What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-15 compared with 2021-02-16 · 305 added, 342 removed, 1211 unchanged (35% of the section changed)

Financial Statements and Supplementary Data

Financial Statements Page

Consolidated Statement s of Income

Consolidated Statements of Comprehensive Income

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Consolidated Statements of Shareholders' Equity

Notes to Consolidated Financial Statements

Report of an Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Statements of Income

10 unchanged sentences

Interest income 2.3 3.7 4.9

Non-service pension and other postretirement (expense) income ( 4.7 ) 10.2 ( 6.2 )

Other income, net 10.0 13.0 9.4

Non-service pension and other postretirement income (expense) 18.3 ( 4.7 ) 10.2

Other income (expense), net 0.8 ( 1.1 ) 13.0

Acquisition-related gain 0.9 11.1 —

Income Before Income Taxes 476.6 396.3 472.4

13 unchanged sentences

Net Income $ 381.5 $ 292.4 $ 374.7

Other comprehensive income (loss), net of tax:

Other comprehensive (loss) income, net of tax:

Foreign currency translation adjustments ( 63.7 ) 92.7 ( 19.9 )

1 unchanged sentence

Change in fair value of derivative financial instruments 4.8 ( 2.4 ) ( 2.0 )

Other comprehensive income (loss), net of tax 86.8 45.0 ( 63.2 )

Other comprehensive (loss) income, net of tax ( 65.7 ) 86.8 45.0

Comprehensive Income, net of tax 315.8 379.2 419.7

comprehensive income (loss) attributable to noncontrolling interest 3.3 12.4 ( 4.2 )

comprehensive income attributable to noncontrolling interest 11.0 3.3 12.4

Comprehensive Income Attributable to The Timken Company $ 304.8 $ 375.9 $ 407.3

17 unchanged sentences

Operating lease assets 118.9 118.2

Non-current pension assets 2.0 3.4

Non-current other postretirement benefit assets — 36.6

Deferred income taxes 67.6 77.0

4 unchanged sentences

Current Liabilities

Short-term debt $ 119.8 $ 17.3

Current portion of long-term debt 10.9 64.7

Short-term operating lease liabilities 27.2 28.3

Accounts payable, trade $ 430.0 $ 351.4

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

Salaries, wages and benefits 136.0 135.7

20 unchanged sentences

Retained earnings 1,616.4 1,339.5

Accumulated other comprehensive loss 41.3 ( 50.1 )

Accumulated other comprehensive (loss) income ( 23.0 ) 41.3

Treasury shares at cost (2021 – 1,715,282 shares;

17 unchanged sentences

Loss (gain) on sale of assets 1.3 0.9 ( 4.0 )

Gain on disposal of lease assets — ( 0.4 ) —

Acquisition-related gain ( 0.9 ) ( 11.1 ) —

Loss on divestitures — — 0.8

Deferred income tax benefit ( 15.1 ) ( 23.2 ) ( 8.9 )

Stock-based compensation expense 20.2 23.2 27.1

Pension and other postretirement expense 17.4 2.2 20.7

Pension and other postretirement (income) expense ( 6.6 ) 17.4 2.2

Pension and other postretirement benefit contributions and payments ( 24.5 ) ( 20.6 ) ( 43.4 )

10 unchanged sentences

Capital expenditures ( 148.3 ) ( 121.6 ) ( 140.6 )

Acquisitions, net of cash acquired of $ 5.9 million in 2019 and $ 30.1 million in 2018

Acquisitions, net of cash acquired of $ 5.9 million in 2019

( 7.5 ) ( 24.0 ) ( 226.5 )

Proceeds from disposals of property, plant and equipment 0.6 1.5 6.3

Proceeds from divestitures — — 14.0

Investments in short-term marketable securities, net ( 18.0 ) ( 9.4 ) ( 4.1 )

Other ( 0.6 ) — —

Net Cash Used in Investing Activities ( 173.8 ) ( 153.5 ) ( 364.9 )

11 unchanged sentences

Noncontrolling interest dividends paid ( 0.5 ) ( 16.9 ) ( 0.3 )

Net Cash (Used in) Provided by Financing Activities ( 331.1 ) ( 100.7 ) 553.1

Net Cash Used in Financing Activities ( 269.3 ) ( 331.1 ) ( 100.7 )

Effect of exchange rate changes on cash ( 7.4 ) 11.9 ( 1.4 )

Increase In Cash, Cash Equivalents and Restricted Cash 104.9 83.1 7.7

(Decrease) Increase In Cash, Cash Equivalents and Restricted Cash ( 63.2 ) 104.9 83.1

Cash, cash equivalents and restricted cash at beginning of year 321.1 216.2 133.1

7 unchanged sentences

Comprehensive

Income (Loss) Treasury

(Loss) Income Treasury

Year Ended December 31, 2019

Balance at January 1, 2019 $ 1,642.7 $ 53.1 $ 951.9 $ 1,630.2 $ ( 95.3 ) $ ( 960.3 ) $ 63.1

Cumulative effect of the new revenue standard

(net of income tax benefit of $ 1.5 million)

Cumulative effect of ASU 2018-02 — 0.7 ( 0.7 )

Net income 374.7 362.1 12.6

Foreign currency translation adjustments ( 19.9 ) ( 19.7 ) ( 0.2 )

Pension and other postretirement liability

adjustments (net of $ 0.5 million income tax expense)

Pension and other postretirement liability adjustments

(net of $ 22.2 million income tax expense)

Change in fair value of derivative financial

instruments, net of reclassifications ( 2.0 ) ( 2.0 )

Shares issued for the acquisition of ABC Bearings 66.0 30.9 35.1

Change in ownership of noncontrolling interest ( 0.5 ) ( 10.3 ) 9.8

Noncontrolling interest acquired 1.8 1.8

Dividends declared to noncontrolling interest ( 0.5 ) ( 0.5 )

Dividends – $ 1.12 per share

4 unchanged sentences

Restricted share activity — ( 23.3 ) 23.3

Payments related to tax withholding for

stock-based compensation ( 5.4 ) ( 5.4 )

Payments related to tax withholding for stock-based

compensation ( 15.4 ) ( 15.4 )

Balance at December 31, 2019 $ 1,954.8 $ 53.1 $ 937.6 $ 1,907.4 $ ( 50.1 ) $ ( 979.8 ) $ 86.6

Year Ended December 31, 2020

Cumulative effect of ASU 2016-13 (net of $ 0.2 million

income tax benefit)

( 0.5 ) ( 0.5 )

Net income 292.4 284.5 7.9

Foreign currency translation adjustments 92.7 97.3 ( 4.6 )

Pension and other postretirement liability

adjustments (net of $ 22.2 million income tax expense)

Pension and other postretirement liability adjustments

(net of $ 1.1 million income tax benefit)

( 3.5 ) ( 3.5 )

Change in fair value of derivative financial

3 unchanged sentences

Dividends declared to noncontrolling interest ( 16.1 ) ( 16.1 )

Treasury stock retirement — ( 12.4 ) ( 213.3 ) ( 764.9 ) 990.6

Dividends – $ 1.13 per share

4 unchanged sentences

Restricted share activity — ( 23.9 ) 23.9

Payments related to tax withholding for

stock-based compensation ( 15.4 ) ( 15.4 )

Payments related to tax withholding for stock-based

compensation ( 16.0 ) ( 16.0 )

Balance at December 31, 2020 $ 2,225.2 $ 40.7 $ 740.7 $ 1,339.5 $ 41.3 $ ( 9.3 ) $ 72.3

Year Ended December 31, 2021

Cumulative effect of ASU 2016-13

(net of income tax benefit of $ 0.2 million)

( 0.5 ) ( 0.5 )

Net income 381.5 369.1 12.4

Foreign currency translation adjustments ( 63.7 ) ( 62.3 ) ( 1.4 )

Pension and other postretirement liability

adjustments (net of $ 1.1 million income tax benefit)

Pension and other postretirement liability adjustments

(net of $ 2.3 million income tax benefit)

( 6.8 ) ( 6.8 )

1 unchanged sentence

instruments, net of reclassifications 4.8 4.8

Change in ownership of noncontrolling interest 0.5 0.5

Noncontrolling interest acquired ( 1.0 ) 1.0 ( 2.0 )

Dividends declared to noncontrolling interest ( 0.5 ) ( 0.5 )

Treasury stock retirement — ( 12.4 ) ( 213.3 ) ( 764.9 ) 990.6

Dividends – $ 1.19 per share

3 unchanged sentences

Stock option exercise activity 26.0 26.0

Restricted share activity — ( 23.9 ) 23.9

Payments related to tax withholding for

stock-based compensation ( 16.0 ) ( 16.0 )

Payments related to tax withholding for stock-based

compensation ( 23.8 ) ( 23.8 )

Balance at December 31, 2021 $ 2,377.7 $ 40.7 $ 786.9 $ 1,616.4 $ ( 23.0 ) $ ( 126.1 ) $ 82.8

8 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.

Of the Company's revenue, approximately 85 - 90 % is from short-term, fixed-price contracts and continues to be recognized as of a point in time when products are shipped from the Company's manufacturing facilities or at a later point in time when control of the products transfers to the customer.

The Company recognizes approximately 10 - 15 % of revenue over time for services and certain sales of customer-specific product as it satisfies the performance obligations because of the continuous transfer of control to the customer, supported as follows:

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

Of the Company's revenue, approximately 85 % to 90 % is from fixed-price contracts and continues to be recognized as of a point in time when products are shipped from the Company's manufacturing or distribution facilities or at a later point in time when control of the products transfers to the customer.

The Company recognizes approximately 10 % to 15 % of revenue over time for services and certain sales of customer-specific product as it satisfies the performance obligations because of the continuous transfer of control to the customer, supported as follows:

• For certain service contracts, this continuous transfer of control to the customer occurs as the Company's service enhances assets that the customer owns and controls at all times, and the Company is contractually entitled to payment for work performed to date plus a reasonable margin.

