Good morning. My name is Brian. I will be your conference operator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to Timken's third quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press star, then number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad. Thank you. Mr. Hershiser, you may begin.
Thanks, Brian, and welcome everyone to our third quarter 2019 earnings conference call. This is Jason Hershiser, Manager of Investor Relations for The Timken Company. We appreciate you joining us today. If after our call you should have further questions, please feel free to contact me directly at 234-262-7101. Before we begin our remarks this morning, I wanted to point out that we have posted on the company's website presentation materials that we will reference as part of today's review of the quarterly results. You can also access this material through the Download feature on the earnings call webcast link. With me today are The Timken Company's President and CEO, Rich Kyle, and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions.
During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone an opportunity to participate. During today's call, you may hear forward-looking statements related to our future financial results, plans, and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company. Without express written consent, we prohibit any use, recording, or transmission of any portion of the call.
With that, I would like to thank you for your interest in The Timken Company, and I will now turn the call over to Rich.
Thanks, Jason. Good morning, everyone, and thank you for joining us today. We grew revenue 4% in the third quarter despite a more significant sequential decline in the top line than we anticipated, as we saw softening across several markets and a continued negative impact from currency. Organically, revenue was down 3%, with significant declines in off-highway and heavy truck, as well as modest declines across industrial markets and distribution channels. Softness was exclusively in North America as OEMs and distributors became increasingly cautious and managed inventory levels down as the quarter progressed. Despite the weakness, we continue to grow in all other regions of the world, as well as in wind, solar, marine, and rail. Acquisitions contributed 8%, which netted to 4% top-line growth for the quarter.
Also worth highlighting, Process Industries revenue was higher than Mobile Industries as we continue to shift our portfolio and improve our mix both organically and inorganically. Given the market conditions, we performed very well on the bottom line with earnings per share up 8% for a record third quarter of $1.14. We held EBIT margins from the second quarter at 15.5%, up 110 basis points from the prior year. This is despite production levels below sales as we continue to modestly reduce inventory levels in the quarter. Through three quarters, our margins of 15.9% are up 180 basis points from last year, despite tariffs, inventory reductions, and sequentially declining demand. Process Industries margins year to date are a strong 21.8% and continue to mix the company up. The Mobile margins are also a solid 12.4% year to date.
Cash flow was very good in the quarter. We continued to actively deploy capital to value-creating opportunities. We purchased about 1% of the outstanding shares in the quarter. We expect to complete the acquisition of BEKA Lubrication today. Our balance sheet remains solid. Let me talk briefly about recent acquisitions. First, the two large acquisitions that we completed in the third quarter of last year, Cone Drive and Rollon, have both recently completed one year within the Timken portfolio. We grew revenue and EBITDA over the first 12 months of ownership. The pro forma multiples would now be below 10 times for the combination. Cone Drive solar business has grown significantly. We expect double-digit growth again next year. Rollon has and will continue to take Timken into more diverse end markets with different cyclicality and growth rates.
We also purchased ABC Bearings last year, and we have quickly integrated ABC into Timken India. We are converting the operation to be capable of producing to Timken quality levels to expand our low-cost bearing capabilities. The plant is one of our many cost reduction and growth tactics that are contributing to our strong margin performance year-on-year and will contribute more next year with another year of traction. In regards to Diamond Chain, I discussed last quarter that the acquisition got off to a much slower start than we anticipated, primarily from low plant productivity and volume. The EBITDA margins improved significantly from the second quarter to the mid-teens in the third quarter, despite lower seasonal revenue.
The improvements were driven from both improved performance and stabilization in the operations as well as cost reductions from the integration. We've implemented over $3 million of annualized cost reductions in the seven months since the acquisition. We will see further benefit from these actions in the fourth quarter. As I said, we expect to complete the acquisition of BEKA Lubrication today. Automatic lubrication systems apply lubrication to bearings and other points of industrial equipment and vehicles. This eliminates the labor cost of manual lubrication and extends the life of the equipment through more reliable and precise application. We entered this market with the acquisition of Interlube in 2013. We scaled our position significantly with the acquisition of Groeneveld in 2017. The combination of Groeneveld and Interlube became a world leader in off-highway equipment and on-highway trucks and buses.
Together, they have been very successful in the markets, have a strong management team in place, and have been performing above the corporate averages financially. Our market position and product offering outside of off-highway and truck was small. BEKA Lubrication immediately changes that. BEKA brings a leading position in Germany and a much broader product offering with products specifically designed for wind, food and beverage, packaging, and other general industrial applications. We will have one of the broadest product offerings serving diverse markets in the automatic lubrication industry. BEKA has been family owned and operated for three generations, and we're very excited to bring the company into Timken. While long term, we expect the Groeneveld-BEKA combination to mix us up at the margin level.
