Item 1A. Risk Factors

The following are certain risk factors that could affect our business, financial condition and results of operations. The risks that are described below are not the only ones that we face. These risk factors should be considered in connection with evaluating forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results and financial condition to differ materially from those projected in forward-looking statements. Although the risks are organized by headings, and each risk is discussed separately, many are interrelated. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected.

Risk Relating to our Business

The bearing industry is highly competitive, and this competition results in significant pricing pressure for our bearings products that could affect our revenues and profitability.

The global bearing industry is highly competitive. We compete with domestic manufacturers and many foreign manufacturers of anti-friction bearings, including SKF Group, Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd., and an increasing number of emerging market competitors. Due to competitiveness within the bearing industry, we may not be able to increase prices for our products to cover increases in our costs or to achieve desired profitability. In many cases we face pressure from our customers to reduce prices, which could adversely affect our revenues and profitability. In addition, our customers may choose to purchase products from one of our competitors rather than pay the prices we seek for our products, which could adversely affect our revenues and profitability.

Our business is capital intensive, and if there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend operations with respect to those industries, which could result in our recording asset impairment charges, restructuring charges or taking other measures that may adversely affect our results of operations and profitability.

Our business operations are capital intensive, and we devote a significant amount of capital to certain industries. Our profitability is dependent on factors such as labor compensation and productivity and inventory and supply chain management, which are subject to risks that we may not be able to control. If there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend our operations with respect to those industries, including laying-off employees, reducing production, recording asset impairment charges and other ~~measures,~~measures, which may adversely affect our results of operations and profitability. We have taken approximately ~~$52~~$59 million in impairment and restructuring charges in the aggregate during the last five years. Changes in business or economic conditions, or our business strategy, may result in additional restructuring programs and may require us to take additional charges in the future, which could have a material adverse effect on our earnings.

Changes in customer preferences and inventory reductions by customers or distributors could adversely affect the Company's business.

~~Weakness in global economic conditions or in any~~

The Company has previously experienced distributor inventory corrections reflecting de-stocking of the ~~industries or geographic regions~~supply chain associated with softer demand in ~~which we or our customers operate,~~certain markets. The Company's results in a period may be adversely impacted by similar customer inventory adjustments in the future, as well as changes in customer buying preferences.

Any change in raw material prices or the ~~cyclical nature~~availability or cost of raw materials could adversely affect our results of operations and profit margins.

We require substantial amounts of raw materials, including steel, to operate our business. Our supply of raw materials could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and could do so in the future. We generally attempt to manage these fluctuations by passing along increased raw material prices to our customers in the form of price increases or surcharges; however, we may be unable to increase the price of our ~~customers' businesses generally~~products due to pricing pressure, contract terms or ~~sustained uncertainty in financial markets,~~other factors, which could adversely impact our ~~revenues~~revenue and ~~profitability by reducing demand and~~profit margins.

~~There has been significant volatility~~

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Moreover, future disruptions in the ~~capital markets and~~supply of our raw materials could impair our ability to manufacture our products for our customers or require us to pay higher prices in order to obtain these raw materials from other sources. Any significant increase in the ~~end markets~~prices for such raw materials could adversely affect our results of operations and ~~geographic regions~~profit margins.

We may not realize the improved operating results that we anticipate from past and future acquisitions and we may experience difficulties in integrating acquired businesses.

We seek to grow, in part, through strategic acquisitions, joint ventures and other alliances, which are intended to complement or expand our businesses, and expect to continue to do so in the future. These acquisitions involve challenges and risks. In the event that we do not successfully integrate these acquisitions into our existing operations so as to realize the expected return on our investment or we uncover material issues that were not identified during our due diligence review, our results of operations, cash flow or financial condition could be adversely affected.

Our operating results depend in part on continued successful research, development and marketing of new and/or improved products and services, and there can be no assurance that we will continue to successfully introduce new products and services.

The success of new and improved products and services depends on their initial and continued acceptance by our ~~customers operate, which has negatively~~customers. Our businesses are affected, ~~our revenues. Our revenues also may be negatively affected~~to varying degrees, by ~~changes~~technological change and corresponding shifts in customer demand, which could result in unpredictable product transitions or shortened life cycles, especially as it relates to market and technological changes driven by electrification, environmental requirements, the continued rising importance of e-commerce and increased digitization. We may experience difficulties or delays in the ~~product mix~~research, development, production, or marketing of new products and services that may prevent us from recouping or realizing a return on the investments required to bring new products and services to market. The end result could have a negative ~~pricing pressure~~impact on our operating results.

Loss of our rights to exclusive use of our intellectual property whether through patent infringement, counterfeiting, theft of trade secrets, or otherwise could have a material adverse effect on the Company. Third-party claims alleging our infringement of intellectual property rights could also have a material adverse effect on the Company.

We rely on a combination of patents, trademarks, trade secret laws, invention assignment agreements, confidentiality agreements, and other arrangements to protect our intellectual property rights. These rights are important to our business, and their loss, whether through patent infringement, counterfeiting, theft of trade secrets, or otherwise, could have a material adverse effect on the Company.

Additionally, third parties may bring claims to challenge the validity of our patents or other intellectual property rights or allege that we infringe their patents or other intellectual property rights. We may incur substantial costs if our competitors or other third parties allege such claims. If the outcomes of any such disputes are unfavorable to us, we could be subject to damages and reputational harm and our business could be otherwise adversely affected.

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Risks Related to our Capital Structure, the Global Financial Markets, and Currency Exchange Rates

Our level of debt and financial covenants or a failure to maintain our credit ratings could limit our ability to invest in our business.

At times, our debt level may lead us to have less cash flow available for our business operations, capital expenditures, and strategic transactions and our ability to service our debt obligations or to obtain future financing could be negatively impacted by general adverse economic and industry conditions and interest rate trends. In addition, a failure to maintain our credit ratings could adversely affect our cost of borrowing, liquidity and access to capital markets.

The global nature of our business exposes us to foreign currency fluctuations that may affect our asset values, results of operations and competitiveness.

We are exposed to the risks of currency exchange rate fluctuations because a significant portion of our net sales, costs, assets and liabilities, are denominated in currencies other than the U.S. dollar. These risks include a reduction in our net asset values, net sales, operating income and competitiveness.

For those countries outside the U.S. where we have significant sales, a strengthening in the ~~industries~~U.S. dollar or devaluation in ~~which we operate. Margins~~the local currency would reduce the value of our local inventory as presented in ~~those industries are highly sensitive~~our Consolidated Financial Statements. In addition, a stronger U.S. dollar or a weaker local currency would result in reduced revenue, operating profit and shareholders' equity due to ~~demand cycles,~~the impact of foreign exchange translation on our Consolidated Financial Statements. Fluctuations in foreign currency exchange rates may make our products more expensive for others to purchase or increase our operating costs, affecting our competitiveness and our ~~customers~~profitability.

Changes in ~~those industries historically~~exchange rates between the U.S. dollar and other currencies and volatile economic, political and market conditions in emerging market countries have ~~tended to delay large capital projects, including expensive maintenance~~in the past adversely affected our financial performance and ~~upgrades, during economic downturns. As a result,~~may in the future adversely affect the value of our ~~revenues~~assets located outside the United States, our gross profit and ~~earnings are impacted by overall levels~~our results of ~~industrial production.~~operations.

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Our results of operations may be materially affected by conditions in global financial markets or in any of the geographic regions in which we, our customers or our suppliers operate. If an end user cannot obtain financing to purchase our products, either directly or indirectly contained in machinery or equipment, demand for our products will be reduced, which could have a material adverse effect on our financial condition and earnings.

Global financial markets have experienced volatility in ~~recent years,~~the past, including volatility in securities prices and diminished liquidity and credit availability. Our access to the financial markets cannot be assured and is dependent on, among other things, market conditions and company performance. Accordingly, we may be forced to delay raising capital, issue shorter tenors than we prefer or pay unattractive interest rates, which could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility.

If a customer becomes insolvent or files for bankruptcy, our ability to recover accounts receivable from that customer would be affected adversely and any payment we received during the preference period prior to a bankruptcy filing potentially may be recoverable by the bankruptcy estate. Furthermore, if certain of our customers liquidate in bankruptcy, we may incur impairment charges relating to obsolete inventory and machinery and equipment.

In addition, financial instability of certain companies in the supply chain could disrupt production in any particular industry. A disruption of production in any of the industries where we participate could have a material adverse effect on our financial condition and earnings. If any of our suppliers are unable or unwilling to provide the products or services that we require or materially increase their costs, our ability to offer and deliver our products on a timely and profitable basis could be impaired. We cannot assure you that any or all of our relationships will not be terminated or that such relationships will continue as presently in effect. Furthermore, if any of our suppliers were to become subject to bankruptcy, receivership or similar proceedings, we may be unable to arrange for alternate or replacement relationships on favorable terms, which could harm our sales and operating results.

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Risks Related to the Global Nature of our Operations

Global political instability and other risks of international operations may adversely affect our operating costs, revenues and the price of our products.

Our international operations expose us to risks not present in a purely domestic business, including primarily:

•changes in international treaties or trade unions (e.g., the UK's recent withdrawal from the European Union, commonly referred to as "Brexit"), which may make our products or our customers' products more costly to export or import;

•changes in tariff regulations, which may make our products more costly to export or import;

•difficulties establishing and maintaining relationships with local OEMs, distributors and dealers;

•import and export licensing requirements;

•compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and environmental or other regulatory requirements, which could increase our operating and other expenses and limit our operations;

•disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the Foreign Corrupt Practices Act ("FCPA");

•difficulty in staffing and managing geographically diverse operations; and

•tax exposures related to cross-border intercompany transfer pricing and other tax risks unique to international operations.

•compliance with data protection regulations

These and other risks also may increase the relative price of our products compared to those manufactured in other countries, reducing the demand for our products in the markets in which we operate, which could have a material adverse effect on our revenues and earnings.

Changes in ~~customer preferences~~U.S. trade policy, including the imposition of tariffs and ~~inventory reductions by customers or distributors~~the resulting consequences, could adversely ~~affect the Company's business.~~

The Company has previously experienced distributor inventory corrections reflecting de-stocking of the supply chain associated with softer demand in certain markets. The Company's results in a period may be adversely impacted by similar customer inventory adjustments in the future, as well as changes in customer buying preferences.

~~Our level of debt and financial covenants or a failure to maintain~~impact our ~~credit ratings could limit our ability to invest in our business.~~

Due to our current level of debt, we may have less cash flow available for our business operations, capital expenditures, and strategic transactions and our ability to service our debt obligations or to obtain future financing could be negatively impacted by general adverse economic and industry conditions and interest rate trends. In addition, a failure to maintain our credit ratings could adversely affect our cost of borrowing, liquidity and access to capital markets.

~~Any change in raw material prices or the availability or cost of raw materials could adversely affect our results of operations~~revenue and profit margins.

~~We require substantial amounts of~~The U.S. government has imposed tariffs on certain foreign goods, including steel and other raw materials including steel, to operate our business. Our supply of raw materials could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for productionas well as certain products made from such materials. Changes in U.S. trade policy have ~~fluctuated significantly~~resulted in, ~~the past~~ and could ~~do so~~further result in, U.S. trading partners adopting responsive trade policies that make it more difficult or costly for us to export our products to those countries. These measures have resulted in increased costs for goods imported into the ~~future. We generally attempt to manage these fluctuations by passing along increased raw material prices to our customers in the form of price increases or surcharges; however,~~U.S. If we ~~may be~~are unable to increase the price of our products ~~due to pricing pressure, contract terms~~ or ~~other factors, which~~otherwise mitigate these increased costs, it could adversely impact our revenue and profit margins.

~~Moreover, future disruptions in~~

Risks Related to Human Capital Management and Employee Benefits

If we are unable to attract, retain and develop key personnel, our business could be materially adversely affected.

Our business substantially depends on the ~~supply~~continued service of key members of our ~~raw materials could impair our ability to manufacture our products for our customers or require us to pay higher prices in order to obtain these raw materials from~~management and other ~~sources. Any significant increase in~~key employees. The loss of the ~~prices for such raw materials could adversely affect our results of operations and profit margins.~~

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~~Warranty, recall, quality or product liability claims could materially adversely affect our earnings.~~

Warranty, recall, quality or product liability claims could materially adversely affect our earnings and brand reputation. In our business, we are exposed to warranty and product liability claims. In addition, we may be required to participate in the recallservices of a ~~product. If we fail to meet customer specifications for their products, we may be subject to product quality costs and claims, as well as adverse brand reputational impacts. A successful warranty~~significant number of members of our management or ~~product liability claim against us, or a requirement that we participate in a product recall,~~other key employees could have a material adverse effect on our ~~earnings~~business. Our future success also will depend on our ability to attract, retain and ~~brand reputation.~~develop highly skilled personnel, such as engineering, finance, marketing and senior management professionals, as well as skilled labor. Competition for these types of employees is intense, and we could experience difficulty from time to time in hiring, developing and retaining the personnel necessary to support our business. If we do not succeed in retaining and developing our current employees and attracting new high-quality employees, our business could be materially adversely affected.

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Work stoppages or similar difficulties could significantly disrupt our operations, reduce our revenues and materially affect our earnings.

A work stoppage at one or more of our facilities, whether caused by fire, flooding, epidemics, pandemics (including the COVID-19 outbreak), other natural disaster or otherwise, could have a material adverse effect on our business, financial condition and results of operations. In addition, some of our employees are represented by labor unions or works councils under collective bargaining agreements with varying durations and terms. We have experienced work stoppages at certain of our facilities historically at times, and while these stoppages have been short-term in nature, no assurances can be made that we will not experience additional work stoppages due to government directives, employee health concerns, and other types of conflicts with labor unions, works councils, and other similar groups in the future.

A work stoppage at one of our suppliers, whether caused by epidemic, pandemic or otherwise could also materially and adversely affect our operations if an alternative source of supply were not readily available. In addition, if one or more of our customers were to experience a work stoppage, whether due to an epidemic, pandemic or otherwise, that customer could halt or limit purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations. In addition, the credit and default risk or bankruptcy of customers or suppliers as a result of work stoppages could also materially and adversely affect our operations and results.

Expenses and contributions related to our defined benefit plans are affected by factors outside our control, including the performance of plan assets, interest rates, actuarial data and experience, and changes in laws and regulations, all of which could impact our funded status.

Our future expense and funding obligations for defined benefit pension plans depend upon a number of factors, including the level of benefits provided for by the plans, the future performance of assets with specific country economic performance risks set aside in trust for these plans, the level of interest rates used to determine the discount rate to calculate the amount of liabilities, actuarial data and experience, and any changes in government laws and regulations. In addition, if the various investments held by our pension trusts do not perform as expected or the liabilities increase as a result of discount rate changes and other actuarial changes, our pension expense and required contributions would increase and, as a result, could materially adversely affect our business or require us to record charges that could be significant and would cause a reduction in our shareholders' equity. We may be required legally to make contributions to the pension plans in the future in excess of our current expectations, and those contributions could be material.

Future actions involving our defined benefit and other postretirement plans, such as annuity purchases, lump-sum payouts, and/or plan terminations could cause us to incur significant pension and postretirement settlement and curtailment charges, and require cash contributions.

We have purchased annuities and offered lump-sum payouts to defined benefit plan and other postretirement plan participants and retirees in the past. If we were to take similar actions in the future, we could incur significant pension settlement and curtailment charges related to the reduction in pension and postretirement obligations from annuity purchases, lump-sum payouts of benefits to plan participants, and/or plan terminations. Pursuing these types of actions could require us to make additional contributions to the defined benefit plans to maintain a legally required funded status.

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Risks Related to Legal, Compliance and Regulatory Matters

If government-imposed restrictions continue, are re-imposed, or are expanded, our business could be further adversely impacted.

The global outbreak of COVID-19 continues to create uncertainty with respect to economic demand and operations. We have global operations and customers and suppliers, in countries most impacted by COVID-19. The COVID-19 outbreak has resulted in significant governmental measures being implemented to control the spread of COVID-19, including, among others, restrictions on travel and manufacturing operations in many regions of the world that are changing frequently as the pandemic evolves. In addition, we have implemented risk mitigation plans across the enterprise (including work-from-home policies, "social distancing," and use of personal protective equipment) to reduce the risk of spreading the virus in many of our global locations. To the extent that governments implement more restrictive mandates to combat the spread of COVID‐19, or reimpose restrictions that have now lapsed, or to the extent that the COVID‐19 outbreak intensifies, we could experience additional material impacts on our short-term and long-term operations and related results of operations, including revenue, gross margins, operating margins and cash flows.

The full magnitude of the COVID‐19 pandemic, including the extent of the total impact on the Company’s business, financial position, results of operations or liquidity, which could be material, cannot be reasonably estimated at this time due to the fluidity of the situation. The full impact of the COVID‐19 pandemic will be determined by its duration, its geographic spread, the rate and intensity of individual spread, the extent and length of business disruptions due to government mandates and health authority guidance and the overall impact on the global economy, among other factors.

Environmental health and safety laws and regulations impose substantial costs and limitations on our operations and compliance may be more costly than we expect.

We are subject to the risk of substantial environmental liability and limitations on our operations due to environmental laws and regulations. We are subject to extensive federal, state, local and foreign environmental, health and safety laws and regulations concerning matters such as air emissions, wastewater discharges, solid and hazardous waste handling and disposal and the investigation and remediation of contamination. The risks of substantial costs and liabilities related to compliance with these laws and regulations are an inherent part of our business, and future conditions may develop, arise or be discovered that create substantial environmental compliance or remediation liabilities and costs.

Compliance with environmental, health and safety legislation and regulatory requirements may prove to be more limiting and costly than we anticipate. To date, we have committed significant expenditures in our efforts to ~~achieve~~manage remediation activities and maintain compliance with these requirements at our facilities, and we expect that we will continue to make significant expenditures related to such compliance in the future. From time to time, we may be subject to legal proceedings brought by private parties or governmental authorities with respect to environmental matters, including matters involving alleged noncompliance with or liability arising from environmental, health and safety laws, property damage or personal injury. Actual or alleged violations of environmental, health and safety laws or environmental permit requirements could result in restrictions or prohibitions on operations and substantial civil or criminal fines, as well as, under some environmental, health, and safety laws, the assessment of strict liability and/or joint and several liability. New laws and regulations, including those that may relate to emissions of greenhouse gases, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition or results of operations.

~~The Company may be subject to risks relating to its information technology systems, including the risk of security breaches.~~

The Company relies on information technology systems to manage and operate its business and to process, transmit and store sensitive and confidential data, including its intellectual property and other proprietary business information and that of its customers and suppliers. Despite security measures taken by the Company, the Company’s information technology systems (both on-premises and third-party managed) may be vulnerable to attacks by hackers or breached due to employee error, supplier error, malfeasance or other disruptions. Any such breach in security could expose the Company and its employees, customers and suppliers to risks of misuse of confidential information, manipulation and destruction of data, production downtimes, litigation and operational disruptions, which in turn could adversely affect the Company's reputation, competitive position, business or results of operations.

~~Data privacy and security concerns, as well as evolving government regulation, could adversely affect our results of operations and profitability.~~

We collect, store, access and otherwise process certain confidential or sensitive data, including proprietary business information, personal data or other information that is subject to privacy and security laws, regulations and/or customer-imposed controls. We operate in a global environment in which the data privacy regulatory and legal framework is evolving quickly. Moreover, the data privacy laws of the specific jurisdictions in which we operate may vary and potentially conflict. As such, we cannot predict the cost of compliance with future data privacy laws, regulations and standards, future interpretations of current laws, regulations and standards, or the potential effects on our business.

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Government enforcement actions can be costly and interrupt the regular operation of our business, and a violation of data privacy laws or a security breach involving personal data can result in fines, reputational damage and civil lawsuits, any of which may adversely affect our results of operations and profitability.

~~The global nature of our business exposes us to foreign currency fluctuations that may affect our asset values, results of operations and competitiveness.~~

We are exposed to the risks of currency exchange rate fluctuations because a significant portion of our net sales, costs, assets and liabilities, are denominated in currencies other than the U.S. dollar. These risks include a reduction in our asset values, net sales, operating income and competitiveness.

For those countries outside the United States where we have significant sales, a strengthening in the U.S. dollar or devaluation in the local currency would reduce the value of our local inventory as presented in our Consolidated Financial Statements. In addition, a stronger U.S. dollar or a weaker local currency would result in reduced revenue, operating profit and shareholders' equity due to the impact of foreign exchange translation on our Consolidated Financial Statements. Fluctuations in foreign currency exchange rates may make our products more expensive for others to purchase or increase our operating costs, affecting our competitiveness and our profitability.

Changes in exchange rates between the U.S. dollar and other currencies and volatile economic, political and market conditions in emerging market countries have in the past adversely affected our financial performance and may in the future adversely affect the value of our assets located outside the United States, our gross profit and our results of operations.

~~Global political instability and other risks of international operations may adversely affect our operating costs, revenues and the price of our products.~~

~~Our international operations expose us to risks not present in a purely domestic business, including primarily:~~

changes in international treaties or trade unions (e.g., the UK's probable withdrawal from the European Union, commonly referred to as "Brexit"), which may make our products or our customers' products more costly to export or import;

~~changes in tariff regulations, which may make our products more costly to export or import;~~

~~difficulties establishing and maintaining relationships with local OEMs, distributors and dealers;~~

~~import and export licensing requirements;~~

compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and environmental or other regulatory requirements, which could increase our operating and other expenses and limit our operations;

~~disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the Foreign Corrupt Practices Act ("FCPA");~~

~~difficulty in staffing and managing geographically diverse operations; and~~

~~tax exposures related to cross-border intercompany transfer pricing and other tax risks unique to international operations.~~

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~~Changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences, could adversely impact our revenue and profit margins~~.

The U.S. government has indicated an intent to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements. It has also imposed tariffs on certain foreign goods, including steel and other raw materials as well as certain products made from such materials. Changes in U.S. trade policy have resulted in, and could further result in, U.S. trading partners adopting responsive trade policies that make it more difficult or costly for us to export our products to those countries. These measures have resulted in increased costs for goods imported into the U.S. If we are unable to increase the price of our products or otherwise mitigate these increased costs, it could adversely impact our revenue and profit margins.

~~Work stoppages or similar difficulties could significantly disrupt our operations, reduce our revenues and materially affect our earnings.~~

A work stoppage at one or more of our facilities, whether caused by fire, flooding, pandemics, other natural disaster or otherwise, could have a material adverse effect on our business, financial condition and results of operations. In addition, some of our employees are represented by labor unions or works councils under collective bargaining agreements with varying durations and terms. Although we have experienced no material strikes or work stoppages recently, no assurances can be made that we will not experience these and other types of conflicts with labor unions, works councils, and other similar groups in the future.

A work stoppage at one of our suppliers could also materially and adversely affect our operations if an alternative source of supply were not readily available. In addition, if one or more of our customers were to experience a work stoppage, that customer likely would halt or limit purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations.

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We are subject to a wide variety of domestic and foreign laws and regulations that could adversely affect our results of operations, cash flow or financial condition.

We are subject to a wide variety of domestic and foreign laws and regulations, and legal compliance risks, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trade laws, and laws governing improper business practices. We are affected by both new laws and regulations, and changes to existing laws and regulations which may continue to evolve through interpretations by courts and regulators. Furthermore, the laws and regulations to which we are subject may differ from jurisdiction to jurisdiction, further increasing the cost of compliance and the risk of noncompliance.

In addition, we could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws as well as export controls and economic sanction laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Recently, there has been a substantial increase in the global enforcement of anti-corruption laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Our policies mandate compliance with these laws, but we cannot assure you that our internal controls and procedures will always protect us from the improper acts committed by our employees, agents or ~~agents.~~third-party intermediaries. If we are found to be liable for FCPA, export control or sanction violations, we could suffer from criminal or civil penalties or other sanctions, including loss of export privileges or authorization needed to conduct aspects of our international business, which could have a material adverse effect on our business.

Also, our sales to public-sector customers are subject to complex regulations. Noncompliance with government procurement regulations or other applicable laws or regulations could result in civil, criminal and administrative liability, termination of government contracts or other public-sector customer contracts, and suspension, debarment or ineligibility from doing business with governmental entities or other customers in the public sector.

Compliance with the laws and regulations described above or with other applicable foreign, federal, state, and local laws and regulations currently in effect or that may be adopted in the future could materially adversely affect our competitive position, operating results, financial condition and liquidity.

New or more stringent government regulations or standards designed to address climate change could increase our operational costs and severe weather associated with a changing climate could negatively impact our operations and those of our customers and suppliers.

We are subject to domestic and foreign regulations and standards governing emissions controls which are, in part, designed to address climate change. Due to increasing global concern over the effects of climate change, new or more stringent regulations and standards may be mandated. In addition, various stakeholders may demand additional controls beyond what is required by such regulations or standards. Tighter emissions controls as a result of these actions could increase our operational costs and could lead to disruptions in our operations as compliance is attained. Severe weather associated with a changing climate could also negatively impact the operation of our facilities, as well as those of our customers and suppliers.

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Risks Related to Data Privacy and Information Security

The Company may be subject to risks relating to its information technology systems, including the risk of security breaches.

The Company relies on information technology systems to manage and operate its business and to process, transmit and store sensitive and confidential data, including its intellectual property and other proprietary business information and that of its customers and suppliers. Despite security measures taken by the Company, the Company’s information technology systems (both on-premises and third-party managed) may be vulnerable to attacks by hackers or breached due to employee error, supplier error, malfeasance or other disruptions. We have been and may in the future be subject to attempts to gain unauthorized access to our information technology systems. To date, the impacts of prior events have not had a material adverse effect on us. Any such breach in security could expose the Company and its employees, customers and suppliers to risks of misuse of confidential information, manipulation and destruction of data, production downtimes, litigation and operational disruptions, which in turn could adversely affect the Company's reputation, competitive position, business or results of operations.

Data privacy and security concerns, as well as evolving government regulation, could adversely affect our results of operations and profitability.

General Risk Factors

Weakness in global economic conditions or in any of the industries or geographic regions in which we or our customers operate, as well as the cyclical nature of our customers' businesses generally or sustained uncertainty in financial markets, could adversely impact our revenues and profitability by reducing demand and margins.

There has been significant volatility in the capital markets and in the end markets and geographic regions in which we and our customers operate, which has negatively affected our revenues. Our revenues also may be negatively affected by changes in customer demand, changes in the product mix and negative pricing pressure in the industries in which we operate. Margins in those industries are highly sensitive to demand cycles, and our customers in those industries historically have tended to delay large capital projects, including expensive maintenance and upgrades during economic downturns. As a result, our revenues and earnings are impacted by overall levels of industrial production.

Warranty, recall, quality or product liability claims could materially adversely affect our earnings.

~~Our business substantially depends on the continued service of key members of our management and other key employees. The loss of the services of~~claims, as well as adverse brand reputational impacts. A successful warranty or product liability claim against us, or a ~~significant number of members of our management or other key employees~~requirement that we participate in a product recall, could have a material adverse effect on our ~~business. Our future success also will depend on our ability to attract~~earnings and retain highly skilled personnel, such as engineering, finance, marketing and senior management professionals, as well as skilled labor. Competition for these types of employees is intense, and we could experience difficulty from time to time in hiring and retaining the personnel necessary to support our business. If we do not succeed in retaining our current employees and attracting new high-quality employees, our business could be materially adversely affected.brand reputation.

~~We may not realize the improved operating results that we anticipate from past and future acquisitions and we may experience difficulties in integrating acquired businesses.~~

We seek to grow, in part, through strategic acquisitions, joint ventures and other alliances, which are intended to complement or expand our businesses, and expect to continue to do so in the future. These acquisitions involve challenges and risks. In the event that we do not successfully integrate these acquisitions into our existing operations so as to realize the expected return on our investment, our results of operations, cash flow or financial condition could be adversely affected.

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The success of new and improved products and services depends on their initial and continued acceptance by our customers. Our businesses are affected, to varying degrees, by technological change and corresponding shifts in customer demand, which could result in unpredictable product transitions or shortened life cycles, especially as it relates to market and technological changes driven by electrification, environmental requirements, the continued rising importance of e-commerce and increased digitalization. We may experience difficulties or delays in the research, development, production, or marketing of new products and services that may prevent us from recouping or realizing a return on the investments required to bring new products and services to market. The end result could have a negative impact on our operating results.

If our internal controls are found to be ineffective, our financial results or our stock price may be adversely affected.

Our most recent evaluation resulted in our conclusion that, as of December 31, ~~2019,~~2020, our internal control over financial reporting was effective. We believe that we currently have adequate internal control procedures in place for future periods, including processes related to newly acquired businesses; however, increased risk of internal control breakdowns generally exists in a business environment that is decentralized. In addition, if our internal control over financial reporting is found to be ineffective, investors may lose confidence in the reliability of our financial statements, which may adversely affect our stock price.

Changes in accounting ~~guidance~~standards could have an adverse effect on our results of operations, as reported in our financial statements.

Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), which is periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting ~~guidance~~standards and related interpretations issued by recognized authoritative bodies, including the Financial Accounting Standards Board ("FASB") and the SEC. The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in this Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. It is possible that future accounting guidance we are required to adopt, or future changes in accounting principles, could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have an adverse effect on our results of operations, as reported in our consolidated financial statements.

~~Certain members~~

Table of our Board of Directors and management may have actual or potential conflicts of interest because of their ownership of shares of TimkenSteel Corporation ("TimkenSteel") following the spinoff of TimkenSteel into an independent publicly traded company on June 30, 2014 (the "Spinoff").Contents

Certain members of our Board of Directors and management own shares of TimkenSteel and/or options to purchase shares of TimkenSteel, which could create, or appear to create, potential conflicts of interest when our directors and executive officers are faced with decisions that could have different implications for us and TimkenSteel.

Item 1B. Unresolved Staff Comments

None.

~~Table of Contents~~

Item 2. Properties

~~Timken has~~

The Company’s corporate headquarters are located in North Canton, Ohio, and, at December 31, 2020, the Company maintained 73 manufacturing plants. The Company also maintains various sales and administrative offices and distribution centers throughout the world. None of these manufacturing plants, administrative offices or distribution centers are individually material to the Company’s operations. The facilities ~~at multiple locations~~are situated in the United States, as well as 41 other countries, including China, India, and ~~in a number~~Romania. The Company owns the majority of ~~countries outside the United States. The aggregate floor area~~its manufacturing plants, and its leased properties primarily consist of ~~these facilities worldwide is approximately 12.4 million square feet, all of which, except for approximately 3.3 million square feet, is owned in fee. The facilities not owned in fee are leased.~~ sales and administrative offices and distribution centers.

The buildings occupied by Timken are principally made of brick, steel, reinforced concrete and concrete block construction. The Company believes all buildings are in satisfactory operating condition to conduct business.

Timken’s Mobile Industries segment's manufacturing facilities and service centers in the United States are located in Los Alamitos, California; Manchester, Connecticut; Carlyle, Illinois; Lenexa, Kansas; Keene and Lebanon, New Hampshire; Iron Station, North Carolina; Bucyrus, Canton, New Philadelphia and Sharon Center, Ohio; Gaffney and Honea Path, South Carolina; Knoxville, Tennessee; and Ogden, Utah. These facilities, including warehouses at plant locations and a technology center and wind center in North Canton, Ohio, have an aggregate floor area of approximately 3.1 million square feet.

Timken’s Mobile Industries segment’s manufacturing plants and service centers outside the United States are located in Belo Horizonte and Rio Clara, Brazil; Yantai, China; Cheltenham, Northampton and Plymouth, England; Colmar, France; Cruessen, Pegnitz and Wannberg, Germany; Bharuch and Jamshedpur, India; Karmiel, Israel; Arcore, Cassago, Brianza, Valmadrea and Villa Carcina, Italy; Sosnowiec, Poland; Tikhvin, Russia; and Gauteng, South Africa. These facilities, including warehouses at plant locations, have an aggregate floor area of approximately 3.1 million square feet.

Timken's Process Industries segment's manufacturing plants and service centers in the United States are located in Hueytown, Alabama; Sante Fe Springs, California; Broomfield and Denver, Colorado; New Haven, Connecticut; New Castle, Delaware; Downers Grove, Fulton and Mokena, Illinois; Indianapolis and Mishawaka, Indiana; Fort Scott, Kansas; Portland, Maine; Springfield, Massachusetts; Ludington, Rochester Hills, South Haven and Traverse City, Michigan; Springfield, Missouri; Hackettstown, New Jersey; Randleman and Rutherfordton, North Carolina; Union, South Carolina; Ferndale and Pasco, Washington; and Princeton, West Virginia. These facilities, including warehouses at plant locations and a wind center in North Canton, Ohio, have an aggregate floor area of approximately 3.5 million square feet.

Timken's Process Industries segment's manufacturing plants and service centers outside the United States are located in Mississauga, Prince George and Sasakatoon, Canada; Chengdu, Jiangsu, Wuxi and Xiangtan, China; Dudley, England; Dusseldorf and Werdohl, Germany; Chennai, India; Arcore and Vimercate, Italy; and Ploiesti and Prahova, Romania. These facilities, including warehouses at plant locations, have an aggregate floor area of approximately 2.7 million square feet.

In addition to the manufacturing and distribution facilities discussed above, Timken owns or leases warehouses and distribution facilities in Argentina, Australia, Austria, Belgium, Brazil, Canada, China, England, France, Germany, India, Japan, Mexico, Netherlands, New Zealand, Poland, South Africa, Singapore, Spain and the United States.

The extent to which the Company ~~uses~~utilizes its properties varies by property and from time to time. The Company believes that its capacity levels are adequate for its present and anticipated future needs. Most of the Company’s manufacturing facilities remain capable of handling additional volume ~~increases.~~increases.

Item 3. Legal Proceedings

The Company is involved in various claims and legal actions arising in the ordinary course of business. 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 a threshold of $1 million or more for purposes of determining whether disclosure of any such proceedings is required as we believe matters under this threshold are not material to the Company. 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 annual results of operations.

In October 2014, the Brazilian government antitrust agency, Administrative Council for Economic Defense ("CADE"), announced that it had opened an investigation of alleged antitrust violations in the bearing industry. The Company’s Brazilian subsidiary, Timken do Brasil Comercial Importadora Ltda. ("Timken do Brasil"), was included in the investigation. During the fourth quarter of 2019, the Company paid approximately $1.8 million to settle the matter with CADE.

~~Table of Contents~~

Item 4. Mine Safety Disclosures

Not applicable.

Table of Contents

Item 4A. Information about our Executive Officers

The executive officers are elected by the Board of Directors normally for a term of one year and until the election of their successors. All executive officers have been employed by Timken or by a subsidiary of the Company during the past five-year period. The executive officers of the Company as of February ~~14, 2020~~16, 2021 are as follows:

Name

Age

Current Position and Previous Positions During Last Five Years

Christopher A. Coughlin

5960

2014 Executive Vice President, Group President

Philip D. Fracassa

5152

2014 Executive Vice President and Chief Financial Officer

Richard G. Kyle

5455

2014 President and Chief Executive Officer

Hans Landin

4748

2018 Group Vice President

2017 Vice President - Mechanical Power Transmission

2014 Vice President - Power Transmission and Engineering Systems

Ronald J. Myers

6162

2017 Executive Vice President - Human Resources

2015 Vice President of Human Resources

~~2014 Vice President - Organizational Advancement~~

Hansal N. Patel

3940

2019 Vice President, General Counsel and Secretary

2019 Vice President - Legal and Corporate Secretary

2018 Director - Legal and Corporate Secretary

2016 Managing Attorney - M&A, Securities and Assistant
Corporate Secretary

2014 Senior Corporate Attorney, Securities and Finance

Andreas Roellgen

5253

2016 Vice President - Europe, Asia and Africa

2014 Vice President - Process Industries and Managing Director, Europe

Table of Contents

PART II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common shares are traded on the New York Stock Exchange under the symbol “TKR". The estimated number of record holders of the Company’s common shares at December 31, ~~2019~~2020 was ~~3,635.~~3,461. The estimated number of beneficial shareholders at December 31, ~~2019~~2020 exceeds ~~40,000.~~80,000.

Issuer Purchases of Common Shares:

The following table provides information about purchases of its common shares by the Company during the quarter ended December 31, ~~2019.~~2020.

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⁾
10/1/2019 - 10/31/2019 154,253
$ 42.75
153,668
5,357,042
11/1/2019 - 11/30/2019 26,432
52.81
—
5,357,042
12/1/2019 - 12/31/2019 1,301
55.21
—
5,357,042
Total 181,986
$ 44.30
153,668
—


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)
10/1/2020 - 10/31/2020	518	$	58.70	—	4,357,042
11/1/2020 - 11/30/2020	154,350	69.05		96,000	4,261,042
12/1/2020 - 12/31/2020	4,486	74.94		4,000	4,257,042
Total	159,354	$	69.19	100,000	—

(1)Of the shares purchased in October, November and December, 518, 58,350 and 486 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 and 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 share price at the time the options are exercised.

(3)On February 6, 2017, the Company's Board of Directors approved a share repurchase plan 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, 2021. Under this plan the Company purchased shares from time to time in open market purchases or privately negotiated transactions and was able to make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans. On February 12, 2021, the Company's Board of Directors approved a new share repurchase 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.

Table of Contents

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (continued)


~~(1)~~			~~Of the shares purchased in October, November and~~*Total return assumes reinvestment of dividends. Fiscal years ending December 585, 26,432 and 1,301, 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 and vesting of restricted shares.31.

~~(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 share price at the time the options are exercised.

~~(3)~~

On February 6, 2017, the Company's Board of Directors approved a share repurchase plan 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, 2021. Under this plan the Company purchased shares from time to time in open market purchases or privately negotiated transactions and was able to make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans.

~~Table of Contents~~

*Total return assumes reinvestment of dividends. Fiscal years ending December 31.



	2015		2016		2017		2018		2019			2016		2017		2018		2019		2020
Timken	$	69	$	99	$	125	$	97	$	151	Timken	$	143	$	182	$	141	$	219	$	307
S&P 500	101		114		138		132		174		S&P 500	112		136		130		171		203
S&P 400 Industrials	97		125		154		131		175		S&P 400 Industrials	129		159		135		181		211

The line graph compares the cumulative total shareholder returns over five years for The Timken Company, the S&P 500 Stock Index and the S&P 400 Industrials Index. The graph assumes, in each case, an initial investment of $100 on January 1, ~~2015,~~2016, in Timken common shares, S&P 500 Index and S&P 400 Industrials Index, based on market prices at the end of each fiscal year through and including December 31, ~~2019,~~2020, and reinvestment of dividends.

Table of Contents

Item 6. Selected Financial Data

Summary of Operations and Other Comparative Data:


(Dollars in millions, except per share, shareholder and per employee data)	2020			2019			2018			2017			2016
Statements of Income
Net sales	$	3,513.2		$	3,789.9		$	3,580.8		$	3,003.8		$	2,669.8
Gross profit	1,009.9			1,141.8			1,040.1			812.1			706.3
Operating income	454.9			516.4			454.5			299.5			244.4
Net income	292.4			374.7			305.5			202.3			141.1
Net income attributable to The Timken Company	$	284.5		$	362.1		$	302.8		$	203.4		$	140.8
Balance Sheets
Total assets	$	5,041.6		$	4,859.9		$	4,445.2		$	3,402.4		$	2,763.2




Total debt	1,564.6			1,730.1			1,681.6			962.3			659.2
Total liabilities	2,816.4			2,905.1			2,802.5			1,927.5			1,452.3
Total equity	$	2,225.2		$	1,954.8		$	1,642.7		$	1,474.9		$	1,310.9
Other Comparative Data
Net income / net sales	8.3		%	9.9		%	8.5		%	6.7		%	5.3		%
Net income attributable to The Timken Company / net sales	8.1		%	9.6		%	8.5		%	6.8		%	5.3		%
Return on equity (1)	13.1		%	19.2		%	18.6		%	13.7		%	10.8		%
Net sales per employee (2)	$	193.8		$	208.8		$	220.5		$	206.3		$	185.3
Capital expenditures	121.6			140.6			112.6			104.7			137.5
Capital expenditures / net sales	3.5		%	3.7		%	3.1		%	3.5		%	5.2		%
Depreciation and amortization	167.1			160.6			146.0			137.7			131.7
Basic earnings per share (3)	3.78			4.78			3.93			2.62			1.79
Diluted earnings per share (4)	3.72			4.71			3.86			2.58			1.78
Dividends per share	$	1.13		$	1.12		$	1.11		$	1.07		$	1.04
Weighted average number of shares outstanding - basic	75,354,280			75,758,123			77,119,602			77,736,398			78,516,029
Weighted average number of shares outstanding - diluted	76,401,366			76,896,565			78,337,481			78,911,149			79,234,324
Number of employees at year-end	17,430			18,829			17,477			15,006			14,111

(1)Return on equity is defined as net income divided by ending total equity.

(2)Dollars in thousands, based on average number of employees employed during the year.

(3)Based on weighted average number of shares outstanding during the year.

(4)Based on weighted average number of shares outstanding during the year, assuming dilution of stock options and awards.

(Dollars in millions, except per share, shareholder and per employee data) 2019 2018 2017 2016 2015
Statements of Income
Net sales $ 3,789.9
$ 3,580.8
$ 3,003.8
$ 2,669.8
$ 2,872.3
Gross profit 1,141.8
1,040.1
812.1
706.3
803.8
Operating income 516.4
454.5
299.5
244.4
333.2
Net income 374.7
305.5
202.3
141.1
191.4
Net income attributable to The Timken Company $ 362.1
$ 302.8
$ 203.4
$ 140.8
$ 188.6
Balance Sheets
Total assets $ 4,859.9
$ 4,445.2
$ 3,402.4
$ 2,763.2
$ 2,789.0
Total debt 1,730.1
1,681.6
962.3
659.2
656.5
Total liabilities 2,905.1
2,802.5
1,927.5
1,452.3
1,439.4
Total equity $ 1,954.8
$ 1,642.7
$ 1,474.9
$ 1,310.9
$ 1,349.6
Other Comparative Data
Net income / net sales 9.9 % 8.5 % 6.7 % 5.3 % 6.7 %
Net income attributable to The Timken Company / net sales 9.6 % 8.5 % 6.8 % 5.3 % 6.6 %
Return on equity ⁽¹⁾
19.2 % 18.6 % 13.7 % 10.8 % 14.2 %
Net sales per employee ⁽²⁾
$ 208.8
$ 220.5
$ 206.3
$ 185.3
$ 197.5
Capital expenditures 140.6
112.6
104.7
137.5
105.6
Capital expenditures / net sales 3.7 % 3.1 % 3.5 % 5.2 % 3.7 %
Depreciation and amortization 160.6
146.0
137.7
131.7
130.8
Basic earnings per share ⁽³⁾
4.78
3.93
2.62
1.79
2.23
Diluted earnings per share ⁽⁴⁾
4.71
3.86
2.58
1.78
2.21
Dividends per share $ 1.12
$ 1.11
$ 1.07
$ 1.04
$ 1.03
Weighted average number of shares outstanding - basic 75,758,123
77,119,602
77,736,398
78,516,029
84,631,778
Weighted average number of shares outstanding - diluted 76,896,565
78,337,481
78,911,149
79,234,324
85,346,246
Number of employees at year-end 18,829
17,477
15,006
14,111
14,709


~~(1)~~	~~Return on equity is defined as net income divided by ending total equity.~~


~~(2)~~	~~Dollars in thousands, based on average number of employees employed during the year.~~


~~(3)~~	~~Based on weighted average number of shares outstanding during the year.~~


~~(4)~~	~~Based on weighted average number of shares outstanding during the year, assuming dilution of stock options and awards.~~

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars in millions, except per share data)

OVERVIEW

Introduction:

The Timken Company designs and manufactures a growing portfolio of engineered bearings and power transmission products. 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. Timken posted ~~$3.8~~$3.5 billion in sales in ~~2019~~2020 and employs more than ~~18,000~~17,000 people globally, operating 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 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.

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 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 other organic growth initiatives; (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.

1923

Table of Contents

The following ~~items highlight certain~~highlights some of the ~~Company~~'sCompany's more significant ~~strategic~~ accomplishments in ~~2019:~~2020:

•Sales to renewable energy customers grew by over 50% from 2019 through strong market growth and the benefit of outgrowth initiatives. Renewable energy became Timken’s largest individual end-market sector in 2020 at 12% of sales. The Company also announced over $75 million in capital investments to be made through early 2022 to increase the company’s renewable energy capabilities across its footprint.

~~On November 1, 2019,~~

•The Company reacted swiftly to the COVID-19 pandemic by taking decisive actions to (a) protect employees and other stakeholders while continuing to serve customers in essential industries and (b) reduce costs to mitigate the impact from lower revenue caused by the pandemic and improve the Company’s overall cost structure.

•Timken paid its 391st through 394th consecutive quarterly dividends during 2020, including a dividend of $0.29 per share during the fourth quarter, an increase of 4% from the prior quarter. 2020 marked the 7th consecutive year of annual dividend increases. The Company also repurchased 1.1 million shares of common stock in 2020.

•The Company completed the acquisition of ~~BEKA Lubrication ("BEKA"), a leading global supplier~~the assets of ~~automatic lubrications systems serving~~Aurora Bearing Company (“Aurora”) in November 2020, which will enhance the Timken’s product portfolio and leadership position in engineered bearings. With annual sales of approximately $30 million in 2020, Aurora serves a diverse range of industrial sectors, including ~~wind, food~~aerospace and ~~beverage, rail, on-~~defense, racing, off-highway equipment, and ~~off-highway~~packing.

RESULTS OF OPERATIONS

2020 vs. 2019

Overview:


	2020		2019		$ Change		% Change
Net sales	$	3,513.2	$	3,789.9	$	(276.7)	(7.3	%)


Net income	292.4		374.7		(82.3)		(22.0	%)
Net income attributable to noncontrolling interest	7.9		12.6		(4.7)		(37.3	%)
Net income attributable to The Timken Company	$	284.5	$	362.1	$	(77.6)	(21.4	%)



Diluted earnings per share	$	3.72	$	4.71	$	(0.99)	(21.0	%)
Average number of diluted shares	76,401,366		76,896,565		—		(0.6	%)

The decrease in net sales was primarily driven by lower organic volume revenue and the unfavorable impact of foreign currency exchange rate changes, partially offset by the benefit of acquisitions and positive pricing. The decrease in net income was primarily due to the impact of lower volume, the unfavorable impact of foreign currency exchange rate changes and higher restructuring and pension remeasurement charges. The decrease was partially offset by lower selling, general and administrative ("SG&A") expenses, reflecting cost reduction initiatives, lower material and logistics costs, and the benefits from acquisitions and favorable price/mix.

Throughout the COVID-19 pandemic in 2020, Timken continued to operate and fill customer orders, and adjusted production as required by local government directives and to reflect changes in global demand. For most of the second quarter, the Company's operations were adversely impacted by lower global demand caused by the ongoing spread of COVID-19 around the world, which included various customer shut-downs and government imposed operating restrictions. During the second quarter, the Company took steps to reduce costs by implementing temporary salary reductions, work furloughs and other ~~process industries. BEKA, located~~actions to align its costs with near-term demand expectations. During the third and fourth quarters, Timken was able to operate with no major restrictions, and production levels improved. Timken continued certain temporary cost reduction actions and expanded and accelerated certain structural cost reduction initiatives to align its costs with near-term demand expectations and to improve the profitability of the Company longer term.

Table of Contents

Outlook:

The world continues to be impacted by the COVID-19 pandemic. The Company continues to adhere to mandates and other guidance from local governments and health authorities, including the World Health Organization and the Centers for Disease Control and Prevention. Timken has implemented risk mitigation plans across the enterprise to protect employees and reduce the risk of spreading the virus, while continuing to operate where permitted and to the extent practicable. The Company’s main priority continues to be the health of its employees and others in ~~Pegnitz, Germany, employs~~the communities where it does business.

While the Company’s operations and financial results were adversely impacted during 2020 resulting from the COVID-19 pandemic, operations had largely stabilized by the end of the year. The Company will continue to monitor, assess and manage the uncertainty surrounding the COVID-19 pandemic. Timken’s outlook for 2021 assumes that COVID-19 conditions around the world will improve globally as the year progresses.

The Company expects 2021 full-year revenue to be up approximately ~~900 people,~~12% compared to 2020, primarily due to higher organic revenue across both the Mobile Industries and ~~had annual~~Process Industries segments, the impact from foreign currency exchange rates and the benefit of acquisitions. The Company's earnings are expected to be up approximately 20% in 2021 compared with 2020, primarily due to the impact of higher volume, partially offset by higher material costs and higher operating expenses to serve increased customer demand.

The Company expects to generate cash from operating activities of approximately $450 million in 2021, a decrease from 2020 of approximately $128 million, or 22%, as the Company anticipates working capital to be a use of cash in 2021 versus a source of cash in 2020. The Company expects capital expenditures to be approximately $150 million (approximately 3.8% of sales) in 2021, compared with $122 million in 2020.

THE STATEMENTS OF INCOME

Sales:


	2020		2019		$ Change		Change
Net sales	$	3,513.2	$	3,789.9	$	(276.7)	(7.3	%)

Net sales atdecreased in 2020 compared with 2019, primarily due to lower organic revenue (net of positive pricing) of $365 million and the ~~time~~unfavorable impact of foreign currency exchange rate changes of $32 million, partially offset by the benefit of acquisitions of $120 million. The lower organic revenue was primarily due to lower demand driven by the economic slowdown caused by the COVID-19 pandemic that impacted most market sectors, partially offset by growth in renewable energy market sector.

Gross Profit:


	2020			2019			$ Change		Change
Gross profit	$	1,009.9		$	1,141.8		$	(131.9)	(11.6	%)
Gross profit % to net sales	28.7		%	30.1		%	—		(140)	bps

Gross profit decreased in 2020 compared with 2019, primarily due to the impact of lower volume of $168 million, the unfavorable impact of foreign currency exchange rate changes of $28 million and unfavorable manufacturing performance of $12 million. These items were partially offset by the net benefit of acquisitions of $39 million, lower material and logistics costs $28 million and favorable price/mix of $4 million. In addition, the Company recognized net insurance proceeds of $1 million in 2020 after incurring property losses of $8 million in 2019.

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Selling, General and Administrative Expenses:


	2020			2019			$ Change		Change
Selling, general and administrative expenses	$	533.8		$	618.6		$	(84.8)	(13.7%)
Selling, general and administrative expenses % to net sales	15.2		%	16.3		%	—		(110) bps

The decrease in selling, general and administrative ("SG&A") expenses in 2020 compared with 2019 was primarily due to lower employee costs and related benefits and lower discretionary spending as the Company implemented cost reduction initiatives, including temporary salary reductions, work furloughs and permanent headcount reductions, to reduce costs to combat the impact of the COVID-19 pandemic and the impact lower demand, mainly during the second quarter of 2020. Performance-based compensation was also lower in 2020, compared to 2019.

Impairment and Restructuring Charges:


	2020		2019		$ Change
Impairment charges	$	0.4	$	2.6	$	(2.2)
Severance and related benefit costs	19.6		3.0		16.6
Exit costs	1.2		1.2		—
Total	$	21.2	$	6.8	$	14.4

Impairment and restructuring charges of $21.2 million in 2020 were comprised primarily of severance and related benefits associated with initiatives to reduce headcount and right-size the Company's manufacturing footprint, including the planned closure of the Company's Indianapolis, Indiana chain plant and the reorganization of the Company's Canton, Ohio and Gaffney, South Carolina bearing facilities. In addition, the Company recognized severance and related benefits as it began to accelerate and expand cost reduction initiatives.

Impairment and restructuring charges of $6.8 million in 2019 were primarily due to severance and related benefits associated with a variety of initiatives to reduce headcount, as well as a goodwill impairment charge of $1.8 million for one of its reporting units.

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Other Income (Expense):


	2020		2019		$ Change		% Change
Non-service pension and other postretirement (expense) income	$	(4.7)	$	10.2	$	(14.9)	(146.1	%)

Other income, net	10.0		13.0		(3.0)		(23.1	%)

The Company recognized non-service pension and other postretirement expense in 2020 primarily due to the recognition of net actuarial losses ("Mark-to-Market Charges"). In 2019, the Company recognized non-service pension and other postretirement income. The Mark-to-Market Charges in 2020 were primarily due to the impact of lower discount rates to measure the benefit obligations for pension and other postretirement plans and the impact of experience losses, partially offset by favorable asset returns. The Mark-to-Market Charges in 2019 were the result of higher than expected returns on plan asset and the impact of a reduction in contractual rates for the Medicare Advantage plans, driven by a law change that repealed the tax on Health Care Insurers after 2020, partially offset by lower discount rates to measure the benefit obligations for pension and other postretirement plans. In addition, there was higher amortization of prior service credit in the current year due to a plan amendment for the Company's postretirement benefit plans in the second half of 2019. Refer to Note 15 - Retirement Benefit Plans and Note 16 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for more information.

The change in other income in 2020, compared to 2019, was primarily due to foreign currency losses, net of hedging activity, recognized in 2020, compared to foreign currency gains, net of hedging activity, in 2019, more than offset by an acquisition-related gain in 2020. The acquisition-related gain represents a bargain purchase price gain on the acquisition of ~~approximately $135 million.~~ the assets of Aurora acquired on November 30, 2020. Refer to Note 3 - Acquisitions for more information.

Income Tax Expense:


	2020			2019			$ Change		Change
Income tax expense	$	103.9		$	97.7		$	6.2	6.3	%
Effective tax rate	26.2		%	20.7		%	—		550	bps

The ~~acquisition~~effective tax rate for 2020 was ~~funded~~26.2%, which was unfavorable compared to the U.S. federal statutory rate of 21%, primarily due to earnings in certain foreign jurisdictions where the effective tax rate was higher than 21%, unfavorable U.S. permanent differences and U.S. state and local income taxes.

The effective tax rate for 2019 was 20.7%, which was slightly favorable compared to the U.S. federal statutory rate of 21%, primarily due to the release of foreign valuation allowance against certain foreign deferred tax assets and the remeasurement of deferred tax balances to reflect the reduced India statutory rate. These impacts were partially offset by reductions in foreign jurisdictions where the effective tax rate was higher than 21%, additional discrete accruals for uncertain tax positions, U.S. state and local income taxes and withholding taxes recorded on planned dividend distributions.

The change in the effective rate for 2020 compared with ~~cash~~2019 was an increase of 5.5%. The increase was primarily due to the release of certain valuation allowances and the remeasurement of deferred tax balances to reflect the reduced India statutory tax rate during 2019. These items were partially offset by prior year discrete accruals for uncertain tax positions and withholding taxes recorded on ~~hand~~planned dividend distributions during 2019.

Refer to Note 5 - Income Taxes in the Notes to the Consolidated Financial Statements for more information on the computation of the income tax expense in interim periods.

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BUSINESS SEGMENTS

The Company's reportable segments are business units that serve different industry sectors. While the segments often 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 earnings before interest, taxes, depreciation and ~~through borrowings under existing credit facilities.~~amortization ("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.

~~On April 1,~~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 2020 and 2019 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 items highlight the Company's acquisitions completed in 2020 and 2019 by segment based on the customers and underlying markets served:

•The Company acquired Aurora during the fourth quarter of 2020. Results for Aurora are reported in the Mobile Industries and Process Industries segments based on customers and underlying market sectors served.

•The Company acquired BEKA Lubrication ("BEKA") during the fourth quarter of 2019. The majority of the results for BEKA are reported in the Mobile Industries segment.

•The Company acquired The Diamond Chain Company ("Diamond Chain")~~, a leading supplier~~ during the second quarter of ~~high-performance roller chains~~2019. The majority of the results for ~~industrial markets.~~ Diamond Chain serves a diverse range of sectors, including industrial distribution, material handling, food and beverage, agriculture, construction and other process industries. At the time of the acquisition, Diamond had annual sales of approximately $60 million. Diamond Chain has manufacturing operationsare reported in the ~~U.S.~~Process Industries segment.

Mobile Industries Segment:


	2020			2019			$ Change		Change
Net sales	$	1,671.6		$	1,893.9		$	(222.3)	(11.7	%)
EBITDA	$	232.5		$	284.9		$	(52.4)	(18.4	%)
EBITDA margin	13.9		%	15.0		%	—		(110)	bps

	2020			2019			$ Change		% Change
Net sales	$	1,671.6		$	1,893.9		$	(222.3)	(11.7	%)
Less: Acquisitions	76.0			—			76.0		NM

Currency	(21.0)			—			(21.0)		NM
Net sales, excluding the impact of acquisitions and currency	$	1,616.6		$	1,893.9		$	(277.3)	(14.6	%)

The Mobile Industries segment's net sales, excluding the effects of acquisitions and ~~China~~foreign currency exchange rate changes, decreased $277.3 million or 14.6% in 2020 compared with 2019, reflecting lower shipments across most market sectors, partially offset by higher pricing. EBITDA decreased in 2020 by $52.4 million or 18.4% compared with 2019, primarily due to the impact of lower volume and ~~employs approximately 370 people. The acquisition was funded with cash on hand~~related manufacturing utilization, as well as the unfavorable impact of foreign currency exchange rate changes. These decreases were partially offset by the favorable impact of cost reduction initiatives and ~~through borrowings under existing credit facilities.~~price/mix, lower material and logistics costs, and the favorable impact of acquisitions.

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Process Industries Segment:


	2020			2019			$ Change		Change
Net sales	$	1,841.6		$	1,896.0		$	(54.4)	(2.9	%)
EBITDA	$	442.9		$	466.6		$	(23.7)	(5.1	%)
EBITDA margin	24.0		%	24.6		%	—		(60)	bps

	2020			2019			$ Change		% Change
Net sales	$	1,841.6		$	1,896.0		$	(54.4)	(2.9	%)
Less: Acquisitions	44.1			—			44.1		NM
Currency	(11.0)			—			(11.0)		NM
Net sales, excluding the impact of acquisitions and currency	$	1,808.5		$	1,896.0		$	(87.5)	(4.6	%)

The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, decreased $87.5 million or 4.6% in 2020 compared with 2019. The decrease was primarily driven by lower demand across most industrial sectors, partially offset by increased demand in the renewable energy sector, as well as higher pricing. EBITDA decreased $23.7 million or 5.1% in 2020 compared with 2019 primarily due to the impact of lower demand, the impact of unfavorable foreign currency exchange rate changes and the unfavorable impact of price/mix, partially offset by the favorable impact of cost reduction initiatives, favorable manufacturing performance, lower material and logistics costs and the favorable impact of acquisitions.

Corporate:


	2020			2019			$ Change		Change
Corporate EBITDA	$	(40.7)		$	(55.4)		$	14.7	(26.5	%)
Corporate EBITDA % to net sales	(1.2		%)	(1.5		%)	—		30	bps

Corporate expenses decreased in 2020 compared with 2019 primarily due to the favorable impact of cost reduction initiatives, lower performance-based compensation and lower transaction costs related to acquisitions.

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RESULTS OF ~~OPERATIONS~~OPERATIONS:

2019 vs. 2018

~~2019~~ ~~vs.~~ ~~2018~~

Overview:


	2019		2018		$ Change		% Change
Net sales	$	3,789.9	$	3,580.8	$	209.1	5.8	%
Net income	374.7		305.5		69.2		22.7	%
Income attributable to noncontrolling interest	12.6		2.7		9.9		366.7	%
Net income attributable to The Timken Company	$	362.1	$	302.8	$	59.3	19.6	%
Diluted earnings per share	$	4.71	$	3.86	$	0.85	22.0	%
Average number of diluted shares	76,896,565		78,337,481		—		(1.8	%)

~~Overview:~~

2019 2018 $ Change % Change
Net sales $ 3,789.9
$ 3,580.8
$ 209.1
5.8 %
Net income 374.7
305.5
69.2
22.7 %
Net income attributable to noncontrolling interest 12.6
2.7
9.9
366.7 %
Net income attributable to The Timken Company $ 362.1
$ 302.8
$ 59.3
19.6 %
Diluted earnings per share $ 4.71
$ 3.86
$ 0.85
22.0 %
Average number of diluted shares 76,896,565
78,337,481
—
(1.8 %)

The increase in net sales was primarily driven by the benefit of acquisitions, the impact of higher pricing and higher demand in the Process Industries segment, partially offset by the unfavorable impact of foreign currency exchange rate changes and lower shipments in the Mobile Industries segment. The increase in net income in 2019 compared with 2018 was primarily due to the net benefit of acquisitions, favorable price/mix and the impact of a lower tax rate driven by net discrete benefits, partially offset by the impact of lower volume, unfavorable currency and higher interest expense. Results for 2019 also benefited from pension and other postretirement plan remeasurement income compared to expense in 2018.

~~Outlook:~~

The Company expects 2020 full-year revenue to be in the range of down 2% to up 2% compared with 2019 primarily due to the benefit of acquisitions made in 2019, offset by expected organic declines and the impact of currency. The Company's earnings are expected to be down in 2020 compared with 2019, primarily due to the impact of lower volume, higher manufacturing costs and higher income tax expense, partially offset by lower material and logistics costs, favorable price/mix and the impact of acquisitions.

The Company expects to generate operating cash of approximately $585 million in 2020, an increase from 2019 of approximately $35 million, or 6%, as the Company anticipates lower pension and medical benefit plan payments, partially offset by less cash generation from working capital and higher capital expenditures. The Company expects capital expenditures to be approximately $160 million in 2020, compared with $141 million in 2019.

~~Table of Contents~~

THE STATEMENTS OF INCOME

Sales:


	2019		2018		$ Change		% Change
Net sales	$	3,789.9	$	3,580.8	$	209.1	5.8	%

Net sales increased in 2019 compared with 2018, primarily due to the benefit of acquisitions of $270 million and higher organic revenue of $11 million, partially offset by the unfavorable impact of foreign currency exchange rate changes of $72 million. The increase in organic revenue was driven primarily by improved demand in the Process Industries segment and the impact of positive pricing, partially offset by lower shipments in the Mobile Industries segment.

Gross Profit:


	2019			2018			$ Change		Change
Gross profit	$	1,141.8		$	1,040.1		$	101.7	9.8	%
Gross profit % to net sales	30.1		%	29.0		%	—		110	bps

Gross profit increased in 2019 compared with 2018, primarily due to the benefit of acquisitions of $86 million, favorable price/mix of $51 million and lower material and logistics costs (including tariffs) of $5 million. These factors were partially offset by the impact of lower volume of $19 million, the unfavorable impact of foreign currency exchange rate changes of $15 million and property losses of $8 million.

Selling, General and Administrative Expenses:


	2019			2018			$ Change		Change
Selling, general and administrative expenses	$	618.6		$	580.7		$	37.9	6.5	%
Selling, general and administrative expenses % to net sales	16.3		%	16.2		%	—		10	bps

2019 2018 $ Change Change
Selling, general and administrative expenses $ 618.6
$ 580.7
$ 37.9
6.5%
Selling, general and administrative expenses % to net sales 16.3 % 16.2 % —
10 bps

~~The increase in selling, general and administrative ("~~
SG~~&A")~~&A expenses in 2019 compared with 2018 was primarily due to SG&A expense from acquisitions of $45 million, partially offset by the favorable impact from changes in foreign currency exchange rates of $10 million.

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Interest Expense and Income:


	2019		2018		$ Change		% Change
Interest expense	$	(72.1)	$	(51.7)	$	(20.4)	39.5	%
Interest income	$	4.9	$	2.1	$	2.8	133.3	%

2019 2018 $ Change % Change
Interest expense $ (72.1 ) $ (51.7 ) $ (20.4 ) 39.5 %
Interest income 4.9
2.1
2.8
133.3 %

Interest expense increased in 2019 compared to 2018 primarily due to higher average outstanding debt during the year, which was primarily used to fund acquisitions. ~~Refer to~~ ~~Note 11 - Financing Arrangements~~ ~~in the Notes to the Consolidated Financial Statements for further discussion.~~

~~Table of Contents~~

Other Income (Expense):


	2019		2018		$ Change		% Change
Non-service pension and other postretirement income (expense)	$	10.2	$	(6.2)	$	16.4	(264.5	%)
Other income, net	$	13.0	$	9.4	$	3.6	38.3	%

2019 2018 $ Change % Change
Non-service pension and other postretirement income (expense) $ 10.2
$ (6.2 ) $ 16.4
(264.5 %)
Other income, net 13.0
9.4
3.6
38.3 %

The increase in non-service pension and other postretirement income (expense) for 2019 compared with 2018 was primarily due to the recognition of ~~net actuarial gains ("~~Mark-to-Market ~~Charges")~~Charges of $4.2 million in 2019 compared to actuarial losses of $22.1 million in 2018. The Mark-to-Market Charges were the result of higher than expected returns on plan assets and the impact of a reduction in contractual rates for Medicare Advantage plans, driven by a law change that repealed the tax on ~~Health Care Insurers~~health care insurers after 2020, partially offset by lower discount rates to measure the benefit obligations for pension and other postretirement plans. Actuarial losses in 2018 were partially offset by the benefit of curtailment gains of $10.2 million for two of the U.S. pension plans. ~~Refer to~~ ~~Note 14 - Retirement Benefit Plans~~ ~~and~~ ~~Note 15 - Other Postretirement Benefit Plans~~ ~~in the Notes to the Consolidated Financial Statements for more information.~~

Income Tax Expense:


	2019			2018			$ Change		Change
Income tax expense	$	97.7		$	102.6		$	(4.9)	(4.8	%)
Effective tax rate	20.7		%	25.1		%	—		(440)	bps

2019 2018 $ Change Change
Income tax expense $ 97.7
$ 102.6
$ (4.9 ) (4.8 %)
Effective tax rate 20.7 % 25.1 % —
(440 ) bps

The effective tax rate for 2019 was 20.7%, which was slightly favorable compared to the U.S. federal statutory rate of 21%, primarily due to the release of a foreign valuation allowance against certain foreign deferred tax assets and the remeasurement of deferred tax balances to reflect the reduced India statutory tax rate. These impacts were partially offset by earnings in foreign jurisdictions where the effective tax rate was higher than 21%, additional discrete accruals for uncertain tax positions,, U.S. state and local income taxes and withholding taxes recorded on planned dividend distributions.

The effective tax rate for 2018 was 25.1%, which was unfavorable compared to the U.S. federal statutory rate of 21%, primarily due to earnings in certain foreign jurisdictions where the effective tax rate was higher than 21%, unfavorable U.S. permanent differences and U.S. state and local income taxes. These impacts were partially offset by reductions to the one-time net charge related to the taxation of unremitted foreign earnings and the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate enacted ~~under~~with the Tax ~~Cuts~~Cut and Jobs Act of 2017 (“("U.S. Tax ~~Reform”~~Reform").

The change in the effective rate for 2019 compared with 2018 was a decrease of 4.4%. The decrease was primarily due to the release of certain valuation allowances and the remeasurement of deferred tax balances to reflect the reduced India statutory tax rate. These impacts were partially offset by additional discrete accruals for uncertain tax positions and withholding taxes recorded on planned dividend distributions.

~~Refer to~~ ~~Note 5 - Income Taxes~~ ~~in the Notes to the Consolidated Financial Statements for more information on the computation of the income tax expense in interim periods.~~

2331

Table of Contents

BUSINESS SEGMENTS

~~The Company~~
's reportable segments are business units that serve different industry sectors. While the segments often operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. Beginning in the fourth quarter of 2019, the main operating income metric used by management to measure the financial performance of each segment was earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Company made this change because recent acquisitions have resulted in an increased amount of purchase accounting amortization expense that affects comparability of results across periods and versus other companies. The primary measurement used by management to measure the financial performance of each segment prior to the fourth quarter of 2019 was earnings before interest and taxes ("EBIT"). Segment results have been revised for all periods presented to be consistent with new measure of segment performance. 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 2019 and 2018 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 items highlight the Company's acquisitions and divestitures completed in 2019 and ~~2018 by segment based on the customers and underlying markets served:~~2018:

•The Company acquired BEKA during the fourth quarter of 2019. The majority of the results for BEKA are reported in the Mobile Industries segment.

•The Company acquired Diamond Chain during the second quarter of 2019. The majority of the results for Diamond Chain are reported in the Process Industries segment.

•The Company acquired ABC Bearings Limited ("ABC Bearings"), Apiary Investments Holding Limited ("Cone Drive"), and Rollon S.p.A. ("Rollon") during the third quarter of 2018. Substantially all of the results for ABC Bearings are reported in the Mobile Industries segment. Results for Cone Drive and Rollon are reported in the Mobile Industries and Process Industries segments based on customers and underlying ~~market sectors~~markets served.

•The Company divested Groeneveld Information Technology Holding B.V. (the "ICT Business") on September 19, 2018. The Company acquired the ICT Business in ~~July~~ 2017 as a part of the Groeneveld Group ("Groeneveld") acquisition. The ICT Business is separate from the Groeneveld lubrication solutions business and was considered non-core to the operations. Results for the ICT Business were reported in the Mobile Industries segment.

~~Table of Contents~~

Mobile Industries Segment:


	2019			2018			$ Change		Change
Net sales	$	1,893.9		$	1,903.7		$	(9.8)	(0.5	%)
EBITDA	$	284.9		$	272.2		$	12.7	4.7	%
EBITDA margin	15.0		%	14.3		%	—		70	bps


	2019			2018			$ Change			Change
Net sales	$	1,893.9		$	1,903.7		$	(9.8	)	(0.5	%)
EBITDA	$	284.9		$	272.2		$	12.7		4.7	%
EBITDA margin	15.0		%	14.3		%	—			70	bps

	2019			2018			$ Change			% Change			2019		2018		$ Change		% Change
Net sales	$	1,893.9		$	1,903.7		$	(9.8	)	(0.5	%)	Net sales	$	1,893.9	$	1,903.7	$	(9.8)	(0.5	%)
Less: Acquisitions	82.5			—			82.5			NM		Less: Acquisitions	82.5		—		82.5		NM
Divestitures	(8.5		)	—			(8.5		)	NM		Divestitures	(8.5)		—		(8.5)		NM
Currency	(36.0		)	—			(36.0		)	NM		Currency	(36.0)		—		(36.0)		NM
Net sales, excluding the impact of acquisitions, divestitures and currency	$	1,855.9		$	1,903.7		$	(47.8	)	(2.5	%)	Net sales, excluding the impact of acquisitions, divestitures and currency	$	1,855.9	$	1,903.7	$	(47.8)	(2.5	%)

The Mobile Industries segment's net sales, excluding the effects of acquisitions, divestitures and foreign currency exchange rate changes, decreased $47.8 million or 2.5% in 2019 compared with 2018, reflecting lower shipments in

the off highway and heavy truck sectors, partially offset by growth in the aerospace and rail sectors, as well as higher pricing. EBITDA increased in 2019 by $12.7 million or 4.7% compared with 2018, primarily due to favorable price/mix, lower material and logistics costs, the net benefit of acquisitions, and lower SG&A expenses. These factors were partially offset by the impact of lower volume and related manufacturing utilization, as well as property losses and related expenses from flood damage at a Company facility in Tennessee and fire damage at a facility in China.

Full-year sales for the Mobile Industries segment are expected to be roughly flat to down 4% in 2020 compared with 2019. This reflects a decrease of organic revenue in the off-highway, heavy truck and automotive sectors, partially offset by the impact of acquisitions. EBITDA for the Mobile Industries segment is expected to decrease in 2020 compared with 2019 primarily due to lower shipments and higher manufacturing costs, partially offset by favorable price/mix, lower material and logistics costs and the impact of acquisitions.

Table of Contents

Process Industries Segment:


	2019			2018			$ Change		Change
Net sales	$	1,896.0		$	1,677.1		$	218.9	13.1	%
EBITDA	$	466.6		$	405.7		$	60.9	15.0	%
EBITDA margin	24.6		%	24.2		%	—		40	bps

	2019			2018			$ Change		% Change
Net sales	$	1,896.0		$	1,677.1		$	218.9	13.1	%
Less: Acquisitions	196.4			—			196.4		NM
Currency	(36.5)			—			(36.5)		NM
Net sales, excluding the impact of acquisitions and currency	$	1,736.1		$	1,677.1		$	59.0	3.5	%

2019 2018 $ Change Change
Net sales $ 1,896.0
$ 1,677.1
$ 218.9
13.1 %
EBITDA $ 466.6
$ 405.7
$ 60.9
15.0 %
EBITDA margin 24.6 % 24.2 % —
40 bps

2019 2018 $ Change % Change
Net sales $ 1,896.0
$ 1,677.1
$ 218.9
13.1 %
Less: Acquisitions 196.4
—
196.4
NM
Currency (36.5 ) —
(36.5 ) NM
Net sales, excluding the impact of acquisitions and currency $ 1,736.1
$ 1,677.1
$ 59.0
3.5 %

The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased $59.0 million or 3.5% in 2019 compared with 2018. The increase was primarily driven by growth in the renewable energy sector, as well as positive pricing. EBITDA increased $60.9 million or 15.0% in 2019 compared with 2018 primarily due to the net benefit of acquisitions, favorable price/mix and the impact of higher volume, partially offset by higher SG&A expenses.

Full-year sales for the Process Industries segment are expected to be flat to up 4% in 2020 compared with 2019. This reflects expected growth in the renewable energy and industrial services sectors, as well as the benefit of acquisitions, partially offset by a decline in revenue in the industrial distribution sector. EBITDA for the Process Industries segment is expected to increase in 2020 compared with 2019 primarily due to favorable price/mix, lower material costs and the impact of acquisitions, partially offset by higher manufacturing costs and SG&A expenses.

Corporate:


	2019			2018			$ Change		Change
Corporate expenses	$	56.2		$	62.0		$	(5.8)	(9.4	%)
Corporate expenses % to net sales	1.5		%	1.7		%	—		(20)	bps

2019 2018 $ Change Change
Corporate expenses $ 56.2
$ 62.0
$ (5.8 ) (9.4 %)
Corporate expenses % to net sales 1.5 % 1.7 % —
(20 ) bps

Corporate expenses decreased in 2019 compared with 2018 primarily due to higher transaction costs related to acquisitions in 2018.

Table of Contents

~~RESULTS OF OPERATIONS:~~

~~2018~~ ~~vs.~~ ~~2017~~

~~Overview:~~

2018 2017 $ Change % Change
Net sales $ 3,580.8
$ 3,003.8
$ 577.0
19.2 %
Net income 305.5
202.3
103.2
51.0 %
Income (loss) attributable to noncontrolling interest 2.7
(1.1 ) 3.8
(345.5 %)
Net income attributable to The Timken Company $ 302.8
$ 203.4
$ 99.4
48.9 %
Diluted earnings per share $ 3.86
$ 2.58
$ 1.28
49.6 %
Average number of diluted shares 78,337,481
78,911,149
—
(0.7 %)

The increase in net sales was primarily due to organic revenue growth driven by higher end-market demand, the benefit of acquisitions and the impact of higher pricing. The increase in net income in 2018 compared with 2017 was primarily due to improved performance across the business, driven by the impact of higher volume, favorable price/mix, the net benefit of acquisitions and improved manufacturing performance, as well as lower Mark-to-Market Charges due to the remeasurement of pension and other postretirement assets and obligations, restructuring charges, and interest expense. These factors were partially offset by the impact of higher SG&A expenses, higher income tax expenses and higher material and logistics costs (including tariffs).

~~THE STATEMENTS OF INCOME~~

~~Sales:~~

2018 2017 $ Change % Change
Net sales $ 3,580.8
$ 3,003.8
$ 577.0
19.2 %

Net sales increased in 2018 compared with 2017 primarily due to higher organic revenue of $396 million and the benefit of acquisitions of $177 million. The increase in organic revenue was driven by higher demand across all of the Company's end-market sectors, as well as the impact of higher pricing.

~~Gross Profit:~~

2018 2017 $ Change Change
Gross profit $ 1,040.1
$ 812.1
$ 228.0
28.1 %
Gross profit % to net sales 29.0 % 27.0 % —
200 bps

Gross profit increased in 2018 compared with 2017 primarily due to the impact of higher volume of $133 million, the favorable price/mix of $66 million, the benefit of acquisitions of $54 million, improved manufacturing performance of $12 million and lower restructuring costs of $6 million. These factors were partially offset by higher material and logistics costs of $44 million (including tariffs).

~~Selling, General and Administrative Expenses:~~

2018 2017 $ Change Change
Selling, general and administrative expenses $ 580.7
$ 508.3
$ 72.4
14.2 %
Selling, general and administrative expenses % to net sales 16.2 % 16.9 % —
(70 ) bps

The increased in SG&A expenses in 2018 compared with 2017 was primarily due to the impact of acquisitions of $39 million, higher compensation expense and other spending increases to support the higher sales levels.

~~Table of Contents~~

~~Interest Expense and Income:~~

2018 2017 $ Change % Change
Interest expense $ (51.7 ) $ (37.1 ) $ (14.6 ) 39.4 %
Interest income $ 2.1
$ 2.9
$ (0.8 ) (27.6 %)

~~Interest expense increased in 2018 compared to 2017 primarily due to an increase in outstanding debt to fund the acquisitions of Groeneveld, Rollon and Cone Drive.~~

~~Other Income (Expense):~~

2018 2017 $ Change % Change
Non-service pension and other postretirement expense (6.2 ) (15.0 ) 8.8
(58.7 %)
Other income (expense), net $ 9.4
$ 9.6
$ (0.2 ) (2.1 )%

The decrease in non-service pension and other postretirement expense for 2018 compared to 2017 was primarily due to lower Mark-to-Market Charges of $8.8 million. The Mark-to-Market Charges resulted from the remeasurement of pension and postretirement plan obligations and assets due to changes in actuarial assumptions, partially offset by the benefit of curtailments for two of the U.S. pension plans.

~~Income Tax Expense:~~

2018 2017 $ Change Change
Income tax expense $ 102.6
$ 57.6
$ 45.0
78.1 %
Effective tax rate 25.1 % 22.2 % —
290 bps

The effective tax rate for 2018 was 25.1%, which was unfavorable compared to the U.S. federal statutory rate of 21% primarily due to earnings in certain foreign jurisdictions where the effective rate was higher than 21%, unfavorable U.S. permanent differences and U.S. state and local income tax expenses. These impacts were partially offset by reductions to the one-time net charge related to the taxation of unremitted foreign earnings and the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate enacted under U.S. Tax Reform.

The effective tax rate for 2017 was 22%, which was favorable compared to the U.S. federal statutory rate of 35% primarily due to earnings in certain foreign jurisdictions where the effective tax rate was less than 35%, U.S. foreign tax credits realized on earnings distributed to the United States, and favorable U.S. permanent deductions and tax credits. The effective tax rate was also favorably impacted by the net reversal of accruals for prior year uncertain tax positions, a valuation allowance release and other discrete items.

These favorable impacts were partially offset by provisional amounts for the one-time net charge related to the taxation of unremitted foreign earnings and the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate enacted under U.S. Tax Reform. U.S. Tax Reform included a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. U.S. Tax Reform also requires companies to pay a one-time net charge related to the taxation of unremitted foreign earnings, created new taxes on certain foreign sourced earnings and allowed for immediate expensing of certain depreciable assets after September 27, 2017.

The change in the effective rate for 2018 compared with 2017 was an increase of 2.9%. The increase was primarily due to the net reversal of accruals for prior year uncertain tax positions in 2017. The effective tax rate also increased due to earnings in certain foreign jurisdictions where the effective rate was higher than 21%, unfavorable U.S. permanent differences and the release of valuations allowances in 2017. These impacts were partially offset by reductions to the one-time net charge related to the taxation of unremitted foreign earnings and the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate.

~~Table of Contents~~

~~BUSINESS SEGMENTS~~

The presentation of segment results below includes a reconciliation of the changes in net sales for each segment reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of acquisitions completed in 2018 and 2017 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 items highlight the Company~~'~~s acquisitions and divestitures completed in 2018 and 2017:~~

The Company acquired ABC Bearings, Cone Drive and Rollon during the third quarter of 2018. Substantially all of the results for ABC Bearings are reported in the Mobile Industries segment. Results for Cone Drive and Rollon are reported in the Mobile Industries and Process Industries segments based on customers and underlying market sectors served.

~~The Company acquired Groeneveld during the third quarter of 2017. Substantially all of the results for Groeneveld are reported in the Mobile Industries segment.~~

The Company acquired Torsion Control Products, Inc. ("Torsion Control Products") and PT Tech, Inc. ("PT Tech") during the second quarter of 2017. Results for Torsion Control Products and PT Tech are reported in the Mobile Industries and Process Industries segments based on customers and underlying market sectors served.

~~Mobile Industries Segment:~~

2018 2017 $ Change Change
Net sales $ 1,903.7
$ 1,640.0
$ 263.7
16.1 %
EBITDA $ 272.2
$ 209.9
$ 62.3
29.7 %
EBITDA margin 14.3 % 12.8 % —
150 bps

2018 2017 $ Change % Change
Net sales $ 1,903.7
$ 1,640.0
$ 263.7
16.1
Less: Acquisitions 98.6
—
98.6
NM
Currency (2.3 ) —
(2.3 ) NM
Net sales, excluding the impact of acquisitions and currency $ 1,807.4
$ 1,640.0
$ 167.4
10.2

The Mobile Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased in 2018 compared with 2017, reflecting organic growth across all market sectors, as well as higher pricing. EBITDA increased in 2018 compared with 2017 primarily due to higher volume of $53 million, the benefit of acquisitions of $15 million, favorable price/mix of $11 million, lower restructuring charges of $9 million and improved manufacturing performance of $5 million. These factors were offset partially by higher material and logistics costs of $24 million (including tariffs) and higher SG&A expenses of $8 million.

~~Table of Contents~~

~~Process Industries Segment:~~

2018 2017 $ Change Change
Net sales $ 1,677.1
$ 1,363.8
$ 313.3
23.0 %
EBITDA $ 405.7
$ 288.6
$ 117.1
40.6 %
EBITDA margin 24.2 % 21.2 % —
300 bps

2018 2017 $ Change % Change
Net sales $ 1,677.1
$ 1,363.8
$ 313.3
23.0 %
Less: Acquisitions 78.7
—
78.7
NM
Currency 6.0
—
6.0
NM
Net sales, excluding the impact of acquisitions and currency $ 1,592.4
$ 1,363.8
$ 228.6
16.8 %

The Process Industries segment's net sales, excluding the effects of acquisitions and foreign currency exchange rate changes, increased in 2018 compared with 2017 reflecting increased demand across all market sectors, as well as higher pricing. EBITDA increased in 2018 compared with 2017 primarily due to the impact of higher volume of $84 million, favorable price/mix of $51 million, improved manufacturing performance of $6 million and the benefit of acquisitions of $12 million (excluding inventory step-up expense of $8 million). These factors were partially offset by higher material and logistics costs of $20 million (including tariffs) and higher SG&A expenses of $16 million.

~~Corporate:~~

2018 2017 $ Change Change
Corporate expenses $ 62.0
$ 49.1
$ 12.9
26.3 %
Corporate expenses % to net sales 1.7 % 1.6 % —
10 bps

~~Corporate expense increased in 2018 compared with 2017 primarily due to the impact of acquisition-related costs of $10 million.~~

~~Table of Contents~~

THE BALANCE SHEETS

The following discussion is a comparison of the Consolidated Balance Sheets at December 31, ~~2019~~2020 and ~~2018.~~December 31, 2019.

Current Assets:


	December 31,
	2020		2019		$ Change		% Change
Cash and cash equivalents	$	320.3	$	209.5	$	110.8	52.9	%
Restricted cash	0.8		6.7		(5.9)		(88.1	%)
Accounts receivable, net	581.1		545.1		36.0		6.6	%
Unbilled receivables	110.9		129.2		(18.3)		(14.2	%)
Inventories, net	841.3		842.0		(0.7)		(0.1	%)
Deferred charges and prepaid expenses	39.9		36.7		3.2		8.7	%
Other current assets	106.0		105.4		0.6		0.6	%
Total current assets	$	2,000.3	$	1,874.6	$	125.7	6.7	%

December 31,



2019 2018 $ Change % Change
Cash and cash equivalents $ 209.5
$ 132.5
$ 77.0
58.1 %
Restricted cash 6.7
0.6
6.1
NM
Accounts receivable, net 545.1
546.6
(1.5 ) (0.3 %)
Unbilled receivables 129.2
$ 116.6
12.6
10.8 %
Inventories, net 842.0
835.7
6.3
0.8 %
Deferred charges and prepaid expenses 36.7
28.2
8.5
30.1 %
Other current assets 105.4
77.0
28.4
36.9 %
Total current assets $ 1,874.6
$ 1,737.2
$ 137.4
7.9 %

Refer to the "Cash Flows" section for discussion on the change in cash ~~and~~and cash equivalents. ~~Unbilled receivables~~Accounts receivable increased primarily due to ~~higher~~the timing of billings related to marine ~~production and related revenue recognized over time in~~contracts as of December ~~2019 of $110 million compared to $101 million in December 2018. The increase in other current assets was~~31, 2020. Unbilled receivables decreased primarily due to ~~the increase current income taxes receivable and in the fair value~~customer billings exceeding revenue recognized for marine contracts as of ~~derivative instruments outstanding.~~December 31, 2020.

Property, Plant and Equipment, Net:


	December 31,
	2020		2019		$ Change		% Change
Property, plant and equipment, net	$	1,035.6	$	989.2	$	46.4	4.7	%

December 31,



2019 2018 $ Change % Change
Property, plant and equipment, net $ 989.2
$ 912.1
$ 77.1
8.5 %

The increase in property, plant and equipment, net in ~~2019~~2020 was primarily due to capital expenditures of ~~$136.8~~$132 million, ~~and $51.1 million from businesses acquired in 2019, partially offset by depreciation of $103.3 million and~~ the net impact of foreign currency exchange rate changes of ~~$8.2~~$22 million and $11 million from a business acquired in 2020. The increase was partially offset by depreciation of $111 million in ~~2019.~~2020.

~~Operating Lease Assets~~

Other Assets:

December 31,
2019 December 31,
2018 $ Change % Change
Operating lease assets $ 114.1
$ —
$ 114.1
NM


	December 31,
	2020		2019		$ Change		% Change
Goodwill	$	1,047.6	$	993.7	$	53.9	5.4	%
Other intangible assets	741.4		758.5		(17.1)		(2.3	%)
Operating lease assets	118.2		114.1		4.1		3.6	%
Non-current pension assets	2.0		3.4		(1.4)		(41.2	%)
Non-current other postretirement benefit assets	—		36.6		(36.6)		(100.0	%)
Deferred income taxes	77.0		71.8		5.2		7.2	%
Other non-current assets	19.5		18.0		1.5		8.3	%
Total other assets	$	2,005.7	$	1,996.1	$	9.6	0.5	%

The increase in ~~operating lease assets~~goodwill in ~~2019~~2020 was primarily due to foreign currency exchange rate changes of $46 million. The decrease in other intangible assets was primarily due to amortization of $47 million in 2020, partially offset by the ~~adoption~~impact of foreign currency exchange rate changes of $36 million

The decrease in non-current postretirement benefit assets was due to the creation of a new ~~lease accounting standard.~~Voluntary Employee Beneficiary Association ("VEBA") trust in January 2020. The ~~increase also includes~~creation of a new $50 million VEBA trust to pay for certain active employee's medical benefits shifted the ~~reclassification~~balance from an overfunded asset position as of ~~$15.3 million~~December 31, 2019 to a liability position as of lease assets from non-current assets to operating lease assets related to purchase accounting adjustments from the ABC Bearings acquisition. These reclassified assets do not have corresponding lease liabilities.December 31, 2020. Refer toNote 116 - ~~Significant Accounting Policies~~Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for further discussion.

Table of Contents

~~Other Assets:~~

December 31,



2019 2018 $ Change % Change
Goodwill $ 993.7
$ 960.5
$ 33.2
3.5 %
Other intangible assets 758.5
733.2
25.3
3.5 %
Non-current pension assets 3.4
6.2
(2.8 ) (45.2 %)
Non-current other postretirement benefit assets 36.6
—
36.6
NM
Deferred income taxes 71.8
59.0
12.8
21.7 %
Other non-current assets 18.0
37.0
(19.0 ) (51.4 %)
Total other assets $ 1,882.0
$ 1,795.9
$ 86.1
4.8 %

The increase in goodwill in 2019 was primarily due to acquisitions in 2019. The increase in other intangible assets was primarily due to the impact of acquisitions of $87.1 million in 2019, partially offset by amortization of $57.3 million and the impact of foreign currency exchange rate changes of $8.0 million in 2019. During the third quarter of 2019, the Company made changes to the medical plan offerings for certain Company postretirement benefit plans, effective January 1, 2020, which will impact the benefits provided to certain retirees. The plan amendment triggered a remeasurement, which resulted in a reduction in the postretirement benefit obligation with a corresponding amount recorded to accumulated other comprehensive loss. As a result of the plan amendment, one of the Company's postretirement benefit plans became overfunded. See ~~Note 15 - Other Postretirement Benefit Plans~~ for further discussion. The increase in deferred income taxes was primarily due to the reversal of foreign valuation allowances in the fourth quarter of 2019, partially offset by a reduction in deferred income taxes related to the plan amendment of the Company's postretirement benefit plans. See ~~Note 5 - Income Taxes~~ for further discussion. The decrease in other non-current assets was primarily due to the reclassification of $15.3 million of lease assets from non-current assets to operating lease assets related to the ABC Bearings acquisition.

Current Liabilities:

December 31,



2019 2018 $ Change % Change
Short-term debt $ 17.3
$ 33.6
$ (16.3 ) (48.5 %)
Current portion of long-term debt 64.7
9.4
55.3
NM
Accounts payable 301.7
273.2
28.5
10.4 %
Salaries, wages and benefits 134.5
174.9
(40.4 ) (23.1 %)
Income taxes payable 17.8
23.5
(5.7 ) (24.3 %)
Other current liabilities 172.3
171.0
1.3
0.8 %
Total current liabilities $ 708.3
$ 685.6
$ 22.7
3.3 %


	December 31,
	2020		2019		$ Change		% Change
Short-term debt	$	119.8	$	17.3	$	102.5	NM
Current portion of long-term debt	10.9		64.7		(53.8)		(83.2	%)
Short-term operating lease liabilities	27.2		28.3		(1.1)		(3.9	%)
Accounts payable	351.4		301.7		49.7		16.5	%
Salaries, wages and benefits	135.7		134.5		1.2		0.9	%
Income taxes payable	16.1		17.8		(1.7)		(9.6	%)

Other current liabilities	186.9		172.3		14.6		8.5	%

Total current liabilities	$	848.0	$	736.6	$	111.4	15.1	%

The ~~decrease~~increase in short-term debt was primarily due to borrowings under the ~~decrease~~$100 million Amended and Restated Asset Securitization Agreement (the "Accounts Receivable Facility") being now classified as short-term due to its upcoming maturity in November of 2021, as well as an increase in borrowings under the variable-rate lines of credit for the Company's foreign subsidiaries. The ~~increase~~decrease in the current portion of long-term debt was primarily due to the ~~2020 Term Loan (as defined below) being reclassified to~~payment of $47 million on the ~~current portion of long-term debt as it matures~~Company's €100 million term loan that matured on September 18, ~~2020. Refer to~~ ~~Note 11 - Financing Arrangements~~ ~~to the Notes to the Consolidated Financial Statements for additional information.~~2020 (the "2020 Term Loan").

The increase in accounts payable was primarily due to efforts by the Company to ~~extend supplier payment terms~~increase days payable outstanding in ~~2019, as well as~~2020, partially offset by the impact of ~~acquisitions.~~ foreign currency exchange rate changes of $11 million.

The ~~decrease~~increase in ~~accrued salaries, wages and benefits~~other current liabilities was primarily due to ~~timing as~~an increase in the ~~payments~~current derivative liability of $6 million. Refer to Note 19 - Derivative Instruments in the Notes to the Consolidated Financial Statements for ~~2018 performance-based compensation exceeded accruals for 2019 performance-based compensation expense.~~additional information. In addition, ~~the current pension liability decreased due~~accrued restructuring increased $5 million as compared to the ~~payout of deferred compensation to a former executive of the Company.~~prior year end. Refer to Note 14 - ~~Retirement Benefit Plans~~ Impairment and Restructuring Chargestoin the Notes to the Consolidated Financial Statements for additional information.

Table of Contents

Non-Current Liabilities:


	December 31,
	2020		2019		$ Change		% Change
Long-term debt	$	1,433.9	$	1,648.1	$	(214.2)	(13.0	%)
Accrued pension benefits	163.0		165.1		(2.1)		(1.3	%)
Accrued postretirement benefits	41.3		31.8		9.5		29.9	%
Long-term operating lease liabilities	75.5		71.3		4.2		5.9	%
Deferred income taxes	148.7		168.2		(19.5)		(11.6	%)
Other non-current liabilities	106.0		84.0		22.0		26.2	%
Total non-current liabilities	$	1,968.4	$	2,168.5	$	(200.1)	(9.2	%)

December 31,



2019 2018 $ Change % Change
Long-term debt $ 1,648.1
$ 1,638.6
$ 9.5
0.6 %
Accrued pension benefits 165.1
161.3
3.8
2.4 %
Accrued postretirement benefits 31.8
108.7
(76.9 ) (70.7 %)
Long-term operating lease liabilities 71.3
—
71.3
NM
Deferred income taxes 168.2
138.0
30.2
21.9 %
Other non-current liabilities 84.0
70.3
13.7
19.5 %
Total non-current liabilities $ 2,168.5
$ 2,116.9
$ 51.6
2.4 %

The decrease in long-term debt was due to repayment of debt during the year, including the repayment of the 2020 Term Loan that matured in September of 2020 and reduced borrowings under the Fourth Amended and Restated Credit Agreement (the "Senior Credit Facility"), as well as the reclassification of borrowings under the Accounts Receivable facility to short-term as of December 31, 2020.

The ~~decrease~~increase in accrued postretirement benefits was primarily due to ~~changes to~~ the ~~medical plan offerings for certain~~creation of the new VEBA trust. In January 2020, the Company transferred $50 million from an existing VEBA trust under the Company's postretirement benefit plans ~~effective January 1, 2020, which will impact~~to fund the ~~benefits provided~~new VEBA trust to pay for certain ~~retirees.~~active employees' medical benefits. The plan amendment triggered a remeasurement, which resulted in a $92.8 million reduction in the postretirement benefit obligation and a corresponding amount of income recorded to accumulated other comprehensive loss. This reduction was partially offset by the reclassificationcreation of the new VEBA trust shifted the balance from overfunded ~~status~~as of ~~one~~December 31, 2019 to a liability position as of ~~the Company's postretirement benefit plans as a result of the above-described plan amendment.~~December 31, 2020. Refer to Note 1516 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for further discussion.

The increase in ~~long-term operating lease~~other non-current liabilities was primarily due to $8.5 million of payroll taxes that are deferred for more than 12 months under the ~~adoption of the new lease accounting standard. Refer to~~ ~~Note 1 - Significant Accounting Policies~~ ~~in the Notes~~Coronavirus Aid, Relief, and Economic Security Act, as well as an increase to the ~~Consolidated Financial Statements for further discussion.~~uncertain tax positions of approximately $5 million.

Shareholders’ Equity:


	December 31,
	2020		2019		$ Change		% Change
Common stock	$	781.4	$	990.7	$	(209.3)	(21.1	%)
Retained earnings	1,339.5		1,907.4		(567.9)		(29.8	%)
Accumulated other comprehensive income (loss)	41.3		(50.1)		91.4		(182.4	%)
Treasury shares	(9.3)		(979.8)		970.5		99.1	%
Noncontrolling interest	72.3		86.6		(14.3)		(16.5	%)
Total equity	$	2,225.2	$	1,954.8	$	270.4	13.8	%

The ~~increase~~decrease in ~~the deferred income taxes was~~common stock is primarily due to the ~~decrease~~retirement of shares, resulting in ~~accrued postretirement benefits discussed above~~a $12.4 million reduction to stated capital and ~~additional deferred tax liabilities from recent acquisitions. Refer~~a $213.3 million reduction to ~~Note 5 - Income Taxes~~ ~~in the Notes to the Consolidated Financial Statements for further discussion.~~

~~Shareholders’ Equity:~~

December 31,



2019 2018 $ Change % Change
Common stock $ 990.7
$ 1,005.0
$ (14.3 ) (1.4 %)
Earnings invested in the business 1,907.4
1,630.2
277.2
17.0 %
Accumulated other comprehensive loss (50.1 ) (95.3 ) 45.2
(47.4 %)
Treasury shares (979.8 ) (960.3 ) (19.5 ) (2.0 %)
Noncontrolling interest 86.6
63.1
23.5
37.2 %
Total equity $ 1,954.8
$ 1,642.7
$ 312.1
19.0 %

other paid-in capital, partially offset by stock option exercises of $16.1 million. Earnings invested in the business in ~~2019 increased~~2020 decreased primarily due to the retirement of treasury shares of $764.9 million and dividends declared of $87.0 million, partially offset by net income attributable to the Company of ~~$362.1 million, partially offset by dividends declared of $84.9~~$284.5 million.

The ~~decrease~~increase in accumulated other comprehensive ~~loss~~income was primarily due to a reduction in the postretirement benefit obligation due to a plan amendment that resulted in a corresponding after-tax reduction in accumulated other comprehensive loss of $70.5 million ($92.8 million pretax), partially offset by current year foreign currency adjustments of ~~$19.9~~$92.7 million. See "Other Disclosures - Foreign Currency" for further discussion regarding the impact of foreign currency translation.

The decrease in treasury shares was primarily due to the ~~Company's purchase~~retirement of ~~1.4~~23.0 million ~~of its common~~ shares for ~~$62.7~~$990.6 million ~~partially offset by $43.2~~and $29.2 million of shares issued, net of shares surrendered, for stock compensation plans for ~~2019.~~2020, partially offset by the purchase of 1.1 million of its common shares for $49.3 million. The ~~increase~~decrease in noncontrolling interest was primarily due to a ~~lower income tax rate and higher income of $10 million at~~dividend declared by Timken India Limited ~~("Timken India"), and~~that resulted in payment to the ~~2019 acquisition~~noncontrolling interest parties in the third quarter of ~~the joint venture partner's interest in Timken-XEMC (Hunan) Bearing Co., Ltd, which had losses of $9 million in 2018 and are now included in total Company retained earnings as of December 31, 2019.~~2020.

Table of Contents

CASH FLOWS


	2020		2019		$ Change
Net cash provided by operating activities	$	577.6	$	550.1	$	27.5
Net cash used in investing activities	(153.5)		(364.9)		211.4
Net cash (used in) provided by financing activities	(331.1)		(100.7)		(230.4)
Effect of exchange rate changes on cash	11.9		(1.4)		13.3
Increase in cash and cash equivalents	$	104.9	$	83.1	$	21.8

2019 2018 $ Change
Net cash provided by operating activities $ 550.1
$ 332.5
$ 217.6
Net cash used in investing activities (364.9 ) (865.2 ) 500.3
Net cash (used) provided by financing activities (100.7 ) 553.1
(653.8 )
Effect of exchange rate changes on cash (1.4 ) (12.7 ) 11.3
Increase (decrease) in cash and cash equivalents $ 83.1
$ 7.7
$ 75.4

Operating Activities:

The increase in net cash provided by operating activities in ~~2019~~2020 compared with ~~2018~~2019 was primarily due to a favorable impact of working capital items of ~~$218.6~~$47.6 million, the favorable impact of income taxes of $8.4 million, the favorable impact of pension and other postretirement benefit expense and contributions of $38.1 million, partially offset by lower net income of $82.3 million. Refer to the table below for additional detail of the impact of each line on net cash provided by operating activities.

The following chart displays the impact of working capital items on cash during ~~2019~~2020 and ~~2018,~~2019, respectively:

2019 2018 $ Change
Cash (used) provided:
Accounts receivable $ 24.1
$ (66.4 ) $ 90.5
Unbilled receivables (12.6 ) (21.8 ) 9.2
Inventories 50.7
(87.1 ) 137.8
Trade accounts payable 19.9
(20.2 ) 40.1
Other accrued expenses (26.8 ) 32.2
(59.0 )
Cash used in working capital items $ 55.3
$ (163.3 ) $ 218.6


	2020		2019		$ Change
Cash provided (used):
Accounts receivable	$	(20.7)	$	24.1	$	(44.8)
Unbilled receivables	18.5		(12.6)		31.1
Inventories	27.4		50.7		(23.3)
Trade accounts payable	22.6		19.9		2.7
Other accrued expenses	55.1		(26.8)		81.9
Cash provided by working capital items	$	102.9	$	55.3	$	47.6

The following table displays the impact of income taxes on cash during ~~2019~~2020 and ~~2018,~~2019, respectively:


	2020		2019		$ Change
Accrued income tax expense	$	103.9	$	97.7	$	6.2
Income tax payments	(119.3)		(118.6)		(0.7)
Other miscellaneous	0.7		(2.2)		2.9
Change in income taxes	$	(14.7)	$	(23.1)	$	8.4

2019 2018 $ Change
Accrued income tax expense $ 97.7
$ 102.6
$ (4.9 )
Income tax payments (118.6 ) (121.3 ) 2.7
Other miscellaneous (2.2 ) (0.8 ) (1.4 )
Change in income taxes $ (23.1 ) $ (19.5 ) $ (3.6 )

Investing Activities:

The decrease in net cash used in investing activities in ~~2019~~2020 compared with ~~2018~~2019 was primarily due to a ~~$538.9~~$202.5 million decrease in cash used for acquisitions ~~partially offset by~~and a ~~$28.0~~$19.0 million~~increase~~ decrease in cash used in capital expenditures, ~~and~~partially offset by a ~~$14~~$5.2 million ~~decrease~~increase in cash ~~proceeds from the divestiture of the ICT Business completed~~used for investments in ~~2018.~~short-term marketable securities.

Financing Activities:

The decrease in net cash used by financing activities in ~~2019~~2020 compared with ~~2018~~2019 was primarily due to a decrease in net borrowings of ~~$695.7 million. Net borrowings were higher in 2018~~$234.6 million due to ~~the funding of the Cone Drive and Rollon acquisitions. The decrease was partially offset by~~ an increase of debt payments in ~~cash used for share repurchases of $35.8 million and an increase in proceeds from stock option activity of $14.7 million during 2019 compared with 2018.~~

2020.

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LIQUIDITY AND CAPITAL RESOURCES

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

Net Debt:


	December 31,
	2020		2019
Short-term debt	$	119.8	$	17.3
Current portion of long-term debt	10.9		64.7
Long-term debt	1,433.9		1,648.1
Total debt	$	1,564.6	$	1,730.1
Less: Cash and cash equivalents	320.3		209.5
Net debt	$	1,244.3	$	1,520.6

December 31,

2019 2018
Short-term debt $ 17.3
$ 33.6
Current portion of long-term debt 64.7
9.4
Long-term debt 1,648.1
1,638.6
Total debt $ 1,730.1
$ 1,681.6
Less: Cash and cash equivalents 209.5
132.5
Net debt $ 1,520.6
$ 1,549.1

Ratio of Net Debt to Capital:


	December 31,
	2020			2019
Net debt	$	1,244.3		$	1,520.6
Total equity	2,225.2			1,954.8
Capital (net debt + total equity)	$	3,469.5		$	3,475.4
Ratio of net debt to capital	35.9		%	43.8		%

December 31,

2019 2018
Net debt $ 1,520.6
$ 1,549.1
Total equity 1,954.8
1,642.7
Capital (net debt + total equity) $ 3,475.4
$ 3,191.8
Ratio of net debt to capital 43.8 % 48.5 %

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.

The Company has a $100 million Amended and Restated Asset Securitization Agreement (the "Accounts Receivable Facility"), which matures on November 30, 2021. The Accounts Receivable Facility is subject to certain borrowing base limitations and is secured by certain domestic accounts receivable of the Company. Borrowings under the Accounts Receivable Facility were not reduced by any such borrowing base limitations atAt December 31, ~~2019. As of December 31, 2019,~~2020, the Company had ~~$100.0~~strong liquidity with $320.3 million ~~in outstanding borrowings, which reduced the availability under the facility to zero. The interest rate~~of cash and cash equivalents on the ~~Accounts Receivable Facility is variable and was 2.77% as of December 31, 2019, which reflects the prevailing commercial paper rate plus facility fees.~~

~~On June 25, 2019, the Company entered into a Fourth Amended and Restated Credit Agreement (the "Senior Credit Facility"), which is a $650.0~~Consolidated Balance Sheet. $287.4 million unsecured revolving credit facility that matures on June 25, 2024. The Senior Credit Facility amends and restates the Company's previous credit agreement, dated as of June 19, 2015. At December 31, 2019, the Senior Credit Facility had outstanding borrowings of $132.7 million, which reduced the availability to $517.3 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 (increasing for a limited time period following the qualifying acquisitions). As of December 31, 2019, the Company’s consolidated leverage ratio was 2.40 to 1.0. The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility is 3.5 to 1.0. As of December 31, 2019, the Company’s consolidated interest coverage ratio was 10.53 to 1.0.

The interest rate under the Senior Credit Facility is variable with a spread based on the Company’s credit rating. The average rate on outstanding U.S. dollar borrowings was 2.85% and the average rate on outstanding Euro borrowings was 1.00% as of December 31, 2019. In addition, the Company pays a facility fee based on the Company's credit rating multiplied by the aggregate commitments of all of the lenders under the Senior Credit Facility. As of December 31, 2019, the Company’s credit ratings were investment grade with Standard and Poor's (BBB), Moody's (Baa3) and Fitch (BBB).

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Other sources of liquidity include short-term lines of credit for certain of the Company’s foreign subsidiaries, which provide for borrowings up to approximately $268.9 million. At December 31, 2019, the Company had borrowings outstanding of $15.5 million and bank guarantees of $0.5 million, which reduced the aggregate availability under these facilities to $252.9 million.

On September 6, 2018, the Company issued $400 million aggregate principal amount of fixed-rate 4.50% senior unsecured notes that mature on December 15, 2028 (the "2028 Notes"). 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 2028 Notes and the 2023 Term Loan were used to fund the acquisitions of Cone Drive and Rollon, which closed on September 1, 2018 and September 18, 2018, respectively. On July 12, 2019, the Company amended the terms of the 2023 Term Loan to, among other things, align covenants and other terms with the Company's Senior Credit Facility. Refer to o~~Note 11 - Financing Arrangements~~ ~~to the Notes to the Consolidated Financial Statements for additional information.~~

On September 7, 2017, the Company issued €150 million aggregate principal amount of senior unsecured notes with a fixed interest rate of 2.02% that mature on September 7, 2027 in the aggregate principal amount of €150 million. On September 18, 2017, the Company entered into a variable-rate €100 million term loan that matures on September 18, 2020 (the "2020 Term Loan"). During the second quarter of 2019, the Company repaid approximately €51.5 million under the 2020 Term Loan, reducing the principal balance to €48.5 million as of December 31, 2019. The 2020 Term Loan was classified as a current portion of long-term debt as of December 31, 2019. The Company expects to service interest and repay the remaining principal balance of the 2020 Term Loan with cash held or generated outside the U.S.

~~At December 31, 2019, $207.2 million of the Company's $209.5~~f its $320.3 million of cash and cash equivalents resided in jurisdictions outside the U.S. ~~It is the Company's practice to use available cash in the U.S. to pay down its Senior Credit Facility or Accounts Receivable Facility in order to minimize total interest expense.~~ 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 U.S. 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 December 31, 2020, the Senior Credit Facility had outstanding borrowings of $9.7 million, which reduced the availability to $640.3 million. The ~~Company expects~~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 December 31, 2020, the Company's consolidated leverage ratio was 1.92 to 1.0 (based on the net debt construct discussed further below). The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility is 3.0 to 1.0. As of December 31, 2020, the Company's consolidated interest coverage ratio was 10.14 to 1.0.

On May 27, 2020, both the Senior Credit Facility and the $350 million variable-rate term loan that ~~any~~matures on September 11, 2023 (the "2023 Term Loan") were amended to, among other things, effectively increase the limit with respect to the consolidated leverage ratio. As amended, the consolidated leverage ratio under both the Senior Credit Facility and the 2023 Term Loan is calculated using a net debt construct, netting unrestricted cash ~~requirements~~ in excess of ~~cash on hand and cash generated from operating activities~~$25 million, instead of total debt. This change to the consolidated leverage ratio calculation will be ~~met~~effective through June 30, 2021, after which the calculation of the consolidated leverage ratio under the Senior Credit Facility and the 2023 Term Loan will revert back to a total debt construct.

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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 2.01% and the average rate on outstanding Euro borrowings was 1.48% as of December 31, 2020. 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 ~~committed funds available~~aggregate commitments of all of the lenders under ~~its~~the Senior Credit Facility. The Company currently carries investment-grade credit ratings with Moody's (Baa3), Fitch (BBB-) and Standard and Poor's (BBB-).

The Company has a $100 million Accounts Receivable Facility, which matures on November 30, 2021. The Accounts Receivable Facility is subject to certain borrowing base limitations and ~~Senior Credit Facility. Management believes it has sufficient liquidity to meet its obligations through the term~~is secured by certain domestic trade accounts receivable of the ~~Senior Credit Facility.~~Company. As of December 31, 2020, the Company had $58.0 million outstanding borrowings under the Accounts Receivable Facility. Certain borrowing base limitations reduced the availability under the Accounts Receivable Facility to $83.9 million at December 31, 2020. The Company currently intends to renew or replace the Accounts Receivable Facility prior to its maturity.

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 $277.4 million. At December 31, 2020, the Company had borrowings outstanding of $61.8 million and bank guarantees of $0.7 million, which reduced the aggregate availability under these facilities to approximately $214.9 million.

At December 31, ~~2019,~~2020, the Company was in full compliance with all applicable covenants on its outstanding debt, and ~~the Company~~ expects to remain in full compliance with its debt covenants. However, the Company may need to limit its borrowings under the Senior Credit Facility or other facilities from time to time in order to remain in compliance. As of December 31, 2019, the Company could have borrowed the full amounts available under the Senior Credit Facility and Accounts Receivable Facility and still would have been in compliance with its debt covenants.

The Company expects to generate cash from operating ~~cash~~activities of approximately ~~$585~~$450 million in ~~2020, an increase~~2021, a decrease from ~~2019~~2020 of approximately ~~$35~~$128 million, or 6%22%, as the Company anticipates ~~lower pension and medical benefit plan payments, partially offset by less cash generated from~~ working capital ~~and higher capital expenditures.~~to be a use of cash in 2021 versus a source of cash in 2020. The Company expects capital expenditures to be approximately ~~$160~~$150 million in ~~2020,~~2021, compared with ~~$141~~$122 million in ~~2019.~~2020.

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FUTURE CONTRACTUAL PAYMENTS

~~CONTRACTUAL OBLIGATIONS~~

The Company’s contractual debt obligations and contractual commitments outstanding as of December 31, ~~2019~~2020 were as follows:

Payments due by period:


Future Contractual Payments	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Interest payments	$	351.8	$	52.3	$	103.2	$	88.6	$	107.7
Long-term debt, including current portion	1,444.8		10.9		20.4		664.5		749.0
Short-term debt	119.8		119.8		—		—		—

Operating leases	113.5		30.2		39.5		19.1		24.7
Retirement benefits	152.5		21.3		31.4		29.8		70.0
Total	$	2,295.9	$	264.7	$	234.0	$	821.1	$	976.1

Contractual Obligations Total
Less than
1 Year
1-3 Years 3-5 Years
More than
5 Years
Interest payments $ 380.6
$ 61.8
$ 117.9
$ 94.0
$ 106.9
Long-term debt, including current portion 1,712.8
64.7
120.8
797.3
730.0
Short-term debt 17.3
17.3
—
—
—
Purchase commitments 50.5
44.6
4.9
1.0
—
Operating leases 110.4
31.7
39.1
19.6
20.0
Retirement benefits 165.8
14.4
38.7
27.2
85.5
Total $ 2,437.4
$ 234.5
$ 321.4
$ 939.1
$ 942.4

The interest payments beyond five years primarily relate to long-term fixed-rate notes. Refer to Note 11 - Financing Arrangements in the Notes to the Consolidated Financial Statements for additional information.

Purchase commitments are defined as an agreement to purchase goods or services that are enforceable and legally binding on the Company. Included in purchase commitments above are certain obligations related to take-or-pay contracts, capital commitments, service agreements and utilities. Many of these commitments relate to take-or-pay contracts in which the Company guarantees payment to ensure availability of products or services. These purchase commitments do not represent the entire anticipated purchases in the future, but represent only those items that the Company is contractually obligated to purchase. The majority of the products and services purchased by the Company are purchased as needed, with no commitment.

In order to maintain minimum funding requirements, the Company is required to make contributions to the trusts established for its defined benefit pension plans and other postretirement benefit plans. The table above shows the expected future minimum cash contributions to the trusts for the funded plans as well as estimated future benefit payments to participants for the unfunded plans. Those minimum funding requirements and estimated benefit payments can vary significantly. The amounts in the table above are based on actuarial estimates using current assumptions for, among other things, discount rates, expected return on assets and health care cost trend rates. During ~~2019,~~2020, the Company made cash contributions and payments of approximately ~~$35.4~~$17.9 million to its global defined benefit pension plans and ~~$8.0~~$2.7 million to its other postretirement benefit plans. Refer to Note 1415 - Retirement Benefit Plans and Note 1516 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for additional information.

Refer to Note 5 - Income Taxes and Note 12 - Contingencies in the Notes to the Consolidated Financial Statements for additional information regarding the Company's exposure for certain tax and legal matters.

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 December 31, ~~2019,~~2020, outstanding letters of credit ~~totaled $42.4~~totaled $41.5 million, primarily having expiration dates within 12 months.

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NEW ACCOUNTING GUIDANCE ISSUED AND NOT YET ADOPTED

~~New Accounting Guidance Issued and Not Yet Adopted~~

Information required for this Item is incorporated by reference to Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. 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 following paragraphs include a discussion of some critical areas that require a higher degree of judgment, estimates and complexity.

~~Revenue recognition:~~

A contract exists when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

~~Revenue is recognized when performance obligations under the terms of a contract with a customer of the Company are satisfied. Refer to~~ ~~Note 1 - Significant Accounting Policies~~ ~~in the Notes to the Consolidated Financial Statements for further discussion around the Company's revenue policy.~~

Inventory:

Inventories are valued at the lower of cost or market, with approximately ~~59%~~61% valued by the first-in, first-out ("FIFO") method and the remaining ~~41%~~39% valued by the last-in, first-out ("LIFO") method. The majority of the Company’s domestic inventories are valued by the LIFO method, while all of the Company’s international inventories are valued by the FIFO method. 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 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 Company recognized a decrease in its LIFO reserve of ~~$5.0~~$3.2 million during ~~2019~~2020 compared to an increase in its LIFO reserve of ~~$6.2~~$5.0 million during ~~2018.~~2019.

Goodwill and Indefinite-lived Intangible Assets:

The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually, performing its annual impairment test as of October 1st. Furthermore, goodwill and indefinite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Each interim period, the Company assesses whether or not an indicator of impairment is present that would necessitate a goodwill and indefinite-lived intangible assets impairment analysis be performed in an interim period other than during the fourth quarter.

The Company reviews goodwill for impairment at the reporting unit level. The Mobile Industries segment has four reporting units and the Process Industries segment has two reporting units. The reporting units within the Mobile Industries segment are Mobile Industries, Lubrication Systems, Aerospace Drive Systems and Aerospace Bearing Inspection. The reporting units within the Process Industries segment are Process Industries and Industrial Services.

Accounting guidance permits an entity to first assess qualitative factors to determine whether additional indefinite-lived intangible asset impairment testing, including goodwill, is required. ~~The Company chose to utilize this~~No qualitative assessment in the annual indefinite-lived asset impairment testing, including the goodwill of the Mobile Industries, Aerospace Bearing Inspection, Process Industries, Industrial Services and Lubrication Systems reporting units and other material indefinite-lived intangible trade name assets in the fourth quarter of 2019. Based on this qualitative assessment, the Company concludedfactors indicated that it was more likely than not that the fair ~~values~~value of ~~these~~ reporting units ~~and trade names exceeded~~were less than their respective carrying ~~values.~~

~~Table~~values, but due to the length of ~~Contents~~

~~The~~time since the previous quantitative tests, the Company chose to perform a quantitative ~~goodwill impairment~~ analysis ~~in the annual goodwill impairment testing~~for all reporting units as of ~~the Aerospace Drive Systems reporting unit having a goodwill balance of $1.8 million.~~ October 1, 2020.

The Company prepares its quantitative goodwill impairment analysis ~~compares~~by comparing the ~~carrying amount of the reporting unit to its estimated fair value. To the extent that the carrying value of the reporting unit exceeds its~~ estimated fair value ~~impairment exists~~of each reporting unit, using an income approach (a discounted cash flow model), as well as a market approach, with its carrying value. The income approach and ~~must be recognized. The quantitative analysis performed~~market approach are weighted in ~~2019 resulted in an estimated~~arriving at fair value ~~that was less than~~based on the ~~carrying value, such that full impairment~~relative merits of the ~~$1.8 million goodwill balance~~methods used and the quantity and quality of collected data to arrive at the indicated fair value.

The income approach requires several assumptions including future sales growth, EBITDA margins and capital expenditures. The Company’s reporting units each provide their forecast of results for the next five years. These forecasts form the basis for the information used in the ~~Aerospace Drive Systems~~discounted cash flow model. The discounted cash flow model also requires the use of a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the five years forecast by the reporting ~~unit was recorded during~~units), as well as projections of future operating margins (for the period beyond the forecast five years). During the fourth ~~quarter. Further analysis~~quarter of 2020, the ~~undiscounted cash flows~~Company used discount rates for its individual reporting units in the range of 10.0% to 11.0% and a terminal revenue growth rate in the range of 2.0% to 3.0%.

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The market approach requires several assumptions including sales and EBITDA multiples for comparable companies that operate in the same markets as the Company’s reporting ~~unit determined there was no impairment~~units. During the fourth quarter of ~~long-lived assets held by~~2020, the ~~Aerospace Drive Systems~~Company used sales multiples in the range of 1.05 to 2.00 and EBITDA multiples in the range of 7.0 to 9.5 for its reporting ~~unit.~~units.

As of December 31, ~~2019,~~2020, the Company had ~~$993.7~~$1,047.6 million of goodwill on its Consolidated Balance Sheet, of which ~~$361.3~~$384.6 million was attributable to the Mobile Industries segment and ~~$632.4~~$663.0 million was attributable to the Process Industries segment. See Note 9 - Goodwill and Other ~~Intangibles~~Intangible Assets in the Notes to the Consolidated Financial Statements for movements in the carrying amount of goodwill by segment.

The Company notes that reporting units with goodwill and indefinite-lived intangibles primarily due to recent acquisitions are likely to have fair values that are closer to the current carrying value, due to the shorter period of time for fair value from the recent acquisition to have changed. The Lubrication reporting unit has a carrying value of $436.9 million and the fair value as of October 1, 2020 exceeded that amount by 10%. The Lubrication reporting unit primarily consists of businesses acquired in 2017 and 2019, and as a result, it is consistent with expectations that the fair value is closer to the carrying value.

In addition, there was one indefinite-lived intangible with a carrying value totaling $17.5 million in which the fair value exceeded the carrying value of the assets by 10% or less. This is consistent with management's expectations, as the acquisition that generated this asset was completed in the second half of 2019.

Based on the October 1, 2020 quantitative assessment, all other reporting units and indefinite-lived intangibles have fair value that exceeds the current carrying value by more than 10%.

Management believes the future sales growth and EBITDA margins in the long range plan and the discount rate used in the valuations requires significant use of judgment. If any of our reporting units do not meet our long range plan estimates or our discount rate increase significantly, we could be required to perform an interim goodwill impairment analysis or charges in future periods. The assumptions used for the reporting units and indefinite-lived intangibles with fair values exceeding carrying values of 10% or less are more sensitive to future performance and will be monitored accordingly.

Income taxes:

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, valuation allowances against deferred tax assets, and accruals for uncertain tax positions.

The Company, which is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions, accounts for income taxes in accordance with Accounting Standards Codification ("ASC") Topic 740, “Income Taxes.” Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Deferred tax assets relate primarily totax loss carryforwards in foreign jurisdictions, as well as pension and postretirement benefit obligations in the U.S., which the Company believes are more likely than not to result in future tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the entity recording the net deferred tax asset is considered along with any other pertinent information. The Company recorded $0.7 million in 2020 and $44.5 million in 2019 ~~and $12.6 million in 2017~~ of tax benefits related to the reversal of valuation allowances. ~~There were no valuation allowance reversals in 2018~~. Refer to Note 5 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion on the valuation allowance reversals.

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In the ordinary course of the Company’s business, there are many transactions and calculations where the ultimate income tax determination is uncertain. The Company is regularly under audit by tax authorities. Accruals for uncertain tax positions are provided for in accordance with the requirements of ASC Topic 740. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense. In ~~2019,~~2020, the Company recorded ~~$9.6~~$6.4 million of net tax expense for uncertain tax positions, which consisted of ~~$12.1~~$10.7 million of interest and increases to current and prior year uncertain tax positions. This expense was partially offset by ~~$2.5~~$4.2 million related to the net reversal of accruals for prior year uncertain tax positions and settlements with tax authorities. The Company also recorded ~~$2.9 million of uncertain tax positions related to prior years for acquisitions made during 2019 and $2.8~~$3.8 million of uncertain tax positions related to deferred tax liabilities.

Purchase accounting and business combinations:

Assets acquired and liabilities assumed as part of a business combination are recognized at their acquisition date fair values. In determining these fair values, the Company utilized various forms of the income, cost and market approaches depending on the asset or liability being valued. The Company used a discounted cash flow model to measure the trade names, customer relationship, and technology and know-how-related intangible assets. The estimation of fair value required significant judgment related to future net cash flows based on assumptions related to revenue and EBITDA growth rates, discount rates, and royalty rates. Inputs were generally determined by taking into account competitive trends, market comparisons, independent appraisals, and historical data, among other factors, and were supplemented by current and anticipated market conditions.

Refer to Note 1 - Significant Accounting Policies for further discussion regarding the fair value process.

Revenue recognition:

Revenue is recognized when performance obligations under the terms of a contract with a customer of the Company are satisfied. Refer to Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements for further discussion around the Company's revenue policy.

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Benefit Plans:

The Company sponsors a number of defined benefit pension plans that cover eligible employees. The Company also sponsors several funded and unfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and their dependents. These plans are accounted for in accordance with ASC Topic 715-30, "Defined Benefit Plans – Pension," and ASC Topic 715-60, "Defined Benefit Plans – Other Postretirement."

The measurement of liabilities related to these plans is based on management's assumptions related to future events, including discount rates and health care cost trend rates. Management regularly evaluates these assumptions and adjusts them as required and appropriate. Other plan assumptions also are reviewed on a regular basis to reflect recent experience and the Company's future expectations. Actual experience that differs from these assumptions may affect future liquidity, expense and the overall financial position of the Company. While the Company believes that current assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may affect materially the Company's pension and other postretirement employee benefit obligations and its future expense and cash flow.

The discount rate is used to calculate the present value of expected future pension and postretirement cash flows as of the measurement date. The Company establishes the discount rate by constructing a notional portfolio of high-quality corporate bonds and matching the coupon payments and bond maturities to projected benefit payments under the Company's pension and postretirement welfare plans. The bonds included in the portfolio generally are non-callable. A lower discount rate will result in a higher benefit obligation; conversely, a higher discount rate will result in a lower benefit obligation. The discount rate also is used to calculate the annual interest cost, which is a component of net periodic benefit cost.

The expected rate of return on plan assets is determined by analyzing the historical long-term performance of the Company's pension plan assets, as well as the mix of plan assets between equities, fixed-income securities and other investments, the expected long-term rate of return expected for those asset classes and long-term inflation rates. Short-term asset performance can differ significantly from the expected rate of return, especially in volatile markets. A lower-than-expected rate of return on pension plan assets will increase pension expense and future contributions.

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Defined Benefit Pension Plans:

The Company recognized net periodic benefit cost of ~~$22.7~~$23.9 million during ~~2019~~2020 for defined benefit pension plans, compared to net periodic benefit cost of ~~$35.0~~$22.7 million during ~~2018.~~2019. The Company recognized ~~actuarial losses~~mark-to-market charges of $16.2 million during 2020 compared to $13.9 million during ~~2019 compared to $38.8 million during 2018, partially offset by a curtailment gain of $10.2 million recognized~~2019. Mark-to-market charges in ~~2018. Actuarial losses in 2019~~2020 were primarily due to the impact of a net reduction in the discount rate used to measure its defined benefit pension obligations of ~~$100.9~~$88.0 million and the impact of experience losses ~~and other changes in valuation assumptions~~ of ~~$3.1~~$16.9 million, partially offset by higher than expected returns on plan assets of ~~$90.1~~$84.3 million and other changes in valuation assumptions of $4.4 million. The impact of the net reduction in the discount rate used to measure the Company's defined benefit ~~obligation~~pension obligations was primarily driven by a 8666 basis point reduction in the weighted-average discount rate used to measure its U.S. ~~defined benefit~~ plan obligations, which decreased from ~~4.36% in 2018 to~~ 3.50% in ~~2019.~~2019 to 2.84% in 2020.

In ~~2020,~~2021, the Company expects net periodic benefit cost ~~of $6.6~~to be approximately $1 million for defined benefit pension plans, compared with net periodic benefit cost of ~~$22.7~~$23.9 million in ~~2019.~~2020. Net periodic benefit cost for ~~2020~~2021 does not include ~~Mark-to-Market~~mark-to-market charges that will be recognized immediately through earnings in the fourth quarter of ~~2020,~~2021, or on an interim basis if specific events trigger a remeasurement. Excluding the ~~actuarial~~mark-to-market charges of $16.2 million and curtailment losses of ~~$13.9~~$0.9 million recognized in ~~2019, the expected~~2020, net periodic benefit cost ~~of $6.6~~was $6.8 million in ~~2020 compares to~~2020. The expected reduction in net periodic benefit cost, ~~of $8.8 million in 2019 as the Company expects lower interest costs of $4.1 million, partially offset by~~excluding mark-to-market charges and curtailment losses, primarily reflects lower expected ~~return on plan assets of $1.7 million.~~interest costs.

The Company expects to contribute to its defined benefit pension plans or pay directly to participants of defined benefit plans approximately ~~$11.8~~$16 million in ~~2020~~2021 compared with ~~$35.4~~$17.9 million of contributions and payments in ~~2019. The decrease in 2020 planned employer contributions/payments is primarily due to the 2019 payout of deferred compensation to a former executive officer of the Company.~~2020.

~~For expense purposes in 2019, the Company applied a weighted-average discount rate of 4.36% to its U.S. defined benefit pension plans.~~ For expense purposes in 2020, the Company ~~will apply~~applied a weighted-average discount rate of 3.50% to its U.S. defined benefit pension plans. For expense purposes in 2021, the Company will apply a weighted-average discount rate of 2.84% to its U.S. defined benefit pension plans.

For expense purposes in ~~2019,~~2020, the Company applied an expected weighted-average rate of return of ~~6.12%~~5.22% for the Company’s U.S. pension plan assets. For expense purposes in ~~2020,~~2021, the Company will apply an expected weighted-average rate of return on plan assets of ~~5.22%~~4.69%.

The following table presents the sensitivity of the Company's U.S. projected pension benefit obligation ("PBO") ~~and 2019 expense~~ to the indicated increase/decrease in key assumptions:

+ / - Change at December 31,2020

Change

PBO

Assumption:

Discount rate

.25%

22.6

+ / - Change at December 31, 2019 Change to
Change PBO 2019 Expense
Assumption:
Discount rate + 0.25% $ 20.2
$ 20.2
Overall return on plan assets + 0.25% N/A
1.1

In the table above, a 25 basis point decrease in the discount rate will increase the PBO by ~~$20.2~~$22.6 million and decrease income before income taxes through the recognition of actuarial losses of $22.6 million. A 25 basis point increase in the discount rate will decrease the PBO by ~~$20.2~~$22.6 million and increase income before income taxes through the recognition of actuarial gains of $22.6 million. Defined benefit pension plans in the U.S. represent ~~66%~~64% of the Company's benefit ~~obligation and 65% of the fair value of the Company's plan assets at December 31, 2019.~~

obligation.

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Other Postretirement Benefit Plans:

The Company recognized net periodic benefit credit of ~~$20.5~~$6.5 million during ~~2019~~2020 for other postretirement benefit plans, compared to net periodic benefit credit of ~~$14.3~~$20.5 million during ~~2018.~~ 2019. The Company recognized mark-to-market charges of $1.4 million during 2020 compared to mark-to-market gains of $18.0 million during 2019. Mark-to-market charges in 2020 were primarily due to the impact of an 81 basis point decrease in the discount rate used to measure the Company's defined benefit postretirement obligations, which decreased from 3.43% in 2019 to 2.62% in 2020. The decrease in the discount rate resulted in a $3.9 million loss. This mark-to-market charge was partially offset by mark-to-market gains of $2.0 million due to the impact of a reduction in the rate for Medicare Advantage plans, $0.4 million due to higher than expected returns on plans assets and $0.1 million due to changes in other actuarial assumptions.

In addition to mark-to-market charges and gains, the Company recognized prior service credits of $9.8 million during 2020 compared to $5.4 million during ~~2019 compared to $1.7 million during 2018.~~2019. During July 2019, the Company announced changes to the medical plan offerings for certain of its postretirement benefit plans, effective January 1, 2020, which will impact the benefits provided to certain retirees. This plan amendment resulted in a $92.8 million reduction in the postretirement benefit obligation and a corresponding pretax adjustment to accumulated other comprehensive loss. ~~Starting with the three months ended September 30, 2019, the~~The pretax adjustment of $92.8 million began being amortized in the third quarter of 2019 and will be amortized from accumulated other comprehensive loss into net periodic benefit cost (as a benefit) ~~over the next twelve years.~~until 2031.

In ~~2020,~~2021, the Company expects net periodic benefit credit of ~~$7.9~~approximately $8 million for other postretirement benefit plans, compared to net periodic benefit credit of ~~$20.5~~$6.5 million in ~~2019.~~2020. Net periodic benefit credit for ~~2020~~2021 does not include ~~Mark-to-Market~~mark-to-market charges that will be recognized immediately through earnings in the fourth quarter of ~~2020,~~2021, or on an interim basis if specific events trigger a remeasurement. Excluding the ~~actuarial gain~~ mark-to-market charges of ~~$18.0~~$1.4 million recognized in ~~2019,~~2020, the ~~expected~~ net periodic benefit credit ofwas $7.9 million in 2020, ~~compares to net periodic benefit credit of $2.5 million in 2019 as~~which is relatively consistent with the ~~Company expects higher amortization of prior service credit of $4.4 million in 2020 related to the plan amendment in 2019.~~outlook for 2021.

In January 2020, the Company established a second ~~Voluntary Employee Beneficiary Association ("VEBA")~~VEBA trust for certain active employees’ medical benefits. The Company transferred $50 million from the existing VEBA trust to fund this new VEBA trust. The $50 million that was transferred ~~will~~was primarily be classified as other current assets based on the portfolio of the assets in the trust. The Company ~~expects to fully utilize~~utilized all of the assets of the ~~new~~ trust in 2020 for the ~~payout~~payment of certain active employees’ medical benefits.

~~For expense purposes in 2019,~~ In January 2021, the Company ~~applied~~transferred the remaining $11.1 million in the existing VEBA trust to the new VEBA trust. As a ~~discount rate of 3.48%~~result, the Company expects to ~~4.30% to its~~fund 2021 payments for other postretirement benefit ~~plans.~~ plans, which are expected to be approximately $5 million, from the general funds of the Company.

For expense purposes in 2020, the Company ~~will apply~~applied a discount rate of 3.43% to its other postretirement benefit plans. For expense purposes in ~~2019,~~2021, the Company ~~applied an expected~~will apply a discount rate of ~~return of 4.85%~~2.62% to ~~the VEBA trust assets.~~its other postretirement benefit plans. For expense purposes in 2020, the Company ~~will apply~~applied an expected rate of return of 3.00% to the VEBA trust assets.

The following table presents the sensitivity of the Company's accumulated other postretirement benefit obligation ("APBO") ~~and 2019 expense~~ to the indicated increase/decrease in key assumptions:

+ / - Change at December 31, 2020

Change

APBO

Assumption:

Discount rate

.25%

1.3

+ / - Change at December 31, 2019 Change to
Change APBO 2019 Expense
Assumption:
Discount rate + 0.25% $ 1.3
$ 1.3
Overall return on plan assets + 0.25% N/A
0.2

In the table above, a 25 basis point decrease in the discount rate will increase the APBO by $1.3 million and decrease income before income taxes through the recognition of actuarial losses of $1.3 million. A 25 basis point increase in the discount rate will decrease the APBO by $1.3 million and increase income before income taxes through the recognition of actuarial gains of $1.3 million.

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For measurement purposes, the Company assumed a weighted-average annual rate of increase in the per capita cost (health care cost trend rate) for medical benefits of ~~5.8%~~5.5% for ~~2020,~~2021, declining gradually to 5.0% in 2023 and thereafter for medical and prescription drug benefits. For Medicare Advantage benefits, actual contract rates have been set for 2020 through 2022, and are assumed to increase by 7.3% for ~~2023,~~2022, declining gradually to 5.0% in 2031 and thereafter. The assumed health care cost trend rate may have a significant effect on the amounts reported. A one percentage point increase in the assumed health care cost trend rate would have increased the ~~2019~~2020 total service and interest cost components by $0.1 million and would have increased the postretirement benefit obligation by ~~$2.4~~$1.8 million. A one percentage point decrease would provide corresponding reductions of $0.1 million and ~~$2.0~~$1.6 million, respectively.

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Other loss reserves:

The Company has a number of loss exposures that are incurred in the ordinary course of business such as environmental clean-up, product liability, product warranty, litigation and accounts receivable reserves. Establishing loss reserves for these matters requires management’s judgment with regards to estimating risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances.

OTHER DISCLOSURES:

Foreign Currency:

Net of related derivative activity, the Company recognized a foreign currency exchange ~~gain~~loss resulting from transactions of ~~$6.1~~$10.0 million for the year ended December 31, ~~2019,~~2020, and recognized a gain of ~~$3.6~~$6.1 million and ~~a loss of $3.7~~$3.6 million for the years ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively. For the year ended December 31, ~~2019~~,2020, the Company recorded a positive non-cash foreign currency translation adjustment of $97.3 million that increased shareholders’ equity, compared with a negative non-cash foreign currency translation adjustment of $19.7 million that decreased shareholders’ equity ~~compared with a negative non-cash foreign currency translation adjustment of $60.5 million that decreased shareholders’ equity~~ for the year ended December 31, ~~2018~~.2019. The foreign currency translation adjustments for the year ended December 31, ~~2019~~2020 were favorably impacted ~~negatively~~ by the ~~strengthening~~weakening of the U.S. dollar relative to other currencies as of December 31, ~~2019~~2020 compared to December 31, ~~2018.~~2019.

Trade Law Enforcement:

The U.S. government has an antidumping duty order in effect covering tapered roller bearings from China. The Company is a producer of these bearings, as well as ball bearings and other bearing types, in the U.S.

Quarterly Dividend:

On February ~~7, 2020,~~12, 2021, the Company’s Board of Directors declared a quarterly cash dividend of ~~$0.28~~$0.29 per common share. The quarterly dividend will be paid on March 4, ~~2020~~2021 to shareholders of record as of February ~~21, 2020.~~22, 2021. This will be the ~~391~~395^stth consecutive quarterly dividend paid on the common shares of the Company.

Forward-Looking Statements

Certain statements set forth in this Annual Report on Form 10-K and in the Company’s ~~2019~~2020 Annual Report to Shareholders 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 Annual Report on Form 10-K. 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:

~~(a)~~

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, pandemics 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;

~~(b)~~

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, 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 our markets;

4347

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(a)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;

(b)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;

(c)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, 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;

(d)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, and new technology that may impact the way the Company’s products are produced, sold or distributed;

(e)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; 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 meant to address climate change; and changes in the cost of labor and benefits;

(f)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;

(g)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;

(h)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, competition and anti-bribery laws, environmental or health and safety issues, data privacy and taxes;

(i)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;

(j)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;

(k)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

(l)those items identified under Item 1A. Risk Factors on pages 9 through 17.


~~(c)~~	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, and new technology that may impact the way the Company’s products are produced, sold or distributed;

~~(d)~~

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; 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 or natural disasters; and changes in the cost of labor and benefits;


~~(e)~~	the success of the Company’s operating plans, announced programs, initiatives and capital investments; the ability to integrate acquired companies; and the ability of acquired companies to achieve satisfactory operating results, including results being accretive to earnings;


~~(f)~~	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 and to maintain the continued service of our management and other key employees;


~~(g)~~	unanticipated litigation, claims or assessments. This includes: claims, investigations or problems related to intellectual property, product liability or warranty, foreign export and trade laws, competition and anti-bribery laws, environmental or health and safety issues, data privacy and taxes;


~~(h)~~	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;


~~(i)~~	~~the Company's ability to satisfy its obligations under its debt agreements and maintain favorable credit ratings, as well as its ability to renew or refinance borrowings on favorable terms;~~


~~(j)~~	~~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~~


~~(k)~~	~~those items identified under Item 1A. Risk Factors on pages 6 through 11.~~

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 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.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk:

Changes in short-term interest rates related to several separate funding sources impact the Company’s earnings. These sources are borrowings under the Accounts Receivable Facility, borrowings under the Senior Credit Facility and short-term bank borrowings by the Company's international subsidiaries. If the market rates for short-term borrowings increased by one-percentage-point around the globe, the impact from our variable rate debt would be an increase in interest expense of ~~$6.4~~ $4.6 million annually, with a corresponding decrease in income from continuing operations before income taxes of the same amount. This amount was determined by considering the impact of hypothetical interest rates on the Company’s borrowing cost and year-end debt balances by category.

Foreign Currency Exchange Rate Change Risk:

Fluctuations in the value of the U.S. dollar compared to foreign currencies, including the Euro, also impact the Company’s earnings. The greatest risk relates to products shipped between the Company’s European operations and the United States, as well as intercompany loans between Timken affiliates. Foreign currency forward contracts are used to hedge a portion of these intercompany transactions. Additionally, hedges are used to cover third-party purchases of products and equipment. As of December 31, ~~2019,~~2020, there were ~~$295.7~~ $173.2 million of hedges in place. A uniform 10% weakening of the U.S. dollar against all currencies would have resulted in a charge of ~~$7.6~~$6.8 million related to these hedges, which would have partially offset the otherwise favorable impact of the underlying currency fluctuation. In addition to the direct impact of the hedged amounts, changes in exchange rates also affect the volume of sales or foreign currency sales price as competitors’ products become more or less attractive.

Commodity Price Risk:

In the ordinary course of business, the Company is exposed to market risk with respect to commodity price fluctuations, primarily related to our purchases of raw materials and energy, principally steel and natural gas. Whenever possible, the Company manages its exposure to commodity risks primarily through the use of supplier pricing agreements that enable the Company to establish the purchase prices for certain inputs that are used in our manufacturing and distribution business.

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Item 8. Financial Statements and Supplementary Data

Consolidated Statements of Income
Year Ended December 31,
2019 2018 2017
(Dollars in millions, except per share data)
Net sales $ 3,789.9
$ 3,580.8
$ 3,003.8
Cost of products sold 2,648.1
2,540.7
2,191.7
Gross Profit 1,141.8
1,040.1
812.1
Selling, general and administrative expenses 618.6
580.7
508.3
Impairment and restructuring charges 6.8
4.9
4.3
Operating Income 516.4
454.5
299.5
Interest expense (72.1 ) (51.7 ) (37.1 )
Interest income 4.9
2.1
2.9
Non-service pension and other postretirement income (expense) 10.2
(6.2 ) (15.0 )
Other income, net 13.0
9.4
9.6
Income Before Income Taxes 472.4
408.1
259.9
Provision for income taxes 97.7
102.6
57.6
Net Income 374.7
305.5
202.3
Less: Net income (loss) attributable to noncontrolling interest 12.6
2.7
(1.1 )
Net Income Attributable to The Timken Company $ 362.1
$ 302.8
$ 203.4

Net Income per Common Share Attributable to The Timken Company
Common Shareholders

Basic earnings per share $ 4.78
$ 3.93
$ 2.62

Diluted earnings per share $ 4.71
$ 3.86
$ 2.58
Consolidated Statements of Income


	Year Ended December 31,
	2020		2019		2018
(Dollars in millions, except per share data)
Net sales	$	3,513.2	$	3,789.9	$	3,580.8
Cost of products sold	2,503.3		2,648.1		2,540.7
Gross Profit	1,009.9		1,141.8		1,040.1
Selling, general and administrative expenses	533.8		618.6		580.7
Impairment and restructuring charges	21.2		6.8		4.9
Operating Income	454.9		516.4		454.5
Interest expense	(67.6)		(72.1)		(51.7)
Interest income	3.7		4.9		2.1
Non-service pension and other postretirement (expense) income	(4.7)		10.2		(6.2)

Other income, net	10.0		13.0		9.4
Income Before Income Taxes	396.3		472.4		408.1
Provision for income taxes	103.9		97.7		102.6
Net Income	292.4		374.7		305.5
Less: Net income attributable to noncontrolling interest	7.9		12.6		2.7
Net Income Attributable to The Timken Company	$	284.5	$	362.1	$	302.8

Net Income per Common Share Attributable to The Timken Company Common Shareholders
Basic earnings per share	$	3.78	$	4.78	$	3.93

Diluted earnings per share	$	3.72	$	4.71	$	3.86

See accompanying Notes to the Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income
Year Ended December 31,
2019 2018 2017
(Dollars in millions)
Net Income $ 374.7
$ 305.5
$ 202.3
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (19.9 ) (67.4 ) 47.1
Pension and postretirement liability adjustments 66.9
0.4
(1.8 )
Change in fair value of derivative financial instruments (2.0 ) 3.8
(3.3 )
Other comprehensive income (loss), net of tax 45.0
(63.2 ) 42.0
Comprehensive Income, net of tax 419.7
242.3
244.3
Less: comprehensive income (loss) attributable to noncontrolling interest 12.4
(4.2 ) 1.3
Comprehensive Income Attributable to The Timken Company $ 407.3
$ 246.5
$ 243.0
Consolidated Statements of Comprehensive Income


	Year Ended December 31,
	2020		2019		2018
(Dollars in millions)
Net Income	$	292.4	$	374.7	$	305.5
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	92.7		(19.9)		(67.4)
Pension and postretirement liability adjustments	(3.5)		66.9		0.4

Change in fair value of derivative financial instruments	(2.4)		(2.0)		3.8
Other comprehensive income (loss), net of tax	86.8		45.0		(63.2)
Comprehensive Income, net of tax	379.2		419.7		242.3
Less: comprehensive income (loss) attributable to noncontrolling interest	3.3		12.4		(4.2)
Comprehensive Income Attributable to The Timken Company	$	375.9	$	407.3	$	246.5

See accompanying Notes to the Consolidated Financial Statements.

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Consolidated Balance Sheets


	December 31,
	2020		2019
(Dollars in millions)
ASSETS
Current Assets
Cash and cash equivalents	$	320.3	$	209.5
Restricted cash	0.8		6.7
Accounts receivable, less allowances: (2020 - $16.5 million; 2019 - $18.1 million)	581.1		545.1
Unbilled receivables	110.9		129.2
Inventories, net	841.3		842.0
Deferred charges and prepaid expenses	39.9		36.7
Other current assets	106.0		105.4
Total Current Assets	2,000.3		1,874.6
Property, Plant and Equipment, Net	1,035.6		989.2
Other Assets
Goodwill	1,047.6		993.7
Other intangible assets, net	741.4		758.5
Operating lease assets	118.2		114.1
Non-current pension assets	2.0		3.4
Non-current other postretirement benefit assets	0		36.6
Deferred income taxes	77.0		71.8
Other non-current assets	19.5		18.0
Total Other Assets	2,005.7		1,996.1
Total Assets	$	5,041.6	$	4,859.9
LIABILITIES AND EQUITY
Current Liabilities
Short-term debt	$	119.8	$	17.3
Current portion of long-term debt	10.9		64.7
Short-term operating lease liabilities	27.2		28.3
Accounts payable, trade	351.4		301.7
Salaries, wages and benefits	135.7		134.5
Income taxes payable	16.1		17.8

Other current liabilities	186.9		172.3
Total Current Liabilities	848.0		736.6
Non-Current Liabilities
Long-term debt	1,433.9		1,648.1
Accrued pension benefits	163.0		165.1
Accrued postretirement benefits	41.3		31.8
Long-term operating lease liabilities	75.5		71.3
Deferred income taxes	148.7		168.2
Other non-current liabilities	106.0		84.0
Total Non-Current Liabilities	1,968.4		2,168.5
Shareholders’ Equity
Class I and II Serial Preferred Stock without par value:
Authorized - 10,000,000 shares each class, NaN issued	0		0
Common stock without par value:
Authorized - 200,000,000 shares
Issued (including shares in treasury) (2020 – 75,834,668 shares; 2019 – 98,375,135 shares)
Stated capital	40.7		53.1
Other paid-in capital	740.7		937.6
Retained earnings	1,339.5		1,907.4
Accumulated other comprehensive loss	41.3		(50.1)
Treasury shares at cost (2020 – 158,836 shares; 2019 – 22,836,180 shares)	(9.3)		(979.8)
Total Shareholders’ Equity	2,152.9		1,868.2
Noncontrolling interest	72.3		86.6
Total Equity	2,225.2		1,954.8
Total Liabilities and Equity	$	5,041.6	$	4,859.9

Consolidated Balance Sheets
December 31,
2019 2018
(Dollars in millions)
ASSETS
Current Assets
Cash and cash equivalents $ 209.5
$ 132.5
Restricted cash 6.7
0.6
Accounts receivable, less allowances: (2019 - $18.1 million; 2018 - $21.9 million) 545.1
546.6
Unbilled receivables 129.2
116.6
Inventories, net 842.0
835.7
Deferred charges and prepaid expenses 36.7
28.2
Other current assets 105.4
77.0
Total Current Assets 1,874.6
1,737.2
Property, Plant and Equipment, Net 989.2
912.1
Operating Lease Assets 114.1
—
Other Assets
Goodwill 993.7
960.5
Other intangible assets 758.5
733.2
Non-current pension assets 3.4
6.2
Non-current other postretirement benefit assets 36.6
—
Deferred income taxes 71.8
59.0
Other non-current assets 18.0
37.0
Total Other Assets 1,882.0
1,795.9
Total Assets $ 4,859.9
$ 4,445.2
LIABILITIES AND EQUITY
Current Liabilities
Short-term debt $ 17.3
$ 33.6
Current portion of long-term debt 64.7
9.4
Short-term operating lease liabilities 28.3
—
Accounts payable, trade 301.7
273.2
Salaries, wages and benefits 134.5
174.9
Income taxes payable 17.8
23.5
Other current liabilities 172.3
171.0
Total Current Liabilities 736.6
685.6
Non-Current Liabilities
Long-term debt 1,648.1
1,638.6
Accrued pension benefits 165.1
161.3
Accrued postretirement benefits 31.8
108.7
Long-term operating lease liabilities 71.3
—
Deferred income taxes 168.2
138.0
Other non-current liabilities 84.0
70.3
Total Non-Current Liabilities 2,168.5
2,116.9
Shareholders’ Equity
Class I and II Serial Preferred Stock without par value:
Authorized - 10,000,000 shares each class, none issued —
—
Common stock without par value:
Authorized - 200,000,000 shares
Issued (including shares in treasury) (2019 – 98,375,135 shares; 2018 – 98,375,135 shares)
Stated capital 53.1
53.1
Other paid-in capital 937.6
951.9
Earnings invested in the business 1,907.4
1,630.2
Accumulated other comprehensive loss (50.1 ) (95.3 )
Treasury shares at cost (2019 – 22,836,180 shares; 2018 – 22,421,213 shares) (979.8 ) (960.3 )
Total Shareholders’ Equity 1,868.2
1,579.6
Noncontrolling interest 86.6
63.1
Total Equity 1,954.8
1,642.7
Total Liabilities and Equity $ 4,859.9
$ 4,445.2

See accompanying Notes to the Consolidated Financial Statements.

Table of Contents

Consolidated Statements of Cash Flows

Consolidated Statements of Cash Flows

	Year Ended December 31,										Year Ended December 31,
	2019			2018			2017				2020		2019		2018
(Dollars in millions)										(Dollars in millions)
CASH PROVIDED (USED)										CASH PROVIDED (USED)
Operating Activities										Operating Activities
Net income	$	374.7		$	305.5		$	202.3		Net income	$	292.4	$	374.7	$	305.5
Adjustments to reconcile net income to net cash provided by operating activities:										Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	160.6			146.0			137.7			Depreciation and amortization	167.1		160.6		146.0
Impairment charges	2.6			1.3			0.1			Impairment charges	0.4		2.6		1.3
Loss (gain) on sale of assets	(3.6		)	0.3			(2.1		)	Loss (gain) on sale of assets	0.9		(3.6)		0.3
Gain on disposal of lease assets	(0.4		)	—			—			Gain on disposal of lease assets	0		(0.4)		0
Acquisition-related gain										Acquisition-related gain	(11.1)		0		0
Loss on divestitures	—			0.8			—			Loss on divestitures	0		0		0.8
Deferred income tax benefit	(8.9		)	(21.4		)	(0.4		)	Deferred income tax benefit	(23.2)		(8.9)		(21.4)
Stock-based compensation expense	27.1			32.3			24.7			Stock-based compensation expense	23.2		27.1		32.3
Pension and other postretirement expense	2.2			20.7			28.9			Pension and other postretirement expense	17.4		2.2		20.7
Pension and other postretirement benefit contributions and payments	(43.4		)	(18.7		)	(23.9		)	Pension and other postretirement benefit contributions and payments	(20.6)		(43.4)		(18.7)
Operating lease expense	36.6			—			��
Operating lease payments	(35.6		)	—			—
Changes in operating assets and liabilities:										Changes in operating assets and liabilities:

Accounts receivable	24.1			(66.4		)	(42.3		)	Accounts receivable	(20.7)		24.1		(66.4)
Unbilled receivables	(12.6		)	(21.8		)	—			Unbilled receivables	18.5		(12.6)		(21.8)
Inventories	50.7			(87.1		)	(132.1		)	Inventories	27.4		50.7		(87.1)
Accounts payable, trade	19.9			(20.2		)	70.7			Accounts payable, trade	22.6		19.9		(20.2)
Other accrued expenses	(26.8		)	32.2			36.3			Other accrued expenses	55.1		(26.8)		32.2
Income taxes	(14.2		)	1.9			(36.2		)	Income taxes	8.5		(14.2)		1.9
Other, net	(2.9		)	27.1			(26.9		)	Other, net	19.7		(1.9)		27.1
Net Cash Provided by Operating Activities	550.1			332.5			236.8			Net Cash Provided by Operating Activities	577.6		550.1		332.5

Investing Activities										Investing Activities
Capital expenditures	(140.6		)	(112.6		)	(104.7		)	Capital expenditures	(121.6)		(140.6)		(112.6)
Acquisitions, net of cash acquired of $5.9 million in 2019, $30.1 million in 2018 and $35.4 million in 2017	(226.5		)	(765.4		)	(346.8		)
Acquisitions, net of cash acquired of $5.9 million in 2019 and $30.1 million in 2018										Acquisitions, net of cash acquired of $5.9 million in 2019 and $30.1 million in 2018	(24.0)		(226.5)		(765.4)
Proceeds from disposals of property, plant and equipment	6.3			1.5			7.1			Proceeds from disposals of property, plant and equipment	1.5		6.3		1.5
Proceeds from divestitures	—			14.0			—			Proceeds from divestitures	0		0		14.0
Investments in short-term marketable securities, net	(4.2		)	(2.8		)	(3.6		)	Investments in short-term marketable securities, net	(9.4)		(4.1)		(2.7)
Other	0.1			0.1			(0.7		)

Net Cash Used in Investing Activities	(364.9		)	(865.2		)	(448.7		)	Net Cash Used in Investing Activities	(153.5)		(364.9)		(865.2)

Financing Activities										Financing Activities
Cash dividends paid to shareholders	(84.9		)	(85.7		)	(83.3		)	Cash dividends paid to shareholders	(87.0)		(84.9)		(85.7)
Purchase of treasury shares	(62.7		)	(98.5		)	(43.4		)	Purchase of treasury shares	(49.3)		(62.7)		(98.5)
Proceeds from exercise of stock options	27.5			12.8			32.9			Proceeds from exercise of stock options	37.4		27.5		12.8
Payments related to tax withholding for stock-based compensation	(15.4		)	(5.4		)	(11.4		)	Payments related to tax withholding for stock-based compensation	(16.0)		(15.4)		(5.4)
Proceeds from long-term debt	662.8			1,391.1			927.8			Proceeds from long-term debt	562.0		662.8		1,391.1
Payments on long-term debt	(633.8		)	(663.8		)	(684.5		)	Payments on long-term debt	(757.7)		(633.8)		(663.8)
Deferred financing costs	(1.9		)	(1.2		)	(1.2		)	Deferred financing costs	(1.7)		(1.9)		(1.2)
Accounts receivable facility financing borrowings	25.0			152.0			56.7			Accounts receivable facility financing borrowings	144.0		25.0		152.0
Accounts receivable facility financing payments	—			(139.9		)	(42.7		)	Accounts receivable facility financing payments	(186.0)		0		(139.9)
Short-term debt activity, net	(17.0		)	(6.7		)	19.9			Short-term debt activity, net	40.1		(17.0)		(6.7)
Other	(0.3		)	(1.6		)	(2.6		)
Noncontrolling interest dividends paid										Noncontrolling interest dividends paid	(16.9)		(0.3)		(1.6)

Net Cash (Used in) Provided by Financing Activities	(100.7		)	553.1			168.2			Net Cash (Used in) Provided by Financing Activities	(331.1)		(100.7)		553.1
Effect of exchange rate changes on cash	(1.4		)	(12.7		)	17.6			Effect of exchange rate changes on cash	11.9		(1.4)		(12.7)
Increase (decrease) In Cash, Cash Equivalents and Restricted Cash	83.1			7.7			(26.1		)
Increase In Cash, Cash Equivalents and Restricted Cash										Increase In Cash, Cash Equivalents and Restricted Cash	104.9		83.1		7.7
Cash, cash equivalents and restricted cash at beginning of year	133.1			125.4			151.5			Cash, cash equivalents and restricted cash at beginning of year	216.2		133.1		125.4
Cash, Cash Equivalents and Restricted Cash at End of Year	$	216.2		$	133.1		$	125.4		Cash, Cash Equivalents and Restricted Cash at End of Year	$	321.1	$	216.2	$	133.1

See accompanying Notes to the Consolidated Financial Statements.

Table of Contents

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Shareholders’ Equity

				The Timken Company Shareholders
	Total			Stated Capital		Other Paid-In Capital			Earnings Invested in the Business			Accumulated Other Comprehensive Income (Loss)			Treasury Shares			Non- controlling Interest						The Timken Company Shareholders
(Dollars in millions, except per share data)																					(Dollars in millions, except per share data)	Total		Stated Capital		Other Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Shares		Non- controlling Interest
Year Ended December 31, 2017
Balance at January 1, 2017	$	1,310.9		$	53.1	$	906.9		$	1,289.3		$	(77.9	)	$	(891.7	)	$	31.2
Cumulative effect of ASU 2016-09	0.5					1.5			(1.0		)
Net income (loss)	202.3								203.4									(1.1		)
Foreign currency translation adjustments	47.1											44.7						2.4
Pension and other postretirement liability adjustments (net of income tax benefit of $1.1 million)	(1.8		)									(1.8		)
Change in fair value of derivative financial instruments, net of reclassifications	(3.3		)									(3.3		)
Dividends declared to noncontrolling interest	(0.3		)															(0.3		)
Dividends – $1.07 per share	(83.3		)						(83.3		)
Stock-based compensation expense	24.7					24.7
Purchase of treasury shares	(43.4		)												(43.4		)
Stock option exercise activity	32.9					(10.7		)							43.6
Restricted share activity	—					(18.6		)							18.6
Payments related to tax withholding for stock-based compensation	(11.4		)												(11.4		)
Balance at December 31, 2017	$	1,474.9		$	53.1	$	903.8		$	1,408.4		$	(38.3	)	$	(884.3	)	$	32.2
Year Ended December 31, 2018																					Year Ended December 31, 2018
Cumulative effect of the revenue standard (net of income tax benefit of $1.5 million)	4.0								4.0
Balance at January 1, 2018																					Balance at January 1, 2018	$	1,474.9	$	53.1	$	903.8	$	1,408.4	$	(38.3)	$	(884.3)	$	32.2
Cumulative effect of the new revenue standard (net of income tax benefit of $1.5 million)																					Cumulative effect of the new revenue standard (net of income tax benefit of $1.5 million)	4.0						4.0
Cumulative effect of ASU 2018-02	—								0.7			(0.7		)							Cumulative effect of ASU 2018-02	—						0.7		(0.7)
Net income	305.5								302.8									2.7			Net income	305.5						302.8						2.7
Foreign currency translation adjustments	(67.4		)									(60.5		)				(6.9		)	Foreign currency translation adjustments	(67.4)								(60.5)				(6.9)
Pension and other postretirement liability adjustments (net of $0.5 income tax expense)	0.4											0.4
Pension and other postretirement liability adjustments (net of $0.5 million income tax expense)																					Pension and other postretirement liability adjustments (net of $0.5 million income tax expense)	0.4								0.4

Change in fair value of derivative financial instruments, net of reclassifications	3.8											3.8									Change in fair value of derivative financial instruments, net of reclassifications	3.8								3.8
Shares issued for the acquisition of ABC Bearings	66.0					30.9												35.1			Shares issued for the acquisition of ABC Bearings	66.0				30.9								35.1

Dividends – $1.11 per share	(85.7		)						(85.7		)										Dividends – $1.11 per share	(85.7)						(85.7)

Stock-based compensation expense	32.3					32.3															Stock-based compensation expense	32.3				32.3
Purchase of treasury shares	(98.5		)												(98.5		)				Purchase of treasury shares	(98.5)										(98.5)
Stock option exercise activity	12.8					(3.8		)							16.6						Stock option exercise activity	12.8				(3.8)						16.6
Restricted share activity	—					(11.3		)							11.3						Restricted share activity	0				(11.3)						11.3
Payments related to tax withholding for stock-based compensation	(5.4		)												(5.4		)				Payments related to tax withholding for stock-based compensation	(5.4)										(5.4)
Balance at December 31, 2018	$	1,642.7		$	53.1	$	951.9		$	1,630.2		$	(95.3	)	$	(960.3	)	$	63.1		Balance at December 31, 2018	$	1,642.7	$	53.1	$	951.9	$	1,630.2	$	(95.3)	$	(960.3)	$	63.1
Year Ended December 31, 2019																					Year Ended December 31, 2019

Net income	374.7								362.1									12.6			Net income	374.7						362.1						12.6
Foreign currency translation adjustments	(19.9		)									(19.7		)				(0.2		)	Foreign currency translation adjustments	(19.9)								(19.7)				(0.2)
Pension and other postretirement liability adjustments (net of $22.2 income tax expense)	66.9											66.9
Pension and other postretirement liability adjustments (net of $22.2 million income tax expense)																					Pension and other postretirement liability adjustments (net of $22.2 million income tax expense)	66.9								66.9

Change in fair value of derivative financial instruments, net of reclassifications	(2.0		)									(2.0		)							Change in fair value of derivative financial instruments, net of reclassifications	(2.0)								(2.0)
Change in ownership of noncontrolling interest	(0.5		)			(10.3		)										9.8			Change in ownership of noncontrolling interest	(0.5)				(10.3)								9.8
Noncontrolling interest acquired	1.8																	1.8			Noncontrolling interest acquired	1.8												1.8

Dividends declared to noncontrolling interest	(0.5		)															(0.5		)	Dividends declared to noncontrolling interest	(0.5)												(0.5)
Dividends – $1.12 per share	(84.9		)						(84.9		)										Dividends – $1.12 per share	(84.9)						(84.9)

Stock-based compensation expense	27.1					27.1															Stock-based compensation expense	27.1				27.1
Purchase of treasury shares	(62.7		)												(62.7		)				Purchase of treasury shares	(62.7)										(62.7)
Stock option exercise activity	27.5					(7.8		)							35.3						Stock option exercise activity	27.5				(7.8)						35.3
Restricted share activity	—					(23.3		)							23.3						Restricted share activity	0				(23.3)						23.3
Payments related to tax withholding for stock-based compensation	(15.4		)												(15.4		)				Payments related to tax withholding for stock-based compensation	(15.4)										(15.4)
Balance at December 31, 2019	$	1,954.8		$	53.1	$	937.6		$	1,907.4		$	(50.1	)	$	(979.8	)	$	86.6		Balance at December 31, 2019	$	1,954.8	$	53.1	$	937.6	$	1,907.4	$	(50.1)	$	(979.8)	$	86.6
Year Ended December 31, 2020																					Year Ended December 31, 2020
Cumulative effect of ASU 2016-13 (net of income tax benefit of $0.2 million)																					Cumulative effect of ASU 2016-13 (net of income tax benefit of $0.2 million)	(0.5)						(0.5)
Net income																					Net income	292.4						284.5						7.9
Foreign currency translation adjustments																					Foreign currency translation adjustments	92.7								97.3				(4.6)
Pension and other postretirement liability adjustments (net of $1.1 million income tax benefit)																					Pension and other postretirement liability adjustments (net of $1.1 million income tax benefit)	(3.5)								(3.5)
Change in fair value of derivative financial instruments, net of reclassifications																					Change in fair value of derivative financial instruments, net of reclassifications	(2.4)								(2.4)

Change in ownership of noncontrolling interest																					Change in ownership of noncontrolling interest	0.5												0.5
Noncontrolling interest acquired																					Noncontrolling interest acquired	(1.0)				1.0								(2.0)
Dividends declared to noncontrolling interest																					Dividends declared to noncontrolling interest	(16.1)												(16.1)
Treasury stock retirement																					Treasury stock retirement	0		(12.4)		(213.3)		(764.9)				990.6
Dividends – $1.13 per share																					Dividends – $1.13 per share	(87.0)						(87.0)
Stock-based compensation expense																					Stock-based compensation expense	23.2				23.2
Purchase of treasury shares																					Purchase of treasury shares	(49.3)										(49.3)
Stock option exercise activity																					Stock option exercise activity	37.4				16.1						21.3
Restricted share activity																					Restricted share activity	0				(23.9)						23.9
Payments related to tax withholding for stock-based compensation																					Payments related to tax withholding for stock-based compensation	(16.0)										(16.0)
Balance at December 31, 2020																					Balance at December 31, 2020	$	2,225.2	$	40.7	$	740.7	$	1,339.5	$	41.3	$	(9.3)	$	72.3

See accompanying Notes to the Consolidated Financial Statements.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share data)

Note 1 - Significant Accounting Policies

Principles of Consolidation:

The consolidated financial statements include the accounts and operations of the Company in which a controlling interest is maintained. Investments in affiliated companies where the Company exercises significant influence, but does not control, and the activities of which it is not the primary beneficiary, are accounted for using the equity method. All intercompany accounts and transactions are eliminated upon consolidation.

Revenue:

Revenue is recognized when performance obligations under the terms of a contract with a customer of the Company are satisfied. Of the Company's revenue, approximately 85-90% is from short-term, fixed-price contracts and continues to be recognized as of a point in time when products are shipped from the Company's manufacturing facilities or at a later point in time when control of the products transfers to the customer. ~~In accordance with applicable accounting guidance adopted by the Company on January 1, 2018 and applied on a modified retrospective basis, the~~The Company recognizes approximately 10-15% of revenue over time for services and certain sales of customer-specific product as it satisfies the performance obligations because of the continuous transfer of control to the customer, supported as follows:

•For certain service contracts, this continuous transfer of control to the customer occurs as the Company's service enhances assets that the customer owns and controls at all times and the Company is contractually entitled to payment for work performed to date plus a reasonable margin.

•For U.S. government contracts, the customer is allowed to unilaterally terminate the contract for convenience, and is required to pay the Company for costs incurred plus a reasonable margin and can take control of any work in process.

•For certain non-U.S. government contracts involving customer-specific products, the customer controls the work in process based on contractual termination clauses or restrictions on the Company's use of the product and the Company possesses a right to payment for work performed to date plus a reasonable margin.

As a result of control transferring over time for these products and services, revenue is recognized based on progress toward completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company has elected to use the cost-to-cost input measure of progress for these contracts because it best depicts the transfer of goods or services to the customer based on incurring costs on the contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.

The pricing and payment terms for non-U.S. government contracts are based on the Company's standard terms and conditions or the result of specific negotiations with each customer. The Company's standard terms and conditions require payment 3045-75 days from the invoice date, but the timing of payment for specific negotiated terms may vary. The Company also has both prime and subcontracts in support of the provision of goods and services to the U.S. government. Certain of these contracts are subject to the Federal Acquisition Regulation ("FAR") and are priced ~~commercially~~ based on a competitive ~~market.~~market prices. Under the payment terms of certain of those U.S. government fixed-price contracts, the customer pays the Company performance-based payments, which are interim payments of up to ~~80%~~90% of the ~~contract price for~~ costs incurred to date based on quantifiable measures of performance or on the achievement of specified events or milestones. Because the customer retains a portion of the contract price until completion of such contracts, certain of these U.S. government fixed-price contracts result in revenue recognized in excess of billings, which is presented within "Unbilled Receivables" on the Consolidated Balance Sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer.

5054

Table of Contents

Note 1 –- Significant Accounting Policies (continued)

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. As a practical expedient, the Company may exclude an assessment of whether promised goods or services are performance obligations, if such promised goods and services are immaterial to the customer contract taken as a whole, and combine these with other performance obligations. The Company has also elected not to adjust the promised amount of consideration for the effects of any significant financing component where the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Finally, the Company's policy is to exclude performance obligations resulting from contracts with a duration of one year or less from its disclosures related to remaining performance obligations.

The amount of consideration to which the Company expects to be entitled in exchange for the goods and services is not generally subject to significant variations. However, the Company does offer certain customers rebates, prompt payment discounts, end-user discounts, the right to return eligible products, and/or other forms of variable consideration. The Company estimates this variable consideration using the expected value amount, which is based on historical experience. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company adjusts the estimate of revenue at the earlier of when the amount of consideration the Company expects to receive changes or when the consideration becomes fixed. The Company recognizes the cost of freight and shipping when control of the products or services has transferred to the customer as an expense in "Cost of products sold" on the Consolidated Statement of Income, because those are costs incurred to fulfill the promise recognized, not a separate performance obligation. To the extent certain freight and shipping fees are charged to customers, the Company recognizes the amounts charged to customers as revenues and the related costs as an expense in "Cost of products sold" when control of the related products or services has transferred to the customer.

Contracts are occasionally modified to account for changes in contract specifications, requirements, and pricing. The Company considers contract modifications to exist when the modification either creates new enforceable rights and obligations or changes existing ones. Substantially all of the Company's contract modifications are for goods or services that are distinct from the existing contract. Therefore, the effect of a contract modification on the transaction price and the Company's measure of progress for the performance obligation to which it relates is generally recognized on a prospective basis.

Cash Equivalents:

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Restricted Cash:

Cash of ~~$6.7~~$0.8 million and ~~$0.6~~$6.7 million at December 31, ~~2019~~2020 and ~~2018,~~2019, respectively, was restricted for contractually specified uses. The ~~increase~~decrease was primarily due to the release of the Company's contractual cash hold-back ~~of cash~~ for ~~potential~~ working capital ~~adjustments~~adjustment as part of the BEKA acquisition.

Accounts Receivable, Less Allowances:

Accounts receivable, less allowances on the Consolidated Balance Sheet include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. The Company maintains an allowance for doubtful accounts, which represents an estimate of the losses expected from the accounts receivable portfolio, to reduce accounts receivable to their net realizable value. The allowance is based upon historical trends in collections and write-offs, management's judgment of the probability of collecting accounts and management's evaluation of business risk. The Company extends credit to customers satisfying pre-defined credit criteria. The Company believes it has limited concentration of credit risk due to the diversity of its customer base.

Table of Contents

Note 1 - Significant Accounting Policies (continued)

Unbilled Receivables:

Unbilled receivables on the Consolidated Balance Sheet primarily include unbilled amounts typically resulting from sales under long-term contracts when the following conditions exist: (i) cost-to-cost method of revenue recognition is utilized; (ii) the revenue recognized exceeds the amount billed to the customer; and (iii) the right to payment is primarily subject only to the passage of time. The amounts recorded for unbilled ~~amounts~~receivables do not exceed their net realizable value.

~~Table of Contents~~

~~Note 1 – Significant Accounting Policies (continued)~~

Inventories:

Inventories are valued at the lower of cost or net realizable value, with approximately ~~59%~~61% valued by the FIFO method and the remaining ~~41%~~39% valued by the LIFO method. The majority of the Company’s domestic inventories are valued by the LIFO method, while all of the Company’s international inventories are valued by the FIFO method.

Investments:

Short-term investments are investments with maturities between three months and one year and are valued at amortized cost, which approximates fair value. The Company held short-term investments as of December 31, ~~2019~~2020 and ~~2018~~2019 with a fair value and cost basis of ~~$25.8~~$37.6 million and ~~$21.8~~$25.7 million, respectively, which were included in "Other current assets" on the Consolidated Balance Sheets.

Property, Plant and Equipment:

Property, plant and equipment, net on the Consolidated Balance Sheets is valued at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. The provision for depreciation is computed by the straight-line method based upon the estimated useful lives of the assets. The useful lives are approximately 30 years for buildings, ~~three~~3 to 10 years for computer software and ~~three~~3 to 20 years for machinery and equipment.

The impairment of long-lived assets is evaluated when events or changes in circumstances indicate that the carrying amount of the asset or related group of assets may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time to reduce the asset to the lower of its fair value or its net book value.

~~Goodwill and Other Intangible Assets:~~

Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from one to 20 years. Goodwill and indefinite-lived intangible assets not subject to amortization are tested for impairment at least annually. The Company performs its annual impairment test as of October 1st. Furthermore, goodwill and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable in accordance with accounting rules related to goodwill and other intangible assets.

~~Purchase accounting and business combinations:~~

Assets acquired and the liabilities assumed as part of a business combination are recognized at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. The Company considers inputs to value the assets and liabilities by taking into account competitive trends, market comparisons, independent appraisals, and historical data, among other factors, as supplemented by current and anticipated market conditions. The valuation inputs in these analyses are based on market participant assumptions. The Company may refine these estimates and record adjustments to an asset or liability with the offset to goodwill during the measurement period, which may be up to one year from the acquisition date. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the Company’s Consolidated Statements of Income.

~~Product Warranties:~~

The Company provides limited warranties on certain of its products. The Company accrues liabilities for warranties generally based upon specific claims and in certain instances based on historical warranty claim experience in accordance with accounting rules relating to contingent liabilities. When the Company becomes aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. Adjustments are made quarterly to the accruals as claim data and historical experience change.

~~Table of Contents~~

~~Note 1 – Significant Accounting Policies (continued)~~

~~Income Taxes:~~

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. The Company recognizes valuation allowances against deferred tax assets by tax jurisdiction when it is more likely than not those assets will not be realized. Accruals for uncertain tax positions are provided for in accordance with ASC 740-10. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.

~~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. Translation adjustments for assets and liabilities are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions are included in the Consolidated Statements of Income. Net of related derivative activity, the Company recognized a foreign currency exchange gain resulting from transactions of $6.1 million for the year ended December 31, 2019, and recognized a gain of $3.6 million and a loss of $3.7 million for the years ended December 31, 2018 and 2017, respectively.

~~Pension and Other Postretirement Benefits:~~

With the adoption of Accounting Standards Update ("ASU") 2017-07 on January 1, 2018, service cost is included in other employee compensation costs within operating income and is the only component of net periodic benefit cost that may be capitalized when applicable. The other components of net periodic benefit cost are presented outside of operating income. Also, actuarial gains and losses are excluded from segment results, while all other components of net periodic benefit cost will continue to be included within segment results. These changes in accounting principles were applied retrospectively; therefore, prior period amounts impacted have been revised accordingly herein. For further information, refer to the description of new accounting guidance adopted below.

~~Stock-Based Compensation:~~

The Company recognizes stock-based compensation expense over the related vesting period of the awards based on the fair value on the grant date. Stock options are issued with an exercise price equal to the opening market price of Timken common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. The fair value of stock-based awards that will settle in Timken common shares, other than stock options, is based on the opening market price of Timken common shares on the grant date. The fair value of stock-based awards that will settle in cash are remeasured at each reporting period until settlement of the awards.

~~Earnings Per Share:~~

Only certain unvested restricted share grants provide for the payment of nonforfeitable dividends. The Company considers these awards as participating securities. Earnings per share are computed using the two-class method. Basic earnings per share are computed by dividing net income less undistributed earnings allocated to unvested restricted shares by the weighted-average number of common shares outstanding during the year. Diluted earnings per share are computed by dividing net income less undistributed earnings allocated to unvested restricted shares by the weighted-average number of common shares outstanding, adjusted for the dilutive impact of outstanding stock-based awards.

~~Derivative Instruments:~~

The Company recognizes all derivatives on the Consolidated Balance Sheets at fair value. Derivatives that are not designated as hedges are adjusted to fair value through earnings. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive loss until the hedged item is recognized in earnings. The Company’s holdings of forward foreign currency exchange contracts qualify as derivatives pursuant to the criteria established in derivative accounting guidance, and the Company has designated certain of those derivatives as hedges.

~~Table of Contents~~

~~Note 1 – Significant Accounting Policies (continued)~~

~~Use of Estimates:~~

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Because actual results could differ from these estimates, the Company reviews and updates these estimates and assumptions regularly to reflect recent experience.

~~Recent Accounting Pronouncements:~~

~~New Accounting Guidance Adopted:~~

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 was issued to increase transparency and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. The Company adopted the new leasing standard on January 1, 2019 using the cumulative-effect adjustment transition method. The Company also elected several practical expedients to not asses the following as part of adoption: (1) whether any expired or existing contracts contain leases; (2) the lease classification between finance and operating leases for any expired or existing leases; and (3) the recognition of initial direct costs for existing leases. The Company also elected to not recognize leases with a term of 12 months or less on the Consolidated Balance Sheets. The adoption of the lease standard had no impact to the Company's consolidated results of operations or the captions on the consolidated statements of cash flows. The cumulative effect of the changes made to the balance sheet as of January 1, 2019 for the adoption of the new lease standard was as follows:

Balance at December 31, 2018 Effect of Accounting Change
Balance at
January 1, 2019
Operating lease assets $ —
$ 114.1
$ 114.1
Other intangible assets 733.2
0.7
733.9
Other non-current assets ⁽¹⁾
37.0
(15.3 ) 21.7
Total Assets 4,445.2
99.5
4,544.7

Short-term operating lease liability —
29.8
29.8
Long-term operating lease liability —
69.7
69.7
Total Liabilities $ 2,802.5
$ 99.5
$ 2,902.0

⁽¹⁾Due to the adoption of the new leasing standard, the Company recognized operating lease assets and corresponding operating lease liabilities on the Consolidated Balance Sheet. In conjunction with the adoption of the new leasing standard, the Company reclassified $15.3 million of lease assets related to purchase accounting adjustments from the ABC Bearings acquisition from Other assets to Operating lease assets. These assets do not have material corresponding lease liabilities.Leases:

The Company determines if any arrangement is a lease at the inception of a contract. For leases where the Company is the lessee, it recognizes lease assets and related lease liabilities at the lease commencement date based on the present value of lease payments over the lease term. Most of the Company’s leases do not provide an implicit interest rate. As a result, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease assets also consist of amounts for favorable or unfavorable lease terms related to acquisitions. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. A lease asset and lease liability are not recorded for leases with an initial term of less than 12 months or less and the lease expenses related to these leases is recognized as incurred over the lease term.

~~In August 2017, the FASB issued ASU 2017-12, "Derivatives~~Goodwill and ~~Hedging (Topic 815): Targeted Improvements~~Other Intangible Assets:

Intangible assets subject to ~~Accounting~~amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from 1 to 20 years. Goodwill and indefinite-lived intangible assets not subject to amortization are tested for ~~Hedging Activities", which impacts both designation~~impairment at least annually. The Company performs its annual impairment test as of October 1st. Furthermore, goodwill and ~~measurement guidance~~intangible assets are reviewed for ~~qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 amends and clarifies the requirements to qualify for hedge accounting, removes the requirement to recognize~~impairment whenever events or changes in ~~fair value from certain hedges~~circumstances indicate that the carrying values may not be recoverable in ~~current earnings,~~accordance with accounting rules related to goodwill and specifies the presentation of changes in fair value in the income statement for all hedging instruments. ASU 2017-12 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2017-12 effective January 1, 2019, and the impact of adoption was not material to the Company's results of operations and financial condition.other intangible assets.

Table of Contents

Note 1 –- Significant Accounting Policies (continued)

Purchase accounting and business combinations:

Product Warranties:

Income Taxes:

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. Translation adjustments for assets and liabilities are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions are included in the Consolidated Statements of Income. Net of related derivative activity, the Company recognized a foreign currency exchange loss resulting from transactions of $10.0 million for the year ended December 31, 2020, and recognized a gain of $6.1 million and a gain of $3.6 million for the years ended December 31, 2019 and 2018, respectively.

Pension and Other Postretirement Benefits:

The Company recognizes actuarial gains and losses immediately through net periodic benefit cost upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement. Actuarial gains and losses are excluded from segment results, while all other components of net periodic benefit cost will continue to be included within segment results.

Stock-Based Compensation:

Table of Contents

Note 1 - Significant Accounting Policies (continued)

Earnings Per Share:

Certain unvested restricted share grants provide for the payment of nonforfeitable dividends. The Company considers these awards as participating securities. Earnings per share are computed using the two-class method. Basic earnings per share are computed by dividing net income less undistributed earnings allocated to unvested restricted shares by the weighted-average number of common shares outstanding during the year. Diluted earnings per share are computed by dividing net income less undistributed earnings allocated to unvested restricted shares by the weighted-average number of common shares outstanding, adjusted for the dilutive impact of outstanding stock-based awards.

Derivative Instruments:

Use of Estimates:

Recent Accounting Pronouncements:

New Accounting Guidance ~~Issued and Not Yet~~ Adopted:

In June 2016, the FASB issued ~~ASU~~Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments".~~Instruments," and was subsequently updated with ASU ~~2016-13 changes~~2019-04 in April of 2019. These ASUs change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance ~~will replace~~replaced the current incurred loss approach with an expected loss model. The new expected credit loss impairment model ~~will apply~~applies to most financial assets measured at amortized cost and certain other instruments, including trade ~~unbilled~~ and other receivables, loans, held-to-maturity debt instruments, net investments in leases, loan commitments and standby letters of credit. Upon initial recognition of the exposure, the expected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. ASU 2016-13 does not prescribe a specific method to make the estimate, so its application ~~will require~~requires significant judgment. ASU 2016-13 iswas effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ~~Based on the Company's analysis,~~The Company adopted ASU 2016-13 ~~did~~effective January 1, 2020, and the impact of adoption was not ~~have a~~ material ~~impact on~~to the Company's results of operations and financial ~~condition upon~~condition. Refer to the Consolidated Statements of Shareholders’ Equity for the cumulative effect of initially applying ASU 2016-13.

Table of Contents

Note 1 - Significant Accounting Policies (continued)

New Accounting Guidance Issued and Not Yet Adopted:

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." This guidance 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 at the completion of that analysis.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (ASC 740) – Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. This standard is effective for public companies in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on ~~January 1, 2020.~~

the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company has assessed the adoption of ASU 2019-12, and determined that the standard is not expected to materially impact the Company’s results of operations and financial condition.

Note 2 - Acquisitions ~~and Divestitures~~

The Company completed ~~two acquisitions~~1 acquisition in ~~2019.~~2020. On November 30, 2020, the Company completed the acquisition of the assets of Aurora. With expected 2020 annual sales of approximately $30 million, Aurora serves a diverse range of industrial sectors, including aerospace and defense, racing, off-highway equipment and packing. Aurora is headquartered in Montgomery, Illinois. The total purchase price for this acquisition was $17.8 million, including $0.5 million of the purchase price that was held back for the settlement of net working capital, subject to a post-closing net working capital adjustment. Based on markets and customers served, results for Aurora are reported in both the Mobile Industries segment and the Process Industries segment.

During 2019 the Company completed 2 acquisitions. On November 1, 2019,, the Company completed the acquisition of BEKA, a leading global supplier of automatic lubrication systems. ~~With expected 2019 annual sales of approximately $135 million,~~ BEKA serves a diverse range of industrial sectors, including wind, food and beverage, rail, on- and off-highway and other process industries. Headquartered in Pegnitz, Germany, BEKA has manufacturing and research and development ~~based~~facilities in Germany, and assembly facilities and sales offices around the world. On April 1, 2019,, the Company completed the acquisition of Diamond Chain, a leading supplier of high-performance roller chains for industrial markets. Diamond Chain serves a diverse range of market sectors, including industrial distribution, material handling, food and beverage, agriculture, construction and other process industries. Diamond Chain ~~located in Indianapolis, Indiana,~~ operates primarily in the ~~United States~~U.S. and China and had sales of approximately $60 million for the twelve months ended March 31, 2019. The total purchase price for these acquisitions was $252.2 million, which includes cash consideration of $228.4 million, net of cash acquired of $5.9 million, plus assumed debt of $17.9 million. The Company incurred acquisition-related costs of $4.0 million in 2019 to complete these acquisitions. Based on markets and customers served, the majority of the results for BEKA are reported in the Mobile Industries segment, and a majority of the results for Diamond Chain are reported in the Process Industries segment.China.

~~During 2018, the Company completed three acquisitions. On~~ ~~September 18, 2018~~, the Company completed the acquisition of Rollon, a leader in engineered linear motion products, specializing in the design and manufacture of linear guides, telescopic rails and linear actuators used in a wide range of industries such as passenger rail, aerospace, packaging and logistics, medical and automation. On ~~September 1, 2018~~, ~~the Company completed the acquisition of Cone Drive, a leader in precision drives used in diverse markets including solar, automation, aerial platforms, and food and beverage. On~~ ~~August 30, 2018, the Company's majority-owned subsidiary, Timken India, completed the acquisition of ABC Bearings, a manufacturer of tapered, cylindrical and spherical roller bearings and slewing rings in India. Consideration for the acquisition of ABC Bearings consisted of Timken India stock. Refer to the Consolidated Statement of Shareholders' Equity~~for more information on the acquisition of ABC Bearings. The total purchase price for these acquisitions, net of cash acquired of $30.1 million, was $829.5 million, which represents $834.3 million as of December 31, 2018 net of purchase price adjustments of $4.8 million made in 2019. Also, the total purchase price for 2018 acquisitions included $540.0 million for Rollon. The Company i~~ncurred acquisition-related costs~~ ~~of $9.6 million~~ in ~~2018~~ ~~to complete these acquisitions.~~ Based on markets and customers served, the majority of the results for Rollon and Cone Drive are reported in the Process Industries segment and substantially all of the results for ABC Bearings are reported in the Mobile Industries segment.

5559

Table of Contents

Note 2 - Acquisitions ~~and Divestitures~~ (continued)

The purchase price allocations at fair value, net of cash acquired, for ~~2019~~2020 and ~~2018~~2019 acquisitions as of December 31, ~~2019~~2020 and ~~2018~~2019 are presented below:


	2020		2019
Assets:
Accounts receivable	$	2.7	$	26.1
Inventories	16.4		59.4
Other current assets	0.1		5.1
Property, plant and equipment	10.9		57.4
Operating lease assets	0		5.1
Goodwill	0		52.6
Other intangible assets	0		84.3
Other non-current assets	0		0.9
Total assets acquired	$	30.1	$	290.9
Liabilities:
Accounts payable, trade	$	0.8	$	10.6
Salaries, wages and benefits	0		6.8
Income taxes payable	0		2.1
Other current liabilities	0.9		7.1
Short-term debt	0		0.8
Long-term debt	0		17.2
Accrued pension cost	0		0.8
Accrued postretirement liability	0		0.1
Long-term operating lease liabilities	0		4.5
Deferred taxes	0		2.9
Other non-current liabilities	0		1.1
Total liabilities assumed	$	1.7	$	54.0
Noncontrolling interest acquired	0		1.8
Net assets acquired	$	28.4	$	235.1
Cash flow reconciling items:
Working capital adjustment related to 2018 acquisitions paid in 2019	$	0	$	2.9
Working capital adjustment for 2019 acquisitions paid (recognized) in 2020	6.7		(6.7)
Indemnification settlement received	0		(4.8)
Bargain purchase price gain	(11.1)		0
Cash paid for acquisitions, net of cash acquired	$	24.0	$	226.5

2019 2018
Assets:
Accounts receivable $ 26.3
$ 42.5
Inventories 62.9
61.6
Other current assets 4.9
8.5
Property, plant and equipment 57.4
71.7
Operating lease assets 4.7
—
Goodwill 44.2
468.2
Other intangible assets 84.4
372.6
Other non-current assets 0.7
20.2
Total assets acquired $ 285.5
$ 1,045.3
Liabilities:
Accounts payable, trade $ 10.8
$ 35.2
Salaries, wages and benefits 6.8
9.1
Income taxes payable 2.1
2.5
Other current liabilities 6.7
8.2
Short-term debt 0.8
2.5
Long-term debt 17.2
3.0
Accrued pension cost 0.5
5.7
Accrued postretirement liability 0.1
11.7
Long-term operating lease liabilities 4.1
—
Deferred taxes 5.1
116.2
Other non-current liabilities 1.1
16.9
Total liabilities assumed $ 55.3
$ 211.0
Noncontrolling interest acquired 1.8
—
Net assets acquired $ 228.4
$ 834.3
Cash flow reconciling items:
Indemnification payment (accrual) $ 2.9
$ (2.9 )
Working capital purchase price adjustment (4.8 ) —
Shares issued for the acquisition of ABC Bearings —
(66.0 )
Cash paid for acquisitions, net of cash acquired $ 226.5
$ 765.4

In April 2020, the Company paid $6.7 million for a working capital adjustment to the purchase price for BEKA in accordance with the purchase agreement. This adjustment, as well as other measurement period adjustments recorded in 2020, resulted in an $8.4 million increase to goodwill.

As a result of applying the accounting rules on business combinations, the Company recognized a bargain purchase gain of $11.1 million on the acquisition of Aurora. The Company believes it was able to negotiate a bargain purchase price for the business due to some historic operational performance challenges, as well as the seller’s desire to exit the business in an expedited manner in an exclusive process with the Company.

~~As reflected in table above,~~

In January 2019, the Company paid a working capital adjustment of $2.9 million ~~in January 2019~~ in connection with the Cone Drive acquisition, which was accrued and reflected in the purchase price in 2018. In May 2019, the Company received a $4.8 million payment from escrow related to an indemnification settlement for the Cone Drive acquisition, which is reflected as a purchase price adjustment. ~~This adjustment,~~These adjustments, as well as other measurement period adjustments recorded in 2019, resulted in a $1.9 million increase to Goodwill.

The 2019 acquisitions presented above include goodwill of $25.4 million and intangible assets of $55.1 million for BEKA, and the 2018 acquisitions presented above include goodwill of $311.5 million and intangible assets of $261.7 million for Rollon.

Table of Contents

Note 2 - Acquisitions ~~and Divestitures~~ (continued)

The amounts for ~~2019~~2020 in the table above represent the preliminary purchase price allocations for ~~Diamond Chain and BEKA.~~Aurora. These purchase price allocations ~~including the residual amount allocated to goodwill,~~ are based on preliminary information and are subject to change as additional information concerning final asset and liability valuations is obtained. The purchase price allocation for ~~Diamond Chain is incomplete as it relates to the final determination of fair value for contingencies, intangible assets and certain income tax adjustments. The purchase price allocation for BEKA~~Aurora is preliminary as a result of the proximity of the acquisition date to December 31, ~~2019,~~2020, and as a result, no elements of the purchase price allocation have been finalized. During the measurement period for ~~each~~this acquisition, wethe Company will adjust assets and liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date. The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the acquisition date. As a result of recognizing the bargain purchase price gain, any change will be reflected as an adjustment to pretax income.

NaN intangible assets were acquired in 2020. The following table summarizes the ~~preliminary~~ purchase price allocation at fair value for identifiable intangible assets acquired in ~~2019 and 2018:~~2019:

2019 2018

Weighted-
Average Life

Weighted-
Average Life
Trade names (indefinite life) $ 28.2
Indefinite $ 45.3
Indefinite
Trade names (finite life) —

4.4
10 years
Technology and know-how 22.4
17 years 122.3
17 years
Customer relationships 33.3
19 years 201.5
18 years
Other —

0.2
6 years
Capitalized software 0.5
2 years 1.7
5 years
Total intangible assets $ 84.4
$ 375.4


	2019
				Weighted- Average Life
Trade names (indefinite life)		$	28.2	Indefinite

Technology and know-how		22.4		17 years
Customer relationships		33.3		19 years

Capitalized software		0.5		2 years
Total intangible assets		$	84.4

The total acquired intangible asset amount for ~~2018~~2019 acquisitions does not ~~agree to~~fully align with the purchase price allocations shown previously due to measurement period adjustments reflected in the purchase price allocations.

~~Divestiture:~~

On September 19, 2018, the Company completed the sale of the ICT Business, located in Gorinchem, Netherlands. The Company acquired the business in July 2017 as part of the Groeneveld acquisition. The ICT Business is separate from the Groeneveld lubrications solutions business and had sales of approximately $15 million for the twelve months ended September 30, 2018.

Table of Contents

Note 3 - Revenue

The following table presents details deemed most relevant to the users of the financial statements about total revenue for the years ended December 31, 2020, 2019 and 2018:


	December 31, 2020
	Mobile		Process		Total
United States	$	853.8	$	699.6	$	1,553.4
Americas excluding United States	168.1		138.0		306.1
Europe / Middle East / Africa	389.9		457.0		846.9
China	102.2		421.0		523.2
Asia-Pacific excluding China	157.6		126.0		283.6
Net sales	$	1,671.6	$	1,841.6	$	3,513.2

	December 31, 2019
	Mobile		Process		Total
United States	$	1,007.1	$	821.0	$	1,828.1
Americas excluding United States	209.6		167.7		377.3
Europe / Middle East / Africa	390.8		489.2		880.0
China	92.1		268.5		360.6
Asia-Pacific excluding China	194.3		149.6		343.9
Net sales	$	1,893.9	$	1,896.0	$	3,789.9

	December 31, 2018
	Mobile		Process		Total
United States	$	1,028.8	$	769.5	$	1,798.3
Americas excluding United States	208.9		176.7		385.6
Europe / Middle East / Africa	382.5		380.2		762.7
China	95.4		218.4		313.8
Asia-Pacific excluding China	188.1		132.3		320.4
Net sales	$	1,903.7	$	1,677.1	$	3,580.8

December 31, 2019
Mobile Process Total
United States $ 1,007.1
$ 821.0
$ 1,828.1
Americas excluding United States 209.6
167.7
377.3
Europe / Middle East / Africa 390.8
489.2
880.0
Asia-Pacific 286.4
418.1
704.5
Net sales $ 1,893.9
$ 1,896.0
$ 3,789.9

December 31, 2018
Mobile Process Total
United States $ 1,028.8
$ 769.5
$ 1,798.3
Americas excluding United States 208.9
176.7
385.6
Europe / Middle East / Africa 382.5
380.2
762.7
Asia-Pacific 283.5
350.7
634.2
Net sales $ 1,903.7
$ 1,677.1
$ 3,580.8

December 31, 2017
Mobile Process Total
United States $ 938.4
$ 664.6
$ 1,603.0
Americas excluding United States 182.5
150.7
333.2
Europe / Middle East / Africa 305.0
265.3
570.3
Asia-Pacific 214.1
283.2
497.3
Net sales $ 1,640.0
$ 1,363.8
$ 3,003.8

When reviewing revenues by sales channel, the Company separates net sales to OEMs from sales to distributors and end users. The following table presents the percent of revenues by sales channel for the ~~year~~years ended December 31, ~~2019~~2020 and December 31, ~~2018:~~2019:


Revenue by sales channel	December 31, 2020	December 31, 2019
Original equipment manufacturers	60%	56%
Distribution/end users	40%	44%

Revenue by sales channel December 31, 2019 December 31, 2018
Original equipment manufacturers 56% 56%
Distribution/end users 44% 44%

In addition to disaggregating revenue by segment and 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 ~~year~~years ended December 31, ~~2019~~2020 and December 31, ~~2018, approximately 12%~~2019, approximately 11% and ~~10%~~12%, respectively, 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. ~~The~~Approximately 4% and 5% of total net sales represented service revenue in 2020 and 2019, respectively. Finally, the payment terms with the U.S. government or its contractors ~~which~~ represented ~~approximately~~approximately 8% ~~and 7% of~~of total net sales for 2020 and 2019, ~~and 2018, respectively, differ from those~~respectively.

Table of ~~non-government customers. Finally, approximately 5% of total net sales represented service revenue in both 2019 and 2018.~~Contents

Note 3 - Revenue(continued)

Remaining Performance Obligations:

Remaining performance obligations represent the transaction price of orders meeting the definition of a contract in the new revenue standard 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 ~~$204.6~~$224.3 million at December 31, ~~2019.~~2020.

~~Table of Contents~~

~~Note 3 - Revenue (continued)~~

Unbilled Receivables:

The following table contains a rollforward of unbilled receivables for the year ended December 31, ~~2019:~~2020:


	December 31, 2020
Beginning balance, January 1	$	129.2
Additional unbilled revenue recognized	393.6
Less: amounts billed to customers	(411.9)

Ending balance	$	110.9

December 31,
2019
Beginning balance, January 1 $ 116.6
Additional unbilled revenue recognized 444.0
Less: amounts billed to customers (431.4 )
Ending balance $ 129.2

There were no impairment losses recorded on unbilled receivables for the year ended December 31, ~~2019.~~2020.

Note 4 - Segment Information

The Company operates under 2 reportable segments: (1) Mobile Industries and (2) Process Industries.

Description of types of products and services from which each reportable segment derives its revenues:

The Company's reportable segments are business units that target different industry sectors. While the segments often operate using a shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market segments.

Mobile Industries offers an extensive portfolio of bearings, seals, lubrication devices and systems, as well as power transmission components, engineered chain, augers, belts, couplings, clutches, brakes and related products and maintenance services, to OEMs and end users of: off-highway equipment for the agricultural, construction, mining, outdoor power equipment and powersports markets; on-highway vehicles including passenger cars, light trucks and medium- and heavy-duty trucks; rail cars and locomotives. 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, and include hub units, specialty kits and more. Mobile Industries also provides power transmission systems and flight-critical components for civil and military aircraft, which include bearings, helicopter transmission systems, rotor-head assemblies, turbine engine components, gears and housings.

Process Industries supplies industrial bearings and assemblies, power transmission components such as gears and gearboxes, linear motion products, couplings, seals, lubricants, chains, belts and related products and services to OEMs and end users in industries that place heavy demands on operating equipment they make or use. This includes: metals, mining, cement and aggregate production; wind energy and solar; coal power generation and oil and gas; pulp and paper in applications including printing presses; packaging and automation; and cranes, hoists, drawbridges, gear drives, conveyors, health and critical motion control equipment, marine equipment and food processing equipment. 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. In addition, the Company’s industrial services group offers end users a broad portfolio of maintenance support and capabilities that include repair and service for bearings and gearboxes as well as electric motor rewind, repair and services.

Table of Contents

Note 4 - Segment Information (continued)

Measurement of segment profit or loss and segment assets:

The Company evaluates performance and allocates resources based on return on capital and profitable growth. Beginning in the fourth quarter of 2019, the primary measurement used by management to measure the financial performance of each segment was EBITDA. The Company began using EBITDA as its main operating income metric as recent acquisitions have resulted in an increased amount of purchase accounting amortization expense that affects comparability of results across periods and versus other companies. The primary measurement used by management to measure the financial performance of each segment ~~prior to the fourth quarter of 2019 was EBIT. Segment results have been revised for all periods presented to be consistent with new measure of segment performance.~~is EBITDA.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

~~Table of Contents~~

~~Note 4 - Segment Information (continued)~~

Factors used by management to identify the enterprise’s reportable segments:

Net sales by geographic area are reported by the destination of net sales, which is reflective of how the Company operates its segments. Long-lived assets by geographic area are reported by the location of the subsidiary.

Timken’s non-U.S. operations are subject to normal international business risks not generally applicable to a domestic business. These risks include currency fluctuation, changes in tariff restrictions, difficulties in establishing and maintaining relationships with local distributors and dealers, import and export licensing requirements, difficulties in staffing and managing geographically diverse operations and restrictive regulations by foreign governments, including price and exchange controls, compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and environmental regulatory requirements, and disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the FCPA.

Business Segment Information:

The following tables provide segment financial information and a reconciliation of segment results to consolidated results:

2019 2018 2017
Net sales to external customers:
Mobile Industries $ 1,893.9
$ 1,903.7
$ 1,640.0
Process Industries 1,896.0
1,677.1
1,363.8
$ 3,789.9
$ 3,580.8
$ 3,003.8
Segment EBITDA:
Mobile Industries $ 284.9
$ 272.2
$ 209.9
Process Industries 466.6
405.7
288.6
Total EBITDA, for reportable segments $ 751.5
$ 677.9
$ 498.5
Corporate EBITDA (55.4 ) (61.4 ) (48.6 )
Corporate pension-related charges ⁽¹⁾
4.1
(12.8 ) (18.1 )
Depreciation and amortization (160.6 ) (146.0 ) (137.7 )
Interest expense, net (67.2 ) (49.6 ) (34.2 )
Income before income taxes $ 472.4
$ 408.1
$ 259.9


	2020		2019		2018
Net sales to external customers:
Mobile Industries	$	1,671.6	$	1,893.9	$	1,903.7
Process Industries	1,841.6		1,896.0		1,677.1
	$	3,513.2	$	3,789.9	$	3,580.8
Segment EBITDA:
Mobile Industries	$	232.5	$	284.9	$	272.2
Process Industries	442.9		466.6		405.7
Total EBITDA, for reportable segments	$	675.4	$	751.5	$	677.9
Corporate EBITDA	(40.7)		(55.4)		(61.4)
Corporate pension and other postretirement benefit related (expense) income (1)	(18.5)		4.1		(12.8)
Acquisition-related gain (2)	11.1		0		0
Depreciation and amortization	(167.1)		(160.6)		(146.0)
Interest expense, net	(63.9)		(67.2)		(49.6)
Income before income taxes	$	396.3	$	472.4	$	408.1

⁽¹⁾Corporate ~~pension-related charges represent~~pension and other postretirement benefit related (expense) income represents curtailments, professional fees associated with pension de-risking and 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.

(2) The acquisition-related gain represents a bargain purchase price gain on the acquisition of Aurora, acquired on November 30, 2020. See Note 2 - Acquisitions for additional information.


	2019		2018			2020		2019
Assets employed at year-end:					Assets employed at year-end:
Mobile Industries	$	2,109.9	$	1,984.5	Mobile Industries	$	2,082.2	$	2,109.9
Process Industries	2,366.7		2,211.3		Process Industries	2,482.6		2,366.7
Corporate ⁽²⁾	383.3		249.4		Corporate (2)	476.8		383.3
	$	4,859.9	$	4,445.2		$	5,041.6	$	4,859.9

⁽²⁾Corporate assets include corporate buildings and cash and cash equivalents.

2019 2018 2017
Capital expenditures:
Mobile Industries $ 74.2
$ 48.3
$ 57.3
Process Industries 65.3
63.3
46.2
Corporate 1.1
1.0
1.2
$ 140.6
$ 112.6
$ 104.7
Depreciation and amortization:
Mobile Industries $ 73.6
$ 73.5
$ 70.9
Process Industries 86.2
71.9
66.3
Corporate 0.8
0.6
0.5
$ 160.6
$ 146.0
$ 137.7

Table of Contents

Note 4 - Segment Information (continued)


	2020		2019		2018
Capital expenditures:
Mobile Industries	$	70.5	$	74.2	$	48.3
Process Industries	50.1		65.3		63.3
Corporate	1.0		1.1		1.0
	$	121.6	$	140.6	$	112.6
Depreciation and amortization:
Mobile Industries	$	79.7	$	73.6	$	73.5
Process Industries	86.6		86.2		71.9
Corporate	0.8		0.8		0.6
	$	167.1	$	160.6	$	146.0

Geographic Financial Information:

2019 2018
Property, Plant and Equipment, net:
United States $ 391.7
$ 371.7
Americas excluding United States 28.1
13.7
Europe / Middle East / Africa 252.6
236.6
Asia-Pacific 316.8
290.1
$ 989.2
$ 912.1


	2020		2019
Property, Plant and Equipment, net:
United States	$	401.8	$	391.7
China	196.4		183.4
India	140.0		132.6
Romania	118.0		105.3
Rest of world	179.4		176.2
	$	1,035.6	$	989.2

Refer to Note 3 - Revenue for further information pertaining to geographic net sales information.

Table of Contents

Note 5 - Income Taxes

Income before income taxes, based on geographic location of the operations to which such earnings are attributable, is provided below. As the Company has elected to treat certain foreign subsidiaries as branches for U.S. income tax purposes, pretax income attributable to the United States shown below may differ from the pretax income reported in the Company’s annual U.S. federal income tax return.

Income before income taxes:


	2020		2019		2018
United States	$	144.1	$	190.7	$	202.0
Non-United States	252.2		281.7		206.1
Income before income taxes	$	396.3	$	472.4	$	408.1

2019 2018 2017
United States $ 190.7
$ 202.0
$ 107.4
Non-United States 281.7
206.1
152.5
Income before income taxes $ 472.4
$ 408.1
$ 259.9

The provision for income taxes consisted of the following:

2019 2018 2017
Current:
Federal $ 20.8
$ 46.1
$ 9.1
State and local 4.8
9.9
4.6
Foreign 81.0
68.0
44.3
$ 106.6
$ 124.0
$ 58.0
Deferred:
Federal $ 39.8
$ (19.9 ) $ 13.6
State and local 6.5
(0.7 ) (4.6 )
Foreign (55.2 ) (0.8 ) (9.4 )
$ (8.9 ) $ (21.4 ) $ (0.4 )
United States and foreign tax provision on income $ 97.7
$ 102.6
$ 57.6


	2020		2019		2018
Current:
Federal	$	40.3	$	20.8	$	46.1
State and local	7.9		4.8		9.9
Foreign	78.9		81.0		68.0
	$	127.1	$	106.6	$	124.0
Deferred:
Federal	$	(19.5)	$	39.8	$	(19.9)
State and local	(1.3)		6.5		(0.7)
Foreign	(2.4)		(55.2)		(0.8)
	$	(23.2)	$	(8.9)	$	(21.4)
United States and foreign tax provision on income	$	103.9	$	97.7	$	102.6

The Company made net income tax payments of $119.3 million, $118.6 million and $121.3 million in 2020, 2019 and ~~$89.9 million in 2019,~~ 2018, ~~and 2017,~~ respectively.

~~Table of Contents~~

~~Note 5 - Income Taxes (continued)~~

The following table is the reconciliation between the provision for income taxes and the amount computed by applying the U.S. federal income tax ~~rate~~rate of 21% ~~(35% in 2017)~~ to income before taxes:


	2020			2019			2018
Income tax at the U.S. federal statutory rate	$	83.2		$	99.2		$	85.7
Adjustments:
State and local income taxes, net of federal tax benefit	4.8			7.4			6.8
Tax on foreign remittances and U.S. tax on foreign income	22.5			26.4			21.1
Tax expense related to undistributed earnings of foreign subsidiaries	0.1			6.0			0
Foreign losses without current tax benefits	2.5			3.2			3.7
Foreign earnings taxed at different rates including tax holidays	11.1			12.6			11.1

U.S. foreign tax credit	(13.8)			(18.3)			(21.2)
Accruals and settlements related to tax audits	3.4			11.1			(3.8)
Valuation allowance changes	(0.7)			(44.5)			0
Deferred taxes related to branch operations	0			5.3			0
U.S. Tax Reform	0			0			(10.6)
Other tax rate change	0.8			(5.0)			(2.4)
Other items, net	(10.0)			(5.7)			12.2
Provision for income taxes	$	103.9		$	97.7		$	102.6
Effective income tax rate	26.2		%	20.7		%	25.1		%

2019 2018 2017
Income tax at the U.S. federal statutory rate $ 99.2
$ 85.7
$ 91.0
Adjustments:
State and local income taxes, net of federal tax benefit 7.4
6.8
3.1
Tax on foreign remittances and U.S. tax on foreign income 26.4
21.1
93.0
Tax expense related to undistributed earnings of foreign subsidiaries 6.0
—
—
Foreign losses without current tax benefits 3.2
3.7
8.9
Foreign earnings taxed at different rates including tax holidays 12.6
11.1
(18.0 )
U.S. domestic manufacturing deduction —
—
(3.9 )
U.S. foreign tax credit (18.3 ) (21.2 ) (104.2 )
Accruals and settlements related to tax audits 11.1
(3.8 ) (34.4 )
Valuation allowance changes (44.5 ) —
(12.6 )
Deferred taxes related to branch operations 5.3
—
—
U.S. Tax Reform —
(10.6 ) 35.3
Other tax rate change (5.0 ) (2.4 ) —
Other items, net (5.7 ) 12.2
(0.6 )
Provision for income taxes $ 97.7
$ 102.6
$ 57.6
Effective income tax rate 20.7 % 25.1 % 22.2 %

Table of Contents

Note 5 - Income Taxes (continued)

The Company released $44.5 million of foreign valuation allowances for the year ended December 31, 2019, $40.7 million of which relates to the valuation allowance that was recorded against German indefinite-lived loss carryforwards and pension deferred tax assets. Once established, the valuation allowance is released when, based on the weight of all available evidence, management concludes that related deferred tax assets are more likely than not to be realized. As a result of the execution of a tax planning strategy in the fourth quarter of 2019, management reached this conclusion and accordingly released the valuation allowance. Because the local German entity is treated as a branch under U.S. tax law, the valuation allowance release was partially offset by income tax expense of $5.3 million related to a U.S. deferred tax liability.

U.S. Tax Reform reduced the U.S. federal statutory rate from 35% to 21% beginning in 2018. U.S. Tax Reform also required companies to pay a one-time net charge related to the taxation of unremitted foreign earnings and to remeasure its U.S. deferred tax balances to the lower corporate income tax rate for the 2017 tax year. Additionally, U.S. Tax Reform created taxes on certain foreign sourced earnings known as the global intangible low-taxed income (“GILTI”) tax beginning with tax year 2018. The Company has elected to account for GILTI as a period cost in the year the tax is incurred. The accounting for the tax effects of U.S. Tax Reform was completed as of December 31, 2018 under Staff Accounting Bulletin No. 118.

Provisional estimates of $25.2 million for the one-time net charge related to the taxation of unremitted foreign earnings and $10.1 million related to the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate were recognized as components of income tax expense for the year ended December 31, 2017. For the year ended December 31, 2018, the Company recorded $8.2 million of tax benefit for changes to the provisional estimate for the remeasurement of net U.S. deferred tax balances as a result of adjustments to finalize purchase accounting for prior-year acquisitions, the remeasurement of anticipatory tax credits for foreign branches and changes to U.S. deferred tax assets included in the 2017 U.S. federal income tax return. Over the same period, the Company recorded $2.4 million of tax benefit for changes in the provisional estimate of the 2017 one-time net charge related to the taxation of unremitted foreign earnings as a result of additional federal and state regulatory guidance issued and the filing of the Company's 2017 U.S. federal income tax return.

~~Table of Contents~~

~~Note 5 - Income Taxes (continued)~~

There are no changes to the Company’s assertion about its permanent reinvestment in undistributed foreign earnings. ~~For the year ended December 31, 2019, the~~The Company recorded $0.1 million and $6.0 million of income tax expense related to foreign withholding taxes on planned one-time ~~distributions.~~distribution for the years ended December 31, 2020 and 2019, respectively. No additional deferred taxes have been recorded for any other outside basis differences as these amounts continue to be indefinitely reinvested in foreign operations. The amounts of undistributed foreign earnings were ~~$785.3~~$810.3 million and ~~$651.1~~$785.3 million at December 31, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. It is not practicable to calculate the additional taxes that might be payable on such unremitted earnings due to the variety of circumstances and tax laws applicable at the time of distribution.

The effect of temporary differences giving rise to deferred tax assets and liabilities at December 31, ~~2019~~2020 and ~~2018~~2019 was as follows:


	2020		2019
Deferred tax assets:
Accrued postretirement benefits cost	$	15.4	$	0.1
Accrued pension cost	57.4		55.1
Other employee benefit accruals	11.0		10.9
Tax loss and credit carryforwards	90.2		86.0
Other, net	46.7		46.9
Valuation allowances	(36.7)		(33.7)
	$	184.0	$	165.3
Deferred tax liabilities - principally depreciation and amortization	(255.7)		(261.6)
Net deferred tax (liabilities) assets	$	(71.7)	$	(96.3)

2019 2018
Deferred tax assets:
Accrued postretirement benefits cost $ 0.1
$ 28.9
Accrued pension cost 55.1
59.5
Other employee benefit accruals 10.9
16.8
Tax loss and credit carryforwards 86.0
86.1
Other, net 46.9
42.9
Valuation allowances (33.7 ) (77.5 )
$ 165.3
$ 156.7
Deferred tax liabilities - principally depreciation and amortization (261.6 ) (235.7 )
Net deferred tax (liabilities) assets $ (96.3 ) $ (79.0 )

Table of Contents

Note 5 - Income Taxes (continued)

The Company has U.S. federal and state tax credit and loss carryforwards with tax benefits totaling ~~$3.7~~$6.7 million, portions of which will expire in ~~2020~~2021 and continue until ~~2039.~~2040. In addition, the Company has loss carryforwards in various non-U.S. jurisdictions with tax benefits totaling ~~$82.3~~$83.5 million, portions of which will expire in ~~2020~~2021 while others will be carried forward indefinitely. The Company has provided valuation allowances of ~~$33.5~~$35.9 million against certain of these carryforwards and ~~$0.2~~$0.8 million against other deferred tax assets. A majority of the non-U.S. loss carryforwards represent local country net operating losses for branches of the Company or entities treated as branches of the Company under U.S. tax law for which deferred taxes have been recorded.

As of December 31, 2020, the Company had $45.6 million of total gross unrecognized tax benefits, $39.2 million of which would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized. As of December 31, 2020, the Company believes it is reasonably possible that the amount of unrecognized tax positions could decrease by approximately $8.4 million during the next 12 months. The potential decrease would be primarily driven by settlements with tax authorities and the expiration of various applicable statutes of limitation. As of December 31, 2020, the Company had accrued $8.6 million of interest and penalties related to uncertain tax positions. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.

As of December 31, 2019, the Company had $38.9 million of total gross unrecognized tax benefits, $36.1 million of which would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized. As of December 31, 2019, the Company believes it is reasonably possible that the amount of unrecognized tax positions could decrease by approximately $7.7 million during the next 12 months. The potential decrease would be primarily driven by settlements with tax authorities and the expiration of various applicable statutes of limitation. As of December 31, 2019, the Company had accrued $5.0 million of interest and penalties related to uncertain tax positions. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.

As of December 31, 2018, the Company had $26.0 million of total gross unrecognized tax benefits, all of which would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized. As of December 31, 2018, the Company had accrued $2.5 million of interest and penalties related to uncertain tax positions. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.

As of December 31, 2017, the Company had $14.0 million of total gross unrecognized tax benefits, all of which would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized. As of December 31, 2017, the Company had accrued $3.0 million of interest and penalties related to uncertain tax positions.

~~Table of Contents~~

~~Note 5 - Income Taxes (continued)~~

The following table reconciles the Company’s total gross unrecognized tax benefits for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017:~~2018:


	2020		2019		2018
Beginning balance, January 1	$	38.9	$	26.0	$	14.0
Tax positions related to the current year:
Additions	2.2		3.6		0.4
Tax positions related to prior years:
Additions	8.7		11.7		17.8
Reductions	(1.0)		(1.1)		(2.9)
Settlements with tax authorities	(0.3)		(1.2)		(2.2)
Lapses in statutes of limitation	(2.9)		(0.1)		(1.1)
Ending balance, December 31	$	45.6	$	38.9	$	26.0

2019 2018 2017
Beginning balance, January 1 $ 26.0
$ 14.0
$ 39.2
Tax positions related to the current year:
Additions 3.6
0.4
2.7
Tax positions related to prior years:
Additions 11.7
17.8
6.9
Reductions (1.1 ) (2.9 ) (5.2 )
Settlements with tax authorities (1.2 ) (2.2 ) —
Lapses in statutes of limitation (0.1 ) (1.1 ) (29.6 )
Ending balance, December 31 $ 38.9
$ 26.0
$ 14.0

During 2020, gross unrecognized tax benefits increased primarily for additional accruals for uncertain tax positions related to non-U.S. transfer pricing along with prior year tax matters in multiple jurisdictions related to previous acquisitions and non-deductible expenses. These increases were partially offset by releases of accrual for lapses in statutes of limitations.

Table of Contents

Note 5 - Income Taxes (continued)

During 2019, gross unrecognized tax benefits increased primarily for additional accruals for uncertain tax positions related to U.S. Tax Reform along with prior year tax matters in multiple jurisdictions related to acquisitions. These increases were partially offset by settlements with the tax authorities for prior year tax matters related to the Company’s foreign operations.

During 2018, gross unrecognized tax benefits increased primarily for prior year tax matters in multiple jurisdictions related to acquisitions. These increases were partially offset by settlements with the tax authorities for prior year tax matters related to the Company’s international operations.

During 2017, gross unrecognized tax benefits decreased primarily due to expiration of applicable statutes of limitations in multiple jurisdictions. These decreases were partially offset by accruals related to both current and prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’s international operations.

As of December 31, ~~2019,~~2020 the Company is subject to examination by the IRS for tax years ~~2016~~2017 to the present. The Company also is subject to tax examination in various U.S. state and local tax jurisdictions for tax years ~~2012~~2013 to the present, as well as various foreign tax jurisdictions, including Mexico, China, Poland, France, Germany and India for tax years as early as ~~2003~~1999 to the present. The Company’s unrecognized tax benefits were presented on the Consolidated Balance Sheets as a component of other non-current ~~liabilities.~~liabilities and as a reduction to deferred income taxes.

Table of Contents

Note 6 - Earnings Per Share

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 years ended December 31, 2020, 2019 ~~2018~~ and ~~2017:~~2018:


	2020		2019		2018
Numerator:
Net income attributable to The Timken Company	$	284.5	$	362.1	$	302.8
Less: undistributed earnings allocated to nonvested stock	0		0		0
Net income available to common shareholders for basic and diluted earnings per share	$	284.5	$	362.1	$	302.8
Denominator:
Weighted average number of shares outstanding - basic	75,354,280		75,758,123		77,119,602
Effect of dilutive securities:
Stock options and awards - based on the treasury stock method	1,047,086		1,138,442		1,217,879
Weighted average number of shares outstanding, assuming dilution of stock options and awards	76,401,366		76,896,565		78,337,481
Basic earnings per share	$	3.78	$	4.78	$	3.93
Diluted earnings per share	$	3.72	$	4.71	$	3.86

2019 2018 2017
Numerator:
Net income attributable to The Timken Company $ 362.1
$ 302.8
$ 203.4
Less: undistributed earnings allocated to nonvested stock —
—
—
Net income available to common shareholders for basic and diluted earnings per share $ 362.1
$ 302.8
$ 203.4
Denominator:
Weighted average number of shares outstanding - basic 75,758,123
77,119,602
77,736,398
Effect of dilutive securities:
Stock options and awards - based on the treasury stock method 1,138,442
1,217,879
1,174,751
Weighted average number of shares outstanding, assuming dilution of stock options and awards 76,896,565
78,337,481
78,911,149
Basic earnings per share $ 4.78
$ 3.93
$ 2.62
Diluted earnings per share $ 4.71
$ 3.86
$ 2.58

The exercise prices for certain stock options that the Company has awarded exceed the average market price of the Company’s common shares. Such stock options are antidilutive and were not included in the computation of diluted earnings per share. The antidilutive stock options outstanding were 676,627, 1,016,435 and 1,139,146 during 2020, 2019 and ~~512,657 during~~ ~~2019~~, 2018, ~~and~~ ~~2017~~, respectively.

Note 7 - Inventories

The components of inventories at December 31, ~~2019~~2020 and ~~2018~~2019 were as follows:


	2020		2019
Manufacturing supplies	$	34.8	$	34.2
Raw materials	99.5		100.0
Work in process	320.3		308.9
Finished products	441.2		439.0
Subtotal	$	895.8	$	882.1
Allowance for surplus and obsolete inventory	(54.5)		(40.1)
Total Inventories, net	$	841.3	$	842.0

2019 2018
Manufacturing supplies $ 34.2
$ 32.4
Raw materials 99.8
102.4
Work in process 307.2
287.7
Finished products 436.6
452.7
Subtotal $ 877.8
$ 875.2
Allowance for surplus and obsolete inventory (35.8 ) (39.5 )
Total Inventories, net $ 842.0
$ 835.7

Inventories at December 31, ~~2019~~2020 valued on the FIFO cost method were ~~59%~~61% and the remaining ~~41%~~39% were valued by the LIFO method. If all inventories had been valued at FIFO, inventories would have been ~~$168.9~~$172.1 million and ~~$173.9~~$168.9 million greater at December 31, ~~2019~~2020 and ~~2018~~,2019, respectively. The Company recognized an increase in its LIFO reserve of $3.2 million during 2020, compared to a decrease in its LIFO reserve of $5.0 million during 2019. Inventory and the allowance for surplus and obsolete inventory increased from 2019~~, compared to an increase in its LIFO reserve~~ primarily as a result of ~~$6.2 million during~~ ~~2018~~.recent acquisitions.

Table of Contents

Note 8 - Property, Plant and Equipment

The components of property, plant and equipment, net at December 31, ~~2019~~2020 and ~~2018~~2019 were as follows:


	2020		2019
Land and buildings	$	535.3	$	510.9
Machinery and equipment	2,206.2		2,093.3
Subtotal	$	2,741.5	$	2,604.2
Less: accumulated depreciation	(1,705.9)		(1,615.0)
Property, Plant and Equipment, net	$	1,035.6	$	989.2

2019 2018
Land and buildings $ 510.9
$ 484.1
Machinery and equipment 2,093.3
2,002.4
Subtotal $ 2,604.2
$ 2,486.5
Less: accumulated depreciation (1,615.0 ) (1,574.4 )
Property, Plant and Equipment, net $ 989.2
$ 912.1

Total depreciation expense was $110.9 million, $103.3 million and $99.2 million ~~and $97.7 million in 2019, 2018 and 2017, respectively. In addition, depreciation expense is expected to increase~~ in 2020, ~~primarily due to incremental deprecation from acquisitions completed in 2019.~~

2019 and 2018, respectively.

Note 9 - Goodwill and Other ~~Intangibles~~Intangible Assets

Goodwill:

The Company reviews goodwill for impairment at the reporting unit level. The Mobile Industries segment has 4 reporting units and the Process Industries segment has 2 reporting units. Changes in the carrying value of goodwill were as follows:

Year ended December 31, 2020:


	Mobile Industries		Process Industries		Total
Beginning Balance	$	361.3	$	632.4	$	993.7
Acquisitions	5.6		2.8		8.4
Foreign currency translation adjustments	17.7		27.8		45.5
Ending Balance	$	384.6	$	663.0	$	1,047.6

The $8.4 million addition from acquisitions was the result of measurement period adjustments related to the 2019 acquisitions of BEKA and Diamond Chain bringing total goodwill to $52.6 million for these acquisitions. Approximately $19.0 million of this amount is tax deductible. Refer to Note 2 - Acquisitions for further information.

Year ended December 31, 2019:


	Mobile Industries		Process Industries		Total
Beginning Balance	$	349.7	$	610.8	$	960.5
Acquisitions	18.2		27.9		46.1
Foreign currency translation adjustments and other changes	(6.6)		(6.3)		(12.9)
Ending Balance	$	361.3	$	632.4	$	993.7

Mobile Industries
Process
Industries
Total
Beginning Balance $ 349.7
$ 610.8
$ 960.5
Acquisitions 18.2
27.9
46.1
Foreign currency translation adjustments and other changes (6.6 ) (6.3 ) (12.9 )
Ending Balance $ 361.3
$ 632.4
$ 993.7

~~The~~In 2019, the $46.1 million addition ~~from acquisitions~~ resulted ~~primarily~~ from the acquisitions of BEKA and Diamond Chain ~~in addition to~~and the measurement period adjustments of $1.9 million recorded in 2019 for 2018 acquisitions. ~~The Company is still evaluating the tax deductibility of goodwill from the BEKA acquisition. Refer to~~ ~~Note 2 - Acquisitions and Divestitures~~ ~~for further information.~~

~~Year ended December 31, 2018:~~

Mobile Industries
Process
Industries
Total
Beginning Balance $ 254.3
$ 257.5
$ 511.8
Acquisitions 108.4
356.6
465.0
Divestiture (5.1 ) —
(5.1 )
Foreign currency translation adjustments and other changes

(7.9 ) (3.3 ) (11.2 )
Ending Balance $ 349.7
$ 610.8
$ 960.5

In 2018, the $465.0 million addition from acquisitions resulted primarily from the acquisitions of Rollon, Cone Drive and ABC Bearings, partially offset by measurement period adjustments of $3.2 million recorded in 2018 for 2017 acquisitions. In addition, goodwill was reduced by $5.1 million as a result of the divestiture of the ICT Business.

No material goodwill impairment losses were recorded in 2020, 2019 ~~2018~~ or ~~2017.~~2018.

Table of Contents

Note 9 - Goodwill and Other ~~Intangibles~~Intangible Assets (continued)

Intangible Assets:

The following table displays intangible assets as of December 31, ~~2019~~2020 and ~~2018:~~2019:


	2020						2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Intangible assets subject to amortization:
Customer relationships	$	532.2	$	(161.9)	$	370.3	$	510.9	$	(128.8)	$	382.1
Technology and know-how	277.2		(72.0)		205.2		265.1		(54.7)		210.4
Trade names	14.2		(8.8)		5.4		12.7		(6.1)		6.6
Capitalized Software	276.4		(254.6)		21.8		270.3		(245.8)		24.5
Other	4.7		(3.7)		1.0		13.8		(9.1)		4.7
	$	1,104.7	$	(501.0)	$	603.7	$	1,072.8	$	(444.5)	$	628.3
Intangible assets not subject to amortization:
Trade names	$	129.0			$	129.0	$	121.5			$	121.5
FAA air agency certificates	8.7				8.7		8.7				8.7
	$	137.7			$	137.7	$	130.2			$	130.2
Total intangible assets	$	1,242.4	$	(501.0)	$	741.4	$	1,203.0	$	(444.5)	$	758.5

2019 2018

Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Intangible assets subject
to amortization:
Customer relationships $ 510.9
$ (128.8 ) $ 382.1
$ 481.5
$ (99.8 ) $ 381.7
Technology and know-how 265.1
(54.7 ) 210.4
245.0
(40.4 ) 204.6
Trade names 12.7
(6.1 ) 6.6
11.3
(4.8 ) 6.5
Capitalized Software 270.3
(245.8 ) 24.5
266.4
(236.5 ) 29.9
Other 13.8
(9.1 ) 4.7
40.8
(35.2 ) 5.6
$ 1,072.8
$ (444.5 ) $ 628.3
$ 1,045.0
$ (416.7 ) $ 628.3
Intangible assets not
subject to amortization:
Trade names $ 121.5

$ 121.5
$ 96.2

$ 96.2
FAA air agency certificates 8.7

8.7
8.7

8.7
$ 130.2

$ 130.2
$ 104.9

$ 104.9
Total intangible assets $ 1,203.0
$ (444.5 ) $ 758.5
$ 1,149.9
$ (416.7 ) $ 733.2

~~The gross carrying amount and accumulated amortization balances~~There were ~~impacted by $28.5 million of fully-amortized~~no intangible assets ~~that were written off~~acquired in ~~2019.~~

2020. Intangible assets acquired in 2019 totaled $84.4 million from the ~~Beka~~BEKA and Diamond Chain acquisitions. Intangible assets subject to amortization acquired in 2019 were assigned useful lives of two to 20 years and had a weighted-average amortization period of 18.1 years. Intangible assets acquired in 2018 totaled $375.4 million from the acquisitions of Rollon, Cone Drive and ABC Bearings. Intangible assets subject to amortization acquired in 2018 were assigned useful lives of two to 20 years and had a weighted-average amortization period of 17.1 years.

Amortization expense for intangible assets was $56.2 million, $57.3 million ~~$46.8 million~~ and ~~$40.0~~$46.8 million for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017,~~2018, respectively. Amortization expense for intangible assets is estimated to be approximately ~~$55.4 million in 2020, $51.4~~$54.2 million in 2021, ~~$46.6~~$49.4 million in 2022, ~~$43.7~~$46.2 million in 2023, ~~and $42.1~~$44.3 million in ~~2024.~~

2024 and $43.2 million in 2025.

Table of Contents

Note 10 - Leasing

The Company enters into operating and finance leases for manufacturing facilities, warehouses, sales offices, information technology equipment, plant equipment, vehicles and certain other equipment.

Lease expense ~~for the year ended December 31, 2019 was as follows:~~

2019
Operating lease expense $ 36.6
Amortization of right-of-use assets on finance leases 1.2
Total lease expense $ 37.8

~~Lease expense for operating leases under the prior leasing standard amounted to $35.7 million and $35.2 million~~ for the years ended December 31, ~~2018~~2020 and ~~2017, respectively.~~2019 was as follows:



	December 31, 2020		December 31, 2019
Operating lease expense	$	36.0	$	36.6
Amortization of right-of-use assets on finance leases	1.5		1.2
Total lease expense	$	37.5	$	37.8

The following tables present the impact of leasing on the Consolidated Balance Sheet.


Operating Leases	December 31, 2020		December 31, 2019
Lease assets:
Operating lease assets	$	118.2	$	114.1
Lease liabilities:
Short-term operating lease liabilities	$	27.2	$	28.3
Long-term operating lease liabilities	75.5		71.3
Total operating lease liabilities	$	102.7	$	99.6

Operating Leases December 31, 2019
Lease assets:
   Operating lease assets $ 114.1
Lease liabilities:
   Short-term operating lease liabilities $ 28.3
   Long-term operating lease liabilities 71.3
      Total operating lease liabilities $ 99.6


Finance Leases	December 31, 2020		December 31, 2019
Lease assets:
Property, plant and equipment, net	$	5.3	$	5.0
Lease liabilities:
Current portion of long-term debt	$	0.8	$	0.5
Long-term debt	2.9		2.9
Total finance lease liabilities	$	3.7	$	3.4

Finance Leases December 31, 2019
Lease assets:
   Property, plant and equipment, net $ 5.0
Lease liabilities:
   Current portion of long-term debt $ 0.5
   Long-term debt 2.9
      Total finance lease liabilities $ 3.4

Future minimum lease payments under non-cancellable leases at December 31, ~~2019~~2020 were as follows:

Operating Leases Finance Leases
Year Ending December 31,

2020 $ 31.7
$ 1.1
2021 22.5
1.1
2022 16.6
1.0
2023 11.8
0.3
2024 7.8
—
Thereafter 20.0
—
Total future minimum lease payments $ 110.4
$ 3.5
Less: imputed interest (10.8 ) (0.1 )
Total $ 99.6
$ 3.4


	Operating Leases		Finance Leases
Year Ending December 31,
2021	$	30.2	$	1.5
2022	23.5		1.3
2023	16.0		0.6
2024	10.5		0.3
2025	8.6		0.1
Thereafter	24.7		0
Total future minimum lease payments	$	113.5	$	3.8
Less: imputed interest	(10.8)		(0.1)
Total	$	102.7	$	3.7

Table of Contents

Note 10 - Leasing (continued)

The following tables present other information related to leases:



	December 31, 2020		December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	35.7	$	35.6
Financing cash flows from finance leases	1.2		1.6
Lease assets added in the period:
Operating leases	$	39.9	$	58.6
Finance leases	0.9		2.0


	December 31, 2020		December 31, 2019
Weighted-average remaining lease term:
Operating leases	5.1 years		5.3 years
Finance leases	2.9 years		3.3 years
Weighted-average discount rate:
Operating leases	3.69	%	3.87	%
Finance leases	2.55	%	2.55	%

2019
Cash paid for amounts included in the measurement of lease liabilities:
   Operating cash flows from operating leases $ 35.6
   Financing cash flows from finance leases 1.6
Lease assets added in the period:
   Operating leases $ 58.6
   Finance leases 2.0



	~~December 31, 2019~~
~~Weighted-average remaining lease term:~~
~~Operating leases~~	~~5.3 years~~
~~Finance leases~~	~~3.3 years~~
~~Weighted-average discount rate:~~
~~Operating leases~~	~~3.87~~	%
~~Finance leases~~	~~2.55~~	%

Note 11 - Financing Arrangements

Short-term debt as of December 31, ~~2019~~2020 and ~~2018~~2019 was as follows:


	2020		2019
Variable-rate Accounts Receivable Facility with an interest rate of 0.96% at December 31, 2020 and of 2.77% at December 31, 2019	$	58.0	$	1.8
Borrowings under lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.24% to 1.75% at December 31, 2020 and 0.27% to 1.75% at December 31, 2019	61.8		15.5
Short-term debt	$	119.8	$	17.3

2019 2018
Variable-rate Accounts Receivable Facility with an interest rate of 2.77% at December 31, 2019 $ 1.8
$ —
Borrowings under lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 0.27% to 1.75% at December 31, 2019 and 0.29% to 1.00% at December 31, 2018 15.5
33.6
Short-term debt $ 17.3
$ 33.6

The Company has a ~~$100~~$100.0 million Accounts Receivable Facility, which matures November 30, ~~2021~~.2021. The Company currently intends to renew or replace the Accounts Receivable Facility prior it its maturity. 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~~are limited to certain borrowing base ~~limitations; however,~~limitations. These limitations reduced the availability ~~under~~of the Accounts Receivable Facility ~~was not reduced by any such borrowing base limitations~~to $83.9 million at December 31, ~~2019.~~2020. As of December 31, ~~2019,~~2020, there were outstanding borrowings of ~~$100.0~~$58.0 million under the Accounts Receivable Facility, which reduced the availability under this facility to ~~0. $1.8 million~~$25.9 million. All of the outstanding borrowings under the Accounts Receivable Facility ~~was~~were classified as short-term ~~and reflects the Company's expectations over the next 12 months relative~~due to ~~the minimum borrowing base.~~its upcoming maturity in November of 2021. 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 ~~yield~~interest rate was ~~2.77%~~1.0%, ~~3.22%~~2.8% and ~~2.15%~~3.2% at December 31, 2020, 2019 ~~2018~~ and ~~2017,~~2018, respectively.

The lines of credit for certain of the Company’s foreign subsidiaries provide for short-term borrowings up to ~~$268.9~~$277.4 million in the aggregate. Most of these lines of credit are uncommitted. At December 31, ~~2019,~~2020, the Company’s foreign subsidiaries had borrowings outstanding of ~~$15.5~~$61.8 million and guarantees of ~~$0.5~~$0.7 million, which reduced the aggregate availability under these facilities to ~~$252.9~~$214.9 million. The weighted-average interest rate on these lines of credit during the year were ~~0.5%~~0.6%, 0.5% and 0.6% ~~and 0.7%~~ in ~~2019~~2020, ~~2018~~2019 and ~~2017,~~2018, respectively. The ~~decrease~~increase in the weighted-average interest rate was primarily due to ~~a decrease~~an increase in ~~borrowing rates~~borrowings in ~~Europe.~~Europe with higher rates. The weighted-average interest rate on lines of credit outstanding at December 31, 2020 and 2019 was 0.8% and ~~2018 was 1.03% and 0.33%~~1.0%, respectively.

Long-term debt as of December 31, 2019 and 2018 was as follows:
2019 2018
Variable-rate Senior Credit Facility with an average interest rate on U.S. Dollar of 2.85% and Euro of 1.00% at December 31, 2019 and 3.40% and 1.10%, respectively, at December 31, 2018 $ 132.7
$ 43.9
Variable-rate Euro Term Loan⁽¹⁾, maturing on September 18, 2020, with an interest rate of 1.13% at December 31, 2019 and December 31, 2018
54.4
107.1
Variable-rate Accounts Receivable Facility, with an interest rate of 2.77% at December 31, 2019 and 3.22% at December 31, 2018 98.2
75.0
Variable-rate Term Loan⁽¹⁾, maturing on September 11, 2023, with an interest rate of 2.92% at December 31, 2019 and 3.77% at December 31, 2018
338.5
347.1
Fixed-rate Senior Unsecured Notes⁽¹⁾, maturing on September 1, 2024, with an interest rate of 3.875%
348.5
347.7
Fixed-rate Euro Senior Unsecured Notes⁽¹⁾, maturing on September 7, 2027, with an interest rate of 2.02%
167.7
171.4
Fixed-rate Senior Unsecured Notes⁽¹⁾, maturing on December 15, 2028, with an interest rate of 4.50%
396.1
395.8
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%
154.6
154.6
Fixed-rate Bank Loan, maturing on June 30, 2033, with an interest rate of 2.15% at December 31, 2019. 18.0
—
Other 4.1
5.4
Total debt $ 1,712.8
$ 1,648.0
Less current maturities 64.7
9.4
Long-term debt $ 1,648.1
$ 1,638.6

Table of Contents

Note 11 - Financing Arrangements (continued)

Long-term debt as of December 31, 2020 and 2019 was as follows:


	2020		2019
Variable-rate Senior Credit Facility with an average interest rate on U.S. Dollar of 2.01% and Euro of 1.48% at December 31, 2020 and 2.85% and 1.00%, respectively, at December 31, 2019	$	9.7	$	132.7
Variable-rate Euro Term Loan(1), matured on September 18, 2020, with an interest rate of 1.13% at December 31, 2019.	0		54.4
Variable-rate Accounts Receivable Facility, with an interest rate of 2.77% at December 31, 2019.	0		98.2
Variable-rate Term Loan(1), maturing on September 11, 2023, with an interest rate of 1.63% at December 31, 2020 and of 2.92% at December 31, 2019.	329.6		338.5
Fixed-rate Senior Unsecured Notes(1), maturing on September 1, 2024, with an interest rate of 3.875%	349.0		348.5
Fixed-rate Euro Senior Unsecured Notes(1), maturing on September 7, 2027, with an interest rate of 2.02%	182.9		167.7
Fixed-rate Senior Unsecured Notes(1), maturing on December 15, 2028, with an interest rate of 4.50%	396.5		396.1
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		154.6
Fixed-rate Bank Loan, maturing on June 30, 2033, with an interest rate of 2.15%	18.8		18.0
Other	3.6		4.1
Total debt	$	1,444.8	$	1,712.8
Less current maturities	10.9		64.7
Long-term debt	$	1,433.9	$	1,648.1

(1) Net of discount and fees

On ~~June 25, 2019, the~~The Company entered into the Senior Credit ~~Facility.~~Facility on June 25, 2019. The Senior Credit Facility amends and restates the Company's previous credit agreement, dated as of June 19, 2015. The Senior Credit Facility is a $650.0 million unsecured revolving credit facility, which matures on June 25, ~~2024~~.2024. At December 31, ~~2019,~~2020, the Company had ~~$132.7~~$9.7 million of outstanding borrowings under the Senior Credit Facility, which reduced the availability under this facility to ~~$517.3~~$640.3 million. The Senior Credit Facility has 2 financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. On May 27, 2020, the Senior Credit Facility was amended to, among other things, effectively increase the limit with respect to the consolidated leverage ratio. As amended, the consolidated leverage ratio is calculated using a net debt construct, netting unrestricted cash in excess of $25 million, instead of total debt. This change to the consolidated leverage ratio calculation is effective through June 30, 2021, after which the calculation of the consolidated leverage ratio under the Senior Credit Facility will revert back to using a total debt construct.

On November 1, 2019,, the Company assumed certain fixed-rate debt of €16 million associated with the BEKA acquisition that matures on June 30, ~~2033~~2033.

On ~~September 6, 2018, the Company issued $400 million aggregate principal amount of the 2028 Notes. On~~ September 11, 2018,, the Company entered into the $350 million 2023 Term Loan. Proceeds from ~~the 2028 Notes and~~ the 2023 Term Loan were used to fund the acquisitions of Cone Drive and Rollon, which closed on September 1, 2018 and September 18, 2018,, respectively. ~~Refer~~On July 12, 2019, the Company amended the 2023 Term Loan agreement to, ~~Note 2 - Acquisitions~~among other things, align covenants and ~~Divestitures~~ other terms with the Senior Credit Facility. On May 27, 2020, the 2023 Term Loan agreement was further amended to align the calculation of the consolidated leverage ratio and other terms with the Senior Credit Facility.

~~for additional information.~~

~~The~~On September 18, 2017, the Company ~~expects to service interest and repay the remaining principal balance of $54.4 million for~~entered into the 2020 Term Loan, ~~with cash held or generated outside~~that matured on September 18, 2020. Upon the ~~U.S.~~final payment during the third quarter of 2020, the Company fully repaid the 2020 Term Loan.

At December 31, ~~2019,~~2020, the Company was in full compliance with all applicable covenants on its outstanding debt.

6975

Table of Contents

Note 11 –- Financing Arrangements (continued)

The maturities of long-term debt (including ~~$3.4~~$3.7 million of finance leases) for the five years subsequent to December 31, ~~2019~~2020 are as follows:


Year
2021	$	10.9
2022	10.2
2023	10.2
2024	304.5
2025	360.0
Thereafter	749.0

Year
2020 $ 64.7
2021 110.2
2022 10.6
2023 313.6
2024 483.7
Thereafter 730.0

Interest paid was $65.2 million in 2020, $67.4 million in 2019 and $42.5 million in ~~2018 and $31.5 million in 2017.~~2018. This differs from interest expense due to the timing of payments, the amortization of deferred financing fees and interest capitalized of $1.5 million in 2020, $1.1 million in 2019 and $0.4 million in ~~2018 and $0.7 million in 2017.~~

2018.

Note 12 - Contingencies

The Company and certain of its subsidiaries have been identified as potentially responsible parties for investigation and remediation under the CERCLA, 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 in 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 have been settled or dismissed.

The Company had total environmental accruals of ~~$5.2~~$5.3 million and ~~$5.5~~$5.2 million for various known environmental matters that are probable and reasonably estimable as of December 31, ~~2019~~2020 and ~~2018,~~2019, respectively, which includes the Lovejoy matter discussed 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.

In October 2014, the Brazilian government antitrust agency, CADE, announced that it had opened an investigation of alleged antitrust violations in the bearing industry. The Company’s Brazilian subsidiary, Timken do Brasil, was included in the investigation. During the fourth quarter of 2019, the Company paid approximately $1.8 million to settle the matter with CADE.

The Company is a defendant in a 2017 lawsuit filed in the U.S. by a former employee asserting workplace-related negligence by the Company's medical personnel. No specific amount of damages have been asserted by the plaintiff as of this time. While the Company’s defense is ongoing, management’s low end of the range of probable outcomes is immaterial to the Company.

Product Warranties:

In addition to the contingencies above, the Company provides limited warranties on certain products. The product warranty liability included in other current liabilities on ~~the~~the Consolidated Balance Sheets for 2020 and 2019 was $9.4 million and ~~2018 was~~ $7.5 million, respectively. The increase in the liability during 2020 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, expected trends and ~~$7.1 million, respectively.~~course of dealing experience 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.

Table of Contents

Note 13 - Stock Compensation

Under its long-term incentive plan, the Company’s common shares have been made available for grant, at the discretion of the Compensation Committee of the Board of Directors, to officers and key employees in the form of stock option awards. Stock option awards typically have a ten-year term and generally vest in 25% increments annually beginning on the first anniversary of the date of grant.

During 2020, 2019 ~~2018~~ and ~~2017,~~2018, the Company recognized stock-based compensation expense of $3.6 million ($2.7 million after tax or $0.04 per diluted share), $4.9 million ($3.7 million after tax or $0.05 per diluted share), and $4.8 million ($3.7 million after tax or $0.05 per diluted share) ~~and $5.2 million ($3.2 million after tax or $0.04 per diluted share)~~, respectively, for stock option awards.

Beginning in 2020, the Company discontinued the use of nonqualified stock options. As such, there were 0 stock option awards granted in 2020. The fair value of stock option awards granted in 2019 and 2018 was estimated at the date of grant using a Black-Scholes option-pricing method with the following assumptions:


	2019			2018
Weighted-average fair value per option	$	9.58		$	10.29
Risk-free interest rate	2.46		%	2.62		%
Dividend yield	2.52		%	2.30		%
Expected stock volatility	28.29		%	27.78		%
Expected life - years	5			5

2019 2018 2017
Weighted-average fair value per option $ 9.58
$ 10.29
$ 10.60
Risk-free interest rate 2.46 % 2.62 % 1.96 %
Dividend yield 2.52 % 2.30 % 2.96 %
Expected stock volatility 28.29 % 27.78 % 32.25 %
Expected life - years 5
5
5

Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and the expected lives of the options. The dividend yield was calculated based upon the last dividend prior to the grant compared to the trailing 12 months' daily stock prices. The risk-free interest rate was based upon yields of U.S. zero coupon issues with a term equal to the expected life of the option being valued.

A summary of stock option award activity for the year ended December 31, ~~2019~~2020 is presented below:


	Number of Shares	Weighted-average Exercise Price		Weighted-average Remaining Contractual Term	Aggregate Intrinsic Value (millions)
Outstanding - beginning of year	2,913,272	$	40.10

Exercised	(956,258)	39.07
Canceled of expired	(52,265)	43.27
Outstanding - end of year	1,904,749	$	40.53	7 years	$	70.1
Options expected to vest	1,904,749	40.53		7 years	70.1
Options exercisable	1,259,075	38.94		6 years	48.4

Number of
Shares
Weighted-average
Exercise Price Weighted-average
Remaining
Contractual Term
Aggregate Intrinsic Value
(millions)
Outstanding - beginning of year 3,189,950
$ 38.21

Granted - new awards 558,760
42.61

Exercised (803,604 ) 34.25

Canceled or expired (31,834 ) 42.36

Outstanding - end of year 2,913,272
$ 40.10
6 years $ 47.2
Options expected to vest 2,913,272
$ 40.10
6 years $ 47.2
Options exercisable 1,676,248
$ 38.91
5 years $ 29.2

The total intrinsic value of stock option awards exercised during the years ended December 31, 2020, 2019 and 2018 ~~and 2017~~ was $20.7 million, $13.4 million ~~$6.7 million~~ and ~~$14.7~~$6.7 million, respectively. Net cash proceeds from the exercise of stock option awards were $37.4 million, $27.5 million and $12.8 million, ~~and $32.9 million,~~ respectively.

In addition to stock option awards, the Company has granted performance-based restricted stock units, time-based restricted stock units ~~deferred shares~~ and ~~restricted~~deferred shares under its long-term incentive plan. A summary of those awards granted in ~~2019~~2020 is presented below:


	Expected to be Settled in Equity	Expected to be Settled in Cash	Total Awards Granted
Performance-based restricted stock units	442,371	11,251	453,622
Time-based restricted stock units	204,550	4,480	209,030
Deferred shares	5,000	—	5,000

Expected to be Settled in Equity Expected to be Settled in Cash Total Awards Granted
Performance-based restricted stock units 296,597
7,241
303,838
Time-based restricted stock units 157,465
3,940
161,405
Deferred shares 14,870
0
14,870

Table of Contents

Note 13 - Stock Compensation ~~Plans~~ (continued)

Performance-based restricted stock units are calculated and awarded based on the achievement of specified performance objectives and cliff vest three years from the date of grant. ~~The majority of time-based~~Time-based restricted stock units generally vest in 25% increments annually beginning on the first anniversary of the ~~grant, with the remainder fully-vesting on the first anniversary of the~~ grant. Deferred shares generally cliff vest 5five years from the date of grant. For time-based restricted stock units that are expected to settle in cash, the Company had ~~$1.1~~$1.0 million and ~~$0.8~~$1.1 million accrued in salaries, wages and benefits as of December 31, ~~2019~~2020 and ~~2018,~~2019, respectively, on the Consolidated Balance Sheets.

A summary of stock award activity, including performance-based restricted stock units, time-based restricted stock units ~~deferred shares~~ and ~~restricted~~deferred shares that will settle in common shares for the year ended December 31, ~~2019~~2020 is as follows:


	Number of Shares	Weighted-average Grant Date Fair Value
Outstanding - beginning of year	1,106,386	$	43.13
Granted - new awards	651,921	50.05
Vested	(557,590)	43.76
Canceled or expired	(75,245)	47.97
Outstanding - end of year	1,125,472	$	46.50

Number of Shares Weighted-average
Grant Date Fair Value
Outstanding - beginning of year 1,196,492
$ 38.76
Granted - new awards 468,932
41.57
Vested (539,396 ) 32.08
Canceled or expired (19,304 ) 43.31
Outstanding - end of year 1,106,724
$ 43.13

As of December 31, ~~2019,~~2020, a total of ~~1,106,724~~1,125,472 stock ~~awards~~awards have been awarded that have not yet vested. The Company distributed shares totaling 557,590 in 2020, 539,396 in 2019 and 290,287 in 2018 ~~and 445,036 in 2017~~ due to the vesting of stock awards. The grant date fair value of these vested shares was $24.4 million, $17.3 million and $11.8 million, ~~and $16.5 million,~~ respectively. ~~Shares awarded totaled 468,932 in 2019, 388,525 in 2018 and 407,436 in 2017.~~ The Company recognized compensation expense of $19.6 million, $22.3 million ~~$27.5 million~~ and ~~$19.5~~$27.5 million for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017,~~2018, respectively, relating to performance-based restricted stock units, time-based restricted stock units, deferred shares and restricted shares.

As of December 31, ~~2019,~~2020, the Company had unrecognized compensation expense of ~~$30.0~~$22.5 million related to stock options and stock awards, which is expected to be recognized over a total weighted-average period of two years. There were 107.8 million shares available for future grants for all plans at December 31, ~~2019.~~2020.

Table of Contents

Note 14 - Impairment and Restructuring Charges

Impairment and restructuring charges by segment were as follows:

Year ended December 31, 2020:


	Mobile Industries		Process Industries		Unallocated Corporate		Total
Impairment charges	$	0.2	$	0.2	$	0	$	0.4
Severance expense and related benefit costs	8.2		11.0		0.4		19.6
Exit costs	0.6		0.6		0		1.2
Total	$	9.0	$	11.8	$	0.4	$	21.2

Year ended December 31, 2019:


	Mobile Industries		Process Industries		Unallocated Corporate		Total
Impairment charges	$	1.8	$	0.8	$	0	$	2.6
Severance expense and related benefit costs	1.6		0.9		0.5		3.0
Exit costs	0.2		1.0		0		1.2
Total	$	3.6	$	2.7	$	0.5	$	6.8

Year ended December 31, 2018:


	Mobile Industries		Process Industries		Unallocated Corporate		Total
Impairment charges	$	0	$	1.3	$	0	$	1.3
Severance expense and related benefit costs	1.1		0.3		1.6		3.0
Exit costs	0.3		0.3		0		0.6
Total	$	1.4	$	1.9	$	1.6	$	4.9

The following discussion explains the major 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.

COVID-19 Pandemic Cost Reduction Initiatives:

During 2020, the Company recorded $12.0 million in severance and related benefit costs to eliminate approximately 200 salaried positions to align current employment levels with customer demand. Of the $12.0 million charge, $5.8 million related to the Mobile Industries segment, $5.8 million related to the Process Industries segment and $0.4 million related to Unallocated Corporate.

Mobile Industries:

On October 16, 2019, the Company announced the reorganization of its bearing plant in Gaffney, South Carolina. The Company transferred its high-volume bearing production and roller production to other Timken manufacturing facilities in the U.S. The transfer of these operations was substantially completed by the end of the third quarter of 2020 and is expected to affect approximately 150 employees. The Company expected to incur approximately $8 million to $10 million of pretax costs in total related to this reorganization. During 2020 and 2019, the Company recognized severance and related benefits of $0.3 million and $1.3 million, respectively, and exit costs of $0.4 million and $0.1 million, respectively, related to this reorganization. The Company has incurred cumulative pretax costs related to this reorganization of $7.5 million as of December 31, 2020, including rationalization costs recorded in cost of products sold.

Table of Contents

Note 14 - Impairment and Restructuring Charges (continued)

Process Industries:

On February 4, 2020, the Company announced the closure of its chain plant in Indianapolis, Indiana. This plant was part of the 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 close by the end of the fourth quarter of 2021 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 $10 million to $12 million of expenses related to this closure. During 2020, the Company recorded severance and related benefit costs of $3.1 million related to this closure. The Company has incurred cumulative pretax costs related to this closure of $6.0 million as of December 31, 2020, including rationalization costs recorded in cost of products sold.

On September 3, 2020, the Company announced the reorganization of its bearing plant in Canton, Ohio. The Company will be transferring production for certain product lines to other Timken locations in order to streamline resources and better align capacity with demand. The transfer of these operations is expected to occur by early 2021 and is expected to affect approximately 40 employees. The Company expects to incur approximately $2.0 million to $2.5 million of pretax costs related to this reorganization. During 2020, the Company recognized severance and related benefits of $1.1 million related to this reorganization. The Company has incurred cumulative pretax costs related to this reorganization of $1.2 million as of December 31, 2020, including rationalization costs recorded in cost of products sold.

Consolidated Restructuring Accrual:

The following is a rollforward of the consolidated restructuring accrual for the years ended December 31, 2020 and 2019:


	2020		2019
Beginning balance, January 1	$	2.7	$	2.7
Expense	20.8		4.2
Payments	(15.5)		(4.2)
Ending balance, December 31	$	8.0	$	2.7

The restructuring accrual at December 31, 2020 and 2019 is included in other current liabilities on the Consolidated Balance Sheets.

Table of Contents

Note 1415 - Retirement Benefit Plans

The Company and its subsidiaries sponsor a number of defined benefit pension plans, which cover eligible employees, including certain employees in foreign countries. These plans generally are noncontributory. Pension benefits earned generally are based on years of service and compensation during active employment. The cash contributions and payments for the Company’s defined benefit pension plans were $17.9 million, $35.4 million and $11.3 million ~~and $11.5 million~~ in ~~2019~~2020, ~~2018~~2019 and ~~2017,~~2018, respectively. The 2019 contributions and payments include a $24 million payout of deferred compensation to a former executive officer of the Company.

The following tables summarize the net periodic benefit cost information and the related assumptions used to measure the net periodic benefit cost for the years ended December 31:


	U.S. Plans						International Plans
	2020		2019		2018		2020		2019		2018
Components of net periodic benefit cost:
Service cost	$	10.7	$	10.7	$	12.6	$	1.8	$	1.5	$	1.7
Interest cost	21.0		23.5		24.0		5.5		7.3		7.2
Expected return on plan assets	(25.3)		(25.8)		(29.3)		(8.7)		(10.2)		(11.6)
Amortization of prior service cost	1.6		1.6		1.7		0.2		0.2		0.1
Recognition of net actuarial (gains) losses	(3.9)		(3.5)		30.0		20.1		17.4		8.8
Curtailment losses (gains)	0.9		0		(10.2)		0		0		0
Net periodic benefit cost	$	5.0	$	6.5	$	28.8	$	18.9	$	16.2	$	6.2

U.S. Plans International Plans
2019 2018 2017 2019 2018 2017
Components of net periodic benefit cost:
Service cost $ 10.7
$ 12.6
$ 12.2
$ 1.5
$ 1.7
$ 1.6
Interest cost 23.5
24.0
$ 24.6
7.3
7.2
$ 7.5
Expected return on plan assets (25.8 ) (29.3 ) $ (28.0 ) (10.2 ) (11.6 ) $ (11.1 )
Amortization of prior service cost 1.6
1.7
1.4
0.2
0.1
$ —
Recognition of net actuarial (gains)
losses
(3.5 ) 30.0
23.1
17.4
8.8
$ 0.1
Curtailment gains —
(10.2 ) (1.1 ) —
—
$ —
Net periodic benefit cost (credit) $ 6.5
$ 28.8
$ 32.2
$ 16.2
$ 6.2
$ (1.9 )


Assumptions	2020		2019		2018
U.S. Plans:
Discount rate	3.04% to 3.55%		3.67% to 4.43%		3.75% to 3.94%
Future compensation assumption	2.50	%	2.50	%	2.50	%
Expected long-term return on plan assets	4.50% to 6.25%		5.35% to 6.25%		5.75% to 6.50%
International Plans:
Discount rate	0.75% to 9.00%		1.50% to 11.00%		1.25% to 9.00%
Future compensation assumption	2.00% to 8.20%		2.00% to 8.23%		2.00% to 8.00%
Expected long-term return on plan assets	1.75% to 9.00%		2.50% to 9.00%		2.50% to 9.00%

Assumptions 2019 2018 2017
U.S. Plans:
Discount rate 3.67% to 4.43%
3.75% to 3.94%
4.34% to 4.50%
Future compensation assumption 2.50 % 2.50 % 2.50% to 3.00%
Expected long-term return on plan assets 5.35% to 6.25%
5.75% to 6.50%
5.75% to 6.50%
International Plans:
Discount rate 1.50% to 11.00%
1.25% to 9.00%
1.25% to 9.00%
Future compensation assumption 2.00% to 8.23%
2.00% to 8.00%
2.00% to 8.00%
Expected long-term return on plan assets 2.50% to 9.00%
2.50% to 9.00%
0.75% to 9.25%

The following table summarizes assumptions used to measure the benefit obligation for the defined benefit pension plans at December 31:


Assumptions	2020		2019
U.S. Plans:
Discount rate	2.71% to 2.91%		3.04% to 3.55%
Future compensation assumption	2.50	%	2.50	%
International Plans:
Discount rate	0.25% to 7.75%		0.75	%
Future compensation assumption	1.90% to 8.18%		2.00% to 8.20%

Assumptions 2019 2018
U.S. Plans:
Discount rate 3.04% to 3.55%
4.05% to 4.43%
Future compensation assumption 2.50 % 2.50 %
International Plans:
Discount rate 0.75% to 9.00%
1.50% to 11.00%
Future compensation assumption 2.00% to 8.20%
2.00% to 8.23%

Table of Contents

Note 1415 - Retirement Benefit Plans (continued)

The Company recognized actuarial losses of $16.2 million during 2020 primarily due to the impact of a net reduction in the discount rate used to measure its defined benefit pension obligations of $88.0 million and the impact of experience losses of $16.9 million, partially offset by higher than expected returns on plan assets of $84.3 million and other changes in valuation assumptions of $4.4 million. The impact of the net reduction in the discount rate used to measure the Company's defined benefit pension obligations was primarily driven by 66 basis point reduction in the weighted-average discount rate used to measure its U.S. plan obligations, which decreased from 3.50% in 2019 to 2.84% in 2020.

The Company recognized actuarial losses of $13.9 million during 2019 primarily due to the impact of a net reduction in the discount rate used to measure its defined benefit pension obligations of $100.9 million and the impact of experience losses and other changes in valuation assumptions of $3.1 million, partially offset by higher than expected returns on plan assets of $90.1 million. The impact of the net reduction in the discount rate used to measure the Company's defined benefit pension obligations was primarily driven by a 86 basis point reduction in the weighted-average discount rate used to measure its U.S. plan obligations, which decreased from 4.36% in 2018 to 3.50% in 2019.

The Company recognized actuarial losses of $38.8 million during 2018 primarily due to lower than expected returns on plan assets of $83.4 million driven by negative returns on fixed income investments, which were offset by the increase in discount rates used to measure its defined benefit pension obligations of $62.4 million. The impact of experience losses and other changes in valuation assumptions resulted in losses of approximately $17.8 million. The discount rate used to measure the U.S. plan obligations increased by 56 basis points from 3.80% during 2017 compared to 4.36%% in 2018.

During the fourth quarter of 2018, the Company's Board of Directors approved the freezing of the benefits for two of the Company's U.S. defined benefit pension plans, effective December 31, 2022. In conjunction with this action, the Company recognized a curtailment gain of $10.2 million in 2018.

The Company recognized actuarial losses of $23.2 million during 2017 primarily due to the impact of a net reduction in the discount rate used to measure its defined benefit pension obligations of $52.9 million and the impact of experience losses and other changes in valuation assumptions of $8.7 million, partially offset by higher than expected returns on plan assets of $38.4 million. The impact of the net reduction in the discount rate used to measure the Company's defined benefit pension obligations was primarily driven by a 54 basis point reduction in the discount rate used to measure its U.S. plan obligations, which decreased from 4.34% in 2016 to 3.80% in 2017.

For expense purposes in ~~2019,~~2020, the Company applied a weighted-average discount rate of ~~4.36%~~3.5% to its U.S. defined benefit pension plans. For expense purposes in ~~2020,~~2021, the Company will apply a weighted-average discount rate of ~~3.50%~~2.84% to its U.S. defined benefit pension plans.

For expense purposes in ~~2019,~~2020, the Company applied a weighted-average expected rate of return of ~~6.12%~~5.22% for the Company’s U.S. pension plan assets. For expense purposes in ~~2020,~~2021, the Company will apply a weighted-average expected rate of return on plan assets of ~~5.22%~~4.69%.

Table of Contents

Note 15 - Retirement Benefit Plans (continued)

The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets for the defined benefit pension plans as of December 31, ~~2019~~2020 and ~~2018~~:2019:


	U.S. Plans				International Plans
	2020		2019		2020		2019
Change in benefit obligation:
Benefit obligation at beginning of year	$	634.7	$	586.6	$	328.8	$	300.3
Service cost	10.7		10.7		1.8		1.5
Interest cost	21.0		23.5		5.5		7.3
Plan amendments	0.1		0		0		0
Actuarial losses	56.6		74.9		43.9		29.1
International plan exchange rate change	0		0		14.1		7.6
Curtailments	0.3		0		0		0
Benefits paid	(60.3)		(61.0)		(14.4)		(17.4)
Acquisitions	0		0		0		0.4

Benefit obligation at end of year	$	663.1	$	634.7	$	379.7	$	328.8

U.S. Plans International Plans
2019 2018 2019 2018
Change in benefit obligation:
Benefit obligation at beginning of year $ 586.6
$ 643.0
$ 300.3
$ 335.2
Service cost 10.7
12.6
1.5
1.7
Interest cost 23.5
24.0
7.3
7.2
Plan amendments —
—
—
3.6
Actuarial losses (gains) 74.9
(36.7 ) 29.1
(7.4 )
International plan exchange rate change —
—
7.6
(17.2 )
Curtailments —
(10.2 ) —
—
Benefits paid (61.0 ) (95.8 ) (17.4 ) (24.8 )
Acquisitions —
49.7
0.4
2.0
Benefit obligation at end of year $ 634.7
$ 586.6
$ 328.8
$ 300.3


	U.S. Plans				International Plans
	2020		2019		2020		2019
Change in plan assets:
Fair value of plan assets at beginning of year	$	520.2	$	448.3	$	274.7	$	254.6
Actual return on plan assets	85.8		104.2		32.5		21.9
Company contributions / payments	7.6		28.7		10.3		6.7
International plan exchange rate change	0		0		9.7		8.9


Benefits paid	(60.3)		(61.0)		(14.4)		(17.4)
Fair value of plan assets at end of year	553.3		520.2		312.8		274.7
Funded status at end of year	$	(109.8)	$	(114.5)	$	(66.9)	$	(54.1)


Amounts recognized on the Consolidated Balance Sheets:
Non-current assets	$	1.8	$	0	$	0.2	$	3.4
Current liabilities	(14.2)		(5.4)		(1.5)		(1.5)
Non-current liabilities	(97.4)		(109.1)		(65.6)		(56.0)
	$	(109.8)	$	(114.5)	$	(66.9)	$	(54.1)


Amounts recognized in accumulated other comprehensive loss:

Net prior service cost	$	2.7	$	4.8	$	3.9	$	3.9
Accumulated other comprehensive loss	$	2.7	$	4.8	$	3.9	$	3.9


Changes in prior service cost recognized in accumulated other comprehensive loss:
Accumulated other comprehensive loss at beginning of year	$	4.8	$	6.4	$	3.9	$	4.0

Prior service cost	0.1		0		0		0
Recognized prior service cost	(1.6)		(1.6)		(0.2)		(0.2)
Loss recognized due to curtailment	(0.6)		0		0		0

Foreign currency impact	0		0		0.2		0.1
Total recognized in accumulated other comprehensive loss at December 31	$	2.7	$	4.8	$	3.9	$	3.9

7483

Table of Contents

Note 1415 - Retirement Benefit Plans (continued)

U.S. Plans International Plans
2019 2018 2019 2018
Change in plan assets:
Fair value of plan assets at beginning of year $ 448.3
$ 531.9
$ 254.6
$ 292.4
Actual return on plan assets 104.2
(37.5 ) 21.9
(5.1 )
Company contributions / payments 28.7
5.3
6.7
6.0
International plan exchange rate change —
—
8.9
(15.4 )
Acquisitions —
44.4
—
1.5
Benefits paid (61.0 ) (95.8 ) (17.4 ) (24.8 )
Fair value of plan assets at end of year 520.2
448.3
274.7
254.6
Funded status at end of year $ (114.5 ) $ (138.3 ) $ (54.1 ) $ (45.7 )

Amounts recognized on the Consolidated Balance Sheets:
Non-current assets $ —
$ —
$ 3.4
$ 6.2
Current liabilities (5.4 ) (27.4 ) (1.5 ) (1.5 )
Non-current liabilities (109.1 ) (110.9 ) (56.0 ) (50.4 )
$ (114.5 ) $ (138.3 ) $ (54.1 ) $ (45.7 )

Amounts recognized in accumulated other comprehensive loss:
Net prior service cost $ 4.8
$ 6.4
$ 3.9
$ 4.0
Accumulated other comprehensive loss $ 4.8
$ 6.4
$ 3.9
$ 4.0

Changes in prior service cost recognized in accumulated other comprehensive loss:
Accumulated other comprehensive loss at beginning of year $ 6.4
$ 8.1
$ 4.0
$ 0.5
Prior service cost —
—
—
3.6
Recognized prior service cost (1.6 ) (1.7 ) (0.2 ) (0.1 )
Foreign currency impact —
—
0.1
—
Total recognized in accumulated other comprehensive loss at December 31 $ 4.8
$ 6.4
$ 3.9
$ 4.0

The presentation in the above tables for amounts recognized in accumulated other comprehensive loss on the Consolidated Balance Sheets is before the effect of income taxes.

Defined benefit pension plans in the U.S. represent ~~66%~~64% of the benefit obligation and ~~65%~~64% of the fair value of plan assets as of December 31, ~~2019.~~2020.

Certain of the Company’s defined benefit pension plans were overfunded as of December 31, ~~2019.~~2020. As a result, ~~$3.4~~$2.0 million and ~~$6.2~~$3.4 million at December 31, ~~2019~~2020 and ~~2018,~~2019, respectively, are included in non-current pension assets on the Consolidated Balance Sheets. The current portion of accrued pension benefits, which was included in salaries, wages and benefits on the Consolidated Balance Sheets, was ~~$6.9~~$15.7 million and ~~$28.9~~$6.9 million at December 31, ~~2019~~2020 and ~~2018,~~2019, respectively. The ~~decrease~~increase in the current portion of accrued pension benefits relates to the ~~2019~~expected 2021 deferred compensation ~~payout~~payment to a former executive officer of the Company. In ~~2019,~~2020, the current portion of accrued pension benefits relates to unfunded plans and represents the actuarial present value of expected payments related to the plans to be made over the next 12 months.

The accumulated benefit obligation at December 31, ~~2019~~2020 exceeded the market value of plan assets for several of the Company’s pension plans. For these plans, the projected benefit obligation was ~~$244.1~~$521.2 million, the accumulated benefit obligation was ~~$237.0~~$515.9 million and the fair value of plan assets was ~~$80.7~~$343.4 million at December 31, ~~2019.~~2020.

~~Table of Contents~~

~~Note 14 - Retirement Benefit Plans (continued)~~

The total accumulated benefit obligation for all plans was ~~$942.0~~$1,026.3 million and ~~$864.9~~$942.0 million at December 31, ~~2019~~2020 and ~~2018,~~2019, respectively.

Investment performance increased the value of the Company’s pension assets by ~~18.7%~~16.5% in ~~2019.~~2020.

As of December 31, ~~2019~~2020, ~~2018~~2019 and ~~2017,~~2018, the Company’s defined benefit pension plans did not directly hold any of the Company’s common shares.

The estimated prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $1.7 million.

Plan Assets:

The Company’s target allocation for pension plan assets, as well as the actual pension plan asset allocations as of December 31, ~~2019~~2020 and ~~2018,~~2019, was as follows:


	Current Target Allocation			Percentage of Pension Plan Assets at December 31,
Asset Category				2020	2019
Equity securities	18%	to	24%	22%	21%
Fixed income securities	70%	to	82%	75%	74%
Other investments	2%	to	4%	3%	5%
Total				100%	100%

Current Target
Allocation
Percentage of Pension Plan
Assets at December 31,
Asset Category 2019 2018
Equity securities 16% to 22% 21% 18%
Fixed income securities 70% to 80% 74% 76%
Other investments 4% to 8% 5% 6%
Total 100% 100%

The Company recognizes its overall responsibility to ensure that the assets of its various defined benefit pension plans are managed effectively and prudently and in compliance with its policy guidelines and all applicable laws. Preservation of capital is important; however, the Company also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the pension funds. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes, and are reviewed regularly by management. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.

Table of Contents

Note 1415 - Retirement Benefit Plans (continued)


Ohio			34-0577130
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

~~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)



Class						Outstanding at January 31, ~~2020~~ 2021
Common Shares, without par value						~~75,565,361~~75,710,735 shares



Document						Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held on or about May ~~8, 2020~~7, 2021 (Proxy Statement)						Part III



☒			ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



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⁾
10/1/2019 - 10/31/2019	154,253	$	42.75	153,668	5,357,042
11/1/2019 - 11/30/2019	26,432	52.81		—	5,357,042
12/1/2019 - 12/31/2019	1,301	55.21		—	5,357,042
Total	181,986	$	44.30	153,668	—



	December 31, 2019		December 31, 2018		$ Change		% Change
Operating lease assets	$	114.1	$	—	$	114.1	NM



Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Interest payments	$	380.6	$	61.8	$	117.9	$	94.0	$	106.9
Long-term debt, including current portion	1,712.8		64.7		120.8		797.3		730.0
Short-term debt	17.3		17.3		—		—		—
Purchase commitments	50.5		44.6		4.9		1.0		—
Operating leases	110.4		31.7		39.1		19.6		20.0
Retirement benefits	165.8		14.4		38.7		27.2		85.5
Total	$	2,437.4	$	234.5	$	321.4	$	939.1	$	942.4



		+ / - Change at December 31, 2019		Change to
	Change	PBO		2019 Expense
Assumption:
Discount rate	+ 0.25%	$	20.2	$	20.2
Overall return on plan assets	+ 0.25%	N/A		1.1

Consolidated Statements of Income

	Year Ended December 31,
	2019			2018			2017
(Dollars in millions, except per share data)
Net sales	$	3,789.9		$	3,580.8		$	3,003.8
Cost of products sold	2,648.1			2,540.7			2,191.7
Gross Profit	1,141.8			1,040.1			812.1
Selling, general and administrative expenses	618.6			580.7			508.3
Impairment and restructuring charges	6.8			4.9			4.3
Operating Income	516.4			454.5			299.5
Interest expense	(72.1		)	(51.7		)	(37.1		)
Interest income	4.9			2.1			2.9
Non-service pension and other postretirement income (expense)	10.2			(6.2		)	(15.0		)
Other income, net	13.0			9.4			9.6
Income Before Income Taxes	472.4			408.1			259.9
Provision for income taxes	97.7			102.6			57.6
Net Income	374.7			305.5			202.3
Less: Net income (loss) attributable to noncontrolling interest	12.6			2.7			(1.1		)
Net Income Attributable to The Timken Company	$	362.1		$	302.8		$	203.4

Net Income per Common Share Attributable to The Timken Company Common Shareholders
Basic earnings per share	$	4.78		$	3.93		$	2.62

Diluted earnings per share	$	4.71		$	3.86		$	2.58



	Balance at December 31, 2018		Effect of Accounting Change			Balance at January 1, 2019
Operating lease assets	$	—	$	114.1		$	114.1
Other intangible assets	733.2		0.7			733.9
Other non-current assets ⁽¹⁾	37.0		(15.3		)	21.7
Total Assets	4,445.2		99.5			4,544.7

Short-term operating lease liability	—		29.8			29.8
Long-term operating lease liability	—		69.7			69.7
Total Liabilities	$	2,802.5	$	99.5		$	2,902.0



	December 31, 2019
Beginning balance, January 1	$	116.6
Additional unbilled revenue recognized	444.0
Less: amounts billed to customers	(431.4		)
Ending balance	$	129.2



	Number of Shares		Weighted-average Exercise Price		Weighted-average Remaining Contractual Term	Aggregate Intrinsic Value (millions)
Outstanding - beginning of year	3,189,950		$	38.21
Granted - new awards	558,760		42.61
Exercised	(803,604	)	34.25
Canceled or expired	(31,834	)	42.36
Outstanding - end of year	2,913,272		$	40.10	6 years	$	47.2
Options expected to vest	2,913,272		$	40.10	6 years	$	47.2
Options exercisable	1,676,248		$	38.91	5 years	$	29.2


~~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.~~


	December 31, 2020								December 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	37.1	$	0	$	0	$	37.1	$	17.1	$	0	$	0	$	17.1
Government and agency securities	45.1		3.0		0		48.1		35.8		3.0		0		38.8

Corporate bonds - investment grade	0		99.5		0		99.5		0		79.5		0		79.5


Equity securities - U.S. companies	0		0		0		0		0.1		0		0		0.1






Common collective funds - fixed income	44.5		0		0		44.5		42.0		0		0		42.0




Mutual funds - fixed income	55.4		0		0		55.4		66.9		—		0		66.9

Mutual funds - international equity	60.4		0		0		60.4		36.0		0		0		36.0
Mutual funds - domestic equity	0		0		0		0		3.2		0		0		3.2
Mutual funds - other assets	0		0		0		0		1.4		0		0		1.4

	$	242.5	$	102.5	$	0	$	345.0	$	202.5	$	82.5	$	0	$	285.0

Investments measured at net asset value:
Cash and cash equivalents							$	0							$	0.2

Equity securities - international companies							0.3								1.0
Common collective funds - domestic equities							63.2								76.3
Common collective funds - international equities							42.6								31.9
Common collective funds - fixed income							203.8								202.5
Common collective funds - diversified growth							20.1								17.9
Limited partnerships							13.2								18.7
Real estate partnerships							7.7								11.2
Other liability-driven investments							144.4								128.2
Other assets							25.8								22.0

Total Assets							$	866.1							$	794.9


Employer Contributions to Defined Benefit Plans
2019	$	35.4
2020	17.9
2021 (estimated)	16.0



Benefit Payments
2020	$	85.1
2021	82.1
2022	72.4
2023	66.7
2024	62.2
2025-2029	283.5


Assumptions:	2020		2019		2018
Discount rate	3.43	%	3.48% to 4.30%		3.57	%
Rate of return	3.00	%	4.85	%	4.50	%


Change in plan assets:
Fair value of plan assets at beginning of year	$	64.4	$	72.3
Company contributions / payments	2.7		8.0
Transfer to VEBA trust for certain active employees' medical benefits	(50.0)		0
Return on plan assets	0.8		6.8
Benefits paid	(6.8)		(22.7)
Fair value of plan assets at end of year	11.1		64.4
Funded status at end of year	$	(46.5)	$	1.0


Amounts recognized in accumulated other comprehensive income:

Net prior service credit	$	(91.5)	$	(98.2)
Accumulated other comprehensive income	$	(91.5)	$	(98.2)


Changes to prior service credit recognized in accumulated other comprehensive (income) loss:
Accumulated other comprehensive income at beginning of year	$	(98.2)	$	(10.8)

Prior service credit	(3.1)		(92.8)

Recognized prior service credit	9.8		5.4


Total recognized in accumulated other comprehensive income at December 31	$	(91.5)	$	(98.2)



Changes to prior service credit recognized in accumulated other comprehensive (income) loss:
Accumulated other comprehensive income at beginning of year	$	(10.8	)	$	(8.1	)
Prior service credit	(92.8		)	(4.4		)
Recognized prior service credit	5.4			1.7
Total recognized in accumulated other comprehensive income at December 31	$	(98.2	)	$	(10.8	)


	Current Target Allocation			Percentage of VEBA Assets at December 31,
Asset Category				2020	2019
Equity securities	0	—	0	0%	18%
Fixed income securities	100%			100%	82%
Total				100%	100%


	Future Benefit Payments
2021	$	5
2022	5
2023	5
2024	4
2025	4
2026-2030	18


	Foreign currency translation adjustments		Pension and postretirement liability adjustments		Change in fair value of derivative financial instruments		Total
Balance at December 31, 2019	$	(115.3)	$	66.9	$	(1.7)	$	(50.1)
Other comprehensive income (loss) before reclassifications and income taxes	92.7		2.8		(1.2)		94.3
Amounts reclassified from accumulated other comprehensive (loss) income, before income tax	0		(7.4)		(2.3)		(9.7)
Income tax benefit	0		1.1		1.1		2.2
Net current period other comprehensive income (loss), net of income taxes	92.7		(3.5)		(2.4)		86.8
Noncontrolling interest	4.6		0		0		4.6
Net current period comprehensive income (loss), net of income taxes and noncontrolling interest	97.3		(3.5)		(2.4)		91.4
Balance at December 31, 2020	$	(18.0)	$	63.4	$	(4.1)	$	41.3


		Amount of gain or (loss) recognized in income
		Year Ended December 31,
Derivatives not designated as hedging instruments	Location of gain or (loss) recognized in income	2020		2019		2018
Foreign currency forward contracts	Other income (expense), net	$	(3.7)	$	5.9	$	5.1


	Year Ended December 31,
Expenditures as a percentage of sales	2020		2019		2018
Research and Development Expense	1.2	%	1.1	%	1.0	%
Engineering Expense	1.0	%	1.3	%	1.3	%
Total	2.2	%	2.4	%	2.3	%


~~(1)~~	Net income for the third quarter of 2019 included net actuarial losses of $16.9 million. Net income for the fourth quarter of 2019 included the reversal of tax valuation allowances of $44.5 million and net actuarial gains of $21.1 million.


~~(2)~~	~~Net income for the fourth quarter of 2018 included net actuarial losses of $19.7 million, partially offset by curtailment gains of $10.2 million.~~



			Pension and other postretirement benefit obligations
Description of the Matter			At December 31, ~~2019,~~2020, the Company’s aggregate defined benefit pension and other postretirement benefit obligation was ~~$1,026.9~~$1,100.4 million and exceeded the fair value of defined benefit pension and other postretirement plan assets of ~~$859.3~~$877.2 million, resulting in an unfunded defined benefit pension and other postretirement benefit obligation of ~~$167.6~~$223.2 million. As explained in Note 1, Significant Accounting Policies,, Note ~~14,~~ 15, Retirement Benefit Plans,, and Note ~~15,~~ 16, Other Postretirement Benefit Plans,, to the consolidated financial statements, the Company recognizes actuarial gains and losses immediately through net periodic benefit cost upon the annual remeasurement in the fourth quarter, or on an interim basis if specific events trigger a remeasurement, through updating the estimates used to measure the defined benefit pension and other postretirement benefit obligation and plan assets to reflect the actual return on plan assets and updated actuarial assumptions. Auditing the pension and other postretirement benefit obligations is complex and required the involvement of specialists due to the highly judgmental nature of certain of the actuarial assumptions (e.g., discount ~~rate and health care cost trend rates)~~rate) used in the measurement process. These assumptions had a significant effect on the projected benefit obligation and net periodic benefit costs recognized.
How We Addressed the Matter in Our Audit			We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the measurement of pension and other postretirement obligations. For example, we tested controls over management’s review of the defined benefit pension and other postretirement benefit obligation calculations, the relevant data inputs and the significant actuarial assumptions used in the calculations. To test the defined benefit pension and other postretirement benefit obligation, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above, and the underlying data used by the Company. We compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension and other postretirement benefit obligation from prior year due to the change in service cost, interest cost, plan amendments, actuarial losses (gains), benefits paid and other activities. In addition, we involved an actuarial specialist to assist with our procedures. For example, we evaluated management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the defined benefit pension and other postretirement benefit obligation. In certain instances, as part of this assessment, we compared the projected cash flows to prior year and compared the current year benefits paid to the prior year projected cash flows. To evaluate the health care cost trend rates, we assessed whether the information is consistent with publicly available information, and whether any market data adjusted for entity-specific adjustments were applied. We also tested the completeness and accuracy of the underlying data, including the participant data used in the determination of the projected benefit obligation.



	~~Accounting for Acquisitions - BEKA~~
~~Description of the Matter~~	~~As described in Note 2,~~ ~~Acquisitions and Divestitures~~, to the consolidated financial statements, during 2019 the Company completed two acquisitions for net cash consideration of $228.4 million. The most significant acquisition was the acquisition of all the outstanding stock of BEKA Lubrication (“BEKA”). As part of the allocation of the purchase price under ASC 805, this acquisition resulted in the identification and recognition of $55.1 million of intangible assets, which consisted principally of a trade name, customer relationships, and technology and know-how (collectively “the identifiable intangible assets”), with the remainder allocated to goodwill. Auditing the Company’s accounting for the 2019 acquisition of BEKA was complex because the identifiable intangible assets recognized were material to the consolidated financial statements and the estimates of fair value involved a high degree of subjectivity. The high degree of subjectivity was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business. The Company used a discounted cash flow model to measure the trade name, customer relationships, and technology and know-how-related intangible assets. The significant assumptions used to estimate the fair value of the identifiable intangible assets included discount rates and certain assumptions that form the basis of the future net cash flows (e.g., revenue and EBITDA growth rates and royalty rates). These significant assumptions are forward looking and consider anticipated market conditions.
~~How We Addressed the Matter in Our Audit~~	We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the acquisition, including recognition and measurement of the identifiable intangible assets acquired. For example, we tested controls over the recognition and measurement of the trade name, customer relationships, and technology and know-how-related intangible assets, including the valuation models and underlying assumptions used to develop such estimates. Our audit procedures included, among others, reading the executed purchase agreement, evaluating the significant assumptions and methods used in developing fair value estimates, and testing the recognition of (1) the net assets acquired at fair value; (2) the identifiable acquired intangible assets at fair value; and (3) goodwill measured as a residual. To test the estimated fair value of the trade name, customer relationships and technology and know-how-related intangible assets, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodology, evaluating the methods and significant assumptions (including revenue and EBITDA growth rates and royalty rates), used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. For example, when evaluating the assumptions related to the revenue and EBITDA growth rates, we compared the assumptions to the past performance of BEKA, peer companies within the industry, similar acquisitions made by the Company and expected industry trends and considered whether they were consistent with evidence obtained in other areas of the audit. Additionally, when evaluating the assumptions related to discount and royalty rates, we compared the significant assumptions to current industry, market and economic trends, to the assumptions used to value similar assets in other acquisitions, to the historical results of the acquired business and to other guidelines used by companies within the same industry. Furthermore, we assessed the appropriateness of the disclosures in the consolidated financial statements regarding the acquisition.