What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-03 · 232 added, 85 removed, 366 unchanged (46% of the section changed)

4 unchanged sentences

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.

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thrust and specialty ball bearings;

and housed bearings.

and housed or mounted 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.

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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®.

Philadelphia Gear®, Cone Drive®, 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.

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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:

The Company is 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;

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As part of this framework, the Company may also restructure, reposition or divest underperforming product lines or assets.

The following items highlight some of the Company's more significant strategic accomplishments during the six months ended June 30, 2023:

• On April 4, 2023, the Company acquired Nadella, a leading European manufacturer of linear guides, telescopic rails, actuators and systems and other specialized industrial motion solutions.

With revenue of €100 million in 2022, Nadella will further Timken's strategy to expand and scale its leading industrial motion product portfolio.

• On June 20, 2023, the Company completed the sale of 7.6 million shares of TIL, a subsidiary of the Company, generating net proceeds of $229 million after estimated income taxes of $55 million and transaction costs.

The transaction reduced the Company's ownership in TIL from 67.8 percent to 57.7 percent.

• The Company paid its 403 rd and 404 th consecutive quarterly dividends, including a dividend of $0.33 per share during the second quarter, an increase of 6% from the prior quarter.

The Company also repurchased 1.9 million common shares, or nearly 3% of outstanding common shares.

• On January 31, 2023, the Company acquired the assets of ARB, a North Carolina-based manufacturer of industrial bearings.

ARB, which boasts a large U.S.

installed base and strong aftermarket business, reported revenue of approximately $35 million in 2022.

ARB's product offerings join Timken's industry-leading portfolio of engineered bearings solutions.

Three Months Ended

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Net income 129.5 105.6 23.9 22.6 %

Net income attributable to noncontrolling interest 4.3 0.6 3.7 NM

Net income attributable to The Timken Company $ 125.2 $ 105.0 $ 20.2 19.2 %

Diluted earnings per share $ 1.73 $ 1.42 $ 0.31 21.8 %

Average number of shares – diluted 72,512,991 74,182,793 — (2.3) %

Six Months Ended

2022 2021 $ Change % Change

Net sales $ 2,535.1 $ 2,278.3 $ 256.8 11.3 %

Net income 255.2 227.5 27.7 12.2 %

Net income attributable to noncontrolling interest 7.7 4.3 3.4 79.1 %

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Average number of shares – diluted 72,907,804 74,877,248 — (2.6) %

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.

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 increase in net sales for the three months ended June 30, 2023 compared with the three months ended June 30, 2022 was driven by the favorable impact of acquisitions (net of divestitures) and organic growth in both the Industrial Motion and Engineered Bearings segments, partially offset by the unfavorable impact of foreign currency exchange rate changes.

The increase in net income for the three months ended June 30, 2023 compared with the three months ended June 30, 2022 was primarily due to the favorable price/mix, lower material and logistics costs and lower impairment and restructuring charges, partially offset by higher manufacturing and selling, general and administrative ("SG&A") costs, as well as higher interest expense.

The increase in net sales for the six months ended June 30, 2023 compared with the six months ended June 30, 2022 was driven by 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 six months ended June 30, 2023 compared with the six months ended June 30, 2022 was primarily due to the favorable price/mix, the impact of higher volume and lower material and logistics costs, partially offset by higher manufacturing and SG&A costs, as well as higher impairment and restructuring charges and interest expense.

The Company expects 2023 full-year revenue to be up approximately 8% compared to 2022, driven by continued 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 lower material and logistics costs, partially offset by higher manufacturing and SG&A 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.

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Amortization of intangible assets 17.3 10.6 6.7 63.2%

Impairment and restructuring charges 2.5 10.0 (7.5) (75.0%)

Operating income $ 200.7 $ 175.9 24.8 14.1%

Operating income % to net sales 15.8 % 15.2 % 60 bps

Six Months Ended

2023 2022 $ Change Change

Net sales $ 2,535.1 $ 2,278.3 $ 256.8 11.3%

Cost of products sold 1,712.9 1,587.6 125.3 7.9%

Selling, general and administrative expenses 371.7 310.0 61.7 19.9%

Amortization of intangible assets 30.8 21.5 9.3 43.3%

Impairment and restructuring charges 31.4 11.0 20.4 NM

1 unchanged sentence

Operating income % to net sales 15.3 % 15.3 % — 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.

Net sales increased for the three months ended June 30, 2023 compared with the three months ended June 30, 2022.

