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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
tkr-20201231_g1.jpg
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 CantonOhio 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 classTrading SymbolName of each exchange on which registered
Common Shares, without par valueTKRNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
    Yes      No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes      No  
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 filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 762(b)) by the registered public accounting firm that prepared or issued its audit report  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes      No  
    As of June 30, 2020, the aggregate market value of the registrant’s common shares held by non-affiliates of the registrant was $2,974,671,799 based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding at January 31, 2021
Common Shares, without par value 75,710,735 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held on or about May 7, 2021 (Proxy Statement) Part III


Table of Contents


THE TIMKEN COMPANY
INDEX TO FORM 10-K REPORT
   PAGE
I.
PART I.
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Item 4A.
II.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
III.
Part III.
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
IV.
Item 15.
Exhibits and Financial Statement Schedules
Item 16.


Table of Contents


PART I.


Item 1. Business

General:
As used herein, the term “Timken” or the “Company” refers to The Timken Company and its subsidiaries unless the context otherwise requires. Timken designs and manages a growing portfolio of engineered bearings and power transmission products and related services. The Company’s growing portfolio features many strong brands, including Timken®, Philadelphia Gear®, Drives®, Cone Drive®, Rollon®, Lovejoy®, Diamond®, BEKA® and Groeneveld®.

The Company was founded in 1899 by Henry Timken, who received two patents on the design of a tapered roller bearing. Timken later became, and continues to be, the world's largest manufacturer of tapered roller bearings, leveraging its expertise to develop a full portfolio of industry-leading products and services. Timken built its reputation as a global leader by applying its knowledge of metallurgy, friction management and power transmission to increase the reliability and efficiency of its customers' equipment across a diverse range of industries. Today, the Company's global footprint consists of 127 manufacturing facilities/service centers, 21 technology and engineering centers, and 68 distribution centers and warehouses, supported by a team comprised of more than 17,000 employees. Timken operates in 42 countries around the globe.


Major Customers:
The Company sells products and services to a diverse customer base globally, including customers in the following market sectors: industrial distribution, automotive, aerospace, rail, renewable energy, agriculture/turf, on-highway aftermarket, mining, construction, heavy truck, metals, fossil fuels and marine. No single customer accounts for 5% or more of total net sales.


Products:
Timken manufactures and manages global supply chains for multiple product lines including engineered bearings and power transmission products designed to operate in demanding environments. The Company leverages its technical knowledge, research expertise, and production and engineering capabilities across all of its products and end markets to deliver high-performance products and services to its customers. Differentiation within these product lines is generally based on application engineering, product performance, product quality or customer service.


Engineered Bearings:
The Timken® bearing portfolio features a broad range of engineered bearing products, including tapered, spherical and cylindrical roller bearings; spherical plain bearings and rod end bearings; thrust and specialty ball bearings; and housed units. Timken is a leading authority on tapered roller bearings, and leverages its position by applying engineering know-how and technology across its entire bearing portfolio.

A bearing is a mechanical device that reduces friction between moving parts. The purpose of a bearing is to carry a load while allowing a machine shaft to rotate freely. The basic elements of the bearing generally include two rings, called races; a set of rolling elements that rotate around the bearing raceway; and a cage to separate and guide the rolling elements. Bearings come in a number of designs, featuring tapered, spherical, cylindrical or ball rolling elements. The various bearing designs accommodate radial and/or thrust loads differently, making certain bearing types better suited for specific applications.


1



Table of Contents


Selection and development of bearings for customer applications and demand for high reliability require sophisticated engineering and analytical techniques. High precision tolerances, proprietary internal geometries and quality materials provide Timken bearings with high load-carrying capacity, excellent friction-reducing qualities and long service lives. The uses for bearings are diverse and can be found in transportation applications that include premium passenger cars and trucks, heavy trucks, helicopters, airplanes and trains. Ranging in size from precision bearings the size of a pencil eraser to more than roughly three meters in diameter, Timken components are also used in a wide variety of industrial applications, including: paper and steel mills, mining, oil and gas extraction and production, agriculture, construction, machine tools, gear drives, health and positioning control, wind turbines and food and beverage processing.


Tapered Roller Bearings. Timken tapered roller bearings can increase power density and can include customized geometries, engineered surfaces and specialized sealing solutions. The Company’s tapered roller bearing line comes in thousands of combinations in single-, double- and four-row configurations. Tapered roller designs permit ready absorption of both radial and axial load combinations, which makes them particularly well-adapted to reducing friction where shafts, gears or wheels are used.


