What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-02 compared with 2021-11-01 · 114 added, 286 removed, 318 unchanged (56% of the section changed)

35 unchanged sentences

The Company also targets applications that offer significant aftermarket demand, thereby providing product and services revenue throughout the equipment’s lifetime.

Operating With Excellence.

Operational Excellence.

Timken operates with a relentless drive for exceptional results and a passion for superior execution.

9 unchanged sentences

Three Months Ended

September 30,

2022 2021 $ Change % Change

5 unchanged sentences

Average number of shares – diluted 75,545,665 77,264,641 — (2.2) %

Nine Months Ended

September 30,

2021 2020 $ Change % Change

Net sales $ 3,125.6 $ 2,621.5 $ 504.1 19.2 %

Net income 314.8 237.1 77.7 32.8 %

Net income attributable to noncontrolling interest 8.6 5.7 2.9 50.9 %

Net income attributable to The Timken Company $ 306.2 $ 231.4 $ 74.8 32.3 %

Diluted earnings per share $ 3.97 $ 3.04 $ 0.93 30.6 %

Average number of shares – diluted 77,157,614 76,131,920 — 1.3 %

The increase in net sales for the three months ended September 30, 2021 compared with the three months ended September 30, 2020 was primarily driven by higher organic sales volume across most market sectors, positive pricing, the favorable impact of foreign currency exchange rate changes and the benefit of acquisitions.

The decrease in net income for the three months ended September 30, 2021 compared with the three months ended September 30, 2020 was primarily due to higher material, logistics and other operating costs and higher pension remeasurement losses, mostly offset by the favorable impact of higher volume and related manufacturing utilization, lower restructuring charges, positive price/mix and a lower tax rate.

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

The increase in net sales for the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020 was primarily driven by higher organic revenue across most market sectors, as well as the favorable impact of foreign currency exchange rate changes and the benefit of acquisitions.

The increase in net income for the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020 was primarily due to the favorable impact of higher volume and related manufacturing utilization, lower restructuring charges and a lower tax rate, partially offset by higher material, logistics and other operating costs, unfavorable price/mix and higher pension remeasurement losses.

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

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

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

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

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

For the first nine months of 2021, Timken has been able to serve customers and meet demand levels across most markets, although at higher costs than previously anticipated.

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

Given the continued uncertainty surrounding supply chain disruptions and the COVID-19 pandemic, the Company is not providing detailed sales and earnings guidance at this time.

However, the Company expects 2021 full-year revenue to be up compared to 2020, primarily due to higher sales volume across most market sectors, as well as the impact of positive pricing, foreign currency exchange rate changes and acquisitions.

The Company's earnings are expected to be up in 2021 compared with 2020, primarily due to the impact of higher volume and related manufacturing utilization, the favorable impact of foreign currency exchange rate changes, lower restructuring expenses and a lower tax rate, partially offset by higher material, logistics and other operating costs.

Timken expects to generate solid cash from operating activities in 2021, although down from the $577.6 million in 2020, as the impact of higher earnings is expected to be more than offset by unfavorable changes in working capital (i.e., a use of cash in 2021 versus a source of cash in 2020) to support the higher sales levels.

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

The increase in net sales for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 was primarily driven by strong organic growth (including positive pricing), partially offset by the unfavorable impact of foreign currency exchange rate changes.

The increase in net income for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 was primarily due to the favorable impact of higher volume and favorable price/mix, partially offset by higher material, logistics and other operating costs, a higher tax rate and higher pension mark-to-market charges.

The Company expects 2022 full-year revenue to be up approximately 8% compared to 2021, primarily due to higher demand across most end markets, positive pricing and the continued execution of growth initiatives.

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

In 2021, the Company experienced supply chain disruptions, inflation and staffing issues related to increased customer demand.

Timken expects these headwinds to persist throughout 2022, or potentially worsen due to the impact of Russia's invasion of Ukraine and the ongoing Coronavirus ("COVID-19") lockdowns in China.

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

The Company expects capital expenditures between 4.0% and 4.5% of sales in 2022, compared with 3.6% of sales ($148 million) in 2021.

THE STATEMENT OF INCOME

Three Months Ended

September 30,

2022 2021 $ Change % Change

Net sales $ 1,124.6 $ 1,025.4 $ 99.2 9.7 %

Nine Months Ended

September 30,

2021 2020 $ Change % Change

Net Sales $ 3,125.6 $ 2,621.5 $ 504.1 19.2 %

Net sales increased for the three months ended September 30, 2021 compared with the three months ended September 30, 2020.

The increase was primarily due to higher organic revenue of $118 million, the favorable impact of foreign currency exchange rate changes of $17 million and the benefit of acquisitions of $8 million.

The higher organic revenue was driven by higher demand across both the Mobile Industries and Process Industries segments.

Net sales increased for the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020.

