What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-28 compared with 2022-05-02 · 218 added, 89 removed, 343 unchanged (47% of the section changed)

4 unchanged sentences

With more than a century of innovation and increasing knowledge, the Company continuously improves the reliability and efficiency of global machinery and equipment to move the world forward.

The Company’s growing product and services portfolio features many strong industrial brands, such as Timken®, Philadelphia Gear®, Drives®, Cone Drive®, Rollon®, Lovejoy®, Diamond®, BEKA® and Groeneveld®.

Timken employs more than 18,000 people globally in 43 countries.

22 unchanged sentences

Timken focuses its international efforts and footprint in regions of the world where strong macroeconomic factors such as urbanization, infrastructure development and sustainability create demand for its products and services.

The Company's strategy has three primary elements:

The Company's long-term strategy has three primary elements:

Profitable Growth.

9 unchanged sentences

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

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

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

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

10 unchanged sentences

Average number of shares – diluted 74,182,793 77,254,157 — (4.0) %

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.

Six Months Ended

2022 2021 $ Change % Change

Net sales $ 2,278.3 $ 2,088.3 $ 190.0 9.1 %

Net income 227.5 223.2 4.3 1.9 %

Net income attributable to noncontrolling interest 4.3 5.1 (0.8) (15.7) %

Net income attributable to The Timken Company $ 223.2 $ 218.1 $ 5.1 2.3 %

Diluted earnings per share $ 2.98 $ 2.82 $ 0.16 5.7 %

Average number of shares – diluted 74,877,248 77,257,761 — (3.1) %

The increase in net sales for the three months ended June 30, 2022 compared with the three months ended June 30, 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 June 30, 2022 compared with the three months ended June 30, 2021 was primarily due to favorable price/mix and the impact of higher volume, partially offset by higher material, logistics and other operating costs, higher pension mark-to-market charges, higher impairment and restructuring charges and a higher tax rate.

The increase in net sales for the six months ended June 30, 2022 compared with the six months ended June 30, 2021 was primarily driven by strong organic growth (including positive pricing), partially offset by the unfavorable impact of foreign currency exchange rate ch anges.

The increase in net income for the six months ended June 30, 2022 compared with the six months ended June 30, 2021 was primarily due to favorable price/mix and the impact of higher volume, partially offset by higher material, logistics and other operating costs, higher pension mark-to-market charges and a higher tax rate.

The Company expects 2022 full-year revenue to be up approximately 7% 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's earnings are expected to be up in 2022 compared with 2021, primarily due to the favorable impact of price/mix and higher volume, 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, inflationary cost pressures and staffing issues related to accelerating customer demand.

Timken expects business conditions to remain challenging in 2022, due in part 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.

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.

3 unchanged sentences

Net sales $ 1,153.7 $ 1,062.9 $ 90.8 8.5 %

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.

Six Months Ended

2022 2021 $ Change % Change

Net sales $ 2,278.3 $ 2,088.3 $ 190.0 9.1 %

Net sales increased for the three months ended June 30, 2022 compared with the three months ended June 30, 2021.

The increase was primarily due to strong organic growth of $122 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $35 million.

The higher organic revenue was driven by higher demand across most market sectors in the Mobile and Process Industries segments and higher net pricing.

Net sales increased for the six months ended June 30, 2022 compared with the six months ended June 30, 2021.

The increase was primarily due to strong organic growth of $235 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $50 million.

The higher organic revenue was driven by higher demand across most market sectors in the Mobile and Process Industries segments and higher net pricing.

Gross Profit:

3 unchanged sentences

Gross profit % to net sales 29.6 % 28.4 % 120 bps

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.

Six Months Ended

2022 2021 $ Change Change

Gross profit $ 669.2 $ 601.5 $ 67.7 11.3%

Gross profit % to net sales 29.4 % 28.8 % 60 bps

Gross profit increased for the three months ended June 30, 2022 compared with the three months ended June 30, 2021, primarily due to favorable price/mix of $73 million and the impact of higher volume of $25 million, partially offset by higher material and logistics costs of $44 million, unfavorable manufacturing performance of $7 million and the unfavorable impact of foreign currency exchange rate changes of $5 million.