Day one, BEKA's margins are lower than Groeneveld's and lower than the company average. We expect the acquisition to mix us down both this quarter and through next year. We know that there are many synergies between these two entities with opportunities to reduce overhead, improve productivity, and expand margins while we grow the top line. We've successfully done it with Lovejoy, Interlube, and other privately owned businesses. We will do it again with BEKA. The leadership team is ready to commence the work. Turning to the outlook, we are taking a very cautious view on the fourth quarter, forecasting a sequential decline from the third quarter of about 4% all in. We expect customers to continue to manage inventory, cost, and cash flow tightly to end the year.
We will continue to manage our cost structure and inventory levels down in the quarter to reflect the reduced demand while we invest in the business for long-term growth and success. For the full year, we expect to deliver record earnings per share of $4.70 to $4.75, with EBIT margins over 15% on flattish organic revenue and despite another year of currency headwinds and tariffs. Cash flow in the fourth quarter and the full year will be strong, which will make the incremental debt from the BEKA acquisition minimal, and we will finish the year with a strong balance sheet. While we will not get specific on 2020 yet, we do not view the sequential decline we are experiencing in the second half of this year necessarily rolling over into 2020. We believe much of the softening is normal inventory correction versus end market demand.
We have several markets that we expect to continue to grow through 2020, and we have a variety of self-help initiatives heading into next year. We are currently planning for revenue to be up sequentially in the first quarter of next year from the fourth quarter of this year. Additionally, while we have contracts still to conclude, we expect price to be modestly positive next year and price cost to also be positive. As always, we have a full pipeline of operational excellence initiatives around cost reduction and cash management that will deliver value regardless of the market conditions. From a capital allocation standpoint, we will end 2019 with our debt levels right in the middle of our targets. We expect to generate another strong year of cash flow next year, and we will be in a position to continue to deploy that capital towards value-creating opportunities.
In summary, we continue to take a balanced approach to driving growth, margins, returns, and cash flow through industrial cycles. We also continue to take a balanced approach to investing in the long-term growth and success of our business while delivering short-term results. Our pipeline of outgrowth and operational excellence initiatives remains robust and is evident in our 2019 results. We hope you will join us in New York City on December 12th as we share more on our strategy, goals, and plans for the future. With that, I will turn it over to Phil.
Thanks, Rich. Good morning, everyone. For the financial review, I'm going to start on slide 14 of the materials. Timken delivered very strong operating results in the third quarter, and you can see a summary of our results on this slide. Revenue came in at $914 million, up about 4% from last year. We delivered adjusted EBIT margins of 15.5%, which was 110 basis points more than the prior year. Adjusted earnings came in at $1.14 per share, a new third quarter record for the company, and up about 8% from last year, despite a higher tax rate. Turning to slide 15, let's take a closer look at our third quarter sales performance. Organically, sales were down about 3% in the quarter, with most of the declines coming in Mobile Industries.
Recent acquisitions added about 8% to the top line, while currency translation continued to be a headwind, negatively impacting revenue by over 1%. On the right-hand side of this slide, we outline organic growth by region, so excluding both currency and acquisitions. As you can see, we were down in North America, but up across the rest of the world. I'll provide some additional color on regional performance as I go through the segments. Turning to Slide 16, adjusted EBIT was $142 million or 15.5% of sales in the quarter, with margins up 110 basis points from last year. Adjusted EBITDA margins were 19.8% in the quarter, up 140 basis points from last year. Adjusted EBITDA margins were 10 basis points higher sequentially from the second quarter, despite lower revenue.
The increase in adjusted EBIT was driven by favorable price mix, lower material and logistics costs, and the benefit of acquisitions, offset partially by lower volume and related manufacturing utilization. Let me touch on some of the drivers briefly. As I mentioned, price mix was positive in the quarter. Pricing was positive in both segments, and mix was also positive. Note that material and logistics includes tariffs. We're starting to benefit from lower material costs, and logistics costs were lower year-on-year as well. Tariffs were also favorable. In the quarter, we recorded a small benefit for some tariffs paid in prior periods that are now refundable, as the U.S. government recently granted tariff exemptions retroactively on certain of our imports from China. With respect to manufacturing, we had strong productivity and cost performance in the quarter, as we're benefiting from our more variable cost structure and implementing cost reduction actions.
However, this was more than offset by lower production volumes, which produced a net negative impact for manufacturing year-on-year. We continue to manage SG&A costs well. Excluding the impact of acquisitions and currency, SG&A expense was roughly flat versus the year-ago period, as inflation and other spending was mostly offset by lower compensation expense. Finally, our recent acquisitions are contributing positively to our results, adding $11 million of EBIT in the quarter. This represents an adjusted EBIT margin of around 16% on the acquisition revenue, and that's after purchase accounting amortization. As Rich mentioned, Diamond Chain continues to improve, with EBIT margins above 10% this past quarter. We're excited to be closing on the BEKA acquisition later today. On Slide 17, you'll see that we posted net income of $64 million or $0.84 per diluted share for the quarter on a GAAP basis.
