48
The Timken Company Annual Corporate Governance and Strategy Review 1 Contact Information: Neil Frohnapple, Director – Investor Relations (234) 262-2310 [email protected]
The Timken Company
Annual Corporate Governance and Strategy Review
1
Contact Information:
Neil Frohnapple, Director – Investor Relations
(234) [email protected]
Forward-Looking Statements Safe Harbor and Non-GAAP Financial Information
2
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,
targets, projected sales, cash flows, liquidity and expectations regarding the future financial performance of the company, including the information under the headings
“Timken at a Glance”, “Serving an Attractive and Diverse End-Market Sector Mix”, “Segments Focused on the Market Sectors We Serve”, “Progress in Diversification
Better Positions Timken to Deliver High Returns Through Cycles”, “Proven Strategy to Drive Shareholder Value”, and “Renewable Energy – Powering to New Heights” as
well as information regarding the company’s capital allocation strategy such as plans for dividends and share repurchases, are forward-looking.
The Company cautions that actual results may differ materially from those projected or implied in forward-looking statements due to a variety of important factors,
including: the company's ability to respond to changes in its end markets that could affect demand for the company's products or services; unanticipated changes in
business relationships with customers or their purchases from the company; changes in the financial health of the company's customers, which may have an impact on the
company's revenues, earnings and impairment charges; fluctuations in material and energy costs; the impact of changes to the company’s accounting methods; political
risks associated with government instability; recent world events that have increased the risk posed by international trade disputes, tariffs and sanctions; weakness in
global or regional economic conditions and capital markets; the company’s ability to satisfy its obligations under its debt agreements and renew or refinance borrowings on
favorable terms; fluctuations in currency valuations; changes in the expected costs associated with product warranty claims; the ability to achieve satisfactory operating
results in the integration of acquired companies, including realizing any accretion within expected timeframes or at all; the impact on operations of general economic
conditions; fluctuations in customer demand; the impact on the company’s pension obligations and assets due to changes in interest rates, investment performance and
other tactics designed to reduce risk; the introduction of new disruptive technologies; unplanned plant shutdowns; the Company’s ability to maintain appropriate relations
with unions and works councils; negative impacts to the company’s business, results of operations, financial position or liquidity as a result of COVID-19 or other epidemics
and associated governmental measures such as restrictions on travel and manufacturing operations; and the company’s ability to complete and achieve the benefits of
announced plans, programs, initiatives, acquisitions 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, 2019, 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.
The Timken Company
Corporate Governance
3
Experienced Executive Officers
4
Richard G. KylePresident andChief Executive Officer
15 years at Timken & over 25 years of industry experience
Philip D. FracassaExecutive Vice President,Chief Financial Officer
16 years at Timken & over 25 years of industry experience
Christopher A. CoughlinExecutive Vice President,Group President
37 years at Timken
Ronald J. MyersExecutive Vice President,Human Resources
28 years at Timken
Hansal N. PatelVice President, General Counsel and Secretary
9 years at Timken and over 15 years of industry experience
Hans LandinGroup Vice President
24 years at Timken
Andreas RoellgenVice President – Europe,Asia, Africa
23 years at Timken
Highly Qualified, Diverse Board of Directors
55
John M. Timken, Jr.Independent Chairman, Board of DirectorsThe Timken Company
James F. PalmerRetired Corporate Vice Presidentand Chief Financial OfficerNorthrop Grumman Corporation
Richard G. KylePresident andChief Executive OfficerThe Timken Company
Ajita G. RajendraRetired Executive ChairmanA. O. Smith Corporation
Maria A. CroweRetired President of Manufacturing OperationsEli Lilly and Company
Elizabeth A. HarrellRetired Major General,USAF
Frank C. SullivanChairman andChief Executive OfficerRPM International Inc.
John A. Luke, Jr.ChairmanWestRock Company
Ward J. Timken, Jr.Chief Executive OfficerMcKinley Strategies LLC
Christopher L. MapesChairman, President andChief Executive OfficerLincoln Electric Holdings, Inc.
Jacqueline F. WoodsRetired PresidentAT&T Ohio
Highly Independent, Diverse Board and Committees
6
Committee Memberships
Name and Title Age Director Since Independent Audit CompensationNominating &
Corporate Governance
Other Public Boards
Maria A. Crowe Retired President of Manufacturing Operations, Eli Lilly and Company
61 2014 ✓ ✓ ✓Chair
_
Elizabeth A. HarrellRetired Major General, U.S. Air Force
67 2017 ✓ ✓ ✓ _
Richard G. KylePresident and Chief Executive Officer, The Timken Company
55 2013 1
John A. Luke, Jr.Chairman, WestRock Company
72 1999 ✓ ✓ ✓ 1
Christopher L. MapesChairman, President and Chief Executive Officer, Lincoln Electric Holdings, Inc.
