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 endedSeptember 30, 2008March 31, 2009
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) (I.R.S. Employer
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yeso      Noo
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller“small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
       
Large accelerated filerþ Accelerated filero Non-accelerated filero
Smaller reporting companyo
(Do not check if a smaller reporting company) Smaller reporting companyo 
     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 September 30, 2008March 31, 2009
Common Stock, without par value 96,551,63596,796,639 shares
 
 

 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Proceeds
Item 6. Exhibits
SIGNATURES
EX-12
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 Nine Months Ended
  September 30, September 30,
  2008 2007 2008 2007
 
(Dollars in thousands, except per share data)                
Net sales $1,482,684  $1,261,239  $4,452,903  $3,894,983 
Cost of products sold  1,075,928   1,010,830   3,390,866   3,100,576 
 
Gross Profit
  406,756   250,409   1,062,037   794,407 
                 
Selling, administrative and general expenses  193,658   170,841   568,207   514,773 
Impairment and restructuring charges  3,330   11,840   8,013   32,870 
Loss (gain) on divestitures     152   (8)  468 
 
Operating Income
  209,768   67,576   485,825   246,296 
                 
Interest expense  (11,124)  (10,697)  (33,765)  (30,422)
Interest income  1,494   2,380   4,407   5,536 
Other (expense) income, net  (1,241)  (2,950)  11,662   (7,398)
 
Income from Continuing Operations before Income Taxes
  198,897   56,309   468,129   214,012 
Provision for income taxes  68,484   15,066   164,308   42,914 
 
Income from Continuing Operations
  130,413   41,243   303,821   171,098 
Income from discontinued operations, net of income taxes           665 
 
Net Income
 $130,413  $41,243  $303,821  $171,763 
 
                 
Earnings Per Share:
                
Basic earnings per share                
Continuing operations $1.36  $0.43  $3.18  $1.81 
Discontinued operations           0.01 
 
Net income per share
 $1.36  $0.43  $3.18  $1.82 
 
                 
Diluted earnings per share                
Continuing operations $1.35  $0.43  $3.15  $1.79 
Discontinued operations           0.01 
 
Net income per share
 $1.35  $0.43  $3.15  $1.80 
 
                 
Dividends per share $0.18  $0.17  $0.52  $0.49 
 
         
  Three Months Ended
  March 31,
  2009 2008
 
(Dollars in thousands, except per share data)    
Net sales $960,378  $1,434,670 
Cost of products sold  808,252   1,123,133 
 
Gross Profit
  152,126   311,537 
         
Selling, administrative and general expenses  138,996   177,946 
Impairment and restructuring charges  14,744   2,876 
Gain on divestitures     (8)
 
Operating Income (Loss)
  (1,614)  130,723 
         
Interest expense  (8,474)  (10,998)
Interest income  390   1,398 
Other income (expense), net  7,468   15,467 
 
Income (Loss) before Income Taxes
  (2,230)  136,590 
Provision for income taxes  2,848   51,240 
 
Net Income (Loss)
  (5,078)  85,350 
Less: Net income (loss) attributable to noncontrolling interest  (5,948)  885 
 
Net Income Attributable to The Timken Company
 $870  $84,465 
 
         
Net Income per Common Share Attributable to The Timken Company Common Shareholders
        
         
Basic earnings per share $0.01  $0.88 
 
         
Diluted earnings per share $0.01  $0.88 
 
         
Dividends per share
 $0.18  $0.17 
 
See accompanying Notes to Consolidated Financial Statements.

2


Consolidated Balance Sheet
                
 (Unaudited)   (Unaudited)  
 September 30, December 31, March 31, December 31,
 2008 2007 2009 2008
(Dollars in thousands)     
ASSETS
  
Current Assets
  
Cash and cash equivalents $94,709 $30,144  $112,012 $116,306 
Accounts receivable, less allowances: 2008 - $71,381; 2007 - $42,351 814,702 748,483 
Accounts receivable, less allowances: 2009 - $61,530; 2008 - $56,459 538,804 609,397 
Inventories, net 1,297,928 1,087,712  1,060,399 1,145,695 
Deferred income taxes 66,451 69,137  83,609 83,438 
Deferred charges and prepaid expenses 16,316 14,204  12,359 11,066 
Other current assets 87,226 95,571  63,950 67,563 
Total Current Assets
 2,377,332 2,045,251  1,871,133 2,033,465 
  
Property, Plant and Equipment — Net
 1,733,445 1,722,081  1,698,258 1,743,866 
  
Other Assets
  
Goodwill 273,474 271,784  228,132 230,049 
Other intangible assets 167,736 160,452  169,820 173,704 
Deferred income taxes 80,503 100,872  309,904 314,960 
Other non-current assets 74,629 78,797  40,626 40,006 
Total Other Assets
 596,342 611,905  748,482 758,719 
Total Assets
 $4,707,119 $4,379,237  $4,317,873 $4,536,050 
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
LIABILITIES AND EQUITY
 
Current Liabilities
  
Short-term debt $201,212 $108,370  $100,165 $91,482 
Accounts payable and other liabilities 535,693 528,052  342,475 443,430 
Salaries, wages and benefits 240,650 212,015  156,563 218,695 
Income taxes payable 55,072 17,087  11,280 22,467 
Deferred income taxes 6,167 4,700  5,142 5,131 
Current portion of long-term debt 16,101 34,198  268,696 17,108 
Total Current Liabilities
 1,054,895 904,422  884,321 798,313 
  
Non-Current Liabilities
  
Long-term debt 521,896 580,587  261,413 515,250 
Accrued pension cost 145,619 169,364  842,172 844,045 
Accrued postretirement benefits cost 656,932 662,379  611,439 613,045 
Deferred income taxes 14,912 10,635  9,294 10,388 
Other non-current liabilities 106,163 91,181  98,368 91,971 
Total Non-Current Liabilities
 1,445,522 1,514,146  1,822,686 2,074,699 
  
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) (2008 - 96,891,501 shares; 2007 - 96,143,614 shares) 
Issued (including shares in treasury) (2009 - 96,940,205 shares; 2008 - 96,891,501 shares) 
Stated capital 53,064 53,064  53,064 53,064 
Other paid-in capital 834,595 809,759  835,432 838,315 
Earnings invested in the business 1,633,614 1,379,876  1,563,530 1,580,084 
Accumulated other comprehensive loss  (303,070)  (271,251)  (854,260)  (819,633)
Treasury shares at cost (2008 - 339,866 shares; 2007 - 335,105 shares)  (11,501)  (10,779)
Treasury shares at cost (2009 - 143,566 shares; 2008 - 344,948 shares)  (4,163)  (11,586)
Total Shareholders’ Equity
 2,206,702 1,960,669  1,593,603 1,640,244 
Total Liabilities and Shareholders’ Equity
 $4,707,119 $4,379,237 
Noncontrolling Interest 17,263 22,794 
Total Equity
 1,610,866 1,663,038 
Total Liabilities and Equity
 $4,317,873 $4,536,050 
See accompanying Notes to Consolidated Financial Statements.

3


Consolidated Statement of Cash Flows
(Unaudited)
                
 Nine Months Ended Three Months Ended 
 September 30, March 31, 
 2008 2007 2009 2008 
(Dollars in thousands)      
CASH PROVIDED (USED)
  
Operating Activities
  
Net income $303,821 $171,763 
Net (income) from discontinued operations   (665)
Net income attributable to The Timken Company $870 $84,465 
Net income (loss) attributable to noncontrolling interest  (5,948) 885 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization 178,085 160,595  57,466 57,475 
Impairment charges 1,068 11,620  3,923 362 
(Gain) loss on disposals of property, plant and equipment  (14,086) 2,084 
Gain on divestiture   (666)
Deferred income tax benefit 21,878 16,168 
Stock-based compensation expense 13,171 12,671 
Loss (gain) on disposals of property, plant and equipment 5  (16,935)
Deferred income tax (benefit) provision  (218) 667 
Stock based compensation expense 4,409 4,686 
Pension and other postretirement expense 64,479 90,792  27,584 25,811 
Pension and other postretirement benefit payments  (57,121)  (138,984)  (15,086)  (25,867)
Changes in operating assets and liabilities:  
Accounts receivable  (70,152)  (39,937) 61,071  (71,624)
Inventories  (222,560)  (34,766) 65,434  (68,578)
Accounts payable and accrued expenses 95,338  (38,084)  (152,704)  (2,858)
Other — net  (15,857)  (27,077)  (9,358)  (1,400)
Net Cash Provided by Operating Activities — Continuing Operations 298,064 185,514 
Net Cash Provided by Operating Activities — Discontinued Operations  665 
Net Cash Provided By Operating Activities
 298,064 186,179 
Net Cash Provided (Used) By Operating Activities
 37,448  (12,911)
  
Investing Activities
  
Capital expenditures  (186,298)  (196,374)  (33,562)  (52,417)
Proceeds from disposals of property, plant and equipment 30,079 11,809  2,702 29,628 
Acquisitions  (57,178)  (1,523)  (42)  (55,329)
Divestitures  698 
Other 3,984 1,088  1,332  (453)
Net Cash Used by Investing Activities
  (209,413)  (184,302)  (29,570)  (78,571)
 
Financing Activities
  
Cash dividends paid to shareholders  (50,083)  (46,682)  (17,424)  (16,320)
Net proceeds from common share activity 16,879 36,987  1,648 1,587 
Accounts receivable securitization financing borrowings 225,000  
Accounts receivable securitization financing payments  (130,000)  
Proceeds from issuance of long-term debt 773,301 40,054   450,102 
Payments on long-term debt  (846,987)  (48,423)  (207)  (319,545)
Short-term debt activity — net  (852)  (6,490) 6,241 8,999 
Net Cash Used by Financing Activities
  (12,742)  (24,554)
Net Cash (Used) Provided by Financing Activities
  (9,742) 124,823 
Effect of exchange rate changes on cash  (11,344) 9,372   (2,430) 4,721 
Increase (Decrease) In Cash and Cash Equivalents
 64,565  (13,305)
(Decrease) increase In Cash and Cash Equivalents
  (4,294) 38,062 
Cash and cash equivalents at beginning of year 30,144 101,072  116,306 30,144 
Cash and Cash Equivalents at End of Period
 $94,709 $87,767  $112,012 $68,206 
See accompanying Notes to the Consolidated Financial Statements.

4


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, 2007.2008. Certain amounts in the 20072008 Consolidated Financial Statements have been reclassified to conform to the 20082009 presentation.
Effective January 1, 2008, the Company began operating under new reportable segments. Refer to Note 11 – Segment Information for further discussion.
Note 2 New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB)FASB issued Statement of Financial Accounting Standard (SFAS)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.
In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP FAS 157-2 delaysdelayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The Company’s significant nonfinancial assets and liabilities that could be impacted by this deferral include assets and liabilities initially measured at fair value in a business combination and goodwill tested annually for impairment.  
The implementation of SFAS No. 157 for financial assets and financial liabilities, effectiveOn January 1, 2008, did not have a material impact on2009, the Company’s results of operations and financial condition. The adoptionCompany implemented the previously delayed provisions of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities isrecorded at fair value, as required. The implementation of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities did not expected to have a material impact on the Company’s results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)).
SFAS No. 141(R) provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests and goodwill acquired in a business combination. SFAS No. 141(R) also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS No. 141(R) is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. The adoptionimplementation of SFAS No. 141(R) is, effective January 1, 2009, did not expected to have a material impact on the Company’s results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.Statements - an amendment of ARB No. 51.” SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The adoptionimplementation of SFAS No. 160, iseffective January 1, 2009, did not expected to have a material impact on the Company’s results of operations and financial condition.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 requires entities to provide greater transparency through additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Upon adoption,The implementation of SFAS No. 161, effective January 1, 2009, expanded the Company will include additional disclosures of itson derivative instruments and related hedged items and did not have a material impact on the Company’s results of operations and financial condition. See Note 16 — Derivative Instruments and Hedging Activities for the expanded disclosures.
In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP No. EITF 03-6-1 clarifies that unvested share-based payment awards that contain rights to comply with this standard.receive nonforfeitable dividends are participating securities. FSP No. EITF 03-6-1 provides guidance on how to allocate earnings to participating securities and compute earnings per share using the two-class method. FSP No. EITF 03-6-1 is effective for fiscal years beginning after December 31, 2008, and interim periods within those fiscal years. FSP No. EITF 03-6-1 did not have a material impact on the Company’s disclosure of earnings per share. See Note 10 — Earnings Per Share for the computation of earnings per share using the two-class method.

5


Note 2 — New Accounting Pronouncements (continued)
In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP FAS 132(R)-1 requires the disclosure of additional information about investment allocation, fair values of major categories of assets, development of fair value measurements and concentrations of risk. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The adoption of FSP FAS 132(R)-1 is not expected to have a material impact on the Company’s results of operations and financial condition.
Note 3 — Inventories
                
 September 30, December 31, March 31, December 31,
 2008 2007 2009 2008
Inventories:  
Manufacturing supplies $86,985 $81,716  $83,308 $89,070 
Work in process and raw materials 590,980 484,580  419,115 474,906 
Finished products 619,963 521,416  557,976 581,719 
Inventories $1,297,928 $1,087,712 
Inventories — net $1,060,399 $1,145,695 
An actual valuation of the inventory under the last-in, first-out (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 forcesfactors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation. The LIFO reserve at September 30, 2008March 31, 2009 and December 31, 20072008 was $270,984$295,712 and $228,707,$307,544, respectively.
The Company’s Steel segment recognized income of $17,939 for LIFO during the third quarter of 2008, compared to a charge of $9,325 for LIFO during the third quarter of 2007. The LIFO income recorded during the third quarter of 2008 is a result of expectations of lower steel scrap costs by the end of 2008. Prior to the third quarter of 2008, the Steel segment had recorded a charge of $45,239 for LIFO during the first six months of 2008 due to escalating steel scrap costs at that time. The Company’s Steel segment recognized a chargedecrease in its LIFO reserve of $27,300 for LIFO$12,383 during the first nine monthsquarter of 2008, compared2009 as a result of expected lower year-end inventory quantities and material costs, especially scrap steel costs. The decrease in the Company’s Steel segment LIFO reserve compares to $12,725an increase in the LIFO reserve of $16,600 during the first nine monthsquarter of 2007. The Company recognized a charge of $42,277 for LIFO during the first nine months of 2008, compared to a LIFO charge of $21,280 for the first nine months of 2007.
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 LIFO method. This change affected 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, as determined on a LIFO 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 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 determined that retrospective application to a period prior to January 1, 2007 was 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 nine months of 2007.2008.
Note 4 Property, Plant and Equipment
The components of property, plant and equipment are as follows:
                
 September 30, December 31, March 31, December 31,
 2008 2007 2009 2008
Property, Plant and Equipment:  
Land and buildings $689,795 $668,005  $703,211 $705,701 
Machinery and equipment 3,336,133 3,264,741  3,306,772 3,323,695 
Subtotal 4,025,928 3,932,746  4,009,983 4,029,396 
Less allowances for depreciation  (2,292,483)  (2,210,665)  (2,311,725)  (2,285,530)
Property, Plant and Equipment — Net $1,733,445 $1,722,081 
Property, Plant and Equipment — net $1,698,258 $1,743,866 
At September 30, 2008March 31, 2009 and December 31, 2007,2008, machinery and equipment included approximately $129,358$127,900 and $114,500,$128,800, respectively, of capitalized software. Depreciation expense was $53,947 and $53,994 for the three months ended September 30,March 31, 2009 and 2008, and 2007 was $57,367 and $55,336, respectively. Depreciation expense on capitalized software was approximately $5,100 and $4,400 for the ninethree months ended September 30,March 31, 2009 and 2008, and 2007 was $167,348 and $152,115, respectively. Assets held for sale at September 30, 2008March 31, 2009 and December 31, 20072008 were $7,020$4,392 and $12,340,$7,020, respectively. Assets held for sale at March 31, 2009 relate to land and buildings in Torrington, Connecticut and Clinton, South Carolina, and are classified as otherOther current assets on the Consolidated Balance Sheet.
On February 15, 2008, the Company completed the sale of its former seamless steel tube manufacturing facility located in Desford, England for approximately $28,400. The Company recognized a pretax gain of approximately $20,400$20,200 during the first quarter of 2008 and recorded the gain in otherOther income (expense), net in the Company’s Consolidated Statement of Income. This facility was classified as assets held for sale at December 31, 2007.

6


Note 5 Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the ninethree months ended September 30, 2008March 31, 2009 are as follows:
                                
 Beginning Ending Beginning Ending
 Balance Acquisitions Other Balance Balance Acquisitions Other Balance
Segment:  
Mobile Industries $63,251 $ $(6,763) $56,488 
Process Industries 55,651   (1,290) 54,361  $52,856 $          $(1,547) $51,309 
Aerospace and Defense 152,882  1,103 153,985  167,558 36  (412) 167,182 
Steel  8,640  8,640  9,635 6  9,641 
Total $271,784 $8,640 $(6,950) $273,474  $230,049 $42 $(1,959) $228,132 
Acquisitions represent the preliminary opening balance sheet allocation adjustments for the acquisition of the assets of Boring Specialties, Inc.acquisitions completed in February 2008. The purchase price allocation is preliminary for this acquisition because the Company is waiting for final valuation reports, and may be subsequently adjusted. Other primarily includes foreign currency translation adjustments.
The following table displays intangible assets as of September 30, 2008March 31, 2009 and December 31, 2007:2008:
             
  As of September 30, 2008
  Gross     Net
  Carrying Accumulated Carrying
  Amount Amortization Amount
 
Intangible assets subject to amortization:            
             
Mobile Industries $51,420  $25,700  $25,720 
Process Industries  56,009   25,934   30,075 
Aerospace and Defense  87,119   7,630   79,489 
Steel  16,613   924   15,689 
 
  $211,161  $60,188  $150,973 
 
             
Intangible assets not subject to amortization:            
             
Goodwill $273,474  $  $273,474 
Other  16,763      16,763 
 
  $290,237  $  $290,237 
 
Total intangible assets $501,398  $60,188  $441,210 
 
             
  As of December 31, 2007
  Gross     Net
  Carrying Accumulated Carrying
  Amount Amortization Amount
 
Intangible assets subject to amortization:            
             
Mobile Industries $51,122  $22,277  $28,845 
Process Industries  55,826   23,307   32,519 
Aerospace and Defense  87,029   3,807   83,222 
Steel  944   438   506 
 
  $194,921  $49,829  $145,092 
 
             
Intangible assets not subject to amortization:            
             
Goodwill $271,784  $  $271,784 
Other  15,360      15,360 
 
  $287,144  $  $287,144 
 
Total intangible assets $482,065  $49,829  $432,236 
 

7


Note 5 – Goodwill and Other Intangible Assets (continued)
                         
  As of March 31, 2009 As of December 31, 2008
  Gross     Net Gross     Net
  Carrying Accumulated Carrying Carrying Accumulated Carrying
  Amount Amortization Amount Amount Amortization Amount
 
Intangible assets subject to amortization:                        
                         
Customer relationships $101,099  $17,813  $83,286  $101,098  $16,470  $84,628 
Engineering drawings  5,001   5,001      5,001   5,001    
Know-how  2,075   774   1,301   2,122   784   1,338 
Land-use rights  7,501   2,654   4,847   7,508   2,593   4,915 
Patents  22,729   14,741   7,988   22,729   14,101   8,628 
Technology use  45,677   7,838   37,839   46,120   7,298   38,822 
Trademarks  6,486   4,571   1,915   6,632   4,670   1,962 
PMA licenses  8,792   1,867   6,925   8,792   1,753   7,039 
Non-compete agreements  2,710   670   2,040   2,710   493   2,217 
Unpatented technology  18,425   11,450   6,975   18,425   11,000   7,425 
 
  $220,495  $67,379  $153,116  $221,137  $64,163  $156,974 
 
Intangible assets not subject to amortization:                        
Goodwill $228,132  $  $228,132  $230,049  $  $230,049 
Tradename  1,400      1,400   1,400      1,400 
Land-use rights  123      123   146      146 
Industrial license agreements  961      961   964      964 
FAA air agency certificates  14,220      14,220   14,220      14,220 
 
  $244,836  $  $244,836  $246,779  $  $246,779 
 
Total intangible assets $465,331  $67,379  $397,952  $467,916  $64,163  $403,753 
 
Amortization expense for intangible assets was $3,638$3,470 for the three months ended September 30, 2008 and $10,737 for the nine months ended September 30, 2008.March 31, 2009. Amortization expense for intangible assets is estimated to be approximately $14,400$14,900 for 2008; $14,400 in 2009; $14,200$14,600 in 2010; $13,500$13,600 in 20112011; $13,000 in 2012 and $12,700$9,900 in 2012.2013.

7


Note 6 Equity Investments
The Company’s investments in less than majority-owned companies in which it has the ability to exercise significant influence are accounted for using the equity method except when they qualify as variable interest entities and are consolidated in accordance with FASB Interpretation No. 46 (revised December 2003) (FIN 46(R)), “Consolidation of Variable Interest Entities an interpretation of Accounting Research Bulletin No. 51.”
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 nine monthsquarters of 20082009 and 20072008 relating to the Company’s equity investments.
Investments accounted for under the equity method were $14,873$13,053 and $14,426$13,634 at September 30, 2008March 31, 2009 and December 31, 2007,2008, respectively, and were reported in otherOther non-current assets on the Consolidated Balance Sheet.
The Company’s Mobile Industries segment has an investment in a joint venture calledwith Advanced Green Components, LLC (AGC). AGC is engaged in the business of converting steel to machined rings for tapered bearings and other related products. 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(R). 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. At March 31, 2009 net assets of AGC were $2,721, primarily consisting of the following: inventory of $5,915; property, plant and equipment of $21,692; short-term and long-term debt of $18,120; and other non-current liabilities of $7,365. 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.
The Company has no other variable interest entities, other than AGC, for which it is a primary beneficiary.
Note 7 Financing Arrangements
Short-term debt at September 30, 2008March 31, 2009 and December 31, 20072008 was as follows:
         
  September 30, December 31,
  2008 2007
 
Variable-rate Accounts Receivable Securitization financing agreement with an interest rate of 3.20% $95,000  $ 
Variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 3.14% to 15.50%  106,212   108,370 
 
Short-term debt $201,212  $108,370 
 
         
  March 31, December 31,
  2009 2008
 
Variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 1.94% to 11.75% $100,165  $91,482 
 
Short-term debt $100,165  $91,482 
 
The lines of credit for certain of the Company’s foreign subsidiaries provide for borrowings up to $423,699. At March 31, 2009, the Company had borrowings outstanding of $100,165, which reduced the availability under these facilities to $323,534.
The Company has a $200,000 364-day$175,000 Accounts Receivable Securitization Financing Agreement (Asset Securitization).Securitization Agreement), renewable every 364 days. On December 28, 2007,19, 2008, the Company renewed its Asset Securitization.Securitization Agreement. Under the terms of the Asset Securitization Agreement, the Company sells, on an ongoing basis, certain domestic trade receivables to Timken Receivables Corporation, a wholly-owned consolidated subsidiary that in turn uses the trade receivables to secure borrowings, which are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the agreement are limited to certain borrowing base calculations. Any amounts outstanding under this Asset Securitization Agreement would be reported on the Company’s Consolidated Balance Sheet in Short-term debt. As of September 30, 2008,March 31, 2009, there were no outstanding borrowings under the Asset Securitization Agreement. Although the Company had no outstanding borrowings of $95,000 under the Asset Securitization.Securitization Agreement as of March 31, 2009, certain borrowing base limitations reduced the availability under the Asset Securitization Agreement to $111,563. The yield on the commercial paper, which is the commercial paper rate plus program fees, is considered a financing cost and is included in interestInterest expense in the Consolidated Statement of Income. The Company expects to refinance this facility by the end of 2008.
The lines of credit for certain foreign subsidiaries of the Company provide for borrowings up to $430,270. At September 30, 2008, the Company had borrowings outstanding of $106,212, which reduced the availability under these facilities to $324,058.

8


Note 7 Financing Arrangements (continued)
Long-term debt at September 30, 2008March 31, 2009 and December 31, 20072008 was as follows:
                
 September 30, December 31, March 31, December 31,
 2008 2007 2009 2008
Fixed-rate Medium-Term Notes, Series A, due at various dates through May 2028, with interest rates ranging from 6.74% to 7.76% $175,000 $191,933  $175,000 $175,000 
Variable-rate Senior Credit Facility  55,000 
Variable-rate State of Ohio Air Quality and Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (2.21% at September 30, 2008) 21,700 21,700 
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (2.21% at September 30, 2008) 17,000 17,000 
Variable-rate Unsecured Canadian Note, maturing on December 22, 2010 4.35% at September 30, 2008) 54,365 57,916 
Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.64% at March 31, 2009) 12,200 12,200 
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (1.19% at March 31, 2009) 9,500 9,500 
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (0.82% at March 31, 2009) 17,000 17,000 
Variable-rate Unsecured Canadian Note, maturing on December 22, 2010 (1.47% at March 31, 2009) 45,841 47,104 
Fixed-rate Unsecured Notes, maturing on February 15, 2010 with an interest rate of 5.75% 250,539 250,307  251,651 252,357 
Variable-rate credit facility with US Bank for Advanced Green Components, LLC, maturing on July 17, 2009 (3.59% at September 30, 2008) 12,240 12,240 
Variable-rate credit facility with US Bank for Advanced Green Components, LLC, maturing on July 17, 2009 (1.40% at March 31, 2009) 12,240 12,240 
Other 7,153 8,689  6,677 6,957 
 537,997 614,785  530,109 532,358 
Less current maturities 16,101 34,198  268,696 17,108 
Long-term debt $521,896 $580,587  $261,413 $515,250 
The Company has a $500,000 Amended and Restated Credit Agreement (Senior Credit Facility) that matures on June 30, 2010. At September 30, 2008,March 31, 2009, the Company had no outstanding borrowings andbut had issued letters of credit outstanding under this facility totaling $41,540,$40,963, which reduced the availability under the Senior Credit Facility to $458,460.$459,037. Under the Senior Credit Facility, the Company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At September 30, 2008,March 31, 2009, 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 Dollardollar 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.
In January 2008, the Company repaid $17,000 of medium-term notes upon maturity.
The Company is the guarantor of $6,120 of AGC’s $12,240 credit facility. Refer to Note 6 Equity Investments for additional discussion. In July 2008, AGC renewed its $12,240 credit facility with US Bank that was set to expire July 18, 2008 for another 364 days. The Company continues to guarantee half of this obligation.
Note 8 — Product Warranty
The Company provides limited warranties on certain of its products. The Company accrues liabilities for warranty based upon specific claims and a review of historical warranty claim experience in accordance with SFAS No. 5, “Accounting for Contingencies.” Should the Company become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. Adjustments are made quarterly to the accruals as claim data and historical experience change. The following is a rollforward of the warranty accruals for the ninethree months ended September 30, 2008March 31, 2009 and the twelve months ended December 31, 2007:2008:
                
 September 30, December 31, March 31, December 31,
 2008 2007 2009 2008
Beginning balance, January 1 $12,571 $20,023  $13,515 $12,571 
Expense 2,089 3,068  256 7,525 
Payments  (6,571)  (10,520)  (2,784)  (6,581)
Ending balance $8,089 $12,571  $10,987 $13,515 
The product warranty accrual at September 30, 2008March 31, 2009 and December 31, 20072008 was included in accountsAccounts payable and other liabilities on 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    
          Other  Invested  Other    
      Stated  Paid-In  in the  Comprehensive  Treasury 
  Total  Capital  Capital  Business  Income  Stock 
 
Balance at December 31, 2007 $1,960,669  $53,064  $809,759  $1,379,876  $(271,251) $(10,779)
 
                         
Net Income  303,821           303,821         
                         
Foreign currency translation adjustment  (65,689)              (65,689)    
Pension and postretirement liability adjustment  30,519               30,519     
Unrealized loss on marketable securities  226               226     
Change in fair value of derivative financial instruments, net of reclassifications  3,125               3,125     
                        
Total comprehensive income  272,002                     
                         
Dividends — $0.52 per share  (50,083)          (50,083)        
Tax benefit from stock compensation  4,436       4,436             
(Tender) issuance of (4,761) shares from treasury and 747,887 shares from authorized  19,678       20,400           (722)
 
Balance at September 30, 2008
 $2,206,702  $53,064  $834,595  $1,633,614  $(303,070) $(11,501)
 
                             
      The Timken Company Shareholders  
              Earnings Accumulated    
          Other Invested Other    
      Stated Paid-In in the Comprehensive Treasury Noncontrolling
  Total Capital Capital Business Income Stock Interest
 
Balance at December 31, 2008 $1,663,038  $53,064  $838,315  $1,580,084  $(819,633) $(11,586) $22,794 
 
                             
Net Income (loss)  (5,078)          870           (5,948)
                             
Foreign currency translation adjustment  (44,544)              (44,544)        
Pension and postretirement liability adjustment  10,217               10,217         
Unrealized gain on marketable securities  86               69       17 
Change in fair value of derivative financial instruments, net of reclassifications  (369)              (369)        
                             
Total comprehensive income (loss)  (39,688)                        
Capital investment in Timken XEMC (Hunan) Bearings Co.  400                       400 
Dividends — $0.18 per share  (17,424)          (17,424)            
Issuance of 201,382 shares from treasury and 48,705 shares from authorized  4,540       (2,883)          7,423     
 
Balance at March 31, 2009
 $1,610,866  $53,064  $835,432  $1,563,530  $(854,260) $(4,163) $17,263 
 
The total comprehensive income for the three months ended September 30,March 31, 2008 and 2007 was $41,558 and $82,946, respectively. Total comprehensive income for the nine months ended September 30, 2007 was $274,865.$121,582.
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 September 30, 2008March 31, 2009 and 2007:2008:
                 
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2008 2007 2008 2007
 
Numerator:                
Income from continuing operations for basic earnings per share and diluted earnings per share $130,413  $41,243  $303,821  $171,098 
Denominator:                
Weighted-average number of shares outstanding — basic  95,878,978   95,029,369   95,574,420   94,494,531 
Effect of dilutive securities:                
Stock options and awards – based on the treasury stock method  589,643   1,066,491   740,394   988,889 
 
Weighted-average number of shares outstanding, assuming dilution of stock options and awards  96,468,621   96,095,860   96,314,814   95,483,420 
 
Basic earnings per share from continuing operations $1.36  $0.43  $3.18  $1.81 
 
Diluted earnings per share from continuing operations $1.35  $0.43  $3.15  $1.79 
 
         
  Three Months Ended
  March 31,
  2009 2008
 
Earnings per share — Basic:        
Numerator:        
Net income attributable to the Timken Company $870  $84,465 
Less: distributed and undistributed earnings allocated to nonvested stock  (6)  (606)
 
         
Earnings available to common shareholders — basic  864   83,859 
Denominator:        
Weighted-average number of shares outstanding — basic  96,028,860   95,254,264 
 
Basic earnings per share $0.01  $0.88 
 
         
Earnings per share — Diluted:        
Numerator:        
Net income attributable to the Timken Company $870  $84,465 
Less: distributed and undistributed earnings allocated to nonvested stock  (6)  (606)
 
         
Earnings available to common shareholders — diluted  864   83,859 
Denominator:        
Weighted-average number of shares outstanding — basic  96,028,860   95,254,264 
Effect of dilutive options     393,754 
 
Weighted-average number of shares outstanding, assuming dilution of stock options  96,028,860   95,648,018 
 
Diluted earnings per share $0.01  $0.88 
 
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 40,3504,938,146 and zero1,569,019 during the three months ended September 30,first quarter of 2009 and 2008, and 2007, respectively. The antidilutive stock options outstanding were 536,456 and 571,046 during the nine months ended September 30, 2008 and 2007, respectively.

10


Note 11 Segment Information
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 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 gains and losses on the dissolution of subsidiaries).
Effective January 1, 2008, the Company began operating under new reportable segments. The Company’s four reportable segments are: Mobile Industries, Process Industries, Aerospace and Defense and Steel. Segment results for 2007 have been reclassified to conform to the 2008 presentation of segments.
                        
 Three months ended Nine months ended Three months ended
 September 30, September 30, March 31,
 2008 2007 2008 2007 2009 2008
Net sales to external customers:
  
Mobile Industries $538,967 $586,736 $1,802,457 $1,828,688  $372,864 $635,252 
Process Industries 345,482 260,062 985,198 774,676  242,284 312,212 
Aerospace and Defense 109,987 70,429 317,795 218,513  112,665 102,132 
Steel 488,248 344,012 1,347,453 1,073,106  232,565 385,074 
 $1,482,684 $1,261,239 $4,452,903 $3,894,983  $960,378 $1,434,670 
 
Intersegment sales:
  
Process Industries $972 $600 $2,251 $1,451  $922 $410 
Steel 48,291 37,100 133,002 109,067  16,003 39,914 
 $49,263 $37,700 $135,253 $110,518 
 $16,925 $40,324 
 
Segment EBIT, as adjusted:
  
Mobile Industries $4,466 $10,401 $45,560 $55,905  $(24,879) $30,566 
Process Industries 81,678 33,414 205,056 98,837  47,017 59,037 
Aerospace and Defense 12,489 425 31,792 11,117  18,553 7,162 
Steel 133,802 52,278 267,499 183,692   (7,262) 53,379 
Total EBIT, as adjusted, for reportable segments $232,435 $96,518 $549,907 $349,551  $33,429 $150,144 
Unallocated corporate expense  (19,039)  (14,370)  (54,767)  (48,124)  (12,330)  (16,425)
Impairment and restructuring  (3,330)  (11,840)  (8,013)  (32,870)  (14,744)  (2,876)
(Loss) gain on divestitures   (152) 8  (468)  8 
Rationalization and integration charges 35  (6,234)  (4,266)  (30,776)  (1,465)  (2,182)
Gain on sale of non-strategic assets, net of dissolution of subsidiary  (558) 983 19,987 3,355  1,222 20,355 
Interest expense  (11,124)  (10,697)  (33,765)  (30,422)  (8,474)  (10,997)
Interest income 1,494 2,380 4,407 5,536  390 1,397 
Intersegment eliminations  (1,016)  (279)  (5,369)  (1,770)  (258)  (2,834)
Income from Continuing Operations before Income Taxes $198,897 $56,309 $468,129 $214,012 
Income (Loss) before Income Taxes $(2,230) $136,590 
Intersegment sales represent sales between the segments. These sales are eliminated uponin consolidation.

11


Note 12 Impairment and Restructuring Charges
Impairment and restructuring charges by segment are comprised of the following:
For the three months ended September 30,March 31, 2009:
                         
  Mobile Process Aerospace and      
  Industries Industries Defense Steel Corporate Total
 
Impairment charges $897  $3,026  $    $  $    $3,923 
Severance expense and related benefit costs  7,594   959   54   446   1,200   10,253 
Exit costs  4   563      1      568 
 
Total $8,495  $4,548  $  54  $447  $  1,200  $14,744 
 
For the three months ended March 31, 2008:
                                        
 Mobile Process     Mobile Process Aerospace      
 Industries Industries Steel Total Industries Industries and Defense Steel Corporate Total
Impairment charges $706 $ $ $706  $310 $52 $   $ $   $362 
Severance expense and related benefit costs 589  (148)  441  2,094     2,094 
Exit costs 1,968 190 25 2,183  7 88  325  420 
Total $3,263 $42 $25 $3,330  $2,411 $140 $   $325 $   $2,876 
For the nine months ended September 30, 2008:
                
 Mobile Process    
 Industries Industries Steel Total
Impairment charges $1,016 $52 $ $1,068 
Severance expense and related benefit costs 3,153  (148)  3,005 
Exit costs 1,930 1,621 389 3,940 
Total $6,099 $1,525 $389 $8,013 
For the three months ended September 30, 2007:
                
 Mobile Process    
 Industries Industries Steel Total
Impairment charges $6,900 $1,367 $ $8,267 
Severance expense and related benefit costs 1,190 396 1,310 2,896 
Exit costs 63 368 246 677 
Total $8,153 $2,131 $1,556 $11,840 
For the nine months ended September 30, 2007:
                
 Mobile Process    
 Industries Industries Steel Total
Impairment charges $6,900 $4,720 $ $11,620 
Severance expense and related benefit costs 10,845 241 6,926 18,012 
Exit costs 2,192 404 642 3,238 
Total $19,937 $5,365 $7,568 $32,870 
The following discussion explains the major impairment and restructuring charges recorded for the periods presented; however, it is not intended to reflect a comprehensive discussion of all amounts in the tables above.
Selling and Administrative Reductions
In March 2009, the Company announced the realignment of its organization to improve efficiency and reduce costs. The Company had targeted pretax savings of approximately $30,000 to $40,000 in annual selling and administrative costs. In light of the Company’s revised forecast indicating significantly reduced sales and earnings for the year, the Company is now expanding the target to approximately $80,000. The implementation of these savings began in the first quarter of 2009 and is expected to be significantly completed by the end of the fourth quarter of 2009, with full-year savings expected to be achieved in 2010. As the Company streamlines its operating structure, it expects to cut its salaried workforce by up to 400 positions in 2009, incurring severance costs of approximately $10,000 to $20,000. During the first quarter of 2009, the Company recorded $2,202 of severance and benefit costs related to this initiative to eliminate approximately 26 associates. Of the $2,202 charge, $1,200 related to Corporate, $420 related to the Mobile Industries segment, $409 related to the Steel segment, $166 related to the Process Industries segment and $7 related to the Aerospace and Defense segment.
Manufacturing Workforce Reductions
During the first quarter of 2009, the Company recorded $7,371 in severance and related benefit costs, including a curtailment of pension benefits of $1,850, to eliminate approximately 900 associates to properly align its business as a result of the current downturn in the economy and expected market demand. Of the $7,371 charge, $6,565 related to the Mobile Industries segment, $761 related to the Process Industries segment and $45 related to the Aerospace and Defense segment.
Bearings and Power Transmission Reorganization
In August 2007, the Company announced the realignment of its management structure. During the first quarter of 2008, the Company began to operate under two major business groups: the Steel Group and the Bearings and Power Transmission Group. The Bearings and Power Transmission Group includes three reportable segments: Mobile Industries, Process Industries and Aerospace and Defense. The organizational changes have streamlined operations and eliminated redundancies. The Company expects to realizerealized pretax savings of approximately $10,000 to $20,000 annually by the end of$18,000 in 2008 as a result of these changes. During the first nine monthsquarter of 2008, the Company recorded $1,948$1,092 of severance and related benefit costs related to this initiative. The majorityseverance charge for the first quarter of the severance charge2008 related to the Mobile Industries segment. During the third quarter of 2007, the Company recorded $792 of severance and related benefits costs related to this initiative. Half of the severance charge related to the Mobile Industries segment and the other half of the severance charge related to the Process Industries segment.

12


Note 12 Impairment and Restructuring Charges (continued)
Mobile Industries
In 2005, the Company announced plans to restructure the former automotive segment that is now part of its Mobile Industries segment 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 its Vierzon, France bearing manufacturing facility in response to changes in customer demand for its products. During 2006, the Company completed the closure of its engineering facilities in Torrington, Connecticut and Norcross, Georgia. During 2007, the Company completed the closure of its manufacturing facility in Clinton, South Carolina and the rationalization of its Vierzon, France bearing manufacturing facility.
In September 2006, the Company announced further planned reductions in its Mobile Industries segment workforce. In March 2007, the Company announced the planned closure of its manufacturing facility in Sao Paulo, Brazil. However, theThe closure of thethis manufacturing facility in Sao Paulo, Brazil has beenwas subsequently delayed temporarily to serve higher customer demand.
These plans are However, with the current downturn in the economy, the Company believes it will close this facility before the end of 2010. This closure is targeted to collectively deliver annual pretax savings of approximately $75,000,$5,000, with expected net workforce reductions of approximately 1,300 to 1,400 positions and pretax costs of approximately $115,000$25,000 to $125,000,$30,000, which includeincludes restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses. Due to the delay in the timing of the closure of thethis manufacturing facility, in Sao Paulo, Brazil, the Company does not expectexpects to fully realize thesethe $5,000 of annual pretax savings untilbefore the end of 2009.2010, once this facility closes. Mobile Industries has incurred cumulative pretax costs of approximately $100,769$18,536 as of September 30, 2008 for these plans.
March 31, 2009 related to this closure. During the thirdfirst quarter of 2009 and first nine months of 2008, the Company recorded severance$557 and related benefits of $611 and $961, respectively, associated with the Mobile Industries’ restructuring and workforce reduction plans. In addition, the Company recorded an impairment charge of $706 and exit costs of $1,044 during the third quarter of 2008 associated with these plans. The exit costs recorded in the third quarter of 2008 were primarily the result of environmental charges related to the planned closure of the manufacturing facility in Sao Paulo, Brazil and the Company’s former plant in Clinton, South Carolina. During the third quarter and first nine months of 2007, the Company recorded $794 and $10,449,$1,002, respectively, of severance and related benefit costs and $63 and $2,192, respectively, of exit costs associated with the Mobile Industries’ restructuring and workforce reduction plans. The exit costs recorded in the first nine months of 2007 were primarily the result of environmental charges related to the planned closure of the manufacturing facility inCompany’s Sao Paulo, Brazil.Brazil manufacturing facility.
In addition to the above charges, the Company recorded $924impairment charges of environmental exit costs$897 during the thirdfirst quarter of 2009 related to impairment of fixed assets at two of its facilities in France as a result of the carrying value of these assets exceeding expected future cash flows. During the first quarter of 2008, related to a former plant in Columbus, Ohio. Thethe Company also recorded an impairment charge of $310 related to one of Mobile Industries’ foreign entities during the first nine months of 2008. During the third quarter of 2007, the Company recorded an impairment charge of $5,300 relatedfixed assets at its facility in Spain as a result of the carrying value of these assets exceeding expected future cash flows due to the then-anticipated sale of this same foreign entity.facility.
Process Industries
In May 2004, the Company announced plans to rationalize itsthe Company’s three bearing plants in Canton, Ohio within the Process Industries segment. 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 $20,000 through streamlining operations and workforce reductions, with pretax costs of approximately $45,000 to $50,000, by the end of 2009.
The Company recorded impairment charges of $3,026 and exit costs of $1,621$563 during the first nine monthsquarter of 20082009 related to the Process Industries’ rationalization plans. The exit costs recorded duringDuring the first nine monthsquarter of 2008, were primarily the result of environmental charges. During the third quarter and first nine months of 2007, the Company recorded impairment charges of $1,367$52 and $4,569, respectively,exit costs of $88 as a result of the Process Industries’ rationalization plans. In addition, exit costs of $404 were recorded during the first nine months of 2007 as a result of these rationalization plans. Including rationalization costs recorded in cost of products sold and selling, administrative and general expenses, the Process Industries segment has incurred cumulative pretax costs of approximately $33,444$41,158 as of September 30, 2008 related toMarch 31, 2009 for these rationalization plans. As of March 31, 2009, the Process Industries segment has realized approximately $15,000 in annual pretax savings.
Steel
In April 2007, the Company completed the closure of its seamless steel tube manufacturing facility located in Desford, England. The Company recorded $389$325 of exit costs during the first nine monthsquarter of 2008 related to this action. The Company recorded $1,129 and $6,685 of severance and related benefit costs, and $246 and $642 of exit costs during the third quarter and first nine months of 2007, respectively, related to this action.

13


Note 12 – Impairment and Restructuring Charges (continued)
The following is a rollforward of the consolidated restructuring accrual for the ninethree months ended September 30, 2008March 31, 2009 and the twelve months ended December 31, 2007:2008:
                
 September 30, December 31, March 31, December 31,
 2008 2007 2009 2008
Beginning balance, January 1 $24,455 $31,985  $18,946 $24,455 
Expense 6,945 28,640  8,971 12,597 
Payments  (13,103)  (36,170)  (6,716)  (18,106)
Ending balance $18,297 $24,455  $21,201 $18,946 
The restructuring accrual at September 30, 2008March 31, 2009 and December 31, 20072008 is included in accountsAccounts payable and other liabilities on the Consolidated Balance Sheet. The restructuring accrual at September 30, 2008March 31, 2009 excludes costs related to the curtailment of pension benefit plans of $1,850. The accrual at March 31, 2009 includes $9,648$14,394 of severance and related benefits, with the remainder of the balance primarily representing environmental exit costs. The majorityApproximately half of the $9,648$14,394 accrual relatedrelating to severance and related benefits is expected to be paid by the end of 2009, pendingwith the remainder paid before the end of 2010 once the closure of the manufacturing facility in Sao Paulo, Brazil.Brazil is completed.

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 September 30, 2008March 31, 2009 are based on actuarial calculations prepared during 2007.2008. Consistent with prior years, these calculations will be updated later in the year. These updated calculations may result in a different net periodic benefit cost for 2008.2009. The net periodic benefit cost recorded for the three and nine months ended September 30, 2008March 31, 2009 is the Company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ended December 31, 2008.2009.
                                
 Pension Postretirement Pension Postretirement
 Three Months ended Three Months ended Three months ended Three months ended
 September 30, September 30, March 31, March 31,
 2008 2007 2008 2007 2009 2008 2009 2008
Components of net periodic benefit cost
  
Service cost $9,180 $10,402 $781 $1,215  $8,776 $10,188 $789 $1,153 
Interest cost 40,316 38,919 9,794 10,341  39,902 41,823 10,599 11,087 
Expected return on plan assets  (50,254)  (47,512)     (47,328)  (50,545)   
Amortization of prior service cost 3,143 2,837  (544)  (469) 2,861 3,135  (544)  (469)
Recognized net actuarial loss 7,246 11,872 900 2,762 
Amortization of net actuarial loss 9,443 7,235 1,256 2,229 
Curtailment loss 1,850    
Amortization of transition asset  (23)  (46)     (20)  (25)   
Net periodic benefit cost $9,608 $16,472 $10,931 $13,849  $15,484 $11,811 $12,100 $14,000 
                
 Pension Postretirement
 Nine Months Ended Nine Months Ended
 September 30, September 30,
 2008 2007 2008 2007
Components of net periodic benefit cost
 
Service cost $27,633 $31,098 $2,344 $3,646 
Interest cost 121,661 116,394 30,511 31,023 
Expected return on plan assets  (151,488)  (142,156)   
Amortization of prior service cost 9,443 8,494  (1,633)  (1,408)
Recognized net actuarial loss 21,798 35,545 4,282 8,286 
Amortization of transition asset  (72)  (130)   
Net periodic benefit cost $28,975 $49,245 $35,504 $41,547 

14


Note 14 Income Taxes
                        
 Three Months Ended Nine Months Ended Three Months Ended
 September 30, September 30, March 31,
 2008 2007 2008 2007 2009 2008
Provision for income taxes $68,484 $15,066 $164,308 $42,914  $2,848 $51,240 
Effective tax rate  34.4%  26.8%  35.1%  20.1%  (127.7)%  37.8%
The Company’s provision for income taxes in interim periods is computed in accordance with FIN 18, “Accounting for Income Taxes in Interim Periods — an interpretation of APB Opinion No. 28” by applying its estimatedappropriate annual effective tax rate againstrates to income from continuing operationsor loss 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.
The first quarter of 2009 resulted in $2,848 of net income tax expense, or an effective tax rate for the third quarter of 2008 was lower than the U.S. federal statutory- -127.7%. This tax rate primarily due to the earnings of certain foreign subsidiaries being taxed at a rate less than 35% and the benefit of the U.S. manufacturing deduction. These decreases were partially offsetwas principally driven by the inability to record a tax benefit for losses at certain foreign subsidiaries, U.S. state and local income taxes, a discrete tax adjustment reflecting the filingapplication of the Company’s 2007 U.S. federalFIN 18, as income tax returnexpense on earnings from profitable affiliates exceeded tax benefits that could be recorded on losses from unprofitable affiliates. For the full year of 2009, the Company expects its effective tax rate to be in the third quarterrange of 2008 and the net impact of other items.25% to 30%.
The effective tax rate for the first nine monthsquarter of 20082009 was slightly higher than the U.S. federal statutory tax rate primarily due to the inability to record a tax benefit forincreased losses at certain foreign subsidiaries U.S. state and local income taxes, discretewhere no tax adjustments recorded during the first nine months of 2008 to increase the Company’s accrual for uncertain tax positions and the net impact of other items.benefit could be recorded. These increases were partially offset by the earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, the U.S. Federal research tax credit and other U.S. net tax benefits.
The effective tax rate for the first quarter of 2008 was higher than the U.S. federal statutory tax rate due to losses at certain foreign subsidiaries where no tax benefit could be claimed, U.S. state and local taxes and an unfavorable discrete tax adjustment to increase the Company’s accruals for uncertain tax positions. These increases were offset by tax benefits related to the earnings of certain foreign subsidiaries being taxedtaxes at a rate less than 35% and the benefit of, the U.S. domestic manufacturing deduction.
As of September 30, 2008, the Company has approximately $58,600 of total gross unrecognizeddeduction and other U.S. net tax benefits. During the first nine months of 2008, the Company’s total gross unrecognized tax benefits decreased by $54,500. This decrease was primarily due to the settlement and resulting cash payment related to tax years 2002 through 2005, which were under examination by the Internal Revenue Service (IRS). The tax positions under examination included 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 items.
The following chart reconciles the Company’s total gross unrecognized tax benefits for the nine months ended September 30, 2008.
     
 
 
 
Balance at January 1, 2008 $113,100 
Tax positions related to the current year:    
Additions  3,000 
Tax positions related to prior years:    
Additions  600 
Reductions  (4,800)
Settlements with tax authorities  (53,300)
Lapses in statutes of limitation   
 
Balance at September 30, 2008 $58,600 
 
Included in the $58,600 total gross unrecognized tax benefits amount is approximately $23,100 (including the federal tax benefit on state tax positions), which represents the amount of unrecognized tax benefits that would favorably impact the Company’s effective tax rate in any future periods if such benefits were recognized. As of September 30, 2008, the Company anticipates a decrease in its unrecognized tax positions of approximately $10,000 to $12,000 during the next 12 months. The anticipated decrease is primarily due to the expiration of the statute of limitations for various uncertain tax positions. As of September 30, 2008, the Company has accrued approximately $4,600 of interest and penalties related to uncertain tax positions.
As of September 30, 2008, the Company is subject to examination by the IRS for tax years 2004 to the present. The Company is also subject to tax examination in various U.S. state and local tax jurisdictions for tax years 2002 to the present, as well as various foreign tax jurisdictions, including France, Germany, India, Czech Republic, China and Canada, for tax years 1999 to the present.
The current portion of the Company’s accrual for uncertain tax positions is presented on the Consolidated Balance Sheet within income taxes payable, a current liability, and the non-current portion is recorded as a component of other non-current liabilities.

1514


Note 15 – Acquisitions
On February 21, 2008, the Company purchased the assets of Boring Specialties, Inc. (BSI), a leading provider of a wide range of precision deep-hole oil and gas drilling and extraction products and services, for $56,834, including acquisition costs. The acquisition will extend the Company’s presence in the energy market by adding BSI’s value-added products to the Company’s current range of alloy steel products for oil and gas customers. The acquisition agreement allows for an earnout payment of up to $15,000 to be paid if certain milestones are met over the following five years. BSI is based in Houston, Texas, employs 190 people and had 2006 sales of approximately $48,000. The Company has preliminarily allocated the purchase price to assets of $57,560, including $9,557 of accounts receivable, $9,531 of inventories, $12,251 of property, plant and equipment and $17,460 of amortizable intangible assets, and liabilities of $727. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill in the amount of $8,640. The results of the operations of BSI are included in the Company’s Consolidated Statement of Income for the period subsequent to the effective date of the acquisition. Pro forma results of the operations are not presented because the effect of the acquisition was not significant.
On November 3, 2008, the Company announced the acquisition of the assets of EXTEX Ltd., a leading designer and marketer of high-quality replacement engine parts for the aerospace aftermarket. The acquisition will add most of EXTEX’s nearly 600 Federal Aviation Administration (FAA) parts manufacturer approval (PMA) components to the Company’s existing portfolio of more than 1,400 PMAs. This expanded PMA base further positions the Company to offer comprehensive fleet-support programs, including asset management that maximizes uptime for aircraft operators. EXTEX is based in Gilbert, Arizona and had 2007 sales of approximately $15,400.
Note 16 – Fair Value
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:
   
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.
   
Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
   
Level 3 Unobservable inputs for the asset or liability.
The following table presents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2008 (there were no liabilitiesMarch 31, 2009:
                 
  Total Level 1 Level 2 Level 3
 
Assets:
                
Available-for-sale securities $25,341  $25,341  $  $   
Natural gas forward contracts  233      233    
Foreign currency hedges  4,018      4,018    
Interest rate swaps  1,651      1,651    
 
Total Assets
 $31,243  $25,341  $5,902  $   
 
                 
Liabilities:
                
Foreign currency hedges $6,585  $  $6,585  $   
 
Total Liabilities
 $6,585  $  $6,585  $   
 
The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts. The natural gas forward contracts are marked to market using prevailing forward rates for natural gas. The Company’s interest rate swaps are remeasured each period using observable market interest rates.
The Company does not believe it has significant concentrations of risk associated with the counterparties to its financial instruments.
The following table presents the fair value hierarchy for those nonfinancial assets measured at fair value on a nonrecurring basis as of March 31, 2009:
                     
  Fair Value at March 31, 2009  
  Total Level 1 Level 2 Level 3 Total Losses
   
Assets:
                    
                     
Long-lived assets held and used $244  $    $    $244  $(3,923)
   
Total Assets
 $244  $    $    $244  $(3,923)
   
In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets held and used with a total carrying value of $4,167 were written down to their fair value of $244, resulting in an impairment charge of $3,923, which was included in earnings for the first quarter of 2009. These long-lived assets, which were part of a larger group of assets, were examined and determined to no longer be of use to the Company and thus were scrapped. The remaining assets were written down to an estimated fair value based on what the Company would receive for used machinery and equipment, if sold.

15


Note 16 — Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price risk, foreign currency exchange rate risk, and interest rate risk. Forward contracts on various commodities are entered into to manage the price risk associated with forecasted purchases of natural gas used in the Company’s manufacturing process. Forward contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk on forecasted revenue denominated in foreign currencies. Other forward exchange contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk associated with certain of the Company’s commitments denominated in foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings.
In accordance with SFAS No. 133, the Company designates certain foreign currency forward contracts as cash flow hedges of forecasted revenues, and certain interest rate hedges as fair value hedges of fixed-rate borrowings. The majority of the Company’s natural gas forward contracts are not subject to any hedge designation as they are considered within the normal purchases exemption.
The Company does not purchase or hold any derivative financial instruments for trading purposes.
As of March 31, 2009, the Company had $106,671 of outstanding foreign currency forward contracts at September 30, 2008):notional value. The total notional value of foreign currency hedges as of December 31, 2008 was $239,415.
                 
  Fair Value at September 30, 2008
  Total Level 1 Level 2 Level 3
 
Assets:
                
Available-for-sale securities $27,167  $27,167  $   
Derivatives  4,482      4,482    
Interest rate swaps  539      539    
 
Total Assets
 $32,188  $27,167  $5,021   
 
Cash Flow Hedging Strategy
For certain derivative instruments that are designated as and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffectiveness portion) or hedge components excluded from the assessment of effectiveness, are recognized in the Consolidated Statement of Income during the current period.
To protect against a reduction in the value of forecasted foreign currency cash flows resulting from export sales over the next year, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its forecasted intra-group revenue or expense denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against the foreign currencies, the decline in the present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.
Fair Value Hedging Strategy
For derivative instruments that are designated and qualify as fair value hedges (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as offsetting the loss or gain on the hedged item attributable to the hedged risk are recognized in the same line item associated with the hedged item (i.e., in “interest expense” when the hedged item is fixed-rate debt).

16


Note 16 — Derivative Instruments and Hedging Activities (continued)
The following table presents the fair value and location of all assets and liabilities associated with the Company’s hedging instruments within the unaudited Consolidated Balance Sheet:
                   
    Asset Derivatives Liability Derivatives
              Fair Value
  Balance Sheet Fair Value Fair Value Fair Value at
  Location at 3/31/09 at 12/31/08 at 3/31/09 12/31/08
Derivatives designated as hedging instruments under SFAS No. 133
                  
 
Foreign currency forward contracts Other non-current liabilities $3,889  $4,398  $6,330  $7,635 
Interest rate swaps Other non-current assets  1,651   2,357       
Natural gas forward contracts Other current assets  233   1,559       
 
Total derivatives designated as hedging instruments under SFAS No. 133   $5,773  $8,314  $6,330  $7,635 
 
 
Derivatives not designated as hedging instruments under SFAS No. 133 (a)
                  
 
Foreign currency forward contracts Other non-current liabilities $129  $1,786  $255  $3,218 
 
Total derivatives
   $5,902  $10,100  $6,585  $10,853 
 
(a)See Footnote 15 — Fair Value for additional information on the Company’s purpose for entering into derivatives not designated as hedging instruments and its overall risk management strategies.
The following tables present the impact of derivative instruments and their location within the unaudited Consolidated Statement of Income:
           
    Amount of gain or
    (loss) recognized in
  Location of gain or (loss) income on derivative
Derivatives in SFAS No. 133 fair recognized in income on March 31, March 31,
value hedging relationships derivative 2009 2008
   
Interest rate swaps Interest expense $(706) $1,368 
Natural gas forward contracts Other income (expense)  (1,326)  (448)
 
Total
   $(2,032) $920 
 
           
    Amount of gain or
    (loss) recognized in
  Location of gain or (loss) income on derivative
Hedged items in SFAS No. 133 fair recognized in income on March 31, March 31,
value hedge relationships derivative 2009 2008
   
Fixed-rate debt Interest expense $706  $(1,368)
Inventory Other income (expense)  1,106    
 
Total
   $1,812  $(1,368)
 

17


Note 16 — Derivative Instruments and Hedging Activities (continued)
                 
          Amount of gain or
  Amount of gain or (loss) (loss) reclassified from
  recognized in OCI on AOCI into income
  derivative (effective portion) (a)
  Three months ended Three months ended
Derivatives in SFAS No. 133 cash flow March 31, March 31,
hedging relationships 2009 2008 2009 2008
   
Foreign currency forward contracts $(299) $553  $884  $148 
 
Total
 $(299) $553  $884  $148 
 
All cash flow hedge contracts are 100% effective and as a result, no portion of the gain or loss reclassified from accumulated other comprehensive income into income was ineffective.
           
    Amount of gain or (loss)
    recognized in income on
Derivatives not designated as Location of gain or (loss) derivative
hedging instruments under SFAS recognized in income on Three months ended March 31,
No. 133 derivative 2009 2008
   
Foreign currency forward contracts Cost of sales $(88) $293 
Foreign currency forward contracts Other income (expense)  1,394   332 
 
Total
   $1,306  $625 
 
Note 17 — Subsequent Events
On April 30, 2009, Chrysler LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code to reorganize its business. At this time, the Company’s management is reviewing the impact of this bankruptcy filing. The Company’s accounts receivable from Chrysler LLC and its wholly-owned U.S. subsidiaries (“Chrysler”) were approximately $1.2 million as of April 30, 2009. It is possible that some or all of the Company’s accounts receivable balance from Chrysler either may not be collected or may be paid in the near term either through ordinary claims procedures or other means under the bankruptcy process.

18


Item 2. 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 assemblies, high-quality alloy steels and aerospace power transmission systems, as well as a provider of related products and services. During the fourth quarter of 2007, theThe Company implemented changes in its management structure. Beginning with the first quarter of 2008, the Company began operatingoperates under two business groups: the Steel Group and the Bearings and Power Transmission Group. The Bearings and Power Transmission Group is composed of three operating segments: (1) Mobile Industries, (2) Process Industries and (3) Aerospace and Defense. These three operating segments and the Steel Group comprise the Company’s four reportable segments.
The Mobile Industries segment provides bearings, power transmission components and related products and services. Customers of the Mobile Industries segment include original equipment manufacturers and suppliers for passenger cars, light trucks, medium- tomedium and heavy-duty trucks, rail cars, locomotives and agricultural, construction and mining equipment, in addition toequipment. Customers also include aftermarket distributors of automotive products. The Company’s strategy for the Mobile Industries segment is to improve its financial performance by allocating assets to serve the most attractive market sectors and restructuring or exitexiting those businesses where adequate returns can notcannot be achieved.achieved over the long-term.
The Process Industries segment provides bearings, power transmission components and related products and services. Customers of the Process Industries segment include original equipment manufacturers of power transmission, energy and heavy industries machinery and equipment, including rolling mills, cement and aggregate processing equipment, paper mills, sawmills, printing presses, cranes, hoists, drawbridges, wind energy turbines, gear drives, drilling equipment, coal conveyors and crushers and food processing equipment. Customers of the Process Industries segment also include aftermarket distributors of products other than those for steel and automotive applications. The Company’s strategy for the Process Industries segment is to pursue growth in selected industrial marketsmarket sectors and in the aftermarket and to achieve a leadership position in targeted Asian sectors. The Company has been increasing large-bore bearing capacity in Romania, China, India and the United States to serve heavy industrial market sectors. The Process Industries segment began to benefit from this increase in large-bore bearing capacity during the latter part of 2007.Asia. In December 2007, the Company announced the establishment of a joint venture, Timken XEMC (Hunan) Bearings Co., Ltd., in China, to manufacture ultra-large-bore bearings for the growing Chinese wind energy market. In October 2008, the joint venture broke ground on a new wind energy plant to be built in China. Bearings produced at this facility are expected to be available in 2010. In April 2008, the Process Industries segment began shipping product from its new industrial bearing plant in Chennai, India. In October 2008, the Company announced that it would expand production at its Tyger River facility in Union, South Carolina to make ultra-large-bore bearings to serve wind-turbine manufacturers in North America.
The Aerospace and Defense segment manufactures bearings, helicopter transmission systems, rotor head assemblies, turbine engine components, gears and other precision flight-critical components for commercial and military aviation applications. The Aerospace and Defense segment also provides aftermarket services, including repair and overhaul of engines, transmissions and fuel controls, as well as aerospace bearing repair and component reconditioning. Customers ofIn addition, the Aerospace and Defense segment also includemanufactures bearings for original equipment manufacturers of health and positioning control equipment. The Company’s strategy for the Aerospace and Defense segment is to: (1) grow value by adding power transmission parts, assemblies and services, utilizing a platform approach; (2) develop new aftermarket channels; and (3) add core bearing capacity through manufacturing initiatives in North America and China. In October 2007, the Company completed the acquisition of the assets of The Purdy Corporation (Purdy), located in Manchester, Connecticut. This acquisition further expands the growing range of power-transmission products and capabilities that the Company provides to aerospace customers. In addition,April 2008, the Company opened a new aerospace precision products manufacturing facility in ChinaChina. In November 2008, the Company completed the acquisition of the assets of EXTEX Ltd. (EXTEX), located in April 2008.Gilbert, Arizona. EXTEX is a leading designer and marketer of high-quality replacement engine parts for the aerospace aftermarket.
The Steel segment manufactures more than 450 grades of carbon and alloy steel, which are produced in both solid and tubular sections with a variety of lengths and finishes. The Steel segment also manufactures custom-made steel products for both industrial and automotive applications. The Company’s strategy for the Steel segment is to focus on opportunities where the Company can offer differentiated capabilities while driving profitable growth. In January 2007,November 2008, the Company announced plans to invest approximatelyopened a new $60 million small-bar steel rolling mill to enableexpand its portfolio of differentiated steel products. The new mill enables the Company to competitively produce steel bars down to 1-inch diameter for use in power transmission and friction management applications for a variety of customers, including the rapidly growing automotive transplants. This expansion is expected to become operational during the fourth quarter of 2008. During the first quarter of 2007, the Company added a new induction heat-treat line in Canton, Ohio, which increased capacity and enabled the Company to provide differentiated product to more customers in its global energy markets.foreign automakers. In February 2008, the Company completed the acquisition of the assets of Boring Specialties, Inc. (BSI), a provider of a wide range of precision deep-hole oil and gas drilling and extraction products and services.

17


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Financial Overview
Overview:
                 
  3Q 2008 3Q 2007 $ Change % Change
 
(Dollars in millions, except earnings per share)                
Net sales $1,482.7  $1,261.2  $221.5   17.6%
Income from continuing operations  130.4   41.2   89.2   216.5%
Net income $130.4  $41.2  $89.2   216.5%
Diluted earnings per share:                
Continuing operations $1.35  $0.43  $0.92   214.0%
Net income per share $1.35  $0.43  $0.92   214.0%
Average number of shares — diluted  96,468,621   96,095,860      0.4%
 
                 
  YTD 2008 YTD 2007 $ Change % Change
 
(Dollars in millions, except earnings per share)                
Net sales $4,452.9  $3,895.0  $557.9   14.3%
Income from continuing operations  303.8   171.1   132.7   77.6%
Income from discontinued operations     0.7   (0.7)  (100.0)%
Net income $303.8  $171.8  $132.0   76.8%
Diluted earnings per share:                
Continuing operations $3.15  $1.79  $1.36   76.0%
Discontinued operations     0.01   (0.01)  (100.0)%
Net income per share $3.15  $1.80  $1.35   75.0%
Average number of shares — diluted  96,314,814   95,483,420      0.9%
 
Net sales forIn addition to specific segment initiatives, the third quarter of 2008 were $1.48 billion, compared to $1.26 billion in the third quarter of 2007, an increase of 17.6%. Net sales for the first nine months of 2008 were $4.45 billion, compared to $3.90 billion for the first nine months of 2007, an increase of 14.3%. The increase in sales was primarily driven by higher surcharges to recover historically high raw material costs and higher pricing, as well as higher volume across most market sectors, acquisitions and foreign currency translation, partially offset by weaker automotive demand. For the third quarter of 2008, earnings per diluted share were $1.35, compared to $0.43 per diluted share for third quarter of 2007. For the first nine months of 2008, earnings per diluted share were $3.15, compared to $1.80 per diluted share for the first nine months of 2007. Income from continuing operations per diluted share was $3.15, compared to $1.79 per diluted share for the same period a year ago.
The Company’s results for the third quarter and first nine months of 2008 reflect the strength of industrial markets and increased raw material surcharges, pricing and mix, partially offset by higher material, manufacturing and logistics costs. The Company’s third quarter also benefited from LIFO income as a result of expectations that historically high steel scrap costs during 2008 will significantly decline in the fourth quarter of 2008. Additionally, the Company’s results for the third quarter and first nine months reflect lower expenses associated with restructuring activities. Results for the first nine months of 2008 also reflect income from the sale of the Company’s former seamless steel tube manufacturing facility located in Desford, England. The Company recognized a pretax gain of $20.4 million on the sale of this facility. The Company continued its focus on ramping up new production capacity in targeted areas, including major capacity expansions for industrial products at several manufacturing locations around the world.
The Company expects the relative strength of key global market sectors, such as heavy industries, aerospace and energy, and favorable pricing will be offset by lower demand in the light-vehicle market sector for the remainder of 2008. While these key market sectors are expected to remain relatively strong, the improvements in the Company’s operating performance will be partially constrained by weaker automotive demand in the Company’s Mobile Industries and Steel segments, increases in raw material costs, the timing of its surcharge mechanism, as well ashas been making strategic investments including Asian growthin business processes and Project O.N.E. initiatives. 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.
systems. Project O.N.E. is a multi-year program, which began in 2005, designed to improve the Company’s business processes and systems. The Company expects to invest approximately $210 million to $220 million, which includes internal and external costs, to implement Project O.N.E. As of September 30, 2008,March 31, 2009, the Company has incurred costs of approximately $190.5$201.7 million, of which approximately $110.3$117.0 million have been capitalized to the Consolidated Balance Sheet. During the second quarter of2008 and 2007, the Company completed the installation of Project O.N.E. for the majority of the Company’s domestic operations and a major portion of its domesticEuropean operations. On April 1, 2008,2009, the Company completed the next installation of Project O.N.E. for the majority of the Company’s remaining domesticEuropean operations, and a major portion of its European operations.

18


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The Company’s results for the first nine months of 2007 reflect a lower tax rate primarily due to favorable adjustments to the Company’s accruals for uncertain tax positions.
The Statement of Income
Sales by Segment:
                 
  3Q 2008 3Q 2007 $ Change % Change
 
(Dollars in millions, and exclude intersegment sales)                
Mobile Industries $539.0  $586.7  $(47.7)  (8.1)%
Process Industries  345.5   260.1   85.4   32.8%
Aerospace and Defense  110.0   70.4   39.6   56.3%
Steel  488.2   344.0   144.2   41.9%
 
Total Company $1,482.7  $1,261.2  $221.5   17.6%
 
                 
  YTD 2008 YTD 2007 $ Change % Change
 
(Dollars in millions, and exclude intersegment sales)                
Mobile Industries $1,802.5  $1,828.7  $(26.2)  (1.4)%
Process Industries  985.2   774.7   210.5   27.2%
Aerospace and Defense  317.8   218.5   99.3   45.4%
Steel  1,347.4   1,073.1   274.3   25.6%
 
Total Company $4,452.9  $3,895.0  $557.9   14.3%
 
Net sales for the third quarter of 2008 increased $221.5 million, or 17.6%, compared to the third quarter of 2007. Acquisitions of the assets of Purdy, acquired in the fourth quarter of 2007, and Boring Specialties, Inc. (BSI), acquired during the first quarter of 2008, contributed $34.0 million to the increase in net sales. In addition, the effect of currency rate changes contributed $18.1 million to the increase in net sales. The remaining increase in net sales for the third quarter of 2008, compared to the third quarter of 2007, was primarily due to higher surcharges to recover historically high raw material costs and higher pricing, as well as higher volume across most market sectors, particularly heavy truck, off-highway, aerospace, energy, power transmissioncertain other facilities in North America and heavy industry, as well as fromIndia. With the Company’s industrial distribution channel, partially offset by lower demand from North Americancompletion of the April 2009 installation of Project O.N.E., approximately 80% of the Bearings and European light-vehicle customers.
NetPower Transmission Group’s global sales forflow through the first nine months of 2008 increased $557.9 million, or 14.3%, compared to the first nine months of 2007. The Purdy acquisition and the BSI acquisition contributed $94.4 million to the increase in net sales for the first nine months of 2008. In addition, the effect of currency rate changes contributed $109.0 million to the increase in net sales for the first nine months of 2008. The remaining increase in net sales for the first nine months of 2008, compared to the first nine months of 2007, was primarily due to higher surcharges and pricing as well as higher volume across most market sectors, particularly heavy truck, off-highway, energy, aerospace and heavy industry, as well as from the Company’s industrial distribution channel, partially offset by lower demand from North American light-vehicle customers.
Gross Profit:
                 
  3Q 2008 3Q 2007 $ Change Change
 
(Dollars in millions)                
Gross profit $406.8  $250.4  $156.4   62.5%
Gross profit % to net sales  27.4%  19.9%     750bps
Rationalization expenses included in cost of products sold $0.3  $5.4  $(5.1)  (94.4)%
 
                 
  YTD 2008 YTD 2007 $ Change Change
 
(Dollars in millions)                
Gross profit $1,062.0  $794.4  $267.6   33.7%
Gross profit % to net sales  23.9%  20.4%     350bps
Rationalization expenses included in cost of products sold $2.6  $27.9  $(25.3)  (90.7)%
 
Gross profit margins increased in the third quarter of 2008, compared to the third quarter of 2007, as a result of higher raw material surcharges and favorable pricing, improved product mix, higher sales volumes across most market sectors and lower rationalization expenses, as well as LIFO income of $29.5 million. These increases were partially offset by higher raw material costs, higher manufacturing costs and lower demand from North American and European light-vehicle customers. The higher raw materialnew system.

19


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
costs primarily relateFinancial Overview
Overview
                 
  1Q 2009 1Q 2008 $ Change % Change
 
(Dollars in millions, except earnings per share)                
Net sales $960.4  $1,434.7  $(474.3)  (33.1)%
Net income attributable to The Timken Company  0.9   84.5   (83.6)  (98.9)%
                 
Diluted earnings per share $0.01  $0.88  $(0.87)  (98.9)%
Average number of shares — diluted  96,028,860   95,648,018      0.2%
 
The Company reported net sales for the first quarter of 2009 of approximately $0.96 billion, compared to historically high steel scrap costs. The LIFO income is a result of expectations that historically high steel scrap costs will significantly decline$1.43 billion in the fourth quarter of 2008. Prior to the thirdfirst quarter of 2008, a decrease of 33.1%. Sales were lower across all business segments except for the Company had recognized $71.8 millionAerospace and Defense segment. The decrease in sales was primarily driven by lower volume and lower steel surcharges, partially offset by the favorable impact of LIFO expensepricing. For the first quarter of 2009, earnings per diluted share were $0.01, compared to $0.88 per diluted share for the first six monthsquarter of 2008 as steel scrap costs had been expected to continue to rise. Refer to Note 3 – Inventory for further discussion2008.
The Company’s first quarter results reflect the deterioration of interim LIFO calculations.
Gross profit margins increased in the first nine months of 2008, compared to the first nine months of 2007,most market sectors as a result of the current global economic downturn. The impact of lower volume and higher surcharges, favorable pricing, favorable mix, higher sales volumes across most market sectors and lower rationalization expenses,restructuring charges as a result of actions taken to align the Company’s businesses with current demand was partially offset by higher LIFO charges, higherlower raw material costs and lower demandselling and administrative costs. Additionally, the Company’s results for the first quarter of 2008 reflected a pretax gain of $20.2 million on the sale of the Company’s former seamless steel tube manufacturing facility located in Desford, England.
Outlook
The Company’s outlook for 2009 reflects a deteriorating global economic climate that is expected to last throughout the year, impacting most of the Company’s market sectors. Lower sales, compared to 2008, are expected in all business segments except for the Aerospace and Defense segment. A significant portion of the decrease in the Steel segment sales is expected to be due to significantly lower surcharges to recover raw material costs, which were at historically high levels during the middle of 2008, but declined significantly towards the end of 2008. The Company’s results will reflect lower margins as a result of the lower volume and surcharges, partially offset by improved pricing, lower raw material costs and lower selling, administrative and general expenses. The Company expects to continue to take actions to properly align its business with current market demand. During 2009, the Company announced that it plans to eliminate approximately 400 salaried positions by the end of the fourth quarter of 2009, as well as implement cost savings initiatives that are targeted to save approximately $80 million in annual selling and administrative expenses.
The Company expects to continue to generate cash from North American light-vehicle customers.operations in 2009 as a result of lower working capital levels. In addition, the Company expects to decrease capital expenditures by approximately 40% in 2009, compared to 2008. However, pension contributions are expected to increase to approximately $70 million to $75 million, including $50 million of discretionary U.S. contributions, in 2009, compared to $22 million in 2008, primarily due to negative asset returns in the Company’s defined benefit pension plans during 2008.
The Statement of Income
Sales by Segment:
                 
  1Q 2009 1Q 2008 $ Change % Change
 
(Dollars in millions, and exclude intersegment sales)                
Mobile Industries $372.9  $635.3  $(262.4)  (41.3)%
Process Industries  242.3   312.2   (69.9)  (22.4)%
Aerospace and Defense  112.6   102.1   10.5   10.3%
Steel  232.6   385.1   (152.5)  (39.6)%
 
Total Company $960.4  $1,434.7  $(474.3)  (33.1)%
 
Net sales for the first quarter of 2009 decreased $474.3 million, or 33.1%, compared to the first quarter of 2008, primarily due to lower volume of approximately $400 million across most business segments, except for the Aerospace and Defense segment, lower steel surcharges of $80 million and the effect of currency-rate changes of approximately $75 million, partially offset by improved pricing and favorable sales mix of approximately $80 million.

20


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Gross Profit:
                 
  1Q 2009 1Q 2008 $ Change Change
 
(Dollars in millions)                
Gross profit $152.1  $311.5  $(159.4)  (51.2)%
Gross profit % to net sales  15.8%  21.7%    (590) bps
Rationalization expenses included in cost of products sold $1.2  $1.4  $(0.2)  (14.3)%
 
Gross profit margin decreased in the first quarter of 2009, compared to the first quarter of 2008, due to the impact of lower sales volume across most market sectors of approximately $115 million, lower steel surcharges of $80 million and higher manufacturing costs of approximately $100 million, partially offset by lower raw material costs of approximately $50 million, improved pricing and sales mix of approximately $70 million and lower logistics costs of approximately $25 million. The higher manufacturing costs were primarily driven by the Mobile Industries and Steel segments as a result of the underutilization of plant capacity. The lower raw material costs are primarily due to lower scrap steel costs as scrap steel and other raw material costs have fallen in 2009 from historically high levels in 2008.
In the thirdfirst quarter andof 2009, rationalization expenses included in cost of products sold primarily related to the continued rationalization of Process Industries’ Canton, Ohio bearing manufacturing facilities. In the first nine monthsquarter of 2008, rationalization expenses included in cost of products sold primarily related to certain Mobile Industries segment domestic manufacturing facilities, the continued rationalization of the Company’s Canton, Ohio Process Industries segment bearing facilities and the closure of the Company’s seamless steel tube manufacturing operations located in Desford, England. In the third quarter and first nine months of 2007, rationalization expenses included in cost of products sold primarily related to the planned closure of its manufacturing operations located in Sao Paulo, Brazil, certain Mobile Industries segment domestic manufacturing facilities, the closure of the Company’s seamless steel tube manufacturing operations located in Desford, England and the continued rationalization of the Company’sProcess Industries’ Canton, Ohio Process Industries segment bearing manufacturing facilities. Rationalization expenses in the first quarter of 2009 and 2008 and 2007 primarily includedconsisted of accelerated depreciation on assets, theand relocation of equipment and the write-down of inventory.equipment.
Selling, Administrative and General Expenses:
                 
  3Q 2008 3Q 2007 $ Change Change
 
(Dollars in millions)                
Selling, administrative and general expenses $193.7  $170.8  $22.9   13.4%
Selling, administrative and general expenses % to net sales  13.1%  13.5%     (40) bps 
Rationalization expenses (income) included in selling, administrative and general expenses $(0.4) $0.9  $(1.3)  (144.4)%
 
                                
 YTD 2008 YTD 2007 $ Change Change 1Q 2009 1Q 2008 $ Change Change
(Dollars in millions)  
Selling, administrative and general expenses $568.2 $514.8 $53.4  10.4% $139.0 $177.9 $(38.9)  (21.9)%
Selling, administrative and general expenses % to net sales  12.8%  13.2%  (40) bps   14.5%  12.4%  210 bps
Rationalization expenses included in selling, administrative and general expenses $1.7 $2.8 $(1.1)  (39.3)% $0.3 $0.8 $(0.5)  (62.5)%
The increasedecrease in selling, administrative and general expenses on a dollar basis, in the thirdfirst quarter and first nine months of 2008,2009, compared to the thirdfirst quarter and first nine months of 2007,2008, was primarily due to higherlower performance-based compensation an increase in allowance for doubtful accountsof approximately $18 million and higher depreciationrestructuring initiatives and lower discretionary spending on capitalized Project O.N.E. costs.items such as travel and professional fees of approximately $20 million.
In the thirdfirst quarter of 2009, the rationalization expenses included in selling, administrative and general expenses primarily related to the rationalization of Process Industries’ Canton, Ohio bearing facilities. In the first nine monthsquarter of 2008, the rationalization expenses included in selling, administrative and general expenses primarily related to the rationalization of the Company’sProcess Industries’ Canton, Ohio bearing facilities and costs associated with vacating the Torrington, Connecticut office complex.
Impairment and Restructuring Charges:
             
  1Q 2009 1Q 2008 $ Change
 
(Dollars in millions)            
Impairment charges $3.9  $0.4  $3.5 
Severance and related benefit costs  10.2   2.1   8.1 
Exit costs  0.6   0.4   0.2 
 
Total $14.7  $2.9  $11.8 
 
In the thirdfirst quarter of 2009, impairment and first nine months of 2007,restructuring charges were $8.5 million for the rationalization expenses included in selling, administrative and general expenses primarily related to the closure of Mobile Industries segment, engineering facilities$4.5 million for the Process Industries segment, $0.5 million for the Steel segment and the closure$1.2 million for Corporate. Corporate represents corporate administrative expenses that are not allocated to any of the Company’s seamless steel tube manufacturing operations locatedreportable segments. In the first quarter of 2008, impairment and restructuring charges were $2.4 million for the Mobile Industries segment, $0.2 million for the Process Industries segment and $0.3 million for the Steel segment. The following discussion explains the major impairment and restructuring charges recorded for the periods presented; however, it is not intended to reflect a comprehensive discussion of all amounts in Desford, England.the table above.

2021


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ImpairmentSelling and Restructuring Charges:Administrative Reductions
             
  3Q 2008 3Q 2007 $ Change
 
(Dollars in millions)            
Impairment charges $0.7  $8.2  $(7.5)
Severance and related benefit costs  0.4   2.9   (2.5)
Exit costs  2.2   0.7   1.5 
 
Total $3.3  $11.8  $(8.5)
 
In March 2009, the Company announced the realignment of its organization to improve efficiency and reduce costs. The Company had targeted pretax savings of approximately $30 million to $40 million in annual selling and administrative costs. In light of the Company’s revised forecast indicating significantly reduced sales and earnings for the year, the Company is now expanding the target to approximately $80 million. The implementation of these savings began in the first quarter of 2009 and is expected to be significantly completed by the end of the fourth quarter of 2009, with full-year savings expected to be achieved in 2010. As the Company streamlines its operating structure, it expects to cut its salaried workforce by up to 400 positions in 2009, incurring severance costs of approximately $10 million to $20 million. During the first quarter of 2009, the Company recorded $2.2 million of severance and related benefit costs related to this initiative to eliminate approximately 26 associates. Of the $2.2 million charge, $1.2 million related to Corporate, $0.4 million related to the Mobile Industries segment, $0.4 million related to the Steel segment and $0.2 million related to the Process Industries segment.
             
  YTD 2008 YTD 2007 $ Change
 
(Dollars in millions)            
Impairment charges $1.1  $11.6  $(10.5)
Severance and related benefit costs  3.0   18.0   (15.0)
Exit costs  3.9   3.3   0.6 
 
Total $8.0  $32.9  $(24.9)
 
Manufacturing Workforce Reductions
During the first quarter of 2009, the Company recorded $7.4 million in severance and related benefit costs, including a curtailment of pension benefits of $1.8 million, to eliminate approximately 900 associates to properly align its business as a result of the current downturn in the economy and expected market demand. Of the $7.4 million charge, $6.6 million related to the Mobile Industries segment and $0.8 million related to the Process Industries segment.
Bearings and Power Transmission Reorganization
In August 2007, the Company announced the realignment of its management structure. During the first quarter of 2008, the Company began to operate under two major business groups: the Steel Group and the Bearings and Power Transmission Group. The Bearings and Power Transmission Group includes three reportable segments: Mobile Industries, Process Industries and Aerospace and Defense. The organizational changes have streamlined operations and eliminated redundancies. The Company expects to realizerealized pretax savings of approximately $10$18 million to $20 million annually by the end ofin 2008 as a result of these changes. During the first nine monthsquarter of 2008, the Company recorded $1.9 million of severance and related benefit costs related to this initiative. During the third quarter of 2007, the Company recorded $0.8$1.1 million of severance and related benefit costs related to this initiative.
Mobile Industries
In 2005, the Company announced plans to restructure the former automotive segment that is now part of its Mobile Industries segment to 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 its Vierzon, France bearing manufacturing facility in response to changes in customer demand for its products. During 2006, the Company completed the closure of its engineering facilities in Torrington, Connecticut and Norcross, Georgia. During 2007, the Company completed the closure of its manufacturing facility in Clinton, South Carolina and the rationalization of its Vierzon, France bearing manufacturing facility.
In September 2006, the Company announced further planned reductions in its Mobile Industries segment workforce. In March 2007, the Company announced the planned closure of its manufacturing facility in Sao Paulo, Brazil. However, theThe closure of thethis manufacturing facility in Sao Paulo, Brazil has beenwas subsequently delayed temporarily to serve higher customer demand.
These plans are However, with the current downturn in the economy, the Company believes it will close this facility before the end of 2010. This closure is targeted to collectively deliver annual pretax savings of approximately $75$5 million, with expected net workforce reductions of approximately 1,300 to 1,400 positions and pretax costs of approximately $115$25 million to $125$30 million, which includeincludes restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses. Due to the delay in the timing of the closure of thethis manufacturing facility, in Sao Paulo, Brazil, the Company does not expectexpects to fully realize thesethe $5 million of annual pretax savings untilbefore the end of 2009.2010, once this facility closes. Mobile Industries has incurred cumulative pretax costs of approximately $100.8$18.5 million as of September 30, 2008 for these plans.
March 31, 2009 related to this closure. During the thirdfirst quarter of 2009 and first nine months of 2008, the Company recorded severance and related benefits of $0.6 million and $1.0 million, respectively, associated with the Mobile Industries’ restructuring and workforce reduction plans. In addition, the Company recorded an impairment charge of $0.7 million and exit costs of $1.0 million during the third quarter of 2008 associated with these plans. The exit costs recorded in the third quarter of 2008 were primarily the result of environmental charges related to the planned closure of the manufacturing facility in Sao Paulo, Brazil and the Company’s former plant in Clinton, South Carolina. During the third quarter and first nine months of 2007, the Company recorded $0.8 million and $10.4 million, respectively, of severance and related benefit costs and $0.1 million and $2.2 million, respectively, of exit costs associated with the Mobile Industries’ restructuring and workforce reduction plans. The exit costs recorded in the first nine months of 2007 were primarily the result of environmental charges related to the planned closure of the manufacturing facility inCompany’s Sao Paulo, Brazil.Brazil manufacturing facility.
In addition to the above charges, the Company recorded an impairment charges of $0.9 million of environmental exit costs during the thirdfirst quarter of 2009 related to an impairment of fixed assets at two of its facilities in France as a result of the carrying value of these assets exceeding expected future cash flows. During the first quarter of 2008, related to a former plant in Columbus, Ohio. Thethe Company also recorded an impairment charge of $0.3 million related to one of Mobile Industries’ foreign entities during the first nine months of 2008. During the third quarter of 2007, the Company recorded an impairment charge of $5.3 million relatedfixed assets at its facility in Spain as a result of the carrying value of these assets exceeding expected future cash flows due to the then-anticipated sale of this same foreign entity.

21


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)facility.
Process Industries
In May 2004, the Company announced plans to rationalize itsthe Company’s three bearing plants in Canton, Ohio within the Process Industries segment. 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 $20 million through streamlining operations and workforce reductions, with pretax costs of approximately $45 million to $50 million, by the end of 2009.
The Company recorded impairment charges of $3.0 million and exit costs of $1.6$0.6 million during the first nine monthsquarter of 20082009 related to the Process Industries’ rationalization plans. The exit costs recorded duringDuring the first nine monthsquarter of 2008, were primarily the result of environmental charges. During the third quarter and first nine months of 2007, the Company recorded impairment charges of $1.3$0.1 million and $4.6exit costs of $0.1 million respectively, as a result of the Process Industries’ rationalization plans. In addition, exit costs of $0.4 million were recorded during the first nine months of 2007 as a result of these rationalization plans. Including rationalization costs recorded in cost of products sold and selling, administrative and general expenses, the Process Industries segment has incurred cumulative pretax costs of approximately $33.4$41.2 million as of September 30, 2008 related toMarch 31, 2009 for these rationalization plans. As of March 31, 2009, the Process Industries segment has realized approximately $15 million in annual pretax savings.

22


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Steel
In April 2007, the Company completed the closure of its seamless steel tube manufacturing facility located in Desford, England. The Company recorded $0.4$0.3 million of exit costs during the first nine monthsquarter of 2008 related to this action. The Company recorded $1.1 million and $6.7 million of severance and related benefit costs, and $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.
Rollforward of Restructuring Accruals:
                
 Sept. 30, Dec. 31, March 31, Dec. 31,
 2008 2007 2009 2008
(Dollars in millions)  
Beginning balance, January 1 $24.5 $32.0  $18.9 $24.5 
Expense 6.9 28.6  9.0 12.6 
Payments  (13.1)  (36.1)  (6.7)  (18.2)
Ending balance $18.3 $24.5  $21.2 $18.9 
The restructuring accrual at September 30, 2008March 31, 2009 and December 31, 20072008 is included in accountsAccounts payable and other liabilities on the Consolidated Balance Sheet. The restructuring accrual at September 30, 2008March 31, 2009 excludes costs related to the curtailment of pension benefit plans of $1.8 million. The accrual at March 31, 2009 includes $9.6$14.4 million of severance and related benefits, with the remainder of the balance primarily representing environmental exit costs. The majorityApproximately half of the $9.6$14.4 million accrual relatedrelating to severance and related benefits is expected to be paid by the end of 2009, pendingwith the remainder paid before the end of 2010 once the closure of the manufacturing facility in Sao Paulo, Brazil.
Loss on Divestitures:
             
  3Q 2008 3Q 2007 $ Change
 
(Dollars in millions)            
Loss on divestitures   $(0.2) $0.2 
 
             
  YTD 2008 YTD 2007 $ Change
 
(Dollars in millions)            
Loss on divestitures   $(0.5) $0.5 
 
In June 2006, the Company completed the divestiture of its 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 Mobile Industries’ steering business located in Watertown, Connecticut and Nova Friburgo, Brazil and recorded a loss on disposal of $54.3 million. The Company recorded an additional loss on disposal of $0.2 million and $0.7 million during the third quarter and first nine months of 2007.

22


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)is completed.
Interest Expense and Income:
                                
 3Q 2008 3Q 2007 $ Change % Change 1Q 2009 1Q 2008 $ Change % Change
(Dollars in millions)  
Interest expense $11.1 $10.7 $0.4  3.7% $8.5 $11.0 $(2.5)  (22.7)%
Interest income $1.5 $2.4 $(0.9)  (37.5)% $0.4 $1.4 $(1.0)  (71.4)%
 YTD 2008 YTD 2007 $ Change % Change
(Dollars in millions) 
Interest expense $33.8 $30.4 $3.4  11.2%
Interest income $4.4 $5.5 $(1.1)  (20.0)%
Interest expense for the thirdfirst quarter and first nine months of 2008 increased2009 decreased compared to the thirdfirst quarter and first nine months of 20072008, primarily due to higherlower average debt outstanding in 2008 compared to the same periods a year ago.outstanding. Interest income for the thirdfirst quarter and first nine months of 20082009 decreased compared to the same periods aperiod in the prior year, ago, due to lower interest rates on invested cash balances.
Other Income and Expense:
                 
  3Q 2008 3Q 2007 $ Change % Change
 
(Dollars in millions)                
Gain on divestitures of non-strategic assets $  $0.9  $(0.9)  (100.0)%
(Loss) gain on dissolution of subsidiaries  (0.5)  0.1   (0.6) NM 
Other expense, net  (0.7)  (4.0)  3.3   82.5%
 
Other income (expense) — net $(1.2) $(3.0) $1.8   60.0%
 
 
  YTD 2008 YTD 2007 $ Change % Change
 
(Dollars in millions)                
Gain on divestitures of non-strategic assets $20.5  $3.7  $16.8  NM 
(Loss) gain on dissolution of subsidiaries  (0.5)  0.2   (0.7) NM 
Other expense, net  (8.3)  (11.3)  3.0   26.5%
 
Other income (expense) — net $11.7  $(7.4) $19.1   258.1%
 
                 
  1Q 2009 1Q 2008 $ Change % Change
 
(Dollars in millions)                
Gain on divestitures of non-strategic assets $1.2  $20.4  $(19.2)  (94.1)%
Other income (expense)  6.2   (4.9)  11.1  NM
 
Other income (expense), net $7.4  $15.5  $(8.1)  (52.3)%
 
The gain on divestitures of non-strategic assets for the first nine monthsquarter of 2009 primarily related to the sale of one of the buildings at the Company’s former office complex located in Torrington, Connecticut. The gain on divestitures of non-strategic assets for the first quarter of 2008 primarily related to the sale of the Company’s former seamless steel tube manufacturing facility located in Desford, England. In February 2008, the Company completed the sale of this facility, resulting in a pretax gain of approximately $20.4$20.2 million. In the third quarter and first nine months of 2007, the gain on divestitures of non-strategic assets included a $0.7 million gain on the sale of the Company’s investment in Timken-NSK Bearings (Suzhou) Co., Ltd., a joint venture based in China. The gain on divestitures 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 seamless tube manufacturing facility located in Desford, England.
For the thirdfirst quarter of 2008,2009, other expenseincome (expense) primarily consisted of $1.4$6.9 million of foreign currency exchange gains, $0.7 million of export incentives and $0.5 million of royalty income, partially offset by $1.3 million of losses on the disposal of fixed assets $1.2and $0.6 million of donations and $1.2 million for minority interests, partially offset by foreign currency exchange gains of $2.8 million.losses from equity investments. For the thirdfirst quarter of 2007,2008, other expenseincome (expense) primarily consisted of $1.4$2.9 million of losses on the disposal of fixed assets $1.2 million of equity investment losses, $1.1 million for minority interests and $0.5 million of charitable donations, partially offset by $0.6$1.7 million of foreign currency exchange gains.
For the first nine months of 2008, other expense primarily consisted of $5.6 million of losses on the disposal of fixed assets, $3.1 million for minority interests, $3.1 million of donations, partially offset by gains on equity investments of $1.6 million and $1.2 million of foreign currency exchange gains. For the first nine months of 2007, other expense primarily consisted of $3.7 million of losses on the disposal of fixed assets, $2.8 million for minority interests, $1.7 million of charitable donations and $1.1 million of equity investment losses.

23


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Income Tax Expense:
                                 
 3Q 2008 3Q 2007 $ Change Change  1Q 2009 1Q 2008 $ Change Change
(Dollars in millions)  
Income tax expense $68.5 $15.1 $53.4 NM  $2.8 $51.2 $(48.4)  (94.5)%
Effective tax rate  34.4%  26.8%  760bps   (127.7)%  37.5%  (16,520) bps
 YTD 2008 YTD 2007 $ Change Change 
(Dollars in millions) 
Income tax expense $164.3 $42.9 $121.4 283.0% 
Effective tax rate  35.1%  20.1%  1,500bps 
The increasechange in the effective tax rate forin the thirdfirst quarter of 2008,2009, compared to the thirdfirst quarter of 2007,2008, was primarily due to the net impact of discreteincreased losses at certain foreign subsidiaries where no tax adjustmentsbenefit could be recorded during the respective quarters, the impact of the expiration of the U.S. Federal research tax credit at the end of 2007 and higher U.S. state and local taxes in 2008. This increase was partially offset by the net impact of higherdecreased earnings in 2008 in certain foreign jurisdictions where the effective tax rate is less than 35%.
The increasefirst quarter of 2009 resulted in the$2.8 million of income tax expense, or an effective tax rate of -127.7%. This tax rate was principally driven by the application of the interim period accounting rules for income taxes, as income tax expense on earnings from profitable affiliates exceeded tax benefits that could be recorded on losses from unprofitable affiliates. For the first nine monthsfull year of 2008, compared2009, the Company expects its effective tax rate to be in the first nine monthsrange of 2007, was primarily due25% to 30%.
Net Income (Loss) Attributable to Noncontrolling Interest:
                 
  1Q 2009 1Q 2008 $ Change % Change
 
(Dollars in millions)                
Net income (loss) attributable to Noncontrolling Interest $(5.9) $0.9  $(6.8) NM
 
Total $(5.9) $0.9  $(6.8) NM
 
On January 1, 2009, the Company implemented SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) to be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. In addition, SFAS No. 160 requires that net impactincome (loss) attributable to parties other than the Company be separately reported on the Consolidated Statement of discrete tax adjustments recorded during the respective quarters, including a favorable adjustment of $32.1 million recorded inIncome. In the first quarter of 2007, the expiration of U.S. federal research tax credit at the end of 2007 and higher U.S. state and local taxes in 2008. This increase was partially offset by2009, the net impact of higher earnings in 2008 in certain foreign jurisdictions whereincome (loss) attributable to noncontrolling interest reflects the effective tax rate is lessnet losses attributable to parties other than 35%.
As of September 30, 2008, the Company had approximately $58.6 million of total gross unrecognized tax benefits. DuringCompany. In the first nine monthsquarter of 2008, net income (loss) attributable to noncontrolling interests reflects the Company’s total gross unrecognized tax benefits decreased by $54.5 million. This decrease was primarily duenet income attributable to parties other than the settlement and resulting cash payment related to tax years 2002 through 2005, which were under examination by the Internal Revenue Service (IRS). The tax positions under examination included the timing of income recognition for certain amounts received by the Company and treated as contributions to capital pursuant to Internal Revenue Code Section 118 and other items.
On October 3, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008. The Emergency Economic Stabilization Act includes a provision to extend the U.S. federal research tax credit from January 1, 2008 through December 31, 2009. The credit had expired at the end of 2007. The Company expects to claim this credit in 2008 and will record the associated tax benefit in the fourth quarter.
Discontinued Operations:
                 
  YTD 2008 YTD 2007 $ Change % Change
 
(Dollars in millions)                
Gain on disposal, net of taxes   $0.7  $(0.7)  (100.0)%
 
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 nine months of 2007 represent an additional $0.7 million gain on disposal, net of tax, primarily due to a purchase price adjustment.Company.
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 gains and losses on the dissolution of subsidiaries). Refer to Note 11 — Segment Information for the reconciliation of adjusted EBIT by Segmentsegment to consolidated income before income taxes.
Effective January 1, 2008, the Company began operating under new reportable segments. The Company’s four reportable segments are: Mobile Industries, Process Industries, Aerospace and Defense and Steel. Segment results for 2007 have been reclassified to conform to the 2008 presentation of segments.

24


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Mobile Industries Segment:
                     
  3Q 2008 3Q 2007 $ Change Change    
 
(Dollars in millions)                    
Net sales, including intersegment sales $539.0  $586.7  $(47.7)  (8.1)%    
                     
Adjusted EBIT $4.5  $10.4  $(5.9)  (56.7)%    
Adjusted EBIT margin  0.8%  1.8%     (100) bps  
 
 
  YTD 2008 YTD 2007 $ Change Change    
 
(Dollars in millions)                    
Net sales, including intersegment sales $1,802.5  $1,828.7  $(26.2)  (1.4)%    
                     
Adjusted EBIT $45.6  $55.9  $(10.3)  (18.4)%    
Adjusted EBIT margin  2.5%  3.1%     (60) bps  
 
Sales by the Mobile Industries segment include global sales of bearings, power transmission components and other products and services (other than steel) to a diverse customer base, including original equipment manufacturers and suppliers of passenger cars, light trucks, medium- to heavy-duty trucks, rail cars, locomotives, agricultural, construction and mining equipment. The Mobile Industries segment also includes aftermarket distribution operations for automotive applications.
                 
  1Q 2009 1Q 2008 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $372.9  $635.3  $(262.4)  (41.3)%
Adjusted EBIT (loss) $(24.9) $30.6  $(55.5)  (181.4)%
Adjusted EBIT (loss) margin  (6.7)%  4.8%    (1,150) bps
 
The presentation below reconciles the changes in net sales of the Mobile Industries segment operations reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of currency exchange rates. The effects of currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period. The year 20072008 represents the base year for which the effects of currency are measured; as a result,such, currency is assumed to be zero for the respective periods of 2007.
                 
  3Q 2008 3Q 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $539.0  $586.7  $(47.7)  (8.1)%
Currency  11.0      11.0  NM
     
Net sales, excluding the impact of currency $528.0  $586.7  $(58.7)  (10.0)%
 
                 
  YTD 2008 YTD 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $1,802.5  $1,828.7  $(26.2)  (1.4)%
Currency  70.1      70.1  NM
     
Net sales, excluding the impact of currency $1,732.4  $1,828.7  $(96.3)  (5.3)%
 
The Mobile Industries segment’s net sales, excluding the effects of currency-rate changes, decreased 10.0% for the third quarter of 2008, compared to the third quarter of 2007, primarily due to lower demand from the North American and European light-vehicle sector, partially offset by higher demand from heavy truck and off-highway customers and favorable pricing. Adjusted EBIT margins were lower in the third quarter of 2008 compared to the third quarter of 2007, primarily due to lower manufacturing utilization due to lower demand, higher raw material and logistics costs and a higher allowance for doubtful accounts, partially offset by favorable pricing, product mix and LIFO income.
The Mobile Industries segment’s net sales, excluding the effects of currency-rate changes, decreased 5.3% for the first nine months of 2008, compared to the first nine months of 2007, primarily due to lower demand from the North American light-vehicle sector, including lower sales due to a strike at one of the Company’s customers during the first six months of 2008, partially offset by higher demand from heavy truck, off-highway and automotive aftermarket customers and favorable pricing. Adjusted EBIT margins were lower in the first nine months of 2008 compared to the first nine months of 2007, primarily due to higher raw material and logistics costs, higher LIFO charges, lower automotive demand and the impact of the strike at one of the Company’s customers, partially offset by favorable pricing and product mix. The Mobile Industries segment’s sales are expected to decrease in the fourth quarter of 2008 compared to the fourth quarter of 2007 as favorable pricing is expected to be more than offset by declines in demand from the light-vehicle and rail market sectors. In addition, adjusted EBIT margins for the Mobile Industries segment are expected to be significantly below the fourth quarter of 2007 levels as increases in raw materials costs and the lower utilization of manufacturing capacity will more than offset pricing and portfolio management initiatives and restructuring initiatives.2008.

2524


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
                 
  1Q 2009 1Q 2008 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $372.9  $635.3  $(262.4)  (41.3)%
Currency  (48.5)     (48.5) NM 
 
Net sales, excluding the impact of currency $421.4  $635.3  $(213.9)  (33.7)%
 
The Mobile Industries segment’s net sales, excluding the effects of currency-rate changes, decreased 33.7% for the first quarter of 2009, compared to the first quarter of 2008, primarily due to lower volume of approximately $240 million, partially offset by improved pricing and favorable sales mix of approximately $25 million. The lower volume was seen across all market sectors, led by a 47% decline in light vehicle demand and a 53% decline in heavy truck demand. Adjusted EBIT was lower in the first quarter of 2009 compared to the first quarter of 2008, primarily due to the impact of underutilization of manufacturing capacity of approximately $70 million and the impact of lower demand of $45 million, partially offset by improved pricing and favorable sales mix of approximately $25 million, lower selling, administrative and general expenses of $25 million and lower logistics costs of approximately $15 million. The lower selling, administrative and general expenses reflect actions taken by management to align business activities with business conditions.
The Mobile Industries segment’s sales are expected to decrease approximately 30 to 35 percent in 2009, compared to 2008 full-year results, as demand is expected to be down across all of the Mobile Industries’ market sectors, primarily driven by anticipated declines in global heavy-truck demand of approximately 50%, global light-vehicle demand of approximately 35% and global off-highway demand of approximately 35%. These decreases are expected to be partially offset by improved pricing. The Company believes it will be able to continue to obtain year-over-year price improvements based on recent experience. The Company does expect to see improvements from its automotive distribution channel during the latter part of 2009, compared to the full year of 2008. In addition, adjusted EBIT for the Mobile Industries segment is expected to decrease during the remaining nine months of 2009, compared to the same period of the prior year, as lower demand is partially offset by improved pricing and lower selling, administrative and general expenses. In reaction to the current and anticipated lower demand, the Mobile Industries segment reduced total employment levels by approximately 1,300 positions during the first quarter of 2009. The Company expects to continue to take actions in the Mobile Industries segment to properly align its business with market demand.
Process Industries Segment:
                 
  3Q 2008 3Q 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $346.5  $260.7  $85.8   32.9%
                 
Adjusted EBIT $81.7  $33.4  $48.3   144.6%
Adjusted EBIT margin  23.6%  12.8%     1,080 bps
 
                 
  YTD 2008 YTD 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $987.4  $776.1  $211.3   27.2%
                 
Adjusted EBIT $205.1  $98.8  $106.3   107.6%
Adjusted EBIT margin  20.8%  12.7%     810 bps
 
Sales by the Process Industries segment include global sales of bearings, power transmission components and other products and services (other than steel) to a diverse customer base, including those in the power transmission, energy and heavy industry market sectors. The Process Industries segment also includes aftermarket distribution operations for products other than steel and automotive applications.
                 
  1Q 2009 1Q 2008 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $243.2  $312.6  $(69.4)  (22.2)%
Adjusted EBIT $47.0  $59.0  $(12.0)  (20.3)%
Adjusted EBIT margin  19.3%  18.9%    40 bps
 
The presentation below reconciles the changes in net sales of the Process Industries segment operations reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of currency exchange rates. The effects of currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period. The year 20072008 represents the base year for which the effects of currency are measured; as a result,such, currency is assumed to be zero for the respective periods of 2007.2008.
                 
  3Q 2008 3Q 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $346.5  $260.7  $85.8   32.9%
Currency  6.5      6.5  NM
 
Net sales, excluding the impact of currency $340.0  $260.7  $79.3   30.4%
 
                                
 YTD 2008 YTD 2007 $ Change Change 1Q 2009 1Q 2008 $ Change Change
(Dollars in millions)  
Net sales, including intersegment sales $987.4 $776.1 $211.3  27.2% $243.2 $312.6 $(69.4)  (22.2)%
Currency 34.5  34.5 NM  (22.2)   (22.2) NM 
Net sales, excluding the impact of currency $952.9 $776.1 $176.8  22.8% $265.4 $312.6 $(47.2)  (15.1)%
The Process Industries segment’s net sales, excluding the effects of currency-rate changes, increased 30.4%decreased 15.1% in the thirdfirst quarter of 2008,2009, compared to the same period in the prior year, primarily due to higherlower volume particularly from itsof approximately $80 million, partially offset by improved pricing and favorable sales mix of approximately $30 million. The lower volume was seen across most market sectors, led by a 42% decline in global metals and mining markets, a 39% decline in global wind energy demand and a 16% decline in gear drive demand. In addition, the Company’s industrial distribution channel as well as itshas experienced a 20% decline in demand. These declines were partially offset by increases in global power transmission andgeneration market demand. Adjusted EBIT was lower in the heavy industry market sectors,first quarter of 2009 compared to the first quarter of 2008, primarily due to the impact of lower volumes of approximately $40 million, partially offset by favorable pricing and favorable pricing.sales mix of approximately $30 million. The Company expects lower Process Industries segment began benefiting from increasing large-bore bearing capacity in Romania, China, Indiasales and adjusted EBIT for the United States to serve heavy industrial market sectors. Adjusted EBIT margins were higher in the third quarterremainder of 20082009, compared to the thirdfull year of 2008, due to significantly reduced demand across most Process Industries’ market sectors. In reaction to the current and anticipated lower demand, the Process Industries segment reduced total employment levels by approximately 600 positions during the first quarter of 2007, primarily due to favorable pricing and higher volumes, partially offset by higher raw material and manufacturing costs.
2009. The Process Industries segment’s net sales excluding the effects of currency-rate changes, increased 22.8% for the first nine months of 2008,are expected to decrease approximately 25% to 30% in 2009 as compared to the first nine months of 2007, due to higher volume, particularly from its industrial distribution channel, as well as the heavy industry and power transmission market sectors, and favorable pricing. Adjusted EBIT margins were higher in the first nine months of 2008 compared to the first nine months of 2007, primarily due to favorable pricing and higher volumes, partially offset by higher raw material and manufacturing costs.
levels. The Company expects to continue to take actions in the Process Industries segment results for the fourth quarter of 2008 to be better than the fourth quarter of 2007 as it benefits from continued strength in heavy industry and energy markets, as well as from distribution, for the remainder of 2008. The Process Industries segment is also expected to benefit from increased manufacturing capacity and improved pricing.properly align its business with market demand.

2625


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Aerospace and Defense Segment:
                 
  3Q 2008 3Q 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $110.0  $70.4  $39.6   56.3%
                 
Adjusted EBIT $12.5  $0.4  $12.1  NM
Adjusted EBIT margin  11.4%  0.6%     1,080 bps
 
                 
  YTD 2008 YTD 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $317.8  $218.5  $99.3   45.4%
                 
Adjusted EBIT $31.8  $11.1  $20.7   186.5%
Adjusted EBIT margin  10.0%  5.1%     490 bps
 
Sales by the Aerospace and Defense segment include sales of bearings, helicopter transmission systems, rotor head assemblies, turbine engine components, gears and other precision flight-critical components for commercial and military aviation applications. The Aerospace and Defense segment also provides aftermarket services, including repair and overhaul of engines, transmissions and fuel controls, as well as aerospace bearing repair and component reconditioning. Sales by the Aerospace and Defense segment also include sales of bearings and related products for health and positioning control applications.
                 
  1Q 2009 1Q 2008 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $112.6  $102.1  $10.5   10.3%
Adjusted EBIT $18.6  $7.2  $11.4   158.3%
Adjusted EBIT margin  16.5%  7.1%    940 bps
 
The presentation below reconciles the changes in net sales of the Aerospace and Defense segment operations reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of acquisitions made in the last twelve months2008 and currency exchange rates. The effects of acquisitions and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period. During the fourth quarter of 2007,2008, the Company completed the acquisition of the assets of Purdy.EXTEX. Acquisitions in the current year represent the increase in sales, year over year, for this recent acquisition. The year 20072008 represents the base year for which the effects of currency are measured; as a result,such, currency is assumed to be zero for the respective periods of 2007.2008.
                 
  3Q 2008 3Q 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $110.0  $70.4  $39.6   56.3%
Acquisitions  20.3      20.3  NM
Currency  0.3      0.3  NM
 
Net sales, excluding the impact of acquisitions and currency $89.4  $70.4  $19.0   27.0%
 
                                
 YTD 2008 YTD 2007 $ Change Change 1Q 2009 1Q 2008 $ Change Change
(Dollars in millions)  
Net sales, including intersegment sales $317.8 $218.5 $99.3  45.4% $112.6 $102.1 $10.5  10.3%
Acquisitions 62.4  62.4 NM 3.1  3.1 NM 
Currency 3.2  3.2 NM  (2.3)   (2.3) NM 
Net sales, excluding the impact of acquisitions and currency $252.2 $218.5 $33.7  15.4% $111.8 $102.1 $9.7  9.5%
The Aerospace and Defense segment’s net sales, excluding the effectimpact of acquisitions and currency-rate changes, increased 27.0%9.5% in the thirdfirst quarter of 2008,2009, compared to the thirdfirst quarter of 2007,2008, as a result of higher volumeimproved pricing and favorable pricing. Adjusted EBIT margins increased insales mix of approximately $7 million and higher volumes of approximately $3 million. Profitability for the thirdfirst quarter of 2008, compared to the third quarter of 2007, primarily due to favorable pricing, the favorable impact of the Purdy acquisition and improved manufacturing productivity, partially offset by investments in capacity additions at aerospace precision products plants in North America and China.
The Aerospace and Defense segment’s net sales, excluding the effect of acquisitions and currency-rate changes, increased 15.4% during the first nine months of 2008,2009, compared to the first nine monthsquarter of 2007,2008, improved primarily due to favorable pricing and higher volumes. Adjusted EBIT margins increasedleveraging these increases in the first nine months of 2008, compared to the first nine months of 2007, primarily due to the favorable impact of acquisitions and favorable pricing, partially offset by investments in capacity additions at aerospace precision products plants in North America and China.
sales with improved manufacturing performance. The Company expects demand for products in the Aerospace and Defense segment to remain strongsee a modest increase in sales for the remainder of 2008. Margins for2009, compared to 2008, as a result of the fourth quartercontinued integration of 2008 are expected to be comparable to the fourth quarteracquisition of The Purdy Corporation, acquired in October 2007, aswhich has a strong defense oriented profile, and the benefits from the inclusion of a full year of sales from the EXTEX acquisition. The Aerospace and Defense segment benefits fromsegment’s adjusted EBIT is expected to improve slightly in 2009, leveraging improved manufacturing performance and the integration of the Purdy acquisition and strong end-market demand.

27


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)acquisitions.
Steel Segment:
                 
  3Q 2008 3Q 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $536.5  $381.1  $155.4   40.8%
                 
Adjusted EBIT $133.8  $52.3  $81.5   155.8%
Adjusted EBIT margin  24.9%  13.7%     1,120 bps
 
                 
  YTD 2008 YTD 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $1,480.5  $1,182.2  $298.3   25.2%
                 
Adjusted EBIT $267.5  $183.7  $83.8   45.6%
Adjusted EBIT margin  18.1%  15.5%     260 bps
 
The Steel segment sells steel of low and intermediate alloy and carbon grades in both solid and tubular sections, as well as custom-made steel products for industrial, energy and automotive applications.
                 
  1Q 2009 1Q 2008 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $248.6  $425.0  $(176.4)  (41.5)%
Adjusted EBIT $(7.3) $53.4  $(60.7)  (113.7)%
Adjusted EBIT margin  -2.9%  12.6%    (1,150) bps
 
The presentation below reconciles the changes in net sales of the Steel segment operations reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of surcharges, acquisitions and divestitures completedmade in the last twelve months2008 and currency exchange rates. Surcharges are a pricing mechanism that the Company uses to recover scrap steel, energy and alloy costs. Surcharges were higher during the third quarter and first nine months of 2008, compared to respective periods of 2007, primarily driven by higher scrap steel costs, as well as the timing of the Company’s surcharge mechanism to recover these costs. The effects of acquisitions divestitures and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period. In FebruaryDuring the first quarter of 2008, the Company completed the acquisition of the assets of BSI. In April 2007,Acquisitions in the Company completedcurrent year represent the closure of the Company’s former seamless steel tube manufacturing facility locatedincrease in Desford, England.sales, year over year, for this acquisition. The year 20072008 represents the base year for which the effects of currency are measured; as a result,such, currency is assumed to be zero for the respective periods2008.
                 
  1Q 2009 1Q 2008 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $248.6  $425.0  $(176.4)  (41.5)%
Acquisitions  7.5      7.5  NM 
Currency  (1.8)     (1.8) NM 
 
Net sales, excluding the impact of acquisitions and currency $242.9  $425.0  $(182.1)  (42.8)%
 

26


Management’s Discussion and Analysis of 2007.
                 
  3Q 2008 3Q 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $536.5  $381.1  $155.4   40.8%
Surcharges  232.4   95.2   137.2   144.1%
Acquisitions  13.7      13.7  NM
Divestitures          NM
Currency  0.3      0.3  NM
 
Net sales, excluding the impact of surcharges, acquisitions, divestitures and currency $290.1  $285.9  $4.2   1.5%
 
                 
  YTD 2008 YTD 2007 $ Change Change
 
(Dollars in millions)                
Net sales, including intersegment sales $1,480.5  $1,182.2  $298.3   25.2%
Surcharges  537.7   282.5   255.2   90.3%
Acquisitions  32.0      32.0  NM
Divestitures  (42.2)     (42.2) NM
Currency  1.2      1.2  NM
 
Net sales, excluding the impact of surcharges, acquisitions, divestitures and currency $951.8  $899.7  $52.1   5.8%
 
Financial Condition and Results of Operations (continued)
The Steel segment’s net sales for the thirdfirst quarter of 2009, excluding the effect of acquisitions and currency-rate changes, decreased 42.8% compared to the first quarter of 2008 excludingprimarily due to lower volume of approximately $100 million across all market sectors and lower surcharges in the effectsfirst quarter of surcharges, acquisitions, divestitures and currency rate changes, increased 1.5%2009, compared to the thirdfirst quarter of 2007,2008. Surcharges decreased to $37.3 million in the first quarter of 2009 from $117.3 million in the first quarter of 2008. Surcharges are a pricing mechanism that the Company uses to recover scrap steel, energy and certain alloy costs, which are derived from published monthly indices. The average scrap index for the first quarter of 2009 was $219 per ton compared to $396 per ton for the first quarter of 2008. Steel shipments for the first quarter of 2009 were 202,289 tons, compared to 314,929 tons for the first quarter 2008, a decrease of 35.8%. The Steel segment’s average selling price, including surcharges, was $1,229 per ton for the first quarter of 2009, compared to an average selling price of $1,349 per ton in the first quarter of 2008. The decrease in the average selling prices was primarily the result of lower surcharges. The lower surcharges were the result of lower prices for certain input raw materials, especially scrap steel, molybdenum, nickel, manganese and chrome.
The Steel segment’s adjusted EBIT decreased $60.7 million in the first quarter of 2009, compared to the first quarter of 2008, primarily due to strong demand by customers in most market sectors,lower surcharges of $80 million, the impact of lower sales volume of approximately $30 million and the impact of underutilization of capacity of approximately $30 million, partially offset by lower automotive demand. Adjusted EBIT marginsraw material costs of approximately $50 million and lower LIFO charges of $29 million. In the first quarter of 2009, the Steel segment recognized LIFO income of $12 million, compared to LIFO expense of $17 million in the thirdfirst quarter of 2008. Raw material costs consumed in the manufacturing process, including scrap steel, alloys and energy, decreased 32% in the first quarter of 2009 over the comparable period in the prior year to an average cost of $317 per ton.
The Company expects the Steel segment to see a 55% to 65% decrease in sales for the remainder of 2009 due to lower volume and lower average selling prices. The average selling prices are driven by lower surcharges as scrap steel and alloy costs have fallen substantially from historically high levels in 2008. The Company also expects lower demand across most markets, primarily driven by a 50% decline in energy markets and a 40% decline in industrial markets. The Company expects the Steel segment’s adjusted EBIT to be significantly lower in 2009 primarily due to the lower average selling prices, partially offset by lower raw material costs and related LIFO. Scrap costs are expected to remain at current levels, as are alloy and energy costs. As a result of lower scrap costs and other raw material costs, as well as lower quantities, the Steel segment expects to recognize approximately $49 million in LIFO income for 2009. In light of the current market demands, the Steel segment reduced total employment levels by approximately 140 positions in late 2008 increasedand the first quarter of 2009. The Company will continue to take actions in the Steel segment to properly align its business with market demand.
Corporate Expense:
                 
  1Q 2009 1Q 2008 $ Change Change
 
(Dollars in millions)                
Corporate Expenses $12.3  $16.4  $(4.1)  (25.0)%
Corporate expenses % to net sales  1.3%  1.1%    20 bps
 
Corporate expenses decreased for the first quarter of 2009, compared to the third quartersame period in 2008, as a result of 2007,lower performance-based compensation and the result of restructuring initiatives.
The Balance Sheet
Total assets as shown on the Consolidated Balance Sheet at March 31, 2009 decreased by $218.2 million from December 31, 2008. This decrease was primarily due to higher surchargeslower working capital as a result of lower volumes, the impact of foreign currency translation and lower capital expenditures in excess2009.
Current Assets:
                 
  March 31, Dec. 31,    
  2009 2008 $ Change % Change
 
(Dollars in millions)                
Cash and cash equivalents $112.0  $116.3  $(4.3)  (3.7)%
Accounts receivable, net  538.8   609.4   (70.6)  (11.6)%
Inventories, net  1,060.4   1,145.7   (85.3)  (7.4)%
Deferred income taxes  83.6   83.4   0.2   0.2%
Deferred charges and prepaid expenses  12.4   11.1   1.3   11.7%
Other current assets  63.9   67.6   (3.7)  (5.5)%
 
Total current assets $1,871.1  $2,033.5  $(162.4)  (8.0)%
 
Refer to the Consolidated Statement of Cash Flows for a discussion of the decrease in cash and cash equivalents. Accounts receivable, net decreased as a result of the lower sales in the first quarter of 2009, as compared to the fourth quarter of 2008. The decrease in inventories was primarily due to lower volume and the Company’s concerted effort to decrease inventory levels, lower raw material costs LIFOand the impact of foreign currency translation.

27


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Property, Plant and Equipment – Net:
                 
  March 31, Dec. 31,    
  2009 2008 $ Change % Change
 
(Dollars in millions)                
Property, plant and equipment $4,010.0  $4,029.4  $(19.4)  (0.5)%
Less: allowances for depreciation  (2,311.7)  (2,285.5)  (26.2)  1.1%
 
Property, plant and equipment — net $1,698.3  $1,743.9  $(45.6)  (2.6)%
 
The decrease in property, plant and equipment – net in the first quarter of 2009 was primarily due to current-year depreciation expense exceeding capital expenditures and the impact of foreign currency translation.
Other Assets:
                 
  March 31, Dec. 31,    
  2009 2008 $ Change % Change
 
(Dollars in millions)                
Goodwill $228.2  $230.0  $(1.8)  (0.8)%
Other intangible assets  169.8   173.7   (3.9)  (2.2)%
Deferred income taxes  309.9   315.0   (5.1)  (1.6)%
Other non-current assets  40.6   40.0   0.6   1.5%
 
Total other assets $748.5  $758.7  $(10.2)  (1.3)%
 
The decrease in other intangible assets was primarily due to amortization expense recognized in the first quarter of 2009.
Current Liabilities:
                 
  March 31, Dec. 31,    
  2009 2008 $ Change % Change
 
(Dollars in millions)                
Short-term debt $100.2  $91.5  $8.7   9.5%
Accounts payable and other liabilities  342.5   443.4   (100.9)  (22.8)%
Salaries, wages and benefits  156.5   218.7   (62.2)  (28.4)%
Income taxes payable  11.3   22.5   (11.2)  (49.8)%
Deferred income taxes  5.1   5.1      0.0%
Current portion of long-term debt  268.7   17.1   251.6  NM
 
Total current liabilities $884.3  $798.3  $86.0   10.8%
 
The increase in short-term debt was primarily due to increased net borrowings by the Company’s foreign subsidiaries under lines of credit due to higher seasonal working capital requirements. The decrease in accounts payable and other liabilities was primarily due to lower volumes. The decrease in accrued salaries, wages and benefits was the result of the payout of 2008 performance-based compensation in the first quarter of 2009. The decrease in income higher volume and favorable sales mix,taxes payable was primarily due to income tax payments during the quarter, partially offset by higher raw material costs, higher manufacturing costs and the effect of weaker automotive demand. There are timing differences between when the Company purchases raw materials, when the surcharges are invoiced to customers, and when the raw material costs are reflectedprovision for current-year taxes. The increase in the costcurrent portion of long-term debt was primarily due to the reclassification of the Company’s $250 million fixed-rate unsecured notes, which mature in February 2010, from non-current liabilities to current liabilities.
Non-Current Liabilities:
                 
  March 31, Dec. 31,    
  2009 2008 $ Change % Change
 
(Dollars in millions)                
Long-term debt $261.4  $515.3  $(253.9)  (49.3)%
Accrued pension cost  842.2   844.0   (1.8)  (0.2)%
Accrued postretirement benefits cost  611.4   613.0   (1.6)  (0.3)%
Deferred income taxes  9.3   10.4   (1.1)  (10.6)%
Other non-current liabilities  98.4   92.0   6.4   7.0%
 
Total non-current liabilities $1,822.7  $2,074.7  $(252.0)  (12.1)%
 
The decrease in long-term debt was primarily due to the reclassification of the Company’s $250 million fixed-rate unsecured notes, which mature in February 2010, to current liabilities.

28


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
products sold. The Steel segment also benefited from the BSI acquisition. The Steel segment recorded LIFO income of $17.9 million during the third quarter of 2008, compared to LIFO expense of $9.3 million during the third quarter of 2007. The LIFO income recorded during the third quarter of 2008 is a result of expectations of lower steel scrap costs by the end of 2008. Prior to the third quarter of 2008, the Steel segment had recorded $45.2 million of LIFO expense during the first six months of 2008 due to escalating steel scrap costs. Refer to Note 3 — Inventory for further discussion of interim LIFO calculations.
The Steel segment’s net sales for the first nine months of 2008, excluding the effects of surcharges, acquisitions, divestitures and currency rate changes, increased 5.8%, compared to the first nine months of 2007, primarily due to strong demand by customers in the energy market sector, partially offset by lower automotive demand. Adjusted EBIT margins in the first nine months of 2008 increased compared to the first nine months of 2007, primarily due to higher raw material surcharges, higher volume and favorable sales mix, partially offset by LIFO charges, higher raw material costs and higher manufacturing costs. LIFO charges for the first nine months of 2008 were $14.6 million higher than the first nine months of 2007.
The Company expects the Steel segment sales to be higher in the fourth quarter of 2008, compared to the fourth quarter of 2007, as a result of the favorable impact of the BSI acquisition and higher surcharges, partially offset by lower automotive demand. However, the Steel segment results for the fourth quarter of 2008 are expected to be lower than the fourth quarter of 2007 as raw material costs are expected to exceed surcharges during the quarter due to the timing of the Company’s surcharge mechanism, partially offset by a favorable impact of the BSI acquisition. The Company expects to fully recoup its raw material costs for the full 2008 year. Scrap steel costs are expected to significantly decrease from the third quarter to the fourth quarter, after being at historically high levels for most of 2008. In addition, the effects of the timing differences in the Company’s surcharge mechanism are anticipated to be magnified between the third and fourth quarters of 2008 due to an expected significant decrease in raw material costs, beginning late in the third quarter.
Corporate Expense:
                 
  3Q 2008 3Q 2007 $ Change Change
 
(Dollars in millions)                
Corporate Expenses $19.0  $14.4  $4.6   31.9%
Corporate expenses % to net sales  1.3%  1.1%     20 bps
 
                 
  YTD 2008 YTD 2007 $ Change Change
 
(Dollars in millions)                
Corporate Expenses $54.8  $48.1  $6.7   13.9%
Corporate expenses % to net sales  1.2%  1.2%     0 bps
 
Corporate expenses increased for the third quarter and first nine months of 2008, compared to the third quarter and first nine months of 2007 as a result of higher performance-based compensation.
The Balance Sheet
Total assets as shown on the Consolidated Balance Sheet at September 30, 2008 increased by $327.8 million from December 31, 2007. This increase was primarily due to increased working capital required to support higher sales and the BSI acquisition, partially offset by the impact of foreign currency translation.
Current Assets:
                 
  Sept. 30, Dec. 31,    
  2008 2007 $ Change % Change
 
(Dollars in millions)                
Cash and cash equivalents $94.7  $30.2  $64.5   213.6%
Accounts receivable, net  814.7   748.5   66.2   8.8%
Inventories, net  1,297.9   1,087.7   210.2   19.3%
Deferred income taxes  66.5   69.1   (2.6)  (3.8)%
Deferred charges and prepaid expenses  16.3   14.2   2.1   14.8%
Other current assets  87.2   95.6   (8.4)  (8.8)%
 
Total current assets $2,377.3  $2,045.3  $332.0   16.2%
 
Refer to the Consolidated Statement of Cash Flows for a discussion of the increase in cash and cash equivalents. Accounts receivable, net increased as a result of the higher sales in the third quarter of 2008, as compared to the fourth quarter of 2007, partially offset by higher allowance for doubtful accounts. The increase in inventories was primarily due to higher raw material costs, higher volume and the BSI acquisition, partially offset by the impact of foreign currency translation. The

29


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
decrease in other current assets was driven by the sale of the manufacturing facility in Desford, England, which was previously classified as “assets held for sale.”
Property, Plant and Equipment — Net:
                 
  Sept. 30, Dec. 31,    
  2008 2007 $ Change % Change
 
(Dollars in millions)                
Property, plant and equipment $4,026.0  $3,932.8  $93.2   2.4%
Less: allowances for depreciation  (2,292.5)  (2,210.7)  (81.8)  3.7%
 
Property, plant and equipment — net $1,733.5  $1,722.1  $11.4   0.7%
 
The increase in property, plant and equipment — net in the first nine months of 2008 was primarily due to capital expenditures exceeding 2008 depreciation expense.
Other Assets:
                 
  Sept. 30, Dec. 31,    
  2008 2007 $ Change % Change
 
(Dollars in millions)                
Goodwill $273.5  $271.8  $1.7   0.6%
Other intangible assets  167.7   160.5   7.2   4.5%
Deferred income taxes  80.5   100.9   (20.4)  (20.2)%
Other non-current assets  74.6   78.7   (4.1)  (5.2)%
 
Total other assets $596.3  $611.9  $(15.6)  (2.5)%
 
The increase in goodwill was primarily due to acquisitions, partially offset by the impact of foreign currency translation. The increase in other intangible assets was primarily due to acquisitions, partially offset by amortization expense recognized during the first nine months of 2008. The decrease in deferred income taxes was primarily due to additional deductions claimed on the Company’s 2007 U.S. Federal income tax return arising from a change in a tax accounting method, partially offset by the estimated deferred tax benefit for the current year.
Current Liabilities:
                 
  Sept. 30, Dec. 31,    
  2008 2007 $ Change % Change
 
(Dollars in millions)                
Short-term debt $201.2  $108.4  $92.8   85.6%
Accounts payable and other liabilities  535.7   528.0   7.7   1.5%
Salaries, wages and benefits  240.6   212.0   28.6   13.5%
Income taxes payable  55.1   17.1   38.0   222.2%
Deferred income taxes  6.2   4.7   1.5   31.9%
Current portion of long-term debt  16.1   34.2   (18.1)  (52.9)%
 
Total current liabilities $1,054.9  $904.4  $150.5   16.6%
 
The increase in short-term debt was primarily due to increased net borrowings under the Company’s Asset Securitization Facility to support acquisition activity and reduce the Company’s borrowings under the Company’s Senior Credit Facility. The increase in salaries, wages and benefits was the result of accrued 2008 performance-based compensation, partially offset by the payout of 2007 performance-based compensation in the first quarter of 2008. The increase in income taxes payable was primarily due to the provision for current-year taxes, offset by income tax payments during the first nine months of 2008, including payments related to the closure of prior year U.S. federal income tax audits, as well as a reclassification of a portion of the accrual for uncertain tax positions from current income taxes payable to other non-current liabilities. The decrease in the current portion of long-term debt was primarily due to the payment of medium-term notes that matured during the first quarter of 2008.

30


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-Current Liabilities:
                 
  Sept. 30, Dec. 31,    
  2008 2007 $ Change % Change
 
(Dollars in millions)                
Long-term debt $521.9  $580.6  $(58.7)  (10.1)%
Accrued pension cost  145.6   169.4   (23.8)  (14.0)%
Accrued postretirement benefits cost  656.9   662.4   (5.5)  (0.8)%
Deferred income taxes  14.9   10.6   4.3   40.6%
Other non-current liabilities  106.2   91.2   15.0   16.4%
 
Total non-current liabilities $1,445.5  $1,514.2  $(68.7)  (4.5)%
 
The decrease in long-term debt was primarily due to a reduction in the utilization of the Company’s Senior Credit Facility. The decrease in accrued pension cost in the first nine months of 2008 was primarily due to foreign-based pension plan contributions, partially offset by current year accruals for pension expense. The increase in other non-current liabilities was primarily due to the reclassification of a portion of the accrual for uncertain tax positions from current income taxes payable to other non-current liabilities.
Shareholders’ Equity:
                                
 Sept. 30, Dec. 31,     March 31, Dec. 31,    
 2008 2007 $ Change % Change 2009 2008 $ Change % Change
(Dollars in millions)  
Common stock $887.7 $862.8 $24.9  2.9% $888.5 $891.4 $(2.9)  (0.3)%
Earnings invested in the business 1,633.6 1,379.9 253.7  18.4% 1,563.6 1,580.1  (16.5)  (1.0)%
Accumulated other comprehensive loss  (303.1)  (271.2)  (31.9)  11.8%  (854.3)  (819.6)  (34.7)  4.2%
Treasury shares  (11.5)  (10.8)  (0.7)  6.5%  (4.2)  (11.6) 7.4  (63.8)%
Noncontrolling interest 17.3 22.8  (5.5)  24.1%
Total shareholders’ equity $2,206.7 $1,960.7 $246.0  12.5%
Total equity $1,610.9 $1,663.1 $(52.2)  (3.1)%
Earnings invested in the business increaseddecreased in the first nine monthsquarter of 20082009 by dividends declared of $17.4 million, partially offset by net income of $303.8 million, partially reduced by dividends declared of $50.1$0.9 million. The increase in accumulated other comprehensive loss was primarily due to the negative impact of foreign currency translation partially offset byand the recognition of prior-year service costs and actuarial losses for defined benefit pension and postretirement benefit plans. The decrease in the foreign currency translation adjustment of $65.7$44.5 million was due to the strengthening of the U.S. dollar relative to other currencies, such as the Euro, the Indian rupee, the Romanian lei the British pound and the Brazilian real.Polish zloty. See “Foreign Currency” for further discussion regarding the impact of foreign currency translation. Treasury shares decreased in the first quarter of 2009 as a result of Company utilizing these shares for the Company’s stock compensation plans. Noncontrolling interest decreased in the first quarter of 2009 primarily due to net losses attributable to noncontrolling interest.
Cash Flows:
                        
 YTD 2008 YTD 2007 $ Change 1Q 2009 1Q 2008 $ Change
(Dollars in millions)  
Net cash provided by operating activities $298.1 $186.2 $111.9 
Net cash provided (used) by operating activities $37.4 $(12.9) $50.3 
Net cash used by investing activities  (209.4)  (184.3)  (25.1)  (29.5)  (78.6) 49.1 
Net cash used by financing activities  (12.8)  (24.6) 11.8 
Net cash (used) provided by financing activities  (9.7) 124.8  (134.5)
Effect of exchange rate changes on cash  (11.3) 9.4  (20.7)  (2.4) 4.7  (7.1)
Increase (decrease) in cash and cash equivalents $64.6 $(13.3) $77.9 
(Decrease) increase in cash and cash equivalents $(4.2) $38.0 $(42.2)
Net cash provided byfrom operating activities increased from $186.2provided cash of $37.4 million for the first nine monthsquarter of 2007 to $298.12009 after using cash of $12.9 million for the first nine monthsquarter of 2008 as a2008. The change in cash from operating activities was the result of a higher net incomecash provided by working capital items, particularly inventories and accounts receivable, and lower pension and postretirement benefit payments. Net income was $303.8 million for the first nine monthspayments, partially offset by lower net income. Inventories provided cash of 2008, compared to $171.8$65.4 million in the first nine monthsquarter of 2007. Pension and postretirement benefit payments were $57.12009 after using cash of $68.6 million forin the first nine monthsquarter of 2008, compared to $139.02008. Accounts receivable provided cash of $61.1 million forin the first nine monthsquarter of 2007. These increases were partially offset by an increase2009 after using cash of $71.6 million in cash used for working capital requirements, particularly inventorythe first quarter of 2008. Inventories and accounts receivable partially offset by accountsdecreased in the first quarter of 2009 primarily due to lower volumes and the Company’s effort to improve working capital. Accounts payable and other accrued expenses. Inventory wasexpenses, including income taxes, were a use of cash of $222.6$152.7 million infor the first nine monthsquarter of 20082009, compared to a use of cash of $34.8$2.8 million for the first quarter of 2008. Pension and postretirement benefit payments were $15.1 million for the first quarter of 2009, compared to $25.9 million for the first quarter of 2008. Net income decreased $83.6 million in the first nine monthsquarter of 2007. Accounts receivable was a use of cash of $70.2 million in the first nine months of 2008 compared to a use of cash of $39.9 million in the first nine months of 2007. Inventories and accounts receivable increased during the first nine months of 2008 primarily due to higher volumes and higher inventory costs. Accounts payable and other accrued expenses provided cash of $95.3 million in the first nine months of 2008 after using cash of $38.1 million in the first nine months of 2007. The change in accounts payable and accrued expenses was primarily due to higher accrued income taxes in 2008, compared to 2007, as well as higher accrued performance-based compensation for the first nine months of 2008,2009, compared to the first nine monthsquarter of 2007.

31


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)2008.
The net cash used by investing activities of $209.4$29.5 million for the first ninethree months of 2008 increased2009 decreased from the same period in 20072008 primarily due to higherlower acquisition activity and lower capital expenditures in the current year, partially offset by higherlower proceeds from disposals of property, plant and equipment. Cash used for acquisitions increased $55.7decreased $55.3 million in 2008,2009, compared to the same period in 2007,2008, primarily due to the acquisition of the assets of BSI acquisition.in 2008. Capital expenditures decreased $18.9 million in the first quarter of 2009, compared to the first quarter of 2008. The Company expects to decrease capital expenditures by approximately 40% in 2009, compared to the 2008 level, as it reacts to the current economic downturn. Proceeds from the disposal of property, plant and equipment increased $18.3decreased $26.9 million primarily due to the sale of the Company’s former seamless steel tube manufacturing facility located in Desford, England for approximately $28.0 million. Capital expenditures decreased $10.1 million forduring the first nine monthsquarter of 2008, compared to the first nine months of 2007.2008.
The net cash flows from financing activities used cash of $12.8$9.7 million forin the first nine monthsquarter of 2009 after providing cash of $124.8 million in the first quarter of 2008, after using cash of $24.6 million during the first nine months of 2007. The decrease in net cash used by financing activities for the first nine months of 2008 wasas a result of the Company increasingdecreasing its net borrowings by $35.3 million to support acquisition activity, partially offset by a decrease of $20.1$133.5 million in proceedslight of cash provided from the exercise of stock optionsoperations during the first nine monthsquarter of 2008, compared to the first nine months2009 and lower acquisition activity, as well as lower capital expenditures.

29


Management’s Discussion and Analysis of 2007.Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources
Total debt was $739.2$630.3 million at September 30, 2008,March 31, 2009, compared to $723.2$623.9 million at December 31, 2007.2008. Net debt was $644.5$518.3 million at September 30, 2008,March 31, 2009, compared to $693.0$507.6 million at December 31, 2007.2008. The net debt to capital ratio was 22.6%24.3% at September 30, 2008,March 31, 2009, compared to 26.1%23.4% at December 31, 2007.2008.
Reconciliation of total debt to net debt and the ratio of net debt to capital:
Net Debt:
                
 Sept. 30, Dec. 31, March 31, Dec. 31,
 2008 2007 2009 2008
(Dollars in millions)  
Short-term debt $201.2 $108.4  $100.2 $91.5 
Current portion of long-term debt 16.1 34.2  268.7 17.1 
Long-term debt 521.9 580.6  261.4 515.3 
Total debt 739.2 723.2  630.3 623.9 
Less: cash and cash equivalents  (94.7)  (30.2)  (112.0)  (116.3)
Net debt $644.5 $693.0  $518.3 $507.6 
Ratio of Net Debt to Capital:
                
 Sept. 30, Dec. 31, March 31, Dec. 31,
 2008 2007 2009 2008
(Dollars in millions)  
Net debt $644.5 $693.0  $518.3 $507.6 
Shareholders’ equity 2,206.7 1,960.7  1,610.9 1,663.0 
Net debt + shareholders’ equity (capital) $2,851.2 $2,653.7  $2,129.2 $2,170.6 
Ratio of net debt to capital  22.6%  26.1%  24.3%  23.4%
The Company presents net debt because it believes net debt is more representative of the Company’s financial position.
At September 30, 2008,March 31, 2009, the Company had no outstanding borrowings under the Company’s Asset Securitization, which provides for borrowings up to $175 million, subject to certain borrowing base limitations, and is secured by certain domestic trade receivables of the Company. As of March 31, 2009, although the Company had no outstanding borrowings under the Asset Securitization, certain borrowing base limitations reduced the availability under the Asset Securitization to $111.6 million.
At March 31, 2009, the Company had no outstanding borrowings under its $500 million Amended and Restated Credit Agreement (Senior Credit Facility), but it had letters of credit outstanding totaling $41.5$41.0 million, which reduced the availability under the Senior Credit Facility to $458.5$459.0 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 September 30, 2008,March 31, 2009, the Company was in full compliance with the covenants under the Senior Credit Facility and its other debt agreements. The maximum consolidated leverage ratio permitted under the Senior Credit Facility is 3.0 to 1.0. As of March 31, 2009, the Company’s consolidated leverage ratio was 0.98 to 1.0. The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility is 2.0 to 1.0. As of March 31, 2009, the Company’s consolidated interest coverage ratio was 9.46 to 1.0. Were the Company to borrow the remaining balances available under both the Senior Credit Facility and the Company’s Asset Securitization, the Company would still be in full compliance with the covenants under the Senior Credit Facility and its other debt agreements as of March 31, 2009. Refer to Note 7 Financing Arrangements for further discussion.
At September 30, 2008, the Company had outstanding borrowings of $95.0 million 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 September 30, 2008, outstanding borrowings reduced the availability under the Asset Securitization to $105.0 million. The Company’s Asset Securitization matures in December 2008. The Company expects to refinance this 364-day facility by the end of 2008.
The Company expects that any cash requirements in excess of cash generated from operating activities will be met by the committed availabilitiesfunds available under its Asset Securitization and Senior Credit Facility, which totaled $563.5$570.6 million as of September 30,March 31, 2008. The Company believes it has sufficient liquidity to meet its obligations through at least the middle of 2010.

32


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Other sources of liquidity include lines of credit for certain of the Company’s foreign subsidiaries, which provide for borrowings up to $430.3$423.7 million. The majority of these lines are uncommitted. At September 30, 2008,March 31, 2009, the Company had borrowings outstanding of $106.2$100.2 million, which reduced the availability under these facilities to $324.1$323.5 million.
In the third quarter of 2008, Moody’s Investors Service increased Timken’s corporate credit rating to “Baa3,” which is considered investment-grade, reflecting the Company’s improved financial condition. This rating is consistent with the Company’s investment-grade rating from Standard & Poor’s Ratings Services (BBB-).

30


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The Company has $250 million of fixed-rate unsecured notes which mature in February 2010. In addition, the Company’s $500 million revolving Senior Credit Facility, as noted above, expires in June 2010. The current credit shortage affecting the world economy may impact the availability of credit throughout 2009 and is expected to result in higher financing costs on any new credit. The Company plans to refinance both the unsecured notes and the Senior Credit Facility in advance of their maturities, but expects financing costs to increase.
The Company expects to continue to generate cash from operations due to lower working capital levels, as well as by reducing selling, administrative and general expenses. In addition, the Company expects to decrease capital expenditures by 40% in 2009, compared to 2008. However, pension contributions are expected to increase to approximately $70 million to $75 million in 2009, compared to $22.1 million in 2008, primarily due to negative asset returns in the Company’s defined benefit pension plans during 2008.
The Company will likely take further actions to reduce expenses and preserve liquidity beyond the actions announced to-date as it reacts to the current global economic and financial crisis, including the impact on the automotive industry. In addition, further actions are expected to reduce expenses to optimize the size of the Company as a result of the economy and current and anticipated market demand. However, these actions are not expected to have a material impact on the liquidity of the Company.
Financing Obligations and Other Commitments
The Company currently expects to make cash contributions of $21.4approximately $70 million to $75 million, including $50 million of discretionary U.S. contributions, to its global defined benefit pension plans in 2008. Through October 31, 2008, returns2009. The estimated contributions are lower than previous estimates as a result of lower expected discretionary U.S. contributions. Returns for ourthe Company’s global defined benefit pension plan assets in 2008 were significantly below ourthe expected rate of return assumption of 8.75 percent, due to broad declines in global equity markets. These unfavorable returns negatively impacted the funded status of the plans at the end of 2008 and are expected to result in significant pension contributions over the next several years. The decrease in global defined benefit pension assets in 2008 is expected to increase pension expense by approximately $15 million in 2009 and may significantly impact future pension expense beyond 2009. Through March 31, 2009, returns for the Company’s global defined benefit pension plan assets were below the expected rate of return assumption of 8.75 percent, due to the continued decline in the global equity markets. This is expected toThese lower returns may negatively impact the funded status of the plans at the end of 2008,2009, which in turn may impact future pension expense and required cash contributions.
During the first nine monthsquarter of 2008,2009, the Company did not purchase any shares of its common stock pursuant to authorizationas 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, which are to be held as treasury shares and used for specificspecified purposes, up to an aggregate of $180 million. The Company may exercise this authorization untilexpires on December 31, 2012.
The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.
Recently Adopted Accounting Pronouncements:
In September 2006, the Financial Accounting Standards Board (FASB)FASB issued Statement of Financial Accounting Standard (SFAS)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. The implementation of SFAS No. 157 for financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on the Company’s results of operations and financial condition.
Recently Issued Accounting Pronouncements:
In February 2008, the FASB Issuedissued FASB Staff Position (FSP) FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP FAS 157-2 delaysdelayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The Company’s significant nonfinancial assets and liabilities that could be impacted by this deferral include assets and liabilities initially measured at fair value in a business combination and goodwill tested annually for impairment. The adoptionimplementation of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, iseffective January 1, 2009, did not expected to have a material impact on the Company’s results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)).
SFAS No. 
141(R) provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests and goodwill acquired in a business combination. SFAS No. 141(R) also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS No. 141(R) is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. The adoptionimplementation of SFAS No. 141(R) is, effective January 1, 2009, did not expected to have a material impact on the Company’s results of operations and financial condition.

31


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”160. SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The adoptionimplementation of SFAS No. 160, iseffective January 1, 2009, did not expected to have a material impact on the Company’s results of operations and financial condition.

33


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 requires entities to provide greater transparency through additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”Activities,” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Upon adoption,The implementation of SFAS No. 161, effective January 1, 2009, expanded the Company will include additional disclosures of itson derivative instruments and related hedged item and did not have a material impact on the Company’s results of operations and financial condition. See Note 16 – Derivative Instruments and Hedging Activities for the expanded disclosures.
In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP No. EITF 03-6-1 clarifies that unvested share-based payment awards that contain rights to comply with this standard.receive nonforfeitable dividends are participating securities. FSP No. EITF 03-6-1 provides guidance on how to allocate earnings to participating securities and compute earnings per share using the two-class method. FSP No. EITF 03-6-1 is effective for fiscal years beginning after December 31, 2008, and interim periods within those fiscal years. FSP No. EITF 03-6-1 did not have a material impact on the Company’s disclosure of earnings per share. See Note 10 – Earnings Per Share for the computation of earnings per share using the two-class method.
Recently Issued Accounting Pronouncements:
In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP FAS 132(R)-1 requires the disclosure of additional information about investment allocation, fair values of major categories of assets, development of fair value measurements and concentrations of risk. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The adoption of FSP FAS 132(R)-1 is not expected to have a material impact on the Company’s results of operations and financial condition.
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. TheExcept for the following critical accounting policies on Inventory and Goodwill, 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, 2007,2008, during the ninethree months ended September 30,March 31, 2009.
Inventory:
Inventories are valued at the lower of cost or market, with approximately 48% valued by the last-in, first-out (LIFO) method and the remaining 52% valued by the first-in, first-out (FIFO) method. The majority of the Company’s domestic inventories are valued by the LIFO method and all of the Company’s international (outside the United States) inventories are valued by the FIFO method. An actual valuation of the inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation. The Company’s Steel segment recognized $12.4 million in LIFO income for the first quarter ended March 31, 2009, compared to LIFO expense of $16.6 million for the first quarter ended March 31, 2008. Based on current expectations of inventory levels and costs, the Steel segment expects to recognize approximately $49.5 million in LIFO income for the year ended December 31, 2009. The expected reduction in the LIFO reserve for 2009 is a result of lower costs, especially scrap steel costs, as well as lower quantities. A 1.0% increase in costs would reduce the current LIFO income estimate for 2009 by $1.2 million. A 1.0% increase in inventory quantities would reduce the current LIFO income estimate for 2009 by $0.4 million.

32


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Goodwill:
The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually. The Company performs its annual impairment test during the fourth quarter after the annual forecasting process is completed. Furthermore, goodwill is reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Each interim period, management of the Company assesses whether or not an indicator of impairment is present that would necessitate a goodwill impairment analysis be performed in an interim period other than during the fourth quarter.
The Company reviews goodwill for impairment at the reporting unit levels. The Company’s reporting units are the same as its reportable segments: Mobile Industries, Process Industries, Aerospace and Defense and Steel. During the fourth quarter of 2008, the Company reviewed its reporting units for impairment. The Company’s four reporting units each provide their forecast of results for the next three years. In addition, the Company projects revenue growth and operating profit margin beyond the three years. The Company prepares its goodwill impairment analysis by comparing the carrying value of each reporting unit with its fair value, using an income approach (a discounted cash flow model) and a market approach. The following table provides some of the Company’s material assumptions used in preparing the goodwill impairment analysis:
                 
  Mobile Process Aerospace and  
  Industries Industries Defense Steel
 
Income approach:                
Discount rate  12.0%  11.0%  12.0%  11.0%
Market approach:                
Sales Multiple  0.4   1.0   1.0   0.5 
EBIT multiple  6.3   6.0   8.0   3.8 
 
As a result of the goodwill impairment analysis performed during the fourth quarter of 2008, the Company recognized a goodwill impairment loss of $48.8 million for the Mobile Industries segment in its financial statements for the year ending December 31, 2008. The fair value of each of the Company’s other reporting units exceeded their carrying value.
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 Statement of Income.
Foreign currency exchange gains included in the Company’s operating results for the three months ended September 30, 2008March 31, 2009 were $2.4$6.2 million, compared to foreign currency exchange lossesa loss of $2.5$2.9 million forduring the three months ended September 30, 2007. Foreign currency exchange gains included in the Company’s operating results for the nine months ended September 30, 2008 were $0.9 million, compared to foreign currency exchange losses of $5.5 million for the nine months ended September 30, 2007.March 31, 2008. For the three months ended September 30, 2008,March 31, 2009, the Company recorded a negative non-cash foreign currency translation adjustment of $106.9$44.5 million that decreased shareholders’ equity, compared to a positive non-cash foreign currency translation adjustment of $34.6$28.6 million that increased shareholders’ equity infor the three months ended September 30, 2007. For the nine months ended September 30, 2008, the Company recorded a negative non-cash foreign currency translation adjustment of $65.7 million that decreased shareholders’ equity, compared to a positive non-cash foreign currency translation adjustment of $80.8 million that increased shareholders’ equity in the nine months ended September 30, 2007.March 31, 2008. The foreign currency translation adjustment for the three months and nine months ended September 30, 2008 wereMarch 31, 2009 was negatively impacted by the strengthening of the U.S. dollar relative to other currencies, such as the Euro, the Indian rupee, the Romanian lei the British pound and the Brazilian real.Polish zloty.
Quarterly Dividend:
On November 7, 2008,April 24, 2009, the Company’s Board of Directors declared a quarterly cash dividend of $0.18$0.09 per share. The dividend will be paid on DecemberJune 2, 20082009 to shareholders of record as of November 21, 2008.May 22, 2009. This will be the 346th348th consecutive dividend paid on the common stock of the Company.

33


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Forward-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 contains 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 athe global economic slowdown, 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 conduct business, and significant changes in currency valuations;
 
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,bankruptcies, the impact of changes in industrial business cycles and whether conditions of fair trade continue in the U.S. market;markets;

34


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
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;
 
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, environmental issues, and environmental issues;taxes;
 
g) changes in worldwide financial markets, including availability of financing and interest rates to the extent they affect the Company’s ability to raise capital or increase the Company’s cost of funds, including the ability to refinance its unsecured notes and Senior Credit Facility, have an impact on the overall performance of the Company’s pension fund investments and/or cause changes in the global economy and financial markets which affect customer demand and the ability of customers to obtain financing to purchase the Company’s products or equipment which contains the Company’s products; 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, 2007 and in the Company’s Quarterly Report on Form 10-Q for the quarters ended June 30, 2008 and March 31, 2008.
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.

3534


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, 2007.
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, 2008. There have been no material changes in reported market risk since the inclusion of this discussion in the Company’s Annual Report on Form 10-K referenced above.
Item 4. Controls and Procedures
 (a) Disclosure Controls and Procedures
 
   As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
 
 (b) Changes in Internal Control Over Financial Reporting
 
   During the Company’s 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.

3635


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 is not expected to have a materially adverse effect on the Company’s consolidated financial position or results of operations.
Item 1A. Risk Factors
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008 an June 30, 2008 included 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 the Form 10-K and the Forms 10-Q.10-K.
WeaknessChanges in global economic conditions, weakness in any of the industries in which our customers operate the cyclical nature of our customers’ businesses generally or changes in financial markets could adversely impact our revenues and profitability by reducing demand and margins.
Our results of operations are materially affected by the conditions in the global economy generally and in global capital markets. The current global economic downturn has caused extreme volatility in the capital markets and in the end markets in which our customers operate. Our revenues may be negatively affected by changes in customer demand, changes in the product mix and negative pricing pressure in the industries in which we operate. Many of the industries in which our end customers operate are cyclical. Margins in those industries are highly sensitive to demand cycles, and our customers in those industries historically have tended to delay large capital projects, including expensive maintenance and upgrades, during economic downturns. As a result, our business is also cyclical and our revenues and earnings are impacted by overall levels of industrial production.
Certain automotive industry companies have recently experienced significant financial downturns. Earlier this year and in 2005, we increased our reserve for accounts receivable relating to our automotive industry customers. If any of our automotive industry customers becomes insolvent or files for bankruptcy, our ability to recover accounts receivable from that customer would be adversely affected and any payment we received in the preference period prior to a bankruptcy filing may be potentially recoverable. In addition, financial instability of certain companies that participate in the automotive industry supply chain could disrupt production in the industry. A disruption of production in the automotive industry could have a materially adverse effect on our financial condition and earnings.
Our results of operations can be materially affected by the conditions in the global financial markets. If an end user cannot obtain financing to purchase our products, either directly or indirectly contained in machinery or equipment, demand for our products will be reduced, which could have a material adverse effect on our financial condition and earnings.
Any changeCertain automotive industry companies have recently experienced significant financial downturns. In both 2008 and in the operationfirst quarter of 2009, we increased our reserve for accounts receivable relating to our automotive industry customers. If any of our rawautomotive industry customers becomes insolvent or files for bankruptcy, our ability to recover accounts receivable from that customer would be adversely affected and any payment we received in the preference period prior to a bankruptcy filing may be potentially recoverable by the bankruptcy estate. Furthermore, if certain of our automotive industry customers liquidate in bankruptcy, we may incur impairment charges relating to obsolete inventory, machinery and equipment. In addition, financial instability of certain companies that participate in the automotive industry supply chain could disrupt production in the industry. A disruption of production in the automotive industry could have a material surcharge mechanisms, a raw material market indexadverse effect on our financial condition and earnings.
The unprecedented conditions in the financial and credit markets may affect the availability and cost of credit.
The Company has $250 million of fixed-rate unsecured notes which mature in February 2010. In addition, our $500 million revolving Senior Credit Facility expires in June 2010. The Company plans to refinance both the unsecured notes and the Senior Credit Facility in advance of their maturities.
The financial and credit markets are experiencing unprecedented levels of volatility and disruption, which has impacted the general availability of credit and resulted in significantly higher financing costs. If the Company is unable to issue debt or obtain credit as we need it, including refinancing our unsecured notes and the Senior Credit Facility, our liquidity and ability to operate our business may be adversely impacted. If the Company is able to issue debt, including by refinancing our unsecured notes or the availability or costSenior Credit Facility, it is expected to incur significantly higher financing costs.

36


The failure to achieve the anticipated results of raw materialsour restructuring, rationalization and energy resourcesrealignment initiatives could materially affect our revenues and earnings.
We require substantialIn 2005, we refined our plans to rationalize our Canton bearing operations. During 2005, we announced plans for our Automotive Group (now part of our Mobile Industries segment) 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 Mobile Industries workforce. In 2009 we announced plans to reduce operative and professional employment levels, overhead costs and discretionary expenditures.
The initiatives relating to the Canton bearing operations, the Mobile Industries segment, and the employment and cost reductions are each targeted to deliver annual pretax savings, assuming certain amounts of raw materials,costs. The failure to achieve the anticipated results of any of these plans, including scrap metalour targeted costs and alloysannual savings, could materially adversely affect our earnings. In addition, increases in other costs and natural gas to operate our business. Many of our customer contracts contain surcharge pricing provisions. The surcharges are tied to a widely-available market index forexpenses may offset any cost savings from these efforts.
We may incur further impairment and restructuring charges that specific raw material. Many of the widely-available raw material market indices have recently experienced wide fluctuations. Any change in a raw material market index could materially affect our revenues. Any changeprofitability.
We have taken approximately $159.2 million in impairment and restructuring charges during the last four years related to the Company’s restructuring, rationalization and realignment initiatives. We expect to take additional charges in connection with the Canton bearing operations, Mobile Industries segment, and employment and cost reduction initiatives. Continued weakness in business or economic conditions, or changes in our business strategy, may result in additional restructuring programs and may require us to take additional charges in the relationship betweenfuture, which could have a material adverse effect on our earnings.
The underfunded status of our pension plans may require large contributions which may divert funds from other uses.
The underfunded status of our pension plans may require us to make large contributions to such plans. We made cash contributions of approximately $1 million, $80 million and $243 million in 2008, 2007 and 2006, respectively, to our U.S.-based defined benefit pension plans and currently expect to make cash contributions of approximately $50 million in 2009 to such plans. However, we cannot predict whether changing economic conditions, the market indices and our underlying costs could materially affect our earnings. Any change in our projected year end input costs could materially affect our LIFO inventory valuation method and earnings.
Moreover, future disruptionsperformance of assets in the supply of our raw materialsplans, or energy resources could impair our ability to manufacture our products for our customersother factors will lead us or require us to pay higher pricesmake contributions in orderexcess of our current expectations, diverting funds we would otherwise apply to obtain these raw materials or energy resources from other sources, and could thereby affect our sales and profitability. Any increase in the prices for such raw materials or energy resources could materially affect our costs and therefore our earnings.uses.

37


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 September 30, 2008March 31, 2009 of its common stock.
                 
          Total number  Maximum 
          of shares  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) 
 
7/1/08 - 7/31/08  1,995  $33.12      4,000,000 
8/1/08 - 8/31/08  5,783   32.50      4,000,000 
9/1/08 - 9/30/08  168   32.33      4,000,000 
 
Total  7,946  $32.65      4,000,000 
 
                 
          Total number Maximum
          of shares 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)
 
1/1/09 - 1/31/09  229  $19.29      4,000,000 
2/1/09 - 2/28/09  85,799   14.81      4,000,000 
3/1/09 - 3/31/09  127   13.98      4,000,000 
 
Total  86,155  $14.82      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) For restricted shares, the average price paid per share is an average calculated using the daily high and low of the Company’s common stock as quoted on the New York Stock Exchange at the time of vesting. For stock options, the price paid is the 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.
Item 6. Exhibits
 
12 Computation of Ratio of Earnings to Fixed Charges
 
 
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.

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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
     
THE TIMKEN COMPANY  Date 
May 7, 2009
 
Date November 7, 2008 By /s/ James W. Griffith
James W. Griffith
  
  James W. Griffith  
  President, Chief Executive Officer and Director
(Principal Executive Officer)
 
 
   
Date NovemberMay 7, 20082009
 By /s/ Glenn A. Eisenberg
Glenn A. Eisenberg
  
  Glenn A. Eisenberg  
  Executive Vice President - Finance
and Administration (Principal Financial Officer)
  

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