9) (294.1) (399.7) Net Debt 381.9$ 236.0$ 46.0$ Total equity 1,371.1$ 1,589.1$ 2,648.6$ Ratio of Total Debt to Capital 31.7 % 25.0 % 14.4 % Ratio of Net Debt to Capital 21.8 % 12.9 % 1.7 % Reconciliation of Total Debt to Net Debt and the Ratio of Net Debt to Capital: This reconciliation is provided as additional relevant information about the Company's financial position. Capital, used for the ratio of total debt to capital, is defined as total debt plus total shareholders' equity. Capital, used for the ratio of net debt to capital, is defined as total debt less cash, cash equivalents and restricted cash plus total shareholders' equity. Management believes Net Debt is an important measure of the Company's financial position, due to the amount of cash and cash equivalents.
Timken (NYSE:TKR)
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