58 2014 ✓ ✓ ✓ 1
James F. PalmerRetired Corporate Vice President and Chief Financial Officer, Northrop Grumman Corporation
71 2015 ✓ ✓Chair
✓ _
Ajita G. Rajendra Retired Executive Chairman, A. O. Smith Corporation
69 2014 ✓ ✓ ✓Chair
2
Frank C. SullivanChairman and Chief Executive Officer, RPM International Inc.
60 2003 ✓ ✓ ✓ 1
John M. Timken, Jr.Chairman, Board of Directors, The Timken Company
69 1986✓
Independent Chairman
_
Ward J. Timken, Jr.Chief Executive Officer, McKinley Strategies, LLC
53 2002 _
Jacqueline F. WoodsRetired President, AT&T Ohio
73 2000 ✓ ✓ ✓ 1
Average Age / Median Tenure 64 7 years
Board Composition Overview
7
Refreshment
OverHalfof our Board
refreshed within the last decade
3
17
Gender and Ethnic Diversity
36%
Independence
Gender Ethnic Other
Representative Skills and Attributes of our Board
8
LEADERSHIP AND GOVERNANCE
Senior leadership experience at a large
organization, including current or former
service as a public company CEO, CFO or
military general, or other public
company board service leading to
valuable insight on corporate
governance matters
HUMAN CAPITAL MANAGEMENT
Expertise in talent management, public
company compensation structures, key
employee retention and executive
succession planning
STRATEGY/M&A
Responsibility for driving growth through
innovative strategic initiatives and
through acquisitions and other business
combinations
MANUFACTURING/ENVIRONMENTAL MANAGEMENT
Expertise in manufacturing operations
and logistics and environmental
management to drive operating
performance through sustainable means
FINANCIAL
Experience in the finance function of an
enterprise, resulting in a complex
understanding of financial management,
financial reporting, and capital allocation
processes
MARKETING AND SALES
Expertise in marketing, sales, and
customer service at a scale relevant to
the Company’s global business
GLOBAL BUSINESS
Service in a leadership role with
multinational companies or in global
markets, leading to a deep knowledge
of global industry dynamics and
international supply chain
management
RISK MANAGEMENT
Experience with risk management and
compliance oversight relevant to the
exercise of fiduciary responsibilities
GOVERNMENTAL AND REGULATORY AFFAIRS
Insight into managing governmental
and regulatory affairs relevant to the
Company’s business operations
Strong Corporate Governance Practices
9
Shareholder Engagement and Outreach
10
We talk to our shareholders, and have taken steps to improve our shareholder outreach and engagement in order to listen to and respond to their views.
Over the past several years, we have made significant improvements to our shareholder communication by adopting proxy statement and CD&A enhancements, including:
▪ Executive Summary
▪ Compensation Best Practices List
▪ Corporate Governance and Corporate Social Responsibility Highlights
▪ Pay Mix Charts
▪ Performance Graphics
▪ Enhanced Director Profiles
▪ Prospective Performance Goals
Shareholder Outreach in 2020:
▪ Investor Conferences: 9
▪ Non-Deal Roadshows: 9
▪ Total Investor Contacts in 2020: >520 (up 25% vs. 2019)
▪ Spoke with shareholders holding nearly 50% of our outstanding shares
Total Shareholder Returns(Dividends Reinvested)
11
42.7%
16.5%
20.9%
11.5%
4.9%
0.3%
9.8%8.1%
17.5%
13.2% 14.0% 14.2%
0%
10%
20%
30%
40%
50%
1 Year 3 Year 5 Year 10 Year
TKR Peer Median S&P 500
Total Shareholder Returns as of 11/30/20. All periods include reinvestment of dividends. Peers represent composite of 18-company group consisting primarily of S&P 400 Mid-Cap Industrials. The 10-Year period takes into account the value of the TimkenSteel Corporation common shares distributed in the spinoff completed on June 30, 2014.
Executive Compensation Philosophy – Pay for Performance and Alignment with Shareholder Experience
12
We design our executive compensation plans and program to help us attract, motivate, reward and retain highly qualified executives who are capable of creating and sustaining value for our shareholders over the long term.
Objectives Philosophy
Our executive compensation program is designed to:
▪ Align the interests of our executives and shareholders
▪ Reward sustained, strong business results
▪ Incentivize profitable growth
▪ Attract, retain and motivate the best talent
Our executive compensation philosophy is built on the following principles:
▪ Recognizing that people are our most important resource
▪ Rewarding results linked to both short- and long-term performance (pay-for-performance)
▪ Positioning our pay to be competitive in the marketplace
▪ Focusing on increasing shareholder value
Compensation Best Practices
13
Targeted Performance-Based Pay for CEO and other NEOs
14
The Company’s incentive compensation program for executives is designed to link compensation with key financial and operational goals, some of which are short term, while others take several years or more to achieve. The Company uses a balance of short- and long-term incentives as well as cash and non-cash compensation to meet these objectives:
Incentive Compensation Plans
15(1) Represents metrics applicable to participants in the corporate STIP plan. Metrics for individual business unit STIPs can vary.