Gross profit increased for the six months ended June 30, 2022 compared with the six months ended June 30, 2021, primarily due to favorable price/mix of $118 million and the impact of higher volume of $54 million, partially offset by higher material and logistics costs of $89 million, unfavorable manufacturing performance of $8 million and the unfavorable impact of foreign currency exchange rate changes of $5 million.

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

3 unchanged sentences

Selling, general and administrative expenses % to net sales 13.5 % 14.0 % (50) bps

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.

Six Months Ended

2022 2021 $ Change Change

Selling, general and administrative expenses $ 310.0 $ 293.5 $ 16.5 5.6 %

Selling, general and administrative expenses % to net sales 13.6 % 14.1 % (50) bps

SG&A expenses increased for the three and six months ended June 30, 2022 compared with the three and six months ended June 30, 2021.

The increase for the three and six months ended June 30, 2022, as compared to the year-ago periods, was primari ly due to higher compensation costs and increased spending to support the higher sales levels.

Impairment and Restructuring:

2 unchanged sentences

Impairment charges $ 8.8 $ 1.1 $ 7.7 NM

Severance and related benefit costs 1.1 0.1 1.0 NM

Exit costs 0.1 0.1 — — %

Total $ 10.0 $ 1.3 $ 8.7 NM

Six Months Ended

2022 2021 $ Change % Change

Impairment charges $ 8.8 $ 4.5 $ 4.3 95.6 %

Severance and related benefit costs 1.4 0.6 0.8 133.3 %

Exit costs 0.7 0.1 0.6 NM

Exit costs 0.8 0.2 0.6 300.0 %

Total $ 11.0 $ 5.3 $ 5.7 107.5 %

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.

Impairment and restructuring charges of $10.0 million and $11.0 million during the three and six months ended June 30, 2022 were comprised primarily of impairment charges related to property, plant and equipment at the Company's joint venture in Russia.

In addition, the Company incurred severance and related benefits, and exit costs associated with the closure of the Company's Villa Carcina, Italy bearing plant during the three and six months ended June 30, 2022.

This initiative was undertaken to reduce headcount and continue to right-size the Company's manufacturing footprint.

Impairment and restructuring charges of $1.3 million and $5.3 million during the three and six months ended June 30, 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 the engineering-related assets and as a result, reduced the value to zero.

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

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

Interest Income and Expense:

Three Months Ended

2022 2021 $ Change % Change

Interest expense $ (18.3) $ (15.3) $ (3.0) 19.6 %

Interest income 1.0 0.7 $ 0.3 42.9 %

Six Months Ended

2022 2021 $ Change % Change

Interest expense $ (32.6) $ (30.2) $ (2.4) 7.9 %

Interest income 1.6 1.2 $ 0.4 33.3 %

The increase in interest expense for the three and six months ended June 30, 2022 compared with the three and six months ended June 30, 2021 was primarily due to higher average debt outstanding due to the issuance of the $350 million 2032 Notes in March 2022 .

A portion of the proceeds from these notes was used to fund the acquisition of Spinea in the second quarter of 2022.

Other Income (Expense):

1 unchanged sentence

2022 2021 $ Change % Change

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

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 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.

Non-service pension and other postretirement

(expense) income $ (7.9) $ 1.4 $ (9.3) NM

Other expense, net (1.1) (2.2) 1.1 (50.0) %

Total other expense $ (9.0) $ (0.8) $ (8.2) NM

Six Months Ended

2022 2021 $ Change % Change

Non-service pension and other postretirement

(expense) income $ (6.6) $ 5.4 $ (12.0) (222.2) %

Other expense, net (0.9) (1.2) 0.3 (25.0) %

Total other (expense) income $ (7.5) $ 4.2 $ (11.7) (278.6) %

Non-service pension and other postretirement (expense) income decreased for the three and six months ended June 30, 2022 compared with the three and six months ended June 30, 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 two of the Company's U.S.

defined benefit pension plans.

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.

As a result of the remeasurements, the Company recognized net actuarial losses of $11.6 million and $3.5 million during the three months ended June 30, 2022 and June 30, 2021, respectively, and $14.2 million and $4.4 million during the six months ended June 30, 2022 and June 30, 2021, respectively.

In addition, the decrease was due to a lower expected return on plan assets in 2022.

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

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:

3 unchanged sentences

Effective tax rate 29.4 % 21.5 % 790 bps

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.

Six Months Ended

2022 2021 $ Change Change

Provision for income taxes $ 82.2 $ 54.7 $ 27.5 50.3 %

Effective tax rate 26.5 % 19.7 % 680 bps

Income tax expense increased $14.6 million for the three months ended June 30, 2022 compared with the three months ended June 30, 2021 primarily due to higher pre-tax earnings, an unfavorable mix of earnings in higher tax rate jurisdictions, the unfavorable impact of discrete tax items, and lower deductions for stock-based compensation.

Income tax expense increased $27.5 million for the six months ended June 30, 2022 compared with the six months ended June 30, 2021 primarily due to higher pre-tax earnings, an unfavorable mix of earnings in higher tax rate jurisdictions, the unfavorable impact of discrete tax items, including a discrete tax benefit recorded in the prior period in connection with the settlement of the 2017 and 2018 U.S.

federal tax years, and lower deductions for stock-based compensation.

Refer to Note 6 - 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 foreign currency exchange rate changes.

GAAP to net sales adjusted to remove the effects of acquisitions completed in 2022 and 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 item represents the Company's acquisitions completed in 2021:

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

The following item represents the Company's acquisitions completed in 2022 and 2021:

• The Company acquired Spinea during the second quarter of 2022.

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

• The Company acquired iMS during the third quarter of 2021.

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

10 unchanged sentences

Net sales, excluding the impact of currency $ 559.3 $ 494.2 $ 65.1 13.2 %

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.

Six Months Ended

2022 2021 $ Change Change

Net sales $ 1,084.0 $ 998.7 $ 85.3 8.5%

EBITDA $ 144.2 $ 146.9 $ (2.7) (1.8%)

EBITDA margin 13.3 % 14.7 % (90) bps

Six Months Ended

2022 2021 $ Change % Change

Net sales $ 1,084.0 $ 998.7 $ 85.3 8.5 %

Currency (24.9) — (24.9) NM

Net sales, excluding the impact of currency $ 1,108.9 $ 998.7 $ 110.2 11.0 %

The Mobile Industries segment's net sales, excluding the effects of foreign currency exchange rate changes, increased $65.1 million or 13.2% in the three months ended June 30, 2022 compared with the three months ended June 30, 2021, reflecting increased shipments in the off-highway, automotive, rail and heavy truck sectors, as well as higher net pricing, partially offset by lower shipments in the aerospace sector.

EBITDA increased by $1.8 million or 2.7% for the three months ended June 30, 2022 compared with the three months ended June 30, 2021, primarily due to favorable price/mix and the impact of higher volume, partially offset by higher material, logistics and other operating costs, higher impairment and restructuring charges, and the unfavorable impact of foreign currency exchange rate changes.

The Mobile Industries segment's net sales, excluding the effects of foreign currency exchange rate changes, increased $110.2 million or 11.0% in the six months ended June 30, 2022 compared with the six months ended June 30, 2021, reflecting increased shipments in the off-highway, rail and heavy truck sectors, as well as higher net pricing, partially offset by lower shipments in the aerospace sector.

EBITDA decreased by $2.7 million or 1.8% for the six months ended June 30, 2022 compared with the six months ended June 30, 2021, primarily due to higher material, logistics and other operating costs, higher impairment and restructuring charges, partially offset by favorable price/mix and the impact of higher volume.

Process Industries Segment:

10 unchanged sentences

Net sales, excluding the impact of acquisitions and currency $ 625.2 $ 568.7 $ 56.5 9.9 %

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 .

