UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
   
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedMarch 31,September 30, 2007
OR
   
o 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 (I.R.S. Employer
incorporation or organization) Identification No.)
   
1835 Dueber Ave., SW, Canton, OH 44706-2798
(Address of principal executive offices) (Zip Code)
330.438.3000
(Registrant’s telephone number, including area code)
     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.
Yesþ Noo
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filerþ       Accelerated filero      Non-accelerated filero
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
     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 March 31,September 30, 2007
   
Common Stock, without par value 94,892,63795,787,433 shares
 
 

 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PART I. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of ProceedsProceeds.
Item 6. Exhibits
SIGNATURES
EX-12
EX-18
EX-31.1
EX-31.2
EX-32


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE TIMKEN COMPANY AND SUBSIDIARIES
Consolidated Statement of Income
(Unaudited)
                        
 Three Months Ended Three Months Ended Nine Months Ended
 March 31, September 30, September 30,
(Dollars in thousands, except per share data) 2007 2006 2007 2006 2007 2006
Net sales $1,284,513 $1,254,308  $1,261,239 $1,185,962 $3,894,983 $3,742,444 
Cost of products sold 1,027,020 984,495  1,009,929 953,565 3,097,145 2,946,385 
Gross Profit
 257,493 269,813  251,310 232,397 797,838 796,059 
  
Selling, administrative and general expenses 164,303 170,752  170,841 160,679 514,773 503,940 
Impairment and restructuring charges 13,776 1,040  11,840 2,682 32,870 11,191 
Loss on divestitures 354   152  468 9,971 
Operating Income
 79,060 98,021  68,477 69,036 249,727 270,957 
  
Interest expense  (9,644)  (13,065)  (10,698)  (11,704)  (30,422)  (37,487)
Interest income 1,955 1,463  2,381 854 5,536 3,338 
Other expense — net  (3,385)  (5,159)  (3,851)  (1,749)  (10,829)  (9,089)
Income Before Income Taxes
 67,986 81,260 
(Benefit) provision for income taxes  (6,268) 24,166 
Income from Continuing Operations before Income Taxes
 56,309 56,437 214,012 227,719 
Provision for income taxes 15,066 17,749 42,914 67,049 
Income from Continuing Operations
 74,254 57,094  41,243 38,688 171,098 160,670 
Income from discontinued operations, net of income taxes 940 8,846   7,859 665 26,508 
Net Income
 $75,194 $65,940  $41,243 $46,547 $171,763 $187,178 
  
Earnings Per Share:
  
Basic earnings per share  
Continuing operations $0.79 $0.61  $0.43 $0.41 $1.81 $1.72 
Discontinued operations 0.01 0.10   0.09 0.01 0.29 
Net income per share
 $0.80 $0.71  $0.43 $0.50 $1.82 $2.01 
  
Diluted earnings per share  
Continuing operations $0.78 $0.61  $0.43 $0.41 $1.79 $1.70 
Discontinued operations 0.01 0.09   0.08 0.01 0.29 
Net income per share
 $0.79 $0.70  $0.43 $0.49 $1.80 $1.99 
  
Dividends per share $0.16 $0.15  $0.17 $0.16 $0.49 $0.46 
See accompanying Notes to Consolidated Financial Statements.

2


Consolidated Balance Sheet
                
 (Unaudited)   (Unaudited)  
 March 31, December 31, September 30, December 31,
(Dollars in thousands) 2007 2006 2007 2006
ASSETS
  
Current Assets
  
Cash and cash equivalents $100,818 $101,072  $87,767 $101,072 
Accounts receivable, less allowances: 2007 - $38,711; 2006 - $36,673 740,837 673,428 
Accounts receivable, less allowances: 2007 - $39,427; 2006 - $36,673 734,771 673,428 
Inventories, net 974,967 952,310  1,021,961 952,310 
Deferred income taxes 86,113 85,576  66,583 85,576 
Deferred charges and prepaid expenses 14,740 11,083  14,981 11,083 
Other current assets 80,123 76,811  92,305 76,811 
Total Current Assets
 1,997,598 1,900,280  2,018,368 1,900,280 
  
Property, Plant and Equipment — Net
 1,598,160 1,601,559  1,644,965 1,601,559 
  
Other Assets
  
Goodwill 204,247 201,899  215,778 201,899 
Other intangible assets 101,074 104,070  96,965 104,070 
Deferred income taxes 169,058 169,417  159,134 169,417 
Other non-current assets 53,926 54,308  61,842 54,308 
Total Other Assets
 528,305 529,694  533,719 529,694 
Total Assets
 $4,124,063 $4,031,533  $4,197,052 $4,031,533 
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
  
Current Liabilities
  
Short-term debt $109,696 $40,217  $41,711 $40,217 
Accounts payable and other liabilities 528,742 506,301  502,458 506,301 
Salaries, wages and benefits 169,724 225,409  211,598 225,409 
Income taxes payable 8,532 52,768  18,445 52,768 
Deferred income taxes 635 638  638 638 
Current portion of long-term debt 28,213 10,236  33,180 10,236 
Total Current Liabilities
 845,542 835,569  808,030 835,569 
  
Non-Current Liabilities
  
Long-term debt 530,590 547,390  526,521 547,390 
Accrued pension cost 391,398 410,438  328,023 410,438 
Accrued postretirement benefits cost 683,520 682,934  681,762 682,934 
Deferred income taxes 14,512 6,659  6,659 6,659 
Other non-current liabilities 96,244 72,363  91,784 72,363 
Total Non-Current Liabilities
 1,716,264 1,719,784  1,634,749 1,719,784 
  
Shareholders’ Equity
  
Class I and II Serial Preferred Stock without par value:  
Authorized - 10,000,000 shares each class, none issued  
Common stock without par value:  
Authorized - 200,000,000 shares      
Issued (including shares in treasury) (2007 - 95,067,547 shares; 2006 - 94,244,407 shares) 
Issued (including shares in treasury) (2007 - 96,109,525 shares;
2006 - 94,244,407 shares)
     
Stated capital 53,064 53,064  53,064 53,064 
Other paid-in capital 769,420 753,095  805,152 753,095 
Earnings invested in the business 1,282,832 1,217,167  1,347,871 1,217,167 
Accumulated other comprehensive loss  (537,753)  (544,562)  (441,460)  (544,562)
Treasury shares at cost (2007 - 174,909 shares; 2006 - 80,005 shares)  (5,306)  (2,584)
Treasury shares at cost (2007 - 322,092 shares; 2006 - 80,005 shares)  (10,354)  (2,584)
Total Shareholders’ Equity
 1,562,257 1,476,180  1,754,273 1,476,180 
Total Liabilities and Shareholders’ Equity
 $4,124,063 $4,031,533  $4,197,052 $4,031,533 
See accompanying Notes to Consolidated Financial Statements.

3


Consolidated Statement of Cash Flows
(Unaudited)
                
 Three Months Ended Nine Months Ended
 March 31, September 30,
(Dollars in thousands) 2007 2006 2007 2006
CASH PROVIDED (USED)
  
 
Operating Activities
  
Net income $75,194 $65,940  $171,763 $187,178 
Net (income) from discontinued operations  (940)  (8,846)  (665)  (26,508)
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization 54,500 49,490  160,595 145,126 
Impairment charges 2,398   11,620 1,792 
Loss on disposals of property, plant and equipment 665 531  2,084 2,109 
Gain on divestiture   (660)
Deferred income tax provision 905 2,452 
(Gain) loss on divestiture  (666) 9,311 
Deferred income taxes 16,168  (24,016)
Stock based compensation expense 4,234 3,827  12,671 11,760 
Pension and other postretirement expense 90,792 116,266 
Pension and other postretirement benefit payments  (138,984)  (189,306)
Changes in operating assets and liabilities:  
Accounts receivable  (64,776)  (69,452)  (39,937)  (15,330)
Inventories  (17,791)  (37,705)  (34,766)  (65,572)
Other assets 1,943  (187)
Accounts payable and accrued expenses  (63,764)  (47,542)  (45,167)  (21,948)
Foreign currency translation (gain) loss 790  (6,101)
Income taxes payable 7,083 24,894 
Other — net  (27,077)  (25,161)
Net Cash Used by Operating Activities — Continuing Operations  (6,642)  (48,253)
Net Cash Provided by Operating Activities — Continuing Operations 185,514 130,595 
Net Cash Provided by Operating Activities — Discontinued Operations 940 11,577  665 41,755 
Net Cash Used By Operating Activities
  (5,702)  (36,676)
Net Cash Provided By Operating Activities
 186,179 172,350 
  
Investing Activities
  
Capital expenditures  (60,942)  (39,354)  (196,374)  (175,224)
Proceeds from disposals of property, plant and equipment 3,630 1,518  11,809 6,253 
Divestitures  875  698  (2,723)
Acquisitions  (1,523)    (1,523)  (4,299)
Other  (506)  (1,205) 1,088  (85)
Net Cash Used by Investing Activities — Continuing Operations  (59,341)  (38,166)  (184,302)  (176,078)
Net Cash Used by Investing Activities — Discontinued Operations   (1,719)   (4,205)
Net Cash Used by Investing Activities
  (59,341)  (39,885)  (184,302)  (180,283)
  
Financing Activities
  
Cash dividends paid to shareholders  (15,152)  (14,027)  (46,682)  (43,170)
Net proceeds from common share activity 11,886 6,132  36,987 22,066 
Accounts receivable securitization financing borrowings  140,000 
Accounts receivable securitization financing payments   (50,000)
Proceeds from issuance of long-term debt 15,054 38,015  40,054 191,615 
Payments on long-term debt  (15,250)  (38,346)  (48,423)  (291,477)
Short-term debt activity — net 67,011 49,507   (6,490) 24,984 
Net Cash Provided by Financing Activities
 63,549 41,281 
Net Cash Used by Financing Activities
  (24,554)  (5,982)
Effect of exchange rate changes on cash 1,240 1,148  9,372 2,567 
Decrease In Cash and Cash Equivalents
  (254)  (34,132)  (13,305)  (11,348)
Cash and cash equivalents at beginning of year 101,072 65,417  101,072 65,417 
Cash and Cash Equivalents at End of Period
 $100,818 $31,285  $87,767 $54,069 
See accompanying Notes to the Consolidated Financial Statements.

4


PART I. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, except per share data)
Note 1 Basis of Presentation
The accompanying Consolidated Financial Statements (unaudited) for The Timken Company (the company) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by the accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and footnotes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2006. Certain amounts in the 2006 Consolidated Financial Statements have been reclassified to conform to the 2007 presentation.
Note 2 New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertain tax positions recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes requirements and other guidance for financial statement recognition and measurement of positions taken or expected to be taken on tax returns. This interpretation is effective for fiscal years beginning after December 15, 2006. The cumulative effect of adopting FIN 48 is recorded as an adjustment to the opening balance of retained earnings in the period of adoption. The company adopted FIN 48 effective January 1, 2007. In connection with the adoption of FIN 48, the company recorded a $5,623 increase to retained earnings to recognize net tax benefits under the recognition and measurement criteria of FIN 48 that were previously not recognized under the company’s former accounting policy.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a framework for measuring fair value that is based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information to develop those assumptions. Additionally, the standard expands the disclosures about fair value measurements to include separately disclosing the fair value measurements of assets or liabilities within each level of the fair value hierarchy. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The company is currently evaluating the impact of adopting SFAS No. 157 on the company’s results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The company is currently evaluating the impact of adopting SFAS No. 159 on the company’s results of operations and financial condition.
Note 3 — Inventories
               
 March 31, December 31, September 30, December 31,
 2007 2006 2007 2006
Inventories:  
Manufacturing supplies $75,838 $84,398  $78,704 $84,398 
Work in process and raw materials 433,531 390,133  418,703 390,133 
Finished products 465,598 477,779  524,554 477,779 
Inventories $974,967 $952,310  $1,021,961 $952,310 

5


Note 3 Inventories (continued)
Effective January 1, 2007, the company changed the method of accounting for certain product inventories for one of its domestic legal entities from the first-in, first-out (FIFO) method to the last-in, first-out (LIFO) method. This change affects approximately 8% of the company’s total gross inventory at December 31, 2006. As a result of this change, substantially all domestic inventories are stated at the lower of cost determined(determined on a LIFO basis,basis) or market. The change is preferable because it improves financial reporting by supporting the continued integration of the company’s domestic bearing business, as well as providingprovides a consistent and uniform costing method across the company’s domestic operations and reduces the complexity of intercompany transactions. SFAS No. 154, “Accounting Changes and Error Corrections,” requires that a change in accounting principle be reflected through retrospective application of the new accounting principle to all prior periods, unless it is impractical to do so. The company has determined that retrospective application to a period prior to January 1, 2007 is not practical as the necessary information needed to restate prior periods is not available. Therefore, the company began to apply the LIFO method to these inventories beginning January 1, 2007. The adoption of the LIFO method for these inventories did not have a material impact on the company’s results of operations or financial position during the first quarternine months of 2007.
An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these are subject to many forces beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation.
Note 4 Property, Plant and Equipment
The components of property, plant and equipment are as follows:
               
 March 31, December 31, September 30, December 31,
 2007 2006 2007 2006
Property, Plant and Equipment:  
Land and buildings $615,739 $628,542  $655,703 $628,542 
Machinery and equipment 3,085,540 3,036,266  3,177,776 3,036,266 
Subtotal 3,701,279 3,664,808  3,833,479 3,664,808 
Less allowances for depreciation  (2,103,119)  (2,063,249)  (2,188,514)  (2,063,249)
Property, Plant and Equipment — net $1,598,160 $1,601,559 
Property, Plant and Equipment — Net $1,644,965 $1,601,559 
At March 31,September 30, 2007, machineryproperty, plant and equipment — net included approximately $91,000 of$102,320 in capitalized software. Depreciation expense was $51,882$55,301 and $47,039$152,037, respectively, for the three and nine months ended March 31, 2007 and March 31, 2006, respectively.September 30, 2007. Assets held for sale at March 31,September 30, 2007 were $11,448.$12,962. Assets held for sale relate to land and buildings in Torrington, Connecticut and Desford, England and are classified as other current assets on the Consolidated Balance Sheet.
Note 5 Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the threenine months ended March 31,September 30, 2007 are as follows:
               
                 Balance Balance
 Balance Balance December 31, September 30,
 12/31/06 Acquisitions Other 03/31/07 2006 Acquisitions Other 2007
Goodwill:  
Industrial $201,899 $1,023 $1,325 $204,247  $201,899 $1,023 $12,856 $215,778 
Total $201,899 $1,023 $1,325 $204,247  $201,899 $1,023 $12,856 $215,778 
Acquisitions represent the opening balance sheet adjustment for an acquisition completed in December 2006. Other primarily includes foreign currency translation adjustments.

6


Note 5 Goodwill and Other Intangible Assets (continued)
The following table displays intangible assets as of March 31,September 30, 2007 and December 31, 2006:
                        
 As of March 31, 2007 As of September 30, 2007
 Gross Net Gross Net
 Carrying Accumulated Carrying Carrying Accumulated Carrying
 Amount Amortization Amount Amount Amortization Amount
Intangible assets subject to amortization:  
Industrial $54,027 $13,739 $40,288  $54,673 $16,443 $38,230 
Automotive 70,696 25,776 44,920  72,288 29,400 42,888 
Steel 819 284 535  893 394 499 
 $125,542 $39,799 $85,743  $127,854 $46,237 $81,617 
  
Intangible assets not subject to amortization:  
  
Goodwill $204,247 $ $204,247  $215,778 $ $215,778 
Other 15,331  15,331  15,348  15,348 
 $219,578 $ $219,578  $231,126 $ $231,126 
Total intangible assets $345,120 $39,799 $305,321  $358,980 $46,237 $312,743 
             
  As of December 31, 2006
  Gross     Net
  Carrying Accumulated Carrying
  Amount Amortization Amount
 
Intangible assets subject to amortization:            
Industrial $54,654  $12,754  $41,900 
Automotive  70,545   24,255   46,290 
Steel  864   313   551 
 
  $126,063  $37,322  $88,741 
 
             
Intangible assets not subject to amortization:            
             
Goodwill $201,899  $  $201,899 
Other  15,329      15,329 
 
  $217,228  $  $217,228 
 
Total intangible assets $343,291  $37,322  $305,969 
 
Amortization expense for intangible assets was approximately $2,500$3,100 and $8,900, respectively, for the three and nine months ended March 31,September 30, 2007. Amortization expense for intangible assets is estimated to be approximately $10,800 for 2007$10,900 in 2007; $9,400 in 2008; $9,100 in 2009; $8,900 in 2010 and is estimated to be approximately $8,600 annually for the next five years.$8,100 in 2011.
Note 6 Equity Investments
Investments accounted for under the equity method were $12,739$13,495 and $12,144 at March 31,September 30, 2007 and December 31, 2006, respectively, and were reported in other non-current assets on the Consolidated Balance Sheet. In the third quarter of 2007, the company sold its investment in Timken-NSK Bearings (Suzhou) Co., Ltd., a joint venture based in China, and recognized a pretax gain on divestiture of $666. In the first quarter of 2006, the company sold a portion of CoLinx, LLC due to the addition of another company to the joint venture.venture and recognized a pretax gain on divestiture of $660.
Equity investments are reviewed for impairment when circumstances (such as lower-than-expected financial performance or change in strategic direction) indicate that the carrying value of the investment may not be recoverable. If impairment does exist, the equity investment is written down to its fair value with a corresponding charge to the Consolidated Statement of Income. No impairments were recorded during the first quartersnine months of 2007 and 2006 relating to the company’s equity investments.

7


Note 6 Equity Investments (continued)
PEL
During 2000, the company’s Steel Group invested in a joint venture, PEL, to commercialize a proprietary technology that converts iron units into engineered iron oxides for use in pigments, coatings and abrasives. The company concluded that PEL was a variable interest entity and that the company was the primary beneficiary. In accordance with FIN 46, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51,” the company consolidated PEL effective March 31, 2004. In the first quarter of 2006, plans were finalized to liquidate the assets of PEL, and the company recorded a related gain of approximately $3,549. In January 2006, the company repaid, in full, the $23,000 balance outstanding of the revenue bonds held by PEL. In June 2006, the company continued to liquidate PEL, with land and buildings exchanged and the buyer’s assumption of the fixed-rate mortgage, which resulted in a gain of $2,787.
Advanced Green Components
During 2002, the company’s Automotive Group formed a joint venture, Advanced Green Components, LLC (AGC), with Sanyo Special Steel Co., Ltd. (Sanyo) and Showa Seiko Co., Ltd. (Showa). AGC is engaged in the business of converting steel to machined rings for tapered bearings and other related products. The company has been accounting for its investment in AGC under the equity method since AGC’s inception. During the third quarter of 2006, AGC refinanced its long-term debt of $12,240. The company guaranteed half of this obligation. The company concluded the refinancing represented a reconsideration event to evaluate whether AGC was a variable interest entity under FIN 46 (revised December 2003). The company concluded that AGC was a variable interest entity and that the company was the primary beneficiary. Therefore, the company consolidated AGC, effective September 30, 2006. All of AGC’s assets are collateral for its obligations. Except for AGC’s indebtedness for which the company is a guarantor, AGC’s creditors have no recourse to the general credit of the company.
Note 7 Financing Arrangements
Short-term debt at March 31,September 30, 2007 and December 31, 2006 was as follows:
                
 March 31, December 31, September 30, December 31,
 2007 2006 2007 2006
Variable-rate lines of credit for certain of the company’s European and Asian subsidiaries with various banks with interest rates ranging from 3.35% to 12.50% $99,238 $27,000 
Fixed-rate short-term loans of an Asian subsidiary with interest rates ranging from 6.76% to 6.84% at March 31, 2007 10,009 10,005 
Variable-rate lines of credit for certain of the company’s European and Asian subsidiaries with various banks with interest rates ranging from 4.54% to 13.50% $38,202 $27,000 
Fixed-rate short-term loan of an Asian subsidiary with an interest rate of 6.71% 1,001 10,005 
Other 449 3,212  2,508 3,212 
Short-term debt $109,696 $40,217  $41,711 $40,217 
Borrowings under the Accounts Receivable Securitization financing agreement (Asset Securitization), which provides for borrowings up to $200 million$200,000 subject to certain borrowing base limitations, are secured by certain trade receivables. Under the terms of the Asset Securitization, the company sells, on an ongoing basis, certain domestic trade receivables to Timken Receivables Corporation, a wholly owned consolidated subsidiary, which in turn uses the trade receivables to secure the borrowings, which are funded through a vehicle that issues commercial paper in the short-term market. As of March 31,September 30, 2007, there were no outstanding borrowings under this facility. A balance outstanding related to the Asset Securitization would be reflected on the company’s Consolidated Balance Sheet in short-term debt. The yield on the commercial paper, which is the commercial paper rate plus program fees, is considered a financing cost and is included in interest expense on the Consolidated Statement of Income. As of March 31,September 30, 2007, the company had issued letters of credit totaling $18,758,$18,380, which reduced the availability under the Asset Securitization to $181,242.$181,620.
The lines of credit for certain of the company’s European and Asian subsidiaries provide for borrowings up to $246,778.$269,313. At March 31,September 30, 2007, the company had borrowings outstanding of $99,238,$38,202, which reduced the availability under these facilities to $147,540.$231,111.

8


Note 7 Financing Arrangements (continued)
Long-term debt at March 31,September 30, 2007 and December 31, 2006 was as follows:
                
 March 31, December 31, September 30, December 31,
 2007 2006 2007 2006
Fixed-rate Medium-Term Notes, Series A, due at various dates through May 2028, with interest rates ranging from 6.20% to 7.76% $191,775 $191,601  $191,914 $191,601 
Variable-rate State of Ohio Air Quality and Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (3.62% at March 31, 2007) 21,700 21,700 
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (3.62% at March 31, 2007) 17,000 17,000 
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on May 1, 2007 (3.62% at March 31, 2007) 8,000 8,000 
Variable-rate Unsecured Canadian Note, Maturing on December 22, 2010 (4.89% at March 31, 2007) 50,104 49,593 
Variable-rate State of Ohio Air Quality and Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (3.70% at September 30, 2007) 21,700 21,700 
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (3.70% at September 30, 2007) 17,000 17,000 
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, matured on May 1, 2007  8,000 
Variable-rate Unsecured Canadian Note, Maturing on December 22, 2010 (5.67% at September 30, 2007) 58,266 49,593 
Fixed-rate Unsecured Notes, maturing on February 15, 2010 with an interest rate of 5.75% 248,385 247,773  249,027 247,773 
Variable-rate credit facility with US Bank for Advanced Green Components, LLC, maturing on July 18, 2008 (6.32% at March 31, 2007) 12,240 12,240 
Variable-rate credit facility with US Bank for Advanced Green Components, LLC, maturing on July 18, 2008 (6.12% at September 30, 2007) 12,240 12,240 
Other 9,599 9,719  9,554 9,719 
 558,803 557,626  559,701 557,626 
Less current maturities 28,213 10,236  33,180 10,236 
Long-term debt $530,590 $547,390  $526,521 $547,390 
The company has a $500,000 Amended and Restated Credit Agreement (Senior Credit Facility) that matures on June 30, 2010. At March 31,September 30, 2007, the company had no outstanding borrowings under the Senior Credit Facility and had issued letters of credit under this facility totaling $33,213,$23,809, which reduced the availability under the Senior Credit Facility to $466,787.$476,191. Under the Senior Credit Facility, the company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At March 31,September 30, 2007, the company was in full compliance with the covenants under the Senior Credit Facility and its other debt agreements.
In December 2005, the company entered into a 57,800 Canadian Dollar unsecured loan in Canada. The principal balance of the loan is payable in full on December 22, 2010. The interest rate is variable based on the Canadian LIBOR rate and interest payments are due quarterly.
AGC is a joint venture of the company formerly accounted for using the equity method. The company is the guarantor of $6,120 of AGC’s $12,240 credit facility. Effective September 30, 2006, the company consolidated AGC and its outstanding debt. Refer to Note 6 – Equity Investments for additional discussion.
Note 8 — Product Warranty
The company provides warranty policies on certain of its products. The company accrues liabilities under warranty policies based upon specific claims and a review of historical warranty claim experience in accordance with SFAS No. 5. Should the company become aware of a specific potential warranty claim, a specific charge is recorded and accounted for accordingly. Adjustments are made quarterly to the reserves as claim data and historical experience change. The following is a rollforward of the warranty reserves for the threenine months ended March 31,September 30, 2007 and the year ended December 31, 2006:
                
 March 31, December 31, September 30, December 31,
 2007 2006 2007 2006
Beginning balance, January 1 $20,023 $910  $20,023 $910 
Expense 260 20,024  924 20,024 
Payments  (47)  (911)  (9,964)  (911)
Ending balance $20,236 $20,023  $10,983 $20,023 
The product warranty charge in 2006 related primarily to a single production line at an individual plant that occurred during a limited period. Part of this claim was paid during the third quarter of 2007. The product warranty accrual at March 31,September 30, 2007 and December 31, 2006 was included in accounts payable and other liabilities inon the Consolidated Balance Sheet.

9


Note 9 Shareholders’ Equity
An analysis of the change in capital and earnings invested in the business is as follows:
                                             
 Common Stock Earnings Accumulated   Common Stock Earnings Accumulated  
 Other Invested Other   Other Invested Other  
 Stated Paid-In in the Comprehensive Treasury Stated Paid-In in the Comprehensive Treasury
 Total Capital Capital Business Income Stock Total Capital Capital Business Income Stock
Balance at December 31, 2006 $1,476,180 $53,064 $753,095 $1,217,167 $(544,562) $(2,584) $1,476,180 $53,064 $753,095 $1,217,167 $(544,562) $(2,584)
  
Cumulative effect of adoption of FIN 48 5,623 5,623  5,623 5,623 
  
Net Income 75,194 75,194  171,763 171,763 
Foreign currency translation adjustment 10,580 10,580  80,780 80,780 
Minimum pension adjustment  (4,023)  (4,023) 
Pension/OPEB liability adjustments during the period 22,667 22,667 
Change in fair value of derivative financial instruments, net of reclassifications 252 252   (345)  (345) 
     
Total comprehensive income 82,003  274,865 
  
Dividends — $0.16 per share  (15,152)  (15,152) 
Dividends — $0.49 per share  (46,682)  (46,682) 
Tax benefit from stock compensation 1,137 1,137  5,683 5,683 
Issuance (tender) of 94,904 shares from treasury and 823,140 shares from authorized 12,466 15,188  (2,722)
Issuance (tender) of (242,087) shares from treasury and 1,865,119 shares from authorized 38,604 46,374  (7,770)
Balance at March 31, 2007
 $1,562,257 $53,064 $769,420 $1,282,832 $(537,753) $(5,306)
Balance at September 30, 2007
 $1,754,273 $53,064 $805,152 $1,347,871 $(441,460) $(10,354)
The total comprehensive income for the three months ended March 31,September 30, 2007 and 2006 was $80,268.$82,946 and $43,581, respectively. Total comprehensive income for the nine months ended September 30, 2006 was $211,998.
Note 10 – Earnings Per Share
The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share and diluted earnings per share for the three and nine months ended March 31,September 30, 2007:
              
         Three Months Ended Nine Months Ended
 Three Months Ended September 30, September 30,
 March 31, 2007 2006 2007 2006
 2007 2006
Numerator:  
Income from continuing operations for basic earnings per share and diluted earnings per share $74,254 $57,094  $41,243 $38,688 $171,098 $160,670 
Denominator:  
Weighted-average number of shares outstanding — basic 93,963,797 92,942,082  95,029,369 93,500,491 94,494,531 93,239,292 
Effect of dilutive securities:  
Stock options and awards – based on the treasury stock method 848,133 1,068,401  1,066,491 876,446 988,889 999,121 
Weighted-average number of shares outstanding, assuming dilution of stock options and awards 94,811,930 94,010,483  96,095,860 94,376,937 95,483,420 94,238,413 
Basic earnings per share from continuing operations $0.79 $0.61  $0.43 $0.41 $1.81 $1.72 
Diluted earnings per share from continuing operations $0.78 $0.61  $0.43 $0.41 $1.79 $1.70 
The exercise prices for certain stock options that the company has awarded exceed the average market price of the company’s common stock. Such stock options are antidilutive and were not included in the computation of diluted earnings per share. The antidilutive stock options outstanding were 1,713,137zero and 563,200539,550 during the first quarter ofthree months ended September 30, 2007 and 2006, respectively. The antidilutive stock options outstanding were 571,046 and 544,583 during the nine months ended September 30, 2007 and 2006, respectively.

10


Note 11 Segment Information
The primary measurement used by management to measure the financial performance of each Group is adjusted EBIT (earnings before interest and taxes, excluding the effect of amounts related to certain items that management considersdoes not consider representative of ongoing operations such as impairment and restructuring, manufacturing rationalization and integration costs, one-time gains and losses on disposal of non-strategic assets, allocated receipts received or payments made under the U.S. Continued Dumping and Subsidy Offset Act (CDSOA) and loss on the dissolution of subsidiary).
                        
 Three months ended Three Months Ended Nine Months Ended
 March 31, September 30, September 30,
 2007 2006 2007 2006 2007 2006
Industrial Group
  
Net sales to external customers $544,076 $503,444  $556,195 $501,347 $1,665,729 $1,533,396 
Intersegment sales 366 435  601 469 1,453 1,366 
Depreciation and amortization 20,625 18,356  27,238 18,514 66,059 55,354 
EBIT, as adjusted 49,175 45,885  55,365 48,180 166,346 157,557 
 
Automotive Group
  
Net sales to external customers $387,960 $420,984  $361,032 $363,585 $1,156,147 $1,211,283 
Depreciation and amortization 20,355 20,818  20,459 19,457 59,350 59,434 
EBIT (loss) as adjusted  (7,233)  (3,141)
EBIT (loss), as adjusted  (20,654)  (26,276)  (35,278)  (31,377)
 
Steel Group
  
Net sales to external customers $352,477 $329,880  $344,012 $321,030 $1,073,107 $997,765 
Intersegment sales 37,815 45,530  37,100 34,584 109,066 116,555 
Depreciation and amortization 13,520 10,316  10,423 9,777 35,186 30,338 
EBIT, as adjusted 61,817 56,983  47,437 50,436 170,358 167,168 
 
Reconciliation to Income from Continuing Operations before Income Taxes
  
Total EBIT, as adjusted, for reportable segments $103,759 $99,727  $82,148 $72,340 $301,426 $293,348 
Impairment and restructuring  (13,776)  (1,040)  (11,840)  (2,682)  (32,870)  (11,191)
Manufacturing rationalization expenses  (13,173)  (3,413)  (6,234)  (4,463)  (30,776)  (14,137)
Loss on divestiture  (354)  
Loss on divestitures  (152)   (468)  (9,971)
Other 343  (308) 983 76 3,355 2,430 
Interest expense  (9,644)  (13,065)  (10,698)  (11,704)  (30,422)  (37,487)
Interest income 1,955 1,463  2,381 854 5,536 3,338 
Intersegment adjustments  (1,124)  (2,104)  (279) 2,016  (1,769) 1,389 
Income from Continuing Operations before Income Taxes $67,986 $81,260  $56,309 $56,437 $214,012 $227,719 

11


Note 12 Impairment and Restructuring Charges
Impairment and restructuring charges by segment are comprised of the following:
For the three months ended March 31,September 30, 2007:
                                
 Industrial Automotive Steel Total Industrial Automotive Steel Total
Impairment charges $2,398 $ $ $2,398  $6,667 $1,600 $ $8,267 
Severance expense and related benefit costs  (155) 6,546 4,627 11,018  396 1,190 1,310 2,896 
Exit costs 32 264 64 360  368 63 246 677 
Total $2,275 $6,810 $4,691 $13,776  $7,431 $2,853 $1,556 $11,840 

11

For the nine months ended September 30, 2007:


Note 12 – Impairment and Restructuring Charges (continued)
                 
  Industrial Automotive Steel Total
 
Impairment charges $10,020  $1,600  $  $11,620 
Severance expense and related benefit costs  241   10,845   6,926   18,012 
Exit costs  404   2,192   642   3,238 
 
Total $10,665  $14,637  $7,568  $32,870 
 
For the three months ended March 31,September 30, 2006:
                                
 Industrial Automotive Steel Total Industrial Automotive Steel Total
Impairment charges $ $ $ $  $592 $ $485 $1,077 
Severance expense and related benefit costs  966  966   1,647  1,647 
Exit costs 55 19  74  189  (231)   (42)
Total $55 $985 $ $1,040  $781 $1,416 $485 $2,682 
For the nine months ended September 30, 2006:
                 
  Industrial Automotive Steel Total
 
Impairment charges $592  $689  $485  $1,766 
Severance expense and related benefit costs     8,248      8,248 
Exit costs  363   814      1,177 
 
Total $955  $9,751  $485  $11,191 
 
Industrial
In May 2004, the company announced plans to rationalize the company’s three bearing plants in Canton, Ohio within the Industrial Group. On September 15, 2005, the company reached a new four-year agreement with the United Steelworkers of America, which went into effect on September 26, 2005, when the prior contract expired. This rationalization initiative is expected to deliver annual pretax savings of approximately $25,000 by 2009 through streamlining operations and workforce reductions, with pretax costs of approximately $35,000 to $40,000.
Impairment charges of $2,398$1,367 and $4,569, and exit costs of $32$371 and $404 were recorded in the third quarter and first quarternine months of 2007, were therespectively, as a result of the Industrial Group’s rationalization plans. During the third quarter and first quarternine months of 2006, exit costs of $55$189 and $363, respectively, were recorded as a result of the Industrial Group’s rationalization plans. The company also recorded impairment charges of $592 during the third quarter and first nine months of 2006 as a result of these rationalization plans. Including rationalization costs recorded in cost of products sold and selling, administrative and general expenses, the Industrial Group has incurred cumulative pretax costs of approximately $25,390$29,444 as of March 31,September 30, 2007 for these rationalization plans.
In addition, the company recorded an impairment charge of $5,300 related to one of the Industrial Group’s entities during the third quarter of 2007. The company also recorded $396 and $241 of severance and related benefits during the third quarter and first nine months of 2007, respectively, and impairment charges of $151 during the first nine months of 2007 related to other company initiatives.

12


Note 12 — Impairment and Restructuring Charges (continued)
Automotive
In 2005, the company announced plans for its Automotive Group to restructure its business and improve performance. These plans included the closure of a manufacturing facility in Clinton, South Carolina and engineering facilities in Torrington, Connecticut and Norcross, Georgia. In February 2006, the company announced additional plans to rationalize production capacity at itsthe company’s Vierzon, France bearing manufacturing facility in response to changes in customer demand for its products.
In September 2006, the company announced further planned reductions in its Automotive Group workforce. In March 2007, the company announced the closure of its manufacturing facility in Sao Paulo, Brazil. The closure of the manufacturing facility in Sao Paulo, Brazil has been delayed to serve demand, driven primarily by industrial markets, until further notice.
These plans are targeted to collectively deliver annual pretax savings of approximately $75,000 by the fourth quarter of 2008, with expected net workforce reductions of approximately 1,300 to 1,400 positions and pretax costs of approximately $125,000$115,000 to $135,000,$125,000, which include restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses. The Automotive Group has incurred cumulative pretax costs of approximately $74,421$93,972 as of March 31,September 30, 2007 for these plans.
During the third quarter and first quarternine months of 2007, the company recorded $6,546$794 and $10,449, respectively, of severance and related benefit costs and $264$63 and $2,192, respectively, of exit costs associated with the Automotive Group’s restructuring and workforce reduction plans. DuringThe exit costs recorded during the first nine months of 2007 were primarily the result of environmental charges related to the closure of a manufacturing facility in Sao Paulo, Brazil. The company also recorded impairment charges of $1,600 during the third quarter and first nine months of 2006,2007 as a result of the Automotive Group’s restructuring and workforce reduction plans. The company recorded $966 of severance and related benefit costs of $1,647 and exits costs of a negative $231 during the third quarter of 2006. The company recorded impairment charges of $689, severance and related benefit costs of $8,248 and exits costs of $814 during the first nine months of 2006. The charges taken during the respective periods of 2006 related to the closure of a manufacturing facility in Clinton, South Carolina and administrative and engineering facilities in Torrington, Connecticut and Norcross, Georgia.Georgia, and the rationalization of the company’s Vierzon, France bearing manufacturing facility.
The company also recorded $396 of severance and related benefits during the third quarter and first nine months of 2007 related to other company initiatives.
Steel
In October 2006,April 2007, the company announced its intention to exitcompleted the closure of its European seamless steel tube manufacturing operationsfacility located in Desford, England during 2007.England. The company recorded $4,627$1,129 and $6,685 of severance and related benefit costs, and $64$246 and $642 of exit costs during the third quarter and first quarternine months of 2007, respectively, related to this action.

12


Note 12 – ImpairmentThe company also recorded $181 and Restructuring Charges (continued)$241 of severance and related benefits during the third quarter and first nine months of 2007, respectively, related to other company initiatives. During the third quarter of 2006, the company recorded an impairment charge of $485 related to the write-down of property, plant and equipment at one of the Steel Group’s facilities.
The rollforward of the consolidated restructuring accrual is as follows:
                
 March 31, December 31, September 30, December 31,
 2007 2006 2007 2006
Beginning balance, January 1 $31,985 $18,143  $31,985 $18,143 
Expense 11,444 29,614  21,316 29,614 
Payments  (12,308)  (15,772)  (28,660)  (15,772)
Ending balance $31,121 $31,985  $24,641 $31,985 
The restructuring accrual at March 31,September 30, 2007 and December 31, 2006 was included in accounts payable and other liabilities inon the Consolidated Balance Sheet. The majority of the restructuring accrual balance at March 31,September 30, 2007 is expected to be paid by the endmiddle of 2007.2008.

13


Note 13 Retirement and Postretirement Benefit Plans
The following table sets forth the net periodic benefit cost for the company’s retirement and postretirement benefit plans. The amounts for the three and nine months ended March 31,September 30, 2007 are based on actuarial calculations prepared during 2006. Consistent with prior years, these calculations will be updated later in the year. These updated calculations may result in different net periodic benefit cost for 2007. The net periodic benefit cost recorded for the three and nine months ended March 31,September 30, 2007 is the company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ended December 31, 2007.
                                
 Pension Postretirement Pension Postretirement
 Three months ended Three months ended Three Months ended Three Months ended
 March 31, March 31, September 30, September 30,
 2007 2006 2007 2006 2007 2006 2007 2006
Components of net periodic benefit cost
  
Service cost $11,102 $11,948 $1,250 $1,568  $10,402 $11,388 $1,215 $1,327 
Interest cost 39,896 40,125 10,300 12,353  38,919 39,562 10,341 11,066 
Expected return on plan assets  (47,049)  (43,085)     (47,512)  (43,546)   
Amortization of prior service cost 2,825 3,118  (475)  (485) 2,837 3,122  (469)  (486)
Recognized net actuarial loss 12,499 14,939 2,425 4,064  11,872 14,540 2,762 3,060 
Amortization of transition asset  (40)  (42)     (46)  (43)   
Net periodic benefit cost $19,233 $27,003 $13,500 $17,500  $16,472 $25,023 $13,849 $14,967 
                 
  Pension Postretirement 
  Nine Months Ended Nine Months Ended
  September 30, September 30,
  2007 2006 2007 2006
 
Components of net periodic benefit cost
                
Service cost $31,098  $34,081  $3,646  $3,982 
Interest cost  116,394   118,311   31,023   33,197 
Expected return on plan assets  (142,156)  (130,279)      
Amortization of prior service cost  8,494   9,364   (1,408)  (1,456)
Recognized net actuarial loss  35,545   43,511   8,286   9,179 
Amortization of transition asset  (130)  (129)      
 
Net periodic benefit cost $49,245  $74,859  $41,547  $44,902 
 
Effective November 30, 2006, the company sold its Latrobe Steel subsidiary. As part of the sale, Latrobe Steel retained responsibility for the pension and postretirement benefit obligations with respect to current and retired employees covered by collective bargaining arrangements. The net periodic benefit cost for the third quarter and first quarternine months of 2006 includes $1,165 and $3,495, respectively, for defined benefit pension and postretirement plans retained by Latrobe Steel classified as discontinued operations.

13


Note 14 Income Taxes
                        
 Three months ended Three Months Ended Nine Months Ended
 March 31, September 30, September 30,
 2007 2006 2007 2006 2007 2006
(Benefit) provision for income taxes $(6,268) $24,166 
Provision for income taxes $15,066 $17,749 $42,914 $67,049 
Effective tax rate  (9.2)%  29.7%  26.8%  31.4%  20.1%  29.4%
The company’s provision for income taxes in interim periods is computed by applying itsan estimated annual effective tax rate against income from continuing operations before income taxes for the period. In addition, non-recurring or discrete items, including interest on prior year tax liabilities, are recorded during the period in which they occur.

14


Note 14 — Income Taxes (continued)
The effective tax rate for the firstthird quarter of 2007 was lower than the U.S. Federal statutory tax rate primarily due primarily to (1) a favorable discrete tax adjustment of $32,100 recorded in the first quarter of 2007 to recognize the benefits of a prior year tax position as a result of a change in tax law during the quarter, (2) tax benefits on foreign income, including tax holidays in China and the Czech Republic, as well as earnings of certain other foreign subsidiaries being taxed at a rate less than 35%, (3)(2) the domesticU.S. manufacturing deduction, provided by(3) a tax benefit on the American Jobs Creation Actdivesture of 2004,a foreign joint venture in the third quarter of 2007, and (4) aggregateother tax benefit of other U.S. tax items, including the accrual of the tax-free Medicare prescription drug subsidy, deductible dividends paidan adjustment to the company’s Employee Stock Ownership Plan (ESOP)deferred tax assets to reflect a state tax law change and the U.S. Federal research tax credit. These additional tax benefits were partially offset partially by (1) the inability to record a tax benefit for losses at certain foreign subsidiaries, (2) taxes incurred on foreign remittances, (3) U.S. state and local income taxes, (3) taxes incurred on foreign remittances and (4) the aggregateother tax expense items.
For the third quarter of other discrete tax items, including2006, the accrual of interest expense related to uncertain tax positions from prior years.
The effective tax rate for the first quarter of 2006 was lower than the U.S. Federalfederal statutory tax rate primarily due to tax benefits on foreign income, including the extraterritorial income exclusion on U.S. exports, tax holidays in China and the Czech Republic and(1) earnings of certain foreign subsidiaries being taxed at a rate less than 35%, as well as the net favorable impact of(2) tax benefits on U.S. exports, and (3) other discrete tax items, including tax reserve adjustments.benefit items. These benefits were partially offset partially by taxes incurred on foreign remittances,(1) U.S. state and local income taxes, and(2) taxes incurred on foreign remittances, (3) the inability to record a tax benefit for losses at certain foreign subsidiaries.subsidiaries and (4) other tax expense items.
The decrease in the effective tax rate in the third quarter of 2007 compared to the third quarter of 2006 was primarily caused by a tax benefit realized upon divestiture of a foreign joint venture in the third quarter of 2007, a favorable deferred tax adjustment to reflect a U.S. state tax law change in the third quarter of 2007, and increased U.S. research tax credits in 2007. These benefits were partially offset by increased losses in 2007 at certain foreign subsidiaries where no tax benefit could be claimed.
The effective tax rate for the first nine months of 2007 was lower than the U.S. Federal statutory tax rate primarily due to (1) the net tax benefit of adjustments to the company’s accruals for uncertain tax positions, including a favorable adjustment of $32,100 recorded in the first quarter of 2007 to recognize the benefit of a prior year tax position as a result of a change in tax law, (2) earnings of certain foreign subsidiaries being taxed at a rate less than 35%, (3) the U.S. manufacturing deduction, and (4) other tax benefit items. These additional tax benefits were partially offset by (1) the inability to record a tax benefit for losses at certain foreign subsidiaries, (2) U.S. state and local income taxes, (3) taxes incurred on foreign remittances and (4) other tax expense items.
For the first nine months of 2006, the effective tax rate was lower than the U.S. federal statutory tax rate primarily due to (1) earnings of certain foreign subsidiaries being taxed at a rate less than 35%, (2) tax benefits on U.S. exports, and (3) other tax benefit items. These benefits were partially offset by (1) U.S. state and local income taxes, (2) taxes on foreign remittances, (3) the inability to record a tax benefit for losses at certain foreign subsidiaries and (4) other tax expense items.
The decrease in the effective tax rate for the first nine months of 2007 compared to the first nine months of 2006 was primarily caused by a $32,100 tax benefit recorded in the first quarter of 2007 to recognize the benefit of a prior year tax position as a result of a change in tax law, as well as the third quarter items described above. These benefits were partially offset by increased losses in 2007 at certain foreign subsidiaries where no tax benefit could be claimed.
In July 2007, the Governor of Michigan signed into law the “Michigan Business Tax Act” (Public Act 36 of 2007), creating the Michigan Business Tax (MBT). The MBT will be effective January 1, 2008 and replaces the Michigan Single Business Tax, which was recorded as a component of pre-tax income. The MBT will be recorded as a component of income tax expense. The company adjusted its deferred taxes in the third quarter of 2007 to reflect the new income tax. The company anticipates that the new MBT will increase the company’s state effective tax rate and overall expense for 2008 and subsequent tax years, but the amount is not expected to be material.
Effective January 1, 2007, the company adopted FIN 48, including the provisions of FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48.” In connection with the adoption of FIN 48,therewith, the company recorded a $5,623 increase to retained earnings to recognize net tax benefits under the recognition and measurement criteria of FIN 48 that were previously not recognized under the company’s former accounting policy. As of January 1, 2007, the company had approximately $137,300 of total gross unrecognized tax benefits. Included in this amount was approximately $60,300 (including the federal benefit on state tax positions), which represents the amount of unrecognized tax benefits that would favorably impact the company’s effective income tax rate in any future periods if such benefits were recognized. As of January 1, 2007, the company anticipated a decrease in its unrecognized tax positions of approximately $75,000 to $80,000 during 2007. The anticipated decrease was primarily due to settlements and resulting cash payments related to tax years 2002 to 2005, which are currently under examination by the U.S. Internal Revenue Service (IRS). The tax positions under examination include the timing of income recognition for certain amounts received by the company and treated as capital contributions pursuant to Internal Revenue Code Section 118 and other miscellaneous items.
The company will recordrecords interest and penalties related to uncertain tax positions as a component of income tax expense. As of January 1, 2007, the company had approximately $7,800 of accrued interest and penalties related to uncertain tax positions. As of January 1, 2007, the company is subject to examination by the IRS forhad approximately $137,300 of total gross unrecognized tax years 2002 to the present. The company is also subject to tax examination in various U.S. state and local tax jurisdictions for tax years 1997 to the present, as well as various foreign tax jurisdictions, including France, Germany and Canada, for tax years 1998 to the present.

14


Note 14 – Income Taxes (continued)benefits.
During the first quarter of 2007, the company’s unrecognized tax benefits decreased by $29,800 (excluding interest), as the company recognized a tax benefit related to a prior year tax position due to a change in tax law in the quarter. The tax position relates to one of the company’s foreign affiliates and was not anticipated as of the beginning of the year.

15


Note 14 — Income Taxes (continued)
As of March 31,September 30, 2007, the company hashad approximately $107,500$111,200 of total gross unrecognized tax benefits. Included in this amount is approximately $31,000$34,700 (including the federal benefit on state tax positions), which represents the amount of unrecognized tax benefits that would favorably impact the company’s effective income tax rate in any future periods if such benefits were recognized. As of March 31,September 30, 2007, the company anticipates a decrease in its unrecognized tax positions of approximately $75,000$70,000 to $80,000$75,000 during the next 12 months. The anticipated decrease is primarily due to settlements and resulting cash payments related to tax years 2002 tothrough 2005, which are currently under examination by the IRS. The tax positions under examination include the timing of income recognition for certain amounts received by the company and treated as capital contributions pursuant to Internal Revenue Code Section 118 and other miscellaneous items. As of March 31,September 30, 2007, the company hashad accrued approximately $4,500$6,400 of interest and penalties related to uncertain tax positions.
Note 15 –Divestures—Divestitures
In December 2006, the company completed the divestiture of its subsidiary, Latrobe Steel. Latrobe Steel is a leading global producer and distributor of high-quality, vacuum melted specialty steels and alloys. This business was part of the Steel Group for segment reporting purposes. The following results of operations for this business have been treatedclassified as discontinued operations for all periods presented.
         
  Three Months Ended
  March 31,
  2007 2006
 
Net sales $  $92,772 
Earnings before income taxes     14,153 
Net income     8,846 
Gain on divestiture, net of tax  940    
 
Income from discontinued operations $940  $8,846 
 
                 
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2007 2006 2007 2006
 
Net sales $  $86,960  $  $265,583 
 
Earnings before income taxes     12,574      42,413 
Income tax on operations     (4,715)     (15,905)
Gain on divestiture        1,098    
Income tax on disposal        (433)   
 
Income from discontinued operations, net of income taxes $  $7,859  $665  $26,508 
 
The gain on divestiture recorded in the first quarternine months of 2007 primarily represents a purchase price adjustment and was net of tax of $611.adjustment. As of December 31, 2006, there were no assets or liabilities remaining from the divestiture of Latrobe Steel.
In June 2006, the company completed the divestiture of its Timken Precision Components — Europe business. This business was part of the Steel Group. The company recognized a pretax loss on divestiture of $9,971 and the loss was reflected in Loss on divestitures in the Consolidated Statement of Income.
Note 16 — Subsequent Events
On October 23, 2007, the company announced the acquisition of the assets of The Purdy Corporation, a leading precision manufacturer and systems integrator for military and commercial aviation customers, for $200,000. The Purdy Corporation’s expertise includes design, manufacturing, testing, overhaul and repair of transmissions, gears, rotor-head systems and other high-complexity components for helicopter and fixed-wing aircraft platforms. The Purdy Corporation is based in Manchester, Connecticut, employs more than 200 people and had 2006 sales of approximately $87,000.

1516


Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Introduction
The Timken Company is a leading global manufacturer of highly engineered anti-friction bearings and alloy steels and a provider of related products and services. Timken operates under three segments: Industrial Group, Automotive Group and Steel Group.
The Industrial and Automotive Groups design, manufacture and distribute a range of bearings and related products and services. Industrial Group customers include both original equipment manufacturers and distributors for agriculture, construction, mining, energy, mill, machine tool, aerospace and rail applications. Automotive Group customers include original equipment manufacturers and suppliers for passenger cars, light trucks, and medium- to heavy-duty trucks. Steel Group products include steels of low and intermediate alloy and carbon grades, in both solid and tubular sections, as well as custom-made steel products for both industrial and automotive applications, including bearings.
Financial Overview
Overview:
                
 1Q 2007 1Q 2006 $ Change % Change                
(Dollars in millions, except earnings per share)  3Q 2007 3Q 2006 $ Change % Change
Net sales $1,284.5 $1,254.3 $30.2  2.4% $1,261.2 $1,186.0 $75.2  6.3%
Income from continuing operations 74.3 57.1 17.2  30.1% 41.2 38.7 2.5  6.5%
Income from discontinued operations 0.9 8.8  (7.9)  (89.8)%  7.8  (7.8)  (100.0)%
Net income $75.2 $65.9 9.3  14.1% $41.2 $46.5  (5.3)  (11.4)%
Diluted earnings per share:  
Continuing operations $0.78 $0.61 $0.17  27.9% $0.43 $0.41 $0.02  4.9%
Discontinued operations 0.01 0.09  (0.08)  (88.9)%  0.08  (0.08)  (100.0)%
Net income per share $0.79 $0.70 $0.09  12.9% $0.43 $0.49 $(0.06)  (12.2)%
Average number of shares — diluted 94,811,930 94,010,483   0.9% 96,095,860 94,376,937   1.8%
The Timken Company reported net
                 
(Dollars in millions, except earnings per share) YTD 2007 YTD 2006 $ Change % Change
 
Net sales $3,895.0  $3,742.4  $152.6   4.1%
Income from continuing operations  171.1   160.7   10.4   6.5%
Income from discontinued operations  0.7   26.5   (25.8)  (97.4)%
Net income $171.8  $187.2   (15.4)  (8.2)%
Diluted earnings per share:                
Continuing operations $1.79  $1.70  $0.09   5.3%
Discontinued operations  0.01   0.29   (0.28)  (96.6)%
Net income per share $1.80  $1.99  $(0.19)  (9.5)%
Average number of shares — diluted  95,483,420   94,238,413      1.3%
 
Net sales for the firstthird quarter of 2007 ofwere approximately $1.28$1.26 billion, compared to $1.25$1.19 billion in the firstthird quarter of 2006, an increase of 2.4%6.3%. SalesNet sales for the first nine months of 2007 were higherapproximately $3.90 billion, compared to $3.74 billion for the first nine months of 2006, an increase of 4.1%. Higher sales were driven by continued strong industrial markets across the Industrial and Steel Groups, offset by lower sales in the Automotive Group.Group due to the divestiture of its steering operations in 2006. In December 2006, the company completed the divestiture of its Latrobe Steel subsidiary and recognized a gain on sale, net of tax, of $12.9 million in 2006.subsidiary. Discontinued operations for the third quarter and first quarternine months of 2006 represent the operating results, net of tax, of this business in 2006.Latrobe Steel. For the firstthird quarter of 2007, earnings per diluted share were $0.79,$0.43, compared to $0.70$0.49 per diluted share for firstthird quarter of 2006. For the first quarter of 2007, incomeIncome from continuing operations per diluted share was $0.78,$0.43 for the third quarter of 2007, compared to $0.61 $0.41 per diluted share for the third quarter of 2006. For the first nine months of 2007, earnings per diluted share were $1.80, compared to $1.99

17


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
per diluted share for the first quarternine months of 2006. Income from continuing operations per diluted share was $1.79 for the first nine months of 2007, compared to $1.70 per diluted share for the same period a year ago.
The company’s results for the third quarter and first quarter resultsnine months of 2007 reflect the ongoing strength of industrial markets and the performance of the Steel Group.Group, partially offset by higher raw material costs, higher manufacturing costs and restructuring activities. The company continued its focus to increaseon increasing production capacity in targeted areas, including major capacity expansions for industrial products at several manufacturing locations around the world.
The company’s first quarter results also reflect a favorable discrete tax adjustment of $32.1 million to recognize the benefits of a prior year tax position as a result of a change in tax law during the quarter.
The company expects that the continued strength in industrial markets throughout 2007 should drive year-over-year volume and margin improvement.increases. While global industrial markets are expected to remain strong, the improvements in the company’s operating performance will be partially constrained by restructuring initiatives, as well as strategic investments, including Asian growth and Project O.N.E. and Asian growth initiatives. Project O.N.E. is a program designed to improve the company’s business processes and systems. In 2006, the company successfully completed a pilot program of Project O.N.E. in Canada. The company expects to complete the installation of Project O.N.E. for a major portion of its domestic operations during the second quarter of 2007. The objective of the Asian growth initiatives is to increase market share, influence major design centers and expand the company’s network of sources of globally competitive friction management products.
Project O.N.E. is a five-year program, which began in 2005, designed to improve the company’s business processes and systems. The company expects to invest approximately $170 million, which includes internal and external costs, to implement Project O.N.E. As of September 30, 2007, the company has incurred approximately $140 million, of which approximately $81 million has been capitalized to the Consolidated Balance Sheet. The company completed the installation of Project O.N.E. for a major portion of its domestic operations during the second quarter of 2007.
The company’s results for the first nine months of 2007 also reflect a favorable discrete tax adjustment of $32.1 million to recognize the benefits of a prior year tax position due to a change in tax law.
The company’s strategy for the Industrial Group is to pursue growth in selected industrial markets and achieve a

16


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
leadership position in targeted Asian markets. In 2006, the company invested in three new plants in Asia to build the infrastructure to support its Asian growth initiative.sectors. The company also expanded its capacity in aerospace products by investing in a new aerospace aftermarket facility in Mesa, Arizona and through the acquisition of the assets of Turbo Engines, Inc. in December 2006. The new facility in Mesa, which will include manufacturing and engineering functions, more than doubles the capacity of the company’s previous aerospace aftermarket operations in Gilbert, Arizona. In February, the company announced the launch of a fully integrated casting operation to produce precision aerospace aftermarket components at this new site. In addition, the company is increasing large-bore bearing capacity in Romania, China, India and the United States to serve heavy industrial markets. The Industrial Group expects to benefit from this increase in large-bore bearing capacity during the second halfremainder of 2007.2007, as well as in 2008. In addition, the company is investing in a new aerospace precision products manufacturing facility in China, which is expected to make its first shipment in early 2008. In October 2007, the company completed the acquisition of The Purdy Corporation, located in Manchester, Connecticut, for $200 million. This acquisition further expands the growing range of power-transmission products and capabilities that the company provides to the aerospace market.
The company’s strategy for the Automotive Group is to make structural changes to its business to improve its financial performance. In 2005, the company disclosedannounced plans for its Automotive Group to restructure its business. These plans included the closure of its automotive engineering center in Torrington, Connecticut and its manufacturing engineering center in Norcross, Georgia. These facilities were consolidated into a new technology facility on the campus of Clemson University’s International Center for Automotive Research (CU-ICAR) in Greenville, South Carolina during 2006. The center is primarily responsible for Timken’s development of automotive powertrain technology and allows the company to consolidate its product, process and application engineering. Additionally, the company announced the closure of its manufacturing facility in Clinton, South Carolina. In February 2006, the company announced plans to downsize its manufacturing facility in Vierzon, France.
In September 2006, the company announced further planned reductions in its Automotive Group workforce. In March 2007, the company announced the closure of its manufacturing facility in Sao Paulo, Brazil. The closure of the manufacturing facility in Sao Paulo, Brazil has been delayed to serve demand, driven primarily by industrial markets, until further notice.
These plans are targeted to collectively deliver annual pretax savings of approximately $75 million by the fourth quarter of 2008, with expected net workforce reductions of approximately 1,300 to 1,400 positions and pretax costs of approximately $125$115 million to $135$125 million, which include restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses.
In December 2006, the company completed the divestiture of its steering businessoperations located in Watertown, Connecticut and Nova Friburgo, Brazil. The steering businessoperations employed approximately 900 associates.
The company’s strategy for the Steel Group is to focus on opportunities where the company can offer differentiated capabilities while driving profitable growth. In January 2007, the company announced plans to invest approximately $60 million to enable the company to competitively produce steel bars down to 1-inch

18


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
diameter for use in power transmission and friction management applications for a variety of customers, including the rapidly growing automotive transplants. During the first quarter of 2007, the company added a new induction heat-treat line in Canton, Ohio, which will increaseincreased capacity and the ability to provide differentiated product to more customers in its global energy markets. In 2006,April 2007, the company also completed the divestitureclosure of its Latrobe Steel subsidiary and its Timken Precision Steel Components — Europe business. In addition, the company plans to close its seamless steel tube manufacturing operations located in Desford, England.
The Statement of Income
Sales by Segment:
                
 1Q 2007 1Q 2006 $ Change % Change                
(Dollars in millions, and exclude intersegment sales)(Dollars in millions, and exclude intersegment sales)  3Q 2007 3Q 2006 $ Change % Change
Industrial Group $544.1 $503.4 $40.7  8.1% $556.2 $501.4 $54.8  10.9%
Automotive Group 387.9 421.0  (33.1)  (7.9)% 361.0 363.6  (2.6)  (0.7)%
Steel Group 352.5 329.9 22.6  6.9% 344.0 321.0 23.0  7.2%
Total Company $1,284.5 $1,254.3 $30.2  2.4% $1,261.2 $1,186.0 $75.2  6.3%
                 
(Dollars in millions, and exclude intersegment sales) YTD 2007 YTD 2006 $ Change % Change
 
Industrial Group $1,665.7  $1,533.4  $132.3   8.6%
Automotive Group  1,156.2   1,211.3   (55.1)  (4.5)%
Steel Group  1,073.1   997.7   75.4   7.6%
 
Total Company $3,895.0  $3,742.4  $152.6   4.1%
 
The Industrial Group’s net sales in the firstthird quarter of 2007 increased from the firstthird quarter of 2006 as a result of favorable pricing, and higher volume across most end markets, particularly in the off-highway, aerospace, and heavy industry markets. Theand rail market sectors, as well as the favorable impact of foreign currency translation on sales also had a favorable impact.sales. The Automotive Group’s net sales in the firstthird quarter of 2007 decreased slightly from the firstthird quarter of 2006 primarily due to the divestiture of its steering businessoperations located in Watertown, Connecticut and Nova Friburgo, Brazil and lower demand from North American light vehicle and heavy truck customers, partially offset by ahigher demand from North American light truck customers, higher demand in Europe and the favorable impact from

17


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
foreign currency translation. The Steel Group’s net sales in the third quarter of 2007 increased from the same period a year ago primarily due to strong demand across all market sectors, particularly in the energy and automotive sectors, as well as increased surcharges to recover high raw material costs, partially offset by the decline in sales resulting from the closure of its manufacturing operations in Desford, England in April 2007.
The Industrial Group’s net sales in the first quarternine months of 2007 increased from the first nine months of 2006 as a result of favorable pricing, higher volume across most end markets, particularly in the heavy industry, automotive aftermarket and aerospace sectors, and the favorable impact of foreign currency translation on sales. The Automotive Group’s net sales in the first nine months of 2007 decreased from the first nine months of 2006 primarily due to the divestiture of its steering operations and lower demand from North American heavy truck customers, partially offset by the favorable impact of foreign currency translation on sales. The Steel Group’s net sales in the first nine months of 2007 increased from the same period a year ago primarily due to strong demand by customers in the energy and service centerautomotive market sectors, as well as increased pricing and surcharges to recover high raw material costs, partially offset by significantly lower automotive demand.sales resulting from the sale of its Timken Precision Steel Components – Europe business and the closure of its manufacturing operations in Desford, England.

19


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Gross Profit:
                
 1Q 2007 1Q 2006 $ Change Change                
(Dollars in millions)  3Q 2007 3Q 2006 $ Change Change
Gross profit $257.5 $269.8 $(12.3)  (4.6)% $251.3 $232.4 $18.9  8.1%
Gross profit % to net sales  20.0%  21.5%  (150) bps  19.9%  19.6%  30 bps
Rationalization expenses included in cost of products sold $11.8 $3.0 $8.8 NM  $5.4 $3.4 $2.0  58.8%
                 
(Dollars in millions) YTD 2007 YTD 2006 $ Change Change
 
Gross profit $797.8  $796.1  $1.7   0.2%
Gross profit % to net sales  20.5%  21.3%    (80) bps
Rationalization expenses included in cost of products sold $27.9  $11.4  $16.5   144.7%
 
Gross profit margin decreasedmargins increased in the firstthird quarter of 2007, compared to the firstthird quarter of 2006, as a result of lowerfavorable sales volume infrom the Automotive Group, which led to the underutilization of manufacturing capacity,Industrial and Steel businesses and price increases, partially offset by higher raw material costs across the company’s three segments, higher costs associated with the Industrial Group’s capacity additions, higher manufacturing and logistics costs, as well as higher rationalization expenses. In addition, the third quarter of 2006 includes a $7.0 million charge for product warranty.
Gross profit margins decreased in the first nine months of 2007, compared to the first nine months of 2006, as a result of higher raw material costs across the company’s three segments, higher costs associated with the Industrial Group’s capacity additions, higher manufacturing costs in the Steel Group, as well as higher rationalization expenses, partially offset by favorable sales volume from the Industrial and Steel businesses,Groups, price increases and increased productivity in the company’s Steel business.Group.
In the third quarter and first quarternine months of 2007, rationalization expenses included in cost of products sold primarily related to certain Automotive Group domestic manufacturing facilities, the closure of the company’s seamless steel tube manufacturing operations located in Desford, England, the pending closure of itsthe company’s manufacturing operations located in Sao Paulo, Brazil and the continued rationalization of the company’s Canton, Ohio Industrial Group bearing facilities. In the third quarter and first quarternine months of 2006, rationalization expenses included in cost of products sold primarily related to the company’s Canton, Ohio Industrial Group bearing facilities and certain Automotive Group domestic manufacturing facilities. Rationalization expenses in the first quarter of 2007 and 2006 primarily included accelerated depreciation on assets, the relocation of equipment and the write-down of inventory.
Selling, Administrative and General Expenses:
                
 1Q 2007 1Q 2006 $ Change Change                
(Dollars in millions)  3Q 2007 3Q 2006 $ Change Change
Selling, administrative and general expenses $164.3 $170.8 $(6.5)  (3.8)% $170.8 $160.7 $10.1  6.3%
Selling, administrative and general expenses % to net sales  12.8%  13.6%  (80)bps  13.5%  13.5%  0 bps
Rationalization expenses included in selling, administrative and general expenses $1.3 $0.4 $0.9 NM $0.9 $1.0 $(0.1)  (10.0)%
(Dollars in millions) YTD 2007 YTD 2006 $ Change Change
Selling, administrative and general expenses $514.8 $503.9 $10.9  2.2%
Selling, administrative and general expenses % to net sales  13.2%  13.5%  (30) bps
Rationalization expenses included in selling, administrative and general expenses $2.8 $2.7 $0.1  3.7%
The decreaseincrease in selling, administrative and general expenses of $10.1 million in the firstthird quarter of 2007, compared to the firstthird quarter of 2006, was primarily due to higher costs associated with investments in Project O.N.E. The increase in selling, administrative and general expenses of $10.9 million in the first nine months of 2007, compared to the first nine months of 2006, was primarily due to higher costs associated with investments in Project O.N.E., partially offset by reductions in Automotive Group selling, administrative and general expenses as a result of restructuring initiatives, as well as lower-performance basedlower performance-based compensation and lower

20


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
bad debt expense, partially offset by higher costs associated with investments in Project O.N.E.expense.
In the third quarter and first quarternine months of 2007, the rationalization expenses included in selling, administrative and general expenses primarily related to the Automotive Group engineering facilities.facilities, the Canton, Ohio Industrial Group bearing facilities and the closure of the company’s seamless steel tube manufacturing operations located in Desford, England. In the third quarter and first quarternine months of 2006, the rationalization expenses included in selling, administrative and general expenses charges primarily related to the rationalization of certain Automotive Group domestic manufacturing facilities.
Impairment and Restructuring Charges:
                        
 1Q 2007 1Q 2006 $ Change      
(Dollars in millions)  3Q 2007 3Q 2006 $ Change
Impairment charges $2.4 $ $2.4  $8.2 $1.1 $7.1 
Severance and related benefit costs 11.0 0.9 10.1  2.9 1.6 1.3 
Exit costs 0.4 0.1 0.3  0.7  0.7 
Total $13.8 $1.0 $12.8  $11.8 $2.7 $9.1 
             
       
(Dollars in millions) YTD 2007 YTD 2006 $ Change
 
Impairment charges $11.6  $1.8  $9.8 
Severance and related benefit costs  18.0   8.2   9.8 
Exit costs  3.3   1.2   2.1 
 
Total $32.9  $11.2  $21.7 
 
Industrial
In May 2004, the company announced plans to rationalize the company’s three bearing plants in Canton, Ohio within the Industrial Group. On September 15, 2005, the company reached a new four-year agreement with the United Steelworkers of America, which went into effect on September 26, 2005, when the prior contract expired. This rationalization initiative is expected to deliver annual pretax savings of approximately $25 million by 2009

18


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
through streamlining operations and workforce reductions, with pretax costs of approximately $35 to $40 million.
Impairment charges of $2.4$1.3 million and $4.6 million were recorded in the third quarter and first quarternine months of 2007, were therespectively, as a result of the Industrial Group’s rationalization plans. In addition, exit costs of $0.4 million were recorded in the third quarter and first nine months of 2007 as a result of these rationalization plans. During the third quarter and first quarternine months of 2006, exit costs of $0.1$0.2 million and $0.4 million, respectively, were recorded as a result of the Industrial Group’s rationalization plans. The company also recorded impairment charges of $0.6 million during the third quarter and first nine months of 2006 as a result of these rationalization plans. Including rationalization costs recorded in cost of products sold and selling, administrative and general expenses, the Industrial Group has incurred cumulative pretax costs of approximately $25.4$29.4 million as of March 31,September 30, 2007 for these rationalization plans.
In addition, the company recorded an impairment charge of $5.3 million related to one of the Industrial Group’s entities during the third quarter of 2007. The company also recorded $0.4 million and $0.3 million of severance and related benefits during the third quarter and first nine months of 2007, respectively, and impairment charges of $0.1 million during the first nine months of 2007 related to other company initiatives.
Automotive
In 2005, the company announced plans for its Automotive Group to restructure its business and improve performance. These plans included the closure of a manufacturing facility in Clinton, South Carolina and engineering facilities in Torrington, Connecticut and Norcross, Georgia. In February 2006, the company announced additional plans to rationalize production capacity at itsthe company’s Vierzon, France bearing manufacturing facility in response to changes in customer demand for its products.
In September 2006, the company announced further planned reductions in its Automotive Group workforce. In March 2007, the company announced the closure of its manufacturing facility in Sao Paulo, Brazil. The closure of the manufacturing facility in Sao Paulo, Brazil has been delayed to serve demand, driven primarily by

21


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
industrial markets, until further notice.
These plans are targeted to collectively deliver annual pretax savings of approximately $75 million by the fourth quarter of 2008, with expected net workforce reductions of approximately 1,300 to 1,400 positions and pretax costs of approximately $125$115 million to $135$125 million, which include restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses. The targeted costs are higher than previous estimates of $105 to $115 million. The Automotive Group has incurred cumulative pretax costs of approximately $74.4$94.0 million as of March 31,September 30, 2007 for these plans.
During the third quarter and first quarternine months of 2007, the company recorded $6.5$0.8 million and $10.4 million, respectively, of severance and related benefit costs and $0.3$0.1 million and $2.2 million, respectively, of exit costs associated with the Automotive Group’s restructuring and workforce reduction plans. DuringThe exit costs recorded during the first nine months of 2007 were primarily the result of environmental charges related to the closure of the manufacturing facility in Sao Paulo, Brazil. The company also recorded impairment charges of $1.6 million during the third quarter and first nine months of 2006,2007 as a result of the Automotive Group’s restructuring and workforce reduction plans. The company recorded approximately $0.9 million of severance and related benefit costs of $1.6 million and exit costs of a negative $0.2 million during the third quarter of 2006. The company recorded impairment charges of $0.7 million, severance and related benefit costs of $8.2 million and exits costs of $0.8 million during the first nine months of 2006. The charges taken during the respective periods of 2006 related to the closure of a manufacturing facility in Clinton, South Carolina and administrative and engineering facilities in Torrington, Connecticut and Norcross, Georgia.Georgia, and the rationalization of the company’s Vierzon, France bearing manufacturing facility.
The company also recorded $0.4 million of severance and related benefits during the third quarter and first nine months of 2007 related to other company initiatives.
Steel
In October 2006,April 2007, the company announced its intention to exitcompleted the closure of its European seamless steel tube manufacturing operationsfacility located in Desford, England during 2007.England. The company recorded approximately $4.6$1.1 million and $6.7 million of severance and related benefit costs, and $0.1$0.2 million and $0.7 million of exit costs during the third quarter and first nine months of 2007, respectively, related to this action.
The company also recorded $0.2 million of severance and related benefits during the third quarter and first nine months of 2007 related to this action.other company initiatives. During the third quarter of 2006, the company recorded an impairment charge of $0.5 million related to the write-down of property, plant and equipment at one of the Steel Group’s facilities.
Rollforward of Restructuring Accruals:
                
 3/31/2007 12/31/2006  Sept. 30, Dec. 31,
(Dollars in millions)  2007 2007
Beginning balance, January 1 $32.0 $18.1  $32.0 $18.1 
Expense 11.4 29.6  21.3 29.6 
Payments  (12.3)  (15.7)  (28.7)  (15.7)
Ending balance $31.1 $32.0  $24.6 $32.0 
The restructuring accrual at March 31,September 30, 2007 and December 31, 2006 is included in accounts payable and other liabilities inon the Consolidated Balance Sheet. The majority of the restructuring accrual balance at March 31,September 30, 2007 is expected to be paid by the endmiddle of 2007.2008.

1922


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Loss on Divestitures:
            
(Dollars in millions) 3Q 2007 3Q 2006 $ Change
(Loss) on divestitures $(0.2) $ $(0.2)
            
 1Q 2007 1Q 2006 $ Change
(Dollars in millions)  YTD 2007 YTD 2006 $ Change
(Loss) on Divestitures $(0.4) $ $(0.4)
(Loss) on divestitures $(0.5) $(10.0) $9.5 
In June 2006, the company completed the divestiture of is Timken Precision Steel Components – Europe business and recorded a loss on disposal of $10.0 million. During the first nine months of 2007, the company recorded a gain of $0.2 million related to this divestiture. In December 2006, the company completed the divestiture of the Automotive Group’s steering business located in Watertown, Connecticut and Nova Friburgo, Braziloperations and recorded a loss on disposal of $54.3 million. The company recorded an additional loss on disposal of $0.4$0.2 million inand $0.7 million during the third quarter and first quarternine months of 2007.
Interest Expense and Income:
                
 1Q 2007 1Q 2006 $ Change % Change                
(Dollars in millions)  3Q 2007 3Q 2006 $ Change % Change
Interest expense $9.7 $13.1 $(3.4)  (26.0)% $10.7 $11.7 $(1.0)  (8.5)%
Interest income $2.0 $1.5 $0.5  33.3% $2.4 $0.9 $1.5  166.7%
                 
(Dollars in millions) YTD 2007 YTD 2006 $ Change % Change
 
Interest expense $30.4  $37.5  $(7.1)  (18.9)%
Interest income $5.5  $3.3  $2.2   66.7%
 
Interest expense for the third quarter and first quarternine months of 2007 decreased compared to the third quarter and first quarternine months of 2006 primarily due to lower average debt outstanding in the current year compared to the same periodperiods a year ago. Interest income for the third quarter and first quarternine months of 2007 increased compared to the same periodperiods a year ago, due to interest received on higher invested cash balances.
Other Income and Expense:
                
 1Q 2007 1Q 2006 $ Change % Change                
(Dollars in millions)  3Q 2007 3Q 2006 $ Change % Change
Gain on divestitures of non-strategic assets $0.4 $4.0 $(3.6)  (90.0)%
Gain (loss) on dissolution of subsidiaries   (4.3) 4.3  100.0%
(Gain) on divestiture of non-strategic assets $(0.9) $(0.1) $(0.8) NM 
(Gain) on dissolution of subsidiaries  (0.1)   (0.1) NM 
Other  (3.8)  (4.9) 1.1  22.4% 4.9 1.8 3.1  172.2%
Other expense – net $(3.4) $(5.2) $1.8  34.6% $3.9 $1.7 $2.2  129.4%
                 
(Dollars in millions) YTD 2007 YTD 2006 $ Change % Change
 
(Gain) on divestiture of non-strategic assets $(3.7) $(7.1) $3.4   47.9%
(Gain) loss on dissolution of subsidiaries  (0.2)  4.7   (4.9)  (104.3)%
Other  14.7   11.5   3.2   27.8%
 
Other expense – net $10.8  $9.1  $1.7   18.7%
 
In the third quarter and first quarternine months of 2007, $0.3 million of the gain on divestituresdivestiture of non-strategic assets related toincluded a $0.7 million gain on the sale of the engineeringcompany’s investment in Timken-NSK Bearings (Suzhou) Co., Ltd., a joint venture based in China. The gain on divestiture of non-strategic assets for the first nine months of 2007 also included a $3.2 million gain on the sale of certain machinery and equipment at the company’s former manufacturing facility in Norcross, Georgia.Desford, England. In the first quarternine months of 2006, $3.5 million of the gain on divestituresdivestiture of non-strategic assets primarily included a $6.4 million gain related to the sale of assets of PEL, a former joint venture of the company. The company consolidated PEL effective March 31, 2004 in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46. In 2006, the company liquidated the joint venture. Refer to Note 6 – Equity Investments for additional discussion.
In 2004, the company began the process of liquidating one of its inactive subsidiaries, British Timken Ltd., located in Duston, England. The company recorded additional non-cash charges on dissolution of $4.3 million in the first quarter of 2006.
For the first quarter of 2007, other expense primarily consisted of operating expenses related to assets held for sale, donations, losses on disposal of assets, minority interests and foreign currency exchange gains. For the first quarter of 2006, other expense included donations, losses on disposal of assets, minority interests, losses from equity investments and foreign currency exchange losses.
Income Tax Expense:
                 
  1Q 2007 1Q 2006 $ Change Change
(Dollars in millions)                
Income tax (benefit) expense $(6.3) $24.2  $(30.5)  (126.0)%
Effective tax rate  (9.2)%  29.7%     (3,890) bps
 
The effective tax rate for the first quarter of 2007 was lower than the U.S. Federal statutory tax rate primarily due to (1) a favorable discrete tax adjustment of $32.1 million recorded in the first quarter of 2007 to recognize the benefits of a prior year tax position as a result of a change in tax law during the quarter, (2) tax benefits on foreign income, including tax holidays in China and the Czech Republic as well as earnings of certain other foreign subsidiaries being taxed at a rate less than 35%, (3) the domestic manufacturing deduction provided by the American Jobs Creation Act of 2004, and (4) the aggregate tax benefit of other U.S. tax items, including the accrual of the tax-free Medicare prescription drug subsidy, deductible dividends paid to the company’s

2023


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Employee Stock Ownership Plan (ESOP)The company recorded a non-cash charge related to an inactive subsidiary, British Timken Ltd., located in Duston, England of $4.7 million in the first nine months of 2006.
For the third quarter and the U.S. Federal research tax credit. These additional tax benefits were offset partially by (1)first nine months of 2007, other expense primarily consisted of losses on disposal of fixed assets, minority interests, losses from equity investments, donations and foreign currency exchange gains. For the inability to record a tax benefit forthird quarter and first nine months of 2006, other expense included donations, minority interests, losses at certainfrom equity investments, losses on disposal of fixed assets and foreign subsidiaries, (2) taxes incurred on foreign remittances, (3) U.S. state and local income taxes and (4) the aggregate tax expense of other discrete tax items, including the accrual of interest expense related to uncertain tax positions from prior years.currency exchange losses.
Income Tax Expense:
                 
(Dollars in millions) 3Q 2007 3Q 2006 $ Change Change
 
Income tax expense $15.1  $17.7  $(2.6)  (14.7)%
Effective tax rate  26.8%  31.4%    (460)bps
 
                 
(Dollars in millions) YTD 2007 YTD 2006 $ Change Change
 
Income tax expense $42.9  $67.0  $(24.1)  (36.0)%
Effective tax rate  20.1%  29.4%    (930)bps
 
The decrease in the effective tax rate forin the firstthird quarter of 2007 compared to the third quarter of 2006 was lower thanprimarily caused by a tax benefit realized upon divestiture of a foreign joint venture in the third quarter of 2007, a favorable deferred tax adjustment to reflect a U.S. Federal statutorystate tax rate due tolaw change in the third quarter of 2007 and increased U.S. research tax benefits on foreign income, including the extraterritorial income exclusion on U.S. exports, tax holidayscredits in China and the Czech Republic and earnings of certain foreign subsidiaries being taxed at a rate less than 35%, as well as the net favorable impact of other discrete tax items, including tax reserve adjustments.2007. These benefits were offset partially by taxes incurred on foreign remittances, U.S. state and local income taxes, and the inability to record a tax benefit for losses at certain foreign subsidiaries.
The effective rate for the first quarter of 2007 was lower than the effective rate for the first quarter of 2006 primarily due to the favorable quarter-over-quarter impact of discrete tax adjustments. This was partially offset by increased losses quarter-over-quarterin 2007 at certain foreign subsidiaries where no tax benefit could be recorded.claimed.
The company adopted FASB Interpretation (FIN) 48, “Accountingdecrease in the effective tax rate for Uncertaintythe first nine months of 2007 compared to the first nine months of 2006 was primarily caused by a $32.1 million tax benefit recorded in Income Taxes – an interpretationthe first quarter of FASB Statement 109,”2007 to recognize the benefit of a prior year tax position as a result of a change in tax law, as well as the third quarter items described above. These benefits were partially offset by increased losses in 2007 at certain foreign subsidiaries where no tax benefit could be claimed.
In July 2007, the Governor of Michigan signed into law the “Michigan Business Tax Act” (Public Act 36 of 2007), creating the Michigan Business Tax (MBT). The MBT is effective January 1, 2007. Refer2008 and replaces the Michigan Single Business Tax, which was recorded as a component of pre-tax income. The MBT will be recorded as a component of income tax expense. The company anticipates that the new MBT will increase the company’s state effective tax rate and overall expense for 2008 and subsequent years, but the amount is not expected to “Recently Issued Accounting Pronouncements” and Note 14 – Income Taxes for further discussion of the impact of the adoption of FIN 48.be material.
Discontinued Operations:
                
 1Q 2007 1Q 2006 $ Change % Change                
(Dollars in millions)  3Q 2007 3Q 2006 $ Change % Change
Operating results, net of tax $ $8.8 $(8.8)  (100.0)% $ $7.9 $(7.9)  (100.0)%
Gain on disposal, net of taxes 0.9  0.9 NM 
Total $0.9 $8.8 $(7.9)  (89.8)% $ $7.9 $(7.9)  (100.0)%
                 
(Dollars in millions) YTD 2007 YTD 2006 $ Change % Change
 
Operating results, net of tax $  $26.5  $(26.5)  (100.0)%
Gain on disposal, net of taxes  0.7      0.7  NM
 
Total $0.7  $26.5  $(25.8)  (97.4)%
 
In December 2006, the company completed the divestiture of its Latrobe Steel subsidiary and recognized a gain on disposal, net of tax, of $12.9 million. Discontinued operations for the first quarternine months of 2007 represent an additional $0.9$0.7 million gain on disposal, net of tax, due to a purchase price adjustment. Discontinued operations

24


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
for the third quarter and first quarternine months of 2006 represent the operating results, net of tax, of this business.
Business Segments:
The primary measurement used by management to measure the financial performance of each segment is adjusted EBIT (earnings before interest and taxes, excluding the effect of amounts related to certain items that management considers not representative of ongoing operations such as impairment and restructuring, manufacturing rationalization and integration charges, one-time gains or losses on disposal of non-strategic assets, allocated receipts received or payments made under the U.S. Continued Dumping and Subsidy Offset Act (CDSOA) and loss on the dissolution of subsidiary). Refer to Note 11 – Segment Information for the reconciliation of adjusted EBIT by Group to consolidated income before income taxes.
In August 2007, the company announced organizational changes which affect the reportable segments that it will disclose in the future. These changes will be reflected in the company’s Annual Report on Form 10-K for the year ended December 31, 2007.
Industrial Group:
                                
 1Q 2007 1Q 2006 $ Change Change        
(Dollars in millions)  3Q 2007 3Q 2006 $ Change Change
Net sales, including intersegment sales $544.4 $503.9 $40.5  8.0% $556.8 $501.8 $55.0  11.0%
Adjusted EBIT $49.2 $45.9 $3.3  7.2% $55.4 $48.2 $7.2  14.9%
Adjusted EBIT margin  9.0%  9.1%   (10) bps  9.9%  9.6%  30 bps
                 
         
(Dollars in millions) YTD 2007 YTD 2006 $ Change Change
 
Net sales, including intersegment sales $1,667.2  $1,534.8  $132.4   8.6%
Adjusted EBIT $166.3  $157.6  $8.7   5.5%
Adjusted EBIT margin  10.0%  10.3%    (30) bps
 
Sales by the Industrial Group include global sales of bearings and other products and services (other than steel) to a diverse customer base, including: industrial equipment, construction and agriculture, rail, and aerospace and defense customers. The Industrial Group also includes aftermarket distribution operations, including automotive applications, for products other than steel.
The Industrial Group’s net sales for the firstthird quarter of 2007, compared to the firstthird quarter of 2006, increased

21


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
8.0% 11.0% primarily due to favorable pricing and higher volume across most Industrial end markets, particularly in the off-highway, aerospace, and heavy industry markets. Theand rail sectors, as well as the favorable impact of foreign currency translation on sales also had a favorable impact. While net sales increased in the first quarter of 2007, adjustedsales. Adjusted EBIT margin was slightly lowerhigher in the firstthird quarter of 2007, compared to the firstthird quarter of 2006, primarily due to favorable pricing and higher volume, partially offset by increases in raw material and logistics costs, as well as higher manufacturing costs associated with capacity additions.
The Industrial Group’s net sales for the first nine months of 2007, compared to the first nine months of 2006, increased 8.6% primarily due to favorable pricing, higher volume across most end markets, particularly in the heavy industry, automotive aftermarket and aerospace sectors, and the favorable impact of foreign currency translation on sales. EBIT margins decreased for the first nine months of 2007, compared to the same period a year ago, primarily due to increases in raw material and logistics costs, as well as higher manufacturing costs associated with capacity additions, which more than offset favorable pricing and higher volume. The Industrial Group continues to focus on improvingincreasing selected manufacturing capacity, utilization,improving product availability and customer service in response to strong industrial demand. The company expects the Industrial Group to benefit in 2007 from continued strength in most global industrial markets for the remainder of 2007 and full-year margins are expected to improve over 2006 levels as a result of higher volume, improved pricing and better manufacturing performance. However, margins are expected to be impacted by higher raw material costs for the remainder of 2007. The Industrial Group is also expected to benefit from additional supplymanufacturing capacity offor constrained products during the second halfremaining quarter of 2007.

25


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Automotive Group:
                                
 1Q 2007 1Q 2006 $ Change Change        
(Dollars in millions)  3Q 2007 3Q 2006 $ Change Change
Net sales, including intersegment sales $387.9 $421.0 $(33.1)  (7.9)% $361.0 $363.6 $(2.6)  (0.7)%
Adjusted EBIT (loss) $(7.2) $(3.1) $(4.1)  (132.3)% $(20.7) $(26.3) $5.6  21.3%
Adjusted EBIT (loss) margin  (1.9)%  (0.7)%   (120) bps  (5.7)%  (7.2)%  150 bps
                 
         
(Dollars in millions) YTD 2007 YTD 2006 $ Change Change
 
Net sales, including intersegment sales $1,156.2  $1,211.3  $(55.1)  (4.5)%
Adjusted EBIT (loss) $(35.3) $(31.4) $(3.9)  (12.4)%
Adjusted EBIT (loss) margin  (3.1)%  (2.6)%    (50) bps
 
The Automotive Group includes sales of bearings and other products and services (other than steel) to automotive original equipment manufacturers and suppliers. The Automotive Group’s net sales infor the firstthird quarter of 2007 decreased slightly compared to sales in the same period a year ago primarily due to the divestiture of its steering business located in Watertown, Connecticut and Nova Friburgo, Braziloperations and lower demand from North American light vehicle and heavy truck customers, partiallymostly offset by ahigher demand from North American light truck customers, higher demand in Europe and the favorable impact from foreign currency translation. The divestiture of the steering businessoperations was completed in December 2006. Profitability for the third quarter of 2007 improved compared to the third quarter of 2006, primarily due to a $7.0 million charge for product warranty recognized in the third quarter of 2006, as well as the favorable impact of restructuring initiatives, partially offset by higher raw material costs.
The Automotive Group’s net sales for the first nine months of 2007, compared to the first nine months of 2006, decreased primarily due to the divestiture of its steering operations, as well as lower demand from North American heavy truck customers, partially offset by the favorable impact from foreign currency translation on sales. Profitability for the first threenine months of 2007 decreased compared to the same period a year ago, primarily due to higher raw material costs and lower volume, which led to the underutilization of manufacturing capacity, particularly at its manufacturing facilitiesfacility in Clinton, South Carolina, and Sao Paulo, Brazil, which the Automotive Groupcompany plans to close by the end of 2007. The Automotive Group’s profitability was favorably impacted2007, partially offset by the favorable impact of reductions in selling, administrative and general expenses as a result of restructuring initiatives. Theinitiatives and a charge for product warranty recorded in the third quarter of 2006. For the remainder of 2007, the Automotive Group’s sales are expected to be at levels consistent with those experienced duringin the second half of 2006 for the remainderthird quarter of 2007, and the Automotive Group is expected to deliver improved margins, compared to the fourth quarter of 2006, due to its restructuring initiatives.
During the third quarter and first quarternine months of 2007, the company recorded impairment and restructuring charges of approximately $6.5$2.9 million of severance and related benefit costs and $0.3$14.6 million, respectively, which were primarily the result of exit costs associated with the Automotive Group’s restructuring and workforce reduction plans. During the third quarter and first quarternine months of 2006, the company recorded impairment and restructuring charges of approximately $0.9$1.4 million of severance and related benefit costs$9.7 million, respectively, related to the closure of a manufacturing facility in Clinton, South Carolina and administrative and engineering facilities in Torrington, Connecticut and Norcross, Georgia.Georgia, and the rationalization of the company’s Vierzon, France bearing manufacturing facility. The Automotive Group’s adjusted EBIT (loss) excludes these restructuring costs, as well as rationalization costs recorded in cost of products sold and selling, administrative and general expenses, as they are not representative of ongoing operations.

26


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Steel Group:
                                
 1Q 2007 1Q 2006 $ Change Change        
(Dollars in millions)  3Q 2007 3Q 2006 $ Change Change
Net sales, including intersegment sales $390.3 $375.4 $14.9  4.0% $381.1 $355.6 $25.5  7.2%
Adjusted EBIT $61.8 $57.0 $4.8  8.4% $47.4 $50.4 $(3.0)  (6.0)%
Adjusted EBIT margin  15.8%  15.2%  60 bps  12.4%  14.2%  (180) bps
                 
         
(Dollars in millions) YTD 2007 YTD 2006 $ Change Change
 
Net sales, including intersegment sales $1,182.2  $1,114.3  $67.9   6.1%
Adjusted EBIT $170.4  $167.2  $3.2   1.9%
Adjusted EBIT margin  14.4%  15.0%    (60) bps
 
The Steel Group sells steels of low and intermediate alloy and carbon grades in both solid and tubular sections, as well as custom-made steel products for both automotive and industrial applications, including bearings.
In December 2006, the company completed the sale of its Latrobe Steel subsidiary. Sales and adjusted EBIT from these operations for the third quarter and first quarternine months of 2006 are included in discontinued operations. The Steel Group’s net sales for the firstthird quarter of 2007, compared to the firstthird quarter of 2006, increased 4.0%7.2% primarily due to strong demand by customersacross all market sectors, particularly in the energy and service centerautomotive sectors, as well as increased pricing and surcharges to recover high raw material costs, partially offset by significantly lower automotive demand.the closure of the Desford, England manufacturing facility. Profitability for the Steel Group in the firstthird quarter of 2007 decreased compared to the third quarter of 2006, primarily due to higher raw material costs, a LIFO inventory charge reflecting higher estimates of year-end costs of purchased scrap and higher manufacturing costs, partially offset by surcharges to recover the higher raw material costs and increased volume.
The Steel Group’s net sales for the first nine months of 2007, compared to the first quarternine months of 2006, increased 6.1% primarily due to strong demand by customers in the energy and automotive market sectors, as well as increased pricing and surcharges to recover high raw material costs, partially offset by lower sales due to the sale of its Timken Precision Steel Components – Europe business and the closure of the Desford, England manufacturing facility. Profitability, on a dollar basis, increased for the first nine months of 2007, compared to the same period a year ago, primarily due to favorable sales mix, increased pricingvolume and higher manufacturing productivity, as well as lower

22


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
energy costs,surcharges, partially offset by higher raw material costs and higher manufacturing costs.
The For the remainder of 2007, the company expects the Steel Group to benefit from strong demand in the energy sector, throughout 2007, with other sectors increasing slightly over 2006 levels. The company also expects the Steel Group’s Adjusted EBIT to be slightly higher for 2007 compared to 2006, due to higher volume, product mix, price increases and higher manufacturing productivity.surcharges. Scrap costs are expected to decline from theirremain at current level,levels, while alloy and energy costs are expected to remain at high levels. However, these costs are expected to be recovered through surcharges and price increases.

27


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The Balance Sheet
Total assets as shown on the Consolidated Balance Sheet at March 31,September 30, 2007 increased by $92.6$165.6 million fromcompared to December 31, 2006. This increase was primarily due primarily to increased working capital required to support higher sales and the impact of foreign currency translation, slightly offset by lower property, plant and equipment — net.translation.
Current Assets:
                                
 3/31/2007 12/31/2006 $ Change % Change Sept. 30, Dec. 31,    
(Dollars in millions)  2007 2006 $ Change % Change
Cash and cash equivalents $100.8 $101.1 $(0.3)  (0.3)% $87.8 $101.1 $(13.3)  (13.2)%
Accounts receivable, net 740.8 673.4 67.4  10.0% 734.8 673.4 61.4  9.1%
Inventories, net 975.0 952.3 22.7  2.4% 1,021.9 952.3 69.6  7.3%
Deferred income taxes 86.1 85.6 0.5  0.6% 66.6 85.6  (19.0)  (22.2)%
Deferred charges and prepaid expenses 14.8 11.1 3.7  33.3% 15.0 11.1 3.9  35.1%
Other current assets 80.1 76.8 3.3  4.3% 92.3 76.8 15.5  20.2%
Total current assets $1,997.6 $1,900.3 $97.3  5.1% $2,018.4 $1,900.3 $118.1  6.2%
Refer to the Consolidated Statement of Cash Flows for a discussion of the decrease in cash and cash equivalents. Accounts receivable, net increased as a result of the higher sales in the firstthird quarter of 2007 as compared to the fourth quarter of 2006. The impact of foreign currency translation on net accounts receivable was offset by higher allowance for doubtful accounts. The increase in inventories was primarily due to higher volume, increased raw material costs2006 and the impact of foreign currency translation. The increase in inventories was primarily due to the impact of foreign currency translation, as well as higher volume and increased raw material costs, partially offset by an increase in LIFO reserves. The decrease in deferred income taxes was primarily due to tax accounting method changes and other items, such as LIFO, that resulted in additional deductions claimed on the company’s 2006 U.S. Federal income tax return. The increase in other current assets was primarily driven by the reclassification of administrative facilities in Torrington, Connecticut and manufacturing facilities in Desford, England asto “assets held for sale.”
Property, Plant and Equipment – Net:
                                
 3/31/2007 12/31/2006 $ Change % Change Sept. 30, Dec. 31,    
(Dollars in millions)  2007 2006 $ Change % Change
Property, plant and equipment $3,701.3 $3,664.8 $36.5  1.0% $3,833.5 $3,664.8 $168.7  4.6%
Less: allowances for depreciation  (2,103.1)  (2,063.3)  (39.8)  1.9%  (2,188.5)  (2,063.3)  (125.2)  6.1%
Property, plant and equipment — net $1,598.2 $1,601.5 $(3.3)  (0.2)% $1,645.0 $1,601.5 $43.5  2.7%
The decreaseincrease in property, plant and equipment – net in the first quarternine months of 2007 was primarily due to capital expenditures exceeding depreciation expense and the impact of foreign currency translation, partially offset by the reclassification of assets held for sale to other current assets more than offsetting the impact of capital spending.assets.
Other Assets:
                 
  3/31/2007  12/31/2006  $ Change  % Change 
(Dollars in millions)                
Goodwill $204.2  $201.9  $2.3   1.1%
Other intangible assets  101.1   104.1   (3.0)  (2.9)%
Deferred income taxes  169.1   169.4   (0.3)  (0.2)%
Other non-current assets  53.9   54.3   (0.4)  (0.7)%
 
Total other assets $528.3  $529.7  $(1.4)  (0.3)%
 

23


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
                 
  Sept. 30, Dec. 31,    
(Dollars in millions) 2007 2006 $ Change % Change
 
Goodwill $215.8  $201.9  $13.9   6.9%
Other intangible assets  97.0   104.1   (7.1)  (6.8)%
Deferred income taxes  159.1   169.4   (10.3)  (6.1)%
Other non-current assets  61.8   54.3   7.5   13.8%
 
Total other assets $533.7  $529.7  $4.0   0.8%
 
The increase in goodwill was due to the impact of foreign currency translation and an opening balance sheet adjustment related to an acquisition completed in December 2006. The decrease in other intangible assets was primarily due to the amortization expense recognized in the first quarternine months of 2007. The decrease in deferred income taxes was primarily due to tax accounting method changes that resulted in additional deductions

28


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
claimed on the company’s 2006 U.S. Federal income tax return, partially offset by the estimated deferred tax benefit for the current year.
Current Liabilities:
                                
 3/31/2007 12/31/2006 $ Change % Change Sept. 30, Dec. 31,    
(Dollars in millions)  2007 2006 $ Change % Change
Short-term debt $109.7 $40.2 $69.5  172.9% $41.7 $40.2 $1.5  3.7%
Accounts payable and other liabilities 528.8 506.3 22.5  4.4% 502.5 506.3  (3.8)  (0.8)%
Salaries, wages and benefits 169.7 225.4  (55.7)  (24.7)% 211.6 225.4  (13.8)  (6.1)%
Income taxes payable 8.5 52.8  (44.3)  (83.9)% 18.4 52.8  (34.4)  (65.2)%
Deferred income taxes 0.6 0.6   0.0% 0.6 0.6   0.0%
Current portion of long-term debt 28.2 10.2 18.0  176.5% 33.2 10.2 23.0 NM
����
Total current liabilities $845.5 $835.5 $10.0  1.2% $808.0 $835.5 $(27.5)  (3.3)%
The increase in short-term debt was primarily due to increased net borrowings by the company’s foreign subsidiaries under lines of credit. The increase in accounts payable and other liabilities was primarily due to the increase in purchasing volume to meet the higher production demand. The decrease in salaries, wages and benefits was the result of the payout of 2006 performance-based compensation in the first quarter of 2007.2007, partially offset by accrued 2007 performance-based compensation. The decrease in income taxes payable was primarily due to the reclassification of a portion of the income taxes payable balance from current liabilities to non-current liabilities as a result of the adoption of FIN 48 in the first quarter, and current year cash tax payments and prior year overpayments applied to 2007, partially offset by the provision for current-yearcurrent year taxes. The increase in the current portion of long-term debt is primarily due to the reclassification of debt that is expected to mature within the next twelve months from non-current liabilities to current liabilities.
Non-Current Liabilities:
                                
 3/31/2007 12/31/2006 $ Change % Change Sept. 30, Dec. 31,    
(Dollars in millions)  2007 2006 $ Change % Change
Long-term debt $530.6 $547.4 $(16.8)  (3.1)% $526.5 $547.4 $(20.9)  (3.8)%
Accrued pension cost 391.4 410.4  (19.0)  (4.6)% 328.0 410.4  (82.4)  (20.1)%
Accrued postretirement benefits cost 683.5 682.9 0.6  0.1% 681.8 682.9  (1.1)  (0.2)%
Deferred income taxes 14.5 6.7 7.8  116.4% 6.7 6.7   0.0%
Other non-current liabilities 96.3 72.4 23.9  33.0% 91.8 72.4 19.4  26.8%
Total non-current liabilities $1,716.3 $1,719.8 $(3.5)  (0.2)% $1,634.8 $1,719.8 $(85.0)  (4.9)%
The decrease in long-term debt is primarily due to the reclassification of debt that is expected to mature within the next twelve months to current liabilities. The decrease in accrued pension cost in the first quarternine months of 2007 was primarily due to U.S.-based pension plan contributions, partially offset by current year accruals for pension expense.contributions. The increase in other non-current liabilities was primarily due to the reclassification of a portion of income taxes payable from current liabilities to non-current liabilities as a result of the adoption of FIN 48.
Shareholders’ Equity:
                 
  3/31/2007 12/31/2006 $ Change % Change
(Dollars in millions)                
Common stock $822.5  $806.2  $16.3   2.0%
Earnings invested in the business  1,282.9   1,217.2   65.7   5.4%
Accumulated other comprehensive loss  (537.8)  (544.6)  6.8   (1.2)%
Treasury shares  (5.3)  (2.6)  (2.7)  103.8%
 
Total shareholders’ equity $1,562.3  $1,476.2  $86.1   5.8%
 

24


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
                 
  Sept. 30, Dec. 31,    
(Dollars in millions) 2007 2006 $ Change % Change
 
Common stock $858.2  $806.2  $52.0   6.5%
Earnings invested in the business  1,347.9   1,217.2   130.7   10.7%
Accumulated other comprehensive loss  (441.5)  (544.6)  103.1   (18.9)%
Treasury shares  (10.3)  (2.6)  (7.7) NM
 
Total shareholders’ equity $1,754.3  $1,476.2  $278.1   18.8%
 
The increase in common stock related to stock option exercises by employees and the related income tax benefits. Earnings invested in the business were increased induring the first quarternine months of 2007 by net income of $75.2$171.8 million and $5.6 million related to the cumulative effect of adopting FIN 48, partially reduced by dividends declared of $15.2$46.7 million. The decrease in accumulated other comprehensive loss was primarily due to the positive impact of the foreign currency translation.translation and the recognition of prior service costs and actuarial losses for

29


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
defined benefit pension and postretirement benefit plans. The increase in the foreign currency translation adjustment of $10.6$80.8 million was due to the weakening of the U.S. dollar relative to other currencies, such as the Euro, the Romanian lei, the Brazilian real, the Canadian dollar and the Euro.Indian rupee. See “Foreign Currency” for further discussion regarding the impact of foreign currency translation.
Cash Flows:
                        
 3/31/2007 3/31/2006 $ Change Sept. 30, Sept. 30,  
(Dollars in millions)  2007 2006 $ Change
Net cash used by operating activities $(5.7) $(36.6) $30.9 
Net cash provided by operating activities $186.2 $172.4 $13.8 
Net cash used by investing activities  (59.3)  (39.9)  (19.4)  (184.3)  (180.3)  (4.0)
Net cash provided by financing activities 63.5 41.3 22.2 
Net cash used by financing activities  (24.6)  (6.0)  (18.6)
Effect of exchange rate changes on cash 1.2 1.1 0.1  9.4 2.6 6.8 
Decrease in cash and cash equivalents $(0.3) $(34.1) $33.8  $(13.3) $(11.3) $(2.0)
The net cash usedprovided by operating activities decreased from $36.6of $186.2 million for the first quarternine months of 2007 increased $13.8 million from the first nine months of 2006 to $5.7with operating cash flows from discontinued operations decreasing $41.1 million, for first quarter of 2007 as a result of higher net income and a lower use of cash for working capital items, particularly inventories and accounts receivable, partially offset by accounts payable and accrued expenses. Inventories were a use ofoperating cash of $17.8 million in the first quarter of 2007, compared to a use of cash of $37.7 million in the first quarter of 2006. Accounts receivable was a use of cash of $64.8 million in the first quarter of 2007, compared to a use of cash of $69.5 million in the first quarter of 2006. Inventories and accounts receivable increased in the first quarter of 2007 due to higher sales volume. The use of cash in the first quarter of 2007 for accounts payable and accrued expenses was primarily due to the payout of 2006 performance-based compensation in the first quarter and the contributions to the company’s U.S.-based pension plans, which more than offset the increase in payables to meet higher production volume. Excluding cash contributions to the company’s U.S.-based pension plans, accounts payable and accrued expenses were a use of cash of $36.8 million in the first quarter of 2007, compared to a source of cash of $12.1 million in the first quarter of 2006. The company made cash contributions to its U.S.-based pension plans in the first quarter of 2007 of $27.0 million, compared to $59.6 million in the first quarter of 2006.flows from continuing operations increasing $54.9 million. The decrease in operating cash flows from discontinued operations was primarily due to the eliminationsale of operating results from the company’s former Latrobe Steel subsidiary duein December 2006. The increase in net cash provided by operating activities from continuing operations was primarily driven by a $50.3 million decrease in pension and postretirement cash payments during the first nine months of 2007 compared to the salefirst nine months of 2006. Higher income from continuing operations in 2007 and lower tax payments in 2007, compared to 2006, were partially offset by an increase in cash used for working capital requirements. Working capital items, account receivable and accounts payable and other accrued expenses, were partially offset by inventory. Accounts receivable was a use of cash of $39.9 million in the businessfirst nine months of 2007 compared to a use of cash of $15.3 million in Decemberthe first nine months of 2006. Accounts payable and other accrued expenses were a use of cash of $45.1 million in the first nine months of 2007 compared to a use of cash of $21.9 million in the first nine months of 2006. Inventory was a use of cash of $34.8 million in the first nine months of 2007 compared to a use of cash of $65.6 million in the first nine months of 2006.
The net cash used by investing activities of $59.3$184.3 million for the first threenine months of 2007 increased from the same period in the prior year primarily due to higher capital expenditures to fund Industrial Group growth initiatives.initiatives, partially offset by higher proceeds from the disposal of property, plant and equipment and lower acquisition activity.
The net cash provided byCash flows from financing activities used cash of $63.5$24.6 million for the first quarter of 2007, compared to the first quarter of 2006, increased primarily due to higher net borrowings on credit facilities by the company’s foreign subsidiaries during the first threenine months of 2007 after using cash of $6.0 million during the first nine months of 2006. The company decreased its net borrowings $14.9 million during the first nine months of 2007 after increasing its net borrowings $15.1 million during the same period last year. This decrease in net borrowings was partially offset by higher proceeds from the exercise of stock options during the first nine months of 2007 compared to the first three months of 2006. In addition, proceeds from the exercise of stock options increased during the first three months of 2007 compared to the first threenine months of 2006.
Liquidity and Capital Resources
Total debt was $668.5$601.4 million at March 31,September 30, 2007, compared to $597.8 million at December 31, 2006. Net debt was $567.7$513.6 million at March 31,September 30, 2007, compared to $496.7 million at December 31, 2006. The net debt to capital ratio was 26.7%22.6% at March 31,September 30, 2007, compared to 25.2% at December 31, 2006.

2530


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Reconciliation of total debt to net debt and the ratio of net debt to capital:
Net Debt:
         
Net Debt:    
     
  Sept. 30, Dec. 31,
(Dollars in millions) 2007 2006
 
Short-term debt $41.7  $40.2 
Current portion of long-term debt  33.2   10.2 
Long-term debt  526.5   547.4 
 
Total debt  601.4   597.8 
Less: cash and cash equivalents  (87.8)  (101.1)
 
Net debt $513.6  $496.7 
 
         
  3/31/2007 12/31/2006
(Dollars in millions)        
Short-term debt $109.7  $40.2 
Current portion of long-term debt  28.2   10.2 
Long-term debt  530.6   547.4 
 
Total debt  668.5   597.8 
Less: cash and cash equivalents  (100.8)  (101.1)
 
Net debt $567.7  $496.7 
 
Ratio of Net Debt to Capital:
                
Ratio of Net Debt to Capital:    
 3/31/2007 12/31/2006 Sept. 30, Dec. 31,
(Dollars in millions)  2007 2006
Net debt $567.7 $496.7  $513.6 $496.7 
Shareholders’ equity 1,562.3 1,476.2  1,754.3 1,476.2 
Net debt + shareholders’ equity (capital) $2,130.0 $1,972.9  $2,267.9 $1,972.9 
Ratio of net debt to capital  26.7%  25.2%  22.6%  25.2%
The company presents net debt because it believes net debt is more representative of the company’s financial position.
At March 31,September 30, 2007, the company had no outstanding borrowings under its $500 million Amended and Restated Credit Agreement (Senior Credit Facility), and had letters of credit outstanding totaling $33.2$23.8 million, which reduced the availability under the Senior Credit Facility to $466.8$476.2 million. The Senior Credit Facility matures on June 30, 2010. Under the Senior Credit Facility, the company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At March 31,September 30, 2007, the company was in full compliance with the covenants under the Senior Credit Facility and its other debt agreements. Refer to Note 7 – Financing Arrangements for further discussion.
At March 31,September 30, 2007, the company had no outstanding borrowings under the company’s Asset Securitization, which provides for borrowings up to $200 million, limited to certain borrowing base calculations, and is secured by certain domestic trade receivables of the company. As of March 31,September 30, 2007, there were letters of credit outstanding totaling $18.8$18.4 million, which reduced the availability under the Asset Securitization to $181.2$181.6 million.
The company expects that any cash requirements in excess of cash generated from operating activities will be met by the availability under its Asset Securitization and Senior Credit Facility. The company believes it has sufficient liquidity to meet its obligations through 2010.
In October 2007, the company completed the acquisition of The Purdy Corporation for $200 million in cash. The company borrowed approximately $180 million under its Senior Credit Facility to finance this acquisition.
Financing Obligations and Other Commitments
The company expects to make cash contributions of approximately $100 million to its global defined benefit pension plans in 2007.
During the first quarternine months of 2007, the company did not purchase any shares of its common stock as authorized under the company’s 2006 common stock purchase plan. This plan authorizes the company to buy in the open market or in privately negotiated transactions up to four million shares of common stock. This plan authorizes purchases up to an aggregate of $180 million. The company may exercise this authorization until December 31, 2012. The company does not expect to be active in repurchasing its shares under the plan in the near-term.
The company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.

2631


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.
Accounting Change:
Effective January 1, 2007, the company changed the method of accounting for certain product inventories for one of its domestic legal entities from the first-in, first-out (FIFO) method to the last-in, first-out (LIFO) method. This change affects approximately 8% of the company’s total gross inventory at December 31, 2006. As a result of this change, substantially all domestic inventories are stated at the lower of cost determined(determined on a LIFO basis,basis) or market. The change is preferable because it improves financial reporting by supporting the continued integration of the company’s domestic bearing business, as well as providing a consistent and uniform costing method across the company’s domestic operations and a reduction in the complexity of intercompany transactions. SFAS No. 154, “Accounting Changes and Error Corrections,” requires that a change in accounting principle be reflected through retrospective application of the new accounting principle to all prior periods, unless it is impractical to do so. The company has determined that retrospective application to a period prior to January 1, 2007 is not practical as the necessary information needed to restate prior periods is not available. Therefore, the company began to apply the LIFO method to these inventories beginning January 1, 2007. The adoption of the LIFO method for these inventories did not have a material impact on the company’s results of operations or financial position during the first quarternine months of 2007 nor is it expected to have a material impact for the remainder of the year.
Recently Issued Accounting Pronouncements:
In July 2006, the Financial Accounting Standards Board (FASB) issued FIN 48. This interpretation clarifies the accounting for uncertain tax positions recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes requirements and other guidance for financial statement recognition and measurement of positions taken or expected to be taken on tax returns. This interpretation is effective for fiscal years beginning after December 15, 2006. The cumulative effect of adopting FIN 48 is recorded as an adjustment to the opening balance of retained earnings in the period of adoption. The company adopted FIN 48 effective January 1, 2007. In connection with the adoption of FIN 48, the company recorded a $5.6 million increase to retained earnings to recognize net tax benefits under the recognition and measurement criteria of FIN 48 that were previously not recognized under the company’s former accounting policy.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a framework for measuring fair value that is based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information to develop those assumptions. Additionally, the standard expands the disclosures about fair value measurements to include separately disclosing the fair value measurements of assets or liabilities within each level of the fair value hierarchy. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The company is currently evaluating the impact of adopting SFAS No. 157 on the company’s results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The company is currently evaluating the impact of adopting SFAS No. 159 on the company’s results of operations and financial condition.

32


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Critical Accounting Policies and Estimates:
The company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The company reviews its critical accounting policies throughout the year. Except for the adoption of FIN 48, which is discussed in further detail in Note 14 – Income Taxes, the company has concluded that there have been no changes to its critical accounting policies or estimates, as described in its Annual Report on Form 10-K for the year ended December 31, 2006, during the threenine months ended March 31,September 30, 2007.

27


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Other Matters:
Foreign Currency:
Assets and liabilities of subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the quarter. Related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Foreign currency gains and losses resulting from transactions are included in the consolidated statementConsolidated Statement of income.Income.
Foreign currency exchange losses included in the company’s operating results for the three months ended March 31,September 30, 2007 and 2006 were $1.3$2.5 million and $1.5 million, respectively. Foreign currency exchange losses included in each period.the company’s operating results for the nine months ended September 30, 2007 and 2006 were $5.5 million and $2.9 million, respectively. For the three months ended March 31,September 30, 2007, the company recorded a positive non-cash foreign currency translation adjustment of $10.6$34.6 million that increased shareholders’ equity, compared to a negative non-cash foreign currency translation adjustment of $1.0 million that decreased shareholders’ equity in the three months ended September 30, 2006. For the nine months ended September 30, 2007, the company recorded a positive non-cash foreign currency translation adjustment of $80.8 million that increased shareholders’ equity, compared to a positive non-cash foreign currency translation adjustment of $15.7$30.7 million that increased shareholders’ equity in the threenine months ended March 31,September 30, 2006. The foreign currency translation adjustment for the three months and nine months ended March 31,September 30, 2007 waswere positively impacted by the weakening of the U.S. dollar relative to other currencies, such as the Euro, the Romanian lei, the Brazilian real, the Canadian dollar, and the Euro.Indian rupee.
Quarterly Dividend:
On May 1,November 2, 2007, the company’s Board of Directors declared a quarterly cash dividend of $0.16$0.17 per share. The dividend will be paid on June 5,December 4, 2007 to shareholders of record as of May 18,November 16, 2007. This was the 340th342nd consecutive dividend paid on the common stock of the company.
Forward LookingForward-Looking Statements
Certain statements set forth in this document (including the company’s forecasts, beliefs and expectations) that are not historical in nature are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, the Management’s Discussion and Analysis containcontains numerous forward-looking statements. The company cautions readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of the company due to a variety of important factors, such as:
a) changes in world economic conditions, including additional adverse effects from terrorism or hostilities. This includes, but is not limited to, political risks associated with the potential instability of governments and legal systems in countries in which the company, or its customers and suppliers conduct business and significant changes in currency valuations;

33


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
b) the effects of fluctuations in customer demand on sales, product mix and prices in the industries in which the company operates. This includes the ability of the company to respond to the rapid changes in customer demand, the effects of customer strikes, the impact of changes in industrial business cycles and whether conditions of fair trade continue in the U.S. market;
c) competitive factors, including changes in market penetration, increasing price competition by existing or new foreign and domestic competitors, the introduction of new products by existing and new competitors and new technology that may impact the way the company’s products are sold or distributed;
d) changes in operating costs. This includes: the effect of changes in the company’s manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; higher cost and availability of raw materials and energy; the company’s ability to mitigate the impact of fluctuations in raw materials and energy costs and the operation of the company’s surcharge mechanism; changes in the expected costs associated with product warranty claims; changes resulting from inventory management and cost reduction initiatives and different levels of customer demands; the effects of unplanned work stoppages; and changes in the cost of labor and benefits;

28


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
e) the success of the company’s operating plans, including its ability to achieve the benefits from its ongoing continuous improvement and rationalization programs; the ability of acquired companies to achieve satisfactory operating results; and the company’s ability to maintain appropriate relations with unions that represent company associates in certain locations in order to avoid disruptions of business;
f) unanticipated litigation, claims or assessments. This includes, but is not limited to, claims or problems related to intellectual property, product liability or warranty and environmental issues;
g) changes in worldwide financial markets, including interest rates to the extent they affect the company’s ability to raise capital or increase the company’s cost of funds, have an impact on the overall performance of the company’s pension fund investments and/or cause changes in the economy which affect customer demand; and
h) those items identified under Item 1A. Risk Factors in this document, and in the Annual Report on Form 10-K for the year ended December 31, 2006.2006 and in the company’s Quarterly Reports on Form 10Q for the quarters ended March 31, 2007 and June 30, 2007.
Additional risks relating to the company’s business, the industries in which the company operates or the company’s common stock may be described from time to time in the company’s filings with the SEC. All of these risk factors are difficult to predict, are subject to material uncertainties that may affect actual results and may be beyond the company’s control.
Except as required by the federal securities laws, the company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

2934


Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to information appearing under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q. Furthermore, a discussion of market risk exposures is included in Part II, Item 7A. Quantitative and Qualitative Disclosure about Market Risk, of the company’s Annual Report on Form 10-K for the year ended December 31, 2006. There have been no material changes in reported market risk since the inclusion of this discussion in the company’s Annual Report on Form 10-K referenced above.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the company carried out an evaluation, under the supervision and with the participation of the company’s management, including the company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined by in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the principal executive officer and principal financial officer concluded that the company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
(a)Disclosure Controls and Procedures
As of the end of the period covered by this report, the company carried out an evaluation, under the supervision and with the participation of the company’s management, including the company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the principal executive officer and principal financial officer concluded that the company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
(b)Changes in Internal Control Over Financial Reporting
During the company’s most recent fiscal quarter, there have been no changes in the company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

3035


PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a materially adverse effect on the company’s consolidated financial position or results of operations.
In October 2007, the company signed a consent agreement with the State of New Hampshire concerning violations of New Hampshire air pollution control laws. Pursuant to the terms of the consent agreement, the company has agreed to pay $154,000 to the State of New Hampshire as a civil penalty.
Item 1A. Risk Factors
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 includesand our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007 include a detailed discussion of our risk factors. The information presented below amends and updates those risk factors and should be read in conjunction with the risk factors and information disclosed in thatthe Form 10-K.
Due to developments previously disclosed by the company, the risk factor entitled “We may not be able to realize the anticipated benefits from, or successfully execute, Project O.N.E.” has been updated.
We may not be able to realize the anticipated benefits from, or successfully execute, Project O.N.E.
During 2005, we began implementing Project O.N.E., a multi-year program designed to improve business processes10-K and systems to deliver enhanced customer service and financial performance. During the second quarter of 2007, we will undertake the first major U.S. implementation of Project O.N.E. We may not be able to realize the anticipated benefits from or successfully execute this program. If we are not able to successfully execute this program, we may lose the ability to operate a significant portion of our business, including the ability to schedule production, receive orders, ship product, track inventory and prepare financial statements. Our future success will depend, in part, on our ability to improve our business processes and systems. We may not be able to successfully do so without substantial costs, delays or other difficulties. We may face significant challenges in improving our processes and systems in a timely and efficient manner.
Implementing Project O.N.E. will be complex and time-consuming, may be distracting to management and disruptive to our businesses, and may cause an interruption of, or a loss of momentum in, our businesses as a result of a number of obstacles, such as:
the loss of key associates or customers;
the failure to maintain the quality of customer service that we have historically provided;
the need to coordinate geographically diverse organizations; and
the resulting diversion of management’s attention from our day-to-day business and the need to dedicate additional management personnel to address obstacles to the implementation of Project O.N.E.
If we are not successful in executing Project O.N.E., or if it fails to achieve the anticipated results, then our operations, margins, sales and reputation could be adversely affected.Form 10-Q.
Due to developments previously disclosed by the company, the risk factor entitled “The failure to achieve the anticipated results of our Automotive Group initiatives could materially affect our earnings” has been updated.
The failure to achieve the anticipated results of our Automotive Group initiatives could materially affect our earnings.
During 2005, we announced plans for our Automotive Group to restructure its business and improve performance. In response to reduced production demand from North American automotive manufacturers, in September 2006, we announced further planned reductions in our Automotive Group workforce of approximately 700 associates. These plans are targeted to collectively deliver annual pretax savings of approximately $75 million by the end of 2008, with pretax costs of approximately $125$115 to $135$125 million. The failure to achieve the anticipated results of these plans, including our targeted costs and annual savings, could adversely affect our earnings. In addition, increases in other costs and expenses may offset any cost savings from these efforts. Furthermore, the pretax costs required to deliver the targeted savings may increase.
Due to developments at customers, the risk factor entitled “Work stoppages or similar difficulties could significantly disrupt our operations, reduce our revenues and materially affect our earnings” has been updated.
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 could have a materially adverse effect on our business, financial condition and results of operations. Also, if one or more of our customers were to experience a work stoppage, that customer would likely halt or limit purchases of our products, which could have a materially adverse effect on our business, financial condition and results of operations. Collective bargaining agreements between the United Autoworkers Union and General Motors Corporation and The Chrysler Corporation have both been approved. A proposed collective bargaining agreement between the United Autoworkers Union and Ford Motor Company has recently been reached and is expected to be voted on later this month. We sell bearings and steel products to both Ford Motor Company and its Tier I suppliers.
Due to developments in litigation involving CDSOA, the risk factor entitled “Any reduction of CDSOA distributions in the future would reduce our earnings and cash flows” has been updated.

3136


Item 1A. Risk Factors (continued)
Any reduction of CDSOA distributions in the future would reduce our earnings and cash flows.
The CDSOA provides for distribution of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. The company reported CDSOA receipts, net of expenses, of $87.9 million, $77.1 million and $44.4 million in 2006, 2005 and 2004, respectively. In February 2006, U.S. legislation was enacted that would end CDSOA distributions for imports covered by antidumping duty orders entering the United States after September 30, 2007. Instead, any such antidumping duties collected would remain with the U.S. Treasury. This legislation is not expected to have a significant effect on potential CDSOA distributions in 2007, but would be expected to reduce any distributions in years beyond 2007, with distributions eventually ceasing.
In separate cases in July and September 2006, the U.S. Court of International Trade (CIT) ruled that the procedure for determining recipients eligible to receive CDSOA distributions is unconstitutional. The ruling of the CIT is now under appeal. The company is unable to determine, at this time, if these rulings will have a material adverse impact on the company’s financial results. A federal court could rule that an appropriate remedy would be return of distributions received in prior years. The company is unable to determine, at this time, the likelihood of a federal court finally ruling on any particular remedy.
In addition to the CIT ruling, there are a number of other factors that can affect whether the company receives any CDSOA distributions and the amount of such distributions in any year. These factors include, among other things, potential additional changes in the law, other ongoing and potential additional legal challenges to the law, and the administrative operation of the law. It is possible that CIT rulings might prevent us from receiving any CDSOA distributions in 2007 and beyond. Any reduction of CDSOA distributions would reduce our earnings and cash flow.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer of Purchases of Common Stock
The following table provides information about purchases by the company during the quarter ended March 31,September 30, 2007 of its common stock.
                 
          Total number Maximum
          of shared number of
          purchased as shares that
          part of publicly may yet
  Total number Average announced be purchased
  of shares price paid plans or under the plans
Period purchased(1) per share(2) programs or programs(3)
1/1/07 - 1/31/07  14,710  $28.34      4,000,000 
2/1/07 - 2/28/07  69,240   28.77      4,000,000 
3/1/07 - 3/31/07  5,041   28.70      4,000,000 
 
Total  88,991  $28.70      4,000,000 
 
                 
          Total number Maximum
          of shared number of
          purchased as shares that
          part of publicly may yet
  Total number Average announced be purchased
  of shares price paid plans or under the plans
Period purchased(1) per share(2) programs or programs(3)
 
7/1/07 - 7/31/07  15,546  $37.03      4,000,000 
8/1/07 - 8/31/07  4,097   35.12      4,000,000 
9/1/07 - 9/30/07  136   35.63      4,000,000 
 
Total  19,779  $36.63      4,000,000 
 
 
(1) Represents shares of the company’s common stock that are owned and tendered by employees to satisfy tax withholding obligations in connection with the vesting of restricted shares and the exercise of stock options.
 
(2) The averageFor restricted shares, the price paid per share is an average calculated using the daily high and low sales prices of the company’s common stock as quoted on the New York Stock Exchange at the time of vesting. For stock options, the employee tendersprice paid is the shares.real time trading stock price at the time the options are exercised.
 
(3) Pursuant to the company’s 2006 common stock purchase plan, the company may purchase up to four million shares of common stock at an amount not to exceed $180 million in the aggregate. The company may purchase shares under its 2006 common stock purchase plan until December 31, 2012.

3237


Item 6. Exhibits
 
12 Computation of Ratio of Earnings to Fixed Charges
 
18Preferability Letter
 
31.1 Certification of James W. Griffith, President and Chief Executive Officer (principal executive officer) of The Timken Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2 Certification of Glenn A. Eisenberg, Executive Vice President – Finance and Administration (principal financial officer) of The Timken Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32 Certifications of James W. Griffith, President and Chief Executive Officer (principal executive officer) and Glenn A. Eisenberg, Executive Vice President – Finance and Administration (principal financial officer) of The Timken Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

3338


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
       
  THE TIMKEN COMPANY  
       
Date May 09,November 7, 2007 By /s//s/ James W. Griffith
  
  James W. Griffith  
  President, Chief Executive Officer and Director  
  (Principal Executive Officer)  
       
Date May 09,November 7, 2007 By /s//s/ Glenn A. Eisenberg  
     
  Glenn A. Eisenberg  
  Executive Vice President — Finance and
Administration (Principal Financial Officer)  

3439