QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-1169
THE TIMKEN COMPANY
(Exact name of registrant as specified in its charter)
Ohio
34-0577130
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
4500 Mount Pleasant Street NW
North Canton
Ohio
44720-5450
(Address of principal executive offices)
(Zip Code)
234.262.3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Shares, without par value
TKR
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes☐No☒
Indicate the number of shares outstanding of each of the issuer's classes of common shares, as of the latest practicable date.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions, except per share data)
Note 1 - Basis of Presentation
The accompanying Consolidated Financial Statements (unaudited) for The Timken Company (the "Company" or "Timken") have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by the accounting principles generally accepted in the United States ("U.S. GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and accompanying Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Note 2 - Significant Accounting Policies
The Company's significant accounting policies are detailed in "Note 1 - Significant Accounting Policies" of the Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements:
New Accounting Guidance Adopted:
In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2021-08, "Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with ASC Topic 606 as if the acquirer had originated the contracts. This new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2021-08 effective January 1, 2022, and the impact of the adoption was not material to the Company's results of operations and financial condition.
New Accounting Guidance Issued and Not Yet Adopted:
In November 2021, the FASB issued ASU 2021-10, "Government Assistance (Topic 832)." ASU 2021-10 is intended to increase transparency of government assistance by requiring entities to disclose the types of government assistance, the entity's accounting for government assistance, and the effect of the government assistance on an entity's financial statements. This new guidance is effective for all entities for annual reporting periods beginning after December 15, 2021. The Company is currently evaluating the impact of the new guidance on its disclosures.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2020-04 is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022. The Company is currently assessing which of its various contracts will require an update for a new reference rate and will determine the timing for implementation of this guidance after completing that analysis.
The following table presents details deemed most relevant to the users of the financial statements about total revenue for the three months ended March 31, 2022 and 2021, respectively:
Three Months Ended
Three Months Ended
March 31, 2022
March 31, 2021
Mobile
Process
Total
Mobile
Process
Total
United States
$
262.2
$
226.6
$
488.8
$
242.9
$
186.2
$
429.1
Americas excluding the United States
58.1
55.1
113.2
48.8
43.2
92.0
Europe / Middle East / Africa
129.4
135.6
265.0
127.1
127.2
254.3
China
30.7
120.7
151.4
34.4
124.3
158.7
Asia-Pacific excluding China
60.0
46.2
106.2
51.3
40.0
91.3
Net sales
$
540.4
$
584.2
$
1,124.6
$
504.5
$
520.9
$
1,025.4
When reviewing revenue by sales channel, the Company separates net sales to original equipment manufacturers ("OEMs") from sales to distributors and end users. The following table presents the percent of revenue by sales channel for the three months ended March 31, 2022 and 2021, respectively:
Three Months Ended
Three Months Ended
Revenue by sales channel
March 31, 2022
March 31, 2021
Original equipment manufacturers
60%
61%
Distribution/end users
40%
39%
In addition to disaggregating revenue by segment, geography and by sales channel as shown above, the Company believes information about the timing of transfer of goods or services, type of customer and distinguishing service revenue from product sales is also relevant. During the three months ended March 31, 2022 and March 31, 2021, approximately 9% of total net sales were recognized on an over-time basis because of the continuous transfer of control to the customer, with the remainder recognized as of a point in time. Approximately 5% and 4% of total net sales represented service revenue during each of the three months ended March 31, 2022 and March 31, 2021, respectively. Finally, business with the United States ("U.S.") government or its contractors represented approximately 7% of total net sales during the three months ended March 31, 2022 and March 31, 2021.
Remaining Performance Obligations:
Remaining performance obligations represent the transaction price of orders meeting the definition of a contract for which work has not been performed and excludes unexercised contract options. Performance obligations having a duration of more than one year are concentrated in contracts for certain products and services provided to the U.S. government or its contractors. The aggregate amount of the transaction price allocated to remaining performance obligations for such contracts with a duration of more than one year was approximately $213.1 million at March 31, 2022.
Unbilled Receivables:
The following table contains a rollforward of unbilled receivables for the three months ended March 31, 2022:
March 31, 2022
Beginning balance, January 1
$
104.5
Additional unbilled revenue recognized
105.5
Less: amounts billed to customers
(121.5)
Ending balance
$
88.5
There were no impairment losses recorded on unbilled receivables for the three months ended March 31, 2022.
The primary measurement used by management to measure the financial performance of each segment is earnings before interest, taxes, depreciation and amortization ("EBITDA").
Three Months Ended March 31,
2022
2021
Net sales:
Mobile Industries
$
540.4
$
504.5
Process Industries
584.2
520.9
Net sales
$
1,124.6
$
1,025.4
Segment EBITDA:
Mobile Industries
$
75.1
$
79.6
Process Industries
155.6
131.0
Total EBITDA, for reportable segments
$
230.7
$
210.6
Unallocated corporate expense
(12.9)
(11.6)
Corporate pension and other postretirement benefit related expense (1)
(2.6)
(0.9)
Acquisition-related gain (2)
—
0.6
Depreciation and amortization
(41.4)
(43.0)
Interest expense
(14.3)
(14.9)
Interest income
0.6
0.5
Income before income taxes
$
160.1
$
141.3
(1) Corporate pension and other postretirement benefit related expense represents actuarial (losses) and gains that resulted from the remeasurement of pension and other postretirement plan assets and obligations as a result of changes in assumptions or experience.
(2) The acquisition-related gain represents measurement period adjustments to the bargain purchase gain on the acquisition of Aurora Bearing Company ("Aurora"), which closed on November 30, 2020.
Note 5 - Income Taxes
The Company's provision for income taxes in interim periods is computed by applying the estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items are recorded during the period(s) in which they occur.
Three Months Ended March 31,
2022
2021
Provision for income taxes
$
38.2
$
25.3
Effective tax rate
23.9
%
17.9
%
Income tax expense for the three months ended March 31, 2022 was calculated using forecasted multi-jurisdictional annual effective tax rates to determine a blended annual effective tax rate. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the projected mix of earnings in international jurisdictions with relatively higher tax rates.
The effective tax rate of 23.9% for the three months ended March 31, 2022 was higher than the rate for the three months ended March 31, 2021 primarily due to higher pre-tax earnings and a higher discrete tax benefit in the prior year due to the release of accruals for uncertain tax positions from the settlement of the 2017 and 2018 U.S. federal tax years during the three months ended March 31, 2021.
The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share and diluted earnings per share for the three months ended March 31, 2022 and 2021, respectively:
Three Months Ended March 31,
2022
2021
Numerator:
Net income attributable to The Timken Company
$
118.2
$
113.3
Less: undistributed earnings allocated to nonvested stock
—
—
Net income available to common shareholders for basic and diluted earnings per share
$
118.2
$
113.3
Denominator:
Weighted average number of shares outstanding - basic
74,782,153
75,820,157
Effect of dilutive securities:
Stock options and awards - based on the treasury stock method
763,512
1,444,484
Weighted average number of shares outstanding assuming dilution of stock options and awards
75,545,665
77,264,641
Basic earnings per share
$
1.58
$
1.49
Diluted earnings per share
$
1.56
$
1.47
The dilutive effect of stock options and awards includes all outstanding stock options and awards except stock options that are considered antidilutive. Stock options are antidilutive when the exercise price exceeds the average market price of the Company’s common shares during the periods presented. There were no antidilutive stock options outstanding during the three months ended March 31, 2022 and 2021.
Note 7 - Inventories
The components of inventories at March 31, 2022 and December 31, 2021 were as follows:
March 31, 2022
December 31, 2021
Manufacturing supplies
$
39.3
$
38.0
Raw materials
132.6
121.8
Work in process
466.6
418.4
Finished products
533.3
527.8
Subtotal
1,171.8
1,106.0
Allowance for obsolete and surplus inventory
(59.2)
(63.3)
Total inventories, net
$
1,112.6
$
1,042.7
Inventories are valued at net realizable value, with approximately 58% valued on the first-in, first-out ("FIFO") method and the remaining 42% valued on the last-in, first-out ("LIFO") method. The majority of the Company's domestic inventories are valued on the LIFO method, and all the Company's international inventories are valued on the FIFO method.