The increase was primarily due to higher organic revenue of $400 million, the favorable impact of foreign currency exchange rate changes of $81 million and the benefit of the acquisitions of $24 million.

The higher organic revenue was driven by higher demand across both the Mobile Industries and Process Industries segments.

Net sales increased for the three months ended March 31, 2022 compared with the three months ended March 31, 2021.

The increase was primarily due to strong organic growth (including positive pricing) of $113 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $15 million.

The higher organic revenue was driven by higher demand across both segments.

Gross Profit:

Three Months Ended

September 30,

2022 2021 $ Change Change

1 unchanged sentence

Gross profit % to net sales 29.1 % 29.2 % (10) bps

Nine Months Ended

September 30,

2021 2020 $ Change Change

Gross profit $ 869.4 $ 772.9 $ 96.5 12.5%

Gross profit % to net sales 27.8 % 29.5 % (170) bps

Gross profit increased for the three months ended September 30, 2021 compared with the three months ended September 30, 2020, primarily due to the impact of higher volume of $42 million, favorable net manufacturing performance of $5 million, favorable price/mix of $6 million, and the favorable impact of foreign currency exchange rate changes of $6 million, partially offset by higher materials and logistics costs of $53 million.

Gross profit increased for the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020, primarily due to the impact of higher volume of $156 million, favorable net manufacturing performance of $28 million, the favorable impact of foreign currency exchange rate changes of $23 million, and the favorable impact of acquisitions of $7 million.

These increases were partially offset by higher materials and logistics costs of $110 million and unfavorable price/mix of $10 million.

Selling, General and Administrative Expenses:

Gross profit increased for the three months ended March 31, 2022 compared with the three months ended March 31, 2021, primarily due to favorable price/mix of $45 million and the impact of higher volume of $29 million, partially offset by higher material and logistics costs of $45 million.

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

Three Months Ended

September 30,

2022 2021 $ Change Change

1 unchanged sentence

Selling, general and administrative expenses % to net sales 13.7 % 14.1 % (40) bps

Nine Months Ended

September 30,

2021 2020 $ Change Change

Selling, general and administrative expenses $ 434.2 $ 398.1 $ 36.1 9.1 %

Selling, general and administrative expenses % to net sales 13.9 % 15.2 % (130) bps

SG&A expenses increased in the three and nine months ended September 30, 2021 compared with the three and nine months ended September 30, 2020.

The increase for the three months ended September 30, 2021, as compared to the year-ago period, was primarily due to higher spending to support the higher sales levels, partially offset by lower incentive compensation expense.

The increase for the nine months ended September 30, 2021, as compared to the year-ago period, was primarily due to the favorable impact of 2020 cost reduction initiatives, including temporary salary reductions and work furloughs implemented during the nine months ended September 30, 2020 in response to the COVID-19 pandemic, which did not repeat in the current year.

SG&A expenses increased for the three months ended March 31, 2022 compared with the three months ended March 31, 2021.

The increase for the three months ended March 31, 2022, as compared to the year-ago period, was primari ly due to higher compensation and other spending to support the higher sales levels.

Impairment and Restructuring:

Three Months Ended

September 30,

2022 2021 $ Change % Change

Severance and related benefit costs $ 2.5 $ 11.9 $ (9.4) (79.0) %

Exit costs 0.4 0.1 0.3 300.0 %

Total $ 2.9 $ 12.0 $ (9.1) (75.8) %

Nine Months Ended

September 30,

2021 2020 $ Change % Change

Impairment charges $ — $ 3.4 $ (3.4) NM

Severance and related benefit costs 0.3 0.5 (0.2) (40.0) %

Exit costs 0.6 0.8 (0.2) (25.0) %

Exit costs 0.7 0.1 0.6 NM

Total $ 1.0 $ 4.0 $ (3.0) (75.0) %

Impairment and restructuring charges of $2.9 million and $8.2 million during the three and nine months ended September 30, 2021 were comprised primarily of severance and related benefits related to the planned closures of the Company's Villa Carcina, Italy bearing plant and Indianapolis, Indiana chain plant.

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

In addition, impairment and restructuring during the nine months ended September 30, 2021 included impairment charges related to certain engineering-related assets used in the business.

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

Impairment and restructuring charges of $12.0 million and $18.7 million during the three and nine months ended September 30, 2020 were comprised primarily of severance and related benefits associated with initiatives to reduce headcount and right-size the Company's manufacturing footprint, including planned closure of the Company's Indianapolis, Indiana chain plant and the reorganization of the Company's Canton, Ohio and Gaffney, South Carolina bearing facilities.

Impairment and restructuring charges of $1.0 million during the three months ended March 31, 2022 were comprised primarily of severance and related benefits and exit costs related to the planned closure of the Company's Villa Carcina, Italy bearing plant.

