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 manufactures a growing portfolio of engineered bearings and industrial motion products, and related services. With more than a century of knowledge and innovation, 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®, GGB®, Drives®, Cone Drive®, Rollon®, Lovejoy®, Diamond®, BEKA®, Groeneveld®, Nadella® and Spinea®. Timken employs more than 19,000 people globally in 46 countries. The Company operates under two reportable segments: (1) Engineered Bearings and (2) Industrial Motion. The following further describes these business segments: • Timken’s Engineered Bearings segment features a broad range of product designs serving original equipment manufacturers (OEMs) and end-users worldwide. Timken is a leading authority on tapered roller bearings and leverages its position by applying engineering know-how and technology across its entire bearing portfolio, which includes tapered, spherical and cylindrical roller bearings; plain bearings, metal-polymer bearings and rod end bearings; thrust and specialty ball bearings; and housed bearings. The Engineered Bearings portfolio features Timken® and GGB® brands and serves customers across global industries, including wind energy, agriculture, construction, food and beverage, metals and mining, automotive and truck, aerospace, rail and more. • Timken’s Industrial Motion segment includes a diverse and growing portfolio of engineered products, including industrial drives, automatic lubrication systems, linear motion products and systems, chains, belts, couplings and industrial clutches and brakes that keep systems running efficiently. Industrial Motion also includes industrial drivetrain services, which return equipment to like-new condition. The Industrial Motion portfolio features many strong brands: Philadelphia Gear®, Cone Drive®, Spinea®, Rollon®, Nadella®, Groeneveld®, BEKA®, Diamond®, Drives®, Timken® Belts, Lovejoy® and PT Tech®. Industrial Motion products are used across a broad range of industries, including solar energy, automation, construction, agriculture and turf, passenger rail, marine, aerospace, packaging and logistics, medical and more. 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. 25 Table of Contents The Company's 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 industrial motion 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 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 industrial motion 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. Overview: Three Months Ended March 31, 2023 2022 $ Change % Change Net sales $ 1,262.8 $ 1,124.6 $ 138.2 12.3 % Net income 125.7 121.9 3.8 3.1 % Net income attributable to noncontrolling interest 3.4 3.7 (0.3) (8.1) % Net income attributable to The Timken Company $ 122.3 $ 118.2 $ 4.1 3.5 % Diluted earnings per share $ 1.67 $ 1.56 $ 0.11 7.1 % Average number of shares – diluted 73,360,854 75,545,665 — (2.9) % The increase in net sales for the three months ended March 31, 2023 compared with the three months ended March 31, 2022 was driven by strong organic growth in both the Engineered Bearings and Industrial Motion segments and the favorable impact of acquisitions (net of divestitures), partially offset by the unfavorable impact of foreign currency exchange rate changes. The increase in net income for the three months ended March 31, 2023 compared with the three months ended March 31, 2022 was primarily due to the favorable price/mix and the impact of higher volume, partially offset by higher operating costs and higher impairment and restructuring charges. Outlook: The Company expects 2023 full-year revenue to be up between 8% and 11% compared to 2022, driven by organic growth and the benefit of acquisitions (net of divestitures). The Company's earnings are expected to be up in 2023 compared with 2022, due to the favorable impact of price/mix and higher sales volume, as well as lower material and logistics costs, partially offset by higher operating costs, higher impairment and restructuring charges, the unfavorable impact of foreign currency exchange rate changes and higher interest expense. The Company expects to generate a higher amount of cash from operating activities in 2023 compared to 2022, primarily driven by higher earnings and improved working capital performance. The Company expects higher capital expenditures in 2023 compared to 2022, but relatively in line with 2022 spending as a percentage of sales (4.0%). 