The LIFO reserve at March 31, 2022 and December 31, 2021 was $211.7 million and $199.4 million, respectively. An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation.
The changes in the carrying amount of goodwill for the three months ended March 31, 2022 were as follows:
Mobile Industries
Process Industries
Total
Beginning balance
$
371.7
$
651.0
$
1,022.7
Foreign currency translation adjustments and other changes
(5.6)
(6.7)
(12.3)
Ending balance
$
366.1
$
644.3
$
1,010.4
The following table displays intangible assets as of March 31, 2022 and December 31, 2021:
Balance at March 31, 2022
Balance at December 31, 2021
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Intangible assets subject to amortization:
Customer relationships
$
512.3
$
(194.5)
$
317.8
$
518.1
$
(189.3)
$
328.8
Technology and know-how
267.5
(90.0)
177.5
270.7
(86.6)
184.1
Trade names
12.9
(8.4)
4.5
14.3
(9.6)
4.7
Capitalized software
281.7
(262.8)
18.9
280.0
(261.3)
18.7
Other
3.8
(3.0)
0.8
4.7
(3.6)
1.1
$
1,078.2
$
(558.7)
$
519.5
$
1,087.8
$
(550.4)
$
537.4
Intangible assets not subject to amortization:
Trade names
$
120.4
$
120.4
$
122.7
$
122.7
FAA air agency certificates
8.7
8.7
8.7
8.7
$
129.1
$
129.1
$
131.4
$
131.4
Total intangible assets
$
1,207.3
$
(558.7)
$
648.6
$
1,219.2
$
(550.4)
$
668.8
Amortization expense for intangible assets was $12.7 million and $14.1 million for the three months ended March 31, 2022 and 2021, respectively. Amortization expense included $10.9 million and $12.1 million related to intangible assets acquired as part of a business combination for the three months ended March 31, 2022 and 2021, respectively. Amortization expense for intangible assets is projected to be $50.9 million in 2022; $45.5 million in 2023; $43.5 million in 2024; $42.1 million in 2025; and $40.8 million in 2026. Substantially all amortization expense for intangible assets is recorded in Cost of product sold on the Consolidated Statement of Income.
Note 9 - Other Current Liabilities
The following table displays other current liabilities as of March 31, 2022 and December 31, 2021:
Short-term debt at March 31, 2022 and December 31, 2021 was as follows:
March 31, 2022
December 31, 2021
Borrowings under lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.50% to 2.10% at March 31, 2022 and 0.50% to 2.00% at December 31, 2021
$
29.9
$
42.6
Short-term debt
$
29.9
$
42.6
The lines of credit for certain of the Company's foreign subsidiaries provide for short-term borrowings up to $268.4 million in the aggregate. Most of these lines of credit are uncommitted. At March 31, 2022, the Company’s foreign subsidiaries had borrowings outstanding of $29.9 million and bank guarantees of $0.3 million, which reduced the aggregate availability under these facilities to $238.2 million.
Long-term debt at March 31, 2022 and December 31, 2021 was as follows:
March 31, 2022
December 31, 2021
Variable-rate Senior Credit Facility with an average interest rate on U.S. Dollar of 1.17% and Euro of 1.00% at March 31, 2022 and U.S. Dollar of 1.09% and Euro of 1.00% at December 31, 2021
$
8.8
$
9.0
Variable-rate Term Loan(1), maturing on September 11, 2023, with an interest rate of 1.58% at March 31, 2022 and 1.23% at December 31, 2021
319.0
321.1
Fixed-rate Senior Unsecured Notes(1), maturing on September 1, 2024, with an interest rate of 3.875%
349.6
349.5
Fixed-rate Euro Senior Unsecured Notes(1), maturing on September 7, 2027, with an interest rate of 2.02%
165.8
170.3
Fixed-rate Senior Unsecured Notes(1), maturing on December 15, 2028, with an interest rate of 4.50%
396.9
396.9
Fixed-rate Medium-Term Notes, Series A(1), maturing at various dates through May 2028, with interest rates ranging from 6.74% to 7.76%
154.7
154.7
Fixed-rate Senior Unsecured Notes(1), maturing on April 1, 2032, with an interest rate of 4.125%
341.7
—
Fixed-rate Euro Bank Loan, maturing on June 30, 2033, with an interest rate of 2.15%
15.4
15.8
Other
6.4
5.0
Total debt
$
1,758.3
$
1,422.3
Less: Current maturities
11.1
11.2
Long-term debt
$
1,747.2
$
1,411.1
(1) Net of discounts and fees
The Company has a $100 million Amended and Restated Asset Securitization Agreement (the "Accounts Receivable Facility"), which matures on November 30, 2024. Under the terms of the Accounts Receivable Facility, the Company sells, on an ongoing basis, certain domestic trade receivables to Timken Receivables Corporation, a wholly-owned consolidated subsidiary that, in turn, uses the trade receivables to secure borrowings that are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the Accounts Receivable Facility may be limited to certain borrowing base limitations; however, availability under the Accounts Receivable Facility was not reduced by any such borrowing base limitations at March 31, 2022. As of March 31, 2022, there were no outstanding borrowings under the Accounts Receivable Facility. The cost of this facility, which is the prevailing commercial paper rate plus facility fees, is considered a financing cost and is included in interest expense in the Consolidated Statements of Income.
The Company entered into the Fourth Amended and Restated Credit Agreement ("Senior Credit Facility") on June 25, 2019. The Senior Credit Facility is a $650.0 million unsecured revolving credit facility, which matures on June 25, 2024. At March 31, 2022, the Company had $8.8 million of outstanding borrowings under the Senior Credit Facility, which reduced the availability under this facility to $641.2 million. The Senior Credit Facility has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio.
On March 28, 2022, the Company issued fixed-rate unsecured senior notes ("2032 Notes") in the aggregate principal amount of $350 million with an interest rate of 4.125%, maturing on April 1, 2032. Proceeds from the notes were used to repay borrowings under the Senior Credit Facility and the Accounts Receivable Facility outstanding at the time of issuance, and for general corporate purposes.
On September 11, 2018, the Company entered into a $350 million variable-rate term loan that matures on September 11, 2023 (the "2023 Term Loan"). Proceeds from the 2023 Term Loan were used to fund the acquisitions of Apiary Investments Holding Limited and Rollon S.p.A., which closed on September 1, 2018 and September 18, 2018, respectively. On July 12, 2019, the Company amended the 2023 Term Loan agreement to, among other things, align covenants and other terms with the Senior Credit Facility.
At March 31, 2022, the Company was in full compliance with all applicable covenants on its outstanding debt.
In the ordinary course of business, the Company utilizes standby letters of credit issued by financial institutions to guarantee certain obligations, most of which relate to insurance contracts. At March 31, 2022, outstanding letters of credit totaled $42.8 million, most with expiration dates within 12 months.
The maturities of long-term debt (including $3.8 million of finance leases) subsequent to March 31, 2022 are as follows:
The Company and certain of its subsidiaries have been identified as potentially responsible parties for investigation and remediation under the Comprehensive Environmental Response, Compensation and Liability Act, known as the Superfund, or similar state laws with respect to certain sites. Claims for investigation and remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation.
On December 28, 2004, the United States Environmental Protection Agency (“USEPA”) sent Lovejoy, Inc. ("Lovejoy") a Special Notice Letter that identified Lovejoy as a potentially responsible party, together with at least 14 other companies, at the Ellsworth Industrial Park Site, Downers Grove, DuPage County, Illinois (the “Site”). The Company acquired Lovejoy in 2016. Lovejoy’s Downers Grove property is situated within the Ellsworth Industrial Complex. The USEPA and the Illinois Environmental Protection Agency (“IEPA”) allege there have been one or more releases or threatened releases of hazardous substances, allegedly including, but not limited to, a release or threatened release on or from Lovejoy's property, at the Site. The relief sought by the USEPA and IEPA includes further investigation and potential remediation of the Site and reimbursement of response costs. Lovejoy’s allocated share of past and future costs related to the Site, including for investigation and/or remediation, could be significant. All previously pending property damage and personal injury lawsuits against Lovejoy related to the Site were settled or dismissed prior to our acquisition of Lovejoy.
The Company had total environmental accruals of $6.4 million and $6.0 million for various known environmental matters that are probable and reasonably estimable at March 31, 2022andDecember 31, 2021, respectively, which includes the Lovejoy matter described above. These accruals were recorded based upon the best estimate of costs to be incurred in light of the progress made in determining the magnitude of remediation costs, the timing and extent of remedial actions required by governmental authorities and the amount of the Company’s liability in proportion to other responsible parties.
Product Warranties:
In addition to the contingencies above, the Company provides limited warranties on certain of its products. The product warranty liability included in "Other current liabilities" on the Consolidated Balance Sheets was $13.0 million and $11.7 million at March 31, 2022 and December 31, 2021, respectively. The increase in the liability primarily relates to accruals that are based on the best estimate of costs for future claims based on products sold that are still under warranty. The estimate of these accruals is based on historical claims and expected trends that continue to mature. Any significant change to these assumptions may be material to the results of operations in any particular period in which that change occurs.
The following is a rollforward of the consolidated product warranty accrual for the three months ended March 31, 2022 and twelve months ended December 31, 2021:
Impairment and restructuring charges by segment are comprised of the following:
For the three months ended March 31, 2022:
Mobile Industries
Process Industries
Total
Severance and related benefit costs
$
0.4
$
(0.1)
$
0.3
Exit costs
0.7
—
0.7
Total
$
1.1
$
(0.1)
$
1.0
For the three months ended March 31, 2021:
Mobile Industries
Process Industries
Total
Impairment charges
$
0.1
$
3.3
$
3.4
Severance and related benefit costs
—
0.5
0.5
Exit costs
0.1
—
0.1
Total
$
0.2
$
3.8
$
4.0
The following discussion explains the impairment and restructuring charges recorded for the periods presented; however, it is not intended to reflect a comprehensive discussion of all amounts in the tables above.
Mobile Industries:
On July 19, 2021, the Company announced the closure of its bearing manufacturing facility in Villa Carcina, Italy. The Company will be transferring the manufacturing of its single-row tapered roller bearing production to other bearing facilities in Europe, Asia and the United States. The Company expects to complete the closure by June of 2022 and is expected to affect approximately 110 employees. The Company expects to incur approximately $9 million to $11 million of expenses related to this closure. During the three months ended March 31, 2022, the Company recorded severance and related benefits of $0.4 million and exit costs of $0.6 million related to this closure. The Company has incurred cumulative pretax costs related to this closure of $7.5 million as of March 31, 2022, including rationalization costs recorded in cost of products sold. On January 31, 2022, the Company entered into an agreement to sell this facility with the sale expected to close in the fourth quarter of 2022.
Process Industries:
On February 4, 2020, the Company announced the closure of its chain manufacturing facility in Indianapolis, Indiana. This facility was part of the Diamond Chain Company ("Diamond Chain") acquisition completed on April 1, 2019. The Company will be transferring the manufacturing of its Diamond Chain product line to its chain facility in Fulton, Illinois. The chain plant is expected to cease operations by the end of the fourth quarter of 2022 and is expected to affect approximately 240 employees. The Company expects to hire approximately 130 full-time positions in Fulton, Illinois and expects to incur approximately $11 million to $14 million of expenses related to this closure. During the three months ended March 31, 2021, the Company recorded severance and related benefit costs of $0.3 million, respectively, related to this closure. The Company has incurred cumulative pretax costs related to this closure of $11.1 million as of March 31, 2022, including rationalization costs recorded in cost of products sold.
In addition, the Company recorded impairment charges of $3.3 million related to certain engineering-related assets used in the business during the three months ended March 31, 2021. Management concluded no further investment would be made in these assets and as a result, reduced the value to zero.
Note 13 - Impairment and Restructuring Charges (continued)
Consolidated Restructuring Accrual:
The following is a rollforward of the consolidated restructuring accrual for the three months ended March 31, 2022 and twelve months ended December 31, 2021:
March 31, 2022
December 31, 2021
Beginning balance, January 1
$
7.0
$
8.0
Expense
1.0
4.4
Payments
(1.0)
(5.4)
Ending balance
$
7.0
$
7.0
The restructuring accrual at March 31, 2022 and December 31, 2021 was included in other current liabilities on the Consolidated Balance Sheets.
The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans. The amounts for the three months ended March 31, 2022 are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of that period’s proportionate share of the amounts to be recorded for the year ending December 31, 2022.
U.S. Plans
International Plans
Total
Three Months Ended March 31,
Three Months Ended March 31,
Three Months Ended March 31,
2022
2021
2022
2021
2022
2021
Components of net periodic benefit cost (credit):
Service cost
$
1.9
$
2.5
$
0.4
$
0.5
$
2.3
$
3.0
Interest cost
4.1
4.4
1.5
1.1
5.6
5.5
Expected return on plan assets
(5.2)
(6.1)
(2.5)
(2.5)
(7.7)
(8.6)
Amortization of prior service cost
0.3
0.3
—
—
0.3
0.3
Recognition of net actuarial losses
2.6
0.9
—
—
2.6
0.9
Net periodic benefit cost (credit)
$
3.7
$
2.0
$
(0.6)
$
(0.9)
$
3.1
$
1.1
The Company expects full year 2022 lump sum payments for one of its U.S. defined benefit pension plans to exceed annual interest and service costs. This expectation triggered a remeasurement of assets and obligations for the plan. As a result of this remeasurement, the Company recognized net actuarial losses ("Mark-to-Market Charges") of $2.6 million during the three months ended March 31, 2022.
For the three months ended March 31, 2021, the Company expected to make lump sum payments related to new retirees in excess of annual interest and service costs for three of the Company's U.S. defined benefit pension plans in 2021. This expectation triggered a remeasurement of assets and obligations for these plans. As a result of this remeasurement, the Company recognized net actuarial losses of $0.9 million during the three months ended March 31, 2021.
Note 15 - Other Postretirement Benefit Plans
The following table sets forth the net periodic benefit cost for the Company’s other postretirement benefit plans. The amounts for the three months ended March 31, 2022 are based on calculations prepared by the Company's actuaries and represent the Company’s best estimate of that period’s proportionate share of the amounts to be recorded for the year ending December 31, 2022.
Note 16 - Accumulated Other Comprehensive Income (Loss)
The following tables present details about components of accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021, respectively:
Foreign currency translation adjustments
Pension and other postretirement liability adjustments
Change in fair value of derivative financial instruments
Total
Balance at December 31, 2021
$
(80.3)
$
56.6
$
0.7
$
(23.0)
Other comprehensive (loss) income before reclassifications and income taxes
(22.6)
0.2
3.2
(19.2)
Amounts reclassified from accumulated other comprehensive (loss) income before income taxes
—
(2.2)
(0.9)
(3.1)
Income tax benefit (expense)
—
0.5
(0.3)
0.2
Net current period other comprehensive (loss) income, net of income taxes
(22.6)
(1.5)
2.0
(22.1)
Noncontrolling interest
2.6
—
—
2.6
Net current period comprehensive (loss) income, net of income taxes and noncontrolling interest
(20.0)
(1.5)
2.0
(19.5)
Balance at March 31, 2022
$
(100.3)
$
55.1
$
2.7
$
(42.5)
Foreign currency translation adjustments
Pension and other postretirement liability adjustments
Change in fair value of derivative financial instruments
Total
Balance at December 31, 2020
$
(18.0)
$
63.4
$
(4.1)
$
41.3
Other comprehensive (loss) income before reclassifications and income taxes
(44.4)
—
1.4
(43.0)
Amounts reclassified from accumulated other comprehensive (loss) income before income taxes
—
(2.2)
1.7
(0.5)
Income tax (expense) benefit
—
0.6
(0.9)
(0.3)
Net current period other comprehensive (loss) income, net of income taxes
(44.4)
(1.6)
2.2
(43.8)
Noncontrolling interest
0.4
—
—
0.4
Net current period comprehensive (loss) income, net of income taxes and noncontrolling interest
(44.0)
(1.6)
2.2
(43.4)
Balance at March 31, 2021
$
(62.0)
$
61.8
$
(1.9)
$
(2.1)
Other comprehensive income (loss) before reclassifications and income taxes includes the effect of foreign currency.
Fair value is defined as the price that would be expected to be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB provides accounting rules that classify the inputs used to measure fair value into the following hierarchy:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 – Unobservable inputs for the asset or liability.
The following tables present the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:
March 31, 2022
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
407.0
$
404.4
$
2.6
$
—
Cash and cash equivalents measured at net asset value
17.5
—
—
—
Restricted cash
0.7
0.7
—
—
Short-term investments
57.8
—
57.8
—
Interest rate swap contract
2.6
—
2.6
—
Foreign currency forward contracts
6.6
—
6.6
—
Total assets
$
492.2
$
405.1
$
69.6
$
—
Liabilities:
Foreign currency forward contracts
$
6.3
$
—
$
6.3
$
—
Total liabilities
$
6.3
$
—
$
6.3
$
—
December 31, 2021
Total
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
257.1
$
244.8
$
12.3
$
—
Restricted cash
0.8
0.8
—
—
Short-term investments
56.9
—
56.9
—
Foreign currency forward contracts
5.6
—
5.6
—
Total assets
$
320.4
$
245.6
$
74.8
$
—
Liabilities:
Foreign currency forward contracts
$
1.0
$
—
$
1.0
$
—
Total liabilities
$
1.0
$
—
$
1.0
$
—
Cash and cash equivalents are highly liquid investments with maturities of three months or less when purchased and are valued at the redemption value. Short-term investments are investments with maturities between four months and one year, and generally are valued at amortized cost, which approximates fair value. A portion of the cash and cash equivalents and short-term investments are valued based on net asset value. The Company uses publicly available market interest rates to measure the fair value of its interest rate swap contracts. The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts.
In addition, the Company remeasures certain assets at fair value, using Level 3 inputs, as a result of the occurrence of triggering events such as purchase accounting for acquisitions.
No other material assets were measured at fair value on a nonrecurring basis during the three months ended March 31, 2022 and 2021, respectively.
Financial Instruments:
The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, trade accounts payable, short-term borrowings and long-term debt. Due to their short-term nature, the carrying value of cash and cash equivalents, short-term investments, accounts receivable, trade accounts payable and short-term borrowings are a reasonable estimate of their fair value. Due to the nature of fair value calculations for variable-rate debt, the carrying value of the Company's long-term variable-rate debt is a reasonable estimate of its fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was $1,468.0 million and $1,171.1 million at March 31, 2022 and December 31, 2021, respectively. The carrying value of this debt was $1,424.5 million and $1,087.5 million at March 31, 2022 and December 31, 2021, respectively. The fair value of long-term fixed-rate debt was measured using Level 2 inputs.
The Company does not believe it has significant concentrations of risk associated with the counterparties to its financial instruments.
Note 18 - Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange rate risk and interest rate risk. Forward contracts on various foreign currencies are entered into in order to manage the foreign currency exchange rate risk associated with certain of the Company's commitments denominated in foreign currencies. From time to time, interest rate swaps are used to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings.
The Company designates certain foreign currency forward contracts as cash flow hedges of forecasted revenues and certain interest rate hedges as cash flow hedges of fixed-rate borrowings.
On September 8, 2020, the Company entered into a $100 million floating-to-fixed rate swap on the 2023 Term Loan, which hedges the change in the 1-month LIBOR rate between October 30, 2020 and September 11, 2023 to a fixed rate. The Company’s risk management objective is to hedge the risk of changes in the monthly interest expense attributable to changes in the benchmark interest rate.
On September 15, 2020, the Company designated €54.5 million of its €150.0 million fixed-rate senior unsecured notes, maturing on September 7, 2027 (the "2027 Notes"), as a hedge against its net investment in one of its European subsidiaries. The objective of the hedge transaction is to protect the net investment in the foreign operations against changes in the exchange rate between the U.S. dollar and the Euro. The net impact for the three months ended March 31, 2022, respectively, was a gain of $1.7 million to accumulated comprehensive (loss) income with a corresponding offset to other income, which partially offsets the impact of the foreign currency adjustment on the 2027 Notes.
The Company entered into $350 million floating-to-fixed 10-year Treasury rate locks during the first quarter of 2022, prior to issuing the 2032 Notes. This fixed the 10-year Treasury yield and settled at pricing of the 2032 Notes, resulting in $6.4 million of cash proceeds received by the Company. This amount was recorded to accumulated comprehensive income and will be amortized as a reduction in interest expense over the 10-year tenor of the 2032 Notes.
The Company does not purchase or hold any derivative financial instruments for trading purposes. As of March 31, 2022 and December 31, 2021, the Company had $291.4 million and $300.8 million, respectively, of outstanding foreign currency forward contracts at notional value. Refer to Note 17 - Fair Value for the fair value disclosure of derivative financial instruments.
Note 18 - Derivative Instruments and Hedging Activities (continued)
Cash Flow Hedging Strategy:
For certain derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.
To protect against a reduction in the value of forecasted foreign currency cash flows resulting from export sales, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its forecasted cash flows denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against foreign currencies, the decline in the present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts. As of March 31, 2022 and December 31, 2021, the Company had $83.5 million and $80.0 million, respectively, of outstanding foreign currency forward contracts at notional value that were classified as cash flow hedges.
The maximum length of time over which the Company hedges its exposure to the variability in future cash flows for forecast transactions is generally eighteen months or less.
Purpose for Derivative Instruments not designated as Hedging Instruments:
For derivative instruments that are not designated as hedging instruments, the instruments are typically forward contracts. In general, the practice is to reduce volatility by selectively hedging transaction exposures including intercompany loans, accounts payable and accounts receivable. Intercompany loans between entities with different functional currencies typically are hedged with a forward contract at the inception of the loan with a maturity date corresponding to the maturity of the loan. The revaluation of these contracts, as well as the revaluation of the underlying balance sheet items, is recorded directly to the income statement so the adjustment generally offsets the revaluation of the underlying balance sheet items to protect cash payments and reduce income statement volatility.
As of March 31, 2022 and December 31, 2021, the Company had $207.9 million and $220.8 million, respectively, of outstanding foreign currency forward contracts at notional value that were not designated as hedging instruments. The following table presents the impact of derivative instruments not designated as hedging instruments for the three months ended March 31, 2022 and 2021, respectively, and the related location within the Consolidated Statements of Income:
Amount of gain or (loss) recognized in income
Three Months Ended March 31,
Derivatives not designated as hedging instruments:
Location of gain or (loss) recognized in income
2022
2021
Foreign currency forward contracts
Other income (expense), net
$
(1.0)
$
0.2
Note 19 - Subsequent Events
On April 29, 2022, the Company reached an agreement to acquire Spinea, s.r.o. (Spinea), a European technology leader and manufacturer of highly engineered cycloidal reduction gears and actuators. Spinea’s solutions primarily serve high-precision automation and robotics applications in the factory automation sector. Spinea is located in Presov, Slovakia, and is expected to have sales around $40 million for the full year of 2022. The transaction, which is subject to customary closing conditions, is expected to close in the second quarter and will be funded with cash and borrowings from existing credit facilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share data)
OVERVIEW
Introduction:
The Timken Company designs and manages a growing portfolio of engineered bearings and power transmission products. With more than a century of innovation and increasing knowledge, the Company continuously improves the reliability and efficiency of global machinery and equipment to move the world forward. The Company’s growing product and services portfolio features many strong industrial brands, such as Timken®, Philadelphia Gear®, Drives®, Cone Drive®, Rollon®, Lovejoy®, Diamond®, BEKA® and Groeneveld®. Timken employs more than 18,000 people globally in 42 countries. The Company operates under two reportable segments: (1) Mobile Industries and (2) Process Industries. The following further describes these business segments:
•Mobile Industries serves OEM customers that manufacture off-highway equipment for the agricultural, mining and construction markets; on-highway vehicles including passenger cars, light trucks, and medium- and heavy-duty trucks; rail cars and locomotives; outdoor power equipment; rotorcraft and fixed-wing aircraft; and other mobile equipment. Beyond service parts sold to OEMs, aftermarket sales and services to individual end users, equipment owners, operators and maintenance shops are handled directly or through the Company's extensive network of authorized automotive and heavy-truck distributors.
•Process Industries serves OEM and end-user customers in industries that place heavy demands on the fixed operating equipment they make or use in heavy and other general industrial sectors. This includes metals, cement and aggregate production; power generation and renewable energy sources; oil and gas extraction and refining; pulp and paper and food processing; automation and robotics; and health and critical motion control equipment. Other applications include marine equipment, gear drives, cranes, hoists and conveyors. This segment also supports aftermarket sales and service needs through its global network of authorized industrial distributors and through the provision of services directly to end users.
Timken creates value by understanding customer needs and applying its know-how to serve a broad range of customers in attractive markets and industries across the globe. The Company’s business strengths include its product technology, end-market diversity, geographic reach and aftermarket mix. Timken collaborates with OEMs to improve equipment efficiency with its engineered products and captures subsequent equipment replacement cycles by selling largely through independent channels in the aftermarket. Timken focuses its international efforts and footprint in regions of the world where strong macroeconomic factors such as urbanization, infrastructure development and sustainability create demand for its products and services.
The Company's strategy has three primary elements:
Profitable Growth. The Company intends to expand into new and existing markets by leveraging its collective knowledge of metallurgy, friction management and power transmission to create value for Timken customers. Using a highly collaborative technical selling approach, the Company places particular emphasis on creating unique solutions for challenging and/or demanding applications. The Company intends to grow in attractive market sectors around the world, emphasizing those spaces that are highly fragmented, demand high service and value the reliability and efficiency offered by Timken products. The Company also targets applications that offer significant aftermarket demand, thereby providing product and services revenue throughout the equipment’s lifetime.
Operational Excellence. Timken operates with a relentless drive for exceptional results and a passion for superior execution. The Company embraces a continuous improvement culture that is charged with increasing efficiency, lowering costs, eliminating waste, encouraging organizational agility and building greater brand equity to fuel growth. This requires the Company’s ongoing commitment to attract, retain and develop the best talent across the world.
Capital Deployment to Drive Shareholder Value. The Company is intently focused on providing the highest returns for shareholders through its capital allocation framework, which includes: (1) investing in the core business through capital expenditures, research and development and initiatives to drive profitable organic growth; (2) pursuing strategic acquisitions to broaden its portfolio and capabilities across diverse markets, with a focus on bearings, adjacent power transmission products and related services; (3) returning capital to shareholders through dividends and share repurchases; and (4) maintaining a strong balance sheet and sufficient liquidity. As part of this framework, the Company may also restructure, reposition or divest underperforming product lines or assets.
Overview:
Three Months Ended March 31,
2022
2021
$ Change
% Change
Net sales
$
1,124.6
$
1,025.4
$
99.2
9.7
%
Net income
121.9
116.0
5.9
5.1
%
Net income attributable to noncontrolling interest
3.7
2.7
1.0
37.0
%
Net income attributable to The Timken Company
$
118.2
$
113.3
$
4.9
4.3
%
Diluted earnings per share
$
1.56
$
1.47
$
0.09
6.1
%
Average number of shares – diluted
75,545,665
77,264,641
—
(2.2)
%
The increase in net sales for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 was primarily driven by strong organic growth (including positive pricing), partially offset by the unfavorable impact of foreign currency exchange rate changes. The increase in net income for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 was primarily due to the favorable impact of higher volume and favorable price/mix, partially offset by higher material, logistics and other operating costs, a higher tax rate and higher pension mark-to-market charges.
Outlook:
The Company expects 2022 full-year revenue to be up approximately 8% compared to 2021, primarily due to higher demand across most end markets, positive pricing and the continued execution of growth initiatives. The Company's earnings are expected to be up in 2022 compared with 2021, primarily due to the favorable impact of higher volume and price/mix, partially offset by higher material, logistics and other operating costs, as well as higher interest costs and a higher tax rate. In 2021, the Company experienced supply chain disruptions, inflation and staffing issues related to increased customer demand. Timken expects these headwinds to persist throughout 2022, or potentially worsen due to the impact of Russia's invasion of Ukraine and the ongoing Coronavirus ("COVID-19") lockdowns in China.
The Company expects to generate cash from operating activities in 2022 above 2021 levels driven by higher earnings and lower pension and other postretirement contributions and payments. The Company expects capital expenditures between 4.0% and 4.5% of sales in 2022, compared with 3.6% of sales ($148 million) in 2021.
Net sales increased for the three months ended March 31, 2022 compared with the three months ended March 31, 2021. The increase was primarily due to strong organic growth (including positive pricing) of $113 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $15 million. The higher organic revenue was driven by higher demand across both segments.
Gross Profit:
Three Months Ended March 31,
2022
2021
$ Change
Change
Gross profit
$
327.4
$
299.2
$
28.2
9.4%
Gross profit % to net sales
29.1
%
29.2
%
(10)
bps
Gross profit increased for the three months ended March 31, 2022 compared with the three months ended March 31, 2021, primarily due to favorable price/mix of $45 million and the impact of higher volume of $29 million, partially offset by higher material and logistics costs of $45 million.
Selling, General and Administrative ("SG&A") Expenses:
Three Months Ended March 31,
2022
2021
$ Change
Change
Selling, general and administrative expenses
$
154.1
$
144.5
$
9.6
6.6
%
Selling, general and administrative expenses % to net sales
13.7
%
14.1
%
(40)
bps
SG&A expenses increased for the three months ended March 31, 2022 compared with the three months ended March 31, 2021. The increase for the three months ended March 31, 2022, as compared to the year-ago period, was primarily due to higher compensation and other spending to support the higher sales levels.
Impairment and restructuring charges of $1.0 million during the three months ended March 31, 2022 were comprised primarily of severance and related benefits and exit costs related to the planned closure of the Company's Villa Carcina, Italy bearing plant. This initiative is expected to reduce headcount and right-size the Company's manufacturing footprint.
Impairment and restructuring charges of $4.0 million during the three months ended March 31, 2021 were comprised primarily of impairment charges related to certain engineering-related assets used in the business. Management concluded no further investment would be made in these assets and, as a result, reduced the value to zero. In addition, severance and related benefits are associated with initiatives to reduce headcount and right-size the Company's manufacturing footprint, including the planned closure of the Company's Indianapolis, Indiana chain plant.
Refer to Note 13 - Impairment and Restructuring Charges inthe Notes to the Consolidated Financial Statements for additional information.
Other Income (Expense):
Three Months Ended March 31,
2022
2021
$ Change
% Change
Non-service pension and other postretirement income
$
1.3
$
4.0
$
(2.7)
(67.5)
%
Other income, net
0.2
1.0
(0.8)
(80.0)
%
Total other income
$
1.5
$
5.0
$
(3.5)
(70.0)
%
Non-service pension and other postretirement income decreased for the three months ended March 31, 2022 compared with the three months ended March 31, 2021, primarily due to higher pension remeasurement losses in 2022. The remeasurements were triggered by expected lump sum payments to new retirees exceeding annual service and interest costs for one of the Company's U.S. defined benefit pension plans. As a result of the remeasurements, the Company recognized net actuarial losses of $2.6 million and $0.9 million during the three months ended March 31, 2022 and March 31, 2021, respectively. The decrease was also due to a lower expected return on plan assets in 2022. Refer to Note 14 - Retirement Benefit Plans and Note 15 - Other Postretirement Benefit Plans inthe Notes to the Consolidated Financial Statements for additional information.
Other income, net decreased for the three months ended March 31, 2022 compared with the three months ended March 31, 2021, primarily due to the bargain purchase gain on the acquisition of Aurora that was recognized in 2021.
Income tax expense increased $12.9 million for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 due to higher pre-tax earnings and a discrete tax benefit in the prior year for release of accruals for uncertain tax positions from the settlement of the 2017 and 2018 U.S. federal tax years.
Refer to Note 5 - Income Taxes for more information on the computation of the income tax expense in interim periods.
The Company's reportable segments are business units that serve different industry sectors. While the segments operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. The primary measurement used by management to measure the financial performance of each segment is EBITDA. Refer to Note 4 - Segment Informationin the Notes to the Consolidated Financial Statements for the reconciliation of EBITDA by segment to consolidated income before income taxes.
The presentation of segment results below includes a reconciliation of the changes in net sales for each segment reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of acquisitions completed in 2021 and foreign currency exchange rate changes. The effects of acquisitions and foreign currency exchange rate changes on net sales are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period.
The following item represents the Company's acquisitions completed in 2021:
•The Company acquired Intelligent Machine Solutions ("iMS") during the third quarter of 2021. The majority of the results for iMS are reported in the Process Industries segment.
Mobile Industries Segment:
Three Months Ended March 31,
2022
2021
$ Change
Change
Net sales
$
540.4
$
504.5
$
35.9
7.1%
EBITDA
$
75.1
$
79.6
$
(4.5)
(5.7%)
EBITDA margin
13.9
%
15.8
%
(190)
bps
Three Months Ended March 31,
2022
2021
$ Change
% Change
Net sales
$
540.4
$
504.5
$
35.9
7.1
%
Less: Currency
(9.2)
(9.2)
NM
Net sales, excluding the impact of currency
$
549.6
$
504.5
$
45.1
8.9
%
The Mobile Industries segment's net sales, excluding the effects of foreign currency exchange rate changes, increased $45.1 million or 8.9% in the three months ended March 31, 2022 compared with the three months ended March 31, 2021, reflecting increased shipments in the off-highway and rail sectors, as well as higher net pricing, partially offset by lower shipments in the automotive sector. EBITDA decreased by $4.5 million or 5.7% for the three months ended March 31, 2022 compared with the three months ended March 31, 2021, primarily due to higher material, logistics and other operating costs, partially offset by favorable price/mix and the impact of higher volume.
Net sales, excluding the impact of acquisitions and currency
$
589.0
$
520.9
$
68.1
13.1
%
The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $68.1 million or 13.1% in the three months ended March 31, 2022 compared with the three months ended March 31, 2021. The increase was primarily driven by increased demand in the distribution, general industrial, heavy industries, marine and services sectors, as well as higher net pricing, partially offset by lower revenue in the renewable energy sector. EBITDA increased $24.6 million or 18.8% for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 primarily due to favorable price/mix and higher volume, partially offset by higher material, logistics and other operating costs.
Unallocated Corporate:
Three Months Ended March 31,
2022
2021
$ Change
Change
Unallocated corporate expense
$
(12.9)
$
(11.6)
$
(1.3)
11.2
%
Unallocated corporate expense % to net sales
(1.1)
%
(1.1)
%
—
bps
The increase in unallocated corporate expense for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 was primarily due to higher variable compensation expense.
Net cash (used in) provided by operating activities
$
(1.2)
$
31.7
$
(32.9)
Net cash used in investing activities
(35.0)
(39.4)
4.4
Net cash provided by (used in) financing activities
204.7
(6.4)
211.1
Effect of exchange rate changes on cash
(1.2)
(3.9)
2.7
Increase (decrease) in cash, cash equivalents and restricted cash
$
167.3
$
(18.0)
$
185.3
Operating Activities:
The change in net cash (used in) provided by operating activities for the first three months of 2022 compared with the first three months of 2021 was primarily due to an increase in cash used for working capital items of $46.3 million, partially offset by an increase in the benefit of income taxes on cash of $6.5 million and higher net income of $5.9 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 2022 and 2021, respectively:
Three Months Ended March 31,
2022
2021
$ Change
Cash (Used) Provided:
Accounts receivable
$
(118.2)
$
(138.9)
$
20.7
Unbilled receivables
16.1
(2.5)
18.6
Inventories
(70.2)
(33.3)
(36.9)
Trade accounts payable
7.7
19.9
(12.2)
Other accrued expenses
(19.5)
17.0
(36.5)
Cash used in working capital items
$
(184.1)
$
(137.8)
$
(46.3)
The following table displays the impact of income taxes on cash during the three months of 2022 and 2021, respectively:
Three Months Ended March 31,
2022
2021
$ Change
Accrued income tax expense
$
38.2
$
25.3
$
12.9
Income tax payments
(25.3)
(16.5)
(8.8)
Other miscellaneous items
(4.8)
(7.2)
2.4
Cash benefit from income taxes
$
8.1
$
1.6
$
6.5
Investing Activities:
The decrease in net cash used in investing activities for the first three months of 2022 compared with the first three months of 2021 was primarily due to a decrease in cash used for investments in short-term marketable securities of $9.1 million, partially offset by an increase in capital expenditures of $4.9 million.
Financing Activities:
The change in net cash provided by (used in) financing activities for the first three months of 2022 compared with the first three months of 2021 was primarily due to an increase in net borrowings of $283.1 million, partially offset by an increase in the purchases of treasury shares of $73.7 million.
Reconciliation of total debt to net debt and the ratio of net debt to capital:
Net Debt:
March 31, 2022
December 31, 2021
Short-term debt, including current portion of long-term debt
$
41.0
$
53.8
Long-term debt
1,747.2
1,411.1
Total debt
$
1,788.2
$
1,464.9
Less: Cash and cash equivalents
424.5
257.1
Net debt
$
1,363.7
$
1,207.8
Ratio of Net Debt to Capital:
March 31, 2022
December 31, 2021
Net debt
$
1,363.7
$
1,207.8
Total equity
2,355.0
2,377.7
Net debt plus total equity (capital)
$
3,718.7
$
3,585.5
Ratio of net debt to capital
36.7
%
33.7
%
The Company presents net debt because it believes net debt is more representative of the Company's financial position than total debt due to the amount of cash and cash equivalents held by the Company and the ability to utilize such cash and cash equivalents to reduce debt if needed.
At March 31, 2022, the Company had strong liquidity with $424.5 million of cash and cash equivalents on the Consolidated Balance Sheet, as well as $741.2 million of available resources of committed credit lines. Of the $424.5 million of cash and cash equivalents, $267.7 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 June 25, 2019, the Company entered into the Senior Credit Facility, which is a $650.0 million unsecured revolving credit facility that matures on June 25, 2024. At March 31, 2022, the Senior Credit Facility had outstanding borrowings of $8.8 million, which reduced the availability to $641.2 million. The Senior Credit Facility has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. The maximum consolidated leverage ratio permitted under the Senior Credit Facility is 3.5 to 1.0. As of March 31, 2022, the Company's consolidated leverage ratio was 2.45 to 1.0 (based on total debt as described below). The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility is 3.0 to 1.0. As of March 31, 2022, the Company's consolidated interest coverage ratio was 12.54 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 1.17% and the average rate on outstanding Euro borrowings was 1.00% as of March 31, 2022. In addition, the Company pays a facility fee based on the applicable rate, which is variable with a spread based on the Company's debt rating, multiplied by the aggregate commitments of all of the lenders under the Senior Credit Facility. As of March 31, 2022, the Company carried investment-grade credit ratings with Moody's (Baa2), S&P Global (BBB-) and Fitch (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. Borrowings under the Accounts Receivable Facility were not reduced by any such borrowing base limitations at March 31, 2022. As of March 31, 2022, the Company had no outstanding borrowings under the Accounts Receivable Facility.
Other sources of liquidity include uncommitted short-term lines of credit for certain of the Company's foreign subsidiaries, which provide for borrowings of up to approximately $268.4 million. At March 31, 2022, the Company had borrowings outstanding of $29.9 million and bank guarantees of $0.3 million, which reduced the aggregate availability under these facilities to approximately $238.2 million.
On March 28, 2022, the Company issued the 2032 Notes in the aggregate principal amount of $350 million with an interest rate of 4.125%, maturing on April 1, 2032. Proceeds from the notes were used to repay borrowings under the Senior Credit Facility and the Accounts Receivable Facility outstanding at the time of issuance, and for general corporate purposes.
At March 31, 2022, the Company was in full compliance with all applicable covenants on its outstanding debt.
The Company expects to generate cash from operating activities in 2022 above 2021 levels driven by higher earnings and lower pension and other postretirement contributions and payments. The Company expects capital expenditures between 4.0% and 4.5% of sales in 2022, compared with 3.6% of sales ($148 million) in 2021.
Financing Obligations and Other Commitments:
During the first three months of 2022, the Company made cash contributions and payments of $4.3 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 $10 million in 2022. The Company expects to make payments of approximately $5 million to its other postretirement benefit plans in 2022. Excluding mark-to-market charges, the Company expects lower pension and other postretirement benefits expense in 2022.
The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The Company reviews its critical accounting policies throughout the year. The Company has concluded that there have been no significant changes to its critical accounting policies or estimates, as described in its Annual Report on Form 10-K for the year ended December 31, 2021, during the three months ended March 31, 2022.
Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the reporting period. Related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions, and the related hedging activity, are included in the Consolidated Statements of Income.
For the three months ended March 31, 2022, the Company recorded negative foreign currency translation adjustments of $20.0 million that decreased shareholders' equity, compared with negative foreign currency translation adjustments of $44.0 million that decreased shareholders' equity for the three months ended March 31, 2021. The foreign currency translation adjustments for the three months ended March 31, 2022 were negatively impacted by the strengthening 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 March 31, 2022 totaled $2.2 million of net gains, compared with $2.1 million of net losses during the three months ended March 31, 2021.
Russia Operations:
The Company has two subsidiaries that operate in Russia, including a 51%-owned joint venture that produces bearings for the rail market in Russia. As a result of Russia's invasion of Ukraine (and associated sanctions), the Company recorded allowances of $3.5 million for trade receivables and other assets and recorded a $1.1 million write-down of inventory during the three months ended March 31, 2022. After giving effect to these allowances and write-downs, as of March 31, 2022, the Company has net assets (net of noncontrolling interest) and cumulative foreign currency translation adjustments totaling $21.9 million on its Consolidated Balance Sheet related to its Russia operations. Net assets related to the Company's Russia operations include $12.9 million of cash and cash equivalents. The Company will continue to monitor the events in Russia and Ukraine and may record additional asset impairments or write-offs in the future.
In addition to results reported in accordance with U.S. GAAP, the Company provides information on non-GAAP financial measures. These non-GAAP financial measures include adjusted net income, adjusted earnings per share, adjusted EBITDA and adjusted EBITDA margins, segment adjusted EBITDA and segment adjusted EBITDA margins, ratio of net debt to adjusted EBITDA (for the trailing 12 months), net debt, ratio of net debt to capital and free cash flow. This information is intended to supplement GAAP financial measures and is not intended to replace GAAP financial measures. Net debt and the ratio of net debt to capital is disclosed in the "Liquidity and Capital Resources" section of Management's Discussion and Analysis of Financial Condition and Results of Operations.
Adjusted Net Income and Adjusted EBITDA:
Adjusted net income and adjusted earnings per share represent net income attributable to The Timken Company and diluted earnings per share, respectively, adjusted for impairment, restructuring and reorganization charges, acquisition costs, including transaction costs and the amortization of the inventory step-up, property losses and recoveries, actuarial gains and losses associated with the remeasurement of the Company's defined benefit pension and other postretirement benefit plans, gains and losses on the sale of real estate, gains and losses on divestitures, the income tax impact of these adjustments, as well as other income tax discrete items, and other items from time to time that are not part of the Company's core operations. Management believes adjusted net income and adjusted earnings per share are useful to investors as they are representative of the Company's core operations and are used in the management of the business.
Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization, adjusted for items that are not part of the Company's core operations. These items include impairment, restructuring and reorganization charges, acquisition costs, including transaction costs and the amortization of the inventory step-up, property losses and recoveries, actuarial gains and losses associated with the remeasurement of the Company's defined benefit pension and other postretirement benefit plans, gains and losses on the sale of real estate, gains and losses on divestitures, and other items from time to time that are not part of the Company's core operations. Management believes adjusted EBITDA is useful to investors as it is representative of the Company's core operations and is used in the management of the business, including decisions concerning the allocation of resources and assessment of performance.
Reconciliation of net income attributable to The Timken Company to adjusted net income, adjusted EBITDA and adjusted EBITDA Margin:
Three Months Ended March 31,
2022
2021
Net Sales
$
1,124.6
$
1,025.4
Net Income Attributable to The Timken Company
118.2
113.3
Impairment, restructuring and reorganization charges (1)
1.6
5.2
Corporate pension and other postretirement benefit related expense (2)
2.6
0.9
Acquisition-related charges (gain) (3)
1.1
(0.8)
Russia-related charges (4)
4.6
—
Noncontrolling interest of above adjustments
(1.3)
0.2
Provision for income taxes (5)
(5.1)
(12.1)
Adjusted Net Income
$
121.7
$
106.7
Net income attributable to noncontrolling interest
3.7
2.7
Provision for income taxes (as reported)
38.2
25.3
Interest expense
14.3
14.9
Interest income
(0.6)
(0.5)
Depreciation and amortization expense (6)
41.4
42.7
Less: Noncontrolling interest
(1.3)
0.2
Less: Provision for income taxes (5)
(5.1)
(12.1)
Adjusted EBITDA
$
225.1
$
203.7
Adjusted EBITDA Margin (% of net sales)
20.0
%
19.9
%
Diluted earnings and adjusted earnings per share in the table below are based on net income attributable to The Timken Company and adjusted net income, respectively, in the table above.
Three Months Ended March 31,
2022
2021
Diluted earnings per share (EPS)
$
1.56
$
1.47
Adjusted EPS
$
1.61
$
1.38
Diluted Shares
75,545,665
77,264,641
Reconciliation of segment EBITDA to segment adjusted EBITDA and segment adjusted EBITDA margin:
Three Months Ended March 31, 2022
Mobile
Process
Unallocated Corporate
Total
Net Sales
$
540.4
$
584.2
$
—
$
1,124.6
EBITDA
75.1
155.6
(15.5)
215.2
Impairment, restructuring and reorganization
charges (1)
1.0
0.6
—
1.6
Corporate pension and other postretirement benefit
(1) Impairment, restructuring and reorganization charges (including items recorded in cost of products sold) relate to: (i) plant closures; (ii) the rationalization of certain plants; and (iii) severance related to cost reduction initiatives. The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges. However, management believes these actions are not representative of the Company’s core operations.
(2) Corporate pension and other postretirement benefit related expense represents actuarial losses (gains) that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience. The Company recognizes actuarial losses and (gains) in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement. Refer to Note 14 - Retirement Benefit Plans and Note 15 - Other Postretirement Benefit Plans for additional discussion.
(3) Acquisition-related charges (gain) represent the contingent consideration related to the acquisition of iMS that closed on August 20, 2021, and deal-related expenses associated with completed and certain unsuccessful transactions, as well as any resulting inventory step-up impact. In addition, the 2021 acquisition-related gain includes measurement period adjustments to the bargain purchase gain on the acquisition of the assets of Aurora that closed on November 30, 2020.
(4) Russia-related charges include allowances or impairments recorded against certain trade receivables, inventory and other assets to reflect the current impact of Russia's invasion of Ukraine (and associated sanctions) on the Company's operations. Refer to Russia Operations on page 30 above for additional information.
(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 (used in) operating activities less capital expenditures. Management believes free cash flow is useful to investors because it is a meaningful indicator of cash generated from operating activities available for the execution of its business strategy.
Reconciliation of net cash provided by operating activities to free cash flow:
Three Months Ended March 31,
2022
2021
Net cash (used in) provided by operating activities
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 March 31, 2022 and December 31, 2021 was $387.4 million and $381.5 million, respectively. Net debt to adjusted EBITDA for the trailing twelve months was 1.8 at March 31, 2022, compared with 1.7 at December 31, 2021.
Reconciliation of Net income to Adjusted EBITDA for the trailing twelve months:
Twelve Months Ended
March 31, 2022
December 31, 2021
Net income
$
387.4
$
381.5
Provision for income taxes
108.0
95.1
Interest expense
58.2
58.8
Interest income
(2.4)
(2.3)
Depreciation and amortization
166.2
167.8
Consolidated EBITDA
717.4
700.9
Adjustments:
Impairment, restructuring and reorganization charges (1)
$
11.0
$
14.3
Corporate pension and other postretirement benefit related expense (2)
2.0
0.3
Acquisition-related charges (3)
4.2
2.3
Russia-related charges (4)
4.6
—
Tax indemnification and related items
0.2
0.2
Total adjustments
22.0
17.1
Adjusted EBITDA
$
739.4
$
718.0
Net Debt
$
1,363.7
$
1,207.8
Ratio of Net Debt to Adjusted EBITDA
1.8
1.7
(1) Impairment, restructuring and reorganization charges (including items recorded in cost of products sold) relate to: (i) plant closures; (ii) the rationalization of certain plants and (iii) severance related to cost reduction initiatives. The Company re-assesses its operating footprint and cost structure periodically, and makes adjustments as needed that result in restructuring charges. However, management believes these actions are not representative of the Company’s core operations.
(2) Corporate pension and other postretirement benefit related expense represents actuarial losses and (gains) that resulted from the remeasurement of plan assets and obligations as a result of changes in assumptions or experience. The Company recognizes actuarial losses and (gains) in connection with the annual remeasurement in the fourth quarter, or if specific events trigger a remeasurement.
(3) Acquisition-related charges represent contingent consideration related to the acquisition of iMS that closed on August 20, 2021, and deal-related expenses associated with completed and certain unsuccessful transactions, as well as any resulting inventory step-up impact. Also included is the acquisition-related gain related to measurement period adjustments to the bargain purchase gain on the acquisition of the assets of Aurora that closed on November 30, 2020.
(4) Russia-related charges include allowances or impairments recorded against certain trade receivables, inventory and other assets to reflect the current impact of Russia's invasion of Ukraine (and associated sanctions) on the Company's operations. Refer to Russia Operations on page 30 in Management Discussion and Analysis for additional information.
Certain statements set forth in this Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 that are not historical in nature (including the Company's forecasts, beliefs and expectations) are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, Management's Discussion and Analysis contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “outlook,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-Q. The Company cautions readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of the Company due to a variety of factors, such as:
•deterioration in world economic conditions, or in economic conditions in any of the geographic regions in which the Company or its customers or suppliers conduct business, including adverse effects from a global economic slowdown, terrorism, or hostilities. This includes: political risks associated with the potential instability of governments and legal systems in countries in which the Company or its customers or suppliers conduct business, changes in currency valuations and recent world events that have increased the risks posed by international trade disputes, tariffs and sanctions;
•negative impacts to the Company's business, results of operations, financial position or liquidity, disruption to the Company's supply chains, negative impacts to customer demand or operations, and availability and health of employees, as a result of COVID-19 or other pandemics and associated governmental measures such as restrictions on travel and manufacturing operations;
•the effects of fluctuations in customer demand on sales, product mix and prices in the industries in which the Company operates. This includes: the ability of the Company to respond to rapid changes in customer demand, disruptions to the Company's supply chain, logistical issues associated with port closures or congestion, delays or increased costs, the effects of customer or supplier bankruptcies or liquidations, the impact of changes in industrial business cycles, the effects of distributor inventory corrections reflecting de-stocking of the supply chain and whether conditions of fair trade continue in the Company's markets;
•competitive factors, including changes in market penetration, increasing price competition by existing or new foreign and domestic competitors, the introduction of new products or services by existing and new competitors, competition for skilled labor and new technology that may impact the way the Company’s products are produced, sold or distributed;
•changes in operating costs. This includes: the effect of changes in the Company’s manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; availability and cost of raw materials and energy; disruptions to the Company's supply chain and logistical issues associated with port closures or congestion, delays or increased costs; changes in the expected costs associated with product warranty claims; changes resulting from inventory management and cost reduction initiatives; the effects of unplanned plant shutdowns; the effects of government-imposed restrictions and commercial requirements meant to address climate change; and changes in the cost of labor and benefits;
•the impact of inflation on employee expenses, shipping costs, raw material costs, energy and fuel costs and other production costs;
•the success of the Company’s operating plans, announced programs, initiatives and capital investments; the ability to integrate acquired companies and to address material issues not uncovered during the Company's due diligence review; and the ability of acquired companies to achieve satisfactory operating results, including results being accretive to earnings, realization of synergies and expected cash flow generation;
•the Company’s ability to maintain appropriate relations with unions or works councils that represent Company associates in certain locations in order to avoid disruptions of business and to maintain the continued service of our management and other key employees;
•unanticipated litigation, claims, investigations or assessments. This includes: claims, investigations or problems related to intellectual property, product liability or warranty, foreign export and trade laws, government procurement regulations, competition and anti-bribery laws, environmental or health and safety issues, data privacy and taxes;
•changes in worldwide financial and capital markets, including availability of financing and interest rates on satisfactory terms, which affect the Company’s cost of funds and/or ability to raise capital, as well as
customer demand and the ability of customers to obtain financing to purchase the Company’s products or equipment that contain the Company’s products;
•the Company's ability to satisfy its obligations and comply with covenants under its debt agreements, maintain favorable credit ratings and its ability to renew or refinance borrowings on favorable terms;
•the impact on the Company's pension obligations and assets due to changes in interest rates, investment performance and other tactics designed to reduce risk; and
•those items identified under Item 1A. "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 or this Form 10-Q.
Additional risks relating to the Company's business, the industries in which the Company operates, or the Company's common shares may be described from time to time in the Company's filings with the Securities and Exchange Commission. All of these risk factors are difficult to predict, are subject to material uncertainties that may affect actual results and may be beyond the Company's control.
Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered to be a complete list. Except as required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 2021. 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.
ITEM 4. CONTROLS AND PROCEDURES
(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 March 31, 2022, 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.
The Company is involved in various claims and legal actions arising in the ordinary course of business. U.S. Securities and Exchange Commission ("SEC") regulations require us to disclose certain information about environmental proceedings when a governmental authority is a party to the proceedings if we reasonably believe that such proceedings may result in monetary sanctions above a stated threshold. Pursuant to such regulations, the Company uses the maximum permitted threshold of $1 million or more for purposes of determining whether disclosure of any such proceedings is required. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
Item 1A. Risk Factors
The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021, 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, 2021. Investors should not interpret the disclosure of any risk factor to imply that the risk has not already materialized.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Common Shares
The following table provides information about purchases by the Company of its common shares during the quarter ended March 31, 2022.
Period
Total number
of shares
purchased (1)
Average
price paid
per share (2)
Total number of shares purchased as part of publicly announced plans or programs
Maximum
number of
shares that
may yet
be purchased
under the plans
or programs (3)
1/1/2022 - 1/31/2022
451,275
$
71.42
450,000
8,600,000
2/1/2022 - 2/28/2022
583,758
66.88
475,000
8,125,000
3/1/2022 - 3/31/2022
576,354
62.82
575,000
7,550,000
Total
1,611,387
$
66.70
1,500,000
—
(1)Of the shares purchased in January, February and March, 1,275, 108,758 and 1,354 respectively, represent common shares of the Company that were owned and tendered by employees to exercise stock options and to satisfy withholding obligations in connection with the exercise of stock options or vesting of restricted shares.
(2)For shares tendered in connection with the vesting of restricted shares, the average price paid per share is an average calculated using the daily high and low of the Company's common shares as quoted on the New York Stock Exchange at the time of vesting. For shares tendered in connection with the exercise of stock options, the price paid is the real-time trading stock price at the time the options are exercised.
(3)On February 12, 2021, the Company's Board of Directors approved a new share purchase plan, effective March 1, 2021, pursuant to which the Company may purchase up to ten million of its common shares, in the aggregate. This share purchase plan expires on February 28, 2026. Under this plan, the Company may purchase shares from time to time in open market purchases or privately negotiated transactions, and it may make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans.
Certification of Richard G. Kyle, President and Chief Executive Officer (principal executive officer) of The Timken Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Philip D. Fracassa, Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) of The Timken Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certifications of Richard G. Kyle, President and Chief Executive Officer (principal executive officer) and Philip D. Fracassa, Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) of The Timken Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Financial statements from the quarterly report on Form 10-Q of The Timken Company for the quarter ended March 31, 2022 filed on May 2, 2022, formatted in Inline XBRL: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE TIMKEN COMPANY
Date: May 2, 2022
By: /s/ Richard G. Kyle
Richard G. Kyle President and Chief Executive Officer (Principal Executive Officer)
Date: May 2, 2022
By: /s/ Philip D. Fracassa
Philip D. Fracassa Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