This initiative is expected to reduce headcount and right-size the Company's manufacturing footprint.

Impairment and restructuring charges of $4.0 million during the three months ended March 31, 2021 were comprised primarily of impairment charges related to certain engineering-related assets used in the business.

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

In addition, severance and related benefits are associated with initiatives to reduce headcount and right-size the Company's manufacturing footprint, including the planned closure of the Company's Indianapolis, Indiana chain plant.

Refer to Note 13 - Impairment and Restructuring Charges in the Notes to the Consolidated Financial Statements for additional information.

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Three Months Ended

September 30,

2022 2021 $ Change % Change

Non-service pension and other postretirement income $ 1.3 $ 4.0 $ (2.7) (67.5) %

Other income (expense), net 1.5 (1.0) 2.5 (250.0) %

Total other income $ 2.0 $ 14.3 $ (12.3) (86.0) %

Nine Months Ended

September 30,

2021 2020 $ Change % Change

Non-service pension and other postretirement income $ 5.9 $ 13.4 $ (7.5) (56.0) %

Other income 0.3 1.1 (0.8) (72.7) %

Other income, net 0.2 1.0 (0.8) (80.0) %

Total other income $ 1.5 $ 5.0 $ (3.5) (70.0) %

Non-service pension and other postretirement income decreased for the three and nine months ended September 30, 2021 compared with the three and nine months ended September 30, 2020, primarily due to the recognition of pension remeasurement losses in 2021, compared to pension remeasurement gains in 2020.

The remeasurements were triggered by lump sum payments to new retirees exceeding annual service and interest costs for three of the Company's U.S.

defined benefit pension plans.

As a result of the remeasurements, the Company recognized net actuarial losses of $3.9 million and $8.3 million during the three and nine months ended September 30, 2021, respectively.

The actuarial gains in three and nine months ended September 30, 2020 were due to the remeasurement of pension plan assets and obligations, as well as the Company's announcement of the reorganization of one of its bearing plants in Canton, Ohio.

The remeasurements were triggered as a result of lump sum payments to new retirees in 2020 that exceeded annual service and interest costs, and the reorganization triggered a curtailment of one of the Company's U.S.

Non-service pension and other postretirement income decreased for the three months ended March 31, 2022 compared with the three months ended March 31, 2021, primarily due to higher pension remeasurement losses in 2022.

The remeasurements were triggered by expected lump sum payments to new retirees exceeding annual service and interest costs for one of the Company's U.S.

defined benefit pension plans.

As a result of the remeasurement and curtailment, the Company recognized net actuarial gains of $11.9 million and $3.1 million during the three and nine months ended September 30, 2020, respectively.

As a result of the remeasurements, the Company recognized net actuarial losses of $2.6 million and $0.9 million during the three months ended March 31, 2022 and March 31, 2021, respectively.

The decrease was also due to a lower expected return on plan assets in 2022.

Refer to Note 14 - Retirement Benefit Plans and Note 15 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for additional information.

Other income (expense), net increased for the three months ended September 30, 2021 compared with the three months ended September 30, 2020, primarily due to lower foreign currency exchange losses.

Other income decreased for the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020, primarily due to lower insurance recoveries.

Other income, net decreased for the three months ended March 31, 2022 compared with the three months ended March 31, 2021, primarily due to the bargain purchase gain on the acquisition of Aurora that was recognized in 2021.

Income Tax Expense:

Three Months Ended

September 30,

2022 2021 $ Change Change

1 unchanged sentence

Effective tax rate 23.9 % 17.9 % 600 bps

Nine Months Ended

September 30,

2021 2020 $ Change % Change

Provision for income taxes $ 75.1 $ 84.2 $ (9.1) (10.8) %

Effective tax rate 19.3 % 26.2 % (690) bps

Income tax expense decreased $6.2 million for the three months ended September 30, 2021 compared with the three months ended September 30, 2020, primarily due to the release of accruals for uncertain tax positions and favorable U.S.

permanent book-tax differences, including the new elective GILTI high tax exemption rules.

The impact was partially offset by the mix of earnings in higher tax rate jurisdictions.

Income tax expense decreased $9.1 million for the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020, primarily due to the release of accruals for uncertain tax positions and favorable U.S.

permanent book-tax differences, including the tax impact from stock-based compensation awards and the new elective GILTI high tax exemption rules.

This impact was partially offset by increased income taxes due to higher pre-tax earnings that increased the mix of earnings in higher tax rate jurisdictions.

Income tax expense increased $12.9 million for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 due to higher pre-tax earnings and a discrete tax benefit in the prior year for release of accruals for uncertain tax positions from the settlement of the 2017 and 2018 U.S.

federal tax years.

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

5 unchanged sentences

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

GAAP to net sales adjusted to remove the effects of acquisitions completed in 2021 and 2020 and foreign currency exchange rate changes.

GAAP to net sales adjusted to remove the effects of acquisitions completed in 2021 and foreign currency exchange rate changes.

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

The following items highlight the Company's acquisitions completed in 2021 and 2020:

• The Company acquired iMS during the third quarter of 2 021.

The following item represents the Company's acquisitions completed in 2021:

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

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

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

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

Mobile Industries Segment:

Three Months Ended

September 30,

2022 2021 $ Change Change

3 unchanged sentences

Three Months Ended

September 30,

2022 2021 $ Change % Change

Net sales $ 540.4 $ 504.5 $ 35.9 7.1 %

Acquisitions 3.9 — 3.9 NM

Currency (9.2) (9.2) NM

Net sales, excluding the impact of acquisitions and currency $ 478.8 $ 428.6 $ 50.2 11.7 %

Nine Months Ended

September 30,

2021 2020 $ Change Change

Net sales $ 1,486.0 $ 1,237.9 $ 248.1 20.0%

EBITDA $ 200.1 $ 177.9 $ 22.2 12.5%

EBITDA margin 13.5 % 14.4 % (90) bps

Nine Months Ended

September 30,

2021 2020 $ Change % Change

Net sales $ 1,486.0 $ 1,237.9 $ 248.1 20.0 %

Acquisitions 12.7 — 12.7 NM

Currency 26.4 — 26.4 NM

Net sales, excluding the impact of acquisitions and currency $ 1,446.9 $ 1,194.4 $ 209.0 17.5 %

The Mobile Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $50.2 million or 11.7% in the three months ended September 30, 2021 compared with the three months ended September 30, 2020, reflecting increased shipments in the off-highway and heavy truck sectors, as well as positive pricing, partially offset by lower shipments in the automotive and rail sectors.

EBITDA decreased by $10.8 million or 16.9% in the three months ended September 30, 2021 compared with the three months ended September 30, 2020, primarily due to higher material, logistics and other operating costs, partially offset by the impact of higher volume and related manufacturing utilization.

The Mobile Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $209.0 million or 17.5% in the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020, reflecting organic growth in the off-highway, automotive and heavy truck sectors.

These increases were partially offset by lower shipments in the aerospace and rail sectors.

EBITDA increased by $22.2 million or 12.5% in the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020, primarily due to the impact of higher volume and related manufacturing utilization, partially offset by higher material, logistics and other operating costs.

Net sales, excluding the impact of currency $ 549.6 $ 504.5 $ 45.1 8.9 %

The Mobile Industries segment's net sales, excluding the effects of foreign currency exchange rate changes, increased $45.1 million or 8.9% in the three months ended March 31, 2022 compared with the three months ended March 31, 2021, reflecting increased shipments in the off-highway and rail sectors, as well as higher net pricing, partially offset by lower shipments in the automotive sector.

EBITDA decreased by $4.5 million or 5.7% for the three months ended March 31, 2022 compared with the three months ended March 31, 2021, primarily due to higher material, logistics and other operating costs, partially offset by favorable price/mix and the impact of higher volume.

Process Industries Segment:

Three Months Ended

September 30,

2022 2021 $ Change Change

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Three Months Ended

September 30,

2022 2021 $ Change % Change

3 unchanged sentences

Net sales, excluding the impact of acquisitions and currency $ 589.0 $ 520.9 $ 68.1 13.1 %

Nine Months Ended

September 30,

2021 2020 $ Change Change

Net sales $ 1,639.6 $ 1,383.6 $ 256.0 18.5%

EBITDA $ 401.9 $ 343.0 $ 58.9 17.2%

EBITDA margin 24.5 % 24.8 % (30) bps

Nine Months Ended

September 30,

2021 2020 $ Change % Change

Net sales $ 1,639.6 $ 1,383.6 $ 256.0 18.5 %

Acquisitions 11.0 — 11.0 NM

Currency 54.1 — 54.1 NM

Net sales, excluding the impact of acquisitions and currency $ 1,574.5 $ 1,363.8 $ 210.7 15.4 %

The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $68.2 million or 14.6% in the three months ended September 30, 2021 compared with the three months ended September 30, 2020.

The increase was primarily driven by increased demand in the distribution, general industrial, renewable energy, and heavy industries sectors, as well as positive pricing.

EBITDA increased $20.5 million or 18.8% in the three months ended September 30, 2021 compared with the three months ended September 30, 2020 primarily due to higher volume and related manufacturing utilization and the favorable impact of foreign currency exchange rate changes, partially offset by higher material and logistics costs.

The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $210.7 million or 15.4% in the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020.

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

EBITDA increased $58.9 million or 17.2% in the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020 primarily due to higher volume and related manufacturing utilization, and the favorable impact of foreign currency exchange rate changes, partially offset by higher material, logistics and other operating costs, as well as unfavorable mix.

The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $68.1 million or 13.1% in the three months ended March 31, 2022 compared with the three months ended March 31, 2021 .

The increase was primarily driven by increased demand in the distribution, general industrial, heavy industries, marine and services sectors, as well as higher net pricing, partially offset by lower revenue in the renewable energy sector.

EBITDA increased $24.6 million or 18.8% for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 primarily due to favorable price/mix and higher volume, partially offset by higher material, logistics and other operating costs.

Unallocated Corporate:

Three Months Ended

September 30,

2022 2021 $ Change Change

1 unchanged sentence

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

Nine Months Ended

September 30,

2021 2020 $ Change Change

Unallocated corporate expense $ (34.9) $ (28.2) $ (6.7) 23.8 %

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

The increase in unallocated corporate expense for the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020, was primarily due to the favorable impact of COVID-19 related temporary cost reduction initiatives in 2020, which did not repeat in 2021.

Nine Months Ended

September 30,

The increase in unallocated corporate expense for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 was prim arily due to higher variable compensation expense.

Three Months Ended

2022 2021 $ Change

Net cash provided by operating activities $ 284.6 $ 457.2 $ (172.6)

Net cash (used in) provided by operating activities $ (1.2) $ 31.7 $ (32.9)

Net cash used in investing activities (35.0) (39.4) 4.4

Net cash used in financing activities (222.4) (257.7) 35.3

Net cash provided by (used in) financing activities 204.7 (6.4) 211.1

Effect of exchange rate changes on cash (1.2) (3.9) 2.7

(Decrease) increase in cash, cash equivalents and restricted cash $ (58.5) $ 97.8 $ (156.3)

Increase (decrease) in cash, cash equivalents and restricted cash $ 167.3 $ (18.0) $ 185.3

Op erating Activities:

The decrease in net cash provided by operating activities for the first nine months of 2021 compared with the first nine months of 2020 was primarily due to an increase in cash used for working capital items of $196.5 million, a reduction in the benefit of income taxes on cash of $12.4 million, an increase in pension and other postretirement benefit contributions and payments of $5.3 million and a decrease in other items.

The decrease was partially offset by higher net income of $77.7 million.

The change in net cash (used in) provided by operating activities for the first three months of 2022 compared with the first three months of 2021 was primarily due to an increase in cash used for working capital items of $46.3 million, partially offset by an increase in the benefit of income taxes on cash of $6.5 million and higher net income of $5.9 million.

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

The following table displays the impact of working capital items on cash during the nine months of 2021 and 2020, respectively:

Nine Months Ended

September 30,

The following table displays the impact of working capital items on cash during the three months of 2022 and 2021, respectively:

Three Months Ended

2022 2021 $ Change

5 unchanged sentences

Other accrued expenses (19.5) 17.0 (36.5)

Cash (used in) provided by working capital items $ (135.9) $ 60.6 $ (196.5)

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

Nine Months Ended

September 30,

Cash used in working capital items $ (184.1) $ (137.8) $ (46.3)

The following table displays the impact of income taxes on cash during the three months of 2022 and 2021, respectively:

Three Months Ended

2022 2021 $ Change

2 unchanged sentences

Other miscellaneous items (4.8) (7.2) 2.4

Cash (expense) benefit from income taxes $ (6.7) $ 5.7 $ (12.4)

Cash benefit from income taxes $ 8.1 $ 1.6 $ 6.5

Investing Activities:

The increase in net cash used in investing activities for the first nine months of 2021 compared with the first nine months of 2020 was primarily due to an increase in capital expenditures of $17.9 million.

The decrease in net cash used in investing activities for the first three months of 2022 compared with the first three months of 2021 was primarily due to a decrease in cash used for investments in short-term marketable securities of $9.1 million, partially offset by an increase in capital expenditures of $4.9 million.

Financing Activities:

The change in net cash used in financing activities decreased for the first nine months of 2021 compared with the first nine months of 2020, primarily due to a decrease in net payments of $41.5 million on outstanding debt, as well as lower dividends of $15.3 million to noncontrolling interest parties.

These changes were partially offset by an increase in the purchase of treasury shares of $14.3 million.

The change in net cash provided by (used in) financing activities for the first three months of 2022 compared with the first three months of 2021 was primarily due to an increase in net borrowings of $283.1 million, partially offset by an increase in the purchases of treasury shares of $73.7 million.

LIQUIDITY AND CAPITAL RESOURCES

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

September 30,

2022 December 31,

Short-term debt $ 27.9 $ 119.8

Current portion of long-term debt 11.1 10.9

Short-term debt, including current portion of long-term debt $ 41.0 $ 53.8

Long-term debt 1,747.2 1,411.1

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Ratio of Net Debt to Capital:

September 30,

2022 December 31,

4 unchanged sentences

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

At September 30, 2021, the Co mpany had strong liquidity with $261.8 million of cash and cash equivalents on the Consolidated Balance Sheet.