ANNUAL (STIP) LONG-TERM (LTIP)
OBJECTIVEShort-Term Operational
Business Priorities3-Year Strategic
Business PrioritiesLong-Term Shareholder
Value Creation
PARTICIPANTS ~11,400 Associates Globally ~250 Leadership Associates ~250 Leadership Associates
TIME HORIZON 1 Year 3 Years4-YearVesting
METRICS
EBIT(1)
Free Cash Flow(1)
EBIT Margin(1)
Cumulative EPS
ROIC
Share Price and Dividend
Share Priceand Dividend
AWARD CashEquity – Performance-Based Restricted
Stock UnitsEquity – Time-Based Restricted
Stock Units
Compensation Aligned to Shareholder Value Creation
Performance targets are established annually by the Compensation Committee with input from its external compensation consultant. The Committee establishes performance targets at levels that are challenging for the management team to achieve based on a variety of factors including consideration of prior-year results for the Company compared to results for U.S. industrial peers, current market conditions, cyclicality and outlook, among other things. The Committee selects metrics that it believes are highly correlated to driving long-term shareholder value with an emphasis on pay-for-performance.
Shareholder Support for NEO Compensation Program
16
The Company’s compensation program is designed to link pay and performance, which we believe has been demonstrated by the strong level of shareholder support we have received for our named executive officer compensation program over the last few years (as depicted below).
2016
Consistent, Strong Support of Named Executive Officer Compensation
2017 2018 2019 2020
2020 Compensation Program Updates
17
No Modification to Targets or Plan Designs due to COVID-19:
No adjustments or modifications were made for our 2020 annual cash incentive plan or our three outstanding performance-based RSU cycles. We retained our original:
▪ Plan design;
▪ Financial performance metrics; and
▪ Targets.
Certain Updates Implemented at the Beginning of 2020:
Adjusted mix for awards granted to our NEOs in 2020 to further align with current market practices and increase focus on meeting our performance objectives:
▪ Increased allocation for performance-based RSUs from 50% to 60%;
▪ Increased allocation for time-based RSUs from 20% to 40%; and
▪ Eliminated the use of nonqualified stock options (reduced allocation from 30% to 0%).
COVID Safety Precautions and Response
18
Focused on protecting the health and safety of employees and other stakeholders
Quickly implemented best practice precautions, including:
▪ Work-from-home policies;
▪ Company-provided PPE, regular sanitation of workspaces and temperature taking; and
▪ Social distancing policies and workplace barriers, among other measures.
We recognize and are thankful for the commitment of our associates who allowed us to continue to operate safely and efficiently during this challenging year.
Executive officer base pay reductions
To partially mitigate the financial impact to the Company from COVID-19, the Board approved certain temporary reductions to the base salaries for each executive officer. Reductions were gradually eased between April and July of 2020.
▪ April: 90% reduction in base salary for the CEO and 75% reduction in the salaries of each other executive officer
▪ May and June: CEO’s salary reduced by 50%, all other executive officers’ salaries reduced by 25%
▪ July: all executive officer salaries (including CEO’s) reduced by 10%
Reductions to Board Retainers
50% reduction to annual retainer and independent Chairman fee for first three quarters of 2020
Corporate Social Responsibility (CSR): Three Key Focus Areas
19
▪ Engineering innovative products that increase efficiency and propel renewable energy
▪ Improving our world-class safety programs to protect associates
▪ Embracing energy efficiency, pollution prevention, waste management and recycling programs to reduce our environmental footprint
▪ Building and investing in our communities through giving, partnership and volunteerism
▪ Upholding strong corporate governance principles and practices
▪ Leading with and living our values every day, while operating ethically and responsibly
▪ Investing in education, training and development programs to support a culture of learning
▪ Enhancing diversity and inclusion initiatives to encourage global, diverse viewpoints
▪ Deploying comprehensive employee surveys to increase associate engagement
▪ Rewarding associates with strong wages and competitive benefits to recognize professional excellence and achievement
Growing Knowledge Advancing Sustainability Promoting Leadership
2019 CSR Report: Tracking Progress
20
In 2020, we released our
second corporate social
responsibility report. See
www.Timken.com/about/corpo
rate-social-responsibility/ for
the full report. Here are some
highlights:
Achieved lowest lost-time-accident rate in our 121-year history in 2019
Named one of the world's most ethical companies by the Ethisphere®
Institute for the 10th time
Donated $1.6 million+ to address basic needs, education, and community-building in the U.S.
