Market Snapshot
  • U.S.
  • Europe
  • Asia
Ticker Volume Price Price Delta
DJIA 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 2.54 0.14%
NASDAQ 4,095.52 9.29 0.23%
Ticker Volume Price Price Delta
STOXX 50 3,155.81 16.55 0.53%
FTSE 100 6,625.25 41.08 0.62%
DAX 9,409.71 91.89 0.99%
Ticker Volume Price Price Delta
NIKKEI 14,516.27 98.74 0.68%
TOPIX 1,173.37 6.78 0.58%
HANG SENG 22,760.24 64.23 0.28%

Relational Investors LLC and CalSTRS Urge Timken’s Board to Take Action to Separate the Company’s Businesses to Unlock



  Relational Investors LLC and CalSTRS Urge Timken’s Board to Take Action to
  Separate the Company’s Businesses to Unlock Shareholder Value

Business Wire

SAN DIEGO -- February 19, 2013

Relational Investors LLC (“Relational”) announced today that Relational and
the California State Teachers Retirement System (“CalSTRS”), collectively
owners of 7.31% of The Timken Company, (NYSE: TKR) (“Timken” or “the
Company”), have sent a joint letter to the Board of Directors of Timken urging
a separation of Timken’s steel and bearings businesses to unlock significant
value for all shareholders.

Relational had previously presented a detailed analysis to Timken’s management
and Board on August 23, 2012. In that analysis, Relational demonstrated the
deep undervaluation of Timken’s shares due to the company’s conglomerate
structure. By separating the steel and bearing businesses, Timken would
realize improved operating performance and the investment community could
appropriately value the earnings profile of each business – resulting in
maximized shareholder value and long-term potential for these businesses and
the communities that they serve.

In their letter, Relational and CalSTRS highlight key aspects of this analysis
as well as recent excerpts from third-party analyst reports, demonstrating
broad support by the investment community for a separation of Timken’s
businesses.

Among the main points contained in their letter to the Board are:

  * A Separation Will Enable a Fundamental Change To Valuation: The Company
    trades at a steep discount due to the widely divergent characteristics of
    its businesses, and a separation of the Steel business would fundamentally
    change the way the businesses are valued by the market.
  * A Separation Will Increase Management And Investor Focus: The Company will
    be able to optimally manage each business independently, leading to more
    efficient capital allocation and the potential to trade at multiples near
    the high end of their peer range.
  * Spin-Off Transactions Have Created Substantial Value For Shareholder’s In
    The Past:

       * Timken’s closest bearings peer, SKF, separated its steel business and
         returned 59% vs. Timken’s return of 10% over the same period.
       * Marathon Oil separated its refining operations and the stock returned
         40% compared to only 10% for the S&P 500 Energy Index over that time
         period.

  * Now Is The Optimal Time To Separate The Businesses: The costs of a
    sub-optimal business mix compound over time, so now is the time to focus
    on optimally managing each independent business.
  * Separation Should Not Be Disruptive To Timken and the Community: A
    separation should not meaningfully disrupt the Canton community or
    Timken’s employees. The Timken name and Canton headquarters can and should
    survive with both businesses operating as independent entities.
  * The Timken Company Has A History Of Poor Corporate Governance: The Timken
    Family holds 3 of 11 Board seats; the $9M compensation received by
    executive Chairman Ward Timken, Jr., is grossly out of line with other
    executive chairmen in Timken’s peer group; the Company’s
    pay-for-performance scheme received a “D” rating in 2012 by Glass Lewis, a
    prominent independent proxy advisory service; and the Board has
    consistently demonstrated its unwillingness to seriously consider
    strategies to increase shareholder value.

Relational and CalSTRS call for Timken’s Board to promptly respond to the
investment community and take action to separate the Company’s businesses to
unlock value for all shareholders. They emphasize that Timken is well
positioned financially and operationally to effectuate the separation of its
steel and bearings businesses, while explaining that management’s public
statements against the suggested transaction are not supported by empirical
evidence, nor persuasive to investors.