26 Table of Contents THE STATEMENT OF INCOME Operating Income: Three Months Ended March 31, 2023 2022 $ Change Change Net sales $ 1,262.8 $ 1,124.6 $ 138.2 12.3% Cost of products sold 846.0 786.3 59.7 7.6% Selling, general and administrative expenses 186.8 154.1 32.7 21.2% Amortization of intangible assets 13.5 10.9 2.6 23.9% Impairment and restructuring charges 28.9 1.0 27.9 NM Operating income $ 187.6 $ 172.3 15.3 8.9% Operating income % to net sales 14.9 % 15.3 % (40) bps Net sales increased for the three months ended March 31, 2023 compared with the three months ended March 31, 2022. The increase was driven by strong organic growth of $123 million and the benefit of acquisitions (net of divestitures) of $45 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $30 million. The higher organic revenue was driven by higher demand and positive pricing in both the Engineered Bearings and Industrial Motion segments. Operating income increased for the three months ended March 31, 2023 compared with the three months ended March 31, 2022, due to the favorable net impact of higher sales volume (including pricing), less cost of products sold, partially offset by higher selling, general and administrative ("SG&A") expenses, higher impairment and restructuring charges and increased amortization expense. • Cost of products sold increased for the three months ended March 31, 2023 compared with the three months ended March 31, 2022, due to higher manufacturing costs, net of favorable mix impact, of $57 million, and the incremental cost of goods sold from acquisitions (net of divestitures) of $34 million, partially offset by the impact of foreign currency exchange rate changes of $16 million and lower material and logistics costs of $14 million. The higher manufacturing costs reflect continued labor and input cost inflation, as well as the impact of reduced inventory build in the current quarter compared to a year ago. • SG&A expenses increased for the three months ended March 31, 2023 compared with the three months ended March 31, 2022. The increase for the three months ended March 31, 2023, as compared to the year-ago period was primarily due to higher compensation costs (including incentive-based compensation) and increased spending to support the higher sales and business activity levels. • Amortization of intangible assets increased for the three months ended March 31, 2023 compared with the three months ended March 31, 2022, primarily due to the addition of intangible assets from the GGB acquisition, which was completed in the fourth quarter of 2022. • Impairment and restructuring charges were higher for the three months ended March 31, 2023 compared with the three months ended March 31, 2022 primarily due to the impairment of goodwill. During the first quarter of 2023, the Company reviewed goodwill for impairment for its reporting units due to the change in reporting segments that went into effect January 1, 2023. As a result of this analysis the Company determined that one of the new reporting units within the Industrial Motion segment could not support the carrying value of its goodwill, and subsequently recorded a pretax impairment loss of $28.3 million in the first quarter of 2023. 27 Table of Contents Interest Income and Expense: Three Months Ended March 31, 2023 2022 $ Change % Change Interest expense $ (24.1) $ (14.3) $ (9.8) 68.5 % Interest income 1.5 0.6 $ 0.9 150.0 % The increase in interest expense for the three months ended March 31, 2023 compared with the three months ended March 31, 2022 was due to increased debt levels and higher average interest rates. Other Income (Expense): Three Months Ended March 31, 2023 2022 $ Change % Change Non-service pension and other postretirement income $ 0.1 $ 1.3 $ (1.2) (92.3) % Other income, net 3.1 0.2 2.9 NM Total other income $ 3.2 $ 1.5 $ 1.7 113.3 % Non-service pension and other postretirement income decreased for the three months ended March 31, 2023 compared with the three months ended March 31, 2022, primarily due to a lower expected return on pension plan assets and higher interest expense on pension plan obligations. In addition, the Company recognized a pension remeasurement gain in 2023, compared to pension remeasurement loss in 2022. R efer to Note 16 - Retirement Benefit Plans and Note 17 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for additional information. Other income, net increased for the three months ended March 31, 2023 compared with the three months ended March 31, 2022, due to gains on divestitures of $4.0 million primarily related to the sale of SE Setco , a 50% owned joint venture, partially offset foreign currency losses of $0.2 million, net of derivative activity, during the three months ended March 31, 2023, compared to foreign currency gains of $0.5 million, net of derivative activity, during the three months ended March 31, 2022. Income Tax Expense: Three Months Ended March 31, 2023 2022 $ Change Change Provision for income taxes $ 42.5 $ 38.2 $ 4.3 11.3 % Effective tax rate 25.3 % 23.9 % 140 bps Income tax expense increased $4.3 million for the three months ended March 31, 2023 compared with the three months ended March 31, 2022 primarily due to an increase in the mix of earnings in international jurisdictions with relatively higher tax rates. Refer to Note 6 - Income Taxes for more information on the computation of the income tax expense in interim periods. 