Spherical and Cylindrical Roller Bearings. Timken also produces spherical and cylindrical roller bearings that are used in gear drives, rolling mills and other industrial and infrastructure development applications. These products are sold worldwide to original equipment manufacturers ("OEMs") and industrial distributors serving major end-market sectors, including construction and mining, natural resources, wind energy, defense, pulp and paper production, rolling mills and general industrial goods.


Ball Bearings. Timken radial, angular and precision ball bearings are used by customers in a variety of market sectors, including aerospace, agriculture, construction, health, machine tool, the automotive aftermarket and general industries. Radial ball bearings are designed to tolerate relatively high-speed operation under a range of load conditions. These bearing types consist of an inner and outer ring with a cage containing a complement of precision balls. Angular contact ball bearings are designed for a combination of radial and axial loading. Precision ball bearings are manufactured to tight tolerances and come in miniature and instrument, thin section and ball screw support designs.


Housed Units. Timken markets among the broadest range of housed bearing units in the industry. These products deliver durable, heavy-duty components designed to protect spherical, tapered and ball bearings in debris-filled, contaminated or high-moisture environments. Common housed unit applications include material handling and processing equipment.

Plain Bearings. Timken produces a range of plain bearings including rod-ends, spherical plain bearings and journal bearings. These friction-type bearings are used to support misalignment and oscillating movements in a variety of applications and end-markets including aircraft controls, packaging equipment, off-highway equipment, heavy truck, performance auto racing, robotics and many more.


Power Transmission Products:
Linear Motion Products. The Company designs and manufactures a global portfolio of Rollon® engineered linear motion products, including linear guides, telescopic rails and linear actuators. These engineered products are highly customized to control movements with different variability and complexity based on the application. Rollon products serve a wide range of industries, including passenger rail, aerospace, packaging and logistics, medical and automation.



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Gear Drives. The Company’s Philadelphia Gear® line of low- and high-speed gear drive designs are used in large-scale industrial applications such as crushing and pulverizing equipment, conveyors and pumps, power generation and military marine. These gear drive designs are custom made to meet user specifications, offering a wide-array of size, footprint and gear arrangements. Timken also offers Cone Drive® high-torque worm gears, harmonic solutions and precision slew drives. Cone Drive products can be found in a variety of industrial end-market sectors, including solar, oil and gas, aerial platforms, automation and food and beverage.


Lubrication Systems. The Company's Groeneveld® and BEKA® lubrication systems include a wide variety of automatic lubrication delivery devices, oil management systems and safety support systems designed to enhance vehicle and machine uptime in on- and off-highway applications. These systems complement the Company's Interlube® line of lubrication systems, which are used by the commercial vehicle, mining, and heavy and general industries. Timken also offers 27 formulations of grease, leveraging its knowledge of tribology and anti-friction bearings to enable smooth equipment operation.


Belts. The Company makes and markets a full line of Timken® and Carlisle® belts used in industrial, commercial and consumer applications. The portfolio features more than 20,000 parts designed for demanding applications, which are sold to original equipment and aftermarket customers. These belts are engineered for maximum performance and durability, with products available in wrap molded, raw edge, v-ribbed and synchronous belt designs. Common applications include agriculture, construction, industrial machinery, outdoor power equipment and powersports.


Chain. Timken manufactures precision Diamond® and Drives® roller chain, pintle chain, agricultural conveyor chain, engineering class chain and oil field roller chain. These highly engineered products are used in a wide range of mobile and industrial machinery applications, including agriculture, oil and gas, aggregate and mining, primary metals, forest products and other heavy industries. They are also used in the food and beverage and packaged goods sectors, which often require high-end, specialty products, including stainless-steel and corrosion-resistant roller chain.


Couplings. The Company offers a full range of industrial couplings within its power transmission products portfolio. The Lovejoy brand is widely known for its flexible coupling design and as the creator of the jaw-style coupling. Lovejoy® couplings are available in curved jaw, jaw in-shear, s-flex, gear-torsional and disc style configurations. These components are used in a wide range of industries such as steel, pulp and paper, power generation, food processing, mining and construction. The Company also offers an extensive line of torsional couplings offered under the Torsion Control Products brand.


Aerospace Drive Systems. The Company's portfolio of parts, systems and services for the aerospace market sector includes products used in helicopters for military and commercial use.  Timken designs, manufactures and tests a wide variety of power transmission and drive train components, including transmissions, gears and rotor-head assemblies and housings. In addition to original equipment, Timken provides aftermarket overhaul and repair services for transmissions, gearboxes and other components.