Diverted around 90% of waste from landfills through recycling, waste-to-energy and other methods
2019 CSR Report: Rewarding Associates
21
We believe it is important to provide pay that is competitive and equitable based on the local markets in which we operate.
*Based on May 2019 estimates provided by the U.S. Bureau of Labor Statistics available at: https://www.bls.gov/oes/tables.htm
2019 CSR Report: Prioritizing Safety, Supporting Associate Resource Groups
22
In 2019, we achieved the lowest lost time accident (LTA) rate in Timken history. More than 70% of our global facilities finished the year with zero LTAs. Timken’s three associate resource groups (ARGs) help
us understand and address the challenges our diverse, global workforce faces and embrace the opportunities diversity offers:
Women’s International Network (WIN)
Multicultural Association of Professionals (MAP)
Young Professionals Network (YPN)
2019 CSR Report: Protecting the Environment
23
Timken is carrying out a global initiative to drive down single-use plastics across our business, including our vendors and third-party logistics providers. We’ve started this effort by replacing plastic bubble dunnage with a recyclable paper option. With the transition complete in three of our U.S. facilities, we expect to fully implement the initiative globally in 2021. In the U.S. alone, we estimate this initiative will prevent 13,556 cubic feet of plastic material from going into landfills annually.
A New Initiative:Making Shipping More Sustainable
Timken is a trusted supplier to some of the world's leading wind turbine manufacturers.
2019 CSR Report: Investing in Our Communities
24
Giving Back in India
In India,* we’re contributing to the community through collaborations with:
Automotive Skill Development Council —working to upskill nearly 350 commercial vehicle technicians
Sri Sri Ravishankar Vidya Mandir Trust —supporting the development of a school classroom and multipurpose hall
Sri Sri College and Ayurvedic Science and Research Hospital —funding medical equipment for a medical facility
Shakthi Kendra Trust, Bangalore —renovating a school library, computer lab and classrooms
Inspiring At-Risk Students through STEM Education
We’re collaborating with the LeBron James Family Foundation I PROMISE School to provide science, technology, engineering and mathematics (STEM) programming to at-risk and underrepresented youth in Akron, Ohio, through a sponsorship of the school’s Makerspace — a real-world learning lab and library.
*Timken India spends at least two percent of their profits each year on charitable initiatives, as required by the Indian government.
Earning Recognition for Our Efforts
25
10xThe Timken Company was named one
of the World’s Most Ethical Companies®
for the 10th time by the Ethisphere® Institute in 2020.
The Timken Company
Corporate Overview and Strategy
26
Advancing as a Global Industrial Leader
Timken at a Glance
27
42Countriesworldwide
TKRFounded 1899
NYSE listedsince 1922
97+Years
continuous quarterly dividends
>17KTimken
employees
20.9%5-year
annualized total
shareholder return(1)(2)
52%North America
6%Latin America
23%Europe, Middle East, Africa
19%Asia Pacific
70%
30%
56%
44%Engineered Bearings
Power Transmission Products
Original Equipment Manufacturers (OEM)
Distribution/End-Users
$3.8B Revenue
$4.60 Record Adjusted EPS
1.5% Dividend Yield(1)
$410M Free Cash Flow
Sales By Geography(3)Product Offering Sales(3) Sales by Channel(3)
(1) Total shareholder return and dividend yield as of November 30, 2020.(2) Total shareholder return for the Company was calculated on an annualized basis, assumes quarterly reinvestment of dividends(3) Percentage of actual sales for 2019.
$726M Adjusted EBITDA
19.2% Adjusted EBITDA Margins
2019 Key Metrics
See appendix for reconciliations of adjusted EBITDA, adjusted EBITDA margin, adjusted EPS and free cash flow to their most directly comparable GAAP financial measures. Free cash flow is defined as net cash provided by operating activities minus capital expenditures.
A Broad and Market-Leading Product Portfolio
28
BELTS & CHAIN COUPLINGS, CLUTCHES & BRAKES
LINEAR MOTION LUBRICATION SYSTEMS DRIVES & GEARSBEARINGS
Serving an Attractive and Diverse End-Market Mix
292929
Timken Supports Many Critical Infrastructure Sectors
27%
In
du
str
ial/
Oth
er
10%
Au
tom
otiv
e (
OE
)
7%
Ag
ric
ultu
re/
Tu
rf
6%A
uto
/Tru
ck A
fterm
arket
5%
Min
ing
5%
Meta
ls
5%
Heavy T
ru
ck (
OE
)
5%
Co
nstr
uctio
n
4%
Fo
ssil F
uels
8%
Aero
sp
ace
8%
Rail
7%
Ren
ew
ab
le E
nerg
y
3%
Marin
e
Percentage of actual sales for 2019.