Relational and CalSTRS expressed their intent to continue to dialogue with
shareholders and the broader investment community about the value creation
potential of the separation of Timken’s steel business. Their hope is that
investors communicate their views directly with the Company, prompting the
Board to act now to effectuate a separation, reserving the opportunity to make
a clear public statement of their support through their votes at the annual
meeting on the shareholder proposal CalSTRS sponsored, with the support of
Relational, as disclosed in their Schedule 13D filed November 28, 2012, as
amended February 19, 2013.

Attached is the letter from Relational and CalSTRS to the Timken Board of
Directors.

About Relational Investors LLC:

Relational Investors LLC, founded in 1996, is a privately held, multi-billion
dollar asset management firm and registered investment adviser. Relational
invests in publicly traded companies that it believes are undervalued in the
marketplace. The firm seeks to engage the management, board of directors, and
shareholders of its portfolio companies in a productive dialogue designed to
build a consensus for positive change to improve shareholder value.

About the California State Teachers Retirement System: The California State
Teachers’ Retirement System (CalSTRS) is a public pension fund established for
the benefit of California’s public school teachers over 100 years ago. CalSTRS
serves the investment and retirement interests of over 856,000 plan
participants. As of December 31, 2012 the CalSTRS portfolio was valued at over
$157 billion; approximately $76 billion of the fund’s assets are invested in
the public equity markets, on both a domestic and an international basis.

                                     ***

Relational Investors LLC                California State Teachers’ Retirement
                                        System
12400 High Bluff Drive, Suite           100 Waterfront Place, MS-04
600
San Diego, CA 92130                     West Sacramento, CA 95605-2807
 

VIA ELECTRONIC AND OVERNIGHT MAIL

February 19, 2013

Mr. Ward J. Timken, Jr.
Chairman of the Board
Timken Corporation
1835 Dueber Ave. S.W.
Canton, OH 44706

Dear Mr. Timken:

As you know from our meetings with management and representatives of the Board
on May 18 and August 23, 2012, respectively, we believe that Timken’s shares
are trading at a substantial discount to its peers’, even after the recent
share price appreciation. As we shared with you, our analysis clearly
identifies that this discount results, in large part, from Timken’s integrated
structure which combines two incongruent core businesses - Steel and Bearings.

Moreover, we have shown both the Board and management through our analysis
that separating the Steel business segment (“Steel Business”) from the
remaining business segments (collectively, “Bearings Business”) would unlock
significant shareholder value and enable these businesses to perform optimally
over the long-term, maximizing the benefits for all their constituencies.

In addition, numerous third-party analyst reports have been published
reinforcing our message, that the separation of these businesses should
achieve enhanced value for Timken shareholders. We want to ensure that, as
fiduciaries for all shareholders, the Board has access to the more recent of
these third-party investment community reports examining the important
strategic opportunity for Timken to unlock shareholder value through a
separation of the Steel and Bearings businesses. Accordingly, we have sent a
copy of this letter to each of the Company’s directors.

As summarized below, the analyst community, through its own independent,
objective analyses, has also reached a consensus that a spin-off of the Steel
Business will maximize shareholder value. Furthermore, since filing our
Schedule 13D on November 28, 2012, we have received phone calls from the
investment community that have increased our confidence that shareholders of
Timken want and would support a spin-off. Given these facts, we urge the Board
to read both the excerpts from the analyst reports below as well as the full
reports themselves, a list of which is attached:

“Our sum-of-the-parts valuation suggests a $69 target price ($52 + $17).
However, given the disparate nature of the assets and investors’ preference
for pure plays, we believe that an above-average conglomerate discount is
likely required to entice investors. Assuming a 20% discount to the
sum-of-the-parts valuation yields a price target of $55/share. A case could be
made for a narrowing of the conglomerate discount if the management signaled a
potential separation.”^1