The increase was driven by the benefit of acquisitions (net of divestitures) of $77 million and organic growth (including pricing) of $52 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $11 million.

Net sales increased for the six months ended June 30, 2023 compared with the six months ended June 30, 2022.

The increase was driven by organic growth (including pricing) of $176 million and the benefit of acquisitions (net of divestitures) of $122 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $41 million.

Operating income increased for the three months ended June 30, 2023 compared with the three months ended June 30, 2022, due to favorable impact of higher sales net of cost of products sold, and lower impairment and restructuring charges, partially offset by higher SG&A expenses and increased amortization expense.

Operating income increased for the six months ended June 30, 2023 compared with the six months ended June 30, 2022, due to favorable impact of higher sales net of cost of products sold, partially offset by higher SG&A expenses, higher impairment and restructuring charges and increased amortization expense.

• Cost of products sold increased for the three months ended June 30, 2023 compared with the three months ended June 30, 2022, due to the incremental cost of goods sold from acquisitions (net of divestitures) of $55 million and higher manufacturing costs of $39 million, partially offset by lower material and logistics costs of $22 million and the impact of foreign currency exchange rate changes of $6 million.

Cost of products sold increased for the six months ended June 30, 2023 compared with the six months ended June 30, 2022, due to higher manufacturing costs, net of favorable mix impact, of $94 million and the incremental cost of goods sold from acquisitions (net of divestitures) of $89 million, partially offset by lower material and logistics costs of $36 million and the impact of foreign currency exchange rate changes of $22 million.

The higher manufacturing costs for the three and six months ended June 30, 2023 compared with the three and six months ended June 30, 2022 reflect continued labor and input cost inflation, as well as the impact of reduced inventory build in the 2023 periods compared to the same periods a year ago.

• SG&A expenses increased for the three months ended June 30, 2023 compared with the three months ended June 30, 2022, primarily due to the impact of acquisitions and increased spending to support the higher sales and business activity levels.

SG&A expenses increased for the six months ended June 30, 2023 compared with the six months ended June 30, 2022, primarily due to the impact of acquisitions, higher compensation costs and increased spending to support the higher sales and business activity levels.

• Amortization of intangible assets increased for the three and six months ended June 30, 2023 compared with the three and six months ended June 30, 2022, primarily due to the addition of intangible assets from the GGB acquisition, which was completed in the fourth quarter of 2022, and the Nadella acquisition, which was completed in the second quarter of 2023.

• Impairment and restructuring charges were lower for the three months ended June 30, 2023 compared with the three months ended June 30, 2022, primarily due to impairment charges recorded in the second quarter of 2022 related to the Company's operations in Russia.

As a result of Russia's invasion of Ukraine (and associated sanctions), the Company suspended its operations in Russia.

Refer to Russia Operations below for additional information.

Impairment and restructuring charges were higher for the six months ended June 30, 2023 compared with the six months ended June 30, 2022 primarily due to the impairment of goodwill, partially offset by the Russia-related charges in 2022 discussed above.

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 on 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.

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Interest income 1.9 1.0 $ 0.9 90.0 %

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.

Six Months Ended

2023 2022 $ Change % Change

Interest expense $ (52.4) $ (32.6) $ (19.8) 60.7 %

Interest income 3.4 1.6 $ 1.8 112.5 %

The increase in interest expense for the three and six months ended June 30, 2023 compared with the three and six months ended June 30, 2022 was due to increased debt levels and higher average interest rates.

Other Income (Expense):

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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.

Non-service pension and other postretirement income (expense) $ — $ (7.9) $ 7.9 (100.0) %

Other income (expense) 2.3 (1.1) 3.4 NM

Total other income (expense) $ 2.3 $ (9.0) $ 11.3 (125.6) %

Six Months Ended

2023 2022 $ Change % Change

Non-service pension and other postretirement income (expense) $ 0.1 $ (6.6) $ 6.7 (101.5) %

Other income (expense) 5.4 (0.9) 6.3 NM

Total other income (expense) $ 5.5 $ (7.5) $ 13.0 (173.3) %

Non-service pension and other postretirement income (expense) increased for the three and six months ended June 30, 2023 compared with the three and six months ended June 30, 2022.

The Company recognized pension remeasurement gains in 2023 compared to pension remeasurement losses in 2022.

This favorable impact was partially offset by the impact of a lower expected return on pension plan assets and higher interest expense on pension plan obligations.

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.