Six Months Ended

2022 2021 $ Change Change

Net sales $ 1,194.3 $ 1,089.6 $ 104.7 9.6%

EBITDA $ 319.1 $ 272.2 $ 46.9 17.2%

EBITDA margin 26.7 % 25.0 % 170 bps

Six Months Ended

2022 2021 $ Change % Change

Net sales $ 1,194.3 $ 1,089.6 $ 104.7 9.6 %

Acquisitions 5.1 — 5.1 NM

Currency (25.0) — (25.0) NM

Net sales, excluding the impact of acquisitions and currency $ 1,214.2 $ 1,089.6 $ 124.6 11.4 %

The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $56.5 million or 9.9% in the three months ended June 30, 2022 compared with the three months ended June 30, 2021 .

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

EBITDA increased $22.3 million or 15.8% for the three months ended June 30, 2022 compared with the three months ended June 30, 2021 primarily due to favorable price/mix and the impact of higher volume, partially offset by higher material, logistics and other operating costs.

The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $124.6 million or 11.4% in the six months ended June 30, 2022 compared with the six months ended June 30, 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.

EBITDA increased $46.9 million or 17.2% for the six months ended June 30, 2022 compared with the six months ended June 30, 2021 primarily due to favorable price/mix and the impact of higher volume, partially offset by higher material, logistics and other operating costs.

Unallocated Corporate:

3 unchanged sentences

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

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

Six Months Ended

2022 2021 $ Change Change

Unallocated corporate expense $ (26.3) $ (23.2) $ (3.1) 13.4 %

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

The increase in unallocated corporate expense for the three and six months ended June 30, 2022 compared with the three and six months ended June 30, 2021 was primarily due to higher compensation expense and other spending to support increased business activity levels.

Six Months Ended

2022 2021 $ Change

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

Net cash provided by operating activities $ 77.1 $ 178.8 $ (101.7)

Net cash used in investing activities (198.7) (73.9) (124.8)

1 unchanged sentence

Effect of exchange rate changes on cash (7.7) (0.8) (6.9)

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

Increase (Decrease) in cash and cash equivalents and restricted cash $ 48.1 $ (14.8) $ 62.9

Op erating Activities:

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.

The decrease in net cash provided by operating activities for the first six months of 2022 compared with the first six months of 2021 was primarily due to an increase in cash used for working capital items of $143.0 million, partially offset by an increase in the benefit of incom e taxes on cash of $21.2 million, a decrease in pension and other postretirement benefit contributions and payments of $6.9 million, higher net income of $4.3 million and a decrease in other items.

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 three months of 2022 and 2021, respectively:

Three Months Ended

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

Six Months Ended

2022 2021 $ Change

Cash (Used) Provided:

Cash (used in) provided by:

Accounts receivable $ (149.3) $ (125.8) $ (23.5)

4 unchanged sentences

Cash used in working capital items $ (267.8) $ (124.8) $ (143.0)

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

Three Months Ended

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

Six Months Ended

2022 2021 $ Change

1 unchanged sentence

Income tax payments (68.3) (53.1) (15.2)

Other miscellaneous items (4.8) (7.2) 2.4

Cash benefit from income taxes $ 8.1 $ 1.6 $ 6.5

Other items (0.1) (9.0) 8.9

Change in income taxes $ 13.8 $ (7.4) $ 21.2

Investing Activities:

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.

The increase in net cash used in investing activities for the first six months of 2022 compared with the first six months of 2021 was primarily due to an increase in cash used for acquisitions of $152.4 million and an increase in capital expenditures of $14.7 million, partially offset by a decrease in cash used for investments in short-term marketable securities of $37.2 million.

Financing Activities:

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.

The change in net cash used in financing activities for the first six months of 2022 compared with the first six months of 2021 was primarily due to an increase in net borrowings of $419.4 million, partially offset by an increase in the purchases of treasury shares of $118.0 million.

LIQUIDITY AND CAPITAL RESOURCES

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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 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.

At June 30, 2022, the Company had strong liquidity with $305.3 million of cash and cash equivalents on the Consolidated Balance Sheet, as well as $741.7 million of available resources from committed credit lines.

Of the $305.3 million of cash and cash equivalents, $257.0 million resided in jurisdictions outside the United States.

1 unchanged sentence

cash could be subject to taxes and some portion may be subject to governmental restrictions.

As of June 30, 2022, Timken has $17.8 million of cash in Russia, which the Company is presently unable to repatriate.

