Timken Co: Form 10-Q for the period ended Jun 30, 2024

(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®, GGB®, Philadelphia Gear®, Cone Drive®, Rollon®, Nadella®, Diamond®, Drives®, Groeneveld®, BEKA®, Des-Case®, Lovejoy® and Lagersmit®. Timken employs more than 19,000 people globally in 45 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 or mounted bearings. The Engineered Bearings portfolio features the Timken®, GGB® and Fafnir® 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, filtration systems 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, including Philadelphia Gear®, Cone Drive®, Spinea®, Rollon®, Nadella®, Groeneveld®, BEKA®, Des-Case®, Diamond®, Drives®, Timken® Belts, Lovejoy®, PT Tech® and Lagersmit®. 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.

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 materials science, friction management and power transmission to create value for Timken customers. Using a highly collaborative technical selling approach, the Company places particular emphasis on creating unique solutions for challenging and/or demanding applications. The Company intends to grow in attractive market sectors around the world, emphasizing those spaces that are highly fragmented, demand high service and value the reliability and efficiency offered by Timken products. The Company also targets applications that offer significant aftermarket demand, thereby providing product and services revenue throughout the equipment’s lifetime.

Operational Excellence. Timken operates with a relentless drive for exceptional results and a passion for superior execution. The Company embraces a continuous improvement culture that is charged with increasing efficiency, lowering costs, eliminating waste, encouraging organizational agility and building greater brand equity to fuel growth. This requires the Company’s ongoing commitment to attract, retain and develop the best talent across the world.

Capital Deployment to Drive Shareholder Value. The Company is 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 engineered 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 to run the business. As part of this framework, the Company may also restructure, reposition or divest underperforming product lines or assets.

Overview:

The decrease in net sales for the three and six months ended June 30, 2024 compared with the three and six months ended June 30, 2023 was driven by lower organic sales and the unfavorable impact of foreign currency exchange rate changes, partially offset by the benefit of acquisitions (net of divestitures).

The decrease in net income for the three months ended June 30, 2024 compared with the three months ended June 30, 2023 was primarily due to the impact of lower volume, higher interest expense, and the unfavorable impact of foreign currency exchange rate changes, partially offset by favorable price/mix, lower operating costs, and the benefit of acquisitions (net of divestitures). The decrease in net income for the six months ended June 30, 2024 compared with the six months ended June 30, 2023 was primarily due to the impact of lower volume, higher interest expense, and the unfavorable impact of foreign currency exchange rate changes, partially offset by lower operating costs, favorable price/mix, lower impairment charges, and the benefit of acquisitions (net of divestitures).

Outlook:

The Company expects 2024 full-year revenue to be down 3% to 4% compared to 2023, driven by lower demand and unfavorable currency impact, partially offset by the favorable impact from acquisitions (net of divestitures) and favorable pricing. The Company's net earnings are expected to be down in 2024 compared with 2023, primarily due to the impact of lower sales volume, higher operating costs, and a higher income tax rate, partially offset by lower impairment and pension remeasurement charges, favorable price/mix, and the benefit of acquisitions (net of divestitures).

The Company expects to generate a comparable amount of cash from operating activities in 2024 compared to 2023. The Company expects capital expenditures to remain flat in 2024 compared to 2023, and relatively in line with 2023 spending as a percentage of sales (4.0%).

THE STATEMENT OF INCOME

Operating Income:

Net sales decreased for the three and six months ended June 30, 2024 compared with the three and six months ended June 30, 2023. The decrease was driven by lower organic sales of $98 and $214 million, respectively (lower volume partially offset by favorable pricing), including a significant decline in the renewable energy market sector, and the unfavorable impact of foreign currency exchange rate changes of $14 and $20 million, respectively, partially offset by the favorable impact of acquisitions (net of divestitures) of $22 and $72 million, respectively.

Operating income decreased for the three months ended June 30, 2024 compared with the three months ended June 30, 2023, due to the unfavorable impact of lower sales net of cost of products sold, increased amortization expense, and higher impairment charges, offset partially by lower SG&A expenses. Operating income decreased for the six months ended June 30, 2024 compared with the six months ended June 30, 2023, due to the unfavorable impact of lower sales net of cost of products sold, higher SG&A expenses, and increased amortization expense, partially offset by lower impairment and restructuring charges.