Other income (expense) increased for the six months ended June 30, 2023 compared with the six months ended June 30, 2022 due to gains on divestitures of $4.8 million primarily related to the sale of SE Setco , a 50% owned joint venture.

Income Tax Expense:

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Effective tax rate 26.7 % 29.4 % (270) 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.

Six Months Ended

2023 2022 $ Change Change

Provision for income taxes $ 89.6 $ 82.2 $ 7.4 9.0 %

Effective tax rate 26.0 % 26.5 % (50) bps

Income tax expense increased $3.1 million for the three months ended June 30, 2023 compared with the three months ended June 30, 2022 due to higher pre-tax earnings and an increase in the mix of earnings in non-U.S.

jurisdictions with relatively higher tax rates, partially offset by the net favorable impact of discrete tax items in comparison to the year ago period.

Income tax expense increased $7.4 million for the six months ended June 30, 2023 compared with the six months ended June 30, 2022 due to higher pre-tax earnings and an increase in the mix of earnings in non-U.S.

jurisdictions with relatively higher tax rates, partially offset by the net favorable impact of discrete tax items in comparison to the year ago period.

Refer to Note 6 - Income Taxes for more information on the computation of the income tax expense in interim periods.

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The following item represents the Company's acquisitions and divestitures completed in 2023 and 2022:

• The Company acquired Nadella during the second quarter of 2023.

Results for Nadella are reported in the Industrial Motion segment.

• The Company acquired ARB during the first quarter of 2023.

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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.

• The Company completed the sale of ADS during the fourth quarter of 2022.

Results for ADS were reported in the Industrial Motion segment.

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Currency (10.1) (10.1) 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.

Net sales, excluding the impact of acquisitions,

divestitures and currency $ 811.2 $ 798.3 $ 12.9 1.6 %

Six Months Ended

2023 2022 $ Change Change

Net sales $ 1,757.9 $ 1,570.7 $ 187.2 11.9%

EBITDA $ 390.5 $ 335.8 $ 54.7 16.3%

EBITDA margin 22.2 % 21.4 % 80 bps

Six Months Ended

2023 2022 $ Change % Change

Net sales $ 1,757.9 $ 1,570.7 $ 187.2 11.9 %

Acquisitions 113.1 113.1 NM

Divestitures (4.8) (4.8) NM

Currency (32.3) (32.3) NM

Net sales, excluding the impact of acquisitions,

divestitures and currency $ 1,681.9 $ 1,570.7 $ 111.2 7.1 %

The Engineered Bearings segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, increased $12.9 million or 1.6% in the three months ended June 30, 2023 compared with the three months ended June 30, 2022.

The increase reflects higher pricing across the segment and higher sales volume in the renewable energy, rail and heavy industries sectors, partially offset by lower sales volume in the distribution, auto/truck and general industrial sectors.

EBITDA increased by $18.0 million or 10.7% for the three months ended June 30, 2023 compared with the three months ended June 30, 2022, primarily due to favorable price/mix, lower material and logistics costs, the benefit of acquisitions and lower Russia related charges, partially offset by higher manufacturing costs, the impact of lower volume, and the unfavorable impact of foreign currency exchange rate changes.

The Engineered Bearings segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, increased $111.2 million or 7.1% in the six months ended June 30, 2023 compared with the six months ended June 30, 2022.

EBITDA increased by $54.7 million or 16.3% for the six months ended June 30, 2023 compared with the six months ended June 30, 2022, primarily due to favorable price/mix, lower material and logistics costs and the benefit of acquisitions, partially offset by higher manufacturing and SG&A costs, and the unfavorable impact of foreign currency exchange rate changes.

Industrial Motion Segment:

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divestitures and currency $ 395.2 $ 355.4 $ 39.8 11.2 %

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.

Six Months Ended

2023 2022 $ Change Change

Net sales $ 777.2 $ 707.6 $ 69.6 9.8%

EBITDA $ 129.1 $ 127.5 $ 1.6 1.3%

EBITDA margin 16.6 % 18.0 % (140) bps

Six Months Ended

2023 2022 $ Change % Change

Net sales $ 777.2 $ 707.6 $ 69.6 9.8 %

Acquisitions 36.6 36.6 NM

Divestitures (23.1) (23.1) NM

Currency (8.5) (8.5) NM

Net sales, excluding the impact of acquisitions,

divestitures and currency $ 772.2 $ 707.6 $ 64.6 9.1 %

The Industrial Motion segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, increased $39.8 million or 11.2% in the three months ended June 30, 2023 compared with the three months ended June 30, 2022 .