9 unchanged sentences

government contracts are based on the Company's standard terms and conditions or the result of specific negotiations with each customer.

The Company's standard terms and conditions require payment 45-75 days from the invoice date, but the timing of payment for specific negotiated terms may vary.

The Company's standard terms and conditions require payment 45 to 75 days from the invoice date, but the timing of payment for specific negotiated terms may vary.

The Company also has both prime and subcontracts in support of the provision of goods and services to the U.S.

Certain of these contracts are subject to the Federal Acquisition Regulation ("FAR") and are priced based on a competitive market prices.

Certain of these contracts are subject to the Federal Acquisition Regulation ("FAR") and are priced based on competitive market prices.

Under the payment terms of certain of those U.S.

1 unchanged sentence

Because the customer retains a portion of the contract price until completion of such contracts, certain of these U.S.

government fixed-price contracts result in revenue recognized in excess of billings, which is presented within "Unbilled Receivables" on the Consolidated Balance Sheet.

government fixed-price contracts result in revenue recognized in excess of billings, which is presented within "Unbilled receivables" on the Consolidated Balance Sheets.

The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer.

1 unchanged sentence

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services.

Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.

Sales, value-added, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.

As a practical expedient, the Company may exclude an assessment of whether promised goods or services are performance obligations, if such promised goods and services are immaterial to the customer contract taken as a whole, and combine these with other performance obligations.

15 unchanged sentences

Restricted Cash:

Cash of $ 0.8 million and $ 6.7 million at December 31, 2020 and 2019, respectively, was restricted for contractually specified uses.

The decrease was primarily due to the release of the Company's contractual cash hold-back for working capital adjustment as part of the BEKA acquisition.

Cash of $ 0.8 million at December 31, 2021 and 2020, respectively, was restricted for contractually specified uses.

Accounts Receivable, Less Allowances:

Accounts receivable, less allowances on the Consolidated Balance Sheet include amounts billed and currently due from customers.

Accounts receivable, less allowances on the Consolidated Balance Sheets include amounts billed and currently due from customers.

The amounts due are stated at their net estimated realizable value.

3 unchanged sentences

The Company believes it has limited concentration of credit risk due to the diversity of its customer base.

Note 1 - Significant Accounting Policies (continued)

Unbilled Receivables:

Unbilled receivables on the Consolidated Balance Sheet primarily include unbilled amounts typically resulting from sales under long-term contracts when the following conditions exist:

Unbilled receivables on the Consolidated Balance Sheets primarily include unbilled amounts typically resulting from sales under long-term contracts when the following conditions exist:

(i) cost-to-cost method of revenue recognition is utilized;

(ii) the revenue recognized exceeds the amount billed to the customer;

and (iii) the right to payment is primarily subject only to the passage of time.

and (iii) the right to payment is generally subject to the passage of time as milestones are achieved.

The amounts recorded for unbilled receivables do not exceed their net realizable value.

Note 1 - Significant Accounting Policies (continued)

Inventories are valued at the lower of cost or net realizable value, with approximately 59 % valued by the FIFO method and the remaining 41 % valued by the LIFO method.

6 unchanged sentences

The provision for depreciation is computed by the straight-line method based upon the estimated useful lives of the assets.

The useful lives are approximately 30 years for buildings, 3 to 10 years for computer software and 3 to 20 years for machinery and equipment.

The useful lives are 10 to 30 years for buildings, three to 10 years for computer software and three to 20 years for machinery and equipment.

The impairment of long-lived assets is evaluated when events or changes in circumstances indicate that the carrying amount of the asset or related group of assets may not be recoverable.

6 unchanged sentences

Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition.

A lease asset and lease liability are not recorded for leases with an initial term of less than 12 months or less and the lease expenses related to these leases is recognized as incurred over the lease term.

A lease asset and lease liability are not recorded for leases with an initial term of 12 months or less, and the lease expense related to these leases is recognized as incurred over the lease term.

Goodwill and Other Intangible Assets:

Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from 1 to 20 years.

Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from one to 20 years.

Goodwill and indefinite-lived intangible assets not subject to amortization are tested for impairment at least annually.

1 unchanged sentence

Furthermore, goodwill and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable in accordance with accounting rules related to goodwill and other intangible assets.

Note 1 - Significant Accounting Policies (continued)

Purchase accounting and business combinations:

5 unchanged sentences

Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the Company’s Consolidated Statements of Income.

Note 1 - Significant Accounting Policies (continued)

Product Warranties:

8 unchanged sentences

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

The Company has elected to account for Global Intangible Low Tax ("GILTI") as a period cost.

Foreign Currency:

1 unchanged sentence

income and expenses are translated at the average rates of exchange prevailing during the reporting period.

Translation adjustments for assets and liabilities are reflected as a separate component of accumulated other comprehensive loss.

Translation adjustments for assets and liabilities are reflected as a separate component of accumulated other comprehensive loss (income).

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 a gain of $ 3.6 million for the years ended December 31, 2019 and 2018, respectively.

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 a gain of $ 6.1 million for the year ended December 31, 2019.

Pension and Other Postretirement Benefits:

10 unchanged sentences

these dividends are charged to retained earnings when paid.

Note 1 - Significant Accounting Policies (continued)

Earnings Per Share:

Certain unvested restricted share grants provide for the payment of nonforfeitable dividends.

Certain unvested restricted share grants provide for the payment of non-forfeitable dividends.

The Company considers these awards as participating securities.

2 unchanged sentences

Diluted earnings per share are computed by dividing net income less undistributed earnings allocated to unvested restricted shares by the weighted-average number of common shares outstanding, adjusted for the dilutive impact of outstanding stock-based awards.

Note 1 - Significant Accounting Policies (continued)

Derivative Instruments:

1 unchanged sentence

Derivatives that are not designated as hedges are adjusted to fair value through earnings.

If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive loss until the hedged item is recognized in earnings.

The Company’s holdings of forward foreign currency exchange contracts qualify as derivatives pursuant to the criteria established in derivative accounting guidance, and the Company has designated certain of those derivatives as hedges.

5 unchanged sentences

New Accounting Guidance Adopted:

In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments," and was subsequently updated with ASU 2019-04 in April of 2019.

These ASUs change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

The new guidance replaced the current incurred loss approach with an expected loss model.

The new expected credit loss impairment model applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt instruments, net investments in leases, loan commitments and standby letters of credit.

Upon initial recognition of the exposure, the expected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures).

The estimate of expected credit losses should consider historical information, current information and reasonable and supportable forecasts, including estimates of prepayments.

Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses.

ASU 2016-13 does not prescribe a specific method to make the estimate, so its application requires significant judgment.

ASU 2016-13 was effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The Company adopted ASU 2016-13 effective January 1, 2020, and the impact of adoption was not material to the Company's results of operations and financial condition.

Refer to the Consolidated Statements of Shareholders’ Equity for the cumulative effect of initially applying ASU 2016-13.

Note 1 - Significant Accounting Policies (continued)

In December 2019, the FASB issued Accounting Standards Update ("ASU") 2019-12, “Income Taxes (ASC 740) – Simplifying the Accounting for Income Taxes,” which is intended to reduce complexity in the accounting for income taxes while maintaining or improving the usefulness of information provided to financial statement users.

The guidance amends certain existing provisions under ASC 740 to address a number of distinct items.

This standard was effective for public companies in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

The Company adopted ASU 2019-12 effective January 1, 2021, and the impact of the adoption was not material to the Company's results of operations and financial condition.

New Accounting Guidance Issued and Not Yet Adopted:

In November 2021, the FASB issued ASU 2021-10, "Government Assistance (Topic 832)." ASU 2021-10 is intended to increase transparency of government assistance by requiring entities to disclose the types of government assistance, the entity's accounting for government assistance, and the effect of the government assistance on an entity's financial statements.

This new guidance is effective for all entities for annual reporting periods beginning after December 15, 2021.

The Company is currently evaluating the impact of the new guidance on its disclosures.

In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with ASC Topic 606 as if the acquirer had originated the contracts.

This new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

Early adoption is permitted.

The Company expects to early adopt this guidance in the first quarter of 2022.

The impact of the new guidance on the Company's Consolidated Financial Statements and related disclosures will depend on the magnitude of future acquisitions.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This guidance is intended to provide temporary optional expedients and exceptions to the U.S.

Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2020-04 is intended to provide temporary optional expedients and exceptions to the U.S.

GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates.

This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022.

The Company is currently assessing which of its various contracts will require an update for a new reference rate, and will determine the timing for implementation of this guidance at the completion of that analysis.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (ASC 740) – Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740.

The amendments also improve consistent application of and simplify U.S.

GAAP for other areas of ASC 740 by clarifying and amending existing guidance.

This standard is effective for public companies in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued.

Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis.

The Company has assessed the adoption of ASU 2019-12, and determined that the standard is not expected to materially impact the Company’s results of operations and financial condition.

The Company is currently assessing which of its various contracts will require an update for a new reference rate and will determine the timing for implementation of this guidance after completing that analysis.

Note 2 - Acquisitions

The Company completed one acquisition in 2020.

On August 20, 2021, the Company completed the acquisition of the assets of iMS, a manufacturer of industrial robotics and automation solutions, with annual sales of approximately $ 6.0 million.

iMS is headquartered in Norton Shores, Michigan.

The purchase price for this acquisition was $ 7.7 million.

In addition, the seller has the opportunity to earn $ 3.0 million of contingent performance-based consideration between January 1, 2022 and June 30, 2024.

This additional component will be accounted for as compensation expense over that period because the payment is contingent in part upon the continued employment of a former owner of the business.

Based on markets and customers served, results for iMS are primarily reported in the Process Industries segment.