Segments Focused on the Markets We Serve
*Percentage of actual sales for 2019.See appendix for reconciliation of adjusted EBITDA margin to its most directly comparable GAAP financial measure.
30
2019 Sales
$1.9B
2019 AdjustedEBITDA Margin
25.2%
Process Industries Segment
2019 Sales
$1.9B
2019 AdjustedEBITDA Margin
15.6%
Mobile Industries Segment
Market/Sector Mix* Market/Sector Mix*
52%
21%
14%
7%6%
Distribution
Heavy/General Industrial
Renewable Energy
Services
Marine
31%
18%16%
14%
11%
10%Off-Highway
Automotive
Rail
Aerospace
On-Highway Aftermarket
Heavy Truck
Progress in Diversification Better-Positions Timken to Deliver Higher Returns Through the Cycle
313131
50%50%
Mobile Industries Process Industries
55%45%
65%
35%
Segment Diversification
56%
44%
OEM Distribution/End-Users
53%47%
64%
36%
Channel Diversification Better-Positioned to Perform Through Cycles
▪ Diversified product portfolio
▪ Growing in Process faster than Mobile
▪ Scaling in new markets
▪ Improved pricing model
▪ Variablized cost structure
▪ Lower-cost footprint
▪ Significantly reduced legacy liabilities
▪ Enhanced margin profile
▪ Strong cash flow
20
08
20
14
20
19
70%
30%
Engineered Bearings Power Transmission Products
88%
12%
97%
3%
Product Diversification
Based on percentage of actual sales.
Proven Strategy to Drive Shareholder Value
32
▪ Drive enterprise-wide lean and continuous improvement efforts
▪ Build a more cost-effective global manufacturing footprint
▪ Deliver efficiencies across our supply chains
▪ Optimize processes and SG&A efficiency
▪ Invest in organic growth and productivity initiatives
▪ Pay an attractive dividend that grows over time with earnings(1)
▪ Broaden portfolio and reach through value-accretive M&A
▪ Return capital through share repurchases(1)
▪ Be the technical leader in solving customers’ friction and power transmission challenges
▪ Expand both our product portfolio and geographic presence
▪ Deliver a best-in-class customer service experience using a differentiated technical sales model
DRIVE PROFITABLE ORGANIC GROWTH
OPERATEWITH EXCELLENCE
DEPLOY CAPITAL TO DELIVER SHAREHOLDER VALUE
(1) Subject to Board approval.
Our Actions Are Driven by the Timken Business Model
33
Markets Supported by Strong Macros
Expand Reach with Adjacent Products and Services
TIM
KE
N C
OM
PE
TIT
IV
E
DIF
FE
RE
NT
IA
TO
RS
DIS
CIP
LIN
ED
FILT
ER
FO
R A
TT
RA
CT
IV
E O
PP
OR
TU
NIT
IE
S
ChallengingApplications
Aftermarket & Rebuild
Fragmentation
High Service Requirements
Talent
Technology& Innovation
Operational Excellence
Business Capabilities
VALUE CREATION
Renewable Energy – Powering to New Heights
Wind and Solar saw significant YOY growth again in 3Q-20
▪ Strong underlying market growth and share gains driving the increase in sales
▪ Timken’s products, technology and innovation continue to support the global trend towards sustainability and meet customers’ evolving requirements for optimized reliability and performance
▪ Renewable energy is Timken’s single largest market year-to-date in 2020*
Outgrowth initiatives and industry dynamics support long-term growth
▪ Timken recently announced more than $75 million in capital investments through early 2022 to increase the company’s renewable energy capabilities across its footprint
▪ These investments include advanced automation and manufacturing technologies
▪ Active pipeline of new program wins
▪ Timken expanding product line coverage in renewables
▪ Increasing size of wind turbines creates opportunities for further share gains
▪ Aftermarket revenue is an additional long-term revenue opportunity for Timken, with minimal contribution in current results
34
Renewable Energy roughly 12% of total company sales YTD*
YTD-19 YTD-20*
>$300M
*Year-to-date as of September 30, 2020
INORGANIC GROWTH
Target Accretive Transactionsto Drive Portfolio Expansion
Disciplined Capital Deployment Framework a Differentiator
35
INVEST IN CORE BUSINESS
Organic Growth, Margin Improvement, R&DCapEx Target: 3.5-4.0% of Sales
DIVIDEND
Pay Attractive Dividend(1)
Target: 20-35% Payout Ratio Over Cycle
SHARE REPURCHASE
Return Capital to Shareholders Through Stock Buybacks(1)
Leverage Target: 1.5X - 2.5X NET DEBT-TO-ADJ. EBITDA
(1) Subject to Board approval.