The increase reflects higher pricing across the segment and higher sales volume in the drive systems, services and automatic lubrication systems platforms, partially offset by lower sales volume in the belts and chain platform.

EBITDA increased $15.8 million or 24.3% for the three months ended June 30, 2023 compared with the three months ended June 30, 2022 primarily due to favorable price/mix and the impact of higher sales volume, partially offset by higher SG&A costs.

The Industrial Motion segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, increased $64.6 million or 9.1% in the six months ended June 30, 2023 compared with the six months ended June 30, 2022.

The increase reflects higher pricing across the segment and higher sales volume in the drive systems, services, automatic lubri cation systems and linear motion platforms, partially offset by lower sales volume in the belts and chain platform.

EBITDA increased $1.6 million or 1.3% for the six months ended June 30, 2023 compared with the six months ended June 30, 2022 primarily due to favorable price/mix, the impact of higher sales volume and lower material and logistics costs, mostly offset by higher impairment and restructuring charges, and higher manufacturing and SG&A costs.

The higher impairment and restructuring charges were primarily related to the impairment of goodwill for one of the segment's reporting units.

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Unallocated corporate expense % to net sales (1.0) % (1.2) % 20 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.

Three Months Ended

Six Months Ended

2023 2022 $ Change Change

Unallocated corporate expense $ (30.9) $ (26.3) $ (4.6) 17.5 %

Unallocated corporate expense % to net sales (1.2) % (1.2) % — bps

Unallocated corporate expense increased for the six months ended June 30, 2023 compared with the six months ended June 30, 2022 primarily due to increased spending for professional services and other corporate expenses.

Six Months Ended

2023 2022 $ Change

Net cash provided by (used in) operating activities $ 78.6 $ (1.2) $ 79.8

Net cash provided by operating activities $ 222.6 $ 77.1 $ 145.5

Net cash used in investing activities (412.0) (198.7) (213.3)

Net cash (used in) provided by financing activities (17.5) 204.7 (222.2)

Net cash provided by financing activities 209.0 177.4 31.6

Effect of exchange rate changes on cash (8.0) (7.7) (0.3)

(Decrease) Increase in cash and cash equivalents and restricted cash $ (1.6) $ 167.3 $ (168.9)

Increase in cash and cash equivalents and restricted cash $ 11.6 $ 48.1 $ (36.5)

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.

The increase in net cash provided by operating activities for the first six months of 2023 compared with the first six months of 2022 was primarily due to a decrease in cash used for working capital items of $134.0 million and an increase in net income of $27.7 million, partially offset by a reduction in the benefit of income taxes on cash of $43.3 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

The following table displays the impact of working capital items on cash during the six months of 2023 and 2022, respectively:

Six Months Ended

2023 2022 $ Change

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Cash used in working capital items $ (133.8) $ (267.8) $ 134.0

The following table displays the impact of income taxes on cash during the first three months of 2023 and 2022, respectively:

Three Months Ended

The following table displays the impact of income taxes on cash during the first six months of 2023 and 2022, respectively:

Six Months Ended

2023 2022 $ Change

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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.

The increase in net cash used in investing activities for the first six months of 2023 compared with the first six months of 2022 was primarily due to an increase in cash used for acquisitions of $172.3 million, an increase in net investments in short-term marketable securities of $24.2 million and an increase in capital expenditures of $16.1 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.

The increase in net cash provided by financing activities for the first six months of 2023 compared with the first six months of 2022 was primarily due to cash proceeds of $284.8 million on the sale of shares of TIL, a subsidiary of the Company, in the second quarter of 2023, partially offset by a decrease in net borrowings of $247.6 million.

LIQUIDITY AND CAPITAL RESOURCES

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

At March 31, 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.

At June 30, 2023, the Company had strong liquidity with $344.3 million of cash and cash equivalents on the Consolidated Balance Sheet, as well as $630.0 million available under committed credit lines.

Of the $344.3 million of cash and cash equivalents, $331.8 million resided in jurisdictions outside the United States.

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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.

At June 30, 2023, the Company had $133.2 million of outstanding borrowings and $1.8 million of letters of credit under the Senior Credit Facility, which reduced the availability under this facility to $615.0 million.

The Credit Agreement has two financial covenants:

1 unchanged sentence

The maximum consolidated leverage ratio permitted under the Senior Credit Facility is 3.5 to 1.0.

As of March 31, 2023, the Company's consolidated leverage ratio was 1.84 to 1.0.