Part of the Company's strategy is to grow in attractive market sectors, many of which are outside the United States.

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

At June 30, 2022, the Senior Credit Facility had outstanding borrowings of $8.3 million, which reduced the availability to $641.7 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 March 31, 2022, the Company's consolidated leverage ratio was 2.45 to 1.0 (based on total debt as described below).

As of June 30, 2022, the Company's consolidated leverage ratio was 2.36 to 1.0.

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

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

As of June 30, 2022, the Company's consolidated interest coverage ratio was 12.64 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 1.17% and the average rate on outstanding Euro borrowings was 1.00% as of March 31, 2022.

The average rate on outstanding Euro borrowings was 1.00% as of June 30, 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 March 31, 2022, the Company carried investment-grade credit ratings with Moody's (Baa2), S&P Global (BBB-) and Fitch (BBB-).

As of June 30, 2022, the Company carried investment-grade credit ratings with both Moody's (Baa2) and S&P Global (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 March 31, 2022.

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

As of June 30, 2022, the Company had no outstanding borrowings under the Accounts Receivable Facility and no borrowing base limitations.

Availability under the Accounts Receivable Facility was $100 million as of June 30, 2022.

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 $254.4 million.

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.

At June 30, 2022, the Company had borrowings outstanding of $70.3 million and bank guarantees of $0.2 million, which reduced the aggregate availability under these facilities to approximately $183.9 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.

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

In addition, a portion of the proceeds from the notes was used to fund the Spinea acquisition, which closed in the second quarter of 2022.

At June 30, 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.

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 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.

During the first six months of 2022, the Company made cash contributions and payments of $6.2 million to its global defined benefit pension plans and $1.9 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 po st retirement benefits expense in 2022.

Excluding mark-to-market charges, the Company expects higher pension and other postretirement benefits expense in 2022 compared to 2021 primarily due to lower expected returns on pension plan assets and higher interest expense, partially offset by lower service costs.

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, 2021, during the three months ended March 31, 2022.

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 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.

For the six months ended June 30, 2022, the Company recorded negative foreign currency translation adjustments of $134.2 million that decreased shareholders' equity, compared with negative foreign currency translation adjustments of $20.2 million that decreased shareholders' equity for the six months ended June 30, 2021.

The foreign currency translation adjustments for the six months ended June 30, 2022 were negatively impacted by the strengthening of the U.S.

dollar relative to other foreign currencies, including the Euro, Chinese Yuan and Indian Rupee.

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 June 30, 2022 totaled $2.3 million of n et gains, compared with $3.5 million of net losses durin g the three months ended June 30, 2021.

Foreign currency exchange gains and losses, net of hedging activity, resulting from transactions included in the Company's operating results for the six months ended June 30, 2022 totaled $4.6 million of n et gains, compared with $5.6 million of net losses durin g the six months ended June 30, 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.

The Company has two subsidiaries in Russia, including a 51%-owned joint venture to serve the rail market in Russia.

As a result of Russia's invasion of Ukraine (and associated sanctions), the Company suspended operations and recorded property, plant and equipment impairment charges of $8.8 million and inventory write-downs of $4.3 million during the six months ended June 30, 2022.

After giving effect to these impairments and write-downs, as of June 30, 2022, the Company has net assets (net of noncontrolling interest of $8.7 million), totaling $17.5 million on its Consolidated Balance Sheet related to its Russia operations.

Net assets related to the Company's Russia operations include $17.8 million of cash and cash equivalents.