Industrial Clutches and Brakes. Timken offers a selection of engineered clutches, brakes, hydraulic power take-off units and other torque management devices marketed under the PT Tech® brand. These products are custom engineered for OEMs and used in mining, aggregate, wood recycling and metals industries.


Other Products. The Company also offers a full line of seals, augers and other power transmission components. Timken industrial sealing solutions come in a variety of types and material options that are used in manufacturing, food processing, mining, power generation, chemical processing, primary metals, pulp and paper, and oil and gas industry applications. The Company also designs and manufactures Drives® helicoid and sectional augers for agricultural applications, like conveying, digging and combines.


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Services:
Power Systems. Timken services components in the industrial customer's drive train, including switch gears, electric motors and generators, gearboxes, bearings, couplings and central panels. The Company’s Philadelphia Gear services for gear drive applications include onsite technical services; inspection, repair and upgrade capabilities; and manufacturing of parts to specifications. In addition, the Company’s Wazee, Smith Services, Schulz, Standard Machine and H&N service centers provide customers with services that include motor and generator rewind and repair and uptower wind turbine maintenance and repair. Timken Power Systems commonly serves customers in the power, wind energy, hydro and fossil fuel, water management, paper, mining and general manufacturing sectors.


Bearing Repair. Timken bearing repair services return worn bearings to like-new specifications, which increases bearing service life and often can restore bearings in less time than required to manufacture new. Bearing remanufacturing is available for any bearing type or brand - including competitor products - and is well-suited to heavy industrial applications such as paper, metals, mining, power generation and cement; railroad locomotives, passenger cars and freight cars; and aerospace engines and gearboxes.

Services accounted for approximately 4% of the Company’s net sales for the year ended December 31, 2020.


Sales and Distribution:
Timken products are sold principally by its internal sales organizations. A portion of each segment's sales are made through authorized distributors.

Customer collaboration is central to the Company's sales strategy. Therefore, Timken goes where our customers need us, with sales engineers primarily working in close proximity to customers rather than at production sites. The Company's sales force continuously updates the team's training and knowledge regarding all friction management products and market sector trends, and Timken employees assist customers during development and implementation phases and provide ongoing service and support.

The Company has a joint venture in North America focused on joint logistics and e-business services. This joint venture, CoLinx, LLC, includes five equity members: Timken, SKF Group, Schaeffler Group, ABB Group and Gates Industrial Corp. The e-business service focuses on information and business services for authorized distributors in the Process Industries segment.

Timken has entered into individually negotiated contracts with some of its customers. These contracts may extend for one or more years and, if a price is fixed for any period extending beyond current shipments, customarily include a commitment by the customer to purchase a designated percentage of its requirements from Timken. Timken does not believe that there is any significant loss of earnings risk associated with any given contract.


Competition:
The anti-friction bearing and power transmission businesses are highly competitive in every country where Timken sells products. Timken primarily competes based on total value, including price, quality, timeliness of delivery, product design and the ability to provide engineering support and service on a global basis. The Company competes with domestic manufacturers and many foreign manufacturers of anti-friction bearings, including SKF Group, Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd., and with manufacturers of power transmission products, including Rexnord Corporation, Altra Industrial Motion Corporation and Regal Beloit Corporation.


Joint Ventures:
Investments in affiliated companies accounted for under the equity method were $2.1 million and $2.5 million, respectively, at December 31, 2020 and 2019. The investment balance at December 31, 2020 was reported in other non-current assets on the Consolidated Balance Sheets.



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Backlog:
The following table provides the backlog of orders for the Company's domestic and overseas operations at December 31, 2020 and 2019:
 December 31,
(Dollars in millions)20202019
Segment:
Mobile Industries$1,012.6 $952.9 
Process Industries1,016.2 782.5 
Total Company$2,028.8 $1,735.4 
Approximately 83% of the Company’s backlog at December 31, 2020 is scheduled for delivery in the succeeding 12 months. Actual shipments depend upon customers' ever-changing production schedules. Accordingly, Timken does not believe that its backlog data and comparisons thereof, as of different dates, reliably indicate future sales or shipments.

Raw Materials:
The principal raw materials used by the Company to make engineered bearings are special bar quality ("SBQ") steel and steel components. SBQ steel and steel components are produced around the world by various suppliers. SBQ steel is purchased in bar, tube and wire forms, while steel components are commonly purchased as forgings, semi-finished or finished components. The availability and price of SBQ steel are subject to changes in supply and demand, commodity prices for ferrous scrap, ore, alloy, electricity, natural gas, transportation fuel, and labor costs. The Company manages price variability of commodities by using surcharge mechanisms on some of its contracts with its customers that provides for partial recovery of these cost increases in the price of bearing products.

The availability of bearing-quality tubing is relatively limited, and the Company has taken steps to limit its exposure to this particular form of SBQ steel. Overall, the Company believes that the number of suppliers of SBQ steel is adequate to support the needs of global bearing production, and, in general, the Company is not dependent on any single source of supply.

Research:
Timken operates a network of technology and engineering centers to support its global customers with sites in North America, Europe and Asia. This network develops and delivers innovative friction management and power transmission solutions and technical services. Timken's largest technical center is located at the Company's world headquarters in North Canton, Ohio. Other smaller sites in the United States ("U.S.") include Los Alamitos, California; Manchester, Connecticut; Downer's Grove and Fulton, Illinois; Rochester Hills and Traverse City, Michigan; Springfield, Missouri; Keene and Lebanon, New Hampshire; and King of Prussia, Pennsylvania. Within Europe, the Company has technology facilities in Plymouth, England; Colmar, France; Pegnitz and Werdohl, Germany; Valmadrera, Italy; Gorinchem, Netherlands; and Ploiesti, Romania. In Asia, Timken operates technology and engineering facilities in Bangalore, India and Shanghai, China.

Compliance with Governmental Regulations:

Environmental Matters
The Company continues its efforts to protect the environment and comply with environmental protection laws. Additionally, it has invested in pollution control equipment and updated plant operational practices. The Company's manufacturing plants are expected to have an effective environmental management system which follows the ISO 14001 principles and internal audits are performed against this standard. Where appropriate to meet or exceed customer requirements, we are certified under the formal ISO 14001 certification process. As of the end of 2020, 21 of the Company’s plants had obtained ISO 14001 certification, including the majority of the Company's bearing manufacturing plants.


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The Company establishes appropriate levels of reserves to cover its environmental expenses and has a well-established environmental compliance audit program for its domestic and international units. This program measures performance against applicable laws, as well as against internal standards that have been established for all units worldwide. It is difficult to assess the possible effect of compliance with future requirements that differ from existing requirements.

The Company and certain of its U.S. subsidiaries previously have been and could in the future be identified as potentially responsible parties for investigation and remediation at off-site disposal or recycling facilities under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as the Superfund, or state laws similar to CERCLA. In general, such claims for investigation and remediation also have been asserted against numerous other entities.

Management believes any ultimate liability with respect to pending actions will not materially affect the Company’s annual results of operations, cash flows or consolidated financial position. The Company also is conducting environmental investigation and/or remediation activities at certain current or former operating sites. The costs of such investigation and remediation activities, in the aggregate, are not expected to be material to the operations or financial position of the Company.

New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements may require Timken to incur costs or become the basis for new or increased liabilities that could have a materially adverse effect on the Company's business, financial condition or results of operations

Other Regulations
Because of its global operations, the Company is subject to a wide variety of domestic and foreign laws and regulations, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trade laws, FCPA and similar worldwide anti-bribery laws, and laws governing improper business practices. The Company has policies and procedures in place to promote compliance with these laws and regulations and management believes any ultimate liability with respect to pending actions will not materially affect the Company’s annual results of operations, cash flows or consolidated financial position. In the future, the Company may be subject to both new laws and regulations, and changes to existing laws and regulations which may continue to evolve through interpretations by courts and regulators. Accordingly, it is difficult to assess the possible effect of compliance with future requirements that differ from existing requirements. Such changes may require the Company to incur costs and such changes could form the basis for new or increased liabilities that could have a materially adverse effect on the Company’s business, financial condition or results of operations. Refer to Item 1.A Risk Factors – Risks Related to Legal, Compliance and Regulatory Matters for further discussion.


Patents, Trademarks and Licenses:
Timken owns numerous U.S. and foreign patents, trademarks and licenses relating to certain products. While Timken regards these as important, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items.


Employment:
At December 31, 2020, Timken had more than 17,000 employees worldwide. Approximately 9% of Timken’s U.S. employees are covered under collective bargaining agreements.



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Human Capital:
The Company believes that its associates and their collective knowledge are its most valuable resource. As a result, the Company is committed to providing a safe and healthy work environment, attracting, motivating and retaining the best talent in the industry and providing opportunities for its associates to learn and advance their career with the Company.


Associate Health and Safety
The Coronavirus ("COVID-19") pandemic presented unique challenges with respect to protecting associate health and safety globally, and the Company is proud of how its associates responded. The health and safety of associates will always remain a top priority for the Company and the commitment to safety starts at the top of the organization. CEO, Richard Kyle, was the first-ever chair of the Company's Environmental Health and Safety Leadership Council, which was created in 2009 and continues to drive accountability and responsibility for safety throughout the organization.

The Company's commitment to the health and safety of its associates is evidenced by its strong safety results in 2019 and 2020 shown in the charts below:
tkr-20201231_g2.jpg
*Rates calculated as (number of injuries and illnesses x 200,000) / employee hours worked. 2020 rates represent the Company's best estimate as of February 16, 2021.
- - - represents the 2019 average (mean) for U.S. metal manufacturers (North American Industry Classification System ("NAICS") code 332) that employ at least 1,000 employees, based on information provided by the U.S. Bureau of Labor Statistics at https://www.bls.gov/iif/.

The 2019 lost time accident rate of 0.19 represented record performance for the Company, while the 2020 rate of 0.31 remained strong. The Company aims to maintain a recordable rate within the top quartile of U.S. metal manufacturers (NAICS code 332) based on information provided by the U.S. Bureau of Labor Statistics, and it met that target in 2019. Industry data for 2020 was not available at the time of this report. In addition, the 2020 recordable rate of 0.91 represented record performance for the Company.


Attracting, Retaining, and Motivating Highly Qualified Associates
Successful execution of the Company's strategy continues to depend on attracting, retaining, and motivating highly qualified talent. As such, the Company believes it is important to reward associates with competitive wages and benefits to recognize professional excellence and career progression. The Company also believes it is important to provide pay and benefits that is competitive and equitable based on the local markets in which it operates.


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In addition, the Company also believes that having open, honest dialogue with its associates is key to evolving its culture and keeping the Company strong. In line with that approach, the Company conducts comprehensive surveys on a periodic basis to measure employee engagement. The Company also deploys regular pulse surveys to gain insights from associates’ recent experiences and to better understand how effectively it is engaging, energizing and enabling its workforce.

The Company also provides several professional development and training opportunities to advance our associates’ skills and expertise. Some of these opportunities include online-learning platforms, job-specific training, and educational reimbursement programs. To better inform its hiring and associate development efforts, the Company has partnered with third-party vendors to provide required training for its managers focused on diversity and inclusion.

To further the Company's goal of inclusiveness, Timken associate resource groups (“ARGs”) around the world help us understand and address the challenges faced by our diverse workforce and the opportunities diversity offers in advancing our collective knowledge. Since 2009, our associates have driven the expansion of regional chapters across three primary ARGs: Women’s International Network (WIN), Multicultural Association of Professionals (MAP), and Young Professionals Network (YPN).


Available Information:
The Company uses its Investor Relations website at http://investors.timken.com, as a channel for routine distribution of important information, including news releases, analyst presentations and financial information. The Company posts filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the "SEC"), including its annual, quarterly and current reports on Forms 10-K, 10-Q and 8-K; its proxy statements; and any amendments to those reports or statements. All such postings and filings are available on the Company’s website free of charge. In addition, this website allows investors and other interested persons to sign up to automatically receive e-mail alerts when the Company posts news releases and financial information on the Company’s website. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Annual Report unless expressly noted.

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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, which may adversely affect our results of operations and profitability. We have taken approximately $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.

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.

Any change in raw material prices or the 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 products due to pricing pressure, contract terms or other factors, which could adversely impact our revenue and profit margins.


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Moreover, future disruptions in the 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 prices for such raw materials could adversely affect our results of operations and 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. 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 digitization. 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.

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 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.

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 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 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 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.


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 continued service of key members of our management and other key employees. The loss of the services of a significant number of members of our management or other key employees could have a material adverse effect on our business. Our future success also will depend on our ability to attract, retain and 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 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.


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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 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.

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.

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.


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.

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 recall 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 or product liability claim against us, or a requirement that we participate in a product recall, could have a material adverse effect on our earnings and brand reputation.


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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, 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 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 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.


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Item 1B. Unresolved Staff Comments
None.


Item 2. Properties

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 are situated in the United States, as well as 41 other countries, including China, India, and Romania. The Company owns the majority of its manufacturing plants, and its leased properties primarily consist of 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. The extent to which the Company 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.


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.


Item 4. Mine Safety Disclosures
Not applicable.



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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 16, 2021 are as follows:
NameAge Current Position and Previous Positions During Last Five Years
Christopher A. Coughlin602014 Executive Vice President, Group President
Philip D. Fracassa522014 Executive Vice President and Chief Financial Officer
Richard G. Kyle552014 President and Chief Executive Officer
Hans Landin482018 Group Vice President
2017 Vice President - Mechanical Power Transmission
2014 Vice President - Power Transmission and Engineering Systems
Ronald J. Myers622017 Executive Vice President - Human Resources
2015 Vice President of Human Resources
Hansal N. Patel402019 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 Roellgen532016 Vice President - Europe, Asia and Africa
2014 Vice President - Process Industries and Managing Director, Europe

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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, 2020 was 3,461. The estimated number of beneficial shareholders at December 31, 2020 exceeds 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, 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)
10/1/2020 - 10/31/2020518 $58.70  4,357,042 
11/1/2020 - 11/30/2020154,350 69.05 96,000 4,261,042 
12/1/2020 - 12/31/20204,486 74.94 4,000 4,257,042 
Total159,354 $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.


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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (continued)
tkr-20201231_g3.jpg
*Total return assumes reinvestment of dividends. Fiscal years ending December 31.

20162017201820192020
Timken$143 $182 $141 $219 $307 
S&P 500112 136 130 171 203 
S&P 400 Industrials129 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, 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, 2020, and reinvestment of dividends.

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Item 6. Selected Financial Data
Summary of Operations and Other Comparative Data:
(Dollars in millions, except per share, shareholder and per employee data)20202019201820172016
Statements of Income
Net sales$3,513.2 $3,789.9 $3,580.8 $3,003.8 $2,669.8 
Gross profit1,009.9 1,141.8 1,040.1 812.1 706.3 
Operating income454.9 516.4 454.5 299.5 244.4 
Net income292.4 374.7 305.5 202.3 141.1 
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 debt1,564.6 1,730.1 1,681.6 962.3 659.2 
Total liabilities2,816.4 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 sales8.3 %9.9 %8.5 %6.7 %5.3 %
Net income attributable to The Timken Company / net sales8.1 %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 expenditures121.6 140.6 112.6 104.7 137.5 
Capital expenditures / net sales3.5 %3.7 %3.1 %3.5 %5.2 %
Depreciation and amortization167.1 160.6 146.0 137.7 131.7 
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 - basic75,354,280 75,758,123 77,119,602 77,736,398 78,516,029 
Weighted average number of shares outstanding - diluted76,401,366 76,896,565 78,337,481 78,911,149 79,234,324 
Number of employees at year-end17,430 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.
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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 $3.5 billion in sales in 2020 and employs more than 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.

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.
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The following highlights some of the Company's more significant accomplishments in 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.

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 the assets of 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 aerospace and defense, racing, off-highway equipment, and packing.


RESULTS OF OPERATIONS
2020 vs. 2019

Overview: 
20202019$ Change% Change
Net sales$3,513.2 $3,789.9 $(276.7)(7.3 %)
Net income292.4 374.7 (82.3)(22.0 %)
Net income attributable to noncontrolling interest7.9 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 shares76,401,366 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 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.


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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 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 12% compared to 2020, primarily due to higher organic revenue across both the Mobile Industries and 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:
20202019$ Change Change
Net sales$3,513.2 $3,789.9 $(276.7)(7.3 %)

Net sales decreased in 2020 compared with 2019, primarily due to lower organic revenue (net of positive pricing) of $365 million and the 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:
20202019$ ChangeChange
Gross profit$1,009.9 $1,141.8 $(131.9)(11.6 %)
Gross profit % to net sales28.7 %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:
20202019$ ChangeChange
Selling, general and administrative expenses$533.8 $618.6 $(84.8)(13.7%)
Selling, general and administrative expenses % to net sales15.2 %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:
20202019$ Change
Impairment charges$0.4 $2.6 $(2.2)
Severance and related benefit costs19.6 3.0 16.6 
Exit costs1.2 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):
20202019$ Change% Change
Non-service pension and other postretirement (expense) income$(4.7)$10.2 $(14.9)(146.1 %)
Other income, net10.0 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 the assets of Aurora acquired on November 30, 2020. Refer to Note 3 - Acquisitions for more information.


Income Tax Expense:
20202019$ ChangeChange
Income tax expense$103.9 $97.7 $6.2 6.3 %
Effective tax rate26.2 %20.7 %— 550  bps

The effective tax rate for 2020 was 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 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 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 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.

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") during the second quarter of 2019. The majority of the results for Diamond Chain are reported in the Process Industries segment.


Mobile Industries Segment:
20202019$ ChangeChange
Net sales$1,671.6 $1,893.9 $(222.3)(11.7 %)
EBITDA$232.5 $284.9 $(52.4)(18.4 %)
EBITDA margin13.9 %15.0 %— (110) bps
  
20202019$ Change% Change
Net sales$1,671.6 $1,893.9 $(222.3)(11.7 %)
Less: Acquisitions76.0 — 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 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 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 price/mix, lower material and logistics costs, and the favorable impact of acquisitions.

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Process Industries Segment:
20202019$ ChangeChange
Net sales$1,841.6 $1,896.0 $(54.4)(2.9 %)
EBITDA$442.9 $466.6 $(23.7)(5.1 %)
EBITDA margin24.0 %24.6 %— (60) bps
  
20202019$ Change% Change
Net sales$1,841.6 $1,896.0 $(54.4)(2.9 %)
Less: Acquisitions44.1 — 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:
20202019$ ChangeChange
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:
2019 vs. 2018

Overview:
20192018$ Change% Change
Net sales$3,789.9 $3,580.8 $209.1 5.8 %
Net income374.7 305.5 69.2 22.7 %
Income attributable to noncontrolling interest12.6 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 shares76,896,565 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.


THE STATEMENTS OF INCOME

Sales:
20192018$ 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:
20192018$ ChangeChange
Gross profit$1,141.8 $1,040.1 $101.7 9.8 %
Gross profit % to net sales30.1 %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:
20192018$ ChangeChange
Selling, general and administrative expenses$618.6 $580.7 $37.9 6.5 %
Selling, general and administrative expenses % to net sales16.3 %16.2 %— 10  bps

SG&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 $10 million.
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Interest Expense and Income:
20192018$ 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.

Other Income (Expense):
20192018$ 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 Mark-to-Market 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 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.


Income Tax Expense:
20192018$ ChangeChange
Income tax expense$97.7 $102.6 $(4.9)(4.8 %)
Effective tax rate20.7 %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 with the Tax Cut and Jobs Act of 2017 ("U.S. Tax 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.

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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 and divestitures completed in 2019 and 2018 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 2019 and 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 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 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.


Mobile Industries Segment:
20192018$ ChangeChange
Net sales$1,893.9 $1,903.7 $(9.8)(0.5 %)
EBITDA$284.9 $272.2 $12.7 4.7 %
EBITDA margin15.0 %14.3 %— 70  bps
  
20192018$ Change% Change
Net sales$1,893.9 $1,903.7 $(9.8)(0.5 %)
Less: Acquisitions82.5 — 82.5 NM
  Divestitures(8.5)— (8.5)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 %)

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.







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Process Industries Segment:
20192018$ ChangeChange
Net sales$1,896.0 $1,677.1 $218.9 13.1 %
EBITDA$466.6 $405.7 $60.9 15.0 %
EBITDA margin24.6 %24.2 %— 40  bps
  
20192018$ Change% Change
Net sales$1,896.0 $1,677.1 $218.9 13.1 %
Less: Acquisitions196.4 — 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.


Corporate:
20192018$ ChangeChange
Corporate expenses$56.2 $62.0 $(5.8)(9.4 %)
Corporate expenses % to net sales1.5 %1.7 %— (20) bps

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

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THE BALANCE SHEETS

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

Current Assets:
  
December 31,
  
  
  
20202019$ Change% Change
Cash and cash equivalents$320.3 $209.5 $110.8 52.9 %
Restricted cash0.8 6.7 (5.9)(88.1 %)
Accounts receivable, net581.1 545.1 36.0 6.6 %
Unbilled receivables110.9 129.2 (18.3)(14.2 %)
Inventories, net841.3 842.0 (0.7)(0.1 %)
Deferred charges and prepaid expenses39.9 36.7 3.2 8.7 %
Other current assets106.0 105.4 0.6 0.6 %
Total current assets$2,000.3 $1,874.6 $125.7 6.7 %

Refer to the "Cash Flows" section for discussion on the change in cash and cash equivalents. Accounts receivable increased primarily due to the timing of billings related to marine contracts as of December 31, 2020. Unbilled receivables decreased primarily due to customer billings exceeding revenue recognized for marine contracts as of December 31, 2020.


Property, Plant and Equipment, Net:
  
December 31,
  
  
  
20202019$ Change% Change
Property, plant and equipment, net$1,035.6 $989.2 $46.4 4.7 %

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


Other Assets:
  
December 31,
  
  
  
20202019$ Change% Change
Goodwill$1,047.6 $993.7 $53.9 5.4 %
Other intangible assets741.4 758.5 (17.1)(2.3 %)
Operating lease assets118.2 114.1 4.1 3.6 %
Non-current pension assets2.0 3.4 (1.4)(41.2 %)
Non-current other postretirement benefit assets 36.6 (36.6)(100.0 %)
Deferred income taxes77.0 71.8 5.2 7.2 %
Other non-current assets19.5 18.0 1.5 8.3 %
Total other assets$2,005.7 $1,996.1 $9.6 0.5 %

The increase in goodwill in 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 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 Voluntary Employee Beneficiary Association ("VEBA") trust in January 2020. The creation of a new $50 million VEBA trust to pay for certain active employee's medical benefits shifted the balance from an overfunded asset position as of December 31, 2019 to a liability position as of December 31, 2020. Refer to Note 16 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for further discussion.