“Our sum of the parts … suggests a valuation closer to $55, but we agree that
the market is unlikely to properly reward either the steel or the bearing
business for the secular improvements they have made as long as these
businesses remain combined.”^2

“In the long run, however, we agree with Relational and CalSTRS’s positioning
that the company would perform better if it separated into two separate
entities. As only 10% of steel volumes are used in the bearings business,
vertical integration is limited. Also, given the highly volatile nature of the
steel industry (steel operating profit fell $320M over four quarters in 2009),
we believe that Timken’s valuation multiple is negatively affected,
particularly during an upcycle. Management has confirmed this since we started
covering the company in 2009. While there are multiple issues to splitting up
the company, … we believe that the bearing business could be revalued given
the high-margin nature and large emerging market exposure that garners higher
growth rates. Given high profitability and specialized nature of the steel
product, we believe the steel business could be floated at relatively solid
multiples…”^3

Given the analysis we have presented to Timken and analyst support for a
separation of the businesses, the Board should not continue to allow
management to obstinately take the position with the investment community that
a spin-off of the Steel Business is not in the best interest of shareholders
at this time, without providing any credible rationale for this position. In
the months since our May meeting, management has had ample access to the
investment community to make its case for the Company’s “conglomerate”
structure. Likewise, we cannot find any analyst reports that make a strong
argument against separating the Steel and Bearing Businesses and unlocking the
Company’s true value for all shareholders.

Fundamental Change to Valuation

As the Board is aware from prior discussions based on our analysis, we
presented compelling evidence that a separation of the Steel Business would
fundamentally change the way the market values Timken’s businesses.
Specifically, the Steel Business would be valued and classified as a
“materials” company and the Bearings Business would remain an “industrial”
company. Unfortunately, the response we received from and subsequent public
statements by management continue to discount the value available to
shareholders from a separation of the two businesses. As reasoned in our
Schedule 13D, and sustained by a number of analysts and shareholders,
management is incorrect in its belief that the existing trading discount will
dissipate with improving returns and decreasing volatility in the Steel
Business. As we have explained to the Board and as reflected in the sentiment
of the analysts cited above, even if such improvements come to fruition, the
Company will continue to trade at a discount due to the widely divergent
characteristics of the businesses. Management and the market recognize that
these two divergent businesses require different working capital, capital
investments, business processes, manufacturing techniques, and management
talents to achieve optimal performance.

Timken’s stock price outperformed the S&P MidCap 400 Index by 11% on the day^4
we publicly put forward our recommendation to split the businesses in order to
unlock shareholder value. The stock has since outperformed the Index by an
additional 12%^5. A significant portion of this stock price appreciation, we
believe, is the result of shareholder anticipation of a separation of the
Steel Business. Yet, even with this stock appreciation, based on peer
multiples, Timken’s share price continues to trade at a meaningful discount to
the sum of its parts valuation as shown in the chart below:

      EV/EBITDA Valuation                                              
                  2013      Pension   2013      Peer       Enterprise   Equity
                                      EBITDA                            Val.
                  EBITDA*   Addback   Ex.       Multiple   Value        Per
                                      Pension                           Share
      Bearings    $647      $51       $699      8.7x       $6,081       $56.27
      Steel       $189      $14       $203      7.9x       $1,600       $14.81
      Total       $837      $65       $902      8.5x       $7,681       $71.07
 
                            Enterprise Value    $7,681
                            Net Debt            ($107)
                            Pension Liability   $398
                            Other               $372
                            Postretirement
                            Transaction Fees    $200
                            Equity Value        $6,819
                            Share Count         95.9
                            Value per Share     $71.07
                            Current Price       $56.25
                            Upside              26%
 
*Totals to 2013 FactSet Consensus EBITDA of $861M minus $25M of incremental
corporate expense
 

A Separation Will Increase Management and Investor Focus

We, and others in the investment community, are confident that separating the
two businesses will allow the Company to optimally manage each business
independently, leading to improved performance and more efficient capital
allocation. Our analysis demonstrates that a separation will eliminate current
misunderstandings of the businesses, allow investors to focus on valuing
pure-play assets, and alleviate the investment community’s concerns about poor
capital allocation.