28 Table of Contents BUSINESS SEGMENTS The Company ' s reportable segments are product-based business groups that serve customers in diverse industrial markets. The primary measurement used by management to measure the financial performance of each segment is EBITDA. Refer to Note 4 - 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 and divestitures completed in 2023 and 2022 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 2023 and 2022: • The Company acquired ARB during the first quarter of 2023. Results for ARB are reported in the Engineered Bearings segment. • The Company acquired GGB during the fourth quarter of 2022. Results for GGB are reported in the Engineered Bearings segment. • The Company completed the sale of Timken Aerospace Drive Systems ("ADS") during the fourth quarter of 2022. Results for ADS were reported in the Industrial Motion segment. • The Company completed the sale of Timken-Rus Service Company ooo ("Timken Russia") during the third quarter of 2022. Results for Timken Russia were reported in the Engineered Bearings segment. • The Company acquired Spinea during the second quarter of 2022. Results for Spinea are reported in the Industrial Motion segment. Engineered Bearings Segment: Three Months Ended March 31, 2023 2022 $ Change Change Net sales $ 900.7 $ 772.4 $ 128.3 16.6% EBITDA $ 205.0 $ 168.3 $ 36.7 21.8% EBITDA margin 22.8 % 21.8 % 100 bps Three Months Ended March 31, 2023 2022 $ Change % Change Net sales $ 900.7 $ 772.4 $ 128.3 16.6 % Less: Acquisitions 55.7 55.7 NM Divestitures (3.5) (3.5) NM Currency (22.1) (22.1) NM Net sales, excluding the impacts of acquisitions, divestitures and currency $ 811.4 $ 772.4 $ 39.0 5.0 % The Engineered Bearings segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, increased $39.0 million or 5.0% in the three months ended March 31, 2023 compared with the three months ended March 31, 2022. The increase reflects organic growth (including pricing) across most sectors, led by renewable energy, distribution, rail and heavy industries. EBITDA increased by $36.7 million or 21.8% for the three months ended March 31, 2023 compared with the three months ended March 31, 2022, primarily due to favorable price/mix, the impact of higher sales volume, lower material and logistics costs and the benefit of acquisitions, partially offset by higher manufacturing costs and SG&A expenses, and the unfavorable impact of foreign currency exchange rate changes. 29 Table of Contents Industrial Motion Segment: Three Months Ended March 31, 2023 2022 $ Change Change Net sales $ 362.1 $ 352.2 $ 9.9 2.8% EBITDA $ 48.2 $ 62.4 $ (14.2) (22.8%) EBITDA margin 13.3 % 17.7 % (440) bps Three Months Ended March 31, 2023 2022 $ Change % Change Net sales $ 362.1 $ 352.2 $ 9.9 2.8 % Less: Acquisitions 5.3 5.3 NM Divestitures (12.8) (12.8) NM Currency (7.5) (7.5) NM Net sales, excluding the impact of acquisitions, divestitures and currency $ 377.1 $ 352.2 $ 24.9 7.1 % The Industrial Motion segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, increased $24.9 million or 7.1% in the three months ended March 31, 2023 compared with the three months ended March 31, 2022 . The increase reflects organic growth (including pricing) across the portfolio, with the automatic lubrication systems platform posting the strongest growth. EBITDA decreased $14.2 million or 22.8% for the three months ended March 31, 2023 compared with the three months ended March 31, 2022 primarily due to higher impairment and restructuring charges, as well as higher manufacturing costs and SG&A expenses, partially offset by favorable price/mix and the impact of higher sales volume. The higher impairment and restructuring charges were primarily related to the impairment of goodwill for one of the segment's reporting units. Unallocated Corporate Three Months Ended March 31, 2023 2022 $ Change Change Unallocated corporate expense $ (17.7) $ (12.9) $ (4.8) 37.2 % Unallocated corporate expense % to net sales (1.4) % (1.1) % (30) bps The increase in unallocated corporate expense for the three months ended March 31, 2023 compared with the three months ended March 31, 2022 was primarily due to higher compensation expense and other spending to support increased business activity levels. 30 Table of Contents CASH FLOW Three Months Ended March 31, 2023 2022 $ Change Net cash provided by (used in) operating activities $ 78.6 $ (1.2) $ 79.8 Net cash used in investing activities (64.5) (35.0) (29.5) Net cash (used in) provided by financing activities (17.5) 204.7 (222.2) Effect of exchange rate changes on cash 1.8 (1.2) 3.0 (Decrease) Increase in cash and cash equivalents and restricted cash $ (1.6) $ 167.3 $ (168.9) Op erating Activities: The increase in net cash provided by operating activities for the first three months of 2023 compared with the first three months of 2022 was primarily due to a decrease in cash used for working capital items of $74.6 million. Refer to the tables below for additional detail of the impact of each line item on net cash provided by operating activities. The following table displays the impact of working capital items on cash during the three months of 2023 and 2022, respectively: Three Months Ended March 31, 2023 2022 $ Change Cash (used in) provided by: Accounts receivable $ (50.3) $ (118.2) $ 67.9 Unbilled receivables (11.1) 16.1 (27.2) Inventories 6.1 (70.2) 76.3 Trade accounts payable (9.4) 7.7 (17.1) Other accrued expenses (44.8) (19.5) (25.3) Cash used in working capital items $ (109.5) $ (184.1) $ 74.6 The following