Special items in the quarter totaled roughly $23 million of after-tax expense, with the largest item being pension and OPEB remeasurement charges. On an adjusted basis, we earned $1.14 per diluted share, up 8% from last year. Note that our share count is down about 2% versus a year ago due to ongoing share buybacks. Our GAAP tax rate in the quarter was approximately 35%. Excluding discrete and other special items, our adjusted tax rate was just over 28%. This is higher than our prior estimate. As of September 30th, our full-year forecast calls for an adjusted tax rate of 27%. The higher tax rate in the quarter gets us to that level on a year-to-date basis. Catch-up cost us about $0.02 per share. Now let's take a look at our business segment results, starting with Process Industries on Slide 18.
Process Industries sales for the third quarter were $459 million, up 10% from last year. Organically, sales were down about 1%, with lower revenue in industrial services offset mostly by growth in wind energy and marine. We also benefited from positive pricing in the quarter. Acquisitions added 12.5% to the top line, while currency translation was unfavorable by about 1.5%. Looking a bit more closely at the markets. Industrial services revenue was down in the quarter, mainly in North America, and reflects softer demand for industrial gearbox and other repair services. Our growth in wind energy was seen in both Asia and Europe and reflects continued strong market growth and share gains. In marine, we had higher revenue in the quarter from our ongoing programs with the U.S. Navy.
Finally, industrial distribution was roughly flat as we saw growth in Asia and Europe, mostly offset by lower demand in North America. For the quarter, Process Industries' EBIT was $96 million. Adjusted EBIT was $98 million or 21.4% of sales, compared to $84 million or 20.1% of sales last year. The increase in EBIT was driven by favorable price mix, lower tariff costs, and the benefit of acquisitions, offset partially by the impact of lower volume. Process Industries' adjusted EBIT margins were up 130 basis points year-on-year. Our current outlook for Process Industries is for 2019 sales to be up 12%-13% in total, with acquisitions driving most of the growth. Organically, we're planning for sales to increase about 3% at the midpoint, reflecting growth in wind, solar, and marine, offset partially by a decline in industrial services.
We expect price cost to be positive for the year and for Process Industries adjusted EBIT margins to be around 21% for the full year, or around 50 basis points higher than last year. Let's turn to Mobile Industries on Slide 19. In the third quarter, Mobile Industries sales were $455 million, down 2% from last year. Organically, sales were down just under 5%, reflecting lower shipments in off-highway and heavy truck, partially offset by growth in rail, as well as the impact of positive pricing. Acquisitions added about 4% to the top line in the quarter, while currency translation was unfavorable by around 1%. Looking a bit more closely at the markets. In off-highway, we were down in all regions and across all subsectors, including agriculture, mining, and constructions. This reflects lower end-user demand as well as customer destocking.
Every truck was down in the quarter, driven mostly by declines in Asia and North America. Our growth in rail was in Asia and Europe, while the Americas were roughly flat. Automotive was up slightly, with higher shipments in the Americas driven by continued strong light truck and SUV market demand. Finally, aerospace was roughly flat in the quarter. Mobile Industries EBIT was $52 million. Adjusted EBIT was $54 million, or 11.8% of sales in the quarter, compared to $53 million, or 11.3% of sales last year. The increase in EBIT reflects favorable price mix, lower material and logistics costs, and the benefit of acquisitions, offset partially by lower volume and related manufacturing utilization. Mobile Industries adjusted EBIT margins were up 50 basis points year-on-year. Our outlook for Mobile Industries is for 2019 sales to be roughly flat to down 1% in total.
Organically, we're planning for sales to be down about 2.5% at the midpoint compared to 2018. This includes growth in aerospace and rail, which is expected to be more than offset by lower shipments in off-highway and heavy truck. We expect positive price cost for the year, and we expect Mobile Industries adjusted EBIT margins to be around 12% for the full year. We're up about 100 basis points from last year. Turning to slide 20, you'll see we generated strong operating cash flow of $145 million during the quarter. After CapEx spending, our third quarter free cash flow was around $101 million. Our year-to-date free cash flow of $272 million is more than double the amount from last year, with the improvement driven primarily by higher earnings and improved working capital performance. We ended the quarter with a strong balance sheet.
Net debt to adjusted EBITDA was around two times at September 30th, down from the end of 2018. With the closure of BEKA expected later today, our pro forma net debt to adjusted EBITDA as of September 30th would be about 2.2 times. I would expect us to end the year below this level, given the strong free cash flow we'll generate in the fourth quarter. You can see some highlights with respect to capital allocation at the bottom of the slide, including the repurchase of 750,000 shares in the quarter, which brings our year-to-date repurchases to just under 1.3 million shares. I'll now review our outlook with a summary on slide 21. We've lowered our outlook for both sales and earnings to reflect our year-to-date performance and relatively cautious view on the fourth quarter.