• Cost of products sold decreased for the three months ended June 30, 2024 compared with the three months ended June 30, 2023, due to the impact of lower volume of $54 million and the impact of foreign currency exchange rate changes of $8 million, partially offset by the incremental cost of goods sold from acquisitions (net of divestitures) of $8 million. Cost of products sold decreased for the six months ended June 30, 2024 compared with the six months ended June 30, 2023, due to the impact of lower volume of $126 million, the impact of foreign currency exchange rate changes of $13 million, and favorable net material and logistics costs of $6 million, partially offset by the incremental cost of goods sold from acquisitions (net of divestitures) of $34 million.
• SG&A expenses decreased for the three months ended June 30, 2024 compared with the three months ended June 30, 2023, primarily due to favorable impact from currency and reduced discretionary spending to align with the lower demand levels, partially offset by the impact of acquisitions and higher compensation expense. SG&A expenses increased for the six months ended June 30, 2024 compared with the six months ended June 30, 2023, primarily due to the impact of acquisitions, partially offset by favorable impact from currency, lower compensation expense, and reduced discretionary spending to align with the lower demand levels.
• Amortization of intangible assets increased for the three and six months ended June 30, 2024 compared with the three and six months ended June 30, 2023, primarily due to the addition of intangible assets from the six acquisitions that were completed during 2023. Refer to Note 3 - Acquisitions and Divestitures in the Notes to the Consolidated Financial Statements for additional information.
• Impairment and restructuring charges were higher for the three months ended June 30, 2024 compared with the three months ended June 30, 2023, primarily due to the impairment of certain engineering-related assets used in the Engineered Bearing Segment. Impairment and restructuring charges were lower for the six months ended June 30, 2024 compared with the six months ended June 30, 2023, primarily due to impairment charges of $28.3 million related to the goodwill impairment recorded in the Industrial Motion segment during the first three months of 2023.

Interest Income and Expense:

The increase in net interest expense for the three and six months ended June 30, 2024 compared with the three and six months ended June 30, 2023 was due to increased debt levels and higher average interest rates.

Other Income (Expense):

The change in non-service pension and other postretirement expense (income) for the three and six months ended June 30, 2024 compared with the three and six months ended June 30, 2023 was due to pension remeasurement gains recognized during 2023. Refer to Note 16 - Retirement Benefit Plans and Note 17 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for additional information.

The change in other income, net, for the six months ended June 30, 2024 compared with the six months ended June 30, 2023 was primarily due to a gain of $4.8 million on the divestiture of SE Setco, a 50% owned joint venture, during the six months ended June 30, 2023.

Income Tax Expense:

Income tax expense decreased $11.2 million for the three months ended June 30, 2024 compared with the three months ended June 30, 2023 due to lower pre-tax earnings, a decrease in the mix of earnings in Non-U.S. jurisdictions with relatively higher tax rates and the net favorable impact of discrete items in comparison to the year ago period.

Income tax expense decreased $11.0 million for the six months ended June 30, 2024 compared with the six months ended June 30, 2023 due to lower pre-tax earnings. This was partially offset by the net unfavorable impact of discrete items in comparison to the year ago period.

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

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 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:

• The Company acquired Lagersmit during the fourth quarter of 2023. Results for Lagersmit are reported in the Industrial Motion segment.
• The Company acquired iMECH during the fourth quarter of 2023. Results for iMECH are reported in the Engineered Bearings segment.
• The Company completed the sale of Jiangsu TWB Bearings Co., Ltd. ("TWB") during the fourth quarter of 2023. Results for TWB were reported in the Engineered Bearings segment.
• The Company acquired Rosa and Des-Case during the third quarter of 2023. Results for Rosa and Des-Case are reported in the Industrial Motion segment.
• 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. Results for ARB are reported in the Engineered Bearings segment.

Engineered Bearings Segment:

The Engineered Bearings segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, decreased $60.2 million or 7.0% in the three months ended June 30, 2024 compared with the three months ended June 30, 2023. The decrease was primarily driven by a significant volume decline in the renewable energy sector and lower volume in the off-highway and heavy industries sectors, partially offset by higher volume in the industrial distribution, aerospace, and rail sectors. EBITDA decreased by $22.2 million or 12.0% for the three months ended June 30, 2024 compared with the three months ended June 30, 2023, primarily due to the impact of lower volume, partially offset by favorable price/mix and improved manufacturing cost performance.