Cash and cash equivalents of $244.4 million of the total cash and cash equivalents of $261.8 million resides in jurisdictions outside the United States.

At March 31, 2022, the Company had strong liquidity with $424.5 million of cash and cash equivalents on the Consolidated Balance Sheet, as well as $741.2 million of available resources of committed credit lines.

Of the $424.5 million of cash and cash equivalents, $267.7 million resided in jurisdictions outside the United States.

Repatriation of non-U.S.

4 unchanged sentences

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

At September 30, 2021, the Senior Credit Facility had outstanding borrowings of $9.2 million, which reduced the availability to $640.8 million.

At March 31, 2022, the Senior Credit Facility had outstanding borrowings of $8.8 million, which reduced the availability to $641.2 million.

The Senior Credit Facility has two financial covenants:

1 unchanged sentence

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

As of September 30, 2021, the Company's consolidated leverage ratio was 2.0 to 1.0 (based on total debt as described below).

As of March 31, 2022, the Company's consolidated leverage ratio was 2.45 to 1.0 (based on total debt as described below).

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

As of September 30, 2021, the Company's consolidated interest coverage ratio was 12.4 to 1.0.

On May 27, 2020, both the Senior Credit Facility and the 2023 Term Loan were amended to, among other things, effectively increase the limit with respect to the consolidated leverage ratio.

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

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

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

As of March 31, 2022, the Company's consolidated interest coverage ratio was 12.54 to 1.0.

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

The average rate on outstanding U.S.

dollar borrowings was 1.12% and the average rate on outstanding Euro borrowings was 1.05% as of September 30, 2021.

dollar borrowings was 1.17% and the average rate on outstanding Euro borrowings was 1.00% as of March 31, 2022.

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

As of September 30, 2021, the Company carried investment-grade credit ratings with Moody's (Baa2), S&P Global (BBB-) and Fitch (BBB-).

As of March 31, 2022, the Company carried investment-grade credit ratings with Moody's (Baa2), S&P Global (BBB-) and Fitch (BBB-).

The Company has a $100 million Accounts Receivable Facility, which matures on November 30, 2024.

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

Borrowings under the Accounts Receivable Facility were not reduced by any such borrowing base limitations at September 30, 2021.

As of September 30, 2021, the Company had no outstanding borrowings under the Accounts Receivable Facility.

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

Borrowings under the Accounts Receivable Facility were not reduced by any such borrowing base limitations at March 31, 2022.

As of March 31, 2022, the Company had no outstanding borrowings under the Accounts Receivable Facility.

Other sources of liquidity include uncommitted short-term lines of credit for certain of the Company's foreign subsidiaries, which provide for borrowings of up to approximately $268.4 million.

At September 30, 2021, the Company had borrowings outstanding of $27.9 million and bank guarantees of $0.5 million, which reduced the aggregate availability under these facilities to approximately $259.0 million.

At September 30, 2021, the Company was in full compliance with all applicable covenants on its outstanding debt, and expects to remain in full compliance with its debt covenants.

The Company expects to generate solid cash from operating activities in 2021, although down from the $577.6 million in 2020, as the impact of higher earnings is expected to be more than offset by unfavorable changes in working capital (i.e., a use of cash in 2021 versus a source of cash in 2020) to support the higher sales levels.

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

At March 31, 2022, the Company had borrowings outstanding of $29.9 million and bank guarantees of $0.3 million, which reduced the aggregate availability under these facilities to approximately $238.2 million.

On March 28, 2022, the Company issued the 2032 Notes in the aggregate principal amount of $350 million with an interest rate of 4.125%, maturing on April 1, 2032 .

Proceeds from the notes were used to repay borrowings under the Senior Credit Facility and the Accounts Receivable Facility outstanding at the time of issuance, and for general corporate purposes.

At March 31, 2022, the Company was in full compliance with all applicable covenants on its outstanding debt.

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

The Company expects capital expenditures between 4.0% and 4.5% of sales in 2022, compared with 3.6% of sales ($148 million) in 2021.

Financing Obligations and Other Commitments:

During the first nine months of 2021, the Company made cash contributions and payments of $15.2 million to its global defined benefit pension plans and $3.0 million to its other postretirement benefit plans.

The Company expects to make contributions to its global defined benefit plans of appr oximately $17 million in 2021.

During the first three months of 2022, the Company made cash contributions and payments of $4.3 million to its global defined benefit pension plans and $0.9 million to its other postretirement benefit plans.

The Company expects to make contributions to its global defined benefit plans of approximately $10 million in 2022.

The Company expects to make payments of approximately $5 million to its other postretirement benefit plans in 2022.

Excluding mark-to-market charges, the Company expects lower pension and other post retirement benefits expense in 2021.