Based on Timken’s financial disclosures, its Bearings and Steel Businesses
each compare favorably to peers’ as measured by return on invested capital,
operating margins, and revenue growth. Separating the businesses will
illuminate the dramatic operating improvements made at the Bearings Business
and the transformation underway at the Steel Business. This process will
enable investors to appropriately value the improved earnings profile of the
businesses. Therefore, it is logical that both businesses would trade at
multiples near the high end of their peer range.

Now is the Optimal Time to Separate the Businesses

Now is the optimal time to separate the businesses because the costs of a
sub-optimal business mix compound over time. By focusing management on
optimally managing each independent business now, shareholders will be in a
position to realize enhanced value from the elimination of the trading
discount and the improved long-term operating performance of the underlying
businesses. Timken’s $1.4B of balance sheet flexibility enables each entity to
pursue optimal capital structures.

Relational’s Response to Timken Management Commentary

Timken management has twice spoken publicly regarding our proposal. In a
November 29^th press release responding to our Schedule 13D, management
asserted that "[a]s a market leader in high-quality engineered steel products,
our steel business leverages the same expertise and know-how that we apply
across our businesses. We have significant technology, cost and revenue
synergies between our bearing and steel businesses as well as diversification
benefits in continuing to operate under our current structure. These synergies
and benefits, coupled with a potential reduction in financial flexibility,
among other factors, led the Board to conclude that the separation of the
businesses at this time would not be in the best interests of Timken
shareholders." More recently, during the Q&A of the Company’s Q4 earnings call
on January 24^th an investor asked management what criteria did the decision
not to spin-off the steel business hinge on and what factors would make the
decision to spin the steel business more attractive in the future. Management
responded “…if you dive to the next level of the analysis, you very quickly
come to some of the pension issues that Glenn talked about that we actually
are valued at a premium from a cash flow point of view largely because of the
pensions. You come to issues of growth and then you come to issues of earnings
volatility and sustainability. And we have been implementing over the past
half-dozen years of very aggressive strategy that is addressing those and we
continue to have steps that we can take…”

However, these points that management has tried to make do not hold up to
close analytical scrutiny:

1) Synergies of integration are minimal and are significantly lower than
current trading discount.

In the November 29^th press release response to our proposal, the Company
claimed that there are substantial synergies between its Bearings and Steel
Businesses, particularly driven by selling synergies and shared material
knowledge. This argument was not repeated on the Company’s January 24^th
earnings call. Our extensive analysis shows that the cost benefits and revenue
synergies between the businesses are minimal. During both our meetings we
asked management to quantify the synergies between the Bearings and Steel
Businesses. As you know, management was unable to quantify any meaningful
benefits during those meetings or in subsequent public communications with
investors. SKF (Swedish Exchange, ticker: SKFB), one of Timken’s closest
public bearings peers has excelled operationally and its shareholders have
been rewarded since the company divested its vertically integrated steel
business, Ovako, in 2005. We are confident that any small cost benefits or
revenue synergies that may exist can be maintained following the split through
joint venture agreements covering R&D spending, material procurement, combined
selling, and/or any other business functions. These agreements have been used
successfully before, including by SKF and Ovako. Additionally, Timken’s
bearings operations are predominately located outside of Ohio and are not
directly integrated with the steel facilities.

Incremental executive compensation required to operate both businesses
independently, in our view, would be minimal. Timken already effectively pays
two CEOs. In 2011, President and CEO Jim Griffith made $13M and you, the
founder’s great-great grandson made $9M for serving as “Executive Chairman, ”
an amount that appears to be dramatically out of line with standard industry
compensation for similar “executives”, as discussed in detail below. In fact,
the excessive compensation you received can be used to substantially offset
the cost of adding a second executive team.

2) The diversification benefits you cite are not worth the cost.

The Company’s November 29^th press release argued that the current
diversification benefits will be lost if the businesses are separated. The
reality is the diversification benefits you cited in defending Timken’s
current structure, in our opinion, cause Timken’s trading discount by
confusing investors and obscuring the dramatic operating improvements in the
underlying businesses. Investors do not need you to diversify for them. The
significant discount investors are applying to Timken’s stock shows the
market’s clear preference for pure-play steel or bearings alternatives.

3) Both companies will have substantial financial flexibility and the pension
liability has been mitigated to the point that it is no longer an issue
following a separation.

The same November 29^th press release cites a decrease in the Company’s
financial flexibility following a separation as a reason to maintain the
current structure and on the January 24^th earnings call management pointed to
the Company’s pension as a reason the businesses needed to stay together. As
you should know, the two issues are linked, and neither presents a real
obstacle to separating the businesses. With net cash of over $100M and
available liquidity of $1.4B^6, Timken has significant financial resources and
flexibility to ensure that both the Steel and Bearings Businesses are
well-capitalized following the separation. Both businesses would have ample
funding for their pension and capital expenditure needs while maintaining
credit metrics superior to their peers’. The Company has invested over $1.3B
into its pension plan over the last 4 years to bring the unfunded liability
down to $398M at the end of 2012. CFO Glenn Eisenberg has stated that the
pension plan will be nearly fully funded by the end of 2013 and that the
Company will annuitize a significant portion of the gross liability, removing
it from the balance sheet. The Company’s $1.4B of liquidity could easily be
used to fund that pension liability. While the pension may have hindered the
Company’s strategic options in the past, we do not find the Company’s
assertion that it lacks the ability to sufficiently fund its pension to be
credible. The reduced size of the underfunded pension liability also makes it
unlikely to be a driver behind Timken’s trading discount.

4) Timken does not trade at a premium to peers on cash flow. It trades at a
substantial discount on any cash flow measure that is relevant to investors.

On the January 24^th call, management asserted that Timken trades at a premium
to peers on cash flow metrics. Management relies on a non-standard calculation
of cash flow that we believe is severely flawed. Investors will normally
adjust GAAP cash flows for voluntary cash outflows related to pension
obligations accrued over previous decades that will not be repeated in future
years (since the pension will be fully funded at the end of this year). These
voluntary, temporary contributions should not be included as a recurring cash
flow. Additionally investors can see that a temporary spike in capital
expenditures (before returning to Company guided 4% of sales in 2H14) and the
corresponding build-up of working capital should not be seen as permanently
impairing free cash generation and should be backed out of the multiple. Once
cash flows are normalized, Timken trades at a substantial discount to peers on
pension-adjusted EV/FCF, just as it does on pension-adjusted EV/EBITDA.

5) Growth and earnings volatility are a reason to separate the businesses, not
keep them together.

On the January 24^th call, management proposed Timken’s earnings volatility as
a reason the businesses should remain combined. The high earnings volatility
and capital intensity of the Steel Business have masked the continually
improving margin performance of the Bearings Business over the last five
years. The combination of these businesses is driving the discount in Timken’s
share price. The only way to eliminate that discount is by separating the
businesses.

Spin-off Transactions have Created Substantial Value for Shareholder’s in the
Past

As noted above, in 2005 Timken’s closest bearings peer, SKF separated its
steel business, Ovako, into a separate company. SKF concluded that the
separation offered a structural solution, allowing shareholders to focus on
the bearings business and SKF to move to a more variable cost structure.

SKF entered into long-term supply agreements with Ovako to ensure a continued
supply of high-quality bearing steel and prevent the loss of technology.
During the 20 months^7 from SKF’s announcement of the separation to
finalization of the transaction, the stock returned 59% vs. Timken’s return of
10% over the same period.

On January 13, 2011 Marathon Oil (ticker: MRO) announced a plan to separate
its refining operations into a separate publicly-traded corporation, Marathon
Petroleum (ticker: MPC), allowing the remaining company (ticker: MRO) to focus
on exploration and production. The company cited expected benefits of enhanced
flexibility to optimally operate each business, improved transparency to the
market, and a better ability to attract talent as driving forces behind the
separation. Over the six months^8 from the announcement to finalization of the
separation, the stock returned 40% compared to only 10% for the S&P 500 Energy
Index.

The outperformance often seen after spin-off transactions is generally driven
by investor expectations of increased operating performance in the long-term
as a result of improved management focus:

“Historically, spinoffs have worked out well. The common thread that runs
through all of this is, if you boil it down, the management focus. They go
from being unwieldy conglomerates with different businesses competing for
capital and management’s attention, to being more focused entities. Often that
translates into better financial performance that should work its way into the
stock.”^9

Separation should not be disruptive to Timken employees and the Community

There should be no meaningful disruption for the Canton community and Timken’s
employees through the separation of the two businesses. The Timken name and
Canton headquarters can survive with both companies as independent entities.
We also believe that additional employment may be needed to help operate the
two companies as independent businesses. In our financial model, we assume
corporate costs increase $25M per year as a result of the separation, which
includes costs for new employment. We do not advocate or expect any change in
employment levels at Timken’s steel or bearings operations.

History of Poor Corporate Governance

The Timken Company has a history of poor corporate governance and a Board that
is excessively influenced by the Timken family. Members of the Timken family
represent nearly a third of Timken’s twelve person board, including a former
executive, the current Executive Chairman, and another family member who sits
on the Audit committee and yet is considered independent by the Board.

In 2008, a majority of the shareholders passed a proposal to declassify
Timken’s Board of Directors. The Company chose to ignore the voice of its
shareholders and refused to declassify the Board (until 2010). The following
year, three of the four Directors standing for election had more than 50% of
the non-affiliated^10 shares withheld, in spite of having no opposing
candidates. The fourth candidate had 43% withheld. The following year the
Chair of the Compensation Committee, John Luke, Jr., had 49% of non-affiliated
votes withheld. All five Directors remain on the Board and John Luke, Jr.
remains Chairman of the Compensation Committee.

The Company’s corporate governance and compensation practices have not
improved sufficiently in the recent past. For the 2012 proxy vote, Glass-Lewis
recommended shareholders withhold support from 3 of the 4 board nominees and
gave the Company’s pay-for-performance scheme a “D” rating. An excerpt is
below:

“The Company has been deficient in linking executive pay to corporate
performance in the past year, as indicated by the "D" grade received by the
Company in Glass Lewis' pay-for-performance model (see page 4). Shareholders
should be concerned with this disconnect. A properly structured pay program
should motivate executives to drive corporate performance, thus aligning
executive and long-term shareholder interests. In this case, as indicated by
the poor grade, the Company has not implemented such a program. In our view,
shareholders should be concerned with the compensation committee's failure in
this area.”

Additionally, the $9M compensation received by Ward Timken, Jr., the
great-great grandson of the founder and owner of less than 0.5% of outstanding
shares, in 2011 for his role as “Executive Chairman” makes him the highest
paid executive chairman in Timken’s peer group^11 and is 3.4x the group
average and 4.1x the group median (ex-Timken). The chart below is provided for
detail:

 
                            Market                                2011 Total
Ticker   Company            Capitalization       Name             Compensation
                            ($m)                                  ($m)
TKR      Timken Co          $5,138               Ward J. Timken   $9.42
                                                 Jr.
FCN      FTI Consulting     $1,364               Dennis J.        $7.46
                                                 Shaughnessy
GEF      Greif Bros Corp    $2,226               Michael J.       $4.42
                                                 Gasser
         Hunt, J.B.
JBHT     Transport          $7,906               Kirk Thompson    $3.55
         Services
ROL      Rollins Inc        $3,629               R. Randall       $2.57
                                                 Rollins
KSU      Kansas City        $10,246              Michael R.       $2.38
         Southern                                Haverty
PKG      Packaging Corp     $3,774               Paul T. Stecko   $2.24
         of America
CXW      Corrections Corp   $3,791               John D.          $1.73
         of America                              Ferguson
WERN     Werner             $1,721               Gary L. Werner   $1.43
         Enterprises Inc
MSM      MSC Industrial     $4,964               Mitchell         $1.31
         Direct A                                Jacobson
IPI      Intrepid Potash    $1,754               Robert P.        $1.01
         Inc                                     Jornayvaz III
 
         Median ex-TKR      $3,701                                $2.31
         ($M)
         Mean ex-TKR ($M)   $4,138                                $2.81
 

We are convinced that Timken’s refusal to act in shareholders’ best interests
and separate the two dissimilar businesses is emblematic of the Company’s poor
corporate governance practices.

Conclusion

The case for the separation of the steel business is highly compelling. Timken
is well positioned financially and operationally to effectuate this
transaction and eliminate the current discount in its share price.
Management’s arguments against this transaction are not supported by empirical
evidence and indeed further a self serving agenda which impairs shareholder
value by causing Timken to trade at a discount as long as these businesses
remain together, in our view. Timken’s main Bearings competitor, SKF AB’s
successful execution in separating its steel business provides strong evidence
that this type of transaction will enhance Timken’s competitive position and
create value for shareholders in the long-term.

We implore the Board to recognize what the investment community is
communicating through Timken’s significant discounted stock price, analyst
reports, shareholder sentiment, and our detailed presentation. Separation of
Timken’s businesses, as broadly believed by the investment community, should
create meaningful enhanced shareholder value; enhanced investment market
appreciation for Timken’s businesses and enhanced long term potential for
these businesses and the communities they serve. We are confident that our
effort will garner the support of a significant majority of the non-affiliated
shareholders.

We will continue to dialogue with shareholders and the broader investment
community about our analysis, emphasizing the value creation potential of a
separation of the Bearings and Steel businesses. As set forth in this letter,
we know our message has traction. Our expectation is that investors will
communicate their support directly to the Board and management, reserving the
opportunity to express more formally their concerns with the Company’s
inaction through their votes on the CalSTRS proposal, which Relational is
fully supporting.

We urge Timken’s Board to act now to unlock Timken’s true value, appreciate
your role as a director of the Company and look forward to a continuing
constructive dialog.

Finally, we would appreciate your assistance in ensuring that a copy of this
letter reaches each member of the Board.

Sincerely,

Ralph V. Whitworth                 Anne E. Sheehan
Principal                          Director of Corporate Governance
Relational Investors LLC           California State Teachers’ Retirement
                                   System
 

Enclosures

Distribution:                                            
Mr. John M. Ballbach        Mr. Phillip R. Cox            Ms. Diane C. Creel
Mr. James W. Griffith       Mr. John A. Luke Jr.          Mr. Joseph W.
                                                          Ralston
Mr. John P. Reilly          Mr. Frank C. Sullivan         Mr. John M. Timken
                                                          Jr.
Mr. Ward J. Timken          Ms. Jacqueline F. Woods
 

cc:   Mr. William R. Burkhart, Senior Vice President and General Counsel
      Mr. Steve Tschiegg, Director – Capital Markets and Investor Relations
 

Relevant Analyst Reports
SunTrust Robinson Humphrey, 11/14/2012
William Blair, 11/28/2012
Bank of America Merrill Lynch, 2/4/2013
Jefferies, 11/29/2012
KeyBanc, 12/6/2012

                       Additional Sell-Side Commentary

SunTrust Robinson Humphrey Report from November 14, 2012

“Timken is worth $69 on a sum-of-the-parts basis. However, the presence of the
more volatile specialty steel business suggests a material 20%-type
conglomerate discount will likely persist, in our opinion.”