We're now planning for 2019 revenue to be up 5%-6% in total versus last year, with acquisitions driving the growth. Organically, we expect sales to be roughly flat at the midpoint compared to 2018, driven by growth in several sectors, including wind and solar energy, aerospace, marine and rail, as well as positive pricing for the year. This is being offset by lower demand in off-highway, heavy truck, and industrial services. Acquisitions should add about 7.5% to the top line for the year. This includes the BEKA acquisition we expect to close on later today. We expect currency translation to be negative 2% based on September 30th exchange rates. On the bottom line, we now estimate that earnings will be in the range of $4.15 to $4.20 per diluted share on a GAAP basis.
Excluding anticipated net special charges totaling $0.55 per share, we expect record adjusted earnings per share in the range of $4.70-$4.75, which at the midpoint would be up 13% from last year. The midpoint of our 2019 outlook implies adjusted EBIT margin expansion of around 125 basis points at the corporate level. Finally, we estimate that we'll generate free cash flow of around $375 million for the year, or almost 120% of GAAP net income at the midpoint. Our cash flow guidance is up slightly from last quarter, as we expect improved working capital performance to more than offset the impact of lower earnings. Before we move to Q&A, I want to remind everyone that we are hosting an Investor Day in New York City on December 12th. We hope to see many of you there.
The event will also be streamed live over the internet via webcast. With that, we'll conclude our formal remarks, and we'll now open the line for questions. Operator?
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We'll pause for a brief moment to allow everyone an opportunity to signal for questions. As a reminder, that is star one to ask a question. We'll take our first question from Joe Ritchie from Goldman Sachs. Please go ahead. Your line is open.
Thanks. Good morning.
Morning. Morning, Joe.
Rich, maybe just starting on the 4Q guide down sequentially, I think you said 4%. Go back into history, I think the last time we experienced something like this was, I guess, back in the 2014 timeframe. Maybe provide a little bit of color on how today's environment stacks versus 2014, and then your confidence in that most of this is really inventory correction.
Okay. I was looking back on the 2014 comp. I think definitely 2014 dropped off from 2013. I think there was another phenomenon happening at that time, that the U.S. dollar was moving dramatically against the rest of the world's currency. I think there were two headwinds happening at that time, and that carried through most of the rest of 2015.
I think we've got a little bit sharper sequential decline from the third quarter to the fourth quarter. I think the other thing that's different is we are, in this case, projecting 2 consecutive sequential declines. When you take the third quarter and the fourth quarter together, it would be a more pronounced decline than what we saw in 2014, and I think a more pronounced decline than anything we've seen probably in 5 or 6 years, so pretty significant. In regards to inventory versus in demand, we know there's an element of both that in some cases, production levels are down in some markets and inventory's coming down more than that. We've gotten very clear signals and data from distributors and large OEMs that a significant part of this is inventory.
I think the question is really around how deep the fourth quarter decline is. Sitting here October 31st, we think we've been pretty conservative on calling that. What happens from the fourth quarter to the first quarter, and as I said in my comments, right now we are planning for a sequential bounce from the fourth quarter to the first quarter, largely because we believe in that inventory correction phenomenon, and normal seasonality would be up from the fourth quarter to the first quarter. I think the last time we weren't was 2016. Certainly from 2015 to 2016. It does happen, but it would basically mean that the market's going to be under pressure for the full year, and at this point, we don't anticipate that.
I think there's obviously a lot of differences in the company between then and now in regards to what we spent the last year and a half at that time working on breaking up the company versus what we've been doing the last few years in building a robust pipeline of commercial activities, cost reduction activities, M&A activities. I think the differences in the company and how the company will perform in the same or better or worse market conditions is dramatically different from what it was five years ago, and that'll be a factor as well.
That's helpful color, Rich. I guess maybe just following up on that last point, the margin expansion in this backdrop with organic declining in both segments, clearly managing the decrementals well. As you think about some of the things that helped, incentive comp probably helped this quarter, and I'm assuming as well, price cost. How do you think about this over the next ensuing quarters if we kind of stay in a pretty weak backdrop in your ability to manage decremental margins over the next few quarters?
I think we're in a really good spot the next few quarters. You're right, incentive comp did help in the third quarter as we lowered the outlook. Incentive comp will help next year. It'll be a tailwind next year as well as we look at raising the bar over this year's performance. Said in the comments, we will start the first quarter of 2020. Pricing will be up. It'll be up less than it was in 2018 and 2019, but it'll be up. We've got a pretty good cyclical cost dynamic, I would say. When I say the cyclical part of cost, meaning material costs, scrap costs, et cetera. We've got the self-help side of cost, which as I said, is also robust. I think we're in a very good position from a price cost standpoint for the next several quarters.
Okay. Thank you. I'll get back in queue.
Thanks.
We'll now take our next question from Stephen Volkmann from Jefferies. Please go ahead. Your line is open.
Good morning, guys.
Good morning, Steve.