Excluding mark-to-market charges, the Company expects lower pension and other po st retirement benefits expense in 2022.

The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.

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The Company reviews its critical accounting policies throughout the year.

The Company has concluded that there have been no significant changes to its critical accounting policies or estimates, as described in its Annual Report on Form 10-K for the year ended December 31, 2020, during the nine months ended September 30, 2021.

OTHER MATTERS

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

For the nine months ended September 30, 2021, th e Company recorded negative foreign currency translation adjustments of $53.3 million that decreased shareholders' equity, compared wit h positive foreign currency translation adjustments of $15.0 million that increased sh areholders' equity for the nine months ended September 30, 2020.

The foreign currency translation adjustments for the nine months ended September 30, 2021 w ere negatively impacted by the strengthening of the U.S.

dollar relative to other foreign currencies, including th e Euro.

Foreign currency exchange gains and losses, net of hedging activity, resulting from transactions included in the Company's operating results for the three months ended September 30, 2021 totale d $3.2 million of net losses, compared with $4.6 million of net losses durin g the three months ended September 30, 2020.

Foreign currency exchange gains and losses, net of hedging activity, resulting from transactions included in the Company's operating results for the nine months ended September 30, 2021 totale d $8.8 million of net losses, c ompared with $3.9 million of net losses during the nine months ended September 30, 2020.

For the three months ended March 31, 2022, th e Company recorded negative foreign currency translation adjustments of $20.0 million that decreased shareholders' equity, compared wit h negative foreign currency translation adjustments of $44.0 million that decreased sh areholders' equity for the three months ended March 31, 2021.

The foreign currency translation adjustments for the three months ended March 31, 2022 w ere negatively impacted by th e strengthening of the U.S.

dollar relative to other foreign currencies, including the Euro.

Foreign currency exchange gains and losses, net of hedging activity, resulting from transactions included in the Company's operating results for the three months ended March 31, 2022 totaled $2.2 million of n et gains, compared with $2.1 million of net losses durin g the three months ended March 31, 2021.

Russia Operations:

The Company has two subsidiaries that operate in Russia, including a 51%-owned joint venture that produces bearings for the rail market in Russia.

As a result of Russia's invasion of Ukraine (and associated sanctions), the Company recorded allowances of $3.5 million for trade receivables and other assets and recorded a $1.1 million write-down of inventory during the three months ended March 31, 2022.

After giving effect to these allowances and write-downs, as of March 31, 2022, the Company has net assets (net of noncontrolling interest) and cumulative foreign currency translation adjustments totaling $21.9 million on its Consolidated Balance Sheet related to its Russia operations.

Net assets related to the Company's Russia operations include $12.9 million of cash and cash equivalents.

The Company will continue to monitor the events in Russia and Ukraine and may record additional asset impairments or write-offs in the future.

NON-GAAP MEASURES

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

Management believes adjusted net income and adjusted earnings per share are useful to investors as they are representative of the Company's core operations and are used in the management of the business, including decisions concerning the allocation of resources and assessment of performance.

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

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Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Net Sales $ 1,124.6 $ 1,025.4

Net Income Attributable to The Timken Company 118.2 113.3

Impairment, restructuring and reorganization

5.9 13.3 13.3 24.9

Corporate pension and other postretirement benefit

related expense (income) (2)

3.9 (11.9) 8.3 (3.1)

Acquisition-related charges (3)

1.8 (0.5) 3.0 3.7

Acquisition-related gain (4)

(0.3) — (0.9) —

Property losses (recoveries) and related expenses (5)

— (1.7) — (3.8)

Impairment, restructuring and reorganization charges (1)

Corporate pension and other postretirement benefit related expense (2)

Acquisition-related charges (gain) (3)

Russia-related charges (4)

Noncontrolling interest of above adjustments (1.3) 0.2

Provision for income taxes (5)

(8.4) (1.6) (26.3) (5.0)

Adjusted Net Income $ 121.7 $ 106.7

Net income attributable to noncontrolling

interest 3.5 2.5 8.6 5.7

Net income attributable to noncontrolling interest 3.7 2.7

Provision for income taxes (as reported) 38.2 25.3

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Depreciation and amortization expense (6)

41.0 41.0 125.7 122.4

Noncontrolling interest (1.3) 0.2

Provision for income taxes (5)

(8.4) (1.6) (26.3) (5.0)

Adjusted EBITDA $ 225.1 $ 203.7

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Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Diluted earnings per share (EPS) $ 1.56 $ 1.47

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

Three Months Ended September 30, 2021

Three Months Ended March 31, 2022

Mobile Process Unallocated Corporate Total

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— 0.4 0.7 1.1

Acquisition-related gain (4)

Russia-related charges (4)

$ 3.1 $ 1.5 — $ 4.6

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Adjusted EBITDA Margin (% of net sales) 14.7 % 27.1 % NM 20.0 %

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2021

Mobile Process Unallocated Corporate Total

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benefit related expense (2)

Acquisition-related charges (3)

0.6 0.5 1.9 3.0

Acquisition-related gain (4)

— — (0.9) (0.9)

Adjusted EBITDA $ 207.0 $ 408.6 $ (33.0) $ 582.6

Adjusted EBITDA Margin (% of net sales) 13.9 % 24.9 % NM 18.6 %

Three Months Ended September 30, 2020

Mobile Process Unallocated Corporate Total

Net Sales $ 428.6 $ 466.0 $ — $ 894.6

EBITDA 64.0 109.2 1.3 174.5

Impairment, restructuring and reorganization

6.6 6.2 0.3 13.1

Corporate pension and other postretirement

benefit related income (2)

— — (11.9) (11.9)

Acquisition-related charges (3)

(0.5) (0.2) 0.2 (0.5)

Property losses (recoveries) and related expenses (5)

(1.7) — — (1.7)

Adjusted EBITDA $ 68.4 $ 115.2 $ (10.1) $ 173.5

Adjusted EBITDA Margin (% of net sales) 16.0 % 24.7 % NM 19.4 %

Nine Months Ended September 30, 2020

Mobile Process Unallocated Corporate Total

Net Sales $ 1,237.9 $ 1,383.6 $ — $ 2,621.5

EBITDA 177.9 343.0 (25.1) 495.8

Impairment, restructuring and reorganization

10.2 11.5 0.4 22.1

Corporate pension and other postretirement

benefit related income (2)

— — (3.1) (3.1)

Acquisition-related charges (3)

2.1 1.0 0.6 3.7

Property losses (recoveries) and related expenses (5)

Acquisition-related charges (gain) (3)

0.2 0.1 (1.1) (0.8)

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

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

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

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

Refer to Note 14 - Retirement Benefit Plans and Note 15 - Other Postretirement Benefit Plans for additional discussion.

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

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

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

(3) Acquisition-related charges (gain) represent the contingent consideration related to the acquisition of iMS that closed on August 20, 2021, and deal-related expenses associated with completed and certain unsuccessful transactions, as well as any resulting inventory step-up impact.

In addition, the 2021 acquisition-related gain includes measurement period adjustments to the bargain purchase gain on the acquisition of the assets of Aurora that closed on November 30, 2020.

(4) Russia-related charges include allowances or impairments recorded against certain trade receivables, inventory and other assets to reflect the current impact of Russia's invasion of Ukraine (and associated sanctions) on the Company's operations.

Refer to Russia Operations on page 30 above for additional information.

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

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Free Cash Flow:

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

Free cash flow represents net cash provided by (used in) operating activities less capital expenditures.

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

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Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Net cash provided by operating activities $ 105.8 $ 153.6 $ 284.6 $ 457.2

Net cash (used in) provided by operating activities $ (1.2) $ 31.7

Capital expenditures (34.3) (29.4)

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

Net income for the trailing twelve months ended September 30, 2021 and December 31, 2020 was $370.1 million and $292.4 million, respectively.

Net debt to adjusted EBITDA for the trailing twelve months was 1.6 at September 30, 2021, compared with 1.9 at December 31, 2020.

Net income for the trailing twelve months ended March 31, 2022 and December 31, 2021 was $387.4 million and $381.5 million, respectively.

Net debt to adjusted EBITDA for the trailing twelve months was 1.8 at March 31, 2022, compared with 1.7 at December 31, 2021.

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

Twelve Months Ended

September 30,

2022 December 31,

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Acquisition-related charges (3)

Acquisition-related gain (4)

(12.0) (11.1)

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

Property losses (recoveries) and related expenses (5)

Russia-related charges (4)

Tax indemnification and related items 0.2 0.2

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

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

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

(3) Acquisition-related charges represent contingent consideration related to the acquisition of iMS that closed on August 20, 2021, and deal-related expenses associated with completed and certain unsuccessful transactions, as well as any resulting inventory step-up impact.

Also included is the acquisition-related gain related to measurement period adjustments to the bargain purchase gain on the acquisition of the assets of Aurora that closed on November 30, 2020.

Refer to Russia Operations on page 30 in Management Discussion and Analysis for additional information.

FORWARD-LOOKING STATEMENTS

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

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

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

• changes in operating costs.

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availability and cost of raw materials and energy;

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

changes in the expected costs associated with product warranty claims;

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the effects of unplanned plant shutdowns;

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

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

and changes in the cost of labor and benefits;

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

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

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This includes:

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

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

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

customer demand and the ability of customers to obtain financing to purchase the Company’s products or equipment that contain the Company’s products;

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

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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-Q

Item 2. Management’s Discussion and Analysis