JEFFERIES GLOBAL INDUSTRIAL AND A&D CONFERENCE NEW YORK CITY AUGUST 8, 2012

Transcription

1 JEFFERIES GLOBAL INDUSTRIAL AND A&D CONFERENCE NEW YORK CITY AUGUST 8, 2012

2 STRATEGIC UPDATE & REVIEW JAMES W. GRIFFITH President and Chief Executive Officer

3 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 In particular, the statements related to Timken s plans, outlook, future financial performance, targets, projected sales, cash flows, and liquidity, including the information under the headings 2012 Full-Year Outlook, 2012 Outlook Estimates, Sales, Earnings Per Share, Free Cash Flow Return on Invested Capital, and 2012 Capital Allocation Highlights 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 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 and their impact on the operation of the company s surcharge mechanisms; the impact of the company s lastin, first-out accounting; weakness in global economic conditions and financial markets; 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, higher or lower raw-material and energy costs, fluctuations in customer demand, the company s ability to achieve the benefits of its ongoing programs and initiatives, and retention of CDSOA distributions. Additional factors are discussed in the company s filings with the Securities and Exchange Commission, including the company s annual report on Form 10-K for the year ended Dec. 31, 2011, quarterly reports on Form 10-Q and current reports on Form 8-K. The company undertakes no obligation to update or revise any forward-looking statement. This presentation includes certain non-gaap financial measures as defined by the rules and regulations of the Securities and Exchange Commission. A reconciliation of those measures to the most directly comparable GAAP equivalent is provided in the Appendix to this presentation. 3

4 TIMKEN OVERVIEW Leader in friction management & mechanical power transmission reliability for diverse markets, including: Aerospace Mining Energy / Wind Rail Established in 1899 Headquartered in Canton, Ohio 2011 sales: $5.2 billion Global footprint with operations in 30 countries 21,000 associates Construction Truck Automotive Aftermarket 4

5 THE TIMKEN COMPANY TODAY Process -- Global growth beyond bearings, diversified, strong aftermarket Sales: $693 Million EBIT Margin: 22.2% Aerospace & Defense -- Diversified into transmissions, and aftermarket Sales: $179 million EBIT Margin: 10.4% Process Industries 25% Aerospace & Defense 7% 1 st half 2012 Total Sales: $2.8 Billion Steel 35% Steel -- High-performance, custom steels Sales: $1.0 Billion EBIT Margin: 17.1% Mobile Industries 33% Mobile -- Transformed portfolio, more aftermarket Sales: $918 Million EBIT Margin: 14.8% 5 Note: Based on June 30, 2012 YTD financial results. Steel segment sales includes $58 million inter-segment sales.

6 THE STRATEGY IS WORKING Enhance existing products and services Leverage technology to create value Capture lifetime of opportunity Attractive industrial markets Developing geographies Channels, services, distribution/aftermarket Structure portfolio for value creation Fix/Exit under-performing areas Refine lean operating model Improve efficiency and reduce cost structure Increase agility Deliver greater profitability 6

7 KEY ACCOMPLISHMENTS IN 2011 Record Sales More Profitable Portfolio Record Profitability Strategic Acquisitions Record New Products Increased Industrial Aftermarket Record Customer Service Growing End-markets Record Safety Global Expansion 7

8 Markets Geographies Products Performance A MULTI-FACETED TRANSFORMATION 8

9 DIVERSE GLOBAL PORTFOLIO Agriculture Mining Construction On-Highway Aftermarket Heavy Truck Other Industrial Machinery Portfolio Diversification Broad-based end markets and customers Increased sales from demanding applications Aerospace & Defense Industrial Aftermarket Expanded channels into the aftermarket Global Diversification Rail Diversified global scope, growing faster outside the U.S. Passenger Car Energy Light Truck 32% of sales outside the U.S. Excluding Steel segment, sales abroad represented nearly 50% of the portfolio in Asia sales up 21% from prior year 9 Note: End market and geographic diversification based on 2011 sales of $5.2 billion.