Maybe I'll just pull on the same thread here a little bit. I think, Phil, you mentioned that your distributor, industrial distributor business in North America was down, offset by growth overseas. Are you willing to say how much that North American distributor business was down?
Yeah, we typically don't go into that level of detail on it, Steve. I would say it was down meaningfully, and then we were up in Asia and Europe as we continue to grow in distribution in Asia as the installed base matures, as we talked about before. We did see some incremental revenue in Europe. The biggest, when you think of the guide down third quarter to fourth quarter, we did take the organic guide down. A big piece of that was distribution. We had it sort of in the mid-single digits organically. Last quarter, we've got it kind of roughly flat this quarter. The biggest move there would've been North America, and it's really, as I said, reflecting lower end user demand and then our expectations for some inventory destock in the fourth quarter.
Just as we sit here today, what we're hearing from our customers, what we're seeing in terms of the data we get would suggest that that's likely to happen. We thought we'd take a relatively cautious view and bake it in. Frankly, ditto on the mobile side, in heavy truck and off-highway. We kind of took those down a little bit more than where they were in July, and it's again reflective of the demand environment we saw. Also given where we're at, we just don't see any reason customers will do anything other than probably take longer than typical shutdowns and kind of slow walk the fourth quarter. Again, we bake that in just to take a relatively cautious view on it. I'd add a couple of comments to that, Steve, that are a direct answer to your questions, but a couple other things.
North America being down 7% in the quarter, North America generally mixes us up and it mixes the bearing industry in general up. I think the fact that performing year to date as we have when North America is the weakest geographic market is a strong statement. Then I'd also say on the distribution side, the difference with U.S. distribution versus rest of world distribution is U.S. distribution, couple large publicly traded companies, a large private equity company, one large private held company. They manage probably inventory a little more aggressively than the rest of the world, where you get a lot of privately held businesses. I think, again, that dynamic that we're seeing in North America is partially that with inventory correction.
Again, I think when you look at our performance despite that, it's a positive, but we also think that bodes well for the first quarter of next year, that some of that is just an inventory correction.
Okay. Rich, is it your assumption that you'll be through with your own Timken inventory reductions at year-end, and that you'll be able to sort of produce to retail demand in 2020? Is that the plan?
Yeah, I think we are bringing inventory down in the second half in relation to volume. Assuming that we are up sequentially in the first quarter, we would expect production to step back up. We do have, as always, some inventory reduction targets and inventory improvement targets out there and things that we're working on. On the macro level, I would say the answer to that question is yes.
Okay. Thank you.
Thanks, Steve. Thanks, Steve.
We'll now take our next question from Steve Barger from KeyBanc Capital Markets. Please go ahead, your line is open.
Hey, good morning, guys. This is Ken Newman on for Steve.
Morning, Steve. Morning, Steve.
Good morning.
Hey, Ken.
We're hearing that some machinery product lines are planning for double-digit declines into early 2020, and we expect rail deliveries to be down year-over-year. Any more detail on what the offsets are specifically on the Mobile side, or do you expect Process will offset whatever happens in Mobile?
I didn't hear the first part of your question. What'd you say was declining double digits?
Yeah, we're just hearing some commentary that machinery product lines are planning for some double-digit declines.
Okay. Yeah, no, I think, just speaking specifically to Timken for 2019, I think what we're seeing is, I'll try and at least give some color as much as I can around 2020. What we're seeing relative to 2019 is there's no question we're feeling it in off-highway. There's no question we're starting to feel it in heavy truck. Both of those verticals, if you will, were down north of 10% organically in the third quarter. We're expecting continued declines both sequentially and year-over-year in the fourth quarter. There's no question we're feeling that. On the mobile side, we are benefiting from a strong aerospace market. While we were flat in the quarter, we are expecting aerospace to be up high singles, low doubles for the year. Global rail continues to be strong.
While we were flat in the Americas in the quarter, we are continuing to build that business out outside the U.S. Saw some really good growth in India, Eastern Europe, elsewhere in Asia, and that's been really positive. Then obviously the automotive business. While I know automotive is getting a lot of negative press these days, we think we've got a really attractive mix in light truck and SUV demand holding up, and I think that's mitigating a lot of what would otherwise be pretty negative heavy truck and off-highway markets that you see on the market chart. On the process side, wind continues to grow. It was up double digits again in the quarter. It's going to be up double digits, we expect, year-on-year in the fourth and again for the full year. That's contributing significantly.
You look across the rest of the verticals, marine's also up, which is helping. The rest of the vertical is kind of flattish, and then the services business being down. At least relative to Timken, you're seeing a little bit of the benefit of that mix, which we've talked about for several quarters now. Heading into 2020, it's obviously tough to call. We're not giving 2020 guidance today, but I think it's fair to say a lot of the markets in 2019 that are strong still have pretty good momentum behind them. When you think wind, solar, aerospace, marine, have pretty strong fundamentals. Regardless of the equipment environment we're in next year, those markets could continue to grow for sure.