As of June 30, 2023, the Company's consolidated leverage ratio was 1.85 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.

As of June 30, 2023, the Company's consolidated interest coverage ratio was 10.47 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.

dollar borrowings was 6.27% and the average rate on outstanding Euro borrowings was 4.07% as of June 30, 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-).

As of June 30, 2023, 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 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.

As of June 30, 2023, the Company had $85 million of outstanding borrowings under the Accounts Receivable Facility and no borrowing base limitations.

There was $15 million of availability under the Accounts Receivable Facility as of June 30, 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 $246.1 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.

At June 30, 2023, the Company had borrowings outstanding of $49.8 million and bank guarantees of $2.7 million, which reduced the aggregate availability under these facilities to $193.6 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.

At June 30, 2023, the Company was in full compliance with all applicable covenants on its outstanding debt.

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%).

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.

During the first six months of 2023, the Company made cash contributions and payments of $6.3 million to its global defined benefit pension plans and $0.9 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.

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 and higher interest expense.

The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.

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The Company reviews its critical accounting policies throughout the year.

The Company has concluded that there have been no significant changes to its critical accounting policies or estimates, as described in its Annual Report on Form 10-K for the year ended December 31, 2022, during the three months ended March 31, 2023.

OTHER MATTERS

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Foreign currency gains and losses resulting from transactions, and the related hedging activity, are included in the Consolidated Statements of Income.

For the three months ended March 31, 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.

For the six months ended June 30, 2023, the Company recorded negative foreign currency translation adjustments of $0.2 million that decreased shareholders' equity, compared with negative foreign currency translation adjustments of $134.2 million that decreased shareholders' equity for the six months ended June 30, 2022.

The foreign currency translation adjustments for the six months ended June 30, 2023 were positively impacted by the weakening of the U.S.

dollar relative to other foreign currencies, including the Euro.

Foreign currency exchange gains and losses, net of hedging activity, resulting from transactions included in the Company's operating results for the three months ended June 30, 2023 totaled $1.7 million of net gains, compared with $2.3 million of net gains during the three months ended June 30, 2022.

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, 2023 totaled $1.3 million of net losses, compared with $4.6 million of net gains during the six months ended June 30, 2022.

Russia Operations:

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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.

After giving effect to these impairments and write-downs, as well as the sale of Timken Russia, as of June 30, 2023, the Company has net assets (net of noncontrolling interest of $4.4 million), totaling $7.1 million on its Consolidated Balance Sheet related to its Rail JV.

Net assets include $6.9 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.

The Company will continue to monitor the events in Russia and Ukraine and may record additional asset impairments or other losses in the future.

Quarterly Dividend:

On August 2, 2023, the Company's Board of Directors declared a quarterly cash dividend of $0.33 per common share.

The quarterly dividend will be paid on August 28, 2023 to shareholders of record as of August 15, 2023.

This will be the 405 th consecutive quarterly dividend paid on the common shares of the Company.

NON-GAAP MEASURES

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net Sales $ 1,272.3 $ 1,153.7 $ 2,535.1 $ 2,278.3

Net Income Attributable to The Timken Company 125.2 105.0 247.5 223.2

Net Income Attributable to The Timken Company as a Percentage of Sales 9.7 % 10.5 %

Net Income Attributable to The Timken Company

as a Percentage of Sales 9.8 % 9.1 % 9.8 % 9.8 %

Acquisition intangible amortization 17.3 10.6 30.8 21.5

Impairment, restructuring and reorganization charges (1)

Corporate pension and other postretirement benefit related (income) expense (2)

Impairment, restructuring and reorganization

6.1 2.1 36.1 3.7

Corporate pension and other postretirement benefit

related (income) expense (2)

(1.0) 11.6 (1.9) 14.2

Russia-related charges (3)

(0.1) 8.4 0.2 13.0

Acquisition-related charges (4)

Gain on divestitures and sale of real estate (5)

3.8 1.6 8.5 2.7

Loss (gain) on divestitures and sale of certain

0.4 (0.1) (4.4) (0.1)

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

Provision for income taxes (6)

(5.6) (2.9) (17.0) (10.8)

Adjusted Net Income $ 146.1 $ 131.8 $ 299.6 $ 261.6

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Depreciation and amortization expense (7)

50.8 40.7 96.2 82.1

Acquisition intangible amortization 17.3 10.6 30.8 21.5

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Provision for income taxes (6)

(5.6) (2.9) (17.0) (10.8)