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Current Liabilities:
  
December 31,
  
  
  
20202019$ Change% Change
Short-term debt$119.8 $17.3 $102.5 NM
Current portion of long-term debt10.9 64.7 (53.8)(83.2 %)
Short-term operating lease liabilities27.2 28.3 (1.1)(3.9 %)
Accounts payable351.4 301.7 49.7 16.5 %
Salaries, wages and benefits135.7 134.5 1.2 0.9 %
Income taxes payable16.1 17.8 (1.7)(9.6 %)
Other current liabilities186.9 172.3 14.6 8.5 %
Total current liabilities$848.0 $736.6 $111.4 15.1 %

The increase in short-term debt was primarily due to borrowings under the $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 decrease in the current portion of long-term debt was primarily due to the payment of $47 million on the Company's €100 million term loan that matured on September 18, 2020 (the "2020 Term Loan").

The increase in accounts payable was primarily due to efforts by the Company to increase days payable outstanding in 2020, partially offset by the impact of foreign currency exchange rate changes of $11 million.

The increase in other current liabilities was primarily due to an increase in the current derivative liability of $6 million. Refer to Note 19 - Derivative Instruments in the Notes to the Consolidated Financial Statements for additional information. In addition, accrued restructuring increased $5 million as compared to the prior year end. Refer to Note 14 - Impairment and Restructuring Charges in the Notes to the Consolidated Financial Statements for additional information.


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Non-Current Liabilities:
  
December 31,
  
  
  
20202019$ Change% Change
Long-term debt$1,433.9 $1,648.1 $(214.2)(13.0 %)
Accrued pension benefits163.0 165.1 (2.1)(1.3 %)
Accrued postretirement benefits41.3 31.8 9.5 29.9 %
Long-term operating lease liabilities75.5 71.3 4.2 5.9 %
Deferred income taxes148.7 168.2 (19.5)(11.6 %)
Other non-current liabilities106.0 84.0 22.0 26.2 %
Total non-current liabilities$1,968.4 $2,168.5 $(200.1)(9.2 %)

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 increase in accrued postretirement benefits was primarily due to the 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 to fund the new VEBA trust to pay for certain active employees' medical benefits. The creation of the new VEBA trust shifted the balance from overfunded as of December 31, 2019 to a liability position as of December 31, 2020. Refer to Note 16 - Other Postretirement Benefit Plans in the Notes to the Consolidated Financial Statements for further discussion.
The increase in other non-current liabilities was primarily due to $8.5 million of payroll taxes that are deferred for more than 12 months under the Coronavirus Aid, Relief, and Economic Security Act, as well as an increase to the uncertain tax positions of approximately $5 million.


Shareholders’ Equity:
  
December 31,
  
  
  
20202019$ Change% Change
Common stock$781.4 $990.7 $(209.3)(21.1 %)
Retained earnings1,339.5 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 interest72.3 86.6 (14.3)(16.5 %)
Total equity$2,225.2 $1,954.8 $270.4 13.8 %

The decrease in common stock is primarily due to the retirement of shares, resulting in a $12.4 million reduction to stated capital and a $213.3 million reduction to other paid-in capital, partially offset by stock option exercises of $16.1 million. Earnings invested in the business in 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 $284.5 million.
The increase in accumulated other comprehensive income was primarily due to current year foreign currency adjustments of $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 retirement of 23.0 million shares for $990.6 million and $29.2 million of shares issued, net of shares surrendered, for stock compensation plans for 2020, partially offset by the purchase of 1.1 million of its common shares for $49.3 million. The decrease in noncontrolling interest was primarily due to a dividend declared by Timken India Limited that resulted in payment to the noncontrolling interest parties in the third quarter of 2020.

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CASH FLOWS
20202019$ 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 cash11.9 (1.4)13.3 
Increase in cash and cash equivalents$104.9 $83.1 $21.8 

Operating Activities:
The increase in net cash provided by operating activities in 2020 compared with 2019 was primarily due to a favorable impact of working capital items of $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 2020 and 2019, respectively:
 20202019$ Change
Cash provided (used):
Accounts receivable$(20.7)$24.1 $(44.8)
Unbilled receivables18.5 (12.6)31.1 
Inventories27.4