What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-15 compared with 2021-02-16 · 332 added, 345 removed, 336 unchanged (67% of the section changed)

14 unchanged sentences

and other mobile equipment.

Beyond service parts sold to OEMs, aftermarket sales and services to individual end users, equipment owners, operators and maintenance shops are handled directly or through the Company's extensive network of authorized distributors.

• Process Industries serves OEM and end-user customers in industries that place heavy demands on the fixed operating equipment they make or use in heavy and other general industrial sectors.

23 unchanged sentences

The Company is intently focused on providing the highest returns for shareholders through its capital allocation framework, which includes:

(1) investing in the core business through capital expenditures, research and development and other organic growth initiatives;

(1) investing in the core business through capital expenditures, research and development and initiatives to drive profitable organic growth;

(2) pursuing strategic acquisitions to broaden its portfolio and capabilities across diverse markets, with a focus on bearings, adjacent power transmission products and related services;

2 unchanged sentences

As part of this framework, the Company may also restructure, reposition or divest underperforming product lines or assets.

The following highlights some of the Company's more significant accomplishments in 2020:

• Sales to renewable energy customers grew by over 50% from 2019 through strong market growth and the benefit of outgrowth initiatives.

Renewable energy became Timken’s largest individual end-market sector in 2020 at 12% of sales.

The Company also announced over $75 million in capital investments to be made through early 2022 to increase the company’s renewable energy capabilities across its footprint.

• The Company reacted swiftly to the COVID-19 pandemic by taking decisive actions to (a) protect employees and other stakeholders while continuing to serve customers in essential industries and (b) reduce costs to mitigate the impact from lower revenue caused by the pandemic and improve the Company’s overall cost structure.

• Timken paid its 391 st through 394 th consecutive quarterly dividends during 2020, including a dividend of $0.29 per share during the fourth quarter, an increase of 4% from the prior quarter.

2020 marked the 7 th consecutive year of annual dividend increases.

The Company also repurchased 1.1 million shares of common stock in 2020.

• The Company completed the acquisition of the assets of Aurora Bearing Company (“Aurora”) in November 2020, which will enhance the Timken’s product portfolio and leadership position in engineered bearings.

With annual sales of approximately $30 million in 2020, Aurora serves a diverse range of industrial sectors, including aerospace and defense, racing, off-highway equipment, and packing.

RESULTS OF OPERATIONS

6 unchanged sentences

Average number of diluted shares 77,006,589 76,401,366 — 0.8 %

The decrease in net sales was primarily driven by lower organic volume revenue and the unfavorable impact of foreign currency exchange rate changes, partially offset by the benefit of acquisitions and positive pricing.

The decrease in net income was primarily due to the impact of lower volume, the unfavorable impact of foreign currency exchange rate changes and higher restructuring and pension remeasurement charges.

The decrease was partially offset by lower selling, general and administrative ("SG&A") expenses, reflecting cost reduction initiatives, lower material and logistics costs, and the benefits from acquisitions and favorable price/mix.

Throughout the COVID-19 pandemic in 2020, Timken continued to operate and fill customer orders, and adjusted production as required by local government directives and to reflect changes in global demand.

For most of the second quarter, the Company's operations were adversely impacted by lower global demand caused by the ongoing spread of COVID-19 around the world, which included various customer shut-downs and government imposed operating restrictions.

During the second quarter, the Company took steps to reduce costs by implementing temporary salary reductions, work furloughs and other actions to align its costs with near-term demand expectations.

During the third and fourth quarters, Timken was able to operate with no major restrictions, and production levels improved.

Timken continued certain temporary cost reduction actions and expanded and accelerated certain structural cost reduction initiatives to align its costs with near-term demand expectations and to improve the profitability of the Company longer term.

The increase in net sales was primarily driven by higher organic volume revenue across most market sectors, including positive pricing, the favorable impact of foreign currency exchange rate changes and the benefit of acquisitions.

The increase in net income was primarily due to the favorable impact of higher volume and related manufacturing utilization, lower restructuring charges and a lower tax rate, partially offset by higher material, logistics and other operating costs.

In addition, the impact of foreign currency exchange rate changes was favorable versus the same period a year-ago.

The world continues to be impacted by the COVID-19 pandemic.

The Company continues to adhere to mandates and other guidance from local governments and health authorities, including the World Health Organization and the Centers for Disease Control and Prevention.

Timken has implemented risk mitigation plans across the enterprise to protect employees and reduce the risk of spreading the virus, while continuing to operate where permitted and to the extent practicable.

Timken has implemented plans across the enterprise to operate in a safe manner, while protecting employees and adhering to mandates and other guidance from local governments and health authorities.

The Company's main priority continues to be the health of its employees and others in the communities where it does business.

While the Company’s operations and financial results were adversely impacted during 2020 resulting from the COVID-19 pandemic, operations had largely stabilized by the end of the year.

The Company will continue to monitor, assess and manage the uncertainty surrounding the COVID-19 pandemic.

Timken’s outlook for 2021 assumes that COVID-19 conditions around the world will improve globally as the year progresses.

The Company expects 2021 full-year revenue to be up approximately 12% compared to 2020, primarily due to higher organic revenue across both the Mobile Industries and Process Industries segments, the impact from foreign currency exchange rates and the benefit of acquisitions.

The Company's earnings are expected to be up approximately 20% in 2021 compared with 2020, primarily due to the impact of higher volume, partially offset by higher material costs and higher operating expenses to serve increased customer demand.

The Company expects to generate cash from operating activities of approximately $450 million in 2021, a decrease from 2020 of approximately $128 million, or 22%, as the Company anticipates working capital to be a use of cash in 2021 versus a source of cash in 2020.

The Company expects capital expenditures to be approximately $150 million (approximately 3.8% of sales) in 2021, compared with $122 million in 2020.

With pandemic conditions generally improving across the globe, industrial markets have strengthened in most parts of the world, and the Company has experienced supply chain disruptions, inflation and staffing issues related to serving the increased customer demand.

During 2021, Timken was able to serve customers and meet demand levels across most markets, although at higher costs than anticipated.

Timken's outlook assumes that COVID-19 conditions will continue to improve, but that supply chain disruptions and inflationary pressures will largely persist throughout 2022.

The Company expects 2022 full-year revenue to be up approximately 10% compared to 2021, primarily due to higher demand across most end markets, positive pricing and the execution of outgrowth initiatives.

The Company's earnings are expected to be up in 2022 compared with 2021, primarily due to the favorable impact of higher volume and price/mix, partially offset by higher material, logistics and other operating costs.

The Company expects to generate cash from operating activities in 2022 above 2021 levels driven by higher earnings and lower pension and other postretirement contributions and payments.

The Company expects capital expenditures to be approximately 4% of sales in 2022, compared with 3.6% of sales ($148 million) in 2021.

THE STATEMENTS OF INCOME

1 unchanged sentence

Net sales $ 4,132.9 $ 3,513.2 $ 619.7 17.6 %

Net sales decreased in 2020 compared with 2019, primarily due to lower organic revenue (net of positive pricing) of $365 million and the unfavorable impact of foreign currency exchange rate changes of $32 million, partially offset by the benefit of acquisitions of $120 million.

The lower organic revenue was primarily due to lower demand driven by the economic slowdown caused by the COVID-19 pandemic that impacted most market sectors, partially offset by growth in renewable energy market sector.

Net sales increased in 2021 compared with 2020, primarily due to higher organic revenue of $513 million, the favorable impact of foreign currency exchange rate changes of $78 million, and the benefit of acquisitions of $29 million.

The higher organic revenue was driven by higher demand across most market sectors in the Mobile Industries and Process Industries segments, plus the benefit of outgrowth initiatives and positive pricing.

Gross Profit:

2 unchanged sentences

Gross profit % to net sales 26.7 % 28.7 % — (200) bps

Gross profit decreased in 2020 compared with 2019, primarily due to the impact of lower volume of $168 million, the unfavorable impact of foreign currency exchange rate changes of $28 million and unfavorable manufacturing performance of $12 million.

These items were partially offset by the net benefit of acquisitions of $39 million, lower material and logistics costs $28 million and favorable price/mix of $4 million.

In addition, the Company recognized net insurance proceeds of $1 million in 2020 after incurring property losses of $8 million in 2019.

Selling, General and Administrative Expenses:

Gross profit increased in 2021 compared with 2020, primarily due to the impact of higher volume of $196 million, the favorable impact of foreign currency exchange rate changes of $23 million, favorable net manufacturing performance of $20 million, favorable price/mix of $15 million, and the favorable impact of acquisitions of $8 million.

These increases were partially offset by higher material and logistics costs of $171 million.

Selling, General and Administrative ("SG&A") Expenses:

2021 2020 $ Change Change

Selling, general and administrative expenses $ 580.5 $ 533.8 $ 46.7 8.7%

Selling, general and administrative expenses % to net sales 15.2 % 16.3 % — (110) bps

The decrease in selling, general and administrative ("SG&A") expenses in 2020 compared with 2019 was primarily due to lower employee costs and related benefits and lower discretionary spending as the Company implemented cost reduction initiatives, including temporary salary reductions, work furloughs and permanent headcount reductions, to reduce costs to combat the impact of the COVID-19 pandemic and the impact lower demand, mainly during the second quarter of 2020.

Performance-based compensation was also lower in 2020, compared to 2019.

Selling, general and administrative expenses % to net

14.0 % 15.2 % — (120) bps

The increase in SG&A expenses in 2021 compared with 2020 was primarily due to higher spending to support the higher sales levels, the favorable impact of temporary cost reduction actions implemented in 2020 in response to the COVID-19 pandemic that did not repeat in 2021, and the addition of SG&A from recent acquisitions.

Impairment and Restructuring Charges:

4 unchanged sentences

Total $ 8.9 $ 21.2 $ (12.3)

Impairment and restructuring charges of $8.9 million in 2021 were comprised primarily of severance and related benefits associated with the planned closures of the Company's Villa Carcina, Italy bearing plant and Indianapolis, Indiana chain plant.

These initiatives are expected to reduce headcount and right-size the Company's manufacturing footprint.

In addition, impairment and restructuring during 2021 included impairment charges related to certain engineering-related assets used in the business.