Adjusted EBITDA $ 263.0 $ 231.2 $ 528.5 $ 456.3

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Diluted earnings per share (EPS) $ 1.73 $ 1.42 $ 3.39 $ 2.98

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

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

Engineered Bearings Industrial Motion Unallocated Corporate Total

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Russia-related charges (3)

(0.1) — — (0.1)

Acquisition-related charges (4)

0.1 3.1 0.6 3.8

Gain on divestitures and sale of real estate (5)

Loss on divestitures and sale of certain assets (5)

Adjusted EBITDA $ 189.6 $ 85.9 $ (12.5) $ 263.0

Adjusted EBITDA Margin (% of net sales) 22.1 % 20.7 % NM 20.7 %

Three Months Ended June 30, 2022

Engineered Bearings Industrial Motion Unallocated Corporate Total

Net Sales $ 798.3 $ 355.4 $ — $ 1,153.7

EBITDA 167.5 65.1 (25.0) 207.6

Impairment, restructuring and reorganization

0.6 1.5 — 2.1

Corporate pension and other postretirement

benefit related expense (2)

— — 11.6 11.6

Russia-related charges (3)

Acquisition-related charges (4)

— 1.0 0.6 1.6

Loss (gain) on divestitures and sale of certain

0.1 (0.2) — (0.1)

Adjusted EBITDA $ 176.6 $ 67.4 $ (12.8) $ 231.2

Adjusted EBITDA Margin (% of net sales) 22.1 % 19.0 % NM 20.0 %

Three Months Ended March 31, 2022

Six Months Ended June 30, 2023

Engineered Bearings Industrial Motion Unallocated Corporate Total

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5.2 30.2 0.1 35.5

Corporate pension and other postretirement benefit

related income (2)

— — (1.9) (1.9)

Russia-related charges (3)

Acquisition-related charges (4)

2.3 3.1 3.1 8.5

(Gain) loss on divestitures and sale of certain

(4.8) 0.4 — (4.4)

Adjusted EBITDA $ 393.4 $ 162.8 $ (27.7) $ 528.5

Adjusted EBITDA Margin (% of net sales) 22.4 % 20.9 % NM 20.8 %

Six Months Ended June 30, 2022

Engineered Bearings Industrial Motion Unallocated Corporate Total

Net Sales $ 1,570.7 $ 707.6 $ — $ 2,278.3

EBITDA 335.8 127.5 (40.5) 422.8

Impairment, restructuring and reorganization

1.6 2.1 — 3.7

Corporate pension and other postretirement

benefit related expense (2)

— — 14.2 14.2

Russia-related charges (3)

13.0 — — 13.0

Acquisition-related charges (4)

— 1.4 1.3 2.7

Gain on divestitures and sale of certain assets (5)

$ 0.1 $ (0.2) — $ (0.1)

Adjusted EBITDA $ 350.5 $ 130.8 $ (25.0) $ 456.3

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(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.

(5) Represents the net loss (gain) resulting from divestitures and the sale of certain assets.

(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.

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Three Months Ended

Net cash provided by (used in) operating activities $ 78.6 $ (1.2)

June 30, Six Months Ended

2023 2022 2023 2022

Net cash provided by operating activities $ 144.0 $ 78.3 $ 222.6 $ 77.1

Capital expenditures (49.6) (40.9) (91.3) (75.2)

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T he Company presents net debt to adjusted EBITDA because it believes it is more representative of the Company's financial position as it is reflective of the Company's ability to cover its net debt obligations with results from its core operations.

Net income for the trailing twelve months ended March 31, 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.

Net income for the trailing twelve months ended June 30, 2023 and December 31, 2022 was $444.7 million and $417.0 million, respectively.

Net debt to adjusted EBITDA for the trailing twelve months was 1.9 at June 30, 2023 and December 31, 2022.

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

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Acquisition-related charges (3)

Gain on divestitures and sale of real estate (4)

Gain on divestitures and sale of certain assets (4)

Russia-related charges (5)

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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.

Impairment, restructuring and reorganization charges for the twelve months ended December 31, 2022 and June 30, 2023 included $29.3 million related to the sale of ADS.

In addition, impairment, restructuring and reorganization charges for the twelve months ended June 30, 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.

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(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.

(4) Represents the net gain resulting from divestitures and the sale of certain assets.

(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.

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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;

claims, investigations or problems related to intellectual property, product liability or warranty, foreign export, sanctions and trade laws, government procurement regulations, competition and anti-bribery laws, climate change, environmental or health and safety issues, data privacy and taxes;

• 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;

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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