Hey, Ken, I would just add, for 2020, the market outlook, not necessarily for Timken, but the one that certainly seemed to be the most negative, and I think could be in those double-digit numbers you're talking about, has been heavy truck, and particularly heavy truck in North America. On the OEM side of that's an important market for us, but it's also below 5% of the company revenue from an OEM standpoint. From an off-highway standpoint, I'd say the 2020 outlook has not been that negative, and then flat to slightly down and depending on whether it's construction or mining. For us, again, what we're seeing right now is, in some cases, customers reducing dealer inventory, reducing manufacturing inventory.
If that does level off, and even if it's down a few %, we could potentially be up next year when you factor that in. I would say outside of heavy truck, we're not seeing a lot of forecasts that are down 10% next year.
Very helpful color. The second question here is, we appreciate the color on price cost being positive into 2020. Any help here as to whether that applies to both segments, or is there one where you expect to get more price cost spread versus the other?
Yeah, I would say it applies to both segments first, and we have generally gotten better price cost coverage in Process than Mobile and would expect that to be the case in 2020 as well.
Very helpful. Thanks.
We'll now take our next question.
With that being said, I would also add one more comment there. Mobile gets more benefit proportionally.
Right
from easing material costs, which we have hit a market here in the last couple of quarters and expect that to carry over in the next year.
Pardon me for interrupting. We have our next question from David Raso from Evercore. Please go ahead. Your line is open.
Hi. Thank you. Maybe that last comment helped address part of my question. I'm trying to understand the Mobile margins.
Sure.
Essentially organic this quarter down 4.8 on the sales. Next quarter implied it gets even worse at down 5.9. The margins up year-over-year solidly in 3 Q, implied again up solidly in 4 Q. Maybe that was the last comment there that the input cost relief, the price cost is particularly positive in Mobile in the second half of the year. Is that how we're seeing that positive dynamic? Obviously, if you can frame a little bit, if it feels likely you're trying to imply that down 5.9% for the fourth quarter in Mobile, we'll see, but it might not get much worse than that. I'm just trying to see if I can extrapolate that margin performance in Mobile into my thoughts on 2020.
Yeah, I would say, I think you have it directionally, David. Cost price positive, mix helping within there a little bit with rail being a little bit stronger, heavy truck being down. Material cost certainly more favorable this year and more in the second half than what we had anticipated coming into the year, and largely price being locked in, with the exception of where we pass material surcharges through. I would add structural cost reductions that have been taking place and continue to take place, as well as some mix impact from acquisitions.
Maybe I'd also add, David, I think in the manufacturing performance, despite the inventory takeout, we are managing costs extremely well. We do expect it to be a headwind at the corporate level, but not anywhere near what we would've had in prior years, if you will. We're flexing down as we need to across some of the softer markets. We've reduced some of our operative personnel by north of 7,800 people so far across the world. I think we're certainly acting quickly to keep costs in line despite lower inventory and that sort of thing.
Is it fair to say after that performance in the second half of the year, if you do the fourth quarter, that mobile, if the revenues are even down next year, that you would expect to hold, broadly speaking from that answer, the margins from this year?
Yeah, I think that's probably too early to talk to. I think a lot of that depends on the environment next year, so it's probably a little premature to talk to that. I do want to comment on the fourth quarter margins, because I did catch your note. We do round the margin guide for Mobile Industries of approximately 12 and for Process Industries of approximately 21 is rounded. I would say we would expect margins to be flat to up from last year, but not quite as much as maybe you were shown. The reverse would be true, I think, on the Process Industries side.
All right. Terrific. All right, I appreciate it. Thank you.
Thanks, David.
We'll now take our next question from Joe O'Dea from Vertical Research Partners. Please go ahead. Your line is open.
Hi. Good morning.
Morning.
Similar line of questions, but just on the process side, it was a good margin in the third quarter, and looks like a bigger than normal step down sequentially from 3Q to 4Q. Trying to understand, I think in the third quarter, it sounds like North America distribution was one of the pinch points. I would expect that that's a continuation in the fourth quarter, but just why we might be seeing some of that larger than normal margin pressure. The second part of that being, what does that mean about a set up into next year? Because it would imply process margins down if we just take the 4Q process margin that you're indicating.
I'd say first, there's an element of seasonality there that the fourth quarter company-wide margins are generally a little bit lower and production is a little bit lower. There's an inventory takeout element in there. Revenue decline in Process sequentially. I don't think it bodes at all for 2020. I would say I wouldn't read much more into it than seasonality, inventory reduction, and the sequential decline. Now obviously, if you're forecasting sequential declines through next year, then there could be some other things, but we're not anticipating that as we sit here today for Process.