table displays the impact of income taxes on cash during the first three months of 2023 and 2022, respectively: Three Months Ended March 31, 2023 2022 $ Change Accrued income tax expense $ 42.5 $ 38.2 $ 4.3 Income tax payments (54.8) (25.3) (29.5) Other items 0.1 (4.8) 4.9 Change in income taxes $ (12.2) $ 8.1 $ (20.3) Investing Activities: The increase in net cash used in investing activities for the first three months of 2023 compared with the first three months of 2022 was primarily due to an increase in cash used for acquisitions of $29.2 million. Financing Activities: The change in net cash used in financing activities for the first three months of 2023 compared with the first three months of 2022 was primarily due to an increase in net borrowings of $269.3 million, partially offset by an decrease in the purchases of treasury shares of $46.0 million. 31 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Reconciliation of total debt to net debt and the ratio of net debt to capital: Net Debt: March 31, 2023 December 31, 2022 Short-term debt, including current portion of long-term debt $ 48.6 $ 49.0 Long-term debt 1,978.8 1,914.2 Total debt $ 2,027.4 $ 1,963.2 Less: Cash and cash equivalents 330.5 331.6 Net debt $ 1,696.9 $ 1,631.6 Ratio of Net Debt to Capital: March 31, 2023 December 31, 2022 Net debt $ 1,696.9 $ 1,631.6 Total equity 2,436.3 2,352.9 Net debt plus total equity (capital) $ 4,133.2 $ 3,984.5 Ratio of net debt to capital 41.1 % 40.9 % The Company presents net debt because it believes net debt is more representative of the Company's financial position than total debt due to the amount of cash and cash equivalents held by the Company and the ability to utilize such cash and cash equivalents to reduce debt if needed. At March 31, 2023, the Company had strong liquidity with $330.5 million of cash and cash equivalents on the Consolidated Balance Sheet, as well as $686.4 million available under committed credit lines. Of the $330.5 million of cash and cash equivalents, $327.9 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. 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 December 5, 2022, the Company entered into the Credit Agreement, which is comprised of the $750.0 million Senior Credit Facility and the $400.0 million 2027 Term Loan that each mature on December 5, 2027. The Credit Agreement amended and restated the Company's previous revolving credit agreement that was set to mature on June 25, 2024, and replaced the $350.0 million 2023 Term Loan. The Credit Agreement also replaced interest rates based on LIBOR with interest rates based on SOFR. At March 31, 2023, the Company had $63.6 million of outstanding borrowings under the Senior Credit Facility, which reduced the availability under this facility to $686.4 million. The Credit Agreement 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 March 31, 2023, the Company's consolidated leverage ratio was 1.84 to 1.0. The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility is 3.0 to 1.0. As of March 31, 2023, the Company's consolidated interest coverage ratio was 11.33 to 1.0. The interest rate under the Senior Credit Facility is variable with a spread based on the Company's debt rating. The average rate on outstanding U.S. dollar borrowings was 5.72% and the average rate on outstanding Euro borrowings was 3.46% as of March 31, 2023. In addition, the Company pays a facility fee based on the applicable rate, which is variable with a spread based on the Company's debt rating, multiplied by the aggregate commitments of all of the lenders under the Senior Credit Facility. As of March 31, 2023, the Company carried investment-grade credit ratings with both Moody's (Baa2) and S&P Global (BBB-). 32 Table of Contents 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 March 31, 2023, the Company had $100 million outstanding borrowings under the Accounts Receivable Facility and no borrowing base limitations. There was no availability under the Accounts Receivable Facility as of March 31, 2023. 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 $237.4 million. At March 31, 2023, the Company had borrowings outstanding of $38.7 million and bank guarantees of $3.7 million, which reduced the aggregate availability under these facilities to $195.0 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 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. At March 31, 2023, the Company was in full compliance with all applicable covenants on its outstanding debt. The Company expects to generate higher amount of cash from operating activities in 2023 compared to 2022, driven by higher earnings and improved working capital performance. The Company expects higher capital expenditures in 2023 compared to 2022, but relatively in line with 2022 spending as a percentage of sales (4.0%). Financing Obligations and Other Commitments: During the first three months of 2023, the Company made cash contributions and payments of $4.4 million to its global defined benefit pension plans and $0.4 million to its other postretirement benefit plans. The Company expects to make contributions to its global defined benefit plans of approximately $25 million in 2023. The Company expects to make payments of approximately $4 million to its other postretirement benefit plans in 2023. Excluding mark-to-market charges, the Company expects higher pension and other postretirement benefits expense in 2023 compared to 2022 primarily due to lower expected returns on pension plan assets. 