Management concluded no further investment would be made in the engineering-related assets and, as a result, reduced the value to zero.

Impairment and restructuring charges of $21.2 million in 2020 were comprised primarily of severance and related benefits associated with initiatives to reduce headcount and right-size the Company's manufacturing footprint, including the planned closure of the Company's Indianapolis, Indiana chain plant and the reorganization of the Company's Canton, Ohio and Gaffney, South Carolina bearing facilities.

In addition, the Company recognized severance and related benefits as it began to accelerate and expand cost reduction initiatives.

Impairment and restructuring charges of $6.8 million in 2019 were primarily due to severance and related benefits associated with a variety of initiatives to reduce headcount, as well as a goodwill impairment charge of $1.8 million for one of its reporting units.

Interest Expense and Income:

2021 2020 $ Change % Change

Interest expense $ (58.8) $ (67.6) $ 8.8 (13.0 %)

Interest income 2.3 3.7 (1.4) (37.8 %)

Interest expense decreased in 2021 compared to 2020 primarily due to lower average outstanding debt during the year.

Other Income (Expense):

2021 2020 $ Change % Change

Non-service pension and other postretirement (expense) income $ (4.7) $ 10.2 $ (14.9) (146.1 %)

Non-service pension and other postretirement

income (expense) $ 18.3 $ (4.7) $ 23.0 (489.4 %)

Other income, net 0.8 10.0 (9.2) (92.0 %)

The Company recognized non-service pension and other postretirement expense in 2020 primarily due to the recognition of net actuarial losses ("Mark-to-Market Charges").

In 2019, the Company recognized non-service pension and other postretirement income.

The Mark-to-Market Charges in 2020 were primarily due to the impact of lower discount rates to measure the benefit obligations for pension and other postretirement plans and the impact of experience losses, partially offset by favorable asset returns.

The Mark-to-Market Charges in 2019 were the result of higher than expected returns on plan asset and the impact of a reduction in contractual rates for the Medicare Advantage plans, driven by a law change that repealed the tax on Health Care Insurers after 2020, partially offset by lower discount rates to measure the benefit obligations for pension and other postretirement plans.

In addition, there was higher amortization of prior service credit in the current year due to a plan amendment for the Company's postretirement benefit plans in the second half of 2019.

Refer to Note 15 - Retirement Benefit Plans and Note 16 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for more information .

The change in other income in 2020, compared to 2019, was primarily due to foreign currency losses, net of hedging activity, recognized in 2020, compared to foreign currency gains, net of hedging activity, in 2019, more than offset by an acquisition-related gain in 2020.

The acquisition-related gain represents a bargain purchase price gain on the acquisition of the assets of Aurora acquired on November 30, 2020.

The Company recognized non-service pension and other postretirement income in 2021 primarily due to the recognition of lower net actuarial losses ("Mark-to-Market Charges") in 2021 compared to 2020.

In 2020, the Company recognized Mark-to-Market Charges totaling $18.5 million.

In 2021, the Company recognized Mark-to-Market Charges of $0.3 million.

R efer to Note 16 - Retirement Benefit Plans and Note 17 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for more information .

The change in other income in 2021, compared to 2020, was primarily due to the acquisition-related gain in 2020.

The acquisition-related gain represents a bargain purchase price gain on the acquisition of the assets of Aurora Bearing Company ("Aurora") acquired on November 30, 2020.

Refer to Note 3 - Acquisitions for more information.

3 unchanged sentences

Effective tax rate 20.0 % 26.2 % — (620) bps

The effective tax rate for 2021 was 20.0%, which was favorable compared to the U.S.

federal statutory rate of 21%, primarily due to the release of accruals for uncertain tax positions, favorable U.S.

permanent differences and the release of a valuation allowance on certain non-U.S.

deferred tax assets.

These amounts were partially offset by the unfavorable effect of earnings in foreign jurisdictions where the effective tax rate was higher than 21%.

The effective tax rate for 2020 was 26.2%, which was unfavorable compared to the U.S.

2 unchanged sentences

state and local income taxes.

The effective tax rate for 2019 was 20.7%, which was slightly favorable compared to the U.S.

federal statutory rate of 21%, primarily due to the release of foreign valuation allowance against certain foreign deferred tax assets and the remeasurement of deferred tax balances to reflect the reduced India statutory rate.

These impacts were partially offset by reductions in foreign jurisdictions where the effective tax rate was higher than 21%, additional discrete accruals for uncertain tax positions, U.S.

state and local income taxes and withholding taxes recorded on planned dividend distributions.

The change in the effective rate for 2020 compared with 2019 was an increase of 5.5%.

The increase was primarily due to the release of certain valuation allowances and the remeasurement of deferred tax balances to reflect the reduced India statutory tax rate during 2019.

These items were partially offset by prior year discrete accruals for uncertain tax positions and withholding taxes recorded on planned dividend distributions during 2019.

The change in the effective rate for 2021 compared with 2020 was a decrease of 6.2%.

The decrease was primarily due to the release of accruals for uncertain tax positions, favorable U.S.

permanent differences, including the tax impact from stock-based compensation awards and the new elective GILTI high tax exemption rules, and the release of a valuation allowance on certain non-U.S.

deferred tax assets.

Refer to Note 5 - Income Taxes in the Notes to the Consolidated Financial Statements for more information on the computation of the income tax expense in interim periods.

For a discussion of changes in our results from 2020 to 2019, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

BUSINESS SEGMENTS

7 unchanged sentences

The following items highlight the Company ' s acquisitions completed in 2021 and 2020 by segment based on the customers and underlying markets served:

• The Company acquired Intelligent Machine Solutions (“iMS”) during the third quarter of 2021.

The majority of the results for iMS are reported in the Process Industries segment.

• The Company acquired Aurora during the fourth quarter of 2020.

Results for Aurora are reported in the Mobile Industries and Process Industries segments based on customers and underlying market sectors served.

• The Company acquired BEKA Lubrication ("BEKA") during the fourth quarter of 2019.

The majority of the results for BEKA are reported in the Mobile Industries segment.

• The Company acquired The Diamond Chain Company ("Diamond Chain") during the second quarter of 2019.

The majority of the results for Diamond Chain are reported in the Process Industries segment.

Mobile Industries Segment:

8 unchanged sentences

Net sales, excluding the impact of acquisitions and currency $ 1,927.4 $ 1,671.6 $ 255.8 15.3 %

The Mobile Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, decreased $277.3 million or 14.6% in 2020 compared with 2019, reflecting lower shipments across most market sectors, partially offset by higher pricing.

EBITDA decreased in 2020 by $52.4 million or 18.4% compared with 2019, p rimarily due to the impact of lower volume and related manufacturing utilization, as well as the unfavorable impact of foreign currency exchange rate changes.

These decreases were partially offset by the favorable impact of cost reduction initiatives and price/mix, lower material and logistics costs, and the favorable impact of acquisitions.

The Mobile Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $255.8 million or 15.3% in 2021 compared with 2020, reflecting organic growth in the off-highway, automotive and heavy truck sectors.

These increases were partially offset by lower revenue in the aerospace sector.

EBITDA increased in 2021 by $7.6 million or 3.3% compared with 2020, primarily due to the impact of higher volume and related manufacturing utilization, and positive price/mix, partially offset by higher material, logistics and other operating costs.

Process Industries Segment:

9 unchanged sentences

$ 2,099.2 $ 1,841.6 $ 257.6 14.0 %

The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, decreased $87.5 million or 4.6% in 2020 compared with 2019.

The decrease was primarily driven by lower demand across most industrial sectors, partially offset by increased demand in the renewable energy sector, as well as higher pricing.

EBITDA decreased $23.7 million or 5.1% in 2020 compared with 2019 primarily due to the impact of lower demand, the impact of unfavorable foreign currency exchange rate changes and the unfavorable impact of price/mix, partially offset by the favorable impact of cost reduction initiatives, favorable manufacturing performance, lower material and logistics costs and the favorable impact of acquisitions.

2020 2019 $ Change Change

Corporate EBITDA $ (40.7) $ (55.4) $ 14.7 (26.5 %)

Corporate EBITDA % to net sales (1.2 %) (1.5 %) — 30 bps

Corporate expenses decreased in 2020 compared with 2019 primarily due to the favorable impact of cost reduction initiatives, lower performance-based compensation and lower transaction costs related to acquisitions.

RESULTS OF OPERATIONS:

2019 2018 $ Change % Change

Net sales $ 3,789.9 $ 3,580.8 $ 209.1 5.8 %

Net income 374.7 305.5 69.2 22.7 %

Income attributable to noncontrolling interest 12.6 2.7 9.9 366.7 %

Net income attributable to The Timken Company $ 362.1 $ 302.8 $ 59.3 19.6 %

Diluted earnings per share $ 4.71 $ 3.86 $ 0.85 22.0 %

Average number of diluted shares 76,896,565 78,337,481 — (1.8 %)

The increase in net sales was primarily driven by the benefit of acquisitions, the impact of higher pricing and higher demand in the Process Industries segment, partially offset by the unfavorable impact of foreign currency exchange rate changes and lower shipments in the Mobile Industries segment.

The increase in net income in 2019 compared with 2018 was primarily due to the net benefit of acquisitions, favorable price/mix and the impact of a lower tax rate driven by net discrete benefits, partially offset by the impact of lower volume, unfavorable currency and higher interest expense.

Results for 2019 also benefited from pension and other postretirement plan remeasurement income compared to expense in 2018.

THE STATEMENTS OF INCOME

2019 2018 $ Change % Change

Net sales $ 3,789.9 $ 3,580.8 $ 209.1 5.8 %

Net sales increased in 2019 compared with 2018, primarily due to the benefit of acquisitions of $270 million and higher organic revenue of $11 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $72 million.

The increase in organic revenue was driven primarily by improved demand in the Process Industries segment and the impact of positive pricing, partially offset by lower shipments in the Mobile Industries segment.

Gross Profit:

2019 2018 $ Change Change

Gross profit $ 1,141.8 $ 1,040.1 $ 101.7 9.8 %

Gross profit % to net sales 30.1 % 29.0 % — 110 bps

Gross profit increased in 2019 compared with 2018, primarily due to the benefit of acquisitions of $86 million, favorable price/mix of $51 million and lower material and logistics costs (including tariffs) of $5 million.