Capital Deployment is Focused on Highest Returns
Balanced approach to capital deployment having a significant impact
Allocated nearly $3.5B of capital over the past five years; all four elements represented:
▪ ~$600M in CapEx
▪ ~$420M in dividends
▪ ~$1,710M in acquisitions
▪ ~$620M in share buybacks
Strong balance sheet and cash flow allow for further deployment to create value
Pensions require much less cash versus prior periods
▪ Effective December 31, 2022: freezing benefits under primary U.S. defined benefit pension plan (includes participating executive officers)
36
2005 - 2009 2010 - 2014 2015 - 2019
Pension/OPEB Share Repo M&A Dividends CapEx
Capital Deployment
~$2.1B
~$3.0B
~$3.5B
NOTE: All periods are excluding the company’s steel business which was spun off on June 30, 2014. Prior to 2012 assumes pension/OPEB split of 65% bearing/35% steel.
(1) Subject to Board approval on a quarterly basis.
Investing in Core Business Remains Top Priority
Investing in core business remains top priority for capital deployment
▪ Supporting organic growth and margin expansion in the core business
▪ Generally produces the highest risk-adjusted returns
Includes investments in CapEx, R&D, etc.
CapEx – target 3½ to 4% of sales over the cycle
▪ Includes maintenance (~1% of sales)
▪ Bulk of spend allocated to organic growth and productivity/margin improvement initiatives
▪ New capacity/capabilities – focused on lower-cost countries
▪ Investments in productivity/automation – focused on higher-cost countries
▪ Operational excellence initiatives across the footprint
37
Breakdown of Target CapEx
OPERATIONAL EXCELLENCE
Improve productivityand margins
GROWTH
Add new capabilities/capacity
Growth/Excellence
Maintenance
Rich History of Dividend Payments
Goal: Pay an attractive dividend that grows over time with earnings
▪ Target 20-35% payout (adj. EPS) over the cycle
▪ Attractive yield as compared to peers and other mid-cap industrials benchmarks
Paid 394th consecutive quarterly dividend in December 2020
▪ Dividend increased to $0.29/share, representing an increase of 4% from the prior quarter
▪ One of the longest active streaks on NYSE
Commitment to dividend expected to continue(1)
38
Dividend Yield (as of: 11/30/20)
The Timken Company 1.5%
Peer Median(2) 0.9%
S&P 500 1.6%
S&P Mid-Cap 400 Industrials 0.9%
(1) Subject to Board approval on a quarterly basis.(2) Peers represent composite of 18-company group consisting primarily of S&P 400 Mid-Cap Industrials
$0.45 $0.53
$0.78
$0.92 $0.92 $1.00 $1.03 $1.04 $1.07 $1.11 $1.12 $1.13
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Annual Dividend Payout
Acquisition Strategy Focused on Broader Power Transmission and Motion Space
Timken acquisition strategy:
Consolidate attractive targets within the global bearing space
▪ Focus on “bolt-ons” to enhance industry-leading product offering or extend reach
Expand into attractive adjacencies that fit the Timken Business Model
▪ Focus on high-quality businesses across the industrial power transmission and motion space
▪ Enhance our organic growth and profitability over the long-term
▪ Continue to grow and enhance global industrial distribution platform
39
*TRB = Tapered roller bearingsNote: Bearing market is based on the 2018 Freedonia report.
Power Transmission and Motion Space
~$10B TRB*
$3.8B
~$80B Bearings
PT Products and Services Align with Timken Business Model
▪ Engineered components
▪ Critical wear parts with regular aftermarket demand
▪ Often served through same aftermarket channels
▪ Close proximity to bearing positions - targets same end users
▪ Requires similar engineering expertise -friction, motion and materials
▪ Fragmented industry with healthy profit pools
40
Customer and channel relevance
DRIVEN EQUIPMENT: PUMPS/COMPRESSORS, FANS, CONVEYORS, GENERATORS, MILLS
COUPLING CLUTCH
BEARINGS
CHAIN
BELTS
LUBRICATION SYSTEMS
ELECTRIC CONTROLS
BEARINGS BEARINGS
ELECTRIC MOTOR SERVICES
SPLIT HOUSED
UNIT BEARING
GEAR DRIVE COUPLING
BRAKE
HOUSED UNIT BEARING
Returning Capital Through Share Repurchases
41
93.0
75.4
Share repurchase an important component of capital deployment strategy
Since 2013:
• Repurchased 22.6M shares for $928M (avg. ~$41/share)
• Basic shares outstanding have been reduced by ~19% since December 31, 2013; this is net of shares issued for stock compensation
Current share repurchase authorization:
• 10 million shares authorized for repurchase through February 2021
• ~4.4 million shares remaining as of 09/30/20
12/31/13 09/30/20
Basic Shares Outstanding (Millions)
Long-Term Financial Goals
42
Strong Top-line Growth
Earnings Growth
Robust Cash Generation
Value-creating Capital Deployment
▪ Positive macros support market growth of 2-3% over cycle
▪ Organic outgrowth driven by new products and markets
▪ Accretive acquisitions will enhance growth
▪ Operational Excellence delivers strong EBITDA margins
▪ Strong EPS growth over the cycle
▪ Share buyback will contribute
▪ Expect strong cash flow to continue
▪ Improved working capital performance
▪ Supports capital deployment strategy
▪ Organic growth remains top priority with greatest returns
▪ M&A drives long-term value creation
▪ Capital return remains important
Long-Term (5-year) Targets
EPS CAGR: 10%
EBITDA Margins: 20%
Free Cash Flow: >100% Conversion on Net Income
Adjusted ROIC: >13%
Leverage: 1.5-2.5x Net Debt-to-Adj. EBITDA
Organic Growth CAGR: 3-4%
Inorganic Growth CAGR: 2-3%
Total Growth CAGR: ~6%
(1) These long-term (5-year) targets were provided at our Investor Day on December 12, 2019 and have not been updated since that date. ROIC is defined as ANOPAT divided by average invested capital.