10 MARKETS: INDUSTRIAL AFTERMARKET A DECADE OF GROWTH 10 Note: Reflects $1 billion in Timken aftermarket sales in 2011, up 500% since the year 2000.

11 Emerging Markets: A Source of Growth 10-Year Sales Revenue ($ in Millions) CAGR 16% $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Africa LA+Mexico India China ASEAN

12 start PRODUCTS: DIVERSIFIED PORTFOLIO 12

13 NEW ACQUISITIONS, NEW CAPABILITIES Differentiated performance Industrial focus Strong aftermarket Supply chain synergy Sales/Timing Sales: $85M Purchase date: July 11 Sales: $100M Purchase date: Oct Sales: $23M Purchase date: Sept. 10 Product Offering Gear drive repair Engineered chains and augers Mounted spherical roller bearings and couplings Growth Synergies Capture lifetime of revenue opportunity Leverage distribution channel Opportunities for cross-selling and development of product lines Global expansion 13 NOTE: Sales for Philadelphia Gear and Drives reflect last 12-month sales at time of purchase. Sales for QM Bearings reflect both Mobile Industries and Process Industries sales.

14 RECORD PERFORMANCE: DELIVERING ON SALES & EARNINGS Net Sales ($ in Millions) Earnings Per Share $6,000 $6.00 $5,000 $5.00 $4,000 $4.00 $3.00 $3,000 $2.00 $2,000 $1.00 $1,000 $0.00 $ ($1.00) 14 Note: EPS assumes dilution includes Torrington acquisition as acquired February Historical results exclude the discontinued operations of Latrobe Steel (2006 divestment) and the Needle Roller Bearings (NRB) business (2009 divestment). NRB discontinued operations for 2003 and 2004 are based on internal estimates.

15 MOBILE INDUSTRIES Segment Overview Bearings, power transmission components and related products and services Serves diverse market sectors Light Vehicle On-highway Aftermarket Off Highway Heavy Truck Rail Customers: OEM s and aftermarket distributors Sector Profile On- Highway Aft Mkt 13% Passenger Car 9% Rail 13% Heavy Truck 13% Off- Highway 26% Light Truck 26% 1 st Half Financial Performance 2011 sales: $1.8B 2012 Full-Year Outlook* Sales ($ Billions) $0.9 $0.9 EBIT Margin 15.8 % 14.8 % Sales expected to be flat to down 5% Rail Off-highway -Drives Auto aftermarket Light Vehicle Heavy Truck EBIT margin includes St. Thomas plant closure costs *2012 Full-Year Outlook as of July 26, 2012

16 PROCESS INDUSTRIES Segment Overview Precision-engineered bearings and mechanical power transmission products for diverse industrial markets Diverse and global customer base Sector Profile Gear Drives 5% Energy 6% Metals 8% Other 1% ~65% aftermarket; consistent, profitable business Machinery 7% Service 9% Aftermarket 64% 2011 sales: $1.2B 1 st Half Financial Performance 2012 Full-Year Outlook* Sales ($ Billions) EBIT Margin Sales expected to be up 7 to 12% $0.6 $ % 22.2 % Bearing & Gear Services Industrial Distribution OEM *2012 Full-Year Outlook as of July 26, 2012

17 AEROSPACE & DEFENSE Segment Overview Power transmission systems and flightcritical components for civil and military aircraft: Helicopter transmissions Bearings Rotor head assemblies Gears Turbine engine Housings components Aftermarket engine overhaul, replacement parts, bearing and component repair Health and positioning control applications 1 st Half Financial Performance Sector Profile Civil 43% Motion Control 11% 2011 sales: $0.3B 2012 Full-Year Outlook* Defense 46% Sales ($ Billions) EBIT Margin Sales expected to be up 10 to 15% $0.2 $ % Civil Defense Motion control 2.5 % *2012 Full-Year Outlook as of July 26, 2012