Yeah. Maybe a couple of things I would add to that, Joe. I think Rich has got it. The only things I would add would be, I think mix, as I talked about, with the services business being a little bit softer, and then our expectations relative to distribution, I think that would be negative for Process from a mix standpoint that I think is definitely impacting there as well. Probably the last point, Rich mentioned it, we're really excited about BEKA in terms of what we can do with it, but it will come in below the corporate average from a margin standpoint, meaning it would be significantly below the Process average, if you think about it that way.
While only about 30% of it's going to go into Process, that will be a little bit of a headwind as well temporarily until we drive those synergies to get those margins back up.
Particularly in the fourth quarter, because we're hitting it for November and December, which would typically be two of, if not the two weakest months of the year for all of our business units.
Understood. On the distribution and what you're seeing with the stock, and given that I think you have better visibility into some of your large North America distribution partners, any insight on where you think months of inventory will stand at the end of the year? Just to kind of appreciate what kind of a step down we're seeing here in the back half of the year.
I wouldn't say months or days of inventory, I think our distributors get better every year at managing inventory, and it's been a trend for well over a decade. They've leveraged their inventory better in the 2017, 2018, and first half of 2019 upturn than what they did in the past. As we've talked before, we didn't really see inventory levels ever. In fact, the inventory turns improved during that time. I think some of what we're seeing is a level of caution there. Some of it is just bringing it down with the realities of where their market demand is. We're going to end the year relatively low in the U.S. as a percentage of sales, or as a percentage of cost goods sold is generally the way we look at it.
Then just one more on wind and any perspective on demand patterns there, how to think about current demand levels, bigger picture, just in terms of where this is trending, sustainability of demand here, as that's been a nice source of strength for you?
I certainly expect 2020 to be very strong. I think that also has ripple effects for some of our confidence on the pricing side, because a lot of the large bore bearings go into off-highway and other markets. While some of those markets may be off their peak, the demand in total is strong in what I'll call large industrial bearings. It's good for the pricing side. We expect a very strong year in 2020 for wind. That's one of our longer lead time areas as well. I'm not looking to call 2021, but if you look out over that five years, we are certainly believers in growth of renewable energies globally, and continue to grow our position there, both in wind and in solar.
I'll just toss in part of the interest in the acquisition of BEKA is that they bring a product line and a market position in wind lubrication systems, which we're excited about.
Very helpful. Thank you.
Thanks, Joe.
We'll now take our next question from Chris Dankert from Longbow Research. Please go ahead, your line is open.
Hi. Morning, guys. Thanks for taking my question.
Morning, Chris.
On the SG&A, flattish on an organic basis, you did highlight some structural cost out. Can you go into a little bit of detail on what's going on there? Are we talking about just kind of pulling down headcount a bit? Are we looking at the footprint? Kind of what's bigger picture, and can we expect additional cost-out actions going forward here?
Yeah. Hey, Chris. I'll take that. I'll talk to the SG&A first. Maybe we'll talk a little bit more even cost of sales. On SG&A, yeah, we were roughly flat year-over-year despite the lower organic revenue, if you will. While we are working on cost reduction initiatives across our administrative functions and did capture a lot of benefits there, we are also adding some costs. We're building out some of our capabilities outside the U.S. We're adding salespeople in Africa, for example, to serve that market and other parts of the world. That continues. I think net-net, we kept it under pretty good control. We did benefit from lower compensation expense in the quarter, which was primarily incentive compensation as we adjusted the outlook. That altogether kind of kept us flat. My comment around headcount was really more around operatives.
Obviously as markets soften, particularly in off-highway and heavy truck, we have had to slow down some of our production, and we do a pretty good job and a very swift job of flexing down, and we've been able to take out or reduce headcount quite a bit to match demand. I think that'll continue. We'll continue to flex with demand, and it's really helped from a manufacturing standpoint. We showed negative $5 million year-over-year, given the reduction in inventory, it certainly would have been higher than that were it not for the cost reduction actions and the more variabilized cost structure that we have.
That would just add is, by design, we are trying really to mix into what would generally be higher SG&A markets and businesses for us. Process runs a higher SG&A level than Mobile, and as you go beneath that, lubrication systems runs a higher SG&A model than bearings, et cetera. When you really look over the last few years, SG&A has been, I think, a bigger contributor to the margin improvement than just what the pure math would show because we've improved the mix, which would've just naturally brought the SG&A up. We've driven a lot of productivity improvements. We've driven acquisition synergy improvements, and it has been a significant contributor to margins. As you look forward, where I talked about we've done a lot of Diamond Drives integration already, really most of that just in the last quarter, so we'll see the benefits of that this quarter.
It'll take us a couple of quarters, but there will be significant integration between Groeneveld and BEKA over the course of the next year. We've got a lot of things happening in other parts of the business. We're taking out another ERP system just this quarter, which not only simplifies the business and improves our IT cost structure, but allows us to pursue other cost reductions as well. It's an integral part of our strategy and our operating performance, and it's been a significant contributor to our acquisition results as well as the performance of the business.
Yeah, absolutely. Thank you so much for all the color there. Really helpful. Just to kind of follow up here, when we look at Europe and Asia, and I apologize if I missed this, but growth certainly well ahead of IP. I know you called out rail as one of the markets that kind of helped lead there, but just any additional color on was it cross-selling? Was it program exposure? What's kind of driving the outgrowth in Asia and Europe?
Yeah, I would say it really is driven a lot by our mix, Chris, as we talked about. Wind was clearly a contributor. Rail in Europe and Asia continues to grow. As we said, we were up in distribution. I think it's really more market driven. We tend to be more tilted toward industrial markets in Europe and Asia like we are as a company. I think just those markets in particular have held up really well, continue to grow and have enabled us to more than offset the declines we're seeing in the heavy truck and off-highway declines are global to a great degree. Yet we've been able to offset that with, I would say, the wind, the rail, and distribution probably are the biggest ones that would come to mind.
Yeah. Thanks for the color, guys, and good luck on the end of the year here.
Thanks.
As a reminder, if you would like to ask a question, please press star one. That is star one as a reminder to ask a question. We'll now take our next question from Justin Bergner. Please go ahead. Your line is open.
Good morning, Rich. Good morning, Phil.
Morning, Justin.
Morning, Justin.
To start off, I got on the call a little bit late. I apologize if anything is redundant. To start off, I guess on the first quarter, you suggested you see a sequential revenue bounce driven by seasonality. Are you expecting that to just be sort of in line with normal seasonality or actually stronger than normal seasonality?
I would say we're planning for normal, which in the last few years have been mid to high single digits up from the fourth quarter. We were double digits in one of those years and mid-single digits in the other couple of years. I'd say we're planning for the lower end of that.
Okay. That's helpful. Secondly, just the GAAP EPS guide came down a lot more than the adjusted EPS guide. I'm not sure if you bridged that at all. Is that higher restructuring expenses, tax rate, or what's behind that?
I would say it's probably the three main things I would point to, Justin, would be the pension remeasurement charge that we took in the third quarter would obviously be in the full year guide that wasn't in last quarter because we didn't have the number calculated. The BEKA acquisition will come in with acquisition-related charges that we wouldn't have anticipated or baked into the guidance last quarter. That would typically be like inventory step-up, acquisition fees, et cetera, that would hit. The last point would be the tax. We do have some discrete tax items we're recording during the current year for some prior year reserves that we're setting up that are larger than what we would have factored in last quarter. Those would be, I would say, the three main items, with the biggest one being the remeasurement charges.
I would point out, at the end of the year, we always have to do a remeasurement of all of our pension and OPEB plans that's required. As we sit here today, we don't know what that amount would be, so we don't bake in anything for that. That could be another number, another amount coming in. It will be another amount coming in. Not sure which way it's going to go at this point, but that'll come in in the fourth quarter, and we will not have included that. If that makes sense.
Yeah, no, that makes sense. It doesn't seem like there's anything too unusual there. The price mix was, I guess a $15 million benefit year-over-year in the third quarter versus $7 million year-over-year in the second quarter. Was that mainly mix, or are you still getting better pricing through the third quarter?
I would say pricing in the third quarter was similar to the second quarter. The improvement from Q2 to Q3 in that column would've been more mix related. Pricing has largely held since the first quarter of the year. Maybe a little bit more has come in through the year, but that's also been offset by material easing and as material input costs on some of our contracts, we pass some of that through. That's largely washed out any midyear price increases we would've realized.
Okay, got it. Maybe one last one on big picture. Has your acquisition appetite slowed now? I realize BEKA was a really good opportunity even if the industrial backdrop is decelerating. Looking forward, are you focused on sort of integration and de-leveraging, or are you still open to material M&A?
It depends on how far you're looking out. I would say we're certainly not expecting to do anything else in 2019 or probably early in 2020. As I mentioned in my comments, we feel very good about the three acquisitions we completed last year, that they're performing well. We know what we have. Integration has been good, management team stable, et cetera. Then we got off to a rough start with Diamond. Feel a lot better about that than we did three or four months ago. Definitely, the short term focus is absorb BEKA. Our cash flow is, we said we're going to end the year right about at the middle of our targeted debt levels. Our cash flow tends to be second half weighted.
We generally, as we look at next year, would anticipate putting that cash to things other than debt reduction, and probably ending our next year at the middle of our targeted range as well.
Okay, thanks. That took care of my questions.
Obviously, M&A could be a part of that, as well as share buyback could be a part of that as well.
Okay, thanks again.
At this time, there appears to be no further questions. I would like to turn the conference back to you for any additional or closing remarks.
Thanks, Brian. Thank you everyone for joining us today. If you have further questions after today's call, please contact me. Again, my name is Jason Hershiser. My number is 234-262-7101. Thank you. This concludes our call.
Thank you for your participation. You may now disconnect.