Why Invest in Timken?
▪ Advancing as a global industrial leader
▪ Robust product portfolio with deep technical and commercial capabilities
▪ Focusing on growth with a compelling pipeline of opportunities for innovation
▪ Positioned to grow in attractive end markets where we can leverage our global footprint and efficiently serve customers
▪ Creating value by performing through cycles with solid margins andstrong cash flow
▪ Maintaining our track record of bolt-on acquisitions to support growth, market penetration and new end market and geographic opportunities
▪ Highly experienced management team driving executional success
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The Timken Company
Appendix:GAAP Reconciliations
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GAAP Reconciliation: 2019 EBITDA and EBITDA, After Adjustments to GAAP Net Income
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Reconciliation of EBITDA to GAAP Net Income, EBITDA Margin to Net Income as a Percentage of Sales, and EBITDA Margin, After Adjustments, to Net Income as a Percentage of Sales, and EBITDA, 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, taxes, depreciation and amortization (EBITDA) is a non-GAAP measure that is useful to investorsas it is representative of the Company's performance and that it is appropriate to compare GAAP net income to consolidated EBITDA. Management also believes that adjusted EBITDA, adjusted EBITDA margin and EBITDA margin are useful to investors as they are representative of theCompany'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)
2019Percentage to
Net Sales
Net Income $ 374.7 9.9 %
Provision for income taxes 97.7
Interest expense 72.1
Interest income (4.9)
Depreciation and amortization 160.6
Consolidated EBITDA $ 700.2 18.5 %
Adjustments:
Impairment, restructuring and reorganization charges (1) $ 9.1
Property (recoveries) losses and related expenses (2) 7.6
Acquisition-related charges (3) 15.5
Brazil legal matter (4) 1.8
Gain on sale of real estate (5) (4.5)
Corporate pension and other postretirement benefit related (income) expense (6) (4.1)
Tax indemnification and related items 0.7
Total Adjustments 26.1 0.7 %
Adjusted EBITDA $ 726.3 19.2 %
(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 cost structure periodically, 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) Represents property loss and related expenses during the year (net of insurance recoveries) resulting from property loss that occurred during the first quarter of 2019 at one of the Company's warehouses in Knoxville, Tennessee and during the third quarter of 2019 at one of the Company's warehouses in Yantai, China.
(3) Acquisition-related charges in 2019 primarily related to the Rollon S.p.A. ("Rollon"), The Diamond Chain Company ("Diamond Chain"), and BEKA Lubrication ("BEKA") acquisitions, including transaction costs and inventory step-up impact.
(4) The Brazil legal matter represents expense recorded to establish a liability associated with an investigation into alleged antitrust violations in the bearing industry that was settled in the fourth quarter of 2019.
(5) The gain on sale of real estate is related to the sale of a manufacturing facility in Pulaski, Tennessee. This amount was recorded in other income.
(6) Corporate pension and other postretirement benefit related (income) expense represent actuarial (gains) and losses that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions. The Company recognizes actuarial (gains) and losses in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement. Refer to the Retirement Benefit Plans and Other Postretirement Benefit Plans footnotes within the Company's annual reports on Form 10-K and quarterly reports on Form 10-Q for additional discussion.
GAAP Reconciliation: 2019 Net Income & EPS
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Reconciliations of Adjusted Net Income to GAAP Net Income and Adjusted Earnings Per Share to GAAP Earnings Per Share:
(Unaudited)
The following reconciliations are 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 themanagement 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 coreoperations.
