TIMKEN CO 10-Q

ITEM 1. FINANCIAL STATEMENTS THE TIMKEN COMPANY AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) Three Months Ended March 31, 2022 2021 (Dollars in millions, except per share data) Net sales $ 1,124.6 $ 1,025.4 Cost of products sold 797.2 726.2 Gross Profit 327.4 299.2 Selling, general and administrative expenses 154.1 144.5 Impairment and restructuring charges 1.0 4.0 Operating Income 172.3 150.7 Interest expense ( 14.3 ) ( 14.9 ) Interest income 0.6 0.5 Non-service pension and other postretirement income 1.3 4.0 Other income, net 0.2 1.0 Income Before Income Taxes 160.1 141.3 Provision for income taxes 38.2 25.3 Net Income 121.9 116.0 Less: Net income attributable to noncontrolling interest 3.7 2.7 Net Income Attributable to The Timken Company $ 118.2 $ 113.3 Net Income per Common Share Attributable to The Timken Company Common Shareholders Basic earnings per share $ 1.58 $ 1.49 Diluted earnings per share $ 1.56 $ 1.47 See accompanying Notes to the Consolidated Financial Statements. Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended March 31, 2022 2021 (Dollars in millions) Net Income $ 121.9 $ 116.0 Other comprehensive loss, net of tax: Foreign currency translation adjustments ( 22.6 ) ( 44.4 ) Pension and postretirement liability adjustments ( 1.5 ) ( 1.6 ) Change in fair value of derivative financial instruments 2.0 2.2 Other comprehensive loss, net of tax ( 22.1 ) ( 43.8 ) Comprehensive Income, net of tax 99.8 72.2 Less: comprehensive income attributable to noncontrolling interest 1.1 2.3 Comprehensive Income Attributable to The Timken Company $ 98.7 $ 69.9 See accompanying Notes to the Consolidated Financial Statements. 1 Table of Contents Consolidated Balance Sheets (Unaudited) (Dollars in millions) March 31, 2022 December 31, 2021 ASSETS Current Assets Cash and cash equivalents $ 424.5 $ 257.1 Restricted cash 0.7 0.8 Accounts receivable, less allowances (2022 – $ 17.5 million; 2021 – $ 16.9 million) 743.9 626.4 Unbilled receivables 88.5 104.5 Inventories, net 1,112.6 1,042.7 Deferred charges and prepaid expenses 41.0 32.2 Other current assets 137.1 149.8 Total Current Assets 2,548.3 2,213.5 Property, Plant and Equipment, net 1,039.9 1,055.3 Other Assets Goodwill 1,010.4 1,022.7 Other intangible assets 648.6 668.8 Operating lease assets 116.7 118.9 Deferred income taxes 65.2 67.6 Other non-current assets 29.4 23.9 Total Other Assets 1,870.3 1,901.9 Total Assets $ 5,458.5 $ 5,170.7 LIABILITIES AND EQUITY Current Liabilities Accounts payable, trade 416.1 430.0 Short-term debt, including current portion of long-term debt 41.0 53.8 Salaries, wages and benefits 118.3 136.0 Income taxes payable 30.0 26.2 Other current liabilities 260.8 250.6 Total Current Liabilities 866.2 896.6 Non-Current Liabilities Long-term debt 1,747.2 1,411.1 Accrued pension benefits 156.5 155.6 Accrued postretirement benefits 45.3 45.8 Long-term operating lease liabilities 76.5 77.6 Deferred income taxes 121.9 121.4 Other non-current liabilities 89.9 84.9 Total Non-Current Liabilities 2,237.3 1,896.4 Shareholders’ Equity Class I and II Serial Preferred Stock, without par value: Authorized – 10,000,000 shares each class, none issued — — Common shares, without par value: Authorized – 200,000,000 shares Issued (including shares in treasury) (2022 – 77,457,218 shares; 2021 – 77,090,104 shares) Stated capital 40.7 40.7 Other paid-in capital 795.4 786.9 Retained earnings 1,711.1 1,616.4 Accumulated other comprehensive loss ( 42.5 ) ( 23.0 ) Treasury shares at cost (2022 – 3,326,669 shares; 2021 – 1,715,282 shares) ( 233.6 ) ( 126.1 ) Total Shareholders’ Equity 2,271.1 2,294.9 Noncontrolling Interest 83.9 82.8 Total Equity 2,355.0 2,377.7 Total Liabilities and Equity $ 5,458.5 $ 5,170.7 See accompanying Notes to the Consolidated Financial Statements. 2 Table of Contents Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2022 2021 (Dollars in millions) CASH PROVIDED (USED) Operating Activities Net income $ 121.9 $ 116.0 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 41.4 43.0 Impairment charges — 3.4 Loss on sale of assets 0.6 0.3 Acquisition-related gain — ( 0.6 ) Deferred income tax provision (benefit) 1.8 ( 2.0 ) Stock-based compensation expense 7.1 6.5 Pension and other postretirement benefit expense (income) 1.0 ( 1.0 ) Pension and other postretirement benefit contributions and payments ( 5.2 ) ( 2.5 ) Changes in operating assets and liabilities: Accounts receivable ( 118.2 ) ( 138.9 ) Unbilled receivables 16.1 ( 2.5 ) Inventories ( 70.2 ) ( 33.3 ) Accounts payable, trade 7.7 19.9 Other accrued expenses ( 19.5 ) 17.0 Income taxes 6.3 3.6 Other, net 8.0 2.8 Net Cash (Used in) Provided by Operating Activities ( 1.2 ) 31.7 Investing Activities Capital expenditures ( 34.3 ) ( 29.4 ) Investments in short-term marketable securities, net ( 0.8 ) ( 9.9 ) Other, net 0.1 ( 0.1 ) Net Cash Used in Investing Activities ( 35.0 ) ( 39.4 ) Financing Activities Cash dividends paid to shareholders ( 23.5 ) ( 23.8 ) Purchase of treasury shares ( 100.0 ) ( 26.3 ) Proceeds from exercise of stock options 1.4 14.1 Payments related to tax withholding for stock-based compensation ( 7.5 ) ( 17.8 ) Borrowings on accounts receivable facility 100.0 66.1 Payments on accounts receivable facility ( 100.0 ) ( 24.1 ) Proceeds from long-term debt 524.3 70.0 Payments on long-term debt ( 182.7 ) ( 73.4 ) Deferred financing costs ( 2.6 ) — Short-term debt activity, net ( 11.1 ) 8.8 Other 6.4 — Net Cash Provided By (Used in) Financing Activities 204.7 ( 6.4 ) Effect of exchange rate changes on cash ( 1.2 ) ( 3.9 ) Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash 167.3 ( 18.0 ) Cash, cash equivalents and restricted cash at beginning of year 257.9 321.1 Cash, Cash Equivalents and Restricted Cash at End of Period $ 425.2 $ 303.1 See accompanying Notes to the Consolidated Financial Statements. 