These factors were partially offset by the impact of lower volume of $19 million, the unfavorable impact of foreign currency exchange rate changes of $15 million and property losses of $8 million.

Selling, General and Administrative Expenses:

2019 2018 $ Change Change

Selling, general and administrative expenses $ 618.6 $ 580.7 $ 37.9 6.5 %

Selling, general and administrative expenses % to net sales 16.3 % 16.2 % — 10 bps

SG&A expenses in 2019 compared with 2018 was primarily due to SG&A expense from acquisitions of $45 million, partially offset by the favorable impact from changes in foreign currency exchange rates of $10 million.

Interest Expense and Income:

2019 2018 $ Change % Change

Interest expense $ (72.1) $ (51.7) $ (20.4) 39.5 %

Interest income $ 4.9 $ 2.1 $ 2.8 133.3 %

Interest expense increased in 2019 compared to 2018 primarily due to higher average outstanding debt during the year, which was primarily used to fund acquisitions.

Other Income (Expense):

2019 2018 $ Change % Change

Non-service pension and other postretirement

income (expense) $ 10.2 $ (6.2) $ 16.4 (264.5 %)

Other income, net $ 13.0 $ 9.4 $ 3.6 38.3 %

The increase in non-service pension and other postretirement income (expense) for 2019 compared with 2018 was primarily due to the recognition of Mark-to-Market Charges of $4.2 million in 2019 compared to actuarial losses of $22.1 million in 2018.

The Mark-to-Market Charges were the result of higher than expected returns on plan assets and the impact of a reduction in contractual rates for Medicare Advantage plans, driven by a law change that repealed the tax on health care insurers after 2020, partially offset by lower discount rates to measure the benefit obligations for pension and other postretirement plans.

Actuarial losses in 2018 were partially offset by the benefit of curtailment gains of $10.2 million for two of the U.S.

pension plans.

Income Tax Expense:

2019 2018 $ Change Change

Income tax expense $ 97.7 $ 102.6 $ (4.9) (4.8 %)

Effective tax rate 20.7 % 25.1 % — (440) bps

The effective tax rate for 2019 was 20.7%, which was slightly favorable compared to the U.S.

federal statutory rate of 21%, primarily due to the release of a foreign valuation allowance against certain foreign deferred tax assets and the remeasurement of deferred tax balances to reflect the reduced India statutory tax rate.

These impacts were partially offset by earnings in foreign jurisdictions where the effective tax rate was higher than 21%, additional discrete accruals for uncertain tax positions, U.S.

state and local income taxes and withholding taxes recorded on planned dividend distributions.

The effective tax rate for 2018 was 25.1%, which was unfavorable compared to the U.S.

federal statutory rate of 21%, primarily due to earnings in certain foreign jurisdictions where the effective tax rate was higher than 21%, unfavorable U.S.

permanent differences and U.S.

state and local income taxes.

These impacts were partially offset by reductions to the one-time net charge related to the taxation of unremitted foreign earnings and the remeasurement of U.S.

deferred tax balances to reflect the new U.S.

corporate income tax rate enacted with the Tax Cut and Jobs Act of 2017 ("U.S.

Tax Reform").

The change in the effective rate for 2019 compared with 2018 was a decrease of 4.4%.

The decrease was primarily due to the release of certain valuation allowances and the remeasurement of deferred tax balances to reflect the reduced India statutory tax rate.

These impacts were partially offset by additional discrete accruals for uncertain tax positions and withholding taxes recorded on planned dividend distributions.

BUSINESS SEGMENTS

The presentation of segment results below includes a reconciliation of the changes in net sales for each segment reported in accordance with U.S.

GAAP to net sales adjusted to remove the effects of acquisitions and divestitures completed in 2019 and 2018 and foreign currency exchange rate changes.

The effects of acquisitions and foreign currency exchange rate changes on net sales are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period.

The following items highlight the Company ' s acquisitions and divestitures completed in 2019 and 2018:

• The Company acquired BEKA during the fourth quarter of 2019.

The majority of the results for BEKA are reported in the Mobile Industries segment.

• The Company acquired Diamond Chain during the second quarter of 2019.

The majority of the results for Diamond Chain are reported in the Process Industries segment.

• The Company acquired ABC Bearings Limited ("ABC Bearings"), Apiary Investments Holding Limited ("Cone Drive"), and Rollon S.p.A.

("Rollon") during the third quarter of 2018.

Substantially all of the results for ABC Bearings are reported in the Mobile Industries segment.

Results for Cone Drive and Rollon are reported in the Mobile Industries and Process Industries segments based on customers and underlying markets served.

• The Company divested Groeneveld Information Technology Holding B.V.

(the "ICT Business") on September 19, 2018.

The Company acquired the ICT Business in 2017 as a part of the Groeneveld Group ("Groeneveld") acquisition.

The ICT Business is separate from the Groeneveld lubrication solutions business and was considered non-core to the operations.

Results for the ICT Business were reported in the Mobile Industries segment.

Mobile Industries Segment:

2019 2018 $ Change Change

Net sales $ 1,893.9 $ 1,903.7 $ (9.8) (0.5 %)

EBITDA $ 284.9 $ 272.2 $ 12.7 4.7 %

EBITDA margin 15.0 % 14.3 % — 70 bps

2019 2018 $ Change % Change

Net sales $ 1,893.9 $ 1,903.7 $ (9.8) (0.5 %)

Acquisitions 82.5 — 82.5 NM

Divestitures (8.5) — (8.5) NM

Currency (36.0) — (36.0) NM

Net sales, excluding the impact of acquisitions, divestitures and currency $ 1,855.9 $ 1,903.7 $ (47.8) (2.5 %)

The Mobile Industries segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, decreased $47.8 million or 2.5% in 2019 compared with 2018, reflecting lower shipments in

the off highway and heavy truck sectors, partially offset by growth in the aerospace and rail sectors, as well as higher pricing.

EBITDA increased in 2019 by $12.7 million or 4.7% compared with 2018, primarily due to favorable price/mix, lower material and logistics costs, the net benefit of acquisitions, and lower SG&A expenses.

These factors were partially offset by the impact of lower volume and related manufacturing utilization, as well as property losses and related expenses from flood damage at a Company facility in Tennessee and fire damage at a facility in China.

Process Industries Segment:

2019 2018 $ Change Change

Net sales $ 1,896.0 $ 1,677.1 $ 218.9 13.1 %

EBITDA $ 466.6 $ 405.7 $ 60.9 15.0 %

EBITDA margin 24.6 % 24.2 % — 40 bps

2019 2018 $ Change % Change

Net sales $ 1,896.0 $ 1,677.1 $ 218.9 13.1 %

Acquisitions 196.4 — 196.4 NM

Currency (36.5) — (36.5) NM

Net sales, excluding the impact of acquisitions and currency $ 1,736.1 $ 1,677.1 $ 59.0 3.5 %

The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $257.6 million or 14.0% in 2021 compared with 2020.

The increase was primarily driven by growth in the renewable energy sector, as well as positive pricing.

EBITDA increased $60.9 million or 15.0% in 2019 compared with 2018 primarily due to the net benefit of acquisitions, favorable price/mix and the impact of higher volume, partially offset by higher SG&A expenses.

2019 2018 $ Change Change

Corporate expenses $ 56.2 $ 62.0 $ (5.8) (9.4 %)

Corporate expenses % to net sales 1.5 % 1.7 % — (20) bps

Corporate expenses decreased in 2019 compared with 2018 primarily due to higher transaction costs related to acquisitions in 2018.

THE BALANCE SHEETS

The following discussion is a comparison of the Consolidated Balance Sheets at December 31, 2020 and December 31, 2019.

Current Assets:

2020 2019 $ Change % Change

Cash and cash equivalents $ 320.3 $ 209.5 $ 110.8 52.9 %

Restricted cash 0.8 6.7 (5.9) (88.1 %)

Accounts receivable, net 581.1 545.1 36.0 6.6 %

Unbilled receivables 110.9 129.2 (18.3) (14.2 %)

Inventories, net 841.3 842.0 (0.7) (0.1 %)

Deferred charges and prepaid expenses 39.9 36.7 3.2 8.7 %

Other current assets 106.0 105.4 0.6 0.6 %

Total current assets $ 2,000.3 $ 1,874.6 $ 125.7 6.7 %

Refer to the "Cash Flows" section for discussion on the change in cash an d cash equivalents.

Accounts receivable increased primarily due to the timing of billings related to marine contracts as of December 31, 2020.

Unbilled receivables decreased primarily due to customer billings exceeding revenue recognized for marine contracts as of December 31, 2020.

Property, Plant and Equipment, Net:

2020 2019 $ Change % Change

Property, plant and equipment, net $ 1,035.6 $ 989.2 $ 46.4 4.7 %

The increase in property, plant and equipment, net in 2020 was primarily due to capital expenditures of $132 million, the net impact of foreign currency exchange rate changes of $22 million and $11 million from a business acquired in 2020.

T he increase was partially offset by depreciation of $111 million in 2020.

Other Assets:

2020 2019 $ Change % Change

Goodwill $ 1,047.6 $ 993.7 $ 53.9 5.4 %

Other intangible assets 741.4 758.5 (17.1) (2.3 %)

Operating lease assets 118.2 114.1 4.1 3.6 %

Non-current pension assets 2.0 3.4 (1.4) (41.2 %)

Non-current other postretirement benefit assets — 36.6 (36.6) (100.0 %)

Deferred income taxes 77.0 71.8 5.2 7.2 %

Other non-current assets 19.5 18.0 1.5 8.3 %

Total other assets $ 2,005.7 $ 1,996.1 $ 9.6 0.5 %

The increase in goodwill in 2020 was primarily due to foreign currency exchange rate changes of $46 million.

The decrease in other intangible assets was primarily due to amortization of $47 million in 2020, partially offset by the impact of foreign currency exchange rate changes of $36 million

The decrease in non-current postretirement benefit assets was due to the creation of a new Voluntary Employee Beneficiary Association ("VEBA") trust in January 2020.

The creation of a new $50 million VEBA trust to pay for certain active employee's medical benefits shifted the balance from an overfunded asset position as of December 31, 2019 to a liability position as of December 31, 2020.