(Dollars in millions, except share data)
Twelve Months Ended December 31, 2019 EPS
Net Income Attributable to The Timken Company $ 362.1 $ 4.71
Adjustments: (1)
Impairment, restructuring and reorganization charges (2) $ 9.8
Property loss and related expenses (3) 7.6
Acquisition-related charges (4) 15.5
Brazil legal matter (5) 1.8
Gain on sale of real estate (6) (4.5)
Corporate pension and other postretirement benefit related charges (7) (4.1)
Tax indemnification and related items 0.7
Noncontrolling interest of above adjustments (0.5)
Provision for income taxes (8) (34.6)
Total Adjustments: (8.3) (0.11)
Adjusted Net Income Attributable to The Timken Company $ 353.8 $ 4.60
(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, (iii) severance related to cost reduction initiatives and (iv) related depreciation and amortization. The Company re-assesses its operating footprint and cost structure periodically, 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) Represents property loss and related expenses during the year (net of insurance proceeds) resulting from property loss that occurred during the first quarter of 2019 at one of the Company's warehouses in Knoxville, Tennessee and during the third quarter of 2019 at one of the Company's warehouses in Yantai, China.
(4) Acquisition-related charges in 2019 primarily related to the Rollon, Diamond Chain, and BEKA acquisitions, including transaction costs and inventory step-up impact. This also includes transaction costs related to the acquisition of the joint venture partner's interest in Timken-XEMC (Hunan) Bearing Co., Ltd.
(5) The Brazil legal matter represents expense recorded to establish a liability associated with an investigation into alleged antitrust violations in the bearing industry that was settled in the fourth quarter of 2019. Refer to the Contingencies footnote within the Company's annual reports on Form 10-K and quarterly reports on Form 10-Q for additional discussion.
(6) The gain on sale of real estate related to the sale of a manufacturing facility in Pulaski, Tennessee during the first quarter of 2019 and disposal of land in Colmar, France during the fourth quarter of 2019. These amounts were recorded in other income.
(7) Corporate pension and other postretirement benefit related charges represent actuarial (gains) and losses that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions. The Company recognizes actuarial (gains) and losses in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement. Refer to the Retirement Benefit Plans and Other Postretirement Benefit Plans footnotes within the Company's annual reports on Form 10-K and quarterly reports on Form 10-Q for additional discussion.
(8) Provisionfor income taxes includes the net tax impact on pre-tax adjustments (listed above), the impact of discrete tax items recorded during the respective periods, including the reduction of a valuation allowance in the fourth quarter of 2019 of $39.2 million, as well as other adjustments to reflect the use of one overall effective tax rate on adjusted pre-tax income in interim periods.
Reconciliation of Free Cash Flow to GAAP Net Cash Provided by Operating Activities:
(Unaudited)
The following reconciliation is provided as additional relevant information about the Company's 2019 performance deemed useful to investors. 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.
Reconciliation of Free Cash Flow 2019
Net cash provided from operating activities $ 550.1
Less: capital expenditures 140.6
Free cash flow $ 409.5
GAAP Reconciliation: Consolidated Free Cash Flow
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GAAP Reconciliation: Segment EBITDA & EBITDA Margin
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Reconciliation of segment EBITDA Margin, After Adjustments, to segment EBITDA as a Percentage of Sales and segment EBITDA, After Adjustments, to segment EBITDA:
(Unaudited)
The following reconciliations are 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 adjustedEBITDA and adjusted EBITDA 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 resourcesand assessment of performance.
Mobile Industries
(Dollars in millions)Twelve Months Ended
December 31, 2019Percentage to
Net Sales
Earnings before interest, taxes, depreciation, and amortization (EBITDA) $ 284.9 15.0%
Impairment, restructuring and reorganization charges (1) 5.2 0.3%
Gain on sale of real estate (2) (4.5) (0.2)%
Property loss and related expenses (3) 7.6 0.4%
Acquisition-related charges (4) 1.5 0.1%
Adjusted EBITDA $ 294.7 15.6%
Process Industries
(Dollars in millions)Twelve Months Ended
December 31, 2019Percentage to
Net Sales
Earnings before interest, taxes, depreciation and amortization (EBITDA) $ 466.6 24.6%
Impairment, restructuring and reorganization charges (1) 3.5 0.2%
Acquisition-related charges (4) 8.3 0.4%
Adjusted EBITDA $ 478.4 25.2%
(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 cost structure periodically, 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 sale of real estate related to the sale of a manufacturing facility in Pulaski, Tennessee during the first quarter of 2019 and disposal of land in Colmar, France during the fourth quarter of 2019. These amounts were recorded in other income.
(3) Represents property loss and related expenses during the year (net of insurance proceeds) resulting from property loss that occurred during the first quarter of 2019 at one of the Company's warehouses in Knoxville, Tennessee and during the third quarter of 2019 at one of the Company's warehouses in Yantai, China.
(4) Acquisition-related charges in 2019 primarily related to the inventory step-up impact for the Rollon, Diamond Chain, and BEKA acquisitions.