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Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Net Sales $ 1,153.7 $ 1,062.9 $ 2,278.3 $ 2,088.3

Net Income Attributable to The Timken Company 105.0 104.8 223.2 218.1

Impairment, restructuring and reorganization charges (1)

Corporate pension and other postretirement benefit related expense (2)

Acquisition-related charges (gain) (3)

Impairment, restructuring and reorganization

2.0 2.2 3.6 7.4

Corporate pension and other postretirement benefit

related expense (2)

11.6 3.5 14.2 4.4

Russia-related charges (3)

Acquisition-related charges (4)

1.6 1.4 2.7 0.6

Noncontrolling interest of above adjustments (4.5) — (5.8) 0.2

Provision for income taxes (5)

(0.2) (5.8) (5.3) (17.9)

Adjusted Net Income $ 123.9 $ 106.1 $ 245.6 $ 212.8

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Depreciation and amortization expense (6)

40.7 42.0 82.1 84.7

Noncontrolling interest (4.5) — (5.8) 0.2

Provision for income taxes (5)

(0.2) (5.8) (5.3) (17.9)

Adjusted EBITDA $ 231.2 $ 200.3 $ 456.3 $ 404.0

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Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Diluted earnings per share (EPS) $ 1.42 $ 1.36 $ 2.98 $ 2.82

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

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

Mobile Process Unallocated Corporate Total

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related expense (2)

— — 11.6 11.6

Russia-related charges (3)

9.4 (1.0) — 8.4

Acquisition-related charges (4)

— 1.0 0.6 1.6

Adjusted EBITDA $ 79.5 $ 164.5 $ (12.8) $ 231.2

Adjusted EBITDA Margin (% of net sales) 14.6 % 27.0 % NM 20.0 %

Three Months Ended June 30, 2021

Mobile Process Unallocated Corporate Total

Net Sales $ 494.2 $ 568.7 $ — $ 1,062.9

EBITDA 67.3 141.2 (15.1) 193.4

Impairment, restructuring and reorganization

1.2 0.8 — 2.0

Corporate pension and other postretirement

benefit related expense (2)

Acquisition-related charges (3)

0.2 0.2 1.0 1.4

Adjusted EBITDA $ 68.7 $ 142.2 $ (10.6) $ 200.3

Adjusted EBITDA Margin (% of net sales) 13.9 % 25.0 % NM 18.8 %

Six Months Ended June 30, 2022

Mobile Process Unallocated Corporate Total

Net Sales $ 1,084.0 $ 1,194.3 $ — $ 2,278.3

EBITDA 144.2 319.1 (40.5) 422.8

Impairment, restructuring and reorganization

2.0 1.6 — 3.6

Corporate pension and other postretirement benefit

related expense (2)

— — 14.2 14.2

Russia-related charges (3)

12.5 0.5 — 13.0

Acquisition-related charges (4)

— 1.4 1.3 2.7

Adjusted EBITDA $ 158.7 $ 322.6 $ (25.0) $ 456.3

Adjusted EBITDA Margin (% of net sales) 14.6 % 27.0 % NM 20.0 %

Three Months Ended March 31, 2021

Six Months Ended June 30, 2021

Mobile Process Unallocated Corporate Total

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benefit related expense (2)

Acquisition-related charges (gain) (3)

Acquisition-related charges (3)

0.4 0.3 (0.1) 0.6

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Refer to Note 15 - Retirement Benefit Plans and Note 16 - Other Postretirement Benefit Plans for additional discussion.

(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.

(3) Russia-related charges include impairments and allowances recorded against certain property, plant and equipment, inventory and trade receivables 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 38 above for additional information.

(4) Acquisition-related charges 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 charges includes measurement period adjustments to the bargain purchase gain on the acquisition of the assets of Aurora that closed on November 30, 2020.

(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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Three Months Ended

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

June 30, Six Months Ended

2022 2021 2022 2021

Net cash provided by operating activities $ 78.3 $ 147.1 $ 77.1 $ 178.8

Capital expenditures (40.9) (31.1) (75.2) (60.5)

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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 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.

Net income for the trailing twelve months ended June 30, 2022 and December 31, 2021 was $385.8 million and $381.5 million, respectively.

Net debt to adjusted EBITDA for the trailing twelve months was 2.0 at June 30, 2022, compared with 1.7 at December 31, 2021.

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

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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.

(4) Russia-related charges include allowances and 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 38 in Management Discussion and Analysis for additional information.

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The Company cautions readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of the Company due to a variety of factors, such as:

• deterioration in world economic conditions, or in economic conditions in any of the geographic regions in which the Company or its customers or suppliers conduct business, including adverse effects from a global economic slowdown, terrorism, or hostilities.

This includes:

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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