TIMKEN CO 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per share data) OVERVIEW Introduction: The Timken Company designs and manages a growing portfolio of engineered bearings and power transmission products. 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®, Groeneveld® and Spinea®. Timken employs more than 18,000 people globally in 43 countries. The Company operates under two reportable segments: (1) Mobile Industries and (2) Process Industries. The following further describes these business segments: • Mobile Industries serves OEM customers that manufacture off-highway equipment for the agricultural, mining and construction markets; on-highway vehicles including passenger cars, light trucks, and medium- and heavy-duty trucks; rail cars and locomotives; outdoor power equipment; rotorcraft and fixed-wing aircraft; and other mobile equipment. Beyond service parts sold to OEMs, aftermarket sales and services to individual end users, equipment owners, operators and maintenance shops are handled directly or through the Company's extensive network of authorized automotive and heavy-truck distributors. • Process Industries serves OEM and end-user customers in industries that place heavy demands on the fixed operating equipment they make or use in heavy and other general industrial sectors. This includes metals, cement and aggregate production; power generation and renewable energy sources; oil and gas extraction and refining; pulp and paper and food processing; automation and robotics; and health and critical motion control equipment. Other applications include marine equipment, gear drives, cranes, hoists and conveyors. This segment also supports aftermarket sales and service needs through its global network of authorized industrial distributors and through the provision of services directly to end users. Timken creates value by understanding customer needs and applying its know-how to serve a broad range of customers in attractive markets and industries across the globe. The Company’s business strengths include its product technology, end-market diversity, geographic reach and aftermarket mix. Timken collaborates with OEMs to improve equipment efficiency with its engineered products and captures subsequent equipment replacement cycles by selling largely through independent channels in the aftermarket. 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 long-term strategy has three primary elements: Profitable Growth. The Company intends to expand into new and existing markets by leveraging its collective knowledge of metallurgy, friction management and power transmission to create value for Timken customers. Using a highly collaborative technical selling approach, the Company places particular emphasis on creating unique solutions for challenging and/or demanding applications. The Company intends to grow in attractive market sectors around the world, emphasizing those spaces that are highly fragmented, demand high service and value the reliability and efficiency offered by Timken products. The Company also targets applications that offer significant aftermarket demand, thereby providing product and services revenue throughout the equipment’s lifetime. Operational Excellence. Timken operates with a relentless drive for exceptional results and a passion for superior execution. The Company embraces a continuous improvement culture that is charged with increasing efficiency, lowering costs, eliminating waste, encouraging organizational agility and building greater brand equity to fuel growth. This requires the Company’s ongoing commitment to attract, retain and develop the best talent across the world. Capital Deployment to Drive Shareholder Value. The Company is intently focused on providing the highest returns for shareholders through its capital allocation framework, which includes: (1) investing in the core business through capital expenditures, research and development, and other 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; (3) returning capital to shareholders through dividends and share repurchases; and (4) maintaining a strong balance sheet and sufficient liquidity. As part of this framework, the Company may also restructure, reposition or divest underperforming product lines or assets. 26 Table of Contents Overview: Three Months Ended June 30, 2022 2021 $ Change % Change Net sales $ 1,153.7 $ 1,062.9 $ 90.8 8.5 % Net income 105.6 107.2 (1.6) (1.5) % Net income attributable to noncontrolling interest 0.6 2.4 (1.8) (75.0) % Net income attributable to The Timken Company $ 105.0 $ 104.8 $ 0.2 0.2 % Diluted earnings per share $ 1.42 $ 1.36 $ 0.06 4.4 % Average number of shares – diluted 74,182,793 77,254,157 — (4.0) % Six Months Ended June 30, 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. Outlook: 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 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. 27 Table of Contents THE STATEMENT OF INCOME Sales: Three Months Ended June 30, 2022 2021 $ Change % Change Net sales $ 1,153.7 $ 1,062.9 $ 90.8 8.5 % Six Months Ended June 30, 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: Three Months Ended June 30, 2022 2021 $ Change Change Gross profit $ 341.8 $ 302.3 $ 39.5 13.1% Gross profit % to net sales 29.6 % 28.4 % 120 bps Six Months Ended June 30, 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. 