The Engineered Bearings segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, decreased $152.7 million or 8.7% in the six months ended June 30, 2024 compared with the six months ended June 30, 2023. The decrease was driven by a significant volume decline in the renewable energy sector, and lower volume in the off-highway and general industrial sectors, partially offset by higher volume in the rail sector, and higher pricing. EBITDA decreased by $48.5 million or 12.4% for the six months ended June 30, 2024 compared with the six months ended June 30, 2023, primarily due to the impact of lower volume and the unfavorable impact of foreign currency exchange rate changes, partially offset by favorable price/mix and improved operating cost performance.

Industrial Motion Segment:

The Industrial Motion segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, decreased $38.0 million or 9.2% in the three months ended June 30, 2024 compared with the three months ended June 30, 2023. The decrease reflects lower volume across most platforms, with drive systems and linear motion experiencing the largest declines, partially offset by higher pricing. EBITDA decreased $5.3 million or 6.6% for the three months ended June 30, 2024 compared with the three months ended June 30, 2023 primarily due to the impact of lower volume, partially offset by the benefit of acquisitions and lower SG&A costs.

The Industrial Motion segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, decreased $61.5 million or 7.9% in the six months ended June 30, 2024 compared with the six months ended June 30, 2023. The decrease reflects lower volume across most platforms, with drive systems, linear motion and belts and chain experiencing the largest decline, partially offset by higher services revenue and higher pricing. EBITDA increased $23.8 million or 18.4% for the six months ended June 30, 2024 compared with the six months ended June 30, 2023 primarily due to lower impairment charges, the benefit of acquisitions, and favorable price/mix, partially offset by the impact of lower volume. The lower impairment charges were primarily due to a goodwill impairment recorded in the quarter ended March 31, 2023.

Unallocated Corporate

Unallocated corporate expense increased for the three and six months ended June 30, 2024 compared with the three and six months ended June 30, 2023 primarily due to the unfavorable impact of foreign currency exchange rate changes.

CASH FLOW

Operating Activities:

The decrease in net cash provided by operating activities for the first six months of 2024 compared with the first six months of 2023 was primarily due to a decrease in net income of $42.6 million, lower non-cash impairment charges of $26.4 million, the unfavorable impact of working capital items of $28.5 million and higher pension and postretirement payments of $8.9 million, partially offset by the favorable impact of income taxes on cash of $56.0 million due to lower tax payments. 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 first six months of 2024 and 2023, respectively:

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The following table displays the impact of income taxes on cash during the first six months of 2024 and 2023, respectively:

Investing Activities:

The decrease in net cash used in investing activities for the first six months of 2024 compared with the first six months of 2023 was primarily due to a decrease in cash used for acquisitions of $324.2 million, an increase in cash from the net liquidation of short-term marketable securities of $21.6 million and lower capital expenditures of $9.9 million, partially offset by lower proceeds from divestitures of $4.2 million.

Financing Activities:

The decrease in net cash used in financing activities for the first six months of 2024 compared with the first six months of 2023 was primarily due to a decrease in net borrowings of $318.9 million, a decrease in the proceeds from the sale of shares of TIL of $52.5 million and a decrease in proceeds from the exercise of stock options of $11.8 million, partially offset by a decrease in the purchase of treasury shares of $124.8 million.

LIQUIDITY AND CAPITAL RESOURCES

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

Net Debt:

Ratio of Net Debt to Capital:

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

At June 30, 2024, the Company had strong liquidity with $469.9 million of cash and cash equivalents on the Consolidated Balance Sheet, as well as $809.3 million available under committed credit lines. Of the $469.9 million of cash and cash equivalents, $446.0 million resided in jurisdictions outside the United States. Repatriation of non-U.S. cash could be subject to taxes and some portion may be subject to governmental restrictions. 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 a $750.0 million Senior Credit Facility and a $400.0 million 2027 Term Loan that each mature on December 5, 2027. The interest rates under the Credit Agreement are based on SOFR. At June 30, 2024, the Company had $40.7 million of outstanding borrowings under the Senior Credit Facility, which reduced the availability under this facility to $709.3 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 June 30, 2024, the Company's consolidated leverage ratio was 1.98 to 1.0. The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility is 3.0 to 1.0. As of June 30, 2024, the Company's consolidated interest coverage ratio was 7.72 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 6.42% and the average rate on outstanding Euro borrowings was 4.80% as of June 30, 2024. In addition, the Company pays a facility fee based on the applicable rate, which is variable with a spread based on the Company's debt rating, multiplied by the aggregate commitments of all of the lenders under the Senior Credit Facility. As of June 30, 2024, 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, 2026. The Accounts Receivable Facility is subject to certain borrowing base limitations and is secured by certain domestic trade accounts receivable of the Company. As of June 30, 2024, the Company had no outstanding borrowings under the Accounts Receivable Facility and no borrowing base limitations.

Other sources of liquidity include uncommitted short-term lines of credit for certain of the Company's foreign subsidiaries, which currently provide for borrowings of up to $223.9 million. At June 30, 2024, the Company had borrowings outstanding of $27.7 million and bank guarantees of $2.1 million, which reduced the aggregate availability under these facilities to $194.1 million.

On May 23, 2024, the Company issued 2034 Notes in the aggregate principal amount of €600 million with an interest rate of 4.125%, maturing on May 23, 2034. Proceeds from the 2034 Notes were used for the redemption of the 2024 Notes in the aggregate principal amount of $350 million that were due to mature on September 1, 2024, as well as the repayment of other debt outstanding at the time of the issuance.

On August 16, 2023, the Company entered into a €200 million 2024 Term Loan, maturing on August 16, 2024. Proceeds from the 2024 Term Loan were used to repay borrowings on the Senior Credit Facility and Accounts Receivable Facility, as well as for general corporate purposes. The Company repaid the 2024 Term Loan during the second quarter of 2024.

At June 30, 2024, the Company was in full compliance with all applicable covenants on its outstanding debt.

The Company expects to generate a comparable amount of cash from operating activities in 2024 compared to 2023. The Company expects capital expenditures to remain relatively flat in 2024 compared to 2023 and in line with 2023 spending as a percentage of sales (4.0%).

Financing Obligations and Other Commitments:

During the first six months of 2024, the Company made cash contributions and payments of $15.5 million to its global defined benefit pension plans and $0.7 million to its other postretirement benefit plans. The Company expects to make contributions to its global defined benefit plans of approximately $25 million in 2024. The Company expects to make payments of approximately $4 million to its other postretirement benefit plans in 2024. Excluding mark-to-market charges, the Company expects higher pension and other postretirement benefits expense in 2024 compared to 2023 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.

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, 2023, during the six months ended June 30, 2024.

OTHER MATTERS

Foreign Currency:

Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the reporting period. Related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions, and the related hedging activity, are included in the Consolidated Statements of Income.

For the six months ended June 30, 2024, the Company recorded negative foreign currency translation adjustments of $79.5 million that decreased shareholders' equity, compared with negative foreign currency translation adjustments of $0.2 million that decreased shareholders' equity for the six months ended June 30, 2023. The foreign currency translation adjustments for the six months ended June 30, 2024 was negatively impacted by the strengthening of the U.S. dollar relative to other foreign currencies, including the Euro, the Chinese Renminbi and Mexican Peso.

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, 2024 totaled $0.4 million of net losses, compared with $1.7 million of net gains during the three months ended June 30, 2023. 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, 2024 totaled $3.6 million of net losses, compared with $1.3 million of net losses during the six months ended June 30, 2023.

CEO Succession:

On March 26, 2024, the Company announced that it had reached an agreement with Tarak Mehta to become Timken’s next President and Chief Executive Officer. Mr. Mehta is an accomplished industry veteran who most recently served as President of the Motion business and a member of the Group Executive Committee at ABB Ltd. He will succeed Richard G. Kyle, who has served as Timken’s President and Chief Executive Officer since 2014. Mr. Mehta is expected to start his employment with the Company on September 5, 2024, at which time Mr. Kyle will move into an advisory role to assist with the leadership transition. Mr. Kyle is expected to retire as an employee of Timken on February 15, 2025, but will remain on the Company’s Board of Directors. Mr. Mehta will also be appointed to the Board of Directors.

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.

Reconciliation of net income attributable to The Timken Company to adjusted net income, adjusted EBITDA and adjusted EBITDA Margin:

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.

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

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(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. On March 26, 2024, the Company announced that Richard G. Kyle, President and CEO of the Company would be retiring from his position as CEO and that Tarak Mehta would be appointed CEO on September 5, 2024. Impairment, restructuring and reorganization charges for 2024 include the acceleration of certain stock compensation awards for Mr. Kyle and other one-time costs associated with the transition. 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 represents actuarial gains 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) Acquisition-related charges represent deal-related expenses associated with completed transactions and any resulting inventory step-up impact.

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

(5) Provision for income taxes includes the net tax impact on pre-tax adjustments (listed above), the impact of discrete tax items recorded during the respective periods as well as other adjustments to reflect the use of one overall effective tax rate on adjusted pre-tax income in interim periods.

(6) Depreciation and amortization shown excludes depreciation recognized in reorganization charges, if any.

Free Cash Flow:

Free cash flow represents net cash provided by 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:

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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. The Company presents net debt to adjusted EBITDA because it believes it is more representative of the Company's financial position as it is reflective of the Company's ability to cover its net debt obligations with results from its core operations. Net income for the trailing twelve months ended June 30, 2024 and December 31, 2023 was $365.4 million and $408.0 million, respectively. Net debt to adjusted EBITDA for the trailing twelve months was 1.9 at June 30, 2024 and December 31, 2023.

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

(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. On March 26, 2024, the Company announced that Richard G. Kyle, President and Chief Executive Officer of the Company would be retiring from his position as CEO and that Tarak Mehta would be appointed CEO on September 5, 2024. Impairment, restructuring and reorganization charges for the twelve months ending June 30, 2024 include the acceleration of certain stock compensation awards and professional fees associated with the transition. Impairment, restructuring and reorganization charges for the twelve months ended December 31, 2023 included $29.3 million related to the sale of ADS and $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 expense represents actuarial losses that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience. The Company recognizes actuarial 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 sale of certain assets.

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, 2023 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, pandemics, epidemics or other public health concerns, 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, strained geopolitical relations between countries in which we have significant operations, 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, availability and health of employees, and governmental 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 ability of the Company to effectively adjust the prices for its products in response to changing dynamics, 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 especially in industry segments with potential high claim values; changes in the global regulatory landscape (including with respect to climate change or other environmental regulations); 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 sustainability 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 employees in certain locations in order to avoid disruptions of business;
• the continued attraction, retention and development of management, other key employees, and other skilled personnel at all levels of the organization, the successful development and execution of succession plans and management of other human capital matters;
• unanticipated litigation, claims, investigations, remediation or assessments. This includes: 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, PFAS, other 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 high 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, 2023 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 U.S. Securities and Exchange Commission ("SEC"). 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.

Refer to information appearing under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q. Furthermore, a discussion of market risk exposures is included in Part II, Item 7A. Quantitative and Qualitative Disclosure about Market Risk, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes in reported market risk since the inclusion of this discussion in the Company’s Annual Report on Form 10-K referenced above.

(a) Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in Internal Control Over Financial Reporting

During the Company’s fiscal quarter ended June 30, 2024, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

During 2023, the Company completed six acquisitions: Lagersmit, iMECH, Rosa, Des-Case, Nadella and ARB. The results of these acquisitions are included in the Company's consolidated financial statements for the first six months of 2024. The total and net assets of these acquisitions represented 12% of the Company's total assets and 20% of the Company's net assets as of June 30, 2024. The net sales of these acquisitions in the aggregate represented 5% of the Company's consolidated net sales for the first six months of 2024. The Company is currently integrating these acquisitions into its internal control framework and processes, and as prescribed by SEC rules and regulations, the Company will include Lagersmit, iMECH, Rosa, Des-Case, Nadella and ARB in the internal control over financial reporting assessment as of December 31, 2024.

The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023, included a detailed discussion of our risk factors. There have been no material changes to the risk factors included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Investors should not interpret the disclosure of any risk factor to imply that the risk has not already materialized.