18 STEEL Segment Overview Market leadership position in high quality air-melted alloy steel bars, tubes, precision components and value-added services Bars: 1 to 16 Serving niche high-end applications where demands on performance are significant Special machining characteristics Resistance to heat, stresses or wear High strength or other traits Tubes: 2 to 13 1 st Half Financial Performance Sector Profile Oil & Gas 25% Mobile On Highway 28% 2011 sales: $2.0B 2012 Full-Year Outlook* Industrial 47% Sales ($ Billions) EBIT Margin Sales expected to be flat to down 5% $1.0 $ % 17.1 % Pricing Energy (Oil & Gas) Mobile On-highway Industrial *2012 Full-Year Outlook as of July 26, 2012

19 KEY TAKEAWAYS More Diversified Geographic strategically expanded market presence globally Product expanded steel & bearing portfolio as well as complimentary products & services Improved cost structure Leaner and more variable Ability to tightly control supply chain and react to market variability Focused execution Well-positioned to achieve solid performance through market cycles 19

20 FINANCIAL REVIEW GLENN EISENBERG Executive Vice President Finance & Administration

21 1 ST HALF 2012 RESULTS Sales of $2.8B, up 7% from prior year 1 st half 2011 Driven by acquisitions, pricing & mix, partially offset by lower sales volume and the impact of currency EBIT of $549M, or 19.9% of sales Includes CDSOA receipts of $110M & St. Thomas plant closure costs of $18M Earnings benefited from improved pricing & mix, and acquisitions, partially offset by lower volume, surcharges and higher SG&A EPS of $3.44 per diluted share, up from prior year s $2.36 Includes CDSOA receipts of $0.70 per share & St. Thomas plant closure costs of $0.18 per share Sales ($ Mils.) $2,764 $2, EBIT Margin 19.9% 14.4% Note: See Appendix for reconciliation of EBIT to the most directly comparable GAAP equivalent. CDOSA is a reference to the US Continued Dumping Subsidy and Offset Act.

22 1 ST HALF 2012 RESULTS Free Cash Flow of $76M From operating activities after pension contributions, capital expenditures and dividends Includes $132M of discretionary pension contributions and $69M of CDSOA receipts, both net of tax Strong Balance Sheet Cash position of $510M and debt of $494M, or $16M net cash Pension & postretirement benefits unfunded liability of $735 million, down $220 million from 2011 year-end Repurchased 1 million shares and increased dividend by 15% to $0.23/share in 1Q 2012 Liquidity of $1.4B, with no significant debt maturities until Note: Free cash flow is defined as net cash provided by operating activities (includes pension contributions) minus capital expenditures and dividends. Net cash is not a GAAP measure. Management believes Net cash is an important measure of the Company's financial position, due to the amount of cash and cash equivalents. See Appendix for reconciliation of Free Cash Flow and Net Cash to the most directly comparable GAAP equivalents.

23 2012 OUTLOOK ESTIMATES Sales Growth Up slightly Mobile Industries Flat to down 5% Process Industries Up 7 to 12% Aerospace & Defense Up 10 to 15% Steel Flat to down 5% EPS (diluted) $5.00 to $5.30 Includes: CDSOA receipts $0.70 St. Thomas closure costs $(0.30) Free Cash Flow $140M CapEx $315M Dividends $90M Pension/VEBA contributions (discretionary) $220M, net of tax 23 Note: Free cash flow is defined as net cash provided by operating activities (includes pension contributions) minus capital expenditures and dividends. See Appendix for reconciliation of Free Cash Flow to the most directly comparable GAAP equivalent.