3 Table of Contents NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in millions, except per share data) Note 1 - Basis of Presentation The accompanying Consolidated Financial Statements (unaudited) for The Timken Company (the "Company" or "Timken") have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by the accounting principles generally accepted in the United States ("U.S. GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and accompanying Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Note 2 - Significant Accounting Policies The Company's significant accounting policies are detailed in " Note 1 - Significant Accounting Policies" of the Annual Report on Form 10-K for the year ended December 31, 2021. Recent Accounting Pronouncements: New Accounting Guidance Adopted: In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 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 adopted ASU 2021-08 effective January 1, 2022, 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 March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): 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 after completing that analysis. 4 Table of Contents Note 3 - Revenue The following table presents details deemed most relevant to the users of the financial statements about total revenue for the three months ended March 31, 2022 and 2021, respectively: Three Months Ended Three Months Ended March 31, 2022 March 31, 2021 Mobile Process Total Mobile Process Total United States $ 262.2 $ 226.6 $ 488.8 $ 242.9 $ 186.2 $ 429.1 Americas excluding the United States 58.1 55.1 113.2 48.8 43.2 92.0 Europe / Middle East / Africa 129.4 135.6 265.0 127.1 127.2 254.3 China 30.7 120.7 151.4 34.4 124.3 158.7 Asia-Pacific excluding China 60.0 46.2 106.2 51.3 40.0 91.3 Net sales $ 540.4 $ 584.2 $ 1,124.6 $ 504.5 $ 520.9 $ 1,025.4 When reviewing revenue by sales channel, the Company separates net sales to original equipment manufacturers ("OEMs") from sales to distributors and end users. The following table presents the percent of revenue by sales channel for the three months ended March 31, 2022 and 2021, respectively: Three Months Ended Three Months Ended Revenue by sales channel March 31, 2022 March 31, 2021 Original equipment manufacturers 60 % 61 % Distribution/end users 40 % 39 % In addition to disaggregating revenue by segment, geography and by sales channel as shown above, the Company believes information about the timing of transfer of goods or services, type of customer and distinguishing service revenue from product sales is also relevant. During the three months ended March 31, 2022 and March 31, 2021, approximately 9 % 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 5 % and 4 % of total net sales represented service revenue during each of the three months ended March 31, 2022 and March 31, 2021, respectively. Finally, business with the United States ("U.S.") government or its contractors represented approximately 7 % of total net sales during the three months ended March 31, 2022 and March 31, 2021. Remaining Performance Obligations: Remaining performance obligations represent the transaction price of orders meeting the definition of a contract for which work has not been performed and excludes unexercised contract options. Performance obligations having a duration of more than one year are concentrated in contracts for certain products and services provided to the U.S. government or its contractors. The aggregate amount of the transaction price allocated to remaining performance obligations for such contracts with a duration of more than one year was approximately $ 213.1 million a t March 31, 2022. Unbilled Receivables: The following table contains a rollforward of unbilled receivables for the three months ended March 31, 2022: March 31, 2022 Beginning balance, January 1 $ 104.5 Additional unbilled revenue recognized 105.5 Less: amounts billed to customers ( 121.5 ) Ending balance $ 88.5 There were no impairment losses recorded on unbilled receivables for the three months ended March 31, 2022 . 