28 Table of Contents Selling, General and Administrative ("SG&A") Expenses: Three Months Ended June 30, 2022 2021 $ Change Change Selling, general and administrative expenses $ 155.9 $ 149.0 $ 6.9 4.6 % Selling, general and administrative expenses % to net sales 13.5 % 14.0 % (50) bps Six Months Ended June 30, 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: Three Months Ended June 30, 2022 2021 $ Change % Change 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 June 30, 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 0.8 0.2 0.6 300.0 % Total $ 11.0 $ 5.3 $ 5.7 107.5 % 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. 29 Table of Contents Interest Income and Expense: Three Months Ended June 30, 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 June 30, 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): Three Months Ended June 30, 2022 2021 $ Change % Change 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 June 30, 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 $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. 30 Table of Contents Income Tax Expense: Three Months Ended June 30, 2022 2021 $ Change Change Provision for income taxes $ 44.0 $ 29.4 $ 14.6 49.7 % Effective tax rate 29.4 % 21.5 % 790 bps Six Months Ended June 30, 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. 31 Table of Contents BUSINESS SEGMENTS The Company ' s reportable segments are business units that serve different industry sectors. While the segments operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. The primary measurement used by management to measure the financial performance of each segment is EBITDA. Refer to Note 5 - Segment Information in the Notes to the Consolidated Financial Statements for the reconciliation of EBITDA by segment to consolidated income before income taxes. 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 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 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. Mobile Industries Segment: Three Months Ended June 30, 2022 2021 $ Change Change Net sales $ 543.6 $ 494.2 $ 49.4 10.0% EBITDA $ 69.1 $ 67.3 $ 1.8 2.7% EBITDA margin 12.7 % 13.6 % (90) bps Three Months Ended June 30, 2022 2021 $ Change % Change Net sales $ 543.6 $ 494.2 $ 49.4 10.0 % Less: Currency (15.7) — (15.7) NM Net sales, excluding the impact of currency $ 559.3 $ 494.2 $ 65.1 13.2 % Six Months Ended June 30, 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 June 30, 2022 2021 $ Change % Change Net sales $ 1,084.0 $ 998.7 $ 85.3 8.5 % Less: Currency (24.9) — (24.9) NM Net sales, excluding the impact of currency $ 1,108.9 $ 998.7 $ 110.2 11.0 % 32 Table of Contents 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: Three Months Ended June 30, 2022 2021 $ Change Change Net sales $ 610.1 $ 568.7 $ 41.4 7.3% EBITDA $ 163.5 $ 141.2 $ 22.3 15.8% EBITDA margin 26.8 % 24.8 % 200 bps Three Months Ended June 30, 2022 2021 $ Change % Change Net sales $ 610.1 $ 568.7 $ 41.4 7.3 % Less: Acquisitions 3.9 — 3.9 NM Currency (19.0) — (19.0) NM Net sales, excluding the impact of acquisitions and currency $ 625.2 $ 568.7 $ 56.5 9.9 % Six Months Ended June 30, 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 June 30, 2022 2021 $ Change % Change Net sales $ 1,194.3 $ 1,089.6 $ 104.7 9.6 % Less: 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 % 33 Table of Contents 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 $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: Three Months Ended June 30, 2022 2021 $ Change Change Unallocated corporate expense $ (13.4) $ (11.6) $ (1.8) 15.5 % Unallocated corporate expense % to net sales (1.2) % (1.1) % (10) bps Six Months Ended June 30, 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. 34 Table of Contents CASH FLOW Six Months Ended June 30, 2022 2021 $ Change Net cash provided by operating activities $ 77.1 $ 178.8 $ (101.7) Net cash used in investing activities (198.7) (73.9) (124.8) Net cash provided by (used in) financing activities 177.4 (118.9) 296.3 Effect of exchange rate changes on cash (7.7) (0.8) (6.9) Increase (Decrease) in cash and cash equivalents and restricted cash $ 48.1 $ (14.8) $ 62.9 Op erating Activities: 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 six months of 2022 and 2021, respectively: Six Months Ended June 30, 2022 2021 $ Change Cash (used in) provided by: Accounts receivable $ (149.3) $ (125.8) $ (23.5) Unbilled receivables (2.9) 10.4 (13.3) Inventories (126.1) (81.4) (44.7) Trade accounts payable (6.1) 41.2 (47.3) Other accrued expenses 16.6 30.8 (14.2) 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 six months of 2022 and 2021, respectively: Six Months Ended June 30, 2022 2021 $ Change Accrued income tax expense $ 82.2 $ 54.7 $ 27.5 Income tax payments (68.3) (53.1) (15.2) Other items (0.1) (9.0) 8.9 Change in income taxes $ 13.8 $ (7.4) $ 21.2 Investing Activities: 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 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. 35 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Reconciliation of total debt to net debt and the ratio of net debt to capital: Net Debt: June 30, 2022 December 31, 2021 Short-term debt, including current portion of long-term debt $ 81.6 $ 53.8 Long-term debt 1,734.3 1,411.1 Total debt $ 1,815.9 $ 1,464.9 Less: Cash and cash equivalents 305.3 257.1 Net debt $ 1,510.6 $ 1,207.8 Ratio of Net Debt to Capital: June 30, 2022 December 31, 2021 Net debt $ 1,510.6 $ 1,207.8 Total equity 2,289.2 2,377.7 Net debt plus total equity (capital) $ 3,799.8 $ 3,585.5 Ratio of net debt to capital 39.8 % 33.7 % 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 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. Repatriation of non-U.S. 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. This strategy includes making investments in facilities, equipment and potential new acquisitions. The Company plans to fund these investments, as well as meet working capital requirements, with cash and cash equivalents and unused lines of credit within the geographic location of these investments where feasible. On June 25, 2019, the Company entered into the Senior Credit Facility, which is a $650.0 million unsecured revolving credit facility that matures on June 25, 2024. 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: a consolidated leverage ratio and a consolidated interest coverage ratio. The maximum consolidated leverage ratio permitted under the Senior Credit Facility is 3.5 to 1.0. 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 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 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 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. 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. 36 Table of Contents 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 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 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 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 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. 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 six months ended June 30, 2022. 37 Table of Contents OTHER MATTERS Foreign Currency: Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the reporting period. Related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions, and the related hedging activity, are included in the Consolidated Statements of Income. 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 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. The Company will continue to monitor the events in Russia and Ukraine and may record additional asset impairments or write-offs in the future. 38 Table of Contents NON-GAAP MEASURES Supplemental Non-GAAP Measures: In addition to results reported in accordance with U.S. GAAP, the Company provides information on non-GAAP financial measures. These non-GAAP financial measures include adjusted net income, adjusted earnings per share, adjusted EBITDA and adjusted EBITDA margins, segment adjusted EBITDA and segment adjusted EBITDA margins, ratio of net debt to adjusted EBITDA (for the trailing 12 months), net debt, ratio of net debt to capital and free cash flow. This information is intended to supplement GAAP financial measures and is not intended to replace GAAP financial measures. Net debt and the ratio of net debt to capital is disclosed in the "Liquidity and Capital Resources" section of Management's Discussion and Analysis of Financial Condition and Results of Operations. Adjusted Net Income and Adjusted EBITDA: Adjusted net income and adjusted earnings per share represent net income attributable to The Timken Company and diluted earnings per share, respectively, adjusted for impairment, restructuring and reorganization charges, acquisition costs, including transaction costs and the amortization of the inventory step-up, property losses and recoveries, actuarial gains and losses associated with the remeasurement of the Company's defined benefit pension and other postretirement benefit plans, gains and losses on the sale of real estate, gains and losses on divestitures, the income tax impact of these adjustments, as well as other income tax discrete items, and other items from time to time that are not part of the Company's core operations. Management believes adjusted net income and adjusted earnings per share are useful to investors as they are representative of the Company's core operations and are used in the management of the business. Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization, adjusted for items that are not part of the Company's core operations. These items include impairment, restructuring and reorganization charges, acquisition costs, including transaction costs and the amortization of the inventory step-up, property losses and recoveries, actuarial gains and losses associated with the remeasurement of the Company's defined benefit pension and other postretirement benefit plans, gains and losses on the sale of real estate, gains and losses on divestitures, and other items from time to time that are not part of the Company's core operations. Management believes adjusted EBITDA is useful to investors as it is representative of the Company's core operations and is used in the management of the business, including decisions concerning the allocation of resources and assessment of performance. 39 Table of Contents Reconciliation of net income attributable to The Timken Company to adjusted net income, adjusted EBITDA and adjusted EBITDA Margin: Three Months Ended June 30, Six Months Ended June 30, 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) 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) 8.4 — 13.0 — 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 Net income attributable to noncontrolling interest 0.6 2.4 4.3 5.1 Provision for income taxes (as reported) 44.0 29.4 82.2 54.7 Interest expense 18.3 15.3 32.6 30.2 Interest income (1.0) (0.7) (1.6) (1.2) Depreciation and amortization expense (6) 40.7 42.0 82.1 84.7 Less: Noncontrolling interest (4.5) — (5.8) 0.2 Less: Provision for income taxes (5) (0.2) (5.8) (5.3) (17.9) Adjusted EBITDA $ 231.2 $ 200.3 $ 456.3 $ 404.0 Adjusted EBITDA Margin (% of net sales) 20.0 % 18.8 % 20.0 % 19.3 % Diluted earnings and adjusted earnings per share in the table below are based on net income attributable to The Timken Company and adjusted net income, respectively, in the table above. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Diluted earnings per share (EPS) $ 1.42 $ 1.36 $ 2.98 $ 2.82 Adjusted EPS $ 1.67 $ 1.37 $ 3.28 $ 2.75 Diluted Shares 74,182,793 77,254,157 74,877,248 77,257,761 Reconciliation of segment EBITDA to segment adjusted EBITDA and segment adjusted EBITDA margin: Three Months Ended June 30, 2022 Mobile Process Unallocated Corporate Total Net Sales $ 543.6 $ 610.1 $ — $ 1,153.7 EBITDA 69.1 163.5 (25.0) 207.6 Impairment, restructuring and reorganization charges (1) 1.0 1.0 — 2.0 Corporate pension and other postretirement benefit 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 % 40 Table of Contents 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 charges (1) 1.2 0.8 — 2.0 Corporate pension and other postretirement benefit related expense (2) — — 3.5 3.5 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 charges (1) 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 % Six Months Ended June 30, 2021 Mobile Process Unallocated Corporate Total Net Sales $ 998.7 $ 1,089.6 $ — $ 2,088.3 EBITDA 146.9 272.2 (27.0) 392.1 Impairment, restructuring and reorganization charges (1) 1.5 5.4 — 6.9 Corporate pension and other postretirement benefit related expense (2) — — 4.4 4.4 Acquisition-related charges (3) 0.4 0.3 (0.1) 0.6 Adjusted EBITDA $ 148.8 $ 277.9 $ (22.7) $ 404.0 Adjusted EBITDA Margin (% of net sales) 14.9 % 25.5 % NM 19.3 % (1) Impairment, restructuring and reorganization charges (including items recorded in cost of products sold) relate to: (i) plant closures; (ii) the rationalization of certain plants; and (iii) severance related to cost reduction initiatives. The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges. However, management believes these actions are not representative of the Company’s core operations. (2) Corporate pension and other postretirement benefit related expense represents actuarial losses (gains) that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience. The Company recognizes actuarial losses and (gains) in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement. Refer to Note 15 - Retirement Benefit Plans and Note 16 - Other Postretirement Benefit Plans for additional discussion. (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. 41 Table of Contents (6) Depreciation and amortization shown excludes depreciation recognized in reorganization charges, if any. Free Cash Flow: Free cash flow represents net cash provided by (used in) operating activities less capital expenditures. Management believes free cash flow is useful to investors because it is a meaningful indicator of cash generated from operating activities available for the execution of its business strategy. Reconciliation of net cash provided by operating activities to free cash flow: Three Months Ended June 30, Six Months Ended June 30, 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) Free cash flow $ 37.4 $ 116.0 $ 1.9 $ 118.3 42 Table of Contents Ratio of Net Debt to Adjusted EBITDA: The ratio of net debt to adjusted EBITDA for the trailing twelve months represents total debt less cash and cash equivalents divided by adjusted EBITDA for the trailing twelve months. T he Company presents net debt to adjusted EBITDA because it believes it is more representative of the Company's financial position as it is reflective of the Company's ability to cover its net debt obligations with results from its core operations. Net income for the trailing twelve months ended 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: Twelve Months Ended June 30, 2022 December 31, 2021 Net income $ 385.8 $ 381.5 Provision for income taxes 122.6 95.1 Interest expense 61.2 58.8 Interest income (2.7) (2.3) Depreciation and amortization 164.7 167.8 Consolidated EBITDA 731.6 700.9 Adjustments: Impairment, restructuring and reorganization charges (1) $ 11.0 $ 14.3 Corporate pension and other postretirement benefit related expense (2) 10.1 0.3 Acquisition-related charges (3) 4.4 2.3 Russia-related charges (4) 13.0 — Tax indemnification and related items 0.2 0.2 Total adjustments 38.7 17.1 Adjusted EBITDA $ 770.3 $ 718.0 Net Debt $ 1,510.6 $ 1,207.8 Ratio of Net Debt to Adjusted EBITDA 2.0 1.7 (1) Impairment, restructuring and reorganization charges (including items recorded in cost of products sold) relate to: (i) plant closures; (ii) the rationalization of certain plants and (iii) severance related to cost reduction initiatives. The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges. However, management believes these actions are not representative of the Company’s core operations. (2) Corporate pension and other postretirement benefit related expense represents actuarial losses and (gains) that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience. The Company recognizes actuarial losses and (gains) in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement. (3) Acquisition-related charges represent contingent consideration related to the acquisition of iMS that closed on August 20, 2021, and deal-related expenses associated with completed and certain unsuccessful transactions, as well as any resulting inventory step-up impact. Also included is the acquisition-related gain related to measurement period adjustments to the bargain purchase gain on the acquisition of the assets of Aurora that closed on November 30, 2020. (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. 43 Table of Contents FORWARD-LOOKING STATEMENTS Certain statements set forth in this Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 that are not historical in nature (including the Company's forecasts, beliefs and expectations) are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, Management's Discussion and Analysis contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “outlook,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-Q. 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, recession, terrorism, or hostilities. This includes: political risks associated with the potential instability of governments and legal systems in countries in which the Company or its customers or suppliers conduct business, changes in currency valuations and recent world events that have increased the risks posed by international trade disputes, tariffs and sanctions; • negative impacts to the Company's business, results of operations, financial position or liquidity, disruption to the Company's supply chains, negative impacts to customer demand or operations, and availability and health of employees, as a result of COVID-19 or other pandemics and associated governmental measures such as restrictions on travel and manufacturing operations; • the effects of fluctuations in customer demand on sales, product mix and prices in the industries in which the Company operates. This includes: the ability of the Company to respond to rapid changes in customer demand, disruptions to the Company's supply chain, logistical issues associated with port closures or congestion, delays or increased costs, the effects of customer or supplier bankruptcies or liquidations, the impact of changes in industrial business cycles, the effects of distributor inventory corrections reflecting de-stocking of the supply chain and whether conditions of fair trade continue in the Company's markets; • competitive factors, including changes in market penetration, increasing price competition by existing or new foreign and domestic competitors, the introduction of new products or services by existing and new competitors, competition for skilled labor and new technology that may impact the way the Company’s products are produced, sold or distributed; • changes in operating costs. This includes: the effect of changes in the Company’s manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; availability and cost of raw materials and energy; disruptions to the Company's supply chain and logistical issues associated with port closures or congestion, delays or increased costs; changes in the expected costs associated with product warranty claims; changes resulting from inventory management and cost reduction initiatives; the effects of unplanned plant shutdowns; the effects of government-imposed restrictions and commercial requirements meant to address climate change; and changes in the cost of labor and benefits; • the impact of inflation on employee expenses, shipping costs, raw material costs, energy and fuel costs and other production costs; • the success of the Company’s operating plans, announced programs, initiatives and capital investments; the ability to integrate acquired companies and to address material issues not uncovered during the Company's due diligence review; and the ability of acquired companies to achieve satisfactory operating results, including results being accretive to earnings, realization of synergies and expected cash flow generation; • the Company’s ability to maintain appropriate relations with unions or works councils that represent Company associates in certain locations in order to avoid disruptions of business and to maintain the continued service of our management and other key employees; • unanticipated litigation, claims, investigations or assessments. This includes: claims, investigations or problems related to intellectual property, product liability or warranty, foreign export and trade laws, government procurement regulations, competition and anti-bribery laws, environmental or health and safety issues, data privacy and taxes; • changes in worldwide financial and capital markets, including availability of financing and interest rates on satisfactory terms, which affect the Company’s cost of funds and/or ability to raise capital, as well as 44 Table of Contents customer demand and the ability of customers to obtain financing to purchase the Company’s products or equipment that contain the Company’s products; • the Company's ability to satisfy its obligations and comply with covenants under its debt agreements, maintain favorable credit ratings and its ability to renew or refinance borrowings on favorable terms; • the impact on the Company's pension obligations and assets due to changes in interest rates, investment performance and other tactics designed to reduce risk; and • those items identified under Item 1A. "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 or this Form 10-Q. Additional risks relating to the Company's business, the industries in which the Company operates, or the Company's common shares may be described from time to time in the Company's filings with the Securities and Exchange Commission. All of these risk factors are difficult to predict, are subject to material uncertainties that may affect actual results and may be beyond the Company's control. Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered to be a complete list. Except as required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.