24 SALES Net Sales ($ Mils.) $8,000 $7, Sales Target* Outlook 2012 Sales Estimate: up slightly Y-O-Y $6,000 $5,000 $4, to 09 Cycle CAGR: 4% 2012 Sales Estimate - favorable impact of pricing, mix and acquisitions, partially offset by lower volumes and surcharges 24 $3,000 $2,000 $1,000 $0 91 to 01 Cycle CAGR: 4% Sales Target: 3-Year CAGR of +7 to 12% - global GDP recovery/ growth in of 3.5% to 4% - includes inorganic growth Note: 2003 includes Torrington acquisition as acquired February Historical results exclude the discontinued operations of Latrobe *2014 Target as of February 14, 2012 Steel (2006 divestment) and the Needle Roller Bearings (NRB) business (2009 divestment). NRB discontinued operations for 2003 and 2004 are based on internal estimates.

25 EARNINGS PER SHARE Net Sales ($ Mils.) Earnings Per Share $8,000 $7,000 $6,000 $5,000 $4, EPS Estimate 2014 EPS Target* $7.00 $6.00 $5.00 $4.00 $3.00 Outlook 2012 EPS Estimate: $5.00 to $5.30 per diluted share - includes CDSOA receipts of $0.70 and St. Thomas closure costs of $(0.30) $3,000 $2,000 $1,000 $2.00 $1.00 $ EPS Target: $6.50 to $7.00 per diluted share - redeployment of capital including inorganic growth $ ($1.00) *2014 Target as of February 14, Note: Earnings are reported on a GAAP basis and include the impact of special items, such as restructuring and reorganization expenses, CDSOA payments and goodwill amortization. EPS assumes dilution includes Torrington acquisition as acquired February Historical results exclude the discontinued operations of Latrobe Steel (2006 divestment) and the Needle Roller Bearings (NRB) business (2009 divestment). NRB discontinued operations for 2003 and 2004 are based on internal estimates.

26 FREE CASH FLOW Free Cash Flow ($ Mils.) $500 Outlook $ FCF Estimate: $140M after, $300 $ Cycle Avg: $87M 2012 FCF Estimate 2014 FCF Target* - CapEx of $315M - dividends of $90M - discretionary pension / VEBA trust contributions of $220M (net of tax) $100 $0 -$ Cycle Avg: $16M FCF Target: $250 to $300M - CapEx above targeted range, increased dividends and lower pension / VEBA contributions *2014 Target as of February 14, Note: Free cash flow is defined as net cash provided by operating activities (includes pension contributions) minus capital expenditures and dividends. Results include discontinued operations until divested. See Appendix for reconciliation of Free Cash Flow to the most directly comparable GAAP equivalent. VEBA is in reference to the company s voluntary employee benefit association trust.

27 NET DEBT Net Debt ($ Mils.) Net Debt /Capital $1,000 50% $800 40% $600 Long-term Leverage Target: 30% - 35% 30% $400 20% $200 10% $0 0% -$200-10% -$400-20% -$ % 27 Note: 2003 includes Torrington acquisition as acquired February Net debt is not a GAAP measure. Management believes Net Debt is an important measure of Company's financial position, due to the amount of cash and cash equivalents. Net Debt / Capital (leverage) defined as Net Debt / (Net Debt + Equity). See Appendix for reconciliation of Net Debt to the most directly comparable GAAP equivalent.

28 RETURN ON INVESTED CAPITAL Return on Invested Capital Cost of Capital 20% 2014 Target* 17-19% 18% 16% 14% Cycle Avg. : 6.2% Cycle Avg. : 7.8% 12% 10% Cost of Capital ~ 9% 8% 6% 4% 2% 0% 28-2% Note: The company uses NOPAT/Average Invested Capital as a type of ratio that indicates return on capital (ROIC). See Appendix for reconciliation of ROIC to the most directly comparable GAAP equivalent. *2014 Target as of February 14, 2012