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, 2022, during the three months ended March 31, 2023. 33 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 three months ended March 31, 2023, the Company recorded positive foreign currency translation adjustments of $27.4 million that increased shareholders' equity, compared with negative foreign currency translation adjustments of $20.0 million that decreased shareholders' equity for the three months ended March 31, 2022. The foreign currency translation adjustments for the three months ended March 31, 2023 were favorably impacted by the weakening of the U.S. dollar relative to other foreign currencies, including the Euro, Mexican Peso and Chinese Yuan. Foreign currency exchange gains and losses, net of hedging activity, resulting from transactions included in the Company's operating results for the three months ended March 31, 2023 totaled $3.0 million of net losses, compared with $2.2 million of net gains during the three months ended March 31, 2022. Russia Operations: The Company had two subsidiaries in Russia prior to Russia's invasion of Ukraine in February 2022, 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 year ended December 31, 2022. During the third quarter of 2022, the Company sold its Timken Russia business resulting in a loss of $2.7 million on the sale. During the first quarter of 2023, the Company recorded additional inventory write-downs of $0.4 million. After giving effect to these impairments and write-downs, as well as the sale of Timken Russia, as of March 31, 2023, the Company has net assets (net of noncontrolling interest of $5.2 million), totaling $7.2 million on its Consolidated Balance Sheet related to its Rail JV. Net assets include $7.9 million of cash and cash equivalents that the Company has classified as restricted as the Company is presently unable to repatriate these funds to one of its subsidiaries outside of Russia. The Company will continue to monitor the events in Russia and Ukraine and may record additional asset impairments or write-offs in the future. 34 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 intangible amortization, 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 discrete income tax 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 intangible amortization, 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. 35 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 March 31, 2023 2022 Net Sales $ 1,262.8 $ 1,124.6 Net Income Attributable to The Timken Company 122.3 118.2 Net Income Attributable to The Timken Company as a Percentage of Sales 9.7 % 10.5 % Adjustments: Acquisition intangible amortization 13.5 10.9 Impairment, restructuring and reorganization charges (1) 30.0 1.6 Corporate pension and other postretirement benefit related (income) expense (2) (0.9) 2.6 Russia-related charges (3) 0.3 4.6 Acquisition-related charges (4) 4.7 1.1 Gain on divestitures and sale of real estate (5) (4.8) — Noncontrolling interest of above adjustments (0.2) (1.3) Provision for income taxes (6) (11.4) (8.0) Adjusted Net Income $ 153.5 $ 129.7 Net income attributable to noncontrolling interest 3.4 3.7 Provision for income taxes (as reported) 42.5 38.2 Interest expense 24.1 14.3 Interest income (1.5) (0.6) Depreciation and amortization expense (7) 45.4 41.4 Less: Acquisition intangible amortization 13.5 10.9 Less: Noncontrolling interest (0.2) (1.3) Less: Provision for income taxes (6) (11.4) (8.0) Adjusted EBITDA $ 265.5 $ 225.1 Adjusted EBITDA Margin (% of net sales) 21.0 % 20.0 % 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 March 31, 2023 2022 Diluted earnings per share (EPS) $ 1.67 $ 1.56 Adjusted EPS $ 2.09 $ 1.72 Diluted Shares 73,360,854 75,545,665 36 Table of Contents Reconciliation of segment EBITDA to segment adjusted EBITDA and segment adjusted EBITDA margin: Three Months Ended March 31, 2023 Engineered Bearings Industrial Motion Unallocated Corporate Total Net Sales $ 900.7 $ 362.1 $ — $ 1,262.8 EBITDA 205.0 48.2 (16.8) 236.4 Impairment, restructuring and reorganization charges (1) 1.1 28.7 — 29.8 Corporate pension and other postretirement benefit related income (2) — — (0.9) (0.9) Russia-related charges (3) 0.3 — 0.3 Acquisition-related charges (4) 2.2 — 2.5 4.7 Gain on divestitures and sale of real estate (5) (4.8) — — (4.8) Adjusted EBITDA $ 203.8 $ 76.9 $ (15.2) $ 265.5 Adjusted EBITDA Margin (% of net sales) 22.6 % 21.2 % NM 21.0 % Three Months Ended March 31, 2022 Engineered Bearings Industrial Motion Unallocated Corporate Total Net Sales $ 772.4 $ 352.2 $ — $ 1,124.6 EBITDA 168.3 62.4 (15.5) 215.2 Impairment, restructuring and reorganization charges (1) 1.0 0.6 — 1.6 Corporate pension and other postretirement benefit related expense (2) — — 2.6 2.6 Russia-related charges (3) 4.6 — — 4.6 Acquisition-related charges (4) — 0.4 0.7 1.1 Adjusted EBITDA $ 173.9 $ 63.4 $ (12.2) $ 225.1 Adjusted EBITDA Margin (% of net sales) 22.5 % 18.0 % NM 20.0 % (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; (iii) severance related to cost reduction initiatives; and (iv) impairment of assets. Impairment, restructuring and reorganization charges for 2023 included $28.3 million related to the impairment of goodwill. 