5 Table of Contents Note 4 - Segment Information The primary measurement used by management to measure the financial performance of each segment is earnings before interest, taxes, depreciation and amortization ("EBITDA"). Three Months Ended March 31, 2022 2021 Net sales: Mobile Industries $ 540.4 $ 504.5 Process Industries 584.2 520.9 Net sales $ 1,124.6 $ 1,025.4 Segment EBITDA: Mobile Industries $ 75.1 $ 79.6 Process Industries 155.6 131.0 Total EBITDA, for reportable segments $ 230.7 $ 210.6 Unallocated corporate expense ( 12.9 ) ( 11.6 ) Corporate pension and other postretirement benefit related expense (1) ( 2.6 ) ( 0.9 ) Acquisition-related gain (2) — 0.6 Depreciation and amortization ( 41.4 ) ( 43.0 ) Interest expense ( 14.3 ) ( 14.9 ) Interest income 0.6 0.5 Income before income taxes $ 160.1 $ 141.3 (1) Corporate pension and other postretirement benefit related expense represents actuarial (losses) and gains that resulted from the remeasurement of pension and other postretirement plan assets and obligations as a result of changes in assumptions or experience. (2) The acquisition-related gain represents measurement period adjustments to the bargain purchase gain on the acquisition of Aurora Bearing Company ("Aurora"), which closed on November 30, 2020. Note 5 - Income Taxes The Company's provision for income taxes in interim periods is computed by applying the estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items are recorded during the period(s) in which they occur. Three Months Ended March 31, 2022 2021 Provision for income taxes $ 38.2 $ 25.3 Effective tax rate 23.9 % 17.9 % Income tax expense for the three months ended March 31, 2022 was calculated using forecasted multi-jurisdictional annual effective tax rates to determine a blended annual effective tax rate. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the projected mix of earnings in international jurisdictions with relatively higher tax rates. The effective tax rate of 23.9 % for the three months ended March 31, 2022 was higher than the rate for the three months ended March 31, 2021 primarily due to higher pre-tax earnings and a higher discrete tax benefit in the prior year due to the release of accruals for uncertain tax positions from the settlement of the 2017 and 2018 U.S. federal tax years during the three months ended March 31, 2021. 6 Table of Contents Note 6 - Earnings Per Share The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share and diluted earnings per share for the three months ended March 31, 2022 and 2021, respectively: Three Months Ended March 31, 2022 2021 Numerator: Net income attributable to The Timken Company $ 118.2 $ 113.3 Less: undistributed earnings allocated to nonvested stock — — Net income available to common shareholders for basic and diluted earnings per share $ 118.2 $ 113.3 Denominator: Weighted average number of shares outstanding - basic 74,782,153 75,820,157 Effect of dilutive securities: Stock options and awards - based on the treasury stock method 763,512 1,444,484 Weighted average number of shares outstanding assuming dilution of stock options and awards 75,545,665 77,264,641 Basic earnings per share $ 1.58 $ 1.49 Diluted earnings per share $ 1.56 $ 1.47 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. There were no antidilutive stock options outstanding during the three months ended March 31, 2022 and 2021. Note 7 - Inventories The components of inventories at March 31, 2022 and December 31, 2021 were as follows: March 31, 2022 December 31, 2021 Manufacturing supplies $ 39.3 $ 38.0 Raw materials 132.6 121.8 Work in process 466.6 418.4 Finished products 533.3 527.8 Subtotal 1,171.8 1,106.0 Allowance for obsolete and surplus inventory ( 59.2 ) ( 63.3 ) Total inventories, net $ 1,112.6 $ 1,042.7 Inventories are valued at net realizable value, with approximately 58 % valued on the first-in, first-out ("FIFO") method and the remaining 42 % valued on the last-in, first-out ("LIFO") method. The majority of the Company's domestic inventories are valued on the LIFO method, and all the Company's international inventories are valued on the FIFO method. The LIFO reserve at March 31, 2022 and December 31, 2021 was $ 211.7 million and $ 199.4 million, respectively. An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation. 7 Table of Contents Note 8 - Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill for the three months ended March 31, 2022 were as follows: Mobile Industries Process Industries Total Beginning balance $ 371.7 $ 651.0 $ 1,022.7 Foreign currency translation adjustments and other changes ( 5.6 ) ( 6.7 ) ( 12.3 ) Ending balance $ 366.1 $ 644.3 $ 1,010.4 The following table displays intangible assets as of March 31, 2022 and December 31, 2021: Balance at March 31, 2022 Balance at December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Intangible assets subject to amortization: Customer relationships $ 512.3 $ ( 194.5 ) $ 317.8 $ 518.1 $ ( 189.3 ) $ 328.8 Technology and know-how 267.5 ( 90.0 ) 177.5 270.7 ( 86.6 ) 184.1 Trade names 12.9 ( 8.4 ) 4.5 14.3 ( 9.6 ) 4.7 Capitalized software 281.7 ( 262.8 ) 18.9 280.0 ( 261.3 ) 18.7 Other 3.8 ( 3.0 ) 0.8 4.7 ( 3.6 ) 1.1 $ 1,078.2 $ ( 558.7 ) $ 519.5 $ 1,087.8 $ ( 550.4 ) $ 537.4 Intangible assets not subject to amortization: Trade names $ 120.4 $ 120.4 $ 122.7 $ 122.7 FAA air agency certificates 8.7 8.7 8.7 8.7 $ 129.1 $ 129.1 $ 131.4 $ 131.4 Total intangible assets $ 1,207.3 $ ( 558.7 ) $ 648.6 $ 1,219.2 $ ( 550.4 ) $ 668.8 Amortization expense for intangible assets was $ 12.7 million and $ 14.1 million for the three months ended March 31, 2022 and 2021, respectively. Amortization expense included $ 10.9 million and $ 12.1 million related to intangible assets acquired as part of a business combination for the three months ended March 31, 2022 and 2021, respectively. Amortization expense for intangible assets is projected to b e $ 50.9 million in 2022 ; $ 45.5 million in 2023; $ 43.5 million in 2024; $ 42.1 million in 2025; and $ 40.8 million in 2026. Substantially all amortization expense for intangible assets is recorded in Cost of product sold on the Consolidated Statement of Income. Note 9 - Other Current Liabilities The following table displays other current liabilities as of March 31, 2022 and December 31, 2021: March 31, December 31, (Dollars in millions) 2022 2021 Sales rebates $ 54.7 $ 70.3 Product warranty 13.0 11.7 Operating lease liabilities 25.7 26.2 Professional fees 11.2 10.8 Restructuring 7.0 7.0 Taxes other than income and payroll taxes 21.5 16.0 Interest 8.3 10.8 Other 119.4 97.8 Total other current liabilities $ 260.8 $ 250.6 8 Table of Contents Note 10 - Financing Arrangements Short-term debt at March 31, 2022 and December 31, 2021 was as follows: March 31, 2022 December 31, 2021 Borrowings under lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.50 % to 2.10 % at March 31, 2022 and 0.50 % to 2.00 % at December 31, 2021 $ 29.9 $ 42.6 Short-term debt $ 29.9 $ 42.6 The lines of credit for certain of the Company's foreign subsidiaries provide for short-term borrowings up to $ 268.4 million in the aggregate. Most of these lines of credit are uncommitted. At March 31, 2022, the Company’s foreign subsidiaries had borrowings outstanding of $ 29.9 million and bank guarantees of $ 0.3 million, which reduced the aggregate availability under these facilities to $ 238.2 million. Long-term debt at March 31, 2022 and December 31, 2021 was as follows: March 31, 2022 December 31, 2021 Variable-rate Senior Credit Facility with an average interest rate on U.S. Dollar of 1.17 % and Euro of 1.00 % at March 31, 2022 and U.S. Dollar of 1.09 % and Euro of 1.00 % at December 31, 2021 $ 8.8 $ 9.0 Variable-rate Term Loan (1) , maturing on September 11, 2023, with an interest rate of 1.58 % at March 31, 2022 and 1.23 % at December 31, 2021 319.0 321.1 Fixed-rate Senior Unsecured Notes (1) , maturing on September 1, 2024, with an interest rate of 3.875 % 349.6 349.5 Fixed-rate Euro Senior Unsecured Notes (1) , maturing on September 7, 2027, with an interest rate of 2.02 % 165.8 170.3 Fixed-rate Senior Unsecured Notes (1) , maturing on December 15, 2028, with an interest rate of 4.50 % 396.9 396.9 Fixed-rate Medium-Term Notes, Series A (1) , maturing at various dates through May 2028, with interest rates ranging from 6.74 % to 7.76 % 154.7 154.7 Fixed-rate Senior Unsecured Notes (1) , maturing on April 1, 2032, with an interest rate of 4.125 % 341.7 — Fixed-rate Euro Bank Loan, maturing on June 30, 2033, with an interest rate of 2.15 % 15.4 15.8 Other 6.4 5.0 Total debt $ 1,758.3 $ 1,422.3 Less: Current maturities 11.1 11.2 Long-term debt $ 1,747.2 $ 1,411.1 (1) Net of discounts and fees The Company has a $ 100 million Amended and Restated Asset Securitization Agreement (the "Accounts Receivable Facility"), which 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 may be limited to certain borrowing base limitations; however, availability under the Accounts Receivable Facility was not reduced by any such borrowing base limitations at March 31, 2022. As of March 31, 2022, 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. 9 Table of Contents Note 10 - Financing Arrangements (continued) The Company entered into the Fourth Amended and Restated Credit Agreement ("Senior Credit Facility") on June 25, 2019. The Senior Credit Facility is a $ 650.0 million unsecured revolving credit facility, which matures on June 25, 2024. At March 31, 2022, the Company had $ 8.8 million of outstanding borrowings under the Senior Credit Facility, which reduced the availability under this facility to $ 641.2 million. The Senior Credit Facility has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. On March 28, 2022, the Company issued fixed-rate unsecured senior notes ("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. On September 11, 2018, the Company entered into a $ 350 million variable-rate term loan that matures on September 11, 2023 (the "2023 Term Loan"). 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. At March 31, 2022, 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 March 31, 2022, outstanding letters of credit totaled $ 42.8 million, most with expiration dates within 12 months. The maturities of long-term debt (including $ 3.8 million of finance leases) subsequent to March 31, 2022 are as follows: Year 2022 $ 8.8 2023 317.6 2024 360.5 2025 1.7 2026 11.5 2027 192.2 Thereafter 866.0 10 Table of Contents Note 11 - Contingencies The Company and certain of its subsidiaries have been identified as potentially responsible parties for investigation and remediation under the Comprehensive Environmental Response, Compensation and Liability Act, known as the Superfund, or similar state laws with respect to certain sites. Claims for investigation and remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation. On December 28, 2004, the United States Environmental Protection Agency (“USEPA”) sent Lovejoy, Inc. ("Lovejoy") a Special Notice Letter that identified Lovejoy as a potentially responsible party, together with at least 14 other companies, at the Ellsworth Industrial Park Site, Downers Grove, DuPage County, Illinois (the “Site”). The Company acquired Lovejoy in 2016. Lovejoy’s Downers Grove property is situated within the Ellsworth Industrial Complex. The USEPA and the Illinois Environmental Protection Agency (“IEPA”) allege there have been one or more releases or threatened releases of hazardous substances, allegedly including, but not limited to, a release or threatened release on or from Lovejoy's property, at the Site. The relief sought by the USEPA and IEPA includes further investigation and potential remediation of the Site and reimbursement of response costs. 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 were settled or dismissed prior to our acquisition of Lovejoy. The Company had total environmental accruals of $ 6.4 million and $ 6.0 million for various known environmental matters that are probable and reasonably estimable at March 31, 2022 and December 31, 2021, respectively, which includes the Lovejoy matter described above. These accruals were recorded based upon the best estimate of costs to be incurred in light of the progress made in determining the magnitude of remediation costs, the timing and extent of remedial actions required by governmental authorities and the amount of the Company’s liability in proportion to other responsible parties. Product Warranties: In addition to the contingencies above, the Company provides limited warranties on certain of its products. The product warranty liability included in "Other current liabilities" on the Consolidated Balance Sheets was $ 13.0 million and $ 11.7 million at March 31, 2022 and December 31, 2021, respectively. The increase in the liability 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 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 for the three months ended March 31, 2022 and twelve months ended December 31, 2021: March 31, 2022 December 31, 2021 Beginning balance, January 1 $ 11.7 $ 9.4 Expense 2.2 10.1 Payments ( 0.9 ) ( 7.8 ) Ending balance $ 13.0 $ 11.7 11 Table of Contents Note 12 - Equity The following tables present the changes in the components of equity for the three months ended March 31, 2022 and 2021, respectively: The Timken Company Shareholders Total Stated Capital Other Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Non controlling Interest Balance at December 31, 2021 $ 2,377.7 $ 40.7 $ 786.9 $ 1,616.4 $ ( 23.0 ) $ ( 126.1 ) $ 82.8 Net income 121.9 118.2 3.7 Foreign currency translation adjustment ( 22.6 ) ( 20.0 ) ( 2.6 ) Pension and other postretirement liability adjustments (net of income tax benefit of $ 0.5 million) ( 1.5 ) ( 1.5 ) Change in fair value of derivative financial instruments, net of reclassifications 2.0 2.0 Dividends – $ 0.30 per share ( 23.5 ) ( 23.5 ) Stock-based compensation expense 7.1 7.1 Stock purchased at fair market value ( 100.0 ) ( 100.0 ) Stock option exercise activity 1.4 1.4 Payments related to tax withholding for stock-based compensation ( 7.5 ) ( 7.5 ) Balance at March 31, 2022 $ 2,355.0 $ 40.7 $ 795.4 $ 1,711.1 $ ( 42.5 ) $ ( 233.6 ) $ 83.9 The Timken Company Shareholders Total Stated Capital Other Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Non controlling Interest Balance at December 31, 2020 $ 2,225.2 $ 40.7 $ 740.7 $ 1,339.5 $ 41.3 $ ( 9.3 ) $ 72.3 Net income 116.0 113.3 2.7 Foreign currency translation adjustment ( 44.4 ) ( 44.0 ) ( 0.4 ) Pension and other postretirement liability adjustments (net of income tax benefit of $ 0.6 million) ( 1.6 ) ( 1.6 ) Change in fair value of derivative financial instruments, net of reclassifications 2.2 2.2 Dividends – $ 0.29 per share ( 23.8 ) ( 23.8 ) Stock-based compensation expense 6.5 6.5 Stock purchased at fair market value ( 26.3 ) ( 26.3 ) Stock option exercise activity 14.1 14.1 Payments related to tax withholding for stock-based compensation ( 17.8 ) ( 17.8 ) Balance at March 31, 2021 $ 2,250.1 $ 40.7 $ 761.3 $ 1,429.0 $ ( 2.1 ) $ ( 53.4 ) $ 74.6 12 Table of Contents Note 13 - Impairment and Restructuring Charges Impairment and restructuring charges by segment are comprised of the following: For the three months ended March 31, 2022: Mobile Industries Process Industries Total Severance and related benefit costs $ 0.4 $ ( 0.1 ) $ 0.3 Exit costs 0.7 — 0.7 Total $ 1.1 $ ( 0.1 ) $ 1.0 For the three months ended March 31, 2021: Mobile Industries Process Industries Total Impairment charges $ 0.1 $ 3.3 $ 3.4 Severance and related benefit costs — 0.5 0.5 Exit costs 0.1 — 0.1 Total $ 0.2 $ 3.8 $ 4.0 The following discussion explains the impairment and restructuring charges recorded for the periods presented; however, it is not intended to reflect a comprehensive discussion of all amounts in the tables above. 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 man ufacturing 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 the t hree months ended March 31, 2022, the Company recorded severance and related benefits of $ 0.4 million and exit costs of $ 0.6 million related to this closure. The Company has incurred cumulative pretax costs related to this closure of $ 7.5 million as of March 31, 2022, 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. Process Industries: On February 4, 2020, the Company announced the closure of its chain manufacturing facility in Indianapolis, Indiana. This facility was part of the Diamond Chain Company ("Diamond Chain") acquisition completed on April 1, 2019. 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 cease operations by the end of the fourth 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 $ 11 million to $ 14 million of expenses related to this closure. During the three months ended March 31, 2021, the Company recorded severance and related benefit costs of $ 0.3 million, respectively, related to this closure. The Company has incurred cumulative pretax costs related to this closure of $ 11.1 million as of March 31, 2022, including rationalization costs recorded in cost of products sold. In addition, the Company recorded impairment charges of $ 3.3 million related to certain engineering-related assets used in the business during the three months ended March 31, 2021 . Management concluded no further investment would be made in these assets and as a result, reduced the value to zero. 13 Table of Contents Note 13 - Impairment and Restructuring Charges (continued) Consolid ated Restructuring Accrual: The following is a rollforward of the consolidated restructuring accrual for the three months ended March 31, 2022 and twelve months ended December 31, 2021: March 31, 2022 December 31, 2021 Beginning balance, January 1 $ 7.0 $ 8.0 Expense 1.0 4.4 Payments ( 1.0 ) ( 5.4 ) Ending balance $ 7.0 $ 7.0 The restructuring accrual at March 31, 2022 and December 31, 2021 was included in other current liabilities on the Consolidated Balance Sheets. 14 Table of Contents Note 14 - Retirement Benefit Plans The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans. The amounts for the three months ended March 31, 2022 are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of that period’s proportionate share of the amounts to be recorded for the year ending December 31, 2022. U.S. Plans International Plans Total Three Months Ended March 31, Three Months Ended March 31, Three Months Ended March 31, 2022 2021 2022 2021 2022 2021 Components of net periodic benefit cost (credit): Service cost $ 1.9 $ 2.5 $ 0.4 $ 0.5 $ 2.3 $ 3.0 Interest cost 4.1 4.4 1.5 1.1 5.6 5.5 Expected return on plan assets ( 5.2 ) ( 6.1 ) ( 2.5 ) ( 2.5 ) ( 7.7 ) ( 8.6 ) Amortization of prior service cost 0.3 0.3 — — 0.3 0.3 Recognition of net actuarial losses 2.6 0.9 — — 2.6 0.9 Net periodic benefit cost (credit) $ 3.7 $ 2.0 $ ( 0.6 ) $ ( 0.9 ) $ 3.1 $ 1.1 The Company expects full year 2022 lump sum payments for one of its U.S. defined benefit pension plans to exceed annual interest and service costs. This expectation triggered a remeasurement of assets and obligations for the plan. As a result of this remeasurement, the Company recognized net actuarial losses ("Mark-to-Market Charges") of $ 2.6 million during the three months ended March 31, 2022. For the three months ended March 31, 2021, the Company expected to make lump sum payments related to new retirees in excess of annual interest and service costs for three of the Company's U.S. defined benefit pension plans in 2021. This expectation triggered a remeasurement of assets and obligations for these plans. As a result of this remeasurement, the Company recognized net actuarial losses of $ 0.9 million during the three months ended March 31, 2021. Note 15 - Other Postretirement Benefit Plans The following table sets forth the net periodic benefit cost for the Company’s other postretirement benefit plans. The amounts for the three months ended March 31, 2022 are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of that period’s proportionate share of the amounts to be recorded for the year ending December 31, 2022. Three Months Ended March 31, 2022 2021 Components of net periodic benefit credit: Interest cost $ 0.4 $ 0.4 Amortization of prior service credit ( 2.5 ) ( 2.5 ) Net periodic benefit credit $ ( 2.1 ) $ ( 2.1 ) 15 Table of Contents Note 16 - Accumulated Other Comprehensive Income (Loss) The following tables present details about components of accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021, respectively: Foreign currency translation adjustments Pension and other postretirement liability adjustments Change in fair value of derivative financial instruments Total Balance at December 31, 2021 $ ( 80.3 ) $ 56.6 $ 0.7 $ ( 23.0 ) Other comprehensive (loss) income before reclassifications and income taxes ( 22.6 ) 0.2 3.2 ( 19.2 ) Amounts reclassified from accumulated other comprehensive (loss) income before income taxes — ( 2.2 ) ( 0.9 ) ( 3.1 ) Income tax benefit (expense) — 0.5 ( 0.3 ) 0.2 Net current period other comprehensive (loss) income, net of income taxes ( 22.6 ) ( 1.5 ) 2.0 ( 22.1 ) Noncontrolling interest 2.6 — — 2.6 Net current period comprehensive (loss) income, net of income taxes and noncontrolling interest ( 20.0 ) ( 1.5 ) 2.0 ( 19.5 ) Balance at March 31, 2022 $ ( 100.3 ) $ 55.1 $ 2.7 $ ( 42.5 ) Foreign currency translation adjustments Pension and other postretirement liability adjustments Change in fair value of derivative financial instruments Total Balance at December 31, 2020 $ ( 18.0 ) $ 63.4 $ ( 4.1 ) $ 41.3 Other comprehensive (loss) income before reclassifications and income taxes ( 44.4 ) — 1.4 ( 43.0 ) Amounts reclassified from accumulated other comprehensive (loss) income before income taxes — ( 2.2 ) 1.7 ( 0.5 ) Income tax (expense) benefit — 0.6 ( 0.9 ) ( 0.3 ) Net current period other comprehensive (loss) income, net of income taxes ( 44.4 ) ( 1.6 ) 2.2 ( 43.8 ) Noncontrolling interest 0.4 — — 0.4 Net current period comprehensive (loss) income, net of income taxes and noncontrolling interest ( 44.0 ) ( 1.6 ) 2.2 ( 43.4 ) Balance at March 31, 2021 $ ( 62.0 ) $ 61.8 $ ( 1.9 ) $ ( 2.1 ) Other comprehensive income (loss) before reclassifications and income taxes includes the effect of foreign currency. 16 Table of Contents Note 17 - Fair Value Fair value is defined as the price that would be expected to be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB provides accounting rules that classify the inputs used to measure fair value into the following hierarchy: Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 – Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. Level 3 – Unobservable inputs for the asset or liability. The following tables present the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021: March 31, 2022 Total Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 407.0 $ 404.4 $ 2.6 $ — Cash and cash equivalents measured at net asset value 17.5 — — — Restricted cash 0.7 0.7 — — Short-term investments 57.8 — 57.8 — Interest rate swap contract 2.6 — 2.6 — Foreign currency forward contracts 6.6 — 6.6 — Total assets $ 492.2 $ 405.1 $ 69.6 $ — Liabilities: Foreign currency forward contracts $ 6.3 $ — $ 6.3 $ — Total liabilities $ 6.3 $ — $ 6.3 $ — December 31, 2021 Total Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 257.1 $ 244.8 $ 12.3 $ — Restricted cash 0.8 0.8 — — Short-term investments 56.9 — 56.9 — Foreign currency forward contracts 5.6 — 5.6 — Total assets $ 320.4 $ 245.6 $ 74.8 $ — Liabilities: Foreign currency forward contracts $ 1.0 $ — $ 1.0 $ — Total liabilities $ 1.0 $ — $ 1.0 $ — Cash and cash equivalents are highly liquid investments with maturities of three months or less when purchased and are valued at the redempti on value. Short-term investments are investments with maturities between four months and one year, and generally are valued at amortized cost, which approximat es 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 market interest rates to measure the fair value of its interest rate swap contracts. The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts. 17 Table of Contents Note 17 - Fair Value (continued) In addition, the Company remeasures certain assets at fair value, using Level 3 inputs, as a result of the occurrence of triggering events such as purchase accounting for acquisitions. No other material assets were measured at fair value on a nonrecurring basis during the three months ended March 31, 2022 and 2021, respectively. Financial Instruments: The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, trade accounts payable, short-term borrowings and long-term debt. Due to their short-term nature, the carrying value of cash and cash equivalents, short-term investments, accounts receivable, trade accounts payable and short-term borrowings are a reasonable estimate of their fair value. Due to the nature of fair value calculati ons for variable-rate debt, the carrying value of the Company's long-term variable-rate debt is a reasonable estima te of its fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was $ 1,468.0 million and $ 1,171.1 million at March 31, 2022 and December 31, 2021, respectively. The carrying value of this debt was $ 1,424.5 million and $ 1,087.5 million at March 31, 2022 and December 31, 2021, respectively. The fair value of long-term fixed-rate debt was measured using Level 2 inputs. The Company does not believe it has significant concentrations of risk associated with the counterparties to its financial instruments. Note 18 - Derivative Instruments and Hedging Activities The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange rate risk and interest rate risk. Forward contracts on various foreign currencies are entered into in order to manage the foreign currency exchange rate risk associated with certain of the Company's commitments denominated in foreign currencies. From time to time, interest rate swaps are used to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings. The