29 2011 CAPITAL ALLOCATION HIGHLIGHTS Target spend in industrial sectors: oil & gas, infrastructure, heavy industries and aerospace Asia growth Capital Spend $205M spent on growth, continuous improvement and maintenance Bearing Capacity $50 mil Steel $35 mil in-line forge press Acquisitions Philadelphia Gear $200M Drives $92M Philadelphia Gear $200 mil Drives LLC $92 mil Over $1 Billion of Capital Deployed in 2011 Industrial & aftermarket focus International Accretive to earnings in year 1 Earn cost of capital in 3 years Discretionary contributions as capital structure and cash flow permit Pension OPEB/Funding Discretionary contributions of $401M, pre-tax Pension funded status of 84% as of 12/31/11 Contributions of $415 mil Funding status ~ 84% Dividends/Share Repurchase Dividends Dividends $76M; mil raised 11% Share to repurchase $0.20/share $44 mil in May 2011 Share repurchases totaling $44M Returning cash to shareholders 358 th consecutive quarterly dividend paid in December 2011* *360 th consecutive quarterly dividend paid on June 5,

30 2012 CAPITAL ALLOCATION HIGHLIGHTS Target spend in industrial sectors: oil & gas, infrastructure, heavy industries and aerospace Asia growth Capital Spend $315M to be spent on growth,continuous improvement and Bearing Capacity $50 mil maintenance Steel $35 mil in-line forge press Acquisitions Strong balance sheet to fund future acquisitions Philadelphia Gear $200 mil Drives LLC $92 mil Strong Capital Redeployment Industrial & aftermarket focus International Accretive to earnings in year 1 Earn cost of capital in 3 years Discretionary contributions as capital structure and cash flow permit Pension OPEB/Funding Discretionary contributions of ~$350M, pre-tax Expected pension funded status of 90%+ Contributions of $415 mil Funding status ~ 84% Dividends/Share Repurchase Dividend Dividends raised $76 mil 15% to $0.23/quarter Share repurchase in February $44 mil Shares repurchased $52M YTD, with 9M authorized shares remaining Returning cash to shareholders 90 years of consecutive quarterly dividends 30

31 THE STRATEGY IS WORKING Enhance existing products and services Leverage technology to create value Capture lifetime of opportunity Attractive industrial markets Developing geographies Channels, services and distribution Structure portfolio for value creation Fix/Exit under-performing areas Refine lean operating model Improve efficiency and reduce cost structure Increase agility Deliver greater profitability 31

32 JEFFERIES GLOBAL INDUSTRIAL AND A&D CONFERENCE NEW YORK CITY AUGUST 8, 2012

33 APPENDIX

34 GEOGRAPHIC PROFILE 2011 Sales: $5.2 Billion Global Footprint Over 70 manufacturing Asia 11% Latin America 4% Rest of World 6% facilities and distribution centers across the globe 10 global Technology & Engineering Centers Nearly 90 sales offices to serve customers in different regions of the world Europe 12% United States 67% Global Sales Diversification Excluding Steel segment, sales abroad represent nearly 50% of the portfolio in Note: Based on 2011 financial results.

35 INCENTIVE COMPENSATION Annual Long-Term Objective Short-term operational business priorities 3 year strategic business priorities Long-term shareholder value creation Participants 6,000 Associates globally 160 General Managers & above 265 Senior Managers 160 General Managers & above Time Horizon 1 Year 3 Years 4 Years 10 Years 40% Corporate EBIT/BIC Metrics 30% Business Unit EBIT/BIC 15% BU working capital % of sales 50% EPS 50% ROIC Share price 15% Customer service or New business sales ratio Award Cash Cash or Equity Equity Restricted Non Qualified Stock Units Equity Stock Options 35 Note: EBIT/BIC is a pre-tax return on invested capital (ROIC) measure. BIC denotes beginning invested capital. The incentive compensation plan depicted above is effective January 2012.