On November 30, 2020, the Company completed the acquisition of the assets of Aurora.

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

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

Aurora is headquartered in Montgomery, Illinois.

The total purchase price for this acquisition was $ 17.8 million, including $ 0.5 million of the purchase price that was held back for the settlement of net working capital, subject to a post-closing net working capital adjustment.

The total purchase price for this acquisition was $ 17.1 million, including a post-closing net working capital adjustment.

Based on markets and customers served, results for Aurora are reported in both the Mobile Industries segment and the Process Industries segment.

During 2019 the Company completed two acquisitions.

On November 1, 2019 , the Company completed the acquisition of BEKA, a leading global supplier of automatic lubrication systems.

BEKA serves a diverse range of industrial sectors, including wind, food and beverage, rail, on- and off-highway and other process industries.

Headquartered in Pegnitz, Germany, BEKA has manufacturing and research and development facilities in Germany, and assembly facilities and sales offices around the world.

On April 1, 2019, the Company completed the acquisition of Diamond Chain, a leading supplier of high-performance roller chains for industrial markets.

Diamond Chain serves a diverse range of market sectors, including industrial distribution, material handling, food and beverage, agriculture, construction and other process industries.

Diamond Chain operates primarily in the U.S.

Note 2 - Acquisitions (continued)

The purchase price allocations at fair value, net of cash acquired, for 2021 and 2020 acquisitions as of December 31, 2021 and 2020 are presented below:

6 unchanged sentences

Other intangible assets 2.2 —

Other non-current assets — 0.9

Total assets acquired $ 9.7 $ 30.6

Accounts payable, trade $ 0.3 $ 0.8

Salaries, wages and benefits — 6.8

Income taxes payable — 2.1

Other current liabilities — 0.5

Short-term debt — 0.8

Long-term debt — 17.2

Accrued pension cost — 0.8

Accrued postretirement liability 1.5 —

Long-term operating lease liabilities 0.2 —

Deferred taxes — 2.9

Other non-current liabilities — 1.1

Total liabilities assumed $ 2.0 $ 1.3

Noncontrolling interest acquired — 1.8

Net assets acquired $ 7.7 $ 29.3

1 unchanged sentence

Working capital adjustment related to 2019 acquisitions paid in 2020 — 6.7

Working capital adjustment for 2019 acquisitions paid (recognized) in 2020 6.7 ( 6.7 )

Indemnification settlement received — ( 4.8 )

Working capital adjustment related to 2020 acquisition received in 2021 ( 0.2 ) —

Bargain purchase price gain — ( 12.0 )

Cash paid for acquisitions, net of cash acquired $ 7.5 $ 24.0

In April 2020, the Company paid $ 6.7 million for a working capital adjustment to the purchase price for BEKA in accordance with the purchase agreement.

This adjustment, as well as other measurement period adjustments recorded in 2020, resulted in an $ 8.4 million increase to goodwill.

As a result of applying the accounting rules on business combinations, the Company recognized a bargain purchase gain of $ 11.1 million on the acquisition of Aurora.

As a result of applying the accounting rules on business combinations, the Company recognized a bargain purchase price gain of $ 11.1 million in 2020 on the acquisition of Aurora.

In April 2021, the Company received $ 0.2 million for a working capital adjustment to the purchase price for Aurora in accordance with the purchase agreement.

This adjustment, as well as other measurement period adjustments recorded in 2021, resulted in an additional purchase price gain of $ 0.9 million recognized in 2021.

The Company believes it was able to negotiate a bargain purchase price for the business due to some historic operational performance challenges, as well as the seller’s desire to exit the business in an expedited manner in an exclusive process with the Company.

In January 2019, the Company paid a working capital adjustment of $ 2.9 million in connection with the Cone Drive acquisition, which was accrued and reflected in the purchase price in 2018.

In May 2019, the Company received a $ 4.8 million payment from escrow related to an indemnification settlement for the Cone Drive acquisition, which is reflected as a purchase price adjustment.

These adjustments, as well as other measurement period adjustments recorded in 2019, resulted in a $ 1.9 million increase to Goodwill.

In April 2020, the Company paid $ 6.7 million for a working capital adjustment to the purchase price for BEKA Lubrication ("BEKA") in accordance with the purchase agreement.

This adjustment, as well as other measurement period adjustments recorded in 2020, resulted in an $ 8.4 million increase to goodwill.

Note 2 - Acquisitions (continued)

The amounts for 2020 in the table above represent the preliminary purchase price allocations for Aurora.

These purchase price allocations are based on preliminary information and are subject to change as additional information concerning final asset and liability valuations is obtained.

The purchase price allocation for Aurora is preliminary as a result of the proximity of the acquisition date to December 31, 2020, and as a result, no elements of the purchase price allocation have been finalized.

The amounts for 2021 in the table above represent the preliminary purchase price allocations for iMS.

These purchase price allocations, including the residual amount allocated to goodwill, is based on preliminary information and is subject to change as additional information concerning final asset and liability valuations are obtained.

As of December 31, 2021, the purchase price allocation for iMS is preliminary as it relates to certain working capital items, including the valuation of inventory and deferred revenue.

During the measurement period for this acquisition, the Company will adjust assets and liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date.

The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the acquisition date.

As a result of recognizing the bargain purchase price gain, any change will be reflected as an adjustment to pretax income.

No intangible assets were acquired in 2020.

The following table summarizes the purchase price allocation at fair value for identifiable intangible assets acquired in 2021:

Trade names (indefinite life) $ 28.2 Indefinite

Technology and know-how $ 1.5 19 years

Customer Relationships 0.5 2 years

Capitalized software 0.5 2 years

Non-Competes 0.2 5 years

Total intangible assets $ 2.2

The total acquired intangible asset amount for 2019 acquisitions does not fully align with the purchase price allocations shown previously due to measurement period adjustments reflected in the purchase price allocations.

Note 3 - Revenue

31 unchanged sentences

During the years ended December 31, 2021 and December 31, 2020, approximatel y 9 % and 11 % , respectively, of total net sales were recognized on an over-time basis because of the continuous transfer of control to the customer, with the remainder recognized as of a point in time.

Approximately 4 % and 5 % of total net sales represented service revenue in 2020 and 2019, respectively.

Finally, the payment terms with the U.S.

Approximately 4 % of total net sales represented service revenue in 2021 and 2020, respectively.

Finally, business with the U.S.

government or its contractors represented approximat ely 7 % o f total net sales for 2021 and 2020, respectively.

57 unchanged sentences

Total EBITDA, for reportable segments $ 746.4 $ 675.4 $ 751.5

Corporate EBITDA ( 40.7 ) ( 55.4 ) ( 61.4 )

Corporate pension and other postretirement benefit related

(expense) income (1)

Unallocated corporate expense ( 46.1 ) ( 40.7 ) ( 55.4 )

Corporate pension and other postretirement benefit related (expense)

( 0.3 ) ( 18.5 ) 4.1

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Depreciation and amortization ( 167.8 ) ( 167.1 ) ( 160.6 )

Interest expense, net ( 63.9 ) ( 67.2 ) ( 49.6 )

Interest expense ( 58.8 ) ( 67.6 ) ( 72.1 )

Interest income 2.3 3.7 4.9

Income before income taxes $ 476.6 $ 396.3 $ 472.4

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Deferred taxes related to branch operations — — 5.3

Tax Reform — — ( 10.6 )

Stock based compensation ( 8.1 ) ( 3.1 ) ( 1.8 )

Other tax rate change ( 1.7 ) 0.8 ( 5.0 )

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Note 5 - Income Taxes (continued)

The Company released $ 44.5 million of foreign valuation allowances for the year ended December 31, 2019, $ 40.7 million of which relates to the valuation allowance that was recorded against German indefinite-lived loss carryforwards and pension deferred tax assets.

The Company released $ 7.8 million of foreign valuation allowance for the year ended December 31, 2021, which relates to a valuation allowance that was recorded against Chinese net operating loss carryforwards.

Once established, the valuation allowance is released when, based on the weight of all available evidence, management concludes that related deferred tax assets are more likely than not to be realized.

Management concluded in the fourth quarter of 2021 that there was sufficient evidence to release the valuation allowance.

For the year ended December 31, 2019, the Company released $ 44.5 million of foreign valuation allowances, $ 40.7 million of which relates to the valuation allowance that was recorded against German indefinite-lived loss carryforwards and pension deferred tax assets.

As a result of the execution of a tax planning strategy in the fourth quarter of 2019, management reached this conclusion and accordingly released the valuation allowance.

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deferred tax liability.

Tax Reform reduced the U.S.

federal statutory rate from 35% to 21% beginning in 2018.

Tax Reform also required companies to pay a one-time net charge related to the taxation of unremitted foreign earnings and to remeasure its U.S.

deferred tax balances to the lower corporate income tax rate for the 2017 tax year.

Additionally, U.S.

Tax Reform created taxes on certain foreign sourced earnings known as the global intangible low-taxed income (“GILTI”) tax beginning with tax year 2018.

The Company has elected to account for GILTI as a period cost in the year the tax is incurred.

The accounting for the tax effects of U.S.

Tax Reform was completed as of December 31, 2018 under Staff Accounting Bulletin No.

For the year ended December 31, 2018, the Company recorded $ 8.2 million of tax benefit for changes to the provisional estimate for the remeasurement of net U.S.

deferred tax balances as a result of adjustments to finalize purchase accounting for prior-year acquisitions, the remeasurement of anticipatory tax credits for foreign branches and changes to U.S.

deferred tax assets included in the 2017 U.S.

federal income tax return.

Over the same period, the Company recorded $ 2.4 million of tax benefit for changes in the provisional estimate of the 2017 one-time net charge related to the taxation of unremitted foreign earnings as a result of additional federal and state regulatory guidance issued and the filing of the Company's 2017 U.S.

federal income tax return.

There are no changes to the Company’s assertion about its permanent reinvestment in undistributed foreign earnings.

The Company recorded $ 0.1 million and $ 6.0 million of income tax expense related to foreign withholding taxes on planned one-time distribution for the years ended December 31, 2020 and 2019, respectively .

The Company recorded $ 0.1 million of income tax expense related to foreign withholding taxes on planned one-time distribution for the years ended December 31, 2021 and 2020, respectively .

No additional deferred taxes have been recorded for any other outside basis differences as these amounts continue to be indefinitely reinvested in foreign operations.

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Deferred tax liabilities - principally depreciation and amortization ( 247.9 ) ( 255.7 )

Net deferred tax (liabilities) assets $ ( 71.7 ) $ ( 96.3 )

Note 5 - Income Taxes (continued)

Net deferred tax liabilities $ ( 53.8 ) $ ( 71.7 )

The Company has U.S.

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jurisdictions with tax benefits totaling $ 74.5 million, portions of which will expire in 2022 while others will be carried forward indefinitely.

The Company has provided valuation allowances of $ 35.9 million against certain of these carryforwards and $ 0.8 million against other deferred tax assets.

The Company has provided valuation allowances of $ 31.0 million against certain of these carryforwards.

A majority of the non-U.S.

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tax law for which deferred taxes have been recorded.

Note 5 - Income Taxes (continued)

As of December 31, 2021, the Company had $ 36.1 million of total gross unrecognized tax benefits, $ 30.7 million of which would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized.

As of December 31, 2021, the Company believes it is reasonably possible that the amount of unrecognized tax positions could decrease by approximately $ 3.2 million during the next 12 months.

The potential decrease would be primarily driven by settlements with tax authorities and the expiration of various applicable statutes of limitation.

The potential decrease would primarily be driven by settlements with tax authorities and the expiration of various applicable statutes of limitation.

As of December 31, 2021, the Company had accrued $ 8.9 million of interest and penalties related to uncertain tax positions.

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As of December 31, 2020, the Company had accrued $ 8.6 million of interest and penalties related to uncertain tax positions.

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

As of December 31, 2018, the Company had $ 26.0 million of total gross unrecognized tax benefits, all of which would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized.

As of December 31, 2019, the Company had $ 38.9 million of total gross unrecognized tax benefits, $ 36.1 million of which would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized.

As of December 31, 2019, the Company had accrued $ 5.0 million of interest and penalties related to uncertain tax positions.

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

The following table reconciles the Company’s total gross unrecognized tax benefits for the years ended December 31, 2021, 2020 and 2019:

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Ending balance, December 31 $ 36.1 $ 45.6 $ 38.9

During 2021, gross unrecognized tax benefits decreased primarily for releases of accruals related to closing agreements and lapses in statute of limitations for the U.S.

and a favorable non-U.S.

transfer pricing settlement.

These decreases were partially offset by accruals for uncertain tax positions related to non-U.S.

non-deductible expenses.

During 2020, gross unrecognized tax benefits increased primarily for additional accruals for uncertain tax positions related to non-U.S.

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These increases were partially offset by releases of accrual for lapses in statutes of limitations.

Note 5 - Income Taxes (continued)

During 2019, gross unrecognized tax benefits increased primarily for additional accruals for uncertain tax positions related to U.S.

Tax Reform along with prior year tax matters in multiple jurisdictions related to acquisitions.

During 2019, gross unrecognized tax benefits increased primarily for additional accruals for uncertain tax positions related to The Tax Cut and Jobs Act of 2017 along with prior year tax matters in multiple jurisdictions related to acquisitions.

These increases were partially offset by settlements with the tax authorities for prior year tax matters related to the Company’s foreign operations.

During 2018, gross unrecognized tax benefits increased primarily for prior year tax matters in multiple jurisdictions related to acquisitions.

These increases were partially offset by settlements with the tax authorities for prior year tax matters related to the Company’s international operations.

As of December 31, 2021 the Company is subject to examination by the IRS for tax years 2017 to the present.

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state and local tax jurisdictions for tax years 2014 to the present, as well as various foreign tax jurisdictions, including Mexico, China, Poland, France, Germany and India for tax years as early as 1999 to the present .

The Company’s unrecognized tax benefits were presented on the Consolidated Balance Sheets as a component of other non-current liabilities and as a reduction to deferred income taxes.

The Company’s unrecognized tax benefits are presented on the Consolidated Balance Sheets as a component of other non-current liabilities, or in certain instances, as a reduction to deferred income taxes.

Note 6 - Earnings Per Share

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Diluted earnings per share $ 4.79 $ 3.72 $ 4.71

The exercise prices for certain stock options that the Company has awarded exceed the average market price of the Company’s common shares.

Such stock options are antidilutive and were not included in the computation of diluted earnings per share.

The antidilutive stock options outstanding were 676,627 , 1,016,435 and 1,139,146 during 2020, 2019 and 2018, respectively.

The dilutive effect of stock options and awards includes all outstanding stock options and awards except stock options that are considered antidilutive.

Stock options are antidilutive when the exercise price exceeds the average market price of the Company’s common shares during the periods presented.

The antidilutive stock options outstanding were zero , 676,627 and 1,016,435 during 2021, 2020 and 2019, respectively.

Note 7 - Inventories

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If all inventories had been valued at FIFO, inventories would have been $ 199.4 million and $ 172.1 million greater at December 31, 2021 and 2020, respectively.

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

Inventory and the allowance for surplus and obsolete inventory increased from 2019 primarily as a result of recent acquisitions.

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

The increase in inventories from 2020 was primarily due to higher demand levels and longer supply chain lead times.

Note 8 - Property, Plant and Equipment

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Ending Balance $ 371.7 $ 651.0 $ 1,022.7

The $ 8.4 million addition from acquisitions was the result of measurement period adjustments related to the 2019 acquisitions of BEKA and Diamond Chain bringing total goodwill to $ 52.6 million for these acquisitions.

Approximately $ 19.0 million of this amount is tax deductible.

Refer to Note 2 - Acquisitions for further information.

The acquisition of iMS added $ 5.4 million of goodwill.

The goodwill for iMS is expected to be 100 % tax deductible.

Year ended December 31, 2020:

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Ending Balance $ 384.6 $ 663.0 $ 1,047.6

In 2019, the $ 46.1 million addition resulted from the acquisitions of BEKA and Diamond Chain and the measurement period adjustments of $ 1.9 million recorded in 2019 for 2018 acquisitions.

In 2020, the $ 8.4 million addition from acquisitions was the result of the measurement period adjustments related to the 2019 acquisitions of BEKA and The Diamond Chain Company ("Diamond Chain"), bringing total goodwill to $ 52.6 million for these acquisitions.

Approximately $ 19.0 million of this amount was tax deductible.

No material goodwill impairment losses were recorded in 2021, 2020 or 2019.

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Total intangible assets $ 1,219.2 $ ( 550.4 ) $ 668.8 $ 1,242.4 $ ( 501.0 ) $ 741.4

There were no intangible assets acquired in 2020.

Intangible assets acquired in 2019 totaled $ 84.4 million from the BEKA and Diamond Chain acquisitions.

Intangible assets subject to amortization acquired in 2019 were assigned useful lives of two to 20 years and had a weighted-average amortization period of 18.1 years.

Amortization expense for intangible assets was $ 54.5 million, $ 56.2 million and $ 57.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Amortization expense included $ 46.8 million, $ 47.3 million and $ 46.7 million related to intangible assets acquired as part of a business combination for the years ended December 31, 2021, 2020 and 2019, respectively.

Amortization expense for intangible assets is estimated to be approximately $ 49.1 million in 2022, $ 46.1 million in 2023, $ 44.0 million in 2024, $ 42.8 million in 2025 and $ 41.4 million in 2026.

Substantially all amortization expense for intangible assets is recorded in Cost of product sold on the Consolidated Statements of Income.

Note 10 - Other Current Liabilities

The following table displays other current liabilities as of December 31, 2021 and 2020:

(Dollars in millions) December 31,

Sales rebates $ 70.3 $ 41.1

Product warranty 11.7 9.4

Operating lease liabilities 26.2 27.2

Professional fees 10.8 9.6

Restructuring 7.0 8.0

Taxes other than income and payroll taxes 16.0 15.7

Interest 10.8 10.8

Other 97.8 92.3

Total Current Liabilities $ 250.6 $ 214.1

Note 11 - Leasing

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2025 13.2 0.4

2026 10.5 0.1

Thereafter 25.5 —

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Short-term debt as of December 31, 2021 and 2020 was as follows:

Variable-rate Accounts Receivable Facility with an interest rate of 0.96 % at December 31, 2020 and of 2.77 % at December 31, 2019

Variable-rate Accounts Receivable Facility with an interest rate of 0.96 % at December 31, 2020

Borrowings under lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.50 % to 2.00 % at December 31, 2021 and 0.24 % to 1.75 % at December 31, 2020

Short-term debt $ 42.6 $ 119.8

The Company has a $ 100.0 million Accounts Receivable Facility, which matures November 30, 2021.

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

The Company renewed the Accounts Receivable Facility on November 30, 2021.

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

Under the terms of the Accounts Receivable Facility, the Company sells, on an ongoing basis, certain domestic trade receivables to Timken Receivables Corporation, a wholly owned consolidated subsidiary that, in turn, uses the trade receivables to secure borrowings that are funded through a vehicle that issues commercial paper in the short-term market.

Borrowings under the Accounts Receivable Facility are limited to certain borrowing base limitations.

Borrowings under the Accounts Receivable Facility may be limited to certain borrowing base limitations.

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

As of December 31, 2020, there were outstanding borrowings of $ 58.0 million under the Accounts Receivable Facility, which reduced the availability under this facility to $ 25.9 million.

All of the outstanding borrowings under the Accounts Receivable Facility were classified as short-term due to its upcoming maturity in November of 2021.

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

The cost of this facility, which is the prevailing commercial paper rate plus facility fees, is considered a financing cost and is included in interest expense in the Consolidated Statements of Income.

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Most of these lines of credit are uncommitted.

At December 31, 2020, the Company’s foreign subsidiaries had borrowings outstanding of $ 61.8 million and guarantees of $ 0.7 million, which reduced the aggregate availability under these facilities to $ 214.9 million.

At December 31, 2021, the Company’s foreign subsidiaries had borrowings outstanding of $ 42.6 million and bank guarantees of $ 0.4 million, which reduced the aggregate availability under these facilities to $ 252.3 million.

The weighted-average interest rate on these lines of credit during the year were 0.8 %, 0.6 % and 0.5 % in 2021 , 2020 and 2019, respectively.

The increase in the weighted-average interest rate was primarily due to an increase in borrowings in Europe with higher rates.

The increase in the weighted-average interest rate was primarily due to a higher borrowing rates.

The weighted-average interest rate on lines of credit outstanding at December 31, 2021 and 2020 was 0.6 % and 0.8 %, respectively.

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Dollar of 1.09 % and Euro of 1.00 % at December 31, 2021 and 2.01 % and 1.48 %, respectively, at December 31, 2020

$ 9.7 $ 132.7

Variable-rate Euro Term Loan (1) , matured on September 18, 2020, with an interest rate of 1.13 % at December 31, 2019.

Variable-rate Accounts Receivable Facility, with an interest rate of 2.77 % at December 31, 2019.

Variable-rate Term Loan (1) , maturing on September 11, 2023, with an interest rate of 1.23 % at December 31, 2021 and of 1.63 % at December 31, 2020.

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On May 27, 2020, the Senior Credit Facility was amended to, among other things, effectively increase the limit with respect to the consolidated leverage ratio.

As amended, the consolidated leverage ratio 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 is effective through June 30, 2021, after which the calculation of the consolidated leverage ratio under the Senior Credit Facility will revert back to using a total debt construct.

As amended, the consolidated leverage ratio was calculated using a net debt construct, netting unrestricted cash in excess of $ 25 million, instead of total debt.

The 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 reverted back to a total debt construct.

On November 1, 2019, the Company assumed certain fixed-rate debt of € 16 million associated with the BEKA acquisition that matures on June 30, 2033.

On September 11, 2018, the Company entered into the $ 350 million 2023 Term Loan.

Proceeds from the 2023 Term Loan were used to fund the acquisitions of Cone Drive and Rollon, which closed on September 1, 2018 and September 18, 2018, respectively.

Proceeds from the 2023 Term Loan were used to fund the acquisitions of Apiary Investments Holding Limited and Rollon S.p.A., which closed on September 1, 2018 and September 18, 2018, respectively.

On July 12, 2019, the Company amended the 2023 Term Loan agreement to, among other things, align covenants and other terms with the Senior Credit Facility.

On May 27, 2020, the 2023 Term Loan agreement was further amended to align the calculation of the consolidated leverage ratio and other terms with the Senior Credit Facility.

On September 18, 2017, the Company entered into the 2020 Term Loan, that matured on September 18, 2020.

The 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 2023 Term Loan reverted back to a total debt construct.

On September 18, 2017, the Company entered into the € 100 million variable-rate term loan that matured on September 18, 2020 (the "2020 Term Loan").

Upon the final payment during the third quarter of 2020, the Company fully repaid the 2020 Term Loan.

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

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

Note 12 - Financing Arrangements (continued)

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Lovejoy’s allocated share of past and future costs related to the Site, including for investigation and/or remediation, could be significant.

All previously pending property damage and personal injury lawsuits against Lovejoy related to the Site have been settled or dismissed.

All previously pending property damage and personal injury lawsuits against Lovejoy related to the Site were settled or dismissed prior to our acquisition of Lovejoy.

The Company had total environmental accruals of $ 6.0 million and $ 5.3 million for various known environmental matters that are probable and reasonably estimable as of December 31, 2021 and 2020, respectively, which includes the Lovejoy matter discussed above.

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The increase in the liability during 2021 primarily relates to accruals that are based on the best estimate of costs for future claims based on products sold that are still under warranty.

The estimate of these accruals is based on historical claims, expected trends and course of dealing experience that continue to mature.

The estimate of these accruals is based on historical claims and expected trends that continue to mature.

Any significant change to these assumptions may be material to the results of operations in any particular period in which that change occurs.

The following is a rollforward of the consolidated product warranty accrual at December 31, 2021 and December 31, 2020, respectively:

2021 December 31,

Beginning balance, January 1 $ 9.4 $ 7.5

Expense 10.1 9.4

Payments ( 7.8 ) ( 7.5 )

Ending balance $ 11.7 $ 9.4

Note 14 - Stock Compensation

Under its long-term incentive plan, the Company’s common shares have been made available for grant, at the discretion of the Compensation Committee of the Board of Directors, to officers and key employees in the form of stock option awards.

Stock option awards typically have a ten-year term and generally vest in 25 % increments annually beginning on the first anniversary of the date of grant.

During 2020, 2019 and 2018, the Company recognized stock-based compensation expense of $ 3.6 million ($ 2.7 million after tax or $ 0.04 per diluted share), $ 4.9 million ($ 3.7 million after tax or $ 0.05 per diluted share) and $ 4.8 million ($ 3.7 million after tax or $ 0.05 per diluted share), respectively, for stock option awards.

Beginning in 2020, the Company discontinued the use of nonqualified stock options.

As such, there were no stock option awards granted in 2020.

The fair value of stock option awards granted in 2019 and 2018 was estimated at the date of grant using a Black-Scholes option-pricing method with the following assumptions:

Weighted-average fair value per option $ 9.58 $ 10.29

Risk-free interest rate 2.46 % 2.62 %

Dividend yield 2.52 % 2.30 %

Expected stock volatility 28.29 % 27.78 %

Expected life - years 5 5

Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and the expected lives of the options.

The dividend yield was calculated based upon the last dividend prior to the grant compared to the trailing 12 months' daily stock prices.

The risk-free interest rate was based upon yields of U.S.

zero coupon issues with a term equal to the expected life of the option being valued.

A summary of stock option award activity for the year ended December 31, 2020 is presented below:

Number of Shares Weighted-average Exercise Price Weighted-average Remaining Contractual Term Aggregate Intrinsic Value (millions)

Outstanding - beginning of year 2,913,272 $ 40.10

Exercised ( 956,258 ) 39.07

Canceled of expired ( 52,265 ) 43.27

Outstanding - end of year 1,904,749 $ 40.53 7 years $ 70.1

Options expected to vest 1,904,749 40.53 7 years 70.1

Options exercisable 1,259,075 38.94 6 years 48.4

The total intrinsic value of stock option awards exercised during the years ended December 31, 2020, 2019 and 2018 was $ 20.7 million, $ 13.4 million and $ 6.7 million, respectively.

Net cash proceeds from the exercise of stock option awards were $ 37.4 million, $ 27.5 million and $ 12.8 million, respectively.

In addition to stock option awards, the Company has granted performance-based restricted stock units, time-based restricted stock units and deferred shares under its long-term incentive plan.

A summary of those awards granted in 2020 is presented below:

Under its long-term incentive plan, the Company's common shares have been made available for grant, at the discretion of the Compensation Committee of the Board of Directors, to officers, directors and other key employees.

Grants can take the form of performance- or time-based restricted stock units, deferred shares and stock options.

A summary of the awards granted in 2021 is presented below:

Expected to be Settled in Equity Expected to be Settled in Cash Total Awards Granted

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Deferred shares 4,100 1,250 5,350

Note 13 - Stock Compensation (continued)

Performance-based restricted stock units are calculated and awarded based on the achievement of specified performance objectives and cliff vest three years from the date of grant.

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Granted - new awards 306,830 75.57

Adjusted for performance results achieved (1)

181,933 44.65

Vested ( 577,948 ) 44.18

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Outstanding - end of year 993,971 $ 56.06

(1) Adjustments for the number of shares vested under the 2018 awards at the end of the three-year period ended December 31, 2020 being higher than the target number of shares.

As of December 31, 2021, a total of 993,971 stock award s have been awarded that have not yet vested.

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The Company recognized compensation expense of $ 18.2 million, $ 19.6 million and $ 22.3 million for the years ended December 31, 2021, 2020 and 2019, respectively, relating to performance-based restricted stock units, time-based restricted stock units, deferred shares and restricted shares.

In addition to performance-based restricted stock units, time-based restricted stock units and deferred shares, the Company has granted stock option awards to officers and key employees.

Stock options typically have a ten-year term and generally vest in 25 % increments beginning annually on the first anniversary date of grant.

Note 14 - Stock Compensation (continued)

During 2021, 2020 and 2019, the Company recognized stock-based compensation expense of $ 2.0 million ($ 1.5 million after tax or $ 0.02 per diluted share), $ 3.6 million ($ 2.7 million after tax or $ 0.04 per diluted share) and $ 4.9 million ($ 3.7 million after tax or $ 0.05 per diluted share), respectively, for stock option awards.

Beginning in 2020, the Company discontinued the use of nonqualified stock options.

As such, there were no stock option awards granted in 2021 or 2020.

The fair value of stock option awards granted in 2019 was estimated at the date of grant using a Black-Scholes option-pricing method with the following assumptions:

Weighted-average fair value per option $ 9.58

Risk-free interest rate 2.46 %

Dividend yield 2.52 %

Expected stock volatility 28.29 %

Expected life 5 years

Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and the expected lives of the options.

The dividend yield was calculated based upon the last dividend prior to the grant compared to the trailing 12 months' daily stock prices.

The risk-free interest rate was based upon yields of U.S.

zero coupon issues with a term equal to the expected life of the option being valued.

A summary of stock option award activity for the year ended December 31, 2021 is presented below:

Number of Shares Weighted-average Exercise Price Weighted-average Remaining Contractual Term Aggregate Intrinsic Value (millions)

Outstanding - beginning of year 1,904,749 $ 40.53

Exercised ( 674,705 ) 38.55

Canceled or expired ( 12,099 ) 43.16

Outstanding - end of year 1,217,945 $ 41.59 7 years $ 33.7

Options expected to vest 1,217,945 41.59 7 years 33.7

Options exercisable 890,855 41.00 6 years 25.2

The total intrinsic value of stock option awards exercised during the years ended December 31, 2021, 2020 and 2019 was $ 29.4 million, $ 20.7 million and $ 13.4 million, respectively.

Net cash proceeds from the exercise of stock option awards were $ 26.0 million, $ 37.4 million and $ 27.5 million, respectively.

As of December 31, 2021, the Company had unrecognized compensation expense of $ 23.4 million related to stock options and stock awards, which is expected to be recognized over a total weighted-average period of two years .

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Impairment charges $ 1.1 $ 3.4 $ — $ 4.5

Severance expense and related benefit costs 8.2 11.0 0.4 19.6

Severance and related benefit costs 1.7 0.9 — 2.6

Exit costs 1.4 0.4 — 1.8

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Impairment charges $ 0.2 $ 0.2 $ — $ 0.4

Severance expense and related benefit costs 1.6 0.9 0.5 3.0

Severance and related benefit costs 8.2 11.0 0.4 19.6

Exit costs 0.6 0.6 — 1.2

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Impairment charges $ 1.8 $ 0.8 $ — $ 2.6

Severance expense and related benefit costs 1.1 0.3 1.6 3.0

Severance and related benefit costs 1.6 0.9 0.5 3.0

Exit costs 0.2 1.0 — 1.2

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COVID-19 Pandemic Cost Reduction Initiatives:

During 2020, the Company recorded $ 12.0 million in severance and related benefit costs to eliminate approximately 200 salaried positions to align current employment levels with customer demand.

During 2020, the Company recorded severance and related benefit costs of $ 12.0 million to eliminate approximately 200 salaried positions to align current employment levels with customer demand.

Of the $ 12.0 million charge, $ 5.8 million related to the Mobile Industries segment, $ 5.8 million related to the Process Industries segment and $ 0.4 million related to Unallocated Corporate.

Mobile Industries:

On July 19, 2021, the Company announced the closure of its bearing manufacturing facility in Villa Carcina, Italy.

The Company will be transferring the manufacturing of its single-row tapered roller bearing production to other bearing facilities in Europe, Asia and the United States.

The Company expects to complete the closure by June of 2022 and is expected to affect approximately 110 employees.

The Company expects to incur approximately $ 9 million to $ 11 million of expenses related to this closure.

During 2021, the Company recorded impairment charges of $ 1.0 million, severance and related benefit costs of $ 1.8 million and exit costs of $ 1.1 million related to this closure.

The Company has incurred cumulative pretax costs related to this closure of $ 6.5 million as of December 31, 2021 , including rationalization costs recorded in cost of products sold.

On January 31, 2022, the Company entered into an agreement to sell this facility with the sale expected to close in the fourth quarter of 2022.

Note 15 - Impairment and Restructuring Charges (continued)

On October 16, 2019, the Company announced the reorganization of its bearing plant in Gaffney, South Carolina.

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The Company has incurred cumulative pretax costs related to this reorganization of $ 7.7 million as of December 31, 2021 , including rationalization costs recorded in cost of products sold.

Note 14 - Impairment and Restructuring Charges (continued)

Process Industries:

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The Company will be transferring the manufacturing of its Diamond Chain product line to its chain facility in Fulton, Illinois.

The chain plant is expected to close by the end of the fourth quarter of 2021 and is expected to affect approximately 240 employees.

The chain plant is expected to cease operations by the end of the second quarter of 2022 and is expected to affect approximately 240 employees.

The Company expects to hire approximately 130 full-time positions in Fulton, Illinois and expects to incur approximately $ 10 million to $ 12 million of expenses related to this closure.

During 2020, the Company recorded severance and related benefit costs of $ 3.1 million related to this closure.

During 2021 and 2020, the Company recorded severance and related benefit costs of $ 1.2 million and $ 3.1 million related to this closure.

The Company has incurred cumulative pretax costs related to this closure of $ 9.9 million as of December 31, 2021 , including rationalization costs recorded in cost of products sold.

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The Company will be transferring production for certain product lines to other Timken locations in order to streamline resources and better align capacity with demand.

The transfer of these operations is expected to occur by early 2021 and is expected to affect approximately 40 employees.

The transfer of these operations is expected to occur by 2022 and is expected to affect approximately 40 employees.

The Company expects to incur approximately $ 2.0 million to $ 2.5 million of pretax costs related to this reorganization.

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The Company has incurred cumulative pretax costs related to this reorganization of $ 0.7 million as of December 31, 2021 , including rationalization costs recorded in cost of products sold.

In addition, the Company recorded impairment charges of $ 3.4 million related to certain engineering-related assets used in the business during the year ended December 31, 2021 .

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

Consolidated Restructuring Accrual:

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Pension benefits earned generally are based on years of service and compensation during active employment.

The cash contributions and payments for the Company’s defined benefit pension plans were $ 17.9 million, $ 35.4 million and $ 11.3 million in 2020 , 2019 and 2018, respectively.

The 2019 contributions and payments include a $ 24 million payout of deferred compensation to a former executive officer of the Company.

The cash contributions and payments for the Company’s define d benefit pension plans were $ 20.4 million, $ 17.9 million and $ 35.4 million in 2021 , 2020 and 2019, respectively.

The 2021 contributions and payments included a $ 10 million payout of deferred compensation to a former executive officer of the Company, and the 2019 contributions and payments included a $ 24 million payout of deferred compensation to a former executive officer of the Company.

The following tables summarize the net periodic benefit cost information and the related assumptions used to measure the net periodic benefit cost for the years ended December 31:

6 unchanged sentences

Amortization of prior service cost 1.2 1.6 1.6 0.2 0.2 0.2

Recognition of net actuarial (gains)

losses ( 3.9 ) ( 3.5 ) 30.0 20.1 17.4 8.8

Curtailment losses (gains) 0.9 — ( 10.2 ) — — —

Net periodic benefit cost $ 5.0 $ 6.5 $ 28.8 $ 18.9 $ 16.2 $ 6.2

Recognition of net actuarial losses

(gains) 13.9 ( 3.9 ) ( 3.5 ) ( 9.5 ) 20.1 17.4

Curtailment losses — 0.9 — — — —

Net periodic benefit cost (credit) $ 19.0 $ 5.0 $ 6.5 $ ( 13.1 ) $ 18.9 $ 16.2

Assumptions 2021 2020 2019

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2.71 % to 2.91 %

Future compensation assumption 2.50 % 2.50 %

Future compensation assumption 2.50 % to 3.50 %

International Plans:

Discount rate 1.00 % to 9.50 %

0.25 % to 7.75 %

Future compensation assumption 2.10 % to 8.00 %

1 unchanged sentence

Note 16 - Retirement Benefit Plans (continued)

The Company recognized actuarial losses of $ 4.4 million during 2021 primarily due to 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 net 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.

The Company recognized actuarial losses of $ 16.2 million during 2020 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 66 basis point reduction in the weighted-average discount rate used to measure its U.S.

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.

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plan obligations, which decreased from 4.36 % in 2018 to 3.50 % in 2019.

The Company recognized actuarial losses of $ 38.8 million during 2018 primarily due to lower than expected returns on plan assets of $ 83.4 million driven by negative returns on fixed income investments, which were offset by the increase in discount rates used to measure its defined benefit pension obligations of $ 62.4 million.

The impact of experience losses and other changes in valuation assumptions resulted in losses of approximately $ 17.8 million.

The discount rate used to measure the U.S.

plan obligations increased by 56 basis points from 3.80 % during 2017 compared to 4.36 % in 2018.

During the fourth quarter of 2018, the Company's Board of Directors approved the freezing of the benefits for two of the Company's U.S.

defined benefit pension plans, effective December 31, 2022.

In conjunction with this action, the Company recognized a curtailment gain of $ 10.2 million in 2018.

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

14 unchanged sentences

Plan amendments — 0.1 0.5 —

Actuarial losses 56.6 74.9 43.9 29.1

Actuarial (gains) losses ( 4.4 ) 56.6 ( 19.6 ) 43.9

International plan exchange rate change — — ( 8.7 ) 14.1

1 unchanged sentence

Benefits paid ( 119.5 ) ( 60.3 ) ( 15.2 ) ( 14.4 )

Acquisitions — — — 0.4

Benefit obligation at end of year $ 566.3 $ 663.1 $ 343.1 $ 379.7

Plans International Plans

2020 2019 2020 2019

Change in plan assets:

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$ ( 110.6 ) $ ( 109.8 ) $ ( 46.3 ) $ ( 66.9 )

Amounts recognized in accumulated other comprehensive loss:

Amounts recognized in accumulated other comprehensive

loss (income):

Net prior service cost $ 1.5 $ 2.7 $ 4.2 $ 3.9

Accumulated other comprehensive loss $ 2.7 $ 4.8 $ 3.9 $ 3.9

Changes in prior service cost recognized in accumulated other comprehensive loss:

Accumulated other comprehensive loss at beginning of year $ 4.8 $ 6.4 $ 3.9 $ 4.0

Accumulated other comprehensive loss (income) $ 1.5 $ 2.7 $ 4.2 $ 3.9

Changes in prior service cost recognized in accumulated other comprehensive loss (income):

Accumulated other comprehensive loss (income) at beginning

of year $ 2.7 $ 4.8 $ 3.9 $ 3.9

Prior service cost — 0.1 0.5 —

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Foreign currency impact — — — 0.2

Total recognized in accumulated other comprehensive loss

at December 31 $ 2.7 $ 4.8 $ 3.9 $ 3.9

Total recognized in accumulated other comprehensive

loss (income) at December 31 $ 1.5 $ 2.7 $ 4.2 $ 3.9

Note 16 - Retirement Benefit Plans (continued)

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Certain of the Company’s defined benefit pension plans were overfunded as of December 31, 2021.

As a result, $ 2.0 million and $ 3.4 million at December 31, 2020 and 2019, respectively, are included in non-current pension assets on the Consolidated Balance Sheets.

As a result, $ 5.0 million and $ 2.0 million at December 31, 2021 and 2020, respectively, are included in other non-current assets on the Consolidated Balance Sheets.

The current portion of accrued pension benefits, which was included in salaries, wages and benefits on the Consolidated Balance Sheets, was $ 6.3 million and $ 15.7 million at December 31, 2021 and 2020, respectively.

The increase in the current portion of accrued pension benefits relates to the expected 2021 deferred compensation payment to a former executive officer of the Company.

The decrease in the current portion of accrued pension benefits relates to the 2021 deferred compensation payment to a former executive officer of the Company.

In 2021, the current portion of accrued pension benefits relates to unfunded plans and represents the actuarial present value of expected payments related to the plans to be made over the next 12 months.

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Corporate bonds - investment grade — 82.7 — 82.7 — 99.5 — 99.5

Equity securities - U.S.

companies — — — — 0.1 — — 0.1

Common collective funds - fixed income 42.5 — — 42.5 44.5 — — 44.5

1 unchanged sentence

Mutual funds - international equity 41.0 — — 41.0 60.4 — — 60.4

Mutual funds - domestic equity — — — — 3.2 — — 3.2

Mutual funds - other assets — — — — 1.4 — — 1.4

$ 171.8 $ 85.4 $ — $ 257.2 $ 242.5 $ 102.5 $ — $ 345.0

Investments measured at net asset value:

Cash and cash equivalents $ — $ 0.2

Equity securities - international companies $ 0.3 $ 0.3

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Total Assets $ 752.5 $ 866.1

International investments measured at net asset value totaled $ 265.0 million as of December 31, 2020 and $ 231.8 million as of December 31, 2019, respectively.

Note 15 - Retirement Benefit Plans (continued)

International investments measured at net asset value totaled $ 253.5 million and $ 265.0 million at December 31, 2021 and 2020, respectively.

Cash and cash equivalents are valued at redemption value.

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When such prices are unavailable, the plan trustee determines a valuation from the market maker dealing in the particular security.

Note 16 - Retirement Benefit Plans (continued)

Limited partnerships include investments in funds that invest primarily in private equity, venture capital and distressed debt.

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2027-2031 247

Note 15 - Retirement Benefit Plans (continued)

Employee Savings Plans:

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Note 17 - Other Postretirement Benefit Plans

The Company and its subsidiaries sponsor several funded and unfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and dependents.

The Company and its subsidiaries sponsor several postretirement plans that provide health care and life insurance benefits for eligible retirees and dependents.

Depending on retirement date and employee classification, certain health care plans contain contribution and cost-sharing features such as deductibles, coinsurance and limitations on employer-provided subsidies.

2 unchanged sentences

2021 2020 2019

Components of net periodic benefit (credit) cost:

Components of net periodic credit:

Service cost $ 0.2 $ 0.2 $ 0.2

2 unchanged sentences

Amortization of prior service credit ( 10.1 ) ( 9.8 ) ( 5.4 )

Recognition of net actuarial losses (gains) 1.4 ( 18.0 ) ( 16.7 )

Net periodic benefit (credit) cost $ ( 6.5 ) $ ( 20.5 ) $ ( 14.3 )

Recognition of net actuarial (gains) losses ( 4.1 ) 1.4 ( 18.0 )

Net periodic credit:

$ ( 12.5 ) $ ( 6.5 ) $ ( 20.5 )

2021 2020 2019

Discount rate 2.62 % 3.43 % 3.48 % to 4.30 %

2 unchanged sentences

Discount rate 2.99 % 2.62 %

The Company recognized actuarial gains of $ 4.1 million during 2021 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 .

The Company recognized actuarial losses of $ 1.4 million during 2020 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.

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Starting with the three months ended September 30, 2019, the pretax adjustment of $ 92.8 million will be amortized from accumulated other comprehensive loss into net periodic benefit cost (as a benefit) until 2031.

Note 16 - Other Postretirement Benefit Plans (continued)

The Company recognized actuarial gains of $ 16.7 million during 2018 primarily due to the impact of a 73 basis point increase in the discount rate used to measure the Company's defined benefit postretirement obligations, which increased from 3.57 % in 2017 to 4.30 % in 2018, and due to a number of participants opting out of coverage from the plans in response to a financial incentive program offered to eligible participants of the Company's retiree health and life insurance plans.

The Company recognized actuarial gains of $ 10.6 million as a result of the increase in the discount rate and $ 10.4 million as a result of the impact of the opt-out program.

These actuarial gains were partially offset by lower than expected returns on plan assets of $ 4.0 million and by the impact of experience losses and other changes in valuation assumptions of $ 0.3 million.

Note 17 - Other Postretirement Benefit Plans

The discount rate assumption is based on current rates of high-quality long-term corporate bonds over the same period that benefit payments will be required to be made.

3 unchanged sentences

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 tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets of the other postretirement benefit plans as of December 31, 2021 and 2020:

4 unchanged sentences

Plan amendments — ( 3.1 )

Actuarial losses (gains) 1.8 ( 14.4 )

International plan exchange rate change — 0.2

Actuarial (gains) losses ( 4.1 ) 1.8

Benefits paid ( 4.1 ) ( 6.8 )

Acquisitions — 0.1

Benefit obligation at end of year $ 51.1 $ 57.6

7 unchanged sentences

Funded status at end of year $ ( 51.1 ) $ ( 46.5 )

Note 16 - Other Postretirement Benefit Plans (continued)

Amounts recognized on the Consolidated Balance Sheets:

Non-current assets $ — $ 36.6

Current liabilities ( 5.3 ) ( 5.2 )

1 unchanged sentence

$ ( 51.1 ) $ ( 46.5 )

Amounts recognized in accumulated other comprehensive income:

Amounts recognized in accumulated other comprehensive loss (income):

Net prior service credit $ ( 81.4 ) $ ( 91.5 )

Accumulated other comprehensive income $ ( 91.5 ) $ ( 98.2 )

Changes to prior service credit recognized in accumulated other comprehensive (income) loss:

Accumulated other comprehensive loss (income) $ ( 81.4 ) $ ( 91.5 )

Changes to prior service credit recognized in accumulated other comprehensive

loss (income):

Accumulated other comprehensive income at beginning of year $ ( 91.5 ) $ ( 98.2 )

1 unchanged sentence

Recognized prior service credit 10.1 9.8

Total recognized in accumulated other comprehensive income at December 31 $ ( 91.5 ) $ ( 98.2 )

Total recognized in accumulated other comprehensive loss (income) at December 31 $ ( 81.4 ) $ ( 91.5 )

Note 17 - Other Postretirement Benefit Plans (continued)

The presentation in the above tables for amounts recognized in accumulated other comprehensive (income) loss on the Consolidated Balance Sheets is before the effect of income taxes.

2 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 2021 and 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.

A one percentage point increase in the assumed health care cost trend rate would have increased the 2020 total service and interest cost components by $ 0.1 million and would have increased the postretirement benefit obligation by $ 1.8 million.

A one percentage point decrease would provide corresponding reductions of $ 0.1 million and $ 1.6 million, respectively.

The Company’s target allocation for the VEBA trust assets, as well as the actual VEBA trust asset allocation as of December 31, 2020 and 2019, was as follows:

Current Target

Allocation Percentage of VEBA Assets

at December 31,

Asset Category 2020 2019

Equity securities — — % 18 %

Fixed income securities 100 % 100 % 82 %

Total 100 % 100 %

Note 16 - Other Postretirement Benefit Plans (continued)

Preservation of capital is important;

however, the Company also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the postretirement funds.

Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes.

The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.

The following table presents those investments of the Company’s VEBA trust assets as of December 31, 2020 and 2019, respectively:

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.

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 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.

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.

The following table presents those investments of the Company’s VEBA trust assets as of December 31, 2020:

Balance at December 31, 2020

3 unchanged sentences

Total Assets $ 0.5 $ 10.6 $ — $ —

Balance at December 31, 2019

NAV Level 1 Level 2 Level 3

Cash and cash equivalents $ 9.4 $ — $ — $ —

Common collective fund - U.S.

equities 7.4 — — —

Common collective fund - international equities 4.2 — — —

Common collective fund - fixed income 43.4 — — —

Total Assets $ 64.4 $ — $ — $ —

Cash and cash equivalents are valued at redemption value.

2 unchanged sentences

Mutual funds are valued at the closing priced reported in the active market in which the individual funds are traded.

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 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 second VEBA trust.

The Company did not make any employer contributions to the VEBA in 2020 and 2019.

The Company does not expect to make any employer contributions in 2021.

The Company did not make any employer contributions to the VEBA in 2021 and 2020, and the Company does not expect to make any employer contributions in the future.

Estimated future benefit payments to be funded by the Company are expected to be as follows:

Future Benefit Payments

Note 17 - Accumulated Other Comprehensive Income (Loss)

Note 18 - Accumulated Other Comprehensive (Loss) Income

The following tables present details about components of accumulated other comprehensive (loss) income for the years ended December 31, 2021 and December 31, 2020, respectively:

4 unchanged sentences

Balance at December 31, 2020 $ ( 18.0 ) $ 63.4 $ ( 4.1 ) $ 41.3

Other comprehensive income (loss) before reclassifications and income taxes 92.7 2.8 ( 1.2 ) 94.3

Amounts reclassified from accumulated other comprehensive (loss) income, before income tax — ( 7.4 ) ( 2.3 ) ( 9.7 )

Income tax benefit — 1.1 1.1 2.2

Net current period other comprehensive income (loss), net of income taxes 92.7 ( 3.5 ) ( 2.4 ) 86.8

Other comprehensive (loss) income before reclassifications

and income taxes ( 63.7 ) ( 0.4 ) 2.4 ( 61.7 )

Amounts reclassified from accumulated other comprehensive

(loss) income, before income tax — ( 8.7 ) 4.2 ( 4.5 )

Income tax benefit (expense) — 2.3 ( 1.8 ) 0.5

Net current period other comprehensive (loss) income,

net of income taxes ( 63.7 ) ( 6.8 ) 4.8 ( 65.7 )

Noncontrolling interest 1.4 — — 1.4

Net current period comprehensive income (loss), net of income taxes and noncontrolling interest 97.3 ( 3.5 ) ( 2.4 ) 91.4

Net current period comprehensive (loss) income, net

of income taxes and noncontrolling interest ( 62.3 ) ( 6.8 ) 4.8 ( 64.3 )

Balance at December 31, 2021 $ ( 80.3 ) $ 56.6 $ 0.7 $ ( 23.0 )

4 unchanged sentences

Balance at December 31, 2019 $ ( 115.3 ) $ 66.9 $ ( 1.7 ) $ ( 50.1 )

Other comprehensive income (loss) before reclassifications and income taxes ( 19.9 ) 92.7 1.2 74.0

Amounts reclassified from accumulated other comprehensive (loss) income, before income tax — ( 3.6 ) ( 3.8 ) ( 7.4 )

Income tax (expense) benefit — ( 22.2 ) 0.6 ( 21.6 )

Net current period other comprehensive income (loss), net of income taxes ( 19.9 ) 66.9 ( 2.0 ) 45.0

Other comprehensive income (loss) before reclassifications

and income taxes 92.7 2.8 ( 1.2 ) 94.3

Amounts reclassified from accumulated other comprehensive

(loss) income, before income tax — ( 7.4 ) ( 2.3 ) ( 9.7 )

Income tax benefit — 1.1 1.1 2.2

Net current period other comprehensive income (loss),

net of income taxes 92.7 ( 3.5 ) ( 2.4 ) 86.8

Noncontrolling interest 4.6 — — 4.6

Net current period comprehensive income (loss), net of income taxes and noncontrolling interest ( 19.7 ) 66.9 ( 2.0 ) 45.2

Net current period comprehensive income (loss), net

of income taxes and noncontrolling interest 97.3 ( 3.5 ) ( 2.4 ) 91.4

Balance at December 31, 2020 $ ( 18.0 ) $ 63.4 $ ( 4.1 ) $ 41.3

Other comprehensive income (loss) before reclassifications and income taxes includes the effect of foreign currency.

Other comprehensive (loss) income before reclassifications and income taxes includes the effect of foreign currency.

Note 19 - Fair Value

12 unchanged sentences

Cash and cash equivalents $ 320.3 $ 318.6 $ 1.7 $ —

Cash and cash equivalents measured at net

asset value 48.8

Restricted cash 0.8 0.8 — —

Short-term investments 37.6 — 37.6 —

Short-term investments measured at net asset value 0.1

Foreign currency hedges 1.1 — 1.1 —

3 unchanged sentences

Cash and cash equivalents are highly liquid investments with maturities of three months or less when purchased and are valued at redemption value.

Short-term investments are investments with maturities between four months and one year, and generally are valued at amortized cost, which approximates fair value A portion of the cash and cash equivalents and short-term investments are valued based on net asset value.

Short-term investments are investments with maturities between four months and one year, and generally are valued at amortized cost, which approximates fair value.

A portion of the cash and cash equivalents and short-term investments are valued based on net asset value.

The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts.

3 unchanged sentences

No material assets were measured at fair value on a nonrecurring basis during the years ended December 31, 2021 and 2020.

Note 18 - Fair Value (continued)

Financial Instruments:

17 unchanged sentences

dollar and the Euro.

The net impact for the twelve months ended December 31, 2020 was to record a loss of $ 2.0 million to accumulated comprehensive loss with a corresponding offset to other (expense) income, which partially offsets the impact of the foreign currency adjustment on the 2027 Notes.

The net impact for the twelve months ended December 31, 2021 was to record a gain of $ 4.6 million to accumulated comprehensive loss (income) with a corresponding offset to other (expense) income, which partially offsets the impact of the foreign currency adjustment on the 2027 Notes.

The Company does not purchase or hold any derivative financial instruments for trading purposes.

4 unchanged sentences

The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any ( i.e ., the ineffective portion), or hedge components excluded from the assessment of effectiveness, are recognized in the Consolidated Statement of Income during the current period.

Note 19 - Derivative Instruments (continued)

To protect against a reduction in the value of forecasted foreign currency cash flows resulting from export sales, the Company has instituted a foreign currency cash flow hedging program.

9 unchanged sentences

The revaluation of these contracts, as well as the revaluation of the underlying balance sheet items, is recorded directly to the income statement so the adjustment generally offsets the revaluation of the underlying balance sheet items to protect cash payments and reduce income statement volatility.

Note 20 - Derivative Instruments (continued)

As of December 31, 2021 and 2020 , the Company had $ 220.8 million and $ 86.3 million, respectively, of outstanding foreign currency forward contracts at notional value that were not designated as hedging instruments.

39 unchanged sentences

Net income attributable to noncontrolling interests 3.3 ( 0.1 ) 2.5 2.2 7.9

3.4 2.4 2.5 4.3 12.6

Net income attributable to The Timken Company 80.7 61.9 88.8 53.1 284.5

7 unchanged sentences

(1) Net income for the second quarter of 202 1 included net actuarial losses of $ 3.5 million.

Net income for the third quarter of 2021 included net actuarial losses of $ 3.9 million.

Net income for the fourth quarter of 2021 included net actuarial gains of $ 8.0 million and the reversal of tax valuation allowances of $ 7.8 million .

(2) Net income for the second quarter of 2020 included net actuarial losses of $ 8.8 million.

Net income for the third quarter of 2020 included net actuarial gains of $ 11.9 million and impairment and restructuring charges of $ 12.0 million.

Net income for the fourth quarter of 2020 included net actuarial losses of $ 21.6 million.

(2) Net income for the third quarter of 2019 included net actuarial losses of $ 16.9 million, Net income for the fourth quarter of 2019 included the reversal of tax valuation allowances of $ 44.5 million and net actuarial gains of $ 21.1 million.

Report of Independent Registered Public Accounting Firm

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.

Pension and other postretirement benefit obligations

Description of the Matter At December 31, 2020, the Company’s aggregate defined benefit pension and other postretirement benefit obligation was $1,100.4 million and exceeded the fair value of defined benefit pension and other postretirement plan assets of $877.2 million, resulting in an unfunded defined benefit pension and other postretirement benefit obligation of $223.2 million.

As explained in Note 1, Significant Accounting Policies, Note 15, Retirement Benefit Plans, and Note 16, Other Postretirement Benefit Plans, to the consolidated financial statements, the Company recognizes actuarial gains and losses immediately through net periodic benefit cost upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement, through updating the estimates used to measure the defined benefit pension and other postretirement benefit obligation and plan assets to reflect the actual return on plan assets and updated actuarial assumptions.

Auditing the pension and other postretirement benefit obligations is complex and required the involvement of specialists due to the highly judgmental nature of certain of the actuarial assumptions (e.g., discount rate) used in the measurement process.

Pension Benefit Obligation

Description of the Matter At December 31, 2021, the Company’s pension benefit obligation was $909.4 million and exceeded the fair value of pension plan assets of $752.5 million, resulting in an unfunded pension benefit obligation of $156.9 million.

As explained in Note 1, Significant Accounting Policies and Note 16, Retirement Benefit Plans, to the consolidated financial statements, the Company recognizes actuarial gains and losses immediately through net periodic benefit cost upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement, through updating the estimates used to measure the pension benefit obligation and plan assets to reflect the actual return on plan assets and updated actuarial assumptions.

Auditing the pension benefit obligation is complex and required the involvement of specialists due to the highly judgmental nature of certain of the actuarial assumptions (e.g., discount rate) used in the measurement process.

These assumptions had a significant effect on the projected benefit obligation and net periodic benefit costs recognized.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the measurement of pension and other postretirement obligations.

For example, we tested controls over management’s review of the defined benefit pension and other postretirement benefit obligation calculations, the relevant data inputs and the significant actuarial assumptions used in the calculations.

To test the defined benefit pension and other postretirement benefit obligation, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above, and the underlying data used by the Company.

We compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension and other postretirement benefit obligation from prior year due to the change in service cost, interest cost, plan amendments, actuarial losses (gains), benefits paid and other activities.

In addition, we involved an actuarial specialist to assist with our procedures.

For example, we evaluated management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the defined benefit pension and other postretirement benefit obligation.

For example, we tested controls over management’s review of the pension benefit obligation calculations, the relevant data inputs and the significant actuarial assumptions used in the calculations.

To test the pension benefit obligation, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above, and the underlying data used by the Company.

We compared the actuarial assumptions used by management to historical trends and evaluated the change in the pension benefit obligation from prior year due to the change in service cost, interest cost, actuarial losses (gains), benefits paid and other activities.

In addition, we involved actuarial specialists to assist with our procedures.

For example, we evaluated management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the pension benefit obligation.

In certain instances, as part of this assessment, we compared the projected cash flows to prior year and compared the current year benefits paid to the prior year projected cash flows.

7 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 8. Financial Statements and Supplementary Data