UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2020

OR

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

For the transition period from             to                          

Commission file number: 1-1169

THE TIMKEN COMPANY

(Exact name of registrant as specified in its charter)

Ohio		34-0577130
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
4500 Mount Pleasant Street NW
North Canton	Ohio	44720-5450
(Address of principal executive offices)		(Zip Code)

234.262.3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Shares, without par value	TKR	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   

 Yes  ☐    No   ☒

Indicate the number of shares outstanding of each of the issuer's classes of common shares, as of the latest practicable date.

Class	Outstanding at June 30, 2020
Common Shares, without par value	75,098,267 shares

THE TIMKEN COMPANY

INDEX TO FORM 10-Q REPORT

			PAGE
I.	PART I.
	Item 1.	Financial Statements	1
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
	Item 4.	Controls and Procedures	41
II.	PART II.
	Item 1.	Legal Proceedings	42
	Item1A.	Risk Factors	42
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
	Item 6.	Exhibits	43

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE TIMKEN COMPANY AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
(Dollars in millions, except per share data)
Net sales	$	803.5		$	1,000.0		$	1,726.9		$	1,979.7
Cost of products sold	573.2			694.3			1,217.7			1,371.4
Gross Profit	230.3			305.7			509.2			608.3
Selling, general and administrative expenses	111.8			158.7			265.4			311.4
Impairment and restructuring charges	3.1			1.9			6.7			1.9
Operating Income	115.4			145.1			237.1			295.0
Interest expense	(18.9		)	(19.3		)	(36.0		)	(37.3		)
Interest income	0.6			1.1			2.1			2.4
Non-service pension and other postretirement (expense) income	(5.3		)	0.2			(1.9		)	0.3
Other income (expense), net	(2.0		)	1.4			2.1			4.7
Income Before Income Taxes	89.8			128.5			203.4			265.1
Provision for income taxes	28.0			33.6			57.6			74.9
Net Income	61.8			94.9			145.8			190.2
Less: Net income (loss) attributable to noncontrolling interest	(0.1		)	2.4			3.2			5.8
Net Income Attributable to The Timken Company	$	61.9		$	92.5		$	142.6		$	184.4
Net Income per Common Share Attributable to The Timken Company   Common Shareholders
Basic earnings per share	$	0.82		$	1.22		$	1.89		$	2.43
Diluted earnings per share	$	0.82		$	1.20		$	1.88		$	2.39

See accompanying Notes to the Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income

(Unaudited) 

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
(Dollars in millions)
Net Income	$	61.8		$	94.9		$	145.8		$	190.2
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	24.5			5.1			(54.3		)	0.9
Pension and postretirement liability adjustments	(1.5		)	—			(2.8		)	(0.1		)
Change in fair value of marketable securities	0.5			—			0.1			—
Change in fair value of derivative financial instruments	(2.6		)	(0.8		)	1.6			(1.4		)
Other comprehensive income (loss), net of tax	20.9			4.3			(55.4		)	(0.6		)
Comprehensive Income, net of tax	82.7			99.2			90.4			189.6
Less: comprehensive income (loss) attributable to noncontrolling interest	1.1			3.1			(3.1		)	7.4
Comprehensive Income Attributable to The Timken Company	$	81.6		$	96.1		$	93.5		$	182.2

See accompanying Notes to the Consolidated Financial Statements.

1

Consolidated Balance Sheets

	(Unaudited)
	June 30, 2020			December 31, 2019
(Dollars in millions)
ASSETS
Current Assets
Cash and cash equivalents	$	415.6		$	209.5
Restricted cash	0.5			6.7
Accounts receivable, less allowances (2020 – $16.9 million; 2019 – $18.1 million)	541.6			545.1
Unbilled receivables	126.2			129.2
Inventories, net	784.0			842.0
Deferred charges and prepaid expenses	33.4			36.7
Other current assets	105.6			105.4
Total Current Assets	2,006.9			1,874.6
Property, Plant and Equipment, net	962.1			989.2
Other Assets
Goodwill	996.5			993.7
Other intangible assets	731.4			758.5
Operating lease assets	110.3			114.1
Non-current pension assets	7.9			3.4
Non-current other postretirement benefit assets	—			36.6
Deferred income taxes	69.7			71.8
Other non-current assets	16.2			18.0
Total Other Assets	1,932.0			1,996.1
Total Assets	$	4,901.0		$	4,859.9
LIABILITIES AND EQUITY
Current Liabilities
Short-term debt	$	42.9		$	17.3
Current portion of long-term debt	18.4			64.7
Short-term operating lease liabilities	27.5			28.3
Accounts payable, trade	267.3			301.7
Salaries, wages and benefits	106.0			134.5
Income taxes payable	31.2			17.8
Other current liabilities	171.5			172.3
Total Current Liabilities	664.8			736.6
Non-Current Liabilities
Long-term debt	1,730.1			1,648.1
Accrued pension benefits	173.3			165.1
Accrued postretirement benefits	44.9			31.8
Long-term operating lease liabilities	70.2			71.3
Deferred income taxes	158.1			168.2
Other non-current liabilities	92.0			84.0
Total Non-Current Liabilities	2,268.6			2,168.5
Shareholders’ Equity
Class I and II Serial Preferred Stock, without par value:
Authorized – 10,000,000 shares each class, none issued	—			—
Common shares, without par value:
Authorized – 200,000,000 shares
Issued (including shares in treasury) (2020 – 98,375,135 shares; 2019 – 98,375,135 shares)
Stated capital	53.1			53.1
Other paid-in capital	924.4			937.6
Earnings invested in the business	2,005.7			1,907.4
Accumulated other comprehensive loss	(99.2		)	(50.1		)
Treasury shares at cost (2020 – 23,276,868 shares; 2019 – 22,836,180 shares)	(1,000.4		)	(979.8		)
Total Shareholders’ Equity	1,883.6			1,868.2
Noncontrolling Interest	84.0			86.6
Total Equity	1,967.6			1,954.8
Total Liabilities and Equity	$	4,901.0		$	4,859.9

See accompanying Notes to the Consolidated Financial Statements.

2

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2020			2019
(Dollars in millions)
CASH PROVIDED (USED)
Operating Activities
Net income	$	145.8		$	190.2
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	84.0			81.2
Impairment charges	0.1			0.7
Loss (gain) on sale of assets	1.6			(1.6		)
Deferred income tax (benefit) provision	(7.1		)	1.8
Stock-based compensation expense	11.4			14.9
Pension and other postretirement expense	8.2			5.8
Pension and other postretirement benefit contributions and payments	(8.6		)	(8.9		)
Changes in operating assets and liabilities:
Accounts receivable	(8.4		)	(35.9		)
Unbilled receivables	3.0			(36.6		)
Inventories	41.3			16.6
Accounts payable, trade	(28.9		)	13.4
Other accrued expenses	5.3			(45.1		)
Income taxes	30.9			0.6
Other, net	25.0			12.8
Net Cash Provided by Operating Activities	303.6			209.9
Investing Activities
Capital expenditures	(56.5		)	(39.2		)
Acquisitions, net of cash received	(6.7		)	(83.0		)
Investments in short-term marketable securities, net	(1.6		)	0.2
Other	0.1			2.2
Net Cash Used in Investing Activities	(64.7		)	(119.8		)
Financing Activities
Cash dividends paid to shareholders	(43.9		)	(42.6		)
Purchase of treasury shares	(42.3		)	(23.6		)
Proceeds from exercise of stock options	7.5			8.9
Payments related to tax withholding for stock-based compensation	(10.4		)	(8.1		)
Accounts receivable facility borrowings	10.0			25.0
Accounts receivable facility payments	(110.0		)	—
Proceeds from long-term debt	550.0			292.0
Payments on long-term debt	(417.1		)	(310.4		)
Deferred financing costs	(1.6		)	(1.9		)
Short-term debt activity, net	26.5			3.8
Net Cash Used in Financing Activities	(31.3		)	(56.9		)
Effect of exchange rate changes on cash	(7.7		)	1.1
Increase in Cash, Cash Equivalents and Restricted Cash	199.9			34.3
Cash, cash equivalents and restricted cash at beginning of year	216.2			133.1
Cash, Cash Equivalents and Restricted Cash at End of Period	$	416.1		$	167.4

See accompanying Notes to the Consolidated Financial Statements.

3

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions, except per share data)

Note 1 - Basis of Presentation

The accompanying Consolidated Financial Statements (unaudited) for The Timken Company (the "Company" or "Timken") have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by the accounting principles generally accepted in the United States ("U.S. GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and accompanying Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Note 2 - Significant Accounting Policies

The Company's significant accounting policies are detailed in "Note 1 - Significant Accounting Policies" of the Annual Report on Form 10-K for the year ended December 31, 2019.

Recent Accounting Pronouncements:

New Accounting Guidance Adopted:

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," and was subsequently updated with ASU 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 the current incurred loss approach with an expected loss model. The new expected credit loss impairment model applies to most financial assets measured at amortized cost and certain other instruments, including trade 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 requires significant judgment. ASU 2016-13 is effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 effective January 1, 2020, and the impact of adoption was not material to the Company's results of operations and financial condition. Refer to Note 12 - Equity for the cumulative effect of initially applying ASU 2016-13.

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 the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company is currently assessing the impact of this standard on its results of operations and financial conditions.

4

Note 3 - Acquisitions

During 2019, the Company completed two acquisitions. On November 1, 2019, the Company completed the acquisition of BEKA Lubrication ("BEKA"), a leading global supplier of automatic lubrication systems. 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 facilities in Germany, and assembly facilities and sales offices around the world. On April 1, 2019, the Company completed the acquisition of Diamond Chain Company ("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 operates primarily in the United States and China. These acquisitions will be collectively referred to hereafter as the "2019 Acquisitions."

The following table presents the purchase price allocation at fair value, net of cash acquired, for the 2019 Acquisitions as of June 30, 2020: 

	Initial Purchase Price Allocation		Adjustments			Purchase Price Allocation
Assets:
Accounts receivable, net	$	26.3	$	(0.1	)	$	26.2
Inventories, net	62.9		0.1			63.0
Other current assets	4.9		0.2			5.1
Property, plant and equipment, net	57.4		—			57.4
Operating lease assets	4.7		—			4.7
Goodwill	44.2		6.3			50.5
Other intangible assets	84.4		—			84.4
Other non-current assets	0.7		—			0.7
Total assets acquired	$	285.5	$	6.5		$	292.0
Liabilities:
Accounts payable, trade	$	10.8	$	(0.2	)	$	10.6
Salaries, wages and benefits	6.8		—			6.8
Income taxes payable	2.1		—			2.1
Other current liabilities	6.7		0.7			7.4
Short-term debt	0.8		—			0.8
Long-term debt	17.2		—			17.2
Accrued pension benefits	0.5		—			0.5
Accrued postretirement benefits	0.1		—			0.1
Long-term operating lease liabilities	4.1		—			4.1
Deferred income taxes	5.1		(0.7		)	4.4
Other non-current liabilities	1.1		—			1.1
Total liabilities assumed	$	55.3	$	(0.2	)	$	55.1
Noncontrolling interest acquired	1.8		—			1.8
Net assets acquired	$	228.4	$	6.7		$	235.1

In March 2020, the Company accrued $6.6 million for a working capital adjustment to the purchase price for BEKA in accordance with the purchase agreement, which was paid during the second quarter of 2020 in the amount of $6.7 million. This adjustment, as well as other measurement period adjustments recorded in 2020, resulted in a $6.3 million increase to goodwill.

In determining the fair value of the amounts above, the Company utilized various forms of the income, cost and market approaches depending on the asset or liability being valued. The estimation of fair value required significant judgment related to future net cash flows, discount rates, competitive trends, market comparisons and other factors. Inputs were generally determined by taking into account independent appraisals and historical data, supplemented by current and anticipated market conditions.

5

Note 3 - Acquisitions (continued)

The above purchase price allocation, including the residual amount allocated to goodwill, is based on preliminary information and is subject to change as additional information concerning final asset and liability valuations is obtained. The purchase price allocation for BEKA is preliminary as a result of the continued evaluation of working capital accounts and contingent liabilities, as well as the finalization of the Company's review pertaining to a limited set of valuation calculations and inputs. The primary areas of the BEKA purchase price allocation that have not been finalized relate to the fair value of inventory, net property, plant, and equipment and other intangible assets, and the related impacts on deferred income taxes and goodwill. During the applicable measurement period, the 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.

Note 4 - Revenue

The following table presents details deemed most relevant to the users of the financial statements about total revenue for the three and six months ended June 30, 2020 and 2019, respectively:

	Three Months Ended						Three Months Ended
	June 30, 2020						June 30, 2019
	Mobile		Process		Total		Mobile		Process		Total
United States	$	186.6	$	173.7	$	360.3	$	258.6	$	226.9	$	485.5
Americas excluding United States	26.8		29.3		56.1		57.2		40.8		98.0
Europe / Middle East / Africa	78.8		112.9		191.7		101.2		129.1		230.3
Asia-Pacific	50.4		145.0		195.4		76.7		109.5		186.2
Net sales	$	342.6	$	460.9	$	803.5	$	493.7	$	506.3	$	1,000.0

	Six Months Ended						Six Months Ended
	June 30, 2020						June 30, 2019
	Mobile		Process		Total		Mobile		Process		Total
United States	$	424.8	$	366.3	$	791.1	$	532.3	$	436.6	$	968.9
Americas excluding United States	75.6		64.3		139.9		105.7		84.4		190.1
Europe / Middle East / Africa	187.5		228.5		416.0		202.9		254.1		457.0
Asia-Pacific	121.4		258.5		379.9		152.8		210.9		363.7
Net sales	$	809.3	$	917.6	$	1,726.9	$	993.7	$	986.0	$	1,979.7

When reviewing revenue by sales channel, the Company separates net sales to original equipment manufacturers from sales to distributors and end users. The following table presents the percent of revenue by sales channel for the six months ended June 30, 2020 and 2019, respectively:

	Six Months Ended	Six Months Ended
Revenue by sales channel	June 30, 2020	June 30, 2019
Original equipment manufacturers	59%	57%
Distribution/end users	41%	43%

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 six months ended June 30, 2020 and June 30, 2019, approximately 13% and 11%, 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. Approximately 5% of total net sales represented service revenue during the six months ended June 30, 2020 and June 30, 2019, respectively. Finally, the United States ("U.S.") government or its contractors represented approximately 9% and 8% of total net sales during the six months ended June 30, 2020 and June 30, 2019, respectively.

6

Note 4 - Revenue (continued)

Remaining Performance Obligations:

Remaining performance obligations represent the transaction price of orders meeting the definition of a contract for which work has not been performed and excludes unexercised contract options. Performance obligations having a duration of more than one year are concentrated in contracts for certain products and services provided to the U.S. government or its contractors. The aggregate amount of the transaction price allocated to remaining performance obligations for such contracts with a duration of more than one year was approximately $244 million at June 30, 2020.

Unbilled Receivables:

The following table contains a rollforward of unbilled receivables for the six months ended June 30, 2020:

	June 30, 2020
Beginning balance, January 1	$	129.2
Additional unbilled revenue recognized	218.6
Less: amounts billed to customers	(221.6		)
Ending balance	$	126.2

There were no impairment losses recorded on unbilled receivables for the six months ended June 30, 2020.

Note 5 - Segment Information

The primary measurement used by management to measure the financial performance of each segment is earnings before interest, taxes, depreciation and amortization ("EBITDA").

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net sales:
Mobile Industries	$	342.6		$	493.7		$	809.3		$	993.7
Process Industries	460.9			506.3			917.6			986.0
Net sales	$	803.5		$	1,000.0		$	1,726.9		$	1,979.7
Segment EBITDA:
Mobile Industries	$	38.8		$	78.0		$	113.9		$	157.3
Process Industries	126.3			125.7			233.8			253.3
Total EBITDA, for reportable segments	$	165.1		$	203.7		$	347.7		$	410.6
Corporate EBITDA	(6.5		)	(15.3		)	(17.6		)	(29.4		)
Corporate pension and other postretirement benefit    related charges (1)	(8.8		)	—			(8.8		)	—
Depreciation and amortization	(41.7		)	(41.7		)	(84.0		)	(81.2		)
Interest expense	(18.9		)	(19.3		)	(36.0		)	(37.3		)
Interest income	0.6			1.1			2.1			2.4
Income before income taxes	$	89.8		$	128.5		$	203.4		$	265.1

⁽¹⁾ Corporate pension and other postretirement benefit related charges represent 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.

7

Note 6 - Income Taxes

The Company's provision for income taxes in interim periods is computed by applying the estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items are recorded during the period(s) in which they occur.

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Provision for income taxes	$	28.0		$	33.6		$	57.6		$	74.9
Effective tax rate	31.2		%	26.1		%	28.3		%	28.3		%

Income tax expense for the three and six months ended June 30, 2020 was calculated using forecasted multi-jurisdictional annual effective tax rates to determine a blended annual effective tax rate. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the projected mix of earnings in international jurisdictions with relatively higher tax rates and unfavorable U.S. permanent differences.

The effective tax rate of 31.2% for the three months ended June 30, 2020 was higher than the three months ended June 30, 2019 primarily due to higher discrete tax expense in the current year compared to discrete tax benefits in the prior year.

The effective tax rate of 28.3% for the six months ended June 30, 2020 was consistent with the six months ended June 30, 2019. Income taxes decreased due to additional accruals recorded discretely for uncertain tax positions in the prior year related to the U.S. Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform"). This was offset by the projected increase in the mix of the earnings in international jurisdictions with relatively higher tax rates.

During the second quarter of 2020, the European Court of Justice issued a ruling applicable to an unrelated taxpayer that concerns the scope of countries subject to exemption on withholding tax on dividends. The Company assessed the ruling and concluded that no accrual for uncertain tax positions was required for withholding taxes on certain prior year intercompany dividends made in Europe.

8

Note 7 - 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 three and six months ended June 30, 2020 and 2019, respectively:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Numerator:
Net income attributable to The Timken Company	$	61.9	$	92.5	$	142.6	$	184.4
Less: undistributed earnings allocated to nonvested stock	—		—		—		—
Net income available to common shareholders for basic    and diluted earnings per share	$	61.9	$	92.5	$	142.6	$	184.4
Denominator:
Weighted average number of shares outstanding - basic	75,078,207		76,085,358		75,298,356		76,024,301
Effect of dilutive securities:
Stock options and awards - based on the treasury stock method	620,082		1,123,074		733,693		1,074,681
Weighted average number of shares outstanding assuming dilution of stock options and awards	75,698,289		77,208,432		76,032,049		77,098,982
Basic earnings per share	$	0.82	$	1.22	$	1.89	$	2.43
Diluted earnings per share	$	0.82	$	1.20	$	1.88	$	2.39

The exercise prices for certain stock options that the Company has awarded exceeded the average market price of the Company’s common shares during each period presented. Such stock options are antidilutive and were not included in the computation of diluted earnings per share. The antidilutive stock options outstanding during the three months ended June 30, 2020 and 2019 were 1,338,686 and 1,428,699, respectively. The antidilutive stock options outstanding during the six months ended June 30, 2020 and 2019 were 1,353,254 and 1,309,878, respectively.

Note 8 - Inventories

The components of inventories at June 30, 2020 and December 31, 2019 were as follows:

	June 30, 2020			December 31, 2019
Manufacturing supplies	$	34.5		$	34.2
Raw materials	99.5			100.0
Work in process	310.4			308.9
Finished products	385.9			439.0
Subtotal	830.3			882.1
Allowance for obsolete and surplus inventory	(46.3		)	(40.1		)
Total Inventories, net	$	784.0		$	842.0

Inventories are valued at net realizable value, with approximately 59% valued on the first-in, first-out ("FIFO") method and the remaining 41% valued on the last-in, first-out ("LIFO") method. The majority of the Company's domestic inventories are valued on the LIFO method, and all the Company's international inventories are valued on the FIFO method.

The LIFO reserve at June 30, 2020 and December 31, 2019 was $162.5 million and $164.6 million, respectively. An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation. The prior year balances have been revised to align to the current year classification of the LIFO reserve and the allowance for obsolete and surplus inventory.

9

Note 9 - Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the six months ended June 30, 2020 were as follows:

	Mobile Industries			Process Industries			Total
Beginning balance	$	361.3		$	632.4		$	993.7
Acquisitions	4.2			2.1			6.3
Foreign currency translation adjustments and other changes	(2.3		)	(1.2		)	(3.5		)
Ending balance	$	363.2		$	633.3		$	996.5

The addition of $6.3 million of goodwill from acquisitions represents measurement period adjustments recorded in 2020 for the 2019 Acquisitions.

The following table displays intangible assets as of June 30, 2020 and December 31, 2019:

	Balance at June 30, 2020							Balance at December 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets subject to amortization:
Customer relationships	$	509.0	$	(143.4	)	$	365.6	$	510.9	$	(128.8	)	$	382.1
Technology and know-how	264.2		(62.1		)	202.1		265.1		(54.7		)	210.4
Trade names	12.5		(6.4		)	6.1		12.7		(6.1		)	6.6
Capitalized software	273.2		(250.2		)	23.0		270.3		(245.8		)	24.5
Other	13.6		(9.4		)	4.2		13.8		(9.1		)	4.7
	$	1,072.5	$	(471.5	)	$	601.0	$	1,072.8	$	(444.5	)	$	628.3
Intangible assets not subject to amortization:
Trade names	$	121.7				$	121.7	$	121.5				$	121.5
FAA air agency certificates	8.7					8.7		8.7					8.7
	$	130.4				$	130.4	$	130.2				$	130.2
Total intangible assets	$	1,202.9	$	(471.5	)	$	731.4	$	1,203.0	$	(444.5	)	$	758.5

Amortization expense for intangible assets was $28.1 million and $29.3 million for the six months ended June 30, 2020 and 2019, respectively. Amortization expense for intangible assets is projected to be $54.7 million in 2020; $51.6 million in 2021; $46.7 million in 2022; $43.8 million in 2023; and $42.1 million in 2024.

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Note 10 - Financing Arrangements

Short-term debt at June 30, 2020 and December 31, 2019 was as follows:

	June 30, 2020		December 31, 2019
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 0.24% to 2.80% at June 30, 2020 and 0.27% to 1.75% at December 31, 2019	42.9		15.5
Short-term debt	$	42.9	$	17.3

The Company has a $100 million Amended and Restated Asset Securitization Agreement (the "Accounts Receivable Facility"), which matures on November 30, 2021. Under the terms of the Accounts Receivable Facility, the Company sells, on an ongoing basis, certain domestic trade receivables to Timken Receivables Corporation, a wholly-owned consolidated subsidiary that, in turn, uses the trade receivables to secure borrowings that are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the Accounts Receivable Facility may be limited by certain borrowing base limitations. As of June 30, 2020, there were no outstanding borrowings under the Accounts Receivable Facility. However, certain borrowing base limitations reduced the availability under the Accounts Receivable Facility to $86.9 million at June 30, 2020. The cost of this facility, which is the prevailing commercial paper rate plus facility fees, is considered a financing cost and is included in "Interest expense" in the Consolidated Statements of Income.

The Company also maintains uncommitted lines of credit at certain foreign subsidiaries, which provide for short-term borrowings up to $267.7 million in the aggregate. At June 30, 2020, the Company’s foreign subsidiaries had borrowings outstanding of $42.9 million and bank guarantees of $0.5 million, which reduced the aggregate availability under these facilities to $224.4 million.

Long-term debt at June 30, 2020 and December 31, 2019 was as follows:

	June 30, 2020		December 31, 2019
Variable-rate Senior Credit Facility with an average interest rate on U.S. Dollar of 2.23% and Euro of 1.04% at June 30, 2020 and 2.85% and Euro of 1.00% at December 31, 2019	$	317.8	$	132.7
Variable-rate Euro Term Loan(1), maturing on September 18, 2020, with an interest rate of 1.375% at June 30, 2020 and 1.13% at December 31, 2019	7.8		54.4
Variable-rate Accounts Receivable Facility with an interest rate of 2.77% at December 31, 2019	—		98.2
Variable-rate Term Loan(1), maturing on September 11, 2023, with an interest rate of 2.11% at June 30, 2020 and 2.92% at December 31, 2019	333.8		338.5
Fixed-rate Senior Unsecured Notes(1), maturing on September 1, 2024, with an interest rate of 3.875%	348.8		348.5
Fixed-rate Euro Senior Unsecured Notes(1), maturing on September 7, 2027, with an interest rate of 2.02%	168.1		167.7
Fixed-rate Senior Unsecured Notes(1), maturing on December 15, 2028, with an interest rate of 4.50%	396.3		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%	154.6		154.6
Fixed-rate Bank Loan, maturing on June 30, 2033, with an interest rate of 2.15%	18.0		18.0
Other	3.3		4.1
	1,748.5		1,712.8
Less: Current maturities	18.4		64.7
Long-term debt	$	1,730.1	$	1,648.1

⁽¹⁾ Net of discounts and fees

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Note 10 - Financing Arrangements (continued)

On June 25, 2019, the Company entered into a Fourth Amended and Restated Credit Agreement ("Senior Credit Facility"). The Senior Credit Facility is a $650.0 million unsecured revolving credit facility, which matures on June 25, 2024. At June 30, 2020, the Company had $317.8 million of outstanding borrowings under the Senior Credit Facility, which reduced the availability to $332.2 million. The Senior Credit Facility has two 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.

On September 11, 2018, the Company entered into a $350 million variable-rate term loan that matures on September 11, 2023 (the "2023 Term Loan"). Proceeds from the 2023 Term Loan were used to fund the acquisitions of Apiary Investments Holding Limited ("Cone Drive") and Rollon S.p.A. ("Rollon"), which closed on September 1, 2018 and September 18, 2018, respectively. On July 12, 2019, the Company amended the 2023 Term Loan agreement to, among other things, align covenants and other terms with the Senior Credit Facility. 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.

On September 18, 2017, the Company entered into a €100 million variable-rate term loan that matures on September 18, 2020 (the "2020 Term Loan"). The Company has paid to-date a total of €93.0 million under the 2020 Term Loan, including a payment of €41.5 million in the second quarter of 2020, which reduced the principal balance to €7.0 million as of June 30, 2020. At June 30, 2020, the 2020 Term Loan was classified as current portion of long-term debt. The Company expects to service interest and repay the remaining principal balance with cash held or generated outside the U.S.

At June 30, 2020, the Company was in full compliance with all applicable covenants on its outstanding debt.

In the ordinary course of business, the Company utilizes standby letters of credit issued by financial institutions to guarantee certain obligations, most of which relate to insurance contracts. At June 30, 2020, outstanding letters of credit totaled $38.5 million, most with expiration dates within 12 months.

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Note 11 - Contingencies

The Company and certain of its subsidiaries have been identified as potentially responsible parties for investigation and remediation under the Comprehensive Environmental Response, Compensation and Liability Act ("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, Downers Grove, DuPage County, Illinois (the “Site”). The Company acquired Lovejoy in 2016. Lovejoy’s Downers Grove property is situated within the Ellsworth Industrial Complex. The USEPA and the Illinois Environmental Protection Agency (“IEPA”) allege there have been one or more releases or threatened releases of hazardous substances, allegedly including, but not limited to, a release or threatened release on or from Lovejoy's property, at the Site. The relief sought by the USEPA and IEPA includes further investigation and potential remediation of the Site and reimbursement of response costs. Lovejoy’s allocated share of past and future costs related to the Site, including for investigation and/or remediation, could be significant. All previously pending property damage and personal injury lawsuits against Lovejoy related to the Site were settled or dismissed prior to our acquisition of Lovejoy.

The Company had total environmental accruals of $5.2 million for various known environmental matters that are probable and reasonably estimable at June 30, 2020 and December 31, 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.

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 has been asserted by the plaintiff at 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 of its products. The product warranty liability included in "Other current liabilities" on the Consolidated Balance Sheets was $10.4 million and $7.5 million at June 30, 2020 and December 31, 2019, respectively. The increase in the liability since year end primarily relates to accruals that are based on the best estimate of costs for future claims based on products sold that are still under warranty. The estimate of these accruals is based on historical claims and expected trends that continue to mature.  Any significant change to these assumptions may be material to the results of operations in any particular period in which that change occurs.

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Note 12 - Equity

The following tables present the changes in the components of equity for the three and six months ended June 30, 2020 and 2019, respectively:

			The Timken Company Shareholders
	Total		Stated Capital		Other Paid-In Capital		Earnings Invested in the Business		Accumulated Other Comprehensive (Loss)			Treasury Stock			Non controlling Interest
Balance at March 31, 2020	$	1,900.3	$	53.1	$	920.1	$	1,964.8	$	(118.9	)	$	(1,001.7	)	$	82.9