36 GAAP RECONCILIATION OF EBIT & EBITDA ($ Mils.) Reconciliation of EBIT and EBITDA to GAAP net income This reconciliation is provided as additional relevant information about the company's performance. Management believes consolidated earnings before interest and taxes (EBIT) are representative of the company's performance and therefore useful to investors. Consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) are another important measure of financial performance and cash generation of the business and therefore useful to investors. Management also believes that it is appropriate to compare GAAP net income to consolidated EBIT and EBITDA. (Dollars in millions) (Unaudited) Net Income Three Months Ended June 30, Six Months Ended June 30, $ $ $ $ Provision for income taxes Interest expense Interest income Consolidated earnings before interest and taxes (EBIT) (0.7) (1.4) (1.4) (2.9) $ $ $ $ Depreciation and Amortization Consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) $ $ $ $

37 GAAP RECONCILIATION OF FREE CASH FLOW ($ Mils.) Reconciliation of Free Cash Flow to GAAP Net Cash Provided (Used) by Operating Activities Management believes that free cash flow and free cash flow adjusted for discretionary pension and postretirement contributions and CDSOA receipts are useful to investors because they are meaningful indicators of cash generated from operating activities available for the execution of its business strategy. Free cash flow: (Dollars in millions) (Unaudited) Net cash provided (used) by operating activities Less: capital expenditures Less: cash dividends paid to shareholders Free cash flow Plus: discretionary pension and postretirement benefit contributions, Three Months Ended Six Months Ended June 30, June 30, $ $ 34.7 $ $ (162.9) (69.3) (39.5) (115.3) (59.6) (22.4) (19.5) (44.9) (37.1) $ $ (24.3) $ 76.2 $ (259.6) net of the tax benefit (1) Less: CDSOA receipts, net of tax expense (2) (69.0) - (69.0) - Free cash flow adjusted for discretionary pension and postretirement $ $ 70.5 $ $ (66.8) contributions and CDSOA (1) The discretionary pension contributions for the second quarter of 2012 was $110.0 million, net of the tax benefit of $40.5 million. The discretionary pension contributions for the first six months of 2012 was $203.8 million, net of the tax benefit of $71.8 million. The discretionary pension contributions for the second quarter of 2011 was $150.0 million, net of the tax benefit of $55.2 million. The discretionary pension contributions for the first six months of 2011 was $301.4 million, net of the tax benefit of $108.6 million. (2) CDSOA for the second quarter of 2012 was $109.5 million, net of tax expense of $40.5 million. 37

38 GAAP RECONCILIATION OF FREE CASH FLOW US$ Million GAAP Net Cash Provided by Operating Activities GAAP Capital expenditures (140) (136) (89) (114) (129) (151) (233) (238) (165) (159) GAAP Cash dividends paid to shareholders (23) (22) (25) (26) (28) (30) (39) (45) (45) (44) Free Cash Flow (1) (23) (43) (46) Estimate Net Cash Provided by Operating Activities Capital expenditures (91) (85) (119) (155) (221) (296) (314) (272) (114) (116) (205) (345) Cash dividends paid to shareholders (40) (32) (42) (47) (55) (58) (63) (67) (43) (51) (76) (90) Free Cash Flow (1) (81) 43 (17) (40) (69) 80 (1) Free cash flow is defined as net cash provided by operating activities (including pension contributions) minus capital expenditures and dividends. Results include discontinued operations until divested. Management believes that free cash flow is useful to investors because it is a meaningful indicator of cash generated from operating activities that is available for the execution of its business strategy. 38

39 GAAP RECONCILIATION OF NET (CASH) DEBT ($ Mils.) Reconciliation of Total Debt to Net (Cash) Debt and the Ratio of Net (Cash) Debt to Capital This reconciliation is provided as additional relevant information about The Timken Company's financial position. Capital is defined as total debt plus total shareholders' equity. Management believes Net (Cash) Debt is an important measure of Timken's financial position, due to the amount of cash and cash equivalents. (Dollars in millions) (Unaudited) Short-term debt Long-term debt Total Debt Less: Cash, cash equivalents and restricted cash Net (Cash) Debt Shareholders' equity Ratio of Total Debt to Capital Ratio of Net Debt to Capital June 30, 2012 December 31, 2011 $ 20.3 $ (509.9) (468.4) $ (15.7) $ 46.7 $ 2,315.2 $ 2, % 20.1% (0.7%) 2.2% 39