“A case could be made for a narrowing of the conglomerate discount if the
management signaled a potential separation.”

William Blair Report from November 28, 2012

“In the long run, however, we agree with Relational and CalSTRS’s positioning
that the company would perform better if it separated into two separate
entities. As only 10% of steel volumes are used in the bearings business,
vertical integration is limited. Also, given the highly volatile nature of the
steel industry (steel operating profit fell $320M over four quarters in 2009),
we believe that Timken’s valuation multiple is negatively affected,
particularly during an upcycle. Management has confirmed this since we started
covering the company in 2009. While there are multiple issues to splitting up
the company, we believe that the bearing business could be revalued given the
high-margin nature and large emerging markets exposure that garners higher
growth rates. Given high profitability and specialized nature of the steel
product, we believe the steel business could be floated at relatively solid
multiples…”

Bank of America Merrill Lynch Report from February 4, 2013

“Timken shares look very cheap to us at 6.7x 2013E EBITDA, a 24% discount to
Swedish competitor SKF. Our $70 price objective would put Timken at 8.5x 2013E
EV/EBITDA, essentially in line with SKF today…Timken is also being valued
below some pure play, higher quality steel companies, which is completely
unwarranted, in our view.”

“Driving the push for a spin, Timken shares have de-rated relative to SKF over
the last 5-10 years. SKF divested its steel business (which was much less
profitable than Timken’s, which is highly profitable with high returns) via a
joint venture that pooled three companies’ steelmaking facilities in 2005. SKF
had a high single digit P/E for much of the early 2000s and now trades at
13.7x consensus 2013 EPS (and 15.8x BofA). During that same time, despite
significant portfolio improvements at Timken, Timken has steadily de-rated
relative to SKF…This leaves Timken at a 6% [P/E] discount to SKF on consensus
estimates, and a 20% [P/E] discount on BofA estimates.”

Please see page 6 of the report for charts supporting the quotation above.

Jefferies Report from November 29, 2012

“Our sum of the parts…suggests a valuation closer to $55, but we agree [with
Relational] that the market is unlikely to properly reward either the steel or
bearings businesses for the secular improvements they have made as long as
these businesses remain combined.”

“…we believe management will continue to oppose this path [spin] near term,
and see [stock price] risk to the high [$]30’s if we lose today’s spin
premium…”

KeyBanc Report from December 6, 2012

“Given management’s position on the issue, we do not view a separation as a
likely event in the near term. That said, we agree with Relational (and
management, for that matter), that a valuation disconnect exists, especially
when we think about the progress TKR has made operationally and financially in
the context of the current multiple…”

^1 James Kawai, SunTrust Robinson Humphrey, 11/14/2012
^2 Stephen Volkmann, Jefferies Group, 11/29/2012
^3 Samuel Eisner, William Blair, 11/28/2012. Though the analyst acknowledges
management’s concerns regarding a separation in the short-term, he believes
that a separation is optimal in the long-term.
^4 11/28/2012
^5 As of 2/15/2013
^6 As stated by management on 1/24/13 earnings call
^7 2/28/2005-10/31/2006. Source: Bloomberg
^8 1/12/2011-7/5/2011. Source: Bloomberg
^9 Joe Cornell, founding principal of Spin-Off Advisors LLC 11/29/2012,
Source: Bloomberg
^10 Assumes all Timken Family, Timken Foundation, and Company Investment Plan
shares are voted for Management
^11 Peer group defined as all companies in the S&P 400 Index Industrials and
Materials sectors that had an executive chairman for full-year 2011

Contact:

Media:
Kekst and Company
Robert Siegfried or Donald C. Cutler
212-521-4832 or 415-852-3903
or
Investors:
Okapi Partners LLC
Bruce H. Goldfarb/Charles W. Garske/Geofrey Sorbello
212-297–0720
info@okapipartners.com
Sponsored Links
Advertisement
Advertisements
Sponsored Links
Advertisement