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 (income) expense represents actuarial (gains) and losses that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience. The Company recognizes actuarial (gains) and losses in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement. Refer to Note 16 - Retirement Benefit Plans and Note 17 - 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. In addition to impairments and allowances recorded, the Company recorded a loss on the divestiture of its Timken Russia business during the fourth quarter of 2022. Refer to Russia Operations on page 34 above for additional information. (4) Acquisition-related charges represent deal-related expenses associated with completed transactions and any resulting inventory step-up impact. (5) Represents the net gain resulting from divestitures and the sale of real estate. (6) 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. (7) Depreciation and amortization shown excludes depreciation recognized in reorganization charges, if any. 37 Table of Contents 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 March 31, 2023 2022 Net cash provided by (used in) operating activities $ 78.6 $ (1.2) Capital expenditures (41.7) (34.3) Free cash flow $ 36.9 $ (35.5) 38 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 March 31, 2023 and December 31, 2022 was $420.8 million and $417.0 million, respectively. Net debt to adjusted EBITDA for the trailing twelve months was 1.9 at March 31, 2023 and December 31, 2022. Reconciliation of Net income to Adjusted EBITDA for the trailing twelve months: Twelve Months Ended March 31, 2023 December 31, 2022 Net income $ 420.8 $ 417.0 Provision for income taxes 138.2 133.9 Interest expense 84.4 74.6 Interest income (4.7) (3.8) Depreciation and amortization 168.2 164.0 Consolidated EBITDA 806.9 785.7 Adjustments: Impairment, restructuring and reorganization charges (1) $ 67.7 $ 39.5 Corporate pension and other postretirement benefit related (income) expense (2) (0.6) 2.9 Acquisition-related charges (3) 18.4 14.8 Gain on divestitures and sale of real estate (4) (7.7) (2.9) Russia-related charges (5) 11.3 15.6 Tax indemnification and related items 0.3 0.3 Total adjustments 89.4 70.2 Adjusted EBITDA $ 896.3 $ 855.9 Net Debt $ 1,696.9 $ 1,631.6 Ratio of Net Debt to Adjusted EBITDA 1.9 1.9 (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; (iii) severance related to cost reduction initiatives; and (iv) impairment of assets. Impairment, restructuring and reorganization charges for the twelve months ended December 31, 2022 and March 31, 2023 included $29.3 million related to the sale of ADS. In addition, impairment, restructuring and reorganization charges for the twelve months ended March 31, 2023 included $28.3 million related to the impairment of goodwill. 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 (income) expense represents actuarial (gains) and losses that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience. The Company recognizes actuarial (gains) and losses in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement. (3) Acquisition-related charges represent deal-related expenses associated with completed transactions and any resulting inventory step-up impact. (4) Represents the net gain resulting from divestitures and the sale of real estate. (5) 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 fourth quarter of 2022. Refer to Russia Operations on page 34 in Management Discussion and Analysis for additional information. 39 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, 2022 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 or 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, commercial requirements and Company goals associated with climate change and emissions or other waste reduction initiatives; 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 both identified and 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; the continued attraction, retention and development of management and other key employees, the successful development and execution of succession plans and management of other human capital matters; • 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, climate change, environmental or health and safety issues, data privacy and taxes; 40 Table of Contents • changes in worldwide financial and capital markets impacting the availability of financing on satisfactory terms, as a result of financial stress affecting the banking system or otherwise, and the 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; • 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, 2022 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. 41 Table of Contents