40 GAAP RECONCILIATION OF NET DEBT ($ Mils.) Total Debt (a) Less: Cash Net Debt Equity 1, ,032 1,056 1,046 1,005 Total Debt to Capital 21.1% 24.5% 28.7% 27.6% 20.5% 24.7% 25.8% 30.8% 30.1% 33.8% Net Debt to Capital 21.0% 24.1% 28.4% 26.7% 19.9% 24.4% 25.3% 30.8% 29.7% 33.4% Total Debt (a) Less: Cash Net Debt (243) (363) 47 Equity ,090 1,270 1,497 1,476 1,961 1,663 1,596 1,942 2,043 Total Debt to Capital 38.9% 43.1% 40.3% 38.0% 32.5% 28.8% 26.9% 27.3% 24.3% 20.9% 20.1% Net Debt to Capital 37.2% 38.4% 39.3% 36.5% 30.5% 25.2% 26.1% 22.8% -18.0% -23.0% 2.2% (a) Total Debt is the sum of commercial paper, short-term debt, current portion of long-term debt and long-term debt 40

41 GAAP RECONCILIATION OF ROIC ($ Mils.) GAAP Operating Income (1) (9) GAAP Other Income / (Expenses) (8) (2) (6) 2 (5) (5) 7 (16) (10) (7) Earnings Before Interest and Taxes (EBIT) (2) (17) Provision for income taxes (6) Adjusted tax rate 37.6% 37.6% 37.6% 37.6% 36.9% 38.3% 35.7% 38.2% 36.8% 35.0% Net Operating Profit After Taxes (NOPAT) (3) (10) Invested Capital: Total Debt Shareholders' Equity 1,075 1, ,032 1,056 1,046 1,005 Total 1,341 1,292 1, ,012 1,032 1,225 1,392 1,526 1,496 1,519 Average Invested Capital (4) 1,317 1,299 1, ,022 1,129 1,308 1,459 1,511 1,507 ROIC: NOPAT / Average Invested Capital (4) -0.8% 1.9% 0.4% 8.5% 12.2% 13.2% 14.1% 8.9% 5.2% 4.3% GAAP Operating Income (1) (18) (54) GAAP Other Income / (Expenses) (0) 4 (1) Earnings Before Interest and Taxes (EBIT) (2) (54) Provision for income taxes (16) Adjusted tax rate 39.8% 39.8% 40.0% 32.1% 32.6% 30.6% 20.4% 35.7% 29.9% 33.5% 34.5% Net Operating Profit After Taxes (NOPAT) (3) (38) Invested Capital: Total Debt Shareholders' Equity ,090 1,270 1,497 1,476 1,961 1,623 1,596 1,942 2,043 Total 1,279 1,070 1,824 2,049 2,218 2,074 2,684 2,246 2,108 2,456 2,558 Average Invested Capital (4) 1,399 1,175 1,447 1,937 2,134 2,146 2,379 2,465 2,177 2,282 2,507 ROIC: NOPAT / Average Invested Capital (4) 0.2% 5.9% 4.5% 8.7% 12.5% 9.7% 10.0% 12.5% -1.7% 12.8% 19.0% (1) GAAP Operating Income excludes discontinued operations for Latrobe Steel (divested Dec. 8, 2006) for years 2004 through 2006 and the Needle Roller Bearings business for years 2007 through 2009 (divested Dec. 31, 2009). (2) EBIT is defined as operating income plus other income (expense) - net. (3) NOPAT is defined as EBIT less an estimated provision for income taxes. This tax provision excludes the tax effect of pre-tax special items on the company's effective tax rate, as w ell as the the impact of discrete tax items recorded during the year. 41 (4) The company uses NOPAT/Average Invested Capital as a type of ratio that indicates return on capital (ROIC). Average Invested Capital is the sum of Total Debt and Shareholders' Equity taken at the beginning and ending of each year and then averaged. Total Debt is the sum of commercial paper, ST-debt, curr. portion of LT-debt & LT-debt.