Refer to Note 16 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for further discussion.

Current Liabilities:

2020 2019 $ Change % Change

Short-term debt $ 119.8 $ 17.3 $ 102.5 NM

Current portion of long-term debt 10.9 64.7 (53.8) (83.2 %)

Short-term operating lease liabilities 27.2 28.3 (1.1) (3.9 %)

Accounts payable 351.4 301.7 49.7 16.5 %

Salaries, wages and benefits 135.7 134.5 1.2 0.9 %

Income taxes payable 16.1 17.8 (1.7) (9.6 %)

Other current liabilities 186.9 172.3 14.6 8.5 %

Total current liabilities $ 848.0 $ 736.6 $ 111.4 15.1 %

The increase in short-term debt was primarily due to borrowings under the $100 million Amended and Restated Asset Securitization Agreement (the "Accounts Receivable Facility") being now classified as short-term due to its upcoming maturity in November of 2021, as well as an increase in borrowings under the variable-rate lines of credit for the Company's foreign subsidiaries.

The decrease in the current portion of long-term debt was primarily due to the payment of $47 million on the Company's €100 million term loan that matured on September 18, 2020 (the "2020 Term Loan").

The increase in accounts payable was primarily due to efforts by the Company to increase days payable outstanding in 2020, partially offset by the impact of foreign currency exchange rate changes of $11 million.

The increase in other current liabilities was primarily due to an increase in the current derivative liability of $6 million.

Refer to Note 19 - Derivative Instruments in the Notes to the Consolidated Financial Statements for additional information.

In addition, accrued restructuring increased $5 million as compared to the prior year end.

Refer to Note 14 - Impairment and Restructuring Charges in the Notes to the Consolidated Financial Statements for additional information.

Non-Current Liabilities:

2020 2019 $ Change % Change

Long-term debt $ 1,433.9 $ 1,648.1 $ (214.2) (13.0 %)

Accrued pension benefits 163.0 165.1 (2.1) (1.3 %)

Accrued postretirement benefits 41.3 31.8 9.5 29.9 %

Long-term operating lease liabilities 75.5 71.3 4.2 5.9 %

Deferred income taxes 148.7 168.2 (19.5) (11.6 %)

Other non-current liabilities 106.0 84.0 22.0 26.2 %

Total non-current liabilities $ 1,968.4 $ 2,168.5 $ (200.1) (9.2 %)

The decrease in long-term debt was due to repayment of debt during the year, including the repayment of the 2020 Term Loan that matured in September of 2020 and reduced borrowings under the Fourth Amended and Restated Credit Agreement (the "Senior Credit Facility"), as well as the reclassification of borrowings under the Accounts Receivable facility to short-term as of December 31, 2020.

The increase in accrued postretirement benefits was primarily due to the creation of the new VEBA trust.

In January 2020, the Company transferred $50 million from an existing VEBA trust under the Company's postretirement benefit plans to fund the new VEBA trust to pay for certain active employees' medical benefits.

The creation of the new VEBA trust shifted the balance from overfunded as of December 31, 2019 to a liability position as of December 31, 2020.

Refer to Note 16 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for further discussion.

The increase in other non-current liabilities was primarily due to $8.5 million of payroll taxes that are deferred for more than 12 months under the Coronavirus Aid, Relief, and Economic Security Act, as well as an increase to the uncertain tax positions of approximately $5 million.

Shareholders’ Equity:

The increase was primarily driven by organic growth in the distribution, renewable energy and general industrial sectors.

EBITDA increased $63.4 million or 14.3% in 2021 compared with 2020 primarily due to the impact of higher volume and related manufacturing utilization, the impact of favorable foreign currency exchange rate changes, and positive price/mix, partially offset by higher material, logistics and other operating costs.

Unallocated Corporate:

2021 2020 $ Change Change

Common stock $ 781.4 $ 990.7 $ (209.3) (21.1 %)

Retained earnings 1,339.5 1,907.4 (567.9) (29.8 %)

Accumulated other comprehensive income (loss) 41.3 (50.1) 91.4 (182.4 %)

Treasury shares (9.3) (979.8) 970.5 99.1 %

Noncontrolling interest 72.3 86.6 (14.3) (16.5 %)

Total equity $ 2,225.2 $ 1,954.8 $ 270.4 13.8 %

The decrease in common stock is primarily due to the retirement of shares, resulting in a $12.4 million reduction to stated capital and a $213.3 million reduction to other paid-in capital, partially offset by stock option exercises of $16.1 million.

Earnings invested in the business in 2020 decreased primarily due to the retirement of treasury shares of $764.9 million and dividends declared of $87.0 million, partially offset by net income attributable to the Company of $284.5 million.

The increase in accumulated other comprehensive income was primarily due to current year foreign currency adjustments of $92.7 million.

See "Other Disclosures - Foreign Currency " for further discussion regarding the impact of foreign currency translation.

The decrease in treasury shares was primarily due to the retirement of 23.0 million shares for $990.6 million and $29.2 million of shares issued, net of shares surrendered, for stock compensation plans for 2020, partially offset by the purchase of 1.1 million of its common shares for $49.3 million.

The decrease in noncontrolling interest was primarily due to a dividend declared by Timken India Limited that resulted in payment to the noncontrolling interest parties in the third quarter of 2020.

Unallocated corporate expense $ (46.1) $ (40.7) $ (5.4) 13.3 %

Unallocated corporate expense % to net sales (1.1 %) (1.2 %) — 10 bps

Unallocated corporate expense increased in 2021 compared with 2020 primarily due to the favorable impact of COVID-19 related temporary cost reduction initiatives in 2020, which did not repeat in 2021.

2021 2020 $ Change

1 unchanged sentence

Net cash used in investing activities (173.8) (153.5) (20.3)

Net cash (used in) provided by financing activities (331.1) (100.7) (230.4)

Net cash used in financing activities (269.3) (331.1) 61.8

Effect of exchange rate changes on cash (7.4) 11.9 (19.3)

Increase in cash and cash equivalents $ 104.9 $ 83.1 $ 21.8

(Decrease) increase in cash and cash equivalents $ (63.2) $ 104.9 $ (168.1)

Operating Activities:

The increase in net cash provided by operating activities in 2020 compared with 2019 was primarily due to a favorable impact of working capital items of $47.6 million, the favorable impact of income taxes of $8.4 million, the favorable impact of pension and other postretirement benefit expense and contributions of $38.1 million, partially offset by lower net income of $82.3 million.

The decrease in net cash provided by operating activities in 2021 compared with 2020 was primarily due to an increase in cash used for working capital items of $236.4 million, an increase in pension and other postretirement benefit contributions and payments of $3.9 million and an increase in other items.

The decrease was partially offset by higher net income of $89.1 million and the favorable impact of income taxes of $8.1 million.

Refer to the table below for additional detail of the impact of each line on net cash provided by operating activities.

1 unchanged sentence

2021 2020 $ Change

Cash provided (used):

Cash (used in) provided by:

Accounts receivable $ (55.8) $ (20.7) $ (35.1)

3 unchanged sentences

Other accrued expenses 55.2 55.1 0.1

Cash provided by working capital items $ 102.9 $ 55.3 $ 47.6

Cash (used in) provided by working capital items $ (133.5) $ 102.9 $ (236.4)

The large cash outflow for inventories in 2021 was driven by higher demand levels and longer supply chain lead times, which resulted in increased levels of inventory.

The following table displays the impact of income taxes on cash during 2021 and 2020, respectively:

5 unchanged sentences

Investing Activities:

The decrease in net cash used in investing activities in 2020 compared with 2019 was primarily due to a $202.5 million decrease in cash used for acquisitions and a $19.0 million decrease in cash used in capital expenditures, partially offset by a $5.2 million increase in cash used for investments in short-term marketable securities.

The increase in net cash used in i nvesting activities in 2021 compared with 2020 was primarily due to an increase of capital expenditures of $26.7 million.

Financing Activities:

The decrease in net cash used by financing activities in 2020 compared with 2019 was primarily due to a decrease in net borrowings of $234.6 million due to an increase of debt payments in 2020.

The change in net cash used by financing activities in 2021 compared with 2020 was primarily due to a decrease in net payments of $111.8 million on outstanding debt, partially offset by an increase in the purchase of treasury shares of $43.7 million.

LIQUIDITY AND CAPITAL RESOURCES

Reconciliation of total debt to net debt and the ratio of net debt to capital:

Short-term debt $ 119.8 $ 17.3

Current portion of long-term debt 10.9 64.7

Short-term debt, including current portion of long-term debt $ 53.8 $ 130.7

Long-term debt 1,411.1 1,433.9

8 unchanged sentences

The Company presents net debt because it believes net debt is more representative of the Company's financial position than total debt due to the amount of cash and cash equivalents held by the Company and the ability to utilize such cash and cash equivalents to reduce debt if needed.

At December 31, 2020, the Company had strong liquidity with $320.3 million of cash and cash equivalents on the Consolidated Balance Sheet.

$287.4 million o f its $320.3 million of cash and cash equivalents resided in jurisdictions outside the U.S.

At December 31, 2021, the Company had strong liquidity with $257.1 million of cash and cash equivalents on the Consolidated Balance Sheet, as well as $733 million of available resources of committed credit lines.

Of the $257.1 million of cash and cash equivalents, $240.5 million resided in jurisdictions outside the U.S.

Repatriation of non-U.S.

3 unchanged sentences

The Company plans to fund these investments, as well as meet working capital requirements, with cash and cash equivalents and unused lines of credit within the geographic location of these investments where feasible.

On June 25, 2019, the Company entered into the Senior Credit Facility, which is a $650.0 million unsecured revolving credit facility that matures on June 25, 2024.

On June 25, 2019, the Company entered into the Fourth Amended and Restated Credit Agreement ("Senior Credit Facility"), which is a $650.0 million unsecured revolving credit facility that matures on June 25, 2024.

At December 31, 2021, the Senior Credit Facility had outstanding borrowings of $9.0 million, which reduced the availability to $641.0 million.

2 unchanged sentences

The maximum consolidated leverage ratio permitted under the Senior Credit Facility is 3.5 to 1.0.

As of December 31, 2020, the Company's consolidated leverage ratio was 1.92 to 1.0 (based on the net debt construct discussed further below).

As of December 31, 2021, the Company's consolidated leverage ratio was 2.05 to 1.0 (based on total debt discussed further below).

The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility is 3.0 to 1.0.

1 unchanged sentence

On May 27, 2020, both the Senior Credit Facility and the $350 million variable-rate term loan that matures on September 11, 2023 (the "2023 Term Loan") were amended to, among other things, effectively increase the limit with respect to the consolidated leverage ratio.

As amended, the consolidated leverage ratio under both the Senior Credit Facility and the 2023 Term Loan is calculated using a net debt construct, netting unrestricted cash in excess of $25 million, instead of total debt.

This change to the consolidated leverage ratio calculation will be effective through June 30, 2021, after which the calculation of the consolidated leverage ratio under the Senior Credit Facility and the 2023 Term Loan will revert back to a total debt construct.

As amended, the consolidated leverage ratio under both the Senior Credit Facility and the 2023 Term Loan was calculated using a net debt construct, netting unrestricted cash in excess of $25 million, instead of total debt.

This change to the consolidated leverage ratio calculation was effective through June 30, 2021.

In the third quarter of 2021, the calculation of the consolidated leverage ratio under the Senior Credit Facility and the 2023 Term Loan reverted back to a total debt construct.

The interest rate under the Senior Credit Facility is variable with a spread based on the Company's debt rating.

2 unchanged sentences

In addition, the Company pays a facility fee based on the applicable rate, which is variable with a spread based on the Company's debt rating, multiplied by the aggregate commitments of all of the lenders under the Senior Credit Facility.

The Company currently carries investment-grade credit ratings with Moody's (Baa3), Fitch (BBB-) and Standard and Poor's (BBB-).

The Company has a $100 million Accounts Receivable Facility, which matures on November 30, 2021.

As of December 31, 2021, the Company carried investment-grade credit ratings with Moody's (Baa2), S&P Global (BBB-) and Fitch (BBB-).

The Company renewed the Amended and Restated Asset Securitization Agreement (the "Accounts Receivable Facility") on November 30, 2021.

The $100.0 million facility matures on November 30, 2024.

The Accounts Receivable Facility is subject to certain borrowing base limitations and is secured by certain domestic trade accounts receivable of the Company.

As of December 31, 2020, the Company had $58.0 million outstanding borrowings under the Accounts Receivable Facil ity.

Certain borrowing base limitations reduced the availability under the Accounts Receivable Facility to $83.9 million at December 31, 2020.

The Company currently intends to renew or replace the Accounts Receivable Facility prior to its maturity.

These limitations reduced the availability of the Accounts Receivable Facility to $92.0 million at December 31, 2021.

As of December 31, 2021, there were no outstanding borrowings under the Accounts Receivable Facility.

Other sources of liquidity include uncommitted short-term lines of credit for certain of the Company's foreign subsidiaries, which provide for borrowings of up to approximately $295.3 million.

1 unchanged sentence

At December 31, 2021, the Company was in full compliance with all applicable covenants on its outstanding debt, and expects to remain in full compliance with its debt covenants.

The Company expects capital expenditures to be approximately $150 million in 2021, compared with $122 million in 2020.

The Company expects to generate cash from operating activities in 2022 above 2021 levels driven by higher earnings and lower pension and other postretirement contributions and payments.

The Company expects capital expenditures to be approximately 4% of sales in 2022, compared with 3.6% of sales ($148 million) in 2021.

FUTURE CONTRACTUAL PAYMENTS

2 unchanged sentences

Future Contractual Payments Total Less than

1 Year 1-3 Years 3-5 Years More than

1 Year 1-5 Years More than

Interest payments $ 294.9 $ 50.2 $ 169.8 $ 74.9

Long-term debt, including current portion 1,444.8 10.9 20.4 664.5 749.0

Short-term debt 119.8 119.8 — — —

Long-term debt 1,411.1 — 675.4 735.7

Short-term debt, including current portion of long-term debt 53.8 53.8 — —

Purchase commitments 79.3 65.0 14.3 —

Operating leases 116.6 29.2 61.9 25.5

Retirement benefits 152.5 21.3 31.4 29.8 70.0

Retirement benefit plans 134.7 14.8 57.2 62.7

Total $ 2,090.4 $ 213.0 $ 978.6 $ 898.8

5 unchanged sentences

The amounts in the table above are based on actuarial estimates using current assumptions for, among other things, discount rates, expected return on assets and health care cost trend rates.

During 2020, the Company made cash contributions and payments of approximately $17.9 million to its global defined benefit pension plans and $2.7 million to its other postretirement benefit plans.

During 2021, the Company made cash contributions and payments of approximat ely $20.4 million to its global defined benefit pension plans and $4.1 million to its other postretirement benefit plans.

Refer to Note 16 - Retirement Benefit Plans and Note 17 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for additional information.

1 unchanged sentence

In the ordinary course of business, the Company utilizes standby letters of credit issued by financial institutions to guarantee certain obligations, most of which relate to insurance contracts.

At December 31, 2020, outstanding letters of credit totale d $41.5 million , primarily having expiration dates within 12 months.

At December 31, 2021, outstanding letters of credit totaled $42.8 million, primarily having expiration dates within 12 months.

NEW ACCOUNTING GUIDANCE ISSUED AND NOT YET ADOPTED

9 unchanged sentences

Because these are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation.

The Company recognized a decrease in its LIFO reserve of $3.2 million during 2020 compared to an increase in its LIFO reserve of $5.0 million during 2019.

The Company recognized an increase in its LIFO reserve of $27.3 million during 2021 compared to a decrease in its LIFO reserve of $3.2 million during 2020.

Goodwill and Indefinite-lived Intangible Assets:

2 unchanged sentences

Each interim period, the Company assesses whether or not an indicator of impairment is present that would necessitate a goodwill and indefinite-lived intangible assets impairment analysis be performed in an interim period other than during the fourth quarter.

As of December 31, 2021, the Company had $1,022.7 million of goodwill on its Consolidated Balance Sheet, of which $371.7 million was attributable to the Mobile Industries segment and $651.0 million was attributable to the Process Industries segment.

See Note 9 - Goodwill and Other Intangible Assets in the Notes to the Consolidated Financial Statements for movements in the carrying amount of goodwill by segment.

The Company reviews goodwill for impairment at the reporting unit level.

3 unchanged sentences

Accounting guidance permits an entity to first assess qualitative factors to determine whether additional indefinite-lived intangible asset impairment testing, including goodwill, is required.

No qualitative factors indicated that it was more likely than not that the fair value of reporting units were less than their respective carrying values, but due to the length of time since the previous quantitative tests, the Company chose to perform a quantitative analysis for all reporting units as of October 1, 2020.

The Company chose to utilize this qualitative assessment in the annual goodwill impairment testing (excluding the indefinite-lived intangible asset impairment testing) for the Mobile Industries, Aerospace Bearing Inspection, Process Industries and Industrial Services reporting units.

Based on the qualitative assessment, the Company concluded that it was more likely than not that the fair value of these reporting units exceeded their respective carrying values.

The Company chose to perform a quantitative goodwill impairment analysis in the annual goodwill impairment testing of the Lubrication systems reporting unit.

The quantitative goodwill impairment analysis compares the carrying value of the reporting unit to its estimated fair value.

To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a goodwill impairment loss would be recorded.

The Company prepares its quantitative goodwill impairment analysis by comparing the estimated fair value of each reporting unit, using an income approach (a discounted cash flow model), as well as a market approach, with its carrying value.

1 unchanged sentence

The income approach requires several assumptions including future sales growth, EBITDA margins and capital expenditures.

The Company’s reporting units each provide their forecast of results for the next five years.

The Company’s reporting units provided their forecast of results for the next five years.

These forecasts form the basis for the information used in the discounted cash flow model.

The discounted cash flow model also requires the use of a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the five years forecast by the reporting units), as well as projections of future operating margins (for the period beyond the forecast five years).

During the fourth quarter of 2020, the Company used discount rates for its individual reporting units in the range of 10.0% to 11.0% and a terminal revenue growth rate in the range of 2.0% to 3.0%.

During the fourth quarter of 2021, the Company used a discount rate of 9.5% for the Lubrication reporting unit and a terminal revenue growth rate of 2.5%.

The market approach requires several assumptions including sales and EBITDA multiples for comparable companies that operate in the same markets as the Company’s reporting units.

During the fourth quarter of 2020, the Company used sales multiples in the range of 1.05 to 2.00 and EBITDA multiples in the range of 7.0 to 9.5 for its reporting units.

As of December 31, 2020, the Company had $1,047.6 million of goodwill on its Consolidated Balance Sheet, of which $384.6 million was attributable to the Mobile Industries segment and $663.0 million was attributable to the Process Industries segment.

See Note 9 - Goodwill and Other Intangible Assets in the Notes to the Consolidated Financial Statements for movements in the carrying amount of goodwill by segment.

The Company notes that reporting units with goodwill and indefinite-lived intangibles primarily due to recent acquisitions are likely to have fair values that are closer to the current carrying value, due to the shorter period of time for fair value from the recent acquisition to have changed.

The Lubrication reporting unit has a carrying valu e of $436.9 millio n and the fair value as of October 1, 2020 exceeded that amount by 10%.

The Lubrication reporting unit primarily consists of businesses acquired in 2017 and 2019, and as a result, it is consistent with expectations that the fair value is closer to the carrying value.

In addition, there was one indefinite-lived intangible with a carrying value totaling $17.5 million in which the fair value exceeded the carrying value of the assets by 10% or less.

This is consistent with management's expectations, as the acquisition that generated this asset was completed in the second half of 2019.

Based on the October 1, 2020 quantitative assessment, all other reporting units and indefinite-lived intangibles have fair value that exceeds the current carrying value by more than 10%.

During the fourth quarter of 2021, the Company used a sales multiple of 1.6 and a EBITDA multiple of 9.25 for the Lubrication reporting unit.

Based on the October 1, 2021 quantitative assessment for the Lubrication Systems reporting unit, the fair value of this reporting unit exceeds the current carrying value by more than 10%.

As of December 31, 2021, the Company had $131.4 million of indefinite-lived intangible assets on its Consolidated Balance Sheet.

The Company’s indefinite-lived intangible assets primarily consist of acquired trade names.

The Company chose to perform a quantitative impairment analysis in the annual impairment testing of indefinite-lived intangible assets.

The Company prepares its quantitative indefinite-lived intangible analysis by comparing the estimated fair value of each indefinite-lived intangible asset, using a relief from royalty method, with its carrying value.

The relief from royalty method requires several assumptions including future sales growth, terminal revenue growth rate, royalty rate and discount rate.

During the fourth quarter of 2021, the Company used discount rates for its indefinite-lived intangible assets in the range of 10.5% to 13.4%, royalty rates in the range of 1.0% to 6.0% and terminal growth rates in the range of 1.0% to 3.5%.

Based on the October 1, 2021 quantitative assessment of indefinite-lived intangible assets, t here were three indefinite-lived intangibles with carrying values totaling $67.1 million in which the fair value exceeded the carrying value of the assets by 10% or less.

Management believes the future sales growth and EBITDA margins in the long-range plan and the discount rate used in the valuations requires significant use of judgment.

If any of our reporting units do not meet our long range plan estimates or our discount rate increase significantly, we could be required to perform an interim goodwill impairment analysis or charges in future periods.

The assumptions used for the reporting units and indefinite-lived intangibles with fair values exceeding carrying values of 10% or less are more sensitive to future performance and will be monitored accordingly.

If any of the Company's reporting units or indefinite-lived intangible assets do not meet their long-range plan estimates or discount rates increase significantly, the Company could be required to perform an interim goodwill or indefinite-lived intangible asset impairment analysis and record impairment charges in future periods.

The assumptions used for the indefinite-lived intangibles with fair values exceeding carrying values of 10% or less are more sensitive to future performance and will be monitored accordingly.

Income taxes:

4 unchanged sentences

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled.

Deferred tax assets relate primarily tax loss carryforwards in foreign jurisdictions, as well as pension and postretirement benefit obligations in the U.S., which the Company believes are more likely than not to result in future tax benefits.

Deferred tax assets relate primarily to tax loss carryforwards in foreign jurisdictions, as well as pension and postretirement benefit obligations in the U.S., which the Company believes are more likely than not to result in future tax benefits.

In determining the need for a valuation allowance, the historical and projected financial performance of the entity recording the net deferred tax asset is considered along with any other pertinent information.

5 unchanged sentences

The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.

In 2020, the Company recorded $6.4 million of net tax expense for uncertain tax positions, which consisted of $10.7 million of interest and increases to current and prior year uncertain tax positions.

This expense was partially offset by $4.2 million related to the net reversal of accruals for prior year uncertain tax positions and settlements with tax authorities.

The Company also recorded $3.8 million of uncertain tax positions related to deferred tax liabilities .

In 2021, the Company recorded $8.3 million of net tax benefit for uncertain tax positions, which consisted primarily of $14.8 million related to the net reversal of accruals for prior year uncertain tax positions and settlements with tax authorities.

This benefit was partially offset by $6.5 million of interest and increases to current and prior year uncertain tax positions.

The Company also recorded $1.3 million of uncertain tax positions related to foreign currency translation adjustments and deferred tax liabilities.

Purchase accounting and business combinations:

7 unchanged sentences

A contract exists when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Revenue is recognized when performance obligations under the terms of a contract with a customer of the Company are satisfied.

Revenue is generally recognized as performance obligations under the terms of a contract with a customer of the Company are satisfied.

Refer to Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements for further discussion around the Company's revenue policy.

19 unchanged sentences

Defined Benefit Pension Plans:

The Company recognized net periodic benefit cost of $23.9 million during 2020 for defined benefit pension plans, compared to net periodic benefit cost of $22.7 million during 2019.

The Company recognized mark-to-market charges of $16.2 million during 2020 compared to $13.9 million during 2019.

Mark-to-market charges in 2020 were primarily due to the impact of a net reduction in the discount rate used to measure its defined benefit pension obligations of $88.0 million and the impact of experience losses of $16.9 million, partially offset by higher than expected returns on plan assets of $84.3 million and other changes in valuation assumptions of $4.4 million.

The impact of the net reduction in the discount rate used to measure the Company's defined benefit pension obligations was primarily driven by a 66 basis point reduction in the weighted-average discount rate used to measure its U.S.

plan obligations, which decreased from 3.50% in 2019 to 2.84% in 2020.

The Company recognized net periodic benefit cost of $5.9 million during 2021 for defined benefit pension plans, compared to net periodic benefit cost of $23.9 million during 2020 The Company recognized mark-to-market charges of $4.4 million during 2021 compared to $16.2 million during 2020.

Mark-to-market charges during 2021 were primarily a result of the impact of lower than expected returns on plan assets of $28.4 million, the impact of experience losses of $9.3 million, the impact of inflation of $8.5 million and other changes in actuarial assumptions of $3.2 million, partially offset by the net increase in the discount rate used to measure its defined benefit pension obligations of $45.0 million.

The impact of the increase in the discount rate used to measure the Company's defined benefit pension obligations was primarily driven by a 55 basis point increase in the discount rate used to measure its U.K.

plan obligations, which increased from 1.25% in 2020 to 1.80% in 2021, and a 23 basis point increase in the weighted-average discount rate used to measure its U.S.

plan obligations, which increased from 2.84% in 2020 to 3.07% in 2021.

In 2022, the Company expects net periodic benefit cost to be approximately $2 million for defined benefit pension plans, compared with net periodic benefit cost of $5.9 million in 2021.

Net periodic benefit cost for 2022 does not include mark-to-market charges that will be recognized immediately through earnings in the fourth quarter of 2022, or on an interim basis if specific events trigger a remeasurement.

Excluding the mark-to-market charges of $16.2 million and curtailment losses of $0.9 million recognized in 2020, net periodic benefit cost was $6.8 million in 2020.

The expected reduction in net periodic benefit cost, excluding mark-to-market charges and curtailment losses, primarily reflects lower expected interest costs.

Excluding the mark-to-market charges of $4.4 million recognized in 2021, net periodic benefit cost was $1.5 million in 2021.

The Company expects to contribute to its defined benefit pension plans or pay directly to participants of defined benefit plans approximately $10 million in 2022 compared with $20.4 million of contributions and payments in 2021.

The 2021 contributions and payments included a $10 million payout of deferred compensation to a former executive officer of the Company.

For expense purposes in 2021, the Company applied a weighted-average discount rate of 2.84% to its U.S.

15 unchanged sentences

The Company recognized net periodic benefit credit of $12.5 million during 2021 for other postretirement benefit plans, compared to net periodic benefit credit of $6.5 million during 2020.

The Company recognized mark-to-market charges of $1.4 million during 2020 compared to mark-to-market gains of $18.0 million during 2019.

Mark-to-market charges in 2020 were primarily due to the impact of an 81 basis point decrease in the discount rate used to measure the Company's defined benefit postretirement obligations, which decreased from 3.43% in 2019 to 2.62% in 2020.

The decrease in the discount rate resulted in a $3.9 million loss.

This mark-to-market charge was partially offset by mark-to-market gains of $2.0 million due to the impact of a reduction in the rate for Medicare Advantage plans, $0.4 million due to higher than expected returns on plans assets and $0.1 million due to changes in other actuarial assumptions.

In addition to mark-to-market charges and gains, t he Company recognized prior service credits of $9.8 million during 2020 compared to $5.4 million during 2019.

During July 2019, the Company announced changes to the medical plan offerings for certain of its postretirement benefit plans, effective January 1, 2020, which will impact the benefits provided to certain retirees.

This plan amendment resulted in a $92.8 million reduction in the postretirement benefit obligation and a corresponding pretax adjustment to accumulated other comprehensive loss.

The pretax adjustment of $92.8 million began being amortized in the third quarter of 2019 and will be amortized from accumulated other comprehensive loss into net periodic benefit cost (as a benefit) until 2031.

The Company recognized mark-to-market gains of $4.1 million during 2021 compared to mark-to-market charges of $1.4 million during 2020 .

Mark-to-market gains in 2021 were primarily due to the impact of a 37 basis point increase in the discount rate used to measure the Company's defined benefit postretirement obligations, which increased from 2.62% in 2020 to 2.99% in 2021 .

The increase in the discount rate resulted in a $1.6 million gain.

In addition to the gain from the discount rate increases, the Company recognized actuarial gains of $1.1 million due to lower than expected benefit payments, $1.0 million due to the impact of a reduction in the rate for Medicare Advantage plans and $0.4 million due to changes in other actuarial assumptions .

In 2022, the Company expects net periodic benefit credit of approximately $8 million for other postretirement benefit plans, compared to net periodic benefit credit of $12.5 million in 2021.

Net periodic benefit credit for 2021 does not include mark-to-market charges that will be recognized immediately through earnings in the fourth quarter of 2021, or on an interim basis if specific events trigger a remeasurement.

Excluding the mark-to-market charges of $1.4 million recognized in 2020, the net periodic benefit credit was $7.9 million in 2020, which is relatively consistent with the outlook for 2021.

In January 2020, the Company established a second VEBA trust for certain active employees’ medical benefits.

The Company transferred $50 million from the existing VEBA trust to fund this new VEBA trust.

Net periodic benefit credit f or 2022 does not include mark-to-market charges that will be recognized immediately through earnings in the fourth quarter of 2022, or on an interim basis if specific events trigger a remeasurement.

Excluding the mark-to-market gains of $4.1 million recognized in 2021, the net periodic benefit credit was $8.4 million in 2021, which is relatively consistent with the outlook for 2022.

In January 2020, the Company established a second Voluntary Employee Beneficiary Association ("VEBA") trust for certain active employees’ medical benefits.

The Company transferred $50 million from the existing VEBA trust to fund the second VEBA trust.

The $50 million that was transferred was primarily classified as other current assets based on the portfolio of the assets in the trust.

The Company utilized all of the assets of the trust in 2020 for the payment of certain active employees’ medical benefits.

In January 2021, the Company transferred the remaining $11.1 million in the existing VEBA trust to the new VEBA trust.

As a result, the Company expects to fund 2021 payments for other postretirement benefit plans, which are expected to be approximately $5 million, from the general funds of the Company.

In January 2021, the Company transferred the remaining $11.1 million in the existing VEBA trust to the second VEBA trust.

The Company utilized all of the assets of the second VEBA trust in 2021 and 2020 for the payment of certain active employees’ medical benefits.

As a result of the transfer, the Company expects to fund 2022 payments for other postretirement benefit plans, which are expected to be approximately $5 million, from the general funds of the Company.

For expense purposes in 2021, the Company applied a discount rate of 2.62% to its other postretirement benefit plans.

For expense purposes in 2022, the Company will apply a discount rate of 2.99% to its other postretirement benefit plans.

For expense purposes in 2020, the Company applied an expected rate of return of 3.00% to the VEBA trust assets.

The following table presents the sensitivity of the Company's accumulated other postretirement benefit obligation ("APBO") to the indicated increase/decrease in key assumptions:

4 unchanged sentences

For measurement purposes, the Company assumed a weighted-average annual rate of increase in the per capita cost (health care cost trend rate) for medical benefits of 6.5% for 2022, declining gradually to 5.0% in 2028 and thereafter for medical and prescription drug benefits.

For Medicare Advantage benefits, actual contract rates have been set for 2020 through 2022, and are assumed to increase by 7.3% for 2022, declining gradually to 5.0% in 2031 and thereafter.

For Medicare Advantage benefits, actual contract rates have been set for 2022, and are assumed to increase by 7.25% for 2022, declining gradually to 5.0% in 2031 and thereafter.

The assumed health care cost trend rate may have a significant effect on the amounts reported.

5 unchanged sentences

These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances.

NON-GAAP MEASURES

Supplemental Non-GAAP Measures:

In addition to results reported in accordance with U.S.

GAAP, the Company provides information on non-GAAP financial measures.

These non-GAAP financial measures include adjusted net income, adjusted earnings per share, adjusted EBITDA and adjusted EBITDA margins, segment adjusted EBITDA and segment adjusted EBITDA margins, ratio of net debt to adjusted EBITDA (for the trailing 12 months), net debt, ratio of net debt to capital, free cash flow and return on invested capital.

This information is intended to supplement GAAP financial measures and is not intended to replace GAAP financial measures.

Net debt and the ratio of net debt to capital is disclosed in the "Liquidity and Capital Resources" section of Management's Discussion and Analysis of Financial Condition and Results of Operations.

Adjusted Net Income and Adjusted EBITDA:

Adjusted net income and adjusted earnings per share represent net income attributable to The Timken Company and diluted earnings per share, respectively, adjusted for impairment, restructuring and reorganization charges, acquisition costs, including transaction costs and the amortization of the inventory step-up, property losses and recoveries, actuarial gains and losses associated with the remeasurement of the Company's defined benefit pension and other postretirement benefit plans, gains and losses on the sale of real estate, gains and losses on divestitures, the income tax impact of these adjustments, as well as other income tax discrete items, and other items from time to time that are not part of the Company's core operations.

Management believes adjusted net income and adjusted earnings per share are useful to investors as they are representative of the Company's core operations and are used in the management of the business.

Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization, adjusted for items that are not part of the Company's core operations.

These items include impairment, restructuring and reorganization charges, acquisition costs, including transaction costs and the amortization of the inventory step-up, property losses and recoveries, actuarial gains and losses associated with the remeasurement of the Company's defined benefit pension and other postretirement benefit plans, gains and losses on the sale of real estate, gains and losses on divestitures, and other items from time to time that are not part of the Company's core operations.

Management believes adjusted EBITDA is useful to investors as it is representative of the Company's core operations and is used in the management of the business, including decisions concerning the allocation of resources and assessment of performance.

Reconciliation of net income attributable to The Timken Company to adjusted net income, adjusted EBITDA and adjusted EBITDA Margin:

Twelve Months Ended December 31,

2021 2020 2019 2018 2017

Net Sales $ 4,132.9 $ 3,513.2 $ 3,789.9 $ 3,580.8 $ 3,003.8

Net Income Attributable to The Timken Company 369.1 284.5 362.1 302.8 203.4

Impairment, restructuring and

reorganization charges (1)

15.1 29.0 9.8 7.1 13.1

Corporate pension and other

postretirement benefit related expense

0.3 18.5 (4.1) 12.8 18.1

Acquisition-related charges (3)

3.2 3.7 15.5 20.6 9.0

Acquisition-related gain (4)

(0.9) (11.1) — — —

Property recoveries and related expenses (5)

— (5.5) 7.6 — —

Gain (loss) on sale of real estate — (0.4) (4.5) 0.8 (3.6)

Brazil legal matter — — 1.8 — —

Tax indemnification and related items 0.2 0.5 0.7 1.5 (1.0)

Health care plan modification costs — — — — (0.7)

Noncontrolling interest of above adjustments — (0.1) (0.5) (1.3) —

Provision for income taxes (6)

(23.6) (6.0) (34.6) (16.8) (30.8)

Adjusted Net Income $ 363.4 $ 313.1 $ 353.8 $ 327.5 $ 207.5

Net income attributable to noncontrolling

interest 12.4 7.9 12.6 2.7 (1.1)

Provision for income taxes (as reported) 95.1 103.9 97.7 102.6 57.6

Interest expense 58.8 67.6 72.1 51.7 37.1

Interest income (2.3) (3.7) (4.9) (2.1) (2.9)

Depreciation and amortization expense (7)

167.0 164.0 159.9 146.0 135.8

Noncontrolling interest — (0.1) (0.5) (1.3) —

Provision for income taxes (6)

(23.6) (6.0) (34.6) (16.8) (30.8)

Adjusted EBITDA $ 718.0 $ 658.9 $ 726.3 $ 646.5 $ 464.8

Adjusted EBITDA Margin (% of net sales) 17.4 % 18.8 % 19.2 % 18.1 % 15.5 %

Diluted earnings and adjusted earnings per share in the table below are based on net income attributable to The Timken Company and adjusted net income, respectively, in the table above.

Twelve Months Ended December 31,

2021 2020 2019 2018 2017

Diluted earnings per share (EPS) $ 4.79 $ 3.72 $ 4.71 $ 3.86 $ 2.58

Adjusted EPS $ 4.72 $ 4.10 $ 4.60 $ 4.18 $ 2.63

Diluted Shares 77,006,589 76,401,366 76,896,565 78,337,481 78,911,149

Reconciliation of segment EBITDA to segment adjusted EBITDA and segment adjusted EBITDA margin:

Twelve Months Ended December 31, 2021

Mobile Process Unallocated Corporate Total

Net Sales $ 1,965.7 $ 2,167.2 $ — $ 4,132.9

EBITDA 240.1 506.3 (45.5) 700.9

Impairment, restructuring and reorganization

7.3 7.0 — 14.3

Corporate pension and other postretirement

benefit related expense (2)

Acquisition-related charges (3)

0.7 0.6 1.9 3.2

Acquisition-related gain (4)

— — (0.9) (0.9)

Tax indemnification and related items 0.2 — — 0.2

Adjusted EBITDA $ 248.3 $ 513.9 $ (44.2) $ 718.0

Adjusted EBITDA Margin (% of net sales) 12.6 % 23.7 % NM 17.4 %

Twelve Months Ended December 31, 2020

Mobile Process Unallocated Corporate Total

Net Sales $ 1,671.6 $ 1,841.6 $ — $ 3,513.2

EBITDA 232.5 442.9 (48.1) 627.3

Impairment, restructuring and reorganization

11.3 14.0 0.6 25.9

Corporate pension and other postretirement

benefit related expense (2)

— — 18.5 18.5

Acquisition-related charges (3)

2.1 1.0 0.6 3.7

Acquisition-related gain (4)

— — (11.1) (11.1)

Property losses (recoveries) and related expenses (5)

(5.5) — — (5.5)

Gain on sale of real estate (0.4) — — (0.4)

Tax indemnification and related items 0.3 — 0.2 0.5

Adjusted EBITDA $ 240.3 $ 457.9 $ (39.3) $ 658.9

Adjusted EBITDA Margin (% of net sales) 14.4 % 24.9 % NM 18.8 %

(1) Impairment, restructuring and reorganization charges (including items recorded in cost of products sold) relate to:

(i) plant closures;

(ii) the rationalization of certain plants;

and (iii) severance related to cost reduction initiatives.

The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges.

However, management believes these actions are not representative of the Company’s core operations.

(2) Corporate pension and other postretirement benefit related expense represents actuarial losses and (gains) that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience.

The Company recognizes actuarial losses and (gains) in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement.

Refer to Note 16 - Retirement Benefit Plans and Note 17 - Other Postretirement Benefit Plans for additional discussion.

(3) Acquisition-related charges represent deal-related expenses associated with completed and certain unsuccessful transactions, as well as any resulting inventory step-up impact.

(4) The acquisition-related gain represents a bargain purchase gain on the acquisition of the assets of Aurora that closed on November 30, 2020.

(5) Represents property loss and related expenses during the periods presented (net of insurance recoveries received in 2020) resulting from property loss that occurred during the first quarter of 2019 at one of the Company's warehouses in Knoxville, Tennessee and during the third quarter of 2019 at one of the Company's warehouses in Yantai, China.

(6) Provision for income taxes includes the net tax impact on pre-tax adjustments (listed above), the impact of discrete tax items recorded during the respective periods as well as other adjustments to reflect the use of one overall effective tax rate on adjusted pre-tax income.

(7) Depreciation and amortization shown excludes depreciation recognized in reorganization charges, if any.

Free Cash Flow:

Free cash flow represents net cash provided by operating activities less capital expenditures.

Management believes free cash flow is useful to investors because it is a meaningful indicator of cash generated from operating activities available for the execution of its business strategy.

Reconciliation of net cash provided by operating activities to free cash flow:

Twelve Months Ended December 31,

2021 2020 2019 2018 2017

Net cash provided by operating activities $ 387.3 $ 577.6 $ 550.1 $ 332.5 $ 236.8

Capital expenditures (148.3) (121.6) (140.6) (112.6) (104.7)

Free cash flow $ 239.0 $ 456.0 $ 409.5 $ 219.9 $ 132.1

Ratio of Net Debt to Adjusted EBITDA:

The ratio of net debt to adjusted EBITDA for the trailing twelve months represents total debt less cash and cash equivalents divided by adjusted EBITDA for the trailing twelve months.

T he Company presents net debt to adjusted EBITDA because it believes it is more representative of the Company's financial position as it is reflective of the Company's ability to cover its net debt obligations with results from its core operations.

Net income for the trailing twelve months ended December 31, 2021 and December 31, 2020 was $381.5 million and $292.4 million, respectively.

Net debt to adjusted EBITDA for the trailing twelve months was 1.7 at December 31, 2021 , compared with 1.9 at December 31, 2020 .

Reconciliation of Net income to Adjusted EBITDA for the twelve months:

Twelve Months Ended December 31,

Net income $ 381.5 $ 292.4

Provision for income taxes 95.1 103.9

Interest expense 58.8 67.6

Interest income (2.3) (3.7)

Depreciation and amortization 167.8 167.1

Consolidated EBITDA 700.9 627.3

Impairment, restructuring and reorganization charges (1)

$ 14.3 $ 25.9

Corporate pension and other postretirement benefit related (expense) income (2)

Acquisition-related charges (3)

Acquisition-related gain (4)

Property recoveries and related expenses (5)

Gain (loss) on sale of real estate — (0.4)

Tax indemnification and related items 0.2 0.5

Total Adjustments 17.1 31.6

Adjusted EBITDA $ 718.0 $ 658.9

Net Debt $ 1,207.8 $ 1,244.3

Ratio of Net Debt to Adjusted EBITDA 1.7 1.9

(1) Impairment, restructuring and reorganization charges (including items recorded in cost of products sold) relate to:

(i) plant closures;

(ii) the rationalization of certain plants and (iii) severance related to cost reduction initiatives.

The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges.

However, management believes these actions are not representative of the Company’s core operations.

(2) Corporate pension and other postretirement benefit related expense (income) represents actuarial losses and (gains) that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience.

The Company recognizes actuarial losses and (gains) in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement.

(3) Acquisition-related charges represent deal-related expenses associated with completed and certain unsuccessful transactions, as well as any resulting inventory step-up impact.

(4) The acquisition-related gain represents a bargain purchase gain on the acquisition of the assets of Aurora that closed on November 30, 2020.

Return on Invested Capital:

Return on Invested Capital is defined as adjusted net operating profit after taxes divided by average invested capital.

The Company uses Average Invested Capital as a type of non-GAAP ratio that indicates return on invested capital, which management believes is useful to investors as a measure of return on their investment.

Reconciliation of adjusted net operating profit after taxes, adjusted invested capital and return on adjusted inv ested capital:

Adjusted Net Operating Profit after Taxes (ANOPAT):

Twelve Months Ended December 31,

2021 2020 2019 2018 2017

Adjusted EBITDA (1)

$ 718.0 $ 658.9 $ 726.3 $ 646.5 $ 464.8

depreciation and amortization expense (2)

167.0 164.0 159.9 146.0 135.8

Adjusted EBIT 551.0 494.9 566.4 500.5 329.0

Adjusted tax rate 24.0 % 25.5 % 26.5 % 26.5 % 30.0 %

Calculated income taxes 132.2 126.2 150.1 132.6 98.7

ANOPAT $ 418.8 $ 368.7 $ 416.3 $ 367.9 $ 230.3

Adjusted Invested Capital:

Twelve Months Ended December 31,

2021 2020 2019 2018 2017 2016

Total debt $ 1,464.9 $ 1,564.6 $ 1,730.1 $ 1,681.6 $ 962.3 $ 659.2

Total equity 2,377.7 2,225.2 1,954.8 1,642.7 1,474.9 1,310.9

Invested capital (total debt + total

equity) 3,842.6 3,789.8 3,684.9 3,324.3 2,437.2 1,970.1

Invested capital (two-point average) $ 3,816.2 $ 3,737.4 $ 3,504.6 $ 2,880.8 $ 2,203.7

Return on Invested Capital:

Twelve Months Ended December 31,

2021 2020 2019 2018 2017

ANOPAT $ 418.8 $ 368.7 $ 416.3 $ 367.9 $ 230.3

Invested capital (two-point average) 3,816.2 3,737.4 3,504.6 2,880.8 2,203.7

Return on invested capital 11.0 % 9.9 % 11.9 % 12.8 % 10.5 %

(1) Refer to page 40 for reconciliations to the most directly comparable GAAP financial measures.

(2) Depreciation and amortization shown excludes depreciation recognized in reorganization charges, if any.

OTHER DISCLOSURES:

4 unchanged sentences

Foreign currency gains and losses resulting from transactions are included in the Consolidated Statements of Income.

Net of related derivative activity, the Company recognized a foreign currency exchange loss resulting from transactions of $10.0 million for the year ended December 31, 2020, and recognized a gain of $6.1 million and $3.6 million for the years ended December 31, 2019 and 2018, respectively.

For the year ended December 31, 2020, the Company recorded a positive non-cash foreign currency translation adjustment of $97.3 million that increased shareholders’ equity, compared with a negative non-cash foreign currency translation adjustment of $19.7 million that decreased shareholders’ equity for the year ended December 31, 2019.

The foreign currency translation adjustments for the year ended December 31, 2020 were favorably impacted by the weakening of the U.S.

Net of related derivative activity, the Company recognized foreign currency exchange losses resulting from transactions of $9.4 million and $10.0 million for the years ended December 31, 2021 and 2020, respectively, and recognized a gain of $6.1 million for the year ended December 31, 2019.

For the year ended December 31, 2021, the Company recorded a negative non-cash foreign currency translation adjustment of $62.3 million that decreased shareholders’ equity, compared with a positive non-cash foreign currency translation adjustment of $97.3 million that increased shareholders’ equity for the year ended December 31, 2020.

The foreign currency translation adjustments for the year ended December 31, 2021 were favorably impacted by the weakening of t he U.S.

dollar relative to other currencies as of December 31, 2021 compared to December 31, 2020.

18 unchanged sentences

This includes:

the ability of the Company to respond to rapid changes in customer demand, the effects of customer or supplier bankruptcies or liquidations, the impact of changes in industrial business cycles, the effects of distributor inventory corrections reflecting de-stocking of the supply chain and whether conditions of fair trade continue in the Company's markets;

(d) competitive factors, including changes in market penetration, increasing price competition by existing or new foreign and domestic competitors, the introduction of new products or services by existing and new competitors, and new technology that may impact the way the Company’s products are produced, sold or distributed;

the ability of the Company to respond to rapid changes in customer demand, disruptions to the Company's supply chain, logistical issues associated with port closures or congestion, delays or increased costs , the effects of customer or supplier bankruptcies or liquidations, the impact of changes in industrial business cycles, the effects of distributor inventory corrections reflecting de-stocking of the supply chain and whether conditions of fair trade continue in the Company's markets;

(d) competitive factors, including changes in market penetration, increasing price competition by existing or new foreign and domestic competitors, the introduction of new products or services by existing and new competitors, competition for skilled labor and new technology that may impact the way the Company’s products are produced, sold or distributed;

(e) changes in operating costs.

3 unchanged sentences

availability and cost of raw materials and energy;

disruptions to the Company's supply chain and logistical issues associated with port closures or congestion, delays or increased costs;

changes in the expected costs associated with product warranty claims;

1 unchanged sentence

the effects of unplanned plant shutdowns;

the effects of government-imposed restrictions meant to address climate change;

the effects of government-imposed restrictions and commercial requirements meant to address climate change;

and changes in the cost of labor and benefits;

(f) the success of the Company’s operating plans, announced programs, initiatives and capital investments;

(f) the impact of inflation on employee expenses, shipping costs, raw material costs, energy and fuel costs and other production costs;

(g) the success of the Company’s operating plans, announced programs, initiatives and capital investments;

the ability to integrate acquired companies and to address material issues not uncovered during the Company's due diligence review;

and the ability of acquired companies to achieve satisfactory operating results, including results being accretive to earnings;

(g) the Company’s ability to maintain appropriate relations with unions or works councils that represent Company associates in certain locations in order to avoid disruptions of business and to maintain the continued service of our management and other key employees;

(h) unanticipated litigation, claims, investigations or assessments.

and the ability of acquired companies to achieve satisfactory operating results, including results being accretive to earnings, realization of synergies and expected cash flow generation;

(h) the Company’s ability to maintain appropriate relations with unions or works councils that represent Company associates in certain locations in order to avoid disruptions of business and to maintain the continued service of our management and other key employees;

(i) unanticipated litigation, claims, investigations or assessments.

This includes:

claims, investigations or problems related to intellectual property, product liability or warranty, foreign export and trade laws, competition and anti-bribery laws, environmental or health and safety issues, data privacy and taxes;

(i) changes in worldwide financial and capital markets, including availability of financing and interest rates on satisfactory terms, which affect the Company’s cost of funds and/or ability to raise capital, as well as customer demand and the ability of customers to obtain financing to purchase the Company’s products or equipment that contain the Company’s products;

(j) the Company's ability to satisfy its obligations and comply with covenants under its debt agreements, maintain favorable credit ratings and its ability to renew or refinance borrowings on favorable terms;

(k) the impact on the Company's pension obligations and assets due to changes in interest rates, investment performance and other tactics designed to reduce risk;

(l) those items identified under Item 1A.

claims, investigations or problems related to intellectual property, product liability or warranty, foreign export and trade laws, government procurement regulations, competition and anti-bribery laws, environmental or health and safety issues, data privacy and taxes;

(j) changes in worldwide financial and capital markets, including availability of financing and interest rates on satisfactory terms, which affect the Company’s cost of funds and/or ability to raise capital, as well as customer demand and the ability of customers to obtain financing to purchase the Company’s products or equipment that contain the Company’s products;

(k) the Company's ability to satisfy its obligations and comply with covenants under its debt agreements, maintain favorable credit ratings and its ability to renew or refinance borrowings on favorable terms;

(l) the impact on the Company's pension obligations and assets due to changes in interest rates, investment performance and other tactics designed to reduce risk;

(m) those items identified under Item 1A.

Risk Factors on pages 8 through 17 .

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis