Annual Reports

  • 10-K (Feb 28, 2014)
  • 10-K (Feb 13, 2013)
  • 10-K (Feb 17, 2012)
  • 10-K (Feb 22, 2011)
  • 10-K (Feb 25, 2010)
  • 10-K (Feb 26, 2009)

 
Quarterly Reports

 
8-K

 
Other

Timken Company 10-K 2010
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Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)   Identification No.)
     
1835 Dueber Avenue, S.W., Canton, Ohio   44706
(Address of principal executive offices)   (Zip Code)
(330) 438-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of each exchange on which registered
     
Common Stock, without par value   New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                         Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ    Accelerated filer o    Non-accelerated filer   o
(Do not check if a smaller reporting company)
  Smaller reporting company o 
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
     As of June 30, 2009, the aggregate market value of the registrant’s common shares held by non-affiliates of the registrant was $1,484,076,144 based on the closing sale price as reported on the New York Stock Exchange.
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding at January 31, 2010
     
Common Shares, without par value   96,902,886 shares
DOCUMENTS INCORPORATED BY REFERENCE
     
Document   Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held May 11, 2010 (Proxy Statement)
  Part III
 
 

 


 

THE TIMKEN COMPANY
INDEX TO FORM 10-K REPORT
                 
            PAGE  
I.   PART I.  
 
       
       
 
       
    Item 1.       1  
            1  
            1  
            2  
            3  
            4  
            4  
            5  
            5  
            6  
            6  
            6  
            7  
            7  
            7  
            7  
    Item 1A.       8  
    Item 1B.       13  
    Item 2.       14  
    Item 3.       14  
    Item 4.       14  
    Item 4A.       15  
II.   PART II.  
 
       
       
 
       
    Item 5.       16  
    Item 6.       19  
    Item 7.       20  
    Item 7A.       51  
    Item 8.       52  
    Item 9.       93  
    Item 9A.       93  
    Item 9B.       95  
III.   Part III.  
 
       
       
 
       
    Item 10.       95  
    Item 11.       95  
    Item 12.       95  
    Item 13.       95  
    Item 14.       95  
IV.   Part IV.  
 
       
       
 
       
    Item 15.       96  
       
 
       
 EX-4.9
 EX-10.1
 EX-10.2
 EX-10.3
 EX-10.4
 EX-10.6
 EX-10.21
 EX-12
 EX-21
 EX-23
 EX-24
 EX-31.1
 EX-31.2
 EX-32

 


Table of Contents

PART I.
Item 1. Business
General
As used herein, the term “Timken” or the “Company” refers to The Timken Company and its subsidiaries unless the context otherwise requires. The Timken Company develops, manufactures, markets and sells products for friction management and power transmission, alloy steels and steel components.
The Company was founded in 1899 by Henry Timken, who received two patents on the design of a tapered roller bearing. Timken grew to become the world’s largest manufacturer of tapered roller bearings. Over the years, the Company has expanded its breadth of bearing products beyond tapered roller bearings to include cylindrical, spherical, needle and precision ball bearings. In addition to bearings, Timken further broadened its portfolio to include a wide array of friction management products and maintenance services to improve the operation of customers’ machinery and equipment, such as lubricants, seals, bearing maintenance tools and condition-monitoring equipment. The Company also manufactures power transmission components and assemblies, as well as systems such as helicopter transmissions, high-quality alloy steel, bars and tubing to custom specifications to meet demanding performance requirements, and finished and semi-finished steel components.
The Company’s business strategy is to grow by optimizing its portfolio and organization. The Company is focused on those markets that offer attractive opportunities for growth and customers who place a premium on Timken’s capabilities.
On December 31, 2009, the Company completed the sale of the assets of its Needle Roller Bearings (NRB) operations to JTEKT Corporation. The NRB operations manufacture needle roller bearings, including a range of radial and thrust needle roller bearings, as well as bearing assemblies and loose needles, for automotive and industrial applications. The NRB operations have facilities in the United States, Canada, Europe and China. The Mobile Industries segment accounted for approximately 80 percent of the 2009 sales of the NRB operations.
Timken’s global footprint consists of 47 manufacturing facilities, 8 technology and engineering centers, 12 distribution centers and nearly 17,000 employees. Timken operates in 26 countries and territories.
Industry Segments
The Company operates 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. Financial information for the segments is discussed in Note 13 to the Consolidated Financial Statements.
Description of types of products and services from which each reportable segment derives its revenues
The Company’s reportable segments are business units that target different industry segments or types of product. Each reportable segment is managed separately because of the need to specifically address customer needs in these different industries.
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 and heavy-duty trucks, rail cars, locomotives and agricultural, construction and mining equipment. Customers also include aftermarket distributors of automotive products.
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, coal conveyors and crushers, drilling equipment and food processing equipment. Customers also include aftermarket distributors of products other than those for steel and automotive applications.

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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. In addition, the Aerospace and Defense segment also manufactures bearings for original equipment manufacturers of health and positioning control equipment.
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, including precision steel components. Approximately 10% of the Company’s steel is consumed in its bearing operations. In addition, sales are made to other anti-friction bearing companies and to the automotive and truck, forging, construction, industrial equipment, oil and gas drilling companies and to steel service centers.
Measurement of segment profit or loss and segment assets
The Company evaluates performance and allocates resources based on return on capital and profitable growth. The primary measurement used by management to measure the financial performance of each segment is adjusted EBIT (earnings before interest and taxes, excluding special items such as impairment and restructuring charges, rationalization and integration costs, one-time gains or losses on sales of assets, allocated receipts received or payments made under the Continued Dumping and Subsidy Offset Act (CDSOA), gains and losses on the dissolution of a subsidiary and other items similar in nature). The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are recorded at values based on market prices, which creates intercompany profit on intersegment sales or transfers that is eliminated in consolidation.
Factors used by management to identify the enterprise’s reportable segments
The Company reports net sales by geographic area in a manner that is more reflective of how the Company operates its segments, which is by the destination of net sales. Long-lived assets by geographic area are reported by the location of the subsidiary.
Export sales from the United States and Canada are less than 10% of revenue. The Company’s Bearings and Power Transmission Group has historically participated in the global bearing industry, while the Steel Group has concentrated primarily on U.S. customers.
Timken’s non-U.S. operations are subject to normal international business risks not generally applicable to domestic business. These risks include currency fluctuation, changes in tariff restrictions, difficulties in establishing and maintaining relationships with local distributors and dealers, import and export licensing requirements, difficulties in staffing and managing geographically diverse operations and restrictive regulations by foreign governments, including price and exchange controls.
Geographical Financial Information:
                                 
    United States   Europe   Other Countries   Consolidated
 
2009
                               
Net sales
  $ 1,943,229     $ 536,182     $ 662,216     $ 3,141,627  
Long-lived assets
    976,427       117,230       241,571       1,335,228  
 
 
                               
2008
                               
Net sales
  $ 3,339,381     $ 852,319     $ 849,100     $ 5,040,800  
Long-lived assets
    1,140,289       149,481       227,202       1,516,972  
 
 
                               
2007
                               
Net sales
  $ 3,174,035     $ 736,424     $ 621,607     $ 4,532,066  
Long-lived assets
    1,095,622       166,452       190,767       1,452,841  
 

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Products
The Timken Company manufactures two core product lines: anti-friction bearings and steel products. Differentiation in these two product lines is achieved by either: (1) differentiation by bearing type or steel type or (2) differentiation in the applications of bearings and steel.
Tapered Roller Bearings. The tapered roller bearing is Timken’s principal product in the anti-friction industry segment. It consists of four components: (1) the cone or inner race, (2) the cup or outer race, (3) the tapered rollers, which roll between the cup and cone and (4) the cage, which serves as a retainer and maintains proper spacing between the rollers. Timken manufactures or purchases these four components and then sells them in a wide variety of configurations and sizes.
The tapered rollers permit ready absorption of both radial and axial load combinations. For this reason, tapered roller bearings are particularly well-adapted to reducing friction where shafts, gears or wheels are used. The uses for tapered roller bearings are diverse and include applications on passenger cars, light and heavy trucks and trains, as well as a wide variety of industrial applications, ranging from very small gear drives to bearings over two meters in diameter for wind energy machines. A number of applications utilize bearings with sensors to measure parameters such as speed, load, temperature or overall bearing condition.
Matching bearings to the specific requirements of customers’ applications requires engineering and, often, sophisticated analytical techniques. The design of Timken’s tapered roller bearing permits distribution of unit pressures over the full length of the roller. This design, combined with high precision tolerances, proprietary internal geometry and premium quality material, provides Timken bearings with high load-carrying capacities, excellent friction-reducing qualities and long lives.
Precision Cylindrical and Ball Bearings. Timken’s aerospace and super precision facilities produce high-performance ball and cylindrical bearings for ultra high-speed and/or high-accuracy applications in the aerospace, medical and dental, computer and other industries. These bearings utilize ball and straight rolling elements and are in the super precision end of the general ball and straight roller bearing product range in the bearing industry. A majority of Timken’s aerospace and super precision bearings products are custom-designed bearings and spindle assemblies. They often involve specialized materials and coatings for use in applications that subject the bearings to extreme operating conditions of speed and temperature.
Spherical and Cylindrical Bearings. Timken produces spherical and cylindrical roller bearings for large gear drives, rolling mills and other process industry and infrastructure development applications. These products are sold worldwide to original equipment manufacturers and industrial distributors serving major industries, including construction and mining, natural resources, defense, pulp and paper production, rolling mills and general industrial goods.
Services. A small part of the business involves providing bearing reconditioning services for industrial and railroad customers, both domestically and internationally. These services accounted for less than 5% of the Company’s net sales for the year ended December 31, 2009.
Aerospace Products and Services. Through strategic acquisitions and ongoing product development, Timken continues to expand its portfolio of parts, systems and services for the aerospace market, where they are used in helicopters and fixed-wing aircraft for the military and commercial aviation. Timken provides design, manufacture and testing for a wide variety of power transmission and drive train components including transmissions, gears and rotor head components. Other parts include bearings, airfoils (such as blades, vanes, rotors and diffusers), nozzles and other precision flight critical components.
Timken also supplies comprehensive aftermarket maintenance, repair and overhaul services and parts for gas turbine engines, gearboxes and accessory systems in rotary and fixed-wing aircraft. Services range from aerospace bearing repair and component reconditioning to the complete overhaul of engines, transmissions and fuel controls.
Steel. Steel products include steels of low and intermediate alloy, as well as some carbon grades. These products are available in a wide range of solid and tubular sections with a variety of lengths and finishes. These steel products are used in a wide array of applications, including bearings, automotive transmissions, engine crankshafts, oil drilling components and other similarly demanding applications.
Timken also produces custom-made steel products, including steel components for automotive and industrial customers. This steel components business has provided the Company with the opportunity to further expand its market for tubing and capture higher value-added steel sales. It also enables Timken’s traditional tubing customers in the automotive and bearing industries to take advantage of higher-performing components that cost less than current alternative products. Customization of products is an important component of the Company’s steel business.

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Sales and Distribution
Timken’s products in the Bearings and Power Transmission Group are sold principally by its own internal sales organizations. A portion of the Process Industries segment’s sales are made through authorized distributors.
Traditionally, a main focus of the Company’s sales strategy has consisted of collaborative projects with customers. For this reason, the Company’s sales forces are primarily located in close proximity to its customers rather than at production sites. In some instances, the sales forces are located inside customer facilities. The Company’s sales force is highly trained and knowledgeable regarding all friction management products, and employees assist customers during the development and implementation phases and provide ongoing support.
The Company has a joint venture in North America focused on joint logistics and e-business services. This alliance is called CoLinx, LLC and was founded by Timken, SKF Group, INA and Rockwell Automation. The e-business service is focused on information and business services for authorized distributors in the Process Industries segment. The Company also has another e-business joint venture which focuses on information and business services for authorized industrial distributors in Europe, Latin America and Asia. This alliance, which Timken founded with SKF Group, Sandvik AB, INA and Reliance, is called Endorsia.com International AB.
Timken’s steel products are sold principally by its own sales organization. Most orders are customized to satisfy customer-specific applications and are shipped directly to customers from Timken’s steel manufacturing plants. Less than approximately 10% of Timken’s Steel Group net sales are intersegment sales. In addition, sales are made to other anti-friction bearing companies and to the automotive and truck, forging, construction, industrial equipment, oil and gas drilling and aircraft industries and to steel service centers.
Timken has entered into individually negotiated contracts with some of its customers in its Bearings and Power Transmission Group and Steel Group. These contracts may extend for one or more years and, if a price is fixed for any period extending beyond current shipments, customarily include a commitment by the customer to purchase a designated percentage of its requirements from Timken. Timken does not believe that there is any significant loss of earnings risk associated with any given contract.
Competition
The anti-friction bearing business is highly competitive in every country in which Timken sells products. Timken competes primarily based on price, quality, timeliness of delivery, product design and the ability to provide engineering support and service on a global basis. The Company competes with domestic manufacturers and many foreign manufacturers of anti-friction bearings, including SKF Group, Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd.
Competition within the steel industry, both domestically and globally, is intense and is expected to remain so. Principal bar competitors include foreign-owned domestic producers MacSteel (wholly-owned by Brazilian steelmaker Gerdau, S.A), Republic Engineered Products (a unit of Mexican steel producer ICH) and Mittal Steel USA (a unit of Luxembourg-based ArcelorMittal Steel S.A.), along with domestic steel producers Steel Dynamics and Nucor Corporation. Seamless tubing competitors include foreign-owned domestic producers ArcelorMittal Tubular Products, V&M Star Tubes (a unit of Vallourec, S.A.), and Tenaris, S.A. Additionally, Timken competes with a wide variety of offshore producers of both bars and tubes, including Sanyo Special Steel and Ovako. Timken also provides value-added steel products to its customers in the energy, industrial and automotive sectors. Competitors within the value-added segment include Linamar, Jernberg, Formflo and Curtis Screw Company.
Maintaining high standards of product quality and reliability, while keeping production costs competitive, is essential to Timken’s ability to compete with domestic and foreign manufacturers in both the anti-friction bearing and steel businesses.

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Trade Law Enforcement
The U.S. government has six antidumping duty orders in effect covering ball bearings from France, Germany, Italy, Japan and the United Kingdom and tapered roller bearings from China. The Company is a producer of all of these products in the United States. The U.S. government determined in August 2006 that each of these six antidumping duty orders should remain in effect for an additional five years, after which the orders could be reviewed again.
Continued Dumping and Subsidy Offset Act (CDSOA)
The CDSOA provides for distribution of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. The Company reported CDSOA receipts, net of expenses, of $3.6 million, $10.2 million and $7.9 million in 2009, 2008 and 2007, respectively.
In September 2002, the World Trade Organization (WTO) ruled that such payments are not consistent with international trade rules. In February 2006, U.S. legislation was enacted that ends CDSOA distributions for dumped imports covered by antidumping duty orders entering the United States after September 30, 2007. Instead, any such antidumping duties collected would remain with the U.S. Treasury. This legislation would be expected to reduce likely distributions in years beyond 2007, with distributions eventually ceasing. Several countries have objected that this U.S. legislation is not consistent with WTO rulings, and have been granted retaliation rights by the WTO, typically in the form of increased tariffs on some imported goods from the United States. The European Union and Japan have been retaliating in this fashion against the operation of U.S. law.
In 2006, the U.S. Court of International Trade (CIT) ruled, in two separate decisions, that the procedure for determining eligible recipients for CDSOA distributions is unconstitutional. In February 2009, the U.S. Court of Appeals for the Federal Circuit reversed both decisions of the CIT. In December 2009, a plaintiff petitioned the U.S. Supreme Court to hear an appeal, and the Supreme Court’s decision on whether to hear the case is expected later in 2010. The Company is unable to determine, at this time, what the ultimate outcome of litigation regarding CDSOA will be.
There are a number of factors that can affect whether the Company receives any CDSOA distributions and the amount of such distributions in any year. These factors include, among other things, potential additional changes in the law, ongoing and potential additional legal challenges to the law, and the administrative operation of the law. Accordingly, the Company cannot reasonably estimate the amount of CDSOA distributions it will receive in future years, if any. It is possible that court rulings might prevent the Company from receiving any CDSOA distributions in 2010 and beyond. Any reduction of CDSOA distributions would reduce our earnings and cash flow.
Joint Ventures
The balances related to investments accounted for under the equity method are reported in Other non-current assets on the Consolidated Balance Sheet, which were approximately $9.5 million and $13.6 million at December 31, 2009 and 2008, respectively.

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Backlog
The backlog of orders of Timken’s domestic and overseas operations is estimated to have been $1.4 billion at December 31, 2009 and $2.2 billion at December 31, 2008. Actual shipments are dependent upon ever-changing production schedules of customers. Accordingly, Timken does not believe that its backlog data and comparisons thereof, as of different dates, are reliable indicators of future sales or shipments.
Raw Materials
The principal raw materials used by Timken in its North American bearing plants to manufacture bearings are its own steel tubing and bars, purchased strip steel and energy resources. Outside North America, the Company purchases raw materials from local sources with whom it has worked closely to ensure steel quality according to the Company’s demanding specifications.
The principal raw materials used by Timken in steel manufacturing are scrap metal, nickel, molybdenum and other alloys. The availability and prices of raw materials and energy resources are subject to curtailment or change due to, among other things, new laws or regulations, changes in demand levels, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and prevailing price levels. For example, the weighted average price of scrap metal increased 14.7% from 2006 to 2007, increased 56.2% from 2007 to 2008, and decreased 49.0% from 2008 to 2009. Prices for raw materials and energy resources continue to remain high compared to historical levels.
The Company continues to expect that it will be able to pass a significant portion of these increased costs through to customers in the form of price increases or raw material surcharges.
Disruptions in the supply of raw materials or energy resources could temporarily impair the Company’s ability to manufacture its products for its customers or require the Company to pay higher prices in order to obtain these raw materials or energy resources from other sources, which could affect the Company’s sales and profitability. Any increase in the prices for such raw materials or energy resources could materially affect the Company’s costs and its earnings.
Timken believes that the availability of raw materials and alloys is adequate for its needs, and, in general, it is not dependent on any single source of supply.
Research
Timken operates a network of technology and engineering centers to support its global customers with sites in North America, Europe and Asia. This network develops and delivers innovative friction management and power transmission solutions and technical services. The largest technical center is in located in North Canton, Ohio, near Timken’s world headquarters. Other sites in the United States include Mesa, Arizona; Manchester, Connecticut; and Keene and Lebanon, New Hampshire. Within Europe, the Company has facilities in Ploiesti, Romania; and Colmar France, and in Asia, it operates a technology facility in Bangalore, India.
Expenditures for research, development and application amounted to approximately $50.0 million, $64.1 million, and $63.5 million in 2009, 2008 and 2007, respectively. Of these amounts, approximately $1.7 million, $5.1 million and $6.2 million, respectively, were funded by others.

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Environmental Matters
The Company continues its efforts to protect the environment and comply with environmental protection regulations. Additionally, it has invested in pollution control equipment and updated plant operational practices. The Company is committed to implementing a documented environmental management system worldwide and to becoming certified under the ISO 14001 standard where appropriate to meet or exceed customer requirements. By the end of 2009, 18 of the Company’s plants had obtained ISO 14001 certification.
The Company believes it has established adequate reserves to cover its environmental expenses and has a well-established environmental compliance audit program, which includes a proactive approach to bringing its domestic and international units to higher standards of environmental performance. This program measures performance against applicable laws, as well as standards that have been established for all units worldwide. It is difficult to assess the possible effect of compliance with future requirements that differ from existing ones. As previously reported, the Company is unsure of the future financial impact to the Company that could result from the U.S. Environmental Protection Agency’s (EPA’s) final rules to tighten the National Ambient Air Quality Standards for fine particulate and ozone. The Company is also unsure of potential future financial impacts to the Company that could result from possible future legislation regulating emissions of greenhouse gases.
The Company and certain U.S. subsidiaries have been designated as potentially responsible parties by the EPA for site investigation and remediation at certain sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as the Superfund, or state laws similar to CERCLA. The claims for remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation.
Management believes any ultimate liability with respect to pending actions will not materially affect the Company’s operations, cash flows or consolidated financial position. The Company is also conducting voluntary environmental investigation and/or remediation activities at a number of current or former operating sites. Any liability with respect to such investigation and remediation activities, in the aggregate, is not expected to be material to the operations or financial position of the Company.
New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements may require the Company to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on Timken’s business, financial condition or results of operations.
Patents, Trademarks and Licenses
Timken owns a number of U.S. and foreign patents, trademarks and licenses relating to certain products. While Timken regards these as important, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items.
Employment
At December 31, 2009, Timken had 16,667 employees. Approximately 10% of Timken’s U.S. employees are covered under collective bargaining agreements.
Available Information
We use our Investor Relations website, www.timken.com, as a channel for routine distribution of important information, including news releases, analyst presentation and financial information. We post filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC, including our annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K; our proxy statements; and any amendments to those reports or statements. All such postings and filings are available on our Investor Relations website free of charge. In addition, this website allows investors and other interested persons to sign up to automatically receive e-mail alerts when we post news releases and financial information on our website. The SEC also maintains a web site, www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The content on any website referred to in this Annual Report Form 10-K is not incorporated by reference into this Annual Report unless expressly noted.

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Item 1A: Risk Factors
The following are certain risk factors that could affect our business, financial condition and results of operations. The risks that are highlighted below are not the only ones that we face. These risk factors should be considered in connection with evaluating forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results and financial condition to differ materially from those projected in forward-looking statements. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected.
The bearing industry is highly competitive, and this competition results in significant pricing pressure for our products that could affect our revenues and profitability.
The global bearing industry is highly competitive. We compete with domestic manufacturers and many foreign manufacturers of anti-friction bearings, including SKF Group, Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd. The bearing industry is also capital intensive and profitability is dependent on factors such as labor compensation and productivity and inventory management, which are subject to risks that we may not be able to control. Due to the competitiveness within the bearing industry, we may not be able to increase prices for our products to cover increases in our costs and, in many cases, we may face pressure from our customers to reduce prices, which could adversely affect our revenues and profitability. In addition, our customers may choose to purchase products from one of our competitors rather than pay the prices we seek for our products, which could adversely affect our revenues and profitability.
Competition and consolidation in the steel industry, together with potential global overcapacity, could result in significant pricing pressure for our products.
Competition within the steel industry, both domestically and worldwide, is intense and is expected to remain so. Global production overcapacity has occurred in the past and may reoccur in the future, which would exert downward pressure on domestic steel prices and result in, at times, a dramatic narrowing, or with many companies the elimination, of gross margins. High levels of steel imports into the United States could exacerbate this pressure on domestic steel prices. In addition, many of our competitors are continuously exploring and implementing strategies, including acquisitions and the addition or repositioning of capacity, which focus on manufacturing higher margin products that compete more directly with our steel products. These factors could lead to significant downward pressure on prices for our steel products, which could have a material adverse effect on our revenues and profitability.
Continued weakness in either global economic conditions or in any of the industries in which our customers operate or sustained uncertainty in financial markets could adversely impact our revenues and profitability by reducing demand and margins.
Our results of operations may be 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 continued reduced customer demand, additional changes in the product mix and negative pricing pressure in the industries in which we operate. Margins in those industries are highly sensitive to demand cycles, and our customers in those industries historically have tended to delay large capital projects, including expensive maintenance and upgrades, during economic downturns. As a result, our revenues and earnings are impacted by overall levels of industrial production.
Our results of operations may 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.
Certain automotive industry companies are experiencing significant financial downturns. While bankruptcies of certain automotive industry companies in 2009 did not result in any material losses to the Company, if any other customers become insolvent or file for bankruptcy, our ability to recover accounts receivable from that customer would be adversely affected and any payment we received during the preference period prior to a bankruptcy filing may be potentially recoverable by the bankruptcy estate. Furthermore, if certain of our customers liquidate in bankruptcy, we may incur impairment charges relating to obsolete inventory and machinery and equipment. In addition, financial instability of certain companies 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 adverse effect on our financial condition and earnings.

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Risk Factors (continued)
We may not be able to realize the anticipated benefits from, or successfully execute, Project O.N.E.
In 2005, we began implementing Project O.N.E., a multi-year program designed to improve business processes and systems to deliver enhanced customer service and financial performance. From 2007 to 2009, we completed the installation of Project O.N.E. in most of our Bearing & Power Transmission operations located in the United States, Europe and India. If we are not successful in executing or operating under Project O.N.E., or if it fails to achieve the anticipated results, then our operations, margins, sales and reputation could be adversely affected.
Any change in the operation of our raw material surcharge mechanisms, a raw material market index or the availability or cost of raw materials and energy resources could materially affect our revenues and earnings.
We require substantial amounts of raw materials, including scrap metal and alloys 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 for 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 change in the relationship between 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 disruptions in the supply of our raw materials or energy resources could impair our ability to manufacture our products for our customers or require us to pay higher prices in order to obtain these raw materials 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.
Warranty, recall or product liability claims could materially adversely affect our earnings.
In our business, we are exposed to warranty and product liability claims. In addition, we may be required to participate in the recall of a product. A successful warranty or product liability claim against us, or a requirement that we participate in a product recall, could have a material adverse effect on our earnings.
The failure to achieve the anticipated results of our restructuring, rationalization and realignment initiatives could materially affect our earnings.
In 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 costs. The failure to achieve the anticipated results of any of these plans, including our targeted costs and annual savings, could materially adversely affect our earnings. In addition, increases in other costs and expenses may offset any cost savings from these efforts.

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Risk Factors (continued)
We may incur further impairment and restructuring charges that could materially affect our profitability.
We have taken approximately $254 million in impairment and restructuring charges, during the last four years, for the Canton bearing operations, Mobile Industries segment, Bearings and Power Transmission Group and employment and other cost reduction initiatives. We expect to take additional charges in connection with the Canton bearing operations, the Mobile Industries segment, and the 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 future, which could have a material adverse effect on our earnings.
Any reduction of CDSOA distributions in the future would reduce our earnings and cash flows.
The CDSOA provides for distribution of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. The Company reported CDSOA receipts, net of expenses, of $3.6 million, $10.2 million and $7.9 million in 2009, 2008 and 2007, respectively. In February 2006, U.S. legislation was enacted that would end CDSOA distributions for imports covered by antidumping duty orders entering the United States after September 30, 2007. Instead, any such antidumping duties collected would remain with the U.S. Treasury. This legislation is expected to reduce any distributions in years beyond 2010, with distributions eventually ceasing.
In separate cases in July and September 2006, the CIT ruled that the procedure for determining recipients eligible to receive CDSOA distributions is unconstitutional. In February 2009, the U.S. Court of Appeals for the Federal Circuit reversed the decision of the CIT. The Company is unable to determine, at this time, what the ultimate outcome of litigation regarding CDSOA will be.
There are a number of other factors that can affect whether the Company receives any CDSOA distributions and the amount of such distributions in any year. These factors include, among other things, potential additional changes in the law, other ongoing and potential additional legal challenges to the law, and the administrative operation of the law. It is possible that CIT rulings might prevent us from receiving any CDSOA distributions in 2010 and beyond. Any reduction of CDSOA distributions would reduce our earnings and cash flow.
Environmental regulations impose substantial costs and limitations on our operations and environmental compliance may be more costly than we expect.
We are subject to the risk of substantial environmental liability and limitations on our operations due to environmental laws and regulations. We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations concerning issues such as air emissions, wastewater discharges, solid and hazardous waste handling and disposal and the investigation and remediation of contamination. The risks of substantial costs and liabilities related to compliance with these laws and regulations are an inherent part of our business, and future conditions may develop, arise or be discovered that create substantial environmental compliance or remediation liabilities and costs.
Compliance with environmental legislation and regulatory requirements may prove to be more limiting and costly than we anticipate. New laws and regulations, including those which may relate to emissions of greenhouse gases, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition or results of operations. We may also be subject from time to time to legal proceedings brought by private parties or governmental authorities with respect to environmental matters, including matters involving alleged property damage or personal injury.

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Risk Factors (continued)
Unexpected equipment failures or other disruptions of our operations may increase our costs and reduce our sales and earnings due to production curtailments or shutdowns.
Interruptions in production capabilities, especially in our Steel Group, would inevitably increase our production costs and reduce sales and earnings for the affected period. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. Our manufacturing processes are dependent upon critical pieces of equipment, such as furnaces, continuous casters and rolling equipment, as well as electrical equipment, such as transformers, and this equipment may, on occasion, be out of service as a result of unanticipated failures. In the future, we may experience material plant shutdowns or periods of reduced production as a result of these types of equipment failures.
The global nature of our business exposes us to foreign currency fluctuations that may affect our asset values, results of operations and competitiveness.
We are exposed to the risks of currency exchange rate fluctuations because a significant portion of our net sales, costs, assets and liabilities, are denominated in currencies other than the U.S. dollar. These risks include a reduction in our asset values, net sales, operating income and competitiveness.
For those countries outside the United States where we have significant sales, devaluation in the local currency would reduce the value of our local inventory as presented in our Consolidated Financial Statements. In addition, a stronger U.S. dollar would result in reduced revenue, operating profit and shareholders’ equity due to the impact of foreign exchange translation on our Consolidated Financial Statements. Fluctuations in foreign currency exchange rates may make our products more expensive for others to purchase or increase our operating costs, affecting our competitiveness and our profitability.
Changes in exchange rates between the U.S. dollar and other currencies and volatile economic, political and market conditions in emerging market countries have in the past adversely affected our financial performance and may in the future adversely affect the value of our assets located outside the United States, our gross profit and our results of operations.
Global political instability and other risks of international operations may adversely affect our operating costs, revenues and the price of our products.
Our international operations expose us to risks not present in a purely domestic business, including primarily:
    changes in tariff regulations, which may make our products more costly to export or import;
 
    difficulties establishing and maintaining relationships with local OEMs, distributors and dealers;
 
    import and export licensing requirements;
 
    compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and environmental or other regulatory requirements, which could increase our operating and other expenses and limit our operations;
 
    difficulty in staffing and managing geographically diverse operations; and
 
    tax exposures related to cross-border intercompany transfer pricing and other tax risks unique to international operations.
These and other risks may also increase the relative price of our products compared to those manufactured in other countries, reducing the demand for our products in the markets in which we operate, which could have a material adverse effect on our revenues and earnings.

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Risk Factors (continued)
Underfunding of our defined benefit and other postretirement plans has caused and may in the future cause a significant reduction in our shareholders’ equity.
Due primarily to negative asset returns for our defined benefit pension plans in 2008 and a change in accounting standards in 2006, we were required to record total reductions, net of income taxes, against our shareholders’ equity of $398 million in 2008 and $276 million in 2006. In the future, we may be required to record additional charges related to pension and other postretirement liabilities as a result of asset returns, discount rate changes or other actuarial adjustments, and these charges may be significant.
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 $63 million, $22 million and $102 million in 2009, 2008 and 2007, respectively, to our defined benefit pension plans and currently expect to make cash contributions of approximately $135 million in 2010 to such plans. However, we cannot predict whether changing economic conditions, the future performance of assets in the plans or other factors will lead us or require us to make contributions in excess of our current expectations, diverting funds we would otherwise apply to other uses.
Our defined benefit plans’ assets and liabilities are substantial and expenses and contributions related to those plans are affected by factors outside our control, including the performance of plan assets, interest rates, actuarial data and experience, and changes in laws and regulations.
Our defined benefit plans had assets with an estimated value of approximately $2.1 billion and liabilities with an estimated value of approximately $2.8 billion, both as of December 31, 2009. Our future expense and funding obligations for the defined benefit pension plans depend upon a number of factors, including the level of benefits provided for by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine the discount rate to calculate the amount of liabilities, actuarial data and experience and any changes in government laws and regulations. In addition, if the various investments held by our pension trusts do not perform as expected or the liabilities increase as a result of discount rate and other actuarial changes, our pension expense and required contributions would increase and, as a result, could materially adversely affect our business. Due to the value of our defined benefit plan assets and liabilities, even a minor decrease in interest rates, to the extent not offset by contributions or asset returns, could increase our obligations under such plans. We may be legally required to make contributions to the pension plans in the future in excess of our current expectations, and those contributions could be material.
Work stoppages or similar difficulties could significantly disrupt our operations, reduce our revenues and materially affect our earnings.
A work stoppage at one or more of our facilities could have a material adverse effect on our business, financial condition and results of operations. Also, if one or more of our customers were to experience a work stoppage, that customer would likely halt or limit purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations.

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Risk Factors (continued)
We may not be able to maintain compliance with the covenants contained in our debt agreement.
We reported a net loss for the full year of 2009. The U.S. and global industrial manufacturing downturn deepened during 2009 and contributed to a decrease in our sales and profitability. We cannot foresee whether our operations will generate sufficient revenue for us to attain profitability in the future, and we may not be able to reduce fixed costs sufficiently to improve our operating ratios.
In addition, our Amended and Restated Credit Agreement, dated July 10, 2009 (Senior Credit Facility) contains financial covenants that require us to achieve certain financial and operating results and maintain compliance with specified financial ratios. In particular, our new Senior Credit Facility contains requirements relating to a maximum consolidated leverage ratio, a minimum consolidated interest coverage ratio and a minimum consolidated net worth. These covenants could, among other things, limit our ability to borrow against the new Senior Credit Facility or other facilities. Further, our ability to meet the financial covenants or requirements in our new Senior Credit Facility may be affected by events beyond our control, and we may not be able to satisfy such covenants and requirements. A breach of these covenants or our inability to comply with the financial ratios, tests or other restrictions could result in an event of default under our new Senior Credit Facility, which in turn could result in an event of default under the terms of our other indebtedness. Upon the occurrence of an event of default under our new Senior Credit Facility, after the expiration of any grace periods, the lenders could elect to declare all amounts outstanding under our new Senior Credit Facility, together with accrued interest, to be immediately due and payable. If this happens, our assets may not be sufficient to repay in full the payments due under that facility or our other indebtedness.
In addition, if we are unable to service our indebtedness or fund our operating costs, we will be forced to adopt alternative strategies that may include:
    further reducing or delaying capital expenditures;
 
    seeking additional debt financing or equity capital, possibly at a higher cost to us or have other terms that are less attractive to us than would otherwise be the case;
 
    selling assets;
 
    restructuring or refinancing debt, which may increase further our financing costs; or
 
    curtailing or eliminating certain activities.
Moreover, we may not be able to implement any of these strategies on satisfactory terms, if at all.
Item 1B. Unresolved Staff Comments
None.

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Item 2. Properties
Timken has manufacturing facilities at multiple locations in the United States and in a number of countries outside the United States. The aggregate floor area of these facilities worldwide is approximately 12,542,000 square feet, all of which, except for approximately 1,255,000 square feet, is owned in fee. The facilities not owned in fee are leased. The buildings occupied by Timken are principally made of brick, steel, reinforced concrete and concrete block construction. All buildings are in satisfactory operating condition in which to conduct business.
Timken’s Mobile Industries and Process Industries segments’ manufacturing facilities in the United States are located in Bucyrus, Canton and Niles, Ohio; Ball Ground, Georgia; Carlyle, Illinois; South Bend, Indiana; Lenexa, Kansas; Randleman and Iron Station, North Carolina; Gaffney, Union and Honea Path, South Carolina; Pulaski and Knoxville, Tennessee; Ogden, Utah; and Altavista, Virginia. These facilities, including warehouses at plant locations and a technology center in North Canton, Ohio, that primarily serves the Mobile Industries and Process Industries business segments, have an aggregate floor area of approximately 4,131,000 square feet. The Company’s Cairo, Dahlonega and Sylvania, Georgia; and Greenville and Walhalla, South Carolina facilities were sold on December 31, 2009.
Timken’s Mobile Industries and Process Industries manufacturing plants outside the United States are located in Benoni, South Africa; Villa Carcina, Italy; Colmar, France; Northampton, England; Ploiesti, Romania; Sao Paulo and Belo Horizonte, Brazil; Jamshedpur and Chennai, India; Sosnowiec, Poland; St. Thomas, Canada; and Yantai and Wuxi, China. These facilities, including warehouses at plant locations, have an aggregate floor area of approximately 3,703,000 square feet. The Company’s Bedford, Canada; Maromme and Vierzon, France; Bilbao, Spain; Halle-Westfallen, Germany; and Olomouc, Czech Republic facilities were sold on December 31, 2009.
Timken’s Aerospace and Defense manufacturing facilities in the United States are located in Mesa and Tucson, Arizona; Los Alamitos, California; Manchester, Connecticut; Keene and Lebanon, New Hampshire; New Philadelphia, Ohio; and Rutherfordton, North Carolina. These facilities, including warehouses at plant locations, have an aggregate floor area of approximately 1,061,000 square feet.
Timken’s Aerospace and Defense manufacturing facilities outside the United States are located in Wolverhampton, England; Medemblik, The Netherlands; and Chengdu, China. These facilities, including warehouses at plant locations, have an aggregate floor area of approximately 188,000 square feet. The Company’s Moult, France facility was sold on December 31, 2009.
Timken’s Steel Group’s manufacturing facilities in the United States are located in Canton and Eaton, Ohio; Columbus, North Carolina; and Houston, Texas. These facilities have an aggregate floor area of approximately 3,459,000 square feet.
In addition to the manufacturing and distribution facilities discussed above, Timken owns or leases warehouses and steel distribution facilities in the United States, United Kingdom, France, Mexico, Singapore, Argentina, Australia, Brazil and China.
The plant utilization for the Mobile Industries segment was between approximately 35% and 45% in 2009. The plant utilization for the Process Industries segment was between 40% and 50% in 2009. The plant utilization for the Aerospace and Defense segment was between approximately 55% and 65% in 2009. Finally, the Steel segment plant utilization was between approximately 25% and 40% in 2009. Plant utilization for all of the segments was lower in 2009 than in 2008.
Item 3. Legal Proceedings
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2009.

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Item 4A. Executive Officers of the Registrant
The executive officers are elected by the Board of Directors normally for a term of one year and until the election of their successors. All executive officers have been employed by Timken or by a subsidiary of the Company during the past five-year period. The executive officers of the Company as of February 25, 2010 are as follows:
             
Name   Age   Current Position and Previous Positions During Last Five Years
Ward J. Timken, Jr.
  42   2005   Chairman of the Board
 
           
James W. Griffith
  56   2002   President and Chief Executive Officer; Director
 
           
Michael C. Arnold
  53   2000   President – Industrial Group
 
      2007   Executive Vice President and President – Bearings & Power Transmission
 
           
William R. Burkhart
  44   2000   Senior Vice President and General Counsel
 
           
Glenn A. Eisenberg
  48   2002   Executive Vice President – Finance and Administration
 
           
J. Ted Mihaila
  55   2000   Controller, Industrial Group
 
      2006   Senior Vice President and Controller
 
           
Salvatore J. Miraglia, Jr.
  59   2005   President – Steel Group

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the New York Stock Exchange under the symbol “TKR.” The estimated number of record holders of the Company’s common stock at December 31, 2009 was 5,871. The estimated number of beneficial shareholders at December 31, 2009 was 27,127.
The following table provides information about the high and low sales prices for the Company’s common stock and dividends paid for each quarter for the last two fiscal years.
                                                 
    2009   2008
    Stock prices   Dividends   Stock prices   Dividends
    High   Low   per share   High   Low   per share
First quarter
  $ 20.98     $ 9.88     $ 0.18     $ 33.16     $ 25.82     $ 0.17  
 
                                               
Second quarter
  $ 19.46     $ 12.53     $ 0.09     $ 38.74     $ 29.52     $ 0.17  
 
                                               
Third quarter
  $ 24.85     $ 16.10     $ 0.09     $ 37.46     $ 24.22     $ 0.18  
 
                                               
Fourth quarter
  $ 26.12     $ 20.84     $ 0.09     $ 28.73     $ 10.96     $ 0.18  

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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (continued)
(LINE GRAPH)
Assumes $100 invested on January 1, 2005, in Timken Common Stock, S&P 500 Index and Peer Index.
                                         
    2005   2006   2007   2008   2009
 
Timken
  $ 125.76     $ 116.92     $ 134.43     $ 82.78     $ 102.76  
S&P 500
    104.91       121.48       128.15       80.74       102.11  
80% Bearing/20% Steel
    151.35       199.64       200.19       95.18       149.99  
The line graph compares the cumulative total shareholder returns over five years for The Timken Company, the S&P 500 Stock Index, and a peer index that proportionally reflects Timken’s two principal businesses. The S&P Steel Index comprises the steel portion of the peer index. This index is comprised of AK Steel, Allegheny Technologies, Cliffs Natural Resources, Nucor and US Steel. The remaining portion of the peer index is a self constructed bearing index that consists of five companies. These five companies are Kaydon, JTEKT, NSK, NTN and SKF Group. The last four are non-US bearing companies that are based in Japan (JTEKT, NSK, NTN), and Sweden (SKF Group).

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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (continued)
Issuer Purchases of Common Stock:
The following table provides information about purchases by the Company during the quarter ended December 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)  
 
10/1/09 - 10/31/09
    376     $ 23.17             4,000,000  
11/1/09 - 11/30/09
    1,554       23.19             4,000,000  
12/1/09 - 12/31/09
    177       24.91             4,000,000  
 
Total
    2,107     $ 23.33             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 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, price paid is the real 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. The Company may purchase shares from time to time in open market purchases or privately negotiated transactions. The Company may make all or part of the purchases pursuant to accelerated share repurchases or Rule 1065-1 plans.

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Item 6. Selected Financial Data
Summary of Operations and Other Comparative Data
                                         
    2009     2008     2007     2006     2005  
(Dollars in thousands, except per share data)                                        
 
Statements of Income
                                       
Net sales
  $ 3,141,627     $ 5,040,800     $ 4,532,066     $ 4,276,394     $ 4,105,399  
 
                                       
Gross profit
    582,747       1,151,853       954,983       893,223       883,020  
Selling, administrative and general expenses
    472,732       657,131       631,162       611,184       580,148  
Impairment and restructuring charges
    164,126       32,783       28,405       30,947       10,114  
Loss on divestitures
                528       64,271        
Operating (loss) income
    (54,111 )     461,939       294,888       186,821       292,758  
Other (expense) income, net
    (140 )     16,257       5,146       65,378       63,685  
Interest expense, net
    39,979       44,401       42,314       49,037       51,299  
(Loss) income from continuing operations
    (66,037 )     282,525       210,714       146,157       208,639  
(Loss) income from discontinued operations, net of income taxes
    (72,589 )     (11,273 )     12,942       79,712       51,642  
Net (loss) income attributable to The Timken Company
  $ (133,961 )   $ 267,670     $ 220,054     $ 222,527     $ 260,281  
 
                                       
Balance Sheets
                                       
Inventories, net
  $ 671,236     $ 1,000,493     $ 935,953     $ 789,522     $ 761,270  
Property, plant and equipment — net
    1,335,228       1,516,972       1,430,515       1,288,952       1,271,862  
Total assets
    4,006,893       4,536,050       4,379,237       4,027,111       3,993,734  
Total debt:
                                       
Short-term debt
    26,345       91,482       108,370       40,217       63,030  
Current portion of long-term debt
    17,035       17,108       33,953       9,908       95,842  
Long-term debt
    469,287       515,250       580,585       547,353       561,653  
 
Total debt
    512,667       623,840       722,908       597,478       720,525  
Net debt:
                                       
Total debt
    512,667       623,840       722,908       597,478       720,525  
Less: cash and cash equivalents
    (755,545 )     (133,383 )     (42,884 )     (107,888 )     (65,417 )
 
Net (cash) debt
    (242,878 )     490,457       680,024       489,590       655,108  
Total liabilities
    2,411,325       2,873,012       2,426,108       2,520,988       2,496,667  
Shareholders’ equity
  $ 1,595,568     $ 1,663,038     $ 1,933,862     $ 1,488,862     $ 1,497,067  
Capital:
                                       
Net (cash) debt
    (242,878 )     490,457       680,024       489,590       655,108  
Shareholders’ equity
    1,595,568       1,663,038       1,933,862       1,488,862       1,497,067  
 
Net (cash) debt + shareholders’ equity (capital)
    1,352,690       2,153,495       2,613,886       1,978,452       2,152,175  
 
                                       
Other Comparative Data
                                       
(Loss) income from continuing operations/Net sales
    (2.1 )%     5.6 %     4.6 %     3.4 %     5.1 %
Net (loss) income attributable to The Timken Company/Net sales
    (4.3 )%     5.3 %     4.9 %     5.2 %     6.3 %
Return on equity (2)
    (4.1 )%     17.0 %     10.9 %     9.8 %     13.9 %
Net sales per employee (3)
  $ 168.8     $ 244.3     $ 216.0     $ 191.6     $ 350.8  
Capital expenditures
  $ 114,150     $ 258,147     $ 289,784     $ 247,806     $ 201,459  
Depreciation and amortization
  $ 201,486     $ 200,799     $ 187,918     $ 149,709     $ 186,795  
Capital expenditures / Net sales
    3.6 %     5.1 %     6.4 %     5.8 %     4.9 %
Dividends per share
  $ 0.45     $ 0.70     $ 0.66     $ 0.62     $ 0.60  
Basic (loss) earnings per share — continuing operations (4)
  $ (0.64 )   $ 2.90     $ 2.17     $ 1.52     $ 2.25  
Diluted (loss) earnings per share — continuing operations (4)
  $ (0.64 )   $ 2.89     $ 2.16     $ 1.51     $ 2.22  
Basic (loss) earnings per share (5)
  $ (1.39 )   $ 2.78     $ 2.31     $ 2.37     $ 2.83  
Diluted (loss) earnings per share (5)
  $ (1.39 )   $ 2.77     $ 2.29     $ 2.35     $ 2.81  
Ratio of net debt to capital (1)
    (18.0 )%     22.8 %     26.0 %     24.7 %     30.4 %
Number of employees at year-end (6)
    16,667       20,550       20,720       21,235       23,408  
Number of shareholders (7)
    27,127       47,742       49,012       42,608       54,514  
 
(1)   The Company presents net debt because it believes net debt is more representative of the Company’s indicative financial position due to temporary changes in cash and cash equivalents.
 
(2)   Return on equity is defined as income from continuing operations divided by ending shareholders’ equity.
 
(3)   Based on average number of employees employed during the year.
 
(4)   Based on average number of shares outstanding during the year.
 
(5)   Based on average number of shares outstanding during the year and includes discontinued operations for all periods presented.
 
(6)   Adjusted to exclude NRB and Latrobe Steel for all periods.
 
(7)   Includes an estimated count of shareholders having common stock held for their accounts by banks, brokers and trustees for benefit plans.
 

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Item 7. 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. The Company operates 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 and heavy-duty trucks, rail cars, locomotives and agricultural, construction and mining equipment. Customers also include aftermarket distributors of automotive products. The Company’s strategy for the Mobile Industries segment is to improve financial performance in the Automotive and Truck original-equipment markets while leveraging more attractive markets in the Rail and Off-Highway sectors and in the Aftermarket. This strategy could result in allocating assets to serve the most attractive market sectors and restructuring or exiting those businesses where adequate returns cannot be 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 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 market sectors and in the aftermarket and to achieve a leadership position in Asia. In December 2007, the Company announced the establishment of a joint venture, Timken XEMC (Hunan) Bearings Co., Ltd., 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 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. In addition, the Aerospace and Defense segment manufactures precision bearings, higher-level assemblies and sensors for equipment manufacturers of health and positioning control equipment. The Company’s strategy for the Aerospace and Defense segment is to: (1) grow by adding power transmission parts, assemblies and services, utilizing a platform approach; (2) develop new aftermarket channels; and (3) improve global capabilities through manufacturing initiatives. In November 2008, the Company completed the acquisition of the assets of EXTEX Ltd. (EXTEX), located in 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 drive profitable growth by focusing on opportunities where the Company can offer differentiated capabilities. In November 2008, the Company opened a new small-bar steel rolling mill to expand 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 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.
In addition to specific segment initiatives, the Company has been making strategic investments in business processes and systems. Project O.N.E. is a multi-year program launched in 2005 to improve the Company’s business processes and systems. In total, the Company expects to invest up to approximately $220 million, which includes internal and external costs, to implement Project O.N.E. As of December 31, 2009, the Company has incurred costs of $214.1 million, of which $121.1 million have been capitalized to the Consolidated Balance Sheet. During 2008 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 European operations. On April 1, 2009, the Company completed an additional installation of Project O.N.E. for the majority of the Company’s remaining European operations, as well as certain other facilities in North America and India. The final installation of Project O.N.E. is expected to be completed in April 2010. With the completion of the April 2010 installation of Project O.N.E., approximately 90% of the Bearings and Power Transmission Group’s global sales will flow through the new system.

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On December 31, 2009, the Company completed the sale of the assets of its Needle Roller Bearings (NRB) operations to JTEKT Corporation (JTEKT). The Company received approximately $304 million in cash proceeds for these operations and retained certain receivables of approximately $26 million, subject to post-sale working capital adjustments. The NRB operations manufacture needle roller bearings, including a range of radial and thrust needle roller bearings, as well as bearing assemblies and loose needles for automotive and industrial applications. The NRB operations have facilities in the United States, Canada, Europe and China. The NRB operations had 2009 sales of approximately $407 million and were previously included in the Company’s Mobile Industries, Process Industries and Aerospace and Defense reportable segments. The Mobile Industries segment accounted for approximately 80 percent of the 2009 sales of the NRB operations. Results for 2009, 2008 and 2007 have been reclassified to conform to the presentation under discontinued operations. The Company incurred a pretax impairment loss of approximately $33.7 million during the third quarter of 2009 as the projected proceeds from the sale of the NRB operations were lower than the net book value of the net assets expected to be transferred as a result of sale of the NRB operations to JTEKT. The Company incurred an after-tax loss of approximately $12.6 million on the sale of the NRB operations during the fourth quarter of 2009. Refer to Note 2 — Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional discussion.
Financial Overview
2009 compared to 2008
Overview:
                                 
    2009   2008   $ Change   % Change
 
(Dollars in millions, except earnings per share)
                               
Net sales
  $ 3,141.6     $ 5,040.8     $ (1,899.2 )     (37.7 )%
(Loss) income from continuing operations
    (66.1 )     282.6       (348.7 )     (123.4 )%
Loss from discontinued operations
    (72.6 )     (11.3 )     (61.3 )   NM  
(Loss) income attributable to noncontrolling interest
    (4.7 )     3.6       (8.3 )     (230.6 )%
Net (loss) income attributable to The Timken Company
    (134.0 )     267.7       (401.7 )     (150.1 )%
Diluted (loss) earnings per share:
                               
Continuing operations
  $ (0.64 )   $ 2.89     $ (3.53 )     (122.1 )%
Discontinued operations
    (0.75 )     (0.12 )     (0.63 )   NM  
Diluted (loss) earnings per share
  $ (1.39 )   $ 2.77     $ (4.16 )     (150.2 )%
Average number of shares — diluted
    96,135,783       95,947,643             0.2 %
 
The Timken Company reported net sales for 2009 of $3.14 billion compared to $5.04 billion in 2008, a decrease of 37.7%. Sales in 2009 were lower across all business segments except for the Aerospace and Defense segment. The decrease in sales was primarily driven by lower volume and lower surcharges in the Steel segment, partially offset by the impact of favorable pricing. For 2009, net loss per share was $1.39 compared to diluted earnings per share of $2.77 for 2008. Loss from continuing operations per share was $0.64 for 2009 compared to income from continuing operations per diluted share of $2.89 for 2008.
The Company’s results for 2009 reflect the deterioration of most market sectors as a result of the global economic downturn. The impact of lower volume and higher restructuring charges, including asset impairments, resulting from actions taken to align the Company’s businesses with current demand, was partially offset by lower raw material costs and lower selling and administrative costs. Additionally, the Company’s results from continuing operations for 2008 reflected a pretax gain of $20.4 million on the sale of the Company’s former seamless steel tube manufacturing facility located in Desford, England.
Outlook
The Company’s outlook for 2010 reflects a modest improvement in the global economy following the deteriorating global economic climate that occurred in 2009. The Company expects higher sales of approximately 5% to 10%, primarily driven by stronger sales in the Steel segment as customers rebuild inventory. As a result of the Company’s improved operating performance and its 2009 cost reduction initiatives, the Company expects to leverage sales growth. The strengthening margins will be partially offset by higher selling, administrative and general expenses to support the higher sales.
From a liquidity standpoint, the Company expects to continue to generate cash from operations in 2010 primarily due to expected margin improvement. In addition, the Company expects to increase capital expenditures by approximately $25 million, or 20% in 2010, compared to 2009. Pension contributions are expected to increase to approximately $135 million in 2010, compared to $63 million in 2009, primarily due to discretionary contributions to the Company’s defined benefit pension plans.

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The Statement of Income
Sales by Segment:
                                 
    2009   2008   $ Change   % Change
 
(Dollars in millions, and exclude intersegment sales)
                               
Mobile Industries
  $ 1,245.0     $ 1,771.8     $ (526.8 )     (29.7 )%
Process Industries
    806.0       1,163.0       (357.0 )     (30.7 )%
Aerospace and Defense
    417.7       412.0       5.7       1.4 %
Steel
    672.9       1,694.0       (1,021.1 )     (60.3 )%
 
Total Company
  $ 3,141.6     $ 5,040.8     $ (1,899.2 )     (37.7 )%
 
Net sales for 2009 decreased $1.9 billion, or 37.7%, compared to 2008, primarily due to lower volume of approximately $1.49 billion across all business segments, except for the Aerospace and Defense segment, lower surcharges in the Steel segment of approximately $555 million and the effect of foreign currency exchange rate changes of approximately $90 million. These decreases were partially offset by improved pricing and favorable sales mix of approximately $220 million.
Gross Profit:
                                 
    2009     2008     $ Change     Change  
 
(Dollars in millions)
                               
Gross profit
  $ 582.7     $ 1,151.9     $ (569.2 )     (49.4 )%
Gross profit % to net sales
    18.5 %     22.9 %         (440 ) bps
Rationalization expenses included in cost of products sold
  $ 8.2     $ 3.4     $ 4.8       141.2 %
 
Gross profit margins decreased in 2009, compared to 2008, due to the impact of lower sales volume across most market sectors of approximately $640 million, lower surcharges in the Steel segment of $555 million and lower utilization of manufacturing costs of approximately $240 million, partially offset by lower raw material costs of approximately $540 million, improved pricing and sales mix of approximately $220 million and lower logistics costs of approximately $100 million.
In 2009, rationalization expenses of $8.2 million included in cost of products sold primarily related to certain Mobile Industries’ and Aerospace and Defense manufacturing facilities and the continued rationalization of Process Industries’ Canton, Ohio bearing facilities. In 2008, rationalization expenses of $3.4 million included in cost of products sold primarily related to certain Mobile Industries’ domestic manufacturing facilities, the continued rationalization of Process Industries’ Canton, Ohio bearing facilities and the closure of the Company’s seamless steel tube manufacturing operations located in Desford, England. Rationalization expenses in 2009 and 2008 primarily included the write-down of inventory, accelerated depreciation on assets and the relocation of equipment.
Selling, Administrative and General Expenses:
                                 
    2009     2008     $ Change     Change  
 
(Dollars in millions)
                               
Selling, administrative and general expenses
  $ 472.7     $ 657.1     $ (184.4 )     (28.1 )%
Selling, administrative and general expenses % to net sales
    15.0 %     13.0 %         200  bps
Rationalization expenses included in selling, administrative and general expenses
  $ 2.9     $ 1.5     $ 1.4       93.3 %
 
The decrease in selling, administrative and general expenses of $184.4 million in 2009, compared to 2008, was primarily due to restructuring initiatives of approximately $60 million, lower performance-based compensation of approximately $60 million, lower discretionary spending of approximately $55 million and a decrease in the provision for doubtful accounts of approximately $10 million.
In 2009, the rationalization expenses included in selling, administrative and general expenses were primarily costs related to employees exiting the Company and costs associated with exiting a variety of office leases due to restructuring initiatives. In 2008, the rationalization expenses included in selling, administrative and general expenses primarily related to the rationalization of Process Industries’ Canton, Ohio bearing facilities and costs associated with vacating the Torrington, Connecticut office complex.

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Impairment and Restructuring Charges:
                         
    2009     2008     $ Change  
 
(Dollars in millions)
                       
Impairment charges
  $ 107.6     $ 20.1     $ 87.5  
Severance and related benefit costs
    52.8       8.7       44.1  
Exit costs
    3.7       4.0       (0.3 )
 
Total
  $ 164.1     $ 32.8     $ 131.3  
 
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. See Note 6 — Impairment and Restructuring in the Notes to Consolidated Financial Statements for further details by segment.
2009 Selling and Administrative Cost Reductions
In March 2009, the Company announced the realignment of its organization to improve efficiency and reduce costs as a result of the economic downturn. The Company had targeted pretax savings of approximately $30 million to $40 million in annual selling and administrative costs. In April 2009, in light of the Company’s revised forecast at that time indicating significantly reduced sales and earnings for the year, the Company expanded the target to approximately $80 million. The implementation of these savings began in the first quarter of 2009 and were substantially completed by the end of the fourth quarter of 2009, with full-year savings expected to be achieved in 2010. During 2009, the Company recorded $10.7 million of severance and related benefit costs related to this initiative to eliminate approximately 280 employees. Of the $10.7 million charge for 2009, $4.5 million related to the Mobile Industries segment, $2.0 million related to the Process Industries segment, $0.6 million related to the Aerospace and Defense segment, $1.6 million related to the Steel segment and $2.0 million related to Corporate. Overall, the Company eliminated approximately 500 sales and administrative employees in 2009 with pretax savings of approximately $26 million.
2009 Manufacturing Workforce Reductions
During 2009, the Company recorded $32.2 million in severance and related benefit costs, including a curtailment of pension benefits of $0.9 million, to eliminate approximately 3,000 manufacturing employees to properly align its business as a result of the current downturn in the economy and expected market demand. Of the $32.2 million charge, $21.5 million related to the Mobile Industries segment, $6.5 million related to the Process Industries segment, $2.5 million related to the Aerospace and Defense segment and $1.7 million related to the Steel segment.
2008 Workforce Reductions
In December 2008, the Company recorded $4.2 million in severance and related benefit costs to eliminate approximately 110 manufacturing and sales and administrative employees as a result of the downturn in the economy. Of the $4.2 million charge, $2.0 million related to the Mobile Industries segment, $0.8 million related to the Process Industries segment, $1.1 million related to the Steel segment and $0.3 million related to Corporate.
Bearings and Power Transmission Reorganization
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 is composed of three reportable segments: Mobile Industries, Process Industries and Aerospace and Defense. During 2008, the Company recorded $2.5 million of severance and related benefit costs related to this initiative.
Torrington Campus
On July 20, 2009, the Company sold the remaining portion of its Torrington, Connecticut office complex. In anticipation of the loss that the Company expected to record upon completion of the sale of this property, the Company recorded an impairment charge of $6.4 million during the second quarter of 2009. During the third quarter of 2009, the Company recorded an additional loss of approximately $0.7 million in Other (expense) income, net upon completion of the sale of this portion of the office complex.

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Mobile Industries
In 2009, the Company recorded fixed asset impairment charges of $71.7 million for certain fixed assets in the United States, Canada, France and China related to several automotive product lines. The Company reviewed these assets for impairment during the fourth quarter due to declining sales and as a result of the Company’s initiative to exit programs where adequate returns could not be obtained through pricing initiatives. Circumstances related to revenue streams for customers coming out of bankruptcy and the results of its pricing initiatives did not become fully evident until the fourth quarter. Incorporating this information into its annual long-term forecasting process, the Company determined the undiscounted projected future cash flows for these product lines could not support the carrying value of these asset groups. The Company then arrived at fair value by either valuing the assets in use where the assets were still producing product or in exchange where the assets had been idled. See Note 15 — Fair Value in the Notes to the Consolidated Financial Statements for further discussion of how the Company arrived at fair value.
The Company recorded an impairment charge of $48.8 million in 2008, representing the write-off of goodwill associated with the Mobile Industries segment. Of the $48.8 million impairment charge, $30.4 million has been reclassified to discontinued operations. The Company is required to review goodwill and indefinite-lived intangibles for impairment annually. The Company performed this annual test during the fourth quarter of 2008 using an income approach (discounted cash flow model) and a market approach. As a result of the economic downturn that began in the second half of 2008, management’s forecasts of earnings and cash flow declined significantly. The Company utilized these forecasts for the income approach as part of the goodwill impairment review. As a result of the lower earnings and cash flow forecasts at that time, the Company determined that the Mobile Industries segment could not support the carrying value of its goodwill. Refer to Note 8 — Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements for additional discussion.
In March 2007, the Company announced the planned closure of its manufacturing facility in Sao Paulo, Brazil. The closure of this manufacturing facility was subsequently delayed to serve higher customer demand. The Company has resumed plans to close this facility on March 31, 2010. This closure is targeted to deliver annual pretax savings of approximately $5 million, with expected pretax costs of approximately $25 million to $30 million, including restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses. The Company expects to realize the $5 million of annual pretax savings by the end of 2010 after this facility closes. Mobile Industries has incurred cumulative pretax costs of approximately $25.0 million as of December 31, 2009 related to this closure. During 2009 and 2008, the Company recorded $5.2 million and $2.2 million, respectively, of severance and related benefit costs and $1.7 million and $0.8 million, respectively, of exit costs associated with the closure of this facility.
Process Industries
In May 2004, the Company announced plans to rationalize its three bearing plants in Canton, Ohio within the Process Industries segment. This rationalization initiative is expected to deliver annual pretax savings of approximately $35 million through streamlining operations and workforce reductions, with expected pretax costs of approximately $70 million to $80 million (including pretax cash costs of approximately $50 million), by the middle of 2010.
In 2009, the Company recorded impairment charges of $27.7 million, exit costs of $1.6 million and severance and related benefits of $0.6 million as a result of Process Industries’ rationalization plans. The significant impairment charge was recorded during the second quarter of 2009 as a result of the rapid deterioration of the market sectors served by one of the rationalized plants resulting in the carrying value of the fixed assets for this plant exceeding their projected future cash flows. The Company then arrived at fair value by either valuing the assets in use, where the assets were still producing product, or in exchange, where the assets had been idled. The fair value was determined based on market comparisons of similar assets. The Company closed this plant at the end of 2009. In 2008, the Company recorded exit costs of $1.8 million related to these rationalization plans. The Process Industries segment has incurred cumulative pretax costs of approximately $69.0 million (including approximately $26.3 million of pretax cash costs) as of December 31, 2009 for these plans, including rationalization costs recorded in cost of products sold and selling, administrative and general expenses. As of December 31, 2009, the Process Industries’ rationalization plans have resulted in approximately $15 million in annual pretax savings.
In October 2009, the Company announced the consolidation of its distribution centers in Bucyrus, Ohio and Spartanburg, South Carolina into a larger, leased facility in the region surrounding the existing Spartanburg location. The consolidation of the Company’s distribution centers is primarily due to 89% of all manufactured product inbound to the Company’s distribution centers originating in the southeastern United States, and the new location reducing the average number of miles required to ship goods and inventory throughout the supply chain. This initiative is expected to deliver annual pretax savings of approximately $4 million to $8 million with expected pretax costs of approximately $5 million to $10 million by the end of 2010. The closure of the Bucyrus Distribution Center will displace approximately 290 employees. During 2009, the Company recorded $4.5 million of severance and related benefit costs related to this closure.

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Rollforward of Restructuring Accruals:
                 
    2009   2008
 
(Dollars in millions)
               
Beginning balance, January 1
  $ 17.0     $ 19.0  
Expense
    55.6       12.7  
Payments
    (38.6 )     (14.7 )
 
Ending balance, December 31
  $ 34.0     $ 17.0  
 
The restructuring accrual at December 31, 2009 and 2008 is included in Accounts payable and other liabilities on the Consolidated Balance Sheet. The restructuring accrual at December 31, 2009 excludes costs related to the curtailment of pension benefit plans of $0.9 million. The accrual at December 31, 2009 includes $27.5 million of severance and related benefits with the remainder of the balance primarily representing environmental exit costs. The majority of the $27.5 million accrual relating to severance and related benefits is expected to be paid by the middle of 2010.
Interest Expense and Income:
                                 
    2009   2008   $ Change   % Change
 
(Dollars in millions)
                               
Interest expense
  $ 41.9     $ 44.4     $ (2.5 )     (5.6 )%
Interest income
  $ 1.9     $ 5.8     $ (3.9 )     (67.2 )%
 
Interest expense for 2009 decreased compared to 2008 due to lower average debt outstanding in 2009 compared to 2008, partially offset by higher borrowing costs. Interest income decreased for 2009 compared to 2008 due to significantly lower interest rates on higher average invested cash balances in 2009.
Other Income and Expense:
                                 
    2009   2008   $ Change   % Change
 
(Dollars in millions)
                               
CDSOA receipts, net of expenses
  $ 3.6     $ 9.1     $ (5.5 )     (60.4 )%
 
 
                               
Other (expense) income, net:
                               
Gain on divestitures of non-strategic assets
  $ 0.5     $ 19.5     $ (19.0 )     (97.4 )%
Equity investment impairment loss
    (6.1 )           (6.1 )   NM  
Gain (loss) on dissolution of subsidiaries
          (0.4 )     0.4       100.0 %
Other
    1.9       (11.9 )     13.8       116.0 %
 
Other (expense) income, net
  $ (3.7 )   $ 7.2     $ (10.9 )     (151.4 )%
 
The U.S. Continued Dumping and Subsidy Offset Act (CDSOA) receipts are reported net of applicable expenses. CDSOA provides for distribution of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. In 2009, the Company received CDSOA receipts, net of expenses, of $3.6 million. In 2008, the Company received CDSOA receipts, net of expenses, of $10.2 million, of which $1.1 million was reclassified to discontinued operations. Refer to Other Matters — Continued Dumping and Subsidy Offset Act (CDSOA) for additional discussion.
In 2009, the gain on divestiture of non-strategic assets was primarily due to the sale of the Company’s former office complex located in Torrington, Connecticut. The sale of the Torrington office complex occurred in two separate transactions: one in the first quarter of 2009 resulting in a gain of $1.3 million and the other in the third quarter of 2009 resulting in a loss of $0.7 million previously mentioned. In 2008, the gain on divestitures of non-strategic assets primarily related to the sale of the Company’s seamless steel tube manufacturing facility located in Desford, England, which closed in April 2007. In February 2008, the Company completed the sale of this facility, resulting in a pretax gain of approximately $20.4 million.

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The equity investment impairment loss for 2009 reflects an impairment loss on two of the Company’s joint ventures, Internacional Component Supply LTDA for $4.7 million and Endorsia.com International AB for $1.4 million. The Company recorded the impairment loss as a result of the carrying value of these investments exceeding the expected future cash flows of these joint ventures. The Company is currently trying to sell both joint ventures.
For 2009, other (expense) income, net primarily consisted of $5.2 million of foreign currency exchange gains, $1.7 million of royalty income, $0.6 million of investment income and $0.5 million of export incentives, offset by $8.0 million of losses on the disposal of fixed assets. For 2008, other (expense) income, net primarily included $6.4 million of foreign currency losses, $4.7 million of losses on the disposal of fixed assets and $3.9 million of donations, partially offset by gains on equity investments of $1.4 million and $1.2 million of export incentives.
Income Tax Expense:
                                 
    2009   2008   $ Change   Change
 
(Dollars in millions)
                               
Income tax (benefit) expense
  $ (28.2 )   $ 157.1     $ (185.3 )     (118.0 )%
Effective tax rate
    29.9 %     35.7 %         (580 ) bps
 
 
The decrease in the effective tax rate in 2009 compared to 2008 was primarily due to increased losses at certain foreign subsidiaries where no tax benefit could be recorded, partially offset by the effective tax rate impact of tax credits and other U.S. tax benefits on lower pretax earnings.
 
The effective tax rate on the pretax loss for 2009 was unfavorable relative to the U.S. federal statutory tax rate primarily due to losses at certain foreign subsidiaries where no tax benefit could be recorded. This item was partially offset by the U.S. research tax credit and the net effect of other items.
 
Discontinued Operations:
    2009   2008   $ Change   % Change
 
(Dollars in millions)
                               
Operating results, net of tax
  $ (60.0 )   $ (11.3 )   $ (48.7 )   NM  
Loss on disposal, net of tax
  $ (12.6 )   $     $ (12.6 )   NM  
 
In December 2009, the Company completed the divestiture of its NRB operations to JTEKT Corporation. Discontinued operations represent the operating results and related loss on sale, net of tax, of these operations. For 2009, the operating results, net of tax, of the NRB operations were a loss of $60.0 million, compared to a loss of $11.3 million for 2008, primarily due to the deterioration of the markets served by the NRB operations and higher restructuring charges in 2009. The restructuring charges include a pretax impairment loss of $33.7 million and pension curtailment of $2.2 million, as well as other pretax charges related to severance and related benefits of $16.0 million. The impairment loss was the result of the projected proceeds from the sale of NRB operations being lower than the net book value of the net assets expected to be transferred as a result of the sale of the NRB operations to JTEKT Corporation. The operating results, net of tax, for 2008 include a pretax impairment charge of $30.4 million, which represents the write-off of goodwill associated with the Mobile Industries segment. Refer to Note 2 — Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional discussion.

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Net (Loss) Income Attributable to Noncontrolling Interest:
                                 
    2009   2008   $ Change   % Change
 
(Dollars in millions)
                               
Net (loss) income attributable to noncontrolling interest
  $ (4.7 )   $ 3.6     $ (8.3 )     (230.6 )%
 
On January 1, 2009, the Company implemented new accounting rules related to noncontrolling interests. The new accounting rules establish 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, the new accounting rules require that net income attributable to parties other than the Company be separately reported on the Consolidated Statement of Income. For 2009, the net (loss) income attributable to noncontrolling interest was a loss of $4.7 million, compared to income of $3.6 million for 2008. In the first quarter of 2009, net (loss) income attributable to noncontrolling interest increased by $6.1 million due to a correction of an error related to the $18.4 million goodwill impairment loss the Company recorded in the fourth quarter of 2008 for the Mobile Industries segment. In recording the goodwill impairment loss in the fourth quarter of 2008, the Company did not recognize that a portion of the goodwill impairment loss related to two separate subsidiaries in India and South Africa in which the Company holds less than 100% ownership. As a result, the Company’s 2008 financial statements were understated by $6.1 million and the Company’s first quarter 2009 financial statements were overstated by $6.1 million. Management concluded the effect of the first quarter adjustment was not material to the Company’s 2008 and first quarter 2009 financial statements as well as the full-year 2009 financial statements.
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 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 CDSOA and gains and losses on the dissolution of subsidiaries). Refer to Note 13 — Segment Information in the Notes to Consolidated Financial Statements for the reconciliation of adjusted EBIT by segment to consolidated income before income taxes.
Mobile Industries Segment:
                                 
    2009   2008   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 1,245.0     $ 1,771.9     $ (526.9 )     (29.7 )%
Adjusted EBIT
  $ 30.5     $ 35.8     $ (5.3 )     (14.8 )%
Adjusted EBIT margin
    2.4 %     2.0 %         40  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 2008 represents the base year for which the effects of currency are measured; as a result, currency is assumed to be zero for 2008.
                                 
    2009   2008   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 1,245.0     $ 1,771.9     $ (526.9 )     (29.7 )%
Currency
    (56.8 )           (56.8 )   NM  
 
Net sales, excluding the impact of currency
  $ 1,301.8     $ 1,771.9     $ (470.1 )     (26.5 )%
 
The Mobile Industries segment’s net sales, excluding the effects of currency-rate changes, decreased 26.5% in 2009, compared to 2008, primarily due to lower volume of approximately $565 million, partially offset by improved pricing and favorable sales mix of approximately $95 million. The lower volume was seen across all market sectors, led by a 13% decline in light vehicle demand, a 49% decline in heavy truck demand and a 44% decline in off-highway demand.

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Adjusted EBIT was lower in 2009 compared to 2008, primarily due to the impact of lower demand of $135 million and the impact of underutilization of manufacturing capacity of approximately $115 million, partially offset by lower selling, administrative and general expenses of $100 million as a result of restructuring initiatives, improved pricing and favorable sales mix of approximately $65 million, lower raw material costs of approximately $40 million and lower logistics costs of approximately $40 million. In reaction to the current and anticipated lower demand, the Mobile Industries segment reduced total employment levels by approximately 3,100 positions in 2009.
The Mobile Industries segment’s sales are expected to increase slightly in 2010 over 2009 primarily due to improved pricing, offset by lower demand. In addition, adjusted EBIT for the Mobile Industries segment is expected to decrease as lower demand is partially offset by improved pricing and lower selling, administrative and general expenses. The Company expects to continue to take actions in the Mobile Industries segment to properly align its business with market demand.
Process Industries Segment:
                                 
    2009   2008   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 808.7     $ 1,166.2     $ (357.5 )     (30.7 )%
Adjusted EBIT
  $ 118.5     $ 218.7     $ (100.2 )     (45.8 )%
Adjusted EBIT margin
    14.7 %     18.8 %         (410 ) 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 2008 represents the base year for which the effects of currency are measured; as a result, currency is assumed to be zero for 2008.
                                 
    2009   2008   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 808.7     $ 1,166.2     $ (357.5 )     (30.7 )%
Currency
    (27.5 )           (27.5 )   NM  
 
Net sales, excluding the impact of currency
  $ 836.2     $ 1,166.2     $ (330.0 )     (28.3 )%
 
The Process Industries segment’s net sales, excluding the effects of currency-rate changes, decreased 28.3% for 2009, compared to 2008, primarily due to lower volume of approximately $410 million, partially offset by improved pricing and favorable sales mix of approximately $70 million. The volume was down 25% to 35% across most market sectors. Adjusted EBIT was lower in 2009 compared to 2008, primarily due to the impact of lower volumes of approximately $220 million, partially offset by improved pricing and favorable sales mix of approximately $70 million, lower selling and administrative costs of approximately $30 million as a result of restructuring initiatives and lower raw material costs of approximately $20 million. In reaction to the current and anticipated lower demand, the Process Industries segment reduced total employment levels by approximately 1,400 positions during 2009.
The Company expects the Process Industries segment sales to be flat for 2010 compared to 2009. Aftermarket demand is expected to remain in line with fourth quarter 2009 rates. The destocking cycle in the channel has not yet run its course. The heavy equipment market sector will continue to decline through 2010 as new project investment and capital formation levels have dropped precipitously. Adjusted EBIT for 2010 is expected to be lower, compared to 2009, as a result of higher selling and administrative costs and higher raw material costs.

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Aerospace and Defense Segment:
                                 
    2009   2008   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 417.7     $ 412.0     $ 5.7       1.4 %
Adjusted EBIT
  $ 72.4     $ 41.5     $ 30.9       74.5 %
Adjusted EBIT margin
    17.3 %     10.1 %         720  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 2009 and 2008 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 2008, the Company completed the acquisition of the assets of EXTEX. Acquisitions in the current year represent the increase in sales, year over year, for this recent acquisition. The year 2008 represents the base year for which the effects of currency and acquisitions are measured; as a result, currency and acquisitions are assumed to be zero for 2008.
                                 
    2009   2008   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 417.7     $ 412.0     $ 5.7       1.4 %
Acquisitions
    10.0             10.0     NM  
Currency
    (2.6 )           (2.6 )   NM  
 
Net sales, excluding the impact of acquisitions and currency
  $ 410.3     $ 412.0     $ (1.7 )     (0.4 )%
 
The Aerospace and Defense segment’s net sales, excluding the effect of acquisitions and currency-rate changes, decreased 0.4% for 2009, compared to 2008. The slight decline was due to reduced demand across commercial and general aviation markets of approximately $22 million, offset by improved pricing and favorable sales mix of approximately $20 million. Adjusted EBIT increased 74.5% in 2009, compared to 2008, primarily due to increased pricing and sales mix of approximately $20 million, the benefits of cost-reduction initiatives of approximately $10 million, and LIFO income of approximately $10 million, partially offset by the impact of lower volumes of approximately $10 million. The Company expects the Aerospace and Defense segment to see modest declines in sales and adjusted EBIT in 2010, compared to 2009, as a result of softer commercial and general aviation markets and flat defense markets.
Steel Segment:
                                 
    2009   2008   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 714.9     $ 1,852.0     $ (1,137.1 )     (61.4 )%
Adjusted EBIT
  $ (57.9 )   $ 264.0     $ (321.9 )     (121.9 )%
Adjusted EBIT margin
    (8.1 )%     14.3 %         (2,240 ) 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 acquisitions completed in 2008 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. In February 2008, the Company completed the acquisition of the assets of BSI. Acquisitions in the current year represent the increase in sales, year over year, for this recent acquisition. The year 2008 represents the base year for which the effects of currency and acquisitions are measured; as a result, currency and acquisitions are assumed to be zero for 2008.

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    2009   2008   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 714.9     $ 1,852.0     $ (1,137.1 )     (61.4 )%
Acquisitions
    7.5             7.5     NM  
Currency
    (5.1 )           (5.1 )   NM  
 
Net sales, excluding the impact of divestitures and currency
  $ 712.5     $ 1,852.0     $ (1,139.5 )     (61.5 )%
 
The Steel segment’s net sales for 2009, excluding the effects of acquisitions and currency-rate changes, decreased 61.5% compared to 2008, primarily due to lower volume of approximately $590 million across all market sectors and lower surcharges in 2009. Surcharges decreased to $100.1 million in 2009 from $656.4 million in 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 2009 was $258 per ton compared to $516 per ton for 2008. Steel shipments for 2009 were 593,595 tons, compared to 1,167,945 tons for 2008, a decrease of 49%. The Steel segment’s average selling price, including surcharges, was $1,204 per ton for 2009, compared to an average selling price of $1,586 per ton for 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, natural gas and nickel. In light of the significantly lower market demands experienced in 2009, compared to 2008, the Steel segment reduced total employment levels by approximately 680 positions in 2009.
The Steel segment’s adjusted EBIT decreased $321.9 million in 2009, compared to 2008, primarily due to lower surcharges of $556 million, the impact of lower sales volume of approximately $280 million and the impact of the underutilization of capacity of approximately $70 million, partially offset by lower raw material costs of approximately $385 million and lower LIFO charges of $67 million. In 2009, the Steel segment recognized LIFO income of $37.1 million, compared to LIFO expense of $29.6 million in 2008. Raw material costs consumed in the manufacturing process, including scrap steel, alloys and energy, decreased 45% in 2009 compared to the prior year to an average cost of $300 per ton.
The Company expects the Steel segment to see a 25% to 35% increase in sales for 2010, compared to 2009, due to higher volume and higher average selling prices. The higher average selling prices are driven by higher surcharges as scrap steel and alloy prices are expected to increase in 2010. The Company also expects higher demand, primarily driven by a 20% to 30% increase in demand in the Mobile market sector and a 35% to 45% increase in demand in the Industrial market sector, partially offset by a continued weak demand from the Oil and Gas market sector. The Company expects the Steel segment’s adjusted EBIT to be higher in 2010 primarily due to the higher demand and average selling prices, partially offset by higher raw material costs and related LIFO expense. Scrap, alloy and energy costs are expected to increase in the near term from current levels as global industrial production improves and then levels off.
Corporate:
                                 
    2009   2008   $ Change   Change
 
(Dollars in millions)
                               
Corporate expenses
  $ 48.7     $ 68.4     $ (19.7 )     (28.8 )%
Corporate expenses % to net sales
    1.6 %     1.4 %         20  bps
 
Corporate expenses decreased in 2009, compared to 2008, as a result of lower performance-based compensation, lower discretionary spending and restructuring initiatives.

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Financial Overview
2008 compared to 2007
Overview:
                                 
    2008   2007   $ Change   % Change
 
(Dollars in millions, except earnings per share)
                               
Net sales
  $ 5,040.8     $ 4,532.1     $ 508.7       11.2 %
Income from continuing operations
    282.6       210.7       71.9       34.1 %
(Loss) income from discontinued operations
    (11.3 )     12.9       (24.2 )     (187.6 )%
Income attributable to noncontrolling interest
    3.6       3.6             0.0 %
Net income attributable to The Timken Company
    267.7       220.0       47.7       21.7 %
Diluted (loss) earnings per share:
                               
Continuing operations
  $ 2.89     $ 2.16     $ 0.73       33.8 %
Discontinued operations
    (0.12 )     0.13       (0.25 )     (192.3 )%
Diluted earnings per share
  $ 2.77     $ 2.29     $ 0.48       21.0 %
Average number of shares — diluted
    95,947,643       95,612,235             0.4 %
 
The Timken Company reported net sales for 2008 of $5.04 billion compared to $4.53 billion in 2007, an increase of 11.2%. The increase in sales was primarily driven by higher surcharges to recover historically high raw material costs and improved pricing as well as strong demand in global industrial markets, acquisitions and foreign currency translation, partially offset by weaker automotive demand. For 2008, net income per diluted share was $2.77 compared to $2.29 for 2007. Income from continuing operations per diluted share was $2.89 for 2008, compared to $2.16 for 2007.
The Company’s results for 2008 reflect the strength of global industrial markets, increased raw material surcharges, improved pricing, favorable sales mix and the favorable impact from acquisitions, partially offset by higher raw material costs and related LIFO expense as well as higher manufacturing and logistics costs. Additionally, the Company’s results for 2008 reflect higher restructuring and impairment charges for 2008 compared to 2007 primarily the result of a pretax goodwill impairment charge of $48.8 million in the Company’s Mobile Industries segment, of which $30.4 million has been reclassified to discontinued operations. Results for 2008 also reflect income from the sale of the Company’s 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’s results for 2007 also 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:
                                 
    2008   2007   $ Change   % Change
 
(Dollars in millions, and exclude intersegment sales)
                               
Mobile Industries
  $ 1,771.8     $ 1,838.4     $ (66.6 )     (3.6 )%
Process Industries
    1,163.0       980.9       182.1       18.6 %
Aerospace and Defense
    412.0       297.7       114.3       38.4 %
Steel
    1,694.0       1,415.1       278.9       19.7 %
 
Total Company
  $ 5,040.8     $ 4,532.1     $ 508.7       11.2 %
 
Net sales for 2008 increased $508.7 million, or 11.2%, compared to 2007 primarily due to higher steel surcharges, improved pricing across all segments and favorable sales mix of approximately $515 million, the favorable impact from acquisitions of approximately $115 million and the effect of currency-rate changes of approximately $45 million, partially offset by lower volume of approximately $125 million and the impact of the closure of the Company’s seamless steel tube manufacturing facility located in Desford, England of approximately $40 million. The favorable impact from acquisitions was due to the acquisitions of Purdy, BSI and EXTEX. Higher volume across most market sectors, particularly off-highway, energy, aerospace and heavy industry, was more than offset by lower demand from North American light-vehicle customers.

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Gross Profit:
                                 
    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Gross profit
  $ 1,151.9     $ 955.0     $ 196.9       20.6 %
Gross profit % to net sales
    22.9 %     21.1 %         180  bps
Rationalization expenses included in cost of products sold
  $ 3.4     $ 18.5     $ (15.1 )     (81.6 )%
 
Gross profit margins increased in 2008 compared to 2007 as a result of higher surcharges, improved pricing and favorable sales mix of approximately $515 million, the favorable impact of acquisitions of $20 million and lower rationalization expenses of $15 million, partially offset by higher raw material costs and related LIFO expense of approximately $300 million, the unfavorable impact of lower overall volume of $20 million and higher logistics costs of approximately $30 million.
In 2008, rationalization expenses of $3.4 million included in cost of products sold primarily related to certain Mobile Industries’ domestic manufacturing facilities, the continued rationalization of Process Industries’ Canton, Ohio bearing facilities and the closure of the Company’s seamless steel tube manufacturing operations located in Desford, England. In 2007, rationalization expenses of $18.5 million included in cost of products sold primarily related to the closure of the Company’s seamless steel tube manufacturing operations located in Desford, England, the eventual closure of the Company’s manufacturing operations located in Sao Paulo, Brazil and the continued rationalization of the Process Industries’ Canton, Ohio bearing facilities. Rationalization expenses in 2008 and 2007 primarily included accelerated depreciation on assets and relocation of equipment. The significant decrease in rationalization expenses in 2008 compared to 2007 was primarily due to the completion of the closure of the Company’s seamless steel tube manufacturing operations in Desford, England in April 2007 and the closure of the Company’s manufacturing facility in Clinton, South Carolina in October 2007.
Selling, Administrative and General Expenses:
                                 
    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Selling, administrative and general expenses
  $ 657.1     $ 631.2     $ 25.9       4.1 %
Selling, administrative and general expenses % to net sales
    13.0 %     13.9 %         (90 ) bps
Rationalization expenses included in selling, administrative and general expenses
  $ 1.5     $ 2.5     $ (1.0 )     (40.0 )%
 
The increase in selling, administrative and general expenses of $25.9 million in 2008 compared to 2007 was primarily due to an increase in the allowance for doubtful accounts of approximately $10 million, higher performance-based compensation of approximately $8 million and higher depreciation on capitalized Project O.N.E. costs of $6 million.
In 2008, the rationalization expenses included in selling, administrative and general expenses primarily related to the rationalization of Process Industries’ Canton, Ohio bearing facilities and costs associated with vacating the Torrington, Connecticut office complex. In 2007, the rationalization expenses included in selling, administrative and general expenses primarily related to Mobile Industries’ engineering facilities, the Process Industries’ Canton, Ohio bearing facilities and the closure of the Company’s seamless steel tube manufacturing operations located in Desford, England.

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Impairment and Restructuring Charges:
                         
    2008   2007   $ Change
 
(Dollars in millions)
                       
Impairment charges
  $ 20.1     $ 4.9     $ 15.2  
Severance and related benefit costs
    8.7       18.5       (9.8 )
Exit costs
    4.0       5.0       (1.0 )
 
Total
  $ 32.8     $ 28.4     $ 4.4  
 
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. See Note 6 — Impairment and Restructuring in the Notes to Consolidated Financial Statements for further details by segment.
2008 Workforce Reductions
In December 2008, the Company recorded $4.2 million in severance and related benefit costs to eliminate approximately 110 employees as a result of the current downturn in the economy and current and anticipated market demand. Of the $4.2 million charge, $2.0 million related to the Mobile Industries segment, $0.8 million related to the Process Industries segment, $1.1 million related to the Steel segment and $0.3 million related to Corporate.
Bearings and Power Transmission Reorganization
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 is composed of three reportable segments: Mobile Industries, Process Industries and Aerospace and Defense. The organizational changes have streamlined operations and eliminated redundancies. The Company realized pretax savings of approximately $18 million in 2008 as a result of these changes. During 2008 and 2007, the Company recorded $2.5 million and $3.5 million, respectively, of severance and related benefit costs related to this initiative.
Mobile Industries
In 2008, the Company recorded $2.2 million of severance and related benefit costs and $0.8 million of environmental exit costs due to the closure of the manufacturing facility in Sao Paulo, Brazil. In 2007, the Company recorded $6.4 million of severance and related benefit costs and $2.0 million of exit costs due to the closure of the manufacturing facility in Sao Paulo, Brazil. Exit costs of $1.7 million recorded during 2007 were the result of environmental charges related to the closure of the manufacturing facility in Sao Paulo, Brazil.
The Company recorded an impairment charge of $48.8 million in 2008, representing the write-off of goodwill associated with the Mobile Industries segment. Of the $48.8 million impairment charge, $30.4 million was reclassified to discontinued operations. The Company is required to review goodwill and indefinite-lived intangibles for impairment annually. The Company performed this annual test during the fourth quarter of 2008 using an income approach (discounted cash flow model) and a market approach. As a result of the economic downturn that began in the second half of 2008, management’s forecasts of earnings and cash flow at that time declined significantly. The Company utilizes these forecasts for the income approach as part of the goodwill impairment review. As a result of the lower earnings and cash flow forecasts, the Company determined that the Mobile Industries segment could not support the carrying value of its goodwill. Refer to Note 8 — Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements for additional discussion.
Process Industries
In 2008, the Company recorded exit costs of $1.8 million related to the Process Industries’ rationalization plans. The exit costs recorded during 2008 were primarily the result of environmental charges. In 2007, the Company recorded $4.8 million of impairment charges and $0.6 million of exit costs associated with the Process Industries’ rationalization plans.
Steel
In April 2007, the Company completed the closure of its seamless steel tube manufacturing facility located in Desford, England. The Company recorded approximately $0.4 million of exit costs in 2008 compared to $7.3 million of severance and related benefit costs and $2.4 million of exit costs during 2007 related to this action.

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Loss on Divestitures:
                                 
    2008           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. In 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. In 2007, the Company recorded an additional loss of $0.7 million related to the divestiture of the steering business.
Interest Expense and Income:
                                 
    2008   2007   $ Change   % Change
 
(Dollars in millions)
                               
Interest expense
  $ 44.4     $ 42.3     $ 2.1       5.0 %
Interest income
  $ 5.8     $ 6.9     $ (1.1 )     (15.9 )%
 
Interest expense for 2008 increased compared to 2007 due to higher average debt outstanding in 2008 compared to 2007. Interest income decreased for 2008 compared to 2007 due to lower average invested cash balances and lower interest rates.
Other Income and Expense:
                                 
    2008   2007   $ Change   % Change
 
(Dollars in millions)
                               
CDSOA receipts, net of expenses
  $ 9.1     $ 6.5     $ 2.6       40.0 %
 
 
                               
Other income (expense), net:
                               
Gain on divestitures of non-strategic assets
  $ 19.5     $ 6.2     $ 13.3       214.5 %
(Loss) gain on dissolution of subsidiaries
    (0.4 )     0.4       (0.8 )     (200.0 )%
Other
    (11.9 )     (8.0 )     (3.9 )     (48.8 )%
 
Other income (expense), net
  $ 7.2     $ (1.4 )   $ 8.6     NM  
 
In 2008, the Company received CDSOA receipts, net of expenses, of $10.2 million. In 2007, the Company received CDSOA receipts, net of expenses, of $7.9 million. CDSOA, receipts, net of expenses, of $1.1 million and $1.4 million have been reclassified to discontinued operations for 2008 and 2007, respectively. Refer to Other Matters — Continued Dumping and Subsidy Offset Act (CDSOA) for additional discussion.
In 2008, the gain on divestitures of non-strategic assets primarily related to the sale of the Company’s seamless steel tube manufacturing facility located in Desford, England, which closed in April 2007. In February 2008, the Company completed the sale of this facility, resulting in a pretax gain of approximately $20.4 million. In 2007, the gain on divestitures of non-strategic assets primarily included a gain of $5.5 million on the sale of certain assets operated by the seamless steel tube facility located in Desford, England.
For 2008, “other” primarily included $6.4 million of foreign currency losses, $4.7 million of losses on the disposal of fixed assets and $3.9 million of donations, partially offset by gains on equity investments of $1.4 million and $1.2 million of export incentives. For 2007, “other” primarily included $5.9 million of losses on the disposal of fixed assets, $3.0 million of donations and $1.3 million of losses from equity investments, partially offset by $1.3 million of foreign currency exchange gains.

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Income Tax Expense:
                                 
    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Income tax expense
  $ 157.1     $ 53.9     $ 103.2       191.5 %
Effective tax rate
    35.7 %     20.4 %         1,530  bps
 
The increase in the effective tax rate for 2008, compared to 2007, was primarily due to a favorable discrete tax adjustment of $32.1 million in the first quarter of 2007 to recognize the benefits of a prior year tax position as a result of a change in tax law during the quarter and higher U.S. state and local taxes in 2008. These increases were partially offset by a lower effective tax rate on foreign income in 2008.
Discontinued Operations:
                                 
    2008   2007   $ Change   % Change
 
(Dollars in millions)
                               
Operating results, net of tax
  $ (11.3 )   $ 12.2     $ (23.5 )     (192.6 )%
Gain on disposal, net of tax
          0.7       (0.7 )     (100.0 )%
 
Total
  $ (11.3 )   $ 12.9     $ (24.2 )     (187.6 )%
 
In December 2009, the Company completed the divestiture of its NRB operations to JTEKT Corporation. Discontinued operations for 2008 represent the operating results, net of tax, of the NRB operations. Discontinued operations for 2007 primarily represent the operating results, net of tax, of the NRB operations. The decrease in the operating results, net of tax, of the NRB operations in 2008, compared to 2007, is primarily due to a pretax impairment charge of $30.4 million, representing the write-off of goodwill associated with the Mobile Industries segment.
Net Income Attributable to Noncontrolling Interest:
                                 
    2008   2007   $ Change   % Change
 
(Dollars in millions)
                               
Net income attributable to noncontrolling interest
  $ 3.6     $ 3.6           0.0 %
 
Net income attributable to noncontrolling interest represents the net income attributable to parties other than the Company.
Business Segments:
Mobile Industries Segment:
                                 
    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 1,771.9     $ 1,838.4     $ (66.5 )     (3.6 )%
Adjusted EBIT
  $ 35.8     $ 28.0     $ 7.8       27.9 %
Adjusted EBIT margin
    2.0 %     1.5 %         50  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 2007 represents the base year for which the effects of currency are measured; as a result, currency is assumed to be zero for 2007.

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    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 1,771.9     $ 1,838.4     $ (66.5 )     (3.6 )%
Currency
    23.5             23.5     NM  
 
Net sales, excluding the impact of currency
  $ 1,748.4     $ 1,838.4     $ (90.0 )     (4.9 )%
 
The Mobile Industries segment’s net sales, excluding the effects of currency-rate changes, decreased 4.9% in 2008, compared to 2007, primarily due to lower volume of approximately $160 million, partially offset by improved pricing, higher surcharges and favorable sales mix of approximately $70 million. The lower volume was primarily due to lower volume 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 was higher in 2008 compared to 2007, primarily due to improved pricing, higher surcharges and favorable sales mix of approximately $70 million and the favorable impact of restructuring of approximately $40 million. These increases were partially offset by higher raw material costs and related LIFO expense of approximately $70 million, the underutilization of manufacturing capacity as a result of lower volume of approximately $25 million and higher logistics costs of approximately $15 million. In reaction to the current and anticipated lower demand, the Mobile Industries segment reduced total employment levels by approximately 2,000 positions in 2008 and temporarily idled factories beyond normal seasonal shutdowns during the fourth quarter of 2008.
Process Industries Segment:
                                 
    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 1,166.2     $ 982.7     $ 183.5       18.7 %
Adjusted EBIT
  $ 218.7     $ 125.8     $ 92.9       73.8 %
Adjusted EBIT margin
    18.8 %     12.8 %         600  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 2007 represents the base year for which the effects of currency are measured; as a result, currency is assumed to be zero for 2007.
                                 
    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 1,166.2     $ 982.7     $ 183.5       18.7 %
Currency
    19.2             19.2     NM  
 
Net sales, excluding the impact of currency
  $ 1,147.0     $ 982.7     $ 164.3       16.7 %
 
The Process Industries segment’s net sales, excluding the effects of currency-rate changes, increased 16.7% for 2008, compared to 2007, primarily due to improved pricing, higher surcharges and favorable sales mix of approximately $90 million and higher volume of approximately $70 million. The higher volume was primarily in the Company’s industrial distribution channel, as well as the heavy industry and power transmission market sectors. Adjusted EBIT was higher in 2008, compared to 2007, primarily due to improved pricing, higher surcharges and favorable sales mix of approximately $90 million and the impact of higher volumes of approximately $35 million, partially offset by higher raw material costs and related LIFO expense and higher manufacturing costs of approximately $35 million.

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Aerospace and Defense Segment:
                                 
    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 412.0     $ 297.7     $ 114.3       38.4 %
Adjusted EBIT
  $ 41.5     $ 18.0     $ 23.5       130.6 %
Adjusted EBIT margin
    10.1 %     6.0 %         410  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 2008 and 2007 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, the Company completed the acquisition of the assets of Purdy. During the fourth quarter of 2008, the Company completed the acquisition of the assets of EXTEX. Acquisitions in the current year represent the increase in sales, year over year, for these recent acquisitions. The year 2007 represents the base year for which the effects of currency and acquisitions are measured; as a result, currency and acquisitions are assumed to be zero for 2007.
                                 
    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 412.0     $ 297.7     $ 114.3       38.4 %
Acquisitions
    69.8             69.8     NM  
Currency
    0.8             0.8     NM  
 
Net sales, excluding the impact of acquisitions and currency
  $ 341.4     $ 297.7     $ 43.7       14.7 %
 
The Aerospace and Defense segment’s net sales, excluding the effect of acquisitions and currency-rate changes, increased 14.7% for 2008, compared to 2007, as a result of improved pricing, higher surcharges and favorable sales mix of approximately $25 million and higher volumes of approximately $20 million in the segment’s aerospace and defense market sector. Adjusted EBIT increased in 2008, compared to 2007, primarily due to increased pricing, surcharges and sales mix of approximately $25 million, the favorable impact of acquisitions of approximately $10 million and the impact of higher volumes of approximately $10 million. These increases were offset by higher raw material costs and related LIFO charges of approximately $15 million and higher manufacturing costs associated with investments in capacity additions at aerospace precision products plants in North America and China of approximately $5 million.
Steel Segment:
                                 
    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 1,852.0     $ 1,561.6     $ 290.4       18.6 %
Adjusted EBIT
  $ 264.0     $ 231.2     $ 32.8       14.2 %
Adjusted EBIT margin
    14.3 %     14.8 %         (50 ) 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 acquisitions and divestitures completed in 2008 and 2007 and currency exchange rates. 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 February 2008, the Company completed the acquisition of the assets of BSI. Acquisitions in the current year represent the increase in sales, year over year, for this recent acquisition. In April 2007, the Company completed the closure of its seamless steel tube manufacturing facility located in Desford, England. Divestitures in the current year represent the decrease in sales, year over year, for this divestiture. The year 2007 represents the base year for which the effects of currency, acquisitions and divestitures are measured; as a result, these items are assumed to be zero for 2007.

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    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Net sales, including intersegment sales
  $ 1,852.0     $ 1,561.6     $ 290.4       18.6 %
Acquisitions
    46.0             46.0     NM
Divestitures
    (42.6 )           (42.6 )   NM
Currency
    0.2             0.2     NM
 
Net sales, excluding the impact of divestitures and currency
  $ 1,848.4     $ 1,561.6     $ 286.8       18.4 %
 
The Steel segment’s 2008 net sales increased 18.4% over 2007, excluding the effect of acquisitions, divestitures and currency-rate changes, primarily due to higher surcharges in 2008, compared to 2007. Surcharges increased to $647.2 million in 2008 from $370.4 million in 2007. Steel shipments for 2008 were 1,168,577 tons, compared to 1,208,352 tons for 2007, a decrease of 3.3%. The Steel segment’s average selling price, including surcharges, was $1,585 per ton for 2008, compared to an average selling price of $1,292 per ton in 2007. The increase in the average selling prices was the result of higher surcharges and better mix, offset by lower volume. The higher surcharges were the result of higher prices for certain input raw materials, especially scrap steel, chrome, molybdenum, vanadium and manganese. The Steel segment’s sales for 2008, compared to 2007, benefited from a favorable sales mix as a higher percentage of sales were sold to the industrial market sector in 2008, compared to 2007, and shifted away from the automotive market sector.
The Steel segment’s adjusted EBIT increased $32.8 million in 2008, compared to 2007, primarily due to higher average selling prices, net of higher raw material costs and related LIFO charges, of approximately $65 million, offset by higher manufacturing costs of approximately $35 million. Raw material costs consumed in the manufacturing process, including scrap steel, alloys and energy, increased 36% over the prior year to an average cost of $551 per ton in 2008.
Corporate:
                                 
    2008   2007   $ Change   Change
 
(Dollars in millions)
                               
Corporate expenses
  $ 68.4     $ 65.9     $ 2.5       3.8 %
Corporate expenses % to net sales
    1.4 %     1.5 %         (10 ) bps
 
Corporate expenses increased in 2008, compared to 2007, as a result of higher performance-based compensation.

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The Balance Sheet
Total assets, as shown on the Consolidated Balance Sheet at December 31, 2009, decreased by $529.2 million from December 31, 2008. This decrease was primarily due to the sale of the NRB operations, a decrease in inventories and accounts receivable, a decrease in property, plant and equipment — net and a decrease in non-current deferred taxes as a result of the Company’s decrease in its defined benefit pension plan accruals during 2009, partially offset by higher cash balances as a result of proceeds received for the sale of the NRB operations.
Current Assets:
                                 
    December 31,        
    2009   2008   $ Change   % Change
 
(Dollars in millions)
                               
Cash and cash equivalents
  $ 755.5     $ 133.4     $ 622.1     NM  
Accounts receivable, net
    411.2       575.9       (164.7 )     (28.6 )%
Inventories, net
    671.2       1,000.5       (329.3 )     (32.9 )%
Deferred income taxes
    61.5       83.4       (21.9 )     (26.3 )%
Deferred charges and prepaid expenses
    11.8       9.7       2.1       21.6 %
Current assets, discontinued operations
          182.9       (182.9 )     (100.0 )%
Other current assets
    111.3       47.7       63.6       133.3 %
 
Total current assets
  $ 2,022.5     $ 2,033.5     $ (11.0 )     (0.5 )%
 
The increase in cash and cash equivalents in 2009 was primarily due to strong cash generated from operations, as well as proceeds received for the sale assets of the NRB operations in December 2009. Refer to the Consolidated Statement of Cash Flows for further explanation. Net accounts receivable decreased primarily due to lower sales in the fourth quarter of 2009 as compared to the same period in 2008, partially offset by lower allowance for doubtful accounts. The decrease in the allowance for doubtful accounts of $13.4 million was largely due to a reduction in the Company’s exposure to the North American automotive industry. The decrease in inventories, net was primarily due to lower volume and the Company’s concerted effort to decrease inventory levels, as well as lower raw material costs, partially offset by lower LIFO reserves of $60.5 million and the impact of foreign currency translation. The decrease in the deferred tax asset was primarily due to reductions in book-tax differences related to accrued liabilities, inventory reserves and allowance for doubtful accounts in 2009. Current assets, discontinued operations, at December 31, 2008 related to the NRB operations sold on December 31, 2009. Other current assets increased primarily due to net income taxes receivable related to the 2009 consolidated pretax loss, which is expected to be refunded in 2010.
Property, Plant and Equipment — Net:
                                 
    December 31,        
    2009   2008   $ Change   % Change
 
(Dollars in millions)
                               
Property, plant and equipment
  $ 3,398.1     $ 3,592.1     $ (194.0 )     (5.4 )%
Less: allowances for depreciation
    (2,062.9 )     (2,075.1 )     (12.2 )     0.6 %
 
Property, plant and equipment — net
  $ 1,335.2     $ 1,517.0     $ (181.8 )     (12.0 )%
 
The decrease in property, plant and equipment — net in 2009 was primarily due to current-year depreciation expense exceeding capital expenditures, as well as asset impairments recorded in 2009.

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Other Assets:
                                 
    December 31,        
    2009   2008   $ Change   % Change
 
(Dollars in millions)
                               
Goodwill
  $ 221.7     $ 221.4     $ 0.3       0.1 %
Other intangible assets
    132.1       140.9       (8.8 )     (6.2 )%
Deferred income taxes
    248.6       315.0       (66.4 )     (21.1 )%
Non-current assets, discontinued operations
          269.6       (269.6 )     (100.0 )%
Other non-current assets
    46.8       38.7       8.1       20.9 %
 
Total other assets
  $ 649.2     $ 985.6     $ (336.4 )     (34.1 )%
 
Other intangible assets decreased in 2009 primarily due to amortization expense recognized during 2009. The decrease in deferred income taxes was primarily due to decreases in the Company’s accrued pension liabilities during 2009. Non-current assets, discontinued operations, at December 31, 2008 related to the NRB operations sold on December 31, 2009.
Current Liabilities:
                                 
    December 31,        
    2009   2008   $ Change   % Change
 
(Dollars in millions)
                               
Short-term debt
  $ 26.3     $ 91.5     $ (65.2 )     (71.3 )%
Accounts payable and other liabilities
    355.2       423.5       (68.3 )     (16.1 )%
Salaries, wages and benefits
    132.6       217.1       (84.5 )     (38.9 )%
Income taxes payable
          22.5       (22.5 )     (100.0 )%
Deferred income taxes
    9.2       5.1       4.1       80.4 %
Current liabilities, discontinued operations
          21.5       (21.5 )     (100.0 )%
Current portion of long-term debt
    17.1       17.1             0.0 %
 
Total current liabilities
  $ 540.4     $ 798.3     $ (257.9 )     (32.3 )%
 
The decrease in short-term debt was primarily due to a reduction in the utilization of the Company’s foreign lines of credit in Europe and Asia. The decrease in accounts payable and other liabilities was primarily due to lower volumes. The decrease in salaries, wages and benefits was primarily due to lower accrued performance-based compensation in 2009, compared to 2008. The decrease in income taxes payable was primarily due to reductions in income taxes payable as a result of the filing of the Company’s 2008 U.S. federal income tax return and current tax benefits associated with the consolidated pretax loss in 2009. The resulting receivable balance at December 31, 2009 was reclassified to Other current assets. Current liabilities, discontinued operations, at December 31, 2008 related to the NRB operations sold on December 31, 2009.
Non-Current Liabilities:
                                 
    December 31,        
    2009   2008   $ Change   % Change
 
(Dollars in millions)
                               
Long-term debt
  $ 469.3     $ 515.3     $ (46.0 )     (8.9 )%
Accrued pension cost
    690.9       830.0       (139.1 )     (16.8 )%
Accrued postretirement benefits cost
    604.2       613.0       (8.8 )     (1.4 )%
Deferred income taxes
    6.1       8.5       (2.4 )     (28.2 )%
Non-current liabilities, discontinued operations
          23.9       (23.9 )     (100.0 )%
Other non-current liabilities
    100.4       84.0       16.4       19.5 %
 
Total non-current liabilities
  $ 1,870.9     $ 2,074.7     $ (203.8 )     (9.8 )%
 

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The decrease in long-term debt was primarily due to the payment of the Company’s variable-rate unsecured Canadian note during 2009. The decrease in accrued pension cost was primarily due to positive asset returns in the Company’s defined benefit pension plans during 2009 as a result of broad increases in the global equity markets. The decrease in accrued postretirement benefits cost was primarily due to actuarial gains recorded in 2009 as a result of plan experience. The amounts at December 31, 2009 and 2008 for both accrued pension cost and accrued postretirement benefits cost reflect the funded status of the Company’s defined benefit pension and postretirement benefit plans. Refer to Note 12 — Retirement and Postretirement Benefit Plans in the Notes to Consolidated Financial Statements for further explanation. The increase in other non-current liabilities was primarily due to deferred revenue received from one of the Company’s automotive customers to be applied against future programs and the increase in the accrual for uncertain tax positions.
Shareholders’ Equity:
                                 
    December 31,        
    2009   2008   $ Change   % Change
 
(Dollars in millions)
                               
Common stock
  $ 896.5     $ 891.4     $ 5.1       0.6 %
Earnings invested in the business
    1,402.9       1,580.1       (177.2 )     (11.2 )%
Accumulated other comprehensive loss
    (717.1 )     (819.6 )     102.5       12.5 %
Treasury shares
    (4.7 )     (11.6 )     6.9       59.5 %
Noncontrolling interest
    18.0       22.8       (4.8 )     (21.1 )%
 
Total shareholders’ equity
  $ 1,595.6     $ 1,663.1     $ (67.5 )     (4.1 )%
 
Earnings invested in the business decreased during 2009 due to a net loss of $133.9 million and dividends declared of $43.3 million. The decrease in accumulated other comprehensive loss was primarily due to a $62.0 million net after-tax pension and postretirement liability adjustment and $39.7 million increase in foreign currency translation. The pension and postretirement liability adjustment was primarily due to the realization of an actuarial gain in the current year due to favorable returns on defined benefit pension plan assets. The increase in the foreign currency translation adjustment was due to the weakening 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. For discussion regarding the impact of foreign currency translation, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Cash Flows:
                         
    December 31,    
    2009   2008   $ Change
 
(Dollars in millions)
                       
Net cash provided by operating activities
  $ 587.7     $ 577.6     $ 10.1  
Net cash provided (used) by investing activities
    194.3       (320.7 )     515.0  
Net cash used by financing activities
    (178.1 )     (145.9 )     (32.2 )
Effect of exchange rate changes on cash
    18.3       (20.5 )     38.8  
 
Increase in cash and cash equivalents
  $ 622.2     $ 90.5     $ 531.7  
 
Net cash provided by operating activities of $587.7 million for 2009 increased 1.7% compared to 2008 with operating cash flows from continuing operations increasing $99.2 million, mostly offset by cash flows from discontinued operations decreasing $89.1 million. The increase in net cash provided by operating activities from continuing operations was primarily the result of higher cash provided by working capital items, partially offset by lower net income adjusted for impairment charges and higher pension and postretirement payments. The increase in cash provided by working capital items was primarily due to lower inventories and accounts receivable, partially offset by lower accounts payable and accrued expenses. Inventories provided cash of $356.2 million in 2009 compared to a use of cash of $97.7 million in 2008, primarily due to the Company’s concerted effort to decrease inventory levels as a result of lower demand in 2009. Accounts receivable provided cash of $174.5 million in 2009 after providing cash of $107.6 million in 2008, primarily due to lower demand. Accounts payable and accrued expenses, including income taxes, used cash of $204.7 million in 2009 after using cash of $22.2 million in 2008. Net income (including discontinued operations), adjusted for impairment charges, decreased $246.7 million in 2009, compared to 2008. Pension and postretirement benefit payments were $113.5 million for 2009, compared to $70.5 million for 2008 as the Company increased its discretionary contributions to the Company’s defined benefit pension plans in 2009. The decrease in net cash provided by operating activities from discontinued operations was primarily due to higher net loss for discontinued operations in 2009, compared to 2008, partially offset by higher cash flows from working capital items, particularly inventories.

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The net cash provided from investing activities provided cash of $194.3 million for 2009 after using cash of $320.7 million for 2008 primarily as the result of higher cash proceeds from divestitures, lower capital expenditures and lower acquisition activity, partially offset by lower proceeds from the disposal of property, plant and equipment in 2009. The cash proceeds from divestitures increased $303.6 million as a result of the sale of the assets of the NRB operations. Capital expenditures decreased $144.0 million in 2009, as compared to 2008, in response to the economic downturn in 2009. Cash used for acquisitions decreased $85.7 million in 2009, compared to 2008, primarily due to the acquisition of the assets of BSI in 2008. Proceeds from the disposal of property, plant and equipment decreased $33.8 million primarily due to the sale of the Company’s seamless steel tube manufacturing facility located in Desford, England for approximately $28.0 million in 2008. In addition, cash used by investing activities of discontinued operations decreased $11.1 million in 2009 primarily due to lower capital expenditures.
The net cash flows from financing activities used cash of $178.1 million in 2009 after using cash of $145.9 million in 2008. The Company reduced its net borrowings by $124.9 million during 2009 after reducing its net borrowings by $95.4 million in 2008. The Company was able to reduce its net borrowings in light of strong cash from operations, lower capital expenditures and lower acquisition activity expenditures. In 2009, proceeds from issuance of long-term debt and payments on long-term debt primarily related to the issuance of $250 million 6.0% fixed-rated unsecured Senior Notes and the redemption of $250 million 5.75% fixed-rated unsecured Senior Notes. In 2008, proceeds from issuance of long-term debt and payments on long-term debt primarily related to short-term borrowings and subsequent repayments under the Company’s Senior Credit Facility. The Company considers the Senior Credit Facility to be a long-term facility. In addition, the Company paid deferred financing costs of $10.8 million in 2009. The deferred financing costs related to the Company’s new $500 million Amended and Restated Credit Agreement (Senior Credit Facility) and the issuance of $250 million of fixed-rated unsecured Senior Notes. Lastly, proceeds from the exercise of stock options decreased during 2009, as compared to 2008, by $16.0 million, partially offset by lower cash dividends paid to shareholders in response to the economic downturn in 2009.
Liquidity and Capital Resources
Total debt was $512.7 million at December 31, 2009 compared to $623.9 million at December 31, 2008. At December 31, 2009, cash and cash equivalents of $755.5 million exceeded total debt of $512.7 million, whereas total debt exceeded cash and cash equivalents by $490.5 million at December 31, 2008. The net debt to capital ratio was negative 17.9% at December 31, 2009 compared to positive 22.8% at December 31, 2008.
Reconciliation of total debt to net (cash) debt and the ratio of net debt to capital:
Net Debt:
                 
    December 31,
    2009   2008
 
(Dollars in millions)
               
Short-term debt
  $ 26.3     $ 91.5  
Current portion of long-term debt
    17.1       17.1  
Long-term debt
    469.3       515.3  
 
Total debt
    512.7       623.9  
Less: cash and cash equivalents
    (755.5 )     (133.4 )
 
Net (cash) debt
  $ (242.8 )   $ 490.5  
 
Ratio of Net Debt to Capital:
                 
    December 31,
    2009   2008
 
(Dollars in millions)
               
Net (cash) debt
  $ (242.8 )   $ 490.5  
Shareholders’ equity
    1,595.6       1,663.1  
 
Net (cash) debt + shareholders’ equity (capital)
  $ 1,352.8     $ 2,153.6  
 
Ratio of net (cash) debt to capital
    (17.9 )%     22.8 %
 
The Company presents net debt because it believes net debt is more representative of the Company’s financial position.

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On November 16, 2009, the Company renewed its 364-day Asset Securitization Agreement, which provides for borrowings up to $100 million, subject to certain borrowing base limitations, and is secured by certain domestic trade receivables of the Company. As of December 31, 2009, the Company had no outstanding borrowings under its Asset Securitization; however, certain borrowing base limitations reduced the availability under the Asset Securitization Agreement to $63.7 million.
On July 10, 2009, the Company entered into a new Senior Credit Facility. This Senior Credit Facility replaced the former senior credit facility, which was due to expire on June 30, 2010. The Senior Credit Facility matures on July 10, 2012. At December 31, 2009, the Company had no outstanding borrowings under its Senior Credit Facility but had letters of credit outstanding totaling $32.2 million, which reduced the availability under the Senior Credit Facility to $467.8 million. Under the Senior Credit Facility, the Company has three financial covenants: a consolidated leverage ratio, a consolidated interest coverage ratio and a consolidated minimum tangible net worth test. The maximum consolidated leverage ratio permitted under the Senior Credit Facility was 3.75 to 1.0. As of December 31, 2009, the Company’s consolidated leverage ratio was 1.55 to 1.0. The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility was 4.0 to 1.0. As of December 31, 2009, the Company’s consolidated interest coverage ratio was 8.63 to 1.0. As of December 31, 2009, the Company’s consolidated tangible net worth exceeded the minimum required amount by a significant margin. Refer to Note 5 — Financing Arrangements in the Notes to Consolidated Financial Statements for further discussion.
The interest rate under the Senior Credit Facility is based on the Company’s consolidated leverage ratio. In addition, the Company pays a facility fee based on the consolidated leverage ratio multiplied by the aggregate commitments of all of the lenders under this agreement. Financing costs on the Senior Credit Facility will be amortized over the life of the new agreement and are expected to result in approximately $2.9 million in annual interest expense.
Other sources of liquidity include lines of credit for certain of the Company’s foreign subsidiaries, which provide for borrowings up to $338.4 million. The majority of these lines are uncommitted. At December 31, 2009, the Company had borrowings outstanding of $26.4 million against these lines, which reduced the availability under these facilities to $312.0 million.
The Company expects that any cash requirements in excess of cash on hand and cash generated from operating activities will be met by the committed funds available under its Asset Securitization and the Senior Credit Facility. The Company believes it has sufficient liquidity to meet its obligations through at least the term of the Senior Credit Facility.
The Company expects to remain in compliance with its debt covenants. However, the Company may need to limit its borrowings under the Senior Credit Facility or other facilities in order to remain in compliance. As of December 31, 2009, the Company could have borrowed the full amounts available under the Senior Credit Facility and Asset Securitization Agreement, and would have still been in compliance with its debt covenants.
In September 2009, the Company issued $250 million of fixed-rated unsecured Senior Notes. These new Senior Notes, which mature in September 2014, bear interest at 6.0% per annum. The net proceeds from the sale of the new Senior Notes were used in December 2009 to redeem fixed-rate unsecured Senior Notes maturing in February 2010.
The Company’s debt, including the new Senior Notes, is rated “Baa3,” by Moody’s Investor Services and “BBB-” by Standard & Poor’s Ratings Services, both of which are considered investment-grade credit ratings.
The Company expects to continue to generate cash from operations as the Company experiences improved margins in 2010. In addition, the Company expects to increase capital expenditures by approximately $25 million, or 20% in 2010, compared to 2009. The Company also expects to make approximately $135 million in pension contributions in 2010, compared to $65 million in 2009.

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Financing Obligations and Other Commitments
The Company’s contractual debt obligations and contractual commitments outstanding as of December 31, 2009 are as follows:
Payments due by Period:
                                         
            Less than                   More than
Contractual Obligations   Total   1 Year   1-3 Years   3-5 Years   5 Years
 
(Dollars in millions)
                                       
Interest payments
  $ 235.7     $ 13.4     $ 25.4     $ 25.2     $ 171.7  
Long-term debt, including current portion
    486.4       17.0       0.7       255.0       213.7  
Short-term debt
    26.3       26.3                    
Operating leases
    145.3       31.6       44.0       32.5       37.2  
Retirement benefits
    2,455.9       231.6       474.3       485.6       1,264.4  
 
Total
  $ 3,349.6     $ 319.9     $ 544.4     $ 798.3     $ 1,687.0  
 
The interest payments beyond five years relate primarily to medium-term notes that mature over the next twenty years.
Returns for the Company’s global defined benefit pension plan assets in 2009 were significantly above the expected rate of return assumption of 8.75 percent due to broad increases in global equity markets. These favorable returns positively impacted the funded status of the plans at the end of 2009 and are expected to result in lower pension expense and required pension contributions over the next several years. However, the Company expects to make cash contributions of $135 million, over $100 million of which is discretionary, to its global defined benefit pension plans in 2010, a significant increase over the $65 million contributed in 2009. Refer to Note 12 — Retirement and Postretirement Benefit Plans in the Notes to Consolidated Financial Statements for additional discussion.
During 2009, the Company did not purchase any shares of its common stock as authorized under the Company’s 2006 common stock purchase plan. The Company expects to purchase shares under this plan in 2010 to help offset the dilutive effect of its incentive compensation programs. 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 specified purposes, up to an aggregate of $180 million. The authorization expires on December 31, 2012.
As disclosed in Note 7 — Contingencies and Note 14 — Income Taxes to the Consolidated Financial Statements, the Company has exposure for certain legal and tax matters.
The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.
Recently Adopted Accounting Pronouncements:
In June 2009, the Financial Accounting Standards Board (FASB) issued final accounting rules that established the Accounting Standards Codification (ASC) as a single source of authoritative accounting principles generally accepted in the United States (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and regulations of the Securities and Exchange Commission (SEC) as well as interpretive releases are also sources of authoritative U.S. GAAP for SEC registrants. The new accounting rules established two levels of U.S. GAAP — authoritative and non authoritative. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective for the Company beginning July 1, 2009. The Codification was not intended to change or alter existing U.S. GAAP, and as a result, the new accounting rules establishing the Accounting Standards Codification did not have an impact on the Company’s results of operations and financial condition.
In September 2006, the FASB issued accounting rules concerning fair value measurements. The new accounting rules establish 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 new rules expand 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 delayed the effective date for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The implementation of new accounting rules for nonfinancial assets and nonfinancial liabilities, effective January 1, 2009, did not have a material impact on the Company’s results of operations and financial condition.

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In December 2007, the FASB issued new accounting rules related to business combinations. The new accounting rules provide revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interest and goodwill acquired in a business combination. The new accounting rules expand required disclosures surrounding the nature and financial effects of business combinations. The new accounting rules were effective, on a prospective basis, for fiscal years beginning after December 15, 2008. The implementation of the new accounting rules for business combinations, effective January 1, 2009, did not have a material impact on the Company’s results of operations and financial condition.
In December 2007, the FASB issued new accounting rules on noncontrolling interests. The new accounting rules establish 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. 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. The new accounting rules on noncontrolling interests were 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 implementation of new accounting rules on noncontrolling interests, effective January 1, 2009, did not have a material impact on the Company’s results of operations and financial condition.
In March 2008, the FASB issued new accounting rules about derivative instruments and hedging activities, which amended previous accounting for derivative instruments and hedging activities. The new accounting rules require 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, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. The new accounting rules were effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The implementation of the new accounting rules on derivative instruments and hedging activities, effective January 1, 2009, expanded the disclosures on 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 in the Notes to Consolidated Financial Statements for the expanded disclosures.
In June 2008, the FASB issued new accounting rules on the two-class method of calculating earnings per share. The new accounting rules clarify that unvested share-based payment awards that contain rights to receive nonforfeitable dividends are participating securities. The new accounting rules provide guidance on how to allocate earnings to participating securities and compute earnings per share using the two-class method. The new accounting rules were effective for fiscal years beginning after December 31, 2008, and interim periods within those fiscal years. The new accounting rules for the two-class method of calculating earnings per share reduced diluted earnings per share by $0.01 for the years ended December 31, 2008 and 2007. The new accounting rules on the two-class method of calculating earnings per share did not have a material impact on the Company’s disclosure of earnings per share. See Note 3 — Earnings Per Share in the Notes to Consolidated Financial Statements for the computation of earnings per share using the two-class method.
In May 2009, the FASB issued new accounting rules for subsequent events. The new accounting rules establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new accounting rules are effective for interim or annual financial periods ending after June 15, 2009 and were adopted by the Company in the second quarter of 2009. The adoption of the new accounting rules for subsequent events did not have a material impact on the Company’s results of operations and financial condition.
In December 2008, the FASB issued new accounting rules on employers’ disclosures about postretirement benefit plan assets. The new accounting rules require the disclosure of additional information about investment allocation, fair values of major categories of assets, development of fair value measurements and concentrations of risk. The new accounting rules are effective for fiscal years ending after December 15, 2009. The adoption of the new accounting rules on employers’ disclosures about postretirement benefit plan assets did not have a material impact on the Company’s results of operations and financial condition.

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Critical Accounting Policies and Estimates:
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The following paragraphs include a discussion of some critical areas that require a higher degree of judgment, estimates and complexity.
Revenue recognition:
The Company recognizes revenue when title passes to the customer. This occurs at the shipping point, except for certain exported goods and certain foreign entities, for which it occurs when the goods reach their destination. Selling prices are fixed based on purchase orders or contractual arrangements.
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 are based on management’s estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation. The Company’s Steel segment recognized $37.1 million in LIFO income for 2009, compared to LIFO expense of $65.0 million for 2008.
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 that a goodwill impairment analysis be performed in an interim period other than during the fourth quarter.
The goodwill impairment analysis is a two-step process. Step one compares the carrying amount of the reporting unit to its estimated fair value. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, step two is performed, where the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value of goodwill exceeds the implied fair value of goodwill, impairment exists and must be recognized.
The Company reviews goodwill for impairment at the reporting unit level. The Company’s reporting units are the same as its reportable segments: Mobile Industries, Process Industries, Aerospace and Defense and Steel. The Company prepares its goodwill impairment analysis by comparing the estimated fair value of each reporting unit, using an income approach (a discounted cash flow model) as well as a market approach, with its carrying value. The income approach and the market approach are equally weighted in arriving at fair value, which the Company has applied consistently.
The discounted cash flow model requires several assumptions including future sales growth, EBIT (earnings before interest and taxes) margins and capital expenditures. The Company’s four reporting units each provide their forecast of results for the next three years. These forecasts are the basis for the information used in the discounted cash flow model. The discounted cash flow model also requires the use of a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the three years forecasted by the reporting units), as well as projections of future operating margins (for the period beyond the forecasted three years). During the fourth quarter of 2009, the Company used a discount rate for each of its four reporting units ranging from 12% to 13% and a terminal revenue growth rate ranging from 2% to 3%. The difference in the discount rates and terminal revenue growth rates is based on the underlying markets and risks associated with each of the Company’s reporting units.
The market approach requires several assumptions including sales multiples and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples for comparable companies that operate in the same markets as the Company’s reporting units. During the fourth quarter of 2009, the Company used sales multiples for its four reporting units ranging from 0.3 to 1.8 and EBITDA multiples ranging from 8.3 to 9.5. The difference in the sales multiples and the EBITDA multiples is due to the underlying markets associated with each of the Company’s reporting units.

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As a result of the goodwill impairment analysis performed during the fourth quarter of 2009, the Company recognized no goodwill impairment loss for the year ended December 31, 2009. The Mobile Industries segment has no goodwill and the fair value of each of the Company’s other reporting units exceeded its carrying value by more than 10%. As of December 31, 2009, the Company had $221.7 million of goodwill on its Consolidated Balance Sheet, of which $162.6 million was attributable to the Aerospace and Defense segment. See Note 8 — Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements for the carrying amount of goodwill by segment. The fair value of this reporting unit was $691.2 million compared to a carrying value of $493.8 million. A 220 basis point increase in the discount rate would have resulted in the Aerospace and Defense segment failing step one of the goodwill impairment analysis, which would have required the completion of step two of the goodwill impairment analysis to arrive at a potential goodwill impairment loss. A 1,970 basis point decrease in the projected cash flows would have resulted in the Aerospace and Defense segment failing step one of the goodwill impairment analysis, which would have required the completion of step two of the goodwill impairment analysis to arrive at a potential goodwill impairment loss.
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 ended December 31, 2008. Of the $48.8 million goodwill impairment charge, $30.4 million of this goodwill impairment loss was reclassified to discontinued operations in connection with the sale of the NRB operations.
Restructuring costs:
The Company’s policy is to recognize restructuring costs in accordance with ASC 420, “Exit or Disposal Cost Obligations,” and ASC 712, “Compensation and Non-retirement Post-Employment Benefits.” Detailed contemporaneous documentation is maintained and updated to ensure that accruals are properly supported. If management determines that there is a change in estimate, the accruals are adjusted to reflect this change.
Benefit plans:
The Company sponsors a number of defined benefit pension plans that cover eligible employees. The Company also sponsors several unfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and their dependents. These plans are accounted for in accordance with accounting rules for defined benefit pension plans and postemployment plans.
The measurement of liabilities related to these plans is based on management’s assumptions related to future events, including discount rates, rates of return on pension plan assets, rates of compensation increases and health care cost trend rates. Management regularly evaluates these assumptions and adjusts them as required and appropriate. Other plan assumptions are also reviewed on a regular basis to reflect recent experience and the Company’s future expectations. Actual experience that differs from these assumptions may affect future liquidity, expense and the overall financial position of the Company. While the Company believes that current assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect the Company’s pension and other postretirement employee benefit obligations and its future expense and cash flow.
A discount rate is used to calculate the present value of expected future pension and postretirement cash flows as of the measurement date. The Company establishes the discount rate by constructing a portfolio of high-quality corporate bonds and matching the coupon payments and bond maturities to projected benefit payments under the Company’s pension plans. The bonds included in the portfolio are generally non-callable and rated AA- or higher by Standard & Poor’s. A lower discount rate will result in a higher benefit obligation; conversely, a higher discount rate will result in a lower benefit obligation. The discount rate is also used to calculate the annual interest cost, which is a component of net periodic benefit cost.
For expense purposes in 2009, the Company applied a discount rate of 6.30%. For expense purposes for 2010, the Company will apply a discount rate of 6.00%. A 0.25 percentage point reduction in the discount rate would increase pension expense by approximately $4.5 million for 2010.
The expected rate of return on plan assets is determined by analyzing the historical long-term performance of the Company’s pension plan assets, as well as the mix of plan assets between equities, fixed income securities and other investments, the expected long-term rate of return expected for those asset classes and long-term inflation rates. Short-term asset performance can differ significantly from the expected rate of return, especially in volatile markets. A lower-than-expected rate of return on pension plan assets will increase pension expense and future contributions. For expense purposes in 2009, the Company applied an expected rate of return of 8.75% for the Company’s pension plan assets. For expense purposes for 2010, the Company will continue to use this same expected rate of return on plan assets. A 0.25 percentage point reduction in the expected rate of return would increase pension expense by approximately $4.9 million for 2009.
For measurement purposes for postretirement benefits, the Company assumed a weighted-average annual rate of increase in the per capita cost (health care cost trend rate) for medical benefits of 9.4% for 2010, declining steadily for the next 68 years to 5.0%; and 10.8% for prescription drug benefits for 2010, declining steadily for the next 68 years to 5.0%. The assumed health care cost trend rate may have a significant effect on the amounts reported. A one percentage point

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increase in the assumed health care cost trend rate would have increased the 2009 total service and interest components by $1.1 million and would have increased the postretirement obligation by $18.4 million. A one percentage point decrease would provide corresponding reductions of $1.0 million and $16.6 million, respectively.
The U.S. Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Medicare Act) was signed into law on December 8, 2003. The Medicare Act provides for prescription drug benefits under Medicare Part D and contains a tax-free subsidy to plan sponsors who provide “actuarially equivalent” prescription plans. The Company’s actuary determined that the prescription drug benefit provided by the Company’s postretirement plan is considered to be actuarially equivalent to the benefit provided under the Medicare Act. The effects of the Medicare Act include reductions to the accumulated postretirement benefit obligation and net periodic postretirement benefit cost of $71.2 million and $7.9 million, respectively. The 2009 expected Medicare subsidy was $3.3 million, of which $2.3 million was received prior to December 31, 2009.
Income taxes:
The Company, which is subject to income taxes in the United States and numerous non-U.S. jurisdictions, accounts for income taxes in accordance with ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The Company records valuation allowances against deferred tax assets by tax jurisdiction when it is more likely than not that such assets will not be realized. In determining the need for a valuation allowance, the historical and projected financial performance of the entity recording the net deferred tax asset is considered along with any other pertinent information. Net deferred tax assets relate primarily to pension and postretirement benefit obligations in the United States, which the Company believes are more likely than not to result in future tax benefits.
In the ordinary course of the Company’s business, there are many transactions and calculations where the ultimate income tax determination is uncertain. The Company is regularly under audit by tax authorities. Accruals for uncertain tax positions are provided for in accordance with the requirements of ASC 740. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.
Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, valuation allowances against deferred tax assets, and accruals for uncertain tax positions.
Other loss reserves:
The Company has a number of loss exposures that are incurred in the ordinary course of business such as environmental claims, product liability, product warranty, litigation and accounts receivable reserves. Establishing loss reserves for these matters requires management’s estimate and judgment with regards to risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances.
Other Matters:
ISO 14001
The Company continues its efforts to protect the environment and comply with environmental protection laws. Additionally, it has invested in pollution control equipment and updated plant operational practices. The Company is committed to implementing a documented environmental management system worldwide and to becoming certified under the ISO 14001 standard to meet or exceed customer requirements. As of the end of 2009, 18 of the Company’s plants had ISO 14001 certification. The Company believes it has established adequate reserves to cover its environmental expenses and has a well-established environmental compliance audit program, which includes a proactive approach to bringing its domestic and international units to higher standards of environmental performance. This program measures performance against applicable laws, as well as standards that have been established for all units worldwide. It is difficult to assess the possible effect of compliance with future requirements that differ from existing ones. As previously reported, the Company is unsure of the future financial impact to the Company that could result from the U.S. Environmental Protection Agency’s (EPA’s) final rules to tighten the National Ambient Air Quality Standards for fine particulate and ozone. The Company is also unsure of potential future financial impacts to the Company that could result from possible future legislation regulating emissions of greenhouse gases.
The Company and certain of its U.S. subsidiaries have been designated as potentially responsible parties by the EPA for site investigation and remediation at certain sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as the Superfund, or state laws similar to CERCLA. The claims for remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation. Management believes any ultimate liability with respect to pending actions will not materially affect the Company’s results of operations, cash flows or financial position. The Company is also conducting voluntary environmental investigation and/or remediation activities at a number of current or former operating sites. Any liability with respect to such investigation and remediation activities, in the aggregate, is not expected to be material to the operations or financial position of the Company.

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Trade Law Enforcement
The U.S. government has six antidumping duty orders in effect covering ball bearings from France, Germany, Italy, Japan and the United Kingdom and tapered roller bearings from China. The Company is a producer of all of these products in the United States. The U.S. government determined in August 2006 that each of these six antidumping duty orders should remain in effect for an additional five years, after which the orders could be reviewed again.
Continued Dumping and Subsidy Offset Act (CDSOA)
The CDSOA provides for distribution of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. The Company reported CDSOA receipts, net of expenses, of $3.6 million, $10.2 million and $7.9 million in 2009, 2008 and 2007, respectively.
In September 2002, the World Trade Organization (WTO) ruled that CDSOA payments are not consistent with international trade rules. In February 2006, U.S. legislation was enacted that would end CDSOA distributions for imports covered by antidumping duty orders entering the United States after September 30, 2007. Instead, any such antidumping duties collected would remain with the U.S. Treasury. This legislation would be expected to eventually reduce any distributions in years beyond 2007, with distributions eventually ceasing. Several countries have objected that this U.S. legislation is not consistent with WTO rulings, and have been granted retaliation rights by the WTO, typically in the form of increased tariffs on some imported goods from the United States. The European Union and Japan have been retaliating in this fashion against the operation of U.S. law.
In 2006, the U.S. Court of International Trade (CIT) ruled, in two separate decisions, that the procedure for determining recipients eligible to receive CDSOA distributions is unconstitutional. In February 2009, the U.S. Court of Appeals for the Federal Circuit reversed both decisions of the CIT. In December 2009, a plaintiff petitioned the U.S. Supreme Court to hear an appeal, and the Supreme Court’s decision on whether to hear the case is expected later in 2010. The Company is unable to determine, at this time, what the ultimate outcome of litigation regarding CDSOA will be.
There are a number of factors that can affect whether the Company receives any CDSOA distributions and the amount of such distributions in any given year. These factors include, among other things, potential additional changes in the law, ongoing and potential additional legal challenges to the law and the administrative operation of the law. Accordingly, the Company cannot reasonably estimate the amount of CDSOA distributions it will receive in future years, if any. It is possible that court rulings might prevent the Company from receiving any CDSOA distributions in 2010 and beyond. Any reduction of CDSOA distributions would reduce the Company’s earnings and cash flow.
Quarterly Dividend
On February 9, 2010, the Company’s Board of Directors declared a quarterly cash dividend of $0.09 per share. The dividend will be paid on March 2, 2010 to shareholders of record as of February 22, 2010. This will be the 351st consecutive dividend paid on the common stock of the Company.

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Forward — Looking Statements
Certain statements set forth in this document and in the Company’s 2009 Annual Report to Shareholders (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, Management’s Discussion and Analysis on pages 20 through 50 contain 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)   continued weakness in world economic conditions, including additional adverse effects from the 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 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 bankruptcies or liquidations, the impact of changes in industrial business cycles and whether conditions of fair trade continue in the U.S. markets;
 
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 employees 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 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, 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 on pages 8 through 13.
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.

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Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
Changes in short-term interest rates related to several separate funding sources impact the Company’s earnings. These sources are borrowings under an Asset Securitization Agreement, borrowings under the $500 million Senior Credit Facility, floating rate tax-exempt U.S. municipal bonds with a weekly reset mode and short-term bank borrowings at international subsidiaries. If the market rates for short-term borrowings increased by one-percentage-point around the globe, the impact would be an increase in interest expense of $0.8 million with a corresponding decrease in income from continuing operations before income taxes of the same amount. The amount was determined by considering the impact of hypothetical interest rates on the Company’s borrowing cost, year-end debt balances by category and an estimated impact on the tax-exempt municipal bonds’ interest rates.
Fluctuations in the value of the U.S. dollar compared to foreign currencies, including the Euro, also impacted the Company’s earnings. The greatest risk relates to products shipped between the Company’s European operations and the United States. Foreign currency forward contracts are used to hedge these intercompany transactions. Additionally, hedges are used to cover third-party purchases of product and equipment. As of December 31, 2009, there were $248.0 million of hedges in place. A uniform 10% weakening of the U.S. dollar against all currencies would have resulted in a charge of $13.3 million related to these hedges, which would have partially offset the otherwise favorable impact of the underlying currency fluctuation. In addition to the direct impact of the hedged amounts, changes in exchange rates also affect the volume of sales or foreign currency sales price as competitors’ products become more or less attractive.

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Item 8. Financial Statements and Supplementary Data
Consolidated Statement of Income
                         
    Year Ended December 31,
 
(Dollars in thousands, except per share data)   2009   2008   2007
 
Net sales
  $ 3,141,627     $ 5,040,800     $ 4,532,066  
Cost of products sold
    2,558,880       3,888,947       3,577,083  
 
Gross Profit
    582,747       1,151,853       954,983  
 
                       
Selling, administrative and general expenses
    472,732       657,131       631,162  
Impairment and restructuring charges
    164,126       32,783       28,405  
Loss on divestitures
                528  
 
Operating (Loss) Income
    (54,111 )     461,939       294,888  
 
                       
Interest expense
    (41,883 )     (44,401 )     (42,314 )
Interest income
    1,904       5,792       6,936  
Receipt of Continued Dumping & Subsidy Offset Act (CDSOA) payment, net of expenses
    3,602       9,136       6,449  
Other (expense) income, net
    (3,742 )     7,121       (1,303 )
 
(Loss) Income From Continuing Operations Before Income Taxes
    (94,230 )     439,587       264,656  
 
                       
(Benefit from) provision for income taxes
    (28,193 )     157,062       53,942  
 
(Loss) Income From Continuing Operations
    (66,037 )     282,525       210,714  
(Loss) income from discontinued operations, net of income taxes
    (72,589 )     (11,273 )     12,942  
 
Net (Loss) Income
    (138,626 )     271,252       223,656  
 
                       
Less: Net (loss) income attributable to noncontrolling interest
    (4,665 )     3,582       3,602  
 
Net (Loss) Income Attributable to The Timken Company
  $ (133,961 )   $ 267,670     $ 220,054  
 
 
                       
Amounts Attributable to The Timken Company’s Common Shareholders:
                       
(Loss) income from continuing operations
  $ (61,372 )   $ 278,943     $ 207,112  
(Loss) income from discontinued operations, net of income taxes
    (72,589 )     (11,273 )     12,942  
 
Net (Loss) Income Attributable to The Timken Company
  $ (133,961 )   $ 267,670     $ 220,054  
 
 
                       
Net (Loss) Income per Common Share Attributable to The Timken Company Common Shareholders
                       
 
                       
(Loss) earnings per share — Continuing Operations
  $ (0.64 )   $ 2.90     $ 2.17  
(Loss) earnings per share — Discontinued Operations
    (0.75 )     (0.12 )     0.14  
 
Basic (loss) earnings per share
  $ (1.39 )   $ 2.78     $ 2.31  
 
                       
Diluted (loss) earnings per share — Continuing Operations
  $ (0.64 )   $ 2.89     $ 2.16  
Diluted (loss) earnings per share - Discontinued Operations
    (0.75 )     (0.12 )     0.13  
 
Diluted (loss) earnings per share
  $ (1.39 )   $ 2.77     $ 2.29  
 
                       
Dividends per share
  $ 0.45     $ 0.70     $ 0.66  
 
See accompanying Notes to Consolidated Financial Statements.

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Consolidated Balance Sheet
                 
    December 31,
 
(Dollars in thousands)   2009   2008
 
ASSETS
               
Current Assets
               
Cash and cash equivalents
  $ 755,545     $ 133,383  
Accounts receivable, less allowances: 2009 - $41,605; 2008 - $55,043
    411,226       575,915  
Inventories, net
    671,236       1,000,493  
Deferred income taxes
    61,508       83,438  
Deferred charges and prepaid expenses
    11,758       9,671  
Current assets, discontinued operations
          182,861  
Other current assets
    111,287       47,704  
 
Total Current Assets
    2,022,560       2,033,465  
 
               
Property, Plant and Equipment-Net
    1,335,228       1,516,972  
 
               
Other Assets
               
Goodwill
    221,734       221,435  
Other intangible assets
    132,088       140,899  
Deferred income taxes
    248,551       314,959  
Non-current assets, discontinued operations
          269,625  
Other non-current assets
    46,732       38,695  
 
Total Other Assets
    649,105       985,613  
 
Total Assets
  $ 4,006,893     $ 4,536,050  
 
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities
               
Short-term debt
  $ 26,345     $ 91,482  
Accounts payable and other liabilities
    355,228       423,523  
Salaries, wages and benefits
    132,592       217,090  
Income taxes payable
          22,467  
Deferred income taxes
    9,233       5,131  
Current liabilities, discontinued operations
          21,512  
Current portion of long-term debt
    17,035       17,108  
 
Total Current Liabilities
    540,433       798,313  
Non-Current Liabilities
               
Long-term debt
    469,287       515,250  
Accrued pension cost
    690,889       830,019  
Accrued postretirement benefits cost
    604,250       613,045  
Deferred income taxes
    6,091       8,540  
Non-current liabilities, discontinued operations
          23,860  
Other non-current liabilities
    100,375       83,985  
 
Total Non-Current Liabilities
    1,870,892       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) (2009 - 97,034,033 shares; 2008 - 96,891,501 shares)
               
Stated capital
    53,064       53,064  
Other paid-in capital
    843,476       838,315  
Earnings invested in the business
    1,402,855       1,580,084  
Accumulated other comprehensive loss
    (717,113 )     (819,633 )
Treasury shares at cost (2009 - 179,963 shares; 2008 - 344,948 shares)
    (4,698 )     (11,586 )
 
Total Shareholders’ Equity
    1,577,584       1,640,244  
 
Noncontrolling Interest
    17,984       22,794  
 
Total Equity
    1,595,568       1,663,038  
 
Total Liabilities and Shareholders’ Equity
  $ 4,006,893     $ 4,536,050  
 
See accompanying Notes to Consolidated Financial Statements.

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Consolidated Statement of Cash Flows
                         
    Year Ended December 31,
 
(Dollars in thousands)   2009   2008   2007
 
CASH PROVIDED (USED)
                       
Operating Activities
                       
Net (loss) income attributable to The Timken Company
  $ (133,961 )   $ 267,670     $ 220,054  
Net loss (income) from discontinued operations
    72,589       11,273       (12,942 )
Net (loss) income attributable to noncontrolling interest
    (4,665 )     3,582       3,602  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
                       
Depreciation and amortization
    201,486       200,799       187,918  
Impairment charges
    113,671       20,081       11,738  
Loss (gain) on sale of assets
    6,765       (15,170 )     5,748  
Deferred income tax provision
    22,761       1,877       11,056  
Stock-based compensation expense
    14,928       16,800       16,127  
Pension and other postretirement expense
    96,699       84,722       119,344  
Pension contributions and other postretirement benefit payments
    (113,463 )     (70,459 )     (151,356 )
Changes in operating assets and liabilities:
                       
Accounts receivable
    174,481       107,601       (15,812 )
Inventories
    356,155       (97,679 )     (57,867 )
Accounts payable and accrued expenses
    (204,700 )     (22,238 )     (20,374 )
Other — net
    (2,709 )     (8,004 )     (52,467 )
 
Net Cash Provided by Operating Activities — Continuing Operations
    600,037       500,855       264,769  
Net Cash (Used) Provided by Operating Activities — Discontinued Operations
    (12,379 )     76,764       77,144  
 
Net Cash Provided by Operating Activities
    587,658       577,619       341,913  
 
                       
Investing Activities
                       
Capital expenditures
    (114,150 )     (258,147 )     (289,784 )
Acquisitions
    (353 )     (86,024 )     (204,422 )
Proceeds from disposals of property, plant and equipment
    2,605       36,427       20,581  
Divestitures, net of cash divested of $1,231
    303,617             698  
Other
    4,905       517       (118 )
 
Net Cash Provided (Used) by Investing Activities — Continuing Operations
    196,624       (307,227 )     (473,045 )
Net Cash Used by Investing Activities — Discontinued Operations
    (2,353 )     (13,468 )     (23,526 )
 
Net Cash Provided (Used) by Investing Activities
    194,271       (320,695 )     (496,571 )
 
                       
Financing Activities
                       
Cash dividends paid to shareholders
    (43,268 )     (67,462 )     (62,966 )
Net proceeds from common share activity
    934       16,909       37,804  
Accounts receivable securitization financing borrowings
          225,000        
Accounts receivable securitization financing payments
          (225,000 )      
Proceeds from issuance of long-term debt
    254,950       810,353       286,403  
Deferred financing costs
    (10,820 )            
Payments on long-term debt
    (305,661 )     (884,082 )     (240,643 )
Short-term debt activity — net
    (74,167 )     (21,639 )     58,481  
 
Net Cash (Used) Provided by Financing Activities
    (178,032 )     (145,921 )     79,079  
 
Effect of exchange rate changes on cash
    18,265       (20,504 )     10,575  
 
Increase (Decrease) In Cash and Cash Equivalents
    622,162       90,499       (65,004 )
Cash and cash equivalents at beginning of year
    133,383       42,884       107,888  
 
Cash and Cash Equivalents at End of Year
  $ 755,545     $ 133,383     $ 42,884  
 
See accompanying Notes to Consolidated Financial Statements.

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Consolidated Statement of Shareholders’ Equity
                                                         
            Common Stock     Earnings     Accumulated                
                    Other     Invested     Other             Non-  
            Stated     Paid-In     in the     Comprehensive     Treasury     controlling  
(Dollars in thousands, except per share data)   Total     Capital     Capital     Business     Loss     Stock     Interest  
 
Year Ended December 31, 2007
                                                       
Balance at January 1, 2007
  $ 1,493,441     $ 53,064     $ 753,095     $ 1,217,167     $ (544,562 )   $ (2,584 )   $ 17,261  
Net income
    223,656                       220,054                       3,602  
Foreign currency translation adjustments (net of income tax of $5,034)
    95,690                               95,690                  
Pension and postretirement liability adjustment, (net of income tax of $84,430)
    177,083                               177,083                  
Change in fair value of derivative financial instruments, net of reclassifications
    538                               538                  
 
                                                     
Total comprehensive income
    496,967                                                  
Dividends declared to noncontrolling interest
    (1,596 )                                             (1,596 )
Cumulative effect of adoption of ASC 740
    5,621                       5,621                          
Dividends – $0.66 per share
    (62,966 )                     (62,966 )                        
Tax benefit from stock compensation
    5,830               5,830                                  
Issuance (tender) of 255,100 shares from treasury (1)
    (8,160 )             35                       (8,195 )        
Issuance of 1,899,207 shares from authorized (1)
    50,799               50,799                                  
 
Balance at December 31, 2007
  $ 1,979,936     $ 53,064     $ 809,759     $ 1,379,876     $ (271,251 )   $ (10,779 )   $ 19,267  
 
Year Ended December 31, 2008
                                                       
Net income
    271,252                       267,670                       3,582  
Foreign currency translation adjustments
    (149,873 )                             (149,873 )                
Pension and postretirement liability adjustment, (net of income tax of $232,656)
    (397,577 )                             (397,577 )                
Unrealized gain on marketable securities (net of income tax of $136)
    264                               211               53  
Change in fair value of derivative financial instruments, net of reclassifications
    (1,143 )                             (1,143 )                
 
                                                     
Total comprehensive income
    (277,077 )                                                
Capital investment of Timken XEMC (Hunan) Bearings Co.
    1,600                                               1,600  
Dividends declared to noncontrolling interest
    (1,708 )                                             (1,708 )
Dividends – $0.70 per share
    (67,462 )                     (67,462 )                        
Tax benefit from stock compensation
    4,466               4,466                                  
Issuance (tender) of 9,843 shares from treasury (1)
    (493 )             314                       (807 )        
Issuance of 738,044 shares from authorized (1)
    23,776               23,776                                  
 
Balance at December 31, 2008
  $ 1,663,038     $ 53,064     $ 838,315     $ 1,580,084     $ (819,633 )   $ (11,586 )   $ 22,794  
 
Year Ended December 31, 2009
                                                       
Net loss
    (138,626 )                     (133,961 )                     (4,665 )
Foreign currency translation adjustments
    39,740                               39,740                  
Pension and postretirement liability adjustment, (net of income tax of $64,558)
    62,009                               62,044               (35 )
Unrealized gain on marketable securities (net of income tax of $15)
    9                               7               2  
Change in fair value of derivative financial instruments, net of reclassifications
    729                               729                  
 
                                                     
Total comprehensive loss
    (36,139 )                                                
Capital investment of Timken XEMC (Hunan) Bearings Co.
    1,000                                               1,000  
Dividends declared to noncontrolling interest
    (1,112 )                                             (1,112 )
Dividends – $0.45 per share
    (43,268 )                     (43,268 )                        
Tax benefit from stock compensation
    (1,577 )             (1,577 )                                
Issuance of 164,985 shares from treasury (1)
    11,630               4,742                       6,888          
Issuance of 142,531 shares from authorized (1)
    1,996               1,996                                  
 
Balance at December 31, 2009
  $ 1,595,568     $ 53,064     $ 843,476     $ 1,402,855     $ (717,113 )   $ (4,698 )   $ 17,984  
 
See accompanying Notes to Consolidated Financial Statements.
 
(1)   Share activity was in conjunction with employee benefit and stock option plans.

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Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Note 1 – Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the accounts and operations of The Timken Company and its subsidiaries (the “Company”). All significant intercompany accounts and transactions were eliminated upon consolidation. Investments in affiliated companies were accounted for by the equity method, except when they qualified as variable interest entities, in which case the investments were consolidated in accordance with accounting rules relating to the consolidation of variable interest entities.
Revenue Recognition: The Company recognizes revenue when title passes to the customer. This occurs at the shipping point except for certain exported goods and certain foreign entities, where title passes when the goods reach their destination. Selling prices are fixed based on purchase orders or contractual arrangements. Shipping and handling costs were included in Cost of products sold in the Consolidated Statement of Income.
Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. During the second quarter of 2009, the Company evaluated the classification of its investments held by the Company’s operations in India and concluded that a portion of these investments should be considered Cash and cash equivalents on the Company’s Consolidated Balance Sheet based on the short-term and highly-liquid nature of the investments. At December 31, 2008, the Company held $23,640 of investments, of which $17,077 was reclassified from Other current assets to Cash and cash equivalents to conform to the 2009 presentation for these investments.
Allowance for Doubtful Accounts: The Company maintains an allowance for doubtful accounts, which represents an estimate of the losses expected from the accounts receivable portfolio, to reduce accounts receivable to their net realizable value. The allowance was based upon historical trends in collections and write-offs, management’s judgment of the probability of collecting accounts and management’s evaluation of business risk. The Company extends credit to customers satisfying pre-defined credit criteria. The Company believes it has limited concentration of credit risk due to the diversity of its customer base.
Inventories, net: Inventories are valued at the lower of cost or market, with 48% valued by the last-in, first-out (LIFO) method and the remaining 52% valued by the first-in, first-out (FIFO) method. If all inventories had been valued at FIFO, inventories, net would have been $237,669 and $298,195 greater at December 31, 2009 and 2008, respectively. The components of inventories, net were as follows:
                 
    December 31,
 
    2009   2008
 
Inventories, net:
               
Manufacturing supplies
  $ 53,022     $ 71,756  
Work in process and raw materials
    269,075       413,273  
Finished products
    349,139       515,464  
 
Total Inventories, net
  $ 671,236     $ 1,000,493  
 
The Company recognized a decrease in its LIFO reserve of $60,526 during 2009 compared to an increase in LIFO reserves of $71,839 during 2008. The decrease in the LIFO reserve recognized during 2009 was due to lower quantities of inventory on hand.
During 2009, inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of 2009 purchases, the effect of which increased net income by approximately $35,228.
Investments: The Company accounts for investments in accordance with accounting rules concerning investments in equity securities. The Company’s business in India held investments in mutual funds of $6,948 as of December 31, 2009. These investments were classified as “available-for-sale” securities and were included in Other current assets on the Consolidated Balance Sheet. Unrealized gains and losses were included in Accumulated other comprehensive loss, net of tax, on the Consolidated Balance Sheet. Realized gains and losses were included in Other (expense) income, net in the Consolidated Statement of Income.

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Note 1 – Significant Accounting Policies (continued)
Property, Plant and Equipment — net: Property, plant and equipment — net is valued at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. Provision for depreciation is computed principally by the straight-line method based upon the estimated useful lives of the assets. The useful lives are approximately 30 years for buildings, five to seven years for computer software and three to 20 years for machinery and equipment. Depreciation expense was $188,711, $186,340 and $176,501 in 2009, 2008 and 2007, respectively. The components of Property, plant and equipment — net were as follows:
                 
    December 31,
 
    2009   2008
 
Property, Plant and Equipment:
               
Land and buildings
  $ 611,670     $ 606,255  
 
Machinery and equipment
    2,786,444       2,985,799  
 
Subtotal
    3,398,114       3,592,054  
Less allowances for depreciation
    (2,062,886 )     (2,075,082 )
 
Property, Plant and Equipment — net
  $ 1,335,228     $ 1,516,972  
 
At December 31, 2009 and 2008, Property, Plant and Equipment – net included approximately $104,300 and $120,400, respectively, of capitalized software. Depreciation expense for capitalized software was approximately $17,800 and $17,700 in 2009 and 2008. There were no assets held for sale at December 31, 2009. At December 31, 2008, assets held for sale of $7,020 primarily consisted of three buildings comprising the Company’s former office complex in Torrington, Connecticut. In January 2009, the Company sold one of these buildings and recognized a pretax gain of $1,322. During the second quarter of 2009, in anticipation of the loss that the Company expected to record upon completion of the sale of the remaining buildings comprising the office complex, the Company recorded an impairment charge of $6,376. The Company finalized the sale of these remaining buildings on July 20, 2009 and recognized an additional loss of $689.
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 $20,200 during the first quarter of 2008 and recorded the gain in Other income (expense), net in the Company’s Consolidated Statement of Income.
The impairment of long-lived assets is evaluated when events or changes in circumstances indicate that the carrying amount of the asset or related group of assets may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time to reduce the asset to the lower of its fair value or its net book value.
Goodwill: The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually. The Company performs its annual impairment test on the same date during the fourth quarter after the annual forecasting process is completed. Furthermore, goodwill and indefinite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with accounting rules related to goodwill and other intangible assets.
Income Taxes: The Company accounts for income taxes in accordance with accounting rules for income taxes. Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. The Company records valuation allowances against deferred tax assets by tax jurisdiction when it is more likely than not that such assets will not be realized. Accruals for uncertain tax positions are provided for in accordance with accounting rules related to uncertainty in income taxes. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.

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Note 1 – Significant Accounting Policies (continued)
Foreign Currency Translation: Assets and liabilities of subsidiaries, other than those located in highly inflationary countries, 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 year. The related translation adjustments are reflected as a separate component of accumulated other comprehensive loss. Gains and losses resulting from foreign currency transactions and the translation of financial statements of subsidiaries in highly inflationary countries are included in the Consolidated Statement of Income. The Company recorded a foreign currency exchange gain of $8,195 in 2009, a loss of $5,904 in 2008 and a loss of $7,230 in 2007.
Stock-Based Compensation: The Company accounts for stock-based compensation in accordance with accounting rules for stock compensation, which require that the fair value of share-based awards be estimated on the date of grant using an option pricing model. The fair value of the award is recognized as expense over the requisite service periods in the accompanying Consolidated Statement of Income.
Earnings Per Share: Earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding, adjusted for the dilutive impact of potential common shares for share-based compensation.
Derivative Instruments: The Company accounts for its derivative instruments in accordance with amended accounting rules regarding derivative instruments and hedging activities. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive loss until the hedged item is recognized in earnings. The Company’s holdings of forward foreign currency exchange contracts have been deemed derivatives pursuant to the criteria established in derivative accounting guidance of which the Company has designated certain of those derivatives as hedges. In 2004, the Company entered into interest rate swaps to hedge a portion of its fixed-rate debt. These instruments qualified as fair value hedges. Accordingly, the gain or loss on both the hedging instrument and the hedged item attributable to the hedged risk were recognized in earnings. These swaps were terminated in the fourth quarter of 2009.
Recently Adopted Accounting Pronouncements:
In June 2009, the Financial Accounting Standards Board (FASB) issued final accounting rules that established the Accounting Standards Codification (ASC) as a single source of authoritative accounting principles generally accepted in the United States (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and regulations of the Securities and Exchange Commission (SEC) as well as interpretive releases are also sources of authoritative U.S. GAAP for SEC registrants. The new accounting rules established two levels of U.S. GAAP — authoritative and non-authoritative. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective for the Company beginning July 1, 2009. The Codification was not intended to change or alter existing U.S. GAAP, and as a result, the new accounting rules establishing the Accounting Standards Codification did not have an impact on the Company’s results of operations and financial condition.
In September 2006, the FASB issued accounting rules concerning fair value measurements. The new accounting rules establish a framework for measuring fair value that is based on the assumptions market participants would use when pricing an asset or liability and establish a fair value hierarchy that prioritizes the information to develop those assumptions. Additionally, the new rules expand 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 delayed the effective date for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The implementation of new accounting rules for nonfinancial assets and nonfinancial liabilities, effective January 1, 2009, did not have a material impact on the Company’s results of operations and financial condition.
In December 2007, the FASB issued new accounting rules related to business combinations. The new accounting rules provide revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interest and goodwill acquired in a business combination. The new accounting rules expand required disclosures surrounding the nature and financial effects of business combinations. The new accounting rules were effective, on a prospective basis, for fiscal years beginning after December 15, 2008. The implementation of the new accounting rules for business combinations, effective January 1, 2009, did not have a material impact on the Company’s results of operations and financial condition.

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Note 1 – Significant Accounting Policies (continued)
In December 2007, the FASB issued new accounting rules for noncontrolling interests. The new accounting rules establish 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. 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. The new accounting rules on noncontrolling interests were effective, on a prospective basis, for fiscal years beginning after December 15, 2008, and the presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The implementation of new accounting rules on noncontrolling interests, effective January 1, 2009, did not have a material impact on the Company’s results of operations and financial condition.
In March 2008, the FASB issued new accounting rules about derivative instruments and hedging activities, which amended previous accounting rules for derivative instruments and hedging activities. The new accounting rules require 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, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. The new accounting rules are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The implementation of the new accounting rules on derivative instruments and hedging activities, effective January 1, 2009, expanded the disclosures on 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 new accounting rules regarding the two-class method of calculating earnings per share. The new accounting rules clarify that unvested share-based payment awards that contain rights to receive nonforfeitable dividends are participating securities. The new accounting rules provide guidance on how to allocate earnings to participating securities and compute earnings per share using the two-class method. The new accounting rules were effective for fiscal years beginning after December 31, 2008, and interim periods within those fiscal years. The new accounting rules for the two-class method of calculating earnings per share reduced diluted earnings per share by $0.01 for the years ended December 31, 2008 and 2007. See Note 3 – Earnings Per Share for the computation of earnings per share using the two-class method.
In May 2009, the FASB issued new accounting rules for subsequent events. The new accounting rules establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new accounting rules were effective for interim or annual financial periods ending after June 15, 2009 and were adopted by the Company in the second quarter of 2009. The adoption of the new accounting rules for subsequent events did not have a material impact on the Company’s results of operations and financial condition.
In December 2008, the FASB issued new accounting rules concerning employers’ disclosures about postretirement benefit plan assets. The new accounting rules require the disclosure of additional information about investment allocation, fair values of major categories of assets, development of fair value measurements and concentrations of risk. The new accounting rules are effective for fiscal years ending after December 15, 2009. The adoption of the new accounting rules for employers’ disclosures about postretirement benefit plan assets did not have a material impact on the Company’s results of operations and financial condition.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions are reviewed and updated regularly to reflect recent experience.
Subsequent Events: Management has evaluated and disclosed all material events occurring subsequent to the date of the financial statements up to February 25, 2010, the filing date of this annual report on Form 10-K.
Reclassifications: Certain amounts reported in the 2008 and 2007 Consolidated Financial Statements have been reclassified to conform to the 2009 presentation.

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Note 2 – Acquisitions and Divestitures
Acquisitions
In November 2008, the Company purchased the assets of EXTEX, Ltd. (EXTEX), a leading designer and marketer of high-quality replacement engine parts for the aerospace aftermarket, for $28,782, including acquisition costs. The acquisition added 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 positioned the Company to offer comprehensive fleet-support programs, including asset management that maximizes uptime for aircraft operators. EXTEX has 2007 sales of approximately $15,400. The results of the operations of EXTEX are included in the Company’s Consolidated Statement of Income for the periods subsequent to the effective date of the acquisition. The purchase price allocation of EXTEX included in-process PMAs. Generally accepted accounting principles do not allow the capitalization of research and development of this nature; therefore, a charge of $892 was included in Cost of products sold in the Consolidated Statement of Income in 2008.
In February 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 $56,897 including acquisition costs. The acquisition extended 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. BSI is based in Houston, Texas and had 2006 sales of approximately $48,000. The results of the operations of BSI were included in the Company’s Consolidated Statement of Income for the periods subsequent to the effective date of the acquisition.
In October 2007, the Company purchased the assets of The Purdy Corporation (Purdy), a leading precision manufacturer and systems integrator for military and commercial aviation customers, for $203,243 including acquisition costs. Purdy’s expertise includes design, manufacturing, testing, overhaul and repair of transmissions, gears, rotor-head systems and other high-complexity components for helicopter and fixed-wing aircraft platforms. The acquisition further expanded the growing range of power-transmission products and capabilities the Company provides to the aerospace market. The results of the operations of Purdy were included in the Company’s Consolidated Statement of Income for the periods subsequent to the effective date of acquisition.
Pro forma results of these operations were not presented because the effect of the acquisitions was not significant in 2009, 2008 and 2007. The initial purchase price allocation and any subsequent purchase price adjustments for acquisitions in 2009, 2008 and 2007 are presented below.
                         
    2009   2008   2007
 
Assets Acquired:
                       
Accounts receivable
  $     $ 11,447     $ 13,167  
Inventories
          13,083       48,304  
Deferred income taxes
                1,266  
Other current assets
          120       317  
Property, plant and equipment — net
          12,766       19,709  
Goodwill
    353       24,669       57,636  
Other intangible assets
          28,502       66,310  
 
 
  $ 353     $ 90,587     $ 206,709  
 
Liabilities Assumed:
                       
Accounts payable and other liabilities
  $     $ 4,563     $ 1,648  
Salaries, wages and benefits
                415  
Income taxes payable
                219  
Deferred income taxes — current
                5  
 
 
          4,563       2,287  
 
Net Assets Acquired
  $ 353     $ 86,024     $ 204,422  
 

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Note 2 – Acquisitions and Divestitures (continued)
Divestitures
On December 31, 2009, the Company completed the sale of the assets of its Needle Roller Bearings (NRB) operations to JTEKT Corporation (JTEKT). The Company received approximately $304,000 in cash proceeds for these operations and retained certain receivables of approximately $26,000, subject to post-sale working capital adjustments. The NRB operations primarily serve the automotive original-equipment market sectors and manufacture highly engineered needle roller bearings, including an extensive range of radial and thrust needle roller bearings bearing assemblies and loose needles for automotive and industrial applications. The NRB operations have facilities in the United States, Canada, Europe and China. The NRB operations had 2009 sales of approximately $407,000 and were previously included in the Company’s Mobile Industries, Process Industries and Aerospace and Defense reportable segments. The Mobile Industries segment accounted for approximately 80% of the 2008 sales of the NRB operations. The results of operations were reclassified as discontinued operations during the third quarter of 2009 as the NRB operations met all the criteria for discontinued operations, including assets held for sale. Previous results for 2009, 2008 and 2007 have been reclassified to conform to the presentation under discontinued operations.
During the third quarter, the net assets associated with the then pending sale of the NRB operations were reclassified to assets held for sale and adjusted for impairment and written down to their fair value of $301,034. The Company based its fair value on the expected proceeds from the sale to JTEKT. At September 30, 2009, the carrying value of the net assets of the NRB operations exceeded the expected proceeds to be realized upon completion of the sale by $33,690. The Company subsequently recognized an after-tax loss on the sale of the NRB operations of $12,651 during the fourth quarter of 2009. The actual loss on the sale exceeded the original estimate primarily due to revisions to estimated working capital adjustments. Working capital adjustments associated with the sale will be finalized in 2010.
The following results of operations for this business have been treated as discontinued operations for all periods presented.
                         
    2009   2008   2007
 
Net sales
  $ 406,731     $ 622,860     $ 703,954  
Cost of goods sold
    376,356       533,244       605,103  
 
Gross profit
    30,375       89,616       98,851  
Selling, administrative and general expenses
    59,304       67,856       64,121  
Impairment and restructuring charges
    52,568       31,593       11,973  
Interest expense, net
    154       353       261  
Other (expense) income, net
    (1,743 )     (222 )     (1,293 )
 
(Loss) earnings before income taxes on operations
    (83,394 )     (10,408 )     21,203  
Income tax benefit (expense) on operations
    23,456       (865 )     (8,927 )
(Loss) gain on divestiture
    (19,894 )           1,098  
Income tax benefit (expense) on disposal
    7,243             (432 )
 
(Loss) income from discontinued operations
  $ (72,589 )   $ (11,273 )   $ 12,942  
 
In 2009, approximately $11,600 of foreign currency translations adjustments were recognized as part of the loss on divestiture of the NRB operations.
The gain on divestiture recorded in 2007 primarily represents a purchase price adjustment related to the divestiture of Latrobe Steel in December 2006.

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Note 2 – Acquisitions and Divestitures (continued)
The following presentation shows the assets and liabilities of discontinued operations for year ended December 31, 2008:
         
    2008
 
Assets:
       
Accounts receivable, net
  $ 27,943  
Inventories, net
    145,201  
Deferred charges and prepaid expenses
    1,396  
Other current assets
    2,782  
Property, plant and equipment — net
    226,895  
Goodwill
    8,614  
Other intangible assets
    32,806  
Other non-current assets
    6,849  
 
Total assets, discontinued operations
  $ 452,486  
 
Liabilities:
       
Accounts payable and other liabilities
  $ 19,907  
Salaries, wages and benefits
    1,605  
Accrued pension cost
    14,026  
Deferred income taxes
    1,848  
Other non-current liabilities
    7,986  
 
Total liabilities, discontinued operations
  $ 45,372  
 
As of December 31, 2009, there were no assets or liabilities remaining from the divestiture of the NRB operations.
Note 3 – Earnings Per Share
The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share and diluted earnings per share for the years ended December 31:
                         
    2009   2008   2007
 
Numerator:
                       
(Loss) income from continuing operations attributable to The Timken Company
  $ (61,372 )   $ 278,943     $ 207,112  
Less: distributed and undistributed earnings allocated to nonvested stock
          (1,910 )     (1,491 )
 
(Loss) income from continuing operations available to common shareholders for basic earnings per share and diluted earnings per share
  $ (61,372 )   $ 277,033     $ 205,621  
 
Denominator:
                       
Weighted average number of shares outstanding — basic
    96,135,783       95,650,104       94,639,065  
Effect of dilutive options
          297,539       642,734  
 
Weighted average number of shares outstanding, assuming dilution of stock options
    96,135,783       95,947,643       95,281,799  
 
Basic (loss) earnings per share from continuing operations
  $ (0.64 )   $ 2.90     $ 2.17  
 
Diluted (loss) earnings per share from continuing operations
  $ (0.64 )   $ 2.89     $ 2.16  
 

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Note 3 – Earnings Per Share (continued)
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 4,128,421, 1,453,512 and 505,497 during 2009, 2008 and 2007, respectively.
Note 4 – Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following for the years ended December 31:
                 
    2009     2008  
 
Foreign currency translation adjustments, net of tax
  $ 92,188     $ 52,448  
Pension and postretirement benefits adjustments, net of tax
    (808,760 )     (870,804 )
Unrealized gain on marketable securities, net of tax
    218       211  
Adjustments to fair value of open foreign currency cash flow hedges, net of tax
    (759 )     (1,488 )
 
Accumulated Other Comprehensive Loss
  $ (717,113 )   $ (819,633 )
 
Note 5 – Financing Arrangements
Short-term debt at December 31, 2009 and 2008 was as follows:
                 
    2009   2008
 
Variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 1.98% to 5.05% and 2.85% to 15.50% at December 31, 2009 and 2008, respectively
  $ 26,345     $ 91,482  
 
Short-term debt
  $ 26,345     $ 91,482  
 
The lines of credit for certain of the Company’s foreign subsidiaries provide for borrowings up to $338,361. Most of these lines of credit are uncommitted. At December 31, 2009, the Company had borrowings outstanding of $26,345, which reduced the availability under these facilities to $312,016.
The weighted average interest rate on short-term debt during the year was 3.7% in 2009, 4.1% in 2008 and 5.3% in 2007. The weighted average interest rate on short-term debt outstanding at December 31, 2009 and 2008 was 4.0% and 5.4%, respectively.
The Company has a $100,000 Accounts Receivable Securitization Financing Agreement (Asset Securitization Agreement), renewable every 364 days. On November 16, 2009, the Company renewed its Asset Securitization Agreement for $100,000. Prior to the renewal, the Company’s Asset Securitization Agreement was $175,000. 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 December 31, 2009 and 2008, there were no outstanding borrowings under the Asset Securitization Agreement. Although the Company had no outstanding borrowings under the Asset Securitization as of December 31, 2009, certain borrowing base limitations reduced the availability under the Asset Securitization to $63,679. The yield on the commercial paper, which is the commercial paper rate plus program fees, is considered a financing cost and is included in Interest expense in the Consolidated Statement of Income. This rate was 1.53%, 2.59% and 5.90%, at December 31, 2009, 2008 and 2007, respectively.

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Note 5 – Financing Arrangements (continued)
Long-term debt at December 31, 2009 and 2008 was as follows:
                 
    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     $ 175,000  
Fixed-rate Senior Unsecured Notes, due September 15, 2014, with an interest rate of 6.0%
    249,680        
Fixed-rate Senior Unsecured Notes with an interest rate of 5.75%
          252,357  
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.29% at December 31, 2009)
    12,200       12,200  
Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.44% at December 31, 2009)
    9,500       9,500  
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (0.43% at December 31, 2009)
    17,000       17,000  
Variable-rate Unsecured Canadian Note
          47,104  
Variable-rate credit facility with US Bank for Advanced Green Components, LLC, maturing on July 17, 2010 (1.41% at December 31, 2009)
    6,120       6,120  
Variable-rate credit facility with US Bank for Advanced Green Components, LLC, guaranteed by The Timken Company, maturing on July 17, 2010 (4.06% at December 31, 2009)
    5,620       6,120  
Other
    11,202       6,957  
 
 
    486,322       532,358  
Less current maturities
    17,035       17,108  
 
Long-term debt
  $ 469,287     $ 515,250  
 
The maturities of long-term debt for the five years subsequent to December 31, 2009 are as follows: 2010 – $17,035; 2011 – $463; 2012 – $170; 2013 – $1; and 2014 — $250,000.
Interest paid was approximately $39,000 in 2009, $46,000 in 2008 and $40,700 in 2007. This differs from interest expense due to the timing of payments and interest capitalized of approximately $1,777 in 2009, $2,953 in 2008 and $5,700 in 2007.
On September 9, 2009, the Company completed a public offering of $250,000 of fixed-rate 6.0% unsecured Senior Notes, due in 2014. The net proceeds from the sale were used for the repayment of the Company’s fixed-rate 5.75% unsecured Senior Notes that were to mature in February 2010.
On July 10, 2009, the Company entered into a new $500,000 Amended and Restated Credit Agreement (Senior Credit Facility). At December 31, 2009, the Company had no outstanding borrowings under its Senior Credit Facility but had letters of credit outstanding totaling $32,163, which reduced the availability under the Senior Credit Facility to $467,837. This Senior Credit Facility matures on July 10, 2012. Under the Senior Credit Facility, the Company has three financial covenants: a consolidated leverage ratio, a consolidated interest coverage ratio and a consolidated minimum tangible net worth test. At December 31, 2009, the Company was in full compliance with the covenants under the Senior Credit Facility.
In December 2005, the Company entered into a 57,800 Canadian dollar unsecured loan in Canada. The Company repaid this loan during 2009.
Advanced Green Components, LLC (AGC) is a joint venture of the Company. The Company is the guarantor of $5,620 of AGC’s $11,740 credit facility with US Bank.
Certain of the Company’s foreign subsidiaries also provide for long-term borrowings up to $26,950. At December 31, 2009, the Company had borrowings outstanding of $5,273, which reduced the availability under these long-term facilities to $21,677.
The Company and its subsidiaries lease a variety of real property and equipment. Rent expense under operating leases amounted to $43,469, $45,691 and $38,142 in 2009, 2008 and 2007, respectively. At December 31, 2009, future minimum lease payments for noncancelable operating leases totaled $145,382 and are payable as follows: 2010–$31,648; 2011–$23,476; 2012–$20,559; 2013–$17,070; 2014–$15,436; and $37,193 thereafter.

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Note 6 – Impairment and Restructuring Charges
Impairment and restructuring charges were comprised of the following for the years ended December 31:
                         
    2009   2008   2007
 
Impairment charges
  $ 107,586     $ 20,081     $ 4,842  
Severance expense and related benefit costs
    52,798       8,742       18,527  
Exit costs
    3,742       3,960       5,036  
 
Total
  $ 164,126     $ 32,783     $ 28,405  
 
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.
2009 Selling and Administrative Cost Reductions
In March 2009, the Company announced the realignment of its organization to improve efficiency and reduce costs as a result of the economic downturn. During 2009, the Company recorded $10,743 of severance and related benefit costs related to this initiative to eliminate approximately 280 employees. Of the $10,743 charge for 2009, $4,549 related to the Mobile Industries segment, $1,977 related to the Process Industries segment, $568 related to the Aerospace and Defense segment, $1,608 related to the Steel segment and $2,041 related to Corporate.
2009 Manufacturing Workforce Reductions
During 2009, the Company recorded $32,150 in severance and related benefit costs, including a curtailment of pension benefits of $941, to eliminate approximately 3,000 manufacturing employees to properly align its business as a result of the current downturn in the economy and expected market demand. Of the $32,150 charge, $21,515 related to the Mobile Industries segment, $6,484 related to the Process Industries segment, $2,462 related to the Aerospace and Defense segment and $1,689 related to the Steel segment.
2008 Workforce Reductions
In December 2008, the Company recorded $4,165 in severance and related benefit costs to eliminate approximately 110 manufacturing and sales and administrative employees as a result of the current downturn in the economy. Of the $4,165 charge, $1,975 related to the Mobile Industries segment, $772 related to the Process Industries segment, $1,098 related to the Steel segment and $320 related to Corporate.
Bearings and Power Transmission Reorganization
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 is composed of three reportable segments: Mobile Industries, Process Industries and Aerospace and Defense. These organizational changes enabled the Company to streamline operations and eliminate redundancies. As a result of these actions, the Company recorded $2,484 and $3,513 during the years ended December 31, 2008 and 2007, respectively, of severance and related benefit costs related to this initiative. The severance charge of $2,484 for 2008 was attributable to 76 employees and primarily related to the Mobile Industries segment. The severance charge of $3,513 for 2007 was attributable to 72 employees throughout the Company’s bearing organization. Approximately half of the severance charge related to the Mobile Industries segment and half related to the Process Industries segment.
Torrington Campus
On July 20, 2009, the Company completed the sale of the remaining portion of its Torrington, Connecticut office complex. In anticipation of recording a loss upon completion of the sale of the office complex, the Company recorded an impairment charge of $6,376 during the second quarter of 2009. During the third quarter of 2009, the Company recorded an additional loss of approximately $700 in Other (expense) income, net upon completion of the sale of this portion of the office complex.

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Note 6 – Impairment and Restructuring Charges (continued)
Mobile Industries
In 2009, the Company recorded fixed asset impairment charges of $71,707 for certain fixed assets in the United States, Canada, France and China related to several automotive product lines. The Company reviewed these assets for impairment during the fourth quarter due to declining sales and as part of the Company’s initiative to exit programs where adequate returns could not be obtained through pricing initiatives. Circumstances related to future revenue streams for customers coming out of bankruptcy and the results of its pricing initiatives did not become fully evident until the fourth quarter. Incorporating this information into its annual long-term forecasting process, the Company determined the undiscounted projected future cash flows for these product lines could not support the carrying value of these asset groups. The Company then arrived at fair value by either valuing the assets in use, where the assets were still producing product, or in exchange, where the assets had been idled. See Note 15 – Fair Value for further discussion of how the Company arrived at fair value.
The Company recorded an impairment charge of $48,765 in 2008, representing the write-off of goodwill associated with the Mobile Industries segment. Of the $48,765 impairment charge, $30,380 has been reclassified to discontinued operations. The Company is required to review goodwill and indefinite-lived intangibles for impairment annually. The Company performed this annual test during the fourth quarter of 2008 using an income approach (discounted cash flow model) and a market approach. As a result of the economic downturn that began in the second half of 2008, management’s forecasts of earnings and cash flow had declined significantly. The Company utilized these forecasts for the income approach as part of the goodwill impairment review. As a result of the lower earnings and cash flow forecasts, the Company determined that the Mobile Industries segment could not support the carrying value of its goodwill. Refer to Note 8 – Goodwill and Other Intangible Assets for additional discussion.
In March 2007, the Company announced the planned closure of its manufacturing facility in Sao Paulo, Brazil. The closure of this manufacturing facility was subsequently delayed to serve higher customer demand. The Company will now close this facility on March 31, 2010. Pretax costs associated with the closure are expected to be approximately $25,000 to $30,000, which includes restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses. Mobile Industries has incurred cumulative pretax costs of approximately $24,965 as of December 31, 2009 related to this closure. In 2009, 2008 and 2007, the Company recorded $5,232, $2,189 and $6,369, respectively, of severance and related benefit costs and $1,742, $807 and $2,044, respectively, of exit costs associated with the closure of this facility. In 2008 and 2007, $800 and $1,744, respectively, of the exit costs recorded related to environmental exit costs.
Process Industries
In May 2004, the Company announced plans to rationalize its three bearing plants in Canton, Ohio within the Process Industries segment. Pretax costs associated with the closure are expected to be approximately $35,000 through streamlining operations and workforce reductions, with expected pretax costs of approximately $70,000 to $80,000 (including pretax cash costs of approximately $50,000), by the middle of 2010.
In 2009, the Company recorded impairment charges of $27,713, exit costs of $1,607 and severance and related benefits of $551 as a result of Process Industries’ rationalization plans. The significant impairment charge was recorded during the second quarter of 2009 as a result of the rapid deterioration of the market sectors served by one of the rationalized plants resulting in the carrying value of the fixed assets for this plant exceeding their projected undiscounted future cash flows. The fair value was determined based on market comparisons to similar assets. The Company closed this facility at the end of 2009. In 2008, the Company recorded exit costs of $1,845 related to these rationalization plans. In 2007, the Company recorded impairment charges of $4,757 and exit costs of $571. The Process Industries segment has incurred cumulative pretax costs of approximately $69,000 (including approximately $26,300 of pretax cash costs) as of December 31, 2009 for these plans, including rationalization costs recorded in cost of products sold and selling, administrative and general expenses. See Note 15 – Fair Value for further discussion of how the Company arrived at fair value.
In October 2009, the Company announced the consolidation of its distribution centers in Bucyrus, Ohio and Spartanburg, South Carolina into a larger, leased facility in the region surrounding the existing Spartanburg location. The consolidation of the Company’s distribution centers is primarily due to 89% of all manufactured product inbound to Company’s distribution centers now originating in the southeastern United States; the new location will cut down on the average number of miles the inventory travels. The closure of the Bucyrus Distribution Center will displace approximately 290 employees. Pretax costs associated with this initiative are expected to be approximately $5,000 to $10,000 by the end of 2010. During 2009, the Company recorded $4,482 of severance and related benefit costs related to this closure.
Steel
In April 2007, the Company completed the closure of its seamless steel tube manufacturing facility located in Desford, England. The Company recorded $391 of exit costs in 2008 and $7,327 of severance and related benefit costs and $2,386 of exit costs in 2007 related to this action.

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Note 6 – Impairment and Restructuring Charges (continued)
Impairment and restructuring charges by segment were as follows:
Year ended December 31, 2009:
                                                 
    Mobile   Process   Aerospace &            
    Industries   Industries   Defense   Steel   Corporate   Total
 
Impairment charges
  $ 75,246     $ 30,356     $ 1,984     $     $     $ 107,586  
Severance expense and related benefit costs
    31,116       13,314       3,030       3,297       2,041       52,798  
Exit costs
    2,133       1,607       1       1               3,742  
 
Total
  $ 108,495     $ 45,277     $ 5,015     $ 3,298     $ 2,041     $ 164,126  
 
Year ended December 31, 2008:
                                                 
    Mobile   Process   Aerospace &            
    Industries   Industries   Defense   Steel   Corporate   Total
 
Impairment charges
  $ 18,789     $ 1,292         $     $     $ 20,081  
Severance expense and related benefit costs
    6,711       624             1,087       320       8,742  
Exit costs
    1,724       1,845             391             3,960  
 
Total
  $ 27,224     $ 3,761         $ 1,478     $ 320     $ 32,783  
 
Year ended December 31, 2007:
                                                 
    Mobile   Process   Aerospace &            
    Industries   Industries   Defense   Steel   Corporate   Total
 
Impairment charges
  $ (66 )   $ 4,908         $         $ 4,842  
Severance expense and related benefit costs
    9,357       1,602             7,568             18,527  
Exit costs
    2,079       571             2,386             5,036  
 
Total
  $ 11,370     $ 7,081         $ 9,954         $ 28,405  
 
The rollforward of the restructuring accrual was as follows for the years ended December 31:
                 
    2009   2008
 
Beginning balance, January 1
  $ 17,021     $ 19,062  
Expense
    55,599       12,702  
Payments
    (38,638 )     (14,743 )
 
Ending balance, December 31
  $ 33,982     $ 17,021  
 
The restructuring accrual at December 31, 2009 and 2008, respectively, is included in Accounts payable and other liabilities on the Consolidated Balance Sheet. The restructuring accrual at December 31, 2009 excluded costs related to the curtailment of pension benefit plans of $941. The accrual at December 31, 2009 included $27,490 of severance and related benefits with the remainder of the balance primarily representing environmental exit costs. The majority of the $27,490 accrual relating to severance and related benefits is expected to be paid by the middle of 2010.

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Note 7 – Contingencies
The Company and certain of its U.S. subsidiaries have been designated as potentially responsible parties (PRPs) by the U.S. Environmental Protection Agency for site investigation and remediation under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) with respect to certain sites. The claims for remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation. In addition, the Company is subject to various lawsuits, claims and proceedings, which arise in the ordinary course of its business. The Company accrues costs associated with environmental, legal and non-income tax matters when they become probable and reasonably estimable. Accruals are established based on the estimated undiscounted cash flows to settle the obligations and are not reduced by any potential recoveries from insurance or other indemnification claims. Management believes that any ultimate liability with respect to these actions, in excess of amounts provided, will not materially affect the Company’s Consolidated Financial Statements.
The Company is also the guarantor of debt for AGC, an equity investment of the Company. The Company guarantees $5,620 of AGC’s outstanding long-term debt of $11,740 with US Bank. In case of default by AGC, the Company has agreed to pay the outstanding balance, pursuant to the guarantee, due as of the date of default. The debt matures on July 17, 2010.
Product Warranties
The Company provides limited warranties on certain of its products. The Company accrues liabilities for warranty policies based upon specific claims and a review of historical warranty claim experience in accordance with accounting rules relating to contingent liabilities. The Company records and accounts for its warranty reserve based on specific claim incidents. 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 reserves for 2009 and 2008:
                 
    2009     2008  
 
Beginning balance, January 1
  $ 13,515     $ 12,571  
Expense
    4,699       7,525  
Payments
    (12,794 )     (6,581 )
 
Ending balance, December 31
  $ 5,420     $ 13,515  
 
The product warranty accrual for 2009 and 2008 was included in Accounts payable and other liabilities on the Consolidated Balance Sheet.

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Note 8 – Goodwill and Other Intangible Assets
During the first quarter of 2008, the Company began to operate under four reportable segments: Mobile Industries, Process Industries, Aerospace and Defense and Steel. Accounting rules concerning goodwill and other intangible assets required the Company to allocate the carrying value of its goodwill to its reporting units based on the relative fair value of each reporting unit. The Company considers its reportable segments to be its reporting units. As such, the Company has reclassified its goodwill to conform to the new segment presentation.
Accounting rules regarding goodwill and other intangible assets require that goodwill and indefinite-lived intangible assets be tested at least annually for impairment. The Company performs its annual impairment test during the fourth quarter after the annual forecasting process is completed. In reviewing goodwill for impairment, potential impairment is identified by comparing the fair value of each reporting unit using an income approach (a discounted cash flow model) and a market approach, with its carrying value. As a result of the recent economic downturn, management’s forecasts of earnings and cash flow have declined significantly. The Company utilizes these forecasts for the income approach as part of the goodwill impairment review. In 2008, as a result of the lower earnings and cash flow forecasts, the Company determined that the Mobile Industries segment could not support the carrying value of its goodwill. As a result, the Company recorded a pretax impairment loss of $48,765, which was reported in Impairment and restructuring charges in the Consolidated Statement of Income at December 31, 2008. Of the $48,765, $30,380 has been reclassified to discontinued operations. In 2009 and 2007, no impairment loss was recorded.
As a result of the goodwill impairment loss recorded for the Mobile Industries segment in 2008, the Company reviewed other long-lived assets for impairment in 2008. The Company concluded that other long-lived assets, such as property, plant and equipment and intangible assets subject to amortization, were not impaired.
Changes in the carrying value of goodwill were as follows:
Year ended December 31, 2009:
                                         
    Beginning                           Ending
    Balance   Acquisitions   Impairment   Other   Balance
 
Segment:
                                       
Process Industries
  $ 49,810     $     $      $ (305 )   $ 49,505  
Aerospace and Defense
    161,990       347             251       162,588  
Steel
    9,635       6                   9,641  
 
Total
  $ 221,435     $ 353     $      $ (54 )   $ 221,734  
 
“Other” for 2009 primarily included foreign currency translation adjustments.
Changes in the carrying value of goodwill were as follows:
Year ended December 31, 2008:
                                         
    Beginning                           Ending
    Balance   Acquisitions   Impairment   Other   Balance
 
Segment:
                                       
Mobile Industries
  $ 22,112     $     $ (18,385 )   $ (3,727 )   $  
Process Industries
    49,933                   (123 )     49,810  
Aerospace and Defense
    149,633       15,034             (2,677 )     161,990  
Steel
          9,635                   9,635  
 
Total
  $ 221,678     $ 24,669     $ (18,385 )   $ (6,527 )   $ 221,435  
 
“Other” for 2008 primarily included foreign currency translation adjustments.

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Note 8 – Goodwill and Other Intangible Assets (continued)
The following table displays intangible assets as of December 31:
                                                 
    2009   2008
    Gross           Net   Gross           Net
    Carrying   Accumulated   Carrying   Carrying   Accumulated   Carrying
    Amount   Amortization   Amount   Amount   Amortization   Amount
 
Intangible assets subject to amortization:
                                               
 
                                               
Customer relationships
  $ 79,139     $ 14,321     $ 64,818     $ 79,139     $ 10,020     $ 69,119  
Engineering drawings
    2,000       2,000             2,000       2,000        
Know-how
    2,110       917       1,193       2,123       785       1,338  
Land-use rights
    7,948       2,964       4,984       7,060       2,462       4,598  
Patents
    4,432       2,936       1,496       4,432       2,459       1,973  
Technology use
    35,000       3,944       31,056       35,000       2,048       32,952  
Trademarks
    6,597       5,023       1,574       6,632       4,670       1,962  
PMA licenses
    8,792       2,207       6,585       8,792       1,753       7,039  
Non-compete agreements
    2,710       1,200       1,510       2,710       493       2,217  
Unpatented technology
    7,625       5,339       2,286       7,625       4,655       2,970  
 
 
  $ 156,353     $ 40,851     $ 115,502     $ 155,513     $ 31,345     $ 124,168  
 
Intangible assets not subject to amortization:
                                               
Goodwill
  $ 221,734     $     $ 221,734     $ 221,435     $     $ 221,435  
Tradename
    1,400             1,400       1,400             1,400  
Land-use rights
                      146             146  
Industrial license agreements
    965             965       964             964  
FAA air agency certificates
    14,220             14,220       14,220             14,220  
 
 
  $ 238,319     $     $ 238,319     $ 238,165     $     $ 238,165  
 
Intangible assets subject to amortization are amortized on a straight-line method over their legal or estimated useful lives, with useful lives ranging from two years to 20 years. Intangibles assets subject to amortization acquired in 2008 were assigned useful lives ranging from two to 20 years and had a weighted average amortization period of 16.4 years.
Amortization expense for intangible assets was $12,776, $14,460 and $11,417 for the years ended December 31, 2009, 2008 and 2007, respectively. Amortization expense for intangible assets is estimated to be approximately $11,400 in 2010; $11,000 in 2011; $10,600 in 2012; $8,100 in 2013 and $7,700 in 2014.

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Note 9 – Stock Compensation Plans
Under the Company’s long-term incentive plan, shares of common stock have been made available to grant, at the discretion of the Compensation Committee of the Board of Directors, to officers and key employees in the form of stock option awards. Stock option awards typically have a ten-year term and generally vest in 25% increments annually beginning on the first anniversary of the date of grant. In addition to stock option awards, the Company has granted restricted shares under the long-term incentive plan. Restricted shares typically vest in 25% increments annually beginning on the first year anniversary of the date of grant and have historically been expensed over the vesting period.
During 2009, 2008 and 2007, the Company recognized stock-based compensation expense of $7,002 ($4,453 after-tax or $0.05 diluted share), $6,019 ($3,828 after-tax or $0.04 diluted share), and $5,348 ($3,423 after-tax or $0.04 diluted share), respectively, for stock option awards.
The fair value of significant stock option awards granted during 2009, 2008 and 2007 was estimated at the date of grant using a Black-Scholes option-pricing method with the following assumptions:
                         
    2009   2008   2007
 
Assumptions:
                       
Weighted average fair value per option
  $ 4.44     $ 9.89     $ 9.99  
Risk-free interest rate
    2.04 %     3.68 %     4.71 %
Dividend yield
    2.65 %     2.08 %     2.06 %
Expected stock volatility
    0.430       0.351       0.351  
Expected life — years
    6       6       6  
 
Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and the expected lives of the options. The dividend yield was calculated based upon the last dividend prior to the grant compared to the trailing 12 months’ daily stock prices. The risk-free interest rate was based upon yields of U.S. zero coupon issues with a term equal to the expected life of the option being valued. Forfeitures were estimated at 4%.
A summary of option activity for the year ended December 31, 2009 is presented below:
                                 
                    Weighted    
            Weighted   Average   Aggregate
            Average   Remaining   Intrinsic
    Number of   Exercise   Contractual   Value
    Shares   Price   Term   (000’s)
 
Outstanding — beginning of year
    4,347,466     $ 26.97                  
Granted
    1,266,000       14.73                  
Exercised
    (50,238 )     16.32                  
Cancelled or expired
    (214,956 )     22.08                  
                     
Outstanding — end of year
    5,348,272     $ 24.37     6 years   $ 13,262  
 
                               
Options exercisable
    3,090,228     $ 25.81     5 years   $ 3,234  
 
The Company has also issued performance-based nonqualified stock options that vest contingent upon the Company’s common shares reaching specified fair market values. No performance-based nonqualified stock options were awarded in 2009, 2008 or 2007. The Company incurred no compensation expense under these plans in 2009, 2008 and 2007.
The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $300, $10,600 and $16,400, respectively. Net cash proceeds from the exercise of stock options were $820, $12,400 and $32,000, respectively. Income tax benefits were $114, $3,400 and $5,500, for the years ended December 31, 2009, 2008 and 2007, respectively.

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Note 9 – Stock Compensation Plans (continued)
A summary of restricted share and deferred share activity for the year ended December 31, 2009 is as follows:
                 
            Weighted
    Number of   Average Grant
    Shares   Date Fair Value
 
Outstanding — beginning of year
    838,935     $ 29.49  
Granted
    372,398       14.98  
Vested
    (388,076 )     27.73  
Cancelled or expired
    (54,733 )     24.50  
 
Outstanding — end of year
    768,524     $ 23.80  
 
The Company offers a performance unit component under its long-term incentive plan to certain employees in which awards are earned based on Company performance measured by two metrics over a three-year performance period. The Compensation Committee of the Board of Directors can elect to make payments that become due in the form of cash or shares of the Company’s common stock. A total of 47,083, 51,225 and 48,025 performance units were granted in 2009, 2008 and 2007, respectively. Performance units granted, if fully earned, would represent 815,032 shares of the Company’s common stock at December 31, 2009. Since the inception of the plan, 59,723 performance units were cancelled. Each performance unit has a cash value of $100.
As of December 31, 2009, a total of 768,524 deferred shares, deferred dividend credits and restricted shares have been awarded and are not vested. The Company distributed 388,076, 371,925 and 318,393 shares in 2009, 2008 and 2007, respectively, due to the vesting of these awards. The shares awarded in 2009, 2008 and 2007 totaled 372,398, 306,434 and 400,628, respectively. The Company recognized compensation expense of $7,926, $10,781 and $10,779, for the years ended December 31, 2009, 2008 and 2007, respectively, relating to restricted shares and deferred shares.
As of December 31, 2009, the Company had unrecognized compensation expense of $20,000 related to stock option awards, restricted shares and deferred shares. The unrecognized compensation expense is expected to be recognized over a total weighted average period of two years. The number of shares available for future grants for all plans at December 31, 2009 was 4,885,509.
Note 10 — Research and Development
The Company performs research and development under Company-funded programs and under contracts with the federal government and other parties. Expenditures committed to research and development amounted to $50,000, $64,100 and $63,500 for 2009, 2008 and 2007, respectively. Of these amounts, approximately $1,700, $5,100 and $6,200, respectively, were funded by others. Expenditures may fluctuate from year to year depending upon special projects and needs.
Note 11 – Equity Investments
Investments accounted for under the equity method were approximately $9,494 and $13,633 at December 31, 2009 and 2008, respectively, and were reported in Other non-current assets on the Consolidated Balance Sheet.
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. During 2009, the Company recorded impairment charges on its investments in Internacional Components Supply LTDA and Endorsia.com International AB of $4,739 and $1,346, respectively. No impairment charges were recorded during 2008 and 2007 related to the Company’s equity investments. See Note 15 – Fair Value for further discussion of how the Company arrived at fair value.

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Note 12 – Retirement and Postretirement Benefit Plans
The Company sponsors defined contribution retirement and savings plans covering substantially all employees in the United States and employees at certain non-U.S. locations. The Company has contributed Timken common stock to certain of these plans based on formulas established in the respective plan agreements. At December 31, 2009, the plans held 10,167,796 shares of the Company’s common stock with a fair value of $241,078. Company contributions to the plans, including performance sharing, were $19,329 in 2009, $28,541 in 2008 and $27,405 in 2007. The Company paid dividends totaling $5,152 in 2009, $7,051 in 2008 and $6,645 in 2007 to plans holding shares of the Company’s common stock.
The Company and its subsidiaries sponsor a number of defined benefit pension plans, which cover eligible employees, including certain employees in foreign countries. These plans are generally noncontributory. Pension benefits earned are generally based on years of service and compensation during active employment. The cash contributions for the Company’s defined benefit pension plans were $62,614 and $22,149 in 2009 and 2008, respectively.
The Company and its subsidiaries also sponsor several unfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and dependents. Depending on retirement date and employee classification, certain health care plans contain contribution and cost-sharing features such as deductibles and coinsurance. The remaining health care and life insurance plans are noncontributory.
The Company recognizes the overfunded status or underfunded status (i.e., the difference between the Company’s fair value of plan assets and the projected benefit obligations) as either an asset or a liability for its defined benefit pension and postretirement benefit plans on the Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income represents the current year net unrecognized actuarial gains and losses and unrecognized prior service costs. These amounts will be recognized in future periods as net periodic benefit cost.
The following tables summarize the net periodic benefit cost information and the related assumptions used to measure the net period benefit cost for the years ended December 31:
                                                        
    Defined Benefit Pension Plans   Postretirement Benefit Plans
    2009   2008   2007   2009   2008   2007
 
Components of net periodic benefit cost
                                               
Service cost
  $ 39,690     $ 36,705     $ 41,642     $ 2,630     $ 3,138     $ 4,874  
Interest cost
    158,860       161,413       155,076       39,474       41,252       41,927  
Expected return on plan assets
    (192,915 )     (200,922 )     (189,500 )                  
Amortization of prior service cost (credit)
    11,333       12,563       11,340       (2,182 )     (2,114 )     (1,814 )
Amortization of net actuarial loss
    35,789       29,634       47,338       3,641       5,630       11,008  
Pension curtailments and settlements
    3,038       266       227                    
Amortization of transition asset
    (87 )     (92 )     (178 )                  
 
Net periodic benefit cost
  $ 55,708     $ 39,567     $ 65,945     $ 43,563     $ 47,906     $ 55,995  
 
Assumptions
                                               
U.S. Plans:
                                               
Discount rate
    6.3 %     6.3 %     5.875 %     6.3 %     6.3 %     5.875 %
Future compensation assumption
  1.5% to 3 %   3% to 4 %   3% to 4 %                        
Expected long-term return on plan assets
    8.75 %     8.75 %     8.75 %                        
International Plans:
                                               
Discount rate
  5.75% to 9 % 5.25% to 8.49 %   4.5% to 9 %                        
Future compensation assumption
  2.75% to 6.31 %   2.75% to 5.19 %   2.75% to 5.75 %                        
Expected long-term return on plan assets
  4.5% to 9.2 %   4.5% to 8.68 %   4% to 9.2 %                        
 

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