Company designates certain foreign currency forward contracts as cash flow hedges of forecasted revenues and certain interest rate hedges as cash flow hedges of fixed-rate borrowings. On September 8, 2020, the Company entered into a $ 100 million floating-to-fixed rate swap on the 2023 Term Loan, which hedges the change in the 1-month LIBOR rate between October 30, 2020 and September 11, 2023 to a fixed rate. The Company’s risk management objective is to hedge the risk of changes in the monthly interest expense attributable to changes in the benchmark interest rate. On September 15, 2020, the Company designated € 54.5 million of its € 150.0 million fixed-rate senior unsecured notes, maturing on September 7, 2027 (the "2027 Notes"), as a hedge against its net investment in one of its European subsidiaries. The objective of the hedge transaction is to protect the net investment in the foreign operations against changes in the exchange rate between the U.S. dollar and the Euro. The net impact for the three months ended March 31, 2022, respectively, was a gain of $ 1.7 million to accumulated comprehensive (loss) income with a corresponding offset to other income, which partially offsets the impact of the foreign currency adjustment on the 2027 Notes. The Company entered into $ 350 million floating-to-fixed 10-year Treasury rate locks during the first quarter of 2022, prior to issuing the 2032 Notes. This fixed the 10-year Treasury yield and settled at pricing of the 2032 Notes, resulting in $ 6.4 million of cash proceeds received by the Company. This amount was recorded to accumulated comprehensive income and will be amortized as a reduction in interest expense over the 10-year tenor of the 2032 Notes. The Company does not purchase or hold any derivativ e financial instruments for trading purposes. As of March 31, 2022 and December 31, 2021, the Company had $ 291.4 million and $ 300.8 million, respectively, of outstanding foreign currency forward contracts at notional value. Refer to Note 17 - Fair Value for the fair value disclosure of derivative financial instruments. 18 Table of Contents Note 18 - Derivative Instruments and Hedging Activities (continued) Cash Flow Hedging Strategy: For certain derivative instruments that are designated and qualify as cash flow hedges ( i.e ., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. 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. The Company hedges portions of its forecasted cash flows denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against foreign currencies, the decline in the present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Co nverse ly, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts. As of March 31, 2022 and December 31, 2021, the Company had $ 83.5 million and $ 80.0 million, respectively, of outstanding foreign currency forward contracts at notional value that were classified as cash flow hedges. The maximum length of time over which the Company hedges its exposure to the variability in future cash flows for forecast transactions is generally eighteen months or less. Purpose for Derivative Instruments not designated as Hedging Instruments: For derivative instruments that are not designated as hedging instruments, the instruments are typically forward contracts. In general, the practice is to reduce volatility by selectively hedging transaction exposures including intercompany loans, accounts payable and accounts receivable. Intercompany loans between entities with different functional currencies typically are hedged with a forward contract at the inception of the loan with a maturity date corresponding to the maturity of the loan. 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. As of March 31, 2022 and December 31, 2021, the Company had $ 207.9 million and $ 220.8 million, respectively, of outstanding foreign currency forward contracts at notional value that were not d esignated as hedging instruments. The following table presents the impact of derivative instruments not designated as hedging instruments for the three months ended March 31, 2022 and 2021, respectively, and the related location within the Consolidated Statements of Income: Amount of gain or (loss) recognized in income Three Months Ended March 31, Derivatives not designated as hedging instruments: Location of gain or (loss) recognized in income 2022 2021 Foreign currency forward contracts Other income (expense), net $ ( 1.0 ) $ 0.2 Note 19 - Subsequent Events On April 29, 2022, the Company reached an agreement to acquire Spinea, s.r.o. (Spinea), a European technology leader and manufacturer of highly engineered cycloidal reduction gears and actuators. Spinea’s solutions primarily serve high-precision automation and robotics applications in the factory automation sector. Spinea is located in Presov, Slovakia, and is expected to have sales around $ 40 million for the full year of 2022. The transaction, which is subject to customary closing conditions, is expected to close in the second quarter and will be funded with cash and borrowings from existing credit facilities. 19 Table of Contents