What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-10-26 compared with 2022-07-28 · 165 added, 110 removed, 451 unchanged (38% of the section changed)

47 unchanged sentences

Three Months Ended

September 30,

2022 2021 $ Change % Change

5 unchanged sentences

Average number of shares – diluted 73,866,743 77,023,973 — (4.1) %

Six Months Ended

Nine Months Ended

September 30,

2022 2021 $ Change % Change

5 unchanged sentences

Average number of shares – diluted 74,548,711 77,157,614 — (3.4) %

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

The higher impairment and restructuring charges were primarily related to the anticipated divestiture of the Company's ADS business.

The increase in net sales for the nine months ended September 30, 2022 compared with the nine months ended September 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 nine months ended September 30, 2022 compared with the nine months ended September 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 impairment and restructuring charges, higher pension mark-to-market charges and a higher tax rate.

The Company expects 2022 full-year revenue to be up approximately 9% compared to 2021, primarily due to higher demand across most end markets, positive pricing and the continued execution of growth initiatives, partially offset by the net unfavorable impact of foreign currency exchange rates.

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.

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

THE STATEMENT OF INCOME

Three Months Ended

September 30,

2022 2021 $ Change % Change

Net sales $ 1,136.4 $ 1,037.3 $ 99.1 9.6 %

Six Months Ended

Nine Months Ended

September 30,

2022 2021 $ Change % Change

Net sales $ 3,414.7 $ 3,125.6 $ 289.1 9.2 %

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.

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

The increase was primarily due to strong organic growth of $141 million and the benefit of acquisitions of $5 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $47 million.

The higher organic revenue was driven by higher demand in the Mobile and Process Industries segments, and higher net pricing.

Net sales increased for the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021.

The increase was primarily due to strong organic growth of $376 million and the benefit of acquisitions of $10 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $97 million.

The higher organic revenue was driven by higher demand in the Mobile and Process Industries segments, and higher net pricing.

Gross Profit:

Three Months Ended

September 30,

2022 2021 $ Change Change

1 unchanged sentence

Gross profit % to net sales 28.4 % 25.8 % 260 bps

Six Months Ended

Nine Months Ended

September 30,

2022 2021 $ Change Change

1 unchanged sentence

Gross profit % to net sales 29.1 % 27.8 % 130 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.

Gross profit increased for the three months ended September 30, 2022 compared with the three months ended September 30, 2021, primarily due to favorable price/mix of $103 million and the impact of higher volume of $27 million, partially offset by higher material and logistics costs of $35 million, unfavorable manufacturing performance of $35 million and the unfavorable impact of foreign currency exchange rate changes of $4 million.

Gross profit increased for the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021, primarily due to favorable price/mix of $221 million and the impact of higher volume of $81 million, partially offset by higher material and logistics costs of $124 million, unfavorable manufacturing performance of $43 million and the unfavorable impact of foreign currency exchange rate changes of $9 million.

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

Three Months Ended

September 30,

2022 2021 $ Change Change

1 unchanged sentence

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

Six Months Ended

Nine Months Ended

September 30,

2022 2021 $ Change Change

1 unchanged sentence

Selling, general and administrative expenses % to net sales 13.8 % 13.9 % (10) 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.

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

The increase for the three and nine months ended September 30, 2022, as compared to the year-ago periods, was primari ly due to higher compensation costs (including incentive-based compensation) and increased spending to support the higher sales levels.

Impairment and Restructuring:

Three Months Ended

September 30,

2022 2021 $ Change % Change

3 unchanged sentences

Total $ 31.3 $ 2.9 $ 28.4 NM

Six Months Ended

Nine Months Ended

September 30,

2022 2021 $ Change % Change

3 unchanged sentences

Total $ 42.3 $ 8.2 $ 34.1 415.9 %

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.

Impairment and restructuring charges of $31.3 million during the three months ended September 30, 2022 were primarily due to impairment charges of $29.3 million related to the anticipated divestiture of the Company's ADS business.

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.

Impairment and restructuring charges of $42.3 million during the nine months ended September 30, 2022 were comprised primarily of impairment charges related to the anticipated divestiture of the ADS business and 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 nine months ended September 30, 2022.

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

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

In addition, impairment charges during the nine September 30, 2021 were 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.

1 unchanged sentence

Three Months Ended

September 30,

2022 2021 $ Change % Change

1 unchanged sentence

Interest income 1.1 0.5 $ 0.6 120.0 %

Six Months Ended

Nine Months Ended

September 30,

2022 2021 $ Change % Change

1 unchanged sentence

Interest income 2.7 1.7 $ 1.0 58.8 %

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.

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

Proceeds from the 2032 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 2032 Notes was used to fund the Spinea acquisition, which closed in the second quarter of 2022.

Other Income (Expense):

Three Months Ended

September 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

income $ 1.3 $ 0.5 $ 0.8 NM

Other income, net 2.3 1.5 0.8 53.3 %

Total other income $ 3.6 $ 2.0 $ 1.6 NM

Nine Months Ended

September 30,

2022 2021 $ Change % Change

1 unchanged sentence

(expense) income $ (5.3) $ 5.9 $ (11.2) (189.8) %

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

Other income, net 1.4 0.3 1.1 366.7 %

Total other (expense) income $ (3.9) $ 6.2 $ (10.1) (162.9) %

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.

Non-service pension and other postretirement income increased for the three months ended September 30, 2022 compared with the three months ended September 30, 2021, primarily due to lower pension remeasurement losses in 2022.

Non-service pension and other postretirement (expense) income decreased for the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021, primarily due to higher pension remeasurement losses in 2022.

The rem easurements 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 in 2022.

As a result of the remeasurements, the Company recognized net actuarial losses of $1.0 million and $3.9 million during the three months ended September 30, 2022 and September 30, 2021, respectively, and $15.2 million and $8.3 million during the nine months ended September 30, 2022 and September 30, 2021, respectively.

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

2 unchanged sentences

Three Months Ended

September 30,

2022 2021 $ Change Change

1 unchanged sentence

Effective tax rate 22.8 % 18.2 % 460 bps

Six Months Ended

Nine Months Ended

September 30,

2022 2021 $ Change Change

1 unchanged sentence

Effective tax rate 25.5 % 19.3 % 620 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.

Income tax expense increased $6.3 million for the three months ended September 30, 2022 compared with the three months ended September 30, 2021 primarily due to the net unfavorable impact of discrete tax items in comparison to the year ago period.

Income tax expense increased $33.8 million for the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021 primarily due to an unfavorable mix of earnings in higher tax rate jurisdictions, the net unfavorable impact of discrete tax items, including a discrete tax benefits in the year ago period, 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.

4 unchanged sentences

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.

In August 2022, the Company announced organizational changes, which included the appointment of executive leaders for its Engineered Bearings and Industrial Motion product groups.

The Company is currently evaluating whether these changes will affect its reportable segments.

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:

GAAP to net sales adjusted to remove the effects of acquisitions and divestitures completed in 2022 and 2021 and foreign currency exchange rate changes.

The effects of acquisitions, divestitures 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 and divestitures completed in 2022 and 2021:

• The Company completed the sale of Timken Russia during the third quarter of 2022.

Results for Timken Russia were reported in the Mobile Industries and Process Industries segments based on customers and underlying market sectors served.

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

4 unchanged sentences

Three Months Ended

September 30,

2022 2021 $ Change Change

3 unchanged sentences

Three Months Ended

September 30,

2022 2021 $ Change % Change

Net sales $ 526.9 $ 487.3 $ 39.6 8.1 %

Divestitures (0.3) — (0.3) NM

Currency (20.1) — (20.1) NM

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

Six Months Ended

Net sales, excluding the impacts of divestitures and currency $ 547.3 $ 487.3 $ 60.0 12.3 %

Nine Months Ended

September 30,

2022 2021 $ Change Change

2 unchanged sentences

EBITDA margin 10.2 % 13.5 % (710) bps

Six Months Ended

Nine Months Ended

September 30,

2022 2021 $ Change % Change

Net sales $ 1,610.9 $ 1,486.0 $ 124.9 8.4 %

Divestitures (0.3) (0.3) NM

Currency (45.0) — (45.0) 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.

Net sales, excluding the impacts of divestitures and currency $ 1,656.2 $ 1,486.0 $ 170.2 11.5 %

The Mobile Industries segment's net sales, excluding the effects of divestitures and foreign currency exchange rate changes, increased $60.0 million or 12.3% in the three months ended September 30, 2022 compared with the three months ended September 30, 2021, reflecting increased shipments in the off-highway and automotive sectors, as well as higher net pricing.

EBITDA decreased by $33.2 million or 62.4% for the three months ended September 30, 2022 compared with the three months ended September 30, 2021, primarily due to higher impairment and restructuring charges, higher material, logistics and other operating costs, partially offset by favorable price/mix and the impact of higher volume .

The Mobile Industries segment's net sales, excluding the effects of divestitures and foreign currency exchange rate changes, increased $170.2 million or 11.5% in the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021, reflecting increased shipments in the off-highway, heavy truck, rail and automotive and aerospace sectors, as well as higher net pricing.

EBITDA decreased by $35.9 million or 17.9% for the nine months ended September 30, 2022 compared with the nine months ended September 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

September 30,

2022 2021 $ Change Change

3 unchanged sentences

Three Months Ended

September 30,

2022 2021 $ Change % Change

1 unchanged sentence

Acquisitions 7.0 — 7.0 NM

Divestitures (1.5) — (1.5) NM

Currency (27.1) — (27.1) NM

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

Six Months Ended

Net sales, excluding the impact of acquisitions,

divestitures and currency $ 631.1 $ 550.0 $ 81.1 14.7 %

Nine Months Ended

September 30,

2022 2021 $ Change Change

2 unchanged sentences

EBITDA margin 26.9 % 24.5 % 240 bps

Six Months Ended

Nine Months Ended

September 30,

2022 2021 $ Change % Change

1 unchanged sentence

Acquisitions 12.1 — 12.1 NM

Divestitures (1.5) — (1.5) NM

Currency (52.1) — (52.1) 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 .

Net sales, excluding the impact of acquisitions,

divestitures and currency $ 1,845.3 $ 1,639.6 $ 205.7 12.5 %

The Process Industries segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, increased $81.1 million or 14.7% in the three months ended September 30, 2022 compared with the three months ended September 30, 2021 .

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

EBITDA increased $35.6 million or 27.4% for the three months ended September 30, 2022 compared with the three months ended September 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, divestitures and foreign currency exchange rate changes, increased $205.7 million or 12.5% in the nine months ended September 30, 2022 compared with the nine months ended September 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.

EBITDA increased $82.5 million or 20.5% for the nine months ended September 30, 2022 compared with the nine months ended September 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

September 30,

2022 2021 $ Change Change

1 unchanged sentence

Unallocated corporate expense % to net sales (0.8) % (1.1) % 30 bps

Six Months Ended

Nine Months Ended

September 30,

2022 2021 $ Change Change

1 unchanged sentence

Unallocated corporate expense % to net sales (1.0) % (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

The decrease in unallocated corporate expense for the three months ended September 30, 2022 compared with the three months ended September 30, 2021 was primarily due to foreign currency exchange gains recorded in 2022, compared to foreign currency exchange losses in the prior year, partially offset by higher compensation expense and other spending to support increased business activity levels.

Nine Months Ended

September 30,

2022 2021 $ Change

3 unchanged sentences

Effect of exchange rate changes on cash (25.1) (4.8) (20.3)

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

Increase (decrease) in cash and cash equivalents

and restricted cash $ 43.7 $ (58.5) $ 102.2

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.

The decrease in net cash provided by operating activities for the first nine months of 2022 compared with the first nine months of 2021 was primarily due to an increase in cash used for working capital items of $140.2 million, partially offset by an increase in the benefit of incom e taxes on cash of $14.0 million, a decrease in pension and other postretirement benefit contributions and payments of $6.6 million and a net increase in non-cash charges included in net income, including impairment charges, pension expense and stock-based compensation expense.

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

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

Nine Months Ended

September 30,

2022 2021 $ Change

6 unchanged sentences

Cash used in working capital items $ (276.1) $ (135.9) $ (140.2)

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

Six Months Ended

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

Nine Months Ended

September 30,

2022 2021 $ Change

4 unchanged sentences

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.

The increase in net cash used in investing activities for the first nine months of 2022 compared with the first nine months of 2021 was primarily due to an increase in cash used for acquisitions of $145.2 million and an increase in capital expenditures of $18.9 million, partially offset by a decrease in cash used for investments in short-term marketable securities of $33.2 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.

The change in net cash used in financing activities for the first nine months of 2022 compared with the first nine months of 2021 was primarily due to an increase in net borrowings of $451.5 million, partially offset by an increase in the purchases of treasury shares of $136.7 million.

LIQUIDITY AND CAPITAL RESOURCES

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

September 30,

2022 December 31,

5 unchanged sentences

Ratio of Net Debt to Capital:

September 30,

2022 December 31,

4 unchanged sentences

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

At 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.

At September 30, 2022, the Company had strong liquidity with $300.9 million of cash and cash equivalents on the Consolidated Balance Sheet, as well as $742.2 million of available resources from committed credit lines.

Of the $300.9 million of cash and cash equivalents, $267.2 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.

As of September 30, 2022, Timken had $10.6 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 June 30, 2022, the Senior Credit Facility had outstanding borrowings of $8.3 million, which reduced the availability to $641.7 million.

At September 30, 2022, the Senior Credit Facility had outstanding borrowings of $7.8 million, which reduced the availability to $642.2 million.

The Senior Credit Facility has two financial covenants:

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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.

As of September 30, 2022, the Company's consolidated leverage ratio was 2.22 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.

As of September 30, 2022, the Company's consolidated interest coverage ratio was 12.45 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.

The average rate on outstanding Euro borrowings was 1.00% as of September 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-).

As of September 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.

As of September 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 September 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 $235.8 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.

At September 30, 2022, the Company had borrowings outstanding of $50.9 million and bank guarantees of $2.6 million, which reduced the aggregate availability under these facilities to approximately $182.3 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 .

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In addition, a portion of the proceeds from the 2032 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.

At September 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.

The Company expects capital expenditures of roughly 4.0% 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.

During the first nine months of 2022, the Company made cash contributions and payments of $8.9 million to its global defined benefit pension plans and $2.7 million to its other postretirement benefit plans.

The Company expects to make contributions to its global defined benefit plans of approximately $11 million in 2022.

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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 six months ended June 30, 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 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.

For the nine months ended September 30, 2022, the Company recorded negative foreign currency translation adjustments of $267.7 million that decreased shareholders' equity, compared with negative foreign currency translation adjustments of $53.3 million that decreased shareholders' equity for the nine months ended September 30, 2021.

The foreign currency translation adjustments for the nine months ended September 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.

Foreign currency exchange gains and losses, net of hedging activity, resulting from transactions included in the Company's operating results for the three months ended September 30, 2022 totaled $9.1 million of n et gains, compared with $3.2 million of net losses durin g the three months ended September 30, 2021.

Foreign currency exchange gains and losses, net of hedging activity, resulting from transactions included in the Company's operating results for the nine months ended September 30, 2022 totaled $13.7 million of n et gains, compared with $8.8 million of net losses durin g the nine months ended September 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 had two subsidiaries in Russia, including Timken Russia, which was 100% owned by Timken and a 51%-owned joint venture to serve the Russian rail market ("Rail JV").

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 $9.0 million and inventory write-downs of $4.1 million during the nine months ended September 30, 2022.

During the third quarter of 2022, the Company sold its Timken Russia business resulting in a loss of $2.1 million on the sale.

After giving effect to these impairments and write-downs, as well as the sale of Timken Russia, as of September 30, 2022, the Company has net assets (net of noncontrolling interest of $7.4 million), totaling $8.1 million on its Consolidated Balance Sheet related to its Rail JV.

Net assets include $10.6 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.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

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

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Mobile Process Unallocated Corporate Total

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related expense (2)

— — 11.6 11.6

Russia-related charges (3)

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Adjusted EBITDA Margin (% of net sales) 10.5 % 27.4 % NM 18.8 %

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

Mobile Process Unallocated Corporate Total

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Adjusted EBITDA Margin (% of net sales) 11.9 % 23.7 % NM 17.2 %

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Mobile Process Unallocated Corporate Total

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Adjusted EBITDA Margin (% of net sales) 13.3 % 27.1 % NM 19.6 %

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Mobile Process Unallocated Corporate Total

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(ii) the rationalization of certain plants;

and (iii) severance related to cost reduction initiatives.

(iii) severance related to cost reduction initiatives;

and (iv) impairment of assets held for sale.

Impairment, restructuring and reorganization charges for the third quarter of 2022 included $29.3 million related to ADS.

The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges.

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(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.

In addition to impairments and allowances recorded, the Company recorded a loss on the divestiture of its Timken Russia business during the third quarter of 2022.

Refer to Russia Operations on page 40 above for additional information.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

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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 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.

Net income for the trailing twelve months ended September 30, 2022 and December 31, 2021 was $384.6 million and $381.5 million, respectively.

Net debt to adjusted EBITDA for the trailing twelve months was 1.8 at September 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

September 30,

2022 December 31,

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(i) plant closures;

(ii) the rationalization of certain plants and (iii) severance related to cost reduction initiatives.

(ii) the rationalization of certain plants;

(iii) severance related to cost reduction initiatives;

and (iv) impairment of assets held for sale.

Impairment, restructuring and reorganization charges for the twelve months ended September 30, 2022 included $29.3 million related to ADS.

The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges.

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(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.

In addition to impairments and allowances recorded, the Company recorded a loss on the divestiture of its Timken Russia business during the third quarter of 2022.

Refer to Russia Operations on page 40 in Management Discussion and